Principal Financial Group Stock

Good morning, and welcome to the Principal Financial Group Second Quarter 2026 Financial Results Conference Call. [Operator Instructions]

I would now like to turn the conference call over to Humphrey Lee, Vice President of Investor Relations and FP&A.

Thank you, and good morning. Welcome to Principal Financial Group's Second Quarter 2026 Earnings Conference Call. As always, materials related to today's call are available on our website at investors.principal.com. Following a reading of the safe harbor provision, CEO, Deanna Strable; and CFO, Joel Pitz, will deliver prepared remarks. We will then open the call for questions. Members of senior management are also available for Q&A.

Some of the comments made during this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. The company does not revise or update them to reflect new information, subsequent events or changes in strategy. Risks and uncertainties that could cause actual results to differ materially from those expressed or implied are discussed in the company's most recent annual report on Form 10-K filed by the company with the U.S. Securities and Exchange Commission.

Additionally, some of the comments made during this conference call may refer to non-GAAP financial measures. Reconciliations of the non-GAAP financial measures to the most directly comparable U.S. GAAP financial measures may be found in our earnings release, financial supplement and slide presentation.

Deanna?

Thanks, Humphrey, and good morning to everyone on the call. This morning, I'll cover our second quarter performance, the progress we're making against our strategic priorities and updates on our business portfolio. Joel will then provide additional details on our financial results and capital position.

Turning to Slide 2. We delivered another strong quarter, demonstrating the earnings power of our diversified business model and continued execution across the enterprise. Adjusted non-GAAP earnings per share increased 17% year-over-year and 15% on a year-to-date basis, both above the high end of our target range. This was supported by strong enterprise earnings growth of 13% with 6% net revenue growth and 200 basis points of margin expansion. Earnings growth was primarily driven by favorable underwriting results and improved mortality within our Benefits and Protection business, strong RIS fundamentals and positive market conditions for our fee-based businesses. This more than offset the revenue impact from investment management net cash flow.

We are delivering on our capital deployment plans. In the second quarter, we returned nearly $430 million of capital to shareholders including $250 million in share repurchases and nearly $180 million in common stock dividends. This brought our total capital return to shareholders to $800 million through the first half of the year, with $450 million of share repurchases and $350 million of common stock dividends. In addition, we raised our common stock dividend for the 13th consecutive quarter, an 8% increase on both a quarterly and trailing 12-month basis.

Moving to Slide 3. Our strategic priorities continue to drive sustained growth across the enterprise. We strengthened our leadership in retirement, advanced our position in the small and midsized business segment and continue to leverage the scale of our global asset management platform to meet evolving client needs. Within the retirement ecosystem, which includes record keeping, asset management, income solutions and advice, we're seeing strong momentum across the platform. Transfer deposits increased 30% year-over-year, recurring deposits increased 6% and participant engagement remains healthy with growth in both planned participation and average contributions.

Our customers continue to consolidate retirement savings onto our platform, resulting in $1.7 billion of roll-ins during the quarter and more than $7 billion over the trailing 12 months, both up nearly 20%. We are further expanding capabilities across the retirement ecosystem. During the quarter, we broadened our retirement income offering through new lifetime income builder CITs, helping participants move seamlessly from saving for retirement to generating dependable income in retirement. This reflects our focus on delivering solutions that support plan participants across the key stages of their financial lives. Our retirement investment expertise continues to gain traction with third-party platforms reflected in DCIO sales of $2 billion in the quarter and nearly $8 billion over the trailing 12 months. Finally, we had $500 million of PRT sales in the quarter after a slow start to the year for the industry.

For the small and midsized business segment, our differentiated capabilities and deep expertise continue to drive results across retirement and benefits. In retirement, the SMB market remains a key contributor to growth. Transfer deposits grew 16% over the trailing 12 months, reflecting continued strength in client activity and long-term momentum. Recurring deposits increased 6% on both a year-over-year and trailing 12-month basis, demonstrating growth and ongoing contributions from both employers and employees.

In Benefits and Protection, our SMB segment continues to deliver growth and deepen customer relationships. Specialty Benefits sales increased 11% year-over-year, reflecting continued demand for our solutions and strong new business momentum. We are building on that momentum by deepening relationships with existing clients with products per customer increasing steadily in the last several years, moving from 2.9 3 years ago to nearly 3.2 today.

Turning to Global Asset Management. I'd like to briefly address net cash flow before moving to key highlights. We had total company net outflows of approximately $11 billion in the quarter, concentrated in a small number of U.S. active equity strategies, which are experiencing acute headwinds in an unusual market environment despite having extraordinary performance for many years. Notwithstanding recent net cash flow, our investment teams have maintained a disciplined approach and have a track record of successfully navigating periods of market dislocation in the past, supported by steady leadership, and consistent investment processes. I am encouraged by the underlying momentum across the broader asset management platform particularly in areas designed to support long-term client needs, including private markets, international and institutional solutions.

Moving to key highlights. Investment Management gross sales increased 2% year-over-year and 13% on a trailing 12-month basis, supported by client demand for our investment capabilities and the strength of our distribution relationships. Private Markets assets under management increased 10% year-over-year, while International Pension assets under management increased 18%. Our active ETF business continues to see healthy growth, generating $500 million of net inflows in the quarter and $2 billion over the trailing 12 months. During the quarter, we expanded our ETF capabilities with the launch of a new fixed income ETF suite, broadening access to our investment expertise and providing clients with more flexible investment solutions aligned to their evolving portfolio needs.

Looking across these 3 growth drivers, I'm proud of our year-to-date results and our ability to execute. Before I hand it over to Joel, I have a couple of updates related to our business portfolio.

Earlier this month, we announced an agreement to acquire Beam Benefits, a digital-first employee benefits company focused on the SMB market. The company has over 25,000 employer customers and generated $175 million of premium in 2025. This acquisition strengthens our position in the SMB segment by expanding our customer reach and adding digital-first distribution capabilities, a powerful complement to our existing benefits platform. Importantly, the transaction remains aligned with our overall capital framework with no change to our 2026 capital deployment plan or EPS growth targets.

Finally, I'm pleased to share that we have completed the transition of our Hong Kong pension business to BCT. This move strengthens our focus as a top provider of retirement investment solutions to the region.

In closing, we have momentum across the business, supported by disciplined execution and the dedication of our 19,000 employees around the world. We are in a strong position to continue delivering on our financial targets.

Joel?

Thanks, Deanna. Good morning to everyone on the call. This morning, I'll share key highlights of our financial performance for the second quarter as well as details on our capital position.

Starting on Slide 4, non-GAAP operating earnings were $547 million, an increase of 12% year-over-year with earnings per share of $2.50, an increase of 16%. Significant variances, detailed on Slide 12, had a positive after-tax impact of $18 million or $0.08 per share in the second quarter. Excluding these items, non-GAAP operating earnings were $529 million, up 13% year-over-year, while earnings per share of $2.42 increased 17%, above the high end of our target range. Total company margin of 32% expanded 200 basis points on net revenue growth of 6%. This demonstrates the strength of our underlying businesses while continuing to invest in strategic priorities.

Non-GAAP operating ROE, excluding significant variances, was 16.4%, improving 120 basis points year-over-year, above the midpoint of our 15% to 17% targeted range. Net income, excluding exit business, was $535 million, an increase of 24% year-over-year with minimal credit losses.

Turning to capital and liquidity. We ended the quarter in a strong position with over $1.6 billion of excess and available capital. This includes $950 million at the holding company, $300 million in our subsidiaries and $350 million in excess of our targeted 375% risk-based capital ratio, which is approximately 400% at quarter end.

In the second quarter, we returned $427 million to shareholders, including $250 million of share repurchases and $177 million of dividends. This brings year-to-date deployments to $800 million and we remain on track to deliver on our full year capital deployment target of $1.5 billion to $1.8 billion. Last night, we announced an $0.84 per share dividend payable in the third quarter. This is a $0.02 increase from the prior quarter and 8% higher than a year ago, demonstrating an ongoing commitment to our 40% dividend payout ratio. Total company managed AUM ended the quarter at $808 billion, an increase of 5% from first quarter 2026 and 7% from the year ago quarter.

Moving to the businesses. The following excludes significant variances. Turning to RIS. As shown on Slide 5, pretax operating earnings increased 8% year-over-year, supported by 5% net revenue growth and continued expense discipline. Operating margin of 41% expanded 120 basis points compared to the year ago quarter, slightly above the high end of our target range. This reflects our focus on profitable revenue growth, expense management and strong business fundamentals. As Deanna mentioned, fundamentals across the business remain healthy, highlighted by robust transfer deposits and steady recurring deposit growth. These trends speak to the sustained demand for our solutions and the strength of our customer relationships.

Turning to Slide 6. Principal Asset Management delivered earnings growth of 6% on AUM growth and margin expansion. Within Investment Management, pretax operating earnings increased 4% from the prior year quarter. Slightly higher revenue along with expense discipline more than offset elevated severance within the quarter. This resulted in a 110 basis point improvement in operating margin. Performance fees were relatively muted in the quarter due to timing, but we continue to expect full year 2026 performance fees to be in line with 2025.

Moving to International Pension. Pretax operating earnings increased 11% year-over-year, driven by favorable foreign currency impacts and growth in the business. Operating margin improved 50 basis points to over 47%, well within our target range. AUM increased 6% from the prior quarter and 18% year-over-year to a record $169 billion.

Turning to Slide 7. Benefits and Protection generated strong pretax operating earnings of $191 million, a 29% year-over-year increase. This was driven by favorable Specialty Benefits underwriting results and improved Life mortality.

Starting with Specialty Benefits, premium fees increased 4% year-over-year. We continue to expect growth to increase in the second half of the year and the acquisition of Beam Benefits will provide an additional uplift upon close. Record pretax operating earnings of $162 million, up 29% year-over-year reflects more favorable underwriting experience and business growth. The Specialty Benefits loss ratio of 57.4% improved 280 basis points compared to the year ago quarter with better results across all products. This drove improved operating margin of 19%, up 360 basis points year-over-year and above our target range.

In Life Insurance, pretax operating earnings of $29 million increased 29% year-over-year, driven by improved mortality experience. This contributed to a 13% operating margin, up 350 basis points year-over-year within our target range.

Turning to the Corporate segment. Losses were elevated due to continued investment in the business. We expect to come in at the high end of our targeted range for the full year. To recap, we have delivered 15% EPS growth year-to-date demonstrating the strength, resilience and benefits of our diversified portfolio. The strategic actions we are taking this year enable us to focus on higher growth opportunities, the agreement to acquire Beam Benefits, the transition of our Hong Kong business to asset management and the pending sale of our Chile annuity business further optimize our portfolio. We remain well positioned to deliver on our financial targets supported by strong fundamentals, a healthy capital position and continued focus on our strategic priorities.

This concludes our prepared remarks. Operator, please open the call for questions.

[Operator Instructions] The first question comes from Wes Carmichael from Wells Fargo.

First question was just on the Beam Benefits acquisition. Just wondering if we can get maybe a little bit more color on the strategic rationale there. And I know you said you don't expect any impact on 2026 capital deployment, but is there any impact to 2027?

Yes. Thanks, Wes, for the question. I'll have Amy talk about the strategic benefits of Beam Benefits and Joel to talk about how that might impact our plans going forward.

Yes, Wes, thanks for the question. So when I think of Beam Benefits, and again, I'm excited about this, we're not at close yet for this. So my ability to talk specifically about some things is going to be a little bit limited. But regarding strategic rationale, when I think about expanding our reach into small and midsized business segment, I get excited about things that allow us to do that. So Beam Benefits has really interesting technology. They've got some great things they've done with their underwriting and quoting. But what they've also got is a great relationship with 25,000 small business employers and they have 400,000 members across the U.S.

And so when I look at that base, combined with $175 million of premium, I get excited about how that is additive to the whole block. What we know in our block is that we do a bunch of activity in what I would consider kind of that micro or small case. So when I look at their ability to put efficient -- effectiveness and efficiency in that micro end and extend that potentially to the full block, I get excited about the potential that will give us kind of bringing in that full capability. So the scale of business they have, the introduction of more footprint into small and midsized business owners and then that extension of that potential effectiveness into our full block are the strategic rationale pieces that get me excited.

Joel?

And then Wes, as it relates to funding, sitting here in the second quarter with $1.6 billion of excess and available capital, the reality is that our cash flow is typically back-end weighted and we have more capital flow generation in the latter half of the year and we had the proceeds from the Chile annuity sale that's coming in the latter half of the year as expected. We feel very good about our capital position and ability to deploy capital to our strategic objectives like Beam Benefits. As we mentioned in the release earlier this quarter as well, we don't expect any changes to our outlook guidance as it relates to earnings, free capital flow or ROE as well. So everything is very much intact.

Wes, do you have a follow-up?

Just the second one was on VII. It was a pretty good result in the quarter. It's roughly in line with long-term expectations. And it's the first quarter in a while where I think that's kind of trended in line. So any color on expectations for the third quarter going forward for VII?

I'll have Joel take that one.

Yes, Wes, very pleased with the results for the quarter, as you said, in line with expectations. And importantly, that was as a result of no real estate transactions in the quarter. So for the first half of the year, you know how heavily weighted we are within the real estate within our alternatives portfolio, which is very unique relative to what you see from others as we didn't have any real estate transaction activity in the first half of the year. So as we indicated an outlook, we expected there to be improvement in '26 versus '25 just as we had the year prior and fully expect that to continue not only for second quarter '26 but also for the remaining quarters of '26 as well.

The next question comes from Ryan Krueger from KBW.

I guess I'll shift to Investment Management. You talked about the drivers of the outflows in the quarter, but I was hoping to get a little bit more color on what you're seeing and thinking for the back half of the year? And if you believe the elevated equity outflows are more isolated to the quarter or if there could be some ongoing headwinds there?

Yes. Thanks, Ryan, for the question. I will have Kamal address that.

Sure. So since you asked about the outlook, let me address that directly because it was a meaningful number this quarter. The first most important point is that the impact is concentrated with a couple of U.S. active equity strategies. Those strategies make up slightly more than 5% of our firm AUM. So it's not broad-based across Global Asset Management.

A few additional parts to help you further with your question. This cohort of strategy is deeply affected by the acute and unusual market that has neither rewarded high-quality companies or valuation of [indiscernible] stock picking. I would note for you that these strategies have a very good long-term track record of strong results and they particularly outperformed in normal return markets. So based on historical cycles, it would expect this type of environment to normalize over time, but it is very difficult to predict the timing of market turns.

To your question on this quarter, gross sales in 2Q were also impacted by conflict in Middle East as many institutional investors delayed mandates and engagements due to headlines and market volatility. So with respect to the rest of the year, we do anticipate net flows to be somewhat challenged, but I am cautiously optimistic. And one data point I would leave you on that is that our committed not funded pipeline has now grown to around $10 billion this quarter. That is up from 1Q which is a testament to the diversity of our capabilities and our channel reach.

Ryan, do you have a follow-up?

Yes. Just I think you -- just 2 really quick related ones. One, I think the fee rate has trended down a bit in Investment Management. Do you think we should kind of continue in that lower 28 basis point range? And then can you quantify the severance impact this quarter?

Yes. Kamal, I think there were a couple of drivers to that fee rate decline. And again, you can quantify the severance as well.

Sure. So Ryan, as you know, we -- our fee rate generally has remained -- the core fee rate has remained generally stable within a band. As you mentioned, this quarter was slightly softer, but generally within that range. Partly volatile public markets do create downward pressure given our business mix and outflows do have some impact on it. As we continue to drive growth in private markets and particularly our international emerging local market clients, I do see more stabilization of these rates to drive more sustained growth and operating leverage.

With respect to severance, you are right, we had elevated severance across IM and IP of around $7 million in the quarter. And partly, that is given that we are always trying to actively manage our expenses to our revenue to continue to generate a strong margin and create operating leverage in the business.

The next question comes from Wilma Burdis from Raymond James.

Can you go into some of the specifics driving lower dental ratios versus prior years? And how we can expect that to evolve?

Yes. I'll ask Amy to address that. It was great to see such great results in Specialty Benefits this quarter and also a very broad-based loss ratio improvement across all of the products. And as you know, that team has been very focused on dental as we've tried to ensure that we continue to focus on profitable growth. But I'll have Amy get into the details.

Yes, Wilma, thanks. So when I think of dental and Deanna definitely hit the right point at the beginning, which is we have intentionally been taking a lot of efforts against our dental portfolio. It's a product. Just as a quick reminder, it's a product that definitely has a lot of inflationary and cost inflation that sits on top of that. It's also a product that when your utilization or severity begins to kind of move differently on you, you can -- you have the ability to kind of change that pricing. But one of the things that really underpins that is if you have the ability to impact some of that dental network. So I'm going to go first to some of the pieces we've done on that dental network optimization.

We know that as the dental network ownership structure, maybe even private equity, some other things entering into some of that ownership structure, the ability to stay really current on understanding how the providers are utilizing that network and where we're seeing more of our members utilize which services, being able to line up those schedules and do that in a way that's very dynamic, is really paying off for our owned dental network.

What I'd also point to is when I think of dental investment, I also put the announcement of the acquisition we did in first quarter, that DentaNet acquisition as an investment in that. That's going to have a little bit of regional impact, but in Alabama, it brought us 1,500 providers in network. It's the largest network in the state. And that gives us the ability to serve our customers even better in those states and to impact the claims costs that they're feeling on those visits to the dentist. So those investments in dental network are also paying off on a regional basis.

We're also making sure that the pricing changes we made in the past are persisting through our block. So all of those changes that we've made, investments in dental network, optimizing that network and also doing the things that we need to do for our pricing changes are making it. So when I look at the second half of the year, my assumption is that loss ratio, not just from a seasonality basis, but from the intentional impacts we've been taking on that, will continue to go down.

Wilma, do you have a follow-up?

Yes. How can we expect the Beam acquisition to improve the existing business? And where will we see the biggest impact?

I'll again turn that back over to Amy.

Yes. So I feel like I always need to start with this. We are not closed on that acquisition announcement yet. And so somewhat limited in what I can offer, but I would say here's how I'm thinking about it. I'm thinking about Beam Benefits. I went through the strategic rationale and the question that was asked earlier. I do think when we think of both revenue and expense synergies, there are things in both categories. So I'll give you a quick example.

Beam currently leases their dental network today. So we would expect from an expense synergy and a fairly immediate one to remove some of those lease network costs. Additionally, they've got a quoting an acquisition front end in that small micro market that I see, again, I mentioned before, it's really efficient, but it's also really effective. And I would expect we could bring those capabilities across our broader small case market block. So again, taking them across our broader market block means 10x the power that they're currently able to put against their own block. So bringing them across the broader box would free up capability to win more business for us even slightly up market because we aren't spending as much time and attention kind of doing those things down market.

So I would expect some of those results to certainly come through on premium and fee growth. And I would expect those results to also come through on some of the efficiency we think we can drive against our expense ratio.

Yes. Wilma, just a few follow-up comments to that. As Amy said, we're very excited about this acquisition. It's a very strong company in the SMB benefits space in and of itself. And it will really complement our strong performance that we've had in that business over decades. I think you know and we've said it a lot, we have a high bar for M&A, every target has to have strong strategic fit, be financially accretive and have very strong cultural alignment and Beam definitely meets all of these criteria, and we're very excited about having them join Principal.

The next question comes from Joel Hurwitz from Dowling & Partners.

Amy, one more for you sticking with the Benefits business. Can you just unpack what you saw on some of your other group businesses with the life and disability results continuing to run very favorable?

Yes. I'll have Amy talk about that and really talk about the drivers this quarter, but also how she's kind of thinking about both sustainability of loss ratio and earnings on a go-forward basis.

Yes, Joel. So when I think about that, underwriting performance, it really was across all the lines of business. So that improved performance, the performance of 57.4% was across all our product groupings. Probably the more notable ones are the ones that we want to dig into a little bit more our dental, disability and life. You heard some comments just on dental. But dental results were improved and continued to be attributable to that dental network optimization efforts as well as past pricing actions.

I have noted that dental seasonality probably is present a little bit in second quarter, and we did see that tick up just a little bit in second quarter as we expected. Again, it wasn't as market as we saw in last year's second quarter, but we did see that and that was something that we had anticipated. Disability was really driven by lower incidents. And that's across all disability lines. I should note there that recoveries for group LTD were right in line with expectations. So this was an incidence-driven overperformance, not really recoveries or severity driven over performance.

Group life, and again, we sometimes don't talk as much about group life, but again, group life continues to well, and that was driven by lower frequency as well. So the full year outlook remains favorable. And I do want to mention that I now expect loss ratios to emerge below the low end of the guidance range for the full year.

When I deconstruct that more towards the second half, we've talked a little bit about dental loss ratio is continuing to trend down, given those past pricing actions, network optimization as well as normal second half seasonality. I don't expect disability loss ratios to improve further from first half results and I do think it's appropriate to expect some upward movement in products like group LTD from the first half, but certainly not back to historical levels.

I think it's worth noting that wage growth, which is an important factor for a product like disability, is positive, and it's holding steady in our block and employment growth is also positive and tracking to our expectations as well.

So when I summarize all that, I'm really pleased with our underwriting performance across SBD, I think the way we run our business, with consistent underwriting discipline that's balanced with an eye towards growth has really been on display this first half of the year. I'd reiterate then that I expect full year underwriting results for SBD in total to emerge below the end of the range on that 60% to 64% that was communicated in outlook, and we do expect dental underwriting results to improve that second half driven by both seasonality and network optimization.

Joel, next question or a follow-up.

Great. Yes. That was very helpful. And Deanna, maybe just going back to M&A. I wanted to get your thoughts on potential further M&A for Principal, right? There were some media reports out earlier this month suggesting interest in larger scale deals. Just your thoughts on whether it's further M&A and retirement to Asset Management or Benefits?

Yes, I'll start with just a boilerplate answer, which is we don't comment on market rumors. What I would say is that as many of you've heard me talk about before, our M&A philosophy has not changed, and we have a very high bar for any transaction. We're not going to shy away from pursuing M&A. You saw that with Beam, but any transaction has to be a financial strategic and cultural fit. And we view M&A more as an opportunistic accelerator than a requirement with organic growth being our primary path to achieving our objectives. I'd also say we're not interested in doing deals solely for scale, especially one that would require a premium paid to transact. And ultimately, we're really looking for transactions that bring us new strategic capabilities that literally can be scaled across the overall enterprise.

I think I'll come back to Beam Benefits is a really good example of that. It added capabilities. It strengthened our SMB value proposition. And those are the types of things that we'll be focused on as we go forward.

The next question comes from Pablo Singzon from JPMorgan.

In the retirement business, there are structural reasons why I think flows will have a negative bias, right? So if you think about cap contributions and large balances that are available for withdraw, but I guess if you think about other metrics such as [ plan counts ] and number of active participants, how have those measures been trending for Principal?

Yes, I'll ask Chris to address that.

Yes, thanks for the question. Yes. If you just look at sort of participant growth, we've shown consistent participant growth over the last several quarters. So we are seeing positive trends in participant growth, participants with account values. We've seen deferrals rising and on top of that, we see really strong retention. So all of those underlying fundamentals in the business are really strong.

On plan counts also, we see really good growth. We have deemphasized a bit the micro market. So that has a lot of plan count, but also comes with a little less economics. And so we've really focused on those areas and those plans that give us greater assets, greater opportunities to look at investment mandates and the like. And so we have trended a little bit up. So you would see our plan count staying flat to maybe slightly down, but participants deferrals up, retention very high, transfer deposits and new sales wins also very strong over the past several quarters.

Yes, Pablo, I think if you look across our retirement fundamentals remain strong across the things that we're focused on. We've talked about how market increase does have a negative impact on flows, but a positive impact on revenue and earnings. And ultimately, Chris and his team continue to do a great job focused on, again, strong fundamentals and driving revenue growth.

So do you have a follow-up question?

Yes, I do. So my follow-up is for Amy, just on group benefits. So I think Principal is not unique in that, most other group insurers have experienced good results as well in their line. So I was wondering, have the good results affected the competitive environment in any way? Are you seeing other companies sort of start to bring down prices to filter in these very good margins that they're experiencing?

Yes. I'll have Amy talk about that. But I do think you have to remember 2 things that are different about our block of business. One is the SMB focus. And one is the portfolio of premiums where dental continues to have a significant impact on our overall bundle. But Amy, if you'll talk about the competitive nature.

Yes. I'll answer kind of just broadly about the competitive environment that I'm seeing, and then I'll go dig down into our block just a little bit more. General competitive environment, I think we had commented a few times in past calls, and this is probably more last year and maybe even the prior year, that we were seeing some pricing in dental that we just simply didn't want to participate in. We didn't think it would give us the profitability that we needed, we were willing to say, we'll slow growth down a little bit so that we can get the type of underwriting results, we think, really drive and build a great business.

I'd point back to we feel like that trade-off was definitely the right one to make. Now we are continuing to see more opportunities to write business at rates that make sense. Here's one of the things I'll start blending in, though, our block of business. And Deanna mentioned this in one of her opening comments and I think it's worth us coming back to. One of the opening comments Deanna made was that our average employer relationships across our whole benefits block is continuing to grow. So that's nearly at 3.2 products today. So that means a product. And again, there's a lot of people who want to sort of dissect with me what's going on with disability, what's going on with dental, what's going on with the specific product.

But when I look at a product like disability for us, it's rarely stand-alone. So in fact, over 95% of our disability premium is going to be tied to another product. So that means when we look at admin, servicing, product designs and pricing. We do that all, whether it's new case or renewal, it's designed with that multiple product in mind. And I bring that up because I do think the pricing flexibility, the product design flexibility, even some of the administrative flexibility that gives us across that bundle, simply isn't present for some of our competitors. So in the end, when we end up winning in that small to midsized space, it's often because that bundle is outperforming and that bundle is giving us the ability to have the flexibility that we need in that marketplace.

