Principal Financial Group, Inc. (PFG) Earnings Call Transcript & Summary

Welcome to the 2021 Annual Meeting of Shareholders of Principal Financial Group. Please submit any questions or comments for today's meeting by clicking on the message icon in the upper right-hand corner of the virtual meeting site. To return to the main page, click the icon at the top of the screen. The polls for this meeting are open and will close just prior to the inspectors report. Closing will be announced. If you've already sent in your proxy or otherwise voted, you do not need to do anything else today. It is now my pleasure to turn today's meeting over to Dan Houston, Chairman, President and Chief Executive Officer of Principal Financial Group. Mr. Houston, the floor is yours.

Good morning. Meeting please come to order. Welcome to the 2021 Annual Meeting of Shareholders of Principal Financial Group. As a result of COVID-19 pandemic and the interest of everyone's health and safety, we are holding this meeting via webcast. The agenda and rules for today's meeting are available on virtual meeting site by clicking on the link on the left side of the page. I'm Dan Houston, Chairman, President and Chief Executive Officer of Principal Financial Group. With me today is Chris Littlefield, Executive Vice President, General Counsel and Secretary; Deanna Strable, Executive Vice President and Chief Financial Officer; and John Egan, Vice President of Investor Relations. All members of the company's Board of Directors are participating in today's meeting as are the company's senior executives, including the executive management team. I invite your questions and comments during today's meeting. Those questions and comments that are related to any proposal will be addressed first during the meeting. Other questions and comments will be addressed towards the end. I'd like to introduce the Directors who are standing for election today: Roger Hochschild, Diane Nordin, Alfredo Rivera and myself, Dan Houston. The skills and experience each director candidate brings to our Board of Directors are detailed in the proxy materials you've received, but I'll summarize a few of them for you. Roger Hochschild has been on our Board since 2015. He serves on our Finance Committee and chairs the nominating and Governance committee. Roger is the Chief Executive Officer and President of Discover Financial Services. He has executive level experience and many facets of financial services, including asset and investment management, marketing, mergers and acquisitions and strategic planning. Diane Nordin has been on our Board since 2017, and serves on the Audit and Finance committees. She was a partner of Wellington Management Company, LLP, a private asset management company from 1995 to 2011. Diane has extensive experience in asset management business as well executive level experience in accounting and finance, talent management, executive compensation, financial services, international operations, product development, risk management and strategic planning. Alfredo Rivera joined the Board just recently in 2020. He's been President of the North America operating unit of the Coca-Cola Company since 2020, and has executive level experience in accounting and finance, talent management, executive compensation, financial services, international operations, product development, risk management and strategic planning. Alfredo Rivera joined the Board just recently in 2020. He's been President of the North America operating unit of the Coca-Cola Company since 2020, and has executive level experience in accounting and finance, consumer, international, marketing, strategic planning, sustainability and ESG as well as technology. And I Dan Houston joined the company in 1984, and have been Chairman, President and Chief Executive Officer since 2016. I've managed numerous businesses and help lead the transformation of the company to a global asset management leader. Other members of the Board are also participating in our meeting today. Those directors are: Jonathan Auerbach, Maliz Beams, Jocelyn Carter-Miller, Michael Dan, Sandra Helton, Scott Mills, Blair Pickerell, Clare Richer, Elizabeth Tallet, who is retired from the Board effective with this meeting and our newest member, Claudio Muruzábal, who will join the Board on July 1 of this year. The Board has appointed Computershare to serve as inspector of election for this meeting. Representatives from Computershare as well as our independent auditing firm, Ernst & Young, are participating in today's meeting. Chris, do we have a quorum?

Yes.

The Board of Directors set March 24, 2021, as the record date for determining shareholders entitled to vote at this meeting. The representatives of Computershare present today have subscribed their oath of office and report to us that on the record date, there were a total of 272,457,272 shares of the company's common stock outstanding. The holders of not less than 1/3 of the shares of common stock entitled to vote at this meeting are present today by virtual participation or by proxy. We have a quorum. An affidavit of mailing has been delivered to us by Computershare, the inspector of the election, attesting to the fact that the notice of the meeting, the proxy statement and the 2020 annual report were all properly made available to all shareholders of record beginning April 5, 2021. As stated in the notice, the purposes of this meeting are to vote on the proposals as well as any other business that may properly come before the meeting. On the basis of the Secretary's report, the meeting is duly convened. Let's turn to the meeting's agenda available to you on the meeting's website. The polls for each proposal voted on this meeting are open, and I will announce the closing shortly. If you've already sent in your proxy or otherwise voted, you don't need to do anything else today. But if you want to vote now or revoke your proxy and change your vote, click on a cast your vote link on the meeting website. Please vote now. Chris, would you present the proposals, please?

