~~0001126328us-gaap:FairValueInputsLevel2Memberus-gaap:FairValueMeasurementsRecurringMemberus-gaap:CollateralizedDebtObligationsMember2019-06-30~~0001126328srt:WeightedAverageMemberpfg:SeparateAccountAssetsMemberus-gaap:FairValueInputsLevel3Memberus-gaap:FairValueMeasurementsRecurringMemberpfg:MeasurementInputTerminalCapitalizationRateMemberpfg:DiscountedCashFlowRealEstateMember2019-09-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~June~~September 30, 2019

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

1-16725

(Commission file number)

PRINCIPAL FINANCIAL GROUP, INC.

(Exact name of registrant as specified in its charter)

Delaware		42-1520346
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

711 High Street, Des Moines, Iowa 50392

(Address of principal executive offices)

(515) 247-5111

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock	PFG	Nasdaq Global Select Market

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ◻

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ◻

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer ⌧	Accelerated filer ◻	Non-accelerated filer ◻	Smaller reporting company ☐	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The total number of shares of the registrant’s Common Stock, $0.01 par value, outstanding as of ~~July 24,~~October 23, 2019, was ~~278,796,363.~~277,671,934.

Table of Contents

PRINCIPAL FINANCIAL GROUP, INC.

TABLE OF CONTENTS

		Page
Part I - FINANCIAL INFORMATION

Item 1.	Financial Statements	3

	Consolidated Statements of Financial Position as of ~~June~~September 30, 2019 (Unaudited) and December 31, 2018	3

	Unaudited Consolidated Statements of Operations for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018	4

	Unaudited Consolidated Statements of Comprehensive Income for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018	5

	Unaudited Consolidated Statements of Stockholders’ Equity for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018	6

	Unaudited Consolidated Statements of Cash Flows for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018	8

	Notes to Unaudited Consolidated Financial Statements — ~~June~~September 30, 2019	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	102

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	~~137~~139

Item 4.	Controls and Procedures	~~143~~145

Part II — OTHER INFORMATION

Item 1.	Legal Proceedings	~~144~~146

Item 1A.	Risk Factors	~~144~~146

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	~~146~~148

Item 6.	Exhibits	~~147~~149

Signature		~~148~~150

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Principal Financial Group, Inc.
Consolidated Statements of Financial Position

December 31,

June 30, 2019

2018

(Unaudited)

(in millions)
Assets

Fixed maturities, available-for-sale (2019 and 2018 include $97.9 million and $94.5 million related to consolidated variable interest entities)

$
65,268.1

$
60,108.5
Fixed maturities, trading

686.8

636.1
Equity securities (2019 and 2018 include $831.7 million and $774.8 million related to consolidated variable interest entities)

1,895.2

1,843.7
Mortgage loans

16,136.8

15,336.9
Real estate (2019 and 2018 include $384.8 million and $364.0 million related to consolidated variable interest entities)

1,740.4

1,729.7
Policy loans

800.9

801.4
Other investments (2019 and 2018 include $288.8 million and $457.9 million related to consolidated variable interest entities and $24.5 million and $23.6 million measured at fair value under the fair value option)

4,667.0

4,310.3
Total investments

91,195.2

84,766.6
Cash and cash equivalents

3,315.9

2,977.5
Accrued investment income

663.8

636.2
Premiums due and other receivables

1,549.2

1,413.1
Deferred acquisition costs

3,519.5

3,693.5
Property and equipment

959.5

767.3
Goodwill

1,111.5

1,100.0
Other intangibles

1,300.7

1,315.1
Separate account assets (2019 and 2018 include $40,957.2 million and $37,183.3 million related to consolidated variable interest entities)

162,848.6

144,987.9
Other assets

1,454.1

1,378.9
Total assets

$
267,918.0

$
243,036.1
Liabilities

Contractholder funds (2019 and 2018 include $397.1 million and $396.0 million related to consolidated variable interest entities)

$
39,658.8

$
39,699.7
Future policy benefits and claims

38,479.5

35,664.8
Other policyholder funds

996.2

888.4
Short-term debt

76.8

42.9
Long-term debt (2019 and 2018 include $64.2 million and $58.4 million related to consolidated variable interest entities)

3,762.4

3,259.6
Income taxes currently payable

19.8

25.3
Deferred income taxes

1,687.5

958.4
Separate account liabilities (2019 and 2018 include $40,957.2 million and $37,183.3 million related to consolidated variable interest entities)

162,848.6

144,987.9
Other liabilities (2019 and 2018 include $113.1 million and $104.9 million related to consolidated variable interest entities)

5,981.9

5,661.9
Total liabilities

253,511.5

231,188.9

Redeemable noncontrolling interest (2019 and 2018 include $194.9 million and $325.7 million related to consolidated variable interest entities)

304.5

391.2

Stockholders' equity

Common stock, par value $0.01 per share — 2,500.0 million shares authorized, 478.9 million and 476.7 million shares issued, and 278.6 million and 279.5 million shares outstanding in 2019 and 2018

4.8

4.8
Additional paid-in capital

10,130.7

10,060.7
Retained earnings

10,805.8

10,290.2
Accumulated other comprehensive income (loss)

647.7

(1,565.1)
Treasury stock, at cost (200.3 million and 197.2 million shares in 2019 and 2018)

(7,554.3)

(7,400.6)
Total stockholders' equity attributable to Principal Financial Group, Inc.

14,034.7

11,390.0
Noncontrolling interest

67.3

66.0
Total stockholders' equity

14,102.0

11,456.0
Total liabilities and stockholders' equity

$
267,918.0

$
243,036.1


	September 30,		December 31,
	2019		2018
	(Unaudited)
	(in millions)
Assets
Fixed maturities, available-for-sale (2019 and 2018 include $98.1 million and $94.5 million related to consolidated variable interest entities)	$	68,071.2	$	60,108.5
Fixed maturities, trading		673.0		636.1
Equity securities (2019 and 2018 include $818.6 million and $774.8 million related to consolidated variable interest entities)		1,907.3		1,843.7
Mortgage loans		16,491.6		15,336.9
Real estate (2019 and 2018 include $420.3 million and $364.0 million related to consolidated variable interest entities)		1,736.8		1,729.7
Policy loans		799.1		801.4
Other investments (2019 and 2018 include $281.1 million and $457.9 million related to consolidated variable interest entities and $19.1 million and $23.6 million measured at fair value under the fair value option)		4,733.4		4,310.3
Total investments		94,412.4		84,766.6
Cash and cash equivalents		3,198.0		2,977.5
Accrued investment income		691.1		636.2
Premiums due and other receivables		1,635.7		1,413.1
Deferred acquisition costs		3,424.9		3,693.5
Property and equipment		961.7		767.3
Goodwill		1,690.7		1,100.0
Other intangibles		1,801.7		1,315.1
Separate account assets (2019 and 2018 include $38,706.1 million and $37,183.3 million related to consolidated variable interest entities)		161,046.7		144,987.9
Other assets		1,375.5		1,378.9
Total assets	$	270,238.4	$	243,036.1
Liabilities
Contractholder funds (2019 and 2018 include $394.4 million and $396.0 million related to consolidated variable interest entities)	$	40,300.0	$	39,699.7
Future policy benefits and claims		40,059.4		35,664.8
Other policyholder funds		946.0		888.4
Short-term debt		96.1		42.9
Long-term debt (2019 and 2018 include $64.2 million and $58.4 million related to consolidated variable interest entities)		3,763.9		3,259.6
Income taxes currently payable		21.6		25.3
Deferred income taxes		1,928.1		958.4
Separate account liabilities (2019 and 2018 include $38,706.1 million and $37,183.3 million related to consolidated variable interest entities)		161,046.7		144,987.9
Other liabilities (2019 and 2018 include $113.7 million and $104.9 million related to consolidated variable interest entities)		6,834.5		5,661.9
Total liabilities		254,996.3		231,188.9

Redeemable noncontrolling interest (2019 and 2018 include $198.0 million and $325.7 million related to consolidated variable interest entities)		369.3		391.2

Stockholders' equity
Common stock, par value $0.01 per share — 2,500.0 million shares authorized, 479.1 million and 476.7 million shares issued, and 278.0 million and 279.5 million shares outstanding in 2019 and 2018		4.8		4.8
Additional paid-in capital		10,162.6		10,060.7
Retained earnings		10,927.8		10,290.2
Accumulated other comprehensive income (loss)		1,307.1		(1,565.1)
Treasury stock, at cost (201.1 million and 197.2 million shares in 2019 and 2018)		(7,598.1)		(7,400.6)
Total stockholders' equity attributable to Principal Financial Group, Inc.		14,804.2		11,390.0
Noncontrolling interest		68.6		66.0
Total stockholders' equity		14,872.8		11,456.0
Total liabilities and stockholders' equity	$	270,238.4	$	243,036.1

See accompanying notes.

