10-Q 1 a15-5965_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 March 31, 2015

 

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 April 22, 2015, was 294,385,885.

 

 

 



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 March 31, 2015 (Unaudited) and December 31, 2014

3

 

 

 

 

Unaudited Consolidated Statements of Operations for the three months ended March 31, 2015 and 2014

4

 

 

 

 

Unaudited Consolidated Statements of Comprehensive Income for the three months ended March 31, 2015 and 2014

5

 

 

 

 

Unaudited Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2015 and 2014

6

 

 

 

 

Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014

7

 

 

 

 

Notes to Unaudited Consolidated Financial Statements — March 31, 2015

8

 

 

 

Item 2.

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

82

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

114

 

 

 

Item 4.

Controls and Procedures

119

 

 

 

Part II — OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

120

 

 

 

Item 1A.

Risk Factors

120

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

120

 

 

 

Item 6.

Exhibits

121

 

 

 

Signature

122

 

2



Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Principal Financial Group, Inc.

Consolidated Statements of Financial Position

 

 

 

March 31, 2015

 

December 31,
2014

 

 

 

(Unaudited)

 

 

 

 

 

(in millions)

 

Assets

 

 

 

 

 

Fixed maturities, available-for-sale (2015 and 2014 include $266.4 million and $278.2 million related to consolidated variable interest entities)

 

$

49,755.7

 

$

49,670.8

 

Fixed maturities, trading (2015 and 2014 both include $100.4 million related to consolidated variable interest entities)

 

574.0

 

604.6

 

Equity securities, available-for-sale

 

144.9

 

123.0

 

Equity securities, trading (2015 and 2014 include $352.3 million and $345.3 million related to consolidated variable interest entities)

 

875.1

 

840.2

 

Mortgage loans

 

11,899.5

 

11,811.6

 

Real estate (2015 and 2014 include $297.8 million and $284.9 million related to consolidated variable interest entities)

 

1,391.7

 

1,344.6

 

Policy loans

 

826.0

 

829.2

 

Other investments (2015 and 2014 include $34.6 million and $40.6 million related to consolidated variable interest entities and $57.5 million and $127.2 million measured at fair value under the fair value option)

 

3,395.6

 

3,209.8

 

Total investments

 

68,862.5

 

68,433.8

 

Cash and cash equivalents

 

1,452.0

 

1,863.9

 

Accrued investment income

 

531.1

 

505.9

 

Premiums due and other receivables

 

1,230.0

 

1,213.0

 

Deferred acquisition costs

 

3,020.8

 

2,993.0

 

Property and equipment

 

607.4

 

590.2

 

Goodwill

 

981.0

 

1,007.4

 

Other intangibles

 

1,291.2

 

1,323.5

 

Separate account assets (2015 and 2014 include $35,319.4 million and $34,655.4 million related to consolidated variable interest entities)

 

143,505.2

 

140,072.8

 

Other assets

 

1,013.7

 

1,083.5

 

Total assets

 

$

222,494.9

 

$

219,087.0

 

Liabilities

 

 

 

 

 

Contractholder funds

 

$

34,173.8

 

$

34,726.7

 

Future policy benefits and claims

 

24,377.1

 

24,036.6

 

Other policyholder funds

 

853.1

 

812.7

 

Short-term debt

 

27.2

 

28.0

 

Long-term debt (2015 and 2014 include $65.6 million and $82.3 million related to consolidated variable interest entities)

 

2,514.6

 

2,531.2

 

Income taxes currently payable

 

12.0

 

11.5

 

Deferred income taxes

 

968.5

 

1,035.3

 

Separate account liabilities (2015 and 2014 include $35,319.4 million and $34,655.4 million related to consolidated variable interest entities)

 

143,505.2

 

140,072.8

 

Other liabilities (2015 and 2014 include $335.9 million and $344.0 million related to consolidated variable interest entities, of which $67.1 million and $71.0 million are measured at fair value under the fair value option)

 

5,506.3

 

5,542.2

 

Total liabilities

 

211,937.8

 

208,797.0

 

Redeemable noncontrolling interest

 

65.0

 

58.0

 

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 2015 and 2014

 

 

 

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 2015 and 2014

 

0.1

 

0.1

 

Common stock, par value $.01 per share — 2,500.0 million shares authorized, 464.7 million and 462.7 million shares issued, and 294.4 million and 293.9 million shares outstanding in 2015 and 2014

 

4.6

 

4.6

 

Additional paid-in capital

 

9,975.6

 

9,945.5

 

Retained earnings

 

6,420.4

 

6,114.1

 

Accumulated other comprehensive income

 

28.0

 

50.4

 

Treasury stock, at cost (170.3 million and 168.8 million shares in 2015 and 2014)

 

(6,006.1

)

(5,930.7

)

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

 

10,422.6

 

10,184.0

 

Noncontrolling interest

 

69.5

 

48.0

 

Total stockholders’ equity

 

10,492.1

 

10,232.0

 

Total liabilities and stockholders’ equity

 

$

222,494.9

 

$

219,087.0

 

 

See accompanying notes.

 

3



Table of Contents

 

Principal Financial Group, Inc.

Consolidated Statements of Operations

(Unaudited)

 

 

 

For the three months ended

 

 

 

March 31,

 

 

 

2015

 

2014

 

 

 

(in millions, except per share data)

 

Revenues

 

 

 

 

 

Premiums and other considerations

 

$

916.4

 

$

803.6

 

Fees and other revenues

 

950.8

 

829.7

 

Net investment income

 

723.9

 

844.7

 

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

 

73.7

 

19.8

 

Net other-than-temporary impairment recoveries on available-for-sale securities

 

14.0

 

10.9

 

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

 

(21.5

)

(30.1

)

Net impairment losses on available-for-sale securities

 

(7.5

)

(19.2

)

Net realized capital gains

 

66.2

 

0.6

 

Total revenues

 

2,657.3

 

2,478.6

 

Expenses

 

 

 

 

 

Benefits, claims and settlement expenses

 

1,236.3

 

1,227.5

 

Dividends to policyholders

 

41.7

 

45.7

 

Operating expenses

 

921.2

 

829.0

 

Total expenses

 

2,199.2

 

2,102.2

 

Income before income taxes

 

458.1

 

376.4

 

Income taxes

 

29.0

 

52.3

 

Net income

 

429.1

 

324.1

 

Net income attributable to noncontrolling interest

 

6.7

 

22.2

 

Net income attributable to Principal Financial Group, Inc.

