Principal Financial Lags - Analyst Blog

Principal Financial Group Inc. (PFG) reported second quarter operating earnings of 63 cents per share, lagging the Zacks Consensus Estimate by 3 cents. This also fell short of operating earnings of 69 cents reported in the prior-year quarter. Operating earnings were $203.5 million compared with $200.5 million in the corresponding quarter last year.
 
The decrease in earnings was due to weak performance at U.S. Asset Accumulation and Life & Health Insurance segments.
 
Including net realized capital losses of $39.5 million or 21 cents per share, net income available to common stockholders was $134 million or 42 cents compared with $150.3 million or 52 cents a year ago. The prior-year quarter included net realized capital losses of $50.2 million or 17 cents.
 
Principal reported a 7.4% decline in premium to $868.2 million in the quarter. Net investment income, however, improved 2% year over year to $877 million. Total revenues increased 3.5% year over year to $2.2 billion in the quarter under review.
 
Operating expenses increased 21.5% year over year to $683.8 million.
 
Assets under management (AUM) increased 10% year over year to $284.7 billion as of June 30, 2010, from $257.7 billion as of June 30, 2009. Improved results at three asset management and asset accumulation segments drove the increase in AUM.
 
Book value per share as of June 30, 2010, was $27.32, up 6.1% from $23.05 as of December 31, 2009.
 
Segment Update
 
U.S. Asset Accumulation: Revenue was $1,021.3 million, up from $991.3 million in the prior-year period. The increase was driven by higher revenues from “accumulation businesses”, partially offset by a decline in revenues from “investment only business”.
 
Operating earnings declined to $129 million from $137.4 million in the year-ago period.  The decline was due to lower earnings from the individual annuities and investment only businesses. However, full service accumulation and mutual funds businesses reported higher earnings.
 
Global Asset Management: Revenues were $114.3 million, higher than $103.3 million in the prior-year period, primarily due to higher management fees.
 
Operating earnings were $12.3 million, higher than $8.2 million in the prior-year quarter, largely driven by an increase in average assets under management.
 
International Asset Management and Accumulation: Revenues were $188.2 million for the second quarter, up from $161.7 million in the prior-year quarter. Increase in higher net investment income from inflation-linked investments in Chile, favorable foreign currency translation, and higher fees on higher assets under management spurred the increase.
 
Operating earnings were $35 million, up from $29.3 million in second-quarter 2009, due to increased higher assets under management and an improvement in economic condition.
 
Life and Health Insurance: A decline in Health division premiums resulted in lower revenues in the quarter. Revenues were $1 million, down from $1.1 billion in the prior-year quarter.
 
Operating earnings were $54.6 million, down from $57.7 million in the prior-year quarter. Lower earnings at Health as well as Individual Life, partially offset by the increase in Specialty Benefits’ earnings, led to the overall decline in operating earnings at the segment.
 
Overall, we expect strong performance across the segments will help the company to continue to post solid results and capitalize on the improving credit and equity market conditions going forward.
 
We maintain our “Neutral” recommendation. The quantitative Zacks #3 Rank (Hold) for the company indicates no clear directional pressure on the shares over the near term.
 
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