PRINCIPAL FINANCIAL GROUP INC, 10-K filed on 2/13/2013
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2012
Feb. 6, 2013
Jun. 29, 2012
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, 2012 
 
 
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
 
 
$ 7,754,473,315 
Entity Common Stock, Shares Outstanding
 
293,402,246 
 
Document Fiscal Year Focus
2012 
 
 
Document Fiscal Period Focus
FY 
 
 
Consolidated Statements of Financial Position (USD $)
In Millions, unless otherwise specified
Dec. 31, 2012
Dec. 31, 2011
Assets
 
 
Fixed maturities, available-for-sale (2012 and 2011 include $194.6 million and $214.2 million related to consolidated variable interest entities)
$ 50,939.3 
$ 49,006.7 
Fixed maturities, trading (2012 and 2011 include $110.4 million and $132.4 million related to consolidated variable interest entities)
626.7 
971.7 
Equity securities, available-for-sale
136.5 
77.1 
Equity securities, trading (2012 and 2011 include $0.0 million and $207.6 million related to consolidated variable interest entities)
252.8 
404.8 
Mortgage loans
11,519.7 
10,727.2 
Real estate
1,180.3 
1,092.9 
Policy loans
864.9 
885.1 
Other investments (2012 and 2011 include $80.3 million and $97.8 million related to consolidated variable interest entities and $113.9 million and $97.5 million measured at fair value under the fair value option)
3,291.1 
2,985.8 
Total investments
68,811.3 
66,151.3 
Cash and cash equivalents (2012 and 2011 include $0.0 million and $317.7 million related to consolidated variable interest entities)
4,177.2 
2,833.9 
Accrued investment income
584.4 
615.2 
Premiums due and other receivables
1,084.4 
1,196.5 
Deferred policy acquisition costs
2,673.8 
2,428.0 
Property and equipment
464.2 
457.2 
Goodwill
543.4 
482.3 
Other intangibles
927.2 
890.6 
Separate account assets
81,653.8 
71,364.4 
Other assets
1,006.8 
942.3 
Total assets
161,926.5 
147,361.7 
Liabilities
 
 
Contractholder funds
37,786.5 
37,676.4 
Future policy benefits and claims
22,436.2 
20,210.4 
Other policyholder funds
716.4 
548.6 
Short-term debt
40.8 
105.2 
Long-term debt
2,671.3 
1,564.8 
Income taxes currently payable
15.3 
3.1 
Deferred income taxes
626.5 
208.7 
Separate account liabilities
81,653.8 
71,364.4 
Other liabilities (2012 and 2011 include $302.9 million and $565.2 million related to consolidated variable interest entities, of which $85.0 million and $88.4 million are measured at fair value under the fair value option)
6,146.1 
6,286.2 
Total liabilities
152,092.9 
137,967.8 
Redeemable noncontrolling interest
60.4 
22.2 
Stockholders' equity
 
 
Common stock, par value $.01 per share - 2,500.0 million shares authorized, 453.5 million and 450.3 million shares issued, and 293.8 million and 301.1 million shares outstanding in 2012 and 2011
4.5 
4.5 
Additional paid-in capital
9,730.9 
9,634.7 
Retained earnings (accumulated deficit)
4,940.2 
4,402.3 
Accumulated other comprehensive income (loss)
631.9 
258.0 
Treasury stock, at cost (159.7 million and 149.2 million shares in 2012 and 2011)
(5,554.4)
(5,281.7)
Total stockholders' equity attributable to Principal Financial Group, Inc.
9,753.2 
9,017.9 
Noncontrolling interest
20.0 
353.8 
Total stockholders' equity
9,773.2 
9,371.7 
Total liabilities and stockholders' equity
161,926.5 
147,361.7 
Series A
 
 
Stockholders' equity
 
 
Preferred stock, value
   
   
Series B
 
 
Stockholders' equity
 
 
Preferred stock, value
$ 0.1 
$ 0.1 
Consolidated Statements of Financial Position (Parenthetical) (USD $)
In Millions, except Per Share data, unless otherwise specified
Dec. 31, 2012
Dec. 31, 2011
Fixed maturities, available-for-sale
$ 50,939.3 
$ 49,006.7 
Fixed maturities, trading
626.7 
971.7 
Equity securities, trading
252.8 
404.8 
Other investments
3,291.1 
2,985.8 
Other investments measured at fair value under fair value option
113.9 
97.5 
Cash and cash equivalents
4,177.2 
2,833.9 
Other liabilities
6,146.1 
6,286.2 
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)
453.5 
450.3 
Common stock, outstanding (in shares)
293.8 
301.1 
Treasury stock (in shares)
159.7 
149.2 
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
194.6 
214.2 
Fixed maturities, trading
110.4 
132.4 
Equity securities, trading
207.6 
Other investments
80.3 
97.8 
Cash and cash equivalents
317.7 
Other liabilities
302.9 
565.2 
Other liabilities measured at fair value under fair value option
$ 85.0 
$ 88.4 
Consolidated Statements of Operations (USD $)
In Millions, except Per Share data, unless otherwise specified
3 Months Ended 12 Months Ended
Dec. 31, 2012
Sep. 30, 2012
Jun. 30, 2012
Mar. 31, 2012
Dec. 31, 2011
Sep. 30, 2011
Jun. 30, 2011
Mar. 31, 2011
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Revenues
 
 
 
 
 
 
 
 
 
 
 
Premiums and other considerations
 
 
 
 
 
 
 
 
$ 3,219.4 
$ 2,891.0 
$ 3,555.5 
Fees and other revenues
 
 
 
 
 
 
 
 
2,626.7 
2,526.7 
2,337.1 
Net investment income (loss)
 
 
 
 
 
 
 
 
3,254.9 
3,375.3 
3,495.8 
Net realized capital gains (losses), excluding impairment losses on available-for-sale securities
 
 
 
 
 
 
 
 
232.7 
75.0 
50.0 
Total other-than-temporary impairment losses on available-for-sale securities
 
 
 
 
 
 
 
 
(135.9)
(147.6)
(296.3)
Other-than-temporary impairment losses on fixed maturities, available-for-sale reclassified to (from) other comprehensive income
 
 
 
 
 
 
 
 
17.3 
(49.7)
56.1 
Net impairment losses on available-for-sale securities
 
 
 
 
 
 
 
 
(118.6)
(197.3)
(240.2)
Net realized capital gains (losses)
 
 
 
 
 
 
 
 
114.1 
(122.3)
(190.2)
Total revenues
2,295.9 
2,704.7 
2,118.6 
2,095.9 
2,058.8 
2,093.6 
2,296.4 
2,221.9 
9,215.1 
8,670.7 
9,198.2 
Expenses
 
 
 
 
 
 
 
 
 
 
 
Benefits, claims and settlement expenses
 
 
 
 
 
 
 
 
5,123.9 
4,616.6 
5,204.3 
Dividends to policyholders
 
 
 
 
 
 
 
 
197.7 
210.2 
219.9 
Operating expenses
 
 
 
 
 
 
 
 
2,934.1 
2,950.8 
2,988.3 
Total expenses
2,030.0 
2,523.3 
1,883.6 
1,818.8 
1,888.5 
1,942.5 
1,986.2 
1,960.4 
8,255.7 
7,777.6 
8,412.5 
Income (loss) before income taxes
 
 
 
 
 
 
 
 
959.4 
893.1 
785.7 
Income taxes (benefits)
 
 
 
 
 
 
 
 
134.7 
204.2 
104.9 
Net income (loss)
230.4 
191.3 
184.1 
218.9 
156.4 
74.5 
249.2 
208.8 
824.7 
688.9 
680.8 
Net income (loss) attributable to noncontrolling interest
 
 
 
 
 
 
 
 
18.8 
36.2 
17.9 
Net income (loss) attributable to Principal Financial Group, Inc.
 
