SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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1-16725
(Commission file number)
PRINCIPAL FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 42-1520346
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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711 HIGH STREET, DES MOINES, IOWA 50392
(Address of principal executive offices)
(515) 247-5111
(Registrant's telephone number, including area code)
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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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_|
The total number of shares of the registrant's Common Stock, $0.01 par value,
outstanding as of April 28, 2004 was 319,201,574.
PRINCIPAL FINANCIAL GROUP, INC.
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Position at March 31, 2004
(Unaudited)and December 31, 2003............................3
Unaudited Consolidated Statements of Operations for the three
months ended March 31, 2004 and 2003........................4
Unaudited Consolidated Statements of Stockholders' Equity for
the three months ended March 31, 2004 and 2003..............5
Unaudited Consolidated Statements of Cash Flows for the three
months ended March 31, 2004 and 2003........................6
Notes to Unaudited Consolidated Financial Statements -
March 31, 2004..............................................8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...........................................35
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......77
Item 4. Controls and Procedures..........................................84
PART II - OTHER INFORMATION
Item 1. Legal proceedings................................................84
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities................................................85
Item 6. Exhibits and Reports on Form 8-K.................................85
Signature................................................................86
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRINCIPAL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
MARCH 31, DECEMBER 31,
2004 2003
------------------ ------------------
(Unaudited) (Note 1)
(IN MILLIONS,
EXCEPT PER SHARE DATA)
ASSETS
Fixed maturities, available-for-sale........................................ $ 38,641.7 $ 37,449.7
Fixed maturities, trading................................................... 103.4 102.9
Equity securities, available-for-sale....................................... 749.2 712.5
Mortgage loans.............................................................. 12,888.1 13,508.1
Real estate................................................................. 1,473.9 1,537.5
Policy loans................................................................ 804.5 804.1
Other investments........................................................... 1,331.7 1,463.0
------------------ ------------------
Total investments........................................................ 55,992.5 55,577.8
Cash and cash equivalents................................................... 1,608.6 1,692.9
Accrued investment income................................................... 625.8 650.7
Premiums due and other receivables.......................................... 543.7 719.8
Deferred policy acquisition costs........................................... 1,552.4 1,571.7
Property and equipment...................................................... 443.3 447.8
Goodwill.................................................................... 250.1 184.2
Other intangibles........................................................... 156.4 121.4
Mortgage loan servicing rights.............................................. 1,748.1 1,953.1
Separate account assets..................................................... 46,186.6 43,407.8
Other assets................................................................ 1,705.3 1,427.2
------------------ ------------------
Total assets............................................................. $ 110,812.8 $ 107,754.4
================== ==================
LIABILITIES
Contractholder funds........................................................ $ 28,913.7 $ 28,902.5
Future policy benefits and claims........................................... 15,525.8 15,474.7
Other policyholder funds.................................................... 769.2 710.2
Short-term debt............................................................. 986.3 1,617.8
Long-term debt.............................................................. 2,555.1 2,767.3
Income taxes payable........................................................ 146.0 90.0
Deferred income taxes....................................................... 1,849.8 1,644.0
Separate account liabilities................................................ 46,186.6 43,407.8
Other liabilities........................................................... 5,893.3 5,740.5
------------------ ------------------
Total liabilities........................................................ 102,825.8 100,354.8
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share - 2,500.0 million shares
authorized, 377.6 million and 377.4 million shares issued, and 320.8
million and 320.7 million shares outstanding in 2004 and 2003,
respectively............................................................. 3.8 3.8
Additional paid-in capital.................................................. 7,179.1 7,153.2
Retained earnings........................................................... 824.0 630.4
Accumulated other comprehensive income...................................... 1,539.6 1,171.3
Treasury stock, at cost (56.8 million and 56.7 million shares in 2004 and
2003, respectively)...................................................... (1,559.5) (1,559.1)
------------------ ------------------
Total stockholders' equity............................................... 7,987.0 7,399.6
------------------ ------------------
Total liabilities and stockholders' equity............................... $ 110,812.8 $ 107,754.4
================== ==================
SEE ACCOMPANYING NOTES.
3
PRINCIPAL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31,
---------------------------------
2004 2003
---------------- ----------------
(IN MILLIONS, EXCEPT PER SHARE
DATA)
REVENUES
Premiums and other considerations..................... $ 921.8 $ 905.5
Fees and other revenues............................... 561.1 632.0
Net investment income................................. 817.0 836.0
Net realized/unrealized capital losses................ (42.8) (76.7)
---------------- ----------------
Total revenues..................................... 2,257.1 2,296.8
EXPENSES
Benefits, claims and settlement expenses.............. 1,187.5 1,195.2
Dividends to policyholders............................ 73.3 80.1
Operating expenses.................................... 730.9 799.3
---------------- ----------------
Total expenses..................................... 1,991.7 2,074.6
---------------- ----------------
Income from continuing operations before income
taxes.............................................. 265.4 222.2
Income taxes.......................................... 66.1 65.8
---------------- ----------------
Income from continuing operations, net of related
income taxes....................................... 199.3 156.4
Loss from discontinued operations, net of related
income taxes....................................... - (0.7)
---------------- ----------------
Income before cumulative effect of
accounting change.................................. 199.3 155.7
Cumulative effect of accounting change, net of
related income taxes............................... (5.7) -
---------------- ----------------
Net income............................................ $ 193.6 $ 155.7
================ ================
EARNINGS PER COMMON SHARE
Basic and diluted earnings per common share:
Income from continuing operations, net of
related income taxes............................. $ 0.62 $ 0.47
Loss from discontinued operations, net of
related income taxes............................. - -
---------------- ----------------
Income before cumulative effect of
accounting change................................ 0.62 0.47
Cumulative effect of accounting change, net of
related income taxes............................. (0.02) -
---------------- ----------------
Net income......................................... $ 0.60 $ 0.47
================ ================
SEE ACCOMPANYING NOTES.
4
PRINCIPAL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY STOCKHOLDERS' OUTSTANDING
STOCK CAPITAL EARNINGS INCOME STOCK EQUITY SHARES
------------- ------------ -------------- --------------- ----------- --------------- -----------
(IN MILLIONS) (IN THOUSANDS)
BALANCES AT JANUARY 1, 2003........ $3.8 $7,106.3 $ 29.4 $ 635.8 $(1,118.1) $6,657.2 334,419.3
Shares issued, net of call options. - (3.0) - - - (3.0) 156.8
Stock-based compensation........... - 5.3 - - - 5.3
Treasury stock acquired............ - - - - (184.1) (184.1) (6,533.0)
Comprehensive income:
Net income....................... - - 155.7 - - 155.7
Net unrealized gains............. - - - 331.9 - 331.9
Provision for deferred income
taxes.......................... - - - (117.0) - (117.0)
Net foreign currency translation
adjustment..................... - - - (9.2) - (9.2)
---------------
Comprehensive income............... 361.4
------------- ------------ -------------- --------------- ----------- --------------- -----------
BALANCES AT MARCH 31, 2003......... $3.8 $7,108.6 $ 185.1 $ 841.5 $(1,302.2) $6,836.8 328,043.1
============= ============ ============== =============== =========== =============== ===========
BALANCES AT JANUARY 1, 2004........ $3.8 $7,153.2 $ 630.4 $1,171.3 $(1,559.1) $7,399.6 320,667.5
Shares issued...................... - 16.0 - - - 16.0 160.5
Stock-based compensation........... - 9.9 - - - 9.9
Treasury stock acquired............ - - - - (0.4) (0.4) (10.2)
Comprehensive income:
Net income....................... - - 193.6 - - 193.6
Net unrealized gains............. - - - 537.1 - 537.1
Provision for deferred income
taxes.......................... - - - (172.7) - (172.7)
Net foreign currency translation
adjustment....................... - - - 3.9 - 3.9
---------------
Comprehensive income............... 561.9
------------- ------------ -------------- --------------- ----------- --------------- -----------
BALANCES AT MARCH 31, 2004......... $3.8 $7,179.1 $ 824.0 $1,539.6 $(1,559.5) $7,987.0 320,817.8
============= ============ ============== =============== =========== =============== ===========
SEE ACCOMPANYING NOTES.
