Principal Financial Group Third Quarter 2018 Earnings Results - - PowerPoint PPT Presentation

Principal Financial Group

Third Quarter 2018 Earnings Results October 25, 2018

A non-GAAP financial measure is a numerical measure of performance, financial position, or cash flows that includes adjustments from a comparable financial measure presented in accordance with U.S. GAAP. The company uses a number of non-GAAP financial measures management believes are useful to investors because they illustrate the performance of the company’s normal, ongoing

• perations which is important in understanding and evaluating the company’s financial

condition and results of operations. While such measures are also consistent with measures utilized by investors to evaluate performance, they are not, however, a substitute for U.S. GAAP financial measures. Therefore, the company has provided reconciliations of the non-GAAP financial measures to the most directly comparable U.S. GAAP financial measure within the

• slides. The company adjusts U.S. GAAP financial measures for items not directly related to
• ngoing operations. However, it is possible these adjusting items have occurred in the past and

could recur in future reporting periods. Management also uses non-GAAP financial measures for goal setting, as a basis for determining employee and senior management awards and compensation, and evaluating performance on a basis comparable to that used by investors and securities analysts. The company also uses a variety of other operational measures that do not have U.S. GAAP counterparts, and therefore do not fit the definition of non-GAAP financial measures. Assets under management is an example of an operational measure that is not considered a non- GAAP financial measure.

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Use of non-GAAP financial measures

Posted on PFG website: 10/25/2018

Certain statements made by the company which are not historical facts may be considered forward-looking statements, including, without limitation, statements as to non-GAAP operating earnings, net income attributable to PFG, net cash flows, realized and unrealized gains and losses, capital and liquidity positions, sales and earnings trends, and management’s beliefs, expectations, goals and opinions. The company does not undertake to update these statements, which are based on a number of assumptions concerning future conditions that may ultimately prove to be inaccurate. Future events and their effects on the company may not be those anticipated, and actual results may differ materially from the results anticipated in these forward-looking statements. The risks, uncertainties and factors that could cause or contribute to such material differences are discussed in the company’s annual report on Form 10-K for the year ended Dec. 31, 2017, and in the company’s quarterly report on Form 10-Q for the quarter ended Jun. 30, 2018, filed by the company with the U.S. Securities and Exchange Commission, as updated or supplemented from time to time in subsequent filings. These risks and uncertainties include, without limitation: adverse capital and credit market conditions may significantly affect the company’s ability to meet liquidity needs, access to capital and cost of capital; conditions in the global capital markets and the economy generally; volatility or declines in the equity, bond or real estate markets; changes in interest rates or credit spreads or a sustained low interest rate environment; the company’s investment portfolio is subject to several risks that may diminish the value of its invested assets and the investment returns credited to customers; the company’s valuation of investments and the determination of the amount of allowances and impairments taken on such investments may include methodologies, estimations and assumptions that are subject to differing interpretations; any impairments of or valuation allowances against the company’s deferred tax assets; the company’s actual experience could differ significantly from its pricing and reserving assumptions; the pattern of amortizing the company’s DAC and other actuarial balances on its universal life-type insurance contracts, participating life insurance policies and certain investment contracts may change; changes in laws, regulations or accounting standards; the company may not be able to protect its intellectual property and may be subject to infringement claims; the company’s ability to pay stockholder dividends and meet its obligations may be constrained by the limitations on dividends Iowa insurance laws impose on Principal Life; litigation and regulatory investigations; from time to time the company may become subject to tax audits, tax litigation or similar proceedings, and as a result it may owe additional taxes, interest and penalties in amounts that may be material; applicable laws and the company’s certificate of incorporation and by-laws may discourage takeovers and business combinations that some stockholders might consider in their best interests; competition, including from companies that may have greater financial resources, broader arrays of products, higher ratings and stronger financial performance; a downgrade in the company’s financial strength or credit ratings; client terminations, withdrawals or changes in investor preferences; inability to attract and retain qualified employees and sales representatives and develop new distribution sources; an interruption in telecommunication, information technology or other systems, or a failure to maintain the confidentiality, integrity or availability of data residing on such systems; international business risks; fluctuations in foreign currency exchange rates; the company may need to fund deficiencies in its “Closed Block” assets; the company’s reinsurers could default on their obligations or increase their rates; risks arising from acquisitions of businesses; and loss of key vendor relationships or failure of a vendor to protect information of our customers or employees.