 
 
 
 
 
 
 
805.9 
652.7 
662.9 
Preferred stock dividends
 
 
 
 
 
 
 
 
33.0 
33.0 
33.0 
Net income (loss) available to common stockholders
$ 218.6 
$ 179.7 
$ 173.1 
$ 201.5 
$ 148.5 
$ 71.9 
$ 217.3 
$ 182.0 
$ 772.9 
$ 619.7 
$ 629.9 
Earnings per common share
 
 
 
 
 
 
 
 
 
 
 
Basic earnings per common share (in dollars per share)
$ 0.74 
$ 0.61 
$ 0.58 
$ 0.67 
$ 0.48 
$ 0.23 
$ 0.68 
$ 0.57 
$ 2.60 
$ 1.97 
$ 1.97 
Diluted earnings per common share (in dollars per share)
$ 0.74 
$ 0.60 
$ 0.58 
$ 0.66 
$ 0.48 
$ 0.23 
$ 0.67 
$ 0.56 
$ 2.57 
$ 1.95 
$ 1.95 
Consolidated Statements of Comprehensive Income (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Consolidated Statements of Comprehensive Income
 
 
 
Net income (loss)
$ 824.7 
$ 688.9 
$ 680.8 
Other comprehensive income (loss), net:
 
 
 
Net unrealized gains (losses) on available-for-sale securities
557.6 
208.6 
1,113.5 
Noncredit component of impairment losses on fixed maturities, available-for-sale
(6.7)
31.0 
(33.7)
Net unrealized gains (losses) on derivative instruments
(43.6)
23.6 
12.9 
Foreign currency translation adjustment
(4.8)
(139.5)
31.9 
Net unrecognized postretirement benefit obligation
(127.4)
(172.9)
208.0 
Other comprehensive income (loss)
375.1 
(49.2)
1,332.6 
Comprehensive income (loss)
1,199.8 
639.7 
2,013.4 
Comprehensive income (loss) attributable to noncontrolling interest
20.0 
35.7 
18.1 
Comprehensive income (loss) attributable to Principal Financial Group, Inc.
$ 1,179.8 
$ 604.0 
$ 1,995.3 
Consolidated Statements of Stockholders' Equity (USD $)
In Millions, unless otherwise specified
Total
Common stock
Additional paid-in capital
Retained earnings (accumulated deficit)
Accumulated other comprehensive income (loss)
Treasury stock
Noncontrolling interest
Series A
Preferred stock
Series B
Preferred stock
Balances at Dec. 31, 2009
$ 7,420.0 
$ 4.5 
$ 9,492.9 
$ 3,584.1 
$ (1,061.8)
$ (4,722.7)
$ 122.9 
$ 0 
$ 0.1 
Increase (decrease) in stockholders' equity
 
 
 
 
 
 
 
 
 
Common stock issued
20.6 
 
20.6 
 
 
 
 
 
 
Stock-based compensation and additional related tax benefits
48.0 
 
50.3 
(2.3)
 
 
 
 
 
Treasury stock acquired, common
(2.6)
 
 
 
 
(2.6)
 
 
 
Dividends to common stockholders
(176.2)
 
 
(176.2)
 
 
 
 
 
Dividends to preferred stockholders
(33.0)
 
 
(33.0)
 
 
 
 
 
Distributions to noncontrolling interest
(7.8)
 
 
 
 
 
(7.8)
 
 
Contributions from noncontrolling interest
24.0 
 
 
 
 
 
24.0 
 
 
Effects of implementation of accounting change related to variable interest entities, net
 
 
 
(10.7)
10.7 
 
 
 
 
Effects of electing fair value option for fixed maturities upon implementation of accounting change related to embedded credit derivatives, net
 
 
 
(25.4)
25.4 
 
 
 
 
Net income (loss) (excludes $1.9 million and $0.2 million in 2012 and 2011 attributable to redeemable noncontrolling interest)
680.8 
 
 
662.9 
 
 
17.9 
 
 
Other comprehensive income (loss) (excludes $1.1 million in 2012 attributable to redeemable noncontrolling interest)
1,332.6 
 
 
 
1,332.4 
 
0.2 
 
 
Balances at Dec. 31, 2010
9,306.4 
4.5 
9,563.8 
3,999.4 
306.7 
(4,725.3)
157.2 
0.1 
Increase (decrease) in stockholders' equity
 
 
 
 
 
 
 
 
 
Common stock issued
25.9 
 
25.9 
 
 
 
 
 
 
Stock-based compensation and additional related tax benefits
43.9 
 
47.0 
(3.1)
 
 
 
 
 
Treasury stock acquired, common
(556.4)
 
 
 
 
(556.4)
 
 
 
Dividends to common stockholders
(213.7)
 
 
(213.7)
 
 
 
 
 
Dividends to preferred stockholders
(33.0)
 
 
(33.0)
 
 
 
 
 
Distributions to noncontrolling interest
(9.8)
 
 
 
 
 
(9.8)
 
 
Contributions from noncontrolling interest
174.6 
 
 
 
 
 
174.6 
 
 
Purchase of subsidiary shares from noncontrolling interest
(5.7)
 
(2.0)
 
 
 
(3.7)
 
 
Net income (loss) (excludes $1.9 million and $0.2 million in 2012 and 2011 attributable to redeemable noncontrolling interest)
688.7 
 
 
652.7 
 
 
36.0 
 
 
Other comprehensive income (loss) (excludes $1.1 million in 2012 attributable to redeemable noncontrolling interest)
(49.2)
 
 
 
(48.7)
 
(0.5)
 
 
Balances at Dec. 31, 2011
9,371.7 
4.5 
9,634.7 
4,402.3 
258.0 
(5,281.7)
353.8 
0.1 
Increase (decrease) in stockholders' equity
 
 
 
 
 
 
 
 
 
Common stock issued
28.9 
 
28.9 
 
 
 
 
 
 
Stock-based compensation and additional related tax benefits
63.6 
 
67.3 
(3.7)
 
 
 
 
 
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 $1.9 million and $0.2 million in 2012 and 2011 attributable to redeemable noncontrolling interest)
822.8 
 
 
805.9 
 
 
16.9 
 
 
Other comprehensive income (loss) (excludes $1.1 million in 2012 attributable to redeemable noncontrolling interest)
374.0 
 
 
 
373.9 
 
0.1 
 
 
Balances at Dec. 31, 2012
$ 9,773.2 
$ 4.5 
$ 9,730.9 
$ 4,940.2 
$ 631.9 
$ (5,554.4)
$ 20.0 
$ 0 
$ 0.1 
Consolidated Statements of Stockholders' Equity (Parenthetical) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2012
Consolidated Statements of Stockholders' Equity
 
Net income (loss) attributable to redeemable noncontrolling interest
$ 1.9 
Other comprehensive income (loss) attributable to redeemable noncontrolling interest
$ 1.1 
Consolidated Statements of Cash Flows (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Operating activities
 
 
 
Net income (loss)
$ 824.7 
$ 688.9 
$ 680.8 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Amortization of deferred policy acquisition costs
92.6 
260.3 
268.7 
Additions to deferred policy acquisition costs
(435.3)
(349.6)
(329.7)
Accrued investment income
30.8 
50.9 
25.8 
Net cash flows for trading securities
335.8 
110.8 
188.3 
Premiums due and other receivables
70.6 
(130.2)
(102.3)
Contractholder and policyholder liabilities and dividends
2,054.7 
1,201.4 
1,303.9 
Current and deferred income taxes (benefits)
20.4 
20.4 
41.2 
Net realized capital (gains) losses
(114.1)
122.3 
190.2 
Depreciation and amortization expense
141.3 
115.8 
164.7 
Mortgage loans held for sale, acquired or originated
(48.0)
(132.3)
(60.6)
Mortgage loans held for sale, sold or repaid, net of gain
90.0 
82.0 
61.2 
Real estate acquired through operating activities
(46.4)
(37.4)
 
Real estate sold through operating activities
43.9 
141.8 
121.6 
Stock-based compensation
63.8 
43.4 
47.6 
Other
(43.9)
524.8 
190.3 
Net adjustments
2,256.2 
2,024.4 
2,110.9 
Net cash provided by (used in) operating activities
3,080.9 
2,713.3 
2,791.7 
Investing activities
 
 
 
Available-for-sale securities: Purchases
(8,263.9)
(6,742.4)
(7,187.9)
Available-for-sale securities: Sales
1,303.7 
980.7 
1,684.6 
Available-for-sale securities: Maturities
6,647.5 
5,760.8 
5,161.3 
Mortgage loans acquired or originated
(2,538.4)
(1,484.9)
(1,272.0)
Mortgage loans sold or repaid
1,668.0 
1,793.1 
1,798.0 
Real estate acquired
(151.8)
(129.9)
(53.8)
Net (purchases) sales of property and equipment
(38.9)
(56.9)
(21.5)
Purchases of interest in subsidiaries, net of cash acquired
(80.4)
(270.5)
 
Net change in other investments
(157.2)
(52.1)
(81.2)
Net cash provided by (used in) investing activities
(1,611.4)
(202.1)
27.5 
Financing activities
 
 
 
Issuance of common stock
28.9 
25.9 
20.6 
Acquisition of treasury stock
(272.7)
(556.4)
(2.6)
Proceeds from financing element derivatives
51.8 
75.9 
79.3 
Payments for financing element derivatives
(49.9)
(46.5)
(46.5)
Excess tax benefits from share-based payment arrangements
10.8 
2.0 
1.0 
Dividends to common stockholders
(231.3)
(213.7)
(176.2)
Dividends to preferred stockholders
(33.0)
(33.0)
(33.0)
Issuance of long-term debt
1,493.4 
 
2.3 
Principal repayments of long-term debt
(450.6)
(12.2)
(11.1)
Net proceeds from (repayments of) short-term borrowings
(68.8)
3.2 
1.7 
Investment contract deposits
6,900.4 
6,302.1 
4,283.8 
Investment contract withdrawals
(7,522.6)
(7,079.0)
(7,343.4)
Net increase (decrease) in banking operation deposits
32.0 
(18.5)
46.2 
Other
(14.6)
(4.5)
(4.3)
Net cash provided by (used in) financing activities
(126.2)
(1,554.7)
(3,182.2)
Net increase (decrease) in cash and cash equivalents
1,343.3 
956.5 
(363.0)
Cash and cash equivalents at beginning of period
2,833.9 
1,877.4 
2,240.4 
Cash and cash equivalents at end of period
4,177.2 
2,833.9 
1,877.4 
Supplemental Information:
 
 
 
Cash paid for interest
127.7 
154.1 
123.4 
Cash paid for income taxes
$ 82.7 
$ 152.8 
$ 55.2 
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 engaged in promoting retirement savings and investment and insurance products and services 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.

