Principal Financial Group Inc

Good morning and welcome to the Principal Financial Group's second quarter 2020 financial results conference call. There will be a question and answer period after the speakers have completed their prepared remarks. If you would like to ask a question at that time, simply press star and the number one on your telephone keypad. We would ask that you be respectful of others and limit your questions to one and to follow up so that we can get to everyone in the queue. I would now like to turn the conference call over to John Egan, Vice President of Investor Relations.

Thank you and good morning. Welcome to Principal Financial Group's second quarter 2020 conference call. As always, materials related to today's call are available on our website at principal.com backslash investor. Similar to last quarter, we posted an additional slide deck on our website with details on our U.S. investment portfolio. Following the 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&A session include Renee Schaaf, Retirement Income Solutions, Tim Dunbar, Global Asset Management, Luis Valdez, Principal International, and Amy Frederick, 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 strategies. Risk and uncertainties that could cause actual results to differ materially from those expressed or implied are discussed in the company's most recent annual report on Form 10-K 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 presentations. Our 2019 Corporate Social Responsibility Report was released a few weeks ago. Learn more about how we are working to build a more inclusive, resilient, and sustainable global community by reading the report on Principle.com. Dan?

Thanks, John, and welcome to everyone on the call. I hope you're all well and have found some sense of normalcy during these unprecedented times. This morning, I'll provide an update on how Principle is responding to the COVID-19 pandemic and its impact on our global economy, our strong financial position, key performance highlights for the second quarter, and how we are well positioned for long-term growth. Deanna will follow with additional details on our capital and liquidity position and our investment portfolio, as well as impact from COVID and our second quarter financial results. The safety of our employees and our customers continue to be top of mind. As a vast majority of our employees continue to work remotely, our previous investments in technology and our accelerated digital investments have enabled us to rapidly meet the challenge of a changing operating environment. Our ability to communicate effectively with our employees, distribution partners, and customers has allowed us to minimize disruption and service to our 32 million global customers. Consistent with our core values and mission, we continue to help our customers and communities through this pandemic. Since it announced in April, the Giving Chain, powered by Principal, has provided more than 50,000 meals for more than 120 businesses in over 30 communities around the world. And we continue to focus on reducing the financial burdens that our customers may be facing by waiving certain fees for participants taking COVID-related withdrawals and loans from their retirement accounts. We're also working closely with plan sponsors and group employer customers to maintain their retirement and protection plans. This pandemic has certainly created some challenges for Principal to overcome, but our diversified business model has been resilient. I'm confident that we're in the right businesses with the right teams in place, and we'll continue to make investments to create long-term shareholder value. We serve our customers across small, medium, and large businesses in the U.S., and we know there are some concerns about the health of small to medium-sized businesses right now. We're finding that the impact from COVID is less about large versus small businesses and more about what industry business is in. As shown on slide seven, we have less exposure to the industries that have been the most impacted by COVID, including accommodation and food services, retail trade, and arts and entertainment. And we have more exposure to industries that are less impacted, such as professional services, wholesale trade, and finance and insurance. While the impacts of unemployment and the economic recovery are uncertain and vary by industry, The amount of stimulus business owners have received from the U.S. government is unprecedented and has helped stabilize businesses during the quarter. As a result, our U.S. retirement and group benefits businesses have had less of an impact from the current environment during the second quarter than some may have expected due to our intentional diversification by industry and geography. Turning to slide eight, we remain well capitalized and are in one of the strongest financial positions in our history. At the end of the second quarter, we had over $3 billion in available cash and liquid assets and over $2.3 billion of excess and available capital. We'll continue to be diligent stewards of our capital and take a balanced and disciplined approach to capital deployment, carefully weighing opportunities as they arise. Moving to our second quarter results, we delivered non-GAAP operating earnings of $403 million. Excluding significant variances, earnings were down 8% compared to the strong prior year quarter partially driven by foreign currency headwinds. During the quarter, we continued to make progress to align our expenses with revenues, and our second quarter results reflect benefits from our expense management actions. Compared to the first quarter, total company AUM increased $71 billion to $702 billion at the end of the second quarter. This increase was driven by favorable market performance as well as the positive net