 

422.4

 

301.9

 

Preferred stock dividends

 

8.2

 

8.2

 

Net income available to common stockholders

 

$

414.2

 

$

293.7

 

 

 

 

 

 

 

Earnings per common share

 

 

 

 

 

Basic earnings per common share

 

$

1.41

 

$

0.96

 

 

 

 

 

 

 

Diluted earnings per common share

 

$

1.39

 

$

0.95

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.36

 

$

0.28

 

 

See accompanying notes.

 

4



Table of Contents

 

Principal Financial Group, Inc.

Consolidated Statements of Comprehensive Income

(Unaudited)

 

 

 

For the three months ended

 

 

 

March 31,

 

 

 

2015

 

2014

 

 

 

(in millions)

 

 

 

 

 

Net income

 

$

429.1

 

$

324.1

 

Other comprehensive income (loss), net:

 

 

 

 

 

Net unrealized gains on available-for-sale securities

 

57.1

 

192.2

 

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

 

13.5

 

17.5

 

Net unrealized gains on derivative instruments

 

27.8

 

9.0

 

Foreign currency translation adjustment

 

(132.6

)

(45.6

)

Net unrecognized postretirement benefit obligation

 

12.0

 

3.5

 

Other comprehensive income (loss)

 

(22.2

)

176.6

 

Comprehensive income

 

406.9

 

500.7

 

Comprehensive income attributable to noncontrolling interest

 

0.4

 

20.2

 

Comprehensive income attributable to Principal Financial Group, Inc.

 

$

406.5

 

$

480.5

 

 

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, 2014

 

$

 

$

0.1

 

$

4.6

 

$

9,798.9

 

$

5,405.4

 

$

183.2

 

$

(5,708.0

)

$

92.8

 

$

9,777.0

 

Common stock issued

 

 

 

 

16.1

 

 

 

 

 

16.1

 

Stock-based compensation and additional related tax benefits

 

 

 

 

22.7

 

(1.4

)

 

 

 

21.3

 

Treasury stock acquired, common

 

 

 

 

 

 

 

(89.0

)

 

(89.0

)

Dividends to common stockholders

 

 

 

 

 

(82.7

)

 

 

 

(82.7

)

Dividends to preferred stockholders

 

 

 

 

 

(8.2

)

 

 

 

(8.2

)

Distributions to noncontrolling interest

 

 

 

 

 

 

 

 

(22.0

)

(22.0

)

Contributions from noncontrolling interest

 

 

 

 

 

 

 

 

7.9

 

7.9

 

Purchase of subsidiary shares from noncontrolling interest

 

 

 

 

 

 

 

 

(25.3

)

(25.3

)

Adjustments to redemption amount of redeemable noncontrolling interest

 

 

 

 

(24.6

)

(9.7

)

 

 

 

(34.3

)

Net income (excludes $2.0 million attributable to redeemable noncontrolling interest)

 

 

 

 

 

301.9

 

 

 

20.2

 

322.1

 

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

 

 

 

 

 

 

178.6

 

 

(3.6

)

175.0

 

Balances at March 31, 2014

 

$

 

$

0.1

 

$

4.6

 

$

9,813.1

 

$

5,605.3

 

$

361.8

 

$

(5,797.0

)

$

70.0

 

$

10,057.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at January 1, 2015

 

$

 

$

0.1

 

$

4.6

 

$

9,945.5

 

$

6,114.1

 

$

50.4

 

$

(5,930.7

)

$

48.0

 

$

10,232.0

 

Common stock issued

 

 

 

 

17.9

 

 

 

 

 

17.9

 

Stock-based compensation and additional related tax benefits

 

 

 

 

33.2

 

(1.6

)

 

 

 

31.6

 

Treasury stock acquired, common

 

 

 

 

 

 

 

(75.4

)

 

(75.4

)

Dividends to common stockholders

 

 

 

 

 

(106.3

)

 

 

 

(106.3

)

Dividends to preferred stockholders

 

 

 

 

 

(8.2

)

 

 

 

(8.2

)

Distributions to noncontrolling interest

 

 

 

 

 

 

 

 

(0.3

)

(0.3

)

Contributions from noncontrolling interest

 

 

 

 

 

 

 

 

1.5

 

1.5

 

Purchase of subsidiary shares from noncontrolling interest

 

 

 

 

(17.3

)

 

(6.5

)

 

15.1

 

(8.7

)

Adjustments to redemption amount of redeemable noncontrolling interest

 

 

 

 

(3.7

)

 

 

 

 

(3.7

)

Net income (excludes $2.9 million attributable to redeemable noncontrolling interest)

 

 

 

 

 

422.4

 

 

 

3.8

 

426.2

 

Other comprehensive loss (excludes $(7.7) million attributable to redeemable noncontrolling interest)

 

 

 

 

 

 

(15.9

)

 

1.4

 

(14.5

)

Balances at March 31, 2015

 

$

 

$

0.1

 

$

4.6

 

$

9,975.6

 

$

6,420.4

 

$

28.0

 

$

(6,006.1

)

$

69.5

 

$

10,492.1

 

 

See accompanying notes.

