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A.M. Best Affirms Ratings of Principal Financial Group, Inc. and Its Subsidiaries

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A.M. Best has affirmed the financial strength rating (FSR) of A+ (Superior) and the issuer credit ratings (ICR) of “aa-” of Principal Life Insurance Company (PLIC) and Principal National Life Insurance Company. Both are life insurance operating companies of Principal Financial Group, Inc. (PFG) (collectively referred to as Principal) [NYSE:PFG], which is headquartered in Des Moines, IA. Concurrently, A.M. Best has affirmed the ICR of “a-” of PFG as well as the group’s existing debt ratings. The outlook for all ratings is stable. (Please see link below for a detailed listing of the companies and ratings.)

Principal’s ratings reflect the group’s diversified revenue sources, consistent operating earnings, solid balance sheet and positive net flows across most business segments. The ratings also reflect Principal’s position as a leading provider of defined contribution plans, defined benefit plans, plan termination annuities and nonqualified plans in the United States. Partially offsetting these strengths are the group’s lower risk-adjusted capitalization relative to similarly rated peers, augmented country risk due to the rapid expansion of its international operations and notable exposure to higher-risk assets within its investment portfolio.

Principal continues to generate favorable operating earnings across its multiple business segments. The group’s controlled distribution strategy, expanded product diversification and ongoing expense management have contributed to its consistent results. The continued shift of Principal’s business to fee-based products versus spread-based products should facilitate organic earnings growth as assets under management trend upward. Additionally, the fee-based model is likely to facilitate higher returns and greater free cash flow for the organization. Principal continues to generate strong net flows, primarily from its Full Service Accumulation and Principal Funds businesses within the Retirement & Investor Services segment. The Principal International and Principal Global Investors business segments also continue to produce positive net flows despite significant surrender activity and volatile economic conditions in certain international markets. The group’s expertise serving small to medium-size businesses is also demonstrated through its solid market positions in group life, disability, dental and vision, as well as individual disability insurance. Moreover, A.M. Best notes that Principal’s investment portfolio has exhibited favorable performance over the past few years as the number of asset impairments continues to decline.

Despite consistent operating earnings, A.M. Best notes the lack of growth in Principal’s risk-adjusted capitalization, which remains at a somewhat lower level compared with similarly rated groups. Over the past few years, the organization has upstreamed substantial dividends from PLIC to fund acquisitions, share repurchase and stockholder dividends. Although its recent acquisition of AFP Cuprum, S.A., a leading Chilean mandatory pension provider, was mainly funded with new debt, a sizable amount of excess capital was utilized. A.M. Best believes Principal’s financial leverage is manageable at approximately 21% with strong interest coverage and good overall financial flexibility.

A.M. Best will continue to monitor the organization’s capital deployments to ensure it maintains sound capitalization at its operating entities. A.M. Best will also consider Principal’s increased exposure to country risk due to the number of significant international acquisitions completed in recent years, consistent with the group’s strategy to reinforce and expand its international footprint. Although several of the countries Principal operates in possess moderate levels of political and financial risk, A.M. Best believes the demographics are favorable and the group has established defensible market positions in Latin America and Asia. Finally, A.M. Best has observed that Principal’s investment portfolio maintains above-average exposure to real estate-related assets such as commercial mortgages and commercial mortgage-backed securities (CMBS). However, A.M. Best notes the organization’s direct loan portfolio is fairly well diversified and that its CMBS portfolio is performing better than some of its peers with respect to problem loans and delinquencies.

A.M. Best believes that a positive rating action for Principal is unlikely in the near to medium term. Factors that could lead to a negative rating action include erosion of its competitive position in key markets or a material decline in operating performance and/or risk-adjusted capitalization relative to A.M. Best’s expectations.

For a complete listing of Principal Financial Group, Inc. and its subsidiaries’ FSRs, ICRs and debt ratings, please visit Principal Financial Group, Inc.

The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.

Key insurance criteria reports utilized:

  • Analyzing Insurance Holding Company Liquidity
  • A.M. Best’s Liquidity Model for U.S. Life Insurers
  • A.M. Best’s Perspective on Operating Leverage
  • Equity Credit For Hybrid Securities
  • Evaluating Country Risk
  • Insurance Holding Company and Debt Ratings
  • Rating Funding Agreement-Backed Securities
  • Rating Members of Insurance Groups
  • Risk Management and the Rating Process for Insurance Companies
  • Understanding BCAR for U.S. and Canadian Life/Health Insurers

This press release relates to rating(s) that have been published on A.M. Best’s website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please visit A.M. Best’s Ratings & Criteria Center.

A.M. Best Company is the world’s oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

Copyright (c) 2015 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.

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