Standard & Poor's Ratings Services ("S&P") upgraded the
long-term counterparty credit ratings to 'BBB+' from 'BBB' of
Principal Financial Group Inc.
(
PFG
) and Principal Financial Services Inc., an intermediary holding
company.
Concurrently, the rating agency upgraded the long-term
counterparty credit and financial strength ratings ("FSR") to 'A+'
from 'A' of Principal Life Insurance Co., a subsidiary of Principal
Financial.
The outlook remains stable.
The upgrade came on the back of the company's better capital
adequacy position, sustained solid operational results and strong
foothold in the markets in which it operates.
The rating agency stated that though the capital position is
improving, yet it has not lived up to the rating agency's
expectations. Nevertheless, sustained earnings growth, strong
liquidity, better asset quality with solid enterprise risk
management ("ERM") dwarfs the underperformance. Also, the company
remains focused on lowering its commercial mortgage-backed
securities.
The rating upgrade of Principal Financial Services was based on
its dominant position in the U.S. small-to-midsize group pension
market, and its position in individual and group life and health
markets. The company is also strengthening its foothold in the
rapidly growing international retirement and asset management
markets. Therefore, the rating agency expects the company to
sustain its strong position, earnings stream and liquidity
alongside the ERM.
S&P noted that Principal Life weathered the economic turmoil
on the back of its solid earnings base and cost management. It also
considers Principal Life's portfolio to be sturdy, based on its
asset base, diversified portfolio, better risk management and
return, although the agency noticed its higher risk profile in the
U.S. commercial real estate investments.
The stable outlook accounts for the growth in the company's
earnings, given its diversified retirement savings franchise and
strong ERM. S&P also expects the company to maintain its asset
quality and estimates it to generate operating earnings of $1.05
billion, fixed charge coverage ratio of 6x, and after-tax net
realized capital losses to stay below $250 million.
S&P might consider further rating upgrades if the company's
capital adequacy matches its expectation, maintains better asset
quality and remains comfortably within our expectations, and the
group's fixed charge coverage ratio exceeds 8x.
Nonetheless, the rating might be subject to downgrade if the
company exploits the excess cash, position plummets substantially,
operating earnings falls below $875 million, fixed charge coverage
ratio drop below 5x, asset quality erodes and Principal Life's
capital adequacy fails to match S&P's expectation.
Rating affirmations or upgrades from credit rating agencies play
an important part in retaining investor confidence in the stock as
well as creditworthiness in the market. We therefore believe, the
company's strong ratings scores will help retain investor
confidence and augment its business going forward.
We retain a Neutral recommendation on Principal Financial. The
quantitative Zacks #3 Rank (short-term Hold rating) for the company
indicates no clear directional pressure on the stock over the near
term.
Iowa-based Principal Financial provides an expansive range of
retirement savings, investment and insurance products and services
through its various subsidiaries and competes with
Lincoln National Corporation
(
LNC
).
LINCOLN NATL-IN (LNC): Free Stock Analysis
Report
PRINCIPAL FINL (PFG): Free Stock Analysis
Report
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