Fitch Affirms Principal Financial Group's IDR at 'A'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed Principal Financial Group, Inc.'s (PFG) long-term Issuer Default Rating (IDR) at 'A'. Fitch has also affirmed the 'AA-' Insurer Financial Strength (IFS) ratings of PFG's U.S. operating subsidiaries. The Rating Outlook is Stable.
KEY RATING DRIVERS
Today's ratings affirmations reflect PFG's strong capitalization and stable, balanced operating profitability, partially offset by above-average exposure to direct mortgages and structured mortgage securities.
PFG's financial leverage was 28.7% at Sept. 30, 2015, up from 21% at Dec. 31, 2014, and above Fitch's expectation of 25%. The increase in financial leverage was driven primarily by PFG's May 2015 issuance of $800 million in a combination of senior notes and junior subordinated debentures to fund the redemption of all of the company's outstanding preferred stock, which historically received full equity credit from Fitch. Proceeds from the May debt issuance were also used to help fund PFG's Sept. 1, 2015, acquisition of AXA's Mandatory Provident Fund and Occupational Retirement Schemes Ordinance pension business in Hong Kong. Fitch expects PFG's financial leverage to gradually decline and return to approximately 25% by mid-year 2016.
For the first three quarters of 2015, PFG reported pre-tax operating earnings of $1.2 billion, down from $1.3 billion for the same period in 2014. The decline in operating earnings was driven primarily by ongoing pressure from persistently low interest rates, foreign exchange reporting losses resulting from the strong U.S. dollar, and weak third-quarter 2015 equity market performance. PFG's ratings benefit from above-average historical earnings stability, particularly relative to its peers during the financial crisis.
Fitch views PFG's fixed-charge coverage of 10.2x to be within expectations for its ratings. While Fitch expects PFG to continue to generate solid, stable earnings on its growing fee-based businesses, low market interest rates, continued competitive pressures and less robust capital market conditions are likely to restrain earnings growth and improvement in coverage metrics in the intermediate term.
PFG's strong capitalization is supported by the organization's primary insurance operating company, PLIC, which reported a risk-based capital ratio (RBC) of 423% at Dec. 31, 2014, down from 439% at Dec. 31, 2013. The company targets consolidated RBC in a range of 415% to 425%.
Fitch considers PFG's allocation to direct mortgages to be above average relative to the life insurance sector as a whole. In addition to $11.2 billion in direct commercial loans and $1.1 billion in residential loans, the company reported $3.9 billion in CMBS holdings at Sept. 30, 2015. Although these asset classes have largely recovered since the financial crisis, Fitch views this level of exposure to be a credit negative.
PFG, headquartered in Des Moines, IA, markets a range of retirement savings, investment and insurance products and services primarily in the small- to medium-sized business segment. The company reported consolidated assets of $215 billion, and total shareholders' equity of $9.7 billion at Sept. 30, 2015.
The key rating triggers that could result in an upgrade include:
--Improved diversification of the company's sources of revenue and earnings;
--Sustainable return on equity of 12% or higher and fixed-charge coverage above 12x;
--Low volatility in earnings and capital over an extended period of time;
--Financial leverage below 20%;
--Reported RBC ratio above 475%.
The key rating triggers that could result in a downgrade include:
--Run-rate return on equity below 10% and a GAAP-based fixed-charge coverage ratio below 7x;
--A decline in the company's reported RBC ratio to a level below 375%;
--Sustained increase in financial leverage to a level above 25%.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings with a Stable Outlook:
Principal Financial Group, Inc.
--IDR at 'A';
--$300 million 1.850% notes due Nov. 2017 at 'A-';
--$350 million 8.875% notes due May 2019 at 'A-';
--$300 million 3.300% notes due Sept. 2022 at 'A-';
--$300 million 3.125% notes due May 2023 at 'A-';
--$400 million 3.400% notes due May 2025 at 'A-';
--$600 million 6.050% notes due Oct. 2036 at 'A-';
--$300 million 4.625% notes due Sept. 2042 'A-';
--$300 million 4.350% notes due May 2043 at 'A-';
--$400 million 4.700% junior subordinated debentures due 2055 'BBB'.
Principal Financial Services, Inc.
--Long-term IDR at 'A';
--Short-term IDR at 'F1;
--Commercial paper at 'F1'.
Principal Life Insurance Company
Principal National Life Insurance Company
--IFS at 'AA-'.