Principal Financial Group Inc

Good morning and welcome to the Principal Financial Group First Quarter 2025 Financial Results Conference Call. There will be a question and answer period after the speakers have completed their prepared remarks. To ask a question during the session, you will need to press star 11 on your telephone. To withdraw your question, please press star 11 again. We would ask that you be respectful of others and limit your questions to one and a follow-up so we can get to everyone in the queue. I would now like to turn the conference over to Humphrey Li, Vice President of Investor Relations.

Thank you and good morning. Welcome to Principal Financial Group's first 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 Diana Strabo and interim CFO Joe Pitts will deliver some 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. Good morning to everyone on the call. Before I get into the highlights for the quarter, I'd like to make a few comments on the current environment. We are operating in a market that is incredibly dynamic. Policy shifts and uncertainty surrounding the market outlook have contributed to a more cautious investor tone and heightened focus on resilience. The magnitude of the volatility we have seen in April has been extreme and unprecedented and impacts our fee revenue in retirement and asset management. We expect market volatility to persist, making upcoming quarters more difficult to predict. While complex, we have successfully navigated market volatility before, with a clear strategy, a resilient and diversified business model, and a strong commitment to supporting our customers when it matters most. From a financial perspective, we will continue to focus on what we can control with a disciplined approach to aligning expenses with revenue. Actions to support this are underway. In addition, the actions we have taken over the last few years to transform our business mix have uniquely positioned us to perform through market cycles. Our conviction and our strategy has never been stronger, with a laser focus on growth across the retirement ecosystem, SMBs, and global asset management. Each presents outsized market growth opportunities aligned with our strong differentiated capabilities. Slide 4 of our materials highlights the progress we are making in advancing these growth drivers. Turning to the quarter, I am proud of our results, which reflect the strength and discipline of our strategy, as well as the benefits of our diversified business. First quarter adjusted non-GAAP earnings excluding significant variances was $439 million, or $1.92 per diluted share. a 10% increase in EPS over the first quarter of 2024. We returned $370 million of capital to shareholders in the first quarter, including $200 million of share repurchases and a continued increase in our common stock dividend. We have the capital flexibility to continue supporting our customers, investing in growth, and returning capital responsibly. Our capital strategy remains grounded in long-term financial discipline. Despite market volatility, total company-managed AUM increased to $718 billion at the end of the quarter, reflecting positive market performance and the beneficial impact of exchange rates. Net cash flow was negative $4 billion in the quarter, driven by two low-fee institutional fixed-income withdrawals in investment management. Overall, higher fee inflows relative to outflows are driving a positive impact to run rate revenue from institutional flows. We saw strong results in key asset classes, including private real estate, preferreds, and stable value. In addition, we saw strong local investment management flows of $700 million total in Mexico and Southeast Asia, reinforcing our local strategies and the benefits of our global business reach. We are also encouraged by signs of green shoots in high yield, preferreds, real estate, and international equities, some of which have already funded in April, pointing to additional growth in the quarters ahead. In retirement, we generated positive account value net cash flow of $400 million after adjusting for the low fee contract lapse discussed on our last call. We continue to see strong activity in our small and mid-sized market, delivering $1.3 billion of positive flows, up from $1 billion in the year-ago quarter. Turning to sales, pension risk transfer volume grew year-over-year, reaching $800 million in the quarter. We remain a leader in the industry, ranking among the top four providers by sales premium and third by number of contracts based on the 2024 LIMRA results. Looking ahead, we see positive momentum in the pipeline across our retirement ecosystem. This momentum is being reinforced by recent industry recognition. Principal was top rated across all categories in the plan advisor survey and received 17 best in class awards from plan sponsor. Moving to specialty benefits, underwriting results were strong, and overall growth is being impacted by the absence of new PFML markets and lower dental sales, a result of our disciplined pricing actions. In life, sales were up 6% compared to the year-ago quarter, driven by bundled business market sales and strong growth in non-qualified sales, a key component of our total retirement solutions. Importantly, our well-established and long-tenured SMB block remains resilient. Findings from our recent SMB Pulse Survey indicate our customers are focused on adapting to the current environment through pricing actions, shifting suppliers, and managing margin, with less emphasis on reducing benefits or staff. Across all of our businesses, the key fundamentals remain strong. including recurring deposits, deferrals, matches, and wage and employment growth. We remain focused on what matters most, delivering for our customers, operating with discipline, and executing on our long-term strategy. We have built this company to perform through many cycles, resilient, diversified, and purpose-led. Importantly, our approach continues to be recognized. For the 14th time, Principal was named one of the 2025 World's Most Ethical Companies by Ethisphere. This award reflects our ongoing commitment to doing what's right for our customers, employees, and shareholders, not just in times of strength, but especially in moments of uncertainty. We are also being recognized for how we use technology to work strategically. Our proprietary generative AI powered assistant, Paige, was honored with a CIO 100 award for its impact on employee productivity. In just one year, it's helped cut task completion time in half, streamline training, and made it easier for teams to create content and serve our customers more efficiently. Overall, I am proud of our results this quarter and confident in the strength and resiliency of our integrated and diversified portfolio. We will continue to invest in growth, operate with discipline, and stay close to the evolving needs of our customers. And we will do so with the same clarity and commitment that have defined our success over the past 145 years. With that, I'll turn it over to Joel to walk through the results in more detail. Joel?

