Thank you and good morning. Welcome to Principal Financial Group's third quarter 2022 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, Dan Houston, and CFO, Deanna Strable will deliver prepared remarks. Then we'll open the call for questions. Others available for Q&A include Chris Littlefield, Retirement and Income Solutions; Pat Halter, Asset Management; and Amy Friedrich, US Insurance Solutions. 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 US 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 US GAAP financial measures may be found in our earnings release financial supplement and slide presentation. Dan?

Thanks Humphrey, and welcome to everyone on the call. This morning I'll touch on key performance and business highlights for the third quarter. Deanna will follow with additional details on our financial results, including our annual assumption review and an update on our financial and capital position. Our third quarter results demonstrate the strength, resilience, and value of our diversified business strategy. We remain focused on aligning expenses with revenues to help offset some of the near-term pressure on our fee-based margins from unfavorable equity and fixed income market performance. At the same time, we continue to invest for growth to fulfill customer needs and expand our capabilities to support our growth drivers. Starting on Slide 2, we reported $427 million of non-GAAP operating earnings, or $1.69 per diluted share in the third quarter. Excluding significant variances, earnings per share of $1.60 decreased 2% from the third quarter of 2021. We returned more than $600 million of capital to shareholders in the quarter and $1.9 billion year-to-date through share repurchases and common stock dividends. We also paid down $300 million of debt that matured during the quarter, a commitment we made coming out of our strategic review to lower our leverage ratio and maintain a strong financial profile. We closed the third quarter with $608 billion of total company AUM pressured by unfavorable equity and fixed income performance, as well as foreign exchange headwinds in the quarter. Our long-term relative investment performance remains strong and our short-term relative performance improved over the second quarter despite continued market volatility. This performance is further enhanced by strong absolute returns and other alpha-producing funds, which are not included in the Morningstar ratings. Third quarter total company net cash flow was a positive $2.4 billion. This included $2.3 billion of PGI managed net cash flow driven by strong institutional flows across equities, real estate, and specialty fixed income. Our differentiated investment solutions and our diversified distribution across institutional wealth and retirement channels helped generate nearly $7 billion of positive total company net cash flow year-to-date. Earlier this month we launched an extension of the Principal brand to further spotlight our investment capabilities. By launching Principal Asset Management, we can more clearly leverage the strong brand equity of Principal while also highlighting our deep local knowledge, distinct global perspectives, and investment capabilities. This launch aligns with investments in our client digital experience, global insights program, and the development of new products and alternative investment options, including model portfolios and direct lending. We're supporting small-to-midsized business customers in the US, as they continue to weather macro volatility and a tight labor market. In response to these market dynamics, businesses are prioritizing wages and maintaining or expanding benefits to attract and retain employees and it's showing positively in our results. Compared to a year ago, recurring deposits and RIS-Fee increased 10% as the number of people deferring is up 5%, the average deferral per participant increased 4%, the number of people receiving a match is up 7%, and the average match per participant also increased 7%. We've also seen a 12% increase in Specialty Benefits premium and fees over the year-ago quarter. Over half the growth was driven by net new business as we deepen relationships with our existing customers, while attracting new customers. We're winning market share. Our capabilities, expertise, and local presence set us apart from the competition. Our strategic focus on the business market in Life Insurance is working. Compared to a year ago, sales of non-qualified deferred compensation and business owner solutions more than doubled for the quarter and increased 74% year-to-date. In total, third quarter Life Insurance sales increased 15% compared to the prior year quarter, as our decision to focus solely on the business market has more than made up for the reduction in the retail market. As we prepare for continued macroeconomic uncertainty, it's important to remember that our SMB customers are more weighted to the scientific and technical sectors, which tend to be more resilient during economic downturns, and we're less exposed to the hospitality and retail sectors, which tend to be more negatively impacted. Internationally, our business continues to grow despite macro and political challenges. Brasilprev, our joint venture with Banco do Brasil, has the highest market share of pension AUM and deposits in Brazil. This, combined with the continued elevated local interest rates, is driving growth in earnings. In Chile, Cuprum has had six consecutive quarters of positive net RIM, the salary base upon which we earn fees, as well as positive net transfers of new customers, meaning more Chileans are choosing to move their mandatory savings to Cuprum. At our core, through our business strategy, company culture, and our foundation, we strive to make financial security accessible to more people and businesses around the globe. To do that successfully, we seek to understand the barriers to financial progress and identify opportunities to improve access and solutions. This influenced our launch of the Principal Global Financial Inclusion Index, a global research study across 42 markets that examines how well a government, financial system, and employer base provide the tools and support to enable greater levels of financial inclusion, and help more people reach financial security. Through the study, we can identify the structural gaps in financial inclusion and take steps to address them through strategic partnerships and recommended policy, building a more productive and protected workforce and society globally. Deanna?

