Upload
others
View
1
Download
0
Embed Size (px)
Citation preview
2 0 0 8 Y e a r i n r e v i e w
Des Moines, iowa 503921-800-986-eDge (3343)www.principal.coM
we’ll give You an edge®
BB 1345-14
0 2 l e t t e r t o s h a r e h o l d e r s 0 6 p e r s p e c t i v e 0 8 d i v e r s i f i c at i o n 1 0 d i s c i p l i n e 1 2 c o m m i t m e n t
1 4 at a g l a n c e 1 6 i n v e s t i n g f o r t h e f u t u r e 1 9 awa r d s & r e c o g n i t i o n 2 0 f i n a n c i a l h i g h l i g h t s
2 2 s u m m a rY c o n s o l i d a t e d f i n a n c i a l s 2 6 b o a r d o f d i r e c t o r s 2 7 s e n i o r m a n a g e m e n t
2 8 r e p o rta b l e s e g m e n t s a n d p r i n c i pa l f u n d s
This 2008 Year in Review provides a company overview, financial highlights and summary financial statements. For complete financial statements, including notes and management’s discussion and analysis of financial condition and results of operations, please refer to the 2008 Form 10-K filed by the company with the Securities and Exchange Commission, which can be found at www.principal.com/10k. Forward Looking and Cautionary StatementsCertain statements made by the company in this Year in Review that are not historical facts may be considered forward-looking statements, including, without limitation, statements as to sales targets, sales and earnings trends, and management’s beliefs, expectations, goals and opinions. The company does not undertake to update these statements, which are based on a number of assumptions concerning future conditions that may ultimately prove to be inaccurate. Future events and their effects on the company may not be those anticipated, and actual results may differ materially from the results anticipated in these forward-looking statements. The risks, uncertainties and factors that could cause or contribute to such material differences are discussed in the company’s annual report on Form 10-K for the year ended Dec. 31, 2008, filed with the Securities and Exchange Commission. These risks and uncertainties include, without limitation: competitive factors; volatility of financial markets; decrease in ratings; interest rate changes; inability to attract and retain sales representatives; international business risks; foreign currency exchange rate fluctuations; a pandemic, terrorist attack or other catastrophic event; default of the company’s re-insurers; and investment portfolio risks. “The Principal Financial Group” and “The Principal” are registered service marks of Principal Financial Services, Inc., a member of the Principal Financial Group.
what you neeD to know. now. We’re all facing uncertain economic times. And we know you have questions about the economy and your own finances. We’re here to help. Find the latest information to help you make smart decisions and secure your financial future at www.principal.com/now.
ç
2008
Corporate Headquarters711 High St.Des Moines, Iowa 503921-800-986-EDGE (3343)
The Principal Financial Group on the InternetThe Principal home page, at www.principal.com, is your source for a vast array of information including company news releases, investment and savings tools, and details on our product and service solutions. The Investor Relations portion of the site provides up-to-the-minute information for shareholders and the investment community, including access to SEC filings, stock information, overview of corporate responsibility, dividend history and credit ratings. It also includes information of interest on the governance of Principal Financial Group, Inc., including:n Board of Directorsn Corporate Governance Guidelinesn Board Committee Chartersn Director Independence Standardsn Corporate Code of Ethics
Annual MeetingThe Annual Meeting of Shareholders will convene at 9 a.m. Central Time, May 19, 2009, in the auditorium at the corporate headquarters of Principal Financial Group, Inc., 711 High St., Des Moines, Iowa 50392.
Contact Investor RelationsIf you have a question for Investor Relations, please contact us as follows: The Principal Financial Group – Investor Relations 711 High Street, S-006-E41 Des Moines, Iowa 50392-0420 Phone: 1-800-986-3343 | Fax: 515-235-5491 E-mail: [email protected]
Shareholder InformationExchange: NYSE
Transfer AgentPrincipal Financial Group, Inc. shareholder inquiries should be addressed to our transfer agent, Computershare Investor Services, LLC. Computershare can assist shareholders with a variety of services, including: address changes, certificate issuance, replacement of lost stock certificates, transfer of stock to another person, account statements, balance inquiries, shareholder dividend inquiries and selling of shares. You can call or write to the transfer agent at: Principal Financial Group, Inc. c/o Computershare Investor Services P.O. Box 43078 Providence, RI 02940-3078Toll-free phone: 866-781-1368Phone for hearing impaired: 312-588-4110Online Contact Form: www-us.computershare.com/contactus
Registered shareholders can also access information about their Principal Financial Group, Inc. common stock accounts via the Internet using Computershare’s Web site at www-us.computershare.com/investor. The Principal does not maintain or provide information directly to this site, makes no representations or warranties with respect to the information contained therein and takes no responsibility for supplementing, correcting or updating any such information.
A Special ThanksA special thanks to our 450,000 registered shareholders, who have owned Principal Financial Group, Inc. common stock since our initial public offering.
Top 10 Holders* of Principal Financial Group, Inc. Common Stock n Nippon Life Insurance Companyn Barclays Global Investors (U.S.)n State Street Global Advisorsn The Vanguard Group, Inc.n UBS Global Asset Management (Americas), Inc.n Davis Selected Advisers, L.P.n UBS Global Asset Management (Switzerland) AGn J.P. Morgan Investment Management, Inc.n Northern Trust Global Investmentsn TIAA-CREF Investment Management, Inc
*Based on public filings as of Dec. 31, 2008
principal financial group, inc.
For nearly 130 years, strong fundamentals
have been key to the success of the Principal Financial Group:
Our founder believed in the importance of long-term financial
security. He gave us perspective.
The Depression highlighted the need to carefully manage risk.
That taught us diversiFication and discipline.
The 1970s and 1980s brought sweeping pension reform and
the opportunity to help customers navigate the maze of ERISA
regulation. We demonstrated our commitment.
Through good times and bad, for more than a century, these
commonsense fundamentals have served us well.
Perspective. Diversification. Discipline. Commitment.
They are what we’re made of.
to our shareholders
We’ve all read the 2008 headlines:
Unprecedented market conditions.
Irrational market behavior. Economic
volatility. Fear and uncertainty.
Times have been tough.
And if all we had to go on were those headlines, the
outlook for financial services companies in 2009 would
indeed be grim. But as we’ve learned time and again,
throughout nearly 130 years in business, there’s always
more to the story.
When you dig deeper at the Principal Financial Group®
(The Principal®), you find that despite the very real
concerns in the global economy and in our industry,
and despite the continuing ripple effects of poor equity
markets, the fundamentals of our company are solid.
Just as they have been through more than a dozen
recessions since 1879 when our company was founded.
Strong fundamentals are what we’re made of:
Perspective. Diversification. Discipline. Commitment.
These fundamentals have carried us through before.
They’ll carry us through again.
Case in point: In 2008, poor equity markets and a
highly difficult business climate drove an 8 percent drop
in our operating earnings per share. Reflecting fear in
the marketplace around financial services companies
broadly, our stock price declined significantly.
While challenges clearly continue in this environment,
key performance measures remained strong in 2008 and
bode well for our future:
n Sales of our three key U.S. retirement and investment
products (Full Service Accumulation, Principal Funds
and Individual Annuities) were outstanding, despite a
difficult sales environment, with $21.1 billion combined
sales in 2008, compared to a record $21.7 billion
for 2007.
n Our three asset management and accumulation
segments had record deposits of $112 billion.
n We saw record net cash flows for the Full Service
Accumulation and Individual Annuities businesses,
which improved 17 percent and 38 percent, respectively.
n In a year when the S&P 500 Index declined 38 percent,
by comparison our total company assets under
management declined 21 percent. Importantly, since
becoming a public company in 2001, our assets under
management have increased more than 150 percent.
Also key to our future success:
n All of us at The Principal remain completely
committed to living our core values of customer
focus, people development, financial strength,
operational excellence and integrity. These values
guide our every move, in good times and bad.
n Our capital and liquidity positions remain strong.
We maintain very strong financial strength ratings
from all four rating agencies; these ratings help
reassure our customers that we can meet obligations.
n Customer retention and client/adviser satisfaction
levels remain high.
n For the seventh consecutive year, we were named one
of FORTUNE magazine’s 100 Best Companies to
Work For, ranking #17 on this prestigious list.
The Principal Financial Group | Letter to Shareholders2
20
to our shareholders
2008 Year in Review | Letter to Shareholders 3
Chairman of the Board Barry Griswell (upper left) and President and CEO Larry Zimpleman (center) remain committed to sharing information and soliciting input from stakeholders such as these employees.
Sticking to our fundamentals—relying on them to guide
our actions and decisions—is paying off. Here’s how:
Perspective. While it’s the short-term pain that’s taken
center stage these past few months, we all must
maintain a long-term view. This is advice we’ve
imparted to our customers for more than a century;
it’s also how we run our business.
Our long-term view is rooted in our business model:
n Our focus on meeting the needs of growing
businesses and their employees provides us stability.
According to 2008 estimates, small to medium-
sized businesses account for 99 percent of all U.S.
companies. We’re deeply rooted in this market;
our customer base includes more than 100,000
employers and millions of workers.
n Investment in our three key growth engines continues
to reap rewards. U.S. Asset Accumulation, Global
Asset Management and Principal International
continue to provide a strong foundation for
The Principal. These businesses require very little
capital to support organic growth, so we generate
substantial free cash flows on an ongoing basis.
n We’re leveraging our U.S. experience in providing
much-needed savings and retirement solutions
for growing middle-class populations in emerging
markets. Principal International is focused on
growing its business in Brazil, China and India, for
instance, which will account for the majority of the
world’s population growth in the next 10 to 20 years.
