PRINCIPAL FINANCIAL GROUP INC, 10-Q filed on 10/28/2015
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2015
Oct. 21, 2015
Document and Entity Information
 
 
Entity Registrant Name
PRINCIPAL FINANCIAL GROUP INC 
 
Entity Central Index Key
0001126328 
 
Document Type
10-Q 
 
Document Period End Date
Sep. 30, 2015 
 
Amendment Flag
false 
 
Current Fiscal Year End Date
--12-31 
 
Entity Current Reporting Status
Yes 
 
Entity Filer Category
Large Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
292,751,140 
Document Fiscal Year Focus
2015 
 
Document Fiscal Period Focus
Q3 
 
Consolidated Statements of Financial Position (USD $)
In Millions, unless otherwise specified
Sep. 30, 2015
Dec. 31, 2014
Assets
 
 
Fixed maturities, available-for-sale (2015 and 2014 include $261.1 million and $278.2 million related to consolidated variable interest entities)
$ 49,780.6 
$ 49,670.8 
Fixed maturities, trading (2015 and 2014 both include $100.4 million related to consolidated variable interest entities)
710.2 
604.6 
Equity securities, available-for-sale (2015 includes $315.8 million related to consolidated variable interest entities)
465.3 
123.0 
Equity securities, trading (2015 and 2014 include $321.2 million and $345.3 million related to consolidated variable interest entities)
869.1 
840.2 
Mortgage loans
12,232.1 
11,811.6 
Real estate (2015 and 2014 include $298.9 million and $284.9 million related to consolidated variable interest entities)
1,415.0 
1,344.6 
Policy loans
822.8 
829.2 
Other investments (2015 and 2014 include $36.8 million and $40.6 million related to consolidated variable interest entities and $56.6 million and $127.2 million measured at fair value under the fair value option)
3,270.4 
3,209.8 
Total investments
69,565.5 
68,433.8 
Cash and cash equivalents
2,514.2 
1,863.9 
Accrued investment income
566.8 
505.9 
Premiums due and other receivables
1,401.6 
1,213.0 
Deferred acquisition costs
3,145.0 
2,993.0 
Property and equipment
611.6 
590.2 
Goodwill
1,005.2 
1,007.4 
Other intangibles
1,398.9 
1,323.5 
Separate account assets (2015 and 2014 include $32,827.6 million and $34,655.4 million related to consolidated variable interest entities)
134,045.8 
140,072.8 
Other assets
1,110.8 
1,083.5 
Total assets
215,365.4 
219,087.0 
Liabilities
 
 
Contractholder funds (2015 includes $329.2 million related to consolidated variable interest entities)
35,115.2 
34,726.7 
Future policy benefits and claims
25,521.7 
24,036.6 
Other policyholder funds
819.5 
812.7 
Short-term debt
221.6 
28.0 
Long-term debt (2015 and 2014 include $38.2 million and $82.3 million related to consolidated variable interest entities)
3,286.1 
2,531.2 
Income taxes currently payable
16.7 
11.5 
Deferred income taxes
878.8 
1,035.3 
Separate account liabilities (2015 and 2014 include $32,827.6 million and $34,655.4 million related to consolidated variable interest entities)
134,045.8 
140,072.8 
Other liabilities (2015 and 2014 include $340.7 million and $344.0 million related to consolidated variable interest entities, of which $64.7 million and $71.0 million are measured at fair value under the fair value option)
5,696.2 
5,542.2 
Total liabilities
205,601.6 
208,797.0 
Redeemable noncontrolling interest
78.0 
58.0 
Stockholders' equity
 
 
Common stock, par value $.01 per share - 2,500.0 million shares authorized, 466.0 million and 462.7 million shares issued, and 293.5 million and 293.9 million shares outstanding in 2015 and 2014
4.7 
4.6 
Additional paid-in capital
9,524.2 
9,945.5 
Retained earnings (accumulated deficit)
6,734.7 
6,114.1 
Accumulated other comprehensive income (loss)
(524.4)
50.4 
Treasury stock, at cost (172.5 million and 168.8 million shares in 2015 and 2014)
(6,118.9)
(5,930.7)
Total stockholders' equity attributable to Principal Financial Group, Inc.
9,620.3 
10,184.0 
Noncontrolling interest
65.5 
48.0 
Total stockholders' equity
9,685.8 
10,232.0 
Total liabilities and stockholders' equity
215,365.4 
219,087.0 
Series A
 
 
Stockholders' equity
 
 
Preferred stock, value
 
   
Series B
 
 
Stockholders' equity
 
 
Preferred stock, value
 
$ 0.1 
Consolidated Statements of Financial Position (Parenthetical) (USD $)
In Millions, except Share data, unless otherwise specified
Sep. 30, 2015
Dec. 31, 2014
Fixed maturities, available-for-sale
$ 49,780.6 
$ 49,670.8 
Fixed maturities, trading
710.2 
604.6 
Equity securities, available-for-sale
465.3 
123.0 
Equity securities, trading
869.1 
840.2 
Real estate
1,415.0 
1,344.6 
Other investments
3,270.4 
3,209.8 
Other investments measured at fair value under fair value option
56.6 
127.2 
Separate account assets
134,045.8 
140,072.8 
Contractholder funds
35,115.2 
34,726.7 
Long-term debt
3,286.1 
2,531.2 
Separate account liabilities
134,045.8 
140,072.8 
Other liabilities
5,696.2 
5,542.2 
Common stock, par value (in dollars per share)
$ 0.01 
$ 0.01 
Common stock, authorized (in shares)
2,500,000,000 
2,500,000,000 
Common stock, issued (in shares)
466,000,000 
462,700,000 
Common stock, outstanding (in shares)
293,500,000 
293,900,000 
Treasury stock (in shares)
172,500,000 
168,800,000 
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)
3,000,000 
Preferred stock, issued (in shares)
3,000,000 
Preferred stock, outstanding (in shares)
3,000,000 
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)
10,000,000 
Preferred stock, issued (in shares)
10,000,000 
Preferred stock, outstanding (in shares)
10,000,000 
Aggregate consolidated variable interest entities
 
