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By Cyril Tuohy
Top executives with The Principal Financial Group held firm in their long-term acquisition strategy in foreign markets despite a November ratings downgrade by Moody’s Investors Service citing capital constraints.
In a conference call with analysts about their company’s outlook in 2014, Larry D. Zimpleman, chairman, president and chief executive officer of Principal Financial Group, said if there was such a thing as a “complementary” downgrade, then this was it.
“I think the Moody’s decision was sort of that example, because their decision in large measure hinged on the fact that with the growth in our fee-based earnings, they see those as more volatile than insurance or spread-based earnings, and that was the primary basis of the downgrade,” he said.
On Nov. 18, Moody’s downgraded the debt ratings of several of Principal’s operating units. Principal Life Insurance, the group’s primary life insurance operating company, saw its debt downgraded to A1 from Aa3.
Analysts downgraded the company’s debt because of the weaker credit profiles of Principal Financial’s international pension and asset management operations, along with profitability pressures faced by Principal Life, the company’s primary U.S. life insurance subsidiary.
Principal Life supplies the holding company with its main source of dividends to repay interest on debt, repurchase shares and fund acquisitions.
Moody’s Vice President Laura Bazer said in a November statement that although “earnings should grow as the global equity markets improve, we expect leverage to remain higher and cash coverage weaker,” as the company continues to build its foreign operating units Principal International and Principal Global Investors.
Net revenue growth in 2014 the company’s foreign operations is expected to surge past the company’s life and retirement operations.
Growth at Principal Global Investors is forecast at between 7 percent and 10 percent over 2013, and revenues at Principal International are expected to rise by as much as 18 percent next year. Revenues from life and annuities are expected to grow at no more than 7 percent next year, the company said.
The company reported third-quarter net income of $245.7 million, a 31 percent increase over the year-ago period.
Terrance J. Lillis, senior vice president and chief financial officer, said the downgrade reflected Moody’s focus on the lower creditworthiness of the company’s international businesses and the higher volatility inherent in fee-based businesses.
Moody’s feels Principal’s life insurance business provides a more stable source of income relative to the company’s foreign operations, and that altered the debt ratios enough to cause the downgrade, Lillis said.
“I still believe over the long term -- even over the intermediate term -- they are the right things to do to grow the company and create shareholder value over time,” Zimpleman said.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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