Diversification. The past year demonstrated that our
diverse product lines not only complement each other
but also strengthen The Principal overall. In a year
when earnings were down in our retirement business
due to equity market declines, for instance, our Life
and Health Insurance segment showed strong earnings
growth, and Principal International enjoyed record
revenues and earnings.
In addition, the breadth of our product offerings for
growing businesses and their employees is unrivaled.
From retirement, annuities, mutual funds and banking
products to life, health, dental and disability
insurance, wellness programs and executive benefit
solutions, we offer more ways for growing businesses
to provide financial security for their employees.
Our customers clearly appreciate these options:
two-thirds of our employer sales result in a multiple
product relationship.
Diversification of both investment type and client
base paid off for Principal Global Investors in 2008.
While new business in 2007 was predominantly
real estate and multi-sector fixed income from U.S.
clients, new business in 2008 was predominantly
international/global equities from an increasing
number of clients outside the United States.
Discipline. Discipline is important in good times,
and it’s critical when challenges arise. In 2008, our
disciplined approach to managing our business helped
us address key concerns as pressures mounted. For
instance, with tremendous help from our employees
in fourth quarter 2008, we decreased total company
operating expenses by $63.5 million compared to
fourth quarter 2007.
A l l o f u s At t h e P r i n c i P A l r e m A i n c o m P l e t e ly c o m m i t t e d t o
l i v i n g o u r c o r e vA l u e s o f c u s t o m e r f o c u s , P e o P l e d e v e l o P m e n t ,
f i n A n c i A l s t r e n g t h , o P e r At i o n A l e x c e l l e n c e A n d i n t e g r i t y .
t h e s e vA l u e s g u i d e o u r e v e ry m o v e , i n g o o d t i m e s A n d b A d .
The Principal Financial Group | Letter to Shareholders4
In addition, disciplined risk management helped us
minimize exposure to certain problematic areas:
n We discontinued our commercial mortgage securities
issuance operation, reducing the inventory from
$1.7 billion at the beginning of 2008 to $20 million
at year-end, with minimal losses.
n We purposely limited the size of our variable
annuities with living benefits business, an area
that’s strained capital for a number of peers.
And while there’s no way to avoid some losses in a
portfolio our size, it’s important to note that our
investment portfolio is high-quality and well-
diversified by industry, geography, property type
and individual borrower. Like others in the life
insurance and retirement sectors, our liabilities tend
to be longer-term and more predictable in nature.
We manage our investment portfolio to match these
liabilities. This long-term approach combined with
our discipline and strong liquidity means we have the
ability and intent to hold assets to maturity.
Commitment. As champions of financial security,
we’re committed to giving our customers an edge.
Since we launched our worksite solutions in 2005,
we’ve made personal financial assistance available
to more than 420,000 employees at nearly 2,000
companies across the United States. We’re heartened
to see that meetings are on the rise, a clear sign that
individuals are looking for assistance as they take
action to protect their investments.
We continue to enthusiastically embrace the important
role advisers play in our business. We share a
common goal with advisers: to simplify financial
decisions for businesses and individuals so they take
action to secure their financial futures. We’ve
continued to partner with them throughout 2008 to
make sure they and their clients have the information
they need to make smart decisions. In the December
2008 PlanAdviser Defined Contribution survey, we
were recognized as a top five provider for adviser
post-sale support, adviser sales and marketing support
and adviser fee structure.
These fundamentals are helping us remain strong now
and serving us well as we look to the future.
We hope the future is brighter for all of us. If that’s to
be the case, it’s clear changes are needed. Coordinated
regulation of all financial products. Comprehensive
and meaningful disclosure to ensure full transparency.
We have stepped forward to help shape those changes,
representing the more than 19 million customers we serve.
Your voices and our expertise can be part of the solution.
Finally, we’d be remiss if we left out the most important
thing we’re made of…
n Loyal customers who have reached out to us and to
their advisers for help securing their financial futures
n Talented employees who have rallied around
The Principal and who continue to offer customers
education, assistance and a sympathetic ear
n Dedicated advisers who are working tirelessly to provide
their customers the best guidance in this critical time
n Seasoned leaders, including a senior management team
that boasts an average 27.5 years of industry experience
n Committed shareholders who have invested in our
company for the long-term, confident in our ability to
face the current challenges head on and emerge stronger
We’re made of all of you. And we’re grateful to each of you.
As always, your opinions are important to us; we hope
you will continue to share your questions, comments and
concerns. And please be sure to cast your vote in time for
the Annual Meeting of Shareholders, May 19, 2009.
J. Barry Griswell
C H A I R M A n O F T H E B O A R D
Larry Zimpleman
P R E S I D E n T A n D C H I E F E x E C U T I v E O F F I C E R
2008 Year in Review | Letter to Shareholders 5
s u c c e s s c o m e s f r o m h Av i n g A n
e f f e c t i v e P l A n A n d m A n A g i n g
t o i t , e v e n w h e n t i m e s g e t t o u g h .
A t t h e P r i n c i P A l , o u r l o n g -
t e r m v i e w r e v o lv e s A r o u n d
m e e t i n g t h e n e e d s o f g r o w i n g
b u s i n e s s e s A n d t h e i r e m P l o y e e s .
g i v i n g t h e m A n e d g e .
Amid short-term pressures, we focus on the long-term view.
The Principal Financial Group | Perspective6
Amid short-term pressures, we focus on the long-term view.
W e continued to keep our long-term view in
mind as we supported growing businesses
and their employees. Examples include:
n Strengthening relationships with customers by offering
innovative solutions. Growing businesses
appreciate the ways we go above and beyond to
enhance their experience with The Principal.
• We’ve recently helped employers comply with new,
product-specific regulations—helping them
understand and implement changes to meet required
deadlines. For example, changes to nonqualified
deferred compensation plans and new retirement
plan fiduciary responsibilities.
• Our new, online benefits administration system,
eBenefits Edge, makes it easy for human resource
managers to administer benefits from multiple
providers. eBenefits Edge consolidates all employee
benefit information into one location, simplifying
day-to-day administration, reducing duplication and
providing extensive reporting capabilities. It saves
our customers valuable time and money.
n Building relationships with advisers and alliance partners.
Since launching our Privileged Partner Program
catering to key distributors of our insurance
products, sales have increased significantly.
Additionally, in 2008 we had the opportunity to
strengthen and expand our relationships with more
than 25 key distribution alliance partners. Overall,
nearly 2,000 advisers sold a plan with us. And just
within our 12 core retirement alliance partners, more
than 300 advisers sold their first plan with us in 2008.
n Advocating legislation that benefits our customers.
We were vocal advocates of legislation designed to
provide temporary funding relief for defined benefit
pension plans during the current economic crisis.
We were successful in getting some of the relief
approved in 2008 and continue advocating for
additional relief we feel is necessary for our clients.
n Expanding our client base outside the United States.
Along with our Malaysian partner, CIMB Group,
Principal Global Investors and Principal International
offer asset management services to meet the growing
global demand for Shariah-compliant investments.
Our future success relies on the success of our customers
and advisers. We look forward to continuing to work
with them and advocate for them in 2009 and beyond.
2008 Year in Review | Perspective 7
m u lt i P l e o P P o r t u n i t i e s f o r
s u c c e s s m A k e u s m o r e r e s i l i e n t
i n t h e f A c e o f c h A l l e n g e s .
A n d o u r c o m P l e m e n tA ry
P r o d u c t s A n d s e rv i c e s f u l f i l l
n u m e r o u s c u s t o m e r n e e d s .
A smart mix of products and investments provides us flexibility.
The Principal Financial Group | Diversification8
A smart mix of products and investments provides us flexibility.
O ur broad range of insurance and investment
products, diverse customer base and innovation
continue to strengthen The Principal:
n A proven approach. Our Total Retirement SuiteSM
approach has made us a leader in retirement-related
benefits. We remain the number one provider of
bundled 401(k) plans, defined benefit plans and
ESOP plans, as well as the number one recordkeeper
for nonqualified deferred compensation plans1.
n Expanding our reach. Principal International’s diverse
line-up proved beneficial as well. In Mexico, for
instance, our retail mutual fund business grew at a time
the industry overall was down. Overall, Principal
International’s customer base grew by 12 percent
to 7.2 million.
n Going green. Principal Real Estate Investors, the real
estate arm of Principal Global Investors, expanded its
commitment to the growing green real estate market.
In June, Real Estate Finance & Investment magazine
awarded the company its Green Giant Award,
recognizing the company’s portfolio of more than
$1.3 billion of green properties and its efforts to retrofit
existing properties so that they conform to Leadership
in Energy and Environmental Design standards.
n Meeting increasing demand for disciplined asset
allocation strategies. As of Dec. 31, 2008, more than
1 million retirement plan participants invested in
Principal LifeTime portfolios, our target date funds,
with more than 70 percent of plan sponsors offering
these options, 35 percent as a default. In addition,
our five actively managed Strategic Asset Management
(SAM) portfolios offer asset allocation solutions
for investors with varying risk tolerances. Our SAM
funds now have nearly $7.5 billion in assets under
management.
n Helping employers as they react to economic pressures.
