From the Chairman, President, and Chief Executive Officer

We arrived here by never standing still—by continually adapting our offerings and experiences to meet the needs of an expanding global customer base. That continues to be our strategy moving forward. We will succeed in the next year, decade, and century by remembering this company was founded 140 years ago on the belief that there is always a better way.

Principal represents a better way for people around the world to have enough, save enough, and protect their financial futures. Through our diversified business, we’re in a unique position to address the complexities of modern life. Our customers rely on us for retirement planning, asset management, and insurance—a comprehensive suite of flexible solutions that helps put financial security within reach. We fulfill the potential of our business model through the strength and commitment of 17,000 employees, operating with the highest standards of ethics and integrity.

The financial services industry is aware of the most significant barriers to financial security, including the effects of global aging. People around the world are living longer and spending more time in retirement. The workforce is shifting toward part-time and contract labor. Traditional pay-as-you-go pension systems struggle to meet individuals’ lifelong financial needs. While these challenges are too complex for any single person or organization, I’m encouraged by the collective pursuit of innovation throughout this industry and around the globe.

One example of cooperation is last year’s Setting Every Community Up for Retirement Enhancement (SECURE) Act, a federal law passed in the United States that paves the way for greater access to 401(k) plans. This is the most significant change to American retirement in more than a decade. Through it, we can deliver more affordable retirement solutions to smaller employers, plus more options for income annuities in retirement plans.

The SECURE Act is consistent with our philosophy: Helping more people achieve financial security isn’t only good business for Principal, it’s critical to our shared future.

These numbers speak to a deeper story of a company that’s never stood still and never will. We always build, invest, and partner with purpose.

Build

Customer experience

Our work in 80 nations and territories bridges markets and cultures to put the customer at the center of business.

Our accelerated digital investment, as part of the overall continuous investment in our operations, helps us personalize our services and engage more of those customers at scale. We combine data, technology, financial products, and talent to deliver convenient and individualized experiences. We nudge customers in the right direction for long-term economic success.

At its best, technology helps us better serve customers throughout their everyday lives. It allows them to access benefits and save for retirement when, where, and how it’s most convenient for them. Our research shows that one of the biggest challenges for retirees is saving enough, then converting their assets into a reliable stream of retirement income.² They’re likelier to trust us with that transition if we’ve already helped during their career, with family or business milestones.

In this spirit, we make retirement readiness and insurance more convenient.

Doing business online has become highly personal—and increasingly fluid. We’ve responded accordingly, with technology such as our new personalized mobile and online investment service, SimpleInvest, launched last year. SimpleInvest provides financial wellness tools and education—plus robo-advice for those who prefer digital transactions or a team of live experts for those preferring a human touch. This was a milestone launch for RobustWealth, a firm we acquired in 2018.

Listening to our customers, we hear the expectation for ease and convenience, and we’re ready. For instance, our new online chat for dental insurance in 2019 handled more than 168,000 sessions, and over 85% of those inquiries required no additional intervention. Providers receive quick, efficient answers about patient-benefits eligibility outside traditional business hours. Early surveys show they’re pleased with the convenience as our customer experience continues to evolve to fit modern lifestyles.

We also hear and understand the expectation for data privacy and security. We invest not only for digital convenience but to protect the data and assets of our customers, employees, and business partners. All employees are required to complete cybersecurity, privacy, ethics, risk, and compliance training that varies according to job function and their performance on routine evaluations.

We encourage and automate healthy savings habits.

The retirement savings gap in eight of the most populous countries, including the U.S., is expected to balloon to $400 trillion by 2050.³ We’re designing new ways to encourage personal retirement savings to avoid a looming crisis.

We adapt to the needs of different income levels and gig workers.

Incremental (or systematic) investing in emerging markets enables customers to save more through modest deposits that fit into their daily budgets. In Malaysia, our financial advisors use convenient digital onboarding and transactions with clients. In China, a high percentage of our mutual fund customers come to us directly—with half of them under age 35 and one-third of them making systematic investments. The trend is clear: Customers expect this kind of access, helping them build more confidence as they manage their personal finances.

We experiment and collaborate with fellow innovators.

It’s easy to fall behind in a world where the pace of progress has been said to wield roughly 3,000 times the impact of the Industrial Revolution.⁴ So we keep looking ahead. Through a relationship based in Singapore, we’re part of a global FinTech Consortium that pairs us with the latest startups. We pursue similar work with Plug and Play in Silicon Valley, the Global Insurance Accelerator in Des Moines, Iowa, and internally with our own digital design and experience labs in Chile, Brazil, and the U.S.

Invest

Strategic growth

A successful financial services company is unlikely to build everything it needs to manage the rate of change across global markets. A strategic acquisition can boost growth for years, if not for decades. The Principal strategy is a balanced approach of organic growth, dividends, acquisitions, and share buybacks. Our full-year 2019 dividend was strong at $2.18 per share, a 4% increase over 2018; its yield was 4%, with a net income payout ratio of more than 40%.

It’s our largest acquisition since Chilean pension manager Cuprum in 2012 and brings together two successful businesses to create one with even greater expertise and a robust experience in helping customers achieve their retirement savings and investment goals.

The addition of IRT doubles down on our 75-year track record in managing retirement plans—literally doubling our domestic footprint in retirement as measured by the number of plan participants. With this single deal, we gained a decade of organic growth.

The acquisition made us a Top Three domestic provider of defined contribution (DC), defined benefit (DB), non-qualified (NQ), and employee stock option plans (ESOP). We’ve earned a seat at the table for more opportunities in each of these categories.

The IRT acquisition expands on our history of serving employers of every size, including the largest plans with billions of dollars in assets. We can tailor retirement savings to fit workers at every level of income and experience. It significantly improves our scale and creates greater opportunity to invest in our business, driving consistent improvements in customer experience at lower costs.