Table of Contents

Principal Financial Group, Inc.
Consolidated Statements of Operations
(Unaudited)


	For the three months ended				For the six months ended				For the three months ended				For the nine months ended
	June 30,				June 30,				September 30,				September 30,
	2019		2018		2019		2018		2019		2018		2019		2018
	(in millions, except per share data)								(in millions, except per share data)
Revenues
Premiums and other considerations	$	1,932.9	$	1,265.8	$	3,657.8	$	2,261.0	$	2,274.2	$	2,172.4	$	5,932.0	$	4,433.4
Fees and other revenues		1,006.6		1,012.6		1,980.1		2,023.9		1,230.0		1,261.8		3,210.1		3,285.7
Net investment income		1,037.1		889.1		1,998.1		1,791.3		996.6		919.4		2,994.7		2,710.7
Net realized capital gains, excluding impairment losses on available-for-sale securities		13.3		76.4		104.6		61.2
Net realized capital gains (losses), excluding impairment losses on available-for-sale securities										(31.3)		(1.9)		73.3		59.3
Net other-than-temporary impairment losses on available-for-sale securities		(17.0)		(8.2)		(26.6)		(6.9)		(4.7)		(1.4)		(31.3)		(8.3)
Other-than-temporary impairment losses on fixed maturities, available-for-sale reclassified to (from) other comprehensive income		(0.3)		(0.8)		2.5		(12.0)
Other-than-temporary impairment losses on fixed maturities, available-for-sale reclassified from other comprehensive income										(6.4)		(2.2)		(3.9)		(14.2)
Net impairment losses on available-for-sale securities		(17.3)		(9.0)		(24.1)		(18.9)		(11.1)		(3.6)		(35.2)		(22.5)
Net realized capital gains (losses)		(4.0)		67.4		80.5		42.3		(42.4)		(5.5)		38.1		36.8
Total revenues		3,972.6		3,234.9		7,716.5		6,118.5		4,458.4		4,348.1		12,174.9		10,466.6
Expenses
Benefits, claims and settlement expenses		2,446.1		1,699.2		4,641.2		3,110.3		2,840.1		2,642.1		7,481.3		5,752.4
Dividends to policyholders		29.9		30.2		60.0		60.7		30.3		31.9		90.3		92.6
Operating expenses		1,046.3		990.1		2,039.0		1,975.1		1,242.3		1,105.0		3,281.3		3,080.1
Total expenses		3,522.3		2,719.5		6,740.2		5,146.1		4,112.7		3,779.0		10,852.9		8,925.1
Income before income taxes		450.3		515.4		976.3		972.4		345.7		569.1		1,322.0		1,541.5
Income taxes		58.2		55.9		132.1		110.4		61.1		109.1		193.2		219.5
Net income		392.1		459.5		844.2		862.0		284.6		460.0		1,128.8		1,322.0
Net income attributable to noncontrolling interest		5.8		2.9		28.0		8.3		7.5		3.7		35.5		12.0
Net income attributable to Principal Financial Group, Inc.	$	386.3	$	456.6	$	816.2	$	853.7	$	277.1	$	456.3	$	1,093.3	$	1,310.0

Earnings per common share
Basic earnings per common share	$	1.38	$	1.59	$	2.93	$	2.97	$	0.99	$	1.60	$	3.92	$	4.57

Diluted earnings per common share	$	1.37	$	1.58	$	2.90	$	2.93	$	0.98	$	1.59	$	3.89	$	4.52

See accompanying notes.

Table of Contents

Principal Financial Group, Inc.
Consolidated Statements of Comprehensive Income
(Unaudited)


	For the three months ended				For the six months ended				For the three months ended				For the nine months ended
	June 30,				June 30,				September 30,				September 30,
	2019		2018		2019		2018		2019		2018		2019		2018
	(in millions)								(in millions)

Net income	$	392.1	$	459.5	$	844.2	$	862.0	$	284.6	$	460.0	$	1,128.8	$	1,322.0
Other comprehensive income (loss), net:
Net unrealized gains (losses) on available-for-sale securities		984.9		(466.1)		2,089.2		(1,271.6)		787.1		(199.2)		2,876.3		(1,470.8)
Noncredit component of impairment losses on fixed maturities, available-for-sale		(0.3)		0.8		(2.8)		10.1		4.3		2.0		1.5		12.1
Net unrealized gains (losses) on derivative instruments		1.6		20.3		(2.9)		5.9
Net unrealized gains on derivative instruments										12.7		2.7		9.8		8.6
Foreign currency translation adjustment		28.9		(236.1)		66.8		(170.3)		(157.8)		(22.9)		(91.0)		(193.2)
Net unrecognized postretirement benefit obligation		57.2		8.8		68.7		17.5		10.0		8.7		78.7		26.2
Other comprehensive income (loss)		1,072.3		(672.3)		2,219.0		(1,408.4)		656.3		(208.7)		2,875.3		(1,617.1)
Comprehensive income (loss)		1,464.4		(212.8)		3,063.2		(546.4)		940.9		251.3		4,004.1		(295.1)
Comprehensive income (loss) attributable to noncontrolling interest		11.5		(0.8)		34.2		5.5
Comprehensive income (loss) attributable to Principal Financial Group, Inc.	$	1,452.9	$	(212.0)	$	3,029.0	$	(551.9)
Comprehensive income attributable to noncontrolling interest										4.4		3.1		38.6		8.6
Comprehensive income attributable to Principal Financial Group, Inc.									$	936.5	$	248.2	$	3,965.5	$	(303.7)

See accompanying notes.

Table of Contents

Principal Financial Group, Inc.
Consolidated Statements of Stockholders' Equity
(Unaudited)

Accumulated

Additional

other

Total

Common

paid-in

Retained

comprehensive

Treasury

Noncontrolling

stockholders'


stock

capital

earnings

income (loss)

stock

interest

equity

(in millions)
Balances as of April 1, 2018

$
4.7

$
9,981.8

$
9,598.3

$
(469.3)

$
(6,928.6)

$
68.9

$
12,255.8
Common stock issued

0.1

12.0

—

—

—

—

12.1
Stock-based compensation

—

21.2

(2.1)

—

—

0.1

19.2
Treasury stock acquired, common

—

—

—

—

(196.9)

—

(196.9)
Dividends to common stockholders

—

—

(148.5)

—

—

—

(148.5)
Distributions to noncontrolling interest

—

—

—

—

—

(1.5)

(1.5)
Contributions from noncontrolling interest

—

—

—

—

—

1.9

1.9
Purchase of subsidiary shares from noncontrolling interest (1)

—

(21.4)

—

—

—

(1.6)

(23.0)
Adjustments to redemption amount of redeemable noncontrolling interest

—

—

—

—

—

(0.3)

