PRINCIPAL FINANCIAL GROUP INC, 10-Q filed on 4/29/2020
Quarterly Report
v3.20.1
Document and Entity Information - shares
3 Months Ended
Mar. 31, 2020
Apr. 22, 2020
Document and Entity Information    
Document Type 10-Q  
Document Quarterly Report true  
Document Period End Date Mar. 31, 2020  
Document Transition Report false  
Entity File Number 1-16725  
Entity Registrant Name PRINCIPAL FINANCIAL GROUP, INC  
Entity Incorporation, State or Country Code DE  
Entity Address, Address Line One 711 High Street  
Entity Address, City or Town Des Moines  
Entity Address, State or Province IA  
Entity Address, Postal Zip Code 50392  
Entity Tax Identification Number 42-1520346  
City Area Code 515  
Local Phone Number 247-5111  
Title of 12(b) Security Common Stock  
Trading Symbol PFG  
Security Exchange Name NASDAQ  
Entity Current Reporting Status Yes  
Entity Interactive Data Current Yes  
Entity Filer Category Large Accelerated Filer  
Entity Small Business false  
Entity Emerging Growth Company false  
Entity Shell Company false  
Entity Common Stock, Shares Outstanding   273,867,770
Entity Central Index Key 0001126328  
Current Fiscal Year End Date --12-31  
Document Fiscal Year Focus 2020  
Document Fiscal Period Focus Q1  
Amendment Flag false  
v3.20.1
Condensed Consolidated Statements of Financial Position - USD ($)
$ in Millions
Mar. 31, 2020
Dec. 31, 2019
Assets    
Fixed maturities, available-for-sale (2020 and 2019 include $34.8 million and $99.4 million related to consolidated variable interest entities) $ 68,707.8 $ 70,106.2
Fixed maturities, trading 596.0 675.9
Equity securities (2020 and 2019 include $728.5 million and $810.9 million related to consolidated variable interest entities) 1,664.1 1,879.4
Mortgage loans 16,645.9 16,486.9
Real estate (2020 and 2019 include $395.7 million and $457.6 million related to consolidated variable interest entities) 1,657.5 1,714.8
Policy loans 797.0 798.0
Other investments (2020 and 2019 include $270.4 million and $263.7 million related to consolidated variable interest entities and $22.7 million and $22.8 million measured at fair value under the fair value option) 4,707.0 4,690.2
Total investments 94,775.3 96,351.4
Cash and cash equivalents 3,482.7 2,515.9
Accrued investment income 721.7 686.6
Premiums due and other receivables 1,691.0 1,740.3
Deferred acquisition costs 3,679.8 3,521.3
Property and equipment 973.8 967.7
Goodwill 1,616.4 1,693.8
Other intangibles 1,716.6 1,786.7
Separate account assets (2020 and 2019 include $30,858.6 million and $39,130.3 million related to consolidated variable interest entities) 136,836.0 165,468.0
Other assets 1,410.6 1,356.1
Total assets 246,903.9 276,087.8
Liabilities    
Contractholder funds (2020 and 2019 include $397.5 million and $394.6 million related to consolidated variable interest entities) 42,126.6 41,367.5
Future policy benefits and claims 41,244.0 40,838.2
Other policyholder funds 860.9 959.4
Short-term debt 105.6 93.4
Long-term debt (2019 includes $64.2 million related to consolidated variable interest entities) 3,670.1 3,734.1
Income taxes currently payable 14.7 16.2
Deferred income taxes 1,450.3 1,796.6
Separate account liabilities (2020 and 2019 include $30,858.6 million and $39,130.3 million related to consolidated variable interest entities) 136,836.0 165,468.0
Other liabilities (2020 and 2019 include $69.6 million and $124.4 million related to consolidated variable interest entities) 7,383.4 6,863.7
Total liabilities 233,691.6 261,137.1
Redeemable noncontrolling interest (2020 and 2019 include $187.6 million and $215.4 million related to consolidated variable interest entities) 239.7 264.9
Stockholders' equity    
Common stock, par value $0.01 per share - 2,500.0 million shares authorized, 480.5 million and 479.3 million shares issued, and 273.4 million and 276.6 million shares outstanding in 2020 and 2019 4.8 4.8
Additional paid-in capital 10,216.5 10,182.6
Retained earnings (accumulated deficit) 11,198.8 11,074.3
Accumulated other comprehensive income (loss) (599.2) 1,037.9
Treasury stock, at cost (207.1 million and 202.7 million shares in 2020 and 2019) (7,913.4) (7,681.6)
Total stockholders' equity attributable to Principal Financial Group, Inc. 12,907.5 14,618.0
Noncontrolling interest 65.1 67.8
Total stockholders' equity 12,972.6 14,685.8
Total liabilities and stockholders' equity $ 246,903.9 $ 276,087.8
v3.20.1
Condensed Consolidated Statements of Financial Position (Parenthetical) - USD ($)
shares in Millions, $ in Millions
Mar. 31, 2020
Dec. 31, 2019
Fixed maturities, available-for-sale $ 68,707.8 $ 70,106.2
Equity securities 1,664.1 1,879.4
Real estate 1,657.5 1,714.8
Other investments 4,707.0 4,690.2
Other investments measured at fair value under fair value option 22.7 22.8
Separate account assets 136,836.0 165,468.0
Contractholder funds 42,126.6 41,367.5
Long-term debt 3,670.1 3,734.1
Separate account liabilities (2020 and 2019 include $30,858.6 million and $39,130.3 million related to consolidated variable interest entities) 136,836.0 165,468.0
Other liabilities 7,383.4 6,863.7
Redeemable noncontrolling interest $ 239.7 $ 264.9
Common stock, par value (in dollars per share) $ 0.01 $ 0.01
Common stock, authorized (in shares) 2,500.0 2,500.0
Common stock, issued (in shares) 480.5 479.3
Common stock, outstanding (in shares) 273.4 276.6
Treasury stock (in shares) 207.1 202.7
Aggregate consolidated variable interest entities    
Fixed maturities, available-for-sale $ 34.8 $ 99.4
Equity securities 728.5 810.9
Real estate 395.7 457.6
Other investments 270.4 263.7
Separate account assets 30,858.6 39,130.3
Contractholder funds 397.5 394.6
Long-term debt   64.2
Separate account liabilities (2020 and 2019 include $30,858.6 million and $39,130.3 million related to consolidated variable interest entities) 30,858.6 39,130.3
Other liabilities 69.6 124.4
Redeemable noncontrolling interest $ 187.6 $ 215.4
v3.20.1
Condensed Consolidated Statements of Operations - USD ($)
$ in Millions
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Revenues    
Premiums and other considerations $ 2,291.0 $ 1,724.9