Forward looking statements

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Posted on PFG website: 10/25/2018

• Quarterly non-GAAP operating earnings1of $481M and quarterly non-GAAP operating

earnings per diluted share1 of $1.67

• AUM of $668B; total company net cash flows of $0.2B
• Significant variances in non-GAAP operating earnings for 3Q18 included:
• Annual actuarial assumption review impacting RIS, USIS, and PI
• Accelerated real estate performance fee partially offset by elevated expenses in PGI
• Higher than expected variable investment income in RIS and SBD
• Continued to generate and deploy capital to create long-term shareholder value
• Deployed $216M of capital in 3Q18 through $151M of common stock dividends and

$65M of share repurchases

• Announced 4Q18 common stock dividend of $0.54 per share, a 10% increase over

4Q17 and our 11th consecutive quarterly dividend increase

• Expect to be at the high end of the $900M -$1.3B guided capital deployment range

for 2018

Diversified business model benefited results, muted by accelerated digital investment and FX headwinds

3Q 2018 earnings call key themes

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1This is a non-GAAP financial measure; see reconciliation in appendix.

Posted on PFG website: 10/25/2018

Percentage of Principal actively managed mutual funds, exchange traded funds (ETFs), insurance separate accounts, and collective investment trusts (CITs)1 in the top two Morningstar quartiles

69% 71% 88% 83% 70% 86% 1-Year 3-Year 5-Year

• Sep. 30, 2017
• Jun. 30, 2018
• Sep. 30, 2018

1Excludes Money Market, Stable Value, Liability Driven Investment (Short, Intermediate and Extended Duration),

Hedge Fund Separate Account, & US Property Separate Account.

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Strong investment performance continues

74%

• Sep. 30, 2018

68%

• Sep. 30, 2018

89%

• Sep. 30, 2018

Posted on PFG website: 10/25/2018

Posted on PFG website: 10/25/2018

Non-GAAP operating earnings excluding impacts from significant variances

3Q18 vs 3Q17

(in millions, except per share data)

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$ change % change Segment pre-tax operating earnings RIS-Fee 155.4 $ 7.7 $

• $

7.0 $ 140.7 $ 108.0 $ (41.0) $ 149.0 $ (8.3) $

• 6%

RIS-Spread 104.4 11.5

• 10.0

82.9 102.1 19.2 82.9

• 0%

Retirement and Income Solutions 259.8 19.2

• 17.0

223.6 210.1 (21.8) 231.9 (8.3)

• 4%

Principal Global Investors 215.4

• 85.6
• 129.8

130.2

• 130.2

(0.4) 0% Principal International 32.4 (53.5)

• 85.9

72.4 (11.8) 84.2 1.7 2% Specialty Benefits 83.7 6.2

• 6.0

71.5 83.8 14.2 69.6 1.9 3% Individual Life 34.5 (15.5)

• 50.0

(0.6) (47.0) 46.4 3.6 8% U.S. Insurance Solutions 118.2 (9.3)

• 6.0

121.5 83.2 (32.8) 116.0 5.5 5% Corporate (32.4)

• (32.4)

(43.0)

• (43.0)

10.6 25% Non-GAAP pre-tax operating earnings 593.4 (43.6) 85.6 23.0 528.4 452.9 (66.4) 519.3 9.1 2% Income taxes 112.2 (22.1) 23.1 4.8 106.4 79.2 (23.5) 102.7 3.7 4% Non-GAAP operating earnings (losses) 481.2 $ (21.5) $ 62.5 $ 18.2 $ 422.0 $ 373.7 $ (42.9) $ 416.6 $ 5.4 $ 1% Net realized capital gains (losses) (24.9) 53.6

• (78.5)

436.5 16.3 420.2 (498.7)

• 119%

Net income (loss) attributable to Principal Financial Group, Inc. 456.3 $ 32.1 $ 62.5 $ 18.2 $ 343.5 $ 810.2 $ (26.6) $ 836.8 $ (493.3) $

• 59%

Weighted average diluted shares outstanding 287.8 287.8 293.1 293.1 (5.3)