(0.3)
Net income (1)

—

—

456.6

—

—

1.6

458.2
Other comprehensive loss (1)

—

—

—

(668.6)

—

(1.9)

(670.5)
Balances as of June 30, 2018

$
4.8

$
9,993.6

$
9,904.3

$
(1,137.9)

$
(7,125.5)

$
67.2

$
11,706.5

Balances as of April 1, 2019

$
4.8

$
10,090.8

$
10,571.9

$
(418.9)

$
(7,554.2)

$
67.8

$
12,762.2
Common stock issued

—

16.3

—

—

—

—

16.3
Stock-based compensation

—

22.6

(2.0)

—

—

0.1

20.7
Treasury stock acquired, common

—

—

—

—

(0.1)

—

(0.1)
Dividends to common stockholders

—

—

(150.4)

—

—

—

(150.4)
Distributions to noncontrolling interest

—

—

—

—

—

(3.4)

(3.4)
Contributions from noncontrolling interest

—

—

—

—

—

1.0

1.0
Adjustments to redemption amount of redeemable noncontrolling interest

—

1.0

—

—

—

(0.2)

0.8
Net income (1)

—

—

386.3

—

—

1.8

388.1
Other comprehensive income (1)

—

—

—

1,066.6

—

0.2

1,066.8
Balances as of June 30, 2019

$
4.8

$
10,130.7

$
10,805.8

$
647.7

$
(7,554.3)

$
67.3

$
14,102.0


							Accumulated
			Additional				other						Total
	Common		paid-in		Retained		comprehensive		Treasury		Noncontrolling		stockholders'
	stock		capital		earnings		income (loss)		stock		interest		equity
	(in millions)
Balances as of July 1, 2018	$	4.8	$	9,993.6	$	9,904.3	$	(1,137.9)	$	(7,125.5)	$	67.2	$	11,706.5
Common stock issued		—		7.8		—		—		—		—		7.8
Stock-based compensation		—		21.3		(2.0)		—		—		0.1		19.4
Treasury stock acquired, common		—		—		—		—		(65.0)		—		(65.0)
Dividends to common stockholders		—		—		(150.7)		—		—		—		(150.7)
Distributions to noncontrolling interest		—		—		—		—		—		(1.0)		(1.0)
Contributions from noncontrolling interest		—		—		—		—		—		0.2		0.2
Purchase of subsidiary shares from noncontrolling interest (1)		—		1.4		—		(1.6)		—		—		(0.2)
Adjustments to redemption amount of redeemable noncontrolling interest		—		2.1		—		—		—		—		2.1
Net income (1)		—		—		456.3		—		—		1.7		458.0
Other comprehensive loss (1)		—		—		—		(208.1)		—		(0.3)		(208.4)
Balances as of September 30, 2018	$	4.8	$	10,026.2	$	10,207.9	$	(1,347.6)	$	(7,190.5)	$	67.9	$	11,768.7

Balances as of July 1, 2019	$	4.8	$	10,130.7	$	10,805.8	$	647.7	$	(7,554.3)	$	67.3	$	14,102.0
Common stock issued		—		8.8		—		—		—		—		8.8
Stock-based compensation		—		22.7		(2.1)		—		—		—		20.6
Treasury stock acquired, common		—		—		—		—		(43.8)		—		(43.8)
Dividends to common stockholders		—		—		(153.0)		—		—		—		(153.0)
Distributions to noncontrolling interest		—		—		—		—		—		(5.0)		(5.0)
Contributions from noncontrolling interest		—		—		—		—		—		3.1		3.1
Adjustments to redemption amount of redeemable noncontrolling interest		—		0.4		—		—		—		—		0.4
Net income (1)		—		—		277.1		—		—		4.9		282.0
Other comprehensive income (1)		—		—		—		659.4		—		(1.7)		657.7
Balances as of September 30, 2019	$	4.8	$	10,162.6	$	10,927.8	$	1,307.1	$	(7,598.1)	$	68.6	$	14,872.8

(1)	Excludes amounts attributable to redeemable noncontrolling interest. See Note ~~10,~~11, Stockholders’ Equity, for further details.

See accompanying notes.

Table of Contents

Principal Financial Group, Inc.
Consolidated Statements of Stockholders' Equity - continued
(Unaudited)


							Accumulated														Accumulated
			Additional				other						Total				Additional				other						Total
	Common		paid-in		Retained		comprehensive		Treasury		Noncontrolling		stockholders'		Common		paid-in		Retained		comprehensive		Treasury		Noncontrolling		stockholders'
	stock		capital		earnings		income (loss)		stock		interest		equity		stock		capital		earnings		income (loss)		stock		interest		equity
	(in millions)														(in millions)
Balances as of January 1, 2018	$	4.7	$	9,925.2	$	9,482.9	$	165.5	$	(6,729.0)	$	72.6	$	12,921.9	$	4.7	$	9,925.2	$	9,482.9	$	165.5	$	(6,729.0)	$	72.6	$	12,921.9
Common stock issued		0.1		44.5		—		—		—		—		44.6		0.1		52.3		—		—		—		—		52.4
Stock-based compensation		—		44.4		(3.6)		—		—		(0.5)		40.3		—		65.7		(5.6)		—		—		(0.4)		59.7
Treasury stock acquired, common		—		—		—		—		(396.5)		—		(396.5)		—		—		—		—		(461.5)		—		(461.5)
Dividends to common stockholders		—		—		(295.8)		—		—		—		(295.8)		—		—		(446.5)		—		—		—		(446.5)
Distributions to noncontrolling interest		—		—		—		—		—		(9.5)		(9.5)		—		—		—		—		—		(10.5)		(10.5)
Contributions from noncontrolling interest		—		—		—		—		—		2.0		2.0		—		—		—		—		—		2.2		2.2
Purchase of subsidiary shares from noncontrolling interest (1)		—		(21.4)		—		—		—		(1.6)		(23.0)		—		(20.0)		—		(1.6)		—		(1.6)		(23.2)
Adjustments to redemption amount of redeemable noncontrolling interest		—		0.9		—		—		—		(0.3)		0.6		—		3.0		—		—		—		(0.3)		2.7
Effects of implementation of accounting change related to equity investments, net		—		—		1.0		(1.0)		—		—		—		—		—		1.0		(1.0)		—		—		—
Effects of implementation of accounting change related to revenue recognition, net		—		—		(65.0)		25.6		—		(0.3)		(39.7)		—		—		(65.0)		25.6		—		(0.3)		(39.7)
Effects of implementation of accounting change related to intra-entity asset transfer taxes, net		—		—		8.7		—		—		—		8.7		—		—		8.7		—		—		—		8.7
Effects of implementation of accounting change related to the reclassification of certain tax effects, net		—		—		(77.6)		77.6		—		—		—		—		—		(77.6)		77.6		—		—		—
Net income (1)		—		—		853.7		—		—		6.2		859.9		—		—		1,310.0		—		—		7.9		1,317.9
Other comprehensive loss (1)		—		—		—		(1,405.6)		—		(1.4)		(1,407.0)		—		—		—		(1,613.7)		—		(1.7)		(1,615.4)
Balances as of June 30, 2018	$	4.8	$	9,993.6	$	9,904.3	$	(1,137.9)	$	(7,125.5)	$	67.2	$	11,706.5
Balances as of September 30, 2018															$	4.8	$	10,026.2	$	10,207.9	$	(1,347.6)	$	(7,190.5)	$	67.9	$	11,768.7

