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Standard & Poor's Ratings Services (“S&P”) upgraded the long-term counterparty credit ratings to 'BBB+' from 'BBB' of Principal Financial Group Inc. (PFG - Analyst Report) and Principal Financial Services Inc., an intermediary holding company.

Concurrently, the rating agency upgraded the long-term counterparty credit and financial strength ratings (“FSR”) to ‘A+’ from ‘A’ of Principal Life Insurance Co., a subsidiary of Principal Financial.

The outlook remains stable.

The upgrade came on the back of the company’s better capital adequacy position, sustained solid operational results and strong foothold in the markets in which it operates.

The rating agency stated that though the capital position is improving, yet it has not lived up to the rating agency’s expectations. Nevertheless, sustained earnings growth, strong liquidity, better asset quality with solid enterprise risk management (“ERM”) dwarfs the underperformance. Also, the company remains focused on lowering its commercial mortgage-backed securities.

The rating upgrade of Principal Financial Services was based on its dominant position in the U.S. small-to-midsize group pension market, and its position in individual and group life and health markets. The company is also strengthening its foothold in the rapidly growing international retirement and asset management markets. Therefore, the rating agency expects the company to sustain its strong position, earnings stream and liquidity alongside the ERM.

S&P noted that Principal Life weathered the economic turmoil on the back of its solid earnings base and cost management. It also considers Principal Life’s portfolio to be sturdy, based on its asset base, diversified portfolio, better risk management and return, although the agency noticed its higher risk profile in the U.S. commercial real estate investments.

The stable outlook accounts for the growth in the company’s earnings, given its diversified retirement savings franchise and strong ERM. S&P also expects the company to maintain its asset quality and estimates it to generate operating earnings of $1.05 billion, fixed charge coverage ratio of 6x, and after-tax net realized capital losses to stay below $250 million.

S&P might consider further rating upgrades if the company’s capital adequacy matches its expectation, maintains better asset quality and remains comfortably within our expectations, and the group's fixed charge coverage ratio exceeds 8x.

Nonetheless, the rating might be subject to downgrade if the company exploits the excess cash, position plummets substantially, operating earnings falls below $875 million, fixed charge coverage ratio drop below 5x, asset quality erodes and Principal Life's capital adequacy fails to match S&P’s expectation.

Rating affirmations or upgrades from credit rating agencies play an important part in retaining investor confidence in the stock as well as creditworthiness in the market. We therefore believe, the company’s strong ratings scores will help retain investor confidence and augment its business going forward.

We retain a Neutral recommendation on Principal Financial. The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the stock over the near term.

Iowa-based Principal Financial provides an expansive range of retirement savings, investment and insurance products and services through its various subsidiaries and competes with Lincoln National Corporation (LNC - Analyst Report).

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