Principal Financial Group, Inc. Reports Fourth Quarter 2003 Results.Business Editors DES MOINES Des Moines, city, United States Des Moines (dĭ moin`), city (1990 pop. 193,187), state capital and seat of Polk co., S central Iowa, at the junction of the Des Moines and Raccoon rivers; inc. , Iowa--(BUSINESS WIRE)--Feb. 2, 2004 Principal Financial Group, Inc. (NYSE NYSE See: New York Stock Exchange :PFG PFG Principal Financial Group PFG Performance Food Group (Richmond, VA) PFG Pinnacle Financial Group PFG Plasma Flood Gun PFG Planning for Growth PFG Pasty Faced Geek PFG Perfluoroguanidine ) today announced quarterly net income for the three months ended December December: see month. 31, 2003, of $203.9 million, or $0.63 per diluted di·lute tr.v. di·lut·ed, di·lut·ing, di·lutes 1. To make thinner or less concentrated by adding a liquid such as water. 2. To lessen the force, strength, purity, or brilliance of, especially by admixture. share compared to net income of $215.4 million, or $0.64 per diluted share for the three months ended December 31, 2002. The company reported operating earnings Operating Earnings Profits after subtracting expenses such as marketing, cost of goods sold, administration and general operating costs from revenue. Notes: Tax and interest expenses are not subtracted - operating earnings are synonymous with EBIT (earnings before of $148.5 million for fourth quarter 2003, compared to $177.9 million for fourth quarter 2002. Operating earnings per diluted share for fourth quarter 2003 were $0.46 compared to $0.53 for the same period in 2002. Operating revenues operating revenue Revenue from any regular source. Revenue from sales is adjusted for discounts and returns when calculating operating revenue. Compare other revenue. for fourth quarter 2003 were $2,452.6 million, compared to $2,423.7 million for the same period last year.(1) "2003 was a very strong year for The Principal, our fifth consecutive year of record operating earnings," said J. Barry Barry, Welsh Barri, town (1991 pop. 45,053) and port, Vale of Glamorgan, S Wales, on the Bristol Channel. Once a major coal-exporting port, its more diversified export products include cement, flour, and steel products. Griswell, chairman, president and chief executive officer. "In spite of in opposition to all efforts of; in defiance or contempt of; notwithstanding. See also: Spite the fourth quarter write-down Write-Down Reducing the book value of an asset because it is overvalued compared to the market value. Notes: This is usually reflected in the company's income statement as an expense, thereby reducing net income. of our mortgage servicing Mortgage servicing The collection of monthly payments and penalties, record keeping, payment of insurance and taxes, and possible settlement of default , involved with a mortgage loan. rights, we still delivered seven percent earnings per share growth in 2003, largely driven by record earnings in the U.S. Asset Management and Accumulation Accumulation 1) In the context of individual investing, it is the process of contributing cash to invest in securities over a period of time in order to build a portfolio of desired value. Dividends and capital gains are also reinvested during this process. segment, which improved 17 percent for the year and 41 percent in the fourth quarter." Highlights for the fourth quarter and full year 2003 include: -- Record net income of $746.3 million in 2003. -- Record operating earnings of $750.6 million in 2003, including record operating earnings in three of the company's four operating segments - U.S. Asset Management and Accumulation, International Asset Management and Accumulation, and Life and Health Insurance. -- Record quarterly operating earnings in the fourth quarter for two segments - $117.6 million for U.S. Asset Management and Accumulation, and $66.4 million for Life and Health Insurance. -- Record sales of the company's key retirement and investment products in 2003, including $6.4 billion for pension full service accumulation ($1.8 billion in the fourth quarter), $1.8 billion for mutual funds and $1.4 billion for individual annuities. -- Record assets under management Assets Under Management (AUM) is a term used by financial services companies in the mutual fund and money management or investment management business to gauge how much money they are managing. of $144.9 billion, up 30 percent from a year ago, including 31 percent growth for U.S. Asset Management and Accumulation, and 70 percent growth for International Asset Management and Accumulation "As we had anticipated, even stronger earnings emerged from our retirement businesses, as equity markets and the economy improved. U.S. Asset Management and Accumulation was our key growth driver in 2003, delivering $434 million in earnings, an additional $63 million contribution to the bottom line," said Griswell. "Fourth quarter marked the segment's third straight quarter of record earnings, reflecting our continued success in growing account values and assets under management. Principal International produced strong earnings growth as well, up 58 percent for the year, the result of organic growth, prudent expense management and strategic acquisition activity. "A number of other leading indicators Leading Indicator A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators are used to predict changes in the economy, but are not always accurate. point to the strength of our position going forward," said Griswell. "Pension full service accumulation account values increased $13 billion, or 30 percent in 2003, to a record $56 billion, driven by improved investment performance, as