So product by product, yes, we do see some competitiveness. We see some pockets where we wouldn't participate in that pricing, but for our market position, which is relatively unique in that small and midsized case with that bundle, we see that we're getting the types of rates and pricing that we need to drive the type of growth we think makes great sense for this business.

The next question comes from Suneet Kamath from Jefferies.

I wanted to go back to Beam for a second. Deanna, I think in the past, you've talked about an M&A budget of 0% to 10% of net income. That would probably put you somewhere in the $150 million to $200 million. Is Beam in line with that range? Or is it bigger? And if it's bigger, does it mean that you're sort of out of the M&A game for a while?

Yes. I think when I talked about that in the past, Suneet, first of all, thank you for the question, I have talked about how we will dedicate 0% to 10% of our annual free cash flow toward M&A. But I've also talked about that one of the reasons that we keep our leverage ratio at such a low level is that will also give us additional flexibility. And so again, we will continue to be inquisitive around M&A activities. And ultimately, it's the combination of both of those as well as things like the proceeds from divestitures as well, that we'll continue to look to deploy both organically and inorganically as we continue to focus on driving long-term shareholder value.

Okay. Got it. And then I guess you had mentioned earlier in the call, you talked about not doing a scale deal or not doing exclusively a scale deal. But when we think about the defined contribution business, how do you think about scale? I've heard it expressed in terms of AUM. I've heard it expressed in terms of participant head count. Just curious kind of where you think companies need to be to have scale and how you think technology advancements could influence that?

Yes, I'll have Chris address that. Obviously, there's not one science definition of scale, and it really goes into the ability to compete as well as the ability to continue investing in your platform, which the great news is I feel that we have the scale needed in our retirement business to compete, but I'll have Chris add to that as well.

Yes. Thanks for the question. Yes, I think, Deanna, handled that. I think when we look at scale, we look at multiple measures of scale. We think the most important right now is the number of participants being served because that's where we believe the future value will accrete from. And so that's kind of how we think about scale at 14 million Americans covered by the plans that we serve. We feel like we're at scale. That doesn't mean that we won't look to get scale. But as I've mentioned on past calls, we already see a lot of the consolidation happening. It may not be as inorganic active -- as active inorganically as it has been in the past but it's definitely happening organically.

And the plans and participants are moving to the larger scale players like us, it's top 3 in participant count in the 401(k) space, to be able to serve their needs, invest in platform and be able to provide them the solutions that they need to get to and through the retirement. And so we feel very well positioned given where we're at. So we look at multiple measures, but we probably lean a little heavily toward participant because we believe that's where future value will drive.

The next question comes from Josh Shanker from Bank of America.

Yes. I guess, Kamal, I just want to follow up a little more with Ryan's questions about the outflows in the equity strategies. Over the past quarter date period our quality is back in favor, although maybe it's just factor trading with semis down or who knows the reasons why, but factor trading seems to be a key positioning for a lot of investors. A, is a return of this kind of stocks that you own and specialize in going to be a benefit that we should see inflows in the quarter? Or b, is this factor trading sort of experience going to be a weight on flows for the foreseeable future?

Yes. Go ahead, Kamal.

Josh, It's a great question. So let me start with part a first, which was right on, which is how you highlighted this market, has been highly unusual and abnormal particularly you highlighted the quality abnormality in the marketplace. One statistic just to further highlight that, within our book, we have observed that over the last year, that dispersion has worsened substantially. In fact, when you look at U.S. companies, the highest quality companies on the period ending 6/30 returned 4%, whereas the lowest quality companies returned 70%.

So to your question, there could be some longer-term statistic elaboration, but that gap is too large, and it has to normalize over a period of time. And as that gap normalizes, clearly, it will benefit our style of investing even though this is early to see in 3Q for the month of July, as those factors have reversed, our performance has become quite strong for that short period. So I do think the market is going to normalize, and we will benefit from it. And longer term, when these momentum trades reverse and certain start of investing like our quality style of investing comes back in work flows do follow, they do take time.

To your second order question, which is a good one, what has changed in the marketplace is a lot of new products, particularly very nichey ETFs do exploit these anomalies more than historically have been exploited. So the market has changed over time where particularly retail investors can get access to these flow trends and it could persist longer than you like. In fact, over the last 12 to 18 months, that's been one of the reasons why the abnormality has persisted longer than we would have liked. So hopefully, that answers your question, Josh.

Yes. Let's presume that one year from today, the performance is outstanding because the styles that you guys specialize in are in vogue. Is that going to take time to turn the train? Do we expect still in 3Q '26, maybe 4Q '26 that the muscle memory of how people [indiscernible] for the last couple of years is a drag on flows? Or at this point in time, it's really quarter-to-quarter?

Well, first, predicting timing of a marketing turn is very difficult. I would also highlight for you predicting an immediate flow reversal or even predicting it over the next 6 months would not be prudent. I could, however, point you to what I see with client behavior. One behavior I would highlight for you is in our retail book, where we have a lot of shareholders who have been owners of these strategies, there is a subset of clients that continues to add new money to this strategy that believes in the process and looks at dislocation. So I would say it does take time. It's very difficult to predict timing but there is a certain subset of clients that keeps on adding money to these strategies. So it will take longer compared to the past.

The next question comes from Mike Ward from UBS.

Just on back to Benefits. So definitely a solid result there. And it sounds like you guys expect it to get seasonally better in the back half. But I'm wondering, you also kind of characterized it as favorable in 2Q. So like if we think about kind of like a normal year, I'm just wondering if you could kind of help quantify how this result compared to kind of a normal quarter?

You cut out a little bit, Mike. Was that specific to dental or more broader across Specialty Benefits?

Well, I guess both would be very helpful, but it was Benefits mainly.

Yes. I'll have Amy talk about that on an earnings perspective. Obviously, every quarter, you're going to have some positive outliers in some places where you have pressure I think the great news is Specialty Benefits had a phenomenon quarter. And I think ultimately, there's pieces of that, that we feel will continue to benefit us going forward, but I'll have Amy go a little bit deeper on our outlook for earnings as we go forward.

Yes. So I'm probably going to -- I'm going to head up to the top of the question, which is sort of that getting after the spirit of the sustainability of earnings in total. And so we have to start with the underwriting results because those underwriting results are clearly what's been driving that performance. So I'm really pleased with those underwriting results. And what I've said is, we want to sustain those where it makes sense. I've given a little bit of color earlier on the call, but some of those answers in terms of what I think will happen with dental, with dental, I do think we see that second half seasonality, which tends to be better. We tend to improve that from first half of the year and then our intentional efforts that we've been taking with past pricing actions and network investments and improvements should continue to pay off.

So I'd say, first, we do expect dental underwriting results to continue to improve in the second half of the year, and that will be helpful in terms of that earnings emergence. I'd also say that we do expect total premium and growth to accelerate in the second half of the year. So I don't think we've really addressed that at this point. So that second half of the year should look like better premium and fee growth than we have seen in the first half of the year. And again, this isn't just driven by new sales. Persistency plays a role in that, but there's also been a build going on for us behind the scenes about capabilities on things like building capabilities to improve participation for our voluntary products. Those are also adding in an organic way to our premium base. And that's a boost then obviously, for earnings growth as well.

The third thing is we've talked a bit on this call about some of the acquisitions we've been making. Our story historically has been nearly purely organic. We've added a little inorganic dimension to that, and that should help us in terms of our future growth prospects.

And then finally, I'd kind of come back to -- the goal of this whole business is not to just have great underwriting results. We'll certainly take them when those emerge, but it's to really make sure we balance profit and growth. We deliver to the customers, the things that protect those small and growing businesses and ultimately then also help us drive that earnings growth. So our current underwriting results put us in what I think is a really enviable position to consider some pricing decreases over time, returning some of those back to our customers to help the customers grow, but then also helping our price competitive so that we grow. Our intention is to keep that SBD growth engine going strong over time and continuing to see that build from earnings growth.

Mike, the other thing I would mention, and Amy answered this earlier in the call, is that the driver across all of the loss ratios in the quarter was really incidents and frequency rather than severity. Severity tends to be lumpy and can be more quickly return to the norm, whereas incidents and frequency-driven underwriting results tend to last longer because it shows a trend across your entire block of business. So that would be the other point I'd make there as well.

Do you have a follow-up question?

I know that was very comprehensive. I was hoping to ask Kamal just about the environment, including in fixed income and across the business, frankly, but like is there a dynamic where there's just so much new money going into AI and data center build-outs, where you guys participate, but maybe in a more measured way, like how frothy is that market, that asset class?

Yes. And I do think that question gets to a broader discussion on how he feels about the entire platform that he has. And I think there's some great strength both on the private side as well as fixed income, but Kamal I'll have you add.

Sure. Mike, great question. So you had a 2-part question. One was just our fixed income book and how do I feel about that? And then the second part is a little bit more in the private market area related to data centers. So let me start with the fixed income business we have. I actually feel quite good about it. A couple of reasons for that. Earlier in the call, there were questions on how our investment performance is doing and our investment performance in fixed income continues to improve, particularly when I look at our client engagement in areas like high yield credit, our ETF business is benefiting from them. Internationally, we have done quite well with emerging market debt. So that's allowed us to scale up. And in the U.S., we have a pretty strong [indiscernible] credit strategies.

Deanna also mentioned, we continue to innovate. She mentioned earlier in our comments, we recently launched a unique set of innovative fixed income ETFs. So I do think our fixed income business on the public side continues to scale up and over time, will contribute more to our earnings power and our growth power.

The data center question is a good one. So first, right off the bat, our focus in the AI data center space is pretty much as a real estate equity investor. We don't generally tend to participate on the private credit side of that equation where there has been recently more concerned on the size of deals that is being done and the risk involved there. My view of this is that even on the real estate equity side on the data center side, it is becoming more nuanced.

One of the key things is the business has moved away from being less about technology and more about being real estate. You have heard noise around the challenges of acquiring properties, getting power access the challenges of working through the regulatory environment. My view is the winners in this space will require real estate negotiation skills, and it will be lumpy, but that's going to be key in this space. So from my side, I think we are on the right side of how that plays out where the value creation would happen. And we also tend to generally focus on the small to mid-market size of those deals, which I do think stay under the radar, which allows us to create returns and value for our shareholders.

Our final question comes from Alex Scott from Barclays.

I wanted to ask a higher level one about expense margins as we head into the back half of the year. I know some of your businesses, I think, tend to generate a little bit better margin in the back half of the year. And how do you approach the trade-off between investing in the business and letting it flow through to earnings? And I ask this just because there's a fair amount of tech spend that's being contemplated out there probably. And you also have the benefit of markets that you're back in some of your business too. So just any thoughts on how you'll approach that at a high level.

Yes. I'll make a couple of comments and then have Joel add on. I think if you looked at us and followed us for years, you know that we have a proven track record of aligning expenses with revenue and ultimately still making investments in the business because we need to make sure that we're driving those capabilities that will drive sustained long-term growth. If I even look at the last year, with only a 2% increase in expenses, and knowing the investments that we're making across AI, across technology, across driving enhanced capabilities. And again, that's relative to a 5% increase in revenue. We're going to continue to have that discipline but also not shrink ourselves to [indiscernible] make sure that we're investing in growth.

And I think the other thing I'd mention is, as Kamal mentioned, when we do see a business that has some more revenue headwinds that business will lean even further into how do they make sure that they're aligning expenses with revenue outlook as well.

But I'll see if Joe has some additional comments.

Alex, the only thing I'll add is that we have the privilege of being at scale within all of our businesses. We're well positioned in all the markets we're at. We're very differentiated. We know how to compete and where to compete, which allows us to be very effective in that regard. And you've heard us say and Deanna said it before, we're going to meaningfully [indiscernible] so we can meaningfully invest. And so again, the reality that we need to invest in our business isn't going to be excuse not to hit our numbers. We're continuing to make sure we extract savings where we can and should so we can make those meaningful investments to position our company for not only short-term but also long-term success.

Do you have a follow-up?

A quick follow-up on Investment Management. I just noticed the Morningstar data that you guys provided in your deck, the 10-year equity performance declined a bit more meaningfully. And I assume it probably just has to do something rolling off but it was a pretty big move. And I just wanted to understand like what kind of impact does that specifically have? Is that a metric -- is that a metric to people focus on? And could there be a tail to the outflows just associated with some of those metrics getting a little worse?

Yes, I'll have Kamal address that.

So the 10-year number is important. I would argue that it's way more important on the Alpha side given that's what institutions focus on. The Morningstar metrics are important, but probably the 3- and 5-year number is a more important metric in that regard. You rightfully observe that some of the equity performance has deteriorated on the Morningstar 10-year number. I explained earlier that a lot of it is driven by our style of investing, which clearly given the normal market, the recent returns have been -- have suffered given the market conditions, and that obviously rolls into the 10-year number.

One of the things I will highlight for one of the strategies, one of our larger strategies the 10-year number, even on Morningstar is still very strong. And my view of this is our larger AUM strategies, where their 10-year number stands and if they are of institutional interest how they are performing. So I feel good from an Alpha perspective on those strategies. But certainly monitoring the Morningstar numbers is important for us. It's important for our retirement clients as well. So we continue to stay focused on it.

We've reached the end of our Q&A. Ms. Strable, your closing comments, please.

Thank you. As we close today's call, I want to thank all of you for your time and questions. As you look at our second quarter results, it reflects disciplined execution, the strength of our strategy and value from diversification of our businesses. We're driving sustainable growth with balanced contributions across revenue growth, margin expansion and impact of capital deployment. In addition, the actions we're taking to sharpen our portfolio alongside momentum, a healthy capital position and strong fundamentals positions us well to deliver on our targets and deliver long-term value for shareholders.

We look forward to connecting with many of you in the months ahead. Thank you again for your time, and have a great day.

Thank you. This concludes today's conference call. You may disconnect your lines at this time, and we thank you for your participation.

Good morning, and welcome to the Principal Financial Group First Quarter 2026 Financial Results Conference Call. [Operator Instructions]

I would now like to turn the conference call over to Humphrey Lee, Vice President of Investor Relations.

Thank you, and good morning. Welcome to Principal Financial Group's First Quarter 2026 Earnings Conference Call. As always, material related to today's call are available on our website at investors.principal.com. Following a reading of the safe harbor provision, CEO, Deanna Strable; and CFO, Joel Pitz, will deliver prepared remarks. We will then open the call for questions. Members of senior management are also available for Q&A.

Some of the comments made during this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. The company does not revise or update them to reflect new information, subsequent events or changes in strategy. Risks and uncertainties that could cause actual results to differ materially from those expressed or implied are discussed in the company's most recent annual report on Form 10-K filed by the company with the U.S. Securities and Exchange Commission.

Additionally, some of the comments made during this conference call may refer to non-GAAP financial measures. Reconciliations of the non-GAAP financial measures to the most directly comparable U.S. GAAP financial measures may be found in our earnings release, financial supplement and slide presentation. Deanna?

Thanks, Humphrey, and good morning to everyone on the call. This morning, I'll discuss our strong first quarter performance and the steady execution of our strategy focused on delivering sustained growth across our diversified businesses. Joel will then provide additional details on our financial results and capital position.

Starting with Slide 2, we delivered 13% adjusted non-GAAP earnings per share growth in the first quarter, above the high end of our target range. This performance was primarily driven by favorable underwriting results and improved mortality within our Benefits and Protection business as well as positive market conditions for our fee-based businesses. This contributed to strong revenue growth and margin expansion.

Strong performance and capital generation enabled us to return approximately $375 million of capital to shareholders in the quarter, including $200 million of share repurchases. We also raised our common stock dividend for the 12th consecutive quarter, an 8% increase on both a quarterly and trailing 12-month basis. Taken together, these results underscore the value of our diversified business model.

Moving to Slide 3. We continue to make progress across our strategic growth drivers, the broad retirement ecosystem, small and midsized businesses and global asset management. Within the retirement ecosystem, we're starting the year with broad-based momentum. Total retirement transfer deposits of $12 billion in the quarter grew 35% year-over-year, and recurring deposits grew 7% over the same time period. This growth reflects our ability to win new business as well as retain and grow existing clients with a comprehensive suite of capabilities across recordkeeping, asset management, investment advice and income solutions.

We're growing our participant base and helping them save more for retirement. This is evidenced by a 3% increase in the number of participants deferring into their retirement plans compared to the year ago quarter with average deferrals up over 3% as well. Participants continue to consolidate retirement savings onto our platform with $1.7 billion of roll-ins in the quarter. When participants consolidate their retirement savings with us, this further reinforces our confidence in the strength of our platform and our ability to provide customized advice and solutions to meet their needs.

Our retirement investment expertise, an important growth driver within the retirement ecosystem, is further gaining traction with third-party retirement platforms. This is evidenced by DCIO sales of $2 billion in the quarter and nearly $8 billion over the trailing 12 months. For the small and midsized business segment, our differentiated capabilities and deep expertise are driving results.

In Retirement, the SMB market continues to perform well. Recurring deposits grew 6% over the year ago quarter and 7% on a trailing 12-month basis. Strong new business activity and favorable retention resulted in positive account value net cash flow of $600 million for the quarter.

In Benefits and Protection, our broad and meaningful value proposition to the SMB segment continues to drive growth and deepen customer relationships. Specialty Benefits delivered record sales, up 24% over the year ago quarter.

Additionally, business market Life premium and fees grew 15% year-over-year, demonstrating robust demand for specialized solutions, which help business owners protect key employees and fund critical succession strategies. Our latest well-being index fielded in late March confirmed steady employment trends with 90% of small and midsized business owners, indicating they are maintaining or increasing staff. When we look at our own block across 180,000 diverse businesses in Group Benefits and Retirement, both employment and wage growth have remained positive and are contributing to growth.

In Global Asset Management, we're generating momentum with record gross sales in Investment Management of $37 billion, up 21% year-over-year. This growth is directly related to in-demand product offerings and our strengthened distribution relationships across global markets. Our private markets capabilities remain attractive to clients globally, generating net inflows of $400 million in the quarter and $3 billion on a trailing 12-month basis.

Private markets AUM grew 11% year-over-year due to ongoing demand for our real estate, infrastructure and private credit strategies. Our active ETF business continues to gain traction and delivered net inflows of $400 million in the quarter and $1.8 billion on a trailing 12-month basis.

Additionally, we generated strong net cash flow of $1.5 billion in the quarter from clients outside the U.S. Looking across these 3 growth drivers, I'm encouraged by this momentum, the breadth of our retirement solutions, our leadership position in serving small and midsize businesses and our expanding global asset management capabilities create multiple avenues for sustained growth.

We also continue to innovate in how we serve and engage customers across the enterprise, leveraging data and emerging technologies, including AI. We're deploying these capabilities across the organization to improve productivity, deepen customer relationships and continuously improve the experience we deliver every day.

Before I turn this over to Joel, I want to share some of the important recognitions we've received. For the 15th time, Principal has been named one of the world's most ethical companies. This recognition from Ethisphere, which I am incredibly proud of, underscores our long-standing commitment to integrity, transparency and responsible business practices. Principal Asset Management was also recognized as the winner of the Data Center Firm of the Year in North America by PERE, a leading private markets publication. This award highlights our decades-long expertise, growing capabilities and track record in this sector. Together, these recognitions reinforce the strength of our culture and competitive advantages that differentiate Principal in the marketplace.

In closing, the momentum we're seeing across our businesses gives us confidence in our ability to deliver our financial targets. As we expand our customer base to 82 million people worldwide, we remain focused on disciplined execution, sustainable growth and creating long-term value for our customers and shareholders. Our strong performance this quarter reflects the dedication of our 19,000 employees around the world. Their focus on serving customers and executing with discipline allowed us to capitalize on opportunities early in the year and positions us well for continued growth as we move through 2026. Joel?

Thanks, Deanna. Good morning to everyone on the call. I'll walk through our financial performance for the first quarter and provide updates on our capital position. As you can see on Slide 4, the first quarter was a strong start to the year, and we are well positioned to deliver on our 2026 financial targets. We reported non-GAAP operating earnings of $456 million, up 10% compared to the year ago quarter or $2.07 per share, an increase of 14%. Excluding significant variances, non-GAAP operating earnings were $479 million, up 9% compared to the year ago quarter or $2.17 per share, a 13% increase.

Additionally, non-GAAP operating ROE was 16.1%, an improvement of 140 basis points compared to the year ago period and at the midpoint of our 15% to 17% target range. Significant variances found on Slide 11 had an after-tax impact of $23 million in the first quarter. Lower variable investment income was primarily driven by timing of real estate transactions and slightly lower returns in our other alternatives portfolio. We shared in our February outlook call that we were evaluating the presentation and depreciation for core real estate in our alternatives portfolio.

Beginning first quarter, we reclassified this noncash expense through realized gains and losses. This better reflects total returns by aligning depreciation with where gains are recognized upon sale. We still expect full year 2026 variable investment income to improve relative to 2025 with or without this change. This impacts reported results only, and there is no impact to our adjusted results.

Margin expanded by 190 basis points to 30% in the first quarter. This improvement reflects our strong business fundamentals with 6% year-over-year net revenue growth and disciplined expense management while investing in the business.

Turning to capital and liquidity. We ended the quarter in a strong position with over $1.4 billion of excess and available capital. This includes $800 million at the holding company at our targeted level, $300 million in our subsidiaries and $350 million in excess of our targeted 375% risk-based capital ratio, which was approximately 400% at quarter end. We returned $374 million to shareholders in the first quarter, including $200 million of share repurchases and $174 million of common stock dividends.

Last night, we announced an $0.82 common stock dividend payable in the second quarter. This is a $0.02 increase from the dividend paid in the first quarter and an 8% increase year-over-year. This remains in line with our targeted 40% dividend payout ratio and demonstrates our confidence in continued earnings growth and capital generation.

Moving to AUM and net cash flow. Total company managed AUM ended the quarter at $770 billion, modestly lower sequentially due to market performance and up 7% year-over-year. Total company net cash flow was negative $1.5 billion in the quarter, a meaningful improvement on both the sequential and year-over-year basis. The improvement was driven by positive net cash flow in International Pension in the quarter and improved year-over-year results in Investment Management.

Moving to the businesses. The following commentary excludes significant variances. Starting with RIS and as shown on Slide 5, pretax operating earnings of $318 million increased 4% year-over-year, driven by 3% net revenue growth and margin expansion. Operating margin of 41.5% expanded 60 basis points compared to the year ago quarter and is slightly above the high end of our target range. This reflects our disciplined focus on profitable revenue growth and expense management as well as some favorable seasonality and timing impacts in the current quarter. Fundamentals across the business remain healthy. As Deanna noted, we delivered strong transfer in recurring deposits as well as favorable retention. This drove $1.8 billion of RIS account value net cash flow in the quarter, supported by fee-based net cash flow across both large and SMB market segments.

Turning to Slide 6. Principal Asset Management delivered earnings growth of 10% year-over-year on 5% revenue growth and margin expansion. Within Investment Management, pretax operating earnings increased 8% from the prior year quarter. Adjusted revenue increased over 2% year-over-year despite the impact of our recent divestiture. Higher revenue, along with expense discipline contributed to a 100 basis point improvement in Investment Management's quarterly operating margin. Gross sales in the quarter were a record, up 21% from the year ago quarter. This highlights the attractiveness of our solutions and the global reach of our distribution. Importantly, demand remains in several key areas, including $1.2 billion of net cash flow spread equally across private markets, ETFs and UCITS.

Moving to International Pension. AUM increased 4% sequentially and 20% year-over-year to a record $160 billion. The increase was primarily due to positive market performance and net cash flow as well as foreign currency tailwinds. Net cash flow was positive $500 million in the quarter with $700 million of net inflows in Brazil.

Pretax operating earnings increased 14% year-over-year, driven by the benefit of higher performance fees, favorable foreign currency impacts and growth in the business. Operating margin of 48.5% remains comfortably within our target range.

Turning to Slide 7. Benefits and Protection delivered a very strong quarter. Pretax operating earnings were $177 million, an increase of 41% year-over-year. This was driven by more favorable Specialty Benefits underwriting, improved life mortality and business growth. Starting with Specialty Benefits, premium fees increased 4% year-over-year, in part supported by record sales in the first quarter. As we indicated in our outlook call, we continue to expect premium fees growth to trend higher throughout the year, most notably in the second half.

Pretax operating earnings of $140 million increased 26% year-over-year, reflecting strong underwriting experience and growth in the business. Total loss ratio improved 220 basis points compared to the year ago quarter due to improved Group Life and Group Dental results, along with continued strong results and group disability. This translated into margin expansion, improving to 16.2% and up 290 basis points year-over-year.

In Life Insurance, pretax operating earnings of $37 million, increased $23 million year-over-year, driven by improved mortality experience due to lower frequency and severity. This contributed to a 15.6% operating margin in the quarter at the high end of our target range.

Moving to Corporate. First quarter losses were elevated due to timing of expenses. On a full year basis, we expect segment results to be within our target range.

Before closing, I'd like to make a few comments regarding our investment portfolio. There has been heightened attention recently on the insurance industry's exposure to private credit. First and foremost, we have over 60 years of experience underwriting and managing private assets for our general account and clients. As we shared with you last quarter, the vast majority of our private fixed income securities are investment grade with minimal exposure to direct lending.

Importantly, our portfolio continues to perform well with experience better than our long-term expectations. I remain confident in our well-constructed and diversified portfolio, which is appropriately aligned with the liquidity profile of our liabilities. In closing, our first quarter results reflect disciplined execution across the enterprise with strong earnings growth, margin expansion and healthy underlying fundamentals. These results reinforce the strength of our diversified business mix and position us well to deliver on our financial targets in 2026 and beyond.

