PRINCIPAL FINANCIAL GROUP INC, 10-K filed on 2/12/2014
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2013
Feb. 5, 2014
Jun. 28, 2013
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, 2013 
 
 
Amendment Flag
false 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Public Float
 
 
$ 11,007,711,269 
Entity Common Stock, Shares Outstanding
 
295,521,829 
 
Document Fiscal Year Focus
2013 
 
 
Document Fiscal Period Focus
FY 
 
 
Consolidated Statements of Financial Position (USD $)
In Millions, unless otherwise specified
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Assets
 
 
 
 
Fixed maturities, available-for-sale (2013 and 2012 include $272.0 million and $194.6 million related to consolidated variable interest entities)
$ 48,757.1 
$ 50,939.3 
 
 
Fixed maturities, trading (2013 and 2012 both include $110.4 million related to consolidated variable interest entities)
563.1 
626.7 
 
 
Equity securities, available-for-sale
110.5 
136.5 
 
 
Equity securities, trading (2013 includes $327.2 million related to consolidated variable interest entities)
716.9 
252.8 
 
 
Mortgage loans
11,533.6 
11,519.7 
 
 
Real estate
1,271.6 
1,180.3 
 
 
Policy loans
859.7 
864.9 
 
 
Other investments (2013 and 2012 include $68.1 million and $80.3 million related to consolidated variable interest entities and $142.9 million and $113.9 million measured at fair value under the fair value option)
2,944.4 
3,291.1 
 
 
Total investments
66,756.9 
68,811.3 
 
 
Cash and cash equivalents
2,371.8 
4,177.2 
2,833.9 
1,877.4 
Accrued investment income
532.1 
584.4 
 
 
Premiums due and other receivables
1,241.0 
1,084.4 
 
 
Deferred acquisition costs
3,077.0 
2,590.0 
2,358.1 
2,442.2 
Property and equipment
500.7 
464.2 
 
 
Goodwill
1,100.3 
543.4 
482.3 
 
Other intangibles
1,459.0 
914.7 
 
 
Separate account assets (2013 includes $32,824.7 million related to consolidated variable interest entities)
130,018.4 
81,653.8 
 
 
Other assets
1,134.2 
1,006.8 
 
 
Total assets
208,191.4 
161,830.2 
 
 
Liabilities
 
 
 
 
Contractholder funds
35,958.3 
37,786.5 
 
 
Future policy benefits and claims
22,626.2 
22,436.2 
 
 
Other policyholder funds
758.9 
716.4 
 
 
Short-term debt
150.6 
40.8 
 
 
Long-term debt
2,601.4 
2,671.3 
 
 
Income taxes currently payable
5.2 
15.3 
 
 
Deferred income taxes
824.0 
600.0 
 
 
Separate account liabilities (2013 includes $32,824.7 million related to consolidated variable interest entities)
130,018.4 
81,653.8 
 
 
Other liabilities (2013 and 2012 include $342.4 million and $302.9 million related to consolidated variable interest entities, of which $104.9 million and $85.0 million are measured at fair value under the fair value option)
5,224.2 
6,146.1 
 
 
Total liabilities
198,167.2 
152,066.4 
 
 
Redeemable noncontrolling interest
247.2 
60.4 
22.2 
 
Stockholders' equity
 
 
 
 
Common stock, par value $.01 per share - 2,500.0 million shares authorized, 459.3 million and 453.5 million shares issued, and 295.2 million and 293.8 million shares outstanding in 2013 and 2012
4.6 
4.5 
 
 
Additional paid-in capital
9,798.9 
9,730.9 
 
 
Retained earnings (accumulated deficit)
5,405.4 
4,862.0 
 
 
Accumulated other comprehensive income (loss)
183.2 
640.3 
 
 
Treasury stock, at cost (164.1 million and 159.7 million shares in 2013 and 2012)
(5,708.0)
(5,554.4)
 
 
Total stockholders' equity attributable to Principal Financial Group, Inc.
9,684.2 
9,683.4 
 
 
Noncontrolling interest
92.8 
20.0 
 
 
Total stockholders' equity
9,777.0 
9,703.4 
9,306.2 
9,246.8 
Total liabilities and stockholders' equity
208,191.4 
161,830.2 
 
 
Series A
 
 
 
 
Stockholders' equity
 
 
 
 
Preferred stock, value
   
   
 
 
Total stockholders' equity
Series B
 
 
 
 
Stockholders' equity
 
 
 
 
Preferred stock, value
0.1 
0.1 
0.1 
 
Total stockholders' equity
$ 0.1 
$ 0.1 
$ 0.1 
$ 0.1 
Consolidated Statements of Financial Position (Parenthetical) (USD $)
In Millions, except Per Share data, unless otherwise specified
Dec. 31, 2013
Dec. 31, 2012
Fixed maturities, available-for-sale
$ 48,757.1 
$ 50,939.3 
Fixed maturities, trading
563.1 
626.7 
Equity securities, trading
716.9 
252.8 
Other investments
2,944.4 
3,291.1 
Other investments measured at fair value under fair value option
142.9 
113.9 
Separate account assets
130,018.4 
81,653.8 
Separate account liabilities
130,018.4 
81,653.8 
Other liabilities
5,224.2 
6,146.1 
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)
459.3 
453.5 
Common stock, outstanding (in shares)
295.2 
293.8 
Treasury stock (in shares)
164.1 
159.7 
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
272.0 
194.6 
Fixed maturities, trading
110.4 
110.4 
Equity securities, trading
327.2 
 
Other investments
68.1 
80.3 
Separate account assets
32,824.7 
 
Separate account liabilities
32,824.7 
 
Other liabilities
342.4 
302.9 
Other liabilities measured at fair value under fair value option
$ 104.9 
$ 85.0 
Consolidated Statements of Operations (USD $)
In Millions, except Per Share data, unless otherwise specified
3 Months Ended 12 Months Ended
Dec. 31, 2013
Sep. 30, 2013
Jun. 30, 2013
Mar. 31, 2013
Dec. 31, 2012
Sep. 30, 2012
Jun. 30, 2012
Mar. 31, 2012
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2011
Revenues
 
 
 
 
 
 
 
 
 
 
 
Premiums and other considerations
 
 
 
 
$ 700.1 
$ 1,158.2 
$ 681.3 
$ 679.8 
$ 3,154.1 
$ 3,219.4 
$ 2,891.0 
Fees and other revenues
 
 
 
 
717.6 
675.0 
636.1 
598.0 
3,222.2 
2,626.7 
2,526.7 
Net investment income (loss)
 
