June 19, 2012 / 2:26 PM / 7 years ago

TEXT-S&P raises Principal Financial Group rating to 'BBB+'

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.
0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below