This concludes our prepared remarks. Operator, please open the call for questions.

[Operator Instructions] The first question comes from Ryan Krueger from KBW.

My first question was on Specialty Benefits. Can you provide some more color on the favorable underwriting experience you had across Dental, Life and Disability and also just how you're thinking about the outlook from here?

Yes, Ryan, good morning, and welcome back. Obviously, it was a really strong quarter for Specialty Benefits. And I'll pass it over to Amy to talk about the drivers.

Yes. Thanks. Yes, Ryan, the underwriting performance was really strong this quarter. As you noted, with that 58.5% loss ratio. When I look through that, it really is primarily Group Life and Dental that are driving that. So when I look at Group Life, it's going to be driven by that low frequency that we saw in this quarter. And when I look at Dental, I think we've talked in prior calls about some of the work we've been doing, certainly about past pricing actions which are now well into the experience and then also some of the Dental network optimization efforts we've been doing, which are also moving into that performance as well.

I should mention too that Group Disability performance remains strong. It was consistent with prior year quarters, and it was tracking to what we expected. As a reminder, you asked about looking ahead. When we look ahead, second quarter does tend to be the seasonally highest for Dental. So that means that the overall SBD loss ratio does rise a bit in second quarter. But when I look at full year outlook, I look at it very favorably with loss ratios expected to emerge at the low end or even slightly below the low end of the range we communicated at outlook.

Ryan, do you have a follow-up question?

Yes. On Investment Management, you've seen this good momentum in gross sales, but then redemptions have also largely ticked up and so the flows haven't improved as much. So I was just hoping to get a little more color on, I mean, maybe both sides of it, what's driving the gross sales momentum, but also why do you -- have you been seeing higher redemptions? And how do you think that may play out from here?

Yes. Thanks, Ryan, for that. I'll ask Kamal to add color regarding that.

Sure. Ryan, thanks for the question. It's a good one. So let me break down a little bit of the net flow question you asked. First, I'll just reiterate. I think Deanna and Joel highlighted this in their remarks and you mentioned it as well. We did generate record gross sales in Investment Management in the first quarter, 21% year-over-year. You would also acknowledge is an impressive number. And I would say it's directly related to our new product focus, new strategies that we are introducing into the marketplace. But more importantly, we are continuing to grow the number of distribution relationships across the globe.

I would highlight for you that Asia had a standout quarter. They had $1.1 billion of positive NCF and with our international clients delivering over $1.5 billion of positive NCF. So the key for us is to grow sales across the globe, which would be key to changing the NCF profile given our legacy book.

Now to your question on what caused the NCF pattern this quarter, we did see some redemption activity that was concentrated among a very small number of U.S. equity -- active equity mutual funds in the U.S. wealth channel, primarily driven by changes in asset allocation and advisory business models. So our goal continues to be to deliver higher gross sales and gathering commitments to a broader product set. As redemption activity normalizes, I would expect our nonaffiliated NCF profile to improve for the balance of the year. And I would just end with that the future pipeline is very strong. I hope that answers your question, Ryan.

It does.

Thanks, Ryan. Next question.

The next question comes from Wes Carmichael from Wells Fargo.

First question was on the Individual Life segment. I think just looking at results, I think it's the best quarter that, that segment has produced in a long time, and I typically think about the first quarter as being seasonally weak from a mortality perspective. So just wondering if you think anything in the earnings power has changed for that segment? Or is this just a little bit more onetime-ish in nature?

Yes. Thanks, Wes, for that question. Obviously, Life did have a very strong earnings quarter, really driven by mortality. So I'll ask Amy to give some color around that.

Yes, thanks for noting that. I do think we definitely feel like we saw some positive volatility in mortality this quarter. And so we've had other quarters though, where we talked about it going in the opposite direction. So I definitely see some positive mortality sitting in this. But what I would also say is that when we think about our full year results for this segment, we did communicate guidance range in terms of our margin from that 12% to 16%. And even though this was kind of pointing us towards that mid- to higher end of that range, I would say something that is in the -- towards the lower end of that range for a full year expectation for the earnings power and margin power of this business is what I would be thinking about for the health of the business.

The other thing I would just say on that, if you did look at claims, it was great to see that the positive came both from incidence and severity. And a lot of times, volatility tends to come from the severity piece, but we did see some better-than-expected results on both incidence as well as severity. So...

And when I parse those out, incidence and severity, it is about 50-50 for each of them.

Wes, do you have a follow-up?

Yes, I do. And so just switching to RIS, pretty strong transfer deposits. Just curious if you could maybe just touch on the flow outlook for that segment for the rest of the year?

Yes, I'll turn it over to Chris. As you know, we focus on revenue growth and ultimately really drove strong. We did have very strong fundamentals across RIS. Large case tend to be lumpy when you look at transfer deposits, and this was a quarter we benefited from that, but I'll ask Chris to give some more color.

Yes. Thanks, Deanna, and thanks, Wes. So again, I think as you noted, we did have a really good quarter from a net cash flow perspective, driven primarily by strong transfer deposits and also experienced very strong contract retention. And those 2 things were also supported by healthy recurring deposits and stable participant withdrawal rates. And all of this is despite the ongoing market performance. So really feel good about our net cash flow.

As we look forward, as Deanna said, as we like to remind you, we really focus on driving profitable revenue growth, but as we look forward to flows in 2026, we do expect it to follow the historical pattern where Q1 is our strongest for the sales and transfer deposits and the remaining quarters are likely going to be impacted by strong markets, which increases withdrawal dollars as well as the lumpiness that we see in large from time to time in the quarterly results.

Thanks, Chris, and thanks, Wes. Next question.

The next question comes from Suneet Kamath from Jefferies.

I wanted to start with RIS also on the advice model that you guys have. And correct me if I'm wrong, but my understanding is that you use more of a sort of a call center model as opposed to sort of feet on the street or building out wealth management offices. And I know one of your competitors is taking that latter approach. Just wondering if that's something that you guys have looked at or if it's something that you might consider?

Yes. Thanks, Suneet. Thanks for being there and for the question. As we've talked about, our focus is really on the majority of our participants and want to be able to broad -- provide broad-based support to those that don't have as much access or to the adviser community. And so I think our approach is different. But I'll ask Chris to continue to give a little bit more insight into that.

Yes. Thanks, Suneet, for the question. Again, we really, as Deanna mentioned, focused on those participants that we serve already. And we're not really looking at building a number of storefront physical presence locations. We do have a few hundred salary-based advisers covering about 90% of our participant base to be able to offer them advisory services, and we're seeing nice results. As we mentioned, we're seeing great in-force dynamics, whether it's from participant roll-ins, increasing deferral rates, increasing participants who are deferring. All of that is coming from the advice model that we're offering.

We're seeing an increase in our retail individual customers that are both IRA and advisory services customers, up about 11% on the year. And so our model is really focused on -- focusing on our participants, focusing on those more mainstream than the high net worth and really focusing where Americans need to help. And we believe that we have a model that will be successful over time.

Yes. And the other thing I'd mention there is we are supplementing that with enhanced technology that will continue to build up as we try to best meet the needs of those clients and how they want to be served. So Suneet, do you have a follow-up question?

I do. And I wanted to come back to the SMB market. It sounds like last quarter, if I remember correctly, you guys were pretty confident in the employment outlook. It sounds like in your prepared remarks, you talked about being confident so far this year. But as we think about the economy and sort of the volatility that we're just seeing in the markets given its kind of global issues, is there typically a lag that you would see that maybe you're not seeing it show up in your results now, but down the road, there could be some impacts from this uncertainty that we're seeing?

Yes, Suneet, a couple of things. And then I'm going to ask Amy to give some additional color. I have asked Amy to spearhead a group really focused on monitoring this real time across the enterprise. I think a couple of things I'll say there is we have a broad-based employer base. So if you think about it, we have 180,000 employers just across RIS and Group Benefits, ranging from different size, different industries, different geographies. And I think that diversity is really going to serve us well.

As mentioned, we're looking at it from our block perspective. We also have very regular surveys with SMB employers as well. And just sitting here today, we're not seeing anything that is impactful. But we also understand that some of this is going to be dynamic, and we want to stay close to it. But I do come back to that. I think that diversity is really going to serve us well. But I'll turn it over to Amy.

Yes. I agree with how Deanna set this up. And I do want to reiterate, as we're seeing in our results, both employment and wage growth are really holding steady in our block. So I'd say wage growth is looking really healthy and similar to what we saw last year. And employment growth has moderated just a bit, but it's really aligned with what we expected to see this year. So your question, though, about could there be a little bit of a lag? I do think that uncertainty of which there is definitely the presence of some uncertainty for both employers and employees tends to have an effect on the marketplace in a couple of ways. One way is that people tend to kind of settle back into, "I'm not necessarily going to make some big expansions in terms of growth," but they also settle back into, "I'm not necessarily going to retract back or do something differently." So it has a little bit of a static effect, that uncertainty in the marketplace.

What that means for employees is many of them are staying where they are. And what that means for employers is that many of them are holding true to the plans that they had for the year. So I'm not seeing that big lag. I am seeing some uncertainty in the sentiment, but small and midsized business owners tend to be and our data proves this out, more optimistic in terms of how aggressively they can take advantage of the market situation when uncertainty does clear. And so I don't -- I'm not seeing a big lag effect, but we will continue to watch that every month.

Thanks, Suneet, for the questions. Next question.

The next question comes from Jack Matten from BMO Capital Markets.

My first one is on International Pension. The earnings run rate took a nice step-up this quarter, even kind of backing out the significant variances that you call out. I guess can you just unpack some of the drivers there and which do you think are kind of more repeatable, more sustainable versus some of the more transitory factors like FX or elevated performance fees?

Yes, I'll ask Joel to talk through that. And again, thanks, Jack, for being here and for your questions. Obviously, it was a strong earnings growth for International Pension, and that segment continues to provide some great diversification to our overall results and really focused on where we feel that we can drive growth. So I'll ask Joel to give some specifics on the quarter.

Jack, as we indicated last quarter, they were in the mid-60s. We did expect improvement within the IP results, and that certainly did manifest itself in first quarter with about $80 million of adjusted earnings for the quarter. I'd say, from a run rate perspective to your question, it was a little bit outsized this quarter because of a performance fee within China Construction Bank, our pension business. There was about a $7 million performance fee that was paid within that market. That is one way that we're compensated for providing the services that we do within the pension space in China. So it was outsized this quarter, but it's something that's going to be volatile and we can expect into the future.

So everything else being equal, I'd say a good run rate. It's going to be more in the mid-70s, a good source to build off. But importantly, we are getting some FX tailwinds finally. I've been in this business a long time, and it's nice to say FX tailwinds as opposed to headwinds. And it's really nice to see the underlying results of these businesses manifest themselves in the U.S. dollars in a meaningful way.

Jack, hope that helps. And do you have a follow-up question?

Yes. Maybe just one on the kind of the outlook for VII and performance fees in the Investment Management business this year. I guess do you have any visibility at this point in kind of the cadence of realizations? And I guess, to what extent do you think market conditions need to change or improve in order to kind of unlock a more normal level of real estate monetization?

I'll have Joel address that.

Yes. So as communicated, we continue to expect 2026 to improve relative to 2025. One of the reasons why we did have the results we did this first quarter was because there was no real estate transaction activity. As a reminder, we have about 50% of our alts portfolio within the real estate. And so it is dependent upon transaction activity, again, which there was none in the first quarter.

We do see some pickup in activity for the second, third and fourth quarter. And therefore, that's -- we do see some improvement year-over-year. But underlying performance of the alts portfolio in its entirety is performing well as expected. And to your question, we don't need to see anything change within the macro environment in order for us to deliver on that improvement that we communicated in outlook.

Yes. I think the other part you weaved in there was performance fees from an Investment Management perspective. And I think we said on outlook that we expected '26 to be similar to '25, but those are going to be lumpy by quarter, and they were a little lower in the current quarter.

Next question.

The next question comes from Wilma Burdis from Raymond James.

What drove the lower PRT sales in the quarter? And is there a little bit more competition flowing into the SMB PRT market?

Yes. Thanks, Wilma, for the question. I'll ask Chris to address that.

Wilma, thanks for the question. Again, if you remember, our fourth quarter was a very strong PRT quarter, fourth quarter of 2025, not just for us, with over $1 billion of PRT sales, but for the industry at about $28 billion. And I think what that had an impact of doing was really reducing the pipelines in the first quarter. So I think we haven't seen the industry-wide data yet. But anecdotally, it sounds like the industry is pretty light in the first quarter, and we reflect those trends. So that would be how we're thinking about the PRT business.

The pipeline remains a little light in the second quarter. But if you remember, last year also sort of developed this way as well, sort of lighter in the first half, more accelerated PRT sales in the second half. And we kind of expect this year to be fairly similar to 2025 when it comes to PRT.

Yes, Wilma, and I think as we've discussed, we're not going to chase sales for the sake of sales. We're going to make sure we're disciplined on the capital that we deploy and the returns that we can get from that. And if it is lower, we're looking for other opportunities to ensure that we're driving profitable growth across the enterprise. So thanks for that question. Do you have a follow-up?

Yes. Are you seeing any competition actually improving or decreasing in Group Dental, given you guys have implemented price increases, but you're still seeing healthy sales growth?

Yes. I think that question, you cut out just a little bit, but I think it was really regarding the competitiveness in the Group Dental market and how that might be impacting the sales volumes. And again, I feel very proud of the results that we delivered both on the profitability side as well as the growth perspective for Specialty Benefits, but I'll have Amy address the market from a Dental perspective.

Yes. Thanks, Wilma. We do tend to be a very significant player nationally in the Dental marketplace. And so one of the things that we saw emerging probably 18 to 24 months ago was some things around cost trend and some other things related to impacts on Dental pricing that we did then move into our pricing. So we had seen some utilization changes, some cost trend changes that we moved into pricing.

As we look at last year's results, I do feel like we were one of the first in the market with some of those pricing changes, and it did mute a little bit of some of the Dental sales that we had for prior year. So I see this year's production, this quarter's production as a good indication about the power of our Dental production for the year in comparison to last year. I do think we are comfortable with the rate we're putting out there in the marketplace. And we're the recipient of some market movement in the marketplace of some of our competitors putting in some rate increases that has brought some things back out to market. So we like the profitability that we're seeing in the Dental business that we're writing. And we think it's a good indication for the type of power that Dental business will have for us throughout 2026.

Wilma, hope that helps. Thank you for the question.

The next question comes from Tom Gallagher from Evercore ISI.

First question just on RIS fee flows. 1Q '25, I think you had a jumbo case that you lost. How were the jumbo case call-outs for this quarter? Did you have any wins, losses? How did that influence RIS fee flows this quarter?

Yes, I'll have Chris address that. You're right. Last first quarter, we had a more significant on the lapse side. This quarter, we're seeing it more positive on the transfer deposit side, but I'll have Chris give some more color.

Yes. I think we had really good wins in the first quarter coming off what was a really strong fourth quarter as well. So I think I'd take you back, and we had strong wins. It was a really strong fourth quarter, and that momentum continued in the first quarter. You're right. Last year, we did have a large case loss that we called out. This year, we had broad strength, but we also had a couple of large case wins in the quarter. And so you did see that very significant difference in growth in our transfer deposits. And as you know, the large segments tend to be a little bit lumpy and the SMB market tends to be sort of more steady and strong.

Thanks, Tom. Do you have a follow-up?

Yes, Deanna. So my follow-up, I guess, is for Kamal, the -- on performance. It looks like your 1-year numbers for equities and asset allocation got better. Fixed income slipped a little bit. 3-year numbers fell across the board, though, in all 3 categories. Are you seeing any impact from the performance issues? And why do you think the performance has slipped a bit here?

Yes, I'll have Kamal address that. Obviously, investment performance is something we spend a lot of time focused on. There is some duplication across some of those, especially when you get into asset allocation. But I'll ask Kamal to follow up on that.

Absolutely. So I'll start with your question on investment performance and break it down by the segments. As you highlighted, improvement on the 1-year number in certain pieces and then 3 years, slightly weaker. One thing I'll highlight for you, these numbers do not include our very strong private market performance. In fact, our marquee real estate strategy is #1 in this category. And as you know, that drives a significant flow for us. I think in Deanna's comment, we also highlighted for you that we grew our private market business 11% year-over-year. I would highlight for you, only 1% of that was from macro. So it shows that we have the engine when investment performance kicks in.

But specifically to your question, the area of our core weakness right now is around U.S. equities, particularly active U.S. equities, is an area of weakness, particularly in the short term. The long-term numbers are very, very good. As you said, our fixed income performance has improved, particularly non-U.S. fixed income performance is very, very strong. We see that in our flows, particularly around emerging market debt, which continues to attract a lot of client attention.

Asset allocation is very important. As you know, we offer our portfolio in multiple flavors. One of our strategies on the hybrid side continues to do well, but you have highlighted some of our challenges in the active book that comes from the U.S. side.

And then the last thing I would highlight for you just this quarter is by design, we do run many of these strategies to complement as the passive business has grown across the industry, we, by design, design our products to be different than the index. That does lead to, in periods of high volatility, significant deviation in market performance, sometimes positive, sometimes negative. But that's what the clients ask from us. They don't want index-like products from us. And in periods where we deliver, it creates a tailwind as well. And it also supports our stable fee rate, which you have always highlighted as a strength for Principal Asset Management.

Thanks, Tom, for the questions. Next question.

The next question comes from Michael Ward from UBS.

I was wondering on the Specialty Benefits. Did the M&A that you did in the quarter, like did that contribute at all to the new business growth? And then are there other targets out there that you guys could look to transact on?

Yes. Thanks, Mike, for that question. We did do a small dental network acquisition with a company that we had a relationship with. I'll have Amy talk to that. And obviously, as I've said on prior calls, it's great to be leaning into some areas that can help drive growth as we continue to think about our portfolio. So Amy?

Yes. Thanks for the question. So we did -- as Deanna noted, we did a small dental network acquisition that happened to be in Alabama. It was both a dental network and then some renewal rights for a block of Group Benefits business. We feel really good about that transaction. Your question, though, I think, was specifically was that into first quarter results? And the answer is no. Those were not yet present in first quarter results.

Any benefit we get from that in terms of new business or cross sales or power of our dental network will start showing up in second quarter and beyond. I do like being able to lean into this piece of the business. We've got some really nice engines running for us in the Specialty Benefits business. And I like being able to add to it a bit inorganically to help us with future growth.

Thanks, Mike. Do you have a follow-up question?

Yes. On RIS, I guess, you guys, I would say, have been a little bit quieter just in terms of the inclusion of privates for retirement funds -- in retirement funds. I'm just curious your sort of stance on that issue and how you see that heading going forward for the industry?

Yes, I'll have Chris talk through that. Obviously, we applaud and support thoughtful efforts to expand investment options within retirement plans. The recent DOL guidance is an important step, but I think our stance is it's going to take time. It's going to be slow. And ultimately, as we talk to our customers, they're intrigued but are not pushing to move at a fast rate for inclusion. But I'll see if Chris has some additional flavor.

Yes. Thanks, Michael. Thanks, Deanna. Yes. I mean, I agree. I mean we do support the evaluation of privates to be included in retirement plans. And obviously, we've been offering privates and retirement plans for a long time with our real estate strategies. So we do believe that they play a proper role. But they are complex, and they come with new challenges. And I think the DOL has proposed safe harbor that you need to evaluate the performance and the fees and the liquidity and the valuation and the benchmarking and the complexity. That causes plan sponsors and fiduciaries to sort of step back and really be thoughtful about what works for them, what risks are we exposing participants to.

And so I think we see a very measured approach to people considering the inclusion of privates in the retirement plans. We just had a significant client conference with 50 or so of our largest and important clients and there wasn't tremendous -- there were a lot of questions and a lot of wanting to understand. But I'm not sensing a tremendous like movement toward everyone, including privates quickly into their plans. I think it's going to take some time. And I think as we've said in the past, it's probably going to be introduced first through advice solutions, whether that's a target date solution vehicle or a managed account vehicle because they are complex, they need a little bit more explanation and the plan sponsor fiduciaries and the fiduciary committees are going to just take some time understanding how do we include this, how do we monitor the performance, how do we think about the valuation issues and then how do we deal with the liquidity.

So again, we support it. We're working with a lot of investment partners on including their solutions into various vehicles. But I think it is going to be a bit more measured progress as opposed to a big wave of inclusion here in the short term.

Thanks, Mike, for those questions. Next question.

Our final question comes from Pablo Singzon from JPMorgan.

So just to start off, maybe a question for RIS. I wanted to ask about your efforts to grow spread earnings, whether from institutional flows or AUM sitting in retirement plans. How do you see the fee versus spread mix evolving over time?

Yes. Thanks, Pablo, and great to have you on the call. I'll have Chris really address that. As we've talked about, we really do think about our fees -- how we think about fee and spread is holistically because those are ways that we drive revenue across our retirement ecosystem. So we think less about one versus the other and really think about how they can contribute to overall retirement as well as Principal growth. But I'll have Chris offer some additional color.

Yes. Thanks, Pablo. We have, over the last several years, really put some emphasis into looking at how do we continue to grow our spread-based earnings. Obviously, PRT and the annuities businesses provide some nice spread-based earnings. But as importantly, we've really focused on growing capital preservation options within our retirement plans, which we call sort of WS or SGA solutions. And those, we've driven very significant flows in those over the last several years and including over $400 million of flows in the quarter just on WS or SGA.

We do think there is an appetite for capital preservation products that can serve the needs of the participant and continue to think that there's opportunities to drive that. But we're not targeting any particular mix. Flow -- fee-based flows are really important for us, and we continue to focus on driving profitable fee revenue and at the same time, supplementing and complementing that with the right mix of more capital-consumptive spread-based products to make sure that we're getting the returns on the capital that we're doing, while also at the same time, meeting the needs for our retirement plan participants for capital preservation.

Thanks, Pablo. Hope that helps. Do you have a follow-up?

Yes, I do. And then secondly, maybe for Kamal. I was hoping you could elaborate on your comment about the asset management pipeline being very strong. Is it better than it was a year ago? Are you seeing new opportunities? Anything you can comment on there?

Yes. That's a great final question. We do have a strong pipeline as we sit here today. I think volatility in the market could impact the timing of when that flows in, but I'll have Kamal give some additional color.

Sure. Pablo, thank you for the question. So just to follow up to Deanna's comments, I feel very good about our pipeline. Our commitment pipeline has now grown to over $9 billion. Just to help you understand, these are mandates that we have actually won that have not funded. And they have diversified across both public and private markets largely from our growth in our global client base. And that's key because the demand is more diversified. Historically, we have highlighted for you a pipeline of around $6 billion around real estate. So you can see how this has scaled up. And it also shows that we are continuing to bring new products to the marketplace as well. So I believe the setup for 2026 is very constructive on that front.

Thank you, Pablo. I hope that helps.

We have reached the end of our Q&A. Ms. Strable, your closing comments, please.

Thank you. As we close, I want to thank all of you for joining the call. Our first quarter results underscore the strength of our diversified business model, our focus on execution and growth and our long-term discipline. As mentioned, we are confident in our ability to deliver on our 2026 financial targets, and we're well positioned to navigate the current environment, grow and deepen customer relationships and deliver long-term value for shareholders. We appreciate all of your continued interest in Principal and look forward to our ongoing dialogue. Thank you again for your time, and have a great day.

Thank you. This concludes today's conference call. You may disconnect your lines at this time, and we thank you for your participation.

Welcome to the Bank of America U.S. Financial Service Conference Day 2. This is going to be the Principal Financial segment of the morning. And if you're looking for the beach, you're probably in the wrong place. But otherwise, you're in the right place.

We're really honored and happy to have Deanna Strable, who is President and CEO of the company. I think you're about month 13 or 14 on the job, although I don't know if it happens as much as it used to, you are a Principal Financial lifer starting in 1990 as a junior actuary and having -- really probably had every role of the company all the way up to the big one.

Probably not every role, but...

Not every role.

Thanks, Josh, for having us here.

Thank you for being here.

And happy birthday one day late.

One day late. Yes, yesterday was my birthday. For those listening to the podcast, they probably know that.

Anyway. So let's get started. We're really happy to have you here, especially on a tight schedule. 36 hours ago, you reported your results, you had your earnings conference call soon thereafter. Is there -- are there any year-end or 4Q '25 sort of pointers that you want to get people to think about as they open their minds into the new year.

Yes. First of all, thank you for having us here, and it's great to be in front of everyone. We did just release our fourth quarter 2025 and 2026 outlook. And really the takeaways is '25 was a really strong year and that followed really a strong 2024 as well. And so for the year, we delivered adjusted EPS of 12%, which is at the top end of our targeted range.

On a reported basis, it was even stronger at nearly 20%. Our free cash flow was at the top end or above the top end of our targeted range, and our ROE actually increased 120 basis points and was squarely in the top half of our targeted range as well.

Beyond the financials, I'd say we are seeing strong traction across our businesses, margins are strong and increasing in our major businesses and really starting to really see strong results around the growth priorities that we've been focused on for the last couple of years. And so just as a reminder, those are around the retirement ecosystem, small- to mid-sized businesses and global asset management.

We did also do our 2026 outlook. And on one hand, it's probably kind of boring because it's very consistent with what we delivered in '24 and '25. We are still targeting the 9% to 12% EPS growth. We actually raised our ROE target from 14% to 16% to 15% to 17%, that reflected where we are as we sit here today and then our confidence that, that can continue on a trajectory and still feel good about 75% to 85% free cash flow.

And I think if you look at all of those very attractive relative to our peers, and it's one thing to do that on a 1-year basis, but to be able to deliver that on a consistent basis is something that we're proud of as well.

Well, terrific. I didn't get a chance this morning to look, but jobs numbers came out this morning.

