Earnings Call: Q2 2021

Jul 28, 2021

As always, materials related to today's call are available on our website atprincipal.com/investor. Following a reading of the Safe Harbor provision, CEO, Dan Houston and CFO, Deanna Strable will deliver some prepared remarks. Then we will open up the call for questions. Others available for the Q and A session include Renee Schaaf, Retirement and Income Solutions Pat Halter, Global Asset Management and Amy Friedrich, U. S. Insurance Solutions. Some of the comments made during this conference call may contain forward looking statements within the meaning of the Private Securities Litigation Reform Act. The company does not revise or update them to reflect new information, Subsequent events or changes in strategy. Risks and uncertainties that could cause actual results to differ materially from those Special or implied are discussed in the company's most recent Annual Report on Form 10 ks filed by the company with the U. S. Securities and Exchange Commission. Additionally, some of the comments made during this conference call may refer to non GAAP financial measures. Reconciliations of the non GAAP financial measures to the most Directly comparable U. S. GAAP financial measures may be found in our earnings release, financial supplement and slide presentation. Dan? Thanks, John, and welcome to everyone on the call. This morning, I will discuss takeaways from our 2021 Investor Day, key performance highlights for the Q2, and how our growth drivers continue to deliver results and fuel momentum across our integrated and focused portfolio. Deanna will follow with additional details on our 2nd quarter results, Our progress against financial targets and our current financial position. Starting on slide 5, our recent Investor Day, we announced the results of our strategic review, Including the areas of our business that we will continue to invest in and expand on, as well as select markets and products we will exit, And we shared how these priorities enable us to reach our financial targets and deliver against our strengthened capital management approach. Our resulting go forward strategy is focused on our growth drivers Ironman in the U. S. And Emerging Markets, Global Asset Management, and U. S. Benefits and Protection. These businesses offer the greatest opportunity for growth, Leverage our differentiators and integrated business model and meet our financial objectives of being more capital efficient with higher returns. We're exiting U. S. Retail fixed annuities as well as the retail segment of U. S. Individual Life and we are seeking transactions for the related in force blocks, allowing us to free up capital and de risk our portfolio. We are focused on executing on the transactions and expect they are actionable in the near term. These moves will better enable us to achieve our financial targets, which include delivering 9% to 12% annual growth in earnings per diluted share from 2020 to 2023, achieving a 15% return on equity by 2023 and generating free capital conversion of 70% to 80%. And lastly, we outlined a plan to return more capital to shareholders, totaling $3,000,000,000 between 20.21 2022. This does not include any excess capital that may be generated from potential transactions. Bottom line, the changes to our business portfolio and capital management strategy will drive future growth, reduce capital intensity, improve risk profile, sharpen our strategic focus and reinforce our commitment to returning more capital to shareholders, all aimed at driving long term shareholder value. We are in a strong position to continue to create long term shareholder value and to grow meaningful ways for our customers and shareholders as evidenced by our Q2 results. As shown on slide 6, we reported $467,000,000 of non GAAP operating earnings in the 2nd quarter. Excluding significant variances, earnings increased 21% over the Q2 of 2020, driven by continued execution of our long term strategy an improvement in macroeconomic conditions in many of our markets. We closed the 2nd quarter with total company AUM of $990,000,000,000 including record PGI managed AUM and more than $130,000,000,000 of institutional retirement and trust retirement assets that migrated over the last 9 months. Total company net cash flow was a positive $2,100,000,000 in the 2nd quarter, including $1,600,000,000 of PGI managed net cash flow. Our growth drivers continue to deliver performance for the enterprise, generating strong earnings growth and creating long term value for shareholders. In our U. S. Retirement business, the underlying fundamentals remain strong and are fueling growth in the business. Recurring deposits increased 33 percent over the Q2 of 2020 with more than half of the growth coming from our legacy block and the remainder from the IRT migration. Participant withdrawals were 2.4 percent of average account values in the 2nd quarter, in line with our historical average and lower than the 2.8% We experienced a year ago during the pandemic. However, as a result of strong equity markets, participant withdrawals increased $3,000,000,000 over the Q2 2020. This is consistent with prior periods of strong equity performance and the opposite is true when equity markets decline. These withdrawals led to negative net cash flow and RIS fee of $400,000,000 in the 2nd quarter as the strong growth in sales and reoccurring deposits, as well as the low contract lapses We're offset by higher dollars of participant withdrawals. We completed the migration of the IRT retirement business during the Q2. As we discussed at the Investor Day, the migration of the trust and custody business will be completed in the Q1 of 2022. Over the last 9 months, Through the IRT migration, we've added 2,400,000 retirement participants and $140,000,000,000 of account value To our platform, increasing scale, driving growth and positioning Principal as a top 3 retirement provider. The strategic benefits of the acquisition continue to emerge, Including revenue and expense synergies, we're beginning to see lower TSA expenses, increased proprietary investment management opportunities, Greater IRE rollovers and expanding retirement plan and total retirement solution opportunities. Our sales pipeline has nearly doubled over the last year With the strongest growth in the large planned market, which we expect to largely benefit sales in 2022 and the RIS Spread business, we had approximately $750,000,000 of MTN issuance in the 2nd quarter and $500,000,000 of pension risk transfer sales. The PRT business continues to be a core offering of our total retirement solutions and we remain disciplined in pricing to ensure opportunities meet our return thresholds. Looking forward, our U. S. Retirement business has 4 key growth engines, which we referenced at Investor Day. Momentum from the IRT acquisition, Differentiation from an unmatched set of total retirement solutions and engaging participant experience evolving with more digital enhancements In PGI's world class investment management solution, these 4 powerful engines will drive future growth for our