 
Fixed maturities, available-for-sale
261.1 
278.2 
Fixed maturities, trading
100.4 
100.4 
Equity securities, available-for-sale
315.8 
 
Equity securities, trading
321.2 
345.3 
Real estate
298.9 
284.9 
Other investments
36.8 
40.6 
Separate account assets
32,827.6 
34,655.4 
Contractholder funds
329.2 
 
Long-term debt
38.2 
82.3 
Separate account liabilities
32,827.6 
34,655.4 
Other liabilities
340.7 
344.0 
Other liabilities measured at fair value under fair value option
$ 64.7 
$ 71.0 
Consolidated Statements of Operations (USD $)
In Millions, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2015
Sep. 30, 2014
Sep. 30, 2015
Sep. 30, 2014
Revenues
 
 
 
 
Premiums and other considerations
$ 1,557.1 
$ 875.8 
$ 4,155.9 
$ 2,514.8 
Fees and other revenues
891.9 
884.5 
2,744.2 
2,569.7 
Net investment income (loss)
753.5 
770.4 
2,267.3 
2,444.1 
Net realized capital gains (losses), excluding impairment losses on available-for-sale securities
46.0 
(24.5)
11.1 
105.0 
Net other-than-temporary impairment (losses) recoveries on available-for-sale securities
(6.5)
(7.3)
6.9 
18.5 
Other-than-temporary impairment losses on fixed maturities, available-for-sale reclassified to (from) other comprehensive income
(1.1)
(14.6)
(28.0)
(82.5)
Net impairment (losses) recoveries on available-for-sale securities
(7.6)
(21.9)
(21.1)
(64.0)
Net realized capital gains (losses)
38.4 
(46.4)
(10.0)
41.0 
Total revenues
3,240.9 
2,484.3 
9,157.4 
7,569.6 
Expenses
 
 
 
 
Benefits, claims and settlement expenses
1,869.6 
1,113.8 
5,160.5 
3,609.7 
Dividends to policyholders
40.7 
44.2 
123.5 
134.5 
Operating expenses
961.4 
932.5 
2,751.6 
2,647.7 
Total expenses
2,871.7 
2,090.5 
8,035.6 
6,391.9 
Income (loss) before income taxes
369.2 
393.8 
1,121.8 
1,177.7 
Income taxes (benefits)
68.3 
141.0 
126.9 
281.6 
Net income (loss)
300.9 
252.8 
994.9 
896.1 
Net income (loss) attributable to noncontrolling interest
0.5 
3.9 
14.5 
30.7 
Net income (loss) attributable to Principal Financial Group, Inc.
300.4 
248.9 
980.4 
865.4 
Preferred stock dividends
 
8.2 
16.5 
24.7 
Excess of redemption value over carrying value of preferred shares redeemed
 
 
8.2 
 
Net income (loss) available to common stockholders
$ 300.4 
$ 240.7 
$ 955.7 
$ 840.7 
Earnings per common share
 
 
 
 
Basic earnings per common share (in dollars per share)
$ 1.02 
$ 0.78 
$ 3.24 
$ 2.78 
Diluted earnings per common share (in dollars per share)
$ 1.01 
$ 0.77 
$ 3.20 
$ 2.75 
Dividends declared per common share (in dollars per share)
$ 0.38 
$ 0.34 
$ 1.12 
$ 0.94 
Consolidated Statements of Comprehensive Income (USD $)
In Millions, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2015
Sep. 30, 2014
Sep. 30, 2015
Sep. 30, 2014
Consolidated Statements of Comprehensive Income
 
 
 
 
Net income (loss)
$ 300.9 
$ 252.8 
$ 994.9 
$ 896.1 
Other comprehensive income (loss), net:
 
 
 
 
Net unrealized gains (losses) on available-for-sale securities
28.3 
(73.9)
(221.0)
296.6 
Noncredit component of impairment losses on fixed maturities, available-for-sale
1.0 
11.0 
17.9 
48.9 
Net unrealized gains (losses) on derivative instruments
10.3 
29.2 
22.0 
42.3 
Foreign currency translation adjustment
(263.2)
(195.8)
(438.3)
(208.4)
Net unrecognized postretirement benefit obligation
11.9 
3.6 
35.9 
10.7 
Other comprehensive income (loss)
(211.7)
(225.9)
(583.5)
190.1 
Comprehensive income (loss)
89.2 
26.9 
411.4 
1,086.2 
Comprehensive income (loss) attributable to noncontrolling interest
(13.8)
(2.7)
(4.5)
23.9 
Comprehensive income (loss) attributable to Principal Financial Group, Inc.
$ 103.0 
$ 29.6 
$ 415.9 
$ 1,062.3 
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
 
 
 
69.6 
 
 
 
 
69.6 
Stock-based compensation and additional related tax benefits
 
 
 
62.3 
(4.5)
 
 
 
57.8 
Treasury stock acquired, common
 
 
 
 
 
 
(222.5)
 
(222.5)
Dividends to common stockholders
 
 
 
 
(276.7)
 
 
 
(276.7)
Dividends to preferred stockholders
 
 
 
 
(24.7)
 
 
 
