PFG

Principal Financial Group Inc. - 10-Q Summary (Q2 2007)

Business Context and Reporting Period

This filing is a Quarterly Report (Form 10-Q) for Principal Financial Group Inc. (PFG) for the period ended June 30, 2007. PFG is a large accelerated filer providing financial products and services through four primary segments: U.S. Asset Management and Accumulation, International Asset Management and Accumulation, Life and Health Insurance, and Corporate and Other. The company operates globally with significant presence in the U.S. and international markets including Chile, Mexico, and Hong Kong.

Key Financial Metrics (Six Months Ended June 30, 2007)

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 13% to $5,492.5 million from $4,862.0 million in the prior year period. This was driven by a 32% increase in fees and other revenues ($1,215.4 million) and an 8% increase in net investment income ($1,899.5 million).
• Profitability: Net income increased 13% to $577.4 million. Net income available to common stockholders rose 13% to $560.9 million.
• Segment Performance:
  • U.S. Asset Management: Operating earnings increased 21% to $375.1 million, largely due to the acquisition of WM Advisors, Inc. and growth in payout annuity sales.
  • International: Operating earnings increased 36% to $46.0 million, despite a 21% decrease in premiums due to lower sales in Chile and Mexico.
  • Life and Health: Operating earnings decreased 22% to $105.6 million, primarily due to higher claim costs in the health business and unfavorable prior year claim development.
• Capital Gains: Net realized/unrealized capital gains increased significantly to $93.0 million from $29.8 million, driven by mark-to-market gains on derivatives and trading securities.

Guidance, Outlook, Risks, and Unusual Items

• Acquisitions: PFG announced the acquisition of Morley Financial Services, Inc. for approximately $75.0 million, expected to close in Q3 2007. The company also integrated WM Advisors, Inc. (acquired Dec 2006), which significantly boosted assets under management and fee revenues.
• Dividends and Buybacks: The Board authorized a new $250.0 million common stock repurchase program in May 2007. Principal Life declared a $450.0 million dividend to the parent company, fully paid by June 30, 2007.
• Investment Portfolio: The company recognized impairment losses of $24.5 million on fixed maturity securities due to interest rate changes and intent to sell. Gross unrealized losses on fixed maturities increased to $610.7 million.
• Regulatory and Legal: The company is cooperating with inquiries from the Attorneys General of New York and Connecticut regarding broker compensation. A class action lawsuit regarding revenue sharing fees in 401(k) plans is being defended. Management does not believe pending litigation will have a material adverse effect.
• Market Risks: The company faces interest rate, equity, foreign currency, and credit risks. A 100 basis point increase in interest rates is estimated to decrease the net fair value of the portfolio by approximately $15.8 million.

Key Facts for Investor Verification

• WM Advisors Integration: Verify the ongoing impact of the WM Advisors acquisition on fee revenue growth and operating expense increases in the U.S. Asset Management segment.
• Fixed Maturity Impairments: Monitor the $24.5 million impairment charge and the $610.7 million in gross unrealized losses on fixed maturities for potential future credit or interest rate risks.
• Life and Health Claims: Review the 22% decline in Life and Health operating earnings, specifically the drivers behind higher claim costs and unfavorable prior year development in the health insurance block.
• Regulatory Exposure: Track the status of the New York and Connecticut Attorney General investigations regarding broker compensation and the 401(k) revenue sharing litigation.
• Capital Deployment: Confirm the execution of the new $250 million share repurchase program and the closing of the Morley Financial acquisition.