Tom Graf – Senior Vice President, Investor Relations Larry Zimpleman – President and Chief Executive Officer Terry Lillis – Senior Vice President and Chief Financial Officer Julia Lawler – Senior Vice President and Chief Investment Officer Dan Houston – President, Retirement and Investor Services Jim McCaughan – President, Global Asset Management

Suneet Kamath – Sanford Bernstein Randy Binner – FBR Capital Markets Colin Devine – Citigroup Andrew Kligerman – UBS Edward Spehar – Merrill Lynch John Nadel – Sterne, Agee & Leach Christopher Nezypor – Goldman Sachs John Hall – Wachovia Capital Markets Welcome to the Principal Financial Group Fourth Quarter 2008 Financial Results Conference Call. There will be a question and answer period after the speakers have completed their remarks. (Operator Instructions) I would now like to turn the call over to Tom Graf, Senior Vice President of Investor Relations.

Thank you. Good morning and welcome to the Principal Financial Group's quarterly conference call. If you don't already have a copy, our earnings release, financial supplement and additional investment portfolio detail can be found on our website at www.principal.com/investor. Following a reading of the Safe Harbor provision, Chief Executive Officer Larry Zimpleman and Chief Financial Officer Terry Lillis will deliver some prepared remarks. Larry will cover performance highlights for the quarter and the year, and provide an update on our capital position. Terry will provide a detailed overview of financials and our investment portfolio. Then we'll open up for questions. Others available for the Q&A are our four segment heads, John Aschenbrenner, responsible for Life and Health Insurance; Dan Houston, responsible for U.S. Asset Accumulation; Jim McCaughan, responsible for Global Asset Management; and Norman Sorenson, responsible for International Asset Management and Accumulation. Also available is Julia Lawler, our Chief Investment Officer. Some of the comments made during this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. The company does not revise or update them to reflect new information, subsequent events or changes in strategy. Risks and uncertainties that could cause actual results to differ materially from those expressed or implied are discussed in the company's most recent annual report on Form 10-K and quarterly report on Form 10-Q filed by the company with the Securities and Exchange Commission. Larry?

Thanks Tom, and welcome to everyone on the call. Fourth quarter and 2008 were clearly challenging. Given this environment, I thought I would begin my remarks by providing investors some longer term perspective on our three growth engines. At the time of our IPO in 2001, we had a great 401(k) business focused on advisors and the small and medium sized market. Over the next seven years, we expanded our sales, service and consulting into an unparallel network of local resources and we created distribution alliances with a dozen firms, providing access to nearly 50,000 advisors. Then we added an integrated capabilities like non-qualified and employee stock ownership plans to create Total Retirement Suite, transforming us from the SMB 401k leader to a market leader across the range of plan types and sizes. The result, a seven year compounded annual growth rate of 15% for full service accumulation sales. In 2001, we had great aspirations for Principal Global Investors and Principal International, but earnings for these businesses were just $43 million on a combined basis. Seven years later, PGI is not only managing assets for 12 of the top 25 U.S. pension funds, but now has clients in 55 countries, with more than 40% of its institutional sales in 2008 coming from outside the U.S. Principal International has built top five positions in many of its markets, increasing its assets under management five fold, and combined their earnings are up more than 400% at $220 million in 2008. We've increased total company assets under management by more than 150%, despite essentially flat markets over that time and we've improved return on equity by 520 basis points. We believe it's critical to remind investors of our track record of strong execution because execution is what will carry us through these difficult…

