The Principal Financial Group®: A strong partner rain or shine
05/20/2009
When the going gets tough, you need a solid, experienced company you can trust. For nearly 130 years, The Principal® has been helping businesses and people map out their financial futures in all kinds of markets. Our fundamentals remain strong during these difficult conditions. We were solid before the storm. We're solid today as evidenced by the following:
- Continued solid business performance
- Strong liquidity and capital adequacy
- Strong financial ratings
- An investment portfolio for the long-term
Continued solid business performance during tough times
The Principal has endured many economic cycles since our beginnings in 1879. We'll endure this one, too. Our performance since becoming a public company in 2001 provides a glimpse at our track record of strong execution:
- Expanded sales, service and consulting in the retirement space to an unparalleled network of local resources across the U.S.
- Added integrated capabilities to create Principal Total Retirement SuiteSM, transforming The Principal from the 401(k) leader[1] to a competitive force across a range of plan types and sizes, driving a seven-year compounded annual growth rate for full service accumulation sales of 15 percent.
- Principal Global Investors now manages assets for 12 of the 25 largest U.S. pension funds[2] and has clients in 55 countries.
- Principal International has built top-five positions in many of its markets, increasing its assets under management five-fold.
This strong execution will carry us through these difficult times. Our most recent financial results (March 31, 2009) reflect the strength of our business under challenging conditions. Highlights of 1Q 2009 results include:
- Strong sales: the company's three key retirement and investment products generated $6.0 billion of sales, on a combined basis in first quarter 2009, despite a difficult sales environment, with $2.8 billion of sales for full service accumulation, $2.1 billion for Principal Funds, and $1.0 billion for individual annuities.
- Capital and liquidity management: the company increased its position in highly liquid assets 76 percent from a year ago to $5.8 billion at March 31, 2009, increasing cash and cash equivalent holdings by 141 percent from a year ago to $2.7 billion as of March 31, 2009, and increasing government-backed securities by 43 percent from a year ago to $3.1 billion as of March 31, 2009. Strong liquidity enabled the company to continue scaling back on the Investment Only business, reducing the block by $1.5 billion during the first quarter from year-end levels.
- Distribution enhancements: the company expanded its distribution relationship with BofA/Merrill Lynch to cover defined contribution (DC) plans, gaining access to a market leader with 15,000 advisors focused on the small to midsize DC (defined contribution) market.
Strong liquidity and capital adequacy
Our three key growth businesses – full service accumulation, Principal Global Investors and Principal International – require very little capital to support organic growth, which helps enable us to generate substantial free cash flows on an ongoing basis. Because of strong liquidity in our general account, we have the flexibility to selectively scale back on certain capital intensive businesses to free up additional capital. In addition, we manage our investment portfolio to match our liabilities, which, like others in the life insurance industry (and different from other financial services industries), are longer-term in nature.
We have continued to enhance liquidity, increasing cash and cash equivalent holdings by 141 percent from a year ago to $2.7 billion at the end of first quarter 2009. Our excess capital position – above what is needed for our current credit rating – is estimated to be approximately $850 million (as of March 31, 2009).
With our common stock offering on May 11, 2009, The Principal increased its already strong capital position by approximately $1.1 billion. And with our debt offering on May 18, 2009, The Principal raised more than enough funds to cover the $441 million of debt maturing in August 2009, preserving capital that otherwise would have been needed to payoff that obligation. The company believes these offerings reflect investor confidence in The Principal's operating performance, financial strength, and ability to meet its obligations.
Strong financial ratings
We continue to earn top-tier financial strength ratings from all the major ratings agencies[3].
- A.M. Best: A+ Superior
- Fitch Rating: AA- Very Strong
- Moody's: Aa3 Excellent
- Standard & Poor's Rating Group: A+ Strong
For customers, these "strong" ratings mean they can continue to have confidence in Principal Life Insurance Company's ability to meet its long-term obligations. For shareholders, it validates The Principal's continued solid business performance and the strength of our capital and liquidity positions. And for all stakeholders, our strong relative ratings speak to our ongoing ability to compete for new business and retain existing business, across product lines.
