Good morning, and welcome to the Principal Financial Group second quarter 2022 financial results conference call. There will be a question and answers period after the speakers have completed their prepared remarks. If you would like to ask a question at that time, simply press star and the number one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. We would ask that you would 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.
Thank you and good morning. Welcome to Principal Financial Group's second quarter 2022 conference call. As always, material 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 some prepared remarks, then we'll open up the call for questions. Others available for Q&A include Chris Littlefield, Retirement and Income Solutions, Pat Halter, Global Asset Management, and Amy Friedrich, U.S. 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 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. As a reminder, the transaction to reinsure our in-force U.S. retail fixed annuity and universal life insurance with secondary guarantee blocks of business closed in the second quarter. The transaction had an effective date of January 1st, 2022, which resulted in a true up in the second quarter to transfer the associated revenue, earnings, net income, and AUM to the counterparty.
As a result, the second quarter financial results are not comparable to prior periods for RIS-S pread, individual life, and total company. Also related to the transaction, we've updated our ROE and book value per share definitions to exclude the cumulative change in the fair value of the funds withheld embedded derivative as the GAAP accounting treatment is non-economic. Additional details of the impact of the transaction are available in the second quarter earnings call presentation available on our website. Dan?
Thanks, Humphrey, and welcome to everyone on the call. This morning, I will touch on key performance and business highlights for the second quarter, including our view on the impacts of our current macroeconomic environment. Deanna will follow with additional details on our results, our financial and capital position, our investment portfolio, and our initial LDTI estimated transition impact. She will also discuss the impacts of the reinsurance transaction, which was a key milestone for Principal as we continue to transform and evolve our portfolio to focus on our growth drivers. The value of our diversified business strategy was evident in our second quarter results during a period of volatile markets, high inflation, and macroeconomic uncertainty. Strong customer growth across our businesses, rising interest rates, and optimization within our general account are helping us to mitigate some of the headwinds from market volatility.
We have a long track record of managing expenses to weather challenging times, and this period is no different. We are keenly focused on aligning expenses with revenues to help offset some of the near-term pressures on our fee-based margins. Second quarter financial highlights are shown on slide two. We reported $423 million of non-GAAP operating earnings or $0.65 per diluted share. Excluding significant variances, earnings per share of $1.70 increased 3% over the second quarter of 2021. We returned approximately $400 million to shareholders in the second quarter and nearly $1.3 billion year to date through our share repurchases and common stock dividends.
We closed the second quarter with $632 billion of total company AUM, reflecting the AUM that was transferred as part of the reinsurance transaction, as well as unfavorable equity and fixed income performance and foreign exchange headwinds. Our long-term relative investment performance remained strong. While short-term relative performance was pressured by market volatility and a continued rotation from quality and growth to value investing in the second quarter, we have seen improvement in July. Total company net cash flow was a + $1.5 billion in the quarter. This included $1.4 billion of PGI managed net cash flow driven by strong institutional flows across equities and real estate, partially offset by industry-wide retail outflows.
The strong year-to-date net cash flow in PGI highlights the appeal and value proposition of our diverse and differentiated investment solutions across equities, real estate, and fixed income. We continue to develop products and capabilities to meet the needs of our customers. We recently launched an actively managed real estate ETF that combines two core strengths of Principal, active management and real estate investing. It is focused on non-traditional real estate sectors including data centers, life sciences, single-family rental, medical office, and self-storage properties, and provides retail investors access in a liquid ETF structure. We're also continuing to build our direct lending team and private credit capabilities. We now have 30 professionals on our team, deploying over $1.2 billion in the last two years following the funding of our first loan.
The demand for our differentiated solutions remains robust and will continue to expand our existing capabilities to meet our clients' needs. A few other business highlights from the quarter, starting in Chile. Despite a level of uncertainty in the future state of Chilean pension system, our business continues to grow. In the second quarter, Cuprum experienced its fifth consecutive quarter of positive net RIM, the salary base upon which we earn fees, as well as a positive net transfers of new customers, suggesting more Chileans are choosing to move their mandatory savings to Cuprum. We remain engaged on the development of pension reform in Chile, and we continue to work with industry peers and stakeholders to promote a more inclusive and well-funded pension system to help improve financial security for all Chileans. In the U.S., the small to mid-size business segments we target are weathering the current environment well.
Similar to previous periods of uncertainty, employers are continuing to seek solutions to help attract and retain talent, and they are leaning into Principal to help in a very competitive labor market. This is especially evident in Specialty Benefits, where premium and fees increased 11% over the year-ago quarter. Roughly half the growth was driven by net new business. This includes customers moving their benefits to Principal, selling additional products to existing customers, attracting customers that are offering benefits for the first time, and maintaining strong retention. The remaining growth is attributable to employment growth and higher salaries from existing customers. Our dedication to creating unique tech-driven solutions and group benefits is receiving recognition. DALBAR recently rated Principal number one for online group benefits administration with its communication seal of excellence for superior web experience. This award spotlights one of our strategic priorities, customer experience.
