PRINCIPAL FINANCIAL GROUP INC - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

__________________

FORM 10-Q
__________________

|X|QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2003

OR

|_|TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

__________________

Commission file number 1-16725

PRINCIPAL FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)

Delaware 42-1520346
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

__________________

711 High Street, Des Moines, Iowa 50392
(Address of principal executive offices)
(515) 247-5111
(Registrant's telephone number, including area code)

__________________

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_|

The total number of shares of the registrant's Common Stock, $0.01 par value,
outstanding as of May 1, 2003 was 327,302,908.

PRINCIPAL FINANCIAL GROUP, INC.
TABLE OF CONTENTS

Page
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Position at March 31, 2003
(Unaudited)and December 31, 2002..................................3
Unaudited Consolidated Statements of Operations for the three
months ended March 31, 2003 and 2002..............................4
Unaudited Consolidated Statements of Stockholders' Equity for the
three months ended March 31, 2003 and 2002........................5
Unaudited Consolidated Statements of Cash Flows for the three
months ended March 31, 2003 and 2002..............................6
Notes to Unaudited Consolidated Financial Statements - March 31,
2003..............................................................8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................16
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......49
Item 4. Controls and Procedures..........................................56

Part II - OTHER INFORMATION
Item 1. Legal Proceedings................................................57
Item 6. Exhibits and Reports on Form 8-K.................................58
Signature and Certifications.............................................59

2

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PRINCIPAL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

MARCH 31, DECEMBER 31,
2003 2002
------------------ ------------------
(Unaudited) (Note 1)
(IN MILLIONS,
EXCEPT PER SHARE DATA)

ASSETS
Fixed maturities, available-for-sale....................................... $35,690.4 $34,185.7
Fixed maturities, trading.................................................. 101.1 101.7
Equity securities, available-for-sale...................................... 388.4 378.7
Mortgage loans............................................................. 11,236.0 11,081.9
Real estate................................................................ 1,329.1 1,229.0
Policy loans............................................................... 810.9 818.5
Other investments.......................................................... 1,083.7 1,200.1
------------------ ------------------
Total investments....................................................... 50,639.6 48,995.6

Cash and cash equivalents.................................................. 966.9 1,038.6
Accrued investment income.................................................. 620.3 646.3
Premiums due and other receivables......................................... 543.7 459.7
Deferred policy acquisition costs.......................................... 1,400.4 1,414.4
Property and equipment..................................................... 470.5 482.5
Goodwill................................................................... 121.7 106.5
Other intangibles.......................................................... 110.9 88.8
Mortgage loan servicing rights............................................. 1,606.8 1,518.6
Separate account assets.................................................... 33,906.7 33,501.4
Other assets............................................................... 1,453.0 1,608.9
------------------ ------------------
Total assets............................................................ $91,840.5 $89,861.3
================== ==================
LIABILITIES
Contractholder funds....................................................... $27,366.8 $26,315.0
Future policy benefits and claims.......................................... 14,838.6 14,736.4
Other policyholder funds................................................... 671.1 642.9
Short-term debt............................................................ 758.6 564.8
Long-term debt............................................................. 1,335.6 1,332.5
Deferred income taxes...................................................... 1,390.7 1,177.7
Separate account liabilities............................................... 33,906.7 33,501.4
Other liabilities.......................................................... 4,735.6 4,933.4
------------------ ------------------
Total liabilities....................................................... 85,003.7 83,204.1

STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share - 2,500.0 million shares authorized,
376.8 million and 376.7 million shares issued, and 328.0 million and
334.4 million shares outstanding in 2003 and 2002, respectively......... 3.8 3.8
Additional paid-in capital................................................. 7,108.6 7,106.3
Retained earnings.......................................................... 185.1 29.4
Accumulated other comprehensive income..................................... 841.5 635.8
Treasury stock, at cost (48.8 million and 42.3 million shares in 2003 and
2002, respectively)..................................................... (1,302.2) (1,118.1)
------------------ ------------------
Total stockholders' equity.............................................. 6,836.8 6,657.2
------------------ ------------------
Total liabilities and stockholders' equity.............................. $91,840.5 $89,861.3
================== ==================

SEE ACCOMPANYING NOTES.

3

PRINCIPAL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

FOR THE THREE MONTHS ENDED
MARCH 31,
---------------------------------
2003 2002
----------------- ---------------
(IN MILLIONS, EXCEPT PER SHARE
DATA)

REVENUES
Premiums and other considerations...................... $ 905.5 $ 885.7
Fees and other revenues................................ 632.0 432.9
Net investment income.................................. 836.0 811.1
Net realized/unrealized capital gains (losses)......... (76.7) 98.1
----------------- ---------------
Total revenues....................................... 2,296.8 2,227.8

EXPENSES
Benefits, claims and settlement expenses............... 1,195.2 1,203.2
Dividends to policyholders............................. 80.1 82.4
Operating expenses..................................... 799.3 592.2
----------------- ---------------
Total expenses....................................... 2,074.6 1,877.8
----------------- ---------------

Income from continuing operations before
income taxes......................................... 222.2 350.0

Income taxes........................................... 65.8 106.3
----------------- ---------------
Income from continuing operations, net of related 156.4 243.7
income taxes.........................................

Income (loss) from discontinued operations, net of
related income taxes................................. (0.7) 2.3
----------------- ---------------
Income before cumulative effect of accounting change... 155.7 246.0

Cumulative effect of accounting change, net of related
income taxes......................................... - (280.9)
----------------- ---------------
Net income (loss)...................................... $ 155.7 $ (34.9)
================= ===============

FOR THE THREE MONTHS ENDED
MARCH 31,
---------------------------------
2003 2002
----------------- ---------------

EARNINGS PER COMMON SHARE
Basic and diluted earnings per common share:
Income from continuing operations, net of related
income taxes....................................... $0.47 $0.68
Income (loss) from discontinued operations, net of
related income taxes............................... - -
----------------- ---------------
Income before cumulative effect of accounting change. 0.47 0.68
Cumulative effect of accounting change, net of
related income taxes............................... - (0.78)
----------------- ---------------
Net income (loss).................................... $0.47 $(0.10)
================= ===============

SEE ACCOMPANYING NOTES.

4

PRINCIPAL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)

ACCUMULATED
ADDITIONAL RETAINED OTHER TOTAL
COMMON PAID-IN EARNINGS COMPREHENSIVE TREASURY STOCKHOLDERS' OUTSTANDING
STOCK CAPITAL (DEFICIT) INCOME (LOSS) STOCK EQUITY SHARES
---------- ---------- ---------- --------------- ---------- ------------- --------------
(IN MILLIONS) (IN THOUSANDS)

BALANCES AT JANUARY 1, 2002..... $3.8 $7,072.5 $ (29.1) $147.5 $ (374.4) $6,820.3 360,142.2
Shares issued, net of put
options....................... - 9.7 - - - 9.7 320.4
Treasury stock acquired and
sold, net..................... - 1.3 - - (23.3) (22.0) (801.4)
Comprehensive loss:
Net loss...................... - - (34.9) - - (34.9)
Net unrealized losses......... - - - (288.9) - (288.9)
Provision for deferred
income tax benefit.......... - - - 102.3 - 102.3
Foreign currency
translation adjustment...... - - - 11.5 - 11.5
-------------
Comprehensive loss.............. (210.0)
---------- ---------- ---------- --------------- ---------- ------------- --------------
BALANCES AT MARCH 31, 2002...... $3.8 $7,083.5 $ (64.0) $(27.6) $ (397.7) $6,598.0 359,661.2
========== ========== ========== =============== ========== ============= ==============

BALANCES AT JANUARY 1, 2003..... $3.8 $7,106.3 $ 29.4 $635.8 $(1,118.1) $6,657.2 334,419.3
Shares issued, net of call
options....................... - (3.0) - - - (3.0) 156.8
Stock-based compensation........ - 5.3 - - 5.3
Treasury stock acquired......... - - - - (184.1) (184.1) (6,533.0)
Comprehensive income:
Net income.................... - - 155.7 - - 155.7
Net unrealized gains.......... - - - 331.9 - 331.9
Provision for deferred
income taxes................ - - - (117.0) - (117.0)
Foreign currency
translation adjustment...... - - - (9.2) - (9.2)
-------------
Comprehensive income............ 361.4
---------- ---------- ---------- --------------- ---------- ------------- --------------
BALANCES AT MARCH 31, 2003...... $3.8 $7,108.6 $ 185.1 $841.5 $(1,302.2) $6,836.8 328,043.1
========== ========== ========== =============== ========== ============= ==============

SEE ACCOMPANYING NOTES.

