Principal Financial Group, Inc. (PFG, NASDAQ)
Industry: Asset Management
Annual report, fiscal year 2017


In the face of accelerating change, it’s easy to forget that what matters most to customers remains the same as ever.

Family. Opportunity. Simplicity.
Peace of mind.



Principal \( ^{®} \) 

Principal Financial Group 2017 Annual Report



5 Letter from the chairman
9 Letter from the board
11 Customer first
13 Reimagined solutions
15 Intuitive technology
17 Investment leadership
19 Financial highlights
21 Executive management
22 Board of directors
23 Principal at a glance
26 Non-GAAP financial measures
27 Principal funds
28 Annual meeting information



What matters most to customers hasn’t changed. It’s how we help them achieve it that’s changing and driving the future. Theirs and ours.

Leading to new solutions that meet and engage them where they are – and where they’re going. That move and inspire them to take greater control of their financial futures. And that enable us to reach millions of new customers in growing middle-class markets around the world.

We invest in what matters most, so we can deliver what matters most to our customers and shareholders.



2017 was a very good year for Principal.

We delivered record results and double-digit growth, with $2.3 billion in net income available to common stockholders and $1.5 billion in non-GAAP operating earnings.

Strong asset appreciation combined with solid net cash flows enabled us to increase assets under management by $77 billion, or 13 percent, to a record $669 billion at year-end.

We remain pleased with our investment performance, with more than 80 percent of our options \( ^{1} \)  in the top two Morningstar quartiles for the five-year period, including more than 50 percent in the top quartile.



We continued to make meaningful investments across our businesses to expand and enhance our customer solution set, broaden distribution, and improve the customer experience, positioning Principal for future growth and success.

During the year, we also committed $180 million to acquisitions \( ^{2} \)  and returned more than $730 million to shareholders through common stock dividends and buybacks, reflecting strong capital generation and balanced deployment.



What matters most is that we helped people through some of the most challenging times in their lives.



From the chairman, president, and chief executive officer

## To our shareholders

2017 was our 138th year in business. It was a year of strong growth for Principal, but more importantly, a year of meaningful progress. Progress meeting customer needs and solving their problems. Progress delivering education and tools that remove barriers to customer action. Progress promoting the importance of investment diversification, savings discipline, and risk protection. Progress advocating for pension systems that enable people around the world to maintain their lifestyle in retirement. Progress on the things that matter most.

While a company’s longevity can speak volumes, the four largest companies in the world by market cap – Apple, Alphabet, Microsoft, and Amazon – are just 125 years old combined. \( ^{1} \)  These relative newcomers have created exceptional shareholder value by creating exceptional customer value. They’ve demonstrated to the world the importance of vision and creativity; of going forward, unconstrained by past formulas for success, and dedicated to innovating in ways that truly benefit customers.

Today, more than ever, Principal is re-imagining its future, with technology investment at the forefront. Undoubtedly, we’re continuing to invest in areas that improve efficiency, making us more cost competitive. But more importantly, we’re accelerating our investment in technology that: enables us to create new solutions; makes us more accessible to customers; and improves the customer experience overall, while protecting customer data and privacy. Ultimately, by enabling us to put more people around the world on the path to financial security, these investments will also enable us to create long-term value for our shareholders.

## Becoming the company

Competitors – traditional and emerging – are working hard, every day, to create something better for customers. Industries are being disrupted, and clearly, longevity alone is not enough. Customer-driven innovation is the key to ongoing success. Which means every day, Principal must continue to evolve.

We must continue becoming the company that is at the forefront of building something better – better guidance, better solutions, better experiences. Better at helping people achieve their financial goals. Here are some of the things that we accomplished in 2017 to do just that, and to differentiate ourselves in this rapidly changing world.

## New solutions

Customer needs can vary dramatically based on countless factors, including life stage, risk tolerance, and financial literacy. Our evolution, from product manufacturer to solutions provider, reflects our recognition that we must meet a broader range of needs and anticipate where demand is going. We have to do more and be more for our customers. With the needs of individuals, retirement, and institutional investors all top of mind, we continued to expand and enhance our investment platforms in three key areas in 2017:



• Outcomes-based funds, with a particular focus on income solutions

• Alternative investments, to enhance diversification and help manage downside risk

• Exchange-traded funds (ETFs) and collective investment trusts (CITs), to provide cost-effective alternatives to pure passive management

We launched more than 50 new funds in total in Southeast Asia, China, and Latin America during the year to address growing local demand for multi-asset and income generating solutions. On our U.S. platform, we launched more than a dozen new investment options, including seven ETFs. This brings us to a dozen ETF strategies in the market as of year-end. Our ETF franchise surpassed both the $1 billion and $2 billion milestones in 2017, moving us into the top 30 as of year-end.

Importantly, we continued to deliver strong investment performance. Throughout the year, we received dozens of best fund awards – in Chile, China, Hong Kong, India, Europe, Malaysia, Mexico, and the U.S. – from organizations including Bloomberg, Morningstar, and Thomson Reuters Lipper. Just after year-end, Principal Millennials ETF made Investment News' list of best performing International ETFs, topping the World Large Stock category with a 41 percent gain for the year.

## More. Easier. Better.

Too many people around the world are under-saved, under-insured, and unadvised. To be part of the solution, we have to provide education, guidance, and advice. We have to address how future generations will buy financial services. We have to make it easier for people to save and protect their assets. We must continue to help advisors serve their clients. But at the same time, we must also help individuals and business owners who are trying to figure it out on their own. During the year, we advanced these efforts in a number of important ways.

Accelerated underwriting (AU): We made an important enhancement to the AU program in our life insurance business. Beyond eliminating intrusive, time-consuming steps like lab testing and medical exams for eligible applicants, further automation of our rules allows for immediate review of applications. Some applications can now be approved within minutes, compared to traditional underwriting, which can take weeks, making this a true breakthrough for customers and advisors alike.

