Executive Summary / Key Takeaways

• Principal Financial Group demonstrated strong financial performance in the first quarter of 2025, with adjusted non-GAAP EPS increasing 10% year-over-year, driven by business growth, margin expansion, and favorable market impacts.
• The company maintains a robust capital position, ending Q1 2025 with $1.8 billion in excess and available capital and an estimated RBC ratio of 395%, supporting significant capital return to shareholders ($370 million in Q1).
• Principal's strategy is laser-focused on growth across the retirement ecosystem, small and midsized businesses (SMBs), and global asset management, leveraging its diversified and integrated business model to navigate dynamic markets.
• Management reaffirmed its 2025 financial targets, including 9% to 12% EPS growth and 75% to 85% free capital flow conversion, expressing confidence in achieving these through organic growth and disciplined expense management despite expected market volatility.
• Key competitive advantages include a strong position in the SMB market, leadership in pension risk transfer (PRT), and investments in technology like the AI assistant Paige, which enhance operational efficiency and customer service.

Principal Financial Group: Building on a Foundation of Resilience

Principal Financial Group, with a history spanning over 145 years, has established itself as a significant player in the financial services industry, specializing in retirement, asset management, and insurance solutions. The company's strategic journey has been marked by adaptation, including recent decisions to exit and reinsure certain legacy businesses to refine its risk profile and a focus on integrating acquisitions like the Wells transaction to enhance its scale. Principal's overarching strategy centers on leveraging its diversified and integrated portfolio to capitalize on growth opportunities within the broad retirement ecosystem, the vital small and midsized business (SMB) market, and its global asset management capabilities. This strategic focus is particularly critical in the current environment characterized by dynamic markets and heightened volatility.

The competitive landscape for Principal is populated by large, diversified financial firms such as Prudential Financial (PRU), MetLife (MET), and Protective Life Corporation (PL), alongside more specialized players and increasingly, fintech innovators. While competitors like PRU and MET may hold larger overall market shares or demonstrate faster growth in certain segments, Principal differentiates itself through deep expertise in areas like pension risk transfer (PRT) and a long-tenured, resilient customer base within the SMB market. PFG's financial performance often reflects higher profitability margins compared to some peers, though it may lag in overall revenue growth rates or the speed of technological innovation in certain areas. The company's strategic response to this competitive pressure involves disciplined underwriting, focusing on profitable growth over sheer volume, and enhancing its integrated service model, particularly for SMBs who value consistent pricing and bundled solutions.

A key aspect of Principal's operational strength and competitive positioning lies in its technological advancements. The company has invested in proprietary technology, including its generative AI-powered assistant, Paige. This tool has demonstrated tangible benefits, such as helping cut task completion time in half, streamlining training processes, and making content creation and customer service more efficient. While specific quantitative metrics comparing the cost advantages of all PFG's technology against rivals are not detailed, the strategic intent is clear: to enhance productivity and improve the customer and employee experience. In Specialty Benefits, the company is also leveraging AI-based dental claims technologies to improve payment accuracy, aiming to support favorable loss ratios. These technological initiatives contribute to operational efficiency, supporting the company's ability to maintain strong margins and deliver value in a competitive market.

Performance Reflecting Strategic Focus and Market Dynamics

Principal's financial performance in the first quarter of 2025 underscored the effectiveness of its strategic focus and disciplined execution. Adjusted non-GAAP operating earnings per diluted share grew by a solid 10% year-over-year to $1.92. This growth was supported by a 4% increase in total company operating revenues, driven by strong top-line performance across the business segments. The company reported non-GAAP operating ROE of 14%, a 100 basis point improvement from the prior year quarter, positioning it within its targeted range.

The Retirement and Income Solutions (RIS) segment was a significant contributor, reporting an 8% increase in pre-tax operating earnings and a 5% increase in net revenue, achieving a 41% margin, a 120 basis point improvement. This performance was fueled by strong underlying fundamentals, including a 9% increase in recurring deposits across all segments and a notable 12% growth in SMB recurring deposits. PRT sales remained robust at $800 million in Q1 2025, building on over $3 billion in sales in 2024. Management highlighted positive momentum in the retirement pipeline and strong activity in the SMB market, which delivered $1.3 billion of positive flows, up from $1 billion a year ago.

