filings.toolsPrincipal Financial Group 10-Q 2022-03-31
Filed 2022-05-04. 7 sections, 494K characters. Original on sec.gov · Markdown · JSON
Cover and table of contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|---|
For the quarterly period ended March 31, 2022
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|---|
1-16725
(Commission file number)
PRINCIPAL FINANCIAL GROUP, INC**.**
(Exact name of registrant as specified in its charter)
| | | |
|---|---|---|
| Delaware | 42-1520346 | |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification Number) |
711 High Street**,** Des Moines**,** Iowa 50392
(Address of principal executive offices)
(515) 247-5111
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | | |
|---|---|---|
| Title of each class | Trading symbol(s) | Name of each exchange on which registered |
| Common Stock | PFG | Nasdaq Global Select Market |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer ☒ | Accelerated filer ☐ | Non-accelerated filer ☐ | Smaller reporting company ☐ | Emerging growth company ☐ |
|---|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The total number of shares of the registrant’s Common Stock, $0.01 par value, outstanding as of April 27, 2022, was 252,684,227.
PRINCIPAL FINANCIAL GROUP, INC.
TABLE OF CONTENTS
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Principal Financial Group, Inc.
Condensed Consolidated Statements of Financial Position
| | | | | | | |
|---|---|---|---|---|---|---|
| | | March 31, | | December 31, | ||
| | 2022 | 2021 | ||||
| | | (Unaudited) | | | | |
| | | (in millions) | ||||
| Assets | | | | | | |
| Fixed maturities, available-for-sale | | $ | 71,413.6 | | $ | 78,154.5 |
| Fixed maturities, trading | | 414.8 | | 422.2 | ||
| Equity securities (2022 and 2021 include $770.5 million and $783.7 million related to consolidated variable interest entities) | | 2,260.4 | | 2,347.2 | ||
| Mortgage loans (2022 and 2021 include $1,574.7 million and $1,260.1 million related to consolidated variable interest entities) | | 20,542.7 | | 19,668.7 | ||
| Real estate (2022 and 2021 include $609.2 million and $672.0 million related to consolidated variable interest entities) | | 2,139.6 | | 2,075.4 | ||
| Policy loans | | 766.7 | | 759.6 | ||
| Other investments (2022 and 2021 include $480.1 million and $522.8 million related to consolidated variable interest entities) | | 5,645.1 | | 5,478.3 | ||
| Total investments | | 103,182.9 | | 108,905.9 | ||
| Cash and cash equivalents (2022 and 2021 include $52.4 million and $49.6 million related to consolidated variable interest entities) | | 2,741.2 | | 2,332.0 | ||
| Accrued investment income | | 738.4 | | 695.8 | ||
| Premiums due and other receivables | | 2,374.4 | | 1,842.4 | ||
| Deferred acquisition costs | | | 4,102.7 | | 3,757.5 | |
| Property and equipment | | | 1,020.2 | | 1,038.0 | |
| Goodwill | | | 1,661.3 | | 1,627.6 | |
| Other intangibles | | | 1,601.0 | | 1,600.6 | |
| Separate account assets (2022 and 2021 include $34,725.7 million and $33,957.7 million related to consolidated variable interest entities) | | 173,516.3 | | 182,345.4 | ||
| Other assets | | 600.1 | | 512.0 | ||
| Total assets | | $ | 291,538.5 | | $ | 304,657.2 |
| Liabilities | | | | | | |
| Contractholder funds (2022 and 2021 include $339.1 million and $344.0 million related to consolidated variable interest entities) | | $ | 44,027.4 | | $ | 43,598.0 |
| Future policy benefits and claims | | 43,770.3 | | 43,948.1 | ||
| Other policyholder funds | | 943.7 | | 1,071.0 | ||
| Short-term debt | | 279.4 | | 79.8 | ||
| Long-term debt | | 4,280.4 | | 4,280.2 | ||
| Income taxes currently payable | | 34.7 | | 15.5 | ||
| Deferred income taxes | | 1,373.9 | | 2,320.2 | ||
| Separate account liabilities (2022 and 2021 include $34,725.7 million and $33,957.7 million related to consolidated variable interest entities) | | 173,516.3 | | 182,345.4 | ||
| Other liabilities (2022 and 2021 include $79.2 million and $58.7 million related to consolidated variable interest entities) | | 11,052.9 | | 10,540.7 | ||
| Total liabilities | | 279,279.0 | | | 288,198.9 | |
| | | | | | | |
| Redeemable noncontrolling interest (2022 and 2021 include $278.3 million and $304.0 million related to consolidated variable interest entities) | | 306.8 | | 332.5 | ||
| | | | | | | |
| Stockholders’ equity | | | | | | |
| Common stock, par value $0.01 per share; 2,500.0 million shares authorized; 486.6 million and 484.9 million shares issued as of 2022 and 2021; 252.2 million and 261.7 million shares outstanding as of 2022 and 2021 | | 4.9 | | 4.8 | ||
| Additional paid-in capital | | 10,402.4 | | 10,495.0 | ||
| Retained earnings | | 13,090.8 | | 12,884.5 | ||
| Accumulated other comprehensive income (loss) | | (1,920.6) | | 1,610.9 | ||
| Treasury stock, at cost (234.4 million and 223.2 million shares as of 2022 and 2021) | | (9,679.9) | | (8,925.8) | ||
| Total stockholders’ equity attributable to Principal Financial Group, Inc. | | 11,897.6 | | 16,069.4 | ||
| Noncontrolling interest | | 55.1 | | 56.4 | ||
| Total stockholders' equity | | 11,952.7 | | 16,125.8 | ||
| Total liabilities and stockholders’ equity | | $ | 291,538.5 | | $ | 304,657.2 |
See accompanying notes.
