管理層發言
Good morning, and welcome to the Principal Financial Group Second Quarter 2026 Financial Results Conference Call. To ask a question during the session, you will need to press 11 on your telephone. To withdraw your question, press 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 call over to Humphrey Lee, Vice President of Investor Relations and FP&A.
Thank you, and good morning. Welcome to Principal Financial Group's Second Quarter 2026 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 Deanna Dawnette Strable-Soethout and CFO Joel Pitz will deliver 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.
Thanks, Humphrey, and good morning to everyone on the call. This morning, I will cover our second quarter performance, the progress we are making against our strategic priorities, and updates on our business portfolio. Joel will then provide additional details on our financial results and capital position. Turning to Slide 2, we delivered another strong quarter demonstrating the earnings power of our diversified business model and continued execution across the enterprise. Adjusted non-GAAP earnings per share increased 16 percent year-over-year and 15% on a year-to-date basis, both above the high end of our target range. This was supported by strong enterprise earnings growth of 13% with 6% net revenue growth and 200 basis points of margin expansion. Earnings growth was primarily driven by favorable underwriting results and improved mortality within our Benefits and Protection business, strong RIS fundamentals, and positive market conditions for our fee-based businesses. This more than offset the revenue impact from investment management net cash flow. We are delivering on our capital deployment plans. In the second quarter, we returned $430 million of capital to shareholders, including $250 million in share repurchases and $180 million in common stock dividends. This brought our total capital return to shareholders to $800 million through the first half of the year with $450 million of share repurchases and $350 million of common stock dividends. In addition, we raised our common stock dividend for the 13th consecutive quarter, an 8% increase on both a quarterly and trailing 12-month basis. Moving to Slide 3, our strategic priorities continue to drive sustained growth across the enterprise. We strengthened our leadership in retirement, advanced our position in the small and mid-sized business segment, and continued to leverage the scale of our global asset management platform to meet evolving client needs. Within the retirement ecosystem, which includes recordkeeping, asset management, income solutions and advice, we are seeing strong momentum across the platform. Transfer deposits increased 30% year-over-year. Recurring deposits increased 6% and participant engagement remains healthy, with growth in both participation and average contributions. Our customers continue to consolidate retirement savings onto our platform, resulting in $1.7 billion of roll-ins during the quarter and more than $7 billion over the trailing 12 months, both up nearly 20%. We are further expanding capabilities across retirement. During the quarter, we broadened our retirement income offering through new Lifetime Income Builder CITs, helping participants move seamlessly from saving for retirement to generating dependable income in retirement. This reflects our focus on delivering solutions that support plan participants across the key stages of their financial lives. Our retirement investment expertise continues to gain traction with third-party platforms, reflected in DCIO sales of $2 billion in the quarter and nearly $8 billion over the trailing 12 months. Finally, we had $500 million of PRT sales in the quarter, after a slow start to the year for the industry. For the small and mid-sized business segment, our differentiated capabilities and deep expertise continue to drive results across retirement and benefits. In retirement, the SMB market remains a key contributor to growth. Transfer deposits grew 16% over the trailing 12 months reflecting continued strength in client activity and long-term momentum. Recurring deposits increased 6% on both a year-over-year and trailing 12-month basis, demonstrating growth and ongoing contributions from both employers and employees. In Benefits and Protection, our SMB segment continues to deliver growth and deepened customer relationships. Specialty Benefits sales increased 11% year-over-year reflecting continued demand for our solutions and strong new business momentum. We are building on that momentum by deepening relationships with existing clients, with products per customer increasing steadily in the last several years, moving from 2.9 three years ago to nearly 3.2 today. Turning to Global Asset Management, I would like to briefly address net cash flow before moving to key highlights. We had total company net outflows of approximately $11 billion in the quarter concentrated in a small number of U.S. active equity strategies which are experiencing acute headwinds in an unusual market environment, despite