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Rating Action:

Moody's rates Principal Financial's senior debt A2

11 Oct 2006
Moody's rates Principal Financial's senior debt A2

New York, October 11, 2006 -- Moody's Investors Service has assigned an A2 rating to the 30-year senior unsecured notes to be issued by Principal Financial Group Inc. (PFG). The senior debt will be fully and unconditionally guaranteed by Principal Financial Services, Inc. (PFSI), whose senior debt (technically, the senior debt of Principal Financial Group (Australia) Pty Ltd, assumed and guaranteed by PFSI), is rated A2. PFSI is a holding company subsidiary of PFG, as well as the direct owner of the group's primary life insurance subsidiary, Principal Life Insurance Company (Principal Life), rated Aa2 for insurance financial strength. The rating outlook for PFG's new senior debt is stable, in line with other Principal ratings.

The notes will be used to finance part of the $740 million purchase price of WM Advisors, Inc., the asset management operation of Washington Mutual Inc. Moody's affirmed the ratings of PFG and its affiliates on July 26, 2006 following PFG's announcement. The company is expected to raise at least $350 million.

The PFSI guarantee will be a senior unsecured and unsubordinated obligation of PFSI, and will rank equally in right of payment with all of its existing indebtedness and senior to all of its existing and future subordinated indebtedness. The rating agency noted that the senior debt of PFG, therefore, benefits from the higher rating of the PFSI senior guarantee. Moody's rates the unguaranteed securities of PFG one-notch lower than those of PFSI, given PFG's structural subordination to PFSI.

According to Moody's, PFG's ratings are based upon Principal Life's leadership in the U.S. 401(k) market, together with its efficient, technology-based operations, and disciplined financial, investment, asset-liability management capabilities. The company's life and health businesses, as well as PFG's other insurance and non insurance activities, both in the U.S. and abroad, provide additional revenue and earnings diversity to the group.

The rating agency indicated that these strengths are tempered by the growing exposure of Principal Life's core pension business to equity market risk and competitive pricing pressures, by the continuing growth of its "investment-only" spread business, and by the company's relatively high direct exposure to commercial mortgages and real estate, in terms of total investments and capital (albeit well managed). In addition, Moody's said that while PFG's consolidated financial leverage has been modest relative to its peers recently, Moody's believes that financial leverage and capital will remain under public shareholder pressure for higher ROEs, via share repurchases, acquisitions, and/or higher levels of debt.

Going forward, factors that could lead to a rating upgrade include: significant expansion of Principal Life's core full-service and qualified pension and life insurance franchises, resulting in a sustainable increase in statutory net income (20% or more) over several consecutive quarters; a permanent reduction in PFG's consolidated adjusted GAAP financial leverage to below 15%; and a NAIC RBC ratio above 400% on a consistent basis.

Factors that could result in a rating downgrade include: a sizable acquisition (over $750 million) and/or expansion into new/higher risk/foreign business; material deterioration of Principal Life's core full-service and qualified pension business, with permanent reduction of statutory net income by 20% or more over several consecutive quarters; increase in "investment-only" institutional spread business to over 35% of general account reserves at Principal Life; consolidated financial leverage at PFG of above 25%; or a reduction in NAIC RBC ratio to below 350%.

Principal Financial Group, Inc. is a diversified life insurance and financial services group based in Des Moines, Iowa. Principal Life Insurance Company is its lead operating company. At June 30, 2006, Principal Financial Group, Inc. reported consolidated GAAP assets of approximately $131.4 billion and consolidated GAAP shareholders' equity of $6.8 billion.

Moody's insurance financial strength ratings are opinions of the ability of insurance companies to repay punctually senior policyholder claims and obligations. For more information, visit our website at www.moodys.com/insurance.

New York
Robert Riegel
Managing Director
Life Insurance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Laura Bazer
VP - Senior Credit Officer
Life Insurance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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