PRINCIPAL FINANCIAL GROUP INC – 10-Q – Management’s Discussion and Analysis of Financial Condition and Results of Operations

Edgar Online, Inc.

 The following analysis discusses our financial condition as of September 30, 2012, compared with December 31, 2011, and our consolidated results of operations for the three and nine months ended September 30, 2012 and 2011, prepared in conformity with U.S. GAAP. The discussion and analysis includes, where appropriate, factors that may affect our future financial performance. The discussion should be read in conjunction with our Form 10-K, for the year ended December 31, 2011, filed with the SEC and the unaudited consolidated financial statements and the related notes to the financial statements and the other financial information included elsewhere in this Form 10-Q.    

Forward-Looking Information

    Our narrative analysis below contains forward-looking statements intended to enhance the reader's ability to assess our future financial performance. Forward-looking statements include, but are not limited to, statements that represent our beliefs concerning future operations, strategies, financial results or other developments, and contain words and phrases such as "anticipate," "believe," "plan," "estimate," "expect," "intend" and similar expressions. Forward-looking statements are made based upon management's current expectations and beliefs concerning future developments and their potential effects on us. Such forward-looking statements are not guarantees of future performance.    Actual results may differ materially from those included in the forward-looking statements as a result of risks and uncertainties including, but not limited to, the following: (1) adverse capital and credit market conditions may significantly affect our ability to meet liquidity needs, as well as our access to capital and cost of capital; (2) continued difficult conditions in the global capital markets and the economy generally may materially and adversely affect our business and results of operations; (3) continued volatility or further declines in the equity markets could reduce our assets under management ("AUM") and may result in investors withdrawing from the markets or decreasing their rates of investment, all of which could reduce our revenues and net income; (4) changes in interest rates or credit spreads may adversely affect our results of operations, financial condition and liquidity, and our net income can vary from period-to-period; (5) our investment portfolio is subject to several risks that may diminish the value of our invested assets and the investment returns credited to customers, which could reduce our sales, revenues, AUM and net income; (6) our valuation of fixed maturities, equity securities and derivatives may include methodologies, estimations and assumptions which are subject to differing interpretations and could result in changes to investment valuations that may materially adversely affect our results of operations or financial condition; (7) the determination of the amount of allowances and impairments taken on our investments requires estimations and assumptions which are subject to differing interpretations and could materially impact our results of operations or financial position; (8) gross unrealized losses may be realized or result in future impairments, resulting in a reduction in our net income; (9) competition from companies that may have greater financial resources, broader arrays of products, higher ratings and stronger financial performance may impair our ability to retain existing customers, attract new customers and maintain our profitability; (10) a downgrade in our financial strength or credit ratings may increase policy surrenders and withdrawals, reduce new sales and terminate relationships with distributors, impact existing liabilities and increase our cost of capital, any of which could adversely affect our profitability and financial condition; (11) our efforts to reduce the impact of interest rate changes on our profitability and retained earnings may not be effective; (12) if we are unable to attract and retain sales representatives and develop new distribution sources, sales of our products and services may be reduced; (13) our international businesses face political, legal, operational and other risks that could reduce our profitability in those businesses; (14) we may face losses if our actual experience differs significantly from our pricing and reserving assumptions; (15) our ability to pay stockholder dividends and meet our obligations may be constrained by the limitations on dividends or distributions Iowa insurance laws impose on Principal Life; (16) the pattern of amortizing our DPAC and other actuarial balances on our universal life-type insurance contracts, participating life insurance policies and certain investment contracts may change, impacting both the level of the DPAC and other actuarial balances and the timing of our net income; (17) we may need to fund deficiencies in our "Closed Block" assets that support participating ordinary life insurance policies that had a dividend scale in force at the time of Principal Life's 1998 conversion into a stock life insurance company; (18) a pandemic, terrorist attack or other catastrophic event could adversely affect our net income; (19) our reinsurers could default on their obligations or increase their rates, which could adversely impact our net income and profitability; (20) we face risks arising from our ability to obtain regulatory approval and consummate the acquisition of Cuprum and from other acquisitions of businesses; (21) changes in laws, regulations or accounting standards may reduce our profitability; (22) we may be unable to mitigate the impact of Regulation XXX and Actuarial Guideline 38, potentially resulting in a negative impact to our capital position and/or a reduction in sales of term and universal life insurance products; (23) a computer system failure or security breach could disrupt our business, damage our reputation and adversely impact our profitability; (24) results of litigation and regulatory investigations may affect our financial strength or reduce our profitability; (25) from time to time we may become subject to tax audits, tax litigation or similar proceedings, and as a result we may owe additional taxes, interest and penalties in amounts that may be material; (26) fluctuations in foreign currency exchange rates could reduce our profitability; (27) applicable laws and our certificate of incorporation and by-laws may discourage takeovers and business combinations that some stockholders might consider in their best interests and (28) our financial results may be adversely impacted by global climate changes.                                           90  --------------------------------------------------------------------------------

   Table of Contents    Overview   

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

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

† 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.

  †          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, group life insurance, wellness services and non-medical fee-for-service claims administration.  †          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 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.   

Critical Accounting Policies and Estimates

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 EGPs. In addition to DPAC, the following actuarial balances are also amortized in relation to EGPs.    †          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.  

† 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.

  †          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.  †          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,                                           91 

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    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.    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 March 31, 2012, these policies accounted for 13% 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. 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 as of March 31, 2012. The net balance of DPAC and related actuarial balances, excluding balances affected by changes in other comprehensive income, was a $2,508.2 million asset.                                                                          Estimated impact to                                                                         net income (1)                                                                          (in millions) Reducing the future equity return assumption by 1%                   $                  (5 ) 

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

                                                                 (45 ) A one-time, 10% drop in equity market values                                           (13 )    

-------------------------------------------------------------------------------- (1)   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.  

(2) Net investment return represents net investment income plus net realized capital gains (losses).

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   Table of Contents    Recent Event    AFP Cuprum S.A.    On October 8, 2012, we announced the signing of a definitive agreement to acquire Cuprum, a leading pension manager in Chile. The agreement requires Empresas Penta S.A. and Inversiones Banpenta Limitada to sell their 63% ownership in Cuprum pursuant to a public tender offer that will also include the remaining 37% of publicly traded shares. Based on current exchange rates, the purchase price for 100% of Cuprum is approximately $1.5 billion. The transaction is expected to close in first quarter 2013, upon receipt of regulatory approval in Chile.   

Transactions Affecting Comparability of Results of Operations

   Acquisitions   

We entered into acquisition agreements for the following businesses during 2012 and 2011.

    Claritas Administração de Recursos Ltda./Claritas Investments, Ltd. On April 2, 2012, we finalized the purchase of a 60% indirect ownership in Claritas Administração de Recursos Ltda./Claritas Investments, Ltd. ("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 and HSBC Bank have established a distribution arrangement 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 both the three and nine months ended September 30, 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 both the three and nine months ended September 30, 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 both the three and nine months ended September 30, 2012. The impact on the income statement line items was as follows - fee revenues                                           93  --------------------------------------------------------------------------------

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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 Health Solutions, 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.    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. 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. 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.    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 $1.2 million and $117.7 million for the three months ended September 30, 2012 and 2011, respectively, and $24.1 million and $553.4 million for the nine months ended September 30, 2012 and 2011, respectively. The other after-tax adjustments associated with the after-tax earnings (loss) of our exited group medical insurance business were $(4.1) million and $14.9 million for the three months ended September 30, 2012 and 2011, respectively, and $(9.6) million and $50.8 million for the nine months ended September 30, 2012 and 2011, respectively.    

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

    Fluctuations in foreign currency to U.S. dollar exchange rates for countries in which we have operations can affect reported financial results. In years when foreign currencies weaken against the U.S. dollar, translating foreign currencies into U.S. dollars results in fewer U.S. dollars to be reported. When foreign currencies strengthen, translating foreign currencies into U.S. dollars results in more U.S. dollars to be reported.    Foreign currency exchange rate fluctuations create variances in our financial statement line items but have not had a material impact on our consolidated financial results. Principal International segment operating earnings were negatively impacted by $5.9 million and $14.3 million for the three and nine months ended September 30, 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 1. "Financial Statements, Notes to Unaudited Consolidated Financial Statements, Note 12, Stock-Based Compensation Plans."

