With more than $144 billion in assets under management, Principal Financial Group Inc. has become the largest manager of 401(k) retirement plans in the U.S. by focusing on small and mid-sized customers.

Now, as the company celebrates its 125th birthday, Principal is turning its sights abroad in a move to replicate its domestic success and continue a streak of growth that has made it one of the state’s largest corporate employers and the most valuable Iowa-based company by market capitalization. At the same time, it is making changes at home to handle expected growth, including acquisitions and shifts in its management structure.

The latest moves come as Principal settles into its new skin as a publicly traded company. Since the fall of 2001, when Principal first sold its shares to the public, profits have more than doubled, touching $746.3 million in 2003, up from $358.8 million in 2001. Investors have so far bet with their wallets, bidding Principal’s shares up to nearly twice their IPO level.

“Investors understand that while the market has its ups and downs, Principal has positioned itself in a corner of the business that has staying power, namely 401(k) plan administration,” said Eric Berg, an analyst with Lehman Bros. “It’s a focused niche player, a high-point player.”

He also said the company has been aggressive about buying back its stock to increase per-share earnings, thus making each share outstanding more valuable. Domestic and international expansion have made Principal stock attractive to investors, especially its operations overseas. “The international business is still seed corn, seed in the ground, but they will germinate later into larger business.”  

Principal isn’t without problems, Berg noted. “They’ve been unable to grow their life and health insurance, and mortgage insurance has posted spotty returns, but the growth of the 01(k) business has impressed investors,” he said.  

In the past two years, Principal, whose businesses extend beyond retirement services to include life and health insurance, mortgage banking and traditional banking, has made a variety of acquisitions to give it toeholds in markets where it didn’t previously have a presence or to help boost its operations in places where it did.

On Feb. 9, Principal agreed to buy Hong Kong-based Dao Heng Fund Management Ltd. from Guoco Group Ltd. to help build its business in Hong Kong, which in recent years has passed laws that mandate contributions to employee retirement plans. Principal has had an office in Hong Kong for several years and was the first U.S. life insurance company to win a license to operate there, said J. Barry Griswell, Principal’s chairman, president and chief executive.

But the new laws are driving consolidating among Hong Kong’s retirement services industry. Principal, which didn’t disclose how much it paid for Dao Heng, wants to be in Asia long-term and believed the company would ultimately help it win business in China. Principal has an office in Beijing, though it is not currently doing business in mainland China.

China, the world’s most populous nation, is undergoing large changes amid a booming economy. The nation’s leaders are trying to determine how to structure a retirement system for workers, and Principal would like a chance at the business. Principal has twice played host to China’s U.S. ambassador, most recently last year when it flew Yang Jiechi to Des Moines on its corporate jet.

“We’re absolutely committed to Asia,” Griswell said. “I believe in the very near future we’ll find a way to do business in mainland China.”

Other purchases include Benefits Consultants Inc. in January 2003, MW Post Advisory Group in August 2003 and Molloy Cos. in December 2003. In June 2002, Principal entered into a strategic business agreement with KeyCorp through its affiliates Victory Capital Management and KeyBank National Association to begin servicing $8 billion in assets previously managed by Victory. In 1999, Principal purchased Spectrum Asset Management.

Griswell has said Principal will continue to search for acquisitions to help boost its capabilities. Some Wall Street analysts said those purchases, when they happen, are likely to be small.

“We expect Principal to continue to engage in small strategic acquisitions ($20-$100 million) to enhance scale and capabilities in its existing business lines, based on recent precedent and management’s tone,” wrote Andrew Klingerman, an analyst at USB, in a Feb. 23 note to clients after meeting with Principal’s top management. “Principal indicated a desire to not only step up its individual life and non-medical insurance businesses, but also its international operations through acquisitions. But a sizable acquisition appears unlikely.”

Not all of Principal’s forays abroad have had happy endings. In the third quarter of 2002, Principal realized a loss of $201 million related to an Australian-based subsidiary called BT Financial that Principal had owned but sold that year. Still, Griswell said he and other top managers took away key lessons from the Australian experience, including the idea that small acquisitions are easier to digest than large ones.