Thanks Dan. Good morning to everyone on the call. This morning, I'll share the key contributors to our financial performance for the quarter, including impacts from the annual actuarial assumption review, and an update on our current financial and capital position. Net income attributable to Principal was $1.4 billion in the third quarter, reflecting $1 billion of income from exited businesses. This benefit was primarily due to a change in the fair value of the funds withheld embedded derivative, which doesn't impact our capital or free cash flow and can be extremely volatile quarter-to-quarter. Excluding the income from exited businesses, net income for the quarter was $395 million with immaterial credit losses. We reported non-GAAP operating earnings of $427 million, or $1.69 per diluted share. As detailed on slide 12, we had several significant variances, including impacts from our annual actuarial assumption review that had a net positive impact on non-GAAP operating earnings during the third quarter. On a pre-tax basis, net favorable impacts from the assumption review and COVID were partially offset by lower-than-expected variable investment income and Latin American Encaje performance. These had a net positive impact on reported non-GAAP operating earnings of $30 million pre-tax, $23 million after tax, and $0.09 per diluted share. The net positive $86 million pre-tax impact from the annual assumption review was primarily driven by model refinements. We updated our models as part of an actuarial modernization project in conjunction with preparing for LDTI. This resulted in slightly lower reserve requirements for RIS-Spread and Individual Life. While we didn't change our long-term interest rate assumptions, the starting point is approximately 125 basis points higher than where we expected rates to be a year ago. Whereas we saw some positive impact from this change on the operating earnings component of the review, the most significant impact from higher interest rates was in net income on the reinsured ULSG block and did not impact non-GAAP operating earnings. Specific to variable investment income, virtually no income from real estate sales and prepayment fees as well as lower-than-expected but still positive alternative investment returns in the US, were partially offset by favorable returns in Principal International. With approximately 40,000 US COVID-related deaths in the quarter, we had a positive $2 million pre-tax benefit as claims in Individual Life were more than offset by favorable impacts in RIS-Spread. Total COVID impacts in Specialty Benefits were immaterial as $1.6 million of group life and group disability claims were offset by claim terminations and Individual Disability. Excluding the impacts of all these significant variances, second quarter non-GAAP operating earnings were $404 million or $1.60 per diluted share. This was a 2% decrease in EPS compared to the third quarter of 2021 as the benefit from share repurchases and strong customer growth was more than offset by macroeconomic pressures on earnings. Macroeconomic volatility continued in the third quarter and pressured earnings in our fee-based businesses. Unfavorable equity market and fixed income performance relative to both the prior quarter and year-ago quarter negatively impacted AUM, account values, fee revenue, and margins in RIS-Fee and PGI. Headwinds from foreign exchange rates pressured third quarter reported and pre-tax operating earnings by a negative $7 million compared to the second quarter of 2022, a negative $8 million compared to the third quarter of 2021, and a negative $19 million on a trailing 12-month basis. We're taking actions across the enterprise on expenses due to pressured fee revenue as we have during previous periods of unfavorable macroeconomics, but there's a natural lag to the financial benefits. Some expenses naturally adjust, like incentive compensation and other variable costs, and we're reducing other expenses while balancing and investing for growth. Our efforts are paying off. Excluding significant variances, our third quarter compensation and other expenses were 4% lower than both the third quarter of 2021 and the second quarter. They increased a modest 2% on a trailing 12-month basis relative to a 4.5% increase in net revenue. Turning to the business units. The following comments on third quarter results excluded significant variances. RIS-Fee pre-tax operating earnings and margin declined from the year-ago quarter, primarily due to unfavorable equity and fixed income markets, pressuring fees and net revenue. Momentum in PGI continued with $2.3 billion of positive net cash flow. The overall management fee rate of approximately 29 basis points remained stable despite pressures on revenues and margin from the unfavorable equity and fixed income markets and lower performance fees. In Principal International, pre-tax operating earnings continued to be pressured as the regulatory fee reduction in Mexico and foreign exchange headwinds are masking underlying growth in the business. On a constant currency basis, pre-tax operating earnings increased 6% over the year-ago quarter and increased 9% over the second quarter. In Specialty Benefits, premium and fees increased a strong 12% over the year-ago quarter, fueled by record year-to-date sales as well as strong retention and employment growth. Pre-tax operating earnings were flat as strong growth in the business and lower group life mortality were offset by higher Individual Disability claim severity in the quarter. Looking ahead to the fourth quarter, we anticipate another quarter of lower variable investment income as well as low performance fees in PGI. Additionally, the fourth quarter is typically the highest quarter for investment lineup changes and contract withdrawals in RIS-Fee as larger plans typically change providers at the end of the year. I also want to remind you that our enterprise fourth quarter compensation and other expenses are typically higher than the other quarters due to seasonality of certain expenses like marketing and IT. We expect the impact of seasonality will be lower this fourth quarter than our typical 7% to 10% as we're taking action to manage expenses relative to revenue. Turning to capital and liquidity. We remain in a strong financial position and are focused on returning excess capital to shareholders. Excess and available capital is currently estimated to be $1.4 billion and includes approximately $900 million at the holding company, slightly higher than our $800 million target, $450 million in our subsidiaries, and $100 million in excess of our targeted 400% risk-based capital ratio. We paid down $300 million of long-term debt in the third quarter and improved our leverage ratio to 22%. This is 90 basis points lower than a year ago and within our 20% to 25% targeted range. Despite the volatile environment, we remain in a strong financial position. We have the financial flexibility, discipline, and experience necessary to manage through this time of macro volatility and uncertainty. As shown on slide three, we deployed $2.2 billion of capital year-to-date, including $1.9 billion returned to shareholders and $300 million of debt reduction. In the third quarter, we returned over $600 million to shareholders with $450 million of share repurchases and $157 million of common stock dividends. Last night we announced a $0.64 common stock dividend payable in the fourth quarter, in line with the dividend paid in the fourth quarter of 2021. Despite significant macroeconomic pressures in 2022 with the S&P 500 daily average down 14% and fixed income returns down 20% compared to our outlook, we continue to see a path to the lower end of our $2.5 billion to $3 billion capital return range. We remain focused on maintaining our capital and liquidity targets at both the life company and the holding company and will continue with a disciplined approach to capital deployment in the current environment. As we move forward executing on our go-forward strategy and strengthening our capital management approach, we will continue to invest in our growth drivers of retirement in the US and select emerging markets, global asset management, and US benefits and protection, all with an aim to drive long-term shareholder value. This concludes our prepared remarks. Operator, please open the call for questions.