(24.7)
Distributions to noncontrolling interest
 
 
 
 
 
 
 
(22.9)
(22.9)
Contributions from noncontrolling interest
 
 
 
 
 
 
 
7.1 
7.1 
Purchase of subsidiary shares from noncontrolling interest
 
 
 
(0.4)
 
 
 
(41.5)
(41.9)
Adjustments to redemption amount of redeemable noncontrolling interest
 
 
 
(13.5)
(19.7)
 
 
 
(33.2)
Net income (loss) (excludes $1.5 million and $8.3 million attributable to redeemable noncontrolling interest in 2015 and 2014 respectively)
 
 
 
 
865.4 
 
 
22.4 
887.8 
Other comprehensive income (loss) (excludes $(17.7) million and $(1.5) million attributable to redeemable noncontrolling interest in 2015 and 2014 respectively)
 
 
 
 
 
196.9 
 
(5.3)
191.6 
Balances at Sep. 30, 2014
0.1 
4.6 
9,916.9 
5,945.2 
380.1 
(5,930.5)
52.6 
10,369.0 
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 
71.4 
 
 
 
 
71.5 
Stock-based compensation and additional related tax benefits
 
 
 
71.6 
(4.9)
 
 
 
66.7 
Treasury stock acquired, common
 
 
 
 
 
 
(188.2)
 
(188.2)
Dividends to common stockholders
 
 
 
 
(330.2)
 
 
 
(330.2)
Dividends to preferred stockholders
 
 
 
 
(16.5)
 
 
 
(16.5)
Preferred stock redemption
 
(0.1)
 
(541.7)
(8.2)
 
 
 
(550.0)
Distributions to noncontrolling interest
 
 
 
 
 
 
 
(13.7)
(13.7)
Contributions from noncontrolling interest
 
 
 
 
 
 
 
6.7 
6.7 
Purchase of subsidiary shares from noncontrolling interest
 
 
 
(19.0)
 
(10.3)
 
12.8 
(16.5)
Adjustments to redemption amount of redeemable noncontrolling interest
 
 
 
(3.6)
 
 
 
 
(3.6)
Net income (loss) (excludes $1.5 million and $8.3 million attributable to redeemable noncontrolling interest in 2015 and 2014 respectively)
 
 
 
 
980.4 
 
 
13.0 
993.4 
Other comprehensive income (loss) (excludes $(17.7) million and $(1.5) million attributable to redeemable noncontrolling interest in 2015 and 2014 respectively)
 
 
 
 
 
(564.5)
 
(1.3)
(565.8)
Balances at Sep. 30, 2015
$ 0 
$ 0 
$ 4.7 
$ 9,524.2 
$ 6,734.7 
$ (524.4)
$ (6,118.9)
$ 65.5 
$ 9,685.8 
Consolidated Statements of Stockholders' Equity (Parenthetical) (USD $)
In Millions, unless otherwise specified
9 Months Ended
Sep. 30, 2015
Sep. 30, 2014
Consolidated Statements of Stockholders' Equity
 
 
Net income (loss) attributable to redeemable noncontrolling interest
$ 1.5 
$ 8.3 
Other comprehensive income (loss) attributable to redeemable noncontrolling interest
$ (17.7)
$ (1.5)
Consolidated Statements of Cash Flows (USD $)
In Millions, unless otherwise specified
9 Months Ended
Sep. 30, 2015
Sep. 30, 2014
Operating activities
 
 
Net income (loss)
$ 994.9 
$ 896.1 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
Amortization of deferred acquisition costs
223.2 
282.8 
Additions to deferred acquisition costs
(289.4)
(291.8)
Accrued investment income
(60.9)
(13.0)
Net cash flows for trading securities
(177.5)
(47.8)
Premiums due and other receivables
(165.4)
85.0 
Contractholder and policyholder liabilities and dividends
2,660.2 
1,211.4 
Current and deferred income taxes (benefits)
(95.3)
204.3 
Net realized capital (gains) losses
10.0 
(41.0)
Depreciation and amortization expense
149.3 
122.8 
Mortgage loans held for sale, sold or repaid, net of gain
 
8.4 
Real estate acquired through operating activities
(32.4)
(43.6)
Real estate sold through operating activities
53.3 
146.1 
Stock-based compensation
66.7 
58.4 
Other
(13.7)
(380.5)
Net adjustments
2,328.1 
1,301.5 
Net cash provided by (used in) operating activities
3,323.0 
2,197.6 
Investing activities
 
 
Available-for-sale securities: Purchases
(7,052.6)
(6,596.0)
Available-for-sale securities: Sales
1,410.8 
1,871.5 
Available-for-sale securities: Maturities
5,020.5 
4,499.3 
Mortgage loans acquired or originated
(1,658.0)
(1,614.2)
Mortgage loans sold or repaid
1,175.3 
1,319.8 
Real estate acquired
(255.8)
(246.8)
Net (purchases) sales of property and equipment
(96.3)
(117.5)
Purchases of interest in subsidiaries, net of cash acquired
(293.7)
 
Net change in other investments
(17.0)
56.6 
Net cash provided by (used in) investing activities
(1,766.8)
(827.3)
Financing activities
 
 
Issuance of common stock
71.5 
69.6 
Acquisition of treasury stock
(188.2)
(222.5)
Proceeds from financing element derivatives
0.2 
14.9 
Payments for financing element derivatives
(60.9)
(41.5)
Excess tax benefits from share-based payment arrangements
15.2 
8.6 
Purchase of subsidiary shares from noncontrolling interest
(22.5)
(222.4)
Dividends to common stockholders
(330.2)
(276.7)
Dividends to preferred stockholders
(16.5)
(24.7)
Preferred stock redemption
(550.0)
 
