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

Good morning, and welcome to the Principal Financial Group 2023 Outlook Conference Call. [Operator Instructions] I'd now like turn the conference call over to Humphrey Lee, Vice President of Investor Relations.

Thank you, and good morning. Welcome to Principal Financial Group's 2023 outlook call. Materials related to today's call are available at investors.principal.com. In addition to our outlook call materials, we posted a refresh and recast fourth quarter 2022 financial supplement on our website reflecting the targeted improvements for long-duration insurance contracts accounting guidance or LDTI. It also includes updates to our financial reporting segments to better align our financials with how we are managing our businesses, and we enhanced our disclosures to provide more visibility into the drivers of the earnings power of our businesses. For our reporting segments, we are now reporting our U.S. retirement business in total in the Retirement and Income Solutions segment. We introduced a new Principal asset management segment that includes Principal Global Investors and Principal International, and we updated the name of the U.S. Insurance Solutions segment to Benefits and Protection. Following a reading of the safe harbor provision, CEO, Dan Houston, will provide more details on these changes in his prepared remarks. We will then open the call for questions. CFO, Deanna Strable is under the weather and will join the others for Q&A, including Chris Littlefield, Retirement and Income Solutions; Pat Halter, Principal Asset Management; and Amy Friedrich, Benefits and Protection. 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 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 measures. Definitions are available in the 2023 outlook call slide presentation on our website. Dan?