 

6



Table of Contents

 

Principal Financial Group, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

For the three months ended

 

 

 

March 31,

 

 

 

2015

 

2014

 

 

 

(in millions)

Operating activities

 

 

 

 

 

Net income

 

$

429.1

 

$

324.1

 

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

 

 

 

 

 

Amortization of deferred acquisition costs

 

61.5

 

74.9

 

Additions to deferred acquisition costs

 

(99.8

)

(95.9

)

Accrued investment income

 

(25.2

)

(8.3

)

Net cash flows for trading securities

 

(8.5

)

(19.1

)

Premiums due and other receivables

 

11.8

 

74.0

 

Contractholder and policyholder liabilities and dividends

 

314.1

 

344.1

 

Current and deferred income taxes (benefits)

 

(67.4

)

14.4

 

Net realized capital gains

 

(66.2

)

(0.6

)

Depreciation and amortization expense

 

41.6

 

40.5

 

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

 

 

0.3

 

Real estate acquired through operating activities

 

(18.2

)

(20.7

)

Real estate sold through operating activities

 

49.2

 

104.3

 

Stock-based compensation

 

31.8

 

21.6

 

Other

 

(22.9

)

(262.3

)

Net adjustments

 

201.8

 

267.2

 

Net cash provided by operating activities

 

630.9

 

591.3

 

Investing activities

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

Purchases

 

(2,220.1

)

(2,659.5

)

Sales

 

567.5

 

475.3

 

Maturities

 

1,694.3

 

1,495.9

 

Mortgage loans acquired or originated

 

(511.3

)

(319.3

)

Mortgage loans sold or repaid

 

408.9

 

335.1

 

Real estate acquired

 

(87.9

)

(182.2

)

Net purchases of property and equipment

 

(32.8

)

(49.8

)

Net change in other investments

 

(48.1

)

69.2

 

Net cash used in investing activities

 

(229.5

)

(835.3

)

Financing activities

 

 

 

 

 

Issuance of common stock

 

17.9

 

16.1

 

Acquisition of treasury stock

 

(75.4

)

(89.0

)

Proceeds from financing element derivatives

 

0.2

 

14.4

 

Payments for financing element derivatives

 

(19.3

)

(12.7

)

Excess tax benefits from share-based payment arrangements

 

13.0

 

4.9

 

Purchase of subsidiary shares from noncontrolling interest

 

(8.7

)

(25.3

)

Dividends to common stockholders

 

(106.3

)

(82.7

)

Dividends to preferred stockholders

 

(8.2

)

 

Issuance of long-term debt

 

3.1

 

14.0

 

Principal repayments of long-term debt

 

(19.8

)

(100.1

)

Net repayments of short-term borrowings

 

(0.1

)

(0.3

)

Investment contract deposits

 

1,277.8

 

1,319.7

 

Investment contract withdrawals

 

(1,871.9

)

(1,751.5

)

Net decrease in banking operation deposits

 

(13.5

)

(39.1

)

Other

 

(2.1

)

(3.1

)

Net cash used in financing activities

 

(813.3

)

(734.7

)

Net decrease in cash and cash equivalents

 

(411.9

)

(978.7

)

Cash and cash equivalents at beginning of period

 

1,863.9

 

2,371.8

 

Cash and cash equivalents at end of period

 

$

1,452.0

 

$

1,393.1

 

 

See accompanying notes.

 

7



Table of Contents

 

Principal Financial Group, Inc.

Notes to Consolidated Financial Statements

March 31, 2015

(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 months ended March 31, 2015, are not necessarily indicative of the results that may be expected for the year ended December 31, 2015. These interim unaudited consolidated financial statements should be read in conjunction with our annual audited financial statements as of December 31, 2014, included in our Form 10-K for the year ended December 31, 2014, filed with the United States Securities and Exchange Commission (“SEC”). The accompanying consolidated statement of financial position as of December 31, 2014, 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.

 

In February 2015, we announced planned changes to our organizational structure to better align businesses, distribution teams and product offerings for future growth. We plan to implement these changes during 2015 and will report our consolidated financial statements under the new structure in our December 31, 2015, Form 10-K. The changes are not expected to have a material impact on our consolidated financial statements.

 

Recent Accounting Pronouncements

 

 

 

 

 

Effect on our consolidated

 

 

Date of

 

financial statements or

Description

 

adoption

 

other significant matters

Standards not yet adopted:

 

 

 

 

 

 

 

 

 

Revenue recognition

This authoritative guidance replaces all general and most industry specific revenue recognition guidance currently prescribed by U.S. GAAP. The core principle is that an entity recognizes revenue to reflect the transfer of a promised good or service to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for that good or service.

 

January 1, 2017

 

We are currently evaluating the impact this guidance will have on our consolidated financial statements.

 

 

 

 

 

Simplifying the presentation of debt issuance costs

This authoritative guidance requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.

 

January 1, 2016

 

We are currently evaluating the impact this guidance will have on our consolidated financial statements.

 

 

 

 

 

Consolidations

This authoritative guidance makes changes to both the variable interest and voting interest consolidation models and eliminates the investment company deferral for portions of the variable interest model. The amendments in the standard impact the consolidation analysis for interests in investment companies and limited partnerships and similar entities.

 

January 1, 2016

 

We are currently evaluating the impact this guidance will have on our consolidated financial statements.

 

8



Table of Contents

 

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements

March 31, 2015
(Unaudited)

 

 

 

 

 

Effect on our consolidated

 

 

Date of

 

financial statements or

Description

 

adoption

 

other significant matters

Standards adopted:

 

 

 

 

 

 

 

 

 

Discontinued operations

This authoritative guidance amends the definition of discontinued operations and requires entities to provide additional disclosures associated with discontinued operations, as well as disposal transactions that do not meet the discontinued operations criteria. The guidance requires discontinued operations treatment for disposals of a component or group of components that represents a strategic shift that has or will have a major impact on an entity’s operations or financial results. The guidance also expands the scope to disposals of equity method investments and businesses that, upon initial acquisition, qualify as held for sale.