Digital sales and advice: We launched a fully digital pension product platform in Brazil (which after regulatory approval, will be owned through a joint venture with BB Seguridade). This is just a prelude to a much broader effort by Principal to introduce digital platforms that:

- support advisors as they seek asset allocation models to use in portfolio construction, and

• support individuals through understandable, affordable, direct-to-consumer solutions for protection, retirement, and other long-term savings needs.

Driving retirement readiness: In 2017, we launched a new account aggregation tool. This provides plan participants a more holistic view of their finances and a more accurate estimation of the income they will have in retirement. We also launched a first-of-its-kind retirement modeling planner. Using real-time data, plan sponsors and advisors can assess plan health, see how plan design features impact participant retirement readiness, and estimate costs associated with changes to plan design.



Going mobile: With a projected 6 billion smartphones in circulation by 2020, \( ^{2} \)  mobile features are clearly critical to delivering a better customer experience. In 2017, we rolled out a number of new features including text alerts so retirement plan participants can receive automatic updates on the status of a loan or distribution request. Mobile rollouts planned for 2018 include investment transfers, contribution changes, withdrawals, and onboarding for newly eligible participants.

Multi-channel, multi-product distribution: In 2017, we continued to make our investment offerings more accessible to investors through placements on third party platforms, model portfolios, and recommended lists. In total, we earned 72 placements, adding more than 40 different options to more than two dozen different distribution platforms with success across asset classes. At year-end, our top 10 firms averaged more than 5.5 products per platform. And we added several key distribution relationships during the year, most notably, Alibaba.

## What matters most

For all our accomplishments, what matters most is that we helped people through some of the most challenging times in their lives. And we helped people achieve financial progress they might have had difficulty attaining on their own. In 2017, we provided monthly income to nearly 50,000 disabled workers (more than 400 million in total), and to more than 200,000 retirees in the U.S., Latin America, and Asia (more than 1.2 billion in total). We paid more than 1 billion in death benefits on nearly 13,000 claims. We helped more than 15 million people around the world save/invest for retirement and other long-term needs, through employer sponsored retirement plans and retail mutual funds. Over the course of the year, those individuals saw their assets appreciate by some 60 billion.

Competitive and environmental challenges remain, but we go forward from a position of strength, with excellent fundamentals and the benefit of broad diversification. And we go forward increasingly well-positioned to:

• compete in asset management globally, in retirement and long-term savings in the U.S., Latin America, and Asia, and insurance in the U.S.,

• capitalize on growing demand associated with a thriving U.S. small- to medium-sized business market, emerging middle-class populations, aging populations, and longer life expectancies, and

• continue to build momentum in 2018, and for that momentum to translate into long-term shareholder value.

On behalf of Principal, my sincere thanks for your continued support. We’ll continue to strive to become an even stronger organization for you and each of our stakeholders.



Dan Houston

Chairman, president, and chief executive officer



Management
continues to take
appropriate actions
to further
strengthen its
competitive
positioning



## To our shareholders

To create long-term shareholder value in a rapidly changing world, management must continuously address new challenges and capitalize on emerging opportunities. As your board of directors, we take our responsibilities, which include oversight of management’s strategy and succession, very seriously, and we are committed to representing your interests. On behalf of the board, I’m pleased to provide an update on our key areas of focus and to share some thoughts on company performance.

Strategic oversight: The board not only evaluates strategy, but also shares perspectives, provides advice, and monitors and assesses management’s implementation of our chosen strategy. Each quarter, as well as at our annual strategy retreat with management, we discuss and debate topics critical to long-term success. At our 2017 retreat, we focused on global growth and capital planning. This involved looking at key challenges, opportunities, and risks created by changing customer expectations, demographic shifts, further expansion of a global middle class, technology (including Principal’s digital transformation), and industry regulation. Management continues to evolve and refine company strategy, invest in growth, and take appropriate actions to further strengthen its competitive positioning.

Risk oversight: We have a coordinated, comprehensive approach to overseeing the company’s enterprise risk management. The board regularly reviews strategic threats, opportunities, and key risks, including financial, product, cybersecurity, regulatory, and reputational risk, as well as new exposures that could potentially emerge in the future. Both your board and management are fully engaged in risk management and have made it a fundamental aspect of company strategy, operations, and culture.

Talent and succession planning: Our role in talent and succession planning applies to both company leadership and the board. In February 2017, as part of a planned succession, Deanna Strable transitioned from president of U.S. Insurance Solutions to chief financial officer, replacing Terry Lillis. Amy Friedrich succeeded Deanna as president of U.S. Insurance Solutions in May 2017, after serving as senior vice president and head of Specialty Benefits Insurance.

In October 2017, Diane Nordin, former partner at Wellington Management Company, LLP, joined the Principal board. She brings over 30 years' experience in investment management, with expertise in product management, client relationship management, strategic planning, and operations. We are committed to regular board refreshment and continue to strive for balance between introducing new perspectives and maintaining continuity. Our board now includes 11 independent directors with broad expertise, skills, and viewpoints to help the company advance and execute its strategy. The board values diversity in all aspects including gender, race, age, and experience. Five of our 11 independent directors are women.

Company performance: The board remains focused on sustainable performance. We, too, were pleased with performance in 2017, but even more so with long-term growth. Since 2012, the company has increased assets under management by more than $265 billion or 66 percent. This has helped drive 13 percent compounded annual growth in earnings per share over the past five years. Again, through strategic investment, the company continues to make important strides in meeting customers' needs.

Thank you for your continued support and for the opportunity to serve as your lead director. Please contact me with your questions, thoughts, and opinions at principal.com/contactliz.

