July 7, 2006
BY EDGAR AND HAND DELIVERY
Securities and Exchange Commission
Division of Corporation Finance
100 F Street, N.E.
Washington, D.C. 20549-0309
Attention: Mr. Jim B. Rosenberg, Mail Stop 6010
Re: Principal Financial Group, Inc.
Form 10-K for the Fiscal Year Ended December 31, 2005
File No. 1-16725
Dear Mr. Rosenberg:
On behalf of Principal Financial Group, Inc. (the "Company"), this letter
responds to the comments of the Division of Corporation Finance (the "Staff") of
the Securities and Exchange Commission (the "Commission") contained in the
letter dated June 23, 2006, concerning the above-referenced Annual Report on
Form 10-K. For convenience, we have repeated your comments in bold and have
provided the Company's response in plain text.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2005
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES, PAGE 31
1. THE SENSITIVITY ANALYSES YOU PROVIDE REGARDING THE POSSIBLE VARIATIONS IN
THE VALUE OF YOUR AVAILABLE-FOR-SALE FIXED MATURITY SECURITIES AND YOUR
DEFERRED POLICY ACQUISITION COSTS APPEAR TO BE BASED ON HYPOTHETICAL
CHANGES IN INTEREST RATES AND LONG-TERM EXPECTED INVESTMENT PERFORMANCE
RATES, RESPECTIVELY. PLEASE TELL US WHETHER YOU BELIEVE THE RATES OF CHANGE
YOU DISCLOSE ARE REASONABLY LIKELY TO OCCUR AS REQUIRED BY FR-72, AND IF
SO, PROVIDE US PROPOSED REVISED DISCLOSURE ACCORDINGLY. OTHERWISE, PLEASE
PROVIDE TO US IN A DISCLOSURE-TYPE FORMAT REVISED DISCUSSIONS THAT INDICATE
THE IMPACT OF REASONABLY LIKELY CHANGES IN INTEREST RATES AND LONG-TERM
EXPECTED INVESTMENT PERFORMANCE RATE.
REGISTRANT'S RESPONSE
The Company respectively advises the Staff that changes to interest rate and
long-term expected investment performance rates, as disclosed in our
available-for-sale fixed maturity securities and our deferred policy acquisition
costs disclosures, respectfully, are reasonably likely to occur based on our
historical experience.
Our available-for-sale fixed maturity securities portfolio held by the Principal
Life general account has an approximate weighted average life of 7 years. An
analysis of historical changes in the 7-year Treasury rate supports our belief
that a 20 to 100 basis point change in interest rates is reasonably likely.
Since a long-term view of investment performance is used in deriving the DPAC
model assumption, we believe judgment of the reasonably likely changes in rates
of return should be considered in the context of the long term. We have changed
the long-term view of investment performance by 1% within the last 5 years.
The following revised disclosures clarify our beliefs regarding the reasonably
likely future interest rate and long-term investment performance rate changes.
We propose to include disclosures similar to these in our future annual reports
on Form 10-K.
VALUATION OF INVESTED ASSETS (Replacing the last sentence of the first
paragraph)
An interest rate increase in the range of 20 to 100 basis points, while holding
credit spreads constant, produces total values ranging from $37.7 billion to
$36.2 billion, as compared to the recorded amount of $38.1 billion related to
our fixed maturity, available-for-sale assets held by the Principal Life general
account. Based on our historical experience, we believe a rate change of 20 to
100 basis points is reasonably likely.
DEFERRED POLICY ACQUISITION COSTS ("DPAC") (Replacing the last paragraph)
The total DPAC asset balance as of December 31, 2005, was $2.2 billion. Based on
historical experience, we believe a 1% change in the long-term investment
performance rate assumption on separate accounts in our DPAC models is
reasonably likely. Such a change would cause an estimated $9.6 million change in
the DPAC asset as of December 31, 2005. Also, removing the mean reversion
methodology from the DPAC asset calculation would reduce the December 31, 2005
DPAC balance by $2.8 million.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS, PAGE 63
2. IT APPEARS THAT THE EXPECTED PAYMENTS DUE FOR YOUR CONTRACTHOLDER FUNDS AND
FUTURE POLICY BENEFITS AND CLAIMS LIABILITIES ARE PRESENTED IN THE TABLE
NET OF PRESENT VALUE DISCOUNTS AND PRESENT VALUE OF FUTURE NET PREMIUMS AS
THESE AMOUNTS AGREE TO THE RESPECTIVE BALANCE SHEET LINE ITEMS. PLEASE
PROVIDE US IN A DISCLOSURE-TYPE FORMAT A REVISED CONTRACTUAL OBLIGATION
TABLE THAT INCLUDES THE ESTIMATED TIMING OF PAYMENT OF YOUR GROSS POLICY
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LIABILITIES. TO THE EXTENT YOU FEEL IT IS NECESSARY TO EXPLAIN TO A READER
WHY THESE AMOUNTS DO NOT AGREE TO YOUR BALANCE SHEET LIABILITIES, YOU MAY
INCLUDE AN EXPLANATION IN THE HEADNOTE OR IN A FOOTNOTE TO THE TABLE.