5
PRINCIPAL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31,
----------------------------------
2004 2003
----------------- ----------------
(IN MILLIONS)
OPERATING ACTIVITIES
Net income............................................ $ 193.6 $ 155.7
Adjustments to reconcile net income to net cash
provided by operating activities:
Loss from discontinued operations, net of related
income taxes................................... - 0.7
Cumulative effect of accounting change,
net of related income taxes.................... 5.7 -
Amortization of deferred policy acquisition costs. 36.2 51.4
Additions to deferred policy acquisition costs.... (97.3) (85.8)
Accrued investment income......................... 24.9 26.0
Premiums due and other receivables................ 47.5 30.9
Contractholder and policyholder liabilities
and dividends.................................. 366.6 481.2
Current and deferred income taxes................. 75.5 63.3
Net realized/unrealized capital losses............ 42.8 76.7
Depreciation and amortization expense............. 27.2 24.6
Mortgage loans held for sale, acquired or
originated..................................... (7,647.2) (16,153.1)
Mortgage loans held for sale, sold or repaid, net
of gain........................................ 8,143.8 15,924.1
Real estate acquired through operating activities. (1.4) (6.3)
Real estate sold through operating activities..... 33.4 1.2
Amortization of mortgage servicing rights......... 95.6 111.2
Stock-based compensation.......................... 8.2 3.5
Mortgage servicing rights valuation adjustments... 271.6 159.3
Other............................................. (46.1) (117.5)
----------------- ----------------
Net adjustments....................................... 1,387.0 591.4
----------------- ----------------
Net cash provided by operating activities............. 1,580.6 747.1
INVESTING ACTIVITIES
Available-for-sale securities:
Purchases......................................... (2,317.3) (2,911.7)
Sales............................................ 606.9 690.6
Maturities....................................... 1,245.1 1,065.9
Mortgage loans acquired or originated................. (390.7) (215.6)
Mortgage loans sold or repaid......................... 417.0 313.9
Purchase of mortgage servicing rights................. (102.7) (310.6)
Proceeds from sale of mortgage servicing rights....... - 0.5
Real estate acquired.................................. (10.2) (92.6)
Real estate sold...................................... 46.2 23.6
Net change in property and equipment.................. (9.6) (3.1)
Net proceeds from sales of subsidiaries............... - 2.1
Purchases of interest in subsidiaries, net of
cash acquired..................................... (106.2) (60.3)
Net change in other investments....................... 20.2 (0.4)
----------------- ----------------
Net cash used in investing activities................. $ (601.3) $ (1,497.7)
6
PRINCIPAL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31,
----------------------------------
2004 2003
----------------- ----------------
(IN MILLIONS)
FINANCING ACTIVITIES
Issuance of common stock, net of call options........ $ 3.5 $ (3.0)
Acquisition of treasury stock........................ (0.4) (184.1)
Proceeds from financing element derivatives.......... 55.3 -
Payments for financing element derivatives........... (22.0) -
Issuance of long-term debt........................... 5.2 7.5
Principal repayments of long-term debt............... (220.3) (4.4)
Net proceeds (repayments) of short-term borrowings... (632.7) 192.8
Investment contract deposits......................... 1,356.5 2,937.8
Investment contract withdrawals...................... (1,602.1) (2,312.4)
Net increase (decrease) in banking operation
deposits.......................................... (6.6) 44.7
----------------- ----------------
Net cash provided by (used in) financing activities.. (1,063.6) 678.9
----------------- ----------------
Net decrease in cash and cash equivalents............ (84.3) (71.7)
Cash and cash equivalents at beginning of period..... 1,692.9 1,038.6
----------------- ----------------
Cash and cash equivalents at end of period........... $ 1,608.6 $ 966.9
================= ================
SEE ACCOMPANYING NOTES.
7
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Principal
Financial Group, Inc. ("PFG"), its majority-owned subsidiaries and, subsequent
to June 30, 2003, its consolidated variable interest entities ("VIE"), have been
prepared in conformity with accounting principles generally accepted in the U.S.
("U.S. GAAP") for interim financial statements and with the instructions to Form
10-Q and Article 10 of Regulation S-X. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three months
ended March 31, 2004, are not necessarily indicative of the results that may be
expected for the year ended December 31, 2004. These interim unaudited
consolidated financial statements should be read in conjunction with our annual
audited financial statements as of December 31, 2003, included in our Form 10-K
for the year ended December 31, 2003, filed with the United States Securities
and Exchange Commission ("SEC"). The accompanying consolidated statement of
financial position at December 31, 2003, has been derived from the audited
consolidated statement of financial position but does not include all of the
information and footnotes required by U.S. GAAP for complete financial
statements.
Reclassifications have been made to the March 31, 2003 financial statements to
conform to the March 31, 2004 presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
On December 24, 2003, the Financial Accounting Standards Board (the "FASB")
issued FASB Interpretation No. 46 (Revised 2003): CONSOLIDATION OF VARIABLE
INTEREST ENTITIES ("FIN 46R"), to clarify some of the provisions of FIN 46 and
to exempt certain entities from its requirements. We adopted FIN 46R effective
January 1, 2004, which did not have a material impact on our consolidated
financial statements.
On July 7, 2003, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 03-1, ACCOUNTING AND REPORTING BY INSURANCE
ENTERPRISES FOR CERTAIN NONTRADITIONAL LONG-DURATION CONTRACTS AND FOR SEPARATE
ACCOUNTS ("SOP 03-1"). This SOP addresses an insurance enterprise's accounting
for certain fixed and variable contract features not covered by other
authoritative accounting guidance. We adopted SOP 03-1 effective January 1,
2004, and recorded a cumulative effect of accounting change of $(5.7) million,
which is net of income tax benefits of $3.0 million.
A provision of SOP 03-1 relates to the classification of contracts and
calculation of an additional liability for contracts that contain significant
insurance features. The adoption of the guidance requires the recognition of a
liability in addition to the contract account value in cases where the insurance
benefit feature results in gains in early years followed by losses in later
years. The accrual and release of the additional liability also impacts the
amortization of deferred policy acquisition costs ("DPAC"). As of January 1,
2004, we increased future policyholder benefits due to our no lapse guarantee
feature of our universal life and variable universal life products within our
Life and Health Insurance segment and for variable annuities with guaranteed
minimum death benefits in our U.S. Asset Management and Accumulation segment.
This resulted in an after-tax cumulative effect of $(0.9) million in the Life
and Health Insurance segment and $(1.5) million in the U.S. Asset Management and
Accumulation segment.
8
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2004
(UNAUDITED)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
We also decreased an equity method investment within our International Asset
Management and Accumulation segment by $3.3 million, net of income taxes, as of
January 1, 2004, for select deferred annuity products, which include guaranteed
annuitization purchase rates. The guidance requires contracts which provide for
potential benefits in addition to the account balance that are payable only upon
annuitization to establish an additional liability if the present value of the
annuitized benefits exceed the expected account balance at the expected
annuitization date.
In addition, the guidance clarifies the accounting and classification for sales
inducements. Although the valuation impacts were immaterial, we reclassified
$37.6 million of sales inducements from DPAC to other assets effective January
1, 2004.
On March 9, 2004, the SEC Staff issued Staff Accounting Bulletin ("SAB") 105,
APPLICATION OF ACCOUNTING PRINCIPLES TO LOAN COMMITMENTS ("SAB 105"), in which
the SEC Staff expressed their view that the fair value of recorded loan
commitments, including interest rate lock commitments ("IRLCs"), that are
required to follow derivative accounting under Statement of Financial Accounting
Standards ("SFAS") No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES, should not consider the expected future cash flows related to the
associated servicing of the loan. Accordingly, effective April 1, 2004, we
intend to record IRLCs at zero value at date of issuance with subsequent gains
or losses measured by changes in market interest rates. We do not expect this
SAB to have a material impact on our consolidated financial statements.
SEPARATE ACCOUNTS
At March 31, 2004 and December 31, 2003, the separate accounts included a
separate account valued at $814.9 million and $833.9 million, respectively,
which primarily includes shares of our stock that were allocated and issued to
eligible participants of qualified employee benefit plans administered by us as
part of the policy credits issued under the demutualization. These shares are
included in both basic and diluted earnings per share calculations. The separate
account shares are recorded at fair value and are reported as separate account
assets and separate account liabilities in the consolidated statement of
financial position. Changes in fair value of the separate account shares are
reflected in both the separate account assets and separate account liabilities.
STOCK-BASED COMPENSATION
At March 31, 2004, we have four stock-based compensation plans. We applied the
fair value method to all stock-based awards granted subsequent to January 1,
2002. For stock-based awards granted prior to this date, we used the intrinsic
value method.
9
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2004
(UNAUDITED)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Awards under our plans vest over periods ranging from one year to three years.
