PRINCIPAL FINANCIAL GROUP INC, 10-K filed on 2/11/2015
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2014
Feb. 4, 2015
Jun. 30, 2014
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, 2014 
 
 
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
 
 
$ 14,833,259,052 
Entity Common Stock, Shares Outstanding
 
294,110,248 
 
Document Fiscal Year Focus
2014 
 
 
Document Fiscal Period Focus
FY 
 
 
Consolidated Statements of Financial Position (USD $)
In Millions, unless otherwise specified
Dec. 31, 2014
Dec. 31, 2013
Assets
 
 
Fixed maturities, available-for-sale (2014 and 2013 include $278.2 million and $272.0 million related to consolidated variable interest entities)
$ 49,670.8 
$ 48,757.1 
Fixed maturities, trading (2014 and 2013 include $100.4 million and $110.4 million related to consolidated variable interest entities)
604.6 
563.1 
Equity securities, available-for-sale
123.0 
110.5 
Equity securities, trading (2014 and 2013 include $345.3 million and $327.2 million related to consolidated variable interest entities)
840.2 
716.9 
Mortgage loans
11,811.6 
11,533.6 
Real estate (2014 and 2013 include $284.9 million and $266.3 million related to consolidated variable interest entities)
1,344.6 
1,271.6 
Policy loans
829.2 
859.7 
Other investments (2014 and 2013 include $40.6 million and $68.1 million related to consolidated variable interest entities and $127.2 million and $142.9 million measured at fair value under the fair value option)
3,209.8 
2,944.4 
Total investments
68,433.8 
66,756.9 
Cash and cash equivalents
1,863.9 
2,371.8 
Accrued investment income
505.9 
532.1 
Premiums due and other receivables
1,213.0 
1,241.0 
Deferred acquisition costs
2,993.0 
3,077.0 
Property and equipment
590.2 
500.7 
Goodwill
1,007.4 
1,100.3 
Other intangibles
1,323.5 
1,459.0 
Separate account assets (2014 and 2013 include $34,655.4 million and $32,824.7 million related to consolidated variable interest entities)
140,072.8 
130,018.4 
Other assets
1,083.5 
1,134.2 
Total assets
219,087.0 
208,191.4 
Liabilities
 
 
Contractholder funds
34,726.7 
35,958.3 
Future policy benefits and claims
24,036.6 
22,626.2 
Other policyholder funds
812.7 
758.9 
Short-term debt
28.0 
150.6 
Long-term debt (2014 and 2013 include $82.3 million and $47.7 million related to consolidated variable interest entities)
2,531.2 
2,601.4 
Income taxes currently payable
11.5 
5.2 
Deferred income taxes
1,035.3 
824.0 
Separate account liabilities (2014 and 2013 include $34,655.4 million and $32,824.7 million related to consolidated variable interest entities)
140,072.8 
130,018.4 
Other liabilities (2014 and 2013 include $344.0 million and $362.4 million related to consolidated variable interest entities, of which $71.0 million and $104.9 million are measured at fair value under the fair value option)
5,542.2 
5,224.2 
Total liabilities
208,797.0 
198,167.2 
Redeemable noncontrolling interest
58.0 
247.2 
Stockholders' equity
 
 
Common stock, par value $.01 per share - 2,500.0 million shares authorized, 462.7 million and 459.3 million shares issued, and 293.9 million and 295.2 million shares outstanding in 2014 and 2013
4.6 
4.6 
Additional paid-in capital
9,945.5 
9,798.9 
Retained earnings (accumulated deficit)
6,114.1 
5,405.4 
Accumulated other comprehensive income (loss)
50.4 
183.2 
Treasury stock, at cost (168.8 million and 164.1 million shares in 2014 and 2013)
(5,930.7)
(5,708.0)
Total stockholders' equity attributable to Principal Financial Group, Inc.
10,184.0 
9,684.2 
Noncontrolling interest
48.0 
92.8 
Total stockholders' equity
10,232.0 
9,777.0 
Total liabilities and stockholders' equity
219,087.0 
208,191.4 
Series A
 
 
Stockholders' equity
 
 
Preferred stock, value
Total stockholders' equity
Series B
 
 
Stockholders' equity
 
 
Preferred stock, value
0.1 
0.1 
Total stockholders' equity
$ 0.1 
$ 0.1 
Consolidated Statements of Financial Position (Parenthetical) (USD $)
In Millions, except Per Share data, unless otherwise specified
Dec. 31, 2014
Dec. 31, 2013
Fixed maturities, available-for-sale
$ 49,670.8 
$ 48,757.1 
Fixed maturities, trading
604.6 
563.1 
Equity securities, trading
840.2 
716.9 
Real estate
1,344.6 
1,271.6 
Other investments
3,209.8 
2,944.4 
Other investments measured at fair value under fair value option
127.2 
142.9 
Separate account assets
140,072.8 
130,018.4 
Long-term debt
2,531.2 
2,601.4 
Separate account liabilities
140,072.8 
130,018.4 
Other liabilities
5,542.2 
5,224.2 
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)
462.7 
459.3 
Common stock, outstanding (in shares)
293.9 
295.2 
Treasury stock (in shares)
168.8 
164.1 
Series A
 
