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An Insurance IPO That Looks Healthy


Along with most of the nation's major life insurers, Principal Financial Group reacted swiftly to the terrorist attacks on America. It set up a toll-free hotline. It advertised its readiness to pay claims and extend deadlines for premiums. And it pledged up to $2 million in relief donations. Yet unlike most insurers, before the terrorists struck, "The Principal" had been busily putting final touches on an initial public offering, tentatively set for October.

Since Sept. 11, Principal and its lead underwriter, Goldman Sachs (GS), have been focusing on more urgent issues, including whether Principal's total claim payments will be sizable. (The early estimate is no.) But unlike Continental Airlines, which shelved an imminent IPO of its regional jet service, Continental Express, Principal still hopes to be able to go forward with its IPO soon, a spokesman told me, if the bear market allows.

SMALL-BIZ FOCUS. I suspect it will go ahead, for two reasons: First, the $2 billion deal is supposed to complete a corporate reorganization that is turning a 122-year-old mutual company owned by policyholders into a public company owned by stockholders. Principal has been at this tedious task since 1998 and would hate to quit now. Second, despite recent declines in share prices of its publicly traded rivals, the price Principal is asking for its shares still looks reasonable (table).

Based in Des Moines, Principal over the years has cultivated a down-home image, catering to the needs of small-business clients. But its offices and 13 million customers now stretch to Latin America, Europe, Asia, and Down Under, where Principal in 1999 paid Deutsche Bank $1.4 billion for a money-management operation it picked up in its own purchase of Bankers Trust. Managing other people's money, $117 billion in institutional accounts, 401(k) plans, plus a family of mutual funds, now ranks as Principal's biggest business. But the company also makes mortgage loans, runs an online bank, and still sells its traditional life and health policies.

How is Principal set for the future? Ahead of its IPO, its executives are staying quiet. But if you look at the company's financial statements, you will find a sound, if sluggish, operation. Total revenues since 1996 have run flat, reaching $8.8 billion in the 12 months ended on June 30. Net earnings have bounced around a little more, but in the past 12 months came in at $599 million, well off their 1999 peak of $742 million. With borrowings of $2.1 billion, including the $665 million it took to finance the Deutsche Bank deal, total debt comes to nearly a third of equity.

MIDDLE OF THE PACK. Against so many IPOs that float in on the whisper of black ink two years out, Principal's long history and solidly profitable record are a rare sight. But next to John Hancock Financial, which went public early last year, its performance and financial position hardly inspire awe. Hancock, with total debt that comes to just 14% of equity, is much less leveraged. It is also far more profitable. On less in revenues ($7.5 billion) in the year ended on June 30, Hancock delivered sharply higher net profits ($764 million). Or, you can look at it this way: With half as many employees, Hancock manages to be much more efficient. It netted nearly $90,000 in profit per employee; Principal's average employee accounted for not quite $34,000 in profit.

If that sounds terrible, it could be worse. Much bigger MetLife, which went public shortly after Hancock, netted less than $31,000 per employee in the past 12 months. And giant Prudential, which still plans to go public by yearend, saw each of its employees account for net profit of $6,200. The point of all this pencil work? Simply to suggest that Principal, while not the best performer among mutual insurers that have been going public, also is far from the pits.

So, as with most IPOs, the question comes down to price. At last estimate--before the attacks of Sept. 11--Principal figured its IPO would come to market near $19.50 a share. That's a market capitalization of $7 billion, or 1.1 times book value. Hancock now commands 1.8 times book, and MetLife, 1.2 times. Given that, Principal still stands a good chance of going public despite the times we live in now. And if those times force Principal to cut the price of its shares from a reasonable $19.50 to something unreasonably cheaper, you might want to take a look. By Robert Barker


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