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Employee and Agent Benefits Expense

    The 2012 annual defined benefit pension expense for substantially all of our employees and certain agents is expected to be $122.1 million pre-tax, which is a $29.4 million increase from the 2011 pre-tax pension expense of $92.7 million. This increase is primarily due to a decrease in the discount rates as of December 31, 2011, increasing the service cost, interest cost, and gain/loss amortization. Pre-tax pension expense of $30.7 million and $92.2 million was reflected in the determination of net income for the three and nine months ended September 30, 2012, respectively.    The 2012 annual other postretirement employee benefit ("OPEB") plan expense (income) for retired employees is expected to be $(55.9) million pre-tax, which is a $2.1 million decrease from the 2011 pre-tax OPEB plan income of $(58.0) million. This decrease in income is primarily due to a reduction in the prior service credit to be recognized. The 2011 expense included $(5.1) million in one-time credits due to the curtailment from the group medical insurance business exit. Pre-tax (income) of  and $(38.8) million was reflected in the determination of net income for the three and nine months ended September 30, 2012, respectively.    Recent Accounting Changes    For recent accounting changes, see Item 1. "Financial Statements, Notes to Unaudited Consolidated Financial Statements, Note 1, Nature of Operations and Significant Accounting Policies" under the captions, "Accounting Changes" and "Recent Accounting Pronouncements."                                           95  --------------------------------------------------------------------------------

   Table of Contents    Results of Operations    The following table presents summary consolidated financial information for the periods indicated:                                                    For the three months ended September 30,              For the nine months ended September 30,                                                                                   Increase                                               Increase                                                  2012              2011          (decrease)           2012               2011           (decrease)                                                                                         (in millions) 

Revenues:

 Premiums and other considerations          $        1,158.2    $       672.7    $       485.5    $       2,519.3    $       2,221.7    $      297.6 Fees and other revenues                               675.0            636.4             38.6            1,909.1            1,892.6            16.5 Net investment income                                 783.8            815.2            (31.4 )          2,409.6            2,548.6          (139.0 ) Net realized capital gains, excluding impairment losses on available-for-sale securities                                            122.1             16.9            105.2              176.4               99.6            76.8 Total other-than-temporary impairment losses on available-for-sale securities               (43.6 )          (12.7 )          (30.9 )           (126.4 )            (67.6 )         (58.8 ) Other-than-temporary impairment losses on fixed maturities, available-for-sale reclassified to (from) other comprehensive income                                    9.2            (34.9 )           44.1               31.2              (83.0 )         114.2 Net impairment losses on available-for-sale securities                         (34.4 )          (47.6 )           13.2              (95.2 )           (150.6 )          55.4 Net realized capital gains (losses)                    87.7            (30.7 )          118.4               81.2              (51.0 )         132.2 Total revenues                                      2,704.7          2,093.6            611.1            6,919.2            6,611.9           307.3 Expenses: Benefits, claims and settlement expenses                                            1,647.0          1,114.9            532.1            3,969.5            3,497.7           471.8 Dividends to policyholders                             49.7             52.2             (2.5 )            149.5              158.7            (9.2 ) Operating expenses                                    826.6            775.4             51.2            2,106.7            2,232.7          (126.0 ) Total expenses                                      2,523.3          1,942.5            580.8            6,225.7            5,889.1           336.6 Income before income taxes                            181.4            151.1             30.3              693.5              722.8           (29.3 ) Income taxes (benefits)                                (9.9 )           76.6            (86.5 )             99.2              190.3           (91.1 ) Net income                                            191.3             74.5            116.8              594.3              532.5            61.8 Net income (loss) attributable to noncontrolling interest                                 3.4             (5.6 )            9.0               15.3               36.6           (21.3 ) Net income attributable to Principal Financial Group, Inc.                                 187.9             80.1            107.8              579.0              495.9            83.1 Preferred stock dividends                               8.2              8.2                -               24.7               24.7               - Net income available to common stockholders                               $          179.7    $        71.9    $       107.8    $         554.3    $         471.2    $       83.1    

Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011

Net Income Available to Common Stockholders

    Net income available to common stockholders increased primarily due to a $141.2 million after-tax gain associated with the merger of Catalyst Health Solutions, Inc. and the subsequent disposition of our remaining interest in the surviving corporation during the third quarter of 2012 and a negative impact of a court ruling on some uncertain tax positions in the third quarter of 2011 with no corresponding activity in the third quarter of 2012. These increases were partially offset by the negative impact related to the third quarter 2012 unlocking of DPAC and other actuarial balances associated with assumptions changes and model refinements.    Total Revenues   

Premiums increased $568.6 million for the Retirement and Investor Services segment primarily due to an increase in sales of single premium group annuities with life contingencies in our full service payout business. Partially offsetting this increase was a $91.6

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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 $27.8 million for the Retirement and Investor Services segment primarily due to higher fee income stemming from an increase in average account values, which resulted from generally positive equity market performance since the third quarter of 2011. In addition, fee revenues increased $13.4 million for the U.S. Insurance Solutions segment primarily due to unlocking of unearned revenue associated with a change in our long-term interest rate assumptions and model refinements. Fee revenues also increased $12.6 million for the Principal International segment primarily due to higher investment management fees driven by higher average AUM as a result of the HSBC AFORE acquisition in Mexico and the Claritas acquisition in Brazil. Fee revenues for the Principal Global Investors segment increased $10.4 million primarily due to higher fee revenues driven by an increase in average AUM. Partially offsetting these increases was a $25.6 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 primarily due to lower inflation-based investment returns on average invested assets and cash as a result of lower inflation in Chile and lower investment yields in our U.S. operations. 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 a gain associated with the merger of Catalyst Health Solutions, Inc. and the subsequent disposition of our remaining interest in the surviving corporation, which was partially offset by losses versus gains attributable to the GMWB embedded derivative and related hedging instruments. For additional information, see "Investments - Investment Results."    Total Expenses   

Benefits, claims and settlement expenses increased $522.5 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 in our full service payout business.

    Operating expenses increased primarily due to DPAC unlocking associated with assumptions changes and model refinements and a charitable contribution of appreciated stock to The Principal Financial Group Foundation, Inc. in the third quarter of 2012. These increases were partially offset by a favorable DPAC true-up resulting from generally positive equity market performance in 2012 compared to negative equity market performance in 2011.    Income Taxes    The effective income tax rates were -5% and 51% for the three months ended September 30, 2012 and 2011, respectively. The effective income tax rate for the three months ended September 30, 2012, was lower than the U.S. statutory rate primarily due to income tax deductions allowed for corporate dividends received, tax benefits associated with a contribution of appreciated stock made to The Principal Financial Group Foundation, Inc. and a third quarter adjustment to reflect a decrease in our estimated annual effective income tax rate. The effective income tax rate for the three months ended September 30, 2011, was higher than the U.S. statutory rate primarily due to the impact of a court ruling on some uncertain tax positions, which was partially offset by 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 decreased to -5% from 51% for the three months ended September 30, 2012 and 2011, respectively, primarily due to the impact of a third quarter 2011 court ruling on some uncertain tax positions and tax benefits associated with a third quarter 2012 contribution of appreciated stock made to The Principal Financial Group Foundation, Inc.

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 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. These increases were partially offset by the negative impact related to the unlocking of DPAC and other actuarial balances associated with assumptions changes and model refinements in 2012.                                           97  --------------------------------------------------------------------------------

   Table of Contents    Total Revenues    Premiums increased $718.5 million for the Retirement and Investor Services segment primarily due to an increase in sales of single premium group annuities with life contingencies in our full service payout business. Partially offsetting this increase was a $474.5 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 $37.8 million for the Principal International segment primarily due to higher investment management fees driven by higher average AUM as a result of the HSBC AFORE acquisition in Mexico and the Claritas acquisition in Brazil. Fee revenues also increased $33.7 million for the Retirement and Investor Services segment primarily due to higher fee income stemming from an increase in average account values, which resulted from generally positive equity market performance since the third quarter of 2011.  In addition, fee revenues increased $29.3 million for the Principal Global Investors segment primarily due to an increase in average AUM and higher real estate transaction fees resulting from higher transaction volumes. Partially offsetting these increases was a $61.2 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. Fee revenues also decreased $23.1 million for the U.S. Insurance Solutions segment primarily due to the unlocking of unearned revenue associated with the change in basis for amortizing DPAC and other actuarial balances in the first quarter of 2012 offset by 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.    Net investment income decreased primarily due to lower investment yields in our U.S. operations, lower inflation-based investments returns on average invested assets and cash as a result of lower inflation in Chile and the weakening of the Chilean peso against the U.S. dollar. 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 $665.3 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 in our full service payout business. In addition, benefits, claims and settlement expenses increased $181.7 million for our U.S. Insurance Solutions segment primarily due to unlocking associated with the change in basis for amortizing DPAC and other actuarial balances in the first quarter of 2012 and a change in our long-term interest rate assumptions and model refinements in the third quarter of 2012. Partially offsetting these increases was a $359.3 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.    U.S. Insurance Solutions operating expenses decreased $117.5 million primarily due to the impact of unlocking associated with the change in basis for amortizing DPAC and other actuarial balances in the first quarter of 2012, which was partially offset by a change in our long-term interest rate assumptions and model refinements in the third quarter of 2012.    Income Taxes    The effective income tax rates were 14% and 26% for the nine months ended September 30, 2012 and 2011, respectively. The effective income tax rate for the nine months ended September 30, 2012, 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 tax benefits associated with the contribution of appreciated stock made to The Principal Financial Group Foundation, Inc. The effective income tax rate for the nine months ended September 30, 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 26% for the nine months ended September 30, 2012 and 2011, respectively, primarily due to the impact of a 2011 court ruling on some uncertain tax positions and tax benefits associated with a 2012 contribution of appreciated stock made to The Principal Financial Group Foundation, Inc.                                           98  --------------------------------------------------------------------------------

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Results of Operations by Segment

For results of operations by segment see Item 1. "Financial Statements, Notes to Unaudited Consolidated Financial Statements, Note 11, Segment Information."

Retirement and Investor Services Segment

Retirement and Investor Services Segment Summary Financial Data

    Growth in earnings of the segment should generally track with, yet will typically be less than, the percentage growth in account values. This trend may vary due to changes in business and/or product mix. Net cash flow and market performance are the two main drivers of account value growth. Net cash flow reflects the segment's ability to attract and retain client deposits. Market performance reflects not only the equity market performance, but also the investment performance of fixed income investments supporting our spread business.    

