Principal Financial CEO: Two-Thirds of Earnings Now Generated From Fee-Based Businesses
February 3, 2015 by Fran Matso Lysiak, senior associate editor, BestWeek: fran.lysiak@ambest.com
DES MOINES, Iowa – Two-thirds of Principal Financial Group Inc.’s earnings are now generated from its fee-based businesses, said its chief executive officer as the company’s fourth quarter and year-end 2014 profits increased.
Each of the company’s four operating businesses had record earnings for the year, Larry D. Zimpleman, chairman and CEO, said during the earnings call. The company’s ability to achieve these results while still facing continued macro-economic volatility reflects, in part, its diversified business model, he said.
Assets under management at Dec. 31, 2014, were $519.3 billion. “Two-thirds of our earnings are now generated from our fee-based businesses, compared to roughly half five years ago,” Zimpleman said.
Full-year net income jumped 26% to $1.1 billion, while operating revenues increased 10% to $10.5 billion.
The Iowa-based Principal is a global investment management company offering retirement services, asset-management and insurance. In the United States, the company is a top seller and administrator of employer-sponsored defined-contribution 401(k) retirement plans.
Fourth-quarter net income increased 16% to $270.4 million. Operating revenues rose to nearly $3 billion, a gain of 8%.
Steven D. Schwartz, an equity analyst with Raymond James & Associates, wrote in a research note that a lower-than-expected tax expense in the fourth quarter benefited Principal’s non-GAAP operating earnings per share by about 7 cents, relative to his estimate.
In the United States, improving macro-economic and employment conditions “are making it easier for individuals to take control of their financial futures,” Zimpleman said. As the employment picture improves, more individuals can save for retirement and participate in benefit programs that protect their income,” he said, adding Principal is seeing this trend in its full-service accumulation business where the number of people making a deferral increased 7% from a year ago.
In its retirement and investor services business, pension-full-service accumulation income increased 13.9% year-over-year, Schwartz wrote. “About half the outperformance relative to our projection came from a lower-than-expected tax rate.”
In October 2012, Principal agreed to buy AFP Cuprum S.A., a pension manager in Chile, for about $1.51 billion in a move that would provide it with a larger presence in fast-growing emerging markets for long-term savings and retirement. AFP Cuprum is a publicly traded pension company, and its products include mandatory employee-funded pension plans, voluntary pension products, and other long-term savings products.
In its international business, operating earnings rose $1.3 million. Earnings were reduced by the strengthening of the U.S. dollar, lower-than-expected returns on a required investment in Chile, and marketing costs. Quarterly earnings were helped an additional month of Cuprum’s results, Principal said.
John Nadel, an equity analyst with Sterne Agee, who also noted the company’s overall earnings benefited from the low tax rate, wrote in a research note that Principal International’s earnings “were ahead of us, the upside was driven entirely by a lower tax rate as pre-tax earnings fell modestly shy” and net revenue fell 4% year over year.
“We’ve never wavered from our core goal of helping individuals around the world achieve financial security,” Zimpleman also said. The company’s strategy was built around three core trends, “that today are more relevant than ever.”
The first is the aging populations around the world, Zimpleman said. The second is “financially constrained employers who want to provide affordable and attractive benefits to attract and retain global talent.” Finally, “financially constrained governments that can no longer support government-provided retirement programs, causing individuals to look to their own resources for financial security.”
In a statement, Zimpleman said with Principal’s recent announcement to acquire Axa’s Hong Kong pension business, “we continue to position ourselves as a global leader in investment management and retirement.”
Fourth-quarter net income also included $44.2 million after-tax loss on impairing Liongate, its hedge fund of funds boutique. This type of fund is an investment whose portfolio consists of shares in several hedge funds, according to BarclayHedge.
Principal Life Insurance Co. and Principal National Life Insurance Co. each currently has a Best’s Financial Strength Rating of A+ (Superior).
On the afternoon of Jan. 30, Principal Financial Group’s stock was trading at $46.93 a share, down 2.39% from the previous close.