having extraordinary performance for many years. Notwithstanding recent net cash flow, our investment teams have maintained a disciplined approach and have a track record of successfully navigating periods of market dislocation in the past, supported by steady leadership and consistent investment processes. I am encouraged by the underlying momentum across the broader asset management platform, particularly in areas designed to support long-term client needs, including private markets, international, and institutional solutions. Moving to key highlights, Investment Management gross sales increased 2% year-over-year and 13% on a trailing 12-month basis, supported by client demand for our investment capabilities and the strength of our distribution relationships. Private markets assets under management increased 10% year-over-year while international pension assets under management increased 18%. Our active ETF business continues to see healthy growth, generating $500 million of net inflows in the quarter and $2 billion over the trailing 12 months. During the quarter, we expanded our ETF capabilities with the launch of a new fixed income ETF suite, broadening access to our investment expertise and providing clients with more flexible investment solutions aligned to their evolving portfolio needs. Looking across these three growth drivers, I am proud of our year-to-date results and our ability to execute. Before I hand it over to Joel, I have a couple of updates related to our business portfolio. Earlier this month, we announced an agreement to acquire Beam Benefits, a digital-first employee benefits company focused on the SMB market. The company has over 25 thousand employer customers and generated $175 million of premium in 2025. This acquisition strengthens our position in the SMB segment by expanding our customer reach and adding digital-first distribution capabilities — a powerful complement to our existing benefits platform. Importantly, the transaction remains aligned with our overall capital framework with no change to our 2026 capital deployment plan or EPS growth targets. Finally, I am pleased to share that we have completed the transition of our Hong Kong pension business to BCT. This move strengthens our focus as a top provider of retirement investment solutions to the region. In closing, we have momentum across the business supported by disciplined execution and the dedication of 19 thousand employees around the world. We are in a strong position to continue delivering on our financial targets. Joel?
Thanks, Deanna. Good morning to everyone on the call. This morning, I will share key highlights of our financial performance for the second quarter, as well as details on our capital position. Starting on Slide 4, non-GAAP operating earnings were $547 million, an increase of 12% year-over-year with earnings per share of $2.50, an increase of 16%. Significant variances detailed on slide 12 had a positive after-tax impact of $18 million or $0.08 per share in the second quarter. Excluding these items, non-GAAP operating earnings were $529 million, up 13% year-over-year while earnings per share of $2.42 increased 17%, above the high end of our target range. Total company margin of 32% expanded 200 basis points on net revenue growth of 6%. This demonstrates the strength of our underlying businesses while continuing to invest in strategic priorities. Non-GAAP operating ROE, excluding significant variances, was 16.4%, improving 120 basis points year-over-year, above the midpoint of our 15% to 17% targeted range. Net income excluding exited business was $535 million, an increase of 24% year-over-year with minimal credit losses. Turning to capital and liquidity, we ended the quarter in a strong position with over $1.6 billion of excess available capital. This includes $150 million at the holding company, $300 million in our subsidiaries, and $350 million in excess of our targeted 375% risk-based capital ratio, which is approximately 400% at quarter end. In the second quarter, we returned $427 million to shareholders, including $250 million of share repurchases and $177 million of dividends. This brings year-to-date deployments to $800 million and we remain on track to deliver on our full year capital deployment target of $1.5 billion to $1.8 billion. Last night, we announced an $0.84 per share dividend payable in the third quarter. This is a $0.02 increase from the prior quarter and 8% higher than a year ago, demonstrating an ongoing commitment to our 40% dividend payout ratio. Total company managed AUM ended the quarter at $808 billion, an increase of 5% from first quarter 2026 and 7% from the year-ago quarter. Moving to the businesses, the following excludes significant variances. Turning to RIS, as shown on slide 5, pre-tax operating earnings increased 8% year-over-year, supported by 5% net revenue growth and continued expense discipline. Operating margin of 41% expanded 120 basis points compared to the year-ago quarter, slightly above the high end of our target range. This reflects our focus on profitable revenue growth, expense