Issuance of long-term debt
800.4 
36.5 
Principal repayments of long-term debt
(52.6)
(100.3)
Net proceeds from (repayments of) short-term borrowings
197.2 
(20.5)
Investment contract deposits
4,190.3 
4,184.3 
Investment contract withdrawals
(4,974.3)
(5,864.3)
Net increase (decrease) in banking operation deposits
24.9 
(2.3)
Other
(10.4)
(10.0)
Net cash provided by (used in) financing activities
(905.9)
(2,471.3)
Net increase (decrease) in cash and cash equivalents
650.3 
(1,101.0)
Cash and cash equivalents at beginning of period
1,863.9 
2,371.8 
Cash and cash equivalents at end of period
$ 2,514.2 
$ 1,270.8 
Nature of Operations and Significant Accounting Policies
Nature of Operations and Significant Accounting Policies

1. Nature of Operations and Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements of Principal Financial Group, Inc. (“PFG”), its majority-owned subsidiaries and its consolidated variable interest entities (“VIEs”), have been prepared in conformity with accounting principles generally accepted in the U.S. (“U.S. GAAP”) for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2015, are not necessarily indicative of the results that may be expected for the year ended December 31, 2015. These interim unaudited consolidated financial statements should be read in conjunction with our annual audited financial statements as of December 31, 2014, included in our Form 10-K for the year ended December 31, 2014, filed with the United States Securities and Exchange Commission (“SEC”). The accompanying consolidated statement of financial position as of December 31, 2014, has been derived from the audited consolidated statement of financial position but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

 

In February 2015, we announced planned changes to our organizational structure to better align businesses, distribution teams and product offerings for future growth. We plan to implement these changes during 2015 and will report our consolidated financial statements under the new structure in our December 31, 2015, Form 10-K. The changes are not expected to have a material impact on our consolidated financial statements.

 

Recent Accounting Pronouncements

 

 

 

 

 

Effect on our consolidated

 

 

Date of

 

financial statements or

Description

 

adoption

 

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 in exchange for that good or service.

 

January 1, 2018

 

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

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

 

December 31, 2016

 

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

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 is not expected to have a material impact on our consolidated financial statements.

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 is not expected to have a material impact on our consolidated financial statements.

 

 

 

 

 

Effect on our consolidated

 

 

Date of

 

financial statements or

Description

 

adoption

 

other significant matters

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

 

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

Standards adopted:

 

 

 

 

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.

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.

 

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.

 

At September 30, 2015 and December 31, 2014, the separate account assets include a separate account valued at $173.3 million and $205.4 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.

 

Goodwill and Other Intangibles

 

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 agency network in Hong Kong. AXA’s MPF and ORSO pension business is consolidated within our Principal International segment. The purchase price resulted in intangible assets and goodwill.

Variable Interest Entities
Variable Interest Entities

 

 

2.  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 Vehicles

 

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 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 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.

 

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 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.

 

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:

 

 

 

 

 

Collateralized

 

 

 

 

 

 

 

 

 

 

 

 

 

private

 

 

 

Mandatory

 

 

 

 

 

 

 

Grantor

 

investment

 

 

 

retirement

 

 

 

 

 

 

 

trusts

 

vehicles

 

CMBS

 

savings

 

Real estate

 

Total

 

 

 

(in millions)

 

September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities, available-for-sale

 

$

261.1

 

$

 

$

 

$

 

$

 

$

261.1

 

Fixed maturities, trading

 

 

100.4

 

 

 

 

100.4

 

Equity securities, available-for-sale

 

 

 

 

315.8

 

 

315.8

 

Equity securities, trading

 

 

 

 

321.2

 

 

321.2

 

Real estate

 

 

 

 

 

298.9

 

298.9

 

Other investments

 

 

 

25.1

 

 

11.7

 

36.8

 

Cash

 

 

 

 

 

7.8

 

7.8

 

Accrued investment income

 

0.4

 

 

0.2

 

 

1.9

 

2.5

 

Premiums due and other receivables

 

 

 

 

 

2.0

 

2.0

 

Separate account assets

 

 

 

 

32,827.6

 

 

32,827.6

 

Other assets

 

 

 

 

 

(0.9

)

(0.9

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

261.5

 

$

100.4

 

$

25.3

 

$

33,464.6

 

$

321.4

 

$

34,173.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contractholder funds

 

$

 

$

 

$

 

$

329.2

 

$

 

$

329.2

 

Long-term debt

 

 

 

 

 

38.2

 

38.2

 

Income taxes currently payable

 

 

 

 

 

(0.1

)

(0.1

)

Deferred income taxes

 

1.6

 

 

 

 

(1.0

)

0.6

 

Separate account liabilities

 

 

 

 

32,827.6

 

 

32,827.6

 

Other liabilities (1)

 

236.7

 

87.2

 

 

 

16.8

 

340.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

$

238.3

 

$

87.2

 

$

 

$

33,156.8

 

$

53.9

 

$

33,536.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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 trusts.

 

We did not provide financial or other support to investees designated as VIEs for the periods ended September 30, 2015 and December 31, 2014.