5

PRINCIPAL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

FOR THE THREE MONTHS ENDED
MARCH 31,
---------------------------------
2003 2002
----------------- ----------------
(IN MILLIONS)

OPERATING ACTIVITIES
Net income (loss)..................................... $ 155.7 $ (34.9)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Loss (income) from discontinued operations, net
of related income taxes............................ 0.7 (2.3)
Cumulative effect of accounting change,
net of related income taxes....................... - 280.9
Amortization of deferred policy acquisition
costs.............................................. 51.4 23.0
Additions to deferred policy acquisition costs...... (85.8) (81.9)
Accrued investment income........................... 26.0 10.0
Premiums due and other receivables.................. 30.9 51.2
Contractholder and policyholder liabilities
and dividends..................................... 481.2 349.6
Current and deferred income taxes................... 63.3 100.8
Net realized/unrealized capital (gains) losses...... 76.7 (98.1)
Depreciation and amortization expense............... 24.6 25.0
Amortization of mortgage servicing rights........... 111.2 67.9
Stock-based compensation............................ 3.5 -
Mortgage servicing rights valuation adjustments..... 159.3 1.4
Other............................................... (142.9) (198.1)
----------------- ----------------
Net adjustments....................................... 800.1 529.4
----------------- ----------------
Net cash provided by operating activities............. 955.8 494.5

INVESTING ACTIVITIES
Available-for-sale securities:
Purchases........................................... (2,911.7) (3,841.2)
Sales............................................... 690.6 1,627.4
Maturities.......................................... 1,065.9 1,140.1
Net cash flows from trading securities................ - (14.1)
Mortgage loans acquired or originated................. (16,253.6) (10,615.0)
Mortgage loans sold or repaid......................... 16,191.3 10,777.0
Purchase of mortgage servicing rights................. (310.6) (252.7)
Proceeds from sale of mortgage servicing rights....... 0.5 1.6
Real estate acquired.................................. (98.9) (108.5)
Real estate sold...................................... 25.6 25.2
Net change in property and equipment.................. (3.1) (14.1)
Net proceeds from sales of subsidiaries............... 2.1 -
Purchases of interest in subsidiaries, net of cash
acquired............................................ (60.3) -
Net change in other investments....................... 0.5 370.1
----------------- ----------------
Net cash used in investing activities................. $ (1,661.7) $ (904.2)

6

PRINCIPAL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)

FOR THE THREE MONTHS ENDED
MARCH 31,
----------------------------------
2003 2002
----------------- ----------------
(IN MILLIONS)

FINANCING ACTIVITIES
Issuance of common stock, net of call and put
options............................................ $ (3.0) $ 11.0
Acquisition and sales of treasury stock, net......... (184.1) (23.3)
Issuance of long-term debt........................... 7.5 7.9
Principal repayments of long-term debt............... (4.4) (42.8)
Net proceeds of short-term borrowings................ 192.8 181.6
Investment contract deposits......................... 2,937.8 1,913.2
Investment contract withdrawals...................... (2,312.4) (1,710.1)
----------------- ----------------
Net cash provided by financing activities............ 634.2 337.5
----------------- ----------------
Net decrease in cash and cash equivalents............ (71.7) (72.2)
Cash and cash equivalents at beginning of period..... 1,038.6 561.2
----------------- ----------------
Cash and cash equivalents at end of period........... $ 966.9 $ 489.0
================= ================

SEE ACCOMPANYING NOTES.

7

PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)

1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of Principal
Financial Group, Inc. and its majority-owned subsidiaries have been prepared in
conformity with accounting principles generally accepted in the U.S. ("U.S.
GAAP") for interim financial statements and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. 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 three months ended
March 31, 2003, are not necessarily indicative of the results that may be
expected for the year ended December 31, 2003. These interim unaudited
consolidated financial statements should be read in conjunction with our annual
audited financial statements as of December 31, 2002, included in our Form 10-K
for the year ended December 31, 2002, filed with the United States Securities
and Exchange Commission. The accompanying consolidated statement of financial
position at December 31, 2002, has been derived from the audited consolidated
statement of financial position but does not include all of the information and
footnotes required by U.S. GAAP for complete financial statements.

Reclassifications have been made to the December 31, 2002 and March 31, 2002,
financial statements to conform to the March 31, 2003, presentation.

SEPARATE ACCOUNTS

At March 31, 2003, the separate accounts included a separate account valued at
$838.0 million, which primarily includes shares of our stock that were allocated
and issued to eligible participants of qualified employee benefit plans
administered by us as part of the policy credits issued under the
demutualization. These shares are included in both basic and diluted earnings
per share calculations. The separate account shares are recorded at fair value
and are reported as separate account assets and separate account liabilities in
the consolidated statement of financial position. Activity of the separate
account shares is reflected in both the separate account assets and separate
account liabilities and does not impact our results of operations.

STOCK-BASED COMPENSATION

At March 31, 2003, we have four stock-based compensation plans. We applied the
fair value method to all stock-based awards granted subsequent to January 1,
2002. For stock-based awards granted prior to this date, we used the intrinsic
value method.

8

PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2003
(UNAUDITED)

1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Awards under our plans vest over periods ranging from three months to three
years. Therefore, the cost related to stock-based compensation included in the
determination of net income for the three months ended March 31, 2003, is less
than that which would have been recognized if the fair value based method had
been applied to all awards since the inception of our stock-based compensation
plans. Had compensation expense for our stock option awards and employees'
purchase rights been determined based upon fair values at the grant dates for
awards under the plans in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, our net
income and earnings per share would have been reduced to the pro forma amounts
indicated below. For the purposes of pro forma disclosures, the estimated fair
value of the options is amortized to expense over the options' vesting period.

FOR THE THREE MONTHS ENDED
MARCH 31,
----------------------------------
2003 2002
----------------- ----------------
(IN MILLIONS, EXCEPT PER SHARE
DATA)

Net income (loss), as reported.................................. $155.7 $(34.9)
Add: Stock-based compensation expense included in reported
net income, net of related tax effects........................ 3.0 2.3
Deduct: Total stock-based compensation expense determined
under fair value based method for all awards, net of
related tax effects........................................... 3.9 3.9
----------------- ----------------
Pro forma net income (loss)..................................... $154.8 $(36.5)
================= ================
Basic and diluted earnings per share:
As reported................................................... $ 0.47 $ (0.10)
Pro forma..................................................... 0.47 (0.10)

2. FEDERAL INCOME TAXES

The effective income tax rate on net income for the three months ended March 31,
2003 and 2002, is lower than the prevailing corporate federal income tax rate
primarily due to income tax deductions allowed for corporate dividends received
and interest exclusion from taxable income, partially offset by state income
taxes.

9

PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2003
(UNAUDITED)
3. COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) is as follows:

FOR THE THREE MONTHS ENDED
MARCH 31,
-------------------------------
2003 2002
-------------- --------------
(IN MILLIONS)

COMPREHENSIVE INCOME (LOSS):
Net income (loss)................................................ $ 155.7 $ (34.9)
Net change in unrealized gains and losses on fixed maturities,
available-for-sale............................................. 406.8 (359.6)
Net change in unrealized gains and losses on equity securities,
available-for-sale, including seed money in separate accounts.. (5.1) 19.4
Adjustments for assumed changes in amortization patterns:
Deferred policy acquisition costs.............................. (48.1) 41.5
Unearned revenue reserves...................................... 2.1 (2.8)
Net change in unrealized gains and losses on derivative
instruments.................................................... 14.4 12.6
Adjustments to unrealized gains for Closed Block policyholder
dividend obligation............................................ (38.2) -
Provision for deferred income tax benefit (expense).............. (117.0) 102.3
Change in net foreign currency translation adjustment............ (9.2) 11.5
-------------- --------------
Comprehensive income (loss)...................................... $ 361.4 $ (210.0)
============== ==============

4. CONTINGENCIES, GUARANTEES AND INDEMNIFICATIONS

LITIGATION

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 asset management and
accumulation products and services, life, health and disability insurance, and
mortgage banking. Some of the lawsuits are class actions, or purport to be, and
some include claims for punitive damages. In addition, 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.

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 of Principal Mutual Holding Company from a mutual insurance
holding company into a stock company violates the United States Constitution.
The action is captioned ESTHER L. GAYMAN V. PRINCIPAL MUTUAL HOLDING COMPANY, ET
AL. On April 16, 2002, the Court granted our Motion to Dismiss and ordered the
lawsuit be dismissed in its entirety. On April 17, 2002, a Judgment was entered
to that effect. The Plaintiffs filed an appeal on May 15, 2002, with the 7th
Circuit Court of Appeals. On November 22, 2002, the 7th Circuit Court of Appeals
affirmed the District Court's decision. The Plaintiffs filed a Petition for a
Writ of Certiorari on April 21, 2003, requesting the United States Supreme Court
to review the decision of the 7th Circuit Court of Appeals.

