A.M. Best Affirms Principal's Ratings Following Announcement to Sell Its Mortgage Banking Business.Business Editors OLDWICK, N.J.--(BUSINESS WIRE)--May 12, 2004 A.M. Best Co. has affirmed the financial strength rating of A+ (Superior) of Principal Life Insurance Company and the existing debt ratings of Principal Financial Group, Inc. (PFG PFG Principal Financial Group PFG Performance Food Group (Richmond, VA) PFG Pinnacle Financial Group PFG Plasma Flood Gun PFG Planning for Growth PFG Pasty Faced Geek PFG Perfluoroguanidine ) (NYSE NYSE See: New York Stock Exchange : PFG) (both of Des Moines, IA), following the company's announcement to sell its wholly-owned mortgage banking subsidiary, Principal Residential Mortgage, Inc. (PRMI PRMI Primary Residential Mortgage Inc ) to Citigroup (NYSE: C) for approximately $1.26 billion. The outlook for all ratings is stable. A.M. Best believes the sale will enable PFG's management to focus on its core retirement products and services, annuities, mutual funds and life/health insurance operations in the United States as well as internationally. In addition, the transaction enhances PFG's financial flexibility and overall liquidity profile as approximately $1.8 billion in debt obligations associated with PRMI will be removed from its balance sheet. A.M. Best expects PFG to judiciously deploy the net proceeds Net Proceeds The amount received after all costs are deducted from the sale of a piece of property or security. Notes: In the case of an investor selling a security, net proceeds represent the proceeds from the sale minus any trading costs (i.e. commissions). from the sale--estimated to be about $700 million--in businesses where it has generated above-average returns while continuing to grow assets under management Assets Under Management (AUM) is a term used by financial services companies in the mutual fund and money management or investment management business to gauge how much money they are managing. and its customer base. Other potential uses may include smaller strategic acquisitions to build scale, repayment of short-term debt Short-term debt Debt obligations, recorded as current liabilities, requiring payment within the year. and share repurchase Share Repurchase A program by which a company buys back its own shares from the marketplace, reducing the number of outstanding shares. This is usually an indication that the company's management thinks the shares are undervalued. . The mortgage banking operations complemented PFG's product portfolio and provided earnings diversity as PRMI represented a significant portion of the group's operating revenues and earnings over the last few years. Accordingly, the transaction will be dilutive to return-on-equity, posing a challenge for PFG to achieve profitability objectives in the near to medium term. Although PFG's debt servicing capacity is expected to remain quite strong--with interest coverage in the mid-double digits--it will diminish slightly until the lost earnings are replaced. The ratings reflect PFG's dominant position in the U.S. defined contribution plan Defined contribution plan A pension plan whose sponsor is responsible only for making specified contributions into the plan on behalf of qualifying participants. Related: Defined benefit plan market, diverse and sustainable earnings, prudent financial management, sound capitalization and excellent liquidity. The natural hedge between mortgage loan production and servicing, as the two businesses are countercyclical coun·ter·cy·cli·cal adj. Intended to compensate for immoderate developments in a business cycle: a countercyclical federal aid program. , has supported the mortgage banking segment's solid profitability. However, this business has more potential earnings volatility than PFG's others due to the impact of interest rates. Therefore, A.M. Best believes that the sale of PRMI improves the group's overall risk profile. The ratings also reflect PFG's well-established product lines and broad distribution, cost-efficient operations and potential for global growth. PFG's positive rating factors are somewhat offset by the limited sales growth of life/health products and competitive pressures the group faces in maintaining its leading market share within the 401(k) sector for small to medium-sized businesses. For a list of A.M. Best's debt ratings, please visit http://www3.ambest.com/debtratings/. A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source. For more information, visit A.M. Best's Web site at www.ambest.com. |
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