 

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:

 

 

 

 

 

Maximum exposure to

 

 

 

Asset carrying value

 

loss (1)

 

 

 

(in millions)

 

September 30, 2015

 

 

 

 

 

Fixed maturities, available-for-sale:

 

 

 

 

 

Corporate

 

$

462.3 

 

$

358.6 

 

Residential mortgage-backed pass-through securities

 

2,680.2 

 

2,572.2 

 

Commercial mortgage-backed securities

 

3,861.2 

 

3,808.8 

 

Collateralized debt obligations

 

633.0 

 

655.9 

 

Other debt obligations

 

4,535.6 

 

4,494.5 

 

Fixed maturities, trading:

 

 

 

 

 

Residential mortgage-backed pass-through securities

 

27.6 

 

27.6 

 

Commercial mortgage-backed securities

 

44.1 

 

44.1 

 

Collateralized debt obligations

 

38.6 

 

38.6 

 

Other investments:

 

 

 

 

 

Other limited partnership and fund interests

 

210.7 

 

210.7 

 

 

 

 

 

 

 

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 

 

 

 

(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 September 30, 2015 and December 31, 2014, these VIEs held $1.3 billion and $1.4 billion in total assets, respectively. We have no contractual obligation to contribute to the funds.

 

We provide asset management and other services to certain investment structures for which we earn performance-based management fees. These structures are considered VIEs. 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

 

3. Investments

 

Fixed Maturities and Equity Securities

 

Fixed maturities include bonds, ABS, redeemable preferred stock and certain nonredeemable preferred securities. Equity securities include mutual funds, common stock, nonredeemable preferred stock and regulatory required investments. We classify fixed maturities and equity securities as either available-for-sale or trading at the time of the purchase and, accordingly, carry them at fair value. See Note 10, Fair Value Measurements, for methodologies related to the determination of fair value. Unrealized gains and losses related to available-for-sale securities, excluding those in fair value hedging relationships, are reflected in stockholders’ equity, net of adjustments associated with deferred acquisition costs (“DAC”) and related actuarial balances, derivatives in cash flow hedge relationships and applicable income taxes. Unrealized gains and losses related to hedged portions of available-for-sale securities in fair value hedging relationships and mark-to-market adjustments on certain trading securities are reflected in net realized capital gains (losses). Mark-to-market adjustments related to certain securities carried at fair value with an investment objective to realize economic value through mark-to-market changes are reflected in net investment income.

 

The cost of fixed maturities is adjusted for amortization of premiums and accrual of discounts, both computed using the interest method. The cost of fixed maturities and equity securities classified as available-for-sale is adjusted for declines in value that are other than temporary. Impairments in value deemed to be other than temporary are primarily reported in net income as a component of net realized capital gains (losses), with noncredit impairment losses for certain fixed maturities, available-for-sale reported in other comprehensive income (“OCI”). For loan-backed and structured securities, we recognize income using a constant effective yield based on currently anticipated cash flows.

 

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

 

 

 

 

 

 

 

 

 

 

 

Other-than-

 

 

 

 

 

Gross

 

Gross

 

 

 

temporary

 

 

 

Amortized

 

unrealized

 

unrealized

 

 

 

impairments in

 

 

 

cost

 

gains

 

losses

 

Fair value

 

AOCI (1)

 

 

 

(in millions)

 

September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities, available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agencies

 

$

1,507.6 

 

$

39.7 

 

$

3.7 

 

$

1,543.6 

 

$

 

Non-U.S. governments

 

645.6 

 

145.3 

 

3.2 

 

787.7 

 

 

States and political subdivisions

 

4,245.0 

 

231.4 

 

20.7 

 

4,455.7 

 

 

Corporate

 

29,851.0 

 

1,866.9 

 

439.2 

 

31,278.7 

 

4.8 

 

Residential mortgage-backed pass-through securities

 

2,572.2 

 

113.0 

 

5.0 

 

2,680.2 

 

 

Commercial mortgage-backed securities

 

3,808.8 

 

103.0 

 

50.6 

 

3,861.2 

 

81.2 

 

Collateralized debt obligations

 

655.9 

 

1.2 

 

24.1 

 

633.0 

 

1.3 

 

Other debt obligations

 

4,499.4 

 

60.8 

 

19.7 

 

4,540.5 

 

60.2 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total fixed maturities, available-for-sale

 

$

47,785.5 

 

$

2,561.3 

 

$

566.2 

 

$

49,780.6 

 

$

147.5 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total equity securities, available-for-sale

 

$

469.1 

 

$

8.5 

 

$

12.3 

 

$

465.3 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 

 

 

States and political subdivisions

 

3,916.8 

 

291.3 

 

4.1 

 

4,204.0 

 

 

Corporate

 

29,308.3 

 

2,442.6 

 

215.9 

 

31,535.0 

 

18.4 

 

Residential mortgage-backed pass-through securities

 

2,702.9 

 

126.3 

 

6.3 

 

2,822.9 

 

 

Commercial mortgage-backed securities

 

3,896.9 

 

141.5 

 

62.9 

 

3,975.5 

 

88.9 

 

Collateralized debt obligations

 

521.2 

 

3.5 

 

20.6 

 

504.1 

 

1.3 

 

Other debt obligations

 

4,583.4 

 

57.5 

 

24.5 

 

4,616.4 

 

66.9 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total fixed maturities, available-for-sale

 

$

46,719.5 

 

$

3,290.1 

 

$

338.8 

 

$

49,670.8 

 

$

175.5 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total equity securities, available-for-sale

 

$

125.1 

 

$

7.7 

 

$

9.8 

 

$

123.0 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Excludes $144.5 million and $167.5 million as of September 30, 2015 and December 31, 2014, respectively, of net unrealized gains on impaired fixed maturities, available-for-sale related to changes in fair value subsequent to the impairment date, which are included in gross unrealized gains and gross unrealized losses.