management, and strong business fundamentals. As Deanna mentioned, fundamentals across the business remain healthy, highlighted by robust transfer deposits and steady recurring deposit growth. These trends speak to the sustained demand for our solutions and the strength of the customer relationships. Turning to slide 6, Principal Asset Management delivered earnings growth of 6% on AUM growth and margin expansion. Within investment management, pre-tax operating earnings increased 4% from the prior year quarter. Slightly higher revenue along with expense discipline more than offset elevated severance within the quarter. This resulted in a 110 basis-point improvement in operating margin. Performance fees were relatively muted in the quarter due to timing. We continue to expect full-year 2026 performance fees to be in line with 2025. Moving to international pension, pre-tax operating earnings increased 11% year-over-year driven by favorable foreign currency impacts and growth in the business. Operating margin improved 50 basis points to over 47%, well within our target range. AUM increased 6% from the prior quarter and 18% year-over-year to a record $169 billion. Turning to slide 7, Benefits and Protection generated strong pre-tax operating earnings of $191 million, a 29% year-over-year increase. This was driven by favorable Specialty Benefits underwriting results and improved life mortality. Starting with Specialty Benefits, premium fees increased 4% year-over-year. We continue to expect growth to increase in the second half of the year, and the acquisition of Beam Benefits will provide additional uplift upon close. Record pre-tax operating earnings of $162 million, up 29% year-over-year, reflects more favorable underwriting experience and business growth. The Specialty Benefits loss ratio of 57.4% improved 280 basis points compared to the year-ago quarter, with better results across all products. This drove improved operating margin of 19%, up 360 basis points year-over-year and above our target range. In life insurance, pre-tax operating earnings of $29 million increased 29% year-over-year driven by improved mortality experience. This contributed to a 13% operating margin, 350 basis points year-over-year within our target range. Turning to the corporate segment, losses were elevated due to continued investment in the business. We expect to come in at the high end of our targeted range for the full year. To recap, we have delivered 15% EPS growth year-to-date, demonstrating the strength, resilience, and benefits of our diversified portfolio. The strategic actions we are taking this year enable us to focus on higher growth opportunities. The agreement to acquire Beam Benefits, the transition of our Hong Kong business to asset management, and the pending sale of our Chile annuity business further optimize our portfolio. We remain well positioned to deliver on our financial targets, supported by strong fundamentals, a healthy capital position, and continued focus on our strategic priorities. This concludes our prepared remarks. Operator, please open the call for questions.
分析師問答
At this time, I would like to remind everyone that to ask a question, press 11 on your telephone. The first question comes from Wesley Carmichael from Wells Fargo.
Hey, good morning. Thank you. First question was just on the Beam Benefits acquisition. Just wondering if we can get maybe a little bit more color on the strategic rationale there. I know you said you do not expect any impact on 2026 capital deployment, but is there any impact to 2027?
Yeah, thanks, Wesley, for the question. I will have Amy talk about the strategic benefits of Beam Benefits and Joel talk about how that might impact our plans going forward.
Yeah, Wesley, thanks for the question. So when I think of Beam Benefits, and again I am excited about this, we are not at close yet for this, so my ability to talk specifically about some things is going to be a little bit limited. But regarding strategic rationale, when I think about expanding our reach into the small and mid-sized business segment, I get excited about things that allow us to do that. Beam Benefits has some really interesting technology. They have some great underwriting and quoting capabilities. But what they also have is a large base with 25 thousand small-business employers and they have 400 thousand members across the U.S. And so when I look at that base combined with $175 million of premium, I get excited about how that is additive to the whole block. What we know in our block is that we do a bunch of activity in what I would consider the micro or small case. So when I look at their ability to put effectiveness and efficiency in that micro end and extend that potentially to the full block, I get excited about the potential that will give us for bringing in that full capability. So the scale of business they have, the introduction of more footprint into small and mid-sized business owners and then that extension of that potential effectiveness into our full block are the strategic rationale pieces that get me excited.
