PRINCIPAL FINANCIAL GROUP INC quarterly report, Q2 FY2009

Vollständiges Dokument

Principal Financial Group, Inc. — Q2 2009 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2009. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.

Business context

Principal provides retirement and asset-management products, life and health insurance, and related financial services. Its reportable segments are U.S. Asset Accumulation, Global Asset Management, International Asset Management and Accumulation, Life and Health Insurance, and Corporate. Results reflect the financial-market downturn, lower account values and asset-management assets, a shift toward more liquid investments, and unusually high investment impairments.

Financial performance and position

  • Q2 revenue and earnings: Total revenue was $2,157.8, down from $2,658.1 in Q2 2008. Net income was $164.0 versus $183.1; net income attributable to Principal was $158.6 versus $176.6. Income available to common stockholders was $150.3 versus $168.3, and diluted EPS was $0.52 versus $0.64.
  • First-half results: Revenue was $4,346.4 versus $5,158.8. Net income was $286.6 versus $360.7; income available to common stockholders was $263.1 versus $342.5. Diluted EPS was $0.95 versus $1.31.
  • Revenue mix and investment losses: Q2 premiums and other considerations were $937.7, fees and other revenues $515.2, and net investment income $860.1. Q2 net realized capital losses were $155.2, including $134.4 of net impairment losses on available-for-sale securities after $66.5 of noncredit impairment losses was recorded in OCI. For the six months, net realized capital losses were $218.5 and net impairment losses were $230.4.
  • Segment operating earnings: Q2 total segment operating earnings were $200.5 versus $254.1; first-half earnings were $364.5 versus $512.5. These management-defined figures exclude adjusted realized capital losses and other adjustments. Q2 earnings fell in U.S. Asset Accumulation ($137.4 versus $152.9) and Global Asset Management ($8.2 versus $24.1); Life and Health also declined ($57.7 versus $66.7). International segment Q2 operating earnings were $29.3 versus $31.8.
  • Cash flow: First-half operating cash flow was $1,414.9 versus $1,073.1 in 2008; investing activities provided $1,232.8 versus using $2,326.7. Financing activities used $927.2 versus providing $1,433.7, reflecting higher net investment-contract withdrawals, partly offset by equity and debt proceeds. Cash and cash equivalents increased to $4,328.5 from $2,608.0 at year-end.
  • Assets, equity and debt: Total assets were $130,706.6 at June 30, up from $128,182.4 at year-end. Total stockholders’ equity rose to $5,776.5 from $2,569.3; the improvement included a substantial reduction in accumulated other comprehensive loss, to $3,042.4 from $4,911.6, and new equity capital. Total debt was $2,192.8 versus $1,791.4; short-term debt declined to $159.5 from $500.9 while long-term debt rose to $2,033.3 from $1,290.5.
  • Capital raised: In May, the company issued 58.2 million common shares at $19.75 per share, generating $1,109.1 in net proceeds, and issued $750.0 of senior notes: $400.0 at 7.875% due 2014 and $350.0 at 8.875% due 2019. Proceeds were primarily intended to refinance notes due in August 2009, with the remainder for general corporate purposes.

Material changes versus comparable periods

  • Both quarterly and first-half GAAP revenue and common earnings declined. Management attributed pressure to lower fees from reduced account values and AUM, lower investment income from the more liquid investment strategy and low short-term rates, and lower insurance premiums in several businesses.
  • Q2 realized capital losses increased year over year, primarily because of higher fixed-maturity impairments; first-half realized capital losses were lower than in 2008, principally due to improved trading-security and derivative marks, partly offset by higher fixed-maturity impairments.
  • Expense-saving initiatives reduced operating costs, but pension and other post-retirement benefit expense increased. Management estimated 2009 pre-tax pension expense of $157.6, versus $12.3 in 2008, primarily due to lower asset returns and a lower discount rate.
  • U.S. Asset Accumulation account values were $151.1 billion at June 30, versus $177.2 billion a year earlier. Global Asset Management AUM was $190.9 billion versus $233.0 billion; net cash flow was negative in the first half. International AUM was $28.7 billion versus $30.0 billion.
  • Fixed-maturity gross unrealized losses were $5,544.2 at June 30, down from $8,215.6 at December 31, 2008. Management cited narrower credit spreads and improved liquidity in Q2, but said losses were concentrated in corporate and structured securities. The company reported that 92% of its fixed maturities were investment grade by fair value under NAIC designations 1 and 2.

Liquidity, outlook, risks and contingencies

  • Management said liquidity was adequate for current needs and reasonably foreseeable contingencies. Cash and cash equivalents were $4.3 billion; the company also cited $1.742 billion of excess holding-company cash available for debt maturities, interest, preferred dividends, and other holding-company obligations. Credit facilities totaled $841.2, with $159.5 outstanding.
  • Approximately $16.6 billion, or 99%, of institutional GICs and funding agreements could not be redeemed before maturity. Management stated it was increasing cash and liquid holdings and continuing to consider capital-market access, cost controls, and other measures to preserve capital flexibility. It declined preliminary approval to participate in the Treasury Capital Purchase Program.
  • No quantified earnings or revenue guidance was provided. Management said it did not expect difficult capital-market and economic conditions to improve in the near future and warned that cash-heavy positioning would reduce yields while conditions remained strained.
  • Investment and credit risks: Problem, potential-problem, and restructured fixed maturities totaled $646.2, or 1.59% of the portfolio, versus $252.1, or 0.65%, at year-end. Comparable commercial mortgage exposures totaled $432.7, or 4.07% of that portfolio, versus $184.5, or 1.64%. The commercial mortgage valuation allowance increased to $96.9 from $57.0. Further deterioration, forced sales, or revised impairment assumptions could cause additional losses.
  • Market and rating risks: The filing identifies sensitivity to interest rates, equity markets, credit spreads, foreign exchange, asset values, and policyholder behavior. A hypothetical 100-basis-point rate increase was estimated to reduce portfolio net fair value by $38.0. Rating actions in Q2 improved or stabilized some Principal Life outlooks following capital raises, but rating agencies continued to express concerns; a downgrade could increase surrenders, collateral needs, and funding costs. PFS was no longer eligible for the Federal Reserve Commercial Paper Funding Facility after rating downgrades.
  • Derivatives and legal matters: Net derivative counterparty exposure after collateral was $1,086.9 on a gross basis; management’s netted exposure after collateral was $104.3. Certain derivative agreements could require additional collateral if debt ratings fell below investment grade. The company disclosed ongoing ERISA-related class-action litigation and other regulatory and legal matters; management did not expect pending matters to materially affect business or financial position, while noting outcomes remain uncertain. Guarantees had maximum exposure of approximately $230.0, with management describing material payment likelihood as remote.
  • The company adopted revised debt-security impairment accounting effective January 1, 2009; adoption increased retained earnings by $9.9 and reduced accumulated OCI correspondingly. The filing states that the effect of forthcoming VIE accounting standards was still under evaluation.

Important facts for investors to verify

  • Whether investment impairments, mortgage delinquencies, and unrealized securities losses stabilize or lead to further charges or realized losses.
  • Whether cash and capital raised are sufficient to meet holding-company obligations, refinancing needs, collateral calls, and policyholder liquidity demands.
  • Trends in account values, AUM, net flows, insurance membership and sales, and the effect of expense reductions and higher pension costs on segment earnings.
  • Changes in Principal Life and PFG credit ratings, including potential effects on derivative collateral requirements, commercial paper access, surrenders, and funding costs.
  • Developments in disclosed litigation, tax audits, guarantees, and the implementation effects of new accounting guidance.