Principal Financial Group, Inc. (PFG) Earnings

Management highlights

### Overall Financial Performance - Adjusted non-GAAP EPS increased 17% year-over-year, and 15% year-to-date, both above the high end of the company's target range. Enterprise earnings grew 13%, with 6% net revenue growth and 200 basis points of total company margin expansion. Excluding significant variances, non-GAAP operating earnings were $529 million (up 13% YoY), with EPS of $2.42 (up 17% YoY), and non-GAAP operating ROE hit 16.4% (up 120 basis points YoY), above the midpoint of the 15-17% target range. - Total managed AUM ended the quarter at $808 billion, up 5% from Q1 2026 and 7% year-over-year. - The company returned $427 million to shareholders in Q2 ($250 million in share repurchases, $177 million in dividends), bringing year-to-date capital return to $800 million, on track to hit the full-year target of $1.5 to $1.8 billion. The common stock dividend was raised 8% for the 13th consecutive quarter, maintaining the 40% target payout ratio. - The company ended Q2 with over $1.6 billion of excess and available capital, with a risk-based capital ratio of ~400%, above the 375% target. ### Strategic & Operational Progress - **Retirement Ecosystem**: Transfer deposits increased 30% year-over-year, recurring deposits rose 6%, and $1.7 billion in roll-ins were recorded in the quarter (up ~20% YoY). DCIO sales hit $2 billion in the quarter, and PRT sales reached $500 million. New lifetime income builder CITs were launched to expand retirement income capabilities. - **Small and Mid-sized Business (SMB) Segment**: Retirement transfer deposits grew 16% over the trailing 12 months, with 6% recurring deposit growth. Specialty benefit sales increased 11% year-over-year, and average products per customer grew from 2.9 three years ago to nearly 3.2 currently. - **Global Asset Management**: Total company net outflows were $11 billion in the quarter, concentrated in a small number of U.S. active equity strategies facing unusual market headwinds. Growth sales increased 2% year-over-year (13% trailing 12 months). Private markets AUM rose 10% year-over-year, and the active ETF business generated $500 million in net inflows in the quarter. A new fixed income ETF suite was launched during the quarter. ### Strategic Portfolio Updates - The company announced an agreement to acquire Beam Benefits, a digital-first SMB-focused employee benefits company with 25,000 employer customers and $175 million in 2025 premium. The acquisition adds digital distribution capabilities and expands SMB reach, and is fully aligned with existing capital plans with no change to 2026 targets. - The transition of the Hong Kong pension business to BCT was completed, sharpening the company's focus on retirement investment solutions in the region. The pending sale of the Chile annuity business remains on track for closing in the second half of 2026.

Guidance

- Full-year 2026 performance fees for investment management are expected to remain in line with 2025 levels. - Benefits and Protection full-year specialty benefit loss ratio is now expected to come in below the low end of the prior 60% to 64% guidance range, driven by better-than-expected underwriting performance across all product lines. Dental loss ratios are expected to continue improving in the second half of 2026 due to past pricing actions and network optimization efforts. - Premium and fee growth for Benefits and Protection is expected to accelerate in the second half of 2026, with the Beam acquisition expected to add an uplift after closing. - The full-year 2026 capital deployment target of $1.5 to $1.8 billion remains unchanged, and there are no changes to 2026 earnings, free capital flow, or ROE guidance following the Beam acquisition announcement. - VII (value-added investment income) improvement in 2026 relative to 2025 remains on track, with performance expected to continue through the second half of the year after meeting expectations in Q2 with no real estate transaction activity in the first half. - Management maintains the 15-17% target range for non-GAAP operating ROE.