Certainly. We'll now be conducting a question-and-answer session. Our first question is coming from John Barnidge from Piper Sandler. Your line is now live.

Thank you very much. Deanna maybe on the VII impact, I think you had mentioned that you expect another quarter of lower VII and performance fees. When you had the call last quarter you talked about it being probably positive, but below expectations which is where it ended up coming in. Can you maybe give an early look into that again please?

Yes, I'll take a first shot and then ask Pat if he has anything to add. Obviously, a lot of volatility has happened in variable investment income and we've benefited from that over the last couple of years but did see a little bit of a pressure in the third quarter. As we sit here today and look into the fourth quarter, we do expect to see similar to slightly more pressured results in the fourth quarter than what we saw this quarter. I still think we will have a positive overall return but the portion of that could turn to be slightly negative in the fourth quarter.

John, to add to that, we expect prepayment income to decrease as it has in the second and third quarters. Real estate sales are also anticipated to decline, similar to what we experienced in the third quarter. We expect this trend to continue as we move into the fourth quarter, John.

Thank you. And then as far as a follow-up. Alternatives within Principal Global Investors has been really strong. I imagine the alternatives pipeline probably has unique characteristics different than fixed income and equity. Given strength in what we saw in 3Q on the alternative side what does the near-term outlook look like for that pipeline? And then also on equity and fixed income? Thank you.

Yes, John. First of all, we continue to see really strong support for all of our investment capabilities, including alternatives, and continue to believe we have a very strong compelling offering across all asset classes in many markets throughout the world to continue to have confidence we can generate positive net cash flow going forward. Particularly in terms of institutional investors, they continue to be very strong and very interested in alternatives. And we continue to see increasing investor interest in alternatives really throughout the road, John. And I think with the opportunities that are now being created and investors taking advantage of potentially some of the disruption, we continue to see a lot of engagement by investors to consider and to continue to believe that there are compelling opportunities in alternatives. As you know, we've been very active in real estate, particularly in the four quadrants of real estate, so not only in private equity but in the debt markets. And that, I think, continues to offer compelling opportunities for investors. I was just in Japan and in South Korea just last night and continue to see a lot of active conversation, a lot of interest in real assets, private asset capabilities, and compelling and even more increasing interest in specialized investment capabilities in fixed income, particularly given the going-in yields that now fixed income is offering. So the pipeline continues to be robust, John. The activity and dialogue continue to be quite accurate in alternatives but also across all asset classes. John, is that helpful?