Thanks Larry. As indicated this morning, I’ll spend a few minutes providing financial detail for the company on each of our operating segments. I’ll also cover our investment portfolio. Let me start with total company results. At $0.69 in fourth quarter 2008, operating earnings per share was down $0.18 from a year ago. As always, there are a number of items impacting comparability between periods. But the variance primarily reflects the impact of equity markets on assets under management, and in term B revenues and earnings. Between the full service accumulation and mutual funds businesses alone the decline in equity markets reduced earnings per share by $0.16. Earnings were also dampened by several items, including the impact on net investment income of holding more liquid investments, severance cost due to our expense initiatives, weakening of Latin American currencies against the U.S. dollar, lower prepayment fee income, and higher amortization of deferred acquisition costs, which I’ll discuss in m ore detail shortly. These items range from about $0.02 to $0.04 each, reducing fourth quarter 2008 earnings by $0.12 per share in total; because of our strong liquidity and asset liability management, we were positioned to opportunistically buy back certain medium-term notes early and at a significant discount. This benefited investment only earnings by about $0.07 per share in the fourth quarter, offsetting a portion of the negative impacts. We'll continue to look for these opportunities in the future as we scale back this business. Adjusting for all of these items with no market growth, our earnings per share would be up about 3%. Moving to the segments, I'll start with U.S. asset accumulation where account values were down $35 billion or 19% from a year ago to $146 billion at year end. Negative investment performance due to equity market performance declines…

Before we open for questions, I’d like to turn the call over to Mr. Larry Zimpleman.

Thank you. As you know, the rating agencies have the North American insurance industry on a negative outlook. This morning, we received word that Moody’s has affirmed the financial strength rating of Principal Life Insurance Company at AA 2 with a negative outlook. We are pleased with Moody’s affirmation of our ratings. Since we are in a stronger capital and liquidity position today than we they affirmed our rating in November, it’s our view the changing outlook primarily reflects market conditions as our fundamentals remain strong. Despite the negative outlook, our relative ratings remain strong and they provide our customers with comfort in our ability to meet our obligations. At this time, we’ve also not heard from any other rating agency regarding ratings changes. With that I would ask the operator to open the call for questions.

(Operator instructions) We’ll pause for just a moment for the Q&A roster.

Our first question comes from the line of Andrew Kligerman – UBS. Andrew Kligerman – UBS: Yes real quickly, good morning. The interest rate swaps, $200 million statutory derivative gain there, one of your competitors had a similar gain this morning and they’ve kind of locked in the gain, could you review whether you locked in that gain and then how that program is going to work going forward? And then I believe I can ask a follow up question.

Okay Andrew, good morning. I had a little trouble hearing you; you were cutting out a little bit. I believe you were asking about the $200 million statutory gain and I think your words were to the extent to which that’s locked in? Andrew Kligerman – UBS: Yes, and going forward, how that might play out as you work with that derivative program, how that would play out?

Just a quick comment and maybe Terry will want to add something on it. I think as he said in his comments, it is a net position on statutory books and, thus, it is subject to some fluctuation up and down as markets would fluctuate, but it’s certainly been in all of our capital calculations in the past, so you can see it hasn’t provided significant fluctuation. Each time, of course, over time as the book of derivatives grows, the fluctuations can become slightly greater, but I wouldn’t expect to see anything too dramatic going forward. That number will bounce around, it wouldn’t be too dramatic, and let me see if Terry’s got something he wants to add.

You are absolutely correct, Larry. The derivatives, the gainer or loss – the net position of gains or losses are always in our statutory calculations. The reason that we're pointing it out this time is because of the significant drop in the interest rate this quarter had a little bit more meaningful impact and that is why we are sharing it at this time. Andrew Kligerman – UBS: Okay and then just one quick follow up, with regard to the deferred tax asset, you’re asking the Iowa insurance division to allow $120 million, I guess, how – you just mentioned Moody’s and they reaffirmed your rating with a negative outlook, how are the rating agencies looking at given that maybe the other insures in the other states won’t be able to garner that benefit. Do they look through it or do they agree that that’s $120 million of additional capital?

Okay, I’ll try to again to kind of provide a little bit of color on that, Andrew, and then Terry might want to add some more. I mean I think that, again clearly it is based on permitted practice, which the Iowa department has indicated for this year, and I think, as it relates to stat accounting, the thing I would remind everybody is that stat accounting has been and continues to be a very conservative method of accounting relative to GAAP. So the $120 million, again, is actually a reasonably small piece of a total deferred tax asset and so it would be inappropriate to conclude that change in permitted practice is somehow a real weakening of what we know to be conservative statutory accounting. So I guess I just wanted to provide that reminder, and then I’ll have Terry comment in more detail.

