10-Q 1 a12-19844_110q.htm 10-Q

Table of Contents

 

 

 

UNITED STATES
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 September 30, 2012

 

OR

 

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

 


 

1-16725

(Commission file number)

 

PRINCIPAL FINANCIAL GROUP, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

42-1520346

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer 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 o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller
reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

 

The total number of shares of the registrant’s Common Stock, $0.01 par value, outstanding as of October 24, 2012, was 293,586,944.

 

 

 



Table of Contents

 

PRINCIPAL FINANCIAL GROUP, INC.

 

TABLE OF CONTENTS

 

 

Page

Part I - FINANCIAL INFORMATION

 

 

 

Item 1.

Financial Statements

3

 

 

 

 

Consolidated Statements of Financial Position at September 30, 2012 (Unaudited) and December 31, 2011

3

 

 

 

 

Unaudited Consolidated Statements of Operations for the three and nine months ended September 30, 2012 and 2011

4

 

 

 

 

Unaudited Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2012 and 2011

5

 

 

 

 

Unaudited Consolidated Statements of Stockholders’ Equity for the nine months ended September 30, 2012 and 2011

6

 

 

 

 

Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011

7

 

 

 

 

Notes to Unaudited Consolidated Financial Statements — September 30, 2012

8

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

90

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

131

 

 

 

Item 4.

Controls and Procedures

136

 

 

 

Part II — OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

136

 

 

 

Item 1A.

Risk Factors

136

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

137

 

 

 

Item 6.

Exhibits

138

 

 

 

Signature

 

139

 


 


Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Principal Financial Group, Inc.

Consolidated Statements of Financial Position

 

 

 

September 30,
2012

 

December 31,
2011

 

 

 

(Unaudited)

 

(As adjusted)

 

 

 

(in millions)

 

Assets

 

 

 

 

 

Fixed maturities, available-for-sale (2012 and 2011 include $180.3 million and $214.2 million related to consolidated variable interest entities)

 

$

51,533.9

 

$

49,006.7

 

Fixed maturities, trading (2012 and 2011 both include $132.4 million related to consolidated variable interest entities)

 

808.0

 

971.7

 

Equity securities, available-for-sale

 

143.6

 

77.1

 

Equity securities, trading (2012 and 2011 include $0.0 million and $207.6 million related to consolidated variable interest entities)

 

237.6

 

404.8

 

Mortgage loans

 

11,297.9

 

10,727.2

 

Real estate

 

1,208.6

 

1,092.9

 

Policy loans

 

866.6

 

885.1

 

Other investments (2012 and 2011 include $81.3 million and $97.8 million related to consolidated variable interest entities and $114.2 million and $97.5 million measured at fair value under the fair value option)

 

3,172.1

 

2,985.8

 

Total investments

 

69,268.3

 

66,151.3

 

Cash and cash equivalents (2012 and 2011 include $0.0 million and $317.7 million related to consolidated variable interest entities)

 

2,279.0

 

2,833.9

 

Accrued investment income

 

614.4

 

615.2

 

Premiums due and other receivables

 

1,192.2

 

1,196.5

 

Deferred policy acquisition costs

 

2,558.5

 

2,428.0

 

Property and equipment

 

468.4

 

457.2

 

Goodwill

 

548.9

 

482.3

 

Other intangibles

 

927.4

 

890.6

 

Separate account assets

 

80,160.5

 

71,364.4

 

Other assets

 

1,175.7

 

942.3

 

Total assets

 

$

159,193.3

 

$

147,361.7

 

Liabilities

 

 

 

 

 

Contractholder funds

 

$

37,312.2

 

$

37,676.4

 

Future policy benefits and claims

 

21,952.0

 

20,210.4

 

Other policyholder funds

 

720.8

 

548.6

 

Short-term debt

 

28.5

 

105.2

 

Long-term debt

 

2,180.0

 

1,564.8

 

Income taxes currently payable

 

6.6

 

3.1

 

Deferred income taxes

 

951.5

 

208.7

 

Separate account liabilities

 

80,160.5

 

71,364.4

 

Other liabilities (2012 and 2011 include $312.5 million and $565.2 million related to consolidated variable interest entities, of which $96.4 million and $88.4 million are measured at fair value under the fair value option)

 

5,974.3

 

6,286.2

 

Total liabilities

 

149,286.4

 

137,967.8

 

 

 

 

 

 

 

Redeemable noncontrolling interest

 

61.0

 

22.2

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Series A preferred stock, par value $.01 per share with liquidation preference of $100 per share — 3.0 million shares authorized, issued and outstanding in 2012 and 2011

 

 

 

Series B preferred stock, par value $.01 per share with liquidation preference of $25 per share — 10.0 million shares authorized, issued and outstanding in 2012 and 2011

 

0.1

 

0.1

 

Common stock, par value $.01 per share — 2,500.0 million shares authorized, 453.3 million and 450.3 million shares issued, and 293.6 million and 301.1 million shares outstanding in 2012 and 2011

 

4.5

 

4.5

 

Additional paid-in capital

 

9,712.2

 

9,634.7

 

Retained earnings

 

4,784.3

 

4,402.3

 

Accumulated other comprehensive income

 

880.8

 

258.0

 

Treasury stock, at cost (159.7 million and 149.2 million shares in 2012 and 2011)

 

(5,554.4

)

(5,281.7

)

Total stockholders’ equity attributable to Principal Financial Group, Inc.

 

9,827.5

 

9,017.9

 

Noncontrolling interest

 

18.4

 

353.8

 

Total stockholders’ equity

 

9,845.9

 

9,371.7

 

Total liabilities and stockholders’ equity

 

$

159,193.3

 

$

147,361.7

 

 

See accompanying notes.

 

3



Table of Contents

 

Principal Financial Group, Inc.

