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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission file number 1-16725
PRINCIPAL FINANCIAL GROUP, INC.
(Exact name of Registrant as specified in its charter)
Delaware 711 High Street, 42-1520346
(State or other Des Moines, Iowa 50392 (I.R.S. Employer
jurisdiction of (Address of principal Identification Number)
incorporation or executive offices)
organization) (515) 247-5111
(Registrant's telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, par value $0.01 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant Item 405 of
Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and will
not be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment of this Form 10-K. |X|
As of February 28, 2002, there were outstanding 360,826,332 shares of Common
Stock, $0.01 par value per share of the Registrant.
The aggregate market value of the shares of the Registrant's common equity held
by non-affiliates of the Registrant was $8,789,729,448 based on the closing
price of $24.36 per share of Common Stock on the New York Stock Exchange on
February 28, 2002.
Documents Incorporated by Reference
The information required to be furnished pursuant to Part III of this Form 10-K
is set forth in, and is hereby incorporated by reference herein from, the
Registrant's definitive proxy statement for the annual meeting of shareholders
to be held on May 20, 2002, to be filed by the Registrant with the Securities
and Exchange Commission pursuant to Regulation 14A not later than 120 days after
the year ended December 31, 2001.
PRINCIPAL FINANCIAL GROUP, INC.
(SUCCESSOR TO PRINCIPAL MUTUAL HOLDING COMPANY)
TABLE OF CONTENTS
PART I........................................................................2
Item 1. Business.............................................................2
Item 2. Properties..........................................................34
Item 3. Legal Proceedings...................................................34
Item 4. Submission of Matters to a Vote of Security Holders.................35
Executive Officers of the Registrant.........................................35
PART II......................................................................36
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters.......................................36
Item 6. Selected Financial Data.............................................37
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................43
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.........105
Item 8. Financial Statements and Supplementary Data........................111
Report of Management.....................................................111
Report of Independent Auditors...........................................112
Consolidated Statements of Financial Position............................113
Consolidated Statements of Operations....................................114
Consolidated Statements of Stockholders' Equity..........................115
Consolidated Statements of Cash Flows....................................116
Notes to Consolidated Financial Statements...............................118
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..............................175
PART III....................................................................175
Item 10. Directors and Executive Officers of the Registrant.................175
Item 11. Executive Compensation.............................................175
Item 12. Security Ownership of Certain Beneficial Owners and Management.....175
Item 13. Certain Relationships and Related Transactions.....................175
PART IV.....................................................................176
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....176
Signatures..................................................................178
Report of Independent Auditors on Schedules..............................179
Schedule I - Summary of Investments - Other Than Investments
in Related Parties...............................................180
Schedule II - Condensed Financial Information of Registrant
(Parent Only)....................................................181
Schedule III - Supplementary Insurance Information.......................184
Schedule IV - Reinsurance................................................186
NOTE CONCERNING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, including the Management's Discussion and
Analysis of Financial Condition and Results of Operations, contains statements
which constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995, including statements relating to
trends in operations and financial results and the business and the products of
the Registrant and its subsidiaries, as well as other statements including words
such as "anticipate," "believe," "plan," "estimate," "expect," "intend" and
other similar expressions. Forward-looking statements are made based upon
management's current expectations and beliefs concerning future developments and
their potential effects on the Company. Such forward-looking statements are not
guarantees of future performance.
Actual results may differ materially from those included in the forward-looking
statements as a result of risks and uncertainties including, but not limited to
the following: (1) competition from companies that may have greater financial
resources, broader arrays of products, higher ratings and stronger financial
performance may impair our ability to retain existing customers, attract new
customers and maintain our profitability; (2) a decline or increased volatility
in the securities markets could result in investors withdrawing from the markets
or decreasing their rates of investment, either of which could reduce our net
income, revenues and assets under management; (3) a downgrade in Principal Life
Insurance Company's ("Principal Life") financial strength ratings may increase
policy surrenders and withdrawals, reduce new sales and terminate relationships
with distributors; (4) our efforts to reduce the impact of interest rate changes
on our profitability and surplus may not be effective; (5) if we are unable to
attract and retain sales representatives and develop new distribution sources,
sales of our products and services may be reduced; (6) our international
businesses face political, legal, operational and other risks that could reduce
our profitability in those businesses; (7) fluctuations in foreign currency
exchange rates could reduce our profitability; (8) a decline in Australian
equity values may reduce the profitability of BT Financial Group; (9) our
reserves established for future policy benefits and claims may prove inadequate,
requiring us to increase liabilities; (10) our investment portfolio is subject
to several risks which may diminish the value of our invested assets and affect
our sales, profitability and the investment returns credited to our customers;
(11) our ability to pay dividends and meet our obligations may be constrained by
the limitations on dividends Iowa insurance laws impose on Principal Life; (12)
we may need to fund deficiencies in our closed block ("Closed Block"); assets
allocated to the Closed Block benefit only the holders of Closed Block policies;
(13) changes in regulations or accounting standards may reduce our
profitability; (14) a challenge to the Insurance Commissioner of the State of
Iowa's approval of the plan of conversion could put the terms of our
demutualization in question and reduce the market price of our common stock;
(15) litigation and regulatory investigations may harm our financial strength
and reduce our profitability; (16) sales of shares distributed in the
demutualization may reduce the market price of our common stock; (17) applicable
laws and our stockholder rights plan, certificate of incorporation and by-laws
may discourage takeovers and business combinations that our stockholders might
consider in their best interests; (18) a downgrade in our debt ratings may
adversely affect our ability to secure funds; and (19) the impact of September
11, 2001, terrorist attacks and military and other actions may result in
decreases in our net income, revenue and assets under management and may
adversely affect our investment portfolio.
1
PART I
Item 1. Business
The Principal Financial Group is a leading provider of retirement savings,
investment and insurance products and services with $120.2 billion in assets
under management and approximately thirteen million customers worldwide as of
December 31, 2001. We were organized as an individual life insurer in 1879,
formed a mutual insurance holding company in 1998, and Principal Financial
Group, Inc. was organized on April 18, 2001, as a Delaware business corporation.
Our U.S. and international operations concentrate primarily on asset management
and accumulation. In addition, we offer a broad range of individual life and
disability insurance, group life and health insurance, and residential mortgage
loan origination and servicing in the U.S.
We focus on providing retirement products and services to businesses and their
employees. We provided services to more 401(k) plans in the U.S. in 2000 than
any other bank, mutual fund or insurance company, according to surveys conducted
by CFO magazine. We also had the leading market share in 2000 within the 401(k)
market for businesses with less than 500 employees based on number of plans and
number of participants according to the Spectrem Group.
We believe there are attractive growth opportunities in the 401(k) and other
defined contribution pension plan markets in the U.S. and internationally. We
believe our expertise and leadership in serving the U.S. pension plan market
give us a unique competitive advantage in the U.S., as well as in countries with
a trend toward private sector defined contribution pension systems.
Demutualization and Initial Public Offering
The board of directors of Principal Mutual Holding Company, on March 31, 2001,
unanimously adopted a plan of conversion from a mutual insurance holding company
("MIHC") to a stock company (the "Plan"). This process is called
demutualization.
On July 24, 2001, policyholders entitled to vote approved the Plan. A public
hearing was held on the Plan on July 25, 2001, and the Iowa Insurance
Commissioner approved the Plan on August 28, 2001.
Under the terms of the Plan, effective October 26, 2001, Principal Mutual
Holding Company converted from an MIHC to a stock company. All membership
interests in Principal Mutual Holding Company were extinguished on that date and
eligible policyholders received compensation in the form of common stock, cash
or policy credits. In aggregate, 260.8 million shares of common stock, $1,177.5
million of cash and $472.6 million of policy credits were distributed as
demutualization compensation.
In connection with the restructuring effective October 26, 2001, Principal
Mutual Holding Company and two of its subsidiaries, Principal Financial Group,
Inc., an Iowa corporation, and Principal Financial Services, Inc., an Iowa
corporation, merged with and into Principal Iowa Newco, Inc., an Iowa
corporation, which changed its name to Principal Financial Services, Inc.
("PFSI"). PFSI is a wholly-owned subsidiary of Principal Financial Group, Inc.,
a Delaware corporation.
On October 26, 2001, Principal Financial Group completed its initial public
offering ("IPO") in which we issued 100.0 million shares of common stock at a
price of $18.50 per share. Net proceeds from the IPO were $1,753.9 million, of
which $64.2 million was retained by Principal Financial Group, Inc., and
$1,689.7 million was contributed to Principal Life Insurance Company ("Principal
Life") principally to fund demutualization compensation to policyholders
receiving cash or policy credits and to cover certain expenses related to our
demutualization. Proceeds were net of offering costs of $96.5 million and a
related tax benefit of $0.4 million.
On November 9, 2001, Principal Financial Group issued 15.0 million additional
shares of common stock, at a price of $18.50 per share, as a result of the
exercise of over-allotment options granted to underwriters in the IPO. Net
proceeds from the over-allotment were $265.4 million.
Costs relating to the demutualization, excluding costs relating to the IPO, were
$18.6 million and $7.2 million, net of tax, in 2001 and 2000, respectively.
Demutualization expenses consist primarily of printing and mailing costs and our
aggregate cost of engaging independent accounting, actuarial, financial,
investment banking, legal and other consultants to advise us on the
demutualization. In addition, our costs included the costs of the advisors of
2
the Iowa Insurance Commissioner and the New York State Insurance Department,
other regulatory authorities and internal allocated costs for staff and related
costs associated with the demutualization.
Our Operating Segments
We organize our businesses into four operating segments:
o U.S. Asset Management and Accumulation;
o International Asset Management and Accumulation;
o Life and Health Insurance; and
o Mortgage Banking.
We also have a Corporate and Other segment which consists of the assets and
activities that have not been allocated to any other segment.
