Business context and reporting period
Principal Financial Group, Inc. (PFG) filed this unaudited Form 10-Q for the quarter ended September 30, 2021. Its businesses span retirement and income solutions, asset management, international operations, and U.S. insurance. Financial amounts below are in U.S. dollars; figures are in millions unless noted.
Financial performance and condition
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenues | $3,423.7 | $3,310.7 | $10,171.6 | $10,976.6 |
| Income before income taxes | $428.1 | $275.1 | $1,474.6 | $1,101.9 |
| Net income attributable to PFG | $359.9 | $236.0 | $1,238.8 | $923.2 |
| Diluted EPS | $1.32 | $0.85 | $4.51 | $3.34 |
| Segment pre-tax operating earnings (non-GAAP) | $568.8 | $276.9 | $1,630.6 | $1,150.7 |
| Net realized capital gains (losses) | $(152.0) | $65.5 | $(41.7) | $169.5 |
- Revenue and earnings: Q3 revenue rose year over year, while nine-month revenue declined, primarily reflecting lower retirement annuity premiums. Higher fee revenue and net investment income supported results. Nine-month net income increased despite lower revenue.
- Investment income and earnings quality: Net investment income was $1,093.4 in Q3 and $3,167.0 for nine months, up from $917.9 and $2,846.1, respectively. Net realized results turned to losses, largely reflecting derivative and hedging-related losses. The filing notes variable investment income is unpredictable and can materially vary between periods.
- Cash flow: Nine-month operating cash flow was $2,107.0, down from $3,110.4; investing cash outflow was $2,867.3 versus $3,639.9; financing cash inflow was $1,055.9 versus $1,570.3. Cash and cash equivalents ended the period at $3,145.4.
- Balance sheet and debt: Total assets were $298,908.4, total liabilities $282,435.9, and stockholders’ equity $16,129.2. Total debt was $4,354.0, including $74.3 short-term and $4,279.7 long-term; debt-to-equity was 27% and debt-to-capitalization 21%.
- Liquidity: Management described capital and liquidity as strong and said it expects available sources to meet current requirements and reasonably foreseeable contingencies. Holding companies and other subsidiaries held $2,466.2 in cash and liquid assets for corporate purposes. Committed revolving facilities totaled $800.0 and were undrawn; total short-term credit capacity was $1,013.9, of which $74.3 was outstanding. No commercial paper was outstanding.
- Margins: The filing does not provide a clear consolidated operating-margin measure; reported revenues include investment and market-sensitive items.
Material changes versus comparable periods
- Q3 pre-tax income and attributable net income improved year over year. Management attributed the net-income increase primarily to less unfavorable actuarial assumption updates and model refinements than in Q3 2020.
- Those Q3 2021 updates reduced attributable net income by $14.2, compared with a $118.2 reduction in Q3 2020. For nine months, management cited a $208.9 after-tax increase in variable investment income and a $104.0 less unfavorable actuarial impact as key drivers of higher attributable earnings.
- Nine-month premiums and other considerations fell to $3,335.3 from $4,628.4, mainly due to lower sales of single-premium group and individual annuities with life contingencies. Fee revenue and net investment income increased.
- At September 30, available-for-sale fixed maturities had $5,555.2 of net unrealized gains, down $1,851.4 from year-end 2020. The filing attributes the decrease principally to rising interest rates, partly offset by tighter credit spreads. The company reported that 91% of Principal Life’s fixed maturities in an unrealized-loss position were investment grade.
- During the first nine months, PFG returned $1,070.7 to common stockholders through $485.6 of dividends and $585.1 of share repurchases. Shares outstanding declined to 266.1 million from 273.3 million at year-end 2020.
Outlook, management commentary, risks and contingencies
- Strategy: Following a 2021 strategic review, PFG discontinued sales of U.S. retail fixed annuities and consumer life insurance products. It identified growth investment in fee-based retirement, global asset management, emerging markets, and U.S. specialty benefits, alongside additional share repurchases. It continued to evaluate strategic alternatives for universal life products with lifetime secondary guarantees and its U.S. retail fixed-annuity business. The future financial impact of the review had not been fully assessed.
- Guidance: The filing provides no specific earnings or revenue guidance. Management cautioned that interim results are not necessarily indicative of full-year results.
- Market and operating risks: Key exposures include interest rates and credit spreads, equity and real estate markets, investment valuations and credit losses, policyholder behavior, guarantees, foreign exchange, COVID-19 effects, litigation and regulatory matters, and acquisition integration. A hypothetical 100-basis-point rate decrease was estimated to reduce segment pre-tax operating earnings by less than 1% over 12 months, excluding potential DAC and actuarial unlocking. A hypothetical equity-market shock was estimated to reduce annual segment pre-tax operating earnings by approximately 5%–7% over 12 months, excluding such unlocking.
- Accounting and estimates: PFG expects the long-duration insurance-contract accounting standard, effective January 1, 2023, to significantly change accounting for many insurance and annuity products; implementation was ongoing and the ultimate impact was not yet clear.
- Legal and guarantees: A class action concerning Principal Life’s Principal Fixed Income Option was decided in Principal Life’s favor in April 2021; the plaintiff appealed. PFG reported no accrual, stating loss was not probable and could not be reasonably estimated. Maximum exposure was approximately $104.0 under certain guarantees and $750.0 under contingent Treasury-strip funding agreements; the future maximum exposure for Chile’s required minimum-return guarantee was indeterminable. Management said it did not believe pending litigation or regulatory matters would materially adversely affect business or financial position.
- Capital constraints: Principal Life paid $900.0 in dividends to its parent in the first nine months, including $600.0 of extraordinary dividends approved by Iowa’s insurance commissioner. Future subsidiary dividends remain subject to statutory limits and regulatory approval.
Important facts for investors to verify
- How much of reported earnings growth came from sustainable fee, insurance, and spread operations versus variable investment income, market movements, and actuarial assumption changes.
- Whether the deterioration in realized investment results and the increase in unrealized fixed-maturity losses affect future earnings, capital, or liquidity.
- The financial and capital implications of discontinued product sales and any strategic alternatives for legacy annuity and universal-life businesses.
- Developments in the appealed ERISA litigation, guarantees, and regulatory or statutory limits on dividends from Principal Life.
- Progress and quantified effects of adopting the long-duration insurance accounting standard in 2023.