PRINCIPAL FINANCIAL GROUP INC quarterly report, Q1 FY2019

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Principal Financial Group, Inc. — Q1 2019 Form 10-Q

Period: Three months ended March 31, 2019; comparative period is Q1 2018. Unaudited U.S. GAAP results. Principal provides retirement and income solutions, asset management, international savings and insurance products. Separate-account investments are generally directed by clients, who bear the investment risk.

Financial results and position

  • Revenue: $3.744 billion, up $860.3 million from $2.884 billion. Premiums and other considerations rose to $1.725 billion from $995.2 million; fees and other revenues declined to $973.5 million from $1.011 billion. Net investment income increased to $961.0 million from $902.2 million.
  • Earnings: Pretax income was $526.0 million versus $457.0 million; net income was $452.1 million versus $402.5 million. Net income attributable to Principal was $429.9 million, up from $397.1 million. Diluted EPS was $1.53 versus $1.36.
  • Cash flow: Operating activities provided $1.176 billion, compared with $746.5 million. Investing activities used $1.491 billion versus $979.9 million; financing activities used $403.1 million versus providing $98.3 million. Cash and cash equivalents ended the quarter at $2.260 billion, down from $2.978 billion at year-end. Management attributed the operating cash-flow increase mainly to timing of receivables and payables.
  • Balance sheet and debt: Total assets were $259.420 billion and total liabilities $246.120 billion at March 31, 2019. Stockholders’ equity was $12.762 billion, including $12.694 billion attributable to Principal. Total debt was $3.310 billion ($43.9 million short-term and $3.266 billion long-term); debt/equity was 26% and debt/capitalization 21%, compared with 29% and 22% at year-end.
  • Liquidity: The company reported $1.703 billion of cash and liquid assets in holding companies and other subsidiaries available for corporate purposes. Committed credit facilities totaled $800 million with no borrowings outstanding; total listed short-term facilities were $1.004 billion, of which $43.9 million was drawn. Principal Life paid $170 million in dividends to its parent during the quarter; all required regulatory approval.
  • Capital returns: Dividends paid to common stockholders were $150.2 million; common-stock repurchases were $153.6 million. The quarterly dividend declared per share was $0.54, versus $0.51 in Q1 2018.

Material changes and performance drivers

  • Revenue and benefits both increased substantially, largely reflecting higher sales of single-premium group and individual annuities with life contingencies. Management noted that these sales can vary significantly from quarter to quarter; the associated increase in reserves also raised benefits and claims expense.
  • Net realized capital results swung to gains of $84.5 million from losses of $25.1 million. Principal attributed the earnings increase primarily to this change, including gains from sponsored investment funds and fixed maturities. These market-sensitive items make reported earnings more volatile.
  • Segment pretax operating earnings, a non-GAAP management measure, were $478.7 million versus $496.5 million. Retirement and Income Solutions reported $240.6 million (down from $243.9 million); Principal Global Investors $100.7 million (down from $113.7 million); Principal International $111.1 million (up from $91.5 million); U.S. Insurance Solutions $110.7 million (down from $115.0 million); and Corporate a loss of $84.4 million (versus a $67.6 million loss).
  • Principal Global Investors ended the quarter with $423.1 billion of AUM, versus $423.8 billion a year earlier; strong investment performance offset lower average AUM and lower management-fee revenue. Principal International AUM was $161.4 billion, versus $171.1 billion a year earlier, while segment operating earnings benefited from favorable relative market performance on required regulatory investments. Currency movements reduced International pretax operating earnings by $10.0 million.
  • Available-for-sale fixed maturities increased to $63.123 billion from $60.109 billion at year-end. Gross unrealized losses fell to $436.0 million from $1.230 billion, which management attributed mainly to tighter credit spreads and lower interest rates. Management said it did not intend, and was not more likely than not required, to sell loss-position securities before recovering amortized cost.
  • The company adopted lease accounting on January 1, 2019, recognizing $168.8 million of lease assets and $164.0 million of lease liabilities; the net-of-tax adjustment increased opening equity by $4.0 million. The adoption did not materially affect earnings or EPS. Segment allocation changes were also made, with prior-period segment results recast and no effect on total-company results.

Outlook, risks and unusual items

  • No specific full-year earnings or revenue guidance is provided in the supplied filing text. Management stated that a hypothetical immediate 100-basis-point interest-rate decline would reduce segment pretax operating earnings by less than 1% over the next 12 months, excluding potential DAC and actuarial-balance unlocking; the adverse effect could grow as assets mature and are reinvested. A hypothetical 10% S&P 500 decline followed by 2% quarterly increases was estimated to reduce annual segment pretax operating earnings by approximately 4%–6%, excluding potential unlocking.
  • On April 9, 2019, after quarter-end, Principal agreed to acquire Wells Fargo’s Institutional Retirement & Trust business for $1.2 billion cash plus a potential earn-out of up to $150 million, based on fee-revenue retention through December 31, 2020. Closing was expected in Q3 2019, subject to regulatory approval, and was to be funded with available cash and debt. The filing identifies completion, integration, customer and employee retention, regulatory approval, transfer of contracts/assets, and realization of expected benefits as risks.
  • Principal suspended purchases under its November 2018 $500 million repurchase authorization during Q1, with $295.3 million remaining. This is relevant alongside the planned acquisition funding needs.
  • Other risks include market, interest-rate, equity, credit-spread and foreign-exchange movements; investment valuation and impairment estimates; insurance claims and policyholder behavior; liquidity and rating changes; regulatory, litigation, technology, cybersecurity, reinsurer, international and acquisition risks. Management reported no litigation or regulatory contingencies for which disclosure was considered appropriate at March 31, 2019; guarantees to third parties had a maximum exposure of approximately $122 million, and contingent Treasury-strip funding agreements had maximum exposure of $750 million.
  • Management reported effective disclosure controls and procedures and no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

  • Whether the Wells Fargo transaction closed on schedule, its final funding mix, earn-out exposure, integration costs and customer/asset retention.
  • How much Q1 earnings growth came from recurring operating performance versus realized investment gains, market movements and annuity sales that can fluctuate materially.
  • Whether cash declines, investment-contract withdrawals and future acquisition funding affect holding-company liquidity, debt levels, dividends or repurchases.
  • How sensitive insurance reserves, DAC, guarantees and investment values are to interest rates, equity markets, credit spreads and policyholder behavior.
  • Credit quality and impairment trends in the investment portfolio, including mortgage exposures, and the effect of foreign-exchange movements on international earnings and equity.