Principal Financial (PFG) CORRESP Correspondence with SEC

October 20, 2010
By EDGAR
Securities and Exchange Commission
Division of Corporation Finance
100 F Street, N.E.
Washington D.C. 20549
Attention:		Mr. Jim Rosenberg,
		Senior Assistant Chief Accountant
Re: Principal Financial Group, Inc.
	Form 10-K for the Fiscal Year Ended December 31, 2009
	Form 10-Q for the Quarterly Period Ended March 31, 2010
	File No. 001-16725
Dear Mr. Rosenberg:
On behalf of Principal Financial Group, Inc., this letter responds to the comment of the Division
of Corporation Finance of the Securities and Exchange Commission received by telephone on
September 23, 2010 from Vanessa Robertson, SEC staff accountant. The comment was a
follow-up to our response dated August 13, 2010 to your letter dated June 29, 2010, concerning
the company’s annual report on Form 10-K and quarterly report on Form 10-Q, both referenced
above. For convenience, we have included your additional comment in bold below.
Form 10-Q for the quarterly period ended March 31, 2010
Please refer to your response to comment 3. Please revise your disclosure to separately
identify the significant inputs used in determining fair value of each material level 2 asset
class included within fixed maturities. Please see ASC 820-10-55-22A for examples of the
types of inputs to be disclosed. For example, some of the inputs used for mortgage backed
securities might include delinquency rates, collateral valuation loss severity rates,
collateral refinancing assumptions, and estimated prepayment rates.
RESPONSE:
We propose to include the requested changes to our fixed maturity securities fair valuation
disclosure starting with our annual report on Form 10-K for the year ending December 31,
2010. To maintain a consistent point of reference, Attachment A uses as a staring point our fair
value disclosure from our quarterly report on Form 10-Q for the quarter ended March 31, 2010.
The proposed additions are underlined. The highlighted language was included in our initial
response and is reflective of instances where we are disclosing qualitative information
regarding the significant inputs used in determining fair value.
*****

After you have completed your review of our response, please call me if you have any questions
or comments.
Sincerely,
/s/ Terrance J. Lillis
Terrance J. Lillis
Senior Vice President and
Chief Financial Officer
(515) 247-4885
cc:	Vanessa Robertson (Securities and Exchange Commission)
	Mary Mast (Securities and Exchange Commission)

Attachment A

From 3/31/2010 Principal Financial Group 10-Q Note 9 – Fair Value Measurements: 

Determination of fair value 

The following discussion describes the valuation methodologies and inputs used for 

assets and liabilities measured at fair value on a recurring basis or disclosed at fair value. The 

techniques utilized in estimating the fair values of financial instruments are reliant on the 

assumptions used. Care should be exercised in deriving conclusions about our business, its 

value or financial position based on the fair value information of financial instruments 

presented below. 

Fair value estimates are made at a specific point in time, based on available market 

information and judgments about the financial instrument. Such estimates do not consider the 

tax impact of the realization of unrealized gains or losses. In addition, the disclosed fair value 

may not be realized in the immediate settlement of the financial instrument. We validate prices 

through an investment analyst review process, which includes validation through direct 

interaction with external sources, review of recent trade activity or use of internal models. In 

circumstances where broker quotes are used to value an instrument, we generally receive one 

non-binding quote. Broker quotes are validated through an investment analyst review process, 

which includes validation through direct interaction with external sources and use of internal 

models or other relevant information. We did not make any significant changes to our valuation 

processes during the first quarter of 2010. 

Fixed Maturities 

Fixed maturities include bonds, asset-backed securities, redeemable preferred stock and 

certain nonredeemable preferred stock. When available, the fair value of fixed maturities is 

based on quoted prices of identical assets in active markets. These are reflected in Level 1 and 

primarily include U.S. Treasury bonds and actively traded redeemable corporate preferred 

securities. 

When quoted prices are not available, our first priority is to obtain prices from third 

party pricing vendors. We have regular interaction with these vendors to ensure we understand 

their pricing methodologies and to confirm they are utilizing observable market information. 

Their methodologies vary by asset class and include inputs such as estimated cash flows, 

benchmark yields, reported trades, broker quotes, credit quality, industry events and economic 

events. Fixed maturities with validated prices from pricing services, which includes the 

majority of our public fixed maturities in all asset classes, are generally reflected in Level 2. 

