June 19 - Overview -- We are raising our long-term ratings on Principal Financial Group, Inc. and its rated subsidiaries by one notch based on the improved capital adequacy position of the operating companies, its very consistent operating performance, and its sustained franchise position in the U.S. and within its leading international platforms. We are affirming our short-term ratings on the company. -- Principal Financial Group Inc.'s GAAP operating and net income remained relatively steady through the financial crisis. -- The company's capital adequacy position was lifted primarily by our updated assessment of the capital charges associated with the company's commercial mortgage loans and CMBS portfolio. -- The stable outlook reflects our expectations that operating earnings will continue on their positive trend line. Rating Action On June 19, 2012, Standard & Poor's Ratings Services raised its long-term counterparty credit ratings on Iowa-based Principal Financial Group Inc. (Principal Financial; NYSE: PFG) and Principal Financial Services, Inc. (an intermediary holding company) to 'BBB+' from 'BBB'. At the same time, we also raised the long-term counterparty credit and financial strength ratings on Principal Life Insurance Co. (Principal Life) to 'A+' from 'A'. The outlook is stable. (See ratings list for all other rating actions.) Rationale The upgrade is based on our view of the operating companies' improved capital adequacy position, Principal Financial's strong and consistent operating performance, and its very strong and sustained franchise position in the U.S. and within its leading international platforms. While the group's capital adequacy position has been improving, a deficit still remains at the 'A' confidence level as measured by our model. In our view, offsetting the capital shortfall are the company's consistent earnings engine, favorable trend in asset quality, very strong liquidity position, and strong enterprise risk management (ERM). The capital adequacy position was lifted largely by our updated commercial mortgage loan analysis and by the company's decision to reduce its position in commercial mortgage-backed securities (CMBS). (Please see "Methodology For Assessing Capital Charges For Commercial Mortgage Loans Held By U.S. Insurance Companies" published May 31, 2012, on RatingsDirect on the Global Credit Portal.) The ratings on Principal Financial reflect our assessment of the group's strong competitive position in the U.S. small-to-midsize group pension market, and its position in individual and group life and health markets. Principal Financial has been successfully building out a number of beach-heads into fast growing international retirement and asset management markets with operations in 15 countries. Standard & Poor's believes that the group will continue to maintain its strong business franchise, operating earnings, and solid operating company liquidity profile. We also consider the quality of Principal Financial's ERM to be strong. Standard & Poor's views the company's core earnings capacity as strong, given Principal Financial's industry-leading wealth management franchise, conservative product designs, and prudent risk management appetite. While the sharp decline in equity markets and weak credit markets affected 2008 and 2009 earnings, we believe that the diversity and quality of the company's earnings base and tight expense management have given Principal Life the ability to ride through periods of economic adversity with a strong relative earnings performance. Generally accepted accounting principles (GAAP) operating and net income remained relatively steady through the financial crisis. Operating income dropped to a low of $733 million in 2009, from a pre-crisis level of $1,058 million in 2007. The low for net income was $475 million in 2008, from a pre-crisis level of $742 million. With approximately 14% of Principal Life's $57 billion in general and guaranteed separate accounts at the minimum guarantee crediting interest rates as of March 31 ,2012, we believe that the firm retains the ability to maintain spreads through the current low interest rate environment. While we believe Principal Life's investment portfolio is strong as measured by asset class, diversification, quality, risk management, and return, we also believe that it has a slightly higher risk profile within its U.S. commercial real estate investments, given our view of the risk profile of its 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, in our view. Outlook The stable outlook reflects our expectations that operating earnings will continue on their positive trend line given the underlying strength and diversity of the company's retirement savings franchise, and the strength of its risk management programs. We also believe that asset quality will remain within historical norms, and capital adequacy will remain supportive of the current ratings. Assuming our base case economic scenario in 2012, we would expect Principal Financial to generate a GAAP EBIT and fixed charge coverage ratio (EBITDA/fixed charges) of $1,050 million and 6x, respectively; net realized capital losses (post tax) to remain below $250 million; and capital adequacy to remain supportive of the current ratings. We could raise the rating if capital adequacy within the group becomes supportive of a 'AA' confidence level as measured by our model, asset quality remains comfortably within our expectations, and the group's fixed charge coverage ratio remains consistently above 8x. We could lower the ratings if the holding company deploys its excess cash aggressively and/or significantly reduces its cash position below current levels, or if Principal Financial's GAAP EBIT and fixed charge coverage perform fall below $875 million and 5x on a sustained basis; asset quality deteriorates greater than expected; or if Principal Life's capital adequacy falls significantly below levels required to support an 'A' confidence level as measured by our capital model. Related Criteria And Research -- Holding Company Analysis, June 11, 2009 -- Interactive Ratings Methodology, April 22, 2009 -- Refined Methodology And Assumptions For Analyzing Insurer Capital Adequacy Using The Risk-Based Insurance Capital Model, June 7, 2010 -- Principles Of Credit Ratings, Feb. 16, 2011 -- Methodology For Assessing capital Charges For Commercial Mortgage Loans Held By U.S. Insurance Companies, May 31, 2012 Ratings List Principal Financial Group Inc. Counterparty Credit Rating Local Currency BBB+/Stable/-- BBB/Positive/-- Senior Unsecured BBB+ BBB Preferred Stock BB+ BB Principal Financial Services Inc. Counterparty Credit Rating Local Currency BBB+/Stable/A-2 BBB/Positive/A-2 Principal Life Insurance Co. Counterparty Credit Rating Local Currency A+/Stable/A-1 A/Positive/A-1 Subordinated A- BBB+ Principal National Life Insurance Co. Counterparty Credit Rating A+/Stable/-- A/Positive/-- Principal Life Insurance Co. Principal National Life Insurance Co. Financial Strength Rating Local Currency A+/Stable/-- A/Positive/-- Principal Financial Global Funding II LLC Senior Secured A+ A Principal Financial Global Funding LLC Senior Secured A+ A Principal Life Global Funding I Senior Secured A+ A Principal Life Global Funding II Senior Secured A+ A Principal Life Income Fundings Trusts Senior Secured A+ A Ratings Affirmed Principal Financial Services Inc. Commercial Paper A-2 Principal Life Insurance Co. 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.