INN Blog

More Posts
 

PRINCIPAL FINANCIAL GROUP INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

Edgar Online, Inc.

The following analysis discusses our financial condition as of December 31, 2012, compared with December 31, 2011, and our consolidated results of operations for the years ended December 31, 2012, 2011 and 2010, and, where appropriate, factors that may affect our future financial performance. The discussion should be read in conjunction with our audited consolidated financial statements and the related notes to the financial statements and the other financial information included elsewhere in this Form 10-K.

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

                                       35

--------------------------------------------------------------------------------

Table of Contents

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. Those risks
and uncertainties include, but are not limited to the risk factors listed in
Item 1A. "Risk Factors."

Overview

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

º •

º Retirement and Investor Services is organized into the Accumulation

          business, which includes full service accumulation, Principal Funds
          (our mutual fund business), individual annuities and bank and trust
          services; and the Guaranteed business, which includes investment only
          and full service payout. We offer a comprehensive portfolio of asset
          accumulation products and services for retirement savings and
          investment:

             º •
             º To businesses of all sizes with a concentration on small and
               medium-sized businesses, we offer products and services for
               defined contribution pension plans, including 401(k) and 403(b)
               plans, defined benefit pension plans, nonqualified executive
               benefit plans and ESOP consulting services. For more basic
               investment needs, we offer SIMPLE IRA and payroll deduction
               plans;

             º •
             º To large institutional clients, we also offer

investment-only

               products, including GICs and funding agreements and

             º •
             º To employees of businesses and other individuals, we offer the
               ability to accumulate savings for retirement and other purposes
               through mutual funds, individual annuities and bank products.

º •

International Travel Means Big Opportunities for Producers this Summer.

º Principal Global Investors, which consists of our asset management

operations, manages assets for sophisticated investors around the

world, using a multi-boutique strategy that enables the segment to

provide an expanded range of diverse investment capabilities including

equity, fixed income and real estate investments. Principal Global

Investors also has experience in currency management, asset

allocation, stable value management and other structured investment

          strategies.

        º •
        º Principal International, which offers retirement products and
          services, annuities, mutual funds, institutional asset management and
          life insurance accumulation products through operations in Brazil,
          Chile, China, Hong Kong SAR, India, Mexico and Southeast Asia.

º •

º U.S. Insurance Solutions, which provides individual life 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 specialty benefit products include

group dental and vision insurance, individual and group disability

insurance and group life insurance. Effective January 1, 2011,

wellness services and fee-for-service claims administration

transitioned to the Specialty Benefits division from the Corporate

segment.

º •

º 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 and preferred stock dividends), income on

International Travel Means Big Opportunities for Producers this Summer.

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.

Economic Factors and Trends

    In 2012, positive net customer cash flows and market performance led to
increases in our Retirement and Investor Services segment's account values and
our Principal Global Investors segment's AUM. Since account values and AUM are
the base by which these businesses generate revenues, the increase in account
values and AUM has contributed to the overall improvement of our profits.

    In our Principal International segment, we continued to grow our business
organically through our existing subsidiaries and joint ventures and through
strategic acquisitions. Local currency AUM, a key indicator of earnings growth
for the segment, increased significantly as a result of positive net customer
cash flows and market performance. The financial results for the Principal
International segment are also impacted by fluctuations of the foreign currency
to U.S. dollar exchange rates for the countries in which we have business.

    The U.S. Insurance Solutions segment has been impacted by lower interest
rates for the past few years as well as decreases in our long term interest rate
assumptions. The current low interest rate environment has caused spread
compression, whereas the decrease in long term interest rate assumptions has led
to higher reserves and lower profit margins in both divisions. In addition, we
experienced a slowdown in the growth of group products between 2009 and 2010
relative to prior years due to a combination of lower sales, higher lapses,
reduced growth in salaries and reductions in covered lives of our existing group
customers as a result of economic pressure. Since 2011, we have seen signs of
recovery through higher sales, slight inforce membership growth and improved
retention.

                                       36

--------------------------------------------------------------------------------

Table of Contents

Profitability


    Our profitability depends in large part upon our:

        º •
        º amount of AUM;

        º •
        º spreads we earn that result from the difference between what we earn
          and what we credit to policyholders;

        º •
        º ability to generate fee revenues by providing administrative and
          investment management services;

        º •
        º ability to price our insurance products at a level that enables us to
          earn a margin over the cost of providing benefits and the related
          expenses;

        º •

º ability to manage our investment portfolio to maximize investment

returns and minimize risks such as interest rate changes or defaults

          or impairments of invested assets;

        º •
        º ability to effectively hedge fluctuations in foreign currency to U.S.
          dollar exchange rates on certain transactions and

        º •
        º ability to manage our operating expenses.

Critical Accounting Policies and Estimates


    The increasing complexity of the business environment and applicable
authoritative accounting guidance requires us to closely monitor our accounting
policies. Our significant accounting policies are described in Item 8.
"Financial Statements and Supplementary Data, Notes to Consolidated Financial
Statements, Note 1, Nature of Operations and Significant Accounting Policies."
We have identified critical accounting policies that are complex and require
significant judgment and estimates about matters that are inherently uncertain.
A summary of our critical accounting policies is intended to enhance the
reader's ability to assess our financial condition and results of operations and
the potential volatility due to changes in estimates and changes in guidance.
The identification, selection and disclosure of critical accounting estimates
and policies have been discussed with the Audit Committee of the Board of
Directors.

Valuation and Impairment of Fixed Income Investments

International Travel Means Big Opportunities for Producers this Summer.

    Fixed Maturities.  Fixed maturities include bonds, redeemable preferred
stock and certain non-redeemable preferred stock. We classify our fixed
maturities as either available-for-sale or trading and, accordingly, carry them
at fair value in the consolidated statements of financial position. The fair
values of our public fixed maturities are primarily based on market prices from
independent pricing services. We have regular interactions with these vendors to
ensure we understand their pricing methodologies and to confirm they are
utilizing observable market information. In addition, 22% of our invested asset
portfolio is invested in fixed maturities that are private placement assets,
where there are no readily available market quotes to determine the fair market
value. The majority of these assets are valued using a spread pricing matrix
that utilizes observable market inputs. Securities are grouped into pricing
categories that vary by asset class, sector, rating and average life. Each
pricing category is assigned a risk spread based on studies of observable public
market data or market clearing data from the investment professionals assigned
to specific security classes. The expected cash flows of the security are then
discounted back at the current Treasury curve plus the appropriate risk spread.
Certain market events that could impact the valuation of securities include
issuer credit ratings, business climate, management changes, litigation and
government actions among others. See item 8. "Financial Statements and
Supplementary Data, Notes to Consolidated Financial Statements, Note 14, Fair
Value Measurements" for further discussion.

If we are unable to price a fixed maturity security from third party pricing vendors we may obtain a broker quote or utilize an internal pricing model specific to the asset utilizing relevant market information to the extent available. Less than 1% of our fixed maturities were valued using internal models.


    A rate increase based on the combined movement of interest rates and credit
spreads of 100 basis points would produce a total value of approximately
$41.8 billion, as compared to the recorded amount of $43.9 billion related to
our fixed maturity, available-for-sale assets held by the Principal Life general
account as of December 31, 2012.

    We had a $1,529.6 million increase in net unrealized gains within the U.S.
fixed maturities, available-for-sale portfolio for the year ended December 31,
2012, of which an approximate $0.2 billion net unrealized gain can be attributed
to an approximate 7 basis points decrease in interest rates in addition to other
market factors that increased unrealized gains. We had a $741.5 million increase
in net unrealized gains for the year ended December 31, 2011, of which an
approximate $2.2 billion net unrealized gain can be attributed to an approximate
98 basis points decrease in interest rates offset in part by net unrealized
losses related to other market factors, primarily from widening of credit
spreads.

    Fixed maturities classified as available-for-sale are subject to impairment
reviews. When evaluating fixed maturities for impairment, we consider relevant
facts and circumstances in evaluating whether a credit or interest-related
impairment is other than temporary. Relevant facts and circumstances considered
include: (1) the extent and length of time the fair value has been below cost;
(2) the reasons for the decline in value; (3) the financial position and access
to capital of the issuer, including the current and future impact of any
specific events; (4) for structured securities, the adequacy of the expected
cash flows and (5) our intent to sell a security or whether it is more likely
than not we will be

                                       37

--------------------------------------------------------------------------------

Table of Contents


required to sell the security before recovery of its amortized cost which, in
some cases, may extend to maturity. When it is determined that the decline in
value is other than temporary the carrying value of the security is reduced to
its fair value, and a corresponding impairment loss is reported primarily in net
income, with noncredit impairment losses for certain fixed maturities we do not
intend to sell reported in other comprehensive income.

    There are a number of significant risks and uncertainties inherent in the
process of monitoring impairments and determining if an impairment is other than
temporary. These risks and uncertainties include: (1) the risk that our
assessment of an issuer's ability to meet all of its contractual obligations
will change based on changes in the credit characteristics of that issuer;
(2) the risk that the economic outlook will be worse than expected or have more
of an impact on the issuer than anticipated; (3) the risk that our investment
professionals are making decisions based on fraudulent or misstated information
in the financial statements provided by issuers and (4) the risk that new
information obtained by us or changes in other facts and circumstances lead us
to change our intent to hold the security until it recovers in value. Any of
these situations could result in a charge to net income in a future period. At
December 31, 2012, we had $4,996.9 million in available-for-sale fixed
maturities with gross unrealized losses totaling $871.1 million. Included in the
gross unrealized losses are losses attributable to both movements in market
interest rates as well as movement in credit spreads. Net income would be
reduced by approximately $871.1 million, on a pre-tax basis, if all the
securities in an unrealized loss position were deemed to be other than
temporarily impaired and our intent was to sell all such securities.

    Mortgage Loans.  Mortgage loans consist primarily of commercial mortgage
loans. At December 31, 2012, the carrying value of our commercial mortgage loans
was $10,183.3 million. Commercial mortgage loans are generally reported at cost
adjusted for amortization of premiums and accrual of discounts, computed using
the interest method and net of valuation allowances.

    Commercial mortgage loans are considered impaired when, based on current
information and events, it is probable that we will be unable to collect all
amounts due according to contractual terms of the loan agreement. When we
determine that a loan is impaired, a valuation allowance is created for the
difference between the carrying amount of the mortgage loan and the estimated
value less cost to sell. Estimated value is based on either the present value of
the expected future cash flows discounted at the loan's effective interest rate,
the loan's observable market price or the fair value of the collateral.

    The determination of the calculation and the adequacy of the mortgage loan
valuation allowance and mortgage impairments are subjective. Our periodic
evaluation and assessment of the adequacy of the mortgage loan valuation
allowance and the need for mortgage impairments is based on known and inherent
risks in the portfolio, adverse situations that may affect the borrower's
ability to repay, the estimated value of the underlying collateral, composition
of the loan portfolio, current economic conditions, loss experience and other
relevant factors. The calculation for determining mortgage impairment amounts
requires estimating the amounts and timing of future cash flows expected to be
received on specific loans, estimating the value of the collateral and gauging
changes in the economic environment in general. The total valuation allowance
can be expected to increase when economic conditions worsen and decrease when
economic conditions improve. For more detailed information concerning mortgage
loan valuation allowances and impairments, see "Investments - U.S. Investment
Operations - Mortgage Loans," and Item 8. "Financial Statements and
Supplementary Data, Notes to Consolidated Financial Statements, Note 4,
Investments - Mortgage Loan Valuation Allowance."

    We have a large experienced commercial real estate staff centrally located
in Des Moines, which includes commercial mortgage underwriters, loan closers,
loan servicers, engineers, appraisers, credit analysts, research staff, legal
staff, information technology personnel and portfolio managers. Experienced
commercial real estate senior management adheres to a disciplined process in
reviewing all transactions for approval on a consistent basis. The typical
commercial mortgage loan for us averages in the mid 48% percent loan-to-value
range at origination with a net operating income coverage ratio of 3.2 times the
annual debt service and is internally rated A+ on a bond equivalent basis. Based
on the most recent analysis, our commercial mortgage loan portfolio, excluding
mortgage loans held in our Principal Global Investors segment, has an overall
loan-to-value ratio of 54% with a 2.2 times debt service coverage. The large
equity cushion and strong debt service coverage in our commercial mortgage
investments will help insulate us from stress during times of weak commercial
real estate fundamentals.

Derivatives

    We primarily use derivatives to hedge or reduce exposure to market risks.
The fair values of exchange-traded derivatives are determined through quoted
market prices. The fair values of over-the-counter derivative instruments are
determined using either pricing valuation models that utilize market observable
inputs or broker quotes. On an absolute fair value basis, 92% of our
over-the-counter derivative assets and liabilities are valued using pricing
valuation models, while the remaining 8% are valued using broker quotes. See
Item 8. "Financial Statements and Supplementary Data, Notes to Consolidated
Financial Statements, Note 14, Fair Value Measurements" for further discussion.
The fair values of our derivative instruments can be impacted by changes in
interest rates, foreign exchange rates, credit spreads, equity indices, and
volatility, as well as other contributing factors.

                                       38

--------------------------------------------------------------------------------

Table of Contents


    We also issue certain annuity contracts and other insurance contracts that
include embedded derivatives that have been bifurcated from the host contract.
They are valued using a combination of historical data and actuarial judgment.
See Item 8. "Financial Statements and Supplementary Data, Notes to Consolidated
Financial Statements, Note 14, Fair Value Measurements" for further discussion.
We include our assumption for own non-performance risk in the valuation of these
embedded derivatives. As our credit spreads widen or tighten, the fair value of
the embedded derivative liabilities decrease or increase, leading to an increase
or decrease in net income. If the current market credit spreads reflecting our
own creditworthiness move to zero (tighten), the reduction to net income would
be approximately $10.7 million, net of DPAC and income taxes, based on
December 31, 2012, reported amounts. The use of risk margins for the valuation
of embedded derivatives increases the fair value of the embedded derivative
liabilities.

    The accounting for derivatives is complex and interpretations of the
applicable accounting standards continue to evolve. Judgment is applied in
determining the availability and application of hedge accounting designations
and the appropriate accounting treatment. Judgment and estimates are used to
determine the fair value of some of our derivatives. Volatility in net income
can result from changes in fair value of derivatives that do not qualify or are
not designated for hedge accounting and changes in fair value of embedded
derivatives.

Deferred Policy Acquisition Costs and Other Actuarial Balances


    Incremental direct costs of contract acquisition as well as certain costs
directly related to acquisition activities (underwriting, policy issuance and
processing, medical and inspection and sales force contract selling) for the
successful acquisition of new and renewal insurance policies and investment
contract business are capitalized to the extent recoverable. Maintenance costs
and acquisition costs that are not deferrable are charged to net income as
incurred.

    Amortization Based on Estimated Gross Profits.  DPAC for universal life-type
insurance contracts, participating life insurance policies and certain
investment contracts are amortized over the expected lifetime of the policies in
relation to estimated gross profits ("EGPs"). In addition to DPAC, the following
actuarial balances are also amortized in relation to EGPs.

        º •
        º Sales inducement asset - Sales inducements are amounts that are
          credited to the contractholder's account balance as an inducement to

purchase the contract. Like DPAC, the cost of the sales inducement is

          capitalized and amortized over the expected life of the contract, in
          proportion to EGPs.

        º •
        º Unearned revenue liability - An unearned revenue liability is

established when we collect fees or other policyholder assessments

          that represent compensation for services to be provided in future
          periods. These revenues are deferred and then amortized over the
          expected life of the contract, in proportion to EGPs.

        º •

º Reinsurance asset or liability - For universal-life type products that

are reinsured, a reinsurance asset or liability is established to

spread the expected net reinsurance costs or profits in proportion to

          the EGPs on the underlying business.

        º •
        º Present value of future profits ("PVFP") - This is an intangible asset

that arises in connection with the acquisition of a life insurance

company or a block of insurance business. PVFP for universal life-type

          insurance contracts, participating life insurance policies and certain
          investment contracts is amortized over the expected life of the
          contracts acquired, in proportion to EGPs.

    We also have additional benefit reserves that are established for annuity or
universal life-type contracts that provide benefit guarantees, or for contracts
that are expected to produce profits followed by losses. The liabilities are
accrued in relation to estimated contract assessments.

    We define EGPs to include assumptions relating to mortality, morbidity,
lapses, investment yield and expenses as well as the change in our liability for
certain guarantees and the difference between actual and expected reinsurance
premiums and recoveries, depending on the nature of the contract. We develop an
estimate of EGPs at issue and each valuation date. As actual experience emerges,
the gross profits may vary from those expected either in magnitude or timing, in
which case a true-up to actual occurs as a charge or credit to current net
income. In addition, we are required to revise our assumptions regarding future
experience if actual experience or other evidence suggests that earlier
estimates should be revised; we refer to this as unlocking. Both actions,
reflecting actual experience and changing future estimates, can change both the
current amount and the future amortization pattern of the DPAC asset and related
actuarial balances.

    For individual variable life insurance, individual variable annuities and
group annuities that have separate account U.S. equity investment options, we
utilize a mean reversion methodology (reversion to the mean assumption), a
common industry practice, to determine the future domestic equity market growth
rate assumption used for the calculation of EGPs. If actual annualized U.S.
equity market performance varies from our 8% long-term assumption, we assume
different performance levels in the short-term such that the mean return is
equal to the long-term assumption over the mean reversion period. However, our
mean reversion process generally limits assumed returns to a range of 4 - 12%
during the mean reversion period. The 12% cap was reached during the third
quarter of 2008, and the mean reversion rate has remained at the 12% cap since
then. Therefore, until the mean reversion rate falls below the 12% cap, we will
not adjust the equity return assumption by the amount needed to result in a mean
return equal to the long-term assumption.

                                       39

--------------------------------------------------------------------------------

Table of Contents


    In limited circumstances, DPAC and certain of the actuarial balances noted
above are amortized in proportion to estimated gross revenues rather than EGPs.
Estimated gross revenues include similar assumptions as the revenue component of
EGPs and the changes of future estimates and reflection of actual experience is
done in the same manner as EGPs discussed above.

    Amortization Based on Premium-Paying Period.  DPAC of non-participating term
life insurance and individual disability policies are amortized over the
premium-paying period of the related policies using assumptions consistent with
those used in computing policyholder liabilities. Once these assumptions are
made for a given policy or group of policies, they will not be changed over the
life of the policy unless a loss recognition event occurs. As of December 31,
2012, these policies accounted for 15% of our total DPAC balance.

    Internal Replacements.  We review policies for modifications that result in
the exchange of an existing contract for a new contract. If the new contract is
determined to be an internal replacement that is substantially changed from the
replaced contract, any unamortized DPAC and related actuarial balances are
written off and acquisition costs related to the new contract are capitalized as
appropriate. If the new contract is substantially unchanged, we continue to
amortize the existing DPAC and related actuarial balances.

    Recoverability.  DPAC and sales inducement assets are subject to
recoverability testing at the time of policy issue and loss recognition testing
on an annual basis, or when an event occurs that may warrant loss recognition.
Likewise, PVFP is subject to impairment testing on an annual basis, or when an
event occurs that may warrant impairment. If loss recognition or impairment is
necessary, the asset balances are written off to the extent that it is
determined that future policy premiums and investment income or gross profits
are not adequate to cover related losses and expenses.

    Sensitivities.  As of December 31, 2012, the net balance of DPAC and related
actuarial balances, excluding balances affected by changes in other
comprehensive income, was a $2,354.9 million asset. We perform sensitivity
analyses to assess the impact that certain assumptions have on our DPAC and
related actuarial balances. The following table shows the estimated immediate
impact of various assumption changes on our DPAC and related actuarial balances.

                                                              Estimated impact to
                                                                net income (1)
                                                                 (in millions)
Reducing the future equity return assumption by 1%           $              

(8 ) Reducing the long-term general account net investment returns assumption by 0.5% (2)

                                                 (60 )
A one-time, 10% drop in equity market values                                

(14 )

--------------------------------------------------------------------------------

º (1)

º Reflects the net impact of changes to the DPAC asset, sales inducement

asset, unearned revenue liability, reinsurance asset or liability, PVFP and

additional benefit reserves. Includes the impact on net income of changes

in DPAC and related balances for our equity method subsidiaries. The DPAC

and related balances of the equity method subsidiaries are not included in

the total DPAC balance listed above as they are not fully consolidated.

º (2)

º Net investment return represents net investment income plus net realized

capital gains (losses).

Goodwill and Other Intangible Assets


    Goodwill and other intangible assets include the cost of acquired
subsidiaries in excess of the fair value of the net tangible assets recorded in
connection with acquisitions. Goodwill and intangible assets with indefinite
lives are not amortized; rather, we test the carrying value for impairment at
least annually at the reporting unit level, which is a business one level below
the operating segment. We formally conduct our annual goodwill and other
intangible asset impairment testing during the fourth quarter. Under certain
circumstances, interim impairment tests may be required if events occur or
circumstances change that would more likely than not reduce the fair value of a
reporting unit below its carrying value. See Item 8. "Financial Statements and
Supplementary Data, Notes to Consolidated Financial Statements, Note 1, Nature
of Operations and Significant Accounting Policies" for further discussion.

    We perform a two-step test in our evaluation of the carrying value of
goodwill. In Step 1 of the evaluation, the fair value of each reporting unit is
determined and compared to the carrying value of the reporting unit. If the fair
value is greater than the carrying value, then the carrying value of the
reporting unit is deemed to be recoverable, and Step 2 is not required. If the
fair value estimate is less than the carrying value, it is an indicator that
impairment may exist, and Step 2 is required. In Step 2, the reporting unit's
goodwill implied fair value is determined. The reporting unit's fair value as
determined in Step 1 is assigned to all of its net assets (recognized and
unrecognized) as if the reporting unit were acquired in a business combination
as of the date of the impairment test. If the implied fair value of the
reporting unit's goodwill is lower than its carrying amount, goodwill is
impaired and written down to its implied fair value.

    The determination of fair value for our reporting units is primarily based
on an income approach whereby we use discounted cash flows for each reporting
unit. When available, and as appropriate, we use market approaches or other
valuation techniques to corroborate discounted cash flow results. The discounted
cash flow model used for each reporting unit is based on either income or
distributable cash flow, depending on the reporting unit being valued.