By listening to our customers and responding with systematic improvements to both digital and human interactions, we are consistently improving the customer's experience and helping them take the necessary steps towards financial security. In individual life, our targeted focus on the business market is paying off. Compared to a year ago, sales of non-qualified deferred compensation and business owner solutions increased 76% on a quarterly basis and 57% on a year-to-date basis, nearly offsetting the impact of our decision to focus solely on this market. Through continuous tracking of our brand health metrics, we're seeing steady increases in brand favorability among SMBs. This, in combination with focused distribution efforts and the market demand for our employer solutions, are driving these strong results.
The resiliency of the SMB market also comes through our U.S. retirement business, and our RISP second quarter recurring deposits increased 37% in total and 14% on our legacy block as compared to a year ago. We're seeing growth across our participant base, stemming from both net new business and employment growth on our existing block. Existing participants are also saving more. This, along with strong sales retention, drove $2.5 billion of positive account value net cash flow in the quarter. DALBAR also recently recognized Principal as one of the top five retirement plan providers with superior mobile enrollment experiences. This acknowledges our seamless rollover process, making it easy for participants to move their retirement savings to Principal and opting into their new retirement plan. Overall, we're entering the second half of 2022 with momentum, prepared to navigate uncertainty in the macro environment.
Our transformed portfolio focused on our growth drivers will continue to drive financial and customer results. 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 of the reinsurance transaction, an update on our current financial and capital position, details of our investment portfolio, and our initial estimate of the LDTI transition date impact. As Humphrey mentioned, the reinsurance transaction closed at the end of May and was a key milestone that reinforces our strategic focus on evolving into a higher growth, higher return, more capital-efficient enterprise while also reducing our risk profile. At close, the economics of the reinsured blocks of business transferred to the counterparty with a January first effective date. This resulted in a true up of the related revenue, non-GAAP operating earnings, net income, and AUM from first quarter in our second quarter reported results.
Net income attributable to Principal was $3.1 billion in the second quarter, reflecting $2.8 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 this $2.8 billion of income from exited businesses as well as a - $83 million true up for the first quarter gains in the funds withheld portfolio, net income for the quarter was $315 million. Excluding true ups related to the reinsurance transactions and other significant variances, second quarter non-GAAP operating earnings were $435 million. Operating EPS of $1.70 per diluted share increased 3% compared to the second quarter of 2021.
The second quarter non-GAAP operating earnings effective tax rate was nearly 20% on a reported basis and 18% excluding significant variances. For the full year, we continue to expect to be within the 17%-20% guided range. As detailed on slide 14, we had several significant variances that had a net negative impact on non-GAAP operating earnings during the second quarter. On a pre-tax basis, benefits from net favorable variable investment income and inflation in Latin America were more than offset by the reinsurance transaction true up, COVID-related claims, and higher DAC amortization. These had a net negative impact to reported non-GAAP operating earnings of $3 million pre-tax, $12 million after tax, and $0.05 per diluted share.
Specific to variable investment income, RIS P, RIS-S pread, Principal International Specialty Benefits and Individual Life benefited by a combined $56 million pre-tax, primarily due to higher than expected real estate sales and alternative investment returns. This was partially offset by a - $41 million impact in corporate as the increase in interest rates and decline in equity investments negatively impacted some mark-to-market investments. With approximately 35,000 U.S. COVID-related deaths in the quarter, we had a - $10 million pre-tax impact, primarily driven by disability claims and specialty benefits and life claims in individual life. The first quarter reinsurance transaction true up negatively impacted second quarter pre-tax operating earnings by $13 million. This excludes stranded costs as they remain in our reported results and were not part of the true up.
Details of the line item impacts of the true ups for RIS-Spread and individual life are available in the appendix. Macroeconomic volatility continued in the second 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 RISP and PGI, as well as DAC amortization in RISP. However, the higher interest rate environment does benefit our businesses over the long term, with our new money yield exceeding 5% in the second quarter. Foreign exchange rates were a headwind in the second quarter. Impacts to reported pre-tax operating earnings included a - $1 million compared to the first quarter of 2022, a - $5 million compared to the second quarter of 2021, and a - $7 million on a trailing 12-month basis.
In [audio distortion], performance in total didn't impact second quarter results as $8 million of higher than expected performance in Chile was completely offset by lower than expected performance in Mexico. We're taking actions across the enterprise on expenses due to pressured fee revenue as we have during previous periods of macro uncertainty and volatility. We are committed to aligning expenses with revenues while continuing to invest for growth, but there is a natural lag as we put actions in place. Turning to the business units, the following comments on second quarter results exclude significant variances. RISP pre-tax operating earnings and margin declined from the year-ago quarter, primarily due to unfavorable equity and fixed income markets pressuring revenue. Second quarter was also impacted by the final TSA expenses related to the IRT transaction.