retirement business as well as the rest of the enterprise. Outside the U. S, our emerging market retirement and long term savings business is facing near term challenges from macroeconomic conditions and the pandemic. In Chile, 2nd quarter AUM was negatively impacted by $1,600,000,000 of COVID related AFP hardship withdrawals as the country approved a 3rd wave of withdrawals during the quarter. As a reminder, this does not impact our revenue in Chile as fees are collected on salary, not AUM. Principal International reported flat net cash flow and $167,000,000,000 of AUM in the 2nd quarter, a 7% increase on a constant Currency basis compared to a year ago. China AUM, which is not included in reported AUM, was $143,000,000,000 in the 2nd quarter and was pressured by negative net cash flow from institutional money market funds. Despite these challenges, we have the competitive advantage needed to drive growth over the long term within our chosen markets. We have strong local and global investment management capabilities, The right joint venture partners with meaningful reach, distribution and brand recognition locally and a digital strategy that allows us to access and service customers Where they are, we continue to diversify our offerings in Principal International. For example, in Brazil, our multiamericado funds, balanced funds and investments in equities or fixed income have become more attractive due to the decline in interest rates. At the end of the second quarter, these funds accounted for over 20% Of AUM and Brazil Priv, with BRL28 billion of net cash flow year to date, we've captured 54% of the market share and 55% of 2nd quarter sales were in these funds. Emerging markets are long term investments. We're well to navigate the inherent volatility that comes with doing business in emerging markets, we will continue to capitalize on our competitive advantages By offering higher value added products and differentiated solutions to our customers, as well as leveraging our global asset management capabilities to drive future growth in Our global asset management business is driving growth and demonstrating the strength of our integrated operating model. The Q2, PGI delivered $1,800,000,000 of sourced net cash flows, a 45% margin, strong pre tax operating earnings, as well as record PGI managed AUM of $532,000,000,000 and PGI sourced AUM of $263,000,000,000 And we continue to deliver strong long term investment performance as 70% of principal mutual funds, ETFs, separate accounts and collective investment trust We're above medium performance for the 3 year period, 74% for the 5 year, and 88% for the 10 year. This performance positions us well to attract retained assets going forward and is contributing to positive net cash flow. We are continuing to see strong interest in our flagship real estate products and continued demand for our yield oriented products, including preferred securities, high yield and our scaling emerging market debt strategy. Together, our strength and high growth investment capabilities, our ability to leverage Principal's global multi channel distribution to develop and deepen Our highly efficient globally integrated operating model and our ability to attract and retain top talent We'll continue to drive growth in our global asset management business. In U. S. Benefits and Protection, our small to medium sized business Customers continue to show signs of resiliency and who are returning to normal sales levels, expected retention levels and positive in group growth. In Group Benefits, trailing 12 months, in group growth turned positive for the first time since the pandemic, increasing nearly 0.5% for the total block With the strongest growth in businesses with under 200 employees, our focused customer segment, and individual life premium and fee growth Increase reflecting very strong non qualified corporate owned life insurance sales, which are critical to our business market strategy and our total retirement solutions offering. Our latest well-being index reiterates the strength of this market. 57% of small to medium sized businesses that responded to our survey So they are optimistic about the overall economic outlook for the next 12 months. This is a higher level than before the pandemic began. ESG continues to be a priority for Principal as highlighted on slide 7. Our ESG approach is aligned to the United Nations' Sustainable Development Goals. It is woven into our investment philosophies, our approach to diversity and inclusion and is embedded in our philanthropic strategies. We've recently published specific ESG commitments and will provide continuous updates to our sustainability website on principle.com and our annual corporate social responsibility report. We're very optimistic about the opportunities that lie ahead as momentum has returned in many of our businesses And we've evolved our portfolio to bring greater focus to our growth drivers. Deanna? Thanks, Dan. Good morning to everyone on the call. This morning, I'll share the key contributors to our financial performance for the quarter, our current financial and capital position And additional details on how the outcomes of the strategic review will drive improved financial results. Net income attributable to Principal was $362,000,000 in the 2nd quarter, including $106,000,000 of net realized capital losses with $5,000,000 of credit losses. We reported $467,000,000 of non GAAP operating earnings in the 2nd quarter or $1.70 per diluted share. Excluding significant variances, non GAAP operating earnings of $453,000,000 or $1.65 per diluted share increased 21% compared to a pressured Q2 of 2020. This is also a 14% increase compared to the pre pandemic Q2 of 2019. As shown on Slide 8, we had a number of significant variances during the Q2. These had a net positive impact to reported non GAAP operating earnings of $10,000,000 pre tax, dollars 14,000,000 after tax and $0.05 per diluted share. Pre tax impacts included a $61,000,000 benefit from higher than expected variable investment income, A $15,000,000 benefit from lower DAC amortization and RIS Fee and model refinements in individual life, A net negative $11,000,000 impact from COVID related claims, a negative $21,000,000 impact from IRT integration cost and a negative $33,000,000 impact in Principal International, including a negative $24,000,000 impact of inflation in Brazil and $9,000,000 of lower than expected encaje performance in Latin America. Additional details of the Brazil inflation impact are available on Slide 20. The 2nd quarter financial impacts from COVID were limited to mortality and morbidity in RIS Spread and U. S. Insurance Solutions. With just over 50,000 U. S. COVID related deaths in the 2nd quarter, the net $8,000,000 after tax impact was higher than our rule of thumb, primarily due to a large claim in Individual Life. This is a significant decline from prior quarters, and we expect the impact will be relatively immaterial to results the remainder of the year. Looking at macroeconomic factors in the 2nd quarter, both the S and P 500 increased 8% compared to the Q1 