PFG

Business Context and Reporting Period

Company: Principal Financial Group, Inc.
Filing Type: Form 8-K (Current Report)
Report Date: April 26, 2012
Reporting Period: First Quarter ended March 31, 2012
Business Overview: A global investment management leader offering retirement services, insurance solutions, and asset management. The company serves approximately 17.3 million customers worldwide.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Income Growth: Net income available to common stockholders increased 11% year-over-year, driven primarily by a significant reduction in net realized capital losses (from $54.9 million in Q1 2011 to $10.0 million in Q1 2012).
• Operating Earnings Decline: Operating earnings decreased 3% to $213.0 million, reflecting lower net investment income and higher compensation costs in certain segments.
• Revenue Increase: Operating revenues rose 3% to $2,107.4 million, aided by higher premiums and fees, partially offset by lower net investment income.
• Asset Growth: Total assets under management reached a record $364.1 billion, an 11% increase from the prior year. Unaffiliated assets under management for Principal Global Investors also hit a record $90.7 billion.
• Segment Performance:
  • Principal International: Operating earnings surged 50% to $41.8 million due to asset growth.
  • Retirement and Investor Services: Earnings declined 7% to $143.6 million due to lower investment income and a legal settlement in Bank and Trust Services.
  • U.S. Insurance Solutions: Earnings dipped 6% to $50.2 million, impacted by accounting changes and lower investment income in Specialty Benefits.

Guidance, Outlook, and Management Commentary

Management Commentary:

• CEO Larry Zimpleman highlighted strong investment performance and impressive sales across Full Service Accumulation, Principal Funds, and international divisions.
• CFO Terry Lillis noted the acquisition of a majority stake in Claritas (Brazil) and the authorization of a $100 million share repurchase program.
• The company initiated a quarterly dividend of $0.18 per share, moving from an annual dividend structure.

Accounting Changes:

• Adopted new guidance on capitalizing costs for insurance contracts effective January 1, 2012.
• Voluntarily changed the accounting method for reinsurance costs in the Individual Life division to recognize differences between actual and expected cash flows immediately.

Risks and Contingencies:

• Exposure to adverse capital and credit market conditions, equity market volatility, and interest rate changes.
• Potential for gross unrealized losses to be realized or result in future impairments.
• Regulatory risks, including limitations on dividends imposed by Iowa insurance laws.
• International business risks and foreign currency exchange rate fluctuations.

Investor Verification Checklist

• Capital Losses: Verify the composition of the $10.0 million net realized capital losses, specifically the $14.3 million loss on commercial mortgage-backed securities.
• Accounting Adjustments: Review the retrospective impact of the new DPAC (Deferred Policy Acquisition Costs) guidance and reinsurance accounting changes on historical comparability.
• Legal Settlements: Confirm the details and future implications of the legal settlement impacting Bank and Trust Services earnings.
• Capital Position: Validate the $1.6 billion excess capital figure and the 440% risk-based capital ratio against regulatory requirements.
• Share Repurchase: Monitor the execution of the newly authorized $100 million share repurchase program.