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Principal Lags EPS Est, Beats Revs

PFG LNC

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Principal Financial Group, Inc. (PFG - Analyst Report) reported third quarter 2012 operating earnings of 45 cents per share, lagging the Zacks Consensus Estimate by 4 cents. Earnings deteriorated 26% from 61 cents earned in the prior-year quarter. Operating income was $134.8 million in the quarter, down 30.2% from $193.2 million in the third quarter of 2011.

Loss at U.S. Insurance Solution largely attributed to the weak results.

Owing to the actuarial assumption review, third quarter operating earnings was adversely affected by $90.7 million or 30 cents per share.

Including net realized capital gains of $88.8 million or 30 cents per share and an unfavorable after tax adjustment of $43.9 million or 15 cents per share, net income available to common stockholders was $179.7 million or 60 cents per share, compared with $71.9 million or 23 cents per share a year ago.

The prior-year quarter included net realized capital losses of $56.8 million or 18 cents and other unfavorable after-tax adjustments of $64.5 million or 20 cents.

Operational Performance

Operating revenues in the third quarter improved 30% to $2.6 billion. The rise was primarily due to an increase in premiums and other considerations and fees and other revenues, partially offset by lower net investment income. Revenue breezed past the Zacks Consensus Estimate of $2.2 billion.

Principal, in the third quarter, reported a soaring 99% year-over-year increase in premiums and an 11% increase in fees and other revenues.  Net investment income decreased 4% year over year.

Total expenses escalated 39% year over year to $2.5 billion. Higher benefits, claims and settlement expenses, commissions, depreciation and amortization primarily contributed to the escalation.

Assets under management were $392.2 billion as of September 30, 2012, up 22% year over year.

Book value per share as of September 30, 2012, stood at $28.63, up 4% year over year and 2% sequentially.

Segment Update

Retirement and Investor Services: Revenues in the quarter augmented by 58% year over year to $1.5 billion, fueled by higher sales in the Full Service Payout business.

Operating earnings slid to $137.5 million in the quarter from $129.6 million in the third quarter of 2011.

Principal Global Investors: Revenues in the quarter were $144 million, 8.3% higher than the prior-year period.

Operating earnings were $20.6 million in the reported quarter compared with $19.1 million in the year-ago quarter. The slight increase was attributable to the elevation in assets under management, offset by additional investments to support growth.

Principal International: Revenues were $203.8 million in the quarter, lower than $220.1 million in the prior-year quarter, attributable to lower inflation in Chile and the strengthening of the U.S. dollar.

Operating earnings waned to $29.5 million from $35.3 million in the year-ago quarter. The decline largely resulted from actuarial assumption review of lapse rate assumptions in Mexico.

US Insurance Solution: Revenues improved to $766.5 million in the quarter from $739.3 million in the year-ago quarter.

Operating loss was $21.6 million in the quarter compared with operating profit of $49.1 million in the year-ago quarter.

Corporate: Operating losses narrowed to $31.2 million from a loss of $39.9 million recorded in the year-ago quarter.

Dividend and Share Repurchase

Principal Financial repurchased 2.7 million shares at an average price of $25.72 per share. The year-to-date shares repurchased totaled 9.9 million.

The Board also approved a quarterly dividend of 21 cents per common share, representing a 17% sequential increase.

Our Take

We believe that Principal Financial is aligning its business to focus more on the strategic opportunities in the growing asset accumulation and asset management businesses while shedding the line of business which provides little scope for growth.

The company’s sound capital position and financial liquidity are supportive of its expansion policies in the emerging markets as they offer ample growth opportunities. It inked a deal to buy Chile based AFP Cuprum S.A. (Cuprum), to widen its presence in the emerging marketplace.

Also, it scores well with the rating agencies.

Principal Financial remains on track to deploy $800–900 million in 2012 in either returning value to shareholders or in merger and acquisitions.  Given sufficient amount in excess capital, we expect it return further value to its shareholders going forward. It had already enhanced its dividend by 17%.

However, the low interest rate environment continues to remain a drag.

We retain our long term Neutral recommendation on Principal Financial. The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no directional pressure on the shares over the near term.

Lincoln National Corporation (LNC - Analyst Report), which competes with Principal Financial, is scheduled to release its results on November 1, 2012 after the closing bell. It carries a Zacks #2 Rank, translating into a short term Buy rating.

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