Balances as of January 1, 2019	$	4.8	$	10,060.7	$	10,290.2	$	(1,565.1)	$	(7,400.6)	$	66.0	$	11,456.0	$	4.8	$	10,060.7	$	10,290.2	$	(1,565.1)	$	(7,400.6)	$	66.0	$	11,456.0
Common stock issued		—		22.1		—		—		—		—		22.1		—		30.9		—		—		—		—		30.9
Stock-based compensation		—		49.4		(4.0)		—		—		0.1		45.5		—		72.1		(6.1)		—		—		0.1		66.1
Treasury stock acquired, common		—		—		—		—		(153.7)		—		(153.7)		—		—		—		—		(197.5)		—		(197.5)
Dividends to common stockholders		—		—		(300.6)		—		—		—		(300.6)		—		—		(453.6)		—		—		—		(453.6)
Distributions to noncontrolling interest		—		—		—		—		—		(4.7)		(4.7)		—		—		—		—		—		(9.7)		(9.7)
Contributions from noncontrolling interest		—		—		—		—		—		1.8		1.8		—		—		—		—		—		4.9		4.9
Adjustments to redemption amount of redeemable noncontrolling interest		—		(1.5)		—		—		—		(0.2)		(1.7)		—		(1.1)		—		—		—		(0.2)		(1.3)
Effects of implementation of accounting change related to leases, net		—		—		4.0		—		—		—		4.0		—		—		4.0		—		—		—		4.0
Net income (1)		—		—		816.2		—		—		3.7		819.9		—		—		1,093.3		—		—		8.6		1,101.9
Other comprehensive income (1)		—		—		—		2,212.8		—		0.6		2,213.4		—		—		—		2,872.2		—		(1.1)		2,871.1
Balances as of June 30, 2019	$	4.8	$	10,130.7	$	10,805.8	$	647.7	$	(7,554.3)	$	67.3	$	14,102.0
Balances as of September 30, 2019															$	4.8	$	10,162.6	$	10,927.8	$	1,307.1	$	(7,598.1)	$	68.6	$	14,872.8

(1)	Excludes amounts attributable to redeemable noncontrolling interest. See Note ~~10,~~11, Stockholders’ Equity, for further details.

See accompanying notes.

Table of Contents

Principal Financial Group, Inc.
Consolidated Statements of Cash Flows
(Unaudited)


	For the six months ended				For the nine months ended
	June 30,				September 30,
	2019		2018		2019		2018
	(in millions)				(in millions)
Operating activities
Net income	$	844.2	$	862.0	$	1,128.8	$	1,322.0
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized capital gains		(80.5)		(42.3)		(38.1)		(36.8)
Depreciation and amortization expense		104.2		101.2		163.8		151.9
Amortization of deferred acquisition costs and contract costs		141.2		138.0		309.8		160.1
Additions to deferred acquisition costs and contract costs		(216.2)		(225.3)		(362.8)		(331.1)
Stock-based compensation		45.8		40.8		66.7		60.3
Income from equity method investments, net of dividends received		(42.5)		(66.8)		(85.6)		(54.6)
Changes in:
Accrued investment income		(27.6)		(17.2)		(54.9)		(49.8)
Net cash flows for trading securities and equity securities with operating intent		(44.7)		(170.6)		(54.1)		(137.9)
Premiums due and other receivables		(70.8)		26.3		(123.3)		(33.7)
Contractholder and policyholder liabilities and dividends		2,003.0		920.5		2,890.5		2,458.9
Current and deferred income taxes		110.6		131.3		202.8		182.3
Real estate acquired through operating activities		(12.8)		(57.6)		(31.7)		(79.5)
Real estate sold through operating activities		3.3		48.6		40.3		133.6
Other assets and liabilities		(67.7)		(26.8)		445.8		13.1
Other		(11.1)		(23.9)		(33.2)		(44.9)
Net adjustments		1,834.2		776.2		3,336.0		2,391.9
Net cash provided by operating activities		2,678.4		1,638.2		4,464.8		3,713.9
Investing activities
Fixed maturities available-for-sale and equity securities with intent to hold:
Purchases		(5,771.8)		(7,364.4)		(8,696.3)		(10,992.3)
Sales		1,477.2		2,122.0		1,816.1		2,900.4
Maturities		3,025.9		3,292.1		4,729.7		4,703.5
Mortgage loans acquired or originated		(2,008.5)		(1,326.2)		(2,872.5)		(2,347.4)
Mortgage loans sold or repaid		1,243.9		1,094.0		1,720.9		1,567.6
Real estate acquired		(48.5)		(36.4)		(89.2)		(53.7)
Real estate sold		57.0		63.5		96.3		63.5
Net purchases of property and equipment		(65.4)		(43.6)		(98.1)		(73.4)
Purchase of interests in subsidiaries, net of cash acquired		—		(141.5)
Purchase of business or interests in subsidiaries, net of cash acquired						(1,209.6)		(184.7)
Net change in other investments		(253.8)		(1.0)		(323.5)		7.8
Net cash used in investing activities		(2,344.0)		(2,341.5)		(4,926.2)		(4,408.7)
Financing activities
Issuance of common stock		22.1		44.6		30.9		52.4
Acquisition of treasury stock		(153.7)		(396.5)		(197.5)		(461.5)
Payments for financing element derivatives		(13.1)		(37.9)		(19.7)		(53.7)
Purchase of subsidiary shares from noncontrolling interest		—		(23.0)		(1.1)		(30.3)
Dividends to common stockholders		(300.6)		(295.8)		(453.6)		(446.5)
Issuance of long-term debt		502.7		41.3		504.0		66.8
Principal repayments of long-term debt		(0.7)		(0.7)		(1.0)		(1.0)
Net proceeds from short-term borrowings		33.1		27.6
Net proceeds from (repayments of) short-term borrowings						58.6		(0.8)
Investment contract deposits		3,627.4		4,196.9		6,202.5		6,228.5
Investment contract withdrawals		(3,800.8)		(3,110.0)		(5,942.3)		(4,361.6)
Net increase in banking operation deposits		82.0		126.0		495.6		159.5
Other		5.6		2.0		5.5		(1.1)
Net cash provided by financing activities		4.0		574.5		681.9		1,150.7
Net increase (decrease) in cash and cash equivalents		338.4		(128.8)
Net increase in cash and cash equivalents						220.5		455.9
Cash and cash equivalents at beginning of period		2,977.5		2,470.8		2,977.5		2,470.8
Cash and cash equivalents at end of period	$	3,315.9	$	2,342.0	$	3,198.0	$	2,926.7

Supplemental disclosure of non-cash activities:
Lease assets established upon adoption of accounting guidance	$	168.8	$	—	$	168.8	$	—
Lease liabilities established upon adoption of accounting guidance	$	164.0	$	—	$	164.0	$	—
Assets received in kind from pension risk transfer transaction	$	139.0	$	—	$	806.8	$	—

See accompanying notes.

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements
~~June~~September 30, 2019
(Unaudited)

1. Nature of Operations and Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements of Principal Financial Group, Inc. (“PFG”) have been prepared in conformity with accounting principles generally accepted in the U.S. (“U.S. GAAP”) for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and ~~six~~nine months ended ~~June~~September 30, 2019, are not necessarily indicative of the results that may be expected for the year ended December 31, 2019. These interim unaudited consolidated financial statements should be read in conjunction with our annual audited financial statements as of December 31, 2018, included in our Form 10-K for the year ended December 31, 2018, filed with the United States Securities and Exchange Commission (“SEC”). The accompanying consolidated statement of financial position as of December 31, 2018, has been derived from the audited consolidated statement of financial position but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

Consolidation

We have relationships with various special purpose entities and other legal entities that must be evaluated to determine if the entities meet the criteria of a variable interest entity (“VIE”) or a voting interest entity (“VOE”). This assessment is performed by reviewing contractual, ownership and other rights, including involvement of related parties, and requires use of judgment. First, we determine if we hold a variable interest in an entity by assessing if we have the right to receive expected losses and expected residual returns of the entity. If we hold a variable interest, then the entity is assessed to determine if it is a VIE. An entity is a VIE if the equity at risk is not sufficient to support its activities, if the equity holders lack a controlling financial interest or if the entity is structured with non-substantive voting rights. In addition to the previous criteria, if the entity is a limited partnership or similar entity, it is a VIE if the limited partners do not have the power to direct the entity’s most significant activities through substantive kick-out rights or participating rights. A VIE is evaluated to determine the primary beneficiary. The primary beneficiary of a VIE is the enterprise with (1) the power to direct the activities of a VIE that most significantly impact the entity's economic performance and (2) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. When we are the primary beneficiary, we are required to consolidate the entity in our financial statements. We reassess our involvement with VIEs on a quarterly basis. For further information about VIEs, refer to Note 2,3, Variable Interest Entities.

