10-Q 1 a16-6244_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, 2016

 

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 ý 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 ý 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 ý

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 ý

 

The total number of shares of the registrant’s Common Stock, $0.01 par value, outstanding as of April 27, 2016, was 289,852,707.

 



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 as of March 31, 2016 (Unaudited) and December 31, 2015

 

3

 

 

 

 

 

 

 

Unaudited Consolidated Statements of Operations for the three months ended March 31, 2016 and 2015

 

4

 

 

 

 

 

 

 

Unaudited Consolidated Statements of Comprehensive Income for the three months ended March 31, 2016 and 2015

 

5

 

 

 

 

 

 

 

Unaudited Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2016 and 2015

 

6

 

 

 

 

 

 

 

Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015

 

7

 

 

 

 

 

 

 

Notes to Unaudited Consolidated Financial Statements — March 31, 2016

 

8

 

 

 

 

 

Item 2.

 

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

 

83

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

114

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

120

 

 

 

 

 

Part II — OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

121

 

 

 

 

 

Item 1A.

 

Risk Factors

 

121

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

121

 

 

 

 

 

Item 6.

 

Exhibits

 

122

 

 

 

 

 

Signature

 

123

 

2



Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Principal Financial Group, Inc.

Consolidated Statements of Financial Position

 

 

March 31, 2016

 

December 31,
2015

 

 

 

(Unaudited)

 

 

 

 

 

(in millions)

 

Assets

 

 

 

 

 

Fixed maturities, available-for-sale (2016 and 2015 include $231.7 million and $257.4 million related to consolidated variable interest entities)

 

$

53,045.4

 

$

49,966.5

 

Fixed maturities, trading (2016 and 2015 both include $100.4 million related to consolidated variable interest entities)

 

687.5

 

686.8

 

Equity securities, available-for-sale

 

103.7

 

104.5

 

Equity securities, trading (2016 and 2015 include $666.9 million and $640.9 million related to consolidated variable interest entities)

 

1,262.0

 

1,202.7

 

Mortgage loans

 

12,378.7

 

12,339.4

 

Real estate (2016 and 2015 include $391.9 million and $354.5 million related to consolidated variable interest entities)

 

1,486.6

 

1,451.8

 

Policy loans

 

819.7

 

817.1

 

Other investments (2016 and 2015 include $285.0 million and $29.5 million related to consolidated variable interest entities and $75.6 million and $53.4 million measured at fair value under the fair value option)

 

4,023.9

 

3,251.7

 

Total investments

 

73,807.5

 

69,820.5

 

Cash and cash equivalents

 

2,142.9

 

2,564.8

 

Accrued investment income

 

580.3

 

545.6

 

Premiums due and other receivables

 

1,309.5

 

1,429.3

 

Deferred acquisition costs

 

3,219.3

 

3,276.1

 

Property and equipment

 

657.3

 

633.8

 

Goodwill

 

1,037.6

 

1,009.0

 

Other intangibles

 

1,370.9

 

1,359.2

 

Separate account assets (2016 and 2015 include $35,356.5 million and $33,300.4 million related to consolidated variable interest entities)

 

132,325.9

 

136,978.9

 

Other assets

 

1,118.8

 

1,043.1

 

Total assets

 

$

217,570.0

 

$

218,660.3

 

Liabilities

 

 

 

 

 

Contractholder funds (2016 and 2015 include $339.5 million and $338.9 million related to consolidated variable interest entities)

 

$

36,660.5

 

$

35,716.1

 

Future policy benefits and claims

 

26,950.3

 

25,856.5

 

Other policyholder funds

 

838.6

 

805.4

 

Short-term debt

 

122.6

 

181.1

 

Long-term debt (2016 and 2015 include $46.0 million and $42.8 million related to consolidated variable interest entities)

 

3,269.1

 

3,265.2

 

Income taxes currently payable

 

16.4

 

18.4

 

Deferred income taxes

 

1,044.5

 

697.2

 

Separate account liabilities (2016 and 2015 include $35,356.5 million and $33,300.4 million related to consolidated variable interest entities)

 

132,325.9

 

136,978.9

 

Other liabilities (2016 and 2015 include $322.7 million and $345.9 million related to consolidated variable interest entities, of which $73.1 million and $68.1 million are measured at fair value under the fair value option)

 

5,971.6

 

5,678.4

 

Total liabilities

 

207,199.5

 

209,197.2

 

Redeemable noncontrolling interest (2016 includes $195.6 million related to consolidated variable interest entities)

 

260.9

 

85.7

 

Stockholders’ equity

 

 

 

 

 

Series A preferred stock, par value $.01 per share with liquidation preference of $100 per share — 0.0 million and 0.0 million shares authorized, issued and outstanding in 2016 and 2015

 

 

 

Series B preferred stock, par value $.01 per share with liquidation preference of $25 per share — 0.0 million and 0.0 million shares authorized, issued and outstanding in 2016 and 2015

 

 

 

Common stock, par value $.01 per share — 2,500.0 million shares authorized, 468.1 million and 466.2 million shares issued, and 290.4 million and 291.4 million shares outstanding in 2016 and 2015

 

4.7

 

4.7

 

Additional paid-in capital

 

9,598.1

 

9,544.8

 

Retained earnings

 

7,131.8

 

6,875.9

 

Accumulated other comprehensive loss

 

(356.1)

 

(882.5

)

Treasury stock, at cost (177.7 million and 174.8 million shares in 2016 and 2015)

 

(6,336.9)

 

(6,231.3

)

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

 

10,041.6

 

9,311.6

 

Noncontrolling interest

 

68.0

 

65.8

 

Total stockholders’ equity

 

10,109.6

 

9,377.4

 

Total liabilities and stockholders’ equity

 

$

217,570.0

 

$

218,660.3

 

 

See accompanying notes.

 

3



Table of Contents

 

Principal Financial Group, Inc.