        Reclassifications have been made to prior period financial statements to conform to the December 31, 2012, presentation.

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.

Accounting Changes

        In October 2010, the Financial Accounting Standards Board ("FASB") issued authoritative guidance that 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. This guidance was effective for us on January 1, 2012, and we adopted the guidance retrospectively.

        Effective January 1, 2012, we elected to change our methods of accounting for the cost of long duration universal life and variable universal life reinsurance contracts and for the estimated gross profits ("EGPs") of these contracts. These changes are collectively referred to as the "Reinsurance Accounting Change". Under our previous method, we recognized all reinsurance cash flows as part of the net cost of reinsurance and amortized this balance over the estimated lives of the underlying policies in proportion to the pattern of EGPs on the underlying policies. Under the new method, any difference between actual and expected reinsurance cash flows is recognized in earnings immediately instead of being deferred and amortized over the life of the underlying policies. In conjunction with this change, we also changed our policy for determining EGPs relating to these contracts to include the difference between actual and expected reinsurance cash flows, where previously these effects had not been included. We adopted the new policies because we believe that they better reflect the economics of our reinsurance transactions by accounting for direct claims and related reinsurance recoveries in the same period. In addition, the new policies are consistent with our intent to purchase reinsurance to protect us against large and unexpected claims.

        Comparative amounts from prior periods have been adjusted to apply the new deferred policy acquisition cost ("DPAC") guidance ("DPAC Guidance") and the Reinsurance Accounting Change retrospectively in these financial statements.

        Our retrospective adoption of the DPAC Guidance and the Reinsurance Accounting Change resulted in reductions to the opening balances of retained earnings and accumulated other comprehensive income ("AOCI") as of January 1, 2010, as shown in the following table.

 
   
  Attributed to  
 
  Impact on
opening
balance as of
January 1, 2010
 
 
  DPAC
Guidance
  Reinsurance
Accounting
Change
 
 
  (in millions)
 

Retained earnings

  $ (576.6 ) $ (555.8 ) $ (20.8 )

Accumulated other comprehensive income

    (19.8 )   (19.9 )   0.1  

        The following tables show the prior period financial statement line items that were affected by the DPAC Guidance and the Reinsurance Accounting Change.


Consolidated Statements of Financial Position

 
  December 31, 2011  
 
   
   
   
  Change attributed to  
 
  As
adjusted
  As
originally
reported
  Effect of
change
  DPAC
Guidance
  Reinsurance
Accounting
Change (1)
 
 
  (in millions)
 

Assets

                               

Other investments

  $ 2,985.8   $ 2,988.0   $ (2.2 ) $ (2.2 ) $  

Premiums due and other receivables

    1,196.5     1,245.2     (48.7 )       (48.7 )

Deferred policy acquisition costs

    2,428.0     3,313.5     (885.5 )   (884.4 )   (1.1 )

Liabilities

                               

Future policy benefits and claims

    20,210.4     20,207.9     2.5         2.5  

Other policyholder funds

    548.6     543.7     4.9     7.0     (2.1 )

Deferred income taxes

    208.7     533.4     (324.7 )   (307.1 )   (17.6 )

Stockholders' equity

                               

Retained earnings

    4,402.3     5,077.5     (675.2 )   (642.0 )   (33.2 )

Accumulated other comprehensive income

    258.0     201.9     56.1     55.5     0.6  


Consolidated Statements of Operations

 
  For the year ended December 31, 2011  
 
   
   
   
  Change attributed to  
 
  As
adjusted
  As
originally
reported
  Effect of
change
  DPAC
Guidance
  Reinsurance
Accounting
Change (1)
 
 
  (in millions, except per share data)
 

Revenue

                               

Fees and other revenues

  $ 2,526.7   $ 2,565.1   $ (38.4 ) $ 0.7   $ (39.1 )

Net investment income

    3,375.3     3,375.8     (0.5 )   (0.5 )    

Expenses

                               

Benefits, claims and settlement expenses

    4,616.6     4,454.1     162.5     (0.1 )   162.6  

Operating expenses

    2,950.8     3,057.7     (106.9 )   14.8     (121.7 )

Income before income taxes

   
893.1
   
987.6
   
(94.5

)
 
(14.5

)
 
(80.0

)

Income taxes

    204.2     236.4     (32.2 )   (4.2 )   (28.0 )
                       

Net income

  $ 688.9   $ 751.2   $ (62.3 ) $ (10.3 ) $ (52.0 )
                       

Net income available to common stockholders

  $ 619.7   $ 682.0   $ (62.3 ) $ (10.3 ) $ (52.0 )
                       

Earnings per common share

                               

Basic earnings per common share

  $ 1.97   $ 2.17   $ (0.20 ) $ (0.03 ) $ (0.17 )
                       

Diluted earnings per common share

  $ 1.95   $ 2.15   $ (0.20 ) $ (0.03 ) $ (0.17 )
                       

 

 
  For the year ended December 31, 2010  
 
   
   
   
  Change attributed to  
 
  As
adjusted
  As
originally
reported
  Effect of
change
  DPAC
Guidance
  Reinsurance
Accounting
Change
 
 
  (in millions, except per share data)
 

Revenue

                               

Fees and other revenues

  $ 2,337.1   $ 2,298.1   $ 39.0   $ 1.8   $ 37.2  

Net investment income

    3,495.8     3,496.5     (0.7 )   (0.7 )    

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

    50.0     48.7     1.3     1.3      

Expenses

                               

Benefits, claims and settlement expenses

    5,204.3     5,338.4     (134.1 )   0.1     (134.2 )

Operating expenses

    2,988.3     2,759.0     229.3     118.7     110.6  

Income before income taxes

   
785.7
   
841.3
   
(55.6

)
 
(116.4

)
 
60.8
 

Income taxes

    104.9     124.1     (19.2 )   (40.5 )   21.3  
                       

Net income

  $ 680.8   $ 717.2   $ (36.4 ) $ (75.9 ) $ 39.5  
                       

Net income available to common stockholders

  $ 629.9   $ 666.3   $ (36.4 ) $ (75.9 ) $ 39.5  
                       

Earnings per common share

                               

Basic earnings per common share

  $ 1.97   $ 2.08   $ (0.11 ) $ (0.24 ) $ 0.13  
                       

Diluted earnings per common share

  $ 1.95   $ 2.06   $ (0.11 ) $ (0.23 ) $ 0.12  
                       

(1)
In the second quarter of 2011, we made various routine adjustments to our model and assumptions in our individual life insurance business. When we updated our actuarial models for the Reinsurance Accounting Change, several of the components of our integrated insurance accounting model were impacted, resulting in changes to various balance sheet and income statement line items. While the same model and assumptions were used to derive both the "as originally reported" and "as adjusted" balances, the financial statement impacts of the model and assumption changes upon adjustment were different than previously reported because of changes to the pattern of EGPs caused by the application of our Reinsurance Accounting Change.

        The following tables show the impact of the Reinsurance Accounting Change on the current period financial statements.