Also included in Level 2 are corporate bonds where quoted market prices are not available, for 

which a matrix pricing valuation approach is used. In this approach, securities are grouped into 

pricing categories that vary by sector, rating and average life. Each pricing category is assigned 

a risk spread based on studies of observable public market data from the investment 

professionals assigned to specific security classes. The expected cash flows of the security are 

then discounted back at the current U.S. Treasury curve plus the appropriate risk spread. 

Although the matrix valuation approach provides a fair valuation of each pricing category, the 

valuation of an individual security within each pricing category may actually be impacted by 

company specific factors. 

If we are unable to price a fixed maturity security using prices from third party pricing 

vendors or other sources specific to the asset class, we may obtain a broker quote or utilize an 

internal pricing model specific to the asset utilizing relevant market information, to the extent 

available, which are reflected in Level 3 and can include fixed maturities across all asset 

classes. These models primarily use projected cash flows discounted using a rate derived from 

market interest rate curves and relevant risk spreads. As of March 31, 2010, less than 1% of our 

fixed maturity securities, which were classified as Level 3 assets, were valued using internal 

pricing models. 

The primary inputs, by asset class, for valuations of the majority of our Level 2 

investments from third party pricing vendors or our internal pricing valuation approach are 

described below. 

U.S. government and agencies/Non-U.S. governments– Inputs include recently 

executed market transactions, interest rate yield curves, maturity dates, market price quotations 

and credit spreads relating to similar instruments. 

State and political subdivisions- Inputs include Municipal Securities Rulemaking 

Board reported trades, U.S. Treasury and other benchmark curves, material event notices, new 

issue data, and issuer financial statements. 

Corporates– Inputs include recently executed transactions, market price quotations, 

benchmark yields, issuer spreads and observations of equity and credit default swap curves 

related to the issuer. For private placement corporate securities valued through the matrix 

valuation approach inputs include the current U.S. Treasury curve and risk spreads based on 

sector, rating and average life of the issuance. 

RMBS, CMBS, CDOs and Other debt obligations—Inputs include cash flows, priority 

of the tranche in the capital structure, expected time to maturity for the specific tranche, 

reinvestment period remaining and performance of the underlying collateral including 

prepayments, defaults, deferrals, loss severity of defaulted collateral and, for RMBS, 

prepayment speed assumptions. Other inputs include market indices and recently executed 

market transactions 

Equity Securities 

Equity securities include mutual funds, common stock and nonredeemable preferred 

stock. Fair values of equity securities are determined using quoted prices in active markets for 

identical assets when available, which are reflected in Level 1. When quoted prices are not 

available, we may utilize internal valuation methodologies appropriate for the specific asset that 

use observable inputs such as underlying share prices, which are reflected in Level 2. Fair 

values might also be determined using broker quotes or through the use of internal models or 

analysis that incorporate significant assumptions deemed appropriate given the circumstances 

and consistent with what other market participants would use when pricing such securities, 

which are reflected in Level 3. 

Mortgage Loans 

Mortgage loans are not measured at fair value on a recurring basis. Fair values of 

commercial and residential mortgage loans are primarily determined by discounting the 

expected cash flows at current treasury rates plus an applicable risk spread, which reflects credit 

quality and maturity of the loans. The risk spread is based on market clearing levels for loans 

with comparable credit quality, maturities and risk. The fair value of mortgage loans may also 

be based on the fair value of the underlying real estate collateral, which is estimated using 

appraised values. 

Policy Loans 

Policy loans are not measured at fair value on a recurring basis. Fair values of policy 

loans are estimated by discounting expected cash flows using a risk-free rate based on the U.S. 

Treasury curve. 

Derivatives 

The fair values of exchange-traded derivatives are determined through quoted market 

prices, which are reflected in Level 1. Exchange-traded derivatives include interest rate and 

equity futures that are settled daily such that their fair value is not reflected in the consolidated 

statements of financial position. The fair values of over-the-counter derivative instruments are 

determined using either pricing valuation models that utilize market observable inputs or broker 

quotes. The majority of our over-the-counter derivatives are valued with models that use market 

observable inputs, which are reflected in Level 2. Significant inputs include contractual terms, 

interest rates, currency exchange rates, credit spread curves, equity prices, and volatilities. 

These valuation models consider projected discounted cash flows, relevant swap curves, and 

appropriate implied volatilities. Certain over-the-counter derivatives utilize unobservable 

market data, primarily independent broker quotes that are nonbinding quotes based on models 

that do not reflect the result of market transactions, which are reflected in Level 3. 