Current environment
All rating agencies have a negative outlook on the North American life insurance sector. This reflects a view that a weakening economy could pressure earnings and result in higher investment portfolio losses, which could pressure capital. Over the past several months, many of our peers have either been downgraded or affirmed with a negative outlook.
Further, given continued uncertainty and market volatility, the rating agencies are refining how they apply their ratings criteria, and reviewing ratings and taking action more frequently. We expect there will continue to be additional rating actions across the sector going forward. The actions taken by A.M. Best, Moody's, S&P and Fitch relative to Principal Life, summarized below, reflect an increasingly negative outlook on the economy.
Ratings updates
In May 2009 Standard & Poor's (S&P), Fitch and Moody's took the following rating actions
- Fitch affirmed the AA- financial strength rating of Principal Life. Fitch changed the outlook to negative from Rating Watch Negative. Rating Watch Negative indicated Fitch could take action if short-term concerns weren't addressed. Their concern was over our ability to successfully refinance maturing debt given difficult capital market conditions. In reaction to our common stock offering, which gives us additional capital, Fitch changed their outlook. Fitch's negative outlook reflects their view on economic conditions and the potential pressure on our investment performance over time.
- S&P affirmed the A+ financial strength rating of Principal Life and changed the outlook to positive.
- Moody's affirmed the Aa3 financial strength rating of Principal Life and changed the outlook to stable from negative.
In February 2009 A.M. Best took the following rating action:
- A.M. Best affirmed the financial strength rating of Principal Life at A+ with a negative outlook.
- Fitch changed the financial strength rating of Principal Life to AA- from AA and placed it on Rating Watch Negative.
A.M. Best
A.M. Best A+ rating is characterized as superior and is the second highest of 16 rating levels. A.M. Best reported that the rating affirmation was based on diverse and sustainable earnings; disciplined financial management, solid liquidity and sound current risk-adjusted capital position; cost-efficient operations; dominant position serving small and medium-sized businesses in the U.S. employer-sponsored retirement plan market; well-established product lines and broad distribution, and emerging global growth. Additionally, A.M. Best downgraded the issuer credit rating of Principal Life to 'aa-' from 'aa'.
Moody's Investors Service
Moody's Investors Service Aa3 rating is characterized as excellent and is the fourth highest of 21 rating levels. In their press release, Moody's indicated that "the proceeds from PFG's equity and debt issuance provided a substantial cushion to cover short-term debt and potential commercial paper maturities, as well as future anticipated capital and liquidity needs at Principal Life — even under extremely stressful economic and capital market conditions." In affirming the rating and changing the outlook to stable, Moody's cited many strengths of The Principal, including: strong broad-based position in the U.S. markets for group pensions, strong asset-liability management and solid capital adequacy.
Standard & Poor's (S&P)
S&P's A+ long-term strength rating is characterized as strong and is the fifth highest of 21 rating levels. S&P noted improved capital position and financial flexibility following The Principal's common stock offering in May 2009, sustained strength in the U.S. small-to-midsize group pension business and strong competitive position in the individual life and group life and health marketplace.
Fitch Rating
Fitch's AA- rating is characterized as very strong and is the fourth highest of 21 ratings levels. Fitch noted many strengths of The Principal, including: strong market position in the employee benefit insurance business, strong liquidity without need to sell assets at depressed prices and modest exposure to variable annuity segment. Fitch's negative outlook reflects their view on economic conditions and the potential pressure on our investment performance.
An investment portfolio for the long-term
A strong risk control environment dictates how we manage our investment portfolio, which is well-diversified by industry, geography, property type and individual borrower. As a company focused on helping customers achieve financial security, our liabilities tend to be longer-term and more predictable in nature. We manage our investment portfolio to match our liabilities. This long term approach, combined with our discipline and strong liquidity, means we have the ability and intent to hold assets to maturity. Therefore, unrealized losses are not necessarily indicative of future investment losses. In addition, as a highly regulated entity, our investments are subject to a variety of asset quality and diversification requirements. We closely monitor holdings in troubled sectors and actively manage our holdings overall.
