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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, 2022 , compared withDecember 31, 2021 , and our consolidated results of operations for the three and nine months endedSeptember 30, 2022 and 2021, 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, 2021 , 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 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 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, individual variable
annuities, trust and custody services and the acquisition, integration and
? migration expenses associated with the purchase of the IRT business of Wells
investment only, pension risk transfer, banking services and our exited retail
fixed annuities business. 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");
To employees of businesses and other individuals, we offer the ability to
? accumulate savings for retirement and other purposes through mutual funds,
individual variable annuities and bank products, along with retirement income
options; and
? To non-retirement businesses, we offer trust and custody services.
investment teams and
? investment capabilities including equity, fixed income, multi-asset, real
estate and alternatives. Services are provided to clients in our retirement
businesses in theU.S. and select emerging markets,U.S. benefits and protection, to our Corporate segment and for third-party 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, group life insurance, critical illness, accident, paid family and
? medical leave, and non-medical fee-for-service claims administration; and
Individual Life insurance, which includes universal life, variable universal
life, indexed universal life, traditional life insurance and our exited ULSG
business. We focus our solutions on small-to-mid sized businesses and their
employees with an emphasis on business owners, executives and key employees.
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, and our exited group medical and long-term care
insurance businesses are reported in this segment.
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. Assumption updates and model refinements were made during the third quarter of 2022 and 2021, which resulted in an unlocking of DAC and other actuarial balances that increased (decreased) consolidated net income attributable toPrincipal Financial Group, Inc. by$130.3 million and$(14.2) million for the three months endedSeptember 30, 2022 and 2021, respectively. 91 Table of Contents The following table presents the increase (decrease) to pre-tax operating earnings for each segment. For the three months ended September 30, 2022 2021 (in millions) Retirement and Income Solutions$ 67.3 $ (67.3) U.S. Insurance Solutions 18.8 34.6 Reinsurance Transaction During the second quarter of 2022, we closed a coinsurance with funds withheld reinsurance transaction withTalcott Life & Annuity Re, a limited liability company organized under the laws of theCayman Islands and an affiliate ofTalcott Resolution Life, Inc. , a subsidiary ofSixth Street , pursuant to which we ceded our in-forceU.S. retail fixed annuity and ULSG blocks of business. The economics of the Reinsurance Transaction were effective as ofJanuary 1, 2022 .
Other Factors Affecting Comparability of Results of Operations
Fluctuations in Foreign Currency to
Fluctuations in foreign currency toU.S. dollar exchange rates for locations 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. 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 negatively impacted$7.8 million and$16.4 million for the three and nine months endedSeptember 30, 2022 , respectively, as a result of fluctuations in foreign currency toU.S. dollar exchange rates. This impact was calculated by comparing (a) the difference between current year results and prior year results to (b) the difference between current year results and prior year results translated using current year exchange rates for both periods. We use this approach to calculate the impact of exchange rates on all revenue and expense line items. For a discussion of our approaches to managing foreign currency exchange rate risk, see Item 3. "Quantitative and Qualitative Disclosures About Market Risk - Foreign Currency Risk."
Variable Investment Income
Variable investment income includes certain types of investment returns such as prepayment fees and income (loss) from certain elements of our other alternative asset classes, including results of value-add real estate sales activity. Due to its unpredictable nature, variable investment income may or may not be material to our financial results for a given reporting period and may create variances when comparing different reporting periods. For additional information, see "Investment Results."
Recent Accounting Changes
For recent accounting changes, see Item 1. "Financial Statements, Notes to
Unaudited Condensed Consolidated Financial Statements, Note 1, Nature of
Operations and Significant Accounting Policies" under the caption, "Recent
Accounting Pronouncements."
