Fitch Ratings has affirmed the 'AA-' (Very Strong) Insurer Financial Strength (IFS) ratings of Principal Financial Group, Inc.'s (Principal Financial) U.S. operating subsidiaries.
Fitch has also affirmed Principal Financial's Long-Term Issuer Default Rating (IDR) at 'A' and senior unsecured debt at 'A-'. The Rating Outlook for Principal Financial is Stable.
The rating affirmation reflects Principal Financial's very strong and stable operating performance and its very strong company profile, which is driven by the company's market position and significant operating scale focusing on small and midsize businesses in the retirement and benefits markets. The ratings also consider Principal Financial's very strong capitalization and moderately above-average investment risk.
Key Rating Drivers
Very Strong Company Profile: Principal Financial's very strong company profile reflects the company's leading market position and significant operating scale. Fitch views Principal Financial's leading position in the U.S. retirement, benefits and protection, and asset management markets favorably. Within the U.S. retirement and benefits and protection segments, the company focuses on small and midsize businesses, leading to strong retention. The company's announced acquisition of Ascensus' employee stock ownership plan (ESOP) recordkeeping business in May 2024 firms up its position as a leading ESOP service provider in the U.S. Principal Financial also has a strong market share as a global asset manager and as a leading pension provider in Latin America and Asia.
Conservative Product Risk: Fitch views Principal Financial 's product risk profile to be conservative relative to the industry and has below-average interest rate risk relative to peers from its focus on the defined contribution retirement business. The company's liability profile is weighted towards fee-based and protection-based products after the 2022 reinsurance transaction with Talcott Financial Group, Ltd.
Stable Operating Performance: Fitch considers Principal Financial's operating performance as very strong, with 2023 reported operating earnings of $1.6 billion, in line with 2022 results. Operating earnings were primarily driven by higher net investment income from improved new money rates, marginally offset by lower fees in the asset management segment due to investors moving assets into more conservative allocations such as money market funds and cash in 2023. Principal Financial's earnings are viewed as less interest-sensitive than peers, given its material proportion of fee-based earnings.
Very Strong Capitalization: Statutory capitalization remained very strong, with a reported RBC ratio for Principal Life Insurance Company of 426% as of YE 2023, which is above the company's consolidated RBC target of 400%. Principal Financial's 2023 U.S. Life Prism capital model score is 'Very Strong', which is in line with 'aa' rating expectations. Principal Financial's financial leverage was 22% as of 1Q24, flat versus YE 2023 and within its 20%-25% target.
Above-Average Investment Exposure: Principal Financial has moderately above-average investment exposure to commercial real estate through direct mortgages, structured mortgage securities and direct real estate investments. As of 1Q24, commercial real estate was approximately 30% of invested assets excluding funds withheld. This exposure is marginally offset by a high-quality portfolio, long track record and favorable performance.
Of the company's commercial mortgage loan portfolio, 94% is allocated to the NAIC's highest rated categories of CM1 and CM2. Office loans represent 22% of Principal Financial's mortgage loan exposure, which is modestly above-average compared with the industry. Mortgage loan losses have been benign, but are expected to trend upwards over the coming periods, though remain manageable in relation to capital.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Improved diversification of the company's sources of revenue and earnings;
Sustained return on equity of 12% or higher and maintain fixed-charge coverage above 12x;
Low volatility in earnings and capital over an extended period;
Financial leverage below 20%;
A Prism capital model score of 'Extremely Strong'.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Run-rate return on equity below 10% and a GAAP-based fixed-charge coverage ratio below 7x;
A decline in the company's reported RBC ratio to a level below 375% or a Prism capital model score of 'Strong';
Sustained increase in financial leverage to a level above 25%;
Deterioration in asset performance and quality, particularly in the commercial real estate portfolio, resulting in increased impairments or realized losses that lead to material capital or earnings degradation.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
MACROECONOMIC ASSUMPTIONS AND SECTOR FORECASTS
Click here to access Fitch's latest quarterly Global Corporates Macro and Sector Forecasts data file which aggregates key data points used in our credit analysis. Fitch's macroeconomic forecasts, commodity price assumptions, default rate forecasts, sector key performance indicators and sector-level forecasts are among the data items included.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
PRINCIPAL FINANCIAL GROUP, INC. 
