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WIKI ANALYSIS
The 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. PFG generated $9.8 billion in revenue in 2006 and serves more than 18 million customers worldwide. [2]. The company's main focus is the small to medium business market.
By selling its mortgage business in 2005, the company was able to significantly reduce its exposure to the U.S. housing market and the subprime lending crisis. With over $10B of commercial mortgage loans remaining on its balance sheets, however, many of which have balloon payments, the company faces significant risk from worsening credit and economic conditions.
Business Overview
Today, Principal Financial Group is composed of 7 business units, which fall into two categories: products for businesses and products for individual clients.
For its corporate and institutional clients, PFG offers:
- Retirement & Investor Services - PFG provides both Defined Benefit (DB) and Defined Contribution (DC) plans to employers, as well as 401(k) plans.
- Group Life and Health Insurance - PFG offers corporations group life and health insurance plans.
- Corporate-level Wellness Programs - Principal works with employers to help their employees stay healthy and fit.
- Global Asset Management and Real Estate - PGI manages about $160 billion in assets.
For individuals, Principal provides:
- Retirement & Investor Services - PFG offers individual retirement accounts (IRAs) and investment vehicles such as mutual funds
- Estate Planning - Principal works with individual clients to form personalized plans to preserve his or her wealth. These services include estate planning and tailoring an insurance plan to fit the specific needs of the client and heirs.
- Specialty Benefits and Wellness Services - The company advises individuals about the best ways to understand and manage their health, and the best ways to prevent and treat illnesses.
- Banking Services - PFG offers a range of general banking products, including personal checking, savings, and money market accounts.
Principal Financial Group has seen relatively steady revenue and income growth over the past five years. There is only one significant drop in net income, between 2002 and 2003, which is a result of atypically poor reported performance in 2002. In the fiscal year ending December 31, 2002, PFG reported non-recurring losses of $363 million, mostly from a loss on discontinued operations of BT Financial Group and a cumulative effect of accounting changes. Since that correction, PFG's growth has been stable.
| 2002 | 2003 | 2004 | 2005 | 2006 | ||
|---|---|---|---|---|---|---|
| Total Revenue ($MM) | 7,627 | 7,987 | 8,321 | 9,042 | 9,871 | |
| Operating Income ($MM) | 142.3 | 746.3 | 825.6 | 901.3 | 1,031 | |
PFG sold its residential mortgage business, Principal Residential Mortgage, to Citigroup in 2005, in order to focus on its insurance and asset management operations and reduce the risk to the company's earnings.
Trends and Forces
Aging Baby Boomers Boost Demand for Retirement Services and Insurance
The baby boomers are an affluent demographic, with the highest median household income of any age range in the United States,[6] $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.[7]
Shift Towards Defined Contribution Plans Favors PFG
In 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.
Examples of defined contribution plans in the USA include Individual Retirement Accounts (IRAs) and 401(k) plans. As the nation's leader in providing 401(k) plans and as a provider of IRAs, Principal is well positioned to take advantage of this trend toward DC plans. This trend is exemplified by the decline in the number of DB plans that PFG provides, from 2,808 in 2005 to 2,785 in 2006, a decline of 0.82%. By contrast, PFG provided 31,756 DC plans in 2005, compared to 32,139 in 2006, an increase of 1.21%.
Health Consciousness Drives Employer Demand for Health Consulting Services
The 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 Factor
Subprime 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.
Although Principal sold its mortgage division to Citigroup in 2005, PFG still owned about $10 billion in commercial mortgage loans as of December 31, 2006.[8]. Many of these loans also come with balloon payments. The current credit environment may put some of these loans at higher risk of default, which could force PFG to sustain losses from its mortgage holdings as customers who cannot refinance their debt are forced to default on their loans.
Competitors
Principal's main competitors are:
- Ameriprise Financial, Inc. (AMP): Ameriprise focuses on providing advising and asset management services to individual clients, although it also serves institutional and corporate clients. AMP's Asset Accumulation and Income division offers a mix of mutual funds and annuities to individuals, as well as 401(k) plans to institutional clients. AMP also has a Protection division, which provides a variety of life and disability insurance services. Although Principal is currently larger than Ameriprise, AMP has been growing more rapidly in the past few years, and may soon overtake PFG.