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Results of Operations
The following table presents summary consolidated financial information for the
periods indicated:
For the three months ended September 30, For the nine months ended September 30,
Increase Increase
2022 2021 (decrease) 2022 2021 (decrease)
(in millions)
Revenues:
Premiums and other considerations$ 1,486.5 $ 1,230.5 $ 256.0 $ 3,740.1 $ 3,335.3 $ 404.8 Fees and other revenues 1,015.7 1,251.8 (236.1) 3,178.3 3,711.0 (532.7) Net investment income 908.2 1,093.4 (185.2) 2,842.8 3,167.0 (324.2) Net realized capital losses (55.7) (152.0) 96.3 (394.1) (41.7)
(352.4)
Net realized capital gains on funds withheld assets 8.5 - 8.5 697.5 - 697.5 Change in fair value of funds withheld embedded derivative 1,237.7 - 1,237.7 4,305.0 - 4,305.0 Total revenues 4,600.9 3,423.7 1,177.2 14,369.6 10,171.6 4,198.0 Expenses: Benefits, claims and settlement expenses 1,734.8 1,770.9 (36.1) 4,473.3 4,958.4 (485.1) Dividends to policyholders 24.5 28.2 (3.7) 72.1 75.3 (3.2) Operating expenses 1,111.5 1,196.5 (85.0) 3,769.0 3,663.3 105.7 Total expenses 2,870.8 2,995.6 (124.8) 8,314.4 8,697.0 (382.6) Income before income taxes 1,730.1 428.1 1,302.0 6,055.2 1,474.6 4,580.6 Income taxes 348.7 63.8 284.9 1,218.5 222.4 996.1 Net income 1,381.4 364.3 1,017.1 4,836.7 1,252.2 3,584.5 Net income (loss) attributable to noncontrolling interest (4.1) 4.4 (8.5) 15.6 13.4 2.2 Net income attributable to Principal Financial Group, Inc.$ 1,385.5 $ 359.9 $ 1,025.6 $ 4,821.1 $ 1,238.8 $ 3,582.3
Three Months Ended
30, 2021
Net Income Attributable to
Net income attributable to
due to the change in fair value of the funds withheld embedded derivative.
Total Revenues
Premiums increased for theU.S. Insurance Solutions segment primarily due to a$74.4 million increase in growth in the Specialty Benefits insurance business, as well as a$60.5 million increase in Individual Life insurance premiums related to the retrocession of ceded premiums as a result of the Reinsurance Transaction. Premiums increased$125.2 million for the Retirement and Income Solutions segment primarily due to higher sales of single premium group 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 decreased$111.8 million for theU.S. Insurance Solutions segment primarily due to the Reinsurance Transaction. Fees and other revenues decreased for thePrincipal Global Investors segment primarily due to$38.2 million lower management fee revenue as a result of decreased average AUM and a$13.3 million decrease in performance fee revenue primarily in our real estate business. Fees and other revenues decreased$43.2 million for the Retirement and Income Solutions segment primarily resulting from declining financial 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.
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Net realized capital gains on funds withheld assets increased as a result of the sale of funds withheld assets associated with the Reinsurance Transaction in 2022.
The change in the fair value of the funds withheld embedded derivative increased
due to an increase in interest rates.
Total Expenses
Benefits, claims and settlement expenses decreased in theU.S. Insurance Solutions segment primarily due to a$139.4 million reduction in our Individual Life insurance business, primarily due to the Reinsurance Transaction, offset by$47.8 million due to growth in our Specialty Benefits insurance business. Benefits, claims and settlement expenses increased$52.4 million for thePrincipal International segment primarily due to higher cost of interest credited to customers partially offset by foreign currency headwinds inLatin America . Benefits, claims and settlement expenses increased$20.8 million for the Retirement and Income Solutions segment primarily due to an increase in reserves, stemming from higher sales of single premium group annuities with life contingencies. Operating expenses decreased primarily due to a$43.3 million more favorable impact associated with actuarial assumption updates and model refinements in 2022 and a$34.9 million decrease in amounts credited to employee accounts in a nonqualified defined contribution pension plan.
Income Taxes
The effective income tax rate increased to 20% for the three months endedSeptember 30, 2022 , from 15% for the three months ended 2021, primarily due to a 3% impact of an increase in pre-tax income with no proportionate increase in permanent tax differences and a 3% impact related to a decrease of available foreign tax credits on theU.S. taxation of international operations. See Item 1. "Financial Statements, Notes to Unaudited Condensed Consolidated Financial Statements, Note 8, Income Taxes" for a reconciliation between theU.S. corporate income tax rate and the effective income tax rate.
