PRINCIPAL FINANCIAL GROUP INC, 10-K filed on 2/8/2017
Annual Report
Document and Entity Information (USD $)
In Billions, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Feb. 1, 2017
Jun. 30, 2016
Document and Entity Information
 
 
 
Entity Registrant Name
PRINCIPAL FINANCIAL GROUP INC 
 
 
Entity Central Index Key
0001126328 
 
 
Document Type
10-K 
 
 
Document Period End Date
Dec. 31, 2016 
 
 
Amendment Flag
false 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Public Float
 
 
$ 11.8 
Entity Common Stock, Shares Outstanding
 
287,476,821 
 
Document Fiscal Year Focus
2016 
 
 
Document Fiscal Period Focus
FY 
 
 
Consolidated Statements of Financial Position (USD $)
In Millions, unless otherwise specified
Dec. 31, 2016
Dec. 31, 2015
Assets
 
 
Fixed maturities, available-for-sale (2016 and 2015 include $232.5 million and $257.4 million related to consolidated variable interest entities)
$ 54,846.1 
$ 49,966.5 
Fixed maturities, trading (2016 and 2015 include $82.4 million and $100.4 million related to consolidated variable interest entities)
398.4 
686.8 
Equity securities, available-for-sale
98.9 
104.5 
Equity securities, trading (2016 and 2015 include $721.9 million and $640.9 million related to consolidated variable interest entities)
1,413.4 
1,202.7 
Mortgage loans
13,230.2 
12,339.4 
Real estate (2016 and 2015 include $305.7 million and $354.5 million related to consolidated variable interest entities)
1,368.8 
1,451.8 
Policy loans
823.8 
817.1 
Other investments (2016 and 2015 include $89.8 million and $29.5 million related to consolidated variable interest entities and $86.2 million and $53.4 million measured at fair value under the fair value option)
3,655.9 
3,251.7 
Total investments
75,835.5 
69,820.5 
Cash and cash equivalents
2,719.6 
2,564.8 
Accrued investment income
580.6 
545.6 
Premiums due and other receivables
1,361.9 
1,429.3 
Deferred acquisition costs
3,380.2 
3,276.1 
Property and equipment
699.0 
633.8 
Goodwill
1,020.8 
1,009.0 
Other intangibles
1,325.3 
1,359.2 
Separate account assets (2016 and 2015 include $35,884.1 million and $33,300.4 million related to consolidated variable interest entities)
139,832.6 
136,978.9 
Other assets
1,258.8 
1,043.1 
Total assets
228,014.3 
218,660.3 
Liabilities
 
 
Contractholder funds (2016 and 2015 include $358.7 million and $338.9 million related to consolidated variable interest entities)
37,953.6 
35,716.1 
Future policy benefits and claims
29,000.7 
25,856.5 
Other policyholder funds
890.4 
805.4 
Short-term debt
51.4 
181.1 
Long-term debt (2016 and 2015 include $0.0 million and $42.8 million related to consolidated variable interest entities)
3,125.7 
3,265.2 
Income taxes currently payable
12.9 
18.4 
Deferred income taxes
972.4 
697.2 
Separate account liabilities (2016 and 2015 include $35,844.1 million and $33,300.4 million related to consolidated variable interest entities)
139,832.6 
136,978.9 
Other liabilities (2016 and 2015 include $284.1 million and $345.9 million related to consolidated variable interest entities, of which $59.9 million and $68.1 million are measured at fair value under the fair value option)
5,783.3 
5,678.4 
Total liabilities
217,623.0 
209,197.2 
Redeemable noncontrolling interest (2016 includes $58.8 million related to consolidated variable interest entities)
97.5 
85.7 
Stockholders' equity
 
 
Common stock, par value $.01 per share - 2,500.0 million shares authorized, 469.2 million and 466.2 million shares issued, and 287.7 million and 291.4 million shares outstanding in 2016 and 2015
4.7 
4.7 
Additional paid-in capital
9,686.0 
9,544.8 
Retained earnings (accumulated deficit)
7,720.4 
6,875.9 
Accumulated other comprehensive income (loss)
(675.2)
(882.5)
Treasury stock, at cost (181.5 million and 174.8 million shares in 2016 and 2015)
(6,508.6)
(6,231.3)
Total stockholders' equity attributable to Principal Financial Group, Inc.
10,227.3 
9,311.6 
Noncontrolling interest
66.5 
65.8 
Total stockholders' equity
10,293.8 
9,377.4 
Total liabilities and stockholders' equity
$ 228,014.3 
$ 218,660.3 
Consolidated Statements of Financial Position (Parenthetical) (USD $)
In Millions, except Per Share data, unless otherwise specified
Dec. 31, 2016
Dec. 31, 2015
Fixed maturities, available-for-sale
$ 54,846.1 
$ 49,966.5 
Fixed maturities, trading
398.4 
686.8 
Equity securities, trading
1,413.4 
1,202.7 
Real estate
1,368.8 
1,451.8 
Other investments
3,655.9 
3,251.7 
Other investments measured at fair value under fair value option
86.2 
53.4 
Separate account assets
139,832.6 
136,978.9 
Contractholder funds
37,953.6 
35,716.1 
Long-term debt
3,125.7 
3,265.2 
Separate account liabilities
139,832.6 
136,978.9 
Other liabilities
5,783.3 
5,678.4 
Redeemable noncontrolling interest
97.5 
85.7 
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)
469.2 
466.2 
Common stock, outstanding (in shares)
287.7 
291.4 
Treasury stock (in shares)
181.5 
174.8 
Aggregate consolidated variable interest entities
 
 
Fixed maturities, available-for-sale
232.5 
257.4 
Fixed maturities, trading
82.4 
100.4 
Equity securities, trading
721.9 
640.9 
Real estate
305.7 
354.5 
Other investments
89.8 
29.5 
Separate account assets
35,844.1 
33,300.4 
Contractholder funds
358.7 
338.9 
Long-term debt
42.8 
Separate account liabilities
35,844.1 
33,300.4 
Other liabilities
284.1 
345.9 
Other liabilities measured at fair value under fair value option
59.9 
68.1 
Redeemable noncontrolling interest
$ 58.8 
 
Consolidated Statements of Operations (USD $)
In Millions, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Revenues
 
 
 
Premiums and other considerations
$ 5,299.1 
$ 5,310.3 
$ 3,722.9 
Fees and other revenues
3,627.4 
3,653.1 
3,482.1 
Net investment income (loss)
3,296.5 
3,052.1 
3,257.9 
Net realized capital gains (losses), excluding impairment losses on available-for-sale securities
269.5 
(20.9)
92.7 
Net other-than-temporary impairment (losses) recoveries on available-for-sale securities
(98.8)
(0.8)
23.8 
Other-than-temporary impairment losses on fixed maturities, available-for-sale reclassified to (from) other comprehensive income
0.4 
(29.4)
(101.8)
Net impairment (losses) recoveries on available-for-sale securities
(98.4)
(30.2)
(78.0)
Net realized capital gains (losses)
171.1 
(51.1)
14.7 
Total revenues
12,394.1 
11,964.4 
10,477.6 
Expenses
 
 
 