 
Preferred stock, par value (in dollars per share)
$ 0.01 
$ 0.01 
Preferred stock, liquidation preference (in dollars per share)
$ 100 
$ 100 
Preferred stock, authorized (in shares)
3.0 
3.0 
Preferred stock, issued (in shares)
3.0 
3.0 
Preferred stock, outstanding (in shares)
3.0 
3.0 
Series B
 
 
Preferred stock, par value (in dollars per share)
$ 0.01 
$ 0.01 
Preferred stock, liquidation preference (in dollars per share)
$ 25 
$ 25 
Preferred stock, authorized (in shares)
10.0 
10.0 
Preferred stock, issued (in shares)
10.0 
10.0 
Preferred stock, outstanding (in shares)
10.0 
10.0 
Aggregate consolidated variable interest entities
 
 
Fixed maturities, available-for-sale
278.2 
272.0 
Fixed maturities, trading
100.4 
110.4 
Equity securities, trading
345.3 
327.2 
Real estate
284.9 
266.3 
Other investments
40.6 
68.1 
Separate account assets
34,655.4 
32,824.7 
Long-term debt
82.3 
47.7 
Separate account liabilities
34,655.4 
32,824.7 
Other liabilities
344.0 
362.4 
Other liabilities measured at fair value under fair value option
$ 71.0 
$ 104.9 
Consolidated Statements of Operations (USD $)
In Millions, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Revenues
 
 
 
Premiums and other considerations
$ 3,722.9 
$ 3,154.1 
$ 3,219.4 
Fees and other revenues
3,482.1 
3,222.2 
2,626.7 
Net investment income (loss)
3,257.9 
3,138.4 
3,254.9 
Net realized capital gains (losses), excluding impairment losses on available-for-sale securities
92.7 
(109.2)
232.7 
Net other-than-temporary impairment (losses) recoveries on available-for-sale securities
23.8 
(91.5)
(135.9)
Other-than-temporary impairment losses on fixed maturities, available-for-sale reclassified to (from) other comprehensive income
(101.8)
(24.5)
17.3 
Net impairment losses on available-for-sale securities
(78.0)
(116.0)
(118.6)
Net realized capital gains (losses)
14.7 
(225.2)
114.1 
Total revenues
10,477.6 
9,289.5 
9,215.1 
Expenses
 
 
 
Benefits, claims and settlement expenses
5,231.0 
4,683.6 
5,123.9 
Dividends to policyholders
177.4 
189.0 
197.7 
Operating expenses
3,574.3 
3,292.9 
2,933.5 
Total expenses
8,982.7 
8,165.5 
8,255.1 
Income (loss) before income taxes
1,494.9 
1,124.0 
960.0 
Income taxes (benefits)
318.5 
187.9 
134.6 
Net income (loss)
1,176.4 
936.1 
825.4 
Net income (loss) attributable to noncontrolling interest
32.3 
23.4 
18.8 
Net income (loss) attributable to Principal Financial Group, Inc.
1,144.1 
912.7 
806.6 
Preferred stock dividends
33.0 
33.0 
33.0 
Net income (loss) available to common stockholders
$ 1,111.1 
$ 879.7 
$ 773.6 
Earnings per common share
 
 
 
Basic earnings per common share (in dollars per share)
$ 3.70 
$ 2.99 
$ 2.60 
Diluted earnings per common share (in dollars per share)
$ 3.65 
$ 2.95 
$ 2.58 
Dividends declared per common share (in dollars per share)
$ 1.28 
$ 0.98 
$ 0.78 
Consolidated Statements of Comprehensive Income (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Consolidated Statements of Comprehensive Income
 
 
 
Net income (loss)
$ 1,176.4 
$ 936.1 
$ 825.4 
Other comprehensive income (loss), net:
 
 
 