Principal Financial Group, Inc.
Condensed Consolidated Statements of Operations**(Unaudited)**
| | | | | | | |
|---|---|---|---|---|---|---|
| | | For the three months ended | ||||
| | | March 31, | ||||
| | 2022 | 2021 | ||||
| | | (in millions, except per share data) | ||||
| Revenues | | | | | | |
| Premiums and other considerations | | $ | 887.4 | | $ | 835.1 |
| Fees and other revenues | | 1,215.0 | | 1,193.9 | ||
| Net investment income | | 1,118.1 | | 1,028.1 | ||
| Net realized capital gains (losses) (1) | | (110.5) | | 151.4 | ||
| Total revenues | | 3,110.0 | | 3,208.5 | ||
| Expenses | | | | | | |
| Benefits, claims and settlement expenses | | 1,459.9 | | 1,374.7 | ||
| Dividends to policyholders | | 23.1 | | 18.2 | ||
| Operating expenses | | 1,199.0 | | 1,201.7 | ||
| Total expenses | | 2,682.0 | | 2,594.6 | ||
| Income before income taxes | | 428.0 | | 613.9 | ||
| Income taxes | | 47.3 | | 97.6 | ||
| Net income | | 380.7 | | 516.3 | ||
| Net income (loss) attributable to noncontrolling interest | | 4.5 | | (0.8) | ||
| Net income attributable to Principal Financial Group, Inc. | | $ | 376.2 | | $ | 517.1 |
| | | | | | | |
| Earnings per common share | | | | | | |
| Basic earnings per common share | | $ | 1.45 | | $ | 1.89 |
| | | | | | | |
| Diluted earnings per common share | | $ | 1.43 | | $ | 1.87 |
(1) Includes realized and unrealized gains (losses). See Note 3, Investments, for further details.
See accompanying notes.
Principal Financial Group, Inc.
Condensed Consolidated Statements of Comprehensive Income**(Unaudited)**
| | | | | | | |
|---|---|---|---|---|---|---|
| | | For the three months ended | ||||
| | | March 31, | ||||
| | 2022 | 2021 | ||||
| | | (in millions) | ||||
| Net income | | $ | 380.7 | | $ | 516.3 |
| Other comprehensive loss, net: | | | | | | |
| Net unrealized losses on available-for-sale securities | | (3,673.9) | | (1,373.4) | ||
| Net unrealized losses on derivative instruments | | (16.3) | | (2.2) | ||
| Foreign currency translation adjustment | | 153.4 | | (56.2) | ||
| Net unrecognized postretirement benefit obligation | | 6.7 | | 2.3 | ||
| Other comprehensive loss | | (3,530.1) | | (1,429.5) | ||
| Comprehensive loss | | (3,149.4) | | (913.2) | ||
| Comprehensive income (loss) attributable to noncontrolling interest | | 5.9 | | (1.0) | ||
| Comprehensive loss attributable to Principal Financial Group, Inc. | | $ | (3,155.3) | | $ | (912.2) |
See accompanying notes.
Principal Financial Group, Inc.
**Condensed Consoli
Showing the first 8K of 307K characters. Open the full section
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following analysis discusses our financial condition as of March 31, 2022, compared with December 31, 2021, and our consolidated results of operations for the three months ended March 31, 2022 and 2021, prepared in conformity with U.S. GAAP. The discussion and analysis includes, where appropriate, factors that may affect our future financial performance. The discussion should be read in conjunction with our Form 10-K, for the year ended December 31, 2021, filed with the SEC and the unaudited condensed consolidated financial statements and the related notes to the financial statements and the other financial information included elsewhere in this Form 10-Q.
Forward-Looking Information
Our narrative analysis below contains forward-looking statements intended to enhance the reader’s ability to assess our future financial performance. Forward-looking statements include, but are not limited to, statements that represent our beliefs concerning future operations, strategies, financial results or other developments, and contain words and phrases such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend” and similar expressions. Forward-looking statements are made based upon management’s current expectations and beliefs concerning future developments and their potential effects on us. Such forward-looking statements are not guarantees of future performance.