In addition to our array of employer-sponsored benefit
products, we also provide voluntary products that enable
employers to offer benefits that matter to employees at
a time when budgets are squeezed. In 2008, group
voluntary products accounted for nearly 25 percent of
our $211 million in group specialty benefits sales,
which include group dental, vision, life and disability.
We’ve long believed it makes good business sense for
The Principal to have diverse lines of business that create
diverse streams of income. We’ve seen the wisdom in
that over many years; we’re seeing it again now.1Spectrem Group analysis of fully bundled 401(k) plans, 2008; Investment Advisor Magazine, November 2008; PLANSPONSOR, June 2008; PLANSPONSOR, January 2009 (based on number of plan records kept).
2008 Year in Review | Diversification 9
t h e r e ’ s A l o t o f c o n f u s i o n i n
t o d Ay ’ s e c o n o m y — A l o t o f n o i s e
A n d u n c e r tA i n t y . w e tA k e A
d e l i b e r At e A P P r o A c h t o m A n A g i n g
o u r b u s i n e s s , A d A P t i n g m o r e
t h A n A c e n t u ry o f e x P e r i e n c e
t o m e e t t h e s e n e w c h A l l e n g e s
A n d Av o i d d i s t r A c t i o n s .
Our success is rooted in 130 years of experience.
The Principal Financial Group | Discipline10
Our success is rooted in 130 years of experience.
D iscipline has helped keep our business
strong during unprecedented times.
Recent examples include:
n Maintaining strong liquidity and capital adequacy.
Responding to market conditions, we have continued
to enhance liquidity, increasing cash and cash
equivalent holdings by 94 percent from a year ago
to $2.6 billion at the end of 2008. Our capital
position—above what is needed for our current
credit rating—is estimated to be approximately
$800 million, up from approximately $375 million
at the end of third quarter 2008.
n Positioning businesses for future growth. A new strategy
has helped position our health insurance business for
success in 2009 and beyond. Our deliberate approach
includes a new focus on building owned healthcare
networks, resulting in better cost and increased
competitiveness in local markets. Because health
insurance is the first benefit employers implement, this
business is an important element of building a strong
franchise with growing businesses.
n Improving productivity. Along with numerous cost-
savings initiatives, employees have worked hard to
improve productivity. For instance, our Health
claim and contact centers have implemented new
business processes and procedures that have increased
productivity 12 percent already; they’re aiming to
reach more than 20 percent in 2009.
n Enhancing distribution. We continue to focus on
building quality distribution across the company.
Our rigorous hiring and training programs have
resulted in strong productivity and career agent
retention. In Principal Global Investors, despite
challenging markets, we met our goal of increasing
distribution through major wirehouses. These
national wirehouses represented $1.2 billion of
separately managed account sales for us in 2008.
We plan to increase this in 2009 as we continue
to build confidence among financial advisers,
facilitating sales of other products.
We have survived—and thrived in—challenging times
before. We’ll rely on our disciplined approach to see
us through again.
2008 Year in Review | Discipline 11
We’re champions of financial security in good times and bad.
The Principal Financial Group | Commitment12
t h e c u r r e n t e c o n o m i c c r i s i s m e A n s m o r e
P e o P l e A r e P Ay i n g At t e n t i o n t o t h e i r
f i n A n c i A l P l A n s t h A n e v e r b e f o r e .
m o r e A n d m o r e i n d i v i d u A l s A r e r e A l i z i n g
t h e y c A n ’ t o r d o n ’ t wA n t t o g o i t A l o n e .
w e ’ r e m A k i n g s u r e t h e y d o n ’ t h Av e t o .
We’re champions of financial security in good times and bad.
A s uncertainty grows, we’ve heard from advisers
and customers who are concerned. We’re
supporting them in numerous ways, including:
n Making it personal. We continue to provide personalized
service in meaningful ways. In 2008, we conducted
nearly 77,000 one-on-one meetings at employer
worksites—offering workers individualized assistance
and information to help them maximize their benefits.
And through Principal Connection, we fielded
approximately 250,000 calls from job-changers and
retirees, helping them make informed decisions
about their retirement plan assets.
n Providing excellent service. In fourth quarter, due to
the economic turmoil, we averaged 23 percent more
calls in our retirement contact center, compared to
fourth quarter 2007. not only were call volumes
higher, but calls were longer as customers addressed
multiple concerns related to their financial well-being.
We brought in extra resources, suspended off-phone
activities and scheduled overtime to meet the demand.
Throughout this time, we maintained an extremely
high customer satisfaction rate of 97 percent.
n Helping advisers sort through the economic confusion.
We’ve consistently reached out to advisers, offering our
expertise and perspective so they can best help their
customers. In recent months we’ve hosted two
conference calls featuring our leading retirement and
investment experts, both times inviting more than
12,000 retirement advisers to participate. These
calls received much positive feedback. And our monthly
e-mails to thousands of advisers provide the latest
economic updates and related marketing tools.
n Enhancing online tools. In May we launched our
My Principal® Edge Milestones online tool, enabling
individual investors to establish a retirement savings
goal, determine if they are on track and create a plan.
Approximately 30 percent of individuals using the
tool made a change to secure their financial future.
n Delivering on our promises. We continue to meet our
obligations to customers, delivering on the promises
we make when they take out a life, health, disability
or other insurance policy from us. Throughout 2008
we paid out $2.4 billion in insurance-related claims,
making sure our customers are taken care of in their
times of need.
We’ve had more interactions with individual customers
this year than ever before. We understand their concerns.
And we’re committed to helping them through this
uncertain time. For the latest information to help you
make smart decisions and secure your financial future,
visit www.principal.com/now.
2008 Year in Review | Commitment 13
The Principal Financial Group | At a Glance14
at a glance THE PRInCIPAL FInAnCIAL GROUP
operating segment What it does products & services
Global Asset Management Principal Global Investors and its affiliates provide a diverse range of asset management capabilities to institutional investors globally.
Institutional Asset Management Equities: n Growth, core and value U.S. equities n Small-, mid- and large-cap U.S. equities n Global ex-U.S. equitiesFixed income: n U.S. fixed income n Global fixed income n Specialty credit n StructuredReal estate: n Equity n Debt
U.S. Asset Accumulation Provides integrated retirement savings, payout solutions and related investment products and services to:n Growing businessesn Their employees and other individualsn Not-for-profit organizations n Large financial institutions and employers
n Full Service Accumulation (FSA) products and services: • Definedcontributionpensionplans (including 401(k) and 403(b) plans) • Definedbenefitpensionplans • EmployeeStockOwnershipplans • Nonqualifiedexecutivebenefitplansn Mutual Fundsn Annuities and Payout Solutionsn Bank and Trust Servicesn Investment Onlyn Full Service Payout
International Asset Management and Accumulation
Principal International provides retirement, investment and related financial services to:n Businessesn Their employees and other individualsn Institutions
Principal International has operations in Brazil, Chile, China, Hong Kong, India, Indonesia, Malaysia, Mexico and Singapore.
n Retirement products and servicesn Long-term mutual fundsn Annuitiesn Life insurance
Life and Health Insurance Offers a broad range of group and individual insurance products to meet the financial protection and security needs of growing businesses and individuals throughout the United States.
Focused on:n Businessesn Employees and other individualsn Business ownersn Executives
Individual life insurance: n Estate planning n Business continuation n Executive benefits n Financial planning n Nonqualified executive benefit plansHealth insurance: n Group medical, including combined high deductible health plans with health savings accounts n Wellness programs n Administrative servicesSpecialty benefits: n Group dental and vision insurance n Group life insurance n Group and individual disability insurance
2008 Year in Review | At a Glance 15
at a glancen Continued outstanding sales of the company’s three key retirement and investment products (FSA, Principal Funds and Individual Annuities) despite a difficult sales environment, with $21.1 billion of sales on a combined basis in 2008, compared to a record $21.7 billion for 2007. n Record net cash flows in 2008 of $5.5 billion for FSA and $2.8 billion for Individual Annuities, an increase from 2007 of 17 percent and 38 percent, respectively, reflecting excellent sales and retention. n Principal Bank delivered record operating earnings of $15.5 million, an increase of 22 percent from 2007; and total deposits of $2.1 billion, an increase of 21 percent. IRAs grew 22 percent to more than 460,000.n FSA serves more than 35,000 plans and 3.7 million customers.
n Longest client retention (an average of 10.3 years vs. an industry average of 8.1 years) in the Boston Research Group’s 2008 plan sponsor Defined Contribution study. (September 2008)n Earned 74 “Best in Class” awards from Chatham Partners Survey of defined benefit, defined contribution and combo clients with more than $5 million in assets, including our range of services, relationship managers, accessibility and actuaries’ knowledge and consulting skills. (December 2008)n Recognized as the #1 recordkeeper by plans for defined contribution and ESOP in PLANSPONSOR magazine’s Recordkeeping Survey. (June 2008)n Named the #1 recordkeeper of defined benefit plans by Investment Advisor Magazine. Named the #1 recordkeeper of bundled 401(k) plans in Spectrem Group’s analysis of fully bundled 401(k) providers. (2008)
n Received the DALBAR Seal of Excellence for defined contribution plan participant and plan sponsor Web sites. (September 2008) n Received the DALBAR Communication Seal of Excellence in customer communications for defined benefit, defined contribution, total retirement, variable annuity and mutual fund statements. (September 2008)n Recognized by Pensions & Investments as one of the magazine’s Eddy Award winners for excellence in investment education for defined contribution plan participants. (February 2009)n Principal Funds ranked as the fourth largest manager of target-date lifecycle funds by Financial Research Corporation. (September 2008)n Eighteen of our mutual funds were recognized as Lipper Leaders in 2008. We received awards in Value and Growth, Large-, Mid- and Small-Caps, U.S. and non-U.S., Real Estate and Traditional Fixed Income and High Yield Fixed Income.