In RIS-S pread, net revenue was flat despite the reinsurance transaction as growth in the business and higher net investment income, including the benefits from portfolio optimization, more than offset the loss of the fixed annuity revenue. Pre-tax operating earnings increased despite flat net revenue as operating expenses were lower, reflecting impacts of the reinsurance transaction. Despite macro pressures, PGI reported strong second quarter results with $1.4 billion of positive net cash flow and the overall management fee rate of approximately 29 basis points remained stable. Pre-tax operating earnings and margin benefited from a net $30 million of performance fees earned in the quarter. Excluding the benefit from performance fees, PGI's second quarter margin was strong at 39%.
In Principal International, pre-tax operating earnings were flat with the year-ago quarter as growth in the business was offset by the regulatory fee reduction in Mexico and foreign exchange headwinds. On a constant currency basis, pre-tax operating earnings increased 5% over the year-ago quarter. As Dan highlighted, Specialty Benefits continues to deliver strong results and increased pre-tax operating earnings 35% over the year-ago quarter. This was fueled by growth in the business, including an 11% increase in premium and fees, as well as improved life and disability claims and disciplined expense management. We expect the strong growth in premium and fees to persist throughout the remainder of the year. Corporate losses were elevated in the second quarter, primarily due to the timing of certain expenses related to strategic initiatives.
We continue to expect to be within the $370 million-$400 million guided range on a full year basis, excluding significant variances, implying lower losses in the second half of the year. Turning to capital and liquidity, we remain in a strong financial position and are focused on returning excess capital to shareholders. We ended the quarter with $2 billion of total company available cash and liquid assets. We also have $800 million of untapped revolving credit facilities available for liquidity purposes.
Excess and available capital is currently estimated to be $1.9 billion and includes $1.3 billion at the holding company, higher than our $800 million to cover 12 months of obligations, approximately $370 million in our subsidiaries, and $200 million in excess of our targeted 400% risk-based capital ratio, estimated to be 415%. We also have access to a $750 million contingent capital facility. We will continue to maintain a 20%-25% leverage ratio and expect the ratio to continue to improve as we pay down $300 million of long-term debt set to mature in the third quarter. Despite the pressures of the 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 returned nearly $1.3 billion of capital to shareholders in the first half of the year. This includes approximately $400 million in the second quarter, with $162 million of common stock dividends and $240 million through share repurchases. $140 million of the share repurchases this quarter was the balance of the $700 million accelerated share repurchase program that we initiated in the first quarter. Last night, we announced a 64-cent common stock dividend payable in the third quarter, a 2% increase from the dividend paid in the third quarter of 2021.
This is in line with our targeted 40% dividend payout ratio and reflects strong business performance. It's important to note that our full year capital return guidance assume markets as of the end of 2021 and the targeted $2.5 billion-$3 billion of capital return to shareholders included three sources of capital, excess capital at the holding company, $800 million of deployable proceeds from the transactions, and free capital flow generation from our businesses. We remain confident in our 75%-85% free capital flow conversion, but the dollars of capital generated is dependent on the overall market environment and the resulting impact on our fee-based businesses. We remain focused on maintaining our capital and liquidity targets at both the life company and the holding company and will continue with a rigorous and disciplined approach to capital deployment in the current environment.
Turning to slide four. After the close of the reinsurance transaction, our investment portfolio remains high quality, diversified, and well-positioned. Our total invested assets decreased $23 billion as a result of the reinsurance transaction during the second quarter. As we worked with the reinsurance counterparty between sign and close to identify the specific assets included in the funds withheld account, we had the opportunity to retain certain differentiated, higher-yielding commercial mortgage loans and private credit assets. These assets fit well with the lower liquidity needs of our go-forward liabilities and increased the portfolio yield by approximately 20 basis points. As a result, the impact of the transaction on the company is reduced, with RIS-S pread benefiting the most. The higher yield is driving higher net investment income and RIS-S pread than we assumed in our guidance, benefiting net revenue and margin.
Excluding significant variances, we now expect the margin to be at the high end of our guidance range and a 5%-10% decrease in RIS-S pread's full-year 2022 net revenue from 2021 due to the transaction, improved from our outlook of a 20%-25% decline. We're comfortable with the risk return profile of the remaining general account. The portfolio is high quality and a good fit for our liability profile. A few other comments on our investment portfolio. The commercial mortgage loan portfolio has an average loan-to-value of 45% and an average debt service coverage ratio of 2.5 times. We have a diverse and manageable exposure to other alternatives in high-risk sectors, and importantly, our liabilities are long-term, and we have a disciplined asset-liability management.
Additional details of our investment portfolio are available in the appendix of the slides. As many of you know, the targeted improvements for long duration insurance contracts accounting guidance, or LDTI, goes into effect on January 1st, 2023. Importantly, LDTI doesn't change our underlying economics, free cash flow generation, or our capital position, but it will have an impact on our reported financial results. We are adopting the guidance on a modified retrospective basis and will recast 2021 and 2022 financial results under LDTI in early 2023. We're currently estimating that the transition impact from the adoption of LDTI will decrease total stockholders' equity between approximately $4.8 billion and $5.8 billion as of January 1, 2021.
