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

Forward-Looking Information

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

Actual results may differ materially from those included in the forward-looking statements as a result of risks and uncertainties including, but not limited to, the following: (1) adverse capital and credit market conditions may significantly affect our ability to meet liquidity needs, as well as our access to capital and cost of capital; (2) 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 to the management team now under the name Beach Point Capital Management LP. The assets under management associated with this sale totaled $3.8 billion. The total cash proceeds were $50.0 million, in addition to which we realized benefits from the cancellation of deferred compensation agreements. The initial $2.2 million cash down payment was received in the second quarter. We expect to receive the remaining balance over the next four years.

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 zero and $2.4 million for the three months ended June 30, 2009 and 2008, respectively, and $(0.1) million and $(18.9) million for the six months ended June 30, 2009 and 2008, respectively. Our commercial mortgage securities issuance operation had after-tax operating losses of zero and $0.4 million for the three months ended June 30, 2009 and 2008, respectively, and $0.3 million and $17.5 million for the six months ended June 30, 2009 and 2008, respectively.

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

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

Foreign currency exchange rate fluctuations create variances in our financial statement line items. Our consolidated net income was negatively impacted by $8.9 million and positively impacted by $0.4 million for the three months ended June 30, 2009 and 2008, respectively, and negatively impacted by $22.1 million and positively impacted by $6.2 million for the six months ended June 30, 2009 and 2008, respectively, as a result of fluctuations in foreign currency to U.S. dollar exchange rates. For a discussion of our approaches to managing foreign currency exchange rate risk, see Item 3. "Quantitative and Qualitative Disclosures About Market Risk - Foreign Currency Risk."

Stock-Based Compensation Plans

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

Defined Benefit Pension Expense

The 2009 annual pension benefit expense for substantially all of our employees and certain agents is expected to be $157.6 million pre-tax, which is a $145.3 million increase from the 2008 pre-tax pension expense of $12.3 million. This increase is primarily due to lower than estimated returns on plan assets and a decrease in discount rate. Approximately $39.4 million and $78.8 million of pre-tax pension expense were reflected in the determination of net income for the three and six months ended June 30, 2009, respectively. In addition, approximately $39.4 million of pre-tax pension expense will be reflected in each of the following two 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 June 30,               For the six months ended June 30,
                                                                Increase                                         Increase
                                2009             2008          (decrease)         2009             2008         (decrease)
                                                                     (in millions)
Revenues:
Premiums and other
considerations               $     937.7    $      1,156.2    $      (218.5 ) $     1,887.6    $     2,209.2   $     (321.6 )
Fees and other revenues            515.2             622.5           (107.3 )         988.7          1,235.9         (247.2 )
Net investment income              860.1             990.9           (130.8 )       1,688.6          1,951.2         (262.6 )
Net realized capital gains
(losses), excluding
impairment losses on
available-for-sale
securities                         (20.8 )           (65.6 )           44.8            11.9           (124.1 )        136.0
Total other-than-temporary
impairment losses on
available-for-sale
securities                        (200.9 )           (45.9 )         (155.0 )        (347.5 )         (113.4 )       (234.1 )
Portion of impairment
losses on fixed
maturities,
available-for-sale
recognized in other
comprehensive income                66.5                 -             66.5           117.1                -          117.1
Net impairment losses on
available-for-sale
securities                        (134.4 )           (45.9 )          (88.5 )        (230.4 )         (113.4 )       (117.0 )
Net realized capital
losses                            (155.2 )          (111.5 )          (43.7 )        (218.5 )         (237.5 )         19.0
Total revenues                   2,157.8           2,658.1           (500.3 )       4,346.4          5,158.8         (812.4 )
Expenses:
Benefits, claims and
settlement expenses              1,334.3           1,634.0           (299.7 )       2,640.9          3,106.0         (465.1 )
Dividends to policyholders          62.9              69.0             (6.1 )         126.4            139.8          (13.4 )
Operating expenses                 562.7             742.6           (179.9 )       1,251.1          1,493.3         (242.2 )
Total expenses                   1,959.9           2,445.6           (485.7 )       4,018.4          4,739.1         (720.7 )
Income before income taxes         197.9             212.5            (14.6 )         328.0            419.7          (91.7 )
Income taxes                        33.9              29.4              4.5            41.4             59.0          (17.6 )
Net income                         164.0             183.1            (19.1 )         286.6            360.7          (74.1 )
Net income attributable to
noncontrolling interest              5.4               6.5             (1.1 )           7.0              1.7            5.3
Net income attributable to
Principal Financial
Group, Inc.                        158.6             176.6            (18.0 )         279.6            359.0          (79.4 )
Preferred stock dividends            8.3               8.3                -            16.5             16.5              -
Net income available to
common stockholders          $     150.3    $        168.3    $       (18.0 ) $       263.1    $       342.5   $      (79.4 )

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

Net Income Available to Common Stockholders

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

Net income available to common stockholders decreased for our Global Asset Management segment primarily due to the severe downturn in the global financial markets in 2008, which has led to a significant reduction in AUM and revenues. This decline was offset in part by a series of expense savings initiatives, which have been undertaken in response to the market downturn. Net income available to common stockholders also decreased in our U.S. Asset Accumulation segment primarily due to lower fee income resulting from a decrease in account values stemming from declining equity markets from 2008 to 2009 and a decrease in net investment income resulting from our decision to pursue a more liquid investment strategy and from a decrease in short-term investment rates.