Consolidated Statements of Operations

(Unaudited)

 

 

 

For the three months ended

 

For the nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(in millions, except per share data)

 

Revenues

 

 

 

 

 

 

 

 

 

Premiums and other considerations

 

$

1,158.2

 

$

672.7

 

$

2,519.3

 

$

2,221.7

 

Fees and other revenues

 

675.0

 

636.4

 

1,909.1

 

1,892.6

 

Net investment income

 

783.8

 

815.2

 

2,409.6

 

2,548.6

 

Net realized capital gains, excluding impairment losses on available-for-sale securities

 

122.1

 

16.9

 

176.4

 

99.6

 

Total other-than-temporary impairment losses on available-for- sale securities

 

(43.6

)

(12.7

)

(126.4

)

(67.6

)

Other-than-temporary impairment losses on fixed maturities, available-for-sale reclassified to (from) other comprehensive income

 

9.2

 

(34.9

)

31.2

 

(83.0

)

Net impairment losses on available-for-sale securities

 

(34.4

)

(47.6

)

(95.2

)

(150.6

)

Net realized capital gains (losses)

 

87.7

 

(30.7

)

81.2

 

(51.0

)

Total revenues

 

2,704.7

 

2,093.6

 

6,919.2

 

6,611.9

 

Expenses

 

 

 

 

 

 

 

 

 

Benefits, claims and settlement expenses

 

1,647.0

 

1,114.9

 

3,969.5

 

3,497.7

 

Dividends to policyholders

 

49.7

 

52.2

 

149.5

 

158.7

 

Operating expenses

 

826.6

 

775.4

 

2,106.7

 

2,232.7

 

Total expenses

 

2,523.3

 

1,942.5

 

6,225.7

 

5,889.1

 

Income before income taxes

 

181.4

 

151.1

 

693.5

 

722.8

 

Income taxes (benefits)

 

(9.9

)

76.6

 

99.2

 

190.3

 

Net income

 

191.3

 

74.5

 

594.3

 

532.5

 

Net income (loss) attributable to noncontrolling interest

 

3.4

 

(5.6

)

15.3

 

36.6

 

Net income attributable to Principal Financial Group, Inc.

 

187.9

 

80.1

 

579.0

 

495.9

 

Preferred stock dividends

 

8.2

 

8.2

 

24.7

 

24.7

 

Net income available to common stockholders

 

$

179.7

 

$

71.9

 

$

554.3

 

$

471.2

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.61

 

$

0.23

 

$

1.86

 

$

1.48

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share

 

$

0.60

 

$

0.23

 

$

1.84

 

$

1.47

 

 

See accompanying notes.

 

4



Table of Contents

 

Principal Financial Group, Inc.

Consolidated Statements of Comprehensive Income

(Unaudited)

 

 

 

For the three months ended

 

For the nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(in millions)

 

Net income

 

$

191.3

 

$

74.5

 

$

594.3

 

$

532.5

 

Other comprehensive income (loss), net:

 

 

 

 

 

 

 

 

 

Net unrealized gains on available-for-sale securities

 

296.0

 

7.4

 

558.0

 

329.5

 

Noncredit component of impairment losses on fixed maturities, available-for-sale

 

(4.0

)

18.9

 

(14.8

)

45.2

 

Net unrealized gains (losses) on derivative instruments

 

(18.2

)

32.1

 

27.2

 

19.5

 

Foreign currency translation adjustment

 

48.6

 

(136.4

)

27.2

 

(64.9

)

Net unrecognized postretirement benefit obligation

 

8.7

 

(201.5

)

26.2

 

(174.2

)

Other comprehensive income (loss)

 

331.1

 

(279.5

)

623.8

 

155.1

 

Comprehensive income (loss)

 

522.4

 

(205.0

)

1,218.1

 

687.6

 

Comprehensive income (loss) attributable to noncontrolling interest

 

4.2

 

(5.9

)

16.3

 

36.3

 

Comprehensive income (loss) attributable to Principal Financial Group, Inc.

 

$

518.2

 

$

(199.1

)

$

1,201.8

 

$

651.3

 

 

See accompanying notes.

 

5


 


Table of Contents

 

Principal Financial Group, Inc.

Consolidated Statements of Stockholders’ Equity

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Series A

 

Series B

 

 

 

Additional

 

 

 

other

 

 

 

 

 

Total

 

 

 

preferred

 

preferred

 

Common

 

paid-in

 

Retained

 

comprehensive

 

Treasury

 

Noncontrolling

 

stockholders’

 

 

 

stock

 

stock

 

stock

 

capital

 

earnings

 

income

 

stock

 

interest

 

equity

 

 

 

(in millions)

 

Balances at January 1, 2011 (as adjusted)

 

$

 

$

0.1

 

$

4.5

 

$

9,563.8

 

$

3,999.4

 

$

306.7

 

$

(4,725.3

)

$

157.2

 

$

9,306.4

 

Common stock issued

 

 

 

 

23.2

 

 

 

 

 

23.2

 

Stock-based compensation and additional related tax benefits

 

 

 

 

32.9

 

 

 

 

 

32.9

 

Treasury stock acquired, common

 

 

 

 

 

 

 

(456.4

)

 

(456.4

)

Dividends to preferred stockholders

 

 

 

 

 

(24.7

)

 

 

 

(24.7

)

Distributions to noncontrolling interest

 

 

 

 

 

 

 

 

(7.4

)

(7.4

)

Contributions from noncontrolling interest

 

 

 

 

 

 

 

 

127.0

 

127.0

 

Purchase of subsidiary shares from noncontrolling interest

 

 

 

 

(2.0

)

 

 

 

(4.0

)

(6.0

)

Net income

 

 

 

 

 

495.9

 

 

 

36.6

 

532.5

 

Other comprehensive income

 

 

 

 

 

 

155.4

 

 

(0.3

)

155.1

 

Balances at September 30, 2011

 

$

 

$

0.1

 

$

4.5

 

$

9,617.9

 

$

4,470.6

 

$

462.1

 

$

(5,181.7

)

$

309.1

 

$

9,682.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at January 1, 2012

 

