Executive Summary / Key Takeaways

• Robust Financial Performance and Capital Returns: Principal Financial Group ($PFG) delivered strong Q3 2025 results with 13% adjusted EPS growth year-over-year and 14% year-to-date, exceeding its target range. The company's return on equity is at the high end of its target, and its year-to-date free capital flow conversion ratio exceeds 90%, underscoring a disciplined capital management strategy that includes significant share repurchases and consistent dividend increases.
• Strategic Focus on Core Profit Pools: PFG is strategically concentrated on three high-growth areas: the broad retirement ecosystem, small and midsized businesses (SMBs), and global asset management. This integrated approach, supported by continuous investment in modernizing capabilities and expanding product offerings, drives sustained growth and market leadership.
• Technological Differentiation and Operational Efficiency: PFG leverages advanced digital solutions, including its proprietary generative AI assistant, PAGE, to enhance customer experience, streamline operations, and improve productivity. These technological investments are critical to its competitive advantage and long-term growth strategy.
• Resilient Business Model Amidst Volatility: Despite a dynamic market environment characterized by volatility, policy shifts, and competitive pressures, PFG's diversified business mix and disciplined underwriting practices enable it to maintain strong margins and manage risks effectively, particularly in its Benefits and Protection segment.
• Positive Outlook with Strategic Investments: Management reaffirms its 2025 enterprise financial targets, including 9-12% EPS growth and 75-85% free capital flow conversion, driven by continued business growth, strategic portfolio optimization, and an improving outlook for variable investment income.

A Diversified Financial Powerhouse in a Dynamic Era

Principal Financial Group ($PFG) stands as a global financial services leader, deeply rooted in its 1879 founding in Des Moines, Iowa. The company's enduring success stems from its diversified business model, which spans retirement solutions, asset management, and insurance products. This integrated approach allows PFG to serve a broad spectrum of clients, from small businesses and their employees to large institutions and individual investors worldwide. PFG's strategic focus is sharply defined around three significant profit pools: the broad retirement ecosystem, small and midsized businesses (SMBs), and global asset management. These areas represent outsized market growth opportunities, aligning with PFG's differentiated capabilities and long-standing expertise.

The financial services industry is currently characterized by a dynamic and often unpredictable environment, marked by market volatility, evolving regulatory landscapes, and geopolitical tensions. PFG's resilience in this complex setting is a testament to its diversified revenue streams and disciplined operational execution. The company consistently emphasizes its commitment to aligning expenses with revenue, a critical strategy for maintaining profitability amidst macroeconomic shifts.

In this competitive landscape, PFG faces a diverse array of rivals, including established financial giants like MetLife, Inc. , Prudential Financial, Inc. , Aon plc , and Ameriprise Financial, Inc. . While these competitors offer similar products and services, PFG distinguishes itself through its integrated solutions, deep client relationships, and a strategic emphasis on specific market niches. PFG's strong brand reputation, built over more than a century, coupled with its extensive global distribution network, provides a significant competitive advantage, fostering customer loyalty and contributing to stable revenue streams.

Technological Edge: Fueling Efficiency and Customer Experience

A cornerstone of PFG's strategy and a key differentiator in the competitive financial services industry is its robust commitment to technological innovation and digital transformation. The company has adopted a cloud-first approach, leveraging strategic partnerships with technology leaders like Amazon (AMZN) Web Services (AWS) and SS&C Technologies (SSNC) to enhance its capabilities and operational efficiency.

A prime example of this technological leadership is the Principal AI Generative Experience (PAGE), PFG's proprietary generative AI-powered assistant. PAGE, recognized with a Newsweek AI Impact Award and a CIO 100 award, has demonstrated tangible benefits for internal operations. It has helped cut task completion time in half, streamlined training processes, and made content creation easier for teams, significantly boosting employee productivity. This internal efficiency translates into improved service delivery and reduced operational costs, strengthening PFG's competitive moat.

