Principal Financial Group Inc. (PFG) Q1 2020 earnings call dated April 28, 2020
Corporate Participants:
John Egan — Vice President, Investor Relations
Daniel J. Houston — Chairman, President, & Chief Executive Officer
Deanna D. Strable — Executive Vice President & Chief Financial Officer
Luis Valdes — President & Chief Executive Officer – Principal International
Timothy M. Dunbar — President – Principal Global Asset Management
Amy C. Friedrich — President – US Insurance Solutions
Renee Schaaf — President – Retirement & Income Solutions
Analysts:
Jimmy Bhullar — JPMorgan — Analyst
Humphrey Lee — Dowling & Partners — Analyst
Andrew Kligerman — Credit Suisse — Analyst
Erik Bass — Autonomous Research — Analyst
Ryan Krueger — KBW — Analyst
John Barnidge — Piper Sandler — Analyst
Suneet Kamath — Citi — Analyst
Alex Scott — Goldman Sachs — Analyst
Presentation:
Operator
Good morning and welcome to the Principal Financial Group First Quarter 2020 Financial Results Conference Call. [Operator Instructions] I would now like to turn the conference call over to John Egan, Vice President of Investor Relations.
John Egan — Vice President, Investor Relations
Thank you and good morning. Welcome to Principal Financial Group’s first quarter 2020 conference call. As always, materials related to today’s call are available on our website at principal.com/investor. We also posted an additional slide deck on our website with details of our US 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 and Income Solutions; Tim Dunbar, Global Asset Management; Luis Valdes, Principal International; and Amy Friedrich, US 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. 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 US 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 US GAAP financial measures may be found in our earnings release, financial supplement and slide presentation. Due to the current environment, we’ve made the decision to delay our June 23 Investor Day and cancel our September 16 Tokyo Investor event. We are working on rescheduling our Investor Day and will let you know when we have a new date. Dan.
Daniel J. Houston — Chairman, President, & Chief Executive Officer
Thanks, John, and welcome to everyone on the call. I hope this call finds all of you and your family safe and healthy during these unprecedented times. This morning, I’ll share insight on our strong financial position, how Principal is responding to COVID-19 pandemic and key performance highlights for the first quarter. Deanna will follow with additional details of our capital and liquidity position. The financial impacts from COVID, our investment portfolio and our first quarter financial results. We started 2020 in one of the strongest financial positions in our history and in a better position than we are going into the global financial crisis. While Deanna will provide additional details, I’ll share a few insights and highlights that speak volumes to the changes we’ve made to our business model since 2008.
At the end of the first quarter, we had over $3 billion in available cash and liquid assets as well as access to revolving credit facilities to use for liquidity purposes. And our capital position is strong with over $1.7 billion of excess and available capital as well as access to contingent capital facilities. We’ll continue to be diligent stewards of our capital during these challenging times while weighing opportunities as they arise. We have a high quality diversified investment portfolio that aligns with our liabilities. The general account has grown in recent years, but so has the quality of the portfolio. Over the past several years, we’ve intentionally prioritized risk management. I want to thank our employees for how resilient they have been in responding to COVID crisis. From the onset of the virus, we have prioritized their safety. Our past investments in technology and digital solutions allowed us to quickly transition our employees around the world to work remotely. Today, 95% of our global workforce is remote with no meaningful impact to our operations or our ability to serve our customers. Our call centers have remained fully operational and we’ve provided easy access to important information on our website for our customers.
Our sales and service professionals are able to take on new business and support existing customers with our digital tools. Throughout our 141-year history, we’ve staked our reputation on demonstrating an ability to adapt and to be there for our customers, employees and communities. The COVID health crisis has tested every aspect of our business and I’m proud of our nearly 18,000 employees who’ve responded with dedication, resiliency and perseverance. This pandemic is impacting all of us in some way and we’re adjusting all of our businesses to help our customers manage through some of the near-term challenges created by the virus. We’ve taken actions to help and reduce the short-term financial burdens for our customers by waiving certain fees for participants that need to take COVID related withdrawals and loans from their retirement accounts. Additionally, we’ve waived certain fees for retirement plan sponsors impacted by COVID to allow participants to access these programs or if needed reduce or suspend their employer contributions. We’ve extended grace periods for premium payments to prevent lapse and coverage and we’ve temporarily paused rate increases for our group insurance customers. As a global company, all of the communities where we have operations have been impacted by COVID crisis. In addition to customer relief, we’ve started community giving programs to provide relief to the small and medium-sized business owners and individuals impacted the most. We anticipate these giving efforts through Principal and Principal Foundation in combination with the relief we’ve already offered to our customers will total more than $25 million. In these times, we are reminded why we’re in the business, tell people save enough, protect enough and have enough and these were to take on a very different meaning during this time.
While these are unprecedented times, we remain committed to our long-term strategy and a diversified business model. We’ll continue to serve, small, medium and large employers who value the comprehensive products and services that we provide to meet the long-term retirement and protection needs of their employees. We look to support their recovery in any way we can. If you recall, the small to medium-sized business market was resilient as it was the strongest market to recover after the last recession in 2008. We have purposefully diversified across geographies, plant size and industries.
Moving to our first quarter results, we delivered non-GAAP operating earnings of $320 million with limited COVID related impacts. Excluding significant variances, earnings were flat compared to the prior year quarter despite foreign currency headwinds. Compared to the sequential quarter, total Company AUM decreased $104 billion to $631 billion at the end of the first quarter. This decline was driven by unfavorable market performance and foreign exchange rates. Additionally, we have ended the quarter with $140 billion of AUM in our China joint venture and $780 billion of assets under administration in the institutional retirement trust or IRT businesses. The integration of IRT businesses continue and retirement plans will start to migrate to our platform later this year as planned. Despite the disruptions in the markets, total Company net cash flow was a positive $3 billion for the quarter after a very promising first 2 months of the year. RIS-Fee had $2.1 billion of positive net cash flow. This was driven by sales of $4.8 billion and strong reoccurring deposit growth, up 14% versus the prior year quarter. RIS-Spread had $0.5 billion of net cash flow in the quarter driven by $2.3 billion of sales, including a record $1.5 billion of pension risk transfer sales. While sales were strong in the first quarter, we do see the pipeline slowing down due to low interest rates and the impact this environment is having on funding ratios of pension plans.