Yes. Proposal number one. On behalf of the Board of Directors, I nominate the following persons, Roger C. Hochschild, Daniel J. Houston, Diane C. Nordin and Alfredo Rivera, for election as Directors to serve in the class as terms expire in 2024 or until each of their respective successors have been elected and qualified. Proposal 2. On behalf of the Board of Directors, I move adoption of the following resolution resolved that the compensation paid to the company's named executive officers, including the compensation discussion and analysis, compensation tables and narrative discussion is hereby approved. Proposal #3. On behalf of the Board of Directors, I move adoption of the following resolution: resolved that the appointment of Ernst & Young LLP to audit the consolidated financial statements of the company for fiscal year ending December 31, 2021, be ratified. Proposal #4. On behalf of the Board of Directors, I move adoption of the following resolution. Resolved that the Principal Financial Group 2021 Stock Incentive Plan is hereby approved and authorized.

Are there any other questions from shareholders regarding any of the proposals on the ballot? If you haven't already done so, please submit any questions or comments regarding any of these proposals. To submit a question, click on the message icon in the upper right-hand corner of the page, we will pause for a moment while we gather the questions and comments. John?

There are no questions pertaining to the proposals. All other questions will be answered at the end of the meeting. The polls will close momentarily. We will now pause to allow time for final voting. Please submit your final votes now. [Voting]

There being no further business to come before the meeting and all ballots have been collected, the polls are now closed. We are ready for the inspector of the election to report on the vote. Chris, will you please read the report?

A substantial majority of shares entitled to vote at this meeting have been voted by proxy. Those results, plus the shares voted at this meeting, will be tallied, and the final results publicly announced within a few days. The Inspector of the Election reports that each of the directors nominated by the Board for election received substantially more than a majority of the votes cast. The advisory vote on the company's executive compensation program indicated approval of the program by a substantial majority of the votes cast. A substantial majority of the votes cast were in favor of the ratification of the appointment of Ernst & Young LLP, and the Principal Financial Group 2021 Stock Incentive Program was approved by a substantial majority of the votes cast.

