Principal Financial Group's Q3 2025: Contradictions Emerge on Expense Management, PRT Sales, and Buyback Strategies

Date of Call: October 28, 2025

Financials Results

• EPS: $2.10 per share (non-GAAP operating EPS), up 19% year-over-year; YTD adjusted EPS $2.32, up 13% YOY
• Gross Margin: Enterprise margin expanded 180 basis points year-over-year
• Operating Margin: Enterprise operating margin expansion of 180 basis points year-over-year (RIS margin 42%, +130 bps YOY; Specialty Benefits margin 17%, +330 bps YOY)

Guidance:

• Company expects to deliver on full-year enterprise financial targets.
• Full-year capital return target reiterated at $1.4B–$1.7B, including $700M–$1.0B of share repurchases.
• Elevated share buyback activity expected in Q4 (outsized vs Q3).
• Quarterly dividend raised to $0.79 (up $0.01), targeting ~40% payout ratio.
• Management expects continued margin expansion while continuing to invest in the business.

Business Commentary:

• Strong Financial Performance:
• Principal Financial Group reported non-GAAP operating earnings of $474 million or $2.10 per share, a 19% increase year-over-year.

• The growth was driven by strong performance across the enterprise, including a 4% increase in top-line growth towards the upper end of their target range and a 14% growth in adjusted earnings per share above their target.

• Retirement Ecosystem Momentum:

• Principal saw strong momentum in their retirement solutions, with Workplace Savings and Retirement Solutions transfer deposits growing 13% year-over-year.

• This growth was attributed to an increase in the number of participants and average deferrals, reflecting strong distribution reach and comprehensive capabilities across recordkeeping and asset management.

• Global Asset Management Expansion:

• The company reported strong earnings in investment management, with management fees increasing 5% year-over-year, driven by higher AUM and stable fee rates.

• This expansion was aided by positive cash flows in private markets, strong demand across real estate, and increased interest in global equity strategies.

• Business Segments Growth:

• Retirement and Income Solutions (RIS) and Principal Asset Management delivered strong earnings on margin improvements and revenue growth.
• Growth was supported by strategic investments in modernizing record-keeping capabilities and expanding capabilities to serve individual customers and retirement plans, despite macroeconomic challenges.

Sentiment Analysis:

Overall Tone: Positive

• Management called Q3 a "strong third quarter," cited 13% adjusted EPS growth YOY, 4% enterprise net revenue growth, 180 bps margin expansion, $1.6B excess capital, and $400M returned to shareholders in the quarter; repeated confidence in delivering full‑year targets.

Q&A:

• Question from Francis Matten (BMO Capital Markets Equity Research): Do you expect continued margin expansion similar to this quarter and where are you accelerating investments?
  Response: Management expects margins to continue expanding while investing—expenses will grow slower than revenue—with investments focused on recordkeeping modernization, front-end acquisition systems, data exchange, private markets and distribution expansion.

• Question from Ryan Krueger (Keefe, Bruyette, & Woods, Inc., Research Division): Thoughts on Investment Management flows, investor appetite, pipeline and are performance fees expected to remain modest in Q4?
  Response: Asset management flows turned positive ($800M total NCF; $1.8B non‑affiliated), driven by private markets and broad distribution; performance fees should remain modest in Q4 (near 2024 levels) though transaction/borrower fees have ticked up.

• Question from John Barnidge (Piper Sandler & Co., Research Division): Is the Barings partnership fee‑enhancing vs Principal AM blended fee rate and any views on 401(k) consolidation implications?
  Response: The Barings partnership augments private‑markets origination while Principal remains portfolio manager—complementary to in‑house capabilities—and management expects industry consolidation to continue, benefiting scale players like Principal while prioritizing organic growth.

• Question from Jamminder Bhullar (JPMorgan Chase & Co, Research Division): Is this quarter's positive asset management flows the start of a trend and how does weaker recent performance factor into flows/pipeline?
  Response: Management sees high‑quality, longer‑term flows (especially private markets) and expects H2 flows to be stronger; performance weakness is concentrated in certain multi‑asset/active target‑date products and is being addressed through added talent and risk management.

• Question from Wilma Jackson Burdis (Raymond James & Associates, Inc., Research Division): How are you growing spread‑based balances in RIS and which products are most favorable? Also, what drove Specialty Benefits' favorable loss ratios?
  Response: Spread growth is coming from guaranteed annuity offerings (WSRSGA), disciplined PRT in targeted segments and RILA annuities; Specialty Benefits' improved loss ratios reflect better underwriting across group disability (lower LTD incidents), group life (lower frequency) and dental, supporting higher profitability.

• Question from Joel Hurwitz (Dowling & Partners Securities, LLC): What would drive you toward the higher end of the $1.4B–$1.7B capital return range and any early outlook on 1/1 Specialty Benefits renewals/new business?
  Response: Management plans elevated Q4 buybacks and feels well positioned to hit the capital return target while remaining disciplined; Specialty Benefits sees more attractive, profitable renewal and new‑business opportunities and expects improving volume into 2026 as tech investments ramp.

• Question from Suneet Kamath (Jefferies LLC, Research Division): Views on private credit performance, competition and credit quality; and metrics on the wealth/advisor program penetration and impact on retention?
  Response: Private credit exposure is modest, with disciplined underwriting, low leverage and strong selection—credit losses remain below long‑term expectations; the advisor program is early but shows strong adoption (200 salaried advisors, ~90% sponsor adoption), double‑digit client growth and ~20% increase in roll‑ins.

