Newswires
PRINCIPAL FINANCIAL GROUP INC – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
The following analysis discusses our financial condition as ofSeptember 30, 2021 , compared withDecember 31, 2020 , and our consolidated results of operations for the three and nine months endedSeptember 30, 2021 and 2020, prepared in conformity withU.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 endedDecember 31, 2020 , filed with theSEC 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.
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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 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
which 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 and meet our obligations
may be constrained by the limitations on dividends 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 our
participation in joint ventures; (23) we may need to fund deficiencies in our
Closed Block assets; (24) the ongoing COVID-19 pandemic and the resulting
financial market impacts could adversely affect our business, results of
operations, financial condition and liquidity; (25) our reinsurers could default
on their obligations or increase their rates, which could adversely impact our
net income and financial condition; (26) we face risks related to our
acquisition of Wells Fargo Bank, N.A.'s IRT business; (27) we face risks arising
from future acquisitions of businesses; (28) a pandemic, terrorist attack,
military action or other catastrophic event could adversely affect our
operations, net income or financial condition; (29) our financial results may be
adversely impacted by global climate changes; (30) technological and societal
changes may disrupt our business model and impair our ability to retain existing
customers, attract new customers and maintain our profitability; (31) damage to
our reputation may adversely affect our revenues and profitability; (32) we may
not be able to protect our intellectual property and may be subject to
infringement claims; (33) 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; (34) 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; (35) 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 (36) our enterprise risk management framework may not be fully effective in
identifying or mitigating all of the risks to which we are exposed.
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Overview
We provide financial products and services through the following reportable
segments:
Retirement and Income Solutions is organized into Retirement and Income
Solutions - Fee, which includes full service accumulation, trust services,
individual variable annuities, the pieces of the Acquired Business that have
not yet migrated to Principal (migration of retirement business completed in
? second quarter 2021; remaining migration estimated to be completed in 2022) and
acquisition, integration and migration expenses associated with the purchase of
the Acquired Business; and Retirement and Income Solutions - Spread, which
includes individual fixed annuities, investment only, pension risk transfer and
banking services. We offer a comprehensive portfolio of products and services
for retirement savings and retirement income: To businesses of all sizes, we offer products and services for defined
contribution plans, including 401(k) and 403(b) plans, defined benefit pension
? plans, nonqualified executive benefit plans, employee stock ownership plan
services and pension closeout services. For more basic retirement services, we
offer SIMPLE IRAs and payroll deduction plans;
? To large institutional clients, we also offer investment only products,
including investment only guaranteed investment contracts ("GICs"); and
To employees of businesses and other individuals, we offer the ability to
? accumulate savings for retirement and other purposes through mutual funds,
individual annuities and bank products, along with retirement income options.
assets for sophisticated investors around the world using focused investment
teams that provide diverse investment capabilities including equity, fixed
? income, real estate and other alternative investments. We also have experience
in asset allocation, stable value management and other structured investment
strategies. We focus on providing services to our other segments in addition to
our retail mutual fund and third party institutional clients.Principal International , which offers pension accumulation products and
services, mutual funds, asset management, income annuities and life insurance
? accumulation products through operations in
provides group dental and vision insurance, individual and group disability
insurance, critical illness, accident, group life insurance and non-medical
? fee-for-service claims administration; and Individual Life insurance, which
provides universal life, variable universal life, indexed universal life and
traditional life insurance. We focus our solutions on small-to-medium sized
businesses and their employees with an emphasis on business owners and executives.
Corporate, which manages the assets representing capital that has not been
allocated to any other segment. Financial results of the Corporate segment
primarily reflect our financing activities (including financing costs), income
on capital not allocated to other segments, inter-segment eliminations, income
? tax risks and certain income, expenses and other adjustments not allocated to
the segments based on the nature of such items. Results of PSI, our retail
broker-dealer and RIA; RobustWealth, our financial technology company; and our
exited group medical and long-term care insurance businesses are reported in
this segment. Strategic Review OnJune 28, 2021 , we announced changes to our portfolio and capital management strategy to drive profitable growth, reduce capital intensity, sharpen our strategic focus and generate long-term value for shareholders. These changes were approved by our Board following a comprehensive review of our business mix and capital management options (the "Strategic Review") that was undertaken as a part of our entry into a cooperation agreement with one of our largest investors,Elliott Investment Management, LP . The Strategic Review, initiated inFebruary 2021 , was led by theFinance Committee of the Board, which is comprised entirely of independent directors. Key results of the Strategic Review include (1) discontinuing sales ofU.S. retail fixed annuities and consumer life insurance products; (2) investing and expanding in growth areas for fee-based businesses: retirement in theU.S. and emerging markets, global asset management andU.S. specialty benefits and protection in the small-to-medium-sized business market and (3) strengthening our capital management strategy, which includes additional share repurchases. For share repurchase information, see Item 1. "Financial Statements, Notes to Unaudited Condensed Consolidated Financial Statements, Note 9, Stockholders' Equity." 89 Table of Contents As ofSeptember 30, 2021 , we discontinued sales ofU.S. retail fixed annuities and consumer life insurance products, as outlined in the Strategic Review. We continue to evaluate strategic alternatives for our universal life insurance products with lifetime secondary guarantee provisions along with ourU.S. retail fixed annuities business. Therefore, the future impact of the Strategic Review on our consolidated financial statements has not been fully assessed.