Thank you, Chris. Based upon the preliminary report of the inspector of election, I declare that Roger Hochschild; myself, Dan Houston; Diane Nordin and Alfredo Rivera, are elected Directors. The advisory vote on executive compensation indicates approval of the company's executive compensation program as set forth in the proxy statement. The appointment of Ernst & Young LLP as independent auditors for 2021 is ratified, and the Principal Financial Group, Inc. 2021 Stock Incentive Program was approved by a substantial majority of the votes cast. The meeting is now adjourned. I'd like to thank you again for taking the time to join us today. On behalf of the Board of Directors and all the Principal employees, thank you for your continued loyalty and support. I'll now share with you some business highlights from 2020 and an update on our strong financial position and our new corporate responsibility commitments. Following that, we will address any remaining questions that have been submitted. 2020 was truly one for the ages. A global pandemic as well as social and political unrest here and abroad. Bottom line, we dealt with these challenges head on and kept our promises to our customers and employees. Our diversified and integrated business model remains resilient and very much intact. In 2020, we prioritized exceptional service to our customers and employee safety above all else, just as we have throughout our 141 year history. In response to COVID, we provided support and relief to our customers, transitioned employees to remote work and stayed focused on our long-term objectives, such as integrating the institutional Retirement and trust business, and advancing our digital strategy that is yielding tangible benefits to our customers. We have less exposure to the industries that have been impacted the most from COVID, including hospitality and travel. The strength and resolve of the small to medium-sized businesses we work with in our U.S. retirement and insurance businesses, combined with our unique ability to serve them, continues to be a differentiator for Principal. COVID has had an impact on the retirement and group benefits landscape with both employers and employees recognize the need for benefits to protect health and well-being of both individuals and their families. This has magnified the role employer benefits play in attracting and retaining top talent, especially within the small to medium-sized business community. Principal delivered full year 2020 non-GAAP operating earnings of $1.4 billion or $4.94 per diluted share, a strong result in a particularly challenging year. COVID negatively impacted our 2020 non-GAAP operating earnings by net $23 million, primarily due to impacts from COVID-related claims, fee waivers for hardship withdrawals and premium relief. To mitigate some of the revenue pressures we faced in 2020, we took actions throughout the year to manage our expenses aggressively. Compared to our expectations at the beginning of 2020, we reduced expenses by nearly $250 million. This impacted all businesses and contributed to resilient margins despite revenue pressures. Total company AUM increased $71 billion year-over-year or 10% to a record $807 [ billion ] at the end of 2020, and this increase was driven by $14 billion of positive net cash flow, favorable market performance and the migration of some of the institutional retirement trust business, which I'll touch on in a few minutes. Despite the pressure and uncertainty over the last year, we remain in one of the strongest financial positions in the company's history. We have the financial flexibility and discipline needed to opportunistically deploy capital and manage through a time of economic uncertainty. At the end of 2020, we had $2.7 billion of total company available cash and liquid assets and $2.9 billion of excess and available capital. Our estimated risk-based capital ratio of 440% and was above our 400% target. The RBC ratio was elevated throughout 2020 due to uncertainty and the timing and the impact from credit drift and losses, which were significantly better than we estimated at the start of the pandemic. We expect RBC ratio will move down towards our targeted 400% throughout 2021, and our non-GAAP debt-to-capital leverage ratio, excluding AOCI, is low at 23.5%. Our next debt maturity of $300 million isn't until 2022, and we have well spaced ladder debt maturity scheduled into the future. We returned more than $900 million of capital in 2020 to shareholders through common stock dividends and share repurchases. We paused our share repurchase program at the onset of the pandemic in early March last year in an effort to preserve capital during a very uncertain time. We restarted share repurchases in the fourth quarter as uncertainty in the macroeconomic environment subsided. We plan to deploy $1.4 billion to $1.8 billion of capital in 2021, including $600 million to $800 million of share repurchases. Additionally, we increased our common stock dividend payable in the second quarter by $0.05 or 9% over the dividend paid in the first quarter, this increase helps us stay on track with our targeted 40% dividend payout ratio. I'll now share some additional execution and business highlights, starting with the integration of the institutional Retirement and Trust business that we acquired in 2019. The migration of the retirement business will be completed in the second quarter of 2021 and the trust and custody business in the third quarter. In total, we're adding more than 2.2 million retirement plan participants and approximately $140 billion in retirement account value through this acquisition. We're beginning to realize some tangible benefits of this acquisition. Having scale and additional distribution channels helped drive record retirement sales in the first quarter, and our pipeline has doubled compared to a year ago. As we're servicing more customers, revenue synergies are starting to build and exceeded our expectations in the first quarter, including IRA rollovers, automatic IRAs, and asset management opportunities. Additionally, expense synergies will begin to emerge in the second half of the year, and the transition services agreement will wind down by the end of the year. This business is a powerful growth driver for Principal. We're increasing our scale to better serve small, medium and large-sized clients. We're enhancing our capabilities, and we have a more robust platform that is needed to compete in the retirement business moving forward. A few of the highlights in Retirement business. We are 1 of the first to market with a uniquely designed pooled employer plan, Principal EASE, combining our integrated retirement plan administration, customer service and investment management capabilities. This paves the way for unrelated employers to participate in a single pooled employer plan to give more people access to retirement benefits. We also launched Simply Retirement by Principal. And all digital 401(k) solution that helps small business owners and their financial