n Principal Global Investors delivered record operating revenues of $598.5 million in 2008, an increase of 4 percent, in spite of the impact of poor market conditions on assets under management. n Near-record deposits for the segment of $54.3 billion in 2008, compared to a record $54.6 billion of deposits in 2007. n Principal Real Estate Investors named Green Giant of the Year by Real Estate Finance & Investment magazine for our portfolio of green properties and efforts to retrofit existing properties. (June 2008)
n More than 400 investment professionals in offices around the world, covering investment markets in more than 50 countries.n Manages assets for 12 of the top 25 largest U.S. pension plans based on Pensions & Investments P&I 1,000 report. (January 2009)n Recognized by Pensions & Investments as the fourth largest manager of real estate. (June 2008)n Ranked as the eighth largest 401(k) manager by Pensions & Investments based on U.S. institutional, tax-exempt assets as of Dec. 31, 2007. (July 2008)
n The 19th largest manager of U.S. institutional, tax-exempt assets, out of 300 managers profiled, according to Pensions & Investments. (December 2008)n Recognized as the 26th largest manager of international/global assets out of 150 managers profiled by Pensions & Investments. (December 2008)
n Record operating revenues for Principal International of $849.0 million, an increase of 7 percent. n Record operating earnings for Principal International of $126.3 million, an increase of 14 percent. n Joint venture partners include China Construction Bank (China), Banco do Brasil (Brazil), CIMB Group (Malaysia) and Punjab National Bank/Vijaya Bank (India).
n Principal Hong Kong won eight Lipper awards across asset categories of bond, mixed asset and equity. (March 2008)n Principal Hong Kong voted by AsianInvestor as the MPF (Mandatory Provident Fund) Master Trust of the Year. (April 2008)n Principal PNB Asset Management Company named Best Mutual Fund House by Outlook Money NDTV Profit Awards 2008. (June 2008)
n CIMB-Principal Asset Management Berhad won the AsianInvestor 2007 Achievement Award for Malaysia Fund House of the Year. (April 2008)n BrasilPrev (joint venture with Banco do Brasil) named one of the most admired companies in Brazil by Carta Capital magazine. (September 2008)
n Life and Health earnings improved $49.3 million, or 22 percent, in 2008 to $270.4 million, with improvement across each of the divisions, including strong earnings performance for the health division. n Segment return on equity improved 250 basis points to 13.5 percent as of Dec. 31, 2008. n Segment serves approximately 73,000 group employers and more than 5.2 million group covered members.
n Principal Life Insurance Company is the eighth largest U.S. life insurer based on HIGHLINEDATA 2008.n Recognized as the #2 provider of non-medical insurance (dental, life and disability) based on LIMRA data of 2007 employer coverages in force. (2008)
n Ranked #6 provider of non-cancelable individual disability income insurance based on LIMRA data of annualized premium in force in 2008. (2009)n Recognized by PLANSPONSOR magazine as the #1 deferred compensation plan service provider. (December 2008)
highlights
The Principal Financial Group | Investing for the Future16
investing For the Future PRInCIPAL FInAnCIAL GROUP, InC.
Following are highlights of some of the most important
ways we’ve given our customers and advisers an edge during
the past year—proving what we’re made of through value-
added solutions, greater investment choice, sales and service
and technology.
value-added solutions
FOR BUSInESSES…
Helping businesses attract and retain employees
n Through the new Principal Executive Bonus
PlusSM—Tax-Exempt retirement plan, The Principal
provides attractive benefits to key employees in non-
profit or tax-exempt organizations. In addition to our
strong 457 plan offering, this simplified and flexible
alternative is another option to help organizations
attract and retain good talent.
n The Principal sponsored a new 403(b) benchmarking
survey by the Profit Sharing/401k Council of America
to help not-for-profit organizations and their financial
professionals evaluate how their plans stack up to
others. This analysis can help them become more
competitive employers.
n In Chile, Principal International launched sales of the
APvC product (similar to a 401(k)). We were among the
very first companies to sell an APvC contract to help
employees in Chile save through the workplace.
Other business owner offerings/solutions
n Plan sponsors count on their annual actuarial valuation
reports to help them with defined benefit (DB) plan funding
decisions. In response to Pension Protection Act regulations,
The Principal revamped the report to help sponsors meet—
and understand—the new rules. The report gives each
actuarial DB client of The Principal customized data to
satisfy the requirements and new tools to make future
planning faster and easier.
n Addressing the multiple needs of small and medium-
sized business owners, The Principal introduced variable
Universal Life Income IISM (vUL Income II). One of the
most flexible policies to date, vUL Income II provides death
benefit protection, a tax-deferred investment and
supplemental income all in one place. These components
make it well suited for a wide range of business needs from
executive benefits for key employees to a business
succession tool to personal retirement income planning.
n We published our seventh benefits Best Practices Guide,
focused on the stories of 10 companies that are relying
on fundamental best practices to help employees secure
their financial futures amid troubling times. The guide
is based on our annual U.S. search, The Principal 10 Best
Companies for Employee Financial Security.
n Our Women in Business program helps us connect regularly
with nearly 6,500 women business leaders. A high
percentage of these women participated in one or more of
our 10 free, educational teleclasses in 2008. Topics
included preparing for the unexpected, brand-building,
using social media to build business and secrets of
successful women entrepreneurs.
Helping employers meet their fiduciary and compliance
responsibilities
n Market turbulence has eaten away at pension fund asset
values. Recognizing that funding levels could be low
enough to trigger new benefit payment restrictions put
in place by the Pension Protection Act, The Principal joined
with industry trade organizations to urge the U.S. Congress
to provide temporary relief from those rules for companies
with defined benefit pension plans.
n In light of complex rules from the Pension Protection
Act, we updated our easy-to-use fiduciary handbook that—
in plain language—helps plan sponsors and their financial
professionals feel more confident in their fiduciary duties.
The Fiduciary Handbook—A Guide to Plan Sponsor and
Plan Fiduciary Responsibilities is part of a package of tools
to help plan sponsors manage these critical responsibilities.
n Throughout the year we offered comprehensive assistance
to not-for-profits and their financial professionals to
address complex new 403(b) retirement plan rules. Our
403(b) Compliance Guides detailed step-by-step actions
to take in each stage of the plan transition and help them
fulfill their compliance obligations.
n For plan sponsors with nonqualified deferred compensation
arrangements, we continued to offer our plan design and
administrative service expertise as they complied with
Internal Revenue Code Section 409A final regulations,
effective Jan. 1, 2009.
2008 Year in Review | Investing for the Future 17
FOR ADvISERS…
n The Principal is helping baby boomers convert their hard-
earned savings into a retirement income for life. Our
white paper, Sustaining Income through Retirement: Four
Strategies for Retiring Clients, compares and contrasts
four key methods of turning retirement savings into an
income stream. It concludes there is no one-size-fits-all
solution and many boomers will need help from financial
professionals to find the right, personalized approach.
n In response to market volatility, The Principal introduced
a series of educational resources to help financial
professionals and employers weather the financial storm.
This includes a new guide, Navigating Your Way through
Market Turbulence, that takes a look at how the market
volatility may affect common types of retirement plans and
action steps to consider.
n Addressing the needs of retirement plan consultants and
independent registered investment advisers, The Principal
created a team to support both consultants and investment
advisory firms that service mid-size and large plan markets.
The team focuses on three key areas: corporate, non-profit
and Taft-Hartley plans and offers a comprehensive range of
solutions including defined contribution, defined benefit,
ESOP, nonqualified, investment only and income solutions.
n Retirement Dashboard, a new online account management
tool, gives retirement-focused financial professionals an
edge, with 24/7, tailored access to client data to help them
better manage their business and deliver top-notch service.
It includes at-a-glance client summaries, detailed information
that can be downloaded for easy sorting and analysis, and
a compliance tab to view the compliance testing results of
all qualified retirement plan clients.
n Our new Retirement Readiness Reviews guide, part of
our More Business. Less Time. client relationship
management program, helps financial professionals walk
their clients through retirement planning. The guide’s
checklists, workbook, timelines and worksheets give clients
a thorough way to plan.
n A new beneficiary planning tool from Principal Funds
equips financial professionals to help clients design a
personal and effective wealth-transfer strategy while
avoiding large and potentially unnecessary tax bills.
It’s the latest offering in our Art of the Rollover series.
n Principal Funds issued a research paper geared for financial
professionals, exploring how the dramatic and historic
decrease in housing values has significantly altered
the retirement plans of many Americans. The Impact of
Diminishing Wealth on Future Consumption: How Housing
Wealth Affects Retirement Planning helps financial
professionals address these new issues.
