PRINCIPAL FINANCIAL GROUP INC

Previous wording

The following analysis discusses our financial condition as of June 30, 2024, compared with December 31, 2023, and our consolidated results of operations for the three and six months ended June 30, 2024 and 2023, prepared in conformity with U.S. GAAP. The discussion and analysis includes, where appropriate, factors that may affect our future financial performance. The discussion should be read in conjunction with our Form 10-K, for the year ended December 31, 2023, filed with the SEC and the unaudited condensed consolidated financial statements and the related notes to the financial statements and the other financial information included elsewhere in this Form 10-Q.

Current wording

The following analysis discusses our financial condition as of September 30, 2024, compared with December 31, 2023, and our consolidated results of operations for the three and nine months ended September 30, 2024 and 2023, prepared in conformity with U.S. GAAP. The discussion and analysis includes, where appropriate, factors that may affect our future financial performance. The discussion should be read in conjunction with our Form 10-K, for the year ended December 31, 2023, filed with the SEC and the unaudited condensed consolidated financial statements and the related notes to the financial statements and the other financial information included elsewhere in this Form 10-Q.

Previous wording

Foreign currency exchange rate fluctuations create variances in our financial statement line items. The most significant impact occurs within our Principal International operations where pre-tax operating earnings were negatively impacted $6.2 million and $7.3 million for the three and six months ended June 30, 2024, respectively, as a result of fluctuations in foreign currency to U.S. dollar exchange rates. This impact was calculated by comparing (a) the difference between current year results and prior year results to (b) the difference between current year results and prior year results translated using current year exchange rates for both periods. We use this approach to calculate the impact of exchange rates on all revenue and expense line items. For a discussion of our approaches to managing foreign currency exchange rate risk, see Item 3. “Quantitative and Qualitative Disclosures About Market Risk — Foreign Currency Risk.”

Current wording

Foreign currency exchange rate fluctuations create variances in our financial statement line items. The most significant impact occurs within our Principal International operations where pre-tax operating earnings were negatively impacted $7.5 million and $14.8 million for the three and nine months ended September 30, 2024, respectively, as a result of fluctuations in foreign currency to U.S. dollar exchange rates. This impact was calculated by comparing (a) the difference between current year results and prior year results to (b) the difference between current year results and prior year results translated using current year exchange rates for both periods. We use this approach to calculate the impact of exchange rates on all revenue and expense line items. For a discussion of our approaches to managing foreign currency exchange rate risk, see Item 3. “Quantitative and Qualitative Disclosures About Market Risk — Foreign Currency Risk.”

Previous wording

Net income attributable to Principal Financial Group, Inc. decreased primarily due to a $158.1 million unfavorable one-time impact of the YRT Reinsurance Transactions in 2024. This decrease was partially offset by a $109.8 million favorable change in fair value of the funds withheld embedded derivative.

Current wording

Net income (loss) attributable to Principal Financial Group, Inc. decreased primarily due to the change in fair value of the funds withheld embedded derivative.

Previous wording

Premiums and other considerations increased $380.2 million for the Retirement and Income Solutions segment primarily due to higher sales of single premium group annuities with life contingencies. The single premium group annuity product, which is typically used to fund defined benefit plan terminations, can generate large premiums from very few customers and therefore premiums tend to vary from period to period.

Current wording

Premiums and other considerations decreased $89.3 million for the Retirement and Income Solutions segment primarily due to lower sales of single premium group annuities with life contingencies. The single premium group annuity product, which is typically used to fund defined benefit plan terminations, can generate large premiums from very few customers and therefore premiums tend to vary from period to period. This decrease was partially offset by a $41.7 million increase for the Benefits and Protection segment primarily due to growth in our Specialty Benefits business.

Previous wording

Net realized capital gains on funds withheld assets decreased due to lower net gains on sales of funds withheld assets as a result of lower sales in second quarter of 2024 resulting from less portfolio re-positioning by an external reinsurer.