    For the income model, we determine fair value based on the present value of
the most recent income projections for each reporting unit and calculate a
terminal value utilizing a terminal growth rate. The significant assumptions in
the

                                       40

--------------------------------------------------------------------------------

Table of Contents

operating income model include: income projections, including the underlying assumptions; discount rate and terminal growth rate.

    For the distributable cash flow model, we determine fair value based on the
present value of projected statutory net income and changes in required capital
to determine distributable income for the respective reporting unit. The
significant assumptions in the distributable cash flow model include: required
capital levels; income projections, including the underlying assumptions;
discount rate; new business projection period and new business production
growth.

    Intangible assets with useful lives are amortized as related benefits emerge
and are reviewed periodically for indicators of impairment in value. If facts
and circumstances suggest possible impairment, the sum of the estimated
undiscounted future cash flows expected to result from the use of the asset is
compared to the current carrying value of the asset. If the undiscounted future
cash flows are less than the carrying value, an impairment loss is recognized
for the excess of the carrying amount of assets over their fair value. For those
assets amortized as related benefits emerge, the most significant assumptions
involved in the estimation of future benefits include surrender/lapse rates,
interest margins and mortality.

    We did not recognize a material impairment in our 2012 consolidated
statement of operations. Investment management contracts acquired in our 2006
purchase of WM Advisors, Inc. are considered an indefinite lived intangible and
are the most material intangible asset included in our 2012 consolidated
statement of financial position with a carrying value of $608.0 million.
Positive net cash flows and expected future flows combined with significantly
lower than expected expenses more than offset lower than expected market returns
on the underlying assets acquired. As a result, the fair value of this
intangible asset as of December 31, 2012, was in excess of its carrying value.
We cannot predict certain future events that might adversely affect the reported
value of goodwill and other intangible assets that totaled $543.4 million and
$927.2 million, respectively, as of December 31, 2012. Such events include, but
are not limited to, strategic decisions made in response to economic and
competitive conditions, the impact of the economic environment on our customer
base, interest rate movements, declines in the equity markets, the legal
environment in which the businesses operate or a material negative change in our
relationships with significant customers. Additional information about
impairments is described in Item 8. "Financial Statements and Supplementary
Data, Notes to Consolidated Financial Statements, Note 2, Goodwill and Other
Intangible Assets."

Insurance Reserves

    Reserves are liabilities representing estimates of the amounts that will
come due, at some point in the future, to or on behalf of our policyholders.
U.S. GAAP, allowing for some degree of managerial judgment, prescribes the
methods of establishing reserves.

    Future policy benefits and claims include reserves for individual
traditional and group life insurance, accident and health insurance and
individual and group annuities that provide periodic income payments, which are
computed using assumptions of mortality, morbidity, lapse, investment
performance and expense. These assumptions are based on our experience and are
periodically reviewed against industry standards to ensure actuarial
credibility. For long duration insurance contracts, once these assumptions are
made for a given policy or group of policies, they will not be changed over the
life of the policy. However, significant changes in experience or assumptions
may require us to provide for expected future losses on a product by
establishing premium deficiency reserves. Premium deficiency reserves may also
be established for short duration contracts to provide for expected future
losses. Our reserve levels are reviewed throughout the year using internal
analysis including, among other things, experience studies, claim development
analysis and annual statutory asset adequacy analysis. To the extent experience
indicates potential loss recognition, we recognize losses on certain lines of
business. The ultimate accuracy of the assumptions on these long-tailed
insurance products cannot be determined until the obligation of the entire block
of business on which the assumptions were made is extinguished. Short-term
variances of actual results from the assumptions used in the computation of the
reserves are reflected in current period net income and can impact
quarter-to-quarter net income.

    Future policy benefits and claims also include reserves for incurred but
unreported health, disability and life insurance claims. We recognize claims
costs in the period the service was provided to our policyowners. However,
claims costs incurred in a particular period are not known with certainty until
after we receive, process and pay the claims. We determine the amount of this
liability using actuarial methods based on historical claim payment patterns as
well as emerging medical cost trends, where applicable, to determine our
estimate of claim liabilities. We also look back to assess how our prior
periods' estimates developed. To the extent appropriate, changes in such
development are recorded as a change to current period claim expense.
Historically, the amount of the claim reserve adjustment made in subsequent
reporting periods for prior period estimates have been within a reasonable range
given our normal claim fluctuations.

Benefit Plans


    The reported expense and liability associated with pension and other
postretirement benefit plans requires the use of assumptions. Numerous
assumptions are made regarding the discount rate, expected long-term rate of
return on plan assets, turnover, expected compensation increases, health care
claim costs, health care cost trends, retirement rates and mortality. The
discount rate and the expected return on plan assets have the most significant
impact on the level of expense.

                                       41

--------------------------------------------------------------------------------

Table of Contents


    The assumed discount rate is determined by projecting future benefit
payments inherent in the Projected Benefit Obligation and discounting those cash
flows using a spot yield curve for high quality corporate bonds. Our assumed
discount rate for the 2012 year-end was 4.00%. Typically a 0.25% decrease in the
discount rate would increase the pension benefits Projected Benefit Obligation
and the Net Periodic Pension Cost ("NPPC") by approximately $99.3 million and
$13.6 million, respectively. Typically a 0.25% decrease in the discount rate
would increase the other postretirement benefits Accumulated Postretirement
Benefit Obligation by approximately $3.6 million and would have a nominal impact
on the Net Periodic Benefit Cost ("NPBC"). Typically a 0.25% increase in the
discount rate would result in decreases in benefit obligations and expenses at a
level generally commensurate with those noted above.

    The assumed long-term rate of return on plan assets is set at the long-term
rate expected to be earned based on the long-term investment policy of the plans
and the various classes of the invested funds. Historical and future expected
returns of multiple asset classes were analyzed to develop a risk-free real rate
of return and risk premiums for each asset class. The overall long-term rate for
each asset class was developed by combining a long-term inflation component, the
real risk free rate of return and the associated risk premium. A weighted
average rate was developed based on long-term returns for each asset class, the
plan's target asset allocation policy and the tax structure of the trusts. For
the 2012 NPPC and 2012 NPBC, an 8.00% and 7.30% weighted average long-term rate
of return was used, respectively. For the 2013 NPPC and 2013 NPBC, a 7.50% and
5.62% weighted average long-term rate of return assumption, respectively, will
be used. Typically a 0.25% decrease in the assumed long-term rate of return
would increase the NPPC by approximately $4.2 million and the NPBC by
approximately $1.3 million. Typically a 0.25% increase in this rate would result
in a decrease to expense at the same levels. The assumed return on plan assets
is based on the fair market value of plan assets as of December 31, 2012.

    The compensation increase assumption is generally set at a rate consistent
with current and expected long-term compensation and salary policy, including
inflation. Actuarial gains and losses are amortized using a straight-line
amortization method over the average remaining service period of employees,
which is approximately 7 years for pension costs and approximately 11 years for
other postretirement benefit costs. Prior service costs are amortized on a
weighted average basis over approximately 2 years for pension and 3 years for
other postretirement benefit costs. See Item 8. "Financial Statements and
Supplementary Data, Notes to Consolidated Financial Statements, Note 11,
Employee and Agent Benefits" for further discussion.

Income Taxes


    We provide for income taxes based on our estimate of the liability for taxes
due. Our tax accounting represents management's best estimate of various events
and transactions, such as completion of tax audits or establishment of, or
changes to, a valuation allowance associated with certain deferred tax assets,
which could affect our estimates and effective income tax rate in a particular
quarter or annual period. Deferred tax liabilities and assets are determined
based on the difference between the financial statement and tax bases of assets
and liabilities using enacted tax rates expected to be in effect during the
years in which the basis differences reverse. We are required to evaluate the
recoverability of our deferred tax assets each quarter and establish a valuation
allowance, if necessary, to reduce our deferred tax assets to an amount that is
more-likely-than-not to be realizable. In determining the need for a valuation
allowance, we consider many factors, including future reversals of existing
taxable temporary differences, future taxable income exclusive of reversing
temporary differences and carryforwards, taxable income in prior carryback years
and implementation of any feasible and prudent tax planning strategies
management would employ to realize the tax benefit.

    Inherent in the provision for income taxes are estimates regarding the
deductibility of certain items, the timing of income and expense recognition and
the current or future realization of operating losses, capital losses and
certain tax credits. In the event these estimates differ from our prior
estimates due to the receipt of new information, we may be required to
significantly change the provision for income taxes recorded in the consolidated
financial statements. Any such change could significantly affect the amounts
reported in the consolidated financial statements in the year these estimates
change. A further significant decline in value of assets incorporated into our
tax planning strategies could lead to an increase of our valuation allowance on
deferred tax assets having an adverse effect on current and future results. In
management's judgment, total deferred income tax assets are more likely than not
to be realized.

    In addition, the amount of income taxes paid is subject to audits in U.S. as
well as various state and foreign jurisdictions. Tax benefits are recognized for
book purposes when the more-likely-than-not threshold is met with regard to the
validity of an uncertain tax position. Once this threshold is met, for each
uncertain tax position we recognize in earnings the largest amount of benefit
that is greater than 50% likely of being realized upon ultimate settlement with
the Internal Revenue Service or other income taxing authorities for audits
ongoing or not yet commenced.

    We had $334.6 million and $263.2 million of current income tax receivables
associated with outstanding audit issues reported as other assets in our
consolidated statements of financial position as of December 31, 2012 and 2011,
respectively. We believe that we have adequate defenses against, or sufficient
provisions for, the contested issues, but final resolution of contested issues
could take several years while legal remedies are pursued. Consequently, we do
not anticipate the ultimate resolution of audits ongoing or not yet commenced to
have a material impact on our net income.

                                       42

--------------------------------------------------------------------------------

Table of Contents

Transactions Affecting Comparability of Results of Operations

Acquisitions

We entered into acquisition agreements for the following businesses, among others, during the past three years.

First Dental Health.  On November 1, 2012, we finalized the purchase of our
100% interest in First Dental Health, a California based independent dental
preferred provider organization. First Dental Health is consolidated within the
U.S. Insurance Solutions segment.

    AFP Cuprum S.A.  On October 8, 2012, we announced the signing of a
definitive agreement to acquire Cuprum, a premier pension manager in Chile. The
agreement required Empresas Penta S.A. and Inversiones Banpenta Limitada to sell
their 63% ownership in Cuprum pursuant to a public tender offer that also
included the remaining 37% of publicly traded shares. The transaction closed
February 4, 2013, resulting in an approximately 90% ownership stake in Cuprum
for a purchase price of approximately $1.4 billion. Cuprum will be consolidated
within the Principal International segment.

    Claritas Administração de Recursos Ltda./Claritas Investments, Ltd.  On
April 2, 2012, we finalized the purchase of a 60% indirect ownership in
Claritas, a leading Brazilian mutual fund and asset management company. The Sao
Paulo-based company manages equity funds, balanced funds, managed accounts and
other strategies for affluent clients and institutions through its multi-channel
distribution network. Claritas had $1.8 billion in AUM at the time of
acquisition and is consolidated within the Principal International segment.

    Origin Asset Management LLP.  On October 3, 2011, we finalized the purchase
of a 74% interest in Origin Asset Management LLP ("Origin"), a global equity
specialist based in London. The initial payment was $63.6 million. Origin had
$2.6 billion in AUM in global and international equities at the time of the
acquisition and is consolidated within the Principal Global Investors segment.

    HSBC AFORE, S.A. de C.V.  On August 8, 2011, we finalized the purchase of
our 100% interest in HSBC AFORE, S.A. de C.V. ("HSBC AFORE"), a Mexican pension
business, from HSBC Bank for $206.1 million. In addition, we have established a
distribution arrangement with HSBC Bank for the distribution of Principal
AFORE's products through HSBC Bank's extensive network in Mexico. HSBC AFORE was
merged into our Principal AFORE pension company, which is consolidated within
the Principal International segment.

    Finisterre Capital LLP and Finisterre Holdings Limited.  On July 1, 2011, we
finalized the purchase of a 51% interest in Finisterre Capital LLP and
Finisterre Holdings Limited, (together "Finisterre Capital"), an emerging
markets debt investor based in London. The initial payment was $84.6 million,
with a possible additional contingent payment of up to $30.0 million in 2013,
dependent upon performance targets. Finisterre Capital had $1.7 billion in AUM
at the time of acquisition and is accounted for on the equity method within the
Principal Global Investors segment.

Other


    Actuarial Assumption Updates.  During the third quarter of 2012, we reviewed
and updated assumptions that are inputs to the models for DPAC and other
actuarial balances. We also reviewed our actuarial models and made improvements
as necessary. As a result of these actions, we had an unlocking of DPAC and
other actuarial balances that decreased total company net income by
$96.7 million for the year ended December 31, 2012.

    We updated our actuarial models to reflect the lower interest rate
environment in our U.S. operations. The updates to our long-term interest rate
assumptions and related refinements to the interest rate component of our
actuarial models resulted in an unlocking that negatively impacted operating
earnings. The negative unlocking from the lower interest rates was partially
offset by the positive impact from the increased expected persistency in our
individual annuities business. The net negative segment operating earnings
impact was $66.3 million, which was comprised of $55.2 million for our U.S.
Insurance Solutions segment and $11.1 million for our Retirement and Investor
Services segment.

    In addition to the interest rate assumption update, we updated other
assumptions and made model refinements that resulted in a net negative unlocking
and a $24.4 million decrease to operating earnings in total for the Retirement
and Investor Services, Principal International and U.S. Insurance Solutions
segments for the year ended December 31, 2012.

    Within our individual life insurance business, we have an integrated
actuarial model that impacts several line items within our income statement.
Operating earnings for the individual life insurance business was negatively
impacted $62.9 million for the year ended December 31, 2012. The impact on the
income statement line items was as follows - fee revenues increased
$13.5 million; benefits, claims and settlement expenses increased $67.2 million;
and operating expenses increased $43.0 million.

    Catalyst Health Solutions, Inc.  In July 2012, Catalyst HealthSolutions, Inc. merged with a wholly owned subsidiary of SXC Health Solutions
Corp. As a result of the merger, we realized an after-tax gain. We subsequently
contributed appreciated stock of the ultimate surviving corporation (now known
as Catamaran Corp.) to The Principal Financial Group Foundation, Inc. and sold
our remaining interest in Catamaran Corp., resulting in a total after-tax net
realized capital gain of $141.2 million.

                                       43

--------------------------------------------------------------------------------

Table of Contents


    Individual Life Insurance Amortization.  During the first quarter of 2012,
our individual life insurance business changed its basis for amortizing DPAC and
other actuarial balances on a portion of our universal life insurance products.
The actuarial balances for these products are now amortized based on estimated
gross revenues instead of EGPs. In addition to impacting comparability of
changes in actuarial balances between 2011 and 2012, this change required an
unlocking of the actuarial balances to reflect the pattern of estimated gross
revenues, which resulted in volatility within certain income statement line
items in the first quarter of 2012. Specifically, fee revenues decreased
$46.6 million; benefits, claims and settlement expenses increased $87.9 million;
and operating expenses decreased $139.6 million. However, on a net basis the
impact was a net gain of $3.3 million after-tax, which is not material.

    Individual Life Insurance Assumption Changes.  During the second quarter of
2011, we updated premium assumptions in our individual life insurance business,
which impacts comparability between reported time periods. Specifically, fee
revenues increased $4.9 million; benefits, claims and settlement expenses
increased $43.1 million; and operating expenses increased $14.9 million. Given
the large magnitude of the assumption changes, we removed the after-tax impact
of $(34.5) million from operating earnings and reported it as an other after-tax
adjustment in order to aid in comparability at the segment level.

    Catalyst Health Solutions, Inc.  In early April 2011, we sold a portion of
our interest in Catalyst Health Solutions,  Inc., which was accounted for on the
equity method. The $46.0 million after-tax gain was reported as a net realized
capital gain in the second quarter of 2011. The remaining portion of the
investment continued to be accounted for as an equity method investment.

    Individual Life Interest Rate Assumption Change.  During the fourth quarter
of 2010, we lowered our long term interest rate assumption, which negatively
impacted operating earnings by $6.8 million. Fee revenues increased
$7.4 million; benefits, claims and settlement expenses decreased $4.6 million
and operating expenses increased $22.5 million.

    Group Medical Insurance Business.  On September 30, 2010, we announced our
decision to exit the group medical insurance business (insured and
administrative services only) and entered into an agreement with United
Healthcare Services, Inc. to renew group medical insurance coverage for our
customers as the business transitions. The exiting of the group medical
insurance business does not qualify for discontinued operations treatment under
U.S. GAAP. Therefore, the results of operations for the group medical insurance
business are still included in our consolidated income from continuing
operations.

    With the exception of corporate overhead, amounts related to our group
medical insurance business previously included in segment operating earnings
have been removed from operating earnings for all periods presented and are
reported as other after-tax adjustments. The operating revenues associated with
our exited group medical insurance business were $25.0 million, $606.3 million
and $ 1,403.9 million for the year ended December 31, 2012, 2011 and 2010,
respectively. The other after-tax adjustments associated with the after-tax
earnings (loss) of our exited group medical insurance business were $(9.6)
million, $50.9 and $24.0 million for the years ended December 31, 2012, 2011 and
2010, respectively.

    Brasilprev Seguros e Previdencia S.A.  On April 30, 2010, we signed
definitive agreements with Banco, including the Shareholders Agreement governing
the operations of our pension joint venture, Brasilprev. The agreements result
in Brasilprev having, for 23 years, the exclusive right to distribute pension
products within the Banco bank network and a reduction in our economic interest
from 46% to 25%, which resulted in a $72.1 million after-tax net realized
capital gain in the second quarter of 2010. Brasilprev continues to be jointly
managed and reported as an equity method investment in our Principal
International segment. Due to the reduction in our economic interest, we reflect
a lower percentage of the earnings from the operation. However, we expect the
operation to grow and offset the decline from the lower percentage.

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 but have not had a material impact on our consolidated financial results. Principal International segment operating earnings were negatively impacted by $16.6 million for the year ended December 31, 2012, 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 8.
"Financial Statements and Supplementary Data, Notes to Consolidated Financial
Statements, Note 17, Stock-Based Compensation Plans."

                                       44

--------------------------------------------------------------------------------

Table of Contents

Effects of Inflation


    The impact of inflation has not had a material effect on our annual
consolidated results of operations over the past three years. However, we may be
materially affected by inflation in the future. For further discussion on
inflation, see Item 1A. "Risk Factors - Continued difficult conditions in the
global capital markets and the economy generally may materially and adversely
affect our business and results of operations."

Employee and Agent Benefits Expense


    The 2012 annual defined benefit pension expense for substantially all of our
employees and certain agents was $122.3 million pre-tax, which was a
$29.5 million increase from the 2011 pre-tax pension expense of $92.8 million.
This increase is due primarily to a decline in the discount rate from 5.65% for
2011 to 5.15% for 2012. The expected long-term return on plan assets used to
develop the 2012 expense remained at the same 8.00% as for 2011.

    The 2013 annual defined benefit pension expense for substantially all of our
employees and certain agents is expected to be $143.3 million pre-tax, which is
a $21.0 million increase from the 2012 pre-tax pension expense of
$122.3 million. This increase is due primarily to a decrease in the discount
rate from 5.15% for 2012 to 4.00% for 2013. Also, the expected long-term return
on plan assets used to develop the 2013 expense decreased to 7.50%.

    The 2012 annual other postemployment benefit ("OPEB") plan expense (income)
for employees and certain agents was $(55.2) million pre-tax, which is a
$2.8 million difference from the 2011 pre-tax OPEB income of $(58.0) million.
The weighted average expected long-term return on plan assets used to develop
the expense (income) in 2012 was 7.30% which was based on the weighted average
expected long-term asset returns for the medical, life and long-term care plan.
The expected long-term rates for the medical, life and long-term care plans were
7.25%, 7.75%, and 5.85%, respectively. The discount rate used to develop the
2012 expense (income) was 5.15%.

    The 2013 annual OPEB plan expense (income) for employees and certain agents
is expected to be $(47.0) million pre-tax, which is an $8.2 million difference
from the 2012 pre-tax OPEB income of $(55.2) million. The weighted average
expected long-term return on plan assets used to develop the expense (income) in
2013 was 5.62% which was based on weighted average expected long-term asset
returns for the medical, life and long-term care plan. The expected long-term
rates for the medical, life and long-term care plans were 5.40%, 7.75% and
5.85%, respectively. The expected rate of return for the medical plans was
reduced to 5.40% to reflect the after-tax return on the plan assets resulting
from the decision to have taxes paid by the trust instead of PLIC. The discount
rate used to develop the 2013 expense (income) decreased to 4.00%, down from the
5.15% discount rate used in 2012.

Healthcare Reform


    During the first quarter of 2010, federal legislation was enacted that
reformed the healthcare system. Among many changes, the newly enacted healthcare
legislation eliminates the tax deductibility of retiree prescription drug
expenses incurred after 2012, up to the Medicare Part D subsidy amount, which
had been allowed to encourage employers to offer retiree drug coverage. We
recognized $7.8 million negative impact of net income for the year ended
December 31, 2010, associated with the release of the portion of our deferred
tax asset on accrued retiree prescription drug expenses related to our employees
that will no longer be tax-deductible after December 31, 2012.

Impact of Low Interest Rate Environment

    The exposure from the low interest rates is reflected in a reduction in the
spreads between the investment income we earn and the interest we credit to our
customers. Some of our products, primarily our fixed deferred annuity, general
account group annuity and universal life insurance products, include guaranteed
minimum interest rates. During periods of low or declining interest rates,
borrowers may prepay or redeem mortgages and fixed maturities that are invested
to support our product obligations, which would force us to reinvest the
proceeds at lower interest rates. The resulting lower net investment income may
make it more difficult for us to maintain our desired spread and thereby reduce
our profitability. See Item 7A "Quantitative and Qualitative Disclosures About
Market Risk," for a presentation of the differences between the interest rates
being credited to contractholders and the respective guaranteed minimum interest
rates.

