The following analysis discusses our financial condition as of September 30, 2009, compared with December 31, 2008, and our consolidated results of operations for the three and nine months ended September 30, 2009 and 2008, prepared in conformity with U.S. GAAP. The discussion and analysis includes, where appropriate, factors that may affect our future financial performance. The discussion should be read in conjunction with our Form 10-K, for the year ended December 31, 2008, filed with the SEC and the unaudited consolidated financial statements and the related notes to the financial statements and the other financial information included elsewhere in this Form 10-Q.

Forward-Looking Information

Our narrative analysis below contains forward-looking statements intended to enhance the reader's ability to assess our future financial performance. Forward-looking statements include, but are not limited to, statements that represent our beliefs concerning future operations, strategies, financial results or other developments, and contain words and phrases such as "anticipate," "believe," "plan," "estimate," "expect," "intend" and similar expressions. Forward-looking statements are made based upon management's current expectations and beliefs concerning future developments and their potential effects on us. Such forward-looking statements are not guarantees of future performance.

Actual results may differ materially from those included in the forward-looking statements as a result of risks and uncertainties including, but not limited to, the following: (1) adverse capital and credit market conditions may significantly affect our ability to meet liquidity needs, as well as our access to capital and cost of capital; (2) a continuation of difficult conditions in the global capital markets and the economy generally may materially adversely affect our business and results of operations; (3) continued declines and volatility in the equity markets could reduce our assets under management ("AUM") and may result in investors withdrawing from the markets or decreasing their rates of investment, all of which could reduce our revenues and net income; (4) there can be no assurance that actions of the U.S. government, Federal Reserve and other governmental and regulatory bodies for the purpose of stabilizing the financial markets will achieve the intended effect; (5) changes in interest rates or credit spreads may adversely affect our results of operations, financial condition and liquidity, and our net income can vary from period-to-period; (6) our investment portfolio is subject to several risks that may diminish the value of our invested assets and the investment returns credited to customers, which could reduce our sales, revenues, AUM and net income; (7) our valuation of fixed maturity and equity securities may include methodologies, estimations and assumptions which are subject to differing interpretations and could result in changes to investment valuations that may materially adversely affect our results of operations or financial condition;
(8) the determination of the amount of allowances and impairments taken on our investments is highly subjective and could materially impact our results of operations or financial position; (9) gross unrealized losses may be realized or result in future impairments, resulting in a reduction in our net income;
(10) competition from companies that may have greater financial resources, broader arrays of products, higher ratings and stronger financial performance may impair our ability to retain existing customers, attract new customers and maintain our profitability; (11) a downgrade in our financial strength or credit ratings may increase policy surrenders and withdrawals, reduce new sales and terminate relationships with distributors, impact existing liabilities and increase our cost of capital, any of which could adversely affect our profitability and financial condition; (12) if we are unable to attract and retain sales representatives and develop new distribution sources, sales of our products and services may be reduced; (13) our international businesses face political, legal, operational and other risks that could reduce our profitability in those businesses; (14) we may face losses if our actual experience differs significantly from our pricing and reserving assumptions;
(15) our ability to pay stockholder dividends and meet our obligations may be constrained by the limitations on dividends Iowa insurance laws impose on Principal Life; (16) the pattern of amortizing our DPAC and other actuarial balances on our investment contract, participating life insurance and universal life-type products may change, impacting both the level of the asset and the timing of our net income; (17) we may need to fund deficiencies in our Closed Block assets; (18) we face risks arising from acquisitions of businesses; (19) changes in laws, regulations or accounting standards may reduce our profitability; (20) results of litigation and regulatory investigations may affect our financial strength or reduce our profitability; (21) from time to time we may become subject to tax audits, tax litigation or similar proceedings, and as a result we may owe additional taxes, interest and penalties in amounts that may be material; (22) fluctuations in foreign currency exchange rates could reduce our profitability and (23) applicable laws and our stockholder rights plan, certificate of incorporation and by-laws may discourage takeovers and business combinations that our stockholders might consider in their best interests.