Net unrealized gains (losses) on available-for-sale securities
324.7 
(540.2)
557.6 
Noncredit component of impairment losses on fixed maturities, available-for-sale
61.9 
6.9 
(6.7)
Net unrealized gains (losses) on derivative instruments
61.1 
(1.8)
(43.6)
Foreign currency translation adjustment
(336.6)
(269.4)
(9.8)
Net unrecognized postretirement benefit obligation
(255.2)
332.6 
(127.4)
Other comprehensive income (loss)
(144.1)
(471.9)
370.1 
Comprehensive income (loss)
1,032.3 
464.2 
1,195.5 
Comprehensive income (loss) attributable to noncontrolling interest
21.0 
8.6 
20.0 
Comprehensive income (loss) attributable to Principal Financial Group, Inc.
$ 1,011.3 
$ 455.6 
$ 1,175.5 
Consolidated Statements of Stockholders' Equity (USD $)
In Millions, unless otherwise specified
Series A
Series B
Common stock
Additional paid-in capital
Retained earnings (accumulated deficit)
Accumulated other comprehensive income (loss)
Treasury stock
Noncontrolling interest
Total
Balances at Dec. 31, 2011
$ 0 
$ 0.1 
$ 4.5 
$ 9,634.7 
$ 4,323.4 
$ 271.4 
$ (5,281.7)
$ 353.8 
$ 9,306.2 
Increase (decrease) in stockholders' equity
 
 
 
 
 
 
 
 
 
Common stock issued
 
 
 
28.9 
 
 
 
 
28.9 
Stock-based compensation and additional related tax benefits
 
 
 
67.3 
(3.7)
 
 
 
63.6 
Treasury stock acquired, common
 
 
 
 
 
 
(272.7)
 
(272.7)
Dividends to common stockholders
 
 
 
 
(231.3)
 
 
 
(231.3)
Dividends to preferred stockholders
 
 
 
 
(33.0)
 
 
 
(33.0)
Distributions to noncontrolling interest
 
 
 
 
 
 
 
(10.7)
(10.7)
Contributions from noncontrolling interest
 
 
 
 
 
 
 
13.1 
13.1 
Deconsolidation of certain variable interest entities
 
 
 
 
 
 
 
(353.2)
(353.2)
Net income (loss) (excludes $9.0 million, $13.6 million and $1.9 million attributable to redeemable noncontrolling interest in 2014, 2013 and 2012 respectively)
 
 
 
 
806.6 
 
 
16.9 
823.5 
Other comprehensive income (loss) (excludes $(5.3) million, $(4.8) million and $1.1 million attributable to redeemable noncontrolling interest in 2014, 2013 and 2012 respectively)
 
 
 
 
 
368.9 
 
0.1 
369.0 
Balances at Dec. 31, 2012
0.1 
4.5 
9,730.9 
4,862.0 
640.3 
(5,554.4)
20.0 
9,703.4 
Increase (decrease) in stockholders' equity
 
 
 
 
 
 
 
 
 
Common stock issued
 
 
0.1 
125.7 
 
 
 
 
125.8 
Stock-based compensation and additional related tax benefits
 
 
 
72.7 
(4.6)
 
 
 
68.1 
Treasury stock acquired, common
 
 
 
 
 
 
(153.6)
 
(153.6)
Dividends to common stockholders
 
 
 
 
(288.4)
 
 
 
(288.4)
Dividends to preferred stockholders
 
 
 
 
(33.0)
 
 
 
(33.0)
Distributions to noncontrolling interest
 
 
 
 
 
 
 
(2.0)
(2.0)
Contributions from noncontrolling interest
 
 
 
 
 
 
 
115.3 
115.3 
Purchase of subsidiary shares from noncontrolling interest
 
 
 
1.4 
 
 
 
(54.1)
(52.7)
Sale of subsidiary shares to noncontrolling interest
 
 
 
11.5 
 
 
 
20.3 
31.8 
Adjustments to redemption amount of redeemable noncontrolling interest
 
 
 
(143.3)
(43.3)
 
 
(6.5)
(193.1)
Net income (loss) (excludes $9.0 million, $13.6 million and $1.9 million attributable to redeemable noncontrolling interest in 2014, 2013 and 2012 respectively)
 
 
 
 
912.7 
 
 
9.8 
922.5 
Other comprehensive income (loss) (excludes $(5.3) million, $(4.8) million and $1.1 million attributable to redeemable noncontrolling interest in 2014, 2013 and 2012 respectively)
 
 
 
 
 
(457.1)
 
(10.0)
(467.1)
Balances at Dec. 31, 2013
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 interest
 
 
 
(2.0)
 
 
 
(45.6)
(47.6)
Adjustments to redemption amount of redeemable noncontrolling interest
 
 
 
(9.2)
(19.7)
 
 
 
(28.9)
Net income (loss) (excludes $9.0 million, $13.6 million and $1.9 million attributable to redeemable noncontrolling interest in 2014, 2013 and 2012 respectively)
 
 
 
 
1,144.1 
 
 
23.3 
1,167.4 
Other comprehensive income (loss) (excludes $(5.3) million, $(4.8) million and $1.1 million attributable to redeemable noncontrolling interest in 2014, 2013 and 2012 respectively)
 
 
 
 
 
(132.8)
 
(6.0)
(138.8)
Balances at Dec. 31, 2014
$ 0 
$ 0.1 
$ 4.6 
$ 9,945.5 
$ 6,114.1 
$ 50.4 
$ (5,930.7)
$ 48.0 
$ 10,232.0 
Consolidated Statements of Stockholders' Equity (Parenthetical) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Consolidated Statements of Stockholders' Equity
 