Thanks, Humphrey, and thanks to everyone for joining the call today. In 2021, we outlined our strategic path forward, focused on a higher growth, higher return and more capital-efficient portfolio balanced with a commitment to return more capital to shareholders and enhance enterprise growth. This simplified model and framework guided our successful execution in 2022 despite a challenging macroeconomic environment. First, we reinsured our U.S. retail fixed annuity and universal life insurance to a secondary guarantees business in 2022, a key milestone that reinforce our strategic path forward, improved our capital efficiency and our overall risk profile. Second, we delivered on our strengthened capital management and deployment strategy, including our commitment to rightsize and return the excess capital that we have built up during the pandemic. And finally, we adapted to the volatile and uncertain macroeconomic environment throughout 2022. We took appropriate action to align our expenses with pressured revenue while continuing to serve the needs of our customers, invest for growth and deliver strong total shareholder return. After completing the strategic review and the transformation of our portfolio, we evaluated our financial supplement and our reporting segments. As shown on Slide 2, we updated our reporting segments to better align our financials with how we are managing our businesses, continuing our focus on our growth drivers of global asset management, retirement and Benefits and Protection, and we enhanced the financial disclosures throughout the supplement to provide more visibility into the drivers of earnings power of our businesses. Earlier this week, we announced we are integrating our global asset management and international pension business under Principal Asset Management, combining and strengthening our leadership, investment capabilities and client-facing teams. This will help expand our ability to deliver global and local investment capabilities and client support across more than 80 markets. In Retirement and Income Solutions, we are reporting our retirement business as a single segment going forward. This better reflects how we manage the business following the completion of the IRT integration and the reinsurance transaction, and aligns with our integrated approach to providing comprehensive end-to-end retirement solutions. And lastly, we updated U.S. Insurance Solution to Benefit and Protection, reflecting the evolution of the business away from retail to focus on small to midsized businesses and business owners, building on our established leadership position and deep expertise supporting SMBs. This refreshed reporting structure aligns with our growth drivers and positions us to achieve our long-term enterprise financial targets, which are shown on Slide 3. Assuming normal macroeconomic conditions over the long term, we are well positioned to deliver 9% to 12% annual growth in earnings per share, a 14% to 16% return on equity and 75% to 85% free cash flow conversion. Slide 4 provides our 2023 and long-term guidance ranges. These are based on the macroeconomics as of the end of 2022, reflect LDTI and exclude the impact of anticipated significant variance shown on Slide 5. The guidance ranges and assumptions imply a 3% to 6% increase in full year 2023 non-GAAP operating earnings per diluted share compared to 2022. This is lower than our long-term target of 9% to 12% due to the macroeconomic pressure on AUM and account values in 2022. Absent these macro pressures, we would have been at the higher end of our targeted range. Underlying our guidance ranges, the full year 2023 S&P 500 daily average is assumed to be [ 39 50 ]. This is 3.5% lower than the 2022 daily average of [ 4,100 ]. And significantly lower than our typical assumption of a 6% increase in daily average. While we expect macroeconomic volatility throughout the year, and the environment has been somewhat favorable so far in early 2023, the assumed daily average through the end of February is still 1% lower than the 2022 daily average. Our macroeconomic sensitivities are available on Slide 10. Slide 6 lays out our capital management strategy. We target 75% to 85% free cash flow conversion, and we'll continue to actively return excess capital to shareholders through our targeted 40% dividend payout ratio and 35% to 45% to share repurchases. Our 2023 guidance ranges for RIS and Benefits and Protection exclude anticipated impacts of lower-than-expected variable investment income. As a result of the current macro environment, we're expecting alternative investment returns, real estate sales and prepayment fees to be lower than 2022 levels and lower than our expected long-term run rate. As usual, we'll quantify the impacts to our reported results from higher or lower-than-expected variable investment income as a significant variance on our earnings calls throughout the year. As a reminder, LDTI goes into effect in the first quarter. Importantly, this does not change our underlying economics, free cash flow generation or capital position. The impacts from LDTI to the business unit guidance ranges are shown on Slide 4. The most significant was in life with a 2% to 4% drag on the margin. In RIS, LDTI is negatively impacting the margin by about 1% and the underperformance of equity and fixed income markets in 2022 is pressuring growth in revenue and margin in 2023. Over the long term, we expect RIS to generate 2% to 5% growth in net revenue and a 36% to 40% margin. We expect margin expansion RIS to be driven by efficiencies in our Group Retirement business over the long term, but it will be muted by more balanced and disciplined growth in our higher margin but more capital-intensive guaranteed businesses. PGI's revenue growth and margin are expected to be pressured in 2023 as we entered the year with lower AUM levels, the results of the macroeconomic headwinds in 2022. Additionally, in 2023, we expect $30 million to $40 million of lower gross performance fees compared to 2022 as they are expected to normalize after being elevated for several years. Principal International's revenue growth of 7% to 11% is expected to improve in 2023 from recent years as our markets are returning to growth post pandemic. The foreign exchange environment is improving, and we have a new source of revenue through our recently acquired stake in the Chinese pension company. Long term, we expect growth in China and Brazil to contribute to margin expansion. In Specialty Benefits, we continue to expect above-market growth with an 8% to 10% increase in premium and fees in 2023, following a very strong 11% growth in 2022. Over the long term, we expect 7% to 10% growth in premium and fees as employment and wage growth moderate. Corporate losses of $375 million to $425 million are expected to be greater than 2022, primarily due to an increase in noncash pension expenses. As a reminder, the first quarter is typically our lowest quarter for earnings due to the seasonality of deferred compensation and elevated payroll tax in PGI as well as claims seasonality we typically experience in Specialty Benefits. As we move forward with a focused and strengthened capital deployment strategy, we will continue to invest in our growth drivers, all with an aim to drive long-term shareholder value. This concludes our prepared remarks. Operator, please open the call for questions.

[Operator Instructions] Our first question comes from Jimmy Bhullar with JPMorgan Securities LLC.

So first, just had a question on your guidance in terms of the impact of LDTI on various businesses. If I look at the impact that you're showing on margins, it seems like the total impact on your earnings is in the 4% to 5% range going forward. Is that for the overall companies, is that a fair assessment? Or do you expect it to be different?

Jimmy, I really appreciate that. Let me just throw that right to Deanna.

Yes. Jimmy, consistent on what I talked about at the last call, we expect the total company impact to be approximately $60 million pretax -- I'm sorry, post-tax, and that is almost entirely driven by the geography change in VI. We then have offsetting impacts in the other businesses as you noticed in those margin expectations. So again, it's at $60 million post tax.

Okay. And then the negative NRS, I guess, is understandable. But then, if we look at historical earnings in Principal International and then in the insurance business, there's a positive in 1 year in the past, negative in the other year. Can you talk about what the various factors were that drove that in your restatement?