 
 
 
845.3 
783.8 
801.0 
824.8 
3,138.4 
3,254.9 
3,375.3 
Net realized capital gains (losses), excluding impairment losses on available-for-sale securities
 
 
 
 
56.3 
122.1 
32.2 
22.1 
(109.2)
232.7 
75.0 
Total other-than-temporary impairment losses on available-for-sale securities
 
 
 
 
(9.5)
(43.6)
(49.1)
(33.7)
(91.5)
(135.9)
(147.6)
Other-than-temporary impairment losses on fixed maturities, available-for-sale reclassified to (from) other comprehensive income
 
 
 
 
(13.9)
9.2 
17.1 
4.9 
(24.5)
17.3 
(49.7)
Net impairment losses on available-for-sale securities
 
 
 
 
(23.4)
(34.4)
(32.0)
(28.8)
(116.0)
(118.6)
(197.3)
Net realized capital gains (losses)
 
 
 
 
32.9 
87.7 
0.2 
(6.7)
(225.2)
114.1 
(122.3)
Total revenues
2,672.6 
2,239.6 
2,210.6 
2,166.7 
2,295.9 
2,704.7 
2,118.6 
2,095.9 
9,289.5 
9,215.1 
8,670.7 
Expenses
 
 
 
 
 
 
 
 
 
 
 
Benefits, claims and settlement expenses
 
 
 
 
1,154.4 
1,647.0 
1,110.0 
1,212.5 
4,683.6 
5,123.9 
4,616.6 
Dividends to policyholders
 
 
 
 
48.2 
49.7 
49.5 
50.3 
189.0 
197.7 
210.2 
Operating expenses
 
 
 
 
832.4 
816.4 
729.6 
555.1 
3,292.9 
2,933.5 
2,971.1 
Total expenses
2,362.7 
1,919.3 
1,945.0 
1,938.5 
2,035.0 
2,513.1 
1,889.1 
1,817.9 
8,165.5 
8,255.1 
7,797.9 
Income (loss) before income taxes
 
 
 
 
260.9 
191.6 
229.5 
278.0 
1,124.0 
960.0 
872.8 
Income taxes (benefits)
 
 
 
 
34.2 
(7.2)
50.9 
56.7 
187.9 
134.6 
198.3 
Net income (loss)
250.4 
259.1 
236.6 
190.0 
226.7 
198.8 
178.6 
221.3 
936.1 
825.4 
674.5 
Net income (loss) attributable to noncontrolling interest
 
 
 
 
3.5 
3.4 
2.7 
9.2 
23.4 
18.8 
36.2 
Net income (loss) attributable to Principal Financial Group, Inc.
 
 
 
 
223.2 
195.4 
175.9 
212.1 
912.7 
806.6 
638.3 
Preferred stock dividends
 
 
 
 
8.3 
8.2 
8.3 
8.2 
33.0 
33.0 
33.0 
Net income (loss) available to common stockholders
$ 233.4 
$ 245.7 
$ 222.3 
$ 178.3 
$ 214.9 
$ 187.2 
$ 167.6 
$ 203.9 
$ 879.7 
$ 773.6 
$ 605.3 
Earnings per common share
 
 
 
 
 
 
 
 
 
 
 
Basic earnings per common share (in dollars per share)
$ 0.79 
$ 0.83 
$ 0.76 
$ 0.61 
$ 0.72 
$ 0.64 
$ 0.56 
$ 0.68 
$ 2.99 
$ 2.60 
$ 1.92 
Diluted earnings per common share (in dollars per share)
$ 0.78 
$ 0.82 
$ 0.75 
$ 0.61 
$ 0.72 
$ 0.63 
$ 0.56 
$ 0.68 
$ 2.95 
$ 2.58 
$ 1.91 
Consolidated Statements of Comprehensive Income (USD $)
In Millions, unless otherwise specified
3 Months Ended 12 Months Ended
Dec. 31, 2013
Sep. 30, 2013
Jun. 30, 2013
Mar. 31, 2013
Dec. 31, 2012
Sep. 30, 2012
Jun. 30, 2012
Mar. 31, 2012
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2011
Consolidated Statements of Comprehensive Income
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
$ 250.4 
$ 259.1 
$ 236.6 
$ 190.0 
$ 226.7 
$ 198.8 
$ 178.6 
$ 221.3 
$ 936.1 
$ 825.4 
$ 674.5 
Other comprehensive income (loss), net:
 
 
 
 
 
 
 
 
 
 
 
Net unrealized gains (losses) on available-for-sale securities
 
 
 
 
 
 
 
 
(540.2)
557.6 
208.6 
Noncredit component of impairment losses on fixed maturities, available-for-sale
 
 
 
 
 
 
 
 
6.9 
(6.7)
31.0 
Net unrealized gains (losses) on derivative instruments
 
 
 
 
 
 
 
 
(1.8)
(43.6)
23.6 
Foreign currency translation adjustment
 
 
 
 
 
 
 
 
(269.4)
(9.8)
(130.9)
Net unrecognized postretirement benefit obligation
 
 
 
 
 
 
 
 
332.6 
(127.4)
(172.9)
Other comprehensive income (loss)
 
 
 
 
 
 
 
 
(471.9)
370.1 
(40.6)
Comprehensive income (loss)
 
 
 
 
 
 
 
 
464.2 
1,195.5 
633.9 
Comprehensive income (loss) attributable to noncontrolling interest
 
 
 
 
 
 
 
 
8.6 
20.0 
35.7 
Comprehensive income (loss) attributable to Principal Financial Group, Inc.
 