Overview

We provide financial products and services through the following reportable segments:

† U.S. Asset Accumulation, which consists of our asset accumulation operations that provide retirement and related financial products and services. We provide a comprehensive portfolio of asset accumulation products and services to businesses and individuals in the U.S., with a concentration on small and medium-sized businesses. We offer to businesses products and services for defined contribution pension plans, including 401(k) and 403(b) plans, defined benefit pension plans, non-qualified executive benefit plans and employee stock ownership plan consulting services. We also offer annuities, mutual funds and bank products and services to the employees of our business customers and other individuals.

† Global Asset Management, which consists of our asset management operations conducted through Principal Global Investors and its affiliates. Global Asset Management offers an extensive range of equity, fixed income and real estate investments as well as specialized overlay and advisory services to institutional investors.

† International Asset Management and Accumulation, which consists of Principal International, offers retirement products and services, annuities, mutual funds, institutional asset management and life insurance accumulation products through operations in Brazil, Chile, China, Hong Kong Special Administrative Region, India, Indonesia, Malaysia, Mexico and Singapore.

† Life and Health Insurance, which provides individual life insurance, group health insurance as well as specialty benefits in the U.S. Our individual life insurance products include universal and variable universal life insurance and traditional life insurance. Our health insurance products include group medical insurance and fee-for-service claims administration and wellness services. Our specialty benefits products include group dental and vision insurance, individual and group disability insurance and group life insurance.

† Corporate, which manages the assets representing capital that has not been allocated to any other segment. Financial results of the Corporate segment primarily reflect our financing activities (including interest expense), income on capital not allocated to other segments, inter-segment eliminations, income tax risks and certain income, expenses and other after-tax adjustments not allocated to the segments based on the nature of such items.

Recent Event

Common Stockholder Dividend

On October 26, 2009, our Board of Directors declared an annual common stock dividend of approximately $159.5 million, equal to $0.50 per share, payable on December 4, 2009, to common stockholders of record as of November 13, 2009.

Transactions Affecting Comparability of Results of Operations

Dispositions

We entered into disposition agreements or disposed of the following business during 2009 and 2008:

Post Advisory Group, LLC. Effective January 1, 2009, we sold certain fixed income asset management contracts within our Post Advisory Group, LLC subsidiary, at which time we realized benefits from the cancellation of deferred compensation agreements. The assets under management associated with this sale totaled $3.8 billion. The total cash proceeds of $50.0 million are expected to be received over a four year time period. The initial $2.2 million cash down payment was received in the second quarter of 2009.

The transaction does not qualify for discontinued operations treatment under U.S. GAAP. The realized capital gain from the sale, which is reflected in our Global Asset Management segment, is not material.

Other

Commercial Mortgage Securities Issuance Operation. During the third quarter of 2008, we made a decision to terminate our commercial mortgage securities issuance operation. This termination does not qualify for discontinued operations treatment under U.S. GAAP. Therefore, the results of the terminated commercial mortgage securities issuance operation are still included in our consolidated income from continuing operations.

As a result of our decision to terminate our commercial mortgage securities issuance operation, amounts previously included in our Global Asset Management segment operating earnings related to our commercial mortgage securities issuance operation have been removed from operating earnings for all periods presented and are reported as other after-tax adjustments. Our commercial mortgage securities issuance operation had operating revenues of $(0.6) and $(5.1) million for the three months ended September 30, 2009 and 2008, respectively, and $(0.7) million and $(24.0) million for the nine months ended September 30, 2009 and 2008, respectively. Our commercial mortgage securities issuance operation had after-tax operating losses of $0.5 and $4.8 million for the three months ended September 30, 2009 and 2008, respectively, and $0.8 million and $22.3 million for the nine months ended September 30, 2009 and 2008, respectively.

Fluctuations in Foreign Currency to U.S. Dollar Exchange Rates

Fluctuations in foreign currency to U.S. dollar exchange rates for countries in which we have operations can affect reported financial results. In years when foreign currencies weaken against the U.S. dollar, translating foreign currencies into U.S. dollars results in fewer U.S. dollars to be reported. When foreign currencies strengthen, translating foreign currencies into U.S. dollars results in more U.S. dollars to be reported.

