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Larry Zimpleman

As I reflect on 2012, three words come to mind — execute, execute, execute.

Larry Zimpleman
Chairman, President and Chief Executive Officer

Dear fellow shareholders:

In 2012, we continued to focus on doing what we do best — helping our clients take action to achieve their financial dreams. We exercised discipline. We managed risk. And as a result, we achieved outstanding growth and success.

Understanding our clients. Serving their dreams.

Since 1879, the Principal Financial Group has been investing clients' hard-earned dollars to help them achieve financial success and protection for their loved ones. We have always invested for the long-term — delivering on our promises through the best and worst of times.

2012 was no exception. Our Investment Management Plus strategy, supported by strong execution, continued to build momentum across our businesses and deliver strong financial results.

  • Despite continued macroeconomic pressures, adjusted total company operating earnings grew 7 percent in 2012.
  • Earnings per share rose 12 percent.
  • Net income grew 25 percent.

These results — in yet another year of market uncertainty — underscore the soundness of our strategy, the synergy of our businesses, the strength of our global partnerships and the huge opportunities available in the exploding middle class market.

The most meaningful proof of our performance is in the stories of real people and businesses whose dreams we've helped achieve.

I hear these stories every day. I talk to financial advisors who work hard on their clients' behalf. I read letters from clients who aspired and achieved. I listen to calls from baby boomers preparing to retire.

I understand the relief a business owner feels when her succession plan is in place. And I'm inspired by the millions of families in emerging markets, who finally have the opportunity to dream, to plan and to save.

Our work on behalf of the clients and advisors who rely on us delivers unparalleled long-term value — not only for them, but also for the shareholders who invest in us.

Achieving strong organic growth.

We ended 2012 with record assets under management — exceeding $400 billion and reflecting $30 billion in total net cash flows.

  • Full Service Accumulation had record sales of $11.5 billion in 2012 and record full-year net cash flows of $7 billion.
  • Driven by strong investment performance, Principal Funds rose to 19th in market share for advisor-sold funds and 11th in net cash flows, based on rankings by Strategic Insight.
  • Both Principal Global Investors and Principal International closed the year with record assets under management.
  • U.S. Insurance Solutions delivered sales growth in both Life Insurance and Specialty Benefits.

Contributing to these growth results is our unique and extensive U.S. distribution network — including proprietary agents, independent financial advisors and consultants, banks, and local market wholesaler and service teams.

We also work with some of the leading wealth management firms, such as Edward Jones, UBS and Merrill Lynch. They choose The Principal because we're a single source for a broad array of proven retirement, investment and insurance solutions. We share their commitment to make a difference in customers' lives. And we're focused on helping them achieve success.

In emerging international markets, we have enviable, long-term relationships with several of the world's largest and most respected financial entities. In China, we partner with China Construction Bank, the second-largest commercial bank in the world. In Brazil, our partnership with Banco do Brasil, the largest bank in Latin America, extends until 2033. In key markets in Southeast Asia, we partner with CIMB Group, one of that region's leading universal banking groups. And in India, we have a partnership with Punjab National Bank, the largest national bank in India. By building strong local relationships, these partnerships — and others — enable us to speak the language, share the dreams and serve the unique needs of each market and culture.

Expanding our global footprint.

Just two years ago, the world's population passed 7 billion. Since 2010, The Principal has completed six strategic transactions that give us strong competitive positions in markets that comprise half that global population. What's even more compelling is that, every minute, record numbers of people are entering the middle class in these emerging markets.

We continued to expand our global footprint in 2012. Two significant Latin America acquisitions solidified our position as a retirement leader in this region's fast-growing emerging markets.

  • In April, we acquired Claritas, a Brazilian retail mutual fund and asset management company. Claritas complements our existing pension leadership position in Brazil, where BrasilPrev, our joint venture with Banco do Brasil, is the fastest-growing pension company.
  • In October, we announced our intent to acquire Cuprum, a premier mandatory and voluntary pension provider in Chile. The transaction closed in February 2013, further positioning The Principal as a retirement leader in that market.

Staying the course. Rewarding investors.

Our Investment Management Plus strategy has been in place for more than a decade. This strategy not only remains unchanged, it has proven itself to be more relevant and appropriate than ever. As a result of that strategy, we have achieved our goal of becoming a global investment management leader. And we are positioned for greater growth and success in the years ahead.

None of these accomplishments would be possible without the skills, experience and dedication of our employees around the world. And we are committed to providing a working environment that supports their growth and success.

  • We are No. 1 in the largest employer category of Pension & Investments Best Places to Work in Money Management.
  • For the 11th consecutive year, IDG's Computerworld named us to its List of 100 Best Places to Work in Information Technology.
  • For the 10th straight year, we were named a Top 50 Company by the National Association of Female Executives.

On behalf of the board of directors, I'd like to thank our shareholders for your continued support and confidence going forward. As our business model continues to generate more fee-based operating earnings, we are able to extend a greater share of these earnings back to shareholders, leading to increased long-term value for them.

To that end, The Principal moved to a quarterly dividend in 2012. Additionally, the total dividend in 2012 was up 11 percent over the previous year. Over time, we hope to increase our common stock dividend payout ratio, which was about 30 percent at the close of 2012.

Finally, please be sure to cast your vote in time for the Annual Meeting of Shareholders on May 21, 2013.

Larry Zimpleman
Chairman, President and
Chief Executive Officer

WE'LL GIVE YOU AN EDGE®

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