 

The amortized cost and fair value of fixed maturities available-for-sale at September 30, 2015, by expected maturity, were as follows:

 

 

 

Amortized cost

 

Fair value

 

 

 

(in millions)

 

Due in one year or less

 

$

2,649.9 

 

$

2,679.5 

 

Due after one year through five years

 

13,017.0 

 

13,461.3 

 

Due after five years through ten years

 

8,303.2 

 

8,581.8 

 

Due after ten years

 

12,279.1 

 

13,343.1 

 

 

 

 

 

 

 

Subtotal

 

36,249.2 

 

38,065.7 

 

Mortgage-backed and other asset-backed securities

 

11,536.3 

 

11,714.9 

 

 

 

 

 

 

 

Total

 

$

47,785.5 

 

$

49,780.6 

 

 

 

 

 

 

 

 

 

 

Actual maturities may differ because borrowers may have the right to call or prepay obligations. Our portfolio is diversified by industry, issuer and asset class. Credit concentrations are managed to established limits.

 

Net Realized Capital Gains and Losses

 

Net realized capital gains and losses on sales of investments are determined on the basis of specific identification. In general, in addition to realized capital gains and losses on investment sales and periodic settlements on derivatives not designated as hedges, we report gains and losses related to the following in net realized capital gains (losses): other-than-temporary impairments of securities and subsequent realized recoveries, mark-to-market adjustments on certain trading securities, mark-to-market adjustments on 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 and impairments of real estate held for investment. Investment gains and losses on sales of certain real estate held for sale due to investment strategy and mark-to-market adjustments on certain securities carried at fair value with an investment objective to realize economic value through mark-to-market changes are reported as net investment income and are excluded from net realized capital gains (losses). The major components of net realized capital gains (losses) on investments are summarized as follows:

 

 

 

For the three months ended

 

For the nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

(in millions)

 

Fixed maturities, available-for-sale:

 

 

 

 

 

 

 

 

 

Gross gains

 

$

2.5

 

$

6.0

 

$

15.7

 

$

45.0

 

Gross losses

 

(2.3

)

(2.9

)

(5.6

)

(20.8

)

Net impairment losses

 

(7.6

)

(21.7

)

(21.4

)

(69.5

)

Hedging, net

 

4.7

 

(21.5

)

(31.2

)

(20.0

)

Fixed maturities, trading

 

(2.1

)

9.5

 

(6.4

)

32.0

 

Equity securities, available-for-sale:

 

 

 

 

 

 

 

 

 

Gross gains

 

0.3

 

 

0.3

 

0.2

 

Gross losses

 

(1.8

)

(0.1

)

(1.8

)

(0.2

)

Net impairment recoveries (losses)

 

 

(0.2

)

0.3

 

5.5

 

Equity securities, trading

 

(12.4

)

9.1

 

(8.5

)

18.7

 

Mortgage loans

 

(1.3

)

(12.0

)

(1.4

)

(10.6

)

Derivatives

 

54.0

 

(2.0

)

59.0

 

1.9

 

Other

 

4.4

 

(10.6

)

(9.0

)

58.8

 

 

 

 

 

 

 

 

 

 

 

Net realized capital gains (losses)

 

$

38.4

 

$

(46.4

)

$

(10.0

)

$

41.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from sales of investments (excluding call and maturity proceeds) in fixed maturities, available-for-sale were $331.7 million and $437.1 million for the three months ended September 30, 2015 and 2014, and $1,213.0 million and $1,744.6 million for the nine months ended September 30, 2015 and 2014, respectively.

 

Other-Than-Temporary Impairments

 

We have a process in place to identify fixed maturity and equity securities that could potentially have a credit impairment that is other than temporary. This process involves monitoring market events that could impact issuers’ credit ratings, business climate, management changes, litigation and government actions and other similar factors. This process also involves monitoring late payments, pricing levels, downgrades by rating agencies, key financial ratios, financial statements, revenue forecasts and cash flow projections as indicators of credit issues.

 

Each reporting period, all securities are reviewed to determine whether an other-than-temporary decline in value exists and whether losses should be recognized. We consider relevant facts and circumstances in evaluating whether a credit or interest-related impairment of a security is other than temporary. Relevant facts and circumstances considered include: (1) the extent and length of time the fair value has been below cost; (2) the reasons for the decline in value; (3) the financial position and access to capital of the issuer, including the current and future impact of any specific events; (4) for structured securities, the adequacy of the expected cash flows; (5) for fixed maturities, our intent to sell a security or whether it is more likely than not we will be required to sell the security before the recovery of its amortized cost which, in some cases, may extend to maturity and (6) for equity securities, our ability and intent to hold the security for a period of time that allows for the recovery in value. To the extent we determine that a security is deemed to be other than temporarily impaired, an impairment loss is recognized.

 

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

 

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

 

 

 

For the three months ended

 

For the nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

(in millions)

 

Fixed maturities, available-for-sale

 

$

(6.5

)

$

(7.1

)

$

6.6

 

$

13.0

 

Equity securities, available-for-sale

 

 

(0.2

)

0.3

 

5.5

 

 

 

 

 

 

 

 

 

 

 

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

 

(6.5

)

(7.3

)

6.9

 

18.5

 

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

 

(1.1

)

(14.6

)

(28.0

)

(82.5

)

 

 

 

 

 

 

 

 

 

 

Net impairment losses on available-for-sale securities

 

$

(7.6

)

$

(21.9

)

$

(21.1

)

$

(64.0

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Represents the net impact of (a) gains resulting from reclassification of noncredit impairment losses for fixed maturities with bifurcated OTTI from net realized capital gains (losses) to OCI and (b) losses resulting from reclassification of previously recognized noncredit impairment losses from OCI to net realized capital gains (losses) for fixed maturities with bifurcated OTTI that had additional credit losses or fixed maturities that previously had bifurcated OTTI that have now been sold or are intended to be sold.