You’re right, Larry. The statutory accounting is very conservative in this particular aspect of the deferred tax asset. We went to the Iowa insurance department and asked for this permitted practice because of the nature of the deferred tax asset at this point in time. The admissibility of it is as Larry mentioned, is a relatively small portion of it, about [9%] of the gross deferred tax asset, and we think this is in line with the conservative nature of the assets.

And as it relates to the rating agencies, Andrew, I think again they have a real understanding of this and they are certainly taking into account appropriately, recognizing that it’s a permitted practice at this time.

Our next question comes from the line John Nadel – Sterne, Agee & Leach John Nadel – Sterne, Agee & Leach: Just a quick one on the risk-based capital, I know it’s still a moving target, but within that range, can you just give us a ball park estimate on the numerator and denominator that goes with that?

John, to be honest with you, I don’t have that much detail. Again, we think that, as we estimated, it’s going to be in the range of 420 to 440%, but let me ask Terry if he’s got more of the numerator and the denominator.

Yes, our estimate on the total adjusted capital numbers are $5.1 billion at this time. Although, as Larry said, it is a moving target. John Nadel – Sterne, Agee & Leach: Yes, understood. That’s perfect. Thank you and then the only other question I have for you is, thinking about the 401(k) business and going back to your investor day, and your outlook for net flows and sort of the organic growth of this business, I wondered if there is any reason to revisit that outlook in light of what feels like anyway, a month or two later, as maybe more dramatic economic pressures in general. And then also we continue to watch, almost day-by-day, as more and more companies, at least in the United States, continue to eliminate their company matches. So I was wondering if you could sort of comment on what, if any, affect that might have relative to your expectations when you outline them at Investor Day?

Okay. It’s a great question, John. I’ll certainly have Dan give you a little bit of color in all those areas of participation, deferral and so forth. I would just note that if any of you had a chance to see the Journal this morning, there was a nice article about small firms adding 401(k)s, which I think plays to our strengths. But I’ll have Dan provide you a little more color here.

Yes John, relative to what we updated there on, I believe it was December the 10th, we still feel very good about Q1. There was a modest uptick in pipeline in Q4. It’s trailed off a little bit from there, but again we feel like we’re having a good shot at a lot of good opportunities and you’ll note in the press release, we announced a very large institutional win in the not-for-profit area, particularly a hospital. So again that’s still a very thriving market for us. As it relates to the elimination or in some cases, suspension of the match, again a lot of our business is small to medium or smaller institutional, so we’ve not seen a lot of decreases in match announcements to our customer base. Two things that have impacted us, on the very smaller plans we’ve seen some businesses go out of business, some foreclosures, some discontinued businesses, and our mid-size market we’ve seen the shut down of some plants and some locations being reduced. But all-in-all, if we look at hardship withdrawals, loans, those are still on track with what I had said back in December, which is a modest uptick in withdrawals, relative to hardships, and actually a decrease in loans both measured in dollars and measured in participants making requests for loans. John Nadel – Sterne, Agee & Leach: Interesting. Okay thanks for the update. I appreciate it.

Our next question comes from the line of Colin Devine with Citigroup. Colin Devine – Citigroup: I have a couple of questions. First, could you just clarify [you mentioned] the improvement in the RBC and reflected some relief on the margins experience adjustment factor. And then two follow-ups, on the job and book value which of course is impacting the stock today, why do you think the 72% drop you had is more than double the peer group average? What is it about Principal that is causing it to be so volatile? And then finally, Larry, you mentioned the article in the Journal today. You laid out all the distribution you’ve added since the IPO, total retirement services, and yet the number of plans that you have has not moved, in fact it’s slightly declined since the IPO. How do we conclude this is a thriving business?

