TEXT-S&P affirms Principal Financial Group 'BBB+' rating

(The following statement was released by the rating agency)

Oct 9 - Overview

-- Principal Financial Group Inc.

will be assuming about $32billion in assets under management with its proposed acquisition of AFP CuprumS.A., a leading pension manager in Chile.

-- We are affirming our 'BBB+' ratings on Principal and its ratedsubsidiaries. At the same time, we are revising the outlook to negative fromstable.

-- The negative outlook reflects the additional financial leverage thatPrincipal has taken on with this acquisition.

Rating ActionOn Oct. 9, 2012, Standard & Poor's Ratings Services affirmed its 'BBB+'counterparty credit ratings on Iowa-based Principal Financial Group Inc.(Principal) and Principal Financial Services Inc. (PFSI, an intermediaryholding company). At the same time, we affirmed the 'A+' counterparty creditand financial strength ratings on Principal Life Insurance Co. We also revisedthe outlook to negative from stable.


The outlook revision reflects the group's increased level of financialleverage, reduced fixed-charge coverage ratio, and increased capital deficitat PLIC (as measured by our capital model) due to the excess debt doubleleverage that will be taken on to complete the acquisition of AFP Cuprum S.A.(Cuprum) and, to a lesser extent, integration risk.

The company has announced that it would be acquiring 63% of Cuprum fromEmpresas Penta S.A. and Inversiones Banpenta Limitada (the Penta group). Thepurchase agreement also includes a public tender offer that will be made tothe minority shareholders for the remaining 37% of publicly traded shares.Purchase price overall purchase price will be about $1.5 billion; roughly $750million in goodwill and $530 million in intangibles will be created by thistransaction. Subject to Chilean regulatory approval and the other conditions,the company expects the transaction to close in first-quarter 2013 and toimmediately add to earnings.

Based on the structure of the planned financing, Principal would finance theCuprum acquisition with $400 million in holding company cash, together with$600 million in prefunded U.S. term debt, and about $500 million in Chileanterm debt. The company does not plan to issue any new common equity or hybridsecurities to complete this transaction. On a pro forma basis, debt leverageand total financial leverage ratios will reach 28.4% and 33.9%, respectively.While we expect total financial leverage to remain within the 35% toleranceswe generally view as acceptable for the current ratings, debt-funded doubleleverage (as we defined it) would be higher than the 20% limit set out withinour insurance ratings criteria. Debt above 20% leverage that does nototherwise qualify for equity treatment under our criteria would adverselyaffect the quality of capital because we deduct the excess amount fromavailable operating company capital in our capital model.

We view Cuprum as a leading franchise among the six major players operatingwithin the mandatory pension provider market within Chile. While there will belimited cost synergies, we believe revenue synergies can be generated givenPrincipal's extensive retirement savings expertise and infrastructure, andstrong asset management platform. We expect the integration of Cuprum toproceed smoothly, since the firm is largely a stand-alone operation, and givenPrincipal's track record of integrating acquisitions, and managing and growingits international pension and retirement savings platform.

The ratings on Principal reflect our assessment of the group's strongcompetitive position in the U.S. small-to-midsize group pension, individualand group life, and health markets. Principal has been successfully expandedinto the fast-growing international retirement and asset management marketswith operations in 15 countries. We believe the group will continue tomaintain its strong business franchise, operating earnings, and solidoperating company liquidity profile. We also consider the quality of itsenterprise risk management to be strong.

While we believe Principal Life's investment portfolio is strong as measuredby asset class, diversification, quality, risk management, and return. We alsobelieve it has a slightly higher risk profile within its U.S. commercial realestate investments in light of our view of the risk profile of its commercialmortgage-backed securities (CMBS) and commercial whole loans portfolio. Thecompany's higher relative position to peers in 'BBB' rated bonds and financialinstitutions also remains an area of incremental risk.


The negative outlook reflects our expectations that we could lower the ratingsif PFG continues to deploy excess cash aggressively and/or significantlyreduces its cash position below current levels; if material issues emerge withthe integration of Cuprum or with operations locally; or if Principal's GAAP(generally accepted accounting principles) EBIT and fixed-charge coverageperform fall below $875 million and 5x on a sustained basis. We could alsolower the ratings if Principal Life's capital adequacy remains significantlybelow levels required to support an 'A' confidence level as measured by ourcapital model. The negative outlook indicates that there is a one-in-threechance of a downgrade within the next one to two years. We could revise theoutlook to stable if capital adequacy is restored to levels that are moresupportive of the financial strength rating, operating earnings remain ontheir positive trend line, and asset quality will remain within historicalnorms.

Assuming our base case economic scenario in 2013, we expect Principal togenerate a GAAP EBIT and fixed-charge coverage ratio of $1.150 billion and 6x,respectively, and net realized capital losses (post tax) to remain below $250million.

Related Criteria And Research

-- Sovereign Rating and Country T&C Assessment Histories, Oct. 2, 2012

-- Methodology For Assessing capital Charges For Commercial MortgageLoans Held by U.S. Insurance Companies, May 31, 2012

-- Principles Of Credit Ratings, Feb. 16, 2011

-- Refined Methodology And Assumptions For Analyzing Insurer CapitalAdequacy Using The Risk-Based Insurance Capital Model, June 7, 2010

-- Holding Company Analysis, June 11, 2009

-- Interactive Ratings Methodology, April 22, 2009

Ratings ListRatings Affirmed; Outlook ActionTo From

Principal Financial Group Inc.

Counterparty Credit Rating BBB+/Negative/-- BBB+/Stable/--

Principal Financial Services Inc.

Counterparty Credit Rating BBB+/Negative/A-2 BBB+/Stable/A-2Principal Life Insurance Co.Counterparty Credit Rating A+/Negative/A-1 A+/Stable/A-1Principal Life Insurance Co.Principal National Life Insurance Co.Financial Strength Rating A+/Negative/-- A+/Stable/--

Principal National Life Insurance Co.

Counterparty Credit Rating A+/Negative/-- A+/Stable/--Ratings Affirmed

Principal Financial Group Inc.

Senior Unsecured BBB+Preferred Stock BB+

Principal Financial Global Funding II LLC

Senior Secured A+

Principal Financial Global Funding LLC

Senior Secured A+

Principal Financial Services Inc.

Commercial Paper A-2

Principal Life Global Funding I

Senior Secured A+

Principal Life Global Funding II

Senior Secured A+

Principal Life Income Fundings Trusts

Senior Secured A+

Principal Life Insurance Co.

Subordinated A-Commercial Paper A-1

Complete ratings information is available to subscribers of RatingsDirect onthe Global Credit Portal at

. All ratings affectedby this rating action can be found on Standard & Poor's public Web site at. Use the Ratings search box located in the leftcolumn.(New York Ratings Team)

((e-mail: pam.niimi@thomsonreuters.com; Reuters Messaging:pam.niimi.reuters.com@reuters.net; Tel:1-646-223-6330;))