Our derivative contracts are generally documented under ISDA Master Agreements, 

which provide for legally enforceable set-off and close-out netting of exposures to specific 

counterparties. Collateral arrangements are bilateral and based on current ratings of each entity. 

We utilize the LIBOR interest rate curve to value our positions, which includes a credit spread. 

This credit spread incorporates an appropriate level of nonperformance risk into our valuations 

given the current ratings of our counterparties, as well as the collateral agreements in place. 

Counterparty credit risk is routinely monitored to ensure our adjustment for non-performance 

risk is appropriate. 

Interest rate contracts.We use discounted cash flow valuation techniques to determine 

the fair value of interest rate swaps using observable swap curves as the inputs. These are 

reflected in Level 2. In addition, we have a limited number of complex inflation-linked interest 

rate swaps and interest rate collars that are valued using broker quotes. These are reflected in 

Level 3. We use option pricing models to determine the fair value of swaptions using 

observable swap interest rate curves and observable implied volatilities as inputs. These are 

reflected in Level 2. 

Page 6 

Foreign exchange contracts.We use discounted cash flow valuation techniques that 

utilize observable swap curves and exchange rates as the inputs to determine the fair value of 

foreign currency swaps. These are reflected in Level 2. In addition, we have a limited number 

of non-standard currency swaps that are valued using broker quotes. These are reflected within 

Level 3. Currency forwards are valued using observable market inputs, including forward 

currency exchange rates. These are reflected in Level 2. 

Equity contracts.We use an option pricing model using observable implied volatilities, 

dividend yields, index prices and swap curves as the inputs to determine the fair value of equity 

options. These are reflected in Level 2. 

Credit contracts.We use either the ISDA Credit Default Swap Standard discounted cash 

flow model that utilizes observable default probabilities and recovery rates as inputs or broker 

prices to determine the fair value of credit default swaps. These are reflected in Level 3. 

Other contracts.We use broker prices to determine the fair value of commodity swaps. 

These are reflected in Level 3. 

Other Investments 

Other investments reported at fair value primarily include seed money investments, for 

which the fair value is determined using the net asset value of the fund. The net asset value of 

the fund represents the price at which we feel we would be able to initiate a transaction. Seed 

money investments in mutual funds for which the net asset value is published are reflected in 

Level 1. Seed money investments in mutual funds or other investment funds in markets that do 

not have a published net asset value are reflected in Level 2. 

Other investments reported at fair value also include commercial mortgage loans of 

consolidated VIEs for which the fair value option was elected, which are reflected in Level 3. 

Fair value of these commercial mortgage loans is computed utilizing a discount rate based on 

the current market. The market discount rate is then adjusted based on various factors that 

differentiate it from our pool of loans. 

The carrying amounts of other assets classified as other investments in the 

accompanying consolidated statements of financial position, which are not measured at fair 

value on a recurring basis, approximate their fair values. 

Cash and Cash Equivalents 

Certain cash equivalents are reported at fair value on a recurring basis and include 

money market instruments and other short-term investments with maturities of less than three 

months. Fair values of these cash equivalents may be determined using public quotations, when 

available, which are reflected in Level 1. When public quotations are not available, because of 

the highly liquid nature of these assets, carrying amounts may be used to approximate fair 

values, which are reflected in Level 2. 

The carrying amounts of cash and cash equivalents that are not reported at fair value on 

a recurring basis approximate their fair value. 

Separate Account Assets 

Separate account assets include equity securities, debt securities and derivative 

instruments, for which fair values are determined as previously described, and are reflected in 

Level 1, Level 2 and Level 3. Separate account assets also include commercial mortgage loans, 

for which the fair value is estimated by discounting the expected total cash flows using market 

rates that are applicable to the yield, credit quality and maturity of the loans. The market 

clearing spreads vary based on mortgage type, weighted average life, rating and liquidity. These 

are reflected in Level 3. Finally, separate account assets include real estate, for which the fair 

value is estimated using discounted cash flow valuation models that utilize public real estate 

market data inputs such as transaction prices, market rents, vacancy levels, leasing absorption, 

market cap rates and discount rates. In addition, each property is appraised annually by an 

independent appraiser. The real estate within the separate accounts is reflected in Level 3. 

Cash Collateral and Cash Collateral Payable 

Cash collateral is not measured at fair value on a recurring basis. The carrying amounts 

of cash collateral received and posted under derivative credit support annex (collateral) 

agreements and the carrying amount of the payable associated with our obligation to return the 

cash collateral received approximate their fair value. 

