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

Forward-Looking Information

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

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

Overview

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

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

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

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

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

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

Transactions Affecting Comparability of Results of Operations

Dispositions

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

Post Advisory Group, LLC. Effective January 1, 2009, we sold certain asset management contracts within our Post Advisory Group, LLC subsidiary. The transaction does not qualify for discontinued operations treatment under U.S. GAAP. The realized capital gain from the sale, which is reflected in our Global Asset Management segment, is not material.

Other

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

As a result of our decision to terminate our commercial mortgage securities issuance operation, amounts previously included in our Global Asset Management segment operating earnings related to our commercial mortgage securities issuance operation have been removed from operating earnings for all periods presented and are reported as other after-tax adjustments. Our commercial mortgage securities issuance operation had operating revenues of $(0.1) million and $(21.3) million for the three months ended March 31, 2009 and 2008, respectively. Our commercial mortgage securities issuance operation had after-tax operating losses of $0.3 million and $17.1 million for the three months ended March 31, 2009 and 2008, respectively.

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

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

Foreign currency exchange rate fluctuations create variances in our financial statement line items. Our consolidated net income was negatively impacted by $13.2 million and positively impacted by $5.8 million for the three months ended March 31, 2009 and 2008, respectively, as a result of fluctuations in foreign currency to U.S. dollar exchange rates. For a discussion of our approaches to managing foreign currency exchange rate risk, see Item 3. "Quantitative and Qualitative Disclosures About Market Risk - Foreign Currency Risk."

Stock-Based Compensation Plans

For information related to our Stock-Based Compensation Plans, see Item 1. "Financial Statements, Notes to Unaudited Consolidated Financial Statements, Note 10, Stock-Based Compensation Plans."

Defined Benefit Pension Expense

The 2009 annual pension benefit expense for substantially all of our employees and certain agents is expected to be $157.6 million pre-tax, which is a $145.3 million increase from the 2008 pre-tax pension expense of $12.3 million. This increase is primarily due to lower than estimated returns on plan assets and a decrease in discount rate. Approximately $39.4 million and $3.1 million of pre-tax pension expense were reflected in the determination of net income for the three months ended March 31, 2009 and 2008, respectively. In addition, approximately $39.4 million of pre-tax pension expense will be reflected in each of the following three quarters for 2009. The discount rate used to develop the 2009 expense was 6.0%, down from the 6.3% discount rate used to develop the 2008 expense. The expected long-term return on plan assets assumption was 8.0%, down from the 8.25% used to develop the 2008 expense.

Recent Accounting Pronouncements

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

Results of Operations



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



                                                          For the three months ended March 31,
                                                                                        Increase
                                                        2009             2008          (decrease)
                                                                     (in millions)
Revenues:
Premiums and other considerations                    $     949.9    $      1,053.0    $      (103.1 )
Fees and other revenues                                    473.5             613.4           (139.9 )
Net investment income                                      828.5             960.3           (131.8 )
Net realized capital gains (losses), excluding
impairment losses on available-for-sale securities          32.7             (58.5 )           91.2
Total other-than-temporary impairment losses on
available-for-sale securities                             (146.6 )           (67.5 )          (79.1 )
Portion of impairment losses on fixed maturities,
available-for-sale recognized in other
comprehensive income                                        50.6                 -             50.6
Net impairment losses on available-for-sale
securities                                                 (96.0 )           (67.5 )          (28.5 )
Net realized capital losses                                 63.3            (126.0 )           62.7
Total revenues                                           2,188.6           2,500.7           (312.1 )
Expenses:
Benefits, claims and settlement expenses                 1,306.6           1,472.0           (165.4 )
Dividends to policyholders                                  63.5              70.8             (7.3 )
Operating expenses                                         688.4             750.7            (62.3 )
Total expenses                                           2,058.5           2,293.5           (235.0 )
Income before income taxes                                 130.1             207.2            (77.1 )
Income taxes                                                 7.5              29.6            (22.1 )
Net income                                                 122.6             177.6            (55.0 )
Net income (loss) attributable to noncontrolling
interest                                                     1.6              (4.8 )            6.4
Net income attributable to Principal Financial
Group, Inc.                                                121.0             182.4            (61.4 )
Preferred stock dividends                                    8.2               8.2                -
Net income available to common stockholders          $     112.8    $        174.2    $       (61.4 )