You're ahead of me.

And so I mean, obviously, Principal Financial has been on the vanguard of this great growth in the small and medium enterprise businesses that's been going on for a long time. It's been a huge strength. There's a lot of questions about the nature of work and what it means for small- and medium-sized businesses. And can we talk a little bit about Principal's positioning there and what that particular segment of the market looks like out into the future?

Yes. So again, I mentioned that's one of our focus areas. And SMB has been a focus here in the U.S. for Principal for decades. And we really did build a platform around that, that really allows us to drive outsized growth. And we still feel really good about our abilities to continue to do that across both our Retirement business and our Benefits business.

And just for a little bit of flavor: When we say SMB, it tends to be employers of up to 1,000 employees. I'd say on our Retirement business, we play across that entire range of employers, probably a little bit more on the M side of SMB; and also, as you're aware, on the Retirement side, we actually go beyond that and play in the large case market as well.

If you look at our Benefit business, we're solely trenched in the SMB market and tend to be probably more on the S side of the SMB and have really seen outsized growth there. I think a lot of times, like you said, people think that the SMB is a risky part of the market. And one of the stats that we shared at our last Investor Day is that our SMB customers have been in business for around 30 years.

So again, they're not a brand-new SMB customer that's still trying to figure out if they can make it. They've gotten over kind of the start-up business, and they have far beyond when they're starting to put benefits and retirement plans into that. And many of -- across our block of business, they have also been customers of ours for over 10 years.

And so what we have seen through cycles is probably different than the headlines is that it has been a very resilient and stable part of the market. What we hear from them is they're slow to hire and they're slow to fire. And they tend -- because they know how hard it is to get talent. And if you look at our metrics, whether it be just natural employee growth, it's been very stable and has been around that 2% the last couple of years, which is slightly lower than what we have seen historically, but still within a 1% range of growth.

And so if you look at recurring deposits, if you look at in-group employment growth, really seeing stability there. The other thing I shared on the call, if you didn't listen, is we just fielded a research study, which we do many times during the year on SMBs and how they think about job growth, how they think about salary growth, in general but also in the landscape of AI.

And what we found there is they don't anticipate many changes. 95% of those employers said they plan to increase salaries or keep them stable. And from an employment level, it's about 85% say they plan to be stable or increase. And so we'll continue to monitor that, but we love that business. We do feel it allows us to grow faster than the market, which we've proven.

It's an underserved market. And I think the great news is we have built our mousetrap to really excel in that market. And you do have to approach it differently. If we look across especially the smaller end of that, most of those companies don't have HR departments. And so how you think about serving them has to be very, very different than a sophisticated larger employee player.

You mentioned slightly different targets in terms of being Benefits versus Retirement. Can we talk a little bit about what that means for the cross-sell opportunity and whether leading with Retirement results in also picking up a new Benefits customer and how that's going?

Yes. What I would say is the cornerstone of our SMB strategy is not all grounded in cross-sell. It's really about how do we use our advantages in SMB to drive outsized growth in Retirement and within Benefits and then look for ways that we can leverage those when it makes sense. I would say one of the reasons that cross-sell is more difficult is we do go to market through third-party advisors and those tend to be very bifurcated between Retirement and Benefits.

Not saying that you can't do it. We do have crossover, but that does make it more difficult. I'd say the places where we have seen the largest probability of success in thinking about expanding with our customers is, first of all, total retirement solutions. If you think about our mousetrap in Retirement, we're not just a 401(k) provider, we're a leading defined benefit provider; we're a leading nonqualified provider, which over half of the time is funded by life insurance.

We're a leader in ESOP provider. And so we do see that natural bundle of retirement solutions be a real differentiator, and we see great success there, both on the traction of those cases, the expansion of those cases and the retention of that.

Within Benefits, we see that they continue to add new coverages, and we talked about on the call that on average, we have over 3.1 coverages with those customers as they think about our supplemental, our voluntary, those types of solutions. And then I'd say, too, over the last couple of years that we've really leaned into and are seeing early signs of success is taking our executive business owner solutions in Life and Disability, which tends to be more sold through individual distribution and really using that as a cross-sell opportunity with our core group Benefits solutions.

And then one that's really interesting is actually going out to our asset management advisors and using our SMB expertise to help them go after the business owner market and the SMB market. And so it's not always on the same customer, but those value-adds are really helping both us and our distributors grow our businesses.

If we can hone in on Benefits for a little bit. Can you talk about both short-term and longer-term trends in terms of incidence, severity and what that means for the pricing of the risks longer term, near term? Is it getting easier, is it getting harder?

Yes. So the first thing I would say is, just a reminder, when you look at our Employee Benefits business, it's a little bit different than some of our peers in that it is our largest premium is coming from Dental and then we have also Life and Disability. And we tend to go to market in a bundled perspective, and so I think that is important to understand.

But I do think if you look back claim trends has fundamentally changed since COVID. And a couple of things that have happened there. And I think there's some normalization that will continue to happen. But what you have found is on the Dental side, actually claims have went up, and that's both on the cost side as well as the incident side.

But on the Life and Disability side, we've actually seen loss ratios go down. Probably the most fundamental change is more on disability. And really what the actual work-from-home environment does to disability claims, both incidences, duration, termination, and I do think that's probably a fundamental shift in that it used to be if you had any type of a surgery or any type of an event, you had to go on disability and stay home for a period of time, and work from home allows much more flexibility relative to that.

If you look at our 2025 results, we had very strong loss ratio. Dental was a little bit elevated from where we would like it to be. Life and Disability was more positive from where we wanted it to be. But when you put the whole package together, our loss ratio was still below the lower end of our loss ratio target.

The great thing about SMB is that we can actually reprice that every year. And ultimately, when you can go to a customer and say, "Your whole package can have a very stable premium, but we're going to increase your dental, we're going to reduce your life and disability," that's a really attractive way to go to market to actually allow you to attract, retain those customers, but also deliver to them a much more stable premium base.

And so I think there will be some normalization as we go forward because ultimately, you want to reflect that in the pricing for your customers. But our bundled approach, I think, will continue to serve us well.

Just for the audience here, if anyone wants to ask a question, you can ask it at any time. There's no point of order, so just raise your hand and we'll make that happen.

I want to dig in a little bit more on these trends. So if we go to the COVID or the early COVID period, people stopped seeing their dentists. And then after reopening, everyone had to play catch-up. A, they had to spend unused benefits; and b, like their teeth were probably in pretty bad shape.

Do you think that today, we're now a number of years past that, that it became a time where people better understood the value of that benefit? As you're saying, the trends have changed, are people thinking about their coverage differently than they did 5 years ago?

I think one of the things that we see when we survey employees is that dental is a very valued benefit. And I think some of us like to say, well, life is more important and disability is more important, but dental is one you're going to use, right? And so I think there is a value there relative to that. I actually also think dentists got smarter, right?

They had a couple of years where they didn't have income when people weren't going. And so we have also seen, and I've experienced this personally, you get much more reminders about going to the dentist, you get much more when you go there, they're upselling, they're doing things to continue to make them a profitable business.

So I think it's a little bit of a combination of that. Dental is a benefit that has maximums, and so it's a little bit different than medical and that they can treat anything that's there. And so I do think over time, that's going to cause it to normalize. The other thing that I think is really important is we have an own network. It's a very sizable network and that does allow us to also use our network and how we contract with those dentists to also help utilization and cost trends over time. And so I think the combination of all of those will go into play.

We started pricing for that pretty early in the cycle. We're pretty much through that pricing. It will continue to play out. But ultimately, that will get priced in over time, and we'll see how it will play out. But feel good about where we are in managing that block of business.

As a benefit ratio, is there more risk because there's more volatility? Do you have to demand a slightly higher margin on dentist than you do want in terms of life and disability?

You actually have to target a much lower margin. And the reason is the risk and the capital charge relative to dental is at a much lower charge. And so let's say you target 15% to 20% ROE across all of your businesses, if you have to hold higher equity on life and disability, your targeted margin is actually much lower on dental.

And so again, if you compare -- first of all, if you look at our margins in absolute levels, they're very competitive to all of our peers and also very stable. But if you're comparing it to a company that doesn't have dental, they could have the exact same return but need a much higher margin to be able to deliver that because the risk and capital charge on dental is much less.

And then obviously, there's a lot of changes going on in just the nature of working things, but also in the nature of where our GLPs are a big part of the ecosystem right now and there's some question about how COVID changed lives. Are you seeing anything trend-wise that's changing how you are thinking about group life and then the pricing of those policies for young populations of working people?

Yes. So I think that's a really great point. First of all, when you think about group life, and we're also a little bit different than our peers, it is -- our group life block is entirely working population. Some group life and group disability coverage is more on the larger size, can also weave in retiree coverage, but on the smaller end, it is entirely working population.

That is something we're monitoring very closely, but we've seen no change in trends relative to those items whether it be cancer prevalence, whether it be cancer morbidity or mortality or GLP-1, but I think it's going to be something that over the next 5 to 10 years we'll need to monitor closely. The great news is, again, a reminder that we annually renew most of our business every year. So if we do start to see it, whether it be positive or whether it be concerning, it's very easy for us to react to that real-time.

I think we'll get to Principal Financial Global Investors shortly. But I think that it's easy in some ways for people to see the ecosystem of providing employers with retirement services, with benefits and also wealth management fits in with the retirement, so there's an easier ecosystem. Principal Financial also has a large international business. Where does that fit in with the mission for the company and why is that a core competency?

Yes. So there's a couple of things there. The one thing I would start with is in how we've taken our capabilities outside the U.S. is really finding the places where it can take what we've built on strengths in the U.S. and export that to places where it makes sense and that's continuing to be our strategy.

What you have seen us do is transition from what used to be Principal Global Investors, which was all Asset Management and Principal International, which was a combination of asset management and retirement, and we bifurcated that now. Both of them are under the Asset Management umbrella, but we're really talking about investment management around the globe.

We do have customers in 80 countries, we have investment teams in many jurisdictions, we have distribution teams in many jurisdictions and then we have international pension which is really just in a select few markets where we really feel the ability that we can leverage our expertise, leverage our joint venture partners and ultimately drive diversified growth to the organization.

On the international pension side, really, after a few of our divestitures is really China, Brazil, Chile and Mexico is really the 4 countries that will be within that realm. And then on the investment management side, it really is that global asset management that can -- we can leverage our global capabilities, our local capabilities with customers around the globe.

The other thing I'll mention, which you started from, is if you look at the history of our Asset Management business, it really was built on the backbones of our other businesses and remains there today. And so if you look at our AUM within investment management, about 40% to 45% of it is from affiliated sources, whether it be our retirement business or our general account.

And then we've taken capabilities that are strong there and use that to then leverage with clients around the globe. And so that still is our strategy today. And the other advantage I would say is it does give you diversification. It gives you access to higher growth markets. But on a macro perspective, we do see that diversification helps stabilize the impact of macro on our results.

So let's talk a little about the wealth business. I think you have some core competencies. Commercial real estate has always been a particular strength at Principal. And over the last 5 years, what a 5 years it's been between people saying that offices will be dead to data center build-outs today, where are the mandates coming from right now? What markets are attractive? And to what extent is the demand of institutional investors matching the demand of Principal's general book in terms of where they want to put money to work?

Yes. So real estate has been a core competency for us, both within our balance sheet, but also how we use that to drive growth in AUM with third-party clients as well. We've seen real estate through a number of cycles, and the one that you mentioned is just one of those. And we did see -- our diversification served us well, but we did see a dip in the actual flows that we were seeing from real estate, but we're starting to see that rebound.

And the great news is, if you look at the overall real estate market, there's been 6 consecutive quarters of growth in the real estate returns, and we're starting to see that continue to play out in the confidence of clients and what we also hear from clients is if interest rates continue to go down, it will actually become even a more attractive market.

And so one of the things we talked about is our strong real estate flows in 2025. But also if you combine it with our other growing private capabilities, whether that be private credit or infrastructure, in total, that was about $3.5 billion to $4 billion of positive flows in 2025, and we're continuing to see interest as we go forward.

The other thing [indiscernible] talked about on the call is the interest that we've seen in customers in Asia and the Middle East to some of our capabilities, both here in the U.S. But we are just launching a data center fund in Europe, and we're seeing great demand from the Middle East and Asian customers relative to that as well. And so that's the attractiveness of our global asset management business is that we have client relationships around the globe, and we have investment capabilities in different regions of the country that we can then match relative to that.

The other thing that really helped drive some of our flows in 2025 is we had a number of current customers in the U.S. that consolidated their real estate mandate, and we were a benefit of that. And so again, they may have had 5 or 6 real estate investing arms within their overall book and they were consolidating that. So we had some takeover business as well. And again, that is a testament of how they thought about our capabilities relative to their block of business.

So we do still see privates as an avenue for growth. All 3 of those are also very attractive from a general account perspective given our capabilities. And so that also is attractive because if our customers can see that we're putting our own money there, that actually is a sign of confidence and is attracting third-party clients as well.

So you talked about the data center build-out. On Monday, insurance distribution got kicked in the keister a little bit because of the argument that ChatGPT is going to be infiltrating that distribution model. And earlier in our discussion, you talked about the difficulty of the cross-sell being -- that you'll be holding to distributors. What do you think is the real, at this point, observable change that we think that artificial intelligence can have about distribution for these insurance products?

Yes. I'll start with, I think AI is a tool that we're going to be able to leverage everywhere. And ultimately, I don't think sitting here today, we have any crystal ball that's going to tell us where this is going to end. If I come back to distribution and distribution specifically with SMBs, I think it's going to be a combination of equipping advisors and customers with digital tools, but they're still going to value the human touch.

We see that even today relative to how we distribute and service small- and mid-sized customers. They want someone locally that they can call upon. And so to me, it's much more about how can we supplement the process with technology versus it being a total replacement.

I'd also say relative to your overall question, I think it's going to be much more easier to disintermediate, if it's a very commoditized product. And one of the things that we see in both Retirement and Benefits is, yes, we have to be competitive, but the things that sell and retain business is not your initial price, it's how you're thinking about serving them.

They don't want a problem when there is a claim. They don't want it hard to be able to add and delete employees. And we have invested so much in APIs with both the distribution partners, but also the end customers, that make that really, really easy. And if it did start to go to more direct, we -- it's very easy for us to pivot those capabilities in that way as well. So first of all, I think the -- it was -- it's likely overblown a little bit. We'll see how it plays out. But specifically on retirement, benefits, SMB, I don't see it as a huge risk.

Can you talk a little bit about your own offering in that AI category? You have an assistant, I guess, AI experience, it's proprietary to Principal and what that is and what the early takeaways are from its deployment?

Yes. So I come back to where I started, which is AI is something that no company can ignore, and it has been a real focus of ours both in making sure that our employees have access to that from a productivity perspective and also grounded in broad-based literacy around what those tools can offer. So we do have proprietary tools. We also use many of the leading third-party tools, but we put it in our environment. So it's using our data rather than third-party data as well.

I'll just give you a few stats. And again, 2025 was a year where we really leaned into employee access and literacy. We started the year with maybe less than 1,000 people that had access to the tools. Fast-forward to the end of the year, we have upwards to 17,000 of our 19,000 employees that have access to those tools. And on any day, 7,000 of those are using those tools.

And so that ranges from me using it to help prepare for a customer meeting to much embedded within how we do code development within our IT space, how we think about our engagement centers and helping our people serve the customers better, to claims, to underwriting, to RFP development, to allowing our distribution to have better data as they target customers.

And so again, we have a lot of use cases that we've implemented. We'll continue to focus on those that we feel have value, but unlike past technology, this is probably the most broad-based application. You still have to use it smartly. You still have to have the right guardrails on it, but we're seeing traction, and I think that will continue to even escalate.

There's some argument about the degree which technology is deflationary. Do you -- does this mean that as you roll this out, that actually the amount of spend you do on technology will flatten out over time or is it going to continue to be a -- to slope with your revenues?

Yes. I think those are things that you're still trying to -- we'll see how it plays out. The first thing I would say is there is upfront cost. And that was in our results last year. And even with that, our expenses were only up 2%. And so we're self-funding a lot of this as we think about it.

And as value comes out the other end, it's going to be a combination. Some of that will drop to the bottom line. Some of it, it will actually allow us to have more capacity to get more done with the same amount of people. Some of it will ultimately drive growth. And some of it should help our products and services be more competitive, which in our market will accelerate growth as well.

And so I think it's going to be a combination of all of those. Ultimately, our mission is to be a growing company. And if I can do that with the same number of employees, that's a mission that's going to be attractive to our shareholders and attractive to our long-term success.

So in terms of long-term success, you started at the beginning talking about raising the ROE guidance, I think at the top end of the range in terms of EPS growth and whatnot. Principal has had a commitment to a certain payout ratio, which typically result in 1 or usually 2 dividend increases throughout the year, which is unusual for most companies that make that decision on an annual basis. Can you talk a little bit about the philosophy behind the dividend payout and that use of capital as opposed to buybacks and how the company negotiates those 2 ideas?

Yes. I think we've actually grown our dividend every quarter for, I think, the last few years, as we went through the strategic review, some divestitures, and ultimately, since then, we've been growing our dividend on a quarterly basis. We do target a 40% payout ratio, and we really targeted that to be a reflection of our business model.

It's higher than pure insurance companies, it's lower than pure asset managers, but it allows us to have more stability in that. And ultimately, as we grow the company, we feel that will allow for a growing dividend as well. And so we think that's attractive. But it's also married with a very significant allocation to buybacks as well.

And so between those 2, we really target 75% to 85% payout ratio with a 40% dividend and then the remainder being on share buybacks. And we still feel that we can accomplish that on an annual basis, but still have enough capital to actually drive organic growth within the organization to still allow us to have EPS growth in a near double-digit range.

And so it really is that combination of all of those that we feel is attractive. We're fortunate to have a business that doesn't need a lot of capital to grow. And even in those places where we do have, whether it be spread or mortality or morbidity or risk, they operate more like fee-like and that they don't require tons of capital to be able to grow. And so we do think it's a great combination to be able to organically grow the company with organic deployment of capital, but still have 75% to 85% to either have a progressive dividend or a growing amount to return to shareholders.

You did use the word organic.

I did.

And so the -- I mean not that Principal is not fully formed, but are there looking-into-the-future capabilities, without mentioning anything in particular, that you look at that the Principal family could benefit from? Obviously, you have most notably acquired some skills in wealth management through different strategies and whatnot. But the value of buying things versus the value of retiring your own stock and rewarding a high payout ratio, how do all those things balance together?

Yes. The first thing I would note is we are always inquisitive about inorganic opportunity, but it also has a very high bar. It needs to be very strategic in nature, which, should go without saying, has to meet financial targets. And if you're acquiring people or businesses, there has to be a cultural fit relative to that as well.

And so we'll be inquisitive across the benefit arena, the retirement arena as well as the asset management arena. What I would say is, first and foremost, is we don't need that to deliver on our objectives. We feel good about the ability of our organic capabilities to meet our goal.

The other thing I would say is relative to how it potentially hinders free cash flow, we also have a very low leverage ratio relative to our peers. So we have a 22% leverage ratio, which also gives you currency that you'd be able to use if you wanted to explore inorganic capabilities as well.

Having said that, I think, I go back to it's a high bar and we don't need it. And so we will look at all of those, but ultimately need to make sure that it's going to be additive to our overall, and ultimately allow us to continue to grow at the rates that we've talked about.

Places we'll continue to explore in the private side. But in some situations, we've pivoted to organic builds and have found that to be more attractive than actually making an acquisition of an organization. We've looked at some capability builds, but then you marry that, do you need to buy or can you partner and get the same type of ability as well?

Wealth Management, you mentioned, and we do have a strategy to continue to leverage our 14 million retirement participants to actually establish a relationship that we can continue to grow. But if you think about that, the target is those 14 million participants and the majority of those that we're going to target are going to be those on the lower asset level value, one, because they need our help; two, they tend to be in the sector that are underserved by traditional advisors.

But when you actually look at that then, to find someone that has built tools and have talent that are targeted at that market, it's difficult to do that. And so, again, we have taken a portion of our primarily telephonic education-based, and we're building out -- we currently have about 200 of those that we've licensed to be advisors to serve that market. We'll continue to grow that organically as needed and demanded. But we'll look across the landscape, but I come back to it's not a necessary action that we need to take to deliver on our objectives.

I would like to end on the topic of culture. Obviously, Principal has grown into quite a large company and still I feel -- I'd like to believe that the heart of the company is still in Iowa, but it's a global company now. As you've been larger and we are in a very unique time in human history, what is Principal doing to try and keep the mission tight and unified among its teammates?

Yes. So that's a great thing that I have to focus on, which is how do I create a culture that builds on our strengths for the last 145 years, but continues to have a culture that morphs with the reality of current times, but doesn't lose what's so great about our company.

You mentioned earlier, Josh, I've been at the company for 35 years. Our last few CEOs retired with over 40 years of service. And that is unique, but creates a culture that has continued to be the reason I've stayed at the company for 35 years. And as I've spent many days on the road this last year and over the last few years, the thing I really love is that regardless of what office I walk into, the culture feels very similar.

So today, we have 19,000 employees, 7,000 to 8,000 of those are in Des Moines, but 40% of them are outside of the United States. And so how do we -- and really, that comes back to a lot of times, we'll put people in those locations that can be ambassadors of our culture. We visit them very often to make sure that we're leveraging those cultures.

And actually, COVID makes that easier, right? Our townhalls are much more easy to have on a virtual basis. And ultimately, we want to make sure that we're focused on those areas that make us strong, but also leaning into places around AI, technology, speed to putting things in place for our customers. And that has been a real priority of mine as I moved into the CEO role.

Great. Well, if there is more question as I asked, you can ask it now, we are running short on time, but I want to give one more opportunity. And if not, we can end the session here. And I hope you have a wonderful day.

Thanks, Josh, for all your time.

Thanks for everyone listening. I don't actually know what the next session is. It's not me, but stay on, and thank you, everyone, for joining us today.

Thank you.

Bye-bye.

Good morning and welcome to the Principal Financial Group Fourth Quarter 2025 Financial Results and 2026 Outlook Conference Call. There will be a question-and-answer period after the speakers have completed their prepared remarks. [Operator Instructions]. I would now like to turn the conference call over to Humphrey Lee, Vice President of Investor Relations.

Thank you, and good morning. Welcome to Principal Financial Group's fourth quarter and full year 2025 earnings and 2026 outlook conference call. As always, materials related to today's call are available on our website at investors.principal.com. Following a reading of the safe harbor provision, CEO, Deanna Strable and CFO Joel Pitz will deliver prepared remarks. We will then open the call for questions. Members of senior management are also available for Q&A.

Some of the comments made during this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. The company does not revise or update them to reflect new information, subsequent events or changes in strategy. Risks and uncertainties that could cause actual results to differ materially from those expressed or implied are discussed in the company's most recent annual report on Form 10-K filed by the company with the U.S. Securities and Exchange Commission.

Additionally, some of the comments made during this conference call may refer to non-GAAP financial measures. Reconciliations of the non-GAAP financial measures to the most directly comparable U.S. GAAP financial measures may be found in our earnings release, financial supplement and slide presentation. Deanna?

Thanks, Humphrey, and welcome to everyone on the call. This morning, I'll walk through our strong full year 2025 performance. Then Joel will follow with more details about our financial results, business unit performance and our 2026 outlook. Our results in 2025 follow strong results in 2024, where we delivered our enterprise financial targets in both years, demonstrating the strength and quality of our execution. This momentum and our strong diversified business mix positions us well for 2026. We expect to deliver another year of performance within our target ranges for EPS growth, free capital flow conversion and ROE.

Turning to our results, which can be found on Slide 2, our adjusted non-GAAP earnings per share growth for full year 2025 was 12% and at the high end of our target range. Reported results were even stronger with EPS growth of nearly 20%. This growth was driven by favorable market conditions, strong underwriting performance in Specialty Benefits and margin expansion with disciplined expense management across the enterprise, all while continuing to invest in the business.

[ Performance ] showcases the power of our diversified and resilient business mix. Strong, high-quality earnings and continued margin expansion reflects disciplined execution across all areas of the company. This momentum translates directly into robust capital generation enabling us to invest in growth while continuing to deliver attractive returns to shareholders. We returned over $1.5 billion in 2025, including approximately $850 million of share repurchases and $685 million of common stock dividends, all within our targets.

Our continued focus and execution against our strategic priorities is driving results. As shown on Slide 3, we remain focused on three attractive profit pools: Retirement ecosystem; small and midsized businesses; and Global Asset Management, where growth is stronger, returns are higher, and our integrated business model creates differentiated advantages.

Let me share some key highlights of our progress in each area for full year 2025, starting with the retirement ecosystem in which we offer a comprehensive suite of capabilities across recordkeeping, asset management, wealth management and income solutions. Our momentum is broad-based, where total retirement transfer deposits of $35 billion grew 9% year-over-year and Workplace Savings and Retirement Solutions, or WSRS recurring deposits increased 5%.

This growth reflects our ability to win new business and retain existing clients in a competitive marketplace. What really excites me is the engagement we're seeing from participants on our platform. WSRS deferring participants grew over 3% and those who are saving are saving more with average deferrals per member increasing over 2%. Participant roll-ins reached $6.5 billion in 2025, up 15% over 2024. As we make it easy for participants to consolidate retirement savings from previous employers onto our platform. These engagement metrics demonstrate the strength of our platform and serving participants' retirement needs.

Turning to sales. We continue to see momentum across key channels. Pension risk transfer sales for the year totaled $3 billion across 70 cases at attractive returns. Importantly, nearly 1/4 of PRT premiums came from existing clients, highlighting the power of our integrated retirement solutions. Our retirement investment expertise continues to gain traction. DCIO sales were nearly $8 billion in 2025, demonstrating that our investment capabilities resonate with third-party retirement platforms.

