Principal Financial Group, Inc. — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. Although the request metadata says “2021 Q4,” this filing reports full-year results, with 2020 as the principal comparison. PFG provides retirement, investment management and insurance products through four operating segments, plus Corporate.
Financial results and key metrics
- Revenue: $14.26 billion, down from $14.74 billion in 2020. Fees and other revenues rose to $5.01 billion from $4.51 billion, and net investment income rose to $4.41 billion from $3.89 billion. Premiums and other considerations fell to $4.84 billion from $6.04 billion; net realized capital gains declined to $2.5 million from $302.6 million.
- Profit: Net income attributable to PFG was $1.71 billion, versus $1.40 billion; diluted EPS was $6.27, versus $5.05. Income before taxes was $2.08 billion, versus $1.69 billion. The effective tax rate was 16% in both years. Derived from reported figures, attributable net income was about 12.0% of revenue, compared with 9.5% in 2020.
- Segment pre-tax operating earnings: Retirement and Income Solutions $1.14 billion (2020: $967 million); Principal Global Investors $708 million ($513 million); Principal International $309 million ($244 million); U.S. Insurance Solutions $471 million ($240 million). Corporate reported a $368 million loss (2020: $326 million loss). Segment operating earnings are a management measure, not consolidated GAAP net income.
- Cash flow: Operating activities provided $3.22 billion, down from $3.74 billion. Investing activities used $5.66 billion, versus $5.03 billion used; financing activities provided $1.92 billion, versus $1.62 billion. Cash and cash equivalents ended the year at $2.33 billion, down from $2.85 billion.
- Capital and debt: Total debt was $4.36 billion, including $79.8 million short-term and $4.28 billion long-term, broadly unchanged year over year. PFG-attributable equity was $16.07 billion, down from $16.56 billion; debt-to-capitalization was 21%. Long-term debt maturities include $301.8 million in 2022.
- Liquidity: Management described capital and liquidity as strong and said available resources were adequate for anticipated obligations. Holding companies and other subsidiaries held $2.42 billion of cash and liquid assets. Committed revolving facilities totaled $800 million, with no borrowings outstanding; commercial paper was also zero at year-end. Principal Life’s ordinary dividend capacity for 2022 was approximately $961.7 million, subject to Iowa insurance law and regulatory limits.
- Investment and balance-sheet scale: Total assets were $304.66 billion, including $108.91 billion of invested assets; separate-account assets were $182.35 billion and are generally matched by separate-account liabilities. Invested assets included $78.15 billion of available-for-sale fixed maturities and $16.35 billion of commercial mortgage loans. Principal reported $713.9 billion of AUM and $1.62 trillion of AUA as of year-end.
Material changes and drivers versus 2020
- Higher average account values and markets supported fee growth in Retirement and Income Solutions; positive investment performance lifted Principal Global Investors’ AUM to $546.5 billion from $502.1 billion. PGI’s 2021 net cash flow was slightly negative at $0.5 billion.
- Retirement and Income Solutions’ lower single-premium annuity sales reduced premiums and associated reserve increases. Its segment operating earnings nevertheless rose, with variable investment income a significant contributor.
- Principal International AUM fell to $152.1 billion from $165.2 billion, despite positive net cash flow and investment performance, largely because currency translation reduced AUM by $13.7 billion. Segment earnings increased, including from inflation-linked investment income in Chile and higher Brazil equity-method earnings.
- U.S. Insurance Solutions earnings increased substantially, principally because 2021 actuarial assumption updates were less unfavorable than 2020 updates. Specialty Benefits experienced an unfavorable year-over-year COVID-19 comparison, partly offset by lower non-COVID claims and business growth.
- Net investment income benefited from variable investment income, including alternative-investment results, bond prepayments and inflation-linked returns. Net realized capital gains fell sharply, including because derivative and hedge-related results turned less favorable.
- Actuarial assumption updates and model refinements reduced consolidated net income attributable to PFG by $14.2 million in 2021, compared with $118.2 million in 2020. The filing also reports a $2.30 billion decrease in net unrealized investment gains, primarily associated with an approximately 51-basis-point rise in interest rates, partly offset by tighter credit spreads.
Outlook, strategic actions and risks
- Portfolio repositioning: Following a strategic review, PFG stopped sales of U.S. individual fixed annuities as of September 30, 2021, and narrowed individual life sales to the business market, ending retail consumer sales. Management emphasized growth in fee-based retirement, global asset management and U.S. specialty benefits for small and medium-sized businesses.
- Subsequent reinsurance transaction: On January 31, 2022, PFG agreed to cede 100% of its in-force U.S. retail fixed annuity and universal life with secondary guarantee blocks to Sutton Cayman through funds-withheld coinsurance. PFG expects to retain administration; closing was expected in Q2 2022, subject to regulatory approval. Proceeds and other capital-efficiency actions were intended to support share repurchases. The Board added $1.6 billion to the existing repurchase authorization; completion, timing and proceeds remain subject to transaction terms and approvals.
- Shareholder returns: PFG returned $1.59 billion through common dividends and share repurchases in 2021, versus $922 million in 2020. It repurchased 14.6 million shares in 2021. Dividends and buybacks depend on financial results, capital needs and the ability of regulated subsidiaries to distribute funds.
- Market and operating risks: Results remain sensitive to equity and fixed-income markets, interest rates, credit spreads, investment performance, policyholder behavior and foreign exchange rates. A hypothetical 100-basis-point rate rise was estimated to reduce the reported fair value of financial assets and derivatives by $5.48 billion, before considering excluded liabilities that may partly offset the exposure. A modeled equity-market shock could reduce annual segment pre-tax operating earnings by approximately 5%–8% over 12 months, excluding potential DAC unlocking.
- Asset and credit exposures: Approximately 46% of invested assets were in categories management described as relatively illiquid. Commercial mortgage loans totaled $16.4 billion, with 23% concentrated in California; about 84% of U.S. commercial mortgage loans had balloon maturities. PFG reported no commercial mortgage loans in foreclosure at year-end, but disclosed one problem loan with an $8.8 million carrying amount and an $8.8 million valuation allowance.
- Other risks and contingencies: The filing cites COVID-19-related claims and market uncertainty, actuarial and fair-value estimation risk, reinsurance counterparty exposure, regulatory and tax changes, cybersecurity and operational risks, and litigation. A class action concerning the Principal Fixed Income Option remained on appeal; no loss was accrued because management assessed loss as not probable and could not reasonably estimate an amount. Auditors issued unqualified opinions on the financial statements and internal control; management reported effective disclosure controls and internal control over financial reporting.
- Accounting change ahead: New long-duration insurance accounting standards are scheduled to take effect January 1, 2023. PFG said they will significantly change accounting for many insurance and annuity products; the ultimate financial impact was not yet clear.
Important facts for investors to verify
- Reconcile GAAP net income and EPS with segment pre-tax operating earnings, focusing on variable investment income and actuarial assumption updates.
- Check the regulatory approval, closing, final economics and capital effects of the Sutton Cayman reinsurance transaction, including any recapture or counterparty provisions.
- Review the quality, liquidity and concentration of the investment portfolio, especially balloon-maturity commercial mortgages, California exposure and unrealized fixed-maturity losses.
- Assess holding-company liquidity and the statutory and regulatory capacity of Principal Life to fund dividends, debt service and planned repurchases.
- Track AUM, net flows, equity-market sensitivity, foreign-currency effects and the performance of fee-based businesses against management’s strategic priorities.
- Monitor the 2023 insurance-accounting transition, COVID-19 claims experience, litigation and reinsurance recoverables.