Principal Financial Group, Inc. Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Strong Performance: Delivered 13% adjusted earnings per share growth YOY and 14% year-to-date above target range. Return on equity is at the high end of target range. Year-to-date free capital flow conversion ratio over 90% tracking above target. Returned $400 million to shareholders in Q3, including $225 million share repurchases. Raised common stock dividend for ninth consecutive quarter, 8% increase quarterly and full year.
• Strategic Priorities: Focused on broad retirement ecosystem, small and midsized businesses, and global asset management. In retirement ecosystem, WSRS transfer deposits and RIS sales growing; in small and midsized business, SMB deposits and Benefits and Protection showing growth; in global asset management, strong net cash flow and AUM growth.
• Capital Position: Ended quarter with $1.6 billion excess and available capital. Confident in delivering full-year capital return target of $1.4B to $1.7B, including $700M to $1B share repurchases. Announced $0.79 common stock dividend, 8% increase YOY.

Segment Performance

• Retirement Ecosystem: Workplace Savings and Retirement Solutions (WSRS) transfer deposits grew 13% year-over-year. Total RIS sales were $7 billion, up 8% year-over-year. DCIO sales were $2 billion in the quarter. The number of participants deferring into retirement plans increased 3% YOY with average deferrals up 2%.
• Small and Midsized Business: WSRS SMB recurring deposits grew 8% and transfer deposits increased 27% YOY. Benefits and Protection business had nearly 2% employment growth on a trailing 12-month basis.
• Global Asset Management: Investment Management gross sales were $32 billion, up 19% YOY. Private AUM grew 9% YOY. ETF business had net inflows of $500 million in Q3 and $1.3 billion year-to-date. Total company managed AUM was $784 billion, up 4% sequentially.

Guidance

• Fully expect to deliver on full-year enterprise financial targets. Confident in capital return targets, including $1.4B to $1.7B full-year return with $700M to $1B share repurchases. Targeted 40% dividend payout ratio aligns with confidence in continued growth and strong capital generation.

Risks

• Actuarial assumption review had net unfavorable impact to GAAP earnings, primarily driven by model refinements, but no impact on free capital flow. Credit risk in private credit markets, though portfolio credit loss remains below long-term run rate estimate.

Question and Answer

Q: Good morning, and welcome to the Principal Financial Group Third Quarter 2025 Financial Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Humphrey Lee, Vice President of Investor Relations. Please go ahead.

A: Thank you, and good morning. Welcome to Principal Financial Group's Third Quarter 2025 Earnings Conference Call. As always, materials related to today's call are available on our website at investors.principal.com. Following a reading of the safe harbor provision, CEO, Deanna Strable; and CFO, Joel Pitz, will deliver prepared remarks. We will then open the call for questions. Members of senior management are also available for Q&A. 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. Deanna?

Q: So the first question on margins. I'm just wondering if you would expect to continue seeing strong margin expansion kind of in line with the 180 basis points this quarter with market performance remains strong. And I guess relatedly, can you discuss areas where Principal is either accelerating or expanding its investments in growth initiatives?

A: Yes. Thanks, Jack, for the question. Obviously, the margin expansion in the current quarter was impacted by both strong underwriting results as well as very disciplined expense management. I'll have Joel talk about that and then maybe ask each of the presidents to maybe highlight a few areas where we're investing in the business.

Q: First question is on Investment Management flows. Can you talk a little bit about any changes you're seeing in investor sentiment from your clients in particular appetite for the areas that you're focused on in that business? And maybe a little bit of perspective on how the pipeline looks going forward as well?

A: Sure. Ryan, so I think let me just first start with the strong results this quarter. I think as Deanna mentioned in her remarks, we had positive net cash flow of $800 million. I think equally impressive is if you look at our non-affiliated NCF, it was $1.8 billion positive, which is largely with the long-term mandates in private markets that not only contributes to the fee rate, but also revenue growth. The other dynamic I would highlight for you is we had net cash flow growth this quarter across multiple channels. We actually had wins in global institutional, which I've highlighted to you in the past. We actually had positive net cash flow across our U.S. retail platform, where we have had a change of trend as well as in our local managed products across Asia and Lat Am. So I think the key observation I would give you is that our focus on having scale in global distribution is really kicking in, and I expect that to continue over a period of time. If I even look at our active ETF business, over 2025, our net AUM growth has been over $3 billion in the last 12 months. So we continue to expand in that business. What I would highlight for you with respect to with the areas where we are seeing continued momentum, real estate, as I've highlighted for you in the prior few quarters, is actually seeing increased momentum. I think the cycle is slowly turning, but the more impressive piece for us is we are actually gaining market share, which I expect to continue as we expand our product lineup. And then the results in fixed income continue to be quite impressive, particularly our growth we have seen in emerging market fixed income is an area I would highlight where we continue to win mandates across the world. So Ryan, hopefully, that answers the question you had.