Recent media reports have heightened the scrutiny of subprime residential mortgage, commercial real estate holdings and commercial mortgage backed securities. Outlined below are some important facts about our general account portfolio holdings:
- Subprime residential mortgages: The Principal has minimal exposure to subprime residential mortgages — less than 1 percent of total invested assets as of March 31, 2009. Minimal exposure has resulted in minimal losses from these holdings — less than one-tenth of 1 percent of total invested assets.
- Commercial real estate portfolio: The Principal is the fourth largest manager of real estate in the U.S.[4] With six decades of real estate investment experience, we have successfully managed our real estate portfolio through all kinds of economic cycles. Our track record, coupled with the following characteristics, illustrate the strength of our loan portfolio (as of March 31, 2009):
- All but one of the 965 loans are performing on schedule
- 88 percent occupancy
- Average loan size of $10.6 million
- 67 percent current loan-to-value
- 1.8 times debt service coverage
Throughout 2008, we clearly communicated that we anticipate defaults and losses on commercial mortgages will increase in the future. However, we believe the increase will occur over a period of several years, and that we will have the ability to accommodate these losses going forward through the use of a number of capital management techniques.
- Commercial mortgage backed securities (CMBS): These investments (bonds) are backed by mortgages on commercial real estate property. The Principal participates in this market and notes the following characteristics of our portfolio (as of March 31, 2009):
- High quality, with 94 percent rated investment grade.
- Relatively small part of our total invested assets—only 6 percent.
- Underlying commercial mortgages that make up these securities continue to perform, with only 1.85 percent of these loans delinquent (behind on payments).
- Third party stress scenario models indicate that losses would be very manageable, occurring later in the cycle and over multi-year period.
- [1]
- The Principal ranks number one in total plans for all asset sizes among fully bundled 401(k) providers - 2008 Spectrem Group analysis of fully-bundled 401(k) providers (companies that provide both administrative and investment services).
- [2]
- Derived from the PENSIONS & INVESTMENTS "P&I 1,000" report on the largest pension plans dated Jan. 26, 2009, compared to our internal records.
- [3]
- Third party ratings relate to Principal Life Insurance Company, the largest member company of the Principal Financial Group, only and do not reflect any ratings actions or notices relating to the US life insurance sector generally. Source: Fitch Rating—'AA-' Very Strong - fourth highest of 21 rating levels; Standard & Poor's Rating Group—'A+' Strong - fifth highest of 21 rating designations; A.M. Best—'A+' Superior - second highest of 16 rating levels; Moody's Investors Service—'Aa3' Excellent - fourth highest of 21 rating levels. Ratings as of May 20, 2009. The four rating agencies referenced have placed negative outlooks on the US Life Insurance Sector. A negative outlook means that the rating of many US Life Insurance Companies may be downgraded due to impact of negative market conditions.
- [4]
- Principal Real Estate Investors. Ranked by U.S. institutional tax-exempt assets, out of 50 managers profiled, as of June 30, 2008. "Real Estate Managers," PENSIONS & INVESTMENTS, September 29, 2008.
Asset allocation/diversification does not guarantee a profit or protect against a loss. Information is current as of the creation of this piece. Keep in mind that portfolio holdings are subject to risk.
Insurance products and plan administrative services provided by Principal Life Insurance Company. Securities offered through Princor Financial Services Corporation, 800/247-1737, member SIPC. Bank productsand services offered through Principal Bank®, member FDIC, Equal Housing Lender. Insurance and securities are not FDIC insured, have no bank guarantee, and may lose value. Principal Life, Principal Bank and Princor® are members of the Principal Financial Group®, Des Moines, IA 50392.
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