Okay let me talk just a little bit about the second one, Colin, around book value, and then maybe Terry can comment on the [ME] factor, then Dan can do the plan count and I think he’ll also get into participant flows and so forth as well. What I would say, Colin, on the book value, and I’m going to try to be relatively brief because I know we have other people who also want to answer questions, but fourth quarter was a particularly unusual quarter in a lot of circumstances. And in terms of the GAAP items and the changes that you see there in book value, one of the real elements there that I think you need to take into account is exactly how derivative movements impacted GAAP book value for those writers who had large, variable annuity exposure. As you know, we have deliberately kept a very minimal exposure to variable annuity with guaranteed minimum benefits, and as a result of that, while we do have a hedging program, it’s small relative to what other peer companies would be, and you’ve noticed as you’ve looked at those peer companies that they’ve all had very, very large increases in their derivative income, in their net income figures all associated with that guaranteed minimum withdrawal benefit. So, on the GAAP side just because a particular movement in derivative marks this quarter, it’s actually come through as a net income gain. Now on the statutory side, of course, it has the opposite effect, which is why you see our RBC ratio increase and you’ve seen our excess capital position increase. So I would just caution everybody to sort of take into account as they’re interpreting our results relative to peers, that again we remain comfortable that our decisions to minimize that variable annuity exposure, while it may have had what looks to be some negative impacts in GAAP in Q4, it’s still the right decision over the long term. And let me have Terry briefly comment on [ME] and then Dan on plan count.

Yes Colin, as you’re aware, last year we had some very minimal experience in terms of losses in our commercial mortgage portfolio and because of that, our [ME] factor was extraordinarily high. Moody's adjusted the 375% RBC – 376% RBC ratio to 406%. We are seeing our experiences more in line with the rest of the industry at this time and so our [ME] factor is one in line with everyone else. That’s why we’re seeing that increase from to 420% to 445% this year, and Dan on plans.

Yes sure, very quickly Colin, we are seeing increases in that mid-size plan, roughly a 3% increase on those plans from 500 to 1000, we saw an 8% increase on those over 1,000. I would say that our alliance partners typically focus on an average case that’s larger than our historical small to medium size independent career agents and brokers. I’d also comment that TRS by its definition, lent itself to a larger size plan because of the multiple coverages being provided, and the last comment I’d make is this was a big year for us in the not-for-profit area, many of those plans becoming ERISA compliant. Again hospital market and not-for-profits tend to be a little bit larger plan. To the very specific question in the small case market, we did double our results in the TPA area, with a number that exceeded $800 million and that continues to be one of our growth areas for the small case plan market, going head-to-head with some major competitors, as you know, leveraging the use of local TPAs, as opposed to providing that service ourselves.

Our next question comes from line of Suneet Kamath – Sanford Bernstein. Suneet Kamath – Sanford Bernstein: Great thank you. Just two questions, I guess, just a follow-up on Colin’s question on the book value. I hear what you’re saying about the unrealized losses and the peer group comparisons and I think Moody's comment that in its press release also about their view that you probably wouldn’t have to realize these unrealized losses, but to Colin’s point, the market seems to care about it. And I guess for Larry, you talked about dynamic management at the Investor Day in December. What is the plan with respect to this number? Are we just going to ride this out and wait for credit spreads to come back and perhaps for bonds to mature? Or is there anything that you can do more actively to manage this number slightly higher? And then I’ll have a second question.

Suneet, I think I’ll just make a comment or two on it, and again I think we understand the point around it, which is again why we’ve tried to emphasize; we’ve built our liquidity position by 94%. We’ve always had a very disciplined asset liability management approach. We only have 1.2% of our liabilities that can be prepaid prior to maturity. So I think we’ve got a lot of elements that sometimes sort of maybe aren’t taken fully into account as people are looking at that. Now again, the other thing we’ve done on the asset side Suneet, is we’ve tried really hard to provide very specific measures, and I'll maybe have Jim McCaughan comment generally, but very specific measures of what we think the illiquidity premium is, because of the nature of our assets and wanting to be call protected, we’re a little bit more in private market assets, which today do have that illiquidity premium. And if you just sort of run the quick calculation based on what Terry said earlier, with the $4.2 billion lower realized losses using synthetics, and you run that through book value Suneet, what you get is you get that to be about somewhere between $8.5 and $9 for book value. So what you see there is sort of $7.45 in our view is actually at a minimum would be more like $16 or $17 just based on the ill liquidity premium, and maybe I can just have Jim comment real quickly on sort of his thoughts around the market and the illiquidity premium and how long that might persist.