Q: The Barings strategic partnership, do you have any visibility into whether that relationship fee rate enhancing versus the blended fee rate at Principal Asset Management and possible other similar opportunities?

A: Sure. John, thanks for highlighting that partnership. So it's part of our strategy to continue expanding our private market expertise. As Deanna highlighted, part of this partnership is to assist on the general account side. But what's most unique about this partnership is, is we have historically done both origination and portfolio management in the private markets area. And the Barings partnership is unique because they had a unique strength in origination in an asset class that they had an edge in. And we continue to play the role of being the portfolio manager, the underwriter of those transactions, which also is our expertise. So we're looking at unique opportunities that expands our business base, but also creates value for Principal overall.

Q: First, just had a question for Kamal on net flows in asset management. I think if we look at your commentary over the past year, it's been fairly positive and flows had been weak, but this quarter obviously showed a turnaround. To what extent do you think it's the beginning of a trend given the favorable market backdrop that you have? And how do you think about like the weaker investment performance that you've seen recently factoring into your net flow expectations over the next year?

A: Sure. Jimmy, and thanks for highlighting the turnaround. You've always been a believer in us, so I appreciate that. With respect to your question around the sustainability of the trend and what's driving it, I will tell you that the quality of flows we are actually seeing this quarter is actually quite high. When I look at the clients who are giving us the mandate, they tend to be more longer term in nature, and they're also putting it in areas that are in the trough of a market cycle. So I expect returns to be quite strong in those areas as we move forward and certainly helps with the sustainability of our flows. I think as Deanna highlighted, one of the other things we did this quarter is not only were cash flows positive, our management fee rate was 5% higher, which is generally bucking the industry trend and something we continue to focus on. So when I look forward, I think 4Q has always been an active quarter for rebalancing and a lot of strategic allocation happens. This year, given the strength of the marketplace, it could be more active than usual. And that is something that other peers are also going to experience. So there will be higher volatility of allocation changes happening. One sentiment signal I could give you to your question that we continue to track is the questions we get in our RFPs. While overall RFP volume as we enter 4Q here is lower than it is in 2024 generally across the industry and for us, we are sort of starting to see a shift in the type of questions we get. They're shifting to focus more on exploration and new idea request rather than active allocation among existing mandates. So I do believe the investors after the run-up in markets are looking for new products, new ideas or areas that have generally been under allocated to. I highlighted global equities as one of those areas where I do believe I think there will be more allocation coming. With respect to timing of flows, it can be very difficult to predict. But what I can tell you, I remain very, very confident that the second half for asset management and IM flows will be much stronger than the first half for our business.

Q: Could you talk a little bit more about where you are on growing the spread-based balances in RIS? And which products you're most focused on to grow that spread business and what you're finding most favorable today?

A: Thanks, Wilma. Thanks for the question. Yes, I mean, we've seen really nice performance in spread-based over the last several quarters. And our emphasis, as we've talked about in prior quarters, is really continuing to figure out how to drive revenue growth within our retirement plans, which includes how do we sell our guaranteed products at a faster pace. We've seen very nice inflows and growth in our WSRSGA products sold through retirement plans. We also have seen nice performance over the last several years in PRT. We had a very strong PRT quarter this year. And as we've talked about, we're not so much focused on volume there. We're focused more on returns. But despite the industry backdrop of declines, we continue to see strong performance in PRT, and we're going to be -- are continue to be disciplined there and focus in our target market, which is in the smaller segments of the market, not the jumbo side, which is where most of the pressure has been felt on PRT. And then lastly, with respect to our annuities business, we've seen very nice growth in the RILA business over the last several years. That provides a lifetime income product for our customers. We focus primarily on serving the lifetime income needs of our retirement customers. And so that is why that exists there. So -- and across all of those, we've seen really nice growth on the spread-based side and not just growth, but growth at really nice returns.