 
 
 
 
 
 
 
$ 455.6 
$ 1,175.5 
$ 598.2 
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
Series B
Balances at Dec. 31, 2010
$ 9,246.8 
$ 4.5 
$ 9,564.0 
$ 3,934.8 
$ 311.5 
$ (4,725.3)
$ 157.2 
$ 0 
$ 0.1 
Increase (decrease) in stockholders' equity
 
 
 
 
 
 
 
 
 
Common stock issued
25.9 
 
25.9 
 
 
 
 
 
 
Stock-based compensation and additional related tax benefits
43.8 
 
46.8 
(3.0)
 
 
 
 
 
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 $13.6 million, $1.9 million and $0.2 million attributable to redeemable noncontrolling interest in 2013, 2012 and 2011, respectively)
674.3 
 
 
638.3 
 
 
36.0 
 
 
Other comprehensive income (loss) (excludes $(4.8) million, $1.1 million attributable to redeemable noncontrolling interest in 2013 and 2012, respectively)
(40.6)
 
 
 
(40.1)
 
(0.5)
 
 
Balances at Dec. 31, 2011
9,306.2 
4.5 
9,634.7 
4,323.4 
271.4 
(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 $13.6 million, $1.9 million and $0.2 million attributable to redeemable noncontrolling interest in 2013, 2012 and 2011, respectively)
823.5 
 
 
806.6 
 
 
16.9 
 
 
Other comprehensive income (loss) (excludes $(4.8) million, $1.1 million attributable to redeemable noncontrolling interest in 2013 and 2012, respectively)
369.0 
 
 
 
368.9 
 
0.1 
 
 
Balances at Dec. 31, 2012
9,703.4 
4.5 
9,730.9 
4,862.0 
640.3 
(5,554.4)
20.0 
0.1 
Increase (decrease) in stockholders' equity
 
 
 
 
 
 
 
 
 
Common stock issued
125.8 
0.1 
125.7 
 
 
 
 
 
 
Stock-based compensation and additional related tax benefits
68.1 
 
72.7 
(4.6)
 
 
 
 
 
Treasury stock acquired, common
(153.6)
 
 
 
 
(153.6)
 
 
 
Dividends to common stockholders
(288.4)
 
 
(288.4)
 
 
 
 
 
Dividends to preferred stockholders
(33.0)
 
 
(33.0)
 
 
 
 
 
Distributions to noncontrolling interest
(2.0)
 
 
 
 
 
(2.0)
 
 
Contributions from noncontrolling interest
115.3 
 
 
 
 
 
115.3 
 
 
Purchase of subsidiary shares from noncontrolling interest
(52.7)
 
1.4 
 
 
 
(54.1)
 
 
Sale of subsidiary shares to noncontrolling interest
31.8 
 
11.5 
 
 
 
20.3 
 
 
Adjustments to redemption amount of redeemable noncontrolling interest
(193.1)
 
(143.3)
(43.3)
 
 
(6.5)
 
 
Net income (loss) (excludes $13.6 million, $1.9 million and $0.2 million attributable to redeemable noncontrolling interest in 2013, 2012 and 2011, respectively)
922.5 
 
 
912.7 
 
 
9.8 
 
 
Other comprehensive income (loss) (excludes $(4.8) million, $1.1 million attributable to redeemable noncontrolling interest in 2013 and 2012, respectively)
(467.1)
 
 
 
(457.1)
 
(10.0)
 
 
Balances at Dec. 31, 2013
$ 9,777.0 
$ 4.6 
$ 9,798.9 
$ 5,405.4 
$ 183.2 
$ (5,708.0)
$ 92.8 
$ 0 
$ 0.1 
Consolidated Statements of Stockholders' Equity (Parenthetical) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Consolidated Statements of Stockholders' Equity
 
 
Net income (loss) attributable to redeemable noncontrolling interest
$ 13.6 
$ 1.9 
Other comprehensive income (loss) attributable to redeemable noncontrolling interest
$ (4.8)
$ 1.1 
Consolidated Statements of Cash Flows (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2011
Operating activities
 
 
 
Net income (loss)
$ 936.1 
$ 825.4 
$ 674.5 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Amortization of deferred acquisition costs
187.1 
94.9 
271.4 
Additions to deferred acquisition costs
(447.0)
(428.9)
(344.4)
Accrued investment income
52.3 
30.8 
50.9 
Net cash flows for trading securities
(76.0)
335.8 
110.8 
Premiums due and other receivables
(131.9)
70.6 
(130.2)
Contractholder and policyholder liabilities and dividends
1,614.7 
2,054.7 
1,017.7 
Current and deferred income taxes (benefits)
211.7 
18.4 
17.8 
Net realized capital (gains) losses
225.2 
(114.1)
122.3 
Depreciation and amortization expense
153.9 
132.1 
119.9 
Mortgage loans held for sale, acquired or originated
 
(48.0)
(132.3)
Mortgage loans held for sale, sold or repaid, net of gain
0.2 
90.0 
82.0 
Real estate acquired through operating activities
(107.2)
(46.4)
(37.4)
Real estate sold through operating activities
24.2 
43.9 
141.8 
Stock-based compensation
68.5 
63.8 
43.4 
Other
(490.6)
(42.2)
705.1 
Net adjustments
1,285.1 
2,255.4 
2,038.8 
Net cash provided by (used in) operating activities
2,221.2 
3,080.8 
2,713.3 
Investing activities
 
 
 
Available-for-sale securities: Purchases
(9,025.2)
(8,263.9)
(6,742.4)
Available-for-sale securities: Sales
1,919.1 
1,303.7 
980.7 
Available-for-sale securities: Maturities
7,359.2 
6,647.5 
5,760.8 
Mortgage loans acquired or originated
(2,192.9)
(2,538.4)
(1,484.9)
Mortgage loans sold or repaid
2,095.1 
1,668.0 
1,793.1 
Real estate acquired
(85.6)
(151.8)
(129.9)
Net (purchases) sales of property and equipment
(59.4)
(38.9)
(56.9)
Purchases of interest in subsidiaries, net of cash acquired
(1,268.3)
(80.4)
(270.5)
Net change in other investments
31.7 
(157.1)
(52.1)
Net cash provided by (used in) investing activities
(1,226.3)
(1,611.3)
(202.1)
Financing activities
 
 
 
Issuance of common stock
125.8 
28.9 
25.9 
Acquisition of treasury stock
(153.6)
(272.7)
(556.4)
Proceeds from financing element derivatives
47.0 
51.8 
75.9 
Payments for financing element derivatives
(48.0)
(49.9)
(46.5)
Excess tax benefits from share-based payment arrangements
10.1 
10.8 
2.0 
Purchase of subsidiary shares from noncontrolling interest
(52.9)
 
 
Sale of subsidiary shares to noncontrolling interest
31.8 
 
 
Dividends to common stockholders
(288.4)
(231.3)
(213.7)
Dividends to preferred stockholders
(33.0)
(33.0)
(33.0)
Issuance of long-term debt
38.2 
1,493.4 
 
Principal repayments of long-term debt
(218.2)
(450.6)
(12.2)
Net proceeds from (repayments of) short-term borrowings
108.0 
(68.8)
3.2 
Investment contract deposits
6,716.3 
6,900.4 
6,302.1 
Investment contract withdrawals
(8,852.7)
(7,522.6)
(7,079.0)
Net increase (decrease) in banking operation deposits
(225.7)
32.0 
(18.5)
Other
(5.0)
(14.6)
(4.5)
Net cash provided by (used in) financing activities
(2,800.3)
(126.2)
(1,554.7)
Net increase (decrease) in cash and cash equivalents
(1,805.4)
1,343.3 
956.5 
Cash and cash equivalents at beginning of period
4,177.2 
2,833.9 
1,877.4 
Cash and cash equivalents at end of period
2,371.8 
4,177.2 
2,833.9 
Supplemental Information:
 
 
 
Cash paid for interest
144.1 
127.7 
154.1 
Cash paid for income taxes
$ 61.2 
$ 82.7 
$ 152.8 
Nature of Operations and Significant Accounting Policies
Nature of Operations and Significant Accounting Policies

1. Nature of Operations and Significant Accounting Policies

Description of Business

        Principal Financial Group, Inc. ("PFG"), along with its consolidated subsidiaries, is a diversified financial services organization offering retirement services, insurance solutions and asset management in the U.S. and selected international markets.