“We did a very extensive look-back analysis to understand what went wrong,” Griswell said of BT Financial. “We had a couple of things go against us. The currency went against us. The other thing that we did not predict was enormous consolidation with [Australian] banks. They all decided they wanted to be in the business we were in.”  

Principal did retain some assets that had belonged to BT Financial, including its real estate business and its fixed-income management operations, Griswell said.  

The insurer also revamped its organizational structure, dividing its operations into three major business divisions and making each division responsible for the distribution of its products. Before the restructuring, which was announced Dec. 3, the marketing and sales of Principal’s products was handled by a separate division overseen by Executive Vice President Michael Daley, who left the company as a result of the changes. The new structure makes the heads of the three business units directly responsible for profits and losses and helps streamline the company’s operations.  

Outsiders Norman Sorensen and Jim McCaughan were brought in to give the company more depth, and Principal moved portfolio managers to London and Singapore to enable them to make better foreign investment decisions.

“That was a reflection of us trying to make sure asset management businesses are global,” Griswell said. “We have to have people all over the globe, understanding the businesses we’re investing in. We will have people all over the globe, especially in Sydney, Singapore, Latin America and London.”  

For the near future, Griswell said, Principal’s growth is likely to be driven by its retirement services business, which has been helped by rebounding stock markets. For the past three years, Principal’s “medical, life and mortgage banking have carried the company,” Griswell said.  

Now, as interest rates have risen from generational lows, Americans have slowed the pace at which they are refinancing their homes. That slowdown has hurt Principal’s mortgage banking subsidiary, just as it has hurt other companies that operate in that business. In the fourth quarter of 2003, Principal said its mortgage banking division had an operating loss of $42.8 million, compared with operating earnings of $29.1 million during the same period of 2002.  

For the first quarter of 2004, Principal is expected to earn 65 cents per share on revenues of $2.33 billion, according to the average estimates of analysts polled by Thomson First Call. During the year-ago quarter, Principal had operating profits of 52 cents on revenues of $2.18 billion.

Now in its 125th year, which makes it one of the oldest companies in the state, Principal is promoting a number of initiatives to celebrate the milestone.  

The biggest is the Principal Riverwalk, a bold $25 million plan that promises the revitalize Des Moines’ riverfront with two miles of bicycling and pedestrian trails, an ice skating rink and an avant-garde bridge.  

And Griswell himself is stepping out into the community in a more active way than he has previously. He is chairman of the Greater Des Moines Partnership this year, and he served as the corporate chairman for the United Way of Central Iowa’s record-setting fund-raising drive in 2002. He has been outspoken about efforts to bring gambling to downtown Des Moines, arguing forcefully in speeches and in newspaper opinion pieces against the idea.  

Principal also has spoken out on national issues, including President George W. Bush’s proposal to create a new breed of savings plans for American workers. The proposal would let workers save money free of taxes and, unlike current plans, they could withdraw funds from the accounts at any time without penalty. Principal argued that without penalties, participants would not have enough incentive to save money over the long term. Also, the company said, laws governing current plans create incentives for employers to contribute to workers’ accounts that are absent from the president’s proposal.

The company continues to win respect from employees and the media. Earlier this year, Principal was named for the second consecutive year to Fortune magazine’s 100 Best Companies to Work For list. Principal climbed in the 2004 rankings to 95 from 100. The magazine also named Pella Corp. to its list for the fifth straight time, ranking the Iowa-based window maker 22nd.  

Earlier this month, Fortune said Principal was one of “America’s Most Admired Companies” in the life and health insurance industry. It was the eighth time the magazine had placed Principal on the list. Fortune compiled its list using a variety of criteria, including innovation, financial soundness, use of corporate assets, social responsibility and quality of products and services. The company has also been named one of the best places to work for mothers.  

Principal’s 15,000 companies serve some 15 million customers worldwide from offices in Asia, Australia, Europe, Latin America and the United States.