Current wording

Net realized capital gains on funds withheld assets increased due to higher net gains on sales of funds withheld assets as a result of higher sales in third quarter 2024 resulting from additional portfolio re-positioning by an external reinsurer.

Previous wording

The change in fair value of the funds withheld embedded derivative resulted in a larger gain in second quarter of 2024 due primarily to an increase in interest rates.

Current wording

The change in fair value of the funds withheld embedded derivative resulted in a loss in third quarter of 2024 due primarily to a decrease in interest rates as compared to a gain in third quarter of 2023 due primarily to an increase in interest rates.

Previous wording

The liability for future policy benefits remeasurement (gain) loss change was primarily due to an unfavorable effect of changes in cost of reinsurance cash flow assumptions for the Benefits and Protection segment driven by the one-time impact of the YRT Reinsurance Transactions in 2024.

Current wording

The liability for future policy benefits remeasurement (gain) loss change was primarily due to the unfavorable effect of changes in cash flow assumptions related to actuarial assumption updates and model refinements.

Previous wording

Operating expenses increased primarily due to a $30.2 million increase in compensation costs and a $20.6 million increase in nondeferrable commission expense.

Current wording

Operating expenses increased primarily due to an increase in compensation costs.

Previous wording

The effective income tax rate increased to 17% for the six months ended June 30, 2024 from (8)% for the six months ended June 30, 2023, primarily due to a 14% impact from an increase in pre-tax income and an 8% impact from state income taxes. See Item 1. “Financial Statements, Notes to Unaudited Condensed Consolidated Financial Statements, Note 11, Income Taxes” for a reconciliation between the U.S. corporate income tax rate and the effective income tax rate.

Current wording

The effective income tax rate increased to 34% for the three months ended September 30, 2024, from 22% for the three months ended September 30, 2023, primarily due to a decrease in pre-tax income with no proportionate change in permanent tax differences. See Item 1. “Financial Statements, Notes to Unaudited Condensed Consolidated Financial Statements, Note 11, Income Taxes” for a reconciliation between the U.S. corporate income tax rate and the effective income tax rate.

Previous wording

Premiums and other considerations increased $563.1 million for the Retirement and Income Solutions segment primarily due to higher sales of single premium group annuities with life contingencies.

Current wording

Premiums and other considerations increased $473.8 million for the Retirement and Income Solutions segment primarily due to higher sales of single premium group annuities with life contingencies. Premiums and other considerations increased $150.3 million for the Benefits and Protection segment primarily due to growth in the Specialty Benefits business.

Previous wording

Fees and other revenues increased $51.1 million for the Retirement and Income Solutions segment primarily due to an increase in fee revenue stemming from an increase in average monthly account values, which resulted from more favorable financial markets. Fees and other revenues increased $21.1 million for the Principal Asset Management segment largely due to higher management fee revenue as a result of higher average AUM managed by our Principal Global Investors operations. Fees and other revenues increased $15.3 million for the Benefits and Protection segment primarily due to growth in our Life Insurance business.

Current wording

Fees and other revenues increased $84.5 million for the Retirement and Income Solutions segment primarily due to an increase in fee revenue stemming from an increase in average monthly account values, which largely resulted from more favorable financial markets. Fees and other revenues increased for the Principal Asset Management segment due to $49.4 million higher management fee revenue as a result of increased average AUM managed by our Principal Global Investors operations, which was partially offset by $20.3 million lower performance fee revenue for our Principal Global Investors operations primarily in our real estate business. Fees and other revenues increased $19.5 million for the Benefits and Protection segment primarily due to growth in our Life Insurance business.

Previous wording

Net realized capital gains on funds withheld assets decreased due to lower net gains on sales of funds withheld assets as a result of lower sales in 2024 resulting from less portfolio re-positioning by an external reinsurer.

Current wording

Net realized capital gains on funds withheld assets decreased due to lower net gains on sales of funds withheld assets as a result of lower sales in 2024 resulting from reduced portfolio re-positioning by an external reinsurer.