 

January 1, 2015

 

This guidance was adopted prospectively and did not have a material impact on our consolidated financial statements.

 

 

 

 

 

Foreign currency cumulative translation adjustment

This authoritative guidance clarifies how the cumulative translation adjustment related to a parent’s investment in a foreign entity should be released when certain transactions related to the foreign entity occur.

 

January 1, 2014

 

The guidance was adopted prospectively and did not have a material impact on our consolidated financial statements.

 

Separate Accounts

 

The separate accounts are legally segregated and are not subject to the claims that arise out of any of our other business. The client, rather than us, directs the investments and bears the investment risk of these funds. The separate account assets represent the fair value of funds that are separately administered by us for contracts with equity, real estate and fixed income investments and are presented as a summary total within the consolidated statements of financial position. An equivalent amount is reported as separate account liabilities, which represent the obligation to return the monies to the client. We receive fees for mortality, withdrawal and expense risks, as well as administrative, maintenance and investment advisory services that are included in the consolidated statements of operations. Net deposits, net investment income and realized and unrealized capital gains and losses of the separate accounts are not reflected in the consolidated statements of operations.

 

Separate account assets and separate account liabilities include certain retirement accumulation products where the segregated funds and associated obligation to the client are consolidated within our financial statements. We have determined that summary totals are the most meaningful presentation for these funds.

 

At March 31, 2015 and December 31, 2014, the separate account assets include a separate account valued at $200.4 million and $205.4 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. For VIEs that are investment companies, the primary beneficiary is the enterprise who absorbs the majority of the entity’s expected losses, receives a majority of the expected residual returns or both. On an ongoing basis, we assess whether we are the primary beneficiary of VIEs in which we have a relationship.

 

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Principal Financial Group, Inc.
Notes to Consolidated Financial Statements

March 31, 2015
(Unaudited)

 

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.

 

Collateralized Private Investment Vehicle

 

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 one 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.

 

Mandatory Retirement Savings

 

We hold an equity interest in Chilean mandatory privatized social security funds in which we provide asset management services. We determined that the mandatory privatized social security funds, which also include contributions for voluntary pension savings, voluntary non-pension savings and compensation savings accounts, are VIEs. This is because the equity holders as a group lack the power, due to voting rights or similar rights, to direct the activities of the entity that most significantly impact the entity’s economic performance and also because equity investors are protected from below-average market investment returns relative to the industry’s return, due to a regulatory guarantee that we provide. Further we concluded that we are the primary beneficiary through our power to make decisions and our variable interest in the funds. The purpose of the funds, which reside in legally segregated entities, is to provide long-term retirement savings. The obligation to the client is directly related to the assets held in the funds and, as such, we present the assets as separate account assets and the obligation as separate account liabilities within our consolidated statements of financial position.

 

Real Estate

 

We invest in several real estate limited partnerships and limited liability companies. The entities invest in real estate properties. Certain of these entities are VIEs based on the combination of our significant economic interest and related voting rights. We determined we are the primary beneficiary as a result of our power to control the entities through our significant ownership.

 

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Table of Contents

 

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements

March 31, 2015
(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

 

 

 

Mandatory

 

 

 

 

 

 

 

Grantor

 

investment

 

 

 

retirement

 

 

 

 

 

 

 

trusts

 

vehicle

 

CMBS

 

savings

 

Real estate

 

Total

 

 

 

(in millions)

 

March 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities, available-for-sale

 

$

266.4

 

$

 

$

 

$

 

$

 

$

266.4

 

Fixed maturities, trading

 

 

100.4

 

 

 

 

100.4

 

Equity securities, trading

 

 

 

 

352.3

 

 

352.3

 

Real estate

 

 

 

 

 

297.8

 

297.8

 

Other investments

 

 

 

28.9

 

 

5.7

 

34.6

 

Cash

 

 

 

 

 

6.0

 

6.0

 

Accrued investment income

 

0.4

 

 

0.2

 

 

1.7

 

2.3

 

Separate account assets

 

 

 

 

35,319.4

 

 

35,319.4

 

Other assets

 

 

 

 

 

0.3

 

0.3

 

Total assets

 

$

266.8

 

$

100.4

 

$

29.1

 

$

35,671.7

 

$

311.5

 

$

36,379.5

 

Long-term debt

 

$

 

$

 

$

 

$

 

$

65.6

 

$

65.6

 

Income taxes currently payable

 

 

 

 

 

0.2

 

0.2

 

Deferred income taxes

 

1.7

 

 

 

 

(0.4

)

1.3

 

Separate account liabilities

 

 

 

 

35,319.4

 

 

35,319.4

 

Other liabilities (1)

 

233.8

 

86.7

 

1.9

 

 

13.5

 

335.9

 

Total liabilities

 

$

235.5

 

$

86.7

 

$

1.9

 

$

35,319.4

 

$

78.9

 

$

35,722.4

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities, available-for-sale

 

$

278.2

 

$

 

$

 

$

 

$

 

$

278.2

 

Fixed maturities, trading

 

 

100.4

 

 

 

 

100.4

 

Equity securities, trading

 

 

 

 

345.3

 

 

345.3

 

Real estate

 

 

 

 

 

284.9

 

284.9

 

Other investments

 

 

 

35.0

 

 

5.6

 

40.6

 

Cash

 

 

 

 

 

4.7

 

4.7

 

Accrued investment income

 

0.4

 

 

0.2

 

 

1.4

 

2.0

 

Separate account assets

 

 

 

 

34,655.4

 

 

34,655.4

 

Other assets

 

 

 

 

 

0.3

 

0.3

 

Total assets

 

$

278.6

 

$

100.4

 

$

35.2

 

$

35,000.7

 

$

296.9

 

$

35,711.8

 

Long-term debt

 

$

 

$

 

$

 

$

 

$

82.3

 

$

82.3

 

Income taxes currently payable

 

 

 

 

 

10.6

 

10.6

 

Deferred income taxes

 

1.5

 

 

 

 

(0.4

)

1.1

 

Separate account liabilities

 

 

 

 

34,655.4

 

 

34,655.4

 

Other liabilities (1)

 

239.1

 

85.6

 

4.8

 

 

14.5

 

344.0

 

Total liabilities

 

$

240.6

 

$

85.6

 

$

4.8

 

$

34,655.4

 

$

107.0

 

$

35,093.4

 

 


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

 

We did not provide financial or other support to investees designated as VIEs for the periods ended March 31, 2015 and December 31, 2014.