and the daily average increased 43% from the year ago quarter benefiting revenue, AUM and account value growth in RIS Fee and PGI. Foreign exchange rates continued to improve in the 2nd quarter, but remained a headwind on a trailing 12 month basis. Impacts to reported pre tax operating earnings included an immaterial impact compared to Q1 2021, A positive $13,000,000 compared to Q2 2020 and a negative $14,000,000 on a trailing 12 month basis. Turning to the business units, my following comments exclude the impacts of significant variances. As Dan mentioned, we completed the migration of the IRT Retirement business in the Q2 and we are seeing the benefits begin to play out. In RIS Fee, we continue to expect $55,000,000 to $65,000,000 of IRT integration expenses for the full year as we continue to work to integrate the trust and custody business. PGI benefited from strong management fees, performance fees and disciplined expense management in the 2nd quarter, boosting growth in revenue and earnings and Expanding the margin to 45 percent. Pretax operating earnings benefited $11,000,000 from performance fees. Specialty Benefits pretax operating earnings declined from the year ago quarter due to higher dental and group life loss ratios driven by severity. Corporate pre tax operating losses were in line with expectations as higher one time expenses were offset by higher variable investment income. Turning to capital and liquidity on Slide 9. We remain in a strong financial position with $2,500,000,000 of excess and available capital, Including $1,700,000,000 at the holding company, more than double our target of $800,000,000 to cover the next 12 months of obligations, $325,000,000 in excess of our targeted 400 percent risk based capital ratio estimated to be 4 21 percent and $460,000,000 of available cash in our subsidiaries. As shown on slide 10, we deployed $431,000,000 of Capital during the Q2, including $266,000,000 of share repurchases and $165,000,000 to common stock dividends. Through the first half of the year, we've returned more than $680,000,000 of capital to shareholders. Last night, we announced A $0.63 common stock dividend payable in the 3rd quarter, a $0.02 or 3% increase from the 2nd quarter. Our dividend yield is approximately 4% and we continue to target a 40% dividend payout ratio for the full year. Through the first half of the year, the impact from credit drift and credit losses has been relatively immaterial and we expect it to remain immaterial for the full year. This has improved from the $100,000,000 estimate at the end of the Q1. As we discussed at Investor Day, the strategic review validated that our capital and leverage Targets are appropriate. We plan to return to our targeted levels by the end of 2022, including a 400% RBC ratio by year end 2021 and $800,000,000 of excess capital at the holding company by the end of 2022. We will continue to maintain a 20% to 25% leverage ratio and expect to pay down $300,000,000 of long term debt when it matures in late 2022. Between 2021 And $1,300,000,000 to $1,400,000,000 of common stock dividends. This excludes any impacts of potential transactions. Through our refined focus and strengthened capital deployment strategy, we will invest in areas where Principal has established competitive advantages, While increasing our returns to shareholders, we have a clear path to becoming a higher growth, more capital efficient company creating long term value for shareholders. We are actively pursuing transactions for several in force blocks, including fixed deferred annuities and single premium income annuities with $18,000,000,000 of reserves and Universal Life Secondary Guarantees with $7,000,000,000 of reserves. While we don't have details to share on transactions, We will continue to update you as we know more, including timing as well as the financial and capital impacts. As a result of these portfolio changes, this results in approximately $110,000,000 of lost pre tax operating earnings on an annual basis, But we expect a 7 to 10 percentage point increase in free capital flow conversion and a positive impact on our return on equity. As we look forward, we are targeting a 9% to 12% annual growth in earnings per diluted share. We have a path to a return on equity of at least 15% And we expect to generate 70% to 80% free capital conversion. These targets exclude proceeds from potential transactions, but reflect the lost earnings and capital impacts from discontinued products and segments. The path forward is attractive and will benefit returns, capital and our risk profile. This concludes our prepared remarks. Operator, please open the call for questions. Our first question will come from the line of Tom Gallagher with Evercore. Good morning. Deanna, I just had a first question is just a follow-up to your comment About Specialty Benefits, did you say the weakness in the quarter was related to one large claim in group life? And if so, how large was that claim? That's my first question. Yes, Tom. I'll comment and then I'll turn it over to Amy to see if she has more to And that comment was relative to the COVID impact, and that we were slightly above our rule of thumb of $10,000,000 after tax impact for every $100,000 of U. S. Deaths and that one large claim was in individual life And then that took us just slightly above our rule of thumb. And so it wasn't a comment on Specialty Benefits. It was a comment on the COVID Claims within Individual Life and Total Company. Anything further Amy? No. Don't follow-up please. Okay, great. And then my follow-up is, Dan, a competitor Great West recently announced That it's acquiring Pru's 401 business. And I guess my question, it surprised me a little bit just Great West is still in the process of integrating their mass mutual block, but it obviously raises the bar in terms of scale By competitors. I guess just in light of that transaction, just curious how you're viewing the market, Your scale, do you still feel like post the IRT deal, you have sufficient scale for the next several years? Or do you First thing I'd say is I certainly like the valuation ascribed to the block of business. I think that speaks volumes about our platform, Which I would emphasize is inclusive of more proprietary asset management. We have a lot of success in roll ins and rollovers. We also have a lot of around non qualified deferred compensation and all the other drivers of our TRS business model. So all that hangs together really well. The other comment I'd make Tom is that this thesis, that apparently is out there in the marketplace is the rationale behind Why we bought the Wells Fargo IRT business in the first place, which was to gain scale, gain access to additional distribution capacity, Certainly create new capabilities and allow us to have bigger footprint out there with distributors, marketers and intermediaries. So Frankly, we enjoy good scale today. We have good capabilities. We are constantly supplementing those and building on From a digital perspective, but we think that we've got a really good place to fight from at this point in