PRINCIPAL FINANCIAL GROUP INC Q3 FY2026 earnings call

Strategic Growth Priorities:

• Retirement Ecosystem: Recurring deposits increased 8% year-over-year. Participant contributions and average deferrals per participant both rose by 4%. Roll-ins totaled $1.8 billion in Q3 ($7.4 billion trailing twelve months). DCIO sales were $1.5 billion and PRT sales were $900 million.
• Small and Mid-Sized Businesses (SMB): SMB transfer deposits increased 21% and recurring deposits increased 7% year-over-year. Specialty benefits employment grew nearly 2% over the trailing 12 months. Sales grew 10% from the prior year quarter.
• Global Asset Management: Private markets generated $800 million of positive net cash flow in Q3. Active ETFs generated positive $500 million. International pension AUM increased 10% year-over-year to $166 billion, generating over $400 million in positive net cash flow.

Operational Highlights:

• Acquisition of BEAM Benefits: Completed on September 1st, adding more than 26,000 small business customers. The acquisition was not contemplated in the 2026 outlook.
• Sale of Chile Annuity Business: Completed on September 1st to sharpen focus on core pension and asset management capabilities.
• Capital Generation: Return on Equity (ROE) remained above 16%. Trailing 12-month free capital flow conversion was 77%. Year-to-date return of capital to shareholders exceeded $1.2 billion.
• Underwriting Performance: Dental results marked their sixth consecutive quarter of year-over-year improvement. Overall specialty benefits loss ratio was 59%, performing better than the long-term targeted range of 60-64%.

RIS: Pre-tax operating earnings increased 5% year-over-year, driven by 4% net revenue growth and expense discipline. Operating margin was 42%, above the high end of the targeted range. Revenue contribution is not explicitly broken out as a percentage of total, but it is a core pillar.

Principal Asset Management (Investment Management): Excluding divestitures, revenue increased 1% year-over-year, though pre-tax operating earnings declined 3% for the quarter due to net cash flow impacts on management fees. International Pension, a key component, saw adjusted pre-tax operating earnings increase 11% year-over-year with an expanded operating margin of 46-50%.

Benefits and Protection: Generated pre-tax operating earnings of $183 million, a 3% year-over-year increase. Specialty Benefits premiums and fees increased 6% year-over-year. Life adjusted pre-tax operating earnings increased 29% to $39 million.

EPS Growth: Maintaining full-year adjusted non-GAAP EPS growth target of 9-12%, with year-to-date performance at the high end (12%).

Capital Deployment: Full-year share buyback target remains $1.5 to $1.8 billion. However, due to the unplanned BEAM acquisition, full-year share buybacks are expected to be towards the low end of this range.

Expense Management: Expect low single-digit expense increases in Q4 relative to the average of the previous three quarters, consistent with historical seasonality.

Earnings Mix: The split between first-half and second-half earnings is expected to be more balanced in 2026 compared to 2025, largely due to strong first-half underwriting in Specialty Benefits.

Investment Flows: Net cash flow for the total company was negative $11 billion in Q3, largely driven by select active equity strategies. Industry-wide pressure on active equity flows is expected to continue in the near term.

Integration Risks: The BEAM Benefits block is currently operating at a modest loss. Integration plans are on track, but repapering to drive value will begin in early 2027, creating near-term earnings drag.

Claims Volatility: Individual disability experienced a higher loss ratio due to claims volatility, partially offsetting strong underwriting results in dental and group life.

Macroeconomic Uncertainty: Small and mid-sized businesses are increasingly cautious about the economic environment, though staffing and benefits remain priorities. Political volatility in Brazil (election results) caused market pressure, though financial impact is limited due to low equity exposure.

Q: Wes Carmichael asked about the decision to move actuarial assumption reviews below the line and sensitivity of International Pension to Brazil's political/economic shifts. / A: CFO Joel Pitz explained that removing actuarial assumption reviews from Non-GAAP operating earnings provides a more meaningful presentation of underlying operational performance, aligning with how incentive compensation is measured. Regarding Brazil, CEO Deanna Strable and CFO Pitz noted that while market volatility exists, less than 1% of International Pension AUM is in Brazilian equities; the business is primarily driven by interest rates, making it resilient to equity market swings post-election.

Q: Joel Hurwitz requested details on fee rate declines in Investment Management and the earnings impact of the BEAM acquisition. / A: Kamal Bhatia (President, Principal Asset Management) stated that fee rate dynamics are complex because traditional management fees may decline, but non-traditional fees (e.g., borrower transaction fees in real estate) and custom mandates are growing, requiring investors to look at total revenue rather than just management fees. Amy Friedrich (President, Benefits and Protection) clarified that BEAM caused a minor earnings headwind of $1-2 million in Q3; repapering policies to the company’s paper and dental network will begin in January 2027, eliminating losses gradually throughout 2027.

Q: Jack Matten inquired about ongoing headwinds in U.S. active equity net flows and drivers behind the 77% free capital conversion rate. / A: Kamal Bhatia confirmed that U.S. retail active equity strategies face continued industry-wide headwinds, though private markets and ETFs are generating positive flows. The pipeline has grown by $700 million. Joel Pitz attributed the 77% free capital conversion to significant capital deployment activities in Q3, including $900 million in PRT sales, $500 million in MTN issuance, and $430 million returned to shareholders, all while funding the unplanned BEAM acquisition without compromising the capital position.

Q: Wilma Burdis asked about the higher loss ratio in group disability and AI demand in private fixed income. / A: Amy Friedrich noted that while group disability showed quarterly volatility, the 12-month trend aligns with historical performance, and the overall specialty benefits loss ratio of 59% remains attractive. Suneet Kamath (Jefferies) highlighted that private infrastructure debt, built around floating-rate strategies, is benefiting from current market conditions and recent institutional mandates, providing a tailwind to private markets.

Q: Ryan Krueger questioned whether the company would broaden its SMB focus beyond small businesses and Alex Scott asked about hyperscaler/AI exposure in the general account. / A: Amy Friedrich reaffirmed that the company’s sweet spot remains the underpenetrated small business market, avoiding the saturated mid-market where competitors have deeper customization capabilities. Joel Pitz stated that direct exposure to data centers/hyperscalers is very low single digits, diversified across geographies and structures, and excludes direct hardware/GPU risk, ensuring manageable risk profiles.