Principal Financial Group Inc. (PFG) and its subsidiaries’ ratings have recently been affirmed by A.M. Best Company. The rating agency has affirmed Principal’s issuer credit ratings (ICR) of “a-” as well as the group’s existing debt ratings. Additionally, the agency has affirmed the financial strength rating of “A+” (Superior) and the ICR of “aa-” of Principal Life Insurance Company and Principal National Life Insurance Company, the life insurance operating companies of Principal Financial Group. The outlook assigned for all ratings is, however, negative.

The ratings reflect Principal’s leading position in the U.S. defined contribution plan market, strong diversification in terms of product and geography, good expense management, continued growth in international markets and substantial cash holdings. Principal also maintains a modest financial leverage ratio of approximately 18% and its interest coverage ratio is roughly 8x. These are consistent with the current ratings.

The company is investing in international markets and focusing on expansion through both organic development and acquisitions. Such expansions are very much required for Principal, though they expose the company to legislative actions, government controls and intense competition from insurers globally.

However, its positives were partially offset by the company’s reduced operating perfomances as a result of the economic turbulence. The ratings also reflect reduced statutory capital and surplus levels. The company has experienced a significant reduction in assets under management, which has significantly impacted its fee revenue stream. The company has a significant unrealized loss position in its investment portfolio and has the possibility for additional asset impairments. Though unrealized loss positions have improved in the last two quarters, still it has over $1.8 billion as unrealized loss as at the end of the third quarter.

Finally, Principal has about one-fourth of its invested assets in commercial mortgage-backed securities and direct commercial mortgage loans. The rating agency expects that stressed economic conditions may lead to an increase in defaults.

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