Risk & Compliance

Principal’s CFO Gears Up For IPO

Mike Gersie details four ways he has prepared for demutualization.
David KatzJune 14, 2001

The benefits of going public are certainly obvious for the Principal Financial Group, the huge 401(k) services provider and life and health insurer.

In changing from a mutual to a stock-company structure, as it plans to do, the Principal could gain capital to expand globally and develop technology to help it stay competitive domestically.

Not as obvious, but formidable in itself, is the downside of going public. How do you cope with demands for financial data that you never had to comply with before?

Not to worry. Mike Gersie, the CFO and executive vice president of Des Moines, Iowa-based Principal, has been championing a corporate “financial transformation project” costing tens of millions of dollars. The project is aimed at readying Principal’s ability to cope with Reg FD and other reporting challenges.

“We’ve spent a lot of time building infrastructure over the last three years,” says Gersie, who jokes that, in the runup to demutualization, he’s become “an old 52.”

Gersie, who’s been with the company for 31 years in a variety of jobs, including heading up information services and new-business development, can truly be called a CFO of CFOs. He chairs a “CFO Council” consisting of the nine finance chiefs who oversee the company’s major business units, plus the CFOs of Principal’s information-technology and administrative-services operations.

Meeting once a month, the council ponders policy issues that may include the financial performance of the organization, its planning and modeling, and its need to build infrastructure, according to Gersie.

One level down, the CFO says, there’s also a “Comptrollers Council,” representing the company’s accountants and actuaries, that “really rolls up its sleeves and delves into accounting issues” like amortization, materiality, and the details of acquisitions.

Both councils have been preoccupied with the Principal’s revamping of its financial data-gathering and reporting operations.

Already about half way through the effort, Principal is retooling its processes and procedures for gathering, modeling, forecasting, analyzing, and communicating its financial and business data in anticipation of the demutualization and the IPO, Gersie says.

On May 29, the 120-year-old company announced it had filed its plan of demutualization with the Iowa insurance commissioner.

The latest in a surge of insurance demutualizations that has included John Hancock, MetLife, Prudential, and Liberty Mutual, the Principal’s move includes distribution of 100 percent of the pre-IPO value of the company to eligible Principal insurance policyholders. For more on demutualization, click here.

Like other financial-services companies, Principal is looking to the capital markets to help it keep pace with domestic competition and to expand in Asia and elsewhere abroad, especially in countries where deregulation of state-run retirement systems offers opportunities for growth.

In terms of its 401(k) business, Principal sees its domestic “sweet spot” as employers in the range of 100 to 500 employees, and it plans to pursue that business globally, although the size of the target- employers may vary in different countries, according to Gersie.

Domestically, the company is, arguably, the biggest provider of services to 401(k) plans. In 2000, Principal provided services to 31,792 401(k) plans, more than any other services provider, according to the 2001 CFO 401(k) Providers Buyer’s Guide.

Going public might also help the company boost its current $350 million IT budget, improving its ability to compete on the E-commerce front, Gersie says.

On June 8, Principal said it had filed a registration statement of its proposed IPO with the Securities and Exchange Commission. Slated for late 2001 or early 2002, the IPO will consist of about 109.5 million shares at $19 per share. At that rate, the offering’s net proceeds will be about $2 billion, or $2.29 billion if the underwriters fully exercise their option to buy added shares.

In preparation for the IPO, Principal has been revamping the management of its financial data in a four-pronged effort that includes building a data warehouse, a new forecasting and planning model, new analysis tools, and an investor-relations function that’s fit for The Street. In interviews with CFO.com, Gersie outlined the key parts of the program: 1. Data warehouse.Starting in early 2000, Principal has been developing its financial data-gathering efforts in phases. Gersie says the first phase, completed in mid-2000, sought to enable the company “to hold all the information and slice and dice the information we would need for public reporting.”

In the first phase, the company’s goal was “to have a single source of truth,” the CFO says. “You don’t want [data] scattered in three places and perhaps have it misinterpreted.”

Principal has thus gathered in the data- warehouse its planned and actual financials, including income statements, assets under management, “and anything we report externally,” Gersie says. (The company has already done some public reporting in connection with its issuance of 144(a) corporate debt.)

It’s now possible to “drill down,” in terms of financial data, from the corporation to a business unit to a major product group, he says.

After the first phase of the warehouse, the “next big deliverable,” slated for first-quarter 2002, will focus on data related to the corporation’s expenses and expense allocation, notes Gersie.

Sometime after that, Principal aims to capture “a higher level of summary within the formal ledger system” in the data warehouse, a move that the CFO says should produce “much faster accounting.”

2. Forecasting and planning.Aided by Aon Consulting, Principal is developing a “macro” corporate financial model that will aid its financial projections and enable it to offset the risks of its various business risks against each other, Gersie says. It will help it to determine, for instance, whether to sell one kind of business rather than another.

In constructing the model, the company is looking at the key attributes of its business units, each of which has a “micro model,” he says. “We try to extract the key drivers out of the micro [models]” in an effort to “validate the macro results we get.”

Further, in its modeling effort, the company is focusing on making “better predictions” from a “more robust” array of indicators, such as sales activity, the movements of interest rates, and medical- cost trends (the company writes health and disability insurance), adds Gersie.

3. Analysis.In this phase, the company is seeking to determine the driving factors behind its financial results. For instance, the company might compare the pricing of its insurance products to the actual experience associated with the products, Gersie says.

By the end of the year, the company plans to complete the installation of a computerized life-insurance valuation tool. The finance chief says the tool is aimed at helping the company calculate its reserves for life insurance policies and its deferred acquisition costs (the first-year costs of acquiring life insurance business, amortized through the life of the business).

Another part of the analysis phase is aimed at determining the verbiage the company will use to report its results, a process that will go on through the IPO, according to Gersie.

“Obviously, when you go to the capital markets, you have a new constituency,” he says. “They’re asking you the questions without benefit of inside knowledge, so you better be able to tell them what drove the business.”

Gersie added that having the data in a faster, more concentrated, and easily calculated form is the basis for improving its analysis of the data.

4. Investor relations.Interestingly, two years ago, Principal, a private company, hired a director of investor relations, John Effrein, who reports to Gersie. Principal is also outsourcing the development of the IR part of its Web site to CCBN, a Boston-based consultancy.

The company has also developed a data supplement to the earnings release it will distribute to analysts when it goes public, according to Gersie.

Further, as part of the effort to develop a strong IR function, Principal is seeking to increase the frequency and relevance of the data it reports. “You can go back five years ago [and find that] our focus was on annual reporting, with some attention to quarterly. Three years ago it was more [on] quarterly, with a little attention to monthly,” says Gersie. “Now it’s monthly.”

Besides CCBN and Aon, Principal has also used Ernst & Young Cap Gemini consultants on some phases of financial transformation. But Principal has been “driving the process,” Gersie stresses.

“A lot of companies put the change effort over to consultants, but we’re from the old school,” he says. “Our people are heavily involved in managing the projects.”

For his part, Gersie considers himself the “project champion,” rallying support for the effort. He says his job is to “get resources corporate-wide to get the job done, remove barriers, [and] to show a senior management interest.”

Assessing his performance on the project, the CFO says that so far, “we have been on-time and on budget.”

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