1. Nature of Operations and Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements of Principal Financial Group, Inc. (“PFG”), its majority-owned subsidiaries and its consolidated variable interest entities (“VIEs”), have been prepared in conformity with accounting principles generally accepted in the U.S. (“U.S. GAAP”) for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2013, are not necessarily indicative of the results that may be expected for the year ended December 31, 2013. These interim unaudited consolidated financial statements should be read in conjunction with our annual audited financial statements as of December 31, 2012, included in our Form 10-K for the year ended December 31, 2012, filed with the United States Securities and Exchange Commission (“SEC”). The accompanying consolidated statement of financial position as of December 31, 2012, has been derived from the audited consolidated statement of financial position but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

Reclassifications have been made to prior period financial statements to conform to the March 31, 2013, presentation.

Revisions of Previously Issued Financial Statements

In conjunction with our first quarter 2013 acquisition of AFP Cuprum S.A. (“Cuprum”) in Chile, we re-evaluated the accounting treatment for similar products offered in other foreign jurisdictions, including the AFORE retirement accumulation business in Mexico. As a result of this re-evaluation, we have concluded that the AFORE product, which was previously accounted for under Accounting Standards Codification 944, Financial Services — Insurance, should be accounted for as a long-term service contract, consistent with the accounting requirements for our recently acquired retirement accumulation business in Chile. The revision to the accounting treatment for the AFORE product in Mexico will result in the following changes:

(a) Fewer acquisition costs are capitalized. Specifically, we expense as incurred salary and related costs associated with the successful efforts of our proprietary sales force and sales support staff. All direct and incremental costs such as commissions will continue to be deferred.

(b) Deferred costs are amortized on a straight line basis over the expected contract life rather than based on estimated gross profits. The amortization method change also impacts purchased customer intangible assets.

We have revised our prior period consolidated financial statements accordingly. These revisions, inclusive of any other potential adjustments, are not material in any prior period based on an analysis of quantitative and qualitative factors in accordance with SEC Staff Accounting Bulletin 108, and, as a result, amendment of previously filed periodic reports is not required. Rather, these revisions will be made the next time we file the prior period consolidated financial statements.

The following tables quantify the prior period impact of this revision.

Principal Financial Group, Inc.

Consolidated Statements of Financial Position

	December 31, 2012						December 31, 2011
	As originally						As originally
	reported			As adjusted			reported			As adjusted
	(in millions)
Assets
Fixed maturities, available-for-sale	$	50,939.3		$	50,939.3		$	49,006.7		$	49,006.7
Fixed maturities, trading	626.7			626.7			971.7			971.7
Equity securities, available-for-sale	136.5			136.5			77.1			77.1
Equity securities, trading	252.8			252.8			404.8			404.8
Mortgage loans	11,519.7			11,519.7			10,727.2			10,727.2
Real estate	1,180.3			1,180.3			1,092.9			1,092.9
Policy loans	864.9			864.9			885.1			885.1
Other investments	3,291.1			3,291.1			2,985.8			2,985.8
Total investments	68,811.3			68,811.3			66,151.3			66,151.3
Cash and cash equivalents	4,177.2			4,177.2			2,833.9			2,833.9
Accrued investment income	584.4			584.4			615.2			615.2
Premiums due and other receivables	1,084.4			1,084.4			1,196.5			1,196.5
Deferred acquisition costs	2,673.8			2,590.0			2,428.0			2,358.1
Property and equipment	464.2			464.2			457.2			457.2
Goodwill	543.4			543.4			482.3			482.3
Other intangibles	927.2			914.7			890.6			870.3
Separate account assets	81,653.8			81,653.8			71,364.4			71,364.4
Other assets	1,006.8			1,006.8			942.3			942.3
Total assets	$	161,926.5		$	161,830.2		$	147,361.7		$	147,271.5
Liabilities
Contractholder funds	$	37,786.5		$	37,786.5		$	37,676.4		$	37,676.4
Future policy benefits and claims	22,436.2			22,436.2			20,210.4			20,210.4
Other policyholder funds	716.4			716.4			548.6			548.6
Short-term debt	40.8			40.8			105.2			105.2
Long-term debt	2,671.3			2,671.3			1,564.8			1,564.8
Income taxes currently payable	15.3			15.3			3.1			3.1
Deferred income taxes	626.5			600.0			208.7			184.0
Separate account liabilities	81,653.8			81,653.8			71,364.4			71,364.4
Other liabilities	6,146.1			6,146.1			6,286.2			6,286.2
Total liabilities	152,092.9			152,066.4			137,967.8			137,943.1