Beyond internal applications, PFG is actively integrating generative AI to enhance customer interactions. By leveraging AWS Contact Center Intelligence (CCI) solutions, including Amazon Transcribe Call Analytics and Amazon Bedrock, PFG can analyze millions of customer calls annually. This technology extracts detailed insights into call drivers, customer sentiment, and agent performance, enabling PFG to identify upsell opportunities and deliver more personalized and seamless customer experiences across various channels. The company's roadmap includes ambitious plans to expand conversational AI capabilities and accelerate generative AI development across the enterprise, with numerous use cases currently in development. This continuous investment in technology not only streamlines internal processes but also positions PFG as a forward-thinking leader capable of attracting tech-savvy clients and adapting to evolving market demands.

Strategic Evolution: Adapting for Profitable Growth

PFG's long history, dating back to 1879, is marked by a continuous evolution of its business model to meet changing market needs and capitalize on growth opportunities. This strategic agility has been particularly evident in recent years through a series of portfolio optimizations and product innovations.

A notable strategic shift occurred in January 2025, when PFG announced an agreement with Bank Consortium Trust (BCT) to transition its sponsor and trustee pension roles in Hong Kong for Mandatory Provident Fund Schemes (MPF Schemes). This move, expected to close in 2026, allows PFG to expand its investment management capabilities with assets from the combined pension schemes, focusing on its core expertise in retirement asset management within a changing regulatory environment. This transaction resulted in a $20 million loss from an impaired distribution agreement intangible asset and a $77 million loss from a customer relationship intangible asset classified as held-for-sale, reflecting the strategic pivot. Similarly, the divestment of Origin Asset Management in Q1 2025 and the planned sale of Post Advisory Group in Q2 2025 underscore PFG's commitment to streamlining its global asset management business and focusing on areas of competitive strength.

In parallel with these portfolio adjustments, PFG has aggressively pursued product innovation. In Q4 2024, it expanded its target date offerings to include both personalized and passive options, catering to the diverse needs of plan sponsors and participants. The company also launched advisory services for plan participants, which have seen a 90% plan sponsor adoption rate and a double-digit increase in advisory and retail customers served. Furthermore, PFG has made significant strides in alternative investments, launching a private credit REIT fund and building out a private infrastructure debt team. Its Data Center Growth and Income Fund has successfully raised over $3.6 billion across 11 countries within 18 months, with 36% of commitments from new institutional clients. A strategic partnership with Barings, announced in October 2025, further strengthens PFG's private credit platform through a $1 billion portfolio finance initiative, leveraging Barings' origination strength and PFG's portfolio management expertise.

Financial Strength: Consistent Performance in Volatile Markets

PFG's strategic focus and operational discipline have translated into robust financial performance, particularly evident in its recent results. For the third quarter of 2025, PFG reported non-GAAP operating earnings of $474 million, or $2.10 per share, marking a 19% increase year-over-year. Adjusted earnings per share grew 13% year-over-year and 14% year-to-date, surpassing the company's target range. The return on equity has significantly expanded, now positioned at the high end of its target range, and the year-to-date free capital flow conversion ratio exceeds 90%, tracking above target. This strong enterprise performance was underpinned by a 4% net revenue growth and a notable 180 basis point margin expansion in Q3 2025.

Segment Performance Highlights:

• Retirement and Income Solutions (RIS): This segment continues to be a primary revenue driver. In Q3 2025, RIS reported pre-tax operating earnings of $315.3 million, an 8% increase from the prior year quarter, supported by a 42% operating margin, which improved by 130 basis points over Q3 2024. Workplace Savings and Retirement Solutions (WSRS) transfer deposits grew 13% year-over-year, and total RIS sales reached $7 billion, an 8% increase year-over-year, driven by strong growth in WSRS and pension risk transfer (PRT). DCIO sales were $2 billion in the quarter. The segment's net revenue growth is attributed to favorable actuarial assumption updates, business expansion, and increased fee revenue from higher average monthly account values.
• Principal Asset Management (PAM): PAM delivered strong earnings, with pre-tax operating earnings increasing 9% from Q3 2024. Management fees rose 5% year-over-year, contributing to a 180 basis point improvement in the quarterly operating margin, which stands at approximately 36%. Gross sales in Investment Management were $32 billion, up 19% year-over-year. Private markets generated $1.7 billion in net inflows, with private AUM growing 9% year-over-year across real estate, infrastructure, and private credit strategies. The ETF business recorded $500 million in net inflows for the quarter and $1.3 billion year-to-date. International Pension achieved a record AUM of $151 billion, a 9% increase year-over-year, with an operating margin of 47%.
• Benefits and Protection (B&P): Specialty Benefits achieved record pre-tax operating earnings of $147 million in Q3 2025, a 28% increase year-over-year, driven by favorable underwriting results and business growth. The total Specialty Benefits (SBD) loss ratio improved by 340 basis points and was below the target range, including a 100 basis point improvement in the dental loss ratio. The operating margin expanded by 330 basis points to 17%. Life Insurance premium fees increased 3% in Q3 2025, with business market growth of 11% outpacing the runoff of the legacy block.
• Corporate: The Corporate segment reported pre-tax operating losses of $91.6 million in Q3 2025, primarily due to increased compensation costs and a decrease in interest income related to tax settlements.

PFG's investment portfolio remains high quality and well-diversified, aligning effectively with its liability profile. The commercial mortgage loan portfolio, a key component, maintains an average loan-to-value ratio of 50% and a debt service coverage ratio of 2.3x. Credit losses have been minimal, with Q3 2025 after-tax losses at approximately $8 million, remaining below the modeled long-term run rate estimate. The company's real estate assets, which are not fair valued quarterly, are in a meaningful unrealized gain position, with appreciation recognized at the time of sale, contributing to variable investment income (VII) volatility.

Robust Capital and Shareholder Returns

Principal Financial Group maintains a very strong capital position, providing both stability and flexibility for strategic initiatives and shareholder returns. As of September 30, 2025, the company reported $1.6 billion in excess and available capital, including $800 million at the holding company and $400 million in excess of its targeted 375% risk-based capital (RBC) ratio, which was estimated at 400% at quarter-end.

This robust capital base supports a consistent and growing return of capital to shareholders. In Q3 2025, PFG returned $400 million to shareholders, comprising $225 million in share repurchases and $173 million in common stock dividends. The company is confident in achieving its full-year capital return target of $1.4 billion to $1.7 billion, including $700 million to $1 billion in share repurchases. PFG also announced a $0.79 common stock dividend payable in Q4 2025, an 8% increase year-over-year, aligning with its targeted 40% dividend payout ratio.

PFG's debt management strategy is equally disciplined. In March 2025, the company exercised its rights under the 2028 P-Caps to issue $400 million of 4.11 Senior Notes, using the proceeds to repay $400 million of 3.40 senior notes that matured in May 2025. Concurrently, PFG issued $500 million of new 2055 P-Caps, bringing its total off-balance sheet facility to $850 million and addressing near-term maturities, with the next debt maturity scheduled for November 2026.

Competitive Dynamics: Strengths in a Crowded Field

PFG operates within a highly competitive financial services industry, facing both traditional institutions and emerging fintech companies. Key direct competitors include MetLife, Inc. (MET), Prudential Financial, Inc. (PRU), Aon plc (AON), and Ameriprise Financial, Inc. (AMP). PFG's competitive advantages are multifaceted, rooted in its diversified business model, strong brand equity, global distribution network, and specialized expertise.

In retirement solutions, PFG's integrated offerings and leadership in the SMB market provide a distinct edge. While the record-keeping industry is consolidating, with an expected reduction from approximately 40 players to single digits over the next decade, PFG, as a top-three player, is well-positioned to benefit from this shakeout. Its focus on personalized retirement services and pension risk transfer (PRT) solutions, often sourced from existing defined benefit clients, differentiates it from broader insurance-centric approaches.

