Principal Financial Group Second Quarter 2017 Earnings Results July 27, 2017
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 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, the company has provided reconciliations of the non-gaap financial measures to the most directly comparable U.S. GAAP financial measure within the slides. 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
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, 2016, and in the company s quarterly report on Form 10-Q for the quarter ended Mar. 31, 2017, filed by the company with the U.S. 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; conditions in the global capital markets and the economy generally; volatility or declines in the equity, bond or real estate markets; changes in interest rates or credit spreads or a sustained low interest rate environment; 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 investments and the determination of the amount of allowances and impairments taken on such investments may include methodologies, estimations and assumptions that are subject to differing interpretations; any impairments of or valuation allowances against the company s deferred tax assets; the company s actual experience could differ significantly from its pricing and reserving assumptions; 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 not be able to protect its intellectual property and may be subject to infringement claims; 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; changes in laws, regulations or accounting standards; 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; 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; 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; changes in investor preferences; inability to attract and retain qualified employees and sales representatives and develop new distribution sources; international business risks; fluctuations in foreign currency exchange rates; 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; and a computer system failure or security breach could disrupt the company s business and damage its reputation. 3
2Q17 Earnings call key themes Solid fundamentals and revenue growth led to record earnings Record quarterly operating earnings 1 of $384M and record quarterly operating earnings per diluted share 1 of $1.31 Trailing twelve month 2 revenue growth and margin metrics for all of our businesses are within or better than our 2017 guided ranges Significant variances in pre -tax operating earnings for 2Q17 were: o o $10M of higher variable investment income $5M of elevated expenses in Principal International Record AUM of $629B, despite negative 2Q17 net cash flows Strong investment performance 3 -more than 80% of investment options in the top two Morningstar quartiles on a three and five-year basis Continued to generate and deploy capital to create long -term shareholder value: o Deployed $166M of capital in 2Q17 through common stock dividends, share repurchases, and increased ownership in a PGI boutique o Announced 3Q17 common stock dividend of $0.47 per share, a 15% increase over 3Q16 4 1 This is a non-gaap financial measure; see reconciliation in appendix. 2 Excludes third quarter 2016 actuarial assumption review. 3 Principal "I" shares (if no "I" share class then "A" share class, if no "A" then we will use the lowest share class available), PVC, ETF, Intl Small Cap Sep Account & Target Date CIT accounts. Excludes Money Market, Stable Value, LDI (Short, Intermediate and Extended) Duration, & US Property.
Strong investment performance continues Morningstar rankings of Principal mutual funds, separate accounts and CITs Percentage of funds in the top two quartiles 72% 46% 41% Jun. 30 2017 81% Jun. 30 2017 95% 93% 89% 80% 85% Jun. 30 2017 Jun. 30, 2016 Mar. 31, 2017 Jun. 30, 2017 1-Year 3-Year 5-Year 5 Principal "I" shares (if no "I" share class then "A" share class, if no "A" then we will use the lowest share class available), PVC, ETF, Intl Small Cap Sep Account & Target Date CIT accounts. Excludes Money Market, Stable Value, LDI (Short, Intermediate and Extended) Duration, & US Property.
Retirement and Income Solutions Fee (RIS Fee) Highlights Growth in pre-tax operating earnings driven by higher net revenue on increased account values and disciplined expense management Fundamentals remain strong; recurring deposits grew 6% and defined contribution contract count increased by nearly 900 contracts over 2Q16 Net revenue ($M) Quarterly basis $382 $406 +6% 2Q16 2Q17 Trailing twelve month basis 1 Reported pre-tax operating earnings ($M) 2Q17 $148 2Q16 $125 Change +$23 (+18%) 6% 35% increase in net revenue pre-tax return on net revenue 6 1 Excludes third quarter 2015 and 2016 actuarial assumption reviews. All financial information rounded to the nearest million. Change and growth rates calculated using data from financial supplement.
Retirement and Income Solutions - Spread (RIS Spread) Highlights Growth in pre-tax operating earnings driven by growth in the business as well as mortality and experience gains Pipeline remains strong in the pension risk transfer market with $1 billion of sales year-to-date Net revenue ($M) Quarterly basis $145 $122 +19% 2Q16 2Q17 Reported pre-tax operating earnings ($M) Significant variances 1 ($M) Pre-tax operating earnings ex significant variances ($M) 2Q17 $96 -$7 $89 Trailing twelve month basis 2 24% increase in net revenue 2Q16 $70 $70 Change +$26 (+37%) +$19 (+27%) 67% pre-tax return on net revenue 7 1 Higher variable investment income. 2 Excludes third quarter 2015 and 2016 actuarial assumption reviews. All financial information rounded to the nearest million. Change and growth rates calculated using data from financial supplement.
