Filed Pursuant to Rule 424(b)(1)
                                                 Registration File No. 333-62558

                        [PRINCIPAL FINANCIAL GROUP LOGO]

                               100,000,000 Shares
                        PRINCIPAL FINANCIAL GROUP, INC.
                                  Common Stock
                             ----------------------
    This is an initial public offering of 100,000,000 shares of common stock of
Principal Financial Group, Inc. This offering is being made in connection with
the conversion of Principal Mutual Holding Company from a mutual insurance
holding company into a stock company in a process called a demutualization.
After the demutualization, Principal Financial Group, Inc. will indirectly own
all of the outstanding common stock of Principal Life Insurance Company.

    This prospectus relates to an offering of 85,000,000 shares in the United
States. In addition, 15,000,000 shares are being offered outside the United
States in an international offering.

    In addition to these shares, Principal Financial Group, Inc. will issue an
estimated 260.6 million shares of its common stock to policyholders entitled to
receive shares in the demutualization in exchange for their membership interests
in Principal Mutual Holding Company, or to a separate account for the benefit of
those policyholders.

    Prior to this offering there has been no public market for the common stock.
The common stock of Principal Financial Group, Inc. has been approved for
listing on the New York Stock Exchange under the symbol "PFG", subject to
official notice of issuance.

    See "Risk Factors" on page 12 to read about factors you should consider
before buying shares of the common stock.

                             ----------------------

    NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.

                             ----------------------

                                                              Per Share       Total
                                                              ---------       -----
                                                                    
Initial public offering price...............................   $ 18.50    $1,850,000,000
Underwriting discount.......................................   $ 0.805    $   80,475,000
Proceeds, before expenses, to Principal Financial Group,
  Inc. .....................................................   $17.695    $1,769,525,000

    To the extent the U.S. underwriters sell more than 85,000,000 shares of
common stock, the U.S. underwriters have the option to purchase up to an
additional 12,750,000 shares from Principal Financial Group, Inc. at the initial
public offering price less the underwriting discount. The international
underwriters have a similar option to purchase up to 2,250,000 additional shares
of common stock.

                             ----------------------

    The underwriters expect to deliver the shares against payment in New York,
New York on October 26, 2001.

GOLDMAN, SACHS & CO.
                    CREDIT SUISSE FIRST BOSTON
                                         MERRILL LYNCH & CO.
                                                    SALOMON SMITH BARNEY

                                    
BANC OF AMERICA SECURITIES LLC             BEAR, STEARNS & CO. INC.
A.G. EDWARDS & SONS, INC.                          FOX-PITT, KELTON
JPMORGAN                                            LEHMAN BROTHERS
RAMIREZ & CO., INC.                                     UBS WARBURG

                             ----------------------

                       Prospectus dated October 22, 2001.

                               PROSPECTUS SUMMARY

    This summary highlights information contained in this prospectus. As a
result, it does not contain all of the information that you should consider
before investing in our common stock. You should read the entire prospectus
carefully, including the "Risk Factors" section and the consolidated financial
statements and the notes to those statements. References to "$", "US$" or
"dollars" are to United States dollars, and references to "A$" are to Australian
dollars, unless we indicate otherwise. The Glossary beginning on page G-1 of
this prospectus includes definitions of certain terms which are unique to this
offering. Each term defined in the Glossary is printed in boldface the first
time it appears in this prospectus.

    The Principal Financial Group is a leading provider of retirement savings,
investment and insurance products and services, with $116.9 billion in assets
under management and approximately thirteen million customers worldwide as of
June 30, 2001. Our U.S. and international operations concentrate primarily on
asset management and accumulation. In addition, we offer a broad range of
individual life and disability insurance, group life and health insurance, and
residential mortgage loan origination and servicing in the United States.

    We focus on providing retirement products and services to businesses and
their employees. We provided services to more 401(k) plans in the United States
in 2000 than any other bank, mutual fund or insurance company, according to
surveys conducted by CFO magazine. We also had the leading market share in 2000
within the 401(k) market for businesses with less than 500 employees based on
number of plans and number of participants according to the Spectrem Group.

    We believe there are attractive growth opportunities in the 401(k) and other
defined contribution pension plan markets in the United States and
internationally. Assets under all 401(k) plans in the United States are
projected to grow at an annual rate of 14.0%, reaching $3.2 trillion in plan
assets by 2006. In addition, only 18% of U.S. businesses with fewer than 500
employees offered a 401(k) plan in 2000, compared to 87% for businesses with 500
or more employees. We believe that our expertise and leadership in serving the
U.S. pension plan market give us a unique competitive advantage in the United
States, as well as in countries with a trend toward private sector defined
contribution pension systems.

OUR OPERATING SEGMENTS

    We organize our businesses into four operating segments:

    - U.S. Asset Management and Accumulation;

    - International Asset Management and Accumulation;

    - Life and Health Insurance; and

    - Mortgage Banking.

    We also have a Corporate and Other segment which consists of the assets and
activities that have not been allocated to any other segment.

    One of the primary measures of our business is assets under management. We
define assets under management to include all assets on which we earn an
asset-based fee or a spread. Further, we measure the composition of assets under
management both by the segment that accumulates the assets and by the entity
that manages the assets. The table below shows the composition of assets under
management by both measures:

                                        1

                     COMPOSITION OF ASSETS UNDER MANAGEMENT
                              AS OF JUNE 30, 2001

                                                                              ASSET MANAGER(2)
                                                   ----------------------------------------------------------------------
                                                                                   OTHER
                                                                                ENTITIES OF
                                                   PRINCIPAL                   THE PRINCIPAL   THIRD-PARTY   TOTAL ASSETS
                                                    CAPITAL     BT FINANCIAL     FINANCIAL        ASSET         UNDER
                                                   MANAGEMENT      GROUP         GROUP(3)       MANAGERS      MANAGEMENT
                                                   ----------   ------------   -------------   -----------   ------------
                                                                              ($ IN BILLIONS)
                                                                                              
ASSET ACCUMULATION SOURCE(1)
U.S. Asset Management and Accumulation...........    $71.9         $  --           $1.0           $5.8          $ 78.7
International Asset Management and Accumulation..      0.1          21.1            3.1            1.4            25.7
Life and Health Insurance........................      9.3            --             --            0.2             9.5
Mortgage Banking.................................       --            --            0.3             --             0.3
Corporate and Other..............................      2.7            --             --             --             2.7
                                                     -----         -----           ----           ----          ------
         Total...................................    $84.0         $21.1           $4.4           $7.4          $116.9
                                                     =====         =====           ====           ====          ======

---------------

(1) We define "asset accumulation" as the sale of investment-oriented products
    and services for which we provide administrative services and/or offer
    investment choices.

(2) We define "asset management" as the provision of investment advisory
    services. We refer to the entity that provides these services as the "asset
    manager."

(3) Principal Residential Mortgage, Inc., Principal International and Principal
    Bank.

    U.S. ASSET MANAGEMENT AND ACCUMULATION.  Our U.S. Asset Management and
Accumulation segment consists of our asset accumulation operations which provide
products and services, including retirement savings and related investment
products and services, and our asset management operations conducted through
Principal Capital Management, our U.S.-based asset manager. We provide a
comprehensive portfolio of asset accumulation products and services to
businesses and individuals in the United States, with a concentration on small
and medium-sized businesses, which we define as businesses with less than 1,000
employees. We offer to businesses products and services for defined contribution
pension plans, including 401(k) and 403(b) plans, defined benefit pension plans
and non-qualified executive benefit plans. We also offer annuities, mutual funds
and bank products and services to the employees of our business customers and
other individuals.

    Principal Capital Management provides asset management services to our U.S.
asset accumulation businesses and third-party institutional clients, as well as
our other segments. We established Principal Capital Management in 1999 to
consolidate our extensive investment management expertise and to focus on
marketing our asset management services to third-party institutional clients. We
believe that Principal Capital Management is well-positioned to compete in this
third-party institutional market through its expertise gained from managing a
significant percentage of the assets originating from our U.S. asset
accumulation operations. As of June 30, 2001, Principal Capital Management
managed $84.0 billion in assets.

    INTERNATIONAL ASSET MANAGEMENT AND ACCUMULATION.  Our International Asset
Management and Accumulation segment consists of BT Financial Group and Principal
International. Our acquisition of BT Financial Group in 1999 was a central
element in the expansion of our international asset management and accumulation
businesses. As of June 30, 2001, BT Financial Group was the fifth largest asset
manager in Australia according to ASSIRT. As of June 30, 2001, BT Financial
Group managed $21.1 billion in assets. We believe that the mandated retirement
savings system in Australia, called superannuation, and BT Financial Group's
strong market position, together with the expertise we have developed in the
U.S. pension market, should provide for growth in our assets under management in
Australia. The activities of Principal International reflect our efforts to
capitalize on the trend toward private sector defined contribution pension
systems. Through Principal International, we offer retirement products and
services, annuities, mutual funds and life insurance. We operate through
subsidiaries in Argentina, Chile, Mexico and Hong Kong and joint ventures in
Brazil, Japan and India.

    LIFE AND HEALTH INSURANCE.  Our Life and Health Insurance segment offers
individual life and disability insurance as well as group life and health
insurance throughout the United States. Our individual life and disability
insurance business served approximately 750,000 policyholders with $81.8 billion
of life insurance in force as of June 30, 2001. Our individual insurance
products include interest-sensitive life, traditional life and disability
insurance. Our group insurance business served approximately 80,000 employers
covering approximately 5.0 million members and had $70.7 billion of group life
insurance in force as of June 30, 2001. Our group insurance products include
life, disability, medical, dental and vision insurance, and administrative
services.

                                        2

    MORTGAGE BANKING.  Our Mortgage Banking segment engages in originating,
purchasing, selling and servicing residential mortgage loans in the United
States. We service a majority of the loans that we originate. We originated or
purchased $15.4 billion in new mortgage loans for the six months ended June 30,
2001 compared to $8.3 billion for the year ended December 31, 2000. We serviced
a portfolio of $64.4 billion of mortgage loans as of June 30, 2001. Residential
mortgages represent a component of our overall portfolio of market-driven
financial products and services.

OUR STRATEGIES AND OPERATING PRINCIPLES

    We seek to enhance stockholder value by pursuing the most attractive
financial services opportunities consistent with the capabilities of our asset
management and accumulation operations. We intend to accomplish this goal by
increasing the growth and profitability of these businesses through the pursuit
of the following primary strategic initiatives:

    ACCELERATE THE GROWTH OF OUR U.S. ASSET ACCUMULATION BUSINESS.  We intend to
strengthen our existing distribution channels and expand into new distribution
channels, further leverage our technology to achieve operating efficiencies,
continue to expand the range of investment options and effectively cross-sell
our products and services.

    INCREASE THE GROWTH AND PROFITABILITY OF OUR INTERNATIONAL ASSET MANAGEMENT
AND ACCUMULATION BUSINESS.  We will continue to leverage our U.S. product
expertise and operating platform to strengthen our international operations. We
seek to accelerate the growth of our assets under management by capitalizing on
the international trend toward privatization of public retirement pension
systems. In addition, we intend to continue our progress in managing expenses.

    GROW OUR THIRD-PARTY INSTITUTIONAL ASSETS UNDER MANAGEMENT.  We selectively
target asset classes and customers in the United States, Australia and globally
to capitalize on the specific strengths of Principal Capital Management and BT
Financial Group. They jointly execute this strategy in their respective markets
and through marketing offices in London, Hong Kong and Singapore.

    In addition to these primary strategic initiatives, we have specific
strategies within each of our operating segments, which are described in the
"Business" section of this prospectus.

    The following operating principles support our primary and segment-specific
strategies:

    - OPERATE A FULL-SERVICE PLATFORM.  We operate a full-service platform to
      serve the wide array of our customers' needs by originating sales through
      our diverse distribution channels, offering a comprehensive portfolio of
      products and services, administering these products and services
      efficiently using information technology and managing a significant
      portion of the assets we accumulate for our customers.

    - BUILD ON STRONG CUSTOMER RELATIONSHIPS.  We are committed to building on
      our strong customer relationships by providing products and services that
      respond to their needs and by increasing the global awareness of our
      brand.

    - FOCUS ON FINANCIAL PERFORMANCE.  We have taken specific actions to improve
      our operating earnings over the last several years, and we intend to
      continue to focus each of our businesses to further improve financial
      performance by:

     - managing capital effectively;

     - improving cost management; and

     - actively managing our investment portfolio.

    - REINFORCE OUR CULTURE.  We are committed to strengthening our
      organization's performance-oriented culture through a new incentive
      compensation program, a management evaluation system and a stock option
      plan, each designed to enhance performance.

THE DEMUTUALIZATION

    The offering of our shares is made in connection with the conversion of
Principal Mutual Holding Company from a mutual insurance holding company into a
stock company in a process called a demutualization. Upon demutualization, the
membership interests of Principal Life's policyholders in Principal Mutual
Holding Company will be extinguished, and eligible policyholders will receive
compensation in exchange for the extinguishment of their membership interests.
Their compensation will be in the form of our common stock, cash or policy
credits, depending upon, among other things, the type of policy or policyholder.

    The policyholders entitled to vote on the plan of conversion approved the
plan of conversion at a meeting held on July 24, 2001, by approximately 92% of
the votes cast. In order for the demutualization to be consummated and for this
offering to occur, the plan of conversion must have been approved by the
Insurance Commissioner of the State of Iowa

                                        3

after a public hearing, which was held on July 25, 2001. The Insurance
Commissioner of the State of Iowa approved the plan of conversion on August 28,
2001. In addition, the effectiveness of the demutualization and the closing of
this offering are conditioned on their simultaneous occurrence.

    We are currently a wholly-owned subsidiary of Principal Mutual Holding
Company. The demutualization of Principal Mutual Holding Company includes the
following steps, all of which will occur on the date of the closing of this
offering:

    - Principal Mutual Holding Company will convert from a mutual insurance
      holding company into a stock company;

    - all membership interests of Principal Life's policyholders in Principal
      Mutual Holding Company will be extinguished;

    - the converted Principal Mutual Holding Company will merge with and into
      one of our wholly-owned subsidiaries;

    - we will sell shares of our common stock to the public in this offering;

    - policyholders entitled to receive compensation in the demutualization will
      receive shares of our common stock, cash or policy credits as compensation
      for the extinguishment of their membership interests in Principal Mutual
      Holding Company no later than 75 days after the closing of this offering,
      unless the Insurance Commissioner of the State of Iowa approves a later
      date; and

    - we will contribute to Principal Life all or a portion of the net proceeds
      from this offering, as described in "Use of Proceeds".

    In addition to this offering, we may also conduct a private placement of our
common stock, a private placement or public offering of convertible preferred
stock, a private placement or public offering of debt or seek other sources of
capital. The primary purpose of any of these capital raising transactions would
be to fund cash and policy credit elections.

    When the demutualization and this offering are complete, we will be a public
company and will indirectly own 100% of the common stock of Principal Life and
other operating subsidiaries of the Principal Financial Group.

EXCHANGE RATE TRANSLATION

    We translated foreign-denominated balance sheet data and assets under
management, as applicable, at the appropriate end of period exchange rate. We
translated foreign-denominated income statement data and asset flow data, as
applicable, at the average exchange rate for the appropriate period. BT
Financial Group, our largest international subsidiary, primarily operates in
Australia. The following end of period exchange rates and average exchange rates
for the Australian dollar to U.S. dollar were as follows for the periods
indicated:

                                 EXCHANGE RATE
                   AUSTRALIAN DOLLAR COMPARED TO U.S. DOLLAR

                                                           AS OF OR FOR THE
                                                              SIX MONTHS
                                                                ENDED            AS OF OR FOR THE YEAR ENDED
                                                               JUNE 30,                 DECEMBER 31,
                                                           ----------------   ---------------------------------
                                                                 2001           2000        1999        1998
                                                           ----------------   ---------   ---------   ---------
                                                                                          
END OF PERIOD EXCHANGE RATES.............................     A$ 1.0000       A$ 1.0000   A$ 1.0000   A$ 1.0000
                                                              ---------       ---------   ---------   ---------
                                                              US$0.5081       US$0.5556   US$0.6543   US$0.6133

AVERAGE EXCHANGE RATES...................................     A$ 1.0000       A$ 1.0000   A$ 1.0000
                                                              ---------       ---------   ---------
                                                              US$0.5139       US$0.5738   US$0.6499

    These rates are based on noon rates of exchange provided by a third party
financial data source. At October 22, 2001, the noon rate of exchange was
A$1:US$0.5078.

OUR PRINCIPAL EXECUTIVE OFFICES ARE LOCATED AT 711 HIGH STREET, DES MOINES, IOWA
                                     50392.
                    OUR TELEPHONE NUMBER IS (515) 247-5111.

                                        4

                                  THE OFFERING

Common stock offered.......100.0 million shares

Common stock outstanding
after the offering.........360.6 million shares

Use of proceeds............Our net proceeds from the offering will be $1,753.3
                           million, or $2,018.8 million if the underwriters
                           exercise their option to purchase additional shares
                           in full. We will contribute all or a portion of the
                           net proceeds to Principal Life to fund (1) policy
                           credits and cash payments for policyholders for whom
                           policy credits or cash are the required form of
                           compensation; (2) the elections for cash and the
                           elections or deemed elections for ACCOUNT VALUE
                           POLICY CREDITS that are attributable to policyholders
                           entitled to these forms of compensation; and (3) an
                           amount equal to the fees and expenses of the
                           demutualization paid by Principal Life. Under the
                           plan of conversion, we may retain up to $250.0
                           million of any remaining proceeds. We must contribute
                           any remaining proceeds, before any exercise of the
                           underwriters' over-allotment option, in excess of
                           this $250.0 million limit to Principal Life.

Dividend policy............Subject to our financial condition and declaration by
                           our board of directors, we currently intend to pay
                           regular annual cash dividends on our common stock. We
                           currently intend to declare an annual cash dividend
                           of $0.25 per share on our common stock. We expect
                           that our first annual cash dividend will be a
                           proportion of that amount, based on the number of
                           months remaining in the calendar year in which we
                           become public. See "Stockholder Dividend Policy".

New York Stock Exchange
  symbol...................PFG

    Unless we specifically state otherwise, the information in this prospectus
does not take into account the sale of up to 15.0 million additional shares of
our common stock, which the underwriters have the option to purchase from us to
cover over-allotments.

                                        5

                    SUMMARY HISTORICAL FINANCIAL INFORMATION

    The following table provides summary historical consolidated financial
information of Principal Mutual Holding Company, the predecessor to Principal
Financial Group, Inc. prior to the demutualization, and will apply to Principal
Financial Group, Inc. following the demutualization. We derived the consolidated
financial information for each of the years ended December 31, 2000, 1999 and
1998 and as of December 31, 2000 and 1999 from our audited consolidated
financial statements and notes to the financial statements included in this
prospectus. We derived the consolidated financial information for the years
ended December 31, 1997 and 1996 and as of December 31, 1998, 1997 and 1996 from
our audited consolidated financial statements not included in this prospectus.
We derived the summary consolidated financial information for the six months
ended June 30, 2001 and 2000 and as of June 30, 2001 from our unaudited interim
consolidated financial statements included in this prospectus. We derived the
summary consolidated financial information as of June 30, 2000 from our
unaudited interim consolidated financial statements not included in this
prospectus. All unaudited interim consolidated financial information presented
in the table below reflects all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of our consolidated financial
position and results of operations for such periods. The results of operations
for the six months ended June 30, 2001 are not necessarily indicative of the
results to be expected for the full year. The following summary consolidated
financial information, other than the Principal Life statutory data, has been
prepared in accordance with U.S. generally accepted accounting principles, or
GAAP.

    The following is a summary and, in order to fully understand our
consolidated financial information, you should also read "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and the notes to the financial statements
included in this prospectus. The results for past accounting periods are not
necessarily indicative of the results to be expected for any future accounting
period.

                                                     FOR THE
                                                   SIX MONTHS
                                                 ENDED JUNE 30,                FOR THE YEAR ENDED DECEMBER 31,
                                               -------------------   ----------------------------------------------------
                                               2001(2)    2000(2)    2000(2)    1999(2)    1998(2)    1997(2)    1996(2)
                                               --------   --------   --------   --------   --------   --------   --------
                                                                            ($ IN MILLIONS)
                                                                                            
INCOME STATEMENT DATA:(1)
Revenues:
  Premiums and other considerations..........  $1,955.3   $1,992.7   $3,996.4   $3,937.6   $3,818.4   $4,667.8   $5,120.9
  Fees and other revenues....................     856.3      783.2    1,576.3    1,287.3      978.8      881.9      722.4
  Net investment income......................   1,686.0    1,558.1    3,172.3    3,072.0    2,933.9    2,936.6    2,894.0
  Net realized capital gains (losses)........    (176.9)      31.5      139.9      404.5      465.8      175.3      387.8
                                               --------   --------   --------   --------   --------   --------   --------
         Total revenues......................   4,320.7    4,365.5    8,884.9    8,701.4    8,196.9    8,661.6    9,125.1

Expenses:
  Benefits, claims and settlement expenses...   2,639.2    2,631.1    5,232.3    5,260.9    5,089.0    5,632.5    6,086.5
  Dividends to policyholders.................     162.1      155.8      312.7      304.6      298.7      299.3      298.5
  Operating expenses.........................   1,228.2    1,228.0    2,479.4    2,070.3    2,074.0    2,035.5    1,909.8
                                               --------   --------   --------   --------   --------   --------   --------
         Total expenses......................   4,029.5    4,014.9    8,024.4    7,635.8    7,461.7    7,967.3    8,294.8
                                               --------   --------   --------   --------   --------   --------   --------
Income before income taxes and cumulative
  effect of accounting change................     291.2      350.6      860.5    1,065.6      735.2      694.3      830.3
Income taxes.................................      56.1      105.3      240.3      323.5       42.2      240.8      304.3
                                               --------   --------   --------   --------   --------   --------   --------
Income before cumulative effect of accounting
  change.....................................     235.1      245.3      620.2      742.1      693.0      453.5      526.0
Cumulative effect of accounting change, net
  of related income taxes....................     (10.7)        --         --         --         --         --         --
                                               --------   --------   --------   --------   --------   --------   --------
         Net income..........................  $  224.4   $  245.3   $  620.2   $  742.1   $  693.0   $  453.5   $  526.0
                                               ========   ========   ========   ========   ========   ========   ========

                                        6

                                            AS OF OR FOR THE
                                            SIX MONTHS ENDED
                                                JUNE 30,                  AS OF OR FOR THE YEAR ENDED DECEMBER 31,
                                          ---------------------   ---------------------------------------------------------
                                           2001(2)     2000(2)     2000(2)     1999(2)     1998(2)     1997(2)     1996(2)
                                          ---------   ---------   ---------   ---------   ---------   ---------   ---------
                                                                           ($ IN MILLIONS)
                                                                                             
BALANCE SHEET DATA:(1)
Invested assets.........................  $44,403.2   $41,224.9   $42,090.6   $41,343.2   $40,686.7   $39,572.2   $38,658.3
Separate account assets.................   33,739.5    36,080.6    34,916.2    34,992.3    29,009.3    23,560.1    17,166.3
All other assets........................    7,087.0     7,040.8     7,398.1     7,617.7     4,350.7     4,002.9     3,358.7
                                          ---------   ---------   ---------   ---------   ---------   ---------   ---------
         Total assets...................  $85,229.7   $84,346.3   $84,404.9   $83,953.2   $74,046.7   $67,135.2   $59,183.3
                                          =========   =========   =========   =========   =========   =========   =========

Policyholder liabilities................  $39,159.4   $37,412.4   $38,243.6   $37,808.9   $35,885.1   $35,306.1   $34,766.3
Separate account liabilities............   33,739.5    36,080.6    34,916.2    34,992.3    29,009.3    23,560.1    17,166.3
Short-term debt.........................      675.9       390.7       459.5       547.3       290.9       313.7       198.5
Long-term debt..........................    1,390.6     1,538.5     1,336.5     1,492.9       670.9       458.9       399.1
All other liabilities...................    3,735.9     3,290.3     3,196.6     3,558.9     2,523.3     2,212.2     1,998.6
                                          ---------   ---------   ---------   ---------   ---------   ---------   ---------
         Total liabilities..............  $78,701.3   $78,712.5   $78,152.4   $78,400.3   $68,379.5   $61,851.0   $54,528.8
                                          =========   =========   =========   =========   =========   =========   =========

Retained earnings.......................  $ 6,536.9   $ 5,937.6   $ 6,312.5   $ 5,692.3   $ 4,950.2   $ 4,257.2   $ 3,803.7
Net unrealized gains (losses) on
  available-for-sale securities.........      268.6      (178.2)      129.9       (79.1)      745.9     1,037.5       859.7
Net foreign currency translation
  adjustment............................     (277.1)     (125.6)     (189.9)      (60.3)      (28.9)      (10.5)       (8.9)
                                          ---------   ---------   ---------   ---------   ---------   ---------   ---------
         Total equity...................  $ 6,528.4   $ 5,633.8   $ 6,252.5   $ 5,552.9   $ 5,667.2   $ 5,284.2   $ 4,654.5
                                          =========   =========   =========   =========   =========   =========   =========
PRINCIPAL LIFE STATUTORY DATA:(3)
Premiums and deposits(4)................  $ 2,301.9   $ 7,665.5   $15,653.3   $15,709.8   $14,120.3   $12,710.9   $12,156.2
Net income(5)...........................      125.2       355.1       912.6       713.7       511.4       432.2       415.0

Statutory capital and surplus(6)........  $ 3,328.9   $ 3,095.4   $ 3,356.4   $ 3,151.9   $ 3,031.5   $ 2,811.1   $ 2,503.5
Asset valuation reserve.................      878.0       951.2       919.8       953.8       966.9     1,087.9     1,005.0
                                          ---------   ---------   ---------   ---------   ---------   ---------   ---------
         Statutory capital and surplus
           and asset valuation
           reserve......................  $ 4,206.9   $ 4,046.6   $ 4,276.2   $ 4,105.7   $ 3,998.4   $ 3,899.0   $ 3,508.5
                                          =========   =========   =========   =========   =========   =========   =========
OTHER SUPPLEMENTAL DATA:
Net income..............................  $   224.4   $   245.3   $   620.2   $   742.1   $   693.0   $   453.5   $   526.0
Less:
Net realized capital gains (losses), as
  adjusted(7)...........................     (108.2)       23.1        93.1       266.9       320.7       111.4       261.0
Non-recurring items(8)..................      (31.4)      (75.8)     (101.0)         --       104.8          --          --
                                          ---------   ---------   ---------   ---------   ---------   ---------   ---------
         Operating earnings.............  $   364.0   $   298.0   $   628.1   $   475.2   $   267.5   $   342.1   $   265.0
                                          =========   =========   =========   =========   =========   =========   =========
Operating return on average equity(9)...      11.1%        8.3%       10.5%        8.9%        5.8%        8.5%        7.5%

Total return on average equity(10)......       9.6%        8.4%       10.3%       13.9%       15.1%       11.3%       14.9%

Operating earnings before amortization
  of goodwill and other intangibles.....  $   385.6   $   317.9   $   670.8   $   492.0   $   304.0   $   352.0   $   273.7

Assets under management ($ in
  billions).............................  $   116.9   $   117.1   $   117.5   $   116.6   $    80.4   $    72.1   $    63.0

Number of employees (actual)............     17,646      16,999      17,473      17,129      15,970      17,637      17,010

    We evaluate segment performance by segment operating earnings, which
excludes the effect of net realized capital gains and losses, as adjusted, and
non-recurring events and transactions. We determine segment operating earnings
by adjusting GAAP net income for net realized capital gains and losses, as
adjusted, and non-recurring items that we believe are not indicative of overall
operating trends. While these items may be significant components in
understanding and assessing our consolidated financial performance, we believe
the presentation of segment operating earnings enhances the understanding of our
results of operations by highlighting earnings attributable to the normal,
recurring operations of our businesses. However, segment operating earnings are
not a substitute for net income determined in accordance with GAAP.

                                        7

    The following table provides selected segment information as of or for the
six months ended June 30, 2001 and 2000, and as of or for each of the years
ended December 31, 2000, 1999 and 1998. The segment information is reported on a
consolidated basis.

                                                     AS OF OR FOR THE SIX MONTHS                   AS OF OR FOR THE YEAR
                                                           ENDED JUNE 30,                            ENDED DECEMBER 31,
                                           -----------------------------------------------   ----------------------------------
                                                  2001(2)                  2000(2)                  2000(2)            1999(2)
                                           ----------------------   ----------------------   ----------------------   ---------
                                            AMOUNT     % OF TOTAL    AMOUNT     % OF TOTAL    AMOUNT     % OF TOTAL    AMOUNT
                                           ---------   ----------   ---------   ----------   ---------   ----------   ---------
                                                                             ($ IN MILLIONS)
                                                                                                 
OPERATING EARNINGS DATA:
Operating revenues:
 U.S. Asset Management and
   Accumulation(11)......................  $ 1,858.2       43%      $ 1,700.7       39%      $ 3,533.9       40%      $ 3,472.6
 International Asset Management and
   Accumulation..........................      310.1        7           309.5        7           630.7        7           379.6
 Life and Health Insurance...............    1,978.2       46         2,100.7       48         4,122.6       46         3,985.5
 Mortgage Banking........................      293.1        7           180.7        4           359.8        4           398.3
 Corporate and Other(11)(12).............       57.5        1            40.5        1            97.1        1            61.9
                                           ---------      ---       ---------      ---       ---------      ---       ---------
       Total operating revenues..........    4,497.1      104         4,332.1       99         8,744.1       98         8,297.9

 Net realized capital gains (losses),
   including recognition of front-end fee
   revenues(7)...........................     (176.4)      (4)           33.4        1           140.8        2           403.5
                                           ---------      ---       ---------      ---       ---------      ---       ---------
       Total consolidated revenues.......  $ 4,320.7      100%      $ 4,365.5      100%      $ 8,884.9      100%      $ 8,701.4
                                           =========      ===       =========      ===       =========      ===       =========
Operating earnings (loss):
 U.S. Asset Management and
   Accumulation..........................  $   176.9       48%      $   177.3       59%      $   356.6       57%      $   356.6
 International Asset Management and
   Accumulation..........................       (4.7)      (1)           (3.7)      (1)           (8.5)      (1)          (38.4)
 Life and Health Insurance...............       90.9       25            86.0       29           162.3       26            90.7
 Mortgage Banking........................       68.8       19            34.4       12            50.0        8            56.8
 Corporate and Other.....................       32.1        9             4.0        1            67.7       10             9.5
                                           ---------      ---       ---------      ---       ---------      ---       ---------
       Total operating earnings..........  $   364.0      100%      $   298.0      100%      $   628.1      100%      $   475.2
                                           =========      ===       =========      ===       =========      ===       =========
INCOME STATEMENT DATA:
Net income (loss):
 U.S. Asset Management and
   Accumulation..........................  $   125.3       56%      $   142.2       58%      $   320.7       52%      $   321.2
 International Asset Management and
   Accumulation..........................      (25.9)     (12)           (0.2)      --            (7.1)      (1)          (30.7)
 Life and Health Insurance...............       86.3       38           136.1       55           209.6       34           100.8
 Mortgage Banking........................       68.8       31            34.4       14            50.0        8            56.8
 Corporate and Other.....................      (30.1)     (13)          (67.2)     (27)           47.0        7           294.0
                                           ---------      ---       ---------      ---       ---------      ---       ---------
       Total net income..................  $   224.4      100%      $   245.3      100%      $   620.2      100%      $   742.1
                                           =========      ===       =========      ===       =========      ===       =========
BALANCE SHEET DATA:
Total assets:
 U.S. Asset Management and
   Accumulation..........................  $66,182.4       78%      $65,109.4       77%      $65,795.9       78%      $65,096.4
 International Asset Management and
   Accumulation..........................    4,919.6        6         5,547.3        7         5,525.9        7         5,926.8
 Life and Health Insurance...............   10,637.2       12        10,293.8       12        10,569.0       12        10,070.8
 Mortgage Banking........................    2,168.9        3         1,606.3        2         1,556.3        2         1,737.7
 Corporate and Other(13).................    1,321.6        1         1,789.5        2           957.8        1         1,121.5
                                           ---------      ---       ---------      ---       ---------      ---       ---------
       Total assets......................  $85,229.7      100%      $84,346.3      100%      $84,404.9      100%      $83,953.2
                                           =========      ===       =========      ===       =========      ===       =========
OTHER SUPPLEMENTAL DATA:
Assets Under Management:
 ($ in billions)
 U.S. Asset Management and
   Accumulation..........................  $    78.7       68%      $    73.9       63%      $    78.1       67%      $    75.6
 International Asset Management and
   Accumulation..........................       25.7       22            29.7       26            28.4       24            30.6
 Life and Health Insurance...............        9.5        8             9.2        8             9.3        8             8.7
 Mortgage Banking(14)....................        0.3       --             1.6        1             0.2       --             0.5
 Corporate and Other.....................        2.7        2             2.7        2             1.5        1             1.2
                                           ---------      ---       ---------      ---       ---------      ---       ---------
       Total assets under management.....  $   116.9      100%      $   117.1      100%      $   117.5      100%      $   116.6
                                           =========      ===       =========      ===       =========      ===       =========

                                                  AS OF OR FOR THE YEAR
                                                   ENDED DECEMBER 31,
                                           -----------------------------------
                                            1999(2)            1998(2)
                                           ----------   ----------------------
                                           % OF TOTAL    AMOUNT     % OF TOTAL
                                           ----------   ---------   ----------
                                                     ($ IN MILLIONS)
                                                           
OPERATING EARNINGS DATA:
Operating revenues:
 U.S. Asset Management and
   Accumulation(11)......................      40%      $ 2,933.1       36%
 International Asset Management and
   Accumulation..........................       4           223.1        3
 Life and Health Insurance...............      46         3,893.1       47
 Mortgage Banking........................       4           340.6        4
 Corporate and Other(11)(12).............       1           342.5        4
                                              ---       ---------      ---
       Total operating revenues..........      95         7,732.4       94
 Net realized capital gains (losses),
   including recognition of front-end fee
   revenues(7)...........................       5           464.5        6
                                              ---       ---------      ---
       Total consolidated revenues.......     100%      $ 8,196.9      100%
                                              ===       =========      ===
Operating earnings (loss):
 U.S. Asset Management and
   Accumulation..........................      75%      $   238.4       89%
 International Asset Management and
   Accumulation..........................      (8)          (35.4)     (13)
 Life and Health Insurance...............      19            50.0       19
 Mortgage Banking........................      12            58.8       22
 Corporate and Other.....................       2           (44.3)     (17)
                                              ---       ---------      ---
       Total operating earnings..........     100%      $   267.5      100%
                                              ===       =========      ===
INCOME STATEMENT DATA:
Net income (loss):
 U.S. Asset Management and
   Accumulation..........................      43%      $   277.0       40%
 International Asset Management and
   Accumulation..........................      (4)          (10.1)      (1)
 Life and Health Insurance...............      13           112.0       16
 Mortgage Banking........................       8            58.8        8
 Corporate and Other.....................      40           255.3       37
                                              ---       ---------      ---
       Total net income..................     100%      $   693.0      100%
                                              ===       =========      ===
BALANCE SHEET DATA:
Total assets:
 U.S. Asset Management and
   Accumulation..........................      78%      $58,701.5       79%
 International Asset Management and
   Accumulation..........................       7         1,239.4        2
 Life and Health Insurance...............      12         9,219.5       13
 Mortgage Banking........................       2         1,810.4        2
 Corporate and Other(13).................       1         3,075.9        4
                                              ---       ---------      ---
       Total assets......................     100%      $74,046.7      100%
                                              ===       =========      ===
OTHER SUPPLEMENTAL DATA:
Assets Under Management:
 ($ in billions)
 U.S. Asset Management and
   Accumulation..........................      65%      $    67.2       84%
 International Asset Management and
   Accumulation..........................      26             1.2        1
 Life and Health Insurance...............       8             8.2       10
 Mortgage Banking(14)....................      --             0.7        1
 Corporate and Other.....................       1             3.1        4
                                              ---       ---------      ---
       Total assets under management.....     100%      $    80.4      100%
                                              ===       =========      ===

---------------

 (1) We have reclassified periods prior to June 30, 2001, to conform to the
     presentation for that period.

                                        8

 (2) Our consolidated financial results were affected by the following
     transactions that affect year-to-year comparability:

     - On September 25, 2001, we disposed of all the stock of PT Asuransi Jiwa
       Principal Indonesia, our subsidiary in Indonesia. We currently have no
       business operations in Indonesia. Total assets of our operations in
       Indonesia as of June 30, 2001 were $3.4 million. We included nominal
       revenues and net loss from our operations in Indonesia in our
       consolidated results of operations for the six months ended June 30, 2001
       and 2000, and for the years ended December 31, 2000, 1999 and 1998.

     - On February 15, 2001, we disposed of all of the stock of Principal
       International Espana, S.A. de Seguros de Vida, our subsidiary in Spain,
       for nominal proceeds, resulting in a net realized capital loss of $38.4
       million, ceasing our business operations in Spain. Total assets of our
       operations in Spain as of December 31, 2000 were $222.7 million. We
       included revenues of $33.1 million from our operations in Spain in our
       consolidated results of operations for the six months ended June 30,
       2000, and revenues of $49.4 million, $51.7 million and $46.0 million in
       our results of operations for the years ended December 31, 2000, 1999 and
       1998, respectively. We included net income of $2.2 million from our
       operations in Spain for the six months ended June 30, 2000, and a net
       loss of $1.2 million and net income of $0.9 million and $2.8 million in
       our results of operations for the years ended December 31, 2000, 1999 and
       1998, respectively. We did not include revenues or net income from our
       operations in Spain in our consolidated results of operations for the six
       months ended June 30, 2001.

     - On August 31, 1999, we acquired several companies affiliated with Bankers
       Trust Australia Group from Deutsche Bank AG at a purchase price of $1.4
       billion. The acquired companies now operate under the name BT Financial
       Group. We accounted for the acquisition using the purchase method. We
       included the results of operations of the acquired companies in our
       International Asset Management and Accumulation segment and our
       consolidated financial statements from the date of acquisition. We
       included revenues of $122.5 million and net loss of $5.8 million in our
       consolidated results of operations for the six months ended June 30,
       2001. We included revenues of $145.4 million and net income of $6.2
       million in our consolidated results of operations for the six months
       ended June 30, 2000. We included revenues of $285.5 million and net
       income of $6.5 million in our consolidated results of operations for the
       year ended December 31, 2000. We included revenues of $116.5 million and
       net loss of $3.1 million in our consolidated results of operations for
       the year ended December 31, 1999. We accounted for the purchase price as
       follows: $897.4 million of identifiable intangibles, consisting primarily
       of management rights and the BT brand name, $38.5 million of workforce
       intangibles and $408.6 million of resulting goodwill, which are being
       amortized on a straight line basis over 40 years, 8 years and 25 years,
       respectively.

     - We acquired Compania de Seguros de Vida El Roble S.A., or El Roble, a
       Chilean life insurance company, for a purchase price of $73.4 million in
       July 1998. We included El Roble's financial results in our International
       Asset Management and Accumulation segment. We combined the operations of
       our existing Chilean life insurance affiliate with the operations of El
       Roble to form Principal International de Chile. Our consolidated
       financial results related to these companies' combined operations
       include: total revenues of $108.6 million and $95.7 million for the six
       months ended June 30, 2001 and 2000, respectively, and $200.2 million,
       $178.1 million and $155.2 million for the years ended December 31, 2000,
       1999 and 1998, respectively; and net income of $4.3 million and $3.4
       million for the six months ended June 30, 2001 and 2000, respectively,
       and $10.2 million, $0.5 million and $17.0 million for the years ended
       December 31, 2000, 1999 and 1998, respectively.

     - In July 1998, we established our residential mortgage loan wholesale
       distribution system, a new distribution channel, by acquiring ReliaStar
       Mortgage Corporation for a purchase price of $18.6 million. We have
       integrated the operations of ReliaStar Mortgage Corporation into
       Principal Residential Mortgage, Inc., as part of our Mortgage Banking
       segment.

     - Effective April 1, 1998, we transferred substantially all of our health
       maintenance organization operations, or HMO operations, to Coventry
       Health Care, Inc., or Coventry, in exchange for 42% of their common
       stock. Our net equity in the transferred HMO operations had a carrying
       value of $170.0 million on April 1, 1998. We sold our remaining HMO
       operations in 1998 for $20.5 million resulting in no realized capital
       gain or loss. Prior to the transfer to Coventry, our Corporate and Other
       segment included $266.7 million of HMO revenues in our results for 1998.
       We report our investment in Coventry in our Corporate and Other segment
       and account for it using the equity method. Our share of Coventry's net
       income was $9.7 million and $10.8 million for the six months ended June
       30, 2001 and 2000, respectively, and $20.0 million and $19.1 million for
       the years ended December 31, 2000 and 1999, respectively. Our share of
       Coventry's net loss was $9.8 million for the year ended December 31,
       1998. In September 2000, we sold a portion of our Coventry stock, which
       reduced our ownership interest to approximately 25% of Coventry stock and
       resulted in a net realized capital gain of $13.9 million, net of tax. Our
       carrying amount in Coventry was $134.6 million as of June 30, 2001.

 (3) We have provided statutory data from quarterly and annual statements of
     Principal Life filed with insurance regulatory authorities. Certain
     financial information for periods beginning on or after January 1, 2001 is
     not comparable to information from earlier periods. We prepared statutory
     data as of or for the six months ended June 30, 2001 in conformity with the
     NAIC Codification of Statutory Principles ("Codification"), adopted as

                                        9

     prescribed and permitted by the Insurance Division, Department of Commerce
     of the State of Iowa, effective January 1, 2001. As allowed by
     Codification, we did not restate prior period information. We prepared
     statutory data as of or for the six months ended June 30, 2000 and the
     years ended December 31, 2000, 1999, 1998, 1997 and 1996 in conformity with
     accounting practices prescribed or permitted on the dates thereof by the
     Insurance Division, Department of Commerce of the State of Iowa.

 (4) Codification, as adopted by Principal Life on January 1, 2001, has
     significantly impacted the reporting of Principal Life's statutory premiums
     and deposits for the six months ended June 30, 2001. Under Codification, we
     no longer report amounts received for deposit-type contracts in the
     statement of operations as revenue, but rather report these amounts
     directly as an increase in an appropriate policy reserve account, a
     treatment that is similar to that under U.S. GAAP. This has the effect of
     decreasing reported total revenues and total expenses of Principal Life,
     with no effect to statutory net income or statutory surplus. Premiums and
     deposits for the six months ended June 30, 2000, and for the years ended
     December 31, 2000, 1999, 1998, 1997 and 1996 included amounts received for
     deposit-type contracts of $5,432.8 million, $11,273.2 million, $11,571.5
     million, $10,312.6 million, $8,694.9 million and $7,493.9 million,
     respectively.

 (5) Codification, as adopted by Principal Life on January 1, 2001, has impacted
     the reporting of Principal Life's statutory net income for the six months
     ended June 30, 2001. Under Codification our net income has been
     significantly impacted due to a change in the accounting for undistributed
     income (loss) from subsidiaries. We no longer report undistributed income
     (loss) from subsidiaries as part of net investment income, but rather
     report these amounts as unrealized gains and losses, which are excluded
     from the calculation of net income. This has the effect of decreasing
     reported total statutory revenues and net income, but has no effect on
     statutory surplus. Undistributed income from subsidiaries for the six
     months ended June 30, 2000, and for the years ended December 31, 2000 and
     1999 were $100.0 million, $208.9 million and $159.9 million, respectively,
     and undistributed loss from subsidiaries for the years ended December 31,
     1998, 1997 and 1996 were $0.4 million, $41.3 million and $104.1 million,
     respectively.

 (6)On August 24, 2001, Principal Life paid a statutory dividend of $250.0
    million, which reduced its surplus by that amount.

 (7) Net realized capital gains (losses), as adjusted, are net of tax, related
     changes in the amortization pattern of deferred policy acquisition costs,
     recognition of front-end fee revenues for sales charges on pension products
     and services and net realized capital gains credited to customers. This
     presentation may not be comparable to presentations made by other
     companies. Deferred policy acquisition costs represent commissions and
     other selling expenses that vary with and are directly related to the
     production of business. These acquisition costs are deferred and amortized
     in conformity with GAAP.

     Following is a reconciliation of net realized capital gains (losses) from
     the consolidated financial statements and the adjustment made to calculate
     segment operating earnings for the periods indicated:

                                                 FOR THE SIX
                                                 MONTHS ENDED
                                                   JUNE 30,              FOR THE YEAR ENDED DECEMBER 31,
                                               ----------------   ---------------------------------------------
                                                2001      2000     2000     1999      1998      1997     1996
                                               -------   ------   ------   -------   -------   ------   -------
                                                                       ($ IN MILLIONS)
                                                                                   
     Net realized capital gains (losses).....  $(176.9)  $ 31.5   $139.9   $ 404.5   $ 465.8   $175.3   $ 387.8
     Recognition of front-end fee revenues...      0.5      1.9      0.9      (1.0)     (1.3)    (0.9)       --
                                               -------   ------   ------   -------   -------   ------   -------
       Net realized capital gains (losses),
         including recognition of front-end
         fee revenues........................   (176.4)    33.4    140.8     403.5     464.5    174.4     387.8
     Amortization of deferred policy
       acquisition costs related to net
       realized capital gains (losses).......      3.9     (3.4)    (0.3)      4.4       5.7     (1.7)       --
     Amounts credited to contractholder
       accounts..............................       --       --       --        --     (26.3)      --        --
     Non-recurring net realized capital
       losses................................       --       --       --        --      (1.7)      --        --
                                               -------   ------   ------   -------   -------   ------   -------
       Net realized capital gains (losses),
         including recognition of front-end
         fee revenues, net of related
         amortization of deferred policy
         acquisition costs and amounts
         credited to contractholders.........   (172.5)    30.0    140.5     407.9     442.2    172.7     387.8
     Income tax effect.......................     64.3     (6.9)   (47.4)   (141.0)   (121.5)   (61.3)   (126.8)
                                               -------   ------   ------   -------   -------   ------   -------
       Net realized capital gains (losses),
         as adjusted.........................  $(108.2)  $ 23.1   $ 93.1   $ 266.9   $ 320.7   $111.4   $ 261.0
                                               =======   ======   ======   =======   =======   ======   =======

                                        10

 (8) For the six months ended June 30, 2001, we excluded $31.4 million of
     non-recurring items, net of tax, from net income for the presentation of
     operating earnings. The non-recurring items included the negative effects
     of: (a) expenses related to our demutualization ($14.8 million); (b) a
     cumulative effect of change in accounting principle related to our
     implementation of SFAS 133 ($10.7 million), as discussed in Note 2 to
     Principal Mutual Holding Company's unaudited consolidated financial
     statements; and (c) a loss contingency reserve established for sales
     practices litigation ($5.9 million).

    For the six months ended June 30, 2000, we excluded $75.8 million of
    non-recurring items, net of tax, from net income for our presentation of
    consolidated operating earnings. The non-recurring items included the
    negative effects of: (a) a loss contingency reserve established for sales
    practices litigation ($75.0 million), and (b) expenses related to our
    demutualization ($0.8 million).

    For the year ended December 31, 2000, we excluded $101.0 million of
    non-recurring items, net of tax, from net income for our presentation of
    operating earnings. The non-recurring items included the negative effects of
    (a) a loss contingency reserve established for sales practices litigation
    ($93.8 million) and (b) expenses related to our demutualization ($7.2
    million).

    For the year ended December 31, 1998, we excluded $104.8 million of
    non-recurring items, net of tax, from net income for our presentation of
    operating earnings. The non-recurring items included:

     - the positive effects of (a) Principal Life's release of tax reserves and
       related accrued interest ($164.4 million) and (b) accounting changes by
       our international operations ($13.3 million); and

     - the negative effects of (a) expenses and adjustments for changes in
       amortization assumptions for deferred policy acquisition costs related to
       our corporate structure change to a mutual insurance holding company
       ($27.4 million) and (b) a contribution related to permanent endowment of
       the Principal Financial Group Foundation ($45.5 million).

 (9) We define operating return on average equity as operating earnings divided
     by average total equity, excluding accumulated other comprehensive income.
     We calculate the returns for interim reporting periods by using operating
     earnings for the trailing twelve months. We have excluded accumulated other
     comprehensive income due to its volatility between periods and because such
     data are often excluded when evaluating the overall financial performance
     of insurers. Operating return on average equity should not be considered a
     substitute for any GAAP measure of performance.

 (10) We define total return on average equity as net income divided by average
      total equity, excluding accumulated other comprehensive income. We
      calculate the returns for interim reporting periods by using net income
      for the trailing twelve months. We have excluded accumulated other
      comprehensive income due to its volatility between periods and because
      such data are often excluded when evaluating the overall financial
      performance of insurers.

(11) We transferred our U.S. investment management operations from our Corporate
     and Other segment to our U.S. Asset Management and Accumulation segment
     effective January 1, 1999. The U.S. Asset Management and Accumulation
     segment received fee revenues for performing investment management services
     for other segments in 2001, 2000 and 1999. The Corporate and Other segment
     received fee revenues for performing investment management services for
     other segments prior to 1999.

(12) Includes inter-segment eliminations primarily related to real estate joint
     venture rental income. We reported rental income from real estate joint
     ventures for office space used by other segments in the Corporate and Other
     segment.

(13) Includes inter-segment elimination amounts related to internally generated
     mortgage loans and an internal line of credit. The U.S. Asset Management
     and Accumulation segment and Life and Health Insurance segment reported
     mortgage loan assets issued for real estate joint ventures. These mortgage
     loans were reported as liabilities in the Corporate and Other segment. In
     addition, the Corporate and Other segment managed a revolving line of
     credit used by other segments.

(14) Excludes our mortgage loan servicing portfolio.

                                        11

                                  RISK FACTORS

    An investment in our common stock involves a number of risks. You should
consider carefully, in addition to the other information contained in this
prospectus, the following factors before investing in shares of our common
stock. In reviewing information contained in this prospectus, you should bear in
mind that past experience is no indication of future performance.

COMPETITION FROM COMPANIES THAT MAY HAVE GREATER FINANCIAL RESOURCES, BROADER
ARRAYS OF PRODUCTS, HIGHER RATINGS AND STRONGER FINANCIAL PERFORMANCE MAY IMPAIR
OUR ABILITY TO RETAIN EXISTING CUSTOMERS, ATTRACT NEW CUSTOMERS AND MAINTAIN OUR
PROFITABILITY.

    We believe that our ability to compete is based on a number of factors
including scale, service, product features, price, investment performance,
commission structure, distribution capabilities, financial strength ratings and
name recognition. We compete with a large number of financial services companies
such as banks, broker-dealers, insurers and asset managers, many of which have
advantages over us in one or more of the above competitive factors.

    Each of our segments faces strong competition. The primary competitors for
our U.S. Asset Management and Accumulation segment are asset managers, banks,
broker-dealers and insurers. Our ability to increase and retain assets under
management is directly related to the performance of our investments as measured
against market averages and the performance of our competitors. Even when
securities prices are generally rising, performance can be affected by
investment styles. For example, as growth stocks have outperformed value stocks
for several years ending in 1999, we were at a competitive disadvantage due to
our historical emphasis on the value style of investing. Principal Capital
Management may also be at a disadvantage in competing for investment management
personnel due to its location in Des Moines.

    Competition for our International Asset Management and Accumulation segment
comes primarily from local financial services firms and other international
companies operating on a stand-alone basis or in partnership with local firms.
Our Life and Health Insurance segment competes with insurers and health
maintenance organizations. We compete with other mortgage bankers, commercial
banks, savings and loan associations, credit unions and other insurers in our
Mortgage Banking segment.

    National banks, with their large existing customer bases, may increasingly
compete with insurers as a result of court rulings allowing national banks to
sell annuity products in some circumstances, and as a result of recently enacted
legislation removing restrictions on bank affiliations with insurers.
Specifically, the Gramm-Leach-Bliley Act of 1999 permits mergers that combine
commercial banks, insurers and securities firms under one holding company. These
developments may increase competition, in particular for our asset management
and accumulation businesses, by substantially increasing the number, size and
financial strength of potential competitors who may be able to offer, due to
economies of scale, more competitive pricing than we can.

A DECLINE OR INCREASED VOLATILITY IN THE SECURITIES MARKETS COULD RESULT IN
INVESTORS WITHDRAWING FROM THE MARKETS OR DECREASING THEIR RATES OF INVESTMENT,
EITHER OF WHICH COULD REDUCE OUR NET INCOME, REVENUES AND ASSETS UNDER
MANAGEMENT.

    Favorable performance by the U.S., European and Australian securities
markets for several years ending in 1999 substantially increased investments in
these markets and benefited our asset management and accumulation businesses and
increased our assets under management. In contrast to the U.S., European and
Australian securities markets, the securities markets in the emerging economies
in which we operate or invest, such as India or Argentina, have experienced
economic disruption, devaluations of their currencies or negative growth rates
during this period, which suppressed our revenues and profits. In addition,
because the revenues of our asset management businesses are, to a large extent,
based on the value of assets under management, a decline in the value of these
assets decreases our revenues. Further declines or turmoil in the U.S., European
and Australian securities markets could lead investors to withdraw from these
markets, decrease their rates of investment or refrain from making new
investments which may reduce our net income, revenues and assets under
management. Our assets, earnings and ability to generate new sales in recent
years have also increased due to significant growth in the retirement-oriented
investment market. Some of that growth is attributable to the expansion of
government mandated retirement savings programs outside the United States. If
these programs are reduced or eliminated, our net income, revenues and assets
would suffer.

A DOWNGRADE IN PRINCIPAL LIFE'S FINANCIAL STRENGTH RATINGS MAY INCREASE POLICY
SURRENDERS AND WITHDRAWALS, REDUCE NEW SALES AND TERMINATE RELATIONSHIPS WITH
DISTRIBUTORS.

    Financial strength ratings are important factors in establishing the
competitive position of insurance companies. A rating downgrade, or the
potential for such a downgrade, of Principal Life could, among other things:

    - materially increase the number of policy or contract surrenders for all or
      a portion of their net cash values and withdrawals by policyholders of
      cash values from their policies;

                                        12

    - result in the termination of our relationships with broker-dealers, banks,
      agents, wholesalers and other distributors of our products and services;
      and

    - reduce new sales, particularly with respect to general account guaranteed
      investment contracts and funding agreements purchased by pension plans and
      other institutions.

    See "Business -- Ratings".

OUR EFFORTS TO REDUCE THE IMPACT OF INTEREST RATE CHANGES ON OUR PROFITABILITY
AND SURPLUS MAY NOT BE EFFECTIVE.

    We attempt to significantly reduce the impact of changes in interest rates
on the profitability and surplus of our asset accumulation and life and health
insurance operations. We accomplish this reduction primarily by managing the
duration of our assets relative to the duration of our liabilities. During a
period of rising interest rates, policy surrenders, withdrawals and requests for
policy loans may increase as customers seek to achieve higher returns. Despite
our efforts to reduce the impact of rising interest rates, we may be required to
sell assets to raise the cash necessary to respond to such surrenders,
withdrawals and loans, thereby realizing capital losses on the assets sold. An
increase in policy surrenders and withdrawals may also require us to accelerate
amortization of policy acquisition costs relating to these contracts, which
would further reduce our net income.

    During periods of declining interest rates, borrowers may prepay or redeem
mortgages and bonds that we own, which would force us to reinvest the proceeds
at lower interest rates. For some of our products, such as guaranteed investment
contracts and funding agreements, we are unable to lower the rate we credit to
customers in response to the lower return we will earn on our investments. In
addition, it may be more difficult for us to maintain our desired spread between
the investment income we earn and the interest we credit to our customers during
periods of declining interest rates thereby reducing our profitability.

    Changes in interest rates can also significantly affect the profitability of
our Mortgage Banking segment. During periods of declining interest rates, we may
lose mortgage loan servicing fees due to an increase in mortgage loan
refinancing activity. During periods of rising interest rates, we may suffer a
loss of mortgage loan origination fees due to a decrease in the overall number
of home sales and the number of mortgage loan refinancings. For further
discussion on interest rate risk management, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Quantitative and
Qualitative Information About Market Risk -- Interest Rate Risk".

IF WE ARE UNABLE TO ATTRACT AND RETAIN SALES REPRESENTATIVES AND DEVELOP NEW
DISTRIBUTION SOURCES, SALES OF OUR PRODUCTS AND SERVICES MAY BE REDUCED.

    We distribute our asset accumulation, asset management and life and health
insurance products and services through a variety of distribution channels,
including our own internal sales representatives, independent brokers, banks,
broker-dealers and other third-party marketing organizations. We must attract
and retain sales representatives to sell our products. Strong competition exists
among financial services companies for efficient sales representatives. We
compete with other financial services companies for sales representatives
primarily on the basis of our financial position, support services and
compensation and product features. If we are unable to attract and retain
sufficient sales representatives to sell our products, our ability to compete
and revenues from new sales would suffer.

    For example, Rogers Benefit Group, a national independent marketing and
service organization, distributes a significant portion of our group insurance
products. For the period ended June 30, 2001, Rogers Benefit Group accounted for
37% of our group insurance sales. An interruption in or changes to our
relationship with Rogers Benefit Group could impair our ability to market our
group insurance products and reduce our revenues accordingly.

OUR INTERNATIONAL BUSINESSES FACE POLITICAL, LEGAL, OPERATIONAL AND OTHER RISKS
THAT COULD REDUCE OUR PROFITABILITY IN THOSE BUSINESSES.

    Our international businesses are subject to comprehensive regulation and
supervision from central and/or local governmental authorities in each country
in which we operate. New interpretations of existing laws and regulations or the
adoption of new laws and regulations may harm our international businesses and
reduce our profitability in those businesses. In particular, BT Financial
Group's profit could suffer if the Australian superannuation system is repealed
or amended to a lower rate of contribution.

    Our international businesses face political, legal, operational and other
risks that we do not face in our operations in the U.S. We face the risk of
discriminatory regulation, nationalization or expropriation of assets, price
controls and exchange controls or other restrictions that prevent us from
transferring funds from these operations out of the countries in which they
operate or converting local currencies we hold into U.S. dollars or other
currencies. Some of our international businesses are, and are likely to continue
to be, in emerging or recently volatile markets such as India and Argentina
where these risks are heightened. In addition, we rely on local staff, including
local sales forces, in these countries and we may encounter labor problems
especially in countries such as Mexico, Argentina and Brazil where

                                        13

workers' associations and trade unions are strong. If our business model is not
successful in a particular country, we may lose all or most of our investment in
that country.

FLUCTUATIONS IN FOREIGN CURRENCY EXCHANGE RATES COULD REDUCE OUR PROFITABILITY.

    Principal International generally writes policies denominated in various
local currencies and invests the premiums and deposits in local currencies.
Although investing in local currencies limits the effect of currency exchange
rate fluctuation on local operating results, fluctuations in such rates affect
the translation of these results into our consolidated financial statements. BT
Financial Group conducts its asset management operations in both local
currencies and U.S. dollars. Accordingly, fluctuations in foreign currency
exchange rates may reduce our profitability. For example, fluctuations in
average foreign currency of our international operations to U.S. dollar exchange
rates reduced our consolidated operating earnings by $0.8 million for the six
months ended June 30, 2001, by $0.6 million for the year ended December 31,
2000, and by $0.3 million for the year ended December 31, 1999. From December
31, 1999 to June 30, 2001, the Australian dollar declined 22% in value relative
to the U.S. dollar.

A DECLINE IN AUSTRALIAN EQUITY VALUES MAY REDUCE THE PROFITABILITY OF BT
FINANCIAL GROUP'S MARGIN LENDING BUSINESS.

    A decline in the Australian equity markets or short-term volatility in the
Australian securities markets could result in investors withdrawing from the
markets or decreasing their rates of investment and level of participation in
the margin lending business, either of which could reduce the profitability of
BT Financial Group's margin lending business. Additionally, short-term
volatility in the securities markets could result in the placing of margin
calls. An inability by borrowers under BT Financial Group's margin lending
business to satisfy these margin calls may decrease our profits. As of June 30,
2001, the margin lending portfolio balance was $0.6 billion (A$1.1 billion).

OUR RESERVES ESTABLISHED FOR FUTURE POLICY BENEFITS AND CLAIMS MAY PROVE
INADEQUATE, REQUIRING US TO INCREASE LIABILITIES.

    Our earnings depend significantly upon the extent to which our actual claims
experience is consistent with the assumptions used in setting prices for our
products and establishing liabilities for future insurance and annuity policy
benefits and claims. The liability that we have established for future policy
benefits is based on assumptions concerning a number of factors, including the
amount of premiums that we will receive in the future, rate of return on assets
we purchase with premiums received, expected claims, expenses and persistency,
which is the measurement of the percentage of insurance policies remaining in
force from year to year, as measured by premiums. However, due to the nature of
the underlying risks and the high degree of uncertainty associated with the
determination of the liabilities for unpaid policy benefits and claims, we
cannot determine precisely the amounts which we will ultimately pay to settle
these liabilities. As a result, we may experience volatility in the level of our
reserves from period to period, particularly for our health and disability
insurance products. To the extent that actual claims experience is less
favorable than our underlying assumptions, we could be required to increase our
liabilities, which may harm our financial strength and reduce our profitability.

OUR INVESTMENT PORTFOLIO IS SUBJECT TO SEVERAL RISKS WHICH MAY DIMINISH THE
VALUE OF OUR INVESTED ASSETS AND AFFECT OUR SALES, PROFITABILITY AND THE
INVESTMENT RETURNS CREDITED TO OUR CUSTOMERS.

  AN INCREASE IN DEFAULTS ON OUR FIXED MATURITY SECURITIES PORTFOLIO MAY REDUCE
  OUR PROFITABILITY.

    We are subject to the risk that the issuers of the fixed maturity securities
we own will default on principal and interest payments, particularly if a major
downturn in economic activity occurs. As of June 30, 2001, our U.S. investment
operations held $28.5 billion of fixed maturity securities, or 66% of total U.S.
invested assets, of which approximately 8% were below investment grade,
including $345.9 million, or 1% of our total fixed maturity securities which we
classified as either "problem," "potential problem," or "restructured." See
"Investments -- U.S. Investment Operations -- U.S. Investment Results -- Fixed
Maturity Securities." As of June 30, 2001, our international investment
operations held $0.8 billion of fixed maturity securities, or 71% of total
international invested assets. Some of these securities have been rated on the
basis of the issuer's country credit rating while others have not been rated by
external agencies, which makes the assessment of credit quality more difficult.
See "Investments -- International Investment Operations." An increase in
defaults on our fixed maturity securities portfolio could harm our financial
strength and reduce our profitability.

  AN INCREASED RATE OF DELINQUENCY AND DEFAULTS ON OUR COMMERCIAL MORTGAGE
  LOANS, ESPECIALLY THOSE WITH BALLOON PAYMENTS, COULD DECREASE OUR
  PROFITABILITY.

    Our commercial mortgage loan portfolio faces both delinquency and default
risk. Commercial mortgage loans of $10.3 billion represented 23% of our total
invested assets as of June 30, 2001. As of June 30, 2001, loans that were either
delinquent or in the process of foreclosure totaled, on a statutory basis, $1.8
million, or less than one-tenth of one percent of our commercial mortgage loan
portfolio, compared to the industry average of 0.2% as reported by the American
Council of Life Insurers as of June 30, 2001. The performance of our commercial
mortgage loan portfolio,

                                        14

however, may fluctuate in the future. An increase in the delinquency rate of our
commercial mortgage loan portfolio could harm our financial strength and
decrease our profitability.

    As of June 30, 2001, approximately $7.9 billion, or 75%, of our commercial
mortgage loans before valuation allowance had balloon payment maturities. A
balloon maturity is a loan with larger dollar amounts of payments becoming due
in the later years of the loan. The default rate on commercial mortgage loans
with balloon payment maturities has historically been higher than for commercial
mortgage loans with standard repayment schedules. Since most of the principal is
being repaid at maturity, the amount of loss on a default is generally greater
than on other commercial mortgage loans. An increase in defaults on such loans
as a result of the foregoing factors could harm our financial strength and
reduce our net income.

  WE MAY HAVE DIFFICULTY SELLING OUR PRIVATELY PLACED FIXED MATURITY SECURITIES,
  COMMERCIAL MORTGAGE LOANS AND REAL ESTATE INVESTMENTS BECAUSE THEY ARE LESS
  LIQUID THAN OUR PUBLICLY TRADED FIXED MATURITY SECURITIES.

    As of June 30, 2001, our privately placed fixed maturity securities,
commercial mortgage loans and real estate investments represented approximately
52% of the value of our invested assets. If we require significant amounts of
cash on short notice, we may have difficulty selling these investments at
attractive prices, in a timely manner, or both.

  DERIVATIVE INSTRUMENTS MAY NOT BE HONORED BY COUNTERPARTIES RESULTING IN
  INEFFECTIVE HEDGING OF OUR RISKS.

    We use derivative instruments to hedge various risks we face in our
businesses. We enter into a variety of derivative instruments, including
interest rate swaps, swaptions, currency swaps, financial futures and
mortgage-backed security forward contracts, with a number of counterparties. If,
however, our counterparties fail to honor their obligations under the derivative
instruments, we will have failed to effectively hedge the related risk. That
failure may harm our financial strength and reduce our profitability.

  ENVIRONMENTAL LIABILITY EXPOSURE MAY RESULT FROM OUR COMMERCIAL MORTGAGE LOAN
  PORTFOLIO AND REAL ESTATE INVESTMENTS.

    Liability under environmental protection laws resulting from our commercial
mortgage loan portfolio and real estate investments may harm our financial
strength and reduce our profitability. Under the laws of several states,
contamination of a property may give rise to a lien on the property to secure
recovery of the costs of cleanup. In some states, this kind of lien has priority
over the lien of an existing mortgage against the property, which would impair
our ability to foreclose on that property should the related loan be in default.
In addition, under the laws of some states and under the federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980, we may be liable
for costs of addressing releases or threatened releases of hazardous substances
that require remedy at a property securing a mortgage loan held by us, if our
agents or employees have become sufficiently involved in the hazardous waste
aspects of the operations of the related obligor on that loan, regardless of
whether or not the environmental damage or threat was caused by the obligor. We
also may face this liability after foreclosing on a property securing a mortgage
loan held by us. This may harm our financial strength and decrease our
profitability.

  REGIONAL CONCENTRATION OF OUR COMMERCIAL MORTGAGE LOAN PORTFOLIO IN CALIFORNIA
  MAY SUBJECT US TO ECONOMIC DOWNTURNS OR LOSSES ATTRIBUTABLE TO EARTHQUAKES IN
  THAT STATE.

    California accounted for 22%, or $2.3 billion, of our commercial mortgage
loan portfolio as of June 30, 2001. Due to this concentration of commercial
mortgage loans in California, we are exposed to potential losses resulting from
the risk of an economic downturn in California as well as to catastrophes, such
as earthquakes, that may affect the region. While we generally do not require
earthquake insurance for properties on which we make commercial mortgage loans,
we do take into account property specific engineering reports, construction type
and geographical concentration by fault lines in our investment underwriting
guidelines. If economic conditions in California deteriorate or catastrophes
occur, we may experience delinquencies on the portion of our commercial mortgage
loan portfolio located in California in the future, which may harm our financial
strength and reduce our profitability.

OUR ABILITY TO PAY DIVIDENDS AND MEET OUR OBLIGATIONS MAY BE CONSTRAINED BY THE
LIMITATIONS ON DIVIDENDS IOWA INSURANCE LAWS IMPOSE ON PRINCIPAL LIFE.

    We are an insurance holding company whose assets include all of the
outstanding shares of the common stock of Principal Life and other direct
subsidiaries. Our ability to pay dividends to our stockholders and meet our
obligations, including paying operating expenses and any debt service, depends
upon the receipt of dividends from Principal Life. Iowa insurance laws impose
limitations on the ability of Principal Life to pay dividends to us. Any
inability of Principal Life to pay dividends to us in the future may cause us to
be unable to pay dividends to our stockholders and meet our other obligations.

                                        15

WE MAY NEED TO FUND DEFICIENCIES IN OUR CLOSED BLOCK; ASSETS ALLOCATED TO THE
CLOSED BLOCK BENEFIT ONLY THE HOLDERS OF CLOSED BLOCK POLICIES.

    In connection with its conversion in 1998 into a stock life insurance
company, Principal Life established an accounting mechanism, known as a CLOSED
BLOCK, for the benefit of participating ordinary life insurance policies that
had a dividend scale in force on July 1, 1998. Dividend scales are the actuarial
formulas used by life insurance companies to determine amounts payable as
dividends on participating policies based on experience factors relating to,
among other things, investment results, mortality, lapse rates, expenses,
premium taxes and policy loan interest and utilization rates. The Closed Block
was designed to provide reasonable assurance to policyholders included in the
Closed Block that, after the conversion, assets would be available to maintain
the aggregate dividend scales in effect for 1997 if the experience underlying
such scales were to continue.

    We allocated assets to the Closed Block as of July 1, 1998 in an amount such
that we expect their cash flows, together with anticipated revenues from the
policies in the Closed Block, to be sufficient to support the Closed Block
business, including payment of claims, expenses, charges and taxes and to
provide for the continuation of aggregate dividend scales in accordance with the
1997 policy dividend scales if the experience underlying such scales continues,
and to allow for appropriate adjustments in such scales if the experience
changes. We bear the costs of expenses associated with Closed Block policies
and, accordingly, these costs were not funded as part of the assets allocated to
the Closed Block. Any increase in such costs in the future will be borne by us.
As of June 30, 2001, Closed Block assets and liabilities were $4,613.4 million
and $5,635.8 million, respectively. As of December 31, 2000, Closed Block assets
and liabilities were $4,526.4 million and $5,566.8 million, respectively. As of
December 31, 1999, Closed Block assets and liabilities were $4,338.3 million and
$5,415.5 million, respectively.

    We will continue to pay guaranteed benefits under the policies included in
the Closed Block, in accordance with their terms. The Closed Block assets, cash
flows generated by the Closed Block assets and anticipated revenues from polices
included in the Closed Block may not be sufficient to provide for the benefits
guaranteed under these policies. If they are not sufficient, we must fund the
shortfall. Even if they are sufficient, we may choose for business reasons to
support dividend payments on policies in the Closed Block with our general
account funds.

    The Closed Block assets, cash flows generated by the Closed Block assets and
anticipated revenues from policies in the Closed Block will benefit only the
holders of those policies. In addition, to the extent that these amounts are
greater than the amounts estimated at the time we funded the Closed Block,
dividends payable in respect of the policies included in the Closed Block may be
greater than they would have been in the absence of a Closed Block. Any excess
earnings will be available for distribution over time to Closed Block
policyholders but will not be available to our stockholders.

CHANGES IN REGULATIONS OR ACCOUNTING STANDARDS MAY REDUCE OUR PROFITABILITY.

  CHANGES IN REGULATION IN THE UNITED STATES MAY REDUCE OUR PROFITABILITY.

    Our insurance business is subject to comprehensive state regulation and
supervision throughout the U.S. The primary purpose of state regulation of the
insurance business is to protect policyholders, not stockholders. The laws of
the various states establish insurance departments with broad powers to regulate
such matters as:

    - licensing companies to transact business,

    - licensing agents,

    - admitting statutory assets,

    - mandating a number of insurance benefits,

    - regulating premium rates,

    - approving policy forms,

    - regulating unfair trade and claims practices,

    - establishing statutory reserve requirements and solvency standards,

    - fixing maximum interest rates on life insurance policy loans and minimum
      rates for accumulation of surrender values,

    - restricting various transactions between affiliates, and

    - regulating the types, amounts and valuation of investments.

    State insurance regulators and the National Association of Insurance
Commissioners, or NAIC, continually reexamine existing laws and regulations, and
may impose changes in the future.

                                        16

    Federal legislation and administrative policies in areas such as employee
benefit plan regulation, financial services regulation and federal taxation can
reduce our profitability. For example, Congress has, from time to time,
considered legislation relating to changes in the Employee Retirement Income
Security Act of 1974 to permit application of state law remedies, such as
consequential and punitive damages, in lawsuits for wrongful denial of benefits,
which, if adopted, could increase our liability for damages in future
litigation. Additionally, new interpretations of existing laws and the passage
of new legislation may harm our ability to sell new policies and increase our
claims exposure on policies we issued previously. In addition, reductions in
contribution levels to defined contribution plans may decrease our
profitability. See "Regulation -- U.S. Operations -- Federal Insurance
Initiatives".

  CHANGES IN FEDERAL TAXATION COULD REDUCE SALES OF OUR INSURANCE, ANNUITY AND
  INVESTMENT PRODUCTS.

    Current federal income tax laws generally permit the tax-deferred
accumulation of earnings on the premiums paid by the holders of annuities and
life insurance products. Taxes, if any, are payable on income attributable to a
distribution under the contract for the year in which the distribution is made.
Congress has, from time to time, considered legislation that would reduce or
eliminate the benefit of such deferral of taxation on the accretion of value
within life insurance and non-qualified annuity contracts. Enactment of this
legislation, including a simplified "flat tax" income structure with an
exemption from taxation for investment income, could result in fewer sales of
our insurance, annuity and investment products.

  REPEAL OR MODIFICATION OF THE FEDERAL ESTATE TAX COULD REDUCE OUR REVENUES.

    The Economic Growth and Tax Relief Reconciliation Act of 2001 amended the
federal estate tax laws by increasing the amount of the unified credit beginning
in 2002, thereby increasing the amount of property not subject to the estate
tax. The Act also gradually reduces the federal estate tax rate over a period of
years beginning in 2002, and repeals the tax entirely in 2010. The law in effect
prior to the Act, however, is reinstated for years after 2010. Through the six
months ended June 30, 2001, we received recurring premium of $26.1 million for
survivorship life insurance policies we have sold. A significant number of these
policies were purchased for the purpose of providing cash to pay federal estate
taxes. The reduction of the federal estate tax and temporary repeal could result
in policyholders reducing coverage under, or surrendering, these policies. See
"Regulation -- U.S. Operations -- Tax Legislation".

  CHANGES IN FEDERAL, STATE AND FOREIGN SECURITIES LAWS MAY REDUCE OUR
  PROFITABILITY.

    Our asset management and accumulation and life insurance businesses are
subject to various levels of regulation under federal, state and foreign
securities laws. These laws and regulations are primarily intended to protect
investors in the securities markets or investment advisory or brokerage clients
and generally grant supervisory agencies broad administrative powers, including
the power to limit or restrict the conduct of business for failure to comply
with such laws and regulations. Changes to these laws or regulations that
restrict the conduct of our business could reduce our profitability.

  WE MAY EXPERIENCE VOLATILITY IN NET INCOME DUE TO CHANGES IN STANDARDS FOR
  ACCOUNTING FOR DERIVATIVES.

    In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS 133 will require us to include all derivatives in
our consolidated statement of financial position at fair value. The accounting
for changes in the fair value of a derivative depends on its intended use.
Changes in derivative fair values will either be recognized in earnings as
offsets to the changes in fair value of related hedged assets, liabilities and
firm commitments or, for forecasted transactions, deferred and recorded as a
component of equity until the hedged transactions occur and are recognized in
earnings. The ineffective portion of a hedging derivative's change in fair value
will be immediately recognized in earnings. Derivatives not used in hedging
activities must be adjusted to fair value through earnings. We adopted SFAS 133
effective January 1, 2001. The cumulative effect of the application of SFAS 133
included a negative effect of $10.7 million on net income and a negative effect
of $14.2 million on accumulated other comprehensive income. During the six
months ended June 30, 2001, we recognized the change in value related to cash
flow hedges in accumulated other comprehensive income, and reclassified a gain
from accumulated other comprehensive income to earnings, which was offset by net
losses on the assets or liabilities being hedged. These amounts were not
material. The impact of the application of SFAS 133 on net income during the six
months ended June 30, 2001 was $28.0 million and the impact to accumulated other
comprehensive income was $(22.8) million.

  WE MAY EXPERIENCE VOLATILITY IN NET INCOME DUE TO RECENT CHANGES IN STANDARDS
  FOR ACCOUNTING FOR BUSINESS COMBINATIONS, GOODWILL AND OTHER INTANGIBLE
  ASSETS.

    In July 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards Nos. 141, "Business Combinations" and 142,
"Goodwill and Other Intangible Assets." Accordingly, our accounting for business
combinations, goodwill and other intangible assets will change effective January
1, 2002. The accounting change includes the adoption of a non-amortization,
impairment-only model for our goodwill and indefinite-lived intangible assets
and a more stringent test methodology for measuring and recognizing impairment
losses. The new statements require testing for impairment on an annual basis.
Net income could be negatively impacted if

                                        17

impairment losses are recognized. We are presently studying the impact the
accounting change will have on our accounting policies, especially with regard
to BT Financial Group.

A CHALLENGE TO THE INSURANCE COMMISSIONER OF THE STATE OF IOWA'S APPROVAL OF THE
PLAN OF CONVERSION COULD PUT THE TERMS OF OUR DEMUTUALIZATION IN QUESTION AND
REDUCE THE MARKET PRICE OF OUR COMMON STOCK.

    After a public hearing, the Insurance Commissioner of the State of Iowa must
determine whether to approve the plan of conversion. To approve the plan, the
Insurance Commissioner of the State of Iowa must find that the plan meets the
standards of Iowa law governing demutualizations, including, among other things,
whether the plan is fair and equitable to Principal Mutual Holding Company and
policyholders of Principal Life. The public hearing was held on July 25, 2001
and the Insurance Commissioner of the State of Iowa approved the plan on August
28, 2001. The order of the Insurance Commissioner of the State of Iowa approving
the plan did not address the fairness of the plan to purchasers of common stock
in the offering.

    The Iowa law governing the demutualization provides that an action
challenging the order of the Insurance Commissioner of the State of Iowa
approving the plan can be filed, within the limitation period provided under
Iowa law, after the Insurance Commissioner issues her order. The existence of a
challenge to the plan or to the Insurance Commissioner's order approving the
plan could reduce the market price of our common stock. A successful challenge
could result in monetary damages, a modification of the plan or the Insurance
Commissioner's approval of the plan being set aside. In addition, a successful
challenge could result in substantial uncertainty relating to the terms and
effectiveness of the plan, and an extended period of time might be required to
reach a final determination. Such an outcome would likely reduce the market
price of our common stock.

    A lawsuit was filed on September 27, 2001 in the United States District
Court for the Northern District of Illinois, seeking damages and other relief on
behalf of a putative class of policyholders based on allegations that the plan
of conversion violates the United States Constitution. The action is captioned
Esther L. Gayman v. Principal Mutual Holding Company, et al. We believe that
there are meritorious defenses to the plaintiff's claims and we intend
vigorously to contest all of the plaintiff's claims. We are not presently aware
of any other lawsuits challenging the plan. There can be no assurance, however,
that additional lawsuits will not be commenced.

LITIGATION AND REGULATORY INVESTIGATIONS MAY HARM OUR FINANCIAL STRENGTH AND
REDUCE OUR PROFITABILITY.

    We are a plaintiff or defendant in actions arising out of our insurance
business and investment operations. We are, from time to time, also involved in
various governmental and administrative proceedings. This litigation may harm
our financial strength and reduce our profitability.

    Life insurance companies have historically been subject to substantial
litigation resulting from claims disputes and other matters. Most recently, they
have faced extensive claims, including class-action lawsuits, alleging improper
life insurance sales practices. Negotiated settlements of such class-action
lawsuits have had a material adverse effect on the business, financial condition
and results of operations of other life insurance companies. Principal Life is
currently a defendant in two purported class-action lawsuits alleging improper
sales practices. We have reached an agreement in principle to settle both of
those lawsuits. The settlement has received court approval. We have established
reserves at a level we believe sufficient to cover the cost of the settlement. A
number of persons and entities who were eligible to be class members have
excluded themselves from the class (or "opted out"), as the law permits them to
do. We have been notified that some of those who opted out from the class will
file lawsuits and make claims similar to those addressed by the settlement.
Similar opt-out lawsuits have been brought against other life insurance
companies as a result of settlement of similar class-action lawsuits. Defense of
these lawsuits may cause us to incur significant costs. At this time, we are not
able to estimate the number of such lawsuits that may be filed, the costs of
defending the lawsuits or whether our defense will be successful.

SALES OF SHARES DISTRIBUTED IN THE DEMUTUALIZATION MAY REDUCE THE MARKET PRICE
OF OUR COMMON STOCK.

    Substantially all of our shares of common stock distributed in the
demutualization and this offering will be freely tradable. Sales of substantial
amounts of common stock, or the perception that such sales could occur, could
reduce the prevailing market price for our common stock. We believe the
following factors may increase selling pressure on our common stock:

    - Some policyholders, in particular owners of larger policies, who elect to
      receive cash instead of common stock as compensation in the
      demutualization may nevertheless receive common stock compensation if
      there is insufficient cash available for cash payment to policyholders.
      Those policyholders who elected to receive cash instead of common stock
      may be especially likely to sell the shares of common stock they received
      in the demutualization to realize cash proceeds.

    - Some policyholders may be fiduciaries of pension plans that are subject to
      the Employee Retirement Income Security Act of 1974, or ERISA, trusts that
      own individual life insurance policies or welfare benefit plans. Those
      policyholders, particularly if they did not elect to receive common stock
      as compensation in the demutualization,

                                        18

may determine that the exercise of their fiduciary duties requires them to
promptly sell the shares of common stock they received in the demutualization.

APPLICABLE LAWS AND OUR STOCKHOLDER RIGHTS PLAN, CERTIFICATE OF INCORPORATION
AND BY-LAWS MAY DISCOURAGE TAKEOVERS AND BUSINESS COMBINATIONS THAT OUR
STOCKHOLDERS MIGHT CONSIDER IN THEIR BEST INTERESTS.

    State laws and our certificate of incorporation and by-laws may delay,
defer, prevent, or render more difficult a takeover attempt that our
stockholders might consider in their best interests. For instance, they may
prevent our stockholders from receiving the benefit from any premium to the
market price of our common stock offered by a bidder in a takeover context. Even
in the absence of a takeover attempt, the existence of these provisions may
adversely affect the prevailing market price of our common stock if they are
viewed as discouraging takeover attempts in the future.

    State laws and our certificate of incorporation and by-laws may also make it
difficult for stockholders to replace or remove our management. These provisions
may facilitate management entrenchment which may delay, defer or prevent a
change in our control, which may not be in the best interests of our
stockholders.

    Under the Iowa insurance laws, for a period of five years following the
effective date of the demutualization, no person may acquire beneficial
ownership of more than 5% of the outstanding shares of our common stock without
the prior approval of the Insurance Commissioner of the State of Iowa and our
board of directors. The Insurance Commissioner of the State of Iowa and our
board of directors may consider the following factors:

    - the effects of the action on our stockholders;

    - the effects of the action on our employees, suppliers, creditors and
      customers;

    - the effects of the action on the communities in which we operate;

    - our long-term as well as short-term interests; and

    - the long-term as well as short-term interests of our stockholders.

    This restriction does not apply to acquisitions made by us or made through
an employee benefit plan or employee benefit trust sponsored by us.

    The following provisions, included in our certificate of incorporation and
by-laws, may also have anti-takeover effects and may delay, defer or prevent a
takeover attempt that our stockholders might consider in their best interests.
In particular, our certificate of incorporation and by-laws:

    - permit our board of directors to issue one or more series of preferred
      stock;

    - divide our board of directors into three classes;

    - limit the ability of stockholders to remove directors;

    - prohibit stockholders from filling vacancies on our board of directors;

    - prohibit stockholders from calling special meetings of stockholders;

    - impose advance notice requirements for stockholder proposals and
      nominations of directors to be considered at stockholder meetings; and

    - require the approval by the holders of at least 75% of our outstanding
      common stock for the amendment of our by-laws and provisions of our
      certificate of incorporation governing:

     - the classified board,

     - the director's discretion in determining what he or she reasonably
       believes to be in the best interests of Principal Financial Group, Inc.,

     - the liability of directors, and

     - the elimination of stockholder actions by written consent.

    In addition, Section 203 of the General Corporation Law of the State of
Delaware may limit the ability of an "interested stockholder" to engage in
business combinations with us. An interested stockholder is defined to include
persons owning 15% or more of our outstanding voting stock.

    Our stockholder rights plan may have anti-takeover effects. The stockholder
rights plan is designed to protect our stockholders in the event of unsolicited
offers to acquire us and other coercive takeover tactics which, in the opinion
of our board of directors, could impair the board's ability to represent
stockholder interests. Our stockholder rights plan

                                        19

might render an unsolicited takeover more difficult or less likely to occur,
even though such a takeover might offer our stockholders the opportunity to sell
their stock at a price above the prevailing market price and may be favored by
our stockholders.

    See "Description of Capital Stock and Change of Control Related Provisions"
for additional information on the anti-takeover measures applicable to us.

THE IMPACT OF RECENT TERRORIST ATTACKS AND POSSIBLE MILITARY AND OTHER ACTIONS
MAY RESULT IN DECREASES IN OUR NET INCOME, REVENUE AND ASSETS UNDER MANAGEMENT
AND MAY ADVERSELY AFFECT OUR INVESTMENT PORTFOLIO.

    Terrorist attacks in New York City and Washington, D.C. on September 11,
2001 disrupted commerce throughout the U.S., resulted in significant loss of
life and caused significant volatility and declines in U.S., European,
Australian and other securities markets. The continued threat of terrorism
within the U.S. and Europe, and the potential for military action and heightened
security measures in response to that threat, may cause additional disruptions
to commerce, reduced economic activity and continued volatility in markets
throughout the world. The impact of the events of September 11, 2001 has reduced
our assets under management as a result of the declines in the U.S., Australian
and other stock markets. These declines in the securities markets and reduced
commercial and economic activity may also decrease our net income and revenue.
See "-- A decline or increased volatility in the securities markets could result
in investors withdrawing from the markets or decreasing their rates of
investment, either of which could reduce our net income, revenues and assets
under management."

    Some of the assets in our investment portfolio may also be adversely
affected by the declines in the securities markets and economic activity caused
by the terrorist attacks and possible military action and heightened security
measures. See "-- Our investment portfolio is subject to several risks which may
diminish the value of our invested assets and affect our sales, profitability
and the investment returns credited to our customers." For example, as of
September 30, 2001, we held corporate fixed maturity securities in the following
sectors (carrying amounts noted in parenthesis): airlines ($258.0 million in
public debt and $202.6 million in private debt), comprised mostly of equipment
trust certificate transactions secured by aircraft; airline manufacturers and
equipment providers ($248.2 million), comprised of public and private unsecured
debt; property and casualty insurance companies($29.8 million), comprised of
public and private unsecured debt; and hotels and gaming companies ($168.0
million), comprised of public and private debt secured by hotel properties. As
of September 30, 2001, we had gross unrealized gains and losses in the following
sectors: airlines ($8.0 million loss in public debt and $8.0 million loss in
private debt), airline manufacturers and equipment providers ($15.5 million
gain), property and casualty insurance companies ($1.5 million gain), and hotels
and gaming companies ($1.7 million gain). We have not recognized any related
impairment of these assets. However, we cannot predict at this time any losses
that these sectors may suffer as a result of the decreased commercial and
economic activity or how any such decrease might impact the obligor's ability to
pay interest or principal on such securities or might affect the value of any
underlying collateral. For example, it is possible that the continued
significantly lower level of airline travel could affect the value of some of
the airplane collateral underlying the equipment trust certificates as airlines
retire aging aircraft. Any such losses, inability to pay or devalued collateral,
may lead to possible write-downs, loss of value or impairments of the securities
issued by companies affected by these events. Credit rating agencies have
downgraded, and may in the future downgrade, some of these companies, as a
result of the impacts of the terrorist attacks. In addition, declines in the
securities markets and reduced commercial and economic activity may impact our
assumptions in assessing the value of intangibles from prior acquisitions and
the amortization patterns for deferred policy acquisition costs. In the event
there is a need to change our assumptions, this may lead to a material
impairment of these assets. See "-- We may experience volatility in net income
due to recent changes in standards for accounting for business combinations,
goodwill and other intangible assets."

    In our Life and Health Insurance segment, we estimate our losses from
insurance claims from the September 11(th) attacks, primarily individual life
insurance claims, to be between $9.0 million and $12.0 million after taxes,
taking into consideration reinsurance coverage. We do not engage in any property
and casualty insurance or any reinsurance businesses.

                                        20

                        STATISTICAL INFORMATION SOURCES

    This prospectus includes statistical data regarding the asset management and
accumulation, life and health insurance and mortgage banking industries.

    - Statistical data regarding industry growth projections of, as well as our
      market share within, the pension industry are based on information
      prepared by the Spectrem Group, a pension consulting organization.
      Spectrem Group data regarding our market share within the pension industry
      exclude all employers with fewer than 5 employees. Spectrem Group
      projections are based on its assumptions as of July 2001.

    - Statistical data regarding our market share within the 401(k) plan market
      are derived from information collected through surveys conducted by CFO
      magazine, a monthly magazine offering coverage of business issues from the
      perspective of the senior financial officer.

    - Statistical data regarding our use of information technology are provided
      by InformationWeek Magazine, a weekly publication reporting on the use of
      technology in business.

    - Statistical data regarding the group insurance, annuity, guaranteed
      investment contract and funding agreement industries are based on
      information reported to LIMRA International, Inc., a financial services
      industry marketing research organization. LIMRA International, Inc.
      rankings are based on data provided by U.S. companies in connection with
      LIMRA International, Inc. conducted surveys.

    - Statistical data comparing the investment performance of some of our
      mutual funds and separate accounts to our competitors are provided by
      Morningstar, an independent provider of financial information concerning
      mutual fund performance and the Investment Company Institute, the national
      association of the American investment company industry.

    - Statistical data regarding the Australian asset management and
      accumulation industries are based on information reported to ASSIRT, an
      Australian investment research firm.

    - Statistical data regarding the growth of Australian superannuation assets
      are provided by Cerulli Associates, Inc., a Boston- and London-based
      research and consulting firm that specializes in financial institutions.
      Cerulli Associates, Inc. projections are based on its assumptions as of
      March 2000.

    - Statistical data regarding the performance of our margin lending business
      in Australia are provided by Cannex, an Australian margin lending rating
      agency.

    - Statistical data regarding the group life and health insurance industry
      are based on information provided by the 1999 Life and Health Statistical
      report of National Underwriter, a weekly publication servicing the
      insurance and financial services industries.

    - Statistical data regarding the mortgage banking industry are based on
      information provided by Inside Mortgage Finance, a weekly newsletter
      reporting on the residential mortgage industry, and by the 1999 Cost of
      Servicing Survey conducted by the Mortgage Bankers Association of America,
      an association representing the interests of members of the real estate
      finance industry.

    - Statistical data regarding the performance of our commercial mortgages and
      information regarding our equity real estate portfolio are provided by the
      American Council of Life Insurers, an organization representing the
      interests of members of the life insurance industry.

    - Statistical data regarding the mutual fund industry are based on
      information provided by the 2001 Mutual Fund Fact Book of the Investment
      Company Institute, an investment company industry organization.

    The organizations gathering such data use methodology and conventions that
they deem appropriate to measure the companies within the relevant industry
segment. These organizations generally indicate that they have obtained
information from sources believed to be reliable, but do not guarantee the
accuracy and completeness of such information. While we believe this information
to be reliable, we have not independently verified such data.

                                        21

                              THE DEMUTUALIZATION

    In the following section, we provide a summary of the demutualization and of
the plan of conversion. The following is just a summary, and is qualified by
reference to the actual terms of the plan of conversion. A copy of the plan of
conversion has been filed as an exhibit to the registration statement of which
this prospectus forms a part.

THE PLAN OF CONVERSION

  ADOPTION AND APPROVAL OF THE PLAN OF CONVERSION

    The board of directors of Principal Mutual Holding Company unanimously
adopted the plan of conversion on March 31, 2001. The principal feature of the
plan of conversion is the conversion of Principal Mutual Holding Company from a
mutual insurance holding company into a stock company, a form of conversion
known as "demutualization".

    Because Principal Mutual Holding Company is a mutual insurance holding
company organized under the laws of the State of Iowa, the demutualization is
governed by Iowa law. Iowa law requires that the plan of conversion be approved
by the policyholders entitled to vote on the plan of conversion by two-thirds of
the votes cast, and also by the Insurance Commissioner of the State of Iowa.

    The policyholders entitled to vote on the plan of conversion approved the
plan of conversion at a meeting held on July 24, 2001, by approximately 92% of
the votes cast.

    The plan of conversion will not become effective unless, after conducting a
public hearing on the plan of conversion, the Insurance Commissioner of the
State of Iowa approves it based on a finding, among other things, that the plan
of conversion is fair and equitable to Principal Mutual Holding Company and the
policyholders of Principal Life. The public hearing was held on July 25, 2001
and the Insurance Commissioner of the State of Iowa approved the plan of
conversion on August 28, 2001. See "Risk Factors -- A challenge to the Insurance
Commissioner of the State of Iowa's approval of the plan of conversion could put
the terms of our demutualization in question and reduce the market price of our
common stock." In addition, the effectiveness of the demutualization and the
closing of this offering are conditioned on their simultaneous occurrence.

  STEPS TO DEMUTUALIZATION

    We are currently a wholly-owned subsidiary of Principal Mutual Holding
Company. The demutualization of Principal Mutual Holding Company includes the
following steps, all of which will occur on the date of the closing of this
offering:

    - Principal Mutual Holding Company will convert from a mutual insurance
      holding company into a stock company;

    - all membership interests of Principal Life's policyholders in Principal
      Mutual Holding Company will be extinguished;

    - the converted Principal Mutual Holding Company will merge with and into
      Principal Iowa Newco, Inc.;

    - Principal Financial Group, Inc., an Iowa business corporation and
      subsidiary of Principal Mutual Holding Company, will merge with and into
      Principal Iowa Newco, Inc.;

    - Principal Financial Services, Inc., an Iowa business corporation, will
      merge with and into Principal Iowa Newco, Inc., and Principal Iowa Newco,
      Inc. will change its name to "Principal Financial Services, Inc.";

    - we will sell shares of our common stock to the public in this offering;

    - policyholders entitled to receive compensation in the demutualization will
      receive shares of our common stock, cash or policy credits as compensation
      for the extinguishment of their membership interests in Principal Mutual
      Holding Company no later than 75 days after the closing of this offering,
      unless the Insurance Commissioner of the State of Iowa approves a later
      date; and

    - we will contribute to Principal Financial Services, Inc., and Principal
      Financial Services, Inc. will contribute to Principal Life, all or a
      portion of the net proceeds from this offering, as described in "Use of
      Proceeds".

    In addition to this offering, we may also conduct a private placement of our
common stock, a private placement or public offering of convertible preferred
stock, a private placement or public offering of debt or seek other sources of
capital. The primary purpose of any of these capital raising transactions would
be to fund cash and policy credit elections.

    When the demutualization and this offering are complete, we will be a
Delaware public company. We will own 100% of the stock of Principal Financial
Services, Inc., and Principal Financial Services, Inc. will own 100% of the
stock of Principal Life and other operating subsidiaries of the Principal
Financial Group.

                                        22

    The following chart illustrates our corporate structure prior to and
following the demutualization:

               [STRUCTURE BEFORE & AFTER DEMUTUALIZATION GRAPHS]

  EFFECTIVE DATE

    The demutualization will become effective on the date of the closing of this
offering. The plan of conversion provides that the effective date will occur
after the approval by the policyholders entitled to vote on the plan of
conversion and the Insurance Commissioner of the State of Iowa, but on or before
12 months after the date on which the Insurance Commissioner of the State of
Iowa approves the plan of conversion. With the approval of the Insurance
Commissioner of the State of Iowa, the effective date deadline may be extended.

                                        23

  ADDITIONAL REVIEW AND APPROVAL

    Our plan of conversion is also subject to review by the New York
Superintendent of Insurance, who may raise objections if he determines that its
provisions are unfair or inequitable to New York policyholders. The New York
Superintendent of Insurance has not raised any such objections as of the date of
this prospectus. The Department of Labor has published notice in the Federal
Register of an order granting prohibited transaction exemptions under ERISA. A
more complete description of these exemptions is provided under the heading
"-- ERISA Considerations".

PAYMENT OF CONSIDERATION TO ELIGIBLE POLICYHOLDERS

  AMOUNT AND FORM OF CONSIDERATION

    Until the effective date of the demutualization, Principal Mutual Holding
Company is a mutual insurance holding company governed by its members, who are
policyholders of Principal Life. In connection with the demutualization, the
membership interests of Principal Life policyholders in Principal Mutual Holding
Company will be extinguished, and policyholders entitled to receive compensation
in the demutualization will receive compensation in exchange for the
extinguishment of their membership interests.

    Policyholders entitled to receive compensation in the demutualization are
those persons who:

    - owned on March 31, 2000 a Principal Life policy or contract and who had a
      continuous membership interest in Principal Mutual Holding Company through
      ownership of a Principal Life policy or contract from March 31, 2000 until
      the date of the closing of this offering; or

    - were issued a Principal Life policy or contract on or before April 8, 1980
      and transferred ownership rights of that policy or contract on or before
      April 8, 1980, so long as that policy or contract remains in force until
      the date of the closing of this offering.

    Whether or not a policy or contract is in force is determined based upon our
records. In general, a policy or contract is in force on a given day if it has
been issued and is in effect, has not matured by death or otherwise or been
surrendered or otherwise terminated, and verbal or written notice of the
insured's death has not been received by Principal Life. A policy is generally
not in force until it is issued and is in effect. However, a policy is
considered to be in force if we have received at our administrative office an
application complete on its face or payment of the full initial premium, or such
lesser amount required by our normal administrative procedures, together with
sufficient information to effect a contract of insurance according to our normal
administrative procedures for coverage to be effective, provided that such
policy is later issued in accordance with the terms of its application.

    The compensation will consist of a fixed component equal to 100 shares of
common stock for each policyholder entitled to receive compensation in the
demutualization, and a variable component of additional shares allocated, based
on actuarial formulas described in our plan of conversion and the actuarial
contribution memorandum. The actuarial formulas take into account a policy's
past and estimated future contributions to the surplus and asset valuation
reserve of Principal Life.

    The compensation will be in the form of either policy credits, cash or
shares of our common stock. In the case of the MANDATORY POLICY CREDITS, policy
credits are either an increase in cash value, account value, dividend
accumulations, face amount, extended term period or benefit payment, as
appropriate, depending on the policy. In the case of group policies, policy
credits are either SEPARATE ACCOUNT POLICY CREDITS or Account Value Policy
Credits. The form of compensation will be determined as follows:

    POLICY CREDITS.  The following types of policies will be required to receive
or be eligible for policy credits:

    - If the policy is required to receive Mandatory Policy Credits, the policy
      credits may take the form of an increase in cash value, account value,
      dividend accumulations, face amount, extended term period or benefit
      payment, as appropriate, depending on the policy. The following types of
      policies are required to receive Mandatory Policy Credits:

     - Individual retirement annuity contracts under Section 408(b) or Section
       408A of the Internal Revenue Code.

     - Tax sheltered annuity contracts under Section 403(b) of the Internal
       Revenue Code.

     - Individual annuity contracts issued directly to a plan participant under
       a plan qualified under Section 401(a) or Section 403(a) of the Internal
       Revenue Code.

     - Individual life insurance policies issued directly to a plan participant
       under a plan qualified under Section 401(a) or Section 403(a) of the
       Internal Revenue Code.

    - If the policy is owned by a QUALIFIED PLAN CUSTOMER, the policy credit may
      take the form of Separate Account Policy Credits, which may be allocated
      to participants under the policy. A Qualified Plan Customer may elect
      common stock or, subject to the limits described in the plan of
      conversion, Account Value Policy Credits or cash

                                        24

      as consideration rather than Separate Account Policy Credits. If no
      election is made, such Qualified Plan Customer will receive Separate
      Account Policy Credits. However, Qualified Plan Customers whose group
      annuity contracts were issued in California will not be eligible for
      Separate Account Policy Credits. Instead, they are eligible to receive
      common stock or, subject to the limits described in the plan of
      conversion, Account Value Policy Credits or cash. If no election is made,
      Qualified Plan Customers whose group annuity contracts were issued in
      California will receive common stock.

    - If the policy is owned by a NON-RULE 180 QUALIFIED PLAN CUSTOMER, the
      policy credit may take the form of an Account Value Policy Credit, which
      may be allocated to participants under the policy. A Non-Rule 180
      Qualified Plan Customer may elect to receive common stock or, subject to
      the limits described in the plan of conversion, cash as consideration
      rather than Account Value Policy Credits. If no election is made, such
      Non-Rule 180 Qualified Plan Customer will receive Account Value Policy
      Credits.

    CASH.  The following types of policies will be eligible solely for cash:

    - Policies for which the mailing address of the policyholder on Principal
      Life's or Principal Mutual Holding Company's records is one at which mail
      is undeliverable.

    - Policies for which the mailing address of the policyholder on Principal
      Life's or Principal Mutual Holding Company's records is located outside
      the United States.

    - Policies for which it is not reasonably feasible or appropriate to provide
      consideration in the form that policyholders would otherwise receive.

    All policyholders who are entitled to receive shares of our common stock
will be permitted, prior to the vote of the policyholders entitled to vote on
the plan of conversion, to express a preference to receive cash, rather than
common stock, as consideration for the extinguishment of their membership
interests. Cash will be distributed to such policyholders to the extent
available. Eligible policyholders that elect cash and are allocated 100 shares
or fewer will receive cash. See "-- Limits on Amount Available for Cash, Account
Value Policy Credits and Separate Account Policy Credits Compensation".

    COMMON STOCK.  Except for policies which are eligible solely for Mandatory
Policy Credits or cash, all eligible policies will be eligible for shares of our
common stock.

  CALCULATION OF COMPENSATION

    COMMON STOCK.  Policyholders receiving common stock as compensation will
receive the number of shares of common stock ultimately allocated to them. The
value of each share of common stock will be equal to its public trading price on
any particular day.

    CASH AND POLICY CREDITS (OTHER THAN SEPARATE ACCOUNT POLICY
CREDITS).  Policyholders receiving cash or policy credits, other than Separate
Account Policy Credits, will receive an amount equal to the number of shares of
common stock that are allocated to them multiplied by the price per share at
which the common stock is sold in this offering.

    SEPARATE ACCOUNT POLICY CREDITS.  Policyholders receiving Separate Account
Policy Credits will receive an amount equal to their respective share of the
assets in the separate account holding shares of our common stock and maintained
by Principal Life. Because our common stock will initially be the only asset in
this separate account, any policyholder's share of the assets when the separate
account is initiated will be equal to the number of shares of our common stock
allocated to that policyholder multiplied by the public trading price of our
common stock at that time. See "-- Operation of the Separate Account Holding
Shares of our Common Stock".

  LIMITS ON AMOUNT AVAILABLE FOR CASH, ACCOUNT VALUE POLICY CREDITS AND SEPARATE
  ACCOUNT POLICY CREDITS COMPENSATION

    Each policyholder who is eligible to receive common stock will have an
opportunity to elect cash. If cash is not elected by such policyholder, a
preference for common stock will be assumed, unless such policyholder is a
Qualified Plan Customer or a Non-Rule 180 Qualified Plan Customer.

    There may be a limit to the amount of funds available to pay cash and
provide Account Value Policy Credits to eligible policyholders allocated more
than 100 shares of common stock under our plan of conversion. It is possible
that the total funds raised in this offering and the other capital raising
transactions, if applicable, will not be sufficient to fund cash distributions
or Account Value Policy Credits for all of the eligible policyholders who have
been allocated more than 100 shares of common stock and who have elected cash,
or elected or are deemed to have elected Account Value Policy Credits. However,
eligible policyholders who are allocated 100 or fewer shares of common stock
will receive cash or Account Value Policy Credits, if they so elect or are
deemed to so elect.

                                        25

    In the event that the total available funds are not sufficient, the
available funds will be distributed to those expressing a preference for cash or
Account Value Policy Credits based on the number of shares of common stock that
would be distributed to each electing policyholder, progressing from the
smallest number of shares to the largest number at which all policyholders
electing cash or Account Value Policy Credits can be accommodated.

    Qualified Plan Customers whose cash or Account Value Policy Credit
preferences cannot be satisfied will instead receive Separate Account Policy
Credits. Non-Rule 180 Qualified Plan Customers and Qualified Plan Customers
whose group annuity contracts were issued in California whose cash or Account
Value Policy Credit preferences cannot be satisfied will instead receive shares
of our common stock.

    The maximum number of allocated shares for which cash or Account Value
Policy Credits will be available will depend on a number of factors. These
factors include the number of policyholders eligible for common stock, Mandatory
Policy Credits or cash, the size of the initial public offering, the initial
public offering stock price, the size of any other capital raising transaction,
if applicable, and the percentage of policyholders who elect to receive cash or
Account Value Policy Credits.

    In addition, the amount of Separate Account Policy Credits will be limited
so that no less than 50% of the total consideration distributed to policyholders
entitled to receive compensation in the demutualization will be in the form of
common stock.

  ACTUARIAL OPINION

    Principal Mutual Holding Company retained Milliman USA ("Milliman"),
formerly named Milliman & Robertson, Inc., an independent actuarial consulting
firm, to advise it in connection with actuarial matters involved in the
development of the plan of conversion and the payment of consideration to
policyholders entitled to receive compensation in the demutualization. The
opinion of Daniel J. McCarthy, F.S.A., an independent consulting actuary
associated with Milliman, dated March 31, 2001, states, in reliance upon the
matters described in such opinion, that the principles, assumptions and
methodologies used to allocate the consideration among policyholders entitled to
receive compensation in the demutualization are reasonable and appropriate and
result in an allocation of consideration that is fair and equitable to these
policyholders. A copy of the opinion is attached as Annex A to this prospectus.

OPERATION OF THE SEPARATE ACCOUNT HOLDING SHARES OF OUR COMMON STOCK

    We estimate that 56.2 million shares of our common stock may be issued to a
new separate account of Principal Life in connection with funding the Separate
Account Policy Credits. As described above, these shares will be held in the
separate account for the benefit of Qualified Plan Customers and may be sold in
the market from time to time as a result of instructions from the Qualified Plan
Customers holding interests in this separate account. If not directed otherwise
by the Qualified Plan Customer, the separate account interests owned by that
Qualified Plan Customer may also be allocated to participants' benefit plan
accounts under the applicable policy. Dividends with respect to these shares
will be paid to Principal Life and allocated to the separate account. The
Qualified Plan Customer may request Principal Life to transfer the value of its
interest in the separate account to Principal Life's general account or to
another account for investment purposes. Principal Life will have no right to
use the assets of the separate account for any obligation or purpose other than
those relating to the group annuity contracts under which the assets in the
separate account will be held.

    Principal Life will hold legal title to these shares in a fiduciary
capacity. The Qualified Plan Customers will remain the beneficial owners of
these shares and be able to exercise voting rights. The plan of conversion
provides that Principal Life, as record holder of the shares held in the
separate account, will solicit voting instructions from the Qualified Plan
Customers holding interests in the separate account and will vote the shares as
instructed.

    If the Qualified Plan Customer fails to provide instructions to Principal
Life, the non-directed shares (the shares as to which Principal Life has
received no instruction) will be voted as follows:

    - if the matter involved is routine, Principal Life will vote the
      non-directed shares under a "mirror voting" provision, in other words the
      non-directed shares will be voted in the same proportion, either for,
      against or abstain, as the shares in the separate account for which
      Principal Life has received instructions; or

    - if the matter involved is not routine, an independent fiduciary appointed
      by Principal Life will instruct Principal Life to vote the non-directed
      shares in a way that, in the independent fiduciary's judgment, would be in
      the best interest of the participants and beneficiaries of the benefits
      plans of Qualified Plan Customers in whose interest such shares are held;
      Principal Life will retain fiduciary responsibility as to these matters,
      and the independent fiduciary will in effect act as Principal Life's
      agent.

    Routine matters refer to matters within the ordinary course of the business
of the corporation and its stockholders, such as the election of directors at an
annual meeting. Non-routine matters refer to fundamental corporate decisions
outside the ordinary course of the business of the corporation and its
stockholders, such as a potential change of control.
                                        26

    Principal Life expects to appoint as independent fiduciary a major financial
institution with investment management expertise. These voting procedures will
be set forth in an agreement between Principal Life and the independent
fiduciary as well as in the plan of operation for the separate account.

    In our future consolidated financial statements, we will report the shares
of our common stock held by the new separate account of Principal Life as an
investment of the separate account, and will establish a corresponding separate
account liability, based on the fair value of those shares, for the amounts owed
to the Qualified Plan Customers under the related group variable annuity
contracts. This is consistent with the accounting under generally accepted
accounting principles for other separate accounts where all investment risks and
rewards are borne by the contractholders. Generally accepted accounting
principles accord special accounting treatment to group variable annuity
contracts issued by separate accounts, recognizing that such contracts provide
contractholders with virtually all the rights of ownership except legal title to
the shares held in the separate account and therefore company shares held in a
subsidiary's separate account need not be accounted for as treasury stock.

THE CLOSED BLOCK

    At the time our existing pre-demutualization mutual insurance holding
company structure was created in 1998, for policy dividend purposes only,
Principal Life formed and began operating a Closed Block for the benefit of
individual policies paying experience-based policy dividends. For accounting
purposes only, assets of Principal Life were allocated to the Closed Block in an
amount that produces cash flows which, together with anticipated revenue from
the Closed Block policies and contracts, were expected to be sufficient to
support the Closed Block policies including, but not limited to, provisions for
payment of claims, expenses, charges and taxes, and to provide for continuation
of policy and contract dividends in aggregate in accordance with the 1997
dividend scales, if the experience underlying such scales continues, and to
allow for appropriate adjustments in such scales, if such experience changes.
Assets in the Closed Block remain as general account assets of Principal Life
and are fully subject to the claims of creditors of Principal Life, like any
general account assets. The Closed Block continues in existence as established
and will not be affected by the demutualization. No additional policies will be
added to the Closed Block as a result of the demutualization.

LIMITATIONS ON ACQUISITION AND DISPOSITION OF SECURITIES BY OFFICERS AND
DIRECTORS

    No officer, director or employee will receive stock or cash compensation at
the time of the demutualization other than what he or she may receive as a
policyholder entitled to receive compensation in the demutualization or as a
plan participant of a policyholder entitled to receive compensation in the
demutualization.

    Until six months after the completion of the demutualization, we may not
award any stock options, stock grants or other stock-based grants to any of our
executive officers or directors, our executive officers and directors and their
families may not purchase shares of our common stock, and our executive officers
and directors may not receive distributions of stock under our long-term
performance plan. Until eighteen months after the completion of the
demutualization, we may not issue any shares of our common stock to a
participant under our excess plan (our non qualified retirement savings plan).
No stock incentive awards to our executive officers and no awards to our
directors may become exercisable or distributable earlier than eighteen months
after the completion of the demutualization, except in cases of death or
disability or, in limited circumstances, with the approval of the Insurance
Commissioner of the State of Iowa. These restrictions apply not only to those
who are "executive officers" within the meaning given that term in the
Securities Exchange Act of 1934, but also to the officers of any of our
affiliated companies or subsidiaries with a title of Second Vice President or a
more senior title, whom we refer to in the plan of conversion as our "executive
officers."

    These limitations do not prevent us from issuing common stock:

    - in connection with our employees savings plan, our agents savings plan,
      any employee stock ownership plan or other employee benefit plan
      established for the benefit of our employees and qualified under the
      Internal Revenue Code; or

    - to match contributions by employees to any such plan.

    Further, our stock incentive plan allows us to issue shares of common stock
to our employees other than our executive officers and directors, as well as to
our agents, but not before 30 days after the completion of the demutualization.

    We may issue shares of common stock, options or other stock-based incentives
pursuant to our stock incentive plan, the long-term performance plan, the
directors stock plan and the excess plan, although the maximum number of shares
of common stock that may be issuable under all such plans, and any new plan
awarding our common stock, during the five year period after the completion of
the demutualization, is 6% of the number of shares outstanding immediately
following the completion of the demutualization, unless the shareholders vote to
increase such maximum number. The number of shares that may be awarded in the
eighteen months following the completion of the

                                        27

demutualization is limited to 40% of such maximum. These limitations are not
applicable to three plans: our employee stock purchase plan, pursuant to which
we may issue up to 2% of the total number of shares outstanding immediately
following the completion of the demutualization, our employees savings plan and
our agents savings plan.

LIMITATIONS ON ACQUISITIONS OF OUR COMMON STOCK

    Iowa law prohibits for a period of 5 years following the date of
distribution of consideration to the policyholders in exchange for their
membership interests:

    - any person, other than the reorganized company, or other than an employee
      benefit plan or employee benefit trust sponsored by the reorganized
      company, from directly or indirectly acquiring or offering to acquire the
      beneficial ownership of more than 5% of any class of voting security of
      the reorganized company, and

    - any person, other than the reorganized company, or other than an employee
      benefit plan or employee benefit trust sponsored by the reorganized
      company, who acquires 5% or more of any class of voting security of the
      reorganized company prior to the conversion, from directly or indirectly
      acquiring or offering to acquire the beneficial ownership of additional
      voting securities of the reorganized company,

unless the acquisition is approved by the Insurance Commissioner of the State of
Iowa and by the board of directors of the reorganized company.

    By virtue of these provisions, we may not be subject to an acquisition by
another company during the 5 years following the distribution of consideration
to policyholders entitled to receive compensation in the demutualization.

AMENDMENTS TO THE PLAN

    The board of directors of Principal Mutual Holding Company may amend the
plan of conversion at any time before the date of the closing of this offering
with the approval of the Insurance Commissioner of the State of Iowa. The board
of directors of Principal Financial Group, Inc. may amend the plan of conversion
after the date of the closing of this offering with the approval of the
Insurance Commissioner of the State of Iowa.

APPEAL

    Under Iowa law, judicial review of a decision of the Insurance Commissioner
of the State of Iowa may be sought by initiation of an action, within the
limitation period provided under Iowa law, after the Insurance Commissioner of
the State of Iowa issues her order approving the plan of conversion.

    The Insurance Commissioner of the State of Iowa approved the plan of
conversion on August 28, 2001.

    A lawsuit was filed on September 27, 2001 in the United States District
Court for the Northern District of Illinois, seeking damages and other relief on
behalf of a putative class of policyholders based on allegations that the plan
of conversion violates the United States Constitution. The action is captioned
Esther L. Gayman v. Principal Mutual Holding Company, et al. We believe that
there are meritorious defenses to the plaintiff's claims and we intend
vigorously to contest all of the plaintiff's claims. We are not presently aware
of any other lawsuits challenging the plan. There can be no assurance, however,
that additional lawsuits will not be commenced.

ERISA CONSIDERATIONS

    We and our subsidiaries provide a variety of fiduciary and other services to
employee benefit plans that are also policyholders. The provision of such
services may cause us to be a "party in interest" or "disqualified person," as
such terms are defined in ERISA and the Internal Revenue Code, with respect to
such plans. Unless an exemption is obtained from the Department of Labor, some
transactions between parties in interest or disqualified persons and those plans
are prohibited by ERISA and the Internal Revenue Code. We have applied to the
Department of Labor for prohibited transaction exemptions under ERISA, which
would, if granted, provide relief from the restrictions of ERISA and the
Internal Revenue Code to permit policyholders entitled to receive compensation
in the demutualization to receive common stock, cash or policy credits in
accordance with the plan of conversion.

    On September 27, 2001, the Department of Labor published notice in the
Federal Register of an order granting the requested prohibited transaction
exemptions with respect to the payment of compensation under the plan of
conversion to policyholders entitled to receive compensation in the
demutualization as to which we are a "party in interest" or "disqualified
person." Such exemption is subject to various conditions, including the
implementation of the plan of conversion in accordance with procedural and
substantive safeguards that are imposed under the Iowa demutualization law and
supervised by the Insurance Commissioner of the State of Iowa.

                                        28

U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE DEMUTUALIZATION TO US

    We have received a private letter ruling from the Internal Revenue Service
to the effect that, among other matters:

    - The conversion of Principal Mutual Holding Company from a mutual insurance
      holding company into a stock company will be treated as a
      "recapitalization" within the meaning of section 368(a)(1)(E) of the
      Internal Revenue Code;

    - The merger of Principal Mutual Holding Company into Principal Iowa Newco,
      Inc. will not be prevented from qualifying as a "reorganization" within
      the meaning of section 368(a)(1)(A) or section 368(a)(2)(D) of the
      Internal Revenue Code by reason of Principal Mutual Holding Company's
      status as a "mutual insurance holding company" until immediately prior to
      such merger; and

    - The affiliated federal income tax group of which Principal Mutual Holding
      Company is the common parent immediately before the consummation of the
      proposed transaction will remain in existence, with Principal Financial
      Group, Inc., a Delaware corporation and the issuer of our common stock, as
      the common parent.

