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