cash flow. Market performance contributed $67 billion to AUM in the second quarter, helping to offset most of the unfavorable performance in the first quarter. Additionally, we ended the quarter with $142 billion of AUM in our China joint venture and $713 billion of assets under administration in the Institutional Retirement and Trust, or IRT, businesses. Through the first six months of the year, total company net cash flow was a positive $9 billion. including more than $6 billion in the second quarter. On a trailing 12-month basis, net cash flow of $23 billion improved significantly from $400 million in the year-ago period, with $21 billion of the increase from PGI. This achievement highlights the strength of our distribution network, our investment performance, and our in-demand products and solutions. RIS fee generated over $700 million of positive net cash flow. This was driven by sales of $2.8 billion low contract lapses, and continued but pressured growth in reoccurring deposits. Transfer deposits were down compared to a year ago period due to lower sales, while participant withdrawals were slightly elevated but in line with our expectations during a stressed period. RIS spread net cash flow was flat despite $2.1 billion of sales, including $1.1 billion of opportunistic issuance and investment only. Due to the low interest rate environment, we've started to see the pension tourist transfer pipeline slow down, and we continue to expect lower annuity sales for the remainder of the year. Principal International generated $900 million of net cash flow and marked its 47th consecutive positive quarter driven by positive flows in Mexico, Chile, Hong Kong, and Brazil. Our collaboration between Principal International and PGI continues to show results as we won a large institutional mandate in an equity fund in Mexico. The investments that we've made in the digital platform in Chile are also paying off as we've continued to onboard and service customers during this pandemic. While not included in the reported net cash flow, China had $4.6 billion of net cash flow in the quarter as market volatility drove investors to money market funds. PGI-sourced net cash flow was a positive $4 billion. This was our highest quarter of both PGI-sourced and institutional net cash flow since 2016 and was aided by the continued strong net cash flow on our mutual fund platform. Institutional sales were across a number of equity and real estate strategies. In the current low interest rate environment, there's an increased demand for yield and proven investment performance. As shown on slide 14, our investment performance remains strong. At quarter end, 75% of principal mutual funds, ETFs, separate accounts, and collective investment trust were above median for one year 81% above median for three year and 80% were above median for five years. Additionally, for our Morningstar rated funds, 77% of the fund level AUM had a four or five star rating. This continued strong performance positions us well to attract and retain assets going forward. The strong net cash flow across the company is a testament to the great work our teams have been doing in a challenging environment to create in-demand products and leverage our digital investments A few examples include in PGI, our principal blue chip fund was awarded the best large cap growth fund over the past five years by Lipper. And principal real estate investors was named a 2020 green lease leader, achieving gold recognition from our commitment to high performing and sustainable property management. Brazil Prev, our joint venture with Banco do Brasil and Principal International, has had great traction with Brazil Prev Facil, a retail long-term savings product that requires no money to open and only a contribution of about 20 U.S. dollars per month to maintain an account. And under two years, we have sold more than 500,000 plans as we've reduced the barriers to entry for long-term savings and helped an underserved market. From a digital perspective, our principal mobile app is now a top-rated app in the app store in the retirement industry. with more reading and actionable feedback than our competitors. We also launched an interactive dashboard for retirement plan sponsors and advisors to understand the behaviors of plan participants. Since its launch in April, we've had extremely positive feedback on the dashboard, and it's a differentiator for principal in the marketplace. In individual life, we've seen continued adoption of our term life online self-service tool. Principal Life Online, one of the first fully digital experiences in the industry. Since January, we've had 25,000 applicants utilize this tool. By leveraging our digital application tools and investments in the underwriting automation, more than a third of our underwriting approvals are able to be completed with less than 10 minutes of underwriting time. Through the first six months of the year, I'm proud of our 18,000 employees executing our diversified and integrated business model. Our capital position remains strong, and we continue to invest for the future while aligning our expenses with revenues. Before I turn the call over to Deanna, I want to make a few comments regarding Principal's dedication to social equality. Principal has a strong history of doing the right thing, and in terms of diversity and inclusion, we have an extensive track record on being recognized for our efforts, including being named by Forbes as one of the best employers for diversity in 2020. Global inclusion is a business imperative for Principal, and we are driven by our purpose of making financial security accessible to all. While we are all proud of the efforts thus far, we continuously push ourselves to do better, both in our communities and our workplace. With that, let me turn the call over to Deanna. Deanna?