Transactions Affecting Comparability of Results of Operations
Actuarial Assumption Updates
We periodically review and update actuarial assumptions that are inputs to the models for DAC and other actuarial balances and make model refinements as necessary. During the third quarter of 2021, assumption updates and model refinements were made resulting in an unlocking of DAC and other actuarial balances that decreased consolidated net income attributable toPrincipal Financial Group, Inc. by$14.2 million for the three months endedSeptember 30, 2021 . During the third quarter of 2020, assumption updates and model refinements were made resulting in an unlocking of DAC and other actuarial balances that decreased consolidated net income attributable toPrincipal Financial Group, Inc. by$118.2 million for the three months endedSeptember 30, 2020 . The following table presents the increase (decrease) to pre-tax operating earnings for each segment. For the three months ended September 30, 2021 2020 (in millions) Retirement and Income Solutions$ (67.3) $ 70.1 Principal International - 2.7 U.S. Insurance Solutions 34.6 (215.1)
The Individual Life insurance business actuarial assumption updates and model
refinements affected several line items within our income statement. The
following table presents the increase (decrease) to the Individual Life
insurance income statement line items.
For the three months ended
September 30,
2021 2020
(in millions)
Pre-tax operating earnings $ 32.1 $ (215.1)
Fees and other revenues (10.0) 22.4
Benefits, claims and settlement expenses (13.0) 154.1
Dividends to policyholders - 1.1
Operating expenses (29.1) 82.3
Other Factors Affecting Comparability of Results of Operations
Fluctuations in Foreign Currency to
Fluctuations in foreign currency toU.S. dollar exchange rates for countries in which we have operations can affect reported financial results. In years when foreign currencies weaken against theU.S. dollar, translating foreign currencies intoU.S. dollars results in fewerU.S. dollars to be reported. When foreign currencies strengthen, translating foreign currencies intoU.S. dollars results in moreU.S. dollars to be reported. 90
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Foreign currency exchange rate fluctuations create variances in our financial statement line items. The most significant impact occurs within ourPrincipal International segment where pre-tax operating earnings were positively impacted$3.7 million and$13.4 million for the three and nine months endedSeptember 30, 2021 , respectively, as a result of fluctuations in foreign currency toU.S. dollar exchange rates. This impact was calculated by comparing (a) the difference between current year results and prior year results to (b) the difference between current year results and prior year results translated using current year exchange rates for both periods. We use this approach to calculate the impact of exchange rates on all revenue and expense line items. For a discussion of our approaches to managing foreign currency exchange rate risk, see Item 3. "Quantitative and Qualitative Disclosures About Market Risk - Foreign Currency Risk."
Variable Investment Income
Variable investment income includes certain types of investment returns such as prepayment fees and income (loss) from certain elements of our other alternative asset classes, including results of value-add real estate sales activity. Due to its unpredictable nature, variable investment income may or may not be material to our financial results for a given reporting period and may create variances when comparing different reporting periods. For additional information, see "Investment Results."
Recent Accounting Changes
For recent accounting changes, see Item 1. "Financial Statements, Notes to
Unaudited Condensed Consolidated Financial Statements, Note 1, Nature of
Operations and Significant Accounting Policies" under the caption, "Recent
Accounting Pronouncements."
Results of Operations
The following table presents summary consolidated financial information for the
periods indicated:
For the three months ended September 30, For the nine months ended September 30,
Increase Increase
2021 2020 (decrease) 2021 2020 (decrease)
(in millions)
Revenues:
Premiums and other considerations$ 1,230.5 $ 1,184.3 $ 46.2 $ 3,335.3 $ 4,628.4 $ (1,293.1) Fees and other revenues 1,251.8 1,143.0 108.8 3,711.0 3,332.6 378.4 Net investment income 1,093.4 917.9 175.5 3,167.0 2,846.1 320.9 Net realized capital gains (losses) (152.0) 65.5 (217.5) (41.7) 169.5 (211.2) Total revenues 3,423.7 3,310.7 113.0 10,171.6 10,976.6 (805.0)
Expenses:
Benefits, claims and settlement expenses 1,770.9 1,839.8 (68.9) 4,958.4 6,299.8 (1,341.4) Dividends to policyholders 28.2 29.9 (1.7) 75.3 90.2 (14.9) Operating expenses 1,196.5 1,165.9 30.6 3,663.3 3,484.7 178.6 Total expenses 2,995.6 3,035.6 (40.0) 8,697.0 9,874.7 (1,177.7) Income before income taxes 428.1 275.1 153.0 1,474.6 1,101.9 372.7 Income taxes 63.8 39.2 24.6 222.4 164.9 57.5 Net income 364.3 235.9 128.4 1,252.2 937.0 315.2 Net income (loss) attributable to noncontrolling interest 4.4 (0.1) 4.5 13.4 13.8 (0.4) Net income attributable to Principal Financial Group, Inc.$ 359.9 $ 236.0 $ 123.9 $ 1,238.8 $ 923.2 $ 315.6
Three Months Ended
30, 2020
Net Income Attributable to
Net income attributable to
due to a less unfavorable impact of actuarial assumption updates and model
refinements in 2021 compared to 2020.
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Total Revenues
Premiums increased for the U.S. Insurance Solutions segment $37.7 million due to
growth in our Specialty Benefits insurance business and $21.5 million from
dental premium credits associated with COVID-19 that lowered premiums in 2020.
Premiums increased $20.0 million for the Principal International segment
primarily due to higher single premium annuity sales in Chile . Partially
offsetting these increases was a $35.7 million decrease in premiums for the
Retirement and Income Solutions segment primarily due to lower sales of single
premium group and individual annuities with life contingencies. The single
premium group annuity product, which is typically used to fund defined benefit
plan terminations, can generate large premiums from very few customers and
therefore premiums tend to vary from period to period.
