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Principal Financial Group Inc. (PFG - Analyst Report) decided to restructure its business to focus more on the strategic opportunities in the growing asset accumulation and asset management businesses while shedding the line of business, which provides little growth. Its sound capital position and financial liquidity further strengthens its expansion policies in the emerging markets as they offer ample growth opportunities.

Given the company has $1.6 billion of excess capital, we expect it to return more value to its shareholders going forward. Also, the company scores strongly with the credit rating agencies.

However, low interest rates continue to dwarf the positives. We thus retain our Neutral recommendation.

Principal Financial’s assets under management grew 11% year over year to $364.1 billion as of March 31, 2012, driven by better results at three asset management and asset accumulation segments. We believe the company is well positioned on the back of its extensive distribution footprint, best-in-class solutions and operational discipline to continue delivering solid operating results.

Principal Financial is on track to deploy $800–900 million in 2012 in either returning value to shareholders or in mergers and acquisitions. In this respect, the company’s Board authorized a $100 million share buyback program in February with another $200 million share buyback program authorized in May.

Rating affirmations or upgrades from credit rating agencies play an important part in retaining investors’ confidence in the stock as well as maintaining creditworthiness in the market. Recently, Standard & Poor's Ratings Services upgraded the long-term counterparty credit ratings to 'BBB+' from 'BBB' of Principal Financial Group with a stable outlook.  We therefore believe the company’s strong ratings scores will help retain investor confidence and help it to write more business going forward.

On the flip side, low interest rate continues to weigh on the results. Net investment income declined over the last few years, partly due to lower yields on average invested assets. The first quarter also experienced lower net investment income due to lower reinvestment yields primarily on fixed maturities portfolio.

The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the shares over the near term. The company competes with Lincoln National Corporation (LNC - Analyst Report).

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