Thanks, Deanna. Good morning to everyone on the call. I will walk through our financial performance for the first quarter and provide updates on our investment portfolio and capital position. As shown on slide three, excluding significant variances, first quarter non-GAAP operating earnings were $439 million, or $1.92 per diluted share. This represents a 10% increase in EPS over the first quarter of 2024 on an adjusted and a reported basis. As previously disclosed, first quarter earnings were impacted by year-over-year elevated seasonal expenses in investment management. This was offset by a lower tax rate during the quarter. First quarter reported net income, excluding exited business, was $299 million, with immaterial credit losses of $4 million. Net income reflects the non-cash impact of the previously announced transition of our Hong Kong MPF schemes to Bank Consortium Trust, or BCT. Importantly, this has no impact to free capital flow. Non-GAAP operating ROE for the quarter, excluding our actuarial assumption review, was 14%, a 100 basis point improvement from a year ago and within our targeted range. Equity markets created modest tailwinds for much of the first quarter, though softened in the final weeks. The S&P 500, small and mid-cap, and real estate all finished the quarter down. while international equities and fixed income products delivered positive returns. Foreign exchange rates had a positive $8 billion impact on AUM for the quarter as spot rates improved. The following commentary excludes significant variances, which can be found on slide 12. Our first quarter results demonstrate the strength of our integrated and diversified businesses, which enabled us to deliver 10% year-over-year EPS growth. Starting with RIS, first quarter top line growth was strong at 5%. This, coupled with expense discipline, while investing in the business, resulted in a 41% margin, a 120 basis point improvement over the prior year quarter. Pre-tax operating earnings increased 8% from the first quarter 2024, driven by growth in the business, higher net investment income, and favorable year-over-year market performance. Underlying fundamentals in the business remain strong. Recurring deposit growth of 9% in the quarter was strong across all segments, with continued outperformance in our small and mid-sized business market generating 12% growth. The number of individuals deferring and receiving employer matches are up 4% compared to first quarter of 2024. In addition, the dollar amount of these deferrals and matches increased by 5% and 4%, respectively, during the same period. Net revenue growth and margin are at the high end of our targeted range this quarter, a product of our disciplined focus on profitable revenue growth. In principal asset management, investment management revenue increased 4% compared to the year-ago quarter within our targeted range. Management fees increased 5% year-over-year driven by higher AUM and stable fee rate, while transaction and borrower fees remain muted. As discussed on last quarter's call, seasonality played out largely as anticipated. Investment management had $35 million of higher deferred compensation and payroll taxes compared to the fourth quarter, partially offset by lower variable expenses. These seasonal expenses are expected to return to normal levels while we continue to invest in our business. These are factored in our outlook. In international pension, net revenue was down slightly. primarily due to impacts from foreign currency. On a constant currency basis, net revenue increased 4% year-over-year. Pre-tax operating earnings increased 5% from the prior year quarter despite a $6 million FX headwind, driven by strong expense discipline. This resulted in margin expansion of nearly 400 basis points over the year-ago quarter and is at the high end of our targeted range. In specialty benefits, premium and fees growth was 4% compared to the year-ago quarter. As Deanna mentioned, this result was impacted by lower dental sales and a difficult comparison from new PFML markets in the year-ago quarter. These were factored into our full-year outlook, implying higher growth in future quarters. While the environment is competitive, both employment and wage growth remain healthy, and persistency remains stable, which contributed to the year-over-year growth. SBD pre-tax operating earnings grew 5% over the prior year quarter, driven by business growth, more favorable underwriting experience, and higher net investment income. Margin expanded compared to the year-ago quarter and remains within our targeted range. SBD loss ratio improved by 40 basis points year-over-year to 60.7% and was at the low end of our targeted range, driven by better group disability and group life results, partially offset by dental experience. Dental pricing changes continue to move through the block, and we expect to see loss ratio improvement when comparing full year 2025 to 2024. Premium and fees growth in our life business increased compared to the prior year quarter, as strong business market growth was up 20% and at or above targeted returns. Pre-tax operating earnings in the quarter were $14 million, down from the prior year quarter driven by higher mortality, primarily from net claim severity. This included a single claim of $5 million that was part of a much larger face amount shared by many carriers issued in 1999. While this impact results in the quarter, our one-year and longer-term mortality is at our expected levels. Our tax rate in the quarter was lower compared to the full year due to foreign tax credit benefits as well as seasonal impacts from share-based compensation. We expect the tax rate to be within our targeted range of 17 to 20% for the full year 2025. Our general account investment portfolio remains high quality, aligned with our liability profile, and well positioned for a variety of economic conditions. The portfolio remains healthy from a credit risk perspective. While we are closely monitoring the evolving trade policy landscape and its potential impact, our current assessment is minimal exposure to industries most likely to be directly affected by tariffs. Our commercial mortgage loan portfolio remains healthy. As discussed in our last call, we had two scheduled loan maturities in the first quarter in our office portfolio, both of which have been paid off. The remainder of the office portfolio and the underlying metrics remain favorable and relatively unchanged from last quarter. Turning to capital and liquidity, we ended the quarter in a very strong position with $1.8 billion of excess and available capital. This includes $1.2 billion at the holding company, above our $800 million targeted level, $250 million in our subsidiaries, and $300 million in excess of our targeted 375% risk-based capital ratio, which was estimated at 395% at quarter end. Capital was elevated by $400 million this quarter as we exercise our 2028 PCAPs and will use the proceeds to pay down a $400 million debt maturity in May. Concurrently, we issued $500 million of new PCAPs in February, bringing the total off-balance sheet facility to $850 million. This addresses our near-term maturities, with our next maturity occurring in November 2026. We continue to deliver on our targeted 75% to 85% free capital flow. As discussed on last quarter's call, free capital flow is typically the lightest in the first quarter due to timing of capital generation and increases throughout the year. As shown on slide three, we returned $370 million to shareholders in the first quarter, including $200 million of share repurchases and $170 million of common stock dividends. Last night, we announced a 76 cent common stock dividend payable in the second quarter. This represents a one cent increase over the prior quarter's dividend and a 9% dividend growth rate on a trailing 12 month basis. We remain aligned with our targeted 40% dividend payout ratio underscoring our confidence in continued growth and overall performance. As Deanna outlined, our first quarter results reflect our resilient and diversified business that continues to perform through various market cycles. We remain disciplined in how we deploy capital, confident in the fundamentals of our businesses, and focused on delivering long-term value to shareholders, while supporting customers when they need us most. As we have consistently done, and as economic conditions evolve, We remain committed to aligning expenses with revenue, with actions already underway, while continuing to invest for growth. This concludes our prepared remarks. Operator, please open the call for questions.