Principal International also generated $300 million of net cash flow and marked its 46th consecutive positive quarter driven by positive flows in Brazil, Mexico and Hong Kong. While not included in the reported net cash flow, China had $8.2 billion of negative net cash flow in the quarter. This was mainly due to the outflows into the first 2 months of the quarter, partially offset by positive flows in March as a result of a flight to quality. Principal Global Investors sourced net cash flow was a negative $300 million, this was the result of institutional outflows driven by client rebalancing activities as well as the real estate asset sales earlier in the quarter to take advantage of market conditions and harvest gains for clients. This was partially offset by record quarterly sales for our US mutual fund and CIT platforms.
Turning to Slide 11, our investment performance remained strong; at quarter-end, 80% of Principal mutual funds, ETFs, separate accounts and collective investment trusts were above median for the five years and 77% were above median for three years. Additionally, for our Morningstar rated funds 73% of the funds-level AUM had a 4 or 5-star rating. This strong performance positions us well to attract and retain assets going forward. I’ll also share some noteworthy third-party recognition of our efforts. Barron’s named Principal Global Investors as a Top 5 Best Fund Families for 2019 and Lipper named our Principal Blue Chip fund as the best fund over the past 5 years in the large cap growth funds. We’re also been named by Barron’s as one of the 100 most sustainable companies in America. Throughout this recent market turmoil, we have not forgotten or moved away from our core values. We talk about withdrawals and claims in terms of numbers but it is times like this that we need to remember the human impact on people’s lives behind these numbers. We are here to help our customers navigate through the good times and the bad and I could not be more proud of how our teams have come together to help.
With that, let me turn it over to Deanna.
Deanna D. Strable — Executive Vice President & Chief Financial Officer
Thanks, Dan. Good morning to everyone on the call. I hope you’re all staying safe and healthy. This morning, I’ll discuss our current financial position, impacts from COVID-19, details of our investment portfolio and the key contributors to our financial performance for the quarter. Now more than ever we’re committed to helping and protecting our customers. Tragically, there has been and will continue to be loss of life and livelihood as a result of this pandemic. We’re focused on providing stability and protection to those who trusted Principal with their life and disability insurance, retirement plans or investment portfolios. We’re offering relief where we can and providing resources for individuals and businesses as they manage through this crisis. We know everyone wants to get back to normal and regardless of how long that takes, we’ll be here to answer questions, provide protection and help our customers emerge from this crisis. COVID has certainly impacted where and how we do business and we’ve added additional details in our conference call presentation to highlight the various impacts, most of which have yet to materialize. It’s important to recognize that the current environment is unprecedented. Unlike market corrections in the past that was driven by technicals, the current volatility is event driven. There is an uncertainty around how long this will last and what the path to recovery looks like. We are forecasting the potential impacts under a range of scenarios and are being prudent in our decisions relative to that range of outcomes.
As shown on Slide 6, our capital and liquidity position remains strong. At the end of the first quarter, we had $3 billion of available cash and liquid assets at the total Company and we have $100 million of revolving credit facilities available for liquidity purposes. We had over $1.7 billion of excess and available capital at the end of the quarter. This includes $1.2 billion at the holding company, nearly $400 million of available cash in our subsidiaries and $140 million in excess of our targeted 400% risk-based capital ratio at the end of the quarter, estimated to be 409%. We also have access to a contingent capital facility that allows us to borrow up to $1 billion, the current fair value of the treasury assets in that facility. We target at least $800 million at the holding company to be able to meet the next 12 months of obligations. In the near term, we’re focusing on maintaining our capital and liquidity target at both the life company and the holding company.
Our non-GAAP debt-to-capital leverage ratio, excluding AOCI is low at 22%; our next debt maturity of $300 million isn’t until 2022 and we have a well-spaced, laddered debt maturity schedule into the future. We’re in one of the strongest financial positions in our Company’s history and we have the financial flexibility needed to manage through this time of economic uncertainty. We’re also taking time to understand the potential impacts COVID could have on our business and our financial results. January and February were off to a good start with strong sales and net cash flow across many of the businesses but things quickly took a turn in March as the pandemic escalated especially outside of Asia. The most direct COVID-related impacts in the first quarter were in specialty benefits. Pre-tax operating earnings benefited from lower claims as dental and vision provider offices closed towards the end of the quarter. We did not have any known COVID-related deaths and only minimal COVID-related short-term disability claims during the first quarter. COVID-related expenses of less than $1 million in the first quarter were modest, in large part due to the investments we had previously made in technology and digital solutions for our employees, customers and advisers.
Slide 5 provides details of potential financial impacts from COVID and market volatility that are starting to emerge. We’re keeping an eye on several key indicators to gauge the potential magnitude of the impact. In the retirement business, we’re closely monitoring both plan sponsor and participant behavior and so far the trends have been manageable. Plan sponsors are just starting to reduce or suspend their company match. So far, we’ve only had a small percentage of plan sponsors make a change. From a participant withdrawal perspective, COVID-related withdrawals have been ramping up as expected but in total, participant withdrawals are only slightly elevated. Some plan sponsors have delayed transferring their plans until later in the year, but only a handful have canceled. This will likely impact the level and pattern of sales, but is expected to benefit our retention levels in 2020. The recent spike in unemployment is starting to have some impacts as we move into the second quarter. We expect the growth in group benefits premiums as well as retirement recurring deposits will moderate the remainder of the year due to COVID-related layoffs, furloughs and reduce contributions to employee benefit plans.
Full-year 2020 sales could be pressured across many of our businesses due to the low interest rate environment and as our customers focus on managing through the pandemic. Whereas this could negatively impact earnings, it reduces the amount of capital needed to support organic growth. Unlike the global financial crisis, the US government has responded quickly with large fiscal and monetary stimulus programs. Some of the impacts we’ve seen so far in April may reverse course as companies and individuals start receiving support. We have a good history of effectively managing our expenses in line with revenue during times of stress. The environment is different now, but we have a playbook on how to manage through revenue declines. Some of our expenses are naturally lower right now like travel, sales-related expenses and bonus accruals and we’re being very intentional on reducing other expenses, including hiring, third-party spend as well as marketing and advertising. We’re reviewing all expenses but we’re going to continue to make investments in our business, including digital in order to drive long-term growth. Many of these past investments are helping us serve our customers and advisors in the current environment.