    Some of our universal life insurance contracts contain secondary guarantees,
which keep the contract in force, even if the contractholder's account balance
is insufficient to cover all of the contract charges, provided that the
contractholder has continually paid a specified minimum premium. It is possible
that more of these secondary guarantees could be triggered, possibly increasing
our policyholder obligation and thereby reducing our profitability.

    Declining or low interest rates could impact the discount rate assumption
used for the purposes of valuing reserves and our pension and other
postretirement benefit obligations. A decrease in the discount rate could result
in higher reserves as well as lower margins and an increase in the annual
pension and other postretirement benefit expense.

    Our expectation of estimated gross profits is an important consideration in
determining the amortization of DPAC and other actuarial balances. To the extent
a low interest rate environment impacts our assumptions regarding future EGPs,
an unlocking of DPAC and other actuarial balances could occur, decreasing net
income.

                                       45

--------------------------------------------------------------------------------

Table of Contents

Lastly, lower net investment income could result in the establishment of a premium deficiency reserve for certain of our insurance products.

We anticipate that a sustained low interest rate environment would reduce the growth in net income.


Recent Accounting Changes

For recent accounting changes, see Item 8. "Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 1, Nature of Operations and Significant Accounting Policies" under the captions, "Accounting Changes" and "Recent Accounting Pronouncements."

Results of Operations


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

                                     For the year ended               Increase (decrease)
                                        December 31,                                 2011 vs.
                                2012        2011        2010       2012 vs. 2011       2010
                                                       (in millions)
Revenues:
Premiums and other
considerations                $ 3,219.4   $ 2,891.0   $ 3,555.5   $         328.4    $  (664.5 )
Fees and other revenues         2,626.7     2,526.7     2,337.1             100.0        189.6
Net investment income           3,254.9     3,375.3     3,495.8            (120.4 )     (120.5 )
Net realized capital gains,
excluding impairment losses
on available-for-sale
securities                        232.7        75.0        50.0             157.7         25.0
Total other-than-temporary
impairment losses on
available-for-sale
securities                       (135.9 )    (147.6 )    (296.3 )            11.7        148.7
Other-than-temporary
impairment losses on fixed
maturities
available-for-sale
reclassified to (from)
other comprehensive income         17.3       (49.7 )      56.1              67.0       (105.8 )

Net impairment losses on
available-for-sale
securities                       (118.6 )    (197.3 )    (240.2 )            78.7         42.9

Net realized capital gains
(losses)                          114.1      (122.3 )    (190.2 )           236.4         67.9

Total revenues                  9,215.1     8,670.7     9,198.2             544.4       (527.5 )
Expenses:
Benefits, claims and
settlement expenses             5,123.9     4,616.6     5,204.3             507.3       (587.7 )
Dividends to policyholders        197.7       210.2       219.9             (12.5 )       (9.7 )
Operating expenses              2,934.1     2,950.8     2,988.3             (16.7 )      (37.5 )

Total expenses                  8,255.7     7,777.6     8,412.5             478.1       (634.9 )

Income before taxes               959.4       893.1       785.7              66.3        107.4
Income taxes                      134.7       204.2       104.9             (69.5 )       99.3

Net income                        824.7       688.9       680.8             135.8          8.1
Net income attributable to
noncontrolling interest            18.8        36.2        17.9             

(17.4 ) 18.3


Net income attributable to
Principal Financial
Group, Inc.                       805.9       652.7       662.9             153.2        (10.2 )
Preferred stock dividends          33.0        33.0        33.0                 -            -

Net income available to
common stockholders           $   772.9   $   619.7   $   629.9   $         153.2    $   (10.2 )


Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

Net Income Available to Common Stockholders


    Net income available to common stockholders increased primarily due to
higher gains associated with the merger of Catalyst Health Solutions, Inc. and
the subsequent disposition of our remaining interest in the surviving
corporation in 2012 compared to the portion of our interest sold in 2011 and a
negative impact of a court ruling on some uncertain tax positions in 2011 with
no corresponding activity in 2012.

Total Revenues


    Premiums increased $772.2 million for the Retirement and Investor Services
segment primarily due to an increase in sales of single premium group annuities
with life contingencies. The single premium product, which is typically used to
fund defined benefit plan terminations, can generate large premiums from very
few customers and therefore tends to vary from period to period. Partially
offsetting this increase was a $509.2 million decrease for the Corporate segment
primarily due to a reduction in average covered medical members in our exited
group medical insurance business.

    Fee revenues increased $93.3 million for our Retirement and Investor
Services segment primarily due to higher fees stemming from an increase in
average account values, which resulted from positive equity market performance
in 2012 and strong net cash flow from customers. Fee revenues also increased
$48.4 million for our Principal International segment primarily due to higher
investment management fees driven by higher average AUM in Mexico and the
Claritas acquisition in Brazil. In addition, fees increased $44.6 million for
our Principal Global Investors segment primarily due to

                                       46

--------------------------------------------------------------------------------

Table of Contents


higher fee revenues as a result of increased AUM. Partially offsetting these
increases was an $86.3 million decrease in fee revenues for the Corporate
segment primarily due to a reduction in average fee-for-service members in our
exited group medical insurance business.

    Net investment income decreased due to lower investment yields on our
invested assets and cash in our U.S. operations, and lower inflation-based
investment returns on average invested assets and cash as a result of lower
inflation in Chile and the weakening of the Latin American currencies against
the U.S. dollar. These decreases were partially offset by an increase in average
invested assets and cash. For additional information, see "Investments -
Investment Results."

    Net realized capital gains (losses) can be volatile due to other than
temporary impairments of invested assets, mark-to-market adjustments of certain
invested assets and our decision to sell invested assets. Net realized capital
gains (losses) increased primarily due to higher gains associated with the
merger of Catalyst Health Solutions, Inc. and the subsequent disposition of our
remaining interest in the surviving corporation in 2012 compared to the portion
of our interest sold in 2011 and a decrease in credit impairments on fixed
maturities, available-for-sale. For additional information, see "Investments -
Investment Results."

     Total Expenses

    Benefits, claims and settlement expenses increased $695.8 million for the
Retirement and Investor Services segment primarily due to an increase in change
in reserves resulting from an increase in sales of single premium group
annuities with life contingencies. Benefits, claims and settlement expenses also
increased $210.4 million for the U.S. Insurance Solutions segment primarily due
to the change in amortization basis, unlocking associated with a change in our
long-term interest rate assumptions and model refinements in the third quarter
of 2012 and growth in our individual life insurance business. Partially
offsetting these increases was a $384.4 million decrease in benefits, claims and
settlement expenses for the Corporate segment primarily due to a reduction in
average covered medical members in our exited group medical insurance business.

Income Taxes


    The effective income tax rates were 14% and 23% for the years ended
December 31, 2012 and 2011, respectively. The effective income tax rate for the
year ended December 31, 2012 was lower than the U.S. corporate income tax rate
of 35% ("U.S. statutory rate") primarily due to income tax deductions allowed
for corporate dividends received, the presentation of taxes on our share of
earnings generated from equity method investments in net investment income and
the interest exclusion from taxable income. The effective income tax rate for
the year ended December 31, 2011, was lower than the U.S. statutory rate
primarily due to income tax deductions allowed for corporate dividends received,
the presentation of taxes on our share of earnings generated from equity method
investments in net investment income and the interest exclusion from taxable
income, which were partially offset by the impact of a court ruling on some
uncertain tax positions. The effective income tax rate decreased to 14% from 23%
for the years ended December 31, 2012 and 2011, respectively, primarily due to
the impact of a 2011 court ruling on some uncertain tax positions.

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

Net Income Available to Common Stockholders


    Net income available to common stockholders decreased primarily due to the
negative impact of a court ruling on some uncertain tax positions in 2011. This
decrease to net income available to common stockholders was partially offset by
higher earnings in our Retirement and Investor Services, Principal International
and Principal Global Investors segments.

Total Revenues

Premiums decreased $770.3 million for the Corporate segment primarily due to a reduction in average covered medical members in our exited group medical insurance business.


    Fees increased $72.4 million for our U.S. Insurance Solutions segment
primarily due to growth in the universal life and variable universal life lines
of business. Fees also increased $72.3 million for our Retirement and Investor
Services segment primarily due to higher fees stemming from an increase in
average account values, which resulted from general positive equity market
performance in 2011. In addition, fees increased $64.0 million for our Principal
Global Investors segment primarily due to higher fee revenues driven by an
increase in average AUM as well as increased performance fees in our equity
business and higher borrower fees from our real estate business.

    Net investment income decreased due to lower investment yields and a
decrease in average invested assets and cash, excluding the fair value
adjustment associated with fixed maturities and equity securities, primarily due
to our decision to scale back our investment only business. These decreases were
partially offset by higher inflation-based investment returns on average
invested assets and cash as a result of higher inflation in Chile and the
strengthening of the Latin American currencies against the U.S. dollar. For
additional information, see "Investments - Investment Results."

                                       47

--------------------------------------------------------------------------------

Table of Contents


    Net realized capital gains (losses) can be volatile due to other than
temporary impairments of invested assets, mark-to market adjustments of certain
invested assets and our decision to sell invested assets. Net realized capital
losses decreased primarily due to a gain associated with the sale of a portion
of our interest in Catalyst Health Solutions, Inc. in 2011, lower losses related
to the residential mortgage loan loss provision for our Bank and Trust Services
business and lower net impairment losses on fixed maturities,
available-for-sale. These decreases were partially offset by a 2010 gain
associated with the signing of our Shareholders Agreement with Banco pertaining
to our Brasilprev joint venture with no corresponding activity in 2011. For
additional information, see "Investments - Investment Results."

Total Expenses

Benefits, claims and settlement expenses decreased $607.1 million for the Corporate segment primarily due to a reduction in average covered medical members in our exited group medical insurance business.

Income Taxes


    The effective income tax rates were 23% and 13% for the years ended
December 31, 2011 and 2010, respectively. The effective income tax rate for the
year ended December 31, 2011, was lower than the U.S. statutory rate primarily
due to income tax deductions allowed for corporate dividends received, the
presentation of taxes on our share of earnings generated from equity method
investments in net investment income and the interest exclusion from taxable
income, which were partially offset by the impact of a court ruling on some
uncertain tax positions. The effective income tax rate for the year ended
December 31, 2010, was lower than the U.S. statutory rate primarily due to
income tax deductions allowed for corporate dividends received, the presentation
of taxes on our share of earnings generated from equity method investments in
net investment income and the interest exclusion from taxable income. The
effective income tax rate increased to 23% from 13% for the years ended
December 31, 2011 and 2010, respectively, primarily due to the impact of a 2011
court ruling on some uncertain tax positions.

Results of Operations by Segment


    For results of operations by segment see Item 8. "Financial Statements and
Supplementary Data, Notes to Consolidated Financial Statements, Note 16, Segment
Information."

Retirement and Investor Services Segment

Retirement and Investor Services Trends


    Several key factors impact revenue and earnings growth in our Retirement and
Investor Services segment. These factors include: the ability of our
distribution channels to generate new sales and retain existing business;
pricing decisions that take account of competitive conditions, persistency,
investment returns, mortality trends, and operating expense levels; investment
management performance; equity market returns and interest rate changes.
Profitability ultimately depends on our ability to price products and invest
assets at a level that enables us to earn a margin over the cost of providing
benefits and the expense of acquiring and administering those products.

    Net revenue is a key metric used to understand RIS earnings growth. Net
revenue is defined as operating revenues less benefits, claims and settlement
expenses, including dividends to policyholders. Net revenue from our
Accumulation business is primarily fee based and is impacted by changes in the
equity markets. Net revenue from our Guaranteed business is driven by our
ability to earn an investment spread. Accumulation business net revenue has
grown due to growth in the block of business as well as improvement in the
equity markets. Guaranteed business net revenue has declined due to our decision
to scale back this business and due to investment spread compression.

The following table presents the Retirement and Investor Services net revenue for the years indicated:

                                 For the year ended                 Increase (decrease)
                                    December 31,                2012 vs.
                            2012        2011        2010          2011         2011 vs. 2010
                                                     (in millions)
Net revenue:
Accumulation              $ 2,044.1   $ 1,917.0   $ 1,819.5   $      127.1    $          97.5
Guaranteed                    155.1       161.3       177.9           (6.2 )            (16.6 )

Total Retirement and
Investor Services         $ 2,199.2   $ 2,078.3   $ 1,997.4   $      120.9    $          80.9



                                       48

--------------------------------------------------------------------------------

Table of Contents

Retirement and Investor Services Segment Summary Financial Data

The following table presents certain summary financial data relating to the Retirement and Investor Services segment for the periods indicated:

                                   For the year ended                Increase (decrease)
                                      December 31,                                  2011 vs.
                              2012        2011        2010       2012 vs. 2011        2010
                                                      (in millions)
Operating revenues:
Premiums and other
considerations              $ 1,162.6   $   390.4   $   332.2   $         772.2    $     58.2
Fees and other revenues       1,525.5     1,432.1     1,363.0              93.4          69.1
Net investment income         2,146.8     2,252.5     2,430.9            (105.7 )      (178.4 )

Total operating revenues      4,834.9     4,075.0     4,126.1             759.9         (51.1 )
Expenses:
Benefits, claims and
settlement expenses,
including dividends to
policy holders                2,635.7     1,996.7     2,128.7             639.0        (132.0 )
Operating expenses            1,474.1     1,351.5     1,306.2             122.6          45.3

Total expenses                4,109.8     3,348.2     3,434.9             761.6         (86.7 )

Operating earnings before
income taxes                    725.1       726.8       691.2              (1.7 )        35.6
Income taxes                    150.0       163.9       148.2             (13.9 )        15.7

Operating earnings          $   575.1   $   562.9   $   543.0   $          12.2    $     19.9


Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

Operating Earnings

    Operating earnings increased $15.5 million in our Accumulation business
resulting from positive equity market performance in 2012 and strong net cash
flow from customers, which was partially offset by higher staff related costs,
including pension and other postretirement benefits, and higher non-deferrable
commissions and investment management fees stemming from an increase in average
account values. Operating earnings decreased $3.3 million in our Guaranteed
business primarily resulting from lower mortality reserve gains in 2012 compared
to 2011.

     Net Revenue

    Net revenue increased $127.1 million in our Accumulation business primarily
due to higher fees stemming from an increase in average account values, which
resulted from positive equity market performance in 2012 and strong net cash
flow from customers.

     Operating Expenses

    Operating expenses increased $124.7 million in our Accumulation business
primarily due to higher staff related costs, including pension and other
postretirement benefits. In addition, operating expenses increased due to higher
non-deferrable commissions and investment management fees stemming from
increased sales and an increase in average account values, respectively.

Income Taxes

    The effective income tax rates for the segment were 21% and 23% for the
years ended December 31, 2012 and 2011, respectively. The effective income tax
rates were lower than the U.S. statutory rate primarily as a result of income
tax deductions allowed for corporate dividends received and the interest
exclusion from taxable income.

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

Operating Earnings

    Operating earnings increased $23.9 million in our Accumulation business
resulting from higher fees stemming from generally positive equity market
performance since 2010. This increase was partially offset by an increase in
DPAC amortization expense resulting from mostly level equity markets in 2011,
compared to improving equity markets in 2010. Operating earnings decreased
$4.0 million in our Guaranteed business primarily resulting from a gain from
early extinguishment of medium term notes in 2010 with no corresponding
experience in 2011. This decrease was partially offset by a decrease in change
in reserves resulting from a larger than normal reserve increase in the third
quarter of 2010 with no corresponding activity in 2011, as well as a larger
reserve release due to favorable mortality experience in 2011.

Net Revenue


    Net revenue increased $97.5 million in our Accumulation business primarily
due to higher fees stemming from an increase in average account values, which
resulted from general positive equity market performance in 2011. Partially

                                       49

--------------------------------------------------------------------------------

Table of Contents

offsetting the increase in net revenue was a $16.6 million decrease in our Guaranteed business primarily due to lower spread earnings and a decline in average account values.

Operating Expenses

    Operating expenses increased $57.2 million in our Accumulation business
primarily due to an increase in DPAC amortization expense resulting from mostly
level equity markets in 2011, compared to improving equity markets in 2010 and
an increase in non-deferrable commission expense and investment management fees
resulting from generally positive equity market performance since 2010.
Operating expenses decreased $11.9 million in our Guaranteed business primarily
resulting from a decrease in DPAC amortization stemming from larger than normal
DPAC amortization in 2010 due to an increase in liability call options exercised
by us.

     Income Taxes
    The effective income tax rates for the segment were 23% and 21% for the
years ended December 31, 2011 and 2010, respectively. The effective income tax
rates were lower than the U.S. statutory rate primarily as a result of income
tax deductions allowed for corporate dividends received and the interest
exclusion from taxable income.

Principal Global Investors Segment

Principal Global Investors Trends

Our overall AUM increased $35.4 billion in 2012 primarily due to continued strong portfolio management as well as positive market performance. We also continue to expand our global presence and experience success in winning institutional asset management mandates and other deposits.

The following table provides a summary of Principal Global Investor's affiliated and third-party AUM as of the years indicated:

                                         Principal Global Investors
                                 Affiliated      Third-Party
             As of                   AUM             AUM         Total AUM
                                               (in billions)
             December 31, 2012   $     165.0      $      98.2    $    263.2
             December 31, 2011         145.4             82.4         227.8
             December 31, 2010         141.4             78.7         220.1

Principal Global Investors Segment Summary Financial Data


    AUM is a key indicator of earnings growth for our Principal Global Investors
segment, as AUM is the base by which we generate revenues. Net cash flow and
market performance are the two main drivers of AUM growth. Net cash flow
reflects our ability to attract and retain client deposits. Market performance
reflects equity, fixed income and real estate market performance. The percentage
growth in earnings of the segment will generally track with the percentage
growth in AUM. This trend may vary due to changes in business and/or product
mix.

The following table presents the AUM rollforward for assets managed by Principal Global Investors for the years indicated:

                                                 For the year ended
                                                    December 31,
                                              2012      2011      2010
                                                    (in billions)
                AUM, beginning of period     $ 227.8   $ 220.1   $ 205.3
                Net cash flow (1)               11.7      (1.8 )    (7.0 )
                Investment performance (2)      24.2       6.1      22.3
                Operations acquired (3)            -       4.3         -
                Other                           (0.5 )    (0.9 )    (0.5 )

                AUM, end of period           $ 263.2   $ 227.8   $ 220.1


--------------------------------------------------------------------------------

º (1)

º Positive net cash flows are primarily due to strong distribution results in

     2012. Includes net cash flow of $(0.7) billion and $(3.7) billion for the
     years ended December 31, 2011 and 2010, respectively, resulting from the
     Retirement Investors Services segment's decision to scale back its
     investment only business.

   º (2)
   º Variations in investment performance are primarily the result of
     fluctuations in market performance over time.

   º (3)
   º Reflects acquisition of Finisterre Capital and Origin in 2011.

                                       50

--------------------------------------------------------------------------------

Table of Contents

The following table presents certain summary financial data relating to the Principal Global Investors segment for the years indicated:

                                         For the year ended           Increase (decrease)
                                            December 31,            2012 vs.       2011 vs.
                                      2012      2011      2010        2011           2010
                                                          (in millions)
Operating revenues:
Fees and other revenues              $ 575.8   $ 531.2   $ 467.2   $      44.6    $      64.0
Net investment income                   15.4      15.1      14.2           0.3            0.9

Total operating revenues               591.2     546.3     481.4          44.9           64.9
Expenses:
Total expenses                         456.2     429.3     384.2          26.9           45.1

Operating earnings before income taxes and noncontrolling interests 135.0 117.0 97.2 18.0

           19.8
Income taxes                            43.5      41.0      33.7           2.5            7.3
Operating earnings attributable to
noncontrolling interests                10.3       2.0       5.0           8.3           (3.0 )

Operating earnings                   $  81.2   $  74.0   $  58.5   $       7.2    $      15.5


Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

Operating Earnings


    Operating earnings increased due to higher fee revenue as a result of
increased AUM. These increases were partially offset by higher expenses stemming
from our focused investment for growth in the areas of global distribution and
targeted investment teams.

     Income Taxes
    The effective income tax rates for the segment were 32% and 35% for the
years ended December 31, 2012 and 2011, respectively. The effective income tax
rate was lower than the U.S. statutory rate for the year ended December 31,
2012, primarily due to inclusion of income attributable to noncontrolling
interest in pre-tax operating earnings with no corresponding change in income
taxes reported by us as the controlling interest.

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

Operating Earnings


    Operating earnings increased due to higher fee revenues driven by an
increase in average AUM. In addition, operating earnings increased due to higher
borrower fees from our real estate business resulting from higher transaction
volumes and higher servicing fees. These increases were partially offset by
higher staff related costs resulting from higher compensation expense, as well
as other expenses generally related to our acquisition of Origin in 2011.

Income Taxes

The effective income tax rate for the segment was 35% for both the years ended December 31, 2011 and 2010.

Principal International Segment

Principal International Trends


    Our Principal International businesses focus on countries with favorable
demographics and growing long-term savings and defined contribution markets.
With variations depending upon the specific country, we have targeted these
markets for sales of retirement and related products and services, including
defined contribution pension plans, annuities and mutual funds to businesses and
individuals. In some of our international markets, we complement our sales of
these products with institutional asset management and life insurance
accumulation products.

We have pursued our international strategy through a combination of start-ups, acquisitions and joint ventures, which require infusions of capital consistent with our strategy of long-term growth and profitability.

Principal International Segment Summary Financial Data


    AUM is a key indicator of earnings growth for the segment, as AUM is the
base by which we can generate local currency profits. Net customer cash flow and
market performance are the two main drivers of local currency AUM growth. Net
customer cash flow reflects our ability to attract and retain client deposits.
Market performance reflects the investment returns on our underlying AUM. The
percentage growth or decline in the earnings of our Principal International
segment will generally track with the percentage growth or decline in AUM. This
trend may vary due to changes in business and/or product mix. Our financial
results are also impacted by fluctuations of the foreign currency to U.S. dollar
exchange rates for the countries in which we have operations. AUM of our foreign
subsidiaries is translated

                                       51

--------------------------------------------------------------------------------

Table of Contents


into U.S. dollar equivalents at the end of the reporting period using the spot
foreign exchange rates. Revenue and expenses for our foreign subsidiaries are
translated into U.S. dollar equivalents at the average foreign exchange rates.

