Principal Financial Group, Inc. Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Earnings and Financials: Adjusted non-GAAP earnings excluding significant variances were $469 million or $2.07 per share, an 18% increase in EPS over 2024. Reported non-GAAP operating earnings were $489 million, up 27% year over year. EPS was $2.16, up 33%.
• AUM and Market Performance: Total company managed AUM reached $753 billion, a 5% increase QoQ and 8% increase YoY. Market performance in the quarter impacted results, but daily equity market averages on assets under management were up 6% YoY.
• Capital Return: Returned $320 million to shareholders in the second quarter, including $150 million of share repurchases. Raised common stock dividend for the eighth consecutive quarter.
• Business Segments: Retirement segment had strong results with RIS sales $6 billion (+7% YoY). Principal Asset Management saw AUM growth and sales increase. Specialty Benefits had strong earnings growth, and Life Insurance had strong sales driven by record nonqualified sales. Recognition for leadership in disability inclusion, AI innovation, and digital ID verification.
• Margin and Expense Discipline: RIS had a 40% margin (80 basis points improvement), Principal Asset Management saw margin expansion, and Specialty Benefits had margin expansion of 100 basis points.

Segment Performance

• Retirement (RIS): Second quarter top-line growth 3%, with margin at 40% (an 80 basis point improvement over 2024) and near the high end of targeted range. Pretax operating earnings increased 5% year over year. Transfer deposits were up 8% compared to 2024, including a 24% increase in fee-based transfer deposits. WSRS recurring deposits grew 7% on a trailing twelve-month basis, with SMB segment at 9% growth.
• Principal Asset Management: AUM of $723 billion increased 5% sequentially. Investment management revenue increased 6% compared to second quarter 2024, with management and performance fees contributing to a 250 basis point improvement in quarterly operating margin.
• Investment Management: Total fee revenue increased 6% over the year-ago quarter. Management fees grew 4% on higher average AUM, and performance fees are expected to be in line with 2024.
• Specialty Benefits: Pretax operating earnings increased 10% year over year, with premium fees up 3% and FBD loss ratio improved 130 basis points. Operating margin was 15%, an increase of 100 basis points.
• Life Insurance: Premium fees increased 5% compared to 2024 (17% business market growth), but pretax operating earnings were down due to higher mortality.

Guidance

• Full-Year Outlook: Expect full-year enterprise results to be aligned with 2025 outlook and enterprise financial targets.
• Capital Return: Committed to $1.4 billion to $1.7 billion capital return for the full year, including $700 million to $1 billion of share repurchases. Announced a $0.78 common stock dividend payable in the third quarter, a 2¢ increase from the second quarter.
• Second Half Expectations: Expect improved results in the second half of 2025 relative to the first half, with continued confidence in financial targets and capital deployment.

Risks

• Market Volatility: Impacted AUM and fee revenue, with market drops in April affecting second quarter fee revenue but positive momentum in May and June.
• Competitive Environment: PRT pipeline smaller than expected in the second quarter, and competition affecting PRT opportunities. Market conditions causing clients to defer decisions impacting flow patterns in asset management.
• Flow Dynamics: Elevated markets pressuring AV net cash flows, with some fee-based flows impacted by rebalancing and reallocation by clients.

Question and Answer

• Q: Tom Gallagher on overall expense levels and RIS spread balances A: Deanna and Joel discussed aligning expenses with revenue, margin expansion, and RIS spread balances being opportunistic with scanning for targeted returns and PRT being disciplined on returns over volume.
• Q: John Barnidge on PRT competition and visibility A: Deanna and Joel/Chris discussed PRT pipeline being smaller, focus on returns over volume, and different segment performances with visibility into third quarter still uncertain.
• Q: Wes Carmichael on performance fees and RIS products A: Kamal discussed performance fees from alternative debt strategies and early days of target date fund with in-plan guarantee in RIS.
• Q: Suneet Kamath on RIS flows and participant outreach A: Chris discussed elevated markets pressuring AV net cash flows, improvement in second quarter flows, and proactive participant outreach with advice solutions rolled out in Q3 2024.
• Q: Ryan Krueger on investment management withdrawals and dental business A: Kamal discussed gross sales growth in investment management, outflows in US businesses due to rebalancing, and Amy discussed dental business with loss ratio patterns and pricing discipline.
• Q: Joel Hurwitz on investment management divestiture and multi-manager model A: Deanna and Kamal discussed evaluating capabilities, immaterial impact of divestiture on earnings, and evolution of strategy for client demand and efficiency.
• Q: Jimmy Bhullar on asset management flows and performance fees A: Kamal discussed pipeline of opportunities, impact of global market changes on flows, and performance fees outlook with private market real estate and specialty global fixed income contributions.
• Q: Jack Matten on specialty benefits margins and competition A: Amy discussed group disability and life margins due to plan design differences and incident-based drivers, with stable competition in life and disability.
• Q: Alex Scott on private investments in DC plans and partnerships A: Christopher and Kamal discussed opportunity in offering private asset classes in DC plans, fiduciary concerns, and active conversations on partnerships with focus on long-term build.