Fees and other revenues 1,145.3 973.5
Net investment income (loss) 983.6 961.0
Net realized capital gains (losses) 131.4 84.5
Total revenues 4,551.3 3,743.9
Expenses    
Benefits, claims and settlement expenses 2,858.7 2,195.1
Dividends to policyholders 28.9 30.1
Operating expenses 1,335.5 992.7
Total expenses 4,223.1 3,217.9
Income (loss) before income taxes 328.2 526.0
Income taxes (benefits) 43.2 73.9
Net income (loss) 285.0 452.1
Net income (loss) attributable to noncontrolling interest (3.9) 22.2
Net income (loss) attributable to Principal Financial Group, Inc. $ 288.9 $ 429.9
Earnings per common share    
Basic earnings per common share (in dollars per share) $ 1.05 $ 1.54
Diluted earnings per common share (in dollars per share) $ 1.04 $ 1.53
v3.20.1
Condensed Consolidated Statements of Comprehensive Income - USD ($)
$ in Millions
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Condensed Consolidated Statements of Comprehensive Income    
Net income (loss) $ 285.0 $ 452.1
Other comprehensive income (loss), net:    
Net unrealized gains (losses) on available-for-sale securities (1,411.6) 1,104.3
Noncredit component of impairment losses on fixed maturities, available-for-sale   (2.5)
Net unrealized gains (losses) on derivative instruments 48.6 (4.5)
Foreign currency translation adjustment (294.3) 37.9
Net unrecognized postretirement benefit obligation 11.0 11.5
Other comprehensive income (loss) (1,646.3) 1,146.7
Comprehensive income (loss) (1,361.3) 1,598.8
Comprehensive income (loss) attributable to noncontrolling interest (13.1) 22.7
Comprehensive income (loss) attributable to Principal Financial Group, Inc. $ (1,348.2) $ 1,576.1
v3.20.1
Condensed Consolidated Statements of Stockholders' Equity - USD ($)
$ in Millions
Common stock
Additional paid-in capital
Retained earnings (accumulated deficit)
Accumulated other comprehensive income (loss)
Treasury stock
Noncontrolling interest
Total
Balances at Dec. 31, 2018 $ 4.8 $ 10,060.7 $ 10,290.2 $ (1,565.1) $ (7,400.6) $ 66.0 $ 11,456.0
Increase (decrease) in stockholders' equity              
Common stock issued   5.8         5.8
Stock-based compensation   26.8 (2.0)       24.8
Treasury stock acquired, common         (153.6)   (153.6)
Dividends to common stockholders     (150.2)       (150.2)
Distributions to noncontrolling interest           (1.3) (1.3)
Contributions from noncontrolling interest           0.8 0.8
Adjustments to redemption amount of redeemable noncontrolling interest   (2.5)         (2.5)
Effects of implementation of accounting change | ASU 2016-02 - Leases     4.0       4.0
Net income (loss) [1]     429.9     1.9 431.8
Other comprehensive income (loss) [1]       1,146.2   0.4 1,146.6
Balances at Mar. 31, 2019 4.8 10,090.8 10,571.9 (418.9) (7,554.2) 67.8 12,762.2
Balances at Dec. 31, 2019 4.8 10,182.6 11,074.3 1,037.9 (7,681.6) 67.8 14,685.8
Increase (decrease) in stockholders' equity              
Common stock issued   9.0         9.0
Stock-based compensation   25.8 (2.4)       23.4
Treasury stock acquired, common         (231.8)   (231.8)
Dividends to common stockholders     (153.6)       (153.6)
Distributions to noncontrolling interest           (22.1) (22.1)
Contributions from noncontrolling interest           2.6 2.6
Purchase of subsidiary shares from noncontrolling interest [1]   (0.6)       (0.3) (0.9)
Adjustments to redemption amount of redeemable noncontrolling interest   (0.3)       (0.1) (0.4)
Effects of implementation of accounting change | ASU 2016-13 - CECL     (8.4)       (8.4)
Net income (loss) [1]     288.9     19.8 308.7
Other comprehensive income (loss) [1]       (1,637.1)   (2.6) (1,639.7)
Balances at Mar. 31, 2020 $ 4.8 $ 10,216.5 $ 11,198.8 $ (599.2) $ (7,913.4) $ 65.1 $ 12,972.6
[1] Excludes amounts attributable to redeemable noncontrolling interest. See Note 9, Stockholders’ Equity, for further details.
v3.20.1
Condensed Consolidated Statements of Cash Flows - USD ($)
$ in Millions
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Operating activities    
Net income (loss) $ 285.0 $ 452.1
Net cash provided by (used in) operating activities 1,589.1 1,176.4
Investing activities    
Fixed maturities available-for-sale and equity securities with intent to hold: Purchases (3,190.1) (2,886.7)
Fixed maturities available-for-sale and equity securities with intent to hold: Sales 582.4 342.6
Fixed maturities available-for-sale and equity securities with intent to hold: Maturities 1,984.1 1,548.9
Mortgage loans acquired or originated (827.3) (625.1)
Mortgage loans sold or repaid 581.6 382.4
Real estate acquired (39.6) (10.5)
Net purchases of property and equipment (18.0) (29.4)
Net change in other investments 14.2 (213.3)
Net cash provided by (used in) investing activities (912.7) (1,491.1)
Financing activities    
Issuance of common stock 9.0 5.8
Acquisition of treasury stock (231.8) (153.6)
Payments for financing element derivatives (7.1) (6.5)
Purchase of subsidiary shares from noncontrolling interest (0.9)  
Dividends to common stockholders (153.6) (150.2)
Issuance of long-term debt   6.7
Principal repayments of long-term debt (64.5) (0.3)
Net proceeds from (repayments of) short-term borrowings 24.6 0.1
Investment contract deposits 2,725.7 1,872.2
Investment contract withdrawals (2,255.6) (1,947.4)
Net increase (decrease) in banking operation deposits 244.5 (35.4)
Other 0.1 5.5
Net cash provided by (used in) financing activities 290.4 (403.1)
Net increase (decrease) in cash and cash equivalents 966.8 (717.8)
Cash and cash equivalents at beginning of period 2,515.9 2,977.5
Cash and cash equivalents at end of period 3,482.7 2,259.7
Supplemental disclosure of non-cash activities:    
Lease assets established upon adoption of accounting guidance   168.8
Lease liabilities established upon adoption of accounting guidance   $ 164.0
Assets received in kind from pension risk transfer transactions $ 909.6  
v3.20.1
Nature of Operations and Significant Accounting Policies
3 Months Ended
Mar. 31, 2020
Nature of Operations and Significant Accounting Policies  
Nature of Operations and Significant Accounting Policies