The following table presents the Principal International segment AUM rollforward for the years indicated:

                                                For the year ended
                                                   December 31,
                                              2012      2011     2010
                                                   (in billions)
                  AUM, beginning of period   $  52.8   $ 45.8   $ 34.6
                  Net cash flow                  9.3      5.5      4.7
                  Investment performance         7.2      3.5      4.1
                  Operations acquired (1)        2.0      3.1      0.7
                  Effect of exchange rates      (1.8 )   (4.8 )    1.9
                  Other                         (0.2 )   (0.3 )   (0.2 )

                  AUM, end of period         $  69.3   $ 52.8   $ 45.8


--------------------------------------------------------------------------------

   º (1)
   º Reflects the acquisition of Claritas in Brazil in April 2012 and the
     acquisition of HSBC AFORE in Mexico in August 2011.

    Net revenue is a key metric used to understand the earnings growth for the
Principal International segment. Net revenue is defined as operating revenues
less benefits, claims and settlement expenses. The following table presents the
net revenue of the Principal International segment for the years indicated.

                          For the year ended                      Increase (decrease)
                             December 31,
               12/31/2012     12/31/2011     12/31/2010     2012 vs. 2011      2011 vs. 2010
                                               (in millions)
Net revenue   $      375.8   $      325.9   $      282.0   $          49.9    $          43.9


    Net revenue increased primarily due to higher fees driven by higher average
AUM in Mexico, higher earnings in our equity method investment in Brazil and the
Claritas acquisition in Brazil. These were partially offset by the weakening of
the Latin American currencies against the U.S. dollar.

The following table presents certain summary financial data of the Principal International segment for the years indicated.

                                     For the year ended             Increase (decrease)
                                        December 31,            2012 vs.
                                  2012      2011      2010        2011         2011 vs. 2010
                                                        (in millions)
Operating revenues:
Premiums and other
considerations                   $ 284.6   $ 264.5   $ 255.2   $      20.1    $           9.3
Fees and other revenues            216.9     168.5     147.7          48.4               20.8
Net investment income              441.2     476.0     376.3         (34.8 )             99.7

Total operating revenues           942.7     909.0     779.2          33.7              129.8
Expenses:
Benefits, claims and
settlement expenses                566.9     583.1     497.2         (16.2 )             85.9
Operating expenses                 221.5     173.9     150.2          47.6               23.7

Total expenses                     788.4     757.0     647.4          31.4              109.6
Operating earnings before
income taxes and
noncontrolling interests           154.3     152.0     131.8           2.3               20.2
Income taxes (benefits)              0.8       2.7      (1.9 )        (1.9 )              4.6
Operating earnings (losses)
attributable to noncontrolling
interests                            0.2      (0.2 )     1.1           0.4               (1.3 )

Operating earnings               $ 153.3   $ 149.5   $ 132.6   $       3.8    $          16.9


Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

Operating Earnings

Operating earnings increased primarily due to higher fees driven by higher average AUM in Mexico and in our equity method investment in Brazil. These increases were partially offset by the weakening of the Latin American currencies against the U.S. dollar and higher PVFP and DPAC amortization resulting from net unlocking and true-ups in Mexico.

Operating Revenues

    Premiums in Chile increased $20.2 million primarily due to higher sales of
single premium annuities with life contingencies, which was partially offset by
the weakening of the Chilean peso against the U.S. dollar.

                                       52

--------------------------------------------------------------------------------

Table of Contents

Fees and other revenues increased primarily due to higher investment management fees driven by higher average AUM in Mexico and the Claritas acquisition in Brazil, which was partially offset by the weakening of the Latin American currencies against the U.S. dollar.


    Net investment income decreased primarily due to lower inflation-based
investment returns on average invested assets and cash as a result of lower
inflation in Chile and the weakening of the Latin American currencies against
the U.S. dollar. These decreases were partially offset by higher earnings in our
equity method investment in Brazil and higher average invested assets in Chile.

Total Expenses


    Benefits, claims and settlement expenses in Chile decreased $14.0 million
primarily due to lower inflation-based interest crediting rates to customers and
the weakening of the Chilean peso against the U.S. dollar, which were partially
offset by an increase in the change in reserves related to higher sales of
single premium annuities with life contingencies.

    Operating expenses increased primarily due to higher PVFP and DPAC
amortization resulting from net unlocking and true-ups in Mexico coupled with
growth initiatives across the segment. These increases were partially offset by
the weakening of the Latin American currencies against the U.S. dollar.

Income Taxes


    The effective income tax rates for the segment were 1% and 2% for the years
ended December 31, 2012 and 2011, respectively. The effective income tax rates
were lower than the U.S. statutory rate primarily due to taxes on our share of
earnings generated from our equity method investments. Specifically, our share
of earnings generated from equity method investments, net of foreign taxes
incurred, are reported within net investment income whereas any residual U.S.
tax expense or benefit related to equity method investments is reported in
income taxes. Lower tax rates of foreign jurisdictions also contributed to the
lower effective income tax rates.

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

Operating Earnings


    Operating earnings increased primarily due to higher fees driven by higher
average AUM as a result of net customer cash flows, market performance and the
HSBC AFORE acquisition; the strengthening of the Latin American currencies
against the U.S. dollar and higher earnings in our equity method investment in
Brazil despite a reduction in the economic interest during the second quarter of
2010.

     Operating Revenues

    Premiums in Chile increased $9.6 million primarily due to the strengthening
of the Chilean peso against the U.S. dollar, which was partially offset by lower
sales of single premium annuities with life contingencies.

Fees and other revenues increased primarily due to higher investment management fees driven by higher average AUM in Mexico as a result of the HSBC AFORE acquisition.

    Net investment income increased primarily due to higher inflation-based
investment returns on average invested assets and cash as a result of higher
inflation in Chile, the strengthening of the Latin American currencies against
the U.S. dollar and higher earnings in our equity method investment in Brazil
despite a reduction in the economic interest during the second quarter of 2010.

Total Expenses


    Benefits, claims and settlement expenses in Chile increased $87.7 million
primarily due to higher inflation-based interest crediting rates to customers
and the strengthening of the Chilean peso against the U.S. dollar.

    Operating expenses increased primarily due to expenses related to the HSBC
AFORE acquisition in Mexico, higher compensation expenses across the segment and
the strengthening of the Latin American currencies against the U.S. dollar.

Income Taxes


    The effective income tax rates for the segment were 2% and -1% for the years
ended December 31, 2011 and 2010, respectively. The effective income tax rates
were lower than the U.S. statutory rate primarily due to taxes on our share of
earnings generated from our equity method investments. Specifically, our share
of earnings generated from equity method investments, net of foreign taxes
incurred, are reported within net investment income whereas any residual U.S.
tax expense or benefit related to equity method investments is reported in
income taxes. Lower tax rates of foreign jurisdictions also contributed to the
lower effective income tax rates.

                                       53

--------------------------------------------------------------------------------

Table of Contents

U.S. Insurance Solutions Segment

Individual Life Insurance Trends


    Our life insurance premiums and fees are influenced by both economic and
industry trends. We have been primarily focused on marketing our universal and
variable universal life insurance products. As such, premiums related to our
traditional life insurance products have declined for several years. To address
recent economic and industry trends, we introduced new term products in 2011.
Term life insurance sales increased 58% in 2012.

The following table provides a summary of our individual universal and variable universal life insurance fee revenues and our individual traditional life insurance premiums for the years indicated:

                                   Universal and
                                 variable universal        Traditional
                                   life insurance         life insurance
           For the year ended       fee revenues             premiums
                                              (in millions)
           December 31, 2012    $             476.3  (1)   $        496.5
           December 31, 2011                  471.4                 502.5
           December 31, 2010                  416.6                 517.9

--------------------------------------------------------------------------------

º (1)

º Fee revenues for the year ended December 31, 2012, reflects a $46.6 million

reduction due to unlocking of unearned revenue associated with the change

in basis for amortizing DPAC and other actuarial balances in the first

quarter of 2012, partially offset by an increase of $13.5 million due to

unearned revenue unlocking associated with a change in long-term interest

rate assumptions and model refinements in the third quarter of 2012.

Specialty Benefits Insurance Trends


    Premium and fees in our specialty benefits insurance business are also
influenced by economic and industry trends. Premium and fees have risen more
slowly in recent years due to more moderate increases in underlying salaries and
lower membership in existing group contracts. We are seeing signs of improvement
in both areas.

The following table provides a summary of our specialty benefits insurance premium and fees for the years indicated:


                   Group dental
                       and                           Group        Individual
 For the year         vision        Group life     disability     disability
 ended              insurance       insurance      insurance      insurance     Wellness (1)
                                                 (in millions)
 December 31,
 2012             $        578.2    $     328.6    $     292.6    $     236.0     $       8.4
 December 31,
 2011                      558.9          319.1          274.6          216.3             8.3
 December 31,
 2010                      518.9          315.0          265.6          196.5               -

--------------------------------------------------------------------------------

º (1)

º Due to the decision to exit the group medical insurance business, wellness

became a part of the specialty benefits division starting January 1, 2011.

U.S. Insurance Solutions Segment Summary Financial Data


    There are several key indicators for earnings growth in our U.S. Insurance
Solutions segment. The ability of our distribution channels to generate new
sales and retain existing business drives growth in our block of business,
premium revenue and fee revenues. Our earnings growth also depends on our
ability to price our products at a level that enables us to earn a margin over
the cost of providing benefits and the expense of acquiring and administering
those products. Factors impacting pricing decisions include competitive
conditions, economic trends, persistency, our ability to assess and manage
trends in mortality and morbidity and our ability to manage operating expenses.

                                       54

--------------------------------------------------------------------------------

Table of Contents

The following table presents certain summary financial data relating to the U.S. Insurance Solutions segment for the years indicated:

                                   For the year ended                Increase (decrease)
                                      December 31,                                  2011 vs.
                              2012        2011        2010       2012 vs. 2011        2010
                                                      (in millions)
Operating revenues:
Premiums and other
considerations              $ 1,769.3   $ 1,724.0   $ 1,685.7   $          45.3    $     38.3
Fees and other revenues
(1)                             531.1       526.2       456.8               4.9          69.4
Net investment income           694.3       689.7       666.7               4.6          23.0

Total operating revenues      2,994.7     2,939.9     2,809.2              54.8         130.7
Expenses:
Benefits, claims and
settlement expenses
(1)                           1,937.7     1,672.7     1,598.5             265.0          74.2
Dividends to
policyholders                   195.8       207.6       218.4             (11.8 )       (10.8 )
Operating expenses (1)          661.7       760.0       700.8             (98.3 )        59.2

Total expenses                2,795.2     2,640.3     2,517.7             154.9         122.6

Operating earnings before
income taxes and
noncontrolling interests        199.5       299.6       291.5            (100.1 )         8.1
Income taxes                     61.3        95.3        93.7             (34.0 )         1.6

Operating earnings          $   138.2   $   204.3   $   197.8   $         (66.1 )  $      6.5


--------------------------------------------------------------------------------

º (1)

º For further details related to the impact associated with the actuarial

assumption updates and the change in basis for amortizing DPAC and other

actuarial balances on results for 2012 and 2010 see "Transactions Affecting

Comparability of Results of Operations - Actuarial Assumption Updates" and

"Individual Life Insurance Amortization" and "Individual Life Interest Rate

Assumption Change".

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

Operating Earnings


    Operating earnings decreased $60.8 million in our individual life insurance
business primarily due to unfavorable unlocking associated with a change in our
long-term interest rate assumptions and model refinements in the third quarter
of 2012. Operating earnings decreased $5.3 million in our specialty benefits
business primarily due to lower yields on invested assets and higher pension and
postretirement benefits.

     Operating Revenues

    Premiums increased $64.8 million in our specialty benefits insurance
business due to growth in all lines of our business and continued recovery in
employment and salary trends. Premiums decreased $19.5 million in our individual
life insurance business primarily due to an increase in use of ceded premium
stemming from growth in our universal life and variable universal life lines of
business and, to a lesser extent, expected continued decline from the decreasing
block of traditional life insurance business.

    Fees and other revenues increased $3.2 million in our individual life
insurance business due to growth in the universal life and variable universal
life lines of business and unlocking associated with a change in our long-term
interest rate assumptions and model refinements in the third quarter of 2012.
The increase was offset by negative unlocking of unearned revenue associated
with the change in basis for amortizing DPAC and other actuarial balances in the
first quarter of 2012. In addition, fees and other revenues increased
$1.7 million in our specialty benefits insurance business primarily due to the
acquisition of First Dental Health.

Total Expenses


    Benefits, claims and settlement expenses increased $220.8 million in our
individual life insurance business primarily due to the change in amortization
basis in the first quarter of 2012, unlocking associated with a change in our
long-term interest rate assumptions and model refinements in the third quarter
of 2012 and growth in the block of business. In addition, benefits, claims and
settlement expenses increased $44.2 million resulting from continued growth in
our specialty benefits insurance business.

    Operating expenses decreased $125.1 million in our individual life business
primarily due to lower DPAC amortization associated with the change in basis for
amortizing DPAC and other actuarial balances in the first quarter of 2012,
partially offset by unlocking associated with the change in our long-term
interest rate assumptions and model refinements. Operating expenses increased
$26.8 million in our specialty benefits insurance business primarily due to
growth in the block of business and higher staff related costs, including
pension and other postretirement benefits.

Income Taxes

    The effective income tax rates for the segment were 31% and 32% for the
years ended December 31, 2012 and 2011, respectively. The effective income tax
rates were lower than the U.S. statutory rate as a result of the interest
exclusion from taxable income and income tax deductions allowed for corporate
dividends received.

                                       55

--------------------------------------------------------------------------------

Table of Contents

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

Operating Earnings

Operating earnings increased due to lowering our long-term interest rate assumptions in 2010 in our individual life insurance business. Growth in specialty benefits also increased operating earnings.

Operating Revenues


    Premiums increased $69.9 million in our specialty benefits insurance
business due to strong sales, stabilizing existing case membership and improved
lapse rates. Premiums decreased $31.6 million in our individual life insurance
business primarily due to the expected continued decline from our decreasing
block of traditional life insurance business and the increase use of ceded
premium stemming from growth in our universal life and variable universal life
lines of business.

Fees and other revenues increased $58.2 million in our individual life insurance business primarily due to growth in the universal life and variable universal life lines of business.

Total Expenses


    Benefits, claims and settlement expenses increased $50.6 million resulting
from continued growth in our specialty benefits insurance business. In addition,
benefits, claims and settlement expense increased $23.6 million in our
individual life insurance business primarily due to growth in the universal life
and variable universal life lines of business.

Operating expenses increased $39.7 million in our specialty benefits insurance business primarily due to growth. Operating expenses increased $19.5 million in our individual life insurance business due to growth in universal life and variable universal life lines of business.

Income Taxes


    The effective income tax rate for the segment was 32% for both the years
ended December 31, 2011 and 2010. The effective income tax rate was lower than
the U.S. statutory rate as a result of the interest exclusion from taxable
income and income tax deductions allowed for corporate dividends received.

Corporate Segment

Corporate Segment Summary Financial Data

The following table presents certain summary financial data relating to the Corporate segment for the years indicated:

                                         For the year ended            Increase (decrease)
                                            December 31,             2012 vs.      2011 vs.
                                     2012       2011       2010        2011          2010
                                                         (in millions)
Operating revenues:
Total operating revenues             (188.1 )   (189.2 )   (118.9 )        1.1          (70.3 )
Expenses:
Total expenses                        (11.7 )     (5.2 )     38.0         (6.5 )        (43.2 )

Operating loss before income
taxes, preferred stock dividends
and noncontrolling interest          (176.4 )   (184.0 )   (156.9 )        7.6          (27.1 )
Income tax benefits                   (69.6 )    (72.9 )    (61.4 )        3.3          (11.5 )
Preferred stock dividends              33.0       33.0       33.0            -              -
Operating earnings attributable
to noncontrolling interest                -        2.8        0.2         (2.8 )          2.6

Operating loss                     $ (139.8 ) $ (146.9 )   (128.7 ) $      7.1    $     (18.2 )


Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

Operating Loss

The operating loss decreased due to a reduction in corporate overhead expenses needed to support the exited group medical insurance business. This decrease was partially offset by higher interest expense on corporate debt.

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

Operating Loss

The operating loss increased due to a decrease in earnings on average invested assets for the segment, representing capital that has not been allocated to any other segment. This increase was partially offset by a reduction in corporate overhead expenses needed to support the exited group medical insurance business and the 2011 transition of wellness and

                                       56

--------------------------------------------------------------------------------

Table of Contents

non-medical fee-for-service claim administration businesses, which had operating losses in 2010, from this segment to the U.S. Insurance Solutions segment.

Liquidity and Capital Resources


    Liquidity and capital resources represent the overall strength of a company
and its ability to generate strong cash flows, borrow funds at a competitive
rate and raise new capital to meet operating and growth needs. Our legal entity
structure has an impact on our ability to meet cash flow needs as an
organization. Following is a simplified organizational structure.

                           [[Image Removed: GRAPHIC]]

Liquidity


    Our liquidity requirements have been and will continue to be met by funds
from consolidated operations as well as the issuance of commercial paper, common
stock, debt or other capital securities and borrowings from credit facilities.
We believe that cash flows from these sources are sufficient to satisfy the
current liquidity requirements of our operations, including reasonably
foreseeable contingencies.

    We maintain a level of cash and securities which, combined with expected
cash inflows from investments and operations, is believed to be adequate to meet
anticipated short-term and long-term payment obligations. We will continue our
prudent capital management practice of regularly exploring options available to
us to maximize capital flexibility, including accessing the capital markets and
careful attention to and management of expenses.

    Our liquidity is supported by a portfolio of U.S. government and agency and
residential pass-through government-backed securities, of which we held
$4.3 billion as of December 31, 2012, that may be utilized to bolster our
liquidity position, as collateral for secured borrowing transactions with
various third parties or by disposing of the securities in the open market, if
needed. As of December 31, 2012, approximately $10.9 billion, or 99%, of our
institutional guaranteed investment contracts and funding agreements cannot be
redeemed by contractholders prior to maturity. Our life insurance and annuity
liabilities contain provisions limiting early surrenders.

    As of December 31, 2012 and 2011, we had short-term credit facilities with
various financial institutions in an aggregate amount of $905.0 million and
$725.0 million, respectively. As of December 31, 2012 and 2011, we had
$40.8 million and $105.2 million, respectively, of outstanding borrowings
related to our credit facilities, with no assets pledged as support as of
December 31, 2012. None of these credit arrangements, other than our commercial
paper back-stop facility, are committed facilities. Due to the financial
strength and the strong relationships we have with these providers, as well as
the small size of these facilities, we are comfortable that there is a very low
risk that the financial institutions would not be able to fund these facilities.
During the first quarter of 2012, we refinanced our $579.0 million revolving
credit agreement that serves as a back-stop to our commercial paper program. The
new facility, effective March 30, 2012, was increased to $800.0 million. This
facility provides 100% back-stop support for our commercial paper program. The
credit agreement is broken into two tranches, a $500.0 million four year
facility that matures in March 2016, and a $300 million 364-day facility. The
four year facility is set up with PFG, PFS and Principal Life as co-borrowers;
the 364-day facility is for Principal Life only. The facility is supported by
eighteen banks, most if not all of which have other relationships with us. We
have no reason to believe that our current providers would be unable or
unwilling to fund the facility if necessary. As of December 31, 2012 and 2011,
commercial paper outstanding was $0.0 million and $50.0 million, respectively.

    The Holding Companies: Principal Financial Group, Inc. and Principal
Financial Services, Inc.  The principal sources of funds available to our parent
holding company, PFG, to meet its obligations, including the payments of
dividends on common stock, debt service and the repurchase of stock, are
dividends from subsidiaries as well as its ability to borrow funds at
competitive rates and raise capital to meet operating and growth needs.
Dividends from Principal Life, our primary subsidiary, are limited by Iowa law.
Under Iowa laws, Principal Life may pay dividends only from the earned surplus
arising from its business and must receive the prior approval of the Insurance
Commissioner of the State of Iowa ("the Commissioner") to pay stockholder
dividends or make any other distribution if such distributions would exceed
certain statutory limitations. Iowa law gives the Commissioner discretion to
disapprove requests for distributions in excess

                                       57

--------------------------------------------------------------------------------

Table of Contents


of these limits. Extraordinary dividends are those, together with dividends or
other distributions made within the preceding twelve months, that exceed the
greater of (i) 10% of Principal Life's statutory policyholder surplus as of the
previous year-end or (ii) the statutory net gain from operations from the
previous calendar year. Based on December 31, 2012 statutory results, the
dividend limitation for Principal Life is approximately $472.0 million in 2013.

In 2012, total stockholder dividends paid by Principal Life to its parent were $700.0 million, which were extraordinary and were approved by the Commissioner.


    Based on Iowa law, Principal Life could have distributed approximately
$509.7 million in statutory dividends in 2011. Principal Life distributed
paid-in and contributed surplus in the amount of $500.0 million to its parent
company in 2011. In addition, Principal Life requested and received permission
from the Commissioner to pay an extraordinary dividend in the amount of
$250.0 million, which was paid by Principal Life to its parent in 2011.

Based on Iowa law, Principal Life could have distributed approximately $608.7 million in statutory dividends in 2010. No dividends were paid as of December 31, 2010; however, on June 21, 2010, Principal Life distributed paid-in and contributed surplus in the amount of $300.0 million to its parent company.


    Operations.  Our primary consolidated cash flow sources are premiums from
insurance products, pension and annuity deposits, asset management fee revenues,
administrative services fee revenues, income from investments and proceeds from
the sales or maturity of investments. Cash outflows consist primarily of payment
of benefits to policyholders and beneficiaries, income and other taxes, current
operating expenses, payment of dividends to policyholders, payments in
connection with investments acquired, payments made to acquire subsidiaries,
payments relating to policy and contract surrenders, withdrawals, policy loans,
interest payments and repayment of short-term debt and long-term debt. Our
investment strategies are generally intended to provide adequate funds to pay
benefits without forced sales of investments. For a discussion of our investment
objectives, strategies and a discussion of duration matching, see "Investments"
as well as Item 7A. "Quantitative and Qualitative Disclosures About Market
Risk - Interest Rate Risk."

