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Principal Financial Group, Inc. (PFG - Analyst Report) reported fourth-quarter 2012 operating earnings of 82 cents per share. The reported result exceeded the Zacks Consensus Estimate by 8 cents and improved 24% year over year. Operating income was $243.9 million in the quarter, up 21% year over year.

Including net realized capital gains of $0.5 million and an unfavorable after tax adjustment due to expenses incurred for extinguishing debt, net income available to common stockholders was $218.6 million or 74 cents per share, compared with $148.5 million or 48 cents per share a year ago.

The prior-year quarter included net realized capital losses of $53.6 million or 18 cents per share and other unfavorable after-tax adjustments of $0.3 million.

Operational Performance

Operating revenues in the fourth quarter improved 9% to $2.3 billion. The rise was primarily due to an increase in premiums and other considerations and fees, and other revenues, as well as higher net investment income. Revenue breezed past the Zacks Consensus Estimate of $2.2 billion.

Total expenses escalated 7% year over year to $2.0 billion. Higher benefits, claims and settlement expenses, commissions, depreciation and amortization, compensation, interest expense primarily contributed to the escalation.

Assets under management were $403.0 billion as of Dec 31, 2012, up 20% year over year.

Book value per share as of Dec 31, 2012, stood at $29.20, up 7% year over year.

Full Year Highlights

Operating earnings came in at $2.69 per share, higher than the Zacks Consensus Estimate of $2.61 and up 1.1% over 2011.

Including net realized capital gains of 13 cents and an unfavorable after tax adjustment of 25 cents, net income available to common stockholders was $2.57 per share, compared with $1.95 share a year ago.

Operating revenues increased nearly 11% to $9.2 billion.

Segment Update

Retirement and Investor Services: Revenues in the quarter augmented by nearly 11% year over year to $1.13 billion, fueled by higher fee revenue in the accumulations businesses and higher premiums in the guaranteed businesses.

Operating earnings increased to $152.3 million in the quarter from $124.5 million in the fourth quarter of 2011.

Principal Global Investors: Revenues in the quarter were $168 million, 11% higher than the prior-year period.

Operating earnings improved 50% year over year to $26.2 million. The improvement was primarily due to an increase in assets under management as well as one-time acquisitions costs incurred in the year-ago quarter.

Principal International: Revenues were $265.8 million in the quarter, up from $255.6 million in the prior-year quarter, attributable to an increase in assets under management.

Operating earnings waned to $45.1 million from $50.1 million in the year-ago quarter.

US Insurance Solution: Revenues improved to $779.7 million in the reported quarter from $737.9 million in the year-ago quarter.

Operating income was $59.4 million in the reported quarter, up from $52.8 million in the year-ago quarter.

Corporate: Operating losses narrowed to $39.1 million from a loss of $43.1 million recorded in the year-ago quarter.

Dividend and Share Repurchase Update

The board of directors declared a quarterly dividend of 23 cents per share, representing an increase of 10%. The dividend will be payable on Mar 29, 2013 to shareholders of record as of Mar 11, 2013.

Principal Financial repurchased 9.9 million shares at an average price of $25.92 per share in 2012.

Our Take

The company’s sound capital position and financial liquidity are supportive of its expansion policies in the emerging markets as these offer ample growth opportunities. It expects to deploy $400–$600 million in 2013. Also, Principal has been increasing its focus on fee-based business that allows the company to return more earnings to shareholders.

In order to widen its presence in the emerging marketplace, Principal Financial initiated a bid to acquire Chile-based leading pension manager AFP Cuprum S.A. Principal Financial already has operations in the emerging markets of Brazil, Chile and Mexico and this acquisition will give it a competitive advantage. PFG, to this point, has asset management and mutual funds businesses in China and India.

Principal Financial presently carries a Zacks Rank #3 (Hold). Among other multi-line insurers such as Radian Group Inc. (RDN - Snapshot Report) and  Assured Guaranty Ltd. (AGO - Snapshot Report), both carrying a Zacks Rank #1 (Strong Buy), and CNO Financial Group, Inc. (CNO - Analyst Report), holding a Zacks Rank #2 (Buy), are yet to announce their results.


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