Nearly all of this impact will be in AOCI and is driven by the requirement to update the discount rate assumption on impacted liabilities to the equivalent of a single- A interest rate with credit ratings based on international rating standards. As a result, LDTI is expected to have an immaterial impact to our equity and book value excluding AOCI. Sitting here today, we expect the impact to stockholders' equity from LDTI to be immaterial as of the second quarter of 2022, as interest rates have risen significantly from where they were at the beginning of 2021. Our transformation into a higher growth, higher return, more capital efficient company focused on our growth drivers is paying off.
As of the second quarter, and excluding significant variances, non-GAAP EPS increased 3% over the year ago quarter, despite impact from the transactions and macro volatility, and ROE improved to 14.2%. As we move forward, executing on our go-forward strategy and strengthen capital management approach, we will continue to invest in our growth drivers of retirement in the U.S. and select emerging markets, global asset management, and U.S. benefits and protection, all with the aim to drive long-term shareholder value. This concludes our prepared remarks. Operator, please open the call for questions.
At this time, I would like to remind everyone that to ask a question, you may press star and then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Our first question comes from the line of Ryan Krueger with KBW. Please proceed with your question.
Hi. Thanks. Good morning. I was hoping to dig into the investment repositioning a little bit. I was trying to do some back of the envelope math, but I'll just ask to see if you can make it a little bit easier. I guess can you just help us think about relative to the original guidance you had given for the impacts of the reinsurance transactions, how much more or how much less of a negative impact you would expect now due to the repositioning actions that you took?
Yeah. Good morning, Ryan. Good to hear your voice. Deanna, you wanna help shape that?
Yeah. I think probably the best way to shape that is to look at 20 basis points impact on a pre-tax basis on the $70 billion portfolio. That would be kind of the delta between what we originally assumed and what we receive now. On the prepared remarks, we did talk about the impact to spreads outlook, which is where most of that benefit will be. Now we expect net revenue to only be down 5%-10%, much improved from the 20%-25% that we talked about earlier. That would equate and spread to about $20 million pre-tax per quarter of additional earnings.
Does that help, Ryan?
Yeah. No, that's great. Thanks. Just to follow up on your comment on capital return. I think you said that the guidance was based on year-end 2021 markets. Are you able to frame how you're thinking about things now with markets where they are today?
Deanna, please.
Yeah. Thanks for the question, Ryan. Obviously, as you just reiterated, our outlook range of $2.5 billion-$3 billion, which included $2 billion-$2.3 billion of share buybacks, was based on markets as of the end of last year. If we look at our implied daily average sitting here today, that's about 15% lower than what we would have anticipated coming into the year, and we've also seen additional fee pressure from fixed income values. I do think as I sit here today and look at year-to-date financial results, I think it's a really good testament of our diversified business model, where strengths in other businesses has offset the revenue pressure that we've seen in PGI and RISP. I do see a path to those outlook numbers.
I still feel really good about the 75%-85% of free cash flow. Obviously, the transaction proceeds are coming in as expected. But there is obviously still some uncertainty in where we end within the 75%-85% and where and what that produces as far as dollar amount of free cash flow is still gonna be pretty dependent on the markets and how that market plays into our fee businesses, because obviously those sit at higher percent free cash flow, flowing into that overall company number. Again, like I said, I do think we're gonna be disciplined in the current environment, but we're also positioned for a much higher dollar amount of capital return this year. Just as a reminder, we'll also be using some of that capital to pay down debt, in the third quarter.
That's $300 million, and obviously, the China pension acquisition could come into play this year as well. A strong year of capital deployment, but some market uncertainty could play into the absolute dollar amount.
Thanks for the questions, Ryan.
Thanks a lot.
Our next question comes from the line of Tom Gallagher with Evercore ISI. Please proceed with your question.
Hey, good morning. First question, just on PGI earnings. I thought those were quite strong, particularly when compared to other asset managers. The $150 million, would you say that's a good run rate heading into Q3 and Q4? I realize, you know, there's an average daily level to consider 2Q versus 3Q, but I think we've recovered most of that. But I guess my real question is there anything unusual in this quarter's earnings on the revenue side, like transactional revenues that may not be recurring, or do you feel like the $150 million is a decent baseline of earnings here?
Yeah. I'll have Pat address that. Again, I would just say, Tom, appreciate the question. We did have really strong results coming out of PGI, and there's a little bit of explanation with regards to some of the fees, but I'll have Pat give you those details.
Tom, thanks for the question. Maybe the only thing I'd highlight is in the second quarter, we did have some performance fees that were noted, and I think you're aware of those. That was predominantly driven by real estate transactions. As you know, the timing of those real estate transactions is quite variable. Kinda depends on market conditions, client demand, when they wanna sell, our portfolio management views of when the right time to sell. We did have some elevated performance fees in the second quarter that probably are front-end loaded a little bit for the year relative to the full year outlook to take advantage of some of the market conditions that we saw in the real estate sector.
That being said, you know, we continue to have a good pipeline of real estate transactions that I think we will be able to harvest performance fees longer term. Probably as we look forward into the second half of the year, Tom, performance fees probably be a little more slightly muted as market conditions warrant. Continue to have very strong, I think, expectations for the management fee outlook.