Then, Wesley, as it relates to funding, sitting here in second quarter with $1.6 billion of excess available capital, the reality is that our cash flow is typically back-end weighted, so we have more capital flow generation in the latter half of the year. And we had the proceeds from the Chile annuity sale that is coming in the latter half of the year as expected. We feel very good about our capital position and ability to deploy capital to our strategic objectives like Beam Benefits. As we mentioned in the release earlier this quarter as well, we do not expect any changes to our outlook guidance that relates to earnings, free capital flow or ROE as well. So everything is very much intact.
Wesley, do you have a follow-up?
Got it. I do. Thank you. Just the second one was on VII. It was a pretty good result in the quarter. It is roughly in line with long-term expectations, and it is the first quarter in a while where that is kind of trended in line. So any color on expectations for the third quarter going forward for VII?
I will have Joel take that one.
Wesley, I am very pleased with the result for the quarter. As you said, in line with expectations. Importantly, that was as a result of no real estate transaction in the quarter. So for the first half of the year, how heavily weighted we are within real estate within our alternatives portfolio, which is very unique relative to what you see from others, is we did not have any real estate transaction activity in the first half of the year. As we indicated in outlook, we expected there to be improvement in 2026 just as we had the year prior, and fully expect that to continue not only for second quarter 2026, but also for the remaining quarters of 2026 as well. Thanks, Wesley.
Thank you.
The next question comes from Ryan Krueger from KBW.
Hey. Thanks. Good morning. I guess I will shift to Investment Management. You talked about the drivers of the outflows in the quarter, but was hoping to get a little bit more color on what you are seeing and thinking for the back half of the year. And if you believe the elevated equity outflows are more isolated to the quarter or if there could be some ongoing headwinds there?
Yes. Thanks, Ryan, for the question. I will have Kamal address that.
Sure. Good morning, Ryan. So since you asked about the outflows, let me address that directly because it was a meaningful number this quarter. The first most important point is that the impact is concentrated with a couple of U.S. active equity strategies. Those strategies make up slightly more than 5% of our firm AUM. So it is not broad-based across Principal Asset Management. A few additional points to help you further with your question. This cohort of strategies is deeply affected by the acute and unusual market that has neither rewarded high-quality companies nor valuation-aware stock picking. I would note for you that these strategies have a very good long-term track record of strong results, and they particularly outperform in normal market environments. Based on historical cycles, I would expect this type of environment to normalize over time, but it is very difficult to predict the timing of market turns. To your question, in this quarter, gross sales in the second quarter were also impacted by conflict in the Middle East, as many institutional investors delayed mandates and engagement due to headlines and market volatility. So with respect to the rest of the year, we do anticipate net flows to be somewhat challenged, but I am cautiously optimistic. One data point I would leave you with is that our committed not-funded pipeline has now grown to around $10 billion this quarter, up from first quarter, which is a testament to the diversity of our capabilities and our channel reach.
Thanks, Ryan. Do you have a follow-up?
Yeah. Just a couple quick related ones. One, I think the fee rate has trended down a bit in investment management. Do you think we should continue in that lower 28 basis point range? And then could you quantify the severance impact this quarter?
Sure. There were a couple of drivers to that fee rate decline. So, Ryan, as you know, our core fee rate has generally remained stable within a band. This quarter was slightly softer, but generally within that range. Partly volatile public markets do create downward pressure given our business mix and outflows do have some impact on it. As we continue to drive growth in private markets and particularly our international emerging local market clients, I do see more stabilization of these rates to drive more sustained growth and operating leverage. With respect to severance, you are right. We had elevated severance across investment management and international pension of around $7 million in the quarter. Partly that is given that we are always trying to actively manage our expenses relative to revenue to continue to generate strong margin and create operating leverage in the business.
Thanks, Ryan. Thank you.
The next question comes from Wilma Jackson Burdis from Raymond James. Wilma, your line may be on mute.
You went into some of the specifics driving lower dental loss ratios versus prior years? How should we expect that to evolve? Thank you.
Yeah, I will ask Amy to address that. It was great to see such strong results in Specialty Benefits this quarter and also very broad-based loss ratio improvement across all of the products. That team's been very focused on dental as we have tried to ensure that we continue to focus on profitable growth. But I will have Amy get into the details.