The following table presents the Retirement and Investor Services account value rollforward for the periods indicated:

                                              For the three months ended        For the nine months ended                                                  September 30,                     September 30,                                              2012             2011             2012             2011                                                                   (in billions)

Account values, beginning of period $ 197.8 $ 187.1 $ 183.3 $ 178.3 Net cash flow

                                      4.7              0.1              9.6              1.6 Credited investment performance                    7.5            (15.5 )           17.3             (8.1 ) Other                                                -             (0.2 )           (0.2 )           (0.3 ) Account values, end of period            $       210.0    $       171.5    $       210.0    $       171.5    

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

                                            For the three months ended September 30,           For the nine months ended September 30,                                                                           Increase                                          Increase                                           2012             2011          (decrease)         2012             2011          (decrease)                                                                                 (in millions) Operating revenues: Premiums and other considerations     $       651.5    $        82.9    $       568.6   $       978.2    $       259.7    $       718.5 Fees and other revenues                       382.1            354.3             27.8         1,121.3          1,087.7             33.6 Net investment income                         537.1            558.8            (21.7 )       1,607.5          1,710.7           (103.2 ) Total operating revenues                    1,570.7            996.0            574.7         3,707.0          3,058.1            648.9 Expenses: Benefits, claims and settlement expenses, including dividends to policyholders                               1,021.6            488.5            533.1         2,085.2          1,474.3            610.9 Operating expenses                            375.8            343.7             32.1         1,080.0          1,014.2             65.8 Total expenses                              1,397.4            832.2            565.2         3,165.2          2,488.5            676.7 Operating earnings before income taxes                                         173.3            163.8              9.5           541.8            569.6            (27.8 ) Income taxes                                   35.8             34.2              1.6           119.0            131.2            (12.2 ) Operating earnings                    $       137.5    $       129.6    $         7.9   $       422.8    $       438.4    $       (15.6 )    

Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011

    Operating Earnings    Operating earnings increased $5.2 million in our individual annuities business primarily due to an increase in fees and a favorable DPAC true-up resulting from generally positive equity market performance in 2012 compared to negative equity market performance in 2011, which was partially offset by negative DPAC unlocking due to a change in our long-term interest rate assumptions in the third quarter of 2012. In addition, operating earnings increased $2.0 million in our full service accumulation business primarily due to a lower effective income tax rate and an increase fee revenue, which was partially offset by higher staff related costs.                                           99 

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   Table of Contents    Operating Revenues    Premiums increased $543.4 million in our full service payout business 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.    Fee revenues increased $16.0 million and $8.5 million in our Principal Funds and full service accumulation businesses, respectively, primarily due to higher fee income stemming from an increase in average account values, which resulted from generally positive equity market performance since the third quarter of 2011.    

Net investment income decreased primarily due to lower investment yields.

   Total Expenses    Benefits, claims and settlement expenses increased $546.4 million in our full service payout business primarily due to an increase in change in reserves resulting from an increase in sales of single premium group annuities with life contingencies.    Operating expenses increased $17.3 million in our full service accumulation business primarily due to higher staff related costs, including pension and other postretirement benefits. In addition, operating expenses increased $13.1 million in our Principal Funds business primarily due to higher distribution costs resulting from an increase in sales and an increase in management fees stemming from an increase in average account values.    Income Taxes    The effective income tax rate for the segment was 21% for the three months ended September 30, 2012 and 2011. The effective income tax rate was lower than the U.S. statutory rate primarily due to income tax deductions allowed for corporate dividends received and the interest exclusion from taxable income.    

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

    Operating Earnings    Operating earnings decreased $5.1 million in our full service accumulation business primarily due to shifts in mix of business, economic pressures on fee revenue and higher staff related costs, including pension and other postretirement benefits. In addition, operating earnings decreased $4.0 million in our bank and trust services business primarily due to an estimated expense for a legal settlement accrual in 2012. Furthermore, operating earnings decreased $2.9 million in our individual annuities business primarily due to higher staff related costs, including pension and other postretirement benefits, and negative DPAC unlocking due to a change in our long-term interest rate assumptions, which was mostly offset by a favorable DPAC true-up resulting from generally positive equity market performance in 2012 compared to negative equity market performance in 2011.    Operating Revenues    Premiums increased $673.3 million in our full service payout business 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.    Fee revenues increased $26.0 million and $7.6 million in our Principal Funds and individual annuities businesses, respectively, primarily due to higher fee income stemming from an increase in average account values, which resulted from generally positive equity market performance since the third quarter of 2011.    

Net investment income decreased primarily due to lower investment yields.

   Total Expenses    Benefits, claims and settlement expenses increased $670.0 million in our full service payout business primarily due to an increase in change in reserves resulting from an increase in sales of single premium group annuities with life contingencies.    Operating expenses increased $26.1 million and $8.4 million in our full service accumulation and individual annuities businesses, respectively, primarily due to higher staff related costs, including pension and other postretirement benefits. In addition, operating expenses increased $25.7 million in our Principal Funds business primarily due to an increase in management fees stemming                                          100  --------------------------------------------------------------------------------

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from an increase in average account values and, to a lesser extent, higher staff related costs, including pension and other postretirement benefits.

   Income Taxes    The effective income tax rates for the segment were 22% and 23% for the nine months ended September 30, 2012 and 2011, respectively. The effective income tax rates were lower than the U.S. statutory rate primarily due to income tax deductions allowed for corporate dividends received and the interest exclusion from taxable income.   

Principal Global Investors Segment

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 periods indicated:

                                             For the three months ended September 30,          For the nine months ended September 30,                                              2012                       2011                    2012                    2011                                                                               (in billions) AUM, beginning of period             $               243.9      $               226.0    $             227.8     $             220.1 Net cash flow                                          4.6                        1.0                   11.2                    (2.2 ) Investment performance                                 8.8                      (12.5 )                 20.1                    (2.4 ) Operations acquired (1)                                  -                        1.7                      -                     1.7 Other                                                  1.1                        1.1                   (0.7 )                   0.1 AUM, end of period                   $               258.4      $               217.3    $             258.4     $             217.3    

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(1) Reflects the acquisition of Finisterre Capital in July 2011.

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

                                              For the three months ended September 30,                 For the nine months ended September 30,                                                                                Increase                                                 Increase                                          2012                2011             (decrease)           2012                2011            (decrease)                                                                                     (in millions) Operating revenues: Fees and other revenues             $         141.2     $         130.8    

$ 10.4 $ 413.8 $ 384.5 $ 29.3 Net investment income

                           2.8                 2.1                0.7                9.4                10.0             (0.6 ) Total operating revenues                      144.0               132.9               11.1              423.2               394.5             28.7

Expenses:

 Total expenses                                110.0               102.6                7.4              332.1               304.2             27.9 Operating earnings before income taxes and noncontrolling interest                                       34.0                30.3                3.7               91.1                90.3              0.8 Income taxes                                   10.5                10.3                0.2               29.4                30.4             (1.0 ) Operating earnings attributable to noncontrolling interest                      2.9                 0.9                2.0                6.7                 3.4              3.3 Operating earnings                  $          20.6     $          19.1     $          1.5    $          55.0     $          56.5     $       (1.5 )                                           101 

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Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011

    Operating Earnings    

Operating earnings increased primarily due to higher fee revenues driven by an increase in average AUM. These increases were partially offset by higher compensation and operating costs resulting from continued investment in the global business model.

   Income Taxes    The effective income tax rates for the segment were 31% and 34% for the three months ended September 30, 2012 and 2011, respectively. The effective income tax rates were lower than the U.S. statutory rate primarily due to the inclusion of income attributable to noncontrolling interest in operating earnings before income taxes with no corresponding change in income taxes reported by us as the controlling interest.   

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

    Operating Earnings    Operating earnings decreased primarily due to higher compensation and operating costs resulting from continued investment in the global business model and other one-time costs during 2012. These increases in expenses were partially offset by higher fee revenues driven by an increase in average AUM, as well as increased real estate transaction fees resulting from higher transaction volumes.    Income Taxes    The effective income tax rates for the segment were 32% and 34% for the nine months ended September 30, 2012 and 2011, respectively. The effective income tax rates were lower than the U.S. statutory rate primarily due to the inclusion of income attributable to noncontrolling interest in operating earnings before income taxes with no corresponding change in income taxes reported by us as the controlling interest.   

Principal International Segment

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 business. AUM of our foreign subsidiaries is translated 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 for the reporting period.    The following table presents the Principal International segment AUM rollforward for the periods indicated:                                          For the three months ended September 30,          For the nine months ended September 30,                                            2012                      2011                    2012                      2011                                                                             (in billions) AUM, beginning of period           $               60.3      $               53.0    $               52.8      $               45.8 Net cash flow                                       2.7                       0.7                     7.3                       3.8 Investment performance                              1.9                       0.5                     5.5                       2.2 Operations acquired (1)                             0.2                       3.1                     2.0                       3.1 Effect of exchange rates                            1.1                      (2.7 )                  (1.2 )                       - Other                                                 -                      (0.1 )                  (0.2 )                    (0.4 ) AUM, end of period                 $               66.2      $               54.5    $               66.2      $               54.5    

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

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

                                                 For the three months ended September 30,                For the nine months ended September 30,                                                                                  Increase                                                 Increase                                              2012               2011            (decrease)           2012                2011            (decrease)                                                                                        (in millions) Operating revenues: Premiums and other considerations       $         65.3     $         69.2     $         (3.9 )  $         213.6     $         193.0     $       20.6 Fees and other revenues                           58.5               45.9               12.6              159.2               121.4             37.8 Net investment income                             80.0              105.0              (25.0 )            304.1               339.0            (34.9 ) Total operating revenues                         203.8              220.1              (16.3 )            676.9               653.4             23.5 Expenses: Benefits, claims, and settlement expenses                                         109.4              137.6              (28.2 )            401.8               419.2            (17.4 ) Operating expenses                                65.1               45.7               19.4              165.9               131.7             34.2 Total expenses                                   174.5              183.3               (8.8 )            567.7               550.9             16.8 Operating earnings before income taxes and noncontrolling interest                 29.3               36.8               (7.5 )            109.2               102.5              6.7 Income taxes (benefits)                           (0.6 )              1.6               (2.2 )              0.6                 3.2             (2.6 ) Operating earnings (losses) attributable to noncontrolling interest                                           0.4               (0.1 )              0.5                0.4                (0.1 )            0.5 Operating earnings                      $         29.5     $         35.3     $         (5.8 )  $         108.2     $          99.4     $        8.8    

Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011

    Operating Earnings    

Operating earnings decreased primarily due to unlocking of PVFP and DPAC associated with assumption changes in Mexico and the weakening of the Latin American currencies against the U.S. dollar. These decreases were partially offset by higher fees driven by higher average AUM in Mexico primarily as a result of the HSBC AFORE acquisition and higher earnings in our equity method investment in Brazil.

