For all our progress and success, there’s still more to do.

From the chairman, president and chief executive officer

To our shareholders

In so many ways, 2016 was an exceptional year for Principal.

Our diversified, integrated businesses delivered a record $1.3 billion in net income available to common stockholders and operating earnings.

We continued to attract and retain customers, delivering more than $19 billion in positive net cash flows, as many of our industry peers experienced net redemptions. Strong flows helped us increase assets under management (AUM) $64 billion or 12 percent in 2016, to $592 billion at year-end.

As an asset manager focused on long-term investment strategies, we remain pleased with our performance, with more than 75 percent of our investment options1 in the top two Morningstar quartiles for the three- and five-year periods as of year-end.

Reflecting strong ongoing capital generation and balanced deployment, we returned more than $720 million to shareholders through common stock dividends and share buybacks; and we made meaningful investments across our businesses to expand and enhance our customer solution set and distribution reach.

Reality check

For all our progress and success, there’s still more to do. More because customer preferences shift, competition increases and the regulatory environment evolves. More because the world is in a state of accelerating change.

In the face of so much disruption, there’s no time like the present for a reality check. To acknowledge that yesterday’s formula for success could become obsolete. To recognize that for all our strengths, we have challenges. To rethink and refine our strategic focus.

There’s no time like the present to assess the balance: between strategy and execution; between expense discipline and investment; between a proud past and a future that requires constant innovation.

And there’s no time like the present to ask ourselves some foundational questions:

Question #1: Are we putting the customer first?

Absolutely. We remain focused on meeting customer needs and solving their problems by delivering new investment options and digital solutions.

We launched a dozen new funds for retirement, retail and institutional investors. Our global product strategy remains purposeful and driven by customer demand. It contemplates:

• Growth in emerging market middle class populations, which drives demand for retirement and other long-term savings strategies.
• Global aging and longer life expectancies, which drives demand for income solutions, including guaranteed income offerings.
• The need for portfolio diversification, regardless of generation or geography.

Our strategy also contemplates increasing investor demand for downside risk protection and lower cost investment options. Five of our 2016 investment launches were strategic beta offerings designed to enhance returns and minimize risk, relative to a standard market index, in a cost-effective manner.

We made our funds more accessible to investors through placements on third-party platforms, model portfolios and recommended lists. In total, we had nearly 60 placements in 2016, adding more than 30 different funds to 22 different distribution platforms.

We also remain focused on delivering easier, faster, more convenient digital solutions – designed to help more people save and protect their assets, and to address future generations’ purchasing preferences.

Our online life and disability insurance purchasing portal helps potential customers calculate coverage needs, get a price quote and obtain assistance to complete the sales process. Early results are promising. Beyond strong interest in our site and good lead generation, we’re converting more than 25 percent of our leads into sales – including nearly $140 million in life insurance face amount.

Our enhanced Accelerated Underwriting process automatically assesses risk, and eliminates intrusive steps like lab testing and medical exams for some 50 percent of eligible applicants. Ultimately, we can reduce the time it takes to issue a policy by nearly two-thirds, a benefit to customers and advisors alike.

We also continued to enhance Principal PlanWorks, our comprehensive approach to workplace retirement readiness that combines best-in-class plan design and participant experience to help people better prepare for retirement. Using our interactive education and enrollment resource, My Virtual Coach, enrollees saved, on average, at a rate more than four percentage points higher than those using traditional enrollment, and were five times as likely to elect automatic annual savings rate increases.

Importantly, we also rolled out our refreshed global brand in 2016 to better represent how we help people in all stages of life achieve financial success. The brand underscores our commitment to meeting the needs of underserved markets, including small- and medium-size businesses in the U.S. and emerging markets in Latin America and Asia. And it reflects our intensified focus on making it easier for everyone – individuals, business owners, institutional clients and advisors – to do business with us.

Question #2: Are we attracting, retaining and developing talent?

At 92 percent, our employee retention in 2016 was top quartile among financial services companies. Much of our success reflects the work we do, every day, to build on a strong culture.

Our core value of integrity continues to define who we are and how we do business. A strong belief system guides us to do the right things, and to value honesty, transparency, fairness, responsibility and respect. In 2016, we were again recognized by Ethisphere Institute as one of the World’s Most Ethical Companies, based on criteria including ethics, compliance, corporate citizenship and governance.