Hi. Thank you. Firstly, for Deanna. On your comments about looking the path to achieving the low end of your total capital deployment targets for 2022. Just thinking specifically about buyback, do you see a path hitting the low end of the $2 billion to $2.3 billion as well?

Erik, we've got an awful lot of static on the line. So Deanna, will take a shot at and make sure we're answering the question appropriately.

Erik, I think your question was regarding the ranges that we had talked about in outlook both regarding the total return to shareholders as well as the share buybacks range. Is that correct?

Yes, exactly.

Okay. So I think, as you are all aware, but I'll just reiterate it. But our outlook ranges were based on markets as of 12/31 of last year, which obviously is much different than what we have experienced thus far this year. And I would say those ranges given really didn't contemplate the amount of macro pressure that we have seen. Our focus is really on the total return to shareholders range as in periods of extreme volatility. I'd say the split between dividends and buybacks can be different than what was originally contemplated. And so I feel better about the $2.5 billion to $3 billion than I do about the $2 billion to $2.3 billion of share buybacks, given where we sit today. I actually feel being at the bottom end of that range given that amount of volatility that we have seen is a very strong result. And I'm also confident in that 75% to 85% of free cash flow that we have targeted and are continuing to see as we look at results sitting here today. So obviously, there's a lot of moving parts in that. Macro uncertainty does play into that. And as Dan mentioned, we'll continue to be prudent and disciplined relative to our capital levels and capital return.

Do you have a follow-up Erik?

Yes. And thank you for those comments. Dan maybe a question for you. Just hoping you could provide an update on the expected timing of closing the China JV?

Yeah. Okay. Very good. I think it was updated on the China situation. Again, we're getting a lot of static on the line Erik. So we actually feel very good about where we stand with China. For those who are less familiar, we've had a joint venture relationship with CCB back to 2005. This past summer, we received the regulatory approval to become a shareholder. We're in the final negotiations around the revisions to the articles of association as well as to update the register and to update the exchange. We feel very good about that. That would make us only one of three foreign providers of retirement services in the country. I'd also remind you that it includes Pillars 1, 2, and 3 which is around the national provincial retirement savings; the enterprise annuity; and lastly, the retirement funds of funds, all of which by the way we do business here in the United States. So at this point in time, the conversations are healthy. We remain optimistic in reaching final conclusions to the negotiations here in the very near future. Does that help Erik?

Yes. Thank you.

Hi. First one I had is on the expense commentary. I appreciate that there's revenue pressure, and I think the average daily value comps begin to be a bit more challenging as we get into next quarter. And so I was just interested, if you could provide any more color around what we should expect in terms of temporary reductions in margins? And what's a reasonable way to think about time frame for something like that? I would think short-term outlook would probably be reasonable to contemplate some of these things. So, any color would be helpful.

Just a couple of quick comments before throwing it over to Deanna. Erik, we've got – Alex, a very strong track record of going after expenses and aligning them with revenues while at the same time, we know we have to invest in the businesses around capabilities and technology and client experience. But again, I think our track record holds up quite well, and Deanna has been here a big part of that and oversees that function on a very daily basis. So, Deanna?

Yes. I want to highlight a few points. Currently, we are actively managing our expenses on three levels. Firstly, Chris and his team are concentrating on achieving the synergies from our IRT integration. Secondly, we are addressing the stranded costs related to our retail fixed annuities and ULSG transactions. In both cases, we are performing slightly better than anticipated. Additionally, we are mindful of the pressures from the current macro environment on our revenues, which requires us to work on restoring our margins. This process takes time as there is a delay between implementing changes and seeing results. However, the team is focused on this while ensuring we do not compromise on necessary investments for long-term shareholder growth. As mentioned earlier, our expenses look promising, whether we consider the third quarter or the trailing 12 months. For the full year, we expect our expenses in 2022 to decrease compared to 2021, and we are optimistic about continuing to manage this as we move into 2023.

Follow-up, Alex?

