4Q 2013 Earnings Conference Call Presentation

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  • 1. Principal Financial Group® Fourth Quarter 2013 Earnings Call February 4, 2014
  • 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: 02/04/2014
  • 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 Sept 30, 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: 02/04/2014
  • 4. 4Q13 Earnings Call Key Themes • Strong 4Q that completed a great year; record full-year operating earnings • Successful execution even when volatile macro conditions remain • Globally diversified business model working; positions us for long-term growth • ROE improved to 12.1% as we grow earnings and manage equity base • Strategic capital deployment: • Paid full year 2013 dividend of 98-cents, our highest annual dividend • Announced 1Q14 dividend of 28-cents, 8% increase over the dividend paid in 4Q13. This reinforces our confidence in the stability and strength of our business model. 4 Posted on PFG website: 02/04/2014
  • 5. Strong Investment Performance Continues Morningstar rankings of Principal mutual funds, separate accounts and CITs Percentage of funds in the top two quartiles Represents $143 billion assets under management of which 75% is managed by PGI boutiques 91% 84% 80% 78% 67% 66% GOAL: ABOVE 60% 72% 60% 58% Dec. 31, 2012 Sept. 30, 2013 Dec. 31, 2013 1-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: 02/04/2014
  • 6. Operating Earnings Normalizing Items After normalizing, 4Q13 EPS is up 25% compared to a year ago Per diluted share Operating Earnings Normalizing items: Higher dividend benefit in Full Service Accumulation Higher variable investment income in Individual Annuities Higher than expected returns on encaje investment offset by one-time impact from a tax law change in Mexico Higher than expected prepayments in Individual Annuities Improved mortality in Individual Life Higher expenses & tax adjustments in Corporate Total of normalizing items Normalized Operating Earnings 4Q12 $0.81 4Q13 $0.96 (0.03) (0.01) ---(0.01) (0.01) +0.02 $(0.04) $0.00 $0.77 $0.96 Up 25% 6 Posted on PFG website: 02/04/2014
  • 7. Retirement and Investor Services Accumulation Net Revenue ($m) 700 600 Operating Earnings After-tax ($m) 617 543 Operating Earnings Adjustment ($m) Adjusted Operating Earnings After-tax ($m) 500 4Q13 $153.4 $(3.0)* $150.4 400 4Q12 $133.5 $(11.0)** $122.5 Change $19.9 (+15%) 300 200 • Growth in the underlying business, equity market performance and diligent expense management led to improved margins 100 0 4Q12 4Q13 On a trailing twelve month basis: • Net revenue up 14% • Pretax return on net revenue of 32% • Positive net cash flow & equity markets led to growth in average account values • Principal Funds gaining market share with $4.1B of sales in the quarter *Higher than expected prepayments in Individual Annuities. **Benefit from higher dividends in Full Service Accumulation and variable investment income in Individual Annuities. 7 $27.9 (+23%) Posted on PFG website: 02/04/2014
  • 8. Retirement and Investor Services Guaranteed Net Revenue ($m) 50 45 40 35 30 25 20 15 10 5 0 47 4Q13 $25.8 4Q12 $18.8 Change 35 $7.0 (+37%) • Investment Only net revenue increased on a lower asset base due to improved spread 4Q12 4Q13 On a trailing twelve month basis: • Net revenue up 19% • Pretax return on net revenue of 81% 8 Operating Earnings After-tax ($m) Posted on PFG website: 02/04/2014 • $205 million of Full Service Payout sales in the quarter
  • 9. Principal Global Investors Revenue ($m) 200 4Q13 50 $26.2 Change 100 $30.2 4Q12 168 150 $4.0 (+15%) • Strong performance fees in 4Q13 0 4Q12 4Q13 On a trailing twelve month basis: • Revenue is up 22% • Pretax margin of 24% 9 Operating Earnings After-tax ($m) 236 250 Posted on PFG website: 02/04/2014 • Margin improvement as we build scale • Record unaffiliated assets under management of $109 billion
  • 10. Principal International Combined* Net Revenue ($m) 350 Operating Earnings After-tax ($m) 375 400 69 294 4Q13 $61.6 250 4Q12 $41.5 200 Change $20.1 (+48%) 300 306 150 100 • 4Q13 OE includes favorable encaje returns largely offset by a one-time negative impact from tax law changes in Mexico • Comparison to 4Q12 is negatively impacted by a prospective change in amortization in Brazil • Solid results despite macroeconomic headwinds; 11% negative impact to OE growth from FX • AUM of $104.5B with growth from record quarterly NCF and market performance partially offset by FX 50 0 4Q12 4Q13 Cuprum On a trailing twelve month combined basis: • Net revenue is up 22% • Pretax return on net revenue of 54% 10 *Combined basis includes all Principal International companies at 100%. Posted on PFG website: 02/04/2014
  • 11. Individual Life Premium and Fees ($m) Operating Earnings After-tax ($m) Operating Earnings Adjustment ($m) Adjusted Operating Earnings After-tax ($m) 4Q13 $32.6 $(3.0)** $29.6 4Q12 $27.8 $0.0 $27.8 Change $4.8 (+17%) 300 250 235 226 200 150 $1.8 (+6%) 100 • Low interest rates continue to be headwind to earnings growth 50 0 4Q12 4Q13 On a trailing twelve month basis: • Adjusted* premium and fees up 2% • Pretax operating margin of 14% • Business market represents 57% of sales for the year *Excludes impact of 3Q12 assumption review and 1Q12 amortization change. **Improved mortality. 11 Posted on PFG website: 02/04/2014
  • 12. Specialty Benefits Premium and Fees ($m) 400 380 360 340 320 300 280 260 240 220 200 368 4Q13 $27.1 4Q12 $31.6 Change $(4.5) (-14%) • Favorable claims experience and growth in the business offset by onetime expenses 4Q12 4Q13 On a trailing twelve month basis: • Premium and fees up 3% • Pretax operating margin of 11% • Loss Ratio of 65.9% 12 Operating Earnings After-tax ($m) 382 Posted on PFG website: 02/04/2014 • Overall quarterly loss ratio of 64.4% is below targeted range largely due to seasonality
  • 13. Capital Deployment • Announced deployment of more than $480M in 2013 ̶ ̶ $150M in share repurchases ($55M remaining on authorization*) ̶ • $288M in common stock dividends $44M Liongate acquisition We expect to deploy $500M-700M in 2014 ̶ 28-cent common stock dividend payable in 1Q14 ̶ Will redeem $100M of surplus notes in 1Q14 ̶ Long term we expect to deploy 65 – 70 percent of our net income with volatility in any given year *as of 12/31/2013. 13 Posted on PFG website: 02/04/2014