well as strong customer net cash flow, which increased 69 percent compared to 2002. Full service accumulation net cash flow grew to more than 11 percent of beginning of year account values, nearly twice our long-term Long-term Three or more years. In the context of accounting, more than 1 year. long-term 1. Of or relating to a gain or loss in the value of a security that has been held over a specific length of time. Compare short-term. expectations, reflecting strong deposits from existing customers, excellent retention, and record sales. "Our performance reflects an uncompromising focus on meeting the needs of our customers, the strength of our people, and their ability to execute To run a program, which causes the computer to carry out its instructions. See executable code, instruction and EXE file. execute - execution , even under difficult conditions. In 2004, we'll we'll Contraction of we will. we'll we will or we shall we'll will ~shall continue to provide innovative retirement and employee benefit solutions, responsive service, and exceptional convenience and choice, which we believe is the key to delivering sustainable, profitable growth, and to building long-term value for our shareholders." Assets under management were $144.9 billion as of December 31, 2003, an increase of $10.1 billion, or 7 percent compared to September September: see month. 30, 2003, and an increase of $33.8 billion, or 30 percent compared to December 31, 2002. For the twelve months ended December 31, 2003: -- Net income increased to $746.3 million, or $2.28 per diluted share, compared to net income of $142.3 million, or $0.41 per diluted share, during the same period a year ago. Net income for the prior year period includes an after-tax af·ter-tax also af·ter·tax adj. Relating to or being that which remains after payment, especially of income taxes: after-tax profits. goodwill write-down of $280.9 million ($255.4 million related to BT Financial Group), a loss on discontinued operations Discontinued operations Divisions of a business that have been sold or written off and that no longer are maintained by the business. of BT Financial Group ($196.7 million), partially offset by a favorable fa·vor·a·ble adj. 1. Advantageous; helpful: favorable winds. 2. Encouraging; propitious: a favorable diagnosis. 3. tax benefit from an IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. audit issue of $138.0 million. -- Operating earnings increased to $750.6 million, compared to $749.4 million in the year earlier period. -- Operating earnings per diluted share increased 7 percent to $2.30 per diluted share compared to $2.14 per diluted share in the year earlier period. -- Operating revenues increased 3 percent to $9,483.0 million from $9,223.1 million during the same period a year ago. Restatement Restatement A revision in a company's earlier financial statements. Notes: The need for restating financial figures can result from fraud, misrepresentation, or a simple clerical error. of third quarter 2003 financial statements The restatement of the company's previously issued financial statements for the quarter ended September 30, 2003 reflects the application of a new accounting standard for Principal Residential Mortgage Inc., the company's mortgage banking subsidiary, and the new standard's impact on the carrying value Carrying Value Also know as "book value," it is a company's total assets minus intangible assets and liabilities, such as debt. Notes: This is different than market value, as it can be higher or lower depending on the circumstances. of loans held for sale. As a result of the restatement, third quarter 2003 net income was reduced by $31.8 million, and third quarter operating earnings were reduced by $30.6 million. (The difference between net income and operating earnings reflects a $1.2 million other after tax adjustment.) The third quarter correction CORRECTION,punishment. Chastisement by one having authority of a person who has committed some offence, for the purpose of bringing him to legal subjection. 2. It is chiefly exercised in a parental manner, by parents, or those who are placed in loco parentis. was effectively reversed in the fourth quarter, the period in which the loans were sold, increasing fourth quarter net income and operating earnings by $31.8 million. For the full year, the net effect of the restatement is as follows: -- Net income was unchanged -- Operating earnings increased by $1.2 million The restatement is the result of a review of the application of FASB FASB See: Financial Accounting Standards Board FASB See Financial Accounting Standards Board (FASB). Interpretation No. 46, Consolidation of Variable Interest Entities (FIN fin, organ of locomotion characteristic of fish and consisting of thin tissue supported by cartilaginous or bony rays. In some fish, e.g., the eel, a single fin extends from the back, around the tail, and along the ventral surface. 46) and the related technical application of effectiveness tests under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments Derivative instruments Contracts such as options and futures whose price is derived from the price of an underlying financial asset. and Hedging hedging, in commerce, method by which traders use two counterbalancing investment strategies so as to minimize any losses caused by price fluctuations. It is generally used by traders on the commodities market. Activities (SFAS SFAS Statement of Financial Accounting Standards SFAS Special Forces Assessment and Selection SFAS Student Financial Aid Services SFAS Sport Fishing Association of Singapore SFAS Safety Features Actuation System SFAS Statewide Fixed Assets System 133) for hedging programs on residential mortgage loans held for sale. Under accepted accounting prior to the company's adoption of FIN 46 on July July: see month. 