Principal Financial Group, Inc. (NASDAQ: PFG) Q3 2020 earnings conference call dated Oct. 27, 2020
Corporate Participants:
John Egan — Vice President, Investor Relations
Daniel J. Houston — Chairman, President and Chief Executive Officer
Deanna D. Strable — Executive Vice President and Chief Financial Officer
Amy C. Friedrich — President, U.S. Insurance Solutions
Renee Schaaf — President, Retirement and Income Solutions
Timothy M. Dunbar — President, Principal Global Asset Management
Analysts:
Humphrey Lee — Dowling & Partners — Analyst
John Barnidge — Piper Sandler — Analyst
Ryan Krueger — Keefe, Bruyette & Woods — Analyst
Suneet Kamath — Citi — Analyst
Erik Bass — Autonomous Research — Analyst
Thomas Gallager — Evercore ISI — Analyst
Joshua Shanker — Bank of America — Analyst
Presentation:
Operator
Good morning, and welcome to the Principal Financial Group’s Third Quarter 2020 Financial Results Conference Call [Operator Instructions].
I would now like to turn the 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 third quarter 2020 conference call. As always, materials related to today’s call are available on our website at principal.com/investor. Similar to last quarter, we’ve posted an additional slide deck on our website with details of our U.S. investment portfolio. Following a reading of the Safe Harbor provision, CEO, Dan Houston; and CFO, Deanna Strable, will deliver some prepared remarks. Then, we will open up the call for questions. Others available for the Q&A session include Renee Schaaf, Retirement/Income Solutions; Tim Dunbar, Global Asset Management; Luis Valdes, Principal International and Amy Friedrich, U.S. Insurance Solutions. Some of the comments made during this conference call, may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act.
The company does not revise or update them to reflect new information, subsequent events, or changes in strategies. Risk and uncertainties that could cause actual results to differ materially from those expressed or implied are discussed in the company’s most recent Annual Report on Form 10-K, filed by the company with the U.S. Securities and Exchange Commission. Additionally, some of the comments made during this conference call, may refer to non-GAAP financial measures. Reconciliations of the non-GAAP financial measures to the most directly comparable U.S. GAAP financial measures may be found in our earnings release, financial supplement and slide presentation. We would like to make you aware of two upcoming investor events. We’re changing the timing of our Outlook Call from December to February 25th. Additionally, we plan to host our 2021 Investor Day, on June 15th next year.
More details of both events will be shared in the future. Dan?
Daniel J. Houston — Chairman, President and Chief Executive Officer
Thanks, John and welcome to everyone on the call. I hope you and family are staying healthy and well. This morning, I’ll provide an update on how Principal continues to respond to COVID-19 and its impact on our business. I’ll discuss key performance highlights for the third quarter, our continued strong financial position, and how we are well-positioned for long-term growth, with the right strategies in place. Dan will follow with our third quarter financial results, including the financial impacts from our annual, actuarial assumption review in COVID, details of our capital and liquidity position and an update on our investment portfolio. Safety of our employees and customers remains a top priority.
While most of our employees continue to effectively work remotely, we’re gradually welcoming some back into our offices around the world. We are extremely pleased on how effective and flexible our employees have been in this remote work environment, while maintaining excellent customer service. Our investments in technology and digital solutions over the last several years, continues to pay off and allow for a seamless transition. COVID has had an impact on the retirement and group benefits landscape with both employers and employees recognizing the need for benefits to protect the health and well-being of both individuals and their families. This has magnified the role employer benefits play in attracting and retaining top talent, especially within small to medium-sized business community.
Last quarter, I mentioned that the impact COVID is having on our customers was less about the size of the business and more about the industry they operate in. This continues to be true. We remain well-diversified by geography and industry, and we’re less exposed to industries most impacted. The pandemic has certainly created some unique opportunities and challenges for Principal. Our integrated and diversified business model remains resilient. I’m confident that we’re in the right businesses with the right teams in place, and we will continue to make investments to create long-term shareholder value. Moving to the third quarter highlights on slide 4, we reported non-GAAP operating earnings of $235 million.
Excluding the impacts of the actuarial assumption review and other significant variances, which Deanna will discuss, non-GAAP operating earnings of $417 million increased a strong 10% compared to a year ago quarter. The increase was driven by higher revenue from increased AUM and disciplined expense management, partially offset by foreign currency headwinds. At the end of the third quarter, we remained well capitalized with $3.4 billion in available cash and liquid assets and $2.6 billion of excess and available capital. We’re positioned to execute on the right opportunities that will enable Principal to grow and create long-term shareholder value. Compared to the second quarter, total company AUM increased nearly $30 billion or 4% to $731 billion at the end of the third quarter. This increase was driven by both positive net cash flow and favorable market performance.
We closed the quarter with a record PGI managed AUM of $468 billion and record PGI sourced AUM of $226 billion. This continues to highlight the strength of our investment performance and our in-demand products and solutions. AUM in our China joint venture, which is not included in our reported AUM, declined 16% during the quarter to $120 billion. This decline was primarily due to the industry trends in China to move investments out of money market funds in light of the low interest rate environment. Through the first nine months of the year, total company net cash flow was a positive $11 billion, including $2 billion in the third quarter. On a trailing 12-month basis, net cash flow of $18 billion increased from $7 billion in the year ago period.
Principal International generated $1.8 billion of net cash flow and marked its 48th consecutive positive quarter, driven by positive flows in Brazil, Southeast Asia, Chile and Hong Kong. This is an extraordinary feat given the significant macro headwinds in emerging markets. RIS-Spread reported net cash flow of $500 million, due in part to another strong quarter of opportunistic MTN and GIC issuances. RIS-Fee had negative $1.8 billion of net cash flow in the quarter, primarily due to continued COVID hardship withdrawals, lower sales and pressure on growth in reoccurring deposits. This also impacted PGI-managed net cash flows where we managed a portion of the retirement assets. PGI sourced net cash flow was a positive $1 billion, driven by our diversified products that continue to have strong performance as well as multiple distribution channels and client types.
