Principal Financial Group NYSE: PFG is a publicly traded corporation based in Des Moines, Iowa, USA.
The Principal Financial Group (The Principal) is a global financial services provider which offers a wide range of financial products and services, and is a U.S. leader in 401(k) plans. Headquartered in Des Moines, Iowa, the company has more than 18 million customers worldwide. As of September 30, 2009, assets under management exceeded $280 billion. It was ranked 273rd on Fortune magazine’s list of the 500 largest U.S. corporations (May 2009). It has been consistently awarded the distinction as one of the world's most ethical companies.[1]

The Principal Financial Group (PFG)[1] is a financial services firm that manages 401(k) plans and pensions for businesses and their employees. The company also provides group life and health insurance. PFG generates revenue by charging asset management fees on the assets in its managed pensions and 401(k) plans, in addition to charging insurance premiums for its life and health insurance plans. The company's main focus is the small to medium business market.

Business Overview

Business & Financial Metrics[2]
In 2009, PFG generated a net income of $645.7 million on $3.75 billion in total revenues. This represents a 38.6% increase in net income with a 10.9% decrease in total revenues from 2008, when the company earned $465.8 million on revenues of $4.21 billion.

Business Segments[3]
PFG is divided into five business segments.

U.S. Asset Accumulation (43.4% of total revenue): This segment offers pension plan products and services to domestic customers.[4]
Global Asset Management (4.7% of total revenue): This segment includes subsidiary Principal Global Investors and its affiliates.[5]
International Asset Management and Accumulation (6.0% of total revenue): This segment includes subsidiary Principal International and has operations in Brazil, Chile, China, Hong Kong, India, Indonesia, Malaysia, Mexico, and Singapore. PFG targets countries with large middle classes and growing long-term savings through this segment.[5]
Life and Health Insurance (47.7% of total revenue): This segment offers life, health, and other insurances to individuals and groups. Its target customers are small- and medium-sized businesses.[6]
Contents
1 Business Overview
1.1 Business & Financial Metrics[2]
1.2 Business Segments[3]
2 Trends and Forces
2.1 Aging Baby Boomers Boost Demand for Retirement Services and Insurance
2.2 Shift Towards Defined Contribution Plans Favors PFG
2.3 Health Consciousness Drives Employer Demand for Health Consulting Services
2.4 PFG's Exposure to Commercial Mortgages still a Factor
3 Competitors
4 References
Corporate (-1.8% of total revenue): This segment is a catchall for assets and activities that are not allocated to any other segment.[4]
[3]

Trends and Forces

Aging Baby Boomers Boost Demand for Retirement Services and Insurance
The baby boomers are an affluent demographic, with the highest median household income of any age range in the United States,[7] $61,000 compared to a national median household income of $44,000. As these consumers age and approach retirement, the demand for retirement services and insurance products, especially life and health insurance, rise. This benefits PFG's Retirement and Investor Services division, which provides a variety of savings and investment vehicles to individuals, as well as Principal's insurance division. This trend is evidenced by PFG's 7.5-8% revenue growth over the past several years, which has been relatively evenly distributed between the company's asset accumulation and insurance divisions.[8]

Shift Towards Defined Contribution Plans Favors PFG
In a defined contribution (DC) plan, an employer is obligated to make a predetermined payment, usually in the form of a donation to match an employee's contribution, to the plan every year. The cost of a DC plan is therefore pre-specified every year, and will not unexpectedly increase. By contrast, an employer with a defined benefit (DB) plan is obligated to provide its retired employees a specific benefit every year, which means that costs can escalate unexpectedly if benefits suddenly become more expensive or as more members retire. As a result, DC plans have become more widespread all over the world in recent years, and are now the dominant form of plan in the private sector in many countries. For example, the number of DB plans in the US has been steadily declining, as more and more employers see the large pension contributions as a large expense that they can avoid by disbanding the plan and instead offering a defined contribution plan.

Health Consciousness Drives Employer Demand for Health Consulting Services
The United States has seen a growing trend towards greater general consciousness of health and wellness. This trend can be observed through healthier food choices, more widespread fitness club membership, and a reduction in unhealthy habits such as smoking. As this wellness trend continues, Principal could see an increase in demand for its wellness products, as more and more employers implement corporate health and wellness programs to attract qualified employees.


PFG's Exposure to Commercial Mortgages still a Factor
Subprime lending refers to the practice of extending credit or loans to borrowers to who fail qualify for prime or market rates due to their less than optimal credit scores. For the past decade, the interest rates associated with subprime mortgages have been about 2% higher than those associated with prime loans; the rationale is that borrowers with lower credit scores carry a higher risk of default and must therefore pay a considerable risk premium. Subprime borrowers can be extremely sensitive to interest rates. As rates rise, these borrowers, many of whom have adjustable-rate mortgages, find themselves unable to meet their debt obligations, leading to higher risks of default. This causes lenders, fearful of losing their capital, to be more wary of originating new loans, even to non-residential (i.e. business customers) with good credit, which means that borrowers may have a more difficult time refinancing their debt.

Competitors

Principal's main competitors are:

Ameriprise Financial, Inc. (AMP): Ameriprise focuses on providing advising and asset management services to individual clients, although it also serves institutional and corporate clients. AMP's Asset Accumulation and Income division offers a mix of mutual funds and annuities to individuals, as well as 401(k) plans to institutional clients. AMP also has a Protection division, which provides a variety of life and disability insurance services. Although Principal is currently larger than Ameriprise, AMP has been growing more rapidly in the past few years, and may soon overtake PFG.
AXA (AXA): AXA sells life insurance and qualified retirement plans to its customers. The company also advises and educates its clients about financial planning and estate planning. AXA operates other segments that provide property and casualty insurance to individuals and corporations, and also international insurance.
Manulife Financial (MFC): MFC offers a range of global insurance products, including individual life and group life and health insurance. Manulife Financial offers wealth management products, such as pension funds, mutual funds, and annuities. MFC also provides reinsurance services to its institutional clients.
Nationwide Financial Services (NFS): NFS is a mutual life insurance company that also provides various group retirement investment plans, including 401(k), 403(b), and 457 plans. NFS also offers individual investment advisory services and a variety of annuity products.
 
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