1, 2003, Principal Residential Mortgage, Inc. had an off-balance sheet facility, used to hold and finance new mortgage loans. With the adoption of FIN 46, the off-balance sheet entity was consolidated con·sol·i·date v. con·sol·i·dat·ed, con·sol·i·dat·ing, con·sol·i·dates v.tr. 1. To unite into one system or whole; combine: within the company's financial statements. The company's hedging program, in place to hedge the market value risk associated with interest rate movements between the time of loan commitment and time the loan is sold outside the facility, has been economically ec·o·nom·i·cal adj. 1. Prudent and thrifty in management; not wasteful or extravagant. See Synonyms at sparing. 2. Intended to save money, as by efficient operation or elimination of unnecessary features; economic: effective. However, in the year-end year-end also year·end n. The end of a year. adj. Occurring or done at the end of the year: a year-end audit. Noun 1. closing process, after revised FIN 46 consolidation of the mortgage loan facility, it was determined that the company could not hold the loans at market value because it did not have sufficient documentation needed to qualify for special hedge accounting Why is hedge accounting necessary? Many financial institutions and corporate businesses (entities) use derivative financial instruments to hedge their exposure to different risks (eg interest rate risk, foreign exchange risk, commodity risk, etc). treatment under SFAS 133. In effect, it was determined that the company correctly recorded hedge losses in the third quarter, but needed to delay recording third quarter appreciation on the loans until the fourth quarter, the period in which the loans were sold. The change had no effect on the economic results of hedging activities or total cash flows for any period, and an immaterial Not essential or necessary; not important or pertinent; not decisive; of no substantial consequence; without weight; of no material significance. immaterial adj. impact to the balance sheet at September 30, 2003. The company is evaluating effectiveness-testing methods for the first quarter 2004, and expects to meet the rigorous documentation standards required by SFAS 133, even though the actual hedging strategies themselves, which have been effective in economic terms, will not change. The remainder of this release covers the highlights of fourth quarter 2003 financial results. All comparisons to prior periods are restated, where applicable. Segment Highlights U.S. Asset Management and Accumulation Segment operating earnings for fourth quarter 2003 were a record $117.6 million, compared to $83.7 million for the same period in 2002. The improvement was driven by record operating earnings in the pension business of $92.6 million, a 25 percent increase compared to the same period a year ago. Operating revenues for the fourth quarter increased to $1,024.1 million compared to $916.8 million for the same period in 2002. The improvement was primarily the result of the 2003 acquisition of Post Advisory Group by Principal Global Investors and increased fees within pension full service accumulation operations. Segment assets under management continued to increase, reaching a record $120.8 billion as of December 31, 2003, up 9 percent from $110.4 billion as of September 30, 2003, and up 31 percent from $92.3 billion as of December 31, 2002. International Asset Management and Accumulation Segment operating earnings for fourth quarter 2003 were $8.2 million, compared to $9.4 million for the same period in 2002. (For the quarter ended December 31, 2002, segment results include a loss of $0.3 million for BT Financial Group.(2)) Principal International, which consists of the company's asset accumulation businesses outside the U.S., had fourth quarter operating earnings of $8.2 million, compared to $9.7 million for the same period in 2002. Operating revenues for the segment were $122.4 million for fourth quarter 2003, compared to $105.6 million for the same period last year, primarily reflecting record annuity annuity: see insurance. annuity Payment made at a fixed interval. A common example is the payment received by retirees from their pension plan. There are two main classes of annuities: annuities certain and contingent annuities. sales in Chile Chile (chĭl`ē, Span. chē`lā), officially Republic of Chile, republic (2005 est. pop. 15,981,000), 292,256 sq mi (756,945 sq km), S South America, west of the continental divide of the Andes Mts. and higher assets under management in Brazil Brazil (brəzĭl`), Port. Brasil, officially Federative Republic of Brazil, republic (2005 est. pop. 186,113,000), 3,286,470 sq mi (8,511,965 sq km), E South America. . Assets under management for the segment were $7.5 billion as of December 31, 2003, compared to $6.9 billion as of September 30, 2003, and compared to $4.4 billion as of December 31, 2002. Life and Health Insurance Segment operating earnings for fourth quarter 2003 were a record $66.4 million, compared to $61.4 million for the same period in 2002. The increase in segment earnings is primarily due to the conversion to new deferred policy acquisition cost (DPAC DPAC Denver Performing Arts Complex (CO, USA aka: DCPA) DPAC Deferred Policy Acquisition Costs (insurance) DPAC District Parent Advisory Committee DPAC Dover Partnership Against Crime ) and policy valuation models on some of our life and disability products. The new models were implemented in the fourth