Yes. Yes. So you will see actual impact based on claim experience and also in PI, given some of the volumes of sales. And so again, on a go-forward basis, we expect that to be more on a normalized basis, but you'd obviously, in any given year, you could have some impact related to actual claim experience.

Okay. And then just lastly, on the lower sort of revenue guidance for RIS versus your long-term target. You mentioned part of it is because of the lower assumed average daily balances. And then I think you mentioned a little bit of an impact from lower sort of incentive fees as well. Is the lower incentive fee just your assumption based on where the markets are? Or do you have enough insight into them to know that they're, in fact, going to be lower this year than they've been recently for long term?

Deanna, did you get the question?

Yes. I think he's talking about PGI's revenue growth and performance fees. And in our prepared remarks, we talked about those being $30 million to $40 million lower. I'll probably kick it to Pat to talk through. I think we do have some transparency that allows us to estimate that impact.

Pat, could you comment?

Yes, Jimmy. We have a really good sort of pipeline of real estate transactions. But due to the macro conditions and transaction volume being quite muted, those transactions in terms of harvesting the gains in those are being pushed off into the future. And so you will see a decline in the performance fees from real estate in 2023 as a result of the market. But as we kind of look forward longer term, we continue to see a nice pipeline of activity, but there'll be a pause because of the macro conditions in real estate right now.

Our next question comes from Erik Bass with Autonomous Research.

First, was hoping you could talk a little bit more about the rationale for combining PGI and Principal International. Wondering if there's any cost synergies? Or is it more about trying to drive better coordination between the businesses and just better capture growth opportunities?

Yes. I'll take that one, Erik, and appreciate the question. So we're excited about this change in -- if you think about 30 years ago and 20 years ago and 10 years ago, a lot of the demand for products were very much local products. But as time has progressed, clearly, the Principal International locations are very much in need of the global product that's manufactured within Principal Global Investors. The second thing I would say is these joint venture partners, which have just been wonderful to work with over the years, they're looking for broader scope of products and services and other places where we can partner together to gain synergies. We have a lot of global distribution relationships. We want make sure and capitalize on those. And of course, there's been a shift. It's not only just been around compulsory retirement also, voluntary savings and institutional opportunities. And the world continues to shrink, and we want to take advantage of all the distribution opportunities that we can by solving for not only retirement, but also wealth management/retail as well as any opportunities that exist within retirement. So we're excited about the shift. To answer your last question, I do think there may be some expense synergies. That's not the intentions coming out of this. It's really around alignment of the resources, and the 2 companies leveraging that. It isn't necessarily an expense takeout play. Does that help, Erik?

It does. And then secondly, we're seeing more headlines about challenges in the commercial real estate market and particularly in office. So I was just hoping you could talk about what you're seeing both in your general account portfolio as well as the real estate business for PGI? And what you're assuming for both growth and performance of this asset class in your PGI outlook?

Yes, it's a great question, one that I fully expected to come up today. And as a guy has been around through half a dozen of these real estate market cycles, the one thing I know for sure is Pat and Todd Everett and the people within commercial real estate have just have an incredible track record of navigating their way through these cycles. And with that, let me have Pat who led that for a long time, share some additional thoughts on his outlook. Pat?

Yes. Erik, as we look at our commercial real estate portfolio holistically, we continue to see very strong, I think, metrics and supply/demand fundamentals in most of the property types, particularly our industrial and residential portfolios. But as you highlight, office is a place that I think every investor who is in real estate is spending a considerable amount of time trying to understand, create a bottom-up analysis of their holdings and what their holdings are sort of reacting to relative to the sort of home-at-work sort of a phenomenon that's occurring throughout the industry today. So we have our own $3.5 billion in our commercial real estate general account portfolio, about 100 loans. What's great about that portfolio is really high quality. We have just completed a bottom-up analysis of that whole portfolio. And the loan-to-value is 52%, and our debt service coverage is 2.7x and a 90% occupancy in that portfolio. But as you can imagine, as we look forward, there'll be more stress in terms of tenant rollover, whether or not corporations and companies continue to release space in the office space. So we're doing a lot of scenario analysis in terms of looking forward on our portfolio. And so far, we continue to see a strong, I think, sense that there'll be some stress, but the stress will be, I think, quite contained. We do have 10 loans right now that are maturing this year in our general account portfolio for about $480 million. And we've already seen 3 of those loans actually have refinanced and pay off, 3 of those loans will be maturing in the second half of the year. One of them is amortizing down to zero. And then there's probably 4 loans that we're watching in terms of potential need to maybe extend the maturity date of those loans because there is sort of a dearth and a challenge in terms of the market liquidity right now for office refinances, but we don't see any losses in those -- in that portfolio. From the point of view of PGI and the desire for real estate, we have a very strong pipeline of uncommitted (sic) [ committed but unfunded ] or capital that's been committed, but we haven't invested. And just being a strong fiduciary, we don't want to invest that capital until we believe that the markets have sort of equalized in terms of valuations and we believe that will take a quarter or 2 yet for that to occur, Erik. So we're putting a pause on really deploying a lot of new capital into the marketplace right now. But we do have a very strong uncommitted (sic) [ committed ] pipeline that could be devoted into real estate at the right time.