One of the primary measures of our business is assets under management. We
define assets under management to include all assets on which we earn an
asset-based fee or a spread. Further, we measure the composition of assets under
management both by the segment that accumulates the assets and by the entity
that manages the assets. The following table shows the composition of assets
under management by both measures:
Composition of Assets Under Management
As of December 31, 2001
Asset Manager(2)
--------------------------------------------------------------------
Other
Entities of
the
Principal Principal Third-Party Total Assets
Capital BT Financial Financial Asset Under
Management Group Group(3) Managers Management
---------- ------------ ----------- ----------- ------------
(in billions)
Asset Accumulation Source(1)
U.S. Asset Management and
Accumulation...................... $ 73.3 $ - $ 2.4 $ 6.5 $ 82.2
International Asset Management and
Accumulation...................... 0.5 18.9 3.6 2.3 25.3
Life and Health Insurance............ 9.4 - - 0.2 9.6
Mortgage Banking(4).................. - - 0.5 - 0.5
Corporate and Other.................. 2.5 - 0.1 - 2.6
-------- ------- ------- ------- -------
Total............................ $ 85.7 $ 18.9 $ 6.6 $ 9.0 $ 120.2
======== ======= ======= ======= =======
- --------------------
(1) We define "asset accumulation" as the sale of investment-oriented products
and services for which we provide administrative services and/or offer
investment choices. We refer to the segment that sells these products and
services as the "asset accumulation source."
(2) We define "asset management" as the provision of investment advisory
services. We refer to the entity that provides these services as the "asset
manager."
(3) Includes assets managed by Principal Residential Mortgage, Inc., Principal
International and Principal Bank as well as Pension separate account assets
of $1.3 billion, which primarily include shares of our stock allocated to
certain eligible policyholders as a result of our demutualization.
(4) Excludes our mortgage loan servicing portfolio.
When we manage assets, we earn an asset-based fee or a spread. On fee-based
products, we typically pass investment performance through to customers and
bear limited or no investment risk. On spread-based products, we typically
provide a guarantee of return to customers for a specified period of time and
assume the investment risk of the spread, the difference between the investment
3
income we earn and the investment income we credit to customers. Generally,
assets associated with spread-based products are reported on our balance sheet
while assets associated with fee-based products either do not appear on our
balance sheet or are included as separate account assets.
The following table shows by segment the amount of assets on which we earned an
asset-based fee as compared to that on which we earned a spread for the years
indicated:
Assets Under Management
Fee-based/Spread-based Composition
As of December 31,
-------------------------------------------------------------------------------------
2001 2000 1999
------------------------- ------------------------- -------------------------
Fee Spread Total Fee Spread Total Fee Spread Total
------ ------ ------- ------ ------ ------- ------ ------ -------
(in billions)
U.S. Asset Management
and Accumulation... $ 51.1 $ 31.1 $ 82.2 $ 48.9 $ 29.2 $ 78.1 $ 46.9 $ 28.7 $ 75.6
International Asset
Management and
Accumulation....... 22.3 3.0 25.3 25.6 2.8 28.4 28.4 2.2 30.6
Life and Health
Insurance.......... 2.0 7.6 9.6 2.1 7.2 9.3 2.0 6.7 8.7
Mortgage Banking(1)... - 0.5 0.5 - 0.2 0.2 - 0.5 0.5
------ ------ ------- ------ ------ ------- ------ ------ ------
Subtotal........... $ 75.4 $ 42.2 117.6 $ 76.6 $ 39.4 116.0 $ 77.3 $ 38.1 115.4
====== ====== ====== ====== ====== ======
Corporate and Other... 2.6 1.5 1.2
------- ------- ------
Total.............. $ 120.2 $ 117.5 $116.6
======= ======= ======
- ---------------------
(1) Excludes our mortgage loan servicing portfolio.
Our Strategies
We seek to enhance stockholder value by pursuing the most attractive financial
services opportunities consistent with the capabilities of our asset management
and accumulation operations. We intend to accomplish this goal by increasing the
growth and profitability of these businesses through the pursuit of the
following primary strategic initiatives:
Accelerate the growth of our U.S. asset accumulation business. We intend to
strengthen our existing distribution channels and expand into new distribution
channels, further leverage our technology to achieve operating efficiencies,
continue to expand the range of investment options and effectively cross-sell
our products and services.
Increase the growth and profitability of our international asset management and
accumulation business. We will continue to leverage our U.S. product expertise
and operating platforms to strengthen our international operations. We seek to
accelerate the growth of our assets under management by capitalizing on the
international trend toward privatization of public retirement pension systems.
In addition, we intend to continue our progress in managing expenses as we
reduce operating unit costs.
Grow our third-party institutional assets under management. We selectively
target asset classes and customers in the U.S., Australia and globally to
capitalize on the specific strengths of Principal Capital Management and BT
Financial Group. They jointly execute this strategy in their respective markets
and through joint marketing offices in London, Hong Kong and Singapore.
U.S. Asset Management and Accumulation Segment
Our U.S. Asset Management and Accumulation segment consists of:
o asset accumulation operations which provide retirement savings and related
investment products and services to businesses, their employees and other
individuals; and
o Principal Capital Management, our U.S.-based asset manager.
4
The following table shows the operating revenues, operating earnings, assets and
assets under management of our U.S. Asset Management and Accumulation segment
for the years indicated:
U.S. Asset Management and Accumulation
Selected Financial Highlights
As of or for the year ended December 31,
-----------------------------------------------------------
2001 2000 1999
--------------- --------------- ---------------
($ in millions)
Operating Revenues(1):
U.S. Asset Accumulation............. $ 3,640.3 96% $ 3,398.1 96% $ 3,348.1 96%
Principal Capital Management........ 194.9 5 174.2 5 156.6 5
Intra-segment eliminations(2)....... (35.2) (1) (38.4) (1) (32.1) (1)
--------- --- --------- --- --------- ---
Total............................. $ 3,800.0 100% $ 3,533.9 100% $ 3,472.6 100%
========= === ========= === ========= ===
Operating Earnings:
U.S. Asset Accumulation............. $ 317.0 90% $ 317.6 89% $ 321.2 90%
Principal Capital Management........ 36.8 10 39.0 11 35.4 10
--------- --- --------- --- --------- ---
Total............................. $ 353.8 100% $ 356.6 100% $ 356.6 100%
========= === ========= === ========= ===
Assets:
U.S. Asset Accumulation(3).......... $67,626.5 99% $64,883.9 99% $64,410.4 99%
Principal Capital Management........ 917.3 1 912.0 1 686.0 1
--------- --- --------- --- --------- ---
Total............................. $68,543.8 100% $65,795.9 100% $65,096.4 100%
========= === ========= === ========= ===
Assets Under Management:
($ in billions)
U.S. Asset Accumulation(3).......... $ 74.6 91% $ 71.0 91% $ 70.3 93%
Principal Capital Management........ 7.6 9 7.1 9 5.3 7
--------- --- --------- --- --------- ---
Total............................. $ 82.2 100% $ 78.1 100% $ 75.6 100%
========= === ========= === ========= ===
- ---------------------
(1) Excludes net realized capital gains (losses) and their impact on recognition
of front-end fee revenues and certain market value adjustments to fee
revenues.
(2) Includes eliminations of amounts related to U.S. asset management fee
revenues received from our U.S. asset accumulation operations.
(3) Assets as of December 31, 2001, include separate account assets of $1.3
billion, which primarily include shares of our stock allocated to certain
eligible policyholders as a result of our demutualization.
U.S. Asset Accumulation
Our asset accumulation activities in the U.S. date back to the 1940s when we
first began providing pension plan products and services. We now offer a
comprehensive portfolio of asset accumulation products and services for
retirement savings and investment:
o To businesses of all sizes, we offer products and services for defined
contribution pension plans, including 401(k) and 403(b) plans, defined
benefit pension plans and non-qualified executive benefit plans. For more
basic needs, we offer SIMPLE IRA and payroll deduction plans;
o To large institutional clients, we also offer investment-only products,
including guaranteed investment contracts and funding agreements; and
o To employees of businesses and other individuals, we offer the ability to
accumulate retirement savings through mutual funds, individual annuities and
bank products.
We organize our U.S. asset accumulation operations into four product and service
categories: pension, mutual funds, individual annuities and Principal Bank.
5
Our pension products and services are further grouped into four categories:
full-service accumulation, full-service payout, investment-only and
administration-only.
The following table shows the operating revenues for our U.S. asset accumulation
operations for the years indicated:
U.S. Asset Accumulation
Operating Revenues
For the year ended December 31,
------------------------------------
2001 2000 1999
---------- ---------- ----------
(in millions)
Pension.............................. $ 3,249.5 $ 3,012.7 $ 2,980.3
Mutual Funds......................... 108.3 116.0 95.4
Individual Annuities................. 263.5 267.5 270.2
Principal Bank....................... 33.9 9.2 2.2
Eliminations......................... (14.9) (7.3) -
---------- ---------- ----------
U.S. Asset Accumulation........... $ 3,640.3 $ 3,398.1 $ 3,348.1
========== ========== ==========
The following table shows the asset flow summary for our U.S. asset
accumulation operations for the years indicated:
U.S. Asset Accumulation
Asset Flow Summary
As of or for the year ended
December 31,
----------------------------
2001 2000 1999
-------- -------- --------
(in billions)
Assets Under Management, beginning
of year................................. $ 71.0 $ 70.3 $ 63.5
Deposits................................ 16.1 14.6 14.7
Withdrawals............................. (12.7) (14.3) (11.9)
Investment Performance.................. (0.6) 1.0 5.6
Other................................... 0.8 (0.6) (1.6)
-------- -------- --------
Assets Under Management, end of year....... $ 74.6 $ 71.0 $ 70.3
======== ======== ========
Pension Services and Products
We offer a wide variety of investment and administrative products and services
for defined contribution pension plans, including 401(k) and 403(b) plans,
defined benefit pension plans and non-qualified executive benefit plans. A
403(b) plan is a plan described in section 403(b) of the Internal Revenue Code
that provides retirement benefits for employees of tax exempt organizations and
public schools.
Pension Services
Our investment and administrative products and services respond to a broad range
of employer-sponsored pension plan needs and are available both on a stand-alone
basis or combined to meet the various needs of our customers.
Administrative Services. We believe our ability to minimize the plan sponsor's
administrative tasks has contributed to our success, particularly among small
and medium-sized businesses. We differentiate ourselves from our competitors by
providing every plan administrative service that is generally required or
desired by a pension plan sponsor, regardless of the type or size of the plan.