 
 
Net income (loss) attributable to redeemable noncontrolling interest
$ 9.0 
$ 13.6 
$ 1.9 
Other comprehensive income (loss) attributable to redeemable noncontrolling interest
$ (5.3)
$ (4.8)
$ 1.1 
Consolidated Statements of Cash Flows (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Operating activities
 
 
 
Net income (loss)
$ 1,176.4 
$ 936.1 
$ 825.4 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Amortization of deferred acquisition costs
367.2 
187.1 
94.9 
Additions to deferred acquisition costs
(404.1)
(447.0)
(428.9)
Accrued investment income
26.2 
52.3 
30.8 
Net cash flows for trading securities
(93.4)
(76.0)
335.8 
Premiums due and other receivables
26.9 
(131.9)
70.6 
Contractholder and policyholder liabilities and dividends
1,634.0 
1,614.7 
2,054.7 
Current and deferred income taxes (benefits)
175.9 
211.7 
18.4 
Net realized capital (gains) losses
(14.7)
225.2 
(114.1)
Depreciation and amortization expense
169.5 
153.9 
132.1 
Mortgage loans held for sale, acquired or originated
 
 
(48.0)
Mortgage loans held for sale, sold or repaid, net of gain
43.3 
0.2 
90.0 
Real estate acquired through operating activities
(49.4)
(107.2)
(46.4)
Real estate sold through operating activities
158.9 
24.2 
43.9 
Stock-based compensation
75.3 
68.5 
63.8 
Other
(189.1)
(490.6)
(42.2)
Net adjustments
1,926.5 
1,285.1 
2,255.4 
Net cash provided by (used in) operating activities
3,102.9 
2,221.2 
3,080.8 
Investing activities
 
 
 
Available-for-sale securities: Purchases
(9,054.0)
(9,025.2)
(8,263.9)
Available-for-sale securities: Sales
2,512.0 
1,919.1 
1,303.7 
Available-for-sale securities: Maturities
6,244.7 
7,359.2 
6,647.5 
Mortgage loans acquired or originated
(2,169.6)
(2,192.9)
(2,538.4)
Mortgage loans sold or repaid
1,793.6 
2,095.1 
1,668.0 
Real estate acquired
(281.7)
(85.6)
(151.8)
Net (purchases) sales of property and equipment
(136.0)
(59.4)
(38.9)
Purchases of interest in subsidiaries, net of cash acquired
 
(1,268.3)
(80.4)
Net change in other investments
(81.7)
31.7 
(157.1)
Net cash provided by (used in) investing activities
(1,172.7)
(1,226.3)
(1,611.3)
Financing activities
 
 
 
Issuance of common stock
77.5 
125.8 
28.9 
Acquisition of treasury stock
(222.7)
(153.6)
(272.7)
Proceeds from financing element derivatives
15.1 
47.0 
51.8 
Payments for financing element derivatives
(58.0)
(48.0)
(49.9)
Excess tax benefits from share-based payment arrangements
9.7 
10.1 
10.8 
Purchase of subsidiary shares from noncontrolling interest
(227.0)
(52.9)
 
Sale of subsidiary shares to noncontrolling interest
 
31.8 
 
Dividends to common stockholders
(376.6)
(288.4)
(231.3)
Dividends to preferred stockholders
(33.0)
(33.0)
(33.0)
Issuance of long-term debt
38.5 
38.2 
1,493.4 
Principal repayments of long-term debt
(100.3)
(218.2)
(450.6)
Net proceeds from (repayments of) short-term borrowings
(118.3)
108.0 
(68.8)
Investment contract deposits
5,638.4 
6,716.3 
6,900.4 
Investment contract withdrawals
(7,099.2)
(8,852.7)
(7,522.6)
Net increase (decrease) in banking operation deposits
30.7 
(225.7)
32.0 
Other
(12.9)
(5.0)
(14.6)
Net cash provided by (used in) financing activities
(2,438.1)
(2,800.3)
(126.2)
Net increase (decrease) in cash and cash equivalents
(507.9)
(1,805.4)
1,343.3 
Cash and cash equivalents at beginning of period
2,371.8 
4,177.2 
2,833.9 
Cash and cash equivalents at end of period
1,863.9 
2,371.8 
4,177.2 
Supplemental Information:
 
 
 
Cash paid for interest
137.6 
144.1 
127.7 
Cash paid for income taxes
$ 73.8 
$ 61.2 
$ 82.7 
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"), along with its consolidated subsidiaries, is a diversified financial services organization offering retirement services, insurance solutions and asset management in the U.S. and selected international markets.

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. 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. 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.

