High Street Funding Trust I — Moody's affirms Principal Financial's credit ratings (senior debt at Baa1); outlook back to stable – Yahoo Finance

Rating Action:

Moody’s affirms Principal Financial’s credit ratings

(senior debt at Baa1); outlook back to stable

31 January 2022

New York, January 31, 2022 – Moody’s Investors Service has affirmed the Baa1 senior backed

unsecured debt rating of the Principal Financial Group, Inc. (PFG: NYSE; guaranteed by Principal

Financial Services, Inc. – PFSI), Baa1 the issuer rating of PFSI, its intermediate holding company,

and the A1 insurance financial strength rating of PFG’s primary life insurance company, Principal

Life Insurance Company (Principal Life), but returned the outlook to stable from positive. Other

affiliated ratings were also affirmed with a stable outlook (see complete list, below). The rating action

follows the PFG’s announcement that Principal Life and certain affiliates had entered into a Master

Transaction Agreement with Sutton Cayman, Ltd. (Sutton Cayman), a subsidiary of Sixth Street,

to reinsure its guaranteed universal life insurance (GUL) and fixed annuity businesses for a net

negative ceding commission of $189 million. PFG expects the transaction, together with additional

capital transactions related to its in-force life insurance blocks, to generate $800 million in deployable

proceeds upon closing, which the firm intends to return to shareholders through share repurchases.

The transaction is expected to close in the second quarter of 2022, subject to regulatory and other

approvals.
RATINGS RATIONALE
Moody’s said that PFG’s rating affirmation was based on Principal Life’s leadership in the

US retirement market and particularly the 401(k) plan sector, some revenue and earnings

diversification from its domestic specialty benefits business, and strong capital adequacy. PFG’s

asset management business in its Principal Global Investors (PGI) subsidiary, and its international

insurance business in Principal International (PI), provide additional earnings and dividends to the

holding company, albeit with greater earnings volatility and risk. Mitigating these strengths are the

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concentrated equity-based focus and high degree of correlation among many of PFG’s businesses.

The rating agency added that the reinsurance transaction should help reduce interest rate risk and

related earnings volatility, allowing management to focus on higher growth global asset management

and retirement businesses.
The return to a stable outlook reflects the net result of the different transactions, their positive credit

attributes being more than offset by shareholder friendly activities, as well as the introduction of

counterparty risk, and uncertainty with PFG’s operations in Chile.
Specifically, the reinsurance of the legacy blocks of business introduces counterparty risk to Sutton

Cayman, a newly-established private capital-owned reinsurer with no established track record. If

Sutton Cayman encounters financial distress, Principal Life and its affiliates may have to recapture

their ceded liabilities, pressuring its regulatory capital adequacy. Secondarily, Moody’s believes

that Principal Life will face reduced earnings and earnings diversification and execution risk,

given multiple complex transactions. The structuring of the reinsurance as a coinsurance “funds

withheld” transaction, where Principal Life holds the assets on behalf of the reinsurer, together with

overcollateralization of funds withheld assets in a separate trust, and minimum risk-based capital

targets at Sutton Cayman, mitigate the risks somewhat.

In addition, PFG said it plans to return the $800 million of combined transaction proceeds to

shareholders as additional share repurchases, rather than redeploy them in its retirement and asset

management businesses. Moody’s expects Principal Life to maintain its consolidated NAIC Risk

Based Capital (RBC) ratio around its 400% target following the transactions and going forward,

versus the 440% actual ratio at year-end 2020, but still strong.
Other factors that contribute to the stabilization of PFG’s rating outlook include greater uncertainty

of the impact of the continuing pandemic on PFG’s businesses, and separately, the future of its

operation in Chile. PFG owns Cuprum, a leading Chilean pension provider, as well as a separate

life and annuity insurance company in that country. The possibility of the nationalization of private

pension companies and/or establishment of a competing government pension fund has risen,

given the election of a left-leaning president last November. As of Q3 2021, Chile amounted to 45%

of Principal International’s pre-tax operating earnings (on trailing twelve-month basis); Principal

International represented 16% of PFG’s consolidated for the same period.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
According to Moody’s, the following factors could lead to an upgrade of Principal Life’s ratings:

steady, profitable growth, with statutory ROCs of 10% or greater on a consistent basis, excluding

one-time items; greater business diversification; consolidated adjusted financial leverage (ex AOCI)

no greater than 25% at the PFG level, with earnings and cash coverage of at least 8x and 5x,

respectively, on a consistent basis.
Additional factors that could lead to an upgrade of PFG are an upgrade of Principal Life, with steady,

concurrent consolidated ROC at PFG of 10% or greater.
The following factors could result in a downgrade of Principal Life: statutory ROCs consistently below

5% at Principal Life; adjusted financial leverage (ex AOCI) above 30% at PFG, with earnings and

cash coverage below 5x and 3x, respectively, on a consistent basis; consolidated NAIC RBC ratio at

Principal Life below 350% could also lead to a downgrade.
Additional factors that could lead to a downgrade of PFG are a downgrade of Principal Life and/or

consolidated GAAP ROC at PFG consistently below 10%, and/or or a transforming acquisition of $1

billion or over is an additional rating downgrade factor for PFG.
AFFECTED RATINGS:
The following ratings have been affirmed:
Principal Financial Group, Inc. (guaranteed by PFSI): backed senior unsecured debt rating at Baa1;

backed junior subordinated debt at Baa2 (hyb);
Principal Financial Services, Inc.: long-term issuer rating at Baa1;
Principal Life Insurance Company: insurance financial strength at A1; commercial paper rating at

Prime-1;
Principal National Life Insurance Company: insurance financial strength rating at A1;
Principal Financial Global Funding, LLC: backed senior secured debt (foreign currency) at A1;
Principal Life Global Funding I: backed senior secured debt at A1;
Principal Life Global Funding II: backed senior secured debt at A1; backed senior secured MTN

program at (P)A1;

High Street Funding Trust I: backed senior unsecured at Baa1;
High Street Funding Trust II: backed senior unsecured at Baa1.
OUTLOOK ACTIONS
Principal Financial Group, Inc.
…Outlook to stable from positive
Principal Financial Services, Inc.
…Outlook from to stable from positive
Principal Life Insurance Company
…Outlook to stable from positive
Principal National Life Insurance Company
…Outlook to stable from positive
Principal Financial Global Funding, LLC
…Outlook remains stable
Principal Life Global Funding I
…Outlooks to stable from positive
Principal Life Global Funding II
…Outlooks to stable from positive
High Street Funding Trust I
…Outlooks to stable from positive
High Street Funding Trust II
…Outlooks to stable from positive
The principal methodology used in these ratings was Life Insurers Methodology published in

September 2021 and available at

https://www.moodys.com/researchdocumentcontentpage.aspx?

docid=PBC_1254133.

Alternatively, please see the Rating Methodologies page on

www.moodys.com for a copy of this methodology.
Principal Financial Group, Inc. is a diversified life insurance and financial services group based in

Des Moines, Iowa. At September 30, 2021, it reported consolidated GAAP assets of approximately

$299 billion and consolidated GAAP shareholders’ equity of approximately $16 billion.
REGULATORY DISCLOSURES
For further specification of Moody’s key rating assumptions and sensitivity analysis, see

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form. Moody’s Rating Symbols and Definitions can be found at:

https://www.moodys.com/

researchdocumentcontentpage.aspx?docid=PBC_79004.

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