1. Nature of Operations and Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed 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, 2020, are not necessarily indicative of the results that may be expected for the year ended December 31, 2020, especially when considering the risks and uncertainties associated with the novel coronavirus ("COVID-19") and the impact it may have on our business, results of operations and financial condition. Our use of estimates and assumptions affect amounts reported and disclosed and includes, but is not limited to, the fair value of investments in the absence of quoted market values, investment impairments and valuation allowances, the fair value of derivatives, deferred acquisition costs ("DAC") and other actuarial balances, measurement of goodwill and intangible assets, the liability for future policy benefits and claims, the value of pension and other postretirement benefits and accounting for income taxes and the valuation of deferred tax assets. Our estimates and assumptions could change in the future as more information becomes known about the impact of COVID-19. Our results of operations and financial condition may also be impacted by evolving regulatory, legislative and standard-setter accounting interpretations and guidance.

These interim unaudited condensed consolidated financial statements should be read in conjunction with our annual audited financial statements as of December 31, 2019, included in our Form 10-K for the year ended December 31, 2019, filed with the United States Securities and Exchange Commission (“SEC”). The accompanying condensed consolidated statement of financial position as of December 31, 2019, 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.

Certain reclassifications have been made to the prior period consolidated statements of cash flows to conform to the current period presentation.

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. If we determine our involvement in an entity no longer meets the requirements for consolidation under either the VIE or VOE models, the entity is deconsolidated. Entities in which we have 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.

Recent Accounting Pronouncements

Description

  

  

Date of
adoption

  

  

Effect on our consolidated
financial statements or other
significant matters

Standards not yet adopted:

Targeted improvements to the accounting for long-duration insurance contracts

This authoritative guidance updates certain requirements in the accounting for long-duration insurance and annuity contracts.

1.    The assumptions used to calculate the liability for future policy benefits on traditional and limited-payment contracts will be reviewed and updated periodically. Cash flow assumptions will be reviewed at least annually and updated when necessary with the impact recognized in net income. Discount rate assumptions are prescribed as the current upper-medium grade (low credit risk) fixed income instrument yield and will be updated quarterly with the impact recognized in other comprehensive income (“OCI”).