Got it. Yes. The other question I had is regarding your commentary on RIS-Fee. At the end of the year, there tends to be more changes in the plans compared to other times during the year. In terms of switching, it appears to have been more stable in recent years due to the pandemic. Are you noticing any signs that this is increasing this year? Also, do you see this as an opportunity or a risk for you? Do you anticipate benefiting from the switching? Those were my questions.

Yes. Thanks, Alex. Thanks for the question. So, I mean, I think as a reminder, and I think as Dan pointed out in his remarks, the underlying fundamentals of the RIS-Fee business are really, really strong with strong recurring deposits, strong client retention year-to-date, strong deferrals and matching performance. So, we're seeing really strong underlying drivers. All that being said, we certainly are seeing an uptick in participant withdrawal activity and some contract lapses, and so we generally do see seasonality in the fourth quarter, as Deanna pointed out, whereas investment lineup changes are made and as plans changed for the January one year. So we would expect to see some of that. We do expect that there may be some pent-up demand in that as well, but we are expecting the full year to be positive from an AV net cash flow basis. And we're sitting at about $5.4 billion positive year-to-date. So, I mean, we feel like we're in a good position with a strong underlying performance, but we do expect to see some higher outflows in the fourth quarter.

Hey. Good morning. Just a question for Amy. I just wanted to get some color on the elevated Individual Disability claims. I think it was on severity. Could you just give us some color, if it's concentrating a few large claims or anything else?

Thanks Wilma for the question. Amy?

Yes. Sure. Thanks again. So, I don't see it concentrated primarily in large claims. So, just to clear a couple of questions on that not COVID-related. I don't really see it as a couple of large claims. I look at it more as when I look at severity, when you take apart the pieces, it was more elevated severity on the new claims that came in this quarter, and then the claims that recovered or terminated had a little bit lower severity. So, just a combination of those two factors sort of move that results around. I do want to note, trailing 12 months is a much better metric to look at trends. So when you're looking at this year's trailing 12 months versus last year's trailing 12 months they're virtually identical. So we're not really seeing a trend there. And it's also probably worth noting that in fourth quarter 2021, we saw a very similar kind of variance to the loss ratio, but in the positive direction. So the full year results are really more helpful to look at across the block. So, no concerns from my perspective. The additional color I would have is this is normal noise that comes in on a quarterly basis. I love the role that income protection plays in our product portfolio and I'm very comfortable that we're managing it.

That makes sense. Yes, there is some variability. Life sales are really strong, up 15%. I think that relates more to the business side. Is that sustainable? Typically, Life sales are more moderate, so I'm looking for more insight.

Yes, I'll have Amy provide further details. I want to emphasize, Wilma, that when we presented our updated strategy to investors, it was a deliberate focus on this business market because we recognized its potential and believed that channeling our efforts towards this opportunity was crucial. Therefore, we are not surprised by the market response and the focus of our teams. Additionally, the economic environment, particularly in the last six months, seems to favor solutions for business owners and non-qualified deferred compensation. Amy, what’s your perspective on this?

Yes. No, you've got it right, Dan. When I look at the outlook, what I see is, there probably was from last year or the year before, a little bit of pent-up demand on the nonqualified side. So there might be a little bunchiness in terms of what we're seeing on non-qualified this year that doesn't continue exactly in pattern next year. But what I'm also seeing is the pickup on our business owner and executive solution story has been really strong. So I would look ahead for strong growth and strong sales patterns within that business owner marketplace, as well as that non-qualified and COLI marketplace.

Hi. Thanks. Good morning. I had a question on the RIS-Fee rate. I think it's probably more challenging than normal to calculate it from our end because we don't have the right average account value. But it did look like the fee rate went up at least some this quarter relative to the last few quarters. So I was hoping you could comment on that. And also, to what extent some of the IRT record-keeping business may be linked to more participants than asset values?

Very good. Chris, please?

Yes, I'll address your question. Regarding IRT, it is indeed positioned toward the larger segment of the market, and some customers are more influenced by participant fee rates rather than asset values. As for the fee rate, we are noticing some positive impacts from our Principal branded character, as well as a transition in the GA and guaranteed products, which are contributing to a slight increase in revenue. In a risk-averse market, these guaranteed products tend to attract more investments, leading to higher revenue for us. While this trend may fluctuate with market changes, we are currently experiencing benefits from this situation.

I understand. Thank you. Regarding RIS-Fee margins, you initially guided for a range of 25% to 29% for the year. Although markets are challenging, do you have any insights on how we should view the margin trajectory, especially after implementing some cost measures?

