Principal Financial Group (PFG)

Fair Value Measurement

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price).  The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels for disclosure purposes.  The fair value hierarchy gives the highest priority (Level 1) to quoted prices in active markets for identical assets or liabilities and gives the lowest priority (Level 3) to unobservable inputs. An asset or liability’s classification within the fair value hierarchy is based on the lowest level of significant input to its valuation. See Item 1. “Financial Statements, Notes to Unaudited Consolidated Financial Statements, Note 8, Fair Value Measurement” for further details.

As of March 31, 2009, 31% of our net assets (liabilities) were Level 1, 62% were Level 2 and 7% were Level 3.  Excluding separate account assets as of March 31, 2009, 3% of our net assets (liabilities) were Level 1, 95% were Level 2 and 2% were Level 3.

As of December 31, 2008, 32% of our net assets (liabilities) were Level 1, 61% were Level 2 and 7% were Level 3.  Excluding separate account assets as of December 31, 2008, 2% of our net assets (liabilities) were Level 1, 95% were Level 2 and 3% were Level 3.

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Fair Value Measurement

SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price).  This standard establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels for disclosure purposes. On January 1, 2008, we adopted SFAS 157. For further discussion, see Item 1. “Financial Statements, Notes to Unaudited Consolidated Financial Statements, Note 6, Fair Value Measurement.”

As of June 30, 2008, we categorized net assets of $50.4 billion in Level 1, $66.4 billion in Level 2 and $9.0 billion in Level 3. During the three months ended June 30, 2008, the fair value balance of Level 3 instruments decreased $263.3 million. This decrease is primarily attributed to the change in fair value of the separate account assets, mainly as a result of unrealized losses, which are not reflected in the consolidated statements of operations, as the change in value of separate account assets is offset by a change in value of separate account liabilities.  During the six months ended June 30, 2008, the fair value balance of Level 3 instruments decreased $571.6 million. This decrease is primarily attributed to the fixed maturities, available-for-sale securities and separate account assets.  The decrease in fixed maturities, available-for-sale securities resulted mostly from unrealized losses recognized in other comprehensive income. Most of the unrealized losses related to collateralized debt obligations, with lesser amounts attributed to corporate bonds, commercial mortgage-backed securities, asset-backed securities and collateralized mortgage obligations.  The decrease in separate account assets is

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Fair Value Measurement

SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price).  This standard establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels for disclosures purposes. On January 1, 2008, we adopted SFAS 157. For further discussion, see Item 1. “Financial Statements, Notes to Unaudited Consolidated Financial Statements, Note 6, Fair Value Measurement.”

As of March 31, 2008, we categorized net assets of $53.2 billion in Level 1, $63.3 billion in Level 2 and $9.3 billion in Level 3. During the first quarter, the fair value balance of Level 3 instruments decreased by $308.3 million. This decrease is attributed primarily to the fixed maturities, available-for-sale securities and resulted mostly from unrealized losses recognized in other comprehensive income. Most of the losses related to collateralized debt obligations, with lesser amounts attributed to corporate bonds, asset-backed securities, collateralized mortgage obligations and commercial mortgage-backed securities.