Principal Financial Group, Inc. Reports Third Quarter 2009 Results

http://www.businesswire.com/news/home/20091102006267/en

DES MOINES, Iowa--(Business Wire)--
Principal Financial Group, Inc. (NYSE: PFG) today announced net income available
to common stockholders for the three months ended September 30, 2009, of $184.7
million, or $0.57 per diluted share compared to $90.1 million, or $0.35 per
diluted share for the three months ended September 30, 2008. The company
reported operating earnings of $238.7 million for third quarter 2009, compared
to $251.2 million for third quarter 2008. Operating earnings per diluted share
(EPS) for third quarter 2009 were $0.74 compared to $0.96 for the same period in
2008.1 The decline in operating earnings from a year ago reflects a number of
items, including lower average assets under management (AUM), higher costs for
employee pension and other post-retirement benefits,2 lower investment income
and unfavorable foreign currency movements. These items were substantially
offset by the company`s expense management activities and lower deferred policy
acquisition cost (DPAC) amortization expense. The decline in per share results
also reflects the company`s May 11, 2009 common stock offering, which increased
weighted average shares outstanding from 261.0 million for the quarter ending
September 30, 2008, to 321.5 million for the quarter ending September 30, 2009.

"Improved market conditions, and the positive impact of actions by management
over the past several quarters, contributed to a strong sequential increase in
assets under management and operating earnings," said Larry D. Zimpleman,
chairman, president and chief executive officer.

Added Terry Lillis, senior vice president and chief financial officer, "We also
achieved strong improvement in net income during the third quarter, our best
result in two years. Since year-end 2008, book value per share has nearly
tripled, as narrowing credit spreads have driven down net unrealized losses by
more than $6 billion pre-tax. This improvement reaffirms the quality and
diversification of our portfolio, the discipline of our asset/liability
management, and the strength of our capital and liquidity positions."

Highlights comparing third quarter 2009 to second quarter 2009:

* Assets under management improved 9 percent, or $22.7 billion, to $280.4
billion as of September 30, 2009.
* Operating earnings improved 19 percent, reflecting double-digit improvement
across all operating segments.
* Net income available to common stockholders improved 23 percent, reflecting
higher operating earnings and a comparable level of net realized capital losses.

* GAAP book value per share improved 35 percent, or $5.66 to $21.85.

"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," said Zimpleman. "In this environment, we
continue to manage all our resources with care, as we focus on positioning the
company for sustainable, profitable growth as the recovery takes hold over time.

"Although businesses and institutional investors remain cautious, which has
impacted sales and net cash flows, we`re seeing some early signs of progress.
Full service accumulation sales quote activity was 30 percent higher in
September than January. And recently, we`re seeing signs of increased search
activity from institutional investors. While it will take several quarters for
pipeline to turn into sales and then deposits, we are cautiously optimistic
about sales and flows as we move into 2010."

Additional Business Highlights:

* Expense management: management action reduced the fixed component of
compensation and other expenses $225 million or 16 percent comparing the nine
months ended September 30, 2009 to the same period a year ago.
* Strong capital and liquidity: the company`s position in liquid assets was $7.3
billion as of September 30, 2009, and its excess capital position3 was
approximately $1.5 billion.
* Solid sales in a difficult sales environment: the company`s three key
retirement and investment products generated $2.7 billion of sales, on a
combined basis in third quarter 2009, with $0.5 billion of sales for full
service accumulation, $1.9 billion for Principal Funds, and $0.3 billion for
individual annuities.

Net Income

Net income available to common stockholders of $184.7 million for third quarter
2009 reflects net realized capital losses of $53.5 million, which includes:
$69.7 million of losses related to sales and permanent impairments of fixed
maturity securities, partially offset by $25.2 million of gains related to sales
of fixed maturity securities; $22.3 million of losses on commercial mortgage
loans; $7.9 million of losses on derivatives and related hedge activities; $11.3
million of gains related to deferred policy acquisition costs; and $10.2 million
of gains on mark to market of fixed maturity securities held as trading.

Segment Highlights

U.S. Asset Accumulation

Segment operating earnings for third quarter 2009 were $154.6 million, compared
to $136.5 million for the same period in 2008, primarily due to variances in
three businesses. Full service accumulation earnings increased $6.1 million from
a year ago to $70.6 million for third quarter 2009. The increase primarily
reflects DPAC true-ups in both periods due to equity market performance, which
reduced DPAC amortization expense in third quarter 2009 by $4.8 million
after-tax, and increased expense in third quarter 2008 by $6.2 million
after-tax. Individual annuities earnings increased $20.2 million from a year ago
to $36.1 million for third quarter 2009. The increase also primarily reflects
DPAC true-ups in both periods due to equity market performance, which reduced
DPAC amortization expense in third quarter 2009 by $7.0 million after-tax, and
increased expense in third quarter 2008 by $5.3 million after-tax. The increase
in individual annuities earnings also reflects a 7 percent increase in average
account values. Partially offsetting these increases was a $7.2 million decline
in earnings compared to a year ago in the full service payout business due to
lower net investment income and lower mortality gains.

