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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 ofMarch 31, 2023 , compared withDecember 31, 2022 , and our consolidated results of operations for the three months endedMarch 31, 2023 and 2022, 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, 2022 , 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. OnJanuary 1, 2023 , we adopted the guidance commonly referred to as LDTI. As such, results for 2022 have been recast and are also presented under the new LDTI guidance.
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 assets under administration 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 prolonged 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 London Inter-Bank Offered Rate 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 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) 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 arising from future acquisitions of businesses; (27) we face risks in
administering the closed Reinsurance Transaction; (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 provides retirement and related financial
products and services primarily to businesses, their employees, and other
individuals. This segment includes workplace savings and retirement solutions,
? banking, trust and custodial services, individual variable annuities, pension
risk transfer, investment only, our exited retail fixed annuities business, and
all of the
expenses. 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.
Principal Asset Management provides global investment solutions to
institutional, retirement, retail and high net worth investors in the
select emerging markets. The segment is organized into Principal Global
Investors, which provides public, multi-asset and private market capabilities
? across all asset classes, including equity, fixed income, real estate and
alternatives, to service a breadth of client investment objectives; and
solutions through pension accumulation, mutual funds, and income annuities,
along with retail asset management services in
Benefits and Protection is organized into Specialty Benefits, which provides
group dental, group life insurance, group disability insurance (including
short-term disability, long-term disability and paid family and medical leave),
supplemental health products (including vision, critical illness, accident and
hospital indemnity) and individual disability insurance; and Life Insurance,
? which provides life insurance, with a focus on the business market customer,
including universal life and variable universal life (including indexed
universal life), and traditional life insurance (including participating whole
life, adjustable life products and term 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.
In the first quarter of 2023 we implemented changes to our organizational structure to better align businesses, distribution teams and product offerings for future growth. We integrated our global asset management and international pension businesses under one segment, Principal Asset Management. Results of our historically reportedPrincipal Global Investors andPrincipal International segments are reported within this segment. Additionally, we are now reporting results for our Retirement and Income Solutions segment in total and not separated into Fee and Spread components. Finally, we updated the name of ourU.S. Insurance Solutions segment to Benefits and Protection and will continue to report the results ofSpecialty Benefits and Life Insurance within this segment. Our segment results have been modified to reflect these changes, which did not have an impact on our consolidated financial statements.
Critical Accounting Policies and Estimates
Some of our critical accounting policies were impacted when we implemented LDTI accounting guidance inJanuary 2023 . See Item 1. "Financial Statements, Notes to Unaudited Condensed Consolidated Financial Statements, Note 1, Nature of Operations and Significant Accounting Policies" under the captions "Recent Accounting Pronouncements" and "Adoption of Targeted Improvements to the Accounting for Long-Duration Insurance Contracts Guidance" for information about that guidance. Below is a discussion of our updated critical accounting policies. 116 Table of Contents Market Risk Benefits MRBs are contracts or contract features that provide protection to the policyholder from capital market risk such as equity, interest rate or foreign exchange risk and expose us to other-than-nominal capital market risk. We have certain annuity and other investment contracts that have GMWB and GMDB riders or a guarantee on the minimum account balance under certain qualifying events. These MRBs have been bifurcated from the host contract and are measured at fair value. The change in fair value is recognized in net income, with the exception of the change in fair value related to our own nonperformance risk, which is recognized in OCI. We use various derivative instruments to hedge against changes in fair value of MRBs related to market risk. MRBs are valued using a combination of historical data and actuarial judgment. See Item 1. "Financial Statements, Notes to Unaudited Condensed Consolidated Financial Statements, Note 9, Market Risk Benefits and Note 16, Fair Value Measurements" for further discussion. We include our assumption for own nonperformance risk in the valuation of these MRBs, which is based on the current market credit spreads for debt-like instruments we have issued and are available in the market. As our credit spreads widen or tighten, the fair value of MRB assets increase or decrease and the fair value of MRB liabilities decrease or increase, leading to an increase or decrease in OCI, respectively. If the current market credit spreads reflecting our own creditworthiness move to zero (tighten), the reduction to OCI would be approximately$197.5 million , net of income taxes, based onMarch 31, 2023 , reported amounts. In addition, the policyholder behavior assumptions used in the valuation of MRBs include risk margins, which decrease the fair value of MRB assets and increase the fair
