Principal Financial Group, Inc. — FY 2009 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2009; it is not a quarterly filing. Principal is a diversified retirement, asset-management and insurance group, with U.S. and international operations across four reporting segments plus Corporate. It reported $284.7 billion of assets under management (AUM) and approximately 18.9 million customers at year-end.
Financial results and condition
| Metric | FY 2009 | FY 2008 |
|---|---|---|
| Total revenues | $8,849.1 million | $9,935.9 million |
| Net investment income | $3,400.8 million | $3,994.3 million |
| Net realized capital losses | $398.3 million | $694.1 million |
| Income from continuing operations | $645.7 million | $465.8 million |
| Net income available to common stockholders | $589.7 million | $425.1 million |
| Diluted EPS | $1.97 | $1.63 |
| Operating cash flow | $2,243.0 million | $2,224.8 million |
| Cash and cash equivalents, year-end | $2,240.4 million | $2,608.0 million |
| Total debt, year-end | $1,686.2 million | $1,791.4 million |
- Revenue fell about 11% year over year as premiums, fees and investment income declined. Net income available to common shareholders rose about 39%, primarily because net realized capital losses decreased; 2009 still included $453.2 million of net impairment losses on available-for-sale securities.
- Segment operating earnings, management’s non-GAAP measure, were $804.1 million, down from $942.7 million. Global Asset Management earnings fell to $38.2 million from $94.4 million; Life and Health earnings were $242.3 million versus $270.4 million. The filing does not provide a single consolidated operating-margin measure.
- AUM increased to $284.7 billion from $247.0 billion, supported by market recovery and positive international flows. Global Asset Management AUM rose to $205.3 billion from $190.0 billion; International AUM rose to $34.6 billion from $23.1 billion.
- Operating cash flow was broadly stable. Investing activities provided $1,026.8 million, compared with $2,917.2 million used in 2008; financing activities used $3,637.4 million, largely reflecting investment-contract withdrawals and short-term debt repayment.
- Total assets were $137.8 billion versus $128.2 billion; stockholders’ equity rose to $8.0 billion from $2.6 billion. The improvement included a substantial recovery in accumulated other comprehensive loss, which narrowed to $1.0 billion from $4.9 billion.
- Debt-to-capitalization excluding accumulated other comprehensive income improved to 16% from 20%. The holding companies reported $761.7 million of excess capital in cash and highly liquid assets. Principal Life’s estimated statutory dividend capacity for 2010 was $608.7 million, subject to regulatory limits and approvals.
Material changes and unusual items
- On May 11, 2009, the company issued 58.2 million common shares at $19.75, raising net proceeds of $1,109.1 million. Shares outstanding increased from 259.3 million to 319.0 million at year-end.
- In May 2009, it issued $750 million of senior notes: $400 million at 7.875% due 2014 and $350 million at 8.875% due 2019. Proceeds primarily refinanced notes maturing in August 2009 and supported general corporate purposes.
- Defined-benefit pension expense increased to $157.6 million pre-tax from $12.3 million in 2008, mainly due to weak prior asset returns and a lower discount-rate assumption. Management estimated 2010 pension expense of $110.4 million.
- The company reported an $18.9 million after-tax increase in third-quarter 2009 net income from correcting a prior-period deferred policy acquisition cost (DPAC) amortization error; it concluded prior periods were not materially misstated.
- A change in impairment accounting effective January 1, 2009 separated credit impairment losses recognized in income from certain noncredit losses recognized in other comprehensive income. This limits direct comparability with earlier periods.
Outlook, commentary, and principal risks
Management described company-wide expense savings and continued elevated liquidity as responses to the downturn. It said market recovery supported AUM in 2009, while lower yields on liquid assets weighed on investment income. The filing gives no specific consolidated earnings or revenue guidance; its risk discussion said management did not expect difficult economic conditions to improve in the near term.
- Investment and credit exposures remain material: $44.5 billion of U.S. fixed-maturity securities included 7.7% below investment grade; gross unrealized losses on U.S. fixed maturities were $2.9 billion at year-end. Commercial mortgage loans totaled $10.1 billion, with problem, potential-problem and restructured loans rising to 6.20% of the portfolio from 1.64%.
- Market volatility, interest rates, credit spreads, real-estate values and liquidity can affect investment values, impairments, earnings, AUM and policyholder behavior. The company said 39% of invested assets were in relatively less-liquid private fixed maturities, commercial mortgages and real estate.
- Insurance risks include changes in mortality, morbidity, lapse and claims experience; policy surrenders; reserve estimates; and costs or availability of reinsurance. The company remains responsible to policyholders if a reinsurer fails to perform.
- Principal Life’s ability to remit dividends to the parent is restricted by Iowa law. Rating actions may also affect sales, surrenders, collateral requirements and access to capital. Principal Life’s year-end insurer ratings included A+ from A.M. Best, AA- from Fitch, A+ from S&P and Aa3 from Moody’s; agency outlooks were mixed.
- Pending matters included ERISA and investment-fee litigation and lawsuits concerning withdrawals from the Principal U.S. Property Separate Account. Management did not expect pending litigation or regulatory matters to have a material adverse effect on the business or financial position, but acknowledged outcomes could affect a particular period. Certain guarantees had maximum exposure of approximately $239 million; management considered material payments remote.
Important facts for investors to verify
- Whether the decrease in realized losses and the AOCI recovery are sustainable, and how much of 2009 earnings reflects market-driven or accounting effects.
- Further development of commercial mortgage delinquencies, valuation allowances and long-duration fixed-maturity unrealized losses.
- Capital and liquidity at the parent versus regulated insurance subsidiaries, including statutory surplus, dividend capacity and rating-agency outlooks.
- The earnings and per-share effects of the 2009 share issuance, alongside the company’s future capital-return and dividend decisions.
- Progress in restoring segment operating earnings, especially Global Asset Management and U.S. Asset Accumulation, as markets and customer activity evolve.
Audit and controls: Ernst & Young issued an unqualified opinion on the consolidated financial statements and concluded internal control over financial reporting was effective as of December 31, 2009.