   Operating Revenues    Premiums decreased $3.9 million in Chile primarily due to lower sales of single premium annuities with life contingencies and the weakening of the Chilean peso against the U.S. dollar.    Fees and other revenues increased primarily due to higher investment management fees driven by higher average AUM as a result of the HSBC AFORE acquisition in Mexico and the Claritas acquisition in Brazil. These increases were 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.

   Total Expenses   

Benefits, claims and settlement expenses decreased $28.0 million in Chile primarily due to lower inflation-based interest crediting rates to customers and the weakening of the Chilean peso against the U.S. dollar.

Operating expenses increased primarily due to unlocking of PVFP and DPAC associated with assumption changes in Mexico and due to higher expenses related to the Claritas acquisition in Brazil.

   Income Taxes    The effective income tax rates for the segment were -2% and 4% for the three months ended September 30, 2012 and 2011, respectively. The effective income tax rates were lower than the U.S. statutory rate primarily due to the presentation of 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                                          103  --------------------------------------------------------------------------------

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method investments is reported in income taxes. Lower tax rates of foreign jurisdictions also contributed to the lower effective income tax rates.

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

    Operating Earnings    Operating earnings increased primarily due to higher fees driven by higher average AUM in Mexico as a result of the HSBC AFORE acquisition and higher earnings 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, the unlocking of PVFP and DPAC associated with assumptions changes in Mexico and lower inflation-based investment returns on average invested assets and cash as a result of lower inflation in Chile.    Operating Revenues   

Premiums increased $20.5 million in Chile 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.

    Fees and other revenues increased primarily due to higher investment management fees driven by higher average AUM as a result of the HSBC AFORE acquisition 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.    Total Expenses    Benefits, claims and settlement expenses decreased $17.2 million in Chile 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 unlocking of PVFP and DPAC associated with assumption changes in Mexico, higher expenses related to the Claritas acquisition in Brazil and higher compensation costs 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 3% for the nine months ended September 30, 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.    

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.                                          104 

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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 periods indicated:

                                            For the three months ended        For the nine months ended                                                September 30,                     September 30,                                            2012             2011             2012             2011                                                                 (in millions) Universal and variable universal life insurance fee revenues (1)        $       138.5    $       123.7    $       331.7    $       349.8 Traditional life insurance premiums            122.0            122.1            371.0            375.5    

-------------------------------------------------------------------------------- (1)   Fee revenues for the three months ended September 30, 2012, reflect a $13.5 million increase due to unearned revenue unlocking associated with a change in our long-term interest rate assumptions and model refinements.  Fee revenues for the nine months ended September 30, 2012, also reflect 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.   

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 periods indicated:

                                              For the three months ended        For the nine months ended                                                  September 30,                     September 30,                                              2012             2011             2012             2011                                                                   (in millions) Premium and fees: Group dental and vision insurance        $       144.0    $       141.4    $       431.8    $       415.6 Group life insurance                              81.6             77.5            245.4            238.5 Group disability insurance                        73.5             68.2            217.1            205.3 Individual disability insurance                   59.7             55.1            174.7            160.6 Wellness                                           1.8              1.7              6.8              6.9    

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.                                          105 

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

                                              For the three months ended September 30,             For the nine months ended September 30,                                                                             Increase                                               Increase                                             2012             2011          (decrease)           2012               2011           (decrease)                                                                                     (in millions) Operating revenues: Premiums and other considerations       $       441.3    $       428.9    $ 

12.4 $ 1,324.7 $ 1,291.7 $ 33.0 Fees and other revenues (1)

                     151.7            137.9             13.8              373.1              391.1           (18.0 ) Net investment income                           173.5            172.5              1.0              517.2              519.2            (2.0 ) Total operating revenues                        766.5            739.3             27.2            2,215.0            2,202.0            13.0 

Expenses:

 Benefits, claims and settlement expenses (1)                                    524.4            411.8            112.6            1,494.9            1,261.1           233.8 Dividends to policyholders                       49.2             51.4             (2.2 )            148.0              156.8            (8.8 ) Operating expenses (1)                          229.2            204.1             25.1              460.8              562.3          (101.5 ) Total expenses                                  802.8            667.3            135.5            2,103.7            1,980.2           123.5 Operating earnings (losses) before income taxes                                    (36.3 )           72.0           (108.3 )            111.3              221.8          (110.5 ) Income taxes (benefits)                         (14.7 )           22.9            (37.6 )             32.5               70.3           (37.8 ) 

Operating earnings (losses) (1) $ (21.6 ) $ 49.1 $

      (70.7 )  $          78.8    $         151.5    $      (72.7 )    

-------------------------------------------------------------------------------- (1)   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 the three and nine months ended September 30, 2012 see, "Transactions Affecting Comparability of Results of Operations - Actuarial Assumption Updates" and "Individual Life Insurance Amortization."    

Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011

    Operating Earnings    Operating earnings in our individual life insurance business decreased $66.1 million primarily due to unlocking associated with a change in our long-term interest rate assumptions and model refinements. Operating earnings in our specialty benefits insurance business decreased $4.6 million primarily due to higher disability claims and staff related costs, including pension and other postretirement benefits.    Operating Revenues   

Premiums increased $16.3 million in our specialty benefits insurance business due to growth in the block of business.

Fees and other revenues increased $13.5 million in our individual life insurance business due to unearned revenue unlocking associated with a change in our long-term interest rate assumptions and model refinements.

   Total Expenses    Benefits, claims and settlement expenses increased $96.4 million in our individual life insurance business primarily due to unlocking associated with a change in our long-term interest rate assumptions and model refinements and the impact associated with the change in basis for amortizing DPAC and other actuarial balances in 2012. Benefits, claims and settlement expenses increased $16.2 million in our specialty benefits business due to growth in the block of business and higher disability claims.    Operating expenses increased $16.9 million in our individual life insurance business primarily due to unlocking associated a change in our long-term interest rate assumptions and model refinements, which was partially offset by the impact associated with the change in basis for amortizing DPAC and other actuarial balances in 2012. Operating expenses increased $8.2 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 40% and 32% for the three months ended September 30, 2012 and 2011, respectively. The effective income tax rate for the three months ended September 30, 2012, reflects the pre-tax operating loss incurred                                          106 

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    and the benefits from the interest exclusion from taxable income and income tax deductions allowed for corporate dividends received. The effective income tax rate for the three months ended September 30, 2011, was lower than the U.S. statutory rate primarily due to the interest exclusion from taxable income and income tax deductions allowed for corporate dividends received.    

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

    Operating Earnings    Operating earnings in our individual life insurance business decreased $61.4 million primarily due to unlocking associated with a change in our long-term interest rate assumptions and model refinements in the third quarter of 2012. Operating earnings in our specialty benefits insurance business decreased $11.3 million due to higher disability claims and staff related costs, including pension and other postretirement benefits, and lower investment yields.    Operating Revenues    Premiums increased $47.9 million in our specialty benefits insurance business due to growth in the block of business. Premiums decreased $14.9 million in our individual life insurance business due to higher ceded premiums in the universal life and variable universal life lines of business and the expected continued decline from our traditional life insurance business.    Fees and other revenues decreased $18.9 million in our individual life insurance business primarily due to the unlocking of unearned revenue associated with the change in basis for amortizing DPAC and other actuarial balances in the first quarter of 2012 offset by 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.    Total Expenses    Total expenses increased $63.7 million in our individual life insurance business primarily due to 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 partially offset by the impact associated with the change in basis for amortizing DPAC and other actuarial balances in the first quarter of 2012.  Total expenses increased $59.8 million in our specialty benefits insurance business primarily due to growth in the block of business, higher disability claims and staff related costs, including pension and other postretirement benefits.    Income Taxes    The effective income tax rates for the segment were 29% and 32% for the nine months ended September 30, 2012 and 2011, respectively. The effective income tax rates were lower than the U.S. statutory rate primarily due to 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 periods indicated:

                                                   For the three months ended September 30,                For the nine months ended September 30,                                                                                     Increase                                              Increase                                                2012                2011            (decrease)           2012               2011          (decrease)                                                                                         (in millions) Operating revenues: Total operating revenues                  $         (46.4 )   $         (56.6 )   $        10.2    $        (139.8 )  $        (130.3 )  $      (9.5 ) Expenses: Total expenses                                       (6.4 )              (4.0 )            (2.4 )            (18.4 )             (5.8 )        (12.6 ) Operating losses before income taxes, preferred stock dividends and noncontrolling interest                             (40.0 )             (52.6 )            12.6             (121.4 )           (124.5 )          3.1 Income tax benefits                                 (17.1 )             (20.9 )             3.8              (45.4 )            (48.3 )          2.9 Preferred stock dividends                             8.2                 8.2                 -               24.7               24.7              - Operating earnings attributable to noncontrolling interest                               0.1                   -               0.1                  -                2.9           (2.9 ) Operating losses                          $         (31.2 )   $         (39.9 )   $         8.7    $        (100.7 )  $        (103.8 )  $       3.1                                           107 

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Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011

    Operating Losses    

Operating losses decreased primarily due to an increase in earnings on average invested assets for the segment, representing capital that has not been allocated to any other segment.