value of MRB liabilities. Insurance Reserves Reserves are liabilities representing estimates of the amounts that will come due, at some point in the future, to or on behalf of our policyholders.U.S. GAAP, allowing for some degree of managerial judgment, provides guidance for establishing reserves. Future policy benefits and claims include reserves for individual traditional and group life insurance, disability, medical and long-term care insurance and individual and group annuities that provide periodic income payments. These reserves are computed using assumptions of mortality, interest, morbidity and lapse. These assumptions are based on our experience, industry results, emerging trends and future expectations. For long-duration insurance contracts, reserves for individual and group annuities are generally equal to the present value of expected future policy benefit payments, while the reserves for non-participating term life insurance, individual disability income contracts and individual and group long-term care contracts is generally equal to the present value of expected future policy benefits less the present value of expected net premiums. Issue-year cohorts are used for the reserve calculation and assumptions are periodically reviewed and updated. Separate cohorts are used for the calculation of ceded reserves. An interest accretion rate is determined for an identified cohort and remains unchanged after the issue year. Reserves are remeasured as of each reporting date to reflect the current upper-medium grade fixed income instruments yields, with the impact reported in OCI. If the current upper-medium grade yields used to remeasure reserves decrease 100 basis points, the reduction in OCI would be approximately$2.3 billion , net of income taxes, based onMarch 31, 2023 , reported amounts. Reserves for participating life insurance contracts are based on the net level premium reserve for death and endowment policy benefits. This net level premium reserve is calculated based on dividend fund interest rates and mortality rates guaranteed in calculating the cash surrender values described in the contract. For short-duration contracts, significant changes in experience or assumptions may require us to provide for expected future losses on a product by establishing premium deficiency reserves. Our reserve levels are reviewed throughout the year using internal analysis including, among other things, experience studies, claim development analysis and annual loss recognition analysis. To the extent experience indicates potential loss recognition, we recognize losses on certain lines of business. The ultimate accuracy of the assumptions on these insurance products cannot be determined until the obligation of the entire block of business on which the assumptions were made is extinguished. Short-term variances of actual results from the assumptions used in the computation of the reserves are reflected in current period net income and can impact quarter-to-quarter net income. 117
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Future policy benefits and claims also include reserves for incurred but unreported disability, medical, dental, vision, critical illness, accident, PFML and life insurance claims. We recognize claims costs in the period the service was provided to our policyholders. However, claims costs incurred in a particular period are not known with certainty until after we receive, process and pay the claims. We determine the amount of this liability using actuarial methods based on historical claim payment patterns as well as emerging cost trends, where applicable, to determine our estimate of claim liabilities. We also look back to assess how our prior periods' estimates developed. To the extent appropriate, changes in such development are recorded as a change to current period claim expense. Historically, the amount of the claim reserve adjustment made in subsequent reporting periods for prior period estimates have been within a reasonable range given our normal claim fluctuations. Future policy benefits and claims also include benefit reserves that are established for universal life-type contracts that provide benefit features that are expected to produce gains in early years followed by losses in later years. The liabilities are accrued in relation to estimated contract assessments. See Item 1. "Financial Statements, Notes to Unaudited Condensed Consolidated Financial Statements, Note 8, Future Policy Benefits and Claims" for further discussion.
We periodically review and update actuarial assumptions that are used to project
cash flows that are used to compute reserves.