Consolidated Statements of Operations

(Unaudited)

 

 

 

For the three months ended

 

 

 

March 31,

 

 

 

2016

 

2015

 

 

 

(in millions, except per share data)

 

Revenues

 

 

 

 

 

 

Premiums and other considerations

 

$

1,282.4

 

 

$

916.4

 

Fees and other revenues

 

855.9

 

 

950.8

 

Net investment income

 

761.7

 

 

723.9

 

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

 

184.7

 

 

73.7

 

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

 

(55.6

)

 

14.0

 

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

 

7.5

 

 

(21.5)

 

Net impairment losses on available-for-sale securities

 

(48.1

)

 

(7.5)

 

Net realized capital gains

 

136.6

 

 

66.2

 

Total revenues

 

3,036.6

 

 

2,657.3

 

Expenses

 

 

 

 

 

 

Benefits, claims and settlement expenses

 

1,658.5

 

 

1,236.3

 

Dividends to policyholders

 

38.8

 

 

41.7

 

Operating expenses

 

899.5

 

 

921.2

 

Total expenses

 

2,596.8

 

 

2,199.2

 

Income before income taxes

 

439.8

 

 

458.1

 

Income taxes

 

70.6

 

 

29.0

 

Net income

 

369.2

 

 

429.1

 

Net income attributable to noncontrolling interest

 

1.2

 

 

6.7

 

Net income attributable to Principal Financial Group, Inc.

 

368.0

 

 

422.4

 

Less:

 

 

 

 

 

 

Preferred stock dividends

 

 

 

8.2

 

Net income available to common stockholders

 

$

368.0

 

 

$

414.2

 

 

 

 

 

 

 

 

Earnings per common share

 

 

 

 

 

 

Basic earnings per common share

 

$

1.26

 

 

$

1.41

 

 

 

 

 

 

 

 

Diluted earnings per common share

 

$

1.25

 

 

$

1.39

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.38

 

 

$

0.36

 

 

See accompanying notes.

 

4



Table of Contents

 

Principal Financial Group, Inc.

Consolidated Statements of Comprehensive Income

(Unaudited)

 

 

 

For the three months ended

 

 

 

March 31,

 

 

 

2016

 

2015

 

 

 

(in millions)

 

 

 

 

 

 

 

 

Net income

 

$

369.2

 

 

$

429.1

 

Other comprehensive income (loss), net:

 

 

 

 

 

 

Net unrealized gains on available-for-sale securities

 

404.4

 

 

57.1

 

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

 

(4.2

)

 

13.5

 

Net unrealized gains on derivative instruments

 

1.3

 

 

27.8

 

Foreign currency translation adjustment

 

129.7

 

 

(132.6

)

Net unrecognized postretirement benefit obligation

 

8.0

 

 

12.0

 

Other comprehensive income (loss)

 

539.2

 

 

(22.2

)

Comprehensive income

 

908.4

 

 

406.9

 

Comprehensive income attributable to noncontrolling interest

 

4.7

 

 

0.4

 

Comprehensive income attributable to Principal Financial Group, Inc.

 

$

903.7

 

 

$

406.5

 

 

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 (loss)

 

 

stock

 

 

interest

 

 

equity

 

 

 

(in millions)

Balances as of 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 as of March 31, 2015

 

$

 

 

$

0.1

 

 

$

4.6

 

 

$

9,975.6

 

 

$

6,420.4

 

 

$

28.0

 

 

$

(6,006.1

)

 

$

69.5

 

 

$

10,492.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances as of January 1, 2016

 

$

 

 

$

 

 

$

4.7

 

 

$

9,544.8

 

 

$

6,875.9

 

 

$

(882.5

)

 

$

(6,231.3

)

 

$

65.8

 

 

$

9,377.4

 

Common stock issued

 

 

 

 

 

 

 

10.0

 

 

 

 

 

 

 

 

 

 

10.0

 

Stock-based compensation and additional related tax benefits

 

 

 

 

 

 

 

25.1

 

 

(1.7

)

 

 

 

 

 

0.1

 

 

23.5

 

Treasury stock acquired, common

 

 

 

 

 

 

 

 

 

 

 

 

 

(105.6

)

 

 

 

(105.6

)

Dividends to common stockholders

 

 

 

 

 

 

 

 

 

(110.4

)

 

 

 

 

 

 

 

(110.4

)

Distributions to noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(0.8

)

 

(0.8

)

Contributions from noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0.1

 

 

0.1

 

Purchase of subsidiary shares from noncontrolling interest

 

 

 

 

 

 

 

15.1

 

 

 

 

(9.3

)

 

 

 

 

 

5.8

 

Adjustments to redemption amount of redeemable noncontrolling interest

 

 

 

 

 

 

 

3.1

 

 

 

 

 

 

 

 

 

 

3.1

 

Net income (excludes $(0.2) million attributable to redeemable noncontrolling interest)

 

 

 

 

 

 

 

 

 

368.0

 

 

 

 

 

 

1.4

 

 

369.4

 

Other comprehensive income (excludes $2.1 million attributable to redeemable noncontrolling interest)

 

 

 

 

 

 

 

 

 

 

 

535.7

 

 

 

 

1.4

 

 

537.1

 

Balances as of March 31, 2016

 

$

 

 

$

 

 

$

4.7

 

 

$

9,598.1

 

 

$

7,131.8

 

 

$

(356.1

)

 

$

(6,336.9

)

 

$

68.0

 

 

$

10,109.6

 

 

See accompanying notes.