Redeemable noncontrolling interest	60.4			60.4			22.2			22.2

Stockholders’ equity
Series A preferred stock, par value	—			—			—			—
Series B preferred stock, par value	0.1			0.1			0.1			0.1
Common stock, par value	4.5			4.5			4.5			4.5
Additional paid-in capital	9,730.9			9,730.9			9,634.7			9,634.7
Retained earnings	4,940.2			4,862.0			4,402.3			4,323.4
Accumulated other comprehensive income	631.9			640.3			258.0			271.4
Treasury stock, at cost	(5,554.4		)	(5,554.4		)	(5,281.7		)	(5,281.7		)
Total stockholders’ equity attributable to Principal Financial Group, Inc.	9,753.2			9,683.4			9,017.9			8,952.4
Noncontrolling interest	20.0			20.0			353.8			353.8
Total stockholders’ equity	9,773.2			9,703.4			9,371.7			9,306.2
Total liabilities and stockholders’ equity	$	161,926.5		$	161,830.2		$	147,361.7		$	147,271.5

Principal Financial Group, Inc.

Consolidated Statements of Operations

	For the year ended						For the year ended
	December 31, 2012						December 31, 2011
	As originally						As originally
	reported			As adjusted			reported			As adjusted
	(in millions, except per share data)
Revenues
Premiums and other considerations	$	3,219.4		$	3,219.4		$	2,891.0		$	2,891.0
Fees and other revenues	2,626.7			2,626.7			2,526.7			2,526.7
Net investment income	3,254.9			3,254.9			3,375.3			3,375.3
Net realized capital gains, excluding impairment losses on available-for-sale securities	232.7			232.7			75.0			75.0
Total other-than-temporary impairment losses on available-for- sale securities	(135.9		)	(135.9		)	(147.6		)	(147.6		)
Other-than-temporary impairment losses on fixed maturities, available-for-sale reclassified to (from) other comprehensive income	17.3			17.3			(49.7		)	(49.7		)
Net impairment losses on available-for-sale securities	(118.6		)	(118.6		)	(197.3		)	(197.3		)
Net realized capital gains (losses)	114.1			114.1			(122.3		)	(122.3		)
Total revenues	9,215.1			9,215.1			8,670.7			8,670.7
Expenses
Benefits, claims and settlement expenses	5,123.9			5,123.9			4,616.6			4,616.6
Dividends to policyholders	197.7			197.7			210.2			210.2
Operating expenses	2,934.1			2,933.5			2,950.8			2,971.1
Total expenses	8,255.7			8,255.1			7,777.6			7,797.9
Income before income taxes	959.4			960.0			893.1			872.8
Income taxes	134.7			134.6			204.2			198.3
Net income	824.7			825.4			688.9			674.5
Net income attributable to noncontrolling interest	18.8			18.8			36.2			36.2
Net income attributable to Principal Financial Group, Inc.	805.9			806.6			652.7			638.3
Preferred stock dividends	33.0			33.0			33.0			33.0
Net income available to common stockholders	$	772.9		$	773.6		$	619.7		$	605.3

Earnings per common share
Basic earnings per common share	$	2.60		$	2.60		$	1.97		$	1.92

Diluted earnings per common share	$	2.57		$	2.58		$	1.95		$	1.91

Principal Financial Group, Inc.