Additionally, this year, we expanded and enhanced our retirement investment solutions addressing a broader spectrum of planned sponsor needs. These connections within and across our businesses dominated distinct competitive advantage as we deliver comprehensive retirement solutions. Turning to our small and midsized business market. Our long-standing focus and differentiated capabilities in this attractive market continues to deliver results. In retirement, growth in our SMB market remains strong. WSRS recurring deposits grew 8% in 2025 and transfer deposits increased 32%. This, along with strong new business activity and retention, resulted in account value net cash flow of positive $1.5 billion.

In Benefits and Protection, we continue to deepen customer relationships. On average, our group benefits customers now have 3.13 products with us, up nearly 3% compared to 2024. Employment growth for our block was nearly 2% on a trailing 12-month basis. This reflects both the resilience of the small business market and the value we deliver to help employers attract and retain talent. Additionally, life business market premium and fees grew 15% in 2025, demonstrating strong demand for specialized solutions, which help business owners protect their key assets.

In Global Asset Management, we're generating strong new business momentum with continued focus on our competitive differentiators. Investment Management gross sales reached $127 billion in 2025, up 16% over full year 2024, with particular strong momentum in private markets where sales increased 50%. Net cash flow in 2025 was strong in key growth areas. Our private markets capabilities generated positive net cash flow of $3.5 billion across real estate, infrastructure and private credit.

Our ETF platform added nearly $2 billion in positive net cash flow, reflecting increased momentum in delivering solutions that meet evolving investor needs. This contributed to strong AUM growth across our platform. private markets AUM grew 12% year-over-year, and our ETF platform reached record AUM of $9 billion. In international pension, AUM grew 24% to record levels, demonstrating the strength of our diversified global platform. Looking across our three strategic growth areas, our execution in 2025 and the momentum we're seen position us well for another strong year in 2026.

Several early indicators stand out. Elevated [ coal ] volumes are materializing across distribution channels, and we're making strategic investments that are driving meaningful engagement and competitive advantage. Managed account adoption is accelerating, with participant enrollment up 51% in 2025 with account values over $9 billion. In our SMB segment, Group Benefits quote activity is strengthening following our disciplined underwriting approach in dental. Additionally, new paid family medical leave markets in 2026 will contribute both as more states adopt mandated requirements similar to past years.

In Global Asset Management, demand for prime market solutions continues to be demonstrated through increased RFP volume up 16% over the average of the last 3 years. Our growth expectations in this space are driven by focused new product development and strengthen through recent mandate takeovers, which further demonstrate client confidence in our capabilities. We're also continuing to innovate in the ways we interact with customers across the enterprise, leveraging data and emerging technologies, including AI, to deepen engagement and improve customer experience. The momentum and strength we are seeing across our businesses continues to build our confidence in delivering our goals as we expand our customer base over $75 million worldwide.

Lastly, as part of our ongoing business portfolio optimization, we recently announced the sale of our runoff annuities business in Chile. This action reflects the continued discipline we've applied over the last several years to strategically focus on higher growth, higher return and more capital-efficient businesses. We are confident in the strength of our current portfolio and the way it positions us for future growth. Before I turn this over to Joel, I want to share some of the important recognitions we've received. For the 14th consecutive year, Principal Asset Management was named a Best Place to Work in Money Management by pensions and investments, earning this recognition every year since the inception of the award.

We are also recognized as a 2026 military-friendly employer receiving this recognition since 2017. In addition, we earned the Equality 100 award for 2026 by the Corporate Equality Index. These recognitions reinforce our culture and competitive advantages help us attract and retain top talent and differentiate us in the marketplace. We closed 2025 with momentum across our diverse portfolio of businesses. I'm incredibly proud of our results and our success is a testament to the focus and hard work of our nearly 20,000 global employees. Their ongoing commitment to excellence and our customers enabled us to capitalize on opportunities throughout the year and has set the stage for continued growth in 2026. Joel?

Thanks, Deanna. Good morning to everyone on the call. I'll walk through our financial performance for the fourth quarter and full year, provide updates on our capital position and share details of our outlook for 2026. Our full year and fourth quarter results can be found on Slides 4 and 5. We delivered strong full year results, meeting or exceeding our 2025 financial targets. Full year non-GAAP operating earnings, excluding significant variances, were $1.9 billion, or $8.55 per diluted share. This represents a 12% increase in EPS over 2024 at the high end of our 9% to 12% EPS target.

Results for the quarter were also strong, with non-GAAP operating earnings of $499 million or $2.24 per diluted share, a 7% increase over a very strong fourth quarter in 2024. Variable investment income improved in the third quarter with quarterly and full year returns better than 2024 and in line with the assumptions provided during our 2025 outlook call. In addition to the OE improvement, similar to last quarter, we had a gain on a real estate transaction reflected below the line of approximately $40 million pretax.

Non-GAAP operating ROE for 2025 was 15.7%. And an improvement of 120 basis points compared to the year ago period and at the high end of our 14% to 16% target range. Margins also strengthened, expanding 80 basis points to 31% for full year 2025. This improvement was driven by top line growth and disciplined expense management with compensation and other operating expenses increasing 2%. These results reflect strong business fundamentals across the enterprise, disciplined expense management while investing in the business and favorable market conditions.

Turning to Capital and Liquidity, we ended the year in a strong position with $1.6 billion of excess and available capital. This includes $800 million at the holding company at our targeted level, $300 million in our subsidiaries and $480 million in excess of our targeted 375% risk-based capital ratio, which is 406% at year-end. We returned $1.5 billion to shareholders in 2025, comfortably within our target. This includes $851 million of share repurchases and $684 million of common stock dividends.

In the fourth quarter alone, we returned $448 million of capital to shareholders, including $275 million in share repurchases and $172 million in dividends. Last night, we announced an $0.80 common stock dividend payable in the first quarter of 2026. This is a $0.01 increase from the dividend paid in the fourth quarter and a 7% increase over the first quarter of 2025. This aligns with our targeted 40% dividend payout ratio and demonstrates our confidence in continued growth and strong capital generation.

Moving to AUM and net cash flow. Total company managed AUM was $781 billion at year-end, down $3 billion sequentially. Compared to the fourth quarter of 2024, AUM increased 10%. The modest sequential decline was primarily driven by $13 billion of disposed operations, which has no impact on our future earnings outlook. Net cash flow was negative $2 billion for the quarter. with positive private flows of $1 billion. As a reminder, our net cash flow definition excludes the $2.4 billion of dividends reinvested within our mutual fund franchise. Moving to the businesses. The following commentary excludes significant variances, which can be found on Slides 17 and 18.

Starting with RIS and as shown on Slide 6, we delivered strong results. Full year net revenue grew 4%, comfortably within our target range, driven by growth in the business and favorable markets. Operating margin of 41% expanded 90 basis points over 2024 and was at the top end of our target range, reflecting our disciplined focus on profitable revenue growth. Pretax operating earnings grew 6% over 2025 and 3% over the prior year quarter. driven by higher net revenue and disciplined expense management. Fundamentals across retirement business remained strong. WSRS recurring deposits grew 5% for both the full year and from the year ago quarter.

Transfer deposits totaled $35 billion for the year, up 9%, including $3 billion in pension risk transfer sales. The fourth quarter was particularly strong with transfer deposits of $12 billion up 35% year-over-year. Turning to Slide 7. Principal Asset Management delivered strong earnings on revenue growth and margin expansion. Within Investment Management, full year adjusted revenue growth of 4% was at the low end of our 4% to 7% target range. The divested businesses had a 150 basis point impact on net revenue growth in 2025 and with no corresponding impact to earnings. Pretax operating earnings for the year were strong, increasing 5% to $610 million, driven by growth in net revenue and margin expansion. Full year operating margin of 36% expanded 60 basis points from a year ago and is within our target range.

Within international pension, we delivered strong AUM of $154 billion an increase of 24% year-over-year. For the full year, while we had strong fee revenue growth in Latin America, net revenue declined 2% due to foreign currency in the Hong Kong business, which we are exiting. Operating margin of 46% for the full year expanded 170 basis points from 2024 and was within our 45% to 49% target range. Fourth quarter results reflect typical seasonality and onetime expenses, and we expect improved earnings in the first quarter.

Turning to Slide 8. Benefits of Protection delivered pretax operating earnings of $177 million in the quarter, up 7% compared to the prior year quarter, driven by life insurance, which was up 29%. Full year pretax operating earnings increased 7%, driven by 11% growth in Specialty Benefits. Starting with Specialty Benefits, Full year premium fee growth of 3% was below our target range driven by lower net new business. Operating margin of 16% for the full year expanded 120 basis points compared to 2024 and was at the high end of our target range of 13% to 16%. The adjusted loss ratio of 59% for the year was the best in our history, improving 130 basis points from 2024 and below our 60% to 64% target range.

These results were driven by favorable experience across group life and group disability. Dental underwriting results show meaningful improvement with another quarter of year-over-year gains. These strong underwriting results underscore the effectiveness of our management actions to drive profitable growth. In Life Insurance, full year premium and fees increased 3% within our 1% to 4% target range a strong business market growth of 15% more than offset the runoff of our legacy block. Operating margin of 10% for the year was below our 12% to 16% target range impacted by higher claim severity during the first half of the year. Long-term mortality remains within our expectations.

As we close out 2025, our results reflect strong execution across the enterprise. We delivered earnings per share growth of 12% and ROE of 16%, both at the high end of our target, expanded margins in every segment and generated strong free capital flow conversion of 92%. We maintained our disciplined approach to capital deployment, returning $1.5 billion to shareholders. This momentum, combined with our strategic focus on the retirement ecosystem, small and midsized businesses, and Global Asset Management positions us well as we enter 2026.

Before turning to outlook, we want to acknowledge that consistent with past practice, supplemental investment slides have been made available on our website. Now turning to our outlook for 2026. As shown on Slides 10 and 11, we are well positioned to, once again, deliver on our enterprise financial targets in 2026. With 9% to 12% growth in earnings per share, 75% to 85% free capital flow conversion and 15% to 17% return on equity.

The ROE target has increased reflecting our strong 2025 results, competitive positioning and the capital efficiency of our diversified business mix. These targets assume normal market conditions throughout 2026 and reinforce our confidence in the sustained delivery of our financial targets. We remain committed to returning excess capital to shareholders and are targeting $1.5 billion to $1.8 billion of capital deployments in 2026. This includes $800 million to $1.1 billion of share repurchases and an increase in common stock dividend aligned with our targeted dividend payout ratio.

Our EPS target is on an excluding significant variances basis and therefore, assumes run rate variable investment income, or VII. In 2026, we once again expect our reported VII results to improve year-over-year. We will continue to quantify the impacts on reported results from higher or lower-than-expected VII as a significant variance in our earnings calls throughout the year. Turning to our business units. Slide 11 outlines our financial targets and 2026 outlook considerations. Notably, our strong execution and profitable growth gives us confidence to revise several of our margin targets upward.

In RIS, building on the strong results in 2025, we are increasing our margin target to 38% to 41% and expect to be at the upper end of the margin range in 2026. Net revenue target of 2% to 5% remains intact. The following outlook commentary for Investment Management and international pension accounts for our previously announced divestitures with the related impact detailed on Slide 10.

In Investment Management, we are increasing our margin target to 35% to 39%, and we remain confident in our ability to deliver on our 4% to 7% adjusted revenue growth target consistent with 2025. In International pension, our margin target is increasing to 46% to 50%, with 2026 expected in the upper half of that range due to growth in higher-margin businesses. We expect to be at the low end of our 4% to 7% net revenue growth target in 2026. In Specialty Benefits, we have updated our premium and fees target to 5% to 9% to better reflect our growth expectations, which remain above industry levels.

In 2026, we expect higher growth at the low end of the revised range, with growth improving throughout the year. Our margin target is increasing to 14% to 17% with 2026 expected in the upper half of the range. Our loss ratio target of 60% to 64% remains intact with 2026 expected to be strong and at the low end of the range. In Life, we are moving a subsidiary supporting enterprise distribution to corporate. This completes the alignment of our affiliated distribution functions within the same segment. As a result, we expect 2026 overall premium and fee growth of negative 2% to negative 4%, and while business owner market continues to grow at over 10%.

Our margin target of 12% to 16% remains intact, with 2026 expected at the low end of the range. Notably, the realignment of fee revenue will have no impact on life or total company earnings. Before opening for questions, I want to remind you of a few seasonality impacts. In Investment Management, the first quarter is typically our lowest quarter for earnings due to seasonality and deferred compensation and elevated payroll taxes. We expect $30 million to $35 million in seasonal expenses in the first quarter of 2026.

In Specialty Benefits, dental claims are typically higher in the first half of the year. Similar to the pattern in 2025, these factors will contribute to higher total company earnings in the second half of 2026 compared to the first half. Additionally, they drive the seasonal pattern of free capital flow which increases throughout the year. As we look to 2026, we have positive momentum and are well positioned to deliver on our financial targets for a third consecutive year. This concludes our prepared remarks. Operator, please open the call for questions.

[Operator Instructions]. The first question we have comes from Wes Carmichael with Wells Fargo.

I had a question on investment management, but I just wanted to ask how you're thinking about the outlook for performance fees in 2026? I know they were a bit more muted in 2025, but curious if the outlook has changed at all.

I'll have Kamal address that.

I think performance fee is, as we've always highlighted, typically in that $30 million to $40 million in an average year. At this stage, I would still expect '26 to be very similar to the trend we saw in '25. So there are no significant changes on that front.

Wes, did you have a follow-up?

A question on earnings and maybe related to real estate, but one of your peers this quarter mentioned that they were redefining operating earnings related to real estate and I know you, in Principal, have a bit of a higher allocation to real estate compared to some peers. So curious if that's something that you maybe looked at as well?

Yes. I'll actually ask Joel to address that one.

Yes. Wes, first and foremost, congrats on the new role. I hope it's going well. Yes. As it relates to definition, we do reflect our operating earnings within our real estate properties within operating earnings. I'm sorry, the depreciation is reflected there. But what's important is for our outlook purposes, we always do in an excess basis. And so we're going to compare run rate to run rate when we do our guidance. We do expect improvements in our VII for 2026 relative to '25 just as we have in recent history. So we are expecting some upside on that front.

But if you look at what we do from a guidance perspective, it doesn't contemplate that improvement within VII. We do think that there is some merit to doing that is what they're doing because I do think it better reflects the total return, and we are contemplating doing that for first quarter '26. But again, it was not contemplated in our outlook. Because our outlook is based on an excess fee basis. Hope that helps with.

Our next question comes from Suneet Kamath with Jefferies.

I wanted to start with some of the job headlines that we're seeing. I mean they continue to point to challenges in the market. I appreciate the slide with the SMB employment growth of, I think, 1.8%. So it didn't look like it hit you in 2025. Just wondering maybe what you're seeing and what are your expectations for employment growth for 2026.

Yes. Thanks, Sumeeth, for that question. Since that does impact a couple of our businesses, I'll take a stab at answering that. And if you have a follow-up, we can go deeper. So obviously, we're early in the understanding of the impact of AI on job levels, and it will likely take some time to play out and will likely also vary by client and industry. There is a few things, I think, that are worth mentioning that we do know. First, when you look across both RIS and Specialty Benefits, we are not seeing any meaningful impact. Employment growth remains positive. It remains stable from a growth perspective. And even if you go over and look at what wage growth, that remains strong as well.

The other thing I'd point to is we periodically field a well-being index relative to SMB employers, and we just fielded that in the last month, and our customers really aren't expecting a near-term impact. In fact, we actually asked with respect to how they expect AI to impact staffing levels and 85% expected levels to either stay the same or increase. And then when we ask them about impact of AI on salary levels, 95% expected wages to stay stable or increase. And the last thing I'll mention is, given that we do have 180,000 employer customers across the enterprise, I think we will benefit from the diversity of our block sonic and how that plays out. We'll obviously continue to watch this closely, communicate any changes in what we're seeing. But sitting here today, we aren't seeing signs of impact.

Okay. And then I guess, just as we think about the Institutional Retirement business, we are hearing more companies talk about expanding into wealth management and there's some costs associated with that. I know you have your own approach, but I'm just curious, how are you sort of differentiating? And how do you avoid channel conflict with perhaps the FAs that sell your 401(k) plans?

Yes, I'll actually ask Chris to spend a little time on that. If you go back to our November '24 Investor Day, we did talk about that being an area that we were leaning into, to continue to: one, deliver outcomes to our customers, but also drive growth as we go forward. And we're on that journey, and I'll ask Chris to answer your specific questions.

Thanks, Deanna. Thanks for the question, Sumeeth. So again, we've talked about rolling out our advice model and we provide more advice to our participants. Our approach is different. We are just focused on those people that are already customers of principal in their 401(k) plans. And so we're very much focused there. And we're also focused on people with less than $1 million, $1.5 million of assets. And so we really are focused on a segment that we believe we have a right to win with that need our help in services, and we're seeing nice momentum in that.

I think we mentioned on the prepared remarks, we saw nice increases in roll-ins. As a result of being able to provide advice. We've added more than 100,000 new customers as a result of these services in the last year. And we're just seeing nice momentum. So we do think we have a differentiation we do believe we're focused on a segment of the customers that while advisers may be interested in them, they're much more interesting people with a lot more investable assets. And so we're working closely in partnership with a lot of our close advisers to make sure that we partner together and get the people, the advice that they need and then figure out how to share the economics of that going forward. I hope that answers the question, Sumeeth.

Our next question comes from Wilma Burtis with Raymond James.

Can you guys hear me. Deanna, maybe you could give us some color on the strategy for some of the small divestitures in international. Thanks.

Yes. Thanks, Wilma, for that question. And I'll maybe step back a little bit. As you know, we've had several meaningful changes to our business portfolio over the last few years. These changes were all risk reducing and more importantly, put us in a great position to deliver on our strategic and financial objectives as demonstrated in our strong performance since then. As I think you've proven and you mentioned it more particularly in a few of our businesses, we will continuously assess our portfolio and make any changes as needed. And the recently announced divestitures are really just an ongoing continuation of our portfolio optimization, ensuring alignment with our growth priorities and a focus on higher growth, higher return businesses.

As Joel talked about relative to the outlook and you saw on those slides, those divestitures will have some impact on some of the financial metrics, whether that be revenue, net cash flow, AUM, capital. But I am confident that all of them will enhance our strategic focus and ultimately be accretive to EPS and ROE. As I sit here today, I feel strongly we have the portfolio we need to deliver consistently on our financial aspirations.

And going forward, I feel we're also in a position where we can be much more focused on growth rather than the ongoing optimization of our portfolio.

Could you talk a little bit about what -- could you talk a little bit about what gives you the confidence to raise the ROE target to 15% to 17%. I think the results have been pretty consistent, but maybe just go in a little bit more detail? And are there any dynamics that might support are we even higher or at least in this pretty solid range longer term?

Yes. I'll have Joel reach into that. As we came into the year, we hadn't actually moved into the range that we had been targeting previously, which was 14% to 16%. And Obviously, sitting here today, we're really proud of the increase we saw. And as we look forward, we felt confident that, that higher range made sense for the trajectory of our businesses. and also contemplate some of the divestitures that I just talked to you about as well. But I'll turn it over to Joel for more input.

Yes. Well, just to complement that, that's a sign of our connection and ability to continue to increase our ROE. As you saw the nice improvement that we have year-over-year. If you look at the 14% to 16% guidance, we're sitting here today at the high end of that, and we expect additional improvements going forward. And again, that's just a price of our competitive positioning, our differentiated business model and our capital-light businesses that not only allow us to invest in organic growth but also make sure we provide plenty of capital to shareholders through share buyback and dividends, which again are both ROE accretive. So again, it's a proud of our conviction and our ability to continue to drive top line growth deliver profitable growth and also with the ROE expansion that we're committing to.

The other thing, Wilma, I'll add on that is we also want to continue to organically grow our businesses. And so ultimately, it is a combination of our metrics that we have a lot of conviction in and also feel are attractive to our shareholders, but feel that, that new range more reflects what we can expect to see over the near term.

Our next question comes from Joel Hurwitz with Tallinger Partners.

First, following up on Wilma's question on shedding the noncore businesses. I appreciate the financial impacts to revenue margins but what were the -- or are the capital benefits to those sales? And then when I think about your overall businesses, sorry, when I think about your overall businesses, you still have like the legacy Life block. Any potential to divest that?

Yes. The first thing I would say on your second question is we like our portfolio of businesses that we have today. We'll obviously explore, if anything, makes both strategic and financial sense, but that's not on our top priority as we think about our portfolio of businesses today. And then I'll ask Joel to respond to the capital implications on our announced divestitures.

Yes, Joel, thanks for the question. So as it relates to announced divestitures, we had a couple of asset management businesses in 2025. We had to run off Chile annuity business in early 2026. All those impacts were fully contemplated within our outlook. And so we have both the earnings impact, which is de minimis. We had the revenue impact, which I communicated in my opening remarks and quantify the year-over-year impact that the revenue headwinds are going to create. Again, no meaningful impact to profitability, but does impact year-over-year revenues. And from a capital perspective, those are fully reflected within our outlook guidance. And therefore, it's within the $1.5-billion to -- $1.5 billion to $1.8 billion capital deployment that we have there.

From a quantification perspective, a question that we are getting on the Chile annuity runoff business. Just to frame a reference in 2025, the revenue was about [ $5 million ] of revenue, and the earnings were about $30 million pretax, just to give you a sense as far as what the magnitude of that business was. And as it relates to the timing of the transaction, we're contemplating. We think from a regulatory approval perspective, it will likely be third quarter 2026 when that transaction closes.

Joel, I hope that helps. Do you have a follow-up question.

Yes. I guess I would just follow up on that, right? If it's $30 million pretax, right, that's call 10-ish percent of international and you said it would be EPS accretive. So just trying to think about the actual capital benefits and how that becomes EPS accretive. Is that in the buyback if it's closing in the back half, should we expect some accelerated buyback in '27?

Yes. So it will be accretive once the transaction closes. And with the capital that's freed up because of the transaction, we are expecting elevated share buybacks in 2026 that takes that into account. And so again, we do expect to deploy the capital pretty shortly thereafter, not only for share buybacks, but also to fund organic priorities as well that are going to be a happy return on what cell annuity business was.

Our next question comes from Tom Gallagher with Evercore ISI.

First question is on spec benefits. You had a strong dental underwriting quarter. I know it's your biggest business at least by premium. And I know it's seasonal, you would certainly pointed that out. But when we think about -- I know you've also been getting rate though. And I just want to understand what we should expect a loss ratio standpoint as we head into the first half of 2016. Did you get more rate in that business in '26? Or what you got in '25 was enough. And so I guess, the punch line on that is, should we still expect a low to mid-70s loss ratio in the first half of this year? Or do you think it will be improved over that driven by pricing?

Yes, I think that's a great question. I'll have Amy address that.

Yes. Thanks. Appreciate the question, Tom. So I do want to start back. You are absolutely right that dental is a large product for us in terms of what it takes up in terms of our total premium. But keep in mind that we really go to market with a bundled set of solutions. So we sell, we renew, we serve as we price with that bundled product in mind. So we always have multiple products, usually three or more kind of a play at the same time. So when I answer for dental, that's usually just part of the picture we have going on with that customer.

But you noted the dental pricing changes. I do want to add one other dimension to that is that we have a nicely competitive owned dental network as well. So we have great relationships with our providers. We have that dental network. That is something that we can work to continue to optimize. I would say the dental pricing as well as the dental network optimization efforts are the two things that are really going to pull through into the loss ratio that we see in I would say the dental pricing efforts are what we saw come through in late 2025 in terms of that improved loss ratio, more of the dental network optimization will show up in 2026.

So they have been historically running at that rate that you quoted, which would be kind of in that low 70s. What I would assume is that we will continue to see that loss ratio move down in 2026. Likely we'll actually see more improvement in 2026 than we saw in full year 2025. Again, that's going to be driven by not just pricing, but by that network optimization. Something in the very high 60s is something that feels a little bit more like what I would think of as the longer-term performance for that dental block.

That is helpful. And for my follow-up, just, I guess, a broader question on free cash flow. You did 22% in 2025. That's a certainly top quartile in terms of the peers. Curious if you kind of zoom out and say, how are you able to produce such a strong level of free cash flow and what gives you confidence in the 80%. I don't even think that at least that I'm aware of you're using a big Bermuda strategy that a lot of your peers use. But what is it about your strategy? And if I just compare Principal to peers that produces such a better free cash flow outcome? And I also say that through the lens of I know you're pivoting within RIS toward more general account, which is usually associated with more capital intensity, not less, yet your free cash flow is still quite strong. So sorry for the long-winded question, but curious, any comments on that?

Yes. I'll make a few comments, and then add Joel, to add on. I think with the actual calculation, there are some nuances that makes 92% a little bit higher than actual kind of what you would think on a run rate basis. But I think I come back to when we came out of the strategic review, we really refocused on places where we could drive, again, capital-efficient businesses, aligned with our strategic imperatives. And the company is very, very focused on ensuring that organic capital deployed is going to places that are accretive to our ROE, but also carries strong value of new business as well.

And so I think we've really transformed the company to figuring out how to optimize EPS growth, free cash flow and ROE. But the nature of our businesses are inherently lower capital-intensive which allows us a lot of flexibility to strategically think about how we deploy the capital to the most strategic and financially accretive opportunities. But with that, I'll turn it over to Joel.

Yes, Tom, as Deanna said, we really like our mix of business, and it gives us a lot of flexibility and optionality to make sure we can deploy organic capital in the highest impact way. Just like we talked about with inorganic opportunities, we have a high bar with organic as well. we place a lot scrutiny and how those finite dollars are being spent and making sure that they're optimized. And so a really good mix of business. and we feel really good about our ability to deploy capital for organic purposes and also free up plenty for share buybacks and dividends, et cetera.