 

6



Table of Contents

 

Principal Financial Group, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

 

 

For the three months ended

 

 

March 31,

 

 

2016

 

 

2015

 

 

 

(in millions)

Operating activities

 

 

 

 

 

 

Net income

 

$

369.2

 

 

$

429.1

 

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

 

 

 

 

 

 

Amortization of deferred acquisition costs

 

99.6

 

 

61.5

 

Additions to deferred acquisition costs

 

(103.2

)

 

(99.8

)

Accrued investment income

 

(34.7

)

 

(25.2

)

Net cash flows for trading securities

 

(11.9

)

 

(8.5

)

Premiums due and other receivables

 

124.2

 

 

11.8

 

Contractholder and policyholder liabilities and dividends

 

617.1

 

 

314.1

 

Current and deferred income taxes (benefits)

 

57.1

 

 

(67.4

)

Net realized capital gains

 

(136.6

)

 

(66.2

)

Depreciation and amortization expense

 

45.8

 

 

41.6

 

Real estate acquired through operating activities

 

(12.8

)

 

(18.2

)

Real estate sold through operating activities

 

0.1

 

 

49.2

 

Stock-based compensation

 

22.3

 

 

31.8

 

Other

 

(140.7

)

 

(22.9

)

Net adjustments

 

526.3

 

 

201.8

 

Net cash provided by operating activities

 

895.5

 

 

630.9

 

Investing activities

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

Purchases

 

(3,558.6

)

 

(2,220.1

)

Sales

 

205.5

 

 

567.5

 

Maturities

 

1,616.0

 

 

1,694.3

 

Mortgage loans acquired or originated

 

(475.9

)

 

(511.3

)

Mortgage loans sold or repaid

 

479.3

 

 

408.9

 

Real estate acquired

 

(44.5

)

 

(87.9

)

Net purchases of property and equipment

 

(44.2

)

 

(32.8

)

Net change in other investments

 

(30.9

)

 

(48.1

)

Net cash used in investing activities

 

(1,853.3

)

 

(229.5

)

Financing activities

 

 

 

 

 

 

Issuance of common stock

 

10.0

 

 

17.9

 

Acquisition of treasury stock

 

(105.6

)

 

(75.4

)

Proceeds from financing element derivatives

 

 

 

0.2

 

Payments for financing element derivatives

 

(21.3

)

 

(19.3

)

Excess tax benefits from share-based payment arrangements

 

5.0

 

 

13.0

 

Purchase of subsidiary shares from noncontrolling interest

 

(2.3

)

 

(8.7

)

Dividends to common stockholders

 

(110.4

)

 

(106.3

)

Dividends to preferred stockholders

 

 

 

(8.2

)

Issuance of long-term debt

 

3.2

 

 

3.1

 

Principal repayments of long-term debt

 

 

 

(19.8

)

Net repayments of short-term borrowings

 

(59.9

)

 

(0.1

)

Investment contract deposits

 

3,976.3

 

 

1,277.8

 

Investment contract withdrawals

 

(3,166.3

)

 

(1,871.9

)

Net increase (decrease) in banking operation deposits

 

4.0

 

 

(13.5

)

Other

 

3.2

 

 

(2.1

)

Net cash provided by (used in) financing activities

 

535.9

 

 

(813.3

)

Net decrease in cash and cash equivalents

 

(421.9

)

 

(411.9

)

Cash and cash equivalents at beginning of period

 

2,564.8

 

 

1,863.9

 

Cash and cash equivalents at end of period

 

$

2,142.9

 

 

$

1,452.0

 

 

See accompanying notes.

 

7



Table of Contents

 

Principal Financial Group, Inc.

Notes to Consolidated Financial Statements

March 31, 2016

(Unaudited)

 

1. Nature of Operations and Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements of Principal Financial Group, Inc. (“PFG”) 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, 2016, are not necessarily indicative of the results that may be expected for the year ended December 31, 2016. These interim unaudited consolidated financial statements should be read in conjunction with our annual audited financial statements as of December 31, 2015, included in our Form 10-K for the year ended December 31, 2015, filed with the United States Securities and Exchange Commission (“SEC”). The accompanying consolidated statement of financial position as of December 31, 2015, 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.

 

Consolidation

 

We have relationships with various special purpose entities and other legal entities that must be evaluated to determine if the entities meet the criteria of a variable interest entity (“VIE”) or a voting interest entity (“VOE”). This assessment is performed by reviewing contractual, ownership and other rights, including involvement of related parties, and requires use of judgment. First, we determine if we hold a variable interest in an entity by assessing if we have the right to receive expected losses and expected residual returns of the entity. If we hold a variable interest, then the entity is assessed to determine if it is a VIE. An entity is a VIE if the equity at risk is not sufficient to support its activities, if the equity holders lack a controlling financial interest or if the entity is structured with non-substantive voting rights. In addition to the previous criteria, if the entity is a limited partnership or similar entity, it is a VIE if the limited partners do not have the power to direct the entity’s most significant activities through substantive kick-out rights or participating rights. A VIE is evaluated to determine the primary beneficiary. The primary beneficiary of a VIE is 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. When we are the primary beneficiary, we are required to consolidate the entity in our financial statements. We reassess our involvement with VIEs on a quarterly basis. For further information about VIEs, refer to Note 2, Variable Interest Entities.

 

If an entity is not a VIE, it is considered a VOE. VOEs are generally consolidated if we own a greater than 50% voting interest. Entities in which we have significant management influence over the operating and financing decisions but are not required to consolidate, other than investments accounted for at fair value under the fair value option, are reported using the equity method.

 

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Table of Contents

 

Principal Financial Group, Inc.

Notes to Consolidated Financial Statements

March 31, 2016

(Unaudited)

 

Recent Accounting Pronouncements

 

 

 

 

 

Effect on our consolidated

 

 

Date of

 

financial statements or

Description

 

adoption

 

other significant matters

Standards not yet adopted:

 

 

 

 

Leases

This authoritative guidance requires lessee recognition of lease assets and lease liabilities on the balance sheet. The concept of an operating lease, where the lease assets and liabilities are off balance sheet, is eliminated under the new guidance. For lessors, the guidance modifies lease classification criteria and accounting for certain types of leases. Other key aspects of the guidance relate to the removal of the current real estate- specific guidance and new presentation and disclosure requirements. Lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, which includes certain optional practical expedients that may be elected. Early adoption is permitted.

 

January 1, 2019

 

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

 

 

 

 

 

Financial instruments - recognition and measurements

This authoritative guidance addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The primary focus of this guidance is to supersede the guidance to classify equity securities with readily determinable fair values into different categories (trading or available-for-sale) and requires equity securities to be measured at fair value with changes in the fair value recognized through net income. This guidance requires adoption through a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption.