    We have received opinions of our special tax counsel, Debevoise & Plimpton,
dated May 24, 2001, substantially to the effect that, under the federal income
tax law and facts as they existed on the date of the opinion:

    - Policies issued by Principal Life prior to the completion of the
      demutualization will not be deemed newly-issued policies for any material
      federal income tax purpose as a result of Principal Mutual Holding
      Company's conversion from a mutual insurance holding company into a stock
      company;

    - Policyholders receiving solely shares of our common stock and Qualified
      Plan Customers whose policies are credited with Separate Account Policy
      Credits should not recognize income, gain or loss for federal income tax
      purposes as a result of the consummation of our demutualization;

    - For policies that are tax sheltered annuities, individual retirement
      annuities, Roth IRAs or individual life insurance policies or annuity
      contracts issued to participants in qualified retirement plans, the
      completion of our demutualization, including the crediting of compensation
      in the form of policy credits, will not result in any transaction that
      will (1) be treated as a contribution or distribution that will result in
      penalties to the holder or that will be subject to withholding, (2)
      disqualify an individual retirement annuity policy or give rise to a
      prohibited transaction between the individual retirement annuity and the
      individual for whose benefit it is established, or his or her beneficiary,
      or (3) adversely affect the tax-favored status of these policies under the
      Internal Revenue Code or result in penalties or any other material adverse
      federal income tax consequences to the holders of these policies under the
      Internal Revenue Code;

    - For policies that are part of a tax-qualified pension or profit-sharing
      plan described in section 401(a) or section 403(a) of the Internal Revenue
      Code and that will be credited with compensation in the form of policy
      credits, the completion of our demutualization, including the crediting of
      compensation in the form of policy credits, will not result in any
      transaction that will disqualify the plan, give rise to a prohibited
      transaction between the plan and the individual for whose benefit it is
      established, or his or her beneficiary, or otherwise adversely affect the
      tax-favored status of the policies under the Internal Revenue Code or
      result in penalties or any other material adverse federal income tax
      consequences to the holders of these policies under the Internal Revenue
      Code; and

    - The summary of the principal federal income tax consequences to
      policyholders of their receipt of compensation under our plan of
      conversion, that is contained under the heading "U.S. Federal Income Tax
      Considerations" in the information booklet provided to policyholders, is,
      to the extent it describes matters of law or legal conclusions and subject
      to the limitations and assumptions described in it, an accurate summary of
      the material federal income tax consequences to policyholders of the
      consummation of our plan of conversion under the federal income tax law.

    In order for us to complete our demutualization, our special tax counsel
must confirm that each of these opinions continues to be true under the facts
and federal income tax law as they exist on the date of the closing of this
offering.

    Based on the Internal Revenue Service rulings we have received and the
opinions of our special tax counsel described above, we believe that the
Principal Financial Group will not realize significant income, gain or loss for
federal income tax purposes as a result of the consummation of the
demutualization under the terms of the plan of conversion.

    The private letter rulings we have received from the Internal Revenue
Service and the opinions of special tax counsel described above are based on the
accuracy of representations and undertakings made by us.

                                        29

                                USE OF PROCEEDS

    Our net proceeds from the offering will be $1,753.3 million, or $2,018.8
million if the underwriters exercise in full their option to purchase additional
shares of common stock in the offering and after deducting underwriting
discounts and commissions and the estimated expenses of the offering. The
following table summarizes the use of these net proceeds, assuming the
underwriters do not exercise their option to purchase additional shares of
common stock in the offering:

USE OF PROCEEDS:                                               ($ IN MILLIONS)
                                                            
Cash contributed to Principal Life..........................      $1,693.8
Proceeds retained by Principal Financial Group, Inc. .......          59.5
                                                                  --------
         Total net proceeds.................................      $1,753.3
                                                                  ========

    The plan of conversion requires us to contribute all or a portion of the net
proceeds to Principal Life to fund (1) policy credits and cash payments for
policyholders for whom policy credits or cash are the required form of
compensation; (2) the elections for cash and the elections or deemed elections
for Account Value Policy Credits that are attributable to policyholders entitled
to these forms of compensation; and (3) an amount equal to the fees and expenses
of the demutualization paid by Principal Life. Under the plan of conversion, we
may retain up to $250.0 million of any remaining proceeds from this offering to
be used for working capital, payment of dividends and other general corporate
purposes. We must contribute any remaining proceeds, before any exercise of the
underwriters' over-allotment option, in excess of this $250.0 million limit to
Principal Life.

    In connection with the demutualization, Principal Life will require funds
contributed by us to satisfy the following needs. As of the date of this
prospectus:

    - $324.7 million is estimated to be necessary to provide compensation to
      policyholders eligible solely for cash or policy credits;

    - $1,329.5 million is estimated to be used to make elective cash payments
      and fund Account Value Policy Credits to policyholders receiving these
      forms of compensation in the demutualization; and

    - $39.6 million is estimated to be required for the cost of the nonrecurring
      expenses of Principal Life directly related to the demutualization.

    In addition to the shares of our common stock distributed in this offering,
for which we will receive cash proceeds, many policyholders entitled to receive
compensation in the demutualization will receive shares of our common stock
distributed in connection with the demutualization, as well as cash, Account
Value Policy Credits or Separate Account Policy Credits, as compensation for
extinguishment of their membership interests in Principal Mutual Holding
Company. None of Principal Financial Group, Inc., Principal Financial Services,
Inc. or Principal Life will receive any proceeds from the issuance of our common
stock to policyholders entitled to receive compensation in the demutualization
for the extinguishment of their membership interests in Principal Mutual Holding
Company or to the separate account to be established for the Separate Account
Policy Credits.

                                        30

                          STOCKHOLDER DIVIDEND POLICY

    We currently intend to pay regular annual cash dividends on our common
stock. We currently intend to declare an annual cash dividend of $0.25 per share
on our common stock. We expect that our first annual cash dividend will be a
proportion of that amount, based on the number of months remaining in the
calendar year in which we become public. Although we intend to pay dividends,
the declaration and payment of dividends is subject to the discretion of our
board of directors. The declaration, payment and amount of dividends will be
dependent upon our results of operations, financial condition, cash
requirements, future prospects, regulatory and other restrictions on the payment
of dividends by our subsidiaries to us and other factors deemed relevant by our
board of directors. There can be no assurance that we will declare and pay any
dividends.

    As a holding company, we will depend principally on dividends from Principal
Life to satisfy our financial obligations, pay operating expenses and pay
dividends to our stockholders.

    If Principal Life is unable to pay stockholder dividends in the future, our
ability to pay dividends to our stockholders and meet our cash obligations will
be limited. The payment of dividends by Principal Life is subject to the
discretion of its board of directors. In addition, the Iowa insurance laws limit
how and when Principal Life can pay stockholder dividends. Principal Life was
able to pay approximately $760.9 million in statutory dividends in 2001 based on
its 2000 statutory financial results without being subject to the restrictions
on payment of extraordinary stockholder dividends, all of which as of August 24,
2001 has been declared and paid. See "Risk Factors -- Our ability to pay
dividends and meet our obligations may be constrained by the limitations on
dividends Iowa insurance laws impose on Principal Life", "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources", and Note 14 to our audited
consolidated financial statements.

                                        31

                                 CAPITALIZATION

    The following table provides, as of June 30, 2001, (1) our actual
consolidated capitalization and (2) our pro forma capitalization after giving
effect to:

    - the demutualization and the issuance of 260.6 million shares of our common
      stock to policyholders entitled to receive compensation in the
      demutualization or to the separate account to be established for the
      Separate Account Policy Credits;

    - the sale of 100.0 million shares of our common stock in this offering at
      an initial public offering price of $18.50 per share; and

    - the application of the net proceeds from this offering as described under
      "Use of Proceeds," as if the demutualization and this offering had
      occurred as of June 30, 2001.

    We based the pro forma information on the assumptions we have made about the
number of shares of common stock and the amount of cash and policy credits that
will be distributed to policyholders entitled to receive compensation in the
demutualization. We describe these assumptions in "Unaudited Pro Forma Condensed
Consolidated Financial Information." You should read this table in conjunction
with the Unaudited Pro Forma Condensed Consolidated Financial Information
appearing in this prospectus.

    The table below assumes that the underwriters' option to purchase additional
shares of common stock in the offering is not exercised.

                                                                         AS OF
                                                                     JUNE 30, 2001
                                                              ---------------------------
                                                                 ACTUAL       PRO FORMA
                                                              ------------   ------------
                                                              ($ IN MILLIONS, EXCEPT PER
                                                                     SHARE AMOUNT)
                                                                       
Debt:
  Short-term debt...........................................    $  675.9       $  675.9
  Long-term debt............................................     1,390.6        1,390.6
                                                                --------       --------
         Total debt.........................................     2,066.5        2,066.5
Equity:
  Common stock, $0.01 par value; 2.5 billion shares
    authorized; 360.6 million shares issued and
    outstanding.............................................          --            3.6
  Additional paid-in capital................................          --        6,628.7
  Retained earnings.........................................     6,536.9             --
  Accumulated other comprehensive loss......................        (8.5)          (8.5)
                                                                --------       --------
         Total equity.......................................     6,528.4        6,623.8
                                                                --------       --------
             Total capitalization...........................    $8,594.9       $8,690.3
                                                                ========       ========

Book value per common share.................................                   $  18.37
                                                                               ========

                                        32

                   SELECTED HISTORICAL FINANCIAL INFORMATION

    The following table provides summary historical consolidated financial
information of Principal Mutual Holding Company, the predecessor to Principal
Financial Group, Inc. prior to the demutualization, and will apply to Principal
Financial Group, Inc. following the demutualization. We derived the consolidated
financial information for each of the years ended December 31, 2000, 1999 and
1998 and as of December 31, 2000 and 1999 from our audited consolidated
financial statements and notes to the financial statements included in this
prospectus. We derived the consolidated financial information for the years
ended December 31, 1997 and 1996 and as of December 31, 1998, 1997 and 1996 from
our audited consolidated financial statements not included in this prospectus.
We derived the summary consolidated financial information for the six months
ended June 30, 2001 and 2000 and as of June 30, 2001, from our unaudited interim
consolidated financial statements included in this prospectus. We derived the
summary consolidated financial information as of June 30, 2000, from our
unaudited interim consolidated financial statements not included in this
prospectus. All unaudited interim consolidated financial information presented
in the table below reflects all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of our consolidated financial
position and results of operations for such periods. The results of operations
for the six months ended June 30, 2001 are not necessarily indicative of the
results to be expected for the full year. The following summary consolidated
financial information, other than the Principal Life statutory data, has been
prepared in accordance with GAAP.

    The following is a summary and, in order to fully understand our
consolidated financial information, you should also read "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and the notes to the financial statements
included in this prospectus. The results for past accounting periods are not
necessarily indicative of the results to be expected for any future accounting
period.

                                           FOR THE SIX
                                          MONTHS ENDED
                                            JUNE 30,                       FOR THE YEAR ENDED DECEMBER 31,
                                      ---------------------   ---------------------------------------------------------
                                       2001(2)     2000(2)     2000(2)     1999(2)     1998(2)     1997(2)     1996(2)
                                      ---------   ---------   ---------   ---------   ---------   ---------   ---------
                                                                       ($ IN MILLIONS)
                                                                                         
INCOME STATEMENT DATA:(1)
Revenues:
  Premiums and other
    considerations..................  $ 1,955.3   $ 1,992.7   $ 3,996.4   $ 3,937.6   $ 3,818.4   $ 4,667.8   $ 5,120.9
  Fees and other revenues...........      856.3       783.2     1,576.3     1,287.3       978.8       881.9       722.4
  Net investment income.............    1,686.0     1,558.1     3,172.3     3,072.0     2,933.9     2,936.6     2,894.0
  Net realized capital gains
    (losses)........................     (176.9)       31.5       139.9       404.5       465.8       175.3       387.8
                                      ---------   ---------   ---------   ---------   ---------   ---------   ---------
         Total revenues.............    4,320.7     4,365.5     8,884.9     8,701.4     8,196.9     8,661.6     9,125.1

Expenses:
  Benefits, claims and settlement
    expenses........................    2,639.2     2,631.1     5,232.3     5,260.9     5,089.0     5,632.5     6,086.5
  Dividends to policyholders........      162.1       155.8       312.7       304.6       298.7       299.3       298.5
  Operating expenses................    1,228.2     1,228.0     2,479.4     2,070.3     2,074.0     2,035.5     1,909.8
                                      ---------   ---------   ---------   ---------   ---------   ---------   ---------
         Total expenses.............    4,029.5     4,014.9     8,024.4     7,635.8     7,461.7     7,967.3     8,294.8
                                      ---------   ---------   ---------   ---------   ---------   ---------   ---------
Income before income taxes and
  cumulative effect of accounting
  change............................      291.2       350.6       860.5     1,065.6       735.2       694.3       830.3
Income taxes........................       56.1       105.3       240.3       323.5        42.2       240.8       304.3
                                      ---------   ---------   ---------   ---------   ---------   ---------   ---------
Income before cumulative effect of
  accounting change.................      235.1       245.3       620.2       742.1       693.0       453.5       526.0
Cumulative effect of accounting
  change, net of related income
  taxes.............................      (10.7)         --          --          --          --          --          --
                                      ---------   ---------   ---------   ---------   ---------   ---------   ---------
         Net income.................  $   224.4   $   245.3   $   620.2   $   742.1   $   693.0   $   453.5   $   526.0
                                      =========   =========   =========   =========   =========   =========   =========

                                        33

                                            AS OF OR
                                           FOR THE SIX
                                          MONTHS ENDED                       AS OF OR FOR THE YEAR ENDED
                                            JUNE 30,                                DECEMBER 31,
                                      ---------------------   ---------------------------------------------------------
                                       2001(2)     2000(2)     2000(2)     1999(2)     1998(2)     1997(2)     1996(2)
                                      ---------   ---------   ---------   ---------   ---------   ---------   ---------
                                                                       ($ IN MILLIONS)
                                                                                         
BALANCE SHEET DATA:(1)
Invested assets.....................  $44,403.2   $41,224.9   $42,090.6   $41,343.2   $40,686.7   $39,572.2   $38,658.3
Separate account assets.............   33,739.5    36,080.6    34,916.2    34,992.3    29,009.3    23,560.1    17,166.3
All other assets....................    7,087.0     7,040.8     7,398.1     7,617.7     4,350.7     4,002.9     3,358.7
                                      ---------   ---------   ---------   ---------   ---------   ---------   ---------
         Total assets...............  $85,229.7   $84,346.3   $84,404.9   $83,953.2   $74,046.7   $67,135.2   $59,183.3
                                      =========   =========   =========   =========   =========   =========   =========

Policyholder liabilities............  $39,159.4   $37,412.4   $38,243.6   $37,808.9   $35,885.1   $35,306.1   $34,766.3
Separate account liabilities........   33,739.5    36,080.6    34,916.2    34,992.3    29,009.3    23,560.1    17,166.3
Short-term debt.....................      675.9       390.7       459.5       547.3       290.9       313.7       198.5
Long-term debt......................    1,390.6     1,538.5     1,336.5     1,492.9       670.9       458.9       399.1
All other liabilities...............    3,735.9     3,290.3     3,196.6     3,558.9     2,523.3     2,212.2     1,998.6
                                      ---------   ---------   ---------   ---------   ---------   ---------   ---------
         Total liabilities..........  $78,701.3   $78,712.5   $78,152.4   $78,400.3   $68,379.5   $61,851.0   $54,528.8
                                      =========   =========   =========   =========   =========   =========   =========

Retained earnings...................  $ 6,536.9   $ 5,937.6   $ 6,312.5   $ 5,692.3   $ 4,950.2   $ 4,257.2   $ 3,803.7
Net unrealized gains (losses) on
  available-for-sale securities.....      268.6      (178.2)      129.9       (79.1)      745.9     1,037.5       859.7
Net foreign currency translation
  adjustment........................     (277.1)     (125.6)     (189.9)      (60.3)      (28.9)      (10.5)       (8.9)
                                      ---------   ---------   ---------   ---------   ---------   ---------   ---------
         Total equity...............  $ 6,528.4   $ 5,633.8   $ 6,252.5   $ 5,552.9   $ 5,667.2   $ 5,284.2   $ 4,654.5
                                      =========   =========   =========   =========   =========   =========   =========
PRINCIPAL LIFE STATUTORY DATA:(3)
Premiums and deposits(4)............  $ 2,301.9   $ 7,665.5   $15,653.3   $15,709.8   $14,120.3   $12,710.9   $12,156.2
Net income(5).......................      125.2       355.1       912.6       713.7       511.4       432.2       415.0

Statutory capital and surplus(6)....  $ 3,328.9   $ 3,095.4   $ 3,356.4   $ 3,151.9   $ 3,031.5   $ 2,811.1   $ 2,503.5
Asset valuation reserve.............      878.0       951.2       919.8       953.8       966.9     1,087.9     1,005.0
                                      ---------   ---------   ---------   ---------   ---------   ---------   ---------
         Statutory capital and
           surplus and asset
           valuation reserve........  $ 4,206.9   $ 4,046.6   $ 4,276.2   $ 4,105.7   $ 3,998.4   $ 3,899.0   $ 3,508.5
                                      =========   =========   =========   =========   =========   =========   =========
OTHER SUPPLEMENTAL DATA:
Net income..........................  $   224.4   $   245.3   $   620.2   $   742.1   $   693.0   $   453.5   $   526.0
Less:
Net realized capital gains (losses),
  as adjusted(7)....................     (108.2)       23.1        93.1       266.9       320.7       111.4       261.0
Non-recurring items(8)..............      (31.4)      (75.8)     (101.0)         --       104.8          --          --
                                      ---------   ---------   ---------   ---------   ---------   ---------   ---------
         Operating earnings.........  $   364.0   $   298.0   $   628.1   $   475.2   $   267.5   $   342.1   $   265.0
                                      =========   =========   =========   =========   =========   =========   =========
Operating return on average
  equity(9).........................      11.1%        8.3%       10.5%        8.9%        5.8%        8.5%        7.5%

Total return on average
  equity(10)........................       9.6%        8.4%       10.3%       13.9%       15.1%       11.3%       14.9%

Operating earnings before
  amortization of goodwill and other
  intangibles.......................  $   385.6   $   317.9   $   670.8   $   492.0   $   304.0   $   352.0   $   273.7

Assets under management ($ in
  billions).........................  $   116.9   $   117.1   $   117.5   $   116.6   $    80.4   $    72.1   $    63.0

Number of employees (actual)........     17,646      16,999      17,473      17,129      15,970      17,637      17,010

                                        34

    We evaluate segment performance by segment operating earnings, which
excludes the effect of net realized capital gains and losses, as adjusted, and
non-recurring events and transactions. We determine segment operating earnings
by adjusting GAAP net income for net realized capital gains and losses, as
adjusted, and non-recurring items that we believe are not indicative of overall
operating trends. While these items may be significant components in
understanding and assessing our consolidated financial performance, we believe
the presentation of segment operating earnings enhances the understanding of our
results of operations by highlighting earnings attributable to the normal,
recurring operations of our businesses. However, segment operating earnings are
not a substitute for net income determined in accordance with GAAP.

    The following table provides selected segment information as of or for the
six months ended June 30, 2001 and 2000, and as of or for each of the years
ended December 31, 2000, 1999 and 1998. The segment information is reported on a
consolidated basis.

                                                  AS OF OR FOR THE SIX MONTHS ENDED             AS OF OR FOR THE YEAR ENDED
                                                              JUNE 30,                                  DECEMBER 31,
                                           -----------------------------------------------   ----------------------------------
                                                  2001(2)                  2000(2)                  2000(2)            1999(2)
                                           ----------------------   ----------------------   ----------------------   ---------
                                            AMOUNT     % OF TOTAL    AMOUNT     % OF TOTAL    AMOUNT     % OF TOTAL    AMOUNT
                                           ---------   ----------   ---------   ----------   ---------   ----------   ---------
                                                                             ($ IN MILLIONS)
                                                                                                 
OPERATING EARNINGS DATA:
Operating revenues:
 U.S. Asset Management and
   Accumulation(11)......................  $ 1,858.2       43%      $ 1,700.7       39%      $ 3,533.9       40%      $ 3,472.6
 International Asset Management and
   Accumulation..........................      310.1        7           309.5        7           630.7        7           379.6
 Life and Health Insurance...............    1,978.2       46         2,100.7       48         4,122.6       46         3,985.5
 Mortgage Banking........................      293.1        7           180.7        4           359.8        4           398.3
 Corporate and Other(11)(12).............       57.5        1            40.5        1            97.1        1            61.9
                                           ---------      ---       ---------      ---       ---------      ---       ---------
       Total operating revenues..........    4,497.1      104         4,332.1       99         8,744.1       98         8,297.9

 Net realized capital gains (losses),
   including recognition of front-end fee
   revenues(7)...........................     (176.4)      (4)           33.4        1           140.8        2           403.5
                                           ---------      ---       ---------      ---       ---------      ---       ---------
       Total consolidated revenues.......  $ 4,320.7      100%      $ 4,365.5      100%      $ 8,884.9      100%      $ 8,701.4
                                           =========      ===       =========      ===       =========      ===       =========
Operating earnings (loss):
 U.S. Asset Management and
   Accumulation..........................  $   176.9       48%      $   177.3       59%      $   356.6       57%      $   356.6
 International Asset Management and
   Accumulation..........................       (4.7)      (1)           (3.7)      (1)           (8.5)      (1)          (38.4)
 Life and Health Insurance...............       90.9       25            86.0       29           162.3       26            90.7
 Mortgage Banking........................       68.8       19            34.4       12            50.0        8            56.8
 Corporate and Other.....................       32.1        9             4.0        1            67.7       10             9.5
                                           ---------      ---       ---------      ---       ---------      ---       ---------
       Total operating earnings..........  $   364.0      100%      $   298.0      100%      $   628.1      100%      $   475.2
                                           =========      ===       =========      ===       =========      ===       =========
INCOME STATEMENT DATA:
Net income (loss):
 U.S. Asset Management and
   Accumulation..........................  $   125.3       56%      $   142.2       58%      $   320.7       52%      $   321.2
 International Asset Management and
   Accumulation..........................      (25.9)     (12)           (0.2)      --            (7.1)      (1)          (30.7)
 Life and Health Insurance...............       86.3       38           136.1       55           209.6       34           100.8
 Mortgage Banking........................       68.8       31            34.4       14            50.0        8            56.8
 Corporate and Other.....................      (30.1)     (13)          (67.2)     (27)           47.0        7           294.0
                                           ---------      ---       ---------      ---       ---------      ---       ---------
       Total net income..................  $   224.4      100%      $   245.3      100%      $   620.2      100%      $   742.1
                                           =========      ===       =========      ===       =========      ===       =========
BALANCE SHEET DATA:
Total assets:
 U.S. Asset Management and
   Accumulation..........................  $66,182.4       78%      $65,109.4       77%      $65,795.9       78%      $65,096.4
 International Asset Management and
   Accumulation..........................    4,919.6        6         5,547.3        7         5,525.9        7         5,926.8
 Life and Health Insurance...............   10,637.2       12        10,293.8       12        10,569.0       12        10,070.8
 Mortgage Banking........................    2,168.9        3         1,606.3        2         1,556.3        2         1,737.7
 Corporate and Other(13).................    1,321.6        1         1,789.5        2           957.8        1         1,121.5
                                           ---------      ---       ---------      ---       ---------      ---       ---------
       Total assets......................  $85,229.7      100%      $84,346.3      100%      $84,404.9      100%      $83,953.2
                                           =========      ===       =========      ===       =========      ===       =========

                                               AS OF OR FOR THE YEAR ENDED
                                                      DECEMBER 31,
                                           -----------------------------------
                                            1999(2)            1998(2)
                                           ----------   ----------------------
                                           % OF TOTAL    AMOUNT     % OF TOTAL
                                           ----------   ---------   ----------
                                                     ($ IN MILLIONS)
                                                           
OPERATING EARNINGS DATA:
Operating revenues:
 U.S. Asset Management and
   Accumulation(11)......................      40%      $ 2,933.1       36%
 International Asset Management and
   Accumulation..........................       4           223.1        3
 Life and Health Insurance...............      46         3,893.1       47
 Mortgage Banking........................       4           340.6        4
 Corporate and Other(11)(12).............       1           342.5        4
                                              ---       ---------      ---
       Total operating revenues..........      95         7,732.4       94
 Net realized capital gains (losses),
   including recognition of front-end fee
   revenues(7)...........................       5           464.5        6
                                              ---       ---------      ---
       Total consolidated revenues.......     100%      $ 8,196.9      100%
                                              ===       =========      ===
Operating earnings (loss):
 U.S. Asset Management and
   Accumulation..........................      75%      $   238.4       89%
 International Asset Management and
   Accumulation..........................      (8)          (35.4)     (13)
 Life and Health Insurance...............      19            50.0       19
 Mortgage Banking........................      12            58.8       22
 Corporate and Other.....................       2           (44.3)     (17)
                                              ---       ---------      ---
       Total operating earnings..........     100%      $   267.5      100%
                                              ===       =========      ===
INCOME STATEMENT DATA:
Net income (loss):
 U.S. Asset Management and
   Accumulation..........................      43%      $   277.0       40%
 International Asset Management and
   Accumulation..........................      (4)          (10.1)      (1)
 Life and Health Insurance...............      13           112.0       16
 Mortgage Banking........................       8            58.8        8
 Corporate and Other.....................      40           255.3       37
                                              ---       ---------      ---
       Total net income..................     100%      $   693.0      100%
                                              ===       =========      ===
BALANCE SHEET DATA:
Total assets:
 U.S. Asset Management and
   Accumulation..........................      78%      $58,701.5       79%
 International Asset Management and
   Accumulation..........................       7         1,239.4        2
 Life and Health Insurance...............      12         9,219.5       13
 Mortgage Banking........................       2         1,810.4        2
 Corporate and Other(13).................       1         3,075.9        4
                                              ---       ---------      ---
       Total assets......................     100%      $74,046.7      100%
                                              ===       =========      ===

                                        35

                                                           AS OF JUNE 30,                            AS OF DECEMBER 31,
                                           -----------------------------------------------   ----------------------------------
                                                  2001(2)                  2000(2)                  2000(2)            1999(2)
                                           ----------------------   ----------------------   ----------------------   ---------
                                            AMOUNT     % OF TOTAL    AMOUNT     % OF TOTAL    AMOUNT     % OF TOTAL    AMOUNT
                                           ---------   ----------   ---------   ----------   ---------   ----------   ---------
                                                                             ($ IN BILLIONS)
                                                                                                 
OTHER SUPPLEMENTAL DATA:
Assets Under Management: ($ in billions)
 U.S. Asset Management and
   Accumulation..........................  $    78.7       68%      $    73.9       63%      $    78.1       67%      $    75.6
 International Asset Management and
   Accumulation..........................       25.7       22            29.7       26            28.4       24            30.6
 Life and Health Insurance...............        9.5        8             9.2        8             9.3        8             8.7
 Mortgage Banking(14)....................        0.3       --             1.6        1             0.2       --             0.5
 Corporate and Other.....................        2.7        2             2.7        2             1.5        1             1.2
                                           ---------      ---       ---------      ---       ---------      ---       ---------
       Total assets under management.....  $   116.9      100%      $   117.1      100%      $   117.5      100%      $   116.6
                                           =========      ===       =========      ===       =========      ===       =========

                                                   AS OF DECEMBER 31,
                                           -----------------------------------
                                            1999(2)            1998(2)
                                           ----------   ----------------------
                                           % OF TOTAL    AMOUNT     % OF TOTAL
                                           ----------   ---------   ----------
                                                     ($ IN BILLIONS)
                                                           
OTHER SUPPLEMENTAL DATA:
Assets Under Management: ($ in billions)
 U.S. Asset Management and
   Accumulation..........................      65%      $    67.2       84%
 International Asset Management and
   Accumulation..........................      26             1.2        1
 Life and Health Insurance...............       8             8.2       10
 Mortgage Banking(14)....................      --             0.7        1
 Corporate and Other.....................       1             3.1        4
                                              ---       ---------      ---
       Total assets under management.....     100%      $    80.4      100%
                                              ===       =========      ===

---------------

 (1) We have reclassified periods prior to June 30, 2001, to conform to the
     presentation for that period.

 (2) Our consolidated financial results were affected by the following
     transactions that affect year-to-year comparability:

     - On September 25, 2001, we disposed of all the stock of PT Asuransi Jiwa
       Principal Indonesia, our subsidiary in Indonesia. We currently have no
       business operations in Indonesia. Total assets of our operations in
       Indonesia as of June 30, 2001 were $3.4 million. We included nominal
       revenues and net loss from our operations in Indonesia in our
       consolidated results of operations for the six months ended June 30, 2001
       and 2000, and for the years ended December 31, 2000, 1999 and 1998.

     - On February 15, 2001, we disposed of all of the stock of Principal
       International Espana, S.A. de Seguros de Vida, our subsidiary in Spain,
       for nominal proceeds, resulting in a net realized capital loss of $38.4
       million, ceasing our business operations in Spain. Total assets of our
       operations in Spain as of December 31, 2000 were $222.7 million. We
       included revenues of $33.1 million from our operations in Spain in our
       consolidated results of operations for the six months ended June 30,
       2000, and revenues of $49.4 million, $51.7 million and $46.0 million in
       our results of operations for the years ended December 31, 2000, 1999 and
       1998, respectively. We included net income of $2.2 million from our
       operations in Spain for the six months ended June 30, 2000, and a net
       loss of $1.2 million and net income of $0.9 million and $2.8 million in
       our results of operations for the years ended December 31, 2000, 1999 and
       1998, respectively. We did not include revenues or net income from our
       operations in Spain in our consolidated results of operations for the six
       months ended June 30, 2001.

     - On August 31, 1999, we acquired several companies affiliated with Bankers
       Trust Australia Group from Deutsche Bank AG at a purchase price of $1.4
       billion. The acquired companies now operate under the name BT Financial
       Group. We accounted for the acquisition using the purchase method. We
       included the results of operations of the acquired companies in our
       International Asset Management and Accumulation segment and our
       consolidated financial statements from the date of acquisition. We
       included revenues of $122.5 million and net loss of $5.8 million in our
       consolidated results of operations for the six months ended June 30,
       2001. We included revenues of $145.4 million and net income of $6.2
       million in our consolidated results of operations for the six months
       ended June 30, 2000. We included revenues of $285.5 million and net
       income of $6.5 million in our consolidated results of operations for the
       year ended December 31, 2000. We included revenues of $116.5 million and
       net loss of $3.1 million in our consolidated results of operations for
       the year ended December 31, 1999. We accounted for the purchase price as
       follows: $897.4 million of identifiable intangibles, consisting primarily
       of management rights and the BT brand name, $38.5 million of workforce
       intangibles and $408.6 million of resulting goodwill, which are being
       amortized on a straight line basis over 40 years, 8 years and 25 years,
       respectively.

     - We acquired Compania de Seguros de Vida El Roble S.A., or El Roble, a
       Chilean life insurance company, for a purchase price of $73.4 million in
       July 1998. We included El Roble's financial results in our International
       Asset Management and Accumulation segment. We combined the operations of
       our existing Chilean life insurance affiliate with the operations of El
       Roble to form Principal International de Chile. Our consolidated
       financial results related to these companies' combined operations
       include: total revenues of $108.6 million and $95.7 million for the six
       months ended June 30, 2001 and 2000, respectively, and $200.2 million,
       $178.1 million and $155.2 million for the years ended December 31, 2000,
       1999 and 1998, respectively; and net income of $4.3 million and $3.4
       million for the six months ended June 30, 2001 and 2000, respectively,
       and $10.2 million, $0.5 million and $17.0 million for the years ended
       December 31, 2000, 1999 and 1998, respectively.

     - In July 1998, we established our residential mortgage loan wholesale
       distribution system, a new distribution channel, by acquiring ReliaStar
       Mortgage Corporation for a purchase price of $18.6 million. We have
       integrated the operations of ReliaStar Mortgage Corporation into
       Principal Residential Mortgage, Inc., as part of our Mortgage Banking
       segment.

                                        36

     - Effective April 1, 1998, we transferred substantially all of our health
       maintenance organization operations, or HMO operations, to Coventry
       Health Care, Inc., or Coventry, in exchange for 42% of their common
       stock. Our net equity in the transferred HMO operations had a carrying
       value of $170.0 million on April 1, 1998. We sold our remaining HMO
       operations in 1998 for $20.5 million resulting in no realized capital
       gain or loss. Prior to the transfer to Coventry, our Corporate and Other
       segment included $266.7 million of HMO revenues in our results for 1998.
       We report our investment in Coventry in our Corporate and Other segment
       and account for it using the equity method. Our share of Coventry's net
       income was $9.7 million and $10.8 million for the six months ended June
       30, 2001 and 2000, respectively, and $20.0 million and $19.1 million for
       the years ended December 31, 2000 and 1999, respectively. Our share of
       Coventry's net loss was $9.8 million for the year ended December 31,
       1998. In September 2000, we sold a portion of our Coventry stock, which
       reduced our ownership interest to approximately 25% of Coventry stock and
       resulted in a net realized capital gain of $13.9 million, net of tax. Our
       carrying amount in Coventry was $134.6 million as of June 30, 2001.

  (3) We have provided statutory data from quarterly and annual statements of
      Principal Life filed with insurance regulatory authorities. Certain
      financial information for periods beginning on or after January 1, 2001 is
      not comparable to information from earlier periods. We prepared statutory
      data as of or for the six months ended June 30, 2001 in conformity with
      the NAIC Codification of Statutory Principles ("Codification"), adopted as
      prescribed and permitted by the Insurance Division, Department of Commerce
      of the State of Iowa, effective January 1, 2001. As allowed by
      Codification, we did not restate prior period information. We prepared
      statutory data as of or for the six months ended June 30, 2000 and the
      years ended December 31, 2000, 1999, 1998, 1997 and 1996 in conformity
      with accounting practices prescribed or permitted on the dates thereof by
      the Insurance Division, Department of Commerce of the State of Iowa.

  (4) Codification, as adopted by Principal Life on January 1, 2001, has
      significantly impacted the reporting of Principal Life's statutory
      premiums and deposits for the six months ended June 30, 2001. Under
      Codification, we no longer report amounts received for deposit-type
      contracts in the statement of operations as revenue, but rather report
      these amounts directly as an increase in an appropriate policy reserve
      account, a treatment that is similar to that under U.S. GAAP. This has the
      effect of decreasing reported total revenues and total expenses of
      Principal Life, with no effect to statutory net income or statutory
      surplus. Premiums and deposits for the six months ended June 30, 2000 and
      for the years ended December 31, 2000, 1999, 1998, 1997 and 1996 included
      amounts received for deposit-type contracts of $5,432.8 million, $11,273.2
      million, $11,571.5 million, $10,312.6 million, $8,694.9 million and
      $7,493.9 million, respectively.

  (5) Codification, as adopted by Principal Life on January 1, 2001, has
      impacted the reporting of Principal Life's statutory net income for the
      six months ended June 30, 2001. Under Codification our net income has been
      significantly impacted due to a change in the accounting for undistributed
      income (loss) from subsidiaries. We no longer report undistributed income
      (loss) from subsidiaries as part of net investment income, but rather
      report these amounts as unrealized gains and losses, which are excluded
      from the calculation of net income. This has the effect of decreasing
      reported total statutory revenues and net income, but has no effect on
      statutory surplus. Undistributed income from subsidiaries for the six
      months ended June 30, 2000, and for the years ended December 31, 2000 and
      1999 were $100.0 million, $208.9 million and $159.9 million, respectively,
      and undistributed loss from subsidiaries for the years ended December 31,
      1998, 1997 and 1996 were $0.4 million, $41.3 million and $104.1 million,
      respectively.

  (6) On August 24, 2001, Principal Life paid a statutory dividend of $250.0
      million, which reduced its surplus by that amount.

                                        37

  (7) Net realized capital gains (losses), as adjusted, are net of tax, related
      changes in the amortization pattern of deferred policy acquisition costs,
      recognition of front-end fee revenues for sales charges on pension
      products and services and net realized capital gains credited to
      customers. This presentation may not be comparable to presentations made
      by other companies. Deferred policy acquisition costs represent
      commissions and other selling expenses that vary with and are directly
      related to the production of business. These acquisition costs are
      deferred and amortized in conformity with GAAP.

    Following is a reconciliation of net realized capital gains (losses) from
    the consolidated financial statements and the adjustment made to calculate
    segment operating earnings for the periods indicated:

                                                 FOR THE SIX
                                                 MONTHS ENDED
                                                   JUNE 30,              FOR THE YEAR ENDED DECEMBER 31,
                                               ----------------   ---------------------------------------------
                                                2001      2000     2000     1999      1998      1997     1996
                                               -------   ------   ------   -------   -------   ------   -------
                                                                       ($ IN MILLIONS)
                                                                                   
      Net realized capital gains (losses)....  $(176.9)  $ 31.5   $139.9   $ 404.5   $ 465.8   $175.3   $ 387.8
      Recognition of front-end fee
         revenues............................      0.5      1.9      0.9      (1.0)     (1.3)    (0.9)       --
                                               -------   ------   ------   -------   -------   ------   -------
         Net realized capital gains (losses),
           including recognition of front-end
           fee revenues......................   (176.4)    33.4    140.8     403.5     464.5    174.4     387.8
      Amortization of deferred policy
         acquisition costs related to net
         realized capital gains (losses).....      3.9     (3.4)    (0.3)      4.4       5.7     (1.7)       --
      Amounts credited to contractholder
         accounts............................       --       --       --        --     (26.3)      --        --
      Non-recurring net realized capital
         losses..............................       --       --       --        --      (1.7)      --        --
                                               -------   ------   ------   -------   -------   ------   -------
         Net realized capital gains (losses),
           including recognition of front-end
           fee revenues, net of related
           amortization of deferred policy
           acquisition costs and amounts
           credited to contractholders.......   (172.5)    30.0    140.5     407.9     442.2    172.7     387.8
      Income tax effect......................     64.3     (6.9)   (47.4)   (141.0)   (121.5)   (61.3)   (126.8)
                                               -------   ------   ------   -------   -------   ------   -------
         Net realized capital gains (losses),
           as adjusted.......................  $(108.2)  $ 23.1   $ 93.1   $ 266.9   $ 320.7   $111.4   $ 261.0
                                               =======   ======   ======   =======   =======   ======   =======

  (8) For the six months ended June 30, 2001, we excluded $31.4 million of
      non-recurring items, net of tax, from net income for the presentation of
      operating earnings. The non-recurring items included the negative effects
      of: (a) expenses related to our demutualization ($14.8 million); (b) a
      cumulative effect of change in accounting principle related to our
      implementation of SFAS 133 ($10.7 million), as discussed in Note 2 to
      Principal Mutual Holding Company's unaudited consolidated financial
      statements; and (c) a loss contingency reserve established for sales
      practices litigation ($5.9 million).

      For the six months ended June 30, 2000, we excluded $75.8 million of
      non-recurring items, net of tax, from net income for our presentation of
      consolidated operating earnings. The non-recurring items included the
      negative effects of: (a) a loss contingency reserve established for sales
      practices litigation ($75.0 million), and (b) expenses related to our
      demutualization ($0.8 million).

      For the year ended December 31, 2000, we excluded $101.0 million of
      non-recurring items, net of tax, from net income for our presentation of
      operating earnings. The non-recurring items included the negative effects
      of: (a) a loss contingency reserve established for sales practices
      litigation ($93.8 million) and (b) expenses related to our demutualization
      ($7.2 million).

      For the year ended December 31, 1998, we excluded $104.8 million of
      non-recurring items, net of tax, from net income for our presentation of
      operating earnings. The non-recurring items included:

     - the positive effects of (a) Principal Life's release of tax reserves and
       related accrued interest ($164.4 million) and (b) accounting changes by
       our international operations ($13.3 million); and

     - the negative effects of (a) expenses and adjustments for changes in
       amortization assumptions for deferred policy acquisition costs related to
       our corporate structure change to a mutual insurance holding company

                                        38

       ($27.4 million) and (b) a contribution related to permanent endowment of
       the Principal Financial Group Foundation ($45.5 million).

  (9) We define operating return on average equity as operating earnings divided
      by average total equity, excluding accumulated other comprehensive income.
      We calculate the returns for interim reporting periods by using operating
      earnings for the trailing twelve months. We have excluded accumulated
      other comprehensive income due to its volatility between periods and
      because such data are often excluded when evaluating the overall financial
      performance of insurers. Operating return on average equity should not be
      considered a substitute for any GAAP measure of performance.

(10) We define total return on average equity as net income divided by average
     total equity, excluding accumulated other comprehensive income. We
     calculate the returns for interim reporting periods by using net income for
     the trailing twelve months. We have excluded accumulated other
     comprehensive income due to its volatility between periods and because such
     data are often excluded when evaluating the overall financial performance
     of insurers.

(11) We transferred our U.S. investment management operations from our Corporate
     and Other segment to our U.S. Asset Management and Accumulation segment
     effective January 1, 1999. The U.S. Asset Management and Accumulation
     segment received fee revenues for performing investment management services
     for other segments in 2001, 2000 and 1999. The Corporate and Other segment
     received fee revenues for performing investment management services for
     other segments prior to 1999.

(12) Includes inter-segment eliminations primarily related to real estate joint
     venture rental income. We reported rental income from real estate joint
     ventures for office space used by other segments in the Corporate and Other
     segment.

(13) Includes inter-segment elimination amounts related to internally generated
     mortgage loans and an internal line of credit. The U.S. Asset Management
     and Accumulation segment and Life and Health Insurance segment reported
     mortgage loan assets issued for real estate joint ventures. These mortgage
     loans were reported as liabilities in the Corporate and Other segment. In
     addition, the Corporate and Other segment managed a revolving line of
     credit used by other segments.

(14) Excludes our mortgage loan servicing portfolio.

                                        39

        UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

    The unaudited pro forma condensed consolidated financial information
presented below for Principal Financial Group, Inc. gives effect to:

    - the demutualization;

    - the sale of shares of common stock in this offering; and

    - the application of the net proceeds from this offering as described in
      "Use of Proceeds," as if the demutualization and the initial public
      offering had occurred as of June 30, 2001, for purposes of the unaudited
      pro forma condensed consolidated statement of financial position, and as
      of January 1, 2000, for purposes of the unaudited pro forma condensed
      consolidated statement of operations for the six months ended June 30,
      2001, and the year ended December 31, 2000.

    The principal assumptions used in the pro forma information are as follows:

    - 100.0 million shares of common stock are sold to investors in the offering
      at a price of $18.50 per share;

    - 260.6 million shares of common stock are allocated and issued to
      policyholders entitled to receive compensation in the demutualization, of
      which 56.2 million shares are allocated and issued as part of the Separate
      Account Policy Credits;

    - 89.4 million shares of common stock are allocated but not issued to
      policyholders entitled to receive compensation in the demutualization who
      receive payments in the form of cash or policy credits (excluding Separate
      Account Policy Credits) at an initial public offering price of $18.50 per
      share, rather than in shares of common stock; and

    - a federal income tax rate of 35% is used to show the income tax effects of
      the pro forma adjustments.

    The pro forma information reflects gross proceeds of $1,850.0 million from
the issuance of the shares, less the underwriting discount and offering expenses
aggregating $96.7 million, or net proceeds from the offering of $1,753.3
million. Of the net proceeds, we have assumed that Principal Financial Group,
Inc. was entitled to and did retain $59.5 million to be used for working
capital, payment of a dividend, if any, to our stockholders in the first year
after the date of the closing of this offering and other general corporate
purposes, and the remaining $1,693.8 million will be contributed to Principal
Life. For purposes of the pro forma statement of financial position, we have
estimated that $5.8 million pre-tax will be required for the cost of additional
nonrecurring expenses related to the demutualization, $1,329.5 million will be
used to make elective cash payments and fund Account Value Policy Credits to
policyholders receiving these forms of compensation in the demutualization and
$324.7 million will be used to provide compensation to policyholders eligible
solely for cash or policy credits.

    The pro forma information is based on available information and on
assumptions management believes are reasonable. The pro forma information is
provided for informational purposes only. This information does not necessarily
indicate our consolidated financial position or our consolidated results of
operations had these transactions been consummated on the dates assumed. It also
does not in any way represent a projection or forecast of our consolidated
financial position or consolidated results of operations for any future date or
period.

    The pro forma information should be read in conjunction with our
consolidated financial statements and the notes to the financial statements,
included in this prospectus, and with the other information included in this
prospectus, including the information provided under "The Demutualization,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business".

                                        40

   UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

                                                                          AS OF JUNE 30, 2001
                                                      ------------------------------------------------------------
                                                                         THE            THE INITIAL
                                                      HISTORICAL   DEMUTUALIZATION    PUBLIC OFFERING    PRO FORMA
                                                      ----------   ---------------    ---------------    ---------
                                                                            ($ IN MILLIONS)
                                                                                             
ASSETS
Invested assets:
  Fixed maturities, available-for-sale..............  $29,328.2       $      --          $     --        $29,328.2
  Equity securities, available-for-sale.............      578.8              --                --            578.8
  Mortgage loans....................................   11,539.1              --                --         11,539.1
  Real estate.......................................    1,238.3              --                --          1,238.3
  Policy loans......................................      820.1              --                --            820.1
  Other investments.................................      898.7              --                --            898.7
                                                      ---------       ---------          --------        ---------
    Total invested assets...........................   44,403.2              --                --         44,403.2

Cash and cash equivalents...........................      371.9        (1,181.5)(1)       1,753.3(2)         940.0
                                                                           (3.7)(5)
Accrued investment income...........................      577.9              --                --            577.9
Premiums due and other receivables..................      572.3              --                --            572.3
Deferred policy acquisition costs...................    1,338.3              --                --          1,338.3
Property and equipment..............................      513.4              --                --            513.4
Goodwill and other intangibles......................    1,252.9              --                --          1,252.9
Mortgage loan servicing rights......................    1,487.2              --                --          1,487.2
Separate account assets.............................   33,739.5         1,039.7(7)             --         34,779.2
Other assets........................................      973.1              --                --            973.1
                                                      ---------       ---------          --------        ---------
    Total assets....................................  $85,229.7       $  (145.5)         $1,753.3        $86,837.5
                                                      =========       =========          ========        =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
  Contractholder funds..............................  $25,073.1       $      --          $     --        $25,073.1
  Future policy benefits and claims.................   13,494.8           472.7(1)             --         13,967.5
  Other policyholder funds..........................      591.5              --                --            591.5
  Short-term debt...................................      675.9              --                --            675.9
  Long-term debt....................................    1,390.6              --                --          1,390.6
  Income taxes currently payable....................        3.6              --                --              3.6
  Deferred income taxes.............................      740.1              --                --            740.1
  Separate account liabilities......................   33,739.5         1,039.7(7)             --         34,779.2
  Other liabilities.................................    2,992.2              --                --          2,992.2
                                                      ---------       ---------          --------        ---------
    Total liabilities...............................   78,701.3         1,512.4                --         80,213.7
Stockholders' equity:
  Common stock, $0.01 par value; 2.5 billion shares
    authorized; 360.6 million shares issued and
    outstanding(6)..................................         --             2.6(3)            1.0(2)           3.6
  Additional paid-in capital........................         --         4,876.4(3)        1,752.3(2)       6,628.7
  Retained earnings.................................    6,536.9        (1,654.2)(1)            --               --
                                                                       (4,879.0)(3)
                                                                           (3.7)(5)
Accumulated other comprehensive loss................       (8.5)             --                --             (8.5)
                                                      ---------       ---------          --------        ---------
    Total stockholders' equity......................    6,528.4        (1,657.9)          1,753.3          6,623.8
                                                      ---------       ---------          --------        ---------
    Total liabilities and stockholders' equity......  $85,229.7       $  (145.5)         $1,753.3        $86,837.5
                                                      =========       =========          ========        =========

 See notes to unaudited pro forma condensed consolidated financial information.

                                        41

       UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

                                                                     FOR THE SIX MONTHS ENDED JUNE 30, 2001
                                                           ----------------------------------------------------------
                                                                              THE           THE INITIAL
                                                           HISTORICAL   DEMUTUALIZATION   PUBLIC OFFERING   PRO FORMA
                                                           ----------   ---------------   ---------------   ---------
                                                              ($ AND SHARES IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                                                                                
Revenues:
  Premiums and other considerations......................   $1,955.3         $  --            $   --        $1,955.3
  Fees and other revenues................................      856.3            --                --           856.3
  Net investment income..................................    1,686.0            --                --         1,686.0
  Net realized capital losses............................     (176.9)           --                --          (176.9)
                                                            --------         -----            ------        --------
    Total revenues.......................................    4,320.7            --                --         4,320.7

Expenses:
  Benefits, claims and settlement expenses...............    2,639.2            --                --         2,639.2
  Dividends to policyholders.............................      162.1            --                --           162.1
  Operating expenses.....................................    1,228.2         (22.7)(4)            --         1,205.5
                                                            --------         -----            ------        --------
    Total expenses.......................................    4,029.5         (22.7)               --         4,006.8
                                                            --------         -----            ------        --------
Income before income taxes and cumulative effect of
  accounting change......................................      291.2          22.7                --           313.9
Income taxes.............................................       56.1           7.9                --            64.0
                                                            --------         -----            ------        --------
Income before cumulative effect of accounting change.....      235.1          14.8                --           249.9
Cumulative effect of accounting change, net of related
  income taxes...........................................      (10.7)           --                --           (10.7)
                                                            --------         -----            ------        --------
    Net income...........................................   $  224.4         $14.8            $   --        $  239.2
                                                            ========         =====            ======        ========
Income per share.........................................                                                   $   0.66
                                                                                                            ========
Shares used in calculating per share amount(6)...........                                                      360.6
                                                                                                            ========

       UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

                                                                  FOR THE YEAR ENDED DECEMBER 31, 2000
                                                       ----------------------------------------------------------
                                                                          THE           THE INITIAL
                                                       HISTORICAL   DEMUTUALIZATION   PUBLIC OFFERING   PRO FORMA
                                                       ----------   ---------------   ---------------   ---------
                                                          ($ AND SHARES IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                                                                            
Revenues:
  Premiums and other considerations..................   $3,996.4        $   --            $   --        $3,996.4
  Fees and other revenues............................    1,576.3            --                --         1,576.3
  Net investment income..............................    3,172.3            --                --         3,172.3
  Net realized capital gains.........................      139.9            --                --           139.9
                                                        --------        ------            ------        --------
    Total revenues...................................    8,884.9            --                --         8,884.9

Expenses:
  Benefits, claims and settlement expenses...........    5,232.3            --                --         5,232.3
  Dividends to policyholders.........................      312.7            --                --           312.7
  Operating expenses.................................    2,479.4         (11.1)(4)            --         2,468.3
                                                        --------        ------            ------        --------
    Total expenses...................................    8,024.4         (11.1)               --         8,013.3
                                                        --------        ------            ------        --------
Income before income taxes...........................      860.5          11.1                --           871.6
Income taxes.........................................      240.3           3.9                --           244.2
                                                        --------        ------            ------        --------
    Net income.......................................   $  620.2        $  7.2            $   --        $  627.4
                                                        ========        ======            ======        ========
Income per share.....................................                                                   $   1.74
                                                                                                        ========
Shares used in calculating per share amount(6).......                                                      360.6
                                                                                                        ========

 See notes to unaudited pro forma condensed consolidated financial information.

                                        42

   NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

(1) Represents ($ in millions):

                                                               
    Cash assumed to be distributed to policyholders who elected
      cash and to policyholders eligible solely for cash........  $1,181.5
    Policy credits assumed to be distributed to policyholders
      eligible solely for policy credits and Account Value
      Policy Credits assumed to be distributed to policyholders
      who have elected or have been deemed to have elected
      Account Value Policy Credits..............................     472.7
                                                                  --------
    Total.......................................................  $1,654.2
                                                                  ========

(2) Represents gross proceeds of $1,850.0 million from the sale of 100.0 million
    shares of common stock at an initial public offering price of $18.50 per
    share, less estimated underwriting discounts and offering expenses of $96.7
    million.

(3) Represents the reclassification of the residual retained earnings ($4,879.0
    million) of Principal Mutual Holding Company to common stock ($2.6 million)
    and additional paid-in capital ($4,876.4 million) to reflect the
    demutualization.

(4) Represents the elimination of $22.7 million, or $14.8 million net of tax, of
    expenses related to the demutualization incurred through the six months
    ended June 30, 2001, and $11.1 million, or $7.2 million net of tax, of
    expenses related to the demutualization incurred through December 31, 2000.

(5) The estimated additional non-recurring expenses of $5.8 million, or $3.7
    million net of tax, related to the demutualization, assumed to be incurred
    as of the date of the unaudited pro forma condensed consolidated statement
    of financial condition, were charged to equity. The pro forma condensed
    consolidated statement of operations does not reflect such non-recurring
    expenses.

(6) The assumed number of shares used in the calculation of unaudited pro forma
    net income per common share was determined as follows:

                                                                  NUMBER OF SHARES
                                                                   (IN MILLIONS)
                                                                  ----------------
                                                               
    Assumed shares allocated to eligible policyholders..........       350.0
    Less: assumed shares allocated to eligible policyholders who
      receive cash or policy credits (excluding Separate Account
      Policy Credits)(a)........................................        89.4
                                                                       -----
    Assumed shares issued to eligible policyholders(b)..........       260.6
    Shares issued in this offering..............................       100.0
                                                                       -----
    Total outstanding shares of common stock....................       360.6
                                                                       =====

    (a) Gives effect to (1) $1,329.5 million to make elective cash payments and
        fund Account Value Policy Credits to eligible policyholders receiving
        these forms of compensation and (2) $324.7 million to provide
        compensation to policyholders eligible solely for cash or policy
        credits.

    (b) Includes 56.2 million shares issued as part of the Separate Account
        Policy Credits. These shares are included in both basic and diluted
        income per share calculations.

    The plan of conversion provides that the amount of consideration paid in
    cash or provided as policy credits to an eligible policyholder will equal
    the number of shares allocated to such eligible policyholder multiplied by
    the initial public offering price.

(7) Represents the value of 56.2 million shares placed in the separate account
    for Qualified Plan Customers at a share price of $18.50 per share. The
    valuations of the separate account shares are recorded at fair value and are
    reported as separate account assets and separate account liabilities in the
    unaudited pro forma condensed consolidated statement of financial position.
    Changes in the fair value of the separate account shares are reflected in
    both the separate account assets and separate account liabilities and do not
    impact the pro forma results of operations.

                                        43

                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

    The following analysis of the consolidated results of our operations and
financial condition should be read in conjunction with the "Selected Historical
Financial Information," the consolidated financial statements and the related
notes to the financial statements and the other financial information included
elsewhere in this prospectus.

FORWARD-LOOKING INFORMATION

    Our narrative analysis below and in "Business" contains forward-looking
statements that are intended to enhance the reader's ability to assess our
future financial performance. Forward-looking statements include, but are not
limited to, statements that represent our beliefs concerning future operations,
strategies, financial results or other developments, and contain words and
phrases such as "may," "expects," "should" or similar expressions. Because these
forward-looking statements are based on estimates and assumptions that are
subject to significant business, economic and competitive risks and
uncertainties, many of which are beyond our control or are subject to change,
actual results could be materially different. See "Risk Factors" for a
discussion of risks and uncertainties that may cause our actual results to
differ materially.

OVERVIEW

    We are a leading provider of retirement savings, investment and insurance
products and services. We have four operating segments:

    - U.S. Asset Management and Accumulation, which consists of our asset
      accumulation operations which provide products and services, including
      retirement savings and related investment products and services, and our
      asset management operations conducted through Principal Capital
      Management, our U.S.-based asset manager. We provide a comprehensive
      portfolio of asset accumulation products and services to businesses and
      individuals in the United States, with a concentration on small and
      medium-sized businesses, which we define as businesses with fewer than
      1,000 employees. We offer to businesses products and services for defined
      contribution pension plans, including 401(k) and 403(b) plans, defined
      benefit pension plans and non-qualified executive benefit plans. We also
      offer annuities, mutual funds and bank products and services to the
      employees of our business customers and other individuals.

    - International Asset Management and Accumulation, which consists of BT
      Financial Group, our Australia-based asset manager, and Principal
      International. Our acquisition of BT Financial Group in 1999 was a central
      element in the expansion of our international asset management and
      accumulation businesses. Through Principal International, we offer
      retirement products and services, annuities, mutual funds and life
      insurance. We operate through subsidiaries in Argentina, Chile, Mexico and
      Hong Kong and joint ventures in Brazil, Japan and India.

    - Life and Health Insurance, which provides individual life and disability
      insurance as well as group life and health insurance throughout the United
      States. Our individual insurance products include interest-sensitive life,
      traditional life and disability insurance. Our group insurance products
      include life, disability, medical, dental and vision insurance, and
      administrative services.

    - Mortgage Banking, which engages in originating, purchasing, selling and
      servicing residential mortgage loans in the United States.

    We also have a Corporate and Other segment which consists of the assets and
activities that have not been allocated to any other segment.

                                        44

  REVENUES AND EXPENSES

    Our segments earn revenues and incur expenses from various sources as
outlined in the following tables. The following tables provide a detailed list
of the sources and their relationship to our financial statement line items.

    REVENUES.  The table below provides a summary of our sources of revenues by
segment:

                           REVENUE SOURCES BY SEGMENT

                                                                   INTERNATIONAL
                                                     U.S. ASSET        ASSET
                                                     MANAGEMENT     MANAGEMENT
                                                        AND             AND        LIFE AND HEALTH   MORTGAGE   CORPORATE AND
                  REVENUE SOURCES                   ACCUMULATION   ACCUMULATION       INSURANCE      BANKING        OTHER
                                                                                                            
 PREMIUMS AND OTHER CONSIDERATIONS:
 Single premium group and individual annuities
   with life contingencies                               X               X
 Group and individual life insurance                                     X                X
 Group medical, dental and vision insurance                                               X
 Group and individual disability insurance                                                X
 FEES AND OTHER REVENUES:
 Administrative and asset management fee revenues
   from group and individual variable annuities          X               X
 Administrative fee revenues from pension plans          X               X
 Asset management and administrative fee revenues
   from institutional asset management and mutual
   funds                                                 X               X
 Assets backing margin lending operations                                X
 Mortality, administrative and asset management
   fee revenues from variable and universal life
   insurance products                                                    X                X
 Group fee-for-service business                                                           X
 Servicing and originating residential mortgage
   loans                                                                 X                              X
 Net gains and losses on the sale of residential
   mortgage loans and residential mortgage loan
   servicing rights                                                                                     X
 Fee revenues from the marketing of other products
   to our servicing portfolio customers                                                                 X
 NET INVESTMENT INCOME:
 Securitizations of commercial mortgage-backed
   securities                                            X
 Assets backing group guaranteed investment
   contracts and individual fixed annuities              X               X
 Assets backing life and health insurance product
   liabilities                                                           X                X
 Securitizations of residential mortgage loans                                                          X
 Assets backing capital                                  X               X                X             X             X

                                        45

    EXPENSES.  The table below provides a summary of our expenses by segment:

                              EXPENSES BY SEGMENT

                                                                   INTERNATIONAL
                                                     U.S. ASSET        ASSET
                                                     MANAGEMENT     MANAGEMENT
                                                        AND             AND        LIFE AND HEALTH   MORTGAGE   CORPORATE AND
                     EXPENSES                       ACCUMULATION   ACCUMULATION       INSURANCE      BANKING        OTHER
                                                                                                            
 BENEFITS, CLAIMS AND SETTLEMENT EXPENSES:
 Benefits paid and reserve increases on single
   premium group and individual annuities with
   life contingencies                                    X               X
 Interest credited on group guaranteed investment
   contracts and individual fixed annuities              X               X
 Benefits paid and reserve increases on group and
   individual life insurance                                             X                X
 Benefits paid and reserve increases on group
   medical, dental and vision insurance                                                   X
 Benefits paid and reserve increases on group and
   individual disability insurance                                                        X
 DIVIDENDS TO POLICYHOLDERS                              X                                X
 OPERATING EXPENSES:
 General business expenses and commissions, net of
   deferred expenses                                     X               X                X             X             X
 Amortization of deferred policy acquisition costs       X               X                X
 Premium taxes                                           X               X                X
 Income taxes                                            X               X                X             X             X
 Amortization of goodwill and other intangibles          X               X                X             X             X
 Amortization of residential mortgage loan
   servicing rights                                                      X                              X
 Net gains and losses on mortgage loan servicing
   hedge activity                                                                                       X
 Interest expense on corporate debt                                                                                   X

                                        46

  PROFITABILITY

    Our profitability depends in large part upon:

    - our amount of assets under management;

    - the spreads we earn on our policyholders' general account balances;

    - our ability to generate fee revenues greater than the amount it costs us
      to administer pension products, manage investments for retail and
      institutional clients and provide other administrative services;

    - our ability to price our life and health insurance products at a level
      that enables us to earn a margin over the cost of providing benefits and
      the expense of acquiring and administering those products, which is
      primarily a function of competitive conditions, persistency, our ability
      to assess and manage trends in mortality and morbidity experience, our
      ability to generate investment earnings and our ability to maintain
      expenses in accordance with pricing assumptions;

    - our ability to effectively monitor and price residential mortgage loans we
      originate, purchase, and sell and to manage the costs to service
      residential mortgage loans;

    - our ability to effectively hedge the effect of interest rate changes on
      our residential mortgage servicing rights. See "Business -- Mortgage
      Banking -- Risk Management";

    - our ability to manage our investment portfolio to maximize investment
      returns and minimize risks such as interest rate changes or defaults or
      impairments of invested assets;

    - fluctuations of foreign currency exchange rates; and

    - our ability to manage our operating expenses.

  TRENDS

    U.S. ASSET MANAGEMENT AND ACCUMULATION.  Our sales of pension and other
asset accumulation products and services in the United States have been affected
by overall trends in the U.S. retirement services industry, as our customers
have begun to rely less on defined benefit retirement plans, social security and
other government programs. Current trends in the work environment include a more
mobile workforce and the desire of employers to pass the market risk of
retirement investments to employees by shifting from offering defined benefit
plans to offering defined contribution plans. These trends are increasing the
demand for defined contribution pension arrangements such as 401(k) plans, as
well as mutual funds and variable annuities. Also, the "baby-boom" generation of
U.S. workers has reached an age where saving is critical and they continue to
seek tax-advantaged investment products for retirement. Considering these
trends, our group and individual variable annuity assets under management and
other fee-based asset accumulation products increased through December 31, 2000,
while traditional spread-based assets under management have grown at a slower
rate. Fee-based assets under management decreased as of June 30, 2001, primarily
due to the negative impacts of the equity markets.

    The table below provides a summary of assets under management from our
fee-based asset accumulation products and spread-based asset accumulation
products as of June 30, 2001, and December 31, 2000, 1999, and 1998:

                                                           U.S. ASSET ACCUMULATION
                                         -----------------------------------------------------------
                                         FEE-BASED ASSETS   SPREAD-BASED ASSETS   TOTAL ASSETS UNDER
                 AS OF                   UNDER MANAGEMENT    UNDER MANAGEMENT         MANAGEMENT
                 -----                   ----------------   -------------------   ------------------
                                                               ($ IN BILLIONS)
                                                                         
June 30, 2001..........................       $41.3                $30.6                $71.9
December 31, 2000......................        42.5                 28.5                 71.0
December 31, 1999......................        42.1                 28.2                 70.3
December 31, 1998......................        34.5                 29.0                 63.5

    Asset management services have been among the most profitable and rapidly
growing sectors of the financial services industry, at both the retail and
institutional level. We formally established Principal Capital Management, our
U.S-based asset manager, in 1999 to consolidate our investment operations and to
enter the third-party institutional asset management market. We seek to take
advantage of current trends which indicate that both retail and institutional
investors embrace specialization, providing increased fees to successful active
managers with expertise in specialty and niche areas. Our U.S. third-party
assets under management were $5.8 billion as of June 30, 2001, compared to $3.5
billion since the establishment of Principal Capital Management on January 1,
1999.

                                        47

    The following table provides a summary of Principal Capital Management's
affiliated and third-party assets under management as of June 30, 2001, and
December 31, 2000, 1999, and 1998:

                                                          PRINCIPAL CAPITAL MANAGEMENT
                                           -----------------------------------------------------------
                                           AFFILIATED ASSETS   THIRD-PARTY ASSETS   TOTAL ASSETS UNDER
AS OF                                      UNDER MANAGEMENT     UNDER MANAGEMENT      MANAGEMENT(1)
-----                                      -----------------   ------------------   ------------------
                                                                 ($ IN BILLIONS)
                                                                           
June 30, 2001............................        $78.2                $5.8                $84.0
December 31, 2000........................         76.9                 6.3                 83.2
December 31, 1999........................         77.5                 4.7                 82.2
December 31, 1998(2).....................         73.6                 3.5                 77.1

---------------

(1) Includes all assets for which Principal Capital Management provides
    investment advisory services.

(2) Represents assets managed by Invista Capital Management and the former
    investment department of Principal Life prior to the formation of Principal
    Capital Management, effective January 1, 1999.

    INTERNATIONAL ASSET MANAGEMENT AND ACCUMULATION.  Our international asset
management and accumulation businesses focus on countries with a trend toward
private sector defined contribution pension systems. Our acquisition of BT
Financial Group in August 1999 is consistent with these trends. We are seeking
to take advantage of an Australian government requirement for all employers to
contribute 8% of an employee's salary to an employer-sponsored defined
contribution retirement plan, referred to as superannuation. The required
employer contribution is scheduled to rise to 9% by 2002.

    The governments of other countries have also instituted privatized pension
systems requiring employees who join the labor force to contribute to a private
pension system. With variations depending upon the specific country, we have
targeted these markets for sales of retirement and related products and
services, including defined contribution pension plans, annuities and mutual
funds to individuals and businesses. In several of our international markets, we
complement our sales of these products with sales of life insurance products.

    We have pursued our international strategy through a combination of
start-ups, acquisitions and joint ventures, which require infusions of capital
consistent with our strategy of long-term growth and profitability.

    LIFE AND HEALTH INSURANCE.  Our U.S. individual life insurance premiums have
been influenced by both economic and industry trends. Both fee revenues and
policyholder liabilities related to our interest-sensitive life insurance
products have increased due to customer preference for insurance products with
variable investment and tax-advantaged accumulation product options. Premiums
and policyholder liabilities related to our individual traditional life
insurance products have remained relatively flat.

                                                                INDIVIDUAL LIFE AND HEALTH
                                         -------------------------------------------------------------------------
                                                 INTEREST-SENSITIVE                     TRADITIONAL LIFE
                                                   LIFE INSURANCE                           INSURANCE
                                         -----------------------------------   -----------------------------------
                                              FEE            POLICYHOLDER                           POLICYHOLDER
AS OF OR FOR THE                            REVENUES        LIABILITIES(1)         PREMIUMS         LIABILITIES
----------------                         --------------   ------------------   ----------------   ----------------
                                                                      ($ IN MILLIONS)
                                                                                      
Six months ended June 30, 2001.........      $48.1             $1,648.7             $388.0            $5,597.7
Year ended December 31, 2000...........       89.1              1,567.6              772.8             5,522.7
Year ended December 31, 1999...........       61.7              1,237.2              780.8             5,331.6
Year ended December 31, 1998...........       49.7              1,070.8              792.3             5,119.6

---------------

(1) Includes separate account liabilities for policies with variable insurance
    options.

    Increased competition in the U.S. group health insurance industry has
affected pricing of premiums. Most group health insurance policies are subject
to annual review by policyholders, who may seek competitive quotations prior to
renewal. Regulation has had and may continue to have an adverse effect on our
ability to adequately price group health insurance products. At the same time,
health care costs have continued to rise, placing pressure on margins. Our group
health insurance premiums increased in recent years due to competitive prices
and new sales initiatives. These increases were partially offset by our
decisions to exit under-performing and non-strategic businesses and markets.
Effective April 1, 1998, we transferred substantially all of our HMO operations
to Coventry Health Care, Inc., due to unsatisfactory scale and return from these
operations. Medical insurance premiums from our HMO operations were $898.2
million in 1997. Also during 1998, we ceased sales of medical insurance products
in fourteen states where we were not achieving desired returns. Medical
insurance premiums from these states were $209.2 million in 1997. We are now
focusing on sales of medical insurance products in select geographic markets
where we believe we can achieve satisfactory returns. Effective January 1, 2000,
we ceased new sales of our Medicare supplement insurance product and effective
July 1, 2000, reinsured all existing business. We continue to sell group dental
and vision insurance,
                                        48

disability insurance and life insurance to employers desiring a broad range of
employee benefit products and services for their employees. We have targeted
these non-medical products for growth, especially dental and vision insurance
products. Our group health insurance and group life insurance premiums for the
six months ended June 30, 2001, and for the years ended December 31, 2000, 1999,
and 1998 were as follows:

                                                                                             GROUP LIFE
                                                      GROUP HEALTH INSURANCE                 INSURANCE
                                         -------------------------------------------------   ----------
                                                      MEDICARE       DENTAL
                                          MEDICAL    SUPPLEMENT    AND VISION   DISABILITY      LIFE
                                         INSURANCE    INSURANCE    INSURANCE    INSURANCE    INSURANCE
                FOR THE                  PREMIUMS    PREMIUMS(1)    PREMIUMS     PREMIUMS     PREMIUMS
                -------                  ---------   -----------   ----------   ----------   ----------
                                                          ($ IN MILLIONS)
                                                                              
Six months ended June 30, 2001.........  $  754.6      $   --        $174.9       $48.7        $112.6
Year ended December 31, 2000...........   1,601.8        98.4         332.7        92.9         277.7
Year ended December 31, 1999...........   1,563.5       164.6         259.0        84.5         273.6
Year ended December 31, 1998...........   1,523.0       121.2         202.7        81.1         350.8

---------------

(1) Effective January 1, 2000, we ceased new sales of our Medicare supplement
    insurance and effective July 1, 2000, reinsured all existing business.

    MORTGAGE BANKING.  We believe residential mortgages play a central role in
the financial planning activities of individuals in the United States. As a
result, our mortgage banking operations complement our portfolio of market-
driven financial products and services.

    Interest rate trends significantly impact our residential mortgage business.
Since 1998, interest rates in the U.S. have remained relatively lower than in
the early 1990s. During 1998 and through most of 1999, the strong economy
coupled with relatively low interest rates created a favorable real estate
market that increased production of residential mortgage loans throughout the
industry and also contributed to an increase in residential mortgage loan
refinancing. Starting late in 1999, interest rates increased, resulting in
decreases in production and refinancing of residential mortgage loans throughout
the industry. This trend reversed in the first six months of 2001, when interest
rates decreased, resulting in significant increases in mortgage loan production.

    We manage growth in the mortgage loan servicing portfolio, through retention
of mortgage loan production and the sale and acquisition of mortgage loan
servicing rights. Our servicing portfolio grew at a compound annual rate of 15%
from December 31, 1998 through December 31, 2000, reflecting our increased
retention of servicing rights of loans produced and acquisition of servicing
rights. Growth in the mortgage loan servicing portfolio was slower in 2000, as a
result of a decrease in mortgage loan production and an increase in sales of
mortgage loan servicing rights. In the first six months of 2001, the mortgage
loan servicing portfolio grew as a result of an increase in mortgage loan
production.

    Our residential mortgage loan production and the unpaid principal balances
in our residential mortgage loan servicing portfolio as of or for the six months
ended June 30, 2001, and as of or for the years ended December 31, 2000, 1999,
and 1998 were as follows:

                                                           RESIDENTIAL MORTGAGE     RESIDENTIAL MORTGAGE
AS OF OR FOR THE                                             LOAN PRODUCTION      LOAN SERVICING PORTFOLIO
----------------                                           --------------------   ------------------------
                                                                           ($ IN MILLIONS)
                                                                            
Six months ended June 30, 2001...........................       $15,368.4                $64,439.5
Year ended December 31, 2000.............................         8,311.8                 55,987.4
Year ended December 31, 1999.............................        13,307.3                 51,875.5
Year ended December 31, 1998.............................        12,120.5                 41,973.0

INVESTMENT ACTIVITY

    Our primary investment objective is to maximize after-tax investment returns
within risk parameters we view as acceptable.

    Sales of equity securities during the six months ended June 30, 2001,
generated net realized capital losses and reflected the continued repositioning
of our portfolio into assets with higher yields with less volatility. The
majority of the losses related to our withdrawal from company-sponsored funds
during the first half of 2001 at a time of general equity market decline. In
addition, we realized losses from the sales of two equity securities we received
in exchange for fixed maturity securities. These sales contributed to net
realized capital losses of $56.9 million for the six months ended June 30, 2001.

    In 2000 and 1999, we sold lower yielding fixed maturity securities to allow
for reinvestment in higher yielding fixed maturity securities. This
repositioning of our investment portfolio generated net realized capital losses
in our fixed maturity security portfolio. Net realized capital losses related to
fixed maturities were $125.9 million and $96.9 million for the years ended
December 31, 2000 and 1999, respectively.

                                        49

    In 1999 and 1998, we began repositioning our investment portfolio by selling
invested assets with lower yields, primarily equity securities and real estate,
and reinvesting the proceeds in assets with higher yields, primarily fixed
maturities. Net realized capital gains related to equity securities were $383.0
million and $302.9 million for the years ended December 31, 1999 and 1998,
respectively. Net realized capital gains related to real estate were $56.4
million and $120.6 million for the years ended December 31, 1999 and 1998,
respectively.

    In 1999, we sold a portion of our investment in United Payors and United
Providers, a publicly traded service organization that acts as an intermediary
between health care payors and health care providers, realizing an after-tax
capital gain of $17.9 million. In 2000, we sold our remaining investment and
realized an after-tax capital gain of $58.9 million.

TRANSACTIONS AFFECTING COMPARABILITY OF RESULTS OF OPERATIONS

  ACQUISITIONS AND DISPOSITIONS

    We acquired and disposed of the following businesses, among others, during
the past several years:

    PT ASURANSI JIWA PRINCIPAL INDONESIA.  On September 25, 2001, we disposed of
all the stock of PT Asuransi Jiwa Principal Indonesia, our subsidiary in
Indonesia. We currently have no business operations in Indonesia. Total assets
of our operations in Indonesia as of June 30, 2001 were $3.4 million. We
included nominal revenues and net loss from our operations in Indonesia in our
consolidated results of operations for the six months ended June 30, 2001 and
2000, and for the years ended December 31, 2000, 1999 and 1998.

    PRINCIPAL INTERNATIONAL ESPANA, S.A. DE SEGUROS DE VIDA.  On February 15,
2001, we disposed of all of the stock of Principal International Espana, S.A. de
Seguros de Vida, our subsidiary in Spain, for nominal proceeds, resulting in a
net realized capital loss of $38.4 million, ceasing our business operations in
Spain. Total assets of our operations in Spain as of December 31, 2000 were
$222.7 million.

    We included revenues of $33.1 million from our operations in Spain in our
consolidated results of operations for the six months ended June 30, 2000, and
revenues of $49.4 million, $51.7 million and $46.0 million in our results of
operations for the years ended December 31, 2000, 1999 and 1998, respectively.
We included net income of $2.2 million from our operations in Spain for the six
months ended June 30, 2000, and a net loss of $1.2 million and net income of
$0.9 million and $2.8 million in our results of operations for the years ended
December 31, 2000, 1999 and 1998, respectively. We did not include revenues or
net income from our operations in Spain in our consolidated results of
operations for the six months ended June 30, 2001.

    BT FINANCIAL GROUP.  On August 31, 1999, we acquired several companies
affiliated with Bankers Trust Australia Group from Deutsche Bank AG at a
purchase price of $1.4 billion. The acquired companies now operate under the
name of BT Financial Group. We accounted for the acquisition using the purchase
method. The results of operations of the acquired companies have been included
in our consolidated financial statements from the date of acquisition. We
included revenues of $122.5 million and net loss of $5.8 million in our
consolidated results of operations for the six months ended June 30, 2001. We
included revenues of $145.4 million and net income of $6.2 million in our
consolidated results of operations for the six months ended June 30, 2000. We
included revenues of $285.5 million and net income of $6.5 million in our
consolidated results of operations for the year ended December 31, 2000. We
included revenues of $116.5 million and net loss of $3.1 million in our
consolidated results of operations for the year ended December 31, 1999.

    We accounted for the purchase price as follows: $897.4 million of
identifiable intangibles, consisting primarily of management rights and the BT
brand name, $38.5 million of workforce intangibles and $408.6 million of
resulting goodwill. We are amortizing these intangible assets on a straight-line
basis over 40 years, 8 years and 25 years, respectively. We report the goodwill
and other intangibles, including the related amortization, in our International
Asset Management and Accumulation segment. The accounting for business
combinations, goodwill and other intangible assets will change effective January
1, 2002. The accounting change includes the adoption of a non-amortization,
impairment-only model for our goodwill and indefinite-lived intangible assets
and a more stringent test methodology for measuring and recognizing impairment
losses. We are presently studying the impact the accounting change will have on
our accounting policies. See "Risk Factors -- We may experience volatility in
net income due to recent changes in standards for accounting for business
combinations, goodwill and other intangible assets."

    We issued unsecured long-term debt of $665.0 million to partially fund our
acquisition of BT Financial Group. We report this debt and related interest
expense in our Corporate and Other segment.

    COMPANIA DE SEGUROS DE VIDA EL ROBLE S.A.  We acquired Compania de Seguros
de Vida El Roble S.A., or El Roble, a Chilean life insurance company, at a
purchase price of $73.4 million in July 1998. We included El Roble's financial
results in our International Asset Management and Accumulation segment. The
operations of our existing Chilean life insurance affiliate were combined with
the operations of El Roble to form Principal International de Chile. Our
consolidated financial results related to these companies' combined operations
include: total revenues of $108.6 million and $95.7 million for the six months
ended June 30, 2001 and 2000, respectively, and $200.2 million, $178.1 million
and $155.2 million for the years ended December 31, 2000, 1999 and 1998,
respectively; and net income

                                        50

of $4.3 million and $3.4 million for the six months ended June 30, 2001 and
2000, respectively, and $10.2 million, $0.5 million and $17.0 million for the
years ended December 31, 2000, 1999 and 1998, respectively.

    RELIASTAR MORTGAGE CORPORATION.  In July 1998, we established our
residential mortgage loan wholesale distribution system, a new distribution
channel, by acquiring ReliaStar Mortgage Corporation at a purchase price of
$18.6 million. The operations of ReliaStar Mortgage Corporation have been
integrated into Principal Residential Mortgage, Inc., as part of our Mortgage
Banking segment.

    COVENTRY HEALTH CARE.  Effective April 1, 1998, we transferred substantially
all of our HMO operations to Coventry Health Care, Inc., or Coventry, in
exchange for 42% of the common stock of Coventry. Our net equity in the
transferred HMO operations had a carrying value of $170.0 million on April 1,
1998. We sold our remaining HMO operations in 1998 for $20.5 million resulting
in no realized capital gain or loss. Prior to the transfer to Coventry, our
Corporate and Other segment included $266.7 million of HMO revenues in our
results for 1998.

    We report our investment in Coventry in our Corporate and Other segment and
account for it using the equity method. Our share of Coventry's net income was
$9.7 million and $10.8 million for the six months ended June 30, 2001 and 2000,
respectively, and $20.0 million and $19.1 million for the years ended December
31, 2000 and 1999, respectively. Our share of Coventry's net loss was $9.8
million for the year ended December 31, 1998. In September 2000, we sold a
portion of our Coventry stock, which reduced our ownership to approximately 25%
of Coventry and resulted in a realized capital gain of $13.9 million, net of
tax. Our carrying amount in Coventry was $134.6 million as of June 30, 2001.

    PRINCIPAL CAPITAL MANAGEMENT.  We transferred our U.S. investment management
operations from our Corporate and Other segment to our U.S. Asset Management and
Accumulation segment effective January 1, 1999. In connection with this
transfer, we established Principal Capital Management to consolidate our U.S.
asset management operations. Principal Capital Management is primarily composed
of the former investment department of Principal Life and the investment
professionals of Invista Capital Management, a registered investment advisor
focused on the specialized needs of institutional clients. We included fee
revenues of $14.3 million and $14.8 million for the six months ended June 30,
2001 and 2000, respectively, and $31.5 million and $36.2 million for the years
ended December 31, 2000 and 1999, respectively, related to our third-party
clients in our U.S. Asset Management and Accumulation segment. Prior to the
formation of Principal Capital Management, we included fee revenues of $10.6
million in 1998, related to our third-party clients in our Corporate and Other
segment.

  REINSURANCE TRANSACTIONS

    We are considering entering into a reinsurance agreement to reduce the
volatility of our group medical insurance earnings.

    Effective July 1, 2000, we entered into a reinsurance agreement with General
& Cologne Life Re of America to reinsure 100% of our Medicare supplement
insurance business. Medicare supplement insurance premiums were $98.4 million
and $75.9 million for the six months ended June 30, 2000 and 1999, respectively,
and $164.6 million and $121.2 million for the years ended December 31, 1999 and
1998, respectively.

  OPERATING EARNINGS AND NON-RECURRING ITEMS

    For the six months ended June 30, 2001, we excluded $31.4 million of
non-recurring items, net of tax, from net income for our presentation of
consolidated operating earnings. The non-recurring items included the negative
effects of: (1) expenses related to our demutualization ($14.8 million); (2) a
cumulative effect of change in accounting principle related to our
implementation of SFAS 133 ($10.7 million), as discussed in Note 2 to Principal
Mutual Holding Company's unaudited consolidated financial statements; and (3) a
loss contingency reserve established for sales practices litigation ($5.9
million).

    For the six months ended June 30, 2000, we excluded $75.8 million of
non-recurring items, net of tax, from net income for our presentation of
consolidated operating earnings. The non-recurring items included the negative
effects of: (1) a loss contingency reserve established for sales practices
litigation ($75.0 million), and (2) expenses related to our demutualization
($0.8 million). See "Business -- Legal Proceedings".

    For the year ended December 31, 2000, we excluded $101.0 million of
non-recurring items, net of tax, from net income for our presentation of
consolidated operating earnings. The non-recurring items included the negative
effects of: (1) a loss contingency reserve established for sales practices
litigation ($93.8 million), and (2) expenses related to our demutualization
($7.2 million). See "Business -- Legal Proceedings".

    For the year ended December 31, 1998, we excluded $104.8 million of
non-recurring items, net of tax, from net income for our presentation of
consolidated operating earnings. The non-recurring items included:

    - the positive effects of: (1) Principal Life's release of tax reserves and
      related accrued interest in the amount of $164.4 million, consisting of
      $145.4 million in taxes and $19.0 million of interest, resulting from the
      decision of the Internal Revenue Service in 1998 to accept Principal
      Life's position on previously contested tax matters, and (2) accounting
      changes by our international operations ($13.3 million); and

                                        51

    - the negative effects of: (1) expenses and adjustments for changes in
      amortization assumptions for deferred policy acquisition costs related to
      our corporate structure change to a mutual insurance holding company
      ($27.4 million), and (2) a contribution related to permanent endowment of
      the Principal Financial Group Foundation ($45.5 million).

  FLUCTUATIONS IN FOREIGN CURRENCY TO U.S. DOLLAR EXCHANGE RATES

    Fluctuations in foreign currency to U.S. dollar exchange rates for countries
in which we have operations can affect reported financial results. In years when
foreign currencies weaken against the U.S. dollar, translating foreign
currencies into U.S. dollars results in fewer U.S. dollars to be reported. When
foreign currencies strengthen, translating foreign currencies into U.S. dollars
results in more U.S. dollars to be reported.

    Foreign currency exchange rate fluctuations have not had a material impact
on our consolidated financial results. Our consolidated operating earnings were
negatively impacted $0.8 million for the six months ended June 30, 2001, $0.6
million for the year ended December 31, 2000 and $0.3 million for the year ended
December 31, 1999, as a result of fluctuations in foreign currency to U.S.
dollar exchange rates. For a discussion of our approaches to foreign currency
exchange rate risk, see "-- Quantitative and Qualitative Information about
Market Risk."

THE MUTUAL INSURANCE HOLDING COMPANY REORGANIZATION

    Effective July 1, 1998, Principal Mutual Life Insurance Company formed
Principal Mutual Holding Company, a mutual insurance holding company, and
converted to Principal Life, a stock life insurance company. All of the shares
of Principal Life were issued to Principal Mutual Holding Company through two
newly formed Iowa intermediate holding companies, Principal Financial Group,
Inc., and Principal Financial Services, Inc. The reorganization itself did not
have a material financial impact on Principal Mutual Holding Company and its
subsidiaries, including Principal Life, as the net assets transferred to achieve
the change in legal organization were accounted for at historical carrying
amounts in a manner similar to that in pooling-of-interests accounting.

    In conjunction with the formation of the mutual insurance holding company,
Principal Life established a Closed Block for the benefit of individual
participating dividend-paying policies in force on that date. The Closed Block
was designed to provide reasonable assurance to policyholders included in the
Closed Block that, after the formation of the mutual insurance holding company,
assets would be available to maintain dividends in aggregate in accordance with
the 1997 policy dividend scales if the experience underlying such scales
continued. Assets were allocated to the Closed Block in amounts such that their
cash flows, together with anticipated revenues from policies included in the
Closed Block, were reasonably expected to be sufficient to support such
policies, including provision for payment of claims, expenses, charges and
taxes, and to provide for the continuation of dividends in aggregate in
accordance with the 1997 policy dividend scales if the experience underlying
such scales continued, and to allow for appropriate adjustments in such scales
if the experience changes.

    Assets allocated to the Closed Block inure to the benefit of the holders of
policies included in the Closed Block. Closed Block assets and liabilities are
carried on the same basis as similar assets and liabilities held by Principal
Mutual Holding Company. Principal Life will continue to pay guaranteed benefits
under all policies, including the policies included in the Closed Block, in
accordance with their terms. If the assets allocated to the Closed Block, the
investment cash flows from those assets and revenues from the policies included
in the Closed Block, including investment income thereon, prove to be
insufficient to pay the benefits guaranteed under the policies included in the
Closed Block, Principal Life will be required to make such payments from its
general funds.

    The formation of the Closed Block in 1998 did not have a material impact on
our financial results. As of June 30, 2001, Closed Block assets and liabilities
were $4,613.4 million and $5,635.8 million, respectively. As of December 31,
2000, Closed Block assets and liabilities were $4,526.4 million and $5,566.8
million, respectively. As of December 31, 1999, Closed Block assets and
liabilities were $4,338.3 million and $5,415.5 million, respectively.

THE DEMUTUALIZATION

    The board of directors of Principal Mutual Holding Company unanimously
adopted the plan of conversion on March 31, 2001. Under the terms of the plan of
conversion, on the effective date of the demutualization, which is the date of
the closing of this offering, Principal Mutual Holding Company will convert from
a mutual insurance holding company into a stock company and become our
wholly-owned subsidiary.

    The demutualization will become effective on the date of the closing of this
offering. The plan of conversion provides that the effective date will occur
after the approval by the Insurance Commissioner of the State of Iowa and the
policyholders entitled to vote on the plan of conversion, but on or before 12
months after the date on which the Insurance Commissioner of the State of Iowa
approves the plan of conversion. With the approval of the Insurance Commissioner
of the State of Iowa, the effective date deadline may be extended.

                                        52

    The policyholders entitled to vote on the plan of conversion approved the
plan of conversion at a meeting held on July 24, 2001, by approximately 92% of
the votes cast. The public hearing was held on July 25, 2001 and the Insurance
Commissioner of the State of Iowa approved the plan of conversion on August 28,
2001.

    We estimate that costs relating to the demutualization, excluding costs
relating to this offering, will be approximately $25.7 million, net of tax, of
which $22.0 million was incurred through June 30, 2001. Demutualization expenses
consist primarily of printing and mailing costs and our aggregate cost of
engaging independent accounting, actuarial, financial, investment banking, legal
and other consultants to advise us on the demutualization. In addition, our
costs include the costs of the staff and advisors of the Insurance Commissioner
of the State of Iowa, the New York State Insurance Department and potentially
other regulatory authorities as to the demutualization process and related
matters.

RECENT DEVELOPMENTS

  TERRORIST ATTACKS IN THE UNITED STATES

    On September 11, 2001, terrorist attacks in the U.S. resulted in significant
loss of life and property, as well as interruption of business activities and an
overall disruption of the world economy. We estimate our losses from insurance
claims from these events, primarily individual life insurance claims, to be
between $9.0 million and $12.0 million after taxes, taking into consideration
reinsurance coverage. Our estimated losses will be reported in our Life and
Health Insurance segment.

    We do not engage in any property and casualty insurance or any reinsurance
businesses. Additionally, we do not have significant insurance exposures to
businesses in the affected areas and did not experience a material increase in
claims related to our group life, health or disability policies. We do not have
any material exposure in our investment portfolio to real estate in lower
Manhattan.

    The impact of the events of September 11, 2001 has reduced our assets under
management as a result of the declines in the U.S., Australian and other stock
markets. These declines in the securities markets and reduced commercial and
economic activity may also decrease our net income and revenue. Some of the
assets in our investment portfolio may also be adversely affected by the
declines in the securities markets and economic activity caused by the terrorist
attacks and possible military action and heightened security measures. In
particular, this may lead to possible write-downs, loss of value or impairments
with regard to securities issued by companies affected by these events. Credit
rating agencies have downgraded, and may in the future downgrade, some of these
companies, as a result of the impacts of the terrorist attacks. See "Risk
Factors -- The impact of recent terrorist attacks and possible military and
other actions may result in decreases in our net income, revenue and assets
under management and may adversely affect our investment portfolio." In
addition, declines in the securities markets and reduced commercial and economic
activity may impact our assumptions in assessing the value of intangibles from
prior acquisitions and the amortization patterns for deferred acquisition costs.
In the event there is a need to change our assumptions, this may lead to a
material impairment of these assets. See "Risk Factors -- We may experience
volatility in net income due to recent changes in standards for accounting for
business combinations, goodwill and other intangible assets."

  OUTLOOK FOR THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS
ENDED SEPTEMBER 30, 2000

    The following discussion provides our summary outlook for our consolidated
results of operations for the three months ended September 30, 2001, as compared
to summary consolidated financial results for the three months ended September
30, 2000. In addition, we have provided summary consolidated financial results
for the three months ended June 30, 2001. See "-- Forward-Looking Information".

    Consolidated total revenues were $2,123.8 million for the three months ended
September 30, 2000. We anticipate an increase in consolidated total revenues for
the three months ended September 30, 2001, primarily due to an expected increase
in sales of single premium group annuities with life contingencies in our U.S.
Asset Management and Accumulation and International Asset Management and
Accumulation segments. Our consolidated total revenues were $2,084.7 million for
the three months ended June 30, 2001.

    Consolidated operating earnings were $163.3 million for the three months
ended September 30, 2000. We anticipate that consolidated operating earnings for
the three months ended September 30, 2001, will be approximately the same level.
We expect an increase in Mortgage Banking segment operating earnings, primarily
resulting from an increase in mortgage loan production volume, which we
anticipate to be partially offset by a decrease in the value of our mortgage
loan servicing portfolio. We also expect an increase in Life and Health
Insurance segment operating earnings, primarily due to an anticipated
improvement in group health insurance loss ratios. These increases are expected
to be partially offset by a decrease in Corporate and Other segment operating
earnings, primarily due to lower investment earnings, and a decrease in U.S.
Asset Management and Accumulation segment operating earnings, primarily a result
of the recent declines in the U.S. equity markets. Our consolidated operating
earnings were $190.3 million for the three months ended June 30, 2001.

                                        53

    Consolidated net income was $173.9 million for the three months ended
September 30, 2000. We expect a decrease in consolidated net income for the
three months ended September 30, 2001, primarily due to anticipated lower levels
of net realized capital gains and, to a lesser extent, anticipated permanent
impairments of fixed maturity securities. Accordingly, our anticipated
consolidated net income for the three months ended September 30, 2001 is
expected to be approximately the same level as consolidated net income of $119.1
million for the three months ended June 30, 2001.

RESULTS OF OPERATIONS

    The table below presents summary consolidated financial information for the
periods indicated.

                                                                 FOR THE SIX
                                                                MONTHS ENDED             FOR THE YEAR ENDED
                                                                  JUNE 30,                  DECEMBER 31,
                                                             -------------------   ------------------------------
                                                               2001       2000       2000       1999       1998
                                                             --------   --------   --------   --------   --------
                                                                               ($ IN MILLIONS)
                                                                                          
INCOME STATEMENT DATA:
Revenues:
  Premiums and other considerations........................  $1,955.3   $1,992.7   $3,996.4   $3,937.6   $3,818.4
  Fees and other revenues..................................     856.3      783.2    1,576.3    1,287.3      978.8
  Net investment income....................................   1,686.0    1,558.1    3,172.3    3,072.0    2,933.9
  Net realized capital gains (losses)......................    (176.9)      31.5      139.9      404.5      465.8
                                                             --------   --------   --------   --------   --------
         Total revenues....................................   4,320.7    4,365.5    8,884.9    8,701.4    8,196.9
Expenses:
  Benefits, claims and settlement expenses.................   2,639.2    2,631.1    5,232.3    5,260.9    5,089.0
  Dividends to policyholders...............................     162.1      155.8      312.7      304.6      298.7
  Operating expenses.......................................   1,228.2    1,228.0    2,479.4    2,070.3    2,074.0
                                                             --------   --------   --------   --------   --------
         Total expenses....................................   4,029.5    4,014.9    8,024.4    7,635.8    7,461.7
                                                             --------   --------   --------   --------   --------
Income before income taxes and cumulative effect of
  accounting change........................................     291.2      350.6      860.5    1,065.6      735.2
Income taxes...............................................      56.1      105.3      240.3      323.5       42.2
                                                             --------   --------   --------   --------   --------
  Income before cumulative effect of accounting change.....     235.1      245.3      620.2      742.1      693.0
Cumulative effect of accounting change, net of related
  income taxes.............................................     (10.7)        --         --         --         --
                                                             --------   --------   --------   --------   --------
  Net income...............................................  $  224.4   $  245.3   $  620.2   $  742.1   $  693.0
                                                             ========   ========   ========   ========   ========
OTHER DATA:
Net income.................................................  $  224.4   $  245.3   $  620.2   $  742.1   $  693.0
Less:
  Net realized capital gains (losses), as adjusted.........    (108.2)      23.1       93.1      266.9      320.7
  Non-recurring items......................................     (31.4)     (75.8)    (101.0)        --      104.8
                                                             --------   --------   --------   --------   --------
Operating earnings.........................................  $  364.0   $  298.0   $  628.1   $  475.2   $  267.5
                                                             ========   ========   ========   ========   ========
Operating earnings before amortization of goodwill and
  other intangibles........................................  $  385.6   $  317.9   $  670.8   $  492.0   $  304.0

 SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000

    Premiums and other considerations decreased $37.4 million, or 2%, to
$1,955.3 million for the six months ended June 30, 2001, from $1,992.7 million
for the six months ended June 30, 2000. The decrease reflected a $167.7 million,
or 10%, decrease from the Life and Health Insurance segment, primarily related
to our decision to reinsure 100% of our group Medicare supplement insurance
business effective July 1, 2000. Life and Health Insurance segment premiums also
decreased due to large premium rate increases in 2000, which led to increased
lapses and lower sales of group medical insurance. The decrease was partially
offset by a $129.2 million, or 64%, increase from the U.S. Asset Management and
Accumulation segment, primarily due to an increase in premiums from single
premium group annuities with life contingencies, which are typically used to
fund defined benefit pension plan terminations. The premium income we receive
from these contracts fluctuates due to the variability in the number and size of
pension plan terminations in the market and our ability to attract new sales.
The decrease was also partially offset by a $1.1 million, or 1%, increase from
the International Asset Management and Accumulation segment, primarily related
to increased sales of single premium annuities with life contingencies in
Mexico, which was offset by the loss of premiums and other considerations due to
the February 2001 divestiture of our operations in Spain.

    Fees and other revenues increased $73.1 million, or 9%, to $856.3 million
for the six months ended June 30, 2001, from $783.2 million for the six months
ended June 30, 2000. The increase was primarily due to a $105.1 million, or 57%,
increase from the Mortgage Banking segment, primarily resulting from an increase
in mortgage loan production

                                        54

fee revenues, reflecting the increase in mortgage loan production volume. The
increase was also due to a $23.9 million, or 23%, increase from the Life and
Health Insurance segment, primarily related to an increase in group
fee-for-service fee revenues, a result of fee rate increases and growth in that
business, and an increase in interest-sensitive life insurance fee revenues, a
result of growth in that block of business. The increases were partially offset
by a $31.3 million, or 9%, decrease from the U.S. Asset Management and
Accumulation segment, primarily due to a decrease in surrender charge revenues
from pension products, as fewer customers surrendered their products due to the
declining interest rate environment. The increases were also partially offset by
a $13.5 million, or 9%, decrease from the International Asset Management and
Accumulation segment, primarily as a result of the weakening of the Australian
dollar versus the U.S. dollar. The increases were also partially offset by an
$11.1 million, or 90%, decrease from the Corporate and Other segment, primarily
related to inter-segment eliminations included in this segment.

    Net investment income increased $127.9 million, or 8%, to $1,686.0 million
for the six months ended June 30, 2001, from $1,558.1 million for the six months
ended June 30, 2000. The increase was primarily due to a $2,034.5 million, or
5%, increase in average invested assets and cash and also to an increase in
investment yields, a result of higher yields on fixed income securities. The
yield on average invested assets and cash was 7.7% for the six months ended June
30, 2001, compared to 7.4% for the six months ended June 30, 2000.

    Net realized capital gains (losses) decreased $208.4 million to $176.9
million of net realized capital losses for the six months ended June 30, 2001,
from $31.5 million of net realized capital gains for the six months ended June
30, 2000. The decrease primarily related to realized capital losses on equity
securities recognized during the six months ended June 30, 2001, a result of the
decline in the equity markets, compared to realized gains on equity securities
recognized during the six months ended June 30, 2000. In addition, we sold our
investment in United Payors and United Providers, and realized a capital gain of
$90.6 million, during the six months ended June 30, 2000. Permanent impairments
of fixed maturity securities, during the six months ended June 30, 2001, and a
realized capital loss on the sale of our operations in Spain, also contributed
to the decrease.

    Benefits, claims and settlement expenses increased $8.1 million to $2,639.2
million for the six months ended June 30, 2001, from $2,631.1 million for the
six months ended June 30, 2000. The increase was primarily due to a $148.2
million, or 14%, increase from the U.S. Asset Management and Accumulation
segment, primarily due to the increase in reserves resulting from an increase in
sales of single premium group annuities with life contingencies. The increase
was also due to a $12.7 million, or 10%, increase from the International Asset
Management and Accumulation segment, primarily due to an increase in the change
in reserves and policy and contract benefit payments, primarily related to
additional sales of annuity products with life contingencies in Mexico and
Argentina. The increases were partially offset by a $119.6 million, or 9%,
decrease from the Life and Health Insurance segment, primarily related to our
decision to reinsure 100% of our group Medicare supplement insurance business
effective July 1, 2000. The increases were also partially offset by a $33.2
million, or 100%, decrease from the Corporate and Other segment, primarily
related to a non-recurring loss contingency reserve established during the six
months ended June 30, 2000, for sales practices litigation.

    Dividends to policyholders increased $6.3 million, or 4%, to $162.1 million
for the six months ended June 30, 2001, from $155.8 million for the six months
ended June 30, 2000. The increase was primarily attributable to a $4.4 million,
or 3%, increase from the Life and Health Insurance segment due to increased
dividends on traditional life insurance products, a result of increases in the
cash value of the policies. The increase was also due to a $1.9 million, or
100%, increase from the U.S. Asset Management and Accumulation segment resulting
from an increase in dividends for our pension full-service accumulation
products.

    Operating expenses increased $0.2 million to $1,228.2 million for the six
months ended June 30, 2001, from $1,228.0 million for the six months ended June
30, 2000. The increase was primarily due to a $59.6 million, or 47%, increase
from the Mortgage Banking segment, primarily due to mortgage loan servicing
expenses, reflecting the growth in the mortgage loan servicing portfolio. The
increase also reflected a $33.6 million, or 9%, increase from the U.S. Asset
Management and Accumulation segment, primarily resulting from an increase in
pension compensation costs resulting from growth in operations; an increase
related to the net impact of capitalization and amortization of deferred policy
acquisition costs attributable to pension products; and an increase in Principal
Bank operating expenses primarily related to growth in bank operations. The
increases were partially offset by a $67.4 million, or 60%, decrease from the
Corporate and Other segment, primarily related to a non-recurring loss
contingency reserve established during the six months ended June 30, 2000, for
sales practices litigation. The increases were also partially offset by a $19.0
million, or 4%, decrease from the Life and Health Insurance segment, primarily a
result of a decrease in commissions resulting from our decision to reinsure 100%
of our group Medicare supplement insurance business effective July 1, 2000. In
addition, the increases were partially offset by a $6.6 million, or 4%, decrease
from the International Asset Management and Accumulation segment, primarily as a
result of the weakening of the Australian dollar versus the U.S. dollar.

    Income taxes decreased $49.2 million, or 47%, to $56.1 million for the six
months ended June 30, 2001, from $105.3 million for the six months ended June
30, 2000. The effective income tax rate was 19% for the six months ended June
30, 2001, and 30% for the six months ended June 30, 2000. The effective income
tax rates for the six months ended June 30, 2001 and 2000 were lower than the
corporate rate of 35%, primarily due to income tax deductions allowed for
corporate dividends received, for which the estimated benefit recognition rate
increased during

                                        55

the six months ended June 30, 2001, compared to the six months ended June 30,
2000. The effective income tax rate for the six months ended June 30, 2001, was
further reduced by additional tax benefits related to excess tax over book
capital losses realized from the sale of our operations in Spain.

    As a result of the foregoing factors and the inclusion of the cumulative
effect of accounting change, net of related income taxes, net income decreased
$20.9 million, or 9%, to $224.4 million for the six months ended June 30, 2001,
from $245.3 million for the six months ended June 30, 2000. The cumulative
effect of accounting change was related to our implementation of SFAS 133, as
previously discussed under the caption "-- Transactions Affecting Comparability
of Results of Operations -- Operating Earnings and Non-Recurring Items."

    During the six months ended June 30, 2001, non-recurring items of $31.4
million, net of tax, included the negative effects of: (1) expenses related to
our demutualization ($14.8 million); (2) a cumulative effect of change in
accounting related to our implementation of SFAS 133 ($10.7 million); and (3) a
loss contingency reserve established for sales practices litigation ($5.9
million). During the six months ended June 30, 2000, non-recurring items of
$75.8 million, net of tax, included the negative effects of: (1) a loss
contingency reserve established for sales practices litigation ($75.0 million);
and (2) expenses related to our demutualization ($0.8 million).

    As a result of the foregoing factors and the exclusion of net realized
capital gains (losses), as adjusted and nonrecurring items, operating earnings
increased $66.0 million, or 22%, to $364.0 million for the six months ended June
30, 2001, from $298.0 million for the six months ended June 30, 2000. The
increase resulted from a $34.4 million, or 100%, increase from the Mortgage
Banking segment, primarily due to an increase in mortgage loan production
earnings, reflecting an increase in mortgage loan production volume. The
increase was also due to a $28.1 million increase from the Corporate and Other
segment, primarily due to improved investment yields. In addition, the increase
was due to a $4.9 million, or 6%, increase from the Life and Health Insurance
segment, primarily due to improved margins on individual life insurance business
resulting from higher investment yields and due to improved loss ratios on group
disability insurance. The increases were partially offset by a $1.0 million, or
27%, decrease from the International Asset Management and Accumulation segment
and a $0.4 million decrease from the U.S. Asset Management and Accumulation
segment.

  YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

    Premiums and other considerations increased $58.8 million, or 1%, to
$3,996.4 million in 2000, from $3,937.6 million in 1999. The increase reflected
a $59.9 million, or 2%, increase from the Life and Heath Insurance segment,
primarily the result of increased sales of group dental insurance products and
an increase in group medical premiums, primarily attributable to increased sales
in 1999 and significant group medical premium rate increases. In addition, the
increase was due to a $40.6 million, or 23%, increase from the International
Asset Management and Accumulation segment, primarily related to sales of single
premium annuities with life contingencies by new annuity companies we
established in Mexico in July 1999 and in Argentina in August 1999. The
increases were partially offset by a $41.3 million, or 7%, decrease from the
U.S. Asset Management and Accumulation segment, primarily related to a decrease
in premiums from single premium group annuities with life contingencies, which
are typically used to fund defined benefit pension plan terminations. The
premium income we receive from these contracts fluctuates due to the variability
in the number and size of defined benefit pension plan terminations in the
market and our ability to attract new sales.

    Fees and other revenues increased $289.0 million, or 22%, to $1,576.3
million in 2000, from $1,287.3 million in 1999. The increase was primarily due
to a $199.6 million increase from the International Asset Management and
Accumulation segment, primarily resulting from the inclusion of fees and other
revenues contributed by BT Financial Group, which we acquired in August 1999.
The increase was also due to a $90.3 million, or 15%, increase from the U.S.
Asset Management and Accumulation segment, primarily attributable to an increase
in administrative fee revenues, reflecting an increase in the amortization of
front-end fee revenues, a result of a change in our assumptions related to
amortization of deferred policy acquisition costs attributable to pension
products. We also received higher fee revenues related to surrender charges,
which are fees charged to policyholders when they surrender an annuity for its
cash value. Fee revenues also increased due to fees from pension
customer-directed investment transfers, reflecting the higher interest rate
environment and the resulting increased customer account activity. Fee revenues
for U.S. pension products and services also increased, reflecting increased
assets under management in 1999. The increase was also due to a $49.8 million,
or 28%, increase from the Life and Health Insurance segment, primarily related
to growth in our interest-sensitive life insurance block of business and
increased fee revenues from our group fee-for-service business, primarily a
result of an increase in members and fees. The increases were partially offset
by a $31.2 million decrease from the Corporate and Other segment, which reflects
a change in inter-segment eliminations included in this segment and the
termination of a reinsurance and participation agreement under which we received
fee revenues in 1999, but not in 2000. The increases were also partially offset
by a $19.5 million, or 5%, decrease from the Mortgage Banking segment, primarily
due to a decrease in residential mortgage loan production revenues as a result
of the decrease in residential mortgage loan production volume during 2000.

    Net investment income increased $100.3 million, or 3%, to $3,172.3 million
in 2000, from $3,072.0 million in 1999. The increase was primarily due to an
increase in investment yields due to higher interest rates on new investments.

                                        56

The yield on average invested assets and cash was 7.5% in 2000, compared to 7.4%
in 1999. The increase was also due to a $934.8 million, or 2%, increase in
average invested assets and cash.

    Net realized capital gains decreased $264.6 million, or 65%, to $139.9
million in 2000, from $404.5 million in 1999. The decrease was due in part to a
decrease in sales of invested assets, primarily equity securities, in 2000. In
1999, we sold a significant portion of our equity securities portfolio to reduce
exposure to common stock and to realize appreciation. We also recognized an
increase in net realized capital losses in 2000, compared to 1999, in our fixed
income securities portfolio, reflecting our investment philosophy to reposition
the investment portfolio to maximize investment returns by selling lower
yielding fixed income securities to allow for reinvestment in higher yielding
fixed income securities. In 1999, we sold a portion of our investment in United
Payors and United Providers, a publicly traded service organization that acts as
an intermediary between health care payors and health care providers, realizing
a capital gain of $27.6 million. In 2000, we sold our remaining investment and
realized a capital gain of $90.6 million.

    Benefits, claims and settlement expenses decreased $28.6 million, or 1%, to
$5,232.3 million in 2000, from $5,260.9 million in 1999. The decrease was
primarily due to a $55.5 million, or 2%, decrease from the Life and Health
Insurance segment, primarily resulting from the release of group medical and
group Medicare supplement claim reserves established in 1999. The claim reserves
were established in 1999 as a result of poor claim experience during the first
three quarters of 1999 and an expectation that claims would continue to increase
through the second quarter of 2000. Group Medicare supplement benefits, claims
and settlement expenses also decreased as a result of our decision to cease new
sales of group Medicare supplement insurance effective January 1, 2000 and our
decision to reinsure all existing business as of July 1, 2000. In addition, the
decrease was related to a $24.7 million, or 1%, decrease from the U.S. Asset
Management and Accumulation segment primarily resulting from a decrease in
benefit payments and reserve changes reflecting the decrease in our block of
pension experience rated business and an increase in our guaranteed business.
The decreases were partially offset by a $52.1 million, or 25%, increase from
the International Asset Management and Accumulation segment, primarily due to an
increase in the change in reserves and policy and contract benefit payments,
primarily related to additional sales of annuity products with life
contingencies in Mexico, Argentina and Chile.

    Dividends to policyholders increased $8.1 million, or 3%, to $312.7 million
in 2000, from $304.6 million in 1999. The increase was primarily attributable to
a $12.5 million, or 4%, increase from the Life and Health Insurance segment due
to increased dividends on traditional individual life insurance products, a
result of increases in the cash values of the policies. The increase was
partially offset by a $4.4 million, or 49%, decrease in dividends from the U.S.
Asset Management and Accumulation segment, which reflected a decrease in our
block of pension experience rated business.

    Operating expenses increased $409.1 million, or 20%, to $2,479.4 million in
2000, from $2,070.3 million in 1999. The increase was primarily due to a $160.2
million, or 76%, increase from the International Asset Management and
Accumulation segment, primarily resulting from the inclusion of BT Financial
Group in our financial results effective August 1999, including a $23.3 million
increase amortization of goodwill and other intangibles. The increase also
reflected a $121.5 million, or 20%, increase from the U.S. Asset Management and
Accumulation segment, primarily due to a change in our assumptions related to
amortization of deferred policy acquisition costs related to pension products
and also due to an increase in pension salary and incentive compensation costs
and other pension administrative expenses. In addition, the increase was due to
a $116.0 million increase from the Corporate and Other segment, primarily
related to a non-recurring loss contingency reserve established for sales
practices litigation and demutualization costs as well as additional interest
costs related to private debt securities and commercial paper issued in
connection with our acquisition of BT Financial Group. The increase was also due
to a $39.5 million, or 5%, increase from the Life and Health Insurance segment,
primarily due to expenses related to our group Medicare supplement business and
higher group medical commissions. The increases were partially offset by a $28.1
million, or 9%, decrease from the Mortgage Banking segment, primarily a result
of net gains we earned on hedges related to our servicing portfolio in 2000.

    Income taxes decreased $83.2 million, or 26%, to $240.3 million in 2000,
from $323.5 million in 1999. The effective income tax rate was 28% in 2000 and
30% in 1999. The effective rates for 2000 and 1999 were lower than the corporate
income tax rate of 35%, primarily due to income tax deductions allowed for
corporate dividends received.

    As a result of the foregoing factors, net income decreased $121.9 million,
or 16%, to $620.2 million in 2000, from $742.1 million in 1999.

    In 2000, non-recurring items of $101.0 million, net of tax, included the
negative effects of (1) a loss contingency reserve established for sales
practices litigation ($93.8 million); and (2) expenses related to our
demutualization study ($7.2 million).

    Operating earnings increased $152.9 million, or 32%, to $628.1 million in
2000, from $475.2 million in 1999. The increase resulted from a $71.6 million,
or 79%, increase from the Life and Health Insurance segment, primarily due to
improved earnings from our group medical business. The increase was also due to
a $58.2 million increase from the Corporate and Other segment, primarily due to
improved investment yields and lower expenses due in part to a net recovery of
interest expense related to a successful tax audit appeal. In addition, the
increase was due to a

                                        57

$29.9 million, or 78%, increase from the International Asset Management and
Accumulation segment due to growth in our international operations, due in part
to BT Financial Group, which we acquired in August 1999. Operating earnings from
the U.S. Asset Management and Accumulation did not change as increases in
revenues were offset by increases in expenses. These increases were partially
offset by a $6.8 million, or 12%, decrease from the Mortgage Banking segment,
primarily due to a decrease in mortgage loan production earnings, reflecting a
decrease in production volume.

  YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

    Premiums and other considerations increased $119.2 million, or 3%, to
$3,937.6 million in 1999, from $3,818.4 million in 1998. The increase was
primarily due to a $285.0 million, or 101%, increase from the U.S. Asset
Management and Accumulation segment, due to increased sales of single premium
group annuities with life contingencies. The premium income we receive from
these contracts fluctuates due to the variability in the number and size of
pension plan terminations in the market and our ability to attract new sales.
The increase was also due to a $64.0 million, or 2%, increase from the Life and
Health Insurance segment, primarily due to growth in our dental insurance
business, and an increase in premiums and other considerations for group
Medicare supplement insurance and group medical insurance, a result of more
competitive pricing and new sales incentives. The increase was also due to a
$32.8 million, or 22%, increase from the International Asset Management and
Accumulation segment, primarily related to the addition of premiums from El
Roble, a Chilean life insurance company we acquired in July 1998, sales of
single premium annuities with life contingencies, related primarily to our newly
formed annuity company in Mexico, and sales of single premium group annuities
with life contingencies in Spain. The increases were partially offset by a
$262.6 million decrease from the Corporate and Other segment, primarily related
to our HMO operations, which contributed premiums and other considerations
through March 31, 1998, prior to being transferred to Coventry.

    Fees and other revenues increased $308.5 million, or 32%, to $1,287.3
million in 1999, from $978.8 million in 1998. The increase was primarily due to
a $165.7 million, or 37%, increase from the U.S. Asset Management and
Accumulation segment, primarily due to growth in assets under management, which
benefited from strong equity market performance in 1999, an increase in net
deposits received from our pension customers and an increase in third-party
asset management fee revenues. The increase in U.S. Asset Management and
Accumulation segment fee revenues was related to the inclusion of asset
management fee revenues of Principal Capital Management in this segment at the
beginning of 1999. Such asset management fee revenues were reported in the
Corporate and Other segment prior to 1999, leading to a $35.1 million decrease
for the Corporate and Other segment. This change in reported segment did not
have an impact on our consolidated financial results. The increase was also due
to a $77.5 million increase from the International Asset Management and
Accumulation segment, primarily related to the inclusion of fees and revenues
contributed by BT Financial Group, which we acquired in August 1999. The
increase was also due to a $66.9 million, or 20%, increase from the Mortgage
Banking segment, primarily due to an increase in residential mortgage loan
servicing revenues resulting from the increase in our residential mortgage loan
servicing portfolio. The increase was also attributable to a $33.5 million, or
23%, increase from the Life and Health Insurance segment, primarily due to an
increase in fee revenues from our group fee-for-service business, as we provided
more clients with customized services that result in higher fees, and an
increase in fee revenues due to increased sales of individual interest-sensitive
life insurance products, a result of customer preference for universal life and
variable life insurance products.

    Net investment income increased $138.1 million, or 5%, to $3,072.0 million
in 1999, from $2,933.9 million in 1998. The increase was primarily due to higher
investment yields in 1999. The yield on average invested assets and cash was
7.4% in 1999, compared to 7.2% in 1998. The increase was also due to an $897.2
million, or 2%, increase in average invested assets. Our pro rata share of
Coventry's net income increased $28.9 million, as a result of Coventry's
improved earnings in 1999 compared to 1998. In addition, BT Financial Group
contributed $18.3 million of net investment income in 1999.

    Net realized capital gains, as adjusted, decreased $61.3 million, or 13%, to
$404.5 million in 1999, from $465.8 million in 1998. Our net realized capital
gains reflect significant sales activity in both 1999 and 1998. We continued to
reposition the investment portfolio to maximize operating investment returns by
selling lower yielding invested assets and reinvesting in higher yielding
investments. In addition, we sold a significant portion of our equity securities
portfolio in 1999 and 1998 to reduce our exposure to common stock and to realize
appreciation in value. Additionally, we reduced our investments in real estate
in 1999 and 1998 to reduce our exposure to this asset class. We actively managed
our portfolio of residential mortgage-backed securities to ensure that the
securities we held traded close to or below par to manage prepayment risk. These
activities resulted in the realization of capital gains and losses.

    Benefits, claims and settlement expenses increased $171.9 million, or 3%, to
$5,260.9 million in 1999, from $5,089.0 million in 1998. The increase was
primarily due to a $288.2 million, or 14%, increase from the U.S. Asset
Management and Accumulation segment, related primarily to a larger block of
single premium group annuities with life contingencies. The increase was also
due to a $109.6 million, or 4%, increase from the Life and Health Insurance
segment, reflecting an increase in group medical and group Medicare supplement
benefits. This increase was also due to reserve changes in 1999, which were
primarily due to claim reserves established as a result of poor claim

                                        58

experience during the first three quarters of 1999 and an expectation that
claims would continue to increase through the second quarter of 2000. The
increase was also due to a $44.9 million, or 27%, increase from the
International Asset Management and Accumulation segment, primarily attributable
to the addition of benefits, claims and settlement expenses from El Roble, which
we acquired in July 1998, and an increase in the change in reserves due to sales
of single premium group annuities with life contingencies in Spain and Mexico.
The increases were partially offset by a $270.8 million decrease from the
Corporate and Other segment, primarily related to our HMO operations, which
generated benefits, claims and settlement expenses in 1998, prior to being
transferred to Coventry.