$

 

$

0.1

 

$

4.5

 

$

9,634.7

 

$

4,402.3

 

$

258.0

 

$

(5,281.7

)

$

353.8

 

$

9,371.7

 

Common stock issued

 

 

 

 

24.7

 

 

 

 

 

24.7

 

Stock-based compensation and additional related tax benefits

 

 

 

 

52.8

 

(2.7

)

 

 

 

50.1

 

Treasury stock acquired, common

 

 

 

 

 

 

 

(272.7

)

 

(272.7

)

Dividends to common stockholders

 

 

 

 

 

(169.6

)

 

 

 

(169.6

)

Dividends to preferred stockholders

 

 

 

 

 

(24.7

)

 

 

 

(24.7

)

Distributions to noncontrolling interest

 

 

 

 

 

 

 

 

(8.1

)

(8.1

)

Contributions from noncontrolling interest

 

 

 

 

 

 

 

 

12.1

 

12.1

 

Deconsolidation of certain variable interest entities

 

 

 

 

 

 

 

 

(353.2

)

(353.2

)

Net income (excludes $1.6 million attributable to redeemable noncontrolling interest)

 

 

 

 

 

579.0

 

 

 

13.7

 

592.7

 

Other comprehensive income (excludes $0.9 million attributable to redeemable noncontrolling interest)

 

 

 

 

 

 

622.8

 

 

0.1

 

622.9

 

Balances at September 30, 2012

 

$

 

$

0.1

 

$

4.5

 

$

9,712.2

 

$

4,784.3

 

$

880.8

 

$

(5,554.4

)

$

18.4

 

$

9,845.9

 

 

See accompanying notes.

 

6


 


Table of Contents

 

Principal Financial Group, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

For the nine months ended

 

 

 

September 30,

 

 

 

2012

 

2011

 

 

 

(in millions)

 

Operating activities

 

 

 

 

 

Net income

 

$

594.3

 

$

532.5

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Amortization of deferred policy acquisition costs

 

27.4

 

222.9

 

Additions to deferred policy acquisition costs

 

(303.1

)

(254.3

)

Accrued investment income

 

0.8

 

2.4

 

Net cash flows for trading securities

 

135.3

 

(193.8

)

Premiums due and other receivables

 

65.7

 

(99.8

)

Contractholder and policyholder liabilities and dividends

 

1,578.8

 

868.7

 

Current and deferred income taxes (benefits)

 

(28.7

)

39.3

 

Net realized capital (gains) losses

 

(81.2

)

51.0

 

Depreciation and amortization expense

 

109.2

 

87.4

 

Mortgage loans held for sale, acquired or originated

 

(48.2

)

(117.4

)

Mortgage loans held for sale, sold or repaid, net of gain

 

90.1

 

49.9

 

Real estate acquired through operating activities

 

(25.5

)

 

Real estate sold through operating activities

 

4.1

 

137.8

 

Stock-based compensation

 

50.2

 

32.5

 

Other

 

204.5

 

526.3

 

Net adjustments

 

1,779.4

 

1,352.9

 

Net cash provided by operating activities

 

2,373.7

 

1,885.4

 

Investing activities

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

Purchases

 

(6,467.5

)

(5,179.4

)

Sales

 

946.5

 

845.6

 

Maturities

 

4,702.7

 

4,350.3

 

Mortgage loans acquired or originated

 

(1,811.8

)

(1,070.4

)

Mortgage loans sold or repaid

 

1,166.7

 

1,269.6

 

Real estate acquired

 

(114.8

)

(43.8

)

Net purchases of property and equipment

 

(35.6

)

(32.6

)

Purchase of interests in subsidiaries, net of cash acquired

 

(62.5

)

 

Net change in other investments

 

(42.9

)

(228.4

)

Net cash used in investing activities

 

(1,719.2

)

(89.1

)

Financing activities

 

 

 

 

 

Issuance of common stock

 

24.7

 

23.2

 

Acquisition of treasury stock

 

(272.7

)

(456.4

)

Proceeds from financing element derivatives

 

51.6

 

74.7

 

Payments for financing element derivatives

 

(38.3

)

(38.6

)

Excess tax benefits from share-based payment arrangements

 

9.8

 

2.0

 

Dividends to common stockholders

 

(169.6

)

 

Dividends to preferred stockholders

 

(16.5

)

(24.7

)

Issuance of long-term debt

 

602.9

 

2.6

 

Principal repayments of long-term debt

 

(2.1

)

(4.3

)

Net repayments of short-term borrowings

 

(81.0

)

(30.7

)

Investment contract deposits

 

4,798.7

 

4,067.3

 

Investment contract withdrawals

 

(6,126.0

)

(5,836.3

)

Net increase (decrease) in banking operation deposits

 

14.9

 

(15.2

)

Other

 

(5.8

)

(3.1

)

Net cash used in financing activities

 

(1,209.4

)

(2,239.5

)

Net decrease in cash and cash equivalents

 

(554.9

)

(443.2

)

Cash and cash equivalents at beginning of period

 

2,833.9

 

1,877.4

 

Cash and cash equivalents at end of period

 

$

2,279.0

 

$

1,434.2

 

 

See accompanying notes.

 

7



Table of Contents

 

Principal Financial Group, Inc.

Notes to Consolidated Financial Statements

September 30, 2012

(Unaudited)

 

1. Nature of Operations and Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements of Principal Financial Group, Inc. (“PFG”), its majority-owned subsidiaries and its consolidated variable interest entities (“VIEs”), 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 and nine months ended September 30, 2012, are not necessarily indicative of the results that may be expected for the year ended December 31, 2012. These interim unaudited consolidated financial statements should be read in conjunction with our annual audited financial statements as of December 31, 2011, included in our Form 10-K for the year ended December 31, 2011, filed with the United States Securities and Exchange Commission (“SEC”). The accompanying consolidated statement of financial position as of December 31, 2011, 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 prior period financial statements to conform to the September 30, 2012, presentation.

