Principal Financial Group, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Business context and reporting period
Principal provides retirement and income solutions, asset management, international savings and insurance, and U.S. insurance products. In Q2, it completed a coinsurance-with-funds-withheld reinsurance transaction with Talcott Life & Annuity Re, ceding its in-force U.S. retail fixed annuity and universal life with secondary guarantee (ULSG) businesses. The transaction’s economics were effective January 1, 2022, and Q2 results include impacts for the first half; the company cautions that Q2 results are not comparable with prior periods.
Key financial metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $6,658.7 | $3,539.4 | $9,768.7 | $6,747.9 |
| Income before taxes | $3,897.1 | $432.6 | $4,325.1 | $1,046.5 |
| Net income attributable to Principal | $3,059.4 | $361.8 | $3,435.6 | $878.9 |
| Diluted EPS | $11.94 | $1.32 | $13.21 | $3.19 |
| Segment pre-tax operating earnings | $526.8 | $556.2 | $1,033.0 | $1,061.8 |
- Reported earnings were dominated by reinsurance-related valuation items. The funds-withheld embedded derivative generated a $3,067.3 million gain and realized gains on funds-withheld assets were $689.0 million in both Q2 and the first half. These items substantially explain the increase in reported revenue and net income. Segment pre-tax operating earnings, a company-defined non-GAAP measure, declined 5% in Q2 and 3% for the first half.
- Q2 net investment income was $816.5 million, down from $1,045.5 million; first-half net investment income was $1,934.6 million, down from $2,073.6 million. Net realized capital losses were $227.9 million in Q2 and $338.4 million for the first half.
- Operating cash flow for the first half was $838.7 million, versus $1,133.6 million. Investing activities used $97.9 million; financing activities provided $100.3 million. Cash and cash equivalents ended June at $3,173.1 million.
- Total assets were $293,220.2 million, versus $304,657.2 million at year-end 2021. Total liabilities were $281,873.1 million; total stockholders’ equity was $11,078.6 million, down from $16,125.8 million. AOCI moved from $1,610.9 million of income to a $5,630.1 million loss, primarily reflecting unrealized fixed-maturity losses as interest rates rose and credit spreads widened.
- Total debt was $4,347.6 million ($66.9 million short-term and $4,280.7 million long-term), broadly unchanged from $4,360.0 million at year-end. Debt-to-equity increased to 39% from 27%, largely reflecting lower equity. Holding companies and other subsidiaries held $1,723.9 million in cash and liquid assets. The $800 million revolving facilities were undrawn; total facility capacity including Chilean lines was $922.5 million, with $66.9 million outstanding.
- No single consolidated operating margin is presented as a key performance measure in the filing; reported revenue and earnings are affected by insurance accounting and the unusual reinsurance valuation items.
Material changes versus comparable periods
- Q2 and first-half reported net income rose sharply, but the increase was principally associated with the newly completed reinsurance transaction and its embedded-derivative valuation, not equivalent growth in ongoing segment operating earnings.
- Market declines and lower average assets under management weighed on fee-related results. Principal Global Investors’ AUM fell to $469.8 billion from $537.4 billion at the start of Q2, including adverse investment performance and $23.1 billion transferred to third parties under the reinsurance transaction.
- U.S. Specialty Benefits benefited from business growth and improved claims experience. Principal International operating earnings increased, including contributions from Brazilian equity-method investments and inflation-linked returns; foreign-exchange movements were a headwind.
- The company repurchased $951.3 million of common stock in the first half and paid $328.7 million of common dividends. Dividends declared were $0.64 per share in Q2, versus $0.61 a year earlier.
Outlook, risks and unusual items
- The filing provides no specific full-year earnings or revenue guidance. Management described liquidity and capital as strong, while noting continued monitoring of economic and market volatility.
- Management estimated adoption of the long-duration insurance accounting standard, effective January 1, 2023, would reduce transition-date stockholders’ equity by approximately $4.8 billion to $5.8 billion. The estimate is subject to change as implementation work continues.
- Interest-rate, credit-spread, equity-market and foreign-currency movements may affect investment values, asset-management fees, policyholder behavior, hedging results and actuarial balances. A hypothetical 100-basis-point rate increase was estimated to reduce the net fair value of specified financial assets and derivatives by $2,987.3 million at June 30; the filing notes that excluded liabilities would partly offset this exposure economically.
- Reinsurance creates counterparty exposure: net ceded recoverables were $14.1 billion, and 99.8% was concentrated among the five largest ceded reinsurers. The company remains contingently liable if reinsurers cannot meet assumed obligations.
- The company reported no material change to previously disclosed risk factors. It said a pending ERISA class-action appeal was not probable of loss and had no estimated loss accrual; management stated litigation outcomes remain uncertain and losses may not be estimable.
- Guarantees included approximately $85 million maximum exposure under certain third-party guarantees and $750 million under contingent funding agreements; the future maximum exposure of a Chilean minimum-return guarantee is indeterminable. Management considered material payments under these guarantees unlikely.
Important facts for investors to verify
- Separate the $3.067 billion embedded-derivative gain and $689 million funds-withheld asset gain from recurring operating performance; review the company’s reconciliation of GAAP results to segment pre-tax operating earnings.
- Assess the reinsurance transaction’s ongoing economics, funds-withheld accounting, recoverable and deposit balances, and Talcott counterparty credit exposure.
- Review the drivers of the $7.375 billion first-half other comprehensive loss and the resulting reduction in equity, including the investment portfolio’s unrealized losses and management’s ability to hold securities through recovery.
- Track operating cash flow, holding-company liquidity, statutory capital and dividend capacity, and the effect of continued repurchases and dividends.
- Monitor the estimated $4.8–$5.8 billion accounting-standard transition impact, implementation updates, and any changes to assumptions or estimates.