Business Context and Reporting Period
Company: Principal Financial Group, Inc.
Filing Type: Form 8-K (Current Report)
Date of Report: September 5, 2012
Reporting Period: This filing updates risk factors for the Registration Statement on Form S-3. Financial data referenced is as of June 30, 2012, and the year ended December 31, 2011.
Key Financial Metrics and Liquidity
This filing focuses on qualitative risk disclosures rather than reporting specific period revenue or profit figures. However, the following financial positions and metrics are disclosed as of June 30, 2012:
- Fixed Maturities (U.S.): $47.1 billion (76% of total U.S. invested assets).
- Below Investment Grade: Approximately 7.1% of the U.S. fixed maturities portfolio.
- Problem/Potential Problem/Restructured Securities: $534.8 million (1.1% of total fixed maturities).
- Commercial Mortgage Loans: $9.8 billion (14% of total invested assets).
- California Commercial Mortgage Concentration: $1.9 billion (19% of the commercial mortgage portfolio).
- Illiquid Assets: Privately placed fixed maturities, commercial mortgage loans, and real estate investments represented approximately 38% of invested assets.
- Gross Unrealized Losses (Fixed Maturities): $1.2 billion pre-tax; $0.9 billion pre-tax for securities trading down 20% or more for over six months.
- Closed Block Assets/Liabilities: Assets of $4,460.0 million and liabilities of $5,149.7 million.
- Estate Tax-Related Life Insurance: Approximately $36.4 billion in coverage from nearly 21,700 policies.
Material Changes and Risk Factors
The filing adds specific risk factors to the company's disclosures, highlighting the following material concerns:
- Market Volatility: Continued disruption in capital and credit markets may limit access to capital, increase the cost of capital, and force the liquidation of assets at a loss to meet liquidity needs.
- Interest Rate Risk: Rising rates could increase unrealized losses and trigger disintermediation (policy surrenders). Declining rates could lead to reinvestment risk and duration mismatches.
- Credit Risk: Exposure to widening credit spreads, defaults on fixed maturities, and delinquencies in the commercial mortgage loan portfolio, particularly those with balloon payments.
- Liquidity Constraints: Difficulty in selling illiquid assets (38% of portfolio) at recorded values during market stress.
- Regulatory Changes: Potential impacts from the Dodd-Frank Act, Basel III capital requirements, and changes to NAIC Regulation XXX and Actuarial Guideline 38 regarding statutory reserves.
Guidance, Outlook, and Contingencies
Management Commentary and Outlook: The company notes that while liquidity has improved, the fixed income market continues to experience price volatility and credit downgrade events. Management emphasizes that adverse economic conditions, including slow recovery and high unemployment, could reduce demand for financial products and increase claims or policy lapses.
Contingencies and Unusual Items:
- Lehman Brothers Litigation: The company is a counterparty in litigation regarding derivative transactions with Lehman Brothers. Approximately $440 million was paid to Principal; the bankruptcy estate is attempting to recover an unspecified amount. Management believes the risk of loss is remote.
- Regulatory Inquiries: The company is subject to inquiries regarding unclaimed property laws and the use of death master file data.
- Closed Block Funding: The company may need to fund deficiencies in the Closed Block assets if cash flows and revenues are insufficient to support guaranteed benefits.
- Reinsurance Risk: Potential for reinsurer default or rate increases, which could impact profitability.
Investor Verification Checklist
- Verify the current status of the $1.2 billion in gross unrealized losses on fixed maturities and any subsequent other-than-temporary impairments.
- Monitor the performance and delinquency rates of the $9.8 billion commercial mortgage loan portfolio, specifically the $1.9 billion concentrated in California.
- Assess the impact of potential revisions to NAIC Actuarial Guideline 38 on statutory reserves and capital requirements.
- Review the outcome of the Lehman Brothers derivative litigation and any potential recovery claims.
- Track the company's ability to maintain financial strength ratings, as a downgrade could trigger policy surrenders and increased capital costs.
- Confirm the sufficiency of the Closed Block assets ($4.46 billion) against liabilities ($5.15 billion) and the potential need for general account funding.