quarter, resulting in a write-up Write-Up An increase made to the book value of an asset because it is undervalued compared to market values. Notes: A write-up will increase a company's accounting book value without any expenditures. of the DPAC asset, and lower amortization expense, which drove an additional $17.7 million of operating earnings for the segment. Partially offsetting this item were higher claims expenses, reflecting normal claims fluctuations, and a one-time one-time adj. 1. or one·time a. Occurring or undertaken only once: a one-time winner in 1995. b. write-off Write-Off A reduction in the value of an asset or earnings by the amount of an expense or loss. Companies are able to write off certain expenses that are required to run the business, or have been incurred in the operation of the business and detract from retained revenues. of accrued ac·crue v. ac·crued, ac·cru·ing, ac·crues v.intr. 1. To come to one as a gain, addition, or increment: interest accruing in my savings account. 2. investment income in connection with distribution alliances in which the company has invested. Operating revenues increased to $1,004.5 million for the quarter, compared to $996.1 million for the same period in 2002, largely as a result of increases within the disability insurance operations. Operating revenues were down slightly in the life business, as the company has shifted marketing emphasis in recent years from traditional premium-based products to fee-based universal life and variable universal life products. Unlike traditional premium-based products, universal life and variable universal life premium is not reported as GAAP GAAP See: Generally Accepted Accounting Principles GAAP See generally accepted accounting principles (GAAP). revenue. Operating revenues were up slightly in the health business. Rate increases and the change in accounting treatment of a reinsurance The contract made between an insurance company and a third party to protect the insurance company from losses. The contract provides for the third party to pay for the loss sustained by the insurance company when the company makes a payment on the original contract. contract were largely offset by the decline in covered members from a year ago. Mortgage Banking Operating losses operating loss The excess of operating expenses over revenue. As with operating income, operating losses exclude revenues and expenses from operations that are not considered a regular part of the business. Also called deficit. Compare operating income. for the segment in fourth quarter 2003 were $42.8 million compared to operating earnings of $29.1 million for the same period in 2002. In line with the earnings guidance update on December 15, 2003, the company took a write-down of its mortgage servicing rights asset in the fourth quarter, reflecting currently available external indicators of market value. The after-tax impact of this write-down was $87.1 million, or 27 cents per diluted share. As described earlier in the release, the third quarter restatement was reversed in the fourth quarter, increasing fourth quarter operating revenues by $51.6 million, which reduced the fourth quarter operating loss by $31.8 million. Mortgage banking earnings are generated from loan production and loan servicing Loan servicing is the process by which a mortgage bank or subservicing firm collects the timely payment of interest and principal from borrowers. The level of service varies depending on the type loan and the terms negotiated between the firm and the investor seeking their services. . Production earnings were $53.0 million (which includes the $31.8 million item described above), compared to $120.0 million for the same period in 2002. The decline in production earnings reflects a 52% decline in mortgage loan production compared to a year ago, as well as lower earnings due to decreased gains on the sale of mortgage loans, reflecting rising interest rates and greater pricing competition for new loan applications. Servicing generated a loss of $95.8 million during the quarter, compared to a loss of $90.9 million for the same period in 2002. The fourth quarter 2003 loss from servicing reflects: the previously discussed $87.1 million write-down of the mortgage servicing rights; $27.4 million of earnings from servicing operations (including a $12.2 million gain from the sale of servicing); and a $36.1 million loss from mortgage servicing rights valuation adjustment (net of hedges). Mortgage loan production was $7.9 billion in the fourth quarter 2003 compared to $16.5 billion in the year earlier period. At December 31, 2003, the servicing portfolio was $118.7 billion, compared to $117.8 billion as of September 30, 2003, and compared to $ 107.7 billion as of December 31, 2002. Operating revenues decreased 29 percent to $301.3 million for the quarter, compared to $421.7 million for the same period last year. Production revenues decreased $146.7 million, or 56 percent, and servicing revenues increased $26.3 million, or 16 percent, from the same quarter a year ago. Corporate and Other Operating losses for fourth quarter 2003 were $0.9 million, compared to operating losses of $5.7 million for the same period in 2002. The improvement reflects higher investment income in the fourth quarter 2003 compared to the same period a year ago. Forward looking and cautionary statements This press release contains forward-looking statements forward-looking statement A projected financial statement based on management expectations. A forward-looking statement involves risks with regard to the accuracy of assumptions underlying the projections. , including, without