Principal Financial Group, Inc. — Q1 2020 Form 10-Q
Business context and reporting period. Principal Financial Group (PFG) provides retirement and income products, asset management, international financial services, and U.S. insurance. This unaudited report covers the three months ended March 31, 2020; balance-sheet comparisons are with December 31, 2019. Results reflect the early effects of COVID-19 and market volatility. The Wells Fargo Institutional Retirement & Trust acquisition, completed July 1, 2019, also affects year-over-year comparisons.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 / prior balance-sheet date |
|---|---|---|
| Total revenue | $4.551 billion | $3.744 billion |
| Net income attributable to PFG | $288.9 million | $429.9 million |
| Diluted EPS | $1.04 | $1.53 |
| Operating cash flow | $1.589 billion | $1.176 billion |
| Cash and cash equivalents | $3.483 billion | $2.516 billion at Dec. 31, 2019 |
| Total debt | $3.776 billion | $3.828 billion at Dec. 31, 2019 |
| PFG stockholders’ equity | $12.908 billion | $14.618 billion at Dec. 31, 2019 |
Revenue increased 21.6%, while PFG-attributable net income declined 32.8%. Calculated from reported figures, pre-tax margin fell to about 7.2% from 14.1%, and PFG-attributable net margin to about 6.3% from 11.5%. The effective tax rate was 13%, versus 14%.
Net cash from investing activities was an outflow of $912.7 million, compared with $1.491 billion in Q1 2019; financing activities provided $290.4 million, versus a $403.1 million outflow. The quarter-end debt-to-equity ratio was 29%, up from 26%, and debt-to-capitalization was 23%, up from 21%. The filing does not provide a single conventional current-liquidity ratio.
Total assets were $246.904 billion, down from $276.088 billion. Separate-account assets and liabilities declined together from $165.468 billion to $136.836 billion; clients bear the investment risk on these legally segregated accounts. Other comprehensive loss was $1.646 billion, driven principally by $1.412 billion of after-tax unrealized losses on available-for-sale securities and $294.3 million of foreign-currency translation losses. PFG’s accumulated other comprehensive income moved from $1.038 billion to a $599.2 million loss.
Material changes versus the prior comparable period
- Premiums and other considerations rose $566.1 million, primarily in Retirement and Income Solutions, including higher single-premium group annuity sales. Such large pension risk-transfer premiums can vary substantially by period.
- Fees and other revenues increased $171.8 million, with contributions from the acquired Wells Fargo business and higher asset-management fees.
- Benefits, claims and settlement expenses increased $663.6 million, and operating expenses increased $342.8 million. Higher DAC amortization, associated with unfavorable equity markets and lower interest rates, contributed to the expense increase.
- Segment pre-tax operating earnings declined to $386.0 million from $478.7 million. Retirement and Income Solutions reported $205.1 million versus $240.6 million; Principal International, $30.8 million versus $111.1 million; Principal Global Investors increased to $111.7 million from $100.7 million; and U.S. Insurance Solutions increased to $129.5 million from $110.7 million.
- Principal Global Investors’ AUM fell to $405.5 billion from $458.6 billion at the start of the quarter, mainly reflecting $51.4 billion of negative investment performance. Principal International AUM declined to $134.5 billion from $169.7 billion, including negative investment performance and $26.4 billion of currency effects.
Outlook, risks, contingencies and unusual items
- COVID-19 and markets: Management said results and estimates may change as the pandemic’s effects become clearer. Market declines reduced account values and AUM, potentially pressuring future fee revenue. Unemployment could weaken sales and retirement-plan contributions; business closures reduced dental and vision claims in Q1. The filing gives no specific earnings guidance.
- Investment and insurance exposures: Credit-spread widening contributed to a sharp rise in unrealized fixed-maturity losses; gross unrealized losses on available-for-sale securities were $1.810 billion. Management reported that 89% of Principal Life’s fixed maturities in an unrealized-loss position were investment grade and did not record allowances on securities where it expected to recover amortized cost. The COVID-related increase in mortgage-loan and lease valuation allowances was $12.9 million in Q1.
- Liquidity and capital: Management described its capital and liquidity position as strong, citing $1.741 billion of cash and liquid assets at holding companies and other subsidiaries, access to revolving credit facilities and contingent funding, and a laddered debt maturity schedule with the next maturity in 2022. Approximately 99% of institutional GICs and funding agreements were not redeemable before maturity. These are management assessments, not guarantees.
- Capital returns: PFG paid $153.6 million in common dividends and repurchased $231.8 million of stock during Q1. The declared dividend was $0.56 per share. A new $900 million repurchase authorization was approved in February 2020.
- Ratings and legal matters: In April, S&P affirmed key ratings but changed the outlook to negative, citing weaker earnings potential and capital adequacy from the global recession. A court of appeals reversed a prior summary judgment in the PFIO ERISA class action and remanded the case; no loss was accrued because management considered loss not probable and could not reasonably estimate it.
- Other exposures: Maximum exposure under certain guarantees was approximately $114 million; contingent Treasury funding agreements had maximum exposure of $750 million. The future maximum exposure under Chile’s mandatory retirement-fund relative-return guarantee is indeterminable. Management said material payments under the cited guarantees were considered remote.
- Accounting: PFG adopted the CECL credit-loss standard on January 1, 2020, recording an $8.4 million reduction to retained earnings. Long-duration insurance accounting changes are expected to significantly change accounting for many insurance and annuity products; adoption is scheduled for 2022.
Important facts for investors to verify
- How much of the revenue increase came from the acquired Wells Fargo business and variable pension risk-transfer premiums, and whether those sources recur.
- Whether COVID-19-related market, credit, claims, unemployment and customer-withdrawal effects increase in subsequent quarters, including further DAC amortization and credit-loss allowances.
- Whether the decline in international earnings and AUM stabilizes, and how foreign exchange and required regulatory investment performance evolve.
- Changes in fixed-maturity valuations, mortgage-loan credit quality, liquidity, statutory capital and rating-agency outlooks.
- Progress and potential financial exposure in the PFIO litigation and any changes to guarantee or contingent funding exposures.