Actual results may differ materially from those included in the forward-looking statements as a result of risks and uncertainties including, but not limited to, the following: (1) adverse capital and credit market conditions may significantly affect our ability to meet liquidity needs, as well as our access to capital and cost of capital; (2) conditions in the global capital markets and the economy generally may materially and adversely affect our business and results of operations; (3) volatility or declines in the equity, bond or real estate markets could reduce our AUM and AUA and may result in investors withdrawing from the markets or decreasing their rates of investment, all of which could reduce our revenues and net income; (4) changes in interest rates or credit spreads or a sustained low interest rate environment may adversely affect our results of operations, financial condition and liquidity, and our net income can vary from period to period; (5) the elimination of LIBOR may affect the value of certain derivatives and floating rate securities we hold or have issued and the profitability of certain real estate lending activity or businesses; (6) our investment portfolio is subject to several risks that may diminish the value of our invested assets and the investment returns credited to customers, which could reduce our sales, revenues, AUM and net income; (7) our valuation of investments and the determinations of the amount of allowances and impairments taken on our investments may include methodologies, estimations and assumptions that are subject to differing interpretations and, if changed, could materially adversely affect our results of operations or financial condition; (8) any impairments of or valuation allowances against our deferred tax assets could adversely affect our results of operations and financial condition; (9) we may face losses on our insurance and annuity products if our actual experience differs significantly from our pricing and reserving assumptions; (10) the pattern of amortizing our DAC asset and other actuarial balances on our universal life-type insurance contracts, participating life insurance policies and certain investment contracts may change, impacting both the level of our DAC asset and other actuarial balances and the timing of our net income; (11) changes in laws or regulations may reduce our profitability or impact how we do business; (12) our ability to pay stockholder dividends, make share repurchases and meet our obligations may be constrained by the limitations on dividends or other distributions Iowa insurance laws impose on Principal Life; (13) changes in accounting standards may adversely affect our reported results of operations and financial condition; (14) litigation and regulatory investigations may affect our financial strength or reduce our profitability; (15) from time to time, we may become subject to tax audits, tax litigation or similar proceedings, and as a result we may owe additional taxes, interest and penalties in amounts that may be material; (16) applicable laws and our certificate of incorporation and by-laws may discourage takeovers and business combinations that some stockholders might consider in their best interests; (17) competition, including from companies that may have greater financial resources, broader arrays of products, higher ratings and stronger financial performance, may impair our ability to retain existing customers, attract new customers and maintain our profitability; (18) a downgrade in our financial strength or credit ratings may increase policy surrenders and withdrawals, reduce new sales, terminate relationships with distributors, impact existing liabilities and increase our cost of capital, any of which could adversely affect our profitability and financial condition; (19) client terminations or withdrawals or changes in investor preferences may lead to a reduction in revenues for our asset management and accumulation businesses; (20) guarantees within certain of our products that protect policyholders may decrease our net income or increase the volatility of our results of operations or financial position under U.S. GAAP if our hedging or risk management strategies prove ineffective or insufficient; (21) our international businesses face political, legal, operational and other risks that could reduce our profitability in those businesses; (22) we face risks arising from fraudulent activities; (23) we face risks arising from our participation in joint ventures; (24) we may need to fund deficiencies in our Closed Block assets; (25) the ongoing COVID-19 pandemic and the resulting financial market impacts could adversely affect our business, results of operations, financial condition and liquidity; (26) our reinsurers could default on their obligations or increase their rates, which could adversely impact our net income and financial condition; (27) we face risks related to our acquisition of Wells Fargo Bank, N.A.’s Institutional Retirement & Trust (“IRT”) business; (28) we face risks arising from future acquisitions of businesses; (29) we face risks in completing the Reinsurance Transaction within the terms or timing contemplated; (30) a pandemic, terrorist attack, military action or other catastrophic event could adversely affect our operations, net income or financial condition; (31) our financial results may be adversely impacted by global climate changes; (32) technological and societal changes may disrupt our business model and impair our ability to retain existing customers, attract new customers and maintain our profitability; (33) damage to our reputation may adversely affect our revenues and profitability; (34) we may not be able to protect our intellectual property and may be subject to infringement claims; (35) if we are unable to attract, develop and retain qualified employees and sales representatives and develop new distribution sources, our results of operations, financial condition and sales of our products may be adversely impacted; (36) interruptions in information technology, infrastructure or other internal or external systems used for our business operations, or a failure to maintain the confidentiality, integrity or availability of data residing on such systems, could disrupt our business, damage our reputation and adversely impact our profitability; (37) loss of key vendor relationships or failure of a vendor to protect information of our customers or employees could adversely affect our business or result in losses and (38) our enterprise risk management framewor
Showing the first 8K of 143K characters. Open the full section
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Risk Exposures and Risk Management
Market risk is the risk we will incur losses due to adverse fluctuations in market rates and prices. Our primary market risk exposures are to interest rates, equity markets and foreign currency exchange rates. The active management of market risk is an integral part of our operations. We manage our overall market risk exposure within established risk tolerance ranges using several approaches, including:
| ● | rebalancing our existing asset or liability portfolios; |
|---|
| ● | controlling the risk structure of newly acquired assets and liabilities and |
|---|
| ● | using derivative instruments to modify the market risk characteristics of existing assets or liabilities or assets expected to be purchased. |
|---|
Interest Rate Risk
Interest rate risk is the risk of economic losses due to adverse changes in interest rates. Interest rate risk arises primarily from our holdings in interest sensitive assets and liabilities. Changes in interest rates impact numerous aspects of our operations, including but not limited to:
| ● | yield on our invested assets; |
|---|
| ● | rate of interest we credit to contractholder account balances; |
|---|
| ● | timing of cash flows on assets and liabilities containing embedded prepayment options; |
|---|
| ● | cost of hedging our GMWB rider; |
|---|
| ● | discount rate used in valuing our pension and OPEB obligations; |
|---|
| ● | estimated gross profits and the amortization of our DAC asset and related actuarial balances; |
|---|
| ● | statutory reserve and capital requirements; |
|---|
| ● | asset-based fees earned on the fixed income assets we manage; |
|---|
| ● | interest expense on our long-term borrowings; |
|---|
| ● | fair value of intangible assets in our reporting units and |
|---|
| ● | fair value of financial assets and liabilities held at fair value on our consolidated statements of financial position. |
|---|
Lower interest rates generally result in lower profitability in the long-term. Conversely, higher interest rates generally result in higher profitability in the long-term. However, an increase in market interest rates may cause a decline in the value of financial assets held at fair value on our consolidated statements of financial position.