time. So Renee, anything you'd like to add on top of that question, please? Yes. I think Dan, you did a great job of covering exactly how we're thinking about it. It's clear that the market will continue to consolidate And scale is important as our capabilities. We're really happy with the IRT acquisition in In terms of what it did bring to us and does bring to us in terms of scale and increasing access to consultant channels that we may not have had before As well as really rounding out our set of capabilities to benefit not only the IRT customers that were acquired, but our legacy customers as well. So as we think about consolidation in the future, we're very mindful about the need to continue to watch our unit costs and the scale If acquisitions make sense in terms of scale and capabilities, we'll keep a close watch on those, but we're happy with the acquisition that we made And we continue to watch the market very closely. Thanks Tom for the question. Okay. Our next question comes from the line of Humphrey Lee with Dowling and Good morning and thank you for taking my questions. My first one is on PGI. So looking at the performance for Quarter both fee income and margin were very strong and you highlighted there's a component of performance fees. But even if you kind of back that How the margin is still kind of around 44%. Just can you talk about the moving pieces for the strong margin for the quarter and how should we think about that in the near term, Especially if the market conditions remain relatively stable? Yes. And it really was a really strong Quarter across the board for PGI. Couldn't be more proud of the team. Pat, you want to provide some additional comments and details here? Yes, Humphrey. Thanks for question. I think one of the things that I want to highlight is that we continue to see strong revenue growth because we have strong investment capabilities that are desired in the marketplace. And we're seeing the desire from retail, from retirement and from institutional clients. So our multi channel, multi distribution model is really playing well With capabilities that are desired in the marketplace. So I think that's been a nice sort of revenue generator for us as an organization, both in terms of sales and in terms of retention. In terms of the margin question, Humphrey, if the macro market and markets continue to I think cooperate, We believe we're going to continue to generate, I think, these strong margins in the upper end of our guidance range, which is 37% to 40% and probably likely a little bit North of that 40% guidance range going forward. As you kind of think about the expense controls we continue to have in place And the organization and our sort of view that our capabilities will continue to be desirable in the marketplace. And so I feel pretty good about the ability to continue to have some fairly strong margins in the In the second half of the year, I think we may have a little bit of additional sort of performance fees on the margin in the second half of the year also. But the margin outlook looks quite strong yet as I look forward into the second half of the year, Humphrey. Got it. Thank you for the color. My second question is related to specialty benefits. I think as you in Deanna's prepared remarks, you talked about dental, you had some severity in the quarter. I was just wondering if Amy or Deanna can talk about what you saw in the quarter and how has that trended into July? Yes. Very good question. Amy, please. Yes, sure. Thanks for the question. So just to take a little bit of a step backwards, we always expect To see loss ratios in the first half of the year that are going to be greater than that second half of the year, just in terms of how these benefits get utilized. And in Q1, We saw the type of utilization that we expected. 2nd quarter, we would have assumed we drew down on that a little bit in terms of Frequency and severity. And what we saw is frequency actually stayed pretty well within the ranges that we expected. It was severity that was a little bit higher. So when we think of severity for dental, severity for dental is going to be those Unit 2 or Unit 3 procedures being done. So something all the way from a Bridge or a crown to a filling. And so I think what we would say there is we have really great plan design features, Really great maximum features that tend to be sort of self regulating mechanisms on those plans. So even if severity comes Up a little bit in Q2, what we're going to see that second half of the year is that is going to come back down. So we're seeing a little bit more of those procedures. And again, I've heard lots People speculate on what's causing that. We don't tend to speculate as much as we tend to make sure our pricing is aligned to what we're seeing in terms of the patterns. And again, we have Great access to a bunch of in network dentists who give us some good insight into this. So what we're saying is that second half of the year, we think it's going to return to normal. Those types of things like severity don't tend to keep happening in 2nd and third and fourth quarter because we've got planned design features that are good self regulators. I think we've got that advantage, Humphrey, in addition to the fact that this business is annually priced and coming out of a global pandemic, I would expect some Degree of volatility in our claims experience. So thank you for the questions. Thanks. Your next question comes from the line of Andrew Kligerman with Credit Suisse. Hey, good morning. Just to maybe first layer on to Tom's earlier question about Scale and multiples paid. We're seeing huge multiples being paid in emerging markets, specialty benefits, asset management. So maybe just along the same lines, do you feel that you've got scale in those businesses? And if so, when you do divest of the sited operations and you raise, I think you'd cited over $1,500,000,000 or at least we think as much. Would that more likely go to Share repurchases as opposed to acquisitions given the scale question? Yes. So appreciate that. One of the benefits we have Just still being 30 days out of having reported on our strategic review. And again, I won't reiterate All of what was said during the course of our Investor Day, but we literally interrogated every one of our businesses, Our markets, our look back and our look forward. And so we do feel as if any gaps that might exist around capabilities and Scale are under our clear understanding. And frankly, we feel like we're in a very strong competitive position across The businesses, the ones we're exiting is where we didn't feel that the economics in our best interest relative to On a go forward basis and we felt there were other organizations that were better owners of these assets. We need to complete these transactions before Coming to a conclusion on how we'll deploy those proceeds, but we are on the record already with investors that For the 2 year period of time, we're going to deploy $3,000,000,000 back in the form of dividends and stock buybacks. We feel we've got our arms around Our capital position, we're