Principal Financial Group, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; balance sheet compared with December 31, 2014. Amounts are in U.S. dollars. The company provides retirement and investment products, asset management, international savings and insurance products.
Financial results and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $3,240.9 million | $2,484.3 million | $9,157.4 million | $7,569.6 million |
| Income before tax | $369.2 million | $393.8 million | $1,121.8 million | $1,177.7 million |
| Net income attributable to PFG | $300.4 million | $248.9 million | $980.4 million | $865.4 million |
| Net income available to common shareholders | $300.4 million | $240.7 million | $955.7 million | $840.7 million |
| Diluted EPS | $1.01 | $0.77 | $3.20 | $2.75 |
| Declared common dividend per share | $0.38 | $0.34 | $1.12 | $0.94 |
- Q3 revenue rose 30%; nine-month revenue rose 21%. Much of the premium increase reflected higher sales of single-premium group and individual annuities with life contingencies, which can vary substantially by period and customer.
- Despite higher common earnings, pretax income declined in both comparisons. Q3 operating earnings by segment totaled $317.0 million versus $353.7 million; nine-month segment operating earnings were $967.3 million versus $993.9 million. These are non-GAAP measures reconciled in the filing.
- Net investment income was $753.5 million for Q3 and $2,267.3 million for nine months, down from $770.4 million and $2,444.1 million. Annualized portfolio yield was 4.4% for the nine-month period versus 4.9% a year earlier.
- Operating cash flow was $3,323.0 million for nine months, up from $2,197.6 million. Investing activities used $1,766.8 million; financing activities used $905.9 million. Cash and equivalents ended at $2,514.2 million, versus $1,863.9 million at year-end 2014.
- Total assets were $215.4 billion, down from $219.1 billion; total liabilities were $205.6 billion. Stockholders’ equity was $9.7 billion, down from $10.2 billion. Separate-account assets and matching liabilities were each $134.0 billion and are generally client-directed and client-risk-bearing.
- Total debt was $3.51 billion, versus $2.56 billion at year-end; debt to capitalization excluding AOCI rose to 26% from 20%. Parent and other holding-company liquid assets available for corporate purposes were $797 million. PFG reported $1.005 billion of revolving credit facilities, with $221.6 million of short-term debt outstanding.
Material changes and unusual items
- Q3 common income benefited from comparison with the prior-year Chilean tax-law charge, which had raised 2014 tax expense. Nine-month 2015 results included a $105.2 million tax benefit from a merger of Chilean legal entities, partly offset by a $30.3 million reduction in net income following a court ruling affecting uncertain tax positions.
- Q3 actuarial assumption updates and model refinements increased total-company net income by $26.2 million. The corresponding 2014 updates increased it by $45.3 million. Impacts varied by segment and financial-statement line.
- A $23.0 million impairment of Brazilian mutual-fund intangibles was recorded in Q3, attributed to macroeconomic and market conditions, higher discount rates and a changed business mix.
- On September 1, the company completed its $335.5 million acquisition of AXA’s Hong Kong MPF and ORSO pension business and entered a 15-year distribution agreement. It also acquired an additional 2.5% of Columbus Circle Investors, bringing ownership to 97.5%.
- In June, PFG redeemed Series A and B preferred shares for $550 million, funded primarily by issuing $400 million of senior notes and $400 million of junior subordinated notes. Common dividends and repurchases returned $518.4 million to common shareholders during the first nine months.
- Other comprehensive loss was $583.5 million for nine months, including a $438.3 million foreign-currency translation loss and a $221.0 million after-tax loss on unrealized available-for-sale securities. AOCI moved from $50.4 million of income at year-end to a $524.4 million loss.
Outlook, commentary and risks
- The filing provides no quantified company earnings or revenue guidance. Management says 2015 operating results are not necessarily indicative of full-year results and expected organizational changes would not materially affect consolidated financial statements.
- International AUM ended at $106.2 billion, down from $114.6 billion at year-end, primarily due to a $26.9 billion adverse currency-translation effect, partly offset by net flows, investment performance and acquisitions. Management reported $33.2 million of adverse currency impact on segment operating earnings for nine months.
- Management cites prolonged low interest rates, credit spreads, market volatility, investment valuations, policyholder behavior, foreign exchange, competition, regulation, litigation, tax uncertainty, cybersecurity, catastrophe and reinsurer performance among material risks. A hypothetical 100-basis-point rate increase produced an estimated $2.40 billion net fair-value loss; the company cautions this is a scenario, not a forecast.
- Legal matters include the ACE fee litigation scheduled for trial in April 2016, an appeal in the McCaffree ERISA case, and Lehman-related claims of approximately $550 million including disputed interest. No losses were accrued for these matters because management said loss was not probable and reasonably estimable; outcomes remain uncertain.
- Other guarantees had maximum exposure of approximately $205 million, with management describing material payment likelihood as remote. The Chilean pension-fund minimum-return guarantee has no determinable maximum future exposure.
- Management stated disclosure controls were effective and reported no material change in internal control over financial reporting. S&P, Fitch and A.M. Best affirmed relevant ratings with stable outlooks during 2015.
Key facts for investors to verify
- How much of premium and revenue growth reflects large, variable single-premium annuity transactions versus recurring business.
- Underlying segment trends, particularly weaker Retirement and Investor Services and Principal International operating earnings, and the company’s non-GAAP reconciliations.
- Whether investment yields, spread income and credit quality remain pressured; unrealized fixed-income losses increased, primarily from wider credit spreads.
- The durability of reported earnings after the Chilean tax benefit, actuarial unlocking, and Brazil intangible impairment; also monitor uncertain tax positions.
- Debt growth, rising leverage, parent-level liquidity and the ability of regulated subsidiaries to upstream dividends.
- Potential outcomes of the disclosed legal cases and guarantees, including the unestimable Chilean minimum-return exposure.