On Slide 7, we highlight our first quarter capital deployments and potential impacts to our capital position. As sales have slowed in our interest-rate sensitive businesses, less capital is needed for organic growth. This will mitigate the expected capital impacts from impairments and drift in our investment portfolio. We deployed $372 million of capital in the first quarter, including $154 million for common stock dividends and $218 million in share repurchases. We paused share repurchases in early March, as the COVID pandemic emerged. We have $850 million remaining on our current share repurchase authorization and we will continue to evaluate and be prudent on future repurchase activity as we gain clarity on the path forward. M&A opportunities have slowed due to COVID, and we expect opportunities that may have been slated for 2020 to likely be delayed until 2021. We now expect our full-year 2020 external capital deployments will be between $800 million and $1 billion, below the $1.2 billion to $1.7 billion targeted range.
With the fluidity of the environment, we’ll continue to evaluate and keep you updated with our current thoughts. Last night, we announced a $0.56 common stock dividend payable in the second quarter, unchanged from the first quarter, and our dividend yield is approximately 7%. As shown on Slides 8 and 9, our investment portfolio is high quality, diversified and well-positioned and importantly, we haven’t changed our investment strategy.
Slide 9 provides a detail of our US fixed maturities and commercial mortgage loan portfolios. These make up nearly 90% of our US investment portfolio. As you can see, the portfolios are high quality and were better positioned relative to 2008 [Phonetic]. A few key takeaways. We currently have a $1.7 billion pre-tax net unrealized gain position in our US fixed maturities portfolio and our risk exposure to in-focused corporate credit sectors is manageable. The commercial mortgage loan portfolio has an average loan to value of 46% and an average debt service coverage ratio of 2.6 times. We have a diverse and manageable exposure to other alternatives and, importantly, our liabilities are long-term and we aren’t forced sellers. We’re focused on understanding the potential impacts to our capital and liquidity position under a wide range of economic scenarios. Under the baseline scenario for 2020, which is conservative and has yet to play out, our capital and liquidity positions remain at or above targeted levels.
Moving to our first quarter financial results. Net income attributable to Principal of $289 million reflects minimal credit losses of $20 million, which includes changes in valuation allowances recorded under the new CECL accounting standard. Reported non-GAAP operating earnings were $320 million for the first quarter or $1.15 per diluted share. Excluding significant variances, but including the impact of Fx, non-GAAP operating earnings and non-GAAP earnings per diluted share were flat compared to first quarter ’19 despite foreign currency translation headwinds. We had three significant variances during the first quarter, including a negative $47 million impact in Principal International due to lower than expected encaje performance in Latin America. Negative $25 million of higher DAC amortization in RIS-Fee, driven by the point-to-point decline in the equity market and a negative $1 million impact in RIS-Fee as IRT integration costs were mostly offset by a reduction in the earn-out liability during the quarter.
First quarter 2019 reported non-GAAP pre-tax operating earnings benefited by $33 million from significant variances. Looking at macroeconomic factors in the first quarter, the S&P 500 Index decreased nearly 20% and the daily average was flat compared to the fourth quarter of 2019. Moving to foreign exchange rates. I’d like to remind you that revenue expenses and pre-tax operating earnings are translated using average foreign exchange rates while AUM is translated using the spot rate. Unfavorable movements in spot rates decreased first quarter AUM by $27 billion relative to the fourth quarter of 2019. Spot rates for Brazil, Chile and Mexico reached historical lows in the first quarter. Movement in average rates were also unfavorable in first quarter, the majority of the decline in foreign exchange rates didn’t occur until March and we expect this will have a bigger impact to translated earnings going forward.
First quarter pre-tax operating earnings impacts included a negative $4 million compared to fourth quarter 2019, a negative $50 million [Phonetic] compared to first quarter 2018 and a negative $29 million on a trailing 12-month basis. Mortality, morbidity and other claims experience were in line with our expectations for the first quarter in RIS-Spread and better than our expectations in specialty benefits as I discussed earlier. In individual life, mortality losses were worse than expected due to higher severity. As a reminder, RIS-Spread typically benefits from seasonality of experience gains in the first half of the year. Both long-term and short-term interest rates severely declined during the first quarter, our near-term earnings are most sensitive to changes in the interest on excess reserves or IOER rate. The IOER rate was lowered 145 basis points in March to 10 basis points. While there was a small impact to IRT trust and custody revenue and the pre-tax operating earnings in the first quarter, most of the impact will be felt the rest of the year.
For the business units, first quarter results excluding significant variances were largely in line with expectations and we’ve added additional details in the slides. The legacy business in RIS-Fee continues to perform well. Excluding significant variances, the margin for the legacy business was 30% in the first quarter. The migration of the IRT business remains on track and will start later this year. As the IRT business migrates, results will be combined into our existing businesses and stand-alone details of the legacy business won’t be available. The fundamentals of our legacy retirement business remained strong in the first quarter with $4.8 billion of sales, $2.1 billion of net cash flow, 14% growth in recurring deposits compared to the prior year quarter, low contract lapses and we added more than 450 plans and nearly 75,000 participants to our legacy-defined contribution business during the quarter. This does not include any IRT customers. Excluding unfavorable encaje performance and foreign exchange headwinds, Principal International’s pre-tax operating earnings were in line with our expectations.
Slide 19 provides our earning sensitivities to macroeconomic changes. These sensitivities are a good way to estimate impacts to our 2020 operating earnings. It’s important to note that we are not as interest rate sensitive as our peers due to our diversified business model.
In closing, these are unprecedented times. We expect COVID will continue to present challenges to people and businesses all over the world. Starting from one of the strongest financial positions in our Company’s history, Principal will continue to navigate this crisis through a strategic lens and will make purposeful decisions for our employees, customers, communities and key stakeholders.