 

January 1, 2018

 

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

 

 

 

 

 

Revenue recognition

This authoritative guidance replaces all general and most industry specific revenue recognition guidance (excluding insurance) 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. This guidance also provides clarification on when an entity is a principal or an agent in a transaction. The guidance may be applied using one of the following two methods: (1) retrospectively to each prior reporting period presented, or (2) retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial application.

 

January 1, 2018

 

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

 

 

 

 

 

Employee share-based payment accounting

This authoritative guidance changes certain aspects of accounting for and reporting share-based payments to employees including changes related to the income tax effects of share-based payments, tax withholding requirements and accounting for forfeitures. Various transition methods will apply depending on the situation being addressed.

 

January 1, 2017

 

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

 

 

 

 

 

Short-duration insurance contracts

This authoritative guidance requires additional disclosures related to short- duration insurance contracts. Retrospective application through comparative disclosures is required.

 

December 31, 2016

 

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

 

 

 

 

 

 

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Table of Contents

 

Principal Financial Group, Inc.

Notes to Consolidated Financial Statements

March 31, 2016

(Unaudited)

 

 

 

 

 

Effect on our consolidated

 

 

Date of

 

financial statements or

Description

 

adoption

 

other significant matters

Standards not yet adopted:

 

 

 

 

Net asset value per share as a practical expedient for fair value

This authoritative guidance removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient.

 

January 1, 2016

 

The guidance was adopted retrospectively and did not have a material impact on our consolidated financial statements. See Note 10, Fair Value Measurements, for further details. 

 

 

 

 

 

Simplifying the presentation of debt issuance costs

This authoritative guidance requires debt issuance costs related to a recognized debt liability to 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

 

The guidance was adopted retrospectively and did not have a material impact on our consolidated financial statements. See Note 5, Long-Term Debt, for further details.

 

 

 

 

 

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

 

The guidance was adopted using the modified retrospective approach. See Note 2, Variable Interest Entities, for further details.

 

 

 

 

 

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 of an entity 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.

 

 

 

 

 

Fair value of financial assets and liabilities of a consolidated collateralized financing entity

This authoritative guidance provides a measurement alternative for a reporting entity to measure both the financial assets and financial liabilities of consolidated collateralized financing entities (“CCFEs”) using the more observable of the fair value of the financial assets or of the financial liabilities for both the financial assets and financial liabilities. 

 

January 1, 2015

 

This guidance was adopted using a modified retrospective approach and did not have a material impact on our consolidated financial statements. See Note 10, Fair Value Measurements, for further details. 

 

 

 

 

 

 

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Table of Contents

 

Principal Financial Group, Inc.

Notes to Consolidated Financial Statements

March 31, 2016

(Unaudited)

 

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 international 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.

 

As of March 31, 2016 and December 31, 2015, the separate account assets included a separate account valued at $125.6 million and $158.2 million, respectively, which primarily included 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 various types of entities which may be VIEs. Certain VIEs are consolidated in our financial results. See Note 1, Nature of Operations and Significant Accounting Policies, under the caption “Consolidation” for further details of our consolidation accounting policies. We did not provide financial or other support to investees designated as VIEs for the periods ended March 31, 2016 and December 31, 2015.

 

Adoption of New Consolidation Guidance

 

Both the variable interest and voting interest consolidation models were changed under authoritative guidance effective January 1, 2016. The guidance eliminated the investment company deferral for portions of the variable interest model. Prior to January 1, 2016, the primary beneficiary of an investment company VIE was the enterprise who absorbed the majority of the entity’s expected losses, received a majority of the expected residual returns or both. The new guidance requires all VIEs to be assessed under one method to determine the primary beneficiary.

 

The determination of whether interests in limited partnerships and similar entities are VIEs or VOEs has also changed under the pronouncement, by requiring evaluation of the equity holders’ rights to determine if they have the power to direct the entity’s most significant activities through substantive kick-out rights or participating rights. Limited partnerships and similar entities without these rights are VIEs.

 

We adopted the guidance using the modified retrospective approach effective January 1, 2016. Under the modified retrospective approach, the cumulative effect of initially applying the new guidance is recognized as of the date of initial application, and comparative periods are not restated. The changes resulting from the adoption were:

 

·                  The adoption resulted in the deconsolidation of $8.6 billion of both assets and liabilities of certain mandatory privatized social security funds in which we provide asset management services. Prior to January 1, 2016, the funds were consolidated as VOEs and the funds were presented in separate account assets and liabilities in the statement of financial position. The deconsolidation did not have a material impact to our consolidated statements of operations and did not result in a cumulative effect of the change on retained earnings.

 

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Principal Financial Group, Inc.

Notes to Consolidated Financial Statements

March 31, 2016

(Unaudited)

 

·                  The adoption of the guidance resulted in consolidation of certain sponsored investment funds in which we provide asset management services. We consolidated $180.1 million of assets and $0.6 million of liabilities. Additionally, we recorded $179.5 million of redeemable noncontrolling interest related to these funds. The consolidation of these funds did not have a material impact to our consolidated statements of operations and did not result in a cumulative effect of the change on retained earnings.

·                  We invest in partnerships and other funds. Prior to new accounting guidance certain of these investments were VOEs. Upon adoption of new accounting guidance, some of these investments are now considered VIEs. We are not the primary beneficiary of these VIEs.

·                  We provide asset management and other services to certain investment structures for which we earn performance-based management fees. These structures were considered VIEs prior to new accounting guidance, and we had a variable interest. We were not the primary beneficiary of these entities as we did not have the obligation to absorb losses or the right to receive benefits of the entities that could be potentially significant to the VIE. Subsequent to new accounting guidance, we no longer consider our fees a variable interest for those investment structures where our fees are deemed to be commensurate with the services provided, consistent with fees for similar services negotiated at arms-length, and we do not have additional interests in the entity that would absorb a significant amount of the entity’s expected losses and expected residual returns of the entity.