Operating revenues for the third quarter were $1,025.6 million, compared to
$1,237.5 million for the same period in 2008. The decline primarily reflects
lower net investment income in the investment only business, which the company
has been scaling back over the past several quarters, and lower premiums in the
individual annuities business due to lower sales of fixed deferred annuities.

Segment assets under management were $158.8 billion as of September 30, 2009,
compared to $160.7 billion as of September 30, 2008.

Global Asset Management

Segment operating earnings for third quarter 2009 were $10.5 million, compared
to $23.5 million in the prior year quarter, reflecting a 12 percent decline in
average assets under management, lower fees due to a slowdown in the real estate
market, and higher costs for employee pension and other post-retirement
benefits.

Operating revenues for third quarter were $111.3 million, compared to $141.7
million for the same period in 2008.

Non-affiliated assets under management were $73.2 billion as of September 30,
2009, compared to $82.9 billion as of September 30, 2008.

International Asset Management and Accumulation

Segment operating earnings for third quarter 2009 were $33.1 million compared to
$44.4 million for the same period in 2008. Third quarter 2009 earnings were
dampened by deflation in Chile, which reduced earnings by $3.5 million. Third
quarter 2008 earnings included a $5.0 million unlocking benefit for price
changes in Brazil and a $7.1 million experience benefit from higher yields on
invested assets in Chile due to unusually high inflation. Adjusting for these
items impacting comparability between periods, segment earnings increased 13
percent compared to the year ago quarter.

Operating revenues were $156.1 million for third quarter, compared to $265.5
million for the same period last year, primarily the result of lower investment
returns due to deflation in Chile in third quarter 2009.

Segment assets under management were $31.4 billion as of September 30, 2009,
compared to $28.6 billion as of September 30, 2008. Had currency rates remained
unchanged from 2008, segment assets under management would have increased 17
percent over last year.

Life and Health Insurance

Segment operating earnings for third quarter 2009 were $68.2 million, compared
to $73.9 million for the same period in 2008. Individual Life earnings increased
to $29.8 million compared to $21.2 million in third quarter 2008, primarily due
to DPAC true-ups in both periods due to equity market performance, which reduced
DPAC amortization expense in third quarter 2009 by $2.9 million after-tax, and
increased expense in third quarter 2008 by $3.6 million after-tax. Health
earnings were $12.0 million in third quarter 2009. This compares to $21.5
million for third quarter 2008, which benefited from more favorable development
of prior quarter claims. Specialty Benefits earnings were $26.4 million compared
to a record $31.2 million in third quarter 2008. In addition to higher costs for
employee pension and other post-retirement benefits in third quarter 2009 than
third quarter 2008, results for the Health and Specialty Benefits divisions also
reflect a reduction in the number of members in existing plans and lower
investment income.

Operating revenues for third quarter were $1,104.2 million, compared to $1,158.9
million for the same period a year ago. The decline was primarily due to a 7
percent decline in Health division premiums, which primarily reflects a decline
in group medical covered members.

Corporate and Other

Operating losses for third quarter 2009 were $27.7 million, compared to
operating losses of $27.1 million for the same period in 2008.

Other-than-temporary impairments for third quarter 2009

On April 9, 2009, the Financial Accounting Standards Board established new
requirements for measuring and presenting other-than-temporary impairment
charges on available for sale securities, which the Company adopted with first
quarter 2009 reporting. Based on the new requirements, on a pre-tax basis, total
other than temporary impairment losses on available for sale securities were
$162.5 million and the noncredit portion of loss recognized in other
comprehensive income was $45.3 million. Net impairment losses on available for
sale securities of $117.2 million for third quarter 2009 reflect: the company`s
actions to reduce asset ratings drift risk by selling or tendering certain
securities, which resulted in a loss of $20.8 million; and deterioration in
expected cash flows, which resulted in a $28.6 million net impairment charge on
non-agency residential mortgage backed securities and residential collateralized
debt obligations, and a $17.8 million net impairment of commercial mortgage
backed securities and commercial mortgage backed collateralized debt
obligations. The remainder of the net impairment losses for third quarter 2009
primarily relates to impairments of corporate credits.

