A.M. Best Affirms Ratings Of Principal Financial Group, Inc. And Its Subsidiaries

A.M. Best Co. has affirmed the financial strength rating (FSR) of A+ (Superior) and issuer credit ratings (ICR) of “aa-” of Principal Life Insurance Company and Principal National Life Insurance Company (together referred to as Principal Life). Both are life insurance operating companies of Principal Financial Group, Inc. (PFG) [NYSE: PFG]. The outlook for these ratings is stable.

A.M. Best also has affirmed the ICR of “a-” of PFG as well as all existing debt ratings. Concurrently, A.M. Best has assigned debt ratings of “a-” to each of the three senior unsecured notes recently issued by PFG. The outlook assigned to these ratings is stable. All companies are domiciled in Des Moines, IA. (Please see link below for a detailed listing of the companies and ratings.)

Principal Life’s ratings reflect its diversified operating earnings, record assets under management, solid risk-adjusted capitalization and its continued performance improvement within its investment portfolio. The ratings also reflect the strong enterprise risk management (ERM) capabilities of PFG.

PFG continues to generate favorable operating earnings across its multiple business segments. The group's expanded product diversification, controlled distribution strategy and ongoing expense management have contributed to its consistent earnings. Additionally, the composition of PFG's business is less reliant on its spread-based products relative to its fee-based products. PFG continues to generate significant improvement in net flows, primarily from its Full Service Accumulation and Principal Funds businesses within the Retirement and Investor Services segment, in addition to positive net flows within the Principal International and Principal Global Investors business segments, where its assets under management (AUM) has continued to grow. The fee income generated from the organization's record AUM has been able to offset the decline in its net investment income for the year. Net income also has benefited from the improved performance of its investment portfolio. PFG's net realized losses have decreased considerably since the recent economic crisis. However, A.M. Best expects realized losses to continue in 2013 as more of its commercial mortgage-backed securities portfolio continues to mature. A.M. Best notes PFG's ERM has been an area of strength for a number of years. A.M. Best believes that PFG’s recent independent review from an outside audit company will only enhance the risk management capabilities of an already strong program.

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.

A.M. Best believes PFG is well positioned at its current rating level in the near to medium term. Factors that could lead to negative future rating actions include a material decrease in PFG’s operating earnings as a result of a decline in its net cash flow and low interest rates and/or a material deterioration in its risk-adjusted capitalization driven by investment losses or the deployment of capital to support further acquisitions or share repurchase activity.

For a complete listing of Principal Financial Group, Inc. and its subsidiaries’ FSRs, ICRs and debt ratings, please visit www.ambest.com/press/120304principal.pdf.

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.

Founded in 1899, A.M. Best Company is the world’s oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

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