Recent Accounting Pronouncements

                                                                                                                                                                                    

Description

 

Date of
adoption

 

Effect on our consolidated
financial statements or
other significant matters

Standards not yet adopted:

 

 

 

 


Revenue recognition


 


 


 


 

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

 

January 1, 2017

 

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


Discontinued operations


 


 


 


 

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

 

January 1, 2015

 

This guidance will be applied prospectively and is not expected to have a material impact on our consolidated financial statements.


Standards adopted:


 


 


 


 


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.


Accumulated other comprehensive income


 


 


 


 

This authoritative guidance requires entities to disclose additional information about items reclassified out of accumulated other comprehensive income ("AOCI"). Entities are required to disclose information regarding changes in AOCI balances by component and significant items reclassified out of AOCI by component either on the face of the income statement or as a separate footnote to the financial statements.

 

January 1, 2013

 

See Note 14, Stockholders' Equity, for further details.

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

Balance sheet offsetting

 

 

 

 

This authoritative guidance requires disclosures about assets and liabilities that are offset or have the potential to be offset. These disclosures are intended to address differences in the asset and liability offsetting requirements under U.S. GAAP and International Financial Reporting Standards. The guidance further clarifies that the disclosure requirements apply to derivative instruments, including bifurcated embedded derivatives, repurchase and reverse repurchase agreements and securities borrowing and securities lending arrangements that are either offset on the balance sheet or subject to an enforceable master netting arrangement or similar agreement. Retrospective application was required.

 

January 1, 2013

 

See Note 5, Investments, for further details.

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


Presentation of comprehensive income


 


 


 


 

This authoritative guidance changes the presentation of comprehensive income in the financial statements. The guidance eliminates the presentation options contained in previous guidance and instead requires entities to report components of comprehensive income in either a continuous statement of comprehensive income or two separate but consecutive statements that show the components of net income and other comprehensive income ("OCI"), including adjustments for items that are reclassified from OCI to net income. The guidance does not change the items that must be reported in OCI or when an item of OCI must be reclassified to net income.

 

January 1, 2012

 

See Consolidated Statements of Comprehensive Income and Note 14, Stockholders' Equity, for further details.

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


Fair value measurement and disclosure requirements


 


 


 


 

This authoritative guidance clarifies and changes fair value measurement and disclosure requirements. This guidance expands existing disclosure requirements for fair value measurements and makes other amendments but does not require additional fair value measurements.

 

January 1, 2012

 

See Note 15, Fair Value Measurements, for further details.

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


Capitalized costs incurred by insurance companies


 


 


 


 

This authoritative guidance modifies the definition of the types of costs incurred by insurance entities that can be capitalized in the successful acquisition of new or renewal insurance contracts. Capitalized costs should include incremental direct costs of contract acquisition, as well as certain costs related directly to acquisition activities such as underwriting, policy issuance and processing, medical and inspection and sales force contract selling.

 

January 1, 2012

 

We adopted the guidance retrospectively.

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:

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

investment impairments and valuation allowances;

the fair value of and accounting for derivatives;

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

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

the liability for future policy benefits and claims;

the value of our pension and other postretirement benefit obligations and

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 nonredeemable preferred securities. Equity securities include mutual funds, common stock and nonredeemable preferred stock. 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 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 basis 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 $174.0 million and $182.3 million as of December 31, 2014 and 2013, 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, 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 certain seed money investments, fair value hedge and cash flow hedge ineffectiveness, mark-to-market adjustments on derivatives not designated as hedges, changes in the mortgage loan valuation allowance provision, impairments of real estate held for investment and impairments on equity method investments. Investment gains and losses on sales of certain real estate held for sale that do not meet the criteria for classification as a discontinued operation 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 other investments are primarily reported at cost, excluding seed money investments, other investment funds, derivative assets, commercial mortgage loans of consolidated VIEs for which the fair value option was elected and equity method real estate investments for which the fair value option was elected.

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. Derivatives may be exchange traded, cleared through centralized clearinghouses, or contracted in the over-the-counter market without being cleared. 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:

(a)

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");

(b)

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");

(c)

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 statement 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 OCI 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 OCI 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 and reserves for 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 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 11%, 12% and 13% of our life insurance in force and 40%, 43% and 47% of the number of life insurance policies in force at December 31, 2014, 2013 and 2012, respectively. Participating business represented approximately 40%, 40% and 43% of life insurance premiums for the years ended December 31, 2014, 2013 and 2012, 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.

        The liability for unpaid disability and health claims 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 that 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.

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 of contract acquisition 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 operations as incurred.

        DAC for universal life-type insurance contracts, participating life insurance policies and certain investment contracts are being amortized over the lives of the policies and contracts in relation to the emergence of estimated gross profits ("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 method (reversion to the mean assumption), a common industry practice, to determine the future domestic equity market growth assumption used for the amortization of DAC. The DAC of nonparticipating term life insurance and individual disability policies are being 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 is necessary, DAC would be written off to the extent that it is determined that future policy premiums and investment income or gross profits are not adequate to cover related losses and expenses.

