Business Context and Reporting Period
Company: Principal Financial Group, Inc. (PFG)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2006
Business Overview: PFG provides 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 focuses on retirement savings, asset management, and insurance products.
Key Financial Metrics (Nine Months Ended Sept 30, 2006)
| Metric | 2006 (in millions) | 2005 (in millions) |
|---|---|---|
| Total Revenues | $7,279.0 | $6,562.5 |
| Net Income | $771.9 | $663.8 |
| Net Income Available to Common Stockholders | $747.2 | $654.4 |
| Diluted EPS (Common) | $2.70 | $2.23 |
| Operating Cash Flow | $2,051.1 | $1,364.2 |
| Investing Cash Flow | ($2,794.9) | ($1,010.8) |
| Financing Cash Flow | $499.1 | $312.6 |
| Total Assets | $136,165.6 | $127,035.4 |
| Total Liabilities | $128,477.5 | $119,228.2 |
| Stockholders' Equity | $7,688.1 | $7,807.2 |
| Short-term Debt | $114.7 | $476.4 |
| Long-term Debt | $873.6 | $898.8 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 11% year-over-year, driven by a 13% increase in premiums and a 9% increase in fees and other revenues. Net investment income rose 9% due to higher yields and increased invested assets.
- Profitability: Net income increased 16% to $771.9 million. Net income available to common stockholders rose 14% to $747.2 million.
- Expense Increases: Benefits, claims, and settlement expenses increased 12% to $4,227.6 million, primarily due to growth in the Life and Health Insurance segment and increased reserves for payout annuities. Operating expenses rose 7% to $1,832.4 million.
- Capital Gains: Net realized/unrealized capital gains increased to $23.1 million (from $6.9 million in 2005), influenced by a gain on the sale of an equity method investment and fewer losses on derivative activities, partially offset by impairments related to the WM Advisors acquisition.
- Discontinued Operations: The 2005 period included income from discontinued operations ($16.0 million) related to real estate sales and the Principal Residential Mortgage divestiture, which were not present in the 2006 period.
Guidance, Outlook, and Risks
- Acquisitions: PFG announced a definitive agreement to acquire WM Advisors, Inc. for $740.0 million, expected to close in Q4 2006 or early 2007. To fund this, the company issued $500.0 million in senior notes on October 11, 2006, at 6.05% interest.
- Share Repurchases: The company entered into an accelerated common stock repurchase agreement for $500.0 million in May 2006, with the program expected to complete in Q4 2006.
- Dividends: Principal Life Insurance Company declared an extraordinary dividend of up to $550.0 million to the parent company, which was paid in May 2006. Preferred stock dividends increased significantly in 2006 due to the issuance of preferred stock in June 2005.
- Market Risks:
- Interest Rate Risk: A 100 basis point increase in interest rates is estimated to decrease the net fair value of the portfolio by approximately $61.2 million.
- Credit Risk: The company maintains a diversified fixed maturity portfolio, with 95% rated investment grade. Gross unrealized losses on fixed maturities were $305.2 million as of September 30, 2006.
- Foreign Currency: Fluctuations in foreign currencies had a positive impact of $4.4 million on consolidated income for the nine months ended September 30, 2006.
- Legal Proceedings: The company is involved in various litigation matters, including industry-wide inquiries regarding compensation arrangements. Management does not believe pending litigation will have a material adverse effect, though outcomes are uncertain.
Investor Verification Checklist
- WM Advisors Acquisition: Verify the closing date and final purchase price of the WM Advisors acquisition and its impact on Q4 2006 results.
- Impairment Charges: Review the $16.0 million in impairment write-downs recognized in 2006 related to the determination that certain fixed maturity securities could not be held to recovery due to the WM Advisors funding needs.
- Discontinued Operations: Confirm that 2005 results included one-time gains from discontinued real estate operations and the Principal Residential Mortgage sale, which are not comparable to 2006 continuing operations.
- Preferred Stock Dividends: Note the significant increase in preferred stock dividends in 2006 ($24.7 million vs. $9.4 million in 2005) due to the June 2005 issuance, impacting net income available to common shareholders.
- Regulatory Capital: Monitor the impact of new accounting standards (SFAS 158, SFAS 157, FIN 48) on future financial reporting and capital requirements.