The following table describes the primary administrative services we offer to
both plan sponsors and plan participants in defined contribution plans and
defined benefit plans:
6
Services Offered to Plan Sponsors
---------------------------------
Defined Contribution Plans o Government compliance and
documentation
o Fund accounting
Defined Benefit Plans o Actuarial valuation services
o Government compliance and
documentation
o Fund accounting
Services Offered to Plan Participants
-------------------------------------
Defined Contribution Plans o Account recordkeeping
o Education and reporting
o Phone center
o Internet access and transaction
capabilities
o Voice response system
o Benefit planning and benefit
distribution
Defined Benefit Plans o Benefit determination and benefit
distribution
o Education and reporting
o Phone center
o Internet access and transaction
capabilities
Investment Services. We provide a full range of guaranteed investment contracts,
money market, equity, fixed income, balanced, indexed and real estate investment
options to our customers. We provide these services through our affiliated asset
managers, Principal Capital Management and BT Financial Group, and through
third-party asset managers. Our affiliate, Principal Financial Advisors, Inc.,
provides asset allocation services to our defined benefit clients. As of
December 31, 2001, we had approximately 229 investment options available,
including U.S. and international fixed income and equity investment options. Our
variable investment options are either in the form of a separate account or a
mutual fund.
Pension Products
The following table shows pension asset flows for the years indicated:
U.S. Asset Accumulation
Pension Asset Flow Summary
As of or for the year ended
December 31,
----------------------------
2001 2000 1999
-------- -------- --------
(in billions)
Assets Under Management, beginning of year... $ 61.7 $ 61.3 $ 55.2
Deposits................................... 13.5 12.2 12.9
Withdrawals................................ (11.0) (12.4) (10.2)
Investment Performance..................... (0.1) 0.9 5.4
Other...................................... 0.6 (0.3) (2.0)
-------- -------- --------
Assets Under Management, end of year......... $ 64.7 $ 61.7 $ 61.3
======== ======== ========
Full-service Accumulation. Full-service accumulation products respond to the
needs of plan sponsors seeking both administrative and investment services for
defined contribution plans or defined benefit plans. The investment component of
our defined contribution plans may be in the form of a group annuity contract or
a mutual fund. The investment component of our defined benefit plans is
available only in the form of a group annuity contract.
As of December 31, 2001, we provided full-service accumulation products to
33,282 defined contribution pension plans, of which 25,289 were 401(k) plans,
covering 1.9 million plan participants, and to 3,148 defined benefit pension
plans, covering 240,047 plan participants. As of December 31, 2001,
approximately 89% of our pension assets under management were managed by
Principal Capital Management or BT Financial Group. Third-party asset managers
provide asset management services with respect to a majority of the remaining
assets.
Prior to 2001, annuities were the only product through which we delivered both
administrative and investment services to our defined contribution plan and
7
defined benefit plan customers. Under U.S. federal securities laws, neither the
annuity nor the underlying investment options are required to be registered with
the SEC. Beginning January 2001, we began to offer administrative and investment
services to defined contribution plan customers through Principal Advantage, a
new 401(k) product based on our recently expanded mutual fund, Principal
Investors Fund. We offer funds covering the full range of stable value, equity,
fixed income and international investment options managed by our affiliated
asset managers, Principal Capital Management and BT Financial Group, as well as
third-party asset managers.
Full-service Payout. Full-service payout products respond to the needs of
pension plan participants who, upon retirement or termination of their
employment, leave their pension plans, and who seek both administrative and
investment services for distributions from the plans they are leaving. Plan
participants who seek these services include those departing pension plans we
service, as well as pension plans other providers service. We offer both
flexible income option products and single premium group annuities. Flexible
income option products allow the customer to control the rate of distribution,
or payout, and provide limited performance guarantees. Single premium group
annuities are immediate or deferred annuities that provide a current or future
specific income amount, fully guaranteed by us. Both products are available to
defined contribution and defined benefit plan participants. For both products,
we make regular payments to individuals, invest the underlying assets on their
behalf and provide tax reporting to them.
Single premium group annuities are traditionally used in conjunction with
defined benefit plans, particularly those where the plan is being terminated. In
such instances, the plan sponsor transfers all its obligations under the plan to
an insurer by paying a single premium. Increasingly, these products are
purchased by defined contribution plan participants who reach retirement age.
Plan sponsors restrict their purchases to insurance companies with superior or
excellent financial quality ratings because the Department of Labor has mandated
that annuities be purchased only from the "safest available" insurer. In 2000,
we received $498.3 million of single premium group annuities annualized new
deposits, ranking us second in the U.S. according to LIMRA International, Inc.'s
2000 U.S. Institutional Pension Sales and Assets report.
Deposits to full-service payout products are in the form of single payments. As
a result, the level of new deposits can fluctuate depending on the number of
retirements and large-scale annuity sales in a particular fiscal quarter. Assets
under management relating to single premium group annuities generate a spread
between the investment income earned by us and the amount credited to the
customer. Assets under management relating to flexible income option products
may generate either spread or fee revenue depending on the investment options
elected by the customer.
Investment-Only. The three primary products for which we provide investment-only
services are: guaranteed investment contracts; funding agreements; and other
investment-only products.
Guaranteed investment contracts ("GICs") and funding agreements pay a specified
rate of return. The rate of return can be a floating rate based on an external
market index or a fixed rate. Some of these investment-only products provide a
feature which permits plan participants to redeem or transfer funds in their
accounts at book value during the term of the contract. All of our
investment-only products contain provisions limiting early surrenders, including
penalties for early surrenders and minimum notice requirements. Put provisions
give customers the option to terminate a contract prior to maturity, provided
they give us a minimum notice period.
The following table breaks down by notice period the put provisions of our
guaranteed investment contracts and funding agreements:
8
U.S. Asset Accumulation
U.S. GAAP Reserves for Guaranteed Investment
Contracts and Funding Agreements by
Withdrawal Provisions
As of December 31, 2001
-----------------------
(in millions)
Book Value Out(1):
Puttable:
Less than 30 days' put....................... $ -
30-89 days' put.............................. -
90-180 days' put............................. -
More than 180 days' put...................... 55.1
No active put provision(2)................... -
-----------------------
Total puttable............................. 55.1
Surrenderable:
Book value out without surrender charge...... 22.9
Book value out with surrender charge......... 396.3
-----------------------
Total surrenderable........................ 419.2
-----------------------
Total book value out.............................. 474.3
Market Value Out(3):
Less than 30 days' notice......................... 26.9
30-89 days' notice................................ 281.9
90-180 days' notice............................... 1,133.6
More than 180 days' notice........................ 4,795.6
No active surrender provision..................... 238.5
-----------------------
Total market value out..................... 6,476.5
Not puttable or surrenderable.............. 11,502.1
-----------------------
Total GICs and funding agreements.......... $ 18,452.9
=======================
- ---------------------
(1) Book Value Out: The amount equal to the sum of deposits less withdrawals
with interest accrued at the contractual interest rate.
(2) Contracts currently in initial lock-out period but which will become
puttable with 90 days' notice at some time in the future.
(3) Market Value Out: The amount equal to the book value out plus a market
value adjustment to adjust for changes in interest rates.
Deposits to investment-only products are predominantly in the form of single
payments. As a result, the level of new deposits can fluctuate from one fiscal
quarter to another. Assets invested in guaranteed investment contracts and
funding agreements generate a spread between the investment income earned by us
and the amount credited to the customer. Our other investment-only products
consist of separate accounts invested in either equities or fixed income
instruments.
Administration-Only. We provide fee-based administrative services for defined
contribution plans, including 401(k) plans, where a third-party provides the
investment choices. As of December 2001, we provided administration-only
services to 3,454 defined contribution plans covering approximately 183,000
employees. In addition to defined contribution plans, we currently provide
administration-only services to 317,884 individual retirement accounts.
Managing Risk in Spread-Based Products
Because of the significant guarantees we provide as part of our spread-based
asset accumulation products, risk management is particularly important in this
line of business. To facilitate risk management, we segregate and manage the
assets supporting our spread-based products separately from the rest of our
general account. Our risk management strategy is more fully described in Part
II, Item 7A, "Quantitative and Qualitative Information about Market Risk."
9
The following table illustrates, for the years indicated, gross new deposits
under management and reserves for the spread-based products in our U.S. asset
accumulation pension operations:
U.S. Asset Accumulation
Pension Spread-Based Products Selected Financial Data
As of or for the year ended
December 31,
----------------------------------
2001 2000 1999
---------- ---------- ----------
(in millions)
Gross New Deposits Under Management:
Guaranteed investment contracts.......... $ 2,456.6 $ 1,685.2 $ 3,221.1
Funding agreements....................... 911.1 1,416.0 1,381.0
Full-service Payout...................... 752.4 519.7 562.4
---------- ---------- ----------
Total.................................. $ 4,120.1 $ 3,620.9 $ 5,164.5
========== ========== ==========
Reserves:
Guaranteed investment contracts.......... $ 13,750.0 $ 14,327.1 $ 15,520.7
Funding agreements....................... 4,329.4 3,247.4 1,881.9
Full-service Payout...................... 5,393.9 4,762.2 4,390.4
Separate Account GICs.................... 373.5 373.8 319.1
---------- ---------- ----------
Total.................................. $ 23,846.8 $ 22,710.5 $ 22,112.1
========== ========== ==========
Markets and Distribution
We offer our pension products and services to employer-sponsored pension plans,
including qualified and non-qualified defined contribution plans, qualified
defined benefit plans and institutional investors. Our primary target market is
pension plans sponsored by small and medium-sized businesses, which we believe
remains under-penetrated. Only 17% of businesses with less than 100 employees,
and 38% of businesses with between 100 and 500 employees, offered a 401(k) plan
in 2000, according to the Spectrem Group. The same study indicates that 87% of
employers with 500 or more employees offered a 401(k) plan in 2000. The
following tables break down, for the years indicated, the number of plans and
assets under management for our full-service accumulation business by employer
size:
U.S. Asset Accumulation
Pension Full-service Accumulation Data by Employer Size
As of December 31,
------------------------------
2001 2000 1999
-------- -------- --------
Number of Plans:
1 - 99 employees........................... 29,529 30,110 32,096
100 - 499 employees.......................... 3,212 3,228 3,123
500 - 999 employees.......................... 333 348 316
1000+ employees.............................. 208 195 205
-------- -------- --------
Number of Defined Contribution Plans...... 33,282 33,881 35,740
Number of Defined Benefit Plans........... 3,148 3,286 3,425
-------- -------- --------
Total.................................. 36,430 37,167 39,165
======== ======== ========
Average Number of Employees Per Plan......... 65 63 61
10
As of December 31,
---------------------------
2001 2000 1999
------- ------- -------
(in billions)
Assets under Management:
1 - 99 employees.......................... $ 17.6 $ 16.7 $ 17.9
100 - 499 employees......................... 10.4 10.2 10.7
500 - 999 employees......................... 3.2 3.1 3.1
1000+ employees............................. 6.0 5.6 5.7
------- ------- -------
Defined Contribution Assets Under
Management............................. 37.2 35.6 37.4
Defined Benefit Assets Under
Management............................. 5.6 6.4 5.9
------- ------- -------
Total................................. $ 42.8 $ 42.0 $ 43.3
======= ======= =======
Full-service Accumulation. We sell our full-service accumulation products and
services nationally, primarily through a captive retirement services sales
force. As of December 31, 2001, 122 retirement services sales representatives in
53 offices, operating as a wholesale distribution network, maintained
relationships with approximately 13,000 independent brokers, consultants and
agents. Retirement services sales representatives are an integral part of the
sales process alongside the referring consultant or independent broker. We
compensate retirement services sales representatives through a blend of salary
and production-based incentives, while we pay independent brokers, consultants
and agents a commission or fee.
