Business Context and Reporting Period
Company: Principal Financial Group, Inc. (NYSE: PFG)
Filing Type: Form 8-K (Current Report)
Date of Report: February 7, 2011
Reporting Period: Fourth Quarter and Full Year ended December 31, 2010
This filing announces the company's financial results for the fourth quarter and full year of 2010. Principal Financial Group operates as a diversified financial services provider offering retirement, investment, insurance, and banking products globally.
Key Financial Metrics
Full Year 2010 vs. 2009
- Operating Earnings: $844.8 million (up 15% from $733.3 million in 2009).
- Operating EPS (Diluted): $2.62 (up from $2.45).
- Net Income (Common Stockholders): $666.3 million (up 13% from $589.7 million).
- Net Income EPS (Diluted): $2.06 (up from $1.97).
- Operating Revenues: $8,041.9 million (up from $7,712.2 million).
- Assets Under Management (AUM): Record $318.8 billion (up 12% from year-end 2009).
Fourth Quarter 2010 vs. Fourth Quarter 2009
- Operating Earnings: $214.1 million (up 5% from $203.9 million).
- Operating EPS (Diluted): $0.66 (up from $0.63).
- Net Income (Common Stockholders): $199.3 million (up 40% from $141.9 million).
- Net Income EPS (Diluted): $0.62 (up from $0.44).
- Operating Revenues: $2,106.5 million (up from $1,983.6 million).
- Book Value per Share (ex-AOCI): Record $27.82 (up 6%).
- Dividend: $0.55 per share (10% increase over 2009).
Liquidity and Capital
- Risk-Based Capital Ratio: Estimated at 420% at year-end.
- Excess Capital: $1.6 billion.
- Principal International Net Cash Flow: Record $4.7 billion for the year.
- Principal Funds Net Cash Flow: Record $1.6 billion for the year.
Material Changes and Segment Performance
Operating expenses remained relatively flat in 2010 despite a 14% growth in average assets under management, demonstrating operating leverage. Net income was impacted by realized capital losses and one-time charges.
Segment Highlights
- Retirement and Investor Services: Q4 operating earnings rose to $151.0 million (from $125.3 million). Full Service Accumulation and Principal Funds saw double-digit earnings growth. Segment AUM reached $175.0 billion.
- Principal Global Investors: Q4 operating earnings increased to $19.2 million (from $12.7 million), driven by transaction fees and AUM growth. Unaffiliated AUM reached $78.8 billion.
- Principal International: Q4 operating earnings decreased to $30.9 million (from $39.5 million) due to a reduced economic interest in a Brazilian joint venture, though revenues grew 17% to $210.5 million. Segment AUM hit a record $45.8 billion.
- U.S. Insurance Solutions: Q4 operating earnings declined to $52.3 million (from $56.0 million). Individual Life earnings dropped due to increased GAAP net reserves following an interest rate assumption review.
- Corporate: Operating losses widened to $39.3 million (from $29.6 million) due to higher expenses and the absence of a favorable settlement reserve release seen in the prior year.
Outlook, Risks, and Unusual Items
Unusual Items and Adjustments
Net income for the full year included net realized capital losses of $194.2 million, comprising:
- $148.9 million in credit losses on fixed maturity securities (including $114.3 million on commercial mortgage-backed securities).
- $64.4 million in losses on residential mortgage loans.
- $34.5 million in losses on commercial mortgage whole loans.
- $48.5 million in one-time after-tax losses (Q3 2010) related to severance and goodwill write-offs from exiting the medical insurance business.
Q4 net income included net realized capital losses of $37.3 million, primarily from fixed maturity securities and mortgage loans.
Management Commentary
Management highlighted a "strong finish" to the year with record AUM and increased operating earnings. The hybrid business model and diversification were cited as key drivers. The company expects to capitalize on growth opportunities in 2011 as the economic recovery takes hold.
Risks and Contingencies
The filing includes standard forward-looking statement disclaimers. Key risks identified include:
- Adverse capital and credit market conditions affecting liquidity and cost of capital.
- Continued difficult conditions in global capital markets and the general economy.
- Investment risks diminishing the value of invested assets.
- Regulatory changes and requirements to post collateral.
- Reliance on subsidiary dividends to meet debt obligations.
Investor Verification Checklist
- Verify the reconciliation of non-GAAP operating earnings to GAAP net income, specifically the treatment of realized capital losses on mortgage-backed securities.
- Confirm the impact of the $48.5 million one-time charge related to the exit from the medical insurance business on future periods.
- Review the details of the $1.6 billion excess capital and the 420% risk-based capital ratio to assess solvency margins.
- Monitor the trend in Individual Life earnings, which declined due to reserve adjustments, to assess long-term profitability in that segment.
- Validate the sustainability of the 14% growth in average assets under management against the flat operating expense base.