Total Revenues

Premiums decreased $137.5 million for the U.S. Asset Accumulation segment, primarily due to a decrease in sales of annuities with life contingencies in our individual annuities and full service payout businesses. In addition, premiums and other considerations decreased $59.4 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 $80.4 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 $36.8 million due to a decrease in AUM as a result of declining market conditions and the sale of certain asset management contracts within Post Advisory Group, LLC.

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

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

Total Expenses

Benefits, claims and settlement expenses decreased $185.7 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 and lower variable crediting rates. Furthermore, a decrease in reserves related to lower sales of annuities with life contingencies in our full service payout and individual annuities businesses also contributed to the decrease. Benefits, claims and settlement expenses decreased $87.3 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, and the weakening of the Chilean peso against the U.S. dollar.

Operating expenses decreased $152.0 million for the U.S. Asset Accumulation segment primarily due to a decrease in DPAC amortization, which related to an improvement in equity markets during the second quarter of 2009, and a decrease due to expense savings initiatives. Despite a $43.9 million increase in employee pension and other post-retirement benefit costs, operating expenses (excluding the impacts of DPAC) for our organization have decreased as a result of company-wide expense savings initiatives.

Income Taxes

The effective income tax rates were 17% and 14% for the three months ended June 30, 2009 and 2008, respectively. The effective income tax rate for the three months ended June 30, 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 June 30, 2008, was lower than the U.S. statutory rate primarily due to income tax deductions allowed for corporate dividends received, additional U.S. foreign tax credits resulting from the second quarter 2008 enactment of legislation to increase the Brazilian tax rate and the interest exclusion from taxable income. As we apply the equity method of accounting to our Brazilian operations, the increase in net deferred tax liabilities associated with the change in tax rate is reflected in net investment income. The effective income tax rate increased to 17% from 14% for the three months ended June 30, 2009 and 2008, respectively, primarily due to additional U.S. foreign tax credits recognized in second quarter 2008 compared to second quarter 2009 resulting from the aforementioned Brazilian tax rate increase.

Six Months Ended June 30, 2009, Compared to Six Months Ended June 30, 2008

Net Income Available to Common Stockholders

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

Net income available to common stockholders decreased in our U.S. Asset Accumulation segment primarily due to a decrease in account values stemming from declining equity markets from 2008 to 2009, our decision to scale back our investment only business and a decrease in net investment income resulting from our decision to pursue a more liquid investment strategy and from a decrease in short-term investment rates.

Total Revenues

Premiums decreased $191.8 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 $106.9 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 $182.0 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 $71.8 million due to a decrease in AUM as a result of declining market conditions and the sale of certain asset management contracts within Post Advisory Group, LLC.

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

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

Total Expenses

Benefits, claims and settlement expenses decreased $250.5 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 and lower variable crediting rates. Furthermore, a decrease in reserves related to lower sales of full service payout annuities with life contingencies also contributed to the decrease. Benefits, claims and settlement expenses decreased $177.1 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, and the weakening of the Chilean peso against the U.S. dollar.

Operating expenses decreased $166.8 million for the U.S. Asset Accumulation segment primarily due to a decrease in DPAC amortization, which related to an improvement in equity markets during the second quarter of 2009 and a decrease due to expense savings initiatives. In addition, operating expenses decreased $66.5 million for the Life and Health Insurance segment primarily due to lower non-deferred sales-related expenses, expense savings initiatives and lower DPAC amortization. Despite a $87.8 million increase in employee pension and other post-retirement benefit costs, operating expenses (excluding the impacts of DPAC) for our organization have decreased as a result of company-wide expense savings initiatives.

Income Taxes

The effective income tax rates were 13% and 14% for the six months ended June 30, 2009 and 2008, respectively. The effective income tax rate for the six months ended June 30, 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 six months ended June 30, 2008, was lower than the U.S. statutory rate primarily due to income tax deductions allowed for corporate dividends received, additional U.S. foreign tax credits resulting from the second quarter 2008 enactment of legislation to increase the Brazilian tax rate and the release of state deferred income tax liabilities associated with the first quarter 2008 reorganization of certain subsidiaries.

Results of Operations by Segment

For results of operations by segment see Item 1. "Financial Statements, Notes to . . .