PRINCIPAL FINANCIAL GROUP INC, 10-Q filed on 10/29/2020
Quarterly Report
v3.20.2
Document and Entity Information - shares
9 Months Ended
Sep. 30, 2020
Oct. 21, 2020
Cover [Abstract]    
Document Type 10-Q  
Document Quarterly Report true  
Document Period End Date Sep. 30, 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   274,728,134
Entity Central Index Key 0001126328  
Current Fiscal Year End Date --12-31  
Document Fiscal Year Focus 2020  
Document Fiscal Period Focus Q3  
Amendment Flag false  
v3.20.2
Condensed Consolidated Statements of Financial Position - USD ($)
$ in Millions
Sep. 30, 2020
Dec. 31, 2019
Assets    
Fixed maturities, available-for-sale (2019 includes $99.4 million related to consolidated variable interest entities) $ 76,494.1 $ 70,106.2
Fixed maturities, trading 560.2 675.9
Equity securities (2020 and 2019 include $844.8 million and $810.9 million related to consolidated variable interest entities) 1,862.7 1,879.4
Mortgage loans 16,875.6 16,486.9
Real estate (2020 and 2019 include $454.2 million and $457.6 million related to consolidated variable interest entities) 1,781.8 1,714.8
Policy loans 783.4 798.0
Other investments (2020 and 2019 include $318.8 million and $263.7 million related to consolidated variable interest entities and $27.0 million and $22.8 million measured at fair value under the fair value option) 4,676.0 4,690.2
Total investments 103,033.8 96,351.4
Cash and cash equivalents 3,556.7 2,515.9
Accrued investment income 728.6 686.6
Premiums due and other receivables 1,530.2 1,740.3
Deferred acquisition costs 3,388.4 3,521.3
Property and equipment 998.8 967.7
Goodwill 1,653.3 1,693.8
Other intangibles 1,705.5 1,786.7
Separate account assets (2020 and 2019 include $36,267.2 million and $39,130.3 million related to consolidated variable interest entities) 160,737.3 165,468.0
Other assets 1,152.2 1,356.1
Total assets 278,484.8 276,087.8
Liabilities    
Contractholder funds (2020 and 2019 include $393.9 million and $394.6 million related to consolidated variable interest entities) 42,947.1 41,367.5
Future policy benefits and claims 44,000.3 40,838.2
Other policyholder funds 1,006.2 959.4
Short-term debt 76.6 93.4
Long-term debt (2019 includes $64.2 million related to consolidated variable interest entities) 4,279.0 3,734.1
Income taxes currently payable 15.7 16.2
Deferred income taxes 2,106.9 1,796.6
Separate account liabilities (2020 and 2019 include $36,267.2 million and $39,130.3 million related to consolidated variable interest entities) 160,737.3 165,468.0
Other liabilities (2020 and 2019 include $35.3 million and $124.4 million related to consolidated variable interest entities) 7,316.1 6,863.7
Total liabilities 262,485.2 261,137.1
Redeemable noncontrolling interest (2020 and 2019 include $210.5 million and $215.4 million related to consolidated variable interest entities) 278.5 264.9
Stockholders' equity    
Common stock, par value $0.01 per share - 2,500.0 million shares authorized, 481.7 million and 479.3 million shares issued, and 274.5 million and 276.6 million shares outstanding in 2020 and 2019 4.8 4.8
Additional paid-in capital 10,291.2 10,182.6
Retained earnings (accumulated deficit) 11,521.4 11,074.3
Accumulated other comprehensive income (loss) 1,747.1 1,037.9