If an entity is not a VIE, it is considered a VOE. VOEs are generally consolidated if we own a greater than 50% voting interest. If we determine our involvement in an entity no longer meets the requirements for consolidation under either the VIE or VOE models, the entity is deconsolidated. Entities in which we have 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.

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

Recent Accounting Pronouncements

~~Table of Contents~~

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June 30, 2019~~
~~(Unaudited)~~

~~Description~~

Date of
adoption

Effect on our consolidated
financial statements or other
significant matters

Goodwill impairment testing

This authoritative guidance simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 (which measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill to the carrying amount of that goodwill) from the goodwill impairment test. A goodwill impairment loss will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. Early adoption is permitted.

January 1,
2020

We ~~are currently evaluating the impact this guidance will have on our consolidated financial statements, but do not expect it to have a material impact on our consolidated financial statements. We~~ expect the guidance will reduce complexity and costs associated with performing a Step 2 test, should one be needed in the future. However, the impact onof eliminating the ~~outcome of~~Step 2 test from any such future impairment assessment will be dependent on modeling factors that are not currently determinable. We do not expect this guidance to have a material impact on our consolidated financial statements.

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
September 30, 2019
(Unaudited)

Description	Date of adoption	Effect on our consolidated financial statements or other significant matters
Credit losses This authoritative guidance requires entities to use a current expected credit loss (“CECL”) model to measure impairment for most financial assets that are not recorded at fair value through net income. Under the CECL model, an entity will estimate lifetime expected credit losses considering available relevant information about historical events, current conditions and reasonable and supportable forecasts. The CECL model does not apply to available-for-sale debt securities. This guidance also expands the required credit loss disclosures and will be applied using a modified retrospective approach by recording a cumulative effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. Early adoption is permitted.	January 1, 2020	Our implementation and evaluation process to date includes, but is not limited to, identifying financial assets within scope of the guidance, developing and refining CECL models for the relevant assets, preparing quarterly estimates of the cumulative effect of adoption, developing and refining necessary internal controls and drafting the required financial statement disclosures. ~~We believe estimated credit losses under the CECL model will generally result in earlier loss recognition for loans~~This guidance is not expected to have a material impact on our consolidated financial statements based on our portfolio composition as of September 30, 2019, current macroeconomic conditions and ~~other receivables.~~
		forecasts.
Standards adopted:
Implementation costs in a cloud computing arrangement that is a service contract This authoritative guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This guidance can be applied either retrospectively or prospectively and early adoption is permitted.	January 1, 2019	The effective date of the guidance is January 1, 2020; however, we elected to early-adopt this guidance on a prospective basis, effective January 1, 2019. This guidance did not have a material impact on our consolidated financial statements.
Nonemployee share-based payment accounting This authoritative guidance simplifies the accounting for share-based payments to nonemployees by generally aligning it with the accounting for share-based payments to employees. Under the guidance, the measurement of equity-classified nonemployee awards will be fixed at the grant date, where previously the measurement was fixed at performance completion date. The guidance will be applied to equity-classified nonemployee awards for which a measurement date has not been established as of the date of adoption.	January 1, 2019	This guidance did not have a material impact on our consolidated financial statements.

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)



Description	Date of adoption	Effect on our consolidated financial statements or other significant matters
Leases This authoritative guidance requires lessee recognition of lease assets and lease liabilities on the balance sheet. The concept of an operating lease, where the lease assets and liabilities are off balance sheet, is eliminated under the new guidance. For lessors, the guidance modifies lease classification criteria and accounting for certain types of leases. Other key aspects of the guidance relate to the removal of the current real estate-specific guidance and new presentation and disclosure requirements. Lessees and lessors are required to recognize and measure leases using a modified retrospective approach, which includes certain optional practical expedients that may be elected. We elected the alternative transition method, which allows entities to initially apply the new standard at the adoption date and recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption.	January 1, 2019	We adopted the guidance using the modified retrospective approach and comparative periods were not restated. Further details are included under the caption “Adoption of Lease Guidance” and in Note 9,10, Contingencies, Guarantees, Indemnifications and Leases.

Targeted improvements to accounting for hedging activities This authoritative guidance updated certain recognition and measurement requirements for hedge accounting. The objective of the guidance is to more closely align the economics of a company’s risk management activities in its financial results and reduce the complexity of applying hedge accounting. The updates included the expansion of hedging strategies that are eligible for hedge accounting, elimination of the separate measurement and reporting of hedge ineffectiveness, presentation of the changes in the fair value of the hedging instrument in the same consolidated statement of operations line as the earnings effect of the hedged item and simplification of hedge effectiveness assessments. This guidance also included new disclosures.	January 1, 2019	This guidance did not have a material impact on our consolidated financial statements. See Note 4,5, Derivative Financial Instruments, for further details.

Premium amortization on purchased callable debt securities This authoritative guidance applies to entities that hold certain non-contingently callable debt securities, where the amortized cost basis is at a premium to the price repayable by the issuer at the earliest call date. Under the guidance the premium will be amortized to the first call date.	January 1, 2019	This guidance did not have a material impact on our consolidated financial statements.

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)



Description	Date of adoption	Effect on our consolidated financial statements or other significant matters
Reclassification of certain tax effects from accumulated other comprehensive income This authoritative guidance permits a reclassification from accumulated other comprehensive income (“AOCI”) to retained earnings for the stranded tax effects resulting from U.S. tax legislation enacted on December 22, 2017, which is referred to as the ‘‘Tax Cuts and Jobs Act’’ (‘‘U.S. tax reform’’). The amount of that reclassification includes the change in corporate income tax rate, as well as an election to include other income tax effects related to the application of U.S. tax reform. The guidance also requires disclosures about stranded tax effects.	January 1, 2018	The effective date of the guidance was January 1, 2019; however, we elected to early adopt the guidance. The guidance was applied at the beginning of the period of adoption and comparative periods were not restated. We reclassified the stranded tax effects in AOCI resulting from U.S. tax reform, which includes the change in corporate income tax rate and an election to reclassify the tax effects of the one-time deemed repatriation tax. A reclassification of $77.6 million was recorded as an increase to AOCI and a decrease to retained earnings.

Revenue recognition This authoritative guidance replaces all general and most industry specific revenue recognition guidance currently prescribed by U.S. GAAP. The core principle is that an entity recognizes revenue to reflect the transfer of a promised good or service to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for that good or service. This guidance also provides clarification on when an entity is a principal or an agent in a transaction. In addition, the guidance updates the accounting for certain costs associated with obtaining and fulfilling a customer contract. The guidance may be applied using one of the following two methods: (1) retrospectively to each prior reporting period presented, or (2) retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial application.	January 1, 2018	We adopted the guidance using the modified retrospective approach. The guidance did not have a material impact on our consolidated financial statements. A cumulative effect adjustment of $39.7 million was recorded as a decrease to total stockholders’ equity. See Note ~~13,~~14, Revenues from Contracts with Customers, for further details.