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

    Operating Losses    Operating losses decreased primarily due to a reduction in corporate overhead expenses needed to support the exited group medical insurance business. Partially offsetting the decrease is a change in income tax reserves established for IRS tax matters.   

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]]    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 $4.5 billion as of September 30, 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 September 30, 2012, approximately $10.5 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 September 30, 2012 and December 31, 2011, we had short-term credit facilities with various financial institutions in an aggregate amount of $914.7 million and $725.0 million, respectively. As of September 30, 2012 and December 31, 2011, we had $28.5 million and $105.2 million, respectively, of outstanding borrowings related to our credit facilities, with no assets pledged as support as of September 30, 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                                          108  --------------------------------------------------------------------------------

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    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 September 30, 2012 and December 31, 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 of these limits. In general, the current statutory limitations are 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 these limitations, Principal Life could distribute approximately $507.7 million in 2012. Total stockholder dividends paid by Principal Life to its parent as of September 30, 2012, were $525.0 million, which were approved by the Commissioner.    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 expense 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 3. "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.

    Net cash provided by operating activities was $ 2,373.7 million and $1,885.4 million for the nine months ended September 30, 2012 and 2011, respectively. From our 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 and investment 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 benefits and expenses paid. The increase in cash provided by operating activities in 2012 compared to 2011 was the result of increased cash flows from trading securities as well as an increase in premiums, fees and other revenue received.  These increases were partially offset by fluctuations in receivables and payables associated with the timing of settlements as well as a decrease in sales of development real estate properties in the current year compared to 2011.    Net cash used in investing activities was $1,719.2 million and $89.1 million for the nine months ended September 30, 2012 and 2011, respectively. The increase in cash used in investing activities in 2012 compared to 2011 was primarily the result of an increase in net purchases of investments in 2012 compared to net sales and maturities of investments in 2011.    Net cash used in financing activities was $1,209.4 million and $2,239.5 million for the nine months ended September 30, 2012 and 2011, respectively. The decrease in cash used in financing activities was primarily due to the issuance of senior notes in 2012, with no corresponding activity in the prior year.  Also contributing to the decrease in cash used in financing activities is a decrease in net withdrawals of investment contracts, for which we have had net withdrawals in both 2012 and 2011, primarily due to our decision to scale back our investment only business. These were partially offset by an increase in common stock dividends in 2012 as a result of moving to a quarterly dividend beginning in 2012.    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 registration.    Preferred Stock Dividend Restrictions and Payments. The certificates of designation for the Series A and B Preferred Stock restrict the declaration of preferred dividends if we fail to meet specified capital adequacy, net income or stockholders' equity levels. As                                          109  --------------------------------------------------------------------------------

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    of September 30, 2012, we have no preferred dividend restrictions. The dividend payments on our preferred stock are not mandatory or cumulative, as our Board of Directors approves each quarterly dividend payment.    

Short-Term Debt. The components of short-term debt as of September 30, 2012 and December 31, 2011, were as follows:

                                     September 30, 2012     December 31, 2011                                                (in millions) Commercial paper                 $                  -   $              50.0 Other recourse short-term debt                   28.5                  55.2 Total short-term debt            $               28.5   $             105.2    

Long-Term Debt. For Long-Term debt information, see Item 1. "Financial Statements, Notes to Unaudited Consolidated Financial Statements, Note 5, Debt."

    Stockholders' Equity. The following table summarizes our return of capital to common stockholders.                                           September 30, 2012     December 31, 2011                                                     (in millions)  Dividends to stockholders             $             (169.6 ) $            (213.7 ) Repurchase of common stock                          (272.7 )              (556.4 ) Total cash returned to stockholders   $             (442.3 ) $            (770.1 )    

For additional stockholders' equity information, see Item 1. "Financial Statements, Notes to Unaudited Consolidated Financial Statements, Note 9, Stockholders' Equity."

   Capitalization   

Our capital structure as of September 30, 2012 and December 31, 2011, consisted of debt and equity summarized as follows:

                                           September 30, 2012     December 31, 2011                                                       (in millions) Debt: Short-term debt                         $              28.5   $             105.2 Long-term debt                                      2,180.0               1,564.8 Total debt                                          2,208.5               1,670.0 Stockholders' equity: Equity excluding AOCI                               8,946.7               8,759.9

Total capitalization excluding AOCI $ 11,155.2 $ 10,429.9 Debt to equity excluding AOCI

                            25 %                  19 % Debt to capitalization excluding AOCI                    20 %                  16 %     As of September 30, 2012, we had $1,227.1 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. In addition, we continue to maintain sufficient capital levels in Principal Life based on our current financial strength ratings.    

Contractual Obligations and Contractual Commitments

As of September 30, 2012, there have been no significant changes to contractual obligations and contractual commitments since December 31, 2011.

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 1. "Financial Statements, Notes to Unaudited Consolidated Financial Statements, Note 2, Variable Interest Entities."

Guarantees and Indemnifications. As of September 30, 2012, there have been no significant changes to guarantees and

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    indemnifications since December 31, 2011. For guarantee and indemnification information, see Item 1. "Financial Statements, Notes to Unaudited Consolidated Financial Statements, Note 8, 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 S&P maintain a stable outlook on the U.S. life insurance sector. However, these rating agencies note that current challenges for the industry such as global sovereign uncertainty, equity market volatility, impact of sustained low interest rates, weakness in the real estate market, lingering unemployment and weak consumer confidence are putting pressure on the stable outlook.    In September 2012 Moody's changed its outlook on the U.S. life insurance industry to negative. The change to negative was driven largely by Moody's expectation that interest rates will remain in the low single-digits for the next few years and the U.S. will have continued below-trend economic growth. This along with prolonged equity market volatility will continue to hurt insurers' earnings and revenues and weaken financial flexibility.    In October 2012 when PFG announced that it had signed a definitive agreement to acquire Cuprum, the rating agencies affirmed the financial strength and debt ratings assigned to Principal Financial Group entities; however, Fitch, Moody's and S&P all changed the outlook to 'negative' from 'stable'. AM Best maintained the 'stable' outlook. The rating affirmation from all agencies reflects that the acquisition is a good strategic fit and that Cuprum is recognized as a leading player in the mandatory pension market in Chile. The negative outlooks reflect integration risk exists and the acquisition puts some pressure on debt and coverage ratios.    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.                                                                    Standard &                                             A.M. Best   Fitch     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                                              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    

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(1) Moody's has rated Principal Financial Group's senior debt issuance "A3"

(2) S&P has rated Principal Financial Group's preferred stock issuance "BB"

    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                                          111 

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    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 1. "Financial Statements, Notes to Unaudited Consolidated Financial Statements, Note 10, Fair Value Measurements" for further details, including a reconciliation of changes in Level 3 fair value measurements.    As of September 30, 2012, 40% of our net assets (liabilities) were Level 1, 56% were Level 2 and 4% were Level 3. Excluding separate account assets as of September 30, 2012, 1% of our net assets (liabilities) were Level 1, 98% 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 September 30, 2012, were $4,852.2 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 largely 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 September 30, 2011, were $4,333.4 million as compared to $4,691.4 million as of December 31, 2010. The decrease was primarily due to net transfers out of Level 3 and into Level 2. These 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 were now able to obtain pricing from a recognized third party pricing vendor.    Investments    We had total consolidated assets as of September 30, 2012, of $159,193.3 million, of which $69,268.3 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 September 30, 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 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.                                          112 

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   Table of Contents                                             September 30, 2012December 31, 2011                                     Carrying amount     % of total    

Carrying amount % of total

                                                            ($ in millions) Fixed maturities: Public                             $        36,944.4            53 %  $        35,350.3            53 % Private                                     15,397.5            22             14,628.1            22 Equity securities                              381.2             1                481.9             1 Mortgage loans: Commercial                                   9,935.7            14              9,396.6            14 Residential                                  1,362.2             2              1,330.6             2 Real estate held for sale                       68.2             -                 44.8             - Real estate held for investment              1,140.4             2              1,048.1             2 Policy loans                                   866.6             1                885.1             1 Other investments                            3,172.1             5              2,985.8             5 Total invested assets                       69,268.3           100 %           66,151.3           100 % Cash and cash equivalents                    2,279.0                            2,833.9 Total invested assets and cash     $        71,547.3                  $        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 three months ended September 30,              Increase (decrease)             For the nine months ended 

September 30, Increase (decrease)