limitation, statements as to sales targets, sales and earnings trends, and management's beliefs, expectations, goals and opinions. These statements are based on a number of assumptions concerning future conditions that may ultimately prove to be inaccurate. Future events and their effects on the company may not be those anticipated, and actual results may differ materially from the results anticipated in these forward-looking statements. The risks, uncertainties and factors that could cause or contribute to such material differences are discussed in the company's annual report on Form 10-K Form 10-K A report required by the SEC from exchange-listed companies that provides for annual disclosure of certain financial information. Form 10-K See 10-K. for the year ended December 31, 2002, and in the company's quarterly report on Form 10-Q Form 10-Q See 10-Q. for the quarter ended September 30, 2003, filed by the company with the Securities and Exchange Commission. These risks and uncertainties include, without limitation: competitive factors; volatility Volatility 1. A statistical measure of the tendency of a market or security to rise or fall sharply within a period of time. 2. A variable in option pricing formulas that denotes the extent to which the return of the underlying asset will fluctuate between now and the of financial markets; decrease in ratings; interest rate changes; inability to attract and retain sales representatives; international business risks; foreign currency exchange rate fluctuations; and investment portfolio risks. Outlook for First Quarter and Full Year 2004 Based on estimated net realized credit losses of $25 million after-tax in the first quarter, and $65 million after-tax for 2004, the company expects first quarter net income to range from $0.53 to $0.57 per diluted share and 2004 net income to range from $2.50 to $2.60 per diluted share.(3) The company expects first quarter 2004 operating earnings to range from $0.61 to $0.65 per diluted share.(4) The company expects 2004 operating earnings to range from $2.70 to $2.80 per diluted share.(5) Share Repurchases Share Repurchase A program by which a company buys back its own shares from the marketplace, reducing the number of outstanding shares. This is usually an indication that the company's management thinks the shares are undervalued. In May 2003, the board of directors authorized au·thor·ize tr.v. au·thor·ized, au·thor·iz·ing, au·thor·iz·es 1. To grant authority or power to. 2. To give permission for; sanction: a repurchase re·pur·chase tr.v. re·pur·chased, re·pur·chas·ing, re·pur·chas·es To buy (something) again. n. The act of buying something that one previously sold or owned. Noun 1. program of up to $300 million of Principal Financial Group, Inc. outstanding common stock. Under this program, in the fourth quarter, the company repurchased 2.3 million shares for $75.0 million, an average price per share of $32.53. In 2003, 15 million shares were repurchased by the company under board-authorized repurchase programs, for $453.0 million, an average price per share of $30.25. Stock Options As communicated in the third quarter 2002 earnings release, The Principal began expensing employee stock options and the employee stock purchase plan, retroactive Having reference to things that happened in the past, prior to the occurrence of the act in question. A retroactive or retrospective law is one that takes away or impairs vested rights acquired under existing laws, creates new obligations, imposes new duties, or attaches a to January January: see month. 1, 2002. This resulted in an after-tax expense of $3.7 million and $14.3 million, respectively, for the three and twelve months ended December 31, 2003, compared to $2.1 million and $7.7 million, respectively, for the three and twelve months ended December 31, 2002. FIN 46 impact on assets and liabilities As communicated in the third quarter 2003 earnings release, effective July 1, 2003, the company early adopted Financial Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46") for variable interest entities ("VIEs") created on or after February February: see month. 1, 2003. FIN 46 provides guidance related to identifying variable interest entities and determining whether such entities should be consolidated. The guidance resulted in an increase in assets and liabilities of $2.2 billion within the company's December 31, 2003, consolidated statement of financial position. Earnings Conference Call At 9:00 A.M. (CST CST abbr. 1. Central Standard Time 2. convulsive shock treatment CST Central Standard Time Noun 1. ) tomorrow, Chairman, President and CEO (1) (Chief Executive Officer) The highest individual in command of an organization. Typically the president of the company, the CEO reports to the Chairman of the Board. J. Barry Griswell and Executive Vice President and CFO See Chief Financial Officer. Mike Gersie will lead a discussion during a live conference call. Parties interested in listening to the conference call live may access the webcast on the Principal Financial Group Investor Relations Investor relations The process by which the corporation communicates with its investors. (IR) website (www.principal.com/investor) or by dialing (800) 374-1609 (U.S. callers) or (706) 643-7701 (International callers) approximately ap·prox·i·mate adj. 1. Almost exact or correct: the approximate time of the accident. 2. 