A.M. Best Rates Debt of Principal Financial Group; Affirms A+ Financial Strength.

Business Editors

OLDWICK, N.J.--(BUSINESS WIRE)--Dec. 6, 2000

A.M. Best Co. has assigned an "a+" rating to $300 million of existing surplus notes of Principal Life Insurance Company, the lead company within Principal Financial Group (PFG), and an "a" rating to $665 million of senior notes issued by Principal Financial Group (Australia) Holdings Pty Limited. In addition, the A+ (Superior) financial strength rating of Principal Life Insurance Company has been affirmed.

The senior notes were issued in August 1999 to partially finance the acquisition of BT Funds Management, one of Australia's largest asset management firms. Principal Financial Services, Inc. (PFS), an intermediate holding company that owns 100% of Principal Life Insurance Company, unconditionally guarantees payments of principal and interest on these securities. Should BT Australia's earnings and cash flows alone be insufficient to service the debt, PFS will look to Principal Life Insurance Company for timely debt service payments. A.M. Best believes the operating cash flows of Principal Life Insurance Company are more than sufficient to cover the debt obligations of the guarantor, PFS, as well as its own.

PFG's overall financial leverage has stepped up from its historical range of 10-15% as a result of the BT Australia acquisition. Nevertheless, the company has demonstrated judicious capital management and its financial flexibility will be enhanced upon completion of the proposed demutualization. A.M. Best expects PFG's debt to capital ratio to remain below 25% in the near to medium-term.

The ratings reflect PFG's dominant market position in the group pension business in the U.S., diverse and sustainable earnings, prudent financial management, ample fixed charge coverage and solid capital and liquidity position. PFG's U.S. asset management and accumulation business represents about 80% of total assets and over half its operating earnings. Its significant group and individual life operations provide stable cash flows that are further supplemented by earnings from the group's residential mortgage banking operations. While PFG's international operations are established and well-positioned for additional growth in certain countries, the segment has yet to achieve operating profitability.

PFG's balanced business mix is supported by diverse distribution channels, an efficient technological infrastructure and effective asset-liability management. The firm holds a premier position in the U.S. 401(k) market where it faces intense competition from insurance companies, mutual fund companies and banks. Specializing in retirement plans for small to medium size businesses, PFG has created and sustained a competitive advantage through early market entry and by achieving scale in a sector encountering considerable pressure on margins and fees. The group plans to leverage its expertise in the U.S. retirement services market to serve employers in countries where the burden of providing retirement security is shifting from the government to the individual. The establishment of leading market share through organic development or acquisition is expected to follow in other targeted countries.

Offsetting considerations are the challenges the organization faces in reducing losses from its health care lines, establishing profitable retirement services businesses in the countries of its choice and managing the risks of its mortgage lending and real estate business. While the operating results of the pension and life businesses have been strong, PFG's group health line has been a drag on earnings over the last two years and poses some challenges to its strategy. In 1998, PFG merged its HMO business with that of Coventry Corporation, forming Coventry Health Care, and in 2000 decreased ownership in the new entity from 40% to 23%. Within the last several months, Principal Financial Group has made significant progress toward exiting certain lines and markets, either by ceasing new sales or through reinsurance of in-force blocks of business and has started to emphasize non-medical lines. These initiatives have improved the segment's earnings in the first nine months of 2000 and are expected to reduce earnings volatility going forward. However, A.M. Best does not expect the health insurance line to contribute significantly to PFG's overall profitability.

While PFG's capital has been judiciously invested in international businesses through the use of joint ventures and acquisitions, A.M. Best recognizes that legislative action, government controls and intense competition from global financial services providers in local markets may limit growth or unexpectedly turn a viable business unprofitable, creating a need for additional capital investment.

Principal Financial Group, headquartered in Des Moines, Iowa, is a leading provider of a wide range of financial products and services for business and individuals globally. Through its operating subsidiaries within the mutual holding company structure, offerings include retirement and investment services, life and health insurance and mortgage banking. As of June 30, 2000, the group reported consolidated assets of $82.5 billion and total surplus of $5.6 billion.

The following ratings have been assigned to existing debt securities:

- Principal Life Insurance Company:

-- "a+" rating on $200 million 7.875% surplus notes due March, 2024;

-- "a+" rating on $100 million 8.00% surplus notes due March, 2044.

- Principal Financial Group (Australia) Holdings Pty Limited:

- "a" senior debt rating on $200 million 7.95% notes due August,

2004;

- "a" senior debt rating on $465 million 8.20% notes due August,

2009. (these securities are unconditionally guaranteed by

Principal Financial Services, Inc.)

- Principal Financial Services, Inc.:

- AMB-1 commercial paper rating.

The A+(Superior) financial strength rating of Principal Life Insurance Company has been affirmed.

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.