This concludes our prepared remarks. Operator, please open the call for questions.
Questions and Answers:
Operator
[Operator Instructions] The first question will come from Jimmy Bhullar with JPMorgan. Please go ahead.
Jimmy Bhullar — JPMorgan — Analyst
Hi, good morning, everyone. First, I just had a question on the asset management business PGI and the flows being negative this quarter, can you talk about how flows loans in that business trended through the quarter and whether most of the negative flow result was because of what happened in March and — or had you been weak throughout the quarter? And then any commentary you’re able to offer on trends in the business in terms of flows in April?
Daniel J. Houston — Chairman, President, & Chief Executive Officer
Yeah. Very good. Good morning, Jimmy. And I’ll throw it right to Tim, who is our — certainly our resident expert, doing a great job running PGAM. So, Tim.
Timothy M. Dunbar — President – Principal Global Asset Management
Yeah. Thanks, Jimmy. So for the quarter, we had negative $0.3 billion [Phonetic] or $300 million in net cash flows and I do think, as you suggest, it was a sort of tale of two sales during the quarter. So for the first 2 months, January and February, we actually saw very strong sales, particularly as it relates to our platforms, and actually I would tell you that that really continued throughout the quarter. We did see a lot of churn in our platforms, towards the end of the quarter-end March, but overall we ended up with about $800 million of positive net cash flow in those platforms, and that is actually a record for us, included the mutual funds as well as the CITs. Interestingly in mutual funds, I would tell you that where we saw the net cash flows were really in equities, blue chip, mid-cap and several of our other equity capabilities.
In the CITs, it was really related to stable value, so you could see some of our clients moving to a little bit safer place. On the institutional side, we did see negative net cash flow, that’s a combination of some of our clients really taking some of their real estate bets off the table. I think we realized and talk to you quite a bit about the performance fees associated with the hotel fund in Europe that hit in fourth quarter. Those assets actually went out the door in first quarter. There are a couple of other real estate mandates that contributed to that. And then we saw institutional clients really looking to rebalance their portfolios and in some cases build cash for liquidity or to maybe seize the market opportunity as they saw what kind of disruptions we had. So those were really the basic trends. Overall, then for the affiliated cash flows, which would include the general account, we saw slightly positive about $100 million in net positive cash flows.
Jimmy Bhullar — JPMorgan — Analyst
And have you seen any improvement or further deterioration in trends in terms of flows so far this quarter?
Timothy M. Dunbar — President – Principal Global Asset Management
No, actually, we are seeing — we continue to see relatively positive results. And I just want to shout out to our distribution team, who, as you know, were all working from home. They have really been instrumental in making sure that they remain — continue relationships with our clients. They’ve done a great job of providing sources of information and insights into the market, as well as into the solutions that they need to build their portfolios going forward. And they’ve just done an excellent job. So initially as I said, we were seeing flows move to cash and other stable value products. Right now, we’re starting to see some of those flows go back into risk assets. You kind of have a bifurcated group of institutional clients that are — some that are on the sideline right now and taking a very cautious tone. And then you have some that are really poised to take advantage of the marketplace and we’re starting to see those come back into the market. So flows have been relatively good in April.
Daniel J. Houston — Chairman, President, & Chief Executive Officer
Jimmy, appreciate your questions.
Jimmy Bhullar — JPMorgan — Analyst
No problem. Thanks.
Timothy M. Dunbar — President – Principal Global Asset Management
Thank you.
Operator
The next question will come from Humphrey Lee with Dowling & Partners. Please go ahead.
Humphrey Lee — Dowling & Partners — Analyst
Good morning and thank you for taking my questions. On the capital management side, I was just wondering if you can provide some color in terms of the downward revision? How much of that is related to halting buybacks versus a slowdown of M&A activities? And then also how should we think about and what needs to happen before you start resuming buyback?
Daniel J. Houston — Chairman, President, & Chief Executive Officer
Yeah, all good questions and maybe just I’ll hit the last one first and throw it over to Deanna, but as you can appreciate and everyone in this management team, the people on the phone today, average experience is 33 years, and they were all here during ’08 and ’09 and they have been through this before, and we understand the importance of discipline and ensuring that the capital management gets a high degree of priority. I’d also note that it was Julia Lawler, our former Chief Investment Officer, who is our Chief Risk Officer, and there’s just been an enormous amount of work that’s been done in the last decade to prepare for this very moment. And so you’ll see as Deanna frames for you the capital deployment and the outlook,. the mindset that we have on ensuring, first, that we went into this from a very strong position and that we’ll emerge in a strong position and will be very thoughtful as we navigate our way through. So, Deanna.
Deanna D. Strable — Executive Vice President & Chief Financial Officer
Yeah, Humphrey. Thanks for the question. So, as you know, we did identify in our slides that we have lowered our target for external deployment. We came into the year targeting $1.2 billion to $1.7 billion, that includes M&A, it includes our common stock dividends and it includes share buyback. We’re now lowering that to a range of $800 million to $1 billion, which does include the $372 million that we deployed in the first quarter. So if you do the math on that, really what it does imply is that there is limited M&A. We have — the reality of the business today and the environment we’re in, those options and activities are very much stalled. It includes us maintaining our shareholder dividend for the rest of the year and at the low end would have no additional share buyback and at the high end would have nearly $200 million of share buybacks for the rest of the year. I think it’s important to note that when you’re thinking about capital deployment in this time of uncertainty, and I think the uncertainty really is evident in that very little of the positive or negative impacts that we’re going to see and that are outlined on Slide 7, have really materialized. Obviously, you want to be very prudent and likely conservative when you’re thinking about your baseline scenario. So I want to just give you a little bit of color on what our baseline scenario includes and again that was really what led us to that $800 million to $1 billion.
