We remain neutral on Principal Financial Group (PFG), concerned as we are about higher delinquencies in its commercial mortgage portfolio as well as persistentlyhigh unemployment levels that restrict participation in the existing employee benefit plans.
Principal’s investment portfolio is highly exposed to commercial real estate. Commercial mortgage loans and commercial mortgage-backed securities (CMBS) represent over 20% of the company’s investment portfolio.
We expect the increasing delinquency rate and defaults under its commercial mortgage loan portfolio to keep the company’s financial strength and profitability under pressure.
The weak economy has restricted the plan sponsors to change their retirement plan providers. Also, the current unemployment is reducing the number of participants in existing employee benefit plans. Consequently, we do not expect any significant improvement in earnings in the near term.
However, Principal’s strong franchise within the pension sector, aided by its diversification in both products and geography, positions it to benefit from the gradual recovery of the credit market.
Principal Financial exited the medical insurance business (insured and self-insured). The medical business has been declining over some years. Following the divestiture, the company will now focus its capital and other resources on strategic opportunities in the growing asset accumulation and asset management businesses.
The company will release between $100 million and $120 million of capital over the next three years. The exit from the group medical insurance business will also result in a curtailment of pension and other post-retirement benefits of the affected employees, thereby resulting in a gain to the company.
Principal Financial’s third quarter earnings surpassed the Zacks Consensus Estimate primarily due to solid performance at Global Asset Management, International Asset Management and Accumulation segments. The company also expects full year 2010 Full Service Accumulation sales to be 15%–20% higher than the 2009 level, resulting in positive cash flows.
Lincoln National Corporation (LNC), which competes with Principal Financial, posted operating earnings way behind the Zacks Consensus. Results were largely affected by the company’s annual comprehensive review of actuarial assumptions and model work, which resulted in a net charge of $72 million or 22 cents per share. Also, the current low interest rate environment has added to the adverse results.
The Zacks Consensus Estimate for fourth-quarter 2010 is 66 cents per share. For full years 2010 and 2011, the Zacks Consensus Estimates are, respectively, $2.63 per share and $2.83 per share.
The quantitative Zacks #3 Rank (short-term Hold rating) indicates no clear directional pressure on the shares over the near term.
Based in Des Moines, Iowa, Principal Financial Group Inc. provides an expansive range of retirement savings, investment and insurance products and services through its various subsidiaries.
LINCOLN NATL-IN (LNC): Free Stock Analysis Report
PRINCIPAL FINL (PFG): Free Stock Analysis Report
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