Principal Financial Group, Inc. — 2022 Form 10-K
Business context and reporting period. This audited annual report covers the fiscal year ended December 31, 2022; it does not present fourth-quarter results separately. Principal provides retirement, asset management and insurance products through Retirement and Income Solutions, Principal Global Investors, Principal International and U.S. Insurance Solutions, plus a Corporate segment. At year-end, assets under administration were $1.456 trillion, including $635.3 billion of assets under management.
Financial performance and condition
| Metric | 2022 | 2021 |
|---|---|---|
| Total revenue | $17.492 billion | $14.263 billion |
| Income before income taxes | $6.060 billion | $2.084 billion |
| Net income attributable to Principal | $4.812 billion | $1.711 billion |
| Diluted earnings per share | $18.85 | $6.27 |
| Net cash provided by operating activities | $3.173 billion | $3.254 billion |
| Net investment income | $3.830 billion | $4.406 billion |
| Net realized capital gains (losses), excluding funds-withheld line | $(258) million | $3 million |
Reported revenue and earnings include material effects from the 2022 reinsurance transaction; therefore, the increase in reported net income is not a straightforward measure of underlying operating growth. Segment pre-tax operating earnings, a company-defined measure, were $2.065 billion versus $2.261 billion. Operating cash flow was broadly steady.
- Segment results: Retirement and Income Solutions pre-tax operating earnings were $1.090 billion (down from $1.141 billion); Principal Global Investors were $604 million (down from $708 million); Principal International was $309 million (roughly flat); U.S. Insurance Solutions was $532 million (up from $471 million). Corporate pre-tax operating loss widened to $469 million from $368 million.
- Assets under management: Principal Global Investors’ AUM declined to $464.7 billion from $546.5 billion, primarily from negative market performance. Principal International AUM increased to $156.5 billion from $152.1 billion, supported by market performance and currency translation, despite net outflows.
- Balance sheet and debt: Total assets were $292.240 billion, down from $304.657 billion. Total debt was $4.078 billion, down from $4.360 billion; debt-to-equity rose to 41% from 27%, and debt-to-capitalization to 29% from 21%, primarily reflecting the fall in equity. Attributable stockholders’ equity fell to $10.002 billion from $16.069 billion; accumulated other comprehensive loss shifted to $7.199 billion from $1.611 billion of income, largely reflecting the decline in fixed-maturity values as rates rose.
- Liquidity: Consolidated cash and cash equivalents were $4.848 billion, versus $2.332 billion. The company reported $2.103 billion of cash and liquid assets at holding companies and other subsidiaries. Its $800 million Principal Life credit facility was undrawn; the Chilean lines had $80.7 million outstanding against $136.9 million of capacity. The company said available resources and expected inflows were adequate for anticipated obligations.
- Capital returns: Principal returned $2.303 billion to common stockholders in 2022, comprising $642 million of dividends and $1.661 billion of share repurchases. Dividends declared were $2.56 per share, up from $2.44.
Material changes, outlook and risks
- Reinsurance transaction: In the second quarter, Principal ceded its in-force U.S. retail fixed annuity and universal life with secondary guarantee blocks to Talcott Life & Annuity Re, with economics effective January 1, 2022. The transaction generated a $3.653 billion gain from the change in fair value of the funds-withheld embedded derivative and $749 million of realized gains on funds-withheld assets. Management identified the embedded-derivative change as the primary reason net income increased. These items are unusual and materially affect year-over-year comparisons.
- Other earnings drivers: Third-quarter actuarial assumption updates and model refinements increased consolidated net income attributable to Principal by $130 million in 2022, versus a $14 million decrease in 2021. A $27 million goodwill impairment was recorded in Individual Life insurance. Specialty Benefits earnings benefited from lower COVID-19 claims and business growth, while asset-based fee revenues were pressured by market declines.
- Near-term outlook: The filing gives no specific consolidated earnings or revenue guidance. Management noted that market volatility can affect account values, AUM and fee revenue; unemployment may weigh on insurance sales and group growth. International earnings also face currency effects and local-market risks.
- Accounting change: Principal adopted long-duration targeted improvements (LDTI) on January 1, 2023. It estimated a transition-date reduction in total stockholders’ equity of approximately $5.3 billion, including about $5.1 billion in AOCI and $0.2 billion in retained earnings. The change alters measurement of insurance liabilities, market risk benefits and deferred acquisition costs.
- Key risks and contingencies: Interest-rate and credit-spread movements, equity-market declines, investment credit losses, commercial mortgage exposure, policyholder surrenders, reinsurance-counterparty performance, regulatory and tax changes, cybersecurity and international political or currency risks could affect results, capital or liquidity. Commercial mortgage loans were $14.0 billion in the U.S. investment portfolio; California represented 26% of that portfolio. The filing reports ongoing litigation and regulatory inquiries but states management does not believe pending matters will have a material adverse effect; outcomes remain uncertain.
- Audit and controls: Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. The auditor identified deferred acquisition cost estimation, investment valuation and accounting for the reinsurance transaction as critical audit matters.
Most important facts for investors to verify
- How much of 2022’s reported profit reflects the reinsurance-related embedded-derivative and asset-sale gains, rather than recurring segment operating earnings.
- The final LDTI transition effects and subsequent changes in earnings, AOCI, reserves and capital measures.
- Talcott’s creditworthiness, collateral and contractual protections, and the consequences if the reinsurance arrangement is recaptured or otherwise impaired.
- Whether AUM, account values, fee revenue and segment operating earnings stabilize after 2022 market declines.
- Insurance statutory capital and dividend capacity, including the stated approximately $430 million ordinary-dividend limit for Principal Life in 2023, subject to Iowa rules.
- Credit quality and liquidity risks in the investment portfolio, including unrealized fixed-maturity losses, commercial mortgage maturities and California concentration.