As of December 31, 2001, we had a separate staff of 151 service representatives
located in the sales offices who play a key role in the ongoing servicing of
pension plans by: providing local services to our customers, such as renewing
contracts, revising plans and solving any administration problems; communicating
the customers' needs and feedback to us; and helping employees understand the
benefits of their pension plans.
We believe that our approach to pension plan services distribution gives us a
local sales and service presence that differentiates us from many of our
competitors. We have also recently established a number of marketing and
distribution relationships to increase the sales of our accumulation products
with firms such as Frank Russell Investment Management Company, A.G. Edwards and
AON.
We sell our annuity-based products through sales representatives, agents and
brokers who are not required to register with the SEC.
Principal Advantage, our mutual fund-based product, is targeted at defined
contribution plans with over $3.0 million of assets. We sell Principal Advantage
through affiliated registered representatives, stockbrokers, registered
investment advisors and fee-based consultants through sales agreements with
non-affiliated broker-dealers. Principal Advantage gives us access to
SEC-registered distributors who are not traditional sellers of annuity-based
products and opens new opportunities for us in the investment advisor and
broker-dealer distribution channels.
We significantly expanded our marketing and product development efforts into the
"not-for-profit" market in 1999, with the acquisition of Professional Pensions,
Inc., which specializes in providing full-service accumulation 403(b) pension
plans to 501(c)(3) not-for-profit organizations. As of December 31, 2001, we
provided pension products and services to 851 pension plans sponsored by
educational and not-for-profit organizations with $1,355.8 million of assets
under management.
Impact401k.com is our self-service Internet site, through which plan sponsors
can handle the purchase, enrollment and administration of a 401(k) pension plan
entirely through the Internet. Impact401k.com allows plan participants to gain
on-line access to their accounts, transfer funds between accounts and review
customized investment options. Accordingly, our employees do not have to perform
any administrative activities. Impact401k.com is targeted at smaller businesses
that seek a low cost product, as well as businesses of any size that prefer to
handle administrative activities through the Internet.
Full-service Payout and Investment-Only. Our primary distribution channel for
full-service payout and investment-only products was comprised of 13 specialized
home office marketers as of December 31, 2001, working through consultants and
brokers that specialize in this type of business. Our home office marketers also
make sales directly to institutions. Our nationally dispersed retirement
services sales representatives act as a secondary distribution channel for these
11
products. Principal Connection also distributes full-service payout products to
participants in plans we service who are terminating employment or retiring.
We market guaranteed investment contracts and funding agreements primarily to
pension plan sponsors and other institutions. We also offer them as part of our
full-service accumulation products. We sell our guaranteed investment contracts
primarily to plan sponsors for funding of tax-qualified retirement plans. We
sell our funding agreements to institutions that may or may not be pension
funds. Our primary market for funding agreements is institutional investors in
the U.S. and around the world. These investors purchase debt obligations from a
special purpose vehicle which, in turn, purchases a funding agreement from us
with terms similar to those of the debt obligations. The strength of this market
is dependent on debt capital market conditions. As a result, our sales through
this channel can vary widely from one quarter to another.
Administration-Only. We sell our defined contribution plan administration-only
services primarily through business relationships with investment management
firms and insurance companies. These organizations package our administrative
services with their proprietary pension plan investment services for sale
through their own distribution channels. We have a small number of regional
consultants who facilitate sales of our defined contribution plan administrative
services by these organizations. Our administration-only individual retirement
account services are distributed by a specialized home office marketer who
establishes business relationships with security brokerage firms that offer
individual retirement account programs directly to the public.
Mutual Funds
We have been providing mutual funds to customers since 1969. We offer mutual
funds to individuals and businesses, for use within variable life and variable
annuity contracts and for use in employer-sponsored pension plans.
Products and Services
We were ranked in the top quartile among U.S. mutual fund managers in terms of
total mutual fund assets under management as of December 31, 2001, according to
the Investment Company Institute. The value of our mutual fund assets we managed
was $6.5 billion as of December 31, 2001. We provide accounting, compliance,
corporate governance, product development and transfer agency functions for all
mutual funds we organize. As of December 31, 2001, our mutual fund operations
served approximately 637,300 mutual fund shareholder accounts.
Principal Mutual Funds. Principal Mutual Funds is a family of mutual funds
offered to individuals and businesses, with 26 mutual funds and $3.6 billion in
assets under management as of December 31, 2001. We report the results for these
funds in this segment under "Mutual Funds".
Principal Variable Contracts Fund. Principal Variable Contracts Fund is a series
mutual fund which, as of December 31, 2001, provided 26 investment options for
use as funding choices in variable annuity and variable life insurance contracts
issued by Principal Life. As of December 31, 2001, this fund had $2.3 billion in
assets under management. We report the results for the funds backing variable
annuity contracts in this segment under "Individual Annuities." We report the
results for the funds backing variable life insurance contracts in the Life and
Health Insurance segment.
Principal Investors Fund. Principal Investors Fund is a recently expanded series
mutual fund which, as of December 31, 2001, offered 44 investment options. This
fund acts as the funding vehicle for Principal Advantage, the defined
contribution product described above under "U.S. Asset Management and
Accumulation Segment-U.S. Asset Accumulation-Pension Services and
Products-Pension Products-Full-service Accumulation." This fund also offers a
retail class of shares to primarily individuals for IRA rollovers. As of
December 31, 2001, this retail class of shares had $128.9 million in assets
under management. We report the results for this fund, excluding the retail
class of shares, under "Pension". We report the results of the retail class of
shares in this segment under "Mutual Funds."
The following table shows our mutual funds asset flow summary for the years
indicated:
12
U.S. Asset Accumulation
Retail Mutual Funds Asset Flow Summary(1)
As of or for the year ended
December 31,
----------------------------
2001 2000 1999
-------- -------- --------
(in billions)
Assets Under Management, beginning of year.... $ 3.9 $ 4.1 $ 3.7
Deposits.................................... 1.3 1.3 1.3
Withdrawals................................. (1.1) (1.4) (1.1)
Investment Performance...................... (0.4) (0.1) 0.2
-------- -------- --------
Assets Under Management, end of year.......... $ 3.7 $ 3.9 $ 4.1
======== ======== ========
- ---------------------
(1) Includes asset flows for the Principal Mutual Funds and the retail share
class of the Principal Investors Fund.
Markets and Distribution
Our markets for retail mutual funds are individuals seeking to accumulate
savings for retirement and other purposes and small businesses seeking to use
mutual funds as the funding vehicle for pension plans, as well as non-qualified
individual savings plans utilizing payroll deductions. We also market our retail
mutual funds to participants in pension plans who are departing their plans and
reinvesting their retirement assets into individual retirement accounts.
Our retail mutual funds are sold primarily through our affiliated financial
representatives, independent brokers registered with our securities
broker-dealer Princor Financial Services Corporation, ("Princor"), registered
representatives from other broker-dealers, direct deposits from our employees
and others and Principal Connection. Princor, as the marketing arm of our mutual
fund business, recruits, trains and supervises registered representatives
selling our products.
The following table shows sales, as measured by deposits, of our retail mutual
funds by distribution channel for the years indicated:
U.S. Asset Accumulation
Retail Mutual Funds Sales by Distribution Channel(1)
For the year ended December 31,
-------------------------------
2001 2000 1999
-------- -------- ---------
(in millions)
Affiliated financial representatives....... $ 311.0 $ 326.9 $ 442.0
Principal Connection....................... 192.4 141.5 114.2
Independent brokers and registered
representatives of Princor............... 15.2 13.6 3.3
Other (non-affiliated) broker-dealers...... 93.0 66.9 40.4
Direct deposits(2)......................... 38.9 18.6 25.9
-------- -------- ---------
Total.................................... $ 650.5 $ 567.5 $ 625.8
======== ======== =========
- ---------------------
(1) Excludes deposits to money market funds totaling $686.0 million in 2001,
$732.8 million in 2000 and $621.3 million in 1999.
(2) Direct deposits from the Principal Financial Group employees and others.
Individual Annuities
Individual annuities offer a tax-deferred means of accumulating retirement
savings and provide a tax-efficient source of income during the payout period.
13
Products and Services
We offer both fixed and variable annuities to individuals. Individual annuities
may be deferred, in which case assets accumulate until the contract is
surrendered, the customer dies or the customer begins receiving benefits under
an annuity payout option, or immediate, in which case payments begin within one
year of issue and continue for a fixed period of time or for life.