Basis of Presentation

        The accompanying consolidated financial statements include the accounts of PFG and all other entities in which we directly or indirectly have a controlling financial interest as well as those variable interest entities ("VIEs") in which we are the primary beneficiary. Entities in which we have significant management influence over the operating and financing decisions but are not required to consolidate, other than investments accounted for at fair value under the fair value option, are reported using the equity method. The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles ("U.S. GAAP"). All significant intercompany accounts and transactions have been eliminated.

        Reclassifications have been made to prior period financial statements to conform to the December 31, 2013, presentation.

Revisions of Previously Issued Financial Statements

        In conjunction with our first quarter 2013 acquisition of AFP Cuprum S.A. ("Cuprum") in Chile, we re-evaluated the accounting treatment for similar products offered in other foreign jurisdictions, including the AFORE retirement accumulation business in Mexico. As a result of this re-evaluation, we have concluded that the AFORE product, which was previously accounted for under Accounting Standards Codification 944, Financial Services — Insurance, should be accounted for as a long-term service contract, consistent with the accounting requirements for our recently acquired retirement accumulation business in Chile. The revision to the accounting treatment for the AFORE product in Mexico resulted in the following changes:

  • (a)
    Fewer acquisition costs are capitalized. Specifically, we expense as incurred salary and related costs associated with the successful efforts of our proprietary sales force and sales support staff. All direct and incremental costs such as commissions will continue to be deferred.

    (b)
    Deferred costs are amortized on a straight line basis over the expected contract life rather than based on estimated gross profits. The amortization method change also impacts purchased customer intangible assets.

        We have revised our prior period consolidated financial statements accordingly. These revisions, inclusive of any other potential adjustments, are not material in any prior period based on an analysis of quantitative and qualitative factors in accordance with SEC Staff Accounting Bulletins 99 and 108, and, as a result, amendment of previously filed periodic reports is not required.

        The following tables quantify the prior period impact of this revision.

Principal Financial Group, Inc.
Consolidated Statements of Financial Position

 
  December 31, 2012  
 
  As originally
reported
  As adjusted  
 
  (in millions)
 

Assets

             

Fixed maturities, available-for-sale

  $ 50,939.3   $ 50,939.3  

Fixed maturities, trading

    626.7     626.7  

Equity securities, available-for-sale

    136.5     136.5  

Equity securities, trading

    252.8     252.8  

Mortgage loans

    11,519.7     11,519.7  

Real estate

    1,180.3     1,180.3  

Policy loans

    864.9     864.9  

Other investments

    3,291.1     3,291.1  
           

Total investments

    68,811.3     68,811.3  

Cash and cash equivalents

    4,177.2     4,177.2  

Accrued investment income

    584.4     584.4  

Premiums due and other receivables

    1,084.4     1,084.4  

Deferred acquisition costs

    2,673.8     2,590.0  

Property and equipment

    464.2     464.2  

Goodwill

    543.4     543.4  

Other intangibles

    927.2     914.7  

Separate account assets

    81,653.8     81,653.8  

Other assets

    1,006.8     1,006.8  
           

Total assets

  $ 161,926.5   $ 161,830.2  
           
           

Liabilities

             

Contractholder funds

  $ 37,786.5   $ 37,786.5  

Future policy benefits and claims

    22,436.2     22,436.2  

Other policyholder funds

    716.4     716.4  

Short-term debt

    40.8     40.8  

Long-term debt

    2,671.3     2,671.3  

Income taxes currently payable

    15.3     15.3  

Deferred income taxes

    626.5     600.0  

Separate account liabilities

    81,653.8     81,653.8  

Other liabilities

    6,146.1     6,146.1  
           

Total liabilities

    152,092.9     152,066.4  

Redeemable noncontrolling interest

   
60.4
   
60.4
 

Stockholders' equity

   
 
   
 
 

Series A preferred stock, par value

         

Series B preferred stock, par value

    0.1     0.1  

Common stock, par value

    4.5     4.5  

Additional paid-in capital

    9,730.9     9,730.9  

Retained earnings

    4,940.2     4,862.0  

Accumulated other comprehensive income

    631.9     640.3  

Treasury stock, at cost

    (5,554.4 )   (5,554.4 )
           

Total stockholders' equity attributable to Principal Financial Group, Inc. 

    9,753.2     9,683.4  

Noncontrolling interest

    20.0     20.0  
           

Total stockholders' equity

    9,773.2     9,703.4  
           

Total liabilities and stockholders' equity

  $ 161,926.5   $ 161,830.2  
           
           

Principal Financial Group, Inc.
Consolidated Statements of Operations

 
  For the year ended
December 31, 2012
  For the year ended
December 31, 2011
 
 
  As originally
reported
  As adjusted   As originally
reported
  As adjusted  
 
  (in millions, except per share data)
 

Revenues

                         

Premiums and other considerations

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

Fees and other revenues

    2,626.7     2,626.7     2,526.7     2,526.7  

Net investment income

    3,254.9     3,254.9     3,375.3     3,375.3  

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

    232.7     232.7     75.0     75.0  

Total other-than-temporary impairment losses on available-for- sale securities

    (135.9 )   (135.9 )   (147.6 )   (147.6 )

Other-than-temporary impairment losses on fixed maturities, available-for-sale reclassified to (from) other comprehensive income

    17.3     17.3     (49.7 )   (49.7 )
                   

Net impairment losses on available-for-sale securities

    (118.6 )   (118.6 )   (197.3 )   (197.3 )
                   

Net realized capital gains (losses)

    114.1     114.1     (122.3 )   (122.3 )
                   

Total revenues

    9,215.1     9,215.1     8,670.7     8,670.7  

Expenses

                         

Benefits, claims and settlement expenses

    5,123.9     5,123.9     4,616.6     4,616.6  

Dividends to policyholders

    197.7     197.7     210.2     210.2  

Operating expenses

    2,934.1     2,933.5     2,950.8     2,971.1  
                   

Total expenses

    8,255.7     8,255.1     7,777.6     7,797.9  
                   

Income before income taxes

    959.4     960.0     893.1     872.8  

Income taxes

    134.7     134.6     204.2     198.3  
                   

Net income

    824.7     825.4     688.9     674.5  

Net income attributable to noncontrolling interest

    18.8     18.8     36.2     36.2  
                   

Net income attributable to Principal Financial Group, Inc. 