Our next question comes from Mike Ward with Citi.

On -- maybe just on capital return. I was wondering if how should we think about some of these macro headwinds driving some of the caution on capital return. I guess, how should we think about maybe headwinds from variable investment income on free cash flow this year? And should we expect you might come in at the lower end of that 75% to 85% target?

Thanks, Mike. I'll have Deanna respond to those questions.

Yes. Great question, Mike. Even with the pressured VII and our drift and loss assumption, I still see a path to that 75% to 85%. But you're correct, where we land within that will likely depend on how the macro environment transpires throughout the year. The other thing that isn't contemplated in that 75% to 85% is the excess that we held at the end of the year, and we'll continue to assess the market conditions to decide when and how much of that we deploy as we go through the year. So again, I feel that our business mix continues to allow us to achieve a higher free cash flow percentage than many of our insurance-related peers. And even with some of the stress, I feel confident about that range.

Great. Maybe on the credit loss and drift base case of $125 million. Just curious if you could comment on maybe which asset classes you see driving that? And then maybe what might be your best or worst case scenarios look, what might that look like just given this is the base case?

Let me have Pat hit that, then Deanna may want to add some additional comments.

Yes. As you can imagine, we spent a lot of time looking at each individual investment in the fixed income portfolio and in the commercial mortgage portfolio. And the $125 million is sort of our base case. That's a little bit higher than our long-term normalized sort of credit loss expectation of $100 million. As you kind of look at where that loss is coming from, we're only identifying around 25% of that as actual losses today. And the remainder of that really is drift, and the expectation for drift and capital use as a result of that. And that's probably -- these remaining about $100 million or $90 million of drift. Predominantly, it's about 2/3 in securities and about 1/3 in the mortgage group. So the mortgage group has continued to hold up quite well. We do have a very strong fixed income portfolio. 93% of its investment grade, and that's continuing to hold up quite well. And real estate, broadly speaking, again, high loan to values -- low loan to values, high debt service coverage ratios. So from an uncertainty perspective, we do have bands around that $125 million credit loss target. We think it could be $75 million. And in a worst case, where we get into a moderate more severe recession, it could be north of $200 million, maybe $200 million to $250 million. But we're not anticipating the latter. So hopefully that helps in terms of just getting a view as to what we expect on a credit loss perspective.

Yes, Pat, thanks for that. And my takeaway from that is it's very manageable against a $70 billion overall general account.

Our next question comes from Ryan Krueger with KBW.

I had a question on international. I think your long-term outlook is a 34% to 38% margin, which is a fair amount of margin expansion from the 2023 target. Could you talk a little bit about what you expect to drive that over time?

Yes. I'm actually very excited about that. And one of the things we discussed at Investor Day was talking about specifically our emphasis in both Brazil and in China. And as we've expanded our relationship with China Construction Bank to include retirement, in addition to asset management as well as retail mutual funds and things opening up in China, we see that as quite positive. Another driver is as things thaw out in China that has a signal of impact across the rest of Southeast Asia. I was just there spending time for 2 weeks in Japan, Malaysia and the Middle East. And again, a lot of positive momentum for institutional product, retail product, in particular in Malaysia. And then that takes me to Latin America, where, again, we've put a country manager in place in Brazil, taking a hard look at exploiting the opportunities with our asset manager, Claritas in country, in addition to strengthening our -- and deepening our relationship with Banco do Brasil. But I also say things have sort of stabilized to the extent that what we know the playing field looks like in both Chile and in Mexico. We didn't like the changes that took place necessarily in Mexico, but there's a path by taking out expenses and aligning what is likely to be increases in deferrals in that retirement scheme. So those are all contributing factors to the insights that we have and the growth of the international business. And then lastly, I would just simply close with what I shared earlier with regards to aligning Principal Asset Management with Principal International and bringing more contemporary and global products into those international markets where we already have existing joint venture partnerships. Ryan, does that help?