At this time, I would like to remind everyone that to ask a question, please press star 1-1 on your telephone. We'll pause for just a moment to compile the Q&A roster. Our first question comes from Joel Hurwitz with Dowling and Partners. Your line is open.

Hi, good morning. I wanted to start on your EPS growth outlook. I know there remains a lot of uncertainty in the environment, but you have the 9% to 12% EPS growth target. How do you feel about that, just given the current macro backdrop?

Yeah, thanks for that question, Joel. I'll give a few high-level remarks and then turn it over to Joel to get into more details. You know, if you listen back to my prepared remarks, I reiterated, and as you just mentioned, we're operating in an environment that is incredibly dynamic and also very unpredictable, driven by policy shifts and uncertainty. If you just look at the daily volatility swings that we experienced in the last four weeks, both positive and negative, They've been extreme, and because of that, that will have an impact on our fee revenue in both retirement and asset management. I think it's important to remember that we have a diverse and resilient portfolio of businesses with revenue diversity by source, by geography, by asset class, and customer base, and that diversity is very critically important in times like this. I'd start with that first quarter was a strong start to the year, and I'll now turn it over to Joel for more details. But keep in mind, we are going to continue to focus on what we can control, including being there for our customers, leaning into growth, and being smart about expenses. Joel?

Yeah, good morning, Joel. Thanks for the question. When looking at the full year, I think it's important to first ground ourselves in what happened during the first quarter. As I mentioned in my prepared remarks, 10% earnings per share growth, unreported and adjusted basis. First quarter is a really strong start to the year and in line with our 9% to 12% earnings per share guidance. This is a product of a 4% revenue growth year over year and 5% on a trailing 12-month basis and 40% of margin expansion over the past year. So although volatile, the first quarter average macro conditions were largely in line with what we expected in outlook as the market downturn occurred later in the quarter. So now to your question that relates to the remainder of the year. As Deanna noted, we benefit. in normal and volatile times from a diversified mix of business. Specifically, our benefits and protection spread businesses are relatively insulated from the recent market volatility. So I realize it makes it difficult to model, but our portfolio business is resilient in times of volatility. A proof point we found on page three of our financial supplement, whereby you can see we had a $3.5 billion increase in AUM for market performance during the quarter. And this occurred despite a 5% decline in the S&P 500 during the quarter. So as for our fee businesses, the macro impact will depend on the severity and longevity of market disruption. On page 10 of the earnings cost slide deck, you see we highlight the macro sensitivities. It's important to note these exclude the impact of management actions. And it also shows the AV and AUM composition within investment management and RIS. So again, these sensitivities you find in that page ignore the expense actions we're taking to compensate for the macro headwinds that have emerged. During market volatility, we focus on what we can control. We lean into expense management activities and will not allow macro headwinds to hit our bottom line dollar for dollar. So in addition to expense management, it's important to note the beneficial impact on AUM levels from lower interest rates. The decline in interest rates during the quarter provide a tailwind for our fee businesses During the quarter, it would be a higher AUM and account value levels. And then lastly, another relevant macro factor for us is FX. These headwinds are importantly dissipating. On a sequential basis, FX headwind and IP or international pension were less than $1 million compared to $32 million headwind on a trailing 12-month basis. On this front, in first quarter alone, the Brazilian REI strengthened 8%. and the Chilean peso strength at 4% relative to the U.S. dollar. So it's a long way of saying there are a lot of macro variables in play. But importantly, based on what we know today, a path exists to remain in the 9% to 12% EPS range, but that will be dependent on duration and severity of market disruption from here on out. So Joel, I hope that helps.

Yeah, very helpful. Thank you.

Yeah, a follow-up question?

Yeah, maybe just on the management actions and the expense side, can you just provide some more color on sort of how much flexibility you have on the expense side and what you've sort of taken thus far in Q2?

Yeah, I think I'd start with if you look back through every economic cycle, we have a proven track record of aligning expenses with revenue, and that alignment is our North Star. It's obviously critical in it, and really the volatility really has started in the last four weeks. But again, we're underway. There's a lot of flexibility and levers that we can pull. We'll continue to be thoughtful, disciplined, and focused on it. But Joel, can you give just a little bit more color on how we're thinking about expenses?

Yeah, so as I said in my prior comments, Joel, we take it very seriously. We want to make sure that we do align expense with revenue, and revenue is going to be our guide. So on that front, it's evidenced by continued margin expansion. You know, you look over the past year, our ability to align expense with revenue is reflected in our 40 basis point improvement year over year in margins. And so again, as I said before, during periods of volatility like this, we'll focus on what we can control and lean into expense management activities. So examples of those things are what you would expect, you know, certain travel, delayed hiring, consulting spend, et cetera. And as we've done historically, we will actively and importantly responsibly Align expense with revenues.

Thanks, Joel, for the question.

Sorry, got it. Thank you.

Thank you. Our next question comes from Ryan Kruger with KBW. Your line is open.

Hey, Ryan. Hi, thanks.

Good morning. Could you talk a little bit about client behavior in your asset management business? I guess amidst the elevated market volatility, what changes you're seeing and how you think that will affect activity going forward?

Yeah, I think that's a great question, Ryan. As I mentioned in my remarks, we're seeing some good green shoots as we think about mandates and client activity as we go through the rest of the year, but I'll ask Kamal to give some more color relative to that.