        DAC on 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 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 statement 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. At December 31, 2014 and 2013, we had $338.0 million and $282.6 million of net ceded reinsurance recoverables related to claims that have been received, respectively. At December 31, 2014 and 2013, our largest exposures to a single third party reinsurer was in our life insurance business, which totaled $38.9 billion and $35.9 billion of life insurance in force, representing 16% and 17% of total net life insurance in force, respectively. The reinsurance recoverable relating to claims received that are associated to this single third party reinsurer recorded in our consolidated statements of financial position was $48.1 million and $31.3 million at December 31, 2014 and 2013, respectively.

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

                                                                                                                                                                                    

 

 

For the year ended
December 31,

 

 

 

2014

 

2013

 

2012

 

 

 

(in millions)

 

Premiums and other considerations:

 

 

 

 

 

 

 

 

 

 

Direct

 

$

4,123.7

 

$

3,524.8

 

$

3,554.1

 

Assumed

 

 

2.1

 

 

2.5

 

 

2.6

 

Ceded

 

 

(402.9

)

 

(373.2

)

 

(337.3

)  

​  

​  

​  

​  

​  

​  

Net premiums and other considerations

 

$

3,722.9

 

$

3,154.1

 

$

3,219.4

 

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

Benefits, claims and settlement expenses:

 

 

 

 

 

 

 

 

 

 

Direct

 

$

5,532.5

 

$

4,933.3

 

$

5,268.6

 

Assumed

 

 

30.7

 

 

32.2

 

 

33.9

 

Ceded

 

 

(332.2

)

 

(281.9

)

 

(178.6

)  

​  

​  

​  

​  

​  

​  

Net benefits, claims and settlement expenses

 

$

5,231.0

 

$

4,683.6

 

$

5,123.9

 

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

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 statement of operations. Net deposits, net investment income and realized and unrealized capital gains and losses of the separate accounts are not reflected in the consolidated statements of operations.

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

        At December 31, 2014 and December 31, 2013, the separate accounts include a separate account valued at $205.4 million and $223.1 million, respectively, which primarily includes shares of our stock that were allocated and issued to eligible participants of qualified employee benefit plans administered by us as part of the policy credits issued under our 2001 demutualization. These shares are included in both basic and diluted earnings per share calculations. In the consolidated statements of financial position, the separate account shares are recorded at fair value and are reported as separate account assets with a corresponding separate account liability to eligible participants of the qualified plan. Changes in fair value of the separate account shares are reflected in both the separate account assets and separate account liabilities and do not impact our results of operations.

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 and net operating losses 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 operations 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 Investor
Services

 

Principal
Global
Investors

 

Principal
International

 

U.S.
Insurance
Solutions

 

Corporate

 

Consolidated

 

 

 

(in millions)

 

Balance at January 1, 2013

 

$

68.6

 

$

239.9

 

$

179.5

 

$

55.4

 

$

 

$

543.4

 

Goodwill from acquisitions

 

 

 

 

 

 

631.8

 

 

2.6

 

 

 

 

634.4

 

Goodwill disposed

 

 

 

 

 

 

 

 

(1.4

)

 

 

 

(1.4

)

Foreign currency

 

 

 

 

1.2

 

 

(81.3

)

 

 

 

 

 

(80.1

)

Other

 

 

4.0

 

 

 

 

 

 

 

 

 

 

4.0

 

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

Balance at December 31, 2013

 

 

72.6

 

 

241.1

 

 

730.0

 

 

56.6

 

 

 

 

1,100.3

 

Foreign currency

 

 

 

 

(3.9

)

 

(89.0

)

 

 

 

 

 

(92.9

)

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

Balance at December 31, 2014

 

$

72.6

 

$

237.2

 

$

641.0

 

$

56.6

 

$

 

$

1,007.4

 

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

Finite Lived Intangible Assets

        Amortized intangible assets that continue to be subject to amortization over a weighted average remaining expected life of 13 years were as follows:

                                                                                                                                                                                    

 

 

December 31, 2014

 

December 31, 2013

 

 

 

Gross
carrying
value

 

Accumulated
amortization

 

Net
carrying
value

 

Gross
carrying
value

 

Accumulated
amortization

 

Net
carrying
value

 

 

 

(in millions)

 

Present value of future profits

 

$

 

$

 

$

 

$

13.5 

 

$

6.7 

 

$

6.8 

 

Other finite lived intangible assets

 

 

674.1 

 

 

183.6 

 

 

490.5 

 

 

858.8 

 

 

262.9 

 

 

595.9 

 

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

Total finite lived intangible assets

 

$

674.1 

 

$

183.6 

 

$

490.5 

 

$

872.3 

 

$

269.6 

 

$

602.7 

 

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

        During 2014, 2013 and 2012, we fully amortized other finite lived intangible assets of $118.6 million, $5.2 million and $5.0 million, respectively.