Consolidated Statements of Operations

	For the six months ended						For the nine months ended
	June 30, 2012						September 30, 2012
	As originally						As originally
	reported			As adjusted			reported			As adjusted
	(in millions, except per share data)
Revenues
Premiums and other considerations	$	1,361.1		$	1,361.1		$	2,519.3		$	2,519.3
Fees and other revenues	1,234.1			1,234.1			1,909.1			1,909.1
Net investment income	1,625.8			1,625.8			2,409.6			2,409.6
Net realized capital gains, excluding impairment losses on available-for-sale securities	54.3			54.3			176.4			176.4
Total other-than-temporary impairment losses on available-for- sale securities	(82.8		)	(82.8		)	(126.4		)	(126.4		)
Other-than-temporary impairment losses on fixed maturities, available-for-sale reclassified to other comprehensive income	22.0			22.0			31.2			31.2
Net impairment losses on available-for-sale securities	(60.8		)	(60.8		)	(95.2		)	(95.2		)
Net realized capital gains (losses)	(6.5		)	(6.5		)	81.2			81.2
Total revenues	4,214.5			4,214.5			6,919.2			6,919.2
Expenses
Benefits, claims and settlement expenses	2,322.5			2,322.5			3,969.5			3,969.5
Dividends to policyholders	99.8			99.8			149.5			149.5
Operating expenses	1,280.1			1,284.7			2,106.7			2,101.1
Total expenses	3,702.4			3,707.0			6,225.7			6,220.1
Income before income taxes	512.1			507.5			693.5			699.1
Income taxes	109.1			107.6			99.2			100.4
Net income	403.0			399.9			594.3			598.7
Net income attributable to noncontrolling interest	11.9			11.9			15.3			15.3
Net income attributable to Principal Financial Group, Inc.	391.1			388.0			579.0			583.4
Preferred stock dividends	16.5			16.5			24.7			24.7
Net income available to common stockholders	$	374.6		$	371.5		$	554.3		$	558.7

Earnings per common share
Basic earnings per common share	$	1.25		$	1.24		$	1.86		$	1.87

Diluted earnings per common share	$	1.24		$	1.22		$	1.84		$	1.85

Principal Financial Group, Inc.

Consolidated Statements of Operations

	For the three months ended						For the three months ended						For the three months ended						For the three months ended
	March 31, 2012						June 30, 2012						September 30, 2012						December 31, 2012
	As originally						As originally						As originally						As originally
	reported			As adjusted			reported			As adjusted			reported			As adjusted			reported			As adjusted
	(in millions, except per share data)
Revenues
Premiums and other considerations	$	679.8		$	679.8		$	681.3		$	681.3		$	1,158.2		$	1,158.2		$	700.1		$	700.1
Fees and other revenues	598.0			598.0			636.1			636.1			675.0			675.0			717.6			717.6
Net investment income	824.8			824.8			801.0			801.0			783.8			783.8			845.3			845.3
Net realized capital gains, excluding impairment losses on available-for-sale securities	22.1			22.1			32.2			32.2			122.1			122.1			56.3			56.3
Total other-than-temporary impairment losses on available-for-sale securities	(33.7		)	(33.7		)	(49.1		)	(49.1		)	(43.6		)	(43.6		)	(9.5		)	(9.5		)
Other-than-temporary impairment losses on fixed maturities, available-for- sale reclassified to (from) other comprehensive income	4.9			4.9			17.1			17.1			9.2			9.2			(13.9		)	(13.9		)
Net impairment losses on available-for-sale securities	(28.8		)	(28.8		)	(32.0		)	(32.0		)	(34.4		)	(34.4		)	(23.4		)	(23.4		)
Net realized capital gains (losses)	(6.7		)	(6.7		)	0.2			0.2			87.7			87.7			32.9			32.9
Total revenues	2,095.9			2,095.9			2,118.6			2,118.6			2,704.7			2,704.7			2,295.9			2,295.9
Expenses
Benefits, claims and settlement expenses	1,212.5			1,212.5			1,110.0			1,110.0			1,647.0			1,647.0			1,154.4			1,154.4
Dividends to policyholders	50.3			50.3			49.5			49.5			49.7			49.7			48.2			48.2
Operating expenses	556.0			555.1			724.1			729.6			826.6			816.4			827.4			832.4
Total expenses	1,818.8			1,817.9			1,883.6			1,889.1			2,523.3			2,513.1			2,030.0			2,035.0
Income before income taxes	277.1			278.0			235.0			229.5			181.4			191.6			265.9			260.9
Income taxes (benefits)	58.2			56.7			50.9			50.9			(9.9		)	(7.2		)	35.5			34.2
Net income	218.9			221.3			184.1			178.6			191.3			198.8			230.4			226.7
Net income attributable to noncontrolling interest	9.2			9.2			2.7			2.7			3.4			3.4			3.5			3.5
Net income attributable to Principal Financial Group, Inc.	209.7			212.1			181.4			175.9			187.9			195.4			226.9			223.2
Preferred stock dividends	8.2			8.2			8.3			8.3			8.2			8.2			8.3			8.3
Net income available to common stockholders	$	201.5		$	203.9		$	173.1		$	167.6		$	179.7		$	187.2		$	218.6		$	214.9

