Business Context and Reporting Period
Company: Principal Financial Group, Inc. (NYSE: PFG)
Filing Type: Form 8-K (Current Report)
Reporting Period: Second Quarter ended June 30, 2009 (Report Date: August 3, 2009)
Business Overview: A Fortune 500 financial services provider offering retirement, investment, life, and health insurance products globally. The company serves approximately 18.8 million customers with $257.7 billion in assets under management (AUM) as of June 30, 2009.
Key Financial Metrics
| Metric (in millions, except per share) | Q2 2009 | Q2 2008 |
|---|---|---|
| Net Income (Common Stockholders) | $150.3 | $168.3 |
| Operating Earnings | $200.5 | $254.1 |
| Diluted EPS (Net Income) | $0.52 | $0.64 |
| Diluted EPS (Operating) | $0.69 | $0.97 |
| Total Revenues (GAAP) | $2,157.8 | $2,658.1 |
| Net Realized Capital Losses | ($155.2) | ($111.5) |
| Assets Under Management (AUM) | $257.7 billion | $308.0 billion |
| Cash and Cash Equivalents | $4.3 billion | $1.5 billion (approx. based on 184% increase) |
| Book Value Per Share | $16.19 | $23.47 |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 19% year-over-year, driven by lower fee income due to a 16% drop in AUM and reduced investment yields. Operating revenues fell 16% to $2,335.8 million.
- Earnings Pressure: Operating earnings declined 21% to $200.5 million. Net income dropped 11% to $150.3 million.
- Capital Losses: Net realized capital losses increased to $155.2 million (from $111.5 million), primarily due to $80.6 million in losses from sales and other-than-temporary impairments (OTTI) of fixed maturity securities.
- Share Count: Weighted average diluted shares increased 12% to 291.4 million following a common stock offering in May 2009, contributing to lower per-share results.
- Pension Costs: Negative market performance in 2008 resulted in higher employee pension and post-retirement benefit costs, reducing EPS by $0.07 compared to the prior year.
Guidance, Outlook, and Management Commentary
Management Commentary: CEO Larry Zimpleman characterized results as "solid," noting a strong rebound from Q1 2009 driven by improved equity markets. The company successfully completed two capital raises totaling $1.9 billion ($1.15 billion equity, $750 million debt), which doubled book value per share from March 31 to $16.19. CFO Terry Lillis highlighted challenges including delayed institutional funding, rising unemployment, and lower investment income, but noted improving retention rates with withdrawals down 100 basis points.
Outlook and Risks: Management expects current pressures to ease over the next several quarters. Key risks cited include adverse capital and credit market conditions, potential impairment of goodwill from acquisitions, investment risks diminishing asset values, and regulatory changes. The company is focusing on expense management (reduced expenses by $156 million or 13% year-to-date) and reducing risk in the investment portfolio.
Unusual Items: The quarter included $134.4 million in net impairment losses on available-for-sale securities, including $48.1 million from sales to reduce capital drift risk and $19.8 million from deterioration in non-agency residential mortgage-backed securities.
Investor Verification Checklist
- Capital Adequacy: Verify the impact of the $1.9 billion capital raise on the company's ability to meet regulatory capital requirements and debt obligations.
- Asset Quality: Review the composition of the $134.4 million in net impairment losses, specifically the exposure to non-agency residential mortgage-backed securities and commercial mortgage loans.
- Liquidity Position: Confirm the sustainability of the $7.5 billion highly liquid asset position and the 184% increase in cash holdings.
- Expense Trajectory: Assess whether the 13% reduction in compensation and other expenses is sustainable or a one-time adjustment.
- Share Dilution: Evaluate the long-term impact of the increased share count (291.4 million) on future earnings per share growth.