It does. Then just one quick follow-up. Are there any material onetime costs that you'll need to incur to do the PGI and PI alignment?

No, there's none that come to mind. Again, we -- this wasn't about an expense synergy play, this was about leveraging relationships. It was about distributing products more broadly and recognizing the demand in the local markets for global products.

Our next question comes from Tracy Benguigui with Barclays.

So cash flows are not changing under LDTI. And if I look at your recasted 2022 earnings, it is slightly down. And I noticed that your 75% to 85% free cash flow conversion has not changed. And since the GAAP earnings base is slightly lower, I'm wondering why your free cash flow conversion doesn't retrofit to these higher -- even on the margin, or should you be leaning on the upper end?

Appreciate that. I'll have Deanna [ spot on ].

Yes, Tracy. Good question. When we talk about our free cash flow conversion, our denominator is our net income. Going forward, that will be our net income as -- excluding the impact of the exited businesses. And because the real impact was a geography change, our net income is unimpacted, thus the reason for no change in the free cash flow conversion. What I'd also say is going forward, given that geography change, the difference between OE and net income will be less meaningful and so that will play into that as well.

Very helpful. Your earnings sensitivities based on changes in macroeconomic indicators have changed year-over-year, if I look at the equity market returns, interest rate alternative. Was this based on LDTI or asset changes, business mix change or just your underlying view of macro trends?

Deanna, please?

Yes, Tracy, actually, that changed last year, and it was really because of the transacted business and how the business may change post the transactions.

Our next question comes from Alex Scott with Goldman Sachs.

I just wanted to circle back on the variable investment income. Certainly, that's going to move around, particularly from the alternative. So I'm curious, is there are a specific number you want to provide on that per se? But I just wanted to see if like the real estate sales and prepay element of it, I mean that's sort of the part of it that I would think you have more visibility on just given the real estate market and sort of the level of interest rates and what happens to prepays. I mean could you give us a feel for how much of a headwind year-over-year you expect those 2 components of variable investment income to be? Or if you have a view on just overall VII and how much of a headwind is this?

Pat, do you have some additional -- maybe we'll have Pat go first and throw it to Deanna.

Yes. Thanks for the question, Alex. I think it's really difficult to -- in terms of variable investment income to really get into a longer-term view of where that will end up because market conditions are quite uncertain right now as we go into the second sort of part of the second quarter this year. Prepayments will probably be definitely lower as we see the volume of transaction activity in the marketplace. And just overall higher rates will definitely mute our sort of historical level of prepayments. I do think we'll see a pickup in second half of the year in terms of real estate transactions. We still have a strong pipeline of opportunities to harvest yet. And if we can get some sort of, I think, valuation sort of reset that we're seeing already in the first and second quarter, we'll be able to, I think, take advantage of market conditions improving in the second half of the year. So I feel a little more positive about real estate, frankly, in terms of actually knowing our pipeline and what we potentially could do in terms of real estate. So hopefully, that helps with maybe a little bit more direction, Alex.

Let's see if Deanna has anything to add to that, please?

Yes, great comments. Our VII is more skewed to prepays and real estate transactions, but we also expect likely lower returns on all, so especially in the first half of the year. But again, that's going to be volatile. As far as sizing, just to remind you, we were $50 million below run rate in total in 2022. And as Dan mentioned on prepared remarks, we do expect that we will likely be below that. I think how much below it really depends on how the market plays out for the full year.

