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10 Feb 2009
New York, February 10, 2009 -- Moody's has affirmed the A2 senior debt rating of Principal Financial
Group, Inc. (NYSE: PFG) and the Aa2 insurance financial
strength (IFS) rating of Principal Life Insurance Company, but changed
the outlook to negative from stable because of continuing investment losses
and weakening earnings capacity.
The rating action follows PFG's announcement of fourth quarter and full-year
2008 results, including net income of $425 million for 2008,
compared with $827 million for 2007. The decline is due
largely to realized capital losses, which totaled $505 million,
and the impact of a weak economy and depressed equity market on PFG's
Moody's said that the rating affirmation is based on PFG's strong
position in the U.S. group pension markets, solid
profitability, conservative asset-liability management,
and the company's excellent capital adequacy and strong liquidity.
Management's decision, in the second half of 2008, to
suspend share repurchases and cut shareholder dividends has allowed Principal
Life to build strong capital and liquidity to meet its operating needs
and maturing debt liabilities in the continuing stressful operating environment
Commenting on the negative outlook, Laura Bazer, Vice President
and Senior Credit Officer said: "The company's pension and
asset management businesses are highly sensitive to equity market risk,
and to the weakening economy. This, together with additional
asset impairments, will continue to depress earnings in 2009."
While Principal's investment exposure to subprime and Alt-A
RMBS securities is generally modest, asset losses will continue
to emerge from other real estate-related and structured holdings
(i.e., CMBS, commercial mortgage loans,
etc.), as well as rising corporate defaults.
The rating agency noted the ultimate economic losses from Principal's
investments are likely to be significantly less than current market values
suggest (approximately $4 billion of net unrealized losses) and
its stable, long-term liability profile and good liquidity
mitigate the need to dispose of assets at current distressed prices.
According to Moody's, the following factors could result in
a downgrade of Principal's ratings: 1) NAIC RBC ratio below
350%; 2) pre-tax investment losses in excess of $500
million in 2009; 3) consolidated financial leverage at PFG of more
than 30%, and cashflow coverage of less than 5x; 4)
material deterioration of Principal Life's core 401(k) defined contribution
business leading to significant reduction in market position; or
5) a sizable acquisition (in excess of $1 billion) or expansion
into new/higher risk/foreign business.
The following factors could change the negative outlook back to stable:
1) NAIC RBC ratio consistently above 400%, 2) returns on
equity consistently above 12%, 3) consolidated financial
leverage below 25% and cashflow coverage above 8x; or 4) pre-tax
asset investment losses well below $500 million in 2009.
The following ratings were affirmed with a negative outlook:
Principal Life Insurance Company: long-term insurance financial
strength at Aa2; surplus notes at A1;
Principal Income Fundings Trusts: senior secured debt at Aa2;
Principal Global Funding LLC, Principal Global Funding I,
Principal Global Funding II, LLC: senior secured debt at Aa2;
Principal Financial Group Australia (Pty) Ltd (guaranteed by Principal
Financial Services, Inc.): senior debt at A2;
Principal Financial Group, Inc.: senior unsecured debt
(guaranteed by Principal Financial Services, Inc.) at A2;
provisional senior unsecured debt shelf at (P) A3 (not guaranteed);
provisional subordinated debt shelf at (P) Baa1 (not guaranteed);
provisional preferred stock shelf at (P) Baa2 (not guaranteed).
Principal Capital I, II and III: provisional trust preferred
stock shelf at (P)Baa1.
The following ratings were affirmed with a stable rating outlook:
Principal Life Insurance Company: short-term insurance financial
strength at Prime-1;
Principal Financial Services, Inc.: short-term
rating for commercial paper at Prime-1.
Principal Financial Group, Inc. is a diversified life insurance
and financial services group based in Des Moines, Iowa. At
December 31, 2008, it reported consolidated GAAP assets of
approximately $128 billion and consolidated GAAP shareholders'
equity of approximately $3 billion. Principal Life Insurance
Company is the lead operating company of Principal Financial Group,
Inc. At September 30, 2008, Principal Life Insurance
Company had statutory assets of $127 billion, and statutory
capital of approximately $4.4 billion.
The last rating action on PFG took place on November 7, 2008,
when Moody's affirmed the group's ratings with a stable rating outlook.
The principal methodology used in rating Principal Life is "Moody's Global
Rating Methodology for Life Insurers", which can be found at www.moodys.com
in the Credit Policy & Methodologies directory, in the Ratings
Methodologies subdirectory. Other methodologies and factors that
may have been considered in the process of rating Principal Life can also
be found in the Credit Policy & Methodologies directory.
Moody's insurance financial strength ratings are opinions of the ability
of insurance companies to pay punctually senior policyholder claims and
obligation. For more information, visit our website at www.moodys.com/insurance.
Life and Health Insurance Group
Moody's Investors Service
Moody's affirms Principal's ratings; outlook changed to negative
VP - Senior Credit Officer
Life and Health Insurance Group
Moody's Investors Service
No Related Data.
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