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Principal Financial Group (PFG) |


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WIKI ANALYSISThe Principal Financial Group (PFG)[1] is a financial services firm that manages 401(k) plans and pensions for businesses and their employees. The company also provides group life and health insurance. PFG generates revenue by charging asset management fees on the assets in its managed pensions and 401(k) plans, in addition to charging insurance premiums for its life and health insurance plans. The company's main focus is the small to medium business market.
Business Overview
Business & Financial Metrics[2]In 2009, PFG generated a net income of $645.7 million on $3.75 billion in total revenues. This represents a 38.6% increase in net income with a 10.9% decrease in total revenues from 2008, when the company earned $465.8 million on revenues of $4.21 billion.
Business Segments[3]PFG is divided into five business segments.
Trends and Forces
Aging Baby Boomers Boost Demand for Retirement Services and InsuranceThe baby boomers are an affluent demographic, with the highest median household income of any age range in the United States,[7] $61,000 compared to a national median household income of $44,000. As these consumers age and approach retirement, the demand for retirement services and insurance products, especially life and health insurance, rise. This benefits PFG's Retirement and Investor Services division, which provides a variety of savings and investment vehicles to individuals, as well as Principal's insurance division. This trend is evidenced by PFG's 7.5-8% revenue growth over the past several years, which has been relatively evenly distributed between the company's asset accumulation and insurance divisions.[8]
Shift Towards Defined Contribution Plans Favors PFGIn a defined contribution (DC) plan, an employer is obligated to make a predetermined payment, usually in the form of a donation to match an employee's contribution, to the plan every year. The cost of a DC plan is therefore pre-specified every year, and will not unexpectedly increase. By contrast, an employer with a defined benefit (DB) plan is obligated to provide its retired employees a specific benefit every year, which means that costs can escalate unexpectedly if benefits suddenly become more expensive or as more members retire. As a result, DC plans have become more widespread all over the world in recent years, and are now the dominant form of plan in the private sector in many countries. For example, the number of DB plans in the US has been steadily declining, as more and more employers see the large pension contributions as a large expense that they can avoid by disbanding the plan and instead offering a defined contribution plan.
Health Consciousness Drives Employer Demand for Health Consulting ServicesThe United States has seen a growing trend towards greater general consciousness of health and wellness. This trend can be observed through healthier food choices, more widespread fitness club membership, and a reduction in unhealthy habits such as smoking. As this wellness trend continues, Principal could see an increase in demand for its wellness products, as more and more employers implement corporate health and wellness programs to attract qualified employees.
PFG's Exposure to Commercial Mortgages still a FactorSubprime lending refers to the practice of extending credit or loans to borrowers to who fail qualify for prime or market rates due to their less than optimal credit scores. For the past decade, the interest rates associated with subprime mortgages have been about 2% higher than those associated with prime loans; the rationale is that borrowers with lower credit scores carry a higher risk of default and must therefore pay a considerable risk premium. Subprime borrowers can be extremely sensitive to interest rates. As rates rise, these borrowers, many of whom have adjustable-rate mortgages, find themselves unable to meet their debt obligations, leading to higher risks of default. This causes lenders, fearful of losing their capital, to be more wary of originating new loans, even to non-residential (i.e. business customers) with good credit, which means that borrowers may have a more difficult time refinancing their debt.
Competitors Principal's main competitors are:
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