Principal Financial Group, Inc. — Q1 2010 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2010, compared with Q1 2009; balance-sheet figures are compared with December 31, 2009. Principal provides U.S. and international retirement, asset-management, life and health insurance, and related financial services.
Financial performance and position
| Metric | Q1 2010 / March 31, 2010 | Prior comparable |
|---|---|---|
| Total revenue | $2.264 billion | $2.189 billion, Q1 2009 |
| Net income attributable to PFG | $199.0 million | $121.0 million, Q1 2009 |
| Net income available to common shareholders | $190.8 million; diluted EPS $0.59 | $112.8 million; diluted EPS $0.43, Q1 2009 |
| Income before tax / income taxes | $256.3 million / $52.7 million | $130.1 million / $7.5 million, Q1 2009 |
| Operating cash flow | $653.2 million | $949.9 million, Q1 2009 |
| Investing / financing cash flow | $(462.0) million / $(801.9) million | $13.4 million / $(871.7) million, Q1 2009 |
| Cash and cash equivalents | $1.630 billion | $2.240 billion, December 31, 2009 |
| Total assets / liabilities / stockholders’ equity | $140.837 billion / $132.149 billion / $8.688 billion | $137.759 billion / $129.743 billion / $8.016 billion, December 31, 2009 |
| Total debt | $1.710 billion; debt-to-capitalization excluding AOCI was 16% | $1.686 billion; 16%, December 31, 2009 |
The filing does not provide a clear consolidated operating-margin figure. The effective tax rate was 21%, versus 6% in Q1 2009. Net investment income was $863.0 million, up from $828.5 million. Net realized capital losses were $45.5 million, improved from $63.3 million of losses.
Material changes and segment results
- Common-shareholder income rose $78.0 million year over year. Management attributed the increase mainly to stronger U.S. Asset Accumulation earnings, lower deferred acquisition cost amortization, higher fees as equity markets recovered, and improved International results.
- Segment operating earnings were $157.0 million for U.S. Asset Accumulation (up from $93.1 million), $12.0 million for Global Asset Management (up from $6.8 million), $37.9 million for International Asset Management and Accumulation (up from $17.0 million), and $69.8 million for Life and Health Insurance (down from $71.8 million). Corporate operating loss was $21.1 million, compared with $24.7 million.
- International results benefited from higher Chilean inflation-linked investment returns and stronger Latin American currencies; related benefits and claims expenses also increased. Life and Health premiums fell, chiefly as covered health and specialty-benefit membership declined.
- Available-for-sale fixed-maturity securities’ gross unrealized losses fell to $2.043 billion from $2.736 billion at year-end, primarily reflecting narrower credit spreads. Problem and potential-problem fixed maturities increased to $693.5 million from $553.2 million; the filing states no securities were classified as restructured for these dates.
Liquidity, outlook, risks and unusual items
- Management said operating cash flows, investment inflows and access to borrowing and capital markets were expected to meet current needs and reasonably foreseeable contingencies. It reported $783.9 million of excess holding-company capital and $680.6 million in credit facilities, including a $579.0 million commercial-paper program backed by a facility maturing in June 2012. Most facilities were not committed.
- About 98% of institutional GICs and funding agreements, totaling approximately $14.2 billion, could not be redeemed before maturity. Principal Life could pay approximately $608.7 million in shareholder dividends in 2010 under statutory limits; none had been paid by March 31.
- No earnings guidance was provided. Management expected 2010 pension expense of $110.4 million pre-tax, down from $157.6 million in 2009; qualified-plan minimum contributions for 2010 were zero, though combined qualified and nonqualified contributions of $20 million to $75 million remained possible.
- Healthcare legislation generated a $7.8 million negative net-income impact from a deferred-tax-asset adjustment. On April 30, 2010, the company signed an agreement renewing its BrasilPrev joint venture arrangement: Banco do Brasil would hold a 75% economic interest and Principal 25%, with exclusive pension-product distribution through Banco’s network for 23 years.
- Effective January 1, 2010, revised variable-interest-entity accounting changed which entities were consolidated; adoption reduced retained earnings and increased AOCI by $10.7 million each. The filing says the accounting change had no material overall impact on consolidated financial statements.
- Key exposures include investment-credit and impairment risk, commercial real estate weakness, interest-rate and equity-market movements, foreign exchange, derivatives and counterparty credit, ratings downgrades, policyholder withdrawals, litigation, regulation and tax uncertainty. Management did not expect pending litigation or regulatory matters to materially harm business or financial position, but said outcomes could materially affect a particular period’s net income. Stated guarantees had maximum exposure of about $217 million, with management viewing material payment as remote.
- Management identified the U.S. life-insurance sector’s negative rating outlook as continuing. It also warned that prolonged market stress, unrealized investment losses, valuation assumptions, reserve experience, and changes in laws or accounting standards could affect results and capital.
Most important facts for investors to verify
- Whether improved credit spreads and equity markets persist, and whether investment impairments or unrealized losses rise again.
- Trends in U.S. account values and cash flows, international inflation and currency effects, and declining health and specialty-benefit membership.
- Cash-flow drivers behind lower operating cash generation and the decline in cash balances; availability and terms of credit facilities and holding-company capital.
- Commercial mortgage credit quality, including the increase in problem and potential-problem fixed maturities, and concentrations in stressed property markets and CMBS.
- Progress and financial effects of the BrasilPrev agreement, healthcare-related tax changes, pending litigation, and the IRS audit of 2004–2008 returns.
- Derivatives’ collateral requirements and counterparty exposure, and the effect of any credit-rating downgrade on collateral calls, liquidity, policyholder behavior and funding access.