    805.9     806.6     652.7     638.3  

Preferred stock dividends

    33.0     33.0     33.0     33.0  
                   

Net income available to common stockholders

  $ 772.9   $ 773.6   $ 619.7   $ 605.3  
                   
                   

Earnings per common share

                         

Basic earnings per common share

  $ 2.60   $ 2.60   $ 1.97   $ 1.92  
                   
                   

Diluted earnings per common share

  $ 2.57   $ 2.58   $ 1.95   $ 1.91  
                   
                   

Principal Financial Group, Inc.
Consolidated Statements of Operations

 
  For the three months
ended
March 31, 2012
  For the three months
ended
June 30, 2012
  For the three months
ended
September 30, 2012
  For the three months
ended
December 31, 2012
 
 
  As originally
reported
  As adjusted   As originally
reported
  As adjusted   As originally
reported
  As adjusted   As originally
reported
  As adjusted  
 
  (in millions, except per share data)
 

Revenues

                                                 

Premiums and other considerations

  $ 679.8   $ 679.8   $ 681.3   $ 681.3   $ 1,158.2   $ 1,158.2   $ 700.1   $ 700.1  

Fees and other revenues

    598.0     598.0     636.1     636.1     675.0     675.0     717.6     717.6  

Net investment income

    824.8     824.8     801.0     801.0     783.8     783.8     845.3     845.3  

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

    22.1     22.1     32.2     32.2     122.1     122.1     56.3     56.3  

Total other-than-temporary impairment losses on available-for-sale securities

    (33.7 )   (33.7 )   (49.1 )   (49.1 )   (43.6 )   (43.6 )   (9.5 )   (9.5 )

Other-than-temporary impairment losses on fixed maturities, available-for- sale reclassified to (from) other comprehensive income

    4.9     4.9     17.1     17.1     9.2     9.2     (13.9 )   (13.9 )
                                   

Net impairment losses on available-for-sale securities

    (28.8 )   (28.8 )   (32.0 )   (32.0 )   (34.4 )   (34.4 )   (23.4 )   (23.4 )
                                   

Net realized capital gains (losses)

    (6.7 )   (6.7 )   0.2     0.2     87.7     87.7     32.9     32.9  
                                   

Total revenues

    2,095.9     2,095.9     2,118.6     2,118.6     2,704.7     2,704.7     2,295.9     2,295.9  

Expenses

                                                 

Benefits, claims and settlement expenses

    1,212.5     1,212.5     1,110.0     1,110.0     1,647.0     1,647.0     1,154.4     1,154.4  

Dividends to policyholders

    50.3     50.3     49.5     49.5     49.7     49.7     48.2     48.2  

Operating expenses

    556.0     555.1     724.1     729.6     826.6     816.4     827.4     832.4  
                                   

Total expenses

    1,818.8     1,817.9     1,883.6     1,889.1     2,523.3     2,513.1     2,030.0     2,035.0  
                                   

Income before income taxes

    277.1     278.0     235.0     229.5     181.4     191.6     265.9     260.9  

Income taxes (benefits)

    58.2     56.7     50.9     50.9     (9.9 )   (7.2 )   35.5     34.2  
                                   

Net income

    218.9     221.3     184.1     178.6     191.3     198.8     230.4     226.7  

Net income attributable to noncontrolling interest

    9.2     9.2     2.7     2.7     3.4     3.4     3.5     3.5  
                                   

Net income attributable to Principal Financial Group, Inc. 

    209.7     212.1     181.4     175.9     187.9     195.4     226.9     223.2  

Preferred stock dividends

    8.2     8.2     8.3     8.3     8.2     8.2     8.3     8.3  
                                   

Net income available to common stockholders

  $ 201.5   $ 203.9   $ 173.1   $ 167.6   $ 179.7   $ 187.2   $ 218.6   $ 214.9  
                                   
                                   

Earnings per common share

                                                 

Basic earnings per common share

  $ 0.67   $ 0.68   $ 0.58   $ 0.56   $ 0.61   $ 0.64   $ 0.74   $ 0.72  
                                   
                                   

Diluted earnings per common share

  $ 0.66   $ 0.68   $ 0.58   $ 0.56   $ 0.60   $ 0.63   $ 0.74   $ 0.72  
                                   
                                   

Principal Financial Group, Inc.
Consolidated Statements of Comprehensive Income

 
  For the year ended
December 31, 2012
  For the year ended
December 31, 2011
 
 
  As originally
reported
  As adjusted   As originally
reported
  As adjusted  
 
  (in millions)
 

Net income

  $ 824.7   $ 825.4   $ 688.9   $ 674.5  

Other comprehensive income (loss), net:

                         

Net unrealized gains on available-for-sale securities

    557.6     557.6     208.6     208.6  

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

    (6.7 )   (6.7 )   31.0     31.0  

Net unrealized gains (losses) on derivative instruments            

    (43.6 )   (43.6 )   23.6     23.6  

Foreign currency translation adjustment

    (4.8 )   (9.8 )   (139.5 )   (130.9 )

Net unrecognized postretirement benefit obligation

    (127.4 )   (127.4 )   (172.9 )   (172.9 )
                   

Other comprehensive income (loss)

    375.1     370.1     (49.2 )   (40.6 )
                   

Comprehensive income

    1,199.8     1,195.5     639.7     633.9  

Comprehensive income attributable to noncontrolling interest

    20.0     20.0     35.7     35.7  
                   

Comprehensive income attributable to Principal Financial Group, Inc. 

  $ 1,179.8   $ 1,175.5   $ 604.0   $ 598.2  
                   
                   

        Certain of the prior period line items in the consolidated statements of cash flows and stockholders' equity were immaterially affected by the revisions of previously issued financial statements. 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 have largely been addressed through the preceding disclosures.