Sure. Thank you, Deanna. Ryan, good morning. So I'll touch upon a couple of things. I think client behavior, particularly given the macro environment, has become a little bit more volatile given rebalancing. But from my seat, what I'm seeing is a material improvement in our pipeline. What I would highlight for you and what I'm most excited about is how clients are actually helping improve the business fundamentals of asset management. And I'll give you three reasons what I would highlight there for you. One, I think as you highlighted is in one queue, you highlighted our NCF behavior, but it truly doesn't capture the strengthening of our underlying business fundamentals because the net revenue rate for asset management continues to increase substantially. In fact, mandates that we are bringing in now are higher than our average book of business. So that's certainly aligned with our strength in private markets. and some of the strategies we have outside the U.S. The other piece of client behavior that I would highlight for you is our global pipeline, which we actively track, is materially going up. In fact, one of the measures that I see in clients is right now there is an increased activity in business now versus business later. So the way you think about it, RFPs are requests for money now versus RFIs versus informational requests. and we are seeing a lot of activity from investment consultants. In fact, just in one queue, we are running at 40% of our annual run rate volume. So activity aside, the quality of mandates that are coming and we are participating is going up, and the net revenue rate is going up with the client mandates.

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

Thanks, yes. I guess a similar question on retirement. One of your competitors said, a few weeks ago said they were seeing elevated hardship withdrawals. Is that something you're seeing at all? It seems like the metrics you were citing still seem pretty constructive, but I wanted to hear what you're seeing there.

Hey, Chris. I'll have you take that.

Yeah. Hi, Brian. Thank you. You know, with respect to participant behavior broadly, I'd say from an investment perspective, we're definitely seeing risk on to risk off activity and a change out into more guaranteed options. With respect to withdrawals, we really haven't seen, hardship withdrawals in particular, we really haven't seen a significant increase in loans or hardship withdrawals from our participants at this point. So it's largely in line with last year's quarter as well as on a quarter-over-quarter and a trailing 12-month basis. We're not seeing that as a big driver of activity. If I think broadly just outside of loans and withdrawals and just about participant withdrawals in general, that rate is stabilized as well. And so when we look at participant draws both on a quarter-over-quarter and the trailing 12-month basis, it's largely in line and has stabilized, as we indicated. That was our expectation last quarter, and we've seen that come through. Now, dollars of participant withdrawals are up, but they're up in line with the increase in average A.V., which really speaks to that impact that equity market performance has on flows and withdrawals. So overall, we're not seeing major changes in either loans or hardship withdrawals or in participant withdrawal rate at this time.

I think if you look at the revenue growth and the margin that Chris's business put out in the first quarter, it is a strength of our and a testament to the strategy. And ultimately, the fundamentals of that business remain very strong. So next question.

Thank you. Our next question comes from Wilma Birdis with Raymond James. Your line is open.

Hey, good morning. Can you talk a little bit more about mortality in the life business? What were the drivers there? And was the result you saw in line with the industry? Thanks.

Yeah, I'll ask Amy to answer that. Obviously, mortality can be volatile quarter to quarter. So, you know, we can highlight what drove the quarterly results. But, you know, keep in mind, if we look at that over a one year and a longer term basis, our mortality still is aligned with our expectations. But Amy, a little bit more color on the quarter.

Yeah, Deanna gave a great starting point to think about the mortality and the life business. I am going to address a couple points there, though. Number one is the individual life business. Deanna hit on it. It can be a bit volatile. We saw some of that volatility flow through. We still feel really good about when we look over one year, three year, five year mortality. We definitely did see a little severity bump. We called out a specific large impact this quarter. What I would also offer, though, is that group life, which tends to be more of that working age population, produced a really nice result this quarter. So the severity that we're tending tends to be where we pick up more all population, not necessarily working population.

Yeah, and Amy, I do know the current quarter's results in individual life was driven much more by severity and even a single large claim. So any color on that larger claim?

Yeah, I think we provided a little bit of color on that larger claim. That larger claim is one that's been on our books for 26 years. It is one where we took a small portion of what appears to be a much larger insurable benefit at the time. And so my guess is that that particular claim will have some impact across the industry. Again, that could be with mutual or public companies, and it could be with reinsurers as well.

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

Sure. Could you provide a little bit of an update on the growth of the spread-based products in retirement? I think you touched on this a bit earlier, but has it been growing and could market uncertainty accelerate that glide path? Thanks.

Yeah, that's a great question. And obviously, you know, that does provide some resilience to our overall results. And there's many different aspects of what drives that spread including even aspects from our 401k business. So, Chris, maybe give a little bit more of a flavor there.

Yeah, sure. Good morning, Wilma. When I think about spread-based growth overall, we're seeing really strong performance in our spread-based businesses. We saw strong registered index-linked annuity sales up over $500 million. We had a strong PRT quarter over $800 million. And we're also, as part of our overall strategy, continuing to drive additional utilization of our guaranteed fixed rate products into our retirement plans. And so we're seeing nice WSRS GA growth as well. So, you know, really, really strong. And that's really part of the strategy as we continue to drive profitable growth, profitable plan dynamics. and using spread where it makes sense to serve our customers' needs. And so we are seeing positive there. If you look at sort of where we see a little bit of pressure on the spread-based, it would be in the investment-only. So if you think about investment-only, that's an opportunistic business for us. We dial it up or down depending on what other opportunities we have to deploy capital. And given the fact that we've been able to deploy capital at nice returns, and whether it's RILA, PRT, or WSRSGA products, We have sort of dialed down investment only, and that contributed a drag of minus $500 million in the current quarter, given IO maturities and the lower issuance that we did in Q1 this year versus last year. So, again, really seeing positive dynamics on spread, and it is part of our overall strategy in RAS to drive overall total revenue and profitable revenue growth.

Thanks, William. Well, I hope that helped. Thank you. Next question.

Thank you. Our next question comes from Wes Carmichael with Autonomous Research. Your line is open. Good morning, Wes.

