Rating Action on Principal Fin. - Analyst Blog

A.M. Best Co. affirmed the financial strength rating (FSR) of A+ (Superior) and issuer credit rating (ICR) of “aa-” of Principal Life Insurance Company and Principal National Life Insurance Company, the life insurance operating companies of Principal Financial Group Inc. (PFG). The outlook was revised to stable from negative.

Also, the rating agency affirmed the ICR of “a-” of Principal Financial and its existing debt ratings. The outlook was revised to stable from negative

The revised outlook was based on Principal Financial's diverse revenue stream, improving capitalization as well as prudent expense management. The company's focus on fee-based businesses helped it to post less volatile operating results.

The rating affirmation came on the back of the company's strong position in the U.S. defined contribution plan market, its broad distribution, diversified product offering, continued global growth and solid cash position. The rating agency also believes Principal Financial's decision to exit the group medical business as a long-term positive. The medical business has been declining over some years. Following the divestiture, the company will now focus its capital and other resources on strategic opportunities in the growing asset accumulation and asset management businesses.

However, a decline in deposits resulting in lower cash flows was a partial offset. The rating agency expects additional asset impairment in spite of Principal Financial's crucial turnaround in its investment portfolio valuations. A.M. Best also expects higher commercial mortgage delinquency rates on the company's commercial mortgage-backed securities portfolio (CMBS) over the near term, likely resulting in additional losses on the $4.3 billion CMBS portfolio. The soft market conditions can also result in additional commercial real estate related investment losses from its $8.8 billion direct commercial mortgage loan portfolio.

On the third quarter conference call, Principal Financial guided full year 2010 Full Service Accumulation sales to be higher by 15% to 20% from the 2009 level that would lead to positive cash flows. Recently, the company also guided full year 2011 operating earnings in a range of $2.80 to $3.00 per share.

Lincoln National Corporation (LNC), one of Principal Financial's close peers, also received FSR affirmation of A+ (Superior) and ICR of “aa-” on key life/health subsidiaries. The rating agency also affirmed the ICR of “a-” as well as the existing debt ratings of Lincoln. The outlook for all ratings at Lincoln remains stable.

Based on higher delinquencies in its commercial mortgage portfolio as well as persistently high unemployment levels that restrict participation in the existing employee benefit plans, we maintain our “Neutral” recommendation on Principal Financial. The quantitative Zacks #3 Rank (short-term Hold rating) indicates no clear directional pressure on the shares over the near term.

Based in Des Moines, Iowa, Principal Financial Group Inc. provides an expansive range of retirement savings, investment and insurance products and services through its various subsidiaries.

 
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