Fitch Affirms Principal Financial Group's Ratings

CHICAGO--(Business Wire)--
Fitch Ratings has affirmed the ratings of Principal Financial
Group Inc. (PFG) and its subsidiaries. At the same time, Fitch has
assigned an 'AA' Insurer Financial Strength (IFS) rating to Principal
National Life Insurance Company. The Rating Outlook for all ratings
remains Stable. (See a full list of ratings below.)

PFG's ratings reflect the company's favorable operating profile,
good balance sheet fundamentals, and strong earnings and cash flow.

PFG's favorable operating profile reflects the company's strong
market position in the 401(k) defined contribution and employee
benefit insurance businesses serving the small-to-midsized employer
market. Fitch believes that PFG's strong market position is the result
of the company's large operating scale, strong distribution
capabilities, and well-established track record in this market. PFG
also maintains a middle-tier position in the individual life and
annuities markets, which provides some diversification to PFG's risk
and earnings profiles.

Financial performance in 2007 was strong, including double-digit
growth across a number of metrics including operating earnings and
assets under management (AUM). AUM growth trends reflect existing
deposit growth, acquisitions, and strong sales growth. PFG improved
operating return on average equity by 1.1% to 16.4% in 2007, following
1.5% increases in each of the prior two years. Although metrics were
not as strong in the first half of 2008, partially due to capital
market performance, the business is still considered to exhibit good
fundamentals.

Equity credit adjusted leverage was 17.8% at June 30, 2008, which
is in line with Fitch's expectations that would it not exceed 25%.
PFG's financial leverage ratio reflects 100% equity credit for PFG's
$542 million of perpetual preferred shares.

Fitch views the current capital levels of PFG's life insurance
subsidiaries as approaching the lower end of rating expectations.
Combined statutory total adjusted capital (TAC) for PFG totaled $4.7
billion at June 30, 2008, which is 3% more than year-end 2007 and 5%
more than $4.5 billion at year-end 2006. However, general account
liabilities grew 11% from year-end 2006, causing an increase in
operating leverage. PFG had a Prism capital score of 106% of the 'AAA'
threshold based on year-end 2006 capital and liability levels. Fitch
expects PFG to maintain a Prism capital score near the 'AAA'
threshold. Principal Life Insurance Company, PFG's lead operating
company, reported a Risk Based Capital (RBC) ratio of 377% at year-end
2007, down from 419% at year-end 2006.

Fitch's primary rating concern for PFG is the company's exposure
to further credit losses due to the ongoing credit market turmoil, and
its impact on the company's risk-based capital levels. PFG recorded a
$1.6 billion increase in gross unrealized capital losses in the first
six months of 2008, primarily on mortgage-related and fixed-maturity
corporate securities. The possibility of a portion of these losses
moving to a permanent impaired status would have a negative effect on
TAC.

PFG's exposure to residential mortgage-related investments is
material at about 8% of total investments; however, the majority of
these investments are in relatively stable higher-rated agency
securities and performing whole loans. Exposure to riskier structured
residential mortgage securities at 2% of total investments (including
a 1% exposure to subprime and Alt-a related investments) is below
average relative to peers and is manageable. Likewise, PFG's
above-average exposure to commercial mortgage-related investments of
24% of total investments is mostly in whole loans that are performing
well. Commercial mortgage backed securities (CMBS) of 8% of total
investments have experienced credit deterioration in 2008, but this
appears to be mostly related to market dynamics versus specific credit
issues.

PFG's below-investment-grade security exposure is considered
manageable at 5% of the fixed maturity portfolio or 49% of TAC at June
30, 2008. However, Fitch notes that industry write-downs have the
potential to spread to higher rated securities, creating adverse
financial effects for the company in the second half of 2008.

Fitch affirms the following ratings:

Principal Financial Group:

--Issuer Default Rating (IDR) at 'A+';

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

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

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

Principal Financial Services Inc.:

--IDR at 'A+';

--Senior debt rating at 'A';

--$465 million 8.2% due Aug. 15, 2009 at 'A'

--Commercial paper at 'F1'.

Insurance subsidiaries:

Principal Life Insurance Company

--IFS at 'AA';

--IDR at 'AA-';

--Surplus notes at 'A+';

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

In addition, Fitch affirms the following funding agreement-backed
notes issuance programs and their outstanding issues at 'AA':

Principal Financial Global Funding LLC

Principal Life Income Fundings Trust

Principal Life Global Funding I

Principal Financial Global Funding II, LLC

A new IFS rating of 'AA' is assigned to Principal National Life
Insurance Company.

Fitch's rating definitions and the terms of use of such ratings
are available on the agency's public site, www.fitchratings.com.
Published ratings, criteria and methodologies are available from this
site, at all times. Fitch's code of conduct, confidentiality,
conflicts of interest, affiliate firewall, compliance and other
relevant policies and procedures are also available from the 'Code of
Conduct' section of this site.

Fitch Ratings
Bruce Cox, +1-312-606-2316 (Chicago)
Julie Burke, +1-312-368-3158 (Chicago)
Sandro Scenga, +1-212-908-0278 (Media Relations,
New York)

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