Principal Financial Group, Inc. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing is an annual report; it also provides unaudited fourth-quarter results. PFG is a diversified retirement, asset-management and insurance company, reporting Retirement and Investor Services, Principal Global Investors, Principal International, U.S. Insurance Solutions and Corporate segments. It reported $335.0 billion of assets under management and approximately 18 million customers at year-end.
Financial results and position
| Metric | 2011 | 2010 | Change / context |
|---|---|---|---|
| Total revenue | $8.71 billion | $9.16 billion | Down $449.0 million, mainly reflecting the run-off of exited group medical insurance. |
| Net income | $751.2 million | $717.2 million | Up $34.0 million. |
| Net income available to common stockholders | $682.0 million | $666.3 million | Up $15.7 million. |
| Diluted earnings per share | $2.15 | $2.06 | Up from $2.06. |
| Net investment income | $3.38 billion | $3.50 billion | Down $120.7 million; lower yields and reduced average invested assets were contributing factors. |
| Net realized capital losses | $122.3 million | $191.5 million | Losses narrowed, including lower investment impairments. |
| Operating cash flow | $2.71 billion | $2.79 billion | Down $78.4 million. |
| Investing cash flow | $(202.1) million | $27.5 million | 2011 use of cash included subsidiary acquisitions. |
| Financing cash flow | $(1.55) billion | $(3.18) billion | Lower net withdrawals from general-account investment contracts, partly offset by increased share repurchases. |
- Segment operating earnings: Retirement and Investor Services $581.1 million (down $3.3 million); Principal Global Investors $74.0 million (up $15.5 million); Principal International $154.0 million (up $17.1 million); U.S. Insurance Solutions $215.9 million (up $22.2 million); Corporate loss $146.9 million (versus $128.7 million loss). Segment operating earnings are a management measure and do not equal GAAP net income.
- Year-end assets were $148.3 billion, including $71.4 billion of separate-account assets for which contractholders generally bear investment risk. Total stockholders’ equity was $10.0 billion.
- Debt totaled $1.67 billion: $105.2 million short-term and $1.56 billion long-term. Debt-to-equity and debt-to-capitalization, excluding AOCI, were 18% and 15%, respectively, unchanged from 2010.
- Cash and cash equivalents were $2.83 billion, up from $1.88 billion. PFG reported $576.2 million of excess capital at the holding companies. Principal Life’s estimated 2012 ordinary dividend capacity under Iowa limits was approximately $507.7 million.
- Common dividends were $0.70 per share for 2011, compared with $0.55 in 2010. PFG repurchased 21.1 million shares for $556.4 million and returned $770.1 million to common stockholders through dividends and repurchases.
- Net investment income yield was 5.0%, down from 5.2%. The filing does not provide a single consolidated operating margin measure.
Material changes and unusual items
- Revenue fell despite higher fees, as the exited group medical business contributed $606.3 million of revenue in 2011 versus $1.40 billion in 2010. PFG continued the transition of that business to UnitedHealthcare; its results remained in continuing operations under GAAP.
- Fees and other revenues rose to $2.57 billion from $2.30 billion, benefiting from higher average account values and AUM, growth in universal-life business, and model-related changes. Benefits and claims expenses declined to $4.45 billion from $5.34 billion, substantially reflecting the medical business run-off.
- 2011 net income included a $68.9 million reduction from a court ruling concerning uncertain tax positions and a gain on the sale of part of PFG’s Catalyst Health Solutions investment. The gain was approximately $46 million after tax and excluded from operating earnings.
- Individual-life model and assumption changes in 2011 shifted amounts among fees, benefits and operating expenses; the reported after-tax impact was a $3.9 million loss. These changes included $48.5 million of additional fee revenue and $185.6 million of additional operating expense, among other offsetting effects.
- AUM increased to $335.0 billion from $318.8 billion. Principal Global Investors AUM rose to $227.8 billion from $220.1 billion, while Principal International AUM rose to $52.8 billion from $45.8 billion. International growth included the 2011 acquisition of HSBC AFORE in Mexico; currency translation reduced international AUM.
- Principal Life’s statutory net income declined to $326.8 million from $404.6 million; statutory capital and surplus declined to $4.22 billion from $4.38 billion. The filing states that its U.S. life insurers exceeded minimum RBC intervention levels.
Outlook, risks and contingencies
- Accounting change: Retrospective adoption of new insurance acquisition-cost guidance on January 1, 2012 was expected to reduce opening retained earnings by approximately $640 million. Management estimated a $35–$45 million reduction in 2012 net income available to common stockholders and operating earnings; estimates were subject to change.
- Other forward-looking items: PFG expected 2012 defined-benefit pension expense of $122.1 million, compared with $92.7 million in 2011, primarily due to lower discount rates. Possible 2012 pension-plan funding was estimated at $75–$125 million, including qualified and nonqualified plans.
- Markets and investments: Management identified sustained low interest rates, credit-spread and equity volatility, defaults, real-estate weakness and illiquid investments as material risks. At year-end, available-for-sale fixed maturities had $1.52 billion of gross unrealized losses; management said it did not intend, and was not more likely than not required, to sell those securities before recovery. U.S. commercial mortgage loans totaled $9.4 billion, with 22% of the portfolio in California.
- Guarantees and liquidity: PFG bears market risk on certain annuity guarantees, including guaranteed minimum withdrawal benefits; hedging results and liability valuations can be volatile. Derivative collateral requirements, counterparty exposure, policy surrenders, ratings changes and restrictions on insurer dividends could affect liquidity or capital flexibility.
- Regulation and legal matters: Federal Reserve oversight began in July 2011 under Dodd-Frank. PFG disclosed continuing litigation and regulatory inquiries, including unclaimed-property and death-file practices; management reported no estimated losses accrued for the specified litigation because loss was not considered probable and could not be reasonably estimated. The filing also described an estimated $10.3 million obligation related to Executive Life of New York’s liquidation petition.
- Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective.
Investor facts to verify
- Separate the recurring earnings trend from the group medical run-off, tax ruling, Catalyst gain and individual-life model changes; reconcile GAAP net income with management’s operating-earnings measure.
- Review the $640 million retained-earnings accounting transition and assess the eventual reported 2012 impact against management’s $35–$45 million estimate.
- Assess fixed-maturity unrealized losses, credit quality and impairments, mortgage-loan delinquencies and valuation allowances, and the California concentration.
- Confirm holding-company liquidity, Principal Life dividend capacity, statutory capital and RBC position, and the availability and renewal status of credit facilities.
- Monitor annuity-guarantee hedging performance, policyholder behavior, interest-rate exposure, derivative collateral needs and changes in insurer financial-strength ratings.
- Track the resolution and financial effects, if any, of the tax disputes, regulatory inquiries and disclosed litigation, as well as the integration and performance of 2011 acquisitions.