 

Consolidated Variable Interest Entities

 

Grantor Trusts

 

We contributed undated subordinated floating rate notes to three grantor trusts. The trusts separated their 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 significant continuing interest in the trusts.

 

Collateralized Private Investment Vehicles

 

We invest in cash and 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 synthetic 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 synthetic entities because we act as the investment manager of the underlying portfolio and we have the power to make decisions and to receive benefits and the obligation to absorb losses that could be potentially significant to the VIE.

 

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 Funds

 

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

 

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Table of Contents

 

Principal Financial Group, Inc.

Notes to Consolidated Financial Statements

March 31, 2016

(Unaudited)

 

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 significant 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 customer 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.

 

Principal International Hong Kong offers retirement pension schemes in which we provide trustee, administration and asset management services to employers and employees under the Hong Kong Mandatory Provident Fund (“MPF”) and Occupational Retirement Schemes Ordinance (“ORSO”) pension schemes. Each pension scheme has various guaranteed and non-guaranteed constituent funds, or investment options, in which customers can invest their money. The guaranteed funds provide either a guaranteed rate of return to the customer or a minimum guarantee on withdrawals under certain qualifying events. We have determined the guaranteed funds are VIEs due to the fact the equity holders, as a group, lack the obligation to absorb expected losses due to the guarantee we provide. We concluded that we are the primary beneficiary because we have the power to make decisions and to receive benefits and the obligation to absorb losses that could be potentially significant to the VIE. Therefore, we consolidate the underlying assets and liabilities of the funds and present as separate accounts or within the general account, depending on the terms of the guarantee.

 

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. Due to the nature of these real estate investments, the investment balance will fluctuate as we purchase and sell interests in the entities and as capital expenditures are made to improve the underlying real estate.

 

Sponsored Investment Funds

 

We sponsor and invest in certain investment funds for which we provide asset management services. Although our asset management fee is commensurate with the services provided and consistent with fees for similar services negotiated at arms-length, we have a variable interest for funds where our other interests are more than insignificant. The funds are VIEs as the equity holders lack power through voting rights to direct the activities of the entity that most significantly impact its economic performance. We determined we are the primary beneficiary of the VIEs where our interest in the entity is more than insignificant and we are the asset manager.

 

Assets and Liabilities of Consolidated Variable Interest Entities

 

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:

 

 

 

March 31, 2016

 

December 31, 2015

 

 

 

Total

 

Total

 

Total

 

Total

 

 

 

assets

 

liabilities

 

assets

 

liabilities

 

 

 

(in millions)

 

Grantor trusts (1)

 

$

232.3

 

$

214.9

 

$

257.9

 

$

231.8

 

Collateralized private investment vehicles (2)

 

100.4

 

84.5

 

100.4

 

85.9

 

CMBS

 

16.7

 

 

18.4

 

 

Mandatory retirement savings funds (3)

 

36,023.4

 

35,696.0

 

33,941.3

 

33,639.3

 

Real estate (4)

 

406.9

 

66.9

 

384.2

 

71.3

 

Sponsored investment funds (5)

 

271.7

 

2.2

 

 

 

Total

 

$

37,051.4

 

$

36,064.5

 

$

34,702.2

 

$

34,028.3

 

 

(1)         The assets of grantor trusts are primarily fixed maturities, available-for-sale. The liabilities are primarily other liabilities that reflect an embedded derivative of the forecasted transaction to deliver the underlying securities.

 

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Table of Contents

 

Principal Financial Group, Inc.

Notes to Consolidated Financial Statements

March 31, 2016

(Unaudited)

 

(2)         The assets of the collateralized private investment vehicles are primarily fixed maturities, trading. The liabilities include derivative liabilities and an obligation to redeem notes at maturity or termination of the trusts, which are reported in other liabilities.

(3)         The assets of the mandatory retirement savings funds include separate account assets and equity securities, trading. The liabilities include separate account liabilities and contractholder funds.

(4)         The assets of the real estate VIEs primarily include real estate, other investments and cash. Liabilities primarily include long-term debt and other liabilities.

(5)         The assets of sponsored investment funds are primarily fixed maturities and equity securities reported in other investments and cash. The consolidated statements of financial position included a $195.6 million redeemable noncontrolling interest for sponsored investment funds as of March 31, 2016.

 

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; equity securities, trading and other investments in the consolidated statements of financial position and are described below.

 

Unconsolidated VIEs include certain 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, which are classified as VIEs. The entities are VIEs as equity holders lack the power to control the most significant activities of the entities because the equity holders do not have either the ability by a simple majority to exercise substantive kick-out rights or substantive participating rights. We have determined we are not the primary beneficiary because we do not have the power to direct the most significant activities of the entities.

 

We hold an equity interest in Mexican mandatory privatized social security funds in which we provide asset management services. Our equity interest in the funds is considered a variable interest. We concluded the funds are VIEs because the equity holders as a group lack decision-making ability through their voting rights. We are not the primary beneficiary of the VIEs because although we, as the asset manager, have the power to direct the activities of the VIEs, we do not have a potentially significant variable interest in the funds.

 

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Table of Contents

 

Principal Financial Group, Inc.

Notes to Consolidated Financial Statements

March 31, 2016

(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, 2016

 

 

 

 

 

Fixed maturities, available-for-sale:

 

 

 

 

 

Corporate

 

$

472.6

 

$

364.1

 

Residential mortgage-backed pass-through securities

 

2,627.6

 

2,516.4

 

Commercial mortgage-backed securities

 

4,179.6

 

4,194.2

 

Collateralized debt obligations

 

752.0

 

783.5

 

Other debt obligations

 

4,624.1

 

4,592.7

 

Fixed maturities, trading:

 

 

 

 

 

Residential mortgage-backed pass-through securities

 

24.2

 

24.2

 

Commercial mortgage-backed securities

 

2.2

 

2.2

 

Collateralized debt obligations

 

35.4

 

35.4

 

Equity securities, trading

 

81.4

 

81.4

 

Other investments:

 

 

 

 

 

Other limited partnership and fund interests

 

639.5

 