Income tax - intra-entity transfers of assets This authoritative guidance requires entities to recognize current and deferred income tax resulting from an intra-entity asset transfer when the transfer occurs. Prior to issuance of this guidance, U.S. GAAP did not allow recognition of income tax consequences until the asset had been sold to a third party. This guidance requires adoption through a cumulative effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption.	January 1, 2018	We adopted the guidance using the modified retrospective approach. A cumulative effect adjustment of $8.7 million was recorded as an increase to retained earnings. In addition, other assets and deferred income taxes decreased $21.1 million and $29.8 million, respectively, due to the adoption of this guidance.

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)



Description	Date of adoption	Effect on our consolidated financial statements or other significant matters
Financial instruments - recognition and measurement This authoritative guidance addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The guidance eliminated the classification of equity securities into different categories (trading or available-for-sale) and requires equity investments to be measured at fair value with changes in the fair value recognized through net income. The guidance also updated certain financial instrument disclosures and eliminated the requirement to disclose the methods and significant assumptions used to estimate the fair value of financial instruments that are measured at amortized cost on the balance sheet.	January 1, 2018	We adopted this guidance using the modified retrospective approach. A cumulative effect adjustment of $1.0 million was recorded as a decrease to AOCI and a corresponding increase to retained earnings. The guidance did not have a material impact on our consolidated financial statements. See Note 3,4, Investments, for further details.

Nonfinancial asset derecognition and partial sales of nonfinancial assets This authoritative guidance clarifies the scope of the recently established guidance on nonfinancial asset derecognition and the accounting for partial sales of nonfinancial assets. The guidance conforms the derecognition guidance on nonfinancial assets with the model for transactions in the new revenue recognition standard.	January 1, 2018	The guidance did not have a material impact on our consolidated financial statements.

Presentation of net periodic pension cost and net periodic postretirement benefit cost This authoritative guidance requires that an employer disaggregate the service cost component from the other components of net benefit cost. The guidance also provides explicit guidance on the presentation of the service cost component and the other components of net benefit cost in the consolidated statement of operations and allows only the service cost component of net benefit cost to be eligible for capitalization.	January 1, 2018	The guidance did not have a material impact on our consolidated financial statements.

Definition of a business This authoritative guidance clarifies the definition of a business to assist with evaluating when transactions involving an integrated set of assets and activities (a “set”) should be accounted for as acquisitions or disposals of assets or businesses. The guidance requires that when substantially all of the fair value of the gross assets acquired or disposed of is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. The guidance also requires a set to include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output to be considered a business. Lastly, the guidance removes the evaluation of whether a market participant could replace missing elements and narrows the definition of outputs by more closely aligning it with how outputs are described in the revenue recognition guidance. The guidance will be applied prospectively.	January 1, 2018	The guidance did not have a material impact on our consolidated financial statements.

When we adopt new accounting standards, we have a process in place to perform a thorough review of the pronouncement, identify the financial statement and system impacts and create an implementation plan among our impacted business units to ensure we are compliant with the pronouncement on the date of adoption. This includes having effective processes and controls in place to support the reported amounts. Each of the standards listed above is in varying stages in our implementation process based on its issuance and adoption dates. We are on track to implement guidance by the respective effective dates.

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

~~implementation process based on its issuance and adoption dates. We are on track to implement guidance by the respective effective dates.~~

Adoption of Lease Guidance

On January 1, 2019, we adopted the guidance using the modified retrospective approach with the cumulative effect of initially applying the standard recognized at the date of adoption. We elected the package of practical expedients permitted under the transition guidance. In addition, we elected the hindsight practical expedient to determine the lease term for existing leases. We have agreements with lease and non-lease components, which we account for as a combined unit of account for all classes.

The impact of the guidance to our consolidated financial statements primarily related to the establishment of additional assets and liabilities of $168.8 million and $164.0 million, respectively. The difference between the additional assets and liabilities, net of deferred tax impacts, was recorded as a cumulative effect adjustment to retained earnings and increased total stockholders’ equity by $4.0 million.

Results of reporting periods beginning January 1, 2019, are presented under the new guidance, while prior period amounts are not adjusted and continue to be reported in accordance with our prior accounting. The guidance did not have a material impact on our consolidated statements of operations and did not impact earnings per common share.

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 swaps, options, futures and forwards. 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 ~~11,~~12, 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 the same income statement line item that is used to report the earnings effect of the hedged item. For fair value hedges of fixed maturities, available-for-sale, these changes in fair value are reported in net investment income. Prior to 2019, these changes in fair value were recorded in net realized capital gains (losses). A fair value hedge determined to be highly effective may still result in a mismatch between the change in the fair value of the hedging instrument and the change in the fair value of the hedged item attributable to the hedged risk.

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

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. 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. If the foreign operation is sold or upon complete or substantially complete liquidation, the deferred gains or losses on the derivative instrument are reclassified into net income.

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

Hedge Documentation and Effectiveness Testing. At inception, we formally document all relationships between hedging instruments and hedged items, as well as our risk management objective and strategy for undertaking various hedge transactions. This process includes associating all derivatives designated as fair value or cash flow hedges with specific assets or liabilities on the consolidated statements of financial position or with specific firm commitments or forecasted transactions. Effectiveness of the hedge is formally assessed at inception and throughout the life of the hedging relationship. Even if a hedge is determined to be highly effective, the hedge may still result in a mismatch between the change in the fair value of the hedging instrument and the change in the fair value of the hedged item attributable to the hedged risk.

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 AOCI related to discontinued cash flow hedges that are no longer highly effective is amortized to the consolidated statements of operations consistent with the net income impacts of the original hedged cash flows. If a cash flow hedge is discontinued because it is probable the hedged forecasted transaction will not occur, the deferred gain or loss is immediately reclassified from AOCI into net income.

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

Separate Accounts

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

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

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

As of ~~June~~September 30, 2019 and December 31, 2018, the separate accounts included a separate account valued at ~~$110.4~~$106.9 million and $94.9 million, respectively, which primarily included shares of our stock that were allocated and issued to eligible participants of qualified employee benefit plans administered by us as part of the policy credits issued under our 2001 demutualization. These shares are included in both basic and diluted earnings per share calculations. In the consolidated statements of financial position, the separate account shares are recorded at fair value and are reported as separate account assets with a corresponding separate account ~~liability to eligible participants of the qualified plan.~~liability. 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.

2. Goodwill and Other Intangible Assets

2.Goodwill

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


	Retirement		Principal				U.S.
	and Income		Global		Principal		Insurance
	Solutions		Investors		International		Solutions		Corporate		Consolidated
	(in millions)
Balance as of January 1, 2018	$	57.4	$	247.3	$	707.5	$	56.6	$	—	$	1,068.8
Goodwill from acquisitions (1)		—		65.0		46.8		—		2.1		113.9
Goodwill disposed (2)		—		—		(12.0)		—		—		(12.0)
Foreign currency		—		(5.0)		(65.7)		—		—		(70.7)
Balance as of December 31, 2018		57.4		307.3		676.6		56.6		2.1		1,100.0
Goodwill from acquisitions (3)		618.5		—		—		—		(1.1)		617.4
Foreign currency		—		(3.0)		(23.7)		—		—		(26.7)
Other (4)		—		2.2		(2.2)		—		—		—
Balance as of September 30, 2019	$	675.9	$	306.5	$	650.7	$	56.6	$	1.0	$	1,690.7

(1)

Relates to the acquisitions of: a) RobustWealth, a financial technology company, which is consolidated within our Corporate segment with the majority of the goodwill allocated to our Principal Global Investors segment; b) INTERNOS, a London-based European real estate investment manager that, upon acquisition, became Principal Real Estate Europe Limited and is consolidated within our Principal Global Investors segment; c) MetLife Afore, S.A. de C.V., which was MetLife, Inc.’s pension fund management business in Mexico and is consolidated within our Principal International segment.

