SecProbe.io

CORRESP
1
filename1.htm

   responsetosec10202010.htm - Generated by SEC Publisher for SEC Filing

     October 20, 2010

     By EDGAR

     Securities and Exchange Commission

     Division of Corporation Finance

     100 F Street, N.E.

     Washington D.C. 20549

     Attention:
     Mr. Jim Rosenberg,

     Senior Assistant Chief Accountant

     Re: Principal Financial Group, Inc.

     Form 10-K for the Fiscal Year Ended December 31, 2009

     Form 10-Q for the Quarterly Period Ended March 31, 2010

     File No. 001-16725

     Dear Mr. Rosenberg:

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

     of Corporation Finance of the Securities and Exchange Commission received by telephone on

     September 23, 2010 from Vanessa Robertson, SEC staff accountant. The comment was a

     follow-up to our response dated August 13, 2010 to your letter dated June 29, 2010, concerning

     the company’s annual report on Form 10-K and quarterly report on Form 10-Q, both referenced

     above. For convenience, we have included your additional comment in bold below.

     Form 10-Q for the quarterly period ended March 31, 2010

     Please refer to your response to comment 3. Please revise your disclosure to separately

     identify the significant inputs used in determining fair value of each material level 2 asset

     class included within fixed maturities. Please see ASC 820-10-55-22A for examples of the

     types of inputs to be disclosed. For example, some of the inputs used for mortgage backed

     securities might include delinquency rates, collateral valuation loss severity rates,

     collateral refinancing assumptions, and estimated prepayment rates.

     RESPONSE:

     We propose to include the requested changes to our fixed maturity securities fair valuation

     disclosure starting with our annual report on Form 10-K for the year ending December 31,

     2010. To maintain a consistent point of reference, Attachment A uses as a staring point our fair

     value disclosure from our quarterly report on Form 10-Q for the quarter ended March 31, 2010.

     The proposed additions are underlined. The highlighted language was included in our initial

     response and is reflective of instances where we are disclosing qualitative information

     regarding the significant inputs used in determining fair value.

     * * * * *

     After you have completed your review of our response, please call me if you have any questions

     or comments.

     Sincerely,

     /s/ Terrance J. Lillis

     Terrance J. Lillis

     Senior Vice President and

     Chief Financial Officer

     (515) 247-4885

     cc:
     Vanessa Robertson (Securities and Exchange Commission)

     Mary Mast (Securities and Exchange Commission)

     Attachment A

     From 3/31/2010 Principal Financial Group 10-Q Note 9 – Fair Value Measurements:

     Determination of fair value

     The following discussion describes the valuation methodologies and inputs used for

     assets and liabilities measured at fair value on a recurring basis or disclosed at fair value. The

     techniques utilized in estimating the fair values of financial instruments are reliant on the

     assumptions used. Care should be exercised in deriving conclusions about our business, its

     value or financial position based on the fair value information of financial instruments

     presented below.

     Fair value estimates are made at a specific point in time, based on available market

     information and judgments about the financial instrument. Such estimates do not consider the

     tax impact of the realization of unrealized gains or losses. In addition, the disclosed fair value

     may not be realized in the immediate settlement of the financial instrument. We validate prices

     through an investment analyst review process, which includes validation through direct

     interaction with external sources, review of recent trade activity or use of internal models. In

     circumstances where broker quotes are used to value an instrument, we generally receive one

     non-binding quote. Broker quotes are validated through an investment analyst review process,

     which includes validation through direct interaction with external sources and use of internal

     models or other relevant information. We did not make any significant changes to our valuation

     processes during the first quarter of 2010.

     Fixed Maturities

     Fixed maturities include bonds, asset-backed securities, redeemable preferred stock and

     certain nonredeemable preferred stock. When available, the fair value of fixed maturities is

     based on quoted prices of identical assets in active markets. These are reflected in Level 1 and

     primarily include U.S. Treasury bonds and actively traded redeemable corporate preferred

     securities.