2.    Market risk benefits, which are certain market-based options or guarantees associated with deposit or account balance contracts, will be measured at fair value. The periodic change in fair value related to instrument-specific credit risk will be recognized in OCI while the remaining change in fair value will be recognized in net income.

3.    DAC for all insurance and annuity contracts will be amortized on a constant basis over the expected term of the related contracts.

4.    Additional disclosures are required, including disaggregated rollforwards of significant insurance liabilities and other account balances and disclosures about significant inputs, judgments, assumptions and methods used in measurement.

The guidance for the liability for future policy benefits for traditional and limited-payment contracts and DAC will be applied on a modified retrospective basis; that is, to contracts in force as of the beginning of the earliest period presented based on their existing carrying amounts. An entity may elect to apply the changes retrospectively. The guidance for market risk benefits will be applied retrospectively. Early adoption is permitted.

January 1,
2022

Our implementation and evaluation process to date includes, but is not limited to the following:

identifying and documenting contracts and contract features in scope of the guidance;
identifying the actuarial models, systems and processes to be updated;
evaluating and selecting our systems solutions for implementing the new guidance;
beginning to build key models;
evaluating our key accounting policies;
assessing the impact to our chart of accounts;
developing format and content of new disclosures and
evaluating transition requirements and impacts.

As we progress through our implementation, we will be able to better assess the impact to our consolidated financial statements; however, we expect this guidance to significantly change how we account for many of our insurance and annuity products.

Simplifying the accounting for income taxes

This authoritative guidance simplifies the accounting for income taxes by removing certain exceptions, including exceptions related to the incremental approach for intraperiod tax allocation, calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. Also, the guidance clarifies the accounting for franchise taxes, transactions that result in a step-up in the tax basis of goodwill and enacted changes in tax laws or rates. It specifies that an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements, although an entity may elect to do so. The guidance will be applied based on varying transition methods defined by amendment. Early adoption is permitted.

January 1,
2021

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

Standards adopted:

Facilitation of the effects of reference rate reform on financial reporting

This authoritative guidance provides optional expedients and exceptions for contracts and hedging relationships affected by reference rate reform. An entity may elect not to apply certain modification accounting requirements to contracts affected by reference rate reform and instead account for the modified contract as a continuation of the existing contract. Also, an entity may apply optional expedients to continue hedge accounting for hedging relationships in which the critical terms change due to reference rate reform.

March 12,
2020

We adopted the guidance upon issuance prospectively through December 31, 2022.

Goodwill impairment testing

This authoritative guidance simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 (which measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill to the carrying amount of that goodwill) from the goodwill impairment test. A goodwill impairment loss will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. Early adoption is permitted.

January 1,
2020

This guidance reduces complexity and costs associated with performing a Step 2 test, should one be needed in the future. However, the impact of eliminating the Step 2 test from any such future impairment assessment will be dependent on modeling factors that are not currently determinable. This guidance did not have a material impact on our consolidated financial statements.

Credit losses

This authoritative guidance requires entities to use a current expected credit loss (“CECL”) model to measure impairment for most financial assets that are not recorded at fair value through net income. Under the CECL model, an entity will estimate lifetime expected credit losses considering available relevant information about historical events, current conditions and reasonable and supportable forecasts. The CECL model does not apply to available-for-sale debt securities. This guidance also expands the required credit loss disclosures.

January 1,
2020

We adopted the guidance using the modified retrospective approach. A cumulative effect adjustment of $8.4 million was recorded as a decrease to retained earnings. We recorded an offsetting increase in the allowance for credit loss for mortgage loans, reinsurance recoverables and commitments and a decrease for deferred tax impacts. See Note 3, Investments, for further details.

Implementation costs in a cloud computing arrangement that is a service contract

This authoritative guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This guidance can be applied either retrospectively or prospectively and early adoption is permitted.

January 1,
2019

The effective date of the guidance is January 1, 2020; however, we elected to early-adopt this guidance on a prospective basis, effective January 1, 2019. This guidance did not have a material impact on our consolidated financial statements.

Nonemployee share-based payment accounting

This authoritative guidance simplifies the accounting for share-based payments to nonemployees by generally aligning it with the accounting for share-based payments to employees. Under the guidance, the measurement of equity-classified nonemployee awards will be fixed at the grant date, where previously the measurement was fixed at performance completion date. The guidance will be applied to equity-classified nonemployee awards for which a measurement date has not been established as of the date of adoption.

January 1,
2019

This guidance did not have a material impact on our consolidated financial statements.

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 using a modified retrospective approach, which includes certain optional practical expedients that may be elected. We elected the alternative transition method, which allows entities to initially apply the new standard at the adoption date and recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption.

January 1,
2019

We adopted the guidance using the modified retrospective approach. A cumulative effect adjustment of $4.0 million was recorded as a increase to retained earnings.

Targeted improvements to accounting for hedging activities

This authoritative guidance updated certain recognition and measurement requirements for hedge accounting. The objective of the guidance is to more closely align the economics of a company’s risk management activities in its financial results and reduce the complexity of applying hedge accounting. The updates included the expansion of hedging strategies that are eligible for hedge accounting, elimination of the separate measurement and reporting of hedge ineffectiveness, presentation of the changes in the fair value of the hedging instrument in the same consolidated statement of operations line as the earnings effect of the hedged item and simplification of hedge effectiveness assessments. This guidance also included new disclosures.

