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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, and welcome to the Principal Financial Group’s Fourth Quarter and Full-Year 2020 Financial Results Conference Call. There will be a question-and-answer period after the speakers have completed their prepared remarks. [Operator Instructions]
I would now like to turn the conference call over to John Egan, Vice President of Investor Relations.
Thank you and good morning. Welcome to Principal Financial Group’s fourth quarter and full-year 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 posted an additional slide deck on our website with details on our U.S. investment portfolio and other supplemental details.
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; Pat Halter, Global Asset Management; Luis Valdés, 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 strategy. Risks and uncertainties that could cause actual results to differ materially from those expressed or implied are discussed in the company’s most recent annual report on Form 10-K filed by the company with the U.S. Securities and Exchange Commission.
Additionally, some of the comments made during this conference call may refer to non-GAAP 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 outreach dates. Our 2021 outlook call will be held on February 25th and we’re hosting our Investor Day on June 15th. Dan?
Thanks, John, and welcome to everyone on the call. I hope you and your family are healthy and well. This morning I will discuss key performance highlights for the fourth quarter and full-year 2020, our continued strong financial position and how we are well-positioned for long term growth with the right strategies in place. Deanna will follow with additional details of our fourth quarter and full-year 2020 financial results, impacts from COVID, our capital and liquidity position, and details of our investment portfolio.
2020 was truly one for the ages, a global pandemic, as well as social and political unrest here and abroad. Bottom line, we dealt with these challenges head on and kept our promises to our customers and our employees. In 2020, we prioritize exceptional service to our customers, and employee safety above all else, just as we have throughout our 141-year history. In response to COVID, we waive fees on hardship withdrawals and granted premium concessions to support our customers, including individuals and businesses of all sizes, who found new and often creative ways to manage through this pandemic.
We kept our employees safe, transitioning to remote work around the world. I'm extremely proud of our employees for maintaining excellent customer service and staying focused on our long-term objectives, such as integrating the Institutional Retirement and Trust business, and advancing our digital strategy that is yielding tangible benefits to our customers. As discussed on previous calls, we have less exposure to industries that have been impacted the most from COVID, including hospitality and travel.
The strength and resolve of the small and medium-sized businesses we work within our U.S. retirement and insurance businesses, combined with our unique ability to serve them continues to be a differentiator for principle. Our SMB customers have been resilient and are leading the recovery. In our retirement business, full-year net cash flow for our SMB block were positive, and within our 1% to 3% of beginning of your account value guidance, and in group benefits and group growth turned positive in the fourth quarter, and it was even stronger in businesses with less than 200 employees.
Starting on Slide 4, Principal delivered full-year 2020 non-GAAP operating earnings of $1.4 billion, excluding significant variances, non-GAAP operating earnings were flat, compared to 2019. Higher fee revenue from increased AUM and account values, as well as ongoing expense management actions were partially offset by foreign currency headwinds, ongoing fee pressure, and lower sales.
We continue to align our expenses with revenues. And our full-year results reflect nearly $250 million of benefits from our expense management actions. As some of the expense savings will naturally reset in 2021, we will remain diligent in managing expenses in-line with revenues. We ended the year in a very strong financial position with increased clarity and stability and the macro environment we restarted our share repurchase program with $75 million of buybacks during the quarter. Along with our consistent dividend, we were able to deploy just over $900 million to shareholders in 2020.
Total company AUM increased $71 billion year-over-year or 10% to a record $807 billion at the end of 2020. This increase was driven by positive net cash flow, favorable market performance, and the migration of some of the IRT retirement business during the fourth quarter. PGI also closed the year with a record managed and sourced AUM, a $502 billion and $245 billion respectively.
Full-year PGI sourced sales were record $56 billion, an increase of 30% from the prior year. This speaks volumes to the strength of our in-demand products and solutions. Our distribution teams, as well as our consistent investment performance. At quarter-end, performance were 83% of principal mutual funds, ETFs, separate accounts, and collective investment trusts were above median for the one-year time period, 70% for the 3-year, 80% for the 5-year, and 91% for the 10-year.
Additionally, for our Morningstar rated funds 74% of the fund level AUM had a four star or five star rating. This continued strong performance positions us well to attract retain assets going forward. Principal International finished 2020 with $165 billion of AUM. This was an increase of 6% on a constant currency basis, compared to year-end 2019. We achieved record AUM in Mexico, Hong Kong, and Southeast Asia in the fourth quarter. AUM and our China joint venture, which is not included in our reported AUM was $118 billion at year-end. China AUM, continued to be pressured by market trends.
We are working diligently to address our customer’s needs by developing new product solutions, strengthening our investment process, harnessing our institutional client network, and growing our digital distribution network in China. For the full-year, total company net cash flow was a positive $14 billion, including $2.5 billion in the fourth quarter, an outstanding result during a volatile and difficult year.
PGI sourced net cash flow was a positive $1.1 billion in the fourth quarter, and $5.6 billion for the full-year, an increase of $4.8 billion from full-year 2019. PGI managed net cash flow of $2 billion for the full-year was driven by strong retail and institutional sales, along with positive general account cash flows. We continue to benefit from multiple distribution channels and client types through our general account, retirement, retail, and institutional clients that position us well as we move into 2021.
RIS spread have $1.2 billion of positive net cash flow in 2020. Including $200 million in the fourth quarter, RIS spread had $900 million of opportunistic MTN issuances in the fourth quarter and $2.9 billion for the full-year, and pension risk transfer sales were $700 million in the fourth quarter and $3 billion for the full-year. RIS-Fee full-year net cash flow was a negative $300 million, largely driven by $2.8 billion of COVID-related hardship withdrawals.
