Fitch Ratings reiterated long-term Issuer Defaults Rating
("IDR") at 'A' of
Principal Financial Group Inc.
). Concurrently, the rating agency also reiterated the Insurer
Financial Strength ("IFS") at 'AA-' of Principal's operating
subsidiaries. The outlook of the ratings remains stable.
LINCOLN NATL-IN (LNC): Free Stock Analysis
PRINCIPAL FINL (PFG): Free Stock Analysis
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The affirmations came on the back of better operational results,
solid capitalization, and moderate financial leverage. However,
increased exposure to direct mortgages and structured mortgage
securities dwarf these positives.
Principal Life Insurance Company, the main insurance operating
subsidiary largely aids Principal Financial to maintain a solid
capitalization. Principal Life's risk-based capital ratio at 2011
end was 449%, up from 420% at 2010 end.
The company also has a modest financial leverage, 16% at the end of
the first quarter of 2012 with cash and equivalents of $378
Though Principal Financial reported higher operating earnings in
2011 (increasing 7% year over year attributable to higher fee
income), its premiums went down due to divestiture of the group
Fitch noted Principal Financial is focusing on its fee-based
businesses, which will help it to weather the shortfall in earnings
owing to the divesture of its heath insurance and cut down in its
institutional spread business.
However, Fitch stated that it might consider rating upgrades if
Principal Financial maintains a return on equity of 10% or higher,
stability in earnings and capital, continues to grow international
operations and risk-based capital ratio remains above 475%.
Ratings might be subject to downgrade if investment losses amplify,
return on equity falls below 6%, fixed charge coverage ratio drops
below 5x, risk-based capital ratio falls below 350% and financial
leverage goes beyond 25%.
Rating affirmations or upgrades from credit rating agencies play an
important part in retaining investor confidence in the stock as
well as maintaining creditworthiness in the market. We believe, the
company's strong ratings scores will help retain investor
confidence and help it to write more businesses going forward,
thereby augmenting the results.
We retain our Neutral recommendation on Principal Financial. The
quantitative Zacks #4 Rank (short-term Sell rating) for the company
indicates slight downward pressure on the shares over the near
term. The compnay competes with
Lincoln National Corporation