These rating actions reflect Principal’s diminished 2008 operating performance, due to the impact of adverse capital and credit market conditions as well as significant realized capital losses in its investment portfolio. The rating actions also reflect Principal’s lower fixed charge coverage, reduced overall assets under management as well as the equity market impact on new transfers within the full service accumulation segment. Additionally, A.M. Best is concerned with Principal’s sizable unrealized loss position on available for sale securities, which exceeded 55% of reported stockholders’ equity at year-end 2008. A.M. Best believes that core earnings will likely moderate in the near to medium term due primarily to the contraction of Principal’s investment only business (i.e., GICs and funding agreements) and reduced fee income from its global asset management segment. While Principal’s balance sheet remains strong overall, A.M. Best notes its level of intangibles—largely driven by the WM Advisors acquisition—which may be subject to future impairments, consistent with some of its life industry peers, should current unfavorable market conditions persist.

Other areas of concern include heightened credit risk within Principal’s investment portfolio—most notably, its exposure to the financial services sector (bonds and hybrid securities), commercial mortgage-backed securities (CMBS) and direct commercial mortgages. While credit risk remains elevated and is increasing across the industry, A.M. Best notes that about 40% of Principal’s investment grade fixed income securities are in the NAIC Class 2 category, which is above average relative to its peers. Additionally, approximately one fourth of Principal’s total invested assets is in CMBS and direct commercial loans. Although A.M. Best recognizes Principal’s expertise in commercial mortgage underwriting and delinquencies have been limited to date, economic conditions are expected to remain stressed in the near term. As a result, A.M. Best expects rising defaults in response to the deepening recession. In general, A.M. Best is most cautious on retail, hotel and office properties within close proximity to distressed housing markets and/or labor markets where unemployment is high.

The current ratings reflect the organization’s dominant position serving small and medium-sized businesses in the U.S. employer-sponsored retirement plan market, its diverse and sustainable earnings, disciplined financial management and solid liquidity. The ratings also recognize Principal’s well-established product lines and broad distribution, cost-efficient operations and emerging global growth. The group’s prudent product design and institutional focus generates long duration, stable liabilities. Along with solid liquidity, this supports Principal’s ability and intent to hold investments to maturity. A.M. Best believes PLIC’s current risk-adjusted capital position is sound and that management will continue to maintain prudent capitalization levels going forward. Principal has limited its exposure to variable annuities with living benefit guarantees by restricting sales to career agents who offer products and riders with more limited investment options and higher fees than many competitors’ offerings.

For a complete listing of Principal Financial Group, Inc.’s FSRs, ICRs and debt ratings, please visit www.ambest.com/press/022714principal.pdf.

The principal methodologies used in determining these ratings, including any additional methodologies and factors, which may have been considered, can be found at www.ambest.com/ratings/methodology.

Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers. For more information, visit www.ambest.com.