    Dividends to policyholders increased $5.9 million, or 2%, to $304.6 million
in 1999, from $298.7 million in 1998. The increase was due to a $10.3 million
increase from the U.S. Asset Management and Accumulation segment, a reflection
of lower dividends in 1998, as several large group annuity contracts renewed in
the form of non-participating contracts in 1998. The increase was partially
offset by a $4.4 million, or 1%, decrease from the Life and Health Insurance
segment, primarily related to a decrease in group life and health insurance
dividends when compared to 1998. After July 1, 1998, new issues and renewals of
group life and health contracts were in the form of non-participating policies.
These policies included experience refund provisions that were reported as
reductions of premiums in 1999, instead of as dividends to policyholders. The
change in presentation did not affect net income. The Life and Health Insurance
segment dividend decrease was partially offset by an increase in individual
traditional life insurance dividends due to increases in the cash values of
policies and in the interest rates credited to the policies.

    Operating expenses decreased $3.7 million to $2,070.3 million in 1999, from
$2,074.0 million in 1998. The decrease was primarily due to a $198.0 million, or
79%, decrease from the Corporate and Other segment, primarily due to our HMO
operations which generated operating expenses in 1998, prior to the transfer of
those operations to Coventry. The decrease was also attributable to a $29.0
million, or 3%, decrease from the Life and Health Insurance segment, primarily
related to a decrease in amortization of deferred policy acquisition costs for
individual life and disability insurance in 1999, compared to 1998. Amortization
was higher in 1998 due to loss recognition on older blocks of business. The
decreases were partially offset by a $120.1 million increase from the
International Asset Management and Accumulation segment, primarily due to the
addition of BT Financial Group in August 1999. BT Financial Group's operating
expenses included $13.7 million of amortization of goodwill and other
intangibles. The decreases were also partially offset by a $60.6 million, or
24%, increase from the Mortgage Banking segment, primarily due to an increase in
amortization of residential mortgage loan servicing rights, a result of the
increase in the residential mortgage loan servicing portfolio. The decreases
were also partially offset by a $42.6 million, or 7%, increase from the U.S.
Asset Management and Accumulation segment, primarily related to Principal
Capital Management, which was included in this segment at the beginning of 1999.

    Income taxes increased $281.3 million to $323.5 million in 1999, from $42.2
million in 1998. The effective income tax rate was 30% in 1999 and 6% in 1998,
compared to the U.S. corporate income tax rate of 35%. The effective income tax
rate was lower than the corporate income tax rate in 1999, primarily due to tax
exempt income. The rate was also reduced due to higher deferred taxes related to
health reserves in 1998, the effects of which were reversed in 1999. The
effective income tax rate was lower than the corporate income tax rate of 35% in
1998, primarily due to Principal Life's release of a tax reserve, as previously
discussed under the caption "-- Transactions Affecting Comparability of Results
of Operations -- Operating Earnings and Non-Recurring Items," and related
accrued interest in the amount of $164.4 million, consisting of $145.4 million
in taxes and $19.0 million of interest.

    As a result of the foregoing factors, net income increased $49.1 million, or
7%, to $742.1 million in 1999, from $693.0 million in 1998.

    In 1998, non-recurring items of $104.8 million, net of tax, included: the
positive effects of (1) a favorable settlement of a contingent tax matter
($164.4 million), see "-- Transactions Affecting Comparability of Results of
Operations -- Operating Earnings and Non-Recurring Items," and (2) accounting
changes by our international operations ($13.3 million); and the negative
effects of (1) expenses related to our corporate structure change to a mutual
insurance holding company and related adjustments for changes in amortization
assumptions for deferred policy acquisition costs ($27.4 million) and (2) a
contribution related to permanent endowment of the Principal Financial Group
Foundation ($45.5 million).

    Operating earnings increased $207.7 million, or 78%, to $475.2 million in
1999, from $267.5 million in 1998. The increase resulted from a $118.2 million,
or 50%, increase from the U.S. Asset Management and Accumulation segment,
primarily resulting from growth in our pension full service accumulation
business. The increase was also due to a $53.8 million increase from the
Corporate and Other segment, primarily due to the absence of losses from our HMO
operations in 1999, a result of the transfer of our HMO operations to Coventry
in 1998. In addition, the increase was due to a $40.7 million, or 81%, increase
from the Life and Health Insurance segment, primarily due to increased earnings
from our individual life insurance business and, to a lesser extent, increases
in earnings from our group disability insurance business. These increases were
partially offset by a $3.0 million, or 8%, decrease from the International Asset
Management and Accumulation segment, primarily attributable to an increase in
operating expenses related to BT Financial Group, which we acquired in August
1999. These increases were also partially offset by a $2.0 million, or 3%,
decrease from the Mortgage Banking segment.

                                        59

RESULTS OF OPERATIONS BY SEGMENT

    We evaluate segment performance by segment operating earnings, which
excludes the effect of net realized capital gains and losses, as adjusted, and
non-recurring events and transactions. Segment operating earnings is determined
by adjusting GAAP net income for net realized capital gains and losses, as
adjusted, and non-recurring items that we believe are not indicative of overall
operating trends. While these items may be significant components in
understanding and assessing our consolidated financial performance, we believe
the presentation of segment operating earnings enhances the understanding of our
results of operations by highlighting earnings attributable to the normal,
recurring operations of our businesses. However, segment operating earnings are
not a substitute for net income determined in accordance with GAAP.

    The following table presents segment information as of or for the six months
ended June 30, 2001 and 2000, and as of or for each of the years ended December
31, 2000, 1999 and 1998:

                                                            AS OF OR FOR THE SIX
                                                                MONTHS ENDED           AS OF OR FOR THE YEAR ENDED
                                                                  JUNE 30,                    DECEMBER 31,
                                                            ---------------------   ---------------------------------
                                                              2001        2000        2000        1999        1998
                                                            ---------   ---------   ---------   ---------   ---------
                                                                                 ($ IN MILLIONS)
                                                                                             
OPERATING REVENUES BY SEGMENT:
U.S. Asset Management and Accumulation(2).................  $ 1,858.2   $ 1,700.7   $ 3,533.9   $ 3,472.6   $ 2,933.1
International Asset Management and Accumulation...........      310.1       309.5       630.7       379.6       223.1
Life and Health Insurance.................................    1,978.2     2,100.7     4,122.6     3,985.5     3,893.1
Mortgage Banking..........................................      293.1       180.7       359.8       398.3       340.6
Corporate and Other(1)(2).................................       57.5        40.5        97.1        61.9       342.5
                                                            ---------   ---------   ---------   ---------   ---------
  Total operating revenues................................    4,497.1     4,332.1     8,744.1     8,297.9     7,732.4
Net realized capital gains (losses), including recognition
  of front-end fee revenues(3)............................     (176.4)       33.4       140.8       403.5       464.5
                                                            ---------   ---------   ---------   ---------   ---------
         Total consolidated revenues......................  $ 4,320.7   $ 4,365.5   $ 8,884.9   $ 8,701.4   $ 8,196.9
                                                            =========   =========   =========   =========   =========
OPERATING EARNINGS (LOSS) BY SEGMENT:
U.S. Asset Management and Accumulation....................  $   176.9   $   177.3   $   356.6   $   356.6   $   238.4
International Asset Management and Accumulation...........       (4.7)       (3.7)       (8.5)      (38.4)      (35.4)
Life and Health Insurance.................................       90.9        86.0       162.3        90.7        50.0
Mortgage Banking..........................................       68.8        34.4        50.0        56.8        58.8
Corporate and Other.......................................       32.1         4.0        67.7         9.5       (44.3)
                                                            ---------   ---------   ---------   ---------   ---------
         Total operating earnings.........................      364.0       298.0       628.1       475.2       267.5
Net realized capital gains (losses), as adjusted(3).......     (108.2)       23.1        93.1       266.9       320.7
Non-recurring items(4)....................................      (31.4)      (75.8)     (101.0)         --       104.8
                                                            ---------   ---------   ---------   ---------   ---------
GAAP REPORTED:
Net income................................................  $   224.4   $   245.3   $   620.2   $   742.1   $   693.0
                                                            =========   =========   =========   =========   =========
TOTAL ASSETS BY SEGMENT:
U.S. Asset Management and Accumulation....................  $66,182.4   $65,109.4   $65,795.9   $65,096.4   $58,701.5
International Asset Management and Accumulation...........    4,919.6     5,547.3     5,525.9     5,926.8     1,239.4
Life and Health Insurance.................................   10,637.2    10,293.8    10,569.0    10,070.8     9,219.5
Mortgage Banking..........................................    2,168.9     1,606.3     1,556.3     1,737.7     1,810.4
Corporate and Other(5)....................................    1,321.6     1,789.5       957.8     1,121.5     3,075.9
                                                            ---------   ---------   ---------   ---------   ---------
         Total assets.....................................  $85,229.7   $84,346.3   $84,404.9   $83,953.2   $74,046.7
                                                            =========   =========   =========   =========   =========

---------------

(1) Includes inter-segment eliminations primarily related to real estate joint
    venture rental income and internal investment management fee revenues. The
    Corporate and Other segment reported rental income from real estate joint
    ventures for office space used by other segments.

(2) The U.S. Asset Management and Accumulation segment received fee revenues for
    performing investment management services for other segments in 2001, 2000
    and 1999. The Corporate and Other segment received fee revenues for
    performing investment management services for other segments prior to 1999.

                                        60

(3) Net realized capital gains (losses), as adjusted, are net of tax, related
    changes in the amortization pattern of deferred policy acquisition costs,
    recognition of front-end fee revenues for sales charges on pension products
    and services and net realized capital gains credited to customers. This
    presentation may not be comparable to presentations made by other companies.

                                                                    FOR THE SIX
                                                                    MONTHS ENDED         FOR THE YEAR ENDED
                                                                      JUNE 30,              DECEMBER 31,
                                                                  ----------------   --------------------------
                                                                   2001      2000     2000     1999      1998
                                                                  -------   ------   ------   -------   -------
                                                                                 ($ IN MILLIONS)
                                                                                         
    Net realized capital gains (losses).........................  $(176.9)  $ 31.5   $139.9   $ 404.5   $ 465.8
    Recognition of front-end fee revenues.......................      0.5      1.9      0.9      (1.0)     (1.3)
                                                                  -------   ------   ------   -------   -------
      Net realized capital gains (losses), including recognition
        of front-end fee revenues...............................   (176.4)    33.4    140.8     403.5     464.5
    Amortization of deferred policy acquisition costs related to
      net realized capital gains (losses).......................      3.9     (3.4)    (0.3)      4.4       5.7
    Amounts credited to contractholder accounts.................       --       --       --        --     (26.3)
    Non-recurring net realized capital losses...................       --       --       --        --      (1.7)
                                                                  -------   ------   ------   -------   -------
      Net realized capital gains (losses), including recognition
        of front-end fee revenues, net of related amortization
        of deferred policy acquisition costs and amounts
        credited to contractholders.............................   (172.5)    30.0    140.5     407.9     442.2
    Income tax effect...........................................     64.3     (6.9)   (47.4)   (141.0)   (121.5)
                                                                  -------   ------   ------   -------   -------
      Net realized capital gains (losses), as adjusted..........  $(108.2)  $ 23.1   $ 93.1   $ 266.9   $ 320.7
                                                                  =======   ======   ======   =======   =======

(4) For the six months ended June 30, 2001, non-recurring items of $31.4
    million, net of tax, included the negative effects of: (a) expenses related
    to our demutualization ($14.8 million); (b) a cumulative effect of change in
    accounting principle related to our implementation of SFAS 133 ($10.7
    million); and (c) a loss contingency reserve established for sales practices
    litigation ($5.9 million). For the six months ended June 30, 2000, non-
    recurring items of $75.8 million, net of tax, included the negative effects
    of: (a) a loss contingency reserve established for sales practices
    litigation ($75.0 million), and (b) expenses related to our demutualization
    ($0.8 million). For the year ended December 31, 2000, non-recurring items of
    $101.0 million, net of tax, included the negative effects of: (a) a loss
    contingency reserve established for sales practices litigation ($93.8
    million) and (b) expenses related to our demutualization ($7.2 million). For
    the year ended December 31, 1998, non-recurring items of $104.8 million, net
    of tax, included: the positive effects of (a) a favorable settlement of a
    contingent tax matter ($164.4 million), see "-- Transactions Affecting
    Comparability of Results of Operations -- Operating Earnings and
    Non-Recurring Items," and (b) accounting changes by our international
    operations ($13.3 million); and the negative effects of (a) expenses related
    to our corporate structure change to a mutual insurance holding company and
    related adjustments for changes in amortization assumptions for deferred
    policy acquisition costs ($27.4 million) and (b) a contribution related to
    permanent endowment of the Principal Financial Group Foundation ($45.5
    million).

(5) Includes inter-segment elimination amounts related to internally generated
    mortgage loans and an internal line of credit. The U.S. Asset Management and
    Accumulation segment and Life and Health Insurance segment reported mortgage
    loan assets issued for real estate joint ventures. These mortgage loans were
    reported as liabilities in the Corporate and Other segment. In addition, the
    Corporate and Other segment managed a revolving line of credit used by other
    segments.

                                        61

U.S. ASSET MANAGEMENT AND ACCUMULATION SEGMENT

    The table below presents certain summary financial data relating to the U.S.
Asset Management and Accumulation segment for the periods indicated:

                                                     FOR THE SIX MONTHS          FOR THE YEAR ENDED
                                                       ENDED JUNE 30,               DECEMBER 31,
                                                     -------------------   ------------------------------
                                                       2001       2000       2000       1999       1998
                                                     --------   --------   --------   --------   --------
                                                                       ($ IN MILLIONS)
                                                                                  
OPERATING EARNINGS DATA:
Operating revenues(1):
  Premiums and other considerations................  $  330.0   $  200.8   $  525.4   $  566.7   $  281.7
  Fees and other revenues..........................     320.8      350.7      704.6      616.2      450.8
  Net investment income............................   1,207.4    1,149.2    2,303.9    2,289.7    2,200.6
                                                     --------   --------   --------   --------   --------
         Total operating revenues..................   1,858.2    1,700.7    3,533.9    3,472.6    2,933.1
Expenses:
  Benefits, claims and settlement expenses,
    including dividends to policyholders...........   1,242.9    1,092.8    2,315.2    2,344.3    2,019.5
  Operating expenses...............................     399.5      359.4      740.9      626.3      592.3
                                                     --------   --------   --------   --------   --------
         Total expenses............................   1,642.4    1,452.2    3,056.1    2,970.6    2,611.8
                                                     --------   --------   --------   --------   --------
Pre-tax operating earnings.........................     215.8      248.5      477.8      502.0      321.3
Income taxes.......................................      38.9       71.2      121.2      145.4       82.9
                                                     --------   --------   --------   --------   --------
Operating earnings.................................     176.9      177.3      356.6      356.6      238.4

Net realized capital gains (losses), as adjusted...     (40.8)     (35.1)     (35.9)     (35.4)      14.7
Non-recurring items................................     (10.8)        --         --         --       23.9
                                                     --------   --------   --------   --------   --------
GAAP REPORTED:
Net income.........................................  $  125.3   $  142.2   $  320.7   $  321.2   $  277.0
                                                     ========   ========   ========   ========   ========

---------------

(1) Excludes net realized capital gains (losses) and their impact on recognition
    of front-end fee revenues.

  SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000

    Premiums and other considerations increased $129.2 million, or 64%, to
$330.0 million for the six months ended June 30, 2001, from $200.8 million for
the six months ended June 30, 2000. The increase was primarily due to a $128.5
million increase in premiums from single premium group annuities with life
contingencies, which are typically used to fund defined benefit pension plan
terminations. The premium income we receive from these contracts fluctuates due
to the variability in the number and size of pension plan terminations in the
market and our ability to attract new sales.

    Fees and other revenues decreased $29.9 million, or 9%, to $320.8 million
for the six months ended June 30, 2001, from $350.7 million for the six months
ended June 30, 2000. The decrease was primarily due to a $32.2 million decrease
in surrender charge revenues from pension products, as fewer customers
surrendered their products due to the declining interest rate environment. A
decrease of $9.4 million was primarily due to intra-segment eliminations. In
addition, a $2.6 million decrease was primarily a result of lower commission fee
revenues from sales of third-party mutual funds and lower mutual fund fee
revenues reflecting a decrease in mutual fund assets under management. The
decreases were partially offset by an increase of $14.4 million related to
Principal Capital Management, primarily the result of revenues attributable to
commercial mortgage-backed securitizations.

    Net investment income increased $58.2 million, or 5%, to $1,207.4 million
for the six months ended June 30, 2001, from $1,149.2 million for the six months
ended June 30, 2000. The increase was primarily due to a $2,327.8 million, or
8%, increase in average invested assets and cash for the segment. The yield on
average invested assets and cash was 7.3% for the six months ended June 30,
2001, compared to 7.5% for the six months ended June 30, 2000, reflecting an
increase in cash and cash equivalents, which earns lower yields than invested
assets.

    Benefits, claims and settlement expenses, including dividends to
policyholders, increased $150.1 million, or 14%, to $1,242.9 million for the six
months ended June 30, 2001, from $1,092.8 million for the six months ended June
30, 2000. An increase of $143.0 million in our pension full-service payout
business primarily reflected the increase in reserves resulting from an increase
in sales of single premium group annuities with life contingencies. An
additional $41.8 million increase related to our pension investment-only
business was primarily due to an increase in interest credited due to growth in
our investment-only business. Partially offsetting the increases was a $38.8
million decrease in our pension

                                        62

full-service accumulation business reflecting a decrease in interest credited,
primarily a result of a decrease in average crediting rates.

    Operating expenses increased $40.1 million, or 11%, to $399.5 million for
the six months ended June 30, 2001, from $359.4 million for the six months ended
June 30, 2000. An increase of $23.9 million related to our pension business was
primarily due to an increase in compensation costs resulting from growth in
operations and an increase related to the net impact of capitalization and
amortization of deferred policy acquisition costs. An increase of $15.3 million
for Principal Bank was primarily related to growth in bank operations.
Additionally, an increase of $13.8 million related to Principal Capital
Management was primarily the result of an increase in compensation costs
resulting from growth in operations. The increases were partially offset by a
$9.4 million decrease resulting from intra-segment eliminations and a $4.3
million decrease in mutual fund commissions.

    Income taxes decreased $32.3 million, or 45%, to $38.9 million for the six
months ended June 30, 2001, from $71.2 million for the six months ended June 30,
2000. The effective income tax rate for this segment was 18% for the six months
ended June 30, 2001, and 29% for the six months ended June 30, 2000. The
effective income tax rates for the six months ended June 30, 2001 and 2000 were
lower than the corporate income tax rate of 35%, primarily due to income tax
deductions allowed for corporate dividends received, for which the estimated
benefit recognition rate increased during the six months ended June 30, 2001,
compared to the six months ended June 30, 2000, and other tax-exempt income.

    As a result of the foregoing factors, operating earnings decreased $0.4
million to $176.9 million for the six months ended June 30, 2001, from $177.3
million for the six months ended June 30, 2000.

    Net realized capital losses, as adjusted, increased $5.7 million, or 16%, to
$40.8 million for the six months ended June 30, 2001, from $35.1 million for the
six months ended June 30, 2000. The increase reflects the current period impact
of SFAS 133 for derivatives, losses resulting from the permanent impairment of
certain equity and fixed maturity securities and fewer real estate sales in the
six months ended June 30, 2001, compared to the six months ended June 30, 2000.
The increases were partially offset by the positive effects of a change in the
mortgage loan valuation allowance, primarily reflecting the decrease in the
amount invested in commercial mortgage loans. In addition, there was a decrease
in losses related to sales of fixed maturity securities, reflecting a decrease
in portfolio activity in 2001.

    As a result of the foregoing factors and the inclusion of non-recurring
items for the six months ended June 30, 2001, net income decreased $16.9
million, or 12%, to $125.3 million for the six months ended June 30, 2001, from
$142.2 million for the six months ended June 30, 2000. Non-recurring items for
the six months ended June 30, 2001, had a negative impact on net income of $10.8
million, net of tax, due to the cumulative effect of accounting change, net of
income taxes, related to our implementation of SFAS 133, as previously discussed
under the caption "-- Transactions Affecting Comparability of Results of
Operations -- Operating Earnings and Non-Recurring Items."

  YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

    Premiums and other considerations decreased $41.3 million, or 7%, to $525.4
million in 2000, from $566.7 million in 1999. The decrease was primarily due to
a $43.3 million decrease in premiums from single premium group annuities with
life contingencies, which are typically used to fund defined benefit pension
plan terminations. The premium income we receive from these contracts fluctuates
due to the variability in the number and size of pension plan terminations in
the market and our ability to attract new sales. This decrease was partially
offset by a $2.0 million increase related to increased sales of our single
premium individual annuities with life contingencies.

    Fees and other revenues increased $88.4 million, or 14%, to $704.6 million
in 2000, from $616.2 million in 1999. The increase was primarily related to a
$74.2 million increase in administrative fee revenues for pension products and
services. The increase in administrative fee revenues reflected an increase in
the amortization of front-end fee revenues, a result of a change in our
assumptions related to amortization of deferred policy acquisition costs
attributable to pension products. We also received higher fee revenues from
surrender charges and pension customer-directed investment transfers, reflecting
the higher interest rate environment and increased customer account activity.
The increase in fee revenues was also due in part to growth in assets under
management related to our pension products in 1999. An increase of $13.0 million
was primarily due to investment management fee revenues from our mutual fund
business and commission fee revenues related to sales of third-party mutual
funds. An increase of $5.6 million in individual annuity fees, primarily a
result of growth in separate account assets related to individual annuity
products, also contributed to the segment increase. The increase in fees and
other revenues was partially offset by a $5.6 million decrease in fee revenues
related to Principal Capital Management, primarily a result of a decrease in
proceeds related to commercial mortgage-backed securitization transactions.

    Net investment income increased $14.2 million, or 1%, to $2,303.9 million in
2000, from $2,289.7 million in 1999. The increase was primarily due to a
$1,561.6 million, or 5%, increase in average invested assets and cash for the
segment. The yield on average invested assets and cash was 7.3% in 2000,
compared to 7.6% in 1999, due to a decrease in interest credited on assets
backing allocated capital. The decrease in interest credited was partially
offset by higher interest rates on fixed income investments backing product
liabilities.

                                        63

    Benefits, claims and settlement expenses, including dividends to
policyholders, decreased $29.1 million, or 1%, to $2,315.2 million in 2000, from
$2,344.3 million in 1999. A decrease of $26.7 million in benefits and reserve
changes, and a $4.5 million decrease in dividends to policyholders were both
related to our full-service pension accumulation products, reflecting the
decrease in our block of pension experience rated business and an increase in
our guaranteed business. An additional $21.4 million decrease was attributable
to decreased sales of single premium group annuities with life contingencies.
Partially offsetting these decreases was a $19.5 million increase related to our
investment-only business, primarily reflecting an increase in interest credited
due to the growth in our investment-only business. An additional $3.8 million
increase was primarily related to an increase in interest credited on individual
fixed annuities and the fixed component of variable annuities, a result of
higher interest crediting rates during 2000.

    Operating expenses increased $114.6 million, or 18%, to $740.9 million in
2000, from $626.3 million in 1999. An increase of $57.3 million was primarily
due to a change in our assumptions related to amortization of deferred policy
acquisition costs attributable to pension products. An additional $28.7 million
increase was primarily related to an increase in pension salary and incentive
compensation costs and other pension administrative costs. Operating expenses
also increased $9.7 million for our mutual fund business, primarily the result
of increased sales of third-party mutual funds and also due to other mutual fund
operating expenses. An $8.3 million increase in operating expenses related to
our individual annuity business was primarily due to an increase in amortization
of deferred policy acquisition costs. Additionally, a $6.5 million increase in
operating expenses for Principal Capital Management was primarily related to an
increase in incentive compensation costs.

    Income taxes decreased $24.2 million, or 17%, to $121.2 million in 2000,
from $145.4 million in 1999. The effective income tax rate for this segment was
25% in 2000, and 29% in 1999. The effective tax rates were lower than the
corporate income tax rate of 35%, primarily due to income tax deductions allowed
for corporate dividends received and other tax-exempt income.

    As a result of the foregoing factors, operating earnings were $356.6 million
in both 2000 and 1999.

    Net realized capital losses, as adjusted, increased to $35.9 million in
2000, from $35.4 million in 1999. This segment recognized net realized capital
losses consistent with our change in investment philosophy, which increased
portfolio activity. We repositioned the investment portfolio to maximize
operating investment returns by selling lower yielding fixed income securities
to allow for reinvestment in higher yielding fixed income securities. This
repositioning of the portfolio generated net realized capital losses.

    As a result of the foregoing factors, net income decreased to $320.7 million
in 2000, from $321.2 million in 1999.

  YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

    Premiums and other considerations increased $285.0 million, or 101%, to
$566.7 million in 1999 from $281.7 million in 1998. The increase was primarily
due to a $279.9 million increase in premiums for single premium group annuities
with life contingencies, which are typically used to fund defined benefit
pension plan terminations. The premium income we receive from these contracts
fluctuates due to the variability in the number and size of defined benefit
pension plan terminations in the market and our ability to attract new sales.
The increase in premiums and other considerations was also due to a $5.1 million
increase related to increased sales of single premium individual annuities with
life contingencies.

    Fees and other revenues increased $165.4 million, or 37%, to $616.2 million
in 1999, from $450.8 million in 1998. The increase was primarily contributed by
our U.S. asset management operations, as we included Principal Capital
Management in this segment at the beginning of 1999. Fees and other revenues
contributed in 1999 by Principal Capital Management were $74.6 million. In
addition, an increase of $71.8 million in fees and other revenues from our
pension products contributed to the increase, as a result of growth in assets
under management, which benefited from strong equity market performance in 1999
and an increase in net deposits received from customers, particularly in early
1999. The increase in fees and other revenues was also due to an $11.9 million
increase in mutual fund fee revenues, primarily due to an increase in assets
under management in our mutual fund business. The growth in assets under
management related to our individual annuity products also contributed to a $6.9
million increase in fees and other revenues, which reflected the increase in new
deposits related to individual variable annuity sales and strong market
performance.

    Net investment income increased $89.1 million, or 4%, to $2,289.7 million in
1999, from $2,200.6 million in 1998. The increase was primarily due to a $858.6
million, or 3%, increase in average invested assets and cash for the segment.
The yield on average invested assets and cash was 7.6% in 1999 and 7.5% in 1998.

    Benefits, claims and settlement expenses, including dividends to
policyholders, increased $324.8 million, or 16%, to $2,344.3 million in 1999,
from $2,019.5 million in 1998. An increase of $227.6 million was primarily due
to a larger block of single premium group annuities with life contingencies.
Additionally, the growth in our block of group annuities caused a $93.6 million
increase in interest credited to guaranteed business. In addition, a $10.3
million increase in dividends to policyholders was a reflection of lower
dividends in 1998, a result of several large group annuity contracts that
renewed in the form of non-participating contracts in 1998. These increases were
partially offset by a $9.9 million

                                        64

decrease, primarily due to a decrease in interest credited on individual
annuities, the result of a smaller block of single premium individual annuities
with life contingencies reflecting terminations that exceeded new sales. The
decrease in interest credited was also due to lower interest crediting rates in
1999 compared to 1998.

    Operating expenses increased $34.0 million, or 6%, to $626.3 million in
1999, from $592.3 million in 1998. The increase was primarily due to higher
operating expenses from our U.S. asset management operations, related to
Principal Capital Management, which was included in this segment at the
beginning of 1999. Operating expenses attributable to Principal Capital
Management were $68.9 million. The increase was also due to a $7.4 million
increase in operating expenses, primarily related to growth in our individual
annuity business, reflected by increases in general expenses, taxes, licenses
and fees and amortization of deferred policy acquisition costs. Additionally, we
experienced an $8.4 million increase, primarily attributable to increased
commissions and other general expenses related to our mutual fund business. The
increases were partially offset by a $35.6 million decrease in operating
expenses related to our pension products and services, which reflect higher
expenses in 1998 related to the costs of implementing new retirement plan
processing technology. In addition, a $16.6 million decrease was due to a
write-down of goodwill in 1998, reflecting continued operating losses and
significantly reduced cash flow forecasts of Trust Consultants, Inc., a pension
administration subsidiary.

    Income taxes increased $62.5 million, or 75%, to $145.4 million in 1999 from
$82.9 million in 1998. The effective income tax rate for this segment was 29% in
1999 and 26% in 1998, compared to the U.S. corporate income tax rate of 35%. The
effective income tax rate was lower than the corporate income tax rate in 1999
and 1998, due to tax exempt income related primarily to dividends received
deductions. Although tax exempt income for the segment increased over 1998
levels, the increase in the effective tax rate for 1999 was due to the increase
in taxable operating earnings for the segment.

    As a result of the foregoing factors, operating earnings increased $118.2
million, or 50%, to $356.6 million in 1999, from $238.4 million in 1998.

    Net realized capital gains, as adjusted, decreased $50.1 million to net
realized capital losses of $35.4 million in 1999, from $14.7 million of net
realized capital gains in 1998. This segment recognized net realized capital
losses consistent with our change in investment philosophy, which increased
portfolio activity. Specifically, we repositioned the investment portfolio to
maximize operating investment returns by selling lower yielding invested assets
to allow for reinvestment in higher yielding investments. This repositioning of
the portfolio generated net realized capital losses.

    As a result of the foregoing factors and the inclusion of non-recurring
items in 1998, net income increased $44.2 million, or 16%, to $321.2 million in
1999, from $277.0 million in 1998. In 1998, net income for this segment included
non-recurring items totaling $23.9 million, net of tax, related to a release of
a tax reserve, as previously discussed under the caption "-- Transactions
Affecting Comparability of Results of Operations -- Operating Earnings and
Non-Recurring Items".

                                        65

INTERNATIONAL ASSET MANAGEMENT AND ACCUMULATION SEGMENT

    The table below presents certain summary financial data relating to the
International Asset Management and Accumulation segment for the periods
indicated:

                                                                FOR THE SIX
                                                               MONTHS ENDED        FOR THE YEAR ENDED
                                                                 JUNE 30,             DECEMBER 31,
                                                              ---------------   ------------------------
                                                               2001     2000     2000     1999     1998
                                                              ------   ------   ------   ------   ------
                                                                           ($ IN MILLIONS)
                                                                                   
OPERATING EARNINGS DATA:
Operating revenues(1):
  Premiums and other considerations.........................  $110.0   $108.9   $220.5   $179.9   $147.1
  Fees and other revenues...................................   139.5    153.0    305.2    105.6     28.1
  Net investment income.....................................    60.6     47.6    105.0     94.1     47.9
                                                              ------   ------   ------   ------   ------
         Total operating revenues...........................   310.1    309.5    630.7    379.6    223.1
Expenses:
  Benefits, claims and settlement expenses..................   139.6    126.9    262.2    210.1    165.2
  Operating expenses........................................   177.5    184.1    372.3    212.1    101.2
                                                              ------   ------   ------   ------   ------
         Total expenses.....................................   317.1    311.0    634.5    422.2    266.4
                                                              ------   ------   ------   ------   ------
Pre-tax operating loss......................................    (7.0)    (1.5)    (3.8)   (42.6)   (43.3)
Income taxes (benefits).....................................    (2.3)     2.2      4.7     (4.2)    (7.9)
                                                              ------   ------   ------   ------   ------
Operating loss..............................................    (4.7)    (3.7)    (8.5)   (38.4)   (35.4)

Net realized capital gains (losses), as adjusted............   (21.2)     3.5      1.4      7.7     12.0
Non-recurring items.........................................      --       --       --       --     13.3
                                                              ------   ------   ------   ------   ------
GAAP REPORTED:
Net loss....................................................  $(25.9)  $ (0.2)  $ (7.1)  $(30.7)  $(10.1)
                                                              ======   ======   ======   ======   ======
OTHER DATA:
Operating earnings (loss):
    Principal International.................................  $  1.1   $ (9.6)  $(14.8)   (33.6)  $(35.4)
    BT Financial Group......................................    (5.8)     5.9      6.3     (4.8)      --

Operating earnings (loss) before amortization of goodwill
  and other intangibles:
    Principal International.................................  $  5.8   $ (4.7)  $ (3.9)  $(31.3)  $(28.5)
    BT Financial Group......................................     9.0     19.2     32.4      6.7       --

---------------

(1) Excludes net realized capital gains (losses) and their impact on recognition
    of front-end fee revenues.

  SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000

    Premiums and other considerations increased $1.1 million, or 1%, to $110.0
million for the six months ended June 30, 2001, from $108.9 million for the six
months ended June 30, 2000. An increase of $23.5 million in Mexico was primarily
the result of increased sales of single premium annuities with life
contingencies, primarily generated as a result of additional agents. In
addition, a $4.8 million increase in Argentina was primarily the result of
increased sales of single premium annuities with life contingencies and group
life insurance products. The increases were partially offset by the loss of
$24.6 million of premiums and other considerations due to the February 2001
divestiture of our operations in Spain. In addition, a $2.9 million decrease was
primarily due to the weakening of the Chilean peso versus the U.S. dollar.

    Fees and other revenues decreased $13.5 million, or 9%, to $139.5 million
for the six months ended June 30, 2001, from $153.0 million for the six months
ended June 30, 2000. The decrease was primarily related to a $21.8 million
decrease of fee revenues contributed by BT Financial Group, primarily a result
of the weakening of the Australian dollar versus the U.S. dollar and, to a
lesser extent, due to declining assets under management for the six months ended
June 30, 2001. The decrease was partially offset by an $8.1 million increase in
Principal International fee revenues, a result of assets under management growth
in Mexico and Argentina and deposits growth in Hong Kong resulting from sales to
plans established under the new Mandatory Provident Fund, which started in
December 2000.

    Net investment income increased $13.0 million, or 27%, to $60.6 million for
the six months ended June 30, 2001, from $47.6 million for the six months ended
June 30, 2000. The increase was primarily attributable to a $19.9 million
increase from Principal International related to a 14% increase in average
invested assets and an increase in investment yields. The yield on average
invested assets and cash was 9.7% for the six months ended June 30, 2001,

                                        66

compared to 6.9% for the six months ended June 30, 2000. The increase in
investment yields was partially due to the impact of inflation adjustments in
Chile, which was offset by a corresponding increase in reserve changes. The
increase in net investment income was partially offset by the $4.3 million loss
of net investment income resulting from the divestiture of our operations in
Spain. In addition, a decrease of $1.5 million of equity method net investment
income was related to our pro rata share of net loss of ING/Principal Pensions
Co., Ltd., a pension company in Japan in which we acquired a minority interest
in January 2000. The increase was also partially offset by a $0.6 million
decrease related to the operations of BT Financial Group.

    Benefits, claims and settlement expenses increased $12.7 million, or 10%, to
$139.6 million for the six months ended June 30, 2001, from $126.9 million for
the six months ended June 30, 2000. The increase was primarily due to an
increase in reserve changes and policy and contract benefit payments of $23.9
million in Mexico and $2.8 million in Argentina, the result of increased sales
of single premium annuities with life contingencies. The increase was also
related to a $13.7 million increase in Chile, primarily related to an increase
in reserve changes to reflect the impact of inflation adjustments. The increases
were partially offset by the loss of $27.6 million of benefits, claims and
settlement expenses resulting from the divestiture of our operations in Spain.

    Operating expenses decreased $6.6 million, or 4%, to $177.5 million for the
six months ended June 30, 2001, from $184.1 million for the six months ended
June 30, 2000. The decrease was primarily due to a $5.1 million decrease of
operating expenses incurred by BT Financial Group, primarily resulting from the
weakening of the Australian dollar versus the U.S. dollar. The decrease was
partially offset by an increase in compensation costs resulting primarily from
annual pay increases and an increase in amortization of goodwill and other
intangibles. The decrease was also due to the loss of $3.3 million of operating
expenses resulting from the divestiture of our operations in Spain. In addition,
a $3.0 million decrease was primarily due to the weakening of the Chilean peso
and the Indonesian rupiah versus the U.S. dollar. The decreases were partially
offset by a $4.6 million increase in Mexico, primarily attributable to
commissions and compensation resulting from increased sales.

    Income tax expense (benefits) decreased $4.5 million to a $2.3 million
income tax benefit for the six months ended June 30, 2001, from $2.2 million of
income tax expense for the six months ended June 30, 2000. The decrease was
primarily due to a decrease in pre-tax operating earnings from BT Financial
Group.

    As a result of the foregoing factors, operating loss increased $1.0 million,
or 27%, to $4.7 million for the six months ended June 30, 2001, from $3.7
million for the six months ended June 30, 2000.

    Net realized capital gains (losses), as adjusted, decreased $24.7 million to
$21.2 million of net realized capital losses for the six months ended June 30,
2001, from $3.5 million of net realized capital gains for the six months ended
June 30, 2000. The decrease was primarily due to a $21.0 million after-tax net
realized capital loss on the February 2001 sale of our operations in Spain. In
addition, a $4.1 million decrease was related to net realized capital gains from
our operations in Spain for the six months ended June 30, 2000.

    As a result of the foregoing factors, net loss increased $25.7 million to
$25.9 million for the six months ended June 30, 2001, from $0.2 million for the
six months ended June 30, 2000.

  YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

    Premiums and other considerations increased $40.6 million, or 23%, to $220.5
million in 2000, from $179.9 million in 1999. Increases of $16.9 million in
Mexico, $16.7 million in Argentina and $5.9 million in Chile were primarily a
result of increased sales of single premium annuities with life contingencies.
The increased sales in Mexico were primarily a result of sales by Principal
Pensiones, S.A. de C.V., an annuity company we established in July 1999. The
increased sales in Argentina primarily resulted from sales by an annuity company
we established in August 1999.

    Fees and other revenues increased $199.6 million to $305.2 million in 2000,
from $105.6 million in 1999. The increase was primarily related to a $180.2
million increase resulting from the contribution of fee revenues by BT Financial
Group, which we acquired in August 1999. In addition, an $8.1 million increase
was primarily due to lower fees and other revenues recognized in 1999 related to
El Roble in Chile. An additional $6.5 million increase was primarily
attributable to higher fee revenues from administering retirement funds in
Mexico, due to the implementation of a more attractive pricing structure for our
customers, which also resulted in increased retention of existing accounts and
an increased number of covered lives.

    Net investment income increased $10.9 million, or 12%, to $105.0 million in
2000, from $94.1 million in 1999. An $11.3 million increase was primarily
attributable to an increase in average invested assets in Principal
International. In addition, an $11.2 million increase resulted from our equity
method investment gains related to our pro rata share of net income, excluding
the effect of goodwill amortization, of BrasilPrev Previdencia Privada S.A., a
pension company in Brazil in which we acquired a minority interest in October
1999. The increases were partially offset by an $8.7 million decrease related to
the inclusion of BT Financial Group, primarily related to its margin lending
business. The margin lending business was securitized in late 1999, which
resulted in a shift of income generation from net investment income to fee
revenues in 2000. The increases were also partially offset by a $3.1 million
equity method investment

                                        67

loss related to our pro rata share of net loss of ING/Principal Pensions Co.,
Ltd., a pension company in Japan in which we acquired a minority interest in
January 2000.

    Benefits, claims and settlement expenses increased $52.1 million, or 25%, to
$262.2 million in 2000, from $210.1 million in 1999. The increase was primarily
due to an increase in reserve changes and policy and contract benefit payments
of $18.5 million in Mexico and $18.4 million in Argentina, the result of
increased sales of single premium annuities with life contingencies. In
addition, a $13.4 million increase in reserve changes and policy and contract
benefit payments in Chile primarily resulted from the increased sales of annuity
products and the implementation of a new reserve calculation method to refine
reserve calculations.

    Operating expenses increased $160.2 million, or 76%, to $372.3 million in
2000, from $212.1 million in 1999. The increase was primarily due to a $151.1
million increase resulting from the inclusion of operating expenses incurred by
BT Financial Group, including a $23.3 million increase in amortization of
goodwill and other intangibles. The increase also included $6.0 million of
amortization of goodwill and present value of future profits related to
BrasilPrev, which we acquired in October 1999.

    Income tax expense (benefits) increased $8.9 million to $4.7 million of tax
expense in 2000, from a $4.2 million tax benefit in 1999. The increase was
primarily due to $9.1 million of income tax expense related to an increase in
pre-tax operating earnings from BT Financial Group.

    As a result of the foregoing factors, operating loss decreased $29.9
million, or 78%, to $8.5 million in 2000, from $38.4 million in 1999.

    Net realized capital gains, as adjusted, decreased $6.3 million, or 82%, to
$1.4 million in 2000, from $7.7 million in 1999. The decrease was primarily due
to a $4.7 million decrease in net realized capital gains in Principal
International, resulting from repositioning of investment portfolios to better
match long-term liabilities and assets in 1999. In addition, net realized
capital gains, as adjusted, in 1999 included a $1.7 million gain on the sale of
minority interest in a capital management company, which was sold following the
acquisition of BT Financial Group.

    As a result of the foregoing factors, net loss decreased $23.6 million, or
77%, to $7.1 million in 2000, from $30.7 million in 1999.

  YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

    Premiums and other considerations increased $32.8 million, or 22%, to $179.9
million in 1999, from $147.1 million in 1998. An increase of $14.2 million was
primarily due to increased premiums in Chile related to El Roble, which we
acquired in July 1998. A $6.9 million increase related primarily to sales of
single premium annuities with life contingencies by a newly formed annuity
company, Principal Pensiones, S.A. de C.V., in Mexico in July 1999. Premiums and
other considerations in Spain increased $6.7 million, primarily due to increased
sales of single premium group annuities with life contingencies. Changes to the
distribution within Principal Mexico Compania de Seguros S.A. de C.V., and new
business generated as a result of name recognition of our two Mexican companies,
Principal Afore S.A. de C.V. and Principal Pensiones S.A. de C.V., helped
contribute to an increase in group insurance premiums of $2.2 million. In
addition, premiums of $1.8 million were generated in 1999 related to a new lump
sum individual annuity product with life contingencies in Argentina.

    Fees and other revenues increased $77.5 million to $105.6 million in 1999,
from $28.1 million in 1998. The increase was primarily related to BT Financial
Group, which contributed $95.5 million of fees and other revenues in 1999. This
increase was partially offset by a $9.7 million decrease relating to El Roble,
and the loss of $6.5 million of fees due to our 1998 divestiture of a pension
subsidiary in Argentina. The divestiture resulted from our decision to
discontinue selling products related to the state-mandated retirement plan,
which we determined did not generate adequate returns.

    Net investment income increased $46.2 million, or 96%, to $94.1 million in
1999, from $47.9 million in 1998. The increase was primarily due to $19.7
million of increased net investment income related to our 1998 acquisition of El
Roble. BT Financial Group generated $18.3 million of net investment income in
1999. An additional $6.7 million of the increase related to investment income
received in 1999 on an international mutual fund in Chile, which had generated a
loss in 1998. This mutual fund was classified as a trading security in 1998 and
1999, but has been classified as available-for-sale since January 1, 2000.
Related gains and losses will be recognized in equity rather than net investment
income.

    Benefits, claims and settlement expenses increased $44.9 million, or 27%, to
$210.1 million in 1999, from $165.2 million in 1998. The increase was primarily
due to $27.0 million of additional expenses related to El Roble. In addition, an
increase in changes in reserves of $7.8 million in Spain was due primarily to
increased sales of single premium group annuities with life contingencies. In
addition, the increase was also due to $6.9 million of expenses related to
Principal Pensiones, which we formed in 1999 in Mexico. The increase was also
due to a $1.0 million increase in change in reserves in Mexico, as a result of
increased sales of group life insurance products.

    Operating expenses increased $110.9 million, or 110%, to $212.1 million in
1999, from $101.2 million in 1998. The increase was primarily related to BT
Financial Group, which contributed $117.3 million of operating expenses in 1999,

                                        68

including $13.7 million amortization of goodwill and other intangibles. The
increase was partially offset by a $5.3 million decrease in expenses in
Argentina, primarily related to the subsidiary we sold in 1998, and reductions
in sales force and staff levels in our remaining operations in Argentina.

    Income tax benefits decreased $3.7 million, or 47%, to $4.2 million in 1999,
from $7.9 million in 1998. A decrease in income tax benefits of $2.4 million was
primarily associated with deferred tax assets related to income tax benefits in
our international asset accumulation operations that were not recognized due to
loss carryforwards we determined would not be utilized. The decrease was also
due to $1.3 million of income tax expense related to BT Financial Group, which
we acquired in August 1999.

    As a result of the foregoing factors, operating loss increased $3.0 million,
or 8%, to $38.4 million in 1999, from $35.4 million in 1998.

    Net realized capital gains, as adjusted, decreased $4.3 million, or 36%, to
$7.7 million in 1999, from $12.0 million in 1998. Net realized capital gains
decreased $6.0 million, primarily because 1998 included the gain on the sale of
the pension subsidiary in Argentina in 1998, as previously discussed. The
decrease was offset by $1.7 million of net realized capital gains contributed by
BT Financial Group.

    As a result of the foregoing factors and the inclusion of non-recurring
items in 1998, net loss increased $20.6 million to $30.7 million in 1999, from
$10.1 million in 1998. In 1998, our net loss included the positive effects of
$13.3 million, net of tax, of non-recurring items related to accounting changes
by Principal International.

LIFE AND HEALTH INSURANCE SEGMENT

    The table below presents certain summary financial data relating to the Life
and Health Insurance segment for the periods indicated:

                                                           FOR THE
                                                      SIX MONTHS ENDED           FOR THE YEAR ENDED
                                                          JUNE 30,                  DECEMBER 31,
                                                     -------------------   ------------------------------
                                                       2001       2000       2000       1999       1998
                                                     --------   --------   --------   --------   --------
                                                                       ($ IN MILLIONS)
                                                                                  
OPERATING EARNINGS DATA:
Operating Revenues(1):
  Premiums and other considerations................  $1,515.3   $1,683.0   $3,250.5   $3,190.6   $3,126.6
  Fees and other revenues..........................     128.9      105.0      230.0      180.2      146.7
  Net investment income............................     334.0      312.7      642.1      614.7      619.8
                                                     --------   --------   --------   --------   --------
         Total operating revenues..................   1,978.2    2,100.7    4,122.6    3,985.5    3,893.1
Expenses:
  Benefits, claims and settlement expenses.........   1,260.4    1,380.0    2,659.4    2,714.9    2,605.3
  Dividends to policyholders.......................     158.3      153.9      308.1      295.6      300.0
  Operating expenses...............................     422.6      440.8      913.6      872.0      892.4
                                                     --------   --------   --------   --------   --------
         Total expenses............................   1,841.3    1,974.7    3,881.1    3,882.5    3,797.7
                                                     --------   --------   --------   --------   --------
  Pre-tax operating earnings.......................     136.9      126.0      241.5      103.0       95.4
  Income taxes.....................................      46.0       40.0       79.2       12.3       45.4
                                                     --------   --------   --------   --------   --------
  Operating earnings...............................      90.9       86.0      162.3       90.7       50.0

Net realized capital gains (losses), as adjusted...      (4.7)      50.1       47.3       10.1        1.9
Non-recurring items................................       0.1         --         --         --       60.1
                                                     --------   --------   --------   --------   --------
GAAP REPORTED:
Net income.........................................  $   86.3   $  136.1   $  209.6   $  100.8   $  112.0
                                                     ========   ========   ========   ========   ========
OTHER DATA:
Premiums and other considerations:
  Group life and health insurance..................  $1,090.8   $1,257.3   $2,403.5   $2,345.2   $2,278.8
  Individual life and disability insurance.........     424.5      425.7      847.0      845.4      847.8
Incurred loss ratios(2):
  Group life insurance.............................        69%        71%        70%        71%        79%
  Group disability insurance.......................        86        100         85         80        102
  Group medical and group Medicare supplement
    insurance(3)...................................        82         82         83         90         85
  Group dental and vision insurance................        77         79         76         77         77

---------------

(1) Excludes net realized capital gains (losses) and their impact on recognition
    of front-end fee revenues.

                                        69

(2) Ratios exclude the impact of the change in experience related reserves for
    all time periods, to reflect underlying claim experience.

(3) Ratios exclude group Medicare supplement insurance after July 1, 2000, the
    date at which group Medicare supplement insurance was 100% reinsured.

  SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000

    Premiums and other considerations decreased $167.7 million, or 10%, to
$1,515.3 million for the six months ended June 30, 2001, from $1,683.0 million
for the six months ended June 30, 2000. Group Medicare supplement insurance
premium decreased $98.5 million, resulting from our decision to reinsure 100% of
this business effective July 1, 2000. Large premium rate increases in 2000 led
to increased lapses and lower sales of group medical insurance, which resulted
in a $59.5 million decrease in premiums. Group life insurance premium decreased
$26.4 million, primarily due to the loss of two large customers and an overall
increase in lapses associated with lapses of group medical coverages. The
decreases were partially offset by a $14.4 million increase in group dental
insurance premium due to increases in dental premium rates.

    Fees and other revenues increased $23.9 million, or 23%, to $128.9 million
for the six months ended June 30, 2001, from $105.0 million for the six months
ended June 30, 2000. Fee revenues from our group fee-for-service business
increased $11.5 million, primarily due to increases in fee rates and growth in
that business. Fee revenues from individual interest-sensitive life insurance
products increased $10.2 million, a result of growth in that business. The
growth reflected a continued shift in customer preference from individual
traditional life insurance products to individual universal life and individual
variable universal life insurance products. Individual traditional life
insurance and other life insurance fee revenues increased $1.6 million,
primarily related to growth in reinsurance fee revenues.

    Net investment income increased $21.3 million, or 7%, to $334.0 million for
the six months ended June 30, 2001, from $312.7 million for the six months ended
June 30, 2000. The increase was primarily due to a $339.2 million, or 4%,
increase in average invested assets and cash for the segment. Net investment
income also increased due to an increase in average investment yields for the
segment. The yield on average invested assets and cash was 7.5% for the six
months ended June 30, 2001, compared to 7.3% for the six months ended June 30,
2000, reflecting higher interest yields on fixed income securities backing
product liabilities.

    Benefits, claims and settlement expenses decreased $119.6 million, or 9%, to
$1,260.4 million for the six months ended June 30, 2001, from $1,380.0 million
for the six months ended June 30, 2000. Group Medicare supplement insurance
benefits, claims and settlement expenses decreased $97.0 million, resulting from
our decision to reinsure 100% of this business effective July 1, 2000. Group
life insurance benefits, claims and settlement expenses decreased $23.4 million
due to lower mortality experience, the loss of two large customers and an
overall decline in business. Group medical insurance business continued to
decline, resulting in an additional decrease in benefits, claims and settlement
expenses.

    Dividends to policyholders increased $4.4 million, or 3%, to $158.3 million
for the six months ended June 30, 2001, from $153.9 million for the six months
ended June 30, 2000. The increase was due to increased dividends on traditional
individual life insurance products, a result of increases in the cash value of
the policies.

    Operating expenses decreased $18.2 million, or 4%, to $422.6 million for the
six months ended June 30, 2001, from $440.8 million for the six months ended
June 30, 2000. Group life and health insurance operating expenses decreased
$27.3 million primarily due to a decrease in commissions resulting from our
decision to reinsure 100% of our group Medicare supplement insurance business
effective July 1, 2000, and due to expense management in response to an overall
decline in business. The decrease was offset by a $9.1 million increase in
individual life and health operating expenses, primarily attributable to growth
in our individual disability insurance business and due to higher amortization
of deferred policy acquisition costs related to individual disability and
individual life insurance.

    Income taxes increased $6.0 million, or 15%, to $46.0 million for the six
months ended June 30, 2001, from $40.0 million for the six months ended June 30,
2000. The effective income tax rate for this segment was 34% for the six months
ended June 30, 2001, and 32% for the six months ended June 30, 2000. The
effective income tax rate for the six months ended June 30, 2001, was lower than
the corporate income tax rate of 35% primarily due to tax-exempt income. The
effective tax rate for the six months ended June 30, 2000 was lower than the
corporate income tax rate of 35%, primarily due to tax exempt income and a
reduction in a tax reserve as a result of a favorable IRS audit event.

    As a result of the foregoing factors, operating earnings increased $4.9
million, or 6%, to $90.9 million for the six months ended June 30, 2001, from
$86.0 million for the six months ended June 30, 2000.

    Net realized capital gains (losses), as adjusted, decreased $54.8 million to
a $4.7 million net realized capital loss for the six months ended June 30, 2001,
from a $50.1 million net realized capital gain for the six months ended June 30,
2000. The decrease primarily related to the sale of our investment in United
Payors and United Providers. In 2000, we sold our remaining investment and
realized an after-tax capital gain of $58.9 million. The decrease was also due
to losses from permanent impairments of fixed maturity securities during the six
months ended June 30, 2001. The

                                        70

decreases were partially offset by the positive effects of a change in the
mortgage loan valuation allowance, primarily reflecting a decrease in the amount
invested in commercial mortgage loans.

    As a result of the foregoing factors and the inclusion of non-recurring
items for the six months ended June 30, 2001, net income decreased $49.8
million, or 37%, to $86.3 million for the six months ended June 30, 2001, from
$136.1 million for the six months ended June 30, 2000. Non-recurring items for
the six months ended June 30, 2001, had a positive impact on net income of $0.1
million, net of tax, due to the cumulative effect of accounting change, net of
income taxes, related to our implementation of SFAS 133, as previously discussed
under the caption "-- Transactions Affecting Comparability of Results of
Operations -- Operating Earnings and Non-Recurring Items."

  YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

    Premiums and other considerations increased $59.9 million, or 2%, to
$3,250.5 million in 2000, from $3,190.6 million in 1999. Group dental insurance
premiums increased $72.3 million, primarily resulting from increased sales of
group dental insurance products. Group medical premiums increased $38.3 million,
primarily related to an increase in the premium base due to increased sales in
late 1999, and significant group medical premium rate increases. Also
contributing to the increase was a $9.6 million increase in individual
disability insurance premiums due to continued growth in sales. Group disability
insurance premiums increased $8.4 million due to an increase in long-term
disability covered members and an increase in short-term disability premium per
member. These increases were partially offset by a $66.2 million decrease in
group Medicare supplement premium, resulting from our decision to cease new
sales of group Medicare supplement insurance in January 2000 and our decision to
reinsure 100% of this business effective July 1, 2000.

    Fees and other revenues increased $49.8 million, or 28%, to $230.0 million
in 2000, from $180.2 million in 1999. Fee revenues from individual
interest-sensitive life insurance products increased $27.4 million, a result of
growth in that block of business. The growth reflects a continued shift in
customer preference from individual traditional life insurance products to
individual universal life and individual variable life insurance products. Fee
revenues from our group fee-for-service business increased $20.3 million,
primarily due to increases in members and fees.

    Net investment income increased $27.4 million, or 4%, to $642.1 million in
2000, from $614.7 million in 1999. The increase was primarily due to a $483.9
million, or 6%, increase in average invested assets and cash for the segment.
The increase in net investment income due to asset growth was partially offset
by a decrease in average investment yields for the segment. The yield on average
invested assets and cash was 7.4% in 2000, compared to 7.5% in 1999, due to a
decrease in interest credited on assets backing allocated capital. The decrease
in interest credited was partially offset by higher interest rates on fixed
income investments backing product liabilities.

    Benefits, claims and settlement expenses decreased $55.5 million, or 2%, to
$2,659.4 million in 2000, from $2,714.9 million in 1999. Group medical insurance
benefits claims and settlement expenses decreased $108.6 million, primarily
resulting from the release of claim reserves established in 1999. The claim
reserves were established in 1999 as a result of poor claim experience during
the year and an expectation that claims would continue to increase through the
second quarter of 2000. This decrease was partially offset by an increase in
claims due to rising medical costs. Benefits, claims and settlement expenses
also decreased $102.8 million for group Medicare supplement insurance, as a
result of our reinsuring this business effective July 1, 2000, improved claim
experience during the first half of the year and the release of reserves
established in 1999, for the same reasons previously described for our group
medical business. These decreases were partially offset by a $56.1 million
increase in group dental benefits, claims and settlement expenses, primarily due
to growth in that block of business. Individual disability insurance claims and
reserves increased $49.5 million, primarily due to less favorable morbidity
experience and related increases in reserves for claims and incurred but not
reported claims. Individual interest-sensitive life insurance benefits and
claims increased $40.2 million, primarily due to an increase in both interest
credited and mortality costs, primarily resulting from growth in the block of
business and reserve adjustments. Group disability claims and reserves increased
$9.5 million, primarily a result of less favorable morbidity experience and an
increase in covered members.

    Dividends to policyholders increased $12.5 million, or 4%, to $308.1 million
in 2000, from $295.6 million in 1999. The increase was due to increased
dividends on traditional individual life insurance products, a result of
increases in the cash values of the policies.

    Operating expenses increased $41.6 million, or 5%, to $913.6 million in
2000, from $872.0 million in 1999. Group life and health insurance operating
expenses increased $26.0 million, primarily due to expenses related to our group
Medicare supplement business, and a write-down of goodwill related to group
Medicare supplement insurance. Group life and health insurance operating
expenses also increased due to an increase in commissions, resulting from higher
commission scales, an increase in premium, and settlements with wholesale
distributors related to discontinued group health business. These increases were
offset by a decrease in general expenses related to both our group medical and
group Medicare supplement insurance products. Individual life and disability
insurance operating expenses also increased $15.6 million, primarily due to an
increase in amortization of deferred policy acquisition costs related to
individual disability insurance.

                                        71

    Income taxes increased $66.9 million to $79.2 million in 2000, from $12.3
million in 1999. The effective income tax rate for this segment was 33% in 2000
and 12% in 1999. The effective tax rate for 2000 was lower than the corporate
income tax rate of 35% due to tax-exempt income. The effective income tax rate
for 1999 was lower than the corporate income tax rate of 35%, primarily
resulting from overestimated deferred taxes related to health insurance reserves
in 1998, the effects of which were reversed in 1999 and also due to tax-exempt
income.

    As a result of the foregoing factors, operating earnings increased $71.6
million, or 79%, to $162.3 million in 2000, from $90.7 million in 1999.

    Net realized capital gains, as adjusted, increased $37.2 million to $47.3
million in 2000, from $10.1 million in 1999. The increase was primarily due to
net realized capital gains, as adjusted, related to the sale of our investment
in United Payors and United Providers. We sold a portion of our investment in
1999, realizing an after-tax capital gain of $17.9 million. In 2000, we sold our
remaining investment and realized an after-tax capital gain of $58.9 million.
The increase in capital gains was partially offset by a $2.3 million increase in
net realized capital losses on sales of fixed income securities, as a result of
our investment portfolio repositioning strategy to sell lower yielding fixed
income securities to allow for reinvestment in higher yielding fixed income
securities.

    As a result of the foregoing factors, net income increased $108.8 million,
or 108%, to $209.6 million in 2000, from $100.8 million in 1999.

  YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

    Premiums and other considerations increased $64.0 million, or 2%, to
$3,190.6 million in 1999, from $3,126.6 million in 1998. In 1999, group health
insurance premiums increased $55.3 million, as a result of increased sales of
our dental insurance products. Premiums and other considerations also increased
$43.4 million for Medicare supplement insurance products and $40.5 million for
group medical insurance products, a result of prices being more competitive and
new sales incentives. Premiums increased $9.1 million due to an increase in
sales of individual disability insurance products, as a result of increased
marketing efforts. Premiums also increased $3.4 million for group disability
insurance products, due to growth in our short-term disability insurance
product. The increases were partially offset by a $77.2 million decrease in
group life insurance products, due to our decision to terminate our
participation during 1998 in two large government reinsurance pools that were
producing inadequate returns. Also, individual traditional life insurance
premiums decreased by $11.5 million in 1999, continuing a shift in customer
preference from traditional life insurance products to universal life and
variable life insurance products.

    Fees and other revenues increased $33.5 million, or 23%, to $180.2 million
in 1999, from $146.7 million in 1998. Fees and other revenues increased in 1999,
primarily due to a $15.1 million increase in fee revenues from our group
fee-for-service business, a result of increased sales due to focused marketing
and distribution efforts to provide more clients with customized services that
resulted in higher fees. Also, fee revenues from individual interest-sensitive
life insurance products increased $12.0 million in 1999. The increase reflects
the shift in customer preference from traditional life insurance products to
universal life and variable life insurance products, as previously discussed.
Fee revenues from traditional life insurance products increased $2.2 million,
due to growth in reinsurance fee revenues associated with term life insurance
products. Fee revenues from dental insurance products and services increased
$2.0 million, related to our 1998 acquisition of Dental Net, Inc., an integrated
managed dental services organization. Fee revenues related to group life
insurance also increased $0.8 million.

    Net investment income decreased $5.1 million, or 1%, to $614.7 million in
1999, from $619.8 million in 1998. The decrease in 1999 was primarily due to a
decrease in average investment yields for the segment. The yield on the weighted
average invested assets and cash was 7.5% in 1999, compared to 7.8% in 1998. The
decrease reflects lower interest rates on new fixed income investments. The
decrease was partially offset by a $247.8 million, or 3%, increase in average
invested assets for the segment.

    Benefits, claims and settlement expenses increased $109.6 million, or 4%, to
$2,714.9 million in 1999, from $2,605.3 million in 1998. The increase in 1999
was primarily due to a $122.3 million increase in group medical benefits and
reserve increases, and a $53.8 million increase in Medicare supplement benefits
and reserve increases, primarily a result of claim reserves established in 1999,
as a result of poor claim experience through the third quarter of 1999 and an
expectation that claims would continue to increase through the second quarter of
2000. Group medical and Medicare supplement benefits, claims and settlement
expenses also increased, due to growth in the blocks of business. Dental
insurance claims also increased $41.7 million, due primarily to growth in our
dental insurance business. The increase was partially offset by an $87.0 million
decrease in group life insurance claims and reserves, due primarily to our
decision to terminate our participation in two large government reinsurance
pools during 1998.

    Dividends to policyholders decreased $4.4 million, or 1%, to $295.6 million
in 1999, from $300.0 million in 1998. The decrease was primarily due to a $13.9
million decrease in group life and health insurance dividends. After July 1,
1998, new issues and renewals of group life and health contracts were in the
form of non-participating policies. The policies included experience refund
provisions that were reported as reductions of premiums in 1999, instead of as
dividends to policyholders. The change in presentation did not affect net
income. The decrease was partially offset by a $9.5 million

                                        72

increase in individual traditional life insurance dividends, primarily a result
of increases in the cash values of the policies and in the interest rates
credited to the policies.

    Operating expenses decreased $20.4 million, or 2%, to $872.0 million in
1999, from $892.4 million in 1998. Operating expenses were lower in 1999,
primarily due to a $28.3 million decrease in individual life and disability
insurance expenses due to a decrease in amortization of deferred policy
acquisition costs in 1999 compared to 1998. Amortization was higher in 1998, due
to loss recognition on older blocks of business. The decrease was partially
offset by a $7.9 million increase in group life and health insurance expenses,
primarily due to an increase in the distribution costs related to the
acquisition of a distribution system, higher commission scales and an increase
in dental insurance operating expenses due to our acquisition of Dental Net,
Inc.

    Income taxes decreased $33.1 million, or 73%, to $12.3 million in 1999, from
$45.4 million in 1998. The effective income tax rate for this segment was 12% in
1999 and 48% in 1998, compared to the corporate income tax rate of 35%. The
effective tax rates differed from the corporate income tax rate in 1999 and
1998, due to overestimated deferred taxes related to health reserves in 1998,
the effects of which were reversed in 1999.

    As a result of the foregoing factors, operating earnings increased $40.7
million, or 81%, to $90.7 million in 1999, from $50.0 million in 1998.

    Net realized capital gains, as adjusted, increased $8.2 million to $10.1
million in 1999, from $1.9 million in 1998, primarily due to a $17.9 million net
realized capital gain related to the sale of a portion of our equity investment
in United Payors and United Providers. This capital gain was offset by a net
$9.7 million decrease in net realized capital gains, primarily due to net
realized capital losses on sales of fixed income investments, as a result of our
investment portfolio repositioning strategy to sell lower yielding fixed income
securities to allow for reinvestment in higher yielding fixed income securities.

    As a result of the foregoing factors and the inclusion of non-recurring
items in 1998, net income decreased $11.2 million, or 10%, to $100.8 million in
1999, from $112.0 million in 1998. Net income was higher in 1998, primarily due
to the positive impacts of non-recurring items totaling $60.1 million, net of
tax, which included a $76.5 million release of tax reserves, as previously
discussed under the caption "-- Transactions Affecting Comparability of Results
of Operations -- Operating Earnings and Non-Recurring Items," and expenses
related to amortization of deferred policy acquisition costs associated with the
formation of the mutual insurance holding company.

                                        73

MORTGAGE BANKING SEGMENT

    The table below presents certain summary financial data relating to the
Mortgage Banking segment for the periods indicated:

                                                          AS OF OR FOR THE
                                                          SIX MONTHS ENDED         AS OF OR FOR THE YEAR ENDED
                                                              JUNE 30,                    DECEMBER 31,
                                                        ---------------------   ---------------------------------
                                                          2001        2000        2000        1999        1998
                                                        ---------   ---------   ---------   ---------   ---------
                                                                             ($ IN MILLIONS)
                                                                                         
OPERATING EARNINGS DATA:
Operating Revenues:(1)
  Loan servicing......................................  $   181.0   $   155.2   $   313.8   $   286.5   $   235.4
  Loan production.....................................      112.1        25.5        46.0       111.8       105.2
                                                        ---------   ---------   ---------   ---------   ---------
         Total operating revenues.....................      293.1       180.7       359.8       398.3       340.6
Expenses:
  Loan servicing......................................      129.5        97.6       215.3       241.3       180.9
  Loan production.....................................       57.8        30.1        67.4        69.5        69.3
                                                        ---------   ---------   ---------   ---------   ---------
         Total expenses...............................      187.3       127.7       282.7       310.8       250.2
                                                        ---------   ---------   ---------   ---------   ---------
Pre-tax operating earnings............................      105.8        53.0        77.1        87.5        90.4
Income taxes..........................................       37.0        18.6        27.1        30.7        31.6
                                                        ---------   ---------   ---------   ---------   ---------
Operating earnings....................................       68.8        34.4        50.0        56.8        58.8

Net realized capital gains (losses), as adjusted......         --          --          --          --          --
Non-recurring items...................................         --          --          --          --          --
                                                        ---------   ---------   ---------   ---------   ---------
GAAP REPORTED:
Net income............................................  $    68.8   $    34.4   $    50.0   $    56.8   $    58.8
                                                        =========   =========   =========   =========   =========
OTHER DATA:
Mortgage loan production volume.......................  $15,368.4   $ 3,290.2   $ 8,311.8   $13,307.3   $12,120.5
Gain on sale of mortgage loans........................       68.5         2.2         9.4        55.2        59.5
Mortgage loan servicing portfolio.....................   64,439.5    51,381.2    55,987.4    51,875.5    41,973.0
Gain on sale of mortgage loan servicing rights........        6.8        14.0        14.9         5.5         1.8

---------------

(1) Excludes net realized capital gains (losses) and their impact on recognition
    of front-end fee revenues.

  SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000

    Total operating revenues increased $112.4 million, or 62%, to $293.1 million
for the six months ended June 30, 2001, from $180.7 million for the six months
ended June 30, 2000. The increase was primarily due to an $86.6 million increase
in mortgage loan production revenues, reflecting the increase in mortgage loan
production volume during the six months ended June 30, 2001. In addition,
mortgage loan servicing revenues increased $25.8 million, reflecting the growth
in the mortgage loan servicing portfolio. The increase in mortgage loan
servicing revenues was partially offset by a decrease in gain on sales of
mortgage loan servicing rights, reflecting a decline in the volume of servicing
rights sold during the six months ended June 30, 2001.

    Total expenses increased $59.6 million, or 47%, to $187.3 million for the
six months ended June 30, 2001, from $127.7 million for the six months ended
June 30, 2000. The increase was primarily due to a $31.9 million increase in
mortgage loan servicing expenses due to growth in the mortgage loan servicing
portfolio. Also contributing to expense growth was a decrease in net gains on
servicing hedge activity recognized in the six months ended June 30, 2001,
compared to the six months ended June 30, 2000. Mortgage loan production
expenses increased $27.7 million, reflecting the increase in mortgage loan
production volume.

    Income taxes increased $18.4 million, or 99%, to $37.0 million for the six
months ended June 30, 2001, from $18.6 million for the six months ended June 30,
2000. The effective income tax rate for this segment was 35% for both the six
months ended June 30, 2001 and 2000.

    As a result of the foregoing factors, operating earnings and net income
increased $34.4 million, or 100%, to $68.8 million for the six months ended June
30, 2001, from $34.4 million for the six months ended June 30, 2000.

  YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

    Total operating revenues decreased $38.5 million, or 10%, to $359.8 million
in 2000, from $398.3 million in 1999. The decrease was primarily due to a $65.8
million decrease in mortgage loan production revenues, reflecting the decrease
in mortgage loan production volume during 2000. The decrease in total revenues
was partially offset by a
                                        74

$27.3 million increase in mortgage loan servicing revenues, primarily due to
growth in the average balance of the mortgage loan servicing portfolio.
Additionally, an increase in mortgage loan servicing fee revenues was the result
of the sale of mortgage loan servicing rights, representing approximately $1.0
billion from the mortgage loan servicing portfolio, as part of our mortgage loan
servicing strategy.

    Total expenses decreased $28.1 million, or 9%, to $282.7 million in 2000
from $310.8 million in 1999. The decrease was primarily due to a $26.0 million
decrease in expenses related to mortgage loan servicing, primarily a result of
net gains we earned on hedges related to our servicing portfolio in 2000. In the
second quarter of 2000, we shifted our servicing hedge portfolio from U.S.
Treasury-related instruments to London Inter-Bank Offer Rate based hedges
including swaps and swaptions, which resulted in net gains of $10.2 million. The
decrease was also due to a $2.1 million decrease in mortgage loan production
expenses related to the decrease in mortgage loan production volume during 2000.

    Income taxes decreased $3.6 million, or 12%, to $27.1 million in 2000, from
$30.7 million in 1999. The effective income tax rate for this segment was 35% in
both 2000 and 1999.

    As a result of the foregoing factors, operating earnings and net income
decreased $6.8 million, or 12%, to $50.0 million in 2000, from $56.8 million in
1999.

  YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

    Total operating revenues increased $57.7 million, or 17%, to $398.3 million
in 1999, from $340.6 million in 1998. The increase was primarily due to a $58.4
million increase in residential mortgage loan servicing revenues. The increase
in revenues was partially offset by a $7.3 million decrease in revenues,
resulting from our sale of Principal Portfolio Services, Inc., a mortgage loan
due diligence service provider, in January 1999. The mortgage loan servicing
portfolio increased by $9.9 billion, or 24%, to $51.9 billion in 1999, from
$42.0 billion in 1998. The mortgage loan servicing portfolio growth during 1999
was due to higher mortgage loan production and acquisitions of mortgage loan
servicing rights, representing $5.6 billion in unpaid principal balances.
Mortgage loan production related revenues increased $6.6 million, due to higher
mortgage loan production volumes in 1999.

    Total expenses increased $60.6 million, or 24%, to $310.8 million in 1999,
from $250.2 million in 1998. The increase in total expenses was attributable to
a $67.6 million increase related to mortgage loan servicing, primarily
reflecting an increase in amortization of mortgage loan servicing rights, a
result of the increase in our mortgage loan servicing portfolio. This increase
was partially offset by a $7.2 million decrease in expenses, resulting from our
sale of Principal Portfolio Services, Inc.

    Income taxes decreased $0.9 million, or 3%, to $30.7 million in 1999, from
$31.6 million in 1998. The effective income tax rate for this segment was 35%
for both 1999 and 1998.

    As a result of the foregoing factors, operating earnings and net income
decreased $2.0 million, or 3%, to $56.8 million in 1999, from $58.8 million in
1998.

CORPORATE AND OTHER SEGMENT

    The table below presents summary financial data relating to the Corporate
and Other segment for the periods indicated:

                                                                FOR THE SIX
                                                               MONTHS ENDED        FOR THE YEAR ENDED
                                                                 JUNE 30,             DECEMBER 31,
                                                              ---------------   -------------------------
                                                               2001     2000     2000      1999     1998
                                                              ------   ------   -------   ------   ------
                                                                            ($ IN MILLIONS)
                                                                                    
OPERATING EARNINGS DATA:
Operating Revenues:(1)
         Total operating revenues...........................  $ 57.5   $ 40.5   $  97.1   $ 61.9   $342.5
Expenses:
         Total expenses.....................................    13.5     29.3      14.4     54.1    430.6
                                                              ------   ------   -------   ------   ------
Pre-tax operating earnings (loss)...........................    44.0     11.2      82.7      7.8    (88.1)
Income taxes (benefits).....................................    11.9      7.2      15.0     (1.7)   (43.8)
                                                              ------   ------   -------   ------   ------
Operating earnings (loss)...................................    32.1      4.0      67.7      9.5    (44.3)

Net realized capital gains (losses), as adjusted............   (41.5)     4.6      80.3    284.5    292.1
Non-recurring items.........................................   (20.7)   (75.8)   (101.0)      --      7.5
                                                              ------   ------   -------   ------   ------
GAAP REPORTED:
Net income (loss)...........................................  $(30.1)  $(67.2)  $  47.0   $294.0   $255.3
                                                              ======   ======   =======   ======   ======

                                        75

---------------

(1) Excludes net realized capital gains (losses) and their impact on recognition
    of front-end fee revenues.

  SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000

    Total operating revenues increased $17.0 million, or 42%, to $57.5 million
for the six months ended June 30, 2001, from $40.5 million for the six months
ended June 30, 2000. Operating revenues increased $22.9 million, primarily as a
result of improved investment yields for the segment. The increase was partially
offset by a $5.7 million decrease related to inter-segment eliminations included
in this segment, which was offset by a corresponding change in total expenses.

    Total expenses decreased $15.8 million, or 54%, to $13.5 million for the six
months ended June 30, 2001, from $29.3 million for the six months ended June 30,
2000. A $5.7 million decrease was related to inter-segment eliminations included
in this segment. Interest expense on commercial paper and private debt
securities issued in connection with the acquisition of BT Financial Group
decreased $4.6 million, primarily as a result of the repayment of commercial
paper. In addition, interest expense decreased $4.2 million as a result of a
reduction of commercial real estate debt on home office properties. Interest
expense also decreased $3.8 million, primarily due to an accrual of interest to
be received as a result of the resolution of a favorable IRS tax audit event in
2000. The decreases were partially offset by a $2.3 million increase related to
interest expense on short-term borrowings.

    Income taxes increased $4.7 million, or 65%, to $11.9 million for the six
months ended June 30, 2001, from $7.2 million for the six months ended June 30,
2000. The effective income tax rates for this segment were 27% for the six
months ended June 30, 2001, and 64% for the six months ended June 30, 2000. The
effective income tax rate for the six months ended June 30, 2001, was lower than
the corporate income tax rate of 35% because of tax exempt income, non-taxable
income and tax credits. The effective income tax rate for the six months ended
June 30, 2000, was higher than the corporate income tax rate of 35% due to an
increase in income tax reserves established for contested IRS tax audit matters.

    As a result of the foregoing factors, operating earnings increased $28.1
million to $32.1 million for the six months ended June 30, 2001, from $4.0
million for the six months ended June 30, 2000.

    Net realized capital gains (losses), as adjusted, decreased $46.1 million to
$41.5 million of net realized capital losses for the six months ended June 30,
2001, from $4.6 million of net realized capital gains for the six months ended
June 30, 2000. The decrease was primarily due to net realized capital losses for
the six months ended June 30, 2001 on sales of equity securities, a result of
the decline in the equity markets.

    As a result of the foregoing factors and the inclusion of non-recurring
items, net loss decreased $37.1 million, or 55%, to $30.1 million for the six
months ended June 30, 2001, from $67.2 million for the six months ended June 30,
2000. For the six months ended June 30, 2001, net income included the negative
effect of non-recurring items totaling $20.7 million, net of tax, related to:
(1) expenses related to our demutualization ($14.8 million) and (2) a loss
contingency reserve established for sales practices litigation ($5.9 million).
For the six months ended June 30, 2000, net income included the negative effect
of non-recurring items totaling $75.8 million, net of tax, related to: (1) a
loss contingency reserve established for sales practices litigation ($75.0
million) and (2) expenses related to our demutualization ($0.8 million). The
non-recurring items were previously discussed under the caption "-- Transactions
Affecting Comparability of Results of Operations -- Operating Earnings and
Non-Recurring Items".

  YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

    Total operating revenues increased $35.2 million, or 57%, to $97.1 million
in 2000, from $61.9 million in 1999. Net investment income increased $71.0
million, as a result of improved investment yields for the segment. The increase
was partially offset by an $11.5 million decrease in net investment income,
reflecting a reduction in average invested assets, primarily due to the sale of
invested assets in 1999 to partially fund the acquisition of BT Financial Group.
The increase in total revenues was also partially offset by a $9.0 million
decrease related to a change in inter-segment eliminations included in this
segment, which was offset by a corresponding change in total expenses. In
addition, the increase was also partially offset by an $8.5 million decrease in
fees and other revenues, primarily related to the termination of a reinsurance
and participation agreement under which we continued to receive fee revenues in
1999, but not in 2000. Net investment income also decreased $5.0 million related
to our pro rata share of net loss of HealthExtras, Inc., a company in which we
hold a minority interest.

    Total expenses decreased $39.7 million, or 73%, to $14.4 million in 2000,
from $54.1 million in 1999. Interest expense related to IRS tax audit matters
decreased $40.8 million, primarily due to a net recovery of previously paid
interest related to a successful tax audit appeal. Expenses also decreased $33.2
million due to the cessation of interim service agreements with Coventry at the
end of 1999. A $9.0 million decrease in operating expenses was related to a
change in inter-segment eliminations included in this segment. The decreases
were partially offset by $31.2 million of additional interest expense in 2000 on
private debt securities and commercial paper issued in connection with the
acquisition of BT Financial Group in August 1999. In addition, a $10.0 million
increase was related primarily to corporate initiatives funded by this segment.

                                        76

    Income tax expense (benefits) increased $16.7 million to $15.0 million of
tax expense in 2000, from a $1.7 million income tax benefit in 1999. The
increase was primarily a result of an increase in pre-tax operating earnings,
which included tax exempt income. The effective income tax rate for this segment
was lower than the corporate income tax rate of 35% in both 2000 and 1999
because of tax exempt income.

    As a result of the foregoing factors, operating earnings increased $58.2
million to $67.7 million in 2000, from $9.5 million in 1999.

    Net realized capital gains, as adjusted, decreased $204.2 million, or 72%,
to $80.3 million in 2000, from $284.5 million in 1999. The decrease was
primarily due to decreased sales of invested assets, primarily equity
securities, in 2000. We sold a significant portion of our equity securities
portfolio in 1999 and 1998 to reduce our exposure to common stock and to realize
appreciation.

    As a result of the foregoing factors and the inclusion of non-recurring
items in 2000, net income decreased $247.0 million, or 84%, to $47.0 million in
2000, from $294.0 million in 1999. In 2000, net income included the negative
effect of non-recurring items totaling $101.0 million, net of tax, related to:
(1) a loss contingency reserve established for sales practices litigation ($93.8
million) and (2) demutualization costs ($7.2 million), as previously discussed
under the caption "-- Transactions Affecting Comparability of Results of
Operations -- Operating Earnings and Non-Recurring Items".

  YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

    Total operating revenues decreased $280.6 million, or 82%, to $61.9 million
in 1999, from $342.5 million in 1998. Our HMO operations contributed $272.6
million of total revenues in 1998, prior to being transferred to Coventry.

    Excluding the impact of HMO operations, total operating revenues decreased
$8.0 million, or 11%, to $61.9 million in 1999, from $69.9 million in 1998. Our
U.S. asset management operations were transferred to the U.S. Asset Management
and Accumulation segment, effective January 1, 1999, and the financial results
of the U.S. asset management operations are no longer reported in the Corporate
and Other segment. This transfer resulted in decreased revenues of $22.7
million, representing $10.6 million of fee revenues collected from institutional
clients for investment management services in 1998 and $12.1 million of net
investment income related to the operations in 1998. An additional decrease in
net investment income of $10.5 million was primarily due to $520.0 million of
invested assets sold in 1999 to partially fund the acquisition of BT Financial
Group. The decreases were partially offset by a $28.9 million increase in net
investment income, related to our pro rata share of Coventry's net income, as a
result of Coventry's improved earnings in 1999, as compared to 1998.

    Total expenses decreased $376.5 million, or 87%, to $54.1 million in 1999,
from $430.6 million in 1998. Our HMO operations contributed $342.3 million of
expenses in 1998 prior to being transferred to Coventry.

    Excluding the impact of HMO operations, total expenses decreased $34.2
million, or 39%, to $54.1 million in 1999, from $88.3 million in 1998. The
decrease was primarily related to $16.3 million of operating expenses of the
U.S. asset management operations that were transferred to the U.S. Asset
Management and Accumulation segment, effective January 1, 1999. Prior to the
transfer, these expenses were reported in the Corporate and Other segment.

    Income tax benefits decreased $42.1 million, or 96%, to $1.7 million in
1999, from $43.8 million in 1998. As a result of an increase in pre-tax
operating earnings, income tax benefits decreased $33.5 million. The remaining
$8.6 million income tax benefit decrease was related to settlements of prior
year IRS tax audits.

    As a result of the foregoing factors, operating earnings increased $53.8
million, or 121%, to $9.5 million in 1999, from a $44.3 million operating loss
in 1998.

    Net realized capital gains, as adjusted, decreased $7.6 million, or 3%, to
$284.5 million in 1999, from $292.1 million in 1998. We sold a significant
portion of our equity securities portfolio in 1999 and 1998 to reduce our
exposure to common stock and to realize appreciation. Our sales of invested
assets, primarily equity securities, increased in 1999 and resulted in a $33.1
million increase in realized capital gains. This increase was more than offset
by a $40.7 million increase in capital gains taxes in 1999, compared to 1998.
Capital gains taxes were lower in 1998, due to permanent income tax differences
in that year related to a gain on appreciated common stock contributed to the
Principal Financial Group Foundation that was not realized for income tax
purposes.

    As a result of the foregoing factors and the inclusion of non-recurring
items in 1998, net income increased $38.7 million, or 15%, to $294.0 million in
1999, from $255.3 million in 1998. In 1998, net income included non-recurring
items totaling $7.5 million, net of tax, related to:

    - the positive effects of a release of tax reserves; and

    - the negative effects of (a) a contribution related to permanent endowment
      of the Principal Financial Group Foundation and (b) expenses related to
      our reorganization into a mutual insurance holding company structure, as
      previously discussed under the caption "-- Transactions Affecting
      Comparability of Results of Operations -- Operating Earnings and
      Non-Recurring Items".
                                        77

LIQUIDITY AND CAPITAL RESOURCES

    Liquidity describes the ability of a company to generate sufficient cash
flows to meet the cash requirements of business operations. The primary source
of our liquidity will be dividends we receive from Principal Life. We could also
receive dividends from our other direct subsidiaries, including Princor
Financial Services Corporation, Principal Financial Services (Australia) Inc.,
Principal International de Chile, S.A. and PFG do Brasil Ltda. However, given
the historical cash flows of the operations and financial results of these
subsidiaries, it is unlikely that we may rely upon them for significant cash
flow in the next twelve months. In addition, under the plan of conversion, we
may retain up to $250.0 million of the net proceeds from this offering to be
used for working capital, payment of dividends and other general corporate
purposes.

    The payment of dividends by Principal Life to us is limited by Iowa laws.
Under Iowa laws, Principal Life may pay dividends only from the earned profits
arising from its business and must receive the prior approval of the Insurance
Commissioner of the State of Iowa to pay any dividend that would exceed
statutory limitations. The current statutory limitation is the greater of:

    - 10% of Principal Life's statutory surplus as of the previous calendar
      year-end; or

    - the net gain from operations of Principal Life determined on a statutory
      basis for the previous calendar year.

    Iowa law gives the Insurance Commissioner of the State of Iowa discretion to
disapprove requests for dividends in excess of these limits. Principal Life was
able to pay approximately $760.9 million in statutory dividends in 2001 based on
its 2000 statutory financial results without being subject to the restrictions
on payment of extraordinary stockholder dividends, all of which as of August 24,
2001 has been declared and paid. The ability to make dividends or distributions
in the future will depend on the amounts of statutory surplus and net gain from
operations determined on a statutory basis for the previous year.

    Our primary uses of liquidity could include payment of dividends on our
common stock, interest payments and any other payments related to debt
servicing, payment of general operating expenses, contributions to subsidiaries,
potential acquisitions and the repurchase of our common stock. Any such
repurchases would occur after due consideration and approval by our board of
directors.

  SOURCES AND USES OF CASH OF CONSOLIDATED OPERATIONS

    Net cash provided by operating activities was $1,452.2 million and $815.3
million for the six months ended June 30, 2001 and 2000, respectively. The
increase was primarily due to a decrease in cash paid for operating expenses.
Net cash provided by operating activities was $2,637.3 million, $2,106.0 million
and $1,963.1 million for the years ended December 31, 2000, 1999 and 1998,
respectively. The increase in 2000 was primarily due to an increase in customer
and escrow deposit liabilities for Principal Bank compared to 1999. The increase
in 1999 resulted primarily from an increase related to current and deferred
income taxes compared to 1998.

    Net cash used in investing activities was $2,959.6 million for the six
months ended June 30, 2001 and net cash provided by investing activities was
$310.0 million for the six months ended June 30, 2000. The increase in cash used
was primarily due to an increase in net cash invested in available-for-sale
securities during the period. Net cash used in investing activities was $1,273.3
million, $3,341.2 million and $739.6 million for the years ended December 31,
2000, 1999 and 1998, respectively. The decrease in cash used in 2000 was
primarily due to a decrease in purchases of interests in subsidiaries in 2000
compared to 1999, primarily a result of the purchase of BT Financial Group in
1999. The increase in 1999 compared to 1998 resulted primarily from an increase
in purchases of available-for-sale fixed maturities and purchases of interests
in subsidiaries, primarily BT Financial Group.

    Net cash provided by financing activities was $952.7 million for the six
months ended June 30, 2001 and net cash used in financing activities was
$1,109.1 million for the six months ended June 30, 2000. Net cash provided
increased as a result of a positive inflow of net investment contract deposits
and net proceeds received from short-term borrowings. Net cash used in financing
activities was $1,006.9 million, net cash provided by financing activities was
$1,343.9 million and net cash used in financing activities was $1,308.7 million
for the years ended December 31, 2000, 1999 and 1998, respectively. The increase
in cash used in 2000 compared to 1999 was primarily due to the change in net
deposits related to investment contracts and due to a decrease in issuance of
debt. The increase in cash provided in 1999 resulted primarily from issuance of
debt, primarily in connection with the acquisition of BT Financial Group in
August 1999, and an increase in net deposits related to investment contract
deposits compared to 1998.

    Cash flow requirements are also supported by committed lines of credit
totaling $600.0 million, of which there were no outstanding balances as of June
30, 2001. The lines of credit are available to provide backup of the commercial
paper programs.

    Given the historical cash flow of our subsidiaries and the financial results
of these subsidiaries, we believe the cash flow from our consolidated operating
activities over the next year will provide sufficient liquidity for our
operations, as well as to satisfy interest payments and any payments related to
debt servicing.

                                        78

  PRINCIPAL LIFE

    Historically, the principal cash flow sources for Principal Life have been
premiums from life and health insurance products, pension and annuity deposits,
asset management fee revenues, administrative services fee revenues, income from
investments, proceeds from the sales or maturity of investments and short-term
borrowings. Cash outflows consist primarily of payment of benefits to
policyholders and beneficiaries, income and other taxes, current operating
expenses, payment of dividends to policyholders, payments in connection with
investments acquired, payments made to acquire subsidiaries, payment of
dividends to parent, and payments relating to policy and contract surrenders,
withdrawals, policy loans, interest expense and repayment of short-term
borrowings.

    Principal Life maintains investment strategies generally intended to provide
adequate funds to pay benefits without forced sales of investments. Products
having liabilities with longer lives, such as life insurance and full-service
payout pension products, are matched with assets having similar estimated lives
such as mortgage loans, long-term bonds and private placement bonds.
Shorter-term liabilities are matched with investments such as short and
medium-term fixed maturities. In addition, highly liquid, high quality
short-term U.S. Treasury securities and other liquid investment grade fixed
maturities are held to fund anticipated operating expenses, surrenders,
withdrawals and development and maintenance expenses associated with new
products and technologies. See "-- Quantitative and Qualitative Information
about Market Risk -- Interest Rate Risk" for a discussion of duration matching.

    Our privately placed fixed maturity securities, commercial mortgage loans
and real estate investments are generally less liquid than our publicly traded
fixed maturity securities. As of June 30, 2001 these asset classes represented
approximately 52% of the value of our consolidated invested assets.

    Life insurance companies generally produce a positive cash flow from
operations, as measured by the amount by which cash inflows are adequate to meet
benefit obligations to policyholders and normal operating expenses as they are
incurred. The remaining cash flow is generally used to increase the asset base
to provide funds to meet the need for future policy benefit payments and for
writing and acquiring new business. It is important to match the investment
portfolio maturities to the cash flow demands of the type of annuity, investment
or insurance product being provided. Principal Life continuously monitors
benefits, surrenders and maturities to provide projections of future cash
requirements. As part of this monitoring process, Principal Life performs cash
flow testing of many of its assets and liabilities under various scenarios to
evaluate the adequacy of reserves. In developing its investment strategy,
Principal Life establishes a level of cash and securities which, combined with
expected net cash inflows from operations, maturities of fixed maturity
investments and principal payments on mortgage-backed securities, are believed
adequate to meet anticipated short-term and long-term benefit and expense
payment obligations. There can be no assurance that future experience regarding
benefits and surrenders will be similar to historic experience since withdrawal
and surrender levels are influenced by such factors as the interest rate
environment and the claims paying ability and financial strength ratings of
Principal Life.

    Principal Life takes into account asset-liability management considerations
in the product development and design process. Contract terms of 97% of
Principal Life's interest-sensitive products as of December 31, 2000 include
surrender and withdrawal provisions which mitigate the risk of losses due to
early withdrawals. These provisions generally do one or more of the following:
limit the amount of penalty-free withdrawals, limit the circumstances under
which withdrawals are permitted, or assess a surrender charge or market value
adjustment relating to the underlying assets. The market value adjustment
feature in Principal Life's fixed annuity products adjusts the surrender value
of a contract in the event of surrender prior to the end of the contract period
to protect Principal Life against losses due to higher interest rates at the
time of surrender. The following table summarizes Principal Life's statutory
liabilities for annuities and deposit funds by their contractual withdrawal
provisions:

                                                               AS OF DECEMBER 31,
                                                                      2000
                                                               ------------------
                                                                ($ IN MILLIONS)
                                                            
STATUTORY LIABILITIES FOR ANNUITIES AND DEPOSIT FUNDS:
  Not subject to discretionary withdrawal...................       $17,813.8
  Subject to discretionary withdrawal with adjustments:
  Specified surrender charges at book value less surrender
    charge of 5% or more....................................           670.9
  Market value adjustments..................................        40,535.0
                                                                   ---------
         Subtotal...........................................        59,019.7
  Subject to discretionary withdrawal without adjustments...         2,138.1
                                                                   ---------
         Total..............................................       $61,157.8
                                                                   =========

  INTERNATIONAL OPERATIONS

    BT Financial Group required no infusions of capital for the six months ended
June 30, 2001 and $59.3 million and $1.6 million for the years ended December
31, 2000 and 1999, respectively, to meet cash flow requirements. We do not

                                        79

anticipate making future capital contributions. Primary sources of cash inflows
for BT Financial Group are fee revenues and interest spread earned on margin
lending operations. Cash outflows consist primarily of operating expenses.

    Principal International is in a development or entry stage in several
countries. Historically, principal cash flow sources for Principal International
have been pension and annuity deposits, asset management fee revenues,
administrative services fee revenues, insurance premiums, income from
investments, proceeds from the sales or maturity of investments and short-term
borrowings. Cash outflows consist primarily of payment of benefits to
policyholders and beneficiaries, income and other taxes, current operating
expenses, payments in connection with investments acquired, and payments
relating to policy and contract surrenders, withdrawals, policy loans, interest
expense and repayment of short-term borrowings.

    Principal International maintains investment strategies generally intended
to provide adequate funds to pay benefits without forced sales of investments.
Highly liquid, high quality short-term government securities and other liquid
investment grade fixed maturities are held to fund anticipated operating cash
outflows and development and maintenance expenses associated with new products
and technologies.

    Principal International's operating companies monitor benefits, surrenders
and maturities to provide projections of future cash requirements. There can be
no assurance that future experience regarding benefits and surrenders will be
similar to historic experience since withdrawal and surrender levels are
influenced by factors such as the interest rate environment.

    Our Brazilian and Chilean operations produced a positive cash flow from
operations in the first six months of 2001 and in 2000. These cash flows have
been historically maintained at the local country level for strategic expansion
purposes. Our other international operations have required infusions of capital
of $19.7 million for the six months ended June 30, 2001 and $75.8 million,
$126.8 million and $219.7 million for the years ended December 31, 2000, 1999
and 1998, respectively, to meet the cash flow requirements of those operations
or to fund acquisitions. These other operations are primarily in the start-up
stage or are expanding in the short term. Our capital funding of these
operations is consistent with our long term strategy to establish viable
companies that can sustain future growth from internally generated sources.

QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK

  MARKET RISK EXPOSURES AND RISK MANAGEMENT

    Market risk is the risk that we will incur losses due to adverse
fluctuations in market rates and prices. Our primary market risk exposure is to
changes in interest rates, although we also have exposures to changes in equity
prices and foreign currency exchange rates.

    The active management of market risk is an integral part of our operations.
We manage our overall market risk exposure within established risk tolerance
ranges by using the following approaches:

    - rebalance our existing asset or liability portfolios;

    - control the risk structure of newly acquired assets and liabilities; or

    - use derivative instruments to modify the market risk characteristics of
      existing assets or liabilities or assets expected to be purchased.

  INTEREST RATE RISK

    Interest rate risk is the risk that we will incur economic losses due to
adverse changes in interest rates. Our exposure to interest rate risk stems
largely from our substantial holdings of guaranteed fixed rate liabilities in
our U.S. Asset Management and Accumulation segment.

    We seek to earn returns on investments that enhance our ability to offer
competitive rates and prices to customers while contributing to attractive and
stable profits and long-term capital growth. Accordingly, our investment
decisions and objectives are a function of the underlying risks and product
profiles of each primary business operation. In addition, we diversify our
product portfolio offerings to include products that contain features that will
protect us against fluctuations in interest rates. Those features include
adjustable crediting rates, policy surrender charges and market value
adjustments on liquidations.

    We manage the interest rate risk inherent in our assets relative to the
interest rate risk inherent in our liabilities. One of the measures we use to
quantify this exposure is duration. Duration measures the change in the fair
value of assets and liabilities for given changes in interest rates. For
example, if interest rates increase by a hypothetical 100 basis points, the fair
value of an asset with a duration of 5 years is expected to decrease in value by
approximately 5%.

    To calculate duration, we project asset and liability cashflows. These
cashflows are discounted to a net present value basis using a spot yield curve,
which is a blend of the spot yield curves for each of the asset types in the

                                        80

portfolio. Duration is calculated by re-calculating these cashflows and
redetermining the net present value based upon an alternative level of interest
rates, and determining the percentage change in fair value.

    As of June 30, 2001, the difference between the asset and liability
durations on our primary duration managed portfolio was 0.04 years. This
duration gap indicates that as of this date the sensitivity of the fair value of
our assets to interest rate movements is greater than that of the fair value of
our liabilities. Our goal is to minimize the duration gap. Currently, our
guidelines dictate that total duration gaps between the asset and liability
portfolios must be within 0.25 years. The value of the assets in this portfolio
was $24,257.1 million as of June 30, 2001.

    We also manage interest rate risk by employing a partial duration analysis.
With this technique, the yield curve is dissected into various term components
and a partial duration is calculated for each. Each partial duration represents
the potential change in fair value of the asset or liability to interest rate
shift in rates in the applicable component of the yield curve. We minimize
potential volatility in the fair value of surplus of Principal Life as a result
of changes in the yield curve by managing each partial duration gap between the
assets and liabilities within established guidelines.

    With respect to our primary duration managed portfolio, we use several
methods to correct any potential total or partial duration gaps that are outside
of our established risk tolerance ranges. We can rebalance the existing asset or
liability portfolios or we can redirect new asset purchases until the asset
portfolio is better aligned with the liabilities and our duration gaps are back
within their limits. If a more expedient correction is desired, another method
we use is forward interest rate swaps. These swaps are designed to move duration
exposure from one specific point on the yield curve to another, and are an
efficient way to quickly shift the partial and total duration profile of the
asset portfolio so that duration gaps and hence interest rate risk is minimized.

    For products such as whole life insurance, term life insurance and single
premium deferred annuities, the liability cashflow is less predictable, and a
duration-matching strategy is less reliable and manageable. We do, however, try
to manage the duration of these portfolios. For these products, we manage
interest rate risk based on a modeling process that considers the target average
life, maturities, crediting rates and assumptions of policyholder behavior. As
of June 30, 2001, the weighted-average difference between the asset and
liability durations on these portfolios was 1.2 years. This duration gap
indicates that as of this date the sensitivity of the fair value of our assets
to interest rate movements is greater than that of the fair value of our
liabilities. We attempt to monitor this duration gap consistent with our overall
risk/reward tolerances. The value of the assets in these portfolios was
$12,184.7 million as of June 30, 2001.

    We also have a block of participating general account pension business that
passes the actual investment performance of the assets to the customer. The
investment strategy of this block is to maximize investment return to the
customer on a "best efforts" basis, and there is little or no attempt to manage
the duration of this portfolio since there is little or no interest rate risk.
The value of the assets in these portfolios was $2,464.6 million as of June 30,
2001.

    Using the assumptions and data in effect as of June 30, 2001, we estimate
that a 100 basis point immediate, parallel increase in interest rates decreases
the net fair value of our portfolio by $169.3 million. The following table
details the estimated changes by risk management strategy:

                                                                      AS OF
                                                                  JUNE 30, 2001       NET FAIR VALUE
RISK MANAGEMENT STRATEGY                                      VALUE OF TOTAL ASSETS       CHANGE
------------------------                                      ---------------------   --------------
                                                                         ($ IN MILLIONS)
                                                                                
Primary duration-managed....................................        $24,257.1            $ (21.1)
Duration-monitored..........................................         12,184.7             (148.2)
Non duration-managed........................................          2,464.6                 --
                                                                    ---------            -------
         Total..............................................        $38,906.4            $(169.3)
                                                                    =========            =======

    Our selection of a 100 basis point immediate, parallel increase in interest
rates is a hypothetical rate scenario we use to demonstrate potential risk.
While a 100 basis point immediate, parallel increase does not represent our view
of future market changes, it is a near term reasonably possible hypothetical
change that illustrates the potential impact of such events. While these fair
value measurements provide a representation of interest rate sensitivity, they
are based on our portfolio exposures at a point in time and may not be
representative of future market results. These exposures will change as a result
of ongoing portfolio transactions in response to new business, management's
assessment of changing market conditions and available investment opportunities.

    We are also exposed to interest rate risk in our Mortgage Banking segment.
We manage this risk by striving to balance our loan origination and loan
servicing operations, the two of which are generally counter-cyclical. In
addition, we use various financial instruments, including derivatives contracts,
to manage the interest rate risk specifically related to committed loans in the
pipeline and mortgage servicing rights. The overall objective of our interest
rate risk management policies is to offset changes in the values of these items
resulting from changes in interest rates. We do not speculate on the direction
of interest rates in our management of interest rate risk.
                                        81

    We manage interest rate risk on our mortgage loan pipeline by buying and
selling mortgage-backed securities in the forward markets, over-the-counter
options on mortgage-backed securities, U.S. Treasury futures contracts and
options on futures contracts. We also use interest rate floors, futures
contracts, options on futures contracts, swaps and swaptions in hedging a
portion of our portfolio of mortgage servicing rights from prepayment risk
associated with changes in interest rates.

    We measure pipeline interest rate risk exposure by adjusting the at-risk
pipeline in light of the theoretical optionality of each applicant's rate/price
commitment. The at-risk pipeline, which consists of closed loans and rate locks,
is then refined at the product type level to express each product's sensitivity
to changes in market interest rates in terms of a single current coupon MBS
duration. Suitable hedges are selected and a similar methodology applied to this
hedge position. We limit our risk exposure by requiring that the net position
value not change by more than $10 million given an instantaneous change in the
benchmark MBS price of +/-2.5%. This price sensitivity analysis is performed at
least once daily. The value of the loans in the pipeline as of June 30, 2001 was
$7.3 billion. Due to the impact of our hedging activities, we estimate that a
100 basis point immediate parallel increase in the interest rates decreases the
June 30, 2001 net position value by less than $24.4 million.

    The financial risk associated with our mortgage servicing operations is the
risk that the market value of the servicing asset falls below its GAAP book
value. To measure this risk, we analyze each servicing risk tranche's GAAP book
value in relation to the then current market value for similar servicing rights.
We perform this valuation using option-adjusted spread valuation techniques
applied to each risk tranche. We produce tranche market values at least monthly.

    The market value of the servicing asset declines as interest rates decrease
due to possible mortgage loan servicing rights impairment that may result from
increased current and projected future prepayment activity. The change in value
of the servicing asset due to interest rate movements is reduced by the use of
financial instruments, including derivative contracts, that increase in
aggregate value when interest rates decline. We recently shifted our servicing
hedge portfolio from U.S. Treasury related instruments to London Inter-Bank
Offer Rate hedges, including swaps and swaptions. Based on values as of June 30,
2001, a 100 basis point parallel decrease in interest rates produces a $93
million decline in value of the servicing asset of our Mortgage Banking segment,
due to the impact of these hedging vehicles and the current differences between
current market values and GAAP book values.

    CASH FLOW VOLATILITY.  Cash flow volatility arises as a result of several
factors. One is the inherent difficulty in perfectly matching the cash flows of
new asset purchases with that of new liabilities. Another factor is the inherent
cash flow volatility of some classes of assets and liabilities. In order to
minimize cash flow volatility, we manage differences between expected asset and
liability cash flows within pre-established guidelines.

    We also seek to minimize cash flow volatility by restricting the portion of
securities with redemption features held in our invested asset portfolio. These
asset securities include redeemable corporate securities, mortgage-backed
securities or other assets with options that, if exercised, could alter the
expected future cash inflows. In addition, we limit sales liabilities with
features such as puts or other options that may change the cash flow profile of
the liability portfolio.

    DERIVATIVES.  We use various derivative financial instruments to manage our
exposure to fluctuations in interest rates, including interest rate swaps,
Principal Only swaps, interest rate floors, swaptions, U.S. Treasury futures,
Treasury rate guarantees and mortgage-backed forwards and options. We use
interest rate futures contracts and mortgage-backed forwards to hedge changes in
interest rates subsequent to the issuance of an insurance liability, such as a
guaranteed investment contract, but prior to the purchase of a supporting asset,
or during periods of holding assets in anticipation of near term liability
sales. We use interest rate swaps and Principal Only swaps primarily to more
closely match the interest rate characteristics of assets and liabilities. They
can be used to change the interest rate characteristics of specific assets and
liabilities as well as an entire portfolio. Occasionally, we will sell a
callable liability or a liability with attributes similar to a call option. In
these cases, we will use interest rate swaptions or similar products to hedge
the risk of early liability payment thereby transforming the callable liability
into a fixed term liability.

    We also seek to reduce call or prepayment risk arising from changes in
interest rates in individual investments. We limit our exposure to investments
that are prepayable without penalty prior to maturity at the option of the
issuer, and we require additional yield on these investments to compensate for
the risk that the issuer will exercise such option. An example of an investment
we limit because of the option risk is residential mortgage-backed securities.
We assess option risk in all investments we make and, when we assume such risk,
we seek to price for it accordingly to achieve an appropriate return on our
investments.

    In conjunction with the interest rate swaps, interest rate swaptions and
other derivatives, we are exposed to counterparty risk, or the risk that
counterparty fails to perform the terms of the derivative contract. We actively
manage this risk by:

    - establishing exposure limits which take into account non-derivative
      exposure we have with the counterparty as well as derivative exposure;

                                        82

    - performing similar credit analysis prior to approval on each derivatives
      counterparty that we do when lending money on a long-term basis;

    - limiting exposure to AA- credit or better;

    - conducting stress-test analysis to determine the maximum exposure created
      during the life of a prospective transaction; and

    - daily monitoring of counterparty credit ratings.

    All new derivative counterparties are approved by the investment committee.
We believe the risk of incurring losses due to nonperformance by our
counterparties is remote and that such losses, if any, would not be material.
Futures contracts trade on organized exchanges and, therefore, effectively have
no credit risk.

    The table below shows the interest rate sensitivity of our derivatives
measured in terms of fair value. These exposures will change as a result of
ongoing portfolio and risk management activities.

                                                                    AS OF JUNE 30, 2001
                                              ---------------------------------------------------------------
                                                                            FAIR VALUE (NO ACCRUED INTEREST)
                                                                           ----------------------------------
                                                                            -100
                                                             WEIGHTED       BASIS                  +100 BASIS
                                              NOTIONAL       AVERAGE        POINT                    POINT
                                               AMOUNT      TERM (YEARS)    CHANGE     NO CHANGE      CHANGE
                                              ---------    ------------    -------    ---------    ----------
                                                                      ($ IN MILLIONS)
                                                                                    
Interest rate swaps.........................  $ 3,908.2        6.06(1)     $ (35.8)    $  7.5        $ 35.6
Principal Only swaps........................      250.0        2.56(1)        23.2      (11.3)        (18.9)
Interest rate floors........................    3,200.0        5.01(2)        62.2       44.1         (23.2)
U.S. Treasury futures.......................      235.7        0.25(3)        (8.7)       2.3           9.4
Swaptions...................................    1,815.0        2.87(4)        22.1       24.0         (18.3)
Treasury rate guarantees....................       61.0        0.04(5)        (3.3)       1.1           5.5
Mortgage-backed forwards and options........    9,770.5        0.17(5)      (198.8)     552.5         243.4
                                              ---------                    -------     ------        ------
         Total..............................  $19,240.4                    $(139.1)    $620.2        $233.5
                                              =========                    =======     ======        ======

---------------

(1) Based on maturity date of swap.
(2) Based on maturity date of floor.
(3) Based on maturity date.
(4) Based on option date of swaption.
(5) Based on settlement date.

    We use U.S. Treasury futures to manage our over/under commitment position,
and our position in these contracts changes daily.

    DEBT ISSUED AND OUTSTANDING.  As of June 30, 2001, the aggregate fair value
of debt was $1,390.4 million. A 100 basis point, immediate, parallel decrease in
interest rates would increase the fair value of debt by approximately $70.9
million.

                                                                        AS OF JUNE 30, 2001
                                                              ---------------------------------------
                                                                 FAIR VALUE (NO ACCRUED INTEREST)
                                                              ---------------------------------------
                                                               -100 BASIS                 +100 BASIS
                                                              POINT CHANGE   NO CHANGE   POINT CHANGE
                                                              ------------   ---------   ------------
                                                                          ($ IN MILLIONS)
                                                                                
7.95% notes payable, due 2004...............................    $  217.5     $  211.6      $  205.9
8.2% notes payable, due 2009................................       526.8        495.9         467.2
7.875% surplus notes payable, due 2024......................       196.3        180.4         165.2
8% surplus notes payable, due 2044..........................        97.9         88.3          80.0
Non-recourse mortgages and notes payable....................       154.0        145.4         137.5
Other mortgages and notes payable...........................       268.8        268.8         268.8
                                                                --------     --------      --------
         Total long-term debt...............................    $1,461.3     $1,390.4      $1,324.6
                                                                ========     ========      ========

  EQUITY RISK

    Equity risk is the risk that we will incur economic losses due to adverse
fluctuations in a particular common stock. As of June 30, 2001, the fair value
of our equity securities was $578.8 million. A 10% decline in the value of the
equity securities would result in an unrealized loss of $57.9 million.

                                        83

    We also have indirect equity risk exposure with respect to BT Financial
Group margin lending operations. Under the terms of this financing arrangement,
BT Financial Group margin lending operations allow retail clients and
independent financial advisors on behalf of clients, within limits approved by
senior management, to borrow funds from BT Financial Group to invest in an
approved list of securities and mutual fund investments which serve as security
for the loan. The risk of loan default increases as the value of the underlying
securities declines. This risk is actively managed through the use of margin
calls on loans when the underlying securities fall below established levels.
Overall, the margin lending portfolio is limited to a ratio of borrowed funds to
market value of securities of 60%. On November 30, 1999, BT Financial Group
margin lending operations securitized its margin lending portfolio with Westpac
Banking Corporation, an Australian bank. Under the terms of this financing, BT
Financial Group margin lending operations are required to allocate capital equal
to approximately 7% of the outstanding borrowed amount, as a cushion for loan
defaults. As of June 30, 2001, the margin lending portfolio was $569.1 million,
or A$1,120.1 million, while the ratio of borrowed funds to market value of
securities was 44%, below that of the maximum allowed.

  FOREIGN CURRENCY RISK

    Foreign currency risk is the risk that we will incur economic losses due to
adverse fluctuations in foreign currency exchange rates. This risk arises from
our international operations and foreign currency-denominated funding agreements
issued to non-qualified institutional investors in the international market. The
notional amount of our currency swap agreements associated with
foreign-denominated liabilities as of June 30, 2001 was $3,078.5 million. We
also have fixed maturity securities that are denominated in foreign currencies.
However, we use derivatives to hedge the foreign currency risk, both interest
payments and the final maturity payment, of these funding agreements and
securities. As of June 30, 2001, the fair value of our foreign currency
denominated fixed maturity securities was $381.8 million. We use currency swap
agreements of the same currency to hedge the foreign currency exchange risk
related to these investments. The notional amount of our currency swap
agreements associated with foreign-denominated fixed maturity securities as of
June 30, 2001 was $398.5 million. With regard to our international operations,
we attempt to do as much of our business as possible in the functional currency
of the country of operation. At times, however, we are unable to do so, and in
these cases, we use foreign exchange derivatives to hedge the resulting risks.

    Additionally, we utilize foreign currency swaps related to $665.0 million of
private notes issued in connection with our acquisition of BT Financial Group.
Currently the interest payments related to these notes are serviced through
operating cash flows of our Australian operations. By utilizing the foreign
currency and interest rate swaps, the impact of Australian dollar and U.S.
dollar exchange rate fluctuations have a minimal effect on our ability to rely
on the cash flows of our Australian operations to service the interest and
principal payments related to the notes.

    We estimate that as of June 30, 2001, a 10% immediate unfavorable change in
each of the foreign currency exchange rates to which we are exposed would result
in no material change to the net fair value of our foreign currency denominated
instruments identified above, including the currency swap agreements. The
selection of a 10% immediate unfavorable change in all currency exchange rates
should not be construed as a prediction by us of future market events, but
rather as an illustration of the potential impact of such an event. Our largest
individual currency exposure is to fluctuations between the Australian dollar
and the U.S. dollar.

  EFFECTS OF INFLATION

    We do not believe that inflation, in the United States or in the other
countries in which we operate, has had a material effect on our consolidated
operations over the past five years. In the future, however, we may be affected
by inflation to the extent it causes interest rates to rise. See "Risk
Factors -- Our efforts to reduce the impact of interest rate changes on our
profitability and surplus may not be effective".

                                        84

                                    BUSINESS

    The Principal Financial Group is a leading provider of retirement savings,
investment and insurance products and services, with $116.9 billion in assets
under management and approximately thirteen million customers worldwide as of
June 30, 2001. Our U.S. and international operations concentrate primarily on
asset management and accumulation. In addition, we offer a broad range of
individual life and disability insurance, group life and health insurance, and
residential mortgage loan origination and servicing in the United States.

    We provide a comprehensive portfolio of asset accumulation products and
services to businesses and individuals in the United States, with a
concentration on small and medium-sized businesses, which we define as
businesses with less than 1,000 employees. We place a particular emphasis on
businesses with less than 500 employees. We offer to businesses products and
services for defined contribution pension plans, including 401(k) and 403(b)
plans, defined benefit pension plans and non-qualified executive benefit plans.
We also offer annuities, mutual funds and bank products and services to the
employees of our business customers and other individuals.

    We provided services to more 401(k) plans in the United States in 2000 than
any other bank, mutual fund or insurance company, according to surveys conducted
by CFO magazine. From 1998 to 2000, our 401(k) assets under management increased
20% and our plan participants increased 8%. Within the 401(k) market for
businesses with less than 500 employees, we had the leading market share in 2000
based on number of plans (8.5%) and number of participants (11.3%) and the third
largest market share based on assets under management (6.6%), according to the
Spectrem Group. We believe that the 401(k) market has strong growth potential.
The Spectrem Group projects that assets under all 401(k) plans in the United
States will grow at a compound annual rate of 14.0%, reaching $3.2 trillion in
plan assets by 2006. The small and medium-sized business market remains
under-penetrated with only 18% of U.S. businesses with less than 500 employees
offering a 401(k) plan in 2000. Accordingly, we believe that we are uniquely
positioned to capitalize on the growth opportunities in the 401(k) plan and
other defined contribution pension plan markets in the United States and
internationally.

    Principal Capital Management, our U.S.-based asset manager, provides asset
management services to our U.S. asset accumulation businesses and third-party
institutional clients, as well as our other segments. We established Principal
Capital Management in 1999 to consolidate our extensive investment management
expertise and to focus on marketing our asset management services to third-party
institutional clients. We believe that Principal Capital Management is
well-positioned to compete in this third-party institutional market through its
expertise gained from managing a significant percentage of the assets
originating from our U.S. asset accumulation operations. As of June 30, 2001,
Principal Capital Management managed $84.0 billion in assets, of which $5.8
billion, or 7%, represented assets managed directly for third-party
institutional clients.

    Our acquisition of BT Financial Group in 1999 was a central element in the
expansion of our international asset management and accumulation businesses. As
of June 30, 2001, BT Financial Group was the fifth largest asset manager in
Australia according to ASSIRT. As of June 30, 2001, BT Financial Group had
accumulated $22.6 billion of assets under management and provided investment
advisory services to $21.1 billion in assets. We believe that the mandated
retirement savings system in Australia, called superannuation, and BT Financial
Group's strong market position, together with the expertise we have developed in
the U.S. defined contribution pension plan market, should provide for growth in
our assets under management in Australia. BT Financial Group and Principal
Capital Management together enhance our ability to compete in global asset
management.

    The activities of Principal International reflect our efforts to capitalize
on the trend toward private sector defined contribution pension systems. We
believe that this trend offers significant potential for future growth. We also
believe that the expertise we have developed in serving the U.S. pension plan
market enables us to take advantage of these opportunities. Through Principal
International, we offer retirement products and services, annuities, mutual
funds and life insurance. We operate through subsidiaries in Argentina, Chile,
Mexico and Hong Kong and joint ventures in Brazil, Japan and India.

    Our Life and Health Insurance segment offers individual life and disability
insurance as well as group life and health insurance throughout the United
States. Our individual life and disability insurance business served
approximately 750,000 policyholders with $81.8 billion of life insurance in
force as of June 30, 2001. Our individual insurance products include
interest-sensitive life, traditional life and disability insurance. Our group
insurance business served approximately 80,000 employers covering approximately
5.0 million members and had $70.7 billion of group life insurance in force as of
June 30, 2001. Our group insurance products include life, disability, medical,
dental and vision insurance, and administrative services.

    Our Mortgage Banking segment engages in originating, purchasing, selling and
servicing residential mortgage loans in the United States. We service a majority
of the loans that we originate. We originated or purchased $15.4 billion in new
mortgage loans for the six months ended June 30, 2001, compared to $8.3 billion
for the year ended December 31, 2000. We serviced a portfolio of $64.4 billion
of mortgage loans as of June 30, 2001. Residential mortgages represent a
component of our overall portfolio of market-driven financial products and
services.

                                        85

ASSETS UNDER MANAGEMENT BY SEGMENT

    For management and financial reporting purposes, we organize our businesses
into four operating segments:

    - U.S. Asset Management and Accumulation;

    - International Asset Management and Accumulation;

    - Life and Health Insurance; and

    - Mortgage Banking.

