Business Context and Reporting Period
Company: Principal Financial Group, Inc.
Filing Type: Form 8-K (Current Report)
Date: October 13, 2008
Reporting Period: Preliminary results for the quarter ended September 30, 2008.
The filing announces preliminary third-quarter 2008 financial results and a dividend declaration. The company operates in retirement and investment services, life and health insurance, and banking, with $308.0 billion in assets under management as of June 30, 2008.
Key Financial Metrics
- Operating Earnings: Estimated range of $0.92 to $0.97 per diluted share.
- Net Income: Estimated range of $0.30 to $0.40 per diluted share available to common stockholders.
- Capital Losses: Estimated net realized/unrealized capital losses of $140 to $170 million after tax. Approximately 50-60% of these losses are attributed to Lehman Brothers and Washington Mutual investments.
- Discontinued Operations: Loss of approximately $5 million after tax related to discontinuing commercial mortgage-backed securitization operations.
- Cash Flow: Net cash flows of approximately $1.5 billion for the quarter, totaling approximately $12.5 billion for the first nine months of the year.
- Unrealized Losses: Gross unrealized losses in accumulated other comprehensive income estimated at $4.4 billion (up from $2.7 billion as of June 30, 2008).
- Liquidity: Cash and cash equivalents at Principal Life Insurance Company increased to approximately $2.2 billion as of September 30, 2008 (up from $1.4 billion in June).
- Capital Position: Approximately $375 million in excess of levels needed to maintain an "AA" rating.
Material Changes and Strategic Actions
- Dividend Reduction: The Board declared an annual dividend of $0.45 per share, payable December 5, 2008. This represents a reduction from prior levels.
- Share Repurchase Suspension: The company suspended purchases of common stock under its existing share repurchase program effective immediately.
- Investment Strategy Shift: Completed planned investment in commercial mortgage-backed securities (CMBS) in July 2008. New cash inflows are now being invested primarily in cash, short-term government-backed securities, and other liquid investments.
- Liquidity Access: Became a member of the Federal Home Loan Bank of Des Moines in the second quarter of 2008 to access new liquidity sources.
Guidance, Outlook, and Risks
Management Commentary: CEO Larry Zimpleman described results as "very solid" given extreme market conditions, including a 9% drop in the S&P 500 in the third quarter. Management attributes the increase in gross unrealized losses primarily to spread widening in a thinly traded bond market rather than fundamental credit deterioration, noting the intent and ability to hold investments to maturity.
Outlook: Management does not expect global capital market conditions or the general economy to improve in the near future. There are no current plans to raise equity capital for non-strategic reasons.
Risks and Contingencies:
- Adverse capital and credit market conditions affecting liquidity and cost of capital.
- Impairment of other financial institutions (specifically Lehman Brothers and Washington Mutual).
- Investment risks diminishing the value of invested assets.
- Requirements to post collateral or fund unanticipated redemptions.
- Changes in laws, regulations, or accounting standards.
Investor Verification Checklist
- Verify the final audited third-quarter 2008 results scheduled for release on November 3, 2008.
- Confirm the specific impact of Lehman Brothers and Washington Mutual holdings on the $140-$170 million capital loss estimate.
- Monitor the company's ability to maintain its "AA" rating given the $375 million capital buffer and market volatility.
- Review the composition of the $2.2 billion cash and cash equivalent holdings to assess liquidity quality.
- Assess the long-term implications of the suspended share repurchase program and reduced dividend on shareholder returns.