Foreign currency exchange rate fluctuations create variances in our financial statement line items. Our consolidated net income was negatively impacted by $4.9 million and positively impacted by $5.2 million for the three months ended September 30, 2009 and 2008, respectively, and negatively impacted by $27.0 million and positively impacted by $11.4 million for the nine months ended September 30, 2009 and 2008, respectively, as a result of fluctuations in foreign currency to U.S. dollar exchange rates. For a discussion of our approaches to managing foreign currency exchange rate risk, see Item 3. "Quantitative and Qualitative Disclosures About Market Risk - Foreign Currency Risk."

Stock-Based Compensation Plans

For information related to our Stock-Based Compensation Plans, see Item 1. "Financial Statements, Notes to Unaudited Consolidated Financial Statements, Note 11, Stock-Based Compensation Plans."

Defined Benefit Pension Expense

The 2009 annual pension benefit expense for substantially all of our employees and certain agents is expected to be $157.6 million pre-tax, which is a $145.3 million increase from the 2008 pre-tax pension expense of $12.3 million. This increase is primarily due to lower than estimated returns on plan assets and a decrease in discount rate. Approximately $39.4 million and $118.2 million of pre-tax pension expense were reflected in the determination of net income for the three and nine months ended September 30, 2009, respectively. In addition, approximately $39.4 million of pre-tax pension expense will be reflected in the fourth quarter of 2009. The discount rate used to develop the 2009 expense was 6.0%, down from the 6.3% discount rate used to develop the 2008 expense. The expected long-term return on plan assets assumption was 8.0%, down from the 8.25% used to develop the 2008 expense.

Recent Accounting Pronouncements

For recent accounting changes, see Item 1. "Financial Statements, Notes to Unaudited Consolidated Financial Statements, Note 1, Nature of Operations and Significant Accounting Policies."

Results of Operations



The following table presents summary consolidated financial information for the
periods indicated:



                          For the three months ended September 30,          For the nine months ended September 30,
                                                         Increase                                            Increase
                            2009           2008         (decrease)          2009              2008          (decrease)
                                                                 (in millions)
Revenues:
Premiums and other
considerations          $      932.9    $  1,049.7    $       (116.8 ) $      2,820.5    $      3,258.9    $      (438.4 )
Fees and other
revenues                       550.7         599.0             (48.3 )        1,539.4           1,834.9           (295.5 )
Net investment income          853.3       1,079.7            (226.4 )        2,541.9           3,030.9           (489.0 )
Net realized capital
gains (losses),
excluding impairment
losses on
available-for-sale
securities                      50.6         (20.9 )            71.5             62.5            (145.0 )          207.5
Total
other-than-temporary
impairment losses on
available-for-sale
securities                    (162.5 )      (209.7 )            47.2           (510.0 )          (323.1 )         (186.9 )
Portion of impairment
losses on fixed
maturities,
available-for-sale
recognized in other
comprehensive income            45.3             -              45.3            162.4                 -            162.4
Net impairment losses
on available-for-sale
securities                    (117.2 )      (209.7 )            92.5           (347.6 )          (323.1 )          (24.5 )
Net realized capital
losses                         (66.6 )      (230.6 )           164.0           (285.1 )          (468.1 )          183.0
Total revenues               2,270.3       2,497.8            (227.5 )        6,616.7           7,656.6         (1,039.9 )
Expenses:
Benefits, claims and
settlement expenses          1,317.1       1,597.2            (280.1 )        3,958.0           4,703.2           (745.2 )
Dividends to
policyholders                   61.9          70.4              (8.5 )          188.3             210.2            (21.9 )
Operating expenses             643.0         723.7             (80.7 )        1,894.1           2,217.0           (322.9 )
Total expenses               2,022.0       2,391.3            (369.3 )        6,040.4           7,130.4         (1,090.0 )
Income before income
taxes                          248.3         106.5             141.8            576.3             526.2             50.1
Income taxes
(benefits)                      44.1          (2.2 )            46.3             85.5              56.8             28.7
Net income                     204.2         108.7              95.5            490.8             469.4             21.4
Net income
attributable to
noncontrolling
interest                        11.3          10.4               0.9             18.3              12.1              6.2
Net income
attributable to
Principal Financial
Group, Inc.                    192.9          98.3              94.6            472.5             457.3             15.2
Preferred stock
dividends                        8.2           8.2                 -             24.7              24.7                -
Net income available
to common
stockholders            $      184.7    $     90.1    $         94.6   $        447.8    $        432.6    $        15.2