Got it. And then maybe just a broad question on inflationary pressures on expenses. As you guys kind of went through and thought about these different businesses, thought about the kind of margins you could achieve near term, I mean how much pressure is sort of embedded from inflationary impacts on expenses? I mean I realize you guys have managed your margins quite well over the last couple of years, but this is built -- has been building up. How are you factoring that in?

Alex, our base case is that we were going to have some stubborn inflation around in for a while. So part of our expense management efforts recognized that we have higher cost of wages for Principal, and we need to be able to attract, retain the best talent. Likewise, what I would tell you is, and we, I believe, talked about this in both the third and the fourth quarter discussions, on a net-net basis, a lot of the benefits, whether it's through payroll and increased life insurance amounts or disability premiums that are tied to salaries, we certainly see that in 401(k) salary deferrals, on a net-net basis, inflation in the system actually is a positive for Principal. And again, that isn't to not recognize that a lot of our customers are dealing with a lot of inflationary issues on their own rights. But the bottom line is it does catch our attention. We manage for that, both for our own employees as well as recognizing it's a bit of a tailwind to our businesses. Hopefully, that helps.

Dan, I have some comments that might be additive to that, if that's okay?

Absolutely. Please go ahead.

Yes. Alex, great question. And I continue to be extremely impressed with this management team and how we continue to align expenses with revenues. You saw that in our actual 2022 results. We're excluding the IRT integration costs, our actual expenses on comp and other were down 3%. And as I sit here today, I expect very modest low single-digit increase in expenses as we go into 2023. That's despite the $50 million increase in noncash pension expense in corporate. It's despite a reset of some of our incentive compensation and it's despite our continued focus on investing in the business to drive long-term growth. So again, obviously, installation is having some impact on what we are paying our employees in terms of salary but the management team continues to find offsets to be able to contribute to the margins that we're laying out.

Our next question comes from Josh Shanker with Bank of America.

Could you talk about what your economic outlook and the assumptions has for the interest rate environment and the shape of the yield curve? And are you making any changes in your U.S. insurance investment portfolio in order to adhere with your outlook?

Deanna, your perspective here?

Yes. We look at the forward curve as we think about the interest rate environment. If you look at that, as of the end of the year, it would have, especially at the longer term points, pretty flat to slightly down interest rates. Again, we are less sensitive to interest rates but ultimately, we benefit from higher interest rates. And so, ultimately, not a huge change as we think about this year. As we talk to some of our more investment professionals, I think there's a wide range of opinions on the path of interest rates as we go throughout 2023. But again, the current -- well, the forward curves as of the end of the year would have just had a slight decrease at the longer-term points as we go throughout the year.

And in the U.S. insurance -- go ahead, Dan.

No, go ahead. Yes, go ahead, please.

In the U.S. insurance portfolio in the interest income outlook, I guess, Deanna, you said flat to down, that's how you're modeling the interest contribution from investments there?

That's correct.

And our last question comes from Tom Gallagher with Evercore ISI.

First question is on RIS. Apologies if you've made any reference to this already, but can you talk about what your net flow expectations are in your guidance for RIS-Fee for 2023? And then also just curious about the thought process behind consolidating the RIS segments. I've always found it very useful to see those separated out. And I think to really understand the drivers and what's going on in the full service business and separated out from your institutional spread business. So curious why you're lumping them together.

Yes. So I'll throw this to Chris pretty quick, but as a person who ran that business for a very long time, the reality is it's become very difficult to parse out the revenues and the expenses within these products, especially in light of the transaction and divesting of the retail annuity business. And so many of our customers are a blend and they have these various component parts. And the -- frankly, the lift and the effort of sorting all that out became somewhat of a juggernaut. And it frankly wasn't a reflection of how we manage that business today. And with the transaction with the IRT acquisition, it frankly even compounded that to another level. But I'll see if Chris wants to add to that and then deal with the question with regards to net flows.