in a very strong position, which gives us frankly a lot of optionality. I'll ask Deanna, if she has any additional comments you'd like to make here? Yes. I think one of the things we did lay out at Investor Day is the fact that one of the reasons why we have a low leverage ratio It does allow us to fund any potential inorganic acquisitions through the issuance of more debt, As well as our strong free capital flow position allows us to use some of the near term free capital flow to also help aid in that. So obviously, we're going to be active at looking to see if there are organic or inorganic opportunities. I think what Dan said is we feel good about the scale and the capabilities of our go forward growth strategy. But we'll see of our go forward growth strategies, but we'll continue to be good stewards of capital. Our plan is to return that capital release from transaction Unless there is a clear value accretive opportunity to deploy it in another way. So hopefully that helps. Thanks, Andrew. Do you have a follow-up? Yes, follow-up. Very helpful answer. Thank you. I'm just curious now in RIS Now that you've brought the IRT on board, sales were $3,300,000,000 Up from $2,800,000,000 year over year. Just kind of curious now that it's all on board, what kind of sales trends you will likely see As you're now expanding your reach into larger markets. So could we see a big uptick in sales? Yes. I think one way to look at that is we'll help frame that as we get fully integrated and as we sort of set our targets here in 2020 2, they might be premature, right? Your observation is a good one with regards to increase in sales from 2.8 to 3.3. I'd also remind you that embedded within those PGI numbers in terms of strong results, we had another $3,800,000,000 of DCIO sales. And so These strategies are working very well. And maybe with that, I'll ask Renee to talk a little bit about the markets that we have historically have not played in That will be additive to our existing distribution strategy. Renee? Yes. Andrew, thank you for that question because I think there's a lot To be said, in terms of the organic growth that we're seeing within RIS Fee. So maybe starting with Q1, You'll recall that in Q1 2021, we had about $8,000,000,000 of sales, which was an exceptionally strong result And included a couple of very large planned sales in there as well as strength in the small to medium sized market. So that indicates that we are, we can and we will play in the large plan market. We are successful and we're winning. Then we turn our attention to the Q2 and what we see is a very strong $3,300,000,000 which is Up 17% from a year ago quarter. The 2nd quarter Sales were really dominated by small to medium sized plans, which again speaks to the fact that we have Strength in small, medium and large size plans. We communicated at Investor Day and in last quarter's Carl, that we are seeing a really nice increase in our institutional our large plan pipeline. And we're very pleased with that and it reflects the fact that we're making good inroads in relationships with top tier consultants. The large plan market, however, has a longer sales cycle. So we would anticipate that those sales will hit in 2022. So All said, very pleased with the momentum that we see in organic growth. It's strong across small, medium and large plan market. And we continue to be very optimistic about our capabilities and our ability to compete in this marketplace. Thanks, Andrew, for the question. Thank you. Your next question will come from the line of Jimmy Bhullar with JPMorgan. Hi, good morning. So first just had a question on investment performance. And if you look at the data that you disclosed on your funds, It seems like the 1 year performance is worse than 3 year, that's worse than 5 year and that's down from the 10 year. So Just wondering, if this is because of a few funds or more broad based and then what the implications of this are in your ability to Attract flows. Very good. Pat, please. Yes. Thanks for the question. I think in terms of our performance, we still feel very Positive about our long term performance. Our 1 year has dropped off a little bit and specifically it dropped off in our U. S. And non U. S. Equity performance. As you know, the U. S. Equity markets in the first half of the year because of just a strong stimulus fiscal monetary optimistic growth, The environment was really one of owning risk in that marketplace and you're rewarded for that. Our sort of overall fund sort of approach is more not universal, but it's probably biased more toward higher quality and lower quality, higher quality than lower quality sort of companies. And that's probably held back a little bit of our performance. Our investment approach process, we have a lot of conviction that will come back again. We've had periods in the past Where we had sort of risk on approach and our high quality, low valve sort of style has been made a little out of favor. As we talk to our clients, they know our process, they know what they're investing in terms of our processes. We feel very confident and comfortable with what we're doing. So We have not seen any drop off at all in terms of either retention or sales because of that. So that's probably the most important part of the sort of If you want to say less drop off or a little bit of a drop off in performance. Thanks, Pat. Jimmy, follow-up? Yes. And then on the international business, Your flow seems weak across a number of regions. So if you just talk about that and then also on the Chilean pension market, given how has gone thus far. How do you feel about sort of any potential pension reform there? Yes. All good questions. So the first place I'd Start is in relative to PI net cash flow. I think it was a challenging quarter, but frankly a trailing 12 month basis, you got $4,400,000,000 of positive net cash flow. That's 3 percentage points beginning of year account Balances, it's up 10% compared to the trailing 12 months Q2 2020 and that's up 25% on a constant currency basis. I could get into the details, but examples might be, for example, last quarter we saw $900,000,000 positive And Southeast Asia and Malaysia, negative $300,000,000 this quarter entirely attributable to an institutional Money market fund moving in and moving out. So again, when we look at our long term equity Strategies across the board that are actually holding up really well in these very market these markets. And where there is downward pressure, some of that of course is coming from. They are frankly still struggling from an economic recovery perspective in large part due to COVID and some of what's happening here in the U. S. So at the end of the day, we still We've got a really strong position as you could see when you adjust OE for encaje inflation in the Chile variable investment income. It's a good result for PI and still retaining 32% margins. As it relates to the Chilean elections, that's interesting. A couple of candidates who are challengers here have what I would consider and categorize as more moderate approach to AFP reform. Obviously, we're