Q: So first, I wanted to get an update on the capital deployment outlook, Joel. You mentioned the pace should increase again in Q4. But I guess what would drive you guys towards the higher end of that $1.4 billion to $1.7 billion capital return range, right? Because if I just look at your excess capital position is very strong and then Q4s are typically the strongest capital generation quarter. Any reason why you wouldn't really accelerate and lean into buybacks where the stock is at now?

A: Yes. And Joel, you raised a good point. We are sitting in a great position from a capital perspective at $1.6 billion, as you mentioned. And as we signaled on last quarter's call, we did do outsized or higher, I guess, third quarter share buybacks than we did in the first half of the year. So as you know well, the first half of the year, we did about $350 million in share buybacks. We did $225 million in the third quarter, and we certainly expect elevated levels from there in the fourth quarter. And so what happened in the third quarter is we did have very positive free capital flow conversion while still investing in the business. And we just feel really good about the optionality we're afford as it relates to investing for organic growth as well as delivering meaningful share -- meaningful capital back to shareholders. So again, you will see some outsized fourth quarter share buybacks relative to what you saw in the third quarter. Does that help, Joel?

Q: I wanted to ask about private credit. Obviously, we've had some flare-ups here in the past couple of weeks. And I know your portfolio is a little -- maybe a little bit different than other companies given its tilt towards real estate. But really just curious what you're seeing in terms of the private credit markets, both in terms of performance, competition and just overall credit quality?

A: Yes, Suneet, thanks for the question. I think there's 2 aspects of our private credit perspective. One is within our general account, which I'll ask Joel to address and one is within how we think about private credit with our third-party investors as well. So I'll maybe ask Joel to start and Kamal to add on to that. Joel Pitz: Yes. So Suneet, thanks for the question. A really good proof point for our managing credit losses is a testament to our third quarter losses, which is about $8 million after tax, as you can see within the financial supplement. The credit losses from securities were at very low levels in 2Q '25 as well. So what you saw a little bit in 3Q was a few impairments, what was very de minimis, no commonality or reason within the industry as it relates to those credits. And importantly, the portfolio credit loss remains below our modeled long-term run rate estimate. Success of any underwriting depends on the quality of the underwriting, and we're real proud of our practices in that regard, whether it's public or private. So we remain really confident in our underwriting standards. We continue to focus on diversification, quality and liquidity profiles that meet our liability needs, which, as you know, are very conducive to investing in privates given our liability profile. So given our quality and well-diversified portfolio, the credit risk is very manageable. And as I said before, remains below long-term expectations and is certainly factored into our capital and deployment expectations.

Q: I just wanted to come back to the assumption review in the Life Insurance segment. Just curious if there's any color on the drivers of experience-related assumptions that's lapse or mortality. And just how should we think about the model refinements? Is that in the rearview mirror? Or should that kind of continue going forward?

A: Yes. Thanks for the question, Wes. And Deanna said exactly right. The impact, as I noted in my opening remarks, reflects a range of tactical model updates and experience, as you mentioned. And these are normal course refinements to this long-term business, and we remain confident in the business. I think it's important to take that away as well. The life impact is modest in scale relative to the overall size of our business. As it relates to model refinement specifically, that was 2/3s of the impact to not only the enterprise but also life. And this really reflects refinements on how policyholder behavior and product cash flows are reflected in the models across a number of products. So think about like as added sophistication to our models is how I view refinement. That's for the experience, that was about 1/3 of the impact in life, and there was not a single driver behind the change. Again, this outcome reflects our disciplined process of updating the assumptions based on our own experience and industry experience. And importantly, the adjustments span across multiple products rather than be concentrated in any one area. So as noted in the prepared remarks and also to reinforced here, it's reflective of a broad range of model refinements and experience updates. It's GAAP only, noncash. It has no impact on our free capital flow for the enterprise. And importantly, it's immaterial to the ongoing run rate, which is actually reflected in our third quarter results. So it certainly does not impact our outlook or expectations on the future growth and profitability of not only life business, but also the enterprise in total.