Recent Accounting Pronouncements

        In January 2014, the Financial Accounting Standards Board ("FASB") issued authoritative guidance to reduce diversity in practice by clarifying when an in substance repossession or foreclosure occurs. This guidance will be effective for us beginning January 1, 2015, and is not expected to have a material impact on our consolidated financial statements.

        Also, in January 2014, the FASB issued authoritative guidance on accounting for investments by a reporting entity in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low-income housing tax credit. This guidance will be effective for us beginning January 1, 2015, and is not expected to have a material impact on our consolidated financial statements.

        In July 2013, the FASB issued authoritative guidance that requires the liability related to certain unrecognized benefits to be offset against a deferred tax asset from operating loss carryforwards. This guidance will be effective for us beginning January 1, 2014, and is not expected to have a material impact on our consolidated financial statements.

        In June 2013, the FASB issued authoritative guidance that formalizes the definition of an investment company. This guidance will be effective for us beginning January 1, 2014, and is not expected to have a material impact on our consolidated financial statements.

        In March 2013, the FASB issued authoritative guidance that clarifies how the cumulative translation adjustment ("CTA") related to a parent's investment in a foreign entity should be released when certain transactions related to the foreign entity occur. This guidance will be effective prospectively for us beginning January 1, 2014, and is not expected to have a material impact on our consolidated financial statements.

        In February 2013, the FASB issued authoritative guidance that requires entities to disclose additional information about items reclassified out of accumulated other comprehensive income ("AOCI"). Entities are required to disclose information regarding changes in AOCI balances by component and significant items reclassified out of AOCI by component either on the face of the income statement or as a separate footnote to the financial statements. This guidance was effective for us beginning January 1, 2013, and did not have a material impact on our consolidated financial statements. This guidance did not impact the requirements for reporting of comprehensive income under FASB guidance issued in June 2011, which changed the presentation of comprehensive income in the financial statements. The guidance eliminated the presentation options contained in previous guidance and instead required entities to report components of comprehensive income in either a continuous statement of comprehensive income or two separate but consecutive statements that show the components of net income and other comprehensive income ("OCI"), including adjustments for items that are reclassified from OCI to net income. The guidance did not change the items that must be reported in OCI or when an item of OCI must be reclassified to net income. 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, Stockholders' Equity, for further details.

        In January 2013 and December 2011, the FASB issued authoritative guidance related to balance sheet offsetting. The 2011 guidance requires disclosures about assets and liabilities that are offset or have the potential to be offset. These disclosures are intended to address differences in the asset and liability offsetting requirements under U.S. GAAP and International Financial Reporting Standards. The 2013 guidance clarified that the disclosure requirements would apply to derivative instruments, including bifurcated embedded derivatives, repurchase and reverse repurchase agreements and securities borrowing and securities lending arrangements that are either offset on the balance sheet or subject to an enforceable master netting arrangement or similar agreement. Both pieces of guidance were effective for us beginning January 1, 2013, with retrospective application required and did not have a material impact on our consolidated financial statements. See Note 5, Investments, for further details.

        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 was effective for our 2013 indefinite-lived intangible asset impairment testing and did not have a material impact on our consolidated financial statements.

        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 was effective for us on January 1, 2013, and did not 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 OCI, including adjustments for items that are reclassified from OCI to net income. The guidance does not change the items that must be reported in OCI or when an item of OCI must be reclassified to net income. 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 14, 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 15, 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 5, Investments, for further details.

        In October 2010, the 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.

        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 5, 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 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 15, Fair Value Measurements, for further details.

Use of Estimates in the Preparation of Financial Statements

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

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

    investment impairments and valuation allowances;

    the fair value of and accounting for derivatives;

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

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

    the liability for future policy benefits and claims;

    the value of our pension and other postretirement benefit obligations and

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

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

Closed Block

        Principal Life Insurance Company ("Principal Life") operates a closed block ("Closed Block") for the benefit of individual participating dividend-paying policies in force at the time of the 1998 mutual insurance holding company ("MIHC") formation. See Note 7, Closed Block, for further details.

Cash and Cash Equivalents

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

Investments

        Fixed maturities include bonds, asset-backed securities, redeemable preferred stock and certain nonredeemable preferred securities. Equity securities include mutual funds, common stock and nonredeemable preferred stock. We classify fixed maturities and equity securities as either available-for-sale or trading at the time of the purchase and, accordingly, carry them at fair value. See Note 15, 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 DAC, 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 certain equity securities, trading that represent mandatory required investments and 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 $182.3 million and $87.0 million as of December 31, 2013 and 2012, 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, mark-to-market adjustments on certain equity securities, trading that represent mandatory required investments 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 options, swaptions, currency swaps, currency forwards, currency options, equity options, futures, credit default swaps and total return swaps. Derivatives may be exchange traded, cleared through centralized clearinghouses, or contracted in the over-the-counter market without being cleared. Derivative positions are either assets or liabilities in the consolidated statements of financial position and are measured at fair value, generally by obtaining quoted market prices or through the use of pricing models. See Note 15, Fair Value Measurements, for policies related to the determination of fair value. Fair values can be affected by changes in interest rates, foreign exchange rates, financial indices, values of securities, credit spreads, and market volatility and liquidity.

        Accounting and Financial Statement Presentation.    We designate derivatives as either:

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

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

    (c)
    a hedge of a net investment in a foreign operation or

    (d)
    a derivative not designated as a hedging instrument.

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

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

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

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

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

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

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

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

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

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

Contractholder and Policyholder Liabilities

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

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

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

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

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

        Participating business represented approximately 12%, 13% and 15% of our life insurance in force and 43%, 47% and 50% of the number of life insurance policies in force at December 31, 2013, 2012 and 2011, respectively. Participating business represented approximately 40%, 43% and 47% of life insurance premiums for the years ended December 31, 2013, 2012 and 2011, 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 disability and health claims is an estimate of the ultimate net cost of reported and unreported losses not yet settled. This liability is estimated using actuarial analyses and case basis evaluations. Although considerable variability is inherent in such estimates, we believe that the liability for unpaid claims is adequate. These estimates are continually reviewed and, as adjustments to this liability become necessary, such adjustments are reflected in net income.

