Principal Financial Group, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023; unaudited. Comparative 2022 figures were recast for the adoption of long-duration targeted improvements (LDTI). The company also reorganized its reporting segments in 2023; segment comparisons reflect the revised presentation.
Financial performance and position
Amounts below are in millions of dollars except per-share data. Consolidated results include sizable, market-sensitive items from the exited U.S. retail fixed annuity and universal life with secondary guarantee businesses.
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $4,598.7 | $4,625.3 | $10,975.0 | $14,385.3 |
| Income before taxes | $1,604.9 | $1,640.4 | $1,846.0 | $5,989.4 |
| Net income attributable to PFG | $1,246.2 | $1,315.7 | $1,494.9 | $4,773.1 |
| Diluted earnings per share | $5.10 | $5.22 | $6.08 | $18.55 |
| Net investment income | $989.2 | $911.7 | $2,964.0 | $2,857.1 |
| Net realized capital gains (losses) | $179.3 | $(27.4) | $40.5 | $(353.4) |
- Quarterly comparison: Attributable net income decreased about 5%, while revenue was nearly flat. Management attributed the earnings decline primarily to a smaller fair-value gain on the funds-withheld embedded derivative, partly offset by improved realized capital gains.
- Nine-month comparison: Attributable net income fell substantially, chiefly reflecting the embedded derivative gain of $392.9 million versus $4,305.0 million in 2022, and lower gains on funds-withheld assets. These items make reported revenue and earnings comparisons especially volatile.
- Segment operating earnings: Pre-tax operating earnings, a non-GAAP measure, were $581.3 million in Q3 versus $493.3 million; for nine months they were $1,470.1 million versus $1,491.0 million. Q3 gains came mainly from Retirement and Income Solutions; nine-month performance was mixed across segments.
- Cash flow: Nine-month operating cash flow was $2,848.4 million, compared with $2,009.7 million. Investing activities used $1,131.9 million, versus providing $490.0 million; financing activities used $2,000.2 million, versus $592.1 million used. Cash and equivalents ended at $4,564.3 million, down from $4,848.0 million at year-end 2022.
- Balance sheet and debt: Total assets were $287.9 billion and total liabilities $277.0 billion. PFG-attributable equity was $10.7 billion. Long-term debt was $3.93 billion and short-term debt $23.8 million. Debt-to-equity was 37% and debt-to-capitalization 27%, compared with 41% and 29% at year-end 2022.
- Liquidity: Management said available cash and liquid assets, operating cash flows, a committed $800 million revolving facility and contingent funding arrangements support liquidity needs. The facility was undrawn; the company reported $2.44 billion of cash and liquid assets held in holding companies and other subsidiaries. $2.44 billion is not the same as consolidated cash.
- Dividends and repurchases: Nine-month common dividends were $466.5 million, and common-stock repurchases were $492.7 million. Dividends declared were $1.93 per share.
Material changes and unusual items
- Interest-rate increases contributed to substantial unrealized fixed-income losses: gross unrealized losses on available-for-sale fixed maturities were $9.24 billion at September 30, 2023, versus $7.88 billion at December 31, 2022. Net unrealized losses on available-for-sale securities and derivatives in AOCI were $7.11 billion, versus $5.82 billion. The company attributed most losses to interest rates and spreads, said it expected to recover amortized cost, and recorded no credit-loss allowance on the securities discussed.
- Q3 actuarial assumption updates had mixed effects: favorable individual disability assumptions and unfavorable term-life mortality assumptions. Updates to ULSG lapse assumptions increased the additional benefit-feature liability by $725.4 million before reinsurance; management reported a $13.1 million decrease to pre-tax income, net of reinsurance.
- In March 2023, the company issued $700 million of senior notes—$400 million due 2033 at 5.375% and $300 million due 2053 at 5.5%—and used proceeds to repay 2023 notes and redeem floating-rate notes due 2055. Early extinguishment generated a one-time operating expense; the amount is not specified in the supplied text.
- LDTI adoption was applied using a January 1, 2021 transition date and changed insurance liability, market risk benefit and acquisition-cost accounting. Opening retained earnings decreased $159.9 million and AOCI decreased $5.13 billion. The company said adoption did not materially affect consolidated statements of operations.
Outlook, management commentary and risks
- The filing provides no specific quantitative earnings or revenue guidance. Management said interim results are not necessarily indicative of full-year results and expressed confidence in meeting long-term obligations and liquidity needs.
- Management highlighted sensitivity to interest rates, credit spreads, equity and real-estate markets, policyholder behavior, investment valuations, insurance assumptions, foreign exchange, reinsurance performance and regulatory or litigation outcomes. A hypothetical 100-basis-point parallel decline in U.S. rates was estimated to affect segment pre-tax operating earnings by between negative 1% and positive 1% over the following 12 months; a separate 100-basis-point rise was estimated to reduce reported fair value of financial assets and derivatives by $2.42 billion, before considering excluded liabilities and other offsets.
- Available-for-sale fixed maturities in unrealized loss positions were predominantly investment grade in Principal Life’s portfolio; the company said it did not intend, and was not more likely than not required, to sell them before recovery. Changes in credit quality, liquidity needs or sale intentions could alter that assessment.
- Reinsurance creates counterparty exposure: reinsurance recoverables and deposit receivables totaled $20.2 billion, and the company is contingently liable if reinsurers fail to meet assumed obligations. The funds-withheld reinsurance arrangement also drives significant reported fair-value volatility.
- Management said pending litigation and regulatory matters were not expected to have a material adverse effect on the business or financial position, but generally could not estimate reasonably possible losses. Guarantees to third parties had maximum exposure of approximately $82 million; a separate contingent funding agreement exposure was $750 million. A Chilean fund minimum-return guarantee has no determinable maximum future exposure.
- Management reported effective disclosure controls and procedures, no material change in internal control over financial reporting, and no material change in the stated risk factors since the 2022 Form 10-K. Major rating outlooks were stable, with no significant rating actions reported through the filing date.
Important facts for investors to verify
- Reconcile GAAP earnings with pre-tax operating earnings, and isolate the exited-business funds-withheld derivative and other market-sensitive items.
- Review segment trends, especially Retirement and Income Solutions’ pension risk-transfer sales and reserve growth, Principal Asset Management’s AUM and fee trends, and Benefits and Protection’s claims and actuarial assumption changes.
- Assess the investment portfolio’s unrealized losses, credit quality, commercial mortgage exposure, and the assumptions supporting management’s expectation of recovery without forced sales.
- Check liquidity at the parent holding company separately from consolidated cash, including subsidiary dividend restrictions, borrowing availability, debt maturities and policyholder withdrawal behavior.
- Monitor reinsurance recoverables, counterparty creditworthiness, the funds-withheld arrangement and the potential effects of adverse interest-rate, market, policyholder-behavior or legal developments.