 

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Principal Financial Group, Inc.
Notes to Consolidated Financial Statements

March 31, 2015
(Unaudited)

 

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.

 

Unconsolidated 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 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 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 and other funds, some of which are classified as VIEs. Some of these entities have returns in the form of income tax credits. These entities are classified as VIEs as the general partners do not have equity investments at risk in the entities. We have determined we are not the primary beneficiary because we are not the general partner, who makes all the significant decisions for the entities. Other limited partnerships and fund interests have returns from investment income. These entities are classified as VIEs as the decision makers do not have equity investments at risk in the entities. We have determined we are not the primary beneficiary because we do not make the significant decisions for the entities, or our variable interest does not absorb the majority of the variability of the entities’ net assets.

 

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Principal Financial Group, Inc.
Notes to Consolidated Financial Statements

March 31, 2015
(Unaudited)

 

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

 

 

 

 

 

Maximum exposure to

 

 

 

Asset carrying value

 

loss (1)

 

 

 

(in millions)

 

March 31, 2015

 

 

 

 

 

Fixed maturities, available-for-sale:

 

 

 

 

 

Corporate

 

$

466.4

 

$

357.3

 

Residential mortgage-backed pass-through securities

 

2,823.5

 

2,688.8

 

Commercial mortgage-backed securities

 

3,911.3

 

3,822.0

 

Collateralized debt obligations

 

532.9

 

549.9

 

Other debt obligations

 

4,648.2

 

4,598.2

 

Fixed maturities, trading:

 

 

 

 

 

Residential mortgage-backed pass-through securities

 

32.1

 

32.1

 

Commercial mortgage-backed securities

 

1.8

 

1.8

 

Collateralized debt obligations

 

39.8

 

39.8

 

Other investments:

 

 

 

 

 

Other limited partnership and fund interests

 

190.7

 

190.7

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

 

Fixed maturities, available-for-sale:

 

 

 

 

 

Corporate

 

$

456.7

 

$

353.3

 

Residential mortgage-backed pass-through securities

 

2,822.9

 

2,702.9

 

Commercial mortgage-backed securities

 

3,975.5

 

3,896.9

 

Collateralized debt obligations

 

504.1

 

521.2

 

Other debt obligations

 

4,616.4

 

4,583.4

 

Fixed maturities, trading:

 

 

 

 

 

Residential mortgage-backed pass-through securities

 

34.4

 

34.4

 

Commercial mortgage-backed securities

 

1.5

 

1.5

 

Collateralized debt obligations

 

39.4

 

39.4

 

Other debt obligations

 

0.2

 

0.2

 

Other investments:

 

 

 

 

 

Other limited partnership and fund interests

 

188.2

 

188.2

 

 


(1)         Our risk of loss is limited to our initial investment measured at amortized cost for fixed maturities, available-for-sale and other investments. Our risk of loss is limited to our investment measured at fair value for our fixed maturities, trading.

 

Sponsored Investment Funds

 

We are the investment manager for certain money market mutual funds that are deemed to be VIEs. We are not the primary beneficiary of these VIEs since our involvement is limited primarily to being a service provider, and our variable interest does not absorb the majority of the variability of the entities’ net assets. As of March 31, 2015 and December 31, 2014, these VIEs held $1.2 billion and $1.4 billion in total assets, respectively. We have no contractual obligation to contribute to the funds.

 

We provide asset management and other services to certain investment structures for which we earn performance-based management fees. These structures are considered VIEs. We are not the primary beneficiary of these entities as we do not have the obligation to absorb losses of the entities that could be potentially significant to the VIE or the right to receive benefits from these entities that could be potentially significant.

 

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Table of Contents

 

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements

March 31, 2015
(Unaudited)

 

3.  Investments

 

Fixed Maturities and Equity Securities

 

Fixed maturities include bonds, ABS, redeemable preferred stock and certain nonredeemable preferred securities. Equity securities include mutual funds, common stock, nonredeemable preferred stock and mandatory regulatory required investments. We classify fixed maturities and equity securities as either available-for-sale or trading at the time of the purchase and, accordingly, carry them at fair value. See Note 9, Fair Value Measurements, for methodologies related to the determination of fair value. Unrealized gains and losses related to available-for-sale securities, excluding those in fair value hedging relationships, are reflected in stockholders’ equity, net of adjustments associated with deferred acquisition costs (“DAC”) and related actuarial balances, derivatives in cash flow hedge relationships and applicable income taxes. Unrealized gains and losses related to hedged portions of available-for-sale securities in fair value hedging relationships and mark-to-market adjustments on certain trading securities are reflected in net realized capital gains (losses). Mark-to-market adjustments related to certain securities carried at fair value with an investment objective to realize economic value through mark-to-market changes are reflected in net investment income.

 

The cost of fixed maturities is adjusted for amortization of premiums and accrual of discounts, both computed using the interest method. The cost of fixed maturities and equity securities classified as available-for-sale is adjusted for declines in value that are other than temporary. Impairments in value deemed to be other than temporary are primarily reported in net income as a component of net realized capital gains (losses), with noncredit impairment losses for certain fixed maturities, available-for-sale reported in other comprehensive income (“OCI”). For loan-backed and structured securities, we recognize income using a constant effective yield based on currently anticipated cash flows.