Good morning, Deanna. On specialty benefits, I was hoping you could talk a little bit about your approach to new business in the quarter. I think you mentioned dental price earning in there. Are you done with actions on dental and any other products where you're taking price? Because I think sales are down significantly. across most lines, and, you know, I'm asking this in recognition of a very good underwriting result.

Yeah, I'll ask Amy to expand upon that. Obviously, you know, we have a very competitive SBD product portfolio. There were some dynamics that impacted that growth rate year over year, including the PFML volatility, but I'll ask Amy to give some more color on sales, what we're seeing, and how it leads into our overall results.

Yeah, thanks. Deanna and Joel both caught this in their earlier prepared remarks, but new sales quarter over quarter is a difficult comparison. So we've mentioned that, keeping in mind that paid family medical leave does come through that group disability line. So specifically, we had a state come online last year, first quarter, and so it makes those comparisons difficult. So when I back that out of the comparison, the new sales gap to expectations really is coming from dental. Since third quarter of last year, we've We've experienced increased dental competition. I think we've talked about it a few times. We're seeing some mutual companies, medical carriers, and to a lesser extent, probably other public company peers be really competitive in that space. So what we're doing there is staying really disciplined. We know that new sale pricing on all of our products, including dental, benefits from staying disciplined. When we've got a customer pricing impact, particularly for SMBs, that moves around a lot, that really means that their ability to plan for cash flow just isn't there. So we do everything we can to keep those consistent, predictable renewals happening. And that really starts with keeping that discipline on new sale. You had specifically asked about dental pricing. We had taken a series of actions on dental pricing throughout 24 and even in early 25. And the thing to keep in mind there is that when we take those actions, they hit first on new sales. So when we adjust that, we see that immediately in our new sale. And I would say that is what we're seeing in the result quarter over quarter. What is a little bit harder to keep the bead on is that Those pricing actions are going to be aligned, though, with policy anniversaries for the enforced block of business. So it's going to blend in through the next 12 months to come in through the rest of the portfolio. What I feel really comfortable about is that when I look at its impact on loss ratio, we are going to see a loss ratio in full year 25 that is better than we saw in full year 24. The other thing I would add is keep in mind, We function and sell and service on an in-force basis with a bundle of products. Group benefits really hit an all-time high this quarter in terms of our bundle. So that's the total coverages we have with a customer. So within that bundle, we are doing things that are not only taking action on those coverages like dental that need some corrective action, but we're also taking action on products that we're seeing good experience flow through. So we're putting things back into the rate that are very positive for us on life and disability. So I'd point you back to looking at our persistency. So our persistency is exactly in line with where we hoped it would be for this first quarter experience. And I'm really proud of that result. I think that really speaks to our renewal formula. It speaks to the things we do within the bundle. And it speaks to the fact that when we have to move up on one product, we're often able to treat the whole case in a really competitive way. So hopefully that gives a little bit more color of how we think about it and what we're expecting for 25.

Yeah, it does. Thank you. And just switching gears, but on variable investment income, it was a little bit of a headwind this quarter. I know it's called out in significant variances, so it's excluded from your EPS guide. But when you think about the balance of the year, particularly in light of some equity market volatility in April. How are you now thinking about BII? I think some peers were kind of expecting normal BII for 2025, but I wonder if that view has now changed.

Yeah, thanks, Wes, for the question. I'll have Joel address that one.

Yeah, thanks for the question, Wes. As you mentioned, BII performance during the quarter is very much in line with fourth quarter 24, as well as first quarter 24. And on that front, despite historically strong performance, we actually did have lower run rate hedge fund returns. which is a small part of our ALTS portfolio, but it did marginally pressure first quarter 2025 results. So as a reminder, regarding our ALTS portfolio, 50% of our portfolio is invested in real estate. So this results in lower concentration in private equity and hedge funds. So since the majority of our real estate is not marked to market each quarter, we're sitting in a portfolio of highly appreciated assets that aren't recognized until the time of sale. So as we expected coming into the year, we did have minimal transaction activity in the quarter and continue to expect the majority of real estate transactions to occur in the latter half of the year. So the VI outlook for the remainder of the year is certainly dependent on, again, the severity and longevity of the market disruption because that could impact our alts returns as well as the timing of our planned real estate sales. So as we've always done, we'll be sure to make sure we highlight this activity as it emerges over the course of the year so you have good visibility as far as what the difference is between long-term expected run rates.

Thanks, Wes, for the questions.

Thank you.

Thank you. Our next question comes from Tom Gallagher with Evercore ISI. Your line is open.

Tom. Good morning. First question is, can you try and help us disaggregate what's going on in your 401 business by plan size? Maybe, you know, referencing large case, mid-small, Are there different dynamics driving those? And then also maybe touch a bit on just the fee rate seemed to go down a bit when I look at fees relative to average AUM. Thanks.

Yeah, you know, if you look at slide four, we did give some color there that highlights both the strong fundamentals that we're seeing for the overall block as well as, you know, the even stronger results regarding transfer deposits, recurring deposits, and net cash flow that we saw for SMBs. Obviously, the biggest difference is the volatility that we can see in flows from large case, both on the ins and outs. But I'll ask Chris to add some more color there around just the overall dynamics.