 

We estimate the amount of the credit loss component of a fixed maturity security impairment as the difference between amortized cost and the present value of the expected cash flows of the security. The present value is determined using the best estimate cash flows discounted at the effective interest rate implicit to the security at the date of purchase or the current yield to accrete an asset-backed or floating rate security. The methodology and assumptions for establishing the best estimate cash flows vary depending on the type of security. The ABS cash flow estimates are based on security specific facts and circumstances that may include collateral characteristics, expectations of delinquency and default rates, loss severity and prepayment speeds and structural support, including subordination and guarantees. The corporate security cash flow estimates are derived from scenario-based outcomes of expected corporate restructurings or liquidations using bond specific facts and circumstances including timing, security interests and loss severity.

 

The following table provides a rollforward of accumulated credit losses for fixed maturities with bifurcated credit losses. The purpose of the table is to provide detail of (1) additions to the bifurcated credit loss amounts recognized in net realized capital gains (losses) during the period and (2) decrements for previously recognized bifurcated credit losses where the loss is no longer bifurcated and/or there has been a positive change in expected cash flows or accretion of the bifurcated credit loss amount.

 

 

 

For the three months ended

 

For the nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

(in millions)

 

Beginning balance

 

$

(134.7

)

$

(185.7

)

$

(144.4

)

$

(235.4

)

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

 

(4.3

)

(2.2

)

(5.9

)

(6.1

)

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

 

(3.2

)

(21.0

)

(11.3

)

(65.5

)

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

 

3.8

 

18.0

 

20.0

 

112.0

 

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

 

2.2

 

1.5

 

5.2

 

5.6

 

Foreign currency translation adjustment

 

0.4

 

 

0.6

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

(135.8

)

$

(189.4

)

$

(135.8

)

$

(189.4

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Amounts are recognized in net investment income.

 

Gross Unrealized Losses for Fixed Maturities and Equity Securities

 

For fixed maturities and equity securities available-for-sale with unrealized losses, including other-than-temporary impairment losses reported in OCI, the gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position are summarized as follows:

 

 

 

September 30, 2015

 

 

 

Less than

 

Greater than or

 

 

 

 

 

twelve months

 

equal to twelve months

 

Total

 

 

 

 

 

Gross

 

 

 

Gross

 

 

 

Gross

 

 

 

Fair

 

unrealized

 

Fair

 

unrealized

 

Fair

 

unrealized

 

 

 

value

 

losses

 

value

 

losses

 

value

 

losses

 

 

 

(in millions)

 

Fixed maturities, available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agencies

 

$

218.0 

 

$

3.5 

 

$

39.7 

 

$

0.2 

 

$

257.7 

 

$

3.7 

 

Non-U.S. governments

 

42.0 

 

1.3 

 

18.6 

 

1.9 

 

60.6 

 

3.2 

 

States and political subdivisions

 

582.4 

 

20.1 

 

6.4 

 

0.6 

 

588.8 

 

20.7 

 

Corporate

 

5,446.5 

 

229.1 

 

1,223.3 

 

210.1 

 

6,669.8 

 

439.2 

 

Residential mortgage-backed pass-through securities

 

260.3 

 

1.6 

 

154.8 

 

3.4 

 

415.1 

 

5.0 

 

Commercial mortgage-backed securities

 

682.6 

 

7.2 

 

296.0 

 

43.4 

 

978.6 

 

50.6 

 

Collateralized debt obligations

 

372.6 

 

2.9 

 

151.2 

 

21.2 

 

523.8 

 

24.1 

 

Other debt obligations

 

753.0 

 

4.3 

 

360.3 

 

15.4 

 

1,113.3 

 

19.7 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total fixed maturities, available-for-sale

 

$

8,357.4 

 

$

270.0 

 

$

2,250.3 

 

$

296.2 

 

$

10,607.7 

 

$

566.2 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total equity securities, available-for-sale

 

$

0.7 

 

$

0.2 

 

$

33.7 

 

$

12.1 

 

$

34.4 

 

$

12.3 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Of the total amounts, Principal Life’s consolidated portfolio represented $10,100.0 million in available-for-sale fixed maturities with gross unrealized losses of $537.6 million. Of those fixed maturity securities in Principal Life’s consolidated portfolio with a gross unrealized loss position, 82% were investment grade (rated AAA through BBB-) with an average price of 95 (carrying value/amortized cost) at September 30, 2015. Gross unrealized losses in our fixed maturities portfolio increased during the nine months ended September 30, 2015, due primarily to widening of credit spreads.

 

For those securities that had been in a continuous unrealized loss position for less than twelve months, Principal Life’s consolidated portfolio held 1,038 securities with a carrying value of $7,986.8 million and unrealized losses of $263.6 million reflecting an average price of 97 at September 30, 2015. Of this portfolio, 85% was investment grade (rated AAA through BBB-) at September 30, 2015, with associated unrealized losses of $182.4 million. The unrealized losses on these securities can primarily be attributed to changes in market interest rates and changes in credit spreads since the securities were acquired.

 

For those securities that had been in a continuous unrealized loss position greater than or equal to twelve months, Principal Life’s consolidated portfolio held 356 securities with a carrying value of $2,113.2 million and unrealized losses of $274.0 million. The average rating of this portfolio was BBB+ with an average price of 89 at September 30, 2015. Of the $274.0 million in unrealized losses, the commercial mortgage-backed securities sector accounts for $43.4 million in unrealized losses with an average price of 87 and an average credit rating of BBB+. The remaining unrealized losses consist primarily of $189.8 million within the corporate sector at September 30, 2015. The average price of the corporate sector was 85 and the average credit rating was BBB. The unrealized losses on these securities can primarily be attributed to changes in market interest rates and changes in credit spreads since the securities were acquired.