Nine Months Ended
2021
Net Income Attributable to
Net income attributable to
due to the change in fair value of the funds withheld embedded derivative.
Total Revenues
Premiums increased for theU.S. Insurance Solutions segment primarily due to$204.7 million from growth in the Specialty Benefits business and$149.7 million in our Individual Life insurance business, primarily related to the Reinsurance Transaction. Fees and other revenues decreased$346.2 million for theU.S. Insurance Solutions segment primarily due to the Reinsurance Transaction. Fees and other revenues decreased$81.0 million for the Retirement and Income Solutions segment primarily resulting from declining financial 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.
Net realized capital gains on funds withheld assets increased as a result of the sale of funds withheld assets associated with the Reinsurance Transaction in 2022.
The change in the fair value of the funds withheld embedded derivative increased
due to the establishment of the funds withheld payable associated with the
Reinsurance Transaction in 2022 and an increase in interest rates.
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Total Expenses
Benefits, claims and settlement expenses decreased $452.7 million for the U.S.
Insurance Solutions segment primarily due to the Reinsurance Transaction.
Benefits, claims and settlement expenses decreased $194.0 million for the
Retirement and Income Solutions segment primarily due to a decrease in reserves,
stemming from the impact of our exited retail fixed annuity business. Partially
offsetting these decreases was a $143.0 million increase in the Principal
International segment primarily due to higher cost of interest credited to
customers partially offset by foreign currency headwinds in Latin America .
Operating expenses increased primarily due to $271.4 million of strategic review
costs and impacts related to our exited business. This increase was partially
offset by a $153.2 million decrease in amounts credited to employee accounts in
a nonqualified defined contribution pension plan and a $43.3 million more
favorable impact associated with actuarial assumption updates and model
refinements in 2022.
Income Taxes
The effective income tax rate increased to 20% for the nine months endedSeptember 30, 2022 from 15% for the nine months ended 2021, primarily due to a 3% impact of an increase in pre-tax income with no proportionate increase in permanent tax differences and a 3% impact related to a decrease of available foreign tax credits on theU.S. taxation of international operations. See Item 1. "Financial Statements, Notes to Unaudited Condensed Consolidated Financial Statements, Note 8, Income Taxes" for a reconciliation between theU.S. corporate income tax rate and the effective 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 13, Segment Information." Beginning in the second quarter of 2022, segment pre-tax operating earnings excludes amounts associated with our exitedU.S. retail fixed annuity and ULSG businesses, including strategic review costs and impacts, amortization of reinsurance gain (loss), impacts to actuarial balances of reinsured businesses, net realized capital gains (losses) on funds withheld assets and the change in fair value of the funds withheld embedded derivative.
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
2022 2021 (decrease) 2022 2021 (decrease)
(in millions)
Retirement and Income Solutions - Fee $ 489.0 $ 448.2 $ 40.8 $ 1,523.5 $ 1,486.8 $ 36.7
Retirement and Income Solutions - Spread 197.5 240.5 (43.0) 605.2 678.5 (73.3)
Total Retirement and Income Solutions $ 686.5 $ 688.7 $ (2.2) $ 2,128.7 $ 2,165.3 $ (36.6)
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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
2022 2021 (decrease) 2022 2021 (decrease)
(in millions)
Operating revenues:
Premiums and other considerations $ 607.3 $ 482.1 $ 125.2 $ 1,197.6 $ 1,112.4 $ 85.2
Fees and other revenues 426.0 472.8 (46.8) 1,322.1 1,412.1 (90.0)
Net investment income 549.3 698.0 (148.7) 1,682.8 2,023.3 (340.5)
Total operating revenues 1,582.6 1,652.9 (70.3) 4,202.5 4,547.8 (345.3)
Expenses:
Benefits, claims and settlement
expenses, including dividends to
policyholders 896.1 964.2 (68.1) 2,073.8 2,382.5 (308.7)
Operating expenses 407.9 445.5 (37.6) 1,276.3 1,353.9 (77.6)
Total expenses 1,304.0 1,409.7 (105.7) 3,350.1 3,736.4 (386.3)
Pre-tax operating earnings$ 278.6 $ 243.2 $
35.4
Three Months Ended
30, 2021
Pre-Tax Operating Earnings Pre-tax operating earnings increased in our Fee business due to an increase in net revenue along with a decrease in operating expenses as described below. Pre-tax operating earnings decreased in our Spread business primarily due to a decrease in net revenue as described below.