Our investment performance remained strong. At quarter end, 73% of Principal Funds, ETFs, separate accounts and collective investment trust were above median for the one year, 77% above median for three-year, 76% were above median for five-year, and 91% above median for 10 years. Additionally, for Morningstar-rated funds, 74% of the funds level AUM had a 4- or 5-star rating. This continued strong performance positions us well to attract and retain assets going forward. Combined with positive net cash flow, this is a testament to the great work our teams have been doing to create in-demand products and leverage our digital investments. I’ll now share some additional execution and business highlights, starting with the integration of the IRT business. Despite working remotely, our teams have successfully started to migrate the core IRT retirement business to our platform.
The migration of the retirement plans will continue through the summer of 2021. Importantly, the strategic and cultural fit are confirmed and showing benefits already. The revenue and expense synergies are also confirmed, though delayed with the expense synergies expected to be 50% higher than originally modeled. These benefits will help mitigate the impact from the reduction in the interest on excess reserves or IOER rate on deposit revenue. These financial benefits will start to emerge after the transition services agreement unwinds in the summer of 2021. Our increased scale and access to the consultant and large market channels have doubled the volumes of creative pipeline in the large plan segment. This pipeline is coming from distribution channels we haven’t previously had access to.
The combined platform we built offers enhanced capabilities for not only our new IRT customers, but also our existing and prospective clients as well. We are extremely excited about the IRT business and the benefits it will provide throughout the organization and all of its segments, small, medium and large plan markets. From a digital perspective, our Principal mobile app remains a top-rated app in the retirement industry with more ratings and actionable feedback than our competitors. We also launched Simply Retirement by Principal, a new all digital 401(k) solution that helps small business owners and their financial professionals build retirement benefit programs in a matter of just a few hours. Simply Retirement features competitive pricing, our industry-leading digital onboarding experience, and tools that make it easy to administer.
In Individual life, we’ve seen continued adoption of our term life digital self-service tool, Principal Life Online, one of the first fully digital experiences in the industry. Since January, we’ve had 47,000 applicants utilize this tool by leveraging our digital application tools and investments in underwriting automation, about a-third of our underwriting approvals can be completed with less than 10 minutes of underwriting time. In Chile, Cuprum recorded highest net transfer rate of new customers since our acquisition of Cuprum in 2013. The new customer growth is driven by Cuprum’s easy-to-use digital solutions as well as our investments in direct-to-consumer and cloud capabilities, all of which have helped make our transaction simple for our customers.
We’ve enjoyed some noteworthy third-party recognition during the third quarter as well. In our Global Asset Management franchise, we received recognition for our ESG efforts from the United Nations Principles for Responsible Investing, or UN PRI. PGI received an A+ overall approach rating and Principal Real Estate Investors received an A+ rating for the fourth consecutive year, both the highest ranked awarded. Principal was recognized by Financial Advisor IQ Service Awards as a top three Record Keeper for an Excellent Advisor Experience. U.S. News & World Report, again, named Principal to its list of top life insurance companies.
And CNET named Principal, the Best Overall Life Insurance Company for 2020. In PI, Brasilprev was recognized by ISTOE DINHEIRO Magazine as the Best Insurance Company in Financial Sustainability, Innovation, Quality and Social Responsibility. They’ve been performing an annual analysis for the last 16 years. Before I turn the call over to Deanna, I’d be remiss if I didn’t recognize the upcoming retirements of Tim Dunbar and Julia Lawler. I’d like to thank Tim and Julia for their unwavering commitment to Principal over the last 35 years. They’ve been tremendous individuals, leaders and professionals over the years and our organization would not be the same place today without them. I, along with so many others, will miss them personally and professionally. We wish you both the best in your well-deserved retirement.
That said Pat Halter and Ken McCullum are in place to now carry the torch as we continue our journey as an ever-evolving and growing global financial services organization. Deanna?
Deanna D. Strable — Executive Vice President and Chief Financial Officer
Thanks, Dan. Good morning to everyone on the call. This morning, I’ll discuss the key contributors to our financial performance for the quarter, including details of our actuarial assumption review, impacts from COVID, our current financial position and details of our investment portfolio. COVID continues to impact where and how we do business, and we’ve included additional details of the impacts in our conference call presentation again this quarter. While uncertainty remains on how the impacts play out over the next year or so, many of the metrics we’re tracking continue to trend better than we expected at the onset of the pandemic. Third quarter, net income attributable to Principal of $236 million, included net realized capital gains of $2 million, with manageable credit losses of $17 million.
Reported net income reflects a negative $187 million impact from the assumption review and other significant variances. We reported $235 million of non-GAAP operating earnings in the third quarter or $0.85 per diluted share. Excluding the impacts of the assumption review and other significant variances, non-GAAP operating earnings of $417 million or $1.51 per diluted share increased 10% and 12%, respectively, compared to the third quarter of 2019. As shown on slide 4, we had several significant variances during the third quarter. These had a net negative impact to reported non-GAAP operating earnings of $233 million pretax, $182 million after-tax and $0.66 per diluted share.
Pretax impacts included a net negative $142 million impact as a result of the assumption review, primarily due to lowering our interest rate assumptions, a net negative $48 million impact from COVID-related claims and other impact in our RIS and USIS businesses, a negative $17 million impact in RIS-Fee from IRT integration costs, a negative $14 million impact from lower-than-expected variable investment income in Specialty Benefits, Individual Life and Principal International and a negative $12 million impact in Principal International from lower-than-expected encaje performance in Latin America and lower-than-expected inflation, primarily in Brazil. Slide 7 and 8 provide additional details of the significant variances by business unit and income statement line item.
Looking back, significant variances negatively impacted third quarter 2019 reported non-GAAP operating earnings by $41 million pretax, $34 million after-tax and $0.12 per diluted share. This year’s assumption review was primarily impacted by economic and experience assumption changes. The most significant impact was the result of updating our interest rate assumptions. We lowered our long-term 10-year treasury rate assumption by 75 basis points to 3.25%. In addition, the starting point dropped more than 130 basis points from this time last year. Experienced assumption changes primarily included updates in RIS-Fee and Individual Life. Individual Life had an unfavorable impact from updated mortality and premium assumptions.