10

PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2003
(UNAUDITED)

4. CONTINGENCIES, GUARANTEES AND INDEMNIFICATIONS (CONTINUED)

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 our business, financial position or results of operations. The
outcome of litigation is always uncertain, and unforeseen results can occur. It
is possible that such outcomes could materially affect our results of operations
in a particular quarter or annual period.

GUARANTEES AND INDEMNIFICATIONS

In the normal course of business, we have provided guarantees to third parties
primarily related to a former subsidiary, joint ventures and industrial revenue
bonds. These agreements generally expire from 2003 through 2019. The estimated
maximum exposure under these agreements as of March 31, 2003, was $183.0
million; however, we believe the likelihood is remote that material payments
will be required and therefore have not accrued for a liability on our
consolidated statements of financial position. Should we be required to perform
under these guarantees, we generally could recover a portion of the loss from
third parties through recourse provisions included in agreements with such
parties, the sale of assets held as collateral that can be liquidated in the
event that performance is required under the guarantees or other recourse
generally available to us, minimizing the impact to our results of operations.

In connection with the 2002 sale of BT Financial Group, we agreed to indemnify
the purchaser, Westpac Banking Corporation ("Westpac") for, among other things,
the costs associated with potential late filings made by BT Financial Group in
New Zealand prior to Westpac's ownership, up to a maximum of A$250 million
Australian dollars (approximately U.S. $150 million). New Zealand securities
regulations allow Australian issuers to issue their securities in New Zealand
provided that certain documents are appropriately filed with the New Zealand
Registrar of Companies. Specifically, the regulations require that any
amendments to constitutions and compliance plans be filed in New Zealand. In
April 2003, the New Zealand Securities Commission ("the Commission") opined that
such late filings would result in certain New Zealand investors having a right
to return of their investment plus interest at 10% per annum from the date of
investment. Consequently, the Commission has advised that it has initiated an
inquiry into the matter, both with regard to BT Financial Group and other
similar issuers. We view these potential late filings as a technical matter as
we believe investors received the information that is required to be provided
directly to them. In addition, we believe this technical issue may affect many
in the industry and result in a favorable legislative or judicial solution.
Finally, we are reviewing the applicability of the indemnification regarding
this matter. Although we cannot predict the outcome of this matter or reasonably
estimate losses, we do not believe that it would result in a material adverse
effect on our business or financial position. It is possible, however, that it
could have a material adverse effect on our results of operations in a
particular quarter or annual period.

In the normal course of business, we are subject to indemnification obligations
related to the sale of residential mortgage loans. Under these indemnifications,
we are required to repurchase certain mortgage loans that fail to meet the
standard representations and warranties included in the sales contracts. The
amount of our exposure is based on the potential loss that may be incurred if
the repurchased mortgage loans are processed through the foreclosure process.
Based on historical experience, total mortgage loans repurchased pursuant to
these indemnification obligations are estimated to be approximately 0.04% of
annual mortgage loan production levels. Total losses on the mortgage loans
repurchased are estimated to approximate 25% of the unpaid principal balance of
the related mortgage loans. As of March 31, 2003, $1.6 million has been accrued
for representing the fair value of such indemnifications issued after January 1,
2003, in accordance with Financial Accounting Standards Board Interpretation
Number 45, GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES,
INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS.

11

PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2003
(UNAUDITED)

4. CONTINGENCIES, GUARANTEES AND INDEMNIFICATIONS (CONTINUED)

We are also subject to various other indemnification obligations issued in
conjunction with certain transactions, primarily the sale of BT Financial Group
and other divestitures, the sale of servicing rights in our mortgage banking
business, acquisitions, and financing transactions whose terms range in duration
and often are not explicitly defined. Certain portions of these indemnifications
may be capped, while other portions are not subject to such limitations.
Generally, a maximum obligation is not explicitly stated; therefore, the overall
maximum amount of the obligation under the indemnifications cannot be reasonably
estimated. While we are unable to estimate with certainty the ultimate legal and
financial liability with respect to these indemnifications, we believe the
likelihood is remote that material payments would be required under such
indemnifications and therefore such indemnifications would not result in a
material adverse effect on our business, financial position or results of
operations.

5. SEGMENT INFORMATION

We provide 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 our asset
accumulation business, the life and health insurance operations and third-party
clients.

The International Asset Management and Accumulation segment offers retirement
products and services, annuities, long-term mutual funds and life insurance
through subsidiaries in Argentina, Chile, Mexico and Hong Kong and joint
ventures in Brazil, Japan, India and Malaysia. Prior to October 31, 2002, the
operating segment included BT Financial Group, an Australia based asset manager.
We sold substantially all of BT Financial Group, effective October 31, 2002. As
a result, the results of operations (excluding corporate overhead) for BT
Financial Group are reported as other after-tax adjustments for all periods
presented.

The Life and Health insurance segment provides individual and group life
insurance, group health insurance and individual and group disability insurance
throughout the U.S.

The Mortgage Banking segment originates and services residential mortgage loan
products for customers in the U.S.

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 our financing activities, income on capital not
allocated to other segments, intersegment eliminations and certain income,
expenses and other after-tax adjustments not allocated to the segments based on
review of the nature of such items.

12

PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2003
(UNAUDITED)

5. SEGMENT INFORMATION (CONTINUED)

We evaluate segment performance on segment operating earnings, which is
determined by adjusting U.S. GAAP net income for net realized/unrealized capital
gains and losses, as adjusted, and other after-tax adjustments which management
believes are not indicative of overall operating trends. Net realized/unrealized
capital gains and losses, as adjusted, are net of income taxes, 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, net
realized capital gains and losses distributed, minority interest capital gains
and certain market value adjustments to fee revenues. Segment operating revenues
exclude net realized/unrealized capital gains and their impact on recognition of
front-end fee revenues and certain market value adjustments to fee revenues.
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 our results of
operations by highlighting earnings attributable to the normal, ongoing
operations of the business. However, segment operating earnings are not a
substitute for net income determined in accordance with U.S. GAAP.

For the three months ended March 31, 2003, other after-tax adjustments of ($0.7)
million included the negative effects of a change in the estimated loss on
disposal of BT Financial Group.

For the three months ended March 31, 2002, other after-tax adjustments of
($280.6) million included the negative effects of: (1) a cumulative effect of
accounting change related to the implementation of SFAS 142, GOODWILL AND OTHER
INTANGIBLE ASSETS, ($280.9 million) and (2) expenses related to the
demutualization ($2.0 million); and the positive effect of the income from
discontinued operations of BT Financial Group ($2.3 million).

The accounting policies of the segments are consistent with the accounting
policies for the consolidated financial statements, with the exception of
capital allocation. We allocate capital to our segments based upon an internal
capital model that allows management to more effectively manage our capital.

13

PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2003
(UNAUDITED)

5. SEGMENT INFORMATION (CONTINUED)

The following tables summarize selected financial information on a continuing
basis by segment and reconcile segment totals to those reported in the
consolidated financial statements:

FOR THE THREE MONTHS ENDED MARCH 31,
-------------------------------------
2003 2002
----------------- ---------------
(IN MILLIONS)

OPERATING REVENUES BY SEGMENT:
U.S. Asset Management and Accumulation.................... $ 886.0 $ 862.1
International Asset Management and Accumulation........... 76.8 75.9
Life and Health Insurance................................. 1,012.3 978.5
Mortgage Banking.......................................... 404.5 208.7
Corporate and Other....................................... (0.7) 10.5
---------------- ---------------
Total segment operating revenues........................ 2,378.9 2,135.7
Net realized/unrealized capital gains (losses), including
recognition of front-end fee revenues and certain market
value adjustments to fee revenues....................... (82.1) 92.1
----------------- ---------------
Total revenue per consolidated statements of operations. $ 2,296.8 $ 2,227.8
================= ===============
REVENUES FROM EXTERNAL CUSTOMERS:
U.S. Asset Management and Accumulation.................... $ 821.8 $ 768.3
International Asset Management and Accumulation........... 71.2 83.2
Life and Health Insurance................................. 998.5 963.2
Mortgage Banking.......................................... 402.2 208.7
Corporate and Other....................................... 3.1 204.4
----------------- ---------------
Total external revenues................................. $ 2,296.8 $ 2,227.8
================= ===============
INTERSEGMENT REVENUES:
U.S. Asset Management and Accumulation.................... $ 13.3 $ 14.6
International Asset Management and Accumulation........... - -
Life and Health Insurance................................. (1.3) (1.5)
Mortgage Banking.......................................... 2.3 -
Corporate and Other....................................... (14.3) (13.1)
----------------- ---------------
Total................................................... $ - $ -
================= ===============
OPERATING EARNINGS (LOSS) BY SEGMENT:
U.S. Asset Management and Accumulation ................... $ 97.5 $ 100.2
International Asset Management and Accumulation........... 6.6 1.2
Life and Health Insurance................................. 59.1 54.3
Mortgage Banking.......................................... 52.3 26.5
Corporate and Other ...................................... (5.0) 0.3
----------------- ---------------
Total segment operating earnings...................... 210.5 182.5
Net realized/unrealized capital gains (losses), as (54.1) 63.2
adjusted................................................
Other after-tax adjustments............................... (0.7) (280.6)
----------------- ---------------
Net income (loss) per consolidated statements of
operations............................................ $ 155.7 $ (34.9)
================= ===============