So our baseline scenario would have 50,000 to 100,000 US deaths related to COVID; it would have the S&P 500 dropping to 2,200 in the second quarter and then ending the year at 2,800. Obviously, if you look at the market today, we’re above that ending year number already, it has flat interest rates and IOER for the rest of the year. It has normalizing of spreads as we go through the rest of the year. It has very significant decline in GDP, with a 20 to 25 basis point quarter-to-quarter annualized rate in the second quarter with some improvement in third quarter and fourth quarter, and it has a 13% second quarter unemployment with some improvement in third quarter and fourth quarter. So I think you’d probably agree that’s a conservative baseline assumption, but what is factored into that external deployment target that we laid out. What I would say is, we’re going to continue to evaluate where we end up in that range. We’ll continue to be prudent, but really we’re not going to make any decision to change that until we gain better clarity on the path forward, how it’s playing out in terms of earnings, how it’s playing out in terms of drift and impairment, how it’s playing out relative to sales and lapse activities within our businesses.
And so, again, I think we’ll be in a more informed position on the second quarter call and as we go throughout the rest of the year, but that’s really how we think about that and how we’re framing our capital deployment.
Humphrey Lee — Dowling & Partners — Analyst
Appreciate the color. Shifting gear, looking at the favorable dental and vision utilization, how should we think about the experience for the balance of the year? Have you had any discussions with potential premium rebate if the utilization were to regain more throughout the year?
Daniel J. Houston — Chairman, President, & Chief Executive Officer
We have, and we’ve given that a lot of thought and frankly all of our businesses, Humphrey, across retirement as well as group benefits, but your question is very specific, so I’ll ask Amy to answer those questions for you. Amy.
Amy C. Friedrich — President – US Insurance Solutions
Sure. Humphrey, thanks for the question. I want to start with saying, this is unprecedented what’s going on in the dental and vision in terms of office closures. And so I think we’re all doing the best we can to make sure we get people back to kind of that normal preventative care because it’s right now not available to everybody who wants to have it. So we know that’s going to create some pent-up demand in the second half of the year. But I want to make sure we’re kind of tempering that pent-up demand with some things that I think are going to be real, particularly in the dental offices. I think there’s going to be some caution for people to go back and get sort of regular non-emergency care. And we’re also hearing from our dentists, particularly those that we know well in our network who are saying that they’re going to have to have different cleaning and sanitizing procedures in between patients. They’re going to have to use personal protective equipment maybe differently than they have in the past. And that might change the speed at which they can see patients on a regular basis. So when we look ahead, we do see that lower claims pattern for dental and vision continuing through second quarter, and then there is going to be some offset in third and fourth quarter but I’m not sure I see that the dental practices can get back to quite the speed they had before.
You asked a question about kind of — I would call it more of a premium relief question. And we’ve already been looking at premium relief. We’ve announced May through October that we will do no renewal rate increases. And that’s not just for dental and vision. That’s actually for all of our group benefits products. We think that’s the right thing to do, and we think that’s the right type of support we should be offering right now. If we continue to see a path where people can’t utilize our products to get normal care, then we will continue to do things and consider other premium relief. So that’s kind of what we know right now, and that’s the best picture we can give you.
Daniel J. Houston — Chairman, President, & Chief Executive Officer
Humphrey, appreciate the questions. And again, when we get to the second quarter call, I’m sure we’ll be able to shed a lot more light on these specific programs. So thank you.
Humphrey Lee — Dowling & Partners — Analyst
Thank you.
Operator
The next question will come from Andrew Kligerman with Credit Suisse. Please go ahead.
Andrew Kligerman — Credit Suisse — Analyst
Hey, good morning. Just to follow-up a little — get a little more clarity on what Humphrey was just asking. When you say M&A options have stalled, is that because you’re not at this time prepared to look at more transaction activity or there just aren’t deals out there? And then with regard to the remaining $200 million of potential in your capital redeployment guidance, I guess that implies that you — and just based on Deanna’s comments, it implies that you’re probably going to wait until the fourth quarter before we would see anything, is that the right read?
Daniel J. Houston — Chairman, President, & Chief Executive Officer
Yes. I guess the way I would respond to your question, and I appreciate it. The first of which is on M&A, I think we’d all recognize that people are very busy in terms of just running their businesses. And M&A is not sort of a short-term view in our — from our perspective, it’s long-term. We’ve identified targets within each of our businesses that add scale or capabilities, things that we feel would be additive to the organization. Frankly, it was true in the case of the Wells Fargo Retirement business. So we’re very disciplined. And right now, the prepared comments we’re suggesting, and because we had shed some light earlier that we were having conversations, that’s been pushed off. It’s resources on the other end as much as anything else. And, frankly, people are grappling with simply running their business. It’d be inappropriate for me to try to speculate on share repurchase. If we work very closely with the Board and the Board Finance Committee on the deployment of capital, it’s a very disciplined model. But to speculate whether it’s in the second, third or fourth quarter would only be that. And so, again, we’ll take a very disciplined approach, making sure that we’ve got plenty of capital for organic growth, making sure that we have enough capital to ensure that if there’s drift in the mortgage portfolio or the fixed maturity portfolios, that we’re adequately capitalized to deal with that level of volatility. Does that help?
Andrew Kligerman — Credit Suisse — Analyst
Very helpful. And then just following up on RIS-Fee. I believe in Slide 5, you have cited net cash flow outlook for the year of 1% to 3%. And typically you get your biggest deposits in the first quarter and your biggest net flow there. So that kind of helps it along, maybe, even get half in the first quarter. So I guess the question is, as you look out over the next 12 months, where might you see that number? And do you think there’s going to be a lot of pressure on deposits, given that we are in the recession and the like? Yes. So great question. Renee, do you want to respond please?
Renee Schaaf — President – Retirement & Income Solutions
Yes, absolutely. Thank you for the question, Andrew. When we consider the net cash flow outlook for 2020, we do see that remaining in the 1% to 3% range for 2020. And as you might guess, when we look at sales, we do see that our pipeline has slowed a little bit as a result of COVID. But on the flip side, client retention is anticipated to be better. So to some extent, there’s a natural offset to what we might see in terms of sales. With respect to recurring deposits, we had an incredibly strong first quarter with a 14% increase over the quarter one year ago. And while we do think that the recurring deposits will moderate a bit through the remainder of the year as a result of the environment that we’re in, we do anticipate seeing strength in recurring deposits, which then the last thing that I would touch on with respect to thinking about the annual net cash flow is the participant withdrawal and the behaviors that we might see there. So maybe to frame this a little bit for you. When we take a look at the actual participant withdrawals that we saw in 2009, which was the height of the financial crisis, we saw that those withdrawals were about 11% of average account values. And those withdrawals were for any reason. So hardship withdrawals, loans, persons leaving the plan for any reason. And to frame that or to give you a point of comparison, in 2019 that same figure was about 11%.