This was partially offset by a favorable impact in RIS-Fee from updated mortality and withdrawal assumptions in our variable annuity business. As a reminder, the Secure Act changed the required minimum distribution age from 70.5 to 72 years of age, meaning annuitants can take their withdrawals later. We expect these changes will decrease pretax operating earnings in Individual Life by $4 million to $5 million per quarter and have an immaterial impact in the other business units. We’ll be finalizing statutory results during the fourth quarter, including the impact of these updated assumptions as well as our annual asset adequacy testing. We expect this capital impact to be manageable. Turning to macroeconomic factors in the third quarter, the S&P 500 Index increased more than 8%, and the daily average increased 13% compared to the second quarter and 12% from the year ago quarter benefiting revenue, AUM and account value growth in RIS-Fee and PGI.
Moving to foreign exchange rates, average rates improved during the quarter, but we continue to face headwinds compared to a year ago. Impacts to third quarter pretax operating earnings included a positive $5 million compared to second quarter 2020, a negative $16 million compared to third quarter 2019, and a negative $53 million on a trailing 12-month basis. For the business units, third quarter results, excluding significant variances were largely in line or better than expectations given the current macroeconomic environment. The legacy business in RIS-Fee continues to perform well given the current operating environment. Excluding significant variances, the margin for the legacy business was nearly 35% in the third quarter and reflects strong expense management and equity market tailwinds.
Slides 9 and 10 provide details of the COVID-related financial impacts we’ve experienced in the third quarter, as well as updated thoughts on potential impacts the pandemic could have on our business and our results in the future. Third quarter pretax operating earnings were impacted by a net negative $48 million, including a negative $42 million impact in Specialty Benefits, primarily from a 10% premium credit for our dental customers, claims in group life and group disability, as well as unfavorable dental and vision claims from pent-up demand that partially offset some of the positive impact from the first half of the year, a negative $8 million in RIS-Fee from waived fees for participant hardship withdraws, and a negative $2 million impact from claims in Individual Life.
These impacts were partially offset by a $5 million benefit from favorable mortality in RIS-Spread. In total, our third quarter direct COVID mortality and morbidity impacts in Specialty Benefits, Individual Life and RIS-Spread netted to a negative $3 million after-tax impact with slightly more than 80,000 COVID deaths reported in the U.S. during the quarter. Our third quarter impact was lower than our COVID sensitivity of a $10 million after-tax impact to earnings for every 100,000 U.S. COVID deaths, primarily due to lower-than-assumed claims in Individual Life. We believe this was normal volatility and are still comfortable with our sensitivity. We’re continuing to monitor several other key indicators to gauge potential future financial impacts from COVID and the related market volatilities.
In the Retirement business, the trends we saw in second quarter for both plan sponsor and participant behavior continued in the third quarter. Participant withdrawals remained elevated during the quarter, partially due to $1 million [Phonetic] of COVID related withdrawals, which we waived fees on through September. We continue to expect full year total participant withdrawals to be approximately 11% of beginning of year account value, about one percentage point higher than we typically see. While we continue to see growth in recurring deposits compared to a year ago, growth is muted as participants making deferrals remain lower due to layoffs and furloughs. In group benefits, as I discussed on last quarter’s call, the number of lives covered under our existing plans is a good indicator of employer behavior.
While overall covered lives decreased 1.2% during the quarter, we saw growth in September in certain industries and regions, a sign of recovery for some sectors and we’re seeing continued improvement so far in October. In Individual Life, while sales are down overall due to our concentration in the business market, we continue to see an increased interest in term life insurance. Application volume is up nearly 140% compared to a year ago due to increased awareness on mortality and our enhanced digital capabilities and digital distribution. In Principal International, Chile passed a law in July, allowing participants to take COVID hardship withdrawals. This negatively impacted our AUM levels by $1.4 billion. To mitigate some of these pressures, we have a strong history of effectively managing our expenses in line with revenue, during times of uncertainty and market volatility.
Compared to our expectations at the beginning of the year, we’ve reduced expenses nearly $200 million year-to-date, including more than $100 million in the third quarter. This is spread across all businesses and contributing to resilient margins, despite revenue pressures. For full year 2020, we continue to expect our actions will reduce expenses by approximately $250 million relative to our expectations at the beginning of the year. As a reminder, fourth quarter compensation and other expenses are typically 7% to 10% higher than other quarters due to seasonality of certain expenses like marketing and IT. We expect to be at or below this range in fourth quarter this year. Turning to capital and liquidity on slide 11, our financial position remained strong and improved from last quarter. We ended the quarter with $3.4 billion of total company available cash and liquid assets.
And we had $2.6 billion of excess and available capital, including $1.6 billion at the holding company, double our target of $800 million to cover the next 12 months of obligations, $500 million of available cash in our subsidiaries and $480 million in excess of our targeted 400% risk-based capital ratio at the end of the quarter, estimated to be 431%. The RBC ratio remains higher than our target due to uncertainty in the timing and impact of credit drift and credit losses. We continue to expect the RBC ratio will trend down to our targeted 400% over time. Our non-GAAP debt-to-capital leverage ratio, excluding AOCI is low at 24%. Our next debt maturity of $300 million isn’t until 2022 and we have a well spaced ladder debt maturity schedule into the future.
Despite the pressures of the current environment, we remain in one of the strongest financial positions in our company’s history and we have the financial flexibility and discipline needed to opportunistically deploy capital and manage through this time of economic uncertainty. As shown on slide 12, we deployed $154 million of capital in the third quarter for common stock dividends. We plan to restart share repurchases, either in the fourth quarter or the first quarter of 2021. While uncertainty remains, we continue to be in a strong financial position. We’re starting to have enhanced clarity and stability in the macro environment and the range of possible outcomes is narrowing. We have $850 million remaining on our current share repurchase authorization.
Last night, we announced a $0.56 common stock dividend payable in the fourth quarter, unchanged from the third quarter, and our dividend yield is approximately 5%. As shown on slide 13, our investment portfolio remains high-quality, diversified and well-positioned. And importantly, our investment strategy hasn’t changed. A few takeaways; at the total company, we are in a $3.7 billion net unrealized gain position. This includes a $6.5 billion pretax net unrealized gain in our U.S. fixed maturity portfolio, which increased another $1 billion during the third quarter as spreads continue to tighten. The U.S. commercial mortgage loan portfolio average loan-to-value of 50%, and average debt service coverage ratio of 2.6 times did not change from the second quarter.