14

PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2003
(UNAUDITED)

6. EARNINGS PER SHARE

Reconciliations of weighted-average shares outstanding and income from
continuing operations for basic and diluted earnings per share are presented
below:

FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED
MARCH 31, 2003 MARCH 31, 2002
---------------------------------------- ----------------------------------------
WEIGHTED- WEIGHTED-
AVERAGE PER SHARE AVERAGE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
----------- ------------- ------------- ------------ -------------- ------------
(IN MILLIONS) (IN MILLIONS)

Basic earnings per share:
Income from continuing
operations................ $156.4 331.4 $0.47 $243.7 360.4 $0.68
Dilutive effects:
Stock options............. 0.3 0.3
Restricted stock
units (1)............... - -
Put options (1)........... - -
----------- ------------- ------------- ------------ -------------- ------------
Diluted earnings per share.. $156.4 331.7 $0.47 $243.7 360.7 $0.68
=========== ============= ============= ============ ============== ============

- -----------------
(1) The dilutive effect was less than 0.1 million shares.

The calculation of diluted earnings per share for the three months ended March
31, 2003 excludes the incremental effect related to call options to purchase our
stock and certain outstanding stock-based compensation grants due to their
anti-dilutive effect.

The calculation of diluted earnings per share for the three months ended March
31, 2002, excludes the incremental effect related to a put option contract. This
contract's strike price was lower than the average market price of our stock
during the period the contract was outstanding, resulting in an anti-dilutive
effect.

15

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following analysis discusses our financial condition as of March 31, 2003,
compared with December 31, 2002, and our consolidated results of operations for
the three months ended March 31, 2003 and 2002, prepared in conformity with
accounting principles generally accepted in the U.S. ("U.S. GAAP"). The
discussion and analysis includes, where appropriate, factors that may affect our
future financial performance. The discussion should be read in conjunction with
our Form 10-K, for the year ended December 31, 2002, filed with the United
States Securities and Exchange Commission and the unaudited consolidated
financial statements and the related notes to the financial statements and the
other financial information included elsewhere in this Form 10-Q.

FORWARD-LOOKING INFORMATION

Our narrative analysis below contains forward-looking statements 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
"anticipate," "believe," "plan," "estimate," "expect," "intend," and similar
expressions. Forward-looking statements are made based upon management's current
expectations and beliefs concerning future developments and their potential
effects on us. Such forward-looking statements are not guarantees of future
performance.

Actual results may differ materially from those included in the forward-looking
statements as a result of risks and uncertainties including, but not limited to
the following: (1) 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; (2) 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; (3)
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; (4) a downgrade in Principal Life Insurance Company's ("Principal
Life") financial strength ratings may increase policy surrenders and
withdrawals, reduce new sales and terminate relationships with distributors and
cause some of our existing liabilities to be subject to acceleration, additional
collateral support, changes in terms, or creation of additional financial
obligations; (5) our efforts to reduce the impact of interest rate changes on
our profitability and surplus may not be effective; (6) if we are unable to
attract and retain sales representatives and develop new distribution sources,
sales of our products and services may be reduced; (7) our international
businesses face political, legal, operational and other risks that could reduce
our profitability in those businesses; (8) our reserves established for future
policy benefits and claims may prove inadequate, requiring us to increase
liabilities; (9) our ability to pay stockholder dividends and meet our
obligations may be constrained by the limitations on dividends Iowa insurance
laws impose on Principal Life; (10) we may need to fund deficiencies in our
closed block ("Closed Block") assets which benefit only the holders of Closed
Block policies; (11) changes in regulations or accounting standards may reduce
our profitability; (12) litigation and regulatory investigations may harm our
financial strength and reduce our profitability; (13) fluctuations in foreign
currency exchange rates could reduce our profitability; (14) 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; (15) 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; and
(16) a downgrade in our debt ratings may adversely affect our ability to secure
funds and cause some of our existing liabilities to be subject to acceleration,
additional collateral support, changes in terms, or creation of additional
financial obligations.

16

OVERVIEW

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

o 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 Global Investors.
We provide a comprehensive portfolio of asset accumulation products and
services to businesses and individuals in the U.S., 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.

o International Asset Management and Accumulation, which consists of
Principal International, offers retirement products and services,
annuities, long-term mutual funds and life insurance through subsidiaries
in Argentina, Chile, Mexico and Hong Kong and joint ventures in Brazil,
Japan, India and Malaysia. Prior to October 31, 2002, the operating segment
included BT Financial Group, an Australia based asset manager. We sold
substantially all of BT Financial Group, effective October 31, 2002. See
"Transactions Affecting Comparability of Results of Operations."

o Life and Health Insurance, which provides life insurance, health insurance
as well as disability insurance throughout the U.S. Our life insurance
products include universal and variable universal life, traditional life,
and group life. Our health insurance products include medical insurance,
dental and vision insurance, and administrative services. Our disability
insurance products include individual and group disability insurance.

o Mortgage Banking, which engages in originating, purchasing, selling and
servicing residential mortgage loans in the U.S.

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

TRANSACTIONS AFFECTING COMPARABILITY OF RESULTS OF OPERATIONS

ACQUISITIONS

We acquired the following businesses, among others, during 2003 and 2002:

IDBI - PRINCIPAL ASSET MANAGEMENT COMPANY. On March 28, 2003, our wholly-owned
subsidiary, Principal Financial Group (Mauritius) Ltd. signed a buy-sale
agreement to purchase an additional 50% ownership of IDBI - Principal Asset
Management Company in India from Industrial Development Bank of India ("IDBI")
for 940 million Indian Rupees ("INR") (approximately U.S. $19.8 million). This
transaction will give Principal Financial Group (Mauritius) Ltd. 100% ownership
of IDBI - Principal Asset Management Company. We expect this transaction to be
completed in the second quarter of 2003.

Principal Financial Group (Mauritius) Ltd. is also in negotiations to sell
minority ownership of IDBI - Principal Asset Management Company to Punjab
National Bank and Vijaya Bank, two large Indian commercial banks. Subsequent to
the close of these transactions, Principal Financial Group (Mauritius) Ltd. will
retain majority ownership of IDBI - Principal Asset Management Company. We
expect to close negotiations in the second half of 2003.

17

We currently account for IDBI - Principal Asset Management Company using the
equity method of accounting. We plan to fully consolidate the subsidiary when we
become majority owners.

AFORE TEPEYAC S.A. DE C.V. On February 28, 2003, we purchased a 100% ownership
of AFORE Tepeyac S.A. de C.V. ("AFORE Tepeyac") in Mexico from Mapfre American
Vida, Caja Madrid and Mapfre Tepeyac for MX$590.0 million Mexican Pesos ("MX$")
(approximately U.S. $53.5 million). The operations of AFORE Tepeyac have been
integrated into Principal International, Inc., as a part of our International
Asset Management and Accumulation segment.

BENEFIT CONSULTANTS, INC. On January 1, 2003, we acquired Benefit Consultants,
Inc. ("BCI Group") headquartered in Appleton, Wisconsin. BCI Group is a
full-service consulting, actuarial and administration firm that specializes in
administering qualified and nonqualified retirement benefit plans with a primary
focus on employee stock ownership plans. Effective, January 1, 2003, the
operations of BCI Group are reported in our U.S. Asset Management and
Accumulation segment.

ZURICH AFORE S.A. DE C.V. On May 31, 2002, we purchased a 100% ownership of
Zurich AFORE S.A. de C.V. ("Zurich AFORE") in Mexico from Zurich Financial
Services for MX$480.5 million (approximately U.S. $49.0 million). The operations
of Zurich AFORE have been integrated into Principal International, Inc., as a
part of our International Asset Management and Accumulation segment.

