Principal Financial Group Fourth Quarter 2012 Earnings Call

Transcription

1 Principal Financial Group Fourth Quarter 2012 Earnings Call February 1, 2013

2 USE OF NON-GAAP FINANCIAL MEASURES A non-gaap financial measure is a numerical measure of performance, financial position, or cash flows that includes adjustments from a comparable financial measure presented in accordance with U.S. GAAP. The company uses a number of non-gaap financial measures that management believes are useful to investors because they illustrate the performance of the company s normal, ongoing operations which is important in understanding and evaluating the company s financial condition and results of operations. While such measures are also consistent with measures utilized by investors to evaluate performance, they are not a substitute for U.S. GAAP financial measures. Therefore, on our investor relations website, the company has provided reconciliations of the non-gaap financial measures to the most directly comparable U.S. GAAP financial measure. The company adjusts U.S. GAAP financial measures for items not directly related to ongoing operations. However, it is possible that these adjusting items have occurred in the past and could recur in the future. Management also uses non-gaap financial measures for goal setting as a basis in determining employee and senior management awards and compensation, and to evaluate performance on a basis comparable to that used by securities analysts. The company also uses a variety of other operational measures that do not have U.S. GAAP counterparts, and therefore do not fit the definition of non-gaap financial measures. Assets under management is an example of an operational measure that is not considered a non-gaap financial measure. 2

3 FORWARD LOOKING STATEMENTS Certain statements made by the company which are not historical facts may be considered forward-looking statements, including, without limitation, statements as to operating earnings, net income available to common stockholders, net cash flows, realized and unrealized gains and losses, capital and liquidity positions, sales and earnings trends, and management's beliefs, expectations, goals and opinions. The company does not undertake to update these statements, which are based on a number of assumptions concerning future conditions that may ultimately prove to be inaccurate. Future events and their effects on the company may not be those anticipated, and actual results may differ materially from the results anticipated in these forward-looking statements. The risks, uncertainties and factors that could cause or contribute to such material differences are discussed in the company's annual report on Form 10-K for the year ended Dec. 31, 2011, and in the company s quarterly report on Form 10-Q for the quarter ended September 30, 2012, filed by the company with the Securities and Exchange Commission, as updated or supplemented from time to time in subsequent filings. These risks and uncertainties include, without limitation: adverse capital and credit market conditions may significantly affect the company s ability to meet liquidity needs, access to capital and cost of capital; continued difficult conditions in the global capital markets and the economy generally; continued volatility or further declines in the equity markets; changes in interest rates or credit spreads; the company s investment portfolio is subject to several risks that may diminish the value of its invested assets and the investment returns credited to customers; the company s valuation of securities may include methodologies, estimations and assumptions that are subject to differing interpretations; the determination of the amount of allowances and impairments taken on the company s investments requires estimations and assumptions that are subject to differing interpretations; gross unrealized losses may be realized or result in future impairments; competition from companies that may have greater financial resources, broader arrays of products, higher ratings and stronger financial performance; a downgrade in the company s financial strength or credit ratings; inability to attract and retain sales representatives and develop new distribution sources; international business risks; the company s actual experience could differ significantly from its pricing and reserving assumptions; the company s ability to pay stockholder dividends and meet its obligations may be constrained by the limitations on dividends or distributions Iowa insurance laws impose on Principal Life; the pattern of amortizing the company s DPAC and other actuarial balances on its universal life-type insurance contracts, participating life insurance policies and certain investment contracts may change; the company may need to fund deficiencies in its Closed Block assets that support participating ordinary life insurance policies that had a dividend scale in force at the time of Principal Life s 1998 conversion into a stock life insurance company; the company s reinsurers could default on their obligations or increase their rates; risks arising from the company's ability to obtain regulatory approval and consummate the acquisition of A.F.P. Cuprum S.A. and from other acquisitions of businesses; changes in laws, regulations or accounting standards; a computer system failure or security breach could disrupt the company s business, and damage its reputation; results of litigation and regulatory investigations; from time to time the company may become subject to tax audits, tax litigation or similar proceedings, and as a result it may owe additional taxes, interest and penalties in amounts that may be material; fluctuations in foreign currency exchange rates; and applicable laws and the company s certificate of incorporation and by-laws may discourage takeovers and business combinations that some stockholders might consider in their best interests. 3

4 4Q12 Earnings Call Key Themes Very strong finish to 2012 Momentum of business fundamentals continues Higher net revenue leads to higher operating earnings Two strategic acquisitions to solidify center of retirement excellence in Latin American emerging markets 65% of earnings are fee-based allowing more capital to be returned to shareholders Paid four quarterly common stock dividends totaling 78-cents in 2012, an 11% increase over 2011 Announced 1Q13 dividend of 23-cents, 10% increase over 4 4Q12.

