Business Context and Reporting Period
Company: Principal Financial Group, Inc.
Filing Type: Form 8-K (Current Report)
Report Date: August 1, 2011
Reporting Period: Second Quarter ended June 30, 2011
Principal Financial Group, Inc. announced its second-quarter 2011 results, reporting record assets under management and significant year-over-year growth in operating earnings and net income. The company operates through Retirement and Investor Services, Principal Global Investors, Principal International, and U.S. Insurance Solutions segments.
Key Financial Metrics
| Metric | Q2 2011 | Q2 2010 | Change |
|---|---|---|---|
| Operating Earnings | $237.3 million | $190.4 million | +25% |
| Net Income (Common Shareholders) | $258.0 million | $134.0 million | +93% |
| Operating EPS (Diluted) | $0.73 | $0.59 | +24% |
| Net Income EPS (Diluted) | $0.80 | $0.42 | +90% |
| Operating Revenues | $2,149.0 million | $1,976.2 million | +9% |
| Assets Under Management (AUM) | $335.8 billion | $284.6 billion (implied) | +18% |
| Excess Capital | $2.1 billion | N/A | N/A |
| Risk-Based Capital Ratio | 445% | N/A | N/A |
Year-to-Date (YTD) Performance: Operating earnings increased 14% to $469 million; Net income increased 40% to $454 million.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues rose $172.8 million year-over-year, driven by higher revenues in accumulation businesses and Principal International.
- Profitability Surge: Net income nearly doubled, aided by $21.4 million in net realized capital gains, though partially offset by $28.4 million in credit losses on fixed maturity securities.
- Asset Growth: Total AUM reached a record $335.8 billion. Principal International AUM grew 39% to $53.0 billion, and Retirement and Investor Services AUM grew 16% to $183.6 billion.
- Capital Deployment: The company completed a $250 million share repurchase authorization, buying back 7.7 million shares in Q2 at an average price of $29.90.
- Segment Performance:
- Retirement and Investor Services: Operating earnings up 25% to $161.3 million.
- Principal Global Investors: Operating earnings up 69% to $20.8 million.
- Principal International: Operating earnings up 7% to $37.5 million.
- U.S. Insurance Solutions: Operating earnings slightly down 1% to $49.5 million, impacted by unfavorable mortality experience in Individual Life.
Guidance, Outlook, and Risks
Management Commentary: CEO Larry Zimpleman highlighted strong operational leverage and a "fragile" but recovering economic environment. The company expects to surpass its $700 million estimate for capital deployment (acquisitions and share repurchases) in 2011. Recent acquisitions include HSBC's Mexican mandatory retirement business and stakes in Finisterre Capital and Origin Asset Management.
Outlook: Management anticipates continued growth in free cash flow and earnings. The run rate for Individual Life earnings is believed to remain at $31 to $33 million per quarter despite Q2 shortfalls.
Risks and Contingencies:
- Adverse capital and credit market conditions affecting liquidity and cost of capital.
- Volatility in equity markets and interest rates.
- Potential realization of gross unrealized losses or future impairments on investments.
- Regulatory constraints on dividends under Iowa insurance laws.
- International business risks and foreign currency fluctuations.
Investor Verification Checklist
- Capital Gains Composition: Verify the sustainability of the $21.4 million net realized capital gains, specifically the $46.0 million gain from the partial sale of an investment interest.
- Investment Portfolio Quality: Review details on the $28.4 million in credit losses, including $23.1 million on commercial mortgage-backed securities, to assess future impairment risks.
- Individual Life Run Rate: Monitor subsequent quarters to confirm if Individual Life earnings return to the stated $31-$33 million run rate following the Q2 shortfall.
- Acquisition Integration: Track the financial impact and integration progress of the HSBC Mexico and London asset manager acquisitions.
- Share Repurchase Status: Confirm the completion of the $250 million buyback program and any new capital deployment authorizations.