Net Revenue
Net revenue increased in our Fee business primarily due to a$79.1 million impact associated with actuarial assumption updates and model refinements, which were favorable in 2022 as compared to unfavorable in 2021, and a$12.9 million increase primarily stemming from revenue associated with our Principal Deposit Sweep program resulting from continued growth in the business. These increases were partially offset by a$46.2 million decrease in fee revenue primarily resulting from declining financial markets and a$10.4 million decrease in variable investment income. Net revenue decreased in our Spread business primarily due to a$80.2 million decrease resulting from the impacts of our exited retail fixed annuity business and a$54.4 million decrease in variable investment income. These decreases were partially offset by a$54.7 million impact associated with actuarial assumption updates and model refinements, which were favorable in 2022 with no corresponding impact in 2021, and a$36.6 million increase due to higher net yields.
Operating Expenses
Operating expenses decreased in our Fee business primarily due to a$20.3 million decrease in expenses associated with the integration of theInstitutional Retirement & Trust business ofWells Fargo Bank, N.A. ("Acquired Business") and a$9.8 million decrease in nondeferrable asset-based commission expenses largely stemming from declining financial markets. Operating expenses did not materially change in our Spread business.
Nine Months Ended
2021
Pre-Tax Operating Earnings
Pre-tax operating earnings increased in our Fee business due to an increase in
net revenue along with a decrease in operating expenses as described below.
Pre-tax operating earnings decreased in our Spread business primarily due to a
decrease in net revenue partially offset by a decrease in operating expenses as
described below.
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Net Revenue
Net revenue increased in our Fee business primarily due to a$79.1 million impact associated with actuarial assumption updates and model refinements, which were favorable in 2022 as compared to unfavorable in 2021, and a$37.7 million increase primarily stemming from revenue associated with our Principal Deposit Sweep program resulting from continued growth in the business. These increases were partially offset by an$86.6 million decrease in fee revenue primarily resulting from declining financial markets. Net revenue decreased in our Spread business primarily due to a$228.4 million decrease resulting from the impacts of our exited retail fixed annuity business. This decrease was partially offset by a$74.8 million increase related to higher net yields, a$54.7 million impact associated with actuarial assumption updates and model refinements, which were favorable in 2022 with no corresponding impact in 2021, and a$24.7 million increase in variable investment income.
Operating Expenses
Operating expenses decreased in our Fee business primarily due to a$50.0 million decrease in expenses associated with the integration of the Acquired Business, partially offset by a$33.1 million increase in DAC amortization due to unfavorable market performance in 2022 compared to favorable in 2021. Operating expenses decreased in our Spread business primarily due to a$66.5 million impact from our exited retail fixed annuity business. This decrease was partially offset by a$16.2 million increase primarily due to growth in our retained business.
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,
2022 2021 2022 2021
(in billions)
AUM, beginning of period $ 469.8 $ 532.3 $ 546.5 $ 502.1
Net cash flow 2.3 2.2 6.9 3.3
Market performance (21.6) 2.1 (98.8) 31.9
Operations acquired (1) - - 18.6 -
Operations disposed (2) - - (23.1) -
Other (1.1) (1.2) (0.7) (1.9)
AUM, end of period $ 449.4 $ 535.4 $ 449.4 $ 535.4
(1) Effective in the first quarter of 2022, includes the integration of
Institutional Asset Advisory, which is associated with our IRT business.
(2) In the second quarter of 2022,
managed AUM was transferred to third parties per the Reinsurance Transaction.