We have a diverse and manageable exposure to other alternatives and high-risk sectors. And importantly, our liabilities are long-term, we have disciplined asset liability management, and we aren’t for sellers. Year-to-date, we’ve experienced $165 million of credit drift and credit losses with $50 million in the third quarter. Our outlook for 2020 continues to improve and we’re now expecting $200 million to $300 million of drift and losses for the full year. This has improved from the $300 million to $500 million range estimated on the second quarter call and $400 million to $800 million that we estimated at the start of the crisis. Using the Global Financial Crisis as a guide, we’re expecting additional credit drift and credit losses to emerge beyond 2020. Economic impacts from the pandemic have been delayed due in part to the large and unprecedented global government, fiscal and monetary stimulus programs.
We’re currently estimating approximately $400 million of credit drift and credit losses in 2021. We continue to monitor the situation closely, and we’ll provide updates on future calls. In closing, COVID and the related market volatility are certainly impacting our business, our employees and our customers, but we’re managing through these unprecedented times. We’re being prudent with both expense management and capital preservation in order to mitigate impact and be prepared as the impacts play out. Our diversified and integrated business model continues to serve us well and our financial strength and discipline positions us well to navigate this crisis. As John mentioned at the start of the call, we’ll host our 2021 Outlook Call on February 25. And we’re looking forward to connecting with many of you at our 2021 Investor Day in June next year.
This concludes our prepared remarks. Operator, please open the call for questions.
Questions and Answers:
Operator
[Operator Instructions] The first 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. The first question for Deanna, you mentioned about you plan to resume share repurchase either in the fourth quarter of this year or first quarter of next year. I guess like what factors do you need to see before you decided to do this in the fourth quarter instead of the first quarter?
Daniel J. Houston — Chairman, President and Chief Executive Officer
Deanna, please?
Deanna D. Strable — Executive Vice President and Chief Financial Officer
Yeah. Thanks, Humphrey, for the question. As you mentioned, we did say in the prepared remarks that we continue to be in a very strong capital position. And we have, every quarter gotten increased clarity on the range of potential path forward with reduced expected impact from drift and impairments. As you said, we mentioned that we’ll either restart share buybacks in the fourth quarter or first quarter. I’d say, based on what we know today, I think there is definitely a path to additional capital deployment in fourth quarter. But I also think you can agree that uncertainty exists, whether that be uncertainty around market volatility, obviously, what we saw yesterday showed some pretty significant pressure, uncertainty around the stimulus package and how that may impact, some of our businesses as well as uncertainty around COVID impacts and how those could play out. And we want to be prudent and not ignore some of that volatility that is out there. But I think, bottom-line, we have a strong capital position. And all deployment options are currently on the table.
Daniel J. Houston — Chairman, President and Chief Executive Officer
Humphrey, do you have a follow-up?
Humphrey Lee — Dowling & Partners — Analyst
Yes. So clearly, for the third quarter, expense was a good story with expenses efficiency, it continues very strong. But I think there’s some amount of that may not recur. And even for the fourth quarter, there seems to be a little bit less benefits than the third quarter. Just can you talk about like what level of the expense savings would be sustainable? And then especially how we think about — as you kind of emerge from the pandemic. And what of the — efficiency could be retained going forward, as opposed to some maybe coming back, given just some of the expenses being suspended expenses?
Daniel J. Houston — Chairman, President and Chief Executive Officer
Humphrey, I’ll throw this to Deanna quickly, but I just want to be on the record to remind you, we have had a history of aligning our expenses with revenues consistently. I think the fact that we could identify $250 million this year was exemplary, and a good indication that the team is really on board of doing the right thing. Having said that, we are going to work and we’ve made good investments. Our digital transformation is still very much intact. We’re transitioning the IRT business over. And so we fully intend to have a similar approach to 2021. But I’ll throw it to Deanna and provide some more detail.
Deanna D. Strable — Executive Vice President and Chief Financial Officer
Yeah, Humphrey, what probably would help is, if I give you a little bit of color on the 2020 expense actions and then weave into fourth quarter as well as 2021. So again, we continue to reiterate, as we did last quarter that we expect about $250 million from what we anticipated coming into the year. And we’ve experienced probably about $200 million of that, materialized through the end of the third quarter. That does ignore any adjustments to variable expenses that naturally flow with revenue changes, such as investment management fees, bonus pools and the like. We think about half of that reduction is what we would call staff-related expenses, so that can come from lower incentive comp, lower benefits, reduced hiring, as well as salary actions that we took earlier in the year.
And the remainder is non-staff related. So that’s where your travel, your contracting, consulting spend, advertising spend would come in. If you take the — we had $200 million year-to-date, $250 million. You’re correct that some of that, third quarter, we think, will be the high point of that expense management. But we actually do still see that some of this persists into fourth quarter as well as into 2021. Just a reminder, that we do have seasonality that always causes fourth quarter expenses to be higher. And we do think that will be somewhat muted, but we still expect that to be — show that seasonality as we go into fourth quarter. As we think about 2021, and I think about what is causing and leading to the expense management picture that we have, you’re correct, some things will reset.
Probably the perfect examples of those is incentive compensation and salary levels. But other items like staffing and travel will increase, but at a lower level than what we would have anticipated pre-crisis. And so if I kind of do the exercise, the same way I calculated the $250 million, which is how do we think 2021 expenses will look relative to what we would have thought pre-pandemic? They’re about down about $100 million from what we would have expected. So that implies that about 40% of that $250 million remains as we go into 2021 and that some items will reset at the beginning of the year, and others will trend up as we go throughout the year. This is an early look at expenses for 2021. And obviously, we’ve had a lot of volatility in revenue over the last six months. So we’ll continue to evaluate, we’ll continue to refine. And our ultimate aim is to align expenses with revenue and ultimately generate the targeted margins that we’ve shared with you and the investors. Hopefully that helps.