 

Accounting Changes

 

In October 2010, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance that modifies the definition of the types of costs incurred by insurance entities that can be capitalized in the successful acquisition of new or renewal insurance contracts. Capitalized costs should include incremental direct costs of contract acquisition, as well as certain costs related directly to acquisition activities such as underwriting, policy issuance and processing, medical and inspection and sales force contract selling. This guidance was effective for us on January 1, 2012, and we adopted the guidance retrospectively.

 

Effective January 1, 2012, we voluntarily changed our method of accounting for the cost of long duration universal life and variable universal life reinsurance contracts. In conjunction with this change, we also changed our accounting policy for estimated gross profits (“EGPs”). These changes are collectively referred to as the “Reinsurance Accounting Change”. Under our previous method, we recognized all reinsurance cash flows as part of the net cost of reinsurance and amortized this balance over the estimated lives of the underlying policies in proportion to the pattern of EGPs on the underlying policies. Under the new method, any difference between actual and expected reinsurance cash flows are recognized in earnings immediately instead of being deferred and amortized over the life of the underlying policies. In conjunction with this change, we also changed our policy for determining EGPs relating to these contracts to include the difference between actual and expected reinsurance cash flows, where previously these effects had not been included. We adopted the new policies because we believe that they better reflect the economics of our reinsurance transactions by accounting for direct claims and related reinsurance recoveries in the same period. In addition, the new policies are consistent with our intent to purchase reinsurance to protect us against large and unexpected claims.

 

Comparative amounts from prior periods have been adjusted to apply the new deferred policy acquisition cost (“DPAC”) guidance (“DPAC Guidance”) and the Reinsurance Accounting Change retrospectively in these financial statements.

 

Our retrospective adoption of the DPAC Guidance and the Reinsurance Accounting Change resulted in reductions to the opening balances of retained earnings and accumulated other comprehensive income (“AOCI”) as of January 1, 2011, as shown in the following table.

 

 

 

Impact on

 

Attributed to

 

 

 

opening
balance as of
January 1, 2011

 

DPAC
Guidance

 

Reinsurance
Accounting
Change

 

 

 

(in millions)

 

Retained earnings

 

$

(612.9

)

$

(631.7

)

$

18.8

 

Accumulated other comprehensive income

 

34.3

 

29.5

 

4.8

 

 

The following tables show the prior period financial statement line items that were affected by the DPAC Guidance and the Reinsurance Accounting Change.

 

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Table of Contents

 

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements

September 30, 2012
(Unaudited)

 

Consolidated Statements of Financial Position

 

 

 

December 31, 2011

 

 

 

 

 

 

 

 

 

Change attributed to

 

 

 

 

 

As

 

 

 

 

 

Reinsurance

 

 

 

As

 

originally

 

Effect of

 

DPAC

 

Accounting

 

 

 

adjusted

 

reported

 

change

 

Guidance

 

Change

 

 

 

(in millions)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Other investments

 

$

2,985.8

 

$

2,988.0

 

$

(2.2

)

$

(2.2

)

$

 

Premiums due and other receivables

 

1,196.5

 

1,245.2

 

(48.7

)

 

(48.7

)

Deferred policy acquisition costs

 

2,428.0

 

3,313.5

 

(885.5

)

(884.4

)

(1.1

)

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

Future policy benefits and claims

 

20,210.4

 

20,207.9

 

2.5

 

 

2.5

 

Other policyholder funds

 

548.6

 

543.7

 

4.9

 

7.0

 

(2.1

)

Deferred income taxes

 

208.7

 

533.4

 

(324.7

)

(307.1

)

(17.6

)

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

 

 

 

Retained earnings

 

4,402.3

 

5,077.5

 

(675.2

)

(642.0

)

(33.2

)

Accumulated other comprehensive income

 

258.0

 

201.9

 

56.1

 

55.5

 

0.6

 

 

Consolidated Statements of Operations

 

 

 

For the three months ended September 30, 2011

 

 

 

 

 

 

 

 

 

Change attributed to

 

 

 

 

 

As

 

 

 

 

 

Reinsurance

 

 

 

As

 

originally

 

Effect of

 

DPAC

 

Accounting

 

 

 

adjusted

 

reported

 

change

 

Guidance (1)

 

Change

 

 

 

(in millions, except per share data)

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

Fees and other revenues

 

$

636.4

 

$

631.5

 

$

4.9

 

$

0.5

 

$

4.4

 

Net investment income

 

815.2

 

815.3

 

(0.1

)

(0.1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

Benefits, claims and settlement expenses

 

1,114.9

 

1,131.8

 

(16.9

)

(0.1

)

(16.8

)

Operating expenses

 

775.4

 

766.6

 

8.8

 

(5.3

)

14.1

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

151.1

 

138.2

 

12.9

 

5.8

 

7.1

 

Income taxes

 

76.6

 

71.9

 

4.7

 

2.1

 

2.6

 

Net income

 

$

74.5

 

$

66.3

 

$

8.2

 

$

3.7

 

$

4.5

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income available to common stockholders

 

$

71.9

 

$

63.7

 

$

8.2

 

$

3.7

 

$

4.5

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.23

 

$

0.20

 

$

0.03

 

$

0.01

 

$

0.02

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share

 

$

0.23

 

$

0.20

 

$

0.03

 

$

0.01

 

$

0.02

 

 

9



Table of Contents

 

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements

September 30, 2012
(Unaudited)

 

Consolidated Statements of Operations

 

 

 

For the nine months ended September 30, 2011

 

 

 

 

 

 

 

 

 

Change attributed to

 

 

 

 

 

As

 

 

 

 

 

Reinsurance

 

 

 

As

 

originally

 

Effect of

 

DPAC

 

Accounting

 

 

 

adjusted

 

reported

 

change

 

Guidance (1)

 

Change (2)

 

 

 

(in millions, except per share data)

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

Fees and other revenues

 

