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   finalsecondresponse050809doc.htm -- Converted by SEC Publisher, created by BCL Technologies Inc., for SEC Filing

     May 8, 2009

     By EDGAR and Hand Delivery

     Securities and Exchange Commission

     Division of Corporation Finance

     100 F Street, N.E.

     Washington D.C. 20549

     Attention:
     Mr. Jim B. Rosenberg,

     Senior Assistant Chief Accountant

     Mail Stop 6010

     Re: Principal Financial Group, Inc.

     Form 10-K for the Fiscal Year Ended December 31, 2008

     Filed February 18, 2009

     File No. 001-16725

     Dear Mr. Rosenberg:

     On behalf of Principal Financial Group, Inc., this letter responds to the comments of the

     Division of Corporation Finance of the Securities and Exchange Commission (“the

     Commission”) contained in the letter dated April 3, 2009, concerning the above-referenced

     Annual Report on Form 10-K. In order to facilitate your review of our responses, we have

     repeated your comments in bold in numerical order immediately followed by our response

     in plain text and, where appropriate, our proposed revised disclosure.

     Item 1. Business, page 4

     1.
     You disclose on page 27 that you cede material amounts of insurance to other

     insurance companies through reinsurance. In addition, on page 109 you disclose

     that for the fiscal year ended December 31, 2008, your largest exposure to a

     single party-reinsurer amounted to $18.5 billion or 11% of total net life

     insurance in force. It appears that this relationship and/or agreement are

     material to your business. Please revise to disclose the name of the reinsurer.

     Please revise to provide a description of each of the material terms of your

     reinsurance agreement, including, but not limited to any payment provisions,

     rights obtained, material obligations that must be met to keep the agreement in

     place, term and termination provisions. In addition, please file a copy of the

     agreement as an exhibit. Alternatively, please provide us with a detailed

     analysis which supports your apparent conclusion that you are not substantially

     dependent on this reinsurance agreement pursuant to Item 601(b)(10)(ii)(B) of

     Regulation S-K.

RESPONSE:

After review of your comment and the disclosures made, we recognize that we have not given an investor the proper context around our use of reinsurance to support the conclusion that we are not substantially dependent on
reinsurance. What follows is a supplemental explanation of that conclusion, and our proposed prospective approach to the disclosure.

In the risk factor discussing reinsurance default on page 27, we are primarily referring to our risk management decisions to reinsure a portion of the mortality risk in our individual life insurance business to third party
insurance companies, since our largest reinsurance exposures exist within this business. As noted within the risk factor, our primary risk is that if a reinsurer defaults, we would lose reinsurance recoverables (ceded reserves and reinsurance
receivables) and need to cover the claims directly. We further describe how we manage this risk through carefully selecting and monitoring the financial condition of reinsurers and how we diversify to further reduce this risk. We have established
exposure limits for each third party reinsurer and actively monitor those exposures to ensure they do not exceed the maximums.

In the financial statement footnote on page 109, we disclose our largest exposure to a single third-party reinsurer in our individual life business (“largest reinsurer”) which amounts to $18.5 billion of face amount
of insurance in force, or 11%. In our view, this reinsurance exposure is not material from a total company perspective and our agreements with the largest reinsurer do not represent a “material contract” that cause us to be substantially
dependent on this reinsurer for the following reasons:

a)

We reinsure with over 20 third-party reinsurers as part of our mortality risk management and capital management activities in the individual life business. If the largest reinsurer were to become insolvent, this would not impact
our plans or ability to continue to sell individual life insurance. We would either reinsure the business with another carrier or retain the risk.

b)

The potential financial statement impact related to the largest reinsurer is approximately $18.0 million, which represents reinsurance recoverables at December 31, 2008. If we were unable to collect anything from this carrier,
our assets, earnings and equity would decrease by $18.0 million, which is 0.01% of total assets and 0.7% of equity before the impact of taxes. Consequently, the financial statement impact of the largest reinsurer in the context of the total
enterprise is immaterial.

c)

We have seven separate reinsurance contracts with the largest reinsurer that accumulate to the exposure we disclosed. All contracts are annually renewable and are subject to ongoing review for solvency risk of the reinsurer. The
contracts are not material in the aggregate or individually.

