Principal Financial Group (PFG)

Year Ended December 31, 2006 Compared to Year Ended December 31, 2005

Operating Earnings

        Specialty benefits insurance operating earnings increased $14.2 million due to reserve refinements in the long-term disability line, favorable claims experience in the dental/vision product line and growth in all product lines. Health insurance operating earnings increased $1.5 million due to positive reserve refinements partially offset by higher expense ratios in our fee for service business. Offsetting the increases was a $7.6 million decline of operating earnings within the individual life insurance business, primarily due to more favorable DPAC unlocking in 2005 and changes in claims experience in 2006.

Operating Revenues

        Health insurance premiums increased $185.8 million, primarily from increased covered medical members and higher premium per member. Specialty benefits insurance premiums increased $180.4 million primarily due to strong sales and stable retention.

Total Expenses

        Health insurance benefits, claims and settlement expenses increased $155.1 million primarily due to higher claim costs per member and growth, partially offset by reserve refinements. Despite generally lower loss ratios, specialty

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benefits insurance benefits, claims and settlement expenses increased $115.7 million, primarily due to growth in the business.

        Specialty benefits insurance and health insurance operating expenses increased $46.1 million and $25.5 million, respectively, due to growth in the businesses. Partially offsetting these increases was a $27.1 million decrease in the individual life insurance operating expenses primarily due to lower sales and changes in claims experience in 2006.

Income Taxes

        The effective income tax rate for the segment was 33% for the each of the years ended December 31, 2006 and 2005. The effective income tax rates were lower than the U.S. corporate income tax rate of 35% primarily due to interest exclusion from taxable income.

Year Ended December 31, 2006 Compared to Year Ended December 31, 2005

Operating Earnings

        Specialty benefits insurance operating earnings increased $14.2 million due to reserve refinements in the long-term disability line, favorable
claims experience in the dental/vision product line and growth in all product lines. Health insurance operating earnings increased $1.5 million due to positive reserve refinements partially
offset by higher expense ratios in our fee for service business. Offsetting the increases was a $7.6 million decline of operating earnings within the individual life insurance business,
primarily due to more favorable DPAC unlocking in 2005 and changes in claims experience in 2006.

Operating Revenues

        Health insurance premiums increased $185.8 million, primarily from increased covered medical members and higher premium per member. Specialty benefits
insurance premiums increased $180.4 million primarily due to strong sales and stable retention.

Total Expenses

        Health insurance benefits, claims and settlement expenses increased $155.1 million primarily due to higher claim costs per member and growth, partially
offset by reserve refinements. Despite generally lower loss ratios, specialty

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benefits
insurance benefits, claims and settlement expenses increased $115.7 million, primarily due to growth in the business.

        Specialty
benefits insurance and health insurance operating expenses increased $46.1 million and $25.5 million, respectively, due to growth in the businesses. Partially
offsetting these increases was a $27.1 million decrease in the individual life insurance operating expenses primarily due to lower sales and changes in claims experience in 2006.

Income Taxes

        The effective income tax rate for the segment was 33% for the each of the years ended December 31, 2006 and 2005. The effective income tax rates were lower
than the U.S. corporate income tax rate of 35% primarily due to interest exclusion from taxable income.

Year Ended December 31, 2006 Compared to Year Ended December 31, 2005

        Total operating revenues increased $31.7 million, or 54%, to a negative $27.4 million for the year ended December 31, 2006, from a negative $59.1 million for the year ended December 31, 2005. Net investment income increased $35.3 million reflecting an increase in average annualized investment yields as well as a decrease in investment expenses related to a significant variable interest in a coal-based synthetic fuel production facility. The decrease in investment expense from this investment largely corresponds to an increase in income taxes due to fewer estimated synthetic fuel tax credits generated from fuel production. Partially offsetting the increase in total revenues was a decrease of $3.5 million in fee revenue for transitional services provided to CitiMortgage, Inc., in the prior year, related to the sale of Principal Residential Mortgage, Inc., which is mostly offset by a corresponding change in total expense.

        Total expenses decreased $4.5 million, or 65%, to a negative $11.4 million for the year ended December 31, 2006, from a negative $6.9 million for the year ended December 31, 2005. The decrease in total expenses was primarily due to a $9.8 million decrease in interest related to federal income tax activities as well as a $3.4 million decrease in transitional services provided to CitiMortgage, Inc., in the prior year, related to the sale of Principal Residential Mortgage, which is mostly offset in total revenue. The decrease in total expenses was largely offset by $12.2 million increase in interest related to the issuance of corporate debt.