Pat, just a quick follow-up on that. Is the 39% pre-tax margin you think a decent, and I think that's an ex performance fee margin. Do you think that's a reasonable expectation for near term results there?
Yeah, I think it is, Tom. You know, we clearly continue to see pressures in the management fees, particularly given the negative equity markets and the fixed income results that we saw in the first half of the year, which will put some pressure on, I think, margins. That being said, we are very focused on preserving margins and within a target range that we put into our outlook for the year, which was 39%-42%, and we expect to be in that range, likely probably at the lower end of that range, but definitely are gonna aspire, and our management team is focused on keeping those margins in that range.
The only thing I might add is, a lot of Pat's expenses are variable expenses, and we are, you know, across the entire organization aligning expenses with our estimated revenues, and so a very conscientious effort to preserve as much margin as we possibly can.
Okay, thanks.
Thank you.
Our next question comes from the line of Jimmy Bhullar with JP Morgan. Please proceed with your question.
Hi, good morning. First, a question for Pat, just on investment performance at PGI, and it seems like it's gotten progressively worse if you look at three year, one year versus the five year and longer periods. Wondering if you think this is because of any stylistic differences or anything more company specific, and what's the impact of this, both on PGI, where you've shown very strong flows recently, but then also some of your other businesses that rely on PGI.
Please, Pat.
Yeah. Thanks for the question, Jimmy. You know, on the one-year numbers, we have had some, I think, performance that is more in the third and fourth quarter, predominantly due to our style investing. On the equity side, it's predominantly a quality growth philosophy in terms of investment approach, whereas value and cyclical sort of style investing has performed much better. That being said, though, Jimmy, we really haven't seen a correlation between one-year performance and net cash flow, which is really the important, I think, variable to look at. As we see, and as you look at our three-, five-, and 10-year performance numbers, those are probably more, I think, insightful in terms of what that translates into investment net cash flow going forward.
We continue to see very strong, I think, results in that longer term, sort of a horizon. You know, we still have a really strong base of strategies that are competitive in the eyes of investors and desired by investors in the marketplace. We saw that in the second quarter with some of our equity capabilities, very desired in the marketplace yet. We saw that in some of our high income-oriented capabilities. We actually think that's continued to create a momentum for us in the third quarter, Jimmy. We continue to see very strong desires for some of the things that we offer. Real estate absolutely continues to be desired.
We continue to see desirability for some of our specialty income products, and that's actually starting to accelerate in the high yield sector and preferreds and emerging market debt. We continue to see some of our equity capabilities continue to be desired in the marketplace. Our sort of solutions, our sort of broad-based capabilities, I think are still relevant in the eyes of investors and still feel good about the performance delivering net cash flow that will be positive as we look forward.
Okay. On fee retirement, the flows, I'm assuming, are obviously benefiting from the strong labor market and competition for talent. Are you seeing any impact from inflation, and is it affecting withdrawal rates at all? Or are you seeing any hardship withdrawals or anything else of that nature because of consumers being stretched?
That's a good question, Jimmy. As we all know, it's a tight labor market. To retain and attract talent, you have to have good benefits. I'm like you, awestruck at just how strong the results are. Maybe we'll just have Chris provide some insights and perspective on the strength of the RISP business.
Yeah. Thanks, Dan, and thanks, Jimmy. You know, again, I think you're right. We are definitely benefiting from the labor markets and the competition for talent, both low unemployment, higher comp, competition, and we're also seeing very strong customer retention. We're seeing mid-teen growth in our deferrals and employee matches, you know, above what we would normally expect. We break that down, we're seeing growth in the number of our participants is up, our in-plan participant growth, those that are deferring, is up. Our average deferrals per members are up. The number of participants receiving an employer match has increased by 10% ex IRT. We're just seeing really strong performance from both employee deferrals, employer match increases, and the benefits from the labor markets.
On withdrawal, we definitely are seeing a bit more, a little bit elevated, but it's slight, largely due to the job changing that we're seeing and the churn a little bit in the employment market. That's driving a small, a slight increase in participant withdrawals, as a percent of average AV, but it's modest.
Jimmy, appreciate the questions.
Thank you.
Our next question comes from the line of Alex Scott with Goldman Sachs. Please proceed with your question.
Hi. First one I had is just around the completion of the transaction. You know, I know the actual, I guess, deferred and fixed annuity transactions were completed. Are you done with, you know, the, I guess, in totality, like, what you announced at the time you announced that transaction? I think some of it had to do with reserve financings and that sort of thing. You know, is there anything left to do there that we should consider as we look at your capital position?
Yeah, Alex, appreciate the question. You know, we've talked about this previously, and just to maybe bring it full circle, the effort that went into the strategic review was really exhaustive, working with the board of directors and outside advisors. We really did feel when we presented a year ago June our go-forward strategy that we had interrogated every business, every market, every location for its ability to contribute to the long-term success as we've framed it for you and all the other investors. I would say any other modifications from here are on the margin around products, around markets specifically. The heavy lifting is, for the most part, complete. Feel really good about the go-forward strategy. Deanna, any further comments?
