PFG

Business Context and Reporting Period

Company: Principal Financial Group, Inc. (NYSE: PFG)
Filing Type: Form 8-K (Current Report)
Date of Report: February 2, 2012
Reporting Period: Full year and fourth quarter ended December 31, 2011.
Business Overview: A global investment management leader providing retirement services, insurance solutions, and asset management to businesses, individuals, and institutional clients.

Key Financial Metrics

Liquidity and Capital:

• Excess capital at year-end: $1.6 billion.
• Estimated risk-based capital ratio: 445%.
• Book value per share (excluding AOCI): $29.54 (up 6% from 2010).

Material Changes vs. Prior Period

• Operating Earnings Growth: Full-year operating earnings increased 4% year-over-year, driven by double-digit growth in Principal International, Principal Global Investors, and U.S. Insurance Solutions.
• Net Income Volatility: While full-year net income rose 2%, Q4 net income dropped 18% compared to Q4 2010. This decline was primarily due to net realized capital losses and specific one-time charges.
• Asset Growth: Total AUM increased 5% to $335.0 billion. Principal International AUM grew 15% to $52.8 billion.
• Sales Performance: Full Service Accumulation sales reached $8.4 billion (up 27%), and Principal Funds saw record sales of $11.2 billion (up 20%).
• Capital Deployment: The company deployed over $1.1 billion in capital in 2011, including $350 million in acquisitions, $215 million in dividends, and $550 million in share repurchases.

Guidance, Outlook, Risks, and Unusual Items

Management Commentary:

• CEO Larry Zimpleman highlighted solid operating earnings despite market challenges and expressed confidence in the company's long-term growth positioning.
• CFO Terry Lillis emphasized the ability to generate free cash flow and return capital to shareholders, citing a strong balance sheet.

Unusual Items Impacting Net Income:

• Full Year: Net income was reduced by $148.3 million in net realized capital losses (including $90.5 million on commercial mortgage-backed securities) and a $79.2 million after-tax loss related to a court ruling on uncertain tax positions and the Executive Life Insurance Company liquidation plan.
• Q4: Net income was reduced by $53.4 million in net realized capital losses.
• Corporate Segment: Q4 operating losses widened to $43.0 million due to lower variable investment income from an active credit strategy on excess capital, which was unwound in January 2012.

Risks and Contingencies:

• Adverse capital and credit market conditions affecting liquidity and cost of capital.
• Volatility in equity markets and changes in interest rates/credit spreads.
• Investment portfolio risks, including potential realization of gross unrealized losses.
• Regulatory constraints on dividends under Iowa insurance laws.
• International business risks and foreign currency fluctuations.

Investor Verification Checklist

• Non-GAAP Reconciliation: Verify the reconciliation of operating earnings to GAAP net income to understand the full impact of the $148.3 million capital losses and $79.2 million tax/legal charges.
• Asset Quality: Review the detailed breakdown of commercial mortgage-backed securities (CMBS) losses and the status of the "Closed Block" assets supporting participating ordinary life insurance policies.
• Credit Strategy: Confirm the status of the unwound active credit strategy at the holding company and its impact on future variable investment income.
• Capital Ratios: Validate the 445% risk-based capital ratio and the $1.6 billion excess capital figure against regulatory requirements.
• Share Repurchases: Confirm the completion of the November Board-authorized share repurchase program and the total 20.9 million shares bought back year-to-date.