Transactions Affecting Comparability of Results of Operations
Acquisition
China Pension Joint Venture. OnDecember 28, 2022 , we finalized the acquisition of a 17.647% interest inCCB Pension Management Co., Ltd. ("CCBP"), China Construction Bank's pension business with theSocial Security Fund of China . CCBP is the first and only asset manager to be permitted to run all types of pension investment portfolios within the country. The joint venture investment is reported within the Principal Asset Management segment.
Other
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 .
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 operations where pre-tax operating earnings were negatively impacted$1.4 million for the three months endedMarch 31, 2023 , 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." 118 Table of Contents 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 captions, "Recent
Accounting Pronouncements" and "Adoption of Targeted Improvements to the
Accounting for Long-Duration Insurance Contracts Guidance."
Results of Operations
The following table presents summary consolidated financial information for the
periods indicated:
For the three months ended March 31,
Increase
2023 2022 (decrease)
(in millions)
Revenues:
Premiums and other considerations $ 1,448.6 $ 887.4 $ 561.2
Fees and other revenues 995.3 1,219.2 (223.9)
Net investment income 986.7 1,125.5 (138.8)
Net realized capital losses (66.0) (136.6) 70.6
Net realized capital gains on funds withheld
assets 81.0 - 81.0
Change in fair value of funds withheld
embedded derivative (626.6) - (626.6)
Total revenues 2,819.0 3,095.5 (276.5)
Expenses:
Benefits, claims and settlement expenses 1,773.9 1,490.7 283.2
Liability for future policy benefits
remeasurement (gain) loss (5.6) 13.4 (19.0)
Market risk benefit remeasurement (gain)
loss (2.9) 8.9 (11.8)
Dividends to policyholders 23.2 23.1 0.1
Operating expenses 1,242.9 1,181.0 61.9
Total expenses 3,031.5 2,717.1 314.4
Income (loss) before income taxes (212.5) 378.4 (590.9)
Income taxes (benefits) (78.0) 35.2 (113.2)
Net income (loss) (134.5) 343.2 (477.7)
Net income attributable to noncontrolling
interest 5.6 4.5 1.1
Net income (loss) attributable to Principal
Financial Group, Inc. $ (140.1) $
338.7
Three Months Ended
Net Income Attributable to
Net income (loss) attributable to
primarily due to the change in the fair value of the funds withheld embedded
derivative.
Total Revenues Premiums increased$459.4 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. 119 Table of Contents Fees and other revenues decreased$149.9 million for the Benefits and Protection segment primarily due to the impact of our exited ULSG business in our Life Insurance business. Fees and other revenues decreased$44.7 million for the Principal Asset Management segment primarily due to lower management fee revenue as a result of decreased average AUM in ourPrincipal Global Investors operations.
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, which closed in the second quarter of 2022.
The change in the fair value of the funds withheld embedded derivative was
driven by a decrease in interest rates.
Total Expenses
Benefits, claims and settlement expenses increased$446.8 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. Benefits, claims and settlement expenses decreased$141.9 million for the Benefits and Protection segment primarily due to the impact of our exited ULSG business in our Life Insurance business. Operating expenses increased for the Corporate segment primarily due to a$35.0 million increase in amounts credited to employee accounts in a nonqualified defined contribution pension plan and a$12.0 million increase in pension and OPEB expenses. Income Taxes The effective income tax rate of 37% for the three months endedMarch 31, 2023 , changed from 9% for the three months endedMarch 31, 2022 , primarily due to a decrease in pre-tax income with no proportionate change in beneficial permanent tax differences. See Item 1. "Financial Statements, Notes to Unaudited Condensed Consolidated Financial Statements, Note 12, Income Taxes" for a reconciliation of the corporate income tax rate to 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 17, 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 the change in fair value of the funds withheld embedded derivative, net realized capital gains (losses) on funds withheld assets, strategic review costs and impacts, amortization of reinsurance gain (loss) and other impacts of reinsured business.
