Principal Financial Group Second Quarter 2013 Earnings Call

Transcription

1 Principal Financial Group Second Quarter 2013 Earnings Call July 26, 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, however, 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 these adjusting items have occurred in the past and could recur in future reporting periods. Management also uses non-gaap financial measures for goal setting, as a basis for determining employee and senior management awards and compensation, and evaluating performance on a basis comparable to that used by investors and 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 Posted on PFG website: 07/26/2013

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, 2012, and in the company s quarterly report on Form 10-Q for quarter ended March 31, 2013, 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 DAC 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 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 Posted on PFG website: 07/26/2013

4 2Q13 Earnings Call Key Themes Strong results, building off the prior quarter s positive momentum Globally diversified business model working; positions us for long-term growth Net revenue growth and expense discipline leads to earnings growth Onboarding of Cuprum, a leading Chilean pension provider, going extremely well Strategic capital deployment: Announced 3Q13 dividend of 26-cents, a 13% increase over the 23-cent dividend we paid in 2Q13. This reinforces our commitment to increasing the dividend payout ratio Closed on acquisition of Liongate, which provides us additional investment capabilities 4 Posted on PFG website: 07/26/2013

5 Strong Investment Performance Continues Morningstar rankings of Principal mutual funds, separate accounts and CITs Percentage of funds in the top two quartiles Represents $126 billion assets under management of which 76% is managed by PGI boutiques 85% 82% 90% 87% 87% GOAL: ABOVE 60% 63% 63% 71% 67% Jun. 30, 2012 Mar. 31, 2013 Jun. 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 separate account. 5 Posted on PFG website: 07/26/2013

6 Operating Earnings Normalizing Items After normalizing, 2Q13 EPS is up 31% compared to a year ago Per diluted share 2Q12 2Q13 Operating Earnings $0.70 $0.91 Normalizing items Principal Global Investors Real Estate performance fee Principal International Lower than expected returns on encaje investment Total of normalizing items $0.00 +$0.01 Normalized Operating Earnings $0.70 $0.92 Up 31%* *Adjusting for Cuprum, normalized operating earnings per diluted share were up 20%. 6 Posted on PFG website: 07/26/2013

7 Encaje What is encaje: Our investment in the underlying funds of our mandatory pension operations in Chile and Mexico as required by local regulations. Financial obligation: Chile: Investment of 1.0% of each fund. Mexico: Investment of 0.8% of each fund. Change in value of these investments reported through net investment income How to track it: A proxy for the quarterly returns can be found by tracking the following: Chile: Cuprum Investment C found on the Pension Superintendent s local website: n/vcfafp.php?tf=c Mexico: AFORE Investment APRINB3 found on 2Q13 Encaje Calculations* Amounts US$M unless otherwise stated Chile** Chile** Mexico Mexico Proxy Expected Proxy Expected AUM ($B) $34.0 $34.0 $11.1 $11.1 Investment requirement 1.0% 1.0% 0.8% 0.8% Encaje investment ($M) Quarterly return % 1.82% 2.125% -7.90% 2.225% Encaje return Ownership % 93.5% 93.5% 100% 100% PFG impact (pre-tax) Tax rate 20% 20% 30% 30% PFG impact (post-tax) Operating earnings differential *These calculations are a proxy which closely represents the actual financial impact for the quarter. **Cuprum is on a one month reporting lag 7 Posted on PFG website: 07/26/2013

8 Retirement and Investor Services Accumulation Net Revenue ($m) Operating Earnings After-tax ($m) 2Q13 $ Q12 $118.0 Change $26.4 (+22%) Q12 2Q13 On a trailing twelve month basis: Net revenue up 14% Pretax return on net revenue of 30% Growth in the underlying business, equity market performance, and disciplined expense management Strong net cash flow & equity markets led to growth in average account values Continued competitive environment Focus 2013 Full Service Accumulation sales on growing net revenue Record sales of $5.8B in Principal Funds 8 Posted on PFG website: 07/26/2013

9 Retirement and Investor Services Guaranteed Net Revenue ($m) Operating Earnings After-tax ($m) 2Q13 $27.9 2Q12 $23.7 Change $4.2 (+18%) Q12 2Q13 On a trailing twelve month basis: Net revenue up 9% Pretax return on net revenue of 80% Improved spreads Continue to approach business opportunistically Will issue when market conditions generate attractive returns 9 Posted on PFG website: 07/26/2013

10 Principal Global Investors Net Revenue ($m) 141 2Q12 2Q13 performance fee Q13 On a trailing twelve month basis: Revenue is up 12% Pretax margin of 25% 8 Operating Earnings After-tax ($m) 2Q13 $29.0 Adjusted* 2Q13 $25.0 2Q12 $18.2 Change $6.8 (+37%) Benefited from a once in 3 year performance fee on one of our real estate funds Margin improvement as we build scale Unaffiliated assets under management of $101 billion Negative NCF reflects a couple large withdrawals from lower revenue and margin options *2Q13 is adjusted for the real estate performance fee. Change calculated with respect to adjusted number 10 Posted on PFG website: 07/26/2013

11 Principal International Combined* Net Revenue ($m) 270 2Q12 Cuprum Q13 On a trailing twelve month combined basis: Adjusted** net revenue is up 7% Pretax return on net revenue of 56% Reported OE After-tax ($m) Cuprum OE excluding Cuprum ($m) 2Q13 $58.3 $26.0 $32.3 Adjusted*** 2Q13 $65.7 $26.7 $39.0 2Q12 $ $31.5 Change $34.2 (+109%) -- $7.5 (+24%) Cuprum onboarding going extremely well Strong 2Q13 net cash flow of $2.2 billion Solid growth despite macroeconomic headwinds AUM of $103 billion reflects a $6.7 billion negative FX impact this quarter 11 *Combined basis includes all Principal International companies at 100%. **Excludes impact of additional month in Brasilprev in 4Q11 and Cuprum acquisition in 1Q13. ***Lower than expected returns on encaje investment. Change calculated with respect to adjusted number. Posted on PFG website: 07/26/2013

12 Individual Life Premium and Fees ($m) Operating Earnings After-tax ($m) 2Q13 $21.5 2Q12 $27.6 Change $(6.1) (-22%) Q12 2Q13 On an adjusted* trailing twelve month basis: Premium and fees up 5% Pretax operating margin of 14% Low interest rates continue to be headwind to earnings growth Strong sales with continued success in business market * Removes impact of 1Q12 change in amortization basis and the 3Q12 actuarial assumption review. 12 Posted on PFG website: 07/26/2013

13 Specialty Benefits Premium and Fees ($m) 361 2Q Q13 On a trailing twelve month basis: Premium and fees up 4% Pretax operating margin of 10% Operating Earnings After-tax ($m) 2Q13 $25.7 2Q12 $22.6 Change $3.1 (+14%) Improved claim experience and growth in the business Strong sales growth Overall quarterly loss ratio of 66.7% is within targeted range of 65-71% 13 Posted on PFG website: 07/26/2013

14 Capital Deployment Strategy Over $1.1 billion in total Allocated $2.1 billion 2013E $400-$600 million Annual Common Stock Dividends $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 Quarterly common stock dividends Strategic acquisition Opportunistic share repurchase YTD Quarterly Common Stock Dividends ~$211M (23 cents for 1Q13 & 2Q13, 26 cents for 3Q13) Anti-dilution & Opportunistic Share Repurchases: $150M (~$115M remaining) Strategic Acquisition: $44M 14 Posted on PFG website: 07/26/2013