UPDATE 2-Principal Fin. posts higher net with cautious outlook

* Net Q3 EPS $0.57, cost cuts, lower capital losses

* Operating Q3 EPS $0.74 vs Street view of 65 cents

* CEO warns of "protracted" economic recovery (Recasts first paragraph to include outlook; adds analyst comment, financial details)

NEW YORK, Nov 2 (Reuters) - Principal Financial Group Inc (PFG.N) posted better-than-expected earnings on Monday, helped by cost cuts and improved credit markets, but it expects a protracted economic recovery that will mute business activity.

Capital losses narrowed sharply from a year ago when market turmoil hit the U.S. provider of retirement plans, life and health insurance. Third-quarter costs were trimmed 17 percent to $2 billion from $2.4 billion a year earlier.

Third-quarter net income more than doubled to $184.7 million, or 57 cents a share, from $90.1 million, or 35 cents a share, a year earlier.

Operating earnings, excluding investments and other items, while lower than a year earlier at $238.7 million, or 74 cents a share, beat analysts' average expectations of 65 cents a share, according to Thomson Reuters I/B/E/S.

In the third quarter of 2008, Principal's operating earnings were $251.2 million, or 96 cents a share, with fewer shares outstanding.

Principal's total revenue in the third quarter fell 9 percent to $2.3 billion, hurt by lower premiums and investment income.

Principal Chief Executive Larry Zimpleman was cautious about future conditions.

"While confidence in the capital markets improved again in the third quarter, we expect the economic recovery will be more protracted, and that near-term, business activity will remain muted," Zimpleman said in a statement.

He added that the company was continuing to trim expenses.

Hexagon analyst David Havens said the results over the past two quarters have been a huge relief for PFG as the company was able to issue capital in the second quarter, and market conditions further buoyed asset values in the third quarter.

"While it is too early to declare that all is well in the markets, and therefore at PFG, the company is in a much better position today than it was in the not-too-distant past," Havens said in an email after Principal posted its results.

The third quarter included net realized capital losses of $66.6 million, well below the $230 million in net realized capital losses absorbed by the insurer last year.

Shares of Principal Financial, which had closed 3 cents lower on Monday at $25.01, were unchanged in after-hours trading following the results. The stock has more than quadrupled since March, when it traded as low as $5.41 a share on concerns that life insurers could run short of capital. (Reporting by Lilla Zuill; Editing by Tim Dobbyn)