Deanna D. Strable
Executive Vice President and Chief Financial Officer at Principal Financial Group
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 1st 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 negative $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% to 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-Fee, RIS-Spread, 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 negative $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 negative $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 a 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, and RIS-Fee and PGI as well as DAC amortization and RIS-Fee. 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 negative $1 million compared to the first quarter of 2022 a negative $5 million compared to the second quarter of 2021 and a negative $7 million on a trailing 12-month basis. Encaje 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. RIS-Fee 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-Spread, 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 remain 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 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 to $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% to 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 3, 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 $0.64 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 assumes markets as of the end of 2021 and the targeted $2.5 billion to $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% to 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 4. 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 increase the portfolio yield by approximately 20 basis points. As a result, the impact of the transaction on the company is reduced with RIS-Spread benefiting the most. The higher yield is driving higher net investment income in RIS-Spread 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% to 10% decrease in RIS-Spread full-year 2022 net revenue from 2021 due to the transaction improved from our outlook of a 20% to 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 2.5x. We have a diverse and manageable exposure to other alternatives in high-risk sectors, and importantly, our liabilities are long-term, and we have 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 1, 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 we'll 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 strengthened 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.
