Business context and reporting period
Principal Financial Group, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2023. The company operates retirement and income solutions, asset management, benefits and protection, and corporate businesses. Comparisons with 2022 reflect recast results following adoption of long-duration targeted improvements (LDTI); the company also reorganized its reportable segments in 2023.
Financial performance and key metrics
Amounts are in millions of dollars except per-share data. Prior-year amounts are as recast.
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenues | $3,557.3 | $6,664.5 | $6,376.3 | $9,760.0 |
| Income before income taxes | $453.6 | $3,970.6 | $241.1 | $4,349.0 |
| Net income attributable to PFG | $388.8 | $3,118.7 | $248.7 | $3,457.4 |
| Diluted earnings per share | $1.58 | $12.17 | $1.01 | $13.30 |
| Pre-tax operating earnings | $448.0 | $528.7 | $888.8 | $997.7 |
| Net cash from operating activities | Six-month period: $1,797.8 vs. $838.7 | $1,797.8 | $838.7 |
Revenue and GAAP earnings fell sharply against 2022, which included unusually large gains from the funds-withheld reinsurance arrangement. In Q2 2022, the company recorded a $3,067.3 gain from the fair-value change in its funds-withheld embedded derivative and $689.0 in realized gains on funds-withheld assets. In the first half of 2023, the embedded derivative generated a $532.7 loss, compared with a $3,067.3 gain in the first half of 2022. Pre-tax operating earnings, a company-defined non-GAAP measure, also declined.
Q2 pre-tax operating earnings by segment were Retirement and Income Solutions $232.3 (prior year $254.6), Principal Asset Management $188.2 ($269.4), Benefits and Protection $124.9 ($157.6), and Corporate loss of $97.4 (loss of $152.9). Management cited lower asset-management fees and performance fees, lower variable investment income, and a decline in Retirement and Income Solutions net revenue; higher pension-risk-transfer annuity sales increased both premiums and related benefit expenses. Benefits and Protection Specialty Benefits growth partly offset pressure in Life Insurance.
At June 30, 2023, total assets were $299.2 billion, investments $96.8 billion, cash and cash equivalents $4.1 billion, and stockholders’ equity $10.4 billion. Total liabilities were $288.5 billion, including $44.3 billion of future policy benefits and claims and $42.4 billion of contractholder funds. Separate-account assets and matching liabilities were each $164.2 billion; investment risk for these accounts is generally borne by clients. Long-term debt was $4.0 billion and short-term debt $26.3 million. Debt to equity was 39% and debt to capitalization 28%.
For the first six months, investing activities used $1,082.4 million and financing activities used $1,489.5 million; cash decreased $774.1 million to $4,073.9 million. Financing outflows included investment-contract withdrawals exceeding deposits, dividends of $310.4 million, and treasury stock purchases of approximately $288.9 million. Management reported $1,455.7 million of cash and liquid assets at holding companies and other subsidiaries available for corporate purposes.
Material changes, outlook, risks and unusual items
- Comparability: PFG adopted LDTI on January 1, 2023, applied it retrospectively to the presented periods, and recorded opening transition reductions of $159.9 million to retained earnings and $5,128.0 million to accumulated other comprehensive income (AOCI). Management said adoption did not materially affect the consolidated statements of operations. Segment reporting was also reorganized, without changing consolidated financial statements.
- Investments and AOCI: Available-for-sale fixed maturities had $7.18 billion of gross unrealized losses at June 30. Management attributed the losses primarily to interest rates and credit spreads, said it expected to recover amortized cost, and reported no intent or expected need to sell before recovery. Net unrealized losses on available-for-sale securities and derivatives in AOCI were $5.29 billion.
- Capital and debt actions: PFG issued $700 million of senior notes in March 2023, using proceeds to repay notes due in 2023 and redeem floating-rate notes due in 2055; early extinguishment incurred a one-time operating expense. First-half dividends and repurchases returned $600.5 million to common stockholders. The quarterly dividend declared was $0.64 per share.
- Liquidity and obligations: Management said available liquidity, operating cash flows, credit facilities, and contingent funding arrangements were sufficient for reasonably foreseeable needs, and noted the next long-term debt maturity was in 2025. Principal Life paid $325 million of extraordinary dividends to its parent in the first half, with regulatory approval. PFG’s ordinary dividend capacity for 2023 was approximately $430.1 million, subject to Iowa law and regulatory requirements.
- Risks and contingencies: Key exposures include interest rates, credit and equity markets, foreign exchange, insurance and annuity guarantees, policyholder behavior, investment valuation, reinsurance counterparty performance, regulation, litigation, and operational and technology risks. Management did not identify material changes to the risk factors in its 2022 Form 10-K. It said pending litigation or regulatory matters were not expected to have a material adverse effect, but generally could not estimate possible losses. Guarantees to third parties had approximately $85 million of maximum exposure; contingent Treasury-strip funding agreements had $750 million maximum exposure. The future maximum exposure under Chilean fund-return guarantees is indeterminable.
- Outlook: The filing provides no specific full-year earnings or revenue guidance. Management cautioned that interim results are not necessarily indicative of full-year results. A hypothetical 100-basis-point parallel U.S. rate decline was estimated to affect segment pre-tax operating earnings by between negative 1% and positive 1% over the next 12 months; a separate 10% equity-market decline scenario was estimated to reduce annual segment pre-tax operating earnings by approximately 5%–8% over the next 12 months.
Important facts for investors to verify
- Reconcile GAAP earnings with pre-tax operating earnings and assess the funds-withheld derivative’s effect on period-to-period comparisons.
- Review asset-management AUM, net flows, performance-fee trends, and the impact of lower average AUM on fee revenue.
- Monitor investment credit quality, commercial real estate exposures, unrealized fixed-maturity losses, and whether liquidity conditions could force asset sales.
- Assess insurance reserve and market-risk-benefit sensitivity to rates, equity markets, policyholder behavior, and actuarial assumptions under LDTI.
- Confirm holding-company liquidity, statutory dividend capacity, reinsurance recoverables and counterparty protections, debt costs, and capital-return sustainability.