January 1,
2019

This guidance did not have a material impact on our consolidated financial statements. See Note 4, Derivative Financial Instruments, for further details.

Premium amortization on purchased callable debt securities

This authoritative guidance applies to entities that hold certain non-contingently callable debt securities, where the amortized cost basis is at a premium to the price repayable by the issuer at the earliest call date. Under the guidance the premium will be amortized to the first call date.

January 1,
2019

This guidance did not have a material impact on our consolidated financial statements.

When we adopt new accounting standards, we have a process in place to perform a thorough review of the pronouncement, identify the financial statement and system impacts and create an implementation plan among our impacted business units to ensure we are compliant with the pronouncement on the date of adoption. This includes having effective processes and controls in place to support the reported amounts. Each of the standards listed above is in varying stages in our implementation process based on its issuance and adoption dates. We are on track to implement guidance by the respective effective dates.

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, 2020 and December 31, 2019, the separate accounts included a separate account valued at $55.8 million and $100.4 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. 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.

v3.20.1
Variable Interest Entities
3 Months Ended
Mar. 31, 2020
Variable Interest Entities  
Variable Interest Entities

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, 2020 and December 31, 2019.

Consolidated Variable Interest Entities

Grantor Trust

We contributed undated subordinated floating rate notes to a grantor trust. The trust separated its 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 determined the grantor trust is a VIE due to insufficient equity to sustain it. We determined we are the primary beneficiary as a result of our contribution of securities into the trust and our significant continuing interest in the trust.

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 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 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 and Occupational Retirement Schemes Ordinance 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 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 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.

We also invest in certain series of another investment fund. These series are VIEs as the equity holders of each series lack the power to direct the most significant activities of the VIE. We determined we are the primary beneficiary of these series as our interest is more than insignificant and collectively we have the power to direct the most significant activities of the fund.

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 were as follows:

March 31, 2020

December 31, 2019

Total

Total

Total

Total

    

assets

    

liabilities

    

assets

    

liabilities

(in millions)

Grantor trust (1)

$

35.1

$

34.7

$

99.9

$

98.6

Mandatory retirement savings funds (2)

 

31,535.3

 

31,256.1

 

39,891.1

 

39,524.9

Real estate (3)

 

421.5

 

26.9

 

479.7

 

88.0

Sponsored investment funds (4)

 

339.7

 

8.3

 

331.4

 

2.2

Total

$

32,331.6

$

31,326.0

$

40,802.1

$

39,713.7

(1)The assets of the grantor trust 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.
(2)The assets of the mandatory retirement savings funds include separate account assets and equity securities. The liabilities include separate account liabilities and contractholder funds.
(3)The assets of the real estate VIEs primarily include real estate and cash. Liabilities primarily include other liabilities and included long-term debt as of December 31, 2019.
(4)The assets of sponsored investment funds are primarily fixed maturities and equity securities, certain of which are reported with other investments, and cash. The consolidated statements of financial position included a $187.6 million and $215.4 million redeemable noncontrolling interest for sponsored investment funds as of March 31, 2020 and December 31, 2019, respectively.

Unconsolidated Variable Interest Entities

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 and other investments in the consolidated statements of financial position and are described below.

Unconsolidated VIEs include certain commercial mortgage-backed securities (“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.

We invest in cash collateralized debt obligations, collateralized bond obligations, collateralized loan obligations and other collateralized structures, which are VIEs due to insufficient equity to sustain the entities. We have determined we are not the primary beneficiary of these entities primarily because we do not control the economic performance of the entities and were not involved with the design of the entities or because we do not have a potentially significant variable interest in the entities for which we are the asset manager.

We have invested in various VIE trusts and similar entities as a debt holder. Most of these entities are classified as VIEs due to insufficient equity to sustain them. In addition, we have an entity classified as a VIE based on the combination of our significant economic interest and lack of voting rights. 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.

As previously discussed, we sponsor and invest in certain investment funds that are VIEs. We determined we are not the primary beneficiary of the VIEs for which we are the asset manager but do not have a potentially significant variable interest in the funds.

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.

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, 2020

Fixed maturities, available-for-sale:

Corporate

$

186.7

$

177.6

Residential mortgage-backed pass-through securities

3,201.9

3,063.8

Commercial mortgage-backed securities

4,493.7

4,793.6

Collateralized debt obligations (2)

3,348.3

3,555.6

Other debt obligations

7,786.3

7,806.8

Fixed maturities, trading:

Residential mortgage-backed pass-through securities

272.2

272.2

Commercial mortgage-backed securities

24.9

24.9

Collateralized debt obligations (2)

19.8

19.8

Other debt obligations

11.5

11.5

Equity securities

97.1

 

97.1

Other investments:

Other limited partnership and fund interests (3)

915.3

1,463.6

December 31, 2019

Fixed maturities, available-for-sale:

Corporate

$

238.2

$

225.7

Residential mortgage-backed pass-through securities

2,982.4

2,913.9

Commercial mortgage-backed securities

4,850.2

4,746.6

Collateralized debt obligations (2)

3,215.3

3,226.7

Other debt obligations

8,191.1

8,076.4

Fixed maturities, trading:

Residential mortgage-backed pass-through securities

282.3

282.3

Commercial mortgage-backed securities

28.2

28.2

Collateralized debt obligations (2)

20.9

20.9

Other debt obligations

13.2

13.2

Equity securities

123.2

 

123.2

Other investments:

Other limited partnership and fund interests (3)

911.9

1,467.0

(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. Our risk of loss is limited to our carrying value plus any unfunded commitments and/or guarantees and similar provisions 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.
(2)Primarily consists of collateralized loan obligations backed by secured corporate loans.
(3)As of March 31, 2020 and December 31, 2019, the maximum exposure to loss for other limited partnership and fund interests includes $126.0 million and $129.1 million, respectively, of debt within certain of our managed international real estate funds that is fully secured by assets whose value exceeds the amount of the debt, but also includes recourse to the investment manager.

Money Market Funds

We are the investment manager for certain money market mutual funds. These types of funds are exempt from assessment under any consolidation model due to a scope exception for money market funds registered under Rule 2a-7 of the Investment Company Act of 1940 or similar funds. As of March 31, 2020 and December 31, 2019, money market mutual funds we manage held $4.7 billion and $4.0 billion in total assets, respectively. We have no contractual obligation to contribute to these funds; however, we provide support through the waiver of fees and through expense reimbursements. The amount of fees waived and expenses reimbursed was insignificant.

v3.20.1
Investments
3 Months Ended
Mar. 31, 2020
Investments  
Investments

3. Investments

Fixed Maturities and Equity Securities

Fixed maturities include bonds, ABS, redeemable preferred stock and certain non-redeemable preferred securities. Equity securities include mutual funds, common stock, non-redeemable preferred stock and required regulatory investments. We classify fixed maturities as either available-for-sale or trading at the time of the purchase and, accordingly, carry them at fair value. Equity securities are also carried at fair value. See Note 10, Fair Value Measurements, for methodologies related to the determination of fair value. Unrealized gains and losses related to fixed maturities, available-for-sale, excluding those in fair value hedging relationships, are reflected in stockholders' equity, net of adjustments associated with DAC and related actuarial balances, derivatives in cash flow hedge relationships and applicable income taxes. Mark-to-market adjustments on equity securities and mark-to-market adjustments on certain fixed maturities, trading are reflected in net realized capital gains (losses). Unrealized gains and losses related to hedged portions of fixed maturities, available-for-sale in fair value hedging relationships are reflected in net investment income. 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 amortized cost of fixed maturities includes cost adjusted for amortization of premiums and discounts, computed using the interest method. The amortized cost of fixed maturities, available-for-sale is adjusted for changes in fair value of the hedged portions of securities in fair value hedging relationships and excludes accrued interest receivable. Accrued interest receivable is reported in accrued investment income on the consolidated statements of financial position. Beginning in 2020, fixed maturities, available-for-sale are subject to an allowance for credit loss and changes in the allowance are reported in net income as a component of net realized capital gains (losses). Prior to 2020, the amortized cost of fixed maturities, available-for-sale was adjusted for declines in value that were other than temporary. Prior to 2020, impairments in value deemed to be other than temporary were 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 OCI. Interest income, as well as prepayment fees and the amortization of the related premium or discount, is reported in net investment income. For loan-backed and structured securities, we recognize income using a constant effective yield based on currently anticipated cash flows.

Available-for-sale securities were as follows:

Gross

Gross

Allowance

Amortized

unrealized

unrealized

for credit

    

cost (1)

    

gains

    

losses

    

loss

    

Fair value

(in millions)

March 31, 2020

Fixed maturities, available-for-sale:

U.S. government and agencies

$

1,463.6

$

267.6

$

$

$

1,731.2

Non-U.S. governments

837.4

120.9

1.6

956.7

States and political subdivisions

7,077.8

709.6

24.0

7,763.4

Corporate

38,044.9

2,446.8

1,063.5

7.0

39,421.2

Residential mortgage-backed pass-through securities

3,063.8

138.4

0.3

3,201.9

Commercial mortgage-backed securities

4,793.6

20.7

320.2

0.4

4,493.7

Collateralized debt obligations (2)

3,555.6

3.9

211.1

0.1

3,348.3

Other debt obligations

7,812.0

172.1

192.6

0.1

7,791.4

Total fixed maturities, available-for-sale

$

66,648.7

$

3,880.0

$

1,813.3

$

7.6

$

68,707.8

Other-than-

Gross

Gross

temporary

Amortized

unrealized

unrealized

impairments 

cost

gains

losses

Fair value

in OCI (3)

(in millions)

December 31, 2019

Fixed maturities, available-for-sale:

U.S. government and agencies

$

1,627.0

$

100.2

$

3.0

$

1,724.2

$

Non-U.S. governments

852.3

144.1

0.2

996.2

States and political subdivisions

6,857.1

644.5

11.6

7,490.0

Corporate

36,993.1

3,706.5

52.2

40,647.4

Residential mortgage-backed pass-through securities

2,913.9

72.3

3.8

2,982.4

Commercial mortgage-backed securities

4,746.6

127.6

24.0

4,850.2

15.8

Collateralized debt obligations (2)