Therefore, the cost related to stock-based compensation included in the
determination of net income for the three months ended March 31, 2004, is less
than that which would have been recognized if the fair value based method had
been applied to all awards since the inception of our stock-based compensation
plans. Had compensation expense for our stock option awards and employees'
purchase rights been determined based upon fair values at the grant dates for
awards under the plans in accordance with SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, our net income and earnings per share would have been
reduced to the pro forma amounts indicated below. For the purposes of pro forma
disclosures, the estimated fair value of the options is amortized to expense
over the options' vesting period.
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------------
2004 2003
--------------- ---------------
(IN MILLIONS, EXCEPT PER SHARE
DATA)
Net income, as reported.......................................... $ 193.6 $155.7
Add: Stock-based compensation expense included in reported
net income, net of related tax effects......................... 3.4 3.0
Deduct: Total stock-based compensation expense determined
under fair value based method for all awards, net of related
tax effects.................................................... 4.2 3.9
--------------- ---------------
Pro forma net income............................................. $ 192.8 $154.8
=============== ===============
Basic and diluted earnings per share:
As reported.................................................... $ 0.60 $ 0.47
Pro forma...................................................... 0.60 0.47
2. FEDERAL INCOME TAXES
The effective income tax rate on income from continuing operations for the three
months ended March 31, 2004 and 2003, is lower than the prevailing corporate
federal income tax rate primarily due to income tax deductions allowed for
corporate dividends received, a tax benefit associated with prior year
accumulated losses on a foreign investment and interest exclusion from taxable
income, partially offset by state income taxes.
10
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2004
(UNAUDITED)
3. EMPLOYEE AND AGENT BENEFITS
COMPONENTS OF NET PERIODIC BENEFIT COST (INCOME):
OTHER POSTRETIREMENT
PENSION BENEFITS BENEFITS
---------------------------- ----------------------------
FOR THE THREE MONTHS FOR THE THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
---------------------------- ----------------------------
2004 2003 2004 2003
------------- -------------- ------------- --------------
(IN MILLIONS)
Service cost.......................... $ 12.8 $ 12.3 $ 2.3 $ 3.1
Interest cost......................... 18.3 16.7 3.9 4.5
Expected return on plan assets........ (21.5) (18.7) (6.8) (6.4)
Amortization of prior service
cost (benefit)...................... 0.4 0.4 (0.7) (0.8)
Amortization of transition asset...... - (0.1) - -
Recognized net actuarial loss......... 4.1 4.4 0.1 0.6
------------- -------------- ------------- --------------
Net periodic benefit cost (income).... $ 14.1 $ 15.0 $(1.2) $ 1.0
============= ============== ============= ==============
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 ("the Act") was signed into law. This Act introduces a
prescription drug benefit under Medicare (Medicare Part D), as well as a federal
subsidy to sponsors of retiree health benefits. The benefit obligations and net
periodic postretirement benefit costs do not reflect any amount associated with
the subsidy as we have not determined that the benefits provided by the plan are
actuarially equivalent to Medicare. The Centers of Medicare and Medicaid
Services ("CMS") are expected to issue guidance on the definition of actuarially
equivalent retiree health coverage later this year. This specific authoritative
guidance, when issued, could require us to change previously reported
information. The new Act will be reflected once the plan is amended or FASB
issues finalized guidance on the accounting impact of the Act.
CONTRIBUTIONS
We anticipate contributing $1.4 million in 2004 to fund our other postretirement
benefit plans. We contributed an immaterial portion of this amount during the
three months ended March 31, 2004. Our funding policy for the qualified pension
plan is to fund the plan annually in an amount at least equal to the minimum
annual contribution required under ERISA and, generally, not greater than the
maximum amount that can be deducted for federal income tax purposes. We don't
anticipate that we will be required to fund a minimum annual contribution under
ERISA for the qualified pension plan. At this time, it is too early to estimate
the amount that may be contributed, but it is possible that we may fund the
plans in 2004 in the range of $10 million to $50 million for both the qualified
and nonqualified plans. No contributions were made to the plans during the three
months ended March 31, 2004.
11
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2004
(UNAUDITED)
4. COMPREHENSIVE INCOME
Comprehensive income is as follows (in millions):
FOR THE THREE MONTHS ENDED
MARCH 31,
-----------------------------------
2004 2003
---------------- ----------------
COMPREHENSIVE INCOME:
Net income.................................. $ 193.6 $ 155.7
Net change in unrealized gains and losses
on fixed maturities, available-for-sale... 638.3 406.8
Net change in unrealized gains and losses
on equity securities, available-for-sale.. 9.2 (2.6)
Adjustments for assumed changes in
amortization patterns:
Deferred policy acquisition costs......... (42.6) (48.1)
Sales inducements......................... (3.1) -
Unearned revenue reserves................. 1.3 2.1
Net change in unrealized gains and losses
on derivative instruments................. 2.6 14.4
Adjustments to unrealized gains for
Closed Block policyholder dividend
obligation................................ (54.9) (38.2)
Provision for deferred income tax expense... (172.7) (117.0)
Net change in unrealized gains and losses
on equity method subsidiaries and
minority interest adjustments............. (13.7) (2.5)
Change in net foreign currency translation
adjustment................................ 3.9 (9.2)
---------------- ----------------
Comprehensive income........................ $ 561.9 $ 361.4
================ ================
5. DEBT
SHORT-TERM DEBT
Effective February 28, 2004, Principal Residential Mortgage, Inc. renewed a
short-term borrowing arrangement with an unaffiliated entity providing up to
$700.00 million related to the activities of its Principal Residential Mortgage
Servicing subsidiary. At March 31, 2004, we had a $300.0 million note payable
outstanding pursuant to this borrowing arrangement. The scheduled maturity of
this note payable is February 28, 2005. We were not in compliance with one of
the covenants under this agreement at March 31, 2004. We obtained a waiver from
the unaffiliated entity.
LONG-TERM DEBT
The components of long-term debt as of March 31, 2004 and December 31, 2003,
were as follows (in millions):
12
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2004
(UNAUDITED)
5. DEBT (CONTINUED)
AS OF AS OF
MARCH 31, DECEMBER 31,
2004 2003
------------------- -------------------
7.95% notes payable, due 2004....................................... $ 200.0 $ 200.0
8.2% notes payable, due 2009........................................ 464.0 464.0
7.875% surplus notes payable, due 2024.............................. - 199.0
8% surplus notes payable, due 2044.................................. 99.2 99.2
PRMCR medium term notes............................................. 1,200.0 1,200.0
PRMCR equity certificates........................................... 193.0 193.0
Nonrecourse mortgages and notes payable............................. 341.7 340.7
Other mortgages and notes payable................................... 57.2 71.4
------------------- -------------------
Total long-term debt................................................ $ 2,555.1 $ 2,767.3
=================== ===================
The amounts included above are net of the discount and direct costs associated
with issuing these notes, which are being amortized to expense over their
respective terms using the interest method.
On March 10, 1994, our subsidiary, Principal Life Insurance Company ("Principal
Life") issued $300.0 million of surplus notes, including $200.0 million due
March 1, 2024, at a 7.875% annual interest rate and the remaining $100.0 million
due March 1, 2044, at an 8% annual interest rate. Subject to the Commissioner of
Insurance of the State of Iowa (the "Commissioner") approval, the surplus notes
due March 1, 2024, were optionally redeemable at Principal Life's election on or
after March 1, 2004, in whole or in part at a redemption price of approximately
103.6% of par. We elected, with the Commissioner's approval, to redeem on March
1, 2004, the entire outstanding $200.0 million principal amount of surplus notes
due March 1, 2024, at a redemption price of 103.6%. Total cash paid for the
surplus note redemption on March 1, 2004, was $207.2 million.
6. CONTINGENCIES, GUARANTEES AND INDEMNIFICATIONS
LITIGATION
We are regularly involved in litigation, both as a defendant and as a plaintiff
but primarily as a defendant. Litigation naming us as a defendant ordinarily
arises out of our business operations as a provider of asset management and
accumulation products and services, life, health and disability insurance and
mortgage banking. Some of the lawsuits are class actions, or purport to be, and
some include claims for punitive damages. In addition, regulatory bodies, such
as state insurance departments, the SEC, the National Association of Securities
Dealers, Inc., the Department of Labor and other regulatory bodies regularly
make inquiries and conduct examinations or investigations concerning our
compliance with, among other things, insurance laws, securities laws, ERISA and
laws governing the activities of broker-dealers.
While the outcome of any pending or future litigation cannot be predicted,
management does not believe that any pending litigation will have a material
adverse effect on our business, financial position or net income. The outcome of
litigation is always uncertain, and unforeseen results can occur. It is possible
that such outcomes could materially affect net income in a particular quarter or
annual period.