Sincerely,



Elizabeth Tallett

Lead director, Principal Financial Group



## Bringing the
voice of the
customer to
everything
we do.



Our customers are the reason we exist. So we work to listen and understand their needs, challenges, and motivations with more than academic interest. Real life input from employers, advisors, plan participants, and retail customers guides our work at every level of the organization.

We gather broad customer knowledge, trends, and insights through third-party research and studies commissioned by partner organizations. This data provides directional value. But it’s the work of our internal research teams that brings us ever closer to our customers.

Our opt-in Customer Community enables us to quickly gather key information on a variety of topics from nearly 1,300 individuals who use our products and services. We regularly segment and poll the group through online surveys, chats, and phone interviews. We use their input to vet everything from product design to education and marketing approaches. We listen, understand, and move forward, together.

Our success with this customer group will soon lead to the creation of an Employer Community that will bring deeper knowledge and immediacy to our work with businesses and plan sponsors.

The habits and interests of younger customers, who are now early in their retirement journeys, are already impacting our industry. In 2017, we studied more than 1,500 millennial and Gen X plan participants who are saving at high levels. The goal was to discover motivations that can be used to help other young participants engage and succeed in saving for retirement. It turns out that parents still hold a great influence on savings habits. So does the prospect of having the income to live a good life in retirement. Young savers are willing to make sacrifices. They’re also willing to help others, with six out of 10 teaching family and friends how to become better savers.

The use of technology and rich data is reshaping our industry. But drilling through the numbers to uncover real customers’ needs and preferences is what drives our future. And theirs.



Being there
when they
need us
is only
the beginning.



Anyone can make a connection. It’s how you engage that produces results and true relationships. That’s why we seek to understand and be inspired by our customers. To rethink how we design the experiences and solutions that they desire. To satisfy their needs. And to create relevant conversations that help them live their best lives.

Our customer insights and innovation team works across our global enterprise to reframe business challenges and engagement opportunities, putting customers at the center. The process evolves through a series of focused conversations guided by human-centered design experts. The result is new, often surprising, solutions that work for both the customers and our business, with immediate, near-term, and future action plans created.

This approach was used to create a new strategy for engaging Hispanic participants in our 401(k) plans. Hispanics comprise the largest, fastest-growing ethnic population in the United States. But a disproportionate number do not actively participate in any form of retirement saving. Human-centered design conversations revealed that the problem wasn’t a lack of financial discipline. Deeper cultural issues were in play, centered on the concept of family helping family. Simply repackaging English materials into Spanish wasn’t the answer.

Using human-centered design, we reimagined an enrollment and participation experience that would resonate specifically with Hispanic workers. We built culturally relevant practices and solutions around their needs, families, and future – including an interactive digital experience, in-language education and enrollment tools, and bicultural support specialists. And we’re already seeing significant growth in both plan engagement and saving.

The team is also working on projects to enhance and reinvent relationships with advisors, plan sponsors, retail customers, and alliance firms in the United States and around the world. Through developmental internships with Principal employees from our global business units, as well as university partnerships, we are seeding the human-centered design philosophy across the enterprise.



Engaging
and
inspiring,
creating magic
and momentum.



Here’s the sad truth about retirement readiness: Most people aren’t on track to achieve it. Many procrastinate. Others aren’t sure what to do. Some participate, but save too little, not understanding the value of their company’s match. More than a few simply don’t expect to retire at all.

But we’re proving that little pushes and simplified choices can produce significant momentum – especially when combined with plan design best practices, intuitive technology, and close working relationships with plan sponsors.

Our first-of-its-kind retirement modeling planner assesses plan design options in real time. It’s designed to help plan sponsors make decisions that can lead to better participant outcomes. For instance, we know that automatic enrollment is important. So is a starting deferral rate of 6 percent, rising to 10 percent over time. Surprisingly, most employees agree. And the journey begins. Interactive, engaging My Virtual Coach conversations provide help to participants along the way. On their smartphone or tablet. Whenever they want to engage. And our experts are never more than a phone call away to provide deep knowledge, understanding, and support.

So how do these tools and best practices work in real life? Movement Mortgage has grown from four to 4,000 employees in 10 short years. The company is fully engaged in guiding their people, mostly Gen Y and millennials, to long-term financial security. In 2017, they partnered with Principal to help take their plan to the next level. They created a contest to drive employees to complete a retirement checkup on principal.com and engage in My Virtual Coach conversations. Nearly a third of their participants increased deferral after having access to their Retirement Wellness Score and Planner. By the end of the year, plan participation grew from 88 percent to 97 percent – with more than 60 percent of participants on track to replace at least 50 percent of their income in retirement.

Clearly, our commitment to best practices is producing satisfying results. People who enroll through My Virtual Coach are five times more likely to contribute 10 percent or more of their salary than those who enroll through other methods.



# Driving
opportunity
for investors
around the
world.



Each investor has a purpose, a goal. Our mission is to help them achieve it – through investment solutions built around our global expertise in asset allocation, active management, and alternative strategies.

Our multi-boutique investment approach brings even the most sophisticated asset classes within reach of every investor. We offer a broad range of specialist investment capabilities, spanning equities, fixed income, real estate, and other alternative investments. And we are an industry leader in delivering customized multi-asset and multi-manager solutions to serve specific client needs.

New and experienced investors alike can benefit from our breadth of asset allocation solutions – including target date and target risk funds. Rather than simply creating products, we build portfolios that meet specific objectives, such as saving for retirement, generating income, or addressing inflation. Think of the process as a conversation. What are your risks? What are your goals for the future? What are your options for getting there?