$

1,892.6

 

$

1,930.9

 

$

(38.3

)

$

0.7

 

$

(39.0

)

Net investment income

 

2,548.6

 

2,549.0

 

(0.4

)

(0.4

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

Benefits, claims and settlement expenses

 

3,497.7

 

3,337.0

 

160.7

 

(0.1

)

160.8

 

Operating expenses

 

2,232.7

 

2,360.9

 

(128.2

)

(7.0

)

(121.2

)

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

722.8

 

794.0

 

(71.2

)

7.4

 

(78.6

)

Income taxes

 

190.3

 

214.7

 

(24.4

)

3.0

 

(27.4

)

Net income

 

$

532.5

 

$

579.3

 

$

(46.8

)

$

4.4

 

$

(51.2

)

 

 

 

 

 

 

 

 

 

 

 

 

Net income available to common stockholders

 

$

471.2

 

$

518.0

 

$

(46.8

)

$

4.4

 

$

(51.2

)

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

1.48

 

$

1.63

 

$

(0.15

)

$

0.01

 

$

(0.16

)

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share

 

$

1.47

 

$

1.61

 

$

(0.14

)

$

0.01

 

$

(0.15

)

 


(1)    In general as a result of the adoption of the DPAC Guidance we capitalize fewer expenses, which lowers earnings. During 2011, we made routine model and assumption refinements that resulted in a write-down of our DPAC asset. The DPAC Guidance was applied to a lower DPAC asset, which reduced the DPAC write-off associated with the model and assumption refinements. This positive impact to earnings more than offset the negative impact of lower capitalization during the period.

 

(2)    In the second quarter of 2011, we made various routine adjustments to our model and assumptions in our individual life insurance business. When we updated our actuarial models for the Reinsurance Accounting Change, several of the components of our integrated insurance accounting model were impacted, resulting in changes to various balance sheet and income statement line items. While the same model and assumptions were used to derive both the “as originally reported” and “as adjusted” balances, the financial statement impacts of the model and assumption changes upon adjustment were different than previously reported because of changes to the pattern of EGPs caused by the application of our Reinsurance Accounting Change.

 

10



Table of Contents

 

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements

September 30, 2012
(Unaudited)

 

The following tables show the impact of the Reinsurance Accounting Change on the current period financial statements.

 

Consolidated Statements of Financial Position

 

 

 

September 30, 2012

 

 

 

New

 

Former

 

Effect of

 

 

 

reinsurance

 

reinsurance

 

Reinsurance

 

 

 

accounting

 

accounting

 

Accounting

 

 

 

method

 

method

 

Change

 

 

 

(in millions)

 

Assets

 

 

 

 

 

 

 

Premiums due and other receivables

 

$

1,192.2

 

$

1,263.3

 

$

(71.1

)

Deferred policy acquisition costs

 

2,558.5

 

2,540.4

 

18.1

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Future policy benefits and claims

 

21,952.0

 

21,952.4

 

(0.4

)

Other policyholder funds

 

720.8

 

714.5

 

6.3

 

Deferred income taxes

 

951.5

 

974.2

 

(22.7

)

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

Retained earnings

 

4,784.3

 

4,828.7

 

(44.4

)

Accumulated other comprehensive income

 

880.8

 

882.7

 

(1.9

)

 

Consolidated Statements of Operations

 

 

 

For the three months ended September 30, 2012

 

 

 

New

 

Former

 

Effect of

 

 

 

reinsurance

 

reinsurance

 

Reinsurance

 

 

 

accounting

 

accounting

 

Accounting

 

 

 

method

 

method

 

Change

 

 

 

(in millions, except per share data)

 

Revenue

 

 

 

 

 

 

 

Fees and other revenues

 

$

675.0

 

$

674.4

 

$

0.6

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

Benefits, claims and settlement expenses

 

1,647.0

 

1,641.5

 

5.5

 

Operating expenses

 

826.6

 

827.6

 

(1.0

)

 

 

 

 

 

 

 

 

Income before income taxes

 

181.4

 

198.2

 

(16.8

)

Income tax benefits

 

(9.9

)

(3.6

)

(6.3

)

Net income

 

$

191.3

 

$

201.8

 

$

(10.5

)

 

 

 

 

 

 

 

 

Net income available to common stockholders

 

$

179.7

 

$

190.2

 

$

(10.5

)

 

 

 

 

 

 

 

 

Earnings per common share

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.61

 

$

0.65

 

$

(0.04

)

 

 

 

 

 

 

 

 

Diluted earnings per common share

 

$

0.60

 

$

0.64

 

$

(0.04

)

 

11


 


Table of Contents

 

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements

September 30, 2012
(Unaudited)

 

Consolidated Statements of Operations

 

 

 

For the nine months ended September 30, 2012

 

 

 

New

 

Former

 

Effect of

 

 

 

reinsurance

 

reinsurance

 

Reinsurance

 

 

 

accounting

 

accounting

 

Accounting

 

 

 

method

 

method

 

Change

 

 

 

(in millions, except per share data)

 

Revenue

 

 

 

 

 

 

 

Fees and other revenues

 

$

1,909.1

 

$

1,917.5

 

$

(8.4

)

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

Benefits, claims and settlement expenses

 

3,969.5

 

3,950.0

 

19.5

 

Operating expenses

 

2,106.7

 

2,129.7

 

(23.0

)

 

 

 

 

 

 

 

 

Income before income taxes

 

693.5

 

711.3

 

(17.8

)

Income taxes

 

99.2

 

105.8

 

(6.6

)

Net income

 

$

594.3

 

$

605.5

 

$

(11.2

)

 

 

 

 

 

 

 

 

Net income available to common stockholders

 

$

554.3

 

$

565.5

 

$

(11.2

)

 

 

 

 

 

 

 

 

Earnings per common share

 

 

 

 

 

 

 

Basic earnings per common share

 

$

1.86

 

$

1.89

 

$

(0.03

)

 

 

 

 

 

 

 

 

Diluted earnings per common share

 

$

1.84

 

$

1.88

 

$

(0.04

)

 

Certain of the current and prior period line items in the consolidated statements of cash flows and consolidated statements of stockholders’ equity were affected by the DPAC Guidance and the Reinsurance Accounting Change. All of the line item changes in the consolidated statements of cash flows were included in the operating activities section and the changes in the consolidated statements of stockholders’ equity have largely been addressed through the preceding disclosures.