3,226.7

2.9

14.3

3,215.3

0.9

Other debt obligations

8,085.8

129.6

14.9

8,200.5

31.7

Total fixed maturities, available-for-sale

$

65,302.5

$

4,927.7

$

124.0

$

70,106.2

$

48.4

(1)Amortized cost excludes accrued interest receivable of $569.8 million as of March 31, 2020.
(2)Primarily consists of collateralized loan obligations backed by secured corporate loans.
(3)Excludes $62.3 million as of December 31, 2019, 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, 2020, by expected maturity, were as follows:

    

Amortized cost

    

Fair value

(in millions)

Due in one year or less

$

2,170.7

$

2,173.4

Due after one year through five years

 

10,179.8

 

10,168.8

Due after five years through ten years

 

12,378.6

 

12,459.7

Due after ten years

 

22,694.6

 

25,070.6

Subtotal

 

47,423.7

 

49,872.5

Mortgage-backed and other asset-backed securities

 

19,225.0

 

18,835.3

Total

$

66,648.7

$

68,707.8

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): mark-to-market adjustments on equity securities, mark-to-market adjustments on certain fixed maturities, trading, mark-to-market adjustments on sponsored investment funds, mark-to-market adjustments on derivatives not designated as hedges, cash flow hedge gains (losses) when the hedged item impacts realized capital gains (losses), changes in the valuation allowance for fixed maturities available-for-sale and certain financing receivables, impairments of real estate held for investment, impairments on equity method investments and, prior to 2020, other-than-temporary impairments of securities and subsequent realized recoveries. 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, 

    

2020

    

2019

(in millions)

Fixed maturities, available-for-sale:

Gross gains

$

23.1

$

2.5

Gross losses

 

(4.2)

 

(1.5)

Net credit losses (1)

 

(7.9)

 

(6.8)

Hedging, net (2)

 

(1.5)

 

Fixed maturities, trading (3)

 

(16.4)

 

14.2

Equity securities (4)

 

(63.7)

 

21.0

Mortgage loans

 

(15.7)

 

0.3

Derivatives

 

290.5

 

5.0

Other

 

(72.8)

 

49.8

Net realized capital gains

$

131.4

$

84.5

(1)Upon adoption of authoritative guidance effective January 1, 2020, net credit losses include adjustments to the credit loss valuation allowance, write-offs and recoveries on available-for-sale securities. Prior to 2020, net credit losses included net other-than-temporary impairment losses and recoveries on available-for-sale securities.
(2)The change in fair value of fixed maturities, available-for-sale and the change in fair value of derivative hedging instruments in fair value hedging relationships are reported in net investment income with the earnings effect of fixed maturities, available-for-sale.
(3)Unrealized gains (losses) on fixed maturities, trading still held at the reporting date were $(14.2) million and $14.2 million for the three months ended March 31, 2020 and 2019, respectively.
(4)Unrealized gains (losses) on equity securities still held at the reporting date were $(66.0) million and $19.8 million for the three months ended March 31, 2020 and 2019, respectively. This excludes $(38.5) million and $22.5 million of unrealized gains (losses) on equity securities still held at the reporting date for the three months ended March 31, 2020 and 2019, respectively, that were reported in net investment income.

Proceeds from sales of investments (excluding call and maturity proceeds) in fixed maturities, available-for-sale were $541.6 million and $163.0 million for the three months ended March 31, 2020 and 2019, respectively.

Allowance for Credit Loss

We have a process in place to identify fixed maturity securities that could potentially require an allowance for credit loss. 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 in an unrealized loss position are reviewed to determine whether a decline in value is due to credit. Relevant facts and circumstances considered include: (1) the extent the fair value is 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 and (4) for structured securities, the adequacy of the expected cash flows. To the extent we determine an unrealized loss is due to credit, an allowance for credit loss is recognized through a reduction to net income.

We estimate the amount of the allowance for credit loss 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. We do not measure a credit loss allowance on accrued interest receivable because we write off the accrued interest receivable balance to net investment income in a timely manner when we have concern regarding collectability.

Amounts on fixed maturities, available-for-sale deemed to be uncollectible are written off and removed from the allowance for credit loss. A write-off may also occur if we intend 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.

The following table provides a rollforward of the allowance for credit loss by major security type.

For the three months ended March 31, 2020

Residential

mortgage-

backed

Commercial

Collateralized

U.S.

States and

pass-

mortgage-

debt

Other

government

Non-U.S

political

through

backed

obligations

debt

    

and agencies

    

governments

    

subdivisions

    

Corporate

    

securities

    

securities

    

(2)

    

obligations

    

Total

(in millions)

Beginning balance (1)

 

$

 

$

 

$

 

$

$

 

$

 

$

 

$

 

$

Additions for credit losses not previously recorded

 

 

 

 

7.0

 

0.4

 

0.1

 

0.1

 

7.6

Ending balance

 

$

 

$

 

$

 

$

7.0

$

 

$

0.4

 

$

0.1

 

$

0.1

 

$

7.6

(1)The allowance for credit loss associated with fixed maturities, available-for-sale was applied prospectively upon adoption of authoritative guidance effective January 1, 2020.
(2)Primarily consists of collateralized loan obligations backed by secured corporate loans.

During 2020, we did not write off any accrued interest to net investment income.