Treasury stock, at cost (207.2 million and 202.7 million shares in 2020 and 2019) (7,913.6) (7,681.6)
Total stockholders' equity attributable to Principal Financial Group, Inc. 15,650.9 14,618.0
Noncontrolling interest 70.2 67.8
Total stockholders' equity 15,721.1 14,685.8
Total liabilities and stockholders' equity $ 278,484.8 $ 276,087.8
v3.20.2
Condensed Consolidated Statements of Financial Position (Parenthetical) - USD ($)
shares in Millions, $ in Millions
Sep. 30, 2020
Dec. 31, 2019
Fixed maturities, available-for-sale $ 76,494.1 $ 70,106.2
Equity securities 1,862.7 1,879.4
Real estate 1,781.8 1,714.8
Other investments 4,676.0 4,690.2
Other investments measured at fair value under fair value option 27.0 22.8
Separate account assets 160,737.3 165,468.0
Contractholder funds 42,947.1 41,367.5
Long-term debt 4,279.0 3,734.1
Separate account liabilities 160,737.3 165,468.0
Other liabilities 7,316.1 6,863.7
Redeemable noncontrolling interest $ 278.5 $ 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) 481.7 479.3
Common stock, outstanding (in shares) 274.5 276.6
Treasury stock (in shares) 207.2 202.7
Aggregate consolidated variable interest entities    
Fixed maturities, available-for-sale   $ 99.4
Equity securities $ 844.8 810.9
Real estate 454.2 457.6
Other investments 318.8 263.7
Separate account assets 36,267.2 39,130.3
Contractholder funds 393.9 394.6
Long-term debt   64.2
Separate account liabilities 36,267.2 39,130.3
Other liabilities 35.3 124.4
Redeemable noncontrolling interest $ 210.5 $ 215.4
v3.20.2
Condensed Consolidated Statements of Operations - USD ($)
$ in Millions
3 Months Ended 9 Months Ended
Sep. 30, 2020
Sep. 30, 2019
Sep. 30, 2020
Sep. 30, 2019
Revenues        
Premiums and other considerations $ 1,184.3 $ 2,274.2 $ 4,628.4 $ 5,932.0
Fees and other revenues 1,143.0 1,230.0 3,332.6 3,210.1
Net investment income (loss) 917.9 996.6 2,846.1 2,994.7
Net realized capital gains (losses) 65.5 (42.4) 169.5 38.1
Total revenues 3,310.7 4,458.4 10,976.6 12,174.9
Expenses        
Benefits, claims and settlement expenses 1,839.8 2,840.1 6,299.8 7,481.3
Dividends to policyholders 29.9 30.3 90.2 90.3
Operating expenses 1,165.9 1,242.3 3,484.7 3,281.3
Total expenses 3,035.6 4,112.7 9,874.7 10,852.9
Income (loss) before income taxes 275.1 345.7 1,101.9 1,322.0
Income taxes (benefits) 39.2 61.1 164.9 193.2
Net income (loss) 235.9 284.6 937.0 1,128.8
Net income (loss) attributable to noncontrolling interest (0.1) 7.5 13.8 35.5
Net income (loss) attributable to Principal Financial Group, Inc. $ 236.0 $ 277.1 $ 923.2 $ 1,093.3
Earnings per common share        
Basic earnings per common share (in dollars per share) $ 0.86 $ 0.99 $ 3.36 $ 3.92
Diluted earnings per common share (in dollars per share) $ 0.85 $ 0.98 $ 3.34 $ 3.89
v3.20.2
Condensed Consolidated Statements of Comprehensive Income - USD ($)
$ in Millions
3 Months Ended 9 Months Ended
Sep. 30, 2020
Sep. 30, 2019
Sep. 30, 2020
Sep. 30, 2019
Condensed Consolidated Statements of Comprehensive Income        
Net income (loss) $ 235.9 $ 284.6 $ 937.0 $ 1,128.8
Other comprehensive income (loss), net:        
Net unrealized gains (losses) on available-for-sale securities 226.7 787.1 852.8 2,876.3