Consolidated Statements of Financial Position

 
  December 31, 2012  
 
  New
reinsurance
accounting
method
  Former
reinsurance
accounting
method
  Effect of
Reinsurance
Accounting
Change
 
 
  (in millions)
 

Assets

                   

Premiums due and other receivables

  $ 1,084.4   $ 1,117.6   $ (33.2 )

Deferred policy acquisition costs

    2,673.8     2,653.2     20.6  

Liabilities

                   

Future policy benefits and claims

    22,436.2     22,437.0     (0.8 )

Other policyholder funds

    716.4     710.6     5.8  

Deferred income taxes

    626.5     632.6     (6.1 )

Stockholders' equity

                   

Retained earnings

    4,940.2     4,978.9     (38.7 )

Accumulated other comprehensive income

    631.9     604.7     27.2  


Consolidated Statements of Operations

 
  For the year ended December 31, 2012  
 
  New
reinsurance
accounting
method
  Former
reinsurance
accounting
method
  Effect of
Reinsurance
Accounting
Change
 
 
  (in millions, except per share data)
 

Revenue

                   

Fees and other revenues

  $ 2,626.7   $ 2,635.7   $ (9.0 )

Expenses

                   

Benefits, claims and settlement expenses

    5,123.9     5,098.9     25.0  

Operating expenses

    2,934.1     2,959.7     (25.6 )

Income before income taxes

   
959.4
   
967.8
   
(8.4

)

Income taxes

    134.7     137.6     (2.9 )
               

Net income

  $ 824.7   $ 830.2   $ (5.5 )
               

Net income available to common stockholders

  $ 772.9   $ 778.4   $ (5.5 )
               

Earnings per common share

                   

Basic earnings per common share

  $ 2.60   $ 2.62   $ (0.02 )
               

Diluted earnings per common share

  $ 2.57   $ 2.59   $ (0.02 )
               

        Certain of the current and prior period line items in the consolidated statements of cash flows, stockholders' equity and comprehensive income were affected by the DPAC Guidance and the Reinsurance Accounting Change. All of the line item changes in the consolidated statements of cash flows were included in the operating activities section and the changes in the consolidated statements of stockholders' equity and comprehensive income have largely been addressed through the preceding disclosures.

Recent Accounting Pronouncements

        In July 2012, the FASB issued authoritative guidance that amends how indefinite-lived intangible assets are tested for impairment. The amendments provide an option to perform a qualitative assessment to determine whether it is necessary to perform the annual fair value calculation impairment test. This new guidance is effective for our 2013 indefinite-lived intangible asset impairment testing and is not expected to have a material impact on our consolidated financial statements.

        In December 2011, the FASB issued authoritative guidance related to balance sheet offsetting. The new 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. This new guidance will be effective for us for interim and annual reporting periods beginning January 1, 2013, with retrospective application required, and is not expected to have a material impact on our consolidated financial statements.

        Also in December 2011, the FASB issued authoritative guidance that requires a reporting entity to follow the real estate sales guidance when the reporting entity ceases to have a controlling financial interest in a subsidiary that is in-substance real estate as a result of a default on the subsidiary's nonrecourse debt. This guidance will be effective for us on January 1, 2013, and is not expected to have a material impact on our consolidated financial statements.

        In September 2011, the FASB issued authoritative guidance that amends how goodwill is tested for impairment. The amendments provide an option to perform a qualitative assessment to determine whether it is necessary to perform the annual two-step quantitative goodwill impairment test. This guidance was effective for our 2012 goodwill impairment test and did not have a material impact on our consolidated financial statements.

        In June 2011, the FASB issued authoritative guidance that changes the presentation of comprehensive income in the financial statements. The new guidance eliminates the presentation options contained in current 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 other comprehensive income to net income. The guidance does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. In December 2011, the FASB issued a final standard to defer the new requirement to present classification adjustments out of OCI to net income on the face of the financial statements. All other requirements contained in the original statement on comprehensive income are still effective. This guidance was effective for us on January 1, 2012, and did not have a material impact on our consolidated financial statements. The required disclosures are included in our consolidated financial statements. See Note 13, Stockholders' Equity, for further details.

        In May 2011, the FASB issued authoritative guidance that 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. This guidance was effective for us on January 1, 2012, and did not have a material impact on our consolidated financial statements. See Note 14, Fair Value Measurements, for further details.

        In April 2011, the FASB issued authoritative guidance that modifies the criteria for determining when repurchase agreements would be accounted for as secured borrowings as opposed to sales. The guidance was effective for us on January 1, 2012, for new transfers and modifications to existing transactions and did not have a material impact on our consolidated financial statements.

        Also in April 2011, the FASB issued authoritative guidance which clarifies when creditors should classify a loan modification as a troubled debt restructuring ("TDR"). A TDR occurs when a creditor grants a concession to a debtor experiencing financial difficulties. Loans denoted as a TDR are considered impaired and are specifically reserved for when calculating the allowance for credit losses. This guidance also ended the indefinite deferral issued in January 2011 surrounding new disclosures on loans classified as a TDR required as part of the credit quality disclosures guidance issued in July 2010. This guidance was effective for us on July 1, 2011, and was applied retrospectively to restructurings occurring on or after January 1, 2011. This guidance did not have a material impact on our consolidated financial statements. See Note 4, Investments, for further details.

        In July 2010, the FASB issued authoritative guidance that requires new and expanded disclosures related to the credit quality of financing receivables and the allowance for credit losses. Reporting entities are required to provide qualitative and quantitative disclosures on the allowance for credit losses, credit quality, impaired loans, modifications and nonaccrual and past due financing receivables. The disclosures are required to be presented on a disaggregated basis by portfolio segment and class of financing receivable. Disclosures required by the guidance that relate to the end of a reporting period were effective for us in our December 31, 2010, consolidated financial statements. Disclosures required by the guidance that relate to an activity that occurs during a reporting period were effective for us on January 1, 2011, and did not have a material impact on our consolidated financial statements. See Note 4, Investments, for further details.

        In April 2010, the FASB issued authoritative guidance addressing how investments held through the separate accounts of an insurance entity affect the entity's consolidation analysis. This guidance clarifies that an insurance entity should not consider any separate account interests held for the benefit of policyholders in an investment to be the insurer's interests and should not combine those interests with its general account interest in the same investment when assessing the investment for consolidation. This guidance was effective for us on January 1, 2011, and did not have a material impact on our consolidated financial statements.

        In March 2010, the FASB issued authoritative guidance that amends and clarifies the guidance on evaluation of credit derivatives embedded in beneficial interests in securitized financial assets, including asset-backed securities ("ABS"), credit-linked notes, collateralized loan obligations and collateralized debt obligations ("CDOs"). This guidance eliminates the scope exception for bifurcation of embedded credit derivatives in interests in securitized financial assets, unless they are created solely by subordination of one financial instrument to another. We adopted this guidance effective July 1, 2010, and within the scope of this guidance reclassified fixed maturities with a fair value of $75.3 million from available-for-sale to trading. The cumulative change in accounting principle related to unrealized losses on these fixed maturities resulted in a net $25.4 million decrease to retained earnings, with a corresponding increase to AOCI.

        In January 2010, the FASB issued authoritative guidance that requires new disclosures related to fair value measurements and clarifies existing disclosure requirements about the level of disaggregation, inputs and valuation techniques. Specifically, reporting entities now must disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. In addition, in the reconciliation for Level 3 fair value measurements, a reporting entity should present separately information about purchases, sales, issuances and settlements. The guidance clarifies that a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities for disclosure of fair value measurement, considering the level of disaggregated information required by other applicable U.S. GAAP guidance and should also provide disclosures about the valuation techniques and inputs used to measure fair value for each class of assets and liabilities. This guidance was effective for us on January 1, 2010, except for the disclosures about purchases, sales, issuances and settlements in the reconciliation for Level 3 fair value measurements, which were effective for us on January 1, 2011. This guidance did not have a material impact on our consolidated financial statements. See Note 14, Fair Value Measurements, for further details.

        In June 2009, the FASB issued authoritative guidance related to the accounting for VIEs, which amends prior guidance and requires an enterprise to perform an analysis to determine whether the enterprise's variable interest or interests give it a controlling financial interest in a VIE. This analysis identifies the primary beneficiary of a VIE 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. In addition, this guidance requires ongoing reassessments of whether an enterprise is the primary beneficiary of a VIE. Furthermore, we are required to enhance disclosures that will provide users of financial statements with more transparent information about an enterprise's involvement in a VIE. We adopted this guidance prospectively effective January 1, 2010. Due to the implementation of this guidance, certain previously unconsolidated VIEs were consolidated and certain previously consolidated VIEs were deconsolidated. The cumulative change in accounting principle from adopting this guidance resulted in a net $10.7 million decrease to retained earnings and a net $10.7 million increase to AOCI. In February 2010, the FASB issued an amendment to this guidance. The amendment indefinitely defers the consolidation requirements for reporting enterprises' interests in entities that have the characteristics of investment companies and regulated money market funds. This amendment was effective January 1, 2010, and did not have a material impact to our consolidated financial statements. The required disclosures are included in our consolidated financial statements. See Note 3, Variable Interest Entities, for further details.

