Fitch Affirms Principal Financial Group’s IDR at ‘A’; Outlook Stable

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed Principal Financial Group, Inc.'s (PFG) long-term Issuer Default Rating (IDR) at 'A', and the Insurer Financial Strength (IFS) ratings of PFG's operating subsidiaries at 'AA-'. The Rating Outlook is Stable. A full list of rating actions is shown below.

The ratings affirmation reflects PFG's strong capitalization, modest financial leverage and improved operating profitability, partially offset by above-average exposure to direct mortgages and structured mortgage securities.

PFG's strong capitalization is supported by the organization's primary insurance operating company, Principal Life Insurance Company, which had an estimated Sept. 30, 2011 risk-based capital ratio of 455%, up from 420% at year-end 2010. Total adjusted capital increased approximately 4.9% over the first three quarters of 2011 to $4.9 billion.

PFG's financial leverage was approximately 14.4% at Sept. 30, 2011, a slight decrease from 15.0% at year-end 2010. The company also reported approximately $370 million of cash and equivalents at the holding company at Sept. 30, 2011, which amounts to approximately 12 months of 2011 common and preferred stock dividends and interest on outstanding debt.

Although premiums for PFG were down modestly in the first nine months of 2011, pre-tax operating earnings improved by approximately 19% relative to the same period in 2010, driven in part by improved fee income due to higher account values, as well as lower benefit expenses following the company's exit from the group medical business. While Fitch believes that PFG will continue to face margin pressure in its pension business, the company is placing increasing emphasis on its fee-based businesses such as asset management and certain pension products. These growth businesses are expected to help mitigate earnings lost from the scale-back in its institutional spread business and the divestiture of its health insurance business.

Fitch considers PFG's allocation to direct mortgages to be above average relative to the life insurance sector as a whole. In addition to $9.5 billion in direct commercial loans and $779 million in residential loans, the company reported $3.6 billion in CMBS holdings at Sept. 30, 2011. As weak economic conditions have continued to drive above-average losses in this asset class, Fitch views this level of exposure to be a credit negative, despite PFG's ability thus far to manage losses generated from these holdings.

PFG, headquartered in Des Moines, IA, markets a range of retirement savings, investment and insurance products and services primarily in the small- to medium-sized business segment. The company reported consolidated assets of $143.3 billion, and shareholders' equity of $10.3 billion at Sept. 30, 2011.

The key rating triggers that could result in an upgrade include:

--Superior earnings performance over an extended period of time;

--Low volatility in earnings and capital over an extended period of time;

--Successful growth of international operations.

The key rating triggers that could result in a downgrade include:

--Commercial real estate related investment losses that materially exceed industry norms;

--Failure to maintain current growth trend in GAAP operating earnings (before taxes and net realized gains/losses) and an interest coverage ratio below 6.5 times;

--Risk based capital decline to a level below the 350% range;

--Material increase in financial leverage to a level above 25% debt-to-total capital.

Fitch has affirmed the following ratings with a Stable Outlook:

Principal Financial Group, Inc.

--IDR at 'A';

--$600 million 6.05% due Oct. 15, 2036 at 'A-';

--$400 million 7.875% due May 2014 at 'A-';

--$350 million 8.875% due May 2019 at 'A-';

--5.563% preferred stock due 2015, series A at 'BBB';

--6.518% preferred stock due 2035, series B at 'BBB'.

Principal Financial Services, Inc.

--Long-term IDR at 'A';

--Short-term IDR at 'F1;

--Commercial paper at 'F1'.

Insurance subsidiaries:

Principal Life Insurance Company

--IFS at 'AA-';

--IDR at 'A+';

--Surplus notes at 'A';

--$100 million due March 1, 2044 at 'A'.

Principal National Life Insurance Company

--IFS at 'AA-'.

The following funding agreement-backed notes issuance programs and their outstanding issues rated 'AA-' are also affirmed:

--Principal Financial Global Funding LLC

--Principal Life Income Fundings Trust

--<org value="ACORN:2571806504" idsrc="xmltag.org">Principal Life Global Funding I

--Principal Financial Global Funding II, LLC

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (Sept. 22, 2011);

--'Principal Financial Group' (Aug. 25, 2011).

Applicable Criteria and Related Research:

Principal Financial Group, Inc.

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=649402

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=651018

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Fitch Ratings
Primary Analyst:Bradley S. Ellis, CFA, +1-312-368-2089
Director
Fitch, Inc.
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13th Floor
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or
Secondary Analyst:Bruce E. Cox, +1-312-606-2316
Director
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Committee Chairperson:Martha M. Butler, CFA, +1-312-368-3191
Senior Director
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Media Relations:Brian Bertsch, New York, +1-212-908-0549
brian.bertsch@fitchratings.com

Source: Fitch Ratings