Principal Drops as Analysts 'Don't Get' 2010 Forecast

By Andrew Frye
Bloomberg News
December 3, 2009

Dec. 3 (Bloomberg) -- Principal Financial Group Inc. dropped the most in almost seven months in New York trading after the life insurer's 2010 profit forecast fell short of analysts' estimates.

Operating earnings per share, which exclude some investment results, are expected to be $2.45 to $2.75 in 2010, Principal Chief Financial Officer Terrance Lillis said in an online presentation to investors today. That's lower than the $2.98 average estimate of 16 analysts surveyed by Bloomberg before the company released its forecast.

"Principal pointed toward disappointing results in 2010," Nigel Dally, an analyst at Morgan Stanley who expected profit of $3 a share next year, wrote in a research note. "We would have expected the impact of rising markets to be more substantial."

Chief Executive Officer Larry Zimpleman has reported six straight quarterly declines in operating earnings per share as the recession pressured sales and reduced investment returns. Principal makes higher asset-management fees when stock markets rise, and analysts including Edward Spehar of Bank of America Corp. asked on the Webcast today why, with equity indexes rallying, the 2010 forecast fell short of expectations.

"I really just don't get it," Spehar told Zimpleman. "There really is no implied growth in this business."

KBW Inc. analysts led by Jeffrey Schuman cut their 2010 estimate to $2.65 from $3.00 after the presentation. "Extensive Q&A discussion did not conclusively reconcile the differences between management and street expectations, but the bottom line is that near-term earnings are likely to be lower than we thought," Schuman wrote in a note to clients.

'More Art Than Science'

Principal fell $3.46, or 13 percent, to $22.52 at 4:15 p.m. in New York Stock Exchange composite trading. The stock last fell as much on May 11. The insurer advanced 15 percent this year before today after slipping 67 percent in 2008, Zimpleman's first year as CEO. MetLife Inc., the biggest U.S. life insurer, is down 2.2 percent since Dec. 31 and No. 2 Prudential Financial Inc. has risen 59 percent.

Zimpleman sold $1.9 billion of shares and debt in the second quarter to cushion mortgage-related losses after cutting jobs and slashing the dividend last year. Today, Zimpleman reiterated the company's "long-term" target of 11 percent to 13 percent average annual increase in earnings per share, and said forecasting results was "more of an art than a science."

The 2010 target "may not appear in line with our long term guidance, but with a few adjustments, we believe it is," Principal's Lillis said. The company's stock sale in the second quarter and a reorganization of its business in Brazil will cut into earnings per share next year, Lillis said. He said Principal won't repurchase shares in 2010.


"I'm trying to figure out where we might be missing things," John Nadel, an analyst with Sterne Agee & Leach Inc., said of the 2010 forecast on the Webcast. "I'm struggling with the range here."

Principal forecast 2009 operating earnings of $2.75 to $3.25 a share in December of last year. The insurer, which earned $2.06 a share through the first nine months, may miss the lower end of the range by 2 cents, according to the average estimate of 16 analysts surveyed by Bloomberg.

Principal, which sells life and health insurance and retirement products, said last month that operating revenue fell 15 percent to $6.95 billion in the first nine months of the year. Fees from asset management dropped as the market slump reduced the value of investments, and retirement sales suffered as the recession curbed savings. Net income rose for the first time since 2007 as corporate bond holdings recovered.

Commercial Mortgages

The insurer said today it expects credit-related losses, including commercial mortgage writedowns, of 65 cents to 75 cents a share next year.

Principal, one of at least 12 insurers to apply for a federal bailout as stocks sank last year, turned down U.S. aid in the second quarter as markets recovered. Carriers that shunned government rescues, including New York-based MetLife and Prudential of Newark, New Jersey, are seeking to win business from bailed-out rivals Hartford Financial Services Group Inc. and Lincoln National Corp.

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