• 2%

Non-GAAP operating earnings per share (EPS) $1.67 ($0.08) $0.22 $0.06 $1.47 $1.28 ($0.14) $1.42 $0.05 4% 3Q17 excluding significant variances 3Q17 Actuarial assumption review 3Q18 vs 3Q17 excluding significant variances 3Q18 Actuarial assumption review Variable investment income Accelerated performance fee & elevated expenses in PGI 3Q18 as reported 3Q18 excluding significant variances Impacts of 3Q18 significant variances 3Q17 as reported

Posted on PFG website: 10/25/2018

Impacts of 3Q18 significant variances

Income statement line item impacts of the annual actuarial assumption review, higher variable investment income, and PGI real estate performance fee and elevated expenses

($ in millions)

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Line Item RIS-Fee RIS-Spread Principal International Specialty Benefits Individual Life RIS-Fee RIS-Spread Specialty Benefits Premiums and other considerations

• $
• $
• $

(1.7) $

• $

(1.7) $

• $
• $
• $
• $
• $

(1.7) $ Fees and other revenues

• (2.3)

(2.3) 253.1

• 250.8

Net investment income

• (53.5)
• (53.5)
• 7.0

10.0 6.0 23.0 (30.5) Total operating revenues

• (53.5)

(1.7) (2.3) (57.5) 253.1 7.0 10.0 6.0 23.0 218.6 Benefits, claims and settlement expenses 3.0 4.3

• (10.0)

20.7 18.0

• 18.0

Dividends to policyholders

• 1.8

1.8

• 1.8

Commissions

• Capitalization of DAC
• Amortization of DAC

(10.7) (15.8)

• (9.3)

(35.8)

• (35.8)

Depreciation and amortization

• Interest expense on corporate debt
• Compensation and other
• 2.1
• 2.1

167.5

• 169.6

Total expenses (7.7) (11.5)

• (7.9)

13.2 (13.9) 167.5

• 153.6

Non-GAAP pre-tax operating earnings (losses) 7.7 $ 11.5 $ (53.5) $ 6.2 $ (15.5) $ (43.6) $ 85.6 $ 7.0 $ 10.0 $ 6.0 $ 23.0 $ 65.0 $ Higher variable investment income Subtotal variable investment income Total Annual actuarial assumption review Subtotal actuarial assumption review Accelerated performance fee & elevated expenses in PGI

$372 $416

3Q17 reported 3Q18 reported

Highlights

• Pre-tax operating earnings excluding significant variances1 decreased

as growth in net revenue was more than offset by higher operating expenses, including accelerated digital investment

• Quarterly net cash flows of $0.9B driven by strong sales of $2.9B,

favorable retention, and recurring deposit growth

• Quarterly recurring deposits grew nearly 9% driven by underlying

employment growth, increased deferral rates, and double digit growth in employer matches 8

1 Higher variable investment income and impact of actuarial assumption review in 3Q18 and

impact of actuarial assumption review in 3Q17.

2 Excludes impacts of 3Q18 and 3Q17 actuarial assumption reviews.

All financial information rounded to the nearest million. Change and growth rates calculated using data from financial supplement.

Retirement and Income Solutions – Fee (RIS – Fee)

Net revenue ($M)

Quarterly basis

increase in net revenue pre-tax return on net revenue

Trailing twelve month basis2

2% 33%

+12%

Reported pre-tax operating earnings ($M) Significant variances1 ($M) Pre-tax operating earnings ex significant variances ($M) 3Q18 $155

• $15

$141 3Q17 $108 +$41 $149 Change +$47 (+44%)

• $8 (-6%)

Posted on PFG website: 10/25/2018

+1% ex significant variances1

$131 $142

3Q17 reported 3Q18 reported

Retirement and Income Solutions - Spread (RIS – Spread)

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1 Higher variable investment income and impact of actuarial assumption review in 3Q18 and

impact of actuarial assumption review in 3Q17.

2 Excludes impacts of 3Q18 and 3Q17 actuarial assumption reviews.

All financial information rounded to the nearest million. Change and growth rates calculated using data from financial supplement.