        In June 2009, the FASB issued authoritative guidance to improve the relevance, representational faithfulness and comparability of the information that a reporting entity provides in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance and cash flows; and a transferor's continuing involvement in transferred financial assets. The most significant change is the elimination of the concept of a qualifying special-purpose entity ("QSPE"). Therefore, former QSPEs, as defined under previous accounting standards, should be evaluated for consolidation by reporting entities on and after the effective date in accordance with the applicable consolidation guidance. This guidance was effective for us on January 1, 2010, and did not have a material impact on our consolidated financial statements.

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 DPAC 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.

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, ABS, redeemable preferred stock and certain nonredeemable preferred stock. 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 related to DPAC, reinsurance assets or liabilities, sales inducements, unearned revenue reserves, policyholder liabilities, 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). We also have a minimal amount of assets within trading securities portfolios that support investment strategies that involve the active and frequent purchase and sale of fixed maturities. Mark-to-market adjustments related to these trading securities 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 $87.0 million and $44.8 million as of December 31, 2012 and 2011, 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 and impairments of real estate held for investment. 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 trading securities that support investment strategies that involve the active and frequent purchase and sale of fixed maturities are reported as net investment income and are excluded from net realized capital gains (losses).

        Policy loans and other investments, excluding investments in unconsolidated entities and commercial mortgage loans of consolidated VIEs for which the fair value option was elected, are primarily reported at cost.

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 collars, swaptions, interest rate futures, currency swaps, currency forwards, currency options, equity options, equity futures, credit default swaps and total return swaps. Derivatives may be exchange traded or contracted in the over-the-counter market. 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, accident and 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 13%, 15% and 16% of our life insurance in force and 47%, 50% and 53% of the number of life insurance policies in force at December 31, 2012, 2011 and 2010, respectively. Participating business represented approximately 43%, 47% and 49% of life insurance premiums for the years ended December 31, 2012, 2011 and 2010, 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 profit margins.

        The liability for unpaid accident 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 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.

Deferred Policy 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. Maintenance costs and acquisition costs that are not deferrable are charged to operations as incurred.

        DPAC 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 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 DPAC. The DPAC 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.

        DPAC 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, DPAC 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.

Deferred Policy 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 DPAC, 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 DPAC, 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. 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, 2012 and 2011, our largest exposures to a single third-party reinsurer in our individual life insurance business were $29.7 billion and $25.3 billion of life insurance in force, representing 18% and 16% of total net individual life insurance in force, respectively. The reinsurance recoverable related to this single third party reinsurer recorded in our consolidated statements of financial position was $26.1 million and $22.6 million at December 31, 2012 and 2011, respectively.

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

 
  For the year ended
December 31,
 
 
  2012   2011   2010  
 
  (in millions)
 

Premiums and other considerations:

                   

Direct

  $ 3,554.1   $ 3,205.6   $ 3,859.8  

Assumed

    2.6     3.0     3.5  

Ceded

    (337.3 )   (317.6 )   (307.8 )
               

Net premiums and other considerations

  $ 3,219.4   $ 2,891.0   $ 3,555.5  
               

Benefits, claims and settlement expenses:

                   

Direct

    5,268.6     4,926.5     5,471.8  

Assumed

    33.9     34.0     36.9  

Ceded

    (178.6 )   (343.9 )   (304.4 )
               

Net benefits, claims and settlement expenses

  $ 5,123.9   $ 4,616.6   $ 5,204.3  
               

Separate Accounts

        The separate account assets presented in the consolidated financial statements represent the fair value of funds that are separately administered by us for contracts with equity, real estate and fixed income investments. The separate account contract owner, rather than us, bears the investment risk of these funds. The separate account assets are legally segregated and are not subject to claims that arise out of any of our other business. 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 on the separate accounts are not reflected in the consolidated statements of operations.

        At December 31, 2012 and December 31, 2011, the separate accounts include a separate account valued at $148.3 million and $146.5 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 fourth 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 to which it was assigned. A reporting unit is an operating segment or a business one level below that 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, 2011

  $ 72.6   $ 169.0   $ 58.9   $ 43.4   $ 1.5   $ 345.4  

Goodwill from acquisitions

        68.0     86.2             154.2  

Foreign currency

            (17.3 )           (17.3 )

Other

                1.5     (1.5 )    
                           

Balance at December 31, 2011

    72.6     237.0     127.8     44.9         482.3  

Goodwill from acquisitions

            63.3     10.5         73.8  

Foreign currency

        2.9     (11.6 )           (8.7 )

Other

    (4.0 )                   (4.0 )
                           

Balance at December 31, 2012

  $ 68.6   $ 239.9   $ 179.5   $ 55.4   $   $ 543.4  
                           

        On September 30, 2010, we announced our decision to exit the group medical insurance business. This event constituted a substantive change in circumstances that would more likely than not reduce the fair value of our group medical insurance reporting unit below its carrying amount. Accordingly, we performed an interim goodwill impairment test as of September 30, 2010. As a result of the shortened period of projected cash flows, we determined that the goodwill related to this reporting unit within our Corporate operating segment was impaired and it was written down to a value of zero. We recorded a $43.6 million pre-tax impairment loss as an operating expense in the consolidated statements of operations during the year ended December 31, 2010.

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,  
 
  2012   2011  
 
  Gross
carrying
value
  Accumulated
amortization
  Net
carrying
value
  Gross
carrying
value
  Accumulated
amortization
  Net
carrying
value
 
 
  (in millions)
 

Present value of future profits

  $ 205.1   $ 70.7   $ 134.4   $ 191.7   $ 47.9   $ 143.8  

Other finite lived intangible assets

    244.5     147.0     97.5     218.9     139.3     79.6  
                           

Total amortized intangible assets

  $ 449.6   $ 217.7   $ 231.9   $ 410.6   $ 187.2   $ 223.4  
                           

        During 2012 and 2010, we fully amortized other finite lived intangible assets of $5.0 million and $1.7 million, respectively. We had no fully amortized other finite lived intangible assets in 2011.

        Present Value of Future Profits.    Present value of future profits ("PVFP") represents the present value of estimated future profits to be generated from existing insurance contracts in-force at the date of acquisition and is amortized over the expected policy or contract duration in relation to estimated gross profits. The PVFP asset and amortization may be adjusted if revisions to estimated gross profits occur.

        The changes in the carrying amount of PVFP, reported in our Principal International segment were as follows (in millions):

Balance at January 1, 2010

  $ 98.4  

Interest accrued

    8.0  

Amortization

    (11.5 )

Foreign currency

    5.1  
       

Balance at December 31, 2010

    100.0  

Acquisitions

    67.4  

Interest accrued

    9.4  

Amortization

    (14.2 )

Foreign currency

    (18.8 )
       

Balance at December 31, 2011

    143.8  

Interest accrued

    11.8  

Amortization

    (31.2 )

Foreign currency

    10.0  
       

Balance at December 31, 2012

  $ 134.4  
       

        At December 31, 2012, the estimated amortization expense, net of interest accrued, related to PVFP for the next five years is as follows (in millions):

Year ending December 31:

       

2013

  $ 5.1  

2014

    4.7  

2015

    4.9  

2016

    6.0  

2017

    7.4  

        Other Finite Lived Intangible Assets.    During 2010, we recorded a $1.6 million pre-tax impairment loss as an operating expense related to finite lived intangible assets with a gross carrying amount of $6.0 million and $4.4 million of accumulated amortization at the time of impairment resulting from our decision to exit the group medical insurance business.

        The amortization expense for intangible assets with finite useful lives was $12.6 million, $11.3 million and $18.9 million for 2012, 2011 and 2010, respectively. At December 31, 2012, the estimated amortization expense for the next five years is as follows (in millions):

Year ending December 31:

       

2013

  $ 13.7  

2014

    12.5  

2015

    10.7  

2016

    10.6  

2017

    10.0  

Indefinite Lived Intangible Assets

        The net carrying amount of unamortized indefinite lived intangible assets was $695.3 million and $667.2 million as of December 31, 2012 and 2011, respectively. As of both December 31, 2012 and 2011, $608.0 million relates to investment management contracts associated with our December 31, 2006, acquisition of WM Advisors, Inc.

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. On an ongoing basis, we assess whether we are the primary beneficiary of VIEs we have relationships with.

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 certain of these entities because we act as the investment manager of the underlying portfolio and we have an ownership interest.

Commercial Mortgage-Backed Securities

        In September 2000, 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.

Hedge Funds

        We are a general partner with insignificant equity ownership in various hedge funds. These entities were deemed VIEs due to the equity owners not having decision-making ability. Prior to the second quarter of 2012, we determined we were the primary beneficiary of these entities due to our control through our management relationships, related party ownership and our fee structure in certain of these funds.

