Principal Financial Group Third Quarter 2012 Earnings Call

Transcription

1 Principal Financial Group Third Quarter 2012 Earnings Call October 26, 2012

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 June 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 stockholder rights plan, certificate of incorporation and by-laws may discourage takeovers and business combinations that some stockholders might consider in their best interests. 3

4 Key Themes Adjusted operating earnings per share up 10% compared to year ago quarter Continued strong business fundamentals are driving growth which leads to higher net revenue and higher operating earnings over the long term Fee-based model allows additional capital to be returned to shareholders Allocated more than $2.1 billion of capital for deployment Common stock dividend increase of 11% year over year Strategic acquisitions, announced Cuprum transaction Opportunistic share repurchase 4

5 Accelerating Our Strategy Opportunity Year Announced Achievement 2012 (a) Complete offering in Chile with marquee pension and savings franchise Claritas 2012 Entry into Brazil mutual fund and asset management market Origin Asset Management 2011 Enhance global equity investment capabilities Finisterre Capital 2011 HSBC AFORE 2011 BrasilPrev 2010 Establish leadership in emerging markets fixed income investing Solidify position as a leader in Mexican Afore market 23 year extension of successful JV with Banco do Brasil Emerged from financial crisis in a position of strength and flexibility Executing on our strategy to increase our global footprint and fee-based earnings 5 (a) Transaction pending

6 Strong Investment Performance Continues Morningstar rankings of Principal mutual funds, separate accounts and CITs Percentage of funds in the top two quartiles Represents $109 billion assets under management of which 74% is managed by PGI boutiques GOAL: ABOVE 60% 85% 86% 77% 67% 90% 90% 60% 63% 62% Sept. 30, 2011 June 30, 2012 Sept. 30, 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 6

7 Operating Earnings Negatively Impacted by Actuarial Assumption Review Excluding items, EPS of $0.75 compared to $0.68 a year ago Per diluted share 3Q11 Change Operating Earnings $0.61 $0.45 $(0.16) Normalizing Items Interest rate unlocking (0.22) (0.22) Lapse, deposit and model review (0.08) (0.08) Equity market true-ups (0.03) 0.03 Variable investment income (0.04) 0.04 Total of Normalizing Items $(0.07) $(0.30) $(0.23) Operating Earnings less Normalizing Items $0.68 $0.75 $0.07 Up 10% 7

8 Key Business Drivers 5 Year Outlook Retirement & Investor Services Principal Global Investors ACCUMULATION GUARANTEED Net revenue growth 6-8% Pre-tax RONR 28-32% Net revenue growth 6-8% Pre-tax RONR 75-80% Revenue growth 14-17% Pre-tax margin 30%+ U.S. Insurance Solutions Principal International Combined net revenue growth* 15-20% Combined pre-tax RONR 55-60% RONR = Return on Net Revenue *Combined basis includes all Principal International companies at 100% LIFE SBD Premium & fee growth 4-8% Pre-tax operating margin 16-21% Premium & fee growth 8-10% Pre-tax operating margin 8-12% 8

9 Retirement and Investor Services Accumulation Net Revenue ($m) Operating Earnings After-tax ($m) $116.6 Adjusted* $ Q11 $108.9 Adjusted* 3Q11 $117.9 Change* $13.1 (+11%) 450 3Q11 On a trailing twelve month basis: Net revenue up 1% Pretax return on net revenue of 30% Growth in average account values Pressure on fees continues Expect 4-6% net revenue growth in *Excludes impact of assumption review and true-ups; Change calculated with respect to adjusted numbers

10 Retirement and Investor Services Guaranteed Net Revenue ($m) 0% Q11 On a trailing twelve month basis: Net revenue down 10% Pretax return on net revenue of 78% Opportunistically pursue business Investment Only market activity remains low Operating Earnings After-tax ($m) $20.9 3Q11 $20.7 Change $0.2 (+1%) Full Service Payout sold $500 million group annuity in 10

11 Principal Global Investors Revenue $m 133 3Q On a trailing twelve month basis: Revenue is up 9% Pretax margin of 21% Competitive investment performance driving strong flows across the platform 2012 pretax margin of 20-22% reflecting investments for growth Operating Earnings After-tax ($m) $20.6 3Q11 $19.1 Change $1.5 (+8%) Record unaffiliated AUM of $97.8 billion 11

12 Principal International Combined* Net Revenue ($m) 272 3Q11 ~0% 273 On a trailing twelve month combined basis: Net revenue is up 12%, up 24% on a constant currency basis Pretax return on net revenue of 57% Operating Earnings After-tax ($m) $29.5 Adjusted** $41.0 3Q11 $35.3 Change** $5.7 (+16%) Record net cash flow of $2.7 billion Strong growth despite FX headwinds Reported Constant FX Adjusted Operating Earnings 16% 36% Combined Net Revenue ~0% 18% AUM 21% 33% 12 *Combined basis includes all Principal International companies at 100% **Excludes impact of assumption review; Change calculated with respect to adjusted number

13 Individual Life Premium and Fees ($m) Operating Earnings After-tax ($m) $(37.9) Adjusted* $25.0 3Q11 $28.2 Change* $(3.2) (-11%) 210 3Q11 Adjusted On an adjusted* trailing twelve month basis: Premium and fees up 1% Pretax operating margin of 18% Low interest rates continue to be headwind to earnings growth 13 *Excludes impact of assumption review and 1Q12 amortization change; Change calculated with respect to adjusted number

14 Specialty Benefits Premium and Fees ($m) Operating Earnings After-tax ($m) $16.3 Adjusted* $18.2 3Q11 $20.9 Change* $(2.7) (-13%) Q11 Higher disability claims reflecting normal quarterly volatility On a trailing twelve month basis: Premium and fees up 5% Pretax operating margin of 9% Overall year-to-date loss ratios in targeted range 14 *Excludes impact of assumption review; Change calculated with respect to adjusted number

15 Operating Earnings Growth Long-term operating earnings growth: Primary Factors Impacting Results: Pressure on fees Low interest rates 10-12% 6-8% Near-term operating earnings growth rate 15

16 Capital Deployment Strategy 2011 October 2012 YTD Over $1.1 billion in total Allocated $2.1 billion Annual Common Stock Dividend $215M (27% increase over 2010) Quarterly Common Stock Dividends $230M (70 to 78 cents, 11% increase) Opportunistic Share Repurchases: $300M 2013E Opportunistic Share Repurchases: $550M Strategic Acquisitions: $350M Strategic Acquisitions: $1,595M Details to be provided at November 27 Outlook Call 16