    Cash Flows.  Activity, as reported in our consolidated statements of cash
flows, provides relevant information regarding our sources and uses of cash. The
following discussion of our operating, investing and financing portions of the
cash flows excludes cash flows attributable to the separate accounts.

    Net cash provided by operating activities was $3,080.9 million,
$2,713.3 million and $2,791.7 for the years ended December 31, 2012, 2011 and
2010, respectively. As an insurance business, we typically generate positive
cash flows from operating activities, as premiums collected from our insurance
products and income received from our investments exceed policy acquisition
costs, benefits paid, redemptions and operating expenses. These positive cash
flows are then invested to support the obligations of our insurance products and
required capital supporting these products. Our cash flows from operating
activities are affected by the timing of premiums, fees, and investment income
received and expenses paid. The increase in cash provided by operating
activities in 2012 compared to 2011 was the result of an increase in premiums
and other consideration received primarily due to an increase in sales of single
premium group annuities with life contingencies and a decrease in claims paid.
The increase was partially offset by fluctuations in receivables and payables
associated with the timing of settlement. The decrease in cash provided by
operating activities in 2011 compared to 2010 was the result of a decrease in
premiums and other consideration received, partially offset by a decrease in
claims, due to our decision to exit the group medical insurance business. The
decrease in cash provided by operating activities was also offset by
fluctuations in receivables and payables associated with the timing of
settlement.

    Net cash used in investing activities was $1,611.4 million and
$202.1 million for the years ended December 31, 2012, and 2011, respectively,
compared to net cash provided by investing activities of $27.5 million for the
year ended December 31, 2010. The increase in cash used in investing activities
in 2012 compared to 2011 was due to an increase in net purchases of investments.
The increase in cash used in investing activities in 2011 compared to 2010 was
primarily due to purchases of interest in subsidiaries in 2011.

    Net cash used in financing activities was $126.2 million, $1,554.7 million
and $3,182.2 million for the years ended December 31, 2012, 2011 and 2010,
respectively. The decrease in cash used in financing activities was primarily
due to the issuance of senior notes in 2012, net of principal repayments, with
no corresponding activity in the prior year. Also contributing to the decrease
in cash used in financing activities is a decrease in treasury stock repurchased
in the current year. The decrease in cash used in financing activities in 2011
compared to 2010 is primarily due to a decrease in net withdrawals of Principal
Life general account investment contracts, due to our decision to scale back our
investment only business, partially offset by an increase in cash used to
repurchase treasury stock in 2011.

    Shelf Registration.  On May 24, 2011, our shelf registration statement was
filed with the SEC and became effective. The shelf registration replaces the
shelf registration that had been in effect since June 2008. Under our current
shelf registration, we have the ability to issue in unlimited amounts, unsecured
senior debt securities or subordinated debt securities, junior subordinated
debt, preferred stock, common stock, warrants, depository shares, stock purchase
contracts and stock purchase units of PFG, trust preferred securities of three
subsidiary trusts and guarantees by PFG of these trust preferred securities. Our
wholly owned subsidiary, PFS, may guarantee, fully and unconditionally or
otherwise, our obligations with respect to any non-convertible securities, other
than common stock, described in the shelf

                                       58

--------------------------------------------------------------------------------

Table of Contents

registration. For information on senior notes issued from our shelf registration, see Item 8. "Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 9, Debt."


    Preferred Stock Dividend Restrictions and Payments.  For preferred stock
dividend restriction and payment information, see Item 8. "Financial Statements
and Supplementary Data, Notes to Consolidated Financial Statements, Note 13,
Stockholders' Equity."

Short-Term Debt and Long-Term Debt. For debt information, see Item 8. "Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 9, Debt."

Stockholders' Equity. Proceeds from the issuance of our common stock were $28.9 million, $25.9 million and $20.6 million in 2012, 2011 and 2010, respectively.


    The following table summarizes our return of capital to common stockholders.

                         December 31, 2012     December 31, 2011     December 31, 2010
                                                 (in millions)
Dividends to
stockholders            $             231.3   $             213.7   $             176.2
Repurchase of common
stock                                 272.7                 556.4                   2.6

Total cash returned
to stockholders         $             504.0   $             770.1   $             178.8

Number of shares
repurchased                            10.5                  21.1                   0.1

For additional stockholders' equity information, see Item 8. "Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 13, Stockholders' Equity."

Capitalization

The following table summarizes our capital structure:

                                            December 31, 2012     December 31, 2011
                                                         (in millions)
Debt:
Short-term debt                            $              40.8   $             105.2
Long-term debt                                         2,671.3               1,564.8

Total debt                                             2,712.1               1,670.0
Stockholders' equity:
Equity excluding accumulated other
comprehensive income ("AOCI")                          9,121.3              

8,759.9

Total capitalization excluding AOCI $ 11,833.4 $ 10,429.9


Debt to equity excluding AOCI                               30 %                  19 %
Debt to capitalization excluding AOCI                       23 %            

16 %

    As of December 31, 2012, we had $270.3 million of excess capital in the
holding companies, consisting of cash and highly liquid assets available for
debt maturities, interest, preferred stock dividends and other holding company
obligations. This is exclusive of the capital that has been earmarked as of
December 31 for the Cuprum acquisition consummation. In addition, we continue to
maintain sufficient capital levels in Principal Life based on our current
financial strength ratings.

Contractual Obligations

The following table presents payments due by period for long-term contractual obligations as of December 31, 2012.

                                                   Payments due in year ending
Contractual                                                                        2018 and
obligations (1)    Total payments       2013       2014 - 2015     2016 - 2017    thereafter
                                                 (in millions)
Contractholder
funds (2)         $       62,988.7   $  7,420.5   $    10,609.6   $     8,251.2   $  36,707.4
Future policy
benefits and
claims (3)                35,829.5      2,072.7         3,266.0         3,080.8      27,410.0
Long-term debt
(4)                        2,671.3          9.8           113.5           299.7       2,248.3
Certificates of
deposit (5)                  817.2        450.5           224.7           139.8           2.2
Other long-term
liabilities (6)            1,928.4      1,630.3            78.4            78.4         141.3
Capital leases                13.2          5.3             7.1             0.8             -
Long-term debt
interest                   2,325.9        129.8           257.8           253.5       1,684.8
Operating
leases (7)                   208.7         43.0            68.5            37.2          60.0
Purchase
obligations (8)              745.1        720.6            18.4             6.1             -

Total
contractual
obligations       $      107,528.0   $ 12,482.5   $    14,644.0   $    12,147.5   $  68,254.0


--------------------------------------------------------------------------------

   º (1)
   º Excludes short-term liabilities, other policyholder funds, taxes and
     short-term debt as these are not long-term and/or not contractual in
     nature. Also excludes obligations under our pension and other

postretirement benefit plans as we do not anticipate contributions will be

                                       59

--------------------------------------------------------------------------------

  Table of Contents

     needed to satisfy the minimum funding requirements of ERISA for our
     qualified pension plan. In addition, separate account liabilities are
     excluded. Separate account liabilities represent the fair market value of
     funds that are separately administered by us. Generally, the separate

account contract owner, rather than us, bears the investment risk of these

funds. The separate account liabilities are legally segregated and are not

subject to claims that arise out of any other business of ours. Net

deposits, net investment income and realized and unrealized capital gains

and losses on the separate accounts are not reflected in the consolidated

statements of operations. The separate account obligations will be fully

funded by cash flows from the separate account assets.

º (2)

º Includes GICs, funding agreements, individual fixed annuities, universal

life insurance and other investment-type contracts. See Item 8. "Financial

Statements and Supplementary Data, Notes to Consolidated Financial

Statements, Note 8, Insurance Liabilities" for additional information.

Amounts included in the contractholder funds line item reflect estimated

cash payments to be made to policyholders. The sum of the cash outflows

shown for all years in the table exceeds the corresponding liability amount

     included in our consolidated statements of financial position as of
     December 31, 2012. The liability amount in our consolidated statements of
     financial position reflects either the account value (in the case of
     individual fixed annuities, universal life insurance and GICs) or the par

value plus accrued interest and other adjustments (in the case of funding

agreements and other investment contracts).

º (3)

º Amounts included in the future policy benefits and claims line item reflect

estimated cash payments to be made to policyholders. The sum of the cash

outflows shown for all years in the table exceeds the corresponding

liability amount included in our consolidated statements of financial

position as of December 31, 2012. The liability amount in our consolidated

statements of financial position reflects estimated cash payments to

policyholders, reductions for expected future premiums, assumptions with

     regard to the timing of cash payments and discounting for interest.

   º (4)
   º For long-term debt information, see Item 8. "Financial Statements and

Supplementary Data, Notes to Consolidated Financial Statements, Note 9,

Debt."

º (5)

º Amounts included in the certificates of deposit line item reflect estimated

     cash payments to be made, including expected interest payments.
     Certificates of deposit are reported as other liabilities on our
     consolidated statements of financial position.

   º (6)

º Other long-term liabilities include other liabilities reflected in the

consolidated statements of financial position that are contractual,

non-cancelable and long-term in nature. The total payments primarily relate

     to checking and savings deposits as well as premium associated with
     purchased option contracts where payments are made over the life of the
     contract. This line item excludes accruals, short-term items and items not
     contractual in nature.

º (7)

º As a lessee, we lease office space, data processing equipment and office

     furniture and equipment under various operating leases.

   º (8)
   º Purchase obligations include material contracts where we have a

non-cancelable commitment to purchase goods and services in addition to

commitments to originate loans and purchase investments.

Pension and Other Postretirement Plan Funding

    We have defined benefit pension plans covering substantially all of our U.S.
employees and certain agents. See Item 8. "Financial Statements and
Supplementary Data, Notes to Consolidated Financial Statements, Note 11,
Employee and Agent Benefits" for a complete discussion of these plans and their
effect on the consolidated financial statements.

    We report the net funded status of our pension and other postretirement
plans in the consolidated statements of financial position. The net funded
status represents the differences between the fair value of plan assets and the
projected benefit obligation for pension plans and other postretirement plans.
The measurement of the net funded status can vary based upon the fluctuations in
the fair value of the plan assets and the actuarial assumptions used for the
plans as discussed below. The net underfunded status of the pension and other
postretirement benefit obligation was $584.0 million pre-tax and $427.9 million
pre-tax as of December 31, 2012 and 2011, respectively. Nonqualified pension
plan assets are not included as part of the funding status mentioned above. The
nonqualified pension plan assets are held in Rabbi trusts for the benefit of all
nonqualified plan participants. The assets held in a Rabbi trust are available
to satisfy the claims of general creditors only in the event of bankruptcy.
Therefore, these assets are fully consolidated in our consolidated statements of
financial position and are not reflected in our funded status as they do not
qualify as plan assets under U.S. GAAP. The market value of assets held in these
trusts was $300.8 million and $281.2 million as of December 31, 2012 and 2011,
respectively.

    Our funding policy for the qualified pension plan is to fund the plan
annually in an amount at least equal to the minimum annual contributions
required under ERISA and, generally, not greater than the maximum amount that
can be deducted for federal income tax purposes. We do not anticipate
contributions will be needed to satisfy the minimum funding requirements of
ERISA for our qualified pension plan. At this time, it is too early to estimate
the amount that may be contributed, but it is possible that we may fund the
plans in 2013 in the range of $75 - $125 million. This includes funding for both
our qualified and nonqualified pension plans. We may contribute to our other
postretirement benefit plans in 2013 pending further analysis.

Contractual Commitments

    In connection with our banking business, we make additional commitments to
extend credit, which are agreements to lend to a customer as long as there is no
violation of any conditions established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. A majority of these commitments are lines of credit and are expected
to expire without being drawn upon. Therefore, the total commitment amounts do
not necessarily represent future cash funding requirements. We evaluate each
customer's creditworthiness on a case-by-case basis. The total commitments to
fund loans were $58.7 million as of December 31, 2012.

                                       60

--------------------------------------------------------------------------------

Table of Contents


    We have made commitments to fund certain limited partnerships in which we
are a limited partner. As of December 31, 2012, the amount of unfunded
commitments was $30.6 million. We are only required to fund additional equity
under these commitments when called upon to do so by the general partner;
therefore, these commitments are not liabilities on our consolidated statements
of financial position.

Off-Balance Sheet Arrangements


    Variable Interest Entities.  We have relationships with various types of
special purpose entities and other entities where we have a variable interest as
described in Item 8. "Financial Statements and Supplementary Data, Notes to
Consolidated Financial Statements, Note 3, Variable Interest Entities." We have
made commitments to fund certain limited partnerships, as previously discussed
in "Contractual Commitments", some of which are classified as unconsolidated
variable interest entities.

    Guarantees and Indemnifications.  As of December 31, 2012, there have been
no significant changes to guarantees and indemnifications since December 31,
2011. For guarantee and indemnification information, see Item 8. "Financial
Statements and Supplementary Data, Notes to Consolidated Financial Statements,
Note 12, Contingencies, Guarantees and Indemnifications" under the caption,
"Guarantees and Indemnifications."

Financial Strength Rating and Credit Ratings


    Our ratings are influenced by the relative ratings of our peers/competitors
as well as many other factors including our operating and financial performance,
asset quality, liquidity, asset/liability management, overall portfolio mix,
financial leverage (i.e., debt), risk exposures, operating leverage, ratings and
other factors.

    A.M. Best Company, Inc., Fitch Rating Ltd., Moody's Investors Service and
S&P publish financial strength ratings on U.S. life insurance companies that are
indicators of an insurance company's ability to meet contractholder and
policyholder obligations. These rating agencies also assign credit ratings on
non-life insurance entities, such as PFG and PFS. Credit ratings are indicators
of a debt issuer's ability to meet the terms of debt obligations in a timely
manner, and are important factors in overall funding profile and ability to
access external capital. Such ratings are not a recommendation to buy, sell or
hold securities. Ratings are subject to revision or withdrawal at any time by
the assigning rating agency.

    A.M. Best, Fitch, and Standard & Poor's maintain a stable outlook on the
U.S. life insurance sector, however, Standard & Poor's indicates it is
'cautious' on maintaining the stable outlook. Moody's has changed its outlook to
negative. Regardless of their published outlook on the sector, these rating
agencies note that current challenges for the industry are the result of
sustained low interest rates, global sovereign uncertainty, equity market
volatility, and lingering unemployment and fiscal tightening.

    In October, at the time the Cuprum acquisition was announced, A.M. Best
affirmed the financial strength ratings of Principal Life and Principal National
Life Insurance Company with no change to the stable outlook. S&P and Moody's
affirmed the financial strength ratings but changed outlooks to negative. The
negative outlooks assigned reflect the pressure from the transaction on certain
cash coverage and debt metrics, as well as execution risk. Fitch also affirmed
the financial strength ratings of Principal Life and Principal National Life
Insurance Company. However, the outlook was changed to rating watch negative,
reflecting the execution risk of the pending Cuprum acquisition. On February 12,
2013, after the acquisition was closed, Fitch affirmed the financial strength
ratings of Principal Life and Principal National Life Insurance Company and
changed the outlook to negative. The negative outlook reflects the pressure of
the transaction on certain cash coverage and debt metrics as well as integration
risk.

    In its annual review completed in December, A.M. Best affirmed the financial
strength ratings of Principal Life and Principal National Life Insurance Company
with a stable outlook.

    The following table summarizes our significant financial strength and debt
ratings from the major independent rating organizations. The debt ratings shown
are indicative ratings. Outstanding issuances are rated the same as indicative
ratings unless otherwise noted. Actual ratings can differ from indicative
ratings based on contractual terms.

                                        A.M. Best   Fitch   Standard & Poor's   Moody's
Principal Financial Group
Senior Unsecured Debt (1)                  a-                     BBB+           Baa1
Preferred Stock (2)                        bbb                    BBB-           Baa3
Principal Financial Services
Senior Unsecured Debt                      a-                     BBB+            A3
Commercial Paper                          AMB-1                    A-2            P-2
Principal Life Insurance Company
Insurer Financial Strength                 A+        AA-           A+             Aa3
Commercial Paper                         AMB-1+                    A-1            P-1
Surplus Notes                               a                      A-             A2
Enterprise Risk Management Rating                                Strong
Principal National Life Insurance
Company
Insurer Financial Strength                 A+        AA-           A+             Aa3

--------------------------------------------------------------------------------

º (1)

º Moody's has rated Principal Financial Group's senior debt issuance "A3"

º (2)

º S&P has rated Principal Financial Group's preferred stock issuance "BB+"

                                       61

--------------------------------------------------------------------------------

Table of Contents

Impacts of Income Taxes

For income tax information, see Item 8. "Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 10, Income Taxes."


Fair Value Measurement

    Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date (an exit price). The fair value hierarchy prioritizes the
inputs to valuation techniques used to measure fair value into three levels for
disclosure purposes. The fair value hierarchy gives the highest priority
(Level 1) to quoted prices in active markets for identical assets or liabilities
and gives the lowest priority (Level 3) to unobservable inputs. An asset or
liability's classification within the fair value hierarchy is based on the
lowest level of significant input to its valuation. See Item 8. "Financial
Statements and Supplementary Data, Notes to Consolidated Financial Statements,
Note 14, Fair Value Measurements" for further details, including a
reconciliation of changes in Level 3 fair value measurements.

    As of December 31, 2012, 41% of our net assets (liabilities) were Level 1,
55% were Level 2 and 4% were Level 3. Excluding separate account assets as of
December 31, 2012, 2% of our net assets (liabilities) were Level 1, 97% were
Level 2 and 1% were Level 3.

    As of December 31, 2011, 41% of our net assets (liabilities) were Level 1,
55% were Level 2 and 4% were Level 3. Excluding separate account assets as of
December 31, 2011, 3% of our net assets (liabilities) were Level 1, 96% were
Level 2 and 1% were Level 3.

Changes in Level 3 fair value measurements


    Net assets (liabilities) measured at fair value on a recurring basis using
significant unobservable inputs (Level 3) as of December 31, 2012, were
$4,987.4 million as compared to $4,647.3 million as of December 31, 2011. The
increase was primarily related to gains on other invested assets and real estate
included in our separate account assets. This increase was partially offset by
sales and net transfers out of Level 3 into Level 2 for certain fixed
maturities, available-for-sale. The transfers out of Level 3 were due to our
obtaining prices from third party pricing vendors or using internal models based
on substantially observable market information versus relying on broker quotes
or utilizing significant unobservable inputs.

    Net assets (liabilities) measured at fair value on a recurring basis using
significant unobservable inputs (Level 3) as of December 31, 2011, were
$4,647.3 million as compared to $4,691.4 million as of December 31, 2010. The
slight net decrease was primarily due to net transfers out of Level 3 and into
Level 2 offset in part by unrealized gains on real estate separate account
assets. The transfers included certain private corporate bonds we are now able
to price using a matrix valuation approach as well as certain separate account
assets for which we are now able to obtain pricing from a recognized third party
pricing vendor.

Investments

    We had total consolidated assets as of December 31, 2012, of
$161,926.5 million, of which $68,811.3 million were invested assets. The rest of
our total consolidated assets are comprised primarily of separate account assets
for which we do not bear investment risk. Because we generally do not bear any
investment risk on assets held in separate accounts, the discussion and
financial information below does not include such assets.

Overall Composition of Invested Assets


    Invested assets as of December 31, 2012, were predominantly high quality and
broadly diversified across asset class, individual credit, industry and
geographic location. Asset allocation is determined based on cash flow and the
risk/return requirements of our products. As shown in the following table, the
major categories of invested assets are fixed maturities

                                       62

--------------------------------------------------------------------------------

Table of Contents

and commercial mortgage loans. The remainder is invested in other investments, residential mortgage loans, real estate and equity securities. In addition, policy loans are included in our invested assets.

                              December 31, 2012                  December 31, 2011
                        Carrying amount     % of total     Carrying amount     % of total
                                                 ($ in millions)
Fixed maturities:
Public                 $        36,136.2             52 % $        35,350.3             53 %
Private                         15,429.8             22            14,628.1             22
Equity securities                  389.3              1               481.9              1
Mortgage loans:
Commercial                      10,183.3             15             9,396.6             14
Residential                      1,336.4              2             1,330.6              2
Real estate held for
sale                                87.0              -                44.8              -
Real estate held for
investment                       1,093.3              2             1,048.1              2
Policy loans                       864.9              1               885.1              1
Other investments                3,291.1              5             2,985.8              5

Total invested
assets                          68,811.3            100 %          66,151.3            100 %

Cash and cash
equivalents                      4,177.2                            2,833.9

Total invested
assets and cash        $        72,988.5                  $        68,985.2



Investment Results

Net Investment Income
    The following table presents the yield and investment income, excluding net
realized capital gains and losses, for our invested assets for the periods
indicated. We calculate annualized yields using a simple average of asset
classes at the beginning and end of the reporting period. The yields for fixed
maturities and equity securities are calculated using amortized cost and cost,
respectively. All other yields are calculated using carrying amounts.

                            For the year ended December 31,                            Increase (decrease)
                     2012                 2011                 2010            2012 vs. 2011        2011 vs. 2010
              Yield     Amount     Yield     Amount     Yield     Amount   

Yield Amount Yield Amount

                                                         ($ in millions)

Fixed

maturities 5.1 % $ 2,485.0 5.5 % $ 2,660.9 5.7 % $ 2,794.7

    (0.4 )% $ (175.9 )   (0.2 )% $ (133.8 )
Equity
securities       3.5        15.2      3.1        14.9      3.0        14.2      0.4         0.3      0.1         0.7
Mortgage
loans -
commercial       5.7       559.6      5.9       558.7      6.0       589.1     (0.2 )       0.9     (0.1 )     (30.4 )
Mortgage
loans -
residential      5.7        76.2      6.4        90.5      5.2        84.2     (0.7 )     (14.3 )    1.2         6.3
Real estate      6.3        71.4      6.9        74.2      5.5        57.5     (0.6 )      (2.8 )    1.4        16.7
Policy
loans            6.1        53.7      6.5        58.2      6.7        60.9     (0.4 )      (4.5 )   (0.2 )      (2.7 )
Cash and
cash
equivalents      0.3         9.6      0.4         8.5      0.4         7.2     (0.1 )       1.1        -         1.3
Other
investments      2.1        65.4     (0.3 )      (7.6 )   (0.9 )     (22.5 )    2.4        73.0      0.6        14.9

Total
before
investment

expenses 4.9 3,336.1 5.1 3,458.3 5.3 3,585.3

    (0.2 )    (122.2 )   (0.2 )    (127.0 )
Investment
expenses        (0.1 )     (81.2 )   (0.1 )     (83.0 )   (0.1 )     (89.5 )      -         1.8        -         6.5

Net
investment
income           4.8 % $ 3,254.9      5.0 % $ 3,375.3      5.2 % $ 3,495.8 

(0.2 )% $ (120.4 ) (0.2 )% $ (120.5 )

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

    Net investment income decreased due to lower reinvestment yields on our
invested assets and cash and lower inflation-based investment returns on average
invested assets and cash as a result of lower inflation in Chile and the
weakening of Latin American currencies against the U.S. dollar. These decreases
were partially offset by an increase in average invested assets and cash.