        In the second quarter of 2012, the hedge funds were no longer consolidated. We determined we were no longer the primary beneficiary due to the increase in external ownership in the funds. As a result of deconsolidation, total assets decreased $587.2 million and liabilities and noncontrolling interest decreased $586.1 million.

        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
vehicles
  CMBS   Hedge funds (2)   Total  
 
  (in millions)
 

December 31, 2012

                               

Fixed maturities, available-for-sale

  $ 194.6   $   $   $   $ 194.6  

Fixed maturities, trading

        110.4             110.4  

Other investments

            80.3         80.3  

Accrued investment income

    0.5         0.6         1.1  
                       

Total assets

  $ 195.1   $ 110.4   $ 80.9   $   $ 386.4  
                       

Deferred income taxes

  $ 1.8   $   $   $   $ 1.8  

Other liabilities (1)

    152.4     104.8     45.7         302.9  
                       

Total liabilities

  $ 154.2   $ 104.8   $ 45.7   $   $ 304.7  
                       

December 31, 2011

                               

Fixed maturities, available-for-sale

  $ 199.2   $ 15.0   $   $   $ 214.2  

Fixed maturities, trading

        132.4             132.4  

Equity securities, trading

                207.6     207.6  

Other investments

            97.5     0.3     97.8  

Cash and cash equivalents

                317.7     317.7  

Accrued investment income

    1.2     0.1     0.6         1.9  

Premiums due and other receivables

                39.1     39.1  
                       

Total assets

  $ 200.4   $ 147.5   $ 98.1   $ 564.7   $ 1,010.7  
                       

Deferred income taxes

  $ 2.2   $   $   $   $ 2.2  

Other liabilities (1)

    136.9     143.8     64.5     220.0     565.2  
                       

Total liabilities

  $ 139.1   $ 143.8   $ 64.5   $ 220.0   $ 567.4  
                       

(1)
Grantor trusts contain an embedded derivative of a forecasted transaction to deliver the underlying securities; collateralized private investment vehicles include derivative liabilities and obligation to redeem notes at maturity or termination of the trust; CMBS includes obligation to the bondholders; and hedge funds include liabilities to securities brokers.

(2)
The consolidated statements of financial position included a $343.6 million noncontrolling interest for hedge funds as of December 31, 2011.

        We did not provide financial or other support to investees designated as VIEs for the years December 31, 2012 and 2011.

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.

        VIEs include CMBS, residential mortgage-backed pass-through securities ("RMBS") and other ABS. All of these entities were deemed VIEs because the equity within these entities is insufficient to sustain them. We determined we are not the primary beneficiary in any of 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, some of which are classified as VIEs. The partnership returns are in the form of income tax credits and investment income. These entities are classified as VIEs as the general partner does not have an equity investment at risk in the entity. We have determined we are not the primary beneficiary because we are not the general partner, who makes all the significant decisions for the entity.

        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, 2012

             

Fixed maturities, available-for-sale:

             

Corporate

  $ 523.2   $ 403.7  

Residential mortgage-backed pass-through securities

    3,226.7     3,022.7  

Commercial mortgage-backed securities

    3,897.4     4,094.8  

Collateralized debt obligations

    379.2     428.8  

Other debt obligations

    3,779.2     3,756.9  

Fixed maturities, trading:

             

Residential mortgage-backed pass-through securities

    77.7     77.7  

Commercial mortgage-backed securities

    2.8     2.8  

Collateralized debt obligations

    56.4     56.4  

Other debt obligations

    3.2     3.2  

Other investments:

             

Other limited partnership interests

    136.2     136.2  

December 31, 2011

             

Fixed maturities, available-for-sale:

             

Corporate

  $ 544.0   $ 392.6  

Residential mortgage-backed pass-through securities

    3,343.0     3,155.8  

Commercial mortgage-backed securities

    3,413.7     3,894.3  

Collateralized debt obligations

    338.8     399.7  

Other debt obligations

    3,570.2     3,606.9  

Fixed maturities, trading:

             

Residential mortgage-backed pass-through securities

    105.6     105.6  

Commercial mortgage-backed securities

    12.0     12.0  

Collateralized debt obligations

    51.4     51.4  

Other debt obligations

    64.9     64.9  

Other investments:

             

Other limited partnership interests

    122.1     122.1  

(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 December 31, 2012 and December 31, 2011, these VIEs held $1.5 billion and $1.7 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 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, 2012

                               

Fixed maturities, available-for-sale:

                               

U.S. government and agencies

  $ 911.4   $ 33.2   $ 0.3   $ 944.3   $  

Non-U.S. government and agencies

    944.9     264.3     0.9     1,208.3      

States and political subdivisions

    2,940.4     241.1     2.7     3,178.8      

Corporate

    31,615.4     3,029.9     319.9     34,325.4     19.5  

Residential mortgage-backed pass-through securities            

    3,022.7     204.4     0.4     3,226.7      

Commercial mortgage-backed securities

    4,094.8     241.7     439.1     3,897.4     195.4  

Collateralized debt obligations

    428.8     7.0     56.6     379.2     4.3  

Other debt obligations

    3,756.9     73.5     51.2     3,779.2     82.8  
                       

Total fixed maturities, available-for-sale

  $ 47,715.3   $ 4,095.1   $ 871.1   $ 50,939.3   $ 302.0  
                       

Total equity securities, available-for-sale

  $ 132.4   $ 12.6   $ 8.5   $ 136.5        
                         

December 31, 2011

                               

Fixed maturities, available-for-sale:

                               

U.S. government and agencies

  $ 772.3   $ 32.8   $   $ 805.1   $  

Non-U.S. government and agencies

    917.6     180.5     1.4     1,096.7      

States and political subdivisions

    2,670.0     218.2     5.5     2,882.7      

Corporate

    31,954.2     2,321.3     719.0     33,556.5     19.5  

Residential mortgage-backed pass-through securities            

    3,155.8     187.9     0.7     3,343.0      

Commercial mortgage-backed securities

    3,894.3     117.0     597.6     3,413.7     168.2  

Collateralized debt obligations

    399.7     1.9     62.8     338.8     7.0  

Other debt obligations

    3,606.9     100.3     137.0     3,570.2     90.0  
                       

Total fixed maturities, available-for-sale

  $ 47,370.8   $ 3,159.9   $ 1,524.0   $ 49,006.7   $ 284.7  
                       

Total equity securities, available-for-sale

  $ 75.2   $ 8.4   $ 6.5   $ 77.1        
                         

(1)
Excludes $95.0 million and $28.9 million as of December 31, 2012 and December 31, 2011, 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 December 31, 2012, by expected maturity, were as follows:

 
  Amortized
cost
  Fair
value
 
 
  (in millions)
 

Due in one year or less

  $ 3,564.2   $ 3,619.0  

Due after one year through five years

    12,644.4     13,356.4  

Due after five years through ten years

    8,944.9     10,023.2  

Due after ten years

    11,258.6     12,658.2  
           

Subtotal

    36,412.1     39,656.8  

Mortgage-backed and other asset-backed securities

    11,303.2     11,282.5  
           

Total

  $ 47,715.3   $ 50,939.3  
           

        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 Investment Income

        Major categories of net investment income are summarized as follows:

 
  For the year ended
December 31,
 
 
  2012   2011   2010  
 
  (in millions)
 

Fixed maturities, available-for-sale

  $ 2,454.8   $ 2,596.2   $ 2,702.1  

Fixed maturities, trading

    30.2     64.7     92.6  

Equity securities, available-for-sale

    8.6     10.5     11.4  

Equity securities, trading

    6.6     4.4     2.8  

Mortgage loans

    635.8     649.2     673.3  

Real estate

    71.4     74.2     57.5  

Policy loans

    53.7     58.2     60.9  

Cash and cash equivalents

    9.6     8.5     7.2  

Derivatives

    (131.2 )   (196.1 )   (174.4 )

Other

    196.6     188.5     151.9  
               

Total

    3,336.1     3,458.3     3,585.3  

Investment expenses

    (81.2 )   (83.0 )   (89.5 )
               

Net investment income

  $ 3,254.9   $ 3,375.3   $ 3,495.8  
               

Net Realized Capital Gains and Losses

 
  For the year ended
December 31,
 
 
  2012   2011   2010  
 
  (in millions)
 

Fixed maturities, available-for-sale:

                   

Gross gains

  $ 31.0   $ 26.4   $ 63.7  

Gross losses

    (144.9 )   (158.8 )   (339.9 )