Yeah, thanks, Tom. And, you know, I think Deanna's, you know, obviously spot on. I mean, I think when we look at the dynamics, we continue to see very healthy, consistent patterns with our SMB business. And, you know, if I look at transfer deposits for SMBs, we're up nearly 30% in the quarter. You know, we see really strong recurring deposit, better than the overall average. So that's really been the core engine for our principal and continues to be a really core engine. For us, on large, it just tends to be a little more lumpy. There's fewer plants that trade, and the timing of when they come in and when they go out has a fairly significant impact on flows just because of the size. But overall, that's what I would say. It's a bit more lumpy and volatile on the large end, but the core SMB is a bit more consistent in showing signs of strength. on a new sales basis, we're seeing strength across all segments. And so we do see a really nice pipeline across all of the segments across our 401 business. So see really positive dynamics there. And I would say the other thing that we see on the benefit from the large segment is we are seeing nice growth in participants. And those participants give us opportunities to serve those individuals both within the plan as well as upon rollover. And if we look at just retail customers we disclosed for you on slide four, that number's up about 10% over the past year. And so the large is bringing us some real benefits as well, despite the fact that it does have a bit more volatile flow pattern. On your fee rate question, we did see some of the same pressures that we've seen in the past. If we look at fee revenue rate, it's down a little bit more than three biffs on the 12-month compare, which we think is the best way to look at it. But as we talked about in past quarters, we attribute at least a biff of that to the market outperformance. That is creating pressure when you have those periods of market outperformance, and we continue to see market outperformance in Q1 this year of 40% higher than Q1 last year. So that one BIP pressure is not what was expected when we talk about sort of our overall two to three BIPs of fee compression expected in normal markets. The other thing that's happening that maybe hasn't gotten as much visibility is we do see pressure from variable annuity lapses. And so what we are seeing in our block is our traditional VA block is seeing some lapses, and we're capturing a lot of those lapses into our spread-based product, RILA. And so while you see that overall variable annuity line staying relatively constant, there is a mixed shift that's happening there between fee and spread, and that's also putting a little bit of pressure on the fee revenue rate. Hope that's helpful, Tom.

That is, yeah, no, that was good color. Appreciate it. And just quick follow-up on the spec benefit side. I heard what you said about top line and the comments there on dental. Supplemental health seemed to slow pretty significantly on earned premium. Any color on what was driving that?

Yeah, I'll turn it over to Amy to address that.

Yeah, so I think that is much more of a function of kind of that prior year quarter over quarter comparison. In first quarter of 24, there was some one-time accounting adjustments where we shifted some premium from the group disability over into that line. We're also then seeing that play through. So it's a comparative issue. What I would say is when you strip that one-time readjustments we did out, that block is actually growing in excess of the rest of our block. So we're seeing actual, a true higher growth rate. And I would expect that to more clearly emerge through the rest of the year while we don't have that noise in the first quarter to first quarter comparison.

And Amy, I think that noise obviously impacted premium as just discussed, but also had some impact on the loss ratio of both the group disability line and the supplemental health line as well. And so, again, it was, you know, just a reclassification of some of the premium within our specialty benefit business.

I agree. I think the fundamental question is, are we seeing some sort of slowdown attractiveness in the supplemental health? And my answer is, no, we are not. It is actually growing at probably double the rate as the other products in our portfolio.

Gotcha. That's a good caller. Thank you.

Thanks, Tom, for the question.

Thank you. Our next question comes from Sunit Kamath with Jefferies. Your line is open.

Great. Thanks. I wanted to focus on the small, medium-sized business market. You know, clearly the first quarter, I think things are kind of business as usual. But I'm just wondering, given everything that's happened so far in April, And maybe it's just too early to tell, but are you getting a sense of any sort of changes in terms of how people are thinking, just given the volatility that we're seeing and employment trends and all that kind of stuff? I mean, you guys have a pretty good view of that market. So I'm just curious if anything is changing in the more recent term.

You know, the great news is we've been able to watch the dynamics of the SMB market through many, many different cycles. And through every cycle that I've lived through, it has been more resilient than the overall block of business of all large cases. And it continues to be a source of strength and differentiation. I'll maybe ask Amy just to share a little bit more about what we're hearing from our customers, how we're thinking about impacts. But I think bottom line, sitting here today, we haven't seen meaningful impacts. But ultimately, we'll continue to monitor that as we go forward. So, Amy?

Yeah, I think you're both right. It is a little early to make a call on this, but we would be, you know, we have a decent amount of data in April to kind of make some assessments. And what I would say is Deanna's exactly right. We aren't seeing deterioration in some of the key metrics that we look at. I do want to start with a reminder. I'm going to take us back to something we shared at Investor Day last November, and that is that principal's block of small and mid-sized companies really have been in business a long time. So that's an average of 30 years across our group benefits and WSRS portfolios. So that means they've seen several economic cycles. So they've gone through GFC and the pandemic. And it means they've used those experiences to plan for some level of uncertainty with respect to those factors. So when I look at working capital, staffing, lending sources, and where relevant things like production capacity is, they have thought ahead on all of those things. So when we talk about resiliency, again, companies that have been in business for three decades tend to have the ability to plan in a little more informed way than people who are really young companies. So our block tends to have good planning in place. Specific to this latest economic uncertainty, and again, some of that is related to the tariff uncertainty, we did actually field a quick survey that Deanna mentioned. We fielded that to over 250 of our own SMB customers in early April to get a sense of kind of where their sentiment is. And one of the most interesting things that came out of that was that although businesses are definitely saying, we think it'll have an impact, we think it could impact growth, they are targeting actions towards things like supply chain adjustments, customer pricing changes, or even bracing for some sort of temporary margin contraction, but very few were planning to take action on things like benefits or staffing or wages. And qualitatively, when we ask them a little bit more about that, what they tell us is that they couldn't get to full staffing after 2020 and 2021, and they remember that. And so right now they're saying we'll take some short-term changes meaning we won't have to impact our own workforce. So we take that as a really insightful point for this marketplace, and we know that these macro conditions are weighing on them. We know what's on their mind, but we really feel like our block is well positioned in this environment.

Does that help? That's really helpful. Yeah, it does. That's very helpful. So the second question, I just wanted to go back to Chris on the participant withdrawals. So on these calls, you and others have kind of conditioned us to think the dollar amount of withdrawals will go up as markets go up, and I think we kind of understand the reasons for that. So if markets remain kind of choppy here, should we be expecting to see the opposite of that? In other words, those nominal withdrawals will decline because markets are down or just want to get a sense of how you're thinking about that?