 

Our accounting policy for DPAC follows, which has been updated from our Form 10-K for the year ended December 31, 2011, to reflect this change.

 

Deferred Policy Acquisition Costs

 

Incremental direct costs of contract acquisition as well as certain costs directly related to acquisition activities (underwriting, policy issuance and processing, medical and inspection and sales force contract selling) for the successful acquisition of new and renewal insurance policies and investment contract business are capitalized to the extent recoverable. Maintenance costs and acquisition costs that are not deferrable are charged to operations as incurred.

 

DPAC for universal life-type insurance contracts, participating life insurance policies and certain investment contracts are being amortized over the lives of the policies and contracts in relation to the emergence of EGPs or, in certain circumstances, estimated gross revenues. This amortization is adjusted in the current period when EGPs or estimated gross revenues are revised. For individual variable life insurance, individual variable annuities and group annuities that have separate account U.S. equity investment options, we utilize a mean reversion method (reversion to the mean assumption), a common industry practice, to determine the future domestic equity market growth assumption used for the amortization of DPAC. The DPAC of nonparticipating term life insurance and individual disability policies are being amortized over the premium-paying period of the related policies using assumptions consistent with those used in computing policyholder liabilities.

 

DPAC are subject to recoverability testing at the time of policy issue and loss recognition testing on an annual basis, or when an event occurs that may warrant loss recognition. If loss recognition is necessary, DPAC would be written off to the extent that it is determined that future policy premiums and investment income or gross profits are not adequate to cover related losses and expenses.

 

12



Table of Contents

 

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements

September 30, 2012
(Unaudited)

 

Recent Accounting Pronouncements

 

In July 2012, the FASB issued authoritative guidance that amends how indefinite-lived intangible assets are tested for impairment. The amendments provide an option to perform a qualitative assessment to determine whether it is necessary to perform the annual fair value calculation impairment test. This new guidance is effective for our 2013 indefinite-lived intangible asset impairment testing and is not expected to have a material impact on our consolidated financial statements.

 

In December 2011, the FASB issued authoritative guidance related to balance sheet offsetting. The new guidance requires disclosures about assets and liabilities that are offset or have the potential to be offset. These disclosures are intended to address differences in the asset and liability offsetting requirements under U.S. GAAP and International Financial Reporting Standards. This new guidance will be effective for us for interim and annual reporting periods beginning January 1, 2013, with retrospective application required and is not expected to have a material impact on our consolidated financial statements.

 

Also in December 2011, the FASB issued authoritative guidance that requires a reporting entity to follow the real estate sales guidance when the reporting entity ceases to have a controlling financial interest in a subsidiary that is in-substance real estate as a result of a default on the subsidiary’s nonrecourse debt. This guidance will be effective for us on January 1, 2013, and is not expected to have a material impact on our consolidated financial statements.

 

In September 2011, the FASB issued authoritative guidance that amends how goodwill is tested for impairment. The amendments provide an option to perform a qualitative assessment to determine whether it is necessary to perform the annual two-step quantitative goodwill impairment test. This guidance will be effective for our 2012 goodwill impairment test and is not expected to have a material impact on our consolidated financial statements.

 

In June 2011, the FASB issued authoritative guidance that changes the presentation of comprehensive income in the financial statements. The new guidance eliminates the presentation options contained in current guidance and instead requires entities to report components of comprehensive income in either a continuous statement of comprehensive income or two separate but consecutive statements that show the components of net income and other comprehensive income (“OCI”), including adjustments for items that are reclassified from OCI to net income. The guidance does not change the items that must be reported in OCI or when an item of OCI must be reclassified to net income. In December 2011, the FASB issued a final standard to defer the new requirement to present classification adjustments out of OCI to net income on the face of the financial statements. All other requirements contained in the original statement on comprehensive income are still effective. This guidance was effective for us on January 1, 2012, and did not have a material impact on our consolidated financial statements. The required disclosures are included in our consolidated financial statements. See Note 9, Stockholders’ Equity, for further details.

 

In May 2011, the FASB issued authoritative guidance that clarifies and changes fair value measurement and disclosure requirements. This guidance expands existing disclosure requirements for fair value measurements and makes other amendments but does not require additional fair value measurements. This guidance was effective for us on January 1, 2012, and did not have a material impact on our consolidated financial statements. See Note 10, Fair Value Measurements, for further details.

 

In April 2011, the FASB issued authoritative guidance that modifies the criteria for determining when repurchase agreements would be accounted for as secured borrowings as opposed to sales. The guidance was effective for us on January 1, 2012, for new transfers and modifications to existing transactions and did not have a material impact on our consolidated financial statements.

 

Also in April 2011, the FASB issued authoritative guidance which clarifies when creditors should classify a loan modification as a troubled debt restructuring (“TDR”). A TDR occurs when a creditor grants a concession to a debtor experiencing financial difficulties. Loans denoted as a TDR are considered impaired and are specifically reserved for when calculating the allowance for credit losses. This guidance also ends the indefinite deferral issued in January 2011 surrounding new disclosures on loans classified as a TDR required as part of the credit quality disclosures guidance issued in July 2010. This guidance was effective for us on July 1, 2011, and was applied retrospectively to restructurings occurring on or after January 1, 2011. This guidance did not have a material impact on our consolidated financial statements. See Note 3, Investments, for further detail.