Impact of Changes in Long-Term Interest Rate Assumptions
We use long-term interest rate assumptions to calculate reserves, DAC, other actuarial balances and benefit plan obligations in accordance with U.S. GAAP. In setting these assumptions, we consider a variety of factors, including historical experience, emerging trends and future expectations. We evaluate our assumptions on at least an annual basis. Due to the long-term nature of our assumptions, we generally do not revise our assumptions in response to short-term fluctuations in market interest rates. However, we will consider revising our assumptions if a significant change occurs in the factors noted above.
A reduction in our long-term interest rate assumptions may result in increases in our reserves and/or unlocking of our DAC asset and other actuarial balances. For additional information, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates — Deferred Acquisition Costs and Other Actuarial Balances” in our Annual Report on Form 10-K for the year ended December 31, 2021.
In addition, we have implemented reinsurance transactions utilizing affiliated reinsurers and highly rated third parties to finance a portion of the statutory reserves for our term life insurance policies and universal life insurance policies with secondary guarantees. We calculate an economic reserve, which represents an estimate of our liability associated with these contracts. The excess of the required statutory reserve over the economic reserve is secured by financing provided by highly rated third parties. The long-term interest rate assumption is a key input in the calculation of the economic reserve. A reduction in our long-term interest rate assumption would reduce the portion of the statutory reserve that can be financed through affiliated reinsurers, thus increasing the amount of invested assets we must maintain to support statutory reserves. For additional information, see Item 8. “Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 15, Statutory Insurance Financial Information” in our Annual Report on Form 10-K for the year ended December 31, 2021.
Impact of Changes in Interest Rates
Changes in interest rates or a sustained low interest rate environment may result in the following impacts, which would impact our financial position and results of operations:
| Impact of Falling Interest Rates or Sustained Low Interest Rates | Impact of Rising Interest Rates |
|---|---|
| Adverse Impacts: | Positive Impacts: |
| A reduction in investment income, which may be partially offset by a reduction in the interest we credit on contractholder account balances; however, our ability to lower crediting rates may be constrained by guaranteed minimum interest rates and competitive pressures | An increase in investment income, which may be partially or fully offset by an increase in the interest we credit on contractholder account balances |
| An increase in the cost of hedging our GMWB rider | A decrease in the cost of hedging our GMWB rider |
| An increase in reserves and/or a true-up or unlocking of our DAC asset and other actuarial balances | A true-up or unlocking of our DAC asset and other actuarial balances |
| A reduction in the discount rate used in valuing our pension and OPEB obligations, leading to an increase in our Projected Benefit Obligation, Net Periodic Pension Cost, Accumulated Postretirement Benefit Obligation and Net Periodic Benefit Cost | An increase in the discount rate used in valuing our pension and OPEB obligations, leading to a decrease in our Projected Benefit Obligation, Net Periodic Pension Cost, Accumulated Postretirement Benefit Obligation and Net Periodic Benefit Cost |
| An increase in statutory capital we are required to hold as well as the amount of assets we must maintain to support statutory reserves | A decrease in statutory capital we are required to hold as well as the amount of assets we must maintain to support statutory reserves |
| An increase in prepayments or redemptions on mortgages and bonds we own, which would force us to reinvest the proceeds at lower interest rates | A decrease in prepayments or redemptions on mortgages and bonds we own, which would reduce our opportunity to reinvest the proceeds at higher interest rates |
| | |
| Positive Impacts: | Adverse Impacts: |
| An increase in the value of the fixed income assets we manage, resulting in an increase in our fee revenue in the short-term | A decrease in the value of the fixed income assets we manage, resulting in a decrease in our fee revenue in the short-term |
| A decrease in the interest expense on our long-term borrowings, to the extent the borrowings have adjustable rates or we are able to refinance our obligations at lower interest rates | An increase in the interest expense on our long-term borrowings, to the extent the borrowings have adjustable rates or we refinance our obligations at higher interest rates |
| An increase in the fair value of certain financial assets held at fair value on our consolidated statements of financial position | A decrease in the fair value of certain financial assets held at fair value on our consolidated statements of financial position, as discussed below |
| | A reduction in the fair value of intangible assets in our reporting units, potentially leading to an impairment of goodwill or other intangible assets |
We estimate a hypothetical 100 basis point immediate, parallel decrease in U.S. interest rates would increase segment pre-tax operating earnings by approximately 1-2% over the next 12 months excluding the impact of any potential unlocking of our DAC asset and other actuarial balances. This estimate reflects the impact of routine management actions in response to changes in interest rates, such as reducing the interest rates we credit on contractholder account balances, but does not reflect the impact of other actions management may consider, such as curtailing sales of certain products.
The selection of a 100 basis point immediate, parallel decrease in U.S. interest rates should not be construed as a prediction by us of future market events, but rather as an illustration of the impact of such an event. Our exposure will change as a result of ongoing portfolio transactions in response to new business, management’s assessment of changing market conditions and changes in our mix of business.
