Principal Financial Announces $1.6B Annuity Reinsurance Transaction

Principal^® expects deployable proceeds of approximately $800 million upon closing of this reinsurance transaction and through additional transactions designed to improve the capital efficiency of its in-force individual life insurance business. The company plans to return the proceeds to shareholders through share repurchases.

At its Investor Day in June 2021, Principal announced it would pursue strategic alternatives for its U.S. retail fixed annuity and individual life insurance businesses as part of a comprehensive review of its business mix and capital management options. Today’s announcement is an important step as the company continues to deliver on its commitment to be more capital efficient with a focus on higher growth businesses within retirement in the U.S. and select emerging markets, global asset management, and U.S. benefits and protection. Reinsurance of these blocks also reduces the company’s risk exposure to interest rates, credit markets, and policyholder behavior.

Today’s announcement will meaningfully enhance the company’s future financial profile:

• Accretive to non-GAAP operating earnings per diluted share (EPS) starting in 2023;
• Improving non-GAAP operating return on average equity (ROE) and affirming the company’s 15% target in 2023; and
• Enhancing free capital flow conversion by approximately 10 percentage points annually; increasing the company’s target range to 75%-85% upon close.

“We are focused on improving capital efficiency and strengthening Principal to win, grow, and create long-term shareholder value,” said Dan Houston, chairman, president, and CEO of Principal. “We conducted a comprehensive process designed to optimize the value of these blocks, while improving our overall risk profile and reducing the capital requirements of our portfolio. At close, these transactions, along with strong operating performance, enables a significant increase to our share repurchase program, while supporting our ability to invest in growth, serve our customers, and lead in higher growth markets.”

Principal will host an investor conference call at 10 a.m. ET today to discuss this announcement; details of the conference call are available at the end of this release.

Agreement to reinsure in-force U.S. retail fixed annuity and ULSG blocks

Principal plans to reinsure approximately $16 billion and $9 billion of U.S. retail fixed annuity and ULSG statutory reserves¹, respectively, with Talcott. Principal will retain policy administration and servicing responsibilities and the expected transaction will have no impact on the company’s relationship with, or commitments to, its customers and distribution partners. As part of the transaction, Talcott will engage Principal to manage approximately $4 billion of commercial mortgage loans and private credit assets for a minimum of five years.

The reinsurance transaction is structured on a coinsurance with funds withheld basis, providing several counterparty protections including agreed upon investment guidelines and over-collateralization of the coinsurance agreement through a supplemental trust.

The transaction, which has been unanimously approved by the company’s Board of Directors, is expected to close in the second quarter of 2022, subject to customary closing conditions, including regulatory approvals.

Increased capital return to shareholders

In connection with today’s announcement, the company’s Board of Directors has approved a $1.6 billion increase to the $1.1 billion that remains available under the company’s existing share repurchase authorization as of December 31, 2021, resulting in an aggregate amount of $2.7 billion. Additionally, the company has increased its share repurchase target for 2022 from $800 million-$1.0 billion to $2.0-$2.3 billion. This $1.5 billion increase in capital return is driven by a combination of stronger operating performance, a favorable macroeconomic environment, and the estimated $800 million of deployable proceeds. Principal now plans to return up to $4.6 billion to shareholders between 2021 and 2022 through share repurchases and common stock dividends, well above the $3 billion announced in June 2021.

In the fourth quarter of 2021, Principal deployed $520.6 million of capital, including $168.5 million of common stock dividends and $352.1 million of share repurchases. For the full year, capital deployments totaled $1.6 billion, including $654.1 million of common stock dividends and $921.0 million of share repurchases, higher than the $600-$800 million targeted range for repurchases.

“Focused execution across our diversified portfolio of businesses drove strong results throughout 2021, and we are confident in our ability to deliver our financial targets,” said Houston. “We’ll continue to take steps to align our business model to drive growth, support our active capital management program, and create long-term shareholder value.”