Principal Financial Signals Confident 2026 After Strong 2025

Principal Financial ((PFG)) has held its Q4 earnings call. Read on for the main highlights of the call.

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Principal Financial’s latest earnings call struck a confident tone, with management emphasizing broad-based operational strength in 2025 and an upbeat outlook into 2026. Double-digit EPS growth, expanding margins, higher ROE, and strong capital generation set the backdrop, while headwinds such as divestiture noise and near-term cash flow volatility were presented as manageable rather than structural.

EPS Growth and Quarterly Performance

Principal delivered adjusted non-GAAP EPS growth of 12% for 2025, landing at the high end of its target range and translating into $1.9 billion of operating earnings, or $8.55 per share. Reported EPS grew nearly 20%, while Q4 operating earnings of $499 million, or $2.24 per share, rose 7% versus a tough comparison, aided by a real estate gain booked below the line.

ROE and Margin Expansion

Return on equity was a standout, with non-GAAP operating ROE rising 120 basis points to 15.7%, again at the top end of the company’s 14%–16% goal. Company-wide margins climbed to 31%, up 80 basis points year over year, giving management confidence to raise its 2026 ROE target to a higher 15%–17% band.

Capital Generation and Shareholder Returns

The company generated $1.6 billion in excess available capital in 2025 and returned over $1.5 billion to shareholders, signaling a disciplined but shareholder-friendly stance. Capital returns were split between roughly $851 million of share repurchases and $684 million of common dividends, with Q4 alone delivering $448 million in combined buybacks and dividends.

Free Capital Flow Conversion

Free capital flow conversion reached an impressive 92% for 2025, underscoring the cash-generative nature of the business. For 2026, management is guiding to a more normalized but still strong range of 75%–85%, which should still comfortably fund buybacks, dividends, and growth investments.

AUM Growth and Asset Management Momentum

Assets under management climbed to $781 billion at year-end, up 10% from a year earlier, as Investment Management gross sales rose 16% to $127 billion. Private markets were a key driver, with sales up 50%, private markets AUM up 12%, and positive net cash flow of $3.5 billion, reinforcing the firm’s strategic pivot toward higher-fee, higher-growth strategies.

Retirement Business Expansion and Engagement

The retirement segment continued to show healthy growth and engagement across its platform. Transfer deposits reached $35 billion, up 9%, while recurring WSRS deposits rose 5%, and participant roll-ins increased 15% to $6.5 billion, as both the number of deferring participants and average deferrals per member ticked higher.

SMB and Benefits Momentum

Small and mid-sized business retirement solutions showed strong traction, with recurring deposits up 8% and transfer deposits surging 32%. Account value net cash flow was a positive $1.5 billion, while group benefits customers now average 3.13 products per relationship and life business premiums and fees grew 15%, highlighting successful cross-selling.

Specialty Benefits Underwriting and Claims

Specialty benefits delivered record underwriting performance, with an adjusted loss ratio improving to 59%, the best in company history and below the 60%–64% long-term target range. This improvement translated into a 120-basis-point expansion in operating margin to 16%, signaling tighter pricing and claims management.

Product, Distribution Wins and Innovation

Product innovation and distribution reach were key themes, with managed account adoption jumping 51% and assets in those accounts surpassing $9 billion. The ETF platform reached a record $9 billion of AUM with nearly $2 billion in net inflows, while international pension AUM rose 24% to $154 billion and DCIO sales approached $8 billion.

Quarterly Net Cash Flow Volatility

Despite strong annual trends, quarterly net cash flow was a negative $2.0 billion, partly masking underlying strength in private markets, which still posted $1.0 billion of positive flows. Management stressed that headline flows exclude $2.4 billion of dividends reinvested into mutual funds, a technicality that can amplify quarter-to-quarter volatility.

Divestitures and Revenue Headwinds

Portfolio reshaping created some drag, as roughly $13 billion of divested businesses weighed on reported growth and produced a modest $3 billion sequential dip in AUM. Investment Management net revenue growth faced a 150-basis-point headwind, while the Chile runoff annuity business—slated to close in 2026—contributed earnings that will disappear before the freed capital is ultimately recycled via buybacks.

Life Insurance Margin Pressure

Life insurance was a weak spot, with operating margins at 10% for 2025, below the 12%–16% target range due to higher claim severity earlier in the year. Premiums and fees grew only 3%, underscoring that this business remains more of a capital and volatility management challenge than a growth engine in the near term.

Specialty Benefits Revenue Growth Lag

While profitability was strong, specialty benefits revenue growth fell short, with premiums and fees up just 3%, below management’s ambitions. The company pointed to lower net new business despite better underwriting results, suggesting an opportunity—and need—to convert improved risk selection into stronger top-line momentum.

International Pension Revenue Fluctuations

International pension operations saw a 2% decline in net revenue for the year, as foreign exchange headwinds and the exit from Hong Kong weighed on reported results. Fourth-quarter figures were further dampened by seasonality and one-time expenses, though management expects conditions to normalize and improve in the first quarter.

Fee-Rate Dynamics in Asset Management

Management fee rates came under some pressure, reflecting both the impact of divestitures and a business mix shift toward private markets. While private assets can temporarily dilute AUM-based fee rates, the company believes they will be offset over time by higher transaction and performance fees, supporting longer-term earnings quality.

Seasonality and Expense Headwinds

Seasonal patterns and near-term expenses remain a consideration for investors tracking quarterly cadence, particularly in Investment Management. The company expects $30 million to $35 million in seasonal Q1 expenses from deferred compensation and payroll taxes, while dental claims in benefits typically run higher in the first half, skewing early-year margins.

Muted Outlook for Performance Fees

Management set cautious expectations for performance fees, guiding to a typical range of $30 million to $40 million for 2026. This implies limited upside from fee volatility, reinforcing that the earnings story is anchored more in steady AUM growth, expense discipline, and capital deployment than in unpredictable performance windfalls.

Forward-Looking Guidance and 2026 Outlook

For 2026, Principal is targeting EPS growth of 9%–12%, free capital flow conversion of 75%–85%, and a higher ROE band of 15%–17%, underpinned by $1.5 billion to $1.8 billion of planned capital deployment. Segment targets call for mid-single-digit revenue growth and strong margins across retirement, investment management, international pension, and specialty benefits, while life is expected to shrink modestly but improve margins, assuming normal markets and typical seasonality.

Principal’s earnings call painted a picture of a company balancing strong execution with realistic acknowledgment of its weak spots and external headwinds. With robust capital returns, improving profitability metrics, and clear 2026 targets, the story remains constructive for investors, even as quarterly cash flows, fee rates, and select product lines introduce some noise around an otherwise solid long-term trajectory.

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