Fees and other revenues increased for the Principal Global Investors segment
primarily due to $59.7 million higher management fee revenue as a result of
increased average AUM and an $11.1 million increase in performance fee revenue
primarily in our real estate business. Fees and other revenues increased $41.7
million for the Retirement and Income Solutions segment primarily related to
higher fees stemming from an increase in mean account values, which resulted
from continued growth in the equity markets.
For net investment income and net realized capital gains (losses) variance
information, see "Investments - Investment Results" under the captions "Net
Investment Income" and "Net Realized Capital Gains (Losses)," respectively.
Total Expenses
Benefits, claims and settlement expenses decreased for theU.S. Insurance Solutions segment primarily due to a$169.6 million impact associated with actuarial assumption updates and model refinements, which were favorable in 2021 compared to unfavorable in 2020. This decrease was partially offset by$31.4 million due to growth in the business and$14.9 million in higher non-COVID-19 claims. Benefits, claims and settlement expenses decreased$43.3 million for the Retirement and Income Solutions segment primarily due to a lower increase in reserves, stemming from lower sales of single premium group and individual annuities with life contingencies. Benefits, claims and settlement expenses increased for thePrincipal International segment primarily due to$49.5 million higher inflation-based interest crediting rates to customers and a$19.8 million increase in reserves from higher single premium annuity sales inChile . Operating expenses increased for the Retirement and Income Solutions segment primarily due to a$39.8 million increase in DAC amortization due to less favorable financial markets in the third quarter of 2021 compared to the third quarter of 2020 and a$24.3 million increase in variable compensation expense. Operating expenses increased for thePrincipal Global Investors segment primarily due to a$14.8 million increase in variable compensation expense, a$7.0 million increase in variable expenses related to increased AUM and a$6.1 million increase in non-variable staff costs. Operating expenses increased$12.3 million for the Corporate segment primarily related to interest income on tax settlements recorded in 2020. Operating expenses decreased$91.6 million for theU.S. Insurance Solutions segment primarily due to the impact associated with actuarial assumption updates and model refinements in the Individual Life insurance business, which were favorable in 2021 compared to unfavorable in 2020.
Income Taxes
The effective income tax rates were 15% and 14% for the three months endedSeptember 30, 2021 and 2020, respectively. See Item 1. "Financial Statements, Notes to Unaudited Condensed Consolidated Financial Statements, Note 6, Income Taxes" for a reconciliation between theU.S. corporate income tax rate and the effective income tax rate.
Nine Months Ended
2020
Net Income Attributable to
Net income attributable toPrincipal Financial Group, Inc. increased primarily due to a$208.9 million after-tax increase in variable investment income and a$104.0 million less unfavorable impact of actuarial assumption updates and model refinements in 2021 compared to 2020.
Total Revenues
Premiums decreased
segment primarily due to lower sales of single premium group and individual
annuities with life contingencies.
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Fees and other revenues increased for thePrincipal Global Investors segment primarily due to$165.2 million higher management fee revenue as a result of increased average AUM and a$19.5 million increase in performance fee revenue primarily in our real estate business. Fees and other revenues increased$127.4 million for the Retirement and Income Solutions segment primarily due to higher fees stemming from an increase in mean account values, which resulted from continued growth in the equity markets. Fees and other revenues increased for thePrincipal International segment primarily due to$19.9 million foreign currency tailwinds inLatin America ,$13.5 million inAsia primarily due to continued growth in the business and$8.1 million inChile primarily due to an increase in deposits for which we collect fees.
For net investment income and net realized capital gains (losses) variance
information, see "Investments - Investment Results" under the captions "Net
Investment Income" and "Net Realized Capital Gains (Losses)," respectively.
Total Expenses
Benefits, claims and settlement expenses decreased
Retirement and Income Solutions segment primarily due to a lower increase in
reserves, stemming from lower sales of single premium group and individual
annuities with life contingencies.
Operating expenses increased for the Retirement and Income Solutions segment primarily due to a$34.5 million increase due to variable compensation expense, a$29.9 million impact from growth in the business and a$20.3 million increase in expenses associated with the integration of the Acquired Business. Operating expenses increased for the Corporate segment primarily due to a$41.0 million increase in amounts credited to employee accounts in a nonqualified defined contribution pension plan, a$16.7 million increase in compensation costs largely due to an increase in incentive compensation and$14.1 million related to interest income on tax settlements recorded in 2020. Operating expenses increased for thePrincipal Global Investors segment primarily due to a$20.1 million increase in variable compensation expense, a$17.2 million increase in variable expenses related to increased AUM and a$9.2 million increase in non-variable staff costs. Partially offsetting these increases was a$112.4 million decrease in theU.S. Insurance Solutions segment primarily due to the impact associated with actuarial assumption updates and model refinements, which were favorable in 2021 compared to unfavorable in 2020.
Income Taxes
The effective income tax rate was 15% for both the nine months ended
30, 2021
Condensed Consolidated Financial Statements, Note 6, Income Taxes" for a
reconciliation between the
income tax rate.
Results of Operations by Segment
For results of operations by segment see Item 1. "Financial Statements, Notes to
Unaudited Condensed Consolidated Financial Statements, Note 11, Segment
Information."
Retirement and Income Solutions Segment
Retirement and Income Solutions Segment Summary Financial Data
Net revenue is a key metric used to understand Retirement and Income Solutions
earnings growth. Net revenue is defined as operating revenues less benefits,
claims and settlement expenses less dividends to policyholders. Net revenue from
Retirement and Income Solutions - Fee is primarily fee based and is also
impacted by changes in the equity markets and interest rates. Net revenue from
Retirement and Income Solutions - Spread is primarily driven by the difference
between investment income earned on the underlying general account assets and
the interest rate credited to the contracts.