1,123.4

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

Fixed maturities, available-for-sale:

 

 

 

 

 

Corporate

 

$

453.4

 

$

359.8

 

Residential mortgage-backed pass-through securities

 

2,627.5

 

2,549.4

 

Commercial mortgage-backed securities

 

3,919.8

 

3,932.5

 

Collateralized debt obligations

 

667.5

 

692.7

 

Other debt obligations

 

4,530.8

 

4,527.3

 

Fixed maturities, trading:

 

 

 

 

 

Residential mortgage-backed pass-through securities

 

25.9

 

25.9

 

Commercial mortgage-backed securities

 

2.3

 

2.3

 

Collateralized debt obligations

 

35.1

 

35.1

 

Other investments:

 

 

 

 

 

Other limited partnership and fund interests

 

255.6

 

255.6

 

 

(1)         Our risk of loss is limited to our initial investment measured at amortized cost for fixed maturities, available-for-sale. Our risk of loss is limited to our investment measured at fair value for our fixed maturities, trading and equity securities, trading. Our risk of loss is limited to our carrying value plus any unfunded commitments and/or guarantees for our other investments. Unfunded commitments are not liabilities on our consolidated statements of financial position because we are only required to fund additional equity when called upon to do so by the general partner or investment manager.

 

Money Market Funds

 

We are the investment manager for certain money market mutual funds. Prior to new accounting guidance effective January 1, 2016, these funds were deemed to be VIEs. Under the prior guidance we were not considered 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.

 

Effective January 1, 2016, new accounting guidance provides a scope exception for money market funds registered under Rule 2a-7 of the Investment Company Act of 1940 or similar funds. The scope exception eliminates the requirement to assess money market mutual funds under any consolidation model.

 

As of both March 31, 2016 and December 31, 2015, these funds held $1.3 billion in total assets. We have no contractual obligation to contribute to the funds; however, we provided support to these money market mutual funds through the waiver of fees and expense reimbursements. The amount of fees waived and expenses reimbursed was insignificant.

 

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Principal Financial Group, Inc.

Notes to Consolidated Financial Statements

March 31, 2016

(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 required regulatory 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 10, 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 were as follows:

 

 

 

 

 

 

 

 

 

 

 

Other-than-

 

 

 

 

 

Gross

 

Gross

 

 

 

temporary

 

 

 

Amortized

 

unrealized

 

unrealized

 

 

 

impairments in

 

 

 

cost

 

gains

 

losses

 

Fair value

 

AOCI (1)

 

 

 

(in millions)

 

March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities, available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agencies

 

$

1,561.7

 

$

60.8

 

$

0.7

 

$

1,621.8

 

$

 

Non-U.S. governments

 

734.4

 

153.7

 

1.6

 

886.5

 

 

States and political subdivisions

 

4,811.4

 

340.7

 

2.8

 

5,149.3

 

 

Corporate

 

31,574.1

 

2,038.5

 

480.0

 

33,132.6

 

16.0

 

Residential mortgage-backed pass-through securities

 

2,516.4

 

113.1

 

1.9

 

2,627.6

 

 

Commercial mortgage-backed securities

 

4,194.2

 

64.5

 

79.1

 

4,179.6

 

80.5

 

Collateralized debt obligations

 

783.5

 

0.4

 

31.9

 

752.0

 

1.0

 

Other debt obligations

 

4,664.7

 

63.8

 

32.5

 

4,696.0

 

56.1

 

Total fixed maturities, available-for-sale

 

$

50,840.4

 

$

2,835.5

 

$

630.5

 

$

53,045.4

 

$

153.6

 

Total equity securities, available-for-sale

 

$

111.2

 

$

7.6

 

$

15.1

 

$

103.7

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities, available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agencies

 

$

1,488.4

 

$

23.4

 

$

8.3

 

$

1,503.5

 

$

 

Non-U.S. governments

 

669.8

 

128.5

 

5.0

 

793.3

 

 

States and political subdivisions

 

4,501.8

 

234.7

 

19.4

 

4,717.1

 

 

Corporate

 

30,245.5

 

1,532.9

 

638.2

 

31,140.2

 

5.9

 

Residential mortgage-backed pass-through securities

 

2,549.4

 

90.0

 

11.9

 

2,627.5

 

 

Commercial mortgage-backed securities

 

3,932.5

 

65.3

 

78.0

 

3,919.8

 

80.7

 

Collateralized debt obligations

 

692.7

 

1.4

 

26.6

 

667.5

 

1.3

 

Other debt obligations

 

4,594.2

 

39.2

 

35.8

 

4,597.6

 

58.2

 

Total fixed maturities, available-for-sale

 

$

48,674.3

 

$

2,115.4

 

$

823.2

 

$

49,966.5

 

$

146.1

 

Total equity securities, available-for-sale

 

$

111.2

 

$

7.5

 

$

14.2

 

$

104.5

 

 

 

 

16



Table of Contents

 

Principal Financial Group, Inc.

Notes to Consolidated Financial Statements

March 31, 2016

(Unaudited)

 

(1)         Excludes $118.1 million and $131.5 million as of March 31, 2016 and December 31, 2015, 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.

 

The amortized cost and fair value of fixed maturities available-for-sale as of March 31, 2016, by expected maturity, were as follows:

 

 

 

Amortized cost

 

Fair value

 

 

 

(in millions)

 

Due in one year or less

 

$

3,020.0

 

$

3,043.2

 

Due after one year through five years

 

13,087.1

 

13,526.4

 

Due after five years through ten years

 

8,637.3

 

9,003.5

 

Due after ten years

 

13,937.2

 

15,217.1

 

Subtotal

 

38,681.6

 

40,790.2

 

Mortgage-backed and other asset-backed securities

 

12,158.8

 

12,255.2

 

Total

 

$

50,840.4

 

$

53,045.4

 

 

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 sponsored investment funds, 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 due to investment strategy and 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 were as follows:

 

 

 

For the three months ended March 31,

 

 

 

2016

 

2015

 

 

 

(in millions)

 

Fixed maturities, available-for-sale:

 

 

 

 

 

Gross gains

 

$

3.2

 

$

9.8

 

Gross losses

 

(2.5)

 

(1.5)

 

Net impairment losses

 

(48.1)

 

(7.5)

 

Hedging, net

 

7.4

 

(10.6)

 

Fixed maturities, trading

 

8.9

 

0.7

 

Equity securities, trading

 

(22.9)

 

1.5

 

Mortgage loans

 

2.5

 

(2.4)

 

Derivatives

 

185.6

 

62.6

 

Other

 

2.5

 

13.6

 

Net realized capital gains

 

$

136.6

 

$

66.2

 

 

Proceeds from sales of investments (excluding call and maturity proceeds) in fixed maturities, available-for-sale were $205.8 million and $556.3 million for the three months ended March 31, 2016 and 2015, respectively.