involved and engaged in talking about those topics with regulators on the value creation to Chilean citizens and how the AFP system has actually worked quite well. It's frankly what's allowed them to use it as a funding vehicle as They've authorized these 10% withdrawals coming out of the AFP system. So we've got a lot of work to do to continue To inform legislators, inform the public, at their concerted effort to do that, it has served the people there well in the past and We believe it still will survive going forward. As you know, we'll have a 1st round of elections in November, 2nd round of elections in December and we'll continue to be vigilant in making sure that our point is made relative to the strength of the AFP. Did that help? Yes. Thank you. You're welcome. Thanks for the question. Your next question comes from the line of Ryan Krueger with KBW. Hi, thanks. Good morning. I just had one quick one in terms of the guidance That you had given at the Investor Day, the 9% to 12% EPS growth. I know you included stranded overhead. Did you include anything for lost fees that you earn on the general account assets that would be reinsured within PEGI? Yes. That was included, Ryan. So the loss fees on DAA were included in the 9% to 12%. Yes. Okay, thanks. That was all I had. Thanks, Ryan. Appreciate it. Next question? The next question comes from the line of Erik Bass with Autonomous Research. Hi. Maybe just a follow-up on Ryan's question on the EPS growth guidance. I do continue to get some questions from investors. So, want to clarify that we're looking at it correctly. But I think you're starting from a base of 567 in 2020, Then assuming 9% to 12% growth, which would imply a range of roughly $7.35 to $7.95 for 2023. And I believe the growth rate assumes the $110,000,000 pre tax drag from lost earnings from the businesses you're exiting and you're not assuming any benefits from redeploying that Capital. So I guess first, do I have that baseline correct? And then if so, should we assume that a sale of the fixed annuity and or SQL blocks would be Accretive to your EPS growth as you redeploy the proceeds. Yes. Yes. You are correct. And then just following up on that last Question from Ryan. It also included an estimate around stranded cost and PGI lost revenue from the general account. Obviously, those last two items are estimates and they would be dependent on the specifics of the transaction, But you have that right. And so again, relative to that guidance, there could be Some upside relative to the deployment of the proceeds from the transaction. Obviously, the magnitude of that will depend on the process and the Specifics of the deal. But again, the confusion was probably that I made a comment slightly dilutive. The slightly dilutive was not relative to that outlook. It was relative to a BAU Result that obviously would be hindered by that lost earnings that I just discussed. Eric, does that help? Are we clear on that one? Got it. Yes. Thank you. That helps. And then maybe the follow-up on it. Could you give a sense of what you're assuming For growth in the RIS Spread and Individual Life Businesses in your guidance, should we assume that earnings from these businesses are Flat or maybe even down over the period given the planned product exits in the stranded costs? Yes. What I would say there is stranded costs are not just in those lines of business. They go over into PGI and they actually go across the entire enterprise. The reason we didn't go into a walk forward on those two lines of businesses as well as obviously corporate is those are the ones that are going to be impacted By the transactions and likely what we expect to see is somewhat of a reset and then a growth that would be more typical from what we have seen Up to this point. And so again, I think that's one that will give you more insight as we transact and as we go forward. But again, the 3 that we didn't give you specific guidance are rolled up into that 9% to 12%. But that's how I would think of it is somewhat of a reset and then a growth from there. Perfect. That's helpful. So just take out the $110,000,000 is a fair, I guess, assumption. Got it. Thank you. Thanks, Eric, for the question. Yes. Your next question comes from the line of John Barnidge with Piper Sandler. Thank you very much. Can we talk maybe a little bit about PGI in the equity product? As I look at the withdrawal activity experience, it looked like it was the lowest level since 2Q 2016 and clearly the turnaround in equity flows really PGI there. Can you maybe talk about what you're seeing from a withdrawal activity perspective as well as your expectations going forward? Thank you. Pat, some insights? Yes. So John, thanks for the question. I think on the institutional side, we're actually seeing Positive net cash flow on the equity side. Some small cap international Yes, there are 2 notable areas. We're also I think I even mentioned in our Investor Day discussion that Origin, which is one of our emerging market Investment boutiques has had some very strong sales growth and they continue to attract some institutional sort of sales activity. So the institutional side, The activity looks quite good on the equity side. I think what you're probably referring to John is what you're seeing maybe within our platforms. Platforms, we are seeing some withdrawals within the mutual fund, particularly the mutual fund. We're actually seeing some, I think, On a broader sort of commentary, we're seeing actually some positive net cash flows in our International Wealth Dublin platform and our SMA sort of product line, specifically with Align Investors, which is a very strong sort of Midcap, large cap manager. So it's going to be a mixed bag in terms of mutual funds. But I think we still believe we have a very strong lineup of equity capabilities The different segments that we cover, John. Follow-up, John? Yes, great. Thank you for the answer. And Dan, a follow-up, maybe Specialty benefits side and the increased loss ratios of dental and vision in the first half of the year. Can you talk about addressing that from a pricing dynamic on renewal and how you're maybe Thinking about whether this could lead to more regular frequency than pre pandemic since we all suddenly became aware dentist offices could be closed on a long term basis. Amy, please? Yes, sure. Happy to give an answer to that. So I think Dan mentioned that the tail end of the question that we took before, but that is That the dental business is one of our highest product lines in terms of annually renewable. So when we look at those things that are going to be Naturally repriced every year that's going to include dental. We do trend. We do a look on trend on a regular basis. We do a lot of regular pricing scrutiny, in fact, more than once a year, probably on more of a quarterly basis to look at our dental Price is exactly what they need to be in the marketplace. So the good news there is, the brokers and employers who have those products are used to Sort of that regular cadence. And so what I would say we're seeing first half of the year