New York, March 18, 2009 -- Moody's Investors Service has downgraded to A3 from A2 the senior debt
ratings of Principal Financial Group, Inc. (NYSE: PFG)
and its intermediate holding company, Principal Financial Services,
Inc. (PFSI). Moody's also downgraded PFSI's
rating for commercial paper to Prime-2 from Prime-1 and
the long-term insurance financial strength (IFS) rating of Principal
Life Insurance Company (Principal Life), PFG's primary life
insurance subsidiary, to Aa3 from Aa2. Other affiliated ratings
were also downgraded (see complete ratings list, below).
The outlook for the long-term ratings of PFG and its affiliates
is negative. The rating action was prompted by greater pressure
on PFG's flexibility and liquidity as a result of the continuing capital
market illiquidity and the increasingly stressful operating environment,
as well as Moody's expectations of higher asset losses and weaker
earnings for PFG in the worsening economic environment.
Commenting on the downgrade, Moody's said that unfavorable capital
market conditions have constricted PFG's ability to issue new debt or
hybrid securities to refinance short-term corporate debt,
including a $455 million debt maturity due in August 2009,
and close to $500 million of commercial paper outstanding.
"While Principal Life's operating liquidity and regulatory capital adequacy
remains good, and its core pension business is healthy, despite
the stressful economic environment, refinancing uncertainties reduce
the group's overall financial flexibility," said President
and Senior Credit Officer, Laura Bazer.
According to the rating agency, PFG has the ability to repay its
near-term holding company obligations entirely from internal liquidity,
if need be, even under situations of extreme stress. However,
"generally tighter liquidity, coupled with refinancing uncertainty
in this environment, as well as pressure on the operating company's
capital adequacy will continue to constrain the holding company's
financial flexibility, which better positions the company at the
Aa3 level", Bazer explained.
Commenting on the negative outlook, Moody's said that PFG's
fee-based pension and asset management earnings remain highly sensitive
to the weakening economy and the level of the equity markets. "This,
together with higher asset impairments over the next 1-2 years,
will continue to depress earnings and capital generation for the company,"
the analyst explained. However, the rating agency noted that
PFG has very minimal exposure to retail variable annuities with guarantees,
which makes the company's capital adequacy and profitability much
less sensitive to the level of equity markets, unlike many life
According to the rating agency, asset losses will continue to emerge
from real estate-related and structured holdings (i.e.,
CMBS, commercial mortgage loans, etc.), as well
as rising corporate defaults, although Moody's reiterated
that the ultimate economic losses from PFG's investments are likely to
be less than current market values suggest (approximately $4 billion
of net unrealized losses). Principal's 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) further tightening of internal liquidity
over the next 6 months; 2) NAIC RBC ratio below 325%;
2) pre-tax investment losses in excess of $1 billion in
2009; 3) consolidated financial leverage at PFG of more than 30%,
and cashflow coverage of less than 4x; 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
The following factors could change the negative outlook back to stable:
1) external refinancing of corporate debt well in advance of maturities;
2) NAIC RBC ratio consistently above 325%, 2) returns on
equity consistently above 8%, 3) consolidated financial leverage
maintained in the mid 20s and cashflow coverage above 5x; or 4) pre-tax
asset investment losses below $500 million in 2009.
The following ratings were downgraded with a negative outlook:
Principal Life Insurance Company: long-term insurance financial
strength to Aa3 from Aa2; surplus notes to A2 from A1;
Principal Income Fundings Trusts: senior secured debt to Aa3 from
Principal Global Funding LLC, Principal Global Funding I,
Principal Global Funding II, LLC: senior secured debt to Aa3
Principal Financial Group Australia (Pty) Ltd (guaranteed by Principal
Financial Services, Inc.): senior debt to A3 from A2;
Principal Financial Group, Inc.: senior unsecured debt
(guaranteed by Principal Financial Services, Inc.) to A3
from A2; provisional senior unsecured debt shelf to (P) Baa1 from
(P) A3 (not guaranteed); provisional subordinated debt shelf to (P)
Baa2 from (P) Baa1 (not guaranteed); provisional preferred stock
shelf to (P) Baa3 from (P) Baa2 (not guaranteed);
Principal Capital I, II and III: provisional trust preferred
stock shelf to (P) Baa2 from (P)Baa1.
The following rating was downgraded with a stable rating outlook:
Principal Financial Services, Inc.: short-term
rating for commercial paper to Prime-2 from Prime-1.
The following rating was affirmed with a stable outlook and withdrawn
for business reasons (please refer to Moody's Withdrawal Policy on moodys.com):
Principal Life Insurance Company: short-term insurance financial
strength 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 December 31, 2008, Principal Life Insurance
Company had statutory assets of $115 billion, and statutory
capital of approximately $4.8 billion.
The last rating action on PFG took place on February 10, 2009, when Moody's affirmed the group's ratings with a negative
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 downgrades Principal Financial (senior to A3) ratings; outlook negative
VP - Senior Credit Officer
Life and Health Insurance Group
Moody's Investors Service