Principal Financial Group, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; balance-sheet comparisons are with December 31, 2023. Figures are unaudited and in U.S. dollars. Principal provides retirement and income solutions, asset management, and benefits and protection products.
Financial performance and position
- Revenue: $4.05 billion, up 43.8% from $2.82 billion. The increase was heavily affected by the funds-withheld embedded derivative: a $197.0 million gain in Q1 2024 versus a $626.6 million loss in Q1 2023.
- Profit: Net income attributable to Principal was $532.5 million, compared with a $140.1 million loss. Diluted EPS was $2.22 versus a loss of $0.58 per share. GAAP pre-tax income was $627.1 million versus a $212.5 million loss; the resulting 15.5% pre-tax margin is materially affected by the derivative swing.
- Operating results: Segment pre-tax operating earnings increased 7.1% to $472.2 million from $440.8 million. Segment operating revenues rose to $3.80 billion from $3.44 billion; the calculated pre-tax operating margin on those revenues was approximately 12.4%, versus 12.8%.
- Segment highlights: Retirement and Income Solutions earnings were $262.2 million, up from $249.8 million; Benefits and Protection earnings were $111.8 million, up from $99.3 million; Principal Asset Management earnings were $187.1 million, roughly flat with $187.8 million. Corporate pre-tax losses narrowed to $88.9 million from $96.1 million.
- Cash flow: Operating cash flow was $584.2 million, down from $695.3 million. Investing activities used $1.34 billion; financing activities provided $219.7 million. Cash and cash equivalents ended at $4.17 billion, down from $4.71 billion at year-end.
- Assets and equity: Total assets were $308.7 billion and total stockholders’ equity was $11.23 billion. Separate-account assets and liabilities were each $171.8 billion and generally represent client-directed investments and matching obligations.
- Debt and capital: Total debt was $3.98 billion, including $3.93 billion of long-term debt. Debt to equity was 36% and debt to capitalization 26%. Long-term debt was essentially unchanged from year-end; the next maturity was stated to be in 2025.
- Liquidity: Management said it believes liquidity is sufficient for reasonably foreseeable needs. Holding companies and other subsidiaries held $2.21 billion of cash and liquid assets for corporate purposes. An $800 million committed credit facility was undrawn; the company reported $50.7 million of short-term debt.
- Shareholder returns: Q1 dividends were $162.4 million and share repurchases were $232.3 million. The Board authorized an additional share-repurchase program of up to $1.5 billion in February 2024. The quarterly dividend declared was $0.69 per share, compared with $0.64 a year earlier.
Material changes and notable items
- Premiums and other considerations rose to $1.68 billion from $1.45 billion, primarily reflecting higher single-premium pension risk-transfer sales and growth in Specialty Benefits. Such pension risk-transfer premiums can vary significantly from quarter to quarter.
- Net investment income increased to $1.07 billion from $986.7 million, supported by higher income from fair-value hedges and higher yields and average invested assets in U.S. fixed maturities and cash.
- Benefits and claims expenses rose to $2.07 billion from $1.77 billion, including higher reserves associated with pension risk-transfer sales. Operating expenses increased to $1.34 billion from $1.24 billion.
- The effective tax rate was 15%, compared with 37% in Q1 2023. Management attributed the change primarily to the shift from a pre-tax loss to pre-tax income without a proportionate change in permanent tax differences.
- Other comprehensive income was $87.4 million, compared with $679.1 million. It included a $554.7 million after-tax gain from remeasurement of future-policy-benefit discount rates, partly offset by a $358.6 million after-tax loss on available-for-sale securities and a $121.0 million foreign-currency translation loss.
- Gross unrealized losses on available-for-sale fixed maturities were $6.18 billion, up from $5.88 billion at year-end; management attributed the increase primarily to higher interest rates, partly offset by tighter credit spreads. Principal said it expected recovery of amortized cost and did not intend, or expect to be required, to sell the securities before recovery.
- Commercial mortgage loan credit provisions were $16.0 million in Q1. Non-accrual financing receivables increased to $152.7 million from $68.6 million at year-end. The filing reported $123.1 million of problem and restructured commercial mortgage loans, or 0.89% of that portfolio, at March 31.
Outlook, risks and contingencies
- The filing provides no specific full-year earnings or revenue guidance. Management cautioned that first-quarter results are not necessarily indicative of full-year results.
- Management cited capital-market, interest-rate, credit-spread, investment-valuation, insurance-claim and policyholder-behavior risks, as well as risks from regulation, litigation, foreign exchange, reinsurer performance, competition, technology and operations.
- Interest-rate sensitivity analysis estimated that an immediate, parallel 100-basis-point U.S. rate decrease would affect segment pre-tax operating earnings by between negative 1% and positive 1% over the next 12 months, assuming routine management actions. A hypothetical 100-basis-point increase would reduce the net reported fair value of financial assets and derivatives by $2.54 billion; management noted that excluded liabilities would partly offset the economic exposure.
- A hypothetical 10% S&P 500 decline followed by 2% quarterly increases would reduce annual segment pre-tax operating earnings by approximately 5%–8% over the next 12 months. These are illustrative sensitivities, not forecasts.
- Management said pending litigation and regulatory matters are not believed to have a material adverse effect, but possible losses generally cannot be estimated. Disclosed exposures include $84 million of guarantees, up to $750 million under contingent funding agreements, and a Chilean mandatory-fund relative-return guarantee whose future maximum exposure is indeterminable.
- Principal Life paid $440 million of extraordinary dividends to its parent in Q1, with regulatory approval. The filing notes that Iowa law and regulatory approval can constrain future subsidiary distributions and, in turn, holding-company capital returns.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material changes to the risk factors in the prior Form 10-K and no significant credit-rating changes through the filing date.
Important facts for investors to verify
- How much of Q1’s reported earnings improvement reflects ongoing segment performance versus the $823.6 million year-over-year swing in the funds-withheld embedded derivative.
- Whether higher pension risk-transfer sales and the related reserves translate into sustainable earnings, given the product’s potential for large quarterly fluctuations.
- Developments in the fixed-maturity unrealized losses, commercial mortgage loan provisions and non-accrual balances, including property-type and borrower-level exposures.
- Cash generation, holding-company liquidity, subsidiary dividend capacity and progress on the new share-repurchase authorization relative to debt and other capital needs.
- Changes in interest rates, equity markets, foreign exchange and policyholder behavior that could affect investment values, reserves, guarantees and hedging results.
- Any material developments in litigation, regulatory inquiries, reinsurance recoverables or the disclosed contingent guarantees; the filing does not quantify potential losses for many such matters.