Highlights

• Pre-tax operating earnings excluding significant variances1 was flat

from year ago quarter as growth in net revenue was offset by higher

• perating expenses
• Sales of $2.7B, including $1.2B of pension risk transfer and $1.0B of

fixed annuity sales

• Continue to be opportunistic and remain disciplined in pricing

Net revenue ($M)

Quarterly basis

decrease in net revenue pre-tax return on net revenue

Trailing twelve month basis2

2% 65%

+8%

Reported pre-tax operating earnings ($M) Significant variances1 ($M) Pre-tax operating earnings ex significant variances ($M) 3Q18 $104

• $22

$83 3Q17 $102

• $19

$83 Change +$2 (+2%) $0 (0%)

Posted on PFG website: 10/25/2018

+6% ex significant variances1

$328 $591

3Q17 reported 3Q18 reported

Principal Global Investors

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1Accelerated real estate performance fee and elevated expenses. 2This is a non-GAAP financial measure; see reconciliation in appendix. 3Excludes accelerated real estate performance fee.

All financial information rounded to the nearest million. Change and growth rates calculated using data from financial supplement.

Highlights

• Pre-tax operating earnings excluding significant variances1 was flat

from year ago quarter as growth in operating revenues was largely

• ffset by higher operating expenses, including our recent acquisition
• f Principal Real Estate Europe and accelerated digital investment
• AUM of $427B, including PGI sourced AUM of $208B, increased 1%

compared to the prior year quarter, despite $9B of operations disposed due to the real estate realignment

• A realignment of a real estate investment team resulted in an

accelerated performance fee that generated a net $101M benefit to pre-tax operating earnings; this was partially offset by elevated expenses of $15M

Operating revenues less pass-through commissions2 ($M)

Quarterly basis increase in

• perating revenues less

pass-through commissions pre-tax return on

• perating revenues less

pass-through commissions Trailing twelve month basis3

4% 37%

+81%

Posted on PFG website: 10/25/2018

Reported pre-tax operating earnings ($M) Significant variances1 ($M) Pre-tax operating earnings ex significant variances ($M) 3Q18 $215

• $86

$130 3Q17 $130 $130 Change +$85 (+65%) $0 (0%)

+3% ex significant variances1

Highlights

• Pre-tax operating earnings excluding significant variances1 increased

slightly from the prior year quarter, as underlying growth in the business was largely offset by foreign currency headwinds of $10M

• Reported AUM of $157B increased 10% compared to prior year

quarter on a constant currency basis2, not including China AUM of $149B

• Net cash flows of $0.7B for the quarter, marking the 40th consecutive

quarter of positive net cash flows driven by strong net cash flows in Asia

Principal International

1Impacts of 3Q18 and 3Q17 actuarial assumption reviews. 2Prior period results translated using foreign exchange rates from the current period. 3Combined basis includes all Principal International companies at 100%. 4This is a non-GAAP financial measure; see reconciliation in appendix. 5Excludes impacts of 3Q18 and 3Q17 actuarial assumption reviews and the impact of actual vs.

expected encaje. All financial information rounded to the nearest million. Change and growth rates calculated using data from financial supplement.

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Combined3 net revenue (at PFG share)4 ($M)

Quarterly basis

3% 35% 13% 36%

increase in net revenue pre-tax return on net revenue

Trailing twelve month combined basis5 (at PFG share) Reported pre-tax operating earnings ($M) Significant variances1 ($M) Pre-tax operating earnings ex significant variances ($M) 3Q18 $32 +$54 $86 3Q17 $72 +$12 $84 Change

• $40 (-55%)

+$2 (+2%)

+2%

Posted on PFG website: 10/25/2018

+6% ex significant variances1

$236 $241

3Q17 reported 3Q18 reported

$514 $548

3Q17 reported 3Q18 reported

1Higher variable investment income and impact of actuarial assumption review in 3Q18

and impact of actuarial assumption review in 3Q17.

2Excludes impacts of 3Q18 and 3Q17 actuarial assumption reviews.

All financial information rounded to the nearest million. Change and growth rates calculated using data from financial supplement.