     When quoted prices are not available, our first priority is to obtain prices from third

     party pricing vendors. We have regular interaction with these vendors to ensure we understand

     their pricing methodologies and to confirm they are utilizing observable market information.

     Their methodologies vary by asset class and include inputs such as estimated cash flows,

     benchmark yields, reported trades, broker quotes, credit quality, industry events and economic

     events. Fixed maturities with validated prices from pricing services, which includes the

     majority of our public fixed maturities in all asset classes, are generally reflected in Level 2.

     Also included in Level 2 are corporate bonds where quoted market prices are not available, for

     which a matrix pricing valuation approach is used. In this approach, securities are grouped into

     pricing categories that vary by sector, rating and average life. Each pricing category is assigned

     a risk spread based on studies of observable public market data from the investment

     professionals assigned to specific security classes. The expected cash flows of the security are

     then discounted back at the current U.S. Treasury curve plus the appropriate risk spread.

     Although the matrix valuation approach provides a fair valuation of each pricing category, the

     valuation of an individual security within each pricing category may actually be impacted by

     company specific factors.

     If we are unable to price a fixed maturity security using prices from third party pricing

     vendors or other sources specific to the asset class, we may obtain a broker quote or utilize an

     internal pricing model specific to the asset utilizing relevant market information, to the extent

     available, which are reflected in Level 3 and can include fixed maturities across all asset

     classes. These models primarily use projected cash flows discounted using a rate derived from

     market interest rate curves and relevant risk spreads. As of March 31, 2010, less than 1% of our

     fixed maturity securities, which were classified as Level 3 assets, were valued using internal

     pricing models.

     The primary inputs, by asset class, for valuations of the majority of our Level 2

     investments from third party pricing vendors or our internal pricing valuation approach are

     described below.

     U.S. government and agencies/Non-U.S. governments – Inputs include recently

     executed market transactions, interest rate yield curves, maturity dates, market price quotations

     and credit spreads relating to similar instruments.

     State and political subdivisions - Inputs include Municipal Securities Rulemaking

     Board reported trades, U.S. Treasury and other benchmark curves, material event notices, new

     issue data, and issuer financial statements.

     Corporates – Inputs include recently executed transactions, market price quotations,

     benchmark yields, issuer spreads and observations of equity and credit default swap curves

     related to the issuer. For private placement corporate securities valued through the matrix

     valuation approach inputs include the current U.S. Treasury curve and risk spreads based on

     sector, rating and average life of the issuance.

     RMBS, CMBS, CDOs and Other debt obligations —Inputs include cash flows, priority

     of the tranche in the capital structure, expected time to maturity for the specific tranche,

     reinvestment period remaining and performance of the underlying collateral including

     prepayments, defaults, deferrals, loss severity of defaulted collateral and, for RMBS,

     prepayment speed assumptions. Other inputs include market indices and recently executed

     market transactions

     Equity Securities

     Equity securities include mutual funds, common stock and nonredeemable preferred

     stock. Fair values of equity securities are determined using quoted prices in active markets for

     identical assets when available, which are reflected in Level 1. When quoted prices are not

     available, we may utilize internal valuation methodologies appropriate for the specific asset that

     use observable inputs such as underlying share prices, which are reflected in Level 2. Fair

     values might also be determined using broker quotes or through the use of internal models or

     analysis that incorporate significant assumptions deemed appropriate given the circumstances

     and consistent with what other market participants would use when pricing such securities,

     which are reflected in Level 3.

     Mortgage Loans

     Mortgage loans are not measured at fair value on a recurring basis. Fair values of

     commercial and residential mortgage loans are primarily determined by discounting the

     expected cash flows at current treasury rates plus an applicable risk spread, which reflects credit

     quality and maturity of the loans. The risk spread is based on market clearing levels for loans

     with comparable credit quality, maturities and risk. The fair value of mortgage loans may also

     be based on the fair value of the underlying real estate collateral, which is estimated using

     appraised values.