Institutional investors see the advantage of our strong presence in money centers around the world. We are close to the markets and close to our clients. They come to us in search of specific objectives. And through our nimble, specialized boutiques, we can move quickly to build outcome-based solutions that fit precisely within their overall portfolios.

In 2017, we introduced more than 50 new funds in Southeast Asia, China, and Latin America, as well as more than a dozen new investment options in the U.S. Globally, our strong investment performance earned a host of “best fund” awards from Bloomberg, Morningstar, Thomson Reuters Lipper, and others.

Consistent with client needs, we take a long-term view. And as active managers, we pay close attention to disruptive trends, such as 5G technology, rich data, driverless cars, and more. Not so much to predict the future. But to understand their potential impact on industries and markets – and how they may separate winners from losers over time.



## 2017 financial highlights

Total assets under management
(in billions)



Total revenue
(in millions)



Net income
available to
common
stockholders \( ^{1} \) 
(in millions)



Total customers \( ^{3} \) 
(in millions)



Non-GAAP operating earnings \( ^{2} \) 
(in millions)



 \( ^{1} $  2017 net income available to common stockholders reflects a 5568 million net benefit from the U.S. Tax Cuts and Jobs Act and a 411 million benefit from a real estate transaction.

 \( ^{2} \)  This is a non-GAAP financial measure. See non-GAAP financial measure reconciliations on page 26.

 \( ^{3} \)  The number of customers to whom we provide a product or service, including employees and their dependents; some duplication occurs.



Non-GAAP
operating
earnings per
diluted
common share \( ^{4} \) 
(in dollars)

Dividends
declared per
common share
(in dollars)

Closing PFG common stock price
(in dollars, as of 12/31)







Total
shareholders'
equity
attributable
to PFG
(in millions)

Non-GAAP
operating earnings
ROE available
to common
stockholders,
excluding AOCI
other than FCTA \( ^{4,5} \) 





 \( ^{4} \)  This is a non-GAAP financial measure. See non-GAAP financial measure reconciliations on page 26.

 \( ^{5} \)  Non-GAAP operating earnings return on equity equals trailing twelve months non-GAAP operating earnings divided by average stockholders' equity available to common stockholders excluding accumulated other comprehensive income (loss) (AOCI) other than foreign currency translation adjustment (FCTA).




Executive
management group

Pictured left to right

Luis Valdés
President
Principal International

Beth Brady
Senior vice president and
chief marketing officer

Deanna Strable
Executive vice president and
chief financial officer

Gary Scholten
Executive vice president,
chief information officer, and
chief digital officer

## Dan Houston

Chairman, president, and chief executive officer

Tim Dunbar
Executive vice president and
chief investment officer

## Nora Everett

President, Retirement and Income Solutions, and chairman of Principal Funds

## Julia Lawler

Senior vice president and
chief risk officer

Amy Friedrich
President
U.S. Insurance Solutions

## Jim McCaughan

President, Global Asset Management, and chief executive officer
Principal Global Investors

## Karen Shaff

Executive vice president,
general counsel, and secretary




Board
of directors

Pictured left to right

Diane C. Nordin
Former partner
Wellington Management
Company, LLP

C. Daniel Gelatt
President
NMT Corporation

Jocelyn Carter-Miller
President
TechEd Ventures

Michael T. Dan
Retired chairman, president,
and chief executive officer
The Brink’s Company

Daniel J. Houston
Chairman, president, and
chief executive officer
Principal Financial Group

Dennis H. Ferro
Retired president and
chief executive officer
Evergreen Investment
Management Company

Elizabeth E. Tallett
Independent Consultant and
Past Principal
Hunter Partners, LLC

Blair C. Pickerell
Retired chairman, Asia
Nikko Asset Management
Hong Kong, Ltd

Betsy J. Bernard
Past president
AT&T

Roger C. Hochschild
President and
chief operating officer
Discover Financial Services

Sandra L. Helton
Past executive vice president
and chief financial officer
Telephone and Data Systems, Inc.

Scott M. Mills
President
BET Networks



## Principal at a glance

## Retirement and Income Solutions

Help more U.S.-based customers save enough for and have enough in retirement – working with third party administrators, advisors, plan sponsors, and individuals.

## Products & services

• Defined contribution retirement plans [including 401(k) and 403(b) plans]

• Defined benefit pension plans

• Employee stock ownership plans

• Nonqualified executive benefit plans

• Annuities

• Pension risk transfer

• Investment only

• Bank and trust services

## 2017 financial highlights

• 2017 pre-tax operating earnings of $900 million, an increase of 13 percent over 2016

• Total account values of $265 billion at year-end, an increase of 15 percent over year-end 2016

• A record $2.8 billion of pension risk transfer sales

• Total net cash flows of $2.7 billion

## Recognition & accomplishments

• PLANADVISER, a leading retirement industry magazine for financial professionals, recognized Principal as a top 10 provider for overall service to micro, small, mid, large, and mega plans, and No. 3 in fee structure for advisors, value added advisor services, and participant educational services. (October 2017)

• Market Strategies International Cogent Reports \( ^{™} \)  Retirement Planscape \( ^{®} \)  survey \( ^{1} \)  asked plan sponsors to rank more than 30 defined contribution plan service providers. Principal earned No.1 rankings in four categories: satisfaction with plan provider, range of investment products, participant website and online capabilities \( ^{2} \) , and in-plan retirement income offering. (May 2017)

## Principal International

Offer long-term savings, asset management, and retirement solutions in select Latin American and Asian emerging markets:

• Brazil

• Chile

• China

• Hong Kong, SAR

• India

• Indonesia

• Malaysia

• Mexico

• Singapore

• Thailand

## Products & services

• Pensions

• Mutual funds

• Asset management

• Shariah-compliant investments

• Retirement advisory services

• Annuities

## Joint venture partners

• Banco do Brasil (Brazil)

