Principal Financial Group, Inc. — Q2 2020 Form 10-Q
Business context and reporting period
Principal Financial Group (PFG) provides retirement and income solutions, asset management, international savings and insurance products. This unaudited filing covers the quarter and six months ended June 30, 2020; balance-sheet comparisons are against December 31, 2019. Management cautions that interim results may not indicate full-year results, particularly given COVID-19 uncertainty.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $3,114.6 million | $3,972.6 million | $7,665.9 million | $7,716.5 million |
| Income before taxes | $498.6 million | $450.3 million | $826.8 million | $976.3 million |
| Net income attributable to PFG | $398.3 million | $386.3 million | $687.2 million | $816.2 million |
| Diluted EPS | $1.45 | $1.37 | $2.49 | $2.90 |
| Operating cash flow | Not separately provided for the quarter | $2,046.1 million | $2,678.4 million |
- Q2 pretax margin, calculated as income before taxes divided by revenue, was approximately 16.0%, versus 11.3% a year earlier. The comparable six-month figures were approximately 10.8% and 12.7%.
- Six-month operating, investing and financing cash flows were $2,046.1 million provided, $2,221.1 million used and $809.5 million provided, respectively. Cash and cash equivalents ended the period at $3,150.4 million, up from $2,515.9 million at year-end.
- At June 30, total assets were $271.3 billion, total liabilities $255.7 billion and total stockholders’ equity $15.3 billion. Separate-account assets and liabilities were each $155.9 billion.
- Total debt was $4.24 billion, including $76.3 million short-term and $4.16 billion long-term debt. Debt-to-equity was 28%, versus 26% at year-end; debt-to-capitalization was 22%, versus 21%.
- Fixed maturities available-for-sale totaled $74.3 billion. The company reported $6.19 billion of net unrealized gains on these securities before related adjustments; accumulated other comprehensive income was $1.45 billion, up from $1.04 billion at year-end.
Material changes versus comparable periods
- Q2 revenue declined $858.0 million, primarily because of lower single-premium group and individual annuity sales in Retirement and Income Solutions and lower international premiums. PFG-attributable net income nevertheless rose $12.0 million, with lower deferred acquisition cost (DAC) amortization from more favorable second-quarter markets contributing to the increase.
- For the first six months, revenue was nearly flat, but PFG-attributable net income fell $129.0 million. Management cited higher DAC amortization amid unfavorable market comparisons, foreign-currency headwinds and weaker relative performance of required regulatory investments in Latin America.
- Q2 net realized capital losses were $27.4 million, including losses on derivatives not designated as hedges; six-month net realized capital gains were $104.0 million. These results were volatile and included market-value movements and portfolio rebalancing.
- Six-month operating cash flow fell $632.3 million year over year, which management primarily attributed to timing-related fluctuations in receivables and payables. Financing cash flow increased from $4.0 million to $809.5 million, reflecting net investment-contract deposits and higher banking deposits.
- COVID-19-related temporary dental and vision office closures reduced Specialty Benefits claims; the company reported a $67.6 million net Q2 benefit in that business. This was partly offset by COVID-related individual-life claims and other unfavorable claims experience.
Outlook, commentary, risks and unusual items
- Management described PFG as having a strong capital and liquidity position and said it was monitoring liquidity closely. It cited $2.32 billion of cash and liquid assets held in holding companies and other subsidiaries for corporate purposes, committed credit facilities and no commercial paper outstanding. The filing does not provide numerical earnings guidance.
- Management warned that lower equity markets had reduced retirement account values and asset-management AUM, potentially pressuring future fee revenue. Principal International AUM was $143.5 billion at June 30, down from $169.7 billion at year-end, largely reflecting currency translation. Rising unemployment could affect sales and retirement-plan deposits; reduced dental and vision claims partly offset the pressure in Specialty Benefits.
- COVID-19 risks include higher insurance claims, operational disruption, investment defaults or valuation declines, liquidity demands from withdrawals and reduced sales. The company also noted uncertainty in estimates for investments, DAC, reserves and other actuarial balances as pandemic effects evolve.
- Credit-loss accounting adopted January 1, 2020 resulted in an $8.4 million reduction to opening retained earnings. The company recorded a $48.7 million allowance for financing receivables at June 30; management said COVID-related forecast changes increased allowances for commercial and residential mortgages and direct financing leases.
- PFG issued $500 million of 2.125% senior notes due 2030 in June for general corporate purposes. It paid $307.1 million in common dividends and repurchased $231.8 million of stock in the first half. The $900 million repurchase authorization was paused in March.
- Ratings agencies affirmed key ratings but several revised PFG outlooks to negative in 2020, citing pandemic-related economic disruption and weaker earnings or capital prospects. A.M. Best maintained a stable outlook for insurer financial-strength ratings.
- An ERISA class action concerning Principal Life’s Principal Fixed Income Option was remanded after an appeals court reversed summary judgment. No loss was accrued because management did not consider loss probable and could not reasonably estimate an amount. Management said pending litigation and regulatory matters were not expected to materially affect business or financial position, while noting outcomes remain uncertain.
- The company disclosed a maximum $111 million exposure under certain guarantees and $750 million under contingent funding agreements; it also provides a Chilean fund relative-return guarantee whose maximum future exposure is indeterminable. Management considered material payments under these arrangements unlikely.
Most important facts for investors to verify
- How COVID-19, unemployment and markets affect insurance claims, annuity and retirement sales, customer withdrawals, AUM and future fee revenue.
- Whether investment credit quality, mortgage delinquencies and allowance levels worsen; also monitor unrealized losses and the company’s ability and intent to hold securities through recovery.
- Whether six-month earnings pressure persists, including DAC amortization, foreign-exchange effects, variable investment income and derivatives-related volatility.
- Liquidity and capital at the relevant insurance subsidiaries, including dividend capacity, rating outlooks, debt levels and the status of paused share repurchases.
- Developments in the ERISA litigation, regulatory matters and guarantee exposures, including any future accruals or revised estimates.