FOR EMPLOYEES AnD OTHER InDIvIDUALS.. .
n Employees overwhelmed by difficult benefit choices and
complex financial decisions now have a new tool to put
them on track. Our interactive program, My Principal®
Edge Milestones, analyzes financial needs, identifying
shortfalls in saving for retirement and gaps in other
financial needs. The program gives employees a
personalized action plan to help meet their long-term
financial goals. It’s available online and through our
Worksite Solutions programs.
n Addressing Americans’ desire for more life insurance
protection for a longer period of time, The Principal
increased the issue age and reduced the price on its
individual term products. Principal 20 year term is
now available until age 65 and Principal 30 year term is
available until age 55 (non-tobacco only), up five years
from previous policies. A couple with two term policies
from The Principal has the option to convert their policies
into one survivorship universal life (SUL) policy, offering
flexibility in estate planning.
n We renewed our pharmacy benefits contract with CvS
Caremark, adding new programs that will offer lower drug
prices, pharmacy discounts and access to healthcare services
through MinuteClinic, a subsidiary of CvS Caremark. All
of this adds up to member savings and lower premiums and
claims costs for employers.
The Principal Financial Group | Investing for the Future18
investing For the Future
n To help members currently diagnosed with diabetes protect
their vision, The Principal introduced a program that offers
a $50 voucher good toward a second eye exam each year to
check for potential problems, including retinopathy, which
can lead to severe vision loss or blindness if undetected.
n To help members prevent oral complications that can
accompany chemotherapy and head/neck radiation, The
Principal extended extra preventive dental benefits to those
undergoing cancer treatments. Dental insurance members
currently undergoing these treatments can receive up to
three fluoride treatments and an additional routine cleaning
yearly. The services are available at no extra cost to the
employer or member.
n In Hong Kong, Principal International launched the
Principal Special voluntary Contribution Program.
An extension of our mandatory provident fund products,
the program encourages the public to save for retirement.
The product offers an easy application process, diversified
investment choices, flexible premium payment options and
independence in making investment decisions.
greater investment choice
n Principal Funds added five new portfolios to its popular
Principal LifeTime funds series. Originally offered in
10-year increments, the new portfolios provide Principal
LifeTime funds at five-year intervals from 2010 through
2055 in share classes designed for retirement plan use and
institutional class shares. As another alternative for the
large plan retirement market, Principal Trust Company
has developed a collective investment trust target series.
The Principal Trust Target Funds embrace a multi-asset
class, multi-style and multi-manager approach.
n Principal Bank’s broad range of deposit products appealed
to investors seeking stability during this period of market
volatility. Responding to customer interest, the bank
created several new deposit products such as Easy
Ladder CDs and a high yield IRA money market account.
Principal Bank also joined the Certificate of Deposit
Account Registry Service (CDARS), which provides
customers easy access to multi-million dollar FDIC
protection along with the convenience of working with
just one bank.
n In India, Principal Asset Management launched its
new Principal Emerging Bluechip Fund, an open-ended
equity fund aimed at investing in local mid- and
small-cap companies.
n Principal International introduced life cycle funds in two
important markets—Mexico and Brazil—offering more
clients access to this simple, do-it-for-me solution. Our
LifeStyle Mutual Funds were the first target risk funds
offered in Mexico.
sales and service
n Our U.S. retirement sales force was nearly 120 strong in
43 local offices, maintaining relationships with more than
11,000 independent brokers, consultants and agents.
n We had more than 165 local retirement service
representatives, focused on the needs of plan sponsors,
and 150 education specialists to provide support to
retirement plan participants.
n In our life and health businesses, we had more than
1,000 career agents; 170 medical, non-medical, life and
disability wholesalers; and more than 120 service
representatives. Our agent retention rate remains slightly
better than the historical industry average.
technology
n By converting a previously very manual process into a
streamlined system, real estate professionals in Principal
Global Investors have begun more easily collaborating with
external parties to conduct real estate transactions securely,
effectively and quickly. The new system makes quick and
cost-effective work of the complex process of conducting
due diligence for real estate acquisitions.
n We continue our investment to support a global work
environment. Through our commitment, for example,
employees in Principal Global Investors can sit down at a
PC in Hong Kong, London, Tokyo, Singapore, Sydney,
new York or Des Moines and access the same desktop,
systems and applications needed to do their jobs.
n After introducing new technologies at our state-of-the-art
Print-to-Mail facility, we’re able to process year-end
retirement statements much faster for millions of customers,
at the same time saving $2 million.
2008 Year in Review | Awards and Recognition 19
Best Place to Work
n Earned our highest ranking to date (#17) on FORTUNE magazine’s list of 100 Best Companies to Work For. This marks our company’s seventh consecutive year
on the list. We were particularly noted for our
communications with employees and others throughout
the challenges of 2008.
n Included on Working Mother magazine’s 100 Best Companies for Working Mothers for the seventh year.
The Principal was noted for the addition of The Principal
Child Development Center, an on-site early learning and
childcare service provider exclusively available to employees
of the company.
n Included among the top 10 of the national Association
of Female Executives’ Top 30 Companies for Executive Women. The Principal has been on this prestigious list
for six consecutive years. It measures women’s
representation among top-paid and top-tier positions at
America’s largest companies.
n Included for the 11th consecutive year on LATInA Style
magazine’s list of 50 Best Companies for Latinas, which recognizes employers that actively recruit and
promote Latinas.
n Scored a 95 out of 100 on the Human Rights Campaign Foundation’s Corporate Equality Index. This annual
measure rates employers on the treatment of gay, lesbian,
bisexual and transgender employees, consumers and investors.
n One of only 11 companies awarded a Platinum rating out
of more than three dozen companies honored in the
national Business Group on Health’s list of the Best Employers for Healthy Lifestyles.
n Maintained the Platinum Well Workplace distinction from
the Wellness Councils of America.
n Ranked #26 on Computerworld’s list of 100 Best Places to Work in IT. This is our company’s seventh consecutive
year on the list. The Principal was noted for its support
of flexible schedules, including compressed work weeks,
part-time hours and telecommuting.
n Ranked #73 on Training Magazine’s Training Top 125,
which honors employers for investment in employee
development, the scope of development programs offered
and how closely such efforts are linked to business goals
and objectives.
Innovation
n Ranked #9 on Information Week magazine’s list of Top 500 Most Innovative Users of Information Technology.
Ethics/Integrity
n named one of the World’s Most Ethical Companies by Ethisphere Magazine. One of only four financial
service organizations selected, this marks the second
consecutive year The Principal has made the prestigious
list of 100 companies.
n named one of America’s Most Admired Companies for
2008 by FORTUNE magazine.
n The 19th company to receive the United Way Spirit of America award—the highest award recognizing a company
that exemplifies leadership and commitment in support of
an annual United Way campaign.
A t t h e P r i n c i P A l , o u r c o m m i t m e n t t o c u s t o m e r s b e g i n s w i t h A s t r o n g c o m m i t m e n t
t o e m P l o y e e s – c r e At i n g A P l A c e w h e r e h i g h - P e r f o r m i n g e m P l o y e e s wA n t t o w o r k .
o u r e f f o r t s c o n t i n u e t o P Ay o f f , A s s h o w n b y t h e t h i r d - P A r t y r e c o g n i t i o n w e ’ v e r e c e i v e d .
t A k e A l o o k At s o m e o f t h e r e A s o n s w e c o n t i n u e t o At t r A c t t h e b r i g h t e s t A n d b e s t .
A great company starts with great employees.
aWards & recognition
The Principal Financial Group | Financial Highlights
2004 2005 2006 2007 2008
15.115.9
17.6
18.619.1
2004 2005 2006 2007 2008
$167
$195
$257
$311
$247
2004 2005 2006 2007 2008
$0.55
$0.65
$0.80
$0.90
$0.45
2004 2005 2006 2007 2008
$40.94
$47.43
$58.70
$68.84
$22.57
T he Principal delivered solid
operating results for 2008, given
the difficult business environment.
Our revenue and earnings diversification and
strong business fundamentals helped minimize
the negative effects of these challenging times.
Since becoming a public company in 2001,
we’ve increased total company assets under
management by more than 150 percent1 —
despite essentially flat markets over that time.
And we’ve improved Return on Equity by 520
basis points1.
We remain well-positioned to capitalize
on growth opportunities when the markets
improve so we can continue to drive earnings
and earnings per share growth over the long-term.
We believe The Principal will emerge even
stronger from these challenges by:
n Maintaining our risk management focus
n Balancing expense discipline with the need
to invest in growth
n Staying true to our mission—to help growing
businesses, individuals and institutional
clients achieve financial security and success
customers2
(in millions)
assets undermanagement
(in billions)
dividends paid on common stock
common share priceas oF year end
20
Financial highlights
1 From Dec. 31, 2001, to Dec. 31, 2008.2 Includes employees and their dependents under employee benefit arrangements. 3 Certain reclassifications have been made to 2004, 2005, 2006 and 2007 to conform to 2008 presentation.4 See Page 25 for a reconciliation of non-GAAP measures to U.S. GAAP.5 Stockholders’ equity available to common stockholders excluding accumulated other comprehensive income (loss).
