Principal Financial Group Inc (PFG)

How it makes money

Retirement and Income Solutions earns fees and spread income — the difference between what it credits savers and what it earns investing their money — on trillions of dollars of retirement assets it administers. Principal Asset Management earns a percentage-of-assets management fee, so revenue rises and falls with markets and net client flows. Benefits and Protection collects insurance premiums and profits when those premiums, plus investment income on them, exceed claims paid out.

Revenue by segment

Once a company has set up its 401(k)-style retirement plan with Principal, moving it to another provider means re-enrolling every employee and re-negotiating recordkeeping and investment lineups, so plan sponsors tend to stay put. But Fidelity, Empower and other large recordkeepers offer the same lock-in to their own plan sponsors, so the advantage mainly protects Principal's existing book rather than winning outsized new business.

Retirement savings and insurance are long-term, recurring needs that do not disappear in a downturn, giving the business a steady core. But Principal Asset Management's fee revenue moves with market values and client flows, and low interest rates can squeeze the spread income Retirement and Income Solutions earns, so results still have a meaningful cyclical component layered on top of the steady base.

Key risks

• Interest rate and credit spread sensitivity — The company states that adverse capital and credit market conditions, changes in interest rates or credit spreads, or a prolonged low-rate environment can hurt results, financial condition and liquidity.
• Assets under management move with markets — An economic downturn or market volatility can reduce assets under management, which directly lowers the fee revenue and profit margins earned on those assets.
• Technology and cybersecurity dependence — Operations depend on information technology systems that can be disrupted by outages or cybersecurity breaches, which could interrupt business and damage the company's reputation.
• Evolving insurance and financial regulation — Changes in laws or regulations governing retirement plans, insurance products or asset management could reduce profitability or force costly changes to how products are structured and sold.