10 minutes prior to the start of the call. To access the call, leader name is Tom Graf GRAF - GRaphic Additions to Fortran. Fortran plus graphic data types. ["GRAF: Graphic Additions to Fortran", A. Hurwitz et al, Proc SJCC 30 (1967)]. [Sammet 1969, p. 674]. . Listeners can access an audio replay of the call on the IR website, or by calling (800) 642-1687 (US callers) or (706) 645-9291 (International callers). The access code for the replay is 4808487. Replays will be available through February 10, 2004. The financial supplement is currently available on our website and will be referred to during the conference call. About the Principal Financial Group The Principal Financial Group(R) (The Principal(R))(6) is a leader in offering businesses, individuals and institutional clients a wide range of financial products and services, including retirement and investment services, life and health insurance and mortgage banking through its diverse family of financial services The examples and perspective in this article or section may not represent a worldwide view of the subject. Please [ improve this article] or discuss the issue on the talk page. companies. More employers choose the Principal Financial Group for their 401(k) plans than any other bank, mutual fund, or insurance company in the United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. (7). A member of the Fortune 500, the Principal Financial Group has $144.9 billion in assets under management(8) and serves some 15 million customers worldwide from offices in Asia, Australia Australia (ôstrāl`yə), smallest continent, between the Indian and Pacific oceans. With the island state of Tasmania to the south, the continent makes up the Commonwealth of Australia, a federal parliamentary state (2005 est. pop. , Europe Europe (y  r`əp), 6th largest continent, c.4,000,000 sq mi (10,360,000 sq km) including adjacent islands (1992 est. pop. 512,000,000). ,
Latin America Latin America, the Spanish-speaking, Portuguese-speaking, and French-speaking countries (except Canada) of North America, South America, Central America, and the West Indies. and the United States. Principal Financial Group, Inc. is
traded on the New York Stock Exchange New York Stock Exchange (NYSE)World's largest marketplace for securities. The exchange began as an informal meeting of 24 men in 1792 on what is now Wall Street in New York City. under the ticker symbol Ticker Symbol An arrangement of characters (usually letters) representing a particular security listed on an exchange or otherwise traded publicly. When a company issues securities to the public marketplace, it selects an available ticker symbol for its securities which investors PFG. For more information, visit www.principal.com. (1) We use a number of non-GAAP financial measures that management believes are useful to investors because they illustrate the performance of our normal, ongoing operations, which is important in understanding and evaluating our financial condition and results of operations. While such measures are consistent with measures utilized by investors to evaluate performance, they are not a substitute for U.S. GAAP financial measures. Therefore, we have provided reconciliations of the non-GAAP financial measures, including consolidated operating earnings and consolidated operating revenues, to the most directly comparable U.S. GAAP financial measure at the end of the release. We adjust U.S. GAAP financial measures for items not directly related to ongoing operations. However, it is possible that these adjusting items have occurred in the past and could recur in the future. Management also uses non-GAAP financial measures for goal setting, determining employee and senior management awards and compensation, and evaluating performance on a basis comparable to that used by securities analysts. (2) As a result of the sale of substantially all of BT Financial Group, which closed on October October: see month. 31, 2002, the operating earnings of BT reflect only the corporate overhead expenses allocated to BT. This treatment is pursuant to Statement of Accounting Standard No. 144, Accounting for the Impairment Impairment 1. A reduction in a company's stated capital. 2. The total capital that is less than the par value of the company's capital stock. Notes: 1. This is usually reduced because of poorly estimated losses or gains. 2. or Disposal of Long-Lived long-lived adj. 1. Having a long life: a long-lived aunt. 2. Lasting a long time; persistent: a long-lived rumor. 3. Assets ("SFAS 144"). Under SFAS 144, all revenues and expenses (excluding allocated corporate overhead) are reported as discontinued operations. Therefore, fourth quarter 2002 results for BT reflect one month of allocated expenses with no corresponding activity in 2003. (3) Other items that we are unable to predict could significantly affect net income, such as changes to laws, regulations, or accounting standards, litigation An action brought in court to enforce a particular right. The act or process of bringing a lawsuit in and of itself; a judicial contest; any dispute. When a person begins a civil lawsuit, the person enters into a process called litigation. , or gains or losses from discontinued operations. (4) First quarter 2004 guidance is based on certain assumptions, including domestic equity market performance improvement, of roughly two percent from December 31, 2003 levels. (5) Full year 2004 guidance is based on certain assumptions, including domestic equity market performance improvement of roughly 2% per quarter for 2004. (6) "The Principal Financial Group(R)" and "The Principal(R)" are registered service marks of Principal Financial Services, Inc., a member of the Principal Financial Group. (7) CFO Magazine, April/May 2003, based on total plans served in 2002 by insurance companies, banks and investment firms. (8) As of December 31, 2003.