Daniel J. Houston — Chairman, President and Chief Executive Officer
Yeah. Thanks, Humphrey for the questions.
Humphrey Lee — Dowling & Partners — Analyst
This is helpful. Thanks.
Operator
The next question will come from John Barnidge with Piper Sandler. Please go ahead.
John Barnidge — Piper Sandler — Analyst
Thank you. Sales volume year-over-year in Specialty Benefits actually got worse sequentially. Can you provide any color on that? Is it small business related, social distancing related? And how do you think of it going forward?
Daniel J. Houston — Chairman, President and Chief Executive Officer
Yeah, great question. And in the midst of a global pandemic, we’ve certainly seen sales across our small and medium-sized business get impacted, both RIS as well as SBD. But Amy has got some additional insights and thoughts maybe about the future. Amy?
Amy C. Friedrich — President, U.S. Insurance Solutions
Sure. John, good to get the question from you. I think the way to think about it is less about, sort of, how we — how our sales process works and more about just overall people’s decision-making, about employers putting in new benefits. So what I would say is, when I look at that sales volume moving down, people are interested. What we’re hearing from small employers and midsized and large alike is they’re interested in protection coverages. Just to do the work to set up a new plan, though, they’ve kind of held on that a little bit. Now what I would say is we’re seeing the pipeline begin to grow back up on that.
And it’s particularly relevant for some of the protection based coverages like life and disability. We’re actually seeing some interest emerge first in our voluntary coverages. And the piece, I guess, I would always put that provides really nice balance on that is persistency. Our persistency numbers, which I would argue are already really strong, got even stronger. So when I look at the things that are happening with sales and I balance that out with the persistency activity, I feel really good about what we’re seeing in terms of overall premium levels for the business.
Daniel J. Houston — Chairman, President and Chief Executive Officer
And Amy before John gets to a second question, maybe a little bit of thought. I mean, we’ve seen life insurance sales actually go the other direction, and again, the sentiment of the marketplace. So maybe just touch on that before we go to the next one.
Amy C. Friedrich — President, U.S. Insurance Solutions
Yeah. I think when we think about the life business, term life interest. And Dan, you noted this in your comments, has been incredibly strong. I think there’s both an understanding that people need protection, maybe more than they were understanding that before. And also, I think it’s a nod to the fact the investments we’ve made in our straight-through processing are really paying off. So when we look at our term life business and we look at the experience that you can have on that term life business that is industry-leading. The place where we’re seeing a little bit of holding in terms of making sales decisions is probably more aligned with our executive variable UL business, which is really aligned with our NQ business. So we’re seeing the same pattern of some employers saying they kind of held off on making some decisions second and third quarter, and we’re seeing that pipeline begin to pick up as well.
Daniel J. Houston — Chairman, President and Chief Executive Officer
John, do you have a follow-up?
John Barnidge — Piper Sandler — Analyst
Yes, thanks. The decline in the AUA in RIS, I know there was a low fee legacy client that was exiting. How much of that decline is from that and how much remains?
Daniel J. Houston — Chairman, President and Chief Executive Officer
Yeah, the vast majority, of course. Yeah, it’s a great question and one that Renee can address head on. Renee?
Renee Schaaf — President, Retirement and Income Solutions
Yeah. Thank you for the question, John. When you look at the AUA, as you noted, when we acquired the block of business, we understood that there was a large legacy client, trust and custody client that was slated to leave. And so we have recognized probably 80% of the withdrawals from that client with the rest slated to go out over future quarters. But the other thing to note, we were aware of this at the time of the transaction and the revenue impact of this particular client was small.
Daniel J. Houston — Chairman, President and Chief Executive Officer
Yeah. Well, the persistency, John, on the block is about what we expected from the initial pricing, adjusting for this large withdrawal. The other thing noteworthy, although we didn’t break it out, we’ve actually added a fairly large well-known Fortune 50 company where they awarded us business in that same period of time. So, we’re open for business as it relates to that trust and custody business. So we feel good about it. Thanks for the question.
Operator
The next question will come from Ryan Krueger with KBW. Please go ahead.
Ryan Krueger — Keefe, Bruyette & Woods — Analyst
Hi, good morning. When you originally announced the Wells IRT deal, you talked about a 28% to 32% margin, I think, by the end of 2022. With the additional expense saves you’re expecting and then the lower interest rate outlook, I guess, do you still think you can get to that level? And do you have a sense of when you may get there now?
Daniel J. Houston — Chairman, President and Chief Executive Officer
Yeah, great question and all very relevant as you think about it. I mean, we are transitioning a massive block of business over in the midst of a pandemic, and interest rates have moved the wrong way. And I applaud the team for the synergies they’ve been able to realize thus far and process the necessary work. Renee, do you want to frame what you think — best thinking right now as it relates to long-term profitability on margin and growth?
Renee Schaaf — President, Retirement and Income Solutions
Yeah, absolutely. So, when I step back and relook at this acquisition, we remain very pleased with how the business is performing and how the integration is going. And of course, it starts with that great strategic fit. This reinforces our standing as a top three retirement provider. It positions us for future growth, a really strong cultural fit as was noted in the prepared remarks. And the other thing that we can see is that expense synergies and the financial fit continues to remain a very good picture. So, when we look at the expense synergies in particular, right after we closed on this block of business, we made a very important strategic decision, and that was to migrate to a single IT platform as quickly as we could.
And to combine the best applications from [Indecipherable] with the Principal application so that we could introduce enhanced capabilities across the board, both to IRT customers as well as to Principal customers. What this meant though, was that we delayed the transition of the clients over from IRT to Principal. What it allows for though, is that client retention is right on track. And we know that we can create a very smooth and seamless transition for our clients. And that was demonstrated in the first wave migration that occurred a couple of weeks ago. It was incredibly smooth and very seamless for both plan sponsors and for participants alike.
But as we go through this migration and the migration for the retirement side will be completed in June of next year. We can see that the expense synergies that we had originally modeled, we believe we can exceed those by about 50%. We’ll begin to see expense synergies emerge in the summer — next summer, and we’ll continue to increase throughout the latter portion of next year. And we’ll continue to drive towards a mature synergy, expense synergy run rate throughout ’22 being realized in ’23. So the good news is that the critical decisions that we made early on are paying off. They’re delayed, but we can see that the expense synergies will be greater.