Fixed Annuities. Our individual fixed annuities are predominantly single premium
deferred annuity contracts. These contracts are savings vehicles through which
the customer makes a single deposit with us. Under the contract, the principal
amount is guaranteed and for a specified time period, typically one year, we
credit the customer's account at a fixed interest rate. Thereafter, we reset,
typically annually, the interest rate credited to the contract based upon market
and other conditions. Our major source of income from fixed annuities is the
spread between the investment income we earn on the underlying general account
assets and the interest rate we credit to customers' accounts. We bear the
investment risk because, while we credit customers' accounts with a stated
interest rate, we cannot be certain the investment income we earn on our general
account assets will exceed that rate.
Variable Annuities. Our individual variable annuity products consist almost
entirely of flexible premium deferred variable annuity contracts. These
contracts are savings vehicles through which the customer makes a single deposit
or a series of deposits of varying amounts and intervals. Customers have the
flexibility to allocate their deposits to investment sub-accounts managed by
Principal Capital Management, or third-party asset managers including Fidelity
Investments, AIM Advisors, Inc., Morgan Stanley Asset Management, J.P. Morgan
Investment Management, Inc., Janus Capital Corporation, Neuberger Berman
Management, Inc., The Dreyfus Corporation, Templeton Global Advisors Limited,
American Century Investment Management, INVESCO Funds Group, Goldman Sachs Asset
Management, Duncan-Hurst Capital Management, Inc., Turner Investment Partners,
Inc., and Berger, LLC. As of December 31, 2001, 58% of our $2.4 billion in
variable annuity account balances was allocated to investment sub-accounts
managed by Principal Capital Management, 30% to investment sub-accounts managed
by third-party asset managers and 12% to our general account, also managed by
Principal Capital Management. The customers bear the investment risk and have
the right to allocate their assets among various separate investment
sub-accounts. The value of the annuity fluctuates in accordance with the
experience of the investment sub-accounts chosen by the customer. Customers have
the option to allocate all or a portion of their account to our general account,
in which case we credit interest at rates we determine, subject to contractual
minimums. Customers may also elect death benefit guarantees. Our major source of
revenue from variable annuities is mortality and expense fees we charge to the
customer, generally determined as a percentage of the market value of the assets
held in a separate investment sub-account.
Markets and Distribution
Our target markets for individual annuities include owners, executives and
employees of small and medium-sized businesses, and individuals seeking to
accumulate and/or eventually receive distributions of assets for retirement. We
market both fixed and variable annuities to both qualified and non-qualified
pension plans.
We sell our individual annuity products largely through our affiliated financial
representatives, who accounted for 74%, 82% and 79% of annuity sales for the
years ended December 31, 2001, 2000 and 1999, respectively. The remaining sales
were made through brokerage general agencies, banks, Principal Connection and
unaffiliated broker-dealer firms.
The following table shows sales of our individual annuities by distribution
channel for the years indicated:
14
U.S. Asset Accumulation
Individual Annuity Sales by Distribution Channel(1)
For the year ended
December 31,
---------------------------
2001 2000 1999
------- ------- -------
(in millions)
Affiliated financial representatives.......... $ 520.6 $ 499.4 $ 409.0
Independent brokers and registered
representatives of Princor................ 77.6 35.4 38.8
Other (non-affiliated) broker dealers......... 5.3 18.3 14.9
Banks......................................... 76.6 30.2 32.8
Principal Connection.......................... 22.3 22.7 23.5
------- ------- -------
Total..................................... $ 702.4 $ 606.0 $ 519.0
======= ======= =======
- --------------------
(1) Excludes deposits related to rollovers from Principal draft account
products.
Principal Bank
Principal Bank, our electronic banking operation, is a federal savings bank that
began its activities in February 1998. It offers traditional retail banking
products and services via the telephone, Internet, ATM or by mail. Our current
products and services offering includes checking and savings accounts,
certificates of deposit, consumer loans, first mortgage loans, home equity
loans, credit cards, debit cards, money market accounts and a college savings
program. As of December 31, 2001, Principal Bank had 61,771 customers and
$1,109.7 million in assets, primarily generated by saving account deposits and
certificates of deposit.
We market our Principal Bank products and services primarily through Principal
Connection to our existing customers, especially pension plan participants and
mortgage customers. Through Principal Bank, we also pursue asset retention
strategies with our existing customers who seek to transfer assets from our
other asset accumulation products by offering them our banking products and
services.
Principal Capital Management
In 1999, we established Principal Capital Management to consolidate our
extensive investment management expertise and to focus on marketing our asset
management services to third-party institutional clients. Principal Capital
Management provides asset management services to our U.S. asset accumulation
businesses and third-party institutional clients, as well as our other
U.S.-based segments. Principal Capital Management provides a full range of asset
management services with emphasis on three primary asset classes: (1) equity
investments; (2) fixed income investments; and (3) real estate investments.
Principal Capital Management manages both U.S. and international assets.
As of December 31, 2001, Principal Capital Management, through its affiliates,
Invista Capital Management, Principal Capital Income Investors, Principal
Capital Real Estate Investors and Spectrum Asset Management, managed $85.7
billion in assets. Our third-party institutional assets were $7.3 billion as of
December 31, 2001, compared to $3.5 billion on January 1, 1999, the date
Principal Capital Management was established.
The following table shows Principal Capital Management's assets under management
by asset class for the years indicated:
15
Principal Capital Management
Assets Under Management by Asset Class
As of December 31,
----------------------------------------
2001 2000 1999
------------ ------------ ------------
($ in billions)
U.S. Equity......................... $ 19.5 23% $ 22.4 27% $ 25.9 32%
International Equity................ 4.1 5 5.6 7 6.3 8
Fixed Income........................ 40.3 47 33.7 40 28.4 34
Commercial Mortgages................ 13.7 16 14.1 17 14.8 18
Commercial Real Estate Equity....... 5.5 6 5.6 7 5.5 7
Other............................... 2.6 3 1.8 2 1.3 1
------ ---- ------ ---- ------ ----
Total............................. $ 85.7 100% $ 83.2 100% $ 82.2 100%
====== ==== ====== ==== ====== ====
The following table shows our asset flow summary for Principal Capital
Management operations for the years indicated:
Principal Capital Management
Asset Flow Summary
As of or for the year ended
December 31,
-----------------------------
2001 2000 1999
------- ------- ---------
(in billions)
Assets Under Management, beginning of year.. $ 83.2 $ 82.2 $ 77.1(1)
Deposits.................................. 16.9 17.4 16.3
Withdrawals............................... (15.3) (15.9) (12.9)
Investment Performance.................... 0.9 1.1 6.7
Other..................................... (1.0) (1.6) (5.0)
Operations acquired....................... 1.0 - -
------- ------- ---------
Assets Under Management, end of year........ $ 85.7 $ 83.2 $ 82.2
======= ======= =========
- -------------------
(1) Includes assets managed by Invista Capital Management and the former
investment department of Principal Life prior to the formation of Principal
Capital Management, effective January 1, 1999.
Products and Services
Principal Capital Management provides a full range of asset management services,
with emphasis on three asset classes through a range of vehicles including
separate accounts, mutual funds, institutional accounts, collateralized debt
securities and Principal Life's general account:
Equity Investments. Principal Capital Management, through its affiliate, Invista
Capital Management, manages equity portfolios, which represented $23.6 billion
in assets as of December 31, 2001. Invista Capital Management provides our
clients with access to a broad array of domestic, international and emerging
markets equity capabilities. The domestic equity products are organized across
growth and value styles, with portfolios targeted to distinct capitalization
ranges. As of December 31, 2001, 76% of Invista Capital Management's assets
under management were derived from our pension products, 18% from other products
of the Principal Financial Group, and the remaining 6% from third-party
institutional clients.
Fixed Income Investments. Principal Capital Management, through its affiliates,
Principal Capital Income Investors and Spectrum Asset Management, manages $40.3
billion in fixed income assets as of December 31, 2001. Principal Capital Income
Investors and Spectrum Asset Management provide our clients with access to
investment-grade corporate debt, mortgage-backed, asset-backed and commercial
mortgage-backed securities, high yield and municipal bonds, private and
syndicated debt instruments and preferred securities. As of December 31, 2001,
68% of these assets were derived from our pension products, 27% from other
products of the Principal Financial Group, and the remaining 5% from third-party
institutional clients.
16
Real Estate Investments. Principal Capital Management, through its affiliate,
Principal Capital Real Estate Investors, manages a commercial real estate
portfolio of $19.2 billion of assets as of December 31, 2001. Principal Capital
Real Estate Investors provides our clients with a broad range of real estate
investment options, including private real estate equity, commercial mortgages,
credit tenant debt, construction-permanent financing, bridge/mezzanine loans,
commercial mortgage-backed securities and real estate investment trusts.
Principal Capital Management had $0.7 billion of assets under management as of
December 31, 2001, from bridge/mezzanine loans and commercial mortgages which
appear on its balance sheet. The commercial mortgages represent the source of
mortgages for our commercial mortgage-backed securitization program. As of
December 31, 2001, 52% of the commercial real estate portfolio was derived from
our pension products, 31% from other products of the Principal Financial Group,
and the remaining 17% from third-party institutional clients.
Markets and Distribution
Principal Capital Management employed 47 institutional sales, relationship
management and client service professionals as of December 31, 2001, who worked
with consultants and directly with large investors to acquire and retain
third-party institutional clients. For the year ended December 31, 2001,
approximately 36% of new institutional clients were originated through direct
client contact by Principal Capital Management representatives, with the balance
derived from consultants.
We also market the combined expertise of Principal Capital Management and BT
Financial Group to third-party institutional clients through joint marketing
offices in London, Hong Kong and Singapore. BT Financial Group's asset
management expertise is complementary to the expertise of Principal Capital
Management.