2008 Year in Review | Financial Highlights
2004 2005 2006 2007 2008
$826
$901
$1,031
$827
$425
2004 2005 2006 2007 2008
$747
$836
$943
$1,053
$943
2004 2005 2006 2007 2008
12.0%13.4%
14.8%
16.3%
14.2%
2004 2005 2006 2007 2008
$2.37
$2.87
$3.42
$3.93
$3.61
2004 2005 2006 2007 2008
$7,544$7,807
$7,861
$7,422
$2,473
2004 2005 2006 2007 2008
$8,321$9,040
$9,873
$10,907
$9,936
total revenue(in millions)
operating return onaverage equity3,4,5
net income available to common stockholders
(in millions)
operating earnings perdiluted common share3,4
stockholders’equity
(in millions)
operating earnings3,4
(in millions)
21
Financial highlights
The Principal Financial Group | Summary Consolidated Financials
summary consolidated statements oF incomePRInCIPAL FInAnCIAL GROUP, InC.
For the year ended December 31,
2008 2007 2006 (in millions, except per share data)
Revenues
Premiums and other considerations $ 4,209.2 $ 4,634.1 $ 4,305.3
Fees and other revenues 2,426.5 2,634.7 1,902.5
Net investment income 3,994.3 3,966.5 3,620.6
Net realized capital gains (losses) (694.1) (328.8) 44.7
Total revenues 9,935.9 10,906.5 9,873.1
Expenses
Benefits, claims and settlement expenses 6,219.9 6,435.3 5,692.4
Dividends to policyholders 267.3 293.8 290.7
Operating expenses 2,995.1 3,129.2 2,558.7
Total expenses 9,482.3 9,858.3 8,541.8
Income from continuing operations before income taxes 453.6 1,048.2 1,331.3
Income taxes (benefits) (4.5) 208.1 295.9
Income from continuing operations, net of related income taxes 458.1 840.1 1,035.4
Income from discontinued operations, net of related income taxes — 20.2 28.9
Net income 458.1 860.3 1,064.3
Preferred stock dividends 33.0 33.0 33.0
Net income available to common stockholders $ 425.1 $ 827.3 $ 1,031.3
Earnings per common share
Basic earnings per common share:
Income from continuing operations, net of related income taxes $ 1.64 $ 3.04 $ 3.67
Income from discontinued operations, net of related income taxes — 0.08 0.11
Net income $ 1.64 $ 3.12 $ 3.78
Diluted earnings per common share:
Income from continuing operations, net of related income taxes $ 1.63 $ 3.01 $ 3.64
Income from discontinued operations, net of related income taxes — 0.08 0.10
Net income $ 1.63 $ 3.09 $ 3.74
The information in the summary consolidated statements of income shown above has been prepared in conformity with accounting principles generally accepted in the U.S. (“U.S. GAAP”). It is a replication of the information in the consolidated statements of operations in the Principal Financial Group, Inc.’s 2008 Form 10-K. For complete financial statements, including notes and management’s discussion and analysis of financial condition and results of operations, please refer to the 2008 Form 10-K filed by the company with the Securities and Exchange Commission, which can be found at www.principal.com/10k.
22
2008 Year in Review | Summary Consolidated Financials
summary consolidated balance sheetsPRInCIPAL FInAnCIAL GROUP, InC.
December 31,
2008 2007 (in millions)
Assets Fixed maturities, available for sale $ 40,117.2 $ 46,738.9Fixed maturities, trading 843.4 529.3Equity securities, available for sale 242.7 316.4Equity securities, trading 158.0 269.8Mortgage loans 13,113.6 12,659.6Real estate 919.4 862.5Policy loans 896.4 869.9Other investments 2,816.6 2,118.6 Total investments 59,107.3 64,365.0Cash and cash equivalents 2,608.0 1,344.4Accrued investment income 750.7 774.1Premiums due and other receivables 988.1 951.2Deferred policy acquisition costs 4,153.0 2,810.1Property and equipment 518.2 469.0Goodwill 375.5 374.7Other intangibles 925.3 1,006.9Separate account assets 55,142.6 80,486.8Other assets 3,613.7 1,938.0 Total assets $ 128,182.4 $ 154,520.2
Liabilities Contractholder funds $ 43,086.6 $ 40,288.9Future policy benefits and claims 18,494.2 18,454.7Other policyholder funds 536.2 540.5Short-term debt 500.9 290.8Long-term debt 1,290.5 1,398.8Income taxes currently payable 1.9 41.6Deferred income taxes 102.8 576.3Separate account liabilities 55,142.6 80,486.8Other liabilities 6,553.9 5,020.1 Total liabilities 125,709.6 147,098.5
Stockholders’ equity Series A preferred stock, par value $.01 with liquidation preference of $100 per share — 3.0 million shares authorized, issued and outstanding at December 31, 2008 and 2007 — —Series B preferred stock, par value $.01 with liquidation preference of $25 per share — 10.0 million shares authorized, issued and outstanding at December 31, 2008 and 2007 0.1 0.1Common stock, par value $.01 per share — 2,500.0 million shares authorized, 387.0 million and 385.8 million shares issued, and 259.3 million and 259.1 million shares outstanding at December 31, 2008 and 2007, respectively 3.9 3.9Additional paid in capital 8,376.5 8,295.4Retained earnings 3,722.5 3,414.3Accumulated other comprehensive income (loss) (4,911.6) 420.2Treasury stock, at cost (127.7 million and 126.7 million shares at December 31, 2008 and 2007, respectively) (4,718.6) (4,712.2) Total stockholders’ equity 2,472.8 7,421.7 Total liabilities and stockholders’ equity $ 128,182.4 $ 154,520.2
The information in the summary consolidated balance sheets shown above has been prepared in conformity with accounting principles generally accepted in the U.S. (“U.S. GAAP”). It is a replication of the information in the consolidated statements of financial position in the Principal Financial Group, Inc.’s 2008 Form 10-K. For complete financial statements, including notes and management’s discussion and analysis of financial condition and results of operations, please refer to the 2008 Form 10-K filed by the company with the Securities and Exchange Commission, which can be found at www.principal.com/10k.
23
The Principal Financial Group | Summary Consolidated Financials
summary consolidated statements oF cash FloWsPRInCIPAL FInAnCIAL GROUP, InC.
For the year ended December 31,
2008 2007 2006 (in millions) Operating activities Net income $ 458.1 $ 860.3 $ 1,064.3Adjustments to reconcile net income to net cash provided by operating activities: Income from discontinued operations, net of related income taxes — (20.2) (28.9) Amortization of deferred policy acquisition costs 373.7 357.3 239.2 Additions to deferred policy acquisition costs (680.3) (606.1) (498.9) Accrued investment income 23.4 (52.1) (41.1) Net cash flows for trading securities (348.0) (258.2) (200.3) Premiums due and other receivables (39.2) 191.8 (419.1) Contractholder and policyholder liabilities and dividends 2,394.2 2,276.7 1,925.8 Current and deferred income taxes (219.7) (70.3) 169.6 Net realized capital (gains) losses 694.1 328.8 (44.7) Depreciation and amortization expense 145.0 130.2 101.3 Mortgage loans held for sale, acquired or originated (92.0) (83.8) (427.3) Mortgage loans held for sale, sold or repaid, net of gain 73.7 166.8 761.4 Real estate acquired through operating activities (77.5) (48.2) (82.3) Real estate sold through operating activities 24.5 43.7 88.6 Stock-based compensation 31.5 72.8 71.8 Other (536.7) (329.5) (403.9)Net adjustments 1,766.7 2,099.7 1,211.2Net cash provided by operating activities 2,224.8 2,960.0 2,275.5
Investing activities Available for sale securities: Purchases (6,605.8) (10,520.3) (7,765.4) Sales 1,343.5 3,039.6 1,438.9 Maturities 3,207.9 4,461.6 3,595.8Mortgage loans acquired or originated (3,484.9) (3,108.0) (2,600.2)Mortgage loans sold or repaid 2,902.0 2,112.8 2,102.6Real estate acquired (33.3) (115.2) (26.6)Real estate sold 70.6 53.0 174.1Net purchases of property and equipment (105.0) (98.4) (50.5)Purchases of interest in subsidiaries, net of cash acquired (20.3) (76.1) (769.2)Net change in other investments (191.9) (248.2) (9.9)Net cash used in investing activities (2,917.2) (4,499.2) (3,910.4)
Financing activities Issuance of common stock 36.4 73.6 66.2Acquisition of treasury stock (6.4) (756.3) (755.8)Proceeds from financing element derivatives 142.2 128.7 132.1Payments for financing element derivatives (114.6) (137.2) (141.0)Excess tax benefits from share-based payment arrangements 3.1 10.2 8.4Dividends to common stockholders (116.7) (235.6) (214.7)Dividends to preferred stockholders (33.0) (41.2) (24.7)Issuance of long-term debt 7.9 0.2 601.7Principal repayments of long-term debt (83.3) (115.0) (20.4)Net proceeds (repayments) of short-term borrowings 217.4 203.9 (390.5)Investment contract deposits 11,349.0 9,958.9 8,925.7Investment contract withdrawals (9,813.7) (8,209.9) (6,859.4)Net increase in banking operation deposits 373.1 417.1 258.9Other (5.4) (5.3) — Net cash provided by financing activities $ 1,956.0 $ 1,292.1 $ 1,586.5
The information in the summary consolidated statements of cash flows shown above has been prepared in conformity with accounting principles generally accepted in the U.S. (“U.S. GAAP”). It is a replication of the information in the consolidated statements of cash flows in the Principal Financial Group, Inc.’s 2008 Form 10-K. For complete financial statements, including notes and management’s discussion and analysis of financial condition and results of operations, please refer to the 2008 Form 10-K filed by the company with the Securities and Exchange Commission, which can be found at www.principal.com/10k.
