February 12, 2013 / 8:51 PM / 5 years ago

TEXT - Fitch affirms Principal Financial Group rating

Feb 12 - Fitch Ratings has removed the ratings of Principal Financial Group,
Inc. (PFG) from Rating Watch Negative and affirmed the long-term Issuer
Default Rating (IDR) of PFG at 'A' and the Insurer Financial Strength (IFS)
ratings of PFG's operating subsidiaries at 'AA-'. The Rating Outlook is
Negative. A full list of rating actions is shown below.


The ratings affirmation reflects PFG's strong capitalization and stable, 
balanced operating profitability, partially offset by increased financial 
leverage and above-average exposure to direct mortgages and structured mortgage 

The Negative Outlook reflects Fitch's concerns related to execution risk 
associated with PFG's recent acquisition of AFP Cuprum S.A. (Cuprum), financial 
leverage at the high end of rating expectations, and fixed charge coverage that 
is below rating expectations.

Cuprum is a leading pension manager in Chile, focusing on the high net worth 
market segment. The acquisition of Cuprum advances PFG's stated strategy of 
continued expansion in high growth emerging markets. Additionally, PFG has 
maintained a presence in Chile, which is considered a relatively stable 
retirement system, since 1995. However, Fitch considers the Cuprum transaction 
to be significant in terms of size, and comes with an increase in financial 
leverage to a level near Fitch's upper expectations. 

PFG's financial leverage was approximately 24% at Dec. 31, 2012, up from 15% at 
Dec. 31 2011. The majority of this increase in financial leverage reflects debt 
issued to fund the acquisition of Cuprum. 

PFG's pre-tax operating earnings declined by approximately 6.6% relative to 2011
driven largely by an unlocking of deferred policy acquisition costs and other 
actuarial balances, which reduced net income by approximately $100 million. This
unlocking resulted primarily from the company's third quarter review of 
assumptions used as inputs for its actuarial models.

Fixed charge coverage declined to approximately 7.1 times (x) in 2012 from 
approximately 7.9x in 2011. While Fitch expects PFG to continue to generate 
solid, stable earnings on its growing fee-based businesses, low market interest 
rates and continued competitive pressures are likely to restrain earnings growth
in the intermediate term. 

PFG's strong capitalization is supported by the organization's primary insurance
operating company, Principal Life Insurance Company, which is expected to report
a risk-based capital ratio between 415% and 420% at year-end 2012, down from 
449% at year-end 2011.

Fitch considers PFG's allocation to direct mortgages to be above average 
relative to the life insurance sector as a whole. In addition to $10.2 billion 
in direct commercial loans and $1.3 million in residential loans, the company 
reported $3.9 billion in CMBS holdings at Dec. 31, 2012. As weak economic 
conditions have continued to drive above-average losses in these asset classes 
within the industry, 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. The company reported consolidated assets of $162 
billion, and total shareholders' equity of $9.8 billion at Dec. 31, 2012.


The key rating triggers that could result in a downgrade include:

--Material increase in investment losses;

--Run-rate return on equity below 10% and a GAAP-based fixed charge coverage 
ratio below 7x;

--A decline in the company's reported RBC ratio to a level below 375%;

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

Fitch has affirmed the following ratings with a Negative Outlook:

Principal Financial Group, Inc. 
--IDR at 'A'; 
--$300 million 1.850% notes due Nov. 2017 'A-';
--$350 million 8.875% notes due May 2019 at 'A-';
--$300 million 3.300% notes due Sept. 2022 'A-';
--$300 million 3.125% notes due May 2023 'A-';
--$600 million 6.050% notes due Oct. 2036 at 'A-';
--$300 million 4.625% notes due Sept. 2042 'A-';
--$300 million 4.350% notes due May 2043 '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-';
--IDR at 'A+'; 
--Surplus notes at 'A'; 
--$100 million due March 1, 2044 at 'A'. 

Principal National Life Insurance Company
--IFS at 'AA-'. 

Fitch also affirmed 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
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