Yeah. I think your question was really specific to the $800 million of deployable proceeds and the timing of that. Sitting here today, we have received the majority of that. Some came in first quarter, most of it came in second quarter up to today, and a small amount is yet to come probably later this year or maybe a little bit early next year. That's either sitting in holdco or sitting in the life company. Almost all of that is already in hand.
You get the benefit of already have had two questions answered with one question, so you still get a follow-up there, Alex.
Thank you. I guess for the second question in RISP, when I think about, you know, the strategy to improve margins there is you sort of bring Wells Fargo completely on, TSA fees gone now. You know, the market's a little more volatile, though. What does that look like in terms of where margins go from here?
Chris?
Yeah. Thank you. Yeah. I mean, I think as you noted, the fee businesses are certainly seeing a little bit of margin pressure. As Deanna pointed out in her comments, we also have a spread-based retirement business. We do look at managing those in total. When you get the offset, it's helpful. As we think about the fee margin going forward, the macro headwinds are providing the greatest pressure to the margin performance. You know, obviously, as Deanna mentioned in her comments, there's a natural lag to adjusting to the speed at which the market's moved on both equities and fixed income in the second quarter.
We're gonna be looking at really pulling revenue and expense levers to narrow the gap to the margin guidance we initially provided. Obviously, some of that will be dependent upon market performance. We certainly have seen a better market performance to start the third quarter. The combination of us remaining disciplined on expenses, looking for additional revenue opportunities, as well as market, should help us close and narrow that gap to the margin guidance we originally provided.
Alex, it's also probably worth noting that we've talked about this historically, and that is some of the value creation from the RIS WSRS platform is captured within asset management, where we're able to get mandates for existing customers and the IRT customers. TRS benefits are captured in oftentimes within our NQ or the life area. Of course, the participants' rollover opportunities will show up in our mutual fund complex. Again, I think we have to be thinking in a very comprehensive way when we think about the value of the retirement plan platform and where some of these benefits are accruing within the overall organization. Hopefully, that helps.
Yep. Got it. Thank you.
Thank you.
Our next question comes from the line of Erik Bass with Autonomous Research. Please proceed with your question.
Hi. Thank you. Actually wanted to follow up on the RIS P discussion. I was hoping you could talk a little bit more about the drivers of the year-over-year decline in normalized earnings, which were down a bit more than the market and AUM over the same period. I guess, was there anything unusual in expenses here, or is that kind of $111 million adjusted number a good baseline to think about going forward?
Chris, please.
Yeah, sure, Erik. I certainly the macro pressures are the biggest driver of that. There is some offset and some additional expense pressure happening from some post-migration work on IRT and the trust and custody businesses. As you all remember, we just brought over the trust and custody business at the end of February. We are seeing some elevated expenses through the balance of this year, as we bring that business and get that business in a normal state. Again, you know, we're gonna be really disciplined in working to narrow that gap to the guidance we provided.
Got it. Thank you. Then maybe a follow-up on just thinking about capital return beyond the second half of 2022. I think your plan contemplates drawing down a lot of the excess capital. Should we think of kind of for 2023, it really being tied to your free cash flow and sort of, the total payout ratio for dividends plus buybacks being in that 75%-85% of earnings range?
Deanna?
Yeah. I think that's the right way to think about it, Erik. You know, having said that, our 2023 reported results will be adjusted due to LDTI, so we'll have to understand kind of how that plays through. Yeah, that really will be the primary driver of our capital deployment, as we think beyond 2022.
Got it. Thank you.
Thanks, Erik.
Our next question comes from the line of Tracy Benguigui with Barclays. Please proceed with your question.
Thank you. Could you walk through the moving parts that drove RBC changes in the second quarter where you're at 415% and in the first quarter you were at 400%? To what extent was this due to the amount of excess capital you're drawing down, or did the reinsurance transaction all have an impact? If I could tag on here, if you're anticipating that your asset allocation changes could impact required capital in any way?
Good questions. Thanks. Deanna?
Yeah, there's a couple of moving parts there. Obviously, any of the capital changes of the portfolio would have been reflected in that RBC ratio as of the end of second quarter. Most of the proceeds of the transactions do flow through the life company, and so, we did do a dividend to holdco during the quarter, but it did not entirely offset the proceeds from the quarter. Ultimately we'll plan to weave that back down closer to the 400% target as we go through the rest of the year. It's really driven by the transaction proceeds, obviously normal gain from operations. Any capital that required capital needed from the change in the portfolio is reflected in that number.
Okay. Got it. How did that impact-
It did have some.
Capital?
It did require some additional capital just given the nature of those portfolio, but very manageable within our capital levels.
Got it. This doesn't affect you guys anymore, but just because ULSG has come up as a theme this quarter, I'm just curious, back when you were contemplating various strategic updates and you identified a ULSG block transaction, what was it about the block that got your attention? Was it changes in policyholder behavior, like a dynamic lapse function or something else? I'm just trying to get an industry perspective here.