Benefits, claims and settlement expenses
6,913.2 
6,697.7 
5,231.0 
Dividends to policyholders
156.6 
163.5 
177.4 
Operating expenses
3,732.6 
3,672.4 
3,574.3 
Total expenses
10,802.4 
10,533.6 
8,982.7 
Income (loss) before income taxes
1,591.7 
1,430.8 
1,494.9 
Income taxes (benefits)
229.9 
177.6 
318.5 
Net income (loss)
1,361.8 
1,253.2 
1,176.4 
Net income (loss) attributable to noncontrolling interest
45.3 
19.2 
32.3 
Net income (loss) attributable to Principal Financial Group, Inc.
1,316.5 
1,234.0 
1,144.1 
Preferred stock dividends
 
16.5 
33.0 
Excess of redemption value over carrying value of preferred shares redeemed
 
8.2 
 
Net income (loss) available to common stockholders
$ 1,316.5 
$ 1,209.3 
$ 1,111.1 
Earnings per common share
 
 
 
Basic earnings per common share (in dollars per share)
$ 4.55 
$ 4.11 
$ 3.70 
Diluted earnings per common share (in dollars per share)
$ 4.50 
$ 4.06 
$ 3.65 
Dividends declared per common share (in dollars per share)
$ 1.61 
$ 1.50 
$ 1.28 
Consolidated Statements of Comprehensive Income (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Consolidated Statements of Comprehensive Income
 
 
 
Net income (loss)
$ 1,361.8 
$ 1,253.2 
$ 1,176.4 
Other comprehensive income (loss), net:
 
 
 
Net unrealized gains (losses) on available-for-sale securities
99.1 
(470.7)
324.7 
Noncredit component of impairment losses on fixed maturities, available-for-sale
(3.5)
19.1 
61.9 
Net unrealized gains (losses) on derivative instruments
15.5 
19.2 
61.1 
Foreign currency translation adjustment
68.1 
(471.6)
(336.6)
Net unrecognized postretirement benefit obligation
41.8 
(39.1)
(255.2)
Other comprehensive income (loss)
221.0 
(943.1)
(144.1)
Comprehensive income (loss)
1,582.8 
310.1 
1,032.3 
Comprehensive income (loss) attributable to noncontrolling interest
49.7 
(1.3)
21.0 
Comprehensive income (loss) attributable to Principal Financial Group, Inc.
$ 1,533.1 
$ 311.4 
$ 1,011.3 
Consolidated Statements of Stockholders' Equity (USD $)
In Millions, unless otherwise specified
Series A
Preferred stock
Series B
Preferred stock
Common stock
Additional paid-in capital
Retained earnings (accumulated deficit)
Accumulated other comprehensive income (loss)
Treasury stock
Noncontrolling interest
Total
Balances at Dec. 31, 2013
$ 0 
$ 0.1 
$ 4.6 
$ 9,798.9 
$ 5,405.4 
$ 183.2 
$ (5,708.0)
$ 92.8 
$ 9,777.0 
Increase (decrease) in stockholders' equity
 
 
 
 
 
 
 
 
 
Common stock issued
 
 
 
77.5 
 
 
 
 
77.5 
Stock-based compensation and additional related tax benefits
 
 
 
80.3 
(6.1)
 
 
 
74.2 
Treasury stock acquired, common
 
 
 
 
 
 
(222.7)
 
(222.7)
Dividends to common stockholders
 
 
 
 
(376.6)
 
 
 
(376.6)
Dividends to preferred stockholders
 
 
 
 
(33.0)
 
 
 
(33.0)
Distributions to noncontrolling interest
 
 
 
 
 
 
 
(23.9)
(23.9)
Contributions from noncontrolling interest
 
 
 
 
 
 
 
7.4 
7.4 
Purchase of subsidiary shares from noncontrolling interest1
 
 
 
(2.0)
 
 
 
(45.6)
(47.6)
Adjustments to redemption amount of redeemable noncontrolling interest
 
 
 
(9.2)
(19.7)
 
 
 
(28.9)
Net income (loss)1
 
 
 
 
1,144.1 
 
 
23.3 
1,167.4 
Other comprehensive income (loss)1
 
 
 
 
 
(132.8)
 
(6.0)
(138.8)
Balances at Dec. 31, 2014
0.1 
4.6 
9,945.5 
6,114.1 
50.4 
(5,930.7)
48.0 
10,232.0 
Increase (decrease) in stockholders' equity
 
 
 
 
 
 
 
 
 
Common stock issued
 
 
0.1 
76.0 
 
 
 
 
76.1 
Stock-based compensation and additional related tax benefits
 
 
 
90.6 
(6.5)
 
 
0.1 
84.2 
Treasury stock acquired, common
 
 
 
 
 
 
(300.6)
 
(300.6)
Dividends to common stockholders
 
 
 
 
(441.0)
 
 
 
(441.0)
Dividends to preferred stockholders
 
 
 
 
(16.5)
 
 
 
(16.5)
Preferred stock redemption
 
(0.1)
 
(541.7)
(8.2)
 
 
 
(550.0)
Distributions to noncontrolling interest
 
 
 
 
 
 
 
(15.4)
(15.4)
Contributions from noncontrolling interest
 
 
 
 
 
 
 
7.7 
7.7 
Purchase of subsidiary shares from noncontrolling interest1
 
 
 
(19.0)
 
(10.3)
 
12.8 
(16.5)
Adjustments to redemption amount of redeemable noncontrolling interest
 
 
 
(6.6)
 
 
 
 
(6.6)
Net income (loss)1
 
 
 
 
1,234.0 
 
 
14.3 
1,248.3 
Other comprehensive income (loss)1
 
 
 
 
 
(922.6)
 
(1.7)
(924.3)
Balances at Dec. 31, 2015
4.7 
9,544.8 
6,875.9 
(882.5)
(6,231.3)
65.8 
9,377.4 
Increase (decrease) in stockholders' equity
 
 
 
 
 
 
 
 
 
Common stock issued
 
 
 
37.8 
 
 
 
 
37.8 
Stock-based compensation and additional related tax benefits
 
 
 
92.5 
(7.1)
 
 
0.4 
85.8 
Treasury stock acquired, common
 
 
 
 
 
 
(277.3)
 
(277.3)
Dividends to common stockholders
 
 
 
 
(464.9)
 
 
 
(464.9)
Distributions to noncontrolling interest
 
 
 
 
 
 
 
(34.8)
(34.8)
Contributions from noncontrolling interest
 
 
 
 
 
 
 
5.5 
5.5 
Purchase of subsidiary shares from noncontrolling interest1
 
 
 
15.1 
 
(9.3)
 
 
5.8 
Adjustments to redemption amount of redeemable noncontrolling interest
 
 
 
(4.2)
 
 
 
 
(4.2)
Net income (loss)1
 
 
 
 
1,316.5 
 
 
28.5 
1,345.0 
Other comprehensive income (loss)1
 
 
 
 
 
216.6 
 
1.1 
217.7 
Balances at Dec. 31, 2016
$ 0 
$ 0 
$ 4.7 
$ 9,686.0 
$ 7,720.4 
$ (675.2)
$ (6,508.6)
$ 66.5 
$ 10,293.8 
Consolidated Statements of Cash Flows (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Operating activities
 
 
 
Net income (loss)
$ 1,361.8 
$ 1,253.2 
$ 1,176.4 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Amortization of deferred acquisition costs
285.1 
270.8 
367.2 
Additions to deferred acquisition costs
(402.3)
(390.3)
(404.1)
Accrued investment income
(35.0)
(39.7)
26.2 
Net cash flows for trading securities
166.5 
(201.9)
(93.4)
Premiums due and other receivables
98.7 
(211.5)
26.9 
Contractholder and policyholder liabilities and dividends
2,140.3 
3,283.6 
1,634.0 
Current and deferred income taxes (benefits)
45.8 
(66.5)
175.9 
Net realized capital (gains) losses
(171.1)
51.1 
(14.7)
Depreciation and amortization expense
186.6 
193.0 
169.5 
Mortgage loans held for sale, sold or repaid, net of gain
 
