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Principal Financial Group Inc. Reports Operating Results (10-Q)
Posted by: gurufocus (IP Logged)
Date: May 4, 2011 12:22PM

Principal Financial Group Inc. (PFG) filed Quarterly Report for the period ended 2011-03-31. Principal Financial Group Inc. has a market cap of $10.21 billion; its shares were traded at around $31.83 with a P/E ratio of 11.5 and P/S ratio of 1.3. The dividend yield of Principal Financial Group Inc. stocks is 1.7%. Principal Financial Group Inc. had an annual average earning growth of 2.5% over the past 10 years.



Highlight of Business Operations:

On April 18, 2011, we announced the signing of a definitive agreement to acquire a majority stake in Finisterre Capital LLP and Finisterre Holdings Limited, (together Finisterre Capital), an emerging markets debt investor based in London. Finisterre Capital has approximately $1.6 billion in AUM. The initial payment for the majority stake will be $84.6 million, with a possible additional contingent payment of up to $30.0 million in 2013, dependent upon performance targets. Finisterre Capital will be accounted for on the equity method within the Principal Global Investors segment. The transaction, subject to regulatory approval, is expected to close by early third quarter 2011.

With the exception of corporate overhead, amounts related to our group medical insurance business previously included in segment operating earnings have been removed from operating earnings for all periods presented and are reported as other after-tax adjustments. The operating revenues associated with our exited group medical insurance business were $254.9 million and $361.3 million for the three months ended March 31, 2011 and 2010, respectively. The other after-tax adjustments associated with the after-tax earnings of our exited group medical insurance business were $17.1 million and $33.9 million for the three months ended March 31, 2011 and 2010, respectively.

The 2011 annual defined benefit pension expense for substantially all of our employees and certain agents was expected to be $90.9 million pre-tax as of the beginning of the year, which is an $18.6 million decrease from the 2010 pre-tax pension expense of $109.5 million. This decrease is primarily due to actual asset returns in 2010 that were higher than expected asset returns. Pre-tax pension expense of $22.4 million and $27.6 million was reflected in the determination of net income for the three months ended March 31, 2011 and 2010, respectively. Due to the exit of the group medical insurance business, we have a curtailment associated with the benefits of the impacted employees that will be recognized as the impacted employees are terminated. As such, the expense will be measured quarterly during 2011 with updated asset values and potentially different discount rates. Based on the March 31, 2011, measurement, approximately $19.6 million of pre-tax pension expense will be reflected in each of the following three quarters of 2011 for an expected total for the year of $81.2 million as of March 31, 2011. The final expense for 2011 could be greater or less than $81.2 million. The expected long-term return on plan assets used to develop the expense reflected in first quarter 2011 remained at the same 8.00% that was used to develop the 2010 expense, while the discount rate declined from 6.00% at December 31, 2009 to 5.65% as of December 31, 2010. As of March 31, 2011, the discount rate increased to 5.80%.

The 2011 annual other postretirement employee benefit (“OPEB”) plan expense (income) for retired employees was expected to be $(53.2) million pre-tax as of the beginning of the year, which is a $41.9 million difference from the 2010 pre-tax OPEB income of $(11.3) million. This difference is primarily due to significant changes in plan design for the postretirement medical plan. As of January 1, 2011, the company-paid subsidy for pre-Medicare-eligible coverage is 40% and the cost of coverage for Medicare-eligible retirees (or their dependents) is no longer subsidized. In addition to the changes for individuals retiring on or after January 1, 2011, the method for determining the premium equivalent rate was changed to be solely based on retiree experience. Pre-tax expense (income) of $(14.5) million and $1.3 million was reflected in the determination of net income for the three months ended March 31, 2011 and 2010, respectively. Due to the exit of the group medical insurance business, we have a curtailment associated with the benefits of the impacted employees that will be recognized as the impacted employees are terminated. As such, the expense will be measured quarterly during 2011 with updated asset values and potentially different discount rates. Based on the March 31, 2011, measurement, approximately $(13.5) million of pre-tax expense (income) will be reflected in each of the following three quarters of 2011 for an expected total for the year of $(55.0) million as of March 31, 2011. The final expense (income) for 2011 could be greater or less than $(55.0) million. The expected long-term return on plan assets used to develop the expense (income) reflected in first quarter 2011 remained at the same 7.30% that was used to develop the 2010 expense, while the discount rate declined from 6.00% at December 31, 2009 to 5.65% as of December 31, 2010. As of March 31, 2011, the discount rate increased to 5.80%.

Fees increased $21.4 million for our Retirement and Investor Services segment primarily due to higher fee income stemming from an increase in average account values as a result of continuing improvement in the equity market. In addition, fees increased $20.4 million for our U.S. Insurance Solutions segment primarily due to growth in the universal life and variable universal life lines of business. Furthermore, fees increased $11.2 million for our Principal Global Investors segment primarily due to higher fee revenues driven by an increase in average AUM.

Benefits, claims and settlement expenses decreased $58.6 million for the Corporate segment primarily due to a reduction in average covered medical members in our exited group medical insurance business. In addition, Retirement and Investor Services segment benefits, claims and settlement expenses decreased $39.8 million in our investment only business primarily due to a decrease in cost of interest credited stemming from lower variable crediting rates and a decline in average account values, which resulted from our decision to scale back this business. Partially offsetting these decreases was a $21.8 million increase for the Principal International segment, primarily due to higher inflation-based interest crediting rates to customers in Chile and the strengthening of the Chilean peso against the U.S. dollar.

Read the The complete Report



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