 

Because we expected to recover our amortized cost, it was not our intent to sell the fixed maturity available-for-sale securities with unrealized losses and it was not more likely than not that we would be required to sell these securities before recovery of the amortized cost, which may be maturity, we did not consider these investments to be other-than-temporarily impaired at September 30, 2015.

 

 

 

December 31, 2014

 

 

 

Less than

 

Greater than or

 

 

 

 

 

 

 

twelve months

 

equal to twelve months

 

Total

 

 

 

 

 

Gross

 

 

 

Gross

 

 

 

Gross

 

 

 

Fair

 

unrealized

 

Fair

 

unrealized

 

Fair

 

unrealized

 

 

 

value

 

losses

 

value

 

losses

 

value

 

losses

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities, available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agencies

 

$

211.5 

 

$

0.7 

 

$

95.0 

 

$

2.2 

 

$

306.5 

 

$

2.9 

 

Non-U.S. governments

 

20.3 

 

1.4 

 

7.5 

 

0.2 

 

27.8 

 

1.6 

 

States and political subdivisions

 

208.1 

 

0.7 

 

210.5 

 

3.4 

 

418.6 

 

4.1 

 

Corporate

 

3,072.1 

 

76.8 

 

1,238.3 

 

139.1 

 

4,310.4 

 

215.9 

 

Residential mortgage-backed pass-through securities

 

18.0 

 

 

395.3 

 

6.3 

 

413.3 

 

6.3 

 

Commercial mortgage-backed securities

 

375.3 

 

3.0 

 

395.0 

 

59.9 

 

770.3 

 

62.9 

 

Collateralized debt obligations

 

114.8 

 

1.0 

 

112.0 

 

19.6 

 

226.8 

 

20.6 

 

Other debt obligations

 

971.2 

 

3.5 

 

432.7 

 

21.0 

 

1,403.9 

 

24.5 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total fixed maturities, available-for-sale

 

$

4,991.3 

 

$

87.1 

 

$

2,886.3 

 

$

251.7 

 

$

7,877.6 

 

$

338.8 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total equity securities, available-for-sale

 

$

10.0 

 

$

 

$

36.0 

 

$

9.8 

 

$

46.0 

 

$

9.8 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Of the total amounts, Principal Life’s consolidated portfolio represented $7,638.7 million in available-for-sale fixed maturities with gross unrealized losses of $310.8 million. Of those fixed maturity securities in Principal Life’s consolidated portfolio with a gross unrealized loss position, 80% were investment grade (rated AAA through BBB-) with an average price of 96 (carrying value/amortized cost) at December 31, 2014. Gross unrealized losses in our fixed maturities portfolio decreased during the year ended December 31, 2014, due primarily to a decrease in interest rates.

 

For those securities that had been in a continuous unrealized loss position for less than twelve months, Principal Life’s consolidated portfolio held 685 securities with a carrying value of $4,907.1 million and unrealized losses of $85.4 million reflecting an average price of 98 at December 31, 2014. Of this portfolio, 77% was investment grade (rated AAA through BBB-) at December 31, 2014, with associated unrealized losses of $44.4 million. The unrealized losses on these securities can primarily be attributed to changes in market interest rates and changes in credit spreads since the securities were acquired.

 

For those securities that had been in a continuous unrealized loss position greater than or equal to twelve months, Principal Life’s consolidated portfolio held 429 securities with a carrying value of $2,731.6 million and unrealized losses of $225.4 million. The average rating of this portfolio was A with an average price of 92 at December 31, 2014. Of the $225.4 million in unrealized losses, the commercial mortgage-backed securities sector accounts for $59.9 million in unrealized losses with an average price of 87 and an average credit rating of A-. The remaining unrealized losses consist primarily of $113.0 million within the corporate sector at December 31, 2014. The average price of the corporate sector was 91 and the average credit rating was BBB+. The unrealized losses on these securities can primarily be attributed to changes in market interest rates and changes in credit spreads since the securities were acquired.

 

Because we expected to recover our amortized cost, it was not our intent to sell the fixed maturity available-for-sale securities with unrealized losses and it was not more likely than not that we would be required to sell these securities before recovery of the amortized cost, which may be maturity, we did not consider these investments to be other-than-temporarily impaired at December 31, 2014.

 

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

 

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

 

 

 

September 30, 2015

 

December 31, 2014

 

 

 

(in millions)

 

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

 

$

2,076.3

 

$

3,079.1

 

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

 

(147.5

)

(175.5

)

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

 

(3.8

)

(2.1

)

Adjustments for assumed changes in amortization patterns

 

(211.5

)

(346.8

)

Adjustments for assumed changes in policyholder liabilities

 

(542.3

)

(1,078.6

)

Net unrealized gains on derivative instruments

 

188.1

 

160.1

 

Net unrealized gains on equity method subsidiaries and noncontrolling interest adjustments

 

92.7

 

88.9

 

Provision for deferred income taxes

 

(484.8

)

(576.8

)

 

 

 

 

 

 

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

 

$

967.2

 

$

1,148.3

 

 

 

 

 

 

 

 

 

 

 

(1)

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

 

Mortgage Loans

 

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

 

 

 

September 30, 2015

 

December 31, 2014

 

 

 

(in millions)

 

 

 

 

 

 

 

Commercial mortgage loans

 

$

11,179.8

 

$

10,723.8

 

Residential mortgage loans

 

1,108.9

 

1,144.3