Principal Financial Group’s (PFG) third quarter earnings of 74 cents a share were ahead of the Zacks Consensus Estimate of 64 cents. This excludes net realized investment gains and losses. The company had earned 96 cents in the year-ago quarter.
However, on a GAAP basis, the company reported net income of $184.7 million or 57 cents per share, compared with $90.1 million or 35 cents in the prior-year period.
Results were driven by the sequential improvement in the U.S. as well as global equity markets during the quarter, combined with cost cuts. Principal posted a sequential improvement in earnings. Assets under management (AUM) increased 9% sequentially while operating earnings were up 19%, driven by improved results at the company’s three asset management and asset accumulation segments.
However, operating earnings were down from the prior-year quarter due to lower average assets under management than a year ago, higher costs for employee pension and other post-retirement benefits, lower investment income and unfavorable foreign currency movements. These negatives were partially offset by the positive impact of the cost containment measures. Also, the latest reported quarter had more shares outstanding due to the company’s common stock offering in May 2009.
Principal’s operating revenues were up 0.9% sequentially but down 14.3% from the year-ago quarter. The quarterly results included net realized capital losses of $66.6 million, significantly below the $230 million in net realized capital losses experienced by the company in the prior-year period.
However, the positive factors that inspire our confidence in the stock are the cost control initiatives which reduced the fixed component of compensation and other expenses by 16% in the first nine months of 2009 compared to the same period a year ago. The company has also achieved strong sales in the quarter, though the sales environment was difficult.
Principal’s three major retirement and investment products generated $2.7 billion of sales on a combined basis in the quarter, with $0.5 billion of sales for full service accumulation, $1.9 billion for Principal Funds and $0.3 billion for individual annuities.
The book value came in at $21.85 per share, up from $16.19 at the Jun 30, 2009 and $19.56 at Sep 30, 2008. Operating book value was $26.34 per share at Sep 30, 2009 compared to $25.75 at Jun 30, 2009 and $26.84 at Sep 30, 2009. Results reflected capital infusion from the stock offering combined with improvements in the credit market. The narrowing of credit spreads has driven down net unrealized investment losses by more than $6 billion.
Segment Performance
Operating earnings of the U.S. Asset Accumulation segment were $154.6 million, up 12.5% sequentially and 13.3% year-over-year. Segment’s AUM was $158.8 billion, up 9.3% sequentially but down 1.2% year-over-year.
Operating earnings of the Global Asset Management segment were $10.5 million, up from $8.2 million in the prior quarter but significantly down from $23.5 million in the year-ago quarter. Segment’s AUM was $73.2 billion, up 8.8% sequentially but down 11.7% year-over-year.
International Asset Management and Accumulation segment’s operating earnings were $33.1 million, up from $29.3 million in the prior quarter but down from $44.4 million in the year-ago quarter. The segment’s AUM was $31.4 billion, up 9.4% sequentially and 9.8% year-over-year.
Operating earnings of Life and Health Insurance segment were $68.2 million. Results were up 18.2% sequentially but down 7.7% year-over-year. The number of participants in existing plans declined in the quarter.
The weak economy has prevented the plan sponsors to change their retirement plan providers. Also, the rising unemployment is reducing the number of participants in existing employee benefit plans. However, the improvement in the stock market has provided some relief. We believe that the company’s strong franchise within the pension sector, aided by its diversification both in terms of products and geography, position it well to benefit from improvements in credit market and economy as a whole, though such recovery will be prolonged.
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