PFG

Business Context and Reporting Period

Company: Principal Financial Group, Inc.
Filing Type: Form 8-K (Current Report)
Reporting Period: Quarter ended March 31, 2003
Date of Report: May 5, 2003
Business Overview: A diversified financial services firm offering retirement and investment services, life and health insurance, and mortgage banking. The company serves approximately 13 million customers globally with $116.3 billion in assets under management as of March 31, 2003.

Key Financial Metrics

Note: Q1 2002 Net Loss included a $280.9 million cumulative effect of accounting change (SFAS 142) and $280.6 million in other after-tax adjustments.

Material Changes vs. Prior Period

• Profitability Turnaround: The company reported a net income of $155.7 million, a significant improvement from a net loss of $34.9 million in Q1 2002. Operating earnings increased 15% to a record $210.5 million.
• Revenue Growth: Operating revenues rose 11% year-over-year, driven by growth across all four operating segments.
• Mortgage Banking Surge: Segment operating earnings nearly doubled to $52.3 million. Production earnings increased 310% to $109.6 million due to higher loan volumes and margins, though servicing operations incurred a $57.3 million loss due to model refinements and impairments.
• Asset Management: U.S. Asset Management operating earnings declined slightly to $97.5 million due to higher incentive compensation accruals, despite strong pension business earnings growth of 7%.
• International Segment: Operating earnings grew to $6.6 million from $1.2 million, excluding the impact of the BT Financial Group sale which closed in late 2002.
• Capital Markets: Net realized/unrealized capital losses were $54.1 million in Q1 2003, compared to gains of $63.2 million in Q1 2002.

Guidance, Outlook, and Risks

Outlook for 2003

• Q2 2003 Net Income: Expected to range from $0.37 to $0.47 per diluted share.
• Full Year 2003 Net Income: Expected to range from $1.73 to $1.88 per diluted share.
• Operating Earnings: Q2 expected at $0.56 to $0.59 per share; Full Year expected at $2.25 to $2.40 per share.
• Assumptions: Estimates assume domestic equity market performance improves by roughly 2% per quarter for the remainder of the year. Estimates include $40-$60 million in estimated net realized capital losses for Q2 and $170 million for the full year.

Management Commentary

CEO J. Barry Griswell highlighted strong execution of strategy, record sales in pension full-service accumulation ($2.5 billion), and deposit growth of 29% in U.S. asset accumulation businesses. The company received top client satisfaction ratings in 401(k) plan sponsor studies.

Risks and Contingencies

• Market Volatility: Results are sensitive to equity market performance and interest rate changes.
• Accounting Adjustments: The company began expensing employee stock options retroactive to Jan 1, 2002, resulting in a $2.6 million after-tax expense in Q1 2003.
• Discontinued Operations: The sale of BT Financial Group impacts year-over-year comparability for the International segment.

Investor Verification Checklist

• Operating Earnings vs. GAAP: Verify the reconciliation between the reported "Operating Earnings" ($210.5M) and GAAP Net Income ($155.7M), specifically the $54.1M in net realized/unrealized capital losses.
• Mortgage Servicing Losses: Review the $57.3 million loss in mortgage servicing, driven by $55.8 million in model refinement impacts on mortgage servicing rights valuation.
• Capital Loss Estimates: Confirm the company's assumption of $170 million in net realized capital losses for the full year 2003 and its impact on the earnings guidance.
• Share Repurchases: Note the repurchase of 6.5 million shares for $184 million in Q1 2003 under the $300 million authorized program.
• Asset Base: Distinguish between the reported $116.3 billion in assets under management and the $91.8 billion in total assets on the balance sheet.