 

The amortized cost, gross unrealized gains and losses, other-than-temporary impairments in accumulated other comprehensive income (“AOCI”) and fair value of fixed maturities and equity securities available-for-sale are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

Other-than-

 

 

 

 

 

Gross

 

Gross

 

 

 

temporary

 

 

 

Amortized

 

unrealized

 

unrealized

 

 

 

impairments in

 

 

 

cost

 

gains

 

losses

 

Fair value

 

AOCI (1)

 

 

 

(in millions)

 

March 31, 2015

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities, available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agencies

 

$

1,181.1

 

$

56.3

 

$

0.9

 

$

1,236.5

 

$

 

Non-U.S. governments

 

666.7

 

170.7

 

0.4

 

837.0

 

 

States and political subdivisions

 

4,021.3

 

326.3

 

1.9

 

4,345.7

 

 

Corporate

 

28,960.4

 

2,669.1

 

208.9

 

31,420.6

 

0.1

 

Residential mortgage-backed pass-through securities

 

2,688.8

 

137.8

 

3.1

 

2,823.5

 

 

Commercial mortgage-backed securities

 

3,822.0

 

142.2

 

52.9

 

3,911.3

 

87.6

 

Collateralized debt obligations

 

549.9

 

3.7

 

20.7

 

532.9

 

1.3

 

Other debt obligations

 

4,598.2

 

69.0

 

19.0

 

4,648.2

 

65.0

 

Total fixed maturities, available-for-sale

 

$

46,488.4

 

$

3,575.1

 

$

307.8

 

$

49,755.7

 

$

154.0

 

Total equity securities, available-for-sale

 

$

145.6

 

$

8.6

 

$

9.3

 

$

144.9

 

 

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities, available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agencies

 

$

1,085.6

 

$

39.1

 

$

2.9

 

$

1,121.8

 

$

 

Non-U.S. governments

 

704.4

 

188.3

 

1.6

 

891.1

 

 

States and political subdivisions

 

3,916.8

 

291.3

 

4.1

 

4,204.0

 

 

Corporate

 

29,308.3

 

2,442.6

 

215.9

 

31,535.0

 

18.4

 

Residential mortgage-backed pass-through securities

 

2,702.9

 

126.3

 

6.3

 

2,822.9

 

 

Commercial mortgage-backed securities

 

3,896.9

 

141.5

 

62.9

 

3,975.5

 

88.9

 

Collateralized debt obligations

 

521.2

 

3.5

 

20.6

 

504.1

 

1.3

 

Other debt obligations

 

4,583.4

 

57.5

 

24.5

 

4,616.4

 

66.9

 

Total fixed maturities, available-for-sale

 

$

46,719.5

 

$

3,290.1

 

$

338.8

 

$

49,670.8

 

$

175.5

 

Total equity securities, available-for-sale

 

$

125.1

 

$

7.7

 

$

9.8

 

$

123.0

 

 

 

 


(1)              Excludes $153.6 million and $167.5 million as of March 31, 2015 and December 31, 2014, respectively, of net unrealized gains on impaired fixed maturities, available-for-sale related to changes in fair value subsequent to the impairment date, which are included in gross unrealized gains and gross unrealized losses.

 

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Table of Contents

 

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements

March 31, 2015
(Unaudited)

 

The amortized cost and fair value of fixed maturities available-for-sale at March 31, 2015, by expected maturity, were as follows:

 

 

 

Amortized cost

 

Fair value

 

 

 

(in millions)

 

Due in one year or less

 

$

2,424.1

 

$

2,455.2

 

Due after one year through five years

 

13,187.1

 

13,813.4

 

Due after five years through ten years

 

7,676.0

 

8,211.4

 

Due after ten years

 

11,542.3

 

13,359.8

 

Subtotal

 

34,829.5

 

37,839.8

 

Mortgage-backed and other asset-backed securities

 

11,658.9

 

11,915.9

 

Total

 

$

46,488.4

 

$

49,755.7

 

 

Actual maturities may differ because borrowers may have the right to call or prepay obligations. Our portfolio is diversified by industry, issuer and asset class. Credit concentrations are managed to established limits.

 

Net Realized Capital Gains and Losses

 

Net realized capital gains and losses on sales of investments are determined on the basis of specific identification. In general, in addition to realized capital gains and losses on investment sales and periodic settlements on derivatives not designated as hedges, we report gains and losses related to the following in net realized capital gains (losses): other-than-temporary impairments of securities and subsequent realized recoveries, mark-to-market adjustments on certain trading securities, mark-to-market adjustments on certain seed money investments, fair value hedge and cash flow hedge ineffectiveness, mark-to-market adjustments on derivatives not designated as hedges, changes in the mortgage loan valuation allowance provision and impairments of real estate held for investment. Investment gains and losses on sales of certain real estate held for sale that do not meet the criteria for classification as a discontinued operation, mark-to-market adjustments on certain securities carried at fair value with an investment objective to realize economic value through mark-to-market changes are reported as net investment income and are excluded from net realized capital gains (losses). The major components of net realized capital gains (losses) on investments are summarized as follows:

 

 

 

For the three months ended March 31,

 

 

 

2015

 

2014

 

 

 

(in millions)

 

Fixed maturities, available-for-sale:

 

 

 

 

 

Gross gains

 

$

9.8

 

$

3.6

 

Gross losses

 

(1.5

)

(3.2

)

Net impairment losses

 

(7.5

)

(25.1

)

Hedging, net

 

(10.6

)

4.5

 

Fixed maturities, trading

 

0.7

 

14.2

 

Equity securities, available-for-sale:

 

 

 

 

 

Gross losses

 

 

(0.1

)

Net impairment recoveries

 

 

5.9

 

Equity securities, trading

 

1.5

 

3.6

 

Mortgage loans

 

(2.4

)

1.4

 

Derivatives

 

62.6

 

(11.3

)

Other

 

13.6

 

7.1

 

Net realized capital gains

 

$

66.2

 

$

0.6

 

 

Proceeds from sales of investments (excluding call and maturity proceeds) in fixed maturities, available-for-sale were $556.3 million and $471.9 million for the three months ended March 31, 2015 and 2014, respectively.