                                     2012                       2011                   2012 vs. 2011                    2012                      2011                 2012 vs. 2011                             Yield        Amount        Yield        Amount        Yield         Amount        Yield        Amount         Yield      Amount       Yield         Amount                                                                                                   ($ in millions) Fixed maturities                4.9 %  $     598.8         5.5 %  $     664.9        (0.6 )%  $     (66.1 )      5.1 %  $     1,857.3        5.5 %  $ 2,014.9       (0.4 )%  $     (157.6 ) Equity securities               3.6            3.3         2.4            3.2         1.2             0.1        3.6             11.7        3.0         11.1        0.6              0.6 Mortgage loans - commercial                      5.7          140.9         5.9          139.7        (0.2 )           1.2        5.8            420.6        5.8        420.3          -              0.3 Mortgage loans - residential                     4.0           13.7         5.6           19.8        (1.6 )          (6.1 )      5.3             53.8        6.2         67.0       (0.9 )          (13.2 ) Real estate                     7.8           23.2         7.3           18.3         0.5             4.9        5.5             47.8        8.3         65.1       (2.8 )          (17.3 ) Policy loans                    6.1           13.2         6.6           14.5        (0.5 )          (1.3 )      6.2             40.8        6.5         43.5       (0.3 )           (2.7 ) Cash and cash equivalents                     0.5            2.6         0.8            3.6        (0.3 )          (1.0 )      0.4              6.9        0.6          7.0       (0.2 )           (0.1 ) Other investments               1.0            7.7        (3.8 )        (28.5 )       4.8            36.2        1.4             31.9       (0.8 )      (18.2 )      2.2             50.1 Total before investment expenses                        4.8          803.4         5.0          

835.5 (0.2 ) (32.1 ) 4.8 2,470.8 5.2

  2,610.7       (0.4 )         (139.9 ) Investment expenses            (0.1 )        (19.6 )      (0.1 )        (20.3 )         -             0.7       (0.1 )          (61.2 )     (0.1 )      (62.1 )        -              0.9 Net investment income           4.7 %  $     783.8         4.9 %  $    

815.2        (0.2 )%  $     (31.4 )      4.7 %  $     2,409.6        5.1 %  $ 2,548.6       (0.4 )%  $     (139.0 )    

Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011

    Net investment income decreased due to lower reinvestment yields within our fixed maturities portfolio and lower inflation-based investment returns on average invested assets and cash as a result of lower inflation in Chile, which was partially offset by lower income in the prior year due to net mark-to-market losses on certain trading portfolios of derivatives and fixed maturities.    

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

    Net investment income decreased due to lower reinvestment yields within our fixed maturities portfolio 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 Chilean peso against the U.S. dollar as well as a decrease in gains on the sale of development real estate.    

Net Realized Capital Gains (Losses)

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

                                      113  --------------------------------------------------------------------------------    Table of Contents                                   For the three months ended         Increase          For the nine months ended          Increase                                      September 30,               (decrease)               September 30,               (decrease)                                  2012             2011          2012 vs. 2011         2012             2011          2012 vs. 2011                                                                          (in millions) Fixed maturities, available-for-sale - credit impairments (1)       $       (34.3 )  $       (46.1 )  $          11.8    $      (95.1 )  $       (139.8 )  $          44.7 Fixed maturities, available-for-sale - other                                  2.4              3.3               (0.9 )          18.0               5.9               12.1 Fixed maturities, trading              4.7            (11.2 )             15.9             5.7             (12.5 )             18.2 Equity securities - credit impairments                    (0.1 )            0.1               (0.2 )          (0.1 )            (2.3 )              2.2 Derivatives and related hedge activities (2)                 (74.8 )           30.0             (104.8 )         (30.1 )            (4.5 )            (25.6 ) Commercial mortgages                  (4.0 )           (5.3 )              1.3           (11.9 )           (17.5 )              5.6 Other gains (losses)                 193.8             (1.5 )            195.3           194.7             119.7               75.0 Net realized capital gains (losses)               $        87.7    $       (30.7 )  $         118.4    $       81.2    $        (51.0 )  $         132.2    

-------------------------------------------------------------------------------- (1)                 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 and $1.6 million for the three months ended September 30, 2012 and 2011, respectively and $0.0 million and $8.9 million for the nine months ended September 30, 2012 and 2011, respectively.  (2)                 Includes fixed maturities, available-for-sale 

impairment-related net gains of $0.0 million and $0.4 for the nine months ended September 30, 2012 and 2011, respectively, which were hedged by derivatives reflected in this line. There were no fixed maturities available-for-sale impairment-related net gains in this line for the three months ended September 30, 2012 and 2011.

Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 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, trading increased due to mark-to-market gains versus losses due to tightening of credit spreads in 2012 and a widening of credit spreads in 2011.

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

Other net realized capital gains increased 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.

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 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, trading increased due to mark-to-market gains versus losses due to tightening of credit spreads in 2012 and a widening of credit spreads in 2011.

    Net realized capital losses on derivatives and related hedge activities increased due to losses versus gains on the GMWB embedded derivatives, including losses versus gains from changes in the spread reflecting our own creditworthiness, and related hedging instruments. These losses were partially offset by gains versus losses on currency forwards and currency swaps not designated as hedging instruments due to changes in exchange rates.    Other net realized capital gains increased in the third quarter of 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. The second quarter of 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.                                          114  --------------------------------------------------------------------------------

   Table of Contents    U.S. Investment Operations    Of our invested assets, $63,345.7 million were held by our U.S. operations as of September 30, 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:   

† credit risk, relating to the uncertainty associated with the continued ability of a given obligor to make timely payments of principal and interest and

† 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 September 30, 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 RMBS, CMBS, 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:    †          material declines in the issuer's revenues or margins;  †          significant management or organizational changes;  †          significant uncertainty regarding the issuer's industry; 

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

 †          violation of financial covenants and  †          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 the origination of 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:                                          115  --------------------------------------------------------------------------------

   Table of Contents                            Weighted average loan-to-value ratio           

Debt service coverage ratio

                        September 30, 2012    December 31, 2011    September 30, 2012    December 31, 2011 New mortgages                          48 %                 45 %                3.0x                 3.3x Entire mortgage portfolio                              56 %                 60 %                2.1x                 2.0x     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 3. "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.                                   September 30, 2012                    December 31, 2011                          Carrying amount      % of total      Carrying amount      % of total                                                    ($ in millions) Fixed maturities: Public                  $        33,254.6              52 %  $        32,081.2              53 % Private                          15,397.5              24             14,628.1              24 Equity securities                   259.8               1                395.9               1 Mortgage loans: Commercial                        9,922.4              16              9,386.0              15 Residential                         690.2               1                746.0               1 Real estate held for sale                                 60.5               -                 36.6               - Real estate held for investment                        1,139.5               2              1,047.3               2 Policy loans                        840.0               1                861.6               1 Other investments                 1,781.2               3              1,783.5               3 Total invested assets            63,345.7             100 %           60,966.2             100 % Cash and cash equivalents                       2,157.2                              2,741.7 Total invested assets and cash                $        65,502.9                    $        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 September 30, 2012 and December 31, 2011, were $9.8 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 $173.7 million and $279.1 million of these trading securities as of September 30, 2012 and December 31, 2011, respectively.                                          116  --------------------------------------------------------------------------------

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

September 30, 2012December 31, 2011                                      Carrying amount     % of total    

Carrying amount % of total

                                                              ($ in 

millions)

 U.S. government and agencies        $         1,121.7             2 %  $         1,004.7             2 % States and political subdivisions             3,397.7             7              3,041.1             7 Non-U.S. governments                            655.6             1                676.1             1 Corporate - public                           19,303.8            40             19,194.4            41 Corporate - private                          12,794.7            26             11,920.7            26 Residential mortgage-backed pass-through securities                       3,333.8             7              3,421.3             7 Commercial mortgage-backed securities                                    3,841.2             8              3,425.7             7 Residential collateralized mortgage obligations                          1,164.9             2              1,403.8             3 Asset-backed securities                       3,038.7             7              2,621.5             6 Total fixed maturities              $        48,652.1           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 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 26% of total fixed maturities as of September 30, 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.                            September 30, 2012     December 31, 2011                                       (in millions) European Union          $           4,398.5   $           4,132.1 United Kingdom                      2,698.6               2,329.5 Australia/New Zealand               1,518.8               1,490.1 Asia-Pacific                        1,296.2               1,172.3 Latin America                         864.7                 868.8 Other countries (1)                 1,997.8               2,139.8 Total                   $          12,774.6   $          12,132.6    

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(1) Includes exposure from 12 countries as of September 30, 2012 and 14 countries as of December 31, 2011.

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    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 September 30, 2012 and December 31, 2011, our investments in Canada totaled $1,810.0 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 September 30, 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 September 30, 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 September 30, 2012, 94% of our total portfolio exposure consists of investment grade bonds with an average price of 102 (carrying value/amortized cost) and a weighted average time to maturity of 5 years.    

