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

Explicit Guidance:

• 2026 EPS Growth: Full-year adjusted non-GAAP EPS growth target of 9%–12% (actual YTD 12% as of Q3); currently on track for the high end of the range.
• 2026 ROE: Target range of 15%–17% (Q3 ex-variance 16.6%); expects full-year to come in at or above the high end.
• 2026 Capital Deployment: Target of $1.5B–$1.8B; expects to deliver on target despite unanticipated Beam acquisition.
• Dividend: $0.85 per share for Q4 2026 (unchanged from Q3, +8% YoY), consistent with a 40% payout ratio commitment.
• Share Buybacks: Expect full-year buybacks to land at the low end of the target range due to the unanticipated $400M+ cost of the Beam acquisition; Q4 buybacks specifically will be reduced to fund this acquisition while maintaining the annual target.
• 2027 Earnings Impact (Beam): Beam acquisition currently a modest earnings drag ($1M–$2M in Q3); repapering to begin Jan 1, 2027, to eliminate losses; significant earnings improvement expected in H1 2027, with full-year 2027 guidance to be provided at the next earnings call.
• Expense Seasonality: Q4 expenses expected to rise low single digits vs. Q3 average (historical seasonality), no material acceleration of investments anticipated.

Business-Segment Outlook:

• Retirement Ecosystem: Recurring deposits expected to continue growing; goal to increase utilization of managed accounts and financial planning services through 2027; roll-in momentum ($1.8B Q3, $7.4B T12) to persist.
• Small & Mid-Sized Business (SMB): "Beam" integration expected to drive growth; focus on "less penetrated" market space rather than moving significantly upmarket to the saturated mid-market.
• Specialty Benefits: Specialty benefits sales growth (10% Q3) to continue; loss ratio (59%) below target range (60–64%); group disability loss ratio expected to gradually normalize toward historical levels over the next 12 months; dental results expected to maintain 6th consecutive quarter of improvement.
• Investment Management: Revenue decline (-2% Q3) expected to reverse as active ETFs ($500M positive flows Q3) and private markets ($800M positive flows Q3) continue to offset active equity outflows; fee rates under pressure from active equity but supported by non-traditional fees (transaction/borrower fees) and custom mandates.
• International Pension: Continued AUM growth (10% YoY) and positive net cash flow across all locations; focus on Latin America (Chile annuity business sold, shifting focus to core pension/asset management).
• Life: Margin expansion expected to continue driven by improved mortality experience (lower frequency/severity); pre-tax operating earnings target to exceed the top end of the targeted range.

Market and Competitive Outlook:

• Active Equity Flows: Industry-wide headwinds in U.S. retail active equity expected to persist in the near term; bias against these products in wealth and retail segments remains a structural challenge.
• Private Markets & Infrastructure: Strong demand for infrastructure debt and floating-rate strategies; winning first large institutional mandate in this organic business; expected to benefit from the global shift from cloud to inference and AI-driven infrastructure build-out.
• ETFs: Active ETF business growing at 84% YoY with $14B AUM; expected to continue generating positive net cash flows and premium fee rates.
• Global Distribution: Expansion of capabilities in the Middle East (partnership with ASB Capital) and Latin America (Broadridge recognition); international diversification expected to drive long-term AUM growth.
• SMB Sentiment: SMBs increasingly cautious regarding the macroeconomic environment (per Sept/Oct Wellbeing Index), yet staffing and benefits remain top priorities; positive employment growth in customer base (+2% over T12) expected to continue.

Macro / Industry Outlook:

• Brazil: Confidence in long-term growth despite recent election volatility; low sensitivity to Brazilian equities (<1% of AUM) due to high interest rate environment; business focused on asset-based fees driven by interest rates rather than equity market performance.
• Interest Rates & Inflation: Anticipates a potential long decade of rising rates/inflation (basis for floating-rate infrastructure strategy); expects market volatility to persist but views Brazil's rate environment as favorable for growth.
• Tariffs/Geopolitics: References to potential tariff impacts from April 2025 as a reference point for SMB sentiment caution; no new specific tariff guidance provided.
• AI Ecosystem: Direct exposure to data centers/infrastructure remains "low single digits" in GA portfolio; strategy focuses on "bricks and mortar" (real estate infrastructure) rather than direct exposure to chips/GPUs; views AI as a multiplier for infrastructure demand.

Strategic Initiatives:

• Beam Benefits Acquisition: Closed Sept 1, 2026; adds 26,000+ SMB customers and digital cloud-native platform; integration and repapering to run throughout 2027.
• Chile Annuity Sale: Closed Sept 1, 2026; proceeds largely offset Beam acquisition cost; exits closed annuity block to sharpen focus on core capabilities.
• Hong Kong Business: Transition of Hong Kong business to asset management completed to optimize portfolio.
• Featured Partner Program: Expanded to include private market strategies to offer holistic retirement solutions.
• 25-Year Anniversary: Celebrated IPO anniversary; reaffirmed commitment to evolving business model for global competitiveness.

Risks and Headwinds to Outlook:

• Active Equity Flows: Continued net outflows in U.S. active equity strategies pose near-term revenue pressure; industry-wide bias against these products.
• Beam Integration: Acquisition currently a modest earnings drag; repapering timeline risk if policy anniversaries delay value realization.
• Underwriting Volatility: Group disability loss ratio subject to quarterly volatility; individual disability facing higher loss ratios due to claims volatility.
• Macro Uncertainty: SMB customer caution driven by broader economic uncertainty, inflation, and potential fiscal/interest rate shifts (specifically noted in Brazil context).
• Variable Investment Income: Significant variances in variable investment income and NCAHE performance caused a ~$59M after-tax impact in Q3; future outcomes remain subject to market performance.
• Actuarial Assumptions: Annual actuarial assumption review (AAR) impacts are now reported separately below the line for operating earnings; one-time nature of reviews remains a source of volatility in net income.

Management Tone on the Future:

• Confidence Level: High confidence in delivering full-year 2026 financial targets (EPS, ROE, capital deployment) despite unanticipated M&A and active equity headwinds.
• Strategic Clarity: Strong emphasis on "organic growth" as the primary path, with M&A acting as an "opportunistic accelerator"; disciplined approach to capital deployment and M&A.
• Resilience: Management expresses comfort with underlying fundamentals, capital position ($1.5B+ excess capital), and ability to navigate market cycles (e.g., Brazil, AI infrastructure).
• Forward-Looking Focus: Shift in focus toward private markets, ETFs, and international pension as structural growth drivers; "green shoots" in retirement ecosystem engagement cited as early signs of long-term success.

Miscellaneous:

• Actuarial Assumption Review (AAR): Effective 2026, AAR impacts are excluded from Non-GAAP Operating Earnings definition and reported as a reconciling item to ensure transparency; previously removed from incentive comp metrics.
• Free Capital Flow Conversion: Trailing 12-month conversion at 77% (within 75%–85% target range); seasonality and inorganic transaction timing (Beam vs. Chile) influenced Q3 figure.
• Korea Market: No comment on Samsung stake rumors; view of Korea as a high-growth market driven by AI transformation and similar dynamics to U.S. (insurance/bank capital control); opportunity exists in retirement system evolution.