So we do anticipate we’ll see a little bit of a tick up. But when you take everything all under consideration, sales offset by better client retention, continued strong deposits and participant withdrawals that will tick up but we believe still will be in the manageable range. We feel confident in that 1% to 3% net cash flow projection.
Daniel J. Houston — Chairman, President, & Chief Executive Officer
Hopefully, that helps Andrew.
Andrew Kligerman — Credit Suisse — Analyst
Thanks a lot. Yes. Thank you.
Daniel J. Houston — Chairman, President, & Chief Executive Officer
You’re welcome. All right.
Operator
The next question will come from Erik Bass with Autonomous Research. Please go ahead.
Erik Bass — Autonomous Research — Analyst
Hi, thank you. Can you talk about your outlook for real estate both in terms of valuations for commercial properties and then the implications from forbearance provisions and loss of rent payments on commercial mortgage loans?
Daniel J. Houston — Chairman, President, & Chief Executive Officer
That’s a great question. I was thinking it’s almost like describing the meaning of life because there are so many different property types within real estate. And I think that’s where this conversation really leads is to the quality of the portfolio and a long history of having demonstrated consistently through these peaks and troughs of the commercial real estate market that our ability to manage that’s quite good. And we’re fortunate because Tim has played such an important role in that area for a long time. So Tim, you want to respond please?
Timothy M. Dunbar — President – Principal Global Asset Management
Sure. And I’d just remind you that, obviously, we have a very diversified commercial mortgage loan portfolio and the metrics going into this crisis are quite good. So somewhere around 45% loan to values, 1.6 debt service coverage ratio. I mean, actually, we’ve been very selective about how we’ve built that portfolio over the years. Right now, we are starting to see some clients look for debt relief. But in April, we had over 99% of our mortgage loans pay on time. We do have a process where we’re working with them. As you know, NAIC has given us relief through June and we’re looking for them to continue to give us relief on credit drift through the end of the year. As we look at the various asset classes, we would expect hotels, retail to both be the hardest hit as it relates to valuations. There we’re thinking they might be somewhere in terms of write-downs of 30% to 35%, really depending on the specifics there. So as you know, it’s very dependent on the location, dependent on the quality of the assets.
In our portfolio, we have very little hotel, really not much exposure there at all. And as it relates to retail, we’re well below the NCREIF index weighting [Phonetic] to retail. And then as you look at our retail more specifically, we feel like we’re really well positioned, really not much exposure to malls and really only about $128 million in malls and then not much exposure — a lot of exposure to grocery anchored retail, which, as you know, has actually probably been doing pretty well. The rest of the portfolio, we’re overweight in industrial, a little overweight in office, and those are in marquee locations and are very well positioned. So we would expect to see write-downs probably somewhere in the 20% to 25% range on average. Hope that helps.
Erik Bass — Autonomous Research — Analyst
Yes, thank you. And then I think you had a comment in the outlook slides related to a slowdown in just real estate activity and some potential impact on near-term revenues and earnings in PGI. Can you just provide a little bit more detail there please?
Timothy M. Dunbar — President – Principal Global Asset Management
Sure. A couple of things going on there is that, obviously, with the shelter-in-place orders, the lack of travel, a little bit hard to go out in private assets and inspect those properties and really close on those. And we’ve seen a real trail-off in terms of acquisition and sales in that marketplace. So that’s really abated for the time being. We’re starting to see a lot more activity pick up. People find ways to get out and inspect those properties either virtually or in person. So we would start to see that pick up. But we do believe that it will be a lag effect, and the third quarter will start to pick up somewhat. And then fourth quarter, we hope will get back to normal. So the delay or the backup in terms of our revenue associated with that would be related to transaction fees, which we would see being less or a bit pressured and then being able to put clients’ money to work in some of those real estate strategies that we have.
Daniel J. Houston — Chairman, President, & Chief Executive Officer
Erik, thanks for your questions.
Erik Bass — Autonomous Research — Analyst
Thank you.
Operator
The next question is from Ryan Krueger with KBW. Please go ahead.
Ryan Krueger — KBW — Analyst
Hi, good morning. Can you give some perspective on, I guess, the potential range of margins you’d expect in RIS-Fee relative to the baseline scenario that you discussed?
Daniel J. Houston — Chairman, President, & Chief Executive Officer
Yes. I mean, the bottom line is we haven’t changed our ranges for RIS-Fee. They’re still very much intact. And it’d be very difficult to sort of try to re-imagine what that might look like for the balance of the year. We have fully — our intentions are to deliver on the same level of margin and growth. But I’ll ask Deanna to make any additional comments.
Deanna D. Strable — Executive Vice President & Chief Financial Officer
Yes. The only other comment I’ll add, Ryan, is that the rule of thumb that we have given in the past and that were included in the appendix are holding together pretty well. And so I think I would use that as a guide as you think about our growth and margins going forward.
Ryan Krueger — KBW — Analyst
Got it. Thanks. And then just a follow-up on the commercial mortgage loans. When you were discussing the potential write-down in value, I guess — I assume that’s related to the overall property value. But given your low LTV, you wouldn’t actually expect material write-downs under your loans themselves?
Daniel J. Houston — Chairman, President, & Chief Executive Officer
That’s right. Tim?
Timothy M. Dunbar — President – Principal Global Asset Management
That’s absolutely correct. I think we expect that we will continue to be in a very good position as it relates to actual credit losses on our real estate portfolio. So you’re right.
Daniel J. Houston — Chairman, President, & Chief Executive Officer
Thanks, Ryan.
Ryan Krueger — KBW — Analyst
Thank you.
Operator
The next question is from John Barnidge with Piper Sandler. Please go ahead.