    We also have a Corporate and Other segment which consists of the assets and
activities that have not been allocated to any other segment.

    One of the primary measures of our businesses is assets under management. We
define "assets under management" as any assets on which we earn an asset-based
fee or a spread. Fee-based products, such as mutual funds, provide no investment
guarantee to the customer and provide us the potential for higher returns on our
capital. Customer deposits in fee-based investments are either included in our
separate accounts or do not appear on our balance sheet. The investment results
of the separate account assets generally pass through to the separate account
policyholders and contractholders, less management fees, so that we bear limited
or no investment risk on such assets. Spread-based products, such as guaranteed
investment contracts, provide a guarantee of return to customers for a specified
period of time. The spread is the difference between the investment income we
earn and the investment income we credit to our customers. We generally report
customer deposits in spread-based investments on our balance sheet.

    The table below shows by segment the amount of assets on which we earned an
asset-based fee as compared to that on which we earned a spread for the periods
indicated:

                            ASSETS UNDER MANAGEMENT
                       FEE-BASED/SPREAD-BASED COMPOSITION

                                 AS OF JUNE 30,                                    AS OF DECEMBER 31,
                             -----------------------   --------------------------------------------------------------------------
                                      2001                      2000                      1999                    1998(2)
                             -----------------------   -----------------------   -----------------------   ----------------------
                              FEE    SPREAD   TOTAL     FEE    SPREAD   TOTAL     FEE    SPREAD   TOTAL     FEE    SPREAD   TOTAL
                             -----   ------   ------   -----   ------   ------   -----   ------   ------   -----   ------   -----
                                                                       ($ IN BILLIONS)
                                                                                        
U.S. Asset Management and
  Accumulation.............  $47.3   $31.4    $ 78.7   $48.9   $29.2    $ 78.1   $46.9   $28.7    $ 75.6   $38.0   $29.2    $67.2
International Asset
  Management and
  Accumulation.............   23.0     2.7      25.7    25.6     2.8      28.4    28.4     2.2      30.6     0.3     0.9      1.2
Life and Health
  Insurance................    2.0     7.5       9.5     2.1     7.2       9.3     2.0     6.7       8.7     1.3     6.9      8.2
Mortgage Banking(1)........     --     0.3       0.3      --     0.2       0.2      --     0.5       0.5      --     0.7      0.7
                             -----   -----    ------   -----   -----    ------   -----   -----    ------   -----   -----    -----
Subtotal...................  $72.3   $41.9     114.2   $76.6   $39.4     116.0   $77.3   $38.1     115.4   $39.6   $37.7     77.3
                             =====   =====             =====   =====             =====   =====             =====   =====
Corporate and Other........                      2.7                       1.5                       1.2                      3.1
                                              ------                    ------                    ------                    -----
        Total..............                   $116.9                    $117.5                    $116.6                    $80.4
                                              ======                    ======                    ======                    =====

---------------

(1) Excludes our mortgage loan servicing portfolio.

(2) Includes assets managed by Invista Capital Management and the former
    investment department of Principal Life prior to the formation of Principal
    Capital Management, effective January 1, 1999.

    Our primary focus is on asset management and accumulation, with particular
emphasis on retirement products and services. We define "asset accumulation" as
the sale of investment-oriented products and services for which we provide
administrative services and/or offer investment choices from one or more asset
managers. Our asset accumulation products and services include pensions, mutual
funds, individual annuities and banking products. The fees our customers pay for
these products and services are based on the asset balance of the product the
customer purchases. We retain a portion of these fees in return for our
administrative services and pay a portion to the asset manager, which may be us.
We report the asset balances within our asset accumulation operations as assets
under management if we earn an asset-based fee or a spread on those assets,
regardless of whether our affiliated asset managers manage any of the underlying
investment assets.

    We define "asset management" as the provision of investment advisory
services, including the screening, selection, purchase and ultimate sale of
specific financial assets. We refer to the entity that provides these services
as an "asset manager." The asset manager may be affiliated with us, such as
Principal Capital Management and BT Financial Group, or may be an unaffiliated
third-party.

                                        86

    We manage a large majority of assets originating from our asset accumulation
operations. The table below shows the assets managed by asset manager:

                            ASSETS UNDER MANAGEMENT
                                BY ASSET MANAGER

                                                                AS OF JUNE 30,       AS OF DECEMBER 31,
                                                                ---------------    -----------------------
                                                                     2001           2000     1999    1998
                                                                ---------------    ------   ------   -----
                                                                             ($ IN BILLIONS)
                                                                                         
Principal Capital Management................................        $ 84.0         $ 83.2   $ 82.2   $77.1
BT Financial Group..........................................          21.1           24.3     28.2      --
Other Entities of the Principal Financial Group.............           4.4            3.7      2.6     1.9
Third-Party Asset Managers..................................           7.4            6.3      3.6     1.4
                                                                    ------         ------   ------   -----
         Total..............................................        $116.9         $117.5   $116.6   $80.4
                                                                    ======         ======   ======   =====

OUR STRATEGY

    Our goal is to enhance stockholder value by pursuing the most attractive
financial services opportunities consistent with the capabilities of our asset
management and accumulation operations. We intend to accomplish this goal by
increasing the growth and profitability of these businesses through the pursuit
of the following primary strategic initiatives:

    ACCELERATE THE GROWTH OF OUR U.S. ASSET ACCUMULATION BUSINESS.  We intend to
strengthen our existing distribution channels and expand into new distribution
channels, further leverage our technology to achieve operating efficiencies,
continue to expand the range of investment options and effectively cross-sell
our products and services.

    INCREASE THE GROWTH AND PROFITABILITY OF OUR INTERNATIONAL ASSET MANAGEMENT
AND ACCUMULATION BUSINESS.  We will continue to leverage our U.S. product
expertise and operating platform to strengthen our international operations. We
seek to accelerate the growth of our assets under management by capitalizing on
the international trend toward privatization of public retirement pension
systems. In addition, we intend to continue our progress in managing expenses.

    GROW OUR THIRD-PARTY INSTITUTIONAL ASSETS UNDER MANAGEMENT.  We selectively
target asset classes and customers in the United States, Australia and globally
to capitalize on the specific strengths of Principal Capital Management and BT
Financial Group. They jointly execute this strategy in their respective markets
and through marketing offices in London, Hong Kong and Singapore.

    In addition to these primary strategic initiatives, we have specific
strategies within each of our operating segments, which are described in our
operating segment discussions.

OPERATING PRINCIPLES

    To effectively realize our strategic initiatives, we are implementing the
following operating principles:

    - operate a full-service platform to serve the needs of our customers;

    - build on strong customer relationships;

    - focus on our financial performance; and

    - reinforce our culture.

  OPERATE A FULL-SERVICE PLATFORM

    We differentiate ourselves by operating a full-service platform to serve the
wide array of our customers' needs by originating sales through our diverse
distribution channels, offering a comprehensive portfolio of products and
services, administering our products and services efficiently using information
technology and managing a significant portion of the assets we accumulate as
follows:

    STRENGTHEN OUR DIVERSE DISTRIBUTION CHANNELS.  We originate sales of our
products and services through diverse distribution channels that include our
retirement services sales representatives, financial representatives, insurance
brokers, registered representatives and direct channels such as Principal
Connection(SM). We also use other distribution sources particular to each
business segment. We intend to strengthen and grow existing distribution
channels and to expand into new distribution sources for sales of our products
and services. In particular, we realigned our retirement services sales force to
focus on new sales, targeted new distribution channels to sell our 401(k)
products and services and created Principal Connection, our direct distribution
channel to individuals.

                                        87

    OFFER A COMPREHENSIVE PORTFOLIO OF MARKET-DRIVEN PRODUCTS AND SERVICES.  We
provide a comprehensive portfolio of products and services in the markets in
which we operate, as follows:

    - We focus on providing full-service asset accumulation products to
      businesses. We continue to add new investment choices to increase the
      range of investment styles, asset classes and asset managers we offer to
      our customers. In addition to our pension products and services, we offer
      a comprehensive portfolio of life and health insurance products.

    - Principal Capital Management and BT Financial Group offer a variety of
      asset classes and investment styles to institutional investors. In
      addition, we have developed a collaborative approach between these two
      firms, whereby the respective strengths and capabilities in asset classes
      of each investment operation are made available to our customers.

    - For our individual customers, including employees of our business
      customers, we offer variable and fixed individual annuities, retail mutual
      funds, individual insurance products, residential mortgages and banking
      products.

    USE TECHNOLOGY TO ENHANCE SALES, CUSTOMER SERVICE AND EFFICIENCY.  We invest
in information technology to achieve continued operational efficiency and to
deliver enhanced value to our customers through timely, responsive service and
competitive pricing.

    - In December 2000, InformationWeek ranked us among the top 25 of the 100
      most innovative companies in the United States in building profitable and
      successful customer relationships, and also profiled Impact401(k).com, our
      fully electronic 401(k) product through which the plan sponsor can handle
      the purchase, enrollment and administration of a 401(k) plan entirely
      through the Internet. We were one of only four financial services
      companies to achieve a top 25 ranking.

    - We are a leader in the use of the Internet to service our customers in the
      United States. Through our Internet site, we offer customers a
      "consolidated view" displaying all the Principal Financial Group products
      they own, including pension plans, insurance policies, mutual funds, bank
      products and mortgage balance information. Our increasing use of the
      Internet to provide pension products and services allows us to lower our
      unit costs and more efficiently serve our customers. For example, the
      number of transactions processed through Principal Direct Connect, which
      allows plan sponsors to transfer retirement data via the Internet, has
      increased from approximately 23.0 million in 1999 to approximately 84.6
      million in 2000. For the six months ended June 30, 2001, approximately
      65.0 million transactions were processed through Principal Direct Connect.

    - We seek to leverage technology developed for our U.S. operations into our
      international operations. We currently utilize a common
      client/server-based system in most countries, designed to incorporate our
      expertise from our U.S. systems.

    PROVIDE ASSET MANAGEMENT FOR A SIGNIFICANT PORTION OF THE ASSETS WE
ACCUMULATE.  Principal Capital Management and BT Financial Group manage a large
majority of the assets we accumulate. By offering investment choices that are
managed by our affiliated asset managers, we enhance our ability to retain the
asset management fees that would otherwise be paid to third-party asset
managers.

  BUILD ON STRONG CUSTOMER RELATIONSHIPS

    We are committed to building on our strong customer relationships by
providing products and services that respond to their needs and by increasing
the global awareness of our brand.

    RESPOND TO THE NEEDS OF OUR CUSTOMERS.  One of our core values is customer
focus, and we place priority on understanding and meeting their needs. We
conduct ongoing market research to monitor customer needs and preferences. We
offer a comprehensive portfolio of products and services, provide a wide range
of choices of investment styles, asset classes and asset managers, and utilize
technology built around the customer's needs and desires. We continue to expand
our product portfolio to continue to meet the changing needs of our customers.
We also use a variety of relationship-building tools, including financial
counseling, a financial education magazine, investment education materials,
account statements and our Internet website.

    INCREASE GLOBAL AWARENESS OF OUR BRAND.  We believe brand recognition is
particularly important in establishing and maintaining strong relationships with
our customers and distributors. Therefore, we have made a substantial effort to
establish the "Edge" triangle as a widely recognized logo in the United States
and the other countries in which we operate. To develop awareness of our brand,
we have maintained high-visibility advertising and event sponsorships, such as
the Olympics and the Super Bowl. For example, during the 2000 Olympic Summer
Games, we launched a new advertising campaign, "we understand what you are
working for," designed to enhance recognition and leverage our brand to attract
new customers. The Mobius Advertising Awards honored us in February 2001 with
its Mobius Award. We received a first-place award in the financial services
category for our 2000 "Happy People" print advertising campaign.
                                        88

  FOCUS ON FINANCIAL PERFORMANCE

    We have taken specific actions to improve our operating earnings over the
last several years, and we intend to continue to focus each of our businesses to
further improve financial performance. We reported record operating earnings for
2000, with an operating return on average equity of 10.5%. We believe our
financial performance will further improve if we continue to:

    - manage capital effectively;

    - improve cost management; and

    - actively manage our investment portfolio.

    MANAGE CAPITAL EFFECTIVELY.  We believe that effective management of capital
is essential to creating stockholder value. This consists of assessing the
near-term financial impact and the long-term attractiveness of each of our
businesses, as well as the appropriateness of share repurchases. We have already
taken the following initiatives:

    - We increased the discipline in our capital allocation process. Our goal is
      to improve profitability by increasing our focus on, and capital
      allocation to, asset management and accumulation products and services
      which offer us a potential for higher returns on our capital, such as
      fee-based products.

    - We exited under-performing and non-strategic businesses and markets,
      including: the HMO business; several other group medical insurance
      businesses; our retail securities brokerage operations; our pre-retirement
      asset accumulation business in Argentina; and our operations in Spain.

    - We have focused our international operations and investments in countries
      that we believe offer the greatest long-term growth opportunities,
      favorable demographics and a trend toward private sector defined
      contribution pension systems. As a result, we operate through subsidiaries
      in Argentina, Chile, Mexico and Hong Kong, and joint ventures in Brazil,
      Japan and India.

    IMPROVE COST MANAGEMENT.  We are committed to improving profitability by
actively managing our operating expenses. We seek to achieve further operating
leverage through increased operating efficiencies. We have made significant
investments in technology to enhance the efficiency of our operations,
particularly in the area of customer service and transaction processing. For
example, our annualized full-service pension transactions per U.S. employee rose
from 11,926 in 1998 to 16,026 for the six months ended June 30, 2001.

    ACTIVELY MANAGE OUR INVESTMENT PORTFOLIO.  Over the past three years, we
rebalanced our investment portfolio by reducing our exposure to equity
securities and real estate. We reoriented the portfolio toward investments that
produce higher current investment income, rather than those that produce
long-term capital gains that had historically been the focus of our investment
activities as a mutual life insurance company. In addition to reducing our
portfolio risk profile, we will continue to manage our investment portfolio to
achieve higher yields consistent with our risk management strategy.

  REINFORCE OUR CULTURE

    We are committed to strengthening our organization's performance-oriented
culture. The following are three specific activities that support this
objective:

    - We have a new incentive compensation program for our senior management
      designed to align compensation with individual and company-wide
      performance measures. We refined our performance review program to
      increase individual accountability and better align individual and
      corporate goals toward profitable growth.

    - We adopted a balanced scorecard for our employees to measure their
      performance from four perspectives: financial results; customer relations;
      internal process and learning and growth. Our balanced scorecard links
      performance in these areas to salary, establishes accountability, focuses
      employees on common goals and helps employees see how their contributions
      can affect our financial results.

    - Upon demutualization, a stock option plan designed to encourage
      broad-based employee ownership will become effective. We believe this plan
      will advance the interests of our stockholders by enhancing our ability to
      attract, retain and motivate individuals who make important contributions
      to our company. We also believe that employee equity ownership
      opportunities and performance-based incentives will closely align the
      interests of our employees with those of our stockholders.

                                        89

SEGMENT OVERVIEW

    The table below provides a summary of the markets targeted, the distribution
channels used and the products and services offered by each of our operating
segments:

                                            U.S. ASSET MANAGEMENT AND ACCUMULATION
-------------------------------------------------------------------------------------------------------------------------------
                MARKETS                               DISTRIBUTION                                 PRODUCTS/SERVICES
---------------------------------------  ---------------------------------------        ---------------------------------------
                                                                                      
Asset Accumulation
- Businesses, their employees and other      - Retirement services sales                    - Pension
  individuals                                  representatives                              - Full-service accumulation
- Not-for-profit organizations               - Institutional marketers                      - Full-service payout
- Large financial institutions and           - Affiliated financial representatives         - Investment-only
  employers for our guaranteed investment    - Affiliated and unaffiliated                  - Administration-only
  contracts, funding agreements and            registered representatives                   - Mutual funds
  institutional mutual funds                 - Independent brokers                          - Individual annuities
                                             - Principal Connection                         - Banking

Principal Capital Management
- Large U.S. corporate, private and          - Institutional marketers                      - Institutional and retail money
  Taft-Hartley pension funds                 - Consultants                                    management in:
- U.S. endowments and foundations                                                           - Domestic equities
- Sub-advisory relationships with                                                           - International equities
  non-affiliated financial institutions                                                     - Fixed income
- Non-US institutions (in collaboration                                                     - Commercial real estate
  with BT Financial Group)
- Real estate development
- Securitization markets

                                        INTERNATIONAL ASSET MANAGEMENT AND ACCUMULATION
-------------------------------------------------------------------------------------------------------------------------------
                MARKETS                               DISTRIBUTION                                 PRODUCTS/SERVICES
---------------------------------------  ---------------------------------------        ---------------------------------------
                                                                                  
BT Financial Group
- Corporate superannuation funds         - Consultants                                  - Institutional and retail money
- Businesses, their employees and other  - Financial intermediaries (financial            management
  individuals                              advisors, accountants and solicitors)        - Mutual funds
- Australian and non-Australian          - Institutional marketers                      - Corporate superannuation products
  institutions                           - Direct distribution to customers             - Processing and transaction services
- Financial intermediaries                                                                for financial planners, financial
                                                                                          intermediaries and companies
                                                                                        - Margin lending
Principal International
- Businesses, their employees and other  - Distribution appropriate to each             - Retirement services
  individuals                              country and market, for example:             - Brazil
                                         - Dedicated retirement services sales          - Hong Kong
                                           forces in Mexico and Hong Kong               - India
                                         - Financial institutions in Brazil             - Japan
                                           through the branches of Banco do             - Mexico
                                           Brasil                                       - Annuities and life insurance
                                         - Unaffiliated brokers in Chile                - Argentina
                                                                                        - Chile
                                                                                        - Mexico

                                                   LIFE AND HEALTH INSURANCE
-------------------------------------------------------------------------------------------------------------------------------
                MARKETS                               DISTRIBUTION                                 PRODUCTS/SERVICES
---------------------------------------  ---------------------------------------        ---------------------------------------
                                                                                  
Individual Life and Disability Insurance
- Businesses, their employees and other  - Affiliated financial representatives         - Individual insurance
  individuals                            - Independent brokers                          - Interest-sensitive life
                                         - Affiliated and unaffiliated                  - Traditional life
                                           registered representatives                   - Disability
                                         - Disability sales representatives

                                        90

                                                   LIFE AND HEALTH INSURANCE
-------------------------------------------------------------------------------------------------------------------------------
                MARKETS                               DISTRIBUTION                                 PRODUCTS/SERVICES
---------------------------------------  ---------------------------------------        ---------------------------------------
                                                                                  
Group Life and Health Insurance
- Businesses                             - Group sales representatives                  - Group life
                                         - Rogers Benefit Group sales                   - Group disability
                                         representatives                                - Group medical
                                         - Non-medical sales representatives            - Group dental and vision
                                                                                        - Fee-for-service

                                                       MORTGAGE BANKING
-------------------------------------------------------------------------------------------------------------------------------
                MARKETS                               DISTRIBUTION                                 PRODUCTS/SERVICES
---------------------------------------  ---------------------------------------        ---------------------------------------
                                                                                  
- Individuals                            - Correspondent lending institutions           - Originate, purchase, sell and service
                                         - Mortgage loan officers (retail                 prime credit quality, first-lien
                                           origination)                                   residential mortgage loans
                                         - Regional offices that work directly
                                           with approved mortgage loan brokers
                                           (wholesale)
                                         - Mortgage Direct

U.S. ASSET MANAGEMENT AND ACCUMULATION SEGMENT

    Our U.S. Asset Management and Accumulation segment consists of:

    - asset accumulation operations which provide retirement savings and related
      investment products and services to businesses, their employees and other
      individuals; and

    - Principal Capital Management, our U.S.-based asset manager.

    Our U.S. Asset Management and Accumulation segment contributed 41%, 41%, 42%
and 38% of our total operating revenues and 48%, 57%, 75% and 89% of our total
operating earnings for the six months ended June 30, 2001, and the years ended
December 31, 2000, 1999 and 1998, respectively.

    The table below shows the operating revenues, operating earnings, assets and
assets under management of our U.S. Asset Management and Accumulation segment
for the periods indicated:

                     U.S. ASSET MANAGEMENT AND ACCUMULATION
                         SELECTED FINANCIAL HIGHLIGHTS

                                                   AS OF OR FOR
                                                      THE SIX
                                                   MONTHS ENDED
                                                     JUNE 30,              AS OF OR FOR THE YEAR ENDED DECEMBER 31,
                                                  ---------------    -----------------------------------------------------
                                                       2001               2000               1999              1998(4)
                                                  ---------------    ---------------    ---------------    ---------------
                                                                              ($ IN MILLIONS)
                                                                                               
OPERATING REVENUES(1)
  U.S. Asset Accumulation.......................  $ 1,780.5    96%   $ 3,398.1    96%   $ 3,348.1    96%   $ 2,933.1   100%
  Principal Capital Management..................       96.3     5        174.2     5        156.6     5           --    --
  Intra-segment eliminations(2).................      (18.6)   (1)       (38.4)   (1)       (32.1)   (1)          --    --
                                                  ---------   ---    ---------   ---    ---------   ---    ---------   ---
        Total...................................  $ 1,858.2   100%   $ 3,533.9   100%   $ 3,472.6   100%   $ 2,933.1   100%
                                                  =========   ===    =========   ===    =========   ===    =========   ===
OPERATING EARNINGS:
  U.S. Asset Accumulation.......................  $   159.0    90%   $   317.6    89%   $   321.2    90%   $   238.4   100%
  Principal Capital Management..................       17.9    10         39.0    11         35.4    10           --    --
                                                  ---------   ---    ---------   ---    ---------   ---    ---------   ---
        Total...................................  $   176.9   100%   $   356.6   100%   $   356.6   100%   $   238.4   100%
                                                  =========   ===    =========   ===    =========   ===    =========   ===
ASSETS:
  U.S. Asset Accumulation.......................  $65,155.9    98%   $64,883.9    99%   $64,410.4    99%   $58,701.5   100%
  Principal Capital Management..................    1,026.5     2        912.0     1        686.0     1           --    --
                                                  ---------   ---    ---------   ---    ---------   ---    ---------   ---
        Total...................................  $66,182.4   100%   $65,795.9   100%   $65,096.4   100%   $58,701.5   100%
                                                  =========   ===    =========   ===    =========   ===    =========   ===
ASSETS UNDER MANAGEMENT:
  ($ in billions)
  U.S. Asset Accumulation.......................  $    71.9    91%   $    71.0    91%   $    70.3    93%   $    63.5    94%
  Principal Capital Management(3)...............        6.8     9          7.1     9          5.3     7          3.7     6
                                                  ---------   ---    ---------   ---    ---------   ---    ---------   ---
        Total...................................  $    78.7   100%   $    78.1   100%   $    75.6   100%   $    67.2   100%
                                                  =========   ===    =========   ===    =========   ===    =========   ===

---------------
(1) Excludes net realized capital gains and their impact on recognition of
    front-end fee revenues.

                                        91

(2) Includes eliminations of amounts related to U.S. asset management fee
    revenues received from our U.S. asset accumulation operations.

(3) Represents $5.8 billion, $6.3 billion, $4.7 billion and $3.5 billion of
    assets from third-party clients as of June 30, 2001 and as of December 31,
    2000, 1999 and 1998, respectively, with the remainder representing assets
    supporting other Principal Capital Management activities. Assets accumulated
    by other affiliates are shown under the business which accumulated the
    assets.

(4) Includes assets managed by Invista Capital Management and the former
    investment department of Principal Life prior to the formation of Principal
    Capital Management, effective January 1, 1999.

U.S. ASSET ACCUMULATION

    Our asset accumulation activities in the United States date back to the
1940s when we first began providing pension plan products and services. We now
offer a comprehensive portfolio of asset accumulation products and services for
retirement savings and investment:

    - To businesses of all sizes, we offer products and services for defined
      contribution pension plans, including 401(k) and 403(b) plans, defined
      benefit pension plans and non-qualified executive benefit plans. For more
      basic needs, we offer our mutual funds as a funding vehicle for SIMPLE
      IRA, payroll deduction, 401(k) and 403(b) plans;

    - To large institutional clients, we also offer investment-only products,
      including guaranteed investment contracts and funding agreements; and

    - To employees of businesses and other individuals, we offer the ability to
      accumulate retirement savings through mutual funds, individual annuities
      and bank products.

    We organize our U.S. asset accumulation operations in the following product
and service categories:

    - pension;

    - mutual funds;

    - individual annuities; and

    - Principal Bank.

    We further group our pension products and services into four categories:

    - full-service accumulation;

    - full-service payout;

    - investment-only; and

    - administration-only.

                                        92

    The table below shows the operating revenues for our U.S. asset accumulation
operations for the periods indicated:

                            U.S. ASSET ACCUMULATION
                               OPERATING REVENUES

                                                          FOR THE SIX
                                                          MONTHS ENDED         FOR THE YEAR ENDED
                                                            JUNE 30,              DECEMBER 31,
                                                          ------------   ------------------------------
                                                              2001         2000       1999       1998
                                                          ------------   --------   --------   --------
                                                                         ($ IN MILLIONS)
                                                                                   
Pension
  Full-service Accumulation.............................    $  530.1     $1,168.1   $1,178.2   $1,185.8
  Full-service Payout...................................       547.1        920.6      929.0      643.6
  Investment-Only.......................................       494.7        881.7      833.8      715.9
  Administration-Only...................................        19.1         42.3       39.3       36.8
Mutual Funds............................................        56.1        116.0       95.4       83.5
Individual Annuities....................................       132.7        267.5      270.2      267.2
Principal Bank..........................................        10.1          9.2        2.2        0.3
Eliminations............................................        (9.4)        (7.3)        --         --
                                                            --------     --------   --------   --------
  U.S. Asset Accumulation...............................    $1,780.5     $3,398.1   $3,348.1   $2,933.1
                                                            ========     ========   ========   ========

    The table below breaks down the assets under management for our U.S. asset
accumulation operations between those derived from fee-based products and those
derived from spread-based products for the periods indicated:

                            U.S. ASSET ACCUMULATION
                           ASSETS UNDER MANAGEMENT(1)
                       FEE-BASED/SPREAD-BASED COMPOSITION

                                   AS OF JUNE 30,                                  AS OF DECEMBER 31,
                               ----------------------   ------------------------------------------------------------------------
                                        2001                     2000                     1999                     1998
                               ----------------------   ----------------------   ----------------------   ----------------------
                                FEE    SPREAD   TOTAL    FEE    SPREAD   TOTAL    FEE    SPREAD   TOTAL    FEE    SPREAD   TOTAL
                               -----   ------   -----   -----   ------   -----   -----   ------   -----   -----   ------   -----
                                                                        ($ IN BILLIONS)
                                                                                       
Pension......................  $35.2   $27.2    $62.4   $36.0   $25.7    $61.7   $35.7   $25.6    $61.3   $29.3   $25.9    $55.2
Mutual Funds.................    3.8      --      3.8     3.9      --      3.9     4.1      --      4.1     3.7      --      3.7
Individual Annuities.........    2.3     2.5      4.8     2.3     2.5      4.8     2.3     2.6      4.9     1.5     3.1      4.6
Principal Bank...............     --     0.9      0.9     0.3     0.3      0.6      --      --       --      --      --       --
                               -----   -----    -----   -----   -----    -----   -----   -----    -----   -----   -----    -----
  U.S. Asset Accumulation....  $41.3   $30.6    $71.9   $42.5   $28.5    $71.0   $42.1   $28.2    $70.3   $34.5   $29.0    $63.5
                               =====   =====    =====   =====   =====    =====   =====   =====    =====   =====   =====    =====

---------------

(1) Assets under management are credited to the operations that accumulated the
    assets.

    The table below shows the asset flow summary for our U.S. asset accumulation
operations for the periods indicated:

                            U.S. ASSET ACCUMULATION
                               ASSET FLOW SUMMARY

                                                              AS OF OR FOR THE   AS OF OR FOR THE
                                                                 SIX MONTHS         YEAR ENDED
                                                               ENDED JUNE 30,      DECEMBER 31,
                                                              ----------------   ----------------
                                                                    2001          2000      1999
                                                              ----------------   ------    ------
                                                                        ($ IN BILLIONS)
                                                                                  
Assets Under Management, beginning of period................        $71.0        $ 70.3    $ 63.5
  Deposits..................................................          8.9          14.6      14.7
  Withdrawals...............................................         (6.6)        (14.3)    (11.9)
  Investment Performance....................................         (0.9)          1.0       5.6
  Other.....................................................         (0.5)         (0.6)     (1.6)
                                                                    -----        ------    ------
Assets Under Management, end of period......................        $71.9        $ 71.0    $ 70.3
                                                                    =====        ======    ======

                                        93

    The table below illustrates the various distribution channels used by our
U.S. asset accumulation operations:

                            U.S. ASSET ACCUMULATION
                                  DISTRIBUTION

                                     RETIREMENT
                                      SERVICES    AFFILIATED
                                       SALES      FINANCIAL    REGISTERED
                                     REPRESENT-   REPRESENT-   REPRESENT-   INDEPENDENT   PRINCIPAL
                                       ATIVES       ATIVES       ATIVES       BROKERS     CONNECTION   INTERNET   BANKS
                                     ----------   ----------   ----------   -----------   ----------   --------   -----
                                                                                             
Pension............................      X            X            X             X            X           X
Mutual Funds.......................      X            X            X             X            X
Individual Annuities...............                   X                          X            X                     X
Principal Bank.....................      X            X            X                          X           X

  STRATEGY

    Our goal is to enhance our position as a leading provider of asset
accumulation products and services to businesses in the United States,
particularly small and medium-sized businesses. To achieve this goal, we are
pursuing the following strategic initiatives:

    ACCELERATE THE GROWTH OF OUR U.S. ASSET ACCUMULATION OPERATIONS BY
LEVERAGING OUR STRENGTH IN PROVIDING RETIREMENT SERVICES TO SMALL AND
MEDIUM-SIZED BUSINESSES.  Our current success is built on our strong position in
the defined contribution pension plan market, in particular the 401(k) market,
to which we provided services to more 401(k) plans than any other bank, mutual
fund or insurance company in 2000.

    In particular, we have taken the following actions to achieve continued
leadership and growth in this market:

    Strengthen our distribution channels.  We are committed to building on our
existing distribution channels, as well as expanding into new distribution
channels:

    - We have increased the focus of our retirement services sales
      representatives on new sales of pension products. We have shifted the
      responsibility for servicing our customers from our retirement services
      sales representatives to a dedicated customer service staff and
      centralized many of the administrative functions related to our pension
      products in regional market centers. In addition, we now compensate our
      retirement services sales representatives with a greater emphasis on new
      sales of products instead of renewals of existing contracts.

    - We have also targeted new distribution channels for sales of our products
      and services, including third-party administrators, certified public
      accountants, registered investment advisors, registered representatives of
      other broker-dealers and direct sales through the Internet. For example,
      we have introduced a new 401(k) product, Principal Advantage, funded by
      mutual funds. Principal Advantage is targeted at non-affiliated
      distribution channels such as registered investment advisors and
      broker-dealers. We have also introduced Impact401k.com, our self-service
      Internet site. This pension product is targeted at smaller businesses that
      seek a low cost product, as well as businesses of any size that prefer to
      handle all administrative activities through the Internet.

    Provide customers with new investment choices.  We added new investment
choices that increased the range of investment styles, asset classes and asset
managers of our offerings. These additional choices complement those offered by
Principal Capital Management. We also offer self-directed brokerage accounts to
401(k) plan participants.

    Continue to use technology to enhance sales, customer service and
efficiency.  Our increasing use of the Internet as a tool to give plan sponsors
and plan participants access to information and the ability to administer their
defined contribution plans has resulted in significant productivity gains. We
have undertaken the following technology initiatives to allow us to better serve
the small and medium-sized business market and to enhance the quality and
efficiency of our U.S. pension operations:

    - Since its inception in 1998, Principal Direct Connect has become a
      preferred means for our pension plan sponsors to transfer retirement data
      via the Internet and to execute transactions online. The number of
      transactions processed through Principal Direct Connect has increased from
      approximately 23.0 million in 1999 to approximately 84.6 million in 2000.
      For the six months ended June 30, 2001, approximately 65.0 million
      transactions were processed through Direct Connect;

    - In 1998, we developed a customer workflow and processing system, Express
      Processing(SM), to support our full-service pension plan administration.
      This technology enables us to achieve significant efficiencies by
      automatically moving workflow to (1) employees with the correct skill-set
      to efficiently process the work and (2) any of five administration
      facilities in the United States with the greatest capacity;

                                        94

    - We have structured the "Retirement Service Center" portion of our Internet
      website as a full-service center through which plan sponsors and plan
      participants can access their complete plan information. During 2000,
      participants made approximately 7.7 million visits to our Retirement
      Service Center, resulting in approximately 5.9 million electronic
      transactions. For the six months ended June 30, 2001, participants made
      approximately 4.4 million visits, resulting in approximately 2.9 million
      electronic transactions; and

    - In April 2000, we launched what we believe is one of the first fully
      electronic 401(k) products, Impact401k.com. Through Impact401k.com, the
      plan sponsor can handle the purchase, enrollment and administration of a
      401(k) plan entirely through the Internet without use of paper forms, the
      mail or the administrative assistance of our employees.

    ENHANCE OUR ASSET RETENTION AND CROSS-SELLING.  In 1997, we created
Principal Connection, a direct response distribution channel for retail
financial services products to individuals. Principal Connection's services are
available over the phone, on the Internet or by mail. As of June 30, 2001,
Principal Connection had 48 professionally licensed sales counselors trained to
sell our products, answer questions regarding the customer's existing financial
product choices and help the customer meet specific financial needs. Through
Principal Connection, we seek to retain a significant portion of the assets that
pension plan participants normally roll over into a different accumulation or
payout product upon retirement or termination of employment. Of the $2.3 billion
of assets eligible for rollover for the six months ended June 30, 2001, we
retained $1.1 billion, or 48%, up from 30% in 1996. Through Principal
Connection, we also seek to cross-sell our products and services to pension plan
participants and banking and mortgage banking customers.

    MAINTAIN OUR POSITION IN THE INVESTMENT-ONLY PENSION MARKET.  We have been a
long-time participant in the investment-only pension market, which emphasizes
the sale of guaranteed investment contracts, funding agreements and other
investment-only products. We have capitalized on our strong claims paying and
financial strength ratings, investment advisory expertise and asset-liability
management expertise we offer to customers seeking investment-only pension
services. We intend to remain a participant in this market to an extent
consistent with our expected returns.

    IMPROVE OUR POSITION IN THE PENSION MARKET FOR LARGER EMPLOYERS.  We have an
advantage over many of our competitors in the larger employer pension market
since we offer both defined benefit and defined contribution plan services. Many
large employers offer both defined benefit and defined contribution plans to
their employees and prefer pension services providers that deliver consolidated
services to both plans. We are currently expanding the scope of our services to
offer:

    - employer-customized websites;

    - a more flexible billing process;

    - consulting services to existing retirement plan customers involved in
      mergers and acquisitions; and

    - customized service through regional customer relations managers dedicated
      to serving large customers.

  PENSION

    We offer a wide variety of investment and administrative products and
services for defined contribution pension plans, including 401(k) and 403(b)
plans, defined benefit pension plans and non-qualified executive benefit plans.
A 403(b) plan is a plan described in section 403(b) of the Internal Revenue Code
that provides retirement benefits for employees of tax exempt organizations and
public schools.

    PENSION SERVICES

    We provide products and services responding to a broad range of
employer-sponsored pension plan needs. We offer administrative and investment
services, which are both available on a stand-alone basis or can be combined
according to the various needs of our customers.

    ADMINISTRATIVE SERVICES.  We believe that our ability to minimize the plan
sponsor's administrative tasks has contributed to our success, particularly
among small and medium-sized businesses. We differentiate ourselves from our
competitors by providing every plan administrative service that is generally
required or desired by a pension plan sponsor, regardless of the type or size of
the plan.

                                        95

    The table below describes the primary administrative services that we offer
to both plan sponsors and plan participants in defined contribution plans and
defined benefit plans, as of June 30, 2001:

                                                                                       SERVICES OFFERED TO PLAN
                                       SERVICES OFFERED TO PLAN SPONSORS                     PARTICIPANTS
                                       ---------------------------------       -----------------------------------------
                                                                         
DEFINED CONTRIBUTION PLANS         - Government compliance and                 - Account recordkeeping
                                     documentation                             - Education and reporting
                                   - Fund accounting                           - Phone center
                                                                               - Internet access and transaction
                                                                                 capabilities
                                                                               - Voice response system
                                                                               - Benefit planning and benefit
                                                                                 distribution
DEFINED BENEFIT PLANS              - Actuarial valuation services              - Benefit determination and benefit
                                   - Government compliance and documentation     distribution
                                   - Fund accounting                           - Education and reporting
                                                                               - Phone center
                                                                               - Internet access and transaction
                                                                                 capabilities

    INVESTMENT SERVICES.  We provide a full range of guaranteed investment
contracts, money market, equity, fixed income, balanced, indexed and real estate
investment options to our customers. We provide these services through our
affiliated asset managers, Principal Capital Management and BT Financial Group,
and through third-party asset managers. As of June 30, 2001, we had
approximately 220 investment options available, including U.S. and international
fixed income and equity investment options. Our investment options are either in
the form of a separate account or a mutual fund.

    PENSION PRODUCTS

    We group our pension products into four categories:

    - full-service accumulation;

    - full-service payout;

    - investment-only; and

    - administration-only.

    Our full-service accumulation products and our full-service payout products
feature both administrative services and investment services. We focus primarily
on our full-service accumulation and full-service payout products, which
together represented 64% of our pension gross new deposits under management for
the six months ended June 30, 2001, and 75% of our pension assets under
management as of June 30, 2001.

    The tables below show, by product category, our pension assets under
management, pension asset flow summary and our pension gross new deposits under
management for the periods indicated:

                            U.S. ASSET ACCUMULATION
                        PENSION ASSETS UNDER MANAGEMENT

                                                               AS OF
                                                              JUNE 30,     AS OF DECEMBER 31,
                                                              --------   ----------------------
                                                                2001     2000     1999    1998
                                                              --------   -----    -----   -----
                                                                       ($ IN BILLIONS)
                                                                              
Full-service Accumulation...................................   $41.2     $42.0    $43.3   $38.5
Full-service Payout.........................................     5.4       4.5      4.3     3.9
Investment-Only.............................................    15.8      15.2     13.7    12.8
Administration-Only.........................................      --        --       --      --
                                                               -----     -----    -----   -----
         Total..............................................   $62.4     $61.7    $61.3   $55.2
                                                               =====     =====    =====   =====

                                        96

                            U.S. ASSET ACCUMULATION
                           PENSION ASSET FLOW SUMMARY

                                                               AS OF OR FOR      AS OF OR FOR THE
                                                              THE SIX MONTHS        YEAR ENDED
                                                              ENDED JUNE 30,       DECEMBER 31,
                                                              --------------     -----------------
                                                                   2001           2000       1999
                                                              --------------     ------     ------
                                                                        ($ IN BILLIONS)
                                                                                   
Assets Under Management, beginning of period................      $61.7          $61.3      $55.2
  Deposits..................................................        7.6           12.2       12.9
  Withdrawals...............................................       (5.7)         (12.4)     (10.2)
  Investment Performance....................................       (0.6)           0.9        5.4
  Other.....................................................       (0.6)          (0.3)      (2.0)
                                                                  -----          -----      -----
Assets Under Management, end of period......................      $62.4          $61.7      $61.3
                                                                  =====          =====      =====

                            U.S. ASSET ACCUMULATION
                  PENSION GROSS NEW DEPOSITS UNDER MANAGEMENT

                                                                FOR THE SIX
                                                                MONTHS ENDED    FOR THE YEAR ENDED
                                                                  JUNE 30,         DECEMBER 31,
                                                                ------------   ---------------------
                                                                    2001       2000    1999    1998
                                                                ------------   -----   -----   -----
                                                                          ($ IN BILLIONS)
                                                                                   
Full-service Accumulation...................................        $4.6       $ 8.1   $ 8.2   $ 7.5
Full-service Payout.........................................         0.3         0.5     0.6     0.3
Investment-Only.............................................         2.7         3.6     4.1     3.4
Administration-Only.........................................          --          --      --      --
                                                                    ----       -----   -----   -----
         Total..............................................        $7.6       $12.2   $12.9   $11.2
                                                                    ====       =====   =====   =====

    FULL-SERVICE ACCUMULATION.  Full-service accumulation products respond to
the needs of plan sponsors seeking both administrative and investment services
for defined contribution plans or defined benefit plans. The investment
component of our defined contribution plans may be in the form of a group
annuity contract or a mutual fund. The investment component of our defined
benefit plans is available only in the form of a group annuity contract.

    As of June 30, 2001, we provided full-service accumulation products to
34,087 defined contribution pension plans, of which 26,545 were 401(k) plans,
covering 2.0 million plan participants, and to 3,404 defined benefit pension
plans, covering 238,293 plan participants. As of June 30, 2001, approximately
92% of our pension assets under management were managed by Principal Capital
Management or BT Financial Group. Third-party asset managers provide asset
management services with respect to the remainder of the assets.

    Prior to 2001, annuities were the only product through which we delivered
both administrative and investment services to our defined contribution plan and
defined benefit plan customers. Under U.S. federal securities laws, neither the
annuity nor the underlying investment options are required to be registered with
the SEC. Beginning January 2001, we began to offer administrative and investment
services to defined contribution plan customers through Principal Advantage, a
new 401(k) product based on our recently expanded mutual fund, Principal
Investors Fund. We offer funds covering the full range of stable value, equity,
fixed income and non-domestic investment options managed by our affiliated asset
managers, Principal Capital Management and BT Financial Group, as well as
third-party asset managers.

    FULL-SERVICE PAYOUT.  Full-service payout products respond to the needs of
pension plan participants who, upon retirement or termination of their
employment, leave their pension plans, and who seek both administrative and
investment services for distributions from the plans they are leaving. Plan
participants who seek these services include those departing pension plans we
service, as well as pension plans other providers service. We offer both
flexible income option products and single premium group annuities. Flexible
income option products allow the customer to control the rate of distribution,
or payout, and provide limited performance guarantees. Single premium group
annuities are immediate or deferred annuities that provide a current or future
specific income amount, fully guaranteed by us. Both products are available to
defined contribution and defined benefit plan participants. For both products,
we make regular payments to individuals, invest the underlying assets on their
behalf and provide tax reporting to them.

    Single premium group annuities are traditionally used in conjunction with
defined benefit plans, particularly those where the plan is being terminated. In
such instances, the plan sponsor transfers all its obligations under the plan to
an insurer by paying a single premium. Increasingly, these products are
purchased by defined contribution plan participants who reach retirement age.
Plan sponsors restrict their purchases to insurance companies with superior or

                                        97

excellent financial quality ratings because the Department of Labor has mandated
that annuities be purchased only from the "safest available" insurer. We believe
that our strong financial strength ratings position us well to compete in this
market. See "-- Ratings" below. In 2000, we received $498.3 million of single
premium group annuities annualized new deposits, ranking us second in the United
States according to LIMRA International, Inc.'s 2000 U.S. Institutional Pension
Sales and Assets report.

    Deposits to full-service payout products are in the form of single payments.
As a result, the level of new deposits can fluctuate depending on the number of
retirements and large-scale annuity sales in a particular fiscal quarter. Assets
under management relating to single premium group annuities generate a spread
between the investment income earned by us and the amount credited to the
customer. Assets under management relating to flexible income option products
may generate either spread or fee revenue depending on the investment options
elected by the customer.

    INVESTMENT-ONLY.  The three primary products for which we provide
investment-only services are: (1) guaranteed investment contracts; (2) funding
agreements; and (3) other investment-only products.

    Guaranteed investment contracts and funding agreements pay a specified rate
of return. The rate of return can be a floating rate based on an external market
index or a fixed rate. Some of these investment-only products provide a feature
which permits plan participants to redeem or transfer funds in their accounts at
book value during the term of the contract. All of our investment-only products
contain provisions limiting early surrenders, including penalties for early
surrenders and minimum notice requirements. Put provisions give customers the
option to terminate a contract prior to maturity, provided they give us a
minimum notice period.

    The table below breaks down by notice period the put provisions of our
guaranteed investment contracts and funding agreements:

                            U.S. ASSET ACCUMULATION
         PENSION GUARANTEED INVESTMENT CONTRACTS AND FUNDING AGREEMENTS
                  GAAP RESERVES PUT PROVISIONS CHARACTERISTICS
                              AS OF JUNE 30, 2001

                                                              GUARANTEED
                                                              INVESTMENT    FUNDING
                                                              CONTRACTS    AGREEMENTS
                                                              ----------   ----------
                                                                  ($ IN MILLIONS)
                                                                     
INVESTMENT-ONLY:
  Less than 30 days' notice.................................  $      --     $     --
  30 to 89 days' notice.....................................      288.2        100.3
  90 to 179 days' notice....................................      587.7        220.8
  More than 179 days' notice................................         --         55.2
  No active put provision(1)................................      293.2
  No put provision..........................................    8,504.8      3,946.6
FULL-SERVICE ACCUMULATION:
  No put provision..........................................    4,927.3           --
                                                              ---------     --------
         Total..............................................  $14,601.2     $4,322.9
                                                              =========     ========

---------------

(1) Contracts currently under an initial lock-out period but which will become
    putable with 90 days' notice at some time in the future.

    Deposits to investment-only products are predominantly in the form of single
payments. As a result, the level of new deposits can fluctuate from one fiscal
quarter to another. Assets invested in guaranteed investment contracts and
funding agreements generate a spread between the investment income earned by us
and the amount credited to the customer. Our other investment-only products
consist of separate accounts invested in either equities or fixed income
instruments.

    ADMINISTRATION-ONLY.  We provide fee-based administrative services for
defined contribution plans, including 401(k) plans, where a third-party provides
the investment choices. As of June 30, 2001, we provided administration-only
services to 3,829 defined contribution plans covering approximately 198,000
employees. In addition to defined contribution plans, we currently provide
administration-only services to 309,686 individual retirement accounts.

    MANAGING RISK IN SPREAD-BASED PRODUCTS

    Because of the significant guarantees we provide as part of our spread-based
asset accumulation products, risk management is particularly important in this
line of business. To facilitate risk management, we segregate and manage the
assets supporting our spread-based products separately from the rest of our
general account. Our risk management strategy is more fully described in
"Management's Discussion and Analysis of Financial Condition and

                                        98

Results of Operations -- Quantitative and Qualitative Information about Market
Risk" and is based upon the following guidelines:

    - Managing interest rate exposure by closely matching the relative
      sensitivity of asset and liability values to interest rate changes, i.e.
      creating a "duration match" of assets and liabilities. Our methodology
      recognizes both partial and total duration. Our tolerance for mismatch is
      +/-0.25 years for total duration and +/-0.10 years for partial durations.
      As of June 30, 2001, the difference between the asset and liability
      durations on our primary duration managed portfolio was 0.04 years.

    - Projecting cash flows for each asset and liability and measuring the
      sensitivity of assets and liabilities to interest rate changes. This
      measurement process provides our risk managers with a more complete
      picture of our liability structure, the appropriateness of pricing and the
      overall soundness of the management of the account than do conventional
      accounting techniques alone.

    - Restricting the portion of securities with redemption features held in our
      invested asset portfolio in order to minimize cash flow volatility.

    - Writing contracts that typically have a predictable maturity structure and
      limit discretionary withdrawal provisions. This allows us to better manage
      our liquidity exposure.

    - Monitoring contribution and withdrawal activity to anticipate deviations
      from expected cash flows. Any such deviations form the basis for new cash
      flow projections and may trigger a change in our portfolio hedging
      requirements.

    - Conducting studies to test our liquidity tolerance to stress situations
      such as sudden and intense outflows of cash. We model various
      "run-on-the-bank" scenarios to evaluate the liquidity needs of our
      portfolios and ensure that the appropriate amount of liquid assets are
      held. Based on these results, we believe that we have more than adequate
      capacity to meet commitments to policyholders.

    - Establishing portfolio management groups to facilitate interaction among
      our various activities, including portfolio management, sales management,
      risk management, financial management and pricing. We believe frequent
      interaction and effective communication across the various activities have
      been key components of our successful risk management strategy.

    The table below illustrates, for the periods indicated, gross new deposits
under management and reserves for the spread-based products in our U.S. asset
accumulation pension operations:

                            U.S. ASSET ACCUMULATION
             PENSION SPREAD-BASED PRODUCTS SELECTED FINANCIAL DATA

                                                       AS OF OR FOR
                                                         THE SIX
                                                       MONTHS ENDED      AS OF OR FOR THE YEAR ENDED
                                                         JUNE 30,               DECEMBER 31,
                                                       ------------   ---------------------------------
                                                           2001         2000        1999        1998
                                                           ----       ---------   ---------   ---------
                                                                       ($ IN MILLIONS)
                                                                                  
GROSS NEW DEPOSITS UNDER MANAGEMENT:
Guaranteed investment contracts......................   $ 1,454.4     $ 1,685.2   $ 3,221.1   $ 4,720.6
Funding agreements...................................       889.9       1,416.0     1,381.0       448.4
Full-service Payout..................................       324.6         519.7       562.4       281.0
                                                        ---------     ---------   ---------   ---------
         Total.......................................   $ 2,668.9     $ 3,620.9   $ 5,164.5   $ 5,450.0
                                                        =========     =========   =========   =========
RESERVES:
Guaranteed investment contracts......................   $14,601.2     $14,700.9   $15,839.7   $15,535.8
Funding agreements...................................     4,322.9       3,247.4     1,881.9       652.7
Full-service Payout..................................     5,012.2       4,762.2     4,390.5     3,951.2
                                                        ---------     ---------   ---------   ---------
         Total.......................................   $23,936.3     $22,710.5   $22,112.1   $20,139.7
                                                        =========     =========   =========   =========

    MARKETS AND DISTRIBUTION

    We offer our pension products and services to employer-sponsored pension
plans, including qualified and non-qualified defined contribution plans,
qualified defined benefit plans and institutional investors. Our primary target
market is pension plans sponsored by small and medium-sized businesses, which we
believe remains under-penetrated. Only 17% of businesses with less than 100
employees, and 38% of businesses with between 100 and 500 employees, offered a
401(k) plan in 2000, according to the Spectrem Group. The same study indicates
that 87% of employers with

                                        99

500 or more employees offered a 401(k) plan in 2000. The tables below break
down, for the periods indicated, the number of plans and assets under management
for our full-service accumulation business by employer size:

                            U.S. ASSET ACCUMULATION
            PENSION FULL-SERVICE ACCUMULATION DATA BY EMPLOYER SIZE

                                                            AS OF JUNE 30,        AS OF DECEMBER 31,
                                                            --------------    --------------------------
                                                                 2001          2000      1999      1998
                                                            --------------    ------    ------    ------
                                                                                      
NUMBER OF PLANS:
1-99 employees............................................      30,139        29,708    32,656    33,730
100-499 employees.........................................       3,376         3,236     3,127     3,179
500-999 employees.........................................         358           347       315       314
1000+ employees...........................................         214           195       206       182
                                                                ------        ------    ------    ------
    Number of Defined Contribution Plans..................      34,087        33,486    36,304    37,405
    Number of Defined Benefit Plans.......................       3,404         3,443     3,592     3,776
                                                                ------        ------    ------    ------
         Total............................................      37,491        36,929    39,896    41,181
                                                                ======        ======    ======    ======
Average Number of Employees Per Plan......................          68            67        64        60

                                                             AS OF JUNE 30,       AS OF DECEMBER 31,
                                                             --------------   --------------------------
                                                                  2001         2000      1999      1998
                                                             --------------   ------    ------    ------
                                                                           ($ IN BILLIONS)
                                                                                      
ASSETS UNDER MANAGEMENT:
1-99 employees.............................................      $16.5        $16.7     $17.9     $15.3
100-499 employees..........................................       10.1         10.2      10.7       9.5
500-999 employees..........................................        2.8          3.1       3.1       2.8
1000+ employees............................................        5.8          5.6       5.7       4.5
                                                                 -----        -----     -----     -----
    Defined Contribution Assets Under Management...........       35.2         35.6      37.4      32.1
    Defined Benefit Assets Under Management................        6.0          6.4       5.9       6.4
                                                                 -----        -----     -----     -----
         Total.............................................      $41.2        $42.0     $43.3     $38.5
                                                                 =====        =====     =====     =====

    FULL-SERVICE ACCUMULATION.  We sell our full-service accumulation products
and services nationally, primarily through a captive retirement services sales
force. As of June 30, 2001, 125 retirement services sales representatives in 55
offices, operating as a wholesale distribution network, maintained relationships
with approximately 13,000 independent brokers, consultants and agents.
Retirement services sales representatives are an integral part of the sales
process alongside the referring consultant or independent broker. We compensate
retirement services sales representatives through a blend of salary and
production-based incentives, while we pay independent brokers, consultants and
agents a commission or fee.

    As of June 30, 2001, we had a separate staff of 160 service representatives
located in the sales offices who play a key role in the ongoing servicing of
pension plans by:

    - providing local services to our customers, such as renewing contracts,
      revising plans and solving any administration problems;

    - communicating the customers' needs and feedback to us; and

    - helping employees understand the benefits of their pension plans.

    We believe that our approach to pension plan services distribution gives us
a local sales and service presence that differentiates us from many of our
competitors. We have also recently established a number of marketing and
distribution relationships to increase the sales of our accumulation products
with firms such as Frank Russell Investment Management Company, A.G. Edwards and
AON.

    We sell our annuity-based products through sales representatives, agents and
brokers who are not required to register with the SEC.

    Principal Advantage, our mutual fund-based product, is targeted at defined
contribution plans with over $3 million of assets. We sell Principal Advantage
through affiliated registered representatives, stockbrokers, registered
investment advisors and fee-based consultants through sales agreements with
non-affiliated broker-dealers. Principal Advantage gives us access to
SEC-registered distributors who are not traditional sellers of annuity-based
products and opens new opportunities for us in the investment advisor and
broker-dealer distribution channels.

    We significantly expanded our marketing and product development efforts into
the "not-for-profit" market in 1999, with the acquisition of Professional
Pensions, Inc., which specializes in providing full-service accumulation

                                       100

403(b) pension plans to 501(c)(3) not-for-profit organizations. As of June 30,
2001, we provided pension products and services to 778 pension plans sponsored
by educational and not-for-profit organizations with $1,208.6 million of assets
under management.

    Impact401k.com is our self-service Internet site, through which plan
sponsors can handle the purchase, enrollment and administration of a 401(k)
pension plan entirely through the Internet. Impact401k.com allows plan
participants to gain on-line access to their accounts, transfer funds between
accounts and review customized investment options. Accordingly, our employees do
not have to perform any administrative activities. Impact401k.com is targeted at
smaller businesses that seek a low cost product, as well as businesses of any
size that prefer to handle administrative activities through the Internet.

    FULL-SERVICE PAYOUT AND INVESTMENT-ONLY.  Our primary distribution channel
for full-service payout and investment-only products was comprised of 11
specialized home office marketers as of June 30, 2001, working through
consultants and brokers that specialize in this type of business. Our home
office marketers also make sales directly to institutions. Our nationally
dispersed retirement services sales representatives act as a secondary
distribution channel for these products. Principal Connection also distributes
full-service payout products to participants in plans we service who are
terminating employment or retiring.

    We market guaranteed investment contracts and funding agreements primarily
to pension plan sponsors and other institutions. We also offer them as part of
our full-service accumulation products. We sell our guaranteed investment
contracts primarily to plan sponsors for funding of tax-qualified retirement
plans. We sell our funding agreements to institutions that may or may not be
pension funds. Our primary market for funding agreements is institutional
investors in the United States and around the world. These investors purchase
debt obligations from a special purpose vehicle which, in turn, purchases a
funding agreement from us with terms similar to those of the debt obligations.
The strength of this market is dependent on debt capital market conditions. As a
result, our sales through this channel can vary widely from one fiscal quarter
to another.

    ADMINISTRATION-ONLY.  We sell our defined contribution plan
administration-only services primarily through business relationships with
investment management firms and insurance companies. These organizations package
our administrative services with their proprietary pension plan investment
services for sale through their own distribution channels. We have a small
number of regional consultants who facilitate the selling of our defined
contribution plan administrative services by these organizations. Our
administration-only individual retirement account services are distributed by a
specialized home office marketer that establishes business relationships with
security brokerage firms that offer individual retirement account programs
directly to the public.

  MUTUAL FUNDS

    We have been providing mutual funds to customers since 1969. We offer mutual
funds:

    - to individuals;

    - for use within variable life and variable annuity contracts; and

    - for use in employer-sponsored pension plans.

    PRODUCTS AND SERVICES

    We were ranked in the top quartile among U.S. mutual fund managers in terms
of total mutual fund assets under management as of May 31, 2001, according to
the Investment Company Institute. The value of mutual fund assets we managed was
$6.0 billion as of June 30, 2001, which included $2.3 billion derived from our
variable life insurance and variable annuity products and $28.9 million related
to the retail class of shares of our Principal Investors Fund. We provide
accounting, compliance, corporate governance, product development and transfer
agency functions for all mutual funds we organize. As of June 30, 2001, our
mutual fund operations served approximately 596,000 mutual fund shareholder
accounts.

    PRINCIPAL MUTUAL FUNDS.  Principal Mutual Funds is a family of mutual funds
offered to individuals and businesses, with 26 mutual funds as of June 30, 2001.
We report the results for these funds in this segment under "Mutual Funds".

                                       101

    The table below shows a breakdown between our affiliated and third-party
asset managers within Principal Mutual Funds, by investment type, for the
periods indicated:

                            U.S. ASSET ACCUMULATION
                    PRINCIPAL MUTUAL FUNDS BY ASSET MANAGER
                              AS OF JUNE 30, 2001

                                          AFFILIATED                THIRD-PARTY                   TOTAL
                                   ------------------------   ------------------------   ------------------------
                                   ASSETS UNDER   NUMBER OF   ASSETS UNDER   NUMBER OF   ASSETS UNDER   NUMBER OF
INVESTMENT TYPE                     MANAGEMENT      FUNDS      MANAGEMENT      FUNDS      MANAGEMENT      FUNDS
---------------                    ------------   ---------   ------------   ---------   ------------   ---------
                                                                  ($ IN BILLIONS)
                                                                                      
Equity
  Domestic U.S. .................      $2.2           9           $0.1           6           $2.3          15
  International..................       0.4           5             --          --            0.4           5
Income...........................       0.7           5             --          --            0.7           5
Money Market.....................       0.4           1             --          --            0.4           1
                                       ----          --           ----          --           ----          --
         Total...................      $3.7          20           $0.1           6           $3.8          26
                                       ====          ==           ====          ==           ====          ==

    The table below shows our mutual funds asset flow summary for the periods
indicated:

                            U.S. ASSET ACCUMULATION
                   PRINCIPAL MUTUAL FUNDS ASSET FLOW SUMMARY

                                                                       AS OF OR FOR
                                                                         THE SIX         AS OF OR FOR THE
                                                                       MONTHS ENDED         YEAR ENDED
                                                                         JUNE 30,          DECEMBER 31,
                                                                     ----------------    ----------------
                                                                           2001          2000       1999
                                                                     ----------------    -----      -----
                                                                               ($ IN BILLIONS)
                                                                                           
Assets Under Management, beginning of period................              $ 3.9          $ 4.1      $ 3.7
  Deposits..................................................                0.7            1.3        1.3
  Withdrawals...............................................               (0.6)          (1.4)      (1.1)
  Investment Performance....................................               (0.2)          (0.1)       0.2
  Other.....................................................                 --             --         --
                                                                          -----          -----      -----
Assets Under Management, end of period......................              $ 3.8          $ 3.9      $ 4.1
                                                                          =====          =====      =====

    PRINCIPAL VARIABLE CONTRACTS FUND.  Principal Variable Contracts Fund is a
series mutual fund which, as of June 30, 2001, provided 26 investment options
for use as funding choices in variable annuity and variable life insurance
contracts issued by Principal Life. As of June 30, 2001, this fund had $2.3
billion in assets under management. We report the results for the funds backing
variable annuity contracts in this segment under "Individual Annuities." We
report the results for the funds backing variable life insurance contracts in
the Life and Health Insurance segment.

    PRINCIPAL INVESTORS FUND.  Principal Investors Fund is a newly expanded
series mutual fund which, as of June 30, 2001, offered 44 investment options.
This fund acts as the funding vehicle for Principal Advantage, the defined
contribution product described above under "-- U.S. Asset Management and
Accumulation -- U.S. Asset Accumulation -- Pension -- Products and
Services -- Full-service Accumulation." This fund also offers a retail class of
shares to individuals and businesses. We report the results for this fund,
excluding the retail class of shares, under "Pension". We report the results of
the retail class of shares in this segment under "Mutual Funds." As of June 30,
2001, this retail class of shares had $28.9 million in assets under management.

    MARKETS AND DISTRIBUTION

    Our markets for mutual funds are individuals seeking to accumulate savings
for retirement and other purposes and small businesses seeking to use mutual
funds as the funding vehicle for pension plans, as well as non-qualified
individual savings plans utilizing payroll deductions. We also market our retail
mutual funds to participants in pension plans who are departing their plans and
reinvesting their retirement assets into individual retirement accounts.

    Our mutual funds are sold primarily through our affiliated financial
representatives, independent brokers registered with our securities
broker-dealer Princor Financial Services Corporation, or Princor, registered
representatives from other broker-dealers, direct deposits from our employees
and others and Principal Connection. Princor, as the marketing arm of our mutual
fund business, recruits, trains and supervises registered representatives
selling our products who numbered approximately 3,500 at June 30, 2001,
including our affiliated financial representatives.

                                       102

Registered representatives are responsible for understanding the customer's
investment objectives and financial situation, complying with all regulations
pertaining to the solicitation and/or execution of securities transactions and
providing current information to the customer. Affiliated financial
representatives produced 47%, or $157.2 million, of our mutual fund sales for
the six months ended June 30, 2001.

    The table below shows sales, as measured by deposits, of our mutual funds by
distribution channel for the periods indicated:

                            U.S. ASSET ACCUMULATION
                 MUTUAL FUNDS SALES BY DISTRIBUTION CHANNEL(1)

                                                              FOR THE SIX
                                                              MONTHS ENDED      FOR THE YEAR ENDED
                                                                JUNE 30,           DECEMBER 31,
                                                              ------------   ------------------------
                                                                  2001        2000     1999     1998
                                                              ------------   ------   ------   ------
                                                                          ($ IN MILLIONS)
                                                                                   
Affiliated financial representatives........................     $157.2      $326.9   $442.0   $517.6
Principal Connection........................................       99.5       141.5    114.2    104.4
Independent brokers and registered representatives of
  Princor...................................................        9.2        13.6      3.3       --
Other (non-affiliated) broker-dealers.......................       47.4        66.9     40.4     76.5
Direct deposits(2)..........................................       22.7        18.6     25.9     29.8
                                                                 ------      ------   ------   ------
Total.......................................................     $336.0      $567.5   $625.8   $728.3
                                                                 ======      ======   ======   ======

---------------

(1) Excludes deposits to money market funds totaling $357.0 million for the six
    months ended June 30, 2001, $732.8 million in 2000, $621.3 million in 1999
    and $2,067.4 million in 1998.
(2) Direct deposits from the Principal Financial Group employees and others.

  INDIVIDUAL ANNUITIES

    Individual annuities offer a tax-deferred means of accumulating retirement
savings and provide a tax-efficient source of income during the payout period.

    PRODUCTS AND SERVICES

    We offer both fixed and variable annuities to individuals. Individual
annuities may be deferred, in which case assets accumulate until the contract is
surrendered, the customer dies or the customer begins receiving benefits under
an annuity payout option, or immediately, in which case payments begin within
one year of issue and continue for a fixed period of time or for life.

    FIXED ANNUITIES.  Our individual fixed annuities are predominantly single
premium deferred annuity contracts. These contracts are savings vehicles through
which the customer makes a single deposit with us. Under the contract, the
principal amount is guaranteed and for a specified time period, typically one
year, we credit the customer's account at a fixed interest rate. Thereafter, we
reset, typically annually, the interest rate credited to the contract based upon
market and other conditions. Our major source of income from fixed annuities is
the spread between the investment income we earn on the underlying general
account assets and the interest rate we credit to customers' accounts. We bear
the investment risk because, while we credit customers' accounts with a stated
interest rate, we cannot be certain the investment income we earn on our general
account assets will exceed that rate.

    VARIABLE ANNUITIES.  Our individual variable annuity products consist almost
entirely of flexible premium deferred variable annuity contracts. These
contracts are savings vehicles through which the customer makes a single deposit
or a series of deposits of varying amounts and intervals. Customers have the
flexibility to allocate their deposits to investment sub-accounts managed by
Principal Capital Management, or third-party asset managers including Fidelity
Investments(R), AIM Advisors, Inc., Morgan Stanley Asset Management, J.P. Morgan
Investment Management, Inc., Janus Capital Corporation, Neuberger Berman
Management, Inc., The Dreyfus Corporation, Goldman Sachs Asset Management,
Duncan-Hurst Capital Management, Inc., Turner Investment Partners, Inc., and
Berger, LLC. As of June 30, 2001, 58% of our $2.3 billion in variable annuity
account balances were allocated to investment sub-accounts managed by Principal
Capital Management, 31% to investment sub-accounts managed by third-party asset
managers and 11% to our general account, also managed by Principal Capital
Management. The value of the annuity fluctuates in accordance with the
experience of the investment sub-accounts chosen by the customer. The customers
bear the investment risk and have the right to allocate their assets among
various separate investment sub-accounts. Customers have the option to allocate
all or a portion of their account to our general account, in which case we
credit interest at rates we determine, subject to contractual minimums.
Customers may also elect death benefit guarantees. Our major

                                       103

source of revenue from variable annuities is mortality and expense fees we
charge to the customer, generally determined as a percentage of the market value
of the assets held in a separate investment sub-account.

    The table below presents summary information regarding our annuity reserve
activity for the periods indicated:

                            U.S. ASSET ACCUMULATION
                   INDIVIDUAL ANNUITY ACCOUNT VALUE ACTIVITY

                                                         AS OF OR FOR THE
                                                            SIX MONTHS       AS OF OR FOR THE YEAR ENDED
                                                          ENDED JUNE 30,             DECEMBER 31,
                                                         ----------------   ------------------------------
                                                               2001           2000       1999       1998
                                                         ----------------   --------   --------   --------
                                                                          ($ IN MILLIONS)
                                                                                      
FIXED ANNUITIES:
Total Account Value, beginning of period...............      $2,364.5       $2,480.9   $2,641.4   $2,797.6
  Premiums and deposits................................          70.3          162.0      208.9      261.3
  Interest credited....................................          65.6          138.6      136.2      149.7
  Surrenders and benefits..............................        (199.9)        (412.5)    (500.8)    (562.3)
  Product charges......................................          (2.0)          (4.5)      (4.8)      (4.9)
                                                             --------       --------   --------   --------
Total Account Value, end of period.....................      $2,298.5       $2,364.5   $2,480.9   $2,641.4
                                                             ========       ========   ========   ========
Number of Contracts, end of period.....................        65,703         68,179     75,119     82,481
VARIABLE ANNUITIES:
Total Account Value, beginning of period...............       2,348.5       $2,202.7   $1,762.8   $1,297.2
  Deposits.............................................         234.0          444.0      385.7      420.6
  Interest credited and investment performance.........        (155.4)         (75.1)     232.6      154.6
  Surrenders and benefits..............................         (98.3)        (193.0)    (153.1)     (91.0)
  Product charges......................................         (14.7)         (30.1)     (25.3)     (18.6)
                                                             --------       --------   --------   --------
Total Account Value, end of period.....................      $2,314.1       $2,348.5   $2,202.7   $1,762.8
                                                             ========       ========   ========   ========
Number of Contracts, end of period.....................        46,235         44,146     39,767     35,283
TOTAL ANNUITIES:
Total Account Value, beginning of period...............      $4,713.0       $4,683.6   $4,404.2   $4,094.8
  Premiums and deposits................................         304.3          606.0      594.6      681.9
  Interest credited and investment performance.........         (89.7)          63.5      368.8      304.3
  Surrenders and benefits..............................        (298.3)        (605.5)    (653.9)    (653.3)
  Product charges......................................         (16.8)         (34.6)     (30.1)     (23.5)
                                                             --------       --------   --------   --------
Total Account Value, end of period.....................      $4,612.5       $4,713.0   $4,683.6   $4,404.2
                                                             ========       ========   ========   ========
Number of Contracts, end of period.....................       111,938        112,325    114,886    117,764

    MARKETS AND DISTRIBUTION

    Our target markets for individual annuities include owners, executives and
employees of small and medium-sized businesses, and individuals seeking to
accumulate and/or eventually distribute assets for retirement. We market both
fixed and variable annuities to both qualified and non-qualified pension plans.

    We sell our individual annuity products largely through our affiliated
financial representatives, who accounted for 83%, 82%, 79% and 82% of annuity
sales for the six months ended June 30, 2001, and the years ended December 31,
2000, 1999 and 1998, respectively. The remaining sales were made through
brokerage general agencies, banks, Principal Connection and unaffiliated
broker-dealer firms.

                                       104

    The table below shows sales of our individual annuities by distribution
channel for the periods indicated:

                            U.S. ASSET ACCUMULATION
              INDIVIDUAL ANNUITY SALES BY DISTRIBUTION CHANNEL(1)

                                                              FOR THE SIX
                                                              MONTHS ENDED      FOR THE YEAR ENDED
                                                                JUNE 30,           DECEMBER 31,
                                                              ------------   ------------------------
                                                                  2001        2000     1999     1998
                                                              ------------   ------   ------   ------
                                                                          ($ IN MILLIONS)
                                                                                   
Affiliated financial representatives........................     $251.5      $499.4   $409.0   $443.0
Independent brokers and registered representatives of
  Princor...................................................       18.0        35.4     38.8     49.1
Other (non-affiliated) broker dealers.......................        0.8        18.3     14.9      3.1
Banks.......................................................       24.9        30.2     32.8     33.6
Principal Connection........................................        9.1        22.7     23.5     13.1
                                                                 ------      ------   ------   ------
         Total..............................................     $304.3      $606.0   $519.0   $541.9
                                                                 ======      ======   ======   ======

---------------

(1) Excludes deposits related to rollovers from Principal draft account
    products.

  PRINCIPAL BANK

    Principal Bank, our electronic banking operation, is a federal savings bank
that began its activities in February 1998. It offers traditional retail banking
products and services via the telephone, Internet, ATM or by mail. Our current
products and services offering includes checking and savings accounts,
certificates of deposit, consumer and home equity loans, credit cards, debit
cards, money market accounts and a college savings program. As of June 30, 2001,
Principal Bank had 49,825 customers and $880.6 million in assets, principally
representing saving account deposits and certificates of deposit.

    We market our Principal Bank products and services through Principal
Connection to our existing customers, especially pension plan participants.
Through Principal Bank, we also pursue asset retention strategies with our
existing customers who seek to transfer assets from our other asset accumulation
products by offering them our banking products and services.

PRINCIPAL CAPITAL MANAGEMENT

    In 1999, we established Principal Capital Management to consolidate our
extensive investment management expertise and to focus on marketing our asset
management services to third-party institutional clients. Principal Capital
Management provides asset management services to our U.S. asset accumulation
businesses and third-party institutional clients, as well as our other
U.S.-based segments. Principal Capital Management provides a full range of asset
management services with a particular emphasis on three primary asset classes:
(1) equity investments; (2) fixed income investments; and (3) real estate
investments. Principal Capital Management manages both U.S. and international
assets.

    As of June 30, 2001, Principal Capital Management, through its affiliates,
Invista Capital Management, Principal Capital Income Investors and Principal
Capital Real Estate Investors, managed $84.0 billion in assets. Our third-party
institutional assets were $5.8 billion as of June 30, 2001, compared to $3.5
billion on January 1, 1999, the establishment date of Principal Capital
Management.

                                       105

    The following table shows Principal Capital Management's assets under
management by asset class for the periods indicated:

                          PRINCIPAL CAPITAL MANAGEMENT
                     ASSETS UNDER MANAGEMENT BY ASSET CLASS

                                             AS OF JUNE 30,                       AS OF DECEMBER 31,
                                            -----------------      ------------------------------------------------
                                                  2001                 2000              1999            1998(1)
                                            -----------------      ------------      ------------      ------------
                                                                        ($ IN BILLIONS)
                                                                                        
U.S. Equity.............................    $   20.2       24%     $22.4     27%     $25.9     32%     $23.2     30%
International Equity....................         4.4        5        5.6      7        6.3      8        4.5      6
Fixed Income............................        36.9       44       33.7     40       28.4     34       27.2     35
Commercial Mortgages....................        14.1       17       14.1     17       14.8     18       15.0     19
Commercial Real Estate Equity...........         5.5        7        5.6      7        5.5      7        5.8      8
Other...................................         2.9        3        1.8      2        1.3      1        1.4      2
                                            --------    -----      -----    ---      -----    ---      -----    ---
         Total..........................    $   84.0      100%     $83.2    100%     $82.2    100%     $77.1    100%
                                            ========    =====      =====    ===      =====    ===      =====    ===

---------------

(1) Includes assets managed by Invista Capital Management and the former
    investment department of Principal Life prior to the formation of Principal
    Capital Management, effective January 1, 1999.

    The table below shows our asset flow summary for Principal Capital
Management operations for the periods indicated:

                          PRINCIPAL CAPITAL MANAGEMENT
                               ASSET FLOW SUMMARY

                                                              AS OF OR FOR THE    AS OF OR FOR THE
                                                                 SIX MONTHS          YEAR ENDED
                                                               ENDED JUNE 30,       DECEMBER 31,
                                                              ----------------    -----------------
                                                                    2001           2000       1999
                                                              ----------------    ------     ------
                                                                         ($ IN BILLIONS)
                                                                                    
Assets Under Management, beginning of period................       $ 83.2         $ 82.2     $ 77.1(1)
  Deposits..................................................          8.8           17.4       16.3
  Withdrawals...............................................         (7.7)         (15.9)     (12.9)
  Investment Performance....................................          0.3            1.1        6.7
  Other.....................................................         (0.6)          (1.6)      (5.0)
                                                                   ------         ------     ------
Assets Under Management, end of period......................       $ 84.0         $ 83.2     $ 82.2
                                                                   ======         ======     ======

---------------

(1) Includes assets managed by Invista Capital Management and the former
    investment department of Principal Life prior to the formation of Principal
    Capital Management, effective January 1, 1999.

    STRATEGY

    We seek to provide asset management services that respond to the needs of
our asset accumulation operations and third-party institutional clients. Our
capabilities include expertise in equities, commercial real estate and fixed
income securities. Principal Capital Management pursues the following strategic
initiatives:

    GROW OUR THIRD-PARTY INSTITUTIONAL ASSETS UNDER MANAGEMENT.  We are
developing relationships with customers and intermediaries through our expanded
institutional marketing staff. We have increased our third-party institutional
marketing and client service staff from five to more than forty over the past
three years. We have also increased the number of consultant informational
databases to which we provide product information. As a result, in 2000 we
gained 27 new institutional mandates, up from 16 in 1999, and for the six months
ended June 30, 2001, we received 7 institutional mandates. We believe these
marketing efforts have led to the considerable growth in our third-party
institutional assets under management since 1999. We also market the combined
expertise of Principal Capital Management and BT Financial Group to third-party
institutional clients through joint marketing offices in London, Hong Kong and
Singapore. BT Financial Group's asset management expertise is complementary to
the expertise of Principal Capital Management.

    IMPROVE OUR ASSET MANAGEMENT CAPABILITIES AND SERVICES.  During 2000, we
instituted greater discipline in our investment management process to better
ensure that our performance compares favorably to the appropriate

                                       106

benchmark. We have also increased the number of experienced investment
professionals we employ. We believe these actions will improve our ability to
attract investment advisory allocations from our asset accumulation operations
and from investment mandates from third-party institutions.

    INCREASE THE NUMBER OF AVAILABLE INVESTMENT STYLES AND ASSET CLASSES.  To
better serve our existing clients and attract new clients, we have made
additional investment styles and asset classes available to our customers. For
example, we offer U.S. equities, emerging market equities, international small
capitalization equities, international fixed income securities, commercial
mortgage-backed securities and real estate mezzanine/bridge loans. We believe
that increasing the number of asset classes we offer will help us increase our
assets under management.

    PRODUCTS AND SERVICES

    Principal Capital Management provides a full range of asset management
services, with a particular emphasis on three asset classes through a range of
vehicles including separate accounts, mutual funds, institutional accounts,
collateralized debt securities and Principal Life's general account:

    EQUITY INVESTMENTS.  Principal Capital Management, through its affiliate,
Invista Capital Management, managed equity portfolios, which represented $24.6
billion in assets as of June 30, 2001. Invista Capital Management provides our
clients with access to a broad array of domestic, international and emerging
markets equity capabilities. The domestic equity products are organized across
growth and value styles, with portfolios targeted to distinct capitalization
ranges. As of June 30, 2001, 78% of Invista Capital Management's assets under
management were derived from our pension products, 16% from other products of
the Principal Financial Group, and the remaining 6% from third-party
institutional clients.

    FIXED INCOME INVESTMENTS.  Principal Capital Management, through its
affiliate, Principal Capital Income Investors, managed $36.9 billion in fixed
income assets as of June 30, 2001. Principal Capital Income Investors provides
our clients with access to investment-grade corporate debt, mortgage-backed,
asset-backed and commercial mortgage-backed securities, high yield and municipal
bonds and private and syndicated debt instruments. As of June 30, 2001, 70% of
these assets were derived from our pension products, 28% from other products of
the Principal Financial Group, and the remaining 2% from third-party
institutional clients.

    REAL ESTATE INVESTMENTS.  Principal Capital Management, through its
affiliate, Principal Capital Real Estate Investors, managed a commercial real
estate portfolio of $19.6 billion of assets as of June 30, 2001. Principal
Capital Real Estate Investors provides our clients with a broad range of real
estate investment options, including private real estate equity, commercial
mortgages, credit tenant debt, construction-permanent financing,
bridge/mezzanine loans, commercial mortgage-backed securities and real estate
investment trusts. Principal Capital Management had $0.8 billion of assets under
management as of June 30, 2001, from bridge/mezzanine loans and commercial
mortgages which appear on its balance sheet. The commercial mortgages represent
the source of mortgages for our commercial mortgage-backed securitization
program. As of June 30, 2001, 52% of the commercial real estate portfolio was
derived from our pension products, 31% from other products of the Principal
Financial Group, and the remaining 17% from third-party institutional clients.

                                       107

    INVESTMENT PERFORMANCE

    A primary measure of asset management services is investment performance.
The table below shows the number of funds and investment performance of
Principal Capital Management's managed separate accounts and mutual funds, by
investment type, compared to other funds by Morningstar as of June 30, 2001:

                          PRINCIPAL CAPITAL MANAGEMENT
                         PERFORMANCE BY INVESTMENT TYPE
                              AS OF JUNE 30, 2001

                                               SEPARATE ACCOUNTS                                 MUTUAL FUNDS
                                 ----------------------------------------------   -------------------------------------------
                                                                                                        FUNDS WITH 3 STARS OR
                                                                                                          ABOVE ON CLASS A
                                                         FUNDS WITH 3 STARS OR                              SHARES/FUNDS
                                                           ABOVE/FUNDS RANKED                                 RANKED(2)
                                                         ----------------------                         ---------------------
                                  NUMBER      ASSETS     NUMBER       ASSETS      NUMBER     ASSETS     NUMBER      ASSETS
                                    OF        UNDER        OF         UNDER         OF       UNDER        OF         UNDER
INVESTMENT TYPE                  FUNDS(1)   MANAGEMENT    FUNDS     MANAGEMENT    FUNDS    MANAGEMENT    FUNDS    MANAGEMENT
---------------                  --------   ----------   ------     ----------    ------   ----------   ------    ----------
                                                                       ($ IN BILLIONS)
                                                                                          
Equity
  Domestic U.S. ...............     26        $16.5        6/10    $ 9.2/$16.1       9        $2.2         4/8     $0.7/$2.2
  International................      6          2.7         3/4        2.5/2.6       5         0.4         2/3       0.1/0.4
Real Estate....................      1          1.2         N/A            N/A     N/A          --         N/A           N/A
Fixed Income...................     12          5.9         4/4        5.9/5.9       5         0.7         3/5       0.5/0.7
Money Market...................      1          2.4         N/A            N/A       1         0.4         N/A           N/A
                                    --        -----       -----    -----------     ---        ----      ------     ---------
        Total..................     46        $28.7       13/18    $17.6/$24.6      20        $3.7        9/16     $1.3/$3.3
                                    ==        =====       =====    ===========     ===        ====      ======     =========

---------------

(1) Includes funds that are not rated by Morningstar.

(2) According to Morningstar, a fund's ten year return accounts for 50% of its
    overall rating score, its five year return accounts for 30% and its three
    year return accounts for 20%. If only five years of history are available,
    the five year period is weighted 60% and the three year period is weighted
    40%. According to Morningstar, funds in the top 67.5% of their asset
    category receive 3 stars or above.

    MARKETS AND DISTRIBUTION

    Principal Capital Management employed 48 institutional sales, relationship
management and client service professionals as of June 30, 2001, who worked with
consultants and directly with large investors to acquire and retain third-party
institutional clients. For the six months ended June 30, 2001, approximately 43%
of new institutional clients were originated through direct client contact by
Principal Capital Management representatives with the balance derived from
consultants.

    We also market the combined expertise of Principal Capital Management and BT
Financial Group to third-party institutional clients through joint marketing
offices in London, Hong Kong and Singapore. BT Financial Group's asset
management expertise is complementary to the expertise of Principal Capital
Management.

                                       108

    The table below shows Principal Capital Management's assets under management
by accumulation source for the periods indicated:

                          PRINCIPAL CAPITAL MANAGEMENT
               ASSETS UNDER MANAGEMENT BY ACCUMULATION SOURCE(1)

                                                              AS OF JUNE 30,     AS OF DECEMBER 31,
                                                              --------------   -----------------------
                                                                   2001        2000    1999    1998(2)
                                                              --------------   -----   -----   -------
                                                                          ($ IN BILLIONS)
                                                                                   
ACCUMULATION SOURCE
Affiliated
  Pension
    General Account.........................................      $29.7        $28.6   $27.8    $27.1
    Separate Account........................................       27.8         28.8    30.9     27.0
  Mutual Funds..............................................        3.7          3.8     4.0      3.7
  Individual Annuities
    General Account.........................................        2.7          2.8     2.8      3.0
    Separate Account........................................        1.3          1.3     1.4      1.3
  Life and Health Insurance General Account.................        9.1          9.0     8.5      8.1
    Separate Account........................................        0.2          0.2     0.1      0.1
  Other.....................................................        3.7          2.4     2.0      3.3
                                                                  -----        -----   -----    -----
         Total Affiliated...................................       78.2         76.9    77.5     73.6
Third-party Institutional...................................        5.8          6.3     4.7      3.5
                                                                  -----        -----   -----    -----
         Total..............................................      $84.0        $83.2   $82.2    $77.1
                                                                  =====        =====   =====    =====

---------------

(1) Includes all assets for which Principal Capital Management provides
    investment advisory services.

(2) Includes assets managed by Invista Capital Management and the former
    investment department of Principal Life prior to the formation of Principal
    Capital Management, effective January 1, 1999.

INTERNATIONAL ASSET MANAGEMENT AND ACCUMULATION SEGMENT

    Our International Asset Management and Accumulation segment consists of BT
Financial Group and Principal International. As of June 30, 2001, BT Financial
Group was the fifth largest asset manager in Australia according to ASSIRT. As
of June 30, 2001, BT Financial Group had accumulated $22.6 billion of assets
under management and provided investment advisory services to $21.1 billion in
assets. Principal International has subsidiaries in Argentina, Chile, Mexico and
Hong Kong and joint ventures in Brazil, Japan and India. We focus on countries
with favorable demographics and a trend toward private sector defined
contribution pension systems. We entered these countries through acquisitions
and joint ventures.

    Our International Asset Management and Accumulation segment generated 7%,
7%, 4% and 3% of our total operating revenues and $(4.7) million, $(8.5)
million, $(38.4) million and $(35.4) million of our total operating earnings for
the six months ended June 30, 2001 and the years ended December 31, 2000, 1999
and 1998, respectively.

    The table below shows the operating revenues, operating earnings, assets and
assets under management of our International Asset Management and Accumulation
segment for the periods indicated:

                INTERNATIONAL ASSET MANAGEMENT AND ACCUMULATION
                         SELECTED FINANCIAL HIGHLIGHTS

                                              FOR THE SIX
                                              MONTHS ENDED
                                                JUNE 30,                FOR THE YEAR ENDED DECEMBER 31,
                                             --------------    --------------------------------------------------
                                                  2001              2000            1999(3)             1998
                                             --------------    --------------    --------------    --------------
                                                                       ($ IN MILLIONS)
                                                                                      
OPERATING REVENUES(1):
  BT Financial Group.......................  $  122.4    39%   $  285.3    45%   $  113.8    30%   $     --    --%
  Principal International..................     187.7    61       345.4    55       265.8    70       223.1   100
                                             --------   ---    --------   ---    --------   ---    --------   ---
         Total.............................  $  310.1   100%   $  630.7   100%   $  379.6   100%   $  223.1   100%
                                             ========   ===    ========   ===    ========   ===    ========   ===

                                       109

                INTERNATIONAL ASSET MANAGEMENT AND ACCUMULATION
                  SELECTED FINANCIAL HIGHLIGHTS -- (CONTINUED)

                                              FOR THE SIX
                                              MONTHS ENDED
                                                JUNE 30,                FOR THE YEAR ENDED DECEMBER 31,
                                             --------------    --------------------------------------------------
                                                  2001              2000            1999(3)             1998
                                             --------------    --------------    --------------    --------------
                                                                       ($ IN MILLIONS)
                                                                                      
OPERATING EARNINGS (LOSS):
  BT Financial Group(2)....................  $   (5.8)  N/A    $    6.3   N/A    $   (4.8)  N/A    $     --   N/A
  Principal International..................       1.1   N/A       (14.8)  N/A       (33.6)  N/A       (35.4)  N/A
                                             --------   ---    --------   ---    --------   ---    --------   ---
         Total.............................  $   (4.7)  N/A    $   (8.5)  N/A    $  (38.4)  N/A    $  (35.4)  N/A
                                             ========   ===    ========   ===    ========   ===    ========   ===
ASSETS:
  BT Financial Group.......................  $3,182.7    65%   $3,716.8    67%   $4,472.8    75%   $     --    --%
  Principal International..................   1,736.9    35     1,809.1    33     1,454.0    25     1,239.4   100
                                             --------   ---    --------   ---    --------   ---    --------   ---
         Total.............................  $4,919.6   100%   $5,525.9   100%   $5,926.8   100%   $1,239.4   100%
                                             ========   ===    ========   ===    ========   ===    ========   ===
ASSETS UNDER MANAGEMENT:
  ($ in billions)
  BT Financial Group.......................  $   22.6    88%   $   25.4    89%   $   28.6    93%   $     --    --%
  Principal International..................       3.1    12         3.0    11         2.0     7         1.2   100
                                             --------   ---    --------   ---    --------   ---    --------   ---
         Total.............................  $   25.7   100%   $   28.4   100%   $   30.6   100%   $    1.2   100%
                                             ========   ===    ========   ===    ========   ===    ========   ===

---------------

(1) Excludes net realized capital gains and their impact on recognition of
    front-end fee revenues.

(2) Reflects amortization of goodwill and other intangibles related to the
    acquisition of BT Financial Group.

(3) Reflects operations of BT Financial Group from August 31, 1999, the date of
    its acquisition.

BT FINANCIAL GROUP

    Our acquisition of BT Financial Group was a central element in our expansion
of our international asset management and accumulation businesses. BT Financial
Group's operations include:

    - retail funds management;

    - institutional asset management;

    - margin lending;

    - portfolio services; and

    - New Zealand.

    In November 1998, Deutsche Bank AG announced the purchase of Bankers Trust
Corporation, the parent company of Bankers Trust Australia Group. In March 1999,
Deutsche Bank announced its intention to sell Bankers Trust's Australian
operations while retaining its asset management operations in Japan, the U.K.
and New York. During the period that Bankers Trust's Australian operations were
for sale, many investment advisors in Australia suspended new deposits pending
clarification on the ownership of the business. On August 31, 1999, we purchased
Bankers Trust Australia Group, including BT Funds Management and related
businesses. We subsequently changed its name to BT Financial Group.

    We measure assets under management in two ways, both by the operation that
accumulates the assets and by the entity that manages the assets. BT Financial
Group both accumulates and manages assets. From an accumulation perspective, BT
Financial Group had assets under management of $22.6 billion as of June 30,
2001. As of that same date, BT Financial Group provided investment advisory
services for $21.1 billion. The difference represents assets accumulated by BT
Financial Group for which another asset manager provides investment advisory
services. BT Financial Group's assets under management increased A$1.0 billion
from December 31, 1999 to June 30, 2001. However, during the same period the
Australian dollar declined 22% in value relative to the U.S. dollar resulting in
a $6.0 billion decrease in assets under management in U.S. dollar terms.

                                       110

    The table below shows the amount of assets under management by operation for
BT Financial Group for the periods indicated:

                               BT FINANCIAL GROUP
                           ASSETS UNDER MANAGEMENT(1)

                                                                   AS OF
                                                                  JUNE 30,            AS OF DECEMBER 31,
                                                                  --------      -------------------------------
                                                                    2001         2000        1999       1998(2)
                                                                  --------      ------      ------      -------
                                                                                  (IN BILLIONS)
                                                                                            
Retail......................................................       A$21.6       A$23.3      A$20.9      A$18.7
Institutional...............................................         16.9         17.5        19.7        22.0
Margin Lending..............................................          1.1          1.1         1.0         1.0
Portfolio Services..........................................          3.7          2.5         0.9         0.1
New Zealand.................................................          1.2          1.1         1.0         1.2
Other.......................................................           --          0.2          --          --
                                                                  -------       ------      ------      ------
         Total..............................................       A$44.5       A$45.7      A$43.5      A$43.0
                                                                  =======       ======      ======      ======
         Total..............................................        $22.6        $25.4       $28.6       $26.4
                                                                  =======       ======      ======      ======

---------------

(1) A$ denotes Australian dollars.

(2) Includes assets managed by BT Financial Group prior to its acquisition by
    the Principal Financial Group. Assets are presented for comparative purposes
    only and are not included in segment or consolidated assets under management
    amounts reported elsewhere in this document.

    The table below shows BT Financial Group's asset flow summary for the
periods indicated:

                               BT FINANCIAL GROUP
                             ASSET FLOW SUMMARY(1)

                                                        AS OF OR FOR
                                                          THE SIX
                                                        MONTHS ENDED      AS OF OR FOR THE YEAR ENDED
                                                          JUNE 30,               DECEMBER 31,
                                                       --------------   -------------------------------
                                                            2001             2000           1999(2)
                                                       --------------   --------------   --------------
                                                                        (IN BILLIONS)
                                                                                
Assets Under Management, beginning of period.........  A$45.7   $25.4   A$43.5   $28.6   A$43.0   $26.4
  Net Deposits and Withdrawals.......................    (0.3)   (0.1)     1.3     0.7     (4.0)   (2.7)
  Investment Performance.............................    (0.5)   (0.2)     0.9     0.5      4.5     3.0
  Effect of Exchange Rates...........................      --    (2.3)      --    (4.4)      --     1.9
  Other..............................................    (0.4)   (0.2)      --      --       --      --
                                                       ------   -----   ------   -----   ------   -----
Assets Under Management, end of period...............  A$44.5   $22.6   A$45.7   $25.4   A$43.5   $28.6
                                                       ======   =====   ======   =====   ======   =====

---------------

(1) A$ denotes Australian dollars.

(2) Includes assets managed by BT Financial Group prior to its acquisition by
    the Principal Financial Group. Assets are presented for comparative purposes
    only and are not included in segment or consolidated assets under management
    amounts reported elsewhere in this document.

    STRATEGY

    Our strategic initiatives for BT Financial Group include:

    FURTHER INTEGRATE BT FINANCIAL GROUP'S ACTIVITIES.  We continue to look for
opportunities to capture synergies between BT Financial Group and our operating
segments, especially with respect to product distribution and operating
platforms. For example, we offer BT Financial Group-managed products in our U.S.
401(k) products. Similarly, we offer Principal Capital Management-managed
products to institutions in Australia through BT Financial Group's existing
distribution network.

    GROW OUR RETAIL FUNDS MANAGEMENT BUSINESS WITH EMPHASIS ON CORPORATE MASTER
TRUST SUPERANNUATION PLANS.  We believe that BT Financial Group has a strong
financial sector brand in Australia, in addition to an extensive family of

                                       111

investment products. It also has distribution relationships with most major
Australian banks, life insurers, independent financial advisors and other
distributors of financial products.

    The Australian asset management market has grown in part from the
introduction of superannuation, a mandatory, tax-favored defined contribution
retirement system established in the early 1990s. According to a March 2000
report by Cerulli Associates, Inc., from June 1995 to June 1999, Australian
superannuation assets grew from A$228.0 billion to A$408.0 billion, a compound
annual growth rate of 15.7%. Under superannuation, all employers in Australia
are required to contribute 8%, increasing to 9% in July 2002, of an employee's
salary to a defined contribution pension plan. These mandatory contributions
will provide continued growth in assets under management in Australia generally
and, we believe, will provide the opportunity for attractive growth for BT
Financial Group specifically.

    Utilizing its brand recognition and extensive distribution channels, BT
Financial Group has increased its marketing efforts on the sale of corporate
master trust superannuation plans, especially those of small and medium-sized
businesses. These corporate master trust plans are similar to 401(k) plans in
the United States in that they are employer-sponsored defined contribution
plans. We believe that BT Financial Group's strong market position, together
with the expertise we have developed in the U.S. defined contribution pension
market, should provide for long-term growth in our assets under management in
Australia.

    GROW OUR THIRD-PARTY INSTITUTIONAL ASSET MANAGEMENT BUSINESS OUTSIDE OF
AUSTRALIA.  BT Financial Group and Principal Capital Management together target
markets abroad through joint marketing offices in London, Hong Kong and
Singapore. These offices market the institutional investment advisory services
of both operations. BT Financial Group also provides investment advisory
services to Principal International.

    GROW BT FINANCIAL GROUP'S WRAP PRODUCT.  BT Financial Group's Wrap product
is an Internet-based portfolio transaction and administration service targeted
at independent financial advisors. It enables a financial planner to track a
client's total portfolio and provide consolidated reporting and transaction
capabilities in a user-friendly and cost effective manner. Since its launch in
early 1998, Wrap assets under management have grown from $0.5 billion (A$0.9
billion) as of December 31, 1999 to $1.8 billion (A$3.6 billion) as of June 30,
2001. We believe that we have a competitive lead in the provision of this type
of administration service to financial advisors and their clients in Australia.

    PRODUCTS AND SERVICES

    BT Financial Group offers a wide range of investment products, margin
lending and portfolio services.

    RETAIL FUNDS MANAGEMENT.  To its retail clients, BT Financial Group offers
an extensive range of retirement and investment services, including retail
mutual funds, pensions, annuities and corporate superannuation plans to over
500,000 retail customers as of June 30, 2001. BT Financial Group makes available
a client service call center and the "BT Online" Internet site, both providing
account information and transaction services for investors and financial
intermediaries.

    INSTITUTIONAL ASSET MANAGEMENT.  To its larger institutional clients, both
in Australia and in targeted global markets, BT Financial Group offers products
and services covering a full investment range, including actively managed
diversified and specialist funds, individual client mandates, pooled investment
funds, global equities and fixed income securities, as well as currency and
asset allocation overlays. An overlay is a portfolio strategy that allows an
institution to seek enhanced portfolio returns by changing its exposure to asset
classes without liquidating a portion of its portfolio.

    MARGIN LENDING.  BT Financial Group is one of the largest margin lenders in
the Australian market. According to Cannex's May 2001 margin lending report, BT
Financial Group was awarded a five star rating (out of 5) on three of its margin
lending products and a four star rating on four other margin lending products.
Margin lending products assigned five stars are described by Cannex as
"Excellent" while those assigned four stars are characterized as "Very Good."
Margin lending enables investors to borrow up to 70% of the value of mutual
funds and select listed securities. Rising levels of share ownership among
Australian investors has generated increased margin lending, with BT Financial
Group's margin lending portfolio balance of $0.6 billion (A$1.1 billion) as of
June 30, 2001. On November 30, 1999, BT Financial Group margin lending
operations securitized its margin lending portfolio with Westpac Banking
Corporation, an Australian Bank. Under the terms of the financing, BT Financial
Group margin lending operations are required to allocate capital equal to
approximately 7% of the outstanding borrowed amount, as a cushion for loan
defaults.

    PORTFOLIO SERVICES.  BT Financial Group is a leading provider of investment
administration and processing in Australia and New Zealand. Wrap is our fastest
growing portfolio services product. It provides independent financial advisors
with a range of investment choices for their clients administered via a central
Internet-based source with a choice of mutual funds and listed equity
securities. This product enables them, on behalf of their clients, to manage all
of a client's investment portfolio. Wrap also provides for custody, settlement
and accounting of all investments with online account capabilities and reporting
to the investor.

                                       112

    NEW ZEALAND.  BT New Zealand provides a comprehensive range of retail and
institutional asset management services in New Zealand. BT Financial Group's New
Zealand business had $0.6 billion (A$1.2 billion) of assets under management as
of June 30, 2001.

    INVESTMENT PERFORMANCE

    As of June 30, 2001, BT Financial Group had a staff of 96 investment
professionals actively managing mutual funds, superannuation plans and other
related investment products. Within the funds management operations, it has
developed particular expertise managing equity and fixed income funds, both in
Australia and internationally.

    Since October 2000, our Australian equity investment performance has been
disappointing. We have recently taken actions to improve performance, including:

    - appointment of new senior management in asset management including chief
      investment officer and senior equities positions; and

    - enhancement of the equity portfolio management process aimed at reducing
      the volatility of investment returns by implementing tighter risk
      controls.

    The table below shows investment performance of BT Financial Group's retail
mutual funds, superannuation plans and other retirement related products
compared to other funds by Morningstar:

                               BT FINANCIAL GROUP
                         PERFORMANCE BY INVESTMENT TYPE
                              AS OF JUNE 30, 2001

                                                                                   FUNDS WITH MORNINGSTAR
                                                                                       RATINGS IN THE
                                                                                   TOP 2 QUARTILES/FUNDS
                                                                                          RATED(1)
                                                                                ----------------------------
                                                 NUMBER OF     ASSETS UNDER     NUMBER OF     ASSETS UNDER
INVESTMENT TYPE                                    FUNDS        MANAGEMENT        FUNDS      MANAGEMENT(2)
---------------                                  ---------     ------------     ---------    -------------
                                                             (A$ IN BILLIONS)               (A$ IN BILLIONS)
                                                                                
Equity:
  Australian...................................      20            A$2.3          --/10       A$--/A$1.9
  International................................      40              7.3          10/11        5.3/5.3
Income.........................................      18              0.3          10/13        0.1/0.3
Balanced.......................................      41             10.3           4/23        2.8/9.3
Money Market...................................       8              0.9            2/6        0.2/0.8
Other..........................................      50              0.5          --/--         --/--
                                                    ---           ------          -----      -------------
         Total.................................     177           A$21.6          26/63      A$8.4/A$17.6
                                                    ===           ======          =====      =============

---------------

(1) Morningstar rates the performance of our funds by comparing the total return
    of each fund to the total return of mutual funds in the same asset category
    as the separate account. Morningstar ranks total returns on a scale of
    1-100, where 1 represents the highest-returning 1% of all funds in that
    asset category and 100 represents the lowest-returning 1% of all funds. For
    example, a quartile rank of 1 for the trailing five-year period would
    indicate that the fund's five-year total return places it in the top 25% of
    all funds in its asset category and a quartile rank of 2 would indicate that
    the fund's five year total return places it in the top 50% in its asset
    category.

(2) Includes assets that are not rated by Morningstar.

    MARKETS AND DISTRIBUTION

    BT Financial Group's products and services are primarily sold throughout
Australia and New Zealand in both the institutional and retail markets. BT
Financial Group also operates institutional asset management offices in Hong
Kong, Singapore and London, as well as a joint venture operation in Malaysia.

    As part of its marketing strategy, BT Financial Group has a comprehensive
brand and advertising strategy covering television, print media and the
Internet. Building on its successful brand campaign which positions BT Financial
Group in investment and superannuation, it is now also positioning itself as a
leading provider in the corporate superannuation market. For example, BT
Financial Group developed a television and print campaign to target employers.
It focuses on employee benefits from BT Financial Group's corporate
superannuation plan, referring to corporate sponsored retirement plans. BT
Financial Group has experienced growth in sales of its corporate superannuation
plans since the beginning of 1999. For the six months ended June 30, 2001, BT
Financial Group had 193 new plans compared to 488 new plans in 2000 and 154 in
1999.

                                       113

    RETAIL FUNDS MANAGEMENT.  The retail funds management operations of BT
Financial Group provide a number of mutual funds and retirement services,
including superannuation for individuals, small and medium-sized businesses and
institutions, as well as pensions and annuities for retirees. These products are
primarily designed to meet the needs created by the superannuation market in
Australia. BT Financial Group has five investor centers in Australia, which
serve existing clients and advisors and promote BT Financial Group products and
services. Independent financial advisors are the main distribution channel for
retail investment products and superannuation products in Australia. BT
Financial Group also distributes these products through major banks, life
insurers and other mutual fund managers.

    INSTITUTIONAL ASSET MANAGEMENT.  BT Financial Group's institutional products
and services are designed for trustees of corporate superannuation funds
institutions, large corporations and quasi-governmental entities. BT Financial
Group distributes the majority of its institutional asset management products
and services through consultants such as Towers Perrin, Mercer, Watson Wyatt,
Frank Russell and others.

    MARGIN LENDING.  BT Financial Group's margin lending services target retail
clients and independent financial advisors. These services are marketed through
independent financial advisors and retail investor centers in addition to other
brokers. BT Financial Group's margin lending services allow independent
financial advisors to provide their clients a full range of financial services.

    PORTFOLIO SERVICES.  BT Financial Group provides portfolio services to large
institutions, corporations and mutual fund managers. Wrap is marketed to
independent financial advisors and other financial intermediaries for a fee.

    NEW ZEALAND.  BT Financial Group's New Zealand operations provide a
comprehensive group of products and services across both the retail and
institutional markets. Retail products are distributed through independent
financial advisors while institutional products are distributed through
consultants.

PRINCIPAL INTERNATIONAL

    The activities of Principal International reflect our efforts to accelerate
the growth of our assets under management by capitalizing on the international
trend toward private sector defined contribution pension systems. Through
Principal International, we offer retirement products and services, annuities,
mutual funds and life insurance. We operate through subsidiaries in Argentina,
Chile, Mexico and Hong Kong and joint ventures in Brazil, Japan and India.

    The table below shows by country the amount on which we earned a fee as
compared to assets on which we earned a spread for the periods indicated:

                            PRINCIPAL INTERNATIONAL
                            ASSETS UNDER MANAGEMENT
                       FEE-BASED/SPREAD-BASED COMPOSITION

                             AS OF JUNE 30,                                AS OF DECEMBER 31,
                          ---------------------   ---------------------------------------------------------------------
                                  2001                    2000                    1999                    1998
                          ---------------------   ---------------------   ---------------------   ---------------------
                          FEE    SPREAD   TOTAL   FEE    SPREAD   TOTAL   FEE    SPREAD   TOTAL   FEE    SPREAD   TOTAL
                          ----   ------   -----   ----   ------   -----   ----   ------   -----   ----   ------   -----
                                                                 ($ IN BILLIONS)
                                                                              
Brazil..................  $ --    $0.9    $0.9    $ --    $0.8    $0.8    $ --    $0.6    $0.6    $ --    $ --    $ --
Chile...................    --     0.9     0.9     0.1     0.9     1.0     0.1     0.8     0.9      --     0.7     0.7
Mexico..................   0.5     0.1     0.6     0.4      --     0.4     0.2      --     0.2     0.1      --     0.1
Other countries.........   0.7      --     0.7     0.5     0.3     0.8     0.2     0.1     0.3     0.2     0.2     0.4
                          ----    ----    ----    ----    ----    ----    ----    ----    ----    ----    ----    ----
Total...................  $1.2    $1.9    $3.1    $1.0    $2.0    $3.0    $0.5    $1.5    $2.0    $0.3    $0.9    $1.2
                          ====    ====    ====    ====    ====    ====    ====    ====    ====    ====    ====    ====

                                       114

    The table below shows the asset flow summary for Principal International for
the periods indicated:

                            PRINCIPAL INTERNATIONAL
                               ASSET FLOW SUMMARY

                                                              AS OF OR FOR THE     AS OF OR FOR THE
                                                              SIX MONTHS ENDED        YEAR ENDED
                                                                  JUNE 30,           DECEMBER 31,
                                                              ----------------     -----------------
                                                                    2001            2000       1999
                                                              ----------------     ------     ------
                                                                         ($ IN BILLIONS)
                                                                                     
Assets Under Management, beginning of period................       $ 3.0           $ 2.0      $ 1.2
  Deposits..................................................         0.9             1.2        0.4
  Withdrawals...............................................        (0.5)           (0.5)      (0.1)
  Investment performance....................................         0.2             0.2        0.1
  Operations acquired.......................................          --             0.2        0.6
  Other.....................................................        (0.3)            0.1       (0.1)
  Effect of exchange rates..................................        (0.2)           (0.2)      (0.1)
                                                                   -----           -----      -----
Assets Under Management, end of period......................       $ 3.1           $ 3.0      $ 2.0
                                                                   =====           =====      =====

  STRATEGY

    Our goal is to leverage our U.S. product expertise and operating platform to
provide retirement and asset accumulation products and services in targeted
international markets. We focus on countries that we believe offer the greatest
long-term growth opportunities, favorable demographics and private defined
contribution systems, particularly those in which small and medium-sized
businesses sponsor the retirement plan. Our primary strategic initiative is to:

    INCREASE THE GROWTH AND PROFITABILITY OF PRINCIPAL INTERNATIONAL

    - Focus our operations on attractive markets.  We have exited
      under-performing operations that lacked scale, such as our pre-retirement
      accumulation business in Argentina, and sold our operations in Spain in
      2001. We remain focused on countries that have attractive long-term
      potential, such as Brazil, Mexico, India and Japan. We believe this focus
      will lead to more rapid growth in our assets under management.

    - Leverage our domestic expertise in these markets.  We operate under a
      structure in which the U.S. business unit responsible for the equivalent
      U.S. product is actively involved in the planning and execution of each
      country's business plan for such product. For example, our U.S. mutual
      fund management team is actively involved in overseeing our mutual fund
      joint venture in India. We believe that this involvement is critical to
      help our local country managers grow these operations.

    - Leverage technology developed for U.S. operations into other
      countries.  We utilize a common client/server-based system in most
      countries. This system incorporates expertise from our U.S. operations
      into a version scaled to each of our international operations. This common
      platform allows us to spread our technology expenditures throughout our
      operations rather than incurring greater expense by operating a separate
      system in each country.

    - Grow revenues and manage expenses.  Our operating revenues for this
      segment increased from $223.1 million in 1998 to $345.4 million in 2000,
      while operating expenses as a percentage of operating revenues declined
      from 45.4% in 1998 to 30.1% in 2000. For the six months ended June 30,
      2001, operating expenses as a percentage of revenues were 25.7%.

  PRODUCTS AND SERVICES

    Through Principal International, we offer retirement products and services,
annuities, mutual funds and life insurance.

  MARKETS AND DISTRIBUTION

    ASIA/PACIFIC REGION

    HONG KONG.  Our subsidiary in Hong Kong is actively competing in the defined
contribution plan market. The government requires employers and employees each
to contribute 5% of an employee's income to a Mandatory Provident Fund. We
target small and medium-sized employers and distribute products through
strategic alliances with insurance companies, mutual funds or banks, direct
marketing and through our own sales representatives. Our strategic partners help
distribute our Mandatory Provident Fund products and services, or use our
administrative and investment services in their own products. Our Mandatory
Provident Fund products and services are marketed by agents under the various
distribution arrangements we have with our strategic partners.

                                       115

    INDIA.  We own 50% of IDBI-Principal Asset Management Company, Ltd., or
IDBI-Principal, a mutual fund company. Our joint venture partner is the
Industrial Development Bank of India, or IDBI, a premier development bank in
India. In addition to the current mutual fund business, we are positioning
IDBI-Principal to compete in the emerging pension and long-term savings market
in India. We sell our mutual funds through regional offices located throughout
India and IDBI's banking offices.

    JAPAN.  We own 50% of ING/Principal Pensions Company, Ltd., which will sell
a new defined contribution plan, as a result of legislation adopted in June
2001. This company will target small and medium-sized businesses and offer full-
service record-keeping and plan administration. Our joint venture partner is ING
Insurance International B.V., a member of the ING Group. Our pension sales
representatives distribute our products through ING Life's independent agents to
existing ING Life business clients and also through additional third-party
distribution relationships developed by ING/ Principal Pensions Company, Ltd.

    LATIN AMERICA

    ARGENTINA.  We own a life insurance company and a retirement annuity
company. Principal Life Compania de Seguros, S.A., our life insurance company,
targets small and medium-sized employers. We sell group and individual life
insurance products through independent brokers and through bank branches of
Societe Generale, with which we have an alliance. Societe Generale is a leading
French banking institution with offices throughout Argentina through which we
distribute our products. Principal Retiro Compania de Seguros de Retiro, S.A.,
our annuity company, provides annuities to individuals exiting the compulsory
private pre-retirement asset accumulation system. We distribute annuity products
through dedicated sales representatives who sell directly to customers and
through independent brokers in Argentina.

    BRAZIL.  We own 46% of BrasilPrev, a private pension company in Brazil,
through a joint venture arrangement with Banco do Brasil, Brazil's largest bank.
We are Banco do Brasil's exclusive partner for distributing pension products.
BrasilPrev provides defined contribution products for the retirement needs of
employers and individuals. Banco do Brasil's employees sell directly to
individual clients through its bank branches. BrasilPrev reaches corporate
clients through two wholesale distribution channels: (1) a wholesale
distribution channel distributes products through a network of independent
brokers who sell to the public, and (2) another channel coordinates with Banco
do Brasil's corporate account executives to reach Banco do Brasil's existing
corporate clients.

    CHILE.  We own Principal Compania de Seguros de Vida Chile S.A., a Chilean
insurance company, that primarily sells retirement annuities to individuals
exiting the pre-retirement accumulation system. In July 1998, we acquired
Compania de Seguros de Vida El Roble, S.A., or El Roble, a Chilean life
insurance company. We have fully integrated the operations of El Roble with
those of Principal Compania de Seguros de Vida Chile S.A. We distribute our
annuity products through a network that consisted of over 60 captive agents and
approximately 300 independent agents as of June 30, 2001. We also utilize sales
representatives who sell through brokers. We also market life and health
insurance products to small and medium-sized businesses and to individuals
through brokers. Based upon assets, we were ranked as the fourth largest life
insurance company in Chile as of June 30, 2001, according to the
Superintendencia de Valores y Seguros, the Chilean regulatory agency for
insurance companies. We also own 60% of Andueza & Principal Creditos
Hipotecarios S.A., in a joint partnership arrangement with Andueza y Compania
Agentes de Mutuos Hipotecarios S.A. Through this business, we sell and service
mortgage loans in Chile.

    MEXICO.  We own Principal Mexico Compania de Seguros S.A. de C.V., or
Principal Seguros, a life insurance company, Principal Afore S.A. de C.V., a
private pension company which manages and administers individual retirement
accounts under the mandatory privatized social security system in effect for all
employees in Mexico and Principal Pensiones S.A. de C.V., or Principal
Pensiones, an annuity company. Our focus is on both pre-retirement and post-
retirement savings plans. We distributed Principal Afore S.A. de C.V.'s products
and services through a dedicated sales force of approximately 550 sales
representatives as of June 30, 2001, who sold directly to individuals. As of
June 30, 2001, Principal Pensiones used 105 employed sales representatives and
independent brokers to distribute annuities directly to customers. Our life
insurance company, Principal Seguros, distributes its products through an array
of independent agents and brokers.

                                       116

LIFE AND HEALTH INSURANCE SEGMENT

    Our Life and Health Insurance segment offers (1) individual life and
disability insurance and (2) group life and health insurance throughout the
United States.

    Our Life and Health Insurance segment contributed 44%, 47%, 48% and 50% of
our total operating revenues and 25%, 26%, 19% and 19% of our total operating
earnings for the six months ended June 30, 2001 and for the years ended December
31, 2000, 1999 and 1998, respectively. The table below shows the total operating
revenues, operating earnings and assets of our Life and Health Insurance
segment, by individual life and disability insurance, and group life and health
insurance, respectively, for the periods indicated:

                           LIFE AND HEALTH INSURANCE
                         SELECTED FINANCIAL HIGHLIGHTS

                                           AS OF OR FOR THE
                                              SIX MONTHS
                                            ENDED JUNE 30,             AS OF OR FOR THE YEAR ENDED DECEMBER 31,
                                          ------------------    -------------------------------------------------------
                                                 2001                 2000                1999               1998
                                          ------------------    ----------------    ----------------    ---------------
                                                                         ($ IN MILLIONS)
                                                                                            
OPERATING REVENUES(1):
  Individual Life and Disability
    Insurance...........................  $   755.7       38%   $ 1,472.9     36%   $ 1,409.8     35%   $1,386.0     36%
  Group Life and Health Insurance.......    1,222.5       62      2,649.7     64      2,575.7     65     2,507.1     64
                                          ---------      ---    ---------    ---    ---------    ---    --------    ---
         Total..........................  $ 1,978.2      100%   $ 4,122.6    100%   $ 3,985.5    100%   $3,893.1    100%
                                          =========      ===    =========    ===    =========    ===    ========    ===
OPERATING EARNINGS:
  Individual Life and Disability
    Insurance...........................  $    52.7       58%   $    54.9     34%   $    86.8     96%   $   52.2    104%
  Group Life and Health Insurance.......       38.2       42        107.4     66          3.9      4        (2.2)    (4)
                                          ---------      ---    ---------    ---    ---------    ---    --------    ---
         Total..........................  $    90.9      100%   $   162.3    100%   $    90.7    100%   $   50.0    100%
                                          =========      ===    =========    ===    =========    ===    ========    ===
ASSETS:
  Individual Life and Disability
    Insurance...........................  $ 8,845.7       83%   $ 8,682.1     82%   $ 8,086.1     80%   $7,605.1     82%
  Group Life and Health Insurance.......    1,791.5       17      1,886.9     18      1,984.7     20     1,614.4     18
                                          ---------      ---    ---------    ---    ---------    ---    --------    ---
         Total..........................  $10,637.2      100%   $10,569.0    100%   $10,070.8    100%   $9,219.5    100%
                                          =========      ===    =========    ===    =========    ===    ========    ===

---------------

(1) Excludes net realized capital gains and their impact on recognition of
    front-end fee revenues.

INDIVIDUAL LIFE AND DISABILITY INSURANCE

    We began as an individual life insurer in 1879, and our U.S. operations
served approximately 750,000 individual policyholders with $81.8 billion of life
insurance in force as of June 30, 2001. Individual life and disability insurance
contributed 17%, 17%, 17% and 18% of our consolidated operating revenues for the
six months ended June 30, 2001 and for the years ended December 31, 2000, 1999
and 1998, respectively.

    We offer a wide array of individual life and disability insurance products
aimed at serving our customers' financial needs throughout their lives.