Earnings per common share
Basic earnings per common share	$	0.67		$	0.68		$	0.58		$	0.56		$	0.61		$	0.64		$	0.74		$	0.72

Diluted earnings per common share	$	0.66		$	0.68		$	0.58		$	0.56		$	0.60		$	0.63		$	0.74		$	0.72

Principal Financial Group, Inc.

Consolidated Statements of Comprehensive Income

	For the year ended						For the year ended
	December 31, 2012						December 31, 2011
	As originally						As originally
	reported			As adjusted			reported			As adjusted
	(in millions)
Net income	$	824.7		$	825.4		$	688.9		$	674.5
Other comprehensive income (loss), net:
Net unrealized gains on available-for-sale securities	557.6			557.6			208.6			208.6
Noncredit component of impairment losses on fixed maturities, available-for-sale	(6.7		)	(6.7		)	31.0			31.0
Net unrealized gains (losses) on derivative instruments	(43.6		)	(43.6		)	23.6			23.6
Foreign currency translation adjustment	(4.8		)	(9.8		)	(139.5		)	(130.9		)
Net unrecognized postretirement benefit obligation	(127.4		)	(127.4		)	(172.9		)	(172.9		)
Other comprehensive income (loss)	375.1			370.1			(49.2		)	(40.6		)
Comprehensive income	1,199.8			1,195.5			639.7			633.9
Comprehensive income attributable to noncontrolling interest	20.0			20.0			35.7			35.7
Comprehensive income attributable to Principal Financial Group, Inc.	$	1,179.8		$	1,175.5		$	604.0		$	598.2

Principal Financial Group, Inc.

Consolidated Statements of Comprehensive Income

	For the six months ended						For the nine months ended
	June 30, 2012						September 30, 2012
	As originally						As originally
	reported			As adjusted			reported			As adjusted
	(in millions)
Net income	$	403.0		$	399.9		$	594.3		$	598.7
Other comprehensive income, net:
Net unrealized gains on available-for-sale securities	262.0			262.0			558.0			558.0
Noncredit component of impairment losses on fixed maturities, available-for-sale	(10.8		)	(10.8		)	(14.8		)	(14.8		)
Net unrealized gains on derivative instruments	45.4			45.4			27.2			27.2
Foreign currency translation adjustment	(21.4		)	(23.9		)	27.2			21.5
Net unrecognized postretirement benefit obligation	17.5			17.5			26.2			26.2
Other comprehensive income	292.7			290.2			623.8			618.1
Comprehensive income	695.7			690.1			1,218.1			1,216.8
Comprehensive income attributable to noncontrolling interest	12.1			12.1			16.3			16.3
Comprehensive income attributable to Principal Financial Group, Inc.	$	683.6		$	678.0		$	1,201.8		$	1,200.5

Principal Financial Group, Inc.