Wilma, thanks. So when I think of dental, and Deanna definitely hit the right point at the beginning, which is we have intentionally been taking a lot of actions on our dental portfolio. As a quick reminder, dental is a product that is sensitive to cost inflation and utilization. When utilization or severity begins to move differently, you can change pricing. One of the things that really underpins the improvement is our dental network optimization. As the dental network ownership structure changes in the market, the ability to stay current on how providers are utilizing the network and where our members use services, and to line up fee schedules dynamically, is really paying off for our owned dental network. I would also point to the DenteMax acquisition we completed in the first quarter as an important investment. That acquisition has regional impact; in Alabama, it brought us 1.5 thousand providers in-network and is the largest network in the state. That gives us the ability to serve our customers better in those states and to impact claim costs for dental visits. Those investments in the dental network are also paying off on a regional basis. We are also ensuring that the pricing changes we made in the past are persisting through our block. So all of those changes — investing in the dental network, optimizing that network, and implementing prior pricing adjustments — are making it so when I look at the second half of the year, my expectation is that the loss ratio, not just from a seasonality basis but from the intentional actions we have been taking, will continue to go down.
Thanks. Do you have a follow-up?
Yes. Thank you. How should we expect the Beam acquisition to improve the existing business and where will we see the biggest impacts? Thank you.
I will again turn that back over to Amy.
Feel like I always need to start with this: we are not closed on the acquisition yet, so somewhat limited in what I can offer. But here's how I am thinking about it. I described some of the strategic rationale earlier. I think there are both revenue and expense synergies. For example, Beam currently leases their dental network today. We would expect from an expense synergy, and a fairly immediate one, to remove some of those leased network costs. Additionally, they have a quoting and acquisition front end in that small micro market that is very efficient and effective. I would expect we could bring those capabilities across our broader small-case market block. Taking those capabilities across our broader block would amplify their impact — essentially realizing more scale than they can achieve on their own. So bringing them across the broader block would free up capability to win more business for us, even slightly upmarket, because we are not spending as much time on micro processes. I would expect some of those results to come through on premium and fee growth, and also through efficiency improvements in our expense ratio.
Just a few follow-up comments to that. As Amy said, we are very excited about this acquisition. It is a very strong company in the SMB benefits space and it will really complement our strong performance in that business over decades. We have a high bar for M&A. Every target has to have strong strategic fit, be financially accretive, and have strong cultural alignment. Beam meets all of these criteria, and we are very excited about having them join Principal. Thank you very much.
The next question comes from Joel Hurwitz from Dowling and Partners.
Hey. Good morning. Amy, one more for you sticking with the benefits business. Can you just unpack what you saw on some of your other group businesses with the life and disability results continuing to run very favorable?
Yeah, I will have Amy talk about that and really talk about the drivers this quarter, but also how she's thinking about both sustainability of loss ratio and earnings going forward.
Joel, when I think about underwriting performance, it really was across all the lines of business. That improved performance was present across product groupings, but the most notable improvements were in dental, disability, and life. Dental results were improved and attributable to network optimization and past pricing actions. Dental seasonality is present in the second quarter, and we did see a slight tick, but it was much improved versus the prior year. Disability was driven by lower incidence across all disability lines. I should note recoveries for group LTD were right in line with expectations, so this was an incidence-driven overperformance, not driven by recoveries or severity. Group life also continues to perform well, driven by lower frequency. For the full year outlook, I now expect loss ratios to emerge below the low end of the guidance range for the full year when I deconstruct that toward the second half. I expect dental loss ratios to continue to trend down in the second half due to past pricing actions, network optimization, and normal seasonality. I do not expect disability loss ratios to improve further from first half results; it is appropriate to expect some upward movement in products like group LTD from the first half but certainly not back to historical levels. It is worth noting that wage growth, which is an important factor for a product like disability, is positive and holding steady in our block, and employment growth is also positive and tracking to our expectations. When I summarize, I am really pleased with our underwriting performance across Specialty Benefits. The way we run our business with consistent underwriting discipline balanced with an eye toward growth has been on display in the first half of the year. I expect full-year underwriting results for Specialty Benefits in total to emerge below the low end of the previously communicated 60% to 64% range, and we expect dental underwriting results to improve in the second half driven by both seasonality and network optimization.