 

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Table of Contents

 

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements

March 31, 2015
(Unaudited)

 

Other-Than-Temporary Impairments

 

We have a process in place to identify fixed maturity and equity securities that could potentially have a credit impairment that is other than temporary. This process involves monitoring market events that could impact issuers’ credit ratings, business climate, management changes, litigation and government actions and other similar factors. This process also involves monitoring late payments, pricing levels, downgrades by rating agencies, key financial ratios, financial statements, revenue forecasts and cash flow projections as indicators of credit issues.

 

Each reporting period, all securities are reviewed to determine whether an other-than-temporary decline in value exists and whether losses should be recognized. We consider relevant facts and circumstances in evaluating whether a credit or interest-related impairment of a security is other than temporary. Relevant facts and circumstances considered include: (1) the extent and length of time the fair value has been below cost; (2) the reasons for the decline in value; (3) the financial position and access to capital of the issuer, including the current and future impact of any specific events; (4) for structured securities, the adequacy of the expected cash flows; (5) for fixed maturities, our intent to sell a security or whether it is more likely than not we will be required to sell the security before the recovery of its amortized cost which, in some cases, may extend to maturity and (6) for equity securities, our ability and intent to hold the security for a period of time that allows for the recovery in value. To the extent we determine that a security is deemed to be other than temporarily impaired, an impairment loss is recognized.

 

Impairment losses on equity securities are recognized in net income and are measured as the difference between amortized cost and fair value. The way in which impairment losses on fixed maturities are recognized in the financial statements is dependent on the facts and circumstances related to the specific security. If we intend to sell a security or it is more likely than not that we would be required to sell a security before the recovery of its amortized cost, we recognize an other-than-temporary impairment in net income for the difference between amortized cost and fair value. If we do not expect to recover the amortized cost basis, we do not plan to sell the security and if it is not more likely than not that we would be required to sell a security before the recovery of its amortized cost, the recognition of the other-than-temporary impairment is bifurcated. We recognize the credit loss portion in net income and the noncredit loss portion in OCI (“bifurcated OTTI”).

 

Total other-than-temporary impairment losses, net of recoveries from the sale of previously impaired securities, were as follows:

 

 

 

For the three months ended March 31,

 

 

 

2015

 

2014

 

 

 

(in millions)

 

Fixed maturities, available-for-sale

 

$

14.0

 

$

5.0

 

Equity securities, available-for-sale

 

 

5.9

 

Net other-than-temporary impairment recoveries on available-for-sale securities

 

14.0

 

10.9

 

Other-than-temporary impairment losses on fixed maturities, available-for-sale reclassified from OCI (1)

 

(21.5

)

(30.1

)

Net impairment losses on available-for-sale securities

 

$

(7.5

)

$

(19.2

)

 


(1)   Represents the net impact of (a) gains resulting from reclassification of noncredit impairment losses for fixed maturities with bifurcated OTTI from net realized capital gains (losses) to OCI and (b) losses resulting from reclassification of previously recognized noncredit impairment losses from OCI to net realized capital gains (losses) for fixed maturities with bifurcated OTTI that had additional credit losses or fixed maturities that previously had bifurcated OTTI that have now been sold or are intended to be sold.

 

We estimate the amount of the credit loss component of a fixed maturity security impairment as the difference between amortized cost and the present value of the expected cash flows of the security. The present value is determined using the best estimate cash flows discounted at the effective interest rate implicit to the security at the date of purchase or the current yield to accrete an asset-backed or floating rate security. The methodology and assumptions for establishing the best estimate cash flows vary depending on the type of security. The ABS cash flow estimates are based on security specific facts and circumstances that may include collateral characteristics, expectations of delinquency and default rates, loss severity and prepayment speeds and structural support, including subordination and guarantees. The corporate security cash flow estimates are derived from scenario-based outcomes of expected corporate restructurings or liquidations using bond specific facts and circumstances including timing, security interests and loss severity.

 

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Table of Contents

 

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements

March 31, 2015
(Unaudited)

 

The following table provides a rollforward of accumulated credit losses for fixed maturities with bifurcated credit losses. The purpose of the table is to provide detail of (1) additions to the bifurcated credit loss amounts recognized in net realized capital gains (losses) during the period and (2) decrements for previously recognized bifurcated credit losses where the loss is no longer bifurcated and/or there has been a positive change in expected cash flows or accretion of the bifurcated credit loss amount.

 

 

 

For the three months ended March 31,

 

 

 

2015

 

2014

 

 

 

(in millions)

 

Beginning balance

 

$

(144.4

)

$

(235.4

)

Credit losses for which an other-than-temporary impairment was not previously recognized

 

(0.8

)

(0.3

)

Credit losses for which an other-than-temporary impairment was previously recognized

 

(1.7

)

(24.1

)

Reduction for credit losses previously recognized on fixed maturities now sold or intended to be sold

 

6.2

 

33.6

 

Net reduction for positive changes in cash flows expected to be collected and amortization (1)

 

2.0

 

2.0

 

Foreign currency translation adjustment

 

0.1

 

 

Ending balance

 

$

(138.6

)

$

(224.2

)

 


(1)   Amounts are recognized in net investment income.

