Ben Holmes

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Principal Financial's IPO Looks Promising

Ben Holmes

"Is this heaven?" "No, it's Iowa." That was the exchange between Ray Liotta's and Kevin Costner's characters in an Iowa corn field-turned-baseball diamond in the movie Field of Dreams. While insurance IPOs have returned less than heavenly results this year, one Des Moines insurer poised to go public next week may be the answer to some investors' prayers.

Principal Financial Group (proposed symbol PFG: NYSE) is scheduled to price its IPO on Monday, Oct. 22, for Tuesday's trading. The proposed sale of 100 million shares at a price range of $17 to $20 makes this the single largest U.S. equity deal in registration based on the number of shares being offered. Underwriter Goldman Sachs leads a twelve-firm syndicate group that includes Credit Suisse First Boston, Merrill Lynch, Salomon Smith Barney, Banc of America Securities, Bear Stearns, A.G. Edwards, Fox-Pitt Kelton, Chase H&Q JP Morgan, Lehman Brothers, Ramirez & Co. and UBS Warburg Paine.

The prospectus describes the company as "a leading provider of retirement savings, investment and insurance products and services, with $116.9 billion in assets under management and approximately 13 million customers worldwide as of June 30, 2001." Impressive, yes, but this is no start-up. For the six months ended June 30, 2001, PFG posted total revenue of $4.32 billion and net income of $224 million. This was down slightly from the previous period in 2000, but consider the job market and the overall disillusionment with the U.S. markets when making this comparison.

In light of the current environment, it is warranted to question PFG's exposure to the World Trade Center attack. The words "terrorist" and "terrorism" occur a combined total of 13 times in the 264-page prospectus. I'm not surprised, as such language has become almost boilerplate in new issues registration documents filed since the Sept. 11 events. What may be of interest to investors is what the company says about its exposure to this and other similar risks.

From the prospectus: "Some of the assets in our investment portfolio may also be adversely affected by the declines in the securities markets and economic activity caused by the terrorist attacks and possible military action and heightened security measures." PFG owns a number of fixed-income instruments, which it says may be affected by these forces. The examples given include equipment trust certificates, a type of collateralized bond, which in this case are secured by aircraft and both public and private corporate debt in the airline and property and casualty insurance sectors.

The face value amounts of these investments are significant, but the real risks in holding this type of paper are assumed to be far less than the total invested amounts. Also included in the filing is the following statement: "In our Life and Health Insurance segment, we estimate our losses from insurance claims from the Sept. 11 attacks, primarily individual life insurance claims, to be between $9.0 million and $12.0 million after taxes, taking into consideration reinsurance coverage. We do not engage in any property and casualty insurance or any reinsurance businesses."

A noteworthy characteristic of the PFG deal is the fact that there is not an accompanying convertible offering to the IPO. Of the three insurance demutualization deals currently being lead by Goldman, which includes Prudential Financial, PFG is the only one without a concurrent convert component. Convertible securities are often offered as a sort of enticement alongside a hard-to-place IPO. This may point to a higher degree of confidence on the part of the underwriters that the Principal deal will be an easy sale.

What about investor confidence? I've spoken with a number of investors and portfolio managers who think that PFG represents a solid equity investment. One reader wrote, "As the chief investment officer for one of their competitors, I am looking forward to getting a piece of the action in a quality company."

My impression is that the Principal Financial Group IPO is a well-anticipated piece of syndicate business. The company is highly regarded and holds a very competitive position within the industry. My expectations for the immediate performance of the stock are somewhat dampened by the sheer size of the deal. But I've seen deals this large deliver respectable premiums. Given this, I'm prone to call this one up small -- perhaps a dollar -- right away. In the intermediate term, say three to six months out, I expect the stock price to slightly outpace the company's quarterly net income growth rate.