Noncredit component of impairment losses on fixed maturities, available-for-sale   4.3   1.5
Net unrealized gains (losses) on derivative instruments (25.1) 12.7 7.1 9.8
Foreign currency translation adjustment 94.3 (157.8) (183.6) (91.0)
Net unrecognized postretirement benefit obligation 10.5 10.0 31.9 78.7
Other comprehensive income (loss) 306.4 656.3 708.2 2,875.3
Comprehensive income (loss) 542.3 940.9 1,645.2 4,004.1
Comprehensive income (loss) attributable to noncontrolling interest 9.9 4.4 12.8 38.6
Comprehensive income (loss) attributable to Principal Financial Group, Inc. $ 532.4 $ 936.5 $ 1,632.4 $ 3,965.5
v3.20.2
Condensed Consolidated Statements of Stockholders' Equity - USD ($)
$ in Millions
Common stock
Additional paid-in capital
Retained earnings (accumulated deficit)
Effects of implementation of accounting change
Retained earnings (accumulated deficit)
Accumulated other comprehensive income (loss)
Treasury stock
Noncontrolling interest
Effects of implementation of accounting change
Total
Balances (ASU 2016-02 - Leases) at Dec. 31, 2018     $ 4.0         $ 4.0  
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   30.9             30.9
Stock-based compensation   72.1   (6.1)     0.1   66.1
Treasury stock acquired, common           (197.5)     (197.5)
Dividends to common stockholders       (453.6)         (453.6)
Distributions to noncontrolling interest             (9.7)   (9.7)
Contributions from noncontrolling interest             4.9   4.9
Adjustments to redemption amount of redeemable noncontrolling interest   (1.1)         (0.2)   (1.3)
Net income (loss) [1]       1,093.3     8.6   1,101.9
Other comprehensive income (loss) [1]         2,872.2   (1.1)   2,871.1
Balances at Sep. 30, 2019 4.8 10,162.6   10,927.8 1,307.1 (7,598.1) 68.6   14,872.8
Balances at Jun. 30, 2019 4.8 10,130.7   10,805.8 647.7 (7,554.3) 67.3   14,102.0
Increase (decrease) in stockholders' equity                  
Common stock issued   8.8             8.8
Stock-based compensation   22.7   (2.1)         20.6
Treasury stock acquired, common           (43.8)     (43.8)
Dividends to common stockholders       (153.0)         (153.0)
Distributions to noncontrolling interest             (5.0)   (5.0)
Contributions from noncontrolling interest             3.1   3.1
Adjustments to redemption amount of redeemable noncontrolling interest   0.4             0.4
Net income (loss) [1]       277.1     4.9   282.0
Other comprehensive income (loss) [1]         659.4   (1.7)   657.7
Balances at Sep. 30, 2019 4.8 10,162.6   10,927.8 1,307.1 (7,598.1) 68.6   14,872.8
Balances (ASU 2016-13 - CECL) at Dec. 31, 2019     $ (8.4)         $ (8.4)  
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   34.6             34.6
Stock-based compensation   74.4   (6.9)         67.5
Treasury stock acquired, common           (232.0)     (232.0)
Dividends to common stockholders       (460.8)         (460.8)
Distributions to noncontrolling interest             (24.3)   (24.3)
Contributions from noncontrolling interest             4.7   4.7
Purchase of subsidiary shares from noncontrolling interest [1]   (0.6)         (0.3)   (0.9)
Adjustments to redemption amount of redeemable noncontrolling interest   0.2             0.2
Net income (loss) [1]       923.2     23.3   946.5