 

17



Table of Contents

 

Principal Financial Group, Inc.

Notes to Consolidated Financial Statements

March 31, 2016

(Unaudited)

 

Other-Than-Temporary Impairments

 

We have a process in place to identify fixed maturity and equity securities that could potentially have an 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 rate-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,

 

 

 

2016

 

2015

 

 

 

(in millions)

 

Fixed maturities, available-for-sale

 

$

(55.6)

 

$

14.0

 

Equity securities, available-for-sale

 

 

 

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

 

(55.6)

 

14.0

 

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

 

7.5

 

(21.5)

 

Net impairment losses on available-for-sale securities

 

$

(48.1)

 

$

(7.5)

 

 

(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.

 

18



Table of Contents

 

Principal Financial Group, Inc.

Notes to Consolidated Financial Statements

March 31, 2016

(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,

 

 

 

2016

 

2015

 

 

 

(in millions)

 

Beginning balance

 

$

(131.5)

 

$

(144.4)

 

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

 

(26.5)

 

(0.8)

 

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

 

(6.3)

 

(1.7)

 

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

 

5.1

 

6.2

 

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

 

(1.0)

 

2.0

 

Foreign currency translation adjustment

 

(0.2)

 

0.1

 

Ending balance

 

$

(160.4)

 

$

(138.6)

 

 

(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 were as follows:

 

 

 

March 31, 2016

 

 

 

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

 

$

92.4

 

$

0.6

 

$

17.6

 

$

0.1

 

$

110.0

 

$

0.7

 

Non-U.S. governments

 

17.0

 

 

10.9

 

1.6

 

27.9

 

1.6

 

States and political subdivisions

 

94.1

 

0.9

 

75.7

 

1.9

 

169.8

 

2.8

 

Corporate

 

3,610.6

 

149.3

 

1,688.2

 

330.7

 

5,298.8

 

480.0

 

Residential mortgage-backed pass-through securities

 

12.8

 

 

214.1

 

1.9

 

226.9

 

1.9

 

Commercial mortgage-backed securities

 

1,340.5

 

23.4

 

426.4

 

55.7

 

1,766.9

 

79.1

 

Collateralized debt obligations

 

493.7

 

6.3

 

197.7

 

25.6

 

691.4

 

31.9

 

Other debt obligations

 

1,398.6

 

12.9

 

445.9

 

19.6

 

1,844.5

 

32.5

 

Total fixed maturities, available-for-sale

 

$

7,059.7

 

$

193.4

 

$

3,076.5

 

$

437.1

 

$

10,136.2

 

$

630.5

 

Total equity securities, available-for-sale

 

$

0.9

 

$

0.9

 

$

31.6

 

$

14.2

 

$

32.5

 

$

15.1

 

 

Of the total amounts, Principal Life’s consolidated portfolio represented $9,708.3 million in available-for-sale fixed maturities with gross unrealized losses of $597.5 million. Of those fixed maturity securities in Principal Life’s consolidated portfolio with a gross unrealized loss position, 81% were investment grade (rated AAA through BBB-) with an average price of 94 (carrying value/amortized cost) as of March 31, 2016. Gross unrealized losses in our fixed maturities portfolio decreased during the three months ended March 31, 2016, primarily due to a decrease in interest rates, partially offset by widening of credit spreads.

 

19



Table of Contents

 

Principal Financial Group, Inc.

Notes to Consolidated Financial Statements

March 31, 2016

(Unaudited)

 

For those securities that had been in a continuous unrealized loss position for less than twelve months, Principal Life’s consolidated portfolio held 829 securities with a carrying value of $6,778.0 million and unrealized losses of $183.8 million reflecting an average price of 97 as of March 31, 2016. Of this portfolio, 84% was investment grade (rated AAA through BBB-) as of March 31, 2016, with associated unrealized losses of $116.3 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 500 securities with a carrying value of $2,930.3 million and unrealized losses of $413.7 million. The average rating of this portfolio was A- with an average price of 88 as of March 31, 2016. Of the $413.7 million in unrealized losses, the corporate sector accounts for $308.9 million in unrealized losses with an average price of 83 and an average credit rating of BBB. The remaining unrealized losses consist primarily of $55.8 million within the commercial mortgage-backed securities sector with an average price of 88 and an average credit rating of A. 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 as of March 31, 2016.

 

 

 

December 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

 

$

590.4

 

$

7.6

 

$

40.5

 

$

0.7

 

$

630.9

 

$

8.3

 

Non-U.S. governments

 

86.3

 

3.1

 

16.1

 

1.9

 

102.4

 

5.0

 

States and political subdivisions

 

692.0

 

19.0

 

6.5

 

0.4

 

698.5

 

19.4

 

Corporate

 

7,975.7

 

309.3

 

1,375.0

 

328.9

 

9,350.7

 

638.2

 

Residential mortgage-backed pass-

 

 

 

 

 

 

 

 

 

 

 

 

 

through securities

 

656.7

 

6.7

 

147.9

 

5.2

 

804.6

 

11.9

 

Commercial mortgage-backed

 

 

 

 

 

 

 

 

 

 

 

 

 

securities

 

1,480.8

 

27.3

 

299.5

 

50.7

 

1,780.3

 

78.0

 

