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

CHICAGO--()--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 direct mortgages and structured mortgage securities.

PFG's financial leverage was 22% at Dec. 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 Administradora de Fondos de Pensiones Cuprum S.A. (Cuprum), a leading pension manager in Chile.

For full-year 2014, PFG reported pre-tax operating earnings of $1.7 billion, continuing a gradual improvement from $1.4 million in 2013 and $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. Fitch notes that the company's operating performance exhibited significantly more stability relative to many of its industry peers during the financial crisis.

As a result of improving earnings, fixed charge coverage (FCC) increased to approximately 10.4x in 2014 from approximately 8.5x in 2013 and 6.8x in 2012. 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 423% at Dec. 31, 2014, down from 439% at Dec. 31, 2013. The company targets consolidated RBC in a range of 415% to 425%.

Fitch considers PFG's allocation to direct mortgages to be above average relative to the life insurance sector as a whole. In addition to $10.7 billion in direct commercial loans and $1.1 billion in residential loans, the company reported $4 billion in CMBS holdings at Dec. 31, 2014. Although there has been significant recovery in these asset classes within the industry since the financial crisis, 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 $219 billion, and total shareholders' equity of $10.2 billion at Dec. 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 FCC 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 FCC ratio below 7x;

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

--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-';

--$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-';

--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-'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (September 2014);

--'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=756650

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=982830

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Contacts

Fitch Ratings
Primary Analyst
Bradley S. Ellis, CFA
Director
+1-312-368-2089
Fitch Ratings, Inc.
70 W. Madison St.
Chicago, IL 60602
or
Secondary Analyst
Nelson Ma, CFA
Director
+1-212-908-0273
or
Committee Chairperson
Martha M. Butler, CFA
Senior Director
+1-312-368-3191
or
Media Relations
Alyssa Castelli, New York, Tel: +1-212-908-0540
alyssa.castelli@fitchratings.com
Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Bradley S. Ellis, CFA
Director
+1-312-368-2089
Fitch Ratings, Inc.
70 W. Madison St.
Chicago, IL 60602
or
Secondary Analyst
Nelson Ma, CFA
Director
+1-212-908-0273
or
Committee Chairperson
Martha M. Butler, CFA
Senior Director
+1-312-368-3191
or
Media Relations
Alyssa Castelli, New York, Tel: +1-212-908-0540
alyssa.castelli@fitchratings.com
Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526
elizabeth.fogerty@fitchratings.com