Specialty Benefits

Highlights

• Pre-tax operating earnings excluding significant variances1 increased

primarily due to growth in the business and favorable claims experience partially offset by higher expenses

• Strong premium and fees growth of 7% over the prior year quarter

reflects continued strong retention, sales, and employment growth

• Loss ratio at the low end of the guided range2 due to continued

favorable claims experience 12 Quarterly basis

increase in premium and fees pre-tax return on premium and fees incurred loss ratio

Trailing twelve month basis2

8% 13%

Premium and fees ($M)

62%

+7%

Reported pre-tax operating earnings ($M) Significant variances1 ($M) Pre-tax operating earnings ex significant variances ($M) 3Q18 $84

• $12

$72 3Q17 $84

• $14

$70 Change $0 (0%) +$2 (+3%)

Posted on PFG website: 10/25/2018

$274 $269

3Q17 reported 3Q18 reported

1Impacts of 3Q18 and 3Q17 actuarial assumption reviews. 2Excludes impacts of 3Q18 and 3Q17 actuarial assumption reviews.

All financial information rounded to the nearest million. Change and growth rates calculated using data from financial supplement.

Individual Life

Highlights

• Pre-tax operating earnings excluding significant variances1 increased

primarily due to favorable claims

• Premium and fees grew 5% over the year ago quarter excluding

significant variances1

• Business market represented 58% of sales in the quarter

13 Quarterly basis

increase in premium and fees pre-tax return on premium and fees

Trailing twelve month basis2

4% 17%

Premium and fees ($M)

• 2%

Reported pre-tax operating earnings ($M) Significant variances1 ($M) Pre-tax operating earnings ex significant variances ($M) 3Q18 $35 +$16 $50 3Q17 $(1) +$47 $46 Change +$36 +$4 (+8%)

Posted on PFG website: 10/25/2018

+5% ex significant variances1

Expect to deploy at the high end of our guided range of $900M to $1.3B of capital in 2018 11th consecutive increase in quarterly dividend

• Announced 4Q18 common stock dividend of $0.54 per share, or $2.10 for 4Q18 TTM;

a 12% increase compared to 4Q17 TTM

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Capital deployment

$1.0B

total capital deployed YTD 2018

Common stock dividends paid

• $151M -3Q18 ($0.53 per share)
• $149M -2Q18 ($0.52 per share)
• $147M -1Q18 ($0.51 per share)

Share repurchases

• $65M -3Q18
• $196M -2Q18
• $179M -1Q18

$440M $447M $130M

Committed M&A and increased ownership in a PGI boutique

• $46M -2Q18
• $84M -1Q18

Posted on PFG website: 10/25/2018

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(in millions)

Three Months Ended

Principal Global Investors Operating Revenues Less Pass-Through Commissions 9/30/18 9/30/17 Principal Global Investors operating revenues $632.8 $367.5 Principal Global Investors commission expense (41.6) (40.0) Principal Global Investors operating revenues less pass-through commissions $591.2 $327.5

Appendix

Non-GAAP financial measure reconciliations

(in millions)

Three Months Ended

Principal International Combined Net Revenue (at PFG Share) 9/30/18 9/30/17 Principal International pre-tax operating earnings $32.4 $72.4 Principal International combined operating expenses

• ther than pass-through commissions (at PFG share)

208.1 163.6 Principal International combined net revenue (at PFG share) $240.5 $236.0

(in millions)

Three Months Ended

Non-GAAP Operating Earnings (Losses) 9/30/18 9/30/17 Net income attributable to PFG $456.3 $810.2 Net realized capital (gains) losses, as adjusted 24.9 (436.5) Non-GAAP operating earnings $481.2 $373.7

Per diluted share

Three Months Ended

Diluted Earnings Per Common Share 9/30/18 9/30/17 Net income $1.59 $2.76 Net realized capital (gains) losses, as adjusted 0.08 (1.48) Non-GAAP operating earnings $1.67 $1.28 Weighted-average diluted common shares

• utstanding (in millions)

287.8 293.1

Posted on PFG website: 10/25/2018

Appendix

Non-GAAP financial measure reconciliations Definitions

Variable investment income includes certain types of investment returns such as prepayment fees and income (loss) from certain elements of our alternative asset classes, including results of value-add real estate sales activity.

Posted on PFG website: 10/25/2018

(in millions)

Three Months Ended

Income Taxes 9/30/18 9/30/17 Total GAAP income taxes $109.1 $344.6 Net realized capital gains (losses) tax adjustments 4.7 (284.3) Income taxes related to equity method investments and noncontrolling interest (1.6) 18.9 Income taxes $112.2 $79.2

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