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

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

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

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

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

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

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

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

Deferred Acquisition Costs

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

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

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

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

Deferred Acquisition Costs on Internal Replacements

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

Long-Term Debt

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

Reinsurance

        We enter into reinsurance agreements with other companies in the normal course of business. 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, 2013 and 2012, our largest exposures to a single third-party reinsurer was in our life insurance business, which totaled $35.9 billion and $29.7 billion of life insurance in force, representing 17% and 18% of total net life insurance in force, respectively. The reinsurance recoverable relating to paid and unpaid claims associated to this single third party reinsurer recorded in our consolidated statements of financial position was $31.3 million and $26.1 million at December 31, 2013 and 2012, respectively.

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

 
  For the year ended
December 31,
 
 
  2013   2012   2011  
 
  (in millions)
 

Premiums and other considerations:

                   

Direct

  $ 3,524.8   $ 3,554.1   $ 3,205.6  

Assumed

    2.5     2.6     3.0  

Ceded

    (373.2 )   (337.3 )   (317.6 )
               

Net premiums and other considerations

  $ 3,154.1   $ 3,219.4   $ 2,891.0  
               
               

Benefits, claims and settlement expenses:

                   

Direct

  $ 4,933.3   $ 5,268.6   $ 4,926.5  

Assumed

    32.2     33.9     34.0  

Ceded

    (281.9 )   (178.6 )   (343.9 )
               

Net benefits, claims and settlement expenses

  $ 4,683.6   $ 5,123.9   $ 4,616.6  
               
               

Separate Accounts

        The separate accounts are legally segregated and are not subject to the claims that arise out of any of our other business. The client, rather than us, directs the investments and bears the investment risk of these funds. The separate account assets represent the fair value of funds that are separately administered by us for contracts with equity, real estate and fixed income investments and are presented as a summary total within the consolidated statements of financial position. An equivalent amount is reported as separate account liabilities, which represent the obligation to return the monies to the client. We receive fees for mortality, withdrawal and expense risks, as well as administrative, maintenance and investment advisory services that are included in the consolidated statement of operations. Net deposits, net investment income and realized and unrealized capital gains and losses of the separate accounts are not reflected in the consolidated statements of operations. Separate account assets and separate account liabilities include certain retirement accumulation products where the segregated funds and associated obligation to the client are consolidated within our financial statements. We have determined that summary totals are the most meaningful presentation for these funds.

        At December 31, 2013 and December 31, 2012, the separate accounts include a separate account valued at $223.1 million and $148.3 million, respectively, which primarily includes shares of our stock that were allocated and issued to eligible participants of qualified employee benefit plans administered by us as part of the policy credits issued under our 2001 demutualization. These shares are included in both basic and diluted earnings per share calculations. In the consolidated statements of financial position, the separate account shares are recorded at fair value and are reported as separate account assets with a corresponding separate account liability to eligible participants of the qualified plan. Changes in fair value of the separate account shares are reflected in both the separate account assets and separate account liabilities and do not impact our results of operations.

Income Taxes

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

Foreign Exchange

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

Goodwill and Other Intangibles

        Goodwill and other intangible assets include the cost of acquired subsidiaries in excess of the fair value of the net tangible assets recorded in connection with acquisitions. Goodwill and indefinite-lived intangible assets are not amortized. Rather, they are tested for impairment during the third quarter each year, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Goodwill is tested at the reporting unit level 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.

Acquisition
Acquisition

2. Acquisition

        On February 4, 2013, we completed the purchase of Cuprum, a premier pension manager in Chile that will grow our ability to offer customers in Chile unmatched pension savings and retirement solutions. Our acquisition agreement required Empresas Penta S.A. and Inversiones Banpenta Limitada to sell their 63% ownership in Cuprum pursuant to a public tender offer that also included the remaining 37% of publicly traded shares. As a result of the public tender offer, we initially acquired a 91.55% ownership stake in Cuprum for a purchase price of $1.3 billion. Cuprum is consolidated within the Principal International segment.

        A summary of the fair values of the net assets acquired as of February 4, 2013, based upon current valuation estimates, is as follows (in millions):

Assets

       

Equity securities, available-for-sale

  $ 3.2  

Equity securities, trading

    340.5  

Real estate

    1.9  

Other investments

    24.2  

Cash and cash equivalents

    3.5  

Premiums due and other receivables

    1.4  

Property and equipment

    19.6  

Goodwill

    631.8  

Other intangibles

    671.3  

Separate account assets

    33,919.4  

Other assets

    27.3  
       

Total assets

    35,644.1  

Liabilities

       

Short-term debt

    5.0  

Long-term debt

    114.6  

Separate account liabilities

    33,919.4  

Other liabilities

    228.0  
       

Total liabilities

    34,267.0  

Noncontrolling interest

    113.6  
       

Net assets acquired

  $ 1,263.5  
       
       

        Of the acquired intangible assets, $631.8 million was assigned to goodwill and is not subject to amortization. The goodwill is largely related to future sales anticipated from our internal workforce and entity-specific revenue synergies that will be generated by combining Cuprum with our existing businesses.

        Of the remaining acquired intangible assets, $185.2 million was assigned to trade name, which is not subject to amortization, and $486.1 million was assigned to customer relationships, which is subject to amortization over a 15-year useful life.

        See Note 4, Variable Interest Entities, for further information on Cuprum's separate account assets and liabilities.

        The following (unaudited) pro forma consolidated results of operations have been prepared to show the impact of the acquisition of Cuprum as if the acquisition had occurred January 1, 2013, for the year ended December 31, 2013, as if the acquisition had occurred on January 1, 2012, for the year ended December 31, 2012 and as if the acquisition had occurred on January 1, 2011, for the year ended December 31, 2011. This supplemental pro forma information has been prepared for comparative purposes and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisition been consummated as of that time, nor is it intended to be a projection of future results.

 
  For the year ended
December 31,
 
 
  2013   2012   2011  
 
  (in millions,
except per share data)

 

Total revenues

  $ 9,339.4   $ 9,424.4   $ 8,840.3  

Net income

    956.6     939.3     753.2  

Basic earnings per common share

    3.25     3.16     2.39  

Diluted earnings per common share

    3.21     3.13     2.37  

        The (unaudited) total revenues and net income of Cuprum included in the consolidated statement of operations from the acquisition date to the period ended December 31, 2013, were as follows:

 
  For the year ended,
December 31, 2013
 

Total revenues

  $ 186.4  

Net income

    87.0  
Goodwill and Other Intangible Assets
Goodwill and Other Intangible Assets

3. 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, 2012

  $ 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  

Goodwill from acquisitions

            631.8     2.6         634.4  

Goodwill disposed

                (1.4 )       (1.4 )

Foreign currency

        1.2     (81.3 )           (80.1 )