Principal Global Investors Highlights Decrease in pre -tax operating earnings due to lower performance fees compared to the year ago quarter Management fees increased 8% compared to the year ago quarter Record AUM of $410B (including Institutional AUM of $132B) increased 7% compared to the year ago quarter Negative net cash flows in the quarter of $3B, primarily due to two large institutional withdrawals On a TTM basis, pre-tax return on operating revenues less passthrough commissions increased 280 bps compared to the year ago period Operating revenue less pass-through commissions 1 Quarterly basis $311 $316 2Q16 2Q17 Trailing twelve month basis +2% Reported pre-tax operating earnings ($M) 2Q17 $115 2Q16 $118 Change -$2 (-2%) 8% 37% increase in operating revenue less pass-through commissions pre-tax return on operating revenue less pass-through commissions 8 1 This is a non-gaap financial measure; see reconciliation in appendix. All financial information rounded to the nearest million. Change and growth rates calculated using data from financial supplement.
Principal International Highlights Continued mid-teens growth in pre-tax operating earnings excluding significant variances and the difference in actual versus expected encaje returns Record reported AUM of $148B increased 13% over 2Q16 35 th consecutive quarter of positive net cash flows, including $400M in 2Q17; we continue to see outflows in Chile and softness in sales in Brazil, despite remaining the market leader in net deposits Record pre-tax operating earnings and AUM in Hong Kong and Southeast Asia Combined 1 net revenue 2 (at PFG share) Quarterly basis $194 2Q16 $220 2Q17 +14% Reported pre-tax operating earnings ($M) Significant variances 3 ($M) Pre-tax operating earnings ex significant variances ($M) 2Q17 $78 $5 $83 Trailing twelve month combined basis (at PFG share) 13% 3% increase in net revenue 2Q16 $70 $70 Change +$9 (+12%) +$13 (+19%) 35% 38% pre-tax return on net revenue 9 1 Combined basis includes all Principal International companies at 100%. 2 This is a non-gaap financial measure; see reconciliation in appendix. 3 Elevated expenses primarily in Mexico. All financial information rounded to the nearest million. Change and growth rates calculated using data from financial supplement.
Specialty Benefits Highlights Pre-tax operating earnings decreased as growth in the business was offset by a return to normal claims levels from a very favorable 2Q16 Premium and fees are up 8% over the prior year period due to strong sales and retention Overall loss ratio within the guided range for the quarter Premium and fees Quarterly basis $464 $499 +8% 2Q16 2Q17 Trailing twelve month basis 1 Reported pre-tax operating earnings ($M) 2Q17 $64 2Q16 $67 Change -$3 (-4%) 8% 13% increase in premium and fees pre-tax return on premium and fees 10 1 Excludes third quarter 2015 and 2016 actuarial assumption reviews. All financial information rounded to the nearest million. Change and growth rates calculated using data from financial supplement. 64% incurred loss ratio
Individual Life Highlights Pre-tax operating earnings excluding significant variances increased due to growth in the business partially offset by higher claims Increase in premium and fees driven by strong sales Business market sales remain strong at more than 50% of quarterly sales Premium and fees Quarterly basis $251 $270 +8% 2Q16 2Q17 Reported pre-tax operating earnings ($M) Significant variances 1 ($M) Pre-tax operating earnings ex significant variances ($M) 2Q17 $41 -$3 $38 Trailing twelve month basis 2 5% increase in premium and fees 2Q16 $37 $37 Change +$4 (+10%) +$1 (+2%) 15% pre-tax return on premium and fees 11 1 Higher variable investment income. 2 Excludes third quarter 2015 and 2016 actuarial assumption reviews. All financial information rounded to the nearest million. Change and growth rates calculated using data from financial supplement.
Capital deployment $144M YTD $263M YTD Share repurchases $26M - 2Q17 $118M - 1Q17 $7M YTD Increased ownership in a PGI boutique $7M - 2Q17 $414M total capital deployed YTD 2017 Common stock dividends paid $133M - 2Q17 ($0.46 per share) $130M - 1Q17 ($0.45 per share) Expect to deploy $800M to $1.1B of capital in 2017 Approaching our targeted 40% dividend payout ratio Announced 3Q17 common stock dividend of $0.47 per share, or $1.81 TTM; a 16% increase compared to 3Q16 TTM 12
Appendix Non-GAAP financial measure reconciliations (in millions) Three Months Ended Principal Global Investors Operating Revenues Less 6/30/17 6/30/16 Pass-Through Commissions Principal Global Investors operating revenues $355.5 $351.3 Principal Global Investors commission expense (39.8) (40.6) Principal Global Investors operating revenues less pass-through commissions $315.7 $310.7 (in millions) Three Months Ended Operating earnings (losses) 6/30/17 Net income attributable to PFG $309.5 Net realized capital (gains) losses, as adjusted 74.1 Operating Earnings $383.6 (in millions) Three Months Ended Principal International Combined Net Revenue (at PFG Share) 6/30/17 6/30/16 Principal International pre-tax operating earnings $78.4 $69.9 Principal International combined operating expenses (at PFG share) 141.8 123.7 Principal International combined net revenue (at PFG share) $220.2 $193.6 Per diluted share Three Months Ended Diluted earnings per common share 6/30/17 Net income $1.06 Net realized capital (gains) losses, as adjusted 0.25 Operating Earnings $1.31 Weighted-average diluted common shares outstanding (in millions) 292.7 Definitions Variable investment income includes certain types of investment returns such as prepayment fees and income (loss) from certain elements of our alternative asset classes, including results of value-add real estate sales activity. 13