13
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2004
(UNAUDITED)
6. CONTINGENCIES, GUARANTEES AND INDEMNIFICATIONS (CONTINUED)
GUARANTEES AND INDEMNIFICATIONS
In the normal course of business, we have provided guarantees to third parties
primarily related to a former subsidiary, joint ventures and industrial revenue
bonds. These agreements generally expire from 2004 through 2019. The maximum
exposure under these agreements as of March 31, 2004, was approximately $192.0
million; however, we believe the likelihood is remote that material payments
will be required and therefore have not accrued for a liability on our
consolidated statements of financial position. Should we be required to perform
under these guarantees, we generally could recover a portion of the loss from
third parties through recourse provisions included in agreements with such
parties, the sale of assets held as collateral that can be liquidated in the
event that performance is required under the guarantees or other recourse
generally available to us, minimizing the impact to net income. The fair value
of such guarantees issued after January 1, 2003, was insignificant.
In connection with the 2002 sale of BT Financial Group, we agreed to indemnify
the purchaser, Westpac Banking Corporation ("Westpac"), for among other things,
the costs associated with potential late filings made by BT Financial Group in
New Zealand prior to Westpac's ownership, up to a maximum of A$250.0 million
Australian dollars (approximately U.S. $190.0 million as of March 31, 2004). New
Zealand securities regulations allow Australian issuers to issue their
securities in New Zealand provided that certain documents are appropriately
filed with the New Zealand Registrar of Companies. Specifically, the regulations
required that any amendments to constitutions and compliance plans be filed in
New Zealand. In April 2003, the New Zealand Securities Commission opined that
such late filings would result in certain New Zealand investors having a right
to return of their investment plus interest at 10% per annum from the date of
investment. We view these potential late filings as a technical matter as we
believe investors received the information that is required to be provided
directly to them. This technical issue affected many in the industry. On April
15, 2004, the New Zealand government enacted legislation that will provide
issuers, including BT Financial Group, the opportunity for retroactive relief
from such late filing violations. The law allows issuers to apply for judicial
validation of non-compliant issuances resulting from late filings. The law
further provides that judicial relief is mandatory and unconditional unless an
investor was materially prejudiced by the late filing. A related judicial action
is pending. Although we cannot predict the outcome of this matter or reasonably
estimate losses, we do not believe that it would result in a material adverse
effect on our business or financial position. It is possible, however, that it
could have a material adverse effect on net income in a particular quarter or
annual period.
We are also subject to various other indemnification obligations issued in
conjunction with certain transactions, primarily the sale of BT Financial Group
and other divestitures, the sale of residential mortgage loans and servicing
rights in our mortgage banking business, acquisitions and financing transactions
whose terms range in duration and often are not explicitly defined. Certain
portions of these indemnifications may be capped, while other portions are not
subject to such limitations. Generally, a maximum obligation is not explicitly
stated; therefore, the overall maximum amount of the obligation under the
indemnifications cannot be reasonably estimated. While we are unable to estimate
with certainty the ultimate legal and financial liability with respect to these
indemnifications, we believe the likelihood is remote that material payments
would be required under such indemnifications and therefore such
indemnifications would not result in a material adverse effect on our business,
financial position or net income. The fair value of such indemnifications issued
after January 1, 2003, was insignificant.
14
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2004
(UNAUDITED)
7. SEGMENT INFORMATION
We provide financial products and services through the following segments: U.S.
Asset Management and Accumulation, International Asset Management and
Accumulation, Life and Health Insurance and Mortgage Banking. In addition, there
is a Corporate and Other segment. The segments are managed and reported
separately because they provide different products and services, have different
strategies or have different markets and distribution channels.
The U.S. Asset Management and Accumulation segment provides retirement and
related financial products and services primarily to businesses, their employees
and other individuals and provides asset management services to our asset
accumulation business, the life and health insurance operations, the Corporate
and Other segment and third-party clients.
The International Asset Management and Accumulation segment offers retirement
products and services, annuities, long-term mutual funds and life insurance
through subsidiaries in Argentina, Chile, Mexico, Hong Kong and India and joint
ventures in Brazil, Japan and Malaysia.
The Life and Health insurance segment provides individual life insurance, group
health insurance and specialty benefits, which consists of group dental and
vision insurance, individual and group disability insurance, and group life
insurance, throughout the U.S.
The Mortgage Banking segment originates and services residential mortgage loan
products for customers in the U.S.
The Corporate and Other segment manages the assets representing capital that has
not been allocated to any other segment. Financial results of the Corporate and
Other segment primarily reflect our financing activities (including interest
expense), income on capital not allocated to other segments, intersegment
eliminations, income tax risks and certain income, expenses and other after-tax
adjustments not allocated to the segments based on the nature of such items.
Management uses segment operating earnings for goal setting, determining
employee compensation, and evaluating performance on a basis comparable to that
used by securities analysts. We determine segment operating earnings by
adjusting U.S. GAAP net income for net realized/unrealized capital gains and
losses, as adjusted, and other after-tax adjustments which management believes
are not indicative of overall operating trends. Net realized/unrealized capital
gains and losses, as adjusted, are net of income taxes, related changes in the
amortization pattern of deferred policy acquisition and sales inducement costs,
recognition of front-end fee revenues for sales charges on pension products and
services, net realized capital gains and losses distributed, minority interest
capital gains and losses and certain market value adjustments to fee revenues.
Segment operating revenues exclude net realized/unrealized capital gains and
their impact on recognition of front-end fee revenues and certain market value
adjustments to fee revenues. While these items may be significant components in
understanding and assessing the consolidated financial performance, management
believes the presentation of segment operating earnings enhances the
understanding of our results of operations by highlighting earnings attributable
to the normal, ongoing operations of the business.
The accounting policies of the segments are consistent with the accounting
policies for the consolidated financial statements, with the exception of income
tax allocation. The Corporate and Other segment functions to absorb the risk
inherent in interpreting and applying tax law. The segments are allocated tax
adjustments consistent with the positions we took on our tax returns. The
Corporate and Other segment results reflect any differences between the tax
returns and the estimated resolution of any disputes.
15
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2004
(UNAUDITED)
7. SEGMENT INFORMATION (CONTINUED)
The following tables summarize selected financial information on a continuing
basis by segment and reconcile segment totals to those reported in the
consolidated financial statements:
AS OF MARCH 31, AS OF DECEMBER 31,
2004 2003
---------------------- --------------------
(IN MILLIONS)
ASSETS:
U.S. Asset Management and Accumulation ............... $ 87,221.9 $83,904.8
International Asset Management and Accumulation....... 3,143.3 3,011.4
Life and Health Insurance............................. 12,514.5 12,171.8
Mortgage Banking...................................... 5,434.0 5,558.8
Corporate and Other .................................. 2,499.1 3,107.6
---------------------- --------------------
Total consolidated assets........................... $ 110,812.8 $107,754.4
====================== ====================
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------------
2004 2003
-------------- --------------
(IN MILLIONS)
OPERATING REVENUES BY SEGMENT:
U.S. Asset Management and Accumulation................ $ 897.2 $ 886.0
International Asset Management and Accumulation....... 115.5 76.8
Life and Health Insurance............................. 1,035.3 1,012.3
Mortgage Banking...................................... 255.6 404.5
Corporate and Other................................... 0.3 (0.7)
-------------- --------------
Total segment operating revenues.................... 2,303.9 2,378.9
Net realized/unrealized capital losses, including
recognition of front-end fee revenues and certain
market value adjustments to fee revenues............ (46.8) (82.1)
-------------- --------------
Total revenue per consolidated statements
of operations..................................... $ 2,257.1 $2,296.8
============== ==============
OPERATING EARNINGS (LOSS) BY SEGMENT:
U.S. Asset Management and Accumulation ............... $ 122.0 $ 97.5
International Asset Management and Accumulation....... 8.7 6.6
Life and Health Insurance............................. 74.8 59.1
Mortgage Banking...................................... 28.6 52.3
Corporate and Other .................................. (11.5) (5.0)
-------------- --------------
Total segment operating earnings.................... 222.6 210.5
Net realized/unrealized capital losses, as adjusted... (23.3) (54.1)
Other after-tax adjustments (1)....................... (5.7) (0.7)
-------------- --------------
Net income per consolidated statements
of operations..................................... $ 193.6 $ 155.7
============== ==============
- ------------------------
(1) For the three months ended March 31, 2004, other after-tax adjustments of
$(5.7) million included the negative effect of a cumulative effect of
accounting change related to the implementation of SOP 03-1. For the three
months ended March 31, 2003, other after-tax adjustments of $(0.7) million
included the negative effect of a change in the estimated loss on disposal
of BT Financial Group.