If market rates increase rapidly, policy surrenders, withdrawals and requests for policy loans may increase as customers seek to achieve higher returns. This may result in unlocking of our DAC and other actuarial balances. We may be required to sell assets to raise the cash necessary to respond to such surrenders, withdrawals and loans, thereby realizing capital losses on the assets sold.
Guaranteed Minimum Interest Rate Exposure. The following table provides detail on the differences between the interest rates being credited to contractholders as of March 31, 2022, and the respective guaranteed minimum interest rates (“GMIRs”). Amounts for contracts without significant fee revenues such as GICs, funding agreements, individual fixed income annuities and guaranteed pension contracts are excluded. Account values are broken down by GMIR level within the Retirement and Income Solutions and U.S. Insurance Solutions segments.
| | | | | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Account values (1) | |||||||||||||||||
| | | | | | Excess of crediting rates over GMIR: | | | | |||||||||||
| | | | Up to 0.50% | 0.51% to 1.00% | 1.01% to 2.00% | 2.01% or more | | | |||||||||||
| | | At GMIR | | above GMIR | | above GMIR | | above GMIR | | above GMIR | | Total | |||||||
| | | ($ in millions) | |||||||||||||||||
| Guaranteed minimum interest rate | | | | | | | | ||||||||||||
| Retirement and Income Solutions | | | | | | | | ||||||||||||
| Up to 1.00% | | $ | 555.3 | | $ | 254.7 | | $ | 8,518.5 | | $ | 1,996.8 | | $ | 1,501.5 | | $ | 12,826.8 | |
| 1.01% - 2.00% | | 143.2 | | | 581.3 | | | 127.9 | | | 350.7 | | | — | | | 1,203.1 | | |
| 2.01% - 3.00% | | 4,302.6 | | | — | | | 0.1 | | | 0.2 | | | — | | | 4,302.9 | | |
| 3.01% - 4.00% | | 183.7 | | | — | | | — | | | — | | | — | | | 183.7 | | |
| 4.01% and above | | | 21.0 | | | — | | | — | | | — | | | — | | | 21.0 | |
| Subtotal | | 5,205.8 | | | 836.0 | | | 8,646.5 | | | 2,347.7 | | | 1,501.5 | | | 18,537.5 | | |
| | | | | | | | | | | | | | | | | | | | |
| U.S. Insurance Solutions | | | | | | | | | | | | | | ||||||
| Up to 1.00% | | — | | | 20.0 | | | — | | | — | | | — | | | 20.0 | | |
| 1.01% - 2.00% | | 328.2 | | | — | | | 392.3 | | | 636.9 | | | 199.5 | | | 1,556.9 | | |
| 2.01% - 3.00% | | 918.1 | | | 1,082.3 | | | 820.0 | | | 58.9 | | | 0.3 | | | 2,879.6 | | |
| 3.01% - 4.00% | | 1,723.4 | | | 4.3 | | | 20.6 | | | 29.2 | | | 3.1 | | | 1,780.6 | | |
| 4.01% and above | | 48.1 | | | 4.0 | | | 3.5 | | | 1.6 | | | — | | | 57.2 | | |
| Subtotal | | 3,017.8 | | | 1,110.6 | | | 1,236.4 | | | 726.6 | | | 202.9 | | | 6,294.3 | | |
| | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 8,223.6 | | $ | 1,946.6 | | $ | 9,882.9 | | $ | 3,074.3 | | $ | 1,704.4 | | $ | 24,831.8 | |
| Percentage of total | | 33.1 | % | | 7.8 | % | | 39.8 | % | | 12.4 | % | | 6.9 | % | | 100.0 | % |
| (1) | Includes only the account values, net of policy loans, for products with GMIRs and discretionary crediting rates. |
|---|
In addition to the domestic account values shown in the table above, Principal International had $645.6 million of account values with GMIRs in Brazil as of March 31, 2022. The Brazil amount includes account values from an equity method subsidiary, adjusted to reflect the proportion of the subsidiary’s results reflected in our net income. Our liabilities in Principal International are generally denominated in the functional currency of the location of operation. The pattern of interest rate movements in our international operations will likely differ from the pattern of interest rate movements in the U.S.
Impact of Rising Interest Rates on the Fair Value of Financial Assets. An increase in market interest rates may cause a decline in the value of financial assets held at fair value on our consolidated statements of financial position. Although changes in the fair value of our financial assets due to changes in interest rates may impact the amount of equity reported in our consolidated statements of financial position, these changes will not cause an economic gain or loss unless we sell investments, terminate derivative positions, record an allowance for credit loss, or determine a derivative instrument is no longer an effective hedge.
We estimate a hypothetical 100 basis point immediate, parallel increase in interest rates would reduce the net reported fair value of our financial assets and derivatives by $4,616.9 million as of March 31, 2022, compared to $5,479.7 million as of December 31, 2021. This estimate only reflects the change in fair value for financial assets and derivatives reported at fair value on our consolidated statements of financial position. Assets and liabilities not reported at fair value on our consolidated statements of financial position – including mortgage loans, liabilities relating to insurance contracts, investment contracts, debt and bank deposits – are excluded from this sensitivity analysis. We believe the excluded liability items would economically serve as a partial offset to the net interest rate risk of the financial instruments included in the sensitivity analysis. Separate account assets and liabilities are also excluded from this estimate, as any interest rate risk is borne by the holder of the separate account. For more information on fair value measurements, see Item 8. “Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 14, Fair Value Measurements” in our Annual Report on Form 10-K for the year ended December 31, 2021.