(2)	Relates to sales of closed blocks of business in Mexico.

(3)	For our Retirement and Income Solutions segment, relates to the acquisition of Wells Fargo Institutional Retirement & Trust business.

(4)	Relates to the movement of our investment management company in Brazil from the Principal International segment to the Principal Global Investors segment.

On July 1, 2019, we completed the purchase of the Institutional Retirement & Trust business of Wells Fargo Bank, N.A. (the “Acquired Business”), which includes defined contribution, defined benefit, executive deferred compensation, employee stock ownership plans, institutional trust and custody, and institutional asset advisory businesses. The purchase price consisted of $1.2 billion cash paid at closing, which was funded with available cash and debt financing. See “Note 7, Long-Term Debt” for further information on the debt financing. An additional earn-out payment of up to $150.0 million may be payable based upon the retention of fee revenue of the Acquired Business through December 31, 2020.

The fair value of the net assets acquired primarily relates to intangible assets. Of the acquired intangible assets, $618.5 million was assigned to goodwill and is not subject to amortization. The goodwill is largely related to the opportunities to realize substantial revenue and cost synergies while achieving scale in operations.

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
September 30, 2019
(Unaudited)

Of the remaining acquired intangible assets, $510.3 million was assigned to customer relationships, which are subject to amortization over a 23-year useful life, and $35.4 million was assigned to technology, which is subject to amortization over a 6-year useful life.

Finite Lived Intangible Assets

Amortized intangible assets primarily relate to customer relationship intangibles associated with the Acquired Business and previous acquisitions in Chile, Mexico and Hong Kong. The finite lived intangible assets that continue to be subject to amortization over a weighted average remaining expected life of 18 years were as follows:


	September 30, 2019		December 31, 2018
	(in millions)
Gross carrying value	$	1,337.9	$	810.2
Accumulated amortization		323.6		288.4
Net carrying value	$	1,014.3	$	521.8

As of September 30, 2019, the estimated amortization expense for the next five years is as follows (in millions):


Year ending December 31:
2019	$	62.6
2020		76.3
2021		74.9
2022		74.2
2023		72.1

3. Variable Interest Entities

We have relationships with various types of entities which may be VIEs. Certain VIEs are consolidated in our financial results. See Note 1, Nature of Operations and Significant Accounting Policies, under the caption “Consolidation” for further details of our consolidation accounting policies. We did not provide financial or other support to investees designated as VIEs for the periods ended ~~June~~September 30, 2019 and December 31, 2018.

Consolidated Variable Interest Entities

Grantor Trust

We contributed undated subordinated floating rate notes to a grantor trust. The trust separated its 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 determined the grantor trust is a VIE due to insufficient equity to sustain it. We determined we are the primary beneficiary as a result of our contribution of securities into the trust and our significant continuing interest in the trust.

Commercial Mortgage-Backed Securities

We sold commercial mortgage loans to a real estate mortgage investment conduit trust. The trust issued various commercial mortgage-backed securities ("CMBS") certificates using the cash flows of the underlying commercial mortgage loans it purchased. This iswas considered a VIE due to insufficient equity to sustain itself. We determined we ~~are~~were 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. The trust was unwound in the third quarter of 2019.

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
September 30, 2019
(Unaudited)

Mandatory Retirement Savings Funds

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

Principal International Hong Kong offers retirement pension schemes in which we provide trustee, administration and asset management services to employers and employees under the Hong Kong Mandatory Provident Fund and Occupational Retirement Schemes Ordinance pension schemes. Each pension scheme has various guaranteed and ~~non-~~

~~Table of Contents~~

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June 30, 2019~~
~~(Unaudited)~~

~~guaranteed~~non-guaranteed constituent funds, or investment options, in which customers can invest their money. The guaranteed funds provide either a guaranteed rate of return to the customer or a minimum guarantee on withdrawals under certain qualifying events. We determined the guaranteed funds are VIEs due to the fact the equity holders, as a group, lack the obligation to absorb expected losses due to the guarantee we provide. We concluded we are the primary beneficiary because we have the power to make decisions and to receive benefits and the obligation to absorb losses that could be potentially significant to the VIE. Therefore, we consolidate the underlying assets and liabilities of the funds and present as separate accounts or within the general account, depending on the terms of the guarantee.

Real Estate

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

Sponsored Investment Funds

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

We also invest in certain series of another investment fund. These series are VIEs as the equity holders of each series lack the power to direct the most significant activities of the VIE. We determined we are the primary beneficiary of these series as our interest is more than insignificant and collectively we have the power to direct the most significant activities of the fund.

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
September 30, 2019
(Unaudited)

Assets and Liabilities of Consolidated Variable Interest Entities

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


	June 30, 2019				December 31, 2018				September 30, 2019				December 31, 2018
	Total		Total		Total		Total		Total		Total		Total		Total
	assets		liabilities		assets		liabilities		assets		liabilities		assets		liabilities
	(in millions)								(in millions)
Grantor trust (1)	$	98.6	$	95.3	$	95.0	$	89.4	$	98.6	$	96.4	$	95.0	$	89.4
CMBS		5.4		—		6.4		—		—		—		6.4		—
Mandatory retirement savings funds (2)		41,743.8		41,354.2		37,915.7		37,579.3		39,479.2		39,100.5		37,915.7		37,579.3
Real estate (3)		397.0		78.3		379.2		70.6		441.2		80.2		379.2		70.6
Sponsored investment funds (4)		337.4		4.0		526.5		3.6		340.4		1.5		526.5		3.6
Total	$	42,582.2	$	41,531.8	$	38,922.8	$	37,742.9	$	40,359.4	$	39,278.6	$	38,922.8	$	37,742.9

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

(2)	The assets of the mandatory retirement savings funds include separate account assets and equity securities. The liabilities include separate account liabilities and contractholder funds.

(3)	The assets of the real estate VIEs primarily include real estate and cash. Liabilities primarily include long-term debt and other liabilities.

(4)

The assets of sponsored investment funds are primarily fixed maturities and equity securities, certain of which are reported with other investments, and cash. The consolidated statements of financial position included a ~~$194.9~~$198.0 million and $325.7 million redeemable noncontrolling interest for sponsored investment funds as of ~~June~~September 30, 2019 and December 31, 2018, respectively.

~~Table of Contents~~

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June 30, 2019~~
~~(Unaudited)~~

Unconsolidated Variable Interest Entities

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

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

We invest in cash collateralized debt obligations, collateralized bond obligations, collateralized loan obligations and other collateralized structures, which are VIEs due to insufficient equity to sustain the entities. We have determined we are not the primary beneficiary of these entities primarily because we do not control the economic performance of the entities and were not involved with the design of the entities or because we do not have a potentially significant variable interest in the entities for which we are the asset manager.

We have invested in various VIE trusts and similar entities as a debt holder. Most of these entities are classified as VIEs due to insufficient equity to sustain them. In addition, we have an entity classified as a VIE based on the combination of our significant economic interest and lack of voting rights. We have determined we are not the primary beneficiary primarily because we do not control the economic performance of the entities and were not involved with the design of the entities.

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

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
September 30, 2019
(Unaudited)

As previously discussed, we sponsor, invest in and have other interests in certain investment funds that are VIEs. We determined we are not the primary beneficiary of the VIEs for which we are the asset manager but do not have a potentially significant variable interest in the funds.