Thanks, Joel. Next question?
Great. Yep. Thank you for that. That was very helpful. Dan, maybe just going back to M&A, wanted to get your thoughts on potential further M&A for Principal. There were some media reports out earlier this month suggesting interest in larger scale deals. Just your thoughts on whether it is further M&A in retirement, asset management, or benefits.
I will start with the boilerplate: we do not comment on market rumors. What I will say is our M&A philosophy has not changed, and we have a very high bar for any transaction. We are not going to shy away from pursuing M&A, as you saw with Beam, but any transaction has to be a financial, strategic, and cultural fit. We view M&A more as an opportunistic accelerator than a requirement, with organic growth being our primary path to achieving our objectives. We are not interested in doing deals solely for scale, especially ones that would require a material premium to transact. Ultimately, we are looking for transactions that bring new strategic capabilities that can be scaled across the enterprise. Beam is a good example of that: it added capabilities and strengthened our SMB value proposition. Those are the types of opportunities we will pursue as we go forward.
The next question comes from Pablo Singzon from JPMorgan.
Hi. Good morning. In the retirement business, there are structural reasons why I think flows will have a negative bias, right? So if you think about caps and contributions and large balances that are available for withdrawal, I guess if you think about other metrics such as client count and number of active participants, how have those measures been trending for Principal?
I will ask Christopher to address that.
Good morning, Pablo. If you just look at participant growth, we have shown consistent participant growth over the last several quarters. We are seeing positive trends in participant growth and participants with account values. We have seen deferrals rising, and on top of that, we see really strong retention. All of those underlying fundamentals in the business are really strong. On client counts, we see really good growth as well. We have deemphasized the micro market somewhat, which has a lot of plan count but comes with less economics, and we have focused more on areas that give us greater assets and greater opportunities for investment mandates. As a result, plan count has stayed flat to slightly down, but participants and deferrals are up and retention is very high. Transfer deposits and new sale wins have also been very strong over the past several quarters.
If you look across our retirement fundamentals, they remain strong across the things we are focused on. Market increases do have a negative impact on flows but a positive impact on revenue and earnings. Christopher and his team continue to focus on strong fundamentals and driving revenue growth. Do you have a follow-up?
Yeah. My follow-up is for Amy on group benefits. Principal is not unique in that most group insurers have experienced good results as well. I was wondering have the good results affected the competitive environment in any way? Are you seeing other companies start to bring down prices to participate in these higher-margin opportunities?
I will have Amy talk about that, but I would note two things that are different about our block: one, our SMB focus, and two, the portfolio where dental continues to have a significant impact on the bundle. Amy, please comment on the competitive dynamics.
I will answer broadly about the competitive environment, then dig into our block. In the market last year and the prior year, we saw some pricing in dental that we chose not to participate in because it would not give us the profitability needed. We were willing to slow growth to get the underwriting results we needed, and that trade-off was the right one. Now we are seeing more opportunities to write business at rates that make sense. Regarding our block, one important point is that our average employer relationships across the benefits block have grown; products per customer are nearly 3.2 today. That means many products are bundled, and over 95% of our disability premium is tied to another product. So our pricing, administration, and product design consider that bundle, which gives us flexibility many competitors do not have. When we win in the small and mid-sized space, we often win because that bundle outperforms, giving us the flexibility in the marketplace. So while there is some competitive pricing in certain pockets, for our market position — which is relatively unique in serving small and mid-sized cases with a product bundle — we are getting the rates and pricing we need to drive attractive growth.
Pablo, next question?
The next question comes from Suneet Kamath from Jefferies.
Thanks. Good morning. I wanted to go back to Beam for a second. Deanna, I think in the past you talked about an M&A budget of 0% to 10% of net income. That would probably put you somewhere in the $150 million to $200 million range. Is Beam in line with that range, or is it bigger? And if it is bigger, does it mean you are out of the M&A game for a while?