Retirement and Income Solutions Segment
Retirement and Income Solutions Segment Summary Financial Data
Net revenue and average monthly account values are key metrics used to
understand Retirement and Income Solutions earnings growth. Net revenue, which
is used only at the segment level, is defined as operating revenues less
benefits, claims and settlement expenses; liability for future policy benefits
remeasurement (gain) loss; market risk benefit remeasurement (gain) loss and
dividends to policyholders. Net revenue is impacted by: (1) changes in the
equity markets and interest rates and (2) the difference between investment
income earned on the underlying general account assets and the interest rate
credited to the contracts. Average monthly account values include the net
balances that customers have accumulated within their account, along with future
policy benefits for retirement payout products. Average monthly account values
are primarily impacted by net customer cash flows and credit market performance.
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The following table presents the Retirement and Income Solutions net revenue and
average monthly account values for the periods indicated:
For the three months ended
March 31,
Increase
2023 2022 (decrease)
Net revenue (in millions) $ 650.1 $ 732.5 $ (82.4)
Average monthly account values (in billions)
(54.7)
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
March 31,
Increase
2023 2022 (decrease)
(in millions)
Operating revenues:
Premiums and other considerations $ 582.7 $ 123.3 $ 459.4
Fees and other revenues 408.5 443.8 (35.3)
Net investment income 624.9 695.9 (71.0)
Total operating revenues 1,616.1 1,263.0 353.1
Expenses:
Benefits, claims and settlement expenses, including
dividends to policyholders
977.5 539.0 438.5
Liability for future policy benefits remeasurement
gain
(13.3) (2.8) (10.5) Market risk benefit remeasurement (gain) loss 1.8 (5.7) 7.5 Operating expenses 400.3 438.3 (38.0) Total expenses 1,366.3 968.8 397.5 Pre-tax operating earnings$ 249.8 $ 294.2 $ (44.4)
Three Months Ended
Pre-Tax Operating Earnings
Pre-tax operating earnings decreased due to a decrease in our net revenue
partially offset by a decrease in operating expenses as described below.
Net Revenue
Net revenue decreased primarily due to a
investment income and a
resulting from a decline in average monthly account values stemming from
unfavorable financial markets in 2022.
Operating Expenses
Operating expenses decreased primarily due to a
associated with the integration of the IRT business of
and a
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Principal Asset Management Segment
Principal Global Investors AUM
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 byPrincipal Global Investors for the periods indicated. The amounts include assets managed byPrincipal Global Investors on behalf ofPrincipal International , which are also reported in the Principal International AUM table below. For the three months ended March 31, 2023 2022 (in billions) AUM, beginning of period $ 464.7 $ 546.5 Net cash flow 0.4 3.2 Market performance 13.4 (29.1) Other 0.2 (1.8) Operations acquired (1) - 18.6 AUM, end of period $ 478.7 $ 537.4
(1) Effective in the first quarter of 2022, includes the integration of
Institutional Asset Advisory, which is associated with our IRT business.
Principal International AUM AUM is generally a key indicator of earnings growth forPrincipal International , 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 Principal International AUM rollforward for the periods indicated. The amounts include assets managed byPrincipal Global Investors on behalf ofPrincipal International , which are also reported in the Principal Global Investors AUM table above, as well as assets managed by other managers. For the three months ended March 31, 2023 2022 (in billions) AUM, beginning of period $ 156.5 $ 152.1 Net cash flow 0.8 (0.5) Market performance 2.5 (1.4) Effect of exchange rates 7.4 13.6 Other (0.1) (0.3) AUM, end of period $ 167.1 $ 163.5 122 Table of Contents
The following table presents certain summary financial data relating to the
Principal Asset Management segment for the periods indicated:
For the three months ended March 31,
Increase
2023 2022 (decrease)
(in millions)
Operating revenues:
Premiums and other considerations$ 6.4 $
10.3$ (3.9) Fees and other revenues 495.0 539.7 (44.7) Net investment income 191.1 205.9 (14.8) Total operating revenues 692.5 755.9 (63.4) Expenses:
Benefits, claims and settlement expenses 115.9 152.7 (36.8) Liability for future policy benefits remeasurement (gain) loss 0.7 (1.8) 2.5 Operating expenses 386.3 392.1 (5.8) Total expenses 502.9 543.0 (40.1) Pre-tax operating earnings attributable to noncontrolling interest 1.8 1.9 (0.1) Pre-tax operating earnings$ 187.8 $ 211.0 $ (23.2)
Three Months Ended
Pre-Tax Operating Earnings
Pre-tax operating earnings decreased$34.3 million in ourPrincipal Global Investors operations primarily due to lower management fee revenue as a result of decreased average AUM. Pre-tax operating earnings increased in ourPrincipal International operations primarily due to$18.3 million favorable relative market performance on our required regulatory investments. This increase was partially offset by$8.5 million lower variable investment income inLatin America .