 
43.3 
Real estate acquired through operating activities
(58.2)
(44.1)
(49.4)
Real estate sold through operating activities
229.0 
53.7 
158.9 
Stock-based compensation
84.4 
84.5 
75.3 
Other
(73.8)
141.2 
(189.1)
Net adjustments
2,496.0 
3,123.9 
1,926.5 
Net cash provided by (used in) operating activities
3,857.8 
4,377.1 
3,102.9 
Investing activities
 
 
 
Available-for-sale securities: Purchases
(13,763.8)
(9,920.3)
(9,054.0)
Available-for-sale securities: Sales
1,890.5 
1,563.0 
2,512.0 
Available-for-sale securities: Maturities
7,742.8 
6,625.9 
6,244.7 
Mortgage loans acquired or originated
(2,889.0)
(2,275.1)
(2,169.6)
Mortgage loans sold or repaid
2,068.7 
1,687.3 
1,793.6 
Real estate acquired
(109.7)
(322.0)
(281.7)
Net (purchases) sales of property and equipment
(154.9)
(136.4)
(136.0)
Purchase of interests in subsidiaries, net of cash acquired
 
(291.2)
 
Net change in other investments
61.5 
(98.8)
(81.7)
Net cash provided by (used in) investing activities
(5,153.9)
(3,167.6)
(1,172.7)
Financing activities
 
 
 
Issuance of common stock
37.8 
76.1 
77.5 
Acquisition of treasury stock
(277.3)
(300.6)
(222.7)
Proceeds from financing element derivatives
0.4 
0.3 
15.1 
Payments for financing element derivatives
(87.7)
(82.0)
(58.0)
Excess tax benefits from share-based payment arrangements
12.0 
15.7 
9.7 
Purchase of subsidiary shares from noncontrolling interest
(2.4)
(22.5)
(227.0)
Dividends to common stockholders
(464.9)
(441.0)
(376.6)
Dividends to preferred stockholders
 
(16.5)
(33.0)
Preferred stock redemption
 
(550.0)
 
Issuance of long-term debt
656.1 
804.9 
38.5 
Principal repayments of long-term debt
(799.3)
(52.6)
(100.3)
Net proceeds from (repayments of) short-term borrowings
(131.4)
157.0 
(118.3)
Investment contract deposits
10,770.9 
6,492.3 
5,638.4 
Investment contract withdrawals
(8,392.7)
(6,666.8)
(7,099.2)
Net increase (decrease) in banking operation deposits
129.0 
91.1 
30.7 
Other
0.4 
(14.0)
(12.9)
Net cash provided by (used in) financing activities
1,450.9 
(508.6)
(2,438.1)
Net increase (decrease) in cash and cash equivalents
154.8 
700.9 
(507.9)
Cash and cash equivalents at beginning of period
2,564.8 
1,863.9 
2,371.8 
Cash and cash equivalents at end of period
2,719.6 
2,564.8 
1,863.9 
Supplemental information:
 
 
 
Cash paid for interest
162.0 
149.6 
137.6 
Cash paid for income taxes
178.8 
129.6 
73.8 
Supplemental disclosure of non-cash activities:
 
 
 
Assets received in kind for pension risk transfer transactions
$ 594.3 
 
 
Nature of Operations and Significant Accounting Policies
Nature of Operations and Significant Accounting Policies

1. Nature of Operations and Significant Accounting Policies

Description of Business

        Principal Financial Group, Inc. ("PFG") is a leader in global investment management offering businesses, individuals and institutional clients a wide range of financial products and services, including retirement, asset management and insurance through our diverse family of financial services companies.

Basis of Presentation

        The accompanying consolidated financial statements include the accounts of PFG and all other entities in which we directly or indirectly have a controlling financial interest as well as those variable interest entities ("VIEs") in which we are the primary beneficiary. The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles ("U.S. GAAP"). All significant intercompany accounts and transactions have been eliminated.

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 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 3, 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 significant management influence over the operating and financing decisions but are not required to consolidate, other than investments accounted for at fair value under the fair value option, are reported using the equity method.

Recent Accounting Pronouncements

                                                                                                                                                                                    

 

 

 

 

 

 

 

 

 

 

 

 

 

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Description

 

 

 

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financial statements or
other significant matters

 

 

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Standards not yet adopted:

 

 

 

 

 

 

 

 

 

 

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Goodwill impairment testing
This authoritative guidance is to simplify 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 with the carrying amount of that goodwill) from the goodwill impairment test. A goodwill impairment will now 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

 

 

 

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

 

 

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Description

 

 

 

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adoption

 

 

 

Effect on our consolidated
financial statements or
other significant matters

 

 

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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 and will be applied using a modified retrospective approach by recording a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Early adoption is permitted.

 

 

 

January 1, 2020

 

 

 

We are currently evaluating the impact this guidance will have on our consolidated financial statements. We believe estimated credit losses under the CECL model will generally result in earlier loss recognition for loans and other receivables.

 

 

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

 

 

 

January 1, 2019

 

 

 

This guidance will require us to add our operating leases to the balance sheet. We are currently evaluating other impacts this guidance will have on our consolidated financial statements.

 

 

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Definition of a business
This authoritative guidance clarifies the definition of a business to assist with evaluating when transactions involving an integrated set of assets and activities (a "set") should be accounted for as acquisitions or disposals of assets or businesses. The guidance requires that when substantially all of the fair value of the gross assets acquired or disposed of is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. The guidance also requires a set to include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output to be considered a business. Lastly, the guidance removes the evaluation of whether a market participant could replace missing elements and narrows the definition of outputs by more closely aligning it with how outputs are described in the revenue recognition guidance. The guidance will be applied prospectively. Early application is permitted in certain circumstances.

 

 

 

January 1, 2018

 

 

 

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

 

 

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Description

 

 

 

Date of
adoption

 

 

 

Effect on our consolidated
financial statements or
other significant matters

 

 

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

 

 

 

January 1, 2018

 

 

 

We are currently evaluating the impact this guidance will have on our consolidated financial statements. As of December 31, 2016, we do not hold material equity securities accounted for at fair value through other comprehensive income that will be accounted for at fair value through net income under the updated guidance. This change is not expected to have a material impact on our consolidated financial statements.

 

 

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Revenue recognition
This authoritative guidance replaces all general and most industry specific revenue recognition guidance (excluding insurance) currently prescribed by U.S. GAAP. The core principle is that an entity recognizes revenue to reflect the transfer of a promised good or service to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for that good or service. This guidance also provides clarification on when an entity is a principal or an agent in a transaction. The guidance may be applied using one of the following two methods: (1) retrospectively to each prior reporting period presented, or (2) retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial application.

 

 

 

January 1, 2018

 

 

 

We are currently evaluating the impact this guidance will have on our consolidated financial statements. Only a portion of our revenues are impacted by this guidance because the guidance does not apply to revenue on contracts accounted for under the financial instruments or insurance contracts standards. Our evaluation process includes, but is not limited to, identifying contracts within the scope of the guidance, reviewing and documenting our accounting for these contracts, and identifying and determining the accounting for any related contract costs.

