June 25, 2012 / 4:45 PM / 7 years ago

TEXT-Fitch affirms Principal Financial Group

June 25 - Fitch Ratings has affirmed Principal Financial Group, Inc.'s (PFG)
 long-term IDR at 'A'. Fitch has also affirmed the 'AA-' Insurer 
Financial Strength (IFS) ratings of PFG's operating subsidiaries. The Rating 
Outlook is Stable. A full list of rating actions is shown below.

The ratings affirmation reflects PFG's strong capitalization, modest financial 
leverage and improved operating profitability. This is partially offset by 
above-average exposure to direct mortgages and structured mortgage securities.

PFG's strong capitalization is supported by the organization's primary insurance
operating company (Principal Life Insurance Company), which reported a 
risk-based capital ratio of 449% at year-end 2011. This figure is up from 420% 
at year-end (YE) 2010. Total adjusted capital was essentially level at YE 2011 
relative to YE 2010.

PFG's financial leverage was approximately 16% at March 31 2012, fundamentally 
unchanged from YE 2011. PFG also reported approximately $378 million of cash and
equivalents at the holding company at March 31, 2012. This amounts to 
approximately 12 months of 2011 common and preferred stock dividends and 
interest on outstanding debt.

PFG's reported premiums were down in the 2011 due to PFG's exit from the group 
medical business. Nonetheless, pre-tax operating earnings improved by 
approximately 7% relative to 2010 driven in part by improved fee income due to 
higher account values.

Fitch believes that PFG will continue to face margin pressure in its pension 
business. That said, PFG is placing increasing emphasis on its fee-based 
businesses such as asset management and certain pension products. These growth 
businesses are expected to help mitigate earnings lost from the scale-back in 
its institutional spread business and the divestiture of its health insurance 
business. 

Fitch considers PFG's allocation to direct mortgages to be above average 
relative to the life insurance sector as a whole. In addition to $9.4 billion in
direct commercial loans and $1.3 million in residential loans, PFG reported $3.4
billion in CMBS holdings at Dec. 31, 2011. As weak economic conditions have 
continued to drive above-average losses in these asset classes, Fitch views this
level of exposure to be a credit negative, despite PFG's ability thus far to 
manage losses generated from these holdings.

PFG, headquartered in Des Moines, IA, markets a range of retirement savings, 
investment and insurance products and services primarily in the small- to 
medium-sized business segment. PFG reported consolidated assets of $154 billion,
and total shareholders' equity of $9.8 billion at March 31, 2012.

Key rating triggers that could result in an upgrade include:

--Sustainable return on equity of 10% or higher;

--Low volatility in earnings and capital over an extended period of time;

--Continued successful growth of the company's international operations;

--reported RBC ratio above 475%.

Conversely, key rating triggers that could result in a downgrade include:

--Material increase in investment losses;

--Run-rate return on equity below 6% and a GAAP-based fixed charge coverage 
ratio below 5x;

--A decline in PFG's reported RBC ratio to a level below 350%;

--Material increase in financial leverage to a level above 25% debt-to-total 
capital.

Fitch has affirmed the following ratings with a Stable Outlook:

Principal Financial Group, Inc. 
--Long-term 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 'F1;
--Commercial paper at 'F1'. 

Insurance subsidiaries: 

Principal Life Insurance Company 
--IFS at 'AA-';
--Long-term 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 rated '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
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