John Barnidge — Piper Sandler — Analyst
Thank you. PFG has always had an SMB focus, which demands local presence that larger new entrants usually don’t have. Can you talk about what PFG is doing to demonstrate that local presence in a work-from-home world?
Daniel J. Houston — Chairman, President, & Chief Executive Officer
It’s been amazing how fortunate we were to have made the investments that we have in our digital strategy, in particular, in the back office, the middle office but equally on the front office. Our ability to connect our advisers and our prospective customers and our wholesalers has been extraordinary. It’s working. We feel like we’ve got great momentum. The pipeline is good. But maybe I’ll just ask Renee and Amy to both comment a little bit and Luis because this is an international phenomenon. And, again, this is where technology investments are rewarding us. So Renee?
Renee Schaaf — President – Retirement & Income Solutions
Yes, absolutely. John, thank you for that question. One of the opportunities that we have taken full advantage of with respect to technology is keeping a very close contact with clients, with advisers and consultants and participants as we’ve gone through these unprecedented times. So we have been very fortunate to not only be able to deploy technology that allows us to reach wide audiences using technology, but also to have the kinds of presentation technologies in place that allow us to continue to showcase our capabilities and continue to allow us to create contacts and deliver on the sale and on retention, on servicing on an ongoing basis. The other thing that I would add is we have been — our sales, our service teams and really not only within RIS but across the enterprise, have been very forward-thinking and very proactive in reaching out to every constituent and providing meaningful information and guidance to them. We have not been reticent. We’ve been very present and very active in the marketplace. And so if anything, I believe that our clients, participants, advisers and consultants have learned that they can rely on us through every single economic scenario, and this one without exception.
Daniel J. Houston — Chairman, President, & Chief Executive Officer
Amy, any brief comments you’d like to add?
Amy C. Friedrich — President – US Insurance Solutions
Yes. I feel similar to Renee in terms of her comments. We’ve built a business that knows how to install things like 15,000 new pieces of business a year. And when we can do that, we can do that from home just as easily as we can do that from our offices. So I feel really strongly that we have continued our business flow without interruption.
Daniel J. Houston — Chairman, President, & Chief Executive Officer
And Luis, you and your team have probably been one of the most aggressive on the digital transformation and when you respond, would you also give us a little bit of color because I think the work that you’re doing with Ant Financial on the joint venture in China speaks volumes about the ability to ramp up with millions of new customers and billions of AUM.
Luis Valdes — President & Chief Executive Officer – Principal International
Yes. Thanks, Dan. And John, thanks for asking. We started putting together our digital strategy five years ago essentially. And that is saying, the first stage was to be digital-ready and then to start building and putting tools and solutions together. We have a whole variety of digital experience, particularly with JVs. China is one. We partnered with Ant Financial. Today, we have more than 10 million customers, digital customers end-to-end, no human intervention, positive net customer cash flows, and that part of our business is becoming really meaningful in China. We’re trying to replicate the same experience in Southeast Asia, also with Ant Financial in a joint venture with CIMB, our partner, using another e-wallet experience. So we are willing to expand all that kind of strength into the Southeast Asia region as well.
If you are looking into Latin America, we have been able also to put solutions and tools B2B2C, D2C in different countries, different stages. And we have seen an enormous increase of traffic from our customers and distributors and partners using those tools 3x, 4x, depending in which tools you’re looking for. So this is a reaffirmation of — that going digital was the right decision. And certainly, we are going to continue investing in our strategy.
Daniel J. Houston — Chairman, President, & Chief Executive Officer
Excellent. John, do you have a follow-up?
John Barnidge — Piper Sandler — Analyst
Yes, I do, and it dovetails off of this. You said 95% of employees are working remotely. Shelters-in-places are starting to lift. Do you actually think all 95% are going to go back into an office? Or do you see real estate savings potentially emerging?
Daniel J. Houston — Chairman, President, & Chief Executive Officer
Yes. So the first thing I would say is we’re going to take our employees’ health is the highest priority in terms of how we reload our buildings. And as Amy was describing, it’s been actually heartwarming to see how effective our employees have been working in a remote environment. And you’d never test it this long in any sort of table-top exercise. And it’s gone, I think, better than all of us would have expected. And by the way, that’s a global number not just a domestic number. We think that we’ll end up with a large percentage of our population that wants to come back into what I’ll call a traditional office environment. I think we’re going to be more comfortable with having more flexibility in how people get their work done. But I will tell you, there’s more employees than you might think that are anxious to get back for the collaborative nature, the friendships. So I think it is going to change things. Having a meaningful change in office or commercial real estate, I don’t know. Maybe, maybe yes, but we’ll have to see how that goes. But we certainly look forward to the opportunity to have face-to-face meetings with our employees in the future. So hopefully, that helps.
John Barnidge — Piper Sandler — Analyst
Thank you very much.
Daniel J. Houston — Chairman, President, & Chief Executive Officer
All right.
Operator
The next question will come from Suneet Kamath with Citi. Please go ahead.
Suneet Kamath — Citi — Analyst
Thanks. Good morning. Just want to start with capital. Deanna I think — or maybe it was Tim, talked about some capital relief from the NAIC on ratings drift. So I was curious about that. But also have you guys sort of quantified what a one-notch downgrade across your investment portfolio would require in terms of incremental RBC?
Daniel J. Houston — Chairman, President, & Chief Executive Officer
Yes. So good question and appropriate. Why don’t I have Tim take it first and then have Deanna clean it up.
Timothy M. Dunbar — President – Principal Global Asset Management
Yes, thanks, Suneet. Specifically, what I was talking about with NAIC is that they’ve granted relief if you negotiate with some of your mortgage holders to forebear their payments for a period of time. Typically, NAIC would require that if you hadn’t received a payment for 90 days that you would have — there would be a fair amount of rating strip for those commercial mortgage loans. They’ve abated that through June, and we’re expecting or hoping that they will continue that through the end of the year. And that’s what we’re working very closely with the NAIC on along with other association.