professionals build retirement benefit programs in a matter of just a few hours. Simply Retirement features competitive pricing, our industry-leading digital onboarding experience and tools that make it easier to administer. In Chile, Cuprum recorded its highest net transfer rate of new customers in the third quarter of 2020. And since our acquisition of the company in 2013. This new customer growth was driven by Cuprum's easy-to-use digital solution as well as our investments in direct-to-consumer and cloud capabilities, all of which have helped make transactions simple for our customers. We strategically review our business portfolio on a regular basis to ensure alignment with our goals, expertise and client demands choosing to enter or exit a business or product when it makes sense. Earlier this year, we announced we were exiting our retail investment and retirement business in India. While recent business results within our Indian Asset management business have been improving, we did not have the scale needed to deliver long-term value for shareholders. Additionally, in individual life, we discontinued new sales of our lifetime guaranteed universal life products, a small portion of our overall block and most interest rate sensitive. Both of these actions are examples of our strategic focus and discipline. Principal recently unveiled new corporate responsibility commitments to bring additional accountability to our ESG strategy. Through these commitments, we're pledging enhanced support for women and minority-owned businesses, continuing to nurture a diverse and inclusive work environment for our 17,000 employees around the world, and by 2050, we are targeting a Net Zero carbon emissions. We shared these clearly defined commitments in our 2020 corporate social responsibility report to help ensure our customers, employees and shareholders understand that we're truly dedicated to taking action, making progress and driving outcomes for a more inclusive and sustainable world. You can find out more about how we plan to drive impactful change for the future by visiting principal.com/sustainability. I'd like to highlight some recent changes to our executive management team as well as our Board of Directors. We welcomed 3 new members to our executive management team over the last year. Ken McCullum joined the team in August of 2020 as our Chief Risk Officer. Through Ken's vast industry experience as well as financial and risk management acumen, he has helped us gain a better understanding of the complexity of risk in our organization. Thomas Cheong, who is responsible for Principal Asia operations; and Roberto Walker, who is responsible for our Latin American operations, joined the team at the beginning of 2021. Having Roberto and Thomas as part of our executive team has been a critical step to ensure our decision-making reflects the voice of all of our customers. They bring direct local perspectives on regional market dynamics and customer preferences that help inform new solutions and distribution channels in their markets and across Principal. I also want to recognize the 3 executive members who retired this past year, all of whom had over 30 years of service with Principal. Luis Valdés led our Principal International operations was central to growing that business from an emerging business into the significant contributor it is today. Tim Dunbar, the former President of Principal Global Asset Management helped us continue to grow our position as a global leader in asset management during a time of unprecedented change and disruption in the industry. And Julia Lawler, our former Chief Risk Officer, helped lead the company through some of the most challenging times during our 141 year history as our Chief Investment Officer during the Great Recession and Chief Risk Office through much of the COVID-19 pandemic. Within the past 6 months, we introduced and welcomed 3 new members to the Board of Directors. Alfredo Rivera, President of North America Operating Unit at the Coca-Cola Company, joined the Board in November of 2020. Alfredo is a seasoned executive with more than 35 years of strategic global business experience. Maliz Beams, former CEO of Retirement Solutions for Voya Financial, joined the Board in February and brings significant retirement and asset management expertise. And Claudio Muruzábal, President of SAP, South Europe, Middle East, Africa and Chairman of SAP, Latin America and the Caribbean, who will join the Board on July 1. Claudio brings immense global experience in many of the markets where Principal does business today, along with more than 25 years of leadership in the technology industry. As I mentioned at the beginning of the meeting, Liz Tallett is retiring from the Board effective today. Liz joined the Board in May of 1992, and for nearly 3 decades, she's been a passionate, knowledgeable advocate for Principal success. During her tenure on the Board, which includes 12 years as Lead Director, Liz provided strategic counsel to 5 CEOs. The time she spent with us has been marked by tremendous growth and success for Principal. Her wisdom experience and perseverance were a constant source of strength and leave an indelible mark here at Principal. Thank you, Liz, for your dedication and countless contributions to Principal. We wish you all the best in retirement. Before turning to our Q&A session, I'll remind you that we're hosting our Virtual 2021 Investor Day on June 29, where we'll share our strategies for long-term growth and outcomes of our strategic review. If you haven't already done so, please submit any questions or comments you may have. [Operator Instructions] John?

Okay. There are no questions, Dan. Your closing comments, please.

Thanks, John. Appreciate that. And thank you for tuning in today and listening to our Investor Day. Just another reminder. We're excited about laying out for you on June 29, 01:00 to 04:00 Central Standard Time on, as I said, June 29, our Investor Day, to outline more of our path forward. Second thing I just wanted to say is we'll get beyond this global pandemic are hearts go out to many of our employees outside the U.S. that are a little bit further behind. Of where we're at here in the U.S., but our employee safety is a priority as is serving our customers. And I couldn't be more proud of our 17,000 employees that continue to deliver world-class service. Just as a reminder, our job is to deliver financial security to our customers. We run -- we operate in a very much global environment. And it's truly our passion to deliver this -- the security to our customers over the long period of time. So with that, I'd just like to thank you for your continued support. We've enjoyed many conversations we've been having with investors over the course of the last couple of years here and look forward very much to seeing you in-person, hopefully sooner rather than later. So with that, we'll let you go and thank you so much. Have a great day.

This concludes the meeting. You may now disconnect, and have a pleasant day.