• China Construction Bank (China)

• CIMB Group (Southeast Asia)

• Punjab National Bank (India)

Mutual fund/asset management/boutique

• Claritas (Brazil)



## 2017 financial highlights

• 2017 pre-tax operating earnings of $330 million, an increase of 15 percent over 2016

• Reported assets under management of $161 billion at year-end, an increase of 17 percent over year-end 2016; excludes $124 billion of assets under management in our joint venture in China, an increase of 23 percent over year-end 2016

• Reported net cash flows of $6.3 billion; excludes $18.3 billion of net cash flows in our joint venture in China

• Combined pre-tax return on net revenue (at Principal’s share) \( ^{3} \)  of 36 percent

## Recognition & accomplishments

• CCB Principal Asset Management was one of seven fund companies chosen to offer selected mutual funds on the Ant Financial Platform, Alibaba’s online financial portal. (March 2017)

• CPAM (CIMB-Principal Asset Management) Malaysia was named Fund House of the Year – Malaysia – by AsianInvestor (April 2017).

• Principal announced an agreement to acquire full ownership of MetLife AFORE operations, providing better support to our customers in Mexico, additional scale, and a larger distribution network. (October 2017)
• Banco do Brasil and Principal announced an investment agreement to create a digital insurance brokerage firm focused on pension and protection products for the Brazilian market. Pending regulatory approvals, the new firm, Ciclic, will target open market customers with pension products manufactured by Brasilprev. (December 2017)

• Principal and Punjab National Bank announced the signing of a share purchase agreement that enables Principal to assume full ownership for the Principal-PNB joint venture asset management company, pending regulatory approval. (December 2017)

• Cuprum AFP was recognized as one of the top 100 companies with the best reputation in Chile according to Merco. (November 2017)

## Principal Global Investors

Provide investment management capabilities to institutional, retirement, and retail investors through a network of specialized boutique asset managers. More than 500 investment professionals around the world with clients in more than 80 countries.

## Products & services

• Broad range of specialist investment capabilities spanning equities, fixed income, real estate, and alternatives

• Industry leader in delivering customized, multi-asset, and multi-manager solutions to meet specific investor objectives

• Capabilities offered in a wide variety of legal vehicles to address differences in investor preferences and regulatory regimes

• Equities
- Global & all-country
- International (ex-U.S.)
- Emerging markets
- U.S.
- Small-cap
- Geographic and objective
- Tailored solutions
- Blue chip
- Mid-cap

• Fixed income
- High yield
- Emerging market debt
- Preferred securities
- Investment-grade credit
- Opportunistic
- Liability-driven investments/ long duration



## Principal at a glance

## • Real estate

- Private equity (core, value-added, and opportunistic properties)

- Public equity (real estate investment trust securities)

- Private debt (commercial mortgages, bridge, and mezzanine loans)

## • Asset allocation

- Strategic asset allocation

- Dynamic outcome

- Dynamic asset allocation

• Alternatives and structured investment strategies

• Currency management

## 2017 financial highlights

• 2017 pre-tax operating earnings of $470 million, an increase of 6 percent over 2016

• Total assets under management of $431 billion at year-end, an increase of 10 percent over year-end 2016

• Pre-tax return on operating revenues less pass-through commissions \( ^{4} \)  of 37 percent

## Recognition & accomplishments

• For the sixth year in a row, Principal earned a top spot in its category in Pensions & Investments’ annual survey of the Best Places to Work in Money Management. \( ^{5} \) 

• Principal Global Investors received strong scores in environmental, social, and governance (ESG) based on the 2017 Principles for Responsible Investment (PRI) pilot Assessment Report. The score for Overall Approach was an A+ (on a scale of A+ to E) and was well above the median score of A. \( ^{6} \) 

## U.S. Insurance Solutions

Offer business solutions to help employers protect their business and their employees, and to help key employees prepare for retirement through nonqualified bonus and deferred compensation plans.

## Products & services

• Specialty benefits: Employer-paid and voluntary work-site solutions

- Group dental, vision, life, disability, and supplemental insurance, including accident and critical illness

- Individual disability insurance
- Dental discount product

• Individual life insurance: Protection and accumulation products and solutions for individuals and businesses

- Universal, indexed, variable, and term life insurance products for individual and business needs

- Business solutions to help employers protect their business, their employees, and their lifestyles, including nonqualified bonus and deferred compensation plans

## 2017 financial highlights

• 2017 pre-tax operating earnings of $385 million, an increase of 7 percent over 2016

• 9 percent growth in premium and fees in both Specialty Benefits and Individual Life

• Specialty Benefits loss ratio of 63 percent

## Recognition & accomplishments

• Ranked as the No. 3 provider of group benefits (dental, life, disability) insurance based on 2016 LIMRA data on fully insured employer contracts in force. (May 2017)

• Recognized by PLANSPONSOR magazine as the No. 1 provider of nonqualified deferred compensation plans. \( ^{7} \)



## Non-GAAP financial measure reconciliations

Principal Financial Group, Inc.