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

                                                        September 30, 2012 Select European Exposure      Greece    Ireland     Italy     Portugal     Spain      Total                                                       (in millions) Non-Sovereign: Financial institutions       $      -   $   59.1   $  62.1   $        -   $ 145.0   $   266.2 Non-financial institutions        7.2      274.2     231.7         24.9     268.6       806.6 Total                        $    7.2   $  333.3   $ 293.8   $     24.9   $ 413.6   $ 1,072.8                                                      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."                                          118 

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    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 September 30, 2012.                                   Amortized cost                                (in millions) General Electric Co.          $          211.9 AT&T Inc.                                196.7 Berkshire Hathaway Inc.                  193.0 Wells Fargo & Co. (1)                    176.6 Bank of America Corp. (1)                156.5 Republic of Korea                        150.7 Prudential Financial Inc.                145.9 JPMorgan Chase & Co.                     145.7 Verizon Communications Inc.              143.6 Merck & Co Inc.                          142.6 Total top ten exposures       $        1,663.2    

-------------------------------------------------------------------------------- (1)                  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 1. "Financial Statements, Notes to Unaudited Consolidated Financial Statements, Note 10, 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. In addition, 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 ("<org>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 National Association of Insurance Commissioners (''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 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.                                          119  --------------------------------------------------------------------------------

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    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.                                                 September 30, 2012                        December 31, 2011                                                               % of total                                   % of total NAIC                                Amortized     Carrying     carrying                        Carrying     carrying Rating   Rating Agency Equivalent      cost        amount       amount      Amortized cost      amount       amount                                                                      ($ in millions) 1        AAA/AA/A                   $ 27,043.5   $ 29,065.9           60 % $       26,802.2   $ 28,115.1           60 % 2        BBB                          14,933.0     16,136.2           33           14,570.4     15,195.9           33 3        BB                            2,569.4      2,423.8            5            2,537.5      2,405.8            5 4        B                               653.2        544.0            1              759.1        582.3            1 5        CCC and lower                   456.0        378.4            1              329.4        255.5            1 6        In or near default              202.1        103.8            -              273.4        154.7            -          Total fixed maturities     $ 45,857.2   $ 48,652.1          100 % $       45,272.0   $ 46,709.3          100 %     Fixed maturities include 21 securities with an amortized cost of $213.1 million, gross gains of $7.7 million, gross losses of $0.1 million and a carrying amount of $220.7 million as of September 30, 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 September 30, 2012, based on amortized cost, 54% of our CMBS portfolio had ratings of A or higher and 34% was issued in 2005 or before and 12% 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.                                                                                       September 30, 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   $     45.0   $    46.1   $      59.3   $     59.7   $      39.5   $     40.0   $      68.7   $     66.3   $    128.0   $     97.4   $    340.5   $   309.5 2004                 78.9        82.1          56.9         59.5          46.7         46.1          32.8         27.9        102.6         80.8        317.9       296.4 2005                337.2       366.9          43.9         49.6          39.9         39.5          70.4         66.5        240.0        152.5        731.4       675.0 2006                142.6       151.8           4.9          5.8         108.5        117.6          42.9         45.6        174.0        119.9        472.9       440.7 2007                132.9       134.5          36.5         39.0         149.1        174.4         266.4        299.5        722.1        471.2      1,307.0     1,118.6 2008                 11.2        12.1          15.0         17.7          28.5         34.3          23.5         25.7         31.2         30.8        109.4       120.6 2009                111.7       119.5          86.1         91.8             -            -             -            -            -            -        197.8       211.3 2010                 64.1        71.2          67.0         70.5             -            -             -            -            -            -        131.1       141.7 2011                 95.6        97.7         124.1        129.7             -            -             -            -            -            -        219.7       227.4 2012                136.5       139.6         154.5        160.4             -            -             -            -            -            -        291.0       300.0 Total (1)      $  1,155.7   $ 1,221.5   $     648.2   $    683.7   $     412.2   $    451.9   $     504.7   $    531.5   $  1,397.9   $    952.6   $  4,118.7   $ 3,841.2    

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(1) The CMBS portfolio included agency CMBS with a $409.9 million amortized cost and a $428.8 million carrying amount.

                                      120  --------------------------------------------------------------------------------    Table of Contents                                                                                       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    

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(1) The CMBS portfolio included agency CMBS with a $204.1 million amortized cost and a $210.2 million carrying amount.

    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.                                                                                          September 30, 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 $ 2.3 $ 2.3 $ 4.9 $ 5.0 $

 11.5   $     11.0   $      18.7   $     18.2   $     143.4   $    123.4   $     180.8   $    159.9 2004                      -            -             -            -          22.4         22.0           3.2          3.2          45.1         39.3          70.7         64.5 2005                      -            -             -            -           3.0          3.1             -            -          71.7         52.8          74.7         55.9 2006                      -            -             -            -             -            -             -            -          14.0         12.7          14.0         12.7 2007                      -            -             -            -             -            -             -            -          37.1         31.7          37.1         31.7 Total           $       2.3   $      2.3   $       4.9   $      5.0   $      36.9   $     36.1   $      21.9   $     21.4   $     311.3   $    259.9   $     377.3   $    324.7                                                                                         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.

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   Table of Contents                                                          September 30, 2012      December 31, 2011                                                                    ($ in millions) Total fixed maturities (public and private)           $          48,652.1    $          46,709.3 Problem fixed maturities (1)                          $             371.2    $             343.5 Potential problem fixed maturities                                  210.4                  166.3 Restructured problem fixed maturities                                15.1                   14.6 Total problem, potential problem and restructured fixed maturities                                      $             596.7    $             524.4 Total problem, potential problem and restructured fixed maturities as a percent of total fixed maturities                                                           1.23 %                 1.12 %    

-------------------------------------------------------------------------------- (1)                  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 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 1. "Financial Statements, Notes to Unaudited Consolidated Financial Statements, Note 3, 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 $95.1 million and $144.7 million for the nine months ended September 30, 2012 and 2011, respectively.    

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.

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   Table of Contents                                                                      September 30, 2012                                                                 Gross                 Gross            Carrying                                        Amortized cost     unrealized gains      unrealized losses       amount                                                                     (in millions) Finance - Banking                     $        4,364.5    $           204.5    $             289.2    $  4,279.8 Finance - Brokerage                              360.7                 29.0                    1.2         388.5 Finance - Finance Companies                      233.7                 12.9                    0.2         246.4 Finance - Financial Other                        514.8                 79.0                      -         593.8 Finance - Insurance                            2,831.2                271.4                   23.2       3,079.4 Finance - REITS                                1,010.5                 60.5                    6.1       1,064.9 Industrial - Basic Industry                    1,680.8                153.2                    2.5       1,831.5 Industrial - Capital Goods                     2,044.0                191.6                    1.3       2,234.3 Industrial - Communications                    2,111.5                250.6                    8.5       2,353.6 Industrial - Consumer Cyclical                 1,618.4                177.4                    3.5       1,792.3 Industrial - Consumer Non-Cyclical             3,412.0                351.8                    1.3       3,762.5 Industrial - Energy                            2,023.9                293.2                    1.5       2,315.6 Industrial - Other                               478.8                 39.8                      -         518.6 Industrial - Technology                          863.3                 71.3                    0.5         934.1 Industrial - Transportation                      687.6                 62.6                    3.0         747.2 Utility - Electric                             2,774.0                323.8                   12.2       3,085.6 Utility - Natural Gas                          1,049.0                133.2                    0.8       1,181.4 Utility - Other                                  250.2                 34.7                      -         284.9 FDIC guaranteed                                    5.0                    -                      -           5.0 Government guaranteed                          1,119.2                146.6                    1.9       1,263.9 Total corporate securities                    29,433.1              2,887.1                  356.9      31,963.3  Residential mortgage-backed pass-through securities                        3,009.0                228.5                    0.1       3,237.4 Commercial mortgage-backed securities                                     4,115.9                211.7                  489.2       3,838.4 Residential collateralized mortgage obligations                           1,130.3                 31.9                   12.1       1,150.1 Asset-backed securities - Home equity (1)                                       377.3                  0.8                   53.4         324.7 Asset-backed securities - All other                                          2,238.0                 37.1                    0.2       2,274.9 Collateralized debt obligations - Credit                                            79.3                    -                   42.7          36.6 Collateralized debt obligations - CMBS                                              95.2                  2.4                   18.1          79.5 Collateralized debt obligations - Loans                                            250.4                  2.3                    2.0         250.7 Collateralized debt obligations - ABS                                               15.0                    -                    1.0          14.0 Total mortgage-backed and other asset-backed securities                       11,310.4                514.7                  618.8      11,206.3  U.S. government and agencies                     935.6                 38.0                      -         973.6 States and political subdivisions              2,999.9                251.0                    2.8       3,248.1 Non-U.S. governments                             573.0                 82.6                      -         655.6 Total fixed maturities, available-for-sale                    $       45,252.0    $         3,773.4    $             978.5    $ 48,046.9    

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(1)  This exposure is all related to sub-prime mortgage loans.                                          123 

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   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    

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(1)                 This exposure is all related to sub-prime mortgage loans.    Of the $978.5 million in gross unrealized losses as of September 30, 2012, there were $3.6 million in losses attributed to securities scheduled to mature in one year or less, $33.1 million attributed to securities scheduled to mature between one to five years, $13.0 million attributed to securities scheduled to mature between five to ten years, $310.0 million attributed to securities scheduled to mature after ten years and $618.8 million related to mortgage-backed and other ABS that are not classified by maturity year. As of September 30, 2012, we were in a $2,794.9 million net unrealized gain position as compared to a $1,437.3 million net unrealized gain position as of December 31, 2011. Of the $1,357.6 million increase in net unrealized gains for the nine months ended September 30, 2012, an approximate $0.3 billion increase can be attributed to an approximate 14 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 have improved due to the below investment grade                                          124  --------------------------------------------------------------------------------

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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.    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.                                              September 30, 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                $ 28,833.1    $    2,659.5    $      238.8    $ 

