Principal Falls as Bond Losses Spur Capital Worry (Update2)

By Hugh Son and Andrew Frye
Bloomberg News
February 10, 2009


Feb. 10 (Bloomberg) -- Principal Financial Group Inc., the life insurer seeking U.S. aid, plummeted the most in seven years in New York trading after losses on corporate debt and mortgage securities raised concerns the company may need more capital.

Principal dropped $4.75, or 28 percent, to $12.28 at 12:29 p.m. in New York Stock Exchange composite trading, making it the worst performer on the Standard and Poor's 500 Index. The Des Moines, Iowa-based insurer said late yesterday that book value per share, a measure of assets minus liabilities, plunged 62 percent in three months, ending the year at $7.45.

"The main issue in the quarter was the significant decrease in stated book value," said Randy Binner, an analyst at Friedman, Billings, Ramsey Group Inc. with a "market perform" rating on Principal, in a research note today. The decline in investments "clearly increases" concern the firm will need to raise capital, he said.

Principal is cutting jobs after halving its dividend and suspending share repurchases to conserve cash amid plunging values for investments backing policies. The company applied for as much as $2 billion from the U.S. Treasury's rescue program in November. MetLife Inc., the largest U.S. life insurer, sold shares last year to bolster its finances, while No. 2 Prudential Financial Inc. halted its buyback.

Fourth-quarter net income dropped 98 percent to $800,000 from $42.4 million a year earlier, Principal said in a statement. Income was reduced by $188.9 million on net realized losses, driven by $102.3 million in declines tied to sales and permanent impairments of fixed-income securities.

'Market Risk'

"The company's pension and asset management businesses are highly sensitive to equity market risk, and to the weakening economy," Moody's Investors Service said today in a statement, lowering the firm's outlook on Principal to "negative." "This, together with additional asset impairments, will continue to depress earnings in 2009."

Moody's said it may also downgrade Lincoln National Corp. and MetLife after investment losses. Philadelphia-based Lincoln National said yesterday it lost $506 million in the fourth quarter. The insurer fell 18 percent to $14.63, and MetLife slipped 9.1 percent to $28.44.

Hartford Financial Services Group Inc., the life and property insurer that lost $2.75 billion last year, had its credit grades cut yesterday by Standard & Poor's and Fitch Ratings because of investment losses. The company fell 11 percent to $13.33.

Unrealized Losses

Principal's gross unrealized losses on corporate debt widened to $5.1 billion from $2.8 billion, driven by declines in holdings of banks, insurers and industrial companies. Losses on commercial mortgage-backed securities doubled to $2.26 billion from $1.06 billion in the third quarter, the company said. Unrealized losses, which don't affect net income, are watched by regulators and rating firms to gauge financial strength.

The company's book value would be about $17 per share when using a different valuation method that gives more credit for interest-bearing assets that are not easily traded, Principal executives said today in a conference call.

"Uncertainty remains around the length and severity of the global recession," Chief Executive Officer Larry Zimpleman said in the statement. "We'll continue working to address the challenges the market presents."

Corporate Debt

Corporate debt defaults are poised for a "significant" increase this year and may end up costing U.S. life insurers more than losses on securities linked to subprime, Alt-A and commercial mortgages, according to a research report this month by Barclays Plc analyst Eric Berg.

Principal said in October that it had shifted to investing new funds from policyholders in cash, short-term government- backed securities and "other liquid investments." It stopped investing in securities tied to commercial real estate mortgages in July.

The biggest insurers in North America have reported more than $139 billion in writedowns and unrealized losses tied to the subprime collapse since the beginning of 2007, according to Bloomberg data.

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