When I have talked about that in the past, we will dedicate 0% to 10% of our annual free cash flow toward M&A, but we also maintain low leverage to provide flexibility. We will continue to be inquisitive around M&A activities. It is the combination of free cash flow, leverage capacity, and proceeds from divestitures that we will continue to deploy both organically and inorganically to drive long-term shareholder value.
And then I guess you mentioned earlier you are not doing a deal solely for scale. When we think about the defined contribution business, how do you think about scale? I have heard it expressed in terms of AUM and participant headcount. Just curious where you think companies need to be to have scale and how technology advancements could influence that. Thanks.
I will have Christopher address that. There is not one scientific definition of scale; it really relates to your ability to compete and to invest in your platform. We believe we have the scale needed in our retirement business to compete, but Christopher will add more.
Thanks for the question. When we look at scale, we look at multiple measures. The most important right now is the number of participants you serve because we believe future value will accrete from that. We serve approximately 14 million Americans covered by plans on our platform, and we feel like we are at scale. That does not mean we will not look to gain additional scale, but much consolidation is happening organically with plans and participants moving to larger scale players like us. Being a top three participant-count provider in the 401(k) space allows us to invest in the platform and provide solutions for participants. So while we consider multiple measures, we lean toward participants as the key metric for future value.
Thanks, Suneet. Yep. Thank you.
The next question comes from Josh Shanker from Bank of America.
Yes. Thank you for taking my question. Kamal, I just want to follow up a little more with Ryan's questions about the outflows in the equity strategies. Over the past quarter, factor trading, and a return to certain sectors, has been a big influence. Is a return to quality or the styles you own likely to lead to inflows, or is factor trading going to be a persistent headwind for flows?
Good morning, Josh. Go ahead, Kamal.
Good question. This market has been highly unusual, particularly with the quality anomaly you mentioned. One statistic to highlight: over the last year, dispersion has worsened substantially. On the period ending 06/30, the highest-quality U.S. companies returned 4% whereas the lowest-quality companies returned 70%. That gap is too large and needs to normalize over time. As that gap normalizes, it will benefit our style of investing. We have seen in early July that as some factors have reversed, our performance has become quite strong for that short period. I do think the market will normalize and we will benefit, but predicting timing is difficult. The market has changed with many new niche ETFs and products that can exploit anomalies, and retail investors can access these flows more easily. That can mean these abnormalities persist longer than in the past. There is a subset of clients in our retail book who continue to add new money to the strategies because they believe in the process and see dislocations as opportunities. So flows will likely take time to fully reverse; it will not be immediate.
Thanks, Josh, for your questions.
The next question comes from Mike Ward from UBS.
Thanks, guys. Good morning. Just on Benefits, specialty benefits had a solid result and you sound like you expect it to get seasonally better in the back half. You characterized it as favorable in Q2. If we think about a normal year, how would this result compare to a normal quarter? And can you comment on whether that was dental-specific or broader across specialty benefits?
I will have Amy go a little deeper on the earnings perspective. Every quarter you can have positive outliers and areas of pressure. The good news is Specialty Benefits had a very strong quarter and there are components we expect to continue to benefit us. Amy, please go deeper on sustainability of earnings.
I will address sustainability of earnings in total. Start with underwriting because that is clearly driving performance. I am pleased with underwriting results and want to sustain them where it makes sense. I expect dental underwriting results to improve in the second half due to seasonality and network optimization. We also expect total premium and fee growth to accelerate in the second half; this is driven not just by new sales but also by persistency and capabilities, like improving participation for voluntary products, that add to our premium base. In addition, our recent acquisitions add an inorganic dimension to growth. The goal is not just strong underwriting; it is to balance profit and growth, delivering protection for small businesses and driving earnings growth. Our current underwriting results put us in a strong position to consider some pricing and returning some benefits to customers to help them grow while maintaining competitiveness. Our intention is to keep Specialty Benefits as a strong growth engine over time.