 

 

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Income tax — intra-entity transfers of assets
This authoritative guidance requires entities to recognize current and deferred income tax resulting from an intra-entity asset transfer when the transfer occurs. Prior to issuance of this guidance, U.S. GAAP did not allow recognition of income tax consequences until the asset had been sold to a third party. This guidance requires adoption through a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption with early adoption permitted.

 

 

 

January 1, 2018

 

 

 

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

 

 

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

 

 

 

January 1, 2017

 

 

 

The guidance will be adopted prospectively as indicated by the guidance for each area of change and will not have a material impact on our consolidated financial statements.

 

 

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Description

 

 

 

Date of
adoption

 

 

 

Effect on our consolidated
financial statements or
other significant matters

 

 

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Standards adopted:

 

 

 

 

 

 

 

 

 

 

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Short-duration insurance contracts
This authoritative guidance requires additional disclosures related to short-duration insurance contracts.

 

 

 

December 31, 2016

 

 

 

The disclosure requirements of this guidance were adopted retrospectively. See Note 8, Insurance Liabilities, for further details.

 

 

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

 

 

 

January 1, 2016

 

 

 

The guidance was adopted retrospectively and did not have a material impact on our consolidated financial statements. See Note 14, Fair Value Measurements, for further details.

 

 

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

 

 

 

January 1, 2016

 

 

 

The guidance was adopted retrospectively and did not have a material impact on our consolidated financial statements. See Note 9, Debt, for further details.

 

 

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

 

 

 

January 1, 2016

 

 

 

The guidance was adopted using the modified retrospective approach. See Note 3, Variable Interest Entities, for further details.

 

 

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

 

 

 

January 1, 2015

 

 

 

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

 

 

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

 

 

 

January 1, 2015

 

 

 

This guidance was adopted using a modified retrospective approach and did not have a material impact on our consolidated financial statements. See Note 14, Fair Value Measurements, for further details.

 

 

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Description

 

 

 

Date of
adoption

 

 

 

Effect on our consolidated
financial statements or
other significant matters

 

 

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

 

 

 

January 1, 2014

 

 

 

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

 

 

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        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.

Use of Estimates in the Preparation of Financial Statements

        The preparation of our consolidated financial statements and accompanying notes requires management to make estimates and assumptions that affect the amounts reported and disclosed. These estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported and disclosed in the consolidated financial statements and accompanying notes. The most critical estimates include those used in determining:

 

 

 

           

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the fair value of investments in the absence of quoted market values; 

           

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investment impairments and valuation allowances; 

           

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the fair value of and accounting for derivatives; 

           

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the deferred acquisition costs ("DAC") and other actuarial balances where the amortization is based on estimated gross profits; 

           

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the measurement of goodwill, indefinite lived intangible assets, finite lived intangible assets and related impairments or amortization, if any; 

           

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the liability for future policy benefits and claims; 

           

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the value of our pension and other postretirement benefit obligations and 

           

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accounting for income taxes and the valuation of deferred tax assets.

        A description of such critical estimates is incorporated within the discussion of the related accounting policies that follow. In applying these policies, management makes subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance and financial services industries; others are specific to our businesses and operations. Actual results could differ from these estimates.

Closed Block

        Principal Life Insurance Company ("Principal Life") operates a closed block ("Closed Block") for the benefit of individual participating dividend-paying policies in force at the time of the 1998 mutual insurance holding company ("MIHC") formation. See Note 6, Closed Block, for further details.

Cash and Cash Equivalents

        Cash and cash equivalents include cash on hand, money market instruments and other debt issues with a maturity date of three months or less when purchased.

Investments

        Fixed maturities include bonds, asset-backed securities ("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 and equity securities as either available-for-sale or trading at the time of the purchase and, accordingly, carry them at fair value. See Note 14, Fair Value Measurements, for methodologies related to the determination of fair value. Unrealized gains and losses related to available-for-sale securities, excluding those in fair value hedging relationships, are reflected in stockholders' equity, net of adjustments associated with DAC and related actuarial balances, derivatives in cash flow hedge relationships and applicable income taxes. Unrealized gains and losses related to hedged portions of available-for-sale securities in fair value hedging relationships and mark-to-market adjustments on certain trading securities are reflected in net realized capital gains (losses). Mark-to-market adjustments related to certain securities carried at fair value with an investment objective to realize economic value through mark-to-market changes are reflected in net investment income.

        The cost of fixed maturities is adjusted for amortization of premiums and accrual of discounts, both computed using the interest method. The cost of fixed maturities and equity securities classified as available-for-sale is adjusted for declines in value that are other than temporary. Impairments in value deemed to be other than temporary are primarily reported in net income as a component of net realized capital gains (losses), with noncredit impairment losses for certain fixed maturities, available-for-sale reported in other comprehensive income ("OCI"). 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.

        Real estate investments are reported at cost less accumulated depreciation. The initial cost bases of properties acquired through loan foreclosures are the lower of the fair market values of the properties at the time of foreclosure or the outstanding loan balance. Buildings and land improvements are generally depreciated on the straight-line method over the estimated useful life of improvements and tenant improvement costs are depreciated on the straight-line method over the term of the related lease. We recognize impairment losses for properties when indicators of impairment are present and a property's expected undiscounted cash flows are not sufficient to recover the property's carrying value. In such cases, the cost basis of the properties are reduced to fair value. Real estate expected to be disposed is carried at the lower of cost or fair value, less cost to sell, with valuation allowances established accordingly and depreciation no longer recognized. The carrying amount of real estate held for sale was $130.7 million and $169.7 million as of December 31, 2016 and 2015, respectively. Any impairment losses and any changes in valuation allowances are reported in net income.

        Commercial and residential mortgage loans are generally reported at cost adjusted for amortization of premiums and accrual of discounts, computed using the interest method and net of valuation allowances. Interest income is accrued on the principal amount of the loan based on the loan's contractual interest rate. Interest income, as well as prepayment of fees and the amortization of the related premium or discount, is reported in net investment income. Any changes in the valuation allowances are reported in net income as net realized capital gains (losses). We measure impairment based upon the difference between carrying value and estimated value less cost to sell. Estimated value is based on either the present value of expected cash flows discounted at the loan's effective interest rate, the loan's observable market price or the fair value of the collateral. If foreclosure is probable, the measurement of any valuation allowance is based upon the fair value of the collateral.

        Net realized capital gains and losses on sales of investments are determined on the basis of specific identification. In general, in addition to realized capital gains and losses on investment sales and periodic settlements on derivatives not designated as hedges, we report gains and losses related to the following in net realized capital gains (losses): other-than-temporary impairments of securities and subsequent realized recoveries, mark-to-market adjustments on certain trading securities, mark-to-market adjustments on sponsored investment funds, fair value hedge and cash flow hedge ineffectiveness, mark-to-market adjustments on derivatives not designated as hedges, changes in the mortgage loan valuation allowance provision, impairments of real estate held for investment and impairments of equity method investments. 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).

        Policy loans and certain other investments are reported at cost. Interests in unconsolidated entities, joint ventures and partnerships are generally accounted for using the equity method. We have other investments reported at fair value or for which the fair value option has been elected. See Note 14, Fair Value Measurements, for detail on these investments.