Previous wording

The change in fair value of the funds withheld embedded derivative resulted in a gain in 2024 due primarily to an increase in interest rates as compared to a loss in 2023 driven by a decrease in interest rates and tightening of credit spreads.

Current wording

The change in fair value of the funds withheld embedded derivative resulted in a loss in 2024 due primarily to a decrease in interest rates as compared to a gain in 2023 due primarily to an increase in interest rates.

Previous wording

Benefits, claims and settlement expenses increased $457.3 million for the Retirement and Income Solutions segment primarily due to an increase in reserves, stemming from higher sales of single premium group annuities with life contingencies. This increase was partially offset by a $202.7 million decrease for the Benefits and Protection segment primarily due to the one-time impact of the YRT Reinsurance Transactions in 2024.

Current wording

Benefits, claims and settlement expenses increased $720.1 million for the Retirement and Income Solutions segment primarily due to an increase in reserves, stemming from higher sales of single premium group annuities with life contingencies.

Previous wording

The liability for future policy benefits remeasurement (gain) loss change was primarily due to an unfavorable effect of changes in cost of reinsurance cash flow assumptions for the Benefits and Protection segment driven by the one-time impact of the YRT Reinsurance Transactions in 2024.

Current wording

The liability for future policy benefits remeasurement (gain) loss change was primarily due to the unfavorable effect of changes in cash flow assumptions related to a $442.1 million one-time impact of the YRT Reinsurance Transactions in 2024 and a $141.0 million impact driven by actuarial assumption updates and model refinements.

Previous wording

Operating expenses increased primarily due to a $58.4 million increase in compensation costs, a $54.9 million increase in amounts credited to employee accounts in a nonqualified defined contribution pension plan and a $38.3 million increase in nondeferrable commission expense.

Current wording

Operating expenses increased primarily due to a $101.3 million increase in compensation costs, a $60.1 million increase in amounts credited to employee accounts in a nonqualified defined contribution pension plan and a $59.5 million increase in nondeferrable commission expense.

Previous wording

The effective income tax rate increased to 20% for the three months ended June 30, 2024, from 13% for the three months ended June 30, 2023, primarily due to a 3% impact from state income taxes and a 2% impact from our foreign valuation allowance. See Item 1. “Financial Statements, Notes to Unaudited Condensed Consolidated Financial Statements, Note 11, Income Taxes” for a reconciliation between the U.S. corporate income tax rate and the effective income tax rate.

Current wording

The effective income tax rate decreased to 11% for the nine months ended September 30, 2024 from 18% for the nine months ended September 30, 2023, primarily due to a decrease in pre-tax income with no proportionate change in permanent tax differences. See Item 1. “Financial Statements, Notes to Unaudited Condensed Consolidated Financial Statements, Note 11, Income Taxes” for a reconciliation between the U.S. corporate income tax rate and the effective income tax rate.

Previous wording

Pre-tax operating earnings increased due to an increase in our net revenue, which was partially offset by an increase in operating expenses as described below.

Current wording

Pre-tax operating earnings decreased due to a decrease in our net revenue, along with an increase in operating expenses as described below.

Previous wording

Net revenue increased primarily due to a $52.6 million increase in fee revenue stemming from an increase in average monthly account values, which resulted from more favorable financial markets and a $39.1 million increase in variable investment income.

Current wording

Net revenue decreased primarily due to a $70.1 million impact associated with actuarial assumption updates and model refinements, which was unfavorable in 2024 compared to favorable in 2023. This decrease was partially offset by a $35.3 million increase in fee revenue stemming from an increase in average monthly account values, which largely resulted from more favorable financial markets, and a $7.8 million increase in variable investment income.

Previous wording

Operating expenses increased $23.2 million primarily due to growth and investments in the business.

Current wording

Operating expenses increased due to a $24.1 million impact primarily resulting from growth and investments in the business.

Previous wording

Pre-tax operating earnings increased due to an increase in our net revenue, which was partially offset by an increase in operating expenses as described below.

Current wording

Pre-tax operating earnings decreased due to an increase in operating expenses, which was partially offset by an increase in net revenue as described below.