The following table presents the Retirement and Income Solutions net revenue for
the periods indicated:
For the three months ended For the nine months ended
September 30, September 30,
Increase Increase
2021 2020 (decrease) 2021 2020 (decrease)
(in millions)
Retirement and Income
Solutions - Fee $ 448.2 $ 530.2 $ (82.0) $ 1,486.8 $ 1,481.2 $ 5.6
Retirement and Income
Solutions - Spread 240.5 166.4 74.1 678.5 466.8 211.7
Total Retirement and Income
Solutions $ 688.7 $ 696.6 $ (7.9) $ 2,165.3 $ 1,948.0 $ 217.3
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The following table presents certain summary financial data relating to the
Retirement and Income Solutions segment for the periods indicated:
For the three months ended For the nine months ended
September 30, September 30,
Increase Increase
2021 2020 (decrease) 2021 2020 (decrease)
(in millions)
Operating revenues:
Premiums and other considerations $ 482.1 $ 517.8 $ (35.7) $ 1,112.4 $ 2,501.1 $ (1,388.7)
Fees and other revenues 472.8 430.9 41.9 1,412.1 1,284.1 128.0
Net investment income 698.0 631.2 66.8 2,023.3 1,880.4 142.9
Total operating revenues 1,652.9 1,579.9 73.0 4,547.8 5,665.6 (1,117.8)
Expenses:
Benefits, claims and settlement
expenses, including dividends to
policyholders 964.2 883.3 80.9 2,382.5 3,717.6 (1,335.1)
Operating expenses 445.5 415.5 30.0 1,353.9 1,247.9 106.0
Total expenses 1,409.7 1,298.8 110.9 3,736.4 4,965.5 (1,229.1)
Pre-tax operating earnings$ 243.2 $ 281.1 $ (37.9) $ 811.4 $ 700.1 $ 111.3
Three Months Ended
30, 2020
Pre-Tax Operating Earnings Pre-tax operating earnings decreased in our Fee business primarily due to a$104.1 million impact associated with actuarial assumption updates and model refinements, which were unfavorable in 2021 versus favorable in 2020. Pre-tax operating earnings increased in our Spread business primarily due to a$74.7 million increase in variable investment income partially offset by a$33.3 million favorable impact associated with actuarial assumption updates and model refinements in 2020. Net Revenue
Net revenue decreased in our Fee business primarily due to a$131.2 million impact associated with actuarial assumption updates and model refinements, which were unfavorable in 2021 versus favorable in 2020 partially offset by a$41.4 million increase related to higher fees stemming from an increase in mean account values, which resulted from continued growth in the equity markets. Net revenue increased in our Spread business primarily due to a$74.7 million increase in variable investment income.
Operating Expenses
Operating expenses increased in our Fee business primarily due to a$15.3 million impact from growth in the business and a$13.5 million increase due to variable compensation expense. These increases were partially offset by a$27.1 million impact associated with actuarial assumption updates and model refinements, which were favorable in 2021 versus unfavorable in 2020. Operating expenses increased in our Spread business primarily due to a$24.4 million favorable impact associated with actuarial assumption updates and model refinements in 2020.
Nine Months Ended
2020
Pre-Tax Operating Earnings Pre-tax operating earnings decreased in our Fee business primarily due to a$104.1 million impact associated with actuarial assumption updates and model refinements, which were unfavorable in 2021 versus favorable in 2020, and an$84.7 million increase in operating expenses, which is described below. The decrease in our Fee business pre-tax operating earnings was partially offset by a$128.0 million increase related to higher fees stemming from an increase in mean account values, which resulted from continued growth in the equity markets. Pre-tax operating earnings increased in our Spread business primarily due to a$165.8 million increase in variable investment income. 94 Table of Contents Net Revenue
Net revenue increased in our Fee business primarily due to a$128.0 million increase related to higher fees stemming from an increase in mean account values, which resulted from continued growth in the equity markets, and a$9.5 million increase in variable investment income. These increases were largely offset by a$131.2 million impact associated with actuarial assumption updates and model refinements, which were unfavorable in 2021 versus favorable in 2020. Net revenue increased in our Spread business primarily due to a$165.8 million increase in variable investment income and a$49.4 million increase primarily due to COVID-19 related reserve gains.
Operating Expenses
Operating expenses increased in our Fee business due to a$34.5 million increase due to variable compensation expense, a$29.9 million impact from growth in the business and a$20.3 million increase in expenses associated with the integration of the Acquired Business. These increases were partially offset by a$27.1 million impact associated with actuarial assumption updates and model refinements, which were favorable in 2021 versus unfavorable in 2020. Operating expenses increased in our Spread business primarily due to a$24.4 million favorable impact associated with actuarial assumption updates and model refinements in 2020.
Principal Global Investors Segment
Principal Global Investors Segment Summary Financial Data
AUM is the base by which we generate management fee revenues. Market performance and net cash flow are the two main drivers of AUM growth. Market performance reflects equity, fixed income, real estate and other alternative investment performance. Net cash flow reflects client deposits and withdrawals. The fee levels on these client deposits and withdrawals are increasingly becoming the more important factor to revenue growth and will vary widely based on business and/or product mix.
The following table presents the AUM rollforward for assets managed by
Global Investors
For the three months ended September 30, For the nine months ended September 30,
2021 2020 2021 2020
(in billions)
AUM, beginning of period $ 532.3 $ 450.1 $ 502.1 $ 458.6
Net cash flow 2.2 (0.4) 3.3 2.4
Investment performance 2.1 19.3 31.9 9.6
Operations disposed (1) - (0.8) - (0.9)
Other (1.2) 0.2 (1.9) (1.3)
AUM, end of period $ 535.4 $ 468.4 $ 535.4 $ 468.4
During the third quarter of 2020, we made the decision to close our large cap
(1) strategy managed by
the credit fund managed by the
announced the fund's closure in the second quarter of 2020.
