Principal Financial(PFG) - 2019 Q1 - Quarterly Report

Part I - FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited consolidated financial statements for Principal Financial Group, Inc. as of March 31, 2019, including statements of financial position, operations, comprehensive income, stockholders' equity, and cash flows, with detailed notes on accounting policies and data breakdowns Consolidated Statements of Financial Position Total assets grew to $259.4 billion from $243.0 billion, driven by separate account assets and investments, with stockholders' equity rising to $12.8 billion Consolidated Balance Sheet Highlights (in millions) | Account | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Total Assets | $259,419.9 | $243,036.1 | | Total Investments | $88,543.9 | $84,766.6 | | Separate account assets | $157,942.8 | $144,987.9 | | Total Liabilities | $246,120.0 | $231,188.9 | | Separate account liabilities | $157,942.8 | $144,987.9 | | Long-term debt | $3,266.4 | $3,259.6 | | Total Stockholders' Equity | $12,762.2 | $11,456.0 | | Retained earnings | $10,571.9 | $10,290.2 | | Accumulated other comprehensive loss | $(418.9) | $(1,565.1) | Consolidated Statements of Operations Q1 2019 net income attributable to PFG rose to $429.9 million from $397.1 million, driven by $3.74 billion in revenues and a shift to capital gains Consolidated Statements of Operations (in millions, except per share data) | Metric | Q1 2019 | Q1 2018 | | :--- | :--- | :--- | | Total Revenues | $3,743.9 | $2,883.6 | | Premiums and other considerations | $1,724.9 | $995.2 | | Net realized capital gains (losses) | $84.5 | $(25.1) | | Total Expenses | $3,217.9 | $2,426.6 | | Income before income taxes | $526.0 | $457.0 | | Net Income | $452.1 | $402.5 | | Net Income Attributable to PFG | $429.9 | $397.1 | | Diluted EPS | $1.53 | $1.36 | Consolidated Statements of Comprehensive Income Q1 2019 comprehensive income attributable to PFG was $1.58 billion, a turnaround from a $339.9 million loss, driven by $1.1 billion in unrealized gains on AFS securities Consolidated Comprehensive Income (in millions) | Metric | Q1 2019 | Q1 2018 | | :--- | :--- | :--- | | Net Income | $452.1 | $402.5 | | Other comprehensive income (loss) | $1,146.7 | $(736.1) | | Net unrealized gains (losses) on AFS securities | $1,104.3 | $(805.5) | | Comprehensive income (loss) attributable to PFG | $1,576.1 | $(339.9) | Consolidated Statements of Stockholders' Equity Stockholders' equity grew from $11.46 billion to $12.76 billion in Q1 2019, driven by $431.8 million net income and $1.15 billion other comprehensive income - Key activities affecting stockholders' equity in Q1 2019 included net income of $429.9 million, other comprehensive income of $1.15 billion, common stock dividends of $150.2 million, and treasury stock acquisitions of $153.6 million[16] Consolidated Statements of Cash Flows Q1 2019 operating cash flow was $1.18 billion, with $1.49 billion used in investing and $403.1 million in financing, resulting in a $717.8 million cash decrease Consolidated Cash Flows (in millions) | Cash Flow Activity | Q1 2019 | Q1 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $1,176.4 | $746.5 | | Net cash used in investing activities | $(1,491.1) | $(979.9) | | Net cash provided by (used in) financing activities | $(403.1) | $98.3 | | Net decrease in cash and cash equivalents | $(717.8) | $(135.1) | Notes to Unaudited Consolidated Financial Statements This section details accounting policies and methodologies, covering recent pronouncements, VIEs, investments, derivatives, insurance liabilities, income taxes, segment information, and subsequent events Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2019 financial condition and operations, covering key drivers, segment performance, investments, liquidity, and capital resources, highlighting net income growth from capital gains - On April 9, 2019, the company announced a definitive agreement to acquire Wells Fargo's Institutional Retirement & Trust business for $1.2 billion in cash plus a potential earn-out, expected to close in Q3 2019[419][425] - Net income attributable to PFG increased to $429.9 million in Q1 2019 from $397.1 million in Q1 2018, primarily due to after-tax net realized capital gains, partially offset by a $31.9 million decrease in after-tax fees and other revenues[437] - Total revenues increased by $860.3 million year-over-year, driven by a $729.7 million increase in premiums and a $109.6 million positive swing in net realized capital gains (losses)[436] - Total expenses increased by $791.3 million year-over-year, mainly due to a $784.0 million rise in benefits, claims, and settlement expenses, corresponding with higher sales of single premium group annuities[436][441] Results of Operations by Segment Segment performance varied in Q1 2019, with Retirement and Income Solutions and Principal Global Investors seeing declines, while Principal International's earnings increased significantly Pre-tax Operating Earnings by Segment (in millions) | Segment | Q1 2019 | Q1 2018 | | :--- | :--- | :--- | | Retirement and Income Solutions | $240.6 | $243.9 | | Principal Global Investors | $100.7 | $113.7 | | Principal International | $111.1 | $91.5 | | U.S. Insurance Solutions | $110.7 | $115.0 | | Corporate | $(84.4) | $(67.6) | | Total | $478.7 | $496.5 | Liquidity and Capital Resources The company maintains strong liquidity with $1.7 billion in cash and liquid assets, an improved debt-to-capitalization ratio of 21%, and returned $303.8 million to shareholders in Q1 2019 - As of March 31, 2019, the holding companies and other subsidiaries held $1.7 billion of cash and liquid assets available for corporate purposes[482] Capitalization Summary (in millions) | Metric | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Total debt | $3,310.3 | $3,302.5 | | Total stockholders' equity attributable to PFG | $12,694.4 | $11,390.0 | | Total capitalization | $16,004.7 | $14,692.5 | | Debt to capitalization | 21% | 22% | - In Q1 2019, the company returned $303.8 million to common stockholders, consisting of $150.2 million in dividends and $153.6 million in share repurchases[492] Investments Total invested assets grew to $88.5 billion, primarily in fixed maturities (72%) and commercial mortgage loans (18%), with 96% of fixed income assets rated investment grade Composition of Invested Assets (in millions) | Asset Class | March 31, 2019 | % of Total | | :--- | :--- | :--- | | Fixed maturities | $63,791.9 | 72% | | Equity securities | $1,864.1 | 2% | | Mortgage loans | $15,597.5 | 18% | | Real estate | $1,736.7 | 2% | | Other investments & Policy loans | $5,553.7 | 6% | | Total invested assets | $88,543.9 | 100% | - The fixed maturities portfolio had a carrying amount of $59.9 billion as of March 31, 2019, with 96% of the portfolio rated investment grade (NAIC designations 1 and 2)[549] - The commercial mortgage loan portfolio carrying amount was $14.0 billion, with a conservative weighted average loan-to-value ratio of 45% and a debt service coverage ratio of 2.5x[528][579] Quantitative and Qualitative Disclosures about Market Risk The company manages market risks from interest rates, equity, and foreign currency, with a 100 bps interest rate drop impacting earnings by less than 1% and a 10% S&P 500 decline by 4-6% - Interest Rate Risk: A hypothetical 100 basis point immediate, parallel decrease in interest rates would reduce segment pre-tax operating earnings by less than 1% over the next 12 months, excluding potential unlocking of DAC[610] - Equity Risk: An immediate 10% decline in the S&P 500 index is estimated to reduce annual segment pre-tax operating earnings by approximately 4% to 6%, excluding potential unlocking of DAC[639] - Foreign Currency Risk: A 10% immediate unfavorable change in foreign currency exchange rates is estimated to reduce the total equity of international operations by $326.8 million as of March 31, 2019[630] Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of March 31, 2019, with no material changes to internal control over financial reporting during the quarter - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of March 31, 2019[643] - No material changes were made to the company's internal control over financial reporting during the first quarter of 2019[641] Part II — OTHER INFORMATION Legal Proceedings The company is regularly involved in litigation, but as of March 31, 2019, there were no litigation or regulatory contingencies requiring disclosure - As of March 31, 2019, the company had no litigation or regulatory contingencies that required disclosure[220][644] Risk Factors New risk factors relate to the Wells Fargo acquisition, including potential deal failure, integration challenges, unanticipated liabilities, and new risks in trust and custody services - New risk factors have been added related to the acquisition of Wells Fargo's Institutional Retirement & Trust business[645] - Risks include potential failure to close the deal, complex and costly integration challenges, and the possibility of not realizing expected benefits and synergies[646][647] - The company may assume unanticipated or unknown liabilities from the seller, with only limited indemnification rights[650] - Entering and expanding the trust and custody services business introduces new operational, competitive, and regulatory risks[651][652] Unregistered Sales of Equity Securities and Use of Proceeds In Q1 2019, the company repurchased approximately 2.7 million shares, suspending its program with $295.3 million remaining under the November 2018 authorization Issuer Purchases of Equity Securities (Q1 2019) | Period | Total Shares Purchased | Average Price Paid | Shares Purchased Under Program | | :--- | :--- | :--- | :--- | | Jan 2019 | 1,468,212 | $47.10 | 1,467,368 | | Feb 2019 | 1,671,267 | $50.39 | 1,224,506 | | Mar 2019 | 4,050 | $52.99 | 0 | | Total | 3,143,529 | | 2,691,874 | - In Q1 2019, the company suspended its share repurchase program, with $295.3 million remaining under the November 2018 authorization[655] Exhibits This section lists exhibits filed with the Form 10-Q, including the Wells Fargo acquisition Purchase Agreement, CEO/CFO certifications, and XBRL data files