Principal Financial Group, Inc. — 2014 Form 10-K
Business context and reporting period. Annual report for the fiscal year ended December 31, 2014, with comparisons to 2013 and 2012. Principal is a diversified financial-services company spanning retirement and investor services, asset management, international operations, and U.S. insurance. Year-end assets under management (AUM) were $519.3 billion; the company reported approximately 19.7 million customers worldwide.
Key financial results
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Total revenue | $10.48 billion | $9.29 billion | +12.8% |
| Net income | $1.18 billion | $936.1 million | +25.7% |
| Net income available to common stockholders | $1.11 billion | $879.7 million | +26.3% |
| Diluted EPS | $3.65 | $2.95 | +23.7% |
| Net cash from operating activities | $3.10 billion | $2.22 billion | +$881.7 million |
Revenue growth included higher premiums, fees, and investment income. Net realized capital gains were $14.7 million, compared with a $225.2 million loss in 2013. The effective tax rate rose to 21% from 17%. Net income was about 11.2% of revenue, versus 10.1% in 2013; this simple ratio is not a company-reported operating margin.
Year-end total assets were $219.1 billion, including $140.1 billion of separate-account assets, generally matched by separate-account liabilities. Stockholders’ equity was $10.23 billion. Total debt was $2.56 billion, down from $2.75 billion; debt-to-capitalization excluding AOCI was 20%, versus 22% in 2013. Cash and cash equivalents were $1.86 billion, down from $2.37 billion. Management said available cash, securities, operating inflows, credit facilities, and capital-market access were adequate for anticipated needs.
Common dividends declared were $1.28 per share, up from $0.98. Cash returned to common stockholders totaled $599.3 million: $376.6 million in dividends and $222.7 million in repurchases.
Material changes and segment performance
- All four operating segments increased operating earnings: Retirement and Investor Services (RIS) to $828.1 million from $694.4 million; Principal Global Investors (PGI) to $116.0 million from $102.6 million; Principal International to $268.0 million from $215.2 million; and U.S. Insurance Solutions to $231.3 million from $196.6 million. Segment operating earnings are management’s measure and do not equal GAAP net income.
- RIS benefited from higher account values, positive equity markets, business growth, and growth in payout annuities. PGI AUM rose to $314.0 billion from $292.1 billion. Principal International AUM increased to $114.6 billion, with positive cash flows and investment performance partly offset by currency translation.
- Low rates continued to pressure insurance spreads and margins. U.S. Insurance Solutions earnings also benefited from favorable actuarial assumption/model updates; the 2014 updates increased total company net income by $45.3 million.
- Fourth-quarter 2014 net income was $280.3 million and diluted EPS was $0.91, compared with $250.4 million and $0.78 in fourth-quarter 2013. Fourth-quarter revenue was $2.91 billion versus $2.67 billion.
Outlook, risks, contingencies, and unusual items
- No consolidated earnings guidance was provided. Management warned that a sustained low-interest-rate environment could reduce net-income growth through spread compression, higher reserves, and DAC or other actuarial adjustments. The filing forecasts 2015 defined-benefit pension expense of $123.3 million pre-tax, up from $85.0 million in 2014.
- Market risks include interest-rate, credit-spread, equity, foreign-exchange, and investment valuation changes. A modeled immediate 100-basis-point rate increase produced an estimated $2.28 billion net fair-value loss at year-end 2014; this is a hypothetical sensitivity, not a forecast. A 10% equity-market decline followed by a gradual recovery was estimated to reduce annual operating earnings by approximately 4%–6%.
- Investment exposures warrant attention: $47.0 billion in U.S. fixed maturities, about 8% below investment grade; $10.7 billion in commercial mortgage loans, with 19% concentrated in California; and approximately 42% of invested assets in relatively less-liquid asset classes. Fixed-maturity gross unrealized losses were $338.8 million at year-end.
- Principal Life paid $850 million in dividends to its parent in 2014, including $400 million approved as extraordinary. Its estimated 2015 dividend limit without extraordinary approval was $615.2 million. Holding companies had $651.5 million of readily deployable cash and liquid assets at year-end. This subsidiary-dividend constraint is relevant to parent-company liquidity and shareholder distributions.
- Unusual 2014 items included a $47.5 million after-tax reduction from a tax-court ruling on uncertain tax positions, a $58.1 million increase in net deferred tax liabilities following Chilean tax legislation, and an impairment of the Liongate investment. A Chilean legal-entity merger received approval in January 2015; the company expected an approximately $125 million first-quarter 2015 net-income benefit from related deferred-tax changes.
- The company announced a $335 million acquisition of AXA’s Hong Kong pension business, expected to close in third-quarter 2015 subject to approvals. Litigation included ERISA and investment-related matters; management stated it did not believe pending matters would materially affect the business or financial position, but generally could not estimate potential losses. Reinsurance counterparty performance and evolving capital/reserving rules are additional risks.
- Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Most important facts for investors to verify
- How much of 2014 earnings growth came from recurring segment operations versus realized investment results, tax effects, actuarial updates, and other adjustments.
- Whether AUM and customer cash-flow growth persist, and the sensitivity of fee income and earnings to market declines and foreign-currency movements.
- Insurance spread, reserve, and guarantee exposure under prolonged low rates, rising rates, or adverse policyholder behavior; assess the effectiveness and cost of hedges.
- Credit quality, liquidity, and valuation of fixed maturities, commercial mortgage loans, and other less-liquid investments, including California concentration and balloon maturities.
- Principal Life statutory capital, dividend capacity, and the parent’s ability to fund dividends, debt service, repurchases, and planned acquisitions.
- Progress and realized benefits of the Hong Kong acquisition, the anticipated Chile tax-related benefit, and developments in tax disputes, litigation, and regulatory requirements.