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010


    Net investment income decreased due to lower yields and a decrease in
average invested assets and cash primarily due to our decision to scale back our
investment only business. These decreases were partially offset by higher
inflation-based investment returns on average invested assets, most notably
fixed maturities and other investments, as a result of higher inflation in Chile
and the strengthening of Latin American currencies against the U.S. dollar.
Further offsetting the decline in investment income were gains on sales of
development real estate properties.

                                       63

--------------------------------------------------------------------------------

Table of Contents

Net Realized Capital Gains (Losses)

The following table presents the contributors to net realized capital gains and losses for our invested assets for the years indicated.

                                     For the year ended              Increase (decrease)
                                        December 31,             2012 vs.
                                 2012       2011       2010        2011        2011 vs. 2010
                                                       (in millions)
Fixed maturities,
available-for-sale - credit
impairments (1)                $ (118.2 ) $ (184.0 ) $ (229.0 ) $     65.8    $          45.0
Fixed maturities,
available-for-sale - other         21.6        1.9        8.9         19.7               (7.0 )
Fixed maturities, trading           2.2       (6.7 )     17.5          8.9              (24.2 )
Equity securities - credit
impairments                        (0.4 )     (3.8 )      3.7          3.4               (7.5 )
Derivatives and related
hedge activities (2)              (38.0 )    (22.4 )     30.8        (15.6 )            (53.2 )
Commercial mortgages              (11.0 )    (18.7 )    (53.0 )        7.7               34.3
Other gains (losses)              257.9      111.4       30.9        146.5               80.5

Net realized capital gains
(losses)                       $  114.1   $ (122.3 ) $ (190.2 ) $    236.4    $          67.9


--------------------------------------------------------------------------------

º (1)

º Includes credit impairments as well as losses on sales of fixed maturities

to reduce credit risk, net of realized credit recoveries on the sale of

previously impaired securities. Credit gains on sales, excluding associated

foreign currency fluctuations that are included in derivatives and related

     hedging activities, were a net gain of $0.0 million, $9.5 million and
     $15.0 million for the years ended December 31, 2012, 2011 and 2010,
     respectively.

   º (2)

º Includes fixed maturities, available-for-sale impairment-related net gains

of $0.0 million, $0.0 million and $0.1 million for the years ended

December 31, 2012, 2011 and 2010, respectively, which were hedged by

derivatives reflected in this line.

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011


    Net realized capital losses on fixed maturities, available-for-sale - credit
impairments decreased primarily due to lower impairments on commercial
mortgage-backed and other asset-backed securities as a result of improved market
conditions.

Net realized capital gains on fixed maturities, available-for-sale - other increased as a result of higher gains on sales in 2012 versus 2011.

    Net realized capital losses on derivatives and related hedge activities
increased due to increased losses on interest rate swaps and GMWB embedded
derivatives, including the spread reflecting our own creditworthiness, and
related hedging instruments. These losses were partially offset by gains versus
losses on derivatives not designated as hedging instruments, including credit
default swaps due to changes in credit spreads and currency forwards and
currency swaps due to changes in exchange rates.

    Other net realized capital gains increased in 2012 due to $184.3 million of
net gains related to the merger of Catalyst Health Solutions, Inc. and the
subsequent disposition of our remaining interest in the merged entity. 2011
included a net realized capital gain of $70.9 million resulting from the sale of
a portion of our interest in Catalyst Health Solutions, Inc. Additionally, gains
on the sale of real estate and joint ventures in real estate increased in 2012
versus 2011.

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010


    Net realized capital losses on fixed maturities, available-for-sale - credit
impairments decreased primarily due to lower impairments on commercial
mortgage-backed and other asset-backed securities as a result of improved market
conditions.

    Net realized capital losses on fixed maturities, trading increased due to
mark-to-market losses versus gains resulting from widening of credit spreads in
2011 and tightening of credit spreads in 2010.

    Net realized capital losses on derivatives and related hedge activities
increased due to losses versus gains on derivatives not designated as hedging
instruments, including credit default swaps due to changes in credit spreads and
currency forwards and currency swaps due to changes in exchange rates.

    Net realized capital losses on commercial mortgages decreased due to a lower
valuation allowance provision in 2011 than in 2010. For additional information,
see "U.S. Investment Operations - Mortgage Loans - Commercial Mortgage Loan
Valuation Allowance."

    Other net realized capital gains increased due to a realized capital gain of
$70.9 million in 2011 resulting from the sale of a portion of our interest in
Catalyst Health Solutions, Inc., which is accounted for on the equity method,
and a $77.6 million decrease in losses related to the residential mortgage loan
loss provision for our bank and trust services business. In addition, other net
realized capital gains in 2010 included an $80.1 million gain resulting from the
signing of our Shareholders Agreement with Banco pertaining to our Brasilprev
joint venture.

                                       64

--------------------------------------------------------------------------------

Table of Contents

U.S. Investment Operations


    Of our invested assets, $62,814.0 million were held by our U.S. operations
as of December 31, 2012. Our U.S. invested assets are managed primarily by our
Principal Global Investors segment. Our primary investment objective is to
maximize after-tax returns consistent with acceptable risk parameters. We seek
to protect policyholders' benefits by optimizing the risk/return relationship on
an ongoing basis, through asset/liability matching, reducing the credit risk,
avoiding high levels of investments that may be redeemed by the issuer,
maintaining sufficiently liquid investments and avoiding undue asset
concentrations through diversification. We are exposed to two primary sources of
investment risk:

º •

º credit risk, relating to the uncertainty associated with the continued

          ability of a given obligor to make timely payments of principal and
          interest and

        º •
        º interest rate risk, relating to the market price and/or cash flow
          variability associated with changes in market yield curves.

    Our ability to manage credit risk is essential to our business and our
profitability. We devote considerable resources to the credit analysis of each
new investment. We manage credit risk through industry, issuer and asset class
diversification. Our Investment Committee, appointed by our Board of Directors,
is responsible for establishing all investment policies and approving or
authorizing all investments, except the Executive Committee of the Board must
approve any investment transaction exceeding $500.0 million. As of December 31,
2012, there are twelve members on the Investment Committee, one of whom is a
member of our Board of Directors. The remaining members are senior management
members representing various areas of our company.

    We also seek to reduce call or prepayment risk arising from changes in
interest rates in individual investments. We limit our exposure to investments
that are prepayable without penalty prior to maturity at the option of the
issuer and we require additional yield on these investments to compensate for
the risk that the issuer will exercise such option. We assess option risk in all
investments we make and, when we take that risk, we price for it accordingly.

    Our Fixed Income Securities Committee, consisting of fixed income securities
senior management members, approves the credit rating for the fixed maturities
we purchase. Teams of security analysts, organized by industry, analyze and
monitor these investments. In addition, we have teams who specialize in
residential mortgage-backed securities ("RMBS"), commercial mortgage-backed
securities ("CMBS"), asset-backed securities ("ABS"), municipals and below
investment grade securities. Our analysts monitor issuers held in the portfolio
on a continuous basis with a formal review documented annually or more
frequently if material events affect the issuer. The analysis includes both
fundamental and technical factors. The fundamental analysis encompasses both
quantitative and qualitative analysis of the issuer. The qualitative analysis
includes an assessment of both accounting and management aggressiveness of the
issuer. In addition, technical indicators such as stock price volatility and
credit default swap levels are monitored.

    Our Fixed Income Securities Committee also reviews private transactions on a
continuous basis to assess the quality ratings of our privately placed
investments. We regularly review our investments to determine whether we should
re-rate them, employing the following criteria:

        º •
        º material changes in the issuer's revenues or margins;

        º •
        º significant management or organizational changes;

        º •
        º significant changes regarding the issuer's industry;

        º •
        º debt service coverage or cash flow ratios that fall below
          industry-specific thresholds;

        º •
        º violation of financial covenants and

        º •
        º other business factors that relate to the issuer.

    A dedicated risk management team is responsible for centralized monitoring
of the commercial mortgage loan portfolio. We apply a variety of strategies to
minimize credit risk in our commercial mortgage loan portfolio. When considering
new commercial mortgage loans, we review the cash flow fundamentals of the
property, make a physical assessment of the underlying security, conduct a
comprehensive market analysis and compare against industry lending practices. We
use a proprietary risk rating model to evaluate all new and substantially all
existing loans within the portfolio. The proprietary risk model is designed to
stress projected cash flows under simulated economic and market downturns. Our
lending guidelines are typically 65% or less loan-to-value ratio and a debt
service coverage ratio of at least 1.5 times. We analyze investments outside of
these guidelines based on cash flow quality, tenancy and other factors. The
following table presents loan-to-value and debt service coverage ratios for our
brick and mortar commercial mortgages, excluding Principal Global Investors
segment mortgages:

                Weighted average loan-to-value ratio               Debt 

service coverage ratio

            December 31, 2012         December 31, 2011     December 31, 2012       December 31, 2011
New
mortgages                   48 %                      45 %                3.2x                    3.3x
Entire
mortgage
portfolio                   54 %                      60 %                2.2x                    2.0x


                                       65

--------------------------------------------------------------------------------

Table of Contents


    Our investment decisions and objectives are a function of the underlying
risks and product profiles of each primary business operation. In addition, we
diversify our product portfolio offerings to include products that contain
features that will protect us against fluctuations in interest rates. Those
features include adjustable crediting rates, policy surrender charges and market
value adjustments on liquidations. For further information on our management of
interest rate risk, see Item 7A. "Quantitative and Qualitative Disclosures About
Market Risk - Interest Rate Risk."

Overall Composition of U.S. Invested Assets

As shown in the following table, the major categories of U.S. invested assets are fixed maturities and commercial mortgage loans. The remainder is invested in other investments, real estate, residential mortgage loans and equity securities. In addition, policy loans are included in our invested assets. The following discussion analyzes the composition of U.S. invested assets, but excludes invested assets of the separate accounts.

                              December 31, 2012                  December 31, 2011
                        Carrying amount     % of total     Carrying amount     % of total
                                                 ($ in millions)
Fixed maturities:
Public                 $        32,437.5             52 % $        32,081.2             53 %
Private                         15,429.8             25            14,628.1             24
Equity securities                  263.2              -               395.9              1
Mortgage loans:
Commercial                      10,167.7             16             9,386.0             15
Residential                        657.7              1               746.0              1
Real estate held for
sale                                80.0              -                36.6              -
Real estate held for
investment                       1,092.5              2             1,047.3              2
Policy loans                       838.2              1               861.6              1
Other investments                1,847.4              3             1,783.5              3

Total invested
assets                          62,814.0            100 %          60,966.2            100 %

Cash and cash
equivalents                      4,071.8                            2,741.7

Total invested
assets and cash        $        66,885.8                  $        63,707.9



Fixed Maturities
    Fixed maturities consist of publicly traded and privately placed bonds,
asset-backed securities, redeemable preferred stock and certain nonredeemable
preferred stock. Included in the privately placed category as of December 31,
2012 and December 31, 2011, were $9.9 billion and $9.1 billion, respectively, of
securities subject to certain holding periods and resale restrictions pursuant
to Rule 144A of the Securities Act of 1933. Fixed maturities include trading
portfolios that support investment strategies that involve the active and
frequent purchase and sale of fixed maturities. We held $10.5 million and
$279.1 million of these trading securities as of December 31, 2012 and
December 31, 2011, respectively.

Fixed maturities were diversified by category of issuer, as shown in the following table for the periods indicated.

                              December 31, 2012                  December 31, 2011
                        Carrying amount     % of total     Carrying amount     % of total
                                                 ($ in millions)
U.S. government and
agencies               $           953.7              2 % $         1,004.7              2 %
States and political
subdivisions                     3,327.8              7             3,041.1              7
Non-U.S. governments               663.4              1               676.1              1
Corporate - public              18,718.2             39            19,194.4             41
Corporate - private             12,808.6             27            11,920.7             26
Residential
mortgage-backed
pass-through
securities                       3,277.4              7             3,421.3              7
Commercial
mortgage-backed
securities                       3,900.2              8             3,425.7              7
Residential
collateralized
mortgage obligations             1,115.3              2             1,403.8              3
Asset-backed
securities                       3,102.7              7             2,621.5              6

Total fixed
maturities             $        47,867.3            100 % $        46,709.3            100 %



    We believe that it is desirable to hold residential mortgage-backed
pass-through securities due to their credit quality and liquidity as well as
portfolio diversification characteristics. Our portfolio is comprised of
Government National Mortgage Association, Federal National Mortgage Association
and Federal Home Loan Mortgage Corporation pass-through securities. In addition,
our residential collateralized mortgage obligation portfolio offers structural
features that allow cash flows to be matched to our liabilities.

    CMBS provide varying levels of credit protection, diversification and
reduced event risk depending on the securities owned and composition of the loan
pool. CMBS are predominantly comprised of large pool securitizations that are
diverse by property type, borrower and geographic dispersion. The risks to any
CMBS deal are determined by the credit quality of the underlying loans and how
those loans perform over time. Another key risk is the vintage of the underlying
loans and the state of the markets during a particular vintage. In the CMBS
market, there is a material difference in the

                                       66

--------------------------------------------------------------------------------

Table of Contents


outlook for the performance of loans originated in 2005 and earlier relative to
loans originated in 2006 through 2008. For loans originated prior to 2006,
underwriting assumptions were more conservative regarding required debt service
coverage and loan-to-value ratios. For the 2006 through 2008 vintages, real
estate values peaked and the underwriting expectations were that values would
continue to increase, which makes those loan values more sensitive to market
declines. The 2009 through 2012 vintages represent a return to debt service
coverage ratios and loan-to-value ratios that more closely resemble loans
originated prior to 2006.

    We purchase ABS to diversify the overall credit risks of the fixed
maturities portfolio and to provide attractive returns. The principal risks in
holding ABS are structural and credit risks. Structural risks include the
security's priority in the issuer's capital structure, the adequacy of and
ability to realize proceeds from the collateral and the potential for
prepayments. Credit risks involve issuer/servicer risk where collateral values
can become impaired in the event of servicer credit deterioration. Our ABS
portfolio is diversified both by type of asset and by issuer. We actively
monitor holdings of ABS to ensure that the risk profile of each security
improves or remains consistent. Prepayments in the ABS portfolio are, in
general, insensitive to changes in interest rates or are insulated from such
changes by call protection features. In the event that we are subject to
prepayment risk, we monitor the factors that impact the level of prepayment and
prepayment speed for those ABS. In addition, we diversify the risks of ABS by
holding a diverse class of securities, which limits our exposure to any one
security.

    The international exposure held in our U.S. operation's fixed maturities
portfolio was 27% of total fixed maturities as of December 31, 2012, and 26% as
of December 31, 2011. It is comprised of corporate and foreign government fixed
maturities. The following table presents the carrying amount of our
international exposure for our U.S. operation's fixed maturities portfolio for
the periods indicated.

                                   December 31, 2012     December 31, 2011
                                                (in millions)
          European Union          $           4,415.8   $           4,132.1
          United Kingdom                      2,663.6               2,329.5
          Australia/New Zealand               1,383.8               1,490.1
          Asia-Pacific                        1,369.0               1,172.3
          Latin America                         844.2                 868.8
          Other countries (1)                 2,047.6               2,139.8

          Total                   $          12,724.0   $          12,132.6


--------------------------------------------------------------------------------

   º (1)
   º Includes exposure from 13 countries as of December 31, 2012 and 14
     countries as of December 31, 2011.

    International fixed maturities are determined by the country of domicile of
the parent entity of an individual asset. All international fixed maturities
held by our U.S. operations are either denominated in U.S. dollars or have been
swapped into U.S. dollar equivalents. Our international investments are analyzed
internally by country and industry credit investment professionals. We control
concentrations using issuer and country level exposure benchmarks, which are
based on the credit quality of the issuer and the country. Our investment policy
limits total international fixed maturities investments and we are within those
internal limits. Exposure to Canada is not included in our international
exposure. As of December 31, 2012 and December 31, 2011, our investments in
Canada totaled $1,819.0 million and $1,749.1 million, respectively.

    Economic and fiscal conditions in select European countries, including
Greece, Ireland, Italy, Portugal and Spain, continue to cause credit concerns
particularly to financial institutions and banks with exposure to the European
periphery region. Our exposure to the region within our U.S. investment
operations fixed maturities portfolio is modest and manageable, representing
2.2% and 2.4% of total fixed maturities as of December 31, 2012 and December 31,
2011, respectively. Additionally, we did not hold any sovereign debt issuances
of the selected countries and had not bought or sold credit protection on
sovereign issuances as of December 31, 2012 and December 31, 2011.

    The fixed maturities within our U.S. operations portfolio with exposure to
the region are primarily corporate credit issuances of large multinational
companies where the majority of revenues are coming from outside the country
where the parent company is domiciled. Our experience indicates multinational
companies have demonstrated better market price performance and credit ratings
stability. As of December 31, 2012, 93% of our total portfolio exposure consists
of investment grade bonds with an average price of 104 (carrying value/amortized
cost) and a weighted average time to maturity of 5 years.

                                       67

--------------------------------------------------------------------------------

Table of Contents

The following table presents the carrying amount of our European periphery zone fixed maturities exposure for the periods indicated:

                                                      December 31, 2012
  Select European Exposure     Greece    Ireland     Italy     Portugal     Spain      Total
                                                        (in millions)
  Non-Sovereign:
  Financial institutions       $     -   $   59.9   $  44.4   $        -   $ 138.5   $   242.8
  Non-financial institutions         -      270.5     225.7         26.7     278.1       801.0

  Total                        $     -   $  330.4   $ 270.1   $     26.7   $ 416.6   $ 1,043.8





                                                      December 31, 2011
  Select European Exposure      Greece    Ireland     Italy     Portugal     Spain      Total
                                                        (in millions)
  Non-Sovereign:
  Financial institutions        $     -    $  62.1   $  53.7    $       -   $ 152.2   $   268.0
  Non-financial institutions        7.1      295.5     223.9         19.9     284.5       830.9

  Total                         $   7.1    $ 357.6   $ 277.6    $    19.9   $ 436.7   $ 1,098.9


For further details on our International investment operations exposure to these European countries, see "International Investment Operations - Fixed Maturities Exposure."


    Fixed Maturities Credit Concentrations.  One aspect of managing credit risk
is through industry, issuer and asset class diversification. Our credit
concentrations are managed to established limits. The following table presents
our top ten exposures as of December 31, 2012.

                                                 Amortized cost
                                                 (in millions)
                 General Electric Co.           $          231.3
                 AT&T Inc.                                 196.8
                 Berkshire Hathaway Inc.                   180.1
                 Prudential Financial Inc.                 145.6
                 JPMorgan Chase & Co. (1)                  145.5
                 Verizon Communications Inc.               143.1
                 Republic of Korea                         143.0
                 Merck & Co Inc.                           142.4
                 Bank of America Corp. (1)                 141.9
                 News Corp                                 141.7

                 Total top ten exposures        $        1,611.4


--------------------------------------------------------------------------------

º (1)

º Includes actual counterparty exposure.


    Fixed Maturities Valuation and Credit Quality.  Valuation techniques for the
fixed maturities portfolio vary by security type and the availability of market
data. The use of different pricing techniques and their assumptions could
produce different financial results. See Item 8. "Financial Statements, Notes to
Consolidated Financial Statements, Note 14, Fair Value Measurements" for further
details regarding our pricing methodology. Once prices are determined, they are
reviewed by pricing analysts for reasonableness based on asset class and
observable market data. Investment analysts who are familiar with specific
securities review prices for reasonableness through direct interaction with
external sources, review of recent trade activity or use of internal models. All
fixed maturities placed on the "watch list" are periodically analyzed by
investment analysts or analysts that focus on troubled securities ("Workout
Group"). This group then meets with the Chief Investment Officer and the
Portfolio Managers to determine reasonableness of prices. The valuation of
impaired bonds for which there is no quoted price is typically based on the
present value of the future cash flows expected to be received. Although we
believe these values reasonably reflect the fair value of those securities, the
key assumptions about risk premiums, performance of underlying collateral (if
any) and other market factors involve qualitative and unobservable inputs.

    The Securities Valuation Office ("SVO") of the NAIC monitors the bond
investments of insurers for regulatory capital and reporting purposes and, when
required, assigns securities to one of six investment categories. For certain
bonds, the NAIC designations closely mirror the Nationally Recognized
Statistical Rating Organizations' ("NRSRO") credit ratings. For most corporate
bonds, NAIC designations 1 and 2 include bonds considered investment grade by
such rating organizations. Bonds are considered investment grade when rated
"Baa3" or higher by Moody's, or "BBB-" or higher by S&P. NAIC designations 3
through 6 are referred to as below investment grade. Bonds are considered below
investment grade when rated "Ba1" or lower by Moody's, or "BB+" or lower by S&P.

    However, for loan-backed and structured securities, as defined by the NAIC,
the NAIC rating is not always equivalent to an NRSRO rating as described below.
For non-agency RMBS, PIMCO Advisors models and assigns the

                                       68

--------------------------------------------------------------------------------

Table of Contents


NAIC ratings. For CMBS, Blackrock Solutions undertakes the modeling and
assignment of those NAIC ratings. Other loan-backed and structured securities
may be subject to an intrinsic price matrix as provided by the NAIC. This may
result in a final designation being higher or lower than the NRSRO credit
rating.