Other comprehensive income (loss) [1]         709.2   (1.0)   708.2
Balances at Sep. 30, 2020 4.8 10,291.2   11,521.4 1,747.1 (7,913.6) 70.2   15,721.1
Balances at Jun. 30, 2020 4.8 10,259.6   11,441.4 1,450.7 (7,913.4) 67.9   15,311.0
Increase (decrease) in stockholders' equity                  
Common stock issued   11.5             11.5
Stock-based compensation   21.9   (2.3)         19.6
Treasury stock acquired, common           (0.2)     (0.2)
Dividends to common stockholders       (153.7)         (153.7)
Distributions to noncontrolling interest             (1.1)   (1.1)
Contributions from noncontrolling interest             1.0   1.0
Adjustments to redemption amount of redeemable noncontrolling interest   (1.8)         0.1   (1.7)
Net income (loss) [1]       236.0     1.4   237.4
Other comprehensive income (loss) [1]         296.4   0.9   297.3
Balances at Sep. 30, 2020 $ 4.8 $ 10,291.2   $ 11,521.4 $ 1,747.1 $ (7,913.6) $ 70.2   $ 15,721.1
[1] Excludes amounts attributable to redeemable noncontrolling interest. See Note 10, Stockholders’ Equity, for further details.
v3.20.2
Condensed Consolidated Statements of Cash Flows - USD ($)
$ in Millions
9 Months Ended
Sep. 30, 2020
Sep. 30, 2019
Operating activities    
Net cash provided by (used in) operating activities $ 3,110.4 $ 4,464.8
Investing activities    
Fixed maturities available-for-sale and equity securities with intent to hold: Purchases (12,060.6) (8,696.3)
Fixed maturities available-for-sale and equity securities with intent to hold: Sales 2,677.3 1,816.1
Fixed maturities available-for-sale and equity securities with intent to hold: Maturities 6,247.7 4,729.7
Mortgage loans acquired or originated (2,281.7) (2,872.5)
Mortgage loans sold or repaid 1,877.0 1,720.9
Real estate acquired (177.1) (89.2)
Real estate sold   96.3
Net (purchases) sales of property and equipment (82.9) (98.1)
Purchase of business or interests in subsidiaries, net of cash acquired   (1,209.6)
Net change in other investments 160.4 (323.5)
Net cash provided by (used in) investing activities (3,639.9) (4,926.2)
Financing activities    
Issuance of common stock 34.6 30.9
Acquisition of treasury stock (232.0) (197.5)
Payments for financing element derivatives (22.2) (19.7)
Purchase of subsidiary shares from noncontrolling interest (0.9) (1.1)
Dividends to common stockholders (460.8) (453.6)
Issuance of long-term debt 608.8 504.0
Principal repayments of long-term debt (65.3) (1.0)
Net proceeds from (repayments of) short-term borrowings (12.3) 58.6
Investment contract deposits 7,798.7 6,202.5
Investment contract withdrawals (6,520.3) (5,942.3)
Net increase (decrease) in banking operation deposits 441.8 495.6
Other 0.2 5.5
Net cash provided by (used in) financing activities 1,570.3 681.9
Net increase (decrease) in cash and cash equivalents 1,040.8 220.5
Cash and cash equivalents at beginning of period 2,515.9 2,977.5
Cash and cash equivalents at end of period 3,556.7 3,198.0
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 $ 1,062.4 $ 806.8
v3.20.2
Nature of Operations and Significant Accounting Policies
9 Months Ended
Sep. 30, 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 and nine months ended September 30, 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.

