Principal Financial Group, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; balance-sheet comparisons are with December 31, 2021. Principal provides retirement and income solutions, asset management, international financial services, and U.S. insurance products.
Financial performance and condition
| Metric | Q1 2022 | Q1 2021 or prior balance-sheet date |
|---|---|---|
| Total revenue | $3,110.0 million | $3,208.5 million |
| Net income attributable to Principal | $376.2 million; diluted EPS $1.43 | $517.1 million; diluted EPS $1.87 |
| Pre-tax operating earnings (non-GAAP segment measure) | $506.2 million | $505.6 million |
| Net investment income | $1,118.1 million | $1,028.1 million |
| Net realized capital gains (losses) | $(110.5) million | $151.4 million |
| Operating cash flow | $31.5 million | $140.8 million |
| Cash and cash equivalents | $2,741.2 million | $2,332.0 million |
| Total debt | $4,559.8 million | $4,360.0 million |
| Stockholders’ equity attributable to Principal | $11,897.6 million | $16,069.4 million |
- Revenue fell about 3%, while attributable net income declined about 27%. The filing attributes the earnings decline principally to realized capital losses in 2022 versus gains in 2021. Higher premiums, fees, and net investment income partly offset the decline.
- Pre-tax operating earnings were essentially flat. Retirement and Income Solutions rose to $317.9 million from $288.0 million; Principal Global Investors increased to $143.4 million from $141.1 million; U.S. Insurance Solutions rose to $115.8 million from $95.2 million; Principal International fell to $58.1 million from $75.1 million; and Corporate losses widened to $129.0 million from $93.8 million.
- Reported total expenses increased to $2,682.0 million from $2,594.6 million. The filing does not provide a single consolidated operating-margin measure; segment results use management’s non-GAAP pre-tax operating earnings measure.
- Operating cash flow decreased, which management primarily attributed to timing of receivables and payables. Investing activities provided $126.8 million, versus $1,019.2 million used in the prior-year quarter; financing activities provided $250.9 million.
- Total assets were $291.5 billion, down from $304.7 billion. Available-for-sale fixed maturities declined to $71.4 billion from $78.2 billion. Separate account assets, whose investment risk is borne by clients, were $173.5 billion and had matching liabilities.
- Debt to equity increased to 38% from 27%, and debt to capitalization to 28% from 21%. The equity decline included a $3.5 billion quarterly other comprehensive loss, principally reflecting unrealized losses on available-for-sale securities amid higher interest rates and wider credit spreads.
Material developments, outlook, and risks
- As part of its strategic review, Principal discontinued U.S. retail fixed annuity and consumer life sales in 2021. In January 2022 it agreed to reinsure 100% of its in-force U.S. retail fixed annuity and universal life with secondary guarantee blocks through a funds-withheld coinsurance arrangement. The company anticipated closing in Q2 2022, subject to regulatory approval; it would retain administration. Proceeds and other capital-efficiency actions were expected to support share repurchases.
- The Board increased the share-repurchase authorization by $1.6 billion in January. A $700 million accelerated repurchase began in March; approximately 8.5 million shares had been received by quarter-end. About $1.8 billion remained available under authorizations at March 31. Q1 cash returned to common shareholders totaled $921.1 million, including $754.1 million of treasury stock acquired and $167.0 million of dividends.
- Management described liquidity and capital as strong, citing cash and liquid assets, revolving credit facilities, contingent funding arrangements, and a strong risk-based capital position. It reported $1.849 billion of cash and liquid assets at holding companies and other subsidiaries. The next long-term debt maturity was September 2022.
- Market risks include interest rates, equity markets, credit spreads, foreign exchange, investment valuations, policyholder behavior, and derivative counterparty exposure. A hypothetical 100-basis-point rate increase would reduce the net reported fair value of included financial assets and derivatives by an estimated $4.6 billion; the sensitivity excludes important liabilities and separate accounts. A stated equity stress scenario would reduce annual segment pre-tax operating earnings by about 5%–8% over 12 months, excluding potential DAC and actuarial-balance unlocking.
- Principal cited ongoing litigation and regulatory inquiries; it had no estimated loss accrued for the disclosed ERISA class action, which was under appeal. It reported maximum exposure of approximately $98 million under certain guarantees and $750 million under contingent funding agreements. The future maximum exposure under a Chilean fund-return guarantee is indeterminable; management considered material payments under these guarantees unlikely.
- No specific company-wide earnings guidance was provided in the filing. Management cautioned that quarterly results may not indicate full-year performance and identified COVID-19, capital-market volatility, interest rates, credit risk, regulation, litigation, ratings, reinsurance, and international operations among relevant uncertainties. A major long-duration insurance accounting standard was scheduled for adoption January 1, 2023; management said implementation was underway and the impact could be significant.
Important facts for investors to verify
- Whether the reinsurance transaction closed as anticipated, received regulatory approval, and delivered expected capital and risk-management benefits.
- How much of the large unrealized fixed-income losses remain unrealized, and whether credit deterioration, asset sales, or further rate changes could affect earnings or capital.
- Whether operating cash flow normalizes after the settlement-timing effects described by management, and how liquid resources and debt maturities evolve.
- The sustainability of segment operating earnings, particularly the decline in Principal International and higher Corporate losses, and the sensitivity of results to equity markets, interest rates, and variable investment income.
- Share-repurchase settlement and subsequent capital returns, alongside the effect of buybacks on leverage and equity.
- Developments in the ERISA appeal, guarantees, and implementation of the new insurance accounting standard.