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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
2022 2021 (decrease) 2022 2021 (decrease)
(in millions)
Operating revenues:
Fees and other revenues $ 402.2 $ 464.5
Net investment income
3.8 0.7 3.1 7.3 3.4 3.9 Total operating revenues 406.0 465.2
(59.2) 1,304.9 1,334.1 (29.2) Expenses: Total expenses 262.9 273.3 (10.4) 835.7 813.7 22.0 Pre-tax operating earnings attributable to noncontrolling interest 1.1 1.8 (0.7) 3.8 4.8 (1.0) Pre-tax operating earnings$ 142.0 $ 190.1 $ (48.1) $ 465.4 $ 515.6 $ (50.2)
Three Months Ended
30, 2021
Pre-Tax Operating Earnings
Pre-tax operating earnings decreased primarily due to
management fee revenue as a result of decreased average AUM and a
decrease in performance fee revenue primarily in our real estate business.
Nine Months Ended
2021
Pre-Tax Operating Earnings
Pre-tax operating earnings decreased primarily due to
management fee revenue as a result of decreased average AUM and a
increase in non-variable staff costs.
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. 98
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The following table presents the
for the periods indicated:
For the three months ended September 30, For the nine months ended September 30,
2022 2021 2022 2021
(in billions)
AUM, beginning of period $ 148.9 $ 167.1 $ 152.1 $ 165.2
Net cash flow (0.2) 0.4 (0.7) 1.8
Market performance - (0.6) (1.4) 1.8
Effect of exchange rates (4.0) (10.8) (4.9) (10.7)
Other (0.1) (0.3) (0.5) (2.3)
AUM, end of period $ 144.6 $ 155.8 $ 144.6 $ 155.8
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
2022 2021 (decrease) 2022 2021 (decrease)
(in millions)
Net revenue $ 174.7 $ 196.3 $ (21.6) $ 541.9 $ 548.6 $ (6.7)
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
2022 2021 (decrease) 2022 2021 (decrease)
(in millions)
Operating revenues:
Premiums and other considerations $ 33.8 $ 36.6
$ (2.8) $ 74.2$ 105.8 $ (31.6) Fees and other revenues 103.4 126.1 (22.7) 325.3 376.6 (51.3) Net investment income 239.7 165.4 74.3 731.4 459.9 271.5 Total operating revenues 376.9 328.1 48.8 1,130.9 942.3 188.6 Expenses: Benefits, claims and settlement expenses 202.2 131.8 70.4 589.0 393.7 195.3 Operating expenses 107.3 114.7 (7.4) 322.9 342.5 (19.6) Total expenses 309.5 246.5 63.0 911.9 736.2 175.7 Pre-tax operating earnings attributable to noncontrolling interest 0.7 0.6 0.1 2.1 2.3 (0.2) Pre-tax operating earnings$ 66.7 $ 81.0 $ (14.3) $ 216.9$ 203.8 $ 13.1
Three Months Ended
30, 2021
Pre-Tax Operating Earnings
Pre-tax operating earnings decreased in
million
investments and
Net Revenue
Net revenue decreased inLatin America primarily due to$14.3 million foreign currency headwinds and$5.0 million inAsia primarily due to lower fee revenue as a result of lower average AUM. 99
Table of Contents
Nine Months Ended
2021
Pre-Tax Operating Earnings Pre-tax operating earnings increased inLatin America primarily due to$37.6 million higher earnings from our equity method investments inBrazil and partially offset by$15.0 million foreign currency headwinds. In addition, pre-tax operating earnings decreased in$7.0 million inAsia primarily due to lower fee revenue as a result of lower average AUM.