16
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2004
(UNAUDITED)
8. EARNINGS PER SHARE
The computations of the basic and diluted per share amounts for our continuing
operations were as follows:
FOR THE THREE MONTHS ENDED
MARCH 31,
----------------------------------
2004 2003
---------------- -----------------
(IN MILLIONS, EXCEPT PER SHARE
DATA)
Income from continuing operations........ $199.3 $156.4
================ =================
Weighted-average shares outstanding:
Basic.................................. 320.8 331.4
Dilutive effect:
Stock options........................ 1.1 0.3
Restricted stock units............... 0.1 -
---------------- -----------------
Diluted................................ 322.0 331.7
================ =================
Income from continuing operations
per share:
Basic.................................. $ 0.62 $ 0.47
================ =================
Diluted................................ $ 0.62 $ 0.47
================ =================
The calculation of diluted earnings per share for the three months ended March
31, 2004 and 2003, excludes the incremental effect related to certain
stock-based compensation grants due to their anti-dilutive effect.
9. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Principal Life has established special purpose entities to issue secured
medium-term notes. Under the program, the payment obligations of principal and
interest on the notes are secured by funding agreements issued by Principal
Life. Principal Life's payment obligations on the funding agreements are fully
and unconditionally guaranteed by PFG. All of the outstanding stock of Principal
Life is indirectly owned by PFG and PFG is the only guarantor of the payment
obligations of the funding agreements.
The following tables set forth condensed consolidating financial information of
Principal Life and PFG as of March 31, 2004 and December 31, 2003, and for the
three months ended March 31, 2004 and 2003.
17
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2004
(UNAUDITED)
9. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF FINANCIAL POSITION
MARCH 31, 2004
PRINCIPAL PRINCIPAL LIFE PRINCIPAL FINANCIAL PRINCIPAL
FINANCIAL INSURANCE SERVICES, INC. AND FINANCIAL
GROUP, INC. COMPANY OTHER SUBSIDIARIES GROUP, INC.
PARENT ONLY ONLY COMBINED (1) ELIMINATIONS CONSOLIDATED
-------------- ---------------- ---------------------- --------------- ---------------
(IN MILLIONS)
ASSETS
Investments, excluding
investment in
unconsolidated entities....... $ - $ 49,153.3 $ 8,038.3 $ (1,384.1) $ 55,807.5
Investment in unconsolidated
entities...................... 7,819.1 876.2 6,078.0 (14,588.2) 185.1
Cash and cash equivalents....... 175.7 171.5 1,748.5 (487.1) 1,608.6
Other intangibles............... - 4.4 152.0 - 156.4
Mortgage loan servicing rights.. - - 1,748.1 - 1,748.1
Separate account assets......... - 45,504.8 670.8 11.0 46,186.6
All other assets................ 1.2 3,735.9 1,578.5 (195.1) 5,120.5
-------------- ---------------- ---------------------- --------------- ---------------
Total assets.................. $ 7,996.0 $ 99,446.1 $ 20,014.2 $(16,643.5) $ 110,812.8
============== ================ ====================== =============== ===============
LIABILITIES
Contractholder funds............ $ - $ 29,051.7 $ 12.0 $ (150.0) $ 28,913.7
Future policy benefits and
claims........................ - 14,065.0 1,460.8 - 15,525.8
Other policyholder funds........ - 764.7 4.5 - 769.2
Short-term debt................. - - 1,429.2 (442.9) 986.3
Long-term debt.................. - 227.0 2,590.5 (262.4) 2,555.1
Income taxes currently
payable....................... - 200.0 33.0 (87.0) 146.0
Deferred income taxes........... 8.3 1,154.9 690.5 (3.9) 1,849.8
Separate account liabilities.... - 45,504.8 670.8 11.0 46,186.6
Other liabilities............... 0.7 1,096.5 5,303.8 (507.7) 5,893.3
-------------- ---------------- ---------------------- --------------- ---------------
Total liabilities............. 9.0 92,064.6 12,195.1 (1,442.9) 102,825.8
STOCKHOLDERS' EQUITY
Common stock.................... 3.8 2.5 - (2.5) 3.8
Additional paid-in capital...... 7,179.1 5,073.7 6,818.9 (11,892.6) 7,179.1
Retained earnings (deficit)..... 824.0 774.8 (539.4) (235.4) 824.0
Accumulated other
comprehensive income.......... 1,539.6 1,530.5 1,539.6 (3,070.1) 1,539.6
Treasury stock, at cost......... (1,559.5) - - - (1,559.5)
-------------- ---------------- ---------------------- --------------- ---------------
Total stockholders' equity.... 7,987.0 7,381.5 7,819.1 (15,200.6) 7,987.0
-------------- ---------------- ---------------------- --------------- ---------------
Total liabilities and
stockholders' equity.......... $ 7,996.0 $ 99,446.1 $ 20,014.2 $(16,643.5) $ 100,812.8
============== ================ ====================== ============== ===============
- -----------------------
(1) Principal Financial Services, Inc. consolidated, except Principal Life,
which is reported on the equity method.
18
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2004
(UNAUDITED)
9. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 2003
PRINCIPAL PRINCIPAL LIFE PRINCIPAL FINANCIAL PRINCIPAL
FINANCIAL INSURANCE SERVICES, INC. AND FINANCIAL
GROUP, INC. COMPANY OTHER SUBSIDIARIES GROUP, INC.
PARENT ONLY ONLY COMBINED (1) ELIMINATIONS CONSOLIDATED
-------------- ---------------- --------------------- -------------- ---------------
(IN MILLIONS)
ASSETS
Investments, excluding
investment in
unconsolidated entities....... $ - $48,156.9 $ 8,610.9 $ (1,357.2) $ 55,410.6
Investment in unconsolidated
entities...................... 7,234.0 793.8 5,693.3 (13,553.9) 167.2
Cash and cash equivalents....... 173.8 640.5 1,360.5 (481.9) 1,692.9
Other intangibles............... - 4.5 116.9 - 121.4
Mortgage loan servicing rights.. - - 1,953.1 - 1,953.1
Separate account assets......... - 42,753.4 632.2 22.2 43,407.8
All other assets................ 1.7 3,825.7 1,374.4 (200.4) 5,001.4
-------------- ---------------- --------------------- -------------- ---------------
Total assets.................. $7,409.5 $96,174.8 $ 19,741.3 $(15,571.2) $ 107,754.4
============== ================ ===================== ============== ===============
LIABILITIES
Contractholder funds............ $ - $29,040.4 $ 11.9 $ (149.8) $ 28,902.5
Future policy benefits and
claims........................ - 14,025.3 1,449.4 - 15,474.7
Other policyholder funds........ - 706.2 4.0 - 710.2
Short-term debt................. - - 2,053.8 (436.0) 1,617.8
Long-term debt.................. - 423.3 2,630.7 (286.7) 2,767.3
Income taxes currently
payable....................... - 160.0 4.3 (74.3) 90.0
Deferred income taxes........... 8.2 974.0 666.9 (5.1) 1,644.0
Separate account liabilities.... - 42,753.4 632.2 22.2 43,407.8
Other liabilities............... 1.7 1,226.1 5,054.2 (541.5) 5,740.5
-------------- ---------------- --------------------- -------------- ---------------
Total liabilities............. 9.9 89,308.7 12,507.4 (1,471.2) 100,354.8
STOCKHOLDERS' EQUITY
Common stock.................... 3.8 2.5 - (2.5) 3.8
Additional paid-in capital...... 7,153.2 5,052.1 6,796.9 (11,849.0) 7,153.2
Retained earnings (deficit)..... 630.4 594.6 (734.4) 139.8 630.4
Accumulated other
comprehensive income.......... 1,171.3 1,216.9 1,171.4 (2,388.3) 1,171.3
Treasury stock, at cost......... (1,559.1) - - - (1,559.1)
-------------- ---------------- --------------------- -------------- ---------------
Total stockholders' equity.... 7,399.6 6,866.1 7,233.9 (14,100.0) 7,399.6
-------------- -------------------------------------- -------------- ---------------
Total liabilities and
stockholders' equity.......... $7,409.5 $96,174.8 $ 19,741.3 $(15,571.2) $ 107,754.4
============== ================ ===================== ============== ===============
- -----------------------
(1) Principal Financial Services, Inc. consolidated, except Principal Life,
which is reported on the equity method.
19
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2004
(UNAUDITED)
9. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2004
PRINCIPAL PRINCIPAL LIFE PRINCIPAL FINANCIAL PRINCIPAL
FINANCIAL INSURANCE SERVICES, INC. AND FINANCIAL
GROUP, INC. COMPANY OTHER SUBSIDIARIES GROUP, INC.