The fixed income market, and particularly over the last three or four months, has been disrupted. The overworked word is unprecedented, but it really is unprecedented to the extent to which the disruption has happened, and the very low liquidity. To give you some examples, in an area such as [CMBX], the only sellers, or the only trades there are in the market over the last few months have been deleveraging hedge funds and double structured products. And of course, when there’s a one-way trade like that with very motivated sellers; that tends both to force prices down and to mean very, very low volume. In fact in some of these markets, the volumes have been 1 or 2% of what they were two years ago. The derivative market that Terry described, particularly taking the [CMBX] and the case of the [CMBX] market is somewhat more liquid. It’s not perfect, but that’s really the origin of the numbers that Larry gave of at least part of the liquidity premium being clearly accounted for, by that number of $4.2 billion that Terry described. To give you some kind of indication of the environment here, for some of these bonds, and I'm not just talking about [CMBX] area here, I'm also talking about some of the corporate bonds. You're down from maybe 10 or 12 dealers to two or three dealers. Some of the dealers have gone out of business, others have withdrawn capital from the market, and those two dealers that are left, are themselves highly conflicted because of the proprietary trading they have. So, I think if you add all this up large parts of the bond market could be described as technically inactive, and that's why although we've used them for GAAP purposes and getting to that 745 book value, it is very important both to test the market values to see what really is the fair value, as opposed to just a mark in a very restricted market, and also to look at the stress testing that we've described in the past at Investor Day and which we've really been trying to encourage investors to see the real situation of the upper portfolio. I hope that helps. Suneet Kamath – Sanford Bernstein: No, it does. Hopefully the accountants start to realize that too. My second question is on the excess capital and it'll just be brief. In the past, and I think it was when you provided guidance, you talked about – well there's a statement that says you have something to the effect no plans to raise common equity for non-strategic reasons. I don't know, I didn't see that in your current press release. I apologize if it was there. I don't think you made that statement on this call. I was wondering if you could, you know, reaffirm that statement if that is in fact the case.

Yes, I mean again just to comment briefly on that. I mean I'd say with $800 million of current excess capital, we do believe that we remain in a strong capital position, but we're going to continue to evaluate that position, given the uncertainty and the length and the depth of the recession. So, I think we, like all of our peer companies, we are going to continue to monitor and evaluate all forms of capital, and we'll make decisions on what we want to do or what we want to use if anything and under what terms. Is this going to remain a very dynamic environment? We feel good that we've made progress from September 30th to today, and again we'll just monitor as this recession continues to grind forward.

Our next question comes from the line of Randy Binner – FBR Capital Markets. Randy Binner – FBR Capital Markets: I think this question's for Julia and I apologize as it's been covered somewhat, but just to understand procedurally the cash versus the synthetic approach. Have you always, over the last three, four quarters used more of a cash approach than a synthetic approach? So, has there been any change in that methodology? And should we read that the lower cash marks are potentially a sign of a slow return of the bond market? And that we'd be stuck with lower cash marks versus synthetic for the next few quarters.

Yes I'll just have Julia quickly comment. Go ahead.

We have always used cash marks or an IDC type pricing in doing our financial statements. We added this quarter a spreadsheet indicating the differences between CBS and [CMBX] because of the dramatic move in cash prices versus synthetic prices. So, it was more for to remind people that fair value really isn't represented in the cash market. We did indicate that cash spreads have improved a bit in first quarter, but I think there is an indication that's going to be a slow return. Randy Binner – FBR Capital Markets: Yes, no it's great, thanks. But just to clarify, I mean was there ever a point in the third or the fourth quarter where you had to rely more on synthetics? Or have you always been cash?

We've always put our financial statement and analysis around cash marks.

Our next question comes from the line of John Hall – Wachovia Capital Markets. John Hall – Wachovia Capital Markets: I just wanted to quickly understand, you had sited at a $5.1 billion number. I wanted to know what that number was. Was that statutory book value at year end?

I'll have Terry comment on that.

That's the total adjusted capital on the statutory books; it's made up of three parts, the statutory equity, the MSBR plus half the dividend liability. John Hall – Wachovia Capital Markets: Okay, so in a sense that represents kind of the liquidation value?