Segment performance

1. Retirement & Income Solutions (RIS): Pre-tax operating earnings increased 8% year-over-year, supported by 5% net revenue growth. Operating margin hit 41%, expanding 120 basis points year-over-year, slightly above the high end of the target range. 2. Principal Asset Management: Overall pre-tax operating earnings grew 6% on AUM growth and margin expansion. Within this: - Investment Management: Pre-tax operating earnings increased 4% year-over-year; operating margin improved 110 basis points, offsetting $7 million in elevated severance costs in the quarter. - International Pension: Pre-tax operating earnings increased 11% year-over-year, driven by favorable foreign currency impacts and business growth. Operating margin improved 50 basis points to over 47%, within the target range. AUM reached a record $169 billion, up 18% year-over-year, contributing 21% of total company AUM. 3. Benefits and Protection: Pre-tax operating earnings hit $191 million, a 29% year-over-year increase: - Specialty Benefits: Pre-tax operating earnings hit a record $162 million, up 29% year-over-year, driven by favorable underwriting results and business growth. The loss ratio improved 280 basis points to 57.4% year-over-year, and operating margin hit 19%, up 360 basis points, above the target range. Premium and fees increased 4% year-over-year. - Life Insurance: Pre-tax operating earnings hit $29 million, up 29% year-over-year, driven by improved mortality experience. Operating margin hit 13%, up 350 basis points year-over-year, within the target range. 4. Corporate Segment: Losses were elevated due to ongoing strategic business investment, and full-year losses are expected to land at the high end of the targeted range.

Risks & headwinds

- U.S. active equity strategies focused on high-quality, valuation-aware stock picking are facing acute, unusual market headwinds that have driven concentrated net outflows; the persistence of this abnormal market environment is uncertain, and a reversal of the current factor trend may take longer than historical cycles. - Elevated net outflows from U.S. active equity strategies and volatile public markets have created mild downward pressure on investment management fee rates, though management expects fee rate stabilization as growth in higher-fee private markets and international solutions continues. - Institutional investor engagement and new mandate activity were negatively impacted in Q2 by volatility related to the Middle East conflict, creating short-term headwinds for investment management sales. - The AI data center real estate market is becoming increasingly nuanced, with challenges around property acquisition, power access, and regulatory approval creating execution risk for investments in the sector. - Dental benefits face persistent cost inflation pressure that could impact margins if network optimization and pricing actions do not deliver expected improvements. - Market speculation about larger-scale M&A creates uncertainty around future capital allocation, though management maintains a high bar for any transaction.

Analyst Q&A

• Q: What is the strategic rationale for the Beam Benefits acquisition, and what impact will it have on 2027 capital deployment and guidance? /

  A: Beam Benefits adds 25,000 small business customers, $175 million in annual premium, and efficient digital underwriting/quoting technology that fills a gap in the company's micro-SMB capabilities. These capabilities can be extended to Principal's existing SMB block to drive growth and efficiency. The acquisition does not require changes to any existing earnings, free capital flow, or ROE guidance; strong current excess capital, expected second half cash flow, and proceeds from the upcoming Chile annuity sale leave the capital position fully able to support the transaction. (309 characters)

• Q: The quarter saw $11 billion in concentrated net outflows from U.S. active equity strategies. Will these headwinds continue through the second half of 2026? /

  A: The outflows are concentrated in just a couple U.S. active equity strategies that make up slightly more than 5% of total firm AUM, and are driven by an abnormal market that has not rewarded quality or valuation-focused stock picking. Q2 growth sales were also modestly impacted by Middle East conflict-related institutional investor delays. While near-term net flows will likely remain challenged, the committed new mandate pipeline has grown to $10 billion (up from Q1), demonstrating the strength of the firm's broader diversified capabilities, and management is cautiously optimistic for a gradual improvement. (472 characters)

• Q: M&A market rumors suggest Principal may pursue larger scale deals. What is the company's approach to future M&A? /

  A: The company does not comment on market rumors, and its M&A philosophy has not changed: all transactions require strong strategic, financial, and cultural fit, with M&A viewed as an opportunistic accelerator of growth rather than a requirement. Organic growth remains the primary path to hitting company targets. Principal is not interested in deals done solely for scale that require large acquisition premiums, and will only pursue transactions that add new strategic capabilities that can be scaled across the entire enterprise, like the Beam Benefits acquisition. (399 characters)

• Q: The current unusual market has heavily favored low-quality over high-quality U.S. stocks. If the quality factor rebounds, how quickly would we see an inflow reversal for your active equity strategies? /

  A: The gap between low-quality and high-quality stock returns is far outside historical norms (low-quality returned 70% vs 4% for high-quality in the year ending 6/30) and will almost certainly normalize over time. Early July performance has already been strong for the firm's quality-focused strategies as factors began to reverse. However, inflows follow performance with a lag, and niche niche ETFs that exploit current momentum trends have made this abnormal environment persist longer than historical cycles. It is not possible to predict the timing of a full inflow reversal, though some long-term clients have continued adding to these strategies through the dislocation. (448 characters)