Excluding these hardship withdrawals in 2020, RIS-Fee net cash flow would have been within our 1% to 3% of beginning of your account value guidance. Principal International generated net cash flow of $1.2 billion in the fourth quarter, marking the 49th consecutive quarter of positive net cash flow. Full-year net cash flow was $4.2 billion with positive flows in Brazil, Chile, Mexico, Hong Kong, and Southeast Asia. This was a 20% increase on a constant currency basis, compared to full-year 2019.
In Chile, quarterly net cash flow increased throughout 2020. And we had a record number of net new customers transferred to Cuprum during the year. Digital solutions continue to be a key to our strategy and drove strong business outcomes in 2020 as we make it easier for customers to do business with us.
I'll now share some additional execution and business highlights starting with the integration of our IRT business. We continue to move customers over to our platform. The second successful migration occurred in December. Most importantly, client and participant feedback from the first two migration waves has been overwhelmingly positive. A majority of the IRT business is slated to migrate in the second quarter of 2021. And we anticipate the synergies to begin to emerge later this year, as we've previously discussed.
We will provide additional details on the integration and expected synergies during our outlook call next month. We are one of the first to market with a uniquely designed pooled employer plan, [Principal ease]. Combining our integrated retirement plan administration, customer service, and investment management capabilities this paves the way for an unrelated employers to participate in a single pooled employer plan to get more people access to retirement benefits.
In Individual Life, we received a record number of life insurance applications in 2020 as the pandemic increased awareness of mortality. For term, the number of digital applications tripled from the beginning of the year, and nearly all policies were delivered electronically. We strategically review our business portfolio to ensure alignment with our goals, expertise and client demands, choosing to enter or exit a business or product when it makes sense.
Yesterday, we announced we are exiting our retail investment and retirement business in India. While recent business results within our India asset management business have been improving, we did not have the scale needed to deliver long-term value for our shareholders. Additionally, in Individual Life, we recently discontinued new sales of our lifetime guaranteed universal life products, a small portion of our overall block and the most interest rate sensitive. Both these actions are examples of our strategic focus and discipline.
Our core values continue to guide our actions in 2020, as shown by some noteworthy third party recognition. PGI was awarded one of the best places to work in money management for the ninth straight year by pensions and their investments in 2020. Principal was included by Forbes in the list of best employers for women and best employers for diversity. We also earned a perfect score on the Human Rights Campaign Foundation's 2020 Corporate Equality Index, and Disability Equality Index. And we were named a 2020 Top company for executive women by Working Mother Media, our 20th time on this list.
Principal also received the Corporate Innovation Award from Plug and Play in 2020. This distinct recognition is awarded to corporations that have demonstrated a commitment to expanding their innovation culture, and cultivating relationships with startups, other businesses, and thought leaders.
Slide 22 highlights some of the progress we've made towards our long-term commitment to environmental, social, and governance efforts. ESG is becoming increasingly important to how we are viewed by our customers, investors, and partners, especially outside the U.S. We recently joined the United Nations Global Compact, the world's largest corporate sustainability initiative. Principal has also been recognized as a climate change leader with an A minus rating from Carbon Disclosure Project.
2020 presented many challenges. Our employees, customers, and communities have risen to these challenges. Last week, democracy prevailed with a transition of power in the United States. We urge unity and bipartisanship, as we continue to advocate on our customers behalf and promote policies that provide greater access to financial security. Guided by our diversified business model, winning strategy, strong financial position and core values we look forward to serving our customers, especially during the times they need us the most.
Before I turn the call over to Deanna, I'd like to take a moment to personally thank Luis Valdés, who has provided nearly 30 years of leadership and dedication to Principal. Luis’ passion for emerging markets, leveraging technology, and embracing local cultures and customs has contributed significantly to our international success. He also leaves a legacy of strong local teams and leaders, including Roberto Walker and Thomas Cheong. We couldn't be more happy for you, Luis and your family, and wish you the best in your well-deserved retirement.
With that, let me turn it over to Deanna.
Thanks, Dan. Good morning to everyone on the call. This morning, I'll discuss the key contributors to our financial performance for the quarter and full-year, impacts from COVID, our current financial position, and details of our investment portfolio. COVID continues to impact our 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 will play out, most of the metrics we're tracking continued to trend better than we expected at the onset of the pandemic. Net income attributable to Principal was $473 million for the fourth quarter and $1.4 billion for the full-year. Quarterly net realized capital gains of $63 million included minimal credit losses of $3 million.
Reported full-year non-GAAP operating earnings of $1.4 billion or $4.94 per diluted share included $410 million in the fourth quarter or $1.48 per diluted share. Excluding the impacts of the actuarial assumption review and other significant variances, full-year non-GAAP operating earnings of $1.6 billion or $5.67 per diluted share were flat with and 2% higher than 2019 respectively. This included $401 million in the fourth quarter or $1.45 per diluted share, a solid end to an unprecedented year.
Excluding significant variances the non-GAAP operating earnings effective tax rate was 16.7% for the fourth quarter, and 17.6% for the full-year within our 16% to 19% guided range. As shown on Slide 6, we had several significant variances during the fourth quarter. These had a net benefit to reported non-GAAP operating earnings of $5 million pre-tax, $9 million after-tax, and $0.03 per diluted share.