Yes. The initial guidance was based on the regional macro environment; we're facing significant challenges on both the equity and fixed income sides, which is affecting our performance. Moving forward, I believe that the third quarter will serve as a good indicator for the fourth quarter, and we expect those trends to remain quite stable. As we enter 2023, we anticipate some complexities related to LDTI, and we will aim to provide updated guidance on our outlook during the first quarter call.

Ryan, one thing and I covered it in my prepared comments and Chris hit on it as well. If you look at those underlying fundamentals of growing the number of participants, the deferrals, the recurring deposits, the matching contributions, the most recently passed for 2023 higher limits for deferrals, and the potential retire secure 2.0, there's just a lot of support for the workplace for people to save for retirement. So again, I think most of the diminution in the economics there was attributable to the macro as opposed to the underlying fundamentals of the business. Thanks for the question.

Good morning. I have a follow-up question regarding the buyback. I want to clarify your position on it. It seems like you're indicating that you will fall below the $2 billion mark for the year based on your comments. Can you confirm if this quarter's $450 million is a reasonable figure to expect for Q4, or should we anticipate something lower?

I think it will probably be in that range. There are two uncertainties to consider. One is where the macroeconomic situation will end up and how that impacts fee levels and ultimately earnings for the quarter. The other is how to handle the recession outlook, specifically whether to bring down to your targeted levels or keep some resources available as you move into 2023 and then allocate them when you have more clarity on the recession. I believe we would be capable of deploying in that range, but we will take the time to be very prudent and disciplined, ensuring we have a clearer understanding of the economic outlook for 2023.

That's helpful. And then my follow-up is just a question on PGI revenues. I'm just trying to get a sense for the transactional type revenues. I think I for the most part have my arms around the fee revenue stream there. But when I try and quantify kind of a ballpark range of transactional-type revenues, I get to something around 10% of your total revenues. Could you give me some sense for whether that's directionally close? And if so any commentary on where you would expect those revenues to trend over the next couple of quarters whether you would expect pressure or you think those might be stable or go up?

Pat please?

Yes, Tom. The transactional revenue will primarily depend on whether we generate more performance fees and whether we see an increase in those fees from origination operations in the private asset classes. Regarding performance fees, I expect to see some subdued levels in the next few quarters. The current market conditions limit our ability to capitalize on the potential gains in our real estate portfolio. We anticipate a better opportunity for entry when transaction volumes increase in the marketplace. So, we expect those performance fees to remain limited for the next couple of quarters. As for transaction fees related to our mortgage origination and other debt origination activities, I believe they will remain fairly consistent as we head into the next couple of quarters, Tom.

Yes, thanks. So you guys have some unique perspective given your focus on the SMB market. And from listening to what you're saying about trends, it doesn't seem like your customers are behaving in a way that would suggest a recession is going to happen next year even though it's been probably the most telegraphed recession, I think we've ever had. So just curious like what are you hearing from your customers? I don't know if you want to take it from RIS-Fee or even Specialty Benefits? I mean how are they preparing for what's going to be potentially a challenging economic environment next year?

I found it amusing as we've had numerous discussions recently. Chris hosted a client conference with his client circle, and Amy just returned from the Inc. 500 event where she got to hear directly from many of our clients and small to medium-sized businesses. I'll let Amy share her insights first, and then Chris can add his thoughts. Amy?

Yes. Suneet, they understand that a recession could happen. However, from my discussions with business owners and some of our primary research, including the well-being index, it seems they are aware of the recessionary risks. They have been focused on acquiring the right talent and ensuring competitive wages, and as a result, addressing recessionary pressures is not at the top of their priority list. The positive aspect for us, especially in the retirement and benefits sectors, is that they don’t plan to make immediate cuts in these areas as a response to potential recessionary pressures. This is why we are hearing more positive sentiment, as our conversations and research indicate they are not prioritizing these actions.

No. I think that's right. I mean, I think certainly there's been this competition for talent and it continues to benefit our businesses, and they aren't really going to pull the lever on people first.

I wanted to shift to capital quickly. Deanna, regarding your comments on share repurchases and the macro outlook, could you give some insight into what you’re observing on the balance sheet regarding asset classes and potential watch lists? I understand you mentioned the importance of being cautious as we approach next year, but I’m curious if there are specific areas where we might encounter some pressure. Thank you.