International Asset Management and Accumulation Segment
Our International Asset Management and Accumulation segment consists of BT
Financial Group and Principal International. As of December 31, 2001, BT
Financial Group was the tenth largest asset manager in Australia according to
ASSIRT. As of December 31, 2001, BT Financial Group had accumulated $21.6
billion of assets under management and provided investment advisory services to
clients with $18.9 billion in assets. Principal International has subsidiaries
in Argentina, Chile, Mexico and Hong Kong and joint ventures in Brazil, Japan
and India. We focus on countries with favorable demographics and a trend toward
private sector defined contribution pension systems. We entered these countries
through acquisitions, start-up operations and joint ventures.
Our International Asset Management and Accumulation segment generated 8%, 7% and
4% of our total operating revenues and $(8.9) million, $(8.5) million and
$(38.4) million of our total operating earnings for the years ended December 31,
2001, 2000 and 1999, respectively.
The following table shows the operating revenues, operating earnings (loss),
assets and assets under management of our International Asset Management and
Accumulation segment for the years indicated:
17
International Asset Management and Accumulation
Selected Financial Highlights
As of or for the year ended December 31,
----------------------------------------------
2001 2000 1999(3)
-------------- -------------- --------------
($ in millions)
Operating Revenues(1):
BT Financial Group......... $ 220.9 30% $ 285.3 45% $ 113.8 30%
Principal International.... 513.1 70 345.4 55 265.8 70
-------- --- -------- --- -------- ---
Total.................... $ 734.0 100% $ 630.7 100% $ 379.6 100%
======== === ======== === ======== ===
Operating Earnings (Loss):
BT Financial Group(2)...... $ (14.8) N/A $ 6.3 N/A $ (4.8) N/A
Principal International.... 5.9 N/A (14.8) N/A (33.6) N/A
-------- --- -------- --- -------- ---
Total.................... $ (8.9) N/A $ (8.5) N/A $ (38.4) N/A
======== === ======== === ======== ===
Assets:
BT Financial Group......... $2,974.3 60% $3,716.8 67% $4,472.8 75%
Principal International.... 1,982.6 40 1,809.1 33 1,454.0 25
-------- --- -------- --- -------- ---
Total.................... $4,956.9 100% $5,525.9 100% $5,926.8 100%
======== === ======== === ======== ===
Assets Under Management:
($ in billions)
BT Financial Group......... $ 21.6 85% $ 25.4 89% $ 28.6 93%
Principal International.... 3.7 15 3.0 11 2.0 7
-------- --- -------- --- -------- ---
Total.................... $ 25.3 100% $ 28.4 100% $ 30.6 100%
======== === ======== === ======== ===
- --------------------
(1) Excludes net realized capital gains (losses) and their impact on recognition
of front-end fee revenues and certain market value adjustments to fee
revenues.
(2) Reflects amortization of goodwill and other intangibles related to the
acquisition of BT Financial Group.
(3) Reflects operations of BT Financial Group from August 31, 1999, the date of
its acquisition.
BT Financial Group
Our acquisition of BT Financial Group was a central element in our expansion of
our international asset management and accumulation businesses.
We measure assets under management in two ways, both by the operation that
accumulates the assets and by the entity that manages the assets. BT Financial
Group both accumulates and manages assets. From an accumulation perspective, BT
Financial Group had assets under management of $21.6 billion as of December 31,
2001. As of that same date, BT Financial Group provided investment advisory
services for $18.9 billion. The difference represents assets accumulated by BT
Financial Group for which another asset manager provides investment advisory
services. BT Financial Group's assets under management decreased A$3.4 billion
from December 31, 2000 to December 31, 2001. However, during the same period the
Australian dollar declined in value relative to the U.S. dollar resulting in a
$3.8 billion decrease in assets under management in U.S. dollar terms.
The following table shows the amount of assets under management by operation for
BT Financial Group for the years indicated:
18
BT Financial Group
Assets Under Management(1)
As of December 31,
---------------------------
2001 2000 1999
------- ------- -------
(in billions)
Retail........................ A$ 18.5 A$ 23.3 A$ 20.9
Institutional................. 16.2 17.5 19.7
Margin Lending................ 1.1 1.1 1.0
Portfolio Services............ 5.2 2.5 0.9
New Zealand................... 1.3 1.1 1.0
Other......................... - 0.2 -
------- ------- -------
Total....................... A$ 42.3 A$ 45.7 A$ 43.5
======= ======= =======
Total....................... $ 21.6 $ 25.4 $ 28.6
======= ======= =======
- --------------------
(1) A$ denotes Australian dollars.
The following table shows BT Financial Group's asset flow summary for the years
indicated:
BT Financial Group
Asset Flow Summary(1)
As of or for the year ended December 31,
-----------------------------------------------------------
2001 2000 1999
----------------- ----------------- ---------------------
(in billions)
Assets Under Management,
beginning of year............... A$ 45.7 $ 25.4 A$ 43.5 $ 28.6 A$ 43.0(2) $ 26.4(2)
Net Deposits and Withdrawals.. (1.3) (0.7) 1.3 0.7 (4.0) (2.7)
Investment Performance........ (1.2) (0.6) 0.9 0.5 4.5 3.0
Effect of Exchange Rates...... - (2.0) - (4.4) - 1.9
Other......................... (0.9) (0.5) - - - -
-------- ------- ------- -------- ---------- ---------
Assets Under Management,
end of year..................... A$ 42.3 $ 21.6 A$ 45.7 $ 25.4 A$ 43.5 $ 28.6
======== ======= ======= ======== ========== =========
- --------------------
(1) A$ denotes Australian dollars.
(2) Includes assets managed by BT Financial Group prior to its acquisition by
the Principal Financial Group. Assets are presented for comparative
purposes only and are not included in segment or consolidated assets under
management amounts reported elsewhere in this document.
Products and Services
BT Financial Group offers a wide range of investment products, margin lending
and portfolio services. BT Financial Group's operations include: retail funds
management, institutional asset management, margin lending, portfolio services
and New Zealand.
Retail Funds Management. To its retail clients, BT Financial Group offers an
extensive range of retirement and investment services, including retail mutual
funds, pensions, annuities and corporate superannuation plans to over 720,000
retail customers as of December 31, 2001. BT Financial Group makes available a
client service call center and the "BT Online" Internet site, both providing
account information and transaction services for investors and financial
intermediaries.
Institutional Asset Management. To its larger institutional clients, both in
Australia and in targeted global markets, BT Financial Group offers products and
services covering a full investment range, including actively managed
diversified and specialist funds, individual client mandates, pooled investment
funds, global equities and fixed income securities, as well as currency and
asset allocation overlays. An overlay is a portfolio strategy that allows an
institution to seek enhanced portfolio returns by changing its exposure to asset
classes without liquidating a portion of its portfolio.
19
Margin Lending. BT Financial Group is one of the largest loan originators in the
Australian market. According to Cannex's November 2001 margin lending report, BT
Financial Group was awarded a four star rating (out of 5) on seven of its margin
lending products and a three star rating on other margin lending products.
Margin lending products assigned four stars are described by Cannex as "Very
good" while those assigned three stars are characterized as "Good." Margin
lending enables investors to borrow up to 70% of the value of mutual funds and
select listed securities. Rising levels of share ownership among Australian
investors has generated increased margin lending, with BT Financial Group's
margin lending portfolio balance of $0.6 billion (A$1.1 billion) as of December
31, 2001. On November 30, 1999, BT Financial Group margin lending operations
securitized its margin lending portfolio with Westpac Banking Corporation, an
Australian Bank. Under the terms of the financing, BT Financial Group margin
lending operations are required to allocate capital equal to approximately 7% of
the outstanding borrowed amount, as a cushion for loan defaults.
Portfolio Services. BT Financial Group is a leading provider of investment
administration and processing in Australia. Wrap is our fastest growing
portfolio services product. It provides independent financial advisors with a
range of investment choices for their clients administered via a central
Internet-based source with a choice of mutual funds and listed equity
securities. This product enables them, on behalf of their clients, to manage all
of a client's investment portfolio. Wrap also provides for custody, settlement
and accounting of all investments with online account capabilities and reporting
to the investor.
New Zealand. BT New Zealand provides a comprehensive range of retail and
institutional asset management services in New Zealand. BT Financial Group's New
Zealand business had $0.6 billion (A$1.3 billion) of assets under management as
of December 31, 2001.
Markets and Distribution
BT Financial Group's products and services are primarily sold throughout
Australia and New Zealand in both the institutional and retail markets. BT
Financial Group also operates institutional asset management offices in Hong
Kong, Singapore and London, as well as a joint venture operation in Malaysia.
As part of its marketing strategy, BT Financial Group has a comprehensive brand
and advertising strategy covering television, print media and the Internet.
Building on its successful brand campaign which positions BT Financial Group in
investment and superannuation, it is now also positioning itself as a leading
provider in the corporate superannuation market. For example, BT Financial Group
developed a television and print campaign to target employers. It focuses on
employee benefits from BT Financial Group's corporate superannuation plan,
referring to corporate sponsored retirement plans. BT Financial Group has
experienced growth in sales of its corporate superannuation plans since the
beginning of 1999. For the year ended December 31, 2001, BT Financial Group had
313 new plans compared to 488 new plans in 2000 and 154 in 1999.
Retail Funds Management. The retail funds management operations of BT Financial
Group provide a number of mutual funds and retirement services, including
superannuation for individuals, small and medium-sized businesses and
institutions, as well as pensions and annuities for retirees. These products are
primarily designed to meet the needs created by the superannuation market in
Australia. BT Financial Group has five investor centers in Australia, which
serve existing clients and advisors and promote BT Financial Group products and
services. Independent financial advisors are the main distribution channel for
retail investment products and superannuation products in Australia. BT
Financial Group also distributes these products through major banks, life
insurers and other mutual fund managers.
Institutional Asset Management. BT Financial Group's institutional products and
services are designed for trustees of corporate superannuation funds
institutions, large corporations and quasi-governmental entities. BT Financial
Group distributes the majority of its institutional asset management products
and services through consultants such as Towers Perrin, Mercer, Watson Wyatt,
Frank Russell and others.
Margin Lending. BT Financial Group's margin lending services target retail
clients and independent financial advisors. These services are marketed through
independent financial advisors and retail investor centers in addition to other
brokers. BT Financial Group's margin lending services allow independent
financial advisors to provide their clients a full range of financial services.
