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A.M. Best Revises Outlook to Stable for Principal Financial Group, Inc. and Its Subsidiaries

The revised outlook reflects Principal's consistent operating income from a more diverse revenue stream, growing capitalization and an improved unrealized gain/loss position in its general account investment portfolio. Over the past several years, the organization has continued to deliver strong operating earnings through its diversified business segments, diligent expense management and controlled distribution. A.M. Best notes that Principal has been placing increasing emphasis on its fee-based businesses. These efforts have enabled the company to generate less volatile operating results recently while improving its consolidated risk-adjusted capital position.

The ratings also reflect Principal's dominant position in the U.S. defined contribution plan market, its broad distribution, continued global growth and significant cash holdings at PFG. Principal has diverse product lines that include group dental and vision insurance, individual and group life and disability insurance, annuities and mutual funds distributed by wholesalers, career agents and independent agents. In addition, Principal continues to be well positioned for international growth 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. Furthermore, A.M. Best views Principal's recently announced decision to exit the group medical business as a long-term credit positive.

A.M. Best also notes that the group continues to maintain a modest financial leverage ratio (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. Principal's financial leverage ratio, as well as its interest coverage ratio of roughly seven times, remains well within A.M. Best's guidelines for its current ratings.

Partially offsetting these positive rating factors are the decline in deposits, particularly the recurring of Principal's group annuity products and declining deposits in other lines of business due to the low interest rate environment, difficult economic conditions and declining membership levels. As a result of declining deposits, net cash flows have been below expectations. A.M. Best notes that some of the decline in deposits was due to Principal scaling back on its guaranteed investment contracts and other funding agreement investments. While Principal has seen a significant turnaround in its investment portfolio valuations-the portfolio is in a statutory pre-tax net unrealized gain position of $1.9 billion as of the end of the third quarter of 2010-there is still a potential for additional invested asset impairments. A.M. Best anticipates a continuation of the currently elevated commercial mortgage delinquency rates on its commercial mortgage-backed securities portfolio (CMBS) over the near term as the difficult economic climate continues, which could result in additional losses on Principal's $4.3 billion CMBS portfolio. Market conditions could also present additional commercial real estate related investment losses from its $8.8 billion direct commercial mortgage loan portfolio.

For a complete list of Principal Financial Group, Inc. and its subsidiaries' FSRs, ICRs and debt ratings, please visit www.ambest.com/press/120902principal.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 and Health Insurers" ; and "Rating Members of Insurance Groups." 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 (c) 2010 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.

A.M. Best Co.
Tom Zitelli, 908-439-2200, ext. 5412
Financial Analyst
tom.zitelli@ambest.com
or
Thomas Rosendale, 908-439-2200, ext. 5201
Assistant Vice President
thomas.rosendale@ambest.com
or
Rachelle Morrow, 908-439-2200, ext. 5378
Senior Manager, Public Relations
rachelle.morrow@ambest.com
or
Jim Peavy, 908-439-2200, ext. 5644
Assistant Vice President, Public Relations
james.peavy@ambest.com