Fitch Affirms Principal Financial Group's IDR at 'A'; Outlook Negative
CHICAGO -- February 12, 2013
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.
KEY RATING DRIVERS
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
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
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'.
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
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (Jan. 11, 2013);
--'Life Insurance (U.S.) Sector Credit Factors' (Oct. 9, 2012);
--'Principal Financial Group' (July 24, 2012).
Applicable Criteria and Related Research:
Insurance Rating Methodology -- Amended
Life Insurance (U.S.) Sector Credit Factors
Principal Financial Group, Inc. (And Operating Subsidiaries)
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Bradley S. Ellis, CFA, +1-312-368-2089
Fitch Ratings, Inc.
70 W. Madison St.
Chicago, IL 60602
Bruce E. Cox, +1-312-606-2316
Martha M. Butler, CFA, +1-312-368-3191
Brian Bertsch, New York, +1-212-908-0549
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