Portfolio Services. BT Financial Group provides portfolio services to large
institutions, corporations and mutual fund managers. Wrap is marketed to
independent financial advisors and other financial intermediaries for a fee.
20
New Zealand. BT Financial Group's New Zealand operations provide a comprehensive
group of products and services across both the retail and institutional markets.
Retail products are distributed through independent financial advisors while
institutional products are distributed through consultants.
Principal International
The activities of Principal International reflect our efforts to accelerate the
growth of our assets under management by capitalizing on the international trend
toward private sector defined contribution pension systems. Through Principal
International, we offer retirement products and services, annuities, mutual
funds and life insurance. We operate through subsidiaries in Argentina, Chile,
Mexico and Hong Kong and joint ventures in Brazil, Japan and India.
The following table shows the asset flow summary for Principal International for
the years indicated:
Principal International
Asset Flow Summary
As of or for the year
ended December 31,
------------------------
2001 2000 1999
------ ------ ------
(in billions)
Assets Under Management, beginning of year..... $ 3.0 $ 2.0 $ 1.2
Deposits..................................... 2.2 1.2 0.4
Withdrawals.................................. (1.2) (0.5) (0.1)
Investment Performance....................... 0.3 0.2 0.1
Operations Acquired.......................... - 0.2 0.6
Other........................................ (0.2) 0.1 (0.1)
Effect of Exchange Rates..................... (0.4) (0.2) (0.1)
------ ------ ------
Assets Under Management, end of year........... $ 3.7 $ 3.0 $ 2.0
====== ====== ======
Products and Services
Through Principal International, we offer retirement products and services,
annuities, mutual funds and life insurance.
Markets and Distribution
Asia/Pacific Region
Hong Kong. Our subsidiary in Hong Kong is actively competing in the defined
contribution plan market. The government requires employers and employees each
to contribute 5% of an employee's income to a Mandatory Provident Fund. We
target small and medium-sized employers and distribute products through
strategic alliances with insurance companies, mutual funds or banks, direct
marketing and through our own sales representatives. Our strategic partners help
distribute our Mandatory Provident Fund products and services, or use our
administrative and investment services in their own products. Our Mandatory
Provident Fund products and services are marketed by agents under the various
distribution arrangements we have with our strategic partners.
India. We own 50% of IDBI-Principal Asset Management Company, Ltd.,
("IDBI-Principal"), a mutual fund company. Our joint venture partner is the
Industrial Development Bank of India, ("IDBI"), a premier development bank in
India. In addition to the current mutual fund business, we are positioning
IDBI-Principal to compete in the emerging pension and long-term savings market
in India. We sell our mutual funds through regional offices located throughout
India and IDBI's banking offices.
Japan. We own 50% of ING/Principal Pensions Company, Ltd., which will sell a new
defined contribution plan, as a result of legislation adopted in June 2001. This
company will target small and medium-sized businesses and offer full-service
record-keeping and plan administration. Our joint venture partner is ING
Insurance International B.V., a member of the ING Group. Our pension sales
representatives distribute our products through ING Life's independent agents to
existing ING Life business clients and also through additional third-party
distribution relationships developed by ING/Principal Pensions Company, Ltd.
21
Latin America
Argentina. We own a life insurance company and a retirement annuity company (our
"Companies"). Principal Life Compania de Seguros, S.A., our life insurance
company, targets small and medium-sized employers. We sell group and individual
life insurance products through independent brokers and through bank branches of
Societe Generale, with which we have an alliance. Societe Generale is a leading
French banking institution with offices throughout Argentina through which we
distribute our products. Principal Retiro Compania de Seguros de Retiro, S.A.,
our annuity company, provides annuities to individuals exiting the compulsory
private pre-retirement asset accumulation system. We distribute annuity products
through dedicated sales representatives who sell directly to customers and
through independent brokers in Argentina. While recent adverse economic and
political events in Argentina are expected to impact our ongoing operations, we
have been positioning our Companies to work through this environment since
mid-2001 and expect to manage revenues and expenses accordingly.
Brazil. We own 46% of BrasilPrev, a private pension company in Brazil, through a
joint venture arrangement with Banco do Brasil, Brazil's largest bank. We are
Banco do Brasil's exclusive partner for distributing pension products.
BrasilPrev provides defined contribution products for the retirement needs of
employers and individuals. Banco do Brasil's employees sell directly to
individual clients through its bank branches. In addition, BrasilPrev reaches
corporate clients through two wholesale distribution channels: (1) a wholesale
distribution channel distributes products through a network of independent
brokers who sell to the public, and (2) another channel coordinates with Banco
do Brasil's corporate account executives to reach Banco do Brasil's existing
corporate clients.
Chile. We own Principal Compania de Seguros de Vida Chile S.A., a Chilean
insurance company, that primarily sells retirement annuities to individuals
exiting the pre-retirement accumulation system. In July 1998, we acquired
Compania de Seguros de Vida El Roble, S.A., or El Roble, a Chilean life
insurance company. We have fully integrated the operations of El Roble with
those of Principal Compania de Seguros de Vida Chile S.A. We distribute our
annuity products through a network that consisted of over 65 captive agents and
approximately 300 independent agents as of December 31, 2001. We also utilize
sales representatives who sell through brokers. We also market life and health
insurance products to small and medium-sized businesses and to individuals
through brokers. Based upon assets, we were ranked as the fourth largest life
insurance company in Chile as of September 30, 2001, according to the
Superintendencia de Valores y Seguros, the Chilean regulatory agency for
insurance companies. We also own 60% of Andueza & Principal Creditos
Hipotecarios S.A., in a joint partnership arrangement with Andueza y Compania
Agentes de Mutuos Hipotecarios S.A. Through this business, we originate, sell
and service mortgage loans in Chile. In November 2001, we acquired 70% of Tanner
Administradora de Fondos Mutuos S.A., a well-known Chilean Mutual Funds
Administrator, as part of our strategy to enter the Voluntary Defined
Contribution Market.
Mexico. We own Principal Mexico Compania de Seguros S.A. de C.V., ("Principal
Seguros"), a life insurance company, Principal Afore S.A. de C.V., a private
pension company which manages and administers individual retirement accounts
under the mandatory privatized social security system in effect for all
employees in Mexico, and Principal Pensiones S.A. de C.V., ("Principal
Pensiones"), an annuity company. Our focus is on both pre-retirement and
post-retirement savings plans. We distributed Principal Afore S.A. de C.V.'s
products and services through a dedicated sales force of approximately 650 sales
representatives as of December 31, 2001, who sold directly to individuals. As of
December 31, 2001, Principal Pensiones used 132 employed sales representatives
and independent brokers to distribute annuities directly to customers. Our life
insurance company, Principal Seguros, distributes its products through an array
of independent agents and brokers.
22
Life and Health Insurance Segment
Our Life and Health Insurance segment offers (1) individual life and disability
insurance and (2) group life and health insurance throughout the U.S.
Our Life and Health Insurance segment contributed 42%, 47% and 48% of our total
operating revenues and 28%, 26% and 19% of our total operating earnings for the
years ended December 31, 2001, 2000 and 1999, respectively. The following table
shows the total operating revenues, operating earnings and assets of our Life
and Health Insurance segment, by individual life and disability insurance, and
group life and health insurance, respectively, for the years indicated:
Life and Health Insurance
Selected Financial Highlights
As of or for the year ended December 31,
--------------------------------------------------
2001 2000 1999
--------------- --------------- ----------------
(in millions)
Operating Revenues(1):
Individual Life and Disability Insurance.. $ 1,508.4 38% $ 1,472.9 36% $ 1,409.8 35%
Group Life and Health Insurance........... 2,438.0 62 2,649.7 64 2,575.7 65
--------- --- --------- --- ---------- ---
Total................................... $ 3,946.4 100% $ 4,122.6 100% $ 3,985.5 100%
========= === ========= === ========== ===
Operating Earnings:
Individual Life and Disability Insurance.. $ 97.7 49% $ 54.9 34% $ 86.8 96%
Group Life and Health Insurance........... 103.5 51 107.4 66 3.9 4
--------- --- --------- --- ---------- ---
Total................................... $ 201.2 100% $ 162.3 100% $ 90.7 100%
========= === ========= === ========== ===
Assets:
Individual Life and Disability Insurance.. $ 9,094.0 84% $ 8,682.1 82% $ 8,086.1 80%
Group Life and Health Insurance........... 1,682.2 16 1,886.9 18 1,984.7 20
--------- --- --------- --- ---------- ---
Total................................... $10,776.2 100% $10,569.0 100% $ 10,070.8 100%
========= === ========= === ========== ===
- --------------------
(1) Excludes net realized capital gains (losses) and their impact on
recognition of front-end fee revenues and certain market value adjustments
to fee revenues.
Individual Life and Disability Insurance
We began as an individual life insurer in 1879. Our U.S. operations served
approximately 758,000 individual policyholders with $84.5 billion of life
insurance in force as of December 31, 2001. Individual life and disability
insurance contributed 16%, 17% and 17% of our consolidated operating revenues
for the years ended December 31, 2001, 2000 and 1999, respectively.
We offer a wide array of individual life and disability insurance products aimed
at serving our customers' financial needs throughout their lives.
The following table shows selected U.S. GAAP financial information regarding our
individual insurance products for the years indicated:
23
Individual Life and Disability Insurance
Selected Product Highlights
As of or for the year ended
December 31,
----------------------------------
2001 2000 1999
---------- ---------- ----------
($ in millions)
Interest-sensitive life insurance:
Number of policies............................. 95,695 90,682 80,459
First-year premiums/Deposits................... $ 58.9 $ 65.0 $ 47.9
Premiums/Deposits.............................. 270.1 374.2 178.6
Future policy benefits/Policy account balance.. 1,748.4 1,567.6 1,237.2
Life insurance in force........................ 22,212.0 19,566.8 15,633.2
Traditional life insurance:
Number of policies............................. 591,797 609,326 632,551
First-year premiums/Deposits................... $ 27.3 $ 27.0 $ 32.2
Premiums/Deposits.............................. 766.2 772.8 780.8
Future policy benefits/Policy account balance.. 5,712.7 5,522.7 5,331.6
Life insurance in force........................ 62,308.5 60,389.0 59,581.1
Disability insurance:
Number of policies............................. 70,453 65,497 59,729
New sales (annualized first-year premium)...... $ 17.9 $ 17.2 $ 15.1
Premiums/Deposits.............................. 83.2 74.2 64.6
Future policy benefits/Policy account balance.. 381.5 338.9 262.6
Products and Services
Our individual life and disability insurance products include:
interest-sensitive life insurance, including universal life and variable
universal life; traditional life insurance and disability insurance.