                                       117

    The table below shows selected GAAP financial information regarding our
individual insurance products for the periods indicated:

                    INDIVIDUAL LIFE AND DISABILITY INSURANCE
                          SELECTED PRODUCT HIGHLIGHTS

                                                       AS OF OR FOR
                                                      THE SIX MONTHS       AS OF OR FOR THE YEAR ENDED
                                                      ENDED JUNE 30,              DECEMBER 31,
                                                      --------------    ---------------------------------
                                                           2001           2000        1999        1998
                                                      --------------    ---------   ---------   ---------
                                                                        ($ IN MILLIONS)
                                                                                    
INTEREST-SENSITIVE LIFE INSURANCE:
  Number of policies................................       92,728          90,682      80,459      71,229
  First-year premiums/Deposits......................    $    29.6       $    65.0   $    47.9   $    37.8
  Premiums/Deposits.................................        138.2           374.2       178.6       175.5
  Future policy benefits/Policy account balance.....      1,648.7         1,567.6     1,237.2     1,070.8
  Life insurance in force...........................     20,898.8        19,566.8    15,633.2    12,726.6
TRADITIONAL LIFE INSURANCE:
  Number of policies................................      597,604         609,326     632,551     659,288
  First-year premiums/Deposits......................    $    12.4       $    27.0   $    32.2   $    45.9
  Premiums/Deposits.................................        387.2           772.8       780.8       796.2
  Future policy benefits/Policy account balance.....      5,597.7         5,522.7     5,331.6     5,119.6
  Life insurance in force...........................     60,940.6        60,389.0    59,581.1    59,415.9
DISABILITY INSURANCE:
  Number of policies................................       68,020          65,497      65,781      55,773
  New sales (annualized first-year premium).........    $     8.2       $    17.2   $    15.1   $    12.7
  Premiums/Deposits.................................         40.6            73.9        64.5        55.6
  Future policy benefits/Policy account balance.....        354.1           338.9       262.6       234.4

  STRATEGY

    We seek to provide individual life and disability insurance products
tailored to the needs of the owners and executives of small and medium-sized
businesses, as well as other individuals. These products also complement the
asset accumulation and group insurance products that we offer to businesses. Our
strategic initiatives are to:

    PROVIDE A TAILORED APPROACH TO BUSINESS NEEDS THAT CAN BE MET WITH LIFE
INSURANCE.  We create marketing materials, customized policy illustrations and
ongoing reports for our customers and agent/brokers that show how our insurance
policies can meet the needs of the customer. For example, when highly paid
individuals, such as owners of small and medium-sized businesses, use variable
life insurance to fund an "excess" 401(k)-like program, they receive reports
similar to those they received from their actual 401(k) plans. We believe that
the ability to provide more than a basic life insurance policy illustration is
critical to success in this market. We also market retirement products and
services to businesses for their executives. We believe there is significant
opportunity to sell products and services providing retirement and other
benefits to executives in addition to pension plans. We have specialized sales
representatives to sell these products to businesses.

    DESIGN OUR INDIVIDUAL DISABILITY PRODUCTS TO TARGET SMALL AND MEDIUM-SIZED
BUSINESSES.  We offer products to pay business overhead expenses for a disabled
business owner and for the purchase by the other business owners of the disabled
business owner's interests in the business. We also offer specialized multi-life
underwriting programs that facilitate the provision of coverage to multiple
executives in a single business.

    INCREASE OUR DISTRIBUTION REACH TO SMALL AND MEDIUM-SIZED BUSINESSES.  In
2000, we acquired a minority stake in Highland Capital Holding Corporation, a
distribution company specializing in sales of insurance to businesses and high
net worth individuals. Our products will be among those marketed by Highland
Capital. In 2001, we acquired Executive Benefit Services, Inc., a company that
specializes in the sale of executive benefit products and services to
businesses. Through Executive Benefit Services, Inc., we have begun marketing
our executive benefit products and services to our existing pension customers.
We constantly seek to hire individuals experienced in selling insurance to small
and medium-sized businesses.

  PRODUCTS AND SERVICES

    Our individual life and disability insurance products include:

    - interest-sensitive life insurance, including universal life and variable
      universal life;

    - traditional life insurance; and

    - disability insurance.

                                       118

    INTEREST-SENSITIVE LIFE INSURANCE.  Interest-sensitive life products include
universal life and variable universal life insurance and offer life insurance
protection for which both the premium and the death benefit may be adjusted by
the policyholder. Our growth in individual life and disability insurance sales
through June 30, 2001, has come mainly from variable universal life insurance
products, which have grown at a compound annual growth rate of 39% from 1997 to
June 30, 2001. Variable universal life insurance products represented 61% of our
interest-sensitive life insurance premiums for the six months ended June 30,
2001. We credit premiums, net of specified expenses, to an account maintained
for the policyholder. Specific charges are made against the account for the cost
of insurance protection and expenses. For universal life contracts, the entire
account balance is invested in our general account. Interest is credited to the
policyholder's account based on the earnings on general account investments. For
variable universal life contracts, the policyholder may allocate the account
balance among our general account and a variety of separate account choices.
Interest is credited on amounts allocated to the general account in the same
manner as for universal life. Net investment performance on separate account
investments is allocated directly to the policyholder accounts. The policyholder
bears the investment risk on separate account investments. Our profitability is
based on charging sufficient asset-based, premium-based and risk-based fees to
cover the cost of insurance and expenses.

    We believe that interest-sensitive life insurance products best meet the
financial objectives of our target customers in the United States because they
provide flexibility, protection and cash value accumulation. In particular,
sales of life insurance in non-qualified executive benefit plans are primarily
variable universal life products. Our variable universal life insurance products
offer asset managers low policy charges and a range of features allowing them to
tailor the policy to the needs of each client.

    TRADITIONAL LIFE INSURANCE.  Traditional life insurance includes
participating whole life, adjustable life products and term life insurance
products. Participating products and term life insurance products represented
13% and 4%, respectively, of our individual life and disability insurance sales
for the six months ended June 30, 2001. Adjustable life insurance products
provide a guaranteed benefit in return for the payment of a fixed premium and
allow the policyholder to change the premium and face amount combination.
Participating policyholders may receive policy dividends if the combined result
of interest earnings, mortality experience and expenses is better than the
assumptions used in setting the premium. Our profitability is based on keeping a
portion of the favorable experience before crediting the remainder to
policyholders. Term insurance products provide a guaranteed benefit for a
specified period of time in return for the payment of a fixed premium. Policy
dividends are not paid on term insurance. Our profitability is based on charging
a premium that is sufficient to cover the cost of insurance and expenses while
providing us with an appropriate return.

    DISABILITY INSURANCE.  Individual disability insurance products provide a
benefit in the event of the disability of the insured. In most instances, this
benefit is in the form of a monthly income. Disability insurance products
represented 9% of our individual life and disability insurance sales for the six
months ended June 30, 2001. In addition to income replacement, we offer products
to pay business overhead expenses for a disabled business owner, and for the
purchase by the other business owners of the disabled business owner's interests
in the business. Our profitability is based on charging a premium that is
sufficient to cover claims and expenses while providing us with an appropriate
return.

  MARKETS AND DISTRIBUTION

    We sell our individual products in all 50 states and the District of
Columbia. Our target market is owners and executives of small and medium-sized
businesses, as well as other individuals. Cash value life insurance provides
valuable benefits at death and funding for needs prior to death, including
funding employee benefit liabilities, estate planning, business continuation or
buy-out. We design, market and administer our products to meet these needs. We
have also recently established a number of marketing and distribution alliances
to increase the sales of individual insurance products with firms such as AXA,
Wells Fargo, Piper Jaffrey, and BISYS. Variable universal life insurance is
popular for many reasons, including higher historical performance of equity
investments resulting in a lower cost of insurance and an increase in values
available while still alive. We also offer products specifically designed to
meet the estate planning needs of business executives. Our individual disability
products are also tailored to the needs of this market. Small and medium-sized
businesses, their owners and executives represented 66% of individual life
insurance sales and 51% of individual disability sales for the six months ended
June 30, 2001, based on first-year annualized premium.

    We distribute our individual insurance products primarily through our
affiliated financial representatives and secondarily through independent
brokers. Affiliated financial representatives were responsible for 73% of
individual life insurance sales, based on first-year annualized premium for the
six months ended June 30, 2001. We had 1,047 affiliated financial
representatives in 49 offices as of June 30, 2001. Although they are independent
contractors, we have a close tie with affiliated financial representatives and
offer them benefits, training and access to tools and expertise. Independent
brokers represented a larger percentage of individual disability sales with 52%
of first-year annualized premium for the six months ended June 30, 2001.

                                       119

GROUP LIFE AND HEALTH INSURANCE

    We began offering group insurance in 1941. We served approximately 80,000
employers and provided products and services to 5.0 million covered members as
of June 30, 2001. We were the 11th largest writer of group insurance in the
United States based on combined group life and health premium for 1999,
according to the 1999 National Underwriter Life and Health Statistical Report.
We offer a broad array of group insurance products including medical, life,
disability, dental and vision insurance. In addition, we also offer
administrative services on a fee-for-service basis to large employers in the
United States.

    The tables below show the premium and premium equivalents, reserves and the
incurred loss ratios for our group insurance products sold in the United States
for the periods indicated:

                        GROUP LIFE AND HEALTH INSURANCE
                        PREMIUM AND PREMIUM EQUIVALENTS

                                                              FOR THE SIX
                                                                MONTHS
                                                                 ENDED            FOR THE YEAR ENDED
                                                               JUNE 30,              DECEMBER 31,
                                                              -----------   ------------------------------
                                                                 2001         2000       1999       1998
                                                              -----------   --------   --------   --------
                                                                            ($ IN MILLIONS)
                                                                                      
Life Insurance(1)...........................................   $  112.6     $  277.7   $  273.6   $  350.8
Disability Insurance........................................       49.3         94.5       86.8       83.3
Medical Insurance(2)........................................      807.2      1,815.6    1,876.7    1,817.3
Dental and Vision Insurance.................................      178.0        340.4      270.0      216.6
Fee-for-service.............................................      877.3      1,502.2    1,287.6    1,083.8
                                                               --------     --------   --------   --------
         Total..............................................   $2,024.4     $4,030.4   $3,794.7   $3,551.8
                                                               ========     ========   ========   ========

---------------

(1) Includes $58.6 million of premium in 1998 related to our decision to
    terminate two large government reinsurance pools.
(2) Includes $98.4 million, $164.6 million and $121.2 million of Medicare
    supplement insurance, for the years ended December 31, 2000, 1999 and 1998,
    respectively, all of which we reinsured effective July 1, 2000.

                        GROUP LIFE AND HEALTH INSURANCE
                       RESERVES AND INCURRED LOSS RATIOS

                                                               AS OF OR
                                                              FOR THE SIX
                                                                MONTHS
                                                                 ENDED       AS OF OR FOR THE YEAR
                                                               JUNE 30,        ENDED DECEMBER 31,
                                                              -----------   ------------------------
                                                                 2001        2000     1999     1998
                                                              -----------   ------   ------   ------
                                                                         ($ IN MILLIONS)
                                                                                  
RESERVES:
Life Insurance..............................................    $254.0      $259.5   $262.2   $256.3
Disability Insurance........................................     276.0       269.0    259.5    254.0
Medical and Medicare Supplement Insurance(1)................     315.8       316.5    396.7    300.3
Dental and Vision Insurance.................................      26.0        28.2     23.8     20.6
                                                                ------      ------   ------   ------
         Total Reserves.....................................    $871.8      $873.2   $942.2   $831.2
                                                                ======      ======   ======   ======
INCURRED LOSS RATIOS:
Life Insurance..............................................        69%         70%      71%      79%
Disability Insurance........................................        86          85       80      102
Medical and Medicare Supplement Insurance...................        82          83       90       85
Dental and Vision Insurance.................................        77          76       77       77

                                       120

---------------

(1) Includes $47.9 million, $46.7 million, $68.2 million and $40.6 million of
    Medicare supplement insurance, for the six months ended June 30, 2001, and
    the years ended December 31, 2000, 1999 and 1998, respectively, all of which
    we reinsured effective July 1, 2000.

  STRATEGY

    Our goal is to provide a broad range of employee benefit products and
services, particularly to small and medium-sized businesses. These products and
services complement those of our other businesses. Our strategic initiatives in
our group life and health insurance business are:

    IMPROVE THE PROFITABILITY OF OUR GROUP MEDICAL BUSINESS

    - Emphasize sale of medical insurance to groups of 51 to 500 employees.  Our
      ability to adjust pricing based on our underwriting standards for these
      groups is subject to less regulation than for the more regulated 50
      employee and under market, which comprised 77% of our medical premium for
      the six months ended June 30, 2001.

    - Exit areas of the group medical business with unsatisfactory returns.  We
      believe the following changes helped us improve the profitability of our
      group insurance business:

     -- We exited the "single life" group medical business for individuals under
        age 65 during 1997 and 1998 to focus on small and medium-sized
        businesses, where we believe we are well-positioned for success.

     -- In 1998, after determining that the HMO business did not meet our
        targeted financial returns on capital deployed, we terminated our active
        participation within that business.

     -- In 1998 and 1999, we exited the group medical insurance business in
        fourteen states where this business did not achieve our financial
        objectives.

     -- In January 2000, we ceased new sales, and in July 2000, we fully
        reinsured our Medicare supplement business due to poor financial results
        and an increasingly difficult regulatory environment, in order to focus
        on small and medium-sized businesses.

    - Strengthen pricing discipline.  For the year ended December 31, 2000, we
      have increased average premiums by 33% on renewals. These price increases
      contributed to an improvement in our medical loss ratio from 90% in 1999
      to 82% for the six months ended June 30, 2001, for our ongoing medical
      business.

    - Increase efficiency and decrease unit costs.  Through the use of
      technology, we have achieved strong gains in productivity. We plan to
      deliver during 2001 an Internet-based service platform to handle
      employer/employee changes, electronic bill presentment and payment,
      communication of claim information and on-line contracts and employee
      booklets. We expect this service platform to ultimately lower our unit
      costs and make it easier to do business with us.

    GROW OUR NON-MEDICAL PRODUCTS (LIFE, DISABILITY, DENTAL AND VISION)

    - Dedicate more sales efforts to non-medical products.  As of June 30, 2001,
      we dedicated 28 non-medical sales representatives, wholesalers, to
      increase our focus on sales of our group, life, disability, dental and
      vision products. We are also expanding distribution through affiliated
      marketing arrangements such as general agents, non-proprietary alliances
      and Internet-based sales channels.

    - Emphasize the sale of non-medical products separately from the sale of our
      medical products.  Approximately 54% of our non-medical in-force contracts
      as of December 31, 1999 were not tied to a medical contract, whereas
      approximately 65% of our new non-medical sales for the year ended December
      31, 2000 are independent of a medical contract.

    - Concentrate on cross-selling additional non-medical products to existing
      non-medical customers including our asset accumulation customers.  Many
      small and medium-sized businesses do not offer dental insurance to their
      employees. We believe the dental insurance market has the potential for
      sales growth.

  PRODUCTS AND SERVICES

    Our U.S. group insurance products and services include:

    - life insurance;

    - disability insurance;

                                       121

    - medical insurance;

    - dental and vision insurance; and

    - fee-for-service.

    GROUP LIFE INSURANCE.  Group life insurance provides coverage to employees
and their dependents for a specified period. As of June 30, 2001, we had $70.7
billion of group life insurance in force covering 2.8 million individuals. We
carry both traditional group life insurance that does not provide for
accumulation of cash values and interest-sensitive group life insurance,
commonly known as group universal life, which provides for accumulation of cash
values. Our group life insurance business remains focused on the traditional
annually renewable term product. Group term life and group universal life
accounted for 90% and 10%, respectively, of our total group life insurance in
force as of June 30, 2001. According to the 2000 LIMRA International, Inc. Sales
and In Force Reports, we were ranked first in the United States in terms of the
number of contracts/employer groups for both sales and existing business in
2000.

    GROUP DISABILITY INSURANCE.  Group disability insurance provides partial
replacement of earnings to insured employees who become disabled. Our group
disability products include both short-term and long-term disability. Long-term
disability represented 59% of our group disability premiums for the six months
ended June 30, 2001. In addition, we provide disability management services, or
rehabilitation services, to assist individuals in returning to work as quickly
as possible following disability. We also work with disability claimants to
improve the approval rate of Social Security benefits, thereby reducing payment
of benefits by the amount of Social Security payments received. For claims
incurred more than two years prior to June 30, 2001, we achieved an 88% approval
rate for such Social Security benefits. Our group disability business was ranked
seventh in the United States as of December 31, 2000 in terms of number of
contracts/employer groups in force, according to the 2000 LIMRA International,
Inc. Sales and In Force Reports.

    GROUP MEDICAL INSURANCE.  Group medical insurance provides partial
reimbursement of medical expenses for insured employees and their dependents.
Employees are responsible for deductibles, co-payments and co-insurance. We
believe our products are well-positioned to address our customers' preference
for a variety of provider choices and preferred provider discounts. We do not
offer unrestricted indemnity and no longer offer the pure HMO model. We are
considering entering into a reinsurance agreement to reduce the volatility of
our group medical insurance earnings.

    GROUP DENTAL AND VISION INSURANCE.  Group dental and vision insurance plans
provide partial reimbursement for dental and vision expenses. As of June 30,
2001, we had over 35,000 group dental and vision insurance plans in force. As of
December 31, 2000, we were the largest group indemnity dental insurer in terms
of 2000 sales based on total indemnity, and the largest in terms of number of
contracts/employer groups in force in 2000 based on total indemnity, according
to the 2000 LIMRA International, Inc. Sales and In Force Reports.

    FEE-FOR-SERVICE.  We offer administration of group disability, medical,
dental and vision services on a fee basis to larger employers.

  MARKETS AND DISTRIBUTION

    We market our group life, disability, medical, dental and vision insurance
products to small and medium-sized businesses to complement our retirement
services and individual insurance products. We market our fee-for-service
administration capabilities to larger employers that self-insure their
employees' health insurance benefits.

    We sell our group life, disability, dental and vision coverages in all 50
states and the District of Columbia. We have chosen to market our medical
insurance in 36 states which we believe have attractive market conditions. We
consider a market to be attractive if there is a lack of deep penetration by
HMOs and a favorable regulatory environment. We continually adapt our products
and pricing to meet local market conditions.

    We distribute our group insurance products through independent benefit
brokers, consultants, financial planners and the same channels that sell our
U.S. asset accumulation products. To reach these independent benefit brokers,
consultants and financial planners, we employ three types of wholesale
distributors:

    - our medical sales representatives;

    - our non-medical sales representatives; and

    - an independent wholesale organization, Rogers Benefit Group, dedicated to
      marketing group life, health and disability insurance products.

    As of June 30, 2001, we had 81 medical and non-medical sales representatives
and 32 service representatives in 58 offices. Our medical and non-medical sales
representatives accounted for 63%, 60%, 64% and 69% of our group insurance sales
for the six months ended June 30, 2001 and for the years ended December 31,
2000, 1999 and 1998, respectively. These representatives act as a unique
combination of wholesalers and brokers. They are an integral part

                                       122

of the sales process alongside the agent or independent broker. In addition to a
high level of involvement in the sales process, the group sales force plays a
key role in the ongoing servicing of the case by:

    - providing local responsive services to our customers, such as renewing
      contracts, revising plans and solving any administrative issues;

    - communicating the customers' needs and feedback to us; and

    - helping employees understand the benefits of their plan.

    Compensation for the group sales force is a blend of salary and
production-based incentives.

    Rogers Benefit Group is a marketing and service organization that represents
major high quality insurance carriers specializing in individual and group
medical programs, and group life, disability and dental plans. Our relationship
with Rogers Benefit Group dates back to its creation in 1970. It accounted for
37%, 40%, 36% and 31% of our group insurance sales, for the six months ended
June 30, 2001 and for the years ended December 31, 2000, 1999 and 1998,
respectively.

MORTGAGE BANKING SEGMENT

    We began our residential lending activities in 1936. Our Mortgage Banking
segment is primarily engaged in residential loan production and loan servicing
in the United States. Through our wholly owned subsidiary, Principal Residential
Mortgage, Inc., or PRMI, we originate, purchase, securitize, sell and service
mortgage loans. We principally originate "A" quality home mortgages and do not
originate sub-prime mortgages to any material degree, nor do we service or
purchase any sub-prime mortgage loans. "A" quality loans are generally defined
as loans eligible for sale to the Federal National Mortgage Association, or
Fannie Mae, Federal Home Loan Mortgage Corporation, or Freddie Mac and the
Government National Mortgage Association, or Ginnie Mae. According to Inside
Mortgage Finance, based on the unpaid balance of $64.4 billion in mortgage loans
in its servicing block, PRMI was ranked as the thirteenth largest mortgage
servicer in the United States as of June 30, 2001 and was ranked thirteenth in
production with $15.0 billion of new loans for the six months ended June 30,
2001.

    Our Mortgage Banking segment contributed 7%, 4%, 5% and 4% of our total
operating revenues and 19%, 8%, 12% and 22% of our total operating earnings for
the six months ended June 30, 2001 and the years ended December 31, 2000, 1999
and 1998, respectively. The table below shows operating revenues, operating
earnings and assets of our Mortgage Banking segment by loan servicing and loan
production for the periods indicated:

                                MORTGAGE BANKING
                         SELECTED FINANCIAL HIGHLIGHTS

                                                AS OF OR FOR
                                               THE SIX MONTHS
                                                   ENDED
                                                  JUNE 30,          AS OF OR FOR THE YEAR ENDED DECEMBER 31,
                                               --------------   ------------------------------------------------
                                                    2001             2000             1999             1998
                                               --------------   --------------   --------------   --------------
                                                                        ($ IN MILLIONS)
                                                                                     
OPERATING REVENUES:(1)
  Loan Servicing.............................  $  181.0    62%  $  313.8    87%  $  286.5    72%  $  235.4    69%
  Loan Production............................     112.1    38       46.0    13      111.8    28      105.2    31
                                               --------   ---   --------   ---   --------   ---   --------   ---
         Total...............................  $  293.1   100%  $  359.8   100%  $  398.3   100%  $  340.6   100%
                                               ========   ===   ========   ===   ========   ===   ========   ===
OPERATING EARNINGS:
  Loan Servicing.............................  $   33.5    49%  $   63.9   128%  $   29.3    52%  $   35.5    60%
  Loan Production............................      35.3    51      (13.9)  (28)      27.5    48       23.3    40
                                               --------   ---   --------   ---   --------   ---   --------   ---
         Total...............................  $   68.8   100%  $   50.0   100%  $   56.8   100%  $   58.8   100%
                                               ========   ===   ========   ===   ========   ===   ========   ===
ASSETS:
         Total...............................  $2,168.9   100%  $1,556.3   100%  $1,737.7   100%  $1,810.4   100%
                                               ========   ===   ========   ===   ========   ===   ========   ===

---------------

(1) Excludes net realized capital gains and their impact on recognition of
    front-end fee revenues.

  STRATEGY

    We pursue a balanced approach encompassing both loan servicing and loan
production activities. Periods of low interest rates increase the value and
volume of our loan production activities, while high interest rates increase the
value of our loan servicing rights since mortgage prepayments decline as
interest rates rise.

                                       123

    We believe that residential mortgages play a central role in the financial
planning activities of Americans, as home ownership is a high priority for many
households. As such, residential mortgages represent a component of our overall
portfolio of customer-driven financial products and services. Our strategic
initiatives include:

    LEVERAGE OUR STRONG SERVICING PLATFORM

    - Concentrate on operating efficiencies.  Our focus on servicing only "A" or
      "A-" quality loans ensures not only relatively high loan credit quality,
      but also allows us to better streamline our systems and processes.
      According to the 1999 Cost of Servicing Survey conducted by the Mortgage
      Bankers Association of America, we serviced 1,670 loans per employee
      compared to an industry average of 1,119 as of December 31, 1999. For the
      six months ended June 30, 2001, we serviced 1,684 loans per employee.

    - Increase servicing revenue per loan.  We have two sources of servicing
      revenues. First, we receive loan servicing fees from the guarantors or
      buyers of the mortgage-backed securities and loans we sell. Our servicing
      fee revenue per loan increased from $329 at the end of 1997 to $448 as of
      June 30, 2001, an increase of 36%. The second source of revenue is
      ancillary fees we receive from the sale of optional products and services
      to our mortgage customers. For the six months ended June 30, 2001, we
      generated $16.19 per loan from the sale of such products and services,
      compared to $9.44 per loan in 1998.

    - Use technology to enhance our customer service.  We offer both an Internet
      site and touch-tone phone access to loan information. Both systems allow
      our customers to initiate various information and account requests which
      are performed entirely electronically.

    RETAIN EXISTING CUSTOMERS.  We believe we can profit from having existing
mortgage customers conduct repeat business with us, either by refinancing an
existing loan or by obtaining financing for a new home purchase. We actively
market refinance and new home purchase opportunities to our existing customers
via direct customer approaches such as targeted mail campaigns, in-bound and
out-bound telephone sales and web-based lending applications. We offer
simplified loan application, processing and closing services to existing
customers, thereby lowering the cost of refinancing to both the customer and to
us. We also offer a new mortgage application process to existing customers with
less documentation than would be required by another lender.

    CAPITALIZE ON THE CROSS-SALE OPPORTUNITIES WITH OUR OTHER LINES OF
BUSINESS.  While we have historically operated our mortgage banking operations
independently of our other businesses, as of June 30, 2001, 68,137 of our
631,004 mortgage customers owned one or more of our other products. We believe
this demonstrates potential for the cross-sale of our retirement investments and
insurance products and services to our residential mortgage customers. We
further believe that there is potential to cross-sell our mortgage banking
offerings to the approximately 12 million customers of our other lines of
business that did not have a residential mortgage relationship with us as of
June 30, 2001.

  LOAN PRODUCTION

    Our loan production strategy is to manage our four distribution channels,
correspondent lending, retail origination, wholesale lending and Mortgage
Direct, in a manner that is consistent with our loan servicing strategy. We
obtain new customers through each of our four production channels, with the
majority being obtained through our correspondent lending and wholesale lending
operations. Our Mortgage Direct operation, which is primarily involved with the
retention of current servicing portfolio customers, refinances current loans and
makes new loans to customers on new properties they purchase.

    We originate and purchase conventional mortgage loans, mortgage loans
insured by the Federal Housing Administration, or FHA, and mortgage loans
partially guaranteed by the Department of Veterans Affairs, or VA. A majority of
our conventional loans are conforming loans that qualify for inclusion in
guarantee programs sponsored by Fannie Mae or Freddie Mac. The remainder of the
conventional loans are non-conforming loans, such as jumbo loans with an
original balance in excess of $275,000 or other loans that do not meet Fannie
Mae or Freddie Mac guidelines. We neither originate nor purchase "B" or "C"
mortgages, defined as lower credit quality loans. However, we are beginning to
originate or purchase "A-" quality residential loans that are eligible for sale
to Fannie Mae or Freddie Mac. We believe this segment presents opportunities to
further penetrate the expanding U.S. housing market without presenting the types
of risks inherent in the subprime sector.

                                       124

    The table below shows our loan production by loan type for the periods
indicated:

                                MORTGAGE BANKING
                          LOAN PRODUCTION BY LOAN TYPE

                                                        FOR THE SIX
                                                        MONTHS ENDED          FOR THE YEAR ENDED
                                                          JUNE 30,               DECEMBER 31,
                                                        ------------   --------------------------------
                                                            2001         2000       1999        1998
                                                        ------------   --------   ---------   ---------
                                                                        ($ IN MILLIONS)
                                                                                  
CONVENTIONAL LOANS:
  Number of loans.....................................      74,458       35,418      56,731      64,630
  Volume of loans.....................................   $10,993.5     $4,969.1   $ 7,307.4   $ 7,865.5
  Percent of total volume.............................          72%          60%         55%         65%
FHA/VA LOANS:
  Number of loans.....................................      37,355       31,093      57,592      44,009
  Volume of loans.....................................   $ 4,374.9     $3,342.7   $ 5,999.9   $ 4,255.0
  Percent of total volume.............................          28%          40%         45%         35%
TOTAL LOANS:
  Number of loans.....................................     111,813       66,511     114,323     108,639
  Volume of loans.....................................   $15,368.4     $8,311.8   $13,307.3   $12,120.5
  Average loan amount
  ($ in thousands)....................................   $   137.4     $  125.0   $   116.4   $   111.6

    The table below shows our loan production by purpose and by interest rate
type for the periods indicated:

                                MORTGAGE BANKING
               LOAN PRODUCTION BY PURPOSE AND INTEREST RATE TYPE

                                                        FOR THE SIX
                                                        MONTHS ENDED          FOR THE YEAR ENDED
                                                          JUNE 30,               DECEMBER 31,
                                                        ------------   --------------------------------
                                                            2001         2000       1999        1998
                                                        ------------   --------   ---------   ---------
                                                                        ($ IN MILLIONS)
                                                                                  
Purchase..............................................   $ 7,174.6     $6,930.1   $ 9,106.8   $ 6,294.0
Refinance.............................................     8,193.8      1,381.7     4,200.5     5,826.5
                                                         ---------     --------   ---------   ---------
         Total........................................   $15,368.4     $8,311.8   $13,307.3   $12,120.5
                                                         =========     ========   =========   =========
Fixed Rate............................................   $15,135.0     $7,400.7   $12,449.4   $11,645.7
Adjustable Rate.......................................       144.4        854.1       683.8       388.9
Balloon...............................................        89.0         57.0       174.1        85.9
                                                         ---------     --------   ---------   ---------
         Total........................................   $15,368.4     $8,311.8   $13,307.3   $12,120.5
                                                         =========     ========   =========   =========

    We are actively engaged in the loan production business via the following
distribution channels: correspondent lending; retail origination; wholesale and
Mortgage Direct.

    The table below shows our loan production by distribution channel for the
periods indicated:

                                MORTGAGE BANKING
                    LOAN PRODUCTION BY DISTRIBUTION CHANNEL

                                                        FOR THE SIX
                                                        MONTHS ENDED          FOR THE YEAR ENDED
                                                          JUNE 30,               DECEMBER 31,
                                                        ------------   --------------------------------
                                                            2001         2000       1999        1998
                                                        ------------   --------   ---------   ---------
                                                                        ($ IN MILLIONS)
                                                                                  
VOLUME OF LOANS:
  Correspondent Lending...............................   $11,580.3     $6,378.6   $10,545.4   $ 9,353.8
  Retail Origination..................................       955.5        734.4     1,088.8     1,721.1
  Wholesale...........................................     2,617.9      1,079.7     1,247.1       761.3
  Mortgage Direct.....................................       214.7        119.1       426.0       284.3
                                                         ---------     --------   ---------   ---------
         Total........................................   $15,368.4     $8,311.8   $13,307.3   $12,120.5
                                                         =========     ========   =========   =========

                                       125

    CORRESPONDENT LENDING.  As of June 30, 2001, we had contracts with 446
lending institutions across the United States to purchase prime credit quality
loans on an ongoing basis. According to Inside Mortgage Finance, as of June 30,
2001, we were the seventh largest correspondent lender in the United States.
High quality financial institutions are approved to do business with us only
after we review their reputation, financial strength and lending expertise. Our
"Correspondent Lending Service Center" on the Internet currently offers online
access to loan registration, an interactive sellers' procedure manual,
seller-specific rate/price quotations and simplified contact information. We are
developing online technologies to offer automated underwriting systems, pipeline
reporting and account management tools and electronic business-to-business
capabilities for our correspondent sellers. Additionally, we are forging
numerous alliances with third-party service providers to further streamline
processes, improve productivity and provide outstanding customer service.

    RETAIL ORIGINATION.  Our retail channel originates prime credit quality
mortgages through referrals from real estate agents, builders and personal
contact with consumers through our nationwide network, which was comprised of
213 mortgage loan officers located in 55 offices as of June 30, 2001. We are
developing automated exchange service agreements which will allow retail loan
officers to establish reciprocal agreements with partners including realtors,
builders, attorneys, title companies and others to and from our Internet
website. This will enable us to build better relationships with such partners by
providing access to relevant information via the Internet for their convenience.

    WHOLESALE.  Our wholesale channel, which we acquired in 1998, originates or
purchases prime credit quality loans through 9 regional offices that worked
directly with 1,491 participating mortgage loan brokers across the United States
as of June 30, 2001. Mortgage loan brokers are approved only after a review of
their reputation and mortgage lending expertise. Through the "Wholesale Lending
Service Center" on our Internet website, wholesale lenders can retrieve contact
information and seller specific interest rate quotations. We have developed
plans and are working to provide online registration, automated underwriting
system, pipeline reporting and account management services to our brokers. We
are also developing electronic document delivery and execution capabilities for
wholesale sellers to exchange secure documents with wholesale purchasers.

    MORTGAGE DIRECT.  Our Mortgage Direct channel originates prime credit
quality mortgage loans through direct contact with current and new customers via
telephone and the Internet. The goal of our Internet channel is to give our
current customers access to a customer-focused website, allowing them to obtain
home financing quickly, confidently and at an attractive value, while preserving
acceptable profit margins for us. We believe that providing current customers
with choice, ease of access, convenient processes and simplified procedures will
cause a growing percentage of our customers to choose us for all of their home
financing needs.

    LOAN UNDERWRITING

    Our guidelines for underwriting conventional conforming loans comply with
the underwriting criteria employed by Fannie Mae and Freddie Mac. Our guidelines
for underwriting FHA-insured and VA-guaranteed loans comply with the criteria
established by those government entities. Our underwriting guidelines and
property standards for conventional non-conforming loans are based on the
underwriting standards employed by private investors for such loans. In
addition, conventional loans having a loan-to-value ratio greater than 80% at
origination, which are originated or purchased by us, are required to have
private mortgage insurance. Insurance is either paid for by the borrower or the
lender. Our underwriting standards generally allow loan-to-value at origination
of up to 97% for mortgage loans with an original principal balance of up to
$275,000. To determine whether a prospective borrower has sufficient monthly
income available to meet: (1) the borrower's monthly obligation on the proposed
mortgage loan and (2) monthly housing expenses and other financial obligations,
we generally use the guidelines, techniques and technology tools provided by our
investors.

    SALE OF LOANS

    As a mortgage banker, substantially all loans we originate or purchase are
sold without recourse, subject in the case of VA loans to the limits of the VA's
guaranty. Conforming conventional loans are generally pooled by us and exchanged
for securities guaranteed by Fannie Mae or Freddie Mac. These securities are
then sold to national or regional broker-dealers. Substantially all conventional
loans securitized through Fannie Mae or Freddie Mac are sold, subject to
representations and warranties made by us on a non-recourse basis, whereby
foreclosure losses are generally a liability of Fannie Mae or Freddie Mac. We
securitize substantially all of our FHA-insured and VA-guaranteed mortgage loans
through Ginnie Mae. The FHA insures us against foreclosure loss and the VA
provides partial guarantees against foreclosure loss. To guarantee timely and
full payment of principal and interest on Fannie Mae, Freddie Mac and Ginnie Mae
securities, we pay guarantee fees to these agencies.

  LOAN SERVICING

    We service residential mortgages in return for a servicing fee. Our
servicing division receives and processes mortgage payments for home owners,
remits payments to investors, holds escrow funds, contacts delinquent borrowers,
supervises foreclosures and property dispositions and performs other
miscellaneous duties related to loan

                                       126

administration. We acquire only "A" or "A-" quality home mortgages for
servicing. This practice simplifies the systems necessary for servicing and
reduces the amount of time and money spent on collections and foreclosure
administration activities. Our goal is to service, on a non-recourse basis, a
majority of the loans that we originate. In addition, we periodically purchase
bulk-servicing contracts, also on a non-recourse basis to us, on prime quality
mortgage loans originated by other lenders. Our bulk purchases focus primarily
on the acquisition of agency servicing packages. Factors which influence the
management of the servicing portfolio include the expected long-term and
short-term profitability of the servicing rights, customer retention objectives
and the potential cross-selling of retirement investments and insurance products
to home owners. Servicing contracts acquired through bulk purchases accounted
for 27% of our mortgage servicing portfolio as of June 30, 2001.

    The table below shows the composition of our servicing portfolio by type and
performance for the periods indicated:

                                MORTGAGE BANKING
           COMPOSITION OF SERVICING PORTFOLIO BY TYPE AND PERFORMANCE

                                                       FOR THE SIX
                                                       MONTHS ENDED
                                                         JUNE 30,            AS OF DECEMBER 31,
                                                       ------------   ---------------------------------
                                                           2001         2000        1999        1998
                                                       ------------   ---------   ---------   ---------
                                                                       ($ IN MILLIONS)
                                                                                  
Conventional Mortgage Loans..........................   $41,709.3     $34,396.3   $30,679.4   $22,839.6
FHA-Insured Mortgage Loans...........................    16,543.8      15,463.8    15,028.8    13,419.6
VA-Guaranteed Mortgage Loans.........................     6,186.4       6,127.3     6,167.3     5,713.8
                                                        ---------     ---------   ---------   ---------
         Total Servicing Portfolio...................   $64,439.5     $55,987.4   $51,875.5   $41,973.0
                                                        =========     =========   =========   =========
DELINQUENT MORTGAGE LOANS AND PENDING FORECLOSURES AT
  PERIOD END(1):
  30 Days............................................         3.7%          4.4%        3.4%        4.3%
  60 Days............................................         0.8           1.2         1.1         1.2
  90 Days or more....................................         0.4           0.5         0.5         0.8
                                                        ---------     ---------   ---------   ---------
         Total Delinquencies.........................         4.9%          6.1%        5.0%        6.3%
                                                        =========     =========   =========   =========
Foreclosures Pending.................................         1.2%          1.3%        1.1%        1.1%

---------------

(1) Expressed as a percentage of the total number of loans serviced excluding
    sub-serviced loans.

    The table below shows the composition of our servicing portfolio by interest
rate as of June 30, 2001:

                                MORTGAGE BANKING
                      SERVICING PORTFOLIO BY INTEREST RATE
                              AS OF JUNE 30, 2001

                                                                                         AVERAGE MATURITY
INTEREST RATE                                  PRINCIPAL BALANCE   PERCENTAGE OF TOTAL       (YEARS)
-------------                                  -----------------   -------------------   ----------------
                                                                    ($ IN MILLIONS)
                                                                                
7% and under.................................      $29,972.9                47%                24.5
7.01-8%......................................       28,128.7                44                 26.0
8.01-9%......................................        6,050.5                 9                 25.4
9.01-10%.....................................          247.2                --                 18.9
Over 10%.....................................           40.2                --                 12.6
                                                   ---------               ---
         Total...............................      $64,439.5               100%                25.2
                                                   =========               ===

    The weighted-average interest rate in our servicing portfolio as of June 30,
2001 was 7.27%. As of June 30, 2001, fixed rate loans comprised 95% of the
servicing portfolio and the weighted-average interest rate of the fixed-rate
loans was 7.26%.

                                       127

    The table below shows the geographic distribution of our loan servicing
portfolio as of June 30, 2001:

                                MORTGAGE BANKING
               GEOGRAPHIC DISTRIBUTION OF LOAN SERVICING BY SIZE
                              AS OF JUNE 30, 2001

                                                               PERCENTAGE OF PRINCIPAL
                                                                  BALANCE SERVICED
                                                               -----------------------
                                                            
California..................................................             10.8%
Texas.......................................................              6.5
Virginia....................................................              5.6
Minnesota...................................................              4.8
Ohio........................................................              4.7
Pennsylvania................................................              4.4
North Carolina..............................................              3.9
New Jersey..................................................              3.6
Florida.....................................................              3.5
Colorado....................................................              3.4
Others(1)...................................................             48.8
                                                                        -----
                                                                        100.0%
                                                                        =====

---------------

(1) No other state constitutes more than 3.4%.

  RISK MANAGEMENT

    Because mortgage lending is subject to asset valuation risk associated with
changes in interest rates, we manage and hedge our servicing assets and our "in
process" mortgage loan production pipeline. Using a balanced blend of
proprietary analytical models and purchased interest rate risk management tools,
we have developed a risk management protocol designed to reduce volatility.

    We use derivatives, such as interest rate swaps and floors, principal-only
swaps, Treasury futures contracts and options on Treasury futures contracts to
hedge a portion of our portfolio of mortgage servicing rights from prepayment
risk associated with changes in interest rates. To further minimize our exposure
to interest rate fluctuations, we seek a balance between loan servicing and loan
production, which are counter cyclical in nature. Historically, during periods
of low interest rates and the resulting increase in refinancings, revenue
generated by mortgage originations generally offsets revenue loss related to
prepayment of mortgages for which we provide servicing.

    In the normal course of business, our Mortgage Banking segment protects its
position in mortgages by taking positions in the options, futures and cash
markets. We hedge in the cash market by entering into forward delivery
contracts, which require us to deliver loans or mortgage-backed securities at a
future date at a preset price. All risk management activity is reviewed and
approved by a committee of our senior management.

  SEASONALITY

    The mortgage banking industry is generally subject to seasonal trends. These
trends reflect the general national pattern of selling and reselling of homes,
although refinancings tend to be less seasonal and more closely related to
changes in interest rates. This activity typically peaks during the spring and
summer seasons and declines to lower levels from mid-November through February.

CORPORATE AND OTHER SEGMENT

    Our Corporate and Other segment manages the assets representing capital that
has not been allocated to any other segment. These assets are primarily
comprised of fixed income securities, common stock and real estate investments.
Included among the common stock are our holdings in Coventry Health Care, Inc.,
which had a carrying value of $134.6 million as of June 30, 2001. All debt
service and interest expense and all inter-segment eliminations are included in
this segment. The assets in excess of that needed by the four operating segments
are held in the Corporate and Other segment.

                                       128

    Our Corporate and Other segment generated 1%, 1%, 1% and 5% of our total
operating revenues and total operating earnings of $32.1 million, $67.7 million,
$9.5 million and operating loss of $(44.3) million for the six months ended June
30, 2001 and for the years ended December 31, 2000, 1999 and 1998, respectively.
The table below shows operating revenues, operating earnings and assets for our
Corporate and Other segment for the periods indicated:

                              CORPORATE AND OTHER
                         SELECTED FINANCIAL HIGHLIGHTS

                                                              AS OF OR FOR THE
                                                                 SIX MONTHS
                                                                   ENDED         AS OF OR FOR THE YEAR ENDED
                                                                  JUNE 30,               DECEMBER 31,
                                                              ----------------   ----------------------------
                                                                    2001          2000      1999       1998
                                                              ----------------   ------   --------   --------
                                                                              ($ IN MILLIONS)
                                                                                         
OPERATING REVENUES(1).......................................      $   57.5       $ 97.1   $   61.9   $  342.5
                                                                  ========       ======   ========   ========
OPERATING EARNINGS (LOSS)...................................      $   32.1       $ 67.7   $    9.5   $  (44.3)
                                                                  ========       ======   ========   ========
ASSETS......................................................      $1,321.6       $957.8   $1,121.5   $3,075.9
                                                                  ========       ======   ========   ========

---------------

(1) Total revenues, excluding net realized capital gains and their impact on
    recognition of front-end fee revenues.

COMPETITION

    Competition in our operating segments is based on a number of factors,
including service, product features, price, investment performance, commission
structure, distribution capacity, financial strength ratings and name
recognition. We compete for customers and distributors with a large number of
financial services companies such as banks, mutual funds, broker-dealers,
insurers and asset managers. Some of these companies offer a broader array of
products, more competitive pricing, greater diversity of distribution sources,
better brand recognition or, with respect to insurers, higher financial strength
ratings. Some may also have greater financial resources with which to compete or
may have better investment performance at various times.

    Competition in the retirement services market is very fragmented. Our main
competitors in this market include Fidelity, Nationwide, AXA, Mass Mutual and
Manulife. We believe the infrastructure and system support needed to meet the
needs of the small and medium-sized business market is a significant barrier to
entry for our competitors. Many of our competitors in the mutual fund industry
are larger, have been established for a longer period of time, offer less
expensive products, have deeper penetration in key distribution channels and
have more resources than we do. There were over 8,171 mutual funds in the United
States as of December 31, 2000, according to the Investment Company Institute
2001 Mutual Fund Fact Book. The institutional asset management market has grown
at a rapid pace over the last decade. Our primary competitors in this market are
large institutional asset management firms, such as J.P. Morgan Chase, Morgan
Stanley Asset Management and T. Rowe Price, many of which offer a broader array
of investment products and services and are better known. The asset management
business has relatively few barriers to entry and continually attracts new
entrants. The variable annuity market is also highly competitive. As we expand
into additional distribution channels for this product, we will face strong
competition from Nationwide and Hartford. Competition in the international
markets in which we operate comes primarily from local financial services firms
and other international companies operating on a stand-alone basis or in a
partnership with local firms, including ING, AXA, Allianz and AIG. In the highly
competitive group life and health insurance business, our competitors include
other insurers and health maintenance organizations such as The Northwestern
Mutual Life Insurance Company, Manulife and Aetna. The mortgage banking industry
is also highly competitive and fragmented and we compete with other mortgage
bankers, commercial banks, savings and loan associations, credit unions and
insurance companies such as Countrywide and Wells Fargo.

    We believe we distinguish ourselves from our competitors through our:

    - full-service platform;

    - strong customer relationships;

    - focus on financial performance; and

    - performance-oriented culture.

    On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act of 1999, implementing fundamental changes in the
regulation of the financial services industry in the United States. The Act
permits mergers that combine commercial banks, insurers and securities firms
under one holding company. Under the Act, national

                                       129

banks retain their existing ability to sell insurance products in some
circumstances. In addition, bank holding companies that qualify and elect to be
treated as "financial holding companies" may engage in activities, and acquire
companies engaged in activities, that are "financial" in nature or "incidental"
or "complementary" to such financial activities. This includes acting as
principal, agent or broker in selling life, property and casualty and other
forms of insurance, including annuities. A financial holding company can own any
kind of insurance company or insurance broker or agent, but its bank subsidiary
cannot own the insurance company. Under state law, the financial holding company
would need to apply to the insurance commissioner in the insurer's state of
domicile for prior approval of the acquisition of the insurer. With the passage
of the Gramm-Leach-Bliley Act, among other things, bank holding companies may
acquire insurers, and insurance holding companies may acquire banks. The ability
of banks to affiliate with insurance companies in the United States may
materially adversely affect all of our product lines by substantially increasing
the number, size and financial strength of potential competitors.

RATINGS

    Insurance companies are assigned financial strength ratings by rating
agencies based upon factors relevant to policyholders. Ratings provide both
industry participants and insurance consumers meaningful information on specific
insurance companies. Higher ratings generally indicate financial stability and a
stronger ability to pay claims.

    Principal Life has been assigned the following ratings as of June 30, 2001:

RATING AGENCY                           FINANCIAL STRENGTH RATING                RATING STRUCTURE
--------------------------------------  --------------------------------------   ----------------------------------
                                                                           
A.M. Best Company, Inc.                 A+ ("Superior") with a stable outlook    Second highest of 16 rating levels
Fitch IBCA, Inc. (formerly Duff &       AA+ ("Very Strong") with a stable        Second highest of 24 rating levels
Phelps Credit Rating Company)           outlook
Moody's Investors Service               Aa2 ("Excellent") with a stable          Third highest of 21 rating levels
                                        outlook
Standard & Poor's Rating Services       AA ("Very Strong") with a stable         Third highest of 21 rating levels
                                        outlook

    A.M. Best's ratings for insurance companies range from "A++" to "S". A.M.
Best indicates that "A++" and "A+" ratings are assigned to those companies that
in A.M. Best's opinion have achieved superior overall performance when compared
to the norms of the life insurance industry and have demonstrated a strong
ability to meet their policyholder and other contractual obligations. Fitch's
ratings for insurance companies range from "AAA" to "D". Fitch indicates that
"AA" ratings are assigned to those companies that have demonstrated financial
strength and a very strong capacity to meet policyholder and contractholder
obligations on a timely basis. Moody's ratings for insurance companies range
from "Aaa" to "C". Moody's indicates that "A ("Excellent")" ratings are assigned
to those companies that have demonstrated excellent financial security. Standard
& Poor's ratings for insurance companies range from "AAA" to "R". Standard &
Poor's indicates that "AA" ratings are assigned to those companies that have
demonstrated very strong financial security. In evaluating a company's financial
and operating performance, these rating agencies review its profitability,
leverage and liquidity, as well as its book of business, the adequacy and
soundness of its reinsurance, the quality and estimated market value of its
assets, the adequacy of its policy reserves and the experience and competency of
its management.

    We believe that our strong ratings are an important factor in marketing our
products to our distributors and customers, since ratings information is broadly
disseminated and generally used throughout the industry. Our ratings reflect
each rating agency's opinion of our financial strength, operating performance
and ability to meet our obligations to policyholders and are not evaluations
directed toward the protection of investors. Such ratings are neither a rating
of securities nor a recommendation to buy, hold or sell any security, including
our common stock.

REINSURANCE

    Principal Life follows the standard industry practice of ceding portions of
its life insurance risks to other insurance companies. This permits us to write
larger policies than we would otherwise be comfortable retaining. Principal Life
usually enters into annually renewable term insurance contracts, which focus on
pure mortality risk. As of December 31, 2000, the amount of statutory premiums
ceded to third-party reinsurers totaled $44.1 million. Principal Life's primary
third-party reinsurer of individual life insurance policies at December 31, 2000
was Transamerica Occidental Life, which was rated A+ by A.M. Best. As of
December 31, 2000, the individual life insurance in force ceded to Transamerica
Occidental Life Insurance Company was $13.4 billion, which represented 9% of our
total net life insurance in force. Of the remaining individual life reinsurers,
no reinsurer has more than two percent of the total net insurance in force.

    For U.S. individual life insurance, we reinsure mortality risk in excess of
$7.5 million on any single life, whether that amount is from only one policy or
multiple policies. For individual disability insurance, we generally retain
between $4,000 and $10,000 of monthly benefit per insured life depending on the
type of coverage.

                                       130

    We acquire reinsurance on both our U.S. group life and disability insurance.
For group life insurance, we purchase catastrophic coverage for claims in excess
of $1.0 million where three or more insureds are involved in a catastrophe. We
also reinsure accidental death claims in excess of $500,000 for our group
universal life product. For group disability, we retain no more than $3,500 of
monthly benefit per insured life for cases with 2,000 or fewer employees. On
larger cases, we cede 80% of the claim risk. Effective July 1, 2000, we entered
into a reinsurance agreement with General & Cologne Life Re of America to
reinsure 100% of our Medicare supplement insurance business. We do not reinsure
our group dental or group vision products.

    Reinsurance does not discharge our obligation to pay policy claims on the
reinsured business. We remain responsible for paying claims, to the extent the
reinsurer fails to pay such claims. As a result, we seek to work only with
highly rated reinsurers that have passed an internal due diligence review.
Nevertheless, there can be no assurance that all our reinsurers will pay the
claims we make against them.

INSURANCE RESERVES

    We establish and report liabilities on our balance sheet to meet our future
obligations using both actuarial and GAAP principles. The reserves are based on
actuarially recognized methods using prescribed mortality and morbidity tables
and assumptions for estimating future policy benefits and claim experience. We
expect these reserve amounts, along with future premiums to be received on the
policy and investment earnings on these amounts, to be sufficient to meet our
contractual and policy obligations. Reserves include amounts for claims incurred
but not yet reported, claims reported but not yet paid and claims in the process
of settlement. Our GAAP-based reserves may vary from those calculated using
statutory accounting practices.

  GROUP HEALTH INSURANCE RESERVES

    The liability for unpaid group health claims, including medical, dental and
short term disability insurance, is an estimate of the ultimate net cost of both
reported and unreported losses not yet settled. We estimate this liability using
actuarial analyses and case basis evaluations. The primary reserve technique is
an evaluation of historical claim runout patterns and includes a provision for
adverse claim development. We also consider factors such as new sales,
terminations, seasonality, medical trend, claim backlog and past estimate
accuracy. Although considerable variability is inherent in such estimates, we
believe that the liability for unpaid claims is adequate. These estimates are
continually reviewed and, as adjustments to this liability become necessary,
such adjustments are reflected in current operations.

  DISABILITY INSURANCE RESERVES

    Reserves for long term disability insurance represent the present value of
benefits for current claimants. Claim benefit payments on long term disability
insurance policies consist of payments made monthly, in accordance with the
contractual terms of the policy. These payments begin at the claimant's
eligibility date as defined in the policy and end upon the earliest of the
claimant's recovery, the expiration of contract limitations included in the
policy or the claimant's death. The liability is estimated using industry
mortality and morbidity data, adjusted for our experience under these policies
and discounted at an appropriate rate of interest. Most policies provide for an
elimination period between the occurrence of the event causing a claimant's
disability and the date when such a claimant is eligible to receive disability
payments. In addition, some claims may not be filed promptly on the eligibility
date under the policy. Reserves for these incurred but not reported claims are
based upon industry factors for disability incidence, rates of termination from
disability and interest rates as modified by our experience under these
policies.

  LIFE INSURANCE RESERVES

    We calculate reserves for incurred but unreported claims using our
historical loss experience with due consideration to current in force volumes.
Reserves for claims that are in course of settlement and/or resisted are
calculated on a similar basis. The life waiver reserve liability measures the
present value of waiver of premium benefits under our group life and group
universal life insurance contracts. We use industry mortality and morbidity
tables and an appropriate rate of interest discount to calculate this liability.
Reserves for interest-sensitive life insurance are equal to cumulative premiums
less charges plus interest which represents the account balances that accrue to
the benefit of the policyholders. The reserve is identical to the current value
of the customer's account on deposit with us.

UNDERWRITING AND PRICING

    We follow detailed underwriting practices and procedures to assess and
quantify the nature and size of risks we are willing to accept as well as the
amount and type of reinsurance level appropriate for a particular type of risk.

    For U.S. individual life insurance, the level of medical and other data
collected on the insured varies by the size of the death benefit requested. For
small death benefits, we gather limited medical information. For large death
benefits, we require extensive medical, financial and other data from the
insured. These practices and procedures are designed to result in policies that
produce mortality experience consistent with the assumptions used in pricing the
product. The

                                       131

pricing of our products varies depending on the age, occupational
classification, type/amount of coverage/features purchased, and additional
ratings or exclusions based on medical history. For individual cases, we
underwrite each prospective insured based on the client's occupation, financial
and medical history.

    For U.S. group medical insurance, we have created a sophisticated claim
system that has the ability to automatically adjudicate a percentage of our
claims without claims examiner intervention. We receive and convert claims to an
electronic and imaged format to enable a paperless environment and to enhance
work flow processes. Once the claim is in the system, it is identified to the
member's account, verifying eligibility. We then determine if the services are
covered under the contract and the amount of benefit payable, using the contract
information built into our system. The adjudication process can be completed
automatically by the system, if the claim meets all system requirements. If the
claim cannot be processed automatically by the system, it will be assigned to a
claims examiner to process. Once the benefit has been determined, a disbursement
or explanation relative to our actions is submitted. As a quality control
measure, we review selected claims. For group insurance sold to smaller
employers, those with fewer than 50 employees, we obtain individual employee
health statements that are used to determine the initial medical premium for the
group or for non-medical coverages or to determine whether we will decline the
business. For larger groups, we assess the health of the group through a variety
of sources such as employee health statements, risk appraisal questionnaire or
prior claim history.

    For all of our U.S. individual insurance and group insurance products, we
base our underwriting practices on the historical claims experience for that
particular product. This experience includes not only the historical mortality
and/or morbidity experience of our existing individual insurance contracts, but
also the experience of the overall individual insurance industry and the general
population. We actively monitor our underwriting standards relative to those of
our competitors and our emerging claims experience to mitigate our exposure to
higher risk business and to stay abreast of market trends. Our underwriters
evaluate policy applications on the basis of the information provided by the
applicant and others. We use a variety of medical tests to evaluate policy
applications, depending on the size of the policy, the age of the applicant and
other factors.

    Product pricing is reflective of our underwriting standards and is based on
our expected policyholder benefits, expenses, persistency and investment
returns. We designed product specifications to protect us against greater than
expected mortality and morbidity experience. We review pricing frequently to
ensure that it is consistent with recent claims experience. We also employ both
prospective and retroactive experience rating. Experience rating is the process
by which the premium charged to a group policyholder reflects a credit for
positive historical experience or a charge for poor experience. Small group
pricing must also meet stringent regulatory requirements.

    In developing pricing proposals for new general account guaranteed
investment contracts, our underwriters estimate both base-line cash flows and
also likely variance from the base-line due to plan participants reallocating
assets from the "stable value" option of their defined contribution plans. Our
underwriters utilize customized pricing models that generate plan-specific risk
charges for each customer's book value payment provision. If these pricing
models project the risk of losses exceeding customary thresholds, instead of
rejecting the business, our underwriters can modify the proposal by suggesting
the use of risk reduction techniques designed to shift some of the risk of
redemptions back to the plan or to a third-party.

    We underwrite immediate annuities using recent mortality experience and an
assumption of continued improvement in longevity. We underwrite deferred
annuities by analyzing not only mortality risk but also the expected time to
retirement.

    In Argentina, Chile and Mexico, we use underwriting and pricing practices
appropriate for the specific market where we conduct our operations.

PROPERTIES

    We own 29 properties in our home office complex in Des Moines, Iowa and in
various other locations. We lease office space for various offices located
throughout the United States and internationally. The normal lease term is 3 to
5 years, but some leases have terms of up to 10 years. Our annual rental expense
under these leases aggregated approximately $38.1 million for leases in place as
of June 30, 2001. We believe that our owned and leased properties are suitable
and adequate for our current business operations.

LEGAL PROCEEDINGS

    We are regularly involved in litigation, both as a defendant and as a
plaintiff but primarily as a defendant. Litigation naming us as a defendant
ordinarily arises out of our business operations as a provider of medical
insurance, life insurance, annuities and residential mortgages. In addition,
state regulatory bodies, such as state insurance departments, the SEC, the
National Association of Securities Dealers, Inc., the Department of Labor and
other regulatory bodies regularly make inquiries and conduct examinations or
investigations concerning our compliance with, among other things, insurance
laws, securities laws, ERISA and laws governing the activities of
broker-dealers.

                                       132

    Recently, companies in the life insurance business have faced extensive
claims, including class-action lawsuits, alleging improper life insurance sales
practices. Principal Life is currently a defendant in two purported class-action
lawsuits alleging improper sales practices. We have reached an agreement in
principle to settle both of those lawsuits. The settlement has received court
approval. We have established reserves at a level we believe sufficient to cover
the cost of the settlement. A number of persons and entities who were eligible
to be class members have excluded themselves from the class (or "opted out"), as
the law permits them to do. We have been notified that some of those who opted
out from the class will file lawsuits and make claims similar to those addressed
by the settlement. Similar opt-out lawsuits have been brought against other life
insurance companies as a result of settlement of similar class-action lawsuits.
Defense of these lawsuits may cause us to incur significant costs. At this time,
we are not able to estimate the number of such lawsuits that may be filed, the
costs of defending the lawsuits or whether our defense will be successful.

    A lawsuit was filed on September 27, 2001 in the United States District
Court for the Northern District of Illinois, seeking damages and other relief on
behalf of a putative class of policyholders based on allegations that the plan
of conversion violates the United States Constitution. The action is captioned
Esther L. Gayman v. Principal Mutual Holding Company, et al. We believe that
there are meritorious defenses to the plaintiff's claims and we intend
vigorously to contest all of the plaintiff's claims. We are not presently aware
of any other lawsuits challenging the plan. There can be no assurance, however,
that additional lawsuits will not be commenced.

    While we cannot predict the outcome of any pending or future litigation,
examination or investigation, we do not believe that any pending matter will
have a material adverse effect on our business, financial condition or results
of operations.

CUSTOMERS

    We had approximately thirteen million customers as of June 30, 2001, which
include employer sponsors of retirement and group insurance products and
services, employees and their covered dependents under employee benefit
arrangements, institutional investment management clients, individual insurance
policyholders, residential mortgage loan borrowers, mutual fund shareholders and
banking customers.

EMPLOYEES

    As of June 30, 2001, we had 17,646 employees. None of our employees is
subject to collective bargaining agreements governing employment with us. We
believe that our employee relations are satisfactory.

                                       133

                                  INVESTMENTS

    We had total consolidated assets as of June 30, 2001 of $85.2 billion, of
which $44.4 billion were invested assets. The rest of our total consolidated
assets are comprised primarily of separate account assets for which we do not
bear investment risk. Because we generally do not bear any investment risk on
assets held in separate accounts, the discussion and financial information below
does not include such assets. Of our invested assets, $43.2 billion were held by
our U.S. operations and the remaining $1.2 billion were held by our
International Asset Management and Accumulation segment.

U.S. INVESTMENT OPERATIONS

    Our U.S. invested assets are managed by Principal Capital Management, a
subsidiary of Principal Life. Our primary investment objective is to maximize
after-tax returns consistent with acceptable risk parameters. We seek to protect
policyholders' benefits by optimizing the risk/return relationship on an ongoing
basis, through asset/liability matching, reducing the credit risk, avoiding high
levels of investments that may be redeemed by the issuer, maintaining
sufficiently liquid investments and avoiding undue asset concentrations through
diversification. We are exposed to three primary sources of investment risk:

    - credit risk, relating to the uncertainty associated with the continued
      ability of a given obligor to make timely payments of principal and
      interest;

    - interest rate risk, relating to the market price and/or cash flow
      variability associated with changes in market yield curves; and

    - equity risk, relating to adverse fluctuations in a particular common
      stock.

    Our ability to manage credit risk is essential to our business and our
profitability. We devote considerable resources to the credit analysis of each
new investment. We manage credit risk through industry, issuer and asset class
diversification. Our Investment Committee, appointed by our board of directors,
establishes all investment policies and reviews and approves all investments.
There are nine members on the Investment Committee, two of whom are members of
our board of directors. The remaining seven members are senior management
members representing various areas of our company.

    Our Fixed Income Securities Committee, consisting of fixed income securities
senior management members, approves the credit rating for the fixed maturity
securities we purchase. Teams specializing in residential mortgage-backed
securities, commercial mortgage-backed securities and public below investment
grade securities monitor these investments. We establish a credit reviewed list
of approved public issuers to provide an efficient way for our portfolio
managers to purchase liquid bonds for which credit review has already been
completed. Issuers remain on the list for 6 months unless removed by our
analyst. The analyst monitors issuers on the list on a continuous basis with a
formal review documented every 6 months.

    Our Fixed Income Securities Committee also reviews private transactions on a
continuous basis to assess the quality ratings of our privately placed
investments. We regularly review our investments to determine whether we should
re-rate them, employing the following criteria:

    - material declines in the issuer's revenues or margins;

    - significant management or organizational changes;

    - significant uncertainty regarding the issuer's industry;

    - debt service coverage or cash flow ratios that fall below
      industry-specific thresholds;

    - violation of financial covenants; and

    - other business factors that relate to the issuer.

    A dedicated risk management team is responsible for centralized monitoring
of the commercial mortgage portfolio. We apply a variety of strategies to
minimize credit risk in our commercial mortgage loan portfolio. When considering
the origination of new commercial mortgage loans, we review the cash flow
fundamentals of the property, make a physical assessment of the underlying
security, conduct a comprehensive market analysis and compare against industry
lending practices. We use a proprietary risk rating model to evaluate all new
and a majority of existing loans within the portfolio. The proprietary risk
model is designed to stress projected cash flows under simulated economic and
market downturns. Our lending guidelines are designed to encourage 75% or less
loan-to-value ratios and a debt service coverage ratio of at least 1.2 times. We
analyze investments outside of these guidelines based on cash flow quality,
tenancy and other factors. From 1998 through June 30, 2001, the weighted average
loan-to-value ratio at origination for brick and mortar commercial mortgages in
our portfolio was in the 65%-68% range and debt service coverage ratios at loan
inception in the 1.6-1.7 times range.

                                       134

    We have limited exposure to equity risk in our common stock portfolio.
Equity securities accounted for only 1% of our U.S. invested assets as of June
30, 2001.

    Our investment decisions and objectives are a function of the underlying
risks and product profiles of each primary business operation. In addition, we
diversify our product portfolio offerings to include products that contain
features that will protect us against fluctuations in interest rates. Those
features include adjustable crediting rates, policy surrender charges and market
value adjustments on liquidations. For further information on our management of
interest rate risk, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Quantitative and Qualitative Information
about Market Risk".

  OVERALL COMPOSITION OF U.S. INVESTED ASSETS

    U.S. invested assets as of June 30, 2001 were predominantly of high quality
and broadly diversified across asset class, individual credit, industry and
geographic location. As shown in the following table, the major categories of
U.S. invested assets are fixed maturity securities and commercial mortgages. The
remainder is invested in real estate, equity securities and other assets. In
addition, policy loans are included in our invested assets. We combined our
invested assets in the Closed Block with invested assets outside the Closed
Block in view of the similar asset quality characteristics of the two
portfolios. The following discussion analyzes the composition of U.S. invested
assets, which includes $4,014.6 million in invested assets of the Closed Block
as of June 30, 2001, but excludes invested assets of the participating separate
accounts.

                              U.S. INVESTED ASSETS

                                                  AS OF JUNE 30,                          AS OF DECEMBER 31,
                                                ------------------    -----------------------------------------------------------
                                                       2001                 2000                 1999                 1998
                                                ------------------    -----------------    -----------------    -----------------
                                                CARRYING     % OF     CARRYING    % OF     CARRYING    % OF     CARRYING    % OF
                                                 AMOUNT      TOTAL     AMOUNT     TOTAL     AMOUNT     TOTAL     AMOUNT     TOTAL
                                                --------     -----    --------    -----    --------    -----    --------    -----
                                                                                 ($ IN MILLIONS)
                                                                                                    
Fixed maturity securities, available-for-sale
  Public......................................  $17,147.6      40%    $14,263.6     35%    $ 9,632.8     24%    $ 8,157.6     21%
  Private.....................................   11,356.4      26      11,611.4     28      12,951.5     32      13,674.9     34
Equity securities, available-for-sale.........      539.4       1         666.0      2         768.1      2         995.7      2
Mortgage loans
  Commercial..................................   10,340.7      24      10,775.3     26      12,588.9     31      12,157.2     31
  Residential.................................    1,023.3       2         550.5      1         651.0      2         997.4      2
Real estate held for sale.....................      653.1       2         695.4      2       1,033.4      3       1,049.8      3
Real estate held for investment...............      577.2       1         696.4      2       1,167.8      3       1,535.4      4
Policy loans..................................      820.1       2         803.6      2         780.5      2         766.2      2
Other investments.............................      786.9       2         681.2      2         514.0      1         339.8      1
                                                ---------    ----     ---------   ----     ---------   ----     ---------   ----
Total invested assets.........................  $43,244.7     100%    $40,743.4    100%    $40,088.0    100%    $39,674.0    100%
                                                             ====                 ====                 ====                 ====
Cash and cash equivalents.....................      237.1                 750.1                368.4                416.2
                                                ---------             ---------            ---------            ---------
Total invested assets and cash................  $43,481.8             $41,493.5            $40,456.4            $40,090.2
                                                =========             =========            =========            =========

    We actively manage public fixed maturity securities, including our portfolio
of residential mortgage-backed securities, in order to provide liquidity and
enhance yield and total return. Our residential mortgage-backed securities are
managed to ensure that the securities we hold trade close to or below par in
order to manage prepayment risk. This active management has resulted in the
realization of capital gains and losses with respect to such investments. In
1999 and 1998, we repositioned our investment portfolio by selling invested
assets with lower yields, primarily equity securities and real estate, and
reinvesting the proceeds in assets with higher yields, primarily debt
securities.

  U.S. INVESTMENT RESULTS

    The yield on U.S. invested assets and on cash and cash equivalents,
excluding net realized gains and losses, was 7.7% as of June 30, 2001 and 7.5%,
7.4% and 7.2% for the years ended December 31, 2000, 1999 and 1998,
respectively.

                                       135

    The table below illustrates the yields on average assets for each of the
components of our investment portfolio for the six months ended June 30, 2001,
and the years ended December 31, 2000, 1999 and 1998:

                              U.S. INVESTED ASSETS
                              YIELDS BY ASSET TYPE

                                                 AS OF OR FOR THE SIX
                                                     MONTHS ENDED
                                                       JUNE 30,                 AS OF OR FOR THE YEAR ENDED DECEMBER 31,
                                                 --------------------   ---------------------------------------------------------
                                                         2001                 2000                1999                1998
                                                 --------------------   -----------------   -----------------   -----------------
                                                  YIELD      AMOUNT     YIELD    AMOUNT     YIELD    AMOUNT     YIELD    AMOUNT
                                                 -------   ----------   -----   ---------   -----   ---------   -----   ---------
                                                                                 ($ IN MILLIONS)
                                                                                                
Fixed maturity securities, available-for-sale
  Gross investment income(1)...................     7.7%   $ 1,045.0     7.5%   $ 1,813.3    7.4%   $ 1,651.4    7.2%   $ 1,546.0
  Net realized capital gains (losses)..........    (0.6)       (77.5)   (0.5)      (129.6)  (0.5)      (104.3)   0.1         28.8
                                                           ---------            ---------           ---------           ---------
  Total........................................            $   967.5            $ 1,683.7           $ 1,547.1           $ 1,574.8
                                                           =========            =========           =========           =========
  Ending assets (at carrying value)............            $28,504.0            $25,875.0           $22,584.3           $21,832.5
Equity securities, available-for-sale
  Gross investment income(1)...................     2.3%   $     6.9     9.4%   $    67.1    4.4%   $    39.2    2.7%   $    30.5
  Net realized capital gains (losses)..........   (19.1)       (57.6)   11.2         80.3   43.2        381.4   27.3        302.7
                                                           ---------            ---------           ---------           ---------
  Total........................................            $   (50.7)           $   147.4           $   420.6           $   333.2
                                                           =========            =========           =========           =========
  Ending assets (at carrying value)............            $   539.4            $   666.0           $   768.1           $   995.7
Mortgage loans -- Commercial
  Gross investment income(1)...................     8.0%   $   422.1     8.2%   $   955.6    8.1%   $ 1,005.8    8.5%   $ 1,053.8
  Net realized capital gains (losses)..........     0.3         14.9     0.1          8.6   (0.1)        (8.4)   0.1          6.3
                                                           ---------            ---------           ---------           ---------
  Total........................................            $   437.0            $   964.2           $   997.4           $ 1,060.1
                                                           =========            =========           =========           =========
  Ending assets (at carrying value)............            $10,340.7            $10,775.3           $12,588.9           $12,157.2
Mortgage loans -- Residential
  Gross investment income(1)...................     7.3%   $    28.7     9.3%   $    56.1   11.9%   $    98.3   10.3%   $    89.2
  Net realized capital gains (losses)..........      --           --      --           --     --           --     --           --
                                                           ---------            ---------           ---------           ---------
  Total........................................            $    28.7            $    56.1           $    98.3           $    89.2
                                                           =========            =========           =========           =========
  Ending assets (at carrying value)............            $ 1,023.3            $   550.5           $   651.0           $   997.4
Real estate
  Gross investment income(1)...................    15.3%   $   100.0     9.5%   $   170.8    7.8%   $   187.1    5.6%   $   143.2
  Net realized capital gains (losses)..........      --         (0.3)    4.6         82.3    2.4         56.4    4.7        120.6
                                                           ---------            ---------           ---------           ---------
  Total........................................            $    99.7            $   253.1           $   243.5           $   263.8
                                                           =========            =========           =========           =========
  Ending assets (at carrying value)............            $ 1,230.3            $ 1,391.8           $ 2,201.2           $ 2,585.2
Policy loans
  Gross investment income(1)...................     7.2%   $    29.4     7.0%   $    55.1    6.5%   $    50.2    6.7%   $    50.9
  Net realized capital gains (losses)..........      --           --      --           --     --           --     --           --
                                                           ---------            ---------           ---------           ---------
  Total........................................            $    29.4            $    55.1           $    50.2           $    50.9
                                                           =========            =========           =========           =========
  Ending assets (at carrying value)............            $   820.1            $   803.6           $   780.5           $   766.2
Cash and cash equivalents
  Gross investment income(1)...................     6.2%   $    15.4     4.3%   $    24.0    5.1%   $    20.0    1.1%   $     5.1
  Net realized capital gains (losses)..........      --           --    (0.5)        (2.7)    --         (0.1)  (0.1)        (0.2)
                                                           ---------            ---------           ---------           ---------
  Total........................................            $    15.4            $    21.3           $    19.9           $     4.9
                                                           =========            =========           =========           =========
  Ending assets (at carrying value)............            $   237.1            $   750.1           $   368.4           $   416.2
Other investments
  Gross investment income(1)...................     8.4%   $    30.9    10.4%   $    62.0    9.2%   $    39.4   47.3%   $   106.5
  Net realized capital gains (losses)..........    (4.8)       (17.7)   16.4         98.2   16.6         70.8   (2.6)        (5.9)
                                                           ---------            ---------           ---------           ---------
  Total........................................            $    13.2            $   160.2           $   110.2           $   100.6
                                                           =========            =========           =========           =========
  Ending assets (at carrying value)............            $   786.9            $   681.2           $   514.0           $   339.8
Total before investment expenses
  Gross investment income......................     7.9%   $ 1,678.4     7.8%   $ 3,204.0    7.7%   $ 3,091.4    7.5%   $ 3,025.2
  Net realized capital gains (losses)..........    (0.7)      (138.2)    0.3        137.1    1.0        395.8    1.1        452.3
                                                           ---------            ---------           ---------           ---------
  Total........................................            $ 1,540.2            $ 3,341.1           $ 3,487.2           $ 3,477.5
                                                           =========            =========           =========           =========
Investment expenses............................     0.2%   $    53.0     0.3%   $   136.7    0.3%   $   113.5    0.3%   $   139.2
Net investment income..........................     7.7%   $ 1,625.4     7.5%   $ 3,067.3    7.4%   $ 2,977.9    7.2%   $ 2,886.0

---------------

(1) Yields, which are annualized for interim periods, are based on quarterly
    average asset carrying values for the six months ended June 30, 2001, and
    annual average asset carrying values for the years ended December 31, 2000,
    1999 and 1998.

    FIXED MATURITY SECURITIES

    We have classified all of our fixed maturity and equity securities as
available-for-sale. Accordingly, we mark such securities to market, with
unrealized gains and losses excluded from earnings and reported as a separate
component of equity on our balance sheet. We write down to fair value securities
whose value is deemed other than temporarily

                                       136

impaired. We record writedowns as realized losses included in earnings and
adjust the cost basis of such securities to fair value. The new cost basis is
not changed for subsequent recoveries in value.

    Fixed maturity securities consist of short-term investments, publicly traded
debt securities, privately placed debt securities and small amounts of
redeemable preferred stock, and represented 66% of total U.S. invested assets as
of June 30, 2001 and 63%, 56% and 55% as of December 31, 2000, 1999 and 1998,
respectively. The fixed maturity securities portfolio was comprised, based on
carrying amount, of 60% in publicly traded fixed maturity securities and 40% in
privately placed fixed maturity securities as of June 30, 2001, and 55% in
publicly traded fixed maturity securities and 45% in privately placed fixed
maturity securities as of December 31, 2000. Included in the privately placed
category as of June 30, 2001 were $3.6 billion of securities eligible for resale
to qualified institutional buyers under Rule 144A under the Securities Act of
1933. Fixed maturity securities were diversified by category of issuer as of
June 30, 2001, and for the years ended December 31, 2000, 1999 and 1998 as shown
in the table below:

                              U.S. INVESTED ASSETS
                  FIXED MATURITY SECURITIES BY TYPE OF ISSUER

                                                    AS OF JUNE 30,                        AS OF DECEMBER 31,
                                                   -----------------   ---------------------------------------------------------
                                                         2001                2000                1999                1998
                                                   -----------------   -----------------   -----------------   -----------------
                                                   CARRYING    % OF    CARRYING    % OF    CARRYING    % OF    CARRYING    % OF
                                                    AMOUNT     TOTAL    AMOUNT     TOTAL    AMOUNT     TOTAL    AMOUNT     TOTAL
                                                   ---------   -----   ---------   -----   ---------   -----   ---------   -----
                                                                                  ($ IN MILLIONS)
                                                                                                   
U.S. Treasury securities and obligations of U.S.
  Government corporations and agencies...........  $     9.2     --%   $    21.3     --%   $   161.3      1%   $   300.0      1%
States and political subdivisions................      299.5      1        295.7      1        167.5      1        147.7      1
Non-U.S. governments.............................      637.9      2        604.3      2        490.4      2        295.2      1
Corporate-public.................................   11,621.3     41      8,740.8     34      5,104.3     22      3,925.1     18
Corporate-private................................    9,485.4     33      9,796.6     38     11,218.0     50     12,085.7     56
Mortgage-backed securities and other asset backed
  securities.....................................    6,450.7     23      6,416.3     25      5,442.8     24      5,078.8     23
                                                   ---------    ---    ---------    ---    ---------    ---    ---------    ---
        Total fixed maturities...................  $28,504.0    100%   $25,875.0    100%   $22,584.3    100%   $21,832.5    100%
                                                   =========    ===    =========    ===    =========    ===    =========    ===

    The international exposure in our U.S. invested assets totaled $3,870.3
million, or 14% of total fixed maturity securities, as of June 30, 2001,
comprised of corporate and foreign government fixed maturity securities. Of the
$3,870.3 million, investments totaled $1,052.7 million in the United Kingdom,
$741.2 million in the continental European Union, $484.1 million in Asia, $409.2
million in South America, $340.5 million in Australia and $25.6 million in
Japan. The remaining $817.0 million was invested in 16 other countries. All
international fixed maturity securities held by our U.S. operations are either
denominated in U.S. dollars or have been swapped into U.S. dollar equivalents.
Our international investments are analyzed internally by country and industry
credit investment professionals. We control concentrations using issuer and
country level exposure benchmarks, which are based on the credit quality of the
issuer and the country. Our investment policy limits total international fixed
maturity securities investments to 15% of total statutory general account assets
with a 4% limit in emerging markets.

    The Securities Valuation Office of the NAIC evaluates most of the fixed
maturity securities that we and other U.S. insurance companies hold. The
Securities Valuation Office evaluates the bond investments of insurers for
regulatory reporting purposes and assigns securities to one of six investment
categories. The NAIC DESIGNATIONS closely mirror the nationally recognized
securities rating organizations' credit ratings for marketable bonds. NAIC
Designations 1 and 2 include bonds considered investment grade by such rating
organizations. Bonds are considered investment grade when rated "Baa3" or higher
by Moody's, or "BBB-" or higher by Standard & Poor's. NAIC Designations 3
through 6 are referred to as below investment grade. Bonds are considered below
investment grade when rated "Ba1" or lower by Moody's, or "BB+" or lower by
Standard & Poor's.

                                       137

    The tables below present our publicly traded, privately placed and total
fixed maturity securities by NAIC Designation and the equivalent ratings of the
nationally recognized securities rating organizations as of June 30, 2001, and
December 31, 2000, 1999 and 1998, as well as the percentage, based on estimated
fair value, that each designation comprises:

                              U.S. INVESTED ASSETS
          PUBLICLY TRADED FIXED MATURITY SECURITIES BY CREDIT QUALITY

                                                AS OF JUNE 30, 2001              AS OF DECEMBER 31, 2000
                                          --------------------------------   --------------------------------
                                                                    % OF                               % OF
                                                                   TOTAL                              TOTAL
NAIC                                      AMORTIZED   CARRYING    CARRYING   AMORTIZED   CARRYING    CARRYING
RATING      RATING AGENCY EQUIVALENT        COST       AMOUNT      AMOUNT      COST       AMOUNT      AMOUNT
------  --------------------------------  ---------   ---------   --------   ---------   ---------   --------
                                                                    ($ IN MILLIONS)
                                                                                
1       Aaa/Aa/A........................  $ 9,913.2   $10,238.7      60%     $9,029.4    $ 9,283.0      65%
2       Baa.............................    5,971.5     6,103.5      36       4,432.3      4,492.8      32
3       Ba..............................      644.2       615.1       4         451.7        434.1       3
4       B...............................       83.4        83.4      --          44.4         21.9      --
5       Caa and lower...................       94.9        78.3      --          27.7         27.3      --
6       In or near default..............       48.4        28.6      --          14.9          4.5      --
                                          ---------   ---------     ---      ---------   ---------     ---
        Total public fixed maturities...  $16,755.6   $17,147.6     100%     $14,000.4   $14,263.6     100%
                                          =========   =========     ===      =========   =========     ===

            AS OF DECEMBER 31, 1999           AS OF DECEMBER 31, 1998
        -------------------------------   -------------------------------
                                 % OF                              % OF
                                TOTAL                             TOTAL
NAIC    AMORTIZED   CARRYING   CARRYING   AMORTIZED   CARRYING   CARRYING
RATING    COST       AMOUNT     AMOUNT      COST       AMOUNT     AMOUNT
------  ---------   --------   --------   ---------   --------   --------
                                 ($ IN MILLIONS)
                                               
1       $6,991.9    $6,888.4      72%     $6,051.4    $6,294.3      77%
2        2,458.3    2,424.8       25       1,423.9    1,491.7       19
3          234.8      233.0        3         325.2      345.2        4
4           35.7       36.0       --           6.8        6.5       --
5           27.3       28.3       --          14.9        3.8       --
6           58.0       22.3       --          50.9       16.1       --
        --------    --------     ---      --------    --------     ---
        $9,806.0    $9,632.8     100%     $7,873.1    $8,157.6     100%
        ========    ========     ===      ========    ========     ===

                              U.S. INVESTED ASSETS
          PRIVATELY PLACED FIXED MATURITY SECURITIES BY CREDIT QUALITY

                                              AS OF JUNE 30, 2001              AS OF DECEMBER 31, 2000
                                        --------------------------------   --------------------------------
                                                                  % OF                               % OF
                                                                 TOTAL                              TOTAL
NAIC                                    AMORTIZED   CARRYING    CARRYING   AMORTIZED   CARRYING    CARRYING
RATING     RATING AGENCY EQUIVALENT       COST       AMOUNT      AMOUNT      COST       AMOUNT      AMOUNT
------  ------------------------------  ---------   ---------   --------   ---------   ---------   --------
                                                                  ($ IN MILLIONS)
                                                                              
1       Aaa/Aa/A......................  $5,103.8    $ 5,186.8      46%     $ 5,155.9   $ 5,213.9      45%
2       Baa...........................   4,476.7      4,570.6      40        4,749.2     4,822.0      42
3       Ba............................   1,176.2      1,173.7      10        1,151.3     1,126.5      10
4       B.............................     304.6        295.8       3          349.5       335.4       3
5       Caa and lower.................      63.6         32.9      --           73.3        40.7      --
6       In or near default............     125.7         96.6       1          111.0        72.9      --
                                        ---------   ---------     ---      ---------   ---------     ---
        Total public fixed
        maturities....................  $11,250.6   $11,356.4     100%     $11,590.2   $11,611.4     100%
                                        =========   =========     ===      =========   =========     ===

            AS OF DECEMBER 31, 1999            AS OF DECEMBER 31, 1998
        --------------------------------   --------------------------------
                                  % OF                               % OF
                                 TOTAL                              TOTAL
NAIC    AMORTIZED   CARRYING    CARRYING   AMORTIZED   CARRYING    CARRYING
RATING    COST       AMOUNT      AMOUNT      COST       AMOUNT      AMOUNT
------  ---------   ---------   --------   ---------   ---------   --------
                                  ($ IN MILLIONS)
                                                 
1       $ 5,775.8   $ 5,652.9      44%     $ 5,525.4   $ 5,837.6      42%
2         5,648.6     5,561.8      43        5,968.2     6,285.9      46
3         1,403.7     1,355.9      10        1,174.9     1,215.7       9
4           223.9       210.7       2          251.6       249.8       2
5           112.4       110.0       1            9.3         9.2      --
6            81.1        60.2      --          105.5        76.7       1
        ---------   ---------     ---      ---------   ---------     ---
        $13,245.5   $12,951.5     100%     $13,034.9   $13,674.9     100%
        =========   =========     ===      =========   =========     ===

                              U.S. INVESTED ASSETS
               TOTAL FIXED MATURITY SECURITIES BY CREDIT QUALITY

                                               AS OF JUNE 30, 2001              AS OF DECEMBER 31, 2000
                                         --------------------------------   --------------------------------
                                                                   % OF                               % OF
                                                                  TOTAL                              TOTAL
NAIC                                     AMORTIZED   CARRYING    CARRYING   AMORTIZED   CARRYING    CARRYING
RATING     RATING AGENCY EQUIVALENT        COST       AMOUNT      AMOUNT      COST       AMOUNT      AMOUNT
------  -------------------------------  ---------   ---------   --------   ---------   ---------   --------
                                                                   ($ IN MILLIONS)
                                                                               
1       Aaa/Aa/A.......................  $15,017.0   $15,425.5      54%     $14,185.3   $14,496.9      56%
2       Baa............................   10,448.2    10,674.1      38        9,181.5     9,314.8      36
3       Ba.............................    1,820.4     1,788.8       6        1,603.0     1,560.6       6
4       B..............................      388.0       379.2       1          393.9       357.3       2
5       Caa and lower..................      158.5       111.2      --          101.0        68.0      --
6       In or near default.............      174.1       125.2       1          125.9        77.4      --
                                         ---------   ---------     ---      ---------   ---------     ---
        Total public fixed
        maturities.....................  $28,006.2   $28,504.0     100%     $25,590.6   $25,875.0     100%
                                         =========   =========     ===      =========   =========     ===

            AS OF DECEMBER 31, 1999            AS OF DECEMBER 31, 1998
        --------------------------------   --------------------------------
                                  % OF                               % OF
                                 TOTAL                              TOTAL
NAIC    AMORTIZED   CARRYING    CARRYING   AMORTIZED   CARRYING    CARRYING
RATING    COST       AMOUNT      AMOUNT      COST       AMOUNT      AMOUNT
------  ---------   ---------   --------   ---------   ---------   --------
                                  ($ IN MILLIONS)
                                                 
1       $12,767.7   $12,541.3      56%     $11,576.8   $12,131.9      55%
2         8,106.9     7,986.6      35        7,392.1     7,777.6      36
3         1,638.4     1,588.9       7        1,500.1     1,560.9       7
4           259.6       246.7       1          258.4       256.3       1
5           139.8       138.3       1           24.2        13.0      --
6           139.1        82.5      --          156.4        92.8       1
        ---------   ---------     ---      ---------   ---------     ---
        $23,051.5   $22,584.3     100%     $20,908.0   $21,832.5     100%
        =========   =========     ===      =========   =========     ===

    We believe that our long-term fixed maturity securities portfolio is well
diversified among industry types and between publicly traded and privately
placed securities. Each year we direct the majority of our net cash inflows into
investment grade fixed maturity securities. We typically invest up to 7% of
general account cash flow in below investment grade assets. While the general
account investment returns have improved due to the below investment grade asset
class, we manage its growth strategically by limiting it to 10% of the total
fixed maturity securities portfolio.

    We invest in privately placed fixed maturity securities to enhance the
overall value of the portfolio, increase diversification and obtain higher
yields than are possible with comparable quality public market securities.
Generally, private placements provide broader access to management information,
strengthened negotiated protective covenants, call protection features and,
where applicable, a higher level of collateral. They are, however, generally not
freely tradable because of restrictions imposed by federal and state securities
laws and illiquid trading markets. As of June 30, 2001, the percentage, based on
estimated fair value, of total publicly traded and privately placed fixed
maturity securities that were investment grade with an NAIC Designation 1 or 2
was 92%.

                                       138

    The tables below show the carrying amount of our corporate fixed maturity
securities by industry category, as well as the percentage of the total
corporate portfolio that each industry category comprises as of June 30, 2001,
and December 31, 2000, 1999, and 1998. The tables also show by industry category
the relative amounts of publicly traded and privately placed securities.

                              U.S. INVESTED ASSETS
 CORPORATE FIXED MATURITY SECURITIES PORTFOLIO BY INDUSTRY AS OF JUNE 30, 2001

                                                          PUBLICLY TRADED    PRIVATELY PLACED          TOTAL
                                                         -----------------   -----------------   -----------------
                                                         CARRYING    % OF    CARRYING    % OF    CARRYING    % OF
                                                          AMOUNT     TOTAL    AMOUNT     TOTAL    AMOUNT     TOTAL
                                                         ---------   -----   ---------   -----   ---------   -----
                                                                              ($ IN MILLIONS)
                                                                                           
INDUSTRY CLASS
Transportation and Public Utilities....................  $ 4,820.2     41%   $1,934.1      20%   $ 6,754.3     32%
Finance, Insurance and Real Estate.....................    3,066.7     26     2,305.1      24      5,371.8     25
Manufacturing..........................................    2,161.0     19     2,684.1      28      4,845.1     23
Mining.................................................      673.3      6       908.4      10      1,581.7      7
Retail.................................................      440.6      4       735.2       8      1,175.8      6
Services...............................................      403.7      4       671.6       7      1,075.3      5
Public Administration..................................       34.9     --        86.0       1        120.9      1
Agriculture, Forestry and Fishing......................       19.6     --        48.9       1         68.5     --
Construction...........................................        1.3     --       112.0       1        113.3      1
                                                         ---------    ---    --------     ---    ---------    ---
Total..................................................  $11,621.3    100%   $9,485.4     100%   $21,106.7    100%
                                                         =========    ===    ========     ===    =========    ===

                              U.S. INVESTED ASSETS
  CORPORATE FIXED MATURITY SECURITIES PORTFOLIO BY INDUSTRY AS OF DECEMBER 31,
                                      2000

                                                           PUBLICLY TRADED    PRIVATELY PLACED          TOTAL
                                                          -----------------   -----------------   -----------------
                                                          CARRYING    % OF    CARRYING    % OF    CARRYING    % OF
                                                           AMOUNT     TOTAL    AMOUNT     TOTAL    AMOUNT     TOTAL
                                                          ---------   -----   ---------   -----   ---------   -----
                                                                               ($ IN MILLIONS)
                                                                                            
INDUSTRY CLASS
Transportation and Public Utilities.....................  $3,197.1      37%   $1,957.9      20%   $ 5,155.0     28%
Finance, Insurance and Real Estate......................   2,657.1      30     2,300.9      24      4,958.0     27
Manufacturing...........................................   1,678.9      19     2,845.9      29      4,524.8     24
Mining..................................................     496.1       6       936.8      10      1,432.9      8
Services................................................     351.5       4       686.3       7      1,037.8      5
Retail..................................................     295.2       3       795.9       8      1,091.1      6
Agriculture, Forestry and Fishing.......................      34.7       1        41.2      --         75.9     --
Public Administration...................................      20.3      --       111.4       1        131.7      1
Construction............................................       9.9      --       120.3       1        130.2      1
                                                          --------     ---    --------     ---    ---------    ---
Total...................................................  $8,740.8     100%   $9,796.6     100%   $18,537.4    100%
                                                          ========     ===    ========     ===    =========    ===

                                       139

                              U.S. INVESTED ASSETS
  CORPORATE FIXED MATURITY SECURITIES PORTFOLIO BY INDUSTRY AS OF DECEMBER 31,
                                      1999

                                                          PUBLICLY TRADED     PRIVATELY PLACED          TOTAL
                                                         ------------------   -----------------   -----------------
                                                          CARRYING    % OF    CARRYING    % OF    CARRYING    % OF
                                                           AMOUNT     TOTAL    AMOUNT     TOTAL    AMOUNT     TOTAL
                                                         ----------   -----   ---------   -----   ---------   -----
                                                                              ($ IN MILLIONS)
                                                                                            
INDUSTRY CLASS
Finance, Insurance and Real Estate.....................   $2,178.0      43%   $ 2,426.8     22%   $ 4,604.8     28%
Manufacturing..........................................    1,280.3      25      3,793.4     34      5,073.7     31
Transportation and Public Utilities....................      655.1      13      2,033.0     18      2,688.1     16
Services...............................................      374.2       7        803.6      7      1,177.8      7
Mining.................................................      296.3       6        963.9      9      1,260.2      8
Retail.................................................      247.8       5        923.9      8      1,171.7      7
Agriculture, Forestry and Fishing......................       60.1       1         42.6     --        102.7      1
Public Administration..................................        9.6      --         70.0      1         79.6      1
Construction...........................................        2.9      --        160.8      1        163.7      1
                                                          --------     ---    ---------    ---    ---------    ---
Total..................................................   $5,104.3     100%   $11,218.0    100%   $16,322.3    100%
                                                          ========     ===    =========    ===    =========    ===

                              U.S. INVESTED ASSETS
  CORPORATE FIXED MATURITY SECURITIES PORTFOLIO BY INDUSTRY AS OF DECEMBER 31,
                                      1998

                                                                 PUBLICLY
                                                                  TRADED         PRIVATELY PLACED          TOTAL
                                                            ------------------   -----------------   -----------------
                                                             CARRYING    % OF    CARRYING    % OF    CARRYING    % OF
                                                              AMOUNT     TOTAL    AMOUNT     TOTAL    AMOUNT     TOTAL
                                                            ----------   -----   ---------   -----   ---------   -----
                                                                                 ($ IN MILLIONS)
                                                                                               
INDUSTRY CLASS
Finance, Insurance and Real Estate........................   $1,713.6      44%   $ 2,241.1     18%   $ 3,954.7     25%
Manufacturing.............................................    1,131.3      29      4,582.8     38      5,714.1     36
Transportation and Public Utilities.......................      459.6      12      2,245.0     18      2,704.6     17
Retail....................................................      244.1       6        944.7      8      1,188.8      7
Mining....................................................      221.8       6        953.0      8      1,174.8      7
Services..................................................      100.2       2        788.4      7        888.6      6
Public Administration.....................................       35.9       1        127.7      1        163.6      1
Construction..............................................       18.6      --        142.6      1        161.2      1
Agriculture, Forestry and Fishing.........................         --      --         60.4      1         60.4     --
                                                             --------     ---    ---------    ---    ---------    ---
         Total............................................   $3,925.1     100%   $12,085.7    100%   $16,010.8    100%
                                                             ========     ===    =========    ===    =========    ===

    As of June 30, 2001, our largest unaffiliated single concentration of fixed
maturity securities consisted of $358.1 million of corporate bonds by Ford Motor
Company and its affiliates. This represented approximately 1% of our total U.S.
invested assets as of June 30, 2001. No other individual non-government issuer
represented more than 1% of U.S. invested assets.

    We held $6,450.7 million of mortgage-backed and asset-backed securities as
of June 30, 2001, and $6,416.3 million, $5,442.8 million and $5,078.8 million as
of December 31, 2000, 1999 and 1998, respectively. The table below presents the
types of mortgage-backed securities ("MBSs"), as well as other asset-backed
securities, held as of the dates indicated:

                              U.S. INVESTED ASSETS
                      MORTGAGE AND ASSET-BACKED SECURITIES

                                                              CARRYING AMOUNT       CARRYING AMOUNT AS OF
                                                              AS OF JUNE 30,             DECEMBER 31,
                                                              ---------------   ------------------------------
                                                                   2001           2000       1999       1998
                                                              ---------------   --------   --------   --------
                                                                              ($ IN MILLIONS)
                                                                                          
Residential pass-through securities.........................     $3,285.1       $3,426.5   $2,971.6   $2,968.8
Commercial MBS..............................................      1,692.5        1,403.4      969.4      677.4
Asset-backed securities.....................................      1,473.1        1,586.4    1,501.8    1,432.6
                                                                 --------       --------   --------   --------
         Total MBSs and asset-backed securities.............     $6,450.7       $6,416.3   $5,442.8   $5,078.8
                                                                 ========       ========   ========   ========

                                       140

    We believe that it is desirable to hold residential mortgage-backed
securities due to their credit quality and liquidity as well as portfolio
diversification characteristics. Our portfolio is comprised of GNMA, FNMA and
FHLMC pass-through securities and is actively managed to ensure that the
securities held are trading close to or below par, in order to reduce risk of
prepayments. As of June 30, 2001, we held no collateralized mortgage obligations
in our U.S. invested asset portfolio.

    Commercial mortgage-backed securities provide high levels of credit
protection, diversification, reduced event risk and enhanced liquidity.
Commercial mortgage-backed securities are predominantly comprised of rated large
pool securitizations that are individually and collectively diverse by property
type, borrower and geographic dispersion.

    We purchase asset-backed securities, or ABS, to diversify the overall credit
risks of the fixed maturity securities portfolio and to provide attractive
returns. The principal risks in holding asset-backed securities are structural
and credit risks. Structural risks include the security's priority in the
issuer's capital structure, the adequacy of and ability to realize proceeds from
the collateral and the potential for prepayments. Credit risks involve
issuer/servicer risk where collateral values can become impaired in the event of
servicer credit deterioration.

    Our ABS portfolio is diversified both by type of asset and by issuer. We
actively monitor holdings of asset-backed securities to ensure that the risk
profile of each security improves or remains consistent. If we are not receiving
an adequate yield for the risk, relative to other investment opportunities, we
will attempt to sell the security. Prepayments in the ABS portfolio are, in
general, insensitive to changes in interest rates or are insulated to such
changes by call protection features. In the event that we are subject to
prepayment risk, we monitor the factors that impact the level of prepayment and
prepayment speed for those asset-backed securities. To the extent we believe
that prepayment risk increases, we may attempt to sell the security and reinvest
in another security that offers better yield relative to the risk. In addition,
we diversify the risks of asset-backed securities by holding a diverse class of
securities, which limits our exposure to any one security.

                              U.S. INVESTED ASSETS
                        ASSET-BACKED SECURITIES BY TYPE

                                                              CARRYING AMOUNT       CARRYING AMOUNT AS OF
                                                              AS OF JUNE 30,             DECEMBER 31,
                                                              ---------------   ------------------------------
                                                                   2001           2000       1999       1998
                                                              ---------------   --------   --------   --------
                                                                              ($ IN MILLIONS)
                                                                                          
Credit cards................................................     $  180.8       $  220.0   $  260.9   $  115.1
Automobile receivables......................................         62.9           72.2       81.0       46.1
Collateralized debt obligations.............................        570.1          579.1      654.2      545.8
Lease receivables...........................................        162.1          198.9      289.1      402.4
Consumer loans..............................................        134.7          145.0      168.5       42.9
Other.......................................................        362.5          371.2       48.1      280.3
                                                                 --------       --------   --------   --------
         Total asset-backed securities......................     $1,473.1       $1,586.4   $1,501.8   $1,432.6
                                                                 ========       ========   ========   ========

                                       141

    In accordance with our asset liability risk management techniques, we manage
the expected lives of U.S. invested assets to be similar to the lives of our
liabilities. Significant amounts of our liabilities have an expected life of six
years or less. Therefore, comparable amounts of assets have a similar expected
life. The amortized cost and estimated fair value of fixed maturity securities,
by contractual maturity dates, excluding scheduled sinking funds, as of June 30,
2001, and as of December 31, 2000 and 1999, respectively is as follows:

                              U.S. INVESTED ASSETS
            FIXED MATURITY SECURITIES BY CONTRACTUAL MATURITY DATES

                                              AS OF JUNE 30,                       AS OF DECEMBER 31,
                                          -----------------------   -------------------------------------------------
                                                   2001                      2000                      1999
                                          -----------------------   -----------------------   -----------------------
                                           AMORTIZED    CARRYING     AMORTIZED    CARRYING     AMORTIZED    CARRYING
                                             COST        AMOUNT        COST        AMOUNT        COST        AMOUNT
                                          -----------   ---------   -----------   ---------   -----------   ---------
                                                                        ($ IN MILLIONS)
                                                                                          
Due in one year or less.................   $ 1,269.8    $ 1,272.8    $ 1,093.6    $ 1,083.8    $ 1,263.5    $ 1,261.6
Due after one year through five years...    10,435.4     10,593.0      9,691.0      9,687.7      8,263.0      8,130.0
Due after five years through ten
  years.................................     5,686.1      5,793.7      5,058.0      5,135.6      4,908.4      4,820.6
Due after ten years.....................     4,297.8      4,393.8      3,505.4      3,551.6      3,056.4      2,929.3
                                           ---------    ---------    ---------    ---------    ---------    ---------
  Subtotal..............................    21,689.1     22,053.3     19,348.0     19,458.7     17,491.3     17,141.5
Mortgage-backed and other securities
  without a single maturity date........     6,317.1      6,450.7      6,242.6      6,416.3      5,560.2      5,442.8
                                           ---------    ---------    ---------    ---------    ---------    ---------
         Total..........................   $28,006.2    $28,504.0    $25,590.6    $25,875.0    $23,051.5    $22,584.3
                                           =========    =========    =========    =========    =========    =========

    We monitor any decline in the credit quality of fixed maturity securities
through the designation of "problem securities", "potential problem securities"
and "restructured securities". We define problem securities in our fixed
maturity portfolio as securities: (i) as to which principal and/or interest
payments are in default or (ii) issued by a company that went into bankruptcy
subsequent to the acquisition of such securities. We define potential problem
securities in our fixed maturity portfolio as securities included on an internal
"watch list" for which management has concerns as to the ability of the issuer
to comply with the present debt payment terms and which may result in the
security becoming a problem or being restructured. The decision whether to
classify a performing fixed maturity security as a potential problem involves
significant subjective judgments by management as to the likely future industry
conditions and developments with respect to the issuer. We define restructured
securities in our fixed maturity portfolio as securities where a concession has
been granted to the borrower related to the borrower's financial difficulties
that would not have otherwise been considered. We determine that restructures
should occur in those instances where greater economic value will be realized
under the new terms than through liquidation or other disposition and may
involve a change in contractual cash flows.

    The table below presents the total carrying amount of our fixed maturity
portfolio, as well as its problem, potential problem and restructured fixed
maturities:

                              U.S. INVESTED ASSETS
PROBLEM, POTENTIAL PROBLEM AND RESTRUCTURED FIXED MATURITIES AT CARRYING AMOUNT

                                                             AS OF JUNE 30,           AS OF DECEMBER 31,
                                                             ---------------   ---------------------------------
                                                                  2001           2000        1999        1998
                                                             ---------------   ---------   ---------   ---------
                                                                               ($ IN MILLIONS)
                                                                                           
Total fixed maturity securities (public and private).......     $28,504.0      $25,875.0   $22,584.3   $21,832.5
                                                                =========      =========   =========   =========
Problem fixed maturity securities..........................     $   137.5      $    79.0   $    85.1   $    92.5
Potential problem fixed maturity securities................         140.0          132.5       150.1        76.5
Restructured fixed maturity securities.....................          68.4           48.6        27.6        73.5
                                                                ---------      ---------   ---------   ---------
Total problem, potential problem and restructured fixed
  maturity securities......................................     $   345.9      $   260.1   $   262.8   $   242.5
                                                                =========      =========   =========   =========
Total problem, potential problem and restructured fixed
  maturity securities as a percent of total fixed maturity
  securities...............................................             1%             1%          1%          1%

    EQUITY SECURITIES

    Our equity securities consist primarily of investments in common stocks. We
classify our investment in common stocks as available for sale and report them
at estimated fair value. We report unrealized gains and losses on common

                                       142

stocks as a separate component of other comprehensive income, net of deferred
income taxes and an adjustment for the effect on deferred acquisition costs that
would have occurred if such gains and losses had been realized.

    Investments in equity securities totaled $539.4 million, which represented
1% of U.S. invested assets as of June 30, 2001 and $666.0 million, $768.1
million and $995.7 million, which represented 2% of U.S. invested assets as of
December 31, 2000, 1999 and 1998, respectively. Investments in company-sponsored
funds totaled $503.2 million, or 93%, of our U.S. equity securities as of June
30, 2001. These sponsored funds are intended to be marketed to our asset
management clients. Of company-sponsored funds, $357.3 million represented
underlying investments in publicly-traded equities, $140.0 million represented
investments in publicly-traded fixed income securities and $5.9 million in
balanced funds which represented investments in both publicly-traded equities
and fixed income securities as of June 30, 2001. The remaining balance of equity
securities is a mixture of public and private securities acquired for investment
purposes or which were acquired through equity participation features of below
investment grade bonds or through recoveries of defaulted securities. Beginning
in 1996, we repositioned our investment portfolio by selling invested assets
with lower yields, primarily equities and real estate, and reinvesting the
proceeds in assets with higher yields, primarily debt securities.

    MORTGAGE LOANS

    Mortgage loans comprised 26% of total U.S. invested assets as of June 30,
2001, 27% as of December 31, 2000 and 33% at each of December 31, 1999 and 1998.
Mortgage loans consist of commercial and residential loans. As of June 30, 2001
and December 31, 2000, 1999 and 1998, commercial mortgage loans comprised
$10,340.7 million, $10,775.3 million, $12,588.9 million and $12,157.2 million,
or 91%, 95%, 95% and 92%, of total mortgage loan investments, respectively.
Residential mortgages comprised $1,023.3 million, $550.5 million, $651.0 million
and $997.4 million, or 9%, 5%, 5% and 8%, of total mortgage loan investments as
of June 30, 2001 and December 31, 2000, 1999 and 1998, respectively. Principal
Residential Mortgage, Inc. and Principal Bank hold the majority of residential
loans. Principal Residential Mortgage, Inc. holds residential loans as part of
its securitization inventory and Principal Bank holds residential loans to
comply with federal thrift charter requirements.

    On September 30, 2000, we completed a securitization of $598.0 million of
general account commercial loans comprised of 102 loans. We sold $578.4 million
of investment grade bonds into the market and we retained $28.7 million of
interest only bonds.

    COMMERCIAL MORTGAGE LOANS.  Commercial mortgages play an important role in
our investment strategy by:

    - providing strong risk adjusted relative value in comparison to other
      investment alternatives;

    - enhancing total returns; and

    - providing strategic portfolio diversification.

    As a result, we have focused on constructing a solid, high quality portfolio
of mortgages. Our portfolio is generally comprised of mortgages with
conservative loan-to-value ratios, high debt service coverages and general
purpose property types with a strong credit tenancy.

    Our commercial loan portfolio consists of primarily non-recourse, fixed rate
mortgages on fully or near fully leased properties. The mortgage portfolio is
comprised of general-purpose industrial properties, manufacturing office
properties and credit oriented retail properties.

    California accounted for 22% of our commercial mortgage loan portfolio as of
June 30, 2001. We are, therefore, exposed to potential losses resulting from the
risk of catastrophes, such as earthquakes, that may affect the region. Like
other lenders, we generally do not require earthquake insurance for properties
on which we make commercial mortgage loans. With respect to California
properties, however, we obtain an engineering report specific to each property.
The report assesses the building's design specifications, whether it has been
upgraded to meet seismic building codes and the maximum loss that is likely to
result from a variety of different seismic events. We also obtain a report that
assesses by building and geographic fault lines the amount of loss our
commercial mortgage loan portfolio might suffer under a variety of seismic
events.

                                       143

    The following is a summary of our commercial mortgage loans by property type
and geographic area as of June 30, 2001, and December 31, 2000, 1999 and 1998,
respectively:

                              U.S. INVESTED ASSETS
                 COMMERCIAL MORTGAGE LOAN DISTRIBUTION BY TYPE

                                             AS OF JUNE 30,                        AS OF DECEMBER 31,
                                            -----------------   ---------------------------------------------------------
                                                  2001                2000                1999                1998
                                            -----------------   -----------------   -----------------   -----------------
                                            CARRYING    % OF    CARRYING    % OF    CARRYING    % OF    CARRYING    % OF
                                             AMOUNT     TOTAL    AMOUNT     TOTAL    AMOUNT     TOTAL    AMOUNT     TOTAL
                                            ---------   -----   ---------   -----   ---------   -----   ---------   -----
                                                                           ($ IN MILLIONS)
                                                                                            
Retail....................................  $ 3,370.1     32%   $ 3,612.7     34%   $ 4,194.7     33%   $ 4,082.8     33%
Office....................................    3,305.0     32      3,273.5     30      3,841.0     31      3,500.8     29
Industrial................................    3,197.0     31      3,381.6     31      4,048.3     32      4,050.5     33
Apartments................................      373.0      4        419.7      4        423.9      3        348.2      3
Mixed Use/other...........................      118.0      1        130.2      1        127.8      1        199.4      2
Hotel.....................................       63.6      1         65.6      1         71.0      1         88.5      1
Valuation allowance.......................      (86.0)    (1)      (108.0)    (1)      (117.8)    (1)      (113.0)    (1)
                                            ---------    ---    ---------    ---    ---------    ---    ---------    ---
         Total............................  $10,340.7    100%   $10,775.3    100%   $12,588.9    100%   $12,157.2    100%
                                            =========    ===    =========    ===    =========    ===    =========    ===

                              U.S. INVESTED ASSETS
                COMMERCIAL MORTGAGE LOAN DISTRIBUTION BY REGION

                                             AS OF JUNE 30,                        AS OF DECEMBER 31,
                                            -----------------   ---------------------------------------------------------
                                                  2001                2000                1999                1998
                                            -----------------   -----------------   -----------------   -----------------
                                            CARRYING    % OF    CARRYING    % OF    CARRYING    % OF    CARRYING    % OF
                                             AMOUNT     TOTAL    AMOUNT     TOTAL    AMOUNT     TOTAL    AMOUNT     TOTAL
                                            ---------   -----   ---------   -----   ---------   -----   ---------   -----
                                                                           ($ IN MILLIONS)
                                                                                            
Region:
Pacific...................................  $ 2,650.8     26%   $ 2,774.8     26%   $ 3,410.2     27%   $ 3,371.8     28%
South Atlantic............................    2,476.7     24      2,630.5     24      3,175.2     25      3,024.9     25
Middle Atlantic...........................    1,643.5     16      1,664.9     15      1,775.2     14      1,687.6     14
East North Central........................    1,048.0     10      1,006.2      9      1,235.4     10      1,222.1     10
West South Central........................      848.8      8        886.4      8        904.9      7        810.9      7
Mountain..................................      614.2      6        600.2      6        643.5      5        553.9      4
West North Central........................      422.6      4        439.9      4        535.1      5        579.3      5
New England...............................      377.4      4        495.9      5        598.7      5        616.0      5
East South Central........................      344.7      3        384.5      4        428.5      3        403.7      3
Valuation allowance.......................      (86.0)    (1)      (108.0)    (1)      (117.8)    (1)      (113.0)    (1)
                                            ---------    ---    ---------    ---    ---------    ---    ---------    ---
         Total............................  $10,340.7    100%   $10,775.3    100%   $12,588.9    100%   $12,157.2    100%
                                            =========    ===    =========    ===    =========    ===    =========    ===

    Our commercial loan portfolio is highly diversified by borrower. As of June
30, 2001, 44% of the U.S. commercial mortgage loan portfolio was comprised of
mortgage loans with principal balances of less than $10 million. The table below
shows our U.S. commercial mortgage loan portfolio by loan size, as of the
periods indicated:

                              U.S. INVESTED ASSETS
               COMMERCIAL MORTGAGE LOAN PORTFOLIO -- BY LOAN SIZE

                                                        AS OF JUNE 30,                          AS OF DECEMBER 31,
                                                 ----------------------------   ---------------------------------------------------
                                                             2001                           2000                       1999
                                                 ----------------------------   ----------------------------   --------------------
                                                  NUMBER    PRINCIPAL   % OF     NUMBER    PRINCIPAL   % OF     NUMBER    PRINCIPAL
                                                 OF LOANS    BALANCE    TOTAL   OF LOANS    BALANCE    TOTAL   OF LOANS    BALANCE
                                                 --------   ---------   -----   --------   ---------   -----   --------   ---------
                                                                                  ($ IN MILLIONS)
                                                                                                  
Under $5 million...............................   1,208     $ 2,548.0     24%    1,236     $ 2,553.5     24%    1,451     $ 3,110.8
$5 million but less than $10 million...........     303       2,119.2     20       304       2,116.5     19       380       2,622.6
$10 million but less than $20 million..........     174       2,322.1     22       187       2,515.2     23       204       2,733.2
$20 million but less than $30 million..........      60       1,410.7     14        63       1,495.3     14        67       1,617.6
$30 million and over...........................      46       2,045.5     20        48       2,204.5     20        56       2,640.2
                                                  -----     ---------    ---     -----     ---------    ---     -----     ---------
      Total....................................   1,791     $10,445.5    100%    1,838     $10,885.0    100%    2,158     $12,724.4
                                                  =====     =========    ===     =====     =========    ===     =====     =========

                                                          AS OF DECEMBER 31,
                                                 ------------------------------------
                                                 1999                1998
                                                 -----   ----------------------------
                                                 % OF     NUMBER    PRINCIPAL   % OF
                                                 TOTAL   OF LOANS    BALANCE    TOTAL
                                                 -----   --------   ---------   -----
                                                           ($ IN MILLIONS)
                                                                    
Under $5 million...............................    24%    1,515     $ 3,179.2     26%
$5 million but less than $10 million...........    21       384       2,649.9     22
$10 million but less than $20 million..........    21       204       2,776.2     23
$20 million but less than $30 million..........    13        58       1,408.4     11
$30 million and over...........................    21        47       2,257.2     18
                                                  ---     -----     ---------    ---
      Total....................................   100%    2,208     $12,270.9    100%
                                                  ===     =====     =========    ===

    The total number of commercial mortgage loans outstanding as of June 30,
2001 and December 31, 2000, 1999 and 1998, was 1,791, 1,838, 2,158 and 2,208,
respectively. The average loan size of our commercial mortgage portfolio

                                       144

was $5.8 million as of June 30, 2001, $5.9 million as of December 31, 2000 and
1999, and $5.6 million as of December 31, 1998. The largest loan on any single
property at such dates aggregated $100.0 million for June 30, 2001 and December
31, 2000, 1999 and 1998, respectively, and represented 0.2% of U.S. invested
assets on these dates. Total mortgage loans to the 10 largest borrowers
accounted in the aggregate for approximately 7% of the total carrying amount of
the commercial mortgage loan portfolio as of June 30, 2001 and December 31, 2000
and 6% as of December 31, 1999 and 1998, respectively, and 2% of total U.S.
invested assets as of June 30, 2001, and December 31, 2000, 1999 and 1998,
respectively. As of such dates, all such loans were performing.

    The table below presents the disposition of maturities for the six months
ended June 30, 2001, and for the years ended December 31, 2000, 1999 and 1998:

                              U.S. INVESTED ASSETS
       DISPOSITIONS OF SCHEDULED MATURITIES OF COMMERCIAL MORTGAGE LOANS

                                                                AS OF
                                                              JUNE 30,             AS OF DECEMBER 31,
                                                              ---------    -----------------------------------
                                                                2001         2000         1999         1998
                                                              ---------    ---------    ---------    ---------
                                                              AMORTIZED    AMORTIZED    AMORTIZED    AMORTIZED
                                                                COST         COST         COST         COST
                                                              ---------    ---------    ---------    ---------
                                                                              ($ IN MILLIONS)
                                                                                         
Paid as scheduled...........................................   $143.6       $395.0       $401.9       $300.0
Extended....................................................    179.2        174.8        164.9        361.0
Refinanced..................................................     19.4         82.7        204.4        203.9
Foreclosed..................................................      5.5           --           --          8.0
Expired maturities..........................................       --         59.1           --         35.1
                                                               ------       ------       ------       ------
         Total..............................................   $347.7       $711.6       $771.2       $908.0
                                                               ======       ======       ======       ======

    The amortized cost of commercial mortgage loans by contractual maturity
dates, excluding scheduled sinking funds as of June 30, 2001, and December 31,
2000, 1999 and 1998, respectively, are as follows:

                              U.S. INVESTED ASSETS
              COMMERCIAL MORTGAGE LOAN PORTFOLIO MATURITY PROFILE

                                     AS OF JUNE 30,                            AS OF DECEMBER 31,
                                   -------------------   ---------------------------------------------------------------
                                          2001                  2000                  1999                  1998
                                   -------------------   -------------------   -------------------   -------------------
                                    AMORTIZED    % OF     AMORTIZED    % OF     AMORTIZED    % OF     AMORTIZED    % OF
                                      COST       TOTAL      COST       TOTAL      COST       TOTAL      COST       TOTAL
                                   -----------   -----   -----------   -----   -----------   -----   -----------   -----
                                                                      ($ IN MILLIONS)
                                                                                           
Due in one year or less..........   $   538.7       5%    $   675.8       6%    $   735.4       6%    $   806.3       7%
Due after one year through five
  years..........................     3,445.0      33       3,033.4      28       3,045.0      24       2,629.2      21
Due after five years through ten
  years..........................     3,278.4      32       3,900.7      36       4,862.1      38       4,711.1      38
Due after ten years..............     3,164.6      30       3,273.4      30       4,064.1      32       4,123.6      34
                                    ---------     ---     ---------     ---     ---------     ---     ---------     ---
         Total...................   $10,426.7     100%    $10,883.3     100%    $12,706.6     100%    $12,270.2     100%
                                    =========     ===     =========     ===     =========     ===     =========     ===

    We actively monitor and manage our commercial mortgage loan portfolio.
Substantially all loans within the portfolio are analyzed regularly, based on a
proprietary risk rating cash flow model, in order to monitor the financial
quality of these assets and are internally rated. Based on ongoing monitoring,
mortgage loans with a likelihood of becoming delinquent are identified and
placed on an internal "watch list". Among criteria which would indicate a
potential problem are: imbalances in ratios of loan to value or contract rents
to debt service, major tenant vacancies or bankruptcies, borrower sponsorship
problems, late payments, delinquent taxes and loan relief/restructuring
requests.

    We state commercial mortgage loans at their unpaid principal balances, net
of discount accrual and premium amortization, valuation allowances and
writedowns for impairment. We provide a valuation allowance for commercial
mortgage loans based on past loan loss experience and for specific loans
considered to be impaired. Mortgage loans are considered impaired when, based on
current information and events, it is probable that all amounts due according to
the contractual terms of the loan agreement may not be collected. When we
determine that a loan is impaired, we establish a valuation allowance for loss
for the excess of the carrying value of the mortgage loan over its estimated
fair value. Estimated fair value is based on either the present value of
expected future cash flows discounted at the loan's original effective interest
rate, the loan's observable market price or the fair value of the collateral. We
record increases in such valuation allowances as realized investment losses and,
accordingly, we reflect such losses in our consolidated

                                       145

results of operations. Such increases (decreases) in valuation allowances
aggregated $(22.0) million as of June 30, 2001, and $(9.8) million, $4.8 million
and $(8.4) million for the years ended December 31, 2000, 1999 and 1998,
respectively.

