Principal Financial Group Fourth Quarter 207 Earnings Results January 29, 208
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 non-gaap 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 0-K for the year ended Dec. 3, 206, and in the company s quarterly report on Form 0-Q for the quarter ended Sept. 30, 207, 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; changes in laws, regulations or accounting standards; 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 Iowa insurance laws impose on Principal Life; 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, including 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; client terminations, withdrawals or changes in investor preferences; inability to attract and retain qualified employees and sales representatives and develop new distribution sources; an interruption in telecommunication, information technology or other systems, or a failure to maintain the confidentiality, integrity or availability of data residing on such systems; international business risks; fluctuations in foreign currency exchange rates; the company may need to fund deficiencies in its Closed Block assets; the company s reinsurers could default on their obligations or increase their rates; risks arising from acquisitions of businesses; and loss of key vendor relationships or failure of a vendor to protect information of our customers or employees. 3
4Q and full year 207 earnings call key themes 207 was a strong year despite a decline in fourth quarter results Record full year 207 non-gaap operating earnings of $.5B including $35M in 4Q7 and record full year 207 non-gaap operating earnings per diluted share of $5.04 including $.9 in 4Q7 Record AUM of $669B; including $.4B of total company net cash flows in the quarter Impacts from the U.S. Tax Cuts and Jobs Act (additional details on slide 6): o o o $568M net benefit reflected in net income attributable to PFG 208 total company non-gaap operating earnings effective tax rate guidance range updated to 8-2% All other non-tax 208 guided ranges remain unchanged from 208 Outlook call Total company quarterly operating expenses were elevated by approximately $80-90M due to normal seasonality and timing, one-time expenses, and increased investment in the business For the full year 2 all outlook metrics were within or better than the guided ranges Continued to generate and deploy capital to create long-term shareholder value: o Deployed $93M of capital in 207, including $308M in 4Q7, through common stock dividends, share repurchases, and committed M&A o Announced Q8 common stock dividend of $0.5 per share, a 3% increase over Q7 and our 8th consecutive quarterly dividend increase 4 This is a non-gaap financial measure; see reconciliation in appendix. 2 Excludes 3Q6 and 3Q7 actuarial assumption reviews, the impact of actual vs. expected encaje returns and 2Q7 elevated expenses in Mexico.
Strong investment performance continues Percentage of Principal actively managed mutual funds, exchange traded funds (ETFs), insurance separate accounts, and collective investment trusts (CITs) in the top two Morningstar quartiles 76% Dec. 3 207 69% Dec. 3 207 86% 88% 83% Dec. 3 207 73% 69% 7% Dec. 3, 206 Sep. 30, 207 42% Dec. 3, 207 -Year 3-Year 5-Year 5 Excludes Money Market, Stable Value, Liability Driven Investment (Short, Intermediate and Extended Duration), Hedge Fund Separate Account, & US Property Separate Account.
Impacts of U.S. Tax Cuts and Jobs Act 4Q7 impacts Net income: $626M benefit from the re-measurement of our net deferred tax liability using the lower corporate tax rate $43M one-time deemed repatriation tax expense on foreign earnings $4M tax expense from other provisions 207 estimated RBC ratio: Immaterial impact on the year-end 207 estimated RBC ratio 208 effective tax rate guidance Guidance provided Dec. 2, 207 Updated guidance Total company U.S. GAAP net income effective tax rate 6-8% 4-7% Total company non-gaap operating earnings effective tax rate 2-23% 8-2% The operating earnings effective tax rate is a non-gaap measure and differs from the U.S. GAAP net income effective tax rate primarily due to net realized capital gains and losses (NRCG). 6
Retirement and Income Solutions Fee (RIS Fee) Highlights Growth in pre-tax operating earnings was driven by higher net revenue on increased account values partially offset by lower net investment income and higher operating expenses Fundamentals remain strong; $.8B in sales for 207, up 9% from prior year, full year recurring deposits grew 6%, and defined contribution contract count increased by nearly 800 over prior year On a trailing twelve month basis net revenue growth and pre-tax return on net revenue were at the top end or above the 207 guidance ranges Net revenue ($M) Quarterly basis $40 $43 4Q6 4Q7 +3% Reported pre-tax operating earnings ($M) 4Q7 $27 4Q6 $24 Change +$3 (+2%) Trailing twelve month basis 5% 35% increase in net revenue pre-tax return on net revenue 7 Excludes 3Q6 and 3Q7 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 Pre-tax operating earnings excluding significant variances were flat as unfavorable mortality and higher operating expenses impacted the current quarter Record full-year pension risk transfer sales of nearly $3B; pipeline remains strong Net revenue ($M) Quarterly basis $33 $24-7% On a trailing twelve month basis 2 net revenue growth and pre-tax return on net revenue were at the top end or above the 207 guidance ranges 4Q6 4Q7 Trailing twelve month basis 2 Reported pre-tax operating earnings ($M) Significant variances ($M) Pre-tax operating earnings ex significant variances ($M) 0% increase in net revenue 4Q7 $75 $75 4Q6 $88 -$2 $75 Change -$2 (-4%) $0 (0%) 65% pre-tax return on net revenue 8 Excludes higher variable investment income in 4Q6. 