Yes. I'll maybe take a little bit of a flavor there and then ask Pat to add on. We feel really good about our balance sheet. And obviously, our exposure to credit was lessened just out of the actual transaction. Actually, if we sit here today, we're going to see a very modest impact from drift and impairments as we sit here into '22 are expecting slightly more as we think about 2023. But really, take a really deep look both from a top-down and a bottom-up approach and don't see any real problem areas. Our quality, as you see in the appendix of our deck, is at a very, very high level and we feel really good about where we're at. Having said that, obviously, with a recession on that, we need to continue to be disciplined. But as I said, our credit exposure and our balance sheet will position us well as we move into 2023. But Pat, do you have anything to add then?

Yes. Suneet, maybe just a couple of things to add. Obviously, we're very respectful of the environment we're in, but we actually have a great deal of confidence in the portfolio. It's well-positioned. I would say we've technically had positioned and biased the portfolio to be a little higher quality in assets, given the sort of market conditions right now, and our new money investing is more defensive. If you kind of look at our portfolio, our high-yield portfolio is very defensive. It's skewed towards BB investments or more defensive there. I think our structured securities portfolio, 95% is in the single A or higher. I think we have a very strong track record in performance in real estate. So we've done a very deep dive in commercial mortgages on real estate holdings, and that seems to hold up very well. Our overall portfolio and the mortgage portfolio is a 45% loan-to-value and a 2.5% debt service coverage. So, as we continue to examine and continue to have a very disciplined and intensive approach on our portfolio, I think it's well-structured and well-positioned for a recessionary environment.

Appreciate the questions, Suneet.

Thank you. I want to follow up on your comments that you expect low performance fees in PGI in the fourth quarter. Can you speak to some of the underlying performance you're seeing so far quarter-to-date that helped inform that view?

Yes. So, in terms of the real estate markets where we've had most of our performance fees generated, Tracy, we are starting to see clearly some valuation reductions in the private equity space. And I think that would be sort of no surprise, given the macro environment and the continued slowdown in the demand curve, relative to the aggressive Central Bank monetary policy. So, there is, I think, a pause going on relative to valuation increases, and we'll probably see some diminution in values over the next two to three quarters to reflect the demand function.

Hello?

Please standby, ladies and gentlemen. Please standby for one moment. Ladies and gentlemen, please stand by while we reconnect the speakers line. Do not disconnect. Please stand by. They are now reconnected. Please go ahead.

Tracy did you get that response? It looks like there was a technical difficulty there.

I think I got most of it. Thank you. I'll move on to my next question. Trying to do a read-through on your assumption update. I guess going into the quarter, I didn't think life insurers would transition into LDTI, but it feels like you're doing that in a way given your comments on the model update and risk spread Individual Life. It just feels a bit transitory. I just want to know if I'm thinking about this the right way?

Transitory the complex, but Deanna will respond accordingly.

Yes, Tracy. Thank you for the question. While we officially transition into LDTI early next year, we've been preparing for this over the past couple of years. This preparation not only ensures compliance but also allows us to modernize our systems and processes. We have migrated many of our actuarial balances to a new system, and this happened to coincide with our actuarial review. Therefore, we determined it was wise to integrate the observations and changes we were seeing in our reserve values into this review. About 80% of the impact from the AAR was due to model refinement, which is somewhat larger than anticipated. However, it resulted in roughly a 0.3% reduction in reserve balances, particularly in the PRT business. Though the reduction is minimal, we felt it was reasonable to reflect this in our results given the timing of the completion.

Yes. Thank you for taking my question. I wanted to talk a little bit on Mexico and understand what the regulatory fee changes there what the future of that business looks like and whether Principal is still the best owner for that kind of business?

Yes, it's a good question, Josh. I appreciate that. And this is something that we also review on an ongoing basis. For those of you who are less familiar with what's transpired in the Afore business, the regulators reduced the maximum amount you can charge related to the asset fees for purposes of providing this compulsory model within the Afore in Mexico. We've already divested ourselves in Mexico of the Life and Annuity business. We have an institutional retail and retirement asset management business as well as this Afore, which again we manage a lot of those assets. So we're looking at that very closely for what's necessary to be successful around scale and capabilities. Just last week we had our Mexican Board meeting here in Des Moines. The following day we actually held Brazil. So I would just tell you that we are taking a very close look at it. It is something that is top of mind for us looking for the right path forward. And as we've shown in the past, strategically, we'll make the right decisions to be successful long term. Deanna?

Yes, Josh. I want to point out that the regulatory change resulted in a decrease in the fee before the deferral percentages increased. Consequently, we will experience some additional benefits over the next few years as the deferral rate rises, which I believe is by 1% each year, starting in 2023 and reflecting in our results.

Does that help, Mike?