Principal Asset Management also delivered growth, with Investment Management revenue increasing 4%, driven by a 5% rise in management fees reflecting higher AUM and a stable fee rate. International Pension saw pre-tax operating earnings increase 5% despite a $6 million FX headwind, demonstrating strong expense discipline and nearly 400 basis points of margin expansion. Total company managed AUM increased to $718 billion by the end of Q1 2025, benefiting from positive market performance and favorable exchange rates, although net cash flow was negative $4 billion due to specific low-fee institutional fixed income withdrawals. Management noted that higher fee inflows relative to outflows are positively impacting run rate revenue.

In Benefits and Protection, Specialty Benefits pre-tax operating earnings grew 5%, driven by business growth and more favorable underwriting experience, with the loss ratio improving 40 basis points year-over-year to 60.7%. Life sales were up 6%, primarily from bundled business market sales and non-qualified sales. While Life pre-tax operating earnings were down due to higher mortality, including a $5 million single claim, management emphasized that one-year and longer-term mortality remains within expected levels. The segment's growth was impacted by the absence of new PFML markets and disciplined dental pricing actions, but the well-established SMB block remains resilient.

Overall financial health is supported by strong cash flow generation. The company reported $977.3 million in net cash provided by operating activities in Q1 2025.

This operational strength underpins a robust capital position. Principal ended the quarter with $1.8 billion of excess and available capital, including $1.2 billion at the holding company, above its $800 million target. The estimated RBC ratio of 395% provides a $300 million buffer above the targeted 375%. This capital strength facilitated the return of $370 million to shareholders in Q1 2025 through share repurchases and dividends, including a $0.76 common stock dividend announced for the second quarter, representing a 9% trailing twelve-month growth rate. The exercise of the 2028 PCAPS elevated capital by $400 million, intended to address a May 2025 debt maturity, while a new $500 million PCAP issuance further enhances liquidity and addresses near-term maturities.

Outlook, Risks, and the Path Forward

Principal's outlook for 2025 remains aligned with its long-term financial targets, signaling confidence in its ability to perform despite anticipated market volatility. Management reaffirmed targets of 9% to 12% EPS growth, 75% to 85% free capital flow conversion, and a 14% to 16% ROE. This outlook is predicated on the continued strength of the company's core growth drivers and disciplined management actions. Key assumptions include a return to normal seasonal expense patterns in Investment Management after Q1, moderation of dental seasonality in Specialty Benefits, and relevant improvement in Variable Investment Income throughout the year, albeit with expected volatility due to the timing of real estate sales. Management explicitly stated that based on current information, a path exists to remain within the 9% to 12% EPS range, contingent on the duration and severity of future market disruption.

The company's strategic focus on expense alignment is a critical lever in managing through volatility. Actions are underway to control costs, including managing travel, hiring, and consulting spend, demonstrating a commitment to not let macro headwinds disproportionately impact the bottom line. The revised RBC target range of 375%-400% is seen as more suitable for the company's current liability profile and provides additional flexibility, although PFG expects to operate prudently in the upper portion of this range given the uncertain environment.

However, the path forward is not without risks. The expected persistence of market volatility poses a significant challenge, potentially impacting fee revenue and making quarterly results difficult to predict. Fluctuations in interest rates and credit spreads could affect investment income and the valuation of assets and liabilities. Competition remains intense across all segments, particularly in areas like dental insurance and retirement plan pricing, requiring continued underwriting discipline. Specific business risks include potential volatility in life mortality and the performance of alternative investments. Derivative counterparty risk and the potential triggering of contingent features on derivative instruments also warrant monitoring, although PFG employs various strategies to mitigate these exposures. Furthermore, the indeterminable maximum exposure from guarantees on Chilean mandatory retirement funds and various indemnification obligations represent long-term risks, although the likelihood of material payments is currently assessed as remote.

Conclusion

Principal Financial Group has commenced 2025 with a strong financial and operational footing, delivering solid earnings growth and maintaining a robust capital position despite operating in a dynamic and volatile market. The company's strategic emphasis on the retirement ecosystem, SMBs, and global asset management, supported by a diversified business model and investments in operational technology, provides a resilient foundation. While challenges such as market volatility and competitive pressures persist, Principal's disciplined approach to expense management, underwriting, and capital deployment positions it to navigate these headwinds. The reaffirmation of its 2025 financial targets underscores management's confidence in the underlying business fundamentals and the expected acceleration of growth in key areas. For investors, Principal represents a company with a clear strategy, proven execution, and the financial strength to deliver long-term value, even as it adapts to evolving market conditions and competitive dynamics.