Previous wording

Net revenue increased primarily due to a $23.4 million increase in variable investment income and a $22.5 million increase in fee revenue stemming from an increase in average monthly account values, which resulted from more favorable financial markets.

Current wording

Net revenue increased primarily due to an $87.9 million increase in fee revenue stemming from an increase in average monthly account values, which largely resulted from more favorable financial markets, and a $46.9 million increase in variable investment income. These increases were partially offset by a $70.1 million impact associated with actuarial assumption updates and model refinements, which was unfavorable in 2024 compared to favorable in 2023.

Previous wording

Operating expenses increased $48.7 million primarily due to growth and investments in the business.

Current wording

Operating expenses increased due to a $72.8 million impact primarily resulting from growth and investments in the business.

Previous wording

Pre-tax operating earnings in our Specialty Benefits business increased $10.6 million primarily due to growth in the business.

Current wording

Pre-tax operating earnings in our Specialty Benefits business decreased $30.7 million due to negative claims experience and $27.8 million due to unfavorable actuarial assumption updates in 2024 compared to favorable in 2023, offset by $8.1 million due to growth in the business. Pre-tax operating earnings in our Life Insurance business decreased $68.4 million due to more unfavorable actuarial assumption updates, model refinements and other updates in 2024 compared to 2023.

Previous wording

Premiums and fees in our Specialty Benefits business increased $63.3 million primarily due to growth in the business.

Current wording

Premiums and fees in our Specialty Benefits business increased primarily due to growth in the business.

Previous wording

Net investment income in our Specialty Benefits business increased $5.8 million from higher yields on invested assets and $3.9 million from growth in invested assets. Net investment income in our Life Insurance business increased $4.2 million from growth in invested assets.

Current wording

Net investment income in our Specialty Benefits business increased $5.3 million due to growth in invested assets. Net investment income in our Life Insurance business increased $8.5 million from mark-to-market changes on options associated with our indexed universal life insurance.

Previous wording

Premiums and fees in our Specialty Benefits business increased $122.5 million primarily due to growth in the business.

Current wording

Premiums and fees in our Specialty Benefits business increased primarily due to growth in the business.

Previous wording

Benefits, claims and settlement expenses in our Specialty Benefits business increased $39.2 million from growth in the business, offset by $4.9 million from improved claims experience. Benefits, claims and settlement expenses in our Life Insurance business decreased $58.0 million due to the one-time impact of the YRT Reinsurance Transactions in 2024, offset by $7.0 million due to growth in the business.

Current wording

Benefits, claims and settlement expenses in our Specialty Benefits business increased $102.3 million due to growth in the business and $19.4 million due to negative claims experience, offset by $8.2 million due to more favorable actuarial assumption updates in 2024 compared to 2023. Benefits, claims and settlement expenses in our Life Insurance business decreased $58.0 million due to the one-time impact of the YRT Reinsurance Transactions in 2024, offset by $14.6 million due to growth in business and a $12.2 million increase from mark-to-market changes on options associated with our indexed universal life insurance.

Previous wording

Operating expenses in our Specialty Benefits business increased $19.5 million due to growth in the business. Operating expenses in our Life Insurance business increased $4.0 million due to growth in the business and $3.1 million primarily due to commissions.

Current wording

Operating expenses in our Specialty Benefits business increased $53.0 million primarily due to growth in the business. Operating expenses in our Life Insurance business increased $10.7 million due to higher net commissions and $8.1 million due to growth in the business.

Previous wording

Pre-tax operating losses increased primarily due to a $9.5 million increase in compensation costs. This increase was partially offset by $4.3 million stranded costs associated with exited business in 2023 with no corresponding activity in 2024.

Current wording

Pre-tax operating losses decreased primarily due to $12.7 million stranded costs associated with exited business in 2023 with no corresponding activity in 2024, $12.3 million higher net investment income largely resulting from an increase to mark-to-market gains on investments and a $10.9 million increase in our retail broker-dealer operations primarily related to more favorable financial markets in 2024.