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The following table presents certain summary financial data relating to the
For the three months ended September 30, For the nine months ended September 30,
Increase Increase
2021 2020 (decrease) 2021 2020 (decrease)
(in millions)
Operating revenues:
Fees and other revenues $ 464.5 $ 381.8 $ 82.7 $ 1,330.7 $ 1,122.3 $ 208.4
Net investment income 0.7 1.0 (0.3) 3.4 4.2 (0.8)
Total operating revenues 465.2 382.8 82.4 1,334.1 1,126.5 207.6
Expenses:
Total expenses 273.3 240.4 32.9 813.7 760.9 52.8
Pre-tax operating earnings attributable to
noncontrolling interest 1.8 1.5 0.3 4.8 4.6 0.2
Pre-tax operating earnings $ 190.1 $ 140.9 $ 49.2 $ 515.6 $ 361.0 $ 154.6
Three Months Ended
30, 2020
Pre-Tax Operating Earnings Pre-tax operating earnings increased primarily due to$59.7 million higher management fee revenue as a result of increased average AUM and an$11.1 million increase in performance fee revenue primarily in our real estate business. This was partially offset by a$14.8 million increase in variable compensation expense.
Nine Months Ended
2020
Pre-Tax Operating Earnings Pre-tax operating earnings increased primarily due to$165.2 million higher management fee revenue as a result of increased average AUM and a$19.5 million increase in performance fee revenue primarily in our real estate business. This was partially offset by a$20.1 million increase in variable compensation expense.
Principal International Segment
Principal International Segment Summary Financial Data
AUM is generally a key indicator of earnings growth for the segment, as AUM is the base by which we can generate local currency profits. The Cuprum business inChile differs in that the majority of fees are collected with each deposit by the mandatory retirement customers, based on a capped salary level, as opposed to asset levels. Net customer cash flow and market performance are the two main drivers of local currency AUM growth. Net customer cash flow reflects our ability to attract and retain client deposits. Market performance reflects the investment returns on our underlying AUM. Our financial results are also impacted by fluctuations of the foreign currency toU.S. dollar exchange rates for the locations in which we have business. AUM of our foreign subsidiaries is translated intoU.S. dollar equivalents at the end of the reporting period using the spot foreign exchange rates. Revenue and expenses for our foreign subsidiaries are translated intoU.S. dollar equivalents at the average foreign exchange rates for the reporting period.
The following table presents the
for the periods indicated:
For the three months ended September 30, For the nine months ended September 30,
2021 2020 2021 2020
(in billions)
AUM, beginning of period $ 167.1 $ 143.5 $ 165.2 $ 169.7
Net cash flow 0.4 1.8 1.8 3.0
Investment performance (0.6) 1.7 1.8 2.5
Effect of exchange rates (10.8) 1.4 (10.7) (26.1)
Other (0.3) (1.4) (2.3) (2.1)
AUM, end of period $ 155.8 $ 147.0 $ 155.8 $ 147.0
96
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Net revenue is a key metric used to understand the earnings growth for the
the
For the three months ended September 30, For the nine months ended September 30,
Increase Increase
2021 2020 (decrease) 2021 2020 (decrease)
(in millions)
Net revenue $ 196.3 $ 165.4
$ 30.9 $ 548.6 $ 491.8 $ 56.8
The following table presents certain summary financial data relating to the
For the three months ended September 30, For the nine months ended September 30,
Increase Increase
2021 2020 (decrease) 2021 2020 (decrease)
(in millions)
Operating revenues:
Premiums and other considerations$ 36.6 $ 16.6
$ 20.0 $ 105.8 $ 130.2 $ (24.4) Fees and other revenues 126.1 112.5 13.6 376.6 326.4 50.2 Net investment income 165.4 96.2 69.2 459.9 345.6 114.3 Total operating revenues 328.1 225.3 102.8 942.3 802.2 140.1 Expenses: Benefits, claims and settlement expenses 131.8 59.9 71.9 393.7 310.4 83.3 Operating expenses 114.7 106.2 8.5 342.5 306.1 36.4 Total expenses 246.5 166.1 80.4 736.2 616.5 119.7 Pre-tax operating earnings attributable to noncontrolling interest 0.6 0.5 0.1 2.3 1.7 0.6 Pre-tax operating earnings$ 81.0 $ 58.7
$ 22.3 $ 203.8 $ 184.0 $ 19.8
Three Months Ended
30, 2020
Pre-Tax Operating Earnings
Pre-tax operating earnings increased in
million
Net Revenue
Net revenue increased in
variable investment income in
Nine Months Ended
2020
Pre-Tax Operating Earnings
Pre-tax operating earnings increased in
million
million
Net Revenue
Net revenue increased inLatin America primarily due to$25.1 million foreign currency tailwinds and$8.7 million higher inflation-based investment returns on average invested assets and cash. Net revenue increased$15.3 million inAsia primarily due to continued growth in the business. 97
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Premium and fees are a key metric for growth in theU.S. Insurance Solutions segment. We receive premiums on our specialty benefits insurance products as well as our traditional life insurance products. Fees are generated from our specialty benefits fee-for-service products as well as our universal life, variable universal life and indexed universal life insurance products. We use several reinsurance programs to help manage the mortality and morbidity risk. Premium and fees are reported net of reinsurance premiums.
