TEXT-S&P affirms Principal Financial Group 'BBB+' rating
Oct 9 - Overview -- Principal Financial Group Inc. will be assuming about $32 billion in assets under management with its proposed acquisition of AFP Cuprum S.A., a leading pension manager in Chile. -- We are affirming our 'BBB+' ratings on Principal and its rated subsidiaries. At the same time, we are revising the outlook to negative from stable. -- The negative outlook reflects the additional financial leverage that Principal has taken on with this acquisition. Rating Action On Oct. 9, 2012, Standard & Poor's Ratings Services affirmed its 'BBB+' counterparty credit ratings on Iowa-based Principal Financial Group Inc. (Principal) and Principal Financial Services Inc. (PFSI, an intermediary holding company). At the same time, we affirmed the 'A+' counterparty credit and financial strength ratings on Principal Life Insurance Co. We also revised the outlook to negative from stable. Rationale The outlook revision reflects the group's increased level of financial leverage, reduced fixed-charge coverage ratio, and increased capital deficit at PLIC (as measured by our capital model) due to the excess debt double leverage that will be taken on to complete the acquisition of AFP Cuprum S.A. (Cuprum) and, to a lesser extent, integration risk. The company has announced that it would be acquiring 63% of Cuprum from Empresas Penta S.A. and Inversiones Banpenta Limitada (the Penta group). The purchase agreement also includes a public tender offer that will be made to the minority shareholders for the remaining 37% of publicly traded shares. Purchase price overall purchase price will be about $1.5 billion; roughly $750 million in goodwill and $530 million in intangibles will be created by this transaction. Subject to Chilean regulatory approval and the other conditions, the company expects the transaction to close in first-quarter 2013 and to immediately add to earnings. Based on the structure of the planned financing, Principal would finance the Cuprum acquisition with $400 million in holding company cash, together with $600 million in prefunded U.S. term debt, and about $500 million in Chilean term debt. The company does not plan to issue any new common equity or hybrid securities to complete this transaction. On a pro forma basis, debt leverage and total financial leverage ratios will reach 28.4% and 33.9%, respectively. While we expect total financial leverage to remain within the 35% tolerances we generally view as acceptable for the current ratings, debt-funded double leverage (as we defined it) would be higher than the 20% limit set out within our insurance ratings criteria. Debt above 20% leverage that does not otherwise qualify for equity treatment under our criteria would adversely affect the quality of capital because we deduct the excess amount from available operating company capital in our capital model. We view Cuprum as a leading franchise among the six major players operating within the mandatory pension provider market within Chile. While there will be limited cost synergies, we believe revenue synergies can be generated given Principal's extensive retirement savings expertise and infrastructure, and strong asset management platform. We expect the integration of Cuprum to proceed smoothly, since the firm is largely a stand-alone operation, and given Principal's track record of integrating acquisitions, and managing and growing its international pension and retirement savings platform. The ratings on Principal reflect our assessment of the group's strong competitive position in the U.S. small-to-midsize group pension, individual and group life, and health markets. Principal has been successfully expanded into the fast-growing international retirement and asset management markets with operations in 15 countries. We believe the group will continue to maintain its strong business franchise, operating earnings, and solid operating company liquidity profile. We also consider the quality of its enterprise risk management to be strong. While we believe Principal Life's investment portfolio is strong as measured by asset class, diversification, quality, risk management, and return. We also believe it has a slightly higher risk profile within its U.S. commercial real estate investments in light of our view of the risk profile of its commercial mortgage-backed securities (CMBS) and commercial whole loans portfolio. The company's higher relative position to peers in 'BBB' rated bonds and financial institutions also remains an area of incremental risk. Outlook The negative outlook reflects our expectations that we could lower the ratings if PFG continues to deploy excess cash aggressively and/or significantly reduces its cash position below current levels; if material issues emerge with the integration of Cuprum or with operations locally; or if Principal's GAAP (generally accepted accounting principles) EBIT and fixed-charge coverage perform fall below $875 million and 5x on a sustained basis. We could also lower the ratings if Principal Life's capital adequacy remains significantly below levels required to support an 'A' confidence level as measured by our capital model. The negative outlook indicates that there is a one-in-three chance of a downgrade within the next one to two years. We could revise the outlook to stable if capital adequacy is restored to levels that are more supportive of the financial strength rating, operating earnings remain on their positive trend line, and asset quality will remain within historical norms. Assuming our base case economic scenario in 2013, we expect Principal to generate a GAAP EBIT and fixed-charge coverage ratio of $1.150 billion and 6x, respectively, and net realized capital losses (post tax) to remain below $250 million. Related Criteria And Research -- Sovereign Rating and Country T&C Assessment Histories, Oct. 2, 2012 -- Methodology For Assessing capital Charges For Commercial Mortgage Loans Held by U.S. Insurance Companies, May 31, 2012 -- Principles Of Credit Ratings, Feb. 16, 2011 -- Refined Methodology And Assumptions For Analyzing Insurer Capital Adequacy Using The Risk-Based Insurance Capital Model, June 7, 2010 -- Holding Company Analysis, June 11, 2009 -- Interactive Ratings Methodology, April 22, 2009 Ratings List Ratings Affirmed; Outlook Action To From Principal Financial Group Inc. Counterparty Credit Rating BBB+/Negative/-- BBB+/Stable/-- Principal Financial Services Inc. Counterparty Credit Rating BBB+/Negative/A-2 BBB+/Stable/A-2 Principal Life Insurance Co. Counterparty Credit Rating A+/Negative/A-1 A+/Stable/A-1 Principal Life Insurance Co. Principal National Life Insurance Co. Financial Strength Rating A+/Negative/-- A+/Stable/-- Principal National Life Insurance Co. Counterparty Credit Rating A+/Negative/-- A+/Stable/-- Ratings Affirmed Principal Financial Group Inc. Senior Unsecured BBB+ Preferred Stock BB+ Principal Financial Global Funding II LLC Senior Secured A+ Principal Financial Global Funding LLC Senior Secured A+ Principal Financial Services Inc. Commercial Paper A-2 Principal Life Global Funding I Senior Secured A+ Principal Life Global Funding II Senior Secured A+ Principal Life Income Fundings Trusts Senior Secured A+ Principal Life Insurance Co. Subordinated A- Commercial Paper A-1 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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