Forward-looking and cautionary statements

This press release contains forward-looking statements, including, without
limitation, statements as to operating earnings, net income available to common
stockholders, net cash flows, realized and unrealized losses, capital and
liquidity positions, sales and earnings trends, and management's beliefs,
expectations, goals and opinions. The company does not undertake to update or
revise these statements, which are based on a number of assumptions concerning
future conditions that may ultimately prove to be inaccurate. Future events and
their effects on the company may not be those anticipated, and actual results
may differ materially from the results anticipated in these forward-looking
statements. The risks, uncertainties and factors that could cause or contribute
to such material differences are discussed in the company's annual report on
Form 10-K for the year ended December 31, 2008, and in company`s quarterly
report on Form 10-Q for the quarter ended June 30, 2009, filed by the company
with the Securities and Exchange Commission, as updated or supplemented from
time to time in subsequent filings. These risks and uncertainties include,
without limitation: adverse capital and credit market conditions that may
significantly affect the company`s ability to meet liquidity needs, access to
capital and cost of capital; a continuation of difficult conditions in the
global capital markets and the general economy that may materially adversely
affect the company`s business and results of operations; the actions of the U.S.
government, Federal Reserve and other governmental and regulatory bodies for
purposes of stabilizing the financial markets might not achieve the intended
effect; the risk from acquiring new businesses, which could result in the
impairment of goodwill and/or intangible assets recognized at the time of
acquisition; impairment of other financial institutions that could adversely
affect the company; investment risks which may diminish the value of the
company`s invested assets and the investment returns credited to customers,
which could reduce sales, revenues, assets under management and net income;
requirements to post collateral or make payments related to declines in market
value of specified assets may adversely affect company liquidity and expose the
company to counterparty credit risk; changes in laws, regulations or accounting
standards that may reduce company profitability; fluctuations in foreign
currency exchange rates that could reduce company profitability; Principal
Financial Group, Inc.`s primary reliance, as a holding company, on dividends
from its subsidiaries to meet debt payment obligations and regulatory
restrictions on the ability of subsidiaries to pay such dividends; competitive
factors; volatility of financial markets; decrease in ratings; interest rate
changes; inability to attract and retain sales representatives; international
business risks; a pandemic, terrorist attack or other catastrophic event; and
default of the company`s re-insurers.

Use of Non-GAAP Financial Measures

The company uses a number of non-GAAP financial measures that management
believes are useful to investors because they illustrate the performance of
normal, ongoing operations, which is important in understanding and evaluating
the company`s financial condition and results of operations. They are not,
however, a substitute for U.S. GAAP financial measures. Therefore, the company
has provided reconciliations of the non-GAAP measures to the most directly
comparable U.S. GAAP measure at the end of the release. The company adjusts U.S.
GAAP measures for items not directly related toongoing operations. However, it
is possible these adjusting items have occurred in the past and could recur in
the future reporting periods. Management also uses non-GAAP measures for goal
setting, as a basis for determining employee and senior management awards and
compensation, and evaluating performance on a basis comparable to that used by
investors and securities analysts.

Earnings Conference Call

At 4:30 P.M. (CST) today, Chairman, President and Chief Executive Officer Larry
Zimpleman and Senior Vice President and Chief Financial Officer Terry Lillis
will lead a discussion of results, asset quality and capital adequacy during a
live conference call, which can be accessed as follows:

* Via live Internet webcast. Please go to www.principal.com/investor at least
10-15 minutes prior to the start of the call to register, and to download and
install any necessary audio software.
* Via telephone by dialing 800-374-1609 (U.S. and Canadian callers) or
706-643-7701 (International callers) approximately 10 minutes prior to the start
of the call. The call leader's name is Tom Graf.
* Replays of the earnings call are available at: www.principal.com/investor or
by dialing 800-642-1687 (U.S. and Canadian callers) or 706-645-9291
(International callers). The access code is 33374311. Replays will be available
approximately two hours after the completion of the live earnings call through
the end of day November 10, 2009.

The company's financial supplement and additional investment portfolio detail
for third quarter 2009 is currently available at www.principal.com/investor, and
may be referred to during the call.

About the Principal Financial Group

The Principal Financial Group® (The Principal ®)4 is a leader in offering
businesses, individuals and institutional clients a wide range of financial
products and services, including retirement and investment services, life and
health insurance, and banking through its diverse family of financial services
companies. A member of the Fortune 500, the Principal Financial Group has $280.4
billion in assets under management5 and serves some 18.6 million customers
worldwide from offices in Asia, Australia, Europe, Latin America and the United
States. Principal Financial Group, Inc. is traded on the New York Stock Exchange
under the ticker symbol PFG. For more information, visit www.principal.com.