In asset management, PFG's expansion in private markets, including real estate, infrastructure, and private credit, positions it favorably against competitors. The company's rigorous underwriting process, with a high selection ratio (only 1 out of 7 deals making it through the funnel), and a focus on low leverage ratios in its private credit vehicles, mitigate risks that have impacted some industry players. This disciplined approach, coupled with strong performance in areas like emerging market fixed income and active equity ETFs, allows PFG to attract long-term mandates and maintain a management fee rate that is bucking industry trends.

The Benefits and Protection segment, particularly Specialty Benefits, demonstrates PFG's ability to drive profitable growth through disciplined underwriting. While the dental market is highly competitive, with aggressive pricing from mutual companies and medical carriers, PFG's strategy of maintaining pricing discipline and selling bundled products helps to ensure stable and predictable renewals for its SMB customers. This approach, combined with favorable claims experience in group disability and group life, allows PFG to achieve strong loss ratios and expand operating margins.

PFG's technological advancements, such as the PAGE AI assistant and its use of generative AI for customer insights, further enhance its competitive standing by improving operational efficiency and customer experience. This focus on digital transformation is crucial for attracting tech-savvy clients and streamlining internal processes, providing a qualitative edge over rivals who may lag in innovation speed.

Outlook and Risks: Sustaining Momentum

Principal Financial Group is well-positioned to deliver on its enterprise long-term financial targets in 2025, reaffirming its guidance of 9% to 12% growth in earnings per share, a 75% to 85% free capital flow conversion, and a 14% to 16% return on equity, excluding significant variances. Management anticipates even stronger EPS growth on a reported basis. The company is targeting $1.4 billion to $1.7 billion in capital deployments for 2025, including $700 million to $1 billion in share repurchases and a 40% dividend payout ratio.

Segment-specific guidance reinforces this optimistic outlook. RIS is expected to see an upward revision in its margin guidance, with net revenue growth of 2% to 5% remaining intact. Investment Management anticipates revenue growth and margin within its targeted ranges. International Pension's net revenue is projected to be at the midpoint of its range on a constant currency basis, with margin improving from 2024 levels. Specialty Benefits expects premium and fees growth near the low end of its 6% to 9% range, improving throughout the year, driven by ongoing underwriting discipline that is enhancing loss ratio and margin targets. Life premium fees growth is expected to be at or above the high end of its range, with high-teens growth in the business market block.

The company's outlook assumes run-rate variable investment income (VII) will improve compared to 2024, with real estate transactions expected to be weighted towards the middle and latter half of 2025. However, market volatility, particularly in equity and interest rate environments, remains a key risk. A hypothetical 100 basis point immediate, parallel decrease in U.S. interest rates could impact segment pre-tax operating earnings between -1% and +1% over the next twelve months. Similarly, a 10% downward equity shock could reduce annual segment pre-tax operating earnings by 5% to 8%. While PFG hedges foreign currency exposures, fluctuations still affect the translation of international operating earnings and equity. Credit risk, particularly in the rapidly growing private credit market, is closely monitored through stringent underwriting. Regulatory changes, such as pension reform in Chile and global Pillar Two tax rules, also present ongoing considerations.

Conclusion

Principal Financial Group's investment thesis is compelling, grounded in its diversified business model, strategic focus on high-growth segments, and a relentless pursuit of operational excellence and technological innovation. The company's strong financial performance in Q3 2025, marked by robust EPS growth, expanding ROE, and industry-leading free capital flow, demonstrates the effectiveness of its strategy. PFG's commitment to the retirement ecosystem, SMBs, and global asset management, coupled with its disciplined capital deployment and proactive risk management, positions it for sustained long-term value creation.

The company's leadership in leveraging digital solutions, particularly its generative AI assistant PAGE, provides a significant competitive advantage by enhancing efficiency and customer experience. While facing a dynamic and competitive landscape, PFG's integrated approach, strong brand, and strategic investments in new capabilities allow it to differentiate itself and capture market share. With a clear outlook for continued earnings growth and a balanced approach to capital returns, Principal Financial Group offers a compelling opportunity for discerning investors seeking a resilient and strategically agile financial services company.