<table><tr><td rowspan="2"></td><td colspan="5">For the year ended Dec. 31</td></tr><tr><td>2017</td><td>2016</td><td>2015</td><td>2014</td><td>2013</td></tr><tr><td>Net income available to common stockholders</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Net income available to common stockholders</td><td>$ 2,310.4</td><td>$ 1,316.5</td><td>$ 1,209.3</td><td>$ 1,111.1</td><td>$ 879.7</td></tr><tr><td>Net realized capital (gains) losses, as adjusted \( ^{1} \)</td><td>(307.3)</td><td>(37.4)</td><td>133.8</td><td>100.5</td><td>179.1</td></tr><tr><td>Other after-tax adjustments</td><td>(524.5)</td><td>52.0</td><td>(72.6)</td><td>106.3</td><td>1.1</td></tr><tr><td>Non-GAAP operating earnings</td><td>$ 1,478.6</td><td>$ 1,331.1</td><td>$ 1,270.5</td><td>$ 1,317.9</td><td>$1,059.9</td></tr><tr><td colspan="6">$1This is a non-GAAP financial measure. See reconciliation below.</td></tr><tr><td>Net realized capital gains (losses)</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>GAAP net realized capital gains (losses)</td><td>$ 524.2</td><td>$ 171.1</td><td>$ (51.1)</td><td>$ 14.7</td><td>$ (225.2)</td></tr><tr><td>Recognition of front-end fee revenues</td><td>(0.2)</td><td>0.2</td><td>(0.1)</td><td>0.7</td><td>(0.9)</td></tr><tr><td>Market value adjustments to fee revenues</td><td>(0.1)</td><td>(2.5)</td><td>(1.1)</td><td>-</td><td>-</td></tr><tr><td>Net realized capital gains (losses) related to equity method investments</td><td>1.4</td><td>0.1</td><td>-</td><td>-</td><td>-</td></tr><tr><td>Derivative and hedging-related adjustments</td><td>(59.4)</td><td>(94.1)</td><td>(111.7)</td><td>(92.8)</td><td>(93.9)</td></tr><tr><td>Sponsored investment fund adjustments</td><td>6.3</td><td>6.1</td><td>1.3</td><td>-</td><td>-</td></tr><tr><td>Amortization of deferred acquisition costs</td><td>47.4</td><td>(66.2)</td><td>(12.2)</td><td>(37.7)</td><td>32.3</td></tr><tr><td>Capital gains distributed - operating expenses</td><td>(38.9)</td><td>3.7</td><td>15.4</td><td>(10.6)</td><td>(23.6)</td></tr><tr><td>Amortization of other actuarial balances</td><td>7.6</td><td>(11.2)</td><td>(1.8)</td><td>(11.6)</td><td>14.8</td></tr><tr><td>Market value adjustments of embedded derivatives</td><td>48.1</td><td>50.0</td><td>(0.2)</td><td>4.8</td><td>18.4</td></tr><tr><td>Capital gains distributed - cost of interest credited</td><td>(16.1)</td><td>(10.9)</td><td>(9.2)</td><td>(10.6)</td><td>(2.2)</td></tr><tr><td>Net realized capital gains (losses) tax adjustments</td><td>(209.1)</td><td>6.6</td><td>45.6</td><td>43.6</td><td>101.4</td></tr><tr><td>Net realized capital gains (losses) attributable to noncontrolling interest, after-tax</td><td>(3.9)</td><td>(15.5)</td><td>(8.8)</td><td>(1.0)</td><td>(0.2)</td></tr><tr><td>Net realized capital gains (losses) associated with exited group medical insurance business, after-tax</td><td>-</td><td>-</td><td>0.1</td><td>-</td><td>-</td></tr><tr><td>Total net realized capital gains (losses) after-tax adjustments</td><td>(216.9)</td><td>(133.7)</td><td>(82.7)</td><td>(115.2)</td><td>46.1</td></tr><tr><td>Net realized capital gains (losses), as adjusted</td><td>$ 307.3</td><td>$ 37.4</td><td>$ (133.8)</td><td>$ (100.5)</td><td>$ (179.1)</td></tr><tr><td>Diluted earnings per common share</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Net income</td><td>$ 7.88</td><td>$ 4.50</td><td>$ 4.06</td><td>$ 3.65</td><td>$ 2.95</td></tr><tr><td>Net realized capital (gains) losses, as adjusted</td><td>(1.05)</td><td>(0.13)</td><td>0.44</td><td>0.34</td><td>0.60</td></tr><tr><td>Other after-tax adjustments</td><td>(1.79)</td><td>0.18</td><td>(0.24)</td><td>0.36</td><td>-</td></tr><tr><td>Adjustment for redeemable noncontrolling interest</td><td>-</td><td>-</td><td>-</td><td>0.06</td><td>-</td></tr><tr><td>Non-GAAP operating earnings</td><td>$ 5.04</td><td>$ 4.55</td><td>$ 4.26</td><td>$ 4.41</td><td>$ 3.55</td></tr><tr><td>Stockholders&#x27; equity</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Stockholders&#x27; equity</td><td>$12,921.9</td><td>$10,293.8</td><td>$ 9,377.4</td><td>$10,232.0</td><td>$9,777.0</td></tr><tr><td>Noncontrolling interest</td><td>(72.6)</td><td>(66.5)</td><td>(65.8)</td><td>(48.0)</td><td>(92.8)</td></tr><tr><td>Stockholders&#x27; equity attributable to Principal Financial Group, Inc.</td><td>12,849.3</td><td>10,227.3</td><td>9,311.6</td><td>10,184.0</td><td>9,684.2</td></tr><tr><td>Net unrealized capital (gains) losses</td><td>(1,455.1)</td><td>(827.0)</td><td>(715.9)</td><td>(1,148.3)</td><td>(700.6)</td></tr><tr><td>Net unrecognized postretirement benefit obligation</td><td>371.1</td><td>408.4</td><td>450.2</td><td>411.1</td><td>155.9</td></tr><tr><td>Preferred stock, at par</td><td>-</td><td>-</td><td>-</td><td>(0.1)</td><td>(0.1)</td></tr><tr><td>Paid-in capital - preferred stock</td><td>-</td><td>-</td><td>-</td><td>(541.9)</td><td>(541.9)</td></tr><tr><td>Stockholders&#x27; equity, excluding AOCI other than foreign currency translation adjustment, available to common stockholders</td><td>$11,765.3</td><td>$ 9,808.7</td><td>$ 9,045.9</td><td>$ 8,904.8</td><td>$8,597.5</td></tr></table>



## Non-GAAP financial measure reconciliations - continued

Principal Financial Group, Inc.