Summary of Segment and Principal Financial Group, Inc. Results
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Operating Earnings(a) (Loss) in
millions
------------------------------------
Three Months Year Ended,
Ended,
------------------------------------
Segment 12/31/03 12/31/02 12/31/03 12/31/02
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U.S. Asset Management and
Accumulation $117.6 $83.7 $433.8 $370.9
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International Asset Management and
Accumulation 8.2 9.4 34.9 19.5
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Life and Health Insurance 66.4 61.4 241.2 233.1
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Mortgage Banking (42.8) 29.1 53.2 142.9
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Corporate and Other (0.9) (5.7) (12.5) (17.0)
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Operating Earnings (net income
excluding net realized/unrealized
capital gains (losses) as
adjusted and other after-tax
adjustments) 148.5 177.9 750.6 749.4
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Net realized/unrealized capital
gains (losses), as adjusted 16.0 (90.1) (51.6) (243.9)
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Other after-tax adjustments 39.4 127.6 47.3 (363.2)
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Net income (b) $203.9 $215.4 $746.3 $142.3
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Per Diluted Share
------------------------------------
Three Months Year Ended,
Ended,
------------------------------------
12/31/03 12/31/02 12/31/03 12/31/02
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Operating Earnings (net income
excluding net realized/unrealized
capital gains (losses) as
adjusted and other after-tax
adjustments) $0.46 $0.53 $2.30 $2.14
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Net realized/unrealized capital
gains (losses), as adjusted 0.05 (0.27) (0.16) (0.69)
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Other after-tax adjustments 0.12 0.38 0.14 (1.04)
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Net income $0.63 $0.64 $2.28 $0.41
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Weighted-average diluted shares
outstanding 323.3 337.4 326.8 350.7
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(a) Operating earnings versus U.S. GAAP (GAAP) net income
Management uses operating earnings, which excludes the effect of net
realized/unrealized capital gains and losses, as adjusted, and other
after-tax adjustments, for goal setting, determining employee
compensation, and evaluating performance on a basis comparable to that
used by securities analysts. Segment operating earnings are determined
by adjusting U.S. GAAP net income for net realized/unrealized capital
gains and losses, as adjusted, and other after-tax adjustments we
believe are not indicative of overall operating trends. Note:
after-tax adjustments have occurred in the past and could recur in
future reporting periods. While these items may be significant
components in understanding and assessing our consolidated financial
performance, we believe the presentation of segment operating earnings
enhances the understanding of our results of operations by
highlighting earnings attributable to the normal, ongoing operations
of our businesses.
(b) Net income for the three months ended December 31 2003 reflects
net realized/unrealized capital gains/(losses) of $16.0 million, which
includes $(28.2) million in credit losses stemming from impairments
and credit impaired sales, as well as $39.4 million in other after-tax
adjustments. The other after-tax adjustments reflect a $28.9 million
gain stemming from contested IRS matters and a $10.5 million gain from
discontinued operations. Net income for the three months ended
December 31, 2002 reflects net realized capital losses of $(90.1)
million, primarily made up of credit losses stemming from impairments
and credit impaired sales of $(76.1) million, as well as $127.6
million in other after-tax adjustments. The other after-tax
adjustments reflect a $138.0 million gain resulting from the
settlement of an IRS issue, a $(8.6) million loss resulting from the
increase to a loss contingency reserve established for sales practices
litigation, and a $(1.8) million loss on discontinued operations.
Principal Financial Group, Inc.
Results of Operations
(in millions)
----------------------------------------------------------------------
Three Months Ended Year Ended
---------------------------------------
12/31/03 12/31/02 12/31/03 12/31/02
---------------------------------------
Premiums and other
considerations $983.2 $940.8 $3,634.1 $3881.8
Fees and other revenues 619.7 604.1 2,416.2 1,990.8
Net investment income 848.0 849.2 3,419.6 3,304.7
Net realized/unrealized
capital gains/(losses) 27.6 (130.8) (65.7) (354.8)
---------------------------------------
Total revenues 2,478.5 2,263.3 9,404.2 8,822.5
---------------------------------------
Benefits, claims, and
settlement expenses 1,302.6 1,274.2 4,861.3 5,216.9
Dividends to policyholders 75.2 75.6 307.9 316.6
Operating expenses 888.9 791.0 3,281.3 2,623.2
---------------------------------------
Total expenses 2,266.7 2,140.8 8,450.5 8,156.7
---------------------------------------
Income from continuing
operations before income
taxes 211.8 122.5 953.7 665.8
Income taxes (benefits) 18.4 (94.7) 225.8 45.9
---------------------------------------
Income from continuing
operations, net of related
income taxes 193.4 217.2 727.9 619.9
Income (loss) from
discontinued operations, net
of taxes 10.5 (1.8) 21.8 (196.7)
---------------------------------------
Income before cumulative
effect of accounting changes 203.9 215.4 749.7 423.2
Cumulative effect of
accounting changes, net of
related income taxes - - (3.4) (280.9)
---------------------------------------
Net income $203.9 $215.4 $746.3 $142.3
Less:
Net realized/unrealized
capital gains (losses), as
adjusted 16.0 (90.1) (51.6) (243.9)
Other after-tax adjustments 39.4 127.6 47.3 (363.2)
---------------------------------------
Operating earnings $148.5 $177.9 $750.6 $749.4
=======================================
Selected Balance Sheet Statistics
-----------------------------------
Period Ended
-----------------------------------
12/31/03 12/31/02 12/31/01
-----------------------------------
Total assets (in billions) $107.8 $89.9 $88.4
Total equity (in millions) $7,399.6 $6,657.2 $6,820.3
Total equity excluding accumulated
other comprehensive income (in
millions) $ 6,228.3 $ 6,021.4 $ 6,672.8
End of period shares outstanding
(in millions) 320.7 334.4 360.1
Book value per share $23.07 $19.91 $18.94
Book value per share excluding
accumulated other comprehensive
income $ 19.42 $ 18.01 $ 18.53
Principal Financial Group, Inc.