Investment-Type Insurance Contracts 

Investment-type insurance contracts are not measured at fair value on a recurring basis. 

The fair values of our reserves and liabilities for investment-type insurance contracts are 

estimated using discounted cash flow analyses based on current interest rates, including non- 

performance risk, being offered for similar contracts with maturities consistent with those 

remaining for the investment-type contracts being valued. Investment-type insurance contracts 

include insurance, annuity and other policy contracts that do not involve significant mortality or 

morbidity risk and are only a portion of the policyholder liabilities appearing in the 

consolidated statements of financial position. Insurance contracts include insurance, annuity 

and other policy contracts that do involve significant mortality or morbidity risk. The fair values 

for our insurance contracts, other than investment-type contracts, are not required to be 

disclosed. 

Certain annuity contracts and other investment-type insurance contracts include 

embedded derivatives that have been bifurcated from the host contract and that are measured at 

fair value on a recurring basis, which are reflected in Level 3. The key assumptions for 

calculating the fair value of the embedded derivative liabilities are market assumptions (such as 

equity market returns, interest rate levels, market volatility, correlations, among other things) 

and policyholder behavior assumptions (such as lapse, mortality, utilization, withdrawal 

patterns, among other things). They are valued using a combination of historical data and 

actuarial judgment. Stochastic models are used to value the embedded derivatives that 

incorporate a spread reflecting our own creditworthiness and risk margins. 

The assumption for our own non-performance risk for investment-type insurance 

contracts and any embedded derivatives bifurcated from certain annuity and investment-type 

insurance contracts is based on the current market credit spreads for debt-like instruments that 

we have issued and are available in the market. 

Short-Term Debt 

Short-term debt is not measured at fair value on a recurring basis. The carrying amount 

of short-term debt approximates its fair value because of the relatively short time between 

origination of the debt instrument and its maturity. 

Long-Term Debt 

Long-term debt is not measured at fair value on a recurring basis. Fair values for debt 

issues are estimated using discounted cash flow analysis based on our incremental borrowing 

rate for similar borrowing arrangements. 

Separate Account Liabilities 

Separate account liabilities are not measured at fair value on a recurring basis. Fair 

values of separate account liabilities, excluding insurance-related elements, are estimated based 

on market assumptions around what a potential acquirer would pay for the associated block of 

business, including both the separate account assets and liabilities. As the applicable separate 

account assets are already reflected at fair value, any adjustment to the fair value of the block is 

an assumed adjustment to the separate account liabilities. To compute fair value, the separate 

account liabilities are originally set to equal separate account assets because these are pass- 

through contracts. The separate account liabilities are reduced by the amount of future fees 

expected to be collected that are intended to offset upfront acquisition costs already incurred 

that a potential acquirer would not have to pay. The estimated future fees are adjusted by an 

adverse deviation discount and the amount is then discounted at a risk-free rate as measured by 

the yield on U.S. Treasury securities at maturities aligned with the estimated timing of fee 

collection. 

Bank Deposits 

Bank deposits are not measured at fair value on a recurring basis. The fair value of 

deposits of our Principal Bank subsidiary with no stated maturity, such as demand deposits, 

savings, and interest-bearing demand accounts, is equal to the amount payable on demand (i.e., 

their carrying amounts). The fair value of certificates of deposit is based on the discounted 

value of contractual cash flows. The discount is estimated using the rates currently offered for 

deposits of similar remaining maturities. The fair value estimates do not include the benefit that 

results from the low-cost funding provided by the deposit liabilities compared to the cost of 

borrowing funds in the market. 

Other Liabilities 

Certain obligations reported in other liabilities include embedded derivatives to deliver 

underlying securities of structured investments to third parties. The fair value of the embedded 

derivatives is calculated based on the value of the underlying securities. We have had an 

embedded derivative in which the fair value of the underlying securities was obtained from a 

third party pricing vendor and was reflected in Level 2. We also have an embedded derivative 

in which the fair value of the underlying securities is calculated utilizing the yield, credit quality 

and average maturity of each security, which is reflected in Level 3. 

  Additionally, obligations of consolidated VIEs for which the fair value option was 

elected are included in other liabilities. These obligations are valued either based on prices 

obtained from third party pricing vendors as utilized and described in our discussion of how fair 

value is determined for fixed maturities, which are reflected in Level 2, or broker quotes, which 

are reflected in Level 3.