I think from my perspective, it had way more to do with the strategic direction of the company, that we really didn't feel that we had a product that we would be competitive in in the retail life insurance business. At the same time, we had had a strong track record in the business owner executive solutions and around non-qualified deferred comp, because again, it supports our strategy of targeting small to medium-sized businesses, and this is what they're looking for from us. All the other variables around, you know, what are long-term interest rates, what's policyholder behavior, all of those things were interesting to us. At the end of the day, it was a divestiture of a block of business that we just didn't feel that we had differentiated capabilities to go to the market.
Maybe I'll ask Amy if she has any additional comments she wants to place there as we contemplated that book of business. Amy?
Yeah. Dan, I think you've done a nice job answering that question. I think one of the things that's lost a little bit of focus through this strategic review is we actually, prior to initiating the strategic review, had announced that we were going to discontinue new ULSG sales. This is something that really was, even without the extra strategic review work, was something that wasn't fitting in our portfolio as well in terms of the future moves we needed to have, the product solutions we needed to have, available to those areas that we wanted to grow. It was, as Dan said, more of a strategic fit issue for us.
Really appreciate the questions, Tracy.
Got it. Sure.
Our next question comes from the line of John Barnidge with Piper Sandler. Please proceed with your question.
Good morning. Thank you. I know people are worried about inflation and job cuts, but group sales is rather strong across products, really. Can you maybe talk about what you're seeing in your core SMB market and maybe how that trended as the quarter progressed?
Yeah. I really appreciate that and what a great quarter and first half of the year for Amy and her team in the group benefits. Amy, you wanna provide some insights? I think maybe, John, just to tag onto that a little bit around what we're also seeing in the retirement space in terms of strength in that SMB segment, because as you know, we have a disproportionate percentage of our business in that market space. Amy?
Yeah. John, you've already noted great sales also, you know, just not across the industry in terms of group benefits, that clearly all of us who have group benefits business has been benefiting from kind of that strong competition for labor. Where I would say Principal's probably uniquely been benefiting is that with that small to medium-sized business focus, we are seeing a sentiment emerge. Again, you're aware that Principal does some primary research on this. We're starting to see some sentiment emerge that says even if we are headed into a point where we have inflation or recessionary concerns, I would say those small business owners and mid-sized businesses have fought so hard for that talent.
What they're saying is, "The first action I am not gonna take is I'm not gonna impact wages and I'm not gonna impact employment." We're seeing very nice persistency in wages and employment. We're also still continuing to see some growth. Our indexing in that small to mid-sized business market, combined with the sentiment we're seeing, is really putting together some nice growth now, and we continue to see that through the future, as Deanna indicated in her comments.
Chris, any comments you wanna add relative to your SMB block and what you're seeing in terms of strength?
Yeah. I mean, we're seeing strength across all plan segments, but with respect to, you know, small, medium, large and mega, we're seeing really nice momentum. In the SMB market in particular, we saw really nice cash flow. We saw participant AVs up at about 5% year-over-year. Our total contracts, our total plan numbers in the SMB space are up, and our recurring deposits in the SMB space alone are up about 14%. We have concentrations in our retirement business, I think similar to Amy's, in the professional scientific technical services segment, which is a very large portion of our retirement block, which is projected to have the second highest growth behind healthcare over the next, you know, seven years or so.
We feel really good about our position on the retirement side in the SMB space as well.
John, do you have a follow-up?
Yes. Thanks, Dan. You had talked about within PGI, there had been some performance fees from real estate gains. Did gain harvesting get accelerated the first half of the year? Is there a knock on that we should be thinking about variable investment income in the second half from that? Could you offer maybe an early look into the third quarter since that's a one-quarter asset lag? Thank you very much.
Well, I'll defer to Pat, but I would just simply say this, we think of this as being a decision that lies within our investment professionals on the timing of divestitures, and when we take full advantage of that, because ultimately we're trying to deliver value to our investors and without regards to, you know, the overall corporation's needs. Pat, any further insights on the real estate profit harvesting?
Yeah, thanks. Thanks, John. You know, the timing really is much more aligned with where the properties are at, their stage of development or stage of just acceptability in terms of sort of harvesting the gains off those properties. It's really a market condition evaluation, John, where the real estate values are, what we're actually sort of looking forward and seeing, what our clients' desires are, what our portfolio managers feel is the right time to harvest those gains. It's not at all a financial sort of arbitrage discussion. It's really to optimize the performance of that asset. The timing is variable, and it will be dependent on market conditions and the decision-making of our portfolio managers.
Thanks, John.
Thank you.
Our next question comes from the line of Suneet Kamath with Jefferies. Please proceed with your question.
Hi, thanks. I just wanted to follow up on one of John's questions that I don't think you answered. Any just insights into what we should expect for VII here in the third quarter?
Yeah. I'll make a few comments and see if Pat has anything to add. You know, I think you're aware, and it really got flowed into the last question, more of our VII than probably some of our peers is driven by real estate. Obviously prepays and other alts flow into that as well. I also think it's worth noting that our alts portfolio is less skewed to private equity than our peers, which does reduce the volatility of our VII. You know, sitting here today, just given the lag, we could see negative VII in the second half of the year, lower than our expectations. I also think it's really critical to understand that the makeup of our portfolio does reduce the volatility both on the upside and the downside relative to our expected levels.