Reconciliation of Non-GAAP Financial Measures to U.S. GAAP
(in millions, except as indicated)
-----------------------------------
Three Months Year Ended
Ended
-----------------------------------
12/31/03 12/31/02 12/31/03 12/31/02
-----------------------------------
Diluted Earnings Per Share:
Operating Earnings 0.46 0.53 2.30 2.14
Net realized/unrealized capital
gains/(losses) 0.05 (0.27) (0.16) (0.69)
Other after-tax adjustments 0.12 0.38 0.14 (1.04)
-----------------------------------
Net income 0.63 0.64 2.28 0.41
===================================
Book Value Excluding Other
Comprehensive Income:
Book value excluding other
comprehensive income 19.42 18.01 19.42 18.01
Net unrealized capital
gains/(losses) 4.03 2.46 4.03 2.46
Minimum pension liability (0.01) - (0.01) -
Foreign currency translation (0.37) (0.56) (0.37) (0.56)
-----------------------------------
Book value including other
comprehensive income 23.07 19.91 23.07 19.91
===================================
Operating Revenues:
USAMA 1,024.1 916.8 3,651.0 3,780.5
IAMA 122.4 105.6 412.1 357.9
Life and Health 1,004.5 996.1 4,014.3 3,946.8
Mortgage Banking 301.3 421.7 1,396.8 1,153.0
Corporate and Other 0.3 (16.5) 8.8 (15.1)
-----------------------------------
Total operating revenues 2,452.6 2,423.7 9,483.0 9,223.1
Net realized/unrealized capital
gains (losses) and related fee
adjustments 25.9 (160.4) (78.8) (400.6)
-----------------------------------
Total GAAP revenues 2,478.5 2,263.3 9,404.2 8,822.5
===================================
Operating Earnings:
USAMA 117.6 83.7 433.8 370.9
IAMA 8.2 9.4 34.9 19.5
Life and Health 66.4 61.4 241.2 233.1
Mortgage Banking (42.8) 29.1 53.2 142.9
Corporate and Other (0.9) (5.7) (12.5) (17.0)
-----------------------------------
Total operating earnings 148.5 177.9 750.6 749.4
Net realized/unrealized capital
gains (losses) 16.0 (90.1) (51.6) (243.9)
Other after-tax adjustments 39.4 127.6 47.3 (363.2)
-----------------------------------
Net income 203.9 215.4 746.3 142.3
===================================
Net Realized/Unrealized Capital
Gains (Losses):
Net realized/unrealized capital
gains (losses), as adjusted 16.0 (90.1) (51.6) (243.9)
Add:
Amortization of DPAC (2.1) (16.6) (5.1) (35.4)
Capital gains (losses) distributed 1.5 (6.1) 4.5 12.7
Tax impacts 10.0 (47.6) (26.7) (134.0)
Minority interest capital gains 0.5 - 0.1 -
Less related fee adjustments:
Unearned front-end fee income (0.5) (20.0) 4.6 (14.0)
Certain market value adjustments
to fee revenues (1.2) (9.6) (17.7) (31.8)
-----------------------------------
GAAP net realized/unrealized
capital gains (losses) 27.6 (130.8) (65.7) (354.8)
===================================
Other After Tax Adjustments:
IRS audit issue 28.9 138.0 28.9 138.0
Demutualization expenses - - - (2.0)
Loss contingency reserve - (8.6) - (21.6)
FIN 46 implementation - (3.4) -
SFAS 142 implementation - - - (280.9)
Discontinued operations 10.5 (1.8) 21.8 (196.7)
-----------------------------------
Total other after-tax adjustments 39.4 127.6 47.3 (363.2)
===================================
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