24
consolidated statements oF cash FloWsPRInCIPAL FInAnCIAL GROUP, InC.
use oF non-gaap Financial measuresPRInCIPAL FInAnCIAL GROUP, InC.
For the year ended December 31,
2008 2007 2006 (in millions, except as indicated) Discontinued operations Net cash provided by operating activities $ — $ 2.5 $ 1.9Net cash used in investing activities — (1.3) (3.4)Net cash used in financing activities — (0.5) (0.6)Net cash provided by (used in) discontinued operations — 0.7 (2.1)Net increase (decrease) in cash and cash equivalents 1,263.6 (246.4) (50.5)Cash and cash equivalents at beginning of year 1,344.4 1,590.8 1,641.3 Cash and cash equivalents at end of year $ 2,608.0 $ 1,344.4 $ 1,590.8
Cash and cash equivalents of discontinued operations included above At beginning of year $ — $ (0.7) $ 1.4At end of year $ — $ — $ (0.7) Supplemental Information: Cash paid for interest $ 111.3 $ 115.1 $ 80.1Cash paid for income taxes $ 206.1 $ 245.9 $ 139.5
For the year ended December 31,
2008 2007 2006 2005 2004 (in millions, except as indicated)Net income available to common stockholders per diluted share Operating earnings per diluted share $ 3.61 $ 3.93 $ 3.42 $ 2.87 $ 2.37Net realized capital gains (losses) (1.93) (0.85) 0.07 (0.06) (0.20)Other after-tax adjustments (0.05) 0.01 0.25 0.30 0.45Net income available to common stockholders per diluted share $ 1.63 $ 3.09 $ 3.74 $ 3.11 $ 2.62 Net income available to common stockholdersOperating earnings $ 942.7 $ 1,052.7 $ 943.4 $ 835.9 $ 747.2Net realized capital gains (losses) (505.3) (229.7) 18.0 (20.6) (62.3)Other after-tax adjustments (12.3) 4.3 69.9 86.0 140.7 Net income available to common stockholders $ 425.1 $ 827.3 $ 1,031.3 $ 901.3 $ 825.6 Total Stockholders’ Equity Stockholders’ equity x-OCI available to common stockholders $ 6,842.4 $ 6,459.5 $ 6,471.9 $ 6,270.4 $ 6,231.0Net unrealized capital gains (losses) (4,170.8) 317.1 859.0 1,027.9 1,403.9Foreign currency translation (173.5) 35.9 (26.6) (21.6) (85.3)Net unrecognized post-retirement benefit obligation (567.3) 67.2 14.5 - -Minimum pension liability - - - (11.5) (5.3)Preferred stock, at par 0.1 0.1 0.1 0.1 -Paid-in capital - preferred stock 541.9 541.9 541.9 541.9 - Total stockholders’ equity $ 2,472.8 $ 7,421.7 $ 7,860.8 $ 7,807.2 $ 7,544.3 Net income ROE available to common stockholders including OCI* Operating earnings ROE x-OCI 14.2% 16.3% 14.8% 13.4% 12.0%Net realized capital gains (losses) -7.6 -3.6 0.3 -0.3 -1.0Other after-tax adjustments -0.2 0.1 1.1 1.3 2.3 Net income ROE available to common stockholders x-OCI 6.4 12.8 16.2 14.4 13.3Net unrealized capital gains (losses) 2.7 -1.0 -2.2 -2.3 -2.4Foreign currency translation 0.1 0.0 0.1 0.1 0.1Net unrecognized post-retirement benefit obligation 0.5 -0.1 0.0 0.0 0.0Minimum pension liability 0.0 0.0 0.0 0.0 0.0Net income ROE available to common stockholders including OCI 9.7% 11.7% 14.1% 12.2% 11.0%
2008 Year in Review | Summary Consolidated Financials
The company uses a number of non-GAAP financial measures that management believes are important in understanding and evaluating the normal, recurring operations of our businesses. Non-GAAP measures included in the Year in Review are operating earnings per diluted share, operating earnings and operating return on average equity excluding other comprehensive income. While such measures are also consistent with metrics utilized by the investment community to evaluate performance, they are not a substitute for U.S. GAAP (GAAP) financial measures. Therefore, we provide below a reconciliation of the non-GAAP measures to the comparable GAAP financial measures.
*OCI, or Other Comprehensive Income, consists of three items — net unrealized gains (losses) on available-for-sale securities and derivative instruments, net foreign currency translation adjustments and unrecognized post-retirement benefit obligation.
25
The Principal Financial Group | Board of Directors
board oF directorsPRInCIPAL FInAnCIAL GROUP, InC.
PRInCIPAL LIFE InSURAnCE COMPAnY
1 J. Barry Griswell Chairman of the Board The Principal Financial Group
2 Elizabeth E. Tallett Principal Hunter Partners, LLC
3 C. Daniel Gelatt President NMT Corporation
4 Arjun K. Mathrani Adjunct Professor – New York University’s Stern School of Business, St. John’s University, New York, and Cambridge University’s Judge Business School
5 Jocelyn Carter-Miller President TechEd Ventures
6 William T. Kerr Chairman of the Board Meredith Corporation
7 Sandra L. Helton Past Executive Vice President and Chief Financial Officer Telephone and Data Systems, Inc.
8 Gary E. Costley Managing Director C & G Capital and Management, LLC
9 Larry D. Zimpleman President and Chief Executive Officer The Principal Financial Group
10 Betsy J. Bernard Past President AT&T
11 Michael T. Dan Chairman, President and Chief Executive Officer The Brink’s Company
12 Richard L. Keyser Chairman of the Board W.W. Grainger, Inc.
26
1 2 3 4
6 8 9
10 11 12
5
7
2008 Year in Review | Senior Management
senior managementPRInCIPAL FInAnCIAL GROUP | MARCH 2009
Norman R. SorensenExecutive Vice President
Gregory J. BurrowsSenior Vice President
Ronald L. DanilsonSenior Vice President
Gregory B. ElmingSenior Vice President and Controller
Ralph C. EucherSenior Vice President
Nora M. EverettSenior Vice President
Mary A. O’KeefeSenior Vice President andChief Marketing Officer
Gary P. ScholtenSenior Vice President andChief Information Officer
G. David ShaferSenior Vice President
Deanna D. StrableSenior Vice President
Thomas J. GrafSenior Vice President
Joyce N. HoffmanSenior Vice Presidentand Corporate Secretary
Ellen Z. LamaleSenior Vice Presidentand Chief Risk Officer
Julia M. LawlerSenior Vice President andChief Investment Officer
Terrance J. LillisSenior Vice Presidentand Chief Financial Officer
Timothy J. MinardSenior Vice President
J. Barry GriswellChairman of the Board
Larry D. ZimplemanPresident andChief Executive Officer
John E. AschenbrennerPresident, Insurance andFinancial Services
Daniel J. HoustonPresident, Retirement andInvestor Services
James P. McCaughanPresident, Global Asset Management
Karen E. ShaffExecutive Vice Presidentand General Counsel
27
Principal FundsBond & Mortgage Securities FundCalifornia Municipal FundDisciplined LargeCap Blend FundDiversified International FundEquity Income FundGlobal Diversified Income FundGlobal Real Estate Securities FundGovernment & High Quality Bond FundHigh Quality Intermediate Term Bond FundHigh Yield FundHigh Yield Fund IIncome FundInflation Protection FundInternational Emerging Markets FundInternational Fund IInternational Growth FundLargeCap Blend Fund ILargeCap Blend Fund IILargeCap Growth FundLargeCap Growth Fund ILargeCap Growth Fund IILargeCap S&P 500 Index FundLargeCap Value FundLargeCap Value Fund ILargeCap Value Fund IILargeCap Value Fund IIILifeTime 2010 FundLifeTime 2015 FundLifeTime 2020 FundLifeTime 2025 FundLifeTime 2030 FundLifeTime 2035 FundLifeTime 2040 FundLifeTime 2045 FundLifeTime 2050 FundLifeTime 2055 FundLifeTime Strategic Income FundMidCap Blend FundMidCap Growth FundMidCap Growth Fund IIMidCap Growth Fund III
MidCap S&P 400 Index FundMidCap Stock FundMidCap Value Fund IMidCap Value Fund IIMidCap Value Fund IIIMoney Market FundMortgage Securities FundPreferred Securities FundReal Estate Securities FundStrategic Asset Management Balanced PortfolioStrategic Asset Management Conservative Balanced PortfolioStrategic Asset Management Conservative Growth PortfolioStrategic Asset Management Flexible Income PortfolioStrategic Asset Management Strategic Growth PortfolioShort-Term Bond FundShort-Term Income FundSmallCap Blend FundSmallCap Growth FundSmallCap Growth Fund ISmallCap Growth Fund IISmallCap Growth Fund IIISmallCap S&P 600 Index FundSmallCap Value FundSmallCap Value Fund ISmallCap Value Fund IISmallCap Value Fund IIITax-Exempt Bond FundUltra Short Bond FundWest Coast Equity Fund
Principal Variable Contracts Fund, Inc.*
U.S. Asset AccumulationDelaware Charter Guarantee & Trust Company d/b/a Principal Trust CompanyPrincipal BankPrincipal Financial Advisors, Inc.Principal Funds Distributor, Inc.Principal Life Insurance CompanyPrincipal Management CorporationPrincipal Shareholder Services, Inc.Princor Financial Services Corporation
Global Asset ManagementColumbus Circle InvestorsEdge Asset Management, Inc.Morley Capital Management, Inc.Morley Financial Services, Inc.Post Advisory Group, LLCPrincipal Commercial Acceptance, LLCPrincipal Commercial Funding, LLCPrincipal Enterprise Capital, LLCPrincipal Global Investors TrustPrincipal Global Investors, LLCPrincipal Real Estate Investors, LLCSpectrum Asset Management, Inc.Union Bond & Trust CompanyAustraliaPrincipal Global Investors (Australia) LimitedPrincipal Real Estate Investors (Australia) LimitedBrazilPrincipal Global Investors (Brazil) LimitedEuropePrincipal Global Investors (Europe) LimitedPrincipal Global Investors (Ireland) LimitedHong KongPrincipal Global Investors (Hong Kong) LimitedJapanPrincipal Global Investors (Japan) LimitedMalaysiaCIMB-Principal Islamic Asset Management BerhadSingaporePrincipal Global Investors (Singapore) Limited
International Asset Management& AccumulationBrazilBrasilPrev Seguros e Previdência S.A. ChilePrincipal Administradora General de Fondos S.A.Principal Asset Management Chile S.A.Principal Compañía de Seguros de Vida Chile S.A.Principal Créditos Hipotecarios, S.A.
