Principal to Drop Fixed Annuities and Retail Life, Keep Variable Annuities

The company now has a "market capitalization," or total outstanding stock value, of about $17.2 billion.

Elliot Management's Advice

The changes are the direct result of a strategic review Principal announced in February. Principal began the strategic review at the request of Elliot Investment Management L.P., an activist fund.

An activist fund invests in what it believes to be companies that could increase shareholder returns by making strategic or other changes. The activist fund then tries to persuade the target companies to take its advice.

Elliott argued that Principal could improve returns by following the example of many other major competitors, such as AXA, MetLife, Prudential PLC and Voya,  and eliminating or limiting the scope of retail life and annuity operations.

The other companies have retreated from offering consumers many types of income and benefits guarantees.

Life insurers have traditionally depended heavily on earnings from huge portfolios of bonds, as well as revenue from policyholders' premium payments, to fund benefits obligations.

In recent years, low interest rates have depressed insurers' bond yields, and new accounting rules have increased the effects of ordinary ups and downs in bond yields on insurers' net earnings.

One possible sign that investors may like the new moves is that Principal's market cap has increased about 18% from where it stood before the strategic review was announced.

The Thinking

Dan Houston, the chairman, president and CEO of Principal, said in a statement that Principal believes the realignment will increase Principal's focus and help it do well in higher-growth markets, as well as helping it add value for shareholders.

Mark Cicirelli, U.S. head of insurance for Elliott, said the changes should lead to greater capital efficiency at Principal.

"We appreciate the constructive dialogue and the company's demonstrated commitment to build a less capital-intensive business and to focus on its higher-growth target markets, Cicirelli said.

What It Means

The new deal underscores the reality that providing guaranteed retirement income has become more of a seller's market. Consumers will need more help from agents and advisors to understand what income guarantee options are still out there.

Pictured: Dan Houston (Photo: Principal Financial)