Yes, that's great. And then one other thing I sort of talked about it with Scott, last night, but I want to just to confirm. There's nothing trending in Individual Disability here with the numbers. It's just some quarters have a frequency pop and there's nothing that you see going on through 4Q 2022 that gives you any reason to believe that doesn't pack off?

Amy, is it keeping you up at night?

No, it's not keeping me up at night. We've looked at industry, we've looked at diagnosis, we've looked at region. I'm very comfortable that there's nothing that's emerging as a trend. If there is, we'll be transparent about that. We'll let you know if we're worried about it. Again, I'd go back to in fourth quarter of 2021 we saw an almost equally sized positive variance in the same block. And so again, better to look for trends in the trailing 12 months. And we're not seeing anything there.

I appreciate the question.

Hi guys. Thank you for taking my question. I'm wondering if you could provide an update on your interactions with the activists from last year and how you are viewing your business mix moving forward. Should we expect you to consider more divestments, or might you also be looking at acquisitions given your capital flexibility? I'm thinking about this from a perspective of a year or two down the line.

We regularly engage with all our shareholders as part of our routine activities. Many of them are on this call today, and there is significant support for our future strategy. We have been sharing insights on what is succeeding and what isn’t. The diversified business model we have appeals to investors, and our capital deployment strategy is well-received. Our commitment to a 40% payout on the common stock dividend has also resonated. We believe we have the necessary foundations in place, and the responsibility now falls on us to execute effectively. I am very enthusiastic about the SMB market and appreciate what Pat and his team are doing with asset management, which is crucial for driving our domestic and international growth. Additionally, as Amy mentioned today, the insurance business is becoming more focused and aligns with our overall corporate strategy. Overall, investors recognize that our new strategy moving forward is the right approach. Do you have a follow-up, Mike?

Thank you, Dan. Yes. I appreciate that. But just quickly on RIS-Fee, again, kind of echoing questions on the fee rate. Chris, I guess I interpreted your comments to potentially mean that part of why, RIS-Fee revenues are hanging in there is partially from inflows to what I think would be variable annuities with guarantees, I was wondering if you could clarify that? And then maybe, is there any chance you could help quantify the contribution to earnings for RIS-Fee that comes from VA?

Yeah. So let me make sure I add back up on the fee rate here because it's not related to VA. It's really about the benefit that we're seeing from certainly the higher investment yields that we're getting from GA flows, so guaranteed product flows, right? So again, as you see market volatility you do see people taking on higher allocations of guaranteed products which generally drive better revenue for us. We also for clarity see some benefits from PDSP which we've talked about in the past. So those increases in interest rates also flow through our PDSP and we get uplift on that in the revenue rate as well. So it's unrelated to VA.

Got it. Thanks. Regarding RIS-Fee margins, you had originally guided for the year to be between 25% and 29%. Clearly, market conditions present a challenge. However, do you have any insights on how we should approach the margin trajectory, particularly once some expense measures are implemented?

Yes. I believe that our initial guidance was based on the regional macro environment; we are facing significant challenges, not only in equities but also in fixed income, which is having an impact. I would suggest that the third quarter might serve as a good indicator for the fourth quarter, and we anticipate that these trends will remain fairly stable. As we move into 2023, there will be a lot of noise around LDTI, and we will aim to provide updated guidance on our outlook during the first quarter.

Ryan, one thing and I covered it in my prepared comments and Chris hit on it as well. If you look at those underlying fundamentals of growing the number of participants, the deferrals, the recurring deposits, the matching contributions, the most recently passed for 2023 higher limits for deferrals, and the potential retire secure 2.0, there's just a lot of support for the workplace for people to save for retirement. So again, I think most of the diminution in the economics there was attributable to the macro as opposed to the underlying fundamentals of the business. Thanks for the question.

Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back over to Mr. Houston for any further or closing comments.

Thank you, Operator. And maybe just piling on Suneet's observation about the market is telegraphing a recession. We don't know if it is or it isn't. We do anticipate volatility, as we have in these last 143 years. I've been here for 38 of those. And about every seven to 10 years you do see market dislocations and disruption. And we've got a track record of managing expenses, growing revenues, seeking or serving the needs of our small to medium-sized business and institutional customers, aligning expenses with our revenues, and making sure that capital deployment is very responsible. So, again, this management team has been through this cycle before, and whatever it deals us, we'll manage it accordingly. We look forward to being on the road with you in the next few months before the next earnings call updating you on some of these factors. So with that, have a great weekend. Thank you.

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