Derivatives

Overview

        Derivatives are financial instruments whose values are derived from interest rates, foreign exchange rates, financial indices or the values of securities. Derivatives generally used by us include interest rate swaps, interest rate options, swaptions, currency swaps, currency forwards, equity options, futures, credit default swaps and total return swaps. Derivative positions are either assets or liabilities in the consolidated statements of financial position and are measured at fair value, generally by obtaining quoted market prices or through the use of pricing models. See Note 14, Fair Value Measurements, for policies related to the determination of fair value. Fair values can be affected by changes in interest rates, foreign exchange rates, financial indices, values of securities, credit spreads, and market volatility and liquidity.

Accounting and Financial Statement Presentation

        We designate derivatives as either:

 

 

 

           

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a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, including those denominated in a foreign currency ("fair value hedge");

           

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a hedge of a forecasted transaction or the exposure to variability of cash flows to be received or paid related to a recognized asset or liability, including those denominated in a foreign currency ("cash flow hedge");

           

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a hedge of a net investment in a foreign operation or

           

(d)          

a derivative not designated as a hedging instrument.

        Our accounting for the ongoing changes in fair value of a derivative depends on the intended use of the derivative and the designation, as described above, and is determined when the derivative contract is entered into or at the time of redesignation. Hedge accounting is used for derivatives that are specifically designated in advance as hedges and that reduce our exposure to an indicated risk by having a high correlation between changes in the value of the derivatives and the items being hedged at both the inception of the hedge and throughout the hedge period.

        Fair Value Hedges.    When a derivative is designated as a fair value hedge and is determined to be highly effective, changes in its fair value, along with changes in the fair value of the hedged asset, liability or firm commitment attributable to the hedged risk, are reported in net realized capital gains (losses). Any difference between the net change in fair value of the derivative and the hedged item represents hedge ineffectiveness.

        Cash Flow Hedges.    When a derivative is designated as a cash flow hedge and is determined to be highly effective, changes in its fair value are recorded as a component of OCI. Any hedge ineffectiveness is recorded immediately in net income. At the time the variability of cash flows being hedged impacts net income, the related portion of deferred gains or losses on the derivative instrument is reclassified and reported in net income.

        Net Investment in a Foreign Operation Hedge.    When a derivative is used as a hedge of a net investment in a foreign operation, its change in fair value, to the extent effective as a hedge, is recorded as a component of OCI. Any hedge ineffectiveness is recorded immediately in net income. If the foreign operation is sold or upon complete or substantially complete liquidation, the deferred gains or losses on the derivative instrument are reclassified into net income.

        Non-Hedge Derivatives.    If a derivative does not qualify or is not designated for hedge accounting, all changes in fair value are reported in net income without considering the changes in the fair value of the economically associated assets or liabilities.

        Hedge Documentation and Effectiveness Testing.    At inception, we formally document all relationships between hedging instruments and hedged items, as well as our risk management objective and strategy for undertaking various hedge transactions. This process includes associating all derivatives designated as fair value or cash flow hedges with specific assets or liabilities on the consolidated statements of financial position or with specific firm commitments or forecasted transactions. Effectiveness of the hedge is formally assessed at inception and throughout the life of the hedging relationship. Even if a derivative is highly effective and qualifies for hedge accounting treatment, the hedge might have some ineffectiveness.

        We use qualitative and quantitative methods to assess hedge effectiveness. Qualitative methods may include monitoring changes to terms and conditions and counterparty credit ratings. Quantitative methods may include statistical tests including regression analysis and minimum variance and dollar offset techniques.

        Termination of Hedge Accounting.    We prospectively discontinue hedge accounting when (1) the criteria to qualify for hedge accounting is no longer met, e.g., a derivative is determined to no longer be highly effective in offsetting the change in fair value or cash flows of a hedged item; (2) the derivative expires, is sold, terminated or exercised or (3) we remove the designation of the derivative being the hedging instrument for a fair value or cash flow hedge.

        If it is determined that a derivative no longer qualifies as an effective hedge, the derivative will continue to be carried on the consolidated statements of financial position at its fair value, with changes in fair value recognized prospectively in net realized capital gains (losses). The asset or liability under a fair value hedge will no longer be adjusted for changes in fair value pursuant to hedging rules and the existing basis adjustment is amortized to the consolidated statements of operations line associated with the asset or liability. The component of accumulated other comprehensive income ("AOCI") related to discontinued cash flow hedges that are no longer highly effective is amortized to the consolidated statements of operations consistent with the net income impacts of the original hedged cash flows. If a cash flow hedge is discontinued because it is probable the hedged forecasted transaction will not occur, the deferred gain or loss is immediately reclassified from AOCI into net income.

        Embedded Derivatives.    We purchase and issue certain financial instruments and products that contain a derivative that is embedded in the financial instrument or product. We assess whether this embedded derivative is clearly and closely related to the asset or liability that serves as its host contract. If we deem that the embedded derivative's terms are not clearly and closely related to the host contract, and a separate instrument with the same terms would qualify as a derivative instrument, the derivative is bifurcated from that contract and held at fair value on the consolidated statements of financial position, with changes in fair value reported in net income.

Contractholder and Policyholder Liabilities

        Contractholder and policyholder liabilities (contractholder funds, future policy benefits and claims and other policyholder funds) include reserves for investment contracts, individual and group annuities that provide periodic income payments, universal life, term life insurance, participating traditional individual life insurance, group life insurance, health insurance and disability income policies, as well as a provision for dividends on participating policies.

        Investment contracts are contractholders' funds on deposit with us and generally include reserves for pension and annuity contracts. Reserves on investment contracts are equal to the cumulative deposits less any applicable charges and withdrawals plus credited interest. Reserves for universal life insurance contracts are equal to cumulative deposits less charges plus credited interest, which represents the account balances that accrue to the benefit of the policyholders.

        We hold additional reserves on certain long-duration contracts where benefit features result in gains in early years followed by losses in later years, universal life/variable universal life contracts that contain no lapse guarantee features, or annuities with guaranteed minimum death benefits.

        Reserves for individual and group annuities that provide periodic income payments, nonparticipating term life insurance and disability income contracts are computed on a basis of assumed investment yield, mortality, morbidity and expenses, including a provision for adverse deviation, which generally varies by plan, year of issue and policy duration. Investment yield is based on our experience. Mortality, morbidity and withdrawal rate assumptions are based on our experience and are periodically reviewed against both industry standards and experience.

        Reserves for participating life insurance contracts are based on the net level premium reserve for death and endowment policy benefits. This net level premium reserve is calculated based on dividend fund interest rates and mortality rates guaranteed in calculating the cash surrender values described in the contract.

        Participating business represented approximately 8%, 9% and 11% of our life insurance in force and 33%, 36% and 40% of the number of life insurance policies in force as of December 31, 2016, 2015 and 2014, respectively. Participating business represented approximately 31%, 36% and 40% of life insurance premiums for the years ended December 31, 2016, 2015 and 2014, respectively. The amount of dividends to policyholders is declared annually by Principal Life's Board of Directors. The amount of dividends to be paid to policyholders is determined after consideration of several factors including interest, mortality, morbidity and other expense experience for the year and judgment as to the appropriate level of statutory surplus to be retained by Principal Life. At the end of the reporting period, Principal Life establishes a dividend liability for the pro rata portion of the dividends expected to be paid on or before the next policy anniversary date.

        Some of our policies and contracts require payment of fees or other policyholder assessments in advance for services that will be rendered over the estimated lives of the policies and contracts. These payments are established as unearned revenue liabilities upon receipt and included in other policyholder funds in the consolidated statements of financial position. These unearned revenue reserves are amortized to operations over the estimated lives of these policies and contracts in relation to the emergence of estimated gross profits ("EGPs").

