PFG

Business Context and Reporting Period

Company: Principal Financial Group, Inc. (NYSE: PFG)
Filing Type: Form 8-K (Current Report)
Reporting Period: Third Quarter ended September 30, 2003
Date of Report: November 3, 2003

The filing announces third-quarter 2003 results, highlighting a return to profitability driven by strong performance in U.S. Asset Management and Accumulation. The company serves approximately 14.8 million customers globally with $134.8 billion in assets under management.

Key Financial Metrics

*Q3 2002 AUM includes BT Financial Group; excluding BT, AUM increased 29% year-over-year.

Material Changes vs. Prior Period

• Profitability Turnaround: The company reported a net income of $216.3 million in Q3 2003, a significant improvement from a net loss of $158.4 million in Q3 2002. The prior year loss included a $280.9 million goodwill write-down and $194.9 million loss from discontinued operations (BT Financial Group).
• Operating Earnings Growth: Operating earnings rose 1% to $204.3 million, while operating EPS increased 9% to $0.63, reflecting share repurchases and improved operational efficiency.
• Segment Performance:
  • U.S. Asset Management: Record operating earnings of $110.5 million (up 30% YoY), driven by a 24% increase in pension earnings.
  • Mortgage Banking: Operating earnings declined 53% to $29.2 million due to decreased gains on loan sales from rising interest rates and a $20.3 million loss from mortgage servicing rights valuation adjustments.
  • Life and Health: Operating earnings decreased slightly to $52.8 million due to lower individual life sales.
• Cash Flow: Net cash flow from U.S. asset accumulation businesses was $0.6 billion in Q3, down from $1.0 billion a year ago, primarily due to $417 million in net outflows from maturing Institutional GIC contracts.

Guidance, Outlook, and Risks

Management Commentary

CEO J. Barry Griswell attributed the results to a focus on small and medium-sized businesses and a diversified earnings mix. He noted that pension account values reached a record $72.5 billion and that retention of at-risk pension assets remained strong at 55% for the quarter.

Financial Guidance

• Q4 2003 Net Income: Expected to range from $0.52 to $0.55 per diluted share (includes estimated $25 million after-tax net realized capital losses).
• Q4 2003 Operating Earnings: Expected to range from $0.60 to $0.63 per diluted share.
• Full Year 2004 Net Income: Expected to range from $2.45 to $2.55 per diluted share (includes estimated $65 million after-tax net realized capital losses).
• Full Year 2004 Operating Earnings: Expected to range from $2.65 to $2.75 per diluted share.

Risks and Contingencies

• Accounting Changes: Early adoption of FIN 46 (Variable Interest Entities) resulted in a $2.2 million loss and a $3.7 billion increase in consolidated assets and liabilities.
• Market Risks: Volatility in financial markets, interest rate changes, and foreign currency fluctuations.
• Operational Risks: Competitive factors, inability to retain sales representatives, and investment portfolio risks.

Key Facts for Investor Verification

• Non-GAAP Reconciliation: Verify the reconciliation of Operating Earnings to GAAP Net Income, specifically the $10.2 million in "other after-tax adjustments" which includes a $12.4 million gain from discontinued operations and a $2.2 million loss from FIN 46 adoption.
• Mortgage Servicing Valuation: Confirm the impact of the $20.3 million loss from model refinements on mortgage servicing rights, which significantly impacted the Mortgage Banking segment.
• Share Repurchases: Verify the $78.0 million spent on repurchasing 2.4 million shares under the $300 million program authorized in May 2003.
• Dividend Declaration: Confirm the annual dividend of $0.45 per share payable December 8, 2003.
• BT Financial Group Impact: Ensure year-over-year comparisons account for the sale of BT Financial Group in late 2002, which distorts Q3 2002 comparables for International Asset Management and discontinued operations.