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
2022 2021 (decrease) 2022 2021 (decrease)
(in millions)
Premium and fees:
Specialty Benefits insurance $ 712.5 $ 638.9
$ 73.6$ 2,081.8 $ 1,878.0 $ 203.8 Individual Life insurance 251.0 302.1 (51.1) 717.0 945.7 (228.7)
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
2022 2021 (decrease) 2022 2021 (decrease)
(in millions)
Operating revenues:
Premiums and other considerations $ 846.6 $ 711.8 $ 134.8 $ 2,471.2 $ 2,117.1 $ 354.1
Fees and other revenues 116.8 229.2 (112.4) 327.2 706.5 (379.3)
Net investment income 129.5 249.1 (119.6) 444.1 723.3 (279.2)
Total operating revenues 1,092.9 1,190.1 (97.2) 3,242.5 3,546.9 (304.4)
Expenses:
Benefits, claims and settlement expenses 622.0 744.0 (122.0) 1,853.0 2,247.7 (394.7)
Dividends to policyholders 24.3 28.2 (3.9) 71.9 75.1 (3.2)
Operating expenses 310.9 266.3 44.6 914.4 850.7 63.7
Total expenses 957.2 1,038.5 (81.3) 2,839.3 3,173.5 (334.2)
Pre-tax operating earnings $ 135.7 $ 151.6 $ (15.9) $ 403.2 $ 373.4 $ 29.8
100
Table of Contents
Three Months Ended
30, 2021
Pre-Tax Operating Earnings (Losses)
Pre-tax operating earnings in our Specialty Benefits insurance business increased$11.1 million from improved claim experience, as well as$7.0 million from a more favorable impact of actuarial assumption updates in the current quarter compared to the prior year quarter. Pre-tax operating earnings in our Individual Life insurance business decreased$23.8 million due to lower variable investment income and$22.8 million due to less favorable actuarial assumption updates in the current period compared to the prior year, partially offset by$11.3 million in lower COVID claims.
Operating Revenues
Premium and fees in ourSpecialty Benefits Insurance business increased$73.6 million , primarily due to growth in the business. Premium and fees in our Individual Life insurance business decreased$51.1 million , primarily due to the impact of our exited ULSG business. Net investment income in our Specialty Benefits insurance business decreased primarily due to$7.6 million of lower variable investment income. Net investment income in our Individual Life insurance business decreased$90.3 million due to the impact of our exited ULSG business and$23.8 million due to lower variable investment income.
Total Expenses
Benefits, claims and settlement expenses in our Specialty Benefits insurance business increased$47.8 million due to growth in the business, partially offset by$11.1 million in lower claim costs and$7.0 million associated with more favorable actuarial assumption updates in the current period compared to the prior period. Benefits, claims and settlement expenses decreased$151.7 million in our Individual Life insurance business, primarily due to the impact of our exited ULSG business. Operating expenses in our Specialty Benefits insurance business increased$23.3 million from growth in the business, partially offset by$5.1 million in strong expense management. Operating expenses in our Individual Life insurance business increased$34.0 million due to the unfavorable impact from actuarial assumption updates and model refinements in the current period compared to favorable impacts in the prior year.
Nine Months Ended
2021
Pre-Tax Operating Earnings Pre-tax operating earnings increased in our Specialty Benefits insurance business due to$37.0 million in improved claim experience,$14.4 million from growth in the business and$13.9 million in strong expense management. Pre-tax operating earnings in our Individual Life insurance decreased primarily due to$60.1 million in lower variable investment income and$30.3 million of less favorable actuarial assumption updates and model refinements in the current period compared to favorable impacts in the prior year, partially offset by$44.3 million in lower COVID claims.
Operating Revenues
Premiums and fees in our Specialty Benefits insurance business increased$203.8 million , primarily due to growth in the business. Premium and fees in our Individual Life insurance business decreased$228.7 million , primarily due to the impact of our exited ULSG business. Net investment income in our Individual Life insurance business decreased$193.0 million , primarily due to the impact of our exited ULSG business,$60.1 million due to lower variable investment income and$32.7 million due to losses on the indexed universal life derivatives in the current period as compared to gains in the previous period. 101 Table of Contents Total Expenses
Benefits claims and settlement expenses in our Specialty Benefits insurance business increased$132.7 million due to growth in the business, offset by$37.0 million from improved claim experience. Benefits, claims and settlement expenses in our Individual Life insurance business decreased$483.5 million , primarily due to the impact of our exited ULSG business. Operating expenses in our Specialty Benefits business increased$64.7 million primarily due to growth in business, offset by$13.9 million from expense management. Operating expenses in our Individual Life insurance business increased$42.4 million from an unfavorable impact from actuarial assumption and model refinements in the current period compared to favorable impacts in the prior year, partially offset by$29.2 million , primarily associated with the impact of our exited ULSG business.