        The liability for unpaid claims for both long-duration and short-duration contracts is an estimate of the ultimate net cost of reported and unreported losses not yet settled. This liability is estimated using actuarial analyses and case basis evaluations. Although considerable variability is inherent in such estimates, we believe the liability for unpaid claims is adequate. These estimates are continually reviewed and, as adjustments to this liability become necessary, such adjustments are reflected in net income. Our liability for unpaid claims does not include any allocated claim adjustment expenses.

        We incur claim adjustment expenses for both long-duration and short-duration contracts that cannot be allocated to a specific claim. Our claim adjustment expense liability is estimated using actuarial analyses based on historical trends of expenses and expected claim runout patterns.

Short-Duration Contracts

        We include the following group products in our short-duration insurance contracts disclosures: long-term disability ("LTD"), group life waiver, dental, vision, short-term disability ("STD") and group life.

        Future policy benefits and claims include reserves for group life and disability insurance that provide periodic income payments. These reserves are computed using assumptions of mortality, morbidity and investment performance. These assumptions are based on our experience, industry results, emerging trends and future expectations. Future policy benefits and claims also include reserves for incurred but unreported group disability, dental, vision and life insurance claims. We recognize claims costs in the period the service was provided to our policyholders. However, claims costs incurred in a particular period are not known with certainty until after we receive, process and pay the claims. We determine the amount of this liability using actuarial methods based on historical claim payment patterns as well as emerging cost trends, where applicable, to determine our estimate of claim liabilities.

        We have defined claim frequency as follows for each short-duration product:

 

 

 

           

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LTD: Claim frequency is based on submitted reserve claim counts. 

           

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Group Life Waiver: Claim frequency is based on submitted reserve claim counts, consistent with LTD. 

           

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Dental and Vision: Claim frequency is based on the claim form, which may include one or more procedures. 

           

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STD: Claim frequency is based on submitted claims. 

           

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Group Life: Claim frequency is based on submitted life claims (lives, not coverages).

        We did not make any significant changes to our methodologies or assumptions used to calculate the liability for unpaid claims for short-duration contracts during 2016.

Recognition of Premiums and Other Considerations, Fees and Other Revenues and Benefits

        Traditional individual life insurance products include those products with fixed and guaranteed premiums and benefits and consist principally of whole life and term life insurance policies. Premiums from these products are recognized as premium revenue when due. Related policy benefits and expenses for individual life products are associated with earned premiums and result in the recognition of profits over the expected term of the policies and contracts.

        Immediate annuities with life contingencies include products with fixed and guaranteed annuity considerations and benefits and consist principally of group and individual single premium annuities with life contingencies. Annuity considerations from these products are recognized as premium revenue. However, the collection of these annuity considerations does not represent the completion of the earnings process, as we establish annuity reserves using estimates for mortality and investment assumptions, which include provision for adverse deviation as required by U.S. GAAP. We anticipate profits to emerge over the life of the annuity products as we earn investment income, pay benefits and release reserves.

        Group life and health insurance premiums are generally recorded as premium revenue over the term of the coverage. Certain group contracts contain experience premium refund provisions based on a pre-defined formula that reflects their claim experience. Experience premium refunds reduce revenue over the term of the coverage and are adjusted to reflect current experience. Related policy benefits and expenses for group life and health insurance products are associated with earned premiums and result in the recognition of profits over the term of the policies and contracts. Fees for contracts providing claim processing or other administrative services are recorded as revenue over the period the service is provided.

        Universal life-type policies are insurance contracts with terms that are not fixed. Amounts received as payments for such contracts are not reported as premium revenues. Revenues for universal life-type insurance contracts consist of policy charges for the cost of insurance, policy initiation and administration, surrender charges and other fees that have been assessed against policy account values and investment income. Policy benefits and claims that are charged to expense include interest credited to contracts and benefit claims incurred in the period in excess of related policy account balances.

        Investment contracts do not subject us to significant risks arising from policyholder mortality or morbidity and consist primarily of guaranteed investment contracts ("GICs"), funding agreements and certain deferred annuities. Amounts received as payments for investment contracts are established as investment contract liability balances and are not reported as premium revenues. Revenues for investment contracts consist of investment income and policy administration charges. Investment contract benefits that are charged to expense include benefit claims incurred in the period in excess of related investment contract liability balances and interest credited to investment contract liability balances.

        Fees and other revenues are earned for asset management services provided to retail and institutional clients based largely upon contractual rates applied to the market value of the client's portfolio. Additionally, fees and other revenues are earned for administrative services performed including recordkeeping and reporting services for retirement savings plans. Fees and other revenues received for performance of asset management and administrative services are recognized as revenue when earned, typically when the service is performed.

        Fees for managing customers' mandatory retirement savings accounts in Chile are collected with each monthly deposit made by our customers. If a customer stops contributing before retirement age, we collect no fees but services are still provided. We recognize revenue from these long-term service contracts as services are performed over the life of the contract.

Deferred Acquisition Costs

        Incremental direct costs of contract acquisition as well as certain costs directly related to acquisition activities (underwriting, policy issuance and processing, medical and inspection and sales force contract selling) for the successful acquisition of new and renewal insurance policies and investment contract business are capitalized to the extent recoverable. Commissions and other incremental direct costs for the acquisition of long-term service contracts are also capitalized to the extent recoverable. Maintenance costs and acquisition costs that are not deferrable are charged to net income as incurred.

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

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

        DAC for long-term service contracts are amortized in proportion to the revenue recognized or straight-line if no pattern of revenue recognition can be reasonably predicted. We amortize capitalized costs of long-term service contracts on a straight-line basis, reflecting lapses as they are incurred, over the expected contract life.

Deferred Acquisition Costs on Internal Replacements

        All insurance and investment contract modifications and replacements are reviewed to determine if the internal replacement results in a substantially changed contract. If so, the acquisition costs, sales inducements and unearned revenue associated with the new contract are deferred and amortized over the lifetime of the new contract. In addition, the existing DAC, sales inducement costs and unearned revenue balances associated with the replaced contract are written off. If an internal replacement results in a substantially unchanged contract, the acquisition costs, sales inducements and unearned revenue associated with the new contract are immediately recognized in the period incurred. In addition, the existing DAC, sales inducement costs or unearned revenue balance associated with the replaced contract is not written off, but instead is carried over to the new contract.

Long-Term Debt

        Long-term debt includes notes payable, nonrecourse mortgages and other debt with a maturity date greater than one year at the date of issuance. Current maturities of long-term debt are classified as long-term debt in our consolidated statements of financial position.

Reinsurance

        We enter into reinsurance agreements with other companies in the normal course of business in order to limit losses and minimize exposure to significant risks. We may assume reinsurance from or cede reinsurance to other companies. Assets and liabilities related to reinsurance ceded are reported on a gross basis. Premiums and expenses are reported net of reinsurance ceded. The cost of reinsurance related to long-duration contracts is accounted for over the life of the underlying reinsured policies using assumptions consistent with those used to account for the underlying policies. We are contingently liable with respect to reinsurance ceded to other companies in the event the reinsurer is unable to meet the obligations it has assumed. As of December 31, 2016 and 2015, we had $412.8 million and $397.5 million of net ceded reinsurance recoverables related to claims that have been received, respectively. As of December 31, 2016 and 2015, $390.5 million, or 95%, and $379.4 million, or 95%, were with our five largest ceded reinsurers, respectively. Our total amount recoverable from reinsurers includes net ceded reinsurance recoverables related to claims that have been received and reserves ceded to reinsurers; however, it does not reflect potentially offsetting impacts of collateral. As of December 31, 2016 and 2015, the total amount recoverable from reinsurers was $837.1 million and $857.3 million, respectively.