Previous wording

We also manage liquidity risk by limiting the sales of liabilities with features such as puts or other options that can be exercised at inopportune times. For example, as of June 30, 2024, approximately $14.7 billion, or 99%, of our institutional guaranteed investment contracts and funding agreements cannot be redeemed by contractholders prior to maturity. Our individual annuity liabilities also contain surrender charges and other provisions limiting early surrenders.

Current wording

We also manage liquidity risk by limiting the sales of liabilities with features such as puts or other options that can be exercised at inopportune times. For example, as of September 30, 2024, approximately $15.0 billion, or 99%, of our institutional guaranteed investment contracts and funding agreements cannot be redeemed by contractholders prior to maturity. Our individual annuity liabilities also contain surrender charges and other provisions limiting early surrenders.

Previous wording

Total stockholder dividends paid by Principal Life to its parent for the six months ended June 30, 2024, were $540.0 million, all of which was extraordinary and approved by the Commissioner. As of June 30, 2024, we had $2,417.0 million of cash and liquid assets held in our holding companies and other subsidiaries, which is available for corporate purposes. Corporate balances held in foreign holding companies meet the indefinite reinvestment exception.

Current wording

Total stockholder dividends paid by Principal Life to its parent for the nine months ended September 30, 2024, were $885.0 million, all of which was extraordinary and approved by the Commissioner. As of September 30, 2024, we had $3,337.5 million of cash and liquid assets held in our holding companies and other subsidiaries, which is available for corporate purposes. Corporate balances held in foreign holding companies meet the indefinite reinvestment exception.

Previous wording

Net cash provided by operating activities was $2,015.9 million and $1,797.8 million for the six months ended June 30, 2024 and 2023, respectively. Our insurance business typically generates positive cash flows from operating activities, as premiums collected from our insurance products and investment income received exceed acquisition costs, benefits paid, redemptions and operating expenses. These positive cash flows are then invested to support the obligations of our insurance and investment products and required capital supporting these products. Our cash flows from operating activities are affected by the timing of premiums, fees and investment income received and benefits and expenses paid. The increase in cash provided by operating activities was primarily due to a one-time impact of the YRT Reinsurance Transactions in 2024.

Current wording

Net cash provided by operating activities was $3,143.9 million and $2,848.4 million for the nine months ended September 30, 2024 and 2023, respectively. Our insurance business typically generates positive cash flows from operating activities, as premiums collected from our insurance products and investment income received exceed acquisition costs, benefits paid, redemptions and operating expenses. These positive cash flows are then invested to support the obligations of our insurance and investment products and required capital supporting these products. Our cash flows from operating activities are affected by the timing of premiums, fees and investment income received and benefits and expenses paid. The increase in cash provided by operating activities was primarily due to a one-time impact of the YRT Reinsurance Transactions in 2024.

Previous wording

Net cash used in investing activities was $1,631.0 million and $1,082.4 million for the six months ended June 30, 2024 and 2023, respectively. The increase in cash used in investing activities was due to higher net purchases of available-for-sale securities and higher net acquisitions and originations of mortgage loans in 2024 as compared to 2023. These were partially offset by higher net sales of real estate in 2024 as compared 2023.

Current wording

Net cash used in investing activities was $1,628.6 million and $1,131.9 million for the nine months ended September 30, 2024 and 2023, respectively. The increase in cash used in investing activities was due to higher net purchases of available-for-sale securities in 2024 as compared to 2023.

Previous wording

Net cash used in financing activities was $276.0 million and $1,489.5 million for the six months ended June 30, 2024 and 2023, respectively. The decrease in cash used by financing activities was due to an increase in banking operations net deposits and net investment contract deposits in 2024 compared to net investment contract withdrawals in 2023.

Current wording

Net cash used in financing activities was $48.5 million and $2,000.2 million for the nine months ended September 30, 2024 and 2023, respectively. The decrease in cash used in financing activities was due to an increase in banking operation deposits in 2024 as compared to a decrease in 2023 and net investment contract deposits in 2024 as compared to net investment contract withdrawals in 2023. These were partially offset by higher acquisitions of treasury stock in 2024 as compared to 2023.

