Principal Financial CFO: Fee-Based Earnings Are Driving Profits
June 3, 2014 by Marie Suszynski
WEST DES MOINES, Iowa – Principal Financial Group Inc.’s quality and type of earnings are dramatically different today than they were before the financial crisis, with its fee-based business being a major driver, the company’s chief financial officer said.
Since the financial crisis in 2008, Principal Financial has moved from spread-risk earnings to fee-based earnings, which make up about two-thirds of the company’s earnings today, Terry Lillis, executive vice president and CFO, said at the 2014 Des Moines Insurance Conference.
There was concern about the sustainability of profitable growth, he said, but the company had a record quarter of operating earnings this year.
Net income available to common stockholders rose 65% to $293.7 million. Total company assets under management grew 9% to $495.5 billion, net cash flows were $2 billion and record assets under management were $109.1 billion, a 2% increase over the year ago quarter (Best’s News Service, April 25, 2014).
The company is holding more capital today than in 2007 before the financial crisis and has more opportunity for revenue growth. “We feel we are very well-positioned in terms of sustainable profitable growth and return on capital,” Lillis said.
Principal Financial’s strategy includes tapping into the large aging population in the United States and around the world, particularly during an “era of personal responsibility,” he said. Individuals have to take on the responsibility of long-term savings and investing as governments are fiscally constrained.
One area of focus for Principal Financial is Chile. The company bought AFP Cuprum S.A., a pension manager in Chile, for $1.51 billion in 2012, giving it a larger presence in fast-growing emerging markets for long-terms savings and retirement.
Principal Financial had been in Chile as a mutual fund and annuities company, but had lacked the “all-important mandatory pension business,” Renee Schaaf, vice president of retirement and investor services, said during the conference. Although there is a mandatory pension system in the country, it is capped at a certain amount, leaving a gap between what people need and what the mandatory pension would give them, she said.
In addition to giving Principal Financial the customer base it was looking for, Cuprum has been a good cultural fit for the company, as well. “Together, we can attack the marketplace and offer a complete solution of savings products backed by advice,” Schaaf said.
Although Latin America has some volatility, global trends show the need for savings and investment vehicles in the region will continue to play out. People in Latin America and Asia have much higher personal savings rates than in the United States, but they’re not investing.
“Even if the economic environment stays similar to where it is today, we have a tremendous opportunity to help people invest instead of simply save,” she said.
On the afternoon of May 30, shares of Principal Financial (NYSE: PFG) were trading at $46.77, up 0.30% from the previous close.
Principal Life Insurance Co. and Principal National Life Insurance Co. have a current Best’s Financial Strength Rating of A+ (Superior).
(By Marie Suszynski, Best’s News Service correspondent)