Chris? Yeah, thanks, Sunita. You know, I think it works both ways. I mean, obviously, as the market values drop, the overall level of and amount of withdrawals reduces as well. So we would expect to see the converse also play out there, Sunita, as well. I mean, I think, you know, flows, again, as you know, we've said on prior quarters, flows, we do monitor flows, but we don't run the business for flows. We run the business for revenue and profit flows. And so when we think about sort of this year, you know, net revenue is going to be highly dependent on what happens in the market. But when we look at margin, we think we're going to be able to deliver margin in the top half regardless of the marketing conditions, which really focuses on sort of that profitable growth, being able to withstand what's ever happening in the participant dynamics or the contract lapse dynamics, and really driving as much profitable growth as we can in RIS.

Got it. Thank you. Thanks, Nate. Thank you.

Thank you. Our next question comes from Jack Motten with BMO Capital Markets. Your line is open.

Good morning, Jack.

Hi, good morning. This is personally a follow-up question on the RAS fee rate drivers. I know you talked about the impact of market outperformance and VA lapses. I guess on a forward-looking basis, would you expect less of an impact from those drivers? Is there any impact on fee rates as participants are shifting their allocations into more risk-off products? I guess just any other color on how you see fee rates evolving moving forward.

Yeah, Jack, I'll ask Chris to address that.

Yeah, thanks, Jack. No, I mean, I think we expect our ongoing guidance to hold true. In normal markets, we can expect two to three bips of compression, and that's coming from movements in or out of proprietary solutions, movements from active to passive. That's all captured, and as well as the pricing, both on new sales and retention basis. So that's where that fee is coming from. When we think about the movement to, I think you said a spread base, that really wouldn't impact the fee revenue rate. It would look at our total revenue rate, but it wouldn't impact fee revenue rate. So it really is market outperformance that is driving a little bit escalated, and then that VA lapse that's creating the additional pressure on fee revenue rate over and above what we would normally expect.

Does that answer your question, Ben?

It does, yes. Thank you. And to follow up on the pension risk transfer market outlook, It was a good start to the year for principal in terms of new business, and I think you referenced positive momentum earlier. I'm just wondering if you expect any near-term kind of headwinds from market volatility and any other color on the outlook for that market.

Yeah, thanks, Jack. We don't. I mean, I think it's expected. The industry estimates expect another strong year for PRT transactions. When you look at the funding levels of defined benefit plans, while their funding levels have come down, they're still over 100%. And we still have a good pipeline of opportunities. So, you know, good start to the year. We're still focused on making sure that we get the right return level for the sales that we're putting on and for the capital that we're investing in that business. But we expect full year 25, at least right now, to be about the same ballpark as it was in 24 on PRT sales.

Yeah, the other thing, Jack, I'd mention there is if, you know, if an employer is thinking of moving into a PRT, they've de-risked their portfolio. to be much more based on, you know, less riskier assets, which then does make the equity movements less impactful to how people think about transacting in that business.

Thank you. Thank you. Our next question comes from Mike Ward with UBS. Your line is now open.

Thank you. Good morning. I recognize there's a lot of uncertainty out there, but I was just wondering if you could comment on how you're approaching the buyback in this volatility.

Yeah, great question, Mike. You know, I think what I would say there is we're in a strong capital position. We had strong deployment in the quarter. And if I think about our capital deployment strategy, it remains grounded in long-term discipline and flexibility. We haven't made any changes to our strategy, and we'll continue to be prudent in returning excess capital to shareholders. But I'll see if Joel has anything to add there.

Yeah, Mike, just a couple of that. You know, our capital deployment plans that we communicate in Outlook are very much intact. And that's demonstrated in the $200 million of share buybacks we did during the first quarter. So we have an active share buyback program in place during the second quarter. So on that front, we're well on our way to delivering on the $700 million to $1 billion of share buyback guidance in 2025. And also an indication of our capital strength is the one-cent dividend increase. You know, we're committed to that 40% dividend payout ratio, a 9% trailing 12-month increase over the prior period. And so, again, we feel really good about our ability to deliver on our capital deployment plans.

And as Deanna said, we'll continue to be disciplined and balance our deployment. Okay. Thank you. Thank you.

I have a follow-up question. Yeah, I was thinking maybe for Kamal, from your viewpoint, you guys touch a lot of different asset classes. I was just wondering if you see any pockets of weakness, or is everything kind of like in a holding pattern across credit? Thank you.

Yeah, you know, I think, you know, Kamal already reiterated that we're seeing some really good winds coming through. And ultimately some of that is even funding as we sit here in April during extreme volatility. But maybe you can talk about some of those asset classes where we're seeing strength.

Yeah, absolutely, Mike. So I think it's a great question because I do think post-April credit spreads have widened across everything. And so what I do think is happening is there is activity now picking up in how you access credit from client's perspective. You heard us mention that we are seeing increased activity in places like high yield and even preferred securities. And one of the reasons we are seeing that is over the last few years, many clients chose riskier credit managers particularly given the environment we were in and the strength of the economy and as the volatility of the economy increases we see a lot of investors trying to now reallocate to a different kind of a credit manager and we're seeing the benefit of that across our fixed income business in fact over time we'll probably see that benefit even come through our real estate debt business One of the things we started a few years ago, which is scaling up quite well, is our infrastructure debt business, which primarily accesses long duration sort of investment grade infrastructure growth. And that's a space where now credit interest is substantially going up. So, yes, the markets have become more volatile, but I think there's a flight to better, more conservative credit manager, which certainly pays to our strength right now.

Thank you. Next question.

Our final question comes from Jimmy Buehler with J.P. Morgan Securities. Your line is open.

