Business Context and Reporting Period
Company: Principal Financial Group, Inc.
Filing Type: Form 8-K (Current Report)
Reporting Period: Third Quarter ended September 30, 2013
Report Date: October 24, 2013
Principal Financial Group, Inc. is a global investment management leader offering retirement services, insurance solutions, and asset management. The filing announces third-quarter 2013 results, highlighting record assets under management and strong operating earnings growth despite macroeconomic headwinds.
Key Financial Metrics
| Metric | 3Q 2013 | 3Q 2012 |
|---|---|---|
| Operating Earnings | $269.2 million ($0.90 per diluted share) | $142.3 million ($0.48 per diluted share) |
| Net Income (Available to Common) | $245.7 million ($0.82 per diluted share) | $187.2 million ($0.63 per diluted share) |
| Operating Revenues | $2,315.8 million | $2,638.6 million |
| Assets Under Management (AUM) | $466.2 billion (Record) | $391.8 billion (Implied) |
| Return on Equity (ROE) | 11.9% | 9.2% |
| Book Value per Share (excl. AOCI) | $29.79 | $28.37 |
| Dividend Declared (Q4 2013) | $0.26 per share | $0.23 per share (Q3 2013) |
Liquidity and Capital: The company reported a quarter-end estimated risk-based capital ratio of 400-405 percent with $800 million of excess capital. The company repurchased 1.5 million shares of common stock in the quarter at an average price of $41.55.
Material Changes vs. Prior Period
- Operating Earnings Growth: Operating earnings increased 89% year-over-year. Adjusted for a $79.2 million actuarial assumption review charge in 3Q 2012, current period earnings were up 22%.
- Revenue Trends: Operating revenues decreased 12% to $2,315.8 million, primarily due to the absence of a large single premium sale in 3Q 2012. Adjusted for this item, revenues increased 9%.
- Investment Performance: Net realized losses were $22.8 million in 3Q 2013, compared to net realized gains of $88.8 million in 3Q 2012. Credit-related net losses were $15.8 million, down 58% from the prior year.
- Segment Performance:
- Retirement and Investor Services (Accumulation): Operating earnings up 29% to $150.7 million.
- Principal International: Operating earnings up 37% to $50.7 million; AUM up 55% to $102.9 billion.
- Individual Life: Operating earnings improved 159% to $22.3 million from a loss of $37.9 million, though adjusted earnings were slightly down due to adverse mortality fluctuations.
- Specialty Benefits: Operating earnings up 94% to $31.7 million driven by favorable claims experience.
Guidance, Outlook, and Risks
Management Commentary: Management highlighted the completion of the Cuprum onboarding and the contribution of seven strategic acquisitions to top and bottom-line results. CEO Larry Zimpleman emphasized the execution of the global investment management strategy, which drove AUM to a record $466 billion. CFO Terry Lillis noted strong earnings growth despite macroeconomic headwinds and increased financial flexibility from fee-based business growth.
Dividend Outlook: The board declared a Q4 2013 dividend of $0.26 per share, bringing the full-year 2013 dividend to a record $0.98 per share.
Risks and Contingencies:
- Market Risks: Continued volatility in equity markets, changes in interest rates, and credit spreads could impact investment returns and asset values.
- Operational Risks: Adverse capital and credit market conditions may affect liquidity and access to capital. The company faces risks related to the valuation of securities and potential future impairments.
- Regulatory and Legal: Risks include changes in laws/regulations, tax audits, litigation outcomes, and limitations on dividends imposed by Iowa insurance laws.
- International Risks: Fluctuations in foreign currency exchange rates and specific regulatory requirements (e.g., "encaje" investments in Chile and Mexico) impact international results.
Investor Verification Checklist
- Non-GAAP Reconciliations: Verify the reconciliation of Operating Earnings to GAAP Net Income, specifically the $22.8 million net realized capital losses and the $79.2 million prior-year actuarial adjustment.
- Revenue Quality: Confirm the impact of the "large single premium sale" in 3Q 2012 on the reported 12% revenue decline versus the 9% adjusted increase.
- Capital Adequacy: Review the $800 million excess capital figure and the 400-405% risk-based capital ratio to assess dividend sustainability.
- Segment Specifics: Investigate the "adverse fluctuation in mortality" in the Individual Life segment and the $10.1 million negative impact from Chilean "encaje" investments in Principal International.
- Share Repurchases: Verify the 1.5 million shares repurchased at $41.55 average price and its impact on diluted share count.