That's basically the statutory accounting treatment of it. It wouldn't necessarily be the liquidation value of the organization. John Hall – Wachovia Capital Markets: But I guess in theory so it seems that – the way that I understood statutory accounting, in a broad sense that number would represent something along the lines of a liquidation value, whereas the GAAP book value historically isn't thought of as a going concern value. If you've got these two numbers upside down, I was just wondering if you could help me reconcile in my mind how that can exist for a long period of time.

John, I don't know that we have that detail here and we can certainly dig into that later. Again what I would say, again I think the key principle here is that stat accounting has been and remains a very conservative method of accounting relative to GAAP. So, I think that's really the kind of key variable. That's always been the case. I think that's appropriate. Again stat is looking more at the solvency basis. So, the details around that in those numbers we'll have to get back to you on, but clearly stat is a much more conservative method than GAAP. John Hall – Wachovia Capital Markets: And then I guess Julia mentioned that we've seen a little bit of recovery since the beginning of the year, I was wondering if you could just put a little bit of I guess numbers or breadth around that?

I don't know, Julia or Jim maybe, do you have any comments do you want to add on that? Jim follows that carefully as well.

Yes two things I'd say, John. I think firstly, it used to be the case that securities analysts sort of felt that stat as liquidation and GAAP as growing concern, but nowadays when you're using cash mark in GAAP, it actually isn't really a going concern valuation to that extent. It's got elements of the [fire bill], which are pretty inappropriate in an organization that's holding those assets to meet long-term liabilities and with a very clear ability and intent to hold. So, I think your [understanding] between stat and GAAP would have been right a few years ago, but I think the way they've evolved, it's no longer so sound. In terms of what's happened so far this year, there's a lot of analysis to put numbers on it. On the corporate side you would have to say the yields have probably – spreads have come in quite a bit, and so it's probably looking better, but it's hard to quantify. On the [CMBX] side the markets still frozen up. So, I wouldn't hold out a lot of gains there, but we continue to monitor it.

Our next question comes from the line of Edward Spehar – Merrill Lynch. Edward Spehar – Merrill Lynch: Two real quick questions, first in the Moody's release they talk about pre-tax investment losses in excess of $500 million in '09 as a potential factor for a downgrade, and Larry, it sounds – obviously the number was a fair bit higher in '08 and it sounds like you're suggesting that it could be higher in '09. So, I'm wondering if you could maybe talk a little bit about that. And then, Terry, I was wondering could you just give us a sense of preliminary statutory operating earnings for '08? And is there any reason, other than major market change for that to deviate materially in '09?

I'll just try to cover briefly in the interest of time here. In terms of the Moody's release, again I think as Terry said in his note, the actual credit losses during 2008 were about $300 million, and again what we've always tried to distinguish there, and I think is reflected in their rating, is not – I mean there's other noise in there that of course doesn't necessarily reflect credit. So, again that's I think essentially the answer to the first one. And, Terry, do you want to comment on the second one?

Yes the second one is statutory numbers are still being finalized, but at this time our estimate of [key in] from operation is $650 million. Edward Spehar – Merrill Lynch: And is that sort of a normal run rate level? Or it seems like that maybe is a little bit lower than normal.

No, it's about a normal run rate. Edward Spehar – Merrill Lynch: I'm sorry. Could you say that again?

Yes, it's about a normal run rate for us.

We have reached the end of our Q&A. Mr. Zimpleman, your closing comments please.

Okay well thank you. In closing, I do want to thank all of you for joining us, and I again appreciate all of your interest in Principal Financial Group. Certainly, we know there's challenges ahead, but we do believe we face them from a position of strong fundamentals and probably more importantly, a very diversified set of businesses and a continuing focus on risk management So, with that again we appreciate your interest and we look forward to the opportunity to meet with many of you in the near future. Thank you.

Thank you for participating in today's conference call. This call will be available for replay beginning at approximately 1:00 pm Eastern time, until end of the February 17, 2009; 80317341 is the access code for the replay. The number to dial in for the replay is 800-642-1687 or 706-645-9291 for international callers. Thank you and have a good day.