Daniel J. Houston — Chairman, President and Chief Executive Officer
So Renee, just to hit it specifically on Ryan’s question, the $28 million to $32 million. If you think about the offset of the IOER with the improved synergies, it’s probably well — it’s within that range. We wouldn’t adjust the range at this point.
Renee Schaaf — President, Retirement and Income Solutions
No, that would be — the range remains intact.
Daniel J. Houston — Chairman, President and Chief Executive Officer
Okay. Ryan, does that help?
Ryan Krueger — Keefe, Bruyette & Woods — Analyst
It does. Thank you. And then I just had one quick follow-up. Are you seeing dental utilization, I guess, normalize now? I mean are you expecting it to be more typical in the fourth quarter?
Daniel J. Houston — Chairman, President and Chief Executive Officer
It couldn’t get any more untypical than the last two quarters. But yeah, we think that on a trailing 12-month basis, it’s going to come in line. Amy, any closing comments there?
Amy C. Friedrich — President, U.S. Insurance Solutions
Yeah. No, I think we’re seeing it begin to normalize. Keep in mind that fourth quarter, we would have seen people moving through their benefits so fourth quarter typically had a really low seasonal utilization. I would say we’re going to go back to normal, but it might feel more like mid-year normal in terms of normalization. So we’re seeing it normalize. Some of the pent-up demand has been exhausted and we would expect fourth quarter to be more of a normal pattern of dental utilization.
Daniel J. Houston — Chairman, President and Chief Executive Officer
Thanks, Ryan.
Ryan Krueger — Keefe, Bruyette & Woods — Analyst
Thank you very much.
Operator
The next question will come from Suneet Kamath with Citi. Please go ahead.
Suneet Kamath — Citi — Analyst
Thanks. Deanna, I just wanted to start with the assumption review. If we go back to last year’s review, I think you changed the grade up period from 10 years to seven years. And I believe, this quarter, you’re kind of going back to seven years. So curious why that changed? And if you didn’t change it back to seven years, would the charge or the ongoing impact, those disclosures that you gave us earlier in the call, would those have changed dramatically?
Deanna D. Strable — Executive Vice President and Chief Financial Officer
Yeah, Suneet, thanks for the question. So yeah, you’re correct. So last year’s review, we would have hit a 4% treasury in 2029. And at this year’s review, we are hitting 3.25% in 2027. So it’s a two-year change in that cycle. What I’d say is that it’s not an exact science. There are many inputs that we look at. We talk to our economists. We look at peer perspectives as well as other external perspectives. And I think the fact that we’re getting to a lower ending point made us comfortable that getting there in 2027 made sense. To get to your second question, when we look at the total impact from interest rates, which was about $85 million of the $114 million after-tax impact we think about two-thirds of that is from the reduction in the starting point. So again, when we did last year’s review, 10-year treasuries were around 2%. When we struck it for this year’s review, it was closer to 65 basis points. And so given that two-thirds was the starting point, I don’t think having that — be extended beyond seven years would have had a significant impact on the numbers.
Suneet Kamath — Citi — Analyst
Got it. Okay. And then my second question, I guess, for Dan, just bigger picture. We are starting to see more insurance companies rationalize their business mixes, either selling businesses or taking blocks of business and reinsuring them. There’s clearly a lot of capital available to do that. Just curious if that enters into your game plan at some point? I’m thinking specifically about fixed annuities or any spread-based blocks you may have, but also on the Individual Life side.
Daniel J. Houston — Chairman, President and Chief Executive Officer
Yeah, absolutely, Suneet. So I think I’d put it into two different buckets. The first bucket is, are we committed to the fee spread and risk business? The answer is yes. Do we like the insurance business, this risk business? The answer is yes. We think it very much serves needs of small to medium-sized employers. It provides us with a lot of flexibility. And then, frankly, it’s a great way for us to serve the needs of our clients. The other half is financial transactions related to the in-force blocks of business. And I would tell you, our capital markets area looks very closely at this, looking at the long-term implications on capital, how it would be redeployed and the financial impact on those blocks of business. So it’s very much top of mind for us. It gets a lot of consideration. We’ve not yet seen the right opportunity that we felt we wanted to move it forward. But certainly, in the categories you’ve identified, that is part of our consideration. Appreciate the questions.
Suneet Kamath — Citi — Analyst
Thanks, Dan.
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 expectations for RIS-Fee flows as we move into 2021? Do you expect to get back to the 1% to 3% organic growth range as withdrawals normalize or could there be some ongoing impacts from a slowdown in recurring deposit growth?
Daniel J. Houston — Chairman, President and Chief Executive Officer
Yes. I’ll throw out to Renee quickly, but I would just say this. I am absolutely somewhat shocked by the fact we could be in a global pandemic, and they’ve held up as well as they have. And there’s a lot of variables that go into it. But certainly, these hard trips were a big contributor, not only here in the U.S., but also, as you know, in some of the emerging market countries as well. Renee, maybe give us some insights and thoughts and the components and where you think this might go in the future?
Renee Schaaf — President, Retirement and Income Solutions
Yeah, absolutely. So when we think about net cash flow, there are a few drivers of net cash flow that are really coming into play this quarter and that we have to think about as we look forward to 2021. So the first very important component and impact that we’re seeing this quarter is the COVID-related withdrawals. And this has resulted in about $1 billion of withdrawals in third quarter, about 3% of our total participants. And we do see that’s consistent with what we experienced in the second quarter, and it’s also very consistent with the activity that we continue to see in the fourth quarter. So when we think about what could slow down that kind of withdrawal, there are a couple of things. First off, much relies on how the pandemic progresses and how the underlying economic and employment trends progress.