Previous wording

In February 2024, our Board authorized a share repurchase program of up to $1.5 billion of our outstanding common stock, which has no expiration. See Item 5. “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities,” for information about our share repurchase authorizations. For additional stockholders’ equity information, see Item 1. “Financial Statements, Notes to Unaudited Condensed Consolidated Financial Statements, Note 14, Stockholders’ Equity.”

Current wording

In February 2024, our Board authorized a share repurchase program of up to $1.5 billion of our outstanding common stock, which has no expiration. See Part II, Item 2. “Unregistered Sales of Equity Securities and Use of Proceeds,” for information about our share repurchase authorizations. For additional stockholders’ equity information, see Item 1. “Financial Statements, Notes to Unaudited Condensed Consolidated Financial Statements, Note 14, Stockholders’ Equity.”

Previous wording

As of June 30, 2024, 47% of our net assets (liabilities) were Level 1, 50% were Level 2 and 3% were Level 3. Excluding separate account assets as of June 30, 2024, 3% of our net assets (liabilities) were Level 1, 87% were Level 2 and 10% were Level 3.

Current wording

As of September 30, 2024, 47% of our net assets (liabilities) were Level 1, 50% were Level 2 and 3% were Level 3. Excluding separate account assets as of September 30, 2024, 3% of our net assets (liabilities) were Level 1, 89% were Level 2 and 8% were Level 3.

Previous wording

Net assets (liabilities) measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of June 30, 2024, were $8,020.1 million as compared to $7,447.8 million as of December 31, 2023. The increase was primarily due to an increase in the funds withheld payable embedded derivative net asset.

Current wording

Net assets (liabilities) measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of September 30, 2024, were $7,022.2 million as compared to $7,447.8 million as of December 31, 2023. The decrease was primarily due to a decrease in the funds withheld payable embedded derivative net asset.

Previous wording

We had total consolidated assets as of June 30, 2024, of $308,777.3 million, of which $99,157.3 million were invested assets. A portion of our invested assets represent funds withheld backing reserves as part of coinsurance with funds withheld reinsurance agreements. The funds withheld assets and associated net investment income and net realized capital gains (losses) are not included in the discussions below as the investment risk is passed to the reinsurer. See Item 1. “Financial Statements, Notes to Unaudited Condensed Consolidated Financial Statements, Note 10, Reinsurance” for more information on the funds withheld assets. The rest of our total consolidated assets are comprised primarily of separate account assets for which we do not bear investment risk; therefore, the discussion and financial information below does not include such assets.

Current wording

We had total consolidated assets as of September 30, 2024, of $322,857.7 million, of which $102,647.7 million were invested assets. A portion of our invested assets represent funds withheld backing reserves as part of coinsurance with funds withheld reinsurance agreements. The funds withheld assets and associated net investment income and net realized capital gains (losses) are not included in the discussions below as the investment risk is passed to the reinsurer. See Item 1. “Financial Statements, Notes to Unaudited Condensed Consolidated Financial Statements, Note 10, Reinsurance” for more information on the funds withheld assets. The rest of our total consolidated assets are comprised primarily of separate account assets for which we do not bear investment risk; therefore, the discussion and financial information below does not include such assets.

Previous wording

Net investment income increased primarily due to higher yields and average invested assets in fixed maturities, cash, and other investments as well as higher income associated with derivatives in fair value hedges in our U.S. operations. These increases were partially offset by foreign currency headwinds and lower inflation-based investment returns on our Latin America average invested assets and cash.

Current wording

Net investment income increased primarily due to higher yields and average invested assets in fixed maturities and cash in our U.S. operations, favorable relative market performance on our required regulatory investments and higher inflation-based investment returns on Latin America average invested assets. These increases were partially offset by lower income on derivatives associated with fair value hedges in our U.S. operations.