A.M. Best Co. has affirmed the financial strength rating (FSR) of A+ (Superior) and issuer credit ratings (ICR) of "aa-" of Principal Life Insurance Company and Principal National Life Insurance Company (together referred to as Principal Life). Both are life insurance operating companies of Principal Financial Group, Inc. (PFG) [NYSE:PFG] and are domiciled in Des Moines, IA. Concurrently, A.M. Best has affirmed the ICR of "a-" of PFG as well as the group's existing debt ratings. The outlook for all ratings is stable, with the exception of the commercial paper program, which does not have an outlook. (Please see link below for a detailed listing of the companies and ratings.)

Principal Life's ratings reflect its diversified operating earnings, record assets under management and positive net flows. The ratings also reflect the continued performance improvement in its investment portfolio.

PFG continues to report favorable operating earnings across its key product lines through its diversified business segments, ongoing expense management and controlled distribution strategy. In addition, the organization continues to grow internationally 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. A.M. Best notes that PFG continues to place an increasing emphasis on its fee-based businesses. These efforts to further diversify its sources of earnings have enabled the company to generate less volatile operating results. PFG continues to generate strong net flows from its Full Service Accumulation and Principal Funds businesses within the Retirement and Investor Services segment, in addition to positive net flows within the Principal International and Principal Global Investors' business segments, where its assets under management (AUM) have continued to grow. The fee income generated from the organization's record AUM has been able to offset the decline in its net investment income for the year. Net income also has benefited from the improved performance of its investment portfolio. PFG's net realized losses have decreased considerably since the recent economic crisis. However, A.M. Best expects realized losses to continue in the near term as more of its commercial mortgage-backed securities portfolio continues to mature.

Offsetting these positive rating factors is Principal Life's lower risk-adjusted capitalization and PFG's increased exposure to country risk due to the rapid expansion of its international operations. Additionally, A.M. Best notes PFG's relatively high overall exposure to equity market risk given the growth in its fee-based businesses.

The decline in Principal Life's risk-adjusted capitalization is primarily attributable to the organization deploying over $3.5 billion for acquisitions, share repurchases and dividends since 2011. Although most of its recent acquisition of AFP Cuprum, S.A. (Cuprum) was funded with new debt, a sizeable amount of excess capital was utilized. Despite the decrease, Principal Life's risk-adjusted capital position, as measured by Best's Capital Adequacy Ratio (BCAR), is considered to be adequate for its current ratings. A.M. Best will continue to monitor the organization's capital deployments to ensure it maintains an adequate capitalization level going forward.

In addition to its capitalization, A.M. Best will be monitoring PFG's increased exposure to country risk. The organization completed several large overseas transactions in recent years as it expands its international operations. Some of these acquisitions were made in countries A.M. Best believes to have moderate levels of political and financial risks, including Mexico and Brazil. However, A.M. Best notes that PFG's most recent acquisition of Cuprum, a leading Chilean mandatory pension provider, operates in a country viewed to have relatively modest economic and political risks. As PFG continues to grow its international businesses, A.M. Best will continue to closely monitor the countries it does business in. Furthermore, A.M. Best will be monitoring PFG's increased expose to market risk. With the organization continuing to grow its fee-based business model, earnings will become more susceptible to market fluctuations.

Despite the sizeable debt issuances in 2012 to support its recent acquisitions, A.M. Best views the organization's adjusted financial leverage (excluding non-recourse debt) of roughly 23%, which incorporates considerable equity credit for its outstanding perpetual preferreds, as being comparable to similarly rated peers. PFG's financial and operating leverage ratios, as well as its interest coverage ratio of over seven times, remain well within A.M. Best's guidelines for its current ratings.

A.M. Best believes PFG is well positioned at its current rating level over the near to medium term. Factors that could lead to negative rating actions include a material decrease in PFG's operating earnings and/or a material deterioration in its risk-adjusted capitalization driven by investment losses or the deployment of capital to support further acquisitions or share repurchase activity.

For a complete listing of Principal Financial Group, Inc. and its subsidiaries' FSRs, ICRs and debt ratings, please visit www.ambest.com/press/121001principal.pdf.

The methodology used in determining these ratings is Best's Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best's rating process and contains the different rating criteria employed in the rating process. Best's Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.

A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

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