 

In July 2010, the FASB issued authoritative guidance that requires new and expanded disclosures related to the credit quality of financing receivables and the allowance for credit losses. Reporting entities are required to provide qualitative and quantitative disclosures on the allowance for credit losses, credit quality, impaired loans, modifications and nonaccrual and past due financing receivables. The disclosures are required to be presented on a disaggregated basis by portfolio segment and class of financing receivable. Disclosures required by the guidance that relate to the end of a reporting period were effective for us in our December 31,

 

13



Table of Contents

 

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements

September 30, 2012
(Unaudited)

 

2010, consolidated financial statements. Disclosures required by the guidance that relate to an activity that occurs during a reporting period were effective for us on January 1, 2011, and did not have a material impact on our consolidated financial statements. See Note 3, Investments, for further details.

 

In April 2010, the FASB issued authoritative guidance addressing how investments held through the separate accounts of an insurance entity affect the entity’s consolidation analysis. This guidance clarifies that an insurance entity should not consider any separate account interests held for the benefit of policyholders in an investment to be the insurer’s interests and should not combine those interests with its general account interest in the same investment when assessing the investment for consolidation. This guidance was effective for us on January 1, 2011, and did not have a material impact on our consolidated financial statements.

 

In January 2010, the FASB issued authoritative guidance that requires new disclosures related to fair value measurements and clarifies existing disclosure requirements about the level of disaggregation, inputs and valuation techniques. Specifically, reporting entities now must disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. In addition, in the reconciliation for Level 3 fair value measurements, a reporting entity should present separately information about purchases, sales, issuances and settlements. The guidance clarifies that a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities for disclosure of fair value measurement, considering the level of disaggregated information required by other applicable U.S. GAAP guidance and should also provide disclosures about the valuation techniques and inputs used to measure fair value for each class of assets and liabilities. This guidance was effective for us on January 1, 2010, except for the disclosures about purchases, sales, issuances and settlements in the reconciliation for Level 3 fair value measurements, which were effective for us on January 1, 2011. This guidance did not have a material impact on our consolidated financial statements. See Note 10, Fair Value Measurements, for further details.

 

Separate Accounts

 

At September 30, 2012 and December 31, 2011, the separate accounts include a separate account valued at $145.9 million and $146.5 million, respectively, 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 our 2001 demutualization. These shares are included in both basic and diluted earnings per share calculations. In the consolidated statements of financial position, the separate account shares are recorded at fair value and are reported as separate account assets with a corresponding separate account liability to eligible participants of the qualified plan. Changes in fair value of the separate account shares are reflected in both the separate account assets and separate account liabilities and do not impact our results of operations.

 

2.  Variable Interest Entities

 

We have relationships with and may have a variable interest in various types of special purpose entities. Following is a discussion of our interest in entities that meet the definition of a VIE. When we are the primary beneficiary, we are required to consolidate the entity in our financial statements. The primary beneficiary of a VIE is defined as the enterprise with (1) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (2) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. On an ongoing basis, we assess whether we are the primary beneficiary of VIEs we have relationships with.

 

Consolidated Variable Interest Entities

 

Grantor Trusts

 

We contributed undated subordinated floating rate notes to three grantor trusts. The trusts separated the cash flows by issuing an interest-only certificate and a residual certificate related to each note contributed. Each interest-only certificate entitles the holder to interest on the stated note for a specified term, while the residual certificate entitles the holder to interest payments subsequent to the term of the interest-only certificate and to all principal payments. We retained the interest-only certificates and the residual certificates were subsequently sold to third parties. We have determined these grantor trusts are VIEs due to insufficient equity to sustain them. We determined we are the primary beneficiary as a result of our contribution of securities into the trusts and our continuing interest in the trusts.

 

14



Table of Contents

 

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements

September 30, 2012
(Unaudited)

 

Collateralized Private Investment Vehicles

 

We invest in synthetic collateralized debt obligations, collateralized bond obligations, collateralized loan obligations and other collateralized structures, which are VIEs due to insufficient equity to sustain the entities (collectively known as “collateralized private investment vehicles”). The performance of the notes of these structures is primarily linked to a synthetic portfolio by derivatives; each note has a specific loss attachment and detachment point. The notes and related derivatives are collateralized by a pool of permitted investments. The investments are held by a trustee and can only be liquidated to settle obligations of the trusts. These obligations primarily include derivatives and the notes due at maturity or termination of the trusts. We determined we are the primary beneficiary for certain of these entities because we act as the investment manager of the underlying portfolio and we have an ownership interest.

 

Commercial Mortgage-Backed Securities

 

We sold commercial mortgage loans to a real estate mortgage investment conduit trust. The trust issued various commercial mortgage-backed securities (“CMBS”) certificates using the cash flows of the underlying commercial mortgages it purchased. This is considered a VIE due to insufficient equity to sustain itself. We have determined we are the primary beneficiary as we retained the special servicing role for the assets within the trust as well as the ownership of the bond class that controls the unilateral kick out rights of the special servicer.

 

Hedge Funds

 

We are a general partner with insignificant equity ownership in various hedge funds. These entities were deemed VIEs due to the equity owners not having decision-making ability. We determined we were the primary beneficiary of these entities due to our control through our management relationships, related party ownership and our fee structure in certain of these funds.

 

In the second quarter of 2012, the hedge funds were no longer consolidated. We determined we were no longer the primary beneficiary due to the increase in external ownership in the funds. As a result of deconsolidation, total assets decreased $587.2 million and liabilities and noncontrolling interest decreased $586.1 million.

