NEW YORK--(BUSINESS WIRE)--(This is a correction of a release issued Oct. 27, 2016. It amends one of the downgrade rating triggers referencing the PRISM capital model score to be at 'Strong' instead of below 'Strong'.)
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 is Stable.
KEY RATING DRIVERS
Today's ratings affirmations reflect PFG's strong capitalization and stable, balanced operating profitability, partially offset by above-average exposure to commercial real estate through direct mortgages, structured mortgage securities, and direct real estate investments.
PFG's strong capitalization is supported by the organization's primary insurance operating company, PLIC, which reported a risk-based capital ratio (RBC) of 431% at Dec. 31, 2015, up from 423% at Dec. 31, 2014. The company targets consolidated RBC in a range of 415% to 425%. PFG's PRISM capital model score is 'Very Strong', which is within expectations for its current rating category.
PFG's financial leverage was 27% at June 30, 2016, which is down from 29% at year-end 2015 and above Fitch's expectation of 25%. The increase in financial leverage was driven by a company debt issuance of $800 million in May 2015 which was used to primarily refinance all of the company's outstanding preferred stock. PFG's preferred stock had historically received full equity credit from Fitch. While the company's financial leverage is currently above expectations for its current rating category, Fitch expects leverage to return to approximately 25% in the near term.
Fitch expects the new fiduciary rules announced by the U.S. Department of Labor (DOL) in April 2016 to have a relatively modest effect on PFG's overall sales and profitability. While the rule will increase compliance costs for PFG and its peers, Fitch believes PFG's diversification in terms of products, international operations, and distribution will help mitigate the financial impact on the broader organization.
PFG's ratings benefit from above-average historical earnings stability, particularly in comparison to many of its peers during the financial crisis. Fitch believes the company's earnings stability is due in part to PFG's business mix, which is well diversified by product and geography. Over the last few years, growth in fees from assets under management has been an offset to lower investment income driven by persistently low interest rates. For the first half of 2016, PFG reported pre-tax operating earnings of $788 million, down from $851 million for the same period in 2014. The decline in operating earnings was driven primarily by weak first-quarter 2015 equity market performance.
Fitch considers PFG's allocation to direct mortgages to be above average relative to the life insurance sector as a whole. In addition to $11.2 billion in direct commercial loans and $3.9 billion in CMBS holdings as of year-end 2015, the company also has direct commercial real estate investments. Although these asset classes have largely recovered since the financial crisis, Fitch views this level of exposure to be a credit negative. PFG's investment portfolio continued to perform within expectations as the company's realized investment losses remained at manageable levels in 2015 and through the first nine months of 2016.
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 $223 billion, and total shareholders' equity of $10.6 billion at June 30, 2016.
RATING SENSITIVITIES
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%;
--A PRISM capital model score of 'Extremely Strong'.
Conversely, 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% or a PRISM capital model score of 'Strong';
--Sustained increase in financial leverage to a level above 25%.
Fitch has affirmed the following ratings with a Stable Outlook:
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-';
--$400 million 3.400% notes due May 2025 at '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 at 'A-';
--$400 million 4.700% junior subordinated debentures due 2055 '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
Principal National Life Insurance Company
--IFS at 'AA-'.
Additional information is available on www.fitchratings.com
Applicable Criteria
Insurance Rating Methodology (pub. 15 Sep 2016)
https://www.fitchratings.com/site/re/887191
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1013888
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013888
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https://www.fitchratings.com/regulatory
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