Our selection of a 100 basis point immediate, parallel increase in interest rates is a hypothetical rate scenario we use to demonstrate potential risk. While a 100 basis point immediate, parallel increase does not represent our view of future market changes, it is a near term reasonably possible hypothetical change that illustrates the potential impact of such events. While this sensitivity analysis provides a representation of interest rate sensitivity, it is based on our portfolio exposures at a point in time and may not be representative of future market results. These exposures will change as a result of ongoing portfolio transactions in response to new business, management’s assessment of changing market conditions and available investment opportunities.
Our net estimated potential loss in fair value as of March 31, 2022, decreased $862.8 million from December 31, 2021, due to a decrease in the balance of fixed maturities, available-for-sale driven by the current rate environment as well as variation in derivative holdings related to various hedging programs.
Interest Rate Risk Management
We manage interest rate risk through the use of an integrated risk management framework. This helps us identify, assess, monitor, report and manage our risks within established limits and risk tolerances. Our internal risk committees monitor and discuss our risk profile and identify necessary actions to mitigate impacts from interest rate risk.
The product designs within our business units result in a variety of different interest rate risk profiles. Therefore, our business units use a variety of different approaches for managing their asset and liability interest rate risks.
| ● | Retirement Business Stable Cash Flows – For stable and predictable cash flow liabilities, such as pension risk transfer, full service accumulation, investment only, and newer fixed deferred annuities, we use investment strategy and hedges to tightly align the cash flow run off of these asset and liability cash flows. Immunization and embedded value analysis are also utilized in the management of interest rate risk. |
|---|
| ● | Retirement Business Dynamic Cash Flows – Dynamic liability cash flows, such as older fixed deferred annuities, are sensitive to policyholder behavior and the current interest rate environment. The risk and return metrics from deterministic and stochastic interest rate scenarios are used to manage the interest rate risk for these liabilities. |
|---|
| ● | U.S. Insurance Stable Cash Flows – Our insurance businesses in many instances contain long-term guarantees with stable and predictable liability cash flows and recurring premiums. We manage the interest rate risk through investment strategy, product crediting rates and analyzing duration and embedded value sensitivity. |
|---|
| ● | Principal International – Our international businesses operate within local regulations and financial market conditions (e.g., derivative markets, assets available) to achieve similar asset and liability cash flow management objectives. In locations with a limited availability of long-dated assets and derivative markets, the duration gap is managed to risk tolerances specific to each location. |
|---|
We also limit our exposure to interest rate risk through our business mix and strategy. We have intentionally limited our exposure to specific products where investment margins are critical to the product’s profitability, and we continue to emphasize the sale of products that generate revenues in the form of fees for service or premiums for insurance coverage and expose us to minimal interest rate risk.
Prepayment risk is controlled by limiting our exposure to investments that are prepayable without penalty prior to maturity at the option of the issuer. We also require additional yield on these investments to compensate for the risk the issuer will exercise such option. Prepayment risk is also controlled by limiting the sales of liabilities with features such as puts or other options that can be exercised at inopportune times. We manage the interest rate risk associated with our long-term borrowings by monitoring the interest rate environment and evaluating refinancing opportunities as maturity dates approach.
The plan fiduciaries use a Dynamic Asset Allocation strategy for our qualified defined benefit pension plan, which strategically allocates an increasing portion of the assets of the pension plan to fixed income securities as the funding status improves. The intended purpose of using the Dynamic Asset Allocation strategy is that the expected change in the value of the plan assets and the change in pension benefit obligation due to market movements are more likely to have more correlation versus a static allocation of assets between categories. For more information see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates — Benefit Plans” and Item 8. “Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 11, Employee and Agent Benefits” in our Annual Report on Form 10-K for the year ended December 31, 2021.
Use of Derivatives to Manage Interest Rate Risk. We use or have used various derivative financial instruments to manage our exposure to fluctuations in interest rates, including interest rate swaps, interest rate options, TBA forwards, bond forwards, treasury forwards, swaptions and futures. We use interest rate swaps, treasury forwards and futures contracts to hedge against changes in the value of the GMWB liability. We use interest rate swaps and have used TBA forwards primarily to more closely match the interest rate characteristics of assets and liabilities. They can be used to change the sensitivity to the interest rate of specific assets and liabilities as well as an entire portfolio. We use bond forwards to fix the purchase price of a bond at a specified date in the future. We use interest rate options to manage prepayment risks in our assets and minimum guaranteed interest rates and lapse risks in our liabilities. We have purchased swaptions to hedge interest rate exposure for certain assets and liabilities.
Foreign Currency Risk
Foreign currency risk is the risk we will incur economic losses due to adverse fluctuations in foreign currency exchange rates. This risk arises from foreign currency-denominated funding agreements issued to nonqualified institutional investors in the international market, foreign currency-denominated fixed maturity and equity securities, and our international operations, including expected cash flows and potential acquisition and divestiture activity.