31,253.8 $ 28,497.9$ 1,989.8 $ 435.0 $ 30,052.7 Private

                 12,709.3           997.8           192.9      13,514.2      12,298.2           757.4           373.8      12,681.8 Below investment grade: Public                   1,839.0            46.6           296.3       1,589.3       1,834.4            21.3           365.1       1,490.6 Private                  1,870.6            69.5           250.5       1,689.6       1,861.4           139.1           296.4       1,704.1 Total fixed maturities, available-for-sale    $ 45,252.0    $    3,773.4    $      978.5    $ 48,046.9    $ 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.                                                         September 30, 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   $   475.2   $        3.4   $   105.0   $        1.2   $   580.2   $        4.6 Greater than three to six months               35.5            0.4        72.7            1.3       108.2            1.7 Greater than six to nine months                 55.3            1.5        29.9            0.3        85.2            1.8 Greater than nine to twelve months               73.2            1.3        20.1            0.4        93.3            1.7 Greater than twelve to twenty-four months                     468.2           27.2       397.8           15.4       866.0           42.6 Greater than twenty-four to thirty-six months           58.9           11.7        14.6            0.8        73.5           12.5 Greater than thirty-six months          834.8          193.3       806.0          173.5     1,640.8          366.8 Total fixed maturities, available-for-sale     $ 2,001.1   $      238.8   $ 1,446.1   $      192.9   $ 3,447.2   $      431.7                                                          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     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.                                          125 

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   Table of Contents                                                          September 30, 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   $     34.1   $        0.1   $    107.4   $        2.8   $   141.5   $        2.9 Greater than three to six months                13.2            0.6         39.0            1.4        52.2            2.0 Greater than six to nine months                     -              -         28.0            1.9        28.0            1.9 Greater than nine to twelve months                 0.3            0.1         16.3            1.2        16.6            1.3 Greater than twelve to twenty-four months                       73.9            6.7         56.7            9.9       130.6           16.6 Greater than twenty-four to thirty-six months             3.7            0.2         17.0            1.6        20.7            1.8 Greater than thirty-six months           676.7          288.6        450.8          231.7     1,127.5          520.3 Total fixed maturities, available-for-sale     $    801.9   $      296.3   $    715.2   $      250.5   $ 1,517.1   $      546.8                                                           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.                                                                         September 30, 2012                                 Problem, potential problem,           All other fixed maturity                                      and restructured                        securities                         Total                                                      Gross                              Gross                           Gross                                Carrying           unrealized         Carrying        unrealized        Carrying       unrealized                                 amount              losses            amount           losses           amount          losses                                                                         (in millions) Three months or less        $             -     $             -    $         3.6    $         1.1    $        3.6    $        1.1 Greater than three to six months                              5.0                 1.4             51.8             14.0            56.8            15.4 Greater than six to nine months                                  4.5                 3.2             18.5              6.2            23.0             9.4 Greater than nine to twelve months                             -                   -             28.7             13.0            28.7            13.0 Greater than twelve months                                210.9               297.3            551.2            454.1           762.1           751.4 

Total fixed maturities, available-for-sale $ 220.4 $ 301.9 $ 653.8 $ 488.4 $ 874.2 $ 790.3

                                                                         December 31, 2011                                 Problem, potential problem,           All other fixed maturity                                      and 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

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   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 $9,922.4 million and $9,386.0 million as of September 30, 2012 and December 31, 2011, respectively. The carrying amount of our residential mortgage loan portfolio was $690.2 million and $746.0 million as of September 30, 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:    †            providing strong risk-adjusted relative value in comparison to

other investment alternatives;

 †            enhancing total returns and  †            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 and general-purpose industrial properties.    Our commercial mortgage loan portfolio is diversified by geography and specific collateral property type. Commercial mortgage lending in the state of California accounted for 19% and 22% of our commercial mortgage loan portfolio as of September 30, 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 September 30, 2012 and December 31, 2011, the total number of commercial mortgage loans outstanding was 963 and 975, of which 69% and 71% were for loans with principal balances less than $10 million, respectively. The average loan size of our commercial mortgage portfolio was $10.3 million and $9.7 million as of September 30, 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 1. "Financial Statements, Notes to Unaudited Consolidated Financial Statements, Note 3, 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 region accounted for over 70% of the problem, potential problem and restructured commercial mortgages as of September 30, 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 September 30, 2012. Office and apartment properties accounted for over half of the problem, potential problem and restructured commercial mortgages as of December 31, 2011.                                          127  --------------------------------------------------------------------------------

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    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.                                                           September 30,                                                            2012           December 31, 2011                                                                  ($ in millions) Total commercial mortgages                            $       9,922.4    $           9,386.0 Problem commercial mortgages                          $          17.5    $             112.7 Potential problem commercial mortgages                          149.7                  152.8 Restructured problem commercial mortgages                           -                    7.5 Total problem, potential problem and restructured commercial mortgages                                  $         167.2    $             273.0 Total problem, potential problem and restructured commercial mortgages as a percent of total commercial mortgages                                             1.69 %                 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 1. "Financial Statements, Notes to Unaudited Consolidated Financial Statements, Note 3, Investments - Mortgage Loan Valuation Allowance."    The valuation allowance decreased $12.4 million for the nine months ended September 30, 2012, and decreased $15.8 million for the year ended December 31, 2011. The decrease in the level of valuation allowance during 2012 and 2011 was related to the same market factors as those causing the decrease in the level of problem, potential problem and restructured commercial mortgages during the nine months ended September 30, 2012. The South Atlantic region accounts for the highest level of reserves at both September 30, 2012 and December 31, 2011.    The following table represents our commercial mortgage valuation allowance for the periods indicated.                                                          September 30, 2012      December 31, 2011                                                                    ($ in millions) Balance, beginning of period                         $               64.8    $              80.6 Provision                                                            14.3                   17.0 Charge-offs                                                         (26.7 )                (32.9 ) Recoveries                                                              -                    0.1 Balance, end of period                               $               52.4    $              64.8 Valuation allowance as % of carrying value before reserves                                                             0.53 %                 0.69 %     Residential Mortgage Loans. The residential mortgage loan portfolio is composed of home equity mortgages with an amortized cost of $519.5 million and $611.0 million and first lien mortgages with an amortized cost of $212.9 million and $171.0 million as of September 30, 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 $35.0 million and $24.0 million as of September 30, 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 September 30, 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 continues to decline. The following table represents our residential mortgage valuation allowance for the periods indicated.                                          128 

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   Table of Contents                                                          September 30, 2012      December 31, 2011                                                                    ($ in millions) Balance, beginning of period                         $               36.0    $              37.7 Provision                                                            32.5                   28.5 Charge-offs                                                         (28.9 )                (33.4 ) Recoveries                                                            2.6                    3.2 Balance, end of period                               $               42.2    $              36.0 Valuation allowance as % of carrying value before reserves                                                              5.8 %                  4.6 %     Real Estate    Real estate consists primarily of commercial equity real estate. As of September 30, 2012 and December 31, 2011, the carrying amount of our equity real estate investment was $1,200.0 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 $1,139.5 million and $1,047.3 million as of September 30, 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 nine months ended September 30, 2012 and year ended December 31, 2011, there were no such impairment adjustments.    The carrying amount of real estate held for sale was $60.5 million and $36.6 million as of September 30, 2012 and December 31, 2011, respectively. There were no valuation allowances as of September 30, 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, West South Central, and Pacific regions of the United States as of September 30, 2012. By property type, there is a concentration in office, industrial, and retail that represented approximately 77% of the equity real estate portfolio as of September 30, 2012.    Other Investments    Our other investments totaled $1,781.2 million as of September 30, 2012, compared to $1,783.5 million as of December 31, 2011. Derivative assets accounted for $1,094.9 million and $1,156.5 million in other investments as of September 30, 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, $ 5,922.6 million were held by our Principal International segment as of September 30, 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 September 30, 2012 and December 31, 2011, were fixed maturities, other investments, residential mortgage loans and equity securities. In addition, policy loans are included in our invested assets. The following table excludes invested assets of the separate accounts.                                          129 

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   Table of Contents                                             September 30, 2012December 31, 2011                                     Carrying amount     % of total    

Carrying amount % of total

                                                            ($ in millions) Fixed maturities - Public          $         3,689.8            62 %  $         3,269.1            63 % Equity securities                              121.4             2                 86.0             2 Mortgage loans: Commercial                                      13.3             -                 10.6             - Residential                                    672.0            12                584.6            11 Real estate held for sale                        7.7             -                  8.2             - Real estate held for investment                  0.9             -                  0.8             - Policy loans                                    26.6             1                 23.5             1 Other investments                            1,390.9            23              1,202.3            23 Total invested assets                        5,922.6           100 %            5,185.1           100 % Cash and cash equivalents                      121.8                               92.2 Total invested assets and cash     $         6,044.4                  $         5,277.3     Investments in equity method subsidiaries and direct financing leases accounted for $691.9 million and $623.4 million, respectively, of other investments as of September 30, 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 September 30, 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 6.5% and 7.7% of our total International invested assets as of September 30, 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 September 30, 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 September 30, 2012, our total portfolio exposure had an average price of 107 (carrying value/amortized cost).    

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

                                    September 30, 2012           December 31, 2011 Select European Exposure     Italy     Spain     Total    Italy     Spain     Total                                                   (in millions) Non-Sovereign: Financial institutions       $    -   $ 255.4   $ 255.4   $    -   $ 241.5   $ 241.5 Non-financial institutions     11.5     127.1     138.6     52.5     112.4     164.9 Total                        $ 11.5   $ 382.5   $ 394.0   $ 52.5   $ 353.9   $ 406.4    

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

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