Pre-tax impacts included a $50 million benefit from higher than expected variable investment income from higher prepayment fees and alternative returns, a $15 million benefit in RIS-Fee from lower than expected DAC amortization due to the point-to-point increase in the equity markets. A net negative $32 million impact from COVID-related claims and other impacts in RIS-Spread and USIS, a negative $18 million impact in RIS-Fee from IRT integration costs, and a net negative $11 million impact in Principal International as $13 million of higher-than-expected encaje performance in Latin America was more than offset by a negative $24 million impact of inflation in Brazil.
Additional details of the Brazil inflation impact are available in the supplemental slides on our website. While volatile quarter-to-quarter both variable investment income and DAC amortization were relatively in-line with our expectations for the full-year.
Slide 7 and 8 provide details of the COVID-related financial impacts we experienced in the fourth quarter, as well as the updated thoughts on potential impacts the pandemic could have on our business and our results in 2020. COVID-impacted fourth quarter pre-tax operating earnings by a net negative $32 million, including a negative $32 million impact in specialty benefits from claims and disability and group life, unfavorable dental and vision claims from continued pent-up demand, as well as the final month of the 10% premium credit, and the final personal protective equipment payments for our dental customers that ended in the fourth quarter, a negative [$15 million] impact from claims and individual life. These impacts were partially offset by a $15 million benefit from favorable reserve gains in RIS-Spread.
Over the last nine months of 2020, COVID has negatively impacted total company non-GAAP pre-tax operating earnings by a net $29 million. The fourth quarter direct COVID mortality and morbidity impacts in specialty benefits individual life and RIS-Spread netted to a negative $11 million after-tax impact, with approximately 140,000 COVID deaths reported in the U.S. during the quarter. This was slightly better than our COVID sensitivity of a $10 million after tax impact to earnings for every 100,000 U.S. COVID deaths due to more favorable reserve gains in RIS spread.
In 2021, we're now estimating 300,000 U.S. COVID deaths, heavily weighted to the first half of the year. We continue to be comfortable with our current COVID sensitivity for earnings. A good sign of recovery immersion our group benefits business during the quarter, as in-group growth move positive by 0.5% in the fourth quarter. And this recovery is even better in businesses with less than 200 employees were in-group growth increase just over 1% double the rate of our entire block.
In the retirement business, recurring deposits increased 7%, compared to fourth quarter 2019, improved from the 3% growth in the third quarter, another sign of recovery. Full-year participant withdrawals were 11% of beginning of your account values, and included $2.8 billion of COVID-related withdrawals. This was about 1 percentage point higher than we typically see. We had $800 million of COVID-related participant withdrawals in the fourth quarter, and 2.8 billion for the year.
In Principal International, Chile passed the law in early December allowing participants to take another COVID hardship withdrawal. This negatively impacted fourth quarter AUM by $1.3 billion. To mitigate some of the overall revenue pressures we faced in 2020, we took action throughout the year to manage our expenses aggressively. Compared to our expectations at the beginning of the year, we reduced expenses nearly $250 million, including approximately $40 million in the fourth quarter. This impacted all businesses and contributed to resilient margins despite revenue pressures.
Excluding significant variances fourth quarter operating expenses were seasonally higher than the other three quarters like we see every year, but at a lower level. Fourth quarter was 5% higher than the average of the first three quarters, lower than the 7% to 10% that we typically see. Looking at macroeconomic factors in the fourth quarter, the S&P 500 index increased more than 11%, and the daily average increased 7%, compared to the third quarter and 15% from the year ago quarter, benefiting revenue AUM account value growth in RIS-Fee and PGI.
Moving to foreign exchange rates, average rates improved again this quarter, but we continue to face headwinds, compared to a year ago. Impacts to fourth quarter pre-tax operating earnings included a positive $2 million, compared to third quarter 2020, a negative $8 million, compared to fourth quarter 2019, and a negative $56 million on a trailing 12-month basis. Excluding significant variances fourth quarter and full-year results were relatively in-line with or better than our expectations for most of the business units given the current macroeconomic environment.
The following business unit comments exclude significant variances. Despite the challenging operating environment, the legacy business and RIS-Fee performed well throughout 2020. Compared to 2019, we saw growth in recurring deposits, low contract lapses, and growth in both plan count and participant count, all fundamentals that will fuel future growth. The margin for the legacy business ended the year strong at 33%.
Total RIS-Fee full-year net revenue growth of 9% was slightly below our guided range primarily due to the reduction in the interest on excess reserves rate impacting revenue in the IRT business. Full-year IRT integration costs of $53 million were slightly lower than the $55 million to $65 million guided range. These were partially offset by a $19 million reduction in the earnout liability for a net $34 million impact.
RIS-Spread’s pre-tax operating earnings and margin for both fourth quarter and full-year benefited from favorable non-COVID related experience gains and growth in the business. PGI’s full-year revenue growth of 3% was slightly below the guided range due to pressure on management fees from the volatility in markets early in the year. PGI’s margin ended the year very strong and higher than 2019 at 38%, reflecting strong expense management.
Macroeconomics pressured Principal International throughout 2020. Excluding the impact of foreign currency translation Principal International’s full-year revenue increased 2% over 2019 with a 33% margin, especially benefits fourth quarter and full-year pre-tax operating earnings were impacted by unfavorable non-COVID related group life and disability claims. Keep in mind, both the fourth quarter 2019 and full-year 2019 benefited from very favorable claims.
Turning to capital and liquidity on Slide 9, we ended the year in an even stronger financial position than we started. At the end of 2020, we had $2.7 billion of total company available cash and liquid assets. We had $2.9 billion of excess and available capital, including $1.8 billion at the holding company, more than double our target of $800 million to cover the next 12 months of obligations, $620 million in excess of our targeted 400% risk-based capital ratio at the end of the year, estimated to be 440%, and $460 million of available cash in our subsidiaries.