Other-Than-Temporary Impairments

Prior to the implementation of authoritative guidance in 2020, we had a process in place to identify fixed maturity securities that could potentially have an impairment that is other than temporary. This process involved monitoring market events that could impact issuers' credit ratings, business climate, management changes, litigation and government actions and other similar factors. This process also involved 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 were reviewed to determine whether an other-than-temporary decline in value existed and whether losses should be recognized. We considered relevant facts and circumstances in evaluating whether a credit or interest rate related impairment of a security was other than temporary. Relevant facts and circumstances considered include: (1) the extent and length of time the fair value was 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 and (5) 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. To the extent we determined a security was deemed to be other than temporarily impaired, an impairment loss was recognized.

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

Prior to 2020, net realized capital gains (losses) included total other-than-temporary impairment losses, net of recoveries from the sale of previously impaired securities, as follows:

For the three months ended

    

March 31, 2019

(in millions)

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

$

91.3

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

(9.6)

Other-than-temporary impairment losses on fixed maturities, available-for-sale reclassified to other comprehensive income (1)

 

2.8

Net impairment losses on available-for-sale securities

(6.8)

Net realized capital gains

$

84.5

(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 estimated 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 was 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 varied depending on the type of security. The ABS cash flow estimates were 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 were derived from scenario-based outcomes of expected corporate restructurings or liquidations using bond specific facts and circumstances including timing, security interests and loss severity.

The following table provides a rollforward of accumulated credit losses for fixed maturities with bifurcated credit losses prior to the implementation of new accounting guidance in 2020. 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, 2019

(in millions)

Beginning balance

$

(117.5)

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

 

(2.0)

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

 

(4.3)

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

 

20.4

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

 

1.1

Ending balance

$

(102.3)

(1)Amounts are recognized in net investment income.

Available-for-Sale Securities in Unrealized Loss Positions Without an Allowance for Credit Loss

For available-for-sale securities with unrealized losses for which an allowance for credit loss has not been recorded, 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, 2020

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 (1):

Non-U.S. governments

$

115.4

$

1.6

$

5.2

$

$

120.6

$

1.6

States and political subdivisions

812.6

23.7

26.1

0.3

838.7

24.0

Corporate

13,248.9

1,021.9

150.9

41.7

13,399.8

1,063.6

Residential mortgage-backed pass-through securities

15.1

0.2

3.7

0.1

18.8

0.3

Commercial mortgage-backed securities

3,691.3

302.2

161.8

15.5

3,853.1

317.7

Collateralized debt obligations (2)

2,419.4

164.5

797.0

45.7

3,216.4

210.2

Other debt obligations

4,598.9

185.4

82.9

7.2

4,681.8

192.6

Total fixed maturities, available-for-sale

$

24,901.6

$

1,699.5

$

1,227.6

$

110.5

$

26,129.2

$

1,810.0

(1)Fair value and gross unrealized losses are excluded for available-for-sale securities for which an allowance for credit loss has been recorded.
(2)Primarily consists of collateralized loan obligations backed by secured corporate loans.

Of the total amounts, Principal Life’s consolidated portfolio represented $25,549.9 million in available-for-sale fixed maturities with gross unrealized losses of $1,741.6 million. Of the available-for-sale fixed maturities within Principal Life's consolidated portfolio in a gross unrealized loss position, 89% were investment grade (rated AAA through BBB-) with an average price of 94 (carrying value/amortized cost) as of March 31, 2020. Gross unrealized losses in our fixed maturities portfolio increased during the three months ended March 31, 2020, primarily due to widening of credit spreads, partially offset by a decrease in interest rates.

For those securities that had been in a continuous unrealized loss position for less than twelve months, Principal Life's consolidated portfolio held 3,571 securities with a carrying value of $24,340.6 million and unrealized losses of $1,632.4 million reflecting an average price of 94 as of March 31, 2020. Of this portfolio, 89% was investment grade (rated AAA through BBB-) as of March 31, 2020, with associated unrealized losses of $1,224.3 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 205 securities with a carrying value of $1,209.3 million and unrealized losses of $109.2 million. The average credit rating of this portfolio was AA with an average price of 92 as of March 31, 2020. Of the $109.2 million in unrealized losses, the corporate sector accounts for $41.7 million in unrealized losses with an average price of 78 and an average credit rating of BB+. The remaining unrealized losses also include $45.4 million within the collateralized debt obligation sector accounts with an average price of 95 and an average credit rating of AA+. 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, we did not record an allowance for credit loss on these securities as of March 31, 2020. Because 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 at maturity, we did not write down these investments to fair value.

Gross Unrealized Losses for Available-for-Sale Securities

December 31, 2019

Less than

Greater than or

twelve months

equal to twelve months

Total

    

    

Gross

    

    

Gross

    

    

Gross

Fair

unrealized

Fair

unrealized

Fair

unrealized

value

losses (2)

value

losses (2)

value

losses (2)

(in millions)

Fixed maturities, available-for-sale:

U.S. government and agencies

$

100.0

$

1.9

$

74.2

$

1.1

$

174.2

$

3.0

Non-U.S. governments

 

17.6

 

0.2

 

12.4

 

 

30.0

 

0.2

States and political subdivisions

 

559.9

 

11.2

 

86.3

 

0.4

 

646.2

 

11.6