    The following table presents our total fixed maturities by NAIC designation
and the equivalent ratings of the NRSROs as of the periods indicated as well as
the percentage, based on fair value, that each designation comprises.

                                     December 31, 2012                        December 31, 2011
                Rating                                % of total                               % of total
                Agency     Amortized     Carrying      carrying     Amortized     Carrying      carrying
NAIC Rating   Equivalent      cost        amount        amount         cost

amount amount

                                                           ($ in millions)
1             AAA/AA/A     $ 26,880.3   $ 28,943.8             60 % $ 26,802.2   $ 28,115.1             60 %
2             BBB            14,331.8     15,596.0             33     14,570.4     15,195.9             33
3             BB              2,416.0      2,330.1              5      2,537.5      2,405.8              5
4             B                 677.2        615.7              1        759.1        582.3              1
              CCC and
5             lower             335.9        254.7              1        329.4        255.5              1
              In or near
6             default           259.2        127.0              -        273.4        154.7              -

              Total
              fixed
              maturities   $ 44,900.4   $ 47,867.3            100 % $ 45,272.0   $ 46,709.3            100 %



    Fixed maturities include 18 securities with an amortized cost of
$232.0 million, gross gains of $7.0 million, gross losses of $0.2 million and a
carrying amount of $238.8 million as of December 31, 2012, that are still
pending a review and assignment of a rating by the SVO. Due to the timing of
when fixed maturities are purchased, legal documents are filed and the review by
the SVO is completed, there will always be securities in our portfolio that are
unrated over a reporting period. In these instances, an equivalent rating is
assigned based on our fixed income analyst's assessment.

    Commercial Mortgage-Backed Securities and Home Equity Asset-Backed
Securities Portfolios.  As of December 31, 2012, based on amortized cost, 53% of
our CMBS portfolio had ratings of A or higher and 32% was issued in 2005 or
before and 6% of our ABS home equity portfolio had ratings of A or higher and
86% was issued in 2005 or before.

The following tables present our exposure by credit quality, based on the lowest NRSRO designation, and year of issuance ("vintage") for our CMBS portfolio as of the periods indicated.

                                                                             December 31, 2012
                  AAA                        AA                         A                         BBB                   BB+ and Below                Total
         Amortized    Carrying     Amortized     Carrying     Amortized     Carrying     Amortized     Carrying    Amortized     Carrying    Amortized    Carrying
            cost       amount        cost         amount        cost         amount        cost         amount        cost        amount        cost       amount
                                                                               (in millions)
2003 &
Prior    $     40.8   $    41.7   $      24.1   $     24.3   $      37.7   $     38.2   $      60.5   $     61.4   $    118.2   $     98.2   $    281.3   $   263.8
2004           73.2        76.3          56.9         59.5          49.2         48.1          31.2         26.5         97.0         71.5        307.5       281.9
2005          345.0       373.2          47.3         51.7          39.6         39.1          91.7         88.8        211.7        140.0        735.3       692.8
2006          124.2       132.1          30.7         32.4          72.9         79.2          93.7        101.8        160.8        110.6        482.3       456.1
2007          117.1       118.4          59.5         69.9         158.6        181.2         231.7        261.6        758.4        544.8      1,325.3     1,175.9
2008           11.2        12.2          43.5         52.3             -            -          23.4         26.0         31.5         32.6        109.6       123.1
2009           92.3       101.2         100.5        108.1             -            -             -            -            -            -        192.8       209.3
2010           64.1        73.1          65.1         68.9             -            -             -            -            -            -        129.2       142.0
2011           97.5       100.6         122.2        128.3             -            -             -            -            -            -        219.7       228.9
2012          157.7       163.2         156.9        163.2             -            -             -            -            -            -        314.6       326.4

Total

(1) $ 1,123.1$ 1,192.0$ 706.7$ 758.6$ 358.0$ 385.8$ 532.2$ 566.1$ 1,377.6$ 997.7$ 4,097.6$ 3,900.2

--------------------------------------------------------------------------------

º (1)

º The CMBS portfolio included agency CMBS with a $403.8 million amortized

cost and a $423.0 million carrying amount.

                                                                             December 31, 2011
                  AAA                        AA                         A                         BBB                   BB+ and Below                Total
         Amortized    Carrying     Amortized     Carrying     Amortized     Carrying     Amortized     Carrying    Amortized     Carrying    Amortized    Carrying
            cost       amount        cost         amount        cost         amount        cost         amount        cost        amount        cost       amount
                                                                               (in millions)
2003 &
Prior     $   147.0   $   142.3    $     81.3    $    81.4    $     72.2    $    70.2    $     94.6    $    85.2    $   117.8    $    79.9    $   512.9   $   459.0
2004          146.5       149.6          56.8         56.9          45.2         41.6          25.1         18.8         79.4         54.7        353.0       321.6
2005          362.0       392.4          43.5         48.0          18.3         17.1          77.5         61.6        225.0        128.7        726.3       647.8
2006          203.4       209.2           4.8          5.6          58.6         62.9          14.6         14.5        151.9         89.9        433.3       382.1
2007          292.2       288.9          22.8         25.1         152.7        165.2         300.8        306.6        637.2        347.8      1,405.7     1,133.6
2008              -           -          15.0         16.3          33.1         36.4             -            -         38.1         32.7         86.2        85.4
2009          123.6       127.5          16.1         16.3             -            -             -            -            -            -        139.7       143.8
2010           76.2        80.8           7.7          7.6             -            -             -            -            -            -         83.9        88.4
2011          165.3       164.0             -            -             -            -             -            -            -            -        165.3       164.0

Total

(1) $ 1,516.2$ 1,554.7$ 248.0$ 257.2$ 380.1$ 393.4$ 512.6$ 486.7$ 1,249.4$ 733.7$ 3,906.3

$ 3,425.7

--------------------------------------------------------------------------------

º (1)

º The CMBS portfolio included agency CMBS with a $204.1 million amortized

cost and a $210.2 million carrying amount.

                                       69

--------------------------------------------------------------------------------

Table of Contents

The following tables present our exposure by credit quality, based on the lowest NRSRO designation, and vintage for our ABS home equity portfolio supported by subprime first lien mortgages as of the periods indicated.

                                                                               December 31, 2012
                   AAA                       AA                         A                         BBB                   BB+ and Below                  Total

Amortized Carrying Amortized Carrying Amortized Carrying Amortized Carrying Amortized Carrying Amortized Carrying

            cost        amount        cost        amount        cost         amount        cost         amount        cost         amount        cost         amount
                                                                                 (in millions)
2003 &
Prior    $       2.0   $     2.0   $       4.8   $     5.0   $       5.7   $      5.8   $      21.6   $     21.5   $     141.4   $    127.8   $     175.5   $    162.1
2004               -           -             -           -           5.9          5.7          19.4         19.2          44.9         40.2          70.2         65.1
2005               -           -             -           -           3.0          3.1             -            -          71.4         58.0          74.4         61.1
2006               -           -             -           -             -            -             -            -          13.8         12.6          13.8         12.6
2007               -           -             -           -             -            -             -            -          37.2         32.9          37.2         32.9

Total    $       2.0   $     2.0   $       4.8   $     5.0   $      14.6   $     14.6   $      41.0   $     40.7   $     308.7   $    271.5   $     371.1   $    333.8





                                                                                December 31, 2011
                   AAA                         AA                         A                         BBB                   BB+ and Below                  Total

Amortized Carrying Amortized Carrying Amortized

   Carrying     Amortized     Carrying     Amortized     Carrying     Amortized     Carrying
            cost         amount        cost         amount        cost         amount        cost         amount        cost         amount        cost         amount
                                                                                  (in millions)
2003 &
Prior     $     12.3    $    12.3    $      7.3    $     7.0    $     12.7    $    12.0    $     61.2    $    54.8    $    102.7    $    77.1    $    196.2    $   163.2
2004             1.5          1.4          12.6         11.9           8.4          7.8           2.1          2.1          47.1         38.3          71.7         61.5
2005               -            -           3.0          3.1             -            -             -            -          67.8         43.3          70.8         46.4
2006               -            -             -            -             -            -             -            -          14.9          9.5          14.9          9.5
2007               -            -             -            -             -            -             -            -          37.2         27.8          37.2         27.8

Total     $     13.8    $    13.7    $     22.9    $    22.0    $     21.1    $    19.8    $     63.3    $    56.9    $    269.7    $   196.0    $    390.8    $   308.4



    Fixed Maturities Watch List.  We monitor any decline in the credit quality
of fixed maturities through the designation of "problem securities," "potential
problem securities" and "restructured securities". We define problem securities
in our fixed maturity portfolio as securities: (i) as to which principal and/or
interest payments are in default or where default is perceived to be imminent in
the near term, or (ii) issued by a company that went into bankruptcy subsequent
to the acquisition of such securities. We define potential problem securities in
our fixed maturity portfolio as securities included on an internal "watch list"
for which management has concerns as to the ability of the issuer to comply with
the present debt payment terms and which may result in the security becoming a
problem or being restructured. The decision whether to classify a performing
fixed maturity security as a potential problem involves significant subjective
judgments by our management as to the likely future industry conditions and
developments with respect to the issuer. We define restructured securities in
our fixed maturity portfolio as securities where a concession has been granted
to the borrower related to the borrower's financial difficulties that would not
have otherwise been considered. We determine that restructures should occur in
those instances where greater economic value will be realized under the new
terms than through liquidation or other disposition and may involve a change in
contractual cash flows. If the present value of the restructured cash flows is
less than the current cost of the asset being restructured, a realized capital
loss is recorded in net income and a new cost basis is established.

The following table presents the total carrying amount of our fixed maturities portfolio, as well as its problem, potential problem and restructured fixed maturities for the periods indicated.

December 31, 2012     December 

31, 2011

                                                         ($ in millions)
Total fixed maturities (public and
private)                                    $          47,867.3   $          46,709.3

Problem fixed maturities (1)                $             385.8   $             343.5
Potential problem fixed maturities                        204.6             

166.3

Restructured problem fixed maturities                      15.2             

14.6


Total problem, potential problem and
restructured fixed maturities               $             605.6   $         

524.4


Total problem, potential problem and
restructured fixed maturities as a
percent of total fixed maturities                          1.27 %           

1.12 %

--------------------------------------------------------------------------------

º (1)

º The problem fixed maturities carrying amount is net of other-than-temporary

impairment losses.


    Fixed Maturities Impairments.  We have a process in place to identify
securities that could potentially have a credit impairment that is other than
temporary. This process involves monitoring market events that could impact
issuers' credit ratings, business climate, management changes, litigation and
government actions and other similar factors. This process also involves
monitoring late payments, pricing levels, downgrades by rating agencies, key
financial ratios, financial statements, revenue forecasts and cash flow
projections as indicators of credit issues.

Each reporting period, a group of individuals including the Chief Investment Officer, our Portfolio Managers, members of our Workout Group and representatives from Investment Accounting review all securities to determine

                                       70

--------------------------------------------------------------------------------

Table of Contents

whether an other-than-temporary decline in value exists and whether losses should be recognized. The analysis focuses on each issuer's ability to service its debts in a timely fashion. Formal documentation of the analysis and our decision is prepared and approved by management.


    We consider relevant facts and circumstances in evaluating whether a credit
or interest-rate related impairment of a security is other than temporary.
Relevant facts and circumstances considered include: (1) the extent and length
of time the fair value has been below cost; (2) the reasons for the decline in
value; (3) the financial position and access to capital of the issuer, including
the current and future impact of any specific events; (4) for structured
securities, the adequacy of the expected cash flows and (5) our intent to sell
the security or whether it is more likely than not we will be required to sell
the security before recovery of its amortized cost which, in some cases, may
extend to maturity. To the extent we determine that a security is deemed to be
other than temporarily impaired, an impairment loss is recognized. For
additional details, see Item 8. "Financial Statements, Notes to Consolidated
Financial Statements, Note 4, Investments."

    We would not consider a security with unrealized losses to be other than
temporarily impaired when it is not our intent to sell the security, it is not
more likely than not that we would be required to sell the security before
recovery of the amortized cost, which may be maturity, and we expect to recover
the amortized cost basis. However, we do sell securities under certain
circumstances, such as when we have evidence of a change in the issuer's
creditworthiness, when we anticipate poor relative future performance of
securities, when a change in regulatory requirements modifies what constitutes a
permissible investment or the maximum level of investments held or when there is
an increase in capital requirements or a change in risk weights of debt
securities. Sales generate both gains and losses.

    There are a number of significant risks and uncertainties inherent in the
process of monitoring credit impairments and determining if an impairment is
other than temporary. These risks and uncertainties include: (1) the risk that
our assessment of an issuer's ability to meet all of its contractual obligations
will change based on changes in the credit characteristics of that issuer,
(2) the risk that the economic outlook will be worse than expected or have more
of an impact on the issuer than anticipated, (3) the risk that our investment
professionals are making decisions based on fraudulent or misstated information
in the financial statements provided by issuers and (4) the risk that new
information obtained by us or changes in other facts and circumstances lead us
to change our intent to not sell the security prior to recovery of its amortized
cost. Any of these situations could result in a charge to net income in a future
period.

    The net realized loss relating to other-than-temporary credit impairments
and credit related sales of fixed maturities was $118.2 million, $186.7 million
and $244.7 million for the years ended December 31, 2012, 2011, and 2010,
respectively.

                                       71

--------------------------------------------------------------------------------

Table of Contents

Fixed Maturities Available-for-Sale


    The following tables present our fixed maturities available-for-sale by
industry category and the associated gross unrealized gains and losses,
including other-than-temporary impairment losses reported in AOCI, as of the
periods indicated.

                                                       December 31, 2012
                                                     Gross          Gross
                                     Amortized     unrealized     unrealized     Carrying
                                        cost         gains          losses        amount
                                                         (in millions)
Finance - Banking                    $  4,243.6   $      219.9   $      234.1   $  4,229.4
Finance - Brokerage                       377.2           31.0            1.1        407.1
Finance - Finance Companies               173.7           12.2              -        185.9
Finance - Financial Other                 519.5           79.9              -        599.4
Finance - Insurance                     2,748.2          280.2           11.0      3,017.4
Finance - REITS                           982.8           66.3            4.1      1,045.0
Industrial - Basic Industry             1,589.0          149.7            1.0      1,737.7
Industrial - Capital Goods              2,012.7          188.1            0.6      2,200.2
Industrial - Communications             2,025.7          242.2            1.9      2,266.0
Industrial - Consumer Cyclical          1,551.0          174.1            2.9      1,722.2
Industrial - Consumer Non-Cyclical      3,303.0          332.5            1.4      3,634.1
Industrial - Energy                     1,985.7          296.9            1.6      2,281.0
Industrial - Other                        477.8           38.2              -        516.0
Industrial - Technology                   904.8           66.4            0.4        970.8
Industrial - Transportation               730.2           64.4            0.7        793.9
Utility - Electric                      2,739.5          310.6           12.1      3,038.0
Utility - Natural Gas                   1,033.7          136.4            0.9      1,169.2
Utility - Other                           291.1           34.1              -        325.2
Government guaranteed                   1,126.7          152.8            1.6      1,277.9

Total corporate securities             28,815.9        2,875.9          275.4     31,416.4
Residential mortgage-backed
pass-through securities                 2,997.8          202.3            0.4      3,199.7
Commercial mortgage-backed
securities                              4,094.8          241.7          439.1      3,897.4
Residential collateralized
mortgage obligations                    1,091.9           31.2            8.9      1,114.2
Asset-backed securities - Home
equity (1)                                371.1            4.7           42.0        333.8
Asset-backed securities - All
other                                   2,293.9           37.6            0.3      2,331.2
Collateralized debt obligations -
Credit                                     79.3              -           40.0         39.3
Collateralized debt obligations -
CMBS                                       92.2            3.4           15.1         80.5
Collateralized debt obligations -
Loans                                     242.3            3.6            1.1        244.8
Collateralized debt obligations -
ABS                                        15.0              -            

0.4 14.6


Total mortgage-backed and other
asset-backed securities                11,278.3          524.5          547.3     11,255.5
U.S. government and agencies              911.4           33.2            0.3        944.3
States and political subdivisions       2,940.4          241.1            2.7      3,178.8
Non-U.S. governments                      545.5          117.9              -        663.4

Total fixed maturities,
available-for-sale                   $ 44,491.5   $    3,792.6   $      825.7   $ 47,458.4


--------------------------------------------------------------------------------

   º (1)
   º This exposure is all related to sub-prime mortgage loans.

                                       72

--------------------------------------------------------------------------------

  Table of Contents

                                                       December 31, 2011
                                                     Gross          Gross
                                     Amortized     unrealized     unrealized     Carrying
                                        cost         gains          losses        amount
                                                         (in millions)
Finance - Banking                    $  4,520.7    $      79.9    $     445.5   $  4,155.1
Finance - Brokerage                       381.0           15.4            6.7        389.7
Finance - Finance Companies               216.2            8.9            4.7        220.4
Finance - Financial Other                 532.4           55.5            1.1        586.8
Finance - Insurance                     2,966.3          227.2           73.0      3,120.5
Finance - REITS                         1,015.2           28.3           22.0      1,021.5
Industrial - Basic Industry             1,656.6          135.3            5.4      1,786.5
Industrial - Capital Goods              2,133.0          146.8           14.3      2,265.5
Industrial - Communications             2,033.2          179.9           23.8      2,189.3
Industrial - Consumer Cyclical          1,606.7          130.5           12.4      1,724.8
Industrial - Consumer Non-Cyclical      3,084.0          286.3            3.7      3,366.6
Industrial - Energy                     1,978.4          220.9            1.2      2,198.1
Industrial - Other                        596.1           32.5            3.9        624.7
Industrial - Technology                   851.3           57.7            9.3        899.7
Industrial - Transportation               626.2           45.7           10.3        661.6
Utility - Electric                      2,709.6          276.0           18.9      2,966.7
Utility - Natural Gas                   1,034.2          100.2            1.8      1,132.6
Utility - Other                           197.1           20.1              -        217.2
FDIC guaranteed                            80.0            0.6              -         80.6
Government guaranteed                   1,219.0          107.8            7.8      1,319.0

Total corporate securities             29,437.2        2,155.5          665.8     30,926.9
Residential mortgage-backed
pass-through securities                 3,130.8          185.6            0.7      3,315.7
Commercial mortgage-backed
securities                              3,894.3          117.0          597.6      3,413.7
Residential collateralized
mortgage obligations                    1,408.1           32.0           51.5      1,388.6
Asset-backed securities - Home
equity (1)                                390.8            0.2           82.6        308.4
Asset-backed securities - All
other                                   1,808.0           68.1            2.9      1,873.2
Collateralized debt obligations -
Credit                                     82.8              -           34.4         48.4
Collateralized debt obligations -
CMBS                                       98.7            1.6           18.5         81.8
Collateralized debt obligations -
Loans                                     203.2            0.3            8.8        194.7
Collateralized debt obligations -
ABS                                        15.0              -            

1.1 13.9


Total mortgage-backed and other
asset-backed securities                11,031.7          404.8          798.1     10,638.4
U.S. government and agencies              772.3           32.8              -        805.1
States and political subdivisions       2,670.0          218.2            5.5      2,882.7
Non-U.S. governments                      580.7           96.3            0.9        676.1

Total fixed maturities,
available-for-sale                   $ 44,491.9    $   2,907.6    $   1,470.3   $ 45,929.2


--------------------------------------------------------------------------------

º (1)

º This exposure is all related to sub-prime mortgage loans.


    Of the $825.7 million in gross unrealized losses as of December 31, 2012,
there were $2.3 million in losses attributed to securities scheduled to mature
in one year or less, $20.3 million attributed to securities scheduled to mature
between one to five years, $4.1 million attributed to securities scheduled to
mature between five to ten years, $251.7 million attributed to securities
scheduled to mature after ten years and $547.3 million related to
mortgage-backed and other ABS that are not classified by maturity year. As of
December 31, 2012, we were in a $2,966.9 million net unrealized gain position as
compared to a $1,437.3 million net unrealized gain position as of December 31,
2011. Of the $1,529.6 million increase in net unrealized gains for the year
ended December 31, 2012, an approximate $0.2 billion increase can be attributed
to an approximate 7 basis points decrease in interest rates in addition to other
market factors that increased unrealized gains.

    Fixed Maturities Available-for-Sale Unrealized Losses.  We believe that our
long-term fixed maturities portfolio is well diversified among industry types
and between publicly traded and privately placed securities. Each year, we
direct the majority of our net cash inflows into investment grade fixed
maturities. Our current policy is to limit the percentage of cash flow invested
in below investment grade assets to 10% of cash flow. During 2012, we did not
actively increase our investment in available-for-sale below investment grade
assets. While Principal Life's general account investment returns can improve
due to the below investment grade asset class, we manage its growth
strategically by limiting it to no more than 10% of the total fixed maturities
portfolios.

    We invest in privately placed fixed maturities to enhance the overall value
of the portfolio, increase diversification and obtain higher yields than are
possible with comparable quality public market securities. Generally, private
placements provide broader access to management information, strengthened
negotiated protective covenants, call protection features and, where applicable,
a higher level of collateral. They are, however, generally not freely tradable
because of restrictions imposed by federal and state securities laws and
illiquid trading markets.

                                       73

--------------------------------------------------------------------------------

Table of Contents

    The following table presents our fixed maturities available-for-sale by
investment grade and below investment grade and the associated gross unrealized
gains and losses, including the other-than-temporary impairment losses reported
in OCI, as of the periods indicated.

