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Press release from Business Wire

A.M. Best Affirms Ratings of Principal Financial Group, Inc. and Its Subsidiaries

Friday, December 23, 2011

A.M. Best Affirms Ratings of Principal Financial Group, Inc. and Its Subsidiaries09:46 EST Friday, December 23, 2011 OLDWICK, N.J. (Business Wire) -- A.M. Best Co. has affirmed the financial strength rating of A+ (Superior) and the issuer credit rating (ICR) of “aa-“ of Principal Life Insurance Company and Principal National Life Insurance Company (together referred to as Principal Life). Both are life insurance operating companies of Principal Financial Group, Inc. (PFG) [NYSE: PFG] and are domiciled in Des Moines, IA. Concurrently, A.M. Best has affirmed the ICR of “a-” of PFG as well as the group's existing debt ratings. The outlook for all ratings is stable. (Please see link below for a detailed listing of the companies and ratings.) The ratings reflect PFG's diverse revenue stream, increasing positive net flows and improved performance within its investment portfolio. The ratings also reflect PFG's dominant position in the U.S. defined contribution plan market, its broad distribution, continued global growth and significant cash holdings at PFG. The organization has continued to report favorable operating earnings across its key product lines through its diversified business segments, ongoing expense management and controlled distribution strategy. In addition, the organization continues to grow internationally by leveraging its retirement plan expertise in the United States to serve selected countries with favorable demographics and growing long-term savings and defined contribution markets. A.M. Best notes that PFG continues to place an increasing emphasis on its fee-based businesses. These efforts to further diversify its sources of earnings have enabled the company to generate less volatile operating results. In addition to improving its profitability, PFG's net flows have also improved in 2011. Principal International, Principal Global Investors, Principal Funds and Full Service Accumulation business segments have all reported significant improvement in net flows. The increase in positive net cash flows has contributed to PFG's record assets-under-management for 2011. A.M. Best believes that the group continues to maintain relatively conservative financial leverage (excluding non-recourse debt) of approximately 16%, incorporating considerable equity credit for the company's outstanding perpetual preferreds per A.M. Best's hybrid methodology. PFG's debt-to-capital ratio, as well as its interest coverage ratio of roughly nine times, remains well within A.M. Best's guidelines for its current ratings. With the organization moving to more of a fee-based business model, PFG's earnings will be more susceptible to fluctuations in equity markets. Despite improvements in operating earnings for the year, A.M. Best notes that PFG's future earnings may be impacted by market dips given that almost half of PFG's assets are in separate accounts. Additionally, A.M. Best remains concerned regarding the future impact of a continued low interest rate environment on PFG's spread-based products. Consistent with its peers, Principal Life will likely have difficulty maintaining its annuity spreads should the challenging operating environment continue for an extended period of time. Although the company's investment performance has improved, the potential for any additional asset impairments remains given PFG's exposure to commercial mortgages and commercial mortgage-backed securities (CMBS). A.M. Best notes that in an effort to maintain interest spreads on its life and annuity products, PFG may be forced to invest in riskier assets to achieve its targeted net yield. Furthermore, a double-dip recession could cause credit deterioration and additional impairments within PFG's investment portfolio. However, A.M. Best notes the company's direct commercial loan portfolio is fairly well diversified and that its CMBS portfolio is performing better than some of its peers with respect to problem loans and delinquencies. A.M. Best believes PFG's ratings are well positioned at their current levels for the near to medium term. Factors that could lead to negative rating actions include a sizeable decline in net flows across its key product lines, resulting in dampened operating performance and/or capitalization, or material deterioration of capital driven by investment losses. For a complete list of Principal Financial Group, Inc.and its subsidiaries' FSRs, ICRs and debt ratings, please visit www.ambest.com/press/122305Principal.pdf. The principal methodology used in determining these ratings is Best's Credit Rating Methodology -- Global Life and Non-Life Insurance Edition, which provides a comprehensive explanation of A.M. Best's rating process and highlights the different rating criteria employed. Additional key criteria utilized include: “Risk Management and the Rating Process for Insurance Companies”; “Understanding BCAR for Life/Health Insurers”; “Rating Members of Insurance Groups”; “Assessing Country Risk”; “A.M. Best's Liquidity Model for U.S. Life Insurers”; “A.M. Best's Ratings and the Treatment of Debt”; and “A.M. Best's Perspective on Operating Leverage.” Methodologies can be found at www.ambest.com/ratings/methodology. Founded in 1899, A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com. Copyright © 2011 by A.M. Best Company, Inc.ALL RIGHTS RESERVED.A.M. Best Co.Tom ZitelliSenior Financial Analyst908-439-2200, ext. 5412tom.zitelli@ambest.comorRachelle MorrowSenior Manager, Public Relations908-439-2200, ext. 5378rachelle.morrow@ambest.comorCarl AustinAssistant Vice President908-439-2200, ext. 5500carl.austin@ambest.comorJim PeavyAssistant Vice President, Public Relations908-439-2200, ext. 5644james.peavy@ambest.com