Three Months Ended March 31, 2009, Compared to Three Months Ended March 31, 2008

Net Income Available to Common Stockholders

Net income available to common stockholders decreased primarily due to lower profitability in our U.S. Asset Accumulation segment as a result of declining equity markets, which resulted in lower fees collected from our account values and an increase in DPAC amortization. In addition, net income available to common stockholders decreased in our International Asset Management and Accumulation segment primarily due to lower investment returns in Chile on assets not backing segment insurance products as a result of deflation in first quarter 2009 and the weakening of the Brazilian real and the Mexican peso against the U.S. dollar. Net income available to common stockholders also decreased for our Global Asset Management segment primarily due to the severe downturn in global financial markets during 2008 and through the early part of 2009, which led to a significant reduction in AUM and revenues and thus to a reduction in earnings. Furthermore, net income available to common stockholders decreased in our Corporate segment due to the release of state deferred income tax liabilities associated with the reorganization of certain subsidiaries in 2008 with no corresponding activity in 2009. These decreases in net income available to common stockholders were partially offset by lower net realized capital losses resulting from mark to market gains versus losses on derivatives and fixed maturity securities classified as trading and higher gains on sales of fixed maturity securities.

Total Revenues

Premiums decreased $54.3 million for the U.S. Asset Accumulation segment, primarily due to a decrease in sales of annuities with life contingencies in our full service payout and individual annuities businesses. In addition, premiums and other considerations decreased $47.5 million for the Life and Health Insurance segment primarily due to a reduction in average covered medical members in our health insurance business and due to the expected continued decline from the decreasing block of traditional life insurance business.

Fees for the U.S. Asset Accumulation segment decreased $101.6 million, primarily due to lower fee income stemming from a decrease in account values as a result of the declining equity markets from 2008 to 2009. In addition, fees for the Global Asset Management segment decreased $35.0 million due to a decrease in AUM as a result of declining market conditions and the sale of certain asset management contracts within Post Advisory Group, LLC.

Net investment income decreased primarily due to lower investment returns on invested assets and cash.

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 appreciated invested assets. Net realized capital losses decreased primarily due to mark to market gains versus losses on derivatives and fixed maturity securities classified as trading and higher gains on sales of fixed maturity securities. For additional information, see "Investments - Investment Results."

Total Expenses

Benefits, claims and settlement expenses decreased $89.8 million for the International Asset Management and Accumulation segment, primarily due to lower interest crediting rates to customers, which are impacted by deflation in Chile. Benefits, claims and settlement expenses decreased $64.8 million in our U.S. Asset Accumulation segment primarily due to a decrease in our investment only business resulting from a decline in account values, reflecting our decision to scale back this business, and lower variable crediting rates. Furthermore, lower sales of full service payout annuities with life contingencies also contributed to the decrease in benefits, claims and settlement expenses.

Operating expenses decreased $38.4 million for the Life and Health Insurance segment primarily due to lower DPAC amortization and lower compensation costs. Operating expenses also decreased $18.5 million for the Global Asset Management segment primarily due to lower staff related costs resulting from expense savings initiatives.

Income Taxes

The effective income tax rates were 6% and 14% for the three months ended March 31, 2009 and 2008, respectively. The effective income tax rate for the three months ended March 31, 2009, was lower than the U.S. statutory rate primarily due to income tax deductions allowed for corporate dividends received, the interest exclusion from taxable income and taxes on our share of earnings generated from equity method investments, which are reflected in net investment income. The effective income tax rate for the three months ended March 31, 2008, was lower than the U.S. statutory rate primarily due to income tax deductions allowed for corporate dividends received, the release of state deferred income tax liabilities associated with a reorganization of certain subsidiaries and the interest exclusion from taxable income. The effective income tax rate decreased to 6% from 14% for the three months ended March 31, 2009 and 2008, respectively, primarily due to a decline in our pre-tax income with no proportionate change in permanent tax differences.