DISPOSITIONS

We entered into disposition agreements or disposed of the following businesses,
among others, during 2003 and 2002:

BT FINANCIAL GROUP. On October 31, 2002, we sold substantially all of BT
Financial Group to Westpac Banking Corporation ("Westpac") for proceeds of
A$900.0 million Australian dollars ("A$") (U.S. $499.4 million), and future
contingent proceeds in 2004 of up to A$150.0 million (approximately U.S. $80.0
million). The contingent proceeds will be based on Westpac's future success in
growing retail funds under management.

Excluding contingent proceeds, our estimated after-tax proceeds from the sale
are expected to be approximately U.S. $875.0 million. This amount includes cash
proceeds, expected tax benefits, and gain from unwinding the hedged asset
associated with our investment in BT Financial Group. As of December 31, 2002,
we accrued for an estimated after-tax loss on disposal of $208.7 million. During
the three months ended March 31, 2003, we incurred an additional after-tax loss
of $0.7 million. These losses are recorded in the loss from discontinued
operations in the consolidated statements of operations. Future adjustments to
the estimated loss are expected to be recorded through the first half of 2003,
as the proceeds from the sale are finalized.

BT Financial Group is accounted for as a discontinued operation and therefore,
the results of operations (excluding corporate overhead) and cash flows have
been removed from our results of continuing operations for all periods
presented. Corporate overhead allocated to BT Financial Group does not qualify
for discontinued operations treatment under SFAS 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, and therefore is still included in
our results of continuing operations. The results of operations (excluding
corporate overhead) for BT Financial Group are reported as other after-tax
adjustments in our International Asset Management and Accumulation segment.
Selected financial information for the discontinued operations is as follows:

18

FOR THE THREE MONTHS ENDED
MARCH 31,
------------------------------------
2003 2002
----------------- ---------------
(IN MILLIONS, EXCEPT AS INDICATED)

Total assets under management ($ in
billions)................................. $ - $ 20.7
================= ===============
Total revenues. ............................ $ - $ 44.8
================= ===============
Loss from continuing operations (corporate
overhead)................................. $ - $ (0.8)

Income (loss) from discontinued operations:
Income (loss) before income taxes........... - 6.6
Income taxes (benefits)..................... - 4.3
----------------- ---------------
Income (loss) from discontinued operations.. - 2.3
Loss on disposal, net of related income
taxes..................................... (0.7) -
----------------- ---------------
Income (loss) from discontinued operations,
net of related income taxes............... (0.7) 2.3
Cumulative effect of accounting change, net
of related income taxes................... - (255.4)
----------------- ---------------
Net loss.................................... $ (0.7) $(253.9)
================= ===============

In connection with the 2002 sale of BT Financial Group, we agreed to indemnify
the purchaser, Westpac Banking Corporation ("Westpac") for, among other things,
the costs associated with potential late filings made by BT Financial Group in
New Zealand prior to Westpac's ownership, up to a maximum of A$250 million
Australian dollars (approximately U.S. $150 million). New Zealand securities
regulations allow Australian issuers to issue their securities in New Zealand
provided that certain documents are appropriately filed with the New Zealand
Registrar of Companies. Specifically, the regulations require that any
amendments to constitutions and compliance plans be filed in New Zealand. In
April 2003, the New Zealand Securities Commission ("the Commission") opined that
such late filings would result in certain New Zealand investors having a right
to return of their investment plus interest at 10% per annum from the date of
investment. Consequently, the Commission has advised that it has initiated an
inquiry into the matter, both with regard to BT Financial Group and other
similar issuers. We view these potential late filings as a technical matter as
we believe investors received the information that is required to be provided
directly to them. In addition, we believe this technical issue may affect many
in the industry and result in a favorable legislative or judicial solution.
Finally, we are reviewing the applicability of the indemnification regarding
this matter. Although we cannot predict the outcome of this matter or reasonably
estimate losses, we do not believe that it would result in a material adverse
effect on our business or financial position. It is possible, however, that it
could have a material adverse effect on our results of operations in a
particular quarter or annual period.

COVENTRY HEALTH CARE. On February 1, 2002, we sold our remaining stake of 15.1
million shares of Coventry Health Care, Inc. ("Coventry") common stock and a
warrant, exercisable for 3.1 million shares of Coventry common stock. We
received proceeds of $325.4 million, resulting in a net realized capital gain of
$183.0 million, or $114.5 million net of income taxes.

We reported our investment in Coventry in our Corporate and Other segment and
accounted for it using the equity method prior to its sale. Our share of
Coventry's net income was $2.1 million for the three months ended March 31,
2002.

19

OTHER TRANSACTIONS

SALE OF RETAIL FIELD MORTGAGE LENDING BRANCH OFFICES. On February 5, 2003,
Principal Residential Mortgage signed a definitive agreement to sell the retail
field mortgage lending branches to American Home Mortgage, Inc. ("American Home
Mortgage"), an independent retail mortgage banking company. American Home
Mortgage has paid Principal Residential Mortgage a guaranteed profit margin on
its application pipeline that existed as of February 4, 2003 and has purchased
the assets of the branch network and assumed related liabilities.

REINSURANCE TRANSACTION. Effective January 1, 2002, we entered into a
reinsurance agreement to reinsure group medical insurance contracts. We have
amended the contract. Effective January 1, 2003, the reinsurance contract will
be reported under the deposit method of accounting. This will reduce ceded
premiums and claims prospectively.

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.

In January 2002, the Argentine government ended its tie of the Argentine peso to
the U.S. dollar, creating a dual currency system with an official fixed exchange
rate of 1.4 pesos to 1.0 U.S. dollar for import and export transactions and a
"free" floating exchange rate for other transactions, subsequently floating the
Argentine peso in February 2002. The devaluation did not materially impact our
consolidated results of operations.

Foreign currency exchange rate fluctuations create variances in our financial
statement line items but have not had a material impact on our consolidated
operating earnings and net income. Our consolidated net income was negatively
impacted $1.8 million for the three months ended March 31, 2003 and positively
impacted $1.3 million for the three months ended March 31, 2002, 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 Item 3.
"Quantitative and Qualitative Disclosures about Market Risk."

PENSION AND OTHER POST-RETIREMENT BENEFIT EXPENSE

The 2003 annual pension benefit expense for substantially all of our employees
and certain agents is approximately $60.2 million pre-tax, $39.1 million
after-tax. This is an annual pre-tax increase of $53.7 million over the 2002
pre-tax pension expense of $6.5 million. Approximately $15.0 million of pre-tax
pension expense was reflected in the determination of first quarter, 2003 net
income. In addition, approximately $15.0 million of pre-tax pension expense will
be reflected in each of the following three quarters of 2003. This increase in
expense over 2002 is primarily due to the impact of low interest rates and the
equity market downturn. The discount rate used to value the liabilities was
lowered to 6.5% from the 2002 discount rate of 7.5% and the return on assets
assumption was lowered to 8.5% from the 2002 return on assets assumption of
9.0%. To a lesser extent, the expense for other post-retirement benefits expense
increased as well.

20

RESULTS OF OPERATIONS

The following table presents summary consolidated financial information for the
years indicated:

FOR THE THREE MONTHS ENDED
MARCH 31,
------------------------------
2003 2002
------------- -------------
INCOME STATEMENT DATA: (IN MILLIONS)

Revenues:
Premiums and other considerations......................... $ 905.5 $ 885.7
Fees and other revenues................................... 632.0 432.9
Net investment income..................................... 836.0 811.1
Net realized/unrealized capital gains (losses)............ (76.7) 98.1
------------- --------------
Total revenues.......................................... 2,296.8 2,227.8

Expenses:
Benefits, claims and settlement expenses.................. 1,195.2 1,203.2
Dividends to policyholders................................ 80.1 82.4
Operating expenses........................................ 799.3 592.2
------------- --------------
Total expenses.......................................... 2,074.6 1,877.8
------------- --------------

Income from continuing operations before income taxes....... 222.2 350.0
Income taxes................................................ 65.8 106.3
------------- --------------
Income from continuing operations, net of related
income taxes............................................ 156.4 243.7

Income (loss) from discontinued operations, net of related
income taxes.............................................. (0.7) 2.3
------------- --------------
Income before cumulative effect of accounting changes..... 155.7 246.0

Cumulative effect of accounting change, net of related
income taxes.............................................. - (280.9)
------------- --------------
Net income (loss)......................................... $ 155.7 $ (34.9)
============= ==============

THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002

Premiums and other considerations increased $19.8 million, or 2%, to $905.5
million for the three months ended March 31, 2003, from $885.7 million for the
three months ended March 31, 2002. The increase reflected a $26.1 million
increase from the Life and Health Insurance segment, primarily related to health
premium rate increases, a reduction in ceded premiums resulting from a change in
the accounting treatment of a group medical reinsurance contract, and increased
group disability sales. The increase also reflected a $4.2 million increase from
the U.S. Asset Management and Accumulation segment, primarily a result of an
increase in individual payout annuity sales due to an expanding distribution
presence that was partially offset by a decrease in pension full-service payout
sales of single premium group annuities with life contingencies. These increases
were partially offset by a $10.5 million decrease from the International Asset
Management and Accumulation segment due to a decrease in Chile primarily a
result of decreased sales of single premium annuities with life contingencies
related to market contraction, the weakening of the Chilean peso versus the U.S.
dollar, and a decrease in Mexico primarily a result of prolonged government
retention of potential annuitants.