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,
2023, tentative

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;
building models and evaluating preliminary output as models are developed;
evaluating our key accounting policies;
assessing the impact to our chart of accounts;
developing format and content of new disclosures;
beginning operational dry runs using model output and updated chart of accounts
evaluating transition requirements and impacts and
evaluating and establishing appropriate internal controls.

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.

Description

  

  

Date of
adoption

  

  

Effect on our consolidated
financial statements or other
significant matters

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

This guidance is not expected to have a material impact 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. This guidance eases the financial reporting impacts of reference rate reform on contracts and hedging relationships and is effective until December 31, 2022.

March 12,
2020

We adopted the guidance upon issuance prospectively and elected the applicable optional expedients and exceptions for contracts and hedging relationships impacted by reference rate reform through December 31, 2022. The guidance did not have an impact on our consolidated financial statements upon adoption.

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 at adoption.

Description

  

  

Date of
adoption

  

  

Effect on our consolidated
financial statements or other
significant matters

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.

Description

  

  

Date of
adoption

  

  

Effect on our consolidated
financial statements or other
significant matters

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 an 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.

Investments

Loan modifications related to COVID-19

Our commercial and residential mortgage loan portfolios can include loans that have been modified. We assess loan modifications on a case-by-case basis to evaluate whether a troubled debt restructuring ("TDR") has occurred. In response to COVID-19, the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") provides a temporary suspension of TDR accounting for certain COVID-19 related loan modifications where the loan was not more than 30 days past due as of December 31, 2019. We elected the TDR relief in the CARES Act beginning in the second quarter of 2020. The CARES Act TDR relief does not apply to modifications completed subsequent to the earlier of 60 days after the national emergency related to COVID-19 ends, or December 31, 2020. In addition, the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (As Revised on April 7, 2020) ("Interagency Statement") provides additional guidance to determine if a short-term COVID-19 related loan modification is a TDR. We consider the CARES Act and the Interagency Statement when assessing loan modifications to determine whether a TDR has occurred. See Note 3, Investments, under the caption "Mortgage Loan Modifications" for further details.

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 September 30, 2020 and December 31, 2019, the separate accounts included a separate account valued at $69.2 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.

v3.20.2
Variable Interest Entities
9 Months Ended
Sep. 30, 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 September 30, 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 entitled the holder to interest on the stated note for a specified term, while the residual certificate entitled 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 was a VIE due to insufficient equity to sustain it. We determined we were the primary beneficiary as a result of our contribution of securities into the trust and our significant continuing interest in the trust. The certificates matured in the second quarter of 2020.

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 invested in certain series of another investment fund. These series were VIEs as the equity holders of each series lacked the power to direct the most significant activities of the VIE. We determined we were the primary beneficiary of these series as our interest was more than insignificant and collectively we had the power to direct the most significant activities of the fund. These investments were redeemed in the third quarter of 2020.

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:

September 30, 2020

December 31, 2019

Total

Total

Total

Total

    

assets

    

liabilities

    

assets

    

liabilities

(in millions)

Grantor trust (1)

$

$

$

99.9

$

98.6

Mandatory retirement savings funds (2)

 

37,065.6

 

36,663.4

 

39,891.1

 

39,524.9

Real estate (3)

 

482.3

 

28.0

 

479.7

 

88.0

Sponsored investment funds (4)

 

395.2

 

5.3

 

331.4

 

2.2

Total

$

37,943.1

$

36,696.7

$

40,802.1

$

39,713.7

(1)The assets of the grantor trust were primarily fixed maturities, available-for-sale. The liabilities were primarily other liabilities that reflected an embedded derivative of the forecasted transaction to deliver the underlying securities.
(2)The assets of the mandatory retirement savings funds primarily include separate account assets and equity securities. The liabilities primarily 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 $210.5 million and $215.4 million redeemable noncontrolling interest for sponsored investment funds as of September 30, 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)

September 30, 2020

Fixed maturities, available-for-sale:

Corporate

$

242.1

$

221.7

Residential mortgage-backed pass-through securities

3,042.3

2,906.3

Commercial mortgage-backed securities

4,871.4

4,719.4

Collateralized debt obligations (2)

3,737.2

3,779.4

Other debt obligations

7,385.7

7,163.4

Fixed maturities, trading:

Residential mortgage-backed pass-through securities

220.0

220.0

Commercial mortgage-backed securities

27.6

27.6

Collateralized debt obligations (2)

20.5

20.5

Other debt obligations

10.3

10.3

Equity securities

105.1

 

105.1

Other investments:

Other limited partnership and fund interests (3)

956.1

1,489.8

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 September 30, 2020 and December 31, 2019, the maximum exposure to loss for other limited partnership and fund interests includes $128.4 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 September 30, 2020 and December 31, 2019, money market mutual funds we manage held $3.9 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.

v3.20.2
Investments
9 Months Ended
Sep. 30, 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 11, 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)

September 30, 2020

Fixed maturities, available-for-sale:

U.S. government and agencies

$

1,701.3

$

262.8

$

4.0

$

$

1,960.1

Non-U.S. governments

849.9

182.9

1,032.8

States and political subdivisions

7,870.4

1,109.0

11.6

8,967.8

Corporate

40,363.8

5,341.2

202.0

6.2

45,496.8

Residential mortgage-backed pass-through securities

2,906.3

136.4

0.4

3,042.3

Commercial mortgage-backed securities

4,719.4

196.8

40.8

4.0

4,871.4

Collateralized debt obligations (2)