REGISTRANT'S RESPONSE
The Company respectfully advises the Staff that, beginning with our Annual
Report on Form 10-K for the year ended December 31, 2006, we will disclose the
gross payments expected for our contractual obligations and commercial
commitments. In addition to revising the gross policy liabilities values, we
have also revised the Certificates of deposits and Other long-term liabilities
values in the attached table to reflect additional interest that is expected to
be paid on these obligations in future years. Included below is a revised table
as of December 31, 2005.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table presents payments due by period for long-term contractual
obligations as of December 31, 2005:
PAYMENTS DUE BY PERIOD
--------------------------------------------------
CONTRACTUAL TOTAL 2007- 2009- 2011 AND
OBLIGATIONS(1) PAYMENTS 2006 2008 2010 THEREAFTER
- -------------------------------------------- ----------------- ---------- ----------- ------------ ------------
Contractholder funds(2) $ 56,079.4 $ 6,793.0 $ 9,493.2 $ 7,156.9 $ 32,636.3
Future policy benefits and claims(3) 41,201.6 2,397.6 4,097.8 3,838.6 30,867.6
Long-term debt(4) 1,430.5 111.4 297.9 518.7 502.5
Certificates of deposit(5) 795.6 321.1 234.7 233.5 6.3
Other long-term liabilities(6) 582.8 405.6 - - 177.2
Operating leases(7) 165.5 48.5 60.5 29.5 27.0
Purchase obligations(8) 970.3 950.3 20.0 - -
Total contractual obligations $101,225.7 $11,027.5 $14,204.1 $11,777.2 $ 64,216.9
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(1) Excludes short-term liabilities, other policyholder funds, taxes and
short-term debt as these are not long-term and/or not contractual in
nature. Also excludes obligations under our pension and other
postretirement benefit plans as benefit payments will be made under a
funded plan and will not require Company contributions or payments within a
five-year period. In addition, separate account liabilities are excluded.
Separate account liabilities represent the fair market value of funds that
are separately administered by the Company. Generally, the separate account
contract owner, rather than the Company, bears the investment risk of these
funds. The separate account liabilities are legally segregated and are not
subject to claims that arise out of any other business of the Company. Net
deposits, net investment income and realized and unrealized capital gains
and losses on the separate accounts are not reflected in the consolidated
statement of operations. The separate account obligations will be fully
funded by cash flows from the separate account assets.
(2) Includes GICs, funding agreements (described below), individual fixed
annuities, universal life insurance, and other investment-type contracts.
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Our guaranteed investment contracts and funding agreements contain
provisions limiting early surrenders, which typically include penalties for
early surrenders, minimum notice requirements or, in the case of funding
agreements with survivor options, minimum pre-death holding periods and
specific maximum amounts.
Funding agreements include those issued directly to nonqualified
institutional investors, as well as to three separate programs where the
funding agreements have been issued directly or indirectly to
unconsolidated special purpose entities. Claims for principal and interest
under funding agreements are afforded equal priority to claims of life
insurance and annuity policyholders under insolvency provisions of Iowa
Insurance Laws.
We are authorized to issue up to $4.0 billion of funding agreements under a
program established in 1998 to support the prospective issuance of
medium-term notes by an unaffiliated entity in non-U.S. markets. As of
December 31, 2005 and 2004, $3,203.6 million and $3,867.0 million,
respectively, of liabilities were being held with respect to the issuance
outstanding under this program.
In addition, we are authorized to issue up to $7.0 billion of funding
agreements under a program established in 2001 to support the prospective
issuance of medium-term notes by an unaffiliated entity in both domestic
and international markets. As of December 31, 2005 and 2004, $4,744.5
million and $5,462.3 million, respectively, of liabilities were being held
with respect to the issuance outstanding under this program. We do not
anticipate any new issuance activity under this program, given our December
2005 termination of the dealership agreement for the program and the March
2004 establishment of the SEC-registered program described in the next
paragraph.
We are authorized to issue up to $4.0 billion of funding agreements under a
program established in March 2004 to support the prospective issuance of
medium-term notes by unaffiliated entities to both domestic and
international investors. Under this program, both the notes and the
supporting funding agreements are registered with the SEC. As of December
31, 2005, $3,667.9 million of liabilities are being held with respect to
the issuance outstanding under this program. In contrast with direct
funding agreements, GIC issuances and the other two funding
agreement-backed medium term note programs described above, Principal
Life's payment obligations on each funding agreement issued under this
SEC-registered program are guaranteed by Principal Financial Group, Inc.
This program was amended in February 2006 to authorize issuance of up to an
additional $5.0 billion of medium-term notes.
Amounts included in the contractholder funds line item reflect estimated
cash payments to be made to policyholders. The sum of the cash outflows
shown for all years in the table exceeds the corresponding liability amount
included in the consolidated financial statements as of December 31, 2005.
The liability amount in our consolidated financial statements reflects
estimated cash payments to policyholders, reductions for expected future
premiums, assumptions with regard to the timing of cash payments and
discounting for interest.
