Principal Financial Group, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Amounts are in millions except per-share data. The filing compares results with the corresponding 2019 periods and notes that COVID-19 makes interim results less indicative of full-year performance.
Business context and financial results
Principal provides retirement and income products and services, asset management, international savings and insurance products, and U.S. insurance. Its reportable segments are Retirement and Income Solutions, Principal Global Investors, Principal International, U.S. Insurance Solutions, and Corporate.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $3,310.7 | $4,458.4 | $10,976.6 | $12,174.9 |
| Income before tax | $275.1 | $345.7 | $1,101.9 | $1,322.0 |
| Net income attributable to Principal | $236.0 | $277.1 | $923.2 | $1,093.3 |
| Diluted EPS | $0.85 | $0.98 | $3.34 | $3.89 |
| Net cash from operating activities | Not provided for quarter | Not provided for quarter | $3,110.4 | $4,464.8 |
Revenue declined about 26% in Q3 and 10% for the nine-month period. Net income attributable to Principal fell about 15% in both comparisons. Calculated pretax margin was approximately 8.3% in Q3 2020 versus 7.8% in Q3 2019, and 10.0% for the first nine months versus 10.9% in 2019.
- Q3 segment pretax operating earnings: Retirement and Income Solutions $281.1 (up from $169.7); Principal Global Investors $140.9 (up from $123.0); Principal International $58.7 (down from $108.9); U.S. Insurance Solutions loss of $134.1 (versus earnings of $120.1); Corporate loss of $69.7 (versus $102.1).
- Nine-month segment pretax operating earnings were $1,150.7 versus $1,411.5. Principal Global Investors’ assets under management were $468.4 billion at quarter-end, compared with $441.9 billion a year earlier.
Financial position, debt, and liquidity
- At September 30, 2020, total assets were $278,484.8, total liabilities $262,485.2, and total stockholders’ equity $15,721.1. Cash and cash equivalents were $3,556.7; total investments were $103,033.8.
- Total debt was $4,355.6, including $76.6 short-term and $4,279.0 long-term debt, up from $3,827.5 at year-end 2019. Debt to equity was 28%, versus 26%; debt to capitalization was 22%, versus 21%.
- Cash increased $1,040.8 over the first nine months. Operating cash flow was $3,110.4, investing cash flow was negative $3,639.9, and financing cash flow was positive $1,570.3. Operating cash flow was lower than 2019, principally reflecting lower pension risk transfer and individual fixed annuity sales and settlement timing.
- Management reported $2,568.7 of cash and liquid assets at holding companies and other subsidiaries available for corporate purposes. It described capital and liquidity as strong, citing available cash and liquid assets, credit facilities, contingent funding arrangements, and staggered debt maturities, with the next maturity in 2022.
Material changes and management commentary
- Lower single-premium group and individual annuity sales drove much of the decline in premiums and related benefits and claims, especially in Retirement and Income Solutions. The filing cautions that this business can produce large period-to-period swings.
- Q3 actuarial assumption updates and model refinements reduced consolidated net income attributable to Principal by $118.2. The effect was substantially worse than the $36.5 reduction in Q3 2019; U.S. Insurance Solutions operating earnings were particularly affected.
- COVID-19 affected insurance claims, dental premium credits, retirement-plan withdrawals, market values, and foreign exchange. Management cited temporary dental and vision closures as reducing some claims, while estimating COVID-related claims and pent-up demand impacts in Specialty Benefits.
- For the nine months, foreign currency movements reduced Principal International pretax operating earnings by $48.6. Unfavorable relative performance on required Latin American regulatory investments and lower Brazilian equity-method income also weighed on results.
- Net investment income fell to $917.9 in Q3 from $996.6 and to $2,846.1 for nine months from $2,994.7, reflecting lower yields and cash returns, foreign exchange, and investment performance. Net realized gains were $65.5 in Q3, versus a $42.4 loss, and $169.5 for nine months, versus $38.1.
- The company issued $600.0 of 2.125% senior notes due 2030 in June and August for general corporate purposes. It paid $460.8 in common dividends and repurchased $232.0 of shares during the first nine months. Repurchases were paused in March; management said resumption could occur as early as Q4 2020 or Q1 2021, depending on macroeconomic clarity and stability.
Outlook, risks, and contingencies
- The filing provides no numerical earnings or revenue guidance. Management warned that COVID-19 and related market impacts could continue to affect operations, results, financial condition, and liquidity.
- Key risks include adverse capital and credit markets; persistently low or volatile interest rates and credit spreads; equity, bond, and real estate market declines; investment credit losses and valuation uncertainty; insurance experience differing from pricing and reserving assumptions; surrenders and withdrawals; foreign exchange, regulatory, and tax changes; litigation; and counterparty or reinsurer failures.
- Interest-rate sensitivity estimates show a hypothetical 100-basis-point parallel Treasury-yield decline would reduce segment pretax operating earnings by less than 1% over the next 12 months, excluding potential DAC and actuarial-balance unlocking. A hypothetical 100-basis-point rate increase would reduce the reported fair value of financial assets and derivatives by $5,123.0 at September 30, 2020; the estimate excludes certain liabilities and separate accounts.
- A hypothetical 10% S&P 500 decline followed by quarterly 2% increases would reduce annual segment pretax operating earnings by approximately 5%–7% over the next 12 months, excluding potential unlocking. These are scenarios, not forecasts.
- Fitch and S&P revised the outlook on PFG ratings to negative in 2020, citing pandemic-related disruption and weaker earnings or capital prospects; the agencies affirmed the referenced ratings. Management said it did not expect pending litigation or regulatory matters to have a material adverse effect. The PFIO ERISA class action was remanded after an appellate reversal; no loss was accrued because management did not consider loss probable and could not reasonably estimate it.
- Potential exposures include $117.0 under certain guarantees and up to $750.0 under contingent funding agreements. The future maximum exposure under the Chilean mandatory retirement funds’ relative-return guarantee is indeterminable. Management considered material payments under the cited guarantees unlikely.
Most important facts for investors to verify
- Whether the unusually large actuarial assumption and model-refinement impacts recur, and how they affect underlying segment earnings.
- Trends in annuity sales, retirement deposits and withdrawals, asset-management AUM and flows, and the effect of market performance on fees.
- COVID-related insurance claims, premium credits, loan modifications, mortgage credit allowances, and subsequent credit performance.
- Liquidity and holding-company resources, statutory capital and dividend capacity, debt issuance and maturities, and the timing of any share-repurchase resumption.
- Changes in credit-rating outlooks, interest-rate and equity sensitivities, foreign-exchange effects, and the status of litigation and contingent guarantees.