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Accordingly, we do not plan to revise our 10-K disclosure and we do not plan to file copies of the seven reinsurance agreements as exhibits to our periodic reports filed with the Commission. To help the reader of the financial statements better understand the financial statement exposure of this reinsurance agreement, we plan to disclose the amount of U.S. GAAP reserves ceded and reinsurance receivables related to our largest single carrier in our next annual report on Form 10-K in footnote 1 as follows (using 2008 information for illustrative purposes):

     At December 31, 2008, our largest exposures to a single third-party reinsurer in our individual life insurance business was $18.5 billion of life insurance in force, representing 11% of total net individual life insurance in force. The financial statement exposure is limited to the reinsurance recoverable related to this single third party reinsurer which was $18.0 million at December 31, 2008.

In our next filing that contains risk factors, we plan to revise the opening sentence of our risk factor concerning reinsurance default to read as follows – “We cede life and health insurance to other insurance companies through reinsurance.”

     Item 1A. Risk Factors, page 18.

     2.
     You state on page 21 that as of December 31, 2008, your U.S. investment

     operations held $6.6 billion of mortgage-backed securities, or 17% of your total

     fixed maturity securities portfolio. Please revise to include a new risk factor

     which discloses all the material risks related to these securities. In addition,

     please separately disclose in the risk factor the amount of residential mortgage-

     backed securities and commercial mortgage-backed securities that the company

     holds and explain the different risks associated with the two types of securities.

RESPONSE:

In accordance with your comment, we propose to include the following revised disclosure in future filings that contain the Risk Factors section (using 2008 information for illustrative purposes):

     Our U.S. fixed maturity securities portfolio includes securities collateralized by residential and commercial mortgage loans. As of December 31, 2008, our U.S. investment operations held $3.0 billion of residential mortgage-backed securities, of which $2.2 billion are Government National Mortgage Association, Federal National Mortgage Association or Federal Home Loan Mortgage Corporation pass-through securities, and $3.6 billion of commercial mortgage-backed securities, which represent in combination 17% of our total fixed maturity securities portfolio. For residential mortgage-backed securities, prepayment speeds, changes in mortgage delinquency or recovery rates, credit rating changes by rating agencies, change in property values underlying the loans, and the quality of service provided by service providers on securities in our portfolios could lead to

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write-downs on these securities. For commercial mortgage-backed securities, changes in mortgage delinquency or default rates, interest rate movement, credit quality and vintage of the underlying loans, change in property values underlying the loans, and credit rating changes by rating agencies could result in write-downs of those securities. See Item 7. ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations — Investments — U.S. Investment Operations — Fixed Maturity Securities.’’

Management’s Discussion and Analysis of Financial Condition and Results of Operations Critical Account Policies and Estimates Fixed Maturities, Available-for-Sale, page 37

     3.
     For your structured investment transactions, please expand your disclosure to

     discuss what internal models you use to determine the value for certain

     investments. Also discuss the circumstances in which you determine that the

     internal values more accurately reflect the fair value of the investments than the

     external values.

RESPONSE:

In accordance with your comment, we propose to enhance the disclosure in future filings of the Form 10-K as follows (using March 31, 2009 data for illustrative purposes):

     In limited circumstances, we have used our internal models with relevant market inputs in lieu of external values, as we have determined the external quoted prices are not representative of market transactions and therefore the internally modeled value better reflects fair value. Less than 2% of our fixed maturity securities were valued using internal models. The internal models utilized are specific to the type of security. Each of the models use projected cash flows discounted using a rate derived from market curves and relevant risk spreads.

If at any time, our use of internal models increases an expanded disclosure will be provided.

