Business context and reporting period
Principal Financial Group, Inc. (Nasdaq: PFG) filed this Form 10-K for the fiscal year ended December 31, 2020—not a standalone fourth-quarter report. The company provides retirement, asset management and insurance products through four operating segments and a Corporate segment. Assets under management were $806.6 billion at year-end, up from $735.3 billion.
Financial performance and position
| Metric | 2020 | 2019 |
|---|---|---|
| Total revenue | $14.742 billion | $16.222 billion |
| Income before tax | $1.694 billion | $1.693 billion |
| Net income attributable to PFG | $1.396 billion | $1.394 billion |
| Diluted EPS | $5.05 | $4.96 |
| Net cash from operating activities | $3.739 billion | $5.493 billion |
| Total assets | $296.628 billion | $276.088 billion |
| Total debt | $4.364 billion | $3.828 billion |
| PFG stockholders’ equity | $16.559 billion | $14.618 billion |
Net income attributable to PFG was approximately 9.5% of revenue in 2020 versus 8.6% in 2019 (calculated). Net investment income declined to $3.891 billion from $3.998 billion; the reported investment yield fell to 4.0% from 4.4%. Net realized capital gains were $302.6 million, compared with a $52.8 million loss in 2019. The effective tax rate was 16%, versus 15%.
Operating cash flow fell $1.755 billion, primarily reflecting lower pension risk transfer and individual fixed annuity sales and timing changes in settlements. Investing activities used $5.026 billion; financing activities provided $1.621 billion. Year-end cash and cash equivalents were $2.850 billion. Management cited $2.880 billion of cash and liquid assets across holding companies and other subsidiaries for corporate purposes. Debt-to-equity was 26% and debt-to-capitalization 21%, both unchanged year over year. Management said liquidity and capital were strong and identified revolving facilities, contingent funding arrangements and liquid assets as additional resources.
Material changes versus 2019
- Revenue declined 9.1%, chiefly because premiums and other considerations fell $1.829 billion, primarily on lower single-premium group and individual annuity sales. Fees increased $101 million; lower net investment income was more than offset by the swing in realized gains and losses.
- PFG-attributable net income was nearly flat: the $299.1 million after-tax improvement in realized capital gains and losses was largely offset by higher non-COVID claims, less favorable actuarial updates, acquired-business losses and lower Brazil equity-method earnings.
- Segment pre-tax operating earnings: Retirement and Income Solutions rose to $966.9 million from $874.0 million; Principal Global Investors rose to $512.9 million from $483.3 million; Principal International fell to $243.6 million from $390.7 million; and U.S. Insurance Solutions fell to $239.9 million from $521.6 million. Corporate pre-tax losses narrowed to $326.4 million from $380.3 million.
- Principal Global Investors AUM increased to $502.1 billion from $458.6 billion, mostly on investment performance. Principal International AUM decreased to $165.2 billion from $169.7 billion, as $14.2 billion of adverse currency translation and $2.7 billion of Chilean hardship withdrawals outweighed positive cash flow and market performance.
- Shareholders received $921.5 million in dividends and repurchases, compared with $887.0 million in 2019. Repurchases were paused in March 2020 and resumed in November. Declared dividends per share increased to $2.24 from $2.18.
Outlook, commentary, risks and unusual items
The filing does not provide a specific quantified earnings or revenue forecast. Management noted that market volatility affects fee income and account values; continued COVID-19 effects and unemployment could weigh on insurance sales, group-benefit growth and retirement-plan contributions. Low interest rates may pressure investment spreads, guarantees, reserves and hedge costs. The filing also identifies equity, credit, real estate, currency, liquidity, policyholder behavior, regulatory and cybersecurity risks.
- Actuarial assumption updates and model refinements reduced consolidated net income by $118.2 million in 2020, compared with $36.5 million in 2019; the largest adverse 2020 impact was in Individual Life.
- COVID-19 effects varied by business: the company reported $25.6 million of COVID-related Individual Life claims, while reduced dental and vision claims partly benefited Specialty Benefits. Higher non-COVID claims also weighed on results.
- The 2019 Wells Fargo Institutional Retirement & Trust acquisition continued to require integration and customer migration. Management reported a $71.0 million pre-tax loss related to the acquired business in Retirement and Income Solutions—Fee for 2020. Migration began in late 2020 and is expected to continue in 2021.
- On January 28, 2021, the company signed an agreement to sell its India investment and retirement operations to Sundaram Mutual, subject to regulatory approval.
- Principal Life’s statutory surplus exceeded minimum RBC requirements. Its 2021 ordinary dividend limit was approximately $932.5 million; dividends above statutory limits require Iowa regulatory approval. Insurer ratings were strong, though Fitch and S&P had negative outlooks; Moody’s had a positive outlook and A.M. Best a stable outlook.
- An ERISA class action concerning the Principal Fixed Income Option remained pending after a November 2020 bench trial; the court had not issued a decision. No loss was accrued because management considered loss not probable and could not reasonably estimate the amount. Management stated it did not believe pending matters would materially adversely affect the business or financial position.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. The filing identifies deferred acquisition cost estimation and valuation of certain investments as critical audit matters.
Most important facts for investors to verify
- Whether investment gains, including derivative and portfolio-rebalancing gains, are repeatable and how underlying operating earnings trend without them.
- Whether Individual Life actuarial assumptions, claims experience and reserves stabilize, and how the 2023 long-duration insurance accounting standard may affect reported results and capital.
- Progress, costs, client retention and expected benefits from the Wells Fargo IRT integration; also confirm completion and terms of the proposed India sale.
- Cash-flow generation, insurer statutory capital and dividend capacity, holding-company liquidity, debt maturities and access to contingent funding.
- Commercial mortgage and fixed-maturity credit quality, particularly balloon maturities, California concentration and pandemic-related exposures; assess the adequacy of credit-loss allowances.
- Developments in the pending ERISA case, tax examinations and regulatory requirements, as well as the mixed rating-agency outlooks.