    We review our mortgage loan portfolio and analyze the need for a valuation
allowance for any loan which is delinquent for 60 days or more, in process of
foreclosure, restructured, on the "watch list", or which currently has a
valuation allowance. We categorize loans which are delinquent, loans in process
of foreclosure and loans to borrowers in bankruptcy as "problem" loans.
Potential problem loans are loans placed on an internal "watch list" for which
management has concerns as to the ability of the borrower to comply with the
present loan payment terms and which may result in the loan becoming a problem
or being restructured. The decision whether to classify a performing loan as a
potential problem involves significant subjective judgments by management as to
the likely future economic conditions and developments with respect to the
borrower. We categorize loans for which the original terms of the mortgages have
been modified or for which interest or principal payments have been deferred as
"restructured" loans. We also consider matured loans that are refinanced at
below market rates as restructured.

    We charge mortgage loans deemed to be uncollectible against the allowance
for losses and credit subsequent recoveries to the allowance for losses. We
maintain the allowance for losses at a level management believes to be adequate
to absorb estimated probable credit losses. Management bases its periodic
evaluation of the adequacy of the allowance for losses on our past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay, the estimated value of the
underlying collateral, composition of the loan portfolio, current economic
conditions and other relevant factors. The evaluation is inherently subjective
as it requires estimating the amounts and timing of future cash flows expected
to be received on impaired loans that may change.

    The table below represents our commercial mortgage valuation allowance for
the periods indicated:

                              U.S. INVESTED ASSETS
                    COMMERCIAL MORTGAGE VALUATION ALLOWANCE

                                                               AS OF
                                                              JUNE 30,      AS OF DECEMBER 31,
                                                              --------   ------------------------
                                                                2001      2000     1999     1998
                                                              --------   ------   ------   ------
                                                                        ($ IN MILLIONS)
                                                                               
Beginning Balance...........................................   $108.0    $117.8   $113.0   $121.4
Provision...................................................      0.3       3.0      9.2      7.3
Release due to writedowns, sales and foreclosures...........    (22.3)    (12.8)    (4.4)   (15.7)
                                                               ------    ------   ------   ------
Ending Balance..............................................   $ 86.0    $108.0   $117.8   $113.0
                                                               ======    ======   ======   ======
Valuation allowance as a percentage of carrying value before
  reserves..................................................        1%        1%       1%       1%

    The following table presents the carrying amounts of problem, potential
problem and restructured commercial mortgages relative to the carrying amount of
all commercial mortgages as of the dates indicated:

                              U.S. INVESTED ASSETS
  PROBLEM, POTENTIAL PROBLEM AND RESTRUCTURED COMMERCIAL MORTGAGES AT CARRYING
                                     AMOUNT

                                                                AS OF
                                                              JUNE 30,           AS OF DECEMBER 31,
                                                              ---------   ---------------------------------
                                                                2001        2000        1999        1998
                                                              ---------   ---------   ---------   ---------
                                                                             ($ IN MILLIONS)
                                                                                      
Total commercial mortgages..................................  $10,340.7   $10,775.3   $12,588.9   $12,157.2
                                                              =========   =========   =========   =========
Problem commercial mortgages(1).............................  $    22.6   $     8.9   $    38.7   $    73.4
Potential problem commercial mortgages......................         --        58.9        39.9        24.9
Restructured commercial mortgages...........................       49.6        92.6       101.5       126.2
                                                              ---------   ---------   ---------   ---------
Total problem, potential problem and restructured commercial
  mortgages.................................................  $    72.2   $   160.4   $   180.1   $   224.5
                                                              =========   =========   =========   =========
  Total problem, potential problem and restructured
    commercial mortgages as a percent of total commercial
    mortgages...............................................          1%          1%          1%          2%

---------------

(1) Problem commercial mortgages included mortgage loans in foreclosure of $6.0
    million, $23.8 million and $27.4 million as of December 31, 2000, 1999 and
    1998, respectively. There were no mortgage loans in foreclosure as of June
    30, 2001.

                                       146

    The delinquency and loss performance of our U.S. invested loan portfolio has
generally outperformed the life insurance industry averages as reported by the
American Council Life Insurers. The table below presents mortgage loan
delinquency rates for the industry and Principal Life on a statutory basis,
expressed as a percentage of the total commercial loan portfolio at year end:

                              U.S. INVESTED ASSETS
                          MORTGAGE LOAN DELINQUENCY(1)

                                         AS OF
                                       JUNE 30,                            AS OF DECEMBER 31,
                                       ---------   -------------------------------------------------------------------
                                         2001      2000   1999   1998   1997   1996   1995   1994   1993   1992   1991
                                       ---------   ----   ----   ----   ----   ----   ----   ----   ----   ----   ----
                                                                                 
Industry(2)..........................     0.2%     0.2%   0.3%   0.5%   0.9%   1.8%   2.4%   3.4%   4.5%   6.4%   5.9%
Principal Life.......................     0.0      0.1    0.3    0.5    0.7    1.0    1.3    2.9    1.8    3.9    2.1

---------------

(1) Includes loans that are delinquent and in process of foreclosure. As defined
    by the American Council of Life Insurers, mortgage loans are classified as
    delinquent when they are 60 days or more past due as to the payment of
    interest or principal.

(2) As reported by the American Council of Life Insurers.

    EQUITY REAL ESTATE

    We hold commercial equity real estate as part of our investment portfolio.
As of June 30, 2001 and December 31, 2000, 1999 and 1998, the carrying amount of
equity real estate investment was $1,230.3 million, $1,391.8 million, $2,201.2
million and $2,585.2 million, respectively, or 3%, 4%, 6% and 7%, of U.S.
invested assets. We own real estate, real estate acquired upon foreclosure of
commercial mortgage loans and interests, both majority owned and non-majority
owned, in real estate joint ventures. We continue to focus on a long-term
strategy of reducing our real estate equity portfolio.

    Equity real estate is categorized as either "real estate held for
investment" or "real estate held for sale". Real estate held for investment
totaled $577.2 million as of June 30, 2001 and $696.4 million, $1,167.8 million
and $1,535.4 million as of December 31, 2000, 1999 and 1998, respectively. The
carrying value of real estate held for investment is generally adjusted for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. Such impairment adjustments
are recorded as realized investment losses and accordingly, are reflected in our
consolidated results of operations. For the six months ended June 30, 2001 and
years ended December 31, 2000, 1999 and 1998, there were no such impairment
adjustments.

    The carrying amount of real estate held for sale as of June 30, 2001 and
December 31, 2000, 1999 and 1998 was $653.1 million, $695.4 million, $1,033.4
million and $1,049.8 million, net of valuation allowances of $34.2 million,
$40.8 million, $70.4 million and $33.1 million, respectively. Once we identify a
real estate property to be sold and commence a plan for marketing the property,
we classify the property as held for sale. We establish a valuation allowance
subject to periodical revisions, if necessary, to adjust the carrying value of
the property to reflect the lower of its current carrying value or the fair
value, less associated selling costs.

    We use research, both internal and external, to recommend appropriate
product and geographic allocations and changes to the equity real estate
portfolio. We monitor product, geographic and industry diversification
separately and together to determine the most appropriate mix.

    Equity real estate is distributed across geographic regions of the country
with larger concentrations in the South Atlantic, Pacific, and West South
Central regions of the United States as of June 30, 2001. By property type,
there is a concentration in office buildings that represented approximately 44%
of the equity real estate portfolio as of June 30, 2001. Our largest equity real
estate holding as of June 30, 2001 consisted of an office/industrial park
located in Durham, North Carolina with an aggregate carrying value of
approximately $145.7 million and represented approximately 12% of total U.S.
equity real estate assets and 0.3% of U.S. invested assets. The ten largest real
estate properties as of June 30, 2001 comprised 50% of total U.S. equity real
estate assets and 1% of total U.S. invested assets.

                                       147

    The tables below present information concerning the geographic and property
type breakdown of the equity real estate portfolio as of June 30, 2001, and
December 31, 2000, 1999 and 1998:

                              U.S. INVESTED ASSETS
                          EQUITY REAL ESTATE BY REGION

                                 AS OF JUNE 30,                                  AS OF DECEMBER 31,
                             ----------------------   ------------------------------------------------------------------------
                                      2001                     2000                     1999                     1998
                             ----------------------   ----------------------   ----------------------   ----------------------
                             CARRYING                 CARRYING                 CARRYING                 CARRYING
                              AMOUNT     PERCENTAGE    AMOUNT     PERCENTAGE    AMOUNT     PERCENTAGE    AMOUNT     PERCENTAGE
                             ---------   ----------   ---------   ----------   ---------   ----------   ---------   ----------
                                                                      ($ IN MILLIONS)
                                                                                            
Region(1):
South Atlantic.............  $  462.7        38%      $  431.7        31%      $  676.1        31%      $  714.8        28%
West South Central.........     288.4        23          362.2        26          449.2        20          486.7        19
Pacific....................     235.4        19          384.6        28          534.3        24          634.8        25
East North Central.........     133.9        11          120.7         9          152.0         7          150.2         6
East South Central.........      36.4         3           21.5         1           28.0         1           34.6         1
West North Central.........      28.2         2           19.0         1          119.2         6          115.3         4
Middle Atlantic............      21.4         2           28.7         2           48.0         2          208.4         8
New England................      14.3         1           14.5         1          112.5         5          142.4         5
Mountain...................       9.6         1            8.9         1           81.9         4           98.0         4
                             --------       ---       --------       ---       --------    ------       --------       ---
         Total.............  $1,230.3       100%      $1,391.8       100%      $2,201.2       100%      $2,585.2       100%
                             ========       ===       ========       ===       ========    ======       ========       ===

---------------

(1) Regions are as defined by the American Council of Life Insurers.

                              U.S. INVESTED ASSETS
                      EQUITY REAL ESTATE BY PROPERTY TYPE

                                  AS OF JUNE 30,                                  AS OF DECEMBER 31,
                              ----------------------   ------------------------------------------------------------------------
                                       2001                     2000                     1999                     1998
                              ----------------------   ----------------------   ----------------------   ----------------------
                              CARRYING                 CARRYING                 CARRYING                 CARRYING
                               AMOUNT     PERCENTAGE    AMOUNT     PERCENTAGE    AMOUNT     PERCENTAGE    AMOUNT     PERCENTAGE
                              ---------   ----------   ---------   ----------   ---------   ----------   ---------   ----------
                                                                       ($ IN MILLIONS)
                                                                                             
Office......................  $  538.5        44%      $  615.5        44%      $  721.7        33%      $  979.8        38%
Industrial..................     247.2        20          413.6        30          462.2        21          557.6        21
Retail......................     232.9        19          152.7        11          691.4        31          689.9        27
Service center..............     119.7        10          120.1         9          205.6         9          308.1        12
Land........................      57.9         4           89.9         6          120.3         6           49.8         2
Apartments..................      34.1         3             --        --             --        --             --        --
                              --------       ---       --------       ---       --------       ---       --------       ---
         Total..............  $1,230.3       100%      $1,391.8       100%      $2,201.2       100%      $2,585.2       100%
                              ========       ===       ========       ===       ========       ===       ========       ===

    DERIVATIVES

    We use various derivative financial instruments to manage our exposure to
fluctuations in interest rates, including interest rate futures and interest
rate swaps and swaptions. We use interest rate futures contracts to hedge
changes in interest rates subsequent to the issuance of an insurance liability,
such as a guaranteed investment contract, but prior to the purchase of a
supporting asset, or during periods of holding assets in anticipation of near
term liability sales. We use interest rate swaps primarily to more closely match
the interest rate characteristics of assets and liabilities. They can be used to
change the interest rate characteristics of specific assets and liabilities as
well as an entire portfolio. Occasionally, we will sell a callable liability or
a liability with attributes similar to a call option. In these cases, we will
use interest rate swaptions or similar products to hedge the risk of early
liability payment, thereby transforming the callable liability into a fixed term
liability.

    We also seek to reduce call or prepayment risk arising from changes in
interest rates in individual investments. We limit our exposure to investments
that are prepayable without penalty prior to maturity at the option of the
issuer, and we require additional yield on these investments to compensate for
the risk that the issuer will exercise such option. An example of an investment
we limit because of the option risk is residential mortgage-backed securities.
We assess option risk in all investments we make and, when we take that risk, we
price for it accordingly.

    Foreign currency risk is the risk that we will incur economic losses due to
adverse fluctuations in foreign currency exchange rates. This risk arises from
our international operations and foreign currency-denominated funding agreements
issued to non-qualified institutional investors in the international market. The
notional amount of our

                                       148

currency swap agreements associated with foreign-denominated liabilities as of
June 30, 2001 was $3,078.5 million. We also have fixed maturity securities that
are denominated in foreign currencies. However, we use derivatives to hedge the
foreign currency risk of these funding agreements and securities. As of June 30,
2001, the fair value of our foreign currency denominated fixed maturity
securities was $381.8 million. We use currency swap agreements of the same
currency to hedge the foreign currency exchange risk related to these
investments. The notional amount of our currency swap agreements associated with
foreign-denominated fixed maturity securities as of June 30, 2001 was $398.5
million.

    In conjunction with the interest rate swaps, interest rate swaptions and
other derivatives, we are exposed to counterparty risk, or the risk that
counterparty fails to perform the terms of the derivative contract. We actively
manage this risk by:

    - establishing exposure limits which take into account non-derivative
      exposure we have with the counterparty as well as derivative exposure;

    - performing similar credit analysis prior to approval on each derivatives
      counterparty that we do when lending money on a long-term basis;

    - limiting exposure to AA- credit or better;

    - conducting stress-test analysis to determine the maximum exposure created
      during the life of a prospective transaction; and

    - daily monitoring of counterparty credit ratings.

    All new derivative counterparties are approved by the investment committee.
We believe the risk of incurring losses due to nonperformance by our
counterparties is remote and that such losses, if any, would not be material.
Futures contracts trade on organized exchanges and, therefore, effectively have
no credit risk.

    The notional amounts used to express the extent of our involvement in swap
transactions represent a standard measurement of the volume of our swap
business. Notional amount is not a quantification of market risk or credit risk
and it may not necessarily be recorded on the balance sheet. Notional amounts
represent those amounts used to calculate contractual flows to be exchanged and
are not paid or received, except for contracts such as currency swaps. Actual
credit exposure represents the amount owed to us under derivative contracts as
of the valuation date.

    The following tables present our position in, and credit exposure to,
derivative financial instruments as of June 30, 2001, and December 31, 2000,
1999 and 1998, respectively:

                              U.S. INVESTED ASSETS
                        DERIVATIVE FINANCIAL INSTRUMENTS

                                      AS OF JUNE 30,                        AS OF DECEMBER 31,
                                     -----------------   ---------------------------------------------------------
                                           2001                2000                1999                1998
                                     -----------------   -----------------   -----------------   -----------------
                                     NOTIONAL    % OF    NOTIONAL    % OF    NOTIONAL    % OF    NOTIONAL    % OF
                                      AMOUNT     TOTAL    AMOUNT     TOTAL    AMOUNT     TOTAL    AMOUNT     TOTAL
                                     ---------   -----   ---------   -----   ---------   -----   ---------   -----
                                                                    ($ IN MILLIONS)
                                                                                     
Foreign currency swaps.............  $ 3,477.0     16%   $ 2,745.0     26%   $ 1,571.5     15%   $   485.9      4%
Interest rate floors...............    3,200.0     15      2,450.0     23      5,550.0     52      5,250.0     46
Interest rate swaps................    3,243.2     15      2,391.5     23      1,298.5     12      1,533.0     13
Mortgage-backed forwards and
  options..........................    9,770.5     44      1,898.3     18      1,546.7     14         81.5      1
Swaptions..........................    1,815.0      8        697.7      7        469.7      4        259.0      2
Call options.......................       30.0     --         30.0     --         30.0     --         30.0     --
Put options........................         --     --           --     --           --     --         18.0     --
Mandatory forwards, options and
  futures..........................         --     --           --     --           --     --      2,369.0     21
U.S. Treasury futures..............      235.7      1        183.2      2        287.6      3        840.7      7
Currency forwards..................       39.4     --         39.4     --         13.0     --           --     --
Options on futures contract........         --     --           --     --           --     --        681.7      6
Principal Only swaps...............      250.0      1           --     --           --     --           --     --
Treasury rate guarantees...........       61.0     --         60.0      1           --     --           --     --
                                     ---------    ---    ---------    ---    ---------    ---    ---------    ---
         Total.....................  $22,121.8    100%   $10,495.1    100%   $10,767.0    100%   $11,548.8    100%
                                     =========    ===    =========    ===    =========    ===    =========    ===

                                       149

                              U.S. INVESTED ASSETS
                        DERIVATIVE FINANCIAL INSTRUMENTS

                                                         AS OF JUNE 30,                      AS OF DECEMBER 31,
                                                        ----------------   ------------------------------------------------------
                                                              2001               2000               1999               1998
                                                        ----------------   ----------------   ----------------   ----------------
                                                         CREDIT    % OF     CREDIT    % OF     CREDIT    % OF     CREDIT    % OF
                                                        EXPOSURE   TOTAL   EXPOSURE   TOTAL   EXPOSURE   TOTAL   EXPOSURE   TOTAL
                                                        --------   -----   --------   -----   --------   -----   --------   -----
                                                                                     ($ IN MILLIONS)
                                                                                                    
Foreign currency swaps................................   $ 25.1       5%    $ 45.3      42%    $ 69.2      50%    $35.2       54%
Interest rate floors..................................      5.7       1       20.0      18       15.1      11       5.9        9
Interest rate swaps...................................     30.3       7       14.1      13       21.6      15      18.6       28
Call options..........................................     10.0       2       12.3      11       19.0      14        --       --
Swaptions.............................................     11.9       3       11.8      11        8.7       6       5.6        9
Put options...........................................       --      --         --      --         --      --       0.3       --
Currency forwards.....................................      8.7       2        5.5       5         --      --        --       --
Mortgage-backed forwards and options..................    359.8      80         --      --        6.0       4        --       --
                                                         ------     ---     ------     ---     ------     ---     -----      ---
        Total.........................................   $451.5     100%    $109.0     100%    $139.6     100%    $65.6      100%
                                                         ======     ===     ======     ===     ======     ===     =====      ===

    OTHER INVESTMENTS

    Our other investments totaled $786.9 million as of June 30, 2001, compared
to $681.2 million as of December 31, 2000 and $514.0 million as of December 31,
1999. Our investment in Coventry is included in other investments as we
accounted for it using the equity method. As of June 30, 2001, our carrying
value in Coventry was $134.6 million. Also included in other investments is a
$135.2 million investment in an Australian hotel trust, which we acquired in
connection with our acquisition of BT Financial Group. With the adoption of SFAS
133 on January 1, 2001, derivatives were reflected on our balance sheet and
accounted for $116.4 million in other investments as of June 30, 2001. The
remaining investment assets include leases and other private equity investments.

    SECURITIES LENDING

    The terms of our securities lending program, approved in 1999, allow us to
lend our securities to major brokerage firms. Our policy requires an initial
minimum of 102% of the fair value of the loaned securities as collateral.
Although we lend from time to time during the financial reporting quarters, we
had no securities on loan as of December 31, 2000 and December 31, 1999. Our
securities on loan as of June 30, 2001, had a fair value of $345.2 million.

INTERNATIONAL INVESTMENT OPERATIONS

    As of June 30, 2001, our international investment operations consist of the
investments of Principal International and BT Financial Group and comprise $1.2
billion in invested assets, which primarily represent the assets of Principal
International. Principal Capital Management works with each Principal
International affiliate to develop investment policies and strategies that are
consistent with the products they offer. Due to the regulatory constraints in
each country, each company maintains its own investment policies which are
approved by Principal Capital Management. Each international affiliate is
required to submit a compliance report relative to its strategy to Principal
Capital Management. A credit committee comprised of Principal Capital Management
employees and international affiliate company chief investment officer's review
each corporate credit annually. In addition, employees from our U.S. operations
who serve on the credit committee currently hold investment positions in two of
our international affiliates. Principal Capital Management provides annual
credit approval training to Principal International personnel.

                                       150

    OVERALL COMPOSITION OF INTERNATIONAL INVESTED ASSETS

    As shown in the table below, the major categories of international invested
assets as of June 30, 2001, were fixed maturity securities and residential
mortgage loans:

                         INTERNATIONAL INVESTED ASSETS

                                               AS OF JUNE 30,                         AS OF DECEMBER 31,
                                              -----------------    ---------------------------------------------------------
                                                    2001                 2000                1999                1998
                                              -----------------    -----------------   -----------------   -----------------
                                              CARRYING    % OF     CARRYING    % OF    CARRYING    % OF    CARRYING    % OF
                                               AMOUNT     TOTAL     AMOUNT     TOTAL    AMOUNT     TOTAL    AMOUNT     TOTAL
                                              ---------   -----    ---------   -----   ---------   -----   ---------   -----
                                                                             ($ IN MILLIONS)
                                                                                               
Fixed maturity securities, available for
  sale
  Public....................................  $  809.0      70%    $  948.6      70%   $  857.0      68%   $  653.1      64%
  Private...................................      15.2       1         16.3       1         2.6      --       242.4      24
Equity securities, available for sale.......      39.4       3         76.9       6        96.1       8       106.6      11
Mortgage loans
  Residential...............................     175.1      15        166.9      12        92.3       7          --      --
Real estate held for investment.............       8.0       1          8.7       1        10.8       1          --      --
Other investments...........................     111.8      10        129.8      10       196.4      16        10.6       1
                                              --------     ---     --------     ---    --------     ---    --------     ---
         Total invested assets..............  $1,158.5     100%    $1,347.2     100%   $1,255.2     100%   $1,012.7     100%
                                                           ===                  ===                 ===                 ===
Cash and cash equivalents...................     134.8                176.5               201.1                44.6
                                              --------             --------            --------            --------
         Total invested assets and cash.....  $1,293.3             $1,523.7            $1,456.3            $1,057.3
                                              ========             ========            ========            ========

    INTERNATIONAL INVESTMENT RESULTS

    The yield on international invested assets, excluding net realized gains and
losses, was 8.6% as of June 30, 2001 and 7.1%, 7.5% and 6.2% for the years ended
December 31, 2000, 1999 and 1998, respectively.

                                       151

    The table below illustrates the yields on average assets for each of the
components of our investment portfolio for the six months ended June 30, 2001,
and for the years ended December 31, 2000, 1999 and 1998:

                         INTERNATIONAL INVESTED ASSETS
                              YIELDS BY ASSET TYPE

                                                   AS OF JUNE 30,            AS OF OR FOR THE YEAR ENDED DECEMBER 31,
                                                  -----------------   ------------------------------------------------------
                                                        2001                2000               1999               1998
                                                  -----------------   ----------------   ----------------   ----------------
                                                  YIELD     AMOUNT    YIELD    AMOUNT    YIELD    AMOUNT    YIELD    AMOUNT
                                                  ------   --------   -----   --------   -----   --------   -----   --------
                                                                               ($ IN MILLIONS)
                                                                                            
Fixed maturity securities, available-for-sale
  Gross investment income(1)....................     9.5%   $ 42.4     7.4%    $ 67.4     6.9%    $ 61.0     6.6%    $ 41.5
  Net realized capital gains (losses)...........    (0.2)     (1.1)    0.4        3.7     0.8        7.4    (0.1)      (0.9)
                                                            ------             ------             ------             ------
  Total.........................................            $ 41.3             $ 71.1             $ 68.4             $ 40.6
                                                            ======             ======             ======             ======
  Ending assets (at carrying value).............            $824.2             $964.9             $859.6             $895.5
Equity securities, available-for-sale
  Gross investment income(1)....................      --%   $   --     0.6%    $  0.5     6.9%    $  7.0     1.4%    $  1.1
  Net realized capital gains (losses)...........     2.4       0.7    (1.3)      (1.1)    1.6        1.6     0.3        0.2
                                                            ------             ------             ------             ------
  Total.........................................            $  0.7             $ (0.6)            $  8.6             $  1.3
                                                            ======             ======             ======             ======
  Ending assets (at carrying value).............            $ 39.4             $ 76.9             $ 96.1             $106.6
Mortgage loans -- Residential
  Gross investment income(1)....................    10.8%   $  9.2     8.6%    $ 11.2    15.2%    $  7.0      --%    $   --
  Net realized capital gains (losses)...........      --        --      --         --      --         --      --         --
                                                            ------             ------             ------             ------
  Total.........................................            $  9.2             $ 11.2             $  7.0             $   --
                                                            ======             ======             ======             ======
  Ending assets (at carrying value).............            $175.1             $166.9             $ 92.3             $   --
Real estate
  Gross investment income(1)....................     9.6%   $  0.4     5.1%    $  0.5     8.6%    $  0.4      --%    $   --
  Net realized capital gains (losses)...........      --        --      --         --      --         --      --         --
                                                            ------             ------             ------             ------
  Total.........................................            $  0.4             $  0.5             $  0.4             $   --
                                                            ======             ======             ======             ======
  Ending assets (at carrying value).............            $  8.0             $  8.7             $ 10.8             $   --
Cash and cash equivalents
  Gross investment income(1)....................     4.5%   $  3.5     4.4%    $  8.3     4.8%    $  5.9     8.7%    $  3.7
  Net realized capital gains (losses)...........      --        --      --         --      --         --    (0.2)      (0.1)
                                                            ------             ------             ------             ------
  Total.........................................            $  3.5             $  8.3             $  5.9             $  3.6
                                                            ======             ======             ======             ======
  Ending assets (at carrying value).............            $134.8             $176.5             $201.1             $ 44.6
Other investments
  Gross investment income(1)....................     9.6%   $  5.8    11.7%    $ 19.1    15.4%    $ 15.9    10.7%    $  1.6
  Net realized capital gains (losses)...........   (63.4)    (38.3)    0.1        0.2    (0.3)      (0.3)   94.9       14.3
                                                            ------             ------             ------             ------
  Total.........................................            $(32.5)            $ 19.3             $ 15.6             $ 15.9
                                                            ======             ======             ======             ======
  Ending assets (at carrying value).............            $111.8             $129.8             $196.4             $ 10.6
Total before investment expenses
  Gross investment income.......................     8.7%   $ 61.3     7.2%    $107.0     7.7%    $ 97.2     6.2%    $ 47.9
  Net realized capital gains (losses)...........    (5.5)   $(38.7)    0.2        2.8     0.7        8.7     1.8       13.5
                                                            ------             ------             ------             ------
  Total.........................................            $ 22.6             $109.8             $105.9             $ 61.4
                                                            ======             ======             ======             ======
Investment expenses.............................     0.1%   $  0.7     0.1%    $  2.0     0.2%    $  3.1      --%    $   --
                                                            ------             ------             ------             ------
Net investment income...........................     8.6%   $ 60.6     7.1%    $105.0     7.5%    $ 94.1     6.2%    $ 47.9

---------------

(1) Yields, which are annualized for interim periods, are based on quarterly
    average asset carrying values for the six months ended June 30, 2001, and
    annual average asset carrying values for the years ended December 31, 2000,
    1999 and 1998.

                                       152

    FIXED MATURITY SECURITIES

    Fixed maturity securities consist primarily of publicly traded debt
securities and represented 71% of total international invested assets for both
June 30, 2001, and December 31, 2000, 68% as of December 31, 1999, and 88% as of
December 31, 1998. Fixed maturity securities were diversified by type of issuer
as of June 30, 2001 and for the years ended December 31, 2000, 1999 and 1998 as
shown in the following table:

                         INTERNATIONAL INVESTED ASSETS
                  FIXED MATURITY SECURITIES BY TYPE OF ISSUER

                                          AS OF JUNE 30,                      AS OF DECEMBER 31,
                                         ----------------   ------------------------------------------------------
                                               2001               2000               1999               1998
                                         ----------------   ----------------   ----------------   ----------------
                                         CARRYING   % OF    CARRYING   % OF    CARRYING   % OF    CARRYING   % OF
                                          AMOUNT    TOTAL    AMOUNT    TOTAL    AMOUNT    TOTAL    AMOUNT    TOTAL
                                         --------   -----   --------   -----   --------   -----   --------   -----
                                                                      ($ IN MILLIONS)
                                                                                     
U.S. Treasury securities and
  obligations of U.S. Government
  corporations and agencies............   $  0.5      --%    $  1.8      --%    $  0.7      --%    $305.4      34%
States and political subdivisions......       --      --         --      --         --      --         --      --
Non-U.S. governments...................    278.0      34      313.6      32      333.3      39       77.0       9
Corporate-public.......................    290.9      35      376.5      39      254.9      30      253.2      28
Corporate-private......................     15.2       2       16.3       2        2.6      --      242.4      27
Mortgage-backed securities and other
  asset backed securities..............    239.6      29      256.7      27      268.1      31       17.5       2
                                          ------     ---     ------     ---     ------     ---     ------     ---
         Total fixed maturities........   $824.2     100%    $964.9     100%    $859.6     100%    $895.5     100%
                                          ======     ===     ======     ===     ======     ===     ======     ===

    The fixed maturity securities held by the international operations have not
been rated by external agencies and cannot be presented in a comparable rating
agency equivalent.

    The issuers of the majority of our fixed maturity corporate securities are
mainly banks and are categorized in the finance, insurance and real estate
category as shown in the tables below:

                         INTERNATIONAL INVESTED ASSETS
 CORPORATE FIXED MATURITY SECURITIES PORTFOLIO BY INDUSTRY AS OF JUNE 30, 2001

                                                           PUBLICLY TRADED    PRIVATELY PLACED        TOTAL
                                                           ----------------   ----------------   ----------------
                                                           CARRYING   % OF    CARRYING   % OF    CARRYING   % OF
                                                            AMOUNT    TOTAL    AMOUNT    TOTAL    AMOUNT    TOTAL
                                                           --------   -----   --------   -----   --------   -----
                                                                              ($ IN MILLIONS)
                                                                                          
INDUSTRY CLASS
Finance, Insurance and Real Estate.......................   $144.0      49%    $10.8       71%    $154.8      51%
Manufacturing............................................      0.3      --        --       --        0.3      --
Transportation and Public Utilities......................     39.5      14        --       --       39.5      13
Services.................................................     39.9      14       4.2       28       44.1      15
Mining...................................................       --      --        --       --         --      --
Retail...................................................     28.3      10        --       --       28.3       9
Agriculture, Forestry and Fishing........................       --      --        --       --         --      --
Public Administration....................................      1.1      --        --       --        1.1      --
Construction.............................................     37.8      13       0.2        1       38.0      12
                                                            ------     ---     -----      ---     ------     ---
         Total...........................................   $290.9     100%    $15.2      100%    $306.1     100%
                                                            ======     ===     =====      ===     ======     ===

                                       153

                         INTERNATIONAL INVESTED ASSETS
  CORPORATE FIXED MATURITY SECURITIES PORTFOLIO BY INDUSTRY AS OF DECEMBER 31,
                                      2000

                                                           PUBLICLY TRADED    PRIVATELY PLACED        TOTAL
                                                           ----------------   ----------------   ----------------
                                                           CARRYING   % OF    CARRYING   % OF    CARRYING   % OF
                                                            AMOUNT    TOTAL    AMOUNT    TOTAL    AMOUNT    TOTAL
                                                           --------   -----   --------   -----   --------   -----
                                                                              ($ IN MILLIONS)
                                                                                          
INDUSTRY CLASS
Finance, Insurance and Real Estate.......................   $240.3      64%    $  --       --%    $240.3      61%
Manufacturing............................................      0.3      --      13.3       82       13.6       3
Transportation and Public Utilities......................    100.6      27        --       --      100.6      26
Services.................................................      9.1       2       2.7       17       11.8       3
Mining...................................................       --      --        --       --         --      --
Retail...................................................     26.2       7        --       --       26.2       7
Agriculture, Forestry and Fishing........................       --      --        --       --         --      --
Public Administration....................................       --      --        --       --         --      --
Construction.............................................       --      --       0.3        1        0.3      --
                                                            ------     ---     -----      ---     ------     ---
         Total...........................................   $376.5     100%    $16.3      100%    $392.8     100%
                                                            ======     ===     =====      ===     ======     ===

                         INTERNATIONAL INVESTED ASSETS
    CORPORATE FIXED MATURITIES PORTFOLIO BY INDUSTRY AS OF DECEMBER 31, 1999

                                                           PUBLICLY TRADED    PRIVATELY PLACED        TOTAL
                                                           ----------------   ----------------   ----------------
                                                           CARRYING   % OF    CARRYING   % OF    CARRYING   % OF
                                                            AMOUNT    TOTAL    AMOUNT    TOTAL    AMOUNT    TOTAL
                                                           --------   -----   --------   -----   --------   -----
                                                                              ($ IN MILLIONS)
                                                                                          
INDUSTRY CLASS
Finance, Insurance and Real Estate.......................   $174.5      69%     $2.6      100%    $177.1      69%
Manufacturing............................................      0.4      --        --       --        0.4      --
Transportation and Public Utilities......................     28.6      11        --       --       28.6      11
Services.................................................     26.7      10        --       --       26.7      10
Mining...................................................       --      --        --       --         --      --
Retail...................................................     15.0       6        --       --       15.0       6
Agriculture, Forestry and Fishing........................       --      --        --       --         --      --
Public Administration....................................      9.7       4        --       --        9.7       4
Construction.............................................       --      --        --       --         --      --
                                                            ------     ---      ----      ---     ------     ---
         Total...........................................   $254.9     100%     $2.6      100%    $257.5     100%
                                                            ======     ===      ====      ===     ======     ===

                         INTERNATIONAL INVESTED ASSETS
    CORPORATE FIXED MATURITIES PORTFOLIO BY INDUSTRY AS OF DECEMBER 31, 1998

                                                           PUBLICLY TRADED    PRIVATELY PLACED        TOTAL
                                                           ----------------   ----------------   ----------------
                                                           CARRYING   % OF    CARRYING   % OF    CARRYING   % OF
                                                            AMOUNT    TOTAL    AMOUNT    TOTAL    AMOUNT    TOTAL
                                                           --------   -----   --------   -----   --------   -----
                                                                              ($ IN MILLIONS)
                                                                                          
INDUSTRY CLASS
Finance, Insurance and Real Estate.......................   $253.2     100%    $   --      --%    $253.2      51%
Manufacturing............................................       --      --      242.4     100      242.4      49
Transportation and Public Utilities......................       --      --         --      --         --      --
Services.................................................       --      --         --      --         --      --
Mining...................................................       --      --         --      --         --      --
Retail...................................................       --      --         --      --         --      --
Agriculture, Forestry and Fishing........................       --      --         --      --         --      --
Public Administration....................................       --      --         --      --         --      --
Construction.............................................       --      --         --      --         --      --
                                                            ------     ---     ------     ---     ------     ---
         Total...........................................   $253.2     100%    $242.4     100%    $495.6     100%
                                                            ======     ===     ======     ===     ======     ===

                                       154

    The international operations held $239.6 million of residential pass-through
securities as of June 30, 2001, and $256.7 million, $268.1 million and $17.5
million as of December 31, 2000, 1999 and 1998, respectively.

                         INTERNATIONAL INVESTED ASSETS
                      MORTGAGE AND ASSET-BACKED SECURITIES

                                                              CARRYING AMOUNT    CARRYING AMOUNT AS OF
                                                              AS OF JUNE 30,         DECEMBER 31,
                                                              ---------------   -----------------------
                                                                   2001          2000     1999    1998
                                                              ---------------   ------   ------   -----
                                                                           ($ IN MILLIONS)
                                                                                      
Residential pass-through securities.........................      $239.6        $256.7   $268.1   $17.5
Commercial MBS..............................................          --            --       --      --
Asset-backed securities.....................................          --            --       --      --
                                                                  ------        ------   ------   -----
         Total MBSs and asset-backed securities.............      $239.6        $256.7   $268.1   $17.5
                                                                  ======        ======   ======   =====

    The amortized cost and estimated fair value of fixed maturity securities, by
contractual maturity dates excluding scheduled sinking funds, as of June 30,
2001, and December 31, 2000 and 1999 were as follows:

                         INTERNATIONAL INVESTED ASSETS
            FIXED MATURITY SECURITIES BY CONTRACTUAL MATURITY DATES

                                                     AS OF JUNE 30,       AS OF DECEMBER 31,     AS OF DECEMBER 31,
                                                  --------------------   --------------------   --------------------
                                                          2001                   2000                   1999
                                                  --------------------   --------------------   --------------------
                                                  AMORTIZED   CARRYING   AMORTIZED   CARRYING   AMORTIZED   CARRYING
                                                    COST       AMOUNT      COST       AMOUNT      COST       AMOUNT
                                                  ---------   --------   ---------   --------   ---------   --------
                                                                           ($ IN MILLIONS)
                                                                                          
Due in one year or less.........................   $ 35.3      $ 36.2     $ 31.6      $ 29.2     $ 49.7      $ 50.5
Due after one year through five years...........     82.6        85.3       91.8        95.3       63.8        65.8
Due after five years through ten years..........    166.6       170.4      215.6       217.2      122.7       132.1
Due after ten years.............................    290.6       292.7      356.4       366.5      334.7       343.1
                                                   ------      ------     ------      ------     ------      ------
         Subtotal...............................    575.1       584.6      695.4       708.2      570.9       591.5
Mortgage-backed and other securities without a
  single maturity date..........................    234.2       239.6      253.5       256.7      272.0       268.1
                                                   ------      ------     ------      ------     ------      ------
         Total..................................   $809.3      $824.2     $948.9      $964.9     $842.9      $859.6
                                                   ======      ======     ======      ======     ======      ======

    EQUITY SECURITIES

    Our equity securities represented 3% of international invested assets as of
June 30, 2001, and 6%, 8% and 11% as of December 31, 2000, 1999 and 1998,
respectively. Our equity securities consisted of $32.6 million in mutual funds
and $6.8 million in common stock as of June 30, 2001.

    RESIDENTIAL MORTGAGE LOANS

    Our Chilean operations originate residential mortgage loans. Residential
mortgage loans comprised $175.1 million, or 15%, of international invested
assets as of June 30, 2001 and $166.9 million, or 12%, as of December 31, 2000.

                                       155

    DERIVATIVES

    Our use of derivative instruments includes foreign currency swaps, interest
rate swaps and currency forwards. The following tables present our position in,
and credit exposure to, derivative financial instruments as of June 30, 2001,
and December 31, 2000 and 1999, respectively. We did not use derivatives prior
to 1999.

                         INTERNATIONAL INVESTED ASSETS
                        DERIVATIVE FINANCIAL INSTRUMENTS

                                          AS OF JUNE 30,                      AS OF DECEMBER 31,
                                         ----------------   ------------------------------------------------------
                                               2001               2000               1999               1998
                                         ----------------   ----------------   ----------------   ----------------
                                         NOTIONAL   % OF    NOTIONAL   % OF    NOTIONAL   % OF    NOTIONAL   % OF
                                          AMOUNT    TOTAL    AMOUNT    TOTAL    AMOUNT    TOTAL    AMOUNT    TOTAL
                                         --------   -----   --------   -----   --------   -----   --------   -----
                                                                      ($ IN MILLIONS)
                                                                                     
Foreign currency swaps.................  $  699.8     40%   $  665.0     39%   $  670.0     39%     $--       --%
Interest rate swaps....................     665.0     38       665.0     39       665.0     39       --       --
Currency forwards......................     380.0     22       380.0     22       380.0     22       --       --
                                         --------    ---    --------    ---    --------    ---      ---       --
         Total.........................  $1,744.8    100%   $1,710.0    100%   $1,715.0    100%     $--       --%
                                         ========    ===    ========    ===    ========    ===      ===       ==

                         INTERNATIONAL INVESTED ASSETS
                        DERIVATIVE FINANCIAL INSTRUMENTS

                                      AS OF JUNE 30,                      AS OF DECEMBER 31,
                                     ----------------   ------------------------------------------------------
                                           2001               2000               1999               1998
                                     ----------------   ----------------   ----------------   ----------------
                                      CREDIT    % OF     CREDIT    % OF     CREDIT    % OF     CREDIT    % OF
                                     EXPOSURE   TOTAL   EXPOSURE   TOTAL   EXPOSURE   TOTAL   EXPOSURE   TOTAL
                                     --------   -----   --------   -----   --------   -----   --------   -----
                                                                  ($ IN MILLIONS)
                                                                                 
Interest rate swaps................   $ 42.7      27%    $39.1       42%    $  --       --%     $--       --%
Foreign currency swaps.............     68.5      43      28.4       30      14.8      100       --       --
Currency forwards..................     48.5      30      26.2       28        --       --       --       --
                                      ------     ---     -----      ---     -----      ---      ---       --
         Total.....................   $159.7     100%    $93.7      100%    $14.8      100%     $--       --%
                                      ======     ===     =====      ===     =====      ===      ===       ==

    OTHER INVESTMENTS

    Our other investments totaled $111.8 million as of June 30, 2001, compared
to $129.8 million as of December 31, 2000 and $196.4 million as of December 31,
1999. Of the $111.8 million, $39.8 million is related to subordinated notes in
BT Financial Group's margin lending program, $36.2 million represents our
investment in subsidiaries including Brazil, Japan and India, $12.9 million
represents BT Financial Group's investment in unit trusts, $22.5 million
represents our investment in Chilean operations, and $0.4 million represents our
investment in Mexican operations.

                                       156

                                   MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

    The following table lists our directors and executive officers, their ages
and their positions:

NAME                                   AGE(1)                             POSITION
----                                   ------                             --------
                                          
David J. Drury.......................    56     Chairman of the Board, Chairman and Director
J. Barry Griswell....................    51     President and Chief Executive Officer and Director
Betsy J. Bernard.....................    45     Director
Jocelyn Carter-Miller................    43     Director
Daniel Gelatt........................    53     Director
Sandra L. Helton.....................    51     Director
Charles S. Johnson...................    62     Director
William T. Kerr......................    59     Director
Lee Liu..............................    67     Director
Victor H. Loewenstein................    62     Director
Ronald D. Pearson....................    60     Director
Federico F. Pena.....................    53     Director
Donald M. Stewart....................    62     Director
Elizabeth E. Tallett.................    51     Director
John E. Aschenbrenner................    51     Executive Vice President
Michael T. Daley.....................    44     Executive Vice President
Dennis P. Francis....................    57     Senior Vice President
Michael H. Gersie....................    52     Executive Vice President and Chief Financial Officer
Ellen Z. Lamale......................    47     Senior Vice President and Chief Actuary
Mary A. O'Keefe......................    44     Senior Vice President
Richard L. Prey......................    59     Executive Vice President
Karen E. Shaff.......................    46     Senior Vice President and General Counsel
Norman R. Sorensen...................    56     Senior Vice President
Carl C. Williams.....................    63     Senior Vice President and Chief Information Officer
Larry D. Zimpleman...................    49     Executive Vice President

---------------

(1) At December 31, 2000.

    The following is biographical information for our directors and executive
officers:

    DAVID J. DRURY has been Chairman of Principal Financial Group, Inc. since
April 25, 2001, Chairman of Principal Life since January 2000, a director of
Principal Financial Group, Inc. since April 24, 2001 and a Principal Life
director since 1993. Mr. Drury has announced his retirement as Chairman of
Principal Financial Group, Inc. and Principal Life, which he expects to occur
following completion of the demutualization. Prior to 2000, Mr. Drury was
Chairman and Chief Executive Officer of Principal Life from 1995 to 1999. He is
a director of Coventry Health Care, Inc., a managed health care company, and a
Fellow of the Society of Actuaries and a member of the American Academy of
Actuaries. He chairs the Executive and Investment Committees of the board of
directors of Principal Life and is a member of the Board-Management Committee
and, effective August 21, 2001, assumed the same positions with Principal
Financial Group, Inc.

    J. BARRY GRISWELL has been President and Chief Executive Officer of
Principal Financial Group, Inc. since April 25, 2001, President and Chief
Executive Officer of Principal Life since January 2000, a director of Principal
Financial Group, Inc. since April 24, 2001 and a Principal Life director since
March 1998. Effective upon Mr. Drury's retirement, Mr. Griswell will assume the
additional title of Chairman of Principal Financial Group, Inc. and Principal
Life. Prior to his current position, Mr. Griswell held the following positions
with Principal Life: President from 1998-2000, Executive Vice President from
1996-1998, Senior Vice President from 1991-1996. He is a Chartered Life
Underwriter, a Chartered Financial Consultant and a LIMRA Leadership Institute
Fellow. He is Chair of the Board-Management Committee and is a member of the
Executive and Investment Committees of the board of directors of Principal Life
and, effective August 21, 2001, assumed the same positions with Principal
Financial Group, Inc. Mr. Griswell serves as a director of the 28 mutual funds
that comprise the Principal Family of Mutual Funds.

    BETSY J. BERNARD has been a director of Principal Financial Group, Inc.
since April 24, 2001, and a Principal Life director since February 1999. Ms.
Bernard has been President and Chief Executive Officer of AT&T Consumer since
April 2001. Prior to April 2001, she was Executive Vice President -- National
Mass Markets of Qwest Communications, formerly U S WEST, from July 2000-January
2001. Prior to July 2000, she was Executive Vice President -- Retail Markets of
U S WEST from August 1998-June 2000; President and Chief Executive Officer of U
S WEST Long Distance from June 1998-August 1998; President and Chief Executive
Officer of Avirnex Communications Group from December 1997-June 1998; President
and Chief Operating Officer of Avirnex from July 1997-December 1997; President
and Chief

                                       157

Executive Officer of Pacific Bell Communications, Pacific Telesis from 1995-July
1997; Vice President, Business Market Group of Pacific Telesis in 1995; Customer
Service Vice President, Data Communication Services of AT&T 1994-1995. She is a
director of Astracon Inc., a company specializing in connectivity intelligence
software, Zantaz.com, a firm that provides Internet based services, Portview
Communications, a telecommunications company, and Serco Group PLC in the UK. She
is a member of the Nominating Committee of the board of directors of Principal
Life. Effective August 21, 2001, Ms. Bernard became Chair of the Nominating
Committee and a member of the Board-Management Committee of the board of
directors of Principal Life and Principal Financial Group, Inc.

    JOCELYN CARTER-MILLER has been a director of Principal Financial Group, Inc.
since April 24, 2001 and a Principal Life director since February 1999. Ms.
Carter-Miller has been Corporate Vice President and Chief Marketing Officer of
Motorola, Inc. since February 1999. Prior to February 1999, she held the
following positions with Motorola: Vice President, CLQC, Consumer Solutions
Group, Personal Communications Sector from 1998-1999; Vice President and General
Manager, Worldwide Networks Division from 1997-1998; Vice President of Latin
American and Caribbean Operations from 1994-1997. She is a member of the Audit
and Strategic Issues Committees of the board of directors of Principal Life and,
effective August 21, 2001, assumed the same positions with Principal Financial
Group, Inc.

    DANIEL GELATT has been a director of Principal Financial Group, Inc. since
April 24, 2001 and a Principal Life director since August 1988. Mr. Gelatt has
been President of NMT Corporation, a computer software and microfilm service
business, since 1986. He is a member of the Executive, Human Resources and
Board-Management Committees of the board of directors of Principal Life and
Principal Financial Group, Inc.

    SANDRA L. HELTON has been a director of Principal Financial Group, Inc.
since May 21, 2001 and a Principal Life director since May 21, 2001. Ms. Helton
has been Executive Vice President and Chief Financial Officer of Telephone &
Data Systems, Inc. since 1998. Prior to 1998, she was Vice President and
Corporate Controller of Compaq Computer Corporation from 1997-1998. From
1994-1997, Ms. Helton was Senior Vice President and Treasurer of Corning
Incorporated. She is director of Telephone & Data Systems, Inc., a diversified
telecommunications corporation. She is a member of the Audit Committee of the
board of directors of Principal Life and, effective August 21, 2001, Ms. Helton
assumed the same position with Principal Financial Group, Inc.

    CHARLES S. JOHNSON has been a director of Principal Financial Group, Inc.
since April 24, 2001 and a Principal Life director since October 1995. Mr.
Johnson is the retired Executive Vice President of DuPont, a position he held in
1999. Prior to his position with DuPont, he was Chairman, President and Chief
Executive Officer of Pioneer Hi-Bred International, Inc. from December
1996-1999, President and Chief Executive Officer from September 1995-December
1996. He is a director of Gaylord Container Corporation, a manufacturer of
corrugated containers. He is a member of the Audit and Strategic Issues
Committees of the board of directors of Principal Life and, effective August 21,
2001, Mr. Johnson assumed the same positions with Principal Financial Group,
Inc., and is a member of the Pricing Committee of the board of directors of
Principal Financial Group, Inc.

    WILLIAM T. KERR has been a director of Principal Financial Group, Inc. since
April 24, 2001 and a Principal Life director since February 1995. Mr. Kerr has
been Chairman and Chief Executive Officer of Meredith Corporation since January
1998. He served as President and Chief Executive Officer of Meredith from
1997-1998 and as Meredith's President and Chief Operating Officer from
1994-1997. He is a director of Meredith Corporation, a media and marketing
company, Maytag Corporation, a manufacturer of household appliances, and Storage
Technology Corporation, a manufacturer of information storage and retrieval
devices. Mr. Kerr is Chair of the Human Resources and Strategic Issues
Committees and a member of the Executive and Board-Management Committees of
Principal Life and Principal Financial Group, Inc. and a member of the Pricing
Committee of the board of directors of Principal Financial Group, Inc.

    LEE LIU has been a director of Principal Financial Group, Inc. since April
24, 2001 and a Principal Life director since August 1990. Mr. Liu is the retired
Chairman of the Board of Alliant Energy Corporation, a position he held from
1998-2000. Prior to his position with Alliant, he was Chairman and Chief
Executive Officer of IES Industries from 1996-1999 and was IES's Chairman,
President and Chief Executive Officer from 1993-1996. He is a director of
Alliant Energy Corporation and Eastman Chemical Company, a manufacturer of
industrial products. He is a member of the Executive and Human Resources
Committees of the board of directors of Principal Life and Principal Financial
Group, Inc.

    VICTOR H. LOEWENSTEIN has been a director of Principal Financial Group, Inc.
since April 24, 2001 and a director of Principal Life since August 1991. Mr.
Loewenstein has been managing partner of Egon Zehnder International, a
management consulting firm, since 1979. He is a member of the Nominating
Committee of the board of directors of Principal Life and, effective August 21,
2001, assumed the same position with Principal Financial Group, Inc.

    RONALD D. PEARSON has been a director of Principal Financial Group, Inc.
since April 24, 2001 and a Principal Life director since June 1996. Mr. Pearson
has been Chairman, President and Chief Executive Officer of Hy-Vee, Inc., a
retail grocer, since 1989. He is a member of the Human Resources Committee of
the board of directors of Principal Life and, effective August 21, 2001, assumed
the same position with Principal Financial Group, Inc.

                                       158

    FEDERICO F. PENA has been a director of Principal Financial Group, Inc.
since April 24, 2001 and a Principal Life director since November 1999. Mr. Pena
has been Managing Director of Vestar Capital Partners, an investment firm
specializing in management buyouts, recapitalizations and growth capital
investments, since 2000. He served as Vestar's Senior Advisor from 1998-2000.
Prior to his employment with Vestar, Mr. Pena was Secretary of the U.S.
Department of Energy from 1996-1998 and Secretary of the U.S. Department of
Transportation from 1993-1996. He is a director of Marsico Funds, which are
mutual funds, Valor Communications, a telecommunications company, and Sonic,
Inc. He is a member of the Nominating Committee of the board of directors of
Principal Life and, effective August 21, 2001, assumed the same position with
Principal Financial Group, Inc.

    DONALD M. STEWART has been a director of Principal Financial Group, Inc.
since April 24, 2001 and a Principal Life director since June 1979. Mr. Stewart
has been President and Chief Executive Officer of The Chicago Community Trust, a
philanthropic organization, since June 2000. Prior to June 2000, he was Senior
Program Officer and Special Advisor to the President at the Carnegie Corporation
of New York from July 1999-May 2000, and President of The College Board from
1986-June 1999. He is a director of The Campbell Soup Company, a food and
beverage manufacturing firm, and The New York Times Company, a diversified media
company. Mr. Stewart is a member of the Nominating Committee of the board of
directors of Principal Life and Principal Financial Group, Inc.

    ELIZABETH E. TALLETT has been a director of Principal Financial Group, Inc.
since April 24, 2001 and a Principal Life director since May 1992. Ms. Tallett
has been President and Chief Executive Officer of Galenor Inc., a research
pharmaceutical company, since 1999 and has also been President and Chief
Executive Officer of Dioscor Inc., a pharmaceutical and biotechnology firm,
since 1996. Prior to 1996, she was President and Chief Executive Officer of
Transcell Technologies, Inc. She is a director of Coventry Health Care, Inc., a
managed health care company, IntegraMed America, Inc., a health services
company, Varian, Inc., a supplier of scientific instruments, and Varian
Semiconductor Equipment Associates, Inc., a semiconductor equipment company. Ms.
Tallett is Chair of the Audit Committee and a member of the Board-Management
Committee of the board of directors of Principal Life and Principal Financial
Group, Inc. and a member of the Pricing Committee of Principal Financial Group,
Inc.

    JOHN E. ASCHENBRENNER who heads the Life and Health Insurance and Mortgage
Banking segments of our operations has been Executive Vice President of
Principal Financial Group, Inc. since April 25, 2001 and Executive Vice
President of Principal Life since January 2000. From 1996-1999, he was Senior
Vice President of Principal Life and from 1990-1995, he was Vice
President -- Individual Markets of Principal Life. Mr. Aschenbrenner serves as a
director of the 28 mutual funds that comprise the Principal Family of Mutual
Funds.

    MICHAEL T. DALEY who heads Marketing and Distribution has been Executive
Vice President of Principal Financial Group, Inc. since April 25, 2001 and
Executive Vice President of Principal Life since June 2000. From 1997-2000, he
was Senior Vice President of CIGNA Retirement and Investment Services and from
1992-1997, he was Managing Director of Bankers Trust Company.

    DENNIS P. FRANCIS has been Chief Executive Officer of Principal Capital
Management since 1999. He has been Senior Vice President of Principal Financial
Group, Inc. since April 25, 2001 and Senior Vice President and Chief Investment
Officer of Principal Life since 1998. From 1990-1997, he was Vice
President -- Commercial Real Estate of Principal Life.

    MICHAEL H. GERSIE has been Executive Vice President and Chief Financial
Officer of Principal Financial Group, Inc. since April 25, 2001 and Executive
Vice President and Chief Financial Officer of Principal Life since January 2000.
From 1994-1999, he was Senior Vice President of Principal Life.

    ELLEN Z. LAMALE has been Senior Vice President and Chief Actuary of
Principal Financial Group, Inc. since April 25, 2001 and Senior Vice President
and Chief Actuary of Principal Life since June 1999. From 1992-1999, she was
Vice President and Chief Actuary of Principal Life.

    MARY A. O'KEEFE who heads Corporate Relations and Human Resources has been
Senior Vice President of Principal Financial Group, Inc. since April 25, 2001
and Senior Vice President of Principal Life since January 1998. From 1994-1997,
she was Vice President -- Corporate Relations of Principal Life.

    RICHARD L. PREY who heads the U. S. Asset Accumulation business has been
Executive Vice President of Principal Financial Group, Inc. since April 25, 2001
and Executive Vice President of Principal Life since January 2000. Mr. Prey has
announced his retirement effective January 31, 2002. From 1997-1999, he was
Senior Vice President of Principal Life, from 1996-1997, he was Vice
President -- Pension of Principal Life and from 1993-1996, he was President and
Chief Executive Officer of Delaware Charter Guarantee & Trust Company, an
indirect subsidiary of Principal Life.

    KAREN E. SHAFF has been Senior Vice President and General Counsel of
Principal Financial Group, Inc. since April 25, 2001 and Senior Vice President
and General Counsel of Principal Life since January 2000. From June 1999-
December 1999, she was Senior Vice President and Deputy General Counsel of
Principal Life, and from 1995-May 1999, she was Vice President and Associate
General Counsel of Principal Life. She is a director of HealthExtras, Inc.

                                       159

    NORMAN R. SORENSEN has been President of Principal International, Inc. since
1998 and has been Senior Vice President of Principal Financial Group, Inc. since
April 25, 2001 and Senior Vice President of Principal Life since December 1998.
From 1989-November 1998, he was Vice President and Senior Executive -- Latin
America, American International Group.

    CARL C. WILLIAMS has been Senior Vice President and Chief Information
Officer of Principal Financial Group, Inc. since April 25, 2001 and Senior Vice
President and Chief Information Officer of Principal Life since July 1997. From
1993-1997, he was Vice President -- Information Technology of Amoco Oil.

    LARRY D. ZIMPLEMAN who leads our global pension expansion efforts and is
responsible for pension underwriting, systems and pricing of Principal Life has
been Executive Vice President of Principal Financial Group, Inc. and Principal
Life since August 25, 2001. Mr. Zimpleman has been named to assume
responsibility for the U.S. Asset Accumulation business of Principal Financial
Group, Inc. upon Mr. Prey's retirement on January 31, 2002. Prior to his current
position, Mr. Zimpleman was Senior Vice President of Principal Life from June
1999-August 2001, Vice President from
1998 - 1999 and Vice President -- Pension from 1994 - 1998.

COMPOSITION OF BOARD AND COMMITTEES

    Principal Financial Group, Inc. is managed under the direction of its board
of directors. Its board of directors was initially composed of 13 directors, 11
of whom were not officers, and has added one additional director, who is not an
officer. Principal Financial Group, Inc. has also established the following
standing committees of the board of directors:

  AUDIT COMMITTEE

    The Audit committee of Principal Financial Group, Inc. was chosen by the
board of directors from those members who are not officers of Principal
Financial Group, Inc. or its subsidiaries. The Audit committee will recommend to
the board of directors a firm of independent certified public accountants to
annually audit the books and records. The Audit committee will review and report
on the activities of the independent certified public accountants to the board
of directors and review and advise the board of directors as to the adequacy of
Principal Financial Group, Inc.'s system of internal accounting controls.

  HUMAN RESOURCES COMMITTEE

    The Human Resources committee of Principal Financial Group, Inc. was chosen
by the board of directors from those members who are not officers of Principal
Financial Group, Inc. or its subsidiaries. The Human Resources committee will
make recommendations to the board of directors regarding salaries and any
supplemental employee compensation of the executive officers and act upon
management's recommendations for salary and supplemental employee compensation
policies for all other employees.

  OTHER COMMITTEES

    The board of directors may form such other committees of the board of
directors as it deems appropriate.

COMPENSATION OF DIRECTORS

    The compensation for our directors who are not officers or employees of
Principal Mutual Holding Company or its subsidiaries consists of a $31,500
annual retainer plus a $2,500 per day attendance fee for each regular or special
board meeting attended in person. These directors are also compensated for
participation on committees. We anticipate that, following the conversion, the
directors of Principal Financial Group, Inc. will be identical to the directors
of Principal Life. We do not currently plan to pay any additional compensation
to directors for also participating on the board of directors of Principal Life.

    In addition, following the conversion, directors who are not officers or
employees will receive initial and annual grants of options and are eligible for
discretionary grants of options pursuant to the directors stock plan.
Non-employee directors also receive an initial grant of RESTRICTED STOCK UNITS
and a grant of Restricted Stock Units upon re-election to the board, and are
eligible for discretionary grants of RESTRICTED STOCK or Restricted Stock Units
pursuant to the directors stock plan. The annual retainer payable to directors
will be reduced by $7,500 upon the grant of awards under the directors stock
plan. A description of our directors stock plan is provided below.

    Principal Financial Group, Inc. intends to adopt a directors deferred
compensation plan pursuant to which each non-employee director who receives a
cash retainer and meeting fees would have the right to defer all or a portion of
such payments into an account. The deferred payments would be deemed to be
invested in common stock.

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COMPENSATION OF NAMED EXECUTIVE OFFICERS

    Since the formation of Principal Financial Group, Inc. in April of 2001,
none of its officers or other personnel has received any compensation from
Principal Financial Group, Inc. All compensation has been paid to such
individuals in their capacities as officers and/or directors of Principal Life.
It is expected that after the demutualization, most of the employees of
Principal Financial Group, Inc., including the executive officers, will continue
to be paid only by Principal Life with an allocation of their compensation to be
made for services rendered to Principal Financial Group, Inc. Principal
Financial Group, Inc. will pay the amount of such allocation to Principal Life
pursuant to a cost allocation agreement. If and to the extent any employees of
Principal Financial Group, Inc. cease to also be employees of Principal Life,
their entire salary will be paid by Principal Financial Group, Inc.

    The following table sets forth the compensation paid to our chief executive
officer and the four other most highly compensated executive officers employed
as of December 31, 2000, for services rendered during the fiscal year ended
December 31, 2000:

                           SUMMARY COMPENSATION TABLE

                                                                                                 ALL OTHER
NAME AND PRINCIPAL POSITION                  YEAR    SALARY     BONUS(1)    LTIP PAYOUTS(2)   COMPENSATION(3)
---------------------------                  ----   --------   ----------   ---------------   ---------------
                                                                               
J. Barry Griswell
President, CEO.............................  2000   $841,346    $378,606       $316,888           $33,783
David J. Drury
Chairman...................................  2000    825,000     371,250        479,538            37,205
Michael H. Gersie
EVP, CFO...................................  2000    333,269     134,974        303,737            13,978
Richard L. Prey
EVP........................................  2000    328,269     132,949        301,087            12,592
John E. Aschenbrenner
EVP........................................  2000    318,269     128,899        295,727            13,211

---------------

(1) The amounts shown represent the 2000 incentive compensation awards paid in
    2001 under the Principal Financial Group incentive pay plan.

(2) The amounts shown represent the payout of the 1998 long-term performance
    award in respect of the 1998 through 2000 cycle under the Principal
    Financial Group long-term performance plan. Amounts shown include amounts
    paid as well as deferred.

(3) The amounts shown represent the total of our contributions to our employees
    savings plan in which all of our employees are generally eligible to
    participate, and contributions to our excess plan, our non-qualified
    supplemental executive retirement plan. For the year ending December 31,
    2000, our contribution to the employees savings plan for each named
    executive officer was $3,938 (the maximum allowable contribution under the
    plan). Our contributions to the excess plan for the year ending December 31,
    2000, for these officers were as follows: Mr. Griswell, $29,845; Mr. Drury,
    $33,267; Mr. Gersie, $10,040; Mr. Prey, $8,654; and Mr. Aschenbrenner,
    $9,273. The amount set forth for Mr. Prey in this column does not include
    matching contributions made by us in the year 2000 in respect of his salary
    and bonus for 1999.

EMPLOYMENT AGREEMENTS

    We have previously entered into an employment agreement with J. Barry
Griswell, pursuant to which Mr. Griswell will continue in his capacity as our
president and chief executive officer for an employment term of three years from
the date of the employment agreement. This three-year term will automatically be
extended for additional two-year terms unless either Mr. Griswell or we notify
the other of the intention not to extend the agreement. Mr. Griswell's annual
salary under this agreement is $850,000, periodically increased in accordance
with our regular policy, and he participates in our incentive compensation
plans, long-term performance plan and qualified and non-qualified savings and
retirement plans.

    The employment agreement provides that Mr. Griswell would be entitled to
certain severance benefits in the event that his employment terminates under
certain circumstances. These benefits are substantially similar to the severance
benefits to which Mr. Griswell would be entitled pursuant to the "change in
control" agreement described below, except that in the case of a termination of
his employment where there has not been a change of control, Mr. Griswell,
pursuant to the terms of his employment agreement, will generally be entitled to
two times the amounts indicated below, not three times.

    We have entered into "change in control" employment agreements with Mr.
Griswell and with each of the other named executive officers that provide each
executive with assurances as to the terms and conditions of his

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employment and as to the termination benefits that would be payable to him upon
a termination of employment relating to a change of control (as defined in the
agreements and as set forth below). The purpose of these agreements is to assure
the covered executive that, following a change of control or related events, he
will receive substantially comparable compensation and benefits and have
substantially comparable terms and conditions of employment as those he enjoyed
prior to the occurrence of such event. To that end, in the event of a change of
control, these agreements:

    - mandate that the executive receive specified levels of salary, incentive
      compensation and benefits for a period of not less than two years
      following the occurrence of a change of control;

    - provide for the immediate vesting of all options and shares of Restricted
      Stock then held by each executive, unless the applicable merger agreement
      provides that the options are to be assumed by the acquirer, in which case
      only the Restricted Stock will vest; however, there can be no exercise of
      options nor distribution of Restricted Stock awards until eighteen months
      following the completion of the demutualization;

    - provide for a payment to be made to each executive, within 10 days of a
      change of control, of a pro rata portion of any annual bonus and/or
      long-term incentive award then outstanding, in respect of the applicable
      periods prior to the change of control;

    - provide that each executive will vest and be paid, within 10 days of a
      change of control, the outstanding account balances under any
      non-qualified deferral or supplemental benefits program, whether vested or
      unvested; and

    - assure each executive of receiving a specified level of termination
      benefits in the event that his employment is terminated without "cause" or
      by the executive voluntarily for "good reason."

    For this purpose, good reason means adverse changes in the terms and
conditions of the executive's employment, including:

    - any failure to pay the executive's base salary or any required increase in
      salary;

    - any failure to pay the executive's annual bonus or any reduction in the
      executive's annual bonus opportunity;

    - any material adverse change in the executive's position (including
      offices, titles or reporting requirements, but not reporting
      responsibilities), authority or duties under the agreement; or

    - any material reduction in the executive's aggregate compensation and
      benefits or requiring the executive to be based at any office or location
      other than the location at which he worked prior to the change of control.

    The benefits to be paid or provided under the agreements upon a qualifying
termination include:

    - a lump sum severance benefit equal to three times the sum of the
      executive's annual base salary, target annual bonus and annualized target
      long-term bonus; provided that the annualized target long-term bonus will
      not be included as part of the severance benefits if the executive's
      termination occurs on or after the third anniversary of the date we first
      make a grant of stock options to a peer executive;

    - the immediate vesting of all stock options and shares of Restricted Stock
      or similar awards then held, except that there can be no option exercise
      or distribution of Restricted Stock until eighteen months following the
      completion of the demutualization;

    - a pro-rated annual bonus for the year of termination and a pro-rated
      long-term incentive plan payment for each cycle then in progress, minus,
      in each case, the amount, if any, paid in respect of such annual or
      long-term incentive plan at the time of the change of control;

    - the unpaid account balances under any non-qualified deferral or
      supplemental benefits program, whether vested or unvested;

    - the lump sum value of the additional retirement benefits the executive
      would have accrued had he or she become fully vested in all such
      previously-unvested benefits, accrued three additional years of service
      and received the lump-sum severance benefits described above, excluding
      the long-term incentive plan bonuses, as covered compensation during such
      assumed additional years of service;

    - an additional payment to offset any excise tax imposed under section 4999
      of the Internal Revenue Code, but only if the after-tax amount of the
      additional payment would exceed 10% of the after-tax benefits the
      executive would receive if the executive's benefits were limited to an
      amount such that the payments would not be subject to the excise tax; and

    - the reimbursement for legal fees and other related expenses required to
      secure, preserve or obtain benefits under the agreement.

    In addition, until the third anniversary of the date of the executive's
termination, the executive shall continue to receive welfare benefits, including
medical, prescription, dental, disability, salary continuance, individual life,
group life,

                                       162

accidental death and travel accident insurance plans and programs, which are at
least as favorable as the most favorable programs at the same costs applicable
to peer executives and their families who are actively employed after such
termination date.

    In exchange for these benefits, Mr. Griswell has agreed that for two years,
and the other named executive officers have agreed that for one year, following
a termination of employment that results in the executive receiving severance
benefits as described above, the executive will not engage or participate in, or
become employed by or serve as a director of or consultant to, a competing
business; nor will the executive solicit employees or customers, or interfere
with the relationship we have with our employees or customers.

    For purposes of these agreements, following the effective date of this
offering, a change of control will mean any one or more of the following events:

    - any person becoming the beneficial owner of 25% or more of our common
      stock;

    - the individuals then serving as members of our board of directors who were
      members of such board as of the date of the agreement cease for any reason
      to constitute at least a majority of the board of directors, provided
      that, for this purpose, any subsequently-appointed or elected member of
      the board of directors whose election or nomination for election (unless
      such election, nomination or appointment was in connection with an actual
      or threatened proxy contest) was approved by a vote or written consent of
      at least a majority of the incumbent directors then in office and the
      directors elected or nominated in a manner consistent with the conditions
      of this provision shall be treated as an incumbent director; or

    - the consummation of a merger, reorganization, consolidation or similar
      transaction other than a transaction immediately following which the
      stockholders of Principal Financial Group, Inc. continue to own more than
      60% of the voting securities of the surviving corporation or its ultimate
      parent corporation; or approval by the stockholders of Principal Financial
      Group, Inc. of a plan or agreement for the sale or other disposition of
      all or substantially all of its consolidated assets or a plan of
      liquidation.

    However, if specific conditions are met, a reorganization transaction of the
type outlined in the third item above may not trigger the full protection
otherwise afforded to management under such agreements because the requisite
conditions will afford management reasonable protection that there will be a
reasonable continuity of the business conditions that existed prior to the
occurrence of such event. These conditions are that:

    - immediately following any such transaction, the stockholders of Principal
      Financial Group, Inc. must continue to own more than 40% of the voting
      securities of the surviving corporation or its ultimate parent
      corporation;

    - no person is or becomes the beneficial owner of 25% or more of the voting
      securities of the corporation surviving such reorganization transaction,
      or its parent;

    - for two years, directors who were in office immediately preceding the
      reorganization transaction continue to constitute not less than (i) a
      majority of the board of directors if, immediately following any such
      transaction, the stockholders of Principal Financial Group, Inc. continue
      to own more than 50% of the voting securities of the surviving corporation
      or its ultimate parent corporation or (ii) one member less than a majority
      of the board of directors, if immediately following any such transaction,
      the stockholders of Principal Financial Group, Inc. continue to own more
      than 40% but less than 50% of the voting securities of the surviving
      corporation or its ultimate parent corporation; and

    - the person who was the chief executive officer of Principal Financial
      Group, Inc. immediately prior to the first to occur of (x) the day prior
      to the first occurrence of certain events leading to the transaction or
      (y) the day prior to the effective date of the transaction shall serve as
      the chief executive officer of the surviving corporation at all times
      during the period commencing on the effective date and ending on the first
      anniversary of the effective date.

    If any of the conditions described in the second, third or fourth items
above cease to be satisfied, then the full benefit of the protection afforded
under such agreements will become operative.

    We have entered into a retirement agreement with Richard L. Prey to secure
his services through January 31, 2002. Under this retirement agreement, Mr. Prey
will continue in our employ through January 31, 2002, with the right to
participate through that date in all compensatory plans and arrangements
generally made available to officers at his level. In exchange for his
commitment to remain in our employ, and for certain other concessions, we have
agreed to continue to pay his base salary following his termination of
employment for six additional months, through July 31, 2002. Thereafter, Mr.
Prey will be treated as a retiree under our pension and retiree medical plans.

STOCK INCENTIVE PLAN

    Our Human Resources committee will be responsible for administering the
Principal Financial Group, Inc. stock incentive plan. Under the stock incentive
plan, the Human Resources committee may from time to time grant to our officers,
employees and agents stock options, STOCK APPRECIATION RIGHTS, Restricted Stock
and Restricted Stock Units.
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The Human Resources committee may not grant any awards to employees or agents
under the stock incentive plan that will take effect prior to 30 days following
the completion of the demutualization and may not make any grants to any of our
executive officers until six months after the completion of the demutualization.

    The maximum number of shares of common stock that may be issued under the
stock incentive plan, together with the excess plan (our non-qualified defined
contribution retirement plan), the directors stock plan described below, the
long-term performance plan described below and any new plan awarding our common
stock, in the five years following the completion of the demutualization, is 6%
of the number of shares outstanding immediately following the completion of the
demutualization, unless shareholders vote to increase the maximum number. The
number of shares that may be awarded in the eighteen months following the
completion of the demutualization is limited to 40% of such maximum. During any
three-year period, no individual participant may be granted awards in respect of
more than 10% of the total shares available for issuance under the plan.

    The Human Resources committee may permit participants to defer receipt of
shares of common stock that would otherwise be issued in connection with an
award under the plan.

    The Human Resources committee intends to make a one-time, nonrecurring grant
of options to most of our employees including our agents who are statutory
employees, 30 days after the completion of the demutualization. The purpose of
this one-time company-wide grant is to encourage the work force to be aware of
the impact that their performance can have on the financial success of the
enterprise taken as a whole. Employees with a title equivalent or senior to
Second Vice President will not participate in the one-time company-wide grant.
None of the participants in the long-term performance plan described below will
participate in the one-time company-wide grant. Each option granted in the
one-time company-wide grant will become exercisable in full on the date which is
three years from the date of the one-time company-wide grant.

    The shares to be issued under the stock incentive plan may be unissued
shares or treasury shares. Upon the occurrence of events that affect our
capitalization, appropriate adjustments may be made in the number and kind of
shares that may be issued under the stock incentive plan in the future and in
the number and kind of shares and price per share under all outstanding stock
options and Stock Appreciation Rights granted before the event. Notwithstanding
the foregoing, if any grant made under the stock incentive plan is for any
reason canceled, terminated or otherwise settled without the issuance of some or
all of the shares of common stock subject to the grant, such shares will be
available for future grants.

    The Human Resources committee may condition the grant of any option or other
award upon the recipient agreeing to conditions or covenants in favor of
Principal Financial Group, Inc. and/or one or more of its subsidiaries that may
have effect following the termination of the recipient's employment. These
conditions and covenants may include restrictions on the ability to transfer the
underlying shares of common stock or covenants not to compete, not to solicit
employees and customers and not to disclose confidential information. The Human
Resources committee may also require that, after an option or other award has
been exercised, the recipient disgorge any profit, gain or other benefit
received from the option if the optionee breaches any of these commitments.
These provisions will not apply to the one-time company-wide grant described
above.

    The Human Resources committee may grant nonqualified stock options to
officers, employees and agents and may grant stock options qualifying as
incentive stock options under the Internal Revenue Code to officers and
employees, including agents who are statutory employees. The maximum number of
shares issuable pursuant to incentive stock options that may be awarded under
the plan is 10,000,000. The exercise price per share of common stock subject to
either a nonqualified stock option or an incentive stock option will be not less
than the fair market value, as defined in the stock incentive plan, of such
share on the date of grant. To exercise an option, an option holder may pay the
exercise price in cash or, if permitted by the Human Resources committee, by
delivering on the date of exercise other shares of common stock having an
aggregate fair market value equal to the exercise price of the option or by
delivering some combination of cash and other shares of common stock. An option
may also be exercised through an arrangement with a broker approved by the Human
Resources committee whereby payment of the exercise price is accomplished with
the sale of common stock.

    Other than options granted with respect to the one-time company-wide grant
as described above, each option will generally become exercisable in three
approximately equal installments on each of the first three anniversaries of the
date of the grant of the option. The term of each option will be fixed by the
Human Resources committee but may not be more than ten years from its date of
grant. Notwithstanding any other provision of the plan, no option shall become
exercisable earlier than 18 months following the completion of the
demutualization, except in cases of accelerated exercisability due to death or
disability of any employee, due to the approved retirement of any employee who
is below the level of Second Vice President or, in limited circumstances, as
approved by the Insurance Commissioner of the State of Iowa.

    In the event an employee terminates service by reason of disability or
death, all options then held by the employee, whether or not then exercisable,
will become immediately exercisable and will generally remain exercisable for a
period of three years or for such shorter period as the Human Resources
committee shall determine at the time of grant. In the event an employee
terminates service by reason of normal or approved early retirement, all options
then held by

                                       164

the employee will become immediately exercisable and will remain exercisable for
a period of three years or for such other period as the Human Resources
committee shall determine at the time of grant, subject to the last sentence in
the previous paragraph. In the event an employee's service terminates for cause
or by resignation, other than in the circumstances addressed above, he or she
will lose all of his or her outstanding options, whether or not then
exercisable. In general, in the event an employee terminates service for any
reason other than those listed above, all options then held by the employee that
are then exercisable will remain exercisable for a period of 90 days. Of course,
regardless of the rules regarding when an option can be exercised after
termination, no option will be exercisable after its stated maximum term.

    The Human Resources committee may also grant Stock Appreciation Rights to
employees, officers and agents that can either be free standing awards or awards
that are related to a stock option in such a way that the exercise of either the
Stock Appreciation Right or the stock option will cause the cancellation of the
other award. The terms and conditions applicable with respect to any grant of a
Stock Appreciation Right will be substantially the same as apply to the grant of
a stock option. This means that the vesting of a Stock Appreciation Right, and
the time that a recipient of a Stock Appreciation Right will have to exercise
the Stock Appreciation Right after the termination of his or her service with
Principal Financial Group, Inc. and its affiliates, will be substantially the
same as applies to a stock option.

    Upon the exercise of a nonqualified option, the option holder will generally
recognize ordinary income in an amount equal to the difference between the then
fair market value of the common stock being purchased and the exercise price
paid to acquire such stock. We will generally be entitled to take a federal
income tax deduction in the amount of ordinary income recognized by the
employee. Upon the sale of the underlying stock after satisfying the holding
period requirement that the stock be held for one year following the exercise of
the option, an employee will recognize long-term capital gain (loss) to the
extent that the sale price received exceeds (or is less than) the fair market
value of the stock at the time of exercise. The tax treatment of a Stock
Appreciation Right is essentially the same as is applicable in respect of a
nonqualified stock option.

    The exercise of an incentive stock option generally does not result in any
federal income tax consequences. Upon the sale of the underlying stock after
satisfying the applicable holding period requirements, including a requirement
that the stock be held until one year following the exercise of the option and
two years following the date of grant, an employee will recognize long-term
capital gain (loss) to the extent that the sale price received exceeds (or is
less than) the price paid to purchase the stock. If the holding periods are not
satisfied, the tax consequences with respect to an incentive stock option are
generally the same as those that apply to a nonqualified stock option, except
that the amount of ordinary income realized by the employee will not exceed the
excess of the amount received by an employee in any sale over the employee's
exercise price to purchase the stock.

    The Human Resources committee also has the right to grant awards of
Restricted Stock to our employees, officers and agents at such times and for
such number of shares of common stock as the Human Resources committee may
determine. The Human Resources committee may elect to grant any such person
Restricted Stock Units, which are contractual rights to receive shares of common
stock or cash in an amount equal to the value of a specified number of shares of
common stock in the future, after the satisfaction of specified vesting
conditions, that is the economic equivalent of an award of Restricted Stock. Any
such award of Restricted Stock Units shall be in substantially the same terms as
an award of Restricted Stock. Notwithstanding any other provision of the plan,
no award shall become exercisable or distributable earlier than 18 months
following the completion of the demutualization, except in cases of accelerated
exercisability or distribution due to death or disability of any employee, due
to the approved retirement of any employee who is below the level of Second Vice
President or, in limited circumstances, with the approval of the Insurance
Commissioner of the State of Iowa.

    Unless the Human Resources committee otherwise specifies at the time of
grant, a pro rata portion of any shares related to Restricted Stock held by an
employee, officer or agent whose service terminates due to his or her death,
disability or approved retirement, will vest at such termination, based upon his
or her service completed through such date of termination, subject to the
requirements of the last sentence in the previous paragraph. Upon any other
termination, any shares of Restricted Stock that have not previously vested will
be forfeited unless the Human Resources committee otherwise determines.

    Generally, an employee, officer or agent who receives Restricted Stock will
be entitled to receive all dividends and other distributions paid with respect
to those shares. However, if any dividends or distributions are paid in shares
of common stock, the shares received as a dividend or distribution will be
subject to the same forfeiture restrictions and restrictions on transferability
as apply to the Restricted Stock with respect to which they were paid.
Additionally, the Human Resources committee may specify at the date of grant
that any cash dividends on shares of Restricted Stock will not be paid
currently, but rather be credited to an account established for the benefit of
the recipient of the Restricted Stock and invested in shares of common stock on
the distribution date of such dividend. Any additional shares credited in
respect of dividends shall become vested and nonforfeitable, if at all, on the
same terms and conditions as are applicable in respect of the Restricted Stock
with respect to which such dividends were payable.

    Generally, an employee, officer or agent who receives Restricted Stock will
have ordinary income at the time that the Restricted Stock is no longer subject
to forfeiture in an amount equal to the fair market value of the common stock

                                       165

at that time less the amount, if any, paid for the Restricted Stock. Such a
person may elect, within 30 days of the date of any Restricted Stock grant, to
be taxed at the time of the grant based on the then current value of the common
stock.

    Upon the occurrence of a change of control, as defined above with respect to
the change of control employment agreements, all outstanding options and Stock
Appreciation Rights shall immediately become exercisable, the restrictions
applicable to any Restricted Stock or Restricted Stock Unit award shall lapse
and any such award may be cashed out at the discretion of the Human Resources
committee; except that no such acceleration of exercisability or lapse of
restrictions shall occur prior to eighteen months following the completion of
the demutualization. However, unless provided otherwise in change of control
employment agreements, if the Human Resources committee determines that the
acquiring or surviving entity, or a parent of such entity, will replace the
outstanding options, Stock Appreciation Rights and awards of Restricted Stock
and Restricted Stock Units or otherwise assume and honor such options, Stock
Appreciation Rights or awards on terms that preserve their economic value at the
time of the change of control and protect the employees against a forfeiture
arising out of an involuntary or specified types of constructive termination,
the ability of the employees to exercise options or Stock Appreciation Rights
will not accelerate and the restrictions related to Restricted Stock and
Restricted Stock Units will not lapse at the time of the change of control.

    Our board of directors may terminate, suspend or amend the stock incentive
plan at any time, but such termination, suspension or amendment may not
adversely affect any stock options, Stock Appreciation Rights or Restricted
Stock or Restricted Stock Unit awards then outstanding under the stock incentive
plan without the consent of the recipients of such an award. Our board of
directors may not amend the plan without the approval of the Insurance
Commissioner of the State of Iowa in the eighteen months following the
completion of the demutualization. Unless earlier terminated by action of our
board of directors, the stock incentive plan will continue in effect until the
tenth anniversary of the date the stock incentive plan was adopted. Stock
options and Stock Appreciation Rights granted prior to such date will continue
in effect until they expire in accordance with their terms.

LONG-TERM PERFORMANCE PLAN

    We also maintain the Principal Financial Group, Inc. long term performance
plan, which provides the opportunity for eligible executives to share in the
success of Principal Financial Group, Inc., if specified minimum corporate
performance objectives are achieved over a three calendar year period. Under the
long-term plan, senior officers are awarded a number of performance units at the
discretion of the Human Resources committee. Over the three year performance
period, the number of performance units held by an executive will be adjusted by
a performance multiplier. This multiplier is a percentage determined based on a
matrix established by the Human Resources committee at the beginning of the
performance period. The matrix will establish the various performance objectives
to be achieved and the levels of reward that participating employees will
receive at stated levels of performance. The amount payable to each eligible
executive is equal to the product of the number of performance units initially
awarded, multiplied by the percentage derived from the performance matrix, and
by the value of such unit as determined at the end of the performance period.
Currently, the value of a performance unit is determined using a multiple of 10
times the product of the average return on equity for the prior three years and
the adjusted consolidated GAAP equity as of the end of the performance period,
divided by the number of initial performance units for that performance period.
For the performance period commencing after the date of this offering, the value
of a performance unit will be equal to the average 20 day trading price of the
common stock at the end of the last year in the performance period. For
performance periods already commenced but not completed when this offering
occurs, the Human Resources committee may determine the value of a performance
unit based on the above formula or the price of the common stock on a date
determined by the Human Resources committee. For this purpose, to assure that
each participant does not receive a penalty or a windfall in the event
performance units are based on the stock price, the number of performance units
outstanding will be adjusted by the Human Resources committee to reflect the
relative values of the common stock and the outstanding performance units at
such time. Notwithstanding the foregoing, in no event shall any payment be made
in respect of any performance period if the threshold performance objectives
established by the Human Resources committee with respect to such performance
period are not satisfied. Unless the Human Resources committee shall otherwise
determine, payment of such amount shall be made in cash, stock or a combination
of cash and stock. If any stock is used for payment, the maximum number of
shares that can be awarded under this plan, together with our stock incentive
plan described above, the excess plan (our non-qualified defined contribution
retirement plan), the directors plan described below, and any new plan awarding
our common stock, in the five years following the completion of the
demutualization is 6% of the number of shares outstanding immediately following
the completion of the demutualization, unless the shareholders vote to increase
the maximum number, and the number of shares that may be awarded in the eighteen
months following the completion of the demutualization is limited to 40% of such
maximum. No awards or payments in the form of stock may be made under the
long-term performance plan prior to six months following the completion of the
demutualization.

    Generally, an executive who receives a grant of performance units must
remain employed by Principal Financial Group, Inc. or one of its subsidiaries
for the entire performance period to receive any payment under the long-term
plan. In the event of termination of employment due to an executive's death,
disability or qualifying retirement, all or, if the termination occurs in the
first year of the performance period, a pro-rated portion of the amount that
would have

                                       166

been payable to the executive had he or she continued to be employed will still
be paid to such executive. An executive may elect to defer payment of all or a
portion of amounts otherwise payable under the long-term performance plan for up
to five years or until the termination of the executive's employment. No amounts
other than those previously deferred will be payable to an executive whose
employment is terminated for cause.

    Listed below are the awards granted in 2000 under the terms of the long-term
plan with respect to the 2000-2002 performance period. The threshold objectives
for this period are:

    - consolidated GAAP equity, as adjusted, for the year ending simultaneously
      with the end of the performance period, stated as a percentage of the
      general account assets of Principal Life, must be at least 6%;

    - the risk based capital ratio of Principal Life must be at least 150%;

    - the return on equity for the last calendar year in the performance period
      must exceed a minimum level established for such performance period in the
      performance matrix; and

    - operating earnings must exceed a minimum level established for such
      performance period in the performance matrix.

    The sum of all awards payable pursuant to any performance period shall not
exceed 5% of pre-tax GAAP operating earnings for the third year of the
performance period.

    Within ten (10) days following a change of control or the date the full
conditions protecting management in the event of a reorganization transaction
fail to be satisfied, as outlined above under "Employment Agreements", executive
officers and specified other senior officers including the executive officers
shall receive under the plan a pro-rated award for service rendered prior to
such date.

            LONG-TERM INCENTIVE PLANS -- AWARDS IN LAST FISCAL YEAR

                                                                            PERFORMANCE      ESTIMATED FUTURE PAYOUTS BASED ON
                                                              NUMBER OF    PERIOD UNTIL               CURRENT FORMULA
                                                             PERFORMANCE   MATURATION OR   --------------------------------------
NAME                                                          UNITS(1)        PAYOUT       THRESHOLD(2)   TARGET(3)    MAXIMUM(4)
----                                                         -----------   -------------   ------------   ----------   ----------
                                                                                                        
J. Barry Griswell
President, CEO..............................................    13,314       12/31/02        $      0     $1,373,472
David J. Drury
Chairman....................................................    12,922       12/31/02               0      1,333,033
Michael H. Gersie
EVP, CFO....................................................     4,198       12/31/02               0        433,065
Richard L. Prey
EVP.........................................................     4,135       12/31/02               0        426,566
John E. Aschenbrenner
EVP.........................................................     4,010       12/31/02               0        413,671

---------------

(1) The number of performance units granted is determined by reference to the
    three year average return on equity for calendar years 1997 through 1999 and
    other factors including job level. Following this offering, the number of
    performance units may be adjusted by the Human Resources committee to
    reflect the relative values of common stock and the number of performance
    units outstanding at such time.

(2) Payouts under the plan will be zero if minimum performance targets are not
    met.

(3) Principal Life did not achieve target in the year 2000. See the Summary
    Compensation Table above for payout information with respect to the year
    2000.

(4) Because the formula may be based on the Principal Financial Group, Inc.
    common stock price in December 2002, the payout under the plan could be
    unlimited.

INCENTIVE PAY PLAN (PRINPAY)

    We also maintain the Principal Financial Group, Inc. incentive pay plan,
which each year provides the opportunity for most of our employees to receive
additional incentive compensation if specified minimum corporate performance
objectives are met for that year. Each eligible employee under the incentive pay
plan is given an award opportunity, which is a fixed percentage of the
employee's base salary. The amount actually payable in respect of such award
opportunity will be adjusted, up or down, based on our actual performance
against one or more corporate financial or non-financial measures established by
the Human Resources committee for the plan year. Business unit performance
measures are determined by the plan administrator. Awards to the named executive
officers and other senior officers are based entirely on corporate performance.
The measures of corporate performance that may be used under the plan include,
but are not limited to, return on equity, operating earnings, earnings before
income taxes, depreciation and amortization, budget, customer satisfaction and
total shareholder return. Individual performance objectives are also

                                       167

established with respect to more senior employees. Different measures of
performance may be used for different employees and the weight afforded to any
performance measure may also vary from employee to employee.

    However, if any threshold performance objective is not met, no amount will
be payable under the incentive pay plan for the applicable year. For 2001 and
beyond, unless otherwise specified by the Human Resources committee by March 15
in a subsequent plan year, the threshold objectives are:

    - Principal Life must maintain the minimum rating from 2 of the 3 specified
      rating agencies;

    - adjusted consolidated GAAP equity for the end of the plan year, stated as
      a percentage of the general account assets of Principal Life, must be at
      least 6%; and

    - Principal Life must have a risk based capital ratio of at least 150%.

    In no event will the sum of all annual awards under the plan exceed 6% of
our pre-tax GAAP operating earnings for the fiscal year. No payment shall be
made to any participant who is on final warning any time during the plan year.

    Award payments under the incentive pay plan are made in cash following the
release of audited results after the end of the plan year in which they are
earned, but no later than March 15 of the year following the year in which the
services are performed. Generally, a participant must remain in our employ
through the end of the plan year, which corresponds to the calendar year, to
receive any payment with respect to that plan year. If a participant's
employment is terminated due to death during the plan year, his or her
beneficiary will receive an early distribution based on the participant's salary
received during the plan year multiplied by the deceased employee's award
opportunity. If a participant dies after the end of a plan year, his or her
beneficiary shall receive a distribution in accordance with the plan at the same
time as other participants. If a participant terminates employment due to
disability, retirement or such other involuntary termination, he or she will
receive a prorated distribution at the same time as the other participants. If a
participant's employment is terminated for cause, he or she will not be entitled
to receive any further payment with respect to any plan year.

    Within ten (10) days following a change of control or the date the full
conditions protecting management in the event of a reorganization transaction
fail to be satisfied, as outlined above under "Employment Agreements," executive
officers and specified other senior officers including the executive officers
shall receive under the plan a pro-rated award for service rendered prior to
such date.

EMPLOYEE STOCK PURCHASE PLAN

    We also have an employee stock purchase plan called the Principal Financial
Group, Inc. employee stock purchase plan. The purchase plan offers virtually all
employees the opportunity to buy shares of common stock of Principal Financial
Group, Inc. at a discount from the prevailing fair market value of our stock.
Participation under the plan will commence no earlier than 30 days following the
completion of the demutualization, except that executives may not commence
participation until six months after the completion of the demutualization. The
number of shares of common stock issuable pursuant to options under the plan may
not exceed 2% of the total number of shares outstanding immediately following
this offering.

    Generally, all employees of Principal Financial Group, Inc. and its
subsidiaries will be eligible to join the purchase plan. However, the plan
administrator has discretion to exclude all of the employees of specific
subsidiaries, as well as employees whose customary employment is 20 hours or
less per week, employees whose customary employment is not for more than five
months in any calendar year and highly compensated employees (but only to the
extent necessary to comply with demutualization requirements). Additionally, any
employee who owns 5% or more of the total voting power of all classes of stock
is excluded from participating in the plan.

    Under the purchase plan, participating employees are granted options, each
with a term of not more than 2 years, to purchase shares of common stock of
Principal Financial Group, Inc. at a price no less than 85% of the share's fair
market value as of the date of grant. The Human Resources committee has
determined that the exercise price may be as low as 85% of the share's fair
market value as of the exercise date, provided that the exercise date price is
less than the grant date price. The phrase "fair market value" is defined by the
purchase plan to be the per share closing price of the shares reported on the
principal exchange, or the last reported trade on the national quotation system,
on which such transactions are reported for the trading day immediately
preceding the grant date, or the exercise date, if applicable.

    An employee may join the purchase plan by authorizing after-tax payroll
contributions to be deducted from gross wages. Additionally, if an employee is
making payroll contributions, the administrator of the plan will permit him or
her to also make cash contributions. The maximum amount which an employee may
contribute during any plan year is the lesser of $10,000 (or such greater or
lesser amount as determined by the plan administrator) and 10% of the employee's
salary. An employee may change the amount of payroll contributions to his or her
individual account at such intervals as are permitted under the purchase plan.
An employee also has the right to completely cease making any further
contributions at any time.

                                       168

    There will be at least one exercise date each year. Generally, this date
will be the last business day of the calendar year. The plan administrator may
select other exercise dates, in its discretion. The Human Resources committee
has determined that the initial grant of options to be made no earlier than 30
days following completion of the demutualization will have an accelerated
exercise date and, thereafter, there will be exercise dates every three months.
Prior to any exercise date, each employee may elect to withdraw the
contributions made to the employee's account during that offering period. Unless
an employee elects such a withdrawal, on the exercise date the cash balance in
the employee's account will be used to purchase the maximum number of shares of
common stock that can be purchased with such balance. An employee is not
permitted to purchase shares pursuant to options granted under the purchase plan
which exceed $25,000 in fair market value in any calendar year, due to the
Internal Revenue Code requirements. If the employee elects not to have his or
her options exercised, his or her contributions for that offering period will be
distributed to him or her. Purchased shares will be held by the plan custodian
until such time as the participating employee either requests a distribution or
terminates employment.

    Generally, if an employee leaves Principal Financial Group, Inc. or one of
its subsidiaries for any reason other than death or permanent disability, any
outstanding options granted to him or her will terminate and his or her
individual account will be returned to him or her. If an employee's employment
terminates due to death or permanent disability, the employee or his or her
designated beneficiary, as applicable, will have the option to elect either to
have the employee's contributions distributed or to have the employee's options
exercised at the next date of exercise.

    Our board of directors may terminate, suspend or amend the purchase plan at
any time, but such termination, suspension or amendment may not adversely affect
any options then outstanding under the purchase plan without the consent of the
recipients of those options. Our board of directors may not amend the plan
without the approval of the Insurance Commissioner of the State of Iowa in the
eighteen months following the completion of the demutualization. The shares to
be issued under the purchase plan may be authorized but unissued shares. Upon
the occurrence of events that affect our capitalization, appropriate adjustments
may be made in the number and kind of shares that may be issued under the
purchase plan in the future and in the number and kind of shares and price per
share under all outstanding grants made before the event. If any grant is for
any reason canceled, terminated or otherwise settled without the issuance of
some or all of the shares subject to the grant, such shares will be available
for future grants.

    If a third party acquires Principal Financial Group, Inc., employee
contributions are protected and will never be forfeited. With respect to granted
options, generally, one of two scenarios will occur: (1) unless the board of
directors determines otherwise, the purchase plan will terminate and all shares
and cash contributions in each employee's account will be distributed to the
employees; or (2) the third-party or new entity may offer to substitute options
for its shares in exchange for the employees' options to buy shares. For shares
an employee has already purchased, the employee will be treated like every other
stockholder.

    The grant of an option to purchase shares will not have any tax
consequences. Upon the exercise of an option, an employee will not be required
to report any taxable income or pay any tax provided that the employee is
employed by Principal Financial Group, Inc. or a subsidiary at the time of
exercise.

    Upon the sale of shares acquired through the purchase plan, an employee will
recognize ordinary income to the extent that the price he or she paid for the
shares was less than the fair market value of the shares at the date of grant of
the opportunity to purchase the shares. Any excess over that amount which is
realized upon the sale of such shares will be treated as long-term capital gain.
However, to receive this special tax treatment, the employee must hold the
shares for at least one year from the date of purchase and until the second
anniversary of the date the purchase opportunity was granted.

DIRECTORS STOCK PLAN

    Our Human Resources committee administers the directors stock plan. The
purpose of the plan is to enable us to attract, retain and motivate the best
qualified non-employee directors and to enhance a long-term aligning of
interests between such directors and the holders of our common stock. Under the
plan, the committee may, from time to time, grant options, Restricted Stock or
Restricted Stock Units to non-employee directors. No committee member may
participate in any decisions with respect to that member's benefits under the
plan unless the decision applies generally to all non-employee directors.

    Six months after the completion of the demutualization, all directors then
in office will each receive options to purchase 2,000 shares of common stock.
Directors first elected to the board of directors after the six month
anniversary of the demutualization will receive an amount of options prorated
with respect to the amount of time remaining until the next annual meeting of
shareholders. At each annual meeting thereafter, each director then in office
will receive options to purchase 2,000 shares of common stock. The exercise
price shall not be less than the fair market value of the shares on the date the
option is granted. Except as otherwise determined by the committee, options will
become exercisable in four approximately equal installments on the third, sixth,
ninth and twelfth month anniversaries of the grant date; however, no options
shall become exercisable earlier than eighteen months following the completion
of the demutualization. To exercise the option, payment must be made in cash,
stock, through an arrangement with a broker whereby payment of the exercise
price is accomplished with the proceeds of the sale of the

                                       169

shares or any combination of the foregoing. We may not make a loan to a director
to facilitate option exercise. Notwithstanding the foregoing, each option shall
expire, if not previously exercised in accordance with the terms of the plan, on
the tenth anniversary of the grant date.

    If a director ceases to provide service to us, the director or, in the case
of death, the director's estate or beneficiary, may exercise any option
exercisable by such director at the date his or her services terminates for a
period of three years, or until the tenth anniversary of the grant date of the
option, whichever is earlier.

    Six months after the completion of the demutualization, all directors then
in office and any subsequently elected director will receive a grant of
Restricted Stock Units. The number received by each director will be prorated
with respect to the amount of time remaining in such director's term, so that
directors whose initial term is the longest will each receive 1,500 Restricted
Stock Units. Upon re-election, each director will receive 1,500 Restricted Stock
Units. Restrictions on the sale or transfer of Restricted Stock Units shall
lapse in substantially equal installments from the date of grant to the date of
the end of such director's term, so that portions of each award vest four times
per year. However, no restrictions shall lapse earlier than the eighteen months
following the completion of the demutualization. In the event a director's
service shall terminate, any Restricted Stock or Restricted Stock Units awarded
to such director as to which the period of restriction has not lapsed shall be
forfeited.

    Subject to the terms and conditions of the plan, the committee may also
grant options, Restricted Stock or Restricted Stock Units to any director at any
time, except that: (i) no grant may be made before the six month anniversary of
the completion of the demutualization; and (ii) during the 18 month period after
the completion of the demutualization, the aggregate number of shares granted
pursuant to such discretionary option awards shall not exceed 20,000 shares, and
the aggregate number of shares granted pursuant to such discretionary Restricted
Stock or Restricted Stock Unit awards shall not exceed 15,000 shares. The
maximum number of shares that can be awarded under this plan is 500,000 shares
of common stock, and such number is counted against the limits referred to in
the second paragraph of the description of the stock incentive plan.

RETIREMENT PROGRAM

    Principal Life maintains a qualified defined benefit retirement plan, The
Principal pension plan, and a nonqualified supplemental pension plan,
supplemental executive retirement plan for employees, or SERP. The SERP provides
for supplemental pension benefits in excess of the benefit limits provided by
the Employee Retirement Income Security Act of 1974 and benefit and compensation
limits provided under the Internal Revenue Code.

    The table below provides for the estimated maximum annual retirement
benefits that a hypothetical participant would be entitled to receive under the
combined retirement plans. These benefits are computed on a straight-life
annuity basis, age 65 retirement, reduction of an annual social security benefit
of $20,028 (maximum allowed in 2001), and the number of credited years of
service and average annual recognized earnings equal to the amounts indicated. A
participant whose maximum credited years of service exceed 35 years upon
retirement at age 65 will be entitled to benefits substantially comparable to
the benefits available to a participant whose credited years of service equal 35
years upon retirement at age 65.

                               PENSION PLAN TABLE

                                                                      YEARS OF SERVICE
                                               ---------------------------------------------------------------
REMUNERATION                                      10         15         20         25         30         35
------------                                   --------   --------   --------   --------   --------   --------
                                                                                    
$300,000.....................................  $ 49,992   $ 74,988   $ 99,984   $124,980   $149,976   $174,972
$350,000.....................................    59,268     88,908    118,548    148,188    177,828    207,228
$400,000.....................................    68,556    102,840    137,124    171,408    205,680    239,964
$450,000.....................................    77,844    116,772    155,688    194,616    233,544    272,472
$500,000.....................................    87,132    130,692    174,264    217,836    261,408    304,968
$550,000.....................................    96,420    144,636    192,840    241,056    289,260    337,476
$600,000.....................................   105,708    158,556    211,416    264,264    317,124    369,972
$650,000.....................................   114,996    172,488    229,980    287,484    344,976    402,468
$700,000.....................................   124,272    186,420    248,556    310,692    372,828    434,976
$750,000.....................................   133,560    200,340    267,132    333,936    400,692    467,472
$800,000.....................................   142,848    214,272    285,696    357,120    428,544    499,968
$850,000.....................................   152,136    228,204    304,272    380,340    456,408    532,476
$900,000.....................................   161,424    242,136    322,836    403,548    484,260    564,972
$950,000.....................................   170,712    256,056    341,412    426,768    512,124    597,468
$1,000,000...................................   179,988    269,988    359,988    449,976    539,976    629,976

                                       170

    The plans will provide pension benefits for Messrs. Drury, Griswell,
Aschenbrenner, Gersie and Prey. "Average final compensation" under the
retirement plans will be determined with respect to each executive's salary and
bonus under the incentive pay plan. These amounts with respect to 2000 are shown
under the "Salary" and "Bonus" columns opposite the names of these executives in
the Summary Compensation Table above. The years of service with us of each of
the named executives for eligibility and benefit purposes as of December 31,
2000 were as follows: David J. Drury, 34 years; J. Barry Griswell, 12 years;
John E. Aschenbrenner, 28 years; Michael H. Gersie, 30 years; and Richard L.
Prey, 35 years. These executives will also receive an additional benefit based
on the service they earned prior to January 1, 1989.

                                       171

                                   REGULATION

U.S. OPERATIONS

    Our business is subject to extensive regulation at both the state and
federal level, including regulation under state insurance and federal and state
securities laws.

  STATE INSURANCE REGULATION

    GENERAL.  Principal Life and its insurance subsidiaries are subject to
regulation and supervision by the insurance authorities in each jurisdiction in
which they transact business. Currently, Principal Life is licensed to transact
business in all fifty states, the District of Columbia, Puerto Rico, the U.S.
Virgin Islands and seven Canadian provinces, and therefore is subject to
regulation in all these jurisdictions. State insurance laws generally establish
supervisory agencies with broad administrative and supervisory powers related to
granting and revoking licenses, transacting business, establishing guaranty fund
associations, licensing agents, approving policy forms, regulating premium rates
for some lines of business, establishing reserve requirements, prescribing the
form and consent of required financial statements and reports, determining the
reasonableness and adequacy of statutory capital and surplus and regulating the
type and amount of investments permitted. State insurance departments
periodically review the business and operations of an insurance company by
examining its financial condition and how it conducts its business in the
marketplace and how its agents sell its products. Principal Life and its
insurance subsidiaries are also required to file various reports relating to
their financial condition, including detailed annual and summary quarterly
statutory-basis financial statements. Filings are required in each jurisdiction
where Principal Life or an insurance subsidiary is licensed.

    State insurance regulatory authorities and other state law enforcement
agencies and attorneys general from time to time make inquiries concerning
whether our insurance subsidiaries are in compliance with the regulations
covering their businesses. We respond to such inquiries in a manner we deem
appropriate and take corrective action if warranted.

    State insurance regulators and the NAIC are continually reexamining existing
laws and regulations and developing new legislation for passage by state
legislatures and new regulations for adoption by insurance authorities. Proposed
laws and regulations or those still underdeveloped pertain to insurer solvency
and market conduct and in recent years have focused on:

    - insurance company investments,

    - risk-based capital guidelines, which consist of regulatory targeted
      surplus level based on the relationship of statutory capital and surplus,
      with prescribed adjustments, to the sum of stated percentages of each
      element of a specified list of company risk exposures,

    - the implementation of non-statutory guidelines and the circumstances under
      which dividends may be paid,

    - product approvals,

    - agent licensing,

    - underwriting practices, and

    - insurance and annuity sales practices.

    For example, the NAIC has promulgated proposed changes to statutory
accounting standards. These initiatives may be adopted by the various states in
which we are licensed, but the ultimate content, timing and impact of any
statutes and regulations adopted by the states cannot be determined at this
time.

    DIVIDENDS.  We are a holding company whose assets include all of the
outstanding shares of the common stock of Principal Life. As a holding company,
we will depend on dividends from our subsidiaries. The Iowa insurance laws may
restrict the ability of Principal Life to pay dividends to us. Our ability to
pay dividends to our stockholders and meet our obligations, including paying
operating expenses and any debt service, depends upon the receipt of dividends
from Principal Life. Any inability of Principal Life to pay dividends to us in
the future in an amount sufficient for us to pay dividends to our stockholders
and meet our other obligations may materially adversely affect our business,
financial condition or results of operations.

    The payment of dividends to us by Principal Life is regulated under Iowa
insurance laws. Under Iowa insurance laws, Principal Life may pay dividends only
out of the earned profits arising from its business. Principal Life must seek
regulatory approval prior to paying a shareholder dividend or distributing cash
or other property whose fair market value, together with that of other
shareholder dividends or distributions made within the preceding 12 month
period, exceeds the greater of:

    - 10% of Principal Life's statutory surplus as of the previous calendar year
      end; or

    - the net gain from operations of Principal Life determined on a statutory
      basis for the previous calendar year.

                                       172

  HOLDING COMPANY REGULATION

    We and our insurance subsidiaries are subject to regulation under the
insurance holding company laws of various jurisdictions. The insurance holding
company laws and regulations vary from jurisdiction to jurisdiction, but
generally require an insurer that is a subsidiary of an insurance holding
company or the insurance holding company to register with state regulatory
authorities and to file with those authorities reports, including information
concerning capital structure, ownership, financial condition, intercompany
transactions and general business operations, including transactions involving
the transfer of assets, loans or payment of dividends between an insurer and its
affiliates, and in some cases to obtain prior approvals from those authorities
for transactions between an insurer and its affiliates.

    In addition, insurance regulators periodically examine an insurer's
financial condition. Applicable state insurance laws, rather than federal
bankruptcy laws, apply to the liquidation or the restructuring of insurance
companies. Insurance company subsidiaries of the holding company would be
subject to such state insurance laws; however, the holding company would
generally be subject to federal bankruptcy laws.

  SURPLUS AND CAPITAL REQUIREMENTS

    Insurance regulators have the discretionary authority, in connection with
the ongoing licensing of our insurance subsidiaries, to limit or prohibit the
ability to issue new policies if, in the regulators' judgment, the insurer is
not maintaining a minimum amount of surplus or is in hazardous financial
condition. Limits may also be established on the ability to issue new life
insurance policies and annuity contracts above an amount based upon the face
amount and premiums of policies of a similar type issued in the prior year. We
do not believe that the current or anticipated levels of statutory surplus of
Principal Life present a material risk that any such regulator would limit the
amount of new insurance business Principal Life may issue. Statutory surplus is
the excess of admitted assets over statutory liabilities, as shown on Principal
Life's statutory financial statements.

  RISK-BASED CAPITAL

    The NAIC has established risk-based capital standards for life insurance
companies as well as a model act to apply such standards at the state level. The
model act provides that life insurance companies must submit an annual
risk-based capital report to state regulators reporting their risk-based capital
based on four categories of risk: asset risk, insurance risk, interest rate risk
and business risk. For each category, the capital requirement is determined by
applying factors to various asset, premium and reserve items, with the factor
being higher for those items with greater underlying risk and lower for less
risky items. The formula is intended to be used by insurance regulators as an
early warning tool to identify possible weakly capitalized companies for
purposes of initiating further regulatory action.

    If an insurer's total adjusted capital falls below specified levels, the
insurer would be subject to different degrees of regulatory action depending
upon the level. These actions range from requiring the insurer to propose
actions to correct the capital deficiency to placing the insurer under
regulatory control. At June 30, 2001, Principal Life's total adjusted capital
exceeded the level of risk-based capital that would require it to take any
corrective action.

  GUARANTY FUNDS

    All fifty states of the United States, the District of Columbia and Puerto
Rico have insurance laws requiring companies licensed to do life or health
insurance business within those jurisdictions to participate as members of the
state's life and health insurance guaranty associations. These associations are
organized to pay contractual obligations under life and health insurance
policies and annuity contracts issued by impaired or insolvent insurance
companies. To meet these obligations, these associations levy assessments on all
member insurers based on the proportionate share of the premiums written by each
member in the lines of business in which the impaired or insolvent insurer is
engaged. Some states permit member insurers to recover assessments paid through
full or partial premium tax offsets, usually over a period of years. For the six
months ended June 30, 2001, and the years ended December 31, 2000, 1999, and
1998, we paid $0.2 million, $0.1 million, $2.2 million, and $6.5 million,
respectively, in assessments, net of returns, made under state guaranty
association laws. While the amount of future assessments cannot be accurately
predicted, we believe that assessments with respect to other pending insurance
company impairments and insolvencies will not be material to our business,
financial condition or results of operations.

  STATUTORY INVESTMENT VALUATION RESERVES

    Life insurance companies are required to establish an asset valuation
reserve to stabilize statutory policyholder surplus from fluctuations in the
market value of and/or realized gains or losses on bonds, stocks, mortgage
loans, real estate and other invested assets, other than fluctuations captured
by the INTEREST MAINTENANCE RESERVE. Although

                                       173

classified as a reserve account, asset valuation reserve does not represent an
obligation of the company. Asset valuation reserve has two components:

    - a "default component," which provides for future credit-related losses on
      fixed maturity investments; and

    - an "equity component," which provides for losses on all types of equity
      investments, including equity securities and real estate.

    Asset valuation reserve generally captures all realized and unrealized gains
or losses on invested assets, other than those resulting from changes in
interest rates. Each year the amount of an insurer's asset valuation reserve
will fluctuate as additional gains or losses are absorbed by the reserve. To
adjust for such changes over time, an annual contribution must be made to the
asset valuation reserve equal to a basic contribution plus 20% of the difference
between the reserve objective and the actual asset valuation reserve. Insurers
also are required to establish an Interest Maintenance Reserve for net realized
capital gains and losses on fixed maturity securities, net of tax, related to
changes in interest rates. The Interest Maintenance Reserve applies to all types
of fixed maturity investments, including bonds, preferred stocks,
mortgage-backed securities and mortgage loans. The Interest Maintenance Reserve
is required to be amortized into statutory earnings on a basis reflecting the
remaining period to maturity of the fixed maturity securities sold. These
reserves are required by state insurance regulatory authorities to be
established as a liability on a life insurer's statutory financial statements,
but do not affect our financial statements prepared in accordance with GAAP.
Although future additions to asset valuation reserve will reduce Principal
Life's future statutory capital and surplus, we do not believe that the impact
under current regulations of such reserve requirements will materially affect
the ability of Principal Life to increase its statutory capital and surplus and
pay future dividends to us.

  NAIC INSURANCE REGULATORY INFORMATION SYSTEM RATIOS

    The NAIC has developed a set of financial tests known as the Insurance
Regulatory Information System for early identification of companies which may
require special attention by insurance regulators. Insurance companies submit
data on an annual basis to the NAIC. These data are used to calculate ratios
covering various categories of financial data, with defined "usual ranges" for
each category. The Insurance Regulatory Information System consists of 12 key
financial ratios for life insurance companies. Departure from the usual range on
four or more of the ratios may lead to inquiries from individual states'
insurance departments. For the year ended December 31, 2000, Principal Life was
within the "usual range" for all of the ratios.

  REGULATION OF INVESTMENTS

    Our insurance subsidiaries are subject to state laws and regulations that
require diversification of their investment portfolios. Some of these laws and
regulations also limit the amount of investments in specified investment
categories, such as below investment grade fixed maturity securities, equity
real estate, other equity investments and derivatives. Failure to comply with
these laws and regulations would cause investments exceeding regulatory
limitations to be treated as non-admitted assets for purposes of measuring
statutory surplus, in some instances, requiring divestiture. Non-admitted assets
are assets or portions of those assets which are not permitted to be reported as
admitted assets in an insurance company's annual statement. As a result, assets
which normally would be accorded value in the financial statements of
non-insurance companies are accorded no value and thus reduce the reported
statutory policyholder surplus of the insurance company. State regulatory
authorities from the domiciliary states of our insurance subsidiaries have not
indicated any non-compliance with any such regulations.

  VALUATION OF LIFE INSURANCE POLICIES MODEL REGULATION

    The NAIC has adopted a revision to the Valuation of Life Insurance Policies
Model Regulation, known as Revised XXX, which Iowa adopted effective January 1,
2000. This regulation establishes new minimum statutory reserve requirements for
some individual life insurance policies written in the future. Under this
regulation, companies selling specified individual life insurance products, such
as term life insurance with guaranteed premium periods and universal life
insurance products with no-lapse guarantees, are required to redesign their
products or hold increased reserves to be consistent with the new minimum
standards with respect to policies issued after the effective date of the
regulation. Principal Life has taken action to either redesign or increase
reserves with respect to these products, and we do not believe these actions
will result in a material adverse effect on our business, financial condition or
results of operations.

  STATUTORY EXAMINATION

    As part of their routine regulatory oversight process, state insurance
departments conduct periodic detailed examinations of the books, records and
accounts of insurers domiciled in their states. These examinations are generally
conducted in cooperation with the departments of two or three other states under
guidelines promulgated by the NAIC. On August 21, 2000, the Iowa insurance
division completed an examination of Principal Life for the three-year period
ended December 31, 1998. No material violations of law were found.

                                       174

    State insurance departments also periodically conduct market conduct
examinations of the sales practices of insurance companies, including our life
insurance subsidiaries. In recent years, a number of life and annuity insurers
have been the subject of regulatory proceedings and litigation relating to
alleged improper life insurance pricing and sales practices. Some of these
insurers have incurred or paid substantial amounts in connection with the
resolution of such matters. Regulatory authorities in a small number of states,
including both insurance departments and attorneys general, have ongoing
investigations of our sales of individual life insurance policies or annuities,
including investigations of alleged improper replacement transactions and
alleged improper sales of insurance with inaccurate or inadequate disclosures as
to the period for which premiums would be payable.

  REGULATION OF SAVINGS AND LOAN HOLDING COMPANY

    Due to our indirect control of Principal Bank, a federal savings bank, we
are a savings and loan holding company regulated by the Office of Thrift
Supervision; however, since we control only one savings bank, our activities are
not subject to all of the limitations on business activities otherwise
applicable to savings and loan holding companies.

  FEDERAL INSURANCE INITIATIVES

    Although the federal government generally does not directly regulate the
insurance business, federal initiatives often have an impact on our business.
Current and proposed measures that may significantly affect the insurance
business generally include limitations on anti-trust immunity, minimum solvency
requirements and health care reform.

    Congressional committees have held hearings with respect to the optional
federal chartering and regulation of insurance companies and agencies. Although
no legislative bills have yet been introduced, there are currently proposals
made by insurance and banking trade associations providing for uniform federal
regulation of the insurance industry. We cannot predict what other proposals may
be made in connection with the federal chartering, what legislation, if any, may
be introduced or enacted and what effect any such legislation may have on us.

    On November 21, 2000, the Department of Labor issued new regulations to
create a rapid process for employees to appeal claims rejected by their health
insurance plans. The new regulations apply to all claims filed on or after
January 1, 2002.

    On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act of 1999, implementing fundamental changes in the
regulation of the financial services industry in the United States. The act
permits the transformation of the already converging banking, insurance and
securities industries by permitting mergers that combine commercial banks,
insurers and securities firms under one holding company. Under the act, national
banks retain their existing ability to sell insurance products in some
circumstances. In addition, bank holding companies that qualify and elect to be
treated as "financial holding companies" may engage in activities, and acquire
companies engaged in activities, that are "financial" in nature or "incidental"
or "complementary" to such financial activities, including acting as principal,
agent or broker in selling life, property and casualty and other forms of
insurance, including annuities. A financial holding company can own any kind of
insurance company or insurance broker or agent, but its bank subsidiary cannot
own the insurance company. Under state law, the financial holding company would
need to apply to the insurance commissioner in the insurer's state of domicile
for prior approval of the acquisition of the insurer, and the act provides that
the commissioner, in considering the application, may not discriminate against
the financial holding company because it is affiliated with a bank. Under the
act, no state may prevent or interfere with affiliations between banks and
insurers, insurance agents or brokers, or the licensing of a bank or affiliate
as an insurer or agent or broker.