Results of Operations by Segment

For results of operations by segment see Item 1. "Financial Statements, Notes to Unaudited Consolidated Financial Statements, Note 9, Segment Information."

U.S. Asset Accumulation Segment

U.S. Asset Accumulation Segment Summary Financial Data

Account values are a key indicator of earnings growth for the segment, as account values are the asset base by which the segment generates much of its fee and spread-based revenues. 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 percentage growth or decline in earnings of the businesses that make up this segment should closely track the percentage growth or decline in account values. This trend may vary due to changes in business and/or product mix.

The following table presents the U.S. Asset Accumulation account value rollforward for the periods indicated:

                                        For the three months ended March 31,
                                             2009                   2008
                                                    (in billions)
Account values, beginning of period   $            146.1     $            180.8
Net cash flow                                        2.0                    3.2
Credited investment performance                     (6.1 )                 (8.4 )
Other                                               (0.3 )                 (1.1 )
Account values, end of period         $            141.7     $            174.5

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

                                                  For the three months ended March 31,
                                                                                 Increase
                                                 2009            2008           (decrease)
                                                              (in millions)
Operating revenues:
Premiums and other considerations            $       69.0    $       123.3    $        (54.3 )
Fees and other revenues                             277.9            381.5            (103.6 )
Net investment income                               660.6            699.9             (39.3 )
Total operating revenues                          1,007.5          1,204.7            (197.2 )
Expenses:
Benefits, claims and settlement expenses,
including dividends to policyholders                590.1            656.8             (66.7 )
Operating expenses                                  312.7            370.6             (57.9 )
Total expenses                                      902.8          1,027.4            (124.6 )
Operating earnings before income taxes              104.7            177.3             (72.6 )
Income taxes                                         11.6             38.2             (26.6 )
Operating earnings                           $       93.1    $       139.1    $        (46.0 )

Three Months Ended March 31, 2009, Compared to Three Months Ended March 31, 2008

Operating Earnings

Operating earnings decreased $17.0 million in our full service accumulation business primarily due to lower fee income resulting from a decrease in account values stemming from declining equity markets from 2008 to 2009. In addition, operating earnings decreased $11.5 million in our individual annuities business primarily due to an increase in DPAC amortization related to declining equity markets from 2008 to 2009. Furthermore, operating earnings decreased $7.9 million in our investment only business primarily due to a decrease in net investment income resulting from a decline in average invested assets, reflecting our decision to scale back this business, our decision to pursue a more liquid investment strategy and from a decrease in short-term investment rates.

Operating Revenues

Premiums decreased $39.2 million in our full service payout business primarily due to a decrease 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. In addition, premiums decreased $15.1 million in our individual payout annuities business primarily due to a decrease in sales of annuities with life contingencies.

Fees decreased $60.5 million in our full service accumulation business primarily due to lower fee income stemming from a decrease in account values as a result of the declining equity markets from 2008 to 2009. Fees decreased $41.3 million in our Principal Funds business primarily due to a decline in distribution income and management fees stemming from a decrease in average account values, which resulted from a decline in the equity markets from 2008 to 2009.

Net investment income decreased primarily due to lower investment returns on invested assets and cash, which related to our move to a more liquid investment strategy for the segment.

Total Expenses

Benefits, claims and settlement expenses, including dividends to policyholders, decreased $57.5 million in our investment only business primarily due to a decline in account values and lower variable crediting rates. In addition, our full service payout business benefits, claims and settlement expenses decreased $40.1 million primarily due to a decrease in the change in reserves resulting from lower sales of annuities with life contingencies. Partially offsetting the overall decrease was a $25.1 million increase in our individual annuities business due to an increase in cost of interest credited and higher benefit payments resulting from a larger block of fixed annuities.

Operating expenses in our full service accumulation business decreased $37.8 million primarily due to decreases in investment management fee expense resulting from a decline in average account values and from a decrease in compensation expenses. In addition, operating expenses within Principal Funds decreased $31.2 million primarily due to lower fees paid to advisors resulting from a decrease in average account values.

Income Taxes

The effective income tax rates for the segment were 11% and 22% for the three months ended March 31, 2009 and 2008, respectively. The effective income tax . . .