The RBC ratio remains elevated as we continue to expect impacts from credit drift and credit losses to play out. We expect the RBC ratio will move down toward our targeted 400% throughout 2021. Our non-GAAP debt-to-capital leverage ratio, excluding AOCI is low at 23.5%. Our next debt maturity of $300 million isn't until 2022, and we have a well-spaced ladder debt maturity schedule into the future. Despite the pressures and uncertainty over the last year, we remain in one of the strongest financial positions in our company's history. We have the financial flexibility and discipline needed to opportunistically deploy capital and manage through this time of economic uncertainty.
As shown on Slide 10, we deployed more than $900 million of capital in 2020, with $229 million in the fourth quarter to common stock dividends and share repurchases. After a pause due to COVID and the resulting capital uncertainty, we restarted our share repurchase program in the quarter with 75 million of buybacks and have $775 million remaining on our current authorization. Last night, we announced a $0.56 common stock dividend payable in the first quarter, unchanged from the fourth quarter, and our dividend yield is approximately 4.5%.
As shown on Slide 11, 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 $4.2 billion net unrealized gain position. This includes a $7.4 billion pre-tax net unrealized gain in our U.S. fixed maturity portfolio, which increased another $900 million during the fourth quarter as the impacts from a further tightening of spreads were partially offset by an increase in rates.
The U.S. commercial mortgage loan portfolio average loan to value of 49%, an average debt service coverage ratio of 2.5x improved slightly from the third 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 forced sellers. The full-year impact from credit drift and credit losses were approximately $235 million, with $70 million in the fourth quarter in-line with the range given on last quarter’s call. This is significantly lower than the $400 million to $800 million range that we estimated at the start of the crisis.
The estimated impact of credit drift and losses in 2021 is now $300 million, improved from the $400 million estimate in the third quarter. Our diversified and integrated business model combined with our financial strength and discipline served us well throughout 2020. Signs of recovery emerge late in the year across many of our businesses with growing momentum in November and December. We’re optimistic heading into 2021, and will provide more details on our guidance for the year on our February 25 outlook call.
This concludes our prepared remarks. Operator, please open the call for questions.
[Operator Instructions] And the first question will come from Ryan Krueger with KBW. Please go ahead.
Hey, good morning. My first question was on capital deployment. Understanding we're still in the middle of the pandemic, but you clearly have a strong capital position. So, I was hoping you could comment on your capital management priorities once we start to emerge from the pandemic?
Yeah, good morning, Ryan. This is Dan. And I'll ask Deanna to respond as she pointed out in her prepared comments. We've got a lot of runway remaining in terms of board authorization. It’s 775 million. You also heard her comments as related to credit drift, and credit losses, and we find ourselves frankly, in a very favorable position. But as we have historically, we've always tried to take a very balanced approach for capital deployment. Deanna, you want to give some insights?
Yeah. I'll start there where Dan ended, which is, you'll see us continue to be very balanced and disciplined relative to capital deployment. We obviously suspended our buyback in early March at the start of the market turmoil, but we did re-enter the market in fourth quarter with 75 million in purchases and more in the market currently today, as we sit here in the first quarter due to our strong capital position, as well as more certainty on our future impacts.
At the February outlook call we’ll reiterate our expected external capital deployment range for 2021, but I think bottom line where we have a very strong capital position, and all deployment opportunities and options are on the table.
Ryan, do you have a follow-up?
Yeah, just one on your comment Deanna that the RBC expect to trend down towards the 400% target, is that due to credit drift or excess dividends you expect to take out of the sub, or I guess, a combination of both?
It's probably a combination of both. You did hear us say on the prepared remarks that we do expect some impact from drift and impairments in 2021. Obviously, it's been a very unusual market cycle, given the support that the government has done in helping businesses through this. And – but again, we did lower even our 2021 expectation. Last quarter, we said [I was] expecting around, 400 million; this quarter, we're saying around 300 million, probably with a range of [200 to 500]. So, we do think there will be some impact, but we also expect that we will dividend out of the life company to the holding company. So, it'll be a combination of both.
Thanks, Ryan, for the questions this morning.
Thank you.
The next question will come from Humphrey Lee with Dowling & Partners. Please go ahead.
Good morning and thank you for taking my questions. My first question is, in your prepared remarks, you talked about seeing positive signs of top line recovery with recurring deposit growth in RIS-Fee and in-group growth in specialty benefits, especially in the SMB market. Can you provide some additional color in terms of what you saw from your clients? And how confident are you that you have reached an inflection point?
Yeah, you know, I was reflecting back, Humphrey you're asking that question. We used the term back in 2008 and 2009 as these green shoots, you know, the economy had drug on for so long, and it seems like we've gone through this cycle in frankly, a fraction of the time, although it was more intense. And to your point about recurring deposits, and in-plan growth, the returning of some employer matches, there are just a lot of green shoots within these small-to-medium sized businesses. We said in the prepared comments, that these SMB's have been incredibly resilient. And that's where, you know, we've got large exposure and we're very encouraged by that. So, we feel that there's fundamentally a very strong recovery in place, but I'll have Amy go first, and then Renee with some of those additional insights. Amy?
Yeah, sure. Humphrey, thanks for the question. I think where I'm seeing it the most, and again, you asked for a level of confidence that that will continue. I'm pretty confident that the small-to-mid size market is feeling pretty good about their positioning right now. Keep in mind, a lot of the areas where we provide benefits are not necessarily going to be in those harvested industries, like some of the recreation and tourism and travel and things like that.