    Until passage of the Gramm-Leach-Bliley Act, the Glass-Steagall Act of 1933
had limited the ability of banks to engage in securities-related businesses, and
the Bank Holding Company Act of 1956 had restricted banks from being affiliated
with insurance companies. With the passage of the Gramm-Leach-Bliley Act, bank
holding companies may acquire insurers, and insurance holding companies may
acquire banks. The ability of banks to affiliate with insurance companies may
materially adversely affect all of our product lines by substantially increasing
the number, size and financial strength of potential competitors.

  TAX LEGISLATION

    Currently, the Internal Revenue Code provides favorable federal income tax
treatment to holders of various types of life insurance and annuity products.
For example, increases in the cash value of life insurance and annuity products
are tax-deferred during the product's accumulation period and life insurance
death benefits paid to the beneficiary after the insured's death are generally
not subject to federal income taxation. Withdrawals from life insurance and
annuity products also receive generally favorable tax treatment. In addition,
interest, within limitations, on loans up to $50,000 secured by the cash value
of life insurance policies owned by businesses on key employees is eligible for
deduction even though investment earnings during the accumulation period are
tax-deferred. Congress has on occasion considered proposals to reduce or
eliminate the favorable tax rules for life insurance and annuity contracts. If
such proposals are ever adopted, they could substantially reduce market demand
for these products.

                                       175

    The Economic Growth and Tax Relief Reconciliation Act of 2001 contains a
number of changes in the federal estate tax. Among other things, it (1)
increases the amount of the unified credit, thereby increasing the amount of
property not subject to the estate tax, and (2) gradually reduces the federal
estate tax rate over a period of years beginning in 2002 and repeals it entirely
for the year 2010. The law in effect prior to the Act, however, is reinstated
for years after 2010. Many insurance products are designed and marketed for the
purpose of reducing the federal estate tax. Although the impact of this new law
on insurance companies is not yet clear, it is quite possible that it could
result in a significant reduction in sales of our insurance products.

  SECURITIES LAWS

    Our investment advisory activities are subject to federal and state
securities laws and regulations. Our mutual funds are registered under the
Investment Company Act of 1940. The shares issued by the mutual funds are
registered under the Securities Act. Additionally, two of our separate
investment accounts fund variable annuity contracts and variable life insurance
policies we issue are registered under the Investment Company Act. Some of the
variable annuity contracts and variable life insurance policies we issue are
registered under the Securities Act. Two of our subsidiaries are registered as
broker/dealers under the Exchange Act, and are members of the National
Association of Securities Dealers, Inc. A number of our subsidiaries are
registered as investment advisers under the Investment Advisers Act of 1940. We
are also subject to similar laws and regulations in the states and foreign
countries in which we provide investment advisory services, offer the products
described above or non-variable life and annuity products or conduct other
securities and investment related activities.

  PRIVACY OF CUSTOMER INFORMATION

    Federal law and regulation requires financial institutions to protect the
security and confidentiality of customer information and to notify customers
about their policies and practices relating to their collection and disclosure
of customer information and their policies relating to protecting the security
and confidentiality of that information. Federal and state laws also regulate
disclosures of customer information. Congress and state legislatures are
expected to consider additional regulation relating to privacy and other aspects
of customer information.

  ENVIRONMENTAL CONSIDERATIONS

    As owner and operator of real property, we are subject to extensive federal,
state and local environmental laws and regulations. Inherent in such ownership
and operation is the risk that there may be potential environmental liabilities
and costs in connection with any required remediation of such properties. When
deemed appropriate, we routinely conduct environmental assessments for real
estate being acquired for investment and before taking title to property
acquired through foreclosure or deed in lieu of foreclosure. Based on these
environmental assessments and compliance with our internal environmental
procedures, we believe that any costs associated with compliance with
environmental laws and regulations or any remediation of such properties would
not be material to our consolidated financial position. Furthermore, although we
hold equity positions in subsidiaries and investments that could potentially be
subject to environmental liabilities, we believe that we would not be subject to
any environmental liabilities with respect to these investments which would have
a material adverse effect on our business, financial position or results of
operations.

  ERISA CONSIDERATIONS

    We engage in several lines of business, including our management of employee
benefit plan assets held in our separate accounts that are subject to the
requirements of ERISA. The Small Business Job Protection Act offered insurers
some protection from potential litigation exposure prompted by the 1993 U.S.
Supreme Court decision in John Hancock Mutual Life Insurance Company v. Harris
Trust & Savings Bank. In Harris Trust, the Court held that, with respect to a
portion of the funds held under general account group annuity contracts, an
insurer is subject to the fiduciary requirements of ERISA under some
circumstances. The pertinent provisions of the Small Business Job Protection Act
provide that insurers are protected from liability for prohibited transactions
and for breaches of fiduciary duties under ERISA for past actions with respect
to their general account contracts. However, insurers remain subject to federal
criminal law and liable for actions brought by the U.S. Secretary of Labor
alleging breaches of fiduciary duties that also constitute a violation of
federal or state criminal law.

    The Small Business Job Protection Act also provides that contracts issued
from an insurer's general account on or before December 31, 1998, that are not
guaranteed benefit policies, will not subject an insurer's general account to
ERISA's fiduciary requirements if they meet the requirements of regulations to
be issued by the United States Department of Labor. Contracts issued from an
insurer's general account after December 31, 1998, that are not guaranteed
benefit policies will potentially subject the insurer's general account to
ERISA. On January 5, 2000, the Department of Labor published regulations under
the Small Business Job Protection Act which provide, among other things, that if
an employee benefit plan acquired an insurance policy, other than a guaranteed
benefit policy, issued on or before December 31, 1998 that is supported by the
assets of the insurer's general account, the plan's assets for purposes of ERISA
will not be deemed to include any of the assets of the insurer's general
account, provided that the

                                       176

requirements of the regulation are met. Accordingly, if those requirements are
met, the insurer would not be subject to the fiduciary obligations of ERISA as a
result of issuing such an insurance policy. These requirements include detailed
disclosures to be made to the employee benefit plan and the requirement that the
insurer must permit the policyholder to terminate the policy on 90 days' notice
and receive without penalty, at the policyholder's option, either: (1) the
accumulated fund balance, which may be subject to market value adjustment; or
(2) a book value payment of such amount in annual installments with interest. In
the event we elect to comply with the requirements to secure the exemption
provided by the regulations from the fiduciary obligations of ERISA, our
exposure to disintermediation risk could increase due to the termination options
that we would be required to provide to policyholders. In the absence of relief
under the regulations, the Harris Trust decision could substantially increase
administrative costs, may require the segregation of assets currently in the
general account, result in potential liability arising from the application of
ERISA's fiduciary rules to our general account or adversely affect future
business.

    With respect to employee welfare benefit plans subject to ERISA, the
Congress periodically has considered amendments to the law's federal preemption
provision, which would expose us, and the insurance industry generally, to state
law causes of action, and accompanying extra-contractual damages, such as
punitive damages, in lawsuits involving, for example, group life and group
disability claims. To date, all such amendments to ERISA have been defeated.

INTERNATIONAL OPERATIONS

  BT FINANCIAL GROUP

    The Australian Securities and Investments Commission is the primary
regulator of the Australian securities industry. The Australian Prudential
Regulatory Authority is primarily responsible for the regulation of
superannuation and life insurance product providers.

    A number of BT Financial Group companies hold securities licenses. Several
BT Financial Group companies have been approved by the Australian Prudential
Regulatory Authority to act as trustees for superannuation products. BT Tactical
Asset Management Pty Limited holds a futures brokers license and is a member of
the Sydney Futures Exchange. BT Life Limited is registered as a life company
under the Life Insurance Act. BT Securities Limited is registered as a financial
corporation under the Financial Corporations Act. BT Financial Group companies
are also subject to various regulations in foreign jurisdictions in which they
operate.

    Australia's risk-based capital adequacy guidelines are generally consistent
with the approach agreed upon by the Bank Committee on Banking Regulation and
Supervisory Practices (Bank for International Settlements).

  PRINCIPAL INTERNATIONAL

    Principal International operates in a number of countries around the world.
The degree of regulation and supervision of our businesses varies from minimal
in some countries to stringent in others.

    Generally, we and those of our subsidiaries conducting business
internationally must obtain licenses from local authorities and satisfy local
regulatory requirements. The licenses local authorities issue to us and our
subsidiaries are subject to modification and revocation by such authorities and,
thus, we and our subsidiaries could be prevented from conducting business in
jurisdictions where we currently operate.

    Local authorities also regulate our international asset accumulation
operations by imposing requirements relating to currency, policy language and
terms, amount and type of security deposits, amount and type of reserves, amount
and type of local investment and the share of profits that must be returned to
policyholders on participating policies. Some local authorities regulate rates
on various types of policies. Certain countries have established reinsurance
institutions, wholly or partially owned by the state, to which admitted insurers
are obligated to cede portion of their business on terms which do not always
allow foreign insurers, including us, for compensation. In some countries,
regulations governing constitution of technical reserves and remittance balances
may hinder remittance of profits and repatriation of assets.

    ARGENTINA.  In Argentina, the National Insurance Superintendence regulates
our insurance and annuity operations, including by restricting the types of
entities that may engage in the insurance business. The National Insurance
Superintendence, at its sole discretion, may award or reject authorizations for
the formation of a new insurance company and requires notice of any transfers of
shares of previously authorized insurance companies. Insurance companies are
subject to reporting requirements which mandate the filing of, among other
things, copies of resolutions passed at shareholders' meetings, financial
statements and statistical information relating to the types of insurance sold
and geographical distribution of such sales.

    BRAZIL.  The National Council of Private Insurance is responsible for
adopting policies, rules and regulations governing private pension companies in
Brazil. The Superintendent of Private Insurance is responsible for the
audit/review of the activities of private pension companies, including
accounting, actuarial and statistical audits/reviews, and for authorizing the
establishment and operations of these companies. All products sold by private

                                       177

pension companies must be approved by the Superintendent of Private Insurance.
Our private pension company, BrasilPrev Previdencia Privada S.A., has been
authorized to operate through a license granted by the Superintendent of Private
Insurance, as well as previous authorization from the Superintendent of Private
Insurance to administer all the products that BrasilPrev currently sells.

    CHILE.  The Superintendent of Securities and Insurance is the regulator
responsible for supervising all insurance company activities in Chile. The
investments of insurance companies are highly regulated. The Superintendent of
Securities and Insurance has established limits with respect to equity and
leverage ratios for insurance company investments. Compliance with these limits
is regularly monitored.

    HONG KONG.  As a long term life insurance provider, Principal Insurance
Company (Hong Kong) Limited is regulated by the Hong Kong Insurance Authority
and its investment products are regulated by the Hong Kong Securities & Futures
Commission, which is also responsible for overseeing its pension operations. The
Insurance Authority requires that, so long as Principal Insurance Company (Hong
Kong) Limited holds an insurance license, it must maintain a minimum capital of
HK$300 million and a solvency margin in respect of each particular product it is
underwriting. Mandatory Provident Fund Schemes must be under a trust. As such,
Principal Trust Company (Asia) Limited, the trustee of all Mandatory Provident
Fund Schemes, along with the delegated administrator Principal Insurance Company
(Hong Kong) Limited and its investment manager Principal Asset Management
Company (Asia) Limited, are regulated by the Mandatory Provident Fund Schemes
Authority.

    INDIA.  In India, the Securities and Exchange Board of India supervises the
registration, regulation and working of collective investment schemes including
mutual funds. Indian law governs the structure of a mutual fund, the rights,
duties and obligations of sponsors, the trustees, the asset management company,
the custodian, the registrar, investment guidelines/limits and valuation
policies, advertisement and marketing code, accounting policies and standards,
code of conduct and disclosure requirements.

    MEXICO.  The Ministry of Treasury is responsible for oversight of the
insurance industry in Mexico, but it is handled through the National Insurance
and Bonding Commission. All claims against insurance companies are handled
through the National Commission for the Rights of the Financial Services Users.

    The National Commission for the Retirement Savings System supervises the
private pension fund managers who administer Mexico's pension system, and the
pension funds, they manage. As of March 31, 2001, each pension fund manager must
keep an initial minimum capital requirement of 25.0 million pesos ($2.8 million)
in reserve in order to operate and each private pension fund must have initial
capital of 4.0 million pesos ($0.4 million). In order to prevent any pension
fund manager from gaining control of the market, no pension fund manager is
permitted to manage assets for more than 17 percent of the number of individuals
in the mandatory privatized social security system in the first four years after
the public pension system begins. Thereafter, a pension fund manager's market
share is limited to 20 percent.

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                           OWNERSHIP OF COMMON STOCK

    The following table presents selected information regarding the beneficial
ownership of our common stock as of the effective date of the demutualization
by:

        (1) each of our directors and named executive officers; and

        (2) all of our directors and executive officers as a group.

    The number of shares of our common stock beneficially owned by each director
and executive officer and all directors and executive officers as a group is
based upon the number of shares that we estimate each director and executive
officer, and persons and entities affiliated with each director and executive
officer, will receive in their capacity as policyholders entitled to receive
compensation in the demutualization. Except as otherwise indicated below, each
of the persons named in the table will have sole voting and investment power
with respect to the shares beneficially owned by such person as indicated
opposite such person's name.

                                                              NUMBER OF SHARES TO BE
NAME                                                          BENEFICIALLY OWNED(1)
----                                                          ----------------------
                                                           
David J. Drury..............................................                *
J. Barry Griswell...........................................                *
Betsy J. Bernard............................................                *
Jocelyn Carter-Miller.......................................                *
Daniel Gelatt...............................................                *
Sandra L. Helton............................................                *
Charles S. Johnson..........................................                *
William T. Kerr.............................................                *
Lee Liu.....................................................                *
Victor H. Loewenstein.......................................                *
Ronald D. Pearson...........................................                *
Federico F. Pena............................................                *
Donald M. Stewart...........................................                *
Elizabeth E. Tallett........................................                *
John E. Aschenbrenner.......................................                *
Michael T. Daley............................................                *
Dennis P. Francis...........................................                *
Michael H. Gersie...........................................                *
Ellen Z. Lamale.............................................                *
Mary A. O'Keefe.............................................                *
Richard L. Prey.............................................                *
Karen E. Shaff..............................................                *
Norman R. Sorensen..........................................                *
Carl C. Williams............................................                *
Larry D. Zimpleman..........................................                *
All directors and executive officers as a group (25
  persons)..................................................                *

---------------

 *  Less than 1% of the number of shares of our common stock expected to be
    outstanding on the effective date of the demutualization.

(1) Based on an estimated allocation of shares based upon policy ownership
    records as of June 30, 2001.

    We believe no person will beneficially own more than 5% of our outstanding
shares of common stock as of the effective date of the demutualization. The
independent fiduciary for the shares of our common stock issued to a new
separate account of Principal Life as part of the Separate Account Policy
Credits may from time to time share beneficial ownership over those shares
because it will, if the matter involved is not routine, instruct Principal Life
to vote the shares as to which Principal Life has received no instruction from
the Qualified Plan Customers. See "The Demutualization -- Operation of the
Separate Account Holding Shares of our Common Stock."

                                       179

               DESCRIPTION OF CAPITAL STOCK AND CHANGE OF CONTROL
                               RELATED PROVISIONS

    The authorized capital stock of Principal Financial Group, Inc. consists of
2.5 billion shares of common stock and 500 million shares of preferred stock.

COMMON STOCK

    Holders of common stock are entitled to receive such dividends as may from
time to time be declared by our board of directors out of funds legally
available for the payment of such dividends. See "Stockholder Dividend Policy".
Holders of common stock are entitled to one vote per share on all matters on
which the holders of common stock are entitled to vote and do not have any
cumulative voting rights. Holders of common stock have no preemptive,
conversion, redemption or sinking fund rights. In the event of a liquidation,
dissolution or winding up of Principal Financial Group, Inc., holders of common
stock are entitled to share equally and ratably in the assets of Principal
Financial Group, Inc., if any, remaining after the payment of all liabilities of
Principal Financial Group, Inc. and the liquidation preference of any
outstanding class or series of preferred stock. The outstanding shares of common
stock are, and the shares of common stock offered by Principal Financial Group,
Inc. in this offering, when issued, will be, fully paid and nonassessable. The
rights and privileges of holders of common stock are subject to any series of
preferred stock that Principal Financial Group, Inc. may issue in the future, as
described below.

PREFERRED STOCK

    Our board of directors has the authority to issue preferred stock in one or
more series and to fix the number of shares constituting any such series and the
voting rights, designations, preferences and qualifications, limitations and
restrictions of the shares constituting any series, without any further vote or
action by our stockholders. The issuance of preferred stock by our board of
directors could adversely affect the rights of holders of common stock.

    We will authorize shares of Series A Junior Participating Preferred Stock in
connection with our stockholder rights plan. See "-- Stockholder Rights Plan".

CHANGE OF CONTROL RELATED PROVISIONS IN OUR CERTIFICATE OF INCORPORATION AND
BY-LAWS, AND DELAWARE LAW

    A number of provisions of our certificate of incorporation and by-laws deal
with matters of corporate governance and rights of stockholders. The following
discussion is a general summary of selected provisions of our certificate of
incorporation and by-laws and regulatory provisions that might be deemed to have
a potential antitakeover effect. See "Risk Factors -- Applicable laws and our
stockholder rights plan, certificate of incorporation and by-laws may discourage
takeovers and business combinations that our stockholders might consider in
their best interests". These provisions may have the effect of discouraging a
future takeover attempt which is not approved by our board of directors but
which individual stockholders may deem to be in their best interests or in which
stockholders may receive a substantial premium for their shares over then
current market prices. As a result, stockholders who might desire to participate
in such a transaction may not have an opportunity to do so. Such provisions will
also render the removal of the incumbent board of directors or management more
difficult. Some provisions of the Delaware General Corporation Law and the Iowa
Insurance Law may also have an antitakeover effect. The following description of
selected provisions of our certificate of incorporation and bylaws and selected
provisions of the Delaware General Corporation Law and the Iowa Insurance Law
are necessarily general and reference should be made in each case to our
certificate of incorporation and by-laws, which are filed as exhibits to our
registration statement, and to the provisions of those laws. See "Additional
Information" for information on where to obtain a copy of our certificate of
incorporation and by-laws.

  UNISSUED SHARES OF CAPITAL STOCK

    COMMON STOCK.  Based upon the assumptions described under "Unaudited Pro
Forma Condensed Consolidated Financial Information," we currently plan to issue
an estimated 360.6 million shares of our authorized common stock in this
offering and the demutualization. The remaining shares of authorized and
unissued common stock will be available for future issuance without additional
stockholder approval. While the additional shares are not designed to deter or
prevent a change of control, under some circumstances we could use the
additional shares to create voting impediments or to frustrate persons seeking
to effect a takeover or otherwise gain control by, for example, issuing those
shares in private placements to purchasers who might side with our board of
directors in opposing a hostile takeover bid.

    PREFERRED STOCK.  Our board of directors has the authority to issue
preferred stock in one or more series and to fix the number of shares
constituting any such series and the preferences, limitations and relative
rights, including dividend rights, dividend rate, voting rights, terms of
redemption, redemption price or prices, conversion rights and liquidation
preferences of the shares constituting any series, without any further vote or
action by our stockholders. The existence of authorized but unissued preferred
stock could reduce our attractiveness as a target for an unsolicited takeover
bid since we could, for example, issue shares of preferred stock to parties who
might oppose such a takeover bid or shares that contain terms the potential
acquiror may find unattractive. This may have the effect of delaying or
                                       180

preventing a change in control, may discourage bids for the common stock at a
premium over the market price of the common stock, and may adversely affect the
market price of, and the voting and other rights of the holders of, common
stock.

    CLASSIFIED BOARD OF DIRECTORS AND REMOVAL OF DIRECTORS.  Our certificate of
incorporation provides that the directors shall be divided into three classes,
as nearly equal in number as possible, with the term of office of each class to
be three years. The classes serve staggered terms, such that the term of one
class of directors expires each year. Any effort to obtain control of our board
of directors by causing the election of a majority of the board of directors may
require more time than would be required without a staggered election structure.
Our certificate of incorporation also provides that directors may be removed
only for cause at a meeting of stockholders by a vote of a majority of the
shares then entitled to vote. This provision may have the effect of slowing or
impeding a change in membership of our board of directors that would effect a
change of control.

    RESTRICTION ON MAXIMUM NUMBER OF DIRECTORS AND FILLING OF VACANCIES ON OUR
BOARD OF DIRECTORS.  Our by-laws provide that the number of directors shall be
fixed and increased or decreased from time to time by resolution of the board of
directors, but the board of directors shall at no time consist of fewer than
three directors. Stockholders can only remove a director for cause by a vote of
a majority of the shares entitled to vote, in which case the vacancy caused by
such removal may be filled at such meeting by the stockholders entitled to vote
for the election of the director so removed. Any vacancy on the board of
directors, including a vacancy resulting from an increase in the number of
directors or resulting from a removal for cause where the stockholders have not
filled the vacancy, may be filled by a majority of the directors then in office,
although less than a quorum. If the vacancy is not so filled, it shall be filled
by the stockholders at the next annual meeting of stockholders. The stockholders
are not permitted to fill vacancies between annual meetings except where the
vacancy resulted from a removal for cause. These provisions give incumbent
directors significant authority that may have the effect of limiting the ability
of stockholders to effect a change in management.

    ADVANCE NOTICE REQUIREMENTS FOR NOMINATION OF DIRECTORS AND PRESENTATION OF
NEW BUSINESS AT MEETINGS OF STOCKHOLDERS; ACTION BY WRITTEN CONSENT.  Our
by-laws provide for advance notice requirements for stockholder proposals and
nominations for director. In addition, under the provisions of both our
certificate of incorporation and by-laws, action may not be taken by written
consent of stockholders; rather, any action taken by the stockholders must be
effected at a duly called meeting. The chief executive officer, or, under some
circumstances, the president or any vice president, and the board of directors
may call a special meeting. These provisions make it more procedurally difficult
for a stockholder to place a proposal or nomination on the meeting agenda or to
take action without a meeting, and therefore may reduce the likelihood that a
stockholder will seek to take independent action to replace directors or seek a
stockholder vote with respect to other matters that are not supported by
management.

  LIMITATIONS ON DIRECTOR LIABILITY

    Our certificate of incorporation contains a provision that is designed to
limit our directors' liability. Specifically, directors will not be held liable
to Principal Financial Group, Inc. for monetary damages for breach of their
fiduciary duty as a director, except to the extent that this limitation on or
exemption from liability is not permitted by the Delaware General Corporation
Law and any amendments to that law.

    The principal effect of the limitation on liability provision is that a
stockholder is unable to prosecute an action for monetary damages against a
director of Principal Financial Group, Inc. unless the stockholder can
demonstrate a basis for liability for which indemnification is not available
under the Delaware General Corporation Law. This provision, however, does not
eliminate or limit director liability arising in connection with causes of
action brought under the federal securities laws. Our certificate of
incorporation does not eliminate our directors' duty of care. The inclusion of
this provision in our certificate of incorporation may, however, discourage or
deter stockholders or management from bringing a lawsuit against directors for a
breach of their fiduciary duties, even though such an action, if successful,
might otherwise have benefited Principal Financial Group, Inc. and our
stockholders. This provision should not affect the availability of equitable
remedies such as injunction or rescission based upon a director's breach of the
duty of care.

    Our by-laws also provide that we will indemnify our directors and officers
to the fullest extent permitted by Delaware law. We are required to indemnify
our directors and officers for all judgments, fines, settlements, legal fees and
other expenses incurred in connection with pending or threatened legal
proceedings because of the director's or officer's position with Principal
Financial Group, Inc. or another entity that the director or officer serves at
our request, subject to various conditions, and to advance funds to our
directors and officers to enable them to defend against such proceedings. To
receive indemnification, the director or officer must have been successful in
the legal proceeding or have acted in good faith and in what was reasonably
believed to be a lawful manner in the best interest of Principal Financial
Group, Inc.

    SUPERMAJORITY VOTING REQUIREMENT FOR AMENDMENT OF CERTAIN PROVISIONS OF OUR
CERTIFICATE OF INCORPORATION AND BY-LAWS.  The provisions of our certificate of
incorporation governing, among other things the classified board, the director's
discretion in determining what he or she reasonably believes to be in the best
interests of Principal Financial

                                       181

Group, Inc., the liability of directors and the elimination of stockholder
actions by written consent may not be amended, altered or repealed unless the
amendment is approved by the vote of holders of three/fourths of the shares then
entitled to vote at an election of directors. This requirement exceeds the
majority vote of the outstanding stock that would otherwise be required by the
Delaware General Corporation Law for the repeal or amendment of such provisions
of the certificate of incorporation. Our by-laws may be amended by the board of
directors or by the vote of holders of three/fourths of the shares then entitled
to vote. These provisions make it more difficult for any person to remove or
amend any provisions that have an antitakeover effect.

    BUSINESS COMBINATION STATUTE.  In addition, as a Delaware corporation, we
are subject to Section 203 of the Delaware General Corporation Law, unless we
elect in our certificate of incorporation not to be governed by the provisions
of Section 203. We have not made that election. Section 203 can affect the
ability of an "interested stockholder" of Principal Financial Group, Inc. to
engage in business combinations, such as mergers, consolidations or acquisitions
of additional shares of Principal Financial Group, Inc., for a period of three
years following the time that the stockholder becomes an "interested
stockholder." An "interested stockholder" is defined to include persons owning
directly or indirectly 15% or more of the outstanding voting stock of a
corporation. The provisions of Section 203 are not applicable in some
circumstances, including those in which (a) the business combination or
transaction which results in the stockholder becoming an "interested
stockholder" is approved by the corporation's board of directors prior to the
time the stockholder becomes an "interested stockholder" or (b) the "interested
stockholder," upon consummation of such transaction, owns at least 85% of the
voting stock of the corporation outstanding prior to such transaction.

  LIMITATIONS ON ACQUISITIONS OF SECURITIES

    Iowa law prohibits for a period of 5 years following the date of
distribution of consideration to the policyholders in exchange for their
membership interests:

    - any person, other than the reorganized company, or other than an employee
      benefit plan or employee benefit trust sponsored by the reorganized
      company from, directly or indirectly, acquiring or offering to acquire the
      beneficial ownership of more than 5% of any class of voting security of
      the reorganized company, and

    - any person, other than the reorganized company, or other than an employee
      benefit plan or employee benefit trust sponsored by the reorganized
      company, who acquires 5% or more of any class of voting security of the
      reorganized company prior to the conversion from, directly or indirectly,
      acquiring or offering to acquire the beneficial ownership of additional
      voting securities of the reorganized company,

unless the acquisition is approved by the Insurance Commissioner of the State of
Iowa and by the board of directors of the reorganized company.

    By virtue of these provisions, we may not be subject to an acquisition by
another company during the 5 years following the distribution of consideration
to Principal Life's policyholders entitled to receive compensation in the
demutualization.

    The insurance holding company and other insurance laws of many states also
regulate changes of control of insurance holding companies, such as Principal
Financial Group, Inc. A change of control is generally presumed upon
acquisitions of 10% or more of voting securities. The Iowa, Arizona and Vermont
insurance holding company laws, which we expect to be applicable to us following
the demutualization, require filings in connection with proposed acquisitions of
control of domestic insurance companies. These insurance holding company laws
prohibit a person from acquiring direct or indirect control of an insurer
incorporated in the relevant jurisdiction without prior insurance regulatory
approval.

STOCKHOLDER RIGHTS PLAN

    Our board of directors has adopted a stockholder rights plan under which
each outstanding share of our common stock issued between the date on which
Principal Financial Group, Inc. enters into the underwriting agreement for the
initial public offering and the distribution date (as described below) will be
coupled with a stockholder right. Initially, the stockholder rights will be
attached to the certificates representing outstanding shares of common stock,
and no separate rights certificates will be distributed. Each right will entitle
the holder to purchase one one-thousandth of a share of our Series A Junior
Participating Preferred Stock. Each one one-thousandth of a share of Series A
Junior Participating Preferred Stock will have economic and voting terms
equivalent to one share of Principal Financial Group, Inc.'s common stock. Until
it is exercised, the right itself will not entitle the holder of the right to
any rights as a stockholder, including the right to receive dividends or to vote
at stockholder meetings. The description and terms of the rights are found in a
rights agreement entered into between Principal Financial Group, Inc. and Mellon
Investor Services LLC, as rights agent. Although the material provisions of the
rights agreement have been accurately summarized, the statements below
concerning the rights agreement are not necessarily complete, and in each
instance reference is made to the form of rights agreement itself, a copy of
which has been filed as an exhibit to the

                                       182

Registration Statement of which this prospectus forms a part. Each statement is
qualified in its entirety by such reference.

    Stockholder rights are not exercisable until the distribution date and will
expire at the close of business on the tenth anniversary of the date on which
the initial public offering price is determined, unless earlier redeemed or
exchanged by us. A distribution date would occur upon the earlier of:

    - the tenth day after the first public announcement or communication to us
      that a person or group of affiliated or associated persons (referred to as
      an acquiring person) has acquired beneficial ownership of 10% or more of
      our outstanding common stock (the date of such announcement or
      communication is referred to as the stock acquisition time); or

    - the tenth business day after the commencement or announcement of the
      intention to commence a tender offer or exchange offer that would result
      in a person or group becoming an acquiring person.

If any person becomes an acquiring person, each holder of a stockholder right
will be entitled to exercise the right and receive, instead of Series A Junior
Participating Preferred Stock, common stock or, in some circumstances, cash, a
reduction in purchase price, property or other securities of Principal Financial
Group, Inc., having a value equal to two times the purchase price of the
stockholder right. All stockholder rights that are beneficially owned by an
acquiring person or its transferee will become null and void.

    If at any time after a public announcement has been made or Principal
Financial Group, Inc. has received notice that a person has become an acquiring
person:

    - Principal Financial Group, Inc. is acquired in a merger or other business
      combination, or

    - 50% or more of Principal Financial Group, Inc.'s assets, cash flow or
      earning power is sold or transferred,

each holder of a stockholder right, except rights which previously have been
voided as described above, will have the right to receive, upon exercise, common
stock of the acquiring company having a value equal to two times the purchase
price of the right.

    The purchase price payable, the number of one one-thousandth of a share of
Series A Junior Participating Preferred Stock or other securities or property
issuable upon exercise of stockholder rights and the number of such rights
outstanding, are subject to adjustment from time to time to prevent dilution.
Except as provided in the rights agreement, no adjustment in the purchase price
or the number of shares of Series A Junior Participating Preferred Stock
issuable upon exercise of a stockholder right will be required until the
cumulative adjustment would require an increase or decrease of at least one
percent in the purchase price or number of shares for which a right is
exercisable.

    At any time until the earlier of (1) the stock acquisition time or (2) the
final expiration date of the rights agreement, we may redeem all the stockholder
rights at a price of $0.001 per right. At any time after a person has become an
acquiring person and prior to the acquisition by such person of 50% or more of
the outstanding shares of our common stock, we may exchange the stockholder
rights, in whole or in part, at an exchange ratio of one share of common stock,
or one one-thousandth of a share of Series A Junior Participating Preferred
Stock or of a share of a class or series of preferred stock having equivalent
rights, preferences and privileges, per right.

    The stockholder rights plan is designed to protect stockholders in the event
of unsolicited offers to acquire Principal Financial Group, Inc. and other
coercive takeover tactics which, in the opinion of the company's board of
directors, could impair its ability to represent stockholder interests. The
provisions of the stockholder rights plan may render an unsolicited takeover
more difficult or less likely to occur or may prevent such a takeover, even
though such takeover may offer our stockholders the opportunity to sell their
stock at a price above the prevailing market rate and may be favored by a
majority of our stockholders.

TRANSFER AGENT AND REGISTRAR

    The transfer agent and registrar for our common stock and our Series A
Junior Participating Preferred Stock is Mellon Investor Services LLC.

                                       183

                     COMMON STOCK ELIGIBLE FOR FUTURE SALE

    Substantially all of the estimated 260.6 million shares of our common stock
distributed to policyholders entitled to receive compensation in the
demutualization or to the separate account to be established for the Separate
Account Policy Credits will be eligible for resale in the public market without
restriction. However, eligible policyholders will receive a written confirmation
of their share ownership or Separate Account Policy Credits within 75 days from
the closing of this offering, unless the Insurance Commissioner of the State of
Iowa approves a later date. Until they receive the written confirmation, they
will effectively be precluded from selling shares or the shares underlying their
Separate Account Policy Credits because they will not know how many shares or
Separate Account Policy Credits they will receive.

    We estimate that these 260.6 million shares will equal approximately 72% of
our outstanding common stock after the offering. See "The Demutualization." We
have been advised by counsel that the distribution of shares to policyholders in
the demutualization or to the separate account to be established for the
Separate Account Policy Credits will be exempt from registration under the
Securities Act by virtue of the exemption provided by Section 3(a)(10) of the
Securities Act, and policyholders entitled to receive compensation in the
demutualization who are not our "affiliates" within the meaning of Rule 144
under the Securities Act will be able to resell their shares, or to direct the
sale of shares underlying Separate Account Policy Credits, immediately in the
public market without registration or compliance with the time, volume, manner
of sale and other limitations in Rule 144.

    No prediction can be made as to the effect, if any, such future sales of
shares, or the availability of shares for such future sales, will have on the
market price of our common stock prevailing from time to time. The sale of
substantial amounts of our common stock in the public market, or the perception
that such sales could occur, could harm prevailing market prices for our common
stock. See "Risk Factors -- Sales of shares distributed in the demutualization
may reduce the market price of our common stock".

                                       184

                                  UNDERWRITING

    Principal Financial Group, Inc. and the underwriters for the U.S. offering
named below, referred to as the U.S. underwriters, have entered into an
underwriting agreement with respect to the shares offered in the United States.
Subject to certain conditions, each U.S. underwriter has severally agreed to
purchase the number of shares indicated in the following table. Goldman, Sachs &
Co., Credit Suisse First Boston Corporation, Merrill Lynch, Pierce, Fenner &
Smith Incorporated, Salomon Smith Barney Inc., Banc of America Securities LLC,
Bear, Stearns & Co. Inc., A.G. Edwards & Sons, Inc., Fox-Pitt, Kelton Inc., J.P.
Morgan Securities Inc., Lehman Brothers Inc., Samuel A. Ramirez & Company, Inc.,
and UBS Warburg LLC are the representatives of the U.S. underwriters.

Underwriters                                                   Number of Shares
------------                                                   ----------------
                                                            
Goldman, Sachs & Co. .......................................      18,812,500
Credit Suisse First Boston Corporation......................       9,030,000
Merrill Lynch, Pierce, Fenner & Smith
            Incorporated....................................       8,653,750
Salomon Smith Barney Inc. ..................................       8,653,750
Banc of America Securities LLC..............................       3,762,500
Bear, Stearns & Co. Inc. ...................................       3,762,500
A.G. Edwards & Sons, Inc. ..................................       3,762,500
Fox-Pitt, Kelton Inc........................................       3,762,500
J.P. Morgan Securities Inc. ................................       3,762,500
Lehman Brothers Inc. .......................................       3,762,500
Samuel A. Ramirez & Company, Inc. ..........................       3,762,500
UBS Warburg LLC.............................................       3,762,500
ABN AMRO Rothschild LLC.....................................         500,000
Sanford C. Bernstein & Co., Inc. ...........................         500,000
Dain Rauscher Incorporated..................................         500,000
Epoch Securities, Inc. .....................................         500,000
First Union Securities, Inc. ...............................         500,000
Keefe, Bruyette & Woods, Inc. ..............................         500,000
Prudential Securities Incorporated..........................         500,000
Putnam Lovell Securities Inc. ..............................         500,000
RBC Dominion Securities Corporation.........................         500,000
Robertson Stephens, Inc. ...................................         500,000
Sandler O'Neill & Partners, L.P. ...........................         500,000
Utendahl Capital Partners, L.P. ............................         500,000
Wells Fargo Van Kasper, LLC.................................         500,000
The Williams Capital Group, L.P. ...........................         500,000
BNY Capital Markets, Inc. ..................................         250,000
M.R. Beal & Company.........................................         250,000
Chatsworth Securities LLC...................................         250,000
Doley Securities, Inc. .....................................         250,000
Guzman & Company............................................         250,000
Legg Mason Wood Walker, Incorporated........................         250,000
Mitchell Securities Corporation of Oregon...................         250,000
Neuberger Berman, LLC.......................................         250,000
Raymond James & Associates, Inc. ...........................         250,000
Muriel Siebert & Co., Inc. .................................         250,000
Sturdivant & Co., Inc. .....................................         250,000
                                                                  ----------
         Total..............................................      85,000,000
                                                                  ==========

    If the U.S. underwriters sell more shares than the total number listed in
the table above, the U.S. underwriters have an option to buy up to an additional
12,750,000 shares from Principal Financial Group, Inc. to cover such sales. They
may exercise that option for 30 days. If any shares are purchased under this
option, the U.S. underwriters will severally purchase shares in approximately
the same proportion as shown in the table above.

                                       185

    The following table shows the per share and total underwriting discounts and
commissions to be paid to the U.S. underwriters by Principal Financial Group,
Inc. Such amounts are shown assuming both no exercise and full exercise of the
U.S. underwriters' option to purchase 12,750,000 additional shares.

                    Paid by Principal Financial Group, Inc.

                                                              No Exercise   Full Exercise
                                                              -----------   -------------
                                                                      
Per Share...................................................  $    0.805     $     0.805
Total.......................................................  $68,403,750    $78,664,313

    Shares sold by the U.S. underwriters to the public will initially be offered
at the initial public offering price provided on the cover of this prospectus.
Any shares sold by the U.S. underwriters to securities dealers may be sold at a
discount of up to $0.49 per share from the initial public offering price. Any
such securities dealers may resell any shares purchased from the U.S.
underwriters to certain other brokers or dealers at a discount of up to $0.10
per share from the initial public offering price. If all the shares are not sold
at the initial offering price, the representatives may change the offering price
and the other selling terms.

    Principal Financial Group, Inc. has entered into an underwriting agreement
with underwriters for the sale of 15,000,000 shares outside of the United
States. The terms and conditions of both offerings are the same and the sale of
shares in both offerings are conditioned on each other. Goldman Sachs
International, Credit Suisse First Boston (Europe) Limited, Merrill Lynch
International, Salomon Brothers International Limited, Banc of America
Securities Limited, Bear, Stearns International Limited, A.G. Edwards & Sons,
Inc., Fox-Pitt, Kelton N.V., J.P. Morgan Securities Ltd., Lehman Brothers
International (Europe), Samuel A. Ramirez & Company, Inc., UBS AG, acting
through its business group UBS Warburg, ABN AMRO Rothschild, BNP Paribas,
Commerzbank Aktiengesellschaft and Credit Lyonnais are referred to as the
international underwriters. Principal Financial Group, Inc. has granted the
international underwriters a similar option to purchase up to an aggregate of an
additional 2,250,000 shares.

    The underwriters for both of the offerings will enter into an agreement in
which they will agree to restrictions on where and to whom they and any dealer
purchasing from them may offer shares as a part of the distribution of the
shares. The underwriters will also agree that they may sell shares among each of
the underwriting groups.

    Principal Financial Group, Inc. has agreed with the underwriters not to
dispose of or hedge any shares of common stock or securities convertible into or
exchangeable for shares of common stock during the period from the date of this
prospectus continuing through the date 180 days after the date of this
prospectus, except with the prior written consent of the representatives. This
restriction does not apply to: (1) shares of our common stock issued to a new
separate account of Principal Life, held for the benefit of Qualified Plan
Customers, as part of the Separate Account Policy Credits and (2) employee stock
option plans existing on, or upon the conversion or exchange of convertible or
exchangeable securities outstanding as of, the date of the underwriting
agreement. See "Common Stock Eligible for Future Sale" for a discussion of
transfer restrictions.

    Prior to the offering, there has been no public market for the shares. The
initial public offering price has been negotiated among us and the
representatives. Among the factors to be considered in determining the initial
public offering price of the shares, in addition to prevailing market
conditions, will be the historical performance of Principal Financial Group,
Inc., estimates of its business potential and earnings prospects, an assessment
of its management and the consideration of the above factors in relation to
market valuation of companies in related businesses.

    The common stock of Principal Financial Group, Inc. has been approved for
listing on the New York Stock Exchange under the symbol "PFG", subject to
official notice of issuance.

    In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. "Covered"
short sales are sales made in an amount not greater than the underwriters'
option to purchase additional shares from us in the offering. The underwriters
may close out any covered short position by either exercising their option to
purchase additional shares or purchasing shares in the open market. In
determining the source of shares to close out the covered short position, the
underwriters will consider, among other things, the price of shares available
for purchase in the open market as compared to the price at which they may
purchase shares through the overallotment option. "Naked" short sales are any
sales in excess of such option. The underwriters must close out any naked short
position by purchasing shares in the open market. A naked short position is more
likely to be created if the underwriters are concerned that there may be
downward pressure on the price of the common stock in the open market after
pricing that could adversely affect investors who purchase in the offering.
Stabilizing transactions consist of various bids for or purchases of common
stock made by the underwriters in the open market prior to the completion of the
offering.

                                       186

    The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.

    Purchases to cover a short position and stabilizing transactions may have
the effect of preventing or retarding a decline in the market price of the
common stock, and together with the imposition of the penalty bid may stabilize,
maintain or otherwise affect the market price of the common stock. As a result,
the price of the common stock may be higher than the price that otherwise might
exist in the open market. If these activities are commenced, they may be
discontinued at any time. These transactions may be effected on the New York
Stock Exchange, in the over-the-counter market or otherwise.

    The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.

    A prospectus in electronic format will be made available on the web sites
maintained by the lead manager of this offering and may also be made available
on web sites maintained by other underwriters. The underwriters may agree to
allocate a number of shares to underwriters for sale to their online brokerage
account holders. Internet distributions will be allocated by the lead manager to
underwriters that may make Internet distributions on the same basis as other
allocations.

    Principal Financial Group, Inc. estimates that its share of the total
expenses of this offering, excluding underwriting discounts and commissions,
will be approximately $16.2 million.

    Principal Financial Group, Inc. and Principal Life Insurance Company have
agreed to, jointly and severally, indemnify the several underwriters against
liabilities, including liabilities under the Securities Act of 1933.

    Certain of the underwriters and their affiliates have in the past provided,
and may in the future from time to time provide, investment banking and general
financing and banking services to Principal Financial Group, Inc. and its
affiliates for which they have in the past received, and may in the future
receive, customary fees.

                                       187

                            VALIDITY OF COMMON STOCK

    The validity of the shares of our common stock offered hereby will be passed
upon for Principal Financial Group, Inc. by Debevoise & Plimpton, New York, New
York and for the underwriters by LeBoeuf, Lamb, Greene & MacRae, L.L.P., a
limited liability partnership including professional corporations, New York, New
York. LeBoeuf, Lamb, Greene & MacRae, L.L.P. has in the past performed, and
continues to perform, legal services for us and our affiliates.

                                    EXPERTS

    Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at December 31, 2000 and 1999, and for each of the three
years in the period ended December 31, 2000, as described in their report. We
have included our consolidated financial statements in this prospectus and in
the registration statement in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.

    Daniel J. McCarthy, F.S.A., a consulting actuary associated with Milliman,
has rendered an opinion, dated March 31, 2001, to our board of directors. See
"The Demutualization -- Actuarial Opinion." This opinion is included as Annex A
of this prospectus. This opinion is included in reliance upon the authority of
such actuary as an expert in actuarial matters generally and in the application
of actuarial concepts to insurance matters.

                             ADDITIONAL INFORMATION

    We have filed with the Securities and Exchange Commission in Washington,
D.C., a registration statement on Form S-1 under the Securities Act with respect
to the common stock offered by this prospectus. This prospectus which forms a
part of the registration statement does not contain all the information found in
the registration statement, certain parts of which are omitted in accordance
with the rules and regulations of the Securities and Exchange Commission. For
further information with respect to Principal Financial Group, Inc. and our
common stock, we refer you to the registration statement. Statements made in
this prospectus describing the contents of any contract, agreement or other
document referred to are not necessarily complete. With respect to each such
contract, agreement or other document filed as an exhibit to the registration
statement, reference is made to the exhibit for a more complete description of
the matter involved, and each such statement is qualified in its entirety by
such reference. The registration statement may be inspected and copied at the
Securities and Exchange Commission's Public Reference Room at 450 Fifth Street,
N.W., Washington, D.C. 20549. The public may obtain information on the operation
of the Public Reference Room by calling the Securities and Exchange Commission
at 1-800-SEC-0330. The Securities and Exchange Commission maintains an Internet
site, http://www.sec.gov that contains periodic and current reports, proxy and
information statements, and other information regarding issuers that file
electronically with the Securities and Exchange Commission.

    As a result of the offering we will become subject to the information
reporting requirements of the Securities Exchange Act of 1934. We will fulfill
our obligations with respect to such requirements by filing periodic and current
reports, proxy statements and other information with the Securities and Exchange
Commission. Such reports, proxy statements and information may be inspected and
copied at the public reference facilities maintained by the Securities and
Exchange Commission referenced above. We intend to furnish holders of our common
stock with annual reports that include our annual consolidated financial
statements audited by an independent certified public accounting firm and
quarterly reports for the first three quarters of each fiscal year containing
unaudited interim financial information.

    Our common stock has been approved for listing on the New York Stock
Exchange under the symbol "PFG", subject to official notice of issuance. Upon
such listing, copies of the registration statement, including all exhibits to
the registration statement, and periodic reports, proxy statements and other
information will be available for inspection at the offices of the New York
Stock Exchange, Inc. located at 20 Broad Street, New York, New York 10005.

                                       188

                                    GLOSSARY

    The following Glossary includes definitions of terms which are unique to
this offering. Each term defined in this Glossary is printed in boldface the
first time it appears in this prospectus.

Account Value Policy
Credits....................Policy credits, in the form of an increase in the
                           value of the applicable group annuity contract,
                           issued to a Qualified Plan Customer or a Non-Rule 180
                           Qualified Plan Customer. The increase in value will
                           be allocated to participants' accounts, where
                           appropriate, based on account balances for which
                           records are kept by Principal Life Insurance Company
                           unless the Qualified Plan Customer or Non-Rule 180
                           Qualified Plan Customer directs otherwise.

Closed Block...............A mechanism established by Principal Life Insurance
                           Company for the benefit of the participating policies
                           and contracts included in the Closed Block, in
                           connection with its reorganization to the mutual
                           insurance holding company structure effective July 1,
                           1998. Assets of Principal Life Insurance Company were
                           allocated to the Closed Block in an amount that
                           produces cash flows which, together with anticipated
                           revenue from the Closed Block policies and contracts,
                           are expected to be sufficient to support the Closed
                           Block policies and contracts including, but not
                           limited to, provisions for payment of claims and
                           certain expenses and taxes, and to provide for
                           continuation of policy and contract dividends in
                           aggregate in accordance with the 1997 dividend scales
                           if the experience underlying those scales continues,
                           and to allow for appropriate adjustments in those
                           scales if such experience changes.

Interest Maintenance
Reserve....................The reserve required by insurance regulators to
                           capture non-credit, interest-related realized capital
                           gains and losses (net of taxes) on fixed income
                           investments (primarily bonds and mortgage loans),
                           which are amortized into net income over the
                           estimated otherwise remaining periods to maturity of
                           the investments sold. The Interest Maintenance
                           Reserve has no effect on financial statements
                           prepared in conformity with GAAP.

Mandatory Policy Credits...Policy credits issued to holders of policies required
                           to receive policy credits under the plan of
                           conversion. Mandatory Policy Credits may take the
                           form of an increase in cash value, account value,
                           dividend accumulations, face amount, extended term
                           period or benefit payment, as appropriate, depending
                           on the policy.

NAIC Designations..........Evaluation made by the Securities Valuation Office of
                           the National Association of Insurance Commissioners
                           of the bond investments of insurers for regulatory
                           reporting purposes and assignments of securities to
                           one of six investment categories.

Non-Rule 180 Qualified Plan
  Customers................Owners of group annuity contracts issued by Principal
                           Life Insurance Company designed to fund benefits
                           under a retirement plan which is qualified under
                           Section 401(a) or Section 403(a) of the Internal
                           Revenue Code and which covers employees described in
                           Section 401(c) of the Internal Revenue Code but which
                           does not meet the requirements of Rule 180
                           promulgated under the Securities Act of 1933.

Qualified Plan Customers...Owners of group annuity contracts issued by Principal
                           Life Insurance Company designed to fund benefits
                           under a retirement plan which is qualified under
                           Section 401(a) or Section 403(a) of the Internal
                           Revenue Code (including a plan covering employees
                           described in Section 401(c) of the Internal Revenue
                           Code, provided such plan meets the requirements of
                           Rule 180 promulgated under the Securities Act of
                           1933) or which is a governmental plan described in
                           Section 414(d) of the Internal Revenue Code,
                           excluding (i) group annuity contracts that fund only
                           guaranteed deferred annuities or annuities in the
                           course of payments and (ii) group annuity contracts
                           for which Principal Life Insurance Company does not
                           perform retirement plan record keeping services and
                           whose group annuity contracts do not provide for
                           investments in Principal Life Insurance Company's
                           pooled unregistered separate accounts.

Restricted Stock...........Awards of common stock subject to restrictions on
                           transferability and a risk of forfeiture.

                                       G-1

Restricted Stock Units.....Contractual rights to receive cash or common stock in
                           the future that are the economic equivalent of an
                           award of Restricted Stock.

Separate Account Policy
Credits....................Policy credits issued to a Qualified Plan Customer in
                           the form of an addition to the Qualified Plan
                           Customer's group annuity contract of an interest in a
                           separate account holding shares of our common stock
                           and maintained by Principal Life Insurance Company.
                           The separate account interests issued as Separate
                           Account Policy Credits to a Qualified Plan Customer
                           will be allocated to plan participants' accounts,
                           where appropriate, based on account balances for
                           which records are kept by Principal Life Insurance
                           Company unless the Qualified Plan Customer directs
                           otherwise.

Stock Appreciation
Rights.....................Rights to receive cash or stock based on the
                           appreciation in value of the common stock from the
                           date of grant.

                                       G-2

                        PRINCIPAL MUTUAL HOLDING COMPANY

                       CONSOLIDATED FINANCIAL STATEMENTS

                                    CONTENTS

                                                           
AUDITED CONSOLIDATED FINANCIAL STATEMENTS -- FOR THE YEARS
  ENDED DECEMBER 31, 2000, 1999 AND 1998

Report of Independent Auditors..............................   F-2

Consolidated Statements of Operations.......................   F-3

Consolidated Statements of Financial Position...............   F-4

Consolidated Statements of Equity...........................   F-5

Consolidated Statements of Cash Flows.......................   F-6

Notes to Consolidated Financial Statements..................   F-7

UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- FOR THE SIX
  MONTHS ENDED JUNE 30, 2001 AND 2000

Consolidated Statements of Operations.......................  F-40

Consolidated Statements of Financial Position...............  F-41

Consolidated Statements of Equity...........................  F-42

Consolidated Statements of Cash Flows.......................  F-43

Notes to Consolidated Financial Statements..................  F-44

                                       F-1

                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors
Principal Mutual Holding Company

    We have audited the accompanying consolidated statements of financial
position of Principal Mutual Holding Company (the Company) as of December 31,
2000 and 1999, and the related consolidated statements of operations, equity and
cash flows for each of the three years in the period ended December 31, 2000.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

    We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

    In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Principal
Mutual Holding Company at December 31, 2000 and 1999, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States.

                                                                             /s/
Ernst & Young LLP
Des Moines, Iowa
February 2, 2001, except for Note 16,
as to which the date is September 11, 2001

                                       F-2

                        PRINCIPAL MUTUAL HOLDING COMPANY

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                                                                 YEAR ENDED DECEMBER 31,
                                                              ------------------------------
                                                                2000       1999       1998
                                                              --------   --------   --------
                                                                      (IN MILLIONS)
                                                                           
REVENUES
Premiums and other considerations...........................  $3,996.4   $3,937.6   $3,818.4
Fees and other revenue......................................   1,576.3    1,287.3      978.8
Net investment income.......................................   3,172.3    3,072.0    2,933.9
Net realized capital gains..................................     139.9      404.5      465.8
                                                              --------   --------   --------
Total revenues..............................................   8,884.9    8,701.4    8,196.9

EXPENSES
Benefits, claims and settlement expenses....................   5,232.3    5,260.9    5,089.0
Dividends to policyholders..................................     312.7      304.6      298.7
Operating expenses..........................................   2,479.4    2,070.3    2,074.0
                                                              --------   --------   --------
Total expenses..............................................   8,024.4    7,635.8    7,461.7
                                                              --------   --------   --------

Income before income taxes..................................     860.5    1,065.6      735.2

Income taxes................................................     240.3      323.5       42.2
                                                              --------   --------   --------
Net income..................................................  $  620.2   $  742.1   $  693.0
                                                              ========   ========   ========

                            See accompanying notes.
                                       F-3

                        PRINCIPAL MUTUAL HOLDING COMPANY

                 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

                                                                  DECEMBER 31,
                                                              ---------------------
                                                                2000        1999
                                                              ---------   ---------
                                                                  (IN MILLIONS)
                                                                    
ASSETS
Fixed maturities, available-for-sale........................  $26,839.9   $23,443.9
Equity securities, available-for-sale.......................      742.9       864.2
Mortgage loans..............................................   11,492.7    13,332.2
Real estate.................................................    1,400.5     2,212.0
Policy loans................................................      803.6       780.5
Other investments...........................................      811.0       710.4
                                                              ---------   ---------
         Total investments..................................   42,090.6    41,343.2

Cash and cash equivalents...................................      926.6       569.5
Accrued investment income...................................      530.8       472.0
Premiums due and other receivables..........................      505.7       540.5
Deferred policy acquisition costs...........................    1,333.3     1,430.9
Property and equipment......................................      507.0       507.7
Goodwill and other intangibles..............................    1,375.9     1,471.5
Mortgage loan servicing rights..............................    1,084.4     1,081.0
Separate account assets.....................................   34,916.2    34,992.3
Other assets................................................    1,134.4     1,544.6
                                                              ---------   ---------
         Total assets.......................................  $84,404.9   $83,953.2
                                                              =========   =========

LIABILITIES
Contractholder funds........................................  $24,300.2   $24,519.8
Future policy benefits and claims...........................   13,346.0    12,612.2
Other policyholder funds....................................      597.4       676.9
Short-term debt.............................................      459.5       547.3
Long-term debt..............................................    1,336.5     1,492.9
Income taxes currently payable..............................      108.4       153.2
Deferred income taxes.......................................      487.4       271.7
Separate account liabilities................................   34,916.2    34,992.3
Other liabilities...........................................    2,600.8     3,134.0
                                                              ---------   ---------
         Total liabilities..................................   78,152.4    78,400.3

EQUITY
Retained earnings...........................................    6,312.5     5,692.3
Accumulated other comprehensive income (loss):
  Net unrealized gains (losses) on available-for-sale
    securities..............................................      129.9       (79.1)
  Net foreign currency translation adjustment...............     (189.9)      (60.3)
                                                              ---------   ---------
         Total equity.......................................    6,252.5     5,552.9
                                                              ---------   ---------
         Total liabilities and equity.......................  $84,404.9   $83,953.2
                                                              =========   =========

                            See accompanying notes.
                                       F-4

                        PRINCIPAL MUTUAL HOLDING COMPANY

                       CONSOLIDATED STATEMENTS OF EQUITY

                                                                                               NET
                                                                        NET UNREALIZED       FOREIGN
                                                                      GAINS (LOSSES) ON     CURRENCY
                                                          RETAINED    AVAILABLE-FOR-SALE   TRANSLATION     TOTAL
                                                          EARNINGS        SECURITIES       ADJUSTMENT     EQUITY
                                                         ----------   ------------------   -----------   ---------
                                                                               (IN MILLIONS)
                                                                                             
BALANCES AT JANUARY 1, 1998............................   $4,257.2        $ 1,037.5          $ (10.5)    $ 5,284.2
Comprehensive income:
  Net income...........................................      693.0               --               --         693.0
  Net change in unrealized gains and losses on fixed
    maturities, available-for-sale.....................         --           (203.3)              --        (203.3)
  Net change in unrealized gains and losses on equity
    securities, available-for-sale, including seed
    money in separate accounts.........................         --           (291.3)              --        (291.3)
  Adjustments for assumed changes in amortization
    patterns:
    Deferred policy acquisition costs..................         --             37.1               --          37.1
    Unearned revenue reserves..........................         --             (3.6)              --          (3.6)
  Provision for deferred income tax benefit............         --            169.5               --         169.5
  Change in net foreign currency translation
    adjustment.........................................         --               --            (18.4)        (18.4)
                                                                                                         ---------
Comprehensive income...................................                                                      383.0
                                                          --------        ---------          -------     ---------
BALANCES AT DECEMBER 31, 1998..........................    4,950.2            745.9            (28.9)      5,667.2
Comprehensive loss:
  Net income...........................................      742.1               --               --         742.1
  Net change in unrealized gains and losses on fixed
    maturities, available-for-sale.....................         --         (1,375.4)              --      (1,375.4)
  Net change in unrealized gains and losses on equity
    securities, available-for-sale, including seed
    money in separate accounts.........................         --           (119.2)              --        (119.2)
  Adjustments for assumed changes in amortization
    patterns:
    Deferred policy acquisition costs..................         --            246.1               --         246.1
    Unearned revenue reserves..........................         --            (29.5)              --         (29.5)
  Provision for deferred income tax benefit............         --            453.0               --         453.0
  Change in net foreign currency translation
    adjustment.........................................         --               --            (31.4)        (31.4)
                                                                                                         ---------
Comprehensive loss.....................................                                                     (114.3)
                                                          --------        ---------          -------     ---------
BALANCES AT DECEMBER 31, 1999..........................    5,692.3            (79.1)           (60.3)      5,552.9
Comprehensive income:
  Net income...........................................      620.2               --               --         620.2
  Net change in unrealized gains and losses on fixed
    maturities, available-for-sale.....................         --            721.8               --         721.8
  Net change in unrealized gains and losses on equity
    securities, available-for-sale, including seed
    money in separate accounts.........................         --           (285.3)              --        (285.3)
  Adjustments for assumed changes in amortization
    patterns:
    Deferred policy acquisition costs..................         --           (122.6)              --        (122.6)
    Unearned revenue reserves..........................         --             15.1               --          15.1
  Provision for deferred income taxes..................         --           (120.0)              --        (120.0)
  Change in net foreign currency translation
    adjustment.........................................         --               --           (129.6)       (129.6)
                                                                                                         ---------
Comprehensive income...................................                                                      699.6
                                                          --------        ---------          -------     ---------
BALANCES AT DECEMBER 31, 2000..........................   $6,312.5        $   129.9          $(189.9)    $ 6,252.5
                                                          ========        =========          =======     =========

                            See accompanying notes.
                                       F-5

                        PRINCIPAL MUTUAL HOLDING COMPANY

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                    YEAR ENDED DECEMBER 31,
                                                              ------------------------------------
                                                                 2000         1999         1998
                                                              ----------   ----------   ----------
                                                                         (IN MILLIONS)
                                                                               
OPERATING ACTIVITIES
Net income..................................................  $    620.2   $    742.1   $    693.0
Adjustments to reconcile net income to net cash provided by
  operating activities:
  Amortization of deferred policy acquisition costs.........       238.6        173.8        218.9
  Additions to deferred policy acquisition costs............      (263.9)      (253.9)      (229.0)
  Accrued investment income.................................       (58.8)       (41.2)        22.9
  Premiums due and other receivables........................       (38.3)        34.4        (23.8)
  Contractholder and policyholder liabilities and
    dividends...............................................     1,478.5      1,650.6      1,638.0
  Current and deferred income taxes.........................        75.0        155.6       (266.2)
  Net realized capital gains................................      (139.9)      (404.5)      (465.8)
  Depreciation and amortization expense.....................       153.6        117.1        137.8
  Amortization and impairment/recovery of mortgage servicing
    rights..................................................       157.3         94.4        142.3
  Other.....................................................       415.0       (162.4)        95.0
                                                              ----------   ----------   ----------
Net adjustments.............................................     2,017.1      1,363.9      1,270.1
                                                              ----------   ----------   ----------
Net cash provided by operating activities...................     2,637.3      2,106.0      1,963.1
INVESTING ACTIVITIES
Available-for-sale securities:
  Purchases.................................................   (13,051.0)   (11,510.2)    (7,475.1)
  Sales.....................................................     7,366.0      7,031.0      5,857.2
  Maturities................................................     2,675.3      2,599.2      1,376.7
Mortgage loans acquired or originated.......................   (10,507.5)   (16,594.6)   (14,261.4)
Mortgage loans sold or repaid...............................    12,026.8     16,361.5     14,477.8
Net change in mortgage servicing rights.....................      (182.9)      (307.5)      (387.4)
Real estate acquired........................................      (324.4)      (449.7)      (436.3)
Real estate sold............................................       796.9        869.8        661.6
Net change in property and equipment........................       (67.1)       (61.2)       (69.6)
Proceeds from sales of subsidiaries.........................          --         41.7         95.5
Purchases of interest in subsidiaries, net of cash
  acquired..................................................       (27.4)    (1,154.6)      (217.7)
Net change in other investments.............................        22.0       (166.6)      (360.9)
                                                              ----------   ----------   ----------
Net cash used in investing activities.......................    (1,273.3)    (3,341.2)      (739.6)
FINANCING ACTIVITIES
Issuance of debt............................................       230.4        885.2        243.0
Principal repayments of debt................................      (120.7)       (40.2)       (50.9)
Proceeds of short-term borrowings...........................     2,417.5      5,150.9      8,627.7
Repayment of short-term borrowings..........................    (2,505.4)    (4,895.7)    (8,924.3)
Investment contract deposits................................     3,982.6      5,325.4      5,854.1
Investment contract withdrawals.............................    (5,011.3)    (5,081.7)    (7,058.3)
                                                              ----------   ----------   ----------
Net cash provided by (used in) financing activities.........    (1,006.9)     1,343.9     (1,308.7)
                                                              ----------   ----------   ----------
Net increase (decrease) in cash and cash equivalents........       357.1        108.7        (85.2)
Cash and cash equivalents at beginning of year..............       569.5        460.8        546.0
                                                              ----------   ----------   ----------
Cash and cash equivalents at end of year....................  $    926.6   $    569.5   $    460.8
                                                              ==========   ==========   ==========
SCHEDULE OF NONCASH OPERATING AND INVESTING ACTIVITIES
Net transfer of noncash assets and liabilities to an
  unconsolidated limited liability company in exchange for a
  minority interest.........................................  $   (255.0)
                                                              ==========
Net transfer of noncash assets and liabilities of Principal
  Health Care Inc. on April 1, 1998 in exchange for common
  shares of Coventry Health Care, Inc.......................                            $   (160.0)
                                                                                        ==========

                            See accompanying notes.
                                       F-6

                        PRINCIPAL MUTUAL HOLDING COMPANY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               DECEMBER 31, 2000

1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

REORGANIZATION

    Effective July 1, 1998, Principal Mutual Life Insurance Company formed a
mutual insurance holding company ("Principal Mutual Holding Company") and
converted to a stock life insurance company ("Principal Life Insurance
Company"). All of the shares of Principal Life Insurance Company ("Principal
Life") were issued to Principal Mutual Holding Company through two newly formed
intermediate holding companies, Principal Financial Group, Inc. and Principal
Financial Services, Inc. The reorganization itself did not have a material
financial impact on Principal Mutual Holding Company and its consolidated
subsidiaries, as the net assets so transferred to achieve the change in legal
organization were accounted for at historical carrying amounts in a manner
similar to that in pooling-of-interests accounting.

PLAN OF DEMUTUALIZATION

    In 2000, the Board of Directors approved management's recommendation to
develop a plan of demutualization to convert Principal Mutual Holding Company
into a stock company. Management expects to complete development of the plan of
demutualization in the first half of 2001. The plan will primarily address how
the organization will be restructured, required approvals, and eligibility for
and allocation of policyholder compensation. The proposed plan, when completed,
will be subject to approval by the Board of Directors, eligible policyholders of
Principal Life Insurance Company and the Insurance Commissioner of the State of
Iowa. See Note 16.

DESCRIPTION OF BUSINESS

    Principal Mutual Holding Company and its consolidated subsidiaries ("the
Company") is a diversified financial services organization engaged in the
marketing and management of retirement savings, investment and insurance
products and services in the United States and selected international markets
and residential mortgage loan origination and servicing in the United States.

BASIS OF PRESENTATION

    The accompanying consolidated financial statements of the Company and its
majority-owned subsidiaries have been prepared in conformity with accounting
principles generally accepted in the United States ("GAAP"). Less than
majority-owned entities in which the Company has at least a 20% interest are
reported on the equity basis in the consolidated statements of financial
position as other investments. All significant intercompany accounts and
transactions have been eliminated.

    Total assets of the unconsolidated entities amounted to $3,098.5 million at
December 31, 2000 and $3,276.6 million at December 31, 1999. Total revenues of
the unconsolidated entities were $2,226.3 million in 2000, $1,978.9 million in
1999 and $1,749.9 million in 1998. During 2000, 1999 and 1998, the Company
included $39.1 million, $107.7 million and $18.2 million, respectively, in net
investment income representing the Company's share of current year net income of
the unconsolidated entities.

CLOSED BLOCK

    In conjunction with the formation of the mutual insurance holding company,
Principal Life established a closed block for the benefit of individual
participating dividend-paying policies in force on that date. The closed block
was designed to provide reasonable assurance to policyholders included therein
that, after the Reorganization, assets would be available to maintain dividends
in aggregate in accordance with the 1997 policy dividend scales if the
experience underlying such scales continued. Assets were allocated to the closed
block in amounts such that their cash flows together with anticipated revenues
from policies included in the closed block, were reasonably expected to be
sufficient to support such policies, including provision for payment of claims,
expenses, charges and taxes, and to provide for the continuation of dividends in
aggregate in accordance with the 1997 policy dividend scales if the experience
underlying such scales continued, and to allow for appropriate adjustments in
such scales if the experience changes.

    Assets allocated to the closed block inure to the benefits of the holders of
policies included in the closed block. Closed block assets and liabilities are
carried on the same basis as similar assets and liabilities held by the Company.
Principal Life will continue to pay guaranteed benefits under all policies,
including the policies included in the closed block, in accordance with their
terms. If the assets allocated to the closed block, the investment cash flows
from those assets and the revenues from the policies included in the closed
block, including investment income thereon, prove to

                                       F-7

                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

be insufficient to pay the benefits guaranteed under the policies included in
the closed block, Principal Life will be required to make such payments from its
general funds. See Note 6.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

    The preparation of the Company's consolidated financial statements and
accompanying notes requires management to make estimates and assumptions that
affect the amounts reported and disclosed. These estimates and assumptions could
change in the future as more information becomes known, which could impact the
amounts reported and disclosed in the consolidated financial statements and
accompanying notes.

CASH AND CASH EQUIVALENTS

    Cash and cash equivalents include cash on hand, money market instruments and
other debt issues with a maturity date of three months or less when purchased.

INVESTMENTS

    Investments in fixed maturities and equity securities are classified as
available-for-sale and, accordingly, are carried at fair value. (See Note 13 for
policies related to the determination of fair value.) The cost of fixed
maturities is adjusted for amortization of premiums and accrual of discounts,
both computed using the interest method. The cost of fixed maturities and equity
securities is adjusted for declines in value that are other than temporary. For
the loan-backed and structured securities included in the bond portfolio, the
Company recognizes income using a constant effective yield based on currently
anticipated prepayments as determined by broker-dealer surveys or internal
estimates and the estimated lives of the securities.

    Real estate investments are reported at cost less accumulated depreciation.
The initial cost bases of properties acquired through loan foreclosures are fair
market values of the properties at the time of foreclosure. Buildings and land
improvements are generally depreciated on the straight-line method over the
estimated useful life of improvements, and tenant improvement costs are
depreciated on the straight-line method over the term of the related lease. The
Company recognizes impairment losses for its properties when indicators of
impairment are present and a property's expected undiscounted cash flows are not
sufficient to recover the property's carrying value. In such cases, the cost
bases of the properties are reduced to fair value. Real estate expected to be
disposed is carried at the lower of cost or fair value, less cost to sell, with
valuation allowances established accordingly and depreciation no longer
recognized. Any impairment losses and any changes in valuation allowances are
reported as net realized capital losses.

    Commercial and residential mortgage loans are generally reported at cost
adjusted for amortization of premiums and accrual of discounts, computed using
the interest method, and net of valuation allowances. Any changes in the
valuation allowances are reported as net realized capital gains (losses). The
Company measures impairment based upon the present value of expected cash flows
discounted at the loan's effective interest rate. If foreclosure is probable,
the measurement of any valuation allowance is based upon the fair value of the
collateral. The Company has residential mortgage loans held for sale in the
amount of $251.7 million and $432.1 million and commercial mortgage loans held
for sale in the amount of $520.9 million and $280.1 million at December 31, 2000
and 1999, respectively, which are carried at lower of cost or fair value and
reported as mortgage loans in the statements of financial position.

    Net realized capital gains and losses on investments are determined using
the specific identification basis.

    Policy loans and other investments, excluding investments in unconsolidated
entities, are primarily reported at cost.

SECURITIZATIONS

    The Company sells commercial mortgage loans to an unconsolidated trust which
then issues mortgage-backed securities. The Company may retain interests in the
loans by purchasing portions of the securities from the issuance. Gain or loss
on the sales of the mortgages depends in part on the previous carrying amounts
of the financial assets involved in the transfer, which is allocated between the
assets sold and the retained interests based on their relative fair value at the
date of transfer. Fair values are determined by quoted market prices of external
buyers of each class of security purchased. The retained interests are
thereafter carried at fair value as is the case of other fixed maturity
investments.

    The Company also sells residential mortgage loans in securitization
transactions, and retains servicing rights which are retained interests in the
securitized loans. Gain or loss on the sales of the loans depends in part on the
previous carrying amounts of the financial assets sold and the retained
interests based on their relative fair values at the date of

                                       F-8

                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

the transfer. To obtain fair values, quoted market prices are used if available.
However, quotes are generally not available for retained interests, so the
Company estimates fair value based on the present value of the future expected
cash flows using management's best estimates of the key
assumptions -- prepayment speeds and option adjusted spreads commensurate with
the risks involved.

    The Company has developed a margin lending securitization program whereby
the Company sells receivables to an unconsolidated trust that packages and sells
interests to investors. The Company retains interest bearing subordinated
tranches. The receivables are sold at face value, which approximates cost and
fair value, to an unconsolidated trust, with no gain or loss recognized on the
sale. Retained interests are initially carried at cost based on their relative
fair values at the date of transfer, then carried at fair value thereafter.

DERIVATIVES

    Derivatives are generally held for purposes other than trading and are
primarily used to hedge or reduce exposure to interest rate and foreign currency
risks associated with assets held or expected to be purchased or sold, and
liabilities incurred or expected to be incurred. Additionally, derivatives are
used to change the characteristics of the Company's asset/liability mix
consistent with the Company's risk management activities.

    The Company's risk of loss is typically limited to the fair value of its
derivative instruments and not to the notional or contractual amounts of these
derivatives. Risk arises from changes in the fair value of the underlying
instruments. The Company is also exposed to credit losses in the event of
nonperformance of the counterparties. This credit risk is minimized by
purchasing such agreements from financial institutions with high credit ratings
and by establishing and monitoring exposure limits.

    The Company's use of derivatives is further described in Note 5. The net
interest effect of interest rate and currency swap transactions is recorded as
an adjustment to net investment income or interest expense, as appropriate, over
the periods covered by the agreements. The cost of other derivative contracts is
amortized over the life of the contracts and classified with the results of the
underlying hedged item. Certain contracts are designated as hedges of specific
assets and, to the extent those assets are marked to market, the hedge contracts
are also marked to market and included as an adjustment of the underlying asset
value. Other contracts are designated and accounted for as hedges of certain
liabilities and are not marked to market. Futures contracts and mortgage-backed
forwards are used to hedge anticipated transactions. Futures contracts are
marked to market value and settled daily. However, changes in the market value
of such contracts have not qualified for inclusion in the measurements of
subsequent transactions or represent hedges of items reported at fair value.
Accordingly, such changes in market value are reported in net income in the
period of change.

    Hedge accounting is used for derivatives that are specifically designated in
advance as hedges and that reduce the Company's exposure to an indicated risk by
having a high correlation between changes in the value of the derivatives and
the items being hedged at both the inception of the hedge and throughout the
hedge period. Should such criteria not be met or if the hedged items are sold,
terminated or matured, the changes in value of the derivatives are included in
net income.

CONTRACTHOLDER AND POLICYHOLDER LIABILITIES

    Contractholder and policyholder liabilities (contractholder funds, future
policy benefits and claims, and other policyholder funds) include reserves for
investment contracts and reserves for universal life, limited payment,
participating and traditional life insurance policies. Investment contracts are
contractholders' funds on deposit with the Company and generally include
reserves for pension and annuity contracts. Reserves on investment contracts are
equal to the cumulative deposits less any applicable charges plus credited
interest.

    Reserves for universal life insurance contracts are equal to cumulative
premiums less charges plus credited interest which represents the account
balances that accrue to the benefit of the policyholders. Reserves for non-
participating term life insurance contracts are computed on a basis of assumed
investment yield, mortality, morbidity and expenses, including a provision for
adverse deviation, which generally vary by plan, year of issue and policy
duration. Investment yield is based on the Company's experience. Mortality,
morbidity and withdrawal rate assumptions are based on experience of the Company
and are periodically reviewed against both industry standards and experience.

    Reserves for participating life insurance contracts are based on the net
level premium reserve for death and endowment policy benefits. This net level
premium reserve is calculated based on dividend fund interest rate and mortality
rates guaranteed in calculating the cash surrender values described in the
contract.

                                       F-9

                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

    Participating business represented approximately 34%, 34% and 36% of the
Company's life insurance in force and 79%, 78% and 81% of the number of life
insurance policies in force at December 31, 2000, 1999 and 1998, respectively.
Participating business represented approximately 61%, 63% and 76% of life
insurance premiums for the years ended December 31, 2000, 1999 and 1998,
respectively.

    The amount of dividends to policyholders is approved annually by Principal
Life's Board of Directors. The amount of dividends to be paid to policyholders
is determined after consideration of several factors including interest,
mortality, morbidity and other expense experience for the year and judgment as
to the appropriate level of statutory surplus to be retained by Principal Life.
At the end of the reporting period, Principal Life establishes a dividend
liability for the pro-rata portion of the dividends expected to be paid on or
before the next policy dividend anniversary date.

    Some of the Company's policies and contracts require payment of fees in
advance for services that will be rendered over the estimated lives of the
policies and contracts. These payments are established as unearned revenue
reserves upon receipt and included in other policyholder funds in the
consolidated statements of financial position. These unearned revenue reserves
are amortized to operations over the estimated lives of these policies and
contracts in relation to the emergence of estimated gross profit margins.

    The liability for unpaid accident and health claims is an estimate of the
ultimate net cost of reported and unreported losses not yet settled. This
liability is estimated using actuarial analyses and case basis evaluations.
Although considerable variability is inherent in such estimates, the Company
believes that the liability for unpaid claims is adequate. These estimates are
continually reviewed and, as adjustments to this liability become necessary,
such adjustments are reflected in current operations.

RECOGNITION OF PREMIUMS AND OTHER CONSIDERATIONS, FEES AND OTHER REVENUES AND
BENEFITS

    Traditional individual life and health insurance products include those
products with fixed and guaranteed premiums and benefits, and consist
principally of whole life and term life insurance policies and certain immediate
annuities with life contingencies. Premiums from these products are recognized
as premium revenue when due.

    Immediate annuities with life contingencies include products with fixed and
guaranteed annuity considerations and benefits, and consist primarily of group
and individual single premium annuities with life contingencies. Annuity
considerations from these products are recognized as revenue when due.

    Group life and health insurance premiums are generally recorded as premium
revenue over the term of the coverage. Some group contracts allow for premiums
to be adjusted to reflect emerging experience. Such adjusted premiums are
recognized in the period that the related experience emerges. Fees for contracts
providing claim processing or other administrative services are recorded over
the period the service is provided.

    Related policy benefits and expenses for individual and group life and
health insurance products are associated with earned premiums and result in the
recognition of profits over the expected lives of the policies and contracts.

    Universal life-type policies are insurance contracts with terms that are not
fixed and guaranteed. Amounts received as payments for such contracts are not
reported as premium revenues. Revenues for universal life-type insurance
contracts consist of policy charges for the cost of insurance, policy initiation
and administration, surrender charges and other fees that have been assessed
against policy account values. Policy benefits and claims that are charged to
expense include interest credited to contracts and benefit claims incurred in
the period in excess of related policy account balances.

    Investment contracts do not subject the Company to risks arising from
policyholder mortality or morbidity, and consist primarily of Guaranteed
Investment Contracts ("GICs") and certain deferred annuities. Amounts received
as payments for investment contracts are established as investment contract
liability balances and are not reported as premium revenues. Revenues for
investment contracts consist of investment income and policy administration
charges. Investment contract benefits that are charged to expense include
benefit claims incurred in the period in excess of related investment contract
liability balances and interest credited to investment contract liability
balances.

    Fees and other revenues are earned for asset management services provided to
retail and institutional clients based largely upon contractual rates applied to
the market value of the client's portfolio. Additionally, fees and other
revenues are earned for administrative services performed including
recordkeeping and reporting services for retirement savings plans. Fees and
other revenues received for performance of asset management and administrative
services are recognized as revenue when the service is performed.

                                       F-10

                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

    Fees and other revenues arising from the residential mortgage banking
operations consist of revenues earned for servicing and originating residential
mortgage loans as well as marketing other products to servicing portfolio
customers. Servicing revenues are recognized as the mortgage loan is serviced
over the life of the mortgage loan. Mortgage loans originated are sold in the
secondary mortgage markets, shortly after origination. As a result, mortgage
loan origination fee revenues are recognized when the mortgage loans are sold.
Fee revenues received for marketing other products to servicing portfolio
customers are recognized when the service is performed. Net revenues are also
recognized upon the sale of residential mortgage loans and residential mortgage
loan servicing rights and are determined using the specific identification
basis.

DEFERRED POLICY ACQUISITION COSTS

    Commissions and other costs (underwriting, issuance and agency expenses)
that vary with and are primarily related to the acquisition of new and renewal
insurance policies and investment contract business are capitalized to the
extent recoverable. Acquisition costs that are not deferrable and maintenance
costs are charged to operations as incurred.

    Deferred policy acquisition costs for universal life-type insurance
contracts and participating life insurance policies and investment contracts are
being amortized over the lives of the policies and contracts in relation to the
emergence of estimated gross profit margins. This amortization is adjusted
retrospectively when estimates of current or future gross profits and margins to
be realized from a group of products and contracts are revised. The deferred
policy acquisition costs of non-participating term life insurance policies are
being amortized over the premium-paying period of the related policies using
assumptions consistent with those used in computing policyholder liabilities.

    Deferred policy acquisition costs are subject to recoverability testing at
the time of policy issue and loss recognition testing at the end of each
accounting period. Deferred policy acquisition costs would be written off to the
extent that it is determined that future policy premiums and investment income
or gross profit margins would not be adequate to cover related losses and
expenses.

REINSURANCE

    The Company enters into reinsurance agreements with other companies in the
normal course of business. The Company may assume reinsurance from or cede
reinsurance to other companies. Premiums and expenses are reported net of
reinsurance ceded. The Company is contingently liable with respect to
reinsurance ceded to other companies in the event the reinsurer is unable to
meet the obligations it has assumed. At December 31, 2000, 1999 and 1998
respectively, the Company had reinsured $13.2 billion, $10.2 billion and $6.9
billion of life insurance in force, representing 9%, 7% and 5% of total net life
insurance in force through a single third-party reinsurer. To minimize the
possibility of losses, the Company evaluates the financial condition of its
reinsurers and continually monitors concentrations of credit risk.

    The effect of reinsurance on premiums and other considerations and policy
and contract benefits and changes in reserves is as follows (in millions):

                                                                 YEAR ENDED DECEMBER 31,
                                                              ------------------------------
                                                                2000       1999       1998
                                                              --------   --------   --------
                                                                           
Premiums and other considerations:
  Direct....................................................  $4,142.1   $3,990.0   $3,799.9
  Assumed...................................................      24.6        4.1       62.2
  Ceded.....................................................    (170.3)     (56.5)     (43.7)
                                                              --------   --------   --------
Net premiums and other considerations.......................  $3,996.4   $3,937.6   $3,818.4
                                                              ========   ========   ========
Benefits, claims and settlement expenses:
  Direct....................................................  $5,387.8   $5,296.1   $5,051.5
  Assumed...................................................       1.9       (1.3)      66.0
  Ceded.....................................................    (157.4)     (33.9)     (28.5)
                                                              --------   --------   --------
Net benefits, claims and settlement expenses................  $5,232.3   $5,260.9   $5,089.0
                                                              ========   ========   ========

                                       F-11

                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

GUARANTY-FUND ASSESSMENTS

    Guaranty-fund assessments are accrued for anticipated assessments, which are
estimated using data available from various industry sources that monitor the
current status of open and closed insolvencies. The Company has also established
an other asset for assessments expected to be recovered through future premium
tax offsets.

SEPARATE ACCOUNTS

    The separate account assets and liabilities presented in the consolidated
financial statements represent the fair market value of funds that are
separately administered by the Company for contracts with equity, real estate
and fixed-income investments. Generally, the separate account contract owner,
rather than the Company, bears the investment risk of these funds. The separate
account assets are legally segregated and are not subject to claims that arise
out of any other business of the Company. The Company receives a fee for
administrative, maintenance and investment advisory services that is included in
the consolidated statements of operations. Net deposits, net investment income
and realized and unrealized capital gains and losses on the separate accounts
are not reflected in the consolidated statements of operations.

INCOME TAXES

    The Company files a U.S. consolidated income tax return that includes all of
its qualifying subsidiaries and has a policy of allocating income tax expenses
and benefits to companies in the group based upon pro rata contribution of
taxable income or operating losses. The Company is taxed at corporate rates on
taxable income based on existing tax laws. Current income taxes are charged or
credited to operations based upon amounts estimated to be payable or recoverable
as a result of taxable operations for the current year. Deferred income taxes
are provided for the tax effect of temporary differences in the financial
reporting and income tax bases of assets and liabilities and net operating
losses using enacted income tax rates and laws. The effect on deferred tax
assets and deferred tax liabilities of a change in tax rates is recognized in
operations in the period in which the change is enacted.

FOREIGN EXCHANGE

    The Company's foreign subsidiaries' statements of financial position and
operations are translated at the current exchange rates and average exchange
rates for the year, respectively. Resulting translation adjustments for foreign
subsidiaries and certain other transactions are reported as a component of
equity. Other translation adjustments for foreign currency transactions that
affect cash flows are reported in current operations.

PENSION AND POSTRETIREMENT BENEFITS

    The Company accounts for its pension benefits and postretirement benefits
other than pension (medical, life insurance and long-term care) using the full
accrual method.

PROPERTY AND EQUIPMENT

    Property and equipment includes home office properties, related leasehold
improvements, purchased and internally developed software and other fixed
assets. Property and equipment use is shown in the consolidated statements of
financial position at cost less allowances for accumulated depreciation.
Provisions for depreciation of property and equipment are computed principally
on the straight-line method over the estimated useful lives of the assets.
Property and equipment and related accumulated depreciation are as follows (in
millions):

                                                                DECEMBER 31,
                                                              -----------------
                                                               2000      1999
                                                              -------   -------
                                                                  
Property and equipment......................................  $ 924.6   $ 887.8
Accumulated depreciation....................................   (417.6)   (380.1)
                                                              -------   -------
Property and equipment, net.................................  $ 507.0   $ 507.7
                                                              =======   =======

GOODWILL AND OTHER INTANGIBLES

    Goodwill and other intangibles include the cost of acquired subsidiaries in
excess of the fair value of the net assets (i.e., goodwill) and other intangible
assets which have been recorded in connection with acquisitions. These assets
are amortized on a straight-line basis generally over 8 to 40 years. At December
31, 2000, the weighted-average

                                       F-12

                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

amortization periods for goodwill and other intangibles were 22.4 years and 38.6
years, respectively. The carrying amount of goodwill and other intangibles is
reviewed periodically for indicators of impairment in value, which in the view
of management are other than temporary, including unexpected or adverse changes
in the economic or competitive environments in which the Company operates,
profitability analyses and the fair value of the relevant subsidiary. If facts
and circumstances suggest that a subsidiary's goodwill is impaired, the Company
assesses the fair value of the underlying business and reduces the goodwill to
an amount that results in the book value of the subsidiary approximating fair
value.

    Goodwill and other intangibles, and related accumulated amortization, are as
follows (in millions):

                                                                 DECEMBER 31,
                                                              -------------------
                                                                2000       1999
                                                              --------   --------
                                                                   
Goodwill....................................................  $  559.0   $  610.9
Other intangibles...........................................     908.0      920.1
                                                              --------   --------
                                                               1,467.0    1,531.0
Accumulated amortization....................................     (91.1)     (59.5)
                                                              --------   --------
         Total goodwill and other intangibles, net..........  $1,375.9   $1,471.5
                                                              ========   ========

PREMIUMS DUE AND OTHER RECEIVABLES

    Premiums due and other receivables include life and health insurance
premiums due, reinsurance recoveries, guaranty funds receivable or on deposit,
receivables from the sale of securities and other receivables.

MORTGAGE LOAN SERVICING RIGHTS

    Mortgage loan servicing rights represent the cost of purchasing or
originating the right to service mortgage loans. These costs are capitalized and
amortized to operations over the estimated remaining lives of the underlying
loans using the interest method and taking into account appropriate prepayment
assumptions. Capitalized mortgage loan servicing rights are periodically
assessed for impairment, which is recognized in the consolidated statements of
operations during the period in which impairment occurs by establishing a
corresponding valuation allowance. For purposes of performing its impairment
evaluation, the Company stratifies the servicing portfolio on the basis of
specified predominant risk characteristics, including loan type and note rate. A
valuation model is used to determine the fair value of each stratum. Cash flows
are calculated using an internal prepayment model and discounted at a spread to
London Inter-Bank Offer Rate. External valuations are obtained for comparison
purposes. Activity in the valuation allowance for mortgage loan servicing rights
is summarized as follows (in millions):

                                                                    YEAR ENDED
                                                                   DECEMBER 31,
                                                              -----------------------
                                                              2000     1999     1998
                                                              -----   ------   ------
                                                                      
Balance at beginning of year................................  $ 2.9   $ 56.1   $  4.2
Impairments.................................................    1.1      1.7    120.0
Recoveries..................................................   (1.7)   (54.9)   (68.1)
                                                              -----   ------   ------
Balance at end of year......................................  $ 2.3   $  2.9   $ 56.1
                                                              =====   ======   ======

OTHER ASSETS

    Included in other assets are certain assets pending transfer or novation
that are carried at fair value (see Note 2). The remainder of other assets are
reported primarily at cost.

COMPREHENSIVE INCOME (LOSS)

    Comprehensive income (loss) includes all changes in equity during a period
except those resulting from investments by shareholders and distributions to
shareholders, which would not be applicable to a mutual holding company.

                                       F-13

                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

    The following table sets forth the adjustments necessary to avoid
duplication of items that are included as part of net income for a year that had
been part of other comprehensive income in prior years (in millions):

                                                                      DECEMBER 31,
                                                              ----------------------------
                                                               2000      1999       1998
                                                              ------   ---------   -------
                                                                          
Unrealized gains (losses) on available-for-sale securities
  arising during the year...................................  $238.9   $(1,013.2)  $(531.8)
Adjustment for realized gains (losses) on available-for-sale
  securities included in net income.........................   (29.9)      188.2     240.2
                                                              ------   ---------   -------
Unrealized gains (losses) on available-for-sale securities,
  as adjusted...............................................  $209.0   $  (825.0)  $(291.6)
                                                              ======   =========   =======

    The above adjustment for net realized gains on available-for-sale securities
included in net income is presented net of tax, related changes in the
amortization patterns of deferred policy acquisition costs and unearned revenue
reserves.

RECLASSIFICATIONS

    Reclassifications have been made to the 1998 and 1999 consolidated financial
statements to conform to the 2000 presentation.

ACCOUNTING CHANGES

    In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities("SFAS 133"). In June 1999, Statement No. 137, Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133 ("SFAS 137") was issued deferring the effective date
of SFAS 133 by one year. The new effective date for the Company to adopt SFAS
133 is January 1, 2001. In June 2000, the FASB issued Statement No. 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities an
amendment of FASB Statement No. 133 which amended the accounting and reporting
standards of SFAS 133 for certain derivative instruments and certain hedging
activities. SFAS 133 will require the Company to include all derivatives in the
consolidated statement of financial position at fair value. The accounting for
changes in the fair value of a derivative depends on its intended use. Changes
in derivative fair values will either be recognized in earnings as offsets to
the changes in fair value of related hedged assets, liabilities and firm
commitments or, for forecasted transactions, deferred and recorded as a
component of equity until the hedged transactions occur and are recognized in
earnings. The ineffective portion of a hedging derivative's change in fair value
will be immediately recognized in earnings. Derivatives not used in hedging
activities must be adjusted to fair value through earnings. The Company adopted
SFAS 133 effective January 1, 2001. The Company evaluated the effect
implementation would have on its reported results of operations and financial
position, based on derivatives holdings and market conditions as of December 31,
2000. That evaluation indicated that the implementation of SFAS 133 would not
have had a material impact on the results of operations and financial position
as of and for the year ended December 31, 2000.

    On January 1, 1999, the Company implemented the Statement of Position
("SOP") 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. SOP 98-1 defines internal use software and when the
costs associated with internal use should be capitalized. The implementation did
not have a material impact on the Company's consolidated financial statements.

    In December 2000, the Accounting Standards Executive Committee issued
Statement of Position 00-3, Accounting by Insurance Enterprises for
Demutualization and Formation of Mutual Insurance Holding Companies and for
Certain Long-Duration Participating Contracts. The effective date for adoption
of SOP 00-3, with retroactive application and restatement of all previously
issued financial statements, is for fiscal years beginning after December 15,
2000, however, early adoption is encouraged by the Accounting Standards
Executive Committee. The Statement provides guidance on accounting by insurance
companies for demutualization and the formation of mutual insurance holding
companies. The Statement specifies that closed block assets, liabilities,
revenues and expenses should be displayed together with all other assets,
liabilities, revenues and expenses of the insurance enterprise based on the
nature of the particular item, with appropriate disclosures relating to the
closed block. The Statement also provides guidance regarding: accounting for
predemutualization participating contracts, establishment of a policyholder
dividend obligation for earnings that relate to the closed block, but do not
inure to stockholders, if applicable, accounting for participating policies sold
outside the closed block, accounting for expenses related to a demutualization
and the formation of an MIHC, accounting for retained earnings and other
comprehensive income and accounting for a distribution from an

                                       F-14

                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

MIHC to its members. The Company early adopted SOP 00-3 during 2000, and
financial statements for all periods presented have been reclassified to reflect
the guidance set forth in SOP 00-3. See Note 6.

2. MERGERS, ACQUISITIONS AND DIVESTITURES

    During 2000, various acquisitions of joint ventures were made by the Company
at purchase prices aggregating $27.4 million. During 2000, the Company included
$(2) million in net investment income representing the Company's share of
current year net losses of the acquired joint ventures. These joint ventures are
part of unconsolidated entities described in Note 1.

    On December 21, 2000, the Company entered into an agreement to dispose of
the stock of Principal International Espana, S.A. de Seguros de Vida, a
subsidiary in Spain. The transaction is expected to be completed in the first
quarter of 2001, after which the Company will have no business operations in
Spain. In 2000, the consolidated financial statements included $222.7 million in
assets, $49.4 million in revenues and $(1.2) million of pretax losses related to
these operations.

    Beginning January 1, 2000, the Company ceased new sales of Medicare
supplement insurance and effective July 1, 2000, the Company entered into a
reinsurance agreement to reinsure 100% of the Medicare supplement insurance
block of business. Medicare supplement insurance premiums were $98.4 million for
the six months ended June 30, 2000 and $164.6 million for the year ended
December 31, 1999.

    On August 31, 1999, the Company acquired the outstanding stock of several
companies affiliated with Bankers Trust Australia Group ("Acquired Companies")
from Deutsche Bank AG at a purchase price of $1,445.6 million. The acquisition
was accounted for using the purchase method and results of operations of the
Acquired Companies have been included in the consolidated financial statements
from the date of acquisition. In connection with the acquisition, the Company
and Deutsche Bank AG agreed to the sale of the investment banking operations of
the Acquired Companies to Macquarie Bank Limited, with net proceeds of $63.7
million from this transaction being included in the acquired assets.

    The purchase price and $9.4 million of direct acquisition costs have been
allocated to the assets acquired and liabilities assumed based on their
respective fair market values at the acquisition date. The allocation included
identifiable intangibles represented by management rights for the funds
management business and the brand name of $897.4 million and $38.5 million of
workforce intangibles, with $408.6 million of resulting goodwill, which are
being amortized on a straight-line basis over 40, 8 and 25 years, respectively.
Refinements in the allocation were made in 2000 as accounting completion and
valuation studies were finalized.

    Completion of the sale of the investment banking operations required the
transfer or novation to Macquarie Bank Limited of the investment banking assets
and liabilities of the Acquired Companies. The bulk of these were statutorily
transferred on August 3, 1999, pursuant to the procedures laid down in the
Financial Sector (Transfers of Business) Act ("the Act") of the Commonwealth of
Australia. Certain assets and liabilities which are governed by a law other than
that of Australia, or which the Act does not address, were excluded from the
statutory transfer. For these assets and liabilities it has been necessary to
effect individual transfers or novations, in some cases with the agreement of
the relevant customers or counterparties. Pending such transfers or novations,
the Company agreed, as part of the sale of the investment banking operations,
that these assets and liabilities will remain in the name of one of the Acquired
Companies, but all economic risks and benefits associated with them will be
assumed and a related indemnification provided by Macquarie Bank Limited. In
addition, the Company may rely upon Deutsche Bank AG to ensure that the Company
does not suffer any claim or loss related to the investment banking operations
sold, including the assets and liabilities, respectively, that will remain in
the name of the Acquired Companies pending transfer or novation. These assets
and liabilities which remain in the name of one of the Acquired Companies and
aggregated $1,020.7 million and $652.7 million at December 31, 1999,
respectively, are reported at fair value and included in other assets and other
liabilities in the Company's consolidated statement of financial position, with
a net payable to Macquarie Bank Limited of $368.0 million. At December 31, 2000,
these assets and liabilities aggregated $424.1 million and $219.6 million,
respectively, with a net payable to Macquarie Bank Limited of $204.5 million.

    During 1999, various other acquisitions were made by the Company at purchase
prices aggregating $121.5 million. The acquisitions were all accounted for using
the purchase method and the results of operations of the acquired businesses
have been included in the financial statements of the subsidiaries from the
dates of acquisition. Such acquired companies had total assets at December 31,
1999 and total 1999 revenue of $126.9 million and $11.2 million, respectively.

                                       F-15

                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. MERGERS, ACQUISITIONS AND DIVESTITURES -- (CONTINUED)

    Effective April 1, 1998, the Company transferred substantially all of its
managed care operations with Coventry Corporation in exchange for a non-majority
ownership position in the resulting entity, Coventry Health Care, Inc. The
Company's investment in Coventry Health Care, Inc. is accounted for using the
equity method. Net equity of the transferred business on April 1, 1998 was
$170.0 million. Consolidated financial results for 1997 included total assets at
December 31, 1997, and total revenues and pretax loss for the year then ended of
approximately $419.0 million, $883.3 million and $(26.1) million, respectively,
for the transferred business. In September 2000, the Company sold a portion of
its equity ownership position, which reduced its ownership to approximately 25%
and resulted in a realized capital gain of $13.9 million, net of tax.

    During 1998, various acquisitions were made by the Company at purchase
prices aggregating $224.5 million. The acquisitions were all accounted for using
the purchase method and the results of operations of the acquired businesses
have been included in the financial statements of the subsidiaries from the
dates of acquisition. Such acquired companies had total assets at December 31,
1998 and total 1998 revenue of $458.8 million and $58.3 million, respectively.

    During 1998, various divestitures were made by the Company at selling prices
aggregating $117.9 million and $15.3 million in net realized capital gains were
realized as a result of these divestitures. In 1997, the financial statements
included $151.6 million in assets, $205.7 million in revenues and $19.8 million
of pretax losses related to these subsidiaries.

    Effective July 1, 1998, the Company no longer participates in reinsurance
pools related to the Federal Employee Group Life Insurance and Service Group
Life Insurance programs. In 1997, the premium assumed from these arrangements
was approximately $84.9 million.

3. INVESTMENTS

    Under SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities, securities are generally classified as available-for-sale,
held-to-maturity, or trading. The Company has classified its entire fixed
maturities portfolio as available-for-sale, although it is generally the
Company's intent to hold these securities to maturity. The Company has also
classified all equity securities as available-for-sale. Securities classified as
available-for-sale are reported at fair value in the consolidated statements of
financial position with the related unrealized holding gains and losses on such
available-for-sale securities reported as a separate component of equity after
adjustments for related changes in deferred policy acquisition costs, unearned
revenue reserves and deferred income taxes.

                                       F-16

                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. INVESTMENTS -- (CONTINUED)

    The cost, gross unrealized gains and losses and fair value of fixed
maturities and equity securities available-for-sale as of December 31, 2000 and
1999, are as follows (in millions):

                                                                          GROSS        GROSS
                                                                        UNREALIZED   UNREALIZED
                                                              COST        GAINS        LOSSES     FAIR VALUE
                                                            ---------   ----------   ----------   ----------
                                                                                      
DECEMBER 31, 2000
Fixed maturities:
  United States Government and agencies...................  $    23.2     $  0.1       $  0.2     $    23.1
  Foreign governments.....................................      895.7       27.6          5.3         918.0
  States and political subdivisions.......................      287.4       12.5          4.2         295.7
  Corporate -- public.....................................    9,027.2      219.5        129.4       9,117.3
  Corporate -- private....................................    9,809.9      208.9        206.0       9,812.8
  Mortgage-backed and other asset-backed securities.......    6,496.1      211.2         34.3       6,673.0
                                                            ---------     ------       ------     ---------
         Total fixed maturities...........................  $26,539.5     $679.8       $379.4     $26,839.9
                                                            =========     ======       ======     =========
         Total equity securities..........................  $   805.9     $191.2       $254.2     $   742.9
                                                            =========     ======       ======     =========

DECEMBER 31, 1999
Fixed maturities:
  United States Government and agencies...................  $   163.7     $   --       $  1.7     $   162.0
  Foreign governments.....................................      820.2       18.7         15.2         823.7
  States and political subdivisions.......................      176.0        1.3          9.8         167.5
  Corporate -- public.....................................    5,425.4       74.4        140.6       5,359.2
  Corporate -- private....................................   11,476.9      106.7        363.0      11,220.6
  Mortgage-backed and other asset-backed securities.......    5,832.2       12.6        133.9       5,710.9
                                                            ---------     ------       ------     ---------
         Total fixed maturities...........................  $23,894.4     $213.7       $664.2     $23,443.9
                                                            =========     ======       ======     =========
         Total equity securities..........................  $   720.8     $176.3       $ 32.9     $   864.2
                                                            =========     ======       ======     =========

    The cost and fair value of fixed maturities available-for-sale at December
31, 2000, by expected maturity, are as follows (in millions):

                                                                COST      FAIR VALUE
                                                              ---------   ----------
                                                                    
Due in one year or less.....................................  $ 1,125.2   $ 1,113.0
Due after one year through five years.......................    9,782.8     9,783.0
Due after five years through ten years......................    5,273.6     5,352.8
Due after ten years.........................................    3,861.8     3,918.1
                                                              ---------   ---------
                                                               20,043.4    20,166.9
Mortgage-backed and other asset-backed securities...........    6,496.1     6,673.0
                                                              ---------   ---------
         Total..............................................  $26,539.5   $26,839.9
                                                              =========   =========

    The above summarized activity is based on expected maturities. Actual
maturities may differ because borrowers may have the right to call or pre-pay
obligations.

                                       F-17

                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. INVESTMENTS -- (CONTINUED)

    Major categories of net investment income are summarized as follows (in
millions):

                                                                 YEAR ENDED DECEMBER 31,
                                                              ------------------------------
                                                                2000       1999       1998
                                                              --------   --------   --------
                                                                           
Fixed maturities, available-for-sale........................  $1,880.7   $1,712.4   $1,587.5
Equity securities, available-for-sale.......................      67.6       46.2       31.6
Mortgage loans..............................................   1,022.9    1,111.1    1,143.0
Real estate.................................................     171.3      187.5      143.2
Policy loans................................................      55.1       50.2       50.9
Cash and cash equivalents...................................      32.3       25.9        8.8
Other.......................................................      81.1       55.3      108.1
                                                              --------   --------   --------
                                                               3,311.0    3,188.6    3,073.1
Less investment expenses....................................    (138.7)    (116.6)    (139.2)
                                                              --------   --------   --------
Net investment income.......................................  $3,172.3   $3,072.0   $2,933.9
                                                              ========   ========   ========

    The major components of net realized capital gains on investments are
summarized as follows (in millions):

                                                                YEAR ENDED DECEMBER 31,
                                                              ----------------------------
                                                               2000       1999       1998
                                                              -------    -------    ------
                                                                           
Fixed maturities, available-for-sale:
  Gross gains...............................................  $  29.1    $  31.2    $ 61.4
  Gross losses..............................................   (155.0)    (128.1)    (33.5)
Equity securities, available-for-sale:
  Gross gains...............................................     84.2      408.7     341.7
  Gross losses..............................................     (5.0)     (25.7)    (38.8)
Mortgage loans..............................................      8.6       (8.4)      6.3
Real estate.................................................     82.3       56.4     120.6
Other.......................................................     95.7       70.4       8.1
                                                              -------    -------    ------
Net realized capital gains..................................  $ 139.9    $ 404.5    $465.8
                                                              =======    =======    ======

    Proceeds from sales of investments (excluding call and maturity proceeds) in
fixed maturities were $5.7 billion, $5.5 billion and $2.8 billion in 2000, 1999
and 1998 respectively. Of the 2000, 1999 and 1998 proceeds, $2.6 billion, $3.8
billion and $2.2 billion, respectively, relates to sales of mortgage-backed
securities. The Company actively manages its mortgage-backed securities
portfolio to control prepayment risk. Gross gains of $2.0 million, $2.1 million
and $23.0 million and gross losses of $40.1 million, $60.3 million and $7.0
million in 2000, 1999 and 1998, respectively, were realized on sales of
mortgage-backed securities. At December 31, 1999, the Company had security
purchases payable totaling $21.9 million relating to the purchases of
mortgage-backed securities at forward dates.

    The net unrealized gains and losses on investments in fixed maturities and
equity securities available-for-sale is reported as a separate component of
equity, reduced by adjustments to deferred policy acquisition costs and unearned
revenue reserves that would have been required as a charge or credit to
operations had such amounts been realized and a provision for deferred income
taxes. The cumulative amount of net unrealized gains and losses on
available-for-sale securities is as follows (in millions):

                                                                DECEMBER 31,
                                                              ----------------
                                                               2000     1999
                                                              ------   -------
                                                                 
Net unrealized gains and losses on fixed maturities,
  available-for-sale........................................  $283.9   $(437.9)
Net unrealized gains and losses on equity securities,
  available-for-sale, including seed money in separate
  accounts..................................................   (55.6)    229.7
Adjustments for assumed changes in amortization patterns:
  Deferred policy acquisition costs.........................   (43.2)     79.4
  Unearned revenue reserves.................................     2.8     (12.3)
Provision for deferred income (taxes) tax benefit...........   (58.0)     62.0
                                                              ------   -------
Net unrealized gains and losses on available-for-sale
  securities................................................  $129.9   $ (79.1)
                                                              ======   =======

                                       F-18

                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. INVESTMENTS -- (CONTINUED)

    The corporate private placement bond portfolio is diversified by issuer and
industry. Restrictive bond covenants are monitored by the Company to regulate
the activities of issuers and control their leveraging capabilities.

    Commercial mortgage loans and corporate private placement bonds originated
or acquired by the Company represent its primary areas of credit risk exposure.
At December 31, 2000 and 1999, the commercial mortgage portfolio is diversified
by geographic region and specific collateral property type as follows:

               GEOGRAPHIC DISTRIBUTION
                                        DECEMBER 31,
                                        -------------
                                        2000     1999
                                        ----     ----

New England...........................    5%       5%
Middle Atlantic.......................   15       14
East North Central....................    9       10
West North Central....................    4        5
South Atlantic........................   24       25
East South Central....................    4        3
West South Central....................    8        7
Mountain..............................    6        5
Pacific...............................   26       27
Valuation allowance...................   (1)      (1)

             PROPERTY TYPE DISTRIBUTION
                                        DECEMBER 31,
                                        -------------
                                        2000     1999
                                        ----     ----

Office................................   30%      31%
Retail................................   34       33
Industrial............................   31       32
Apartments............................    4        3
Hotel.................................    1        1
Mixed use/other.......................    1        1
Valuation allowance...................   (1)      (1)

    Mortgage loans on real estate are considered impaired when, based on current
information and events, it is probable that the Company will be unable to
collect all amounts due according to contractual terms of the loan agreement.
When the Company determines that a loan is impaired, a provision for loss is
established for the difference between the carrying amount of the mortgage loan
and the estimated value. Estimated value is based on either the present value of
the expected future cash flows discounted at the loan's effective interest rate,
the loan's observable market price or fair value of the collateral. The
provision for losses is reported as a net realized capital loss.

    Mortgage loans deemed to be uncollectible are charged against the allowance
for losses and subsequent recoveries are credited to the allowance for losses.
The allowance for losses is maintained at a level believed adequate by
management to absorb estimated probable credit losses. Management's periodic
evaluation of the adequacy of the allowance for losses is based on the Company's
past loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay, the estimated value
of the underlying collateral, composition of the loan portfolio, current
economic conditions and other relevant factors. The evaluation is inherently
subjective as it requires estimating the amounts and timing of future cash flows
expected to be received on impaired loans that may change.

    A summary of the changes in the mortgage loan allowance for losses is as
follows (in millions):

                                                                    DECEMBER 31,
                                                              ------------------------
                                                               2000     1999     1998
                                                              ------   ------   ------
                                                                       
Balance at beginning of year................................  $117.8   $113.0   $121.4
Provision for losses........................................     5.4      9.2      7.3
Releases due to write-downs, sales and foreclosures.........   (12.8)    (4.4)   (15.7)
                                                              ------   ------   ------
Balance at end of year......................................  $110.4   $117.8   $113.0
                                                              ======   ======   ======

    The Company was servicing approximately 582,000 and 555,000 residential
mortgage loans with aggregate principal balances of approximately $55,987.4
million and $51,875.5 million at December 31, 2000 and 1999, respectively. In
connection with these mortgage servicing activities, the Company held funds in
trust for others totaling approximately $343.8 million and $334.0 million at
December 31, 2000 and 1999, respectively. In connection with its loan
administration activities, the Company advances payments of property taxes and
insurance premiums and also advances principal and interest payments to
investors in advance of collecting funds from specific mortgagors. In addition,
the Company makes certain payments of attorney fees and other costs related to
loans in foreclosure. These amounts receivable are recorded, at cost, as
advances on serviced loans. Amounts advanced are considered in management's
evaluation of the adequacy of the mortgage loan allowance for losses.

    In June 2000, the Company's mortgage banking segment created a special
purpose entity to provide an off-balance sheet source of funding for the
Company's residential mortgage loan production. The Company sells residential
mortgage loans to the special purpose entity, where they are warehoused until
sold to the final investor. A maximum of $1 billion may be warehoused by the
special purpose entity at any given time. Through December 31, 2000,

                                       F-19

                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. INVESTMENTS -- (CONTINUED)

$5,340.8 million of loans had been sold to the special purpose entity and $688.2
million was warehoused by the special purpose entity at December 31, 2000. The
Company remains the servicer of the mortgage loans and also performs secondary
marketing, accounting and various administrative functions on behalf of the
special purpose entity. The special purpose entity is owned by unaffiliated
equity certificate holders and thus, is not consolidated with the Company.

    In October 2000, the Company's mortgage banking unit also created an
unconsolidated qualifying special purpose entity ("QSPE") to provide an
off-balance sheet source of funding for up to $250 million of qualifying
delinquent mortgage loans. The Company sells qualifying delinquent loans to the
QSPE, which then pledges the loans to secure its borrowings from a Delaware
business trust. The trust funds its loan to the QSPE by selling participations
certifications to commercial paper conduit purchasers. Mortgage loans remain in
the QSPE until they are processed through claims, reinstated or paid off. The
Company is retained as the servicer on the mortgage loans and also performs
accounting and various administrative functions on behalf of the QSPE. The
Company's retained interest in the mortgage loans of $10.2 million is classified
as other assets in the consolidated statements of financial position.

    Real estate holdings and related accumulated depreciation are as follows (in
millions):

                                                                 DECEMBER 31,
                                                              -------------------
                                                                2000       1999
                                                              --------   --------
                                                                   
Investment real estate......................................  $  822.2   $1,339.6
Accumulated depreciation....................................    (117.1)    (161.0)
                                                              --------   --------
                                                                 705.1    1,178.6
Properties held for sale....................................     695.4    1,033.4
                                                              --------   --------
Real estate, net............................................  $1,400.5   $2,212.0
                                                              ========   ========

    Other investments primarily include properties owned jointly with venture
partners and operated by the partners. Joint ventures in which the Company has
an interest have mortgage loans with the Company of $612.1 million and $760.1
million at December 31, 2000 and 1999, respectively. The Company is committed to
providing additional mortgage financing for such joint ventures aggregating
$71.5 million and $76.8 million at December 31, 2000 and 1999, respectively.

4. SECURITIZATION TRANSACTIONS

COMMERCIAL MORTGAGE LOANS

    During 2000 and 1999, the Company sold commercial mortgage loans in
securitization transactions. In each of those securitizations, the Company
retained primary servicing responsibilities and other interests. The Company
receives annual servicing fees approximating 0.01 percent, which approximates
cost. The investors and the securitization trusts have no recourse to the
Company's other assets for failure of debtors to pay when due. The value of the
Company's retained interests is subject primarily to credit risk.

    In 2000, the Company recognized pretax gains of $0.7 million on the
securitization of commercial mortgage loans.

    Key economic assumptions used in measuring the retained interests at the
date of securitization resulting from transactions completed during the year
included a cumulative default rate between five and eight percent. The assumed
range of the loss severity, as a percentage of defaulted loans, was between 13
and 25 percent. The low end of the loss severity range relates to a portfolio of
seasoned loans. The high end of the loss severity range relates to a portfolio
of newly issued loans.

    At December 31, 2000, the fair values of retained interests related to the
securitizations of commercial mortgage loans were $65.2 million. Key economic
assumptions and the sensitivity of the current fair values of residual cash
flows were tested to one and two standard deviations from the expected rates.
The changes in the fair values at December 31, 2000 as a result of these
assumptions were not significant.

RESIDENTIAL MORTGAGE LOANS

    During 2000 and 1999, the Company sold residential mortgage loans in
securitization transactions. In those securitizations, the Company retained
servicing responsibilities and subordinated interests. The Company receives
annual servicing fees approximating 0.4 percent of the outstanding balance and
rights to future cash flows arising after

                                       F-20

                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. SECURITIZATION TRANSACTIONS -- (CONTINUED)

the investors have received the return for which they have contracted. The
investors have no recourse to the Company's other assets for failure of debtors
to pay when due. The Company's retained interests are subordinate to the
investor's interests. Their value is subject to prepayment and interest rate
risks on the transferred assets.

    In 2000, the Company recognized pretax gains of $9.4 million on the
securitization of residential mortgage loans.

    The key economic assumptions used in determining the fair value of mortgage
servicing rights at the date of securitization resulting from securitizations
completed in 2000 were as follows:

                                                            
Weighted average life (years)...............................    6.87
Prepayment speed............................................   11.81%
Static yield to maturity discount rate......................   10.74%

    Prepayment speed is the constant prepayment rate that results in the
weighted average life disclosed above.

    At December 31, 2000, key economic assumptions and the sensitivity of the
current fair value of the mortgage servicing rights to immediate 10 and 20
percent adverse changes in those assumptions are as follows ($ in millions):

                                                            
Fair value of retained interests............................   $1,193.4
Expected weighted average life (in years)...................        6.7
Prepayment speed............................................      12.43%
Decrease in fair value of 10% adverse change................   $   45.7
Decrease in fair value of 20% adverse charge................   $   87.1
Static yield to maturity discount rate......................       9.44%
Decrease in fair value of 10% adverse change................   $   73.8
Decrease in fair value of 20% adverse change................   $  147.7

    These sensitivities are hypothetical and should be used with caution. As the
figures indicate, changes in fair value based on a 10% variation in assumptions
generally cannot be extrapolated because the relationship of the change in the
assumption to the change in fair value may not be linear. Also, in the above
table, the effect of a variation in a particular assumption on the fair value of
the servicing rights is calculated independently without changing any other
assumption. In reality, changes in one factor may result in change in another,
which might magnify or counteract the sensitivities. For example, changes in
prepayment speed estimates could result in changes in the discount rate.

MARGIN LENDING

    During 2000 and 1999, the Company sold loans under its margin loan
securitization program. In that securitization, the Company retained primary
servicing responsibilities and retained subordinated interests. The Company
receives servicing fees approximating 0.3 percent of the outstanding balance and
rights to future cash flows arising after investors in the trust have received a
contracted return. The Company's retained interests are subordinated to
investors' interests. Retained interests equate to 7% of the outstanding loan
balances, of which the Company may earn a return of 1.5% to 2.0% over the
Australian 30 day Bank Bill swap rate. The investors and the securitization
trusts have no recourse to the Company's other assets for failure of debtors to
pay when due. The value of the Company's retained interests is subject to market
risk and all positions are primarily hedged. No gains or losses on the
transaction have been realized to date.

    The fair values of the retained interests, $43.7 million at December 31,
2000, are based upon the Company's relative ownership percentage of the
outstanding loan balances. At December 31, 2000, the Company utilized the
present value of expected future cash flows as a valuation technique to assess
the sensitivity of the fair values of retained interests. Key economic
assumptions used in measuring the retained interests included interest margin,
credit losses, terminations and discount rates and the resulting changes to the
fair values were not significant.

    The table below summarizes cash flows received from and paid to
securitization trusts for the year ended December 31, 2000 (in millions):

                                                            
Proceeds from new securitizations...........................   $9,658.2
Proceeds from advances on margin loans previously
  securitized...............................................       16.1
Servicing fees received.....................................      239.3
Other cash flows received on retained interests.............       42.8

                                       F-21

                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. DERIVATIVES HELD OR ISSUED FOR PURPOSES OTHER THAN TRADING

    The Company uses exchange-traded interest rate futures and mortgage-backed
securities forwards to hedge against interest rate risks. The Company attempts
to match the timing of when interest rates are committed on insurance products
and on new investments. However, timing differences do occur and can expose the
Company to fluctuating interest rates. Interest rate futures and mortgage-backed
securities forwards are used to minimize these risks. In these contracts, the
Company is subject to the risk that the counterparties will fail to perform and
to the risks associated with changes in the value of the underlying securities;
however, such changes in value generally are offset by opposite changes in the
value of the hedged items. Futures contracts are marked to market and settled
daily, which minimizes the counterparty risk. The notional amounts of futures
contracts represent the extent of the Company's involvement.

    The Company uses interest rate swaps to more closely match the interest rate
characteristics of its assets with those of its liabilities. Swaps are used in
asset and liability management to modify duration and match cash flows.
Occasionally, the Company will sell a callable investment-type contract and may
use interest rate swaptions or similar instruments to transform the callable
liability into a fixed term liability. In addition, the Company may sell an
investment-type contract with attributes tied to market indices in which case
the Company uses a call option to transform the liability into a fixed rate
liability. The Company's current credit exposure on swaps is limited to the
value of interest rate swaps that have become favorable to the Company. The
average unexpired terms of the swaps were approximately four years at December
31, 2000 and five years at December 31, 1999. The net amount payable or
receivable from interest rate swaps is accrued as an adjustment to interest
income. The Company's interest rate swap agreements include cross-default
provisions when two or more swaps are transacted with a given counterparty.