<table><tr><td rowspan="2"></td><td colspan="5">For the year ended Dec. 31</td></tr><tr><td>2017</td><td>2016</td><td>2015</td><td>2014</td><td>2013</td></tr><tr><td></td><td colspan="5">(in millions, except as indicated)</td></tr><tr><td>Net income ROE available to common stockholders (including AOCI)</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Net income ROE available to common stockholders (including AOCI)</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Net unrealized capital (gains) losses</td><td>20.0%</td><td>13.5%</td><td>12.8%</td><td>11.8%</td><td>9.6%</td></tr><tr><td>Net unrecognized postretirement benefit obligation</td><td>2.1%</td><td>1.1%</td><td>1.3%</td><td>1.2%</td><td>1.2%</td></tr><tr><td>Net income ROE available to common stockholders (x-AOCI other than FCTA)</td><td>21.4%</td><td>14.0%</td><td>13.5%</td><td>12.7%</td><td>10.4%</td></tr><tr><td>Net realized capital (gains) losses</td><td>-2.8%</td><td>-0.5%</td><td>1.5%</td><td>1.2%</td><td>2.1%</td></tr><tr><td>Other after-tax adjustments</td><td>-4.9%</td><td>0.6%</td><td>-0.8%</td><td>1.2%</td><td>0.0%</td></tr><tr><td>Non-GAAP operating earnings ROE (x-AOCI other than FCTA)</td><td>13.7%</td><td>14.1%</td><td>14.2%</td><td>15.1%</td><td>12.5%</td></tr></table>

## Principal funds as of Dec. 31, 2017

Principal Funds, Inc.

Blue Chip Fund
Bond Market Index Fund
California Municipal Fund
Capital Securities Fund
Core Plus Bond Fund
Diversified International Fund
Diversified Real Asset Fund
Dynamic Floating Rate High Income Fund
EDGE MidCap Fund
Equity Income Fund
Finisterre Unconstrained Emerging Markets Bond Fund
Global Diversified Income Fund
Global Multi-Strategy Fund
Global Opportunities Fund
Global Real Estate Securities Fund
Government & High Quality Bond Fund
Government Money Market Fund
High Yield Fund
High Yield Fund I
Income Fund
Inflation Protection Fund
International Emerging Markets Fund
International Equity Index Fund
International Fund I
International Small Company Fund
LargeCap Growth Fund
LargeCap Growth Fund I
LargeCap S&P 500 Index Fund
LargeCap Value Fund
LargeCap Value Fund III
MidCap Fund
MidCap Growth Fund
MidCap Growth Fund III
MidCap S&P 400 Index Fund
MidCap Value Fund I
MidCap Value Fund III
Money Market Fund
Multi-Manager Equity Long/Short Fund

Opportunistic Municipal Fund
Origin Emerging Markets Fund
Overseas Fund
Preferred Securities Fund
Principal Capital Appreciation Fund
Principal LifeTime 2010 Fund
Principal LifeTime 2015 Fund
Principal LifeTime 2020 Fund
Principal LifeTime 2025 Fund
Principal LifeTime 2030 Fund
Principal LifeTime 2035 Fund
Principal LifeTime 2040 Fund
Principal LifeTime 2045 Fund
Principal LifeTime 2050 Fund
Principal LifeTime 2055 Fund
Principal LifeTime 2060 Fund
Principal LifeTime 2065 Fund
Principal LifeTime Strategic Income Fund
Principal LifeTime Hybrid 2015 Fund
Principal LifeTime Hybrid 2020 Fund
Principal LifeTime Hybrid 2025 Fund
Principal LifeTime Hybrid 2030 Fund
Principal LifeTime Hybrid 2035 Fund
Principal LifeTime Hybrid 2040 Fund
Principal LifeTime Hybrid 2045 Fund
Principal LifeTime Hybrid 2050 Fund
Principal LifeTime Hybrid 2055 Fund
Principal LifeTime Hybrid 2060 Fund
Principal LifeTime Hybrid 2065 Fund
Real Estate Allocation Fund
Real Estate Debt Income Fund
Real Estate Securities Fund
SAM Balanced Portfolio
SAM Conservative Balance Portfolio
SAM Conservative Growth Portfolio
SAM Flexible Income Portfolio
SAM Strategic Growth Portfolio
Short-Term Income Fund
SmallCap Fund
SmallCap Growth Fund I
SmallCap S&P 600 Index Fund

SmallCap Value Fund II
Small-MidCap Dividend Income Fund
SystematEx International Fund
SystematEx Large Value Fund
Tax-Exempt Bond Fund

## Principal Exchange-Traded Funds

Principal Active Global Dividend Income ETF
Principal Contrarian Value Index ETF
Principal EDGE Active Income ETF
Principal Healthcare Innovators Index ETF
Principal International Multi-Factor Index ETF
Principal Millennials Index ETF
Principal Price Setters Index ETF
Principal Shareholder Yield Index ETF
Principal Spectrum Preferred Securities Active ETF
Principal Sustainable Momentum Index ETF
Principal U.S. Mega-Cap Multi-Factor Index ETF
Principal U.S. Small-Cap Multi-Factor Index ETF

## Principal Variable Contracts Funds, Inc.

The Principal Variable Contracts Fund investment options are available in certain variable annuity and variable life insurance contracts.

Mutual funds and variable contracts are distributed by Principal Funds Distributor, Inc., a member of Principal Financial Group, Des Moines, Iowa, 50392-0200. Phone 1-800-222-5852.