PARENT ONLY ONLY COMBINED (1) ELIMINATIONS CONSOLIDATED
-------------- --------------- ---------------------- -------------- -----------------
(IN MILLIONS)
REVENUES
Premiums and other
considerations.................... $ - $ 857.7 $ 64.1 $ - $ 921.8
Fees and other revenues............. - 233.9 385.0 (57.8) 561.1
Net investment income............... 0.6 702.2 104.9 9.3 817.0
Net realized/unrealized
capital losses.................... - (41.5) (6.9) 5.6 (42.8)
-------------- --------------- ---------------------- -------------- -----------------
Total revenues.................... 0.6 1,752.3 547.1 (42.9) 2,257.1
EXPENSES
Benefits, claims, and settlement
expenses.......................... - 1,111.8 78.1 (2.4) 1,187.5
Dividends to policyholders.......... - 73.3 - - 73.3
Operating expenses.................. 2.7 395.2 383.4 (50.4) 730.9
-------------- --------------- ---------------------- -------------- -----------------
Total expenses.................... 2.7 1,580.3 461.5 (52.8) 1,991.7
-------------- --------------- ---------------------- -------------- -----------------
Income (loss) before income
taxes and cumulative effect of
accounting change................. (2.1) 172.0 85.6 9.9 265.4
Income taxes (benefits)............. (0.7) 41.3 23.1 2.4 66.1
Equity in the net income of
subsidiaries, excluding
cumulative effect of
accounting change................. 200.7 51.9 138.2 (390.8) -
-------------- --------------- ---------------------- -------------- -----------------
Income before cumulative
effect of accounting change....... 199.3 182.6 200.7 (383.3) 199.3
Cumulative effect of accounting
change, net of related income
taxes............................. (5.7) (2.5) (5.7) 8.2 (5.7)
-------------- --------------- ---------------------- -------------- -----------------
Net income.......................... $ 193.6 $ 180.1 $ 195.0 $ (375.1) $ 193.6
============== =============== ====================== ============== =================
- -----------------------
(1) Principal Financial Services, Inc. consolidated, except Principal Life,
which is reported on the equity method.
20
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2004
(UNAUDITED)
9. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2003
PRINCIPAL PRINCIPAL LIFE PRINCIPAL FINANCIAL PRINCIPAL
FINANCIAL INSURANCE SERVICES, INC. AND FINANCIAL
GROUP, INC. COMPANY OTHER SUBSIDIARIES GROUP, INC.
PARENT ONLY ONLY COMBINED (1) ELIMINATIONS CONSOLIDATED
-------------- ----------------- --------------------- --------------- ---------------
(IN MILLIONS)
REVENUES
Premiums and other considerations.. $ - $ 870.9 $ 34.6 $ - $ 905.5
Fees and other revenues............ - 196.2 483.3 (47.5) 632.0
Net investment income.............. 0.9 733.7 103.6 (2.2) 836.0
Net realized/unrealized capital
gains (losses)................... - (79.3) 11.6 (9.0) (76.7)
-------------- ----------------- --------------------- --------------- ---------------
Total revenues................... 0.9 1,721.5 633.1 (58.7) 2,296.8
EXPENSES
Benefits, claims, and settlement
expenses......................... - 1,147.0 50.0 (1.8) 1,195.2
Dividends to policyholders......... - 80.1 - - 80.1
Operating expenses................. 2.2 384.4 453.6 (40.9) 799.3
-------------- ----------------- --------------------- --------------- ---------------
Total expenses................... 2.2 1,611.5 503.6 (42.7) 2,074.6
-------------- ----------------- --------------------- --------------- --------------
Income (loss) from continuing
operations before income taxes... (1.3) 110.0 129.5 (16.0) 222.2
Income taxes (benefits)............ (0.5) 20.2 49.2 (3.1) 65.8
Equity in the net income of
subsidiaries, excluding
discontinued operations.......... 157.2 49.8 76.9 (283.9) -
-------------- ----------------- --------------------- --------------- ---------------
Income from continuing
operations, net of related
income taxes..................... 156.4 139.6 157.2 (296.8) 156.4
Loss from discontinued operations,
net of related income taxes...... (0.7) - (0.7) 0.7 (0.7)
-------------- ----------------- --------------------- --------------- ---------------
Net income......................... $ 155.7 $ 139.6 $ 156.5 $ (296.1) $ 155.7
============== ================= ===================== =============== ===============
- -----------------------
(1) Principal Financial Services, Inc. consolidated, except Principal Life,
which is reported on the equity method.
21
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2004
(UNAUDITED)
9. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2004
PRINCIPAL PRINCIPAL LIFE PRINCIPAL FINANCIAL PRINCIPAL
FINANCIAL INSURANCE SERVICES, INC. AND FINANCIAL
GROUP, INC. COMPANY OTHER SUBSIDIARIES GROUP, INC.
PARENT ONLY ONLY COMBINED (1) ELIMINATIONS CONSOLIDATED
------------- ---------------- -------------------- --------------- ------------------
(IN MILLIONS)
OPERATING ACTIVITIES
Net cash provided by (used in)
operating activities............ $ (1.2) $ 354.1 $ 1,207.5 $ 20.2 $ 1,580.6
INVESTING ACTIVITIES
Available-for-sale securities:
Purchases....................... - (1,880.7) (436.2) (0.4) (2,317.3)
Sales........................... - 488.4 118.5 - 606.9
Maturities...................... - 985.0 260.1 - 1,245.1
Mortgage loans acquired or
originated...................... - (323.3) (74.3) 6.9 (390.7)
Mortgage loans sold or repaid..... - 369.3 79.1 (31.4) 417.0
Purchase of mortgage servicing
rights.......................... - - (102.7) - (102.7)
Real estate acquired.............. - (1.5) (8.7) - (10.2)
Real estate sold.................. - 20.5 25.7 - 46.2
Net change in property and
equipment....................... - (7.2) (2.4) - (9.6)
Purchases of interest in
subsidiaries, net of cash
acquired........................ - - (106.2) - (106.2)
Dividends received from
unconsolidated entities......... - 11.2 94.4 (105.6) -
Net change in other investments... - (75.3) 18.9 76.6 20.2
------------- ---------------- -------------------- --------------- ------------------
Net cash used in investing
activities...................... $ - $ (413.6) $ (133.8) $ (53.9) $ (601.3)
22
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2004
(UNAUDITED)
9. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2004
PRINCIPAL PRINCIPAL LIFE PRINCIPAL FINANCIAL PRINCIPAL
FINANCIAL INSURANCE SERVICES, INC. AND FINANCIAL
GROUP, INC. COMPANY OTHER SUBSIDIARIES GROUP, INC.
PARENT ONLY ONLY COMBINED (1) ELIMINATIONS CONSOLIDATED
-------------- --------------- ---------------------- --------------- ---------------
(IN MILLIONS)
FINANCING ACTIVITIES
Issuance of common stock........ $ 3.5 $ - $ - $ - $ 3.5
Acquisition of treasury stock... (0.4) - - - (0.4)
Issuance of long-term debt...... - 12.3 0.4 (7.5) 5.2
Principal repayments of long-
term debt..................... - (209.5) (42.7) 31.9 (220.3)
Net repayments of short-term
borrowings.................... - - (625.8) (6.9) (632.7)
Dividends paid to parent........ - - (11.0) 11.0 -
Investment contract deposits.... - 1,356.5 - - 1,356.5
Investment contract
withdrawals................... - (1,602.1) - - (1,602.1)
Net decrease in banking
operation deposits............ - - (6.6) - (6.6)
Proceeds from financing
element derivatives........... - 55.3 - - 55.3
Payments for financing element
derivatives................... - (22.0) - - (22.0)
-------------- --------------- ---------------------- --------------- ---------------
Net cash provided by (used in)
financing activities.......... 3.1 (409.5) (685.7) 28.5 (1,063.6)
-------------- --------------- ---------------------- --------------- ---------------
Net increase (decrease) in cash
and cash equivalents.......... 1.9 (469.0) 388.0 (5.2) (84.3)
Cash and cash equivalents at
beginning of year............. 173.8 640.5 1,360.5 (481.9) 1,692.9
-------------- --------------- ---------------------- --------------- ---------------
Cash and cash equivalents at
end of year................... $ 175.7 $ 171.5 $ 1,748.5 $(487.1) $ 1,608.6
============== =============== ====================== =============== ===============
- -----------------------
(1) Principal Financial Services, Inc. consolidated, except Principal Life,
which is reported on the equity method.