Other

    4.0                     4.0  
                           

Balance at December 31, 2013

  $ 72.6   $ 241.1   $ 730.0   $ 56.6   $   $ 1,100.3  
                           
                           

Finite Lived Intangible Assets

        Amortized intangible assets that continue to be subject to amortization over a weighted average remaining expected life of 14 years were as follows:

 
  December 31,  
 
  2013   2012  
 
  Gross
carrying
value
  Accumulated
amortization
  Net
carrying
value
  Gross
carrying
value
  Accumulated
amortization
  Net
carrying
value
 
 
  (in millions)
 

Present value of future profits

  $ 13.5   $ 6.7   $ 6.8   $ 13.5   $ 6.1   $ 7.4  

Other finite lived intangible assets

    858.8     262.9     595.9     436.1     224.1     212.0  
                           

Total amortized intangible assets

  $ 872.3   $ 269.6   $ 602.7   $ 449.6   $ 230.2   $ 219.4  
                           
                           

        During 2013 and 2012, we fully amortized other finite lived intangible assets of $5.2 million and $5.0 million, respectively. We had no fully amortized other finite lived intangible assets in 2011.

        Other Finite Lived Intangible Assets.    The amortization expense for intangible assets with finite useful lives was $48.0 million, $22.7 million and $20.1 million for 2013, 2012 and 2011, respectively. At December 31, 2013, the estimated amortization expense for the next five years is as follows (in millions):

Year ending December 31:

       

2014

  $ 52.3  

2015

    50.9  

2016

    50.1  

2017

    49.2  

2018

    48.0  

Indefinite Lived Intangible Assets

        The net carrying amount of unamortized indefinite lived intangible assets was $856.3 million and $695.3 million as of December 31, 2013 and 2012, respectively. As of both December 31, 2013 and 2012, $608.0 million relates to investment management contracts associated with our acquisition of WM Advisors, Inc. in 2006. In addition, as of December 31, 2013, $185.2 million relates to trade name intangibles associated with our acquisition of Cuprum in 2013.

Variable Interest Entities
Variable Interest Entities

4. 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 Vehicle

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

Commercial Mortgage-Backed Securities

        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.

Mandatory Retirement Savings

        As a result of our first quarter 2013 acquisition of Cuprum, we hold an equity interest in mandatory privatized social security funds in which we provide asset management services. We determined that the mandatory privatized social security funds, which include contributors for voluntary pension savings, voluntary non-pension savings and compensation savings accounts, are VIEs. This is because the equity holders as a group lack the power, due to voting rights or similar rights, to direct the activities of the entity that most significantly impact the entity's economic performance and also because equity investors are protected from below-average market investment returns relative to the industry's return, due to a regulatory guarantee that we provide. Further we concluded that we are the primary beneficiary through our power to make decisions and our variable interest in the funds. The purpose of the funds, which reside in legally segregated entities, is to provide long-term retirement savings. The obligation to the client is directly related to the assets held in the funds and, as such, we present the assets as separate account assets and the obligation as separate account liabilities within our consolidated statements of financial position.

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

 
  Grantor trusts   Collateralized
private investment
vehicle
  CMBS   Mandatory
retirement
savings
  Total  
 
  (in millions)
 

December 31, 2013

                               

Fixed maturities, available-for-sale

  $ 272.0   $   $   $   $ 272.0  

Fixed maturities, trading

        110.4             110.4  

Equity securities, trading

                327.2     327.2  

Other investments

            68.1         68.1  

Accrued investment income

    0.3         0.6         0.9  

Separate account assets

                32,824.7     32,824.7  
                       

Total assets

  $ 272.3   $ 110.4   $ 68.7   $ 33,151.9   $ 33,603.3  
                       
                       

Deferred income taxes

  $ 1.5   $   $   $   $ 1.5  

Separate account liabilities

                32,824.7     32,824.7  

Other liabilities (1)

    217.2     93.8     31.4         342.4  
                       

Total liabilities

  $ 218.7   $ 93.8   $ 31.4   $ 32,824.7   $ 33,168.6  
                       
                       

December 31, 2012

                               

Fixed maturities, available-for-sale

  $ 194.6   $   $   $   $ 194.6  

Fixed maturities, trading

        110.4             110.4  

Equity securities, trading

                     

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  
                       
                       

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

        We did not provide financial or other support to investees designated as VIEs for the years ended December 31, 2013 and 2012.

Unconsolidated Variable Interest Entities

Invested Securities

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

        Unconsolidated VIEs include CMBS, residential mortgage-backed pass-through securities ("RMBS") and other asset-backed securities ("ABS"). All of these entities were deemed VIEs because the equity within these entities is insufficient to sustain them. We determined we are not the primary beneficiary in 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 returns from the partnerships 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, 2013

             

Fixed maturities, available-for-sale:

             

Corporate

  $ 523.4   $ 448.2  

Residential mortgage-backed pass-through securities

    2,845.2     2,799.1  

Commercial mortgage-backed securities

    4,026.4     4,078.0  

Collateralized debt obligations

    363.4     391.9  

Other debt obligations

    4,167.8     4,157.5  

Fixed maturities, trading:

             

Residential mortgage-backed pass-through securities

    47.5     47.5  

Commercial mortgage-backed securities

    1.8     1.8  

Collateralized debt obligations

    59.6     59.6  

Other debt obligations

    1.2     1.2  

Other investments:

             

Other limited partnership interests

    123.5     123.5  

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  

(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, 2013 and December 31, 2012, these VIEs held $1.4 billion and $1.5 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

5. 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, 2013

                               

Fixed maturities, available-for-sale:

                               

U.S. government and agencies

  $ 818.2   $ 12.7   $ 50.4   $ 780.5   $  

Non-U.S. government and agencies

    853.2     148.8     5.2     996.8      

States and political subdivisions

    3,622.8     120.9     85.7     3,658.0      

Corporate

    30,280.6     1,958.8     320.4     31,919.0     17.1  

Residential mortgage-backed pass-through securities

    2,799.1     92.8     46.7     2,845.2      

Commercial mortgage-backed securities

    4,078.0     170.6     222.2     4,026.4     183.4  

Collateralized debt obligations

    391.9     6.0     34.5     363.4     0.7  

Other debt obligations

    4,157.5     51.8     41.5     4,167.8     76.3  
                       

Total fixed maturities, available-for-sale

  $ 47,001.3   $ 2,562.4   $ 806.6   $ 48,757.1   $ 277.5  
                       
                       

Total equity securities, available-for-sale

  $ 113.8   $ 10.0   $ 13.3   $ 110.5        
                         
                         

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  <