Business Context and Reporting Period
Company: Principal Financial Group, Inc. (PFG)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Business Overview: PFG provides financial products and services through five segments: U.S. Asset Accumulation, Global Asset Management, International Asset Management and Accumulation, Life and Health Insurance, and Corporate. The company operates as a savings and loan holding company and a life insurance holding company.
Key Financial Metrics
| Metric (in millions) | Q1 2009 | Q1 2008 |
|---|---|---|
| Total Revenues | $2,188.6 | $2,500.7 |
| Net Income | $122.6 | $177.6 |
| Net Income Attributable to PFG | $121.0 | $182.4 |
| Net Income Available to Common Stockholders | $112.8 | $174.2 |
| Earnings Per Share (Diluted) | $0.43 | $0.67 |
| Total Assets | $123,234.8 | $128,182.4 |
| Total Stockholders' Equity | $2,708.9 | $2,569.3 |
| Cash and Cash Equivalents | $2,699.6 | $1,120.7 |
| Total Debt (Short-term + Long-term) | $1,823.5 | $1,791.4 |
| Net Realized Capital Losses | $(63.3) | $(126.0) |
| Other-Than-Temporary Impairments (OTTI) | $(146.6) | $(67.5) |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased $312.1 million (12.5%) primarily due to lower premiums, fees, and net investment income driven by declining equity markets and reduced assets under management (AUM).
- Net Income Decrease: Net income available to common stockholders fell $61.4 million (35.3%). Key drivers included lower profitability in U.S. Asset Accumulation (due to lower fees and increased DPAC amortization), reduced earnings in Global Asset Management (due to market downturns), and foreign currency impacts in International operations.
- Investment Impairments: Total OTTI losses increased to $146.6 million from $67.5 million. However, net realized capital losses improved significantly (decreased from $126.0 million to $63.3 million) due to mark-to-market gains on derivatives and fixed maturity securities classified as trading.
- Liquidity Position: Cash and cash equivalents increased significantly to $2.7 billion from $1.1 billion as the company adopted a more conservative liquidity strategy in response to market conditions.
- Segment Performance:
- U.S. Asset Accumulation: Operating earnings decreased $46.0 million due to lower fee income and higher DPAC amortization.
- Global Asset Management: Operating earnings decreased $13.0 million due to reduced AUM and revenues.
- International: Operating earnings decreased $14.7 million due to deflation in Chile and weakening foreign currencies.
Guidance, Outlook, Risks, and Unusual Items
- Accounting Changes: The company adopted FSP FAS 115-2 effective January 1, 2009, which changed the recognition and presentation of OTTI. This resulted in a $9.9 million increase to retained earnings and a corresponding decrease to accumulated OCI. Under this guidance, credit losses are recognized in net income, while non-credit losses are recognized in OCI.
- Market Risks: Management highlights significant risks from adverse capital and credit market conditions, continued equity market volatility, and potential rating downgrades. A downgrade could increase policy surrenders and withdrawals.
- Liquidity Strategy: The company is maintaining higher cash balances and liquid investments. It has applied to the Treasury's Capital Purchase Program (CPP) but withdrew its application for the FDIC's Temporary Liquidity Guarantee Program. Commercial paper eligibility under the Federal Reserve's CPFF was lost due to rating downgrades, requiring repayment from existing liquidity.
- Cost Reductions: To maximize capital, the company implemented expense initiatives including temporary salary reductions (2%-10%) for employees and management, hiring limitations, and reduced merit increases.
- Unusual Items: The company terminated its commercial mortgage securities issuance operation; losses from this operation are reported as other after-tax adjustments rather than discontinued operations.
Investor Verification Checklist
- Investment Portfolio Quality: Verify the extent of unrealized losses in the fixed maturity portfolio ($8.2 billion gross unrealized losses) and the company's intent to hold these securities to maturity versus potential future impairments.
- Liquidity Coverage: Confirm the sufficiency of the $2.7 billion cash position and the $829.8 million in credit facilities to meet obligations, especially given the loss of CPFF eligibility.
- Rating Agency Actions: Monitor recent rating changes (A.M. Best negative outlook, Moody's downgrade to Aa3, S&P downgrade to A+) and their potential impact on policyholder behavior and cost of capital.
- Derivative Exposure: Review the $36.7 billion notional amount of derivative instruments and the associated credit exposure ($1.5 billion net) to assess counterparty risk.
- Segment AUM Trends: Track Assets Under Management (AUM) trends in U.S. Asset Accumulation and Global Asset Management segments, as fee revenues are directly correlated to these balances.