And so as it relates to that 92% you quoted, just a technicality, and Deanna mentioned this a little bit. as related to some of the nuances within the calculation. I'd say more of a run rate was high end like 85% when you take into account things in the denominator such as extra assumption review and other noncash activities, but still high end, still have a lot of conviction, our 75% to 85% free capital flow conversion. And again, that affords us a lot of optionality and ability to drive shareholder value.

Our next question comes from Jack Matten with BMO Capital Markets.

Just a question on Investment Management. Can you talk about your outlook for sales and net flows this year? And any leading indicators around RFP volumes or anything else that you can share regarding that outlook?

Yes. Thanks, Jack, for the question. I'll ask Kamal to address that.

So I think your question is around what I see in terms of future outlook from our clients. So I'll point to you a couple of data points. One, as the industry is maturing, we are continuing to pursue new avenues of growth in asset management. First, I would highlight for you a new pipeline of committed transaction and due diligence activity we are seeing in our European real estate business after a while, particularly in partnership with a lot of Asia-based institutional investors, particularly family office.

One of the things that's benefiting us is we have a lot of experience in this space. But we also have an ability to structure these transactions, depending on their preferences, and we see a growing pipeline of activity in that space. And I'm quite excited about these relationships because these are incrementally new clients that will come into principle that we have not had before and we can increase our cross-sell opportunity with them over time as well. The second piece I would point out to you is we also continue to grow our international wealth platform. In fact, just recently, we've launched a wealth product, a private well product in France that exceeded expectations in January with respect to its initial fundraising.

What we are targeting is the independent financial network in France that will help grow that business. Particularly, a lot of that market is covered by bank and insurance products. And we certainly think we have an opportunity there. And it also elevates the brand of Principal Asset Management in Europe. And then the last thing, there has been a lot of interest around strategic partnership. We have a very high bar of selectivity around it. But I would point you to, recently, we signed an exclusive partnership with a leading Islamic bank in Saudi Arabia to design a market-leading private market solution that they seeded with significant capital. We're also working with the asset management arm of that entity to grow into the wealth market. As you would imagine, Saudi Arabia is 1 of the fastest growing markets over the next decades. And a highlight I would point to you is in 2025, we have also grown our private market platform substantially. Over $16 billion of our AUM now in private markets comes from upside real estate. So it gives me great confidence that the pipeline is building both around clients and newer avenues of growth. Hope that answers your question, Jack.

Maybe sticking with IM. The management fee rate in the core was 28.4%, a bit lower than where you had been running. I know that there was kind of some [indiscernible] volatility on a quarterly basis. But just any color on what drove the movement this quarter and anything on your outlook there?

Sure. Yes. So this quarter, there is some noise related to almost $13 billion of divestitures that impacted that revenue growth comparison time periods. But I would point out that it didn't have any impact on earnings. If you include the divestiture, they had roughly 2% revenue growth impact, reducing our 25% growth rate in IM around 4%. There's also an underlying mix of public market strategies and associated performance variability that had some small impact on AUM-based fee rates that you're quoting.

The way I would ask you to think about this is as we continue to grow in private markets around the globe, client demand has shifted to higher return strategies, particularly development intern strategies that do use some level of leverage. Because the strategies are anchored around committed or invested capital other than reported AUM, you could see the mix create some temporary mismatch on average fee rates when you compare it on a traditional basis points over AUM basis.

Importantly, these strategies will incrementally generate more transaction and more performance fees for us. So they support stronger revenue growth and earnings over time. Also in many of the stabilized asset mandates, particularly the takeovers we see in the U.S., given where we are in the real estate cycle, a lot of those mandates are anchored on net operating income, NOI, which is good for clients. And that creates opportunities for us to create value for our clients as well. I think you heard in our comments earlier that we delivered 9% growth in private market revenue this year. So what I would say is the dynamics would create higher variability in the fee rate that you are observing, but we are focused on delivering the revenue growth as we talked about in our targets.

our next question comes from John Barnidge with Piper Sandler.

I appreciate the opportunity. My first question, on the investment portfolio, how do you think about exposure to software within that? And how do you think about the AI impact to the pricing dynamic from a knock-on perspective to benefits and protection

Yes. I'll have Joel talk about the investment portfolio and then Amy can add some questions regarding if any impact she expects within her business as well.

Good morning, John, as it relates to investment portfolio, we continue to feel very good about our overall portfolio well positioned, high-quality, well-matched our liabilities. As it relates to your specific question on software exposure, we are underway. At less than 1% of our GA. And importantly, our deals are underwritten on a cash flow basis and not just on a recurring revenue basis, and that reflects our conservative nature of underwriting. Given our quality well-diversified portfolio, credit risk and drift remain very manageable and remains in line with long-term expectations, both in the current year 2025 as well as the outlook for the future and certainly is factored into all capital deployment expectations.

Amy.

Yes. So thanks, John. Here's how we think about it in terms of AI adoption and -- we don't love to do a lot of guesswork. So we actually go out there and do some primary research on this. Deanna mentioned the well-being index. It actually gave us some really good insight. The last couple of rounds late October, like October last year and then the rounds that we did this year, we definitely see small and midsized businesses as saying they want to adopt more technology they're actually seeing though that AI adoption as more of a growth driver for them.

So again, as you turn into larger companies, they might cite more of the efficiency play, some of the efficiency and workforce dynamics, they need to get out of smaller businesses gather up a little of that, but they're actually seeing it as an ability to know their customers better, to design journeys better for them and to democratize some of the pieces of technology that haven't been affordable for them in the past. So they see it as a growth driver.

The data within our own block does not indicate that we're seeing impacts on this. We're seeing a pretty stable set of expectations around what happens with job growth. I will say Deanna mentioned this before. There is an interesting dynamic on wage, Almost every single SMB that we have talked to and surveyed indicates that they think the likelihood that wages go up is very high. So wages going up tends to not only help benefits and protection, but be something that can transfer over into Chris' businesses as well in the retirement business.

John, do you have a follow-up?

Yes. Principal Asset Management was unifying investment management and international pension. And we're now a couple of years into that structure of the business. And I think there was a comment earlier about continuously evaluating the portfolio. Should we think about businesses within that international pension business where there isn't a natural synergy for investment management within the Principal Asset Management umbrella being kind of the focus area for that. I'd love to hear more.

Yes. I think there's a couple of things there. And I think some of Camel's examples show that by separating and recalibrating our asset management business into investment management and international pension is allowing the investment management arm around the globe to really focus on that we can drive growth and traction with our assets -- our capabilities around the globe. Specifically, if you look at some of the recent international pension divestitures, they have been focused there. But I come back to the remaining entities and assets within our international pension, we feel our strategic and can continue to drive value and growth. And in some situations, also can contribute to the to the IM growth picture as well by leveraging that customer base and our relationships. So hopefully, that helps.

Our final question comes from Alex Scott with Barclays.

First one is on the international pension business. I just wanted to dig into the outlook a little bit. If I take the revenue guide at the lower end, and I think you mentioned the margins at the higher end points to over $300 million. And this is a business where it's been more flattish in terms of earnings growth for the last few years. And I think I heard you mentioned you're losing $30 million from the divested business. So I just wanted to see, what's driving this optimism around being able to grow it this year in a more meaningful way?

Yes. I'll maybe have Joel dig into that and see if we can respond to that.

Yes. So Alex, if you look at where we are in 2025, about $279 million after tax -- or I'm sorry, pretax on an FSP basis. And so that's the basis that we're building on and going into 2026. And we feel certainly that we deliver on that $300 million target in 2026.

A couple of things, a couple of data points. [indiscernible] our assets under manned at record levels, $154 billion as we sit here today, a 24% increase year-over-year. And importantly, from a macro perspective, there is some -- finally some FX tailwinds emerging within these businesses where those local businesses have been dealing with FX headwinds for a period of time.

So even in 2025, there was FX headwinds impacting the business that mitigated the growth a little bit, but that is turning the corner, not only as of year-end 2025 with our strike price, but also you see some of those FX tailwinds emerging in January and thereafter as well. So what's going to be nice if the underlying profitability this is going to show through, not just on a local currency basis but also on a U.S.-denominated basis when you translate those earnings back to U.S. dollars.

Kama, is there anything you'd like to add?

Alex, I'll just point you to 2 data points that should help you. One, we do see a lot of value in many of our pension businesses. I'll point to Mexico as an example. Just in '25, we actually delivered $300 million of positive NCF in Mexico. And the Mexico pension business, for six consecutive quarters has shown positive NCF and growth. So some of these businesses are small and in turn around and they will add earnings growth.

The other piece I would point to you is that geography may not show up in pensions, but we are creating value. Chile is a perfect example where we have a strong moat and brand in the pension business, and we have really leaned into our talent and cross-selling around that brand to grow the IM business, and Chile continues to produce for the [ positive ] net cash flow for us in IM. So you want to think about the turnaround businesses as well as the businesses where we are cross-selling and growing our IM platform.

Thanks, Alex. Do you have a follow-up?

Yes. For a follow-up, I wanted to ask you about industry consolidation. I know you've gotten this question over time. I think it's maybe becoming more interesting just because of some of the advances in technology and Principal Financial Group, I think, been well above average in terms of implementing some of these new tech. So, is that an opportunity to potentially participate in consolidation and leverage your edges maybe with somebody else's business as well?

And I guess the flip side is, is it a risk from the standpoint of if there is consolidated and some of your peers are getting bigger, do you need to think harder about it from that standpoint, too?

I'll make a few opening comments and then maybe ask Chris to talk specifically within the retirement business. So the first thing I would say is that we feel good that we don't need an organic to deliver on the near-term objectives that we've laid out. I'd also say that within all of our businesses, we participate and look at any opportunities that are coming to market.

But there is a unique aspect of both the benefits and protection business and the retirement business in that there are multiple ways to play in that consolidation. Obviously, you can strike a check and get a block of business or because those two businesses have a feature where those employers constantly check the market, and decide where they want to move that. You can also still participate in inorganic opportunity on a case-by-case basis in the open market. So we are obviously very focused on that. But out of the industry discussion has been around retirement. So I'll maybe see if Chris has anything else to add.

Yes. Thanks, Alex. Thanks, Deanna. Yes. I think in retirement, it's been consolidating for quite some time. We're still at, I think, north of 40 overall record keepers and I do expect that to consolidate pretty significantly over the next decade. I think the great position that we're in is we're already at scale.

We feel really good about the scale that we have, and we continue to grow our overall block of business and book of block of participants that we continue to serve. You heard that we continue to grow that amount. And so there's two ways to do the consolidation. One is to go pay a premium for a book of business and the other is to compete it and win it in the marketplace. And our current focus is really about competing in the marketplace and winning it as smaller subscale providers are having a more and more difficult time to meet the needs and demands of employers of participants and the vast and significant regulatory changes that continue to come.

So, we like our position. We're going to continue to look for those opportunities, but we're actually able to win in the market and feel good about our overall position as it exists today with a focus more on organic growth than any sort of premium that we pay to acquire a book of business.

Thanks for question. Are there any more questions in the queue?

No further questions at this time. We have reached the end of our Q&A. Ms. Strable, your closing comments, please.

Thank you. As we close today's call, I want to thank all of you for joining us today and for your questions. as we tried to iterate, we ended 2025 with very strong momentum. Earnings growth and ROE at the top end of our targets, expanding margins and robust free capital flow and capital deployment. Our performance reflects disciplined execution in length of our strategy. As we move into 2026, we're well positioned to deliver against our targets and continue creating sustained long-term shareholder value. Thank you again for your support, and we look forward to connecting with many of you soon. Have a great day.

Thank you. This concludes today's conference call. You may disconnect your lines at this time, and we thank you for your participation.

Good morning, and welcome to the Principal Financial Group Third Quarter 2025 Financial Results Conference Call. [Operator Instructions]

I would now like to turn the conference over to Humphrey Lee, Vice President of Investor Relations. Please go ahead.

Thank you, and good morning. Welcome to Principal Financial Group's Third Quarter 2025 Earnings Conference Call. As always, materials related to today's call are available on our website at investors.principal.com. Following a reading of the safe harbor provision, CEO, Deanna Strable, and CFO, Joel Pitz, will deliver prepared remarks. We will then open the call for questions. .

Members of senior management are also available for Q&A. Some of the comments made during this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. The company does not revise or update them to reflect new information, subsequent events or changes in strategy.

Risks and uncertainties that could cause actual results to differ materially from those expressed or implied are discussed in the company's most recent annual report on Form 10-K filed by the company with the U.S. Securities and Exchange Commission.

Additionally, some of the comments made during this conference call may refer to non-GAAP financial measures, reconciliations of the non-GAAP financial measures to the most directly comparable U.S. GAAP financial measures may be found in our earnings release, financial supplement and slide presentation. Deanna?

Thanks, Humphrey, and good morning to everyone on the call. This morning, I'll discuss our strong third quarter performance and the continued execution of our strategy, focused on delivering sustained growth across our diversified businesses. Joel will then provide additional details on our financial results and capital position.

Turning to Slide 2. Our third quarter results build on the momentum of the first half of the year and demonstrate another period of strong performance toward our financial targets. We delivered 13% adjusted earnings per share growth year-over-year and 14% year-to-date, above our target range.

Our return on equity expanded significantly the last year and is now at the high end of our target range. And our year-to-date free capital flow conversion ratio of over 90% is tracking above target. Additionally, we returned $400 million of capital to shareholders in the quarter, including $225 million of share repurchases. We also raised our common stock dividend for the ninth consecutive quarter an 8% increase on both a quarterly and full year basis. These results were driven by strong business fundamentals across the company, including enterprise net revenue growth of 4% and margin expansion of 180 basis points and positive enterprise net cash flow.

Given the strong performance through the first 3 quarters and our business momentum, we fully expect to deliver on our full year enterprise financial targets. Moving to Slide 3. We continue to make progress on our strategic priorities highlighted at our 2024 Investor Day. As a reminder, we're focused on 3 significant profit pools where we are uniquely positioned to win. The broad retirement ecosystem, small and midsized businesses and Global Asset Management.

Let's start with the retirement ecosystem in which we offer a comprehensive suite of capabilities across recordkeeping, asset management, wealth management and income solutions. We're seeing strong momentum across key metrics. Workplace Savings and Retirement Solutions, our WSRS transfer deposits grew 13% year-over-year, demonstrating the strength of our retirement recordkeeping platform and the breadth of our distribution reach. We're serving an increasing number of participants and the participants we serve are saving more. This is evidenced by a 3% increase in the number of participants deferring into their retirement plans compared to the year ago quarter, with average deferrals up 2%.

Total RIS sales of $7 billion increased 8% year-over-year with strong growth in WSRS and pension risk transfer. On a year-to-date basis, nearly 1/3 of our PRT premiums came from existing defined benefit clients. Additionally, nearly half of our year-to-date nonqualified life insurance sales are part of a total retirement solution with RIS.

Our retirement investment expertise, an important growth driver within the retirement ecosystem continues to gain traction with third-party retirement platforms as evidenced by DCIO sales of $2 billion in the quarter. These connections within and across businesses demonstrate our power across retirement and reinforce our unique competitive advantage in delivering retirement solutions to employers and their employees.

Moving to our small and midsized business segment. Our differentiated capabilities and deep expertise in this attractive segment continues to drive results. WSRS SMB recurring deposits grew 8%, and transfer deposits increased 27% compared to the year ago quarter. In Benefits and Protection, our business continues to show growth and resiliency. Employment growth for our block was nearly 2% on a trailing 12-month basis, and we're seeing continued success in deepening relationships.

Based on our latest insights, employee retention remains a top priority for small business owners and executives and we're well positioned to help them achieve their goals with our comprehensive suite of solutions. In Global Asset Management, we're generating strong momentum with gross sales and investment management of $32 billion, up 19% year-over-year. Revenue on these sales is up even more. Our private markets capabilities remain attractive to clients globally, generating net inflows of $1.7 billion in the quarter.

Private AUM grew 9% year-over-year as strong demand continues across our real estate, infrastructure, and private credit strategies. Additionally, our ETF business delivered net inflows of $500 million in the quarter and $1.3 billion year-to-date. These results reflect the strength of our diversified business mix across asset class, geography and client base.

Looking across our 3 long-term strategic focus areas, I'm encouraged by the momentum. The breadth of our retirement solutions, our leadership position in serving small and midsize businesses and our expanding global asset management capabilities create multiple paths for sustained growth. These competitive advantages, combined with our integrated business model and strong execution position us well to capitalize on the significant opportunities ahead while creating value for our customers, shareholders and employees.

Before I turn this over to Joel, I want to acknowledge our recent release of the Fourth Annual Global Financial Inclusion Index, which tracks how governments, employers and financial systems around the globe are advancing financial inclusion. Since the index launch, we've seen how digital solutions have emerged as a powerful driver of progress, helping people make informed choices and achieve greater financial security.

Markets making the fastest gains are embracing fintech solutions that expand access while embedding financial education and safeguards. While current economic uncertainty has temporarily impacted employer financial inclusion programs, it's encouraging to see governments and financial systems stepping up. The findings highlight the tremendous opportunities ahead and reinforce our important mission to help people feel more confident in their financial decisions. Joel?

Thanks, Deanna. This morning, I'll share the key contributors to our strong financial performance for the quarter as well as details of our capital position. As shown on Slide 4, we reported non-GAAP operating earnings of $474 million or $2.10 per share, a 19% increase year-over-year. And on a year-to-date basis, reported EPS increased 21%.

Excluding significant variances, non-GAAP operating earnings were $523 million, an increase of 9% year-over-year and EPS of $2.32 increased 13%. On a year-to-date basis, adjusted EPS increased 14%. While not on the slide, third quarter reported net income, excluding exit business, was $466 million an increase of 11% over the prior year quarter with minimal credit losses.

Turning to capital and liquidity. We ended the quarter in a strong position with $1.6 billion of excess and available capital. This includes $800 million at the holding company at our targeted level, $350 million in our subsidiaries and $400 million in excess of our targeted 375% risk-based capital ratio which was estimated at 400% at quarter end.

We returned approximately $400 million to shareholders in the third quarter, including $225 million of share repurchases and $173 million of common stock dividends. We are confident we will deliver on our full year capital return target of $1.4 billion to $1.7 billion, including $700 million to $1 billion of share repurchases. Last night, we announced a $0.79 common stock dividend payable in the fourth quarter. This is a $0.01 increase from the dividend paid in the third quarter and an 8% increase over both the year ago quarter and trailing 12-month period. This aligns with our targeted 40% dividend payout ratio and demonstrates our confidence in continued growth and strong capital generation.

Moving to AUM and net cash flow. Markets created tailwinds in the quarter with positive results across U.S. and international equities, fixed income and real estate. Total company managed AUM of $784 million increased 4% sequentially, driven primarily by strong market performance, along with positive net cash flow. Total company net cash flow was $400 million in the quarter, a sequential and year-over-year improvement, driven by investment management flows.

As Deanna mentioned, this was largely driven by strong private inflows. Moving to the businesses. The following commentary excludes significant variances, which can be found on Slide 10. Significant variances this quarter included a net unfavorable impact to GAAP earnings from our actuarial assumption review primarily driven by model refinements. It is important to note the actuarial assumption review impacts our GAAP only and noncash, and therefore, has no impact on free capital flow for the enterprise. The remaining significant variances are a slight net positive.

Starting with RIS and as shown on Slide 5, third quarter top line growth was 4% towards the upper end of our target range driven by growth in the business and favorable markets. This, coupled with expense discipline, while investing in the business resulted in a 42% margin, a 130 basis point improvement over the third quarter of 2024. Pretax operating earnings of $315 million increased 8% from the prior year quarter, driven by growth in the business and margin expansion.

As Deanna noted, fundamentals across the business remain healthy. Total WSRS recurring deposits grew 5% on a trailing 12-month basis with our SMB segment continuing to outperform at 8% growth over the same period. Additionally, consistent with the first half of the year, withdrawal rates in the quarter remained stable.

Turning to Slide 6. Principal Asset Management delivered strong earnings on revenue growth and margin expansion. Within Investment Management, pretax operating earnings increased 9% from the prior year quarter. Management fees increased 5% year-over-year, driven by higher AUM and a stable fee rate against the backdrop of industry fee pressure.

This, along with continued expense discipline contributed to a 180 basis point improvement in Investment Management's quarterly operating margin. Net cash flow was $800 million in the quarter, supported by inflows and privates, with two large wins in private real estate equity as well as positive flows in high yield, emerging market fixed income and active equity ETF strategies.

Moving to international pension, we delivered record reported AUM of $151 billion, an increase of 9% year-over-year. Operating margin of 47% expanded 180 basis points from the prior year quarter and remains comfortably within our targeted range.

Turning to Slide 7. Specialty Benefits pretax operating earnings were $147 million, a record quarter, this was an increase of 28% compared to the year ago quarter, driven by more favorable underwriting results and business growth. These results reflect our focus on pricing discipline and profitable growth. Total SBD loss ratio improved 340 basis points compared to the year ago quarter and was below our target range. These results were driven by favorable group life and group disability underwriting as well as a 100 basis point improvement in the dental loss ratio.

Operating margin of 17% expanded 330 basis points compared to the year ago quarter and is above the high end of our target range. In Life Insurance, improvement fees increased 3% compared to the third quarter of 2024 as strong business market growth of 11% continues to outpace the runoff of the legacy Life Insurance business. Mortality in the quarter was better than expected, but slightly less favorable than a year ago quarter.

In closing, our strong enterprise performance reflects successful execution of our strategy and strong fundamentals. Our diversified business demonstrated its strength through profitable growth and expanded margins. As Deanna highlighted, this momentum, coupled with our year-to-date performance, reinforces our confidence in delivering on full year enterprise financial targets have positioned us well for sustained long-term performance.

This concludes our prepared remarks. Operator, please open the call for questions.

[Operator Instructions]

Our first question comes from Jack Matten with BMO Capital Markets.

So the first question on margins. I'm just wondering if you would expect continue seeing strong margin expansion kind of in line with the 180 basis points this quarter as market performance remains strong. And I guess relatedly, can you discuss areas where principal as either accelerating or expanding its investments in growth initiatives .

Yes. Thanks, Jack, for the question. Obviously, the margin expansion in the current quarter was impacted by both strong underwriting results as well as very disciplined expense management. I'll have Joe talk about that and then maybe ask each of the presidents to maybe highlight a few areas where we're investing in the business. .

Yes. Thanks for the question, Jack. From a margin perspective, we certainly expect margins to continue to expand. Importantly, while investing in the business, as you said. So this quarter was no different than we've done in the past, but we're going to make sure that we ensure that expenses grow at a much lower pace than revenues. And as you said, we had a margin expansion of 180 basis points at the enterprise level and on TTM basis was 100 basis point improvement. So again, we'll continue to actively responsibly manage expenses, in particular in the fee-based businesses where you do see some macro benefits emerging. We're going to continue to invest meaningfully on that regard.

Chris, maybe highlight a few investments that you guys are focusing .

Yes, sure. Jack, obviously, margin was strong for RIS this quarter, and we continue to sort of guide toward the upper end of our margin range. And despite that strong margin performance, we're making a lot of significant investments, both in modernizing our record-keeping capabilities as well as building out our capabilities to serve the individual customers and retirement plans. So we're making very significant investments and still being able to deliver on our market.

Thanks, Jack. So obviously, margin for the SPD businesses was exceptional this quarter. And then when you look across the margin for life, that was within the range as well. So I'd echo what Chris said, again, we're meeting our margin targets. We're exceeding them in one of the businesses, and we're still investing for the business.

So when I think of those key investments we're making, a lot of them are multiyear in nature. So we've been working on some multiyear investments related to our front-end acquisition systems for our Group Benefits business, also some increased data exchange capabilities, and those are going to benefit our employer customers as well as the brokers and advisors who really have to recommend us for that business. So I'm excited to see those capabilities coming to the marketplace in late '25 and early '26. Kamal?

Just I'll highlight both IM and IP for you, both had excellent quarters on margin, and I expect them to continue on high end, the margin is around 36% and it's largely aided by the results we highlighted in our cash flow, but also markets. And in IP where net flows may not be that strong, we still have excellent margin. And the drivers of our margin in both those businesses are slightly different.

In Investment Management, our investments continue to be around building new investment capabilities that will generate higher fee revenue for us. You've seen that in our private markets area, and we continue to do that now in public markets as well, particularly global equities, which we believe will actually add to our growth potential. In IP, our focus continues to be to optimize our sales distribution network across the various regions and leveraging the collaboration between IM and IP in those regions. So that is probably the bigger area of our investment in the IT area.

Jack, did you have a follow-up? .

Yes, it's very helpful. Followup maybe on free capital flow conversion, been running at levels over 90%. I think even if you back out the GAAP assumption review, is there anything notable you call that's driving that and how you would expect that to trend over the near term? .

I'll ask Joe to address that. .

Yes. Thanks, Jack. We are in a very strong capital position as we end third quarter. We have the luxury of a very capital-efficient mix of business, which affords us the ability to organically invest our business, again, while bringing meaningful capital up for the benefit of shareholders. As such, we have and will continue to operate from the position of capital strength. So you saw from our disclosure at the end of third quarter, we do have $1.6 billion of excess available capital. This is $150 million higher than we had coming into the third quarter while investing in organic growth and deploying approximately $400 million of capital in the form of share buybacks and dividends during the quarter.

A signal in the quarter last call, we expected and are deploying elevated levels of capital in the latter part of the year, and you saw this in the third quarter with the $400 million of capital deployed in the course of the quarter $225 million of which was in share buyback activity. So as we sit here today, we feel really good about our share buyback activity and positioning for the fourth quarter.