We're going to be providing in things like knowledge, industries, and manufacturing and kind of those white and gray color industries. And really, the feedback we're getting from small business owners in those industries is that they are almost having a harder time finding staff for the positions that they have openings for. So, what we're getting from the small business industry is least in the ones where we have a deep and broad footprint is that we're going to see good growth.
Renee?
Yeah. Thank you very much for that question. And just to tag on a little bit. When we look at our pipeline, and we see how that's performed over the course of the last year, we did see that the pipeline took a significant decline as a result of COVID, early in the year. But the really positive news is that that pipeline has begun to rebound. And that's true for the small plan market, as well as for the mid and for the large. So that again showed some signs of strength and showed signs of recovery.
With respect to the recurring deposits, when we look at the in-plant enrollment and the number of participants who are actually deferring, we did see that decline, of course, it reached its low point in May, but since then it just continued to climb back out. So, we're very nearly at the same level of in-plan deferrals that we would have seen one year ago, which is a very encouraging sign. And to Dan's point, we are seeing employers begin to reinstate matches, and those reinstatements are happening quicker with the small plan market. So, good signs all around.
Humphrey, a follow-up.
Yes. So my second question is for Luis related to Principal International, but before my questions, I would like to congratulate Luis on his upcoming retirement and wish him the best in his next chapter. So, my question is, the media reports suggested your partner in Brazil – [Banco do Brazil] is re-launching the [sale of] asset management business. So, I guess a two-part question. Does a potential sale have any impact on the operation of your JV partnership? And also, would you be interested in that business?
Yeah, great question. And as you know, we have a very deliberate approach to capital deployment around acquisition that has to build on scale. It has to build on capabilities, or distribution. And one thing I'll say about Banco, they've been a great partner all of these years, and I don't think anybody in the organization, maybe Roberto Walker, but Luis knows them well, and so Luis do you want to frame a little bit about what our thinking is about what it's going to take to be successful and our thoughts on further acquisitions within PI?
Sure, Dan. Humphrey good morning, and thanks for your best wishes. Two [things there] and continue with the same arguments that Ben put together. I'm not referring particularly to this particular opportunity that you have mentioned, but we're going to be always able to look in. We're going to be eager to look, every single opportunity that we might have in Brazil. Brazil is a very strategic country for us. It’s the largest economy in Latin America, by far.
Having said that, we are, as you know, out of U.S., we are pension experts, long-term saving experts and asset managers. So, we do have our own asset management platform in Brazil, any given opportunity that we might explore, including this one or any future one, we're going to pay a lot of attention to. Talking about Banco, we have a long runway with Banco in particularly to explore different ways in order to extend our partnership in Banco. So, I would say that in the years to come, more to come about Brazil. We're very eager about that country in particular.
Appreciate the question Humphrey.
The next question will come from Jimmy Bhullar with J.P. Morgan. Please go ahead.
Good morning. First, just on the DC market, and you mentioned trends getting better in terms of deferrals and matches, but you have seen fairly high hardship withdrawals, what's your view on how that's going and when do you see that abating potentially?
Yeah, Jimmy, good morning. And it's a great question. And I'll throw it to Renee. Just remember that the CARES Act had a lot of provisions within it that actually encouraged hardship withdrawals, those have now worn away. So, my guess is Renee can frame what her expectations are. Renee?
Yeah, thank you. And good morning, Jimmy. And as Dan just referenced, the CARES Act included a provision that allowed participants to access 401(k) funds without penalty for COVID-related financial hardships. And all it required was a simple signature. That particular provision sunsetted at the end of 2020. So, the COVID-related hardship withdrawals that we've been reporting on will now, they came to a stop at the end of 2020. We will, of course, continue to see normal hardship withdrawals for the plan, but normal hardship withdrawal requires a much more stringent evaluation. And so, we anticipate that hardship withdrawals will return to a more historic pattern, and will not be something that will likely need to comment on in the future.
You know Jimmy [indiscernible].
[Indiscernible] through the first third of the quarter then – through the first third of the first quarter in January?
Yes. So, yes. Hardship withdrawals, by definition, came to a stop in the end of 2020. And so now, the hardship withdrawal pattern that we'll see going forward will be more closely aligned with the overall economic conditions. And again, we'll have a much more stringent definition for accessing those funds. If we see an uptick, it'll be relatively small, and probably will not be something that stands out with respect to our net cash flows.
Do you have a second question, Jimmy?
Yeah. Just on specialty benefits. So, as you went through last year, there were sort of patterns in your [loss trends], especially in the dental business where people were deferring care initially, and then you had to catch up and claim. Are you seeing any noticeable trends with the surge in COVID cases recently? And how do you expect margins to trend in the dental product through this year?
Amy, please.
Yeah, thanks for the question. You know, I think just to say a couple things about fourth quarter. I think fourth quarter, we had thought things would normalize a little bit more and they did in terms of what we'd consider sort of a frequency or utilization metric. What didn't normalize in fourth quarter was severity. We don't talk about dental severity a lot, as much as we do on like a disability business, but those higher dollar procedures, so restorations, the fillings or the extractions, those were we saw a lot of activity, particularly in December, right at the end of the year.
And so, what I'm expecting for 2021 is dental offices are open, people are going back and they're comfortable seeing the dentist. The dentist are comfortable offering good care using PPE, they've got their – they've got it down to a science in terms of their patient flow with the right safety measures put in place. So, my hope and expectation for 2021 is that we will begin to just simply normalize back to normal claim patterns for dental.
