The credit rating agency A.M. Best Co. reiterated the financial strength rating of A+ (Superior) and the issuer credit rating (:ICR) of 'aa-' of Principal Life Insurance Company and Principal National Life Insurance, the life insurance operating subsidiaries of Principal Financial Group Inc. (NYSE:PFG - News).
Subsequently, the credit rating agency reaffirmed the ICR of ‘a-’ of Principal Financial along with the present debt ratings.
The outlook for all the ratings remains stable.
The rating affirmations came on the back of Principal’s diversified revenue generating avenues, growing net inflows as well as a well performing investment portfolio. The ratings also take into account the company’s extended distribution, strong presence in the U.S. defined contribution plan market coupled with considerable cash holdings.
A.M. Best noted that the company’s diversified business segments, cost containment measure and its distribution strategies have helped deliver consistently solid operating results. Also, the company continues to focus on its fee based business, which would further help it to diversify its earnings stream.
Also, Principal continues to generate solid net flows. All three business segments have generated higher net flows which in turn have aided the company to deliver huge assets under management. Besides, the company's debt-to-capital ratio and interest coverage ratio are also within A.M. Best’s guidelines.
The rating agency nonetheless remains concerned about the low interest rate environment and its adverse impacts. Also, with Principal Financial focusing more on the fee based business, its earnings will be tied to equity markets fluctuation.
Further, according to A.M. Best, Principal Financial may have to invest in riskier assets to maintain its interest spreads on its life and annuity products. Also, the company’s exposure to commercial mortgages and commercial mortgage-backed securities leaves room for further assets impairments.
There was no earnings momentum on the stock over the last 7 days. We expect the ratings affirmations would encourage analysts to pull their estimates upward. The Zacks Consensus Estimate for fourth-quarter 2011 is currently at 74 cents per share. For full years 2011 and 2012, the Zacks Consensus Estimates are, respectively, $2.80 per share and $3.15 per share.
We retain our Neutral recommendation on Principal Financial. The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the stock over the near term.
Based in Des Moines, Iowa, Principal Financial Group Inc. provides an expansive range of retirement savings, investment and insurance products and services through its various subsidiaries. It competes with Lincoln National Corporation (NYSE:LNC - News).
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