Yes, we had elevated third quarter deployment. We expect fourth quarter be even further elevated. And so we feel really good about our prospects for deploying capital in an optimal and strategic way from this point forward. And last but not least, we announced last night with the dividend, and that continues to be a priority for us. We increased our quarterly dividend by $0.01. And again, that's a testament to our commitment to growing our dividend and maintaining that 40% dividend payout ratio. So Jack, I hope that helps.

Jack, the only thing I'd add to that is, obviously, as we grow our fee-based businesses across the enterprise, that will provide some tailwinds to that free capital percentage as well. .

One moment for our next question. Our next question comes from Ryan Krueger with KBW.

First question is on investment management flows. Can you talk a little bit about any changes you're seeing in investor sentiment from your clients in particular appetite for the areas that you're focused on in that business? And maybe a little bit of perspective on how the pipeline looks going forward as well. .

Kamal?

Sure. Ryan, so I think let me just first start with the strong results this quarter. I think as Deanna mentioned in her remarks, we had positive net cash flow of $800 million. I think equally impressive is if you look at our nonaffiliated NCF, it was $1.8 billion positive, which is largely with the long-term mandates in private markets that not only contributes to the fee rate, but also revenue growth.

The other dynamic I would highlight for you is, we had net cash flow growth this quarter across multiple channels. We actually had wins in global institutional, which I've highlighted to you in the past. We actually had positive net cash flow across our U.S. retail platform, where we have had a change of trend as well as in our local managed products across Asia and Lat Am.

So I think the key observation I would give you is that our focus on having scale in global distribution enticing in, and I expect that to continue over a period of time. If I even look at our active ETF business, over 2025, our net AUM growth has been over $3 billion in the last 12 months. So we continue to expand in that business.

What I would highlight for you with respect to the areas where we are seeing continued momentum. Real estate, as I've highlighted for you in the prior few quarters, is actually seeing increased momentum. I think the cycle is slowly turning but the more impressive piece for us is we are actually gaining market share, which I expect to continue as we expand our product lineup. And then the results in fixed income continue to be quite impressive, particularly our growth we have seen in emerging market fixed income that I would highlight where we continue to win mandates across the world. So Ryan, hopefully, that answers the question that you had.

Just a quick one. Our performance fees still expected to be fairly modest in the fourth quarter, has anything changed? .

Yes, that's a great question. I'll have Kamal address that. .

Yes, Ryan. So yes, performance fees are probably still expected to be the same level as they were in 2024, the area that I would highlight for you is we've actually seen an uptick in transaction over fee activity. I think as the markets have unlocked here a little bit, when I look at transaction borrower fees year-over-year, there's a slight improvement in there of 10% to 20%, but they're still below their long-term potential. Longer term, I would expect performance fees to tick up, but not yet where we are in the market cycle. .

Yes, Ryan. And as you know, performance fees, borrower fees, transaction fees can be volatile quarter-to-quarter, but it's great to see the 5% increase in management fees year-over-year because, again, that's the momentum of the business that's going to drive margin and growth across the enterprise.

Our next question comes from John Barnidge with Piper Sandler. .

Good morning. Thanks for the opportunity. The bearing strategic partnership, do you have any visibility into whether that relationship see rate enhancing versus the blended fee rate at Principal Asset Management and possible other similar opportunities. .

Yes. I'll maybe ask Joel and Kamal to add to that. Obviously, a large proportion of our general account is managed by our internal asset management business. But we have, for a long time, also use third-party providers in areas that we feel are critical for us meeting our strategic asset allocation, but also meet our return and risk thresholds as well. And so we were happy to announce the Barron partnership, and it gave us a unique opportunity to partner with them, but also have some co-investment opportunity as well. So maybe I'll have Kamal address that. And then ultimately, Joel has anything to add as well. .

Sure, thanks for highlighting that partnership. So it's part of our strategy to continue expanding our private market expertise. As Deanna highlighted, part of this partnership is to assist on the general account side. But what's most unique about this partnership is, is we have historically done both origination and portfolio management in the private markets area, and the bearing partnership is unique because they had a unique strength in origination in an asset class that they had an edge in, and we continue to play the role of being the portfolio manager, the underwriter of those transactions, which also is our expertise, so we're looking at unique opportunities that expands our business base, but also creates value for Principal overall. .

Joe, did you have anything to add? .

Yes. And John, just to comment that we have the luxury of great in-house capabilities. So within our general account, we can meet the needs through our investment capabilities, where we manage about 95% of the general account portfolio and we'll continue to look at collaborative ways and whereby we can partner with others in order to augment those capabilities that we need to support our general account, and Bearings a great example of that. .

John, did you have a follow-up? .

My follow-up is on the 401(k) business. With the baby boomer generation more and more retiring and pulling down on those retirement dollars, flows might not be the best metric to look at as much as profit growth, my question is on that secular headwind to flows. What does that make you think about the consolidation in 401(k) more broadly, given the leading position the company has? Or is it really just more about winning business that comes to market? .

Yes, I'll have Chris address that. .

Thanks for the question. I think as I've mentioned in prior quarters, consolidation is definitely happening in the industry. And there's 2 ways that consolidation happens, right? It's happened through large M&A transactions, which we saw a few years ago. And you've seen more muted activity on the inorganic side over the last couple of years. .

But what's really happening is there's been a real shakeout of the lower scale players. And so we are seeing the benefits from being able to win more plans from those players. And I don't think over the long term, the market is going to be able to sustain what is the current about 40 different record keepers in the industry. We believe that that's going to shrink close to single digits sometime over the next 10 years.

And as the #3 player, we expect to be a real beneficiary from that consolidation, and we see that in the overall pool. So we will continue to scale is important. We will continue to evaluate our position. We're comfortable with our position now and we're focused more on how do we continue to drive organic growth in our business than on any large transaction at this point in time. .

Yes. The other thing I'd say, John, and you started your question out here. Chris has continued to reiterate that revenue growth is focused. Obviously, there's some dynamics within just looking at flows, whether it be the market impact, the baby boomer generation, as you talked about. And just the overall fact that positive macro, even though positive to our overall business can be punitive to net cash flow. And so ultimately, that team has been very focused on driving profitable revenue growth, and I think this quarter is another great demonstration of that success. .

Our next question comes from Jimmy Bhullar with JPMorgan. .

First, I just had a question for Kamal on net flows and asset management. I think if you look at your commentary over the past year, it's been fairly positive and flows had been weak, but this quarter obviously showed a turnaround. To what extent do you think it's the beginning of a trend given the favorable market backdrop that you have? And how do you think about like the weaker investment performance that you've seen recently factoring into your net flow expectations over the next year? .

Go ahead, Kamal.

Sure. Thanks for highlighting the turnaround. You've always been a believer in us, so I appreciate that. With respect to your question around the sustainability of the trend and what's driving it, I will tell you that the quality of flows we are actually seeing this quarter is actually quite high.

When I look at the clients who are giving us the mandate, they tend to be more longer term in nature. And they're also putting it in areas that are in the trough of a market cycle. So I expect returns to be quite strong in those areas as we move forward. It certainly helps with the sustainability of our flows.

I think as Deanna highlighted, one of the other things we did this quarter is not only where cash flow is positive. Our management fee rate was 5% higher which is generally bucking the industry trend and something we continue to focus on. So when I look forward, I think for 4Q has always been an active quarter for rebalancing and a lot of strategic allocation happens.

This year, given the strength of the marketplace, it could be more active than usual. And that is something that other peers are also going to experience. So there will be higher volatility of allocation changes happening. One sentiment signal, I could give you to your question that we continue to track is the questions we get in RFP, while overall RFP volume as we enter 4Q here is lower than it is in 2024 generally across the industry and for us.

We are sort of starting to see a shift in the type of questions we get, they're shifting to focus more on exploration and new idea requests rather than active allocation among existing mandates. So I do believe the investors after the run-up in markets are looking for new products, new ideas or areas that have generally been underallocated to highlighted global equities is 1 of those areas where I do believe I think there'll be more allocation coming.

With respect to timing of flows, it can be very difficult to predict. But what I can tell you, I remain very, very confident that the second half for Asset Management and IM flows will be much stronger than the first half for our business.

Jimmy, did you have a follow-up .

Yes. And then on just the part about performance, is that factoring into because I think if I look across your various asset classes, the performance recently, the numbers seem a little weaker than they've been in the past. Is that factoring into your net flows and pipeline? .

So if you decompose the performance drivers, A very large part of our underperformance has come in our multi-asset products in certain target date funds. Our hybrid target date fund continues to perform very well. but the active product has underperformed. And yes, it has had impact in both on and off platform retirement flows, particularly in business and our off-platform business. So certainly an area we continue to pay a lot of attention.

Our performance in other areas like international equity has become stronger over time. So I would highlight that for you. And our performance, we actually are just hitting a 3-year number of our data center products that we launched, which continues to have very, very strong performance. So there are certain areas that continue to do well. And the areas that are weak, we continue to enhance our risk management talent and tools, and we continue to add new talent in areas where performance has been weak and that's generally been on the equity side for us.

Yes. I think, Jimmy, obviously, as Kamal reiterated delivering output generation is a long-term priority. Obviously, in markets like we've seen where equity performance has been concentrated in a few number of names, you can see some volatility quarter-to-quarter. But ultimately, again, our focus is staying close to our customers, making sure we understand what is important to them and delivering alpha generation.

So we'll stay focused there and ultimately continue to focus on driving revenue growth for our clients and for our shareholders.

Our next question comes from Wilma Burdis with Raymond James.

Could you talk a little bit more about where you are on growing the spread-based balances in RIS? And which products you're most focused on to grow that spread business and what you're finding most favorable today.

Yes, Wilma, thanks for the question. Obviously, there's a number of categories of types of sales within the spread business including supporting our WSRS platform as well. But I'll have Chris get into some more details on where our focus is. .

Yes. Thanks, Wilma. Thanks for the question. .

Yes. I mean we've seen really nice performance in spread based over the last several quarters. And our emphasis, as we've talked about in prior quarters, is really continuing to figure out how to drive revenue growth within our retirement plans, which includes how do we sell our guaranteed products at a faster pace.

We've seen very nice inflows and growth in our WSRS GA products sold through retirement plans. We also have seen nice performance over the last several years in PRT. We had a very strong PRT quarter this year. And as we've talked about, we're not so much focused on volume there. We're focused more on returns. But despite the industry backdrop of declines, we continue to see strong performance in PRT, and we're going to be -- continue to be disciplined there and focus in our target market, which is in the smaller segments of the market, not at the jumbo side, which is where most of the pressure has been felt on PRT.

And then lastly, with respect to our annuities business, we've seen very nice growth in the Ryland business over the last several years that provides a lifetime income product for our customers. We focus primarily on serving the lifetime income needs of our retirement customers. And so that is why that exists there. So -- and across all of those, we've seen really nice growth on the spread base side and not just growth but growth at really nice returns. .

Wilma, do you have a follow-up? .

Yes. And then, Amy, maybe you could talk a little bit about what drove the favorable loss ratios and specialty benefits and what you're seeing there as far as the upcoming quarters?

I'll have Amy address that one. .

Yes. Thanks for the question. It was a fantastic quarter in terms of underwriting results. And so I think the first thing I would note is really, there's not one particular product that's driving it. We're seeing really nice performance from group disability that is specifically driven by lower LTV incidents in this quarter. We're also seeing really nice performance from Group Life. That's driven by lower frequency. As Joe noted in his opening comments, we had a 100 basis point improvement in our loss ratio also for dental.

So we're seeing a nice return and improvement kind of back to the path that we want for our dental business, for supplemental health, again, I would say that one is performing as we expected. We want that business on a run rate basis to perform a little bit higher in terms of loss ratio than it had been doing earlier in the year or late into last year.

So I would say the types of loss ratios, that business is putting down is kind of what we would expect. And then there's also the individual disability business, which performed very well. So I think the driver is, we're focused on the right marketplaces. We're in that small to medium-sized business marketplace.

They know they have needs. We're able to grow in that marketplace. And we're able to do that in a rate that we can drive both great benefits that we put in the hands of those business owners, but also appropriate profit for us. So I see the balance of that paying out. We don't have to necessarily go outside of our underwriting guidelines very often.

We don't have to put planned maximum in that we're uncomfortable, and we're growing the right pieces of the business. The last piece I would note there is that our worksite business and our voluntary practices, voluntary participation, worksite array of products that we offer, we're really growing that piece as well. That piece gives us a nice bit of margin expansion over time as the shift of business begins to be a bit more voluntary and it's helping our results as that supplemental health line begins to grow.

Our next question comes from Joel Hurwitz with Dowling Partners. .

So first, I wanted to get an update on the capital deployment outlook. Joel, you mentioned the pace should increase again in Q4. But I guess, what would drive you guys towards the higher end of that 1.4 to 1.7 capital return range, right? Because if I just look at your excess capital position is very strong. And then Q4 are typically the strongest capital generation quarter. Any reason why you wouldn't really accelerate and lean into buybacks where the stocks at now? .

Yes, Joel, thanks for the question. I think if you have followed us for years, you know that we have a very balanced and disciplined approach to capital deployment and ultimately also want to make sure that we're delivering consistent and growing capital return to our shareholders over time. And so it can be volatile quarter-to-quarter, but ultimately, we are focused on delivering strong returns to our shareholders and returning excess capital to shareholders over time. But I'll have Joel address your specific questions. .

Yes. And Joel, you raised a good point. We are sitting in a great position from a capital perspective at $1.6 billion, as you mentioned. And as we signaled in last quarter's call, we did do outsized or higher, I guess, third quarter share buybacks than we did in the first half of the year. So as you know well, the first half of the year, we did about $350 million share buyback, we had $225 million in the third quarter, and we certainly expect elevated levels from there in the fourth quarter.

And so what happened in the third quarter is we did have very positive free capital flow conversion, but while still investing in the business. And we just feel really good about the optionality we're for it as it relates to investing for organic growth as well as delivering meaningful share -- meaningful capital back to shareholders.

So again, you will see some outsized fourth quarter share buybacks relative to what you saw in third quarter. Does that help?

That helps. And then just shifting back to specialty benefits. Amy, any early outlook on how 1/1 renewals and new business is shaping up? Just how is the competitive landscape looking at this point? And do you see a path to have top line return back to that long-term growth range in '26? .

Yes, I'll ask Amy to address that. .

Yes. So just before I directly get back after it, and Joe did a really nice job covering this in his opening comments. But when you look at the stats, like earnings up 28% year-over-year, margins expanding by 330 basis points, underwriting, improving at 340 basis points. I think the trade-off we've been talking about is sometimes a bit slower growth is what you do to drive the profitability that you need for the business.

So I feel like that trade-off is working really, really well. That said, when I look ahead at 1/1 business, I think we're seeing more opportunities to write profitable business than we saw at the same time last year. So we are seeing things come to market that look attractive to us. We're winning against some of those bids. And I like what we're doing with respect to both renewals and new sale as I look ahead.

So I have listed before a couple of those multiyear technology initiatives. Those are really starting to bear fruit and will in late, yet in fourth quarter '25 and into '26. And I feel like those investments are really positioning us to move closer to that low end of that range. Now I know we'll have more to say about that in our next earnings and outlook call, but I feel good about the volume that I'm seeing right now. .

Yes, Joel and I think, as Amy highlighted, we continue to balance pricing discipline with our competitive positioning. And ultimately, we aren't going to chase growth for the sake of growth, and we've done that successfully for decades, and I don't see that not continuing as we look out into the future. .

Our next question comes from Suneet Kamath of Jefferies.

I wanted to ask about private credit. Obviously, we've had some flare-ups here in the past couple of weeks. And I know your portfolio is a little -- maybe a little bit different than other companies, given it's tilt towards real estate. But really, just curious what you're seeing in terms of the private credit markets, both in terms of performance, competition and just overall credit quality. .

Yes, Suneet, thanks for the question. I think there's 2 aspects of our private credit perspective. One is within our general account, which I'll ask Joel to address and one is within how we think about private credit with our third-party investors as well. So I'll maybe ask Joel to start and Kamal to add on to that. .

Yes. So Suneet, thanks for the question. A really good proof point for our managing credit losses is a testament to our third quarter losses, which is about $8 million after tax, as you can see within the financial supplement. The credit losses from securities were at very low levels in 2Q '25 as well.

So what you saw a little bit in 3Q was a few impairments. What was very de minimis. No commonality or reason within the industry as it relates to those credits. And importantly, the portfolio of credit loss remains below our model long-term run rate estimate.

Success of any underwriting depends on the quality of the underwriting. So we're real proud of our practices in that regard, whether it's public or private, we remain really confident in our underwriting standards. We continue to focus on diversification, quality and liquidity profile that meet our liability needs, which, as you know, are very conducive to investing in privates, given our liability profile.

So given our quality and well-diversified portfolio, the credit risk is very manageable. And as I said before, remains below long-term expectations and is certainly factored into our capital and deployment expectations.

Kamal?

Sure. Suneet. So I'll go to the 2 points you raised, which is, how have we done from a performance perspective and what are my overall observations about the industry and the market dynamics. So first, I think, as Joel highlighted, our own exposure in private credit is relatively modest, and it's quite aligned with our risk parameters. .

One of the highlights I would give you is, we've had no direct exposure to some of the names that have been mentioned recently. The quality of the holdings we have in our business are largely underpinned by the extreme focus on underwriting. In fact, we have a very high selection ratio. The number of deals we look at, the number of deals we underwrite and participating somewhere 1 out of 7 deals only makes it through the funnel.

And then the other thing I would highlight for you is most of our vehicles have very low leverage ratio. One of the challenges in the industry has been in a lot of vehicles today in the industry, have very high leverage ratio, just by the way they were designed. So I would say we remain quite focused on underwriting and the portfolio is doing quite well.

When I even look at 3Q we had lower nonaccrual rates and higher quality loan distribution compared to the rest of the industry. Now going back to the industry dynamic, I do think it deserves some caution, the asset class has grown quite rapidly. The amount of capital that is being expected to invest has also grown quite rapidly. And my personal view on this remains that the risk of accidents in the space is really around entities that have to deploy very large amounts of capital very quickly and constantly.

Hope that helps, Suneet. .

Yes. That's very helpful. And then my second question is just on the wealth management opportunity that you guys have talked about. I think you've mentioned having, I think it's 500 advisors that are helping your plan participants to handle retirement. Can you just maybe provide some metrics on that? What sort of penetration are you having? Is it leading to better asset retention within the franchise? Just I don't think we've seen any metrics. So just curious if there's anything you're willing to share. .

Yes, Suneet, thanks for recognizing that. We did highlight at our 2024 Investor Day that this was a priority for us, but we also highlighted that it was a long term build, and it would take time before it actually moved into critical metrics that we would track and share. But I'll ask Chris just to talk about some of the things that we're watching. I think it's 200 advisors that we have licensed to actually have the advice conversations. But Chris, can you add some additional color? .

Yes. Yes. Thanks, Suneet. Yes. As Deanna mentioned, it is going to be a long-term build, and we did at the end of last year. So fourth quarter last year begin the introduction of our advisory services with 200 salary-based advisors. And we've seen very nice early indications of the success of that program. First of all, we have about 90% plan sponsor adoption of the service, so making it available to participants that call in and need help.

So a very strong plan sponsor adoption, we've also seen a very nice increase in this year of the number of clients that we're serving, individuals we're serving. And so we've seen about a double-digit increase in our advisory and retail customers served through our workplace personal investing solutions.

And then another sort of green shoot, I would say, is that we've also seen a nearly 20% increase in roll-ins this year. So people that have a prior plan and then are moving to an employer that's served by Principal, we've seen a 20% increase in the amount of their rollover transfers to roll-in transfers in the Principal plans. So over early days, but those are good early metrics, and we remain very optimistic about the long-term value but the short term is going to be a bit more muted as we continue to build our capabilities.

Our next question comes from Tom Gallagher with Evercore ISI. .

First question for Kamal. The really a question on CRE. All returns, flows in asset management and the commercial mortgage loan exposure to your general account, those all look pretty good this quarter. And I've kind of viewed that we'll call it, overall market exposure as being very important for Principal as a firm and seeing everything kind of being more choppy in the past, all looking better this quarter. Do you think we're at a better inflection point here broadly on those issues? Because I look at a mega CRE investor like Blackstone and they had, I would say, more mixed results this quarter. I look at your results, it kind of looked better across the board. Just curious what you're thinking there. .

Yes. Obviously, we have been a leader in real estate for decades. I'm very proud of our long-term position. And when you're a leader for decades, that means you now you have navigated multiple economic cycles both for our own balance sheet as well as our clients. It's been a tough couple of years from a real estate perspective, but I think we're feeling better relative to where we are in the cycle, but I'll ask Kamal add some additional perspective. .

Yes. Thank you, Deanna. It's a great question and very timely. So I think you asked 2 things. One is, just our own real estate book and where do we see it and the strong results we continue to deliver and the inflection point question. So first, I would say, when I look back over 3 years, I would say CRE or commercial real estate has probably been in the strongest position over the last 3 years, it's obviously coming off of a trough. And I would say, as the year has gone by, we have seen more stability both on the occupancy side, but more importantly, for somebody like us on the pricing power of many of the properties we manage or underwrite, the more important thing over the last few quarters has been that capital flows are improving as well.

So our own year-to-date private market cash flow is only going to reach $3 billion and I certainly expect that to improve over time. The big change more recently probably has been the transaction volume. Compared to last year, we are about 17% up year-to-date comparison. 4Q tends to be a little bit more. Last year, 4Q was very, very strong. So you may see a slight lowering of transaction volume, but still up 10%.

I think that the question you raised, there is going to be a big discussion in real estate winners and losers in this market cycle. One of the things that we see is that the people who don't have any redemption queue in their products are actually going to have a benefit of putting fresh capital to work at much more better valuations and they will get back to getting higher IRRs from that refresh of the book.

I believe those managers will outperform and get market share. And that's where I see the strength of the Principal franchise being positioned and the other benefit we have is our book is largely institutional or comes from our insurance company, which provides us the right match to where the market opportunity is and the liability needs are, so I think those 2 forces are definitely going to help our business and our market position.

Thanks, Tom, do you have an additional question? .

I do, Deanna. And this one is for you. Just -- and I think you and Chris all sort of answered the question, but I just wanted to rephrase it. Just a view of M&A because if I go back several years ago, Principal was very, we'll call it, M&A focused from a capital deployment. And now it's mainly common dividends and buybacks and minimal M&A.

Would you still -- is your philosophy still very much along those lines? Or would you consider if there were lumpy defined contribution type assets that came to the market, would you still take a hard look at those because I think there might be some more lumpy, larger properties that are coming to market in the next year or 2. So just curious what your philosophy on those situations might be. .

So the first thing I would say is just because I'm sitting in a different seat, our philosophy here at Principal around how we approach inorganic opportunities is changing. We're going to continue to be really disciplined and focused and ensure that anything that we take a run at one has strategic alignment. One can give us capabilities that can allow us to even increase our growth potential, has to meet our financial targets. And if we're bringing on people, it has to be very culturally aligned with how we function on a day-to-day basis. .

The first thing I'd point out is that we can meet our financial targets on an organic basis. And so first and foremost, that's our focus of our team is to execute without -- at a very high level to ensure that we're focused on that. We will be inquisitive and we have the capital flexibility to look at opportunities that are out there, but there's a high bar. And that high bar exists, whether it's an organic deployment of capital or an inorganic deployment of capital.

We recognize that scale is going to be critical, especially in some of our businesses. And so it's important for us to be inquisitive around those opportunities and ultimately lean into those that come our way that does meet those financial strategic and cultural thresholds.

And ultimately, I think you'll see the same level of discipline as we've had in the past. As I sit here today, we've had 3 or 4 years where we were integrating successfully the Wells Fargo acquisition. We were then focused on divesting of a few of our perspective. And sitting here today, we can be on our front foot, being able to lean into growth opportunities, both organic and inorganic, still do it with the same level of discipline that we've had in the past.

Our final question comes from Wes Carmichael with Autonomous Research. .

I just wanted to come back to the assumption review in the Life Insurance segment. Just curious if there's any color on the drivers of experience-related assumptions, that's lapse or mortality and just how should we think about the model refinement? Is that in the rearview mirror? Or should that kind of continue going forward? .

Yes. I'll maybe see if Joel can add some color there. I think this is something we do with discipline on an annual basis. And ultimately, we also then take the opportunity to step back to say there's anything that we found as part of that review, change how we think about our business on a go-forward basis.

And I think the answer to that second question is there was nothing that we saw or put through our GAAP financials that makes us think differently about our business or the ability to meet our financial targets going forward. But I'll maybe ask Joel give a little more double-click on the life impacts in the quarter.

Yes. Thanks for the question, Wes. And Deanna said exactly right. The impact, as I noted in my opening remarks, reflects a range of technical model updates and experience, as you mentioned, and these are normal course refinements to this long-term business, and we remain confident in the business. I think it's important to take that away as well.

The life impact is modest in scale relative to the overall size of our business. At model refinement specifically, that was 2/3 of the impact, not only the enterprise, but also life and this really reflects refinements on how policy behavior and product cash flows are reflected in the models across a number of products.

So think about like added sophistication to our model is how I view refinement. That's for the experience. That was about 1/3 of the impact in life, and there was not a single driver behind the change. The outcome reflects our disciplined process of updating the assumptions based on our own experience and industry experience. And importantly, the adjustments span across multiple products rather than be concentrated in any one area. So I know in the prepared remarks and also to reinforce here, it's reflective of a broad range of model refinements and experience update.

It's GAAP only, noncash, that has no impact on our free capital flow for the enterprise and importantly, it's immaterial to the ongoing run rate, which is actually reflected in our third quarter results. So it certainly does not impact our outlook or expectations on the future growth and profitability, not only life business, but also the enterprise in total.

