Principal Financial Group announced Monday it will discontinue sales of all U.S. retail fixed annuities and consumer life insurance products and will pursue strategic alternatives for related in-force blocks.
The major changes to its portfolio and capital management strategy are intended to drive profitable growth, reduce capital intensity, sharpen its strategic focus, and generate long-term value for shareholders, according to a statement released by the Des Moines, Iowa-based company.
These changes were approved by the Principal Board of Directors following a comprehensive review of the company’s business mix and capital management options that was undertaken as a part of a cooperation agreement with one of Principal’s largest investors, Elliott Investment Management, L.P.
“This thorough and intensive review considered strategic fit, client needs, financial impact, and the risk profile of our business lines. The outcome will result in a more focused portfolio and stronger capital management strategy that we believe positions Principal for strengthened leadership in higher growth markets and greater capital efficiency, leading to higher expected shareholder returns,” said Dan Houston, chairman, president, and CEO of Principal. “We identified opportunities to reduce complexity and risk, improve our return profile, and increase our cash flow conversion to better enable us to execute on our strategy, reinvest in growth, and support our financial strength. We’ve also announced a new $1.2 billion share repurchase authorization, which underscores our commitment to return excess capital to shareholders. I am confident that as we move forward, we’ll be positioned to win and grow in meaningful ways for our shareholders, customers, and employees, both today and into the future.”
Principal will fully exit U.S. retail fixed annuities — discontinuing new sales of its deferred annuities, payout annuities, indexed annuities — and will pursue strategic alternatives, including divestiture, of the related in-force blocks, which have policy reserves of approximately $18 billion. Principal will continue selling its variable annuity offering, which plays an important role within its complete suite of retirement solutions.
In U.S. individual life insurance, Principal will fully exit the retail consumer market — discontinuing new sales of term life and universal life products to retail consumers. Building on its prior announcement to cease sales of universal life insurance with secondary guarantees (“ULSG”), Principal will pursue strategic alternatives, including divestiture, for the in-force ULSG block (approximately $7 billion of policy reserves) as well as other related in-force blocks. The company said it will continue to support business owners and key executives, allowing for an even sharper focus on the business market and products with limited interest rate exposure.
“We applaud today’s announcements, which represent a significant step on a path towards higher growth, higher returns, and greater capital efficiency,” said Mark Cicirelli, U.S. Head of Insurance for activist investor Elliott. “We appreciate the constructive dialogue and the company’s demonstrated commitment to build a less capital-intensive business and to focus on its higher-growth target markets. We believe Principal’s refined focus will result in substantial returns of capital to investors and that the implementation of today’s decisions will leave Principal better positioned to leverage its quality franchise and create significant additional value for both its shareholders and its customers.”
The review, initiated in February 2021, was led by the independent Finance Committee of the Principal Board of Directors.
Invest and expand in growth areas
Per the statement, Principal said it will prioritize fee-based businesses and focus on three key areas: retirement in the U.S. and select emerging markets, global asset management, and U.S. specialty benefits and protection in the small-to-medium-sized business market. These businesses are poised for continued growth, are more capital-efficient, and leverage Principal’s leading position and other competitive advantages, including integrated and differentiated solutions, presence in high-growth markets and preferred customer access.
Strengthen its capital management strategy
Principal is committed to actively returning excess capital to shareholders. Consistent with a targeted capital level of $800 million at the holding company, a risk-based capital ratio of 400%, a debt-to-capital ratio of 20% to 25%, and an annual common stock dividend with a targeted payout ratio of 40%, Principal’s Board of Directors has approved a new authorization for the repurchase of up to $1.2 billion of the company’s outstanding common stock.
This new authorization is in addition to the approximately $675 million that remains under the company’s prior authorization as of March 31, 2021. Principal expects to repurchase between $1.3-$1.7 billion of common shares from March 31, 2021 through the end of 2022 by utilizing capital generated from operations and reducing excess capital to target levels while retiring $300 million of debt maturing in 2022.
This repurchase amount does not include additional excess capital that might be generated from any transactions resulting from the strategic review announced June 28.
As these initiatives are implemented, Principal will become increasingly well positioned as a capital-efficient company, producing higher expected shareholder returns, and poised to lead in higher-growth markets. Further details will be discussed at the company’s June 29 investor day, from 1-4 p.m. CDT. To register, visit principal.com/investorday.