Yes. Yes. Thank you, Tom. I think Dan covered it quite well, but it's -- we really manage our retirement business in total. And particularly as we have post the IRT integration and the fixed annuity reinsurance transaction, how we're managing revenue and expense synergies really crosses both. So it wasn't any longer meaningful for us to split it the way we'd split it going forward, and we're looking at the integrated businesses. That's how we manage them. And we've had a lot of examples where there's crossover, right? Our defined benefit business helps feed our PRT business. We've got overlap between bank trust and PCS between fee and spread historically. And so there was just a lot of mixing between, and that's just simply not how we manage our business. So that's how we're doing it. Now we have provided you greater clarity on what is fee based and what is spread based in the supplement. So we did try to give you a breakdown of fee-based revenue, spread-based revenue and the account values by fee based and spread based. So we did try to provide you some of that transparency that you'd like. On a net flow basis, we won't provide net flow guidance for the full year. And I think, as I said in the fourth quarter call, the furthest out that we're willing to look out on that is first quarter, and we expect first quarter to be a positive net flow. From the business overall, we are seeing on the fee-based growth, it is pressured because of lower market macro pressures. But as those pressures subside, we see accelerating growth on the fee-based side over the outlook period. On the spread based, we see growth in the business. We see the full year benefit of rising interest rates in our bank trust and PCS businesses. In the near term and over the full outlook period, we expect it to moderate because we expect to have more balanced growth given the view we're taking with investment only and being more prudent with those more capital investment -- capital-intensive businesses over the next 3 years. So that mix will kind of change between fee based and spread based over the next 3 years. But we're focused on growth. We're focused relentlessly on improving margins, both by reducing expenses so we can invest in long-term growth and also making sure that we're maximizing revenue opportunities. So hopefully, that gives you a sense.

Tom, was that helpful?

That is. And just for a quick follow-up. I thought the new disclosure for PGI was very helpful, splitting out the revenues between performance fees, other revenues and fee income. And I just had a question on that. So Dan, if I understood -- or sorry, Pat, if I understood you correctly, I think you said $30 million to $40 million of lower revenues and performance fees was expected in 2023. But how about those other revenues, which I believe are predominantly transaction-related revenues, transaction and origination and things like that, that number was almost $200 million in 2022. Do you have a view of how we should think about that heading into '23?

So on that point, Tom, I don't know if I follow on the $200 million of revenue you're discussing there.

Pat, it's under -- it's the other revenues, it was $198 million in 2022.

Yes, Deanna, please go ahead.

And Pat, I think that includes both transaction fees as well as net investment income, and we are seeing some benefit on that line just because of higher interest rates. We do think the transaction fees may be pressured, but there's different components that are rolling into that.

Okay. And sorry, one final follow-up on that question. Are those other revenues, is there a high margin on those other revenues, meaning is there much associated expense with those other revenues? Or does most of that fall through to the bottom line?

Yes, I think...

On the trend -- go ahead, Pat.

Yes, on transaction fees, it's really -- it's part of just our ongoing operations. So they're part of the staff cost of the organization. So they would be additive to the organization sort of profitability. We have, obviously, as we discussed in the fourth quarter earnings call, made some expense reductions in the organization. And we continue to monitor when we do have sort of activity changes. We also are looking at expense changes as a result of that, Tom.

Hopefully that helps, Tom.

It does.

If there needs to be a follow-up, we can certainly have Humphrey reach out to you as well.

And we have reached the end of our Q&A. Mr. Houston, your closing comments, please.

Appreciate that. So maybe just a couple of quick comments. The first of which is we can't speculate whether there will be a recession or what happens to inflation, but we can manage our businesses accordingly. I think that we have a lot of reasons to be optimistic, starting with the fact that this SMB franchise just continues to move along nicely. That impacts our group benefits business, our business insurance and retirement businesses. I'm very excited about the alignment between PI and Principal Asset Management and getting greater leverage around distribution. I think there's a lot to be excited about, broadly, international markets recovering. We've seen some parity on currencies improved. And as Deanna appropriately outlined, we are fixated on making sure that we manage our expenses accordingly while at the same time making investments for the future. I'd also be remiss if I didn't call out. Deanna was [ playing hurt ] today. I appreciate her joining us remotely. One of the most resilient CFOs I've ever had the good fortune to ever work with. So with that, thank you. Look forward to seeing you on the road soon. Take care.

Thank you for participating in today's conference call. This call will be available for replay beginning at approximately 12:00 p.m. Eastern Time until end of day March 5, 2023. 13735216 is the access code for the replay. The number to dial for the replay is (877) 660-6853 for U.S. and Canadian callers or (201) 612-7415 for international callers.