Principal Financial Group, Inc. — Q3 2019 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2019; financial statements are unaudited. Principal provides retirement and income, asset management, international, and U.S. insurance products and services. Comparisons are with Q3 and the first nine months of 2018, or with December 31, 2018 for balance-sheet figures.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $4,458.4m | $4,348.1m | $12,174.9m | $10,466.6m |
| Income before taxes | $345.7m | $569.1m | $1,322.0m | $1,541.5m |
| Net income attributable to PFG | $277.1m | $456.3m | $1,093.3m | $1,310.0m |
| Diluted EPS | $0.98 | $1.59 | $3.89 | $4.52 |
- Q3 revenue rose about 3%, while parent-attributable net income fell about 39%; nine-month revenue rose about 16%, while parent-attributable net income fell about 17%. The company’s approximate consolidated pre-tax margin declined to 7.8% from 13.1% in Q3, and to 10.9% from 14.7% for the nine-month period.
- Nine-month net cash provided by operating activities was $4,464.8m, versus $3,713.9m. Investing used $4,926.2m, including $1,209.6m for the Wells Fargo business acquisition; financing provided $681.9m. Cash and cash equivalents ended at $3,198.0m.
- At September 30, total assets were $270,238.4m and total stockholders’ equity was $14,872.8m, including $14,804.2m attributable to PFG. Total debt was $3,860.0m ($96.1m short-term; $3,763.9m long-term); debt to equity was 26% and debt to capitalization 21%.
- Invested assets were $94,412.4m. Available-for-sale fixed maturities were $68,071.2m, up from $60,108.5m at year-end 2018. AOCI improved from a $1,565.1m loss to $1,307.1m income, primarily reflecting unrealized investment gains; these gains are not equivalent to realized earnings.
- Management reported $1,500.5m of cash and liquid assets at holding companies and other subsidiaries available for corporate purposes. Committed revolving credit facilities totaled $800m and had no amounts outstanding; total short-term credit capacity was about $998.8m, with $96.1m outstanding.
Material changes and operating drivers
- The July 1 acquisition of Wells Fargo’s Institutional Retirement & Trust business cost $1.2bn at closing, funded with cash and debt; an earn-out of up to $150m may be payable based on fee-revenue retention through December 31, 2020. It contributed to Retirement and Income Solutions revenue and expenses. PFG issued $500m of 3.7% senior notes due 2029 in May.
- Nine-month premiums and other considerations increased $1,498.6m, principally from Retirement and Income Solutions sales of single-premium group and individual annuities with life contingencies. Related benefit and reserve expenses also increased materially.
- Segment pre-tax operating earnings were lower in Retirement and Income Solutions ($666.5m vs. $738.3m) and Principal Global Investors ($339.3m vs. $459.7m), but higher in Principal International ($313.2m vs. $214.8m) and U.S. Insurance Solutions ($377.1m vs. $354.0m). Corporate operating losses widened to $284.6m from $191.2m.
- Principal Global Investors’ comparison was affected by a $253.1m accelerated real-estate performance fee in Q3 2018, partly offset by $151.9m of related expenses. The company also recorded a $74m impairment of an equity-method investment in 2019 and had a $126m gain from selling an equity-method investment in 2018.
- Q3 2019 actuarial assumption updates and model refinements reduced consolidated net income by $36.5m; the comparable 2018 updates increased it by $32.1m. Foreign-exchange movements reduced Principal International segment pre-tax operating earnings by $3.5m in Q3 and $20.3m for nine months.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings guidance. Management cautions interim results are not necessarily indicative of full-year results and says operating cash flows, liquid assets, and other funding sources are expected to meet reasonably foreseeable liquidity needs.
- Management estimates an immediate 100-basis-point parallel rate decline would reduce segment pre-tax operating earnings by less than 1% over the next 12 months, excluding possible DAC and actuarial-balance unlocking; it expects adverse effects could grow over time as assets mature and are reinvested. A 100-basis-point rate increase was estimated to reduce the reported fair value of financial assets and derivatives by $4,647.3m, before offsets from excluded liabilities.
- Principal identifies market, credit, interest-rate, equity, foreign-currency, insurance-reserving, policyholder behavior, regulatory, cyber, competitive, acquisition-integration, and other risks. A 10% equity-market decline followed by a 2% quarterly recovery was estimated to reduce annual segment pre-tax operating earnings by approximately 4%–6%, excluding potential actuarial unlocking.
- The company reported no litigation or regulatory contingencies for which it believed disclosure was appropriate. Guarantees to third parties had approximately $118m maximum exposure; contingent funding agreements had $750m maximum exposure. The Chilean mandatory retirement-fund minimum-return guarantee has an indeterminable maximum future exposure.
- Disclosure controls were concluded effective, but the acquired Wells Fargo business was excluded from the assessment while controls are evaluated. The acquisition’s operations represented 2% of consolidated revenue in Q3 and 1% for the nine-month period; its assets were less than 1% of consolidated assets at quarter-end.
Important facts for investors to verify
- How the acquired business performs, including customer and fee retention, integration costs, synergies, delayed asset and contract transfers, and any earn-out payment.
- How much of revenue growth reflects annuity sales and acquisition effects, and the associated reserve, benefit, and expense requirements.
- The sustainability of reported earnings after the opposing actuarial assumption impacts and the prior-year real-estate performance fee and investment-sale gain.
- Exposure to interest rates, credit spreads, equity markets, foreign exchange, and guarantees, including the potential effects on earnings, capital, and liquidity.
- Debt, available parent-level liquidity, and the regulatory limits and approvals governing dividends from Principal Life.