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
2022 2021 (decrease) 2022 2021 (decrease)
(in millions)
Operating revenues:
Total operating revenues $ (15.9) $ (14.3) $ (1.6) $ (23.2) $ (21.8) $ (1.4)
Expenses:
Total expenses 85.4 82.3 3.1 309.1 252.5 56.6
Pre-tax operating earnings (losses)
attributable to noncontrolling interest (0.5)
0.5 (1.0) 50.4 (0.7) 51.1 Pre-tax operating losses$ (100.8) $ (97.1) $ (3.7) $ (382.7) $ (273.6) $ (109.1)
Three Months Ended
30, 2021
Pre-Tax Operating Losses
Pre-tax operating losses increased primarily due to lower net investment income
largely resulting from mark-to-market losses on investments.
Nine Months Ended
2021
Pre-Tax Operating Losses
Pre-tax operating losses increased primarily due to
investment income largely resulting from mark-to-market losses on investments
and
102
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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 occurringMay 2023 , 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 ofSeptember 30, 2022 , approximately$14.6 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. 103 Table of Contents
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 $
15,928.0 45.1 %
Subject to discretionary withdrawal with adjustments:
Specified surrender charges
9,905.7 28.0 Market value adjustments 4,683.7 13.3 Subject to discretionary withdrawal without adjustments 4,815.7 13.6 Total domestic investment contracts $
35,333.1 100.0 %
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) (4) Credit facility November 2023 $ 600.0 $ -
PFG, PFS, Principal Life and
Principal Financial Services V
(UK) Ltd as co-borrowers (1) (4) Credit facility November 2023
200.0 - Principal International Chile Unsecured lines (2) of credit 118.6 66.5 Total$ 918.6 $ 66.5
(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.
As of
2027 and combined into one
(4) renewed facility include Principal Life as the sole borrower with PFG and PFS
as listed guarantors, with support from sixteen banks.
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, 2022 andDecember 31, 2021 . 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 or other distributions 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 . 104 Table of Contents Dividends or other distributions from Principal Life, our primary subsidiary, are limited byIowa law. UnderIowa law, Principal Life may pay dividends or make other distributions 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, 2021 , the ordinary stockholder dividend limitation for Principal Life is approximately$961.7 million in 2022. However, because the dividend test is based on dividends previously paid over rolling 12-month periods, if paid before a specified date during 2022, some or all of such dividends may be extraordinary and require regulatory approval. Total stockholder dividends paid by Principal Life to its parent for the nine months endedSeptember 30, 2022 , were$900.0 million , all of which was extraordinary and approved by the Commissioner. As ofSeptember 30, 2022 , we had$1,850.0 million of cash and liquid assets held in our holding companies and other subsidiaries, which is available for corporate purposes. 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. All 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$2,009.7 million and$2,107.0 million for the nine months endedSeptember 30, 2022 and 2021, 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 2022 as compared to 2021. Net cash provided by investing activities was$490.0 million for the nine months endedSeptember 30, 2022 , compared to net cash used in financing activities of$2,867.3 million for the nine months endedSeptember 30, 2021 . The increase in cash provided by investing activities was due to net sales and maturities of available-for sale securities in 2022 compared to net purchases of available-for sale securities in 2021 and decreased net purchases of mortgage loans in 2022 as compared to 2021. The portfolio changes are due in part to the Reinsurance Transaction and the associated funds withheld portfolio activity during 2022. Net cash used in financing activities was$592.1 million for the nine months endedSeptember 30, 2022 , compared to net cash provided by financing activities of$1,055.9 million for the nine months endedSeptember 30, 2021 . The increase in cash used in financing activities was primarily due to increased share repurchases in 2022 primarily related to our accelerated share repurchase programs. Additionally, we paid off$300.0 million of long-term debt that matured during the quarter endedSeptember 30, 2022 . 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. 105
Table of Contents
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, 2021 . 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. 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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