Fees and other revenues increased $199.1 million, or 46%, to $632.0 million for
the three months ended March 31, 2003, from $432.9 million for the three months
ended March 31, 2002. The increase was primarily due to a $178.9 million
increase from the Mortgage Banking segment resulting from an increase in
mortgage loan production fee revenues, reflecting the increase in mortgage loan
production volume. The increase also related to an $11.7 million increase from
the U.S. Asset Management and Accumulation segment primarily related to the
acquisition of BCI Group and an increase in the fee scale of selected funds. In
addition, the increase was also due to a $7.4 million increase from the Life and
Health Insurance segment, primarily related to growth and fee increases in the
fee-for-service business and growth in our individual universal and variable
universal life insurance business.

21

Net investment income increased $24.9 million, or 3%, to $836.0 million for the
three months ended March 31, 2003, from $811.1 million for the three months
ended March 31, 2002. The increase was primarily a result of a $5,180.3 million,
or 11%, increase in average invested assets and cash. Partially offsetting the
increase was a decrease in annualized investment yields. The annualized yield on
average invested assets and cash was 6.6% for the three months ended March 31,
2003, compared to 7.1% for the three months ended March 31, 2002. This reflects
lower yields on fixed maturity securities due in part to a lower interest rate
environment.

Net realized/unrealized capital losses increased $174.8 million to $76.7 million
of net realized/unrealized capital losses for the three months ended March 31,
2003, from $98.1 million of net realized/unrealized capital gains for the three
months ended March 31, 2002. The increase was primarily due to the capital gain
realized as the result of the sale of our remaining investment in Coventry in
February 2002 with no corresponding activity in 2003. There was also an increase
in other than temporary impairments of fixed maturity securities partially
offset by lower losses on the sales of fixed maturity securities and equity
securities.

Benefits, claims and settlement expenses decreased $8.0 million, or 1%, to
$1,195.2 million for the three months ended March 31, 2003, from $1,203.2
million for the three months ended March 31, 2002. The decrease was due to a
$12.2 million decrease from the U.S. Asset Management and Accumulation segment,
primarily reflecting a decrease in interest credited to customers. The decrease
also reflected a $5.2 million decrease from the International Asset Management
and Accumulation segment primarily a result of prolonged government retention of
potential annuitants in Mexico. These decreases were partially offset by an $8.3
million increase from the Life and Health Insurance segment, primarily due to a
reduction in ceded claims for group medical reinsurance, which was a result of a
change in the accounting treatment of the contract.

Dividends to policyholders decreased $2.3 million, or 3%, to $80.1 million for
the three months ended March 31, 2003, from $82.4 million for the three months
ended March 31, 2002. The decrease was primarily attributable to a $2.5 million
decrease from the Life and Health Insurance segment, resulting from changes in
the individual life dividend scale.

Operating expenses increased $207.1 million, or 35%, to $799.3 million for the
three months ended March 31, 2003, from $592.2 million for the three months
ended March 31, 2002. The increase was largely due to a $153.8 million increase
from the Mortgage Banking segment primarily resulting from growth in the
mortgage loan servicing portfolio, an increase in impairment of capitalized
mortgage servicing rights net of servicing hedge activity and an increase in the
mortgage loan production volume. The increase was also due to a $45.3 million
increase in the U.S Asset Management and Accumulation segment due to higher
incentive compensation accruals, the expansion of our asset management offshore
operations and deferred policy acquisition cost ("DPAC") unlocking. In addition,
Life and Health Insurance segment operating expenses increased $21.5 million
related to increased employee benefit costs, a decrease in DPAC capitalization
due to the decrease in sales, and growth in the fee-for-service business. These
increases were partially offset by a $10.9 million decrease from the Corporate
and Other segment, primarily due to decreased corporate initiatives funded by
this segment.

Income taxes decreased $40.5 million, or 38%, to $65.8 million for the three
months ended March 31, 2003 from $106.3 million for the three months ended March
31, 2002. The effective income tax rate was 30% for the three months ended March
31, 2003 and 2002. The effective income tax rates for the three months ended
March 31, 2003 and 2002 were lower than the corporate income tax rate of 35%
primarily due to income tax deductions allowed for corporate dividends received
and interest exclusion from taxable income, partially offset by state income
taxes.

As a result of the foregoing factors and the inclusion of loss from discontinued
operations and the cumulative effect of accounting change, net of related income
taxes, net income increased $190.6 million to $155.7 million of net income for

22

the three months ended March 31, 2003, from $34.9 million of net loss for the
three months ended March 31, 2002. The loss from discontinued operations was
related to our sale of BT Financial Group. The cumulative effect of accounting
change was related to our implementation of SFAS No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS ("SFAS 142") in 2002.

RESULTS OF OPERATIONS BY SEGMENT

We evaluate segment performance by segment operating earnings, which excludes
the effect of net realized/unrealized capital gains and losses, as adjusted, and
other after-tax adjustments. Segment operating earnings are determined by
adjusting U.S. GAAP net income for net realized/unrealized capital gains and
losses, as adjusted, and other after-tax adjustments that we believe are not
indicative of overall operating trends. However, it is possible that these
adjusting items have occurred in the past and could recur in the future. 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, ongoing operations of our
businesses.

The following table presents segment information as of or for the periods
indicated:

23

AS OF OR FOR THREE MONTHS
ENDED MARCH 31,
-----------------------------------
2003 2002
--------------- ---------------
(IN MILLIONS)

OPERATING REVENUES BY SEGMENT:
U.S. Asset Management and Accumulation.......................... $ 886.0 $ 862.1
International Asset Management and Accumulation................. 76.8 75.9
Life and Health Insurance....................................... 1,012.3 978.5
Mortgage Banking................................................ 404.5 208.7
Corporate and Other(1).......................................... (0.7) 10.5
--------------- ---------------
Total segment operating revenues.............................. 2,378.9 2,135.7
Net realized/unrealized capital gains (losses), including
recognition of front-end fee revenues and certain market value
adjustments to fee revenues(2)................................ (82.1) 92.1
--------------- ---------------
Total revenue per consolidated statements of operations....... $ 2,296.8 $ 2,227.8
=============== ===============
OPERATING EARNINGS (LOSS) BY SEGMENT:
U.S. Asset Management and Accumulation ......................... $ 97.5 $ 100.2
International Asset Management and Accumulation................. 6.6 1.2
Life and Health Insurance....................................... 59.1 54.3
Mortgage Banking................................................ 52.3 26.5
Corporate and Other ............................................ (5.0) 0.3
--------------- ---------------
Total segment operating earnings.............................. 210.5 182.5
Net realized/unrealized capital gains (losses), as adjusted(2).. (54.1) 63.2
Other after-tax adjustments(3).................................. (0.7) (280.6)
--------------- ---------------
Net income (loss) per consolidated statements of operations... $ 155.7 $ (34.9)
=============== ===============
TOTAL ASSETS BY SEGMENT:
U.S. Asset Management and Accumulation(4)....................... $72,396.8 $ 68,738.6
International Asset Management and Accumulation................. 2,269.6 4,677.7
Life and Health Insurance....................................... 11,477.0 10,939.1
Mortgage Banking................................................ 3,651.5 2,897.3
Corporate and Other(5).......................................... 2,045.6 1,506.0
--------------- ---------------
Total assets.................................................. $91,840.5 $ 88,758.7
=============== ===============
- -----------------------

(1)Includes inter-segment eliminations primarily related to internal investment
management fee revenues, commission fee revenues paid to U.S. Asset
Management and Accumulation agents for selling Life and Health Insurance
segment insurance products, internal interest paid to our Mortgage Banking
segment for escrow accounts deposited with our U.S. Asset Management and
Accumulation segment.

