Principal Financial Group, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; balance-sheet comparisons are with December 31, 2021. Amounts are in U.S. dollars unless noted. The filing is unaudited.
Business context
Principal provides retirement and income products, asset management, international savings and insurance, and U.S. specialty and individual life insurance. In Q2 2022, it completed a funds-withheld coinsurance transaction with Talcott Life & Annuity Re, ceding its in-force U.S. retail fixed annuity and universal life with secondary guarantee (ULSG) businesses. The transaction’s economics were effective January 1, 2022.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $4,600.9 million | $3,423.7 million | $14,369.6 million | $10,171.6 million |
| Income before taxes | $1,730.1 million | $428.1 million | $6,055.2 million | $1,474.6 million |
| Net income attributable to PFG | $1,385.5 million | $359.9 million | $4,821.1 million | $1,238.8 million |
| Diluted EPS | $5.50 | $1.32 | $18.74 | $4.51 |
| Segment pre-tax operating earnings | $522.2 million | $568.8 million | $1,555.2 million | $1,630.6 million |
| Net cash from operating activities | Not presented by quarter | Not presented by quarter | $2,009.7 million | $2,107.0 million |
Reported earnings rose sharply, principally because the funds-withheld embedded derivative generated gains of $1,237.7 million in Q3 and $4,305.0 million year to date. These fair-value gains are associated with the reinsurance transaction and should not be read as equivalent to recurring operating performance. Segment pre-tax operating earnings, a company-defined non-GAAP measure, declined year over year in both periods.
For the nine months, net realized capital losses were $394.1 million, compared with losses of $41.7 million in 2021. Net investment income was $2,842.8 million, down from $3,167.0 million. The effective tax rate was 20%, versus 15% in the prior-year periods.
Balance sheet, cash flow and capital
- Total assets were $282.6 billion, down from $304.7 billion; total investments were $93.8 billion, down from $108.9 billion.
- Cash and cash equivalents were $4.24 billion, up from $2.33 billion. Nine-month investing cash flow was positive $490.0 million, versus negative $2.87 billion in 2021; financing cash flow was negative $592.1 million, versus positive $1.06 billion.
- Total debt was $4.05 billion, compared with $4.36 billion; the company repaid $300 million of long-term debt at maturity during Q3. Debt-to-equity was 43%, up from 27%, reflecting primarily the decline in reported equity.
- Equity attributable to PFG fell to $9.45 billion from $16.07 billion. Accumulated other comprehensive income moved from a gain of $1.61 billion to a loss of $8.07 billion, primarily reflecting unrealized losses on available-for-sale securities amid higher rates and wider credit spreads. The company said it did not intend, and was not more likely than not required, to sell these securities before recovery of amortized cost.
- Dividends paid to common stockholders were $486.1 million for the nine months, and share repurchases were $1.41 billion. The company reported $1.85 billion of cash and liquid assets held in holding companies and other subsidiaries.
Material changes and segment trends
- Retirement and Income Solutions’ pre-tax operating earnings increased to $278.6 million in Q3 and $852.4 million year to date. Fee business benefited from actuarial assumption updates; spread business faced effects of the exited retail fixed annuity business. The nine-month segment total was $852.4 million versus $811.4 million.
- Principal Global Investors’ pre-tax operating earnings fell to $142.0 million in Q3 and $465.4 million year to date. Assets under management were $449.4 billion, down from $546.5 billion at year-end 2021, reflecting market declines and the transfer of $23.1 billion of managed assets in connection with the reinsurance transaction.
- Principal International’s pre-tax operating earnings were $66.7 million in Q3 and $216.9 million year to date. Its assets under management were $144.6 billion, down from $152.1 billion at year-end, including adverse currency translation.
- U.S. Insurance Solutions’ pre-tax operating earnings were $135.7 million in Q3 and $403.2 million year to date. Specialty Benefits growth and improved claims experience helped; results also reflect the ULSG exit and reinsurance transaction.
- Q3 actuarial assumption updates and model refinements increased consolidated net income attributable to PFG by $130.3 million; the corresponding 2021 effect was a $14.2 million decrease.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management described the company as having a strong capital and liquidity position and said it believed resources and liquidity were adequate to meet obligations, including reasonably foreseeable contingencies.
- Management estimated that adopting the long-duration insurance accounting standard on January 1, 2023 would reduce opening total stockholders’ equity by approximately $5.0 billion to $5.6 billion, subject to change as implementation work continues.
- Market risks include interest-rate, credit-spread, equity, foreign-exchange and real-estate movements; asset-management outflows; insurance and annuity guarantees; and possible forced asset sales if withdrawals rise. A hypothetical immediate 100-basis-point rate increase would reduce the reported fair value of specified financial assets and derivatives by an estimated $2.77 billion; the sensitivity excludes important liabilities and is not a forecast of economic loss.
- The company had $14.1 billion of net ceded reinsurance recoverables, with 99.8% of the cited recoverables concentrated among its five largest ceded reinsurers. It remains contingently liable if reinsurers fail to perform. The transaction also introduced counterparty exposure, noted in the company’s discussion of its stable credit outlook.
- The company disclosed $78 million maximum exposure under certain guarantees and $750 million under contingent funding agreements for U.S. Treasury strips. It said material payments under guarantees were considered remote. A Chilean minimum-return guarantee has no determinable maximum future exposure.
- The Inflation Reduction Act introduced a corporate book minimum tax effective in 2023 and an excise tax on certain share repurchases; the company said the effects remained uncertain. The Rozo ERISA case was affirmed in Principal Life’s favor in September 2022; no loss accrual was recorded for that matter.
Important facts for investors to verify
- How much of reported 2022 earnings reflects the funds-withheld embedded-derivative fair-value gain, and what are results excluding exited-business and other non-operating effects?
- Whether the $5.0–$5.6 billion estimated accounting-transition reduction in equity changes as implementation is finalized, and how statutory capital differs from GAAP equity.
- The credit quality, collateral and collectability of reinsurance recoverables and deposit receivables, including concentration among the largest reinsurers and transaction protections.
- Whether unrealized fixed-income losses remain primarily rate-driven, and how liquidity, surrender activity, collateral calls and any need to sell securities evolve.
- The sustainability of segment operating earnings, especially asset-management fee income amid lower AUM, and the performance of retained insurance and retirement businesses.