We estimate as of March 31, 2022, a 10% immediate unfavorable change in each of the foreign currency exchange rates to which we are exposed would result in no material change to the net fair value of our foreign currency-denominated instruments identified above because we effectively hedge foreign currency-denominated instruments to minimize exchange rate impacts, which is consistent with our estimate as of December 31, 2021. However, fluctuations in foreign currency exchange rates do affect the translation of segment pre-tax operating earnings and equity of our international operations into our consolidated financial statements.
For our Principal International segment, we estimate a 10% immediate unfavorable change in each of the foreign currency exchange rates to which we were exposed would have resulted in a $317.5 million, or 10%, reduction in the total equity excluding noncontrolling interests of our international operations as of March 31, 2022, as compared to an estimated $302.9 million, or 10%, reduction as of December 31, 2021. We estimate a 10% unfavorable change in the average foreign currency exchange rates to which we were exposed through our international operations would have resulted in a $7.4 million, or 13%, reduction in segment pre-tax operating earnings of our international operations for the three months ended March 31, 2022, as compared to an estimated $9.3 million, or 12%, reduction for the three months ended March 31, 2021.
The selection of a 10% immediate unfavorable change in all currency exchange rates should not be construed as a prediction by us of future market events, but rather as an illustration of the potential impact of such an event. These exposures will change as a result of a change in the size and mix of our foreign operations.
Use of Derivatives to Manage Foreign Currency Risk. The foreign currency risk on funding agreements and fixed maturities in our U.S. operations is mitigated by using currency swaps that swap the foreign currency interest and principal payments to our functional currency. We did not have currency swap agreements associated with foreign-denominated liabilities as of March 31, 2022 and December 31, 2021. The notional amount of our currency swap agreements associated with foreign-denominated fixed maturities was $1,076.8 million and $958.9 million as of March 31, 2022 and December 31, 2021, respectively.
With regard to our international operations, in order to enhance the diversification of our investment portfolios we may invest in bonds denominated in a currency that is different than the currency of our liabilities. We use foreign exchange derivatives to economically hedge the currency mismatch. Our Principal International operations had currency swaps with a notional amount of $279.1 million and $283.8 million as of March 31, 2022 and December 31, 2021, respectively. Our Principal International operations also utilized currency forwards with a notional amount of $719.8 million and $721.7 million as of March 31, 2022 and December 31, 2021, respectively.
We use currency forwards to hedge certain foreign-denominated real estate funds in our domestic operations and net equity investments in our foreign operations, including certain sponsored investment funds. We held currency forwards with a notional amount of $382.8 million and $321.9 million as of March 31, 2022 and December 31, 2021, respectively. We have used currency options to hedge currency risk associated with expected cash flows from our foreign operations. No currency options were utilized as of March 31, 2022 or December 31, 2021.
Equity Risk
Equity risk is the risk we will incur economic losses due to adverse fluctuations in equity markets. As of March 31, 2022 and December 31, 2021, the fair value of our equity securities was $2,260.4 million and $2,347.2 million, respectively. We estimate a 10% decline in the prices of the equity securities would result in a decline in fair value of our equity securities of $226.0 million as of March 31, 2022, as compared to a decline in fair value of our equity securities of $234.7 million as of December 31, 2021.
We are also exposed to the risk that asset-based fees decrease as a result of declines in assets under management due to changes in investment prices and the risk that asset management fees calculated by reference to performance could be lower. The risk of decreased asset-based and asset management fees could also impact our estimates of total gross profits used as a basis for amortizing DAC and other actuarial balances. For further discussion, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates — Deferred Acquisition Costs and Other Actuarial Balances” in our Annual Report on Form 10-K for the year ended December 31, 2021.
We also have equity risk associated with (1) fixed deferred annuity and universal life contracts that credit interest to customers based on changes in an external equity index; (2) variable annuity contracts that have a GMWB rider that allows the customer to make withdrawals of a specified annual amount, either for a fixed number of years or for the lifetime of the customer, even if the account value is reduced to zero; (3) variable annuity contracts that have a guaranteed minimum death benefit (“GMDB”) that allows the death benefit to be paid, even if the account value has fallen below the GMDB amount and (4) investment contracts in which the return is subject to minimum contractual guarantees. We are also subject to equity risk based upon the assets that support our employee benefit plans. For further discussion of equity risk associated with these plans, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates — Benefit Plans” in our Annual Report on Form 10-K for the year ended December 31, 2021.
We estimate an immediate 10% decline in the S&P 500 index, followed by a 2% per quarter increase would reduce our annual segment pre-tax operating earnings by approximately 5% to 8% over the next 12 months. This estimate excludes the impact of any potential unlocking of our DAC asset and other actuarial balances. The selection of a 10% unfavorable change in the S&P 500 index should not be construed as a prediction by us of future market events, but rather as an illustration of the potential impact of such an event. Our exposure will change as a result of changes in our mix of business.
Separate and distinct from our equity risk associated with a decline in the S&P index, we also have equity risk associated with certain alternative investments. These investments are comprised of several asset categories (including hedge funds, private equity, infrastructure and direct lending) that provide an attractive asset match to our long-dated liabilities and create diversification benefits to our fixed income investments. The risk profile of these investments is actively monitored by our Investment Committee and our corporate risk management function. Changes in the value of these investments will impact earnings. We estimate an immediate 10% decline in the value of those assets, followed by a 2% per quarter increase would reduce our annual segment pre-tax operating earnings by less than 7%. This estimate excludes the impact of any potential unlocking of our DAC asset and other actuarial balances. The selection of a 10% unfavorable change in the value of those assets should not be construed as a prediction of future market events, but rather as an illustration of the potential impact of such a decline in value of those assets.
