Business Context and Reporting Period
Company: Principal Financial Group, Inc. (NYSE: PFG)
Filing Type: Form 8-K (Current Report)
Reporting Period: First Quarter ended March 31, 2009
Date of Report: May 4, 2009
Principal Financial Group reported first-quarter 2009 results, highlighting the impact of significant equity market declines (S&P 500 down 41% year-over-year) on asset valuations and earnings. The company emphasized strong sales performance, expense management, and enhanced liquidity positions despite the challenging economic environment.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 |
|---|---|---|
| Net Income (Common) | $112.8 million ($0.43/share) | $174.2 million ($0.67/share) |
| Operating Earnings | $164.0 million ($0.63/share) | $258.4 million ($0.99/share) |
| Total Revenues (GAAP) | $2,188.6 million | $2,500.7 million |
| Operating Revenues | $2,261.2 million | $2,660.3 million |
| Assets Under Management (AUM) | $236.6 billion | $304.2 billion |
| Cash & Cash Equivalents | $2.7 billion | Filing text does not provide clear Q1 2008 value |
| Highly Liquid Assets | $5.8 billion | Filing text does not provide clear Q1 2008 value |
| Book Value per Share (GAAP) | $8.03 | $24.36 |
Material Changes vs. Prior Period
- Earnings Decline: Net income decreased 35% and operating earnings decreased 37% year-over-year, primarily driven by lower asset valuations and higher costs for employee pension and post-retirement benefits ($0.08 EPS impact).
- Asset Valuation Impact: Total AUM declined 22% to $236.6 billion due to market performance. Book value per share dropped significantly to $8.03 from $24.36, largely due to unrealized capital losses and foreign currency translation.
- Impairment Charges: The company adopted new FASB requirements for other-than-temporary impairments (OTTI). Total OTTI losses on available-for-sale securities were $146.6 million (pre-tax), with a net impairment loss of $96.0 million recognized in earnings.
- Expense Reduction: Management reduced compensation and other expenses by $86 million (15%) compared to Q1 2008.
- Segment Performance:
- U.S. Asset Accumulation: Operating earnings fell to $93.1 million from $139.1 million due to a 22% decline in average account values.
- Global Asset Management: Operating earnings dropped to $6.8 million from $19.8 million due to a 20% decline in AUM and real estate market slowdown.
- International: Operating earnings declined to $17.0 million from $31.7 million, impacted by deflation in Chile and currency weakening.
Outlook, Management Commentary, and Risks
Management Commentary: CEO Larry Zimpleman noted that operating earnings were solid due to expense initiatives offsetting revenue declines. The company highlighted strong net cash flows of $4.6 billion in asset management and accumulation. Management continues to scale back the "Investment Only" business and reduce exposure to commercial real estate and BBB bonds.
Liquidity and Capital:
- Holding company cash increased to approximately $850 million, sufficient to meet 2009 obligations, including $441 million of senior debt maturing in August.
- Access to a $579 million credit facility remains available.
- Life company risk-based capital ratio estimated between 350% and 375%.
Risks and Contingencies:
- Market Conditions: Adverse capital and credit market conditions may affect liquidity and access to capital.
- Investment Risk: Continued volatility may diminish asset values and investment returns credited to customers.
- Regulatory/Legal: Changes in laws, regulations, or accounting standards could reduce profitability. The company faces potential risks from re-insurer defaults and legal contingencies.
- Forward-Looking Statements: The company cautions that actual results may differ materially from anticipated results due to global economic conditions and government actions.
Investor Verification Checklist
- OTTI Accounting Impact: Verify the specific breakdown of the $96.0 million net impairment loss and the $50.6 million non-credit portion recognized in other comprehensive income under the new FASB rules.
- Liquidity Sufficiency: Confirm the holding company's ability to service the $441 million senior debt maturing in August 2009 given the current cash position of $850 million.
- Expense Run-Rate: Assess the sustainability of the $86 million expense reduction achieved in Q1 2009.
- Asset Quality: Review the composition of the remaining "Investment Only" block and the specific exposure to commercial real estate and BBB bonds following the reported reductions.
- International Exposure: Evaluate the ongoing impact of deflation in Chile and currency fluctuations on the International Asset Management segment.