Principal Financial Posts Mixed 1Q


Principal Financial Group, Inc. (PFG) reported first-quarter 2012 operating earnings of 70 cents per share, lagging the Zacks Consensus Estimate by 4 cents. However, results in the quarter were better than 68 cents earned in the prior-year quarter. Operating income was $213 million in the quarter, down 3.1% from $219.8 million in the first quarter of 2011.

The year-over-year improvement was primarily driven by double-digit growth in the Principal International segment.

Including net realized capital losses of $10.0 million and an unfavorable after tax adjustment of $1.5 million, net income available to common stockholders was $201.5 million or 66 cents per share, compared with $182.0 million or 56 cents per share a year ago.

The prior-year quarter included net realized capital losses of $54.9 million and other favorable after-tax adjustments of $17.1 million.

Operational Performance

Operating revenues in the first quarter crept up 2.9% to $2.11 billion. The increase was primarily due to an increase in premiums and other considerations, partially offset by lower net investment income and fees and other revenues. Revenue was almost in line with the Zacks Consensus Estimate of $2.12 billion.

Principal in the first quarter reported 18.5% year-over-year growth in premium. The fees and other revenues in the quarter decreased 2.0% along with a 4% year-over-year decline in net investment income.

Total expenses increased 4.2% year over year to $1.8 billion. Higher benefits, claims and settlement expenses, commissions, interest expense and compensations contributed to the increase.

Assets under management were $364.1 billion as of March 31, 2012, up 11% year over year.

Book value per share as of March 31, 2012, stood at $27.70, up 5% from $26.43 as of March 31, 2011.

Segment Update

Retirement and Investor Services: Revenues in the quarter increased by 3.6% to $1.055 billion from $1.018 billion in the year-ago quarter. The increase was on the back of higher premiums and fees, but net investment income was a partial offset.

Operating earnings slid to $143.6 million in the quarter from $154.1 million in the first quarter of 2011. 

Principal Global Investors: Revenues in the quarter were $138.1 million, 10.2% higher than the prior-year period, primarily due to an increase in the management fees resulting from a growth in assets under management coupled with higher borrower transaction fees.

Operating earnings were $16.2 million in the reported quarter compared with $16.6 million in the year-ago quarter. The decrease was due to higher compensation cost,  arising from an increase in the number of staff in the distribution and investment wing to support the company’s growth strategies.

Principal International: Revenues were $262.5 million in the quarter, modestly higher than $206.1 million in the prior-year quarter. A 22% increase in assets under management contributed to the growth.

Operating earnings improved to $41.8 million from $27.8 million in the year-ago quarter, mainly due to a growth in assets under management.

US Insurance Solution: Revenues declined to $697.8 million in the quarter from $732 million in the year-ago quarter, as fees and other revenue were adversely affected due to change in the amortization basis.

Operating earnings declined to $50.2 million in the quarter from $53.4 million in the year-ago quarter.

Corporate: Operating losses increased to $38.8 million from a loss of $32.1 million recorded in the year-ago quarter, mainly due to higher tax and legal expenses incurred by the company.

Dividend and Share Repurchase

During the reported quarter, the company’s board of directors authorized a share repurchase program worth $100 million. The company also paid a quarterly dividend of 18 cents per common share on March 30, 2012.

Our Take

We believe that Principal Financial can align its business to focus more on the strategic opportunities in the growing asset accumulation and asset management businesses while shedding the line of business, which provides little growth.

The company’s sound capital position and financial liquidity are supportive of its expansion policies in the emerging markets as they offer ample growth opportunities.

The company remains focused on enhancing its shareholders value via share buyback and dividend payments.  Given the company has $1.8 billion of excess capital, we expect it return further value to its shareholders going forward.

We retain our long term Neutral recommendation on Principal Financial. The quantitative Zacks #2 Rank (short-term Buy rating) for the company indicates slight upward pressure on the shares over the near term.

Based in Des Moines, Iowa, Principal Financial Group Inc. provides an expansive range of retirement savings, investment and insurance products and services through its various subsidiaries. Lincoln National Corporation (LNC), which competes with Principal Financial, is scheduled to release its results on May 2, 2012 after the bell.

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