Reflecting our commitment to learning and development, diversity and inclusion, employee recognition and open communications, we also received multiple “best places to work” awards, including: Pensions & Investments Best Places to Work in Money Management; Computerworld’s Best Places to Work in IT and National Association of Female Executives Top Companies for Executive Women.

With a strong foundation in place, we continued to make progress:

• With cultural imperatives designed to encourage entrepreneurialism and innovation; empower employees to make decisions and take action; drive greater collaboration across our businesses; and intensify our focus overall on helping customers achieve their financial goals.
• Transforming our workspace to create a more collaborative, technology-enabled and environmentally-friendly workplace, and an environment designed to help our people be more productive.
• Advancing our strategic objective of having the right talent in the right place at the right time. Data analytics is helping us better understand success criteria, assess talent and leadership effectiveness, and create development opportunities to prepare our people for future roles.

Question #3: Are we effectively managing enterprise risks?

Yes. In some cases, risk management is about risk avoidance. Protecting customer assets, data and privacy is and will always be priority one for Principal.

In other cases, we mitigate risk through diversification – by product offering, by geography and by asset class. An important development in this area occurred when we signed a Memorandum of Understanding with China Construction Bank (CCB), the second largest bank in the world, to develop a new asset management and pension partnership.

Principal and China Construction Bank jointly created CCB Principal Asset Management Company in 2005, and it is now the sixth largest fund management company in China. The new agreement enhances our existing long-term relationship, and creates significant opportunities for future growth and to further diversify our sources of revenue and earnings.

Another key to effective risk management is evolving risk practices as regulations, markets, products, competition and the overall business environment changes. As examples:

• Our new enterprise-wide risk and control self-assessment tools position our businesses to deepen their risk assessments and enhance risk reporting.
• We continued to review and plan for “low for long,” negative and rising interest rate scenarios, and continued to evolve our foreign currency risk management program.
• New resources allow us to better address a wider array of operational risks such as vendor management, and human resource and IT risk management.

Question #4: Are we being good stewards of shareholder capital?

To me, being a good steward of capital means creating long-term value for shareholders. Over the past five years, we’ve more than doubled our market capitalization, and returned more than $1.8 billion to shareholders through our common stock dividend.

In 2016, we used capital to restructure our debt – improving our interest coverage and reducing our leverage ratios, and better positioning us to capitalize on future opportunities. We used share repurchase for anti-dilutive purposes, as well as to opportunistically reduce share count. And we increased our quarterly common stock dividend three times, as we continue to progress toward a 40 percent payout ratio.

Most importantly, we continued to deploy capital to generate organic growth. Our investments remained focused on adding new product and service solutions and improving the customer experience. Ultimately, organic growth is the key to increasing our deployable free cash flow. In turn, we increase our capacity to re-invest in existing businesses, to expand our capabilities and increase scale through M&A, and to return capital to shareholders.

Creating shareholder value is a balancing act that requires discipline and flexibility. Over the long-term, we'll continue to focus our capital deployment on three things – above market growth in earnings per share, solid expansion of our return on equity, and an above market yield from our common stock dividend.

Reality check: there's always more to do

Technology continues to change not only how people buy and pay, but how they save and invest. We’re using data to not only better understand our customers, but also where demand is headed.

As we study companies that are using technology to create best-in-class customer experiences, we see some common threads. These companies make their customers feel valued. They deliver something different, something better; something that meets a need or solves a problem.

I believe the biggest unsolved problem in financial services is that too many people, around the world, are under-saved, under-insured and unadvised. We’ll continue to do more to be part of the solution, to help more people live their best lives today and tomorrow. We’ll continue to advocate for retirement systems that are structured and financed in ways that help more people maintain their lifestyle in retirement. We’ll continue to promote investment diversification and the importance of savings discipline. We’ll continue to stress the value of insurance in achieving more holistic financial security.

My sincere thanks

As one final reality check, we recognize there are a lot of other companies in which you could invest. On behalf of Principal, my sincere thanks for your continued support. The future presents both challenges and opportunities for us, which we take on from a position of strength. We’ll continue to strive to become an even stronger organization, and to create long-term value for you and each of our stakeholders.

Dan Houston

Chairman, president and chief executive officer

¹Principal mutual funds, separate accounts and collective investment trusts.

²Compounded annual growth rate; 12/31/2012 – 12/31/2016.