Principal Financial Group, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This annual filing includes unaudited quarterly results; it is not a standalone fourth-quarter filing. Principal provides retirement, asset management and insurance products through four operating segments and had $626.8 billion of AUM and approximately 24.2 million customers at year-end.
Financial results and position
Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
| Metric | 2018 | 2017 |
|---|---|---|
| Total revenue | $14,237.2 | $14,093.2 |
| Income before taxes | $1,784.4 | $2,252.2 |
| Net income attributable to PFG | $1,546.5 | $2,310.4 |
| Diluted EPS | $5.36 | $7.88 |
| Net cash from operating activities | $5,156.5 | $4,188.0 |
| AUM | $626.8 billion | $668.6 billion |
| Total assets | $243,036.1 | $253,941.2 |
| Total debt | $3,302.5 | $3,217.9 |
| PFG stockholders’ equity | $11,390.0 | $12,849.3 |
- Revenue rose about 1%, while net income attributable to PFG fell about 33%. Net investment income increased to $3,629.2 million from $3,459.3 million; net realized capital results shifted to a $75.4 million loss from a $524.2 million gain.
- The effective tax rate was 13% versus negative 3% in 2017. The 2018 filing reports a $230.7 million tax expense; 2017 included a $568.3 million net benefit associated with U.S. tax reform.
- Operating, investing and financing cash flows were respectively $5,156.5 million provided, $5,702.5 million used and $1,052.7 million provided. Year-end cash and cash equivalents were $2,977.5 million.
- Debt-to-equity was 29% versus 25%, and debt-to-capitalization was 22% versus 20%. The company reported $1,569.2 million of cash and liquid assets at holding companies and other subsidiaries. Principal Life’s statutory surplus exceeded minimum risk-based capital requirements; its 2019 ordinary dividend limit was approximately $1,085.7 million, subject to Iowa regulatory rules.
- Annual common dividends declared were $2.10 per share, up from $1.87. PFG returned $1,270.2 million to common stockholders through dividends and repurchases and repurchased 12.1 million shares.
Fourth-quarter results and material changes
- For Q4 2018, revenue was $3,770.6 million, net income attributable to PFG was $236.5 million and diluted EPS was $0.83. Q4 2017 figures were $3,237.7 million, $841.8 million and $2.87, respectively. The filing attributes the year-over-year annual earnings decline principally to the 2017 tax benefit and real-estate transaction gain, rather than to a directly comparable Q4 explanation.
- 2017 included a $690.9 million pre-tax ($410.8 million after-tax) gain from real-estate transactions. In 2018, a real-estate team realignment generated a $253.1 million accelerated performance fee, partly offset by $151.9 million of related expenses, adding $101.2 million to Principal Global Investors’ pre-tax operating earnings.
- Principal Global Investors’ AUM declined $37.4 billion to $393.5 billion, reflecting $15.2 billion of net outflows, $13.7 billion of negative investment performance and $11.0 billion of disposals, partly offset by $3.5 billion from an acquisition. Company-wide AUM also declined, with market performance and foreign exchange contributing to the change.
- Segment pre-tax operating earnings, a non-GAAP measure, increased to $1,954.5 million from $1,873.7 million. Principal Global Investors and U.S. Insurance Solutions improved; Retirement and Income Solutions and Principal International declined.
- Other comprehensive income was a loss of $1,835.7 million, including $1,529.6 million of after-tax unrealized losses on available-for-sale securities and $287.6 million of foreign-currency translation losses. This contributed to lower reported equity.
Outlook, risks and unusual items
- The filing provides no numerical earnings or revenue guidance. Management describes growth opportunities in retirement, employee benefits and international savings, but notes pressure on fee revenues from lower account values and AUM. Segment results will be recast in 2019 for changes to expense and investment-income allocations, with no effect on total-company results.
- Management identifies interest-rate and credit-spread movements, market declines, investment performance and client withdrawals, insurance claims and reserving assumptions, foreign exchange, and regulatory and tax changes as significant risks. Low rates may compress spreads and increase reserves; rapidly rising rates could prompt surrenders and asset sales.
- Investments included $57.1 billion of U.S. fixed maturities, about 4% below investment grade, and $14.0 billion of commercial mortgage loans. California represented 21% of U.S. commercial mortgage loans; the filing reported no commercial mortgage loans in foreclosure. Gross unrealized losses on U.S. available-for-sale fixed maturities were $1.2 billion at year-end, primarily associated with higher rates and wider spreads.
- The filing states that no litigation or regulatory contingencies required disclosure as of year-end. Maximum exposure under certain guarantees was approximately $126 million, with management viewing material payments as remote; a Chilean minimum-return guarantee has no determinable maximum exposure. Unfunded investment commitments were $664.7 million.
- Principal’s financial-strength ratings were affirmed with stable outlooks; S&P upgraded PFG senior unsecured debt to A- in 2018. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- How much of 2018 earnings and future results depend on recurring operations versus the 2017 tax and real-estate items and the 2018 accelerated performance fee.
- Whether AUM and net customer cash flows recover, particularly in Principal Global Investors, and how market declines affect fee revenue.
- The sensitivity of insurance spreads, reserves, guarantees and hedging costs to interest rates, equity markets and policyholder behavior.
- The quality and liquidity of the investment portfolio, including unrealized losses, private assets, mortgage exposures and collateral-posting needs.
- Holding-company liquidity, debt and access to subsidiary dividends, including regulatory limits on Principal Life distributions and the terms of the contingent P-Caps funding agreements.
- The effects of acquisitions, international currency movements and forthcoming accounting changes, especially the long-duration insurance standard scheduled for 2021.