Jimmy, you're poking around on this sort of macro economic recovery question, and I get that. One data point that I saw I thought was interesting was that the high watermark for unemployment benefit requests peaked out in May at 25.9 million requests. That number is now down to 4.8 million. So, significant reduction in the number of unemployment benefit request. And although that number is still higher than the pre-pandemic measure, it's down considerably. And my guess is that's going to tie directly towards growth in small-to-medium sized business. Hardship withdrawals, loans, etcetera. So, I wouldn't be surprised to see that significantly improved throughout the balance of 2021. Thanks for the question.
The next question will come from Tom Gallagher with Evercore. Please go ahead.
Good morning. First question on the margin in PGI was over 40% this quarter. I guess the highest I recall it being well above your target, is there something unsustainable about the margin at this level or whether anything unusual in the revenue side or should we expect a bigger increase in expenses relative to revenue growth as we roll into 2021?
Well, all I know is we – Tim Dunbar retired and Pat Halter stepped in. And so Pat, can we count on higher margins from here? That's maybe my question for you.
Well Tom, thanks for the message and vote of confidence Dan. I think the strong market performance Tom, obviously aided the strong fourth quarter. I think expense management, which I'll talk about in a minute also aided I think a strong fourth quarter, We’d also just had some really strong cumulative net cash flow that started to generate the additional revenue, and our alpha generation was very strong. So, it absolutely was a strong quarter in terms of margins. As you know, our long-term guidance right now is 34% to 38% margin second half of the year in the third quarter and fourth quarter were above 40%.
And so your question is a fair question, in terms of what we expect going forward. And we'll be talking more about that in the outlook call in February. But the margins definitely have been benefiting from the favorable markets, and from our expense controls. And we're going to continue to add, I think, a strong disciplined approach as we go forward in terms of trying to have good expense alignment with our revenue, and continue to produce good investment results, which obviously attracts the net cash flow.
From an expense perspective, Tom, I think, you know, we do have some seasonality coming up in the first quarter. As you recall, we usually have some payroll taxes and some long-term comp reconciliation that will probably have a little bit of impact on first quarter margins. We probably will have some additional expenses coming back through travel, if we see the vaccines developing as we see them, and we start to see our distribution teams get back on the road to see clients. And I think that's a positive in terms of potential for growth. And then obviously, we do have a reset in terms of some of the incentive compensation structures we have in the Asset Management Group. But we are going to continue on the expense side to invest, invest for growth, and that is a very important part of our expectations going forward too. So more to come on that Tom, but I feel good about where we're at right now.
Thanks, Pat. Do you have follow up Tom?
I do, Dan. Yeah, just similar question, but different directionally. RIS-Fee, we typically have a nice lift in margins when you go from 4Q to 1Q, I guess, seasonal spending patterns, but I know, there was a big push on expenses this year. So, we didn't see the big uplift in 4Q at least to the extent that we normally do. Would you still expect to see a bit – a pretty big drop in expenses, an improvement in margin and RIS-Fee when we roll into 1Q or will that be more muted than we normally see?
Renee, you want to provide your thoughts there? And I know we'll have more to talk about in February on the outlook call.
Yeah, absolutely. Thank you for the question, Tom. With respect to the first quarter, we will see expenses of course reset. And so, I think that I don't anticipate that we're going to see expenses be anything out of line or out of pattern with what we have seen with previous first quarters or anything that's particularly unusual there. With respect to margins, and so now you're looking at the other end, you're looking at revenues.
Revenues, of course, are impacted by the market. We've had a nice market performance so far in this quarter, but it still remains to be seen how that that really tracks for the rest of the quarter. Remember that with the IRT block of business, we’ll see a little bit of pressure on that because of the anticipated lapse rates, which by the way are right in-line with our models, so nothing out of the ordinary there. So, we can get more into our outlook in the upcoming call, but I'm not seeing anything that's particularly remarkable or anything that's out of the ordinary with first quarter.
Insights. Hopefully that helps Tom?
It does. Thanks.
All right, appreciate it. Thanks for the question.
The next question will come from Josh Shanker with Bank of America. Please go ahead.
Yeah, thank you very much. First question. On the IRT integration, there was $150 million earnout potential if retention was better than thought that I guess would come at the two-year anniversary of when of the close, how is that transaction looking? And should we be considering modeling in a bit more acquisition costs for the transaction at the end?
Yeah, I appreciate that question. I'll take that one quickly. There won't be an earnout. That earnout was structured around the belief from the seller that that it might be better than what our modeling suggested. We've got a little bit of experience and what we thought would transition. So, we've already completely included within our numbers the fact that there would not be an earnout, but as Renee suggested, our modeling, and what we had originally framed for investors, was that we likely would not end up having a better retention that would have generated in earnout to the seller. Do you have a second question Josh?
Yeah. Just want to understand what's happening in the term life sales department? This is obviously very successful first quarter maybe ever, and is that something we should consider being ongoing – an ongoing comp contributor, in terms of the numbers? I guess, is the fourth quarter anomalistic, I guess, and, or whatnot?
Yeah, this was one of those good stories where we can not only talk about solid sales, but how technology that we've invested in, helps drive this business. So Amy, you want to help us there?
Yeah. Thanks for the question. So, we are really glad we made the accelerated digital investment in term life straight through processing. So what that enabled us to do was, was really keep up with the demand. And some of the things we're doing with that straight through processing are the things you would imagine. We're trying to make sure it's really easy that as much of it can be done through some sort of an accelerated or simplified underwriting process, and that you can handle it all digitally.