The following table presents the
fees for the periods indicated:
For the three months ended September 30, For the nine months ended September 30,
Increase Increase
2021 2020 (decrease) 2021 2020 (decrease)
(in millions)
Premium and fees:
Specialty Benefits insurance $ 638.9 $ 579.7 $ 59.2 $ 1,878.0 $ 1,767.4 $ 110.6
Individual Life insurance 302.1 323.6 (21.5) 945.7 925.5 20.2
The following table presents certain summary financial data relating to the
Insurance Solutions
For the three months ended September 30, For the nine months ended September 30,
Increase Increase
2021 2020 (decrease) 2021 2020 (decrease)
(in millions)
Operating revenues:
Premiums and other considerations $ 711.8 $
649.9$ 61.9 $ 2,117.1 $ 1,997.1 $ 120.0 Fees and other revenues (1) 229.2 253.4 (24.2) 706.5 695.7 10.8 Net investment income 249.1 218.1 31.0 723.3 640.0 83.3 Total operating revenues 1,190.1 1,121.4 68.7 3,546.9 3,332.8 214.1 Expenses:
Benefits, claims and settlement expenses (1) 744.0 864.8 (120.8) 2,247.7 2,168.9 78.8 Dividends to policyholders (1) 28.2
29.7 (1.5) 75.1 90.0 (14.9) Operating expenses (1) 266.3 361.0 (94.7) 850.7 923.5 (72.8) Total expenses 1,038.5 1,255.5 (217.0) 3,173.5 3,182.4 (8.9)
Pre-tax operating earnings (losses) (1)
For further details related to the impact associated with actuarial
(1) assumption updates and model refinements for the three months ended September
30, 2021 and 2020, see "Transactions Affecting Comparability of Results of
Operations - Actuarial Assumption Updates."
Three Months Ended
30, 2020
Pre-Tax Operating Earnings (Losses)
Pre-tax operating earnings in our Specialty Benefits insurance business increased$21.0 million from less unfavorable COVID-19 impacts in 2021 compared to 2020,$5.8 million in higher variable investment income and$5.6 million due to lower non-COVID-19 claims. Pre-tax operating earnings in our Individual Life insurance business increased$247.2 million due to the impact associated with actuarial assumption updates and model refinements, which were favorable in 2021 compared to unfavorable in 2020.
Operating Revenues
Premium and fees increased in ourSpecialty Benefits Insurance business due to$37.7 million from growth in the business and$21.5 million in dental premium credits associated with COVID-19 that lowered premium and fees in 2020. Premium and fees decreased in our Individual Life insurance business primarily due to a$32.4 million impact associated with actuarial assumption updates and model refinements, which were unfavorable in 2021 compared to favorable in 2020, partially offset by a$10.9 million increase from growth in the business. 98
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Net investment income increased primarily from higher variable investment
income.
Total Expenses
Benefits, claims and settlement expenses in our Specialty Benefits insurance business increased$23.6 million due to growth in the business partially offset by$5.6 million in lower claims. Benefits, claims and settlement expenses decreased in our Individual Life insurance business primarily due to a$167.1 million impact associated with actuarial assumption updates and model refinements, which were favorable in 2021 compared to unfavorable in 2020, partially offset by$20.5 million in higher non-COVID-19 claims and$11.0 million in higher COVID-19 claims.
Operating expenses decreased primarily due to the impact associated with
actuarial assumption updates and model refinements in our Individual Life
insurance business, which were favorable in 2021 compared to unfavorable in
2020.
Nine Months Ended
2020
Pre-Tax Operating Earnings Pre-tax operating earnings decreased in our Specialty Benefits insurance business due to a$101.6 million impact related to COVID-19, which was unfavorable in 2021 compared to favorable in 2020, primarily due to temporary dental and vision office closures in 2020. This decrease was partially offset by$25.6 million in lower non-COVID-19 claims and$10.3 million in growth of the business. Pre-tax operating earnings in our Individual Life insurance business increased$279.4 million primarily due to the impact associated with actuarial assumption updates and model refinements, which were favorable in 2021 compared to unfavorable in 2020. Operating Revenues
Premiums and fees increased primarily due to growth in the business.
Net investment income increased
income and
Total Expenses
Benefits claims and settlement expenses in our Specialty Benefits insurance business increased$130.3 million from unfavorable COVID-19 impacts in 2021 compared to favorable in 2020 primarily associated with lower claims due to temporary dental and vision office closures in 2020. Benefits, claims and settlement expenses decreased in our Individual Life insurance business$170.1 million due to the impact associated with actuarial assumption updates and model refinements, which were favorable in 2021 compared to unfavorable in 2020. This decrease was partially offset by$35.8 million in more unfavorable COVID-19 related impacts in 2021 compared to 2020,$33.8 million due to growth in the business and$12.8 million in higher non-COVID-19 claims. Dividends to policyholders in our Individual Life insurance business decreased$8.4 million due to the normal decline in the Closed Block business and$6.4 million due to a decrease in the policyholder dividend obligation resulting from higher claims. Operating expenses in our Specialty Benefits business increased$25.9 million primarily due to growth in business. Operating expenses in our Individual Life insurance business decreased$98.7 million primarily due to the impact associated with actuarial assumption updates and model refinements, which were favorable in 2021 compared to unfavorable in 2020. 99 Table of Contents Corporate Segment
Corporate Segment Summary Financial Data
The following table presents certain summary financial data relating to the
Corporate segment for the periods indicated:
For the three months ended September 30, For the nine months ended September 30,
Increase Increase
2021 2020 (decrease) 2021 2020 (decrease)
(in millions)
Operating revenues:
Total operating revenues $ (14.3) $ (17.0) $ 2.7 $ (21.8) $ (24.0) $ 2.2
Expenses:
Total expenses 82.3 53.1 29.2 252.5 202.9 49.6
Pre-tax operating earnings (losses)
attributable to noncontrolling interest 0.5
(0.4) 0.9 (0.7) 17.9 (18.6) Pre-tax operating losses$ (97.1) $ (69.7) $ (27.4) $ (273.6) $ (244.8) $ (28.8)
Three Months Ended
30, 2020
Pre-Tax Operating Losses Pre-tax operating losses increased primarily due to expense increases, including$12.3 million related to interest income on tax settlements recorded in 2020 and a$6.1 million increase in compensation costs largely due to an increase in incentive compensation.