    The Company enters into currency exchange swap agreements to convert both
principal and interest payments of certain foreign denominated fixed rate assets
and liabilities into U.S. dollar denominated instruments to eliminate the
exposure to future currency volatility on those items. At December 31, 2000, the
Company had various foreign currency exchange agreements with maturities ranging
from 2001 to 2019. At December 31, 1999, such maturities ranged from 2000 to
2018. The average unexpired term of the swaps was approximately five years at
December 31, 2000 and six years at December 31, 1999.

    The Company manages the risk on its commercial mortgage loan pipeline by
buying and selling mortgage-backed securities in the forward markets, interest
rate swaps, interest rate futures, and treasury rate guarantees. Such futures
contracts are marked to market and settled daily.

    The Company manages risk on its residential mortgage loan pipeline by buying
and selling mortgage-backed securities in the forward markets, over-the-counter
options on mortgage-backed securities, U.S. Treasury futures contracts and
options on Treasury futures contracts. The Company entered into mandatory
forward, option and futures contracts to reduce interest rate risk on certain
mortgage loans held for sale and other commitments. The forward contracts
provide for the delivery of securities at a specified future date at a specified
price or yield. In the event the counterparty is unable to meet its contractual
obligations, the Company may be exposed to the risk of selling mortgage loans at
prevailing market prices. The effect of these contracts was considered in the
lower of cost or market calculation of mortgage loans held for sale.

    The Company has committed to originate approximately $695.2 million and
$372.0 million of residential mortgage loans at December 31, 2000 and 1999,
respectively, subject to borrowers meeting the Company's underwriting
guidelines. These commitments call for the Company to fund such loans at a
future date with a specified rate at a specified price. Because the borrowers
are not obligated to close the loans, the Company is exposed to risks that it
may not have sufficient mortgage loans to deliver to its mandatory forward
contracts and, thus, would be obligated to purchase mortgage loans at prevailing
market rates to meet such commitments. Conversely, the Company is exposed to the
risk that more loans than expected will close, and the loans would then be sold
at current market prices.

    The Company uses interest rate floors, futures contracts and options on
futures contracts in hedging a portion of its portfolio of mortgage servicing
rights from prepayment risk associated with changes in interest rates. The
floors and contracts provide for the receipt of payments when interest rates are
below predetermined interest rate levels. The premiums paid for floors are
included in other assets in the Company's consolidated statements of financial
position.

    With regard to its international operations, the Company attempts to conduct
much of its business in the functional currency of the country of operation. At
times, the Company is unable to do so and it uses foreign currency forwards,
foreign currency swaps and interest rate swaps to hedge the resulting currency
risk.

                                       F-22

                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. DERIVATIVES HELD OR ISSUED FOR PURPOSES OTHER THAN TRADING -- (CONTINUED)

    The notional amounts and credit exposure of the Company's derivative
financial instruments by type are as follows (in millions):

                                                                  DECEMBER 31,
                                                              ---------------------
                                                                2000        1999
                                                              ---------   ---------
                                                                    
NOTIONAL AMOUNTS OF DERIVATIVE INSTRUMENTS WITH REGARD TO
  UNITED STATES OPERATIONS
  Foreign currency swaps....................................  $ 2,745.0   $ 1,571.5
  Interest rate floors......................................    2,450.0     5,550.0
  Interest rate swaps.......................................    2,391.5     1,298.5
  Mortgage-backed forwards and options......................    1,898.3     1,546.7
  Swaptions.................................................      697.7       469.7
  Call options..............................................       30.0        30.0
  U.S. Treasury futures.....................................      183.2       287.6
  Currency forwards.........................................       39.4        13.0
  Treasury rate guarantees..................................       60.0          --
                                                              ---------   ---------
                                                               10,495.1    10,767.0
NOTIONAL AMOUNTS OF DERIVATIVE INSTRUMENTS WITH REGARD TO
  INTERNATIONAL OPERATIONS
  Foreign currency swaps....................................      665.0       670.0
  Interest rate swaps.......................................      665.0       665.0
  Currency forwards.........................................      380.0       380.0
                                                              ---------   ---------
                                                                1,710.0     1,715.0
                                                              ---------   ---------
         Total notional amounts at end of year..............  $12,205.1   $12,482.0
                                                              =========   =========
CREDIT EXPOSURE OF DERIVATIVE INSTRUMENTS WITH REGARD TO
  UNITED STATES OPERATIONS
  Foreign currency swaps....................................  $    45.3   $    69.2
  Interest rate floors......................................       20.0        15.1
  Interest rate swaps.......................................       14.1        21.6
  Mortgage-backed forwards and options......................         --         6.0
  Swaptions.................................................       11.8         8.7
  Call options..............................................       12.3        19.0
  Currency forwards.........................................        5.5          --
                                                              ---------   ---------
                                                                  109.0       139.6
CREDIT EXPOSURE OF DERIVATIVE INSTRUMENTS WITH REGARD TO
  INTERNATIONAL OPERATIONS
  Foreign currency swaps....................................       28.4        14.8
  Interest rate swaps.......................................       39.1          --
  Currency forwards.........................................       26.2          --
                                                              ---------   ---------
                                                                   93.7        14.8
                                                              ---------   ---------
         Total credit exposure at end of year...............  $   202.7   $   154.4
                                                              =========   =========

                                       F-23

                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. CLOSED BLOCK

    Summarized financial information of the Closed Block is as follows (in
millions):

                                                                 DECEMBER 31,
                                                              -------------------
                                                                2000       1999
                                                              --------   --------
                                                                   
ASSETS
  Fixed maturities, available-for-sale......................  $2,182.2   $1,781.7
  Mortgage loans............................................     919.4    1,035.9
  Policy loans..............................................     770.0      752.1
  Other investments.........................................       1.3        1.2
                                                              --------   --------
  Total investments.........................................   3,872.9    3,570.9

  Cash and cash equivalents.................................      22.7       23.9
  Accrued investment income.................................      72.4       62.9
  Deferred policy acquisition costs.........................     524.7      639.1
  Premiums due and other receivables........................      33.7       41.5
                                                              --------   --------
                                                              $4,526.4   $4,338.3
                                                              ========   ========
LIABILITIES
  Future policy benefits and claims.........................  $5,051.4   $4,885.2
  Other policyholder funds..................................     406.9      405.8
  Other liabilities.........................................     108.5      124.5
                                                              --------   --------
                                                              $5,566.8   $5,415.5
                                                              ========   ========

                                                                 YEAR ENDED
                                                                DECEMBER 31,
                                                              -----------------
                                                               2000      1999
                                                              -------   -------
                                                                  
REVENUES AND EXPENSES
  Premiums and other considerations.........................  $ 752.5   $ 764.4
  Net investment income.....................................    289.9     269.3
  Other income (expense)....................................     (5.0)     (2.0)
  Benefits, claims and settlement expenses..................   (601.2)   (614.5)
  Dividends to policyholders................................   (307.7)   (295.9)
  Operating expenses........................................    (77.8)   (110.6)
                                                              -------   -------
  Contribution from Closed Block (before income taxes)......  $  50.7   $  10.7
                                                              =======   =======

    As described in Note 1, the formation of the closed block required an
actuarial calculation including expectations of future earnings related to
policies in the closed block. Subsequent to formation, cumulative actual
earnings in excess of cumulative expected earnings (which are not revised in
future periods) are required to be recorded as a policyholder dividend
obligation. From date of formation through December 31, 2000, cumulative actual
earnings have been less than cumulative expected earnings, and the resulting
negative policyholder dividend obligation balance has not been recognized.

7. DEFERRED POLICY ACQUISITION COSTS

    Policy acquisition costs deferred and amortized in 2000, 1999 and 1998 are
as follows (in millions):

                                                                       DECEMBER 31,
                                                              ------------------------------
                                                                2000       1999       1998
                                                              --------   --------   --------
                                                                           
Balance at beginning of year................................  $1,430.9   $1,104.7   $1,057.5
Cost deferred during the year...............................     263.9      253.9      229.0
Amortized to expense during the year........................    (238.6)    (173.8)    (218.9)
Effect of unrealized (gains) losses.........................    (122.9)     246.1       37.1
                                                              --------   --------   --------
Balance at end of year......................................  $1,333.3   $1,430.9   $1,104.7
                                                              ========   ========   ========

                                       F-24

                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. INSURANCE LIABILITIES

    Major components of contractholder funds in the consolidated statements of
financial position, are summarized as follows (in millions):

                                                                  DECEMBER 31,
                                                              ---------------------
                                                                2000        1999
                                                              ---------   ---------
                                                                    
Liabilities for investment-type contracts:
  Guaranteed investment contracts...........................  $14,779.6   $15,935.5
  U.S. funding agreements...................................      772.1       742.9
  International funding agreements backing medium-term
    notes...................................................    2,475.3     1,139.0
  Other investment-type contracts...........................    2,537.0     3,117.1
                                                              ---------   ---------
         Total liabilities for investment-type contracts....   20,564.0    20,934.5
Liabilities for individual annuities........................    2,442.7     2,522.3
Universal life and other reserves...........................    1,293.5     1,063.0
                                                              ---------   ---------
         Total contractholder funds.........................  $24,300.2   $24,519.8
                                                              =========   =========

    The Company's guaranteed investment contracts and funding agreements contain
provisions limiting early surrenders, including penalties for early surrenders
and minimum notice requirements. Put provisions give customers the option to
terminate a contract prior to maturity, provided they give us a minimum notice
period.

    The following table presents GAAP reserves for guaranteed investment
contracts and funding agreements by withdrawal provisions (in millions):

                                                                 DECEMBER 31, 2000
                                                              -----------------------
                                                              GUARANTEED
                                                              INVESTMENT    FUNDING
                                                              CONTRACTS    AGREEMENTS
                                                              ----------   ----------
                                                                     
Less than 30 days notice....................................  $      --     $     --
30 to 89 days notice........................................      284.6        100.6
90 to 180 days notice.......................................      456.8        226.2
More than 180 days notice...................................         --        150.9
No active put provision*....................................      426.7           --
No put provision............................................   13,611.5      2,769.7
                                                              ---------     --------
         Total..............................................  $14,779.6     $3,247.4
                                                              =========     ========

---------------

*  Contracts under an initial lock-out period, but which will become puttable
   with 90 days notice at some time in the future.

    Funding agreements are issued to non-qualified institutional investors both
in domestic and international markets. In late 1998, the Company established a
$2.0 billion program, which was expanded to $4.0 billion in 2000, under which an
offshore special purpose entity was created to issue nonrecourse medium-term
notes. Under the program, the proceeds of each note series issuance are used to
purchase a funding agreement from the Company, with the funding agreement so
purchased then used to secure that particular series of notes. The payment terms
of any particular series of notes match the payment terms of the funding
agreement that secures that series. Claims for principal and interest under
those international funding agreements are afforded equal priority to claims of
life insurance and annuity policyholders under insolvency provisions of Iowa
Insurance Laws. During 1999, the Company began issuing international funding
agreements to the offshore special purpose vehicle under that program. The
offshore special purpose vehicle issued medium-term notes to investors in
Europe, Asia and Australia. In general, the medium-term note funding agreements
do not give the contractholder the right to terminate prior to contractually
stated maturity dates, absent the existence of certain circumstances which are
largely within the Company's control. The special purpose entity is consolidated
in the Company's financial statements. The medium-term notes issued by the
special purpose entity are reported with contractholder funds liabilities in the
Company's consolidated statement of financial position. At December 31, 2000,
the contractual maturities were 2002 -- $164.3 million; 2003  --  $476.6
million; 2004 -- $424.9 million; and thereafter -- $1,409.5 million.

    In February 2001, the Company agreed to issue up to $3.0 billion of funding
agreements under another program to support the prospective issuance by an
unaffiliated entity of medium-term notes in both domestic and international
markets. The unaffiliated entity will not be consolidated in the Company's
financial statements. The funding agreements

                                       F-25

                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. INSURANCE LIABILITIES -- (CONTINUED)

issued to the unaffiliated entity will be reported as contractholder funds
liabilities in the Company's consolidated statement of financial position.

    Activity in the liability for unpaid accident and health claims, which is
included with future policy benefits and claims in the consolidated statements
of financial position, is summarized as follows (in millions):

                                                                       DECEMBER 31,
                                                              ------------------------------
                                                                2000       1999       1998
                                                              --------   --------   --------
                                                                           
Balance at beginning of year................................  $  721.7   $  641.4   $  770.3
Incurred:
  Current year..............................................   1,788.1    1,872.2    1,921.8
  Prior years...............................................     (17.8)      (6.2)     (13.8)
                                                              --------   --------   --------
         Total incurred.....................................   1,770.3    1,866.0    1,908.0
Reclassification for subsidiary merger (see Note 2).........        --         --      154.9
Payments:
  Current year..............................................   1,447.3    1,466.3    1,523.1
  Prior years...............................................     339.7      319.4      358.9
                                                              --------   --------   --------
         Total payments.....................................   1,787.0    1,785.7    2,036.9
Balance at end of year:
  Current year..............................................     340.8      405.9      348.7
  Prior years...............................................     364.2      315.8      292.7
                                                              --------   --------   --------
         Total balance at end of year.......................  $  705.0   $  721.7   $  641.4
                                                              ========   ========   ========

    The activity summary in the liability for unpaid accident and health claims
shows a decrease of $17.8 million, $6.2 million and $13.8 million to the
December 31, 1999, 1998 and 1997 liability for unpaid accident and health
claims, respectively, arising in prior years. Such liability adjustments, which
affected current operations during 2000, 1999 and 1998, respectively, resulted
from developed claims for prior years being different than were anticipated when
the liabilities for unpaid accident and health claims were originally estimated.
These trends have been considered in establishing the current year liability for
unpaid accident and health claims.

9. DEBT

SHORT-TERM DEBT

    Short-term debt consists primarily of commercial paper and outstanding
balances on credit facilities with various banks. At December 31, 2000, the
Company and certain subsidiaries had credit facilities with various banks in an
aggregate amount of $1.7 billion. The credit facilities may be used for general
corporate purposes and also to provide backup for the Company's commercial paper
programs.

    The components of short-term debt as of December 31, 2000 and 1999 are as
follows (in millions):

                                                               DECEMBER 31,
                                                              ---------------
                                                               2000     1999
                                                              ------   ------
                                                                 
Commercial paper............................................  $ 29.9   $198.5
Other recourse short-term debt..............................    16.6    100.0
Non-recourse short-term debt................................   413.0    248.8
                                                              ------   ------
         Total short-term debt..............................  $459.5   $547.3
                                                              ======   ======

                                       F-26

                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. DEBT -- (CONTINUED)

LONG-TERM DEBT

    The components of long-term debt as of December 31, 2000 and December 31,
1999 are as follows (in millions):

                                                                 DECEMBER 31,
                                                              -------------------
                                                                2000       1999
                                                              --------   --------
                                                                   
7.95% notes payable, due 2004...............................  $  199.3   $  198.6
8.2% notes payable, due 2009................................     464.9      460.5
7.875% surplus notes payable, due 2024......................     198.9      199.0
8% surplus notes payable, due 2044..........................      99.1       98.8
Non-recourse mortgages and notes payable....................     149.8      335.2
Other mortgages and notes payable...........................     224.5      200.8
                                                              --------   --------
         Total long-term debt...............................  $1,336.5   $1,492.9
                                                              ========   ========

    The amounts included above are net of the discount and direct costs
associated with issuing these notes which are being amortized to expense over
their respective terms using the interest method.

    On August 25, 1999, Principal Financial Group (Australia) Holdings Pty
Limited, a wholly-owned subsidiary of the Company, issued $665.0 million of
unsecured redeemable long-term debt ($200.0 million of 7.95% notes due August
15, 2004 and $465.0 million in 8.2% notes due August 15, 2009). Interest on the
notes is payable semiannually on February 15 and August 15 of each year,
commencing February 15, 2000. Principal Financial Group (Australia) Holdings Pty
Limited used the net proceeds from the notes to partially fund the purchase of
the outstanding stock of several companies affiliated with Bankers Trust
Australia Group (see Note 2).

    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. No
affiliates of the Company 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 of Insurance of the State of Iowa (the
"Commissioner") and only to the extent that Principal Life has sufficient
surplus earnings to make such payments. For each of the years ended December 31,
2000, 1999 and 1998, interest of $24.0 million was approved by the Commissioner,
paid and charged to expense.

    Subject to Commissioner approval, the surplus notes due March 1, 2024 may be
redeemed at Principal Life's election on or after March 1, 2004 in whole or in
part at a redemption price of approximately 103.6% of par. The approximate 3.6%
premium is scheduled to gradually diminish over the following ten years. These
surplus notes may then be redeemed on or after March 1, 2014, at a redemption
price of 100% of the principal amount plus interest accrued to the date of
redemption.

    In addition, 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.

    The mortgages and other notes payable are financings for real estate
developments. The Company has obtained loans with various lenders to finance
these developments. Outstanding principal balances as of December 31, 2000 range
from $0.5 million to $102.8 million per development with interest rates
generally ranging from 6.9% to 8.6%. Outstanding principal balances as of
December 31, 1999 range from $0.6 million to $38.3 million per development with
interest rates generally ranging from 6.4% to 9.3%.

    At December 31, 2000, future annual maturities of the long-term debt are as
follows (in millions):

                                                           
2001........................................................  $  118.9
2002........................................................      94.6
2003........................................................       8.6
2004........................................................     202.2
2005........................................................       3.0
Thereafter..................................................     909.2
                                                              --------
         Total future maturities of the long-term debt......  $1,336.5
                                                              ========

                                       F-27

                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. DEBT -- (CONTINUED)

    Cash paid for interest for 2000, 1999 and 1998 was $116.8 million, $127.7
million and $96.9 million, respectively. These amounts include interest paid on
taxes during these years.

10. INCOME TAXES

    The Company's income tax expense (benefit) is as follows (in millions):

                                                                     YEAR ENDED
                                                                    DECEMBER 31,
                                                              ------------------------
                                                               2000     1999     1998
                                                              ------   ------   ------
                                                                       
Current income taxes:
  Federal...................................................  $167.7   $ 74.9   $(80.6)
  State and foreign.........................................    37.3     23.2     10.2
  Net realized capital gains................................    29.6    162.8    106.7
                                                              ------   ------   ------
         Total current income taxes.........................   234.6    260.9     36.3
Deferred income taxes.......................................     5.7     62.6      5.9
                                                              ------   ------   ------
         Total income taxes.................................  $240.3   $323.5   $ 42.2
                                                              ======   ======   ======

    The Company's provision for income taxes may not have the customary
relationship of taxes to income. Differences between the prevailing corporate
income tax rate of 35% times the pre-tax income and the Company's effective tax
rate on pre-tax income are generally due to inherent differences between income
for financial reporting purposes and income for tax purposes, and the
establishment of adequate provisions for any challenges of the tax filings and
tax payments to the various taxing jurisdictions. A reconciliation between the
corporate income tax rate and the effective tax rate is as follows:

                                                                  YEAR ENDED
                                                                 DECEMBER 31,
                                                              ------------------
                                                              2000   1999   1998
                                                              ----   ----   ----
                                                                   
Statutory corporate tax rate................................   35%    35%    35%
Dividends received deduction................................   (5)    (3)    (4)
Interest exclusion from taxable income......................   (1)    --     (1)
Resolution of prior year tax issues.........................   --     --    (20)
Other.......................................................   (1)    (2)    (4)
                                                               --     --    ---
Effective tax rate..........................................   28%    30%     6%
                                                               ==     ==    ===

    Significant components of the Company's net deferred income taxes are as
follows (in millions):

                                                                DECEMBER 31,
                                                              -----------------
                                                               2000      1999
                                                              -------   -------
                                                                  
Deferred income tax assets (liabilities):
Insurance liabilities.......................................  $ 181.1   $ 241.7
Deferred policy acquisition costs...........................   (360.1)   (358.7)
Net unrealized losses (gains) on available for sale
  securities................................................    (59.1)     91.4
Mortgage loan servicing rights..............................   (206.3)   (209.7)
Other.......................................................     (6.6)     24.1
                                                              -------   -------
                                                              $(451.0)  $(211.2)
                                                              =======   =======

    At December 31, 2000 and 1999, respectively, the Company's net deferred tax
liability is comprised of international net deferred tax assets of $36.4 million
and $60.5 million which have been included in other assets and $487.4 million
and $271.7 million of U.S. net deferred tax liabilities which have been included
in deferred income taxes in the statements of financial position.

    The Internal Revenue Service ("the Service") has completed examination of
the U.S. consolidated federal income tax returns for 1996 and prior years. The
Service has also begun to examine returns for 1997 and 1998. The Company
believes that there are adequate defenses against or sufficient provisions for
any challenges.

                                       F-28

                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. INCOME TAXES -- (CONTINUED)

    Undistributed earnings of certain foreign subsidiaries are considered
indefinitely reinvested by the Company. A tax liability will be recognized when
the Company expects distribution of earnings in the form of dividends, sale of
the investment or otherwise.

    Cash paid for income taxes was $279.3 million in 2000, $251.5 million in
1999 and $308.8 million in 1998.

11. EMPLOYEE AND AGENT BENEFITS

    The Company has defined benefit pension plans covering substantially all of
its employees and certain agents. The employees and agents are generally first
eligible for the pension plans when they reach age 21. The pension benefits are
based on the years of service and generally the employee's or agent's average
annual compensation during the last five years of employment. Partial benefit
accrual of pension benefits is recognized from first eligibility until
retirement based on attained service divided by potential service to age 65 with
a minimum of 35 years of potential service. The Company's policy is to fund the
cost of providing pension benefits in the years that the employees and agents
are providing service to the Company. The Company's funding policy is to deposit
an amount within the range of GAAP net periodic postretirement cost and the sum
of actuarial normal cost and any change in the unfunded accrued liability over a
30-year period as a percentage of compensation.

    The Company also provides certain health care, life insurance and long-term
care benefits for retired employees. Substantially all employees are first
eligible for these postretirement benefits when they reach age 57 and have
completed ten years of service with the Company. Partial benefit accrual of
these health, life and long-term care benefits is recognized from the employee's
date of hire until retirement based on attained service divided by potential
service to age 65 with a minimum of 35 years of potential service. The Company's
policy is to fund the cost of providing retiree benefits in the years that the
employees are providing service to the Company. The Company's funding policy is
to deposit the actuarial normal cost and an accrued liability over a 30-year
period as a percentage of compensation.

    The plans' combined funded status, reconciled to amounts recognized in the
consolidated statements of financial position and consolidated statements of
operations, is as follows (in millions):

                                                                                        OTHER POSTRETIREMENT
                                                           PENSION BENEFITS                   BENEFITS
                                                     -----------------------------   ---------------------------
                                                             DECEMBER 31,                   DECEMBER 31,
                                                     -----------------------------   ---------------------------
                                                       2000       1999      1998      2000      1999      1998
                                                     --------   --------   -------   -------   -------   -------
                                                                                       
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year............  $ (732.5)  $ (827.3)  $(700.5)  $(227.9)  $(206.3)  $(213.7)
Service cost.......................................     (35.0)     (42.2)    (33.8)    (10.4)    (10.9)    (12.1)
Interest cost......................................     (57.5)     (55.1)    (49.3)    (19.0)    (14.1)    (15.9)
Actuarial gain (loss)..............................      (2.7)     163.4     (79.7)      3.7      (3.5)     20.5
Benefits paid......................................      30.4       28.7      36.0        --       6.9      14.9
Other..............................................        --         --        --      31.8        --        --
                                                     --------   --------   -------   -------   -------   -------
Benefit obligation at end of year..................  $ (797.3)  $ (732.5)  $(827.3)  $(221.8)  $(227.9)  $(206.3)
                                                     ========   ========   =======   =======   =======   =======
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year.....  $1,059.8   $  992.9   $ 980.1   $ 345.5   $ 325.7   $ 300.2
Actual return on plan assets.......................      75.1       90.1      23.3      13.7       5.4      14.6
Employer contribution..............................      10.9        5.5      25.5      18.6      21.3      25.8
Benefits paid......................................     (30.4)     (28.7)    (36.0)    (18.0)     (6.9)    (14.9)
                                                     --------   --------   -------   -------   -------   -------
Fair value of plan assets at end of year...........  $1,115.4   $1,059.8   $ 992.9   $ 359.8   $ 345.5   $ 325.7
                                                     ========   ========   =======   =======   =======   =======
Funded status......................................  $  318.1   $  327.3   $ 165.6   $ 138.0   $ 117.6   $ 119.4
Unrecognized net actuarial gain....................    (194.2)    (215.5)    (38.2)    (19.4)    (46.3)    (70.3)
Unrecognized prior service cost....................       9.2       10.9      12.6     (29.8)       --        --
Unamortized transition obligation (asset)..........     (14.2)     (25.7)    (37.2)      0.3       4.7       7.8
                                                     --------   --------   -------   -------   -------   -------
Other assets -- prepaid benefit cost...............  $  118.9   $   97.0   $ 102.8   $  89.1   $  76.0   $  56.9
                                                     ========   ========   =======   =======   =======   =======
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31
Discount rate......................................      8.00%      8.00%     6.75%     8.00%     8.00%     6.75%

                                       F-29

                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. EMPLOYEE AND AGENT BENEFITS -- (CONTINUED)

                                                                                        OTHER POSTRETIREMENT
                                                           PENSION BENEFITS                   BENEFITS
                                                     -----------------------------   ---------------------------
                                                             DECEMBER 31,                   DECEMBER 31,
                                                     -----------------------------   ---------------------------
                                                       2000       1999      1998      2000      1999      1998
                                                     --------   --------   -------   -------   -------   -------
                                                                                       
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost.......................................  $   35.0   $   42.2   $  33.8   $  10.4   $  10.9   $  12.1
Interest cost......................................      57.5       55.1      49.3      19.0      14.1      15.9
Expected return on plan assets.....................     (81.3)     (76.0)    (74.4)    (25.1)    (23.7)    (16.1)
Amortization of prior service cost.................       1.7        1.7       1.7        --        --        --
Amortization of transition (asset) obligation......     (11.5)     (11.5)    (11.5)      2.3       3.7       3.3
Recognized net actuarial loss (gain)...............     (12.5)      (0.3)     (8.3)     (1.1)     (2.3)     (1.8)
                                                     --------   --------   -------   -------   -------   -------
Net periodic benefit cost (income).................  $  (11.1)  $   11.2   $  (9.4)  $   5.5   $   2.7   $  13.4
                                                     ========   ========   =======   =======   =======   =======

    Effective January 1, 2000, the Company amended the method in determining
postretirement health benefit plan and terminated long-term care coverage for
participants retiring on and subsequent to July 1, 2000. The result of these
amendments decreased the postretirement benefit obligation by $31.8 million and
was partially offset by the remaining portion of the original transition
obligation.

    For 2000, 1999 and 1998, the expected long-term rates of return on plan
assets for pension benefits were approximately 5% in each of these years (after
estimated income taxes) for those trusts subject to income taxes. For trusts not
subject to income taxes, the expected long-term rates of return on plan assets
were approximately 8.1% in each of the years 2000, 1999 and 1998. The assumed
rate of increase in future compensation levels varies by age for both the
qualified and non-qualified pension plans.

    For 2000, 1999 and 1998, the expected long-term rates of return on plan
assets for other post-retirement benefits were approximately 5% to 5.9% in each
of these years (after estimated income taxes) for those trusts subject to income
taxes. For trusts not subject to income taxes, the expected long-term rates of
return on plan assets were approximately 9.3%, 8.0% and 8.1% for 2000, 1999 and
1998, respectively. These rates of return on plan assets vary by benefit type
and employee group.

    The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligations starts at 13.9% in 2000 and declines to an
ultimate rate of 6% in 2010. Assumed health care cost trend rates have a
significant effect on the amounts reported for the health care plans. A
one-percentage-point change in assumed health care cost trend rates would have
the following effects (in millions):

                                                               1-PERCENTAGE-    1-PERCENTAGE-
                                                               POINT INCREASE   POINT DECREASE
                                                               --------------   --------------
                                                                          
Effect on total of service and interest cost components.....       $ 7.4            $ (5.5)
Effect on accumulated postretirement benefit obligation.....        47.7             (38.6)

    In addition, the Company has defined contribution plans that are generally
available to all employees and agents who are age 21 or older. Eligible
participants may contribute up to 20% of their compensation, to a maximum of
$10,500 in 2000 and $10,000 in 1999 and 1998. The Company matches the
participant's contribution at a 50% contribution rate up to a maximum Company
contribution of 3% of the participant's compensation in 2000, and 2% of the
participant's compensation in 1999 and 1998. The Company contributed $16.0
million in 2000 and $11.0 million in both 1999 and 1998 to these defined
contribution plans.

                                       F-30

                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12. OTHER COMMITMENTS AND CONTINGENCIES

    The Company, as a lessor, leases industrial, office, retail and other
investment real estate properties under various operating leases. Rental income
for all operating leases totaled $292.5 million in 2000, $356.8 million in 1999
and $362.4 million in 1998. At December 31, 2000, future minimum annual rental
commitments under these noncancelable operating leases are as follows (in
millions):

                                                              HELD FOR    HELD FOR    TOTAL RENTAL
                                                                SALE     INVESTMENT   COMMITMENTS
                                                              --------   ----------   ------------
                                                                             
2001........................................................   $ 85.4      $ 87.8       $  173.2
2002........................................................     80.4        80.4          160.8
2003........................................................     72.5        66.2          138.7
2004........................................................     63.9        56.0          119.9
2005........................................................     54.2        46.1          100.3
Thereafter..................................................    168.2       308.6          476.8
                                                               ------      ------       --------
         Total future minimum lease receipts................   $524.6      $645.1       $1,169.7
                                                               ======      ======       ========

    The Company, as a lessee, leases office space, data processing equipment,
corporate aircraft and office furniture and equipment under various operating
leases. Rental expense for all operating leases totaled $66.3 million in 2000,
$78.5 million in 1999 and $60.8 million in 1998. At December 31, 2000, future
minimum annual rental commitments under these noncancelable operating leases are
as follows (in millions):

                                                           
2001........................................................  $ 49.1
2002........................................................    40.5
2003........................................................    32.3
2004........................................................    25.2
2005........................................................    16.4
Thereafter..................................................    12.1
                                                              ------
                                                               175.6
Less future sublease rental income on these noncancelable
  leases....................................................     1.1
                                                              ------
         Total future minimum lease payments................  $174.5
                                                              ======

    The Company is a plaintiff or defendant in actions arising out of its
operations. The Company is, from time to time, also involved in various
governmental and administrative proceedings. While the outcome of any pending or
future litigation cannot be predicted, management does not believe that any
pending litigation will have a material adverse effect on the Company's
business, financial condition or results of operations. However, no assurances
can be given that such litigation would not materially and adversely affect the
Company's business, financial condition or results of operations.

    Other companies in the life insurance industry have historically been
subject to substantial litigation resulting from claims disputes and other
matters. Most recently, such companies have faced extensive claims, including
class-action lawsuits, alleging improper life insurance sales practices.
Negotiated settlements of such class-action lawsuits have had a material adverse
effect on the business, financial condition and results of operations of certain
of these companies. Principal Life is currently a defendant in two class-action
lawsuits which allege improper sales practices.

    In 2000, the Company reached an agreement in principle to settle these two
class-action lawsuits alleging improper sales practices. The proposed settlement
is subject to court approval and therefore is not yet final. In agreeing to the
settlement, the Company specifically denied any wrongdoing. The Company has
accrued a loss reserve for its best estimate based on information available. As
uncertainties continue to exist in resolving this matter, it is reasonably
possible that, as the actual cost of the claims subject to alternative dispute
resolution becomes available, the final cost of settlement could exceed the
Company's estimate. However, the range of any additional cost related to the
settlement cannot presently be reasonably estimated. See Note 16.

    The Company is also subject to insurance guaranty laws in the states in
which it writes business. These laws provide for assessments against insurance
companies for the benefit of policyholders and claimants in the event of
insolvency of other insurance companies. The assessments may be partially
recovered through a reduction in future premium taxes in some states. The
Company believes such assessments in excess of amounts accrued would not
materially affect its financial condition or results of operations.

                                       F-31

                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

13. FAIR VALUE OF FINANCIAL INSTRUMENTS

    The following discussion describes the methods and assumptions utilized by
the Company in estimating its fair value disclosures for financial instruments.
Certain financial instruments, particularly policyholder liabilities other than
investment-type contracts, are excluded from these fair value disclosure
requirements. The techniques utilized in estimating the fair values of financial
instruments are affected by the assumptions used, including discount rates and
estimates of the amount and timing of future cash flows. Care should be
exercised in deriving conclusions about the Company's business, its value or
financial position based on the fair value information of financial instruments
presented below. The estimates shown are not necessarily indicative of the
amounts that would be realized in a one-time, current market exchange of all of
the Company's financial instruments.

    The Company defines fair value as the quoted market prices for those
instruments that are actively traded in financial markets. In cases where quoted
market prices are not available, fair values are estimated using present value
or other valuation techniques. The fair value estimates are made at a specific
point in time, based on available market information and judgments about the
financial instrument, including estimates of timing, amount of expected future
cash flows and the credit standing of counterparties. Such estimates do not
consider the tax impact of the realization of unrealized gains or losses. In
many cases, the fair value estimates cannot be substantiated by comparison to
independent markets. In addition, the disclosed fair value may not be realized
in the immediate settlement of the financial instrument.

    Fair values of public debt and equity securities have been determined by the
Company from public quotations, when available. Private placement securities and
other fixed maturities and equity securities are valued by discounting the
expected total cash flows. Market rates used are applicable to the yield, credit
quality and average maturity of each security.

    Fair values of commercial mortgage loans are determined by discounting the
expected total cash flows using market rates that are applicable to the yield,
credit quality and maturity of each loan. Fair values of residential mortgage
loans are determined by a pricing and servicing model using market rates that
are applicable to the yield, rate structure, credit quality, size and maturity
of each loan.

    The fair values for assets classified as policy loans, other investments
excluding equity investments in subsidiaries, cash and cash equivalents and
accrued investment income in the accompanying consolidated statements of
financial position approximate their carrying amounts.

    Mortgage servicing rights represent the present value of estimated future
net revenues from contractually specified servicing fees. The fair value was
estimated with a valuation model using current prepayment speeds and a market
discount rate.

    The fair values of the Company's reserves and liabilities for
investment-type insurance contracts (insurance, annuity and other policy
contracts that do not involve significant mortality or morbidity risk and that
are only a portion of the policyholder liabilities appearing in the consolidated
statements of financial position) are estimated using discounted cash flow
analyses (based on current interest rates being offered for similar contracts
with maturities consistent with those remaining for the investment-type
contracts being valued). The fair values for the Company's insurance contracts
(insurance, annuity and other policy contracts that do involve significant
mortality or morbidity risk), other than investment-type contracts, are not
required to be disclosed. The Company does consider, however, the various
insurance and investment risks in choosing investments for both insurance and
investment-type contracts.

    Fair values for debt issues are estimated using discounted cash flow
analysis based on the Company's incremental borrowing rate for similar borrowing
arrangements.

                                       F-32

                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

13. FAIR VALUE OF FINANCIAL INSTRUMENTS -- (CONTINUED)

    The carrying amounts and estimated fair values of the Company's financial
instruments at December 31, 2000 and 1999, are as follows (in millions):

                                                                2000                      1999
                                                       -----------------------   -----------------------
                                                        CARRYING                  CARRYING
                                                         AMOUNT     FAIR VALUE     AMOUNT     FAIR VALUE
                                                        --------    ----------    --------    ----------
                                                                                  
Assets (liabilities)
Fixed maturities (see Note 3)........................  $ 26,839.9   $ 26,839.9   $ 23,443.9   $ 23,443.9
Equity securities (see Note 3).......................       742.9        742.9        864.2        864.2
Mortgage loans.......................................    11,492.7     11,741.9     13,332.2     13,200.0
Policy loans.........................................       803.6        803.6        780.5        780.5
Other investments....................................       507.5        507.5        253.9        253.9
Cash and cash equivalents............................       926.6        926.6        569.5        569.5
Accrued investment income............................       530.8        530.8        472.0        472.0
Mortgage loan servicing rights.......................     1,084.4      1,193.5      1,081.0      1,288.0
Investment-type insurance contracts..................   (22,818.6)   (22,688.9)   (24,072.5)   (23,322.6)
Short-term debt......................................      (459.5)      (459.5)      (547.3)      (547.3)
Long-term debt.......................................    (1,336.5)    (1,343.1)    (1,492.9)    (1,441.4)

14. STATUTORY INSURANCE FINANCIAL INFORMATION

    Principal Life, the largest subsidiary (indirect) of Principal Mutual
Holding Company, prepares statutory financial statements in accordance with the
accounting practices prescribed or permitted by the Insurance Division of the
Department of Commerce of the State of Iowa. Currently "prescribed" statutory
accounting practices include a variety of publications of the National
Association of Insurance Commissioners ("NAIC") as well as state laws,
regulations and general administrative rules. "Permitted" statutory accounting
practices encompass all accounting practices not so prescribed. The impact of
any permitted accounting practices on statutory surplus is not material. The
accounting practices used to prepare statutory financial statements for
regulatory filings differ in certain instances from GAAP. Prescribed or
permitted statutory accounting practices are used by state insurance departments
to regulate the Company.

    The NAIC revised the Accounting Practices and Procedures Manual in a process
referred to as Codification. The revised manual will be effective January 1,
2001. The State of Iowa has adopted the provisions of the revised manual without
modification. The revised manual has changed, to some extent, prescribed
statutory accounting practices and will result in changes to the accounting
practices that Principal Life uses to prepare its statutory-basis financial
statements.

    The Company has identified the following changes in prescribed statutory
accounting practices as those that will have the most significant impact on
Principal Life's statutory-basis financial statements:

    - Deposit-type funds related to both Principal Life's general account and
      its separate accounts will no longer be reported in the statutory
      statement of operations as revenues, but rather will be reported directly
      to an appropriate policy reserve account, a treatment of deposit-type
      funds that is similar to that under GAAP. This will have the effect of
      decreasing total statutory revenues and total statutory expenses of
      Principal Life, with no effect to statutory net income or statutory
      surplus.

    - Undistributed income from subsidiaries will no longer be reported as a
      component of statutory net investment income, but rather will be
      classified as statutory unrealized capital gains and losses. This will
      have the effect of decreasing Principal Life's total statutory revenues,
      with a related effect on statutory net income; however, it will have no
      effect on statutory surplus.

    - Deferred income tax assets and/or liabilities will be recognized. This
      will have the effect of increasing Principal Life's total statutory assets
      or statutory liabilities to the extent it has such deferred income tax
      assets or liabilities and will have a corresponding effect on Principal
      Life's statutory surplus.

    Management believes the net impact of these changes to Principal Life's
statutory-basis capital and surplus as of January 1, 2001 will not be
significant. Insurance regulators, accountants, and the insurance industry
continue work to finalize interpretations of the Codification. The ongoing
implementation work could cause changes to final interpretations that could
ultimately have an adverse effect on Principal Life's statutory surplus or
statutory net income.

                                       F-33

                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

14. STATUTORY INSURANCE FINANCIAL INFORMATION -- (CONTINUED)

    Life/Health insurance companies are subject to certain risk-based capital
("RBC") requirements as specified by the NAIC. Under those requirements, the
amount of capital and surplus maintained by a life/health insurance company is
to be determined based on the various risk factors related to it. At December
31, 2000, Principal Life meets the RBC requirements.

    Under Iowa law, Principal Life may pay stockholder dividends only from the
earned surplus arising from its business and must receive the prior approval of
the Insurance Commissioner of the State of Iowa to pay a stockholder dividend if
such a stockholder dividend would exceed certain statutory limitations. The
current statutory limitation is the greater of 10% of Principal Life's
policyholder surplus as of the preceding year end or the net gain from
operations from the previous calendar year. Based on this limitation and 2000
statutory results, Principal Life could pay approximately $760.9 million in
stockholder dividends in 2001 without exceeding the statutory limitation.

    In 2000, Principal Life notified the Insurance Commissioner of the State of
Iowa in advance of all stockholder dividend payments. Total stockholder
dividends paid to its parent company in 2000 were $538.8 million.

    In 1999, Principal Life notified the Insurance Commissioner of the State of
Iowa in advance of all stockholder dividend payments and received approval for
an extraordinary stockholder dividend of $250.0 million. Total stockholder
dividends paid to its parent company in 1999 were $509.0 million.

    In 1998, Principal Life notified the Insurance Commissioner of the State of
Iowa in advance of dividend payments. Total stockholder dividends paid to its
parent company in 1998 were $140.0 million.

    The following summary reconciles the assets and equity at December 31, 2000,
1999 and 1998, and net income for the years ended December 31, 2000, 1999 and
1998, in accordance with statutory reporting practices prescribed or permitted
by the Insurance Division of the Department of Commerce of the State of Iowa
(Principal Life only) with that reported in these consolidated GAAP financial
statements (in millions):

                                                               ASSETS      EQUITY    NET INCOME
                                                              ---------   --------   ----------
                                                                            
DECEMBER 31, 2000
As reported in accordance with statutory accounting
  practices -- unconsolidated...............................  $75,573.4   $3,356.4    $ 912.6
Additions (deductions):
  Unrealized gain on fixed maturities available-for-sale....      375.3      375.3         --
  Other investment adjustments..............................    2,760.2      590.3     (137.7)
  Adjustments to insurance reserves and policyholder
    dividends...............................................       74.0     (187.0)      26.3
  Deferral of policy acquisition costs......................    1,295.5    1,295.5        8.8
  Surplus note reclassification as debt.....................         --     (298.0)        --
  Provision for deferred federal income taxes and other tax
    reclassifications.......................................         --     (138.3)     (26.6)
  Other -- net..............................................      324.5      306.0     (141.8)
                                                              ---------   --------    -------
As reported in accordance with GAAP  --
  Principal Life only.......................................   80,402.9    5,300.2      641.6
Parent holding company totals...............................    4,002.0      952.3      (21.4)
                                                              ---------   --------    -------
As reported in the consolidated GAAP financial statements...  $84,404.9   $6,252.5    $ 620.2
                                                              =========   ========    =======
DECEMBER 31, 1999
As reported in accordance with statutory accounting
  practices -- unconsolidated...............................  $76,017.7   $3,151.9    $ 713.7
Additions (deductions):
  Unrealized loss on fixed maturities available-for-sale....     (356.8)    (356.8)        --
  Other investment adjustments..............................    2,093.3      994.4        9.8
  Adjustments to insurance reserves and policyholder
    dividends...............................................       (3.6)    (235.5)      15.1
  Deferral of policy acquisition costs......................    1,409.3    1,409.3       68.3
  Surplus note reclassification as debt.....................         --     (297.8)        --
  Provision for deferred federal income taxes and other tax
    reclassifications.......................................         --       33.0       18.2
  Other -- net..............................................      277.1      252.5      (15.4)
                                                              ---------   --------    -------
As reported in accordance with GAAP  --
  Principal Life only.......................................   79,437.0    4,951.0      809.7
Parent holding company totals...............................    4,516.2      601.9      (67.6)
                                                              ---------   --------    -------
As reported in the consolidated GAAP financial statements...  $83,953.2   $5,552.9    $ 742.1
                                                              =========   ========    =======

                                       F-34

                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

14. STATUTORY INSURANCE FINANCIAL INFORMATION -- (CONTINUED)

                                                               ASSETS      EQUITY    NET INCOME
                                                              ---------   --------   ----------
                                                                            
DECEMBER 31, 1998
As reported in accordance with statutory accounting
  practices -- unconsolidated...............................  $70,096.1   $3,031.5    $ 511.4
Additions (deductions):
  Unrealized gain on fixed maturities available-for-sale....      996.9      996.9         --
  Other investment adjustments..............................    1,620.7    1,080.9      176.8
  Adjustments to insurance reserves and policyholder
    dividends...............................................      (66.1)    (191.6)     (55.8)
  Deferral of policy acquisition costs......................    1,104.7    1,104.7         --
  Surplus note reclassification as debt.....................         --     (297.8)        --
  Provision for deferred federal income taxes and other tax
    reclassifications.......................................         --     (474.2)     164.9
  Other -- net..............................................      294.4      219.0     (102.0)
                                                              ---------   --------    -------
As reported in accordance with GAAP  --
  Principal Life only.......................................   74,046.7    5,469.4      695.3
Parent holding company totals...............................         --      197.8       (2.3)
                                                              ---------   --------    -------
As reported in the consolidated GAAP financial statements...  $74,046.7   $5,667.2    $ 693.0
                                                              =========   ========    =======

15. SEGMENT INFORMATION

    The Company provides financial products and services through the following
segments: U.S. Asset Management and Accumulation, International Asset Management
and Accumulation, Life and Health Insurance and Mortgage Banking. In addition,
there is a Corporate and Other segment. The segments are managed and reported
separately because they provide different products and services, have different
strategies or have different markets and distribution channels.

    The U.S. Asset Management and Accumulation segment provides retirement and
related financial products and services primarily to businesses, their employees
and other individuals and provides asset management services to the Company's
asset accumulation business, the life and health insurance operations and
third-party clients.

    The International Asset Management and Accumulation segment provides asset
management products and services to retail clients in Australia and
institutional clients throughout the world and provides life insurance and
retirement and related financial products and services primarily to businesses,
their employees and other individuals principally in Australia, Chile, Brazil,
New Zealand, Mexico, India, Japan, Argentina, and Hong Kong.

    The Life and Health insurance segment provides individual life and
disability insurance to the owners and employees of businesses and other
individuals in the United States and provides group life and health insurance to
businesses in the United States.

    The Mortgage Banking segment originates and services residential mortgage
loan products for customers primarily in the United States.

    The Corporate and Other segment manages the assets representing capital that
has not been allocated to any other segment. Financial results of the Corporate
and Other segment primarily reflect financing activities for the Company, income
on capital not allocated to other segments, intercompany eliminations, and
non-recurring or other income or expenses not allocated to the segments based on
review of the nature of such items.

    The Company evaluates segment performance on segment operating earnings,
which excludes the effect of net realized capital gains and losses, as adjusted,
and non-recurring events and transactions. Net realized capital gains, as
adjusted, are net of tax, related changes in the amortization pattern of
deferred policy acquisition costs, recognition of front-end fee revenues for
sales charges on pension products and services and net realized capital gains
credited to customers. Segment operating revenues exclude net realized capital
gains and their impact on recognition of front-end fee revenues. Segment
operating earnings is determined by adjusting GAAP net income for net realized
capital gains and losses and non-recurring items which management believes are
not indicative of overall operating trends. While these items may be significant
components in understanding and assessing the consolidated financial
performance, management believes the presentation of segment operating earnings
enhances the understanding of the Company's results of operations by
highlighting earnings attributable to the normal, recurring operations of the
business. However, segment operating earnings are not a substitute for net
income determined in accordance with GAAP.

    In 2000, the Company excluded $101.0 million of non-recurring items, net of
tax, from net income for the presentation of operating earnings. The
non-recurring items included the negative effects of (a) a loss contingency

                                       F-35

                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

15. SEGMENT INFORMATION -- (CONTINUED)

reserve established for sales practices litigation ($93.8 million) and (b)
expenses related to the development of a plan of demutualization ($7.2 million).

    In 1998, the Company excluded $104.8 million of non-recurring items, net of
tax, from net income for the presentation of operating earnings. The
non-recurring items included: (1) the positive effects of (a) Principal Life's
release of tax reserves and related accrued interest ($164.4 million) and (b)
accounting changes by the Company's international operations ($13.3 million) and
(2) the negative effects of (a) expenses related to the Company's corporate
structure change to a mutual insurance holding company and related adjustments
for changes in amortization assumptions for deferred policy acquisition costs
($27.4 million) and (b) a contribution related to permanent endowment of the
Principal Financial Group Foundation ($45.5 million).

    The accounting policies of the segments are similar to those as described in
Note 1, with the exception of capital allocation. The Company allocates capital
to its segments based upon an internal capital model that allows management to
more effectively manage the Company's capital.

    The following table summarizes selected financial information by segment as
of, or for the year ended, December 31 and reconciles segment totals to those
reported in the consolidated financial statements (in millions):

                                                          INTERNATIONAL
                                            U.S. ASSET        ASSET
                                            MANAGEMENT     MANAGEMENT      LIFE AND
                                               AND             AND          HEALTH       MORTGAGE    CORPORATE
                                           ACCUMULATION   ACCUMULATION     INSURANCE     BANKING     AND OTHER   CONSOLIDATED
                                           ------------   -------------   -----------   ----------   ---------   ------------
                                                                                               
2000
Revenues
  Operating revenues.....................   $ 3,533.9       $  630.7       $ 4,122.6     $  359.8    $   97.1     $ 8,744.1
  Net realized capital gains (losses)....       (53.8)           2.8            70.8           --       120.1         139.9
  Plus (less) recognition of front-end
    fee revenues.........................         0.9             --              --           --          --           0.9
                                            ---------       --------       ---------     --------    --------     ---------
Revenues.................................   $ 3,481.0       $  633.5       $ 4,193.4     $  359.8    $  217.2     $ 8,884.9
                                            =========       ========       =========     ========    ========     =========
Net income:
  Operating earnings (loss)..............   $   356.6       $   (8.5)      $   162.3     $   50.0    $   67.7     $   628.1
  Net realized capital gains (losses), as
    adjusted.............................       (35.9)           1.4            47.3           --        80.3          93.1
  Non-recurring items....................          --             --              --           --      (101.0)       (101.0)
                                            ---------       --------       ---------     --------    --------     ---------
Net income (loss)........................   $   320.7       $   (7.1)      $   209.6     $   50.0    $   47.0     $   620.2
                                            =========       ========       =========     ========    ========     =========

Assets...................................   $65,795.9       $5,525.9       $10,569.0     $1,556.3    $  957.8     $84,404.9
                                            =========       ========       =========     ========    ========     =========
Other segment data:
  Revenues from external customers.......   $ 3,399.1       $  632.4       $ 4,196.9     $  359.8    $  296.7     $ 8,884.9
  Intersegment revenues..................        81.9            1.1            (3.5)          --       (79.5)           --
  Interest expense.......................          --             --              --           --        78.4          78.4
  Income tax expense (benefit)...........       102.0            6.1           104.7         27.0         0.5         240.3
  Amortization of goodwill and other
    intangibles..........................         1.0           47.9             7.7          0.8        (1.1)         56.3
1999
Revenues:
  Operating revenues.....................   $ 3,472.6       $  379.6       $ 3,985.5     $  398.3    $   61.9     $ 8,297.9
  Net realized capital gains (losses)....       (58.0)           8.7            16.0           --       437.8         404.5
  Plus (less) recognition of front-end
    fee revenues.........................        (1.0)            --              --           --          --          (1.0)
                                            ---------       --------       ---------     --------    --------     ---------
Revenues.................................   $ 3,413.6       $  388.3       $ 4,001.5     $  398.3    $  499.7     $ 8,701.4
                                            =========       ========       =========     ========    ========     =========

                                       F-36

                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

15. SEGMENT INFORMATION -- (CONTINUED)

                                                          INTERNATIONAL
                                            U.S. ASSET        ASSET
                                            MANAGEMENT     MANAGEMENT      LIFE AND
                                               AND             AND          HEALTH       MORTGAGE    CORPORATE
                                           ACCUMULATION   ACCUMULATION     INSURANCE     BANKING     AND OTHER   CONSOLIDATED
                                           ------------   -------------   -----------   ----------   ---------   ------------
                                                                                               
1999 (CONTINUED)
Net income:
  Operating earnings (loss)..............   $   356.6       $  (38.4)      $    90.7     $   56.8    $    9.5     $   475.2
  Net realized capital gains (losses), as
    adjusted.............................       (35.4)           7.7            10.1           --       284.5         266.9
  Non-recurring items....................          --             --              --           --          --            --
                                            ---------       --------       ---------     --------    --------     ---------
Net income (loss)........................   $   321.2       $  (30.7)      $   100.8     $   56.8    $  294.0     $   742.1
                                            =========       ========       =========     ========    ========     =========

Assets...................................   $65,096.4       $5,926.8       $10,070.8     $1,737.7    $1,121.5     $83,953.2
                                            =========       ========       =========     ========    ========     =========
Other segment data:
  Revenues from external customers.......   $ 3,338.7       $  388.3       $ 4,007.9     $  398.3    $  568.2     $ 8,701.4
  Intersegment revenues..................        74.9             --            (6.4)          --       (68.5)           --
  Interest expense.......................          --            0.7              --           --        47.1          47.8
  Income tax expense (benefit)...........       126.4           (3.2)           18.1         30.7       151.5         323.5
  Amortization of goodwill and other
    intangibles..........................         1.0           16.0             4.0          0.8        (1.6)         20.2
1998
Revenues:
  Operating revenues.....................   $ 2,933.1       $  223.1       $ 3,893.1     $  340.6    $  342.5     $ 7,732.4
  Net realized capital gains (losses)....        48.8           13.5            (1.3)                   404.8         465.8
  Plus (less) recognition of front-end
    fee revenues.........................        (1.3)            --              --           --          --          (1.3)
                                            ---------       --------       ---------     --------    --------     ---------
Revenues.................................   $ 2,980.6       $  236.6       $ 3,891.8     $  340.6    $  747.3     $ 8,196.9
                                            =========       ========       =========     ========    ========     =========
Net income:
  Operating earnings (loss)..............   $   238.4       $  (35.4)      $    50.0     $   58.8    $  (44.3)    $   267.5
  Net realized capital gains (losses), as
    adjusted.............................        14.7           12.0             1.9           --       292.1         320.7
  Non-recurring items....................        23.9           13.3            60.1           --         7.5         104.8
                                            ---------       --------       ---------     --------    --------     ---------
Net income (loss)........................   $   277.0       $  (10.1)      $   112.0     $   58.8    $  255.3     $   693.0
                                            =========       ========       =========     ========    ========     =========

Assets...................................   $58,701.5       $1,239.4       $ 9,219.5     $1,810.4    $3,075.9     $74,046.7
                                            =========       ========       =========     ========    ========     =========
Other segment data:
  Revenues from external customers.......   $ 2,980.6       $  236.6       $ 3,891.8     $  340.6    $  747.3     $ 8,196.9
  Intersegment revenues..................          --             --              --           --          --            --
  Interest expense.......................          --             --              --           --        27.4          27.4
  Income tax expense (benefit)...........        78.7          (10.5)          (26.6)        31.6       (31.0)         42.2
  Amortization of goodwill and other
    intangibles..........................        18.1            6.9            18.1          4.0         5.5          52.6

                                       F-37

                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

15. SEGMENT INFORMATION -- (CONTINUED)

    The Company operates in the United States and in selected markets
internationally (including Australia, Chile, Brazil, New Zealand, Mexico, India,
Japan, Argentina, Spain and Hong Kong). The following table summarizes selected
financial information by geographic location as of or for the year ended
December 31 (in millions):

                                                                           LONG-LIVED               NET INCOME
                                                               REVENUES      ASSETS      ASSETS       (LOSS)
                                                               --------    ----------    ------     ----------
                                                                                        
2000
United States...............................................   $8,251.4     $  517.7    $78,879.0     $627.3
International...............................................      633.5      1,365.2      5,525.9       (7.1)
                                                               --------     --------    ---------     ------
         Total..............................................   $8,884.9     $1,882.9    $84,404.9     $620.2
                                                               ========     ========    =========     ======
1999
United States...............................................   $8,313.1     $  505.0    $78,026.4     $772.8
International...............................................      388.3      1,474.2      5,926.8      (30.7)
                                                               --------     --------    ---------     ------
         Total..............................................   $8,701.4     $1,979.2    $83,953.2     $742.1
                                                               ========     ========    =========     ======
1998
United States...............................................   $7,960.3     $  493.6    $72,807.3     $703.1
International...............................................      236.6        116.9      1,239.4      (10.1)
                                                               --------     --------    ---------     ------
         Total..............................................   $8,196.9     $  610.5    $74,046.7     $693.0
                                                               ========     ========    =========     ======

    Long-lived assets include property and equipment and goodwill and other
intangibles.

    The Corporate and Other segment includes an equity ownership interest in
Coventry Health Care, Inc. The ownership interest was initiated through a
transaction in 1998, described further in Note 2. In September 2000, the Company
sold a portion of its equity ownership position, which reduced its ownership to
approximately 25% and resulted in a realized capital gain of $13.9 million, net
of tax. The Corporate and Other segment's equity in earnings of Coventry Health
Care, Inc., which was included in net investment income, was $20.0 million and
$19.1 million for the years ended December 31, 2000 and 1999, respectively. The
investment in Coventry Health Care, Inc. was $122.9 million and $179.3 million
at December 31, 2000 and 1999, respectively. The Corporate and Other segment
also include consolidating and intersegment eliminations.

    The Company's operations are not materially dependent on one or a few
customers, brokers or agents, and revenues, assets and operating earnings are
attributed to geographic location based on the country of domicile sales
originate from.

16. SUBSEQUENT EVENTS

PLAN OF DEMUTUALIZATION AND INITIAL PUBLIC OFFERING

    On March 31, 2001, the Company's Board of Directors adopted a plan to
convert Principal Mutual Holding Company from a mutual insurance holding company
to a stock company. Adoption of the plan authorized management to implement the
plan for demutualization of the Company. Upon demutualization, the membership
interests of Principal Life's policyholders in Principal Mutual Holding Company
will be extinguished, and eligible policyholders will receive compensation in
exchange for the extinguishment of their membership interests. Their
compensation will be in the form of common stock, cash or policy credits,
depending upon the type of policy or policyholder.

    Under Iowa insurance law, the plan also requires the approval of
policyholders and the Insurance Commissioner of the State of Iowa. During June
2001, policyholders received the plan of conversion and Principal Financial
Group, Inc. filed a registration statement with the Securities and Exchange
Commission relating to a proposed initial public offering of common stock. The
registration statement is expected to become effective in the latter part of
2001 or first part of 2002, when shares are expected to be sold to the public.

    On July 24, 2001, Principal Life's policyholders approved the plan for
demutualization. The plan was submitted to the Insurance Commissioner of the
State of Iowa for approval and a public hearing was held on July 25, 2001. The
Insurance Commissioner of the State of Iowa approved the plan of conversion on
August 28, 2001.

                                       F-38

                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

16. SUBSEQUENT EVENTS -- (CONTINUED)

LITIGATION

    In April 2001, the proposed settlement of the class-action lawsuit alleging
improper sales practices received court approval. In agreeing to the settlement,
the Company specifically denied any wrongdoing. The Company has accrued a loss
reserve for its best estimate based on information available. As uncertainties
continue to exist in resolving this matter, it is reasonably possible that, as
the actual cost of the claims subject to alternative dispute resolution becomes
available, the final cost of settlement could exceed the Company's estimate. The
range of any additional cost related to the settlement cannot be presently
estimated, however the Company believes the settlement will not have a material
impact on its business, financial condition or results of operations. A number
of persons and entities who were eligible to be class members have excluded
themselves from the class (or "opted out"), as the law permits them to do. The
Company has been notified that some of those who opted out from the class will
file lawsuits and make claims similar to those addressed by the settlement.

TERRORIST ATTACKS IN THE UNITED STATES

    On September 11, 2001, terrorist attacks in the United States resulted in
significant loss of life and property, as well as interruption of business
activities and an overall disruption of the world economy. Management estimates
that the Company's losses from insurance claims from these events, primarily
individual life insurance claims, to be between $9.0 million and $12.0 million
after taxes, taking into consideration reinsurance coverage. Management has
estimated no material property or investment real estate loss exposures
resulting from these events. However, the continuing impacts of these events on
the world economy and financial markets cannot presently be determined. This
creates related uncertainties as to the future realization of and return on
certain invested assets; the impact on the Company's assumptions in assessing
the value of intangibles from prior acquisitions and the amortization patterns
for deferred policy acquisition costs; and the impact on future operating
results, for which estimates cannot presently be made.

                                       F-39

                        PRINCIPAL MUTUAL HOLDING COMPANY

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)

                                                                  FOR THE SIX
                                                                 MONTHS ENDED
                                                                   JUNE 30,
                                                              -------------------
                                                                2001       2000
                                                              --------   --------
                                                                 (IN MILLIONS)
                                                                   
REVENUES
Premiums and other considerations...........................  $1,955.3   $1,992.7
Fees and other revenues.....................................     856.3      783.2
Net investment income.......................................   1,686.0    1,558.1
Net realized capital gains (losses).........................    (176.9)      31.5
                                                              --------   --------
Total revenues..............................................   4,320.7    4,365.5

EXPENSES
Benefits, claims and settlement expenses....................   2,639.2    2,631.1
Dividends to policyholders..................................     162.1      155.8
Operating expenses..........................................   1,228.2    1,228.0
                                                              --------   --------
Total expenses..............................................   4,029.5    4,014.9
                                                              --------   --------

Income before income taxes and cumulative effect of
  accounting change.........................................     291.2      350.6

Income taxes................................................      56.1      105.3
                                                              --------   --------
Income before cumulative effect of accounting change........     235.1      245.3
Cumulative effect of accounting change, net of related
  income taxes..............................................     (10.7)        --
                                                              --------   --------
Net income..................................................  $  224.4   $  245.3
                                                              ========   ========

                            See accompanying notes.
                                       F-40

                        PRINCIPAL MUTUAL HOLDING COMPANY

                 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
                                  (UNAUDITED)

                                                              JUNE 30,    DECEMBER 31,
                                                                2001          2000
                                                              ---------   ------------
                                                                   (IN MILLIONS)
                                                                    
ASSETS
Fixed maturities, available-for-sale........................  $29,328.2    $26,839.9
Equity securities, available-for-sale.......................      578.8        742.9
Mortgage loans..............................................   11,539.1     11,492.7
Real estate.................................................    1,238.3      1,400.5
Policy loans................................................      820.1        803.6
Other investments...........................................      898.7        811.0
                                                              ---------    ---------
         Total investments..................................   44,403.2     42,090.6

Cash and cash equivalents...................................      371.9        926.6
Accrued investment income...................................      577.9        530.8
Premiums due and other receivables..........................      572.3        505.7
Deferred policy acquisition costs...........................    1,338.3      1,333.3
Property and equipment......................................      513.4        507.0
Goodwill and other intangibles..............................    1,252.9      1,375.9
Mortgage loan servicing rights..............................    1,487.2      1,084.4
Separate account assets.....................................   33,739.5     34,916.2
Other assets................................................      973.1      1,134.4
                                                              ---------    ---------
         Total assets.......................................  $85,229.7    $84,404.9
                                                              =========    =========

LIABILITIES
Contractholder funds........................................  $25,073.1    $24,300.2
Future policy benefits and claims...........................   13,494.8     13,346.0
Other policyholder funds....................................      591.5        597.4
Short-term debt.............................................      675.9        459.5
Long-term debt..............................................    1,390.6      1,336.5
Income taxes currently payable..............................        3.6        108.4
Deferred income taxes.......................................      740.1        487.4
Separate account liabilities................................   33,739.5     34,916.2
Other liabilities...........................................    2,992.2      2,600.8
                                                              ---------    ---------
         Total liabilities..................................   78,701.3     78,152.4

EQUITY
Retained earnings...........................................    6,536.9      6,312.5
Accumulated other comprehensive income (loss):
  Net unrealized gains on available-for-sale securities.....      268.6        129.9
  Net foreign currency translation adjustment...............     (277.1)      (189.9)
                                                              ---------    ---------
         Total equity.......................................    6,528.4      6,252.5
                                                              ---------    ---------
         Total liabilities and equity.......................  $85,229.7    $84,404.9
                                                              =========    =========

                            See accompanying notes.
                                       F-41

                        PRINCIPAL MUTUAL HOLDING COMPANY

                       CONSOLIDATED STATEMENTS OF EQUITY
                                  (UNAUDITED)

                                                                      NET UNREALIZED      NET FOREIGN
                                                                      GAINS (LOSSES)       CURRENCY
                                                         RETAINED    ON AVAILABLE-FOR-    TRANSLATION     TOTAL
                                                         EARNINGS     SALE SECURITIES     ADJUSTMENT      EQUITY
                                                         --------    -----------------    -----------    --------
                                                                              (IN MILLIONS)
                                                                                             
BALANCES AT JANUARY 1, 2000............................  $5,692.3         $ (79.1)          $ (60.3)     $5,552.9
Comprehensive income:
  Net income...........................................    245.3               --                --         245.3
  Net change in unrealized gains and losses on fixed
    maturities, available-for-sale.....................       --             56.2                --          56.2
  Net change in unrealized gains and losses on equity
    securities, available-for-sale, including seed
    money in separate accounts.........................       --           (187.7)               --        (187.7)
  Adjustments for assumed changes in amortization
    patterns:
    Deferred policy acquisition costs..................       --            (10.9)               --         (10.9)
    Unearned revenue reserves..........................       --              5.2                --           5.2
  Provision for deferred income tax benefit............       --             38.1                --          38.1
  Change in net foreign currency translation
    adjustment.........................................       --               --             (65.3)        (65.3)
                                                                                                         --------
Comprehensive income...................................                                                      80.9
                                                         --------         -------           -------      --------
BALANCES AT JUNE 30, 2000..............................  $5,937.6         $(178.2)          $(125.6)     $5,633.8
                                                         ========         =======           =======      ========
BALANCES AT JANUARY 1, 2001............................  $6,312.5         $ 129.9           $(189.9)     $6,252.5
Comprehensive income:
  Net income...........................................    224.4               --                --         224.4
  Net change in unrealized gains and losses on fixed
    maturities, available-for-sale.....................       --            181.4                --         181.4
  Net change in unrealized gains and losses on equity
    securities, available-for-sale, including seed
    money in separate accounts.........................       --             72.2                --          72.2
  Adjustments for assumed changes in amortization
    patterns:
    Deferred policy acquisition costs..................       --            (26.8)               --         (26.8)
    Unearned revenue reserves..........................       --              0.6                --           0.6
  Provision for deferred income taxes..................       --            (85.6)               --         (85.6)
  Change in net foreign currency translation
    adjustment.........................................       --               --             (76.1)        (76.1)
  Cumulative effect of accounting change, net of
    related income taxes...............................       --             (3.1)            (11.1)        (14.2)
                                                                                                         --------
Comprehensive income...................................                                                     275.9
                                                         --------         -------           -------      --------
BALANCES AT JUNE 30, 2001..............................  $6,536.9         $ 268.6           $(277.1)     $6,528.4
                                                         ========         =======           =======      ========

                            See accompanying notes.
                                       F-42

                        PRINCIPAL MUTUAL HOLDING COMPANY

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)

                                                               FOR THE SIX MONTHS
                                                                 ENDED JUNE 30,
                                                              ---------------------
                                                                2001        2000
                                                              ---------   ---------
                                                                  (IN MILLIONS)
                                                                    
OPERATING ACTIVITIES
Net income..................................................  $   224.4   $   245.3
Adjustments to reconcile net income to net cash provided by
  operating activities:
  Cumulative effect of accounting change, net of related
    income taxes............................................       10.7          --
  Amortization of deferred policy acquisition costs.........      104.3        90.3
  Additions to deferred policy acquisition costs............     (133.5)     (128.3)
  Accrued investment income.................................      (49.6)        2.5
  Premiums due and other receivables........................      (10.0)       58.0
  Contractholder and policyholder liabilities and
    dividends...............................................      421.0       600.5
  Current and deferred income taxes.........................       41.7       (42.2)
  Net realized capital (gains) losses.......................      176.9       (31.5)
  Depreciation and amortization expense.....................       74.3        74.2
  Amortization and impairment/recovery of mortgage servicing
    rights..................................................      128.7        78.4
  Other.....................................................      463.3      (131.9)
                                                              ---------   ---------
Net cash provided by operating activities...................    1,452.2       815.3
INVESTING ACTIVITIES
Available-for-sale securities:
  Purchases.................................................   (7,041.0)   (5,699.0)
  Sales.....................................................    3,035.1     4,650.0
  Maturities................................................    1,404.2     1,316.6
Mortgage loans acquired or originated.......................  (16,789.4)   (4,301.2)
Mortgage loans sold or repaid...............................   16,778.4     4,366.0
Net change in mortgage servicing rights.....................     (366.3)      (39.6)
Real estate acquired........................................     (180.4)     (181.1)
Real estate sold............................................      394.4       212.3
Net change in property and equipment........................      (42.0)      (10.1)
Net proceeds from sales of subsidiaries.....................      (13.5)         --
Purchases of interest in subsidiaries, net of cash
  acquired..................................................       (4.2)      (25.7)
Net change in other investments.............................     (134.9)       21.8
                                                              ---------   ---------
Net cash provided by (used in) investing activities.........   (2,959.6)      310.0
FINANCING ACTIVITIES
Issuance of debt............................................      146.4        49.8
Principal repayments of debt................................      (92.3)      (10.5)
Proceeds of short-term borrowings...........................    4,276.5     1,213.3
Repayment of short-term borrowings..........................   (4,060.1)   (1,369.9)
Investment contract deposits................................    3,149.4     1,630.1
Investment contract withdrawals.............................   (2,467.2)   (2,621.9)
                                                              ---------   ---------
Net cash provided by (used in) financing activities.........      952.7    (1,109.1)
                                                              ---------   ---------
Net increase (decrease) in cash and cash equivalents........     (554.7)       16.2
Cash and cash equivalents at beginning of period............      926.6       569.5
                                                              ---------   ---------
Cash and cash equivalents at end of period..................  $   371.9   $   585.7
                                                              =========   =========

                            See accompanying notes.
                                       F-43

                        PRINCIPAL MUTUAL HOLDING COMPANY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 2001
                                  (UNAUDITED)

1. BASIS OF PRESENTATION

    The accompanying consolidated financial statements of Principal Mutual
Holding Company and its consolidated subsidiaries ("the Company") have been
prepared in accordance with generally accepted accounting principles for interim
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six month period ended June 30, 2001
are not necessarily indicative of the results that may be expected for the year
ended December 31, 2001. These interim financial statements should be read in
conjunction with the Company's annual financial statements as of December 31,
2000. The accompanying consolidated statement of financial position at December
31, 2000 has been derived from the audited consolidated statement of financial
position.

    Reclassifications have been made to the December 31, 2000, and June 30,
2000, financial statements to conform to the June 30, 2001, presentation.

2. ACCOUNTING CHANGES

    In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities
("SFAS 133"). In June 1999, Statement No. 137, Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133 was issued deferring the effective date of SFAS 133 by one
year. In June 2000, the FASB issued Statement No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities -- an amendment of FASB
Statement No. 133, which amended the accounting and reporting standards of SFAS
133 for certain derivative instruments and certain hedging activities.

    The Company's derivatives are generally held for purposes other than trading
and are primarily used to hedge or reduce exposure to interest rate and foreign
currency risks associated with assets held or expected to be purchased or sold,
and liabilities incurred or expected to be incurred. Additionally, derivatives
are used to change the characteristics of the Company's asset/liability mix
consistent with the Company's risk management activities.

    The Company's risk of loss is typically limited to the fair value of its
derivative instruments and not to the notional or contractual amounts of these
derivatives. Risk arises from changes in the fair value of the underlying
instruments. The Company is also exposed to credit losses in the event of
nonperformance of the counterparties. This credit risk is minimized by
purchasing such agreements from financial institutions with high credit ratings
and by establishing and monitoring exposure limits.

    The fair value of derivative instruments classified as assets at June 30,
2001, was $200.5 million. Of this amount, the fair value of derivatives related
to investment hedges was $116.4 million and was reported with other invested
assets on the consolidated statement of financial position. The fair value of
derivatives related to residential mortgage loan servicing rights and
residential mortgage loans was $84.1 million and was reported with other assets
on the consolidated statement of financial position. The fair value of
derivative instruments classified as liabilities at June 30, 2001, was $549.8
million and was reported with other liabilities on the consolidated statement of
financial position.

    The net interest effect of interest rate and currency swap transactions is
recorded as an adjustment to net investment income or interest expense, as
appropriate, over the periods covered by the agreements. The cost of other
derivative contracts is amortized over the life of the contracts and classified
with the results of the underlying hedged item. Futures contracts and
mortgage-backed forwards are used to hedge anticipated transactions. Futures
contracts are marked to market value and settled daily. However, changes in the
market value of such contracts have not qualified for inclusion in the
measurement of subsequent transactions or represent hedges of items reported at
fair value. Accordingly, such changes in market value are reported in net income
in the period of change.

    Hedge accounting is used for derivatives that are specifically designated in
advance as hedges and that reduce the Company's exposure to an indicated risk by
having a high correlation between changes in the value of the derivatives and
the items being hedged at both the inception of the hedge and throughout the
hedge period. Should such criteria not be met or if the hedged items are sold,
terminated or matured, the changes in value of the derivatives are included in
net income.

    The Company designates derivatives, identified as hedges into two types:
hedges of fair value exposure and hedges of cash flow exposure. Hedges of fair
value exposure are entered into in order to hedge the fair value of a recognized
asset or liability. Hedges of cash flow exposure are entered into to hedge the
variability of cash flows to be received or paid related to certain assets or
liabilities. On the date the derivative contract is entered, the Company
designates the contract as either a fair value or cash flow hedge. Changes in
fair values of derivatives designated as effective and that qualify as fair
value hedges are recognized in earnings as offsets to the changes in fair value
of the

                                       F-44

                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. ACCOUNTING CHANGES -- (CONTINUED)

hedged assets and liabilities. Changes in fair values of derivatives designated
as effective and that qualify as cash flow hedges are deferred and recognized as
a component of accumulated other comprehensive income until the hedged
transaction occurs and are then recognized in earnings. Any ineffective portion
of hedging a derivative contract's change in fair value is recognized in
earnings. In certain cases, zero hedge ineffectiveness for cash flow hedges is
assumed because the derivative instrument was constructed such that all terms of
the derivative exactly match the hedged risk in the hedged item.

    For the six months ended June 30, 2001, the Company recognized a pre-tax net
gain of $43.1 million related to the ineffective portion of its fair value
hedges. The net gain includes a net gain of $48.6 million related to hedges of
residential mortgage loan servicing rights and was reported with other expenses
on the consolidated statement of operations. The net gain also includes a net
loss of $5.5 million related to investment hedges and was reported with net
realized capital gains on the consolidated statement of operations.

    For the six months ended June 30, 2001, the Company recognized a $22.8
million after-tax decrease in value related to cash flow hedges in accumulated
other comprehensive income.

    At January 1, 2001, the Company's consolidated financial statements were
adjusted to record a cumulative effect of adopting SFAS 133, as follows (in
millions):

                                                                            ACCUMULATED OTHER
                                                                              COMPREHENSIVE
                                                              NET INCOME         INCOME
                                                              ----------    -----------------
                                                                      
Adjustment to fair value of derivative contracts(1).........    $(16.4)          $(15.8)
Income tax impact...........................................       5.7              1.6
                                                                ------           ------
         Total..............................................    $(10.7)          $(14.2)
                                                                ======           ======

---------------

(1) Amount presented is net of adjustment to hedged item.

    Derivatives not designated as hedges primarily consist of swaptions and
derivatives used to manage the interest rate risk on the Company's residential
mortgage loan pipeline. Occasionally, the Company will sell a callable
investment-type contract and may use interest rate swaptions or similar
instruments to transform the callable liability into a fixed term liability. The
Company manages interest rate risk on its residential mortgage loan pipeline by
buying and selling mortgage-backed securities in the forward markets,
over-the-counter options on mortgage-backed securities, U.S. Treasury futures
contracts, and options on Treasury futures contracts. Although swaptions and
other derivatives not designated as hedges are effective hedges from an economic
standpoint, the Company does not elect hedge accounting treatment under SFAS
133.

3. SEGMENT INFORMATION

    The Company provides financial products and services through the following
segments: U.S. Asset Management and Accumulation, International Asset Management
and Accumulation, Life and Health Insurance and Mortgage Banking. In addition,
there is a Corporate and Other segment. The segments are managed and reported
separately because they provide different products and services, have different
strategies or have different markets and distribution channels.

    The U.S. Asset Management and Accumulation segment provides retirement and
related financial products and services primarily to businesses, their employees
and other individuals and provides asset management services to the Company's
asset accumulation business, the life and health insurance operations and
third-party clients.

    The International Asset Management and Accumulation segment provides asset
management products and services to retail clients in Australia and
institutional clients throughout the world and provides life insurance and
retirement and related financial products and services primarily to businesses,
their employees and other individuals principally in Australia, Chile, Brazil,
New Zealand, Mexico, India, Japan, Argentina and Hong Kong.

    The Life and Health Insurance segment provides individual life and
disability insurance to the owners and employees of businesses and other
individuals in the United States and provides group life and health insurance to
businesses in the United States.

    The Mortgage Banking segment originates and services residential mortgage
loan products for customers primarily in the United States.

                                       F-45

                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. SEGMENT INFORMATION -- (CONTINUED)

    The Corporate and Other segment manages the assets representing capital that
has not been allocated to any other segment. Financial results of the Corporate
and Other segment primarily reflect financing activities for the Company, income
on capital not allocated to other segments, intercompany eliminations, and
non-recurring or other income or expenses not allocated to the segments based on
review of the nature of such items.

    The Company evaluates segment performance on segment operating earnings,
which excludes the effect of net realized capital gains and losses, as adjusted,
and non-recurring events and transactions. Net realized capital gains, as
adjusted, are net of tax, related changes in the amortization pattern of
deferred policy acquisition costs, recognition of front-end fee revenues for
sales charges on pension products and services and net realized capital gains
credited to customers. Segment operating revenues exclude net realized capital
gains and their impact on recognition of front-end fee revenues. Segment
operating earnings is determined by adjusting GAAP net income for net realized
capital gains and losses and non-recurring items which management believes are
not indicative of overall operating trends. While these items may be significant
components in understanding and assessing the consolidated financial
performance, management believes the presentation of segment operating earnings
enhances the understanding of the Company's results of operations by
highlighting earnings attributable to the normal, recurring operations of the
business. However, segment operating earnings are not a substitute for net
income determined in accordance with GAAP.

    For the six months ended June 30, 2001, the Company excluded $31.4 million
of non-recurring items, net of tax, from net income for the presentation of
operating earnings. The non-recurring items included the negative effects of:
(a) expenses related to our demutualization ($14.8 million); (b) a cumulative
effect of change in accounting principle related to our implementation of SFAS
133 ($10.7 million); and (c) a loss contingency reserve established for sales
practices litigation ($5.9 million).

    For the six months ended June 30, 2000, the Company excluded $75.8 million
of non-recurring items, net of tax, from net income for the presentation of
operating earnings. The non-recurring items included the negative effects of:
(a) a loss contingency reserve established for sales practices litigation ($75.0
million), and (b) expenses related to our demutualization ($0.8 million).

    The accounting policies of the segments are similar to those of the Company,
with the exception of capital allocation. The Company allocates capital to its
segments based upon an internal capital model that allows management to more
effectively manage the Company's capital.

    The following table summarizes selected financial information by segment as
of, or for the six months ended, June 30 and reconciles segment totals to those
reported in the consolidated financial statements (in millions):

                                                          INTERNATIONAL
                                            U.S. ASSET        ASSET
                                            MANAGEMENT     MANAGEMENT      LIFE AND
                                               AND             AND          HEALTH       MORTGAGE    CORPORATE
                                           ACCUMULATION   ACCUMULATION     INSURANCE     BANKING     AND OTHER   CONSOLIDATED
                                           ------------   -------------   -----------   ----------   ---------   ------------
                                                                                               
2001
Revenues:
  Operating revenues.....................   $ 1,858.2       $  310.1       $ 1,978.2     $  293.1    $   57.5     $ 4,497.1
  Net realized capital losses, including
    recognition of front-end fee
    revenues.............................       (64.9)         (38.7)           (9.1)          --       (63.7)       (176.4)
                                            ---------       --------       ---------     --------    --------     ---------
Revenues.................................   $ 1,793.3       $  271.4       $ 1,969.1     $  293.1    $   (6.2)    $ 4,320.7
                                            =========       ========       =========     ========    ========     =========
Net income:
  Operating earnings (loss)..............   $   176.9       $   (4.7)      $    90.9     $   68.8    $   32.1     $   364.0
  Net realized capital losses, as
    adjusted.............................       (40.8)         (21.2)           (4.7)          --       (41.5)       (108.2)
  Non-recurring items....................       (10.8)            --             0.1           --       (20.7)        (31.4)
                                            ---------       --------       ---------     --------    --------     ---------
Net income (loss)........................   $   125.3       $  (25.9)      $    86.3     $   68.8    $  (30.1)    $   224.4
                                            =========       ========       =========     ========    ========     =========
Assets...................................   $66,182.4       $4,919.6       $10,637.2     $2,168.9    $1,321.6     $85,229.7
                                            =========       ========       =========     ========    ========     =========

                                       F-46

                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. SEGMENT INFORMATION -- (CONTINUED)

                                                          INTERNATIONAL
                                            U.S. ASSET        ASSET
                                            MANAGEMENT     MANAGEMENT      LIFE AND
                                               AND             AND          HEALTH       MORTGAGE    CORPORATE
                                           ACCUMULATION   ACCUMULATION     INSURANCE     BANKING     AND OTHER   CONSOLIDATED
                                           ------------   -------------   -----------   ----------   ---------   ------------
                                                                                               
2001 (CONTINUED)
Other segment data:
  Revenues from external customers.......   $ 1,744.5       $  270.8       $ 1,970.8     $  293.1    $   41.5     $ 4,320.7
  Intersegment revenues..................        48.8            0.6            (1.7)          --       (47.7)           --
  Interest expense.......................         2.1            0.1             2.2           --        36.1          40.5
  Income tax expense (benefit)...........        16.8          (19.8)           43.5         37.0       (21.4)         56.1
  Amortization of goodwill and other
    intangibles..........................         0.5           26.2             2.0          0.4        (0.5)         28.6
2000
Revenues:
  Operating revenues.....................   $ 1,700.7       $  309.5       $ 2,100.7     $  180.7    $   40.5     $ 4,332.1
  Net realized capital gains (losses),
    including recognition of front-end
    fee revenues.........................       (49.5)           3.7            76.0           --         3.2          33.4
                                            ---------       --------       ---------     --------    --------     ---------
Revenues.................................   $ 1,651.2       $  313.2       $ 2,176.7     $  180.7    $   43.7     $ 4,365.5
                                            =========       ========       =========     ========    ========     =========
Net income:
  Operating earnings (loss)..............   $   177.3       $   (3.7)      $    86.0     $   34.4    $    4.0     $   298.0
  Net realized capital gains (losses), as
    adjusted.............................       (35.1)           3.5            50.1           --         4.6          23.1
  Non-recurring items....................          --             --              --           --       (75.8)        (75.8)
                                            ---------       --------       ---------     --------    --------     ---------
Net income...............................   $   142.2       $   (0.2)      $   136.1     $   34.4    $  (67.2)    $   245.3
                                            =========       ========       =========     ========    ========     =========
Assets...................................   $65,109.4       $5,547.3       $10,293.8     $1,606.3    $1,789.5     $84,346.3
                                            =========       ========       =========     ========    ========     =========
Other segment data:
  Revenues from external customers.......   $ 1,615.7       $  312.5       $ 2,178.3     $  180.7    $   78.3     $ 4,365.5
  Intersegment revenues..................        35.5            0.7            (1.6)          --       (34.6)           --
  Interest expense.......................         5.1            0.1             1.3           --        42.3          48.8
  Income tax expense (benefit)...........        52.3            2.4            67.0         18.6       (35.0)        105.3
  Amortization of goodwill and other
    intangibles..........................         0.5           23.9             2.1          0.4        (0.6)         26.3

    The Company operates in the United States and in selected markets
internationally (including Australia, Chile, Brazil, New Zealand, Mexico, India,
Japan, Argentina and Hong Kong). The following table summarizes selected
financial information by geographic location as of or for the six months ended
June 30 (in millions):

                                                                         LONG-LIVED                 NET INCOME
                                                             REVENUES      ASSETS       ASSETS        (LOSS)
                                                             --------    ----------    ---------    ----------
                                                                                        
2001
United States..............................................  $4,049.3     $  547.9     $80,310.1      $250.3
International..............................................    271.4       1,218.4       4,919.6       (25.9)
                                                             --------     --------     ---------      ------
Total......................................................  $4,320.7     $1,766.3     $85,229.7      $224.4
                                                             ========     ========     =========      ======
2000
United States..............................................  $4,052.3     $  495.3     $78,799.0      $245.5
International..............................................    313.2       1,451.8       5,547.3        (0.2)
                                                             --------     --------     ---------      ------
Total......................................................  $4,365.5     $1,947.1     $84,346.3      $245.3
                                                             ========     ========     =========      ======

    Long-lived assets include property and equipment and goodwill and other
intangibles.

                                       F-47

                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. SEGMENT INFORMATION -- (CONTINUED)

    The Corporate and Other segment includes an equity ownership interest in
Coventry Health Care, Inc. The Corporate and Other segment's equity in earnings
of Coventry Health Care, Inc., which was included in net investment income, was
$9.7 million and $10.8 million for the six months ended June 30, 2001 and 2000,
respectively. The investment in Coventry Health Care, Inc. was $134.6 million
and $122.9 million at June 30, 2001 and December 31, 2000, respectively. The
Corporate and Other segment also includes consolidating and intersegment
eliminations.

    The Company's operations are not materially dependent on one or a few
customers, brokers or agents, and revenues, assets and operating earnings are
attributable to geographic location based on the country of domicile sales
originate from.

4. PLAN OF DEMUTUALIZATION AND INITIAL PUBLIC OFFERING

    On March 31, 2001, the Company's Board of Directors adopted a plan to
convert Principal Mutual Holding Company from a mutual insurance holding company
to a stock company. Adoption of the plan authorized management to implement the
plan for demutualization of the Company. Upon demutualization, the membership
interests of Principal Life's policyholders in Principal Mutual Holding Company
will be extinguished, and eligible policyholders will receive compensation in
exchange for the extinguishment of their membership interests. Their
compensation will be in the form of common stock, cash or policy credits,
depending upon the type of policy or policyholder.

    Under Iowa insurance law, the plan also requires the approval of
policyholders and the Insurance Commissioner of the State of Iowa. During June
2001, policyholders received the plan of conversion and Principal Financial
Group, Inc. filed a registration statement with the Securities and Exchange
Commission relating to a proposed initial public offering of common stock. The
registration statement is expected to become effective in the latter part of
2001 or first part of 2002, when shares are expected to be sold to the public.

5. COMMITMENTS AND CONTINGENCIES

    The Company is a plaintiff or defendant in actions arising out of its
operations. The Company is, from time to time, also involved in various
governmental and administrative proceedings. While the outcome of any pending or
future litigation cannot be predicted, management does not believe that any
pending litigation will have a material adverse effect on the Company's
business, financial condition or results of operations. However, no assurances
can be given that such litigation would not materially and adversely affect the
Company's business, financial condition or results of operations.

    Other companies in the life insurance industry have historically been
subject to substantial litigation resulting from claims disputes and other
matters. Most recently, such companies have faced extensive claims, including
class-action lawsuits, alleging improper life insurance sales practices.
Negotiated settlements of such class-action lawsuits have had a material adverse
effect on the business, financial condition and results of operations of certain
of these companies. Principal Life is currently a defendant in two class-action
lawsuits which allege improper sales practices.

    In 2000, the Company reached an agreement in principal to settle these two
class-action lawsuits alleging improper sales practices. In April 2001, the
proposed settlement of the class-action lawsuit received court approval. In
agreeing to the settlement, the Company specifically denied any wrongdoing. The
Company has accrued a loss reserve for its best estimate based on information
available. As uncertainties continue to exist in resolving this matter, it is
reasonably possible that, as the actual cost of the claims subject to
alternative dispute resolution becomes available, the final cost of settlement
could exceed the Company's estimate. The range of any additional cost related to
the settlement cannot be presently estimated, however the Company believes the
settlement will not have a material impact on its business, financial condition
or results of operations. A number of persons and entities who were eligible to
be class members have excluded themselves from the class (or "opted out"), as
the law permits them to do. The Company has been notified that some of those who
opted out from the class will file lawsuits and make claims similar to those
addressed by the settlement.

    The Company is also subject to insurance guaranty laws in the states in
which it writes business. These laws provide for assessments against insurance
companies for the benefit of policyholders and claimants in the event of
insolvency of other insurance companies. The assessments may be partially
recovered through a reduction in future premium taxes in some states. The
Company believes such assessments in excess of amounts accrued would not
materially affect its financial condition or results of operations.

                                       F-48

                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. SUBSEQUENT EVENTS

PLAN OF DEMUTUALIZATION

    On July 24, 2001, Principal Life's policyholders approved the plan for
demutualization. The plan was submitted to the Insurance Commissioner of the
State of Iowa for approval and a public hearing was held on July 25, 2001. The
Insurance Commissioner of the State of Iowa approved the plan of conversion on
August 28, 2001.

ACCOUNTING CHANGES

    On July 20, 2001, the FASB issued Statements of Financial Accounting
Standards No. 141, Business Combinations, and No. 142, Goodwill and Other
Intangible Assets ("SFAS 142"), which dramatically change the accounting for
business combinations, goodwill and other intangible assets. These Statements
are effective July 1, 2001, for any business combinations entered into
subsequent to June 30, 2001. SFAS 142, which will become effective January 1,
2002, for the Company's business combinations entered into prior to June 30,
2001, adopts a nonamortization, impairment-only model for the Company's goodwill
and indefinite-lived intangible assets. This includes a more stringent
impairment test methodology for measuring and recognizing impairment losses. The
Company is presently studying the impact the new Statements will have on its
accounting policies.

TERRORIST ATTACKS IN THE UNITED STATES

    On September 11, 2001, terrorist attacks in the United States resulted in
significant loss of life and property, as well as interruption of business
activities and an overall disruption of the world economy. Management estimates
that the Company's losses from insurance claims from these events, primarily
individual life insurance claims, to be between $9.0 million and $12.0 million
after taxes, taking into consideration reinsurance coverage. Management has
estimated no material property or investment real estate loss exposures
resulting from these events. However, the continuing impacts of these events on
the world economy and financial markets cannot presently be determined. This
creates related uncertainties as to the future realization of and return on
certain invested assets; the impact on the Company's assumptions in assessing
the value of intangibles from prior acquisitions and the amortization patterns
for deferred policy acquisition costs; and the impact on future operating
results, for which estimates cannot presently be made.

                                       F-49

                         OPINION OF DANIEL J. MCCARTHY

                                                                  March 31, 2001

                     The Board of Directors
                     Principal Mutual Holding Company
                     711 High Street
                     Des Moines, IA 50392-0650

                     Re: Plan of Conversion of Principal Mutual Holding Company

                                   STATEMENT OF ACTUARIAL OPINION

                     SUBJECT OF THIS OPINION

                         This opinion letter relates to the actuarial aspects of
                     the proposed Reorganization of Principal Mutual Holding
                     Company ("Principal") pursuant to its Plan of Conversion
                     (the "Plan") as presented to Principal's Board of Directors
                     for its consideration and adoption on March 31, 2001. The
                     specific opinion set forth herein relates to the proposed
                     allocation of consideration among Eligible Policyholders as
                     described in the Plan.

                         Capitalized terms have the same meaning in this opinion
                     as they have in the Plan.

                     QUALIFICATIONS AND USAGE

                         I, Daniel J. McCarthy, am associated with the firm of
                     Milliman & Robertson, Inc., ("M&R") and am a Member of the
                     American Academy of Actuaries, qualified under the
                     Academy's Qualification Standards to render the opinions
                     set forth herein. I and other M&R staff acting under my
                     direction have advised Principal during the course of its
                     development of the Plan and the Actuarial Contribution
                     Memorandum, an Exhibit thereto. The Plan is based on
                     authority in Sections 521A.14(5)(b) and 508B.2 of Title
                     XIII of the Code of Iowa (2001). The opinions set forth
                     herein are not legal opinions concerning the Plan but
                     rather reflect the application of actuarial concepts and
                     standards of practice to the provisions thereof.

                         I am aware that this opinion letter will be furnished
                     to the Commissioner of Insurance of the State of Iowa for
                     her use in determining the fairness of the Plan, and to
                     Principal's Members as part of the Policyholder Information
                     Booklet that will be delivered to them, and I consent to
                     the use of this letter for those purposes.

                     RELIANCE

                         In forming the opinions set forth in this memorandum, I
                     have received from Principal extensive information
                     concerning the past and present practices and financial
                     results of Principal Life Insurance Company ("Principal
                     Life"), formerly known as Principal Mutual Life Insurance
                     Company and Bankers Life Company. This information includes
                     actuarial studies and projected asset cash flows developed
                     by Principal Life staff. I, and other M&R staff acting
                     under my direction, met with Principal personnel and
                     defined the information
                                WWW.MILLIMAN.COM
ALBANY, ATLANTA, BOISE, BOSTON, CHICAGO, COLUMBUS, DALLAS, DENVER, HARTFORD,
HOUSTON, INDIANAPOLIS, IRVINE, KANSAS CITY, LOS ANGELES, MILWAUKEE, MINNEAPOLIS,
NEW YORK, OMAHA, PHILADELPHIA, PHOENIX, PORTLAND, MF., PORTLAND, OR, ST. LOUIS,
SALT LAKE CITY, SAN DIEGO, SAN FRANCISCO, SEATTLE, TAMPA, WASHINGTON D.C.,
BERMUDA, HONG KONG, MELBOURNE, TOKYO

              MILLIMAN GLOBAL FIRMS IN PRINCIPAL CITIES WORLDWIDE

LOGO
                                       A-1

Board of Directors
March 31, 2001
Page  2

we required; in all cases, we were provided with the information we requested to
the extent that it was available or could be developed from Principal Life's
records. We have made no independent verification of this information, although
we have reviewed it where practicable for general reasonableness and internal
consistency. I have relied on this information, which was provided under the
general direction of Ellen Lamale, Principal Life's Senior Vice President &
Chief Actuary. My opinions depend on the substantial accuracy of this
information.

PROCESS

    In all cases, I and other M&R staff acting under my direction either derived
the results on which my opinions rest or reviewed derivations carried out by
Principal Life employees.

OPINION

    Under the Plan, consideration (shares of Common Stock of Principal Financial
Group Inc., or their equivalent value in cash or policy credits) is to be
distributed to each Eligible Policyholder in exchange for the Eligible
Policyholder's Membership Interest. In my opinion, the principles, assumptions,
and methodologies used to allocate consideration among Principal's Eligible
Policyholders, as set forth in Article VII of the Plan (including the Actuarial
Contribution Memorandum, an Exhibit thereto) are reasonable and appropriate and
result in an allocation of consideration that is fair and equitable to the
Eligible Policyholders.

DISCUSSION

    General description of the method of allocation.  Under the Plan, each
Eligible Policyholder will be allocated a fixed component of consideration;
i.e., a value, expressed in terms of shares of Common Stock, that is independent
of the Eligible Policyholder's Actuarial Contribution. In addition, each
Eligible Policyholder will be allocated a variable component of consideration if
the Actuarial Contribution of any of the Policies owned by the Eligible
Policyholder is positive. As defined in the Plan, Actuarial Contribution means,
with respect to a particular Policy, the contribution that such Policy is
estimated to have made to Principal Life's surplus and asset valuation reserve,
plus the contribution that such Policy is expected to make in the future,
calculated in each case according to the principles, assumptions and
methodologies set forth in Article VII of the Plan and the Actuarial
Contribution Memorandum.

    For each Eligible Policyholder who receives a variable component of
consideration, the amount of such consideration is equal to:

        (a) the sum of the positive Actuarial Contributions of all Policies
    owned by the Eligible Policyholder, multiplied by

        (b) the ratio of the Aggregate Variable Component to the sum of the
    positive Actuarial Contributions of all Policies,

subject to rounding rules described in the Plan.

    Appropriateness of the "actuarial contribution" method.  Most of the
consideration allocated to Eligible Policyholders is allocated via the Aggregate
Variable Component, using the "actuarial contribution" method described above.
The previously cited Sections of the Code of Iowa do not provide any specific
guidance as to the method of allocation; it is therefore appropriate to consider
applicable professional literature when considering the appropriateness of an
allocation method. The actuarial contribution method is recognized in the
actuarial literature as an appropriate allocation method. In particular,
Actuarial Standard of Practice 37, "Allocation of Policyholder Consideration in
Mutual Life Insurance Company Demutualizations" ("ASOP 37"), which is the most
authoritative professional guidance available to actuaries on this subject,
states in part, "The variable component of consideration should be allocated on
the basis of the actuarial contribution." ASOP 37 defines "actuarial
contribution," in relevant part, to be "The contributions that a particular
policy ... has made to the company's statutory surplus and asset valuation
reserve, plus the present value of contributions that the same policy ... is
expected to make in the future." This is consistent with the definition in the
Plan. I therefore find that the use of "actuarial contribution" as the principal
basis underlying the allocation of consideration is appropriate. I further find
that, in the Plan, the actuarial contribution method has been implemented in a
reasonable manner, through the use of methods and assumptions that are
reasonable and appropriate, consistent with Principal's past and present
business practices and relevant actuarial literature and, in particular,
consistent with methods and assumptions prescribed or permitted by ASOP 37.

                           MILLIMAN & ROBERTSON, INC.

                                       A-2

Board of Directors
March 31, 2001
Page  3

    Discounting of expected future contributions to surplus.  In determining the
portion of a policy's Actuarial Contribution that arises from its expected
future contribution to surplus, ASOP 37 provides that such contributions may be
discounted to present value using either the expected after-tax rate of
investment return or ".. a risk-adjusted rate appropriate for the line of
business or type of policy involved." Principal has chosen the latter course,
and has selected risk-adjusted rates of return generally consistent with
Principal Life's pricing objectives or, in the instance of policies in the
Closed Block, consistent with the funding of the Closed Block. I find that this
use of risk-adjusted rates of return is appropriate, and that the rates of
return selected are reasonable.

    The effect of the Closed Block.  As is set forth in Article II of the Plan,
Principal Life formed and began operating a Closed Block coincident with the
reorganization of Principal Mutual Life Insurance Company to a mutual holding
company structure effective July 1, 1998. After the conversion of the MIHC,
Principal Life will continue to operate the Closed Block in accordance with its
terms as originally established. Principal has -- in calculating the Actuarial
Contribution of each Closed Block policy -- estimated the contribution that each
such policy is expected to make to Principal Life's surplus and asset valuation
reserve from the date of the Closed Block's establishment forward by using
assumptions that are consistent with those used in the funding of the Closed
Block, with further adjustments to reflect the effect of future operating
expenses that were not funded for in the Closed Block. I find that this is an
appropriate manner in which to determine the expected future contributions to
Principal Life's surplus and asset valuation reserve arising from Closed Block
policies.

    Appropriateness of the fixed component.  Consideration is also allocated to
Eligible Policyholders via the fixed component, through which each Eligible
Policyholder is allocated a fixed number of shares of Common Stock without
regard to the Actuarial Contribution of Policies owned by that Eligible
Policyholder. This element of the allocation assures that each Eligible
Policyholder will receive some distribution, and is consistent with overall
concepts of equity. Under the Plan, the percentage of the total consideration
that is allocated in this manner is small relative to that allocated in
proportion to positive actuarial contributions, which is appropriate. I find
that including a minimum allocation to each Eligible Policyholder using the
fixed component is reasonable and appropriate, and that the size of the fixed
component to be distributed to each Eligible Policyholder as set forth in the
Plan, and the overall portion of consideration allocated among Eligible
Policyholders via the fixed component -- approximately one-fourth of the
total -- are reasonable. In making this finding, I have taken into account the
guidance provided in ASOP 37. In particular, I have taken into account the
treatment of the fixed component -- both as to the size of the fixed component
received by each Eligible Policyholder and as to the overall portion of
consideration allocated via the fixed component -- in prior demutualizations of
mutual life insurance companies.

    Appropriateness of the definition of "Eligible Policyholder."  In
considering the fairness of the allocation, I have taken into account the
definition of "Eligible Policyholder" set forth in the Plan. Principal's
definition is influenced in part by Iowa law, in part by the company's manner of
operation (including the sale of certain classes of business through Company
Trusts), in part by the provisions of Principal's By-laws, and in part by
precedent from prior demutualizations. Taking into account these influences, I
find the definition of Eligible Policyholder to be reasonable and appropriate.

                                         Yours sincerely,

                                         /s/ Daniel J. McCarthy
                                         Daniel J. McCarthy

                           MILLIMAN & ROBERTSON, INC.

                                       A-3

------------------------------------------------------------
------------------------------------------------------------

  No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus is an offer to
sell only the shares offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
                             ----------------------
                               TABLE OF CONTENTS

                                                 Page
                                                 ----
                                              
Prospectus Summary.............................    1
Risk Factors...................................   12
Statistical Information Sources................   21
The Demutualization............................   22
Use Of Proceeds................................   30
Stockholder Dividend Policy....................   31
Capitalization.................................   32
Selected Historical Financial Information......   33
Unaudited Pro Forma Condensed Consolidated
  Financial Information........................   40
Management's Discussion And Analysis Of
  Financial Condition And Results Of
  Operations...................................   44
Business.......................................   85
Investments....................................  134
Management.....................................  157
Regulation.....................................  172
Ownership Of Common Stock......................  179
Description Of Capital Stock And Change Of
  Control Related Provisions...................  180
Common Stock Eligible For Future Sale..........  184
Underwriting...................................  185
Validity Of Common Stock.......................  188
Experts........................................  188
Additional Information.........................  188
Glossary.......................................  G-1
Consolidated Financial Statements..............  F-1
Opinion Of Daniel J. McCarthy..................  A-1

                             ----------------------

  Through and including November 16, 2001 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to a dealer's obligation to deliver a prospectus when acting
as an underwriter and with respect to an unsold allotment or subscription.
------------------------------------------------------------
------------------------------------------------------------
------------------------------------------------------------
------------------------------------------------------------

                               100,000,000 Shares

                              PRINCIPAL FINANCIAL
                                  GROUP, INC.

                                  Common Stock
                    ----------------------------------------

                        [PRINCIPAL FINANCIAL GROUP LOGO]

                    ----------------------------------------
                              GOLDMAN, SACHS & CO.

                           CREDIT SUISSE FIRST BOSTON
                              MERRILL LYNCH & CO.
                              SALOMON SMITH BARNEY

                         BANC OF AMERICA SECURITIES LLC
                            BEAR, STEARNS & CO. INC.
                           A.G. EDWARDS & SONS, INC.
                                FOX-PITT, KELTON
                                    JPMORGAN
                                LEHMAN BROTHERS
                              RAMIREZ & CO., INC.
                                  UBS WARBURG

                      Representatives of the Underwriters

------------------------------------------------------------
------------------------------------------------------------

                  [Alternate Page to International Prospectus]

                        [PRINCIPAL FINANCIAL GROUP LOGO]

                               100,000,000 Shares
                        PRINCIPAL FINANCIAL GROUP, INC.
                                  Common Stock
                             ----------------------
    This is an initial public offering of 100,000,000 shares of common stock of
Principal Financial Group, Inc. This offering is being made in connection with
the conversion of Principal Mutual Holding Company from a mutual insurance
holding company into a stock company in a process called a demutualization.
After the demutualization, Principal Financial Group, Inc. will indirectly own
all of the outstanding common stock of Principal Life Insurance Company.

    This prospectus relates to an offering of 15,000,000 shares in an
international offering outside the United States. In addition, 85,000,000 shares
are being offered in an United States offering.

    In addition to these shares, Principal Financial Group, Inc. will issue an
estimated 260.6 million shares of its common stock to policyholders entitled to
receive shares in the demutualization in exchange for their membership interests
in Principal Mutual Holding Company, or to a separate account for the benefit of
those policyholders.

    Prior to this offering there has been no public market for the common stock.
The common stock of Principal Financial Group, Inc. has been approved for
listing on the New York Stock Exchange under the symbol "PFG", subject to
official notice of issuance.

    See "Risk Factors" on page 12 to read about factors you should consider
before buying shares of the common stock.
                             ----------------------
    NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
                             ----------------------

                                                              Per Share       Total
                                                              ---------       -----
                                                                    
Initial public offering price...............................   $ 18.50    $1,850,000,000
Underwriting discount.......................................   $  0.805   $   80,475,000
Proceeds, before expenses, to Principal Financial Group,
  Inc. .....................................................   $ 17.695   $1,769,525,000

    To the extent the international underwriters sell more than 15,000,000
shares of common stock, the underwriters have the option to purchase up to an
additional 2,250,000 shares from Principal Financial Group, Inc. at the initial
public offering price less the underwriting discount. The U.S. underwriters have
a similar option to purchase up to 12,750,000 additional shares of common stock.

                             ----------------------

    The international underwriters expect to deliver the shares against payment
in New York, New York on October 26, 2001.

GOLDMAN SACHS INTERNATIONAL
                    CREDIT SUISSE FIRST BOSTON
                                      MERRILL LYNCH INTERNATIONAL
                                                    SALOMON SMITH BARNEY

                                        
BANC OF AMERICA SECURITIES LIMITED              BEAR, STEARNS INTERNATIONAL LIMITED
A.G. EDWARDS & SONS, INC.                                          FOX-PITT, KELTON
JPMORGAN                                                            LEHMAN BROTHERS
RAMIREZ & CO., INC.                                                     UBS WARBURG

ABN AMRO ROTHSCHILD                                                  BNP PARIBAS
COMMERZBANK SECURITIES                                           CREDIT LYONNAIS
                             ----------------------

                       Prospectus dated October 22, 2001.

                  [ALTERNATE PAGE TO INTERNATIONAL PROSPECTUS]

                                  UNDERWRITING

    Principal Financial Group, Inc. and the underwriters for the international
offering named below, referred to as the international underwriters, have
entered into an underwriting agreement with respect to the shares offered
outside the United States. Subject to certain conditions, each international
underwriter has severally agreed to purchase the number of shares indicated in
the following table.

                 International underwriters                     Number of Shares
                 --------------------------                     ----------------
                                                             
Goldman Sachs International.................................        3,562,500
Credit Suisse First Boston (Europe) Limited.................        1,710,000
Merrill Lynch International.................................        1,638,750
Salomon Brothers International Limited......................        1,638,750
Banc of America Securities Limited..........................          712,500
Bear, Stearns International Limited.........................          712,500
A.G. Edwards & Sons, Inc....................................          712,500
Fox-Pitt, Kelton N.V........................................          712,500
J.P. Morgan Securities Ltd..................................          712,500
Lehman Brothers International (Europe)......................          712,500
Samuel A. Ramirez & Company, Inc............................          712,500
UBS AG, acting through its business group UBS Warburg.......          712,500
ABN AMRO Rothschild.........................................          187,500
BNP Paribas.................................................          187,500
Commerzbank Aktiengesellschaft..............................          187,500
Credit Lyonnais.............................................          187,500
                                                                   ----------
  Total.....................................................       15,000,000
                                                                   ==========

    If the international underwriters sell more shares than the total number
listed in the table above, the international underwriters have an option to buy
up to an additional 2,250,000 shares from Principal Financial Group, Inc. to
cover such sales. They may exercise that option for 30 days. If any shares are
purchased under this option, the international underwriters will severally
purchase shares in approximately the same proportion as shown in the table
above.

    The following table shows the per share and total underwriting discounts and
commissions to be paid to the international underwriters by Principal Financial
Group, Inc. Such amounts are shown assuming both no exercise and full exercise
of the international underwriters' option to purchase 2,250,000 additional
shares.

                    Paid by Principal Financial Group, Inc.

                                                                No Exercise    Full Exercise
                                                                -----------    -------------
                                                                         
Per Share...................................................    $     0.805     $     0.805
Total.......................................................    $12,071,250     $13,881,938

    Shares sold by the international underwriters to the public will initially
be offered at the initial public offering price provided on the cover of this
prospectus. Any shares sold by the international underwriters to securities
dealers may be sold at a discount of up to $0.49 per share from the initial
public offering price. Any such securities dealers may resell any shares
purchased from the international underwriters to certain other brokers or
dealers at a discount of up to $0.10 per share from the initial public offering
price. If all the shares are not sold at the initial offering price, the
international underwriters may change the offering price and the other selling
terms.

    Principal Financial Group, Inc. has entered into an underwriting agreement
with underwriters for the sale of 85,000,000 shares in the United States. The
terms and conditions of both offerings are the same and the sale of shares in
both offerings are conditioned on each other. Goldman, Sachs & Co., Credit
Suisse First Boston Corporation, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Salomon Smith Barney Inc., Banc of America Securities LLC, Bear,
Stearns & Co. Inc., A.G. Edwards & Sons, Inc., Fox-Pitt, Kelton Inc., J.P.
Morgan Securities Inc., Lehman Brothers Inc., Samuel A. Ramirez & Company, Inc.,
and UBS Warburg LLC are the representatives of the underwriters for the offering
in the United States, referred to as the U.S. underwriters. Principal Financial
Group, Inc. has granted the U.S. underwriters a similar option to purchase up to
an aggregate of an additional 12,750,000 shares.

    The underwriters for both of the offerings will enter into an agreement in
which they will agree to restrictions on where and to whom they and any dealer
purchasing from them may offer shares as a part of the distribution of the
shares. The underwriters will also agree that they may sell shares among each of
the underwriting groups.

    Principal Financial Group, Inc. has agreed with the underwriters not to
dispose of or hedge any shares of common stock or securities convertible into or
exchangeable for shares of common stock during the period from the date of this
prospectus continuing through the date 180 days after the date of this
prospectus, except with the prior written consent of the representatives. This
restriction does not apply to: (1) shares of our common stock issued to a new
separate account of Principal Life, held for the benefit of Qualified Plan
Customers, as part of the Separate Account Policy Credits and (2) employee stock
option plans existing on, or upon the conversion or exchange of convertible or
exchangeable securities outstanding as of, the date of the underwriting
agreement. See "Common Stock Eligible for Future Sale" for a discussion of
transfer restrictions.

    Prior to the offering, there has been no public market for the shares. The
initial public offering price has been negotiated among us and the
representatives. Among the factors to be considered in determining the initial
public offering price of the shares, in addition to prevailing market
conditions, will be the historical performance of Principal Financial Group,
Inc., estimates of its business potential and earnings prospects, an assessment
of its management and the consideration of the above factors in relation to
market valuation of companies in related businesses.

    The common stock of Principal Financial Group, Inc. has been approved for
listing on the New York Stock Exchange under the symbol "PFG", subject to
official notice of issuance.

    In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Shorts sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. "Covered"
short sales are sales made in an amount not greater than the underwriters'
option to purchase additional shares from us in the offering. The underwriters
may close out any covered short position by either exercising their option to
purchase additional shares or purchasing shares in the open market. In
determining the source of shares to close out the covered short position, the
underwriters will consider, among other things, the price of shares available
for purchase in the open market as compared to the price at which they may
purchase shares through the overallotment option. "Naked" short sales are any
sales in excess of such option. The underwriters must close out any naked short
position by purchasing shares in the open market. A naked short position is more
likely to be created if the underwriters are concerned that there may be
downward pressure on the price of the common stock in the open market after
pricing that could adversely affect investors who purchase in the offering.
Stabilizing transactions consist of various bids for or purchases of common
stock made by the underwriters in the open market prior to the completion of the
offering.

    The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.

    Purchases to cover a short position and stabilizing transactions may have
the effect of preventing or retarding a decline in the market price of the
common stock, and together with the imposition of the penalty bid may stabilize,
maintain or otherwise affect the market price of the common stock. As a result,
the price of the common stock may be higher than the price that otherwise might
exist in the open market. If these activities are commenced, they may be
discontinued at any time. These transactions may be effected on the New York
Stock Exchange, in the over-the-counter market or otherwise.

    Each international underwriter has also represented and agreed that (i) it
has not offered or sold and, prior to the date six months after the date of
issue of the shares of common stock, will not offer or sell any shares of common
stock to persons in the United Kingdom, except to persons whose ordinary
activities involve them in acquiring, holding, managing or disposing of
investments (as principal or agent) for the purposes of their businesses or
otherwise in circumstances that have not resulted and will not result in an
offer to the public in the United Kingdom within the meaning of the Public
Offers of Securities Regulations 1995; (ii) it has complied, and will comply
with, all applicable provisions of the Financial Services Act 1986 of Great
Britain with respect to anything done by it in relation to the shares of common
stock in, from or otherwise involving the United Kingdom; and (iii) it has only
issued or passed on and will only issue or pass on in the United Kingdom any
document received by it in connection with the issuance of the shares of common
stock to a person who is of a kind described in Article 11(3) of the Financial
Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 (as
amended) of Great Britain or is a person to whom the document may otherwise
lawfully be issued or passed on.

    The shares of common stock may not be offered, sold, transferred or
delivered in or from The Netherlands, as part of their initial distribution or
as part of any re-offering, and neither this prospectus nor any other document
in respect of the offering may be distributed or circulated in The Netherlands,
other than to individuals or legal entities which include, but are not limited
to, banks, brokers, dealers, institutional investors and undertakings with a
treasury department, who or which trade or invest in securities in the conduct
of a business or profession.

    Each international underwriter has acknowledged and agreed that the shares
of common stock have not been registered under the Securities and Exchange Law
of Japan and are not being offered or sold and may not be offered or sold,
directly or indirectly, in Japan or to or for the account of any resident of
Japan, except (i) pursuant to an exemption from the registration requirements of
the Securities and Exchange Law of Japan and (ii) in compliance with any other
applicable requirements of Japanese law. As part of the offering, the
underwriters may offer the shares of common stock in Japan to a list of 49
offerees in accordance with the above provisions.

    The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.

    A prospectus in electronic format will be made available on the web sites
maintained by one or more of the lead managers of this offering and may also be
made available on web sites maintained by other underwriters. The underwriters
may agree to allocate a number of shares to underwriters for sale to their
online brokerage account holders. Internet distributions will be allocated by
the lead managers to underwriters that may make Internet distributions on the
same basis as other allocations.

    Principal Financial Group, Inc. estimates that its share of the total
expenses of this offering, excluding underwriting discounts and commissions,
will be approximately $16.2 million.

    Principal Financial Group, Inc. and Principal Life Insurance Company have
agreed to, jointly and severally, indemnify the several underwriters against
certain liabilities, including liabilities under the Securities Act of 1933.

    Certain of the underwriters and their affiliates have in the past provided,
and may in the future from time to time provide, investment banking and general
financing and banking services to Principal Financial Group, Inc. and its
affiliates for which they have received in the past and may in the future
receive, customary fees.

    This prospectus may be used by the underwriters and other dealers in
connection with offers and sales of the shares, including sales of shares
initially sold by the underwriters in the offering being made outside of the
United States, to persons located in the United States.

------------------------------------------------------------
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  No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus is an offer to
sell only the shares offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.

                             ----------------------

                               TABLE OF CONTENTS

                                                 Page
                                                 ----
                                              
Prospectus Summary.............................    1
Risk Factors...................................   12
Statistical Information Sources................   21
The Demutualization............................   22
Use Of Proceeds................................   30
Stockholder Dividend Policy....................   31
Capitalization.................................   32
Selected Historical Financial Information......   33
Unaudited Pro Forma Condensed Consolidated
  Financial Information........................   40
Management's Discussion And Analysis Of
  Financial Condition And Results Of
  Operations...................................   44
Business.......................................   85
Investments....................................  134
Management.....................................  157
Regulation.....................................  172
Ownership Of Common Stock......................  179
Description Of Capital Stock And Change Of
  Control Related Provisions...................  180
Common Stock Eligible For Future Sale..........  184
Underwriting...................................  185
Validity Of Common Stock.......................  188
Experts........................................  188
Additional Information.........................  188
Glossary.......................................  G-1
Consolidated Financial Statements..............  F-1
Opinion Of Daniel J. McCarthy..................  A-1

                             ----------------------

  Through and including November 16, 2001 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to a dealer's obligation to deliver a prospectus when acting
as an underwriter and with respect to an unsold allotment or subscription.

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                               100,000,000 Shares

                              PRINCIPAL FINANCIAL
                                  GROUP, INC.

                                  Common Stock
                    ----------------------------------------

                        [PRINCIPAL FINANCIAL GROUP LOGO]

                    ----------------------------------------
                          GOLDMAN SACHS INTERNATIONAL
                           CREDIT SUISSE FIRST BOSTON
                          MERRILL LYNCH INTERNATIONAL
                              SALOMON SMITH BARNEY

                       BANC OF AMERICA SECURITIES LIMITED
                      BEAR, STEARNS INTERNATIONAL LIMITED
                           A.G. EDWARDS & SONS, INC.
                                FOX-PITT, KELTON
                                    JPMORGAN
                                LEHMAN BROTHERS
                              RAMIREZ & CO., INC.
                                  UBS WARBURG
                              ABN AMRO ROTHSCHILD
                                  BNP PARIBAS
                             COMMERZBANK SECURITIES
                                CREDIT LYONNAIS

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