The other wildcard is The CARES Act has removed the penalty that was applied to hardship withdrawals. That sunsets at the end of this year. If there is a new stimulus bill that continues that waiver of the penalty, we could continue to see this go into ’21. So we’ll continue to watch it. But I think it’s fair to say that COVID-related withdrawals will continue to pressure net cash flows likely into ’21, certainly for the remainder of this year and likely into ’21. The next very important lever is recurring deposits. And so if you look at the recurring deposits, we were running at about an 8% increase on a trailing 12-month basis. That’s declined to a 3% increase in recurring deposits for third quarter ’20 over third quarter ’19. And this decrease, again, is attributable to a couple of things.
First off is the number of deferring participants decreased about 2% when you look at that quarterly comparison even though the deferral rate remained pretty consistent and pretty strong. When we look forward for that, we do anticipate that, that will continue to be pressured. Again, much depends on how the economy and how the pandemic began to resolve and what kind of a rebound we begin to see. But certainly, there will be pressures there. And then last of all, is the sales — new sales. We do see pressure and have seen pressure, particularly in the small to medium-sized pipeline and sales as businesses have been very distracted as a result of COVID.
On the other hand, as a result of the IRT acquisition, we’ve seen an incredible bump up in our large plan pipeline, and simply as a result of having a larger footprint in that space and more and more consultant relationships. We do think that we’ll see some recovery in the new sales for 2021. But again, much depends on the economy and the pandemic. The good news throughout all of this is that our client retention remains very strong. We are not distracted. We continue to serve client sponsors and participants very well. So when we look at the overall net cash flow for 2020 we anticipate that will be flat and certainly it’s been pressured again by withdrawals, COVID withdrawals, and recurring deposits. Looking forward, we’ll have a better view for you in the Outlook Call, but we do see that some pressures will persist.
Daniel J. Houston — Chairman, President and Chief Executive Officer
Erik, hopefully that helped.
Erik Bass — Autonomous Research — Analyst
Yes. Thank you. And then if I could just ask quickly on PGI margins, which were very strong this quarter, I think about 40%. Do you expect to be able to sustain a higher than target margin in the near-term due to expense savings? Do you expect that to come back down to more of the target range given either higher comp accruals or other adjustments given the recovery in revenues?
Daniel J. Houston — Chairman, President and Chief Executive Officer
Well, given this is Tim Dunbar’s last earnings call, he’s handing this over. So I’ll be curious to see what he — how he answers this question, how he sets up path for the future. Tim, please.
Timothy M. Dunbar — President, Principal Global Asset Management
Thanks, Erik for the question. And I’m going to be nice to pass, I’m going to tell you, but I think we would guide you to our long-term guidance somewhere between 34% and 38% margins. And so while this quarter’s margins were quite strong, as you mentioned at 41%, we think that fourth quarter and beyond would be probably more in the trailing 12-month range, which right now stands at about 37%.
Erik Bass — Autonomous Research — Analyst
Excellent.
Daniel J. Houston — Chairman, President and Chief Executive Officer
Thanks for the question, Erik.
Erik Bass — Autonomous Research — Analyst
Thank you.
Operator
The next question will come from Tom Gallager with Evercore. Please go ahead.
Thomas Gallager — Evercore ISI — Analyst
Good morning. Just as a follow-up to underlying persistency trends in your RIS-Fee business. Are you seeing any signs when you unpack the data that you’re seeing pressure from, particularly in the small business segment of companies going out of business? Are you seeing any real change in trend from bankruptcies and plans actually going away or are you not really seeing that emerge?
Daniel J. Houston — Chairman, President and Chief Executive Officer
Yeah. It’s actually probably been one of the, I guess, solid outcomes that’s come out of this. Although there are a lot of displaced employees in hospitality, and we know the airline industry and restaurants, we know those have been impacted. Many of those didn’t have small employers anyway, didn’t have a lot of these plans in place. We’ve seen some shrinkage of the participant base within those plans, but we’ve not seen an increase in lapse. And I think, although new case sales are down, new plan formation, I think we can all appreciate. If you didn’t have one, are you going to do it in the midst of a pandemic? But Renee, you want to provide any additional color to that thesis?
Renee Schaaf — President, Retirement and Income Solutions
Yeah, absolutely. So when we look at new plan formations, to Dan’s point, that certainly has slowed. But when we look at plan terminations, due to simply plans being dissolved, that is not emerging, at least in this quarter, as a threat. And I think some of the stimulus package actions that we’re taking are helping the small employer, the small to medium-sized employers. So we may see that emerge in future quarters, but we’re not seeing it emerge right now. I think the one thing that’s been really interesting and also reaffirms having a very diverse block of business within RIS is that when we look at plan size and we look at the impact on net cash flow, our small to medium-sized business block has been really very resilient in terms of almost every measure, in terms of the in-plan participation, in terms of employer match and the employer match being continued for that block of business. And so, when we look at the net cash flow for the SMB business, we’re actually seeing — see it performing slightly better than the large plan business.
Daniel J. Houston — Chairman, President and Chief Executive Officer
Tom, before you get to your next question, in case you’re wondering, just another data point here at Principal. SBD would be — group benefits should be quite comparable, where we’ve seen the participants within the existing plans fall, Amy, somewhere in that 2% to 3% range. And yet the plan lapses or terminations are not escalated. So I’d say SMBs for Principal, holding together nicely. Do you have a follow-up?
Thomas Gallager — Evercore ISI — Analyst
Yeah, that is good to hear, Dan, in terms of the underlying experience. Yeah, my follow-up is just on your credit loss expectation. It sounds like more getting pushed out to 2021. I guess the $400 million number, in a vacuum, sounds a bit higher than I would have guessed based on the way things are trending right now. Is that just out of an abundance of caution or are you seeing anything on the commercial real estate side that would cause you — whether that’s delinquencies that are not yet impacting you, because the NAIC has that moratorium or can you unpack that a little bit why you still have, I would say, pretty high expected for next year.
Daniel J. Houston — Chairman, President and Chief Executive Officer
Yeah. Thanks again for that question. It’s a timely one. And frankly, your term of abundance of caution is one that we use frequently around here, because we want to make sure that we’ve got adequate capital. And I do think we’ve sized up the balance of the year nicely and by making that adjustment. But Tim, you want to sort of give your insights and perspective on the $400 million for next year?