We've made that extension though to our distributors. So, it's not just a front facing customer. It's to our distributors and intermediaries that get to take advantage of this all the way through digital e-delivery of the policy. And so when I think of fourth quarter, fourth quarter was a little bit of a culmination of a whole bunch of business throughout the year and making sure we got it fully processed. So, I would say fourth quarter is probably a little bit overstated in terms of what we would think to model, but the market interest matched with our capabilities is very high for term life. So, I would continue to assume that that makes up a really healthy portion of our life sales growth.
And Josh just on a technology side, I noted that there were 72% of the medical – all applications were done online, and 96% of the applications were delivered in an e-delivery format. So, really efficient operations within the life area. Thanks for the questions.
Thank you.
The next question will come from Erik Bass with Autonomous Research. Please go ahead.
Hi, thank you. I was hoping you could talk about the underlying earnings power for Principal International and some of the drivers there, I think thinking normalized earnings to 71 million this quarter and 76 million last quarter, but market levels and most of the currencies I think were favorable quarter-over-quarter. So, are there other dynamics we should be thinking about going forward?
Yeah. I'm glad you asked that question, Erik. Because, you know, Luis has done an amazing job leading Principal International. And frankly, there's been just a lot of headwinds related to inflation encaje, there's been regulatory changes, there's been currency FX challenges, but every time you dig into these numbers, and you appeal it back and you look at the underlying fundamentals of these businesses around the world, they're quite extraordinary, and they're growing. And so, with that, Luis, you want to help frame this for us?
Well, yes. Good morning, Erik and this is a great question. So, you're right. We’ve pointed out a $76 million as our run rate in the third quarter. Now, we're much more comfortable saying that 71 is a better representation for fourth quarter. The main reason of that delta is China, you can activate $4 million of that delta to China and the $30 billion negative net customer cash flows that we had in money market funds in the third quarter. So the other Delta is additional expenses, mainly severance expenses that we incurred in Latin America that certainly more than offset the slight tailwind that we have for FX.
So, there is a clear answer for your question. And if you allow me, we are working super hard in order to overcome the situation in China. We have had very interesting developments in different funds and increasing AUMs in different funds like equity funds by 16% for the whole year. We continue adding more products in order to better serve our customers. So, I'm positive about China, but still we have to overcome that particular good amount of negative net customer cash flow that we suffered in third quarter and [$5 billion] in the fourth quarter.
One of the proof points in China, which I find pretty extraordinary back to technology. If you went back to the fourth quarter of 2019, we had 900,000 new digital equity customers. In other words, they didn't purchase a money market account. They purchased online an equity product. For the fourth quarter of this year, that number was 1.7 million new investors purchased an equity product through an online solution. So again, when Luis talks about the underlying value creation in China, we still think it's very much intact. Do you have a follow-up, Erik?
Yes. Thank you. Maybe if we can switch to PGI, I was just hoping you could provide some more color around the flow trends at an asset class level. In particular, it looks like there's been a rebound in fixed income demand, but I think equity flows have softened after being really strong in the second quarter. So, I was just hoping if you could provide a little bit more detail there.
Pat, do you want to help us there?
Yeah. Erik, thanks for the question. One of the great things about our platform is, we offer a lot of choice. And we also offer a lot of value in terms of our alpha generation capabilities and being a global sort of a provider of that choice value, we see flows that vary from quarter-to-quarter. And I think this quarter was a strong quarter in fixed income. Prior quarters, we had strong quarters in things like real estate. And so my sort of take on all this is, we're going to continue to be very solution-oriented as a global asset management firm and provide choice.
And my guess, there is enough money in motion throughout the world and our segments of the marketplace, retail, retirement, and institutional that [indiscernible] providing choice, I think we can capture that share in the marketplace. So, my guess, we will continue to see those asset classes shift a little bit from quarter-to-quarter, Erik, but we think we're well positioned both in fixed income, equities, and candidly alternatives. We think some of the opportunity again is a pickup in alternatives in our strength in real estate and we're starting to see some investor interest actually pick up globally in real estate again.
So I think you're awfully confident about your key strategy as well, feeling that our method of investing aligns well with what consumer demand is today.
Yeah. That's a great follow-up, Dan. We definitely are seeing more support from an investor base in ESG, it really started in Europe, it's really becoming global and it's really starting to take hold in the U.S. and all of our investment strategies in terms of investment approach processes and corporate ESG, I think we're well-positioned to have I think a great sort of flow of that capture in future also.
Erik, thanks for the questions.
Thank you.
The next question will come from Suneet Kamath with Citi. Please go ahead.
Thanks. Good morning. Just looking at Slide 12 of your deck, you show that normalized RIS-Fee earnings are down about 11% year-over-year despite, you know pretty strong equity markets. It seems like the legacy business is performing well based on the margin, so it feels like a lot of this is the IRT business. So can you help us think through, how much of the pressure is related to the interest on excess reserves versus maybe some of what you're seeing in terms of shock lapses?
Yeah. Lot of pressure on IOER. Renee, you want to help better understand this dynamic?
Yeah, absolutely. And thank you for that question. When you look at the pre-tax operating earnings, fourth quarter 2020 over fourth quarter 2019 and you adjust – you take out the impact of the actuarial adjustment review. There are a couple of things that are impacting that. First off, of course market performance is a help and that definitely has a nice impact upward. It helps revenues, but that is offset then by lower revenues from deposits, as a result of the IOER reserve and that had about a $10 million negative there.