Good morning, Jimmy. Hi. I had a question just on your flows across the three main businesses, RIS, asset management, and international pension. Your comments on the pipeline have been generally constructive, but flows were weak across all of those businesses. And I think you did outline the loss of a couple of large mandates in both of them, but maybe just give us a little bit more insight into what's going on in terms of flows.

Yeah, maybe I'll have Kamal start with investment management and international pension. And I think the dynamics that we've continued to talk to you about really resonate in all of those businesses, which is all flows are not created equally. And even with the significant outflows that we saw in investment management in the first quarter, the actual run rate revenue on those negative flows were actually positive. And so, again, I know it's an important metric. It's one we focus on, but ultimately we're here to drive revenue and earnings growth for our shareholders, but ultimately maybe some additional color. And then we didn't talk about international pension, and Brazil was probably a little more pressured this quarter than we would typically see in the first quarter.

Absolutely. Diana, Jimmy, good morning. I'll touch upon quickly what Diana mentioned in our international pension businesses. There is generally seasonality in that flow, so a little bit more muted in Brazil. We believe that it's going to actually improve as the year goes by. We are actually taking some management actions in that direction. And one of the reasons it was pressured in Brazil was really macro related. The very, very high rates in Brazil have certainly caused a little bit of pressure on those pension flows. But we are working on actually newer products that will work well in that environment. The other thing I would highlight for you when you think about cash flows is, given we are such a large private market manager, for us, while we can continue to capital raise, NCF is dependent on deployment. And one of the things we are focused on is increasing the rate of deployment. And I'll give you a couple of figures that give me great comfort as we think about our deployment. We have certainly increased how we deploy capital. Certainly, the market gives us more opportunities at times as well. This, we deployed almost 1.35 billion on behalf of third-party clients in one queue. This will not only generate fees, but over time generate performance fees for us. That is up almost 200 million more from four queue. And I expect that pace of deployment to pick up In fact, if I include affiliated revenue accretive deployments, because you kind of think about these things in terms of how your mix of business is improving and your revenue is accreting to the book of business, it would be close to $2 billion this quarter. So I think you want to think about revenue as well as the pace of deployment we have. It generates and grows our book of business overall.

Chris, do you have anything else on flow dynamics?

Yeah, I mean, I think, Jimmy, I think, you know, we can expect AV net cash flow to be pressured due to the same trends and flow patterns and seasonality that we've experienced in prior quarters. But again, we continue to deliver 5% net revenue growth this quarter. We delivered margins at the top end at 41%. And that's kind of how we're thinking about the business. We did have one large quarter. contract lapse that we mentioned last quarter. That was a contract that we terminated. It's not that the customer left us, but with our focus on profitable business, we did decide that that customer would be better somewhere else. And that was, you know, 2.3 low fee outflow for us in the quarter that certainly impacted flows. I previously talked about the participant withdrawal rates and the loans and hardships. Again, loans and hardships are up modestly and the rate largely in line, but they're up modestly. But it's less than 10% of overall impact on flow, so that's not going to be a big driver of the flow dynamics. So hopefully that helps, Jimmy.

Yeah, the only additional dynamic, Chris, and you can correct me if I'm wrong, but in extreme periods of volatility, you do see plant activity may be impacted. Obviously, that would benefit us on the lapse side, but could impact the timing of some of the transfer. deposits, but again, some of that will play out as we go forward.

Yep, I agree with that. Fears of volatility, plan sponsors are less reluctant to go into a blackout period with their plans, and so you could see lower transfer deposits throughout the year, but on the opposite side, we'd see higher retention, which is a positive for us.

Thanks, Jeremy.

Just on your comments on the loss of lower fee business in D.C. and then also in asset management, has there been a change in your view on how you approach the business versus before? Just trying to get a sense of how the low fee business got on your platform to begin with. Is it all acquisition related or there's just been a shift in your view on how you're managing the business and being more selective than maybe a few years ago?

Yeah, I think, Chris, most of those have been, were part of the IRT transaction that has impacted us more over the last, but maybe talk just to how we're approaching new sales as well.

Yeah, I mean, I think as we think about the role that large plays in retirement, it's really important component of it brings scale. It gives us opportunity to spread those fixed costs across more participants, and it gives us more participants to serve. and to serve them individually as they look to manage both their qualified and non-qualified money when they look to roll out the money or do something else with those funds. So large play is an extremely important role, but it's not an area where we generally get a lot of proprietary asset capture, for instance, or the like. So we have to think about those plans thoughtfully as we put them on. But the large percentage of them came from the acquisition. But we've been very successful in gaining some momentum in the large market, too, particularly with the consultant channel.

Anything, Kamal, from your perspective?

No, Jimmy, the only thing, I'll give you two data points, which is a lot of this is legacy business. And I think there are probably two things to keep in mind as you think about this. One, our incentives on growing the book is heavily focused on revenue rate rather than just growth sales. And that's definitely a modernization. The other piece is As we have integrated PGI and PI, we are naturally benefiting from the fact that international clients, when they buy global product, are willing to pay a premium, particularly in the asset classes we are in. So as the book becomes more global and we actually execute very well on our strategy of growing sales in Asia and Latin America, that provides us higher revenue, higher quality assets, which will certainly benefit the business over a long period of time.

Thanks, Jimmy. Thank you.

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

Yeah, thank you. As we close out today's call, I do want to thank you all for joining us and for your thoughtful questions. Our first quarter results are a testament to the strength of our diversified business, the proactive steps we're taking to mitigate risk, our disciplined execution, and the clarity and the strength of our strategy. Amid market volatility and economic uncertainty, we remain confident in our ability to deliver through cycles and create long-term value for our customers and our shareholders. We're investing in our future. We're staying close to and being there for our customers, and we're operating with the same resilience and purpose that has defined us for the last 145 years. Thank you for your time today. Thank you for your continued support. We look forward to connecting with many of you in the near future. 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.