(2)In addition to sales activity and other than temporary impairments, net
realized/unrealized capital gains (losses) include unrealized gains (losses)
on mark to market changes of certain seed money investments and investments
classified as trading securities, as well as unrealized gains (losses) on
certain derivatives. Net realized/unrealized capital gains (losses), as
adjusted, are net of income taxes, net realized capital gains and losses
distributed, minority interest capital gains, 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
certain market value adjustments to fee revenues.

24

FOR THE THREE MONTHS ENDED
MARCH 31,
-------------------------------
2003 2002
-------------- --------------
(IN MILLIONS)

Net realized/unrealized capital gains (losses)................ $ (76.7) $ 98.1
Certain market value adjustments to fee revenues.............. (9.8) (8.6)
Recognition of front-end fee revenues......................... 4.4 2.6
-------------- --------------
Net realized/unrealized capital gains (losses),
including recognition of front-end fee
revenues and certain market value
adjustments to fee revenues............................... (82.1) 92.1
Amortization of deferred policy acquisition costs
related to net realized capital gains (losses).............. 3.7 10.9
Capital losses distributed.................................... 1.6 -
Minority interest capital gains............................... (0.1) -
-------------- --------------
Net realized/unrealized capital gains (losses),
including recognition of front-end fee revenues and
certain market value adjustments to fee revenues, net
of related amortization of deferred policy acquisition
costs, capital losses distributed and minority interest
capital gains............................................. (76.9) 103.0
Income tax effect............................................. 22.8 (39.8)
-------------- --------------
Net realized/unrealized capital gains (losses), as
as adjusted............................................... $ (54.1) $ 63.2
============== ==============

(3)For the three months ended March 31, 2003, other after-tax adjustments of
$0.7 million included the negative effect of a change in the estimated loss
on disposal of BT Financial Group. For the three months ended March 31, 2002,
other after-tax adjustments of $280.6 million included (1) the negative
effects of: (a) a cumulative effect of accounting change related to our
implementation of SFAS 142 ($280.9 million) and (b) expenses related to our
demutualization ($2.0 million) and (2) the positive effect of the income on
discontinued operations of BT Financial Group ($2.3 million).

(4)U.S. Asset Management and Accumulation separate account assets include
shares of Principal Financial Group stock allocated to a separate account, a
result of our demutualization. The value of the separate account was $838.0
million at March 31, 2003, and $1.1 billion at March 31, 2002. Activity of
the separate account was reflected in both separate account assets and
separate account liabilities and did not impact our results of operations.

(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.

25

U.S. ASSET MANAGEMENT AND ACCUMULATION SEGMENT

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

FOR THE THREE MONTHS ENDED MARCH 31,
-------------------------------------
2003 2002
---------------- ----------------
(IN MILLIONS)

OPERATING EARNINGS DATA:
Operating revenues(1):
Premiums and other considerations........... $ 113.8 $ 109.6
Fees and other revenues..................... 184.8 173.7
Net investment income....................... 587.4 578.8
---------------- ----------------
Total operating revenues.................. 886.0 862.1

Expenses:
Benefits, claims and settlement expenses,
including dividends to policyholders........ 535.6 547.6
Operating expenses.......................... 225.4 187.5
---------------- ----------------
Total expenses............................ 761.0 735.1
---------------- ----------------
Pre-tax operating earnings.................... 125.0 127.0
Income taxes.................................. 27.5 26.8
---------------- ----------------
Operating earnings............................ $ 97.5 $ 100.2
================ ================

- -----------------------------
(1) Excludes net realized/unrealized capital losses and their impact on
recognition of front-end fee revenues and certain market value adjustments
to fee revenues.

THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002

Premiums and other considerations increased $4.2 million, or 4%, to $113.8
million for the three months ended March 31, 2003, from $109.6 million for the
three months ended March 31, 2002. The increase primarily resulted from a $15.4
million increase in individual payout annuity sales due to an expanding
distribution presence. This increase was offset by an $11.2 million decrease in
pension full-service payout sales of single premium group annuities with life
contingencies, which are typically used to fund defined benefit plan
terminations. The premium income received from these contracts fluctuates due to
the variability in the number and size of pension plan terminations, the
interest rate environment, and the ability to attract new sales.

Fees and other revenues increased $11.1 million, or 6%, to $184.8 million for
the three months ended March 31, 2003, from $173.7 million for the three months
ended March 31, 2002. Pension full-service accumulation fees and other revenue
increased $7.0 million primarily due to the acquisition of BCI Group and an
increase in the fee scale of selected funds. In addition, Principal Global
Investors fees and other revenues increased $5.3 million primarily due to
increased revenues from Spectrum and the expansion of our asset management
offshore operations.

Net investment income increased $8.6 million, or 1%, to $587.4 million for the
three months ended March 31, 2003, from $578.8 million for the three months
ended March 31, 2002. The increase primarily resulted from a $3,375.5 million,
or 10%, increase in average invested assets and cash. The increase was offset by
a decrease in the average annualized yield on invested assets and cash, which
was 6.3% for the three months ended March 31, 2003, compared to 6.8% for the
three months ended March 31, 2002.

Benefits, claims and settlement expenses, including dividends to policyholders,
decreased $12.0 million, or 2%, to $535.6 million for the three months ended

26

March 31, 2003, from $547.6 million for the three months ended March 31, 2002.
The decrease primarily resulted from a $25.8 million decrease in our pension
full-service accumulation business. This decrease was largely due a decrease in
interest credited to customers and a decrease in our participating block of
business. Partially offsetting this decrease was a $14.8 million increase, which
primarily related to an increase in reserves resulting from higher individual
payout annuity sales.

Operating expenses increased $37.9 million, or 20%, to $225.4 million for the
three months ended March 31, 2003, from $187.5 million for the three months
ended March 31, 2002. The increase largely resulted from a $15.1 million
increase in Principal Global Investors operating expenses due to higher
incentive compensation accruals and the expansion of our asset management
offshore operations. In addition, pension full-service accumulation operating
expenses increased $12.0 million primarily due to favorable unlocking of DPAC in
2002, resulting from a change in the compensation structure for Employee Benefit
Sales and Service. Furthermore, individual deferred annuity operating expenses
increased $7.4 million primarily due to DPAC unlocking caused by adverse
separate account performance and higher lapse rates associated with the variable
deferred annuity product line.

Income taxes increased $0.7 million, or 3%, to $27.5 million for the three
months ended March 31, 2003, from $26.8 million for the three months ended March
31, 2002. The effective income tax rate for this segment was 22% for the three
months ended March 31, 2003, and 21% for the three months ended March 31, 2002.
The effective income tax rates for the three months ended March 31, 2003 and
2002, 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.

Operating earnings decreased $2.7 million, or 3%, to $97.5 million for the three
months ended March 31, 2003 from $100.2 million for the three months ended March
31, 2002 primarily reflecting higher incentive compensation accruals, the
expansion of the asset management offshore operations and favorable DPAC
unlocking in 2002.

27

INTERNATIONAL ASSET MANAGEMENT AND ACCUMULATION SEGMENT

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

FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------------
2003 2002
------------- ---------------
(IN MILLIONS)

OPERATING EARNINGS DATA:
Operating revenues (1):
Premiums and other considerations...................... $ 30.7 $ 41.2
Fees and other revenues................................ 14.8 12.1
Net investment income.................................. 31.3 22.6
------------- ---------------
Total operating revenues............................. 76.8 75.9

Expenses:
Benefits, claims and settlement expenses............... 48.1 52.7
Operating expenses..................................... 20.6 22.8
------------- ---------------
Total expenses....................................... 68.7 75.5
------------- ---------------
Pre-tax operating earnings............................... 8.1 0.4
Income taxes (benefits).................................. 1.5 (0.8)
------------- ---------------
Operating earnings....................................... $ 6.6 $ 1.2
============= ===============

OTHER DATA:
Operating earnings (loss):
Principal International................................ $ 6.6 $ 2.0
BT Financial Group..................................... - (0.8)

- ---------------------
(1) Excludes net realized/unrealized capital gains (losses).

THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002

Premiums and other considerations decreased $10.5 million, or 25%, to $30.7
million for the three months ended March 31, 2003, from $41.2 million for the
three months ended March 31, 2002. A decrease of $5.1 million in Chile was
primarily a result of decreased sales of single premium annuities with life
contingencies due to market contraction and the weakening of the Chilean peso
versus the U.S. dollar. In addition, a decrease of $4.2 million in Mexico was
primarily a result of prolonged government retention of potential annuitants.