        The effects of reinsurance on premiums and other considerations and policy and contract benefits were as follows:

                                                                                                                                                                                    

 

 

For the year ended
December 31,

 

 

 

2016

 

2015

 

2014

 

 

 

(in millions)

 

Premiums and other considerations:

 

 

 

 

 

 

 

 

 

 

Direct

 

$

5,753.8

 

$

5,710.8

 

$

4,123.7

 

Assumed

 

 

1.7

 

 

1.9

 

 

2.1

 

Ceded

 

 

(456.4

)

 

(402.4

)

 

(402.9

)

​  

​  

​  

​  

​  

​  

Net premiums and other considerations

 

$

5,299.1

 

$

5,310.3

 

$

3,722.9

 

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

Benefits, claims and settlement expenses:

 

 

 

 

 

 

 

 

 

 

Direct

 

$

7,202.5

 

$

7,196.7

 

$

5,532.5

 

Assumed

 

 

28.1

 

 

28.7

 

 

30.7

 

Ceded

 

 

(317.4

)

 

(527.7

)

 

(332.2

)

​  

​  

​  

​  

​  

​  

Net benefits, claims and settlement expenses

 

$

6,913.2

 

$

6,697.7

 

$

5,231.0

 

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

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 December 31, 2016 and December 31, 2015, the separate accounts included a separate account valued at $158.4 million and $158.2 million, respectively, which primarily included shares of our stock that were allocated and issued to eligible participants of qualified employee benefit plans administered by us as part of the policy credits issued under our 2001 demutualization. These shares are included in both basic and diluted earnings per share calculations. In the consolidated statements of financial position, the separate account shares are recorded at fair value and are reported as separate account assets with a corresponding separate account liability to eligible participants of the qualified plan. Changes in fair value of the separate account shares are reflected in both the separate account assets and separate account liabilities and do not impact our results of operations.

Income Taxes

        We file a U.S. consolidated income tax return that includes all of our qualifying subsidiaries. In addition, we file income tax returns in all states and foreign jurisdictions in which we conduct business. Our policy of allocating income tax expenses and benefits to companies in the group is generally based upon pro rata contribution of taxable income or operating losses. We are taxed at corporate rates on taxable income based on existing tax laws. Current income taxes are charged or credited to net income based upon amounts estimated to be payable or recoverable as a result of taxable operations for the current year. Deferred income taxes are provided for the tax effect of temporary differences in the financial reporting and income tax bases of assets and liabilities, net operating loss carryforwards and tax credit carryforwards using enacted income tax rates and laws. The effect on deferred income tax assets and deferred income tax liabilities of a change in tax rates is recognized in net income in the period in which the change is enacted.

Foreign Exchange

        Assets and liabilities of our foreign subsidiaries and affiliates denominated in non-U.S. dollars, where the U.S. dollar is not the functional currency, are translated into U.S. dollar equivalents at the year-end spot foreign exchange rates. Resulting translation adjustments are reported as a component of stockholders' equity, along with any related hedge and tax effects. Revenues and expenses for these entities are translated at the average exchange rates. Revenue, expense and other foreign currency transaction and translation adjustments that affect cash flows are reported in net income, along with related hedge and tax effects.

Goodwill and Other Intangibles

        Goodwill and other intangible assets include the cost of acquired subsidiaries in excess of the fair value of the net tangible assets recorded in connection with acquisitions. Goodwill and indefinite-lived intangible assets are not amortized. Rather, they are tested for impairment during the third quarter each year, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Goodwill is tested at the reporting unit level, which is a business one level below the operating segment, if financial information is prepared and regularly reviewed by management at that level. Once goodwill has been assigned to a reporting unit, it is no longer associated with a particular acquisition; therefore, all of the activities within a reporting unit, whether acquired or organically grown, are available to support the goodwill value. Impairment testing for indefinite-lived intangible assets consists of a comparison of the fair value of the intangible asset with its carrying value.

        Intangible assets with a finite useful life are amortized as related benefits emerge and are reviewed periodically for indicators of impairment in value. If facts and circumstances suggest possible impairment, the sum of the estimated undiscounted future cash flows expected to result from the use of the asset is compared to the current carrying value of the asset. If the undiscounted future cash flows are less than the carrying value, an impairment loss is recognized for the excess of the carrying amount of assets over their fair value.

Earnings Per Common Share

        Basic earnings per common share is calculated by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period and excludes the dilutive effect of equity awards. Diluted earnings per common share reflects the potential dilution that could occur if dilutive securities, such as options and non-vested stock grants, were exercised or resulted in the issuance of common stock.

Goodwill and Other Intangible Assets
Goodwill and Other Intangible Assets

2. Goodwill and Other Intangible Assets

Goodwill

        The changes in the carrying amount of goodwill reported in our segments were as follows:

                                                                                                                                                                                    

 

 

Retirement
and Income
Solutions

 

Principal
Global
Investors

 

Principal
International

 

U.S.
Insurance
Solutions

 

Corporate

 

Consolidated

 

 

 

(in millions)

 

Balance as of January 1, 2015

 

$

57.4

 

$

252.4

 

$

641.0

 

$

56.6

 

$

 

$

1,007.4

 

Goodwill from acquisitions

 

 

 

 

3.1

 

 

101.7

 

 

 

 

 

 

104.8

 

Foreign currency

 

 

 

 

(3.4

)

 

(99.8

)

 

 

 

 

 

(103.2

)

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

Balance as of December 31, 2015

 

 

57.4

 

 

252.1

 

 

642.9

 

 

56.6

 

 

 

 

1,009.0

 

Foreign currency

 

 

 

 

(9.6

)

 

21.4

 

 

 

 

 

 

11.8

 

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

Balance as of December 31, 2016

 

$

57.4

 

$

242.5

 

$

664.3

 

$

56.6

 

$

 

$

1,020.8

 

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

        On September 1, 2015, we completed our purchase of AXA's Mandatory Provident Fund ("MPF") and Occupational Retirement Schemes Ordinance ("ORSO") pension business in Hong Kong for $335.5 million. As part of the transaction, we entered into an exclusive 15-year distribution agreement with AXA to provide co-branded pension products through AXA's extensive agency network in Hong Kong. AXA's MPF and ORSO pension business is consolidated within our Principal International segment with a portion of the goodwill and identifiable intangible assets allocated to our Principal Global Investors segment.

        Of the acquired intangible assets, $104.8 million was assigned to goodwill and is not subject to amortization. The goodwill is largely related to future sales anticipated from our internal workforce and entity-specific revenue synergies that will be generated by combining AXA's MPF and ORSO pension business with our existing businesses. This goodwill will be tested annually as part of the Principal International Hong Kong reporting unit and the Principal Global Investors Equity Investments and Fixed Income Investments reporting units.

        Of the remaining acquired intangible assets, $138.0 million was assigned to customer relationships, which are subject to amortization over a 30-year useful life, and $53.0 million was assigned to the distribution agreement, which is subject to amortization over a 15-year useful life based on its contractual term.