Consolidated Statements of Comprehensive Income

	For the three months ended						For the three months ended						For the three months ended						For the three months ended
	March 31, 2012						June 30, 2012						September 30, 2012						December 31, 2012
	As originally						As originally						As originally						As originally
	reported			As adjusted			reported			As adjusted			reported			As adjusted			reported			As adjusted
	(in millions)
Net income	$	218.9		$	221.3		$	184.1		$	178.6		$	191.3		$	198.8		$	230.4		$	226.7
Other comprehensive income (loss) net:
Net unrealized gains (losses) on available-for-sale securities	161.3			161.3			100.7			100.7			296.0			296.0			(0.4		)	(0.4		)
Noncredit component of impairment losses on fixed maturities, available-for-sale	(0.9		)	(0.9		)	(9.9		)	(9.9		)	(4.0		)	(4.0		)	8.1			8.1
Net unrealized gains (losses) on derivative instruments	(3.5		)	(3.5		)	48.9			48.9			(18.2		)	(18.2		)	(70.8		)	(70.8		)
Foreign currency translation adjustment	65.3			59.6			(86.7		)	(83.5		)	48.6			45.4			(32.0		)	(31.3		)
Net unrecognized postretirement benefit obligation	8.7			8.7			8.8			8.8			8.7			8.7			(153.6		)	(153.6		)
Other comprehensive income (loss)	230.9			225.2			61.8			65.0			331.1			327.9			(248.7		)	(248.0		)
Comprehensive income (loss)	449.8			446.5			245.9			243.6			522.4			526.7			(18.3		)	(21.3		)
Comprehensive income attributable to noncontrolling interest	10.0			10.0			2.1			2.1			4.2			4.2			3.7			3.7
Comprehensive income (loss) attributable to Principal Financial Group, Inc.	$	439.8		$	436.5		$	243.8		$	241.5		$	518.2		$	522.5		$	(22.0	)	$	(25.0	)

Certain of the prior period line items in the consolidated statements of cash flows and stockholders’ equity were immaterially affected by the revisions of previously issued financial statements. All of the line item changes in the consolidated statements of cash flows were included in the operating activities section and the changes in the consolidated statements of stockholders’ equity have largely been addressed through the preceding disclosures.

Recent Accounting Pronouncements

In March 2013, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance that clarifies how the cumulative translation adjustment (“CTA”) related to a parent’s investment in a foreign entity should be released when certain transactions related to the foreign entity occur. This guidance will be effective prospectively for us beginning on January 1, 2014, and is not expected to have a material impact on our consolidated financial statements.

In February 2013, the FASB issued authoritative guidance that requires entities to disclose additional information about items reclassified out of accumulated other comprehensive income (“AOCI”). Entities are required to disclose information regarding changes in AOCI balances by component and significant items reclassified out of AOCI by component either on the face of the income statement or as a separate footnote to the financial statements. This guidance was effective for us beginning January 1, 2013, and did not have a material impact on our consolidated financial statements. This guidance did not impact the requirements for reporting of comprehensive income under FASB guidance issued in June 2011, which changed the presentation of comprehensive income in the financial statements. The guidance eliminated the presentation options contained in previous guidance and instead required entities to report components of comprehensive income in either a continuous statement of comprehensive income or two separate but consecutive statements that show the components of net income and other comprehensive income (“OCI”), including adjustments for items that are reclassified from OCI to net income. The guidance did not change the items that must be reported in OCI or when an item of OCI must be reclassified to net income. This guidance was effective for us on January 1, 2012, and did not have a material impact on our consolidated financial statements. See Note 9, Stockholders’ Equity, for further details.