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        Income tax benefits decreased $26.8 million, or 55%, to $21.7 million for the year ended December 31, 2006, from $48.5 million for the year ended December 31, 2005. The decrease was primarily due to a decrease in the estimated synthetic fuel tax credits in 2006, as well as a decrease in operating loss before income taxes and preferred stock dividends.

        Preferred stock dividends increased $15.3 million, or 86%, to $33.0 million for the year ended December 31, 2006, from $17.7 million for the year ended December 31, 2005. The preferred stock dividends were a result of issuing preferred stock in June 2005.

        As a result of the foregoing factors, operating loss increased $5.9 million, or 28%, to $27.3 million for the year ended December 31, 2006, from $21.4 million for the year ended December 31, 2005.

        Net realized/unrealized capital gains, as adjusted, increased $47.8 million to $34.2 million for the year ended December 31, 2006, from $13.6 million net realized/unrealized losses for the year ended December 31, 2005. The increase was primarily due to the gain on sale of stock of an equity method investment, fewer losses on sales of invested assets, and the prior year impairment of an equity partnership interest.

        As a result of the foregoing factors and the inclusion of other after-tax adjustments, net income available to common stockholders increased $18.6 million, or 63%, to $48.1 million for the year ended December 31, 2006, from $29.5 million for the year ended December 31, 2005. For the year ended December 31, 2006, net income included other after-tax adjustments totaling $41.2 million related to positive effects of: (1) gains on sales of real estate properties that qualify for discontinued operations treatment ($30.9 million) (2) a favorable court ruling on contested IRS issues for 1991 and later years ($18.8 million) and the negative effect of a contribution to the Principal Financial Group Foundation, Inc. ($8.5 million).

Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005

Total operating revenues increased $32.6 million, or 71%, to negative $13.5 million for the nine months ended September 30, 2006, from negative $46.1 million for the nine months ended September 30, 2005. Net investment income increased $35.8 million reflecting an increase in average annualized investment yields as well as a decrease in investment expenses related to a significant variable interest in a coal-based synthetic fuel production facility. The decrease in investment expense from the synthetic fuel investment largely corresponds to an increase in income taxes due to fewer estimated tax credits generated from fuel production.

Total expenses decreased $6.6 million to negative $6.5 million for the nine months ended September 30, 2006, from a positive $0.1 million for the nine months ended September 30, 2005. The decrease in total expenses was mostly due to a $12.9 million decrease in interest related to federal income tax audit activities. The decrease in total expenses was partially offset by a $7.8 million increase in interest related to the issuance of corporate debt.

Income tax benefits decreased $27.3 million, or 71%, to $10.9 million for the nine months ended September 30, 2006, from $38.2 million for the nine months ended September 30, 2005. The decrease was primarily due to a decrease in the estimated tax credits from our investment in a synthetic fuel production facility in 2006, as well as a decrease in operating loss before income taxes and preferred stock dividends.

Preferred stock dividends increased $15.3 million to $24.7 million for the nine months ended September 30, 2006, from $9.4 million from the nine months ended September 30, 2005. The preferred stock dividends were a result of issuing preferred stock in June 2005.

As a result of the foregoing factors, operating loss increased $3.4 million, or 20%, to $20.8 million for the nine months ended September 30, 2006, from $17.4 million for the nine months ended September 30, 2005.

Net realized/unrealized capital gains, as adjusted, increased $29.9 million to $32.3 million for the nine months ended September 30, 2006, from $2.4 million for the nine months ended September 30, 2005. The increase was primarily due to the gain on sale of stock of an equity method investment.

As a result of the foregoing factors and the inclusion of other after-tax adjustments, net income available to common stockholders increased $23.0 million to $30.3 million for the nine months ended September 30, 2006, from $7.3 million for the nine months ended September 30, 2005. For the nine months ended September 30, 2006, net income included the positive effect of other after-tax adjustments of $18.8 million related to a favorable court ruling on a contested IRS issue for 1991 and later years. For the nine months ended September 30, 2005, net income included the positive effect of other after-tax adjustments totaling $22.3 million due to gains on sales of real estate properties that qualify for discontinued operations treatment under SFAS 144.

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Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005

Total operating revenues increased $32.2 million, or 85%, to negative $5.9 million for the six months ended June 30, 2006, from negative $38.1 million for the six months ended June 30, 2005.  Net investment income increased $35.2 million reflecting an increase in average annualized investment yields as well as a decrease in investment expenses related to a significant variable interest in a coal-based synthetic fuel production facility.  The decrease in investment expense from this investment is more than offset by an increase in income taxes due to fewer estimated Section 29 tax credits generated from fuel production.  Partially offsetting the increase in total revenues was a decrease of $3.5 million in fee revenue for transitional services provided to CitiMortgage, Inc., in the prior year, related to the sale of Principal Residential Mortgage, Inc., which was mostly offset by a corresponding change in total expense.

