Business Context and Reporting Period
This Form 8-K was filed by Principal Financial Group, Inc. on November 18, 2008. The report serves as a Regulation FD disclosure to address market commentary and potential misinterpretations regarding the company's financial condition following its third-quarter 2008 earnings call on November 4, 2008. The filing specifically clarifies the company's exposure to annuities with living benefits, credit ratings, and commercial real estate holdings.
Key Financial Metrics and Liquidity
- Liquidity: Cash and cash equivalent holdings increased by more than 50% from June 30, 2008, to $2.3 billion at the end of the third quarter of 2008.
- Commercial Real Estate: The company holds an $11 billion commercial mortgage loan portfolio, with every loan currently performing on schedule.
- Annuity Exposure: The block of annuities with guaranteed minimum withdrawal benefits (GMWB) totals $1 billion, representing approximately 0.5% of third-quarter 2008 earnings.
- Investment Strategy: New cash flows are being invested primarily in government and agency-backed securities. The general account securities lending program has been closed out.
Material Changes and Clarifications
The filing addresses specific market concerns rather than reporting new operational changes:
- Rating Affirmations: Moody's Investors Service affirmed Principal's financial strength and debt ratings with stable outlooks on November 7, 2008. Fitch affirmed similar ratings in September 2008.
- Market Misinterpretation: Management asserts that industry commentary has incorrectly equated Principal's exposure to GMWB risks with that of other insurers, noting Principal's exposure is minimal.
- Asset-Liability Management: The company emphasizes its ability to hold fixed maturity assets to maturity due to the long-term nature of its liabilities, rendering gross unrealized losses an inaccurate indicator of future losses.
Outlook, Risks, and Management Commentary
- Commercial Real Estate Outlook: Management anticipates that defaults and losses on commercial mortgages will increase in the future but expects this to occur over several years. The company plans to accommodate these losses through capital management techniques.
- Capital Flexibility: The company notes that its key growth businesses (U.S. Asset Accumulation, Principal Global Investors, and Principal International) require little capital for organic growth, generating substantial free cash flows. This allows flexibility to scale back capital-intensive businesses if necessary.
- Resilience to Downgrades: Management stated that even if industry-wide rating downgrades occur, the company's key growth engines could continue to operate successfully.
Investor Verification Checklist
- Verify the $2.3 billion cash and cash equivalent balance as of September 30, 2008, in the full Q3 2008 financial statements.
- Confirm the $1 billion GMWB exposure and its 0.5% contribution to Q3 earnings.
- Review the $11 billion commercial mortgage portfolio details for any subsequent changes in performance status.
- Monitor future credit rating actions by Moody's and Fitch to ensure the "stable" outlook remains intact.
- Assess the company's capital management techniques for handling anticipated future commercial real estate losses.