23
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2004
(UNAUDITED)
9. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2003
PRINCIPAL PRINCIPAL LIFE PRINCIPAL FINANCIAL PRINCIPAL
FINANCIAL INSURANCE SERVICES, INC. AND FINANCIAL
GROUP, INC. COMPANY OTHER SUBSIDIARIES GROUP, INC.
PARENT ONLY ONLY COMBINED (1) ELIMINATIONS CONSOLIDATED
------------- ----------------- -------------------- --------------- -----------------
(IN MILLIONS)
OPERATING ACTIVITIES
Net cash provided by (used in)
operating activities.......... $ (0.8) $ 456.5 $ 404.1 $ (112.7) $ 747.1
INVESTING ACTIVITIES
Available-for-sale securities:
Purchases..................... - (2,418.1) (500.5) 6.9 (2,911.7)
Sales......................... - 602.4 88.2 - 690.6
Maturities.................... - 869.4 196.5 - 1,065.9
Net cash flows from trading
securities.................... - - 2.0 (2.0) -
Mortgage loans acquired or
originated.................... - (227.2) 11.6 - (215.6)
Mortgage loans sold or repaid... - 226.1 89.6 (1.8) 313.9
Purchase of mortgage
servicing rights.............. - - (310.6) - (310.6)
Proceeds from sale of mortgage
servicing rights.............. - - 0.5 - 0.5
Real estate acquired............ - (84.1) (8.5) - (92.6)
Real estate sold................ - 5.9 17.7 - 23.6
Net change in property and
equipment..................... - (2.9) (0.2) - (3.1)
Net proceeds from sales of
subsidiaries.................. - - 2.1 - 2.1
Purchases of interest in
subsidiaries, net of cash
acquired...................... - (18.5) (41.8) - (60.3)
Dividends received from
(contributions to)
unconsolidated entities....... - 22.9 (18.7) (4.2) -
Net change in other investments. - (24.4) (68.6) 92.6 (0.4)
------------- ----------------- -------------------- --------------- -----------------
Net cash used in investing
activities.................... $ - $ (1,048.5) $ (540.7) $ 91.5 $ (1,497.7)
24
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2004
(UNAUDITED)
9. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2003
PRINCIPAL PRINCIPAL LIFE PRINCIPAL FINANCIAL PRINCIPAL
FINANCIAL INSURANCE SERVICES, INC. AND FINANCIAL
GROUP, INC. COMPANY OTHER SUBSIDIARIES GROUP, INC.
PARENT ONLY ONLY COMBINED (1) ELIMINATIONS CONSOLIDATED
------------- ---------------- --------------------- --------------- ----------------
(IN MILLIONS)
FINANCING ACTIVITIES
Issuance of common stock........ $ (3.0) $ - $ - $ - $ (3.0)
Acquisition of treasury stock... (184.1) - - - (184.1)
Issuance of long-term debt...... - - 7.5 - 7.5
Principal repayments of long-
term debt..................... - (4.4) (1.8) 1.8 (4.4)
Net proceeds of short-term
borrowings.................... - - 191.7 1.1 192.8
Investment contract deposits.... - 2,937.8 - - 2,937.8
Investment contract
withdrawals................... - (2,312.4) - - (2,312.4)
Net increase in banking
operation deposits............ - - 44.7 - 44.7
------------- ---------------- --------------------- --------------- ----------------
Net cash provided by (used in)
financing activities.......... (187.1) 621.0 242.1 2.9 678.9
------------- ---------------- --------------------- --------------- ----------------
Net increase (decrease) in cash
and cash equivalents.......... (187.9) 29.0 105.5 (18.3) (71.7)
Cash and cash equivalents at
beginning of year............. 332.1 585.7 809.7 (688.9) 1,038.6
------------- ---------------- --------------------- --------------- ----------------
Cash and cash equivalents at
end of year................... $ 144.2 $ 614.7 $ 915.2 $(707.2) $ 966.9
============= ================ ===================== =============== ================
- -----------------------
(1) Principal Financial Services, Inc. consolidated, except Principal Life,
which is reported on the equity method.
25
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2004
(UNAUDITED)
9. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
In December 2003, we filed a shelf registration statement with the Securities
and Exchange Commission. The shelf registration totals $3.0 billion, with the
ability to issue debt securities, preferred stock, common stock, warrants, stock
purchase contracts and stock purchase units of PFG and trust preferred
securities of three subsidiary trusts. If we issue securities, we intend to use
the proceeds from the sale of the securities offered by this prospectus,
including the corresponding junior subordinated debentures issued to the trusts
in connection with their investment of all the proceeds from the sale of
preferred securities, for general corporate purposes, including working capital,
capital expenditures, investments in subsidiaries, acquisitions and refinancing
of debt, including commercial paper and other short-term indebtedness. Principal
Financial Services, Inc. unconditionally guarantees our obligations with respect
to one or more series of debt securities described in the shelf registration
statement.
The following tables set forth condensed consolidating financial information of
Principal Financial Services, Inc. and Principal Financial Group, Inc. as of
March 31, 2004 and December 31, 2003, and for the three months ended March 31,
2004 and 2003.
CONDENSED CONSOLIDATING STATEMENTS OF FINANCIAL POSITION
MARCH 31, 2004
PRINCIPAL LIFE
PRINCIPAL PRINCIPAL LIFE INSURANCE PRINCIPAL
FINANCIAL FINANCIAL COMPANY AND FINANCIAL
GROUP, INC. SERVICES, INC. OTHER SUBSIDIARIES GROUP, INC.
PARENT ONLY ONLY COMBINED ELIMINATIONS CONSOLIDATED
------------- ---------------- --------------------- --------------- ----------------
(IN MILLIONS)
ASSETS
Investments, excluding
investment in
unconsolidated entities....... $ - $ 151.5 $ 55,656.0 $ - $ 55,807.5
Investment in unconsolidated
entities...................... 7,819.1 8,375.8 185.1 (16,194.9) 185.1
Cash and cash equivalents....... 175.7 580.8 1,065.3 (213.2) 1,608.6
Other intangibles............... - - 156.4 - 156.4
Mortgage loan servicing rights.. - - 1,748.1 - 1,748.1
Separate account assets......... - - 46,186.6 - 46,186.6
All other assets................ 1.2 99.6 5,043.0 (23.3) 5,120.5
------------- ---------------- --------------------- --------------- ----------------
Total assets.................. $ 7,996.0 $ 9,207.7 $ 110,040.5 $(16,431.4) $110,812.8
============= ================ ===================== =============== ================
LIABILITIES
Contractholder funds............ $ - $ - $ 28,913.7 $ - $ 28,913.7
Future policy benefits and
claims........................ - - 15,525.8 - 15,525.8
Other policyholder funds........ - - 769.2 - 769.2
Short-term debt................. - 239.9 757.1 (10.7) 986.3
Long-term debt.................. - 664.1 1,891.0 - 2,555.1
Income taxes currently
payable....................... - 13.6 139.1 (6.7) 146.0
Deferred income taxes........... 8.3 19.5 1,822.2 (0.2) 1,849.8
Separate account liabilities.... - - 46,186.6 - 46,186.6
Other liabilities............... 0.7 451.5 5,660.0 (218.9) 5,893.3
------------- ---------------- --------------------- --------------- ----------------
Total liabilities............. $ 9.0 $ 1,388.6 $ 101,664.7 $ (236.5) $102,825.8
26
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2004
(UNAUDITED)
9. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF FINANCIAL POSITION (CONTINUED)
MARCH 31, 2004
PRINCIPAL LIFE
PRINCIPAL PRINCIPAL INSURANCE PRINCIPAL
FINANCIAL FINANCIAL COMPANY AND FINANCIAL
GROUP, INC. SERVICES, INC. OTHER SUBSIDIARIES GROUP, INC.
PARENT ONLY ONLY COMBINED ELIMINATIONS CONSOLIDATED
-------------- ------------------ -------------------- --------------- ----------------
(IN MILLIONS)
STOCKHOLDERS' EQUITY
Common stock................... $ 3.8 $ - $ 64.4 $ (64.4) $ 3.8
Additional paid-in capital..... 7,179.1 6,818.9 5,906.1 (12,725.0) 7,179.1
Retained earnings (deficit).... 824.0 (539.4) 867.2 (327.8) 824.0
Accumulated other
comprehensive income......... 1,539.6 1,539.6 1,538.1 (3,077.7) 1,539.6
Treasury stock, at cost........ (1,559.5) - - - (1,559.5)
-------------- ------------------ -------------------- --------------- ----------------
Total stockholders' equity... 7,987.0 7,819.1 8,375.8 (16,194.9) 7,987.0
-------------- ------------------ -------------------- --------------- ----------------
Total liabilities and
stockholders' equity......... $ 7,996.0 $ 9,207.7 $ 110,040.5 $ (16,431.4) $ 110,812.8
============== ================== ==================== =============== ================
27
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2004
(UNAUDITED)
9. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 2003
PRINCIPAL LIFE
PRINCIPAL PRINCIPAL INSURANCE PRINCIPAL
FINANCIAL FINANCIAL COMPANY AND FINANCIAL
GROUP, INC. SERVICES, INC. OTHER SUBSIDIARIES GROUP, INC.