Deanna D. Strable — Executive Vice President & Chief Financial Officer
The only thing I would say is, you specifically asked around a one notch drop in every — I’m not sure that’s the most realistic scenario. I think if you point to the high quality that we have, and I think the likelihood that most of the drift and impairments are going to happen, one, in flex sectors but two in the lower end of those quality curves. What we have quantified what we think in our baseline scenario, and it’s in the $400 million to $800 million range, but that encompasses both drift and impairments.
The other thing I think I’d state is that unlike the financial crisis where it took some time for that to materialize, and actually you saw that kind of even ramp up over the time frame, we actually think that this will be very front-end loaded with the majority of the impact actually happening in 2020. I think if you go back to Slide 7 though, I think we have a number of levers that can offset that. That includes reducing our external deployment, which we’ve already talked about. It includes some of the expense management actions that we’re going to take. And then I do think even though long-term we want to continue to grow the sales of our spread businesses, when we do see those reduce we do see lower need for organic growth to support those sales. And that’s a pretty significant number when you think about how that might add up. So hopefully, that frames it but again, that was really looking almost sector by sector and asset by asset to come up with that range and we think it’s a pretty reasonable estimate.
Suneet Kamath — Citi — Analyst
Makes sense. And just my quick follow-up is on something you just mentioned. Can you help us think about how much capital is freed from lower sales and sort of the natural capital release that you talked about on that slide?
Deanna D. Strable — Executive Vice President & Chief Financial Officer
Yes. I think it’s hard to do because every product has a different capital charge. I think it could be half of what I just said from drift and impairments in that range. But some of it depends on, does that come in PRT or does that come in income annuities or retail fixed deferred annuities? And so the makeup matters, but I think it could be in that range of half of what I said for impairments and drift.
Suneet Kamath — Citi — Analyst
So $200 million to $400 million?
Deanna D. Strable — Executive Vice President & Chief Financial Officer
Yes.
Suneet Kamath — Citi — Analyst
Got it.
Daniel J. Houston — Chairman, President, & Chief Executive Officer
Yes, thank you.
Suneet Kamath — Citi — Analyst
Okay. Thanks.
Operator
The final question will come from Alex Scott with Goldman Sachs. Please go ahead.
Alex Scott — Goldman Sachs — Analyst
Hi, good morning. First one I had was on RIS-Fee. I was just interested if you could provide any color on the level of the TSA fees on the Wells Fargo IRT this quarter and how that will progress just thinking through the dynamics with revenue decline. And then how much offset do you think you can get from the expense side with that business? And what that means for overall margins and RIS-Fee for 2020?
Daniel J. Houston — Chairman, President, & Chief Executive Officer
Yes. Thanks, Alex, for the question. And before I throw it over to Renee, I would just say this. We couldn’t be more pleased about the acquisition itself. Some of the economics are not as favorable due to macroeconomic pressures on the business and where we’re at in the cycle. But in terms of a strategic fit and putting us in a wonderful position to compete in all size markets down the road, it’s still very, very positive for the organization. Renee, you want to cover the TSA?
Renee Schaaf — President – Retirement & Income Solutions
Yes, absolutely. So Alex, again, just to reiterate, we are extremely pleased with this integration. The integration is on track. Client retention is on track. Our value proposition continues to resonate with clients. And also, very importantly, there is an incredible amount of collaboration and teamwork between the IRT team at Wells Fargo and Principal. We really are functioning as one cohesive team. And that matters on several fronts. First off, our ability to deliver the value proposition in a smooth transition to our clients from RIT to principal. But also our ability to work together to control and to manage costs, including that of the TSA. So we would anticipate that the TSA expenses would continue to bend down over the course of time as services begin to diminish from the IRT team and as the IRT employees come on to Principal. But the really good news is that everything is on track. We feel good about our ability to smoothly migrate customers, and we couldn’t be more pleased with the progress that we’ve made.
Daniel J. Houston — Chairman, President, & Chief Executive Officer
Thanks, Alex.
Alex Scott — Goldman Sachs — Analyst
Can I have one quick follow-up on that?
Daniel J. Houston — Chairman, President, & Chief Executive Officer
Yes, please.
Alex Scott — Goldman Sachs — Analyst
Any way to think about the level of those TSA fees? I think they’ve been hovering around $95 million or so. I mean, will they — do you have a way to reduce those at all before the end of the year when I think you’re going to move more of the assets on to your platform?
Daniel J. Houston — Chairman, President, & Chief Executive Officer
Yes, good question.
Renee Schaaf — President – Retirement & Income Solutions
So, Alex, this is Renee again. We would anticipate to see the TSA fees come down as clients and employees begin to migrate. And keep in mind that the clients will start to migrate at the end of this year, but the migration will continue into 2021. So we’ll see some moderation of TSA expenses but I think you’ll see the largest moderation begin to occur next year.
Daniel J. Houston — Chairman, President, & Chief Executive Officer
Please go ahead, operator.
Operator
We have reached the end of our Q&A session. Mr. Houston, your closing comments.
Daniel J. Houston — Chairman, President, & Chief Executive Officer
Yes, I’d be happy to. When you think through these most challenging times, you ask yourself whether or not the strategy has worked and will work. And I think about the 33 million customers that we have, the 200,000 business owners that we have around the world, and the demand for our products and services are relevant and in high demand, and I don’t see that changing. So the strategy is very much on track. I have to tell you, I’ve been humbled by our employees’ ability to adapt to this new environment. I couldn’t be more proud of their resiliency and their commitment to support our customers, the participant as well as the plan sponsor and our institutional customers. We work, frankly, tirelessly to serve our customers to help them through the crisis with resources, technical support and concessions to help bear some of the burden that the employers are going through. I’m convinced the shareholders are going to be rewarded as we work our way through this process, and it is challenging. But with that, I would just say this, I wish you much health and happiness and safety, as you also work through this challenging time and look forward to talking to you at the end of the second quarter. Thank you.
Operator
Thank you for participating in today’s conference call. This call will be available for replay beginning at approximately 1:00 PM Eastern Time until end of day March 4, 2020. 7354068 is the access code for the replay. The number to dial for the replay is 855-859-2056 US and Canadian callers or 404-537-3406 international callers.
Ladies and gentlemen, thank you for participating. You may now disconnect.