Principal Financial Group warns of more job cuts after 'challenging' quarter

After laying off employees in late 2018, Principal Financial Group is warning workers to expect more job losses this year.

The bleak assessment came Wednesday after Principal reported its profits dropped by more than half a billion dollars in the fourth quarter of last year, falling short of Wall Street analysts' expectations.

The Des Moines-based financial services company's fourth-quarter earnings report, released after the market closed Tuesday afternoon, showed net income fell to $236.5 million, down from $841.8 million in the fourth quarter of 2017. CEO Dan Houston characterized the quarter as "challenging" on a call with stock analysts Wednesday morning.

The retirement services company is one of the largest employers in central Iowa with some 6,500 workers in the Des Moines metro area.

Executives said the firm is working to better align its expenses to match lower revenues as firms consolidate and customer preferences change within the financial services industry.

Principal still posted record annual operating earnings of $1.6 billion last year. Houston blamed "macroeconomic conditions," particularly volatility in the stock market, for the company's lackluster performance in the fourth quarter.

But he assured analysts that the fundamentals of the business remained strong.

Principal spent $14 million on severance in the last three months of 2018, the company reported. And Houston said Principal will continue to rack up costs associated with future reductions in force.

Principal declined Wednesday to say how many employees were cut in connection with the $14 million in severance.

"There will be ongoing, consistent efforts on our part to become more efficient without mortgaging our future relative to our ability to attract and retain business," Houston said.

He said executives are aware of "pressures on the business" as they constantly analyze expenses. But even as they realign, Houston said the company is committed to making strategic investments in growing parts of the business, including digital.

"And so when we step back and look at our 2019 expenses, we know there have to be reductions," he said, "and we have to be surgical about taking those out."

Principal is no outlier in the financial services market, said John Barnidge, managing director of equity research at Sandler O'Neill + Partners in Chicago.

"It's not just Principal," said Barnidge, whose firm owns stock in Principal. "It's the industry as well."

Barnidge expects the company to cut expenses such as travel and corporate entertainment. And he said employment changes were inevitable regardless of fourth-quarter performance.

"I don't think you’re going to have across-the-board, massive layoffs at Principal," he said. "Technology is getting better. Certain jobs that when a person retires or leaves organically, you may have job reductions through attrition. But I would not expect broad-based job reductions."

With the stock market down so significantly in the fourth quarter — the S&P 500 index declined about 14 percent over that time — Barnidge said the company's performance shouldn't come as a surprise.

Principal, like many competitors, is also experiencing increased pressure on its management fees. That's largely driven by a shift in preference from more expensive, actively managed funds to passive funds.

Tom Root, an associate finance professor at Drake University, said he’s concerned continued stock market volatility could cause job losses at more than just Principal.

Des Moines has one of the nation’s largest concentration of insurance and financial services jobs.

Root expects any losses to be modest.

"We’re talking about a slowdown in what's been strong growth," he said, so "it's not a Detroit-type of situation."

Root said he expects about a 2.5 percent increase in 2019 economic growth nationally, instead of the "3-plus" percentage growth last year. Economic data on the fourth quarter has yet to be released because of the government shutdown.

Other financial services firms already have announced cuts: Wells Fargo, the single largest private employer in the Des Moines area, announced it would lay off 400 workers in November.

Nationwide insurance, another top local employer, cut 80 Des Moines positions in the same month.

On Jan. 16, Principal laid off 27 workers in its retirement and income solutions division. That included eliminating a vice president of sales position, according to employee emails provided to the Des Moines Register.

"There are many factors we cannot control, but expenses are something we can impact," Jerry Patterson, senior vice president of retirement and income solutions, wrote to employees earlier this month. "And the reality is we must save to invest."

Principal will continue investing in technology and automation as it works to better the customer experience.

But in an email to employees, Nora Everett, president of retirement and income services, said the company had to evolve its business model "more quickly than ever before."

Everett said Principal must address evolving customer expectations, "including what they are willing to pay for."

She recently announced she would retire at the end of March.

"Our entire company is under expense pressure as we move into 2019," she wrote, "no different than many in our industry."

Despite layoffs, Root said Principal's investment in improved digital consumer services could improve long-term profits and the outlook for the company. Consumers, he said, want all their financial services "at their fingertips."

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