Fees and other revenues increased $2.7 million, or 22%, to $14.8 million for the
three months ended March 31, 2003, from $12.1 million for the three months ended
March 31, 2002. An increase of $3.3 million in Mexico was primarily a result of
an increase in the number of retirement plan participants due to the acquisition
of Zurich AFORE in 2002 and AFORE Tepeyac in 2003. The increase was partially
offset by a decrease of $0.3 million in Argentina, primarily related to the
weakening of the Argentine peso versus the U.S. dollar and of the general
economic environment.

Net investment income increased $8.7 million, or 38%, to $31.3 million for the
three months ended March 31, 2003, from $22.6 million for the three months ended
March 31, 2002. The increase was primarily related to an increase in the
annualized yield on average invested assets and cash, excluding our equity
investment in subsidiaries, which was 7.9% for the three months ended March 31,
2003, compared to 6.2% for the three months ended March 31, 2002. To a lesser
extent, the increase was due to a $155.4 million, or 12%, increase in average
invested assets and cash, excluding our equity investment in subsidiaries.

28

Benefits, claims and settlement expenses decreased $4.6 million, or 9%, to $48.1
million for the three months ended March 31, 2003, from $52.7 million for the
three months ended March 31, 2002. A $3.7 million decrease in Mexico was
primarily a result of prolonged government retention of potential annuitants. In
addition, a decrease of $1.2 million in Argentina was primarily related to the
weakening of the Argentine peso versus the U.S. dollar and of the general
economic environment.

Operating expenses decreased $2.2 million, or 10%, to $20.6 million for the
three months ended March 31, 2003, from $22.8 million for the three months ended
March 31, 2002. A decrease of $2.7 million was due to weakening currencies in
Latin American countries. Partially offsetting this decrease was an increase of
$2.2 million in Mexico primarily due to the acquisition of Zurich AFORE in 2002
and AFORE Tepeyac in 2003. Operating expenses incurred by BT Financial Group
were $1.3 million for the three months ended March 31, 2002. These expenses
represent corporate overhead allocated to BT Financial Group and do not qualify
for discontinued operations treatment.

Income tax expense increased $2.3 million to $1.5 million of income tax expense
for the three months ended March 31, 2003, from a $0.8 million income tax
benefit for the three months ended March 31, 2002. The increase was primarily a
result of an increase in pre-tax operating earnings.

Operating earnings increased $5.4 million to $6.6 million for the three months
ended March 31, 2003, from $1.2 million for the three months ended March 31,
2002 primarily due to increased earnings from the acquisition of Zurich AFORE in
2002 and higher nominal yields on invested assets in Chile.

29

LIFE AND HEALTH INSURANCE SEGMENT

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

FOR THE THREE MONTHS ENDED
MARCH 31,
-------------------------------
2003 2002
--------------- ------------
(IN MILLIONS)

OPERATING EARNINGS DATA:
Operating Revenues(1):
Premiums and other considerations.................. $ 761.0 $ 734.9
Fees and other revenues............................ 84.4 77.0
Net investment income.............................. 166.9 166.6
-------------- ------------
Total operating revenues......................... 1,012.3 978.5

Expenses:
Benefits, claims and settlement expenses........... 617.8 609.5
Dividends to policyholders......................... 75.5 78.0
Operating expenses................................. 230.1 208.4
-------------- ------------
Total expenses................................... 923.4 895.9
-------------- ------------
Pre-tax operating earnings........................... 88.9 82.6
Income taxes......................................... 29.8 28.3
-------------- ------------
Operating earnings................................... $ 59.1 $ 54.3
============== ============
- ------------

(1) Excludes net realized/unrealized capital gains (losses).

THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002

Premiums and other considerations increased $26.1 million, or 4%, to $761.0
million for the three months ended March 31, 2003, from $734.9 million for the
three months ended March 31, 2002. Health insurance premiums increased $22.7
million, primarily due to rate increases and a reduction in ceded premium for
group medical reinsurance, which was a result a change in the accounting
treatment of the contract. Disability insurance premiums increased $9.7 million
primarily due to increased sales and favorable retention. Partially offsetting
the increase was a $6.3 million decrease in life insurance premiums, primarily
resulting from the continued shift of customer preference from traditional life
insurance products to fee-based universal and variable universal life insurance
products.

Fees and other revenues increased $7.4 million, or 10%, to $84.4 million for the
three months ended March 31, 2003, from $77.0 million for the three months ended
March 31, 2002. Fee revenues from our health insurance business increased $4.7
million, primarily a result of growth and fee increases. Fee revenues from our
life insurance business increased $2.7 million, primarily due to the continued
shift in customer preference, as previously mentioned.

Net investment income increased $0.3 million to $166.9 million for the three
months ended March 31, 2003, from $166.6 million for the three months ended
March 31, 2002. The increase primarily reflects a $578.6 million, or 6%,
increase in average invested assets and cash for the segment. Partially
offsetting the increase was a lower annualized average investment yield due in
part to an overall lower interest rate environment. The annualized yield on
average invested assets and cash was 7.0% for the three months ended March 31,
2003, compared to 7.4% for the three months ended March 31, 2002.

Benefits, claims and settlement expenses increased $8.3 million, or 1%, to
$617.8 million for the three months ended March 31, 2003, from $609.5 million
for the three months ended March 31, 2002. Health insurance benefits, claims and

30

settlement expenses increased $8.6 million, primarily due to a reduction in
ceded claims for group medical reinsurance, which was related to a change in the
accounting treatment of the contract. Increased claim costs per member were more
than offset by decreases in insured members and improved loss ratios. Disability
insurance benefits, claims and settlement expenses increased $3.9 million,
primarily a result of growth in the business. Partially offsetting these
increases was a $4.2 million decrease in life insurance benefits, claims and
settlement expenses primarily due to lower reserve increases related to the
decrease in premium.

Dividends to policyholders decreased $2.5 million, or 3%, to $75.5 million for
the three months ended March 31, 2003, from $78.0 million for the three months
ended March 31, 2002. The decrease is primarily related to changes in the
individual life dividend scale.

Operating expenses increased $21.7 million, or 10%, to $230.1 million for the
three months ended March 31, 2003, from $208.4 million for the three months
ended March 31, 2002. Health insurance operating expenses increased $14.0
million, primarily a result of prior period premium tax related adjustments in
2003, growth in the fee-for-service business, increased employee benefit costs,
and increased commissions related to higher premiums. Disability insurance
operating expenses increased $5.9 million primarily due to increases in
compensation costs, non-deferrable commissions related to higher premium,
non-deferrable distribution expenses associated with higher sales, and
amortization of DPAC on a growing block of disability insurance business.

Income taxes increased $1.5 million, or 5%, to $29.8 million for the three
months ended March 31, 2003, from $28.3 million for the three months ended March
31, 2002. The effective income tax rate for the segment was 34% for the three
months ended March 31, 2003 and 2002. The effective income tax rates for the
three months ended March 31, 2003 and 2002 were lower than the corporate income
tax rate of 35% primarily due to tax-exempt income.

Operating earnings increased $4.8 million, or 9%, to $59.1 million for the three
months ended March 31, 2003, from $54.3 million for the three months ended March
31, 2002 primarily due to improved health insurance loss ratios and favorable
one-time reserve and expense adjustments in the life insurance business.

31

MORTGAGE BANKING SEGMENT

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

FOR THE THREE MONTHS ENDED
MARCH 31,
------------------------------------
2003 2002
----------------- ---------------
(IN MILLIONS)

OPERATING EARNINGS DATA:
Operating Revenues:
Loan servicing.................................. $ 164.1 $ 127.6
Loan production................................. 240.4 81.1
----------------- ---------------
Total operating revenues...................... 404.5 208.7

Expenses:
Loan servicing.................................. 256.9 127.9
Loan production................................. 63.5 38.7
----------------- ---------------
Total expenses................................ 320.4 166.6
----------------- ---------------
Pre-tax operating earnings........................ 84.1 42.1
Income taxes...................................... 31.8 15.6
----------------- ---------------
Operating earnings................................ $ 52.3 $ 26.5
================= ===============

THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002

Total operating revenues increased $195.8 million, or 94%, to $404.5 million for
the three months ended March 31, 2003, from $208.7 million for the three months
ended March 31, 2002. Residential mortgage loan production revenues increased
$159.3 million primarily due to an increase in mortgage loan production, which
increased to $15.5 billion for the three months ended March 31, 2003, compared
to $10.0 billion for the same period a year ago. A $36.5 million increase in
residential mortgage loan servi