Despite the debt issuances in support of its recent acquisition, A.M. Best views the organization’s adjusted financial leverage (excluding non-recourse debt) of roughly 23%, which incorporates considerable equity credit for the company’s outstanding perpetual preferreds per A.M. Best’s hybrid methodology, as being relatively conservative in comparison to its similarly rated peers. PFG’s leverage ratios, as well as its interest coverage ratio of roughly seven times, remain well within A.M. Best’s guidelines for its current ratings.
Offsetting these positive rating factors are PFG's exposure to equity market risk given the growth in its fee-based businesses, its exposure to country risk due to the rapid expansion of its international operations and the sizeable amounts of capital it deployed in recent years. Additionally, A.M. Best is concerned with the negative impact an extended period of low interest rates could have on Principal Life's spread business and net investment income.
With PFG moving more towards a fee-based business model, earnings will continue to be susceptible to equity and credit market fluctuations. In addition to market risk, A.M. Best will be monitoring PFG's increased exposure to country risk. The organization has made several large overseas transactions in recent years as it looks to expand its international operations. Some of these acquisitions were made in countries A.M. Best believes to have moderate levels of political and financial risk (e.g. Brazil). However, A.M. Best notes that PFG's most recent acquisition of AFP Cuprum, S.A., a leading Chilean mandatory pension provider, operates in a country viewed to have relatively modest economic and political risks. As PFG continues to grow its international businesses, A.M. Best will continue to closely monitor the countries it does business in. Furthermore, A.M. Best will be monitoring PFG's capitalization levels, as it has deployed over $1 billion for acquisitions, share repurchases and dividends in each of the past two years. While most of this year's acquisitions were funded with new debt, a sizeable amount of excess capital was utilized. Although financial leverage remains in line with its current ratings, PFG's leverage has grown considerably in 2012. Similar to other life and annuity companies, an extended period of low interest rates continues to have an adverse impact on the organization's earnings, sales and portfolio net yields. PFG maintains a sizeable block of annuities, as it comprises approximately one-seventh of its GAAP earnings. Core interest spreads in PFG's annuities have remained challenged, which has impacted earnings. The low interest rate environment continues to negatively impact the individual annuity segment's net flows, which remains negative for the second consecutive year. A.M. Best notes that despite a slight decline in earnings and negative net flows, PFG's account values continue to increase.