Finite Lived Intangible Assets

        Amortized intangible assets that continue to be subject to amortization over a weighted average remaining expected life of 16 years were as follows:

                                                                                                                                                                                    

 

 

December 31,

 

 

 

2016

 

2015

 

 

 

(in millions)

 

Gross carrying value

 

$

756.2 

 

$

766.7 

 

Accumulated amortization

 

 

228.7 

 

 

198.1 

 

​  

​  

​  

​  

Net carrying value

 

$

527.5 

 

$

568.6 

 

​  

​  

​  

​  

​  

​  

​  

​  

        During 2015, we recorded an $8.3 million pre-tax impairment loss in operating expenses related to finite lived intangible assets that originated from the acquisition of our mutual fund company in Brazil with a gross carrying amount of $11.5 million and $3.2 million of accumulated amortization at the time of impairment. During 2016, 2015 and 2014, we fully amortized other finite lived intangible assets of $2.2 million, $0.5 million and $118.6 million, respectively.

        The amortization expense for intangible assets with finite useful lives was $44.5 million, $42.5 million and $49.9 million for 2016, 2015 and 2014, respectively. As of December 31, 2016, the estimated amortization expense for the next five years is as follows (in millions):

                                                                                                                                                                                    

Year ending December 31:

 

 

 

 

2017

 

$

44.7 

 

2018

 

 

44.1 

 

2019

 

 

43.0 

 

2020

 

 

42.3 

 

2021

 

 

39.6 

 

Indefinite Lived Intangible Assets

        The 2015 net impact of impairments of indefinite lived intangibles of our mutual fund company in Brazil resulted in a pre-tax loss of $14.7 million that was recorded in operating expenses.

        The net carrying amount of unamortized indefinite lived intangible assets was $797.8 million and $790.6 million as of December 31, 2016 and 2015, respectively. As of both December 31, 2016 and 2015, $608.0 million relates to investment management contracts associated with our acquisition of WM Advisors, Inc. in 2006. The remaining balance primarily relates to the trade name intangible associated with our acquisition of Administradora de Fondos de Pensiones Cuprum S.A. in 2013.

Variable Interest Entities
Variable Interest Entities

3. 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 December 31, 2016 and December 31, 2015.

Adoption of New Consolidation Guidance

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

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

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

 

 

 

           

•          

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

           

•          

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

           

•          

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

           

•          

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

Consolidated Variable Interest Entities

Grantor Trusts

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

Collateralized Private Investment Vehicles

        We invest in cash and synthetic collateralized debt obligations, collateralized bond obligations, collateralized loan obligations and other collateralized structures, which are VIEs due to insufficient equity to sustain the entities (collectively known as "collateralized private investment vehicles"). The performance of the notes of these synthetic structures is primarily linked to a synthetic portfolio by derivatives; each note has a specific loss attachment and detachment point. The notes and related derivatives are collateralized by a pool of permitted investments. The investments are held by a trustee and can only be liquidated to settle obligations of the trusts. These obligations primarily include derivatives and the notes due at maturity or termination of the trusts. We determined we are the primary beneficiary for one of these synthetic entities because we act as the investment manager of the underlying portfolio and we have the power to make decisions and to receive benefits and the obligation to absorb losses that could be potentially significant to the VIE.

Commercial Mortgage-Backed Securities

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

Mandatory Retirement Savings Funds

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

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

Real Estate

        We invest in several real estate limited partnerships and limited liability companies. The entities invest in real estate properties. Certain of these entities are VIEs based on the combination of our significant economic interest and related voting rights. We determined we are the primary beneficiary as a result of our power to control the entities through our significant ownership. Due to the nature of these real estate investments, the investment balance will fluctuate as we purchase and sell interests in the entities and as capital expenditures are made to improve the underlying real estate.

Sponsored Investment Funds

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

Assets and Liabilities of Consolidated Variable Interest Entities

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

                                                                                                                                                                                    

 

 

December 31, 2016

 

December 31, 2015

 

 

 

Total
assets

 

Total
liabilities

 

Total
assets

 

Total
liabilities

 

 

 

(in millions)

 

Grantor trusts (1)

 

$

233.3 

 

$

212.3 

 

$

257.9 

 

$

231.8 

 

Collateralized private investment vehicles (2)

 

 

82.4 

 

 

61.5 

 

 

100.4 

 

 

85.9 

 

CMBS

 

 

12.5 

 

 

 

 

18.4 

 

 

 

Mandatory retirement savings funds (3)

 

 

36,526.7 

 

 

36,202.8 

 

 

33,941.3 

 

 

33,639.3 

 

Real estate (4)

 

 

329.2 

 

 

26.8 

 

 

384.2 

 

 

71.3 

 

Sponsored investment funds (5)

 

 

114.3 

 

 

0.9 

 

 

 

 

 

​  

​  

​  

​  

​  

​  

​  

​  

Total

 

$

37,298.4 

 

$

36,504.3 

 

$

34,702.2 

 

$

34,028.3 

 

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  


 

 

 

(1)          

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

(2)          

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

(3)          

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

(4)          

The assets of the real estate VIEs primarily include real estate, other investments and cash. Liabilities primarily include other liabilities. Liabilities also included long-term debt as of December 31, 2015.

(5)          

The assets of sponsored investment funds are primarily fixed maturities and equity securities reported in other investments and cash. The consolidated statements of financial position included a $58.8 million redeemable noncontrolling interest for sponsored investment funds as of December 31, 2016.

Unconsolidated Variable Interest Entities

Invested Securities

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

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

        As previously discussed, we invest in several types of collateralized private investment vehicles, which are VIEs. These include cash and synthetic structures that we do not manage. We have determined we are not the primary beneficiary of these collateralized private investment vehicles primarily because we do not control the economic performance of the entities and were not involved with the design of the entities.

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

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

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

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

                                                                                                                                                                                    

 

 

Asset carrying value

 

Maximum exposure to
loss (1)

 

 

 

(in millions)

 

December 31, 2016

 

 

 

 

 

 

 

Fixed maturities, available-for-sale:

 

 

 

 

 

 

 

Corporate

 

$

368.4 

 

$

298.6 

 

Residential mortgage-backed pass-through securities

 

 

2,834.7 

 

 

2,798.0 

 

Commercial mortgage-backed securities

 

 

4,096.5 

 

 

4,153.2 

 

Collateralized debt obligations

 

 

758.6 

 

 

780.1 

 

Other debt obligations

 

 

5,036.1 

 

 

5,048.9 

 

Fixed maturities, trading:

 

 

 

 

 

 

 

Residential mortgage-backed pass-through securities

 

 

19.9 

 

 

19.9 

 

Commercial mortgage-backed securities

 

 

1.9 

 

 

1.9 

 

Collateralized debt obligations

 

 

10.6 

 

 

10.6 

 

Equity securities, trading

 

 

68.3 

 

 

68.3 

 

Other investments:

 

 

 

 

 

 

 

Other limited partnership and fund interests

 

 

654.6 

 

 

1,127.8 

 

December 31, 2015

 

 


 

 

 


 

 

Fixed maturities, available-for-sale:

 

 

 

 

 

 

 

Corporate

 

$

453.4 

 

$

359.8 

 

Residential mortgage-backed pass-through securities

 

 

2,627.5 

 

 

2,549.4 

 

Commercial mortgage-backed securities

 

 

3,919.8 

 

 

3,932.5 

 

Collateralized debt obligations

 

 

667.5 

 

 

692.7 

 

Other debt obligations

 

 

4,530.8 

 

 

4,527.3 

 

Fixed maturities, trading:

 

 

 

 

 

 

 

Residential mortgage-backed pass-through securities

 

 

25.9 

 

 

25.9 

 

Commercial mortgage-backed securities