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Investment Firm Presses Principal to Shed Life and Annuity Arm

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What You Need to Know

  • Activist fund Elliott Investment Management and Principal Financial file cooperation agreement with SEC.
  • Principal reported $473 million in net income for the fourth quarter, in spite of low rates and the pandemic.
  • Principal to add two independent directors per Elliott, including former Voya executive Mary Elizabeth Beams.

Activist fund Elliott Investment Management L.P. — the parent of Prosperity Life Group — is pushing Principal Financial Group Inc. to do something with its life and annuity operations, according to reports filed with the U.S. Securities and Exchange Commission. Elliot owns stock in Principal.

Principal is a Des Moines, Iowa-based financial services company that has been selling life insurance since 1879. It was the 23rd largest U.S. life insurance issuer in 2019 and the 15th biggest annuity issuer, according to the most recent market share data available from the National Association of Insurance Commissioners.

The company reported $473 million in net income for the fourth quarter of 2020 on $3.8 billion in revenue, in spite of the effects of low interest rates, the COVID-19 pandemic and the pandemic-related economic disruption.

But many competitors, including Voya, MetLife, AXA, American International Group Inc. and Prudential PLC of London, have either sold their retail life and annuity operations or talked about doing so, because of concerns about low interest rates and tough new accounting rules. Elliott appears to be making the case that Principal could increase its share price if it followed a similar path.

The Elliott Factor

Elliott, a New York-based investment firm, has acquired more than 2% of Principal’s common stock, according to the cooperation agreement that Principal filed with the SEC. The agreement calls for Principal to add two independent directors to its board and conduct a strategic review of its business mix and capital deployment options.

Mark Cicirelli, U.S. head of insurance for Elliott, said in a statement, that his firm believes the appointment of the independent directors at Principal, and the strategic review, will “further enhance the positioning of the company’s high-return businesses and drive meaningful shareholder value creation.”

“We are pleased to reach this agreement with Principal, which reflects constructive and positive discussions we have had with the company’s board and management team, and will result in a rigorous and independent exploration of its strategic options,” Cicirelli said.

Dan Houston, Principal’s CEO, said his firm’s success is a product of its commitment to adapting its product offerings and aligning company goals with shareholder goals

The strategic review described in the cooperation agreement “builds on work Principal has consistently undertaken to enhance shareholder returns and will help ensure we remain well-positioned for continued growth, future success and value creation,” Houston said.

“The current competitive landscape and recent transaction activity in the life and annuity market suggest a supportive environment for a review,” Principal said in the agreement announcement.

Principal demonstrated discipline and focus recently when it stopped selling lifetime guaranteed universal life products, the company said.

Elliott and Insurance

Elliott was founded in 1977 by Paul Singer, who continues to be the company’s co-CEO.

In the world of insurance, Elliott is known for acquiring Prosperity Life Insurance Group LLC from an investor group in 2019. Prosperity Life acquired Shenandoah Life in 2011. It then acquired SBLI USA and S.USA in 2014.

Prosperity Life writes non-variable indexed annuities, single-premium deferred annuities, Medicare supplement insurance, whole life insurance, single-premium universal life, and several types of term life.

Cicirelli is a Prosperity Life director. He has a bachelor’s degree from Dartmouth and a master’s degree in business from Harvard. Before working for Elliott, he worked for TH Lee Putnam Ventures and for J.P. Morgan & Company. He serves on the board of the West Side Montessori School in New York.

The Cooperation Agreement

According to the SEC filing, Principal said it negotiated the agreement Sunday with Elliott Investment Management L.P. and with two Elliott affiliates, Elliott Associates L.P., a Delaware limited partnership, and Elliott International L.P., a Cayman Islands limited partnership.

Houston signed the cooperation agreement for Principal, and Elliot Greenberg, a vice president at all three Elliott parties, signed the agreement for the Elliott entities. Hambledon Inc., Elliott International L.P.’s general partner, was another party that signed the agreement on behalf of Elliott International L.P.

The agreement creates a cooperation period for Principal and the Elliott parties that’s supposed to last at least from now until early 2022.

Representatives from Principal and the Elliott parties are supposed to be polite during the cooperation period and “not to make or cause to be made any statement or announcement that constitutes an ad hominem attack on, or that otherwise disparages, defames, slanders, impugns or is reasonably likely to damage the reputation of” Principal, the Elliott entities, or anyone affiliated with Principal or the Elliott entities, according to the cooperation agreement.

Principal is supposed to carry out a strategic review and make the results public by June 30, 2021.

Principal is also supposed to add former Voya Financial executive Mary Elizabeth “Maliz” Beams to its board, and to its board finance committee, and to work with the Elliott parties to add another independent director to the board and to the finance committee. Maliz has been an executive at TIAA and Voya.

What Elliott Owns Now

Principal and Elliott have not said directly how much Principal stock Elliott owns, or wants to own. But a “minimum ownership requirement” provision in the cooperation agreement says the “new director” provisions in the agreement will expire if the Elliott parties stop having economic exposure to at least 2% of Principal’s economic stock.

Elsewhere, in a cooperation period provision, Elliott has agreed not to make deals that would give it more than a 5% beneficial ownership of Principal’s common stock or total economic exposure to more than 9.9% of Principal’s common stock.

The provisions appear to imply that Elliott parties now own somewhere between 2% and 5% of Principal’s common stock.

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