1 Use of non-GAAP financial measures is discussed in this release after Segment
Highlights.

2 Formerly known as SFAS 87 Pension Expense and SFAS 106 Other Post-Retirement
Benefits. The increase from a year ago was primarily the result of negative
market performance in 2008.

3 Excess capital includes cash at the holding company and capital at the life
company above what is needed to maintain a 350 percent NAIC risk based capital
ratio for the life company.

4 "The Principal Financial Group" and "The Principal" are registered service
marks of Principal Financial Services, Inc., a member of the Principal Financial
Group.

5 As of September 30, 2009

Summary of Segment and Principal Financial Group, Inc. Results

Segment
Operating Earnings (Loss)*
in millions
Three Months Ended, Nine Months Ended,
9/30/09 9/30/08 9/30/09 9/30/08
U.S. Asset Accumulation $154.6 $136.5 $385.1 $428.5
Global Asset Management 10.5 23.5 25.5 67.4
International Asset Management and Accumulation 33.1 44.4 79.4 107.9
Life and Health Insurance 68.2 73.9 197.7 219.8
Corporate and Other (27.7) (27.1) (84.5) (59.9)
Operating Earnings 238.7 251.2 603.2 763.7
Net realized capital losses, as adjusted (53.5) (156.3) (154.6) (316.4)
Other after-tax adjustments (0.5) (4.8) (0.8) (14.7)
Net income available to common stockholders $184.7 $90.1 $447.8 $432.6

Per Diluted Share
Three Months Ended, Nine Months Ended,
9/30/09 9/30/08 9/30/09 9/30/08
Operating Earnings $0.74 $0.96 $2.07 $2.92
Net realized capital losses, as adjusted (0.17) (0.60) (0.53) (1.21)
Other after-tax adjustments (0.00) (0.01) (0.00) (0.05)
Net income available to common stockholders $0.57 $0.35 $1.54 $1.66
Weighted-average diluted common shares outstanding 321.5 261.0 291.1 261.3

*Operating earnings versus U.S. GAAP (GAAP) net income available to common stockholders
Management uses operating earnings, which excludes the effect of net realized capital gains and losses, as adjusted, and other after-tax adjustments, for goal setting, as a basis for determining employee compensation, and evaluating performance on a basis comparable to that used by investors and securities analysts. Segment operating earnings are determined by adjusting U.S. GAAP net income available to common stockholders for net realized capital gains and losses, as adjusted, and other after-tax
adjustments the company believes are not indicative of overall operating trends. Note: it is possible these adjusting items have occurred in the past and could recur in future reporting periods. While these items may be significant components in understanding and assessing our consolidated financial performance, management believes the presentation of segment operating earnings enhances the understanding of results of operations by highlighting earnings attributable to the normal, ongoing operations of the
company`s businesses.

Principal Financial Group, Inc.
Results of Operations
(in millions)

Three Months Ended, Nine Months Ended,
9/30/09 9/30/08 9/30/09 9/30/08
Premiums and other considerations $ 932.9 $ 1,049.7 $ 2,820.5 $ 3,258.9
Fees and other revenues 550.7 599.0 1,539.4 1,834.9
Net investment income 853.3 1,079.7 2,541.9 3,030.9
Net realized capital gains (losses), excluding impairment losses on available-for-sale securities 50.6 (20.9) 62.5 (145.0)
Total other-than-temporary impairment losses on available-for-sale securities (162.5) (209.7) (510.0) (323.1)
Portion of impairment losses on fixed maturities, available-for-sale recognized in other comprehensive income 45.3 - 162.4 -
Net impairment losses on available-for-sale securities (117.2) (209.7) (347.6) (323.1)
Net realized capital losses (66.6) (230.6) (285.1) (468.1)
Total revenues 2,270.3 2,497.8 6,616.7 7,656.6

Benefits, claims and settlement expenses 1,317.1 1,597.2 3,958.0 4,703.2
Dividends to policyholders 61.9 70.4 188.3 210.2
Operating expenses 643.0 723.7 1,894.1 2,217.0
Total expenses 2,022.0 2,391.3 6,040.4 7,130.4

Income before income taxes 248.3 106.5 576.3 526.2
Income taxes (benefits) 44.1 (2.2) 85.5 56.8
Net income 204.2 108.7 490.8 469.4
Net income attributable to noncontrolling interest 11.3 10.4 18.3 12.1
Net income attributable to PFG 192.9 98.3 472.5 457.3
Preferred stock dividends 8.2 8.2 24.7 24.7
Net income available to common stockholders $ 184.7 $ 90.1 $ 447.8 $ 432.6