ChinaCCB Principal Asset Management Company, LTDHong KongPrincipal Asset Management Company (Asia) LimitedPrincipal Insurance Company (Hong Kong) LimitedPrincipal Trust Company (Asia) LimitedPrincipal Global Investors (Asia) LimitedIndiaPNB Principal Financial Planners Private LimitedPNB Principal Insurance Broking Private LimitedPrincipal Consulting (India) Private LimitedPrincipal PNB Asset Management Company Private LimitedPrincipal Trustee Company Private LimitedIndonesiaPT CIMB – Principal Asset ManagementMalaysiaCIMB – Principal Asset Management BerhadCIMB Wealth Advisors BerhadMexicoPrincipal Afore, S.A. de C.V.Principal Fondos de Inversión, S.A. de C.V., Operadora de Fondos de InversionPrincipal Mexico Compañía de Seguros, S.A. de C.V.Principal Pensiones, S.A. de C.V.SingaporeCIMB-Principal Asset Management (Singapore) Pte Ltd
Life & Health InsuranceDiversified Dental Services, Inc.Employers Dental Services, Inc.HealthRisk Resource Group, LLCJF MOLLOY & Associates, Inc.Preferred Product Network, Inc.Principal Dental Services, Inc.Principal Edge Network – Georgia, LLCPrincipal Edge Network – Tennessee, LLCPrincipal Life Insurance CompanyPrincipal Life Insurance Company of IowaPrincipal Life Insurance Company of Iowa IIPrincipal National Life Insurance CompanyPrincipal Reinsurance Company of VermontPrincipal Wellness Company
Corporate and OtherPrincipal Development Investors, LLCPrincipal Global Services Private LimitedPrincipal Life Insurance CompanyPrincipal Real Estate Fund Investors, LLCPrincipal Real Estate Portfolio, Inc.
principal FundsORGAnIZED BY PRInCIPAL LIFE InSURAnCE COMPAnY | MARCH 2009
reportable segments oFprincipal Financial group, inc.
*Available only to fund investment options in certain variable annuity and variable life insurance contracts.
Mutual funds and variable contracts are distributed by Principal Funds Distributor, Inc. and Princor Financial Services Corporation, members of the Principal Financial Group, Des Moines, Iowa 50392-0200. Phone 1-800-222-5852.
The contents of this publication are for general information only and are not intended to solicit the purchase of products from companies of the Principal Financial Group.
The Principal Financial Group | Reportable Segments and Principal Funds28
0 2 l e t t e r t o s h a r e h o l d e r s 0 6 p e r s p e c t i v e 0 8 d i v e r s i f i c at i o n 1 0 d i s c i p l i n e 1 2 c o m m i t m e n t
1 4 at a g l a n c e 1 6 i n v e s t i n g f o r t h e f u t u r e 1 9 awa r d s & r e c o g n i t i o n 2 0 f i n a n c i a l h i g h l i g h t s
2 2 s u m m a rY c o n s o l i d a t e d f i n a n c i a l s 2 6 b o a r d o f d i r e c t o r s 2 7 s e n i o r m a n a g e m e n t
2 8 r e p o rta b l e s e g m e n t s a n d p r i n c i pa l f u n d s
This 2008 Year in Review provides a company overview, financial highlights and summary financial statements. For complete financial statements, including notes and management’s discussion and analysis of financial condition and results of operations, please refer to the 2008 Form 10-K filed by the company with the Securities and Exchange Commission, which can be found at www.principal.com/10k. Forward Looking and Cautionary StatementsCertain statements made by the company in this Year in Review that are not historical facts may be considered forward-looking statements, including, without limitation, statements as to sales targets, sales and earnings trends, and management’s beliefs, expectations, goals and opinions. The company does not undertake to update these statements, which are based on a number of assumptions concerning future conditions that may ultimately prove to be inaccurate. Future events and their effects on the company may not be those anticipated, and actual results may differ materially from the results anticipated in these forward-looking statements. The risks, uncertainties and factors that could cause or contribute to such material differences are discussed in the company’s annual report on Form 10-K for the year ended Dec. 31, 2008, filed with the Securities and Exchange Commission. These risks and uncertainties include, without limitation: competitive factors; volatility of financial markets; decrease in ratings; interest rate changes; inability to attract and retain sales representatives; international business risks; foreign currency exchange rate fluctuations; a pandemic, terrorist attack or other catastrophic event; default of the company’s re-insurers; and investment portfolio risks. “The Principal Financial Group” and “The Principal” are registered service marks of Principal Financial Services, Inc., a member of the Principal Financial Group.
what you neeD to know. now. We’re all facing uncertain economic times. And we know you have questions about the economy and your own finances. We’re here to help. Find the latest information to help you make smart decisions and secure your financial future at www.principal.com/now.
ç
2008
Corporate Headquarters711 High St.Des Moines, Iowa 503921-800-986-EDGE (3343)
The Principal Financial Group on the InternetThe Principal home page, at www.principal.com, is your source for a vast array of information including company news releases, investment and savings tools, and details on our product and service solutions. The Investor Relations portion of the site provides up-to-the-minute information for shareholders and the investment community, including access to SEC filings, stock information, overview of corporate responsibility, dividend history and credit ratings. It also includes information of interest on the governance of Principal Financial Group, Inc., including:n Board of Directorsn Corporate Governance Guidelinesn Board Committee Chartersn Director Independence Standardsn Corporate Code of Ethics
Annual MeetingThe Annual Meeting of Shareholders will convene at 9 a.m. Central Time, May 19, 2009, in the auditorium at the corporate headquarters of Principal Financial Group, Inc., 711 High St., Des Moines, Iowa 50392.
Contact Investor RelationsIf you have a question for Investor Relations, please contact us as follows: The Principal Financial Group – Investor Relations 711 High Street, S-006-E41 Des Moines, Iowa 50392-0420 Phone: 1-800-986-3343 | Fax: 515-235-5491 E-mail: [email protected]
Shareholder InformationExchange: NYSE
Transfer AgentPrincipal Financial Group, Inc. shareholder inquiries should be addressed to our transfer agent, Computershare Investor Services, LLC. Computershare can assist shareholders with a variety of services, including: address changes, certificate issuance, replacement of lost stock certificates, transfer of stock to another person, account statements, balance inquiries, shareholder dividend inquiries and selling of shares. You can call or write to the transfer agent at: Principal Financial Group, Inc. c/o Computershare Investor Services P.O. Box 43078 Providence, RI 02940-3078Toll-free phone: 866-781-1368Phone for hearing impaired: 312-588-4110Online Contact Form: www-us.computershare.com/contactus
Registered shareholders can also access information about their Principal Financial Group, Inc. common stock accounts via the Internet using Computershare’s Web site at www-us.computershare.com/investor. The Principal does not maintain or provide information directly to this site, makes no representations or warranties with respect to the information contained therein and takes no responsibility for supplementing, correcting or updating any such information.
A Special ThanksA special thanks to our 450,000 registered shareholders, who have owned Principal Financial Group, Inc. common stock since our initial public offering.
Top 10 Holders* of Principal Financial Group, Inc. Common Stock n Nippon Life Insurance Companyn Barclays Global Investors (U.S.)n State Street Global Advisorsn The Vanguard Group, Inc.n UBS Global Asset Management (Americas), Inc.n Davis Selected Advisers, L.P.n UBS Global Asset Management (Switzerland) AGn J.P. Morgan Investment Management, Inc.n Northern Trust Global Investmentsn TIAA-CREF Investment Management, Inc
*Based on public filings as of Dec. 31, 2008
principal financial group, inc.
2 0 0 8 Y e a r i n r e v i e w
Des Moines, iowa 503921-800-986-eDge (3343)www.principal.coM
we’ll give You an edge®
BB 1345-14