Fitch Affirms Principal Financial Group’s Ratings; Outlook Negative

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed the ratings of Principal Financial Group, Inc. (PFG) and its subsidiaries. The affirmation includes the Insurer Financial Strength (IFS) ratings of PFG's primary life insurance company subsidiaries at 'AA-' and its holding company senior debt rating at 'A-'. A full list of rating actions follows at the end of this release. The Rating Outlook remains Negative.

This rating action follows a periodic review of PFG's financial results and credit quality. Fitch views PFG's strong market position in the employee benefit business as favorable to the company's operating profile. Operating earnings, particularly in PFG's important pension business, are improving a trend that is expected to continue in 2011. However, PFG's overall operating earnings profile has diminished somewhat from levels achieved prior to the financial crisis. This longer-term decline in earnings profile is due to margin pressure in the pension business, a scale-back in the institutional spread-based business and reduced fees for asset management operations.

PFG has been placing increasing emphasis on its fee based business, thus reducing potential earnings volatility from changing investment spreads and insurance underwriting variability. Fitch believes that PFG's recently announced plan to exit from the group health lines is a reasonable strategic decision given changes in the U.S. health insurance sector, however, the operation did generate earnings and contributed to overhead coverage. Fitch continues to believe that PFG has strong holding company and insurance company liquidity and does not anticipate the company will have to prematurely sell assets to fund maturing operating company liabilities.

Fitch views PFG's Total Financing and Commitment Ratio (TFC), of 0.4 times when excluding goodwill, as moderate and consistent with industry norms. PFG's equity-credit adjusted leverage excluding accumulated other comprehensive income was 15% at Sept. 30, 2010, a slight decrease from 16% at year-end 2009. In addition to this modest leverage, the company had approximately $1.1 billion of cash at the holding company at Sept. 30, 2010. PFG's capital position is also considered to be strong with total adjusted statutory capital of $5.1 billion and an RBC level Fitch estimates at 448% at Sept. 30, 2010.

Fitch's Negative Outlook reflects the previously mentioned longer term earnings challenges as well as continued uncertainty in the level of losses that will ultimately be attributed to PFG's investment portfolio. The uncertainty particularly applies to the concentration in commercial mortgage backed securities (CMBS) where the amount of gross unrealized losses in the remains sizable. Fitch notes that PFG has increased financial resources and financial flexibility that can be used to help mitigate potential investment losses.

Key rating drivers that could lead to a downgrade in PFG's ratings 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 fixed charge coverage;
--RBC decline to a level below the 375% range;
--Material increase in financial leverage and/or TFC ratio.

Fitch affirms the following with an Outlook Negative:

Principal Financial Group, Inc.
--Issuer Default Rating (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 'FI;
--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 at 'AA-' are also affirmed:

--Principal Financial Global Funding LLC
--Principal Life Income Fundings Trust
--Principal Life Global Funding I
--Principal Financial Global Funding II, LLC

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (Aug. 16, 2010);
--'Life Insurance Ratings Criteria' (March 24, 2010);
--'Insurance Industry: Global Notching Methodology and Recovery Analysis' (Dec. 29, 2009);
--'Fitch's Approach to Rating Insurance Groups' (Dec. 14, 2010);
--'Short Term Rating for Corporate Finance' (Nov. 2, 2010).

Applicable Criteria and Related Research:
Insurance Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=547766
Insurance Industry: Global Notching Methodology and Recovery Analysis
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493114
Fitch's Approach to Rating Insurance Groups
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=586765
Short-Term Ratings for Corporate Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=568726

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Fitch Ratings
Primary Analyst:Bruce Cox, +1-312-606-2316
Director
70 W. Madison
Chicago, IL 60670
or
Secondary Analyst:Julie Burke, +1-312-368-3158
Managing Director
or
Committee Chairperson:Brian Schneider, +1-312-606-2321
Senior Director
or
Media Relations:Brian Bertsch, New York, +1-212-908-0549
[email protected]

Source: Fitch Ratings