Collateralized debt obligations

 

426.9

 

3.8

 

164.0

 

22.8

 

590.9

 

26.6

 

Other debt obligations

 

2,512.7

 

19.1

 

403.5

 

16.7

 

2,916.2

 

35.8

 

Total fixed maturities, available-for-sale

 

$

14,421.5

 

$

395.9

 

$

2,453.0

 

$

427.3

 

$

16,874.5

 

$

823.2

 

Total equity securities, available-for-sale

 

$

0.8

 

$

1.0

 

$

32.7

 

$

13.2

 

$

33.5

 

$

14.2

 

 

Of the total amounts, Principal Life’s consolidated portfolio represented $15,980.0 million in available-for-sale fixed maturities with gross unrealized losses of $777.0 million. Of those fixed maturity securities in Principal Life’s consolidated portfolio with a gross unrealized loss position, 87% were investment grade (rated AAA through BBB-) with an average price of 95 (carrying value/amortized cost) as of December 31, 2015. Gross unrealized losses in our fixed maturities portfolio increased during the year ended December 31, 2015, primarily due to an increase in interest rates and widening of credit spreads.

 

For those securities that had been in a continuous unrealized loss position for less than twelve months, Principal Life’s consolidated portfolio held 1,725 securities with a carrying value of $13,673.9 million and unrealized losses of $376.3 million reflecting an average price of 97 as of December 31, 2015. Of this portfolio, 90% was investment grade (rated AAA through BBB-) as of December 31, 2015, with associated unrealized losses of $298.1 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 404 securities with a carrying value of $2,306.1 million and unrealized losses of $400.7 million. The average rating of this portfolio was BBB+ with an average price of 85 as of December 31, 2015. Of the $400.7 million in unrealized losses, the corporate sector accounts for $304.2 million in unrealized losses with an average price of

 

20



Table of Contents

 

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements

March 31, 2016
(Unaudited)

 

80 and an average credit rating of BBB-. The remaining unrealized losses consist primarily of $50.7 million within the commercial mortgage-backed securities sector with an average price of 86 and an average credit rating of 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 as of December 31, 2015.

 

Net Unrealized Gains and Losses on Available-for-Sale Securities and Derivative Instruments

 

The net unrealized gains and losses on investments in fixed maturities available-for-sale, equity securities available-for-sale and derivative instruments in cash flow hedge relationships are reported as a separate component of stockholders’ equity. The cumulative amount of net unrealized gains and losses on available-for-sale securities and derivative instruments in cash flow hedge relationships net of adjustments related to DAC and related actuarial balances and applicable income taxes was as follows:

 

 

March 31, 2016

 

 

December 31, 2015

 

 

(in millions)

Net unrealized gains on fixed maturities, available-for-sale (1)

$

2,296.1

 

$

1,376.0

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

 

(153.6)

 

 

(146.1)

Net unrealized losses on equity securities, available-for-sale

 

(7.5)

 

 

(6.7)

Adjustments for assumed changes in amortization patterns

 

(183.7)

 

 

(127.0)

Adjustments for assumed changes in policyholder liabilities

 

(601.7)

 

 

(309.7)

Net unrealized gains on derivative instruments

 

184.3

 

 

181.6

Net unrealized gains on equity method subsidiaries and noncontrolling interest adjustments

 

145.9

 

 

98.0

Provision for deferred income taxes

 

(562.4)

 

 

(350.2)

Net unrealized gains on available-for-sale securities and derivative instruments

$

1,117.4

 

$

715.9

 

(1)         Excludes net unrealized gains (losses) on fixed maturities, available-for-sale included in fair value hedging relationships.

 

Mortgage Loans

 

Mortgage loans consist of commercial and residential mortgage loans. We evaluate risks inherent in our commercial mortgage loans in two classes: (1) brick and mortar property loans, including mezzanine loans, where we analyze the property’s rent payments as support for the loan, and (2) credit tenant loans (“CTL”), where we rely on the credit analysis of the tenant for the repayment of the loan. We evaluate risks inherent in our residential mortgage loan portfolio in two classes: (1) home equity mortgages and (2) first lien mortgages. The carrying amount of our mortgage loan portfolio was as follows:

 

 

 

March 31, 2016

 

December 31, 2015

 

 

(in millions)

Commercial mortgage loans

$

11,267.7

 

$

11,265.3

Residential mortgage loans

 

1,160.3

 

 

1,125.7

Total amortized cost

 

12,428.0

 

 

12,391.0

 

 

 

 

 

 

Valuation allowance

 

(49.3)

 

 

(51.6)

Total carrying value

$

12,378.7

 

$

12,339.4

 

We periodically purchase mortgage loans as well as sell mortgage loans we have originated. We purchased $55.8 million and $63.5 million of residential mortgage loans during the three months ended March 31, 2016 and 2015, respectively. We sold $17.5 million and $21.4 million of residential mortgage loans during the three months ended March 31, 2016 and 2015, respectively. We purchased $93.4 million and $107.0 million of commercial mortgage loans during the three months ended March 31, 2016 and 2015, respectively. We sold $0.0 million and $1.0 million of commercial mortgage loans during the three months ended March 31, 2016 and 2015, respectively.

 

21



Table of Contents

 

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements

March 31, 2016
(Unaudited)

 

Our commercial mortgage loan portfolio consists primarily of non-recourse, fixed rate mortgages on stabilized properties. Our commercial mortgage loan portfolio is diversified by geographic region and specific collateral property type as follows:

 

 

March 31, 2016

 

December 31, 2015

 

Amortized

 

Percent

 

Amortized

 

Percent

 

cost

 

of total

 

cost

 

of total

 

($ in millions)

Geographic distribution

 

 

 

 

 

 

 

 

 

 

 

 

 

New England

$

506.3

 

 

4.5

%

 

$

509.4

 

 

4.5

%

Middle Atlantic

 

2,991.8

 

 

26.6

 

 

 

3,075.6

 

 

27.3

 

East North Central

 

514.6

 

 

4.6

 

 

 

451.8