2 Excludes 3Q6 and 3Q7 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 Pre-tax operating earnings declined as management fee growth of 0% was more than offset by lower performance fees Record AUM of $43B increased 0% compared to the year ago quarter, including PGI sourced AUM of $29B On a trailing twelve month basis operating revenues less passthrough commissions growth and pre-tax return on operating revenues less pass-through commissions were within the 207 guidance ranges Operating revenues less pass-through commissions ($M) Quarterly basis $339 $335 4Q6 4Q7 -% Trailing twelve month basis Reported pre-tax operating earnings ($M) 4Q7 $24 4Q6 $34 Change -$0 (-7%) 5% 37% increase in operating revenues less pass-through commissions pre-tax return on operating revenues less pass-through commissions 9 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 Pre-tax operating earnings excluding significant variances improved 9% over the prior year quarter due to growth in the business Record AUM of $6B increased 7% over 4Q6, including record AUM in Chile, Hong Kong and Southeast Asia $2.5B of net cash flows in the quarter, marking the 37 th consecutive quarter of positive net cash flows On a trailing twelve month combined 2 basis 3 (at PFG share) net revenue 4 growth and pre-tax return on net revenue were within the 207 guidance ranges Combined net revenue (at PFG share) ($M) Quarterly basis $98 4Q6 $238 4Q7 +20% Reported pre-tax operating earnings ($M) Significant variances ($M) Pre-tax operating earnings ex significant variances ($M) 4Q7 $78 +$6 $84 Trailing twelve month combined basis 3 (at PFG share) 3% 3% increase in net revenue 4Q6 $66 +$ $77 Change +$2 (+9%) +$7 (+9%) 38% 35% pre-tax return on net revenue 0 Excludes the impact of actual vs. expected encaje returns. 2 Combined basis includes all Principal International companies at 00%. 3 Excludes 3Q6 and 3Q7 actuarial assumption reviews, the impact of actual vs. expected encaje returns and 2Q7 elevated expenses in Mexico. 4 This is a non-gaap financial measure; see reconciliation in appendix. All financial information rounded to the nearest million. Change and growth rates calculated using data from financial supplement.
Specialty Benefits Highlights Pre-tax operating earnings excluding significant variances decreased over the prior year quarter due to growth in the business being more than offset by higher operating expenses Premium and fees are up 9% over the prior year period reflecting strong retention and employment growth On a trailing twelve month basis 2 premium and fees growth, pre-tax return on premium and fees, and loss ratio were within the 207 guidance ranges Premium and fees ($M) Quarterly basis $479 4Q6 $52 4Q7 +9% Reported pre-tax operating earnings ($M) Significant variances ($M) Pre-tax operating earnings ex significant variances ($M) Trailing twelve month basis 2 9% increase in premium and fees 4Q7 $63 $63 4Q6 $72 -$5 $67 Change -$9 (-3%) -$5 (-7%) 2% pre-tax return on premium and fees Excludes higher variable investment income in 4Q6. 2 Excludes 3Q6 and 3Q7 actuarial assumption reviews. All financial information rounded to the nearest million. Change and growth rates calculated using data from financial supplement. 64% incurred loss ratio
Individual Life Highlights Pre-tax operating earnings increased primarily due to favorable mortality in 4Q7 versus unfavorable mortality in 4Q6 8% increase in premium and fees driven by growth in the business On a trailing twelve month basis premium and fees growth and pretax return on premium and fees were within the 207 guidance ranges Premium and fees ($M) Quarterly basis $249 $268 +8% 4Q6 4Q7 Reported pre-tax operating earnings ($M) 4Q7 $48 4Q6 $35 Change +$3 (+38%) Trailing twelve month basis 6% 6% increase in premium and fees pre-tax return on premium and fees 2 Excludes 3Q6 and 3Q7 actuarial assumption reviews. All financial information rounded to the nearest million. Change and growth rates calculated using data from financial supplement.
Capital deployment $93M $540M Share repurchases $49M - 3Q7 $26M - 2Q7 $8M - Q7 $80M Committed M&A and increased ownership in PGI boutiques $67M - 4Q7 $6M - 3Q7 $7M - 2Q7 $93M total capital deployed in 207 Common stock dividends paid $4M - 4Q7 ($0.49 per share) $36M - 3Q7 ($0.47 per share) $33M - 2Q7 ($0.46 per share) $30M - Q7 ($0.45 per share) Expect to deploy $900M to $.3B of capital in 208 8 th consecutive increase in quarterly dividend Announced Q8 common stock dividend of $0.5 per share, or $.93 for TTM; a 5% increase compared to Q7 TTM 3 Committed M&A includes the planned MetLife Afore and Internos acquisitions.
Appendix Non-GAAP financial measure reconciliations (in millions) Three Months Ended Principal Global Investors Operating Revenues Less 2/3/7 2/3/6 Pass-Through Commissions Principal Global Investors operating revenues $375.5 $380. Principal Global Investors commission expense (40.2) (4.0) Principal Global Investors operating revenues less pass-through commissions $335.3 $339. (in millions) Three Months Ended Non-GAAP Operating Earnings (Losses) 2/3/7 2/3/6 Net income attributable to PFG $84.8 $38.0 Net realized capital (gains) losses, as adjusted 33.5 2.0 Other after-tax adjustments (524.5) 52.0 Non-GAAP operating earnings $350.8 $372.0 (in millions) Three Months Ended Principal International Combined Net Revenue (at PFG Share) 2/3/7 2/3/6 Principal International pre-tax operating earnings $78.3 $66.0 Principal International combined operating expenses (at PFG share) 59.8 3.8 Principal International combined net revenue (at PFG share) $238. $97.8 Per diluted share Three Months Ended Diluted Earnings Per Common Share 2/3/7 2/3/6 Net income $2.87 $.09 Net realized capital (gains) losses, as adjusted 0. 0.0 Other after-tax adjustments (.79) 0.7 Non-GAAP operating earnings $.9 $.27 Weighted-average diluted common shares outstanding (in millions) 293.5 292.0 4 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.