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Principal Bets on Commercial Property as Bond Yields Fall

Principal Financial Group Inc., the seller of life insurance and retirement products, said it’s turning to real estate to increase investment income as near record-low yields pressure returns from bonds.

“The debt market is very strong, the equity market is growing” in commercial property, Chief Investment Officer Julia Lawler said in a presentation to investors today. “The fundamentals continue to improve, largely because there’s a lot of supply constraints.”

Principal expanded its commercial mortgage-loan portfolio to $9.2 billion as of June 30 from $8.8 billion six months earlier. The loans are about 14 percent of the Des Moines, Iowa-based company’s invested assets.

Insurers are seeking alternatives to bonds after the Federal Reserve vowed to maintain interest rates near record lows to stimulate the U.S. economy. The yield on the 10-year Treasury has dropped to 1.75 percent from 3.29 percent at the end of 2010.

Lower interest rates may decrease operating earnings by as much as $70 million, based on the third-quarter review of actuarial assumptions, the company said today in a regulatory filing. The insurer slipped 1.4 percent to $27.92 at 4 p.m. in New York trading, cutting its gain this year to 14 percent.

The Equal-Weighted U.S. Composite Index of commercial property increased 5.9 percent in July from a year earlier as a smaller ratio of sales were distressed, CoStar Group Inc. said last week. Relative yields on senior top-rated securities backed by commercial mortgages fell 1.77 percentage points in the past year to 1.19 percentage points more than Treasuries, according to a Barclays Plc index.

‘Great Performer’

Lawler said her firm has profited by acquiring real estate and attracting new tenants.

“We opportunistically buy distressed properties, lease them up and sell them,” she said. “It’s been a great performer for us.”

Principal is also looking to emerging-market debt to boost returns, she said. Dollar-denominated emerging market government bonds pay 2.94 percentage points more than U.S. Treasuries, according to JPMorgan Chase & Co.’s EMBI Global Index.

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