                                       December 31, 2012                                       December 31, 2011
                                     Gross          Gross                                    Gross          Gross
                     Amortized     unrealized     unrealized     Carrying    Amortized     unrealized     unrealized     Carrying
                        cost         gains          losses        amount        cost         gains          losses        amount
                                                                     (in millions)
Investment grade:
Public               $ 28,273.4   $    2,604.1   $      198.9   $ 30,678.6   $ 28,497.9   $    1,989.8   $      435.0   $ 30,052.7
Private                12,684.2        1,065.2          142.7     13,606.7     12,298.2          757.4          373.8     12,681.8
Below investment
grade:
Public                  1,723.1           55.2          258.8      1,519.5      1,834.4           21.3          365.1      1,490.6
Private                 1,810.8           68.1          225.3      1,653.6      1,861.4          139.1          296.4      1,704.1

Total fixed
maturities,
available-for-sale   $ 44,491.5   $    3,792.6   $      825.7   $ 47,458.4 

$ 44,491.9$ 2,907.6$ 1,470.3$ 45,929.2




    The following tables present the carrying amount and the gross unrealized
losses, including other-than-temporary impairment losses reported in OCI, on
investment grade fixed maturities available-for-sale by aging category as of the
periods indicated.

                                                   December 31, 2012
                              Public                    Private                     Total
                                    Gross                      Gross                      Gross
                     Carrying     unrealized    Carrying     unrealized    Carrying     unrealized
                      amount        losses       amount        losses       amount        losses
                                                     (in millions)
Three months or
less                 $   646.6   $        3.7   $   227.1   $        1.5   $   873.7   $        5.2
Greater than three
to six months            148.4            2.1        31.8            0.4       180.2            2.5
Greater than six
to nine months            21.3            0.3        50.6            0.6        71.9            0.9
Greater than nine
to twelve months          34.6            1.0         7.1            0.1        41.7            1.1
Greater than
twelve to
twenty-four months       205.8           17.7       167.6           10.0       373.4           27.7
Greater than
twenty-four to
thirty-six months         72.2            8.8        41.9            0.9       114.1            9.7
Greater than
thirty-six months        811.6          165.3       706.9          129.2    

1,518.5 294.5


Total fixed
maturities,
available-for-sale   $ 1,940.5   $      198.9   $ 1,233.0   $      142.7   $ 3,173.5   $      341.6





                                                   December 31, 2011
                              Public                    Private                     Total
                                    Gross                      Gross                      Gross
                     Carrying     unrealized    Carrying     unrealized    Carrying     unrealized
                      amount        losses       amount        losses       amount        losses
                                                     (in millions)
Three months or
less                 $   897.5    $      14.1   $   472.0    $       4.9   $ 1,369.5    $      19.0
Greater than three
to six months          1,022.9           33.7       747.1           24.0     1,770.0           57.7
Greater than six
to nine months           420.3           40.7       337.4           20.2       757.7           60.9
Greater than nine
to twelve months          61.8            5.5        65.2            3.4       127.0            8.9
Greater than
twelve to
twenty-four months       135.0           15.8       184.5           20.5       319.5           36.3
Greater than
twenty-four to
thirty-six months         65.7           16.3        30.0            5.5        95.7           21.8
Greater than
thirty-six months      1,122.5          308.9     1,138.0          295.3    

2,260.5 604.2


Total fixed
maturities,
available-for-sale   $ 3,725.7    $     435.0   $ 2,974.2    $     373.8   $ 6,699.9    $     808.8



                                       74

--------------------------------------------------------------------------------

Table of Contents


    The following tables present the carrying amount and the gross unrealized
losses, including other-than-temporary impairment losses reported in OCI, on
below investment grade fixed maturities available-for-sale by aging category as
of the periods indicated.

                                                    December 31, 2012
                              Public                      Private                     Total
                                     Gross                       Gross                      Gross
                      Carrying     unrealized     Carrying     unrealized    Carrying     unrealized
                       amount        losses        amount        losses       amount        losses
                                                      (in millions)
Three months or
less                 $     32.9   $        0.4   $     47.6   $        0.8   $    80.5   $        1.2
Greater than three
to six months               7.5            0.1         76.1            1.6        83.6            1.7
Greater than six
to nine months             11.0            1.2         17.1            1.4        28.1            2.6
Greater than nine
to twelve months              -              -         26.7            1.6        26.7            1.6
Greater than
twelve to
twenty-four months         17.7            5.1         33.5            2.8        51.2            7.9
Greater than
twenty-four to
thirty-six months           6.8            0.3         12.4            8.4        19.2            8.7
Greater than
thirty-six months         556.2          251.7        400.4          208.7       956.6          460.4

Total fixed
maturities,
available-for-sale   $    632.1   $      258.8   $    613.8   $      225.3   $ 1,245.9   $      484.1





                                                    December 31, 2011
                              Public                     Private                     Total
                                    Gross                       Gross                      Gross
                     Carrying     unrealized     Carrying     unrealized    Carrying     unrealized
                      amount        losses        amount        losses       amount        losses
                                                      (in millions)
Three months or
less                 $   123.4    $       3.6    $    72.3    $       6.3   $   195.7    $       9.9
Greater than three
to six months             71.3            8.1        165.4           12.4       236.7           20.5
Greater than six
to nine months            74.3           11.5         30.8            1.9       105.1           13.4
Greater than nine
to twelve months          16.9            9.5         29.5            1.6        46.4           11.1
Greater than
twelve to
twenty-four months        42.2           11.8         18.9            4.4        61.1           16.2
Greater than
twenty-four to
thirty-six months         17.9            3.6          1.3            0.3        19.2            3.9
Greater than
thirty-six months        693.0          317.0        483.5          269.5   

1,176.5 586.5


Total fixed
maturities,
available-for-sale   $ 1,039.0    $     365.1    $   801.7    $     296.4   $ 1,840.7    $     661.5



    The following tables present the carrying amount and the gross unrealized
losses, including other-than-temporary impairment losses reported in OCI, on
fixed maturities available-for-sale where the estimated fair value had declined
and remained below amortized cost by 20% or more as of the periods indicated.

                                                      December 31, 2012
                         Problem, potential             All other fixed
                            problem, and                   maturity
                            restructured                  securities                     Total
                                       Gross                       Gross                       Gross
                      Carrying      unrealized      Carrying     unrealized     Carrying     unrealized
                       amount         losses         amount        losses        amount        losses
                                                        (in millions)
Three months or
less                 $        -    $           -   $      7.7   $        2.4   $      7.7   $        2.4
Greater than three
to six months                 -                -          1.1            0.7          1.1            0.7
Greater than six
to nine months                -                -          0.4            0.3          0.4            0.3
Greater than nine
to twelve months            3.0              2.5         17.6            5.7         20.6            8.2
Greater than
twelve months             194.1            269.0        457.0          379.5        651.1          648.5

Total fixed
maturities,
available-for-sale   $    197.1    $       271.5   $    483.8   $      388.6   $    680.9   $      660.1





                                                     December 31, 2011
                         Problem, potential            All other fixed
                            problem, and                   maturity
                            restructured                  securities                   Total
                                       Gross                      Gross                      Gross
                      Carrying      unrealized     Carrying     unrealized    Carrying     unrealized
                       amount         losses        amount        losses       amount        losses
                                                       (in millions)
Three months or
less                  $    42.4      $      14.0   $   231.7    $      75.5   $   274.1    $      89.5
Greater than three
to six months              74.4             32.2       587.3          263.9       661.7          296.1
Greater than six
to nine months             18.2             11.6        77.6           47.2        95.8           58.8
Greater than nine
to twelve months            3.5              1.6         6.9            8.5        10.4           10.1
Greater than
twelve months             171.9            262.4       452.8          387.6       624.7          650.0

Total fixed
maturities,
available-for-sale    $   310.4      $     321.8   $ 1,356.3    $     782.7
  $ 1,666.7    $   1,104.5



                                       75

--------------------------------------------------------------------------------

Table of Contents

Mortgage Loans


    Mortgage loans consist of commercial mortgage loans on real estate and
residential mortgage loans. The carrying amount of our commercial mortgage loan
portfolio was $10,167.7 million and $9,386.0 million as of December 31, 2012 and
December 31, 2011, respectively. The carrying amount of our residential mortgage
loan portfolio was $657.7 million and $746.0 million as of December 31, 2012 and
December 31, 2011, respectively.

Commercial Mortgage Loans. We generally report commercial mortgage loans on real estate at cost adjusted for amortization of premiums and accrual of discounts, computed using the interest method and net of valuation allowances.

Commercial mortgage loans play an important role in our investment strategy by:

º •

º providing strong risk-adjusted relative value in comparison to other

          investment alternatives;

        º •
        º enhancing total returns and

        º •
        º providing strategic portfolio diversification.

    As a result, we have focused on constructing a solid, high quality portfolio
of mortgages. Our portfolio is generally comprised of mortgages originated with
conservative loan-to-value ratios, high debt service coverages and general
purpose property types with a strong credit tenancy.

    Our commercial mortgage loan portfolio consists primarily of non-recourse,
fixed rate mortgages on fully or near fully leased properties. The mortgage
portfolio is comprised primarily of credit oriented retail properties, office
properties, general-purpose industrial properties and apartments.

    Our commercial mortgage loan portfolio is diversified by geography and
specific collateral property type. Commercial mortgage lending in the state of
California accounted for 20% and 22% of our commercial mortgage loan portfolio
as of December 31, 2012 and December 31, 2011, respectively. We are, therefore,
exposed to potential losses resulting from the risk of catastrophes, such as
earthquakes, that may affect the region. Like other lenders, we generally do not
require earthquake insurance for properties on which we make commercial mortgage
loans. With respect to California properties, however, we obtain an engineering
report specific to each property. The report assesses the building's design
specifications, whether it has been upgraded to meet seismic building codes and
the maximum loss that is likely to result from a variety of different seismic
events. We also obtain a report that assesses, by building and geographic fault
lines, the amount of loss our commercial mortgage loan portfolio might suffer
under a variety of seismic events.

    The typical borrower in our commercial loan portfolio is a single purpose
entity or single asset entity. As of December 31, 2012 and December 31, 2011,
the total number of commercial mortgage loans outstanding was 977 and 975, of
which 68% and 71% were for loans with principal balances less than $10 million,
respectively. The average loan size of our commercial mortgage portfolio was
$10.4 million and $9.7 million as of December 31, 2012 and December 31, 2011,
respectively.

Commercial Mortgage Loan Credit Monitoring. For further details on monitoring and management of our commercial mortgage loan portfolio, see Item 8. "Financial Statements, Notes to Consolidated Financial Statements, Note 4, Investments - Mortgage Loan Credit Monitoring."


    We categorize loans that are 60 days or more delinquent, loans in process of
foreclosure and loans with borrowers or credit tenants in bankruptcy that are
delinquent as "problem" loans. Valuation allowances or charge-offs have been
recognized on most problem loans. We categorize loans that are delinquent less
than 60 days where the default is expected to be cured and loans with borrowers
or credit tenants in bankruptcy that are current as "potential problem" loans.
The decision whether to classify a loan delinquent less than 60 days as a
potential problem involves significant subjective judgments by management as to
the likely future economic conditions and developments with respect to the
borrower. We categorize loans for which the original note rate has been reduced
below market and loans for which the principal has been reduced as
"restructured" loans. We also consider loans that are refinanced more than one
year beyond the original maturity or call date at below market rates as
restructured.

    There has been a decrease in the total level of problem, potential problem
and restructured commercial mortgages during 2012 primarily due to loan payoffs,
foreclosures, and improvement in collateral occupancies and values. The South
Atlantic and East North Central regions accounted for over 80% of the problem,
potential problem and restructured commercial mortgages as of December 31, 2012.
The South Atlantic, Pacific, and East North Central regions accounted for over
90% of the problem, potential problem, and restructured commercial mortgages as
of December 31, 2011. Office properties accounted for over half of the problem,
potential problem and restructured commercial mortgages as of December 31, 2012.
Office and apartment properties accounted for over half of the problem,
potential problem and restructured commercial mortgages as of December 31, 2011.

                                       76

--------------------------------------------------------------------------------

Table of Contents

The following table presents the carrying amounts of problem, potential problem and restructured commercial mortgages relative to the carrying amount of all commercial mortgages for the periods indicated.

                                             December 31, 2012     December 31, 2011
                                                         ($ in millions)
Total commercial mortgages                  $          10,167.7   $           9,386.0

Problem commercial mortgages                $              40.1   $             112.7
Potential problem commercial mortgages                    177.6             

152.8

Restructured problem commercial mortgages                     -             

7.5


Total problem, potential problem and
restructured commercial mortgages           $             217.7   $         

273.0


Total problem, potential problem and
restructured commercial mortgages as a
percent of total commercial mortgages                      2.14 %           

2.91 %



    Commercial Mortgage Loan Valuation Allowance.  The valuation allowance for
commercial mortgage loans includes loan specific reserves for loans that are
deemed to be impaired as well as reserves for pools of loans with similar
characteristics where a property risk or market specific risk has not been
identified but for which we anticipate a loss may occur. For further details on
the commercial mortgage valuation allowance, see Item 8. "Financial Statements,
Notes to Consolidated Financial Statements, Note 4, Investments - Mortgage Loan
Valuation Allowance."

    The valuation allowance decreased $13.0 million for the year ended
December 31, 2012, and decreased $15.8 million for the year ended December 31,
2011. The decrease in the level of valuation allowance during 2012 and 2011 was
related to the same market factors as those causing the decrease in the level of
problem, potential problem and restructured commercial mortgages during the year
ended December 31, 2012. The South Atlantic region accounts for the highest
level of reserves at both December 31, 2012 and December 31, 2011.

    The following table represents our commercial mortgage valuation allowance
for the periods indicated.

                                            December 31, 2012     December 31, 2011
                                                        ($ in millions)
Balance, beginning of period               $              64.8   $              80.6
Provision                                                 13.5                  17.0
Charge-offs                                              (26.7 )               (32.9 )
Recoveries                                                 0.2                   0.1

Balance, end of period                     $              51.8   $              64.8

Valuation allowance as % of carrying
value before reserves                                     0.51 %            

0.69 %

    Residential Mortgage Loans.  The residential mortgage loan portfolio is
composed of home equity mortgages with an amortized cost of $495.7 million and
$611.0 million and first lien mortgages with an amortized cost of $206.4 million
and $171.0 million as of December 31, 2012 and December 31, 2011, respectively,
primarily held by our Bank and Trust Services business. The home equity loans
are generally second lien mortgages made up of closed-end loans and lines of
credit. Non-performing residential mortgage loans, which are defined as loans
90 days or greater delinquent plus non-accrual loans, totaled $32.3 million and
$24.0 million as of December 31, 2012 and December 31, 2011, respectively.

    We establish the residential mortgage loan valuation allowance at levels
considered adequate to absorb probable losses within the portfolio based on
management's evaluation of the size and current risk characteristics of the
portfolio. Such evaluation considers numerous factors, including, but not
limited to net charge-off trends, loss forecasts, collateral values, geographic
location, borrower credit scores, delinquency rates, industry condition and
economic trends. During the third quarter of 2012, we increased our provision
and charge-offs primarily due to implementation of guidance provided by the
Office of the Comptroller of the Currency ("OCC") Bank Accounting Advisory
Series, which provided additional clarification on accounting for loans
discharged in bankruptcy and measurement of impairment on certain restructured
loans. As of December 31, 2012, only 4% of loans that were charged off under the
OCC guidance were 30 days or more past due. Implementation of this guidance also
increased our nonaccrual loans. The changes in the valuation allowance are
reported in net realized capital gains (losses) on our consolidated statements
of operations.

    Our residential mortgage loan portfolio, and in particular our home equity
loan portfolio, experienced an increase in loss severity from sustained elevated
levels of unemployment along with continued depressed collateral values
beginning in 2010. While these factors continue to drive charge-offs, loss rates
overall have stabilized and the portfolio balance

                                       77

--------------------------------------------------------------------------------

Table of Contents

continues to decline. The following table represents our residential mortgage valuation allowance for the periods indicated.

                                            December 31, 2012     December 31, 2011
                                                        ($ in millions)
Balance, beginning of period               $              36.0   $              37.7
Provision                                                 39.9                  28.5
Charge-offs                                              (35.1 )               (33.4 )
Recoveries                                                 3.6                   3.2

Balance, end of period                     $              44.4   $              36.0

Valuation allowance as % of carrying
value before reserves                                      6.3 %                 4.6 %


Real Estate

    Real estate consists primarily of commercial equity real estate. As of
December 31, 2012 and December 31, 2011, the carrying amount of our equity real
estate investment was $1,172.5 million, or 2%, and $1,083.9 million, or 2%, of
U.S. invested assets, respectively. Our commercial equity real estate is held in
the form of wholly owned real estate, real estate acquired upon foreclosure of
commercial mortgage loans and majority owned interests in real estate joint
ventures.

    Equity real estate is categorized as either "real estate held for
investment" or "real estate held for sale." Real estate held for investment
totaled $1,092.5 million and $1,047.3 million as of December 31, 2012 and
December 31, 2011, respectively. The carrying value of real estate held for
investment is generally adjusted for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. Such impairment adjustments are recorded as net realized losses
and, accordingly, are reflected in our consolidated results of operations. For
the year ended December 31, 2012 and 2011, there were no such impairment
adjustments.

    The carrying amount of real estate held for sale was $80.0 million and
$36.6 million as of December 31, 2012 and December 31, 2011, respectively. There
were no valuation allowances as of December 31, 2012 or December 31, 2011. Once
we identify a real estate property to be sold and commence a plan for marketing
the property, we classify the property as held for sale. We establish a
valuation allowance subject to periodic revisions, if necessary, to adjust the
carrying value of the property to reflect the lower of its current carrying
value or the fair value, less associated selling costs.

We use research, both internal and external, to recommend appropriate product and geographic allocations and changes to the equity real estate portfolio. We monitor product, geographic and industry diversification separately and together to determine the most appropriate mix.


    Equity real estate is distributed across geographic regions of the country
with larger concentrations in the South Atlantic, Pacific, and West South
Central regions of the United States as of December 31, 2012. By property type,
there is a concentration in office, retail, and industrial that represented
approximately 75% of the equity real estate portfolio as of December 31, 2012.

Other Investments

    Our other investments totaled $1,847.4 million as of December 31, 2012,
compared to $1,783.5 million as of December 31, 2011. Derivative assets
accounted for $996.0 million and $1,156.5 million in other investments as of
December 31, 2012 and December 31, 2011, respectively. The remaining invested
assets include equity method investments, which include real estate properties
owned jointly with venture partners and operated by the partners.

International Investment Operations


    Of our invested assets, $5,997.3 million were held by our Principal
International segment as of December 31, 2012. The assets are managed by either
our Principal Global Investors segment or by the local Principal International
affiliate. Due to the regulatory constraints in each country, each company
maintains its own investment policies. As shown in the following table, the
major categories of international invested assets as of December 31, 2012 and
December 31, 2011, were fixed maturities, other investments and residential
mortgage loans. The remainder is invested in equity securities,

                                       78

--------------------------------------------------------------------------------

Table of Contents


commercial mortgage loans and real estate. In addition, policy loans are
included in our invested assets. The following table excludes invested assets of
the separate accounts.

                                 December 31, 2012                December 31, 2011
                           Carrying amount    % of total    Carrying amount    % of total
                                                   ($ in millions)
Fixed maturities -
Public                     $       3,698.7             62 % $       3,269.1             63 %
Equity securities                    126.1              2              86.0              2
Mortgage loans:
Commercial                            15.6              -              10.6              -
Residential                          678.7             11             584.6             11
Real estate held for
sale                                   7.0              -               8.2              -
Real estate held for
investment                             0.8              -               0.8              -
Policy loans                          26.7              1              23.5              1
Other investments                  1,443.7             24           1,202.3             23

Total invested assets              5,997.3            100 %         5,185.1            100 %

Cash and cash
equivalents                          105.4                             92.2

Total invested assets
and cash                   $       6,102.7                  $       5,277.3



    Investments in equity method subsidiaries and direct financing leases
accounted for $718.0 million and $655.1 million, respectively, of other
investments as of December 31, 2012, and $667.5 million and $507.5 million,
respectively, of other investments as of December 31, 2011. The remaining other
investments as of both December 31, 2012 and December 31, 2011, are primarily
related to derivative assets and other short-term investments.

Fixed Maturities Exposure


    Economic and fiscal conditions in select European countries, including
Greece, Ireland, Italy, Portugal and Spain, continue to cause credit concerns
particularly to financial institutions and banks with exposure to the European
periphery region. Our exposure to the region within our International investment
operations fixed maturities portfolio is manageable, representing 6.2% and 7.8%
of our total International invested assets as of December 31, 2012 and
December 31, 2011, respectively. Portfolio holdings with exposure to this region
consist of fixed maturities issued in the same countries as our International
operations by local subsidiaries of the European parent. Nearly all of the
exposure is to bonds issued in Chile. In addition, we did not hold any sovereign
debt issuances of the selected countries and had not bought or sold credit
protection on sovereign issuances as of December 31, 2012 and December 31, 2011.

    Financial sector exposure is to local subsidiary banks, subject to local
capital requirements and banking regulation. The current financial exposure
carries an average AA local rating from S&P and the average time to maturity is
18 years. Non-financial sector exposure consists primarily of infrastructure
bonds, which are backed by the project itself, often with minimum revenue
guarantees from the government. The current non-financial exposure carries an
average AA local rating from S&P. The current Italian exposure has an average
time to maturity of 12 years. In addition, the current Spanish exposure has an
average time to maturity of 14 years. As of December 31, 2012, our total
portfolio exposure had an average price of 107 (carrying value/amortized cost).

The following table presents the carrying amount of our European periphery zone fixed maturities exposure for the periods indicated.

December 31, 2012

December 31, 2011

      Select European Exposure     Italy     Spain     Total    Italy     Spain     Total
                                                        (in millions)
      Non-Sovereign:
      Financial institutions       $    -   $ 237.3   $ 237.3   $    -   $ 241.5   $ 241.5
      Non-financial institutions     11.1     125.4     136.5     52.5     112.4     164.9

      Total                        $ 11.1   $ 362.7   $ 373.8   $ 52.5   $ 353.9   $ 406.4



                                       79

--------------------------------------------------------------------------------

Table of Contents

For further details on our U.S. investment operations exposure to these European countries, see "U.S. Investment Operations - Fixed Maturities."

Wordcount: 31122



USER COMMENTS:

comments powered by Disqus

  More Newswires

More Newswires >>
  Most Popular Newswires

More Popular Newswires >>
Hot Off the Wires  Hot off the Wires

More Hot News >>

insider icon Denotes premium content. Learn more about becoming an Insider here.
International Travel Means Big Opportunities for Producers this Summer.