Benefits and Protection Segment
Benefits and Protection Segment Summary Financial Data
Premium and fees are a key metric for growth in the Benefits and Protection segment. We receive premiums on our specialty benefits insurance products as well as our traditional life insurance products. Fees are generated from 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 Benefits and Protection segment premium and
fees for the periods indicated:
For the three months ended March 31,
Increase
2023 2022 (decrease)
(in millions)
Premium and fees:
Specialty Benefits $ 742.1 $ 674.3 $ 67.8
Life Insurance 224.8 332.5 (107.7)
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The following table presents certain summary financial data relating to the
Benefits and Protection segment for the periods indicated:
For the three months ended March 31,
Increase
2023 2022 (decrease)
(in millions)
Operating revenues:
Premiums and other considerations$ 864.2 $
754.3$ 109.9 Fees and other revenues 102.5 252.4 (149.9) Net investment income 136.7 236.6 (99.9) Total operating revenues 1,103.4 1,243.3 (139.9) Expenses:
Benefits, claims and settlement expenses 638.9 792.5 (153.6) Dividends to policyholders 23.1 23.1 - Liability for future policy benefits remeasurement loss 7.6 18.0 (10.4) Operating expenses 334.5 316.9 17.6 Total expenses 1,004.1 1,150.5 (146.4) Pre-tax operating earnings$ 99.3 $ 92.8 $ 6.5
Three Months Ended
Pre-Tax Operating Earnings
Pre-tax operating earnings increased in our Specialty Benefits business primarily due to$9.4 million growth in the business. Pre-tax operating earnings in our Life Insurance business decreased$16.9 million due to lower variable investment income and$5.9 million due to lower surrender fees, partially offset by$19.0 million in lower Coronavirus disease 2019 ("COVID-19") claims in 2023 compared to 2022. Operating Revenues Premium and fees in our Specialty Benefits business increased$67.8 primarily due to growth in business. Premium and fees decreased$107.7 million in our Life Insurance business primarily due to the impact of our exited ULSG business. Net investment income in our Life Insurance business decreased$87.4 million primarily due to the impact of our exited ULSG business and$16.9 million due to lower variable investment income.
Total Expenses
Benefits, claims and settlement expenses in our Specialty Benefits business increased$42.1 million from growth in the business, partially offset by$25.9 million in lower COVID-19 claims in 2023 compared to 2022. Benefits, claims and settlement expenses in our Life Insurance business decreased$163.9 million primarily due to the impact of our exited ULSG business and$19.0 million in lower COVID-19 claims in 2023 compared to 2022. Liability for future policy benefits remeasurement loss increased$6.7 million in our Specialty Benefits business due to model refinements. Liability for future policy benefits remeasurement loss decreased by$17.2 million in our Life Insurance business primarily due to the impact of our exited ULSG business.
Operating expenses in our Specialty Benefits business increased
due to growth in the business.