Total expenses decreased $4.8 million to negative $3.4 million for the six months ended June 30, 2006, from $1.4 million for the six months ended June 30, 2005.  The decrease in total expenses was partially due to a $3.8 million decrease in interest related to federal income tax audit activities as well as $3.4 million decrease in transitional services provided to CitiMortgage, Inc., in the prior year, related to the sale of Principal Residential Mortgage, which was mostly offset in total revenue.  The decrease in total expenses was partially offset by a $4.4 million increase in interest related to the issuance of corporate debt.

Income tax benefits decreased $20.1 million, or 77%, to $6.1 million for the six months ended June 30, 2006, from $26.2 million for the six months ended June 30, 2005.  The decrease was primarily due to a decrease in operating loss before income taxes and preferred stock dividends as well as a decrease in the estimated Section 29 tax credits from our investment in a synthetic fuel production facility in 2006.

Preferred stock dividends were $16.5 million for the six months ended June 30, 2006, with no corresponding activity for the six months ended June 30, 2005.  The preferred stock dividends were a result of issuing preferred stock in June 2005.

As a result of the foregoing factors, operating loss decreased $0.4 million, or 3%, to $12.9 million for the six months ended June 30, 2006, from $13.3 million for the six months ended June 30, 2005.

Net realized/unrealized capital gains, as adjusted, increased $25.6 million to $25.4 million of net realized/unrealized capital gains for the six months ended June 30, 2006, from $0.2 million net realized/unrealized capital losses for the six months ended June 30, 2005.  The increase was primarily due to the gain on sale of stock of an equity method investment offset in part by the non-recurrence of a large recovery of previously impaired securities received in 2005 as the result of a litigation settlement and increased impairments in 2006 as the result of a change in our ability and intent to hold certain fixed maturity securities until recovery due to the need to fund our recently announced acquisition of WM Advisors.

As a result of the foregoing factors and the inclusion of other after-tax adjustments, net income available to common stockholders increased $30.1 million to $31.3 million for the six months ended June 30, 2006, from $1.2 million for the six months ended June 30, 2005.  For the six months ended June 30, 2006, net income included the positive effect of other after-tax adjustments of $18.8 million related to a favorable court ruling on a contested IRS issue for 1991 and later years.  For the six months ended June 30, 2005, net income included the positive effect of other after-tax adjustments totaling $14.7 million due to a gain on sale of real estate property that qualified for discontinued operations treatment under SFAS 144.

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Three Months Ended March 31, 2006 Compared to Three Months Ended March 31, 2005

Total operating revenues increased $0.4 million, or 4%, to negative $9.7 million for the three months ended March 31, 2006, from negative $10.1 million for the three months ended March 31, 2005.  Net investment income increased $5.0 million   reflecting an increase in average annualized investment yields as well as an increase in average invested assets for the segment.  Partially offsetting the increase in total revenues was a decrease of $3.3 million in fee revenue for transitional services provided to CitiMortgage, Inc., in the prior year, related to the sale of Principal Residential Mortgage, Inc., which was mostly offset by a corresponding change in total expense.

Total expenses decreased $4.2 million to negative $4.7 million for the three months ended March 31, 2006, from negative $0.5 million for the three months ended March 31, 2005.  The decrease in total expenses was primarily due to a $3.2 million decrease in transitional services provided to CitiMortgage, Inc., in the prior year, related to the sale of Principal Residential Mortgage, which was mostly offset in total revenue. 

Income tax benefits increased $6.4 million to $7.6 million for the three months ended March 31, 2006, from $1.2 million for the three months ended March 31, 2005.  The increase was primarily due to an increase in the estimated Section 29 tax credits from our investment in a synthetic fuel production facility in 2006 as well as a 2005 increase in income tax reserves established for contested IRS tax audit matters.

Preferred stock dividends were $8.2 million for the three months ended March 31, 2006, with no corresponding activity for the three months ended March 31, 2005.  The preferred stock dividends were a result of issuing preferred stock in June 2005.

As a result of the foregoing factors, operating loss decreased $2.8 million, or 33%, to $5.6 million for the three months ended March 31, 2006, from $8.4 million for the three months ended March 31, 2005.

Net realized/unrealized capital gains, as adjusted, increased $31.8 million to $27.1 million of net realized/unrealized capital gains for the three months ended March 31, 2006, from $4.7 million net realized/unrealized capital losses for the three months ended March 31, 2005.  The increase was primarily due to the gain on sale of stock of an equity method investment as well as gains on mark to market of certain seed money investments.

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