        Other Finite Lived Intangible Assets.    The amortization expense for intangible assets with finite useful lives was $49.9 million, $48.0 million and $22.7 million for 2014, 2013 and 2012, respectively. At December 31, 2014, the estimated amortization expense for the next five years is as follows (in millions):

                                                                                                                                                                                    

Year ending December 31:

 

 

 

 

2015

 

$

48.6 

 

2016

 

 

48.8 

 

2017

 

 

48.1 

 

2018

 

 

47.7 

 

2019

 

 

46.1 

 

Indefinite Lived Intangible Assets

        The net carrying amount of unamortized indefinite lived intangible assets was $833.0 million and $856.3 million as of December 31, 2014 and 2013, respectively. As of both December 31, 2014 and 2013, $608.0 million relates to investment management contracts associated with our acquisition of WM Advisors, Inc. in 2006. In addition, in the first quarter of 2013, we recorded $185.2 million related to trade name intangibles associated with our acquisition of Administradora de Fondos de Pensiones Cuprum S.A. ("Cuprum").

Variable Interest Entities
Variable Interest Entities

 

3. Variable Interest Entities

        We have relationships with and may have a variable interest in various types of special purpose entities. Following is a discussion of our interest in entities that meet the definition of a VIE. When we are the primary beneficiary, we are required to consolidate the entity in our financial statements. The primary beneficiary of a VIE is defined as the enterprise with (1) the power to direct the activities of a VIE that most significantly impact the entity's economic performance and (2) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. For VIEs that are investment companies, the primary beneficiary is the enterprise who absorbs the majority of the entity's expected losses, receives a majority of the expected residual returns or both. On an ongoing basis, we assess whether we are the primary beneficiary of VIEs in which we have a relationship.

Consolidated Variable Interest Entities

Grantor Trusts

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

Collateralized Private Investment Vehicle

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

Commercial Mortgage-Backed Securities

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

Mandatory Retirement Savings

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

Real Estate

        During the third quarter of 2014, we re-evaluated our consolidation conclusions for certain real estate limited partnerships and limited liability companies. We determined the entities were properly consolidated in the financial statements, but should have been consolidated under the VIE model as opposed to the voting interest model. As a result, we have included the consolidation impacts of these entities within the current and prior period VIE disclosures.

        We invest in several real estate limited partnerships and limited liability companies. The entities invest in real estate properties. 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.

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

                                                                                                                                                                                    

 

 

Grantor trusts

 

Collateralized
private investment
vehicle

 

CMBS

 

Mandatory
retirement
savings

 

Real estate

 

Total

 

 

 

(in millions)

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities, available-for-sale

 

$

278.2

 

$

 

$

 

$

 

$

 

$

278.2

 

Fixed maturities, trading

 

 

 

 

100.4

 

 

 

 

 

 

 

 

100.4

 

Equity securities, trading

 

 

 

 

 

 

 

 

345.3

 

 

 

 

345.3

 

Real estate

 

 

 

 

 

 

 

 

 

 

284.9

 

 

284.9

 

Other investments

 

 

 

 

 

 

35.0

 

 

 

 

5.6

 

 

40.6

 

Cash

 

 

 

 

 

 

 

 

 

 

4.7

 

 

4.7

 

Accrued investment income

 

 

0.4

 

 

 

 

0.2

 

 

 

 

1.4

 

 

2.0

 

Separate account assets

 

 

 

 

 

 

 

 

34,655.4

 

 

 

 

34,655.4

 

Other assets

 

 

 

 

 

 

 

 

 

 

0.3

 

 

0.3

 

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

Total assets

 

$

278.6

 

$

100.4

 

$

35.2

 

$

35,000.7

 

$

296.9

 

$

35,711.8

 

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

Long-term debt

 

$

 

$

 

$

 

$

 

$

82.3

 

$

82.3

 

Income taxes currently payable

 

 

 

 

 

 

 

 

 

 

10.6

 

 

10.6

 

Deferred income taxes

 

 

1.5

 

 

 

 

 

 

 

 

(0.4

)

 

1.1

 

Separate account liabilities

 

 

 

 

 

 

 

 

34,655.4

 

 

 

 

34,655.4

 

Other liabilities (1)

 

 

239.1

 

 

85.6

 

 

4.8

 

 

 

 

14.5

 

 

344.0

 

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

Total liabilities

 

$

240.6

 

$

85.6

 

$

4.8

 

$

34,655.4

 

$

107.0

 

$

35,093.4

 

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities, available-for-sale

 

$

272.0

 

$

 

$

 

$

 

$

 

$

272.0

 

Fixed maturities, trading

 

 

 

 

110.4

 

 

 

 

 

 

 

 

110.4

 

Equity securities, trading

 

 

 

 

 

 