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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 March 31,
Increase
2023 2022 (decrease)
(in millions)
Operating revenues:
Total operating revenues $ 27.6 $ 6.3 $ 21.3
Expenses:
Total expenses 123.6 121.4 2.2
Pre-tax operating earnings attributable to
noncontrolling interest 0.1 13.9 (13.8)
Pre-tax operating losses $ (96.1) $ (129.0) $ 32.9
Three Months Ended
Pre-Tax Operating Losses
Pre-tax operating losses decreased primarily due to higher net investment income
largely resulting from mark-to-market gains on investments.
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, adverse economic disruptions to our business brought on by the banking sector events in 2023. We are not materially impacted by the bank failures ofSilicon Valley Bank andSignature Bank of New York . We are closely tracking additional banks that may be at risk and keeping an eye on exposure across the company. There is also no direct, material impact toPrincipal Bank , whose deposits are well-diversified across sources and customers and primarily support our retirement plan participants. 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 banking sector uncertainty. 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]] 125 Table of Contents 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 ofMarch 31, 2023 , approximately$14.9 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.
The following table summarizes the withdrawal characteristics of our domestic
general account investment contracts as of
Contractholder funds,
net of reinsurance Percentage
(in millions)
Not subject to discretionary withdrawal $
15,990.1 58.3 %
Subject to discretionary withdrawal with adjustments:
Specified surrender charges
7,501.3 27.4 Market value adjustments 3,913.3 14.3 Subject to discretionary withdrawal without adjustments 0.6 - Total domestic investment contracts $
27,405.3 100.0 %
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
Amount
Obligor/Applicant Financing structure Maturity
Capacity outstanding (3)
(in millions)
Principal Life (1) Credit facility October 2027 $ 800.0 $ -
Unsecured lines of
Principal International Chile (2) credit
145.2 24.2 Total$ 945.2 $ 24.2
(1) The credit facility is supported by sixteen 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.
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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 of
March 31, 2023 and December 31, 2022 . 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
in Delaware .
Dividends or other distributions from Principal Life, our primary subsidiary,
are limited by Iowa law. Under Iowa 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 the
State 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 ended December 31, 2022 , the ordinary
stockholder dividend limitation for Principal Life is approximately $430.1
million in 2023. However, because the dividend test is based on dividends
previously paid over rolling 12-month periods, if paid before a specified date
during 2023, 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 three
months ended March 31, 2023 , were $150.0 million , all of which was extraordinary
and approved by the Commissioner. As of March 31, 2023 , we had $2,202.0 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. 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$695.3 million and$31.5 million for the three months endedMarch 31, 2023 and 2022, 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 increase in cash provided by operating activities was primarily due to fluctuations in receivables and payables associated with the timing of settlements in 2023 as compared to 2022. 127
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Net cash used in investing activities was$1,104.1 million for the three months endedMarch 31, 2023 , compared to net cash provided by financing activities of$126.8 million for the three months endedMarch 31, 2022 . The increase in cash used in investing activities was due to net purchases of available-for sale securities in 2023 compared to net sales and maturities of available-for sale securities in 2022, which was partially offset by net sales of mortgage loans in 2023 as compared to net acquisitions and originations in 2022. The portfolio changes are due in part to the Reinsurance Transaction and the associated funds withheld portfolio activity. Net cash provided by financing activities was$201.7 million and$250.9 million for the three months endedMarch 31, 2023 and 2022, respectively. The decrease in cash provided by financing activities was due to mostly offsetting factors, including a decrease in banking operation deposits in 2023 as compared to an increase in 2022. The decrease was largely offset by increased long-term debt issuances in 2023 as compared to 2022 and decreased share repurchases in 2023 as compared to 2022 due to the accelerated share repurchase program in the prior year. 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 10, Debt" in our Annual Report on Form 10-K for the year endedDecember 31, 2022 . For additional long-term debt information, see Item 1. "Financial Statements, Notes to Unaudited Condensed Consolidated Financial Statements, Note 11, Long-Term Debt and Note 21, Subsequent Event." 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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