Principal Financial Group, Inc.

Corporate Headquarters
711 High Street
Des Moines, Iowa 50392
1-800-986-3343

## Principal.com website

Principal.com is your source for a vast array of information including company news releases, investment, and savings tools, and details about our product and service solutions.

The Investor Relations portion of the site provides up-to-the-minute information for shareholders and the investment community, including access to Securities and Exchange Commission filings, stock information, overview of corporate responsibility, dividend history, and credit ratings. It also includes information of interest on the governance of Principal Financial Group, Inc., including:

• Board of directors

• Corporate governance guidelines

• Board committee charters

• Director independence standards

• Global code of business conduct and ethics

## Annual Meeting

The Annual Meeting of Shareholders will convene at 9 a.m. CT on Tuesday, May 22, 2018, at the corporate headquarters of Principal Financial Group, Inc.
711 High Street
Des Moines, Iowa 50392

## Contact Investor Relations

If you have a question for Investor Relations, please contact:

Principal Financial Group – Investor Relations
711 High Street
Des Moines, Iowa 50392
Phone: 1-800-986-3343
Email: investor-relations@principal.com

## Transfer Agent

Principal Financial Group, Inc. shareholder inquiries should be addressed to our transfer agent, Computershare. Computershare can assist shareholders with a variety of services, including: signing up for the direct deposit of dividends, dividend reinvestment, address changes, certificate issuance, account statements, balance inquiries, dividend inquiries, and selling of shares. You can call or write to the transfer agent at:

Principal Financial Group, Inc.
c/o Computershare
P.O. Box 505000
Louisville, KY 40233

Toll-free phone: 866-781-1368
Phone for hearing impaired: 312-588-4110
Online: computershare.com/contactus

Registered shareholders can also access information about their Principal Financial Group, Inc. common stock accounts online at computershare.com/investor. Principal does not maintain or provide information directly to this site, makes no representations or warranties with respect to the information contained therein and takes no responsibility for supplementing, correcting, or updating any such information.

## A Special Thanks

A special thanks to our 280,000 registered shareholders, who have owned Principal Financial Group, Inc. common stock since our initial public offering.

Top 15 holders of Principal Financial Group, Inc. common stock, as of Dec. 31, 2017

• The Vanguard Group, Inc.

• Nissay Asset Management Corporation

• Capital Research Global Investors (U.S.)

• BlackRock Fund Advisors

• State Street Global Advisors (SSgA)

• Wellington Management Company, LLP

• Northern Trust Investments, Inc.

• Newton Investment Management, LTD

• Dimensional Fund Advisors, L.P. (U.S.)

• Geode Capital Management, LLC

• Mellon Capital Management Corporation

• Fidelity Management & Research Company

• Mairs & Power, Inc.

• BlackRock Investment Management (U.K.), LTD

• BlackRock Advisors, LLC




Principal Financial Group \( ^{®} $ 
711 High Street
Des Moines, Iowa 50392

principal.com



## Forward looking and cautionary statements

Certain statements made by the company which are not historical facts may be considered forward-looking statements, including, without limitation, statements as to operating earnings, net income available to common stockholders, net cash flows, realized and unrealized gains and losses, capital and liquidity positions, sales and earnings trends, and management's beliefs, expectations, goals and opinions. The company does not undertake to update these statements, which are based on a number of assumptions concerning future conditions that may ultimately prove to be inaccurate. Future events and their effects on the company may not be those anticipated, and actual results may differ materially from the results anticipated in these forward-looking statements. The risks, uncertainties and factors that could cause or contribute to such material differences are discussed in the company's annual report on Form 10-K for the year ended Dec. 31, 2017, filed by the company with the U.S. Securities and Exchange Commission, as updated or supplemented from time to time in subsequent filings. These risks and uncertainties include, without limitation: adverse capital and credit market conditions may significantly affect the company's ability to meet liquidity needs, access to capital and cost of capital; conditions in the global capital markets and the economy generally; volatility or declines in the equity, bond or real estate markets; changes in interest rates or credit spreads or a sustained low interest rate environment; the company's investment portfolio is subject to several risks that may diminish the value of its invested assets and the investment returns credited to customers; the company's valuation of investments and the determination of the amount of allowances and impairments taken on such investments may include methodologies, estimations and assumptions that are subject to differing interpretations; any impairments of or valuation allowances against the company's deferred tax assets; the company's actual experience could differ significantly from its pricing and reserving assumptions; the pattern of amortizing the company's DAC and other actuarial balances on its universal life-type insurance contracts, participating life insurance policies and certain investment contracts may change; the company may not be able to protect its intellectual property and may be subject to infringement claims; the company's ability to pay stockholder dividends and meet its obligations may be constrained by the limitations on dividends or distributions Iowa insurance laws impose on Principal Life; changes in laws, regulations or accounting standards; results of litigation and regulatory investigations; from time to time the company may become subject to tax audits, tax litigation or similar proceedings, and as a result it may owe additional taxes, interest and penalties in amounts that may be material; applicable laws and the company's certificate of incorporation and by-laws may discourage takeovers and business combinations that some stockholders might consider in their best interests; competition from companies that may have greater financial resources, broader arrays of products, higher ratings and stronger financial performance; a downgrade in the company's financial strength or credit ratings; changes in investor preferences; inability to attract and retain qualified employees and sales representatives and develop new distribution sources; international business risks; fluctuations in foreign currency exchange rates; the company may need to fund deficiencies in its "Closed Block" assets that support participating ordinary life insurance policies that had a dividend scale in force at the time of Principal Life's 1998 conversion into a stock life insurance company; the company's reinsurers could default on their obligations or increase their rates; risks arising from acquisitions of businesses; and a computer system failure or security breach could disrupt the company's business and damage its reputation.