5 Strong Investment Performance Continues Morningstar rankings of Principal mutual funds, separate accounts and CITs Percentage of funds in the top two quartiles Represents $114 billion assets under management of which 75% is managed by PGI boutiques GOAL: ABOVE 60% 86% 84% 78% 72% 90% 91% 60% 62% 60% Dec. 31, 2011 Sept. 30, 2012 Dec. 31, Year 3-Year 5-Year Principal I shares, if no I share class then A share class, separate accounts use R6 rate level; Includes Principal mutual funds, separate accounts and collective investment trusts (CITs); Excludes money market, stable value and U.S. Property 5

6 4Q12 Operating Earnings were Positively Impacted by Several Items Excluding items, 4Q12 EPS of $0.78 compared to $0.67 a year ago Per diluted share 4Q12 Change Operating Earnings $0.66 $0.82 $0.16 Normalizing items Higher dividends benefit (0.03) (0.03) Variable investment income 0.04 (0.01) (0.05) 13 th month in Brasilprev & PI tax credits (0.03) 0.03 Total of normalizing items $0.01 $(0.04) $(0.05) Operating Earnings plus Normalized Items $0.67 $0.78 $0.11 Up 16% 6

7 Key Business Drivers Outlook Retirement & Investor Services 5-Year 2013E Reason Accumulation Guaranteed Net revenue growth 6-8% 2-4% Pressure on fees Pre-tax RONR 28-32% 27-29% Low interest rates Net revenue growth 6-8% Same Opportunistic approach Pre-tax RONR 75-80% 77-80% Operating at scale U.S. Insurance Solutions 5-Year 2013E Reason Individual Life Specialty Benefits Premium & fee growth 4-8% 3-5% Lower single premium sales Pre-tax operating margin 16-21% 15-17% Low interest rates Premium & fee growth 8-10% 6-8% Slow employment growth Pre-tax operating margin 8-12% 8-10% Low interest rates Loss ratio 65-71% Same Stable loss ratios 7 Net revenue = operating revenues less benefits, claims & settlement expenses less dividends to policyholders RONR = Return on Net Revenue Pre-tax operating margin = pre-tax operating earnings / premium and fees

8 Key Business Drivers Outlook Principal Global Investors 5-Year 2013E Reason Revenue growth 14-17% 6-8% Lower performance fees Pre-tax margin 30+% 23-25% Continue building scale Principal International (does not include Cuprum) 5-Year 2013E Reason Combined* net revenue growth 15-20% 16-19% Strong execution Combined pre-tax RONR 55-60% 57-59% Scale offsetting fee pressure Principal s share of combined pre-tax earnings N/A 28% Estimated after-tax operating losses for Corporate of $145-$165 million in *Combined basis includes all Principal International companies at 100% RONR = Return on Net Revenue N/A = not applicable

9 Retirement and Investor Services Accumulation Net Revenue ($m) Q12 On a trailing twelve month basis: Net revenue up 7% Pretax return on net revenue of 30% Operating Earnings After-tax ($m) 4Q12 $133.5 Adjusted* 4Q12 $122.4 $105.5 Change* $16.9 (+16%) Strong retention contributing to growth in average account values Pressure on fees continues Focus 2013 Full Service Accumulation sales on growing net revenue 9 *Removes benefit from higher dividends and variable investment income; Change calculated with respect to adjusted numbers

10 Retirement and Investor Services Guaranteed Net Revenue ($m) Q12 On a trailing twelve month basis: Net revenue down 4% Pretax return on net revenue of 78% Opportunistically pursue business Investment Only market activity remains low Operating Earnings After-tax ($m) 4Q12 $18.8 $19.0 Change $(0.2) (-1%) Continue to evaluate attractive Full Service Payout opportunities 10

11 Principal Global Investors Revenue $m Q12 On a trailing twelve month basis: Revenue is up 8% Pretax margin of 23%, up from 21% in 2011 Competitive investment performance continues Record unaffiliated assets under management of $98.2 billion Very strong 2012 unaffiliated net cash flow of $6.9 billion Operating Earnings After-tax ($m) 4Q12 $26.2 $17.5 Change $8.7 (+50%)

12 Principal International Combined* Net Revenue ($m) Adjusted 294 4Q12 On an trailing twelve month combined basis: Adjusted** net revenue is up 8%, up 20% on a constant currency basis Pretax return on net revenue of 56% Strong 4Q12 net cash flow of $2.0 billion Strong growth despite FX headwinds Reported Constant FX Adjusted Operating Earnings 14% 19% Adjusted Combined Net Revenue 16% 25% AUM 31% 35% *Combined basis includes all Principal International companies at 100% **Excludes impact of Brasilprev 13 th month, tax credits and 3Q12 actuarial assumption review; Change calculated with respect to adjusted number Operating Earnings After-tax ($m) 4Q12 $45.1 $50.1 Adjusted** $39.7 Change** $5.4 (+14%)

13 Individual Life Premium and Fees ($m) 235 Operating Earnings After-tax ($m) 4Q12 $27.8 $27.2 Change $0.6 (2%) Q12 On an adjusted* trailing twelve month basis: Premium and fees up 4% Pretax operating margin of 17% Low interest rates continue to be headwind to earnings growth Continued focus on business market 13 *Remove impact of 3Q12 actuarial assumption review and 1Q12 amortization change.

14 Specialty Benefits Premium and Fees ($m) Q12 On a trailing twelve month basis: Premium and fees up 5% Pretax operating margin of 9% Overall low 4Q12 loss ratio Group disability loss ratio returned to normal level Operating Earnings After-tax ($m) 4Q12 $31.6 $25.6 Change $6.0 (23%) Overall year-to-date loss ratio of 68.2% is in targeted range 14

15 Capital Deployment Strategy Over $1.1 billion in total Allocated $2.1 billion Annual Common Stock Dividend $215M (27% increase over 2010) Opportunistic Share Repurchases: $550M Strategic Acquisitions: $350M Quarterly Common Stock Dividends $230M (70 to 78 cents, 11% increase) Opportunistic Share Repurchases: $300M Strategic Acquisitions: $1,595M 2013E $400-$600 million Quarterly common stock dividends Strategic acquisition Opportunistic share repurchase 23 cent 1Q13 Dividend (up 10% over 4Q12) 15