Wednesday, May 17, 2006

Principal Financial Gets Subpoena

BMO Nesbitt Burns, 17 May 2006

Last night, Principal Financial Group announced that it had received a subpoena from the Attorney General of New York regarding the sale of retirement products and services. While we have no more details on the nature of the subpoenas, we assume that this applies to the sale of corporate and individual retirement plans (401(k)s, IRAs, and 403(b)s) and perhaps annuities and mutual funds. PFG is among the leaders in providing these services and plans in the U.S. These segments account for roughly 65% of PFG’s total operating earnings. From a Canadian perspective, Manulife generates roughly 13% of net earnings from these segments in the U.S., Sun Life at 20%, and Great West at 18%.

We do not believe that any of the Canadian companies are involved with this investigation. While this development is clearly a concern, we would make the following observations. First, the U.S. annuities industry has been under investigation for over two years and we do not know if this subpoena is related to that investigation. Second, the “Spitzer impact” has diminished significantly over the last four years. If true to form, PFG will have to pay some fine and the event should have no long term impact on its franchise. Nonetheless, in our view any investigation into the insurance industry is likely to weigh on the share prices in the short term.