     4.
     Please separately disclose the amount of gross unrealized losses that are

     attributable to movements in market interest rates and the amount that is

     attributable to movements in credit spreads for each period presented.

RESPONSE:

In accordance with your comment, we added the following disclosure in our first quarter filing of the Form 10-Q and propose adding similar disclosure to the Critical Accounting Policies and Estimates section of future filings of the Form 10-K:

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     Of the $81.7 million increase in net unrealized losses for the three months ended March 31, 2009, a $469.9 million net unrealized loss can be attributed to an approximate 30 basis points increase in rates and is offset by net unrealized gains related to other market factors. Of the $7,781.8 million increase in net unrealized losses for the year ended December 31, 2008, a $3,145.9 million net unrealized gain can be attributed to an approximate 210 basis points decrease in rates and is more than offset by net unrealized losses related to other market factors.

     Mortgage loans, page 38

     5.
     Please disclose the amount of the valuation allowances and mortgage

     impairments for each period presented and provide sensitivity analyses around

     the key assumptions for the significant estimates related to your accounting for

     mortgage loans which depict reasonably likely changes in the assumptions and

     the impact that the changes in key assumptions would have on your financial

     results.

RESPONSE:

In accordance with your comment, we propose to refer the reader of the disclosure in question to other existing disclosures concerning mortgage loan valuation allowances and impairments, and to bolster those existing disclosures with additional disclosure regarding sensitivity analysis. The reference to the existing disclosures on valuation allowances and impairments would read as follows in future filings of the Form 10-K:

     For more detailed information concerning mortgage loan valuation allowances and impairments, see Item 7. ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations — Investments — U.S. Investment Operations — Mortgage Loans,’’ and Item 8. “Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Footnote 6, Investments – Commercial Mortgage Loan Valuation Allowance.”

The additional proposed disclosure concerning sensitivity analyses will be added to our Critical Accounting Policies and Estimates disclosure in future filings of the Form 10-K and will read as follows (using our most recent analysis for illustrative purposes):

     We utilize an internally developed model to provide estimates and timing of loan losses. To assess the sensitivity of the loans to foreclosure and loss severities, the loans were stressed using moderately severe downside scenario and a severe downside scenario. The moderately severe downside scenario stressed the portfolio to an economic state that included delinquencies increasing to the 2%-4% range, higher than average commercial property vacancies in excess of equilibrium levels and flat to minimal space absorption. The severe downside scenario assumed a two-year decline to the worst historical economic state and maintaining the worst economic state for the remaining life of each loan.

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Characteristics of the worst economic state include significantly above average commercial mortgage marketplace delinquencies in excess of 4%, very high commercial real estate property vacancies significantly above equilibrium levels and zero to negative space absorption. Pre-tax net income would be negatively impacted by $20-25 million in a $20-25 million in the moderately severe downside scenario and $45-55 million under the severe downside scenario.

     Derivatives, page 39

     6.
     Please expand your disclosure to discuss the process for calculating the fair

     value for each material derivative instrument. Discuss the key assumptions used

     in the fair value calculations and how the inputs are determined. Please disclose

     the impact of non-performance risk, how it is determined and how non-

     performance risk is factored into your fair value calculation.

RESPONSE:

In accordance with your comment, we propose that in our future filings of our Form 10-K we expand the disclosure as follows:

     We primarily use derivatives to hedge or reduce exposure to market risks. The fair values of exchange-traded derivatives are determined through quoted market prices. 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 fair values of our derivative instruments can be impacted by changes in interest rates, foreign exchange rates, credit spreads, equity indices, and volatility, as well as other contributing factors.

     The majority of our over-the-counter derivatives are valued with models that use market observable inputs. Significant inputs include interest rates, currency exchange rates, credit spread curves, equity prices, and volatility. 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.

     Our derivative contracts are generally documented under International Swaps and Derivatives Association, Inc. 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 adjustment. This credit spread reflects an appropriate adjustment to our valuations for nonperformance risk based on the cu