Business Context and Reporting Period
Company: Principal Financial Group, Inc. (PFG)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: PFG provides financial products and services through five segments: U.S. Asset Accumulation, Global Asset Management, International Asset Management and Accumulation, Life and Health Insurance, and Corporate and Other. The company operates as a savings and loan holding company and a life insurance holding company.
Key Financial Metrics
| Metric (in millions) | Q3 2008 | Q3 2007 | 9 Months 2008 | 9 Months 2007 |
|---|---|---|---|---|
| Total Revenues | $2,497.8 | $2,849.6 | $7,656.7 | $8,342.4 |
| Net Income | $98.3 | $240.5 | $457.3 | $817.9 |
| Net Income Available to Common Stockholders | $90.1 | $232.3 | $432.6 | $793.2 |
| Diluted EPS | $0.35 | $0.87 | $1.66 | $2.94 |
| Net Investment Income | $1,079.7 | $1,029.0 | $3,031.0 | $2,928.8 |
| Net Realized/Unrealized Capital Gains (Losses) | $(230.6) | $(89.3) | $(468.1) | $3.7 |
| Total Assets | $143,409.7 | $154,520.2 | — | — |
| Total Stockholders' Equity | $5,612.6 | $7,421.7 | — | — |
| Cash and Cash Equivalents | $2,269.0 | $1,344.4 | — | — |
| Short-term Debt | $350.1 | $290.8 | — | — |
| Long-term Debt | $1,378.6 | $1,398.8 | — | — |
Material Changes vs. Prior Period
- Net Income Decline: Net income available to common stockholders decreased by 61% for the nine months ended September 30, 2008, compared to the same period in 2007. This was primarily driven by a $317.1 million after-tax increase in net realized/unrealized capital losses.
- Investment Losses: Net realized/unrealized capital losses increased significantly due to higher "other-than-temporary" impairments on fixed maturity and equity securities, as well as net losses on trading securities. Specific impairments included $86.3 million related to Lehman Brothers and $69.7 million related to Washington Mutual.
- Revenue Pressure: Total revenues decreased by 8% year-over-year for the nine-month period. Premiums and fees declined in the U.S. Asset Accumulation and Life and Health Insurance segments due to lower sales of annuities and a reduction in covered medical members.
- Equity Erosion: Total stockholders' equity decreased by approximately $1.8 billion from year-end 2007, largely due to a $2.28 billion decline in accumulated other comprehensive income driven by net unrealized losses on fixed maturities.
- Liquidity Position: Cash and cash equivalents increased by $924.6 million to $2.27 billion as the company built additional liquidity in response to market volatility.
Guidance, Outlook, Risks, and Unusual Items
- Market Volatility: Management highlights extreme volatility and disruption in global capital and credit markets as a primary risk. The company notes that continued disruptions could materially adversely affect results of operations, financial condition, and liquidity.
- Government Programs: PFG is evaluating options to utilize government liquidity programs, including the Emergency Economic Stabilization Act (EESA) and Federal Reserve commercial paper facilities, to enhance capital flexibility.
- Dividend and Buyback Actions: The Board declared an annual common stock dividend of $0.45 per share (reduced from prior year levels). Additionally, the company suspended purchases of common stock under its share repurchase program effective October 13, 2008.
- Unusual Items:
- Terminated Operations: The company terminated its commercial mortgage securities issuance operation in Q3 2008. Losses associated with this operation ($22.3 million after-tax for the nine months) are reported as "other after-tax adjustments" rather than discontinued operations.
- Counterparty Risk: Significant exposure to financial institution failures, including Lehman Brothers, Washington Mutual, and AIG, resulted in substantial realized and unrealized losses.
- Outlook: Management does not expect difficult global capital market conditions to improve in the near future. The company anticipates potential declines in Assets Under Management (AUM) and revenues due to market performance and investor behavior.
Key Facts for Investor Verification
- Impairment Methodology: Verify the company's assessment of "other-than-temporary" impairments, particularly regarding the $4.4 billion in gross unrealized losses on fixed maturity securities available-for-sale.
- Liquidity Sufficiency: Confirm that the $2.27 billion in cash and cash equivalents, combined with access to the Federal Home Loan Bank of Des Moines and commercial paper markets, is sufficient to meet potential policy surrenders and withdrawals in a volatile rate environment.
- Counterparty Exposure: Review the extent of remaining exposure to distressed financial institutions (e.g., AIG, monoline insurers) and the effectiveness of credit default swap hedges.
- Regulatory Capital: Monitor the impact of market losses on statutory capital positions and the potential for rating downgrades, which could trigger increased policy surrenders.
- Commercial Mortgage Portfolio: Assess the quality of the $11.3 billion commercial mortgage loan portfolio, specifically the 20% concentration in California and the 0.96% of loans classified as problem, potential problem, or restructured.