though isn't probably indicative of big pricing changes. I would say we tend to look at those over the course of a full year. Now the pandemic has put some different dynamics at play. So we'll continue to be Really agile in responding to those, but if the second half of the year emerges the way that we believe it's going to, We will not be facing a large pricing movement. Now what I would say is that when we look at April May in terms of their utilization and severity, Those were more notably higher than even what we're seeing in June July. So those are beginning to taper off. So that's Increasing our certainty that that second half of the year is going to behave on a more normalized pattern. And so I don't foresee we're going to have to make large movements. Hopefully that helps, John. It does. Thanks for the answers and good luck. All right. Thank you so much. Your next question comes from the line of Tracy Bendiguez with Barclays. Thank you. Turning to your strategic update, I know you're not saying a lot About it, but is it fair to say that an FA block sale could potentially happen sooner than ULSG since on the buyer side, There's a lot more saturation from alternative asset managers? Yes. I think the best way to think about it is we view these As potentially one transaction and there's no shortage of interest in these blocks, whether it's the annuity or the life. As you can expect, we're pulling a lot of data together and initiating the process, but we our intention is to go in as to maximize Shareholder value and whatever structure that is, you're correct in making the assumption that there is sort of a better path or a more well worn out path Relative to the annuity blocks, there's something like ULSG. But again, we feel like there are good buyers out there. Deane, anything you'd like to add to that? No. I think if we think about the outreach that we've had since the announcement and the discussions that we've had, We do think there's a path for execution on both of those. We're diligently focused on that We think that we'll have further announcements over the next 6 to 12 months on both transactions. On full completion. Tracy, a follow-up? Yes. My follow-up is, I'm wondering why you wouldn't refinance your $300,000,000 2022 debt maturity. You would still be in the 20% to 25% Leverage range and it would leave more room to get to a capital return at the higher end of your range. We are planning to refinance that. So is your question why we would do that? Okay. Yes, it wasn't clear to me in your Comments, I thought you just mentioned you will pay that down, which felt to me that there was no refinancing, but you're looking at We are not refinancing. Our plan is to pay that off when it comes due in Q3 of 2022. If you remember back, we during the pandemic Took the opportunity to issue $600,000,000 of extra debt, due to uncertainty in the marketplace and very, very attractive rates. Fast forward today, we found that we do not need that for that volatility or any credit Pressure from the pandemic. And so we felt it was prudent to again take down the debt And retire that $300,000,000 that comes due in Q3 of 2022. Okay. So I should think about that as prefunding and more likely you would want to operate at the lower end of that range? That's correct. Correct. That's exactly right. Okay. Thank you. Thanks, Tracy. Your next question comes from the line of Suneet Kamath with Citi. Thanks. Good morning. I wanted to come back to the scale issue in RIS Fee and maybe just ask for your thoughts on something. So Last week, Empower said on the call that they viewed scale in kind of the DC business as 6,000,000 plant participants, which was up from $2,000,000 5 years ago. And I guess what surprised me was just the rate at which that change, like a threefold increase in planned participants to get to scale. And I guess I'm wondering if you had any thoughts on that change, like that pace of change or if there's something different about your business mix Sir, your target market that maybe would be inconsistent with that commentary? Yes. Everyone's entitled to their own views and Opinions on what is the right scale and those people with a lot of scale like Principal would argue that Having more is better and it helps drive down your unit costs. So I would agree with the overall arching view that more is going to be better And then you have to start focusing on the things that really matter, which is what is the quality of the customer service that you're able to deliver? What are your capabilities and that gets around to total retirement suite and DB and non qualified And clearly the importance of defined contribution 401 and of course what is that customer experience. So The scale is one key component. It's an important component. We're there and we're going to continue to enhance and deploy technology to help Even be more efficient. Renee, I don't know if you have any additional thoughts on this topic? Yes. Dan, you really you've nailed the really critical pieces of this. I think The thing to remember, when we talk about our value proposition and how we compete in the marketplace, We differentiate on several things. First off is total retirement suite and our ability to take our capabilities far beyond defined contribution. Defined contribution, there's no doubt. That is a highly competitive marketplace and record keeping fees are Being driven down not only by competition, but also just automation and digitization of the business. But when we look at our ability to pull together multiple retirement plan types and serve that up to the plan sponsor and their participant in a Fully integrated basis using proprietary capabilities and technology, it sets us apart. And the same thing is true with The participant in the plan sponsor experience that we deliver again fully integrated across multiple plan types. And last of all, our ability to work closely with our global asset manager, that Truly is expert in retirement. And so all of those things create a differentiation that allows us To successfully compete against other competitors that might be more solely or primarily focused on the defined contribution market. Does that help, Suneet? Yes. No, that makes a lot of sense. Thanks for that. And then I guess my follow-up for Deanna. On the $110,000,000 of Pre tax earnings from the blocks that you plan to divest. Our assumption is that the vast majority of that is from the fixed annuity Block and there's not much of an earnings contribution from the SGUL block. Is that a fair characterization? And can you give any help in terms of that $1,500,000,000 of capital that's in those businesses, what the split is between the two blocks? Thanks. Yes. I think that's a fair assumption on the earning. I don't think we feel it's prudent to split those numbers into the underlying pieces given the That's that we are planning to market the divested business as a single transaction and we're already providing incremental disclosure to interested parties. We'll take the opportunity when we announce the transactions to determine whether disclosing more details