The other point: the driver across all of the loss ratios in the quarter was incidence and frequency rather than severity. Severity tends to be lumpy and can revert quickly, while incidence and frequency trends last longer because they show a trend across the block. That is another reason the results are meaningful.
Thanks. That was very comprehensive. I also wanted to ask Kamal about the environment, including fixed income and private markets like data centers. Is there a dynamic where a lot of money is going into AI and data center build-outs that is frothy, and how do you view that market?
That question gets to the broader platform and how Kamal feels about both private markets and fixed income. Kamal, please add your view.
Good morning, Mike. Two parts to your question. First, fixed income: I feel quite good about our fixed income business. Our investment performance in fixed income continues to improve. We are seeing client engagement in areas like high yield, and our ETF business is benefiting internationally. We have done well in emerging market debt and scaled up in several areas, including municipal credit strategies in the U.S. We continue to innovate, including launching innovative fixed income ETFs, and I expect fixed income to contribute more to our earnings over time. On data centers and AI-related real estate: our focus is primarily as a real estate equity investor rather than private credit. The sector has become more nuanced. It is less about technology and more about real estate: acquiring properties, securing power, dealing with regulatory challenges. Winners will require real estate negotiation skills. We focus on small- to mid-market deals that stay under the radar and allow us to create attractive returns. So we are selective and measured in how we participate.
Thanks, Mike, for the questions.
Our final question comes from Alex Scott from Barclays.
Hey. Thanks for fitting me in. I wanted to ask a higher-level one about expense margins as we head into the back half of the year. Some of your businesses tend to generate better margin in the back half. How will you approach the trade-off between investing in the business and letting that flow through to earnings? There's a fair amount of tech spend contemplated across the industry, and you also have the benefit of markets at your back in some businesses. Any thoughts on how you will approach that at a high level?
I will make a couple of comments and then have Joel add on. If you have followed us, you know we have a proven track record of aligning expenses with revenue while continuing to invest in the business. Last year we had only a 2% increase in expenses while making important investments across technology and AI, relative to a 5% increase in revenue. We will continue to maintain discipline but not 'shrink ourselves to greatness.' We will make the investments needed to drive sustained long-term growth. When a business faces revenue headwinds, that business will align expenses to the revenue outlook as well.
Alex, I will add that we have the privilege of being at scale within all of our businesses, and we are well positioned in the markets in which we compete. We intend to meaningfully stay so we can meaningfully invest. The need to invest in the business is not an excuse not to hit our numbers. We will continue to extract savings where we can while making meaningful investments to position the company for both short-term and long-term success.
Thanks for all that. Appreciate it. A follow-up?
Quick follow-up on Investment Management. I noticed Morningstar data in your deck: the 10-year equity performance declined more meaningfully. I assume something rolled off. What impact does that have? Is it a metric that people focus on and is it tied to the outflows?
I will have Kamal address that.
The 10-year Morningstar number is important, particularly on the alpha side for institutional investors, but the 3- and 5-year numbers are also important. Some equity performance has deteriorated on the Morningstar 10-year metric, largely because of our style of investing in this abnormal market. One of our larger strategies still has a very strong 10-year Morningstar number. I would emphasize monitoring Morningstar metrics, which are important for us and for retirement clients, so we continue to focus on performance and client outcomes.
Thank you.
We have reached the end of our Q&A. Ms. Strable, your closing comments, please.
As we close today's call, I want to thank all of you for your time and questions. Our second quarter results reflect disciplined execution, the strength of our strategy, and the value from diversification across our businesses. We are driving sustainable growth with balanced contributions across revenue growth, margin expansion, and capital deployment. The actions we are taking to sharpen our portfolio, alongside momentum, our healthy capital position, and strong fundamentals, position us well to deliver on our targets and create long-term value for shareholders. We look forward to connecting with many of you in the months ahead. Thank you again for your time and have a good day.
Thank you. This concludes today's conference call. You may disconnect your lines at this time, and we thank you for your participation.