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Rating Action on Principal Fin.

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Fitch Ratings reiterated the long-term Issuer Default Rating (IDR) of Principal Financial Group Inc. (PFG - Free Report) at 'A'. Concurrently, the rating agency reiterated the Insurer Financial Strength (IFS) at 'AA-' of Principal Financial’s operating subsidiaries. The ratings carry a negative outlook.

The rating affirmations came on the back of Principal Financial’s sturdy capitalization and continued solid operational performance. However, these positives are dwarfed by higher leverage and substantial exposure to direct mortgages and structured mortgage securities.

The outlook took into account the execution risk associated with the Cuprum acquisition, lower-than-expected fixed charge coverage and higher financial leverage. As of Dec 31, 2012, financial leverage was higher at 24%, an increase of 900 basis points (bps) year over year.  The increase was largely due to the issuance of debt to fund the acquisition. Nevertheless, Chile-based AFP Cuprum compliments Principal Financial’s strategy to widen its presence in the emerging marketplace. Also, fixed charge coverage was 7.1x in 2012, lower from nearly 7.9x in 2011.

Fitch, nonetheless, expects that Principal Financial will be able to deliver sustained profitability on its growing fee-based businesses. At the same time, the rating agency believes that continued low interest rate environment and competition will weigh on earnings improvement in the near term.

Rating affirmations or upgrades from credit rating agencies play an important part in retaining investors’ confidence on the stock as well as maintaining creditworthiness in the market. We believe that the company’s strong score with the credit rating agencies will help it write more business going forward.

The ratings might be subject to downgrade if investment losses escalate considerably, return on equity falls below 10%, fixed charge coverage ratio moves below 7x, risk-based capital ratio goes down below 375% or financial leverage moves above 25%.

Principal Financial currently carries a Zacks Rank #3 (Hold). Multi-line insurers Assured Guaranty Ltd. carries a Zacks Rank #1 (Strong Buy), while Cigna Corp. (CI - Free Report) and CNO Financial Group Inc. (CNO - Free Report) carry a Zacks Rank #2 (Buy) and appear impressive.


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