PRINCIPAL FINANCIAL GROUP INC quarterly report, Q3 FY2015

Principal Financial Group, Inc. — Q3 2015 Form 10-Q

Reporting period: Three and nine months ended September 30, 2015; balance sheet compared with December 31, 2014. Amounts are in U.S. dollars. The company provides retirement and investment products, asset management, international savings and insurance products.

Financial results and position

MetricQ3 2015Q3 2014Nine months 2015Nine months 2014
Total revenue$3,240.9 million$2,484.3 million$9,157.4 million$7,569.6 million
Income before tax$369.2 million$393.8 million$1,121.8 million$1,177.7 million
Net income attributable to PFG$300.4 million$248.9 million$980.4 million$865.4 million
Net income available to common shareholders$300.4 million$240.7 million$955.7 million$840.7 million
Diluted EPS$1.01$0.77$3.20$2.75
Declared common dividend per share$0.38$0.34$1.12$0.94
  • Q3 revenue rose 30%; nine-month revenue rose 21%. Much of the premium increase reflected higher sales of single-premium group and individual annuities with life contingencies, which can vary substantially by period and customer.
  • Despite higher common earnings, pretax income declined in both comparisons. Q3 operating earnings by segment totaled $317.0 million versus $353.7 million; nine-month segment operating earnings were $967.3 million versus $993.9 million. These are non-GAAP measures reconciled in the filing.
  • Net investment income was $753.5 million for Q3 and $2,267.3 million for nine months, down from $770.4 million and $2,444.1 million. Annualized portfolio yield was 4.4% for the nine-month period versus 4.9% a year earlier.
  • Operating cash flow was $3,323.0 million for nine months, up from $2,197.6 million. Investing activities used $1,766.8 million; financing activities used $905.9 million. Cash and equivalents ended at $2,514.2 million, versus $1,863.9 million at year-end 2014.
  • Total assets were $215.4 billion, down from $219.1 billion; total liabilities were $205.6 billion. Stockholders’ equity was $9.7 billion, down from $10.2 billion. Separate-account assets and matching liabilities were each $134.0 billion and are generally client-directed and client-risk-bearing.
  • Total debt was $3.51 billion, versus $2.56 billion at year-end; debt to capitalization excluding AOCI rose to 26% from 20%. Parent and other holding-company liquid assets available for corporate purposes were $797 million. PFG reported $1.005 billion of revolving credit facilities, with $221.6 million of short-term debt outstanding.

Material changes and unusual items

  • Q3 common income benefited from comparison with the prior-year Chilean tax-law charge, which had raised 2014 tax expense. Nine-month 2015 results included a $105.2 million tax benefit from a merger of Chilean legal entities, partly offset by a $30.3 million reduction in net income following a court ruling affecting uncertain tax positions.
  • Q3 actuarial assumption updates and model refinements increased total-company net income by $26.2 million. The corresponding 2014 updates increased it by $45.3 million. Impacts varied by segment and financial-statement line.
  • A $23.0 million impairment of Brazilian mutual-fund intangibles was recorded in Q3, attributed to macroeconomic and market conditions, higher discount rates and a changed business mix.
  • On September 1, the company completed its $335.5 million acquisition of AXA’s Hong Kong MPF and ORSO pension business and entered a 15-year distribution agreement. It also acquired an additional 2.5% of Columbus Circle Investors, bringing ownership to 97.5%.
  • In June, PFG redeemed Series A and B preferred shares for $550 million, funded primarily by issuing $400 million of senior notes and $400 million of junior subordinated notes. Common dividends and repurchases returned $518.4 million to common shareholders during the first nine months.
  • Other comprehensive loss was $583.5 million for nine months, including a $438.3 million foreign-currency translation loss and a $221.0 million after-tax loss on unrealized available-for-sale securities. AOCI moved from $50.4 million of income at year-end to a $524.4 million loss.

Outlook, commentary and risks

  • The filing provides no quantified company earnings or revenue guidance. Management says 2015 operating results are not necessarily indicative of full-year results and expected organizational changes would not materially affect consolidated financial statements.
  • International AUM ended at $106.2 billion, down from $114.6 billion at year-end, primarily due to a $26.9 billion adverse currency-translation effect, partly offset by net flows, investment performance and acquisitions. Management reported $33.2 million of adverse currency impact on segment operating earnings for nine months.
  • Management cites prolonged low interest rates, credit spreads, market volatility, investment valuations, policyholder behavior, foreign exchange, competition, regulation, litigation, tax uncertainty, cybersecurity, catastrophe and reinsurer performance among material risks. A hypothetical 100-basis-point rate increase produced an estimated $2.40 billion net fair-value loss; the company cautions this is a scenario, not a forecast.
  • Legal matters include the ACE fee litigation scheduled for trial in April 2016, an appeal in the McCaffree ERISA case, and Lehman-related claims of approximately $550 million including disputed interest. No losses were accrued for these matters because management said loss was not probable and reasonably estimable; outcomes remain uncertain.
  • Other guarantees had maximum exposure of approximately $205 million, with management describing material payment likelihood as remote. The Chilean pension-fund minimum-return guarantee has no determinable maximum future exposure.
  • Management stated disclosure controls were effective and reported no material change in internal control over financial reporting. S&P, Fitch and A.M. Best affirmed relevant ratings with stable outlooks during 2015.

Key facts for investors to verify

  • How much of premium and revenue growth reflects large, variable single-premium annuity transactions versus recurring business.
  • Underlying segment trends, particularly weaker Retirement and Investor Services and Principal International operating earnings, and the company’s non-GAAP reconciliations.
  • Whether investment yields, spread income and credit quality remain pressured; unrealized fixed-income losses increased, primarily from wider credit spreads.
  • The durability of reported earnings after the Chilean tax benefit, actuarial unlocking, and Brazil intangible impairment; also monitor uncertain tax positions.
  • Debt growth, rising leverage, parent-level liquidity and the ability of regulated subsidiaries to upstream dividends.
  • Potential outcomes of the disclosed legal cases and guarantees, including the unestimable Chilean minimum-return exposure.