• Question from Thomas Gallagher (Evercore ISI Institutional Equities, Research Division): Is CRE and CM loan exposure at a better inflection point, and has your M&A philosophy changed for large DC assets?
  Response: CRE stability and transaction activity are improving and Principal is well‑positioned (institutional book, limited redemption risk); M&A philosophy remains disciplined—organic growth prioritized, with selective, high‑bar inorganic opportunities considered only if strategic, financial and cultural fit.

• Question from Wesley Carmichael (Autonomous Research US LP): What drove the life actuarial assumption/model refinements (lapse/mortality) and is that process complete; and any color on VII/real estate transaction income for Q4?
  Response: Assumption updates were routine GAAP‑only model refinements and experience updates (two‑thirds model refinements, one‑third experience), noncash and immaterial to capital/free cash flow; VII performed well in Q3 with a below‑line transaction gain and management expects continued transaction activity in Q4.

Contradiction Point 1

Expense Management and Revenue Growth

It involves conflicting statements regarding the alignment of expenses with revenue growth and the company's ability to manage expenses in line with revenue projections, which are critical for financial planning and investor expectations.

What are your expectations for margin expansion and growth initiative investments? - Francis Matten(BMO Capital Markets)

2025Q3: Joel Pitz: Expense growth will be slower than revenue growth, ensuring businesses like fee-based ones are managed responsibly. - Joel Pitz(CFO)

Can you discuss your EPS growth outlook given the current macroeconomic environment and confirm if the 9% to 12% EPS growth target remains achievable amid recent market volatility? - Joel Hurwitz(Dowling & Partners)

2025Q1: Joel Pitz: We continue to leverage our scale in managing overhead costs, which helped drive a 5 basis point improvement in our adjusted expense ratio. We remain disciplined on managing our business expenses to align closely with revenue growth. - Joel Pitz(CFO)

Contradiction Point 2

PRT Market Condition and Sales Outlook

It involves differing views on the market competitiveness and sales outlook for PRT, impacting investor expectations for this key revenue stream.

How will the Barings strategic partnership affect fee rates? - John Barnidge (Piper Sandler & Co.)

2025Q3: Christopher Littlefield: Optimistic about PRT performance, but market competitiveness and targeted returns will impact sales. - Christopher Littlefield(CLO)

Is the PRT market becoming more competitive? Are fewer pension partners entering the market? - John Barnidge (Piper Sandler)

2025Q2: Christopher Littlefield: Optimistic about PRT performance, but market competitiveness and targeted returns will impact sales. - Christopher Littlefield(CLO)

Contradiction Point 3

Investment Management Flows and Performance

It addresses inconsistencies in the performance and flow expectations for the Investment Management segment, which is crucial for understanding the company's growth trajectory.

Can you provide an update on Investment Management flows, shifts in investor sentiment, and the current pipeline? - Ryan Krueger (KBW)

2025Q3: Kamal Bhatia: Strong momentum in investment management with long-term mandate inflows. Positive net cash flow in multiple channels, including U.S. retail and local managed products. - Kamal Bhatia(CIO)

Can you elaborate on Investment Management withdrawals and how much room is there for improvement? - Ryan Krueger (KBW)

2025Q2: Kamal Bhatia: We are actively managing our portfolio in response to market conditions. We've made strategic adjustments to provide a more stable performance for our clients, including rebalancing away from strong performers and reallocating to nontraditional assets. - Kamal Bhatia(CIO)

Contradiction Point 4

Private Credit Portfolio Performance

It involves differing perspectives on the performance and risk management of the private credit portfolio, which is crucial for understanding the company's risk appetite and investment strategy.

How is the private credit portfolio performing, and what market dynamics are impacting it? - Suneet Kamath(Jefferies)

2025Q3: Kamal Bhatia: Minimal exposure to recent credit issues. Focus on underwriting and quality selects. Cautious about competition in rapid asset growth and leverage. - Kamal Bhatia

Can you discuss client behavior in your asset management business during elevated market volatility and your expectations for future activity? - Ryan Krueger(KBW)

2025Q1: Kamal Bhatia: Our private credit portfolio has performed well year-to-date. Credit defaults within the portfolio were in line with expectations for the period. We ended the quarter with just over $24 billion in the portfolio. The book is performing well, with a very stable credit underwriting process. - Kamal Bhatia

Contradiction Point 5

Capital Deployment and Share Buybacks

It involves changes in the company's approach to capital deployment and share buybacks, which affect shareholder value and investor sentiment.

What is the outlook for capital deployment and potential for increased buybacks? - Joel Hurwitz (Dowling & Partners Securities, LLC)

2025Q3: Capital in a strong position, with $1.6 billion excess. Planned elevated share buybacks in Q4, aligning with capital strength and strategic deployment. - Joel Pitz(Interim CFO)

Can you clarify the outlook for capital returns and whether it relates to further excess capital drawdown or improved free cash flow conversion? - Alex Scott (Barclays)

2024Q4: Starting from a strong capital position. Joel Pitz: Outsized share buybacks, solid free cash flow conversion expected, with a mix of capital deployment to meet financial targets. - Deanna Strable(CEO) and Joel Pitz(Interim CFO)