Less:
Net realized capital losses, as adjusted (53.5) (156.3) (154.6) (316.4)
Other after-tax adjustments (0.5) (4.8) (0.8) (14.7)
Operating earnings $ 238.7 $ 251.2 $ 603.2 $ 763.7

Selected Balance Sheet Statistics

Period Ended,
9/30/09 12/31/08 9/30/08
Total assets (in billions) $ 137.4 $ 128.2 $ 143.4
Total common equity (in millions) $ 6,966.7 $ 1,930.8 $ 5,070.6
Total common equity excluding accumulated other comprehensive income (in millions) $ 8,400.8 $ 6,842.4 $ 6,957.9
End of period common shares outstanding (in millions) 318.9 259.3 259.2
Book value per common share $ 21.85 $ 7.45 $ 19.56
Book value per common share excluding accumulated other comprehensive income $ 26.34 $ 26.39 $ 26.84

Principal Financial Group, Inc.
Reconciliation of Non-GAAP Financial Measures to U.S. GAAP
(in millions, except as indicated)

Three Months Ended, Nine Months Ended,
09/30/09 09/30/08 09/30/09 09/30/08
Diluted Earnings Per Common Share:
Operating Earnings 0.74 0.96 2.07 2.92
Net realized capital losses (0.17) (0.60) (0.53) (1.21)
Other after-tax adjustments - (0.01) - (0.05)
Net income available to common stockholders 0.57 0.35 1.54 1.66

Book Value Per Common Share Excluding Accumulated Other Comprehensive Income:
Book value per common share excluding accumulatedother comprehensive income 26.34 26.84 26.34 26.84
Net unrealized capital losses (2.67) (7.58) (2.67) (7.58)
Foreign currency translation (0.18) 0.07 (0.18) 0.07
Net unrecognized post-retirement benefit obligations (1.64) 0.23 (1.64) 0.23
Book value per common share including accumulatedother comprehensive income 21.85 19.56 21.85 19.56

Operating Revenues:
USAA 1,025.6 1,237.5 3,024.4 3,697.9
GAM 111.3 141.7 319.0 425.0
IAMA 156.1 265.5 381.8 700.4
Life and Health 1,104.2 1,158.9 3,352.1 3,527.1
Corporate and Other (40.1) (52.4) (123.2) (152.3)
Total operating revenues 2,357.1 2,751.2 6,954.1 8,198.1
Net realized capital losses and related adjustments (86.2) (248.3) (336.7) (517.5)
Terminated commercial mortgage securities issuance operation (0.6) (5.1) (0.7) (24.0)
Total GAAP revenues 2,270.3 2,497.8 6,616.7 7,656.6

Operating Earnings:
USAA 154.6 136.5 385.1 428.5
GAM 10.5 23.5 25.5 67.4
IAMA 33.1 44.4 79.4 107.9
Life and Health 68.2 73.9 197.7 219.8
Corporate and Other (27.7) (27.1) (84.5) (59.9)
Total operating earnings 238.7 251.2 603.2 763.7
Net realized capital losses (53.5) (156.3) (154.6) (316.4)
Other after-tax adjustments (0.5) (4.8) (0.8) (14.7)
Net income available to common stockholders 184.7 90.1 447.8 432.6

Net Realized Capital Gains (losses):
Net realized capital gains losses, as adjusted (53.5) (156.3) (154.6) (316.4)
Periodic settlements and accruals on non-hedge derivatives 20.3 17.6 48.0 45.8
Amortization of DPAC and sale inducement costs (16.7) (16.2) (106.3) (46.1)
Certain market value adjustments of embedded derivatives (2.3) 3.3 (8.8) 6.5
Capital gains (losses) distributed 7.5 (11.8) 14.4 (14.2)
Tax impacts (31.1) (75.4) (96.9) (151.7)
Noncontrolling interest capital gains 9.9 8.1 15.5 4.4
Recognition of front-end fee revenues (0.7) - 2.1 -
Certain market value adjustments to fee revenues - 0.1 1.5 3.6
GAAP net realized capital losses (66.6) (230.6) (285.1) (468.1)

Other After Tax Adjustments:
Change in estimated loss related to a prior year legal contingency - - - 7.6
Terminated commercial mortgage securities issuance operation (0.5) (4.8) (0.8) (22.3)
Total other after-tax adjustments (0.5) (4.8) (0.8) (14.7)

Principal Financial Group, Inc.
Media Contact:
Susan Houser, 515-248-2268
Houser.Susan@principal.com
or
Investor Relations Contact:
Tom Graf, 515-235-9500
investor-relations@principal.com

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