Principal Financial Group, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are with December 31, 2016. Figures are unaudited and in millions of dollars except per-share amounts, percentages, and AUM.
Business context and key financial metrics
Principal provides retirement and income products, asset management, international financial services, and U.S. insurance through Retirement and Income Solutions, Principal Global Investors, Principal International, U.S. Insurance Solutions, and Corporate.
| Metric | Q1 2017 | Q1 2016 / prior date |
|---|---|---|
| Total revenue | $3,049.4 | $3,036.6 |
| Income before tax | $414.0 | $439.8 |
| Net income attributable to Principal | $348.9 | $368.0 |
| Diluted EPS | $1.19 | $1.25 |
| Net investment income | $877.4 | $761.7 |
| Net realized capital gains (losses) | $(16.6) | $136.6 |
| Operating cash flow | $522.9 | $895.5 |
| Total assets / stockholders’ equity | $235,496.0 / $10,684.9 | $228,014.3 / $10,293.8 |
| Cash and cash equivalents | $1,534.7 | $2,719.6 at Dec. 31, 2016 |
| Total debt | $3,185.7 | $3,177.1 at Dec. 31, 2016 |
| Dividend declared per common share | $0.45 | $0.38 |
Net investment income yield was 4.6%, up from 4.2%. The filing does not report a single consolidated operating margin; its segment measure is pre-tax operating earnings. Total segment pre-tax operating earnings rose to $472.8 from $356.3, while GAAP pre-tax income fell. Operating cash flow declined; investing activities used $1,831.0 and financing activities provided $123.2. Debt to capitalization, excluding AOCI, was 22% versus 23% at year-end.
Material changes and segment performance
- Revenue was nearly flat. Higher fees and investment income largely offset lower premiums and a sharp reduction in realized gains.
- The $153.2 year-over-year swing in net realized gains/losses was driven principally by derivatives and related hedge activity, which moved from gains to losses by $212.2. The 2016 comparison included substantial derivative gains.
- Segment pre-tax operating earnings increased $116.5 overall: Retirement and Income Solutions rose to $244.2 from $181.4; Principal Global Investors to $100.0 from $79.7; Principal International to $100.9 from $68.0; and U.S. Insurance Solutions to $86.2 from $80.5. Corporate losses widened to $58.5 from $53.3.
- Principal Global Investors AUM ended at $403.0 billion, up from $390.5 billion at the start of the quarter, primarily reflecting $12.7 billion of investment performance; net cash flow was nil. Principal International AUM rose to $147.3 billion, including positive cash flow, investment performance, and currency translation.
- Other comprehensive income was $221.1, compared with $539.2 a year earlier. The accumulated other comprehensive loss narrowed to $455.1 from $675.2 at year-end.
Liquidity, capital, outlook, risks, and unusual items
- Management stated available cash flows and liquidity resources were adequate for current needs and reasonably foreseeable contingencies. Holding companies and other subsidiaries had $1,200.5 of cash and liquid assets available for corporate purposes at quarter-end. Committed revolving facilities provide full backstop support for the commercial paper program; $59.5 was drawn against short-term credit facilities and other short-term debt.
- Principal returned $272.8 to common shareholders during the quarter through $130.0 of dividends and $142.8 of share repurchases. Principal Life paid a $150.0 extraordinary dividend to its parent during the quarter, with regulatory approval. After quarter-end, Principal Life sold its interest in Principal Global Investors to PFS as part of a reorganization and paid a $1.1 billion extraordinary dividend, also approved by the Iowa insurance regulator.
- No quantified earnings guidance was provided. Management cited business growth and expense discipline; results are not necessarily indicative of full-year performance. The filing estimates a hypothetical 100-basis-point rate decline would reduce segment pre-tax operating earnings by less than 1% over the next 12 months, excluding potential DAC and actuarial-balance unlocking. A 10% equity-market decline followed by 2% quarterly increases would reduce annual segment pre-tax operating earnings by approximately 4%–6%, excluding potential unlocking.
- Unusual items included a $20.0 fee for discontinuing a financing-counterparty arrangement, a $5.5 assessment associated with the Penn Treaty liquidation, and $29.0 of additional nonqualified pension-plan credits offset by gains on backing assets. The filing also describes a CME variation-margin accounting presentation change effective January 2017; it had no net-income impact.
- Principal identified exposure to market and credit conditions, low interest rates, investment valuation and impairment judgments, policyholder behavior and guarantees, foreign exchange, regulation, litigation, cyber and operational risks, and reinsurer or counterparty performance. A downgrade below investment grade could trigger additional collateral requirements; $41.8 of additional collateral would have been required if specified derivative triggers were activated at quarter-end.
- Material litigation disclosures include an investment-fund fee lawsuit, an appeal in another fee case previously dismissed on summary judgment, and the Lehman bankruptcy estate’s appeal of dismissal of claims against Principal Life. No loss was accrued for these matters; management said loss was not considered probable and could not be reasonably estimated. Guarantees to third parties had maximum exposure of approximately $142.0; the maximum future exposure under Chilean mandatory pension return guarantees is indeterminable.
- Major rating agencies affirmed key insurer ratings with stable outlooks, while A.M. Best, Moody’s, and Fitch cited a negative outlook for the U.S. life-insurance sector. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for an investor to verify
- How much of the increase in segment operating earnings is repeatable versus variable investment income, market performance, currency effects, and other favorable items.
- Whether derivative and hedge-related volatility, impairment losses, and the $20.0 counterparty termination fee affect subsequent-period earnings or risk exposure.
- Cash generation and liquidity trends, including the decline in operating cash flow and cash balances, and the effect of the post-quarter $1.1 billion subsidiary dividend on capital flexibility.
- Current investment portfolio credit quality, unrealized losses, mortgage exposure, and the potential sensitivity of earnings and capital to interest rates, equity markets, and foreign exchange.
- Developments in the disclosed litigation and regulatory matters, guarantee exposures, and any changes in ratings or collateral requirements.