Thanks, Wes, do you have a follow-up question?

I do, just 1 quick 1 maybe, but any insight into how VII, variable investment income is shaping up for the fourth quarter. It did sound in Kamal's remarks like maybe there's a bit of real estate transaction momentum. So just curious if there's any poor side to that.

I'll ask Joe to address that.

Yes. So VII performed very well in the third quarter amongst all asset classes. From a reporting perspective, the real estate was the reason why we're below long-term expectations within operating earnings. But importantly, within the real estate portfolio, we did have a gain manifest itself below the line NRCG about $25 million due to a transaction that occurred in the third quarter that doesn't get OE treatment.

And so when you look at that in conjunction with what we report above the line, we're very much aligned not only for all other asset classes, but also real estate as well. And so in last quarter, we signaled that there would be more transaction activity in the latter half of the year. That certainly manifests itself in the third quarter, and we expect more of the same in the fourth quarter. So our VII outlook remains yes, as it was going into the third quarter. I'm very optimistic for the latter half of the year.

Thanks, Wes, for those questions. .

We have reached the end of our Q&A. Ms. Strable, your closing comments, please. .

Thank you. As we close today's call, I want to thank all of you for your time, your questions and your game. Our strong third quarter and year-to-date results reaffirm the strength of our strategy and our discipline around execution which is driving strong profitable growth, expanded ROE and robust free capital flow.

We continue to see momentum across our strategic priorities, our position across the retirement ecosystem is strong. Our SMB relationships are growing and deepening and our global asset management platform is scaling with purpose. I am thankful every day to our almost 20,000 employees that wake up committed to serving our customers. We're focused on providing long-term value to our customers as well as our shareholders and remain well positioned to deliver on our full year financial commitments. We look forward to connecting with many of you in the months ahead. Have a great day.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.

All right. I'm Ryan Krueger, Life Insurance Analyst at KBW. Great to have Principal Financial with us. Up on stage with me is Amy Friedrich, President of Benefits and Protection. Also Humphrey Lee from Investor Relations, is in the front row. So I'll get going. We're going to focus predominantly on the Benefits and Protection businesses, given that's what Amy is in charge of.

Yes. Sounds good.

So I just thought maybe to start, there definitely are some key differences between the group benefits and life insurance businesses at Principal compared to the broader markets that you're in. So could you just start by talking a little bit about what's unique about the businesses at Principal?

Sure. Yes. Thanks for the question. Glad to be here. Certainly, when I look at the group benefits business for Principal, one of the things that stands out and should be probably immediately apparent is the SMB focus. That's a focus we share across the enterprise. So it's not limited to just our Group or Specialty Benefits business. It's also a focus that's present across our retirement portfolio as well.

So when I look at that SMB business, this is talking about -- we think of small to midsized businesses as anywhere from 2 employees to probably up to about 500 employees is where we would cut that off. Traditionally, our absolute sweet spot has been that under 100 life employer. They are often someone who's underserved in terms of even people helping -- asking to help them run their business and manage their business. And they're also not necessarily ones that have even an HR department.

So our offerings have tended to be pretty complete in nature. So the other piece that differentiates us a bit is a very complete product portfolio, complemented by technology and set of solutions that knows the intermediary, the broker adviser is often going to help do some of those HR functions. So we need to make things like our employer web. We need to make sure those interfaces that happen with that intermediary are really effective for them as well as the employer.

The other key piece when we think of differentiation is we have tended to build a block of business that is knowledge workers. We are over-indexed, I would say, compared to the broad industry. When you look at some of the labor statistics and you look at SMBs they would broadly say that there's probably 40% to 45% are considered knowledge workers. Our block of business over time has accumulated more like 55% knowledge workers. So when you compare it to some of the other competitors in the marketplace, some are going to be under indexed. We tend to be over-indexed in that knowledge worker base. So that feels differentiating for us as well.

Actually, just curious, like was that purposeful or that was just how it emerged as you built the business?

Yes. So I would argue 10 years ago, it was something that was just aligned with what we were good at, where our history had been. We tend to -- with that broad set of services, we rarely do just one stand-alone coverage. So we're not going to have just dental or just life or just disability. They tend to put a package together sometimes on initial sale, but definitely upon renewal.

What we've seen is that through our renewal philosophy, and I would argue this is a differentiator for us as well, is that every single coverage every single year, we know what we need to do in terms of that next best coverage that we think would help that employer, and we know where it sits in terms of profitability. How is it performing against our expectations of broad expectations, not case experience related, but our group expectations for claims, for the types of expenses we thought we would deploy to that and then the type of profitability we assume.

So when we look at that full picture together, we know that the areas that have more natural growth in them, so the ones that the employment grows with it, the wages tend to grow with it, tended to have been historically knowledge-based industries. So since those have performed better for us and our algorithms really work for those things that are -- those pieces of the industry that are growing, we've collected more of them over time.

So what began as an outgrowth of our -- how we managed our in-force block has now become a fairly intentional set of work that we've done related to getting knowledge workers. We like what it does for our premium and fee growth, and we like the persistency we see in that block. So we've even built capabilities for that market.

Got it. Maybe before we get more into the specifics of the businesses, could you just talk a little bit about what you're seeing from the SMB market at this point? How healthy is it? What's the -- I know you do a survey. What's -- kind of what's the latest that you're hearing?

Well, we actually just...

I think you just did it, right?

We did. Yes, that's perfect timing. We just dropped the latest well-being index results yesterday. And so what the well-being indexes, it's a sentiment gauge for us. But we've added more pulse questions each quarter. So it's serving about 1,000 business owners. And it's actually businesses of all sizes. So even about 20% of who we survey now would be larger businesses, businesses that employ like 2,500 to 10,000 employees. So we have kind of that ability now to compare large and small businesses. That sentiment basically is telling us that they're pretty resilient.

One of the things we asked is what would be one of the first actions you would take in the face of uncertain growth? And what would be one of the actions you would do as a last resort or never do? The one that popped near the top of that list on last resort or never do is reduce benefits or get rid of benefits. And so one of the lessons we've seen from that research is since COVID their attention to the labor force in the -- especially in the small market has been incredibly high. They do not want to let people go. They want to continue hiring even if it's hiring ahead and they do not want to reduce benefits. So I would characterize them as pretty resilient.

When we ask them in the last 3 months, have you added staff stayed the same or reduce staff, 51% said they had added staff. And this survey was fielded in late July. So 51%, they had added staff. I think it was maybe 41% had said, they had remained the same and then the rest was that they had reduced. So the vast smallest percentage was that they had reduced staff.

All right. Well, that's good news.

Well, it certainly was good news for us.

I guess -- so we'll move into the businesses more, start with disability, which is a big topic these days. So Principal and the whole industry has seen pretty meaningful improvement in disability loss ratios as we've emerged from the pandemic. Can you talk about the reasons you think this has occurred and then how long lasting and sustainable do you think it is? And I guess you could talk probably, there's the claims side and the pricing side, but maybe start more with the claims side.

Yes. I'm going to try really hard not to make this a 10-minute answer because I feel like it could be because there's a lot of things going on underneath here. And it is a very -- people are keenly interested in the answer to those question. So I'm going to look at disability and I'm going to parse it up a little bit into some of the key levers that I look at.

So when emergence of our results comes together, it really is we look at incidents, and we look at severity. And then from the claims patterns, we also make sure we're looking at those recoveries. So when we deconstruct the claims that we're seeing, what I would say is that incidence has been better recoveries have been better and all the things related to kind of the severity pieces have also been better.

So let me deconstruct that. Incidents, I think, is starting to return to normal. So if we were looking at something that was 300 basis points better than a normalized rate, I would have said maybe 50, 75 basis points of that was coming from incidents that looked better. I would say that is going to return to sort of those pre-COVID normal levels.

When I look at severity, I come down to, I think the right question to ask is, what type of block have you built? So we've built that small and midsized block. What that means is the plan designs that we have to competitively put together in that block are different than the large case plan designs. So when we think of planned maximums, when we think of covered monthly earnings that are going to be maybe $30,000 a month plus to cover some of those populations. We don't end up writing much of that content. We don't have to write that content because that's who we're pointed towards in the marketplace, and that's not the type of plan designs that make up the bulk of our portfolio.

So severity for us has, over the last probably 3 or 4 years, even moderated a little bit in terms of the types of plan designs we have in place. We are using -- so when we have -- an example would be an executive content right on top. So maybe it's a group that has 50 people or 75 people. And they're worried about having enough coverage for those 4 or 5 executives at the top. One of the things we do with more frequency than we were doing is use our individual coverages to provide a portable, probably simplified underwriting solution for disability or even for life insurance.

So when you look at the disability block, we're doing more layering using individual and group, and it means we don't have to stretch as much on the group product, and we're still getting the needs met of that group. So severity for us is better than it was. And I think there's going to be pieces of that continue because they're just a remnant of the block that we've built.

The last piece is recoveries. I mentioned before, knowledge workers. The types of things you can do on recoveries, the types of things you can do through hybrid or work from home relationships to accommodate people who need disability recoveries are just more present in the knowledge working environment. If you don't have to get on a forklift or go in a line or be there in person in a retail store, the options on how you can accommodate those workers just tend to be more extensive. Those accommodation options clearly, we're built helpfully over COVID in that period, and they persist in our block.

So if we are over-indexed with those knowledge workers, there's going to be a portion of that continues in perpetuity for our block. So I would say of the ongoing improvement that we have seen, a portion of it will return to normal and a portion of it will sustain in our block. So I expect our block over time to continue to sustain some of the enhancements we've seen on the loss ratio side.

It sounds like -- I guess, from that, I took that like the one thing you definitely think will return is incidents.

I think so.

But it sounded like the other -- it sounded like severity and recoveries, both might be pretty sustainable.

I think the business, you've built matters. I'm answering for Principal. I think it's worth spending some time and energy trying to deconstruct the block of business you've built.

Got it. Well, I guess, so the next natural question is then on pricing. If you have -- you're seeing favorable results relative to what you would have expected, both you and the industry? How are you dealing with this when it comes to pricing? And also what are you seeing from competitors?

We have been for a couple of years returning some of those good performance that we're seeing returning some of that through our pricing. And so when we look at our new sale rates, our new sell rates have gotten more competitive. I would assume that will continue. And our renewal rates have had less adjustments to it than would have been normalized back 3 or 4 years ago. So we've had to adjust less of our ongoing block to meet the targets that we want to meet and our new sale pricing has improved for both group life and disability.

I guess the interesting thing is despite that, it doesn't -- you haven't really seen any reversion higher in your disability loss ratios though, since you've been doing that.

Here's how I would characterize that. I think it's aligned with the experience we see emerging. So the loss ratio technically shouldn't change if your pricing is aligned with what you expect from your block.

Yes. I mean you kind of already touched on this a little, but I still wanted to ask it is just your view of economic sensitivity of disability claims. I probably -- I assume the knowledge workers would be less sensitive, but there has historically been at least some sensitivity for disability claims within the industry, at least on some lagged kind of correlation to the economy. So I'm curious what your latest thoughts are on that.

Yes, my latest thoughts are that it's probably more -- it feels more correlated to the types of blocks you build. It feels more correlated to the types of industries you're in. It feels more correlated to the types of plan designs than it is correlated to just pure macroeconomic conditions. So I think the traditional wisdom of macro deterioration leads towards more claims just simply hasn't been as relevant for group disability in the last few years as it was 10 or 15 years ago.

Has there been any -- I guess, one other related question is because you have to obviously have a qualified claim to file one.

Of course.

And I think there's always been some thought that maybe there could be some fraud involved when related to economic sensitivity. Has advancements in technology and things like that been enabled you to better detect things like that and maybe prevent it? Or is that not, in your view, that key of a consideration?

I think managing and detecting fraud in all of our products is table stakes. So you have to have great -- I'm going to call it, background running. Some of it is AI-enabled, some of it's simply predictive. Some of it's just algorithmic pattern finding. But you have to have great technology as table stakes. It's typically running behind the scenes. We have great fraud technology running behind the scenes on dental for an example, and we actually have really great fraud technology running against disability.

Probably what's more important though than those pieces is your ability to dig in when you see some sort of an indicator of something that looks atypical. Our ability to dig in, we've maintained about the same level of staffing and spend towards digging in towards atypical behaviors. And I wouldn't say we've seen something that's particularly out of pattern with that.

I wanted to switch to dental. Kind of been the opposite of disability you've seen -- you and the industry have seen some pressure on claims as we've emerged from the pandemic. Can you talk about what has caused that? And then how have you -- perhaps Principal gone about addressing it through renewal actions?

Right. So dental is a -- I feel like I've said this a whole bunch of times, and I'm going to say it a whole bunch more. It's an inherently inflationary product. It's a product that follows some of the things that are happening with medical trend. It's going to pick up on some of the things related to severity. It's a product that definitely can be inflationary.

Now I've been -- I hate to admit how many years I've now been working in the group benefits industry, but it's measured in probably decades now as opposed to just 5-year increments. I've seen probably 3 cycles. This is probably the third time I've seen a cycle, where what I would call sort of aggressive. People are very interested in growing their Group Benefits block. And one of the highest premium ways you can do that is through dental. It's a nicely product. People understand it. They actually ask for it at work. So it's a product that has its own set of draw with it.

If you do not have some of the levers at your disposal to manage things like dental network, and I think this probably doesn't get talked about enough sometimes. If you don't have some of the levers within your dental network, if you don't have some of the fraud pieces running behind the scenes, the cost control, the efficiencies that really come with doing this business at scale, it can be a business that ends up getting a price on it to make any margin on it that gets very unattractive very quickly.

And so during these cycles, I'm not saying this will happen exactly this way, but of the last 2 times I've seen this cycle, at this point, we'd probably be about 6 to 12 months away from seeing some increases that drive brokers and advisers to look for other partners to do business with because the renewal rates are going to be unsustainable, especially for small to midsize businesses where their cash flow is really sensitive.

And so one of the great things we have noticed about our block in terms of resilience is that we rarely have dental as a stand-alone. It just rarely happens, that we have it as a standalone for most of our cases. Our average coverages kind of products at play for any one case is going to be above 3. Actually, this year is the first time that has consistently been above 3 in our history. So we're usually going to have like a life product at play, a disability product, maybe a worksite product, but also a dental product.

So what we're finding is our ability to continue to deliver really attractive rates at renewal and keep persistency at the levels we need to for the full case has been a distinguisher for us. So we definitely have seen a slowdown in purely the new sales end of it, that we are definitely not going to participate in some of the pricing that we're seeing, I feel really comfortable, though, that the earnings have continued to emerge in the way that we've articulated they'd emerge and that taking a trade-off right now on some growth is the right thing to do.

It's really the right thing to do for our shareholders. And I think long term, I'm going to be really comfortable with the growth that we see for our whole block.

What's actually -- what would you say is actually has driven the higher claims? I get the -- obviously, just there's medical inflation, but like is utilization also been an issue? Or do you think part of it is just higher cost procedures that people put off during the pandemic or are there things like that, that are going on, too?

Yes. Utilization is actually moderating a bit. Utilization is not quite as far out of pattern as severity is. So at least in our block. So severity has been a little bit further out of pattern.

If you look back 5 years ago, 5 years ago, a lot of the dental practices that we worked with, where I would call them kind of unaffiliated. Certainly, 10 years ago, they were unaffiliated. They were dental practices that were owned by the dentist or a small group of dentists. And they tended to run the business and provide all the care. That has changed over the years. And so we're seeing more ownership structures of dental practices that have a little bit different level to invest, a little bit different expertise. They might optimize claims a little bit differently. They may optimize some of their fee schedules or dental network. It's a little bit differently.

And so I'd say those -- there's probably a little more sophistication from the dental practices itself, on how they're both providing the care and then understanding the mechanics of the economics behind that, that's not necessarily problematic, but it means that there's always a period where we're making sure that we're keeping up with all those underlying changes. So I actually think that carries some explanatory power in the dental industry. I think we'll moderate on that, and it will find its new level, but I think that has been a change. That underlying ownership structure of some of the dental practices have been a bit of a change in this industry.

And then can you just remind us of the typical dental seasonality? And is it your expectation that your results this year will follow that pattern?

Yes, it is absolutely our expectation. We used to say that dental seasonality was everyone kind of used up their maximums and went to the dentist in first quarter. What we're seeing is that's really spread over first half. So we see it as a first half, second half. So first half, you're utilizing your benefits. A lot of times, you're going to the dentist and saying, I'm having some sort of preventive care visit, but they're identifying an issue or a problem or something that you need to follow up on in those visits.

So let's say those preventive utilizations really peak in that first quarter. And then some of the follow-on pieces tend to peak a little bit in second quarter and even slip into the beginning of third quarter sometimes. But by the end of third quarter and into fourth quarter, that second half of the year, we tend to see seasonality that's pretty meaningful in terms of slowdown in utilization and slowdown in some of the higher-cost procedures.

Got it. So it makes sense why your dental premiums have slowed given the competitive conditions and some of the underwriting experience. On -- I guess, you have seen some slowdown also though, in disability and supplemental health. Like what is -- what would you attribute that to?

It's the other side of the coin on bundling your products together. So I think when you do have the bundle, and you don't often have dental as stand-alone, some of those can -- if they're not going to come with it on the initial sale, you have to wait until the next renewal to help them understand how it's sort of the next best thing for your business to put in place. So some of those aren't bundling. I would attribute nearly all of that to the fact that it's not bundling at the beginning.

We are also seeing some lumpiness. I don't know if that's the best term to use, but the -- some of the paid family and medical leave that comes through our disability line, those when states have opened up a mandated program and we've participated in that state, that's made some of the comparisons from prior year a little bit more volatile than what we've seen in the past. So some of the things on the disability line are really attributable to '25, not having any of those openings coming for some of the new states for paid family medical leave as well.

Got it. I guess when you put all this together, how would you think about your premium and fee growth this year in Specialty Benefits and then longer term?

We've been clear long term and intermediate term, we think that 6% to 9% is an appropriate rate. I still think that's an appropriate rate for long term. For this year, it will be lower than that.

Got it.

Yes.

Let's shift to the life insurance business. I talked about a little less, but still a meaningful business for you. You made a strategic shift a few years ago to really focus on the business market. Can you talk about how that has gone since you've made that pivot.

Yes. So I'm really comfortable not being in the pure rate-driven retail life marketplace. That is a marketplace that's been characterized by pretty high commoditization. It is get on this platform and here's what we're going to need for you. Here's the technology investments. So we were really on the life insurance side using a bunch of our discretionary investments to fuel that retail life insurance block. We've taken those discretionary investments, and we've really pointed them towards things like key person insurance, business market for succession planning. So using the same -- many of the same individual life products but using it in a way that either put a layer -- I talked about the Group Benefits, the Group Benefits business meeting the base layer and then maybe for disability or life using those individual products to kind of meet that workplace need for those usually kind of key employees or more highly compensated people.

We like doing that. We like bundling that together and we like having most of our capacity taken up through things like key person insurance, succession planning, exit planning. So I would characterize the premium growth, which is, again, there's a little noise in there from some of the transactions, the reinsurance transactions and other things that we've done have hit some of that premium level. But pretty consistently, we're seeing nice premium growth moderated to how much we want to grow in this industry in that like 1% to 4%. So 2% or 3% growth with that business market focus being higher growth than that. So that's growing at 10% and 12%, and then we've got the legacy block that's running off at the same time. So we're seeing really nice growth from that business market solution, and it's complementary to other pieces of our strategy.

I should mention too, one of the key products we have in that set supports the nonqualified pillar that's part of our retirement -- our kind of 4 pillars of our retirement offering, nonqualified is one of the most -- the most present for a combination for our TRS cases on the retirement side. So a nonqualified and then a 401(k) plan are often together in the marketplace. And that funding when they use life insurance to fund that is from an EVUL product from our set.

I guess when you think about why the business market is more attractive in your mind than the retail market, is it -- I would assume it's partly less competition and then partly the overlap with your other businesses? Are those the two primary drivers? Or are there other things?

And I'll put some sizing to that. The competitive set, when we used to look at our competitive set for like a term life product that was headed towards the retail market, we'd find 38 competitors that we had to plot our pricing against. When we look at key person insurance, when we look at layering in kind of executive benefits, succession planning, we come down to about 4 or 5 players in the market who do that. So it's a magnitude difference in terms of the competitive environment.

And it really is, in my mind, going from a spreadsheet business to going from a consultative sale. It's also a consultative sale that gets you really close to the business owner. And we really like working with the brokers and advisers who have very direct connectivity to those business owners.

From a margin standpoint, you have a 12% to 16% target in this business. I think it's been running around 10% lately. What's been the reason for that? And what do you expect going forward?

This year, it's really been claims. So claims is the explainer for that. It has been a severity issue for us, not a frequency issue. When I look at frequency, over the past year or 2, it's been in line to maybe even just a hair better than we would have expected. From a severity issue, it has been a bit elevated this year over the 3- and 5-year basis, though, it's right at 100%. So I'm comfortable with what I'm seeing when you put your longer-term lens on. It's sometimes kind of difficult quarter-to-quarter to stop some of that volatility.

What I would say is when we made the decision to transact on reinsuring a good portion of that UL with secondary guarantee block, it didn't -- we knew it was making our block a bit smaller. And until the business market really ramps up over the next series of years, we're going to potentially have a bit more volatility sitting in there because we're working off of a smaller base on our non-legacy business market block.

And ex the claim volatility, would you expect over time, some margin uplift just as you grow the business market more and some of the legacy business runs off?

Yes, is the definite answer to that. To add a little bit more color to that, yes, though. When we look at that business, market business, what we also really like is we like the connectivity from distributors that it gives us and intermediaries that it gives us to other pieces of business. So not only do we have a nice path towards getting some nice margins there. It actually is sometimes the lead sale that opens up an ESOP opportunity or that begins to help us understand what we might do with the business owner for even some of the asset management pieces that investment that we need to do.

So it really does open a door for us. So we don't look at it as simply a margin expansion. We look at it as a relationship expansion piece. That's good for the platform. When we integrate our platforms at Principal, it's good for all the platforms to work together. So that business owner piece has ties into asset management and it has ties into retirement, and I really like that piece of it.

I guess going back to disability on one other thing. Have you seen the same trends, that all the trends you talked about on group disability, have they been similar on individual disability as well? Or is that different some?

It's a different -- it's a bit of a different. Again, the -- we don't -- there are some ways to do some guaranteed repriceable things within IDI. We have tended historically within IDI, not to have reprice ability as the pieces of our historical block. And so the comparisons between group and IDI are -- they're just a little bit apples and oranges kind of group chassis, individual chassis.

What is helpful, though, to think about is both of them help work together to provide disability coverages in the workplace. So we like the fact that going to market with both of those in the workplace, we can use individual when we want to have a portable coverage, when we want to have something that we can use sort of a simplified underwriting and get those executive populations covered and then go back to our group coverages, group disability to go after the base coverages. Then we don't have to flex so hard on planned designs on the group coverages. We don't have to kind of get after executive or specialty content in those, and that helps keep the severity down.

I wanted to ask about technology in Group Benefits. It just seems like it's become more and more and more important over time. I hosted a panel, I think at AIFA earlier this year in group benefits and like 50% of it seemed to be about technology ultimately when -- in terms of the answers. So I guess, can you just talk a little bit about some of the investments you've been making in the business and I guess, both on the consumer-facing side and the back end.

Right, right. So we probably are a company that doesn't do a press release for every time we work with a third party. So I have definitely taken some questions on, I can't find as much evidence externally that you're working with third parties. We were one of the first in the industry to see -- there's a disability claims, so it was one of the first areas that we began to say things like -- and this was probably 3 years ago, hey, we think there's some things happening within predictive analytics and AI that allow us to actually go after some of those claims in a way that puts total industry claims experience at our fingertips, de-identified aggregated information about what the entire universe looks like.

So rather than always just going back to our block of business and making decisions about recoveries and claim returns just on our block of business, knowing the whole block and then integrating that into IDI, LTD and short-term disability as well. So having all of those following a really highly efficient claims model from a third party that gave us insight in data. In fact, we even made a small investment in them because we believe in them so much.

And so we've been on the front end at some of the AI players in the marketplace. We know that dental -- that machines can often see things in X-rays that the human eye simply can't detect. So we've been investing and using partners that give us the ability to complement our claims examiners, not do their job for them, but complement their claims examiners by saying, this looks like it's to the naked eye, 5 millimeters, and so we need to do something differently with how we do root planing or scaling. But when you take it through, they might say it's 4 millimeters. And so we are using AI as a complement on the claims side as well.

We're also building solutions in-house that are differentiating for us. One of the things that has been -- we like being different in the industry in terms of having that small market focus. But it's difficult being different in the industry, when the third-party solutions tend to focus on a larger market, large case issues, large case intake points, large case enrollment patterns. And so what it mean -- what it's meant for us is that for things like quoting, things like enrollment, we've often had to build some of our own technology and build some of our own capabilities.

So our claims -- some of our claims work we've actually brought back in-house, so that we can build claims for products that are across the spectrum for us, not just life or disability, but also cases that have dental vision and worksite coverages, and then quoting on the front end that recognizes the place that the brokers and advisers have for us in that small market space.

So when you're doing thousands of quotes every week related to customers that might have between 2 and 9 people that work for them, you got to make that as efficient as possible. So we're just getting set to release some technology capabilities that are proprietary to us in the small market front end as well as the small market claims back end. Our middle office is where we've used a lot of third parties to help us get that middle office work done, and we're doing that in a scalable and differentiated way.

I think we are basically out of time. So we're going to wrap it up there. Thank you very much, Amy and Principal for attending.

Thanks, Ryan. Yes. Appreciate it.