News Column

Fitch Affirms Principal Financial Group's IDR at 'A'; Outlook Revised to Stable

June 12, 2014

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed Principal Financial Group, Inc.'s (PFG) long-term Issuer Default Rating (IDR) at 'A'. Fitch has also affirmed the 'AA-' Insurer Financial Strength (IFS) ratings of PFG's U.S. operating subsidiaries. The Rating Outlook has been revised to Stable from Negative.

Fitch has also affirmed and withdrawn the ratings of PFG's funding agreement-backed notes issuance programs, as the ratings are no longer considered by Fitch to be relevant to the agency's coverage. 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 mortgage securities.

The revision in the company's Rating Outlook to Stable from Negative primarily reflects diminishing concerns related to execution risk associated with PFG's integration of AFP Cuprum S.A. (Cuprum), which it acquired in February 2013. To date, the acquisition has exceeded expectations in terms of its contribution to overall operating profitability. The revision in the Rating Outlook also reflects a gradual decline in PFG's financial leverage.

PFG's financial leverage was approximately 22.6% at March 31, 2014, down from a recent high of 24.2% at Dec. 31, 2012 as the company issued debt to help fund its acquisition of Cuprum. In the first quarter of 2014 (1Q'14), the company redeemed the $100 million of surplus notes issued by Principal Life Insurance Company (PLIC). As PLIC no longer has publicly-held debt outstanding, Fitch has withdrawn the IDR of the company.

In 1Q'14, PFG reported pre-tax operating earnings of $411 million, up from $304 million in 1Q'13. For the full year 2013, the company reported pre-tax operating earnings of $1.4 billion, up from $1 billion in 2012. In addition to the earnings contribution from Cuprum, the recent improvement in operating earnings has been driven by higher fee-based revenue from growing account values and tight expense management.

As a result of improving earnings, fixed charge coverage increased to approximately 8.5x in 2013 from approximately 6.8x in 2012. In 1Q'14, fixed charge coverage was 10.0x. While Fitch expects PFG to continue to generate solid, stable earnings on its growing fee-based businesses, low market interest rates, continued competitive pressures and less robust capital market conditions are likely to restrain earnings growth in the intermediate term.

PFG's strong capitalization is supported by the organization's primary insurance operating company, PLIC, which reported a risk-based capital ratio (RBC) of 438% at Dec. 31, 2013, up from 415% at year-end 2012. The company targets RBC in a range of 415% to 425%, and Fitch expects the company to finish 2014 in that range.

Fitch considers PFG's allocation to direct mortgages to be above average relative to the life insurance sector as a whole. In addition to $10.3 billion in direct commercial loans and $1.2 billion in residential loans, the company reported $4.1 billion in CMBS holdings at March 31, 2014. Although there has been some recovery in these asset classes within the industry, Fitch views this level of exposure to be a credit negative.

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 $211 billion, and total shareholders' equity of $10.1 billion at March 31, 2014.

RATING SENSITIVITIES

The key rating triggers that could result in an upgrade include:

--Improved diversification of the company's sources of revenue and earnings;

--Sustainable return on equity of 12% or higher and fixed-charge coverage above 12x;

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

--Financial leverage below 20%;

--Reported RBC ratio above 475%.

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

--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 and revised the Outlook to Stable from Negative:

Principal Financial Group, Inc.

--IDR at 'A';

--$300 million 1.850% notes due Nov. 2017 at 'A-';

--$350 million 8.875% notes due May 2019 at 'A-';

--$300 million 3.300% notes due Sept. 2022 at 'A-';

--$300 million 3.125% notes due May 2023 at 'A-';

--$600 million 6.050% notes due Oct. 2036 at 'A-';

--$300 million 4.625% notes due Sept. 2042 at 'A-';

--$300 million 4.350% notes due May 2043 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-'.

Principal National Life Insurance Company

--IFS at 'AA-'.

Fitch has affirmed and withdrawn the following rating as the company has redeemed all surplus notes issued by Principal Life Insurance Company:

--IDR at 'A+'.

Fitch has also affirmed and withdrawn the ratings on 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'.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (November 2013);

--'Life Insurance (U.S.) Sector Credit Factors' (Oct. 9, 2012).

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=723072

Life Insurance (U.S.) Sector Credit Factors

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686297

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=834356

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Bradley S. Ellis, CFA

Director

+1-312-368-2089

Fitch Ratings, Inc.

70 W. Madison St.

13th Floor

Chicago, IL 60602

or

Secondary Analyst

Julie A. Burke, CPA, CFA

Managing Director

+1-312-368-3158

or

Committee Chairperson

Martha M. Butler, CFA

Senior Director

+1-312-368-3191

or

Media Relations

Brian Bertsch, New York, +1-212-908-0549

brian.bertsch@fitchratings.com

Source: Fitch Ratings


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