Principal Financial Holding Companies Upgraded To #A-# On Increased Access To Unregulated Outlook Is Stable

Stocks and Financial Services Press Releases Wednesday April 18, 2018 09:29
CHICAGO--18 Apr--S&P Global Ratings

CHICAGO (S&P Global Ratings) April 17, 2018--S&P Global Ratings said today it raised its issuer credit ratings on Principal Financial Group Inc. (PFG) and Principal Financial Services Inc. (PFS) to 'A-' from 'BBB+'. At the same time, we affirmed our 'A+' long-term issuer credit ratings and financial strength ratings (FSRs) on Principal Life Insurance Co. (PLIC) and Principal National Life Insurance Co. (PNLIC). The outlook on the ratings is stable.

Following our upgrade of PFG and PFS, the issuer credit ratings on both entities are now two notches lower than the FSRs on the core operating life insurance companies. The holding companies rely on dividends from both insurance and non-insurance operating subsidiaries to meet their obligations, including shareholder dividends, payment of interest and principal on debt, and other expenses. The Insurance Commissioner of the State of Iowa regulates the cash flows from PLIC and PNLIC and can restrict each's ability to provide dividends to PFG. The two-notch gap is less than the standard three notches because, following the unstacking of Principal Global Investors, its dividends no longer flow through PLIC and are, thus, unregulated. This increases the likelihood of the holding companies routinely meeting their financial obligations because over 50% of the dividends the holding companies receive are now unregulated, and we expect a minimum of 40% of dividends to continue to be unregulated. The one-notch upgrade is also supported by consistent and projected fixed-charge coverage in excess of 10x and adequate liquidity at the holding company level.

PFG's expected dividend receipts from its operating companies for 2018 total $1 billion, compared with ongoing obligations of about $750 million (about $600 million in dividends and $150 million in interest charges on its debt). PFG currently maintains cash and liquid assets of $2.97 billion at the holding company, greatly enhancing financial flexibility.

The affirmation of the operating company ratings reflects the company's maintenance of a very strong business risk profile and upper adequate financial risk profile, because of capital that is significantly redundant at the 'BBB' level, per our risk-based capital model. PFG lacks a rating agency capital target and has historically exhibited somewhat aggressive capital deployment. However, factors supporting the ratings are its strong management, governance, and enterprise risk management.

The stable outlook reflects our expectation that the company will maintain its very strong business risk profile and upper adequate financial risk profile. We expect PFG to continue generating favorable operating earnings in 2018 and 2019. Utilizing our base-case macroeconomic assumptions, we expect GAAP net income of around $1.5 billion, statutory net income of around $900 million-$950 million, financial leverage below 30%, and fixed-charge coverage of at least 10x in each of 2018 and 2019.

We may lower our ratings if we believe over the next 18-24 months that the company's statutory capital adequacy will materially decline. Such a decline could occur due to excessive payment of dividends from the life insurance company to the holding company, increased investment impairments as a result of weakened economic conditions, higher-than-expected mortality or morbidity, or an increased appetite for credit risk.

We may raise our ratings if we believe over the next 18-24 months that Principal Life will achieve and sustain statutory capital adequacy at the 'A' level or higher, per our model.

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