 

 

327.2

 

 

 

 

327.2

 

Real estate

 

 

 

 

 

 

 

 

 

 

266.3

 

 

266.3

 

Other investments

 

 

 

 

 

 

68.1

 

 

 

 

 

 

68.1

 

Cash

 

 

 

 

 

 

 

 

 

 

12.0

 

 

12.0

 

Accrued investment income

 

 

0.3

 

 

 

 

0.6

 

 

 

 

1.1

 

 

2.0

 

Separate account assets

 

 

 

 

 

 

 

 

32,824.7

 

 

 

 

32,824.7

 

Other assets

 

 

 

 

 

 

 

 

 

 

0.1

 

 

0.1

 

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

Total assets

 

$

272.3

 

$

110.4

 

$

68.7

 

$

33,151.9

 

$

279.5

 

$

33,882.8

 

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

Long-term debt

 

$

 

$

 

$

 

$

 

$

47.7

 

$

47.7

 

Deferred income taxes

 

 

1.5

 

 

 

 

 

 

 

 

 

 

1.5

 

Separate account liabilities

 

 

 

 

 

 

 

 

32,824.7

 

 

 

 

32,824.7

 

Other liabilities (1)

 

 

217.2

 

 

93.8

 

 

31.4

 

 

 

 

20.0

 

 

362.4

 

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

Total liabilities

 

$

218.7

 

$

93.8

 

$

31.4

 

$

32,824.7

 

$

67.7

 

$

33,236.3

 

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  


(1)

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

        We did not provide financial or other support to investees designated as VIEs for the periods ended December 31, 2014 and December 31, 2013.

Unconsolidated Variable Interest Entities

Invested Securities

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

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

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

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

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

        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, 2014

 

 

 

 

 

 

 

Fixed maturities, available-for-sale:

 

 

 

 

 

 

 

Corporate

 

$

456.7 

 

$

353.3 

 

Residential mortgage-backed pass-through securities

 

 

2,822.9 

 

 

2,702.9 

 

Commercial mortgage-backed securities

 

 

3,975.5 

 

 

3,896.9 

 

Collateralized debt obligations

 

 

504.1 

 

 

521.2 

 

Other debt obligations

 

 

4,616.4 

 

 

4,583.4 

 

Fixed maturities, trading:

 

 

 

 

 

 

 

Residential mortgage-backed pass-through securities

 

 

34.4 

 

 

34.4 

 

Commercial mortgage-backed securities

 

 

1.5 

 

 

1.5 

 

Collateralized debt obligations

 

 

39.4 

 

 

39.4 

 

Other debt obligations

 

 

0.2 

 

 

0.2 

 

Other investments:

 

 

 

 

 

 

 

Other limited partnership and fund interests

 

 

188.2 

 

 

188.2 

 

December 31, 2013

 

 


 

 

 


 

 

Fixed maturities, available-for-sale:

 

 

 

 

 

 

 

Corporate

 

$

523.4 

 

$

448.2 

 

Residential mortgage-backed pass-through securities

 

 

2,845.2 

 

 

2,799.1 

 

Commercial mortgage-backed securities

 

 

4,026.4 

 

 

4,078.0 

 

Collateralized debt obligations

 

 

363.4 

 

 

391.9 

 

Other debt obligations

 

 

4,167.8 

 

 

4,157.5 

 

Fixed maturities, trading:

 

 

 

 

 

 

 

Residential mortgage-backed pass-through securities

 

 

47.5 

 

 

47.5 

 

Commercial mortgage-backed securities

 

 

1.8 

 

 

1.8 

 

Collateralized debt obligations

 

 

59.6 

 

 

59.6 

 

Other debt obligations

 

 

1.2 

 

 

1.2 

 

Other investments:

 

 

 

 

 

 

 

Other limited partnership and fund interests

 

 

123.5 

 

 

123.5 

 


(1)

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

Sponsored Investment Funds

        We are the investment manager for certain money market mutual funds that are deemed to be VIEs. We are not the primary beneficiary of these VIEs since our involvement is limited primarily to being a service provider, and our variable interest does not absorb the majority of the variability of the entities' net assets. As of both December 31, 2014 and December 31, 2013, these VIEs held $1.4 billion in total assets. We have no contractual obligation to contribute to the funds.

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

Investments
Investments

 

4. Investments

Fixed Maturities and Equity Securities

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

                                                                                                                                                                                    

 

 

Amortized
cost

 

Gross
unrealized
gains

 

Gross
unrealized
losses

 

Fair value

 

Other-than-
temporary
impairments in
AOCI (1)

 

 

 

(in millions)

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities, available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agencies

 

$

1,085.6 

 

$

39.1 

 

$

2.9 

 

$

1,121.8 

 

$

 

Non-U.S. governments

 

 

704.4 

 

 

188.3 

 

 

1.6 

 

 

891.1