PFG

Business Context and Reporting Period

Company: Principal Financial Group, Inc. (NYSE: PFG)
Filing Type: Form 8-K (Current Report)
Date of Report: February 8, 2010
Reporting Period: Fourth Quarter and Full Year ended December 31, 2009

The filing announces financial results for the fourth quarter and full year 2009. The company operates in retirement and investment services, life and health insurance, and banking, serving approximately 18.9 million customers globally.

Key Financial Metrics

Full Year 2009 vs. 2008

• Net Income (GAAP): $589.7 million ($1.97 per diluted share) vs. $425.1 million ($1.63 per diluted share).
• Operating Earnings (Non-GAAP): $804.1 million ($2.69 per diluted share) vs. $942.7 million ($3.61 per diluted share).
• Operating Revenues: $9,322.8 million vs. $10,725.1 million.
• Operating Expenses: Decreased by $375.6 million (12%) compared to 2008.
• Assets Under Management (AUM): $284.7 billion (Dec 31, 2009) vs. $247.0 billion (Dec 31, 2008).
• Book Value per Share: $23.05 (including accumulated other comprehensive income), more than tripled from the prior year.

Fourth Quarter 2009 vs. 2008

• Net Income (GAAP): $141.9 million ($0.44 per diluted share) vs. Net Loss of $7.5 million ($(0.03) per diluted share).
• Operating Earnings (Non-GAAP): $200.9 million ($0.62 per diluted share) vs. $179.0 million ($0.69 per diluted share).
• Operating Revenues: $2,368.7 million vs. $2,527.0 million.
• Operating Return on Average Equity: 10.6% (trailing twelve months).

Liquidity and Capital

• Risk-Based Capital Ratio: Estimated 415% to 425% at year-end.
• Excess Capital: Approximately $1.5 billion.
• Liquid Assets: Approximately $6.4 billion.

Material Changes and Segment Performance

Net Income Drivers: Full year net income included net realized capital losses of $213.7 million, driven by losses on fixed maturity securities ($279.4 million), commercial mortgage loans ($78.1 million), and derivatives ($44.7 million), partially offset by gains on deferred policy acquisition costs ($99.0 million).

Segment Highlights (Q4 2009)

• U.S. Asset Accumulation: Operating earnings of $125.3 million (up from $102.8 million). Driven by higher average account values in Full Service Accumulation and Individual Annuities. Investment Only earnings declined $24.8 million due to lower account values.
• Global Asset Management: Operating earnings of $12.7 million (down from $27.0 million). The prior year included a $15.6 million performance fee not present in the current quarter.
• International Asset Management and Accumulation: Operating earnings of $39.5 million (up from $18.4 million). Driven by higher fee revenues and gains on bonds in Brazil. AUM reached a record $34.6 billion.
• Life and Health Insurance: Operating earnings of $44.6 million (down from $50.6 million). Decline attributed to higher claim costs in the Health division ($11.4 million loss vs. $5.6 million loss prior year).
• Corporate: Operating loss of $21.2 million (vs. $19.8 million loss), primarily due to higher interest on corporate debt.

Outlook, Risks, and Management Commentary

Management Commentary: CEO Larry D. Zimpleman described 2009 as a year of strong management action to address challenging economic conditions, citing expense alignment, liquidity enhancement, and capital strengthening. CFO Terry Lillis noted a substantial recovery in asset valuations but warned that the economic recovery remains tenuous with fragile consumer confidence.

Strategic Actions:

• Continued scaling back of the "Investment Only" business, reducing the block by $4.3 billion in 2009.
• Record sales in key U.S. retirement products ($14.9 billion combined in 2009).
• Extension of the joint venture with Banco do Brasil for 23 years (pending approvals).

Risks and Contingencies:

• Market Conditions: Adverse capital and credit market conditions could affect liquidity and access to capital.
• Investment Risks: Diminishing value of invested assets and investment returns credited to customers.
• Regulatory and Legal: Changes in laws, regulations, or accounting standards; potential impairment of goodwill from acquisitions.
• Operational: Counterparty credit risk, foreign currency fluctuations, and reliance on subsidiary dividends for debt payments.

Investor Verification Checklist

• Non-GAAP Reconciliation: Verify the reconciliation of Operating Earnings to GAAP Net Income, specifically the treatment of realized capital losses and deferred policy acquisition costs.
• Impairment Details: Review the breakdown of the $453.2 million net impairment losses on available-for-sale securities for the full year, particularly the $93.9 million related to commercial mortgage-backed securities.
• Capital Ratios: Confirm the estimated risk-based capital ratio of 415-425% against regulatory requirements.
• Investment Only Reduction: Assess the impact of the $4.3 billion reduction in the Investment Only block on future fee income and capital release.
• Health Division Claims: Monitor the Health division's claim costs and seasonality, which contributed to a decline in Life and Health segment earnings.