- AXA (AXA): AXA sells life insurance and qualified retirement plans to its customers. The company also advises and educates its clients about financial planning and estate planning. AXA operates other segments that provide property and casualty insurance to individuals and corporations, and also international insurance.
- Manulife Financial (MFC): MFC offers a range of global insurance products, including individual life and group life and health insurance. Manulife Financial offers wealth management products, such as pension funds, mutual funds, and annuities. MFC also provides reinsurance services to its institutional clients.
- Nationwide Financial Services (NFS): NFS is a mutual life insurance company that also provides various group retirement investment plans, including 401(k), 403(b), and 457 plans. NFS also offers individual investment advisory services and a variety of annuity products.
| Company | 2005 Revenue ($MM) | 2005 Net Income ($MM) | 2006 Revenue ($MM) | 2006 Net Income ($MM) |
| Principal Financial Group (PFG)[9] | 9,042 | 901.3 | 9,871 | 1,031 |
| Ameriprise Financial, Inc. (AMP)[10] | 7,484 | 574.0 | 8,140 | 631.0 |
| AXA (AXA)[11] | 103,923 | 7,586 | 114,224 | 6,279 |
| Manulife Financial (MFC)[12] | 34,323 | 3,444 | 35,904 | 4,153 |
| Nationwide Financial Services (NFS)[13] | 4,308 | 598.7 | 4,416 | 713.8 |
Principal Financial Group has significantly lower assets under management than either of its main competitors in asset management. This reflects the fact that Principal, as a diversified financial services company, generates almost half of its revenue from its insurance division, whereas many of its competitors earn most of their revenue from asset management.
| Company | 2006 Assets Under Management ($B) | 2006 Return on Assets (%, ttm as of 9/30/07) |
| Principal Financial Group (PFG) [14] | 256.9 | 0.60 |
| Ameriprise Financial, Inc. (AMP)[15] | 466 | 0.83 |
| AXA (AXA)[16] | 1,037.5 | 0.86 |
| Manulife Financial (MFC)[17] | 195.5 | 2.40 |
| Nationwide Financial Services (NFS)[18] | 119.4 | 0.52 |
References
- ↑ PFG's company website
- ↑ As of June 30, 2007. Data taken from Principal Financial Group's Company Profile, June 2007
- ↑ Data from PFG's 2006 Annual Report, page 21.
- ↑ Data from PFG's 2006 10-k statement, page 5.
- ↑ Data from PFG's 2004 and 2006 Annual Reports, pages 21 and 20, respectively.
- ↑ From the U.S. Census Bureau and Department of Labor Statistics.
- ↑ From PFG's 2006 10-k statement, page 5.
- ↑ Data from PFG's 2006 10-k statement, page 34.
- ↑ Data from PFG's 2005 and 2006 10-k statements, pages 27 and 30, respectively.
- ↑ Data from AMP's 2006 Annual Report, page 6.
- ↑ Data from AXA's 2007 20-F Filing (AXA is headquartered in Paris, France), page 5. Figures converted from euros to USD using the exchange rate approximation of 1 euro = 1.45 USD.
- ↑ Data from MFC's 2006 Annual Report, page 4. Figures converted from Canadian dollars to USD using the exchange rate approximation of 1 Canadian dollar = 1.05 USD.
- ↑ Data from NFS's 2006 10-k Report, page 23.
- ↑ Assets under management data from PFG's 2006 Annual Report, page 20. ROA data from Yahoo!Finance.
- ↑ Assets under management data from AMP's 2006 Annual Report, page 6. ROA data from Yahoo!Finance.
- ↑ Assets under management data from AXA's 2007 20-F Filing, page 6. Figures converted from euros to USD using the exchange rate approximation of 1 euro = 1.45 USD. ROA data from Yahoo!Finance
- ↑ Data from MFC's 2006 Annual Report, page 42. Figures converted from Canadian dollars to USD using the exchange rate approximation of 1 Canadian dollar = 1.05 USD. ROA data from Yahoo!Finance
- ↑ Data from NFS's 2006 10-k Report, page 23. ROA data from Yahoo!Finance
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