 

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Principal Financial Group, Inc.
Notes to Consolidated Financial Statements

September 30, 2012
(Unaudited)

 

The carrying amounts of our consolidated VIE assets, which can only be used to settle obligations of consolidated VIEs, and liabilities of consolidated VIEs for which creditors do not have recourse are as follows:

 

 

 

 

 

Collateralized

 

 

 

 

 

 

 

 

 

 

 

private investment

 

 

 

 

 

 

 

 

 

Grantor trusts

 

vehicles

 

CMBS

 

Hedge funds (2)

 

Total

 

 

 

(in millions)

 

September 30, 2012

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities, available-for-sale

 

$

180.3

 

$

 

$

 

$

 

$

180.3

 

Fixed maturities, trading

 

 

132.4

 

 

 

132.4

 

Other investments

 

 

 

81.3

 

 

81.3

 

Accrued investment income

 

0.5

 

 

0.6

 

 

1.1

 

Premiums due and other receivables

 

0.1

 

 

 

 

0.1

 

Total assets

 

$

180.9

 

$

132.4

 

$

81.9

 

$

 

$

395.2

 

Deferred income taxes

 

$

1.9

 

$

 

$

 

$

 

$

1.9

 

Other liabilities (1)

 

137.4

 

126.7

 

48.4

 

 

312.5

 

Total liabilities

 

$

139.3

 

$

126.7

 

$

48.4

 

$

 

$

314.4

 

December 31, 2011

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities, available-for-sale

 

$

199.2

 

$

15.0

 

$

 

$

 

$

214.2

 

Fixed maturities, trading

 

 

132.4

 

 

 

132.4

 

Equity securities, trading

 

 

 

 

207.6

 

207.6

 

Other investments

 

 

 

97.5

 

0.3

 

97.8

 

Cash and cash equivalents

 

 

 

 

317.7

 

317.7

 

Accrued investment income

 

1.2

 

0.1

 

0.6

 

 

1.9

 

Premiums due and other receivables

 

 

 

 

39.1

 

39.1

 

Total assets

 

$

200.4

 

$

147.5

 

$

98.1

 

$

564.7

 

$

1,010.7

 

Deferred income taxes

 

$

2.2

 

$

 

$

 

$

 

$

2.2

 

Other liabilities (1)

 

136.9

 

143.8

 

64.5

 

220.0

 

565.2

 

Total liabilities

 

$

139.1

 

$

143.8

 

$

64.5

 

$

220.0

 

$

567.4

 

 


(1)           Grantor trusts contain an embedded derivative of a forecasted transaction to deliver the underlying securities; collateralized private investment vehicles include derivative liabilities and obligation to redeem notes at maturity or termination of the trust; CMBS includes obligation to the bondholders; and hedge funds include liabilities to securities brokers.

 

(2)            The consolidated statements of financial position included a $343.6 million noncontrolling interest for hedge funds as of December 31, 2011.

 

We did not provide financial or other support to investees designated as VIEs for the nine months ended September 30, 2012 and 2011.

 

Unconsolidated Variable Interest Entities

 

Invested Securities

 

We hold a variable interest in a number of VIEs where we are not the primary beneficiary. Our investments in these VIEs are reported in fixed maturities, available-for-sale; fixed maturities, trading and other investments in the consolidated statements of financial position and are described below.

 

VIEs include CMBS, residential mortgage-backed pass-through securities (“RMBS”) and other asset-backed securities (“ABS”). All of these entities were deemed VIEs because the equity within these entities is insufficient to sustain them. We determined we are not the primary beneficiary in any of the entities within these categories of investments. This determination was based primarily on the fact we do not own the class of security that controls the unilateral right to replace the special servicer or equivalent function.

 

As previously discussed, we invest in several types of collateralized private investment vehicles, which are VIEs. These include cash and synthetic structures that we do not manage. We have determined we are not the primary beneficiary of these

 

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Table of Contents

 

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements

September 30, 2012
(Unaudited)

 

collateralized private investment vehicles primarily because we do not control the economic performance of the entities and were not involved with the design of the entities.

 

We have invested in various VIE trusts as a debt holder. All of these entities are classified as VIEs due to insufficient equity to sustain them. We have determined we are not the primary beneficiary primarily because we do not control the economic performance of the entities and were not involved with the design of the entities.

 

We have invested in partnerships, some of which are classified as VIEs. The partnership returns are in the form of income tax credits and investment income. These entities are classified as VIEs as the general partner does not have an equity investment at risk in the entity. We have determined we are not the primary beneficiary because we are not the general partner, who makes all the significant decisions for the entity.

 

The carrying value and maximum loss exposure for our unconsolidated VIEs were as follows:

 

 

 

 

 

Maximum exposure to

 

 

 

Asset carrying value

 

loss (1)

 

 

 

(in millions)

 

September 30, 2012

 

 

 

 

 

Fixed maturities, available-for-sale:

 

 

 

 

 

Corporate

 

$

484.8

 

$

400.9

 

Residential mortgage-backed pass-through securities

 

3,265.3

 

3,034.6

 

Commercial mortgage-backed securities

 

3,838.4

 

4,115.9

 

Collateralized debt obligations

 

380.8

 

439.9

 

Other debt obligations

 

3,749.7

 

3,745.6

 

Fixed maturities, trading:

 

 

 

 

 

Residential mortgage-backed pass-through securities

 

96.4

 

96.4

 

Commercial mortgage-backed securities

 

2.8

 

2.8

 

Collateralized debt obligations

 

55.7

 

55.7

 

Other debt obligations

 

17.4

 

17.4

 

Other investments:

 

 

 

 

 

Other limited partnership interests

 

126.0

 

126.0

 

 

 

 

 

 

 

December 31, 2011

 

 

 

 

 

Fixed maturities, available-for-sale:

 

 

 

 

 

Corporate

 

$

544.0

 

$

392.6

 

Residential mortgage-backed pass-through securities

 

3,343.0

 

3,155.8

 

Commercial mortgage-backed securities

 

3,413.7

 

3,894.3

 

Collateralized debt obligations

 

338.8

 

399.7

 

Other debt obligations

 

3,570.2

 

3,606.9

 

Fixed maturities, trading:

 

 

 

 

 

Residential mortgage-backed pass-through securities

 

105.6

 

105.6

 

Commercial mortgage-backed securities

 

12.0

 

12.0

 

Collateralized debt obligations

 

51.4

 

51.4

 

Other debt obligations