3Q 2026 Principal Financial Group Earnings Conference Call - PRINCIPAL FINANCIAL GROUP INC

Financial Performance:

• Adjusted non-GAAP EPS increased 12% year-to-date, hitting the high end of the 9%-12% target range, with 7% growth in Q3.
• Q3 adjusted non-GAAP pre-tax operating earnings grew 3% to $482 million; excluding significant variances, earnings were $541 million (up 3%).
• Net revenue grew 4% in Q3 and 5% year-to-date; operating margin expanded 120 basis points year-to-date.
• Return on Equity (ROE) remained above 16% (16.6% excluding variances), within the 15%-17% target range.
• Free capital flow conversion was 77% over the trailing 12 months, within the 75%-85% target.
• Capital returned to shareholders totaled $1.2 billion year-to-date ($429 million in Q3), with $1.53 billion excess capital at quarter-end.
• Specialty benefits loss ratio was 59% (below the 60%-64% target), though group disability saw slightly higher loss ratios due to claims volatility.
• Life segment earnings grew 29% driven by improved mortality experience, with operating margin expanding to 16.4%.

Guidance and Future Outlook:

• Full-year 2026 targets are on track for 12% EPS growth, with expenses expected to rise low-single digits in Q4 seasonally.
• Q3 acquisition of Beam Benefits was not included in 2026 outlook; full-year share buybacks will trend toward the low end of the $1.5B-$1.8B target.
• Q4 dividend set at $0.85 per share (unchanged from prior quarter, up 8% YoY), maintaining a 40% payout ratio target.
• Earnings split for 2026 is expected to be more balanced than 2025 (approx. 47/53 split), driven by strong SMB underwriting.
• 2027 earnings guidance regarding Beam Benefits integration will be provided in the next earnings call; repapering is expected to reduce earnings drag in H1 2027.
• Long-term goals focus on the retirement ecosystem, SMB market, and global asset management to drive organic growth and value creation.

Business Segments and Product Lines:

• Retirement Ecosystem: Recurring deposits up 8% to nearly $13B; roll-ins totaled $1.8B in Q3 ($7.4B trailing 12 months). PRT sales reached $900M.
• SMB & Benefits: Specialty benefits employment grew nearly 2% trailing 12 months; SMB transfer deposits up 21%. Beam Benefits (acquired Sept 1) added 26,000 customers and a digital platform, currently causing a modest $1-$2M earnings drag.
• Global Asset Management: International pension AUM grew 10% to $166B with $400M+ positive net cash flow; sold Chile annuity business to sharpen focus.
• Investment Management: Active equity net cash flow remains challenged (-$11B total for the quarter), offset by positive flows in Private Markets ($800M) and Active ETFs ($500M).
• New Products: Launched Principal Equity Premium Income ETF; expanded Featured Partner Program to include private market strategies.

Market and Competitive Landscape:

• Recognized as a top retirement service provider in the 2026 NAPA Advisors' Choice Awards across participant experience and advisor support.
• SMB market sentiment is cautious regarding the macro economy, yet staffing and benefits remain a priority; employment growth positive within the customer base.
• Industry-wide pressure on US active equity strategies persists; however, ETFs grew 84% YoY to $14B AUM.
• Brazil market volatility post-election is not expected to impact earnings materially (<1% AUM in Brazilian equities).
• South Korea identified as a high-growth opportunity with AI transformation parallels to the US, particularly in infrastructure and real estate investment.
• Private infrastructure debt strategy (floating rate) is gaining traction, winning first large institutional mandate.

Risks and Challenges:

• Continued net outflows in US retail active equity strategies creating revenue headwinds for the investment management segment.
• Beam Benefits integration poses short-term earnings drag; repapering risks and execution timelines are key monitoring areas.
• Claims volatility in group disability insurance affecting loss ratios, though trailing 12-month trends remain healthy.
• Macroeconomic uncertainty affecting SMB sentiment, though diversification across 200,000 employers mitigates concentration risk.
• Actuarial assumption review (AAR) impacts are now reported separately below the operating earnings line to improve transparency.

Management Commentary and Tone:

• Tone is confident and focused, emphasizing discipline in expense management, capital deployment, and strategic execution despite market volatility.
• CEO Deanna Stravo highlighted 25 years as a public company and the company's evolution into a diversified ecosystem player.
• Management expresses strong conviction in the long-term growth of private markets, international pension, and the SMB sector.
• CFO Joel Pitts emphasized capital strength, noting the ability to fund unanticipated M&A (Beam) while maintaining buyback targets and capital ratios.
• Management remains disciplined on M&A, viewing it as an opportunistic accelerator rather than a primary growth engine.

Analyst Questions and Answers:

• Assumption Review: Moved below the line for 2026 to better reflect operational performance, consistent with historical incentive comp definitions.
• Brazil Exposure: Minimal equity exposure (<1% AUM); business performance driven by high interest rates, making equity market volatility immaterial.
• Investment Management Revenue: Fee rates pressured by net cash outflows in active equity, but diversified revenue streams (transaction fees, custom mandates) support total revenue growth.
• Beam Benefits Impact: Estimated $1-$2M earnings drag in Q3; integration and repapering expected to eliminate losses by 2027.
• Private Markets & AI: Strategy focuses on "bricks" (infrastructure/real estate) rather than "pick and shovels" (tech stocks), leveraging floating-rate debt for infrastructure.
• Chile Transaction: Sale proceeds largely offset Beam acquisition costs; Chile was a closed, low-growth block ($30M annual earnings), while Beam offers significant growth potential.
• Expense Seasonality: Q4 expenses expected to increase low-single digits, maintaining margin expansion goals.
• SMB Strategy: Willing to stretch into mid-market but prioritizing the underserved small business segment to avoid saturated, highly customized enterprise markets.

Other Key Points:

• Completed sale of Chile annuity business and acquisition of Beam Benefits on the same day (September 1).
• Partnership with ASB Capital in the Middle East to launch a multi-asset fund.
• Broadridge named Principal a top-five provider for international fund distribution in Latin America.
• Actuarial assumption review impact is now excluded from non-GAAP operating earnings and reported as a reconciling item.
• Managed accounts and financial planning capabilities are being expanded to capture more assets from the retirement ecosystem.