Principal Financial Group, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Amounts are U.S. dollars; financial statement figures are in millions unless noted. Principal provides retirement and income products, asset management, international savings and insurance solutions.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $3,539.4 | $3,114.6 | $6,747.9 | $7,665.9 |
| Income before income taxes | $432.6 | $498.6 | $1,046.5 | $826.8 |
| Net income attributable to Principal | $361.8 | $398.3 | $878.9 | $687.2 |
| Diluted earnings per share | $1.32 | $1.45 | $3.19 | $2.49 |
| Net investment income | $1,045.5 | $944.6 | $2,073.6 | $1,928.2 |
| Net realized capital gains (losses) | $(41.1) | $(27.4) | $110.3 | $104.0 |
- Q2 comparison: Revenue rose 13.6%, but attributable net income fell 9.2%. Management cited higher DAC amortization amid less favorable financial markets and a less favorable COVID-19 claims comparison, partly offset by higher fee revenue as average AUM and account values grew. GAAP pretax income declined despite higher segment pretax operating earnings, a non-GAAP measure ($556.2 million versus $487.8 million).
- Six-month comparison: Revenue fell 12.0%, while attributable net income increased 27.9%. The revenue decline primarily reflected lower sales of single-premium group and individual annuities with life contingencies; related benefit and reserve expenses also declined. Higher fees, investment income and segment operating earnings supported profit growth.
- Cash flow: Operating cash flow was $1,133.6 million for the first half, down from $2,046.1 million. Investing used $942.8 million, versus $2,221.1 million in the prior-year period. Financing used $623.2 million, compared with $809.5 million provided in 2020. Cash and cash equivalents ended at $2,417.4 million, down from $2,849.8 million at year-end 2020.
- Balance sheet and debt: At June 30, total assets were $302.2 billion and total liabilities were $285.5 billion; stockholders’ equity was $16.3 billion. Total debt was $4.36 billion, approximately unchanged from year-end; debt-to-capitalization was 21%. Assets and liabilities each included $182.8 billion of separate accounts, whose investment risk is generally borne by clients.
- Liquidity: Management described liquidity and capital as strong and reported $2.505 billion of cash and liquid assets at holding companies and other subsidiaries available for corporate purposes. The company had $800 million of committed revolving credit facilities undrawn; separate Chilean credit lines had $82.7 million outstanding. Principal Life paid $600 million in dividends to its parent in the first half, including $300 million of extraordinary dividends approved by Iowa’s insurance commissioner.
- Investment and equity indicators: Net investment income yield was 4.1% for the first half of 2021, versus 4.0% in 2020. A 100-basis-point immediate increase in U.S. rates was estimated to reduce the net reported fair value of financial assets and derivatives by $5.14 billion; this sensitivity excludes potentially offsetting liabilities. A single consolidated operating margin is not presented in the filing.
Business, segment trends and material developments
- Second-quarter segment pretax operating earnings were $280.2 million in Retirement and Income Solutions (up from $213.9 million), $184.4 million in Principal Global Investors (up from $108.4 million), $47.7 million in Principal International (down from $94.5 million), and $126.6 million in U.S. Insurance Solutions (down from $155.0 million). Corporate reported a pretax operating loss of $82.7 million.
- Principal Global Investors ended Q2 with $532.3 billion of AUM, up from $450.1 billion a year earlier; management attributed the earnings improvement mainly to higher average AUM and performance fees. International’s Q2 earnings were pressured by unfavorable relative market performance on required regulatory investments in Latin America. U.S. Insurance Solutions faced higher COVID-related claims compared with the prior-year period, when temporary dental and vision office closures reduced claims.
- On June 28, 2021, following a strategic review, the company announced it would discontinue sales of U.S. retail fixed annuities and consumer life insurance and pursue strategic alternatives for the related in-force blocks. It plans to focus growth and investment on fee-based retirement, global asset management, emerging markets and U.S. specialty benefits and protection. The future financial statement effects had not been fully assessed.
- The board authorized a new share repurchase program of up to $1.2 billion in June. First-half repurchases were $381.6 million; dividends to common stockholders were $317.4 million. The declared dividend was $0.61 per share in Q2, versus $0.56 a year earlier.
- The retirement-business migration associated with the acquired Wells Fargo IRT business was completed in Q2 2021; remaining migration activities were expected to continue into 2022. Fitch and S&P revised relevant rating outlooks from negative to stable after the strategic review; Moody’s reported its ratings and positive outlook unchanged.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management cautioned that interim results are not necessarily indicative of full-year results and that COVID-19 and other uncertainties may affect results, financial condition and liquidity.
- Key risks include market and interest-rate volatility, credit and investment valuation risk, policyholder behavior and guarantees, COVID-19, foreign currency and political risks, regulation and litigation, reinsurer performance, and execution of the IRT acquisition and strategic changes. Management estimated a hypothetical 10% equity-market decline followed by a 2% quarterly recovery could reduce annual segment pretax operating earnings by approximately 5%–7%, excluding potential DAC and actuarial-balance unlocking.
- Management said gross unrealized losses on available-for-sale fixed maturities increased during the first half, primarily with rising interest rates, partly offset by tighter credit spreads. It did not record credit-loss allowances on securities in unrealized-loss positions where it expected to recover amortized cost and did not intend, nor expect to be required, to sell before recovery.
- The company expects the long-duration insurance accounting standard effective January 1, 2023 to significantly change accounting for many insurance and annuity products; implementation was ongoing. COVID-related mortgage modifications and troubled debt restructurings were not significant in the periods reported. Mortgage-loan valuation allowances were released in 2021 as economic conditions improved from COVID-related impacts.
- A class action concerning Principal Life’s Principal Fixed Income Option was decided in Principal Life’s favor in April 2021; the plaintiff appealed. No loss was accrued because management considered loss not probable and could not reasonably estimate an amount. The filing also describes guarantees, including a $750 million maximum exposure under contingent funding agreements and a Chilean relative-return guarantee whose future maximum exposure is indeterminable; management considered material payments under guarantees unlikely.
Important facts for investors to verify
- How discontinuing U.S. retail fixed annuity and consumer life sales, and pursuing alternatives for existing blocks, will affect earnings, capital needs and cash flows.
- Whether fee and AUM growth can persist, and whether asset-market movements, withdrawals or performance fees materially change that trend.
- The duration and financial impact of COVID-related claims, especially the Q2 comparison in Specialty Benefits.
- Interest-rate exposure, unrealized fixed-income losses, credit quality and the potential interaction of market changes with DAC amortization and insurance reserves.
- Capital returns and liquidity, including use of the new repurchase authorization, subsidiary dividend capacity and the timing of increased mortgage and real estate commitments.
- Progress on the remaining IRT migration, implementation of the 2023 insurance accounting standard, and the appeal and other legal or guarantee contingencies.