Other-than-temporary impairment losses reclassified to (from) OCI

    17.3     (49.7 )   56.1  

Hedging, net

    (27.5 )   130.5     142.2  

Fixed maturities, trading

    2.2     (6.7 )   17.5  

Equity securities, available-for-sale:

                   

Gross gains

    0.6     2.2     8.9  

Gross losses

    (0.9 )   (6.4 )   (3.2 )

Equity securities, trading

    34.1     20.3     27.7  

Mortgage loans

    (51.3 )   (42.1 )   (152.2 )

Derivatives

    (10.9 )   (180.5 )   (143.9 )

Other

    264.4     142.5     132.9  
               

Net realized capital gains (losses)

  $ 114.1   $ (122.3 ) $ (190.2 )
               

        Proceeds from sales of investments (excluding call and maturity proceeds) in fixed maturities, available-for-sale were $1.2 billion, $0.9 billion and $1.6 billion in 2012, 2011 and 2010, 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 year ended
December 31,
 
 
  2012   2011   2010  
 
  (in millions)
 

Fixed maturities, available-for-sale

  $ (135.5 ) $ (143.8 ) $ (300.0 )

Equity securities, available-for-sale

    (0.4 )   (3.8 )   3.7  
               

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

    (135.9 )   (147.6 )   (296.3 )

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

    17.3     (49.7 )   56.1  
               

Net impairment losses on available-for-sale securities

  $ (118.6 ) $ (197.3 ) $ (240.2 )
               

(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 year ended
December 31,
 
 
  2012   2011   2010  
 
  (in millions)
 

Beginning balance

  $ (434.8 ) $ (325.7 ) $ (204.7 )

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

    (20.7 )   (37.8 )   (112.4 )

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

    (80.0 )   (135.6 )   (109.7 )

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

    191.9     68.2     53.2  

Reduction for credit losses previously recognized on fixed maturities reclassified to trading (1)

            44.4  

Net reduction (increase) for positive changes in cash flows expected to be collected and amortization (2)

    8.4     (3.9 )   3.5  
               

Ending balance

  $ (335.2 ) $ (434.8 ) $ (325.7 )
               

(1)
Fixed maturities previously classified as available-for-sale have been reclassified to trading as a result of electing the fair value option upon adoption of accounting guidance related to the evaluation of credit derivatives embedded in beneficial interests in securitized financial assets.

(2)
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:

 
  December 31, 2012  
 
  Less than twelve
months
  Greater than or
equal to twelve months
  Total  
 
  Fair
value
  Gross
unrealized
losses
  Fair
value
  Gross
unrealized
losses
  Fair
value
  Gross
unrealized
losses
 
 
  (in millions)
 

Fixed maturities, available-for-sale:

                                     

U.S. government and agencies

  $ 115.4   $ 0.3   $   $   $ 115.4   $ 0.3  

Non-U.S. governments

    17.3     0.2     13.4     0.7     30.7     0.9  

States and political subdivisions

    235.3     2.1     8.8     0.6     244.1     2.7  

Corporate

    831.8     10.6     1,961.7     309.3     2,793.5     319.9  

Residential mortgage-backed pass- through securities

    70.4     0.3     2.4     0.1     72.8     0.4  

Commercial mortgage-backed securities

    98.9     3.3     785.0     435.8     883.9     439.1  

Collateralized debt obligations

    72.2     1.0     133.8     55.6     206.0     56.6  

Other debt obligations

    235.6     2.0     414.9     49.2     650.5     51.2  
                           

Total fixed maturities, available-for-sale

  $ 1,676.9   $ 19.8   $ 3,320.0   $ 851.3   $ 4,996.9   $ 871.1  
                           

Total equity securities, available-for-sale

  $ 5.8   $ 0.1   $ 52.9   $ 8.4   $ 58.7   $ 8.5  
                           

        Of the total amounts, Principal Life's consolidated portfolio represented $4,419.4 million in available-for-sale fixed maturities with gross unrealized losses of $825.7 million. Of those fixed maturity securities in Principal Life's consolidated portfolio with a gross unrealized loss position, 71% were investment grade (rated AAA through BBB-) with an average price of 84 (carrying value/amortized cost) at December 31, 2012. Gross unrealized losses in our fixed maturities portfolio decreased during the year ended December 31, 2012, due to a tightening of credit spreads, primarily in the corporate and commercial mortgage-backed securities sectors.

        For those securities that had been in a continuous unrealized loss position for less than twelve months, Principal Life's consolidated portfolio held 224 securities with a carrying value of $1,382.1 million and unrealized losses of $16.2 million reflecting an average price of 99 at December 31, 2012. Of this portfolio, 89% was investment grade (rated AAA through BBB-) at December 31, 2012, with associated unrealized losses of $13.3 million. The unrealized losses on these securities can primarily be attributed to changes in market interest rates and changes in credit spreads since the securities were acquired.

        For those securities that had been in a continuous unrealized loss position greater than or equal to twelve months, Principal Life's consolidated portfolio held 488 securities with a carrying value of $3,037.3 million and unrealized losses of $809.5 million. The average rating of this portfolio was BBB- with an average price of 79 at December 31, 2012. Of the $809.5 million in unrealized losses, the commercial mortgage-backed securities sector accounts for $435.8 million in unrealized losses with an average price of 64 and an average credit rating of BB+. The remaining unrealized losses consist primarily of $268.1 million within the corporate sector at December 31, 2012. The average price of the corporate sector was 86 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, 2012.

 
  December 31, 2011  
 
  Less than twelve
months
  Greater than or
equal to twelve months
  Total  
 
  Fair
value
  Gross
unrealized
losses
  Fair
value
  Gross
unrealized
losses
  Fair
value
  Gross
unrealized
losses
 
 
  (in millions)
 

Fixed maturities, available-for-sale:

                                     

Non-U.S. governments

  $ 68.5   $ 1.4   $ 0.3   $   $ 68.8   $ 1.4  

States and political subdivisions

    5.7     0.1     51.7     5.4     57.4     5.5  

Corporate

    3,445.6     140.9     2,403.9     578.1     5,849.5     719.0  

Residential mortgage-backed pass-through securities

    77.8     0.5     3.7     0.2     81.5     0.7  

Commercial mortgage-backed securities

    608.4     57.3     858.9     540.3     1,467.3     597.6  

Collateralized debt obligations

    107.2     2.5     204.4     60.3     311.6     62.8  

Other debt obligations

    708.1     13.0     508.1     124.0     1,216.2     137.0  
                           

Total fixed maturities, available-for-sale

  $ 5,021.3   $ 215.7   $ 4,031.0   $ 1,308.3   $ 9,052.3   $ 1,524.0  
                           

Total equity securities, available-for-sale

  $ 14.3   $ 3.2   $ 15.6   $ 3.3   $ 29.9   $ 6.5  
                           

        Of the total amounts, Principal Life's consolidated portfolio represented $8,540.7 million in available-for-sale fixed maturities with gross unrealized losses of $1,470.3 million. Of those fixed maturity securities in Principal Life's consolidated portfolio with a gross unrealized loss position, 76% were investment grade (rated AAA through BBB-) with an average price of 85 (carrying value/amortized cost) at December 31, 2011. Gross unrealized losses in our fixed maturities portfolio increased slightly during the year ended December 31, 2011, due to a widening of credit spreads primarily in the corporate and commercial mortgage-backed securities sectors.

        For those securities that had been in a continuous unrealized loss position for less than twelve months, Principal Life's consolidated portfolio held 477 securities with a carrying value of $4,573.6 million and unrealized losses of $198.7 million reflecting an average price of 96 at December 31, 2011. Of this portfolio, 86% was investment grade (rated AAA through BBB-) at December 31, 2011, with associated unrealized losses of $128.5 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 628 securities with a carrying value of $3,967.1 million and unrealized losses of $1,271.6 million. The average rating of this portfolio was BBB with an average price of 76 at December 31, 2011. Of the $1,271.6 million in unrealized losses, the commercial mortgage-backed securities sector accounts for $540.3 million in unrealized losses with an average price of 61 and an average credit rating of BBB-. The remaining unrealized losses consist primarily of $541.4 million within the corporate sector at December 31, 2011. The average price of the corporate sector was 81 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, 2011.