 

Gross Unrealized Losses for Fixed Maturities and Equity Securities

 

For fixed maturities and equity securities available-for-sale with unrealized losses, including other-than-temporary impairment losses reported in OCI, the gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position are summarized as follows:

 

 

 

March 31, 2015

 

 

 

Less than

Greater than or

 

 

 

 

 

twelve months

 

equal to twelve months

 

Total

 

 

 

 

 

Gross

 

 

 

Gross

 

 

 

Gross

 

 

 

Fair

 

unrealized

 

Fair

 

unrealized

 

Fair

 

unrealized

 

 

 

value

 

losses

 

value

 

losses

 

value

 

losses

 

 

 

(in millions)

 

Fixed maturities, available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agencies

 

$

88.9

 

$

0.6

 

$

40.5

 

$

0.3

 

$

129.4

 

$

0.9

 

Non-U.S. governments

 

15.7

 

0.3

 

4.5

 

0.1

 

20.2

 

0.4

 

States and political subdivisions

 

129.5

 

1.3

 

26.4

 

0.6

 

155.9

 

1.9

 

Corporate

 

1,694.0

 

72.1

 

1,035.0

 

136.8

 

2,729.0

 

208.9

 

Residential mortgage-backed pass-through securities

 

170.9

 

0.7

 

170.8

 

2.4

 

341.7

 

3.1

 

Commercial mortgage-backed securities

 

311.4

 

2.5

 

334.8

 

50.4

 

646.2

 

52.9

 

Collateralized debt obligations

 

92.2

 

0.9

 

97.6

 

19.8

 

189.8

 

20.7

 

Other debt obligations

 

556.6

 

1.7

 

340.2

 

17.3

 

896.8

 

19.0

 

Total fixed maturities, available-for-sale

 

$

3,059.2

 

$

80.1

 

$

2,049.8

 

$

227.7

 

$

5,109.0

 

$

307.8

 

Total equity securities, available-for-sale

 

$

 

$

 

$

36.5

 

$

9.3

 

$

36.5

 

$

9.3

 

 

Of the total amounts, Principal Life’s consolidated portfolio represented $4,886.7 million in available-for-sale fixed maturities with gross unrealized losses of $283.7 million. Of those fixed maturity securities in Principal Life’s consolidated portfolio with a gross unrealized loss position, 77% were investment grade (rated AAA through BBB-) with an average price of 95 (carrying value/amortized cost) at March 31, 2015. Gross unrealized losses in our fixed maturities portfolio decreased during the three months ended March 31, 2015, due primarily to a decrease in interest rates.

 

17



Table of Contents

 

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements

March 31, 2015
(Unaudited)

 

For those securities that had been in a continuous unrealized loss position for less than twelve months, Principal Life’s consolidated portfolio held 472 securities with a carrying value of $2,986.4 million and unrealized losses of $78.9 million reflecting an average price of 97 at March 31, 2015. Of this portfolio, 77% was investment grade (rated AAA through BBB-) at March 31, 2015, with associated unrealized losses of $28.6 million. The unrealized losses on these securities can primarily be attributed to changes in market interest rates and changes in credit spreads since the securities were acquired.

 

For those securities that had been in a continuous unrealized loss position greater than or equal to twelve months, Principal Life’s consolidated portfolio held 306 securities with a carrying value of $1,900.3 million and unrealized losses of $204.8 million. The average rating of this portfolio was A- with an average price of 90 at March 31, 2015. Of the $204.8 million in unrealized losses, the commercial mortgage-backed securities sector accounts for $50.4 million in unrealized losses with an average price of 87 and an average credit rating of A-. The remaining unrealized losses consist primarily of $114.0 million within the corporate sector at March 31, 2015. The average price of the corporate sector was 89 and the average credit rating was BBB+. The unrealized losses on these securities can primarily be attributed to changes in market interest rates and changes in credit spreads since the securities were acquired.

 

Because we expected to recover our amortized cost, it was not our intent to sell the fixed maturity available-for-sale securities with unrealized losses and it was not more likely than not that we would be required to sell these securities before recovery of the amortized cost, which may be maturity, we did not consider these investments to be other-than-temporarily impaired at March 31, 2015.

 

 

 

December 31, 2014

 

 

Less than

 

Greater than or

 

 

 

 

 

 

 

twelve months

 

equal to twelve months

 

Total

 

 

 

 

 

Gross

 

 

 

Gross

 

 

 

Gross

 

 

 

Fair

 

unrealized

 

Fair

 

unrealized

 

Fair

 

unrealized

 

 

 

value

 

losses

 

value

 

losses

 

value

 

losses

 

 

 

(in millions)

Fixed maturities, available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agencies

 

$

211.5

 

$

0.7

 

$

95.0

 

$

2.2

 

$

306.5

 

$

2.9

 

Non-U.S. governments

 

20.3

 

1.4

 

7.5

 

0.2

 

27.8

 

1.6

 

States and political subdivisions

 

208.1

 

0.7

 

210.5

 

3.4

 

418.6

 

4.1

 

Corporate

 

3,072.1

 

76.8

 

1,238.3

 

139.1

 

4,310.4

 

215.9

 

Residential mortgage-backed pass-through securities

 

18.0

 

 

395.3

 

6.3

 

413.3

 

6.3

 

Commercial mortgage-backed securities

 

375.3

 

3.0

 

395.0

 

59.9

 

770.3

 

62.9

 

Collateralized debt obligations

 

114.8

 

1.0

 

112.0

 

19.6

 

226.8

 

20.6

 

Other debt obligations

 

971.2

 

3.5

 

432.7

 

21.0

 

1,403.9

 

24.5

 

Total fixed maturities, available-for-sale

 

$

4,991.3

 

$

87.1

 

$

2,886.3

 

$

251.7

 

$

7,877.6

 

$

338.8

 

Total equity securities, available-for-sale

 

$

10.0

 

$

 

$

36.0

 

$

9.8

 

$

46.0

 

$

9.8

 

 

Of the total amounts, Principal Life’