PFG

Principal Financial Group Inc. - 10-Q Summary (Q3 2005)

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2005. Principal Financial Group, Inc. (PFG) provides financial products and services through four primary segments: U.S. Asset Management and Accumulation, International Asset Management and Accumulation, Life and Health Insurance, and Corporate and Other. The Mortgage Banking segment was sold in 2004 and is reported as discontinued operations.

Key Financial Metrics (Nine Months Ended Sept 30, 2005)

• Total Revenues: $6,562.5 million (up from $6,063.5 million in 2004).
• Net Income: $663.8 million (up from $612.1 million in 2004).
• Net Income Available to Common Stockholders: $654.4 million (up from $612.1 million in 2004).
• Diluted Earnings Per Share (EPS): $2.23 (up from $1.92 in 2004).
• Total Assets: $121.1 billion (up from $113.8 billion at Dec 31, 2004).
• Invested Assets: $57.0 billion (excluding separate account assets).
• Cash and Cash Equivalents: $1.1 billion (up from $450.6 million at Dec 31, 2004).
• Debt: Short-term debt of $379.4 million; Long-term debt of $806.7 million.
• Stockholders' Equity: $7.8 billion.

Material Changes vs. Prior Period

• Revenue Growth: Driven by a 17% increase in fees and other revenues ($1,245.8 million) and a 4% increase in net investment income ($2,483.4 million). Premiums increased 3% to $2,826.4 million.
• Capital Gains/Losses: Net realized/unrealized capital gains improved significantly to $6.9 million, compared to a loss of $130.1 million in the prior year, largely due to fewer impairments and recoveries on previously impaired securities.
• Discontinued Operations: Income from discontinued operations was $16.0 million, primarily from gains on real estate sales, partially offset by a $7.7 million loss related to the prior sale of Principal Residential Mortgage, Inc. This compares to $131.9 million in 2004, which included significant gains from the sale of the Mortgage Banking segment and Argentine companies.
• Preferred Stock: PFG issued Series A and Series B perpetual preferred stock in June 2005, raising $542.0 million in net proceeds. Preferred dividends of $9.4 million were paid in Q3 2005.
• Share Repurchases: The company repurchased approximately 22.2 million shares of common stock during the nine-month period, including an accelerated stock repurchase agreement for 13.7 million shares in June 2005.

Guidance, Outlook, Risks, and Unusual Items

• Outlook: Management expects cash flow from consolidated operating activities to provide sufficient liquidity for operations and debt servicing. No specific earnings guidance was provided in this filing.
• Unusual Items:
  • Tax Payments: Operating cash flow decreased partly due to a $445.3 million payment of IRS deficiencies for tax years 1999-2001 in Q1 2005. PFG plans to file refund claims for disputed adjustments.
  • Accounting Changes: PFG is adopting SFAS 154 (Accounting Changes) and SFAS 123R (Share-Based Payment) effective January 1, 2006. Management does not expect a material impact from SFAS 123R as fair-value methods were already used for options granted after 2002.
• Risks and Contingencies:
  • Litigation: PFG is involved in various lawsuits, including a class action regarding demutualization allocation (motion to dismiss granted, plaintiff appealed) and indemnification claims from Westpac regarding the sale of BT Financial Group (approx. $38 million claimed). Management does not believe these will have a material adverse effect.
  • Market Risk: Significant exposure to interest rate risk, equity risk, and foreign currency risk. A 100 basis point increase in interest rates is estimated to decrease net fair value by $97.9 million.
  • Investment Risk: Gross unrealized losses on fixed maturity securities increased to $175.1 million, concentrated in industrial manufacturing and mortgage-backed securities.

Investor Verification Checklist

• Verify the status and potential refund amount of the $445.3 million IRS deficiency payment made in Q1 2005.
• Monitor the outcome of the Westpac indemnification claims related to the BT Financial Group sale.
• Review the composition of the $175.1 million in gross unrealized losses on fixed maturity securities to assess credit risk exposure.
• Confirm the settlement details and final share count of the accelerated stock repurchase agreement initiated in June 2005.
• Assess the impact of the new SOP 05-1 on deferred acquisition costs for future internal replacements of insurance contracts.