Three Months Ended September 30, 2009, Compared to Three Months Ended September 30, 2008

Net Income Available to Common Stockholders

Due to the challenging economic environment, our revenues have decreased while our employee pension and other post-retirement benefit costs have increased relative to 2008. In order to minimize the impact to net income available to common stockholders, we have undertaken extensive company-wide expense savings initiatives to better align our expenses with the declining revenue base.

Net income available to common stockholders increased primarily due to a $113.8 million after-tax decrease in net realized capital losses. The change in net realized capital losses was primarily driven by lower impairments, net of noncredit losses recognized in other comprehensive income and recoveries from sales, on fixed maturity securities and mark-to-market gains versus losses on certain financial instruments and fixed maturity securities classified as trading.

Total Revenues

Premiums decreased $86.8 million for the U.S. Asset Accumulation segment, primarily due to a decrease in sales of annuities with life contingencies in our individual annuities and full service payout businesses. In addition, premiums and other considerations decreased $51.1 million for the Life and Health Insurance segment primarily due to a reduction in average covered medical members in our health insurance business and due to the expected continued decline from our decreasing block of individual traditional life insurance business. Partially offsetting these decreases was a $20.8 million increase for the International Asset Management and Accumulation segment primarily due to higher sales of single premium annuities with life contingencies in Chile.

Fees for the U.S. Asset Accumulation segment decreased $35.6 million, primarily due to lower fee income stemming from a decrease in account values as a result of the declining equity markets from 2008 to 2009. In addition, fees for the Global Asset Management segment decreased $28.4 million due to a decrease in AUM as a result of declining market conditions and the sale of certain asset management contracts within Post Advisory Group, LLC. Partially offsetting these decreases was an $11.6 million increase for the Corporate segment primarily due to a decrease in inter-segment eliminations included in this segment, which was offset by a corresponding change in total expenses.

Net investment income decreased primarily due to lower investment returns on invested assets and cash related to deflation in Chile during 2009 and our more liquid investment strategy.

Net realized capital gains (losses) can be volatile due to other-than-temporary impairments of invested assets, mark-to-market adjustments of certain financial instruments and our decision to sell invested assets. Net realized capital losses decreased primarily due to lower impairments, net of noncredit losses recognized in other comprehensive income and recoveries from sales, on fixed maturity securities and mark-to-market gains versus losses on certain financial instruments and fixed maturity securities classified as trading. For additional information, see "Investments - Investment Results."

Total Expenses

Benefits, claims and settlement expenses decreased $169.5 million for the U.S. Asset Accumulation segment primarily due to a decrease in our investment only business resulting from our decision to scale back this business and lower variable crediting rates. Furthermore, a decrease in reserves related to lower sales of annuities with life contingencies in our full service payout and individual annuities businesses also contributed to the decrease. Benefits, claims and settlement expenses decreased $92.1 million for the International Asset Management and Accumulation segment, primarily due to lower interest crediting rates to customers in Chile, which are impacted by deflation and the weakening of the Chilean peso against the U.S. dollar.

Operating expenses decreased $91.7 million for the U.S. Asset Accumulation segment primarily due to a decline in DPAC amortization in our full service accumulation and individual annuities businesses, lower commission expense and fees paid to advisors due to a decline in average account values in our Principal Funds business and expense savings initiatives throughout the segment. Despite a $43.9 million increase in employee pension and other post-retirement benefit costs, operating expenses (excluding the impacts of DPAC and commissions) for our organization have decreased as a result of company-wide expense savings initiatives.

During the third quarter of 2009, we discovered a prior period error related to DPAC amortization of certain contracts in our full service accumulation business. We evaluated the materiality of the error from qualitative and quantitative perspectives and concluded it was not material to any prior periods. The correction of the error in the current period could be considered material to the results of operations for the three months ended September 30, 2009, but is not material to the results of operations for the nine months ended September 30, 2009. Accordingly, we made an adjustment in the current period which resulted in a decrease in DPAC amortization expense. On an after-tax basis, the adjustment for prior periods resulted in an $18.9 million increase in net income for the three months ended September 30, 2009.