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 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 net of adjustments related to DPAC, reinsurance assets or liabilities, sales inducements, unearned revenue reserves, changes in policyholder liabilities and applicable income taxes was as follows:

 
  December 31, 2012   December 31, 2011  
 
  (in millions)
 

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

  $ 3,562.5   $ 1,920.6  

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

    (302.0 )   (284.7 )

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

    4.1     1.9  

Adjustments for assumed changes in amortization patterns

    (515.2 )   (376.1 )

Adjustments for assumed changes in policyholder liabilities

    (1,198.7 )   (442.7 )

Net unrealized gains on derivative instruments

    90.7     113.2  

Net unrealized gains on equity method subsidiaries and noncontrolling interest adjustments

    191.3     150.3  

Provision for deferred income taxes

    (597.0 )   (354.1 )
           

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

  $ 1,235.7   $ 728.4  
           

(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, 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:

 
  December 31, 2012   December 31, 2011  
 
  (in millions)
 

Commercial mortgage loans

  $ 10,235.1   $ 9,461.4  

Residential mortgage loans

    1,382.0     1,367.9  
           

Total amortized cost

    11,617.1     10,829.3  

Valuation allowance

   
(97.4

)
 
(102.1

)
           

Total carrying value

  $ 11,519.7   $ 10,727.2  
           

        We periodically purchase mortgage loans as well as sell mortgage loans we have originated. We purchased $153.0 million, $40.6 million and $39.8 million of residential mortgage loans in 2012, 2011 and 2010, respectively. We sold $14.2 million, $18.4 million and $17.4 million of residential mortgage loans in 2012, 2011 and 2010, respectively. We purchased $149.1 million, $50.3 million and $0.0 million of commercial mortgage loans in 2012, 2011 and 2010, respectively. We sold $31.1 million, $0.0 million and $34.1 million of commercial mortgage loans in 2012, 2011 and 2010, respectively.

        Our commercial mortgage loan portfolio consists primarily of non-recourse, fixed rate mortgages on fully or near fully leased properties. Our commercial mortgage loan portfolio is diversified by geographic region and specific collateral property type as follows:

 
  December 31, 2012   December 31, 2011  
 
  Amortized
cost
  Percent
of total
  Amortized
cost
  Percent
of total
 
 
  (in millions)
   
  (in millions)
   
 

Geographic distribution

                         

New England

  $ 536.6     5.2 % $ 454.0     4.8 %

Middle Atlantic

    2,233.4     21.8     1,744.4     18.4  

East North Central

    635.6     6.2     774.8     8.2  

West North Central

    377.3     3.7     407.8     4.3  

South Atlantic

    2,135.0     20.9     2,099.8     22.2  

East South Central

    244.8     2.4     231.8     2.4  

West South Central

    767.9     7.5     648.6     6.9  

Mountain

    726.6     7.1     643.2     6.8  

Pacific

    2,562.3     25.0     2,446.4     25.9  

International

    15.6     0.2     10.6     0.1  
                   

Total

  $ 10,235.1     100.0 % $ 9,461.4     100.0 %
                   

Property type distribution

                         

Office

  $ 3,078.8     30.1 % $ 2,753.8     29.1 %

Retail

    2,928.3     28.6     2,580.2     27.3  

Industrial

    1,765.5     17.2     2,070.7     21.9  

Apartments

    1,685.9     16.5     1,242.9     13.1  

Hotel

    445.8     4.4     467.7     4.9  

Mixed use/other

    330.8     3.2     346.1     3.7  
                   

Total

  $ 10,235.1     100.0 % $ 9,461.4     100.0 %
                   

        Our residential mortgage loan portfolio is composed of home equity mortgages with an amortized cost of $495.7 million and $611.0 million and first lien mortgages with an amortized cost of $886.3 million and $756.9 million as of December 31, 2012 and December 31, 2011, respectively. Most of our residential home equity mortgages are concentrated in the United States and are generally second lien mortgages comprised of closed-end loans and lines of credit. The majority of our first lien loans are concentrated in the Chilean market.

Mortgage Loan Credit Monitoring

Commercial Credit Risk Profile Based on Internal Rating

        We actively monitor and manage our commercial mortgage loan portfolio. All commercial mortgage loans are analyzed regularly and substantially all are internally rated, based on a proprietary risk rating cash flow model, in order to monitor the financial quality of these assets. The model stresses expected cash flows at various levels and at different points in time depending on the durability of the income stream, which includes our assessment of factors such as location (macro and micro markets), tenant quality and lease expirations. Our internal rating analysis presents expected losses in terms of a Standard & Poor's ("S&P") bond equivalent rating. As the credit risk for commercial mortgage loans increases, we adjust our internal ratings downward with loans in the category "B+ and below" having the highest risk for credit loss. Internal ratings on commercial mortgage loans are updated at least annually and potentially more often for certain loans with material changes in collateral value or occupancy and for loans on an internal "watch list".

        Commercial mortgage loans that require more frequent and detailed attention than other loans in our portfolio are identified and placed on an internal "watch list". Among the criteria that would indicate a potential problem are imbalances in ratios of loan to value or contract rents to debt service, major tenant vacancies or bankruptcies, borrower sponsorship problems, late payments, delinquent taxes and loan relief/restructuring requests.

        The amortized cost of our commercial mortgage loan portfolio by credit risk, as determined by our internal rating system expressed in terms of an S&P bond equivalent rating, was as follows:

 
  December 31, 2012  
 
  Brick and mortar   CTL   Total  
 
  (in millions)
 

A- and above

  $ 7,257.7   $ 231.3   $ 7,489.0  

BBB+ thru BBB-

    1,804.5     294.9     2,099.4  

BB+ thru BB-

    266.8     1.6     268.4  

B+ and below

    376.0     2.3     378.3  
               

Total

  $ 9,705.0   $ 530.1   $ 10,235.1  
               


 

 
  December 31, 2011  
 
  Brick and mortar   CTL   Total  
 
  (in millions)
 

A- and above

  $ 5,682.5   $ 308.6   $ 5,991.1  

BBB+ thru BBB-

    2,112.3     238.8     2,351.1  

BB+ thru BB-

    403.7     16.4     420.1  

B+ and below

    693.3     5.8     699.1  
               

Total

  $ 8,891.8   $ 569.6   $ 9,461.4  
               

Residential Credit Risk Profile Based on Performance Status

        Our residential mortgage loan portfolio is monitored based on performance of the loans. Monitoring on a residential mortgage loan increases when the loan is delinquent or earlier if there is an indication of impairment. We define non-performing residential mortgage loans as loans 90 days or greater delinquent or on non-accrual status.

        The amortized cost of our performing and non-performing residential mortgage loans were as follows:

 
  December 31, 2012  
 
  Home equity   First liens   Total  
 
  (in millions)
 

Performing

  $ 472.6   $ 865.0   $ 1,337.6  

Nonperforming

    23.1     21.3     44.4  
               

Total

  $ 495.7   $ 886.3   $ 1,382.0  
               


 

 
  December 31, 2011  
 
  Home equity   First liens   Total  
 
  (in millions)
 

Performing

  $ 597.8   $ 733.7   $ 1,331.5  

Nonperforming

    13.2     23.2     36.4  
               

Total

  $ 611.0   $ 756.9   $ 1,367.9  
               

Non-Accrual Mortgage Loans

        Commercial and residential mortgage loans are placed on non-accrual status if we have concern regarding the collectability of future payments or if a loan has matured without being paid off or extended. Factors considered may include conversations with the borrower, loss of major tenant, bankruptcy of borrower or major tenant, decreased property cash flow for commercial mortgage loans or number of days past due and other circumstances for residential mortgage loans. Based on an assessment as to the collectability of the principal, a determination is made to apply any payments received either against the principal or according to the contractual terms of the loan. When a loan is placed on nonaccrual status, the accrued unpaid interest receivable is reversed against interest income. Accrual of interest resumes after factors resulting in doubts about collectability have improved. Residential first lien mortgages in the Chilean market are carried on accrual for a longer period of delinquency than domestic loans, as assessment of collectability is based on the nature of the loans and collection practices in that market.

        The amortized cost of mortgage loans on non-accrual status were as follows:

 
  December 31, 2012   December 31, 2011  
 
  (in millions)
 

Commercial:

             

Brick and mortar

  $ 44.5   $ 46.8  

Residential:

             

Home equity

    23.1     13.2  

First liens

    13.2     15.7  
           

Total

  $ 80.8   $ 75.7  
           

        The aging of our mortgage loans, based on amortized cost, were as follows:

 
  December 31, 2012  
 
  30 - 59 days
past due
  60 - 89 days
past due
  90 days or
more past
due
  Total
past due
  Current   Total
loans
  Recorded
investment
90 days or
more and
accruing
 
 
  (in millions)
 

Commercial-brick and mortar

  $ 32.8   $ 13.7   $   $ 46.5   $ 9,658.5   $ 9,705.0   $  

Commercial-CTL

                    530.1     530.1      

Residential-home equity

    5.7     2.8     3.9     12.4     483.3     495.7      

Residential-first liens

    22.3     5.1     19.8     47.2     839.1     886.3     8.1  
                               

Total

  $ 60.8   $ 21.6   $ 23.7   $ 106.1   $ 11,511.0