(3) Amounts included in the future policy benefits and claims line item reflect
estimated cash payments to be made to policyholders. The sum of the cash
outflows shown for all years in the table exceeds the corresponding
liability amount included in our consolidated financial statements as of
December 31, 2005. The liability amount in our consolidated financial
statements reflects estimated cash payments to policyholders, reductions
for expected future premiums, assumptions with regard to the timing of cash
payments and discounting for interest.
(4) The following are included in long-term debt:
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On November 3, 2005, Principal International de Chile S.A., a wholly owned
indirect subsidiary, entered into long-term borrowing agreements with two
Chilean banks in the amount of US $93.9 million. This debt is denominated
in Unidades de Formento ("UF"), a Chilean inflation-indexed,
peso-denominated monetary unit. Of this amount, US $49.0 million of UF
+4.59% notes and US $44.9 million of UF +4.93% notes mature on November 3,
2011. Interest on the notes is payable semi-annually on May 3 and November
3 each year. The debt outstanding and interest expense will vary due to
fluctuations in the Chilean peso to US dollar exchange rates and Chilean
inflation.
On August 25, 1999, Principal Financial Group (Australia) Holdings Pty.
Limited, a wholly owned indirect subsidiary, issued $665.0 million of
unsecured redeemable long-term debt. Of this amount, $200.0 million of
7.95% notes matured on August 15, 2004, with the remaining $465.0 million
in 8.2% notes due August 15, 2009. On December 28, 2001, all of the
long-term debt obligations of Principal Financial Group (Australia)
Holdings Pty. Limited were assumed by its parent, Principal Financial
Services, Inc.
On March 10, 1994, Principal Life issued $300.0 million of surplus notes,
including $200.0 million due March 1, 2024, at a 7.875% annual interest
rate and the remaining $100.0 million due March 1, 2044, at an 8% annual
interest rate. None of our affiliates hold any portion of the notes. Each
payment of interest and principal on the notes, however, may be made only
with the prior approval of the Commissioner and only to the extent that
Principal Life has sufficient surplus earnings to make such payments.
After receiving approval from the Commissioner, the surplus notes due March
1, 2024, were optionally redeemed by Principal Life on March 1, 2004, in
whole at a redemption price of approximately 103.6% of par. Total cash paid
for the surplus note redemption on March 1, 2004, was $207.2 million.
Subject to Commissioner approval, the notes due March 1, 2044, may be
redeemed at Principal Life's election on or after March 1, 2014, in whole
or in part at a redemption price of approximately 102.3% of par. The
approximate 2.3% premium is scheduled to gradually diminish over the
following ten years. These notes may be redeemed on or after March 1, 2024,
at a redemption price of 100% of the principal amount plus interest accrued
to the date of redemption.
Long-term debt also includes $236.4 million of mortgages and other notes
payable related to real estate developments. We, including certain
subsidiaries, had $135.0 million in credit facilities as of December 31,
2005, with various financial institutions, in addition to obtaining loans
with various lenders to finance these developments. Outstanding principal
balances as of December 31, 2005, range from $0.3 million to $97.5 million
per development with interest rates generally ranging from 5.5% to 8.6%.
Outstanding principal balances as of December 31, 2004, range from $0.4
million to $98.7 million per development with interest rates generally
ranging from 6.0% to 8.6%. Outstanding debt is secured by the underlying
real estate properties, which were reported as real estate on our
consolidated statements of financial position with a carrying value of
$284.1 million and $298.7 million as of December 31, 2005 and 2004,
respectively.
Amounts included in the long-term debt line item reflect estimated cash
payments to be made, including expected interest payments.
(5) Amounts included in the certificates of deposit line item reflect estimated
cash payments to be made, including expected interest payments.
Certificates of deposit are reported as other liabilities on our
consolidated statement of financial position.
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(6) Other long-term liabilities include other liabilities reflected in the
consolidated statement of financial position that are contractual,
non-cancelable and long-term in nature. Amounts included in the other
long-term liabilities line item reflect estimated cash payments to be made,
including expected interest payments. This line item excludes accruals and
short-term items in the amount of $2,415.4 million, which are reported as
other liabilities on our consolidated statements of financial position.
(7) As a lessee, we lease office space, data processing equipment and office
furniture and equipment under various operating leases.
(8) Purchase obligations include material contracts where we have a
non-cancelable commitment to purchase goods and services in addition to
commitments to originate loans and purchase investments.
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The Company acknowledges that it is responsible for the adequacy and accuracy of
the disclosure contained in its periodic reports filed pursuant to the
Securities Exchange Act of 1934, and that Staff comments or Company changes to
disclosure in response to Staff comments do not foreclose the Commission from
taking any action with respect to the Company's reports. Further, the Company
acknowledges that it may not assert Staff comments as a defense in any
proceeding initiated by the Commission or any person under the federal
securities laws of the United States.
After you have completed your review of our response, please call me if you have
any questions or comments.
Sincerely,
/s/ Michael H. Gersie
- ----------------------------------
Michael H. Gersie
Executive Vice President and
Chief Financial Officer
(515) 247-6168
cc: Mark Brunhofer (Securities and Exchange Commission)
Kevin Woody (Securities and Exchange Commission)
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