Income Taxes

The effective income tax rates were 18% and (2)% for the three months ended September 30, 2009 and 2008, respectively. The effective income tax rate for the three months ended September 30, 2009, was lower than the U.S. statutory rate primarily due to income tax deductions allowed for corporate dividends received, taxes on our share of earnings generated from equity method investments reflected in net investment income and the interest exclusion from taxable income. The

effective income tax rate for the three months ended September 30, 2008, was lower than the U.S. statutory rate primarily due to a third quarter 2008 adjustment to reflect a decrease in the annual estimated effective income tax rate resulting from an increase in our annual estimate of net realized capital losses from the second quarter 2008 estimate. Income tax deductions allowed for corporate dividends received and taxes on our share of earnings generated from equity method investments being reflected in net investment income also contributed to a lower than U.S statutory rate. The effective income tax rate increased to 18% from (2)% for the three months ended September 30, 2009 and 2008, respectively, primarily due to a third quarter 2008 adjustment to reflect a decrease in our estimated 2008 annual effective income tax rate.

Nine Months Ended September 30, 2009, Compared to Nine Months Ended September 30, 2008

Net Income Available to Common Stockholders

Due to the challenging economic environment, our revenues have decreased while our employee pension and other post-retirement benefit costs have increased relative to 2008. In order to minimize the impact to net income available to common stockholders, we have undertaken extensive company-wide expense savings initiatives to better align our expenses with the declining revenue base.

Net income available to common stockholders increased primarily due to a $140.0 million after-tax decrease in net realized capital losses related to mark-to-market gains versus losses on fixed maturity securities classified as trading and higher gains on sales of fixed maturity securities. Partially offsetting this increase were lower earnings in our U.S. Asset Accumulation segment primarily due to lower fee income resulting from a decrease in average account values stemming from declining equity markets from 2008 to 2009. Net income available to common stockholders also decreased for our Global Asset Management segment primarily due to the severe downturn in the global financial markets in 2008, which has led to a significant reduction in AUM and revenues. The decline in our Global Asset Management segment was offset in part by a series of expense savings initiatives, which have been undertaken in response to the market downturn.

Total Revenues

Premiums decreased $278.6 million for the U.S. Asset Accumulation segment, primarily due to a decrease in sales of annuities with life contingencies in our full service payout and individual annuities businesses. In addition, premiums and other considerations decreased $158.0 million for the Life and Health Insurance segment primarily due to a reduction in average covered medical members in our health insurance business and due to the expected continued decline from the decreasing block of individual traditional life insurance business.

Fees for the U.S. Asset Accumulation segment decreased $217.6 million, primarily due to lower fee income stemming from a decrease in account values as a result of the declining equity markets from 2008 to 2009. In addition, fees for the Global Asset Management segment decreased $100.2 million due to a decrease in AUM as a result of declining market conditions and the sale of certain asset management contracts within Post Advisory Group, LLC.

Net investment income decreased primarily due to lower investment returns on invested assets and cash related to deflation in Chile during 2009 and our more liquid investment strategy.

Net realized capital gains (losses) can be volatile due to other-than-temporary impairments of invested assets, mark-to-market adjustments of certain financial instruments and our decision to sell invested assets. Net realized capital losses decreased primarily due to mark-to-market gains versus losses on fixed maturity securities classified as trading and higher gains on sales of fixed maturity securities. For additional information, see "Investments - Investment Results."

Total Expenses

Benefits, claims and settlement expenses decreased $420.0 million for the U.S. Asset Accumulation segment primarily due to a decrease in our investment only business resulting from our decision to scale back this business and lower variable crediting rates. Furthermore, a decrease in reserves related to lower sales of annuities with life contingencies in our full service payout and individual annuities businesses also contributed to the decrease. Benefits, claims and settlement expenses decreased $269.2 million for the International Asset Management and Accumulation segment, primarily due to lower interest crediting rates to customers in Chile, which were impacted by deflation and the weakening of the Chilean peso against the U.S. dollar.

. . .