Timothy M. Dunbar — President, Principal Global Asset Management
Sure, Tom. Thank you. And I’d just be remiss if I didn’t mention that we talked often about the quality of the portfolio going into the pandemic, and I think that’s across the board. So it would be in our fixed income portfolio, certainly on our commercial mortgage loan portfolio, and actally in on our alternatives portfolio. So we think we were coming at this pandemic from a position of strength. And our expectations were set generally by some high-level modeling that we’ve done based on the Great Financial Crisis. And as we move through 2020, we saw unprecedented Fed action. We saw government stepping in, and it really delayed a lot of our credit losses and a lot of the drift that we think could have taken place in 2020. And that’s been a very positive story. And you’ve seen prices on bonds rebound.
And actually, our commercial mortgage loan portfolio has maintained very high ratings. We’ve been through that portfolio. And we think it stands pretty strong. So as we look at 2021 and our projections there, yes, we’re upping it a little bit. I would say the range for 2021 as we sit here today, is quite wide. It depends again a lot on Fed actions, on government support. And what we’re seeing there is that we don’t really have a lot of specific ideas about drift and credit losses, but we would expect, as COVID rears its head again and ways on the economy that there’s potential that we could have up to $400 million in losses in drift. Most of that, again, would be coming from the bond portfolio, probably only about a third coming from the commercial mortgage loan portfolio. So that’s some of the color and some of the way we’re looking at it. And obviously, we’ll continue to go through the portfolios and refine these numbers as more information comes out.
Daniel J. Houston — Chairman, President and Chief Executive Officer
Tom thanks for the question.
Thomas Gallager — Evercore ISI — Analyst
Thanks.
Operator
The final question is from Josh Shanker with Bank of America. Please go ahead.
Daniel J. Houston — Chairman, President and Chief Executive Officer
Hello?
Operator
Josh, your line is open.
Joshua Shanker — Bank of America — Analyst
Thank you. Sorry about that. Thanks for taking my call. So I want to talk a little about the commercial mortgage portfolio. The 14 loans that have gone into a forbearance. Can you talk a little bit about the process of the mortgagee in your relationship and how that process is set and whether or not we should expect more loans to go into forbearance over the next 12 months? What’s sort of the process by which this occurs?
Daniel J. Houston — Chairman, President and Chief Executive Officer
Tim, please?
Timothy M. Dunbar — President, Principal Global Asset Management
Sure. So what really happens is that we get contacted from the borrower. The borrower gives us then some very specific information about the property, their situation and generally makes a request of what they’re asking for. And generally, when we say forbearance, that doesn’t mean we’re forgiving the loan payments for a period of time. It really means that we are working out an alternative schedule until we think the property can get back on its feet and start paying the mortgage payments again. Sometimes, it’s an extension of the loan, but it’s very dependent on the specifics of that situation. We have 14, as you suggested, those are all in good states. So they are living up to the loan agreement that we had set with them.
And we’ve worked through the entire list of requests that we’ve had. Now what happens next depends a lot again on, how the pandemic plays out, how the economy plays out. But we’re watching and monitoring commercial mortgage loans very closely. Would I expect to see some additional modifications? Probably, going into 2021 as we see how really the economy looks and what we’re thinking is going to happen. But I’d be remiss if I didn’t say that, I think this portfolio is incredibly high quality. I don’t really see a lot of losses coming through. Our loan to values, after going through every one of the properties in May, still stands at an average of 50% loan-to-value. And we still have good service coverage. So, that’s kind of how we’re looking at the portfolio.
Daniel J. Houston — Chairman, President and Chief Executive Officer
Thanks, Tim. Josh, do you have a last follow-up?
Joshua Shanker — Bank of America — Analyst
I’ll stick on this topic just to exhaust it. These 14 examples, do they have anything in common geographically or property type or anything we need to think about, in relationship to the rest of the portfolio?
Timothy M. Dunbar — President, Principal Global Asset Management
Yeah. The one thing I’d say, generally speaking, these loans are coming from retail. The retail — and we have a very small exposure to shopping malls, but a fair number of those are coming from shopping malls. And then we have some hotel properties. We have less than 1% of our commercial mortgage loan portfolio in hotels. But again, those have been modified. And then just a smattering of properties that I would say don’t have much else in common. But just on the retail front, I want to emphasize that our portfolio is quite a lot less exposed to retail than it would be in the [Indecipherable] Index, which is what we watch pretty closely. And in addition to that, it’s heavily weighted toward grocery-anchored retail or single-store box retail. And those projects are holding up actually quite well.
Joshua Shanker — Bank of America — Analyst
Thanks, Tim and Dan.
Daniel J. Houston — Chairman, President and Chief Executive Officer
Yeah, appreciate the question, Josh.
Operator
We have reached the end of our Q&A session. Mr. Houston, your closing comments, please?
Daniel J. Houston — Chairman, President and Chief Executive Officer
I’ll be quick. We had a Board strategic retreat. We talk about strategy at every Board meeting. But once a year, we get together and interrogate our strategy. We get some third-party unaffiliated views about the strategy. And I would tell you, we exhausted it in terms of looking closely at the fee, the spread and the risk businesses, the countries that we’re in, the portfolio that we have. And we really feel there’s good long-term upside for investors in our current strategy adjusting on the margin. The second thing, I’d take away from today’s call, strong balance sheet, liquidity, significant scale and capabilities. We have good differentiators and the 5% dividend yield at today’s price, we still think is very strong to investors.
And then, I would say, from a historical perspective and going into the future, we have a strong reputation for aligning our expenses with our revenues. We’ve deployed capital in a very thoughtful and balanced approach and we’ll continue to do that, both in the near- and the long-term. And we are going to continue making investments in our future. I’ve seen too many businesses become irrelevant, because they fail to make investments in their businesses. And I look at these digital investments. And frankly, whether it’s international or domestic, we’re seeing those payoffs. So thank you for your interest in the company and look forward to talking to you on the road. Have a great day.
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, November 3rd, 2020. 2198859 is the access code for the replay. The number to dial for the replay is 855-859-2056 U.S. and Canadian callers or 404-537-3406 international callers. Ladies and gentlemen, thank you for participating. You may all disconnect.