3,779.4

6.1

46.4

1.9

3,737.2

Other debt obligations

7,163.4

266.2

43.9

7,385.7

Total fixed maturities, available-for-sale

$

69,353.9

$

7,501.4

$

349.1

$

12.1

$

76,494.1

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 $571.9 million as of September 30, 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 September 30, 2020, by expected maturity, were as follows:

    

Amortized cost

    

Fair value

(in millions)

Due in one year or less

$

2,149.5

$

2,175.2

Due after one year through five years

 

10,909.1

 

11,539.8

Due after five years through ten years

 

13,574.9

 

14,826.5

Due after ten years

 

24,151.9

 

28,916.0

Subtotal

 

50,785.4

 

57,457.5

Mortgage-backed and other asset-backed securities

 

18,568.5

 

19,036.6

Total

$

69,353.9

$

76,494.1

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

For the nine months ended

September 30, 

September 30, 

    

2020

    

2019

    

2020

    

2019

(in millions)

Fixed maturities, available-for-sale:

Gross gains

$

22.3

$

3.0

$

128.6

$

11.7

Gross losses

 

(12.8)

 

(1.3)

 

(38.6)

 

(10.7)

Net credit losses (1)

 

(9.1)

 

(11.1)

 

(25.3)

 

(35.2)

Hedging, net (2)

 

(0.2)

 

 

(9.8)

 

(9.3)

Fixed maturities, trading (3)

 

(1.5)

 

18.1

 

7.2

 

49.8

Equity securities (4)

 

52.8

 

33.2

 

28.4

 

68.9

Mortgage loans

 

(0.3)

 

(0.1)

 

(15.3)

 

0.5

Derivatives

 

(42.5)

 

(11.7)

 

52.3

 

(2.1)

Other

 

56.8

 

(72.5)

 

42.0

 

(35.5)

Net realized capital gains (losses)

$

65.5

$

(42.4)

$

169.5

$

38.1

(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. Gains (losses) for fixed maturities, available-for-sale related to terminated cash flow hedges continue to be reflected in net realized capital gains (losses).
(3)Unrealized gains (losses) on fixed maturities, trading still held at the reporting date were $(1.5) million and $17.9 million for the three months ended September 30, 2020 and 2019, respectively, and $8.7 million and $49.7 million for the nine months ended September 30, 2020 and 2019, respectively.
(4)Unrealized gains (losses) on equity securities still held at the reporting date were $48.0 million and $24.7 million for the three months ended September 30, 2020 and 2019, respectively, and $30.0 million and $55.1 million for the nine months ended September 30, 2020 and 2019, respectively. This excludes $2.7 million and $21.1 million for the three months ended September 30, 2020 and 2019, respectively, and $13.2 million and $62.3 million for the nine months ended September 30, 2020 and 2019, respectively, of unrealized gains on equity securities still held at the reporting date that were reported in net investment income.

Proceeds from sales of investments (excluding call and maturity proceeds) in fixed maturities, available-for-sale were $628.6 million and $176.1 million for the three months ended September 30, 2020 and 2019, and $2,176.2 million and $1,367.1 million for the nine months ended September 30, 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.

A rollforward of the allowance for credit loss by major security type was as follows.

For the three months ended September 30, 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

$

$

$

$

2.8

$

$

3.4

$

1.0

$

$

7.2

Additions for credit losses not previously recorded

 

 

 

 

3.4

 

1.2

 

 

 

4.6

Additional increases (decreases) for credit losses on securities with an allowance recorded in the previous period

1.0

0.9

1.9

Write-offs charged against allowance

(1.6)

(1.6)

Ending balance

 

$

 

$

 

$

 

$

6.2

$

 

$

4.0

 

$

1.9

 

$

 

$

12.1