We invest in serious long-term value, not quick fixes.

We’re doing the necessary work with the IRT integration to bring every customer onto a single system that’s easier and more cost-effective. Plan sponsors and participants can access multiple retirement plan types—including 401(k), DB, NQ, and ESOP—through a single convenient login, our Principal^® Total Retirement Solutions.

It’s the same with our approach to asset management, where we also serve as a hub. Principal tailors solutions to drive alpha for investors through an array of high yield, global real estate, target date funds, and other strategies. Our actively managed investments generate results.

Principal Global Investors’ net cash flow improved last year to a positive $1.1 billion, including $2.7 billion in the fourth quarter. The synergies between Principal Global Investors and Principal International—which ended 2019 with its 45th consecutive quarter of positive net cash flow—have been paying off and, in 2019, drove a large platform win in Hong Kong. This combined team continues to look for opportunities to leverage both our global asset management expertise and our distribution force in local markets.

We also have the scale and expertise to grow our pension risk transfer (PRT) business. Our PRT team provides guaranteed income to more than 350,000 customers. We’re a global firm with a deep portfolio that can take on the investment and longevity risks of DB plans. Employers can shed the burdens of administrative costs and volatility and rest easy that Principal has it handled. It’s an incredibly technical business, but we’ve gotten it right for 75 years.

This commitment to detail is another reason Principal thrives as a provider of comprehensive solutions. Our business is aligned to make retirement, insurance, and investments work for clients.

Partner

Businesses, pensions, and longevity

One of the best examples of Principal partnership is our work with advisors, consultants, and business owners across the U.S. These entrepreneurs represent the economic backbone of Main Street America.

Our protection business, U.S. Insurance Solutions, works closely with more than 100,000 businesses out of the 200,000 businesses we serve across Principal. They can rely on Principal to support their long-term success through economic expansion and volatility alike.

In the same spirit, on a global scale, Principal also partners in pension reform. We combine our financial expertise with a strong sense of responsibility to all of our stakeholders. We strive for sustainable pensions that promote social and demographic equality and reduce gender disparity.

Governments appreciate the role of private asset management in building deep capital markets, which can finance the kind of long-term infrastructure projects they need to modernize. The private pension industry also plays a critical role in offsetting fiscal pressures as governments sort out how to support their aging populations.

We’re a partner in social stability.

We offer the mandatory pension fund investments and individual long-term voluntary savings options to complement pay-as-you-go pension systems. Together we overcome the risks of living longer lives and living longer in retirement.

We have expertise across the U.S., Latin America, and Asia. We’re not only in the investment capitals of New York, London, Hong Kong, and Singapore but throughout key emerging markets such as China, India, Brazil, Chile, and Malaysia. Our firsthand experience in emerging markets gives us the in-depth knowledge to micro-target actively managed investment opportunities for the most sophisticated global clients—including our work with pension providers. We’re also connected to the next generation of customers in the global middle class—including the growing numbers of informal workers who rely on individual savings and investment.

Our international joint ventures also diversify our business across these key markets, and our customers benefit from the growth as the markets mature. Last year, to reinforce our commitment to Southeast Asia, we increased our ownership stake in our joint venture asset management operations in Malaysia, Thailand, Singapore, and Indonesia. We also rebranded these companies to Principal. We’re now better positioned to deliver our asset management expertise and experience to local customers. This spurs innovative new investment products and strategies to continue the sustainable growth of our joint ventures with CIMB Group.

In 2005, we entered a joint venture with China Construction Bank. We ended 2019 with $146 billion in AUM in our China joint venture. We’re a Top Five mutual fund manager in China, where we’ve attracted millions of online investors—the sort of growth and diversification Principal seeks from these partnerships.

We’ve been in Brazil for 20 years, and, in the last decade, we’ve grown our joint venture, BrasilPrev, with BB Seguridade, the insurance arm of Banco do Brasil. Together we created the nation’s first digital and retirement sales platform and became the leading provider of voluntary pensions.

In our work with policymakers and regulators worldwide, we were encouraged last year by the progress in pension policy reform in several locations. For example, Hong Kong introduced new tax incentives for voluntary pension contributions (TVCs). They’re flexible in that there’s no mandatory rate or amount of contribution, and it’s easy for individuals to transfer balances between TVCs. And, in Mexico, the AFORE mandatory savings now offers target date funds as the default investment to enhance pensions and improve retirement outcomes for workers.

Principal’s diversification serves both our bottom line and our overall business strategy: This international set of partners helps us see the bigger picture.

We work on behalf of a broad set of stakeholders.

No matter the political tensions that strain us, we share this world and must coexist as neighbors throughout increasingly interconnected and longer lives. We want to leave the world better than we found it.

The entire business sector is rededicating itself to corporate responsibility. Last year the Business Roundtable and its 2019 Statement on the Purpose of a Corporation declared that companies not only exist for the benefit of shareholders, they’re also charged with being good stewards for all stakeholders, including customers, advisors, employees, and other partners. At Principal, we infuse these values into everything we do.

My signature as one of 181 CEOs wasn’t a departure. It merely reaffirmed how Principal has always worked on behalf of a broad set of stakeholders. We have a long and distinguished history of doing well by doing good business.

A decade from now, I’m confident Principal will stand apart. Continuing to operate from a position of strength, our products, services, and experiences will be simpler and more convenient, offering greater accessibility to a broader set of customers.

We’ll be better equipped to anticipate and fulfill our customers’ every financial need.

We’ll build more value for our shareholders, our customers, our employees, and our communities.

Guided by the belief that there is always a better way, we’ll keep moving forward and never stand still.

Sincerely,

Dan J. Houston

Chairman, President, and Chief Executive Officer