In January 2013 and December 2011, the FASB issued authoritative guidance related to balance sheet offsetting. The 2011 guidance requires disclosures about assets and liabilities that are offset or have the potential to be offset. These disclosures are intended to address differences in the asset and liability offsetting requirements under U.S. GAAP and International Financial Reporting Standards. The 2013 guidance clarified that the disclosure requirements would apply to derivative instruments, including bifurcated embedded derivatives, repurchase and reverse repurchase agreements and securities borrowing and securities lending arrangements that are either offset on the balance sheet or subject to an enforceable master netting arrangement or similar agreement. Both pieces of guidance were effective for us beginning January 1, 2013, with retrospective application required and did not have a material impact on our consolidated financial statements. See Note 4, Investments, for further details.

In July 2012, the FASB issued authoritative guidance that amends how indefinite-lived intangible assets are tested for impairment. The amendments provide an option to perform a qualitative assessment to determine whether it is necessary to perform the annual fair value calculation impairment test. This new guidance is effective for our 2013 indefinite-lived intangible asset impairment testing and is not expected to have a material impact on our consolidated financial statements.

In December 2011, the FASB issued authoritative guidance that requires a reporting entity to follow the real estate sales guidance when the reporting entity ceases to have a controlling financial interest in a subsidiary that is in-substance real estate as a result of a default on the subsidiary’s nonrecourse debt. This guidance was effective for us on January 1, 2013, and did not have a material impact on our consolidated financial statements.

In September 2011, the FASB issued authoritative guidance that amends how goodwill is tested for impairment. The amendments provide an option to perform a qualitative assessment to determine whether it is necessary to perform the annual two-step quantitative goodwill impairment test. This guidance was effective for our 2012 goodwill impairment test and did not have a material impact on our consolidated financial statements.

In May 2011, the FASB issued authoritative guidance that clarifies and changes fair value measurement and disclosure requirements. This guidance expands existing disclosure requirements for fair value measurements and makes other amendments but does not require additional fair value measurements. This guidance was effective for us on January 1, 2012, and did not have a material impact on our consolidated financial statements. See Note 10, Fair Value Measurements, for further details.

In April 2011, the FASB issued authoritative guidance that modifies the criteria for determining when repurchase agreements would be accounted for as secured borrowings as opposed to sales. The guidance was effective for us on January 1, 2012, for new transfers and modifications to existing transactions and did not have a material impact on our consolidated financial statements.

Separate Accounts

The separate accounts are legally segregated and are not subject to the claims that arise out of any of our other business. The client, rather than us, directs the investments and bears the investment risk of these funds. The separate account assets represent the fair value of funds that are separately administered by us for contracts with equity, real estate and fixed income investments and are presented as a summary total within the consolidated statements of financial position. An equivalent amount is reported as separate account liabilities, which represent the obligation to return the monies to the client. We receive fees for mortality, withdrawal and expense risks, as well as administrative, maintenance and investment advisory services that are included in the consolidated statements of operations. Net deposits, net investment income and realized and unrealized capital gains and losses of the separate accounts are not reflected in the consolidated statements of operations. Separate account assets and separate account liabilities include certain non-domestic retirement accumulation products where the segregated funds and associated obligation to the client are consolidated within our financial statements. We have determined that summary totals are the most meaningful presentation for these funds.

At March 31, 2013 and December 31, 2012, the separate account assets include a separate account valued at $171.5 million and $148.3 million, respectively, which primarily includes shares of our stock that were allocated and issued to eligible participants of qualified employee benefit plans administered by us as part of the policy credits issued under our 2001 demutualization. These shares are included in both basic and diluted earnings per share calculations. In the consolidated statements of financial position, the separate account shares are recorded at fair value and are reported as separate account assets with a corresponding separate account liability to eligible participants of the qualified plan. Changes in fair value of the separate account shares are reflected in both the separate account assets and separate account liabilities and do not impact our results of operations.