     Policy Loans

     Policy loans are not measured at fair value on a recurring basis. Fair values of policy

     loans are estimated by discounting expected cash flows using a risk-free rate based on the U.S.

     Treasury curve.

     Derivatives

     The fair values of exchange-traded derivatives are determined through quoted market

     prices, which are reflected in Level 1. Exchange-traded derivatives include interest rate and

     equity futures that are settled daily such that their fair value is not reflected in the consolidated

     statements of financial position. 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 majority of our over-the-counter derivatives are valued with models that use market

     observable inputs, which are reflected in Level 2. Significant inputs include contractual terms,

     interest rates, currency exchange rates, credit spread curves, equity prices, and volatilities.

     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 that are nonbinding quotes based on models

     that do not reflect the result of market transactions, which are reflected in Level 3.

     Our derivative contracts are generally documented under ISDA 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.

     This credit spread incorporates an appropriate level of nonperformance risk into our valuations

     given the current ratings of our counterparties, as well as the collateral agreements in place.

     Counterparty credit risk is routinely monitored to ensure our adjustment for non-performance

     risk is appropriate.

     Interest rate contracts. We use discounted cash flow valuation techniques to determine

     the fair value of interest rate swaps using observable swap curves as the inputs. These are

     reflected in Level 2. In addition, we have a limited number of complex inflation-linked interest

     rate swaps and interest rate collars that are valued using broker quotes. These are reflected in

     Level 3. We use option pricing models to determine the fair value of swaptions using

     observable swap interest rate curves and observable implied volatilities as inputs. These are

     reflected in Level 2.

     Page 6

     Foreign exchange contracts. We use discounted cash flow valuation techniques that

     utilize observable swap curves and exchange rates as the inputs to determine the fair value of

     foreign currency swaps. These are reflected in Level 2. In addition, we have a limited number

     of non-standard currency swaps that are valued using broker quotes. These are reflected within

     Level 3. Currency forwards are valued using observable market inputs, including forward

     currency exchange rates. These are reflected in Level 2.

     Equity contracts. We use an option pricing model using observable implied volatilities,

     dividend yields, index prices and swap curves as the inputs to determine the fair value of equity

     options. These are reflected in Level 2.

     Credit contracts. We use either the ISDA Credit Default Swap Standard discounted cash

     flow model that utilizes observable default probabilities and recovery rates as inputs or broker

     prices to determine the fair value of credit default swaps. These are reflected in Level 3.

     Other contracts. We use broker prices to determine the fair value of commodity swaps.

     These are reflected in Level 3.

     Other Investments

     Other investments reported at fair value primarily include seed money investments, for

     which the fair value is determined using the net asset value of the fund. The net asset value of

     the fund represents the price at which we feel we would be able to initiate a transaction. Seed

     money investments in mutual funds for which the net asset value is published are reflected in

     Level 1. Seed money investments in mutual funds or other investment funds in markets that do

     not have a published net asset value are reflected in Level 2.

     Other investments reported at fair value also include commercial mortgage loans of

     consolidated VIEs for which the fair value option was elected, which are reflected in Level 3.

     Fair value of these commercial mortgage loans is computed utilizing a discount rate based on

     the current market. The market discount rate is then adjusted based on various factors that

     differentiate it from our pool of loans.

     The carrying amounts of other assets classified as other investments in the

     accompanying consolidated statements of financial position, which are not measured at fair

     value on a recurring basis, approximate their fair values.

     Cash and Cash Equivalents

     Certain cash equivalents are reported at fair value on a recurring basis and include

     money market instruments and other short-term investments with maturities of less than three

     months. Fair values of these cash equivalents may be determined using public quotations, when

     available, which are reflected in Level 1. When public quotations are not av