Principal Financial Group, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are to December 31, 2022. The 2022 comparative results were recast for the company’s adoption of long-duration targeted improvements (LDTI). The filing is unaudited.
Business context
Principal provides retirement and income solutions, asset management, and insurance and protection products. In Q1, it reorganized reporting: global asset management and international pension businesses are now combined in Principal Asset Management, and the former U.S. Insurance Solutions segment is named Benefits and Protection. The changes did not affect consolidated financial statements.
Financial performance and position
- Revenue: GAAP total revenue was $2.819 billion, down $276.5 million year over year. Premiums and other considerations rose to $1.449 billion from $887.4 million, while fees and other revenues fell to $995.3 million from $1.219 billion and net investment income declined to $986.7 million from $1.126 billion.
- Earnings: GAAP net loss attributable to Principal was $140.1 million, or $0.58 per diluted share, versus net income of $338.7 million, or $1.28 per diluted share, in Q1 2022. The main driver was a $626.6 million loss from the fair-value change in the funds-withheld embedded derivative associated with the 2022 reinsurance transaction. Segment pre-tax operating earnings were $440.8 million versus $469.0 million; this non-GAAP measure excludes certain items, including the exited-business loss.
- Segment results: Pre-tax operating earnings were $249.8 million in Retirement and Income Solutions (down from $294.2 million), $187.8 million in Principal Asset Management (down from $211.0 million), and $99.3 million in Benefits and Protection (up from $92.8 million). Corporate pre-tax operating losses narrowed to $96.1 million from $129.0 million.
- Cash flow: Operating activities provided $695.3 million, compared with $31.5 million, primarily reflecting timing of receivables and payables. Investing activities used $1.104 billion, versus providing $126.8 million; financing activities provided $201.7 million versus $250.9 million. Cash and cash equivalents ended the quarter at $4.641 billion, down from $4.848 billion.
- Balance sheet and capital: Total assets were $299.408 billion and total stockholders’ equity was $10.261 billion. Total debt was $4.713 billion, up from $4.078 billion; debt-to-equity was 46%, versus 41%. Long-term debt was $4.689 billion and short-term debt $24.2 million. The company reported $2.202 billion of cash and liquid assets at holding companies and other subsidiaries available for corporate purposes.
- Shareholder returns: The company repurchased $188.5 million of shares and paid $155.5 million in common dividends during the quarter. Dividends declared were $0.64 per share.
Material changes and unusual items
- The $626.6 million funds-withheld embedded-derivative loss was recorded in GAAP results and was the primary reason for the year-over-year swing to a net loss. The related exited-business pre-tax loss was $608.3 million; it included the derivative change, partly offset by $81.0 million of realized gains on funds-withheld assets.
- Higher pension risk transfer sales drove the increase in Retirement and Income Solutions premiums, as single-premium group annuity sales can vary substantially between periods. Benefits and claims expenses also rose with the associated reserve growth.
- Principal Asset Management’s earnings were pressured by lower average assets under management and management fees at Principal Global Investors; favorable relative performance on required regulatory investments partly offset this in Principal International.
- Benefits and Protection revenue declined overall, principally reflecting the exited universal life with secondary guarantee business, while Specialty Benefits grew.
- On March 8, the company issued $700 million of senior notes: $400 million of 5.375% notes due 2033 and $300 million of 5.5% notes due 2053. On April 7, it redeemed $400 million of floating-rate notes due 2055; a one-time early-extinguishment cost was recorded in Q2 2023.
- Available-for-sale fixed maturities had $6.639 billion of gross unrealized losses at quarter-end. Management said these were primarily attributable to interest rates and credit spreads, expected amortized-cost recovery, and did not record an allowance for credit loss on the securities in unrealized-loss positions.
Outlook, liquidity, risks and contingencies
- The filing provides no specific full-year earnings or revenue guidance. Management said it was monitoring banking-sector conditions, considered the company not materially affected by the Silicon Valley Bank or Signature Bank failures, and said Principal Bank’s deposits were well diversified. It cited cash and liquid assets, revolving credit and contingent funding arrangements, and risk-based capital as liquidity resources.
- Management stated it believed liquidity was sufficient for foreseeable operating needs and obligations. About 99% of institutional GICs and funding agreements, approximately $14.9 billion, could not be redeemed by contractholders before maturity.
- Interest-rate movements can materially affect investment values, insurance reserves, guarantee costs, and earnings. The company estimated a 100-basis-point decrease in upper-medium-grade yields would reduce OCI by approximately $2.3 billion, net of tax, through reserve remeasurement. A separate 100-basis-point increase scenario estimated a $2.491 billion reduction in the net reported fair value of covered financial assets and derivatives; the filing notes excluded liabilities would partly offset the economic exposure.
- The company estimated an immediate 10% S&P 500 decline followed by quarterly recovery would reduce annual segment pre-tax operating earnings by approximately 5%–8%. These are illustrative sensitivities, not forecasts.
- Principal is contingently liable for ceded reinsurance if reinsurers cannot perform; reinsurance recoverable assets were $13.458 billion. Management did not believe pending litigation or regulatory matters would materially adversely affect the business or financial position, but said reasonably possible losses generally could not be estimated. Certain guarantees include $77 million maximum exposure under specified third-party guarantees, $750 million under contingent funding agreements, and a Chilean minimum-return guarantee whose future maximum exposure is indeterminable.
- The company reported no material changes to the risk factors in its 2022 Form 10-K and concluded disclosure controls and procedures were effective.
Important facts for investors to verify
- How much of the GAAP loss reflects the funds-withheld embedded derivative and other exited-business effects, and how segment operating earnings reconcile to GAAP results.
- Whether asset-management fee trends and average assets under management improve, and whether elevated pension risk transfer sales persist.
- The scale and duration of unrealized investment losses, portfolio credit quality, and any changes in management’s ability or intent to hold securities until recovery.
- Available holding-company liquidity, statutory dividend capacity, debt maturities, and the Q2 cost and funding effects of the $400 million debt redemption.
- Developments in interest-rate, equity-market, reinsurance, litigation, regulatory, and Chilean guarantee exposures, including any changes to estimates or contingencies.