Pat, do you have anything more to add there?
No, I just think the second half of 2022, you know, obviously macro headwinds, and as we talk to the managers, particularly in the private equity side, you know, their current market outlook and the lagging nature of the return cycle, we could see some pullback clearly in our alts performance, and probably be below trend what we've been seeing in the past.
Got it. Maybe if I could just have one quick clarification on it. When you said negative, do you mean, like, negative relative to expectations or an absolute negative return?
Negative relative expectations.
Got it. Just my follow-up is on the assumption review. I know it's less of an issue for you guys now, but anything that you're paying particular attention to as you go through that process? Just wanted to confirm that within the retained life block that you have, that there's no ULSG sitting in there.
Yeah. Good question. Deanna?
Yeah. A couple of things there. We're coming up on our third quarter review since we're sitting here today. You know, think it's important to understand that as part of the strategic review and as we worked with third-party consultants, we did take a look at all of our actuarial assumptions. So I think that will play into the magnitude of the changes that we'll contemplate as we go through this review. We obviously will be updating for current starting interest rates, so that obviously will, if it stays where it is today, will have a positive impact on our actuarial balances. Then specifically to the ULSG, no, we have no remaining secondary guarantee business within our block.
Any impact from an assumption change on the reinsured block would be entirely offset by a reinsurance credit. Again, that obviously does reduce the risk in our block of business as we go into the third quarter review.
Okay. Thank you.
Our next question comes from the line of Andrew Kligerman with Credit Suisse. Please proceed with your question.
Hi. Good morning. Just clarifying, Deanna. Based around your comments, I would assume then that, from an excess capital standpoint, you wanna get to the $800 million that you had specified, at your investor day, so draw the excess down to, $800 million?
Yeah. Andrew, that is our intent. You know, obviously around the edges, whether it gets exactly to $800 million or, you know, a range around that, obviously things happen at the end of the quarter that you don't always understand, but that's our desire. Obviously, if anything greatly increases the risk from a credit perspective, we'll be prudent and disciplined relative to that. Sitting here today, that's our desire.
Makes sense. Along the way, from an M&A standpoint, are you seeing any acquisitions that you might be interested in? And if so, could you give a little color around that?
Right now, we feel strongly, Andrew, that our organic investment is where we wanna put our focus in all of our businesses. We certainly have a sort of an active pipeline of seeing and putting eyes on asset prices in all the businesses in which we do business, but at this point in time, we do not anticipate deploying capital beyond Emerald, which is of course the investment in China with regards to our enterprise annuity build-out.
Got it. Thank you.
Thank you.
Our next question comes from the line of Josh Shanker with Bank of America. Please proceed with your question.
Yeah. Thank you very much for getting me in the end. I'm hearing mixed things. You obviously had an interesting commentary about the LDTI impact prior to this quarter, and now there's a very limited impact going this quarter. There's some volatility in there, but would you be willing to spend any money on hedging merely to manage the volatility in LDTI? Does that seem like not a useful use of your capital?
I think it'd be inefficient to do so, but I'll defer to my very capable CFO to respond.
Yeah. I think you come back to that LDTI does not impact the underlying economics free cash flow generation or capital position. We feel good about our hedging positions that we have across our portfolio and don't feel that LDTI will impact that. I also come back to that a majority of that does sit in AOCI, that volatility. And again, still feel that looking at equity and book value ex AOCI is the appropriate metric, one, given the fact of the volatility there and not all assets and liabilities are running through with LDTI or mark-to-market. We wouldn't contemplate any changes sitting here today.
That's all I need. Thank you very much.
Appreciate it, Josh.
Our next question comes from the line of Mike Ward with Citi. Please proceed with your question.
Thanks, guys. Just a quick one. Any update or further detail you might be able to provide on the China Construction Bank deal or potential use of capital?
Yeah. Again, very much on track, having sought and received the regulatory approval. There's some final steps that we're taking with CCB itself, but definitely see this coming to close before the end of the year and feel very good about leveraging that existing relationship with China Construction Bank.
Okay. Thanks very much.
Thank you. Appreciate it.
We have reached the end of our Q&A. Mr. Houston, your closing comments, please.
Thank you, operator. Appreciate that. I just wanna highlight a couple of recent additions to the Principal leadership team. Teresa Hassara will work with Chris Littlefield to lead our workplace savings and retirement business. Teresa has spent the last 25 years helping shape the workplace retirement solutions and will be just a tremendous add here at Principal. We also wanna welcome Natalie Lamarque, who has joined us as our new general counsel. Natalie has had extensive experience and unique experience within the industry that will provide a welcome perspective to the company. She'll also oversee compliance and our government relations operations. It's wonderful to have both Teresa and Natalie join the organization. I look forward to, and I know the other executives look forward to visiting with investors here over the next couple of weeks to answer any unanswered questions. Thank you for your time today.
Thank you for participating today in today's conference.