PARENT ONLY ONLY COMBINED ELIMINATIONS CONSOLIDATED
-------------- ------------------ -------------------- --------------- ----------------
(IN MILLIONS)
ASSETS
Investments, excluding
investment in
unconsolidated entities...... $ - $ 150.5 $ 55,260.1 $ - $ 55,410.6
Investment in unconsolidated
entities..................... 7,234.0 7,771.7 167.2 (15,005.7) 167.2
Cash and cash equivalents...... 173.8 872.7 870.1 (223.7) 1,692.9
Other intangibles.............. - - 121.4 - 121.4
Mortgage loan servicing
rights....................... - - 1,953.1 - 1,953.1
Separate account assets........ - - 43,407.8 - 43,407.8
All other assets............... 1.7 186.1 4,831.1 (17.5) 5,001.4
-------------- ------------------ -------------------- --------------- ----------------
Total assets................. $ 7,409.5 $8,981.0 $ 106,610.8 $(15,246.9) $ 107,754.4
============== ================== ==================== =============== ================
LIABILITIES
Contractholder funds........... $ - $ - $ 28,902.5 $ - $ 28,902.5
Future policy benefits and
claims....................... - - 15,474.7 - 15,474.7
Other policyholder funds....... - - 710.2 - 710.2
Short-term debt................ - 399.9 1,228.6 (10.7) 1,617.8
Long-term debt................. - 664.0 2,103.3 - 2,767.3
Income taxes currently
payable...................... - 14.1 76.6 (0.7) 90.0
Deferred income taxes.......... 8.2 20.7 1,615.1 - 1,644.0
Separate account liabilities... - - 43,407.8 - 43,407.8
Other liabilities.............. 1.7 648.3 5,320.3 (229.8) 5,740.5
-------------- ------------------ -------------------- --------------- ----------------
Total liabilities............ 9.9 1,747.0 98,839.1 (241.2) 100,354.8
STOCKHOLDERS' EQUITY
Common stock................... 3.8 - 64.4 (64.4) 3.8
Additional paid-in capital..... 7,153.2 6,796.9 5,851.8 (12,648.7) 7,153.2
Retained earnings (deficit).... 630.4 (734.3) 685.6 48.7 630.4
Accumulated other
comprehensive income......... 1,171.3 1,171.4 1,169.9 (2,341.3) 1,171.3
Treasury stock, at cost........ (1,559.1) - - - (1,559.1)
-------------- ------------------ -------------------- --------------- ----------------
Total stockholders' equity... 7,399.6 7,234.0 7,771.7 (15,005.7) 7,399.6
-------------- ------------------ -------------------- -------------- ----------------
Total liabilities and
stockholders' equity......... $ 7,409.5 $8,981.0 $ 106,610.8 $(15,246.9) $ 107,754.4
============== ================== ==================== =============== ================
28
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2004
(UNAUDITED)
9. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2004
PRINCIPAL LIFE
PRINCIPAL PRINCIPAL INSURANCE PRINCIPAL
FINANCIAL FINANCIAL COMPANY AND FINANCIAL
GROUP, INC. SERVICES, INC. OTHER SUBSIDIARIES GROUP, INC.
PARENT ONLY ONLY COMBINED ELIMINATIONS CONSOLIDATED
-------------- ------------------ -------------------- --------------- ----------------
(IN MILLIONS)
REVENUES
Premiums and other
considerations................. $ - $ - $ 921.8 $ - $ 921.8
Fees and other revenues.......... - - 561.3 (0.2) 561.1
Net investment income............ 0.6 12.8 803.5 0.1 817.0
Net realized/unrealized
capital losses................. - (1.8) (41.0) - (42.8)
-------------- ------------------ -------------------- --------------- ----------------
Total revenues................. 0.6 11.0 2,245.6 (0.1) 2,257.1
EXPENSES
Benefits, claims, and settlement
expenses....................... - - 1,187.5 - 1,187.5
Dividends to policyholders....... - - 73.3 - 73.3
Operating expenses............... 2.7 14.8 713.5 (0.1) 730.9
-------------- ------------------ -------------------- --------------- ----------------
Total expenses................. 2.7 14.8 1,974.3 (0.1) 1,991.7
-------------- ------------------ -------------------- --------------- ----------------
Income (loss) before income
taxes and cumulative effect
of accounting change........... (2.1) (3.8) 271.3 - 265.4
Income taxes (benefits).......... (0.7) (1.4) 68.2 - 66.1
Equity in the net income of
subsidiaries, excluding
cumulative effect of
accounting change.............. 200.7 203.1 - (403.8) -
-------------- ------------------ -------------------- --------------- ----------------
Income before cumulative
effect of accounting change.... 199.3 200.7 203.1 (403.8) 199.3
Cumulative effect of accounting
change, net of related income
taxes.......................... (5.7) (5.7) (5.7) 11.4 (5.7)
-------------- ------------------ -------------------- --------------- ----------------
Net income....................... $ 193.6 $195.0 $ 197.4 $(392.4) $ 193.6
============== ================== ==================== =============== ================
29
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2004
(UNAUDITED)
9. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2003
PRINCIPAL LIFE
PRINCIPAL PRINCIPAL INSURANCE PRINCIPAL
FINANCIAL FINANCIAL COMPANY AND FINANCIAL
GROUP, INC. SERVICES, INC. OTHER SUBSIDIARIES GROUP, INC.
PARENT ONLY ONLY COMBINED ELIMINATIONS CONSOLIDATED
-------------- ------------------ -------------------- --------------- ----------------
(IN MILLIONS)
REVENUES
Premiums and other
considerations................. $ - $ - $ 905.5 $ - $ 905.5
Fees and other revenues.......... - - 632.2 (0.2) 632.0
Net investment income............ 0.9 32.9 802.0 0.2 836.0
Net realized/unrealized capital
gains (losses)................. - 7.5 (84.2) - (76.7)
-------------- ------------------ -------------------- --------------- ----------------
Total revenues................. 0.9 40.4 2,255.5 - 2,296.8
EXPENSES
Benefits, claims, and settlement
expenses....................... - - 1,195.2 - 1,195.2
Dividends to policyholders....... - - 80.1 - 80.1
Operating expenses............... 2.2 15.4 781.7 - 799.3
-------------- ------------------ -------------------- --------------- ----------------
Total expenses................. 2.2 15.4 2,057.0 - 2,074.6
-------------- ------------------ -------------------- --------------- ----------------
Income (loss) from continuing
operations before income taxes. (1.3) 25.0 198.5 - 222.2
Income taxes (benefits).......... (0.5) 9.3 57.0 - 65.8
Equity in the net income of
subsidiaries, excluding
discontinued operations........ 157.2 141.5 - (298.7) -
-------------- ------------------ -------------------- --------------- ----------------
Income from continuing
operations, net of related
income taxes................... 156.4 157.2 141.5 (298.7) 156.4
Loss from discontinued
operations, net of related
income taxes................... (0.7) (0.7) (0.7) 1.4 (0.7)
-------------- ------------------ -------------------- --------------- ----------------
Net income....................... $ 155.7 $ 156.5 $ 140.8 $ (297.3) $ 155.7
============== ================== ==================== =============== ================
30
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2004
(UNAUDITED)
9. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2004
PRINCIPAL LIFE
PRINCIPAL PRINCIPAL INSURANCE PRINCIPAL
FINANCIAL FINANCIAL COMPANY AND FINANCIAL
GROUP, INC. SERVICES, INC. OTHER SUBSIDIARIES GROUP, INC.
PARENT ONLY ONLY COMBINED ELIMINATIONS CONSOLIDATED
-------------- ------------------ -------------------- --------------- ----------------
(IN MILLIONS)
OPERATING ACTIVITIES
Net cash provided by (used in)
operating activities.......... $(1.2) $ ( 61.6) $ 1,640.9 $ 2.5 $1,580.6
INVESTING ACTIVITIES
Available-for-sale securities:
Purchases..................... - (150.4) (2,166.9) - (2,317.3)
Sales......................... - 102.4 504.5 - 606.9
Maturities.................... - - 1,245.1