Shock lapse also comes into play, but shock lapse is running right where we thought it would, when we originally did the model. So we're very pleased with the shock lapse and then of course there's just the normal fee pressures and fee compression that we see with this particular line of business. So when we look overall, we remain very positive on how this line of business is performing and how the fundamentals are unfolding and when we look at the IRT integration, we're really pleased with how this is positioning us for future growth.
This acquisition has not only propelled us to be one of the top three retirement providers in the United States, it's also allowed us to leverage this transaction in this acquisition to add a number of different capabilities to our platform to serve plans of all sizes and it's given us considerable strength and presence in the large plan market. So, when we look ahead, we can see that the acquisition and the fundamentals of this business are very solid and we anticipate that we'll begin to see that unfold over the course of the next few quarters.
I think, Suneet, you'll also see on the 25 of February, when we reset the metrics, we'll have our arms around the completion of the integration of the next few waves, which ends at the end of the second quarter. So I think you'll have really good measures and metrics and assumptions that you can use in your model after the outlook call. Did you have follow-up, Suneet?
I did. I did. Thanks for that. That was helpful. So, one of the things we're hearing from another player in the retirement space is that some of the fee compression is coming not just from competition, but from plans wanting to charge fees based on head count, not just AUM, as opposed to AUM. So, just curious if you're seeing that maybe some thoughts on is that a better model as companies try to rationalize expenses, charging based on head count as opposed to AUM?
I don't think that's a new phenomenon, that's existed in the large case market for a very long time, but Renee, your thoughts there.
Yeah, absolutely. So, we see a variety of different ways that plan sponsors want to charge fees or want to have fees charged to them rather. And as Dan mentioned in the smaller plan market that tends to be a little bit more based on assets, as you get into the larger market, it tends to be more based on participants and other activities or activity based. I think the point is though, is that we will remain flexible, we are flexible in how we do our pricing constructs, we're willing to work with plan sponsors to figure out ways that best reflect their plan objectives and it's just a normal part of the market and it’s something that we're used to dealing with.
Seems like the nomenclature that's most commonly used, Suneet, in these finalist presentations as required revenue and we know what our margin targets are, we know what it takes to handle a more complex case, we know that the economics on a TR plan, which is about 50% of our new sales this past year are different and so there is always a revenue analysis that's set on any new piece of business that comes to the Principal. Appreciate the questions.
Okay. Thanks.
The final question is from Brian Meredith with UBS. Please go ahead.
Hey guys, good morning. Thanks. This is Mike Ward on for Brian. Just had a question on the $250 million of expense reductions in 2020, certainly impressive result. Just curious if you had any sense of maybe how much you expect of that to recur in 2021 or might pick up a little bit?
Yeah. So what we had said in our prepared comments of the $250 million, we thought we would have about 40% of that or about $100 million go-forward. But when we chat on the 25th, we'll certainly give you our outlook on expenses. Deanna, if you have anything else you'd like to add to that or not?
No. I think our numbers are tracking really close to what we talked about last quarter as well. So we ended the year at $250 million with $40 million of that happening in the fourth quarter. And if we compare 2021, current expectations on expenses to what we would have thought pre-crisis, it's down about 100, so that gets you that 40%, obviously our net revenue is down from what we would have anticipated, some of that is COVID-related. So our focus is really on aligning our expenses with our revenue, but those targets on revenue and margins will again reiterate at the upcoming outlook call.
Mike, do you have a second question?
Thanks. Yeah, just a high level strategy question. So, there has been an uptick in some M&A in the Life and Retirement Industry lately. Just wondering if you could maybe comment on how you view some of your insurance or underwriting risk businesses, I know these are complementary to much of your core franchise and some actually hedge some risk and spread business, but I'm wondering if you know maybe you might be more interested or less in evaluating opportunities today versus a year or two ago. Thanks.
Yeah. Thanks for the question, Mike. And as you could witness by our decision to divest ourselves of our business in India, we managed the portfolio, literally every quarter and we look closely at capital deployment. We do a risk analysis to understand what risk exist. We obviously just completed an actuarial review in the third quarter. So, when we look at our annuity block and life block, these are core to what we do. And to your point, they are complementary. They're strategically aligned.
Our business owner executive solutions, our deferred comp funding vehicles that are produced in large part out of the Life division are very helpful. Our customers are looking for us to provide guaranteed income in retirement. We want to be smart about how we price those features. These are balance sheet intensive businesses, but at the present time, we do use third party for reinsurance purposes and we evaluate options, but at the present time, we feel very good about our business model and how we finance it and the various component parts, but very much appreciate the question.
Thank you.
So with that, we'll bring – I'm sorry. Please, operator.
We have reached the end of our Q&A session. Mr. Houston, your closing comments please.
Yeah. Sorry to beat you to the punch there. I was ready to go, I guess. And again, I appreciate Humphrey, your comments and shout out to Luis. Luis, thank you for just an extraordinary job. Luis will still be close by. He is going to remain our Chairman of the Board of Principal International for the next couple of years. He will be available to us to help in our relationships with joint venture partners.
He'll be a great sounding board for Roberto and Thomas and certainly be very helpful to me, as we continue to expand and grow our international presence. I know this quarter had a lot of noise, I read your write ups. I think in the midst of a global pandemic, you're going to get a lot of noise. We try to be incredibly transparent with you. As investors, we want you to be well-informed with what our thinking is. We look forward to having deeper conversations with the outlook on the 25 of February, but certainly appreciate your support.
So with that, we'll bring the call to an end. Thank you.
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, February 4, 2021. 488-6533 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.
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