Business Context and Reporting Period
Company: Principal Financial Group, Inc.
Filing Type: Form 8-K (Current Report)
Date of Report: October 27, 2011
Reporting Period: Third Quarter ended September 30, 2011
This filing announces the company's third-quarter 2011 results of operations and financial condition. Principal Financial Group is a diversified financial services company offering retirement, investment, insurance, and banking products.
Key Financial Metrics
| Metric | Q3 2011 | Q3 2010 | YTD 2011 | YTD 2010 |
|---|---|---|---|---|
| Operating Earnings | $191.9 million | $218.9 million | $661.0 million | $630.7 million |
| Net Income (Common) | $63.7 million | $142.2 million | $518.0 million | $467.0 million |
| Operating EPS (Diluted) | $0.61 | $0.68 | $2.06 | $1.95 |
| Net Income EPS (Diluted) | $0.20 | $0.44 | $1.61 | $1.45 |
| Operating Revenues | $2,026.3 million | $1,986.7 million | $6,222.0 million | $5,935.4 million |
| Assets Under Management | $320.8 billion | $305.5 billion (implied) | N/A | N/A |
| Book Value Per Share (excl. AOCI) | $29.59 | $27.71 | N/A | N/A |
Liquidity and Capital: The company reported an estimated risk-based capital ratio of 455% with approximately $1.8 billion of excess capital. Net cash flows were positive across key segments, including $350 million for Full Service Accumulation and $1.2 billion for Principal Global Investors.
Material Changes vs. Prior Period
- Operating Earnings: Decreased 12% in Q3 2011 compared to Q3 2010, primarily due to negative equity market returns increasing deferred policy acquisition cost (DPAC) amortization. However, year-to-date operating earnings increased 5%.
- Net Income: Declined 55% in Q3 2011 compared to Q3 2010. This sharp drop was driven by non-operating items, including $63.7 million in net realized capital losses and a $79.4 million after-tax loss from a court ruling on uncertain tax positions and an obligation related to the Executive Life Insurance Company liquidation.
- Assets Under Management (AUM): Increased 5% year-over-year to a record $320.8 billion, driven by strong sales and the acquisition of HSBC Mexican AFORE operations.
- Segment Performance:
- Retirement and Investor Services: Operating earnings down 13% due to market-driven DPAC amortization.
- Principal Global Investors: Operating earnings up 27% due to operating leverage and higher fees.
- Principal International: Operating earnings up 11% driven by AUM growth.
- U.S. Insurance Solutions: Operating earnings remained relatively flat (+0.6%).
Guidance, Outlook, and Risks
Management Commentary: CEO Larry Zimpleman noted that while extreme market events negatively impacted operating earnings, business momentum remained strong. The company expects full-year 2011 sales and net cash flows for fee-based businesses to be significantly improved from 2010.
Shareholder Returns:
- Completed share repurchase programs, buying back 9.1 million shares in Q3 (16.8 million YTD) at an average price of $24.16.
- Declared an annual common stock dividend of $0.70 per share, a 27% increase over 2010.
Risks and Contingencies:
- Market Volatility: Continued volatility or declines in equity markets and widening credit spreads could impact investment income and asset values.
- Regulatory and Legal: Risks include results of litigation, regulatory investigations, and potential tax audits.
- Capital Markets: Adverse conditions could affect liquidity needs and access to capital.
- Actuarial Assumptions: Actual experience may differ from pricing and reserving assumptions, particularly regarding mortality and DPAC amortization.
Investor Verification Checklist
- Verify the reconciliation of non-GAAP operating earnings to GAAP net income, specifically the $79.4 million after-tax loss related to tax positions and the Executive Life Insurance Company liquidation.
- Confirm the impact of negative equity market returns on DPAC amortization expenses across the Retirement and Investor Services segment.
- Review the details of the HSBC Mexican AFORE acquisition and its contribution to the $3.1 billion in net cash flows for Principal International.
- Assess the sustainability of the 27% dividend increase given the 55% drop in GAAP net income for the quarter.
- Monitor the company's risk-based capital ratio (currently 455%) against regulatory requirements and potential future impairments in the fixed maturity securities portfolio.