Nine Months Ended
2020
Pre-Tax Operating Losses
Pre-tax operating losses increased primarily due to a
compensation costs largely due to an increase in incentive compensation and
100
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Liquidity and Capital Resources
Liquidity and capital resources represent the overall strength of a company and
its ability to generate strong cash flows, borrow funds at a competitive rate
and raise new capital to meet operating and growth needs. We are in a strong
capital and liquidity position as we face the uncertain, volatile and
potentially material adverse economic disruptions to our business brought on by
the COVID-19 pandemic. We are monitoring our liquidity closely and feel
confident in our ability to meet all long-term obligations to customers,
policyholders and debt holders. Our sources of strength include our laddered
long-term debt maturities with the next maturity not until 2022, access to
revolving credit facility and contingent funding arrangements, a strong
risk-based capital position and our available cash and liquid assets. The
combination of these financial levers will enable us to manage through this
period of economic volatility. Our legal entity structure has an impact on our
ability to meet cash flow needs as an organization. Following is a simplified
organizational structure.
[[Image Removed: Graphic]]
Liquidity
Our liquidity requirements have been and will continue to be met by funds from
consolidated operations as well as the issuance of commercial paper, common
stock, debt or other capital securities and borrowings from credit facilities.
We believe the cash flows from these sources are sufficient to satisfy the
current liquidity requirements of our operations, including reasonably
foreseeable contingencies.
We maintain a level of cash and securities which, combined with expected cash
inflows from investments and operations, we believe to be adequate to meet
anticipated short-term and long-term payment obligations. We will continue our
prudent capital management practice of regularly exploring options available to
us to maximize capital flexibility, including accessing the capital markets and
careful attention to and management of expenses.
We perform rigorous liquidity stress testing to ensure our asset portfolio
includes sufficient high quality liquid assets that could be utilized to bolster
our liquidity position under increasingly stressed market conditions. These
assets could be utilized as collateral for secured borrowing transactions with
various third parties or by selling the securities in the open market if needed.
We also manage liquidity risk by limiting the sales of liabilities with features
such as puts or other options that can be exercised at inopportune times. For
example, as of September 30, 2021 , approximately $13.4 billion , or 99%, of our
institutional guaranteed investment contracts and funding agreements cannot be
redeemed by contractholders prior to maturity. Our individual annuity
liabilities also contain surrender charges and other provisions limiting early
surrenders.
101
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The following table summarizes the withdrawal characteristics of our domestic
general account investment contracts as of
Contractholder funds Percentage
(in millions)
Not subject to discretionary withdrawal $
14,660.8 41.4 %
Subject to discretionary withdrawal with adjustments:
Specified surrender charges
9,741.9 27.5 Market value adjustments 5,932.9 16.7 Subject to discretionary withdrawal without adjustments 5,087.9 14.4 Total domestic investment contracts $ 35,423.5 100.0 % Universal life insurance and certain traditional life insurance policies are also subject to discretionary withdrawals by policyholders. However, life insurance policies tend to be less susceptible to withdrawal than our investment contracts because policyholders may be subject to a new underwriting process in order to obtain a new life insurance policy. In addition, our life insurance liabilities include surrender charges to discourage early surrenders.
We had the following short-term credit facilities with various financial
institutions as of
Financing Amount
Obligor/Applicant structure Maturity Capacity outstanding (3)
(in millions)
PFG, PFS, and Principal Life as
co-borrowers (1) Credit facility November 2023 $ 600.0 $ -
PFG, PFS, Principal Financial
Services V (UK) LTD and Principal
Life as co-borrowers (1) Credit facility November 2023 200.0 -
Unsecured lines
Principal International Chile (2) of credit
213.9 74.3 Total$ 1,013.9 $ 74.3
(1) The credit facility is supported by eighteen banks.
(2) The unsecured lines of credit can be used for repurchase agreements or other
borrowings. Each line has a maturity of less than one year.