Interest-Sensitive Life Insurance. Interest-sensitive life products include
universal life and variable universal life insurance and offer life insurance
protection for which both the premium and the death benefit may be adjusted by
the policyholder. Our growth in individual life and disability insurance sales
through December 31, 2001, has come mainly from variable universal life
insurance products. Variable universal life insurance products represented 65%
of our interest-sensitive life insurance premiums for the year ended December
31, 2001. We credit premiums, net of specified expenses, to an account
maintained for the policyholder. Specific charges are made against the account
for the cost of insurance protection and expenses. For universal life contracts,
the entire account balance is invested in our general account. Interest is
credited to the policyholder's account based on the earnings on general account
investments. For variable universal life contracts, the policyholder may
allocate the account balance among our general account and a variety of separate
account choices. Interest is credited on amounts allocated to the general
account in the same manner as for universal life. Net investment performance on
separate account investments is allocated directly to the policyholder accounts.
The policyholder bears the investment risk on separate account investments. Our
profitability is based on charging sufficient asset-based, premium-based and
risk-based fees to cover the cost of insurance and expenses.
Traditional Life Insurance. Traditional life insurance includes participating
whole life, adjustable life products and term life insurance products.
Participating products and term life insurance products represented 15% and 4%,
respectively, of our individual life and disability insurance sales for the year
ended December 31, 2001. Adjustable life insurance products provide a guaranteed
benefit in return for the payment of a fixed premium and allow the policyholder
to change the premium and face amount combination. Participating policyholders
may receive policy dividends as declared by the board of directors of Principal
Life if the combined result of experience factors, including interest earnings,
mortality experience and expenses is better than the assumptions used in setting
the premium. Our profitability is based on keeping a portion of the favorable
experience before crediting the remainder to policyholders. Term insurance
products provide a guaranteed benefit for a specified period of time in return
for the payment of a fixed premium. Policy dividends are not paid on term
insurance. Our profitability is based on charging a premium that is sufficient
to cover the cost of insurance and expenses while providing us with an
appropriate return.
Disability Insurance. Individual disability insurance products provide a benefit
in the event of the disability of the insured. In most instances, this benefit
is in the form of a monthly income. Disability insurance products represented
11% of our individual life and disability insurance sales for the year ended
December 31, 2001. In addition to income replacement, we offer products to pay
business overhead expenses for a disabled business owner, and for the purchase
24
by the other business owners of the disabled business owner's interests in the
business. Our profitability is based on charging a premium that is sufficient to
cover claims and expenses while providing us with an appropriate return.
Markets and Distribution
We sell our individual products in all 50 states and the District of Columbia.
Our target market is owners and executives of small and medium-sized businesses,
as well as other individuals. Cash value life insurance provides valuable
benefits at death and funding for needs prior to death, including funding
employee benefit liabilities, estate planning, business continuation or buy-out.
We design, market and administer our products to meet these needs. We have also
recently established a number of marketing and distribution alliances to
increase the sales of individual insurance products with firms such as AXA,
Highland Capital, AG Edwards, Wells Fargo, Piper Jaffrey, and BISYS. Variable
universal life insurance is popular for many reasons, including higher
historical performance of equity investments resulting in a lower cost of
insurance and an increase in values available while still alive. We also offer
products specifically designed to meet the estate planning needs of business
executives. Our individual disability products are also tailored to the needs of
this market. Small and medium-sized businesses, their owners and executives
represented 62% of individual life insurance sales and 47% of individual
disability sales for the year ended December 31, 2001, based on first-year
annualized premium.
We distribute our individual insurance products primarily through our affiliated
financial representatives and secondarily through independent brokers.
Affiliated financial representatives were responsible for 74% of individual life
insurance sales, based on first-year annualized premium for the year ended
December 31, 2001. We had 1,155 affiliated financial representatives in 49
offices as of December 31, 2001. Although they are independent contractors, we
have a close tie with affiliated financial representatives and offer them
benefits, training and access to tools and expertise. Independent brokers
represented a larger percentage of individual disability sales with 48% of
first-year annualized premium for the year ended December 31, 2001.
Group Life and Health Insurance
We began offering group insurance in 1941. We served approximately 79,000
employers and provided products and services to 4.7 million covered members as
of December 31, 2001. We were the 11th largest writer of group insurance in the
U.S. based on combined group life and health premium for 2000, according to the
2001 National Underwriter Life and Health Statistical Report. We offer a broad
array of group insurance products including medical, life, disability, dental
and vision insurance. In addition, we also offer administrative services on a
fee-for-service basis to large employers in the U.S.
The following tables show the premium and premium equivalents, reserves and the
incurred loss ratios for our group insurance products sold in the U.S. for the
years indicated:
25
Group Life and Health Insurance
Premium and Premium Equivalents
For the year ended December 31,
-----------------------------------
2001 2000 1999
--------- --------- ---------
(in millions)
Life Insurance................... $ 221.8 $ 277.7 $ 273.6
Disability Insurance............. 98.2 94.5 86.8
Medical Insurance(1)............. 1,610.3 1,815.6 1,876.7
Dental and Vision Insurance...... 351.1 340.4 270.0
Fee-for-service.................. 1,828.2 1,502.2 1,287.6
--------- --------- ---------
Total.......................... $ 4,109.6 $ 4,030.4 $ 3,794.7
========= ========= =========
- --------------------
(1) Includes $98.4 million and $164.6 million of Medicare Supplement insurance,
for the years ended December 31, 2000 and 1999, respectively, all of which
we reinsured effective July 1, 2000.
Group Life and Health Insurance
Reserves and Incurred Loss Ratios
As of or for the year ended
December 31,
---------------------------
2001 2000 1999
------- ------- -------
($ in millions)
Reserves:
Life Insurance...................... $ 259.5 $ 259.5 $ 262.2
Disability Insurance................ 286.7 269.0 259.5
Medical Insurance(1)................ 292.8 316.5 396.7
Dental and Vision Insurance......... 26.1 28.2 23.8
------- ------- -------
Total Reserves................... $ 865.1 $ 873.2 $ 942.2
======= ======= =======
Incurred Loss Ratios:
Life Insurance...................... 71% 70% 71%
Disability Insurance................ 89 85 80
Medical Insurance................... 79 83 90
Dental and Vision Insurance......... 75 76 77
- --------------------
(1) Includes $43.0 million, $46.7 million and $68.2 million of Medicare
Supplement insurance, as of December 31, 2001, 2000 and 1999, respectively,
all of which we reinsured effective July 1, 2000.
Products and Services
Our U.S. group insurance products and services include - life insurance,
disability insurance, medical insurance, dental and vision insurance and
fee-for-service.
Group Life Insurance. Group life insurance provides coverage to employees and
their dependents for a specified period. As of December 31, 2001, we had $70.3
billion of group life insurance in force covering 2.6 million individuals. We
carry both traditional group life insurance that does not provide for
accumulation of cash values and interest-sensitive group life insurance,
commonly known as group universal life, which provides for accumulation of cash
values. Our group life insurance business remains focused on the traditional
annually renewable term product. Group term life and group universal life
accounted for 90% and 10%, respectively, of our total group life insurance in
force as of December 31, 2001. According to the 2000 LIMRA International, Inc.
Sales and In Force Reports, we were ranked first in the U.S. in terms of the
number of contracts/employer groups for both sales and existing business in
2000.
Group Disability Insurance. Group disability insurance provides partial
replacement of earnings to insured employees who become disabled. Our group
26
disability products include both short-term and long-term disability. Long-term
disability represented 58% of our group disability premiums for the year ended
December 31, 2001. In addition, we provide disability management services, or
rehabilitation services, to assist individuals in returning to work as quickly
as possible following disability. We also work with disability claimants to
improve the approval rate of Social Security benefits, thereby reducing payment
of benefits by the amount of Social Security payments received. For claims
incurred more than two years prior to December 31, 2001, we achieved an 87%
approval rate for such Social Security benefits. Our group disability business
was ranked seventh in the U.S. as of December 31, 2000, in terms of number of
contracts/employer groups in force, according to the 2000 LIMRA International,
Inc. Sales and In Force Reports.
Group Medical Insurance. Group medical insurance provides partial reimbursement
of medical expenses for insured employees and their dependents. Employees are
responsible for deductibles, co-payments and co-insurance. We believe our
products are well-positioned to address our customers' preference for a variety
of provider choices and preferred provider discounts. We do not offer
unrestricted indemnity and no longer offer the pure HMO model. As of January 1,
2002, we entered into a reinsurance agreement to reduce the volatility of our
group medical insurance earnings.
Group Dental and Vision Insurance. Group dental and vision insurance plans
provide partial reimbursement for dental and vision expenses. As of December 31,
2001, we had over 35,000 group dental and vision insurance plans in force. As of
December 31, 2000, we were the largest group indemnity dental insurer in terms
of 2000 sales based on total indemnity, and the largest in terms of number of
contracts/employer groups in force in 2000 based on total indemnity, according
to the 2000 LIMRA International, Inc. Sales and In Force Reports.
Fee-For-Service. We offer administration of group disability, medical, dental
and vision services on a fee basis to larger employers.
Markets and Distribution
We market our group life, disability, medical, dental and vision insurance
products to small and medium-sized businesses to complement our retirement
services and individual insurance products. We market our fee-for-service
administration capabilities to larger employers that self-insure their
employees' health insurance benefits.
We sell our group life, disability, dental and vision coverages in all 50 states
and the District of Columbia. We have chosen to market our medical insurance in
36 states which we believe have attractive market conditions. We consider a
market to be attractive if there is a lack of deep penetration by HMOs and a
favorable regulatory environment. We continually adapt our products and pricing
to meet local market conditions.
We distri