on the specific Blocks that we transact is warranted, but at this point, I think your assumption on the earnings split is directional. Hopefully, you can appreciate the rationale behind the discussion, Suneet. Yes. Understood. Thank you. Okay. Thank you. Your next question comes from the line of Josh Shanker with Bank of America. Yes, sorry about that. Thank you. I just had a question about calculating this inflation issue in Brazil. Is that a year over year change or is that a quarter over quarter? And if the quarter were To end today, how could we sort of translate that into an outcome for the quarter? Deanna, you want to shed some light on that? So a couple of things I'll talk about there. And again, that is a quarter impact. And so this is all coming about. And if you actually go back To the it's actually a true up is basically what it is, right? And so we have to calculate, based on this closed block of business That we have not sold since 2,001. There's a little bit of feedback coming in on the line. You might want to go on mute. I'm going to mute while you're talking. Okay. Thank you. Yes. So the liability and the underlying contract provision links the inflation, to an index, The IGPM due to unavailability of those assets only about 50% of the assets backing that liabilities that we're able to exactly match to that indices. The other remainder we track to a retail inflation index, the IGPA. Over a long period of time, this has actually been very benign. Back to 2011, it's actually been a cumulative benefit, But it has been a hit over the last 12 months. There's a portion of that in the given quarter that is a lag, But the majority of that impact is the fact that there's a mismatch between what we're earning on the assets versus what we're crediting on the liability. We can take it offline with IR and get into some more details of how you could potentially track this a little bit more closely. But we do believe That over the long term, this will come back into more congruence between the two indexes, but we have a little bit of a mismatch Just given the economic and financial volatility that's occurring in the Brazilian market. It's also probably worth noting, How is it going to be? Yes. Go ahead. Yes. This is an active conversation with the regulators and the appropriate authorities. They're aware of it. There's a lot of domestic players that are obviously impacted, including our joint venture partner. So this is getting a lot of airtime And a lot of debate and discussion on what is an appropriate solution. I cut you off. Go ahead to your question. I'll take the Month to date conversation offline with you guys and figure out what I can do there. I just want to change to PGI for a second. The results were Very good in the quarter. I'm wondering if there is a strategy shift going on where You're able to push more money into the higher fee generating strategies? And is there can we talk about really what led to the really strong results in the quarter? I don't think we want to ever push. I think the idea is that we're going to have very attractive products for our customers. And right now the performance and the asset classes line up well with what Customers are asking for, but Pat, some additional color? Yes, Josh, I think it's really that we have an Incredibly very vibrant marketplace right now both in terms of market conditions and in terms of the flow of capital and some of our Flagship capabilities like real estate, which are absolutely higher fee generation capabilities are in vogue right now. So I think that's one area just to highlight. Our very sort of alpha producing active specialist capabilities, we're really providing that sort of upper first and second quartile performance. We're getting a lot of Strong support with that. And I think our multi channel distribution model, our distribution teams led by Tim Hill and Kirk West, Both on the platform side, U. S. Side and on international side, are really performing very well right now. So we're seeing to be doing really well both in terms of The capabilities that we can offer to the marketplace and getting those capabilities to the broad reach of the retail Retirement and the institution marketplace. So it just seems to be coming together quite nicely right now. Thanks, Pat. Josh, thanks for the answers. Our final question will come from the line of Mike Ward with UBS. Thanks for fitting me in guys. Good morning. I was just wondering if you could maybe frame the strategic review results. You're recognizing you still have to get through the business exits and derisking that you've identified, Which is no easy feat, I'm sure. But just wondering if we should think about the review as being largely complete or is it sort of ongoing? Was this kind of the first step? Could there be more incremental de risking or divestment in other lines over time? Yes. I really, really appreciate the question, Mike. And what I would first say is our Board and our Board Finance Committee just did An incredible job under Claire Richards' leadership and Scott Mills, our Lead Director. As I said earlier in my comments, it was an incredibly thorough Process, we've put in some additional internal mechanisms to monitor performance and to ensure that the go forward strategy Lives up to our investors' expectations and our expectations. And so I don't think it's ever complete. I think the reality is you're Constantly looking at your portfolio for those businesses and those markets that can drive growth to reward investors. And so I'd say Phase 1 is certainly in play as we speak. And I would look for us to continue to look very closely at these Businesses in these markets to make sure that they're meeting our appropriate thresholds and we'll continue to update investors as we go along. Did you have a follow-up? No, that was it. Thanks very much guys. I appreciate the question. We have reached the end of our Q and A. Mr. Howson, your closing comments please. Yes. Thank you. And again, if I were to summarize, I think it was a very strong quarter, both measured by financial and customer metrics, Strong return of capital and advancing our strategy. My closing comments are really before and those were the same comments I made when we closed out our Investor Day, which was we're going to stay focused on our long term growth strategy. We are committed to creating long term shareholder value. We're confident in our ability to execute. We've demonstrated it historically. And again, this quarter was no exception. And we've got 38,000,000 customers around the world to help Chief Financial Security and that's job 1 for us. So appreciate your time today and look forward to follow-up conversations with all of you. Thank you. Thank you for participating in today's conference call. This call will be available for replay beginning at approximately 1 o'clock p. M. Eastern Time Until end of day, August 3, 2021, 7,696,420 is the access code for the replay. The number to dial for the replay is 855-859-2056 for U. S. And Canadian callers or 404 537-3406 for international callers. You may now disconnect.