(3) The amount outstanding is reported in short-term debt on the consolidated
statements of financial position. The revolving credit facilities are committed and available for general corporate purposes. These credit facilities also provide 100% back-stop support for our commercial paper program, of which we had no outstanding balances as ofSeptember 30, 2021 andDecember 31, 2020 . Most of the banks supporting the credit facilities have other relationships with us. Due to the financial strength and the strong relationships we have with these providers, we are comfortable we have very low risk the financial institutions would be unable or unwilling to fund these facilities. The Holding Companies: PFG and PFS. The principal sources of funds available to our parent holding company, PFG, are dividends from subsidiaries as well as its ability to borrow funds at competitive rates and raise capital to meet operating and growth needs. These funds are used by PFG to meet its obligations, which include the payment of dividends on common stock, debt service and the repurchase of stock. The declaration and payment of common stock dividends is subject to the discretion of our Board and will depend on our overall financial condition, results of operations, capital levels, cash requirements, future prospects, receipt of dividends from Principal Life (as described below), risk management considerations and other factors deemed relevant by the Board. No significant restrictions limit the payment of dividends by PFG, except those generally applicable to corporations incorporated inDelaware . Dividends from Principal Life, our primary subsidiary, are limited byIowa law. UnderIowa law, Principal Life may pay dividends only from the earned surplus arising from its business and must receive the prior approval of the Commissioner of Insurance of theState of Iowa (the "Commissioner") to pay stockholder dividends or make any other distribution if such distribution would exceed certain statutory limitations.Iowa law gives the Commissioner discretion to disapprove requests for distributions in excess of these limitations. Extraordinary dividends include those made, together with dividends and other distributions, within the preceding twelve months that exceed the greater of (i) 10% of statutory policyholder surplus as of the previous year-end or (ii) the statutory net gain from operations from the previous calendar year, not to exceed earned surplus. Based on statutory results for the year endedDecember 31, 2020 , the ordinary stockholder dividend limitation for Principal Life is approximately$932.5 million in 2021. However, because the dividend test is based on dividends previously paid over rolling 12-month periods, if paid before a specified date during 2021, some or all of such dividends may be extraordinary and require regulatory approval. 102
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Total stockholder dividends paid by Principal Life to its parent for the nine months endedSeptember 30, 2021 , were$900.0 million ,$600.0 million of which was extraordinary and approved by the Commissioner. As ofSeptember 30, 2021 , we had$2,466.2 million of cash and liquid assets held in our holding companies and other subsidiaries, which is available for corporate purposes. This includes assets in excess of targeted statutory capital ratios and immediate working capital needs. Corporate balances held in foreign holding companies meet the indefinite reinvestment exception. Operations. Our primary consolidated cash flow sources are premiums from insurance products, pension and annuity deposits, asset management fee revenues, administrative services fee revenues, income from investments and proceeds from the sales or maturity of investments. Cash outflows consist primarily of payment of benefits to policyholders and beneficiaries, income and other taxes, current operating expenses, payment of dividends to policyholders, payments in connection with investments acquired, payments made to acquire subsidiaries, payments relating to policy and contract surrenders, withdrawals, policy loans, interest payments and repayment of short-term debt and long-term debt. Our investment strategies are generally intended to provide adequate funds to pay benefits without forced sales of investments. For a discussion of our investment objectives and strategies, see "Investments."
Cash Flows. Cash flow activity, as reported in our consolidated statements of
cash flows, provides relevant information regarding our sources and uses of
cash. The following discussion of our operating, investing and financing
portions of the cash flows excludes cash flows attributable to the separate
accounts.
Net cash provided by operating activities was$2,107.0 million and$3,110.4 million for the nine months endedSeptember 30, 2021 and 2020, respectively. Our insurance business typically generates positive cash flows from operating activities, as premiums collected from our insurance products and income received from our investments exceed acquisition costs, benefits paid, redemptions and operating expenses. These positive cash flows are then invested to support the obligations of our insurance and investment products and required capital supporting these products. Our cash flows from operating activities are affected by the timing of premiums, fees and investment income received and benefits and expenses paid. The decrease in cash provided by operating activities was primarily due to fluctuations in receivables and payables associated with the timing of settlements in 2021 as compared to 2020. Additionally, increases in net income were offset in part by proceeds from real estate sold in 2020 with no corresponding activity in 2021. Net cash used in investing activities was$2,867.3 million and$3,639.9 million for the nine months endedSeptember 30, 2021 and 2020, respectively. The decrease in cash used in investing activities was primarily due to lower net purchases of available-for-sale securities in 2021 as compared to 2020. The decrease was offset in part by increased net purchases of mortgage loans and lowerChile direct financing lease maturities in in 2021 as compared to 2020. Net cash provided by financing activities was$1,055.9 million and$1,570.3 million for the nine months endedSeptember 30, 2021 and 2020, respectively. The decrease in cash provided by financing activities was due to proceeds from long-term debt issued in 2020 with no corresponding activity in 2021 and lower net investment contract deposits in 2021 as compared to 2020. These decreases were partially offset by increased banking operation deposits due to a new bank sweep product launched in the third quarter of 2021 associated with the Acquired Business. Shelf Registration. Under our current shelf registration, we have the ability to issue, in unlimited amounts, unsecured senior debt securities or subordinated debt securities, junior subordinated debt, preferred stock, common stock, warrants, depositary shares, purchase contracts and purchase units of PFG. Our wholly owned subsidiary, PFS, may guarantee, fully and unconditionally or otherwise, our obligations with respect to any non-convertible securities, other than common stock, described in the shelf registration. Guarantors and Issuers ofGuaranteed Securities . PFG has issued certain notes pursuant to transactions registered under the Securities Act of 1933. Such notes include all currently outstanding senior notes and junior subordinated notes, which are subordinated to all our senior debt (collectively, the "registered notes"). For additional information on the senior notes and junior subordinated notes, see Item 8. "Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 9, Debt" in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . PFS, a wholly owned subsidiary of PFG, has guaranteed each of the registered notes on a full and unconditional basis. The full and unconditional guarantees require PFS to satisfy the obligations of the guaranteed security immediately, if and when PFG has failed to make a scheduled payment thereunder. If PFS does not make such payment, any holder of the guaranteed security may immediately bring suit directly against PFS for payment of amounts due and payable. No other subsidiary of PFG has guaranteed any of the registered notes. 103
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Summary financial information is presented below on a combined basis for PFG and PFS (the "obligor group") and transactions between the obligor group have been eliminated. The summary financial information excludes subsidiaries that are not issuers or guarantors. Any investments by the obligor group in other subsidiaries have been excluded.
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