Use of Derivatives to Manage Equity Risk. We economically hedge the fixed deferred annuity and universal life products, where the interest credited is linked to an external equity index, by purchasing options that match the product’s profile or selling options to offset existing exposures. We economically hedged the GMWB exposure, which includes interest rate risk and equity risk, using futures, options, treasury forwards and interest rate swaps with notional amounts of $1,597.0 million, $1,729.6 million, $2,181.6 million, and $4,382.1 million, respectively, as of March 31, 2022, and notional amounts of $1,924.9 million, $1,699.6 million, $2181.6 million, and $4,577.1 million, respectively, as of December 31, 2021. The fair value of both the GMWB embedded derivative and associated hedging instruments are sensitive to financial market conditions and the variance related to the change in fair value of these items for a given period is largely dependent on market conditions at the end of the period.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
In order to ensure that the information that we must disclose in our filings with the SEC is recorded, processed, summarized and reported on a timely basis, we have adopted disclosure controls and procedures. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file with or submit to the SEC is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Our Chief Executive Officer, Daniel J. Houston, and our Chief Financial Officer, Deanna D. Strable-Soethout, have reviewed and evaluated our disclosure controls and procedures as of March 31, 2022, and have concluded our disclosure controls and procedures are effective.
Changes in Internal Control Over Financial Reporting
We had no change in our internal control over financial reporting during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
Disclosure concerning legal proceedings can be found in Part I, Item 1. “Financial Statements, Notes to Unaudited Condensed Consolidated Financial Statements, Note 8, Contingencies, Guarantees and Indemnifications” under the caption, “Litigation and Regulatory Contingencies,” which is incorporated here by this reference.
Item 1A. Risk Factors
In addition to the other information set forth in this report, consideration should be given to the factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021. If any of those factors were to occur, they could materially adversely affect our business, financial condition or future results, and could cause actual results to differ materially from those expressed in forward-looking statements in this report. We have not had material changes with respect to the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The following table presents the amount of our common share purchase activity for the periods indicated.
| | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | Maximum dollar | |
| | | | | | | | Total number of | | value of shares | |
| | | | | | | | shares purchased | | that may yet be | |
| | | Total number of | | Average | | as part of publicly | | purchased under | ||
| | | shares | | price paid | | announced | | the programs (in | ||
| Period | purchased (1) | per share | programs | millions) (2) | ||||||
| January 1, 2022 — January 31, 2022 | 826,763 | | $ | 74.04 | | 800,656 | | $ | 2,595.1 | |
| February 1, 2022 — February 28, 2022 | 911,849 | | $ | 73.20 | | 911,849 | | $ | 2,528.3 | |
| March 1, 2022 — March 31, 2022 | 9,500,197 | | $ | 65.93 | | 9,107,538 | | $ | 1,789.5 | |
| Total | 11,238,809 | | | | | 10,820,043 | | |
| (1) | Includes the number of shares of common stock utilized to execute certain stock incentive awards and shares purchased as part of publicly announced programs. |
|---|
| (2) | In June 2021, our Board authorized a share repurchase program of up to $1.2 billion of our outstanding common stock, which has no expiration. In January 2022, our Board of Directors authorized a $1.6 billion increase to the June 2021 share repurchase program authorization, which has no expiration. In March 2022, we entered into an accelerated share repurchase program with a third party financial institution to repurchase $700.0 million of common stock. We received approximately 8.5 million shares at an initial cost of $560.0 million from our counterparty as of March 31, 2022. This program is scheduled to terminate no later than June 30, 2022, at which time we will settle any positive or negative share balances based on the daily volume-weighted average price of our common stock during the term of the program. |
|---|
Item 6. Exhibits
| | | | Incorporated by reference herein | ||
|---|---|---|---|---|---|
| Exhibit Number | Description | Form | File Date | ||
| 31.1 | | Certification of Daniel J. Houston | | | |
| 31.2 | | Certification of Deanna D. Strable-Soethout | | | |
| 32.1 | | Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code – Daniel J. Houston | | | |
| 32.2 | | Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code – Deanna D. Strable-Soethout | | | |
| 101 | | The following materials from Principal Financial Group, Inc.’s Quarterly Report on Form 10-Q for the period ended March 31, 2022 formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Condensed Consolidated Statements of Financial Position, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Stockholders’ Equity, (v) the Condensed Consolidated Statements of Cash Flows and (vi) the Notes to Unaudited Condensed Consolidated Financial Statements. | | | |
| 104 | | The cover page from Principal Financial Group, Inc.’s Quarterly Report on Form 10-Q for the period ended March 31, 2022 formatted in iXBRL and contained in Exhibit 101. | | | |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | PRINCIPAL FINANCIAL GROUP, INC. | |
|---|---|---|
| | | |
| Dated: May 4, 2022 | By | /s/ Deanna D. Strable-Soethout |
| | | Deanna D. Strable-Soethout |
| | | Executive Vice President and Chief Financial Officer |
| | | |
| | | Duly Authorized Officer, Principal Financial Officer, and Principal Accounting Officer |