Principal Financial Group, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless otherwise noted. PFG provides retirement and income, asset management, international and U.S. insurance products and services. Figures are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and position
- Revenue: $3,208.5, down $1,342.8 (29%) from $4,551.3. The decline was driven mainly by lower premiums and other considerations, particularly fewer large single-premium annuity sales; these sales can vary substantially between periods. Fees and other revenues increased 4% to $1,193.9, and net investment income increased 5% to $1,028.1.
- Earnings: Income before tax was $613.9 versus $328.2; net income attributable to PFG was $517.1 versus $288.9. Diluted EPS rose to $1.87 from $1.04. The effective tax rate increased to 16% from 13%. Net income growth benefited from lower DAC amortization and higher fee revenue, among other factors.
- Operating earnings by segment: Retirement and Income Solutions $288.0 (up from $205.1); Principal Global Investors $141.1 (up from $111.7); Principal International $75.1 (up from $30.8); U.S. Insurance Solutions $95.2 (down from $129.5); Corporate loss $93.8 (versus $91.1). Total segment pre-tax operating earnings were $505.6 versus $386.0.
- Cash flow: Operating cash provided was $140.8, sharply below $1,589.1; management attributed the reduction mainly to timing fluctuations in receivables and payables and the absence of prior-year real estate sale proceeds. Investing used $1,019.2; financing provided $32.1. Cash and cash equivalents ended the quarter at $2,003.5, down from $2,849.8 at year-end.
- Margins: The filing does not present a consolidated operating margin as a headline measure. As simple ratios of reported results, pre-tax income was about 19.1% of revenue versus 7.2% in Q1 2020; PFG-attributable net income was about 16.1% versus 6.3%. Comparability is affected by the substantial change in annuity premiums and related benefits.
- Balance sheet and debt: Total assets were $295,634.6 versus $296,627.7 at December 31, 2020; stockholders’ equity was $15,462.3 versus $16,617.3. Total debt was $4,363.4, essentially unchanged. Debt was 28% of PFG-attributable equity and 22% of total capitalization, compared with 26% and 21%, respectively, at year-end.
- Investments and other measures: Total investments were $104,761.9. Available-for-sale fixed maturities fell to $75,740.9 from $78,710.3; the company attributed the decline in net unrealized gains primarily to rising interest rates, partly offset by tighter credit spreads. AOCI fell to $953.8 from $2,383.1, with Q1 other comprehensive loss of $1,429.5. Principal Global Investors AUM ended at $507.7 billion; Principal International AUM was $160.3 billion.
Material changes and management commentary
- Consolidated revenue fell despite growth in fees and investment income, reflecting a $1,455.9 decrease in premiums and other considerations. In Retirement and Income Solutions, premiums fell $1,417.6, while associated benefits and claims fell $1,468.4; management linked both changes primarily to lower single-premium annuity activity.
- U.S. Insurance Solutions operating earnings declined as COVID-19 claims increased and non-COVID claims returned toward more normal levels after suppressed claims in 2020. Retirement and Income Solutions benefited from higher account values and favorable equity markets; Principal International benefited from favorable relative market performance on required regulatory investments.
- Management described the company as having a strong capital and liquidity position and said it was monitoring liquidity amid COVID-19-related uncertainty. It cited cash and liquid assets, revolving credit facilities, contingent funding arrangements, a strong risk-based capital position and laddered debt maturities; the next long-term debt maturity was not until 2022.
- No numerical earnings or revenue guidance for the year was provided in the supplied filing text. Management cautioned that interim results are not necessarily indicative of full-year results.
Liquidity, risks, contingencies and unusual items
- At March 31, PFG reported $2,800.2 of cash and liquid assets at holding companies and other subsidiaries available for corporate purposes. Committed revolving facilities totaled $800.0, with no amounts outstanding; total listed short-term credit capacity was $954.1, of which $84.0 was outstanding. Commercial paper was also unused.
- Common dividends paid were $152.2 and share repurchases were $115.5 during the quarter; declared dividends were $0.56 per share. Principal Life paid $300.0 in dividends to its parent, all extraordinary and approved by Iowa’s insurance commissioner. Its stated 2021 ordinary dividend limit was approximately $932.5, subject to timing and regulatory rules.
- Market risks include interest rates, equity prices, credit spreads, foreign exchange, investment valuations and policyholder behavior. A hypothetical 100-basis-point parallel increase in rates was estimated to reduce the reported net fair value of included financial assets and derivatives by $5,128.7; this is a sensitivity scenario, not a forecast, and excludes material assets and liabilities that may partly offset the exposure. A modeled equity-market shock was estimated to reduce annual segment pre-tax operating earnings by approximately 5%–7% over 12 months, excluding potential DAC and actuarial-balance unlocking.
- The company cited COVID-19, capital-market and economic conditions, low or changing interest rates, investment and credit losses, insurance experience differing from assumptions, regulation, litigation, ratings changes, foreign operations and other risks. It reported no material changes to the risk factors in its 2020 Form 10-K.
- Available-for-sale fixed maturities had $563.3 of gross unrealized losses without a credit-loss allowance, up from $206.2 at year-end; management attributed the increase primarily to higher interest rates and stated it expected recovery of amortized cost. The allowance for credit losses on these securities was $10.5.
- Management reported no significant COVID-19-related loan modifications within the specified relief guidance in Q1 and no significant modified loans meeting troubled-debt-restructuring criteria. The filing disclosed $107.0 maximum exposure under certain guarantees and $750.0 under contingent funding agreements for Treasury principal and interest strips; the maximum future exposure on a Chilean retirement-fund relative-return guarantee is indeterminable. Management said material payments under guarantees were considered remote.
- In an ERISA class action concerning Principal Life’s Principal Fixed Income Option, the district court ruled for Principal Life on all claims on April 8, 2021, after the quarter-end. The company reported no accrued loss for the matter as of March 31.
- The long-duration insurance-contract accounting standard, effective for PFG January 1, 2023, is expected to significantly change accounting for many insurance and annuity products; the ultimate financial-statement impact was not yet clear.
Key facts for investors to verify
- How much of the year-over-year earnings improvement reflects sustainable underlying operations versus lower DAC amortization, market movements, reserve effects and other adjustments.
- Whether annuity premium volumes and related benefit liabilities normalize after the unusually large Q1 2020 comparison.
- Drivers of the sharp reduction in operating cash flow and the outlook for cash generation, holding-company liquidity and statutory capital.
- Interest-rate exposure, unrealized investment losses, credit quality and the potential effects of market changes on DAC, reserves and equity.
- COVID-19 claims trends in U.S. Insurance Solutions and the durability of performance in Principal International and asset management.
- Regulatory approval requirements and subsidiary dividend capacity, as well as the legal and accounting implications of disclosed guarantees and contingencies.