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Principal Financial Group Inc. Reports Operating Results (10-Q)
Posted by: gurufocus (IP Logged)
Date: August 3, 2011 11:33AM

Principal Financial Group Inc. (PFG) filed Quarterly Report for the period ended 2011-06-30. Principal Financial Group Inc. has a market cap of $8.82 billion; its shares were traded at around $27.44 with a P/E ratio of 10.2 and P/S ratio of 1.1. The dividend yield of Principal Financial Group Inc. stocks is 2%. Principal Financial Group Inc. had an annual average earning growth of 2.5% over the past 10 years.



Highlight of Business Operations:

Finisterre Capital LLP and Finisterre Holdings Limited. 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 closed on July 1, 2011.

Individual Life Insurance Model and Assumption Changes. During second quarter 2011, our individual life insurance business made routine model and assumption changes (collectively referred to as “model changes”) that resulted in a net loss of $3.9 million after-tax for the quarter. The model changes altered the future estimated gross profit patterns that impact actuarial balances associated with our universal life and variable universal life insurance products. These balances are all part of an integrated model and, therefore, although the impact to earnings was not material, the model changes created volatility within certain income statement line items that are impacted by the same future estimated gross profit patterns. Specifically, fee revenues increased $48.5 million; benefits, claims and settlement expenses decreased $131.1 million; and operating expenses increased $185.6 million due to the unlocking of actuarial balances resulting from the model changes.

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 $180.8 million and $344.8 million for the three months ended June 30, 2011 and 2010, respectively, and $435.7 million and $706.1 million for the six months ended June 30, 2011 and 2010, respectively. The other after-tax adjustments associated with the after-tax earnings of our exited group medical insurance business were $18.8 million and $12.9 million for the three months ended June 30, 2011 and 2010, respectively, and $35.9 million and $46.8 million for the six months ended June 30, 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 $19.2 million and $41.6 million was reflected in the determination of net income for the three and six months ended June 30, 2011, respectively. Due to the exit from 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 June 30, 2011, measurement, approximately $19.9 million of pre-tax pension expense will be reflected in each of the following two quarters of 2011 for an expected total for the year of $81.4 million as of June 30, 2011. The final expense for 2011 could be greater or less than $81.4 million. The expected long-term return on plan assets used to develop the expense reflected so far in 2011 remained at the same 8.00% that was used to develop the 2010 expense, while the discount rate changed from 6.00% at December 31, 2009 to 5.65% as of December 31, 2010, to 5.80% as of March 31, 2011, and to 5.70% as of June 30, 2011.

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 $(15.3) million and $(29.8) million was reflected in the determination of net income for the three and six months ended June 30, 2011, respectively. Due to the exit from 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 June 30, 2011, measurement, approximately $(13.5) million of pre-tax expense (income) will be reflected in each of the following two quarters of 2011 for an expected total for the year of $(56.8) million as of June 30, 2011. The final expense (income) for 2011 could be greater or less than $(56.8) million. The expected long-term return on plan assets used to develop the expense (income) reflected so far in 2011 remained at the same 7.30% that was used to develop the 2010 expense, while the discount rate changed from 6.00% at December 31, 2009 to 5.65% as of December 31, 2010, to 5.80% as of March 31, 2011, and to 5.70% as of June 30, 2011.

Fees increased $73.2 million for our U.S. Insurance Solutions segment primarily due to the unlocking of unearned revenue associated with model changes in our individual life insurance business and growth in the universal life and variable universal life lines of business. In addition, fees increased $37.0 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 markets and an increase in product sales.

Read the The complete Report



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