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

~~Table of Contents~~

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June 30, 2019~~
~~(Unaudited)~~

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

Maximum exposure to

Asset carrying value

loss (1)

Asset carrying value

loss (1)

(in millions)

June 30, 2019

September 30, 2019

Fixed maturities, available-for-sale:

Corporate

235.7

220.8

237.2

223.2

Residential mortgage-backed pass-through securities

2,437.0

2,389.1

2,516.3

2,448.3

Commercial mortgage-backed securities

4,569.9

4,460.3

4,882.6

4,700.4

Collateralized debt obligations (2)

2,759.4

2,771.9

2,922.6

2,933.8

Other debt obligations

7,801.9

7,675.1

8,071.6

7,912.0

Fixed maturities, trading:

Residential mortgage-backed pass-through securities

310.3

295.9

Commercial mortgage-backed securities

29.0

29.3

Collateralized debt obligations (2)

20.4

Other debt obligations

13.8

13.1

Equity securities

114.4

115.2

Other investments:

Other limited partnership and fund interests (3)

847.2

1,464.8

886.9

1,473.3

December 31, 2018

Fixed maturities, available-for-sale:

Corporate

235.3

222.6

235.3

222.6

Residential mortgage-backed pass-through securities

2,460.6

2,488.5

2,460.6

2,488.5

Commercial mortgage-backed securities

3,945.6

4,023.1

3,945.6

4,023.1

Collateralized debt obligations (2)

2,420.8

2,451.3

2,420.8

2,451.3

Other debt obligations

7,153.2

7,196.6

7,153.2

7,196.6

Fixed maturities, trading:

Residential mortgage-backed pass-through securities

322.6

Commercial mortgage-backed securities

13.8

Collateralized debt obligations (2)

11.8

Other debt obligations

9.7

Equity securities

103.9

Other investments:

Other limited partnership and fund interests (3)

737.5

1,432.2

737.5

1,432.2

(1)

Our risk of loss is limited to our initial investment measured at amortized cost for fixed maturities, available-for-sale. Our risk of loss is limited to our investment measured at fair value for our fixed maturities, trading and equity securities. Our risk of loss is limited to our carrying value plus any unfunded commitments and/or guarantees and similar provisions for our other investments. Unfunded commitments are not liabilities on our consolidated statements of financial position because we are only required to fund additional equity when called upon to do so by the general partner or investment manager.

(2)	Primarily consists of collateralized loan obligations backed by secured corporate loans.

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
September 30, 2019
(Unaudited)

(3)

As of ~~June~~September 30, 2019 and December 31, 2018, the maximum exposure to loss for other limited partnership and fund interests includes ~~$131.3~~$125.5 million and $132.2 million, respectively, of debt within certain of our managed international real estate funds that is fully secured by assets whose value exceeds the amount of the debt, but also includes recourse to the investment manager.

~~Table of Contents~~

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June 30, 2019~~
~~(Unaudited)~~

Money Market Funds

We are the investment manager for certain money market mutual funds. These types of funds are exempt from assessment under any consolidation model due to a scope exception for money market funds registered under Rule 2a-7 of the Investment Company Act of 1940 or similar funds. As of ~~June~~September 30, 2019 and December 31, 2018, money market mutual funds we manage held ~~$4.0~~$4.2 billion and $3.0 billion in total assets, respectively. We have no contractual obligation to contribute to these funds; however, we provide support through the waiver of fees and through expense reimbursements. The amount of fees waived and expenses reimbursed was insignificant.

3.4. Investments

Fixed Maturities and Equity Securities

Fixed maturities include bonds, ABS, redeemable preferred stock and certain non-redeemable preferred securities. Equity securities include mutual funds, common stock, non-redeemable preferred stock and required regulatory investments. We classify fixed maturities as either available-for-sale or trading at the time of the purchase and, accordingly, carry them at fair value. Equity securities are also carried at fair value. See Note ~~11,~~12, Fair Value Measurements, for methodologies related to the determination of fair value. Unrealized gains and losses related to fixed maturities, available-for-sale, excluding those in fair value hedging relationships, are reflected in stockholders' equity, net of adjustments associated with DAC and related actuarial balances, derivatives in cash flow hedge relationships and applicable income taxes. Mark-to-market adjustments on equity securities, unrealized gains and losses related to hedged portions of fixed maturities, available-for-sale in fair value hedging relationships prior to 2019 and mark-to-market adjustments on certain fixed maturities, trading are reflected in net realized capital gains (losses). Beginning in 2019, unrealized gains and losses related to hedged portions of fixed maturities, available-for-sale in fair value hedging relationships are reflected in net investment income. Mark-to-market adjustments related to certain securities carried at fair value with an investment objective to realize economic value through mark-to-market changes are reflected in net investment income.

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

2122

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

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


									Other-than-										Other-than-
			Gross		Gross				temporary				Gross		Gross				temporary
	Amortized		unrealized		unrealized				impairments in		Amortized		unrealized		unrealized				impairments in
	cost		gains		losses		Fair value		AOCI (1)		cost		gains		losses		Fair value		AOCI (1)
	(in millions)										(in millions)
June 30, 2019
September 30, 2019
Fixed maturities, available-for-sale:
U.S. government and agencies	$	1,457.4	$	82.9	$	3.9	$	1,536.4	$	—	$	1,606.0	$	140.9	$	1.0	$	1,745.9	$	—
Non-U.S. governments		880.4		122.8		2.5		1,000.7		—		872.3		153.6		0.2		1,025.7		—
States and political subdivisions		6,413.2		561.0		5.6		6,968.6		—		6,558.7		821.0		2.5		7,377.2		—
Corporate		35,200.2		3,052.4		81.3		38,171.3		—		35,596.1		3,968.1		51.2		39,513.0		(0.3)
Residential mortgage-backed pass-through securities		2,389.1		56.7		8.8		2,437.0		—		2,448.3		71.1		3.1		2,516.3		—
Commercial mortgage-backed securities		4,460.3		130.7		21.1		4,569.9		20.5		4,700.4		196.4		14.2		4,882.6		15.6
Collateralized debt obligations (2)		2,771.9		1.1		13.6		2,759.4		1.4		2,933.8		2.0		13.2		2,922.6		1.3
Other debt obligations		7,697.9		141.3		14.4		7,824.8		34.2		7,928.2		169.7		10.0		8,087.9		33.1
Total fixed maturities, available-for-sale	$	61,270.4	$	4,148.9	$	151.2	$	65,268.1	$	56.1	$	62,643.8	$	5,522.8	$	95.4	$	68,071.2	$	49.7

December 31, 2018
Fixed maturities, available-for-sale:
U.S. government and agencies	$	1,441.6	$	16.4	$	17.0	$	1,441.0	$	—	$	1,441.6	$	16.4	$	17.0	$	1,441.0	$	—
Non-U.S. governments		833.4		71.7		14.6		890.5		—		833.4		71.7		14.6		890.5		—
States and political subdivisions		6,125.0		196.0		95.3		6,225.7		—		6,125.0		196.0		95.3		6,225.7		—
Corporate		35,134.6		1,249.9		845.2		35,539.3		—		35,134.6		1,249.9		845.2		35,539.3		—
Residential mortgage-backed pass-through securities		2,488.5		21.9		49.8		2,460.6		—		2,488.5		21.9		49.8		2,460.6		—
Commercial mortgage-backed securities		4,023.1		17.1		94.6		3,945.6		16.3		4,023.1		17.1		94.6		3,945.6		16.3
Collateralized debt obligations (2)		2,451.3		—		30.5		2,420.8		1.2		2,451.3		—		30.5		2,420.8		1.2
Other debt obligations		7,228.3		39.4		82.7		7,185.0		36.1		7,228.3		39.4		82.7		7,185.0		36.1
Total fixed maturities, available-for-sale	$	59,725.8	$	1,612.4	$	1,229.7	$	60,108.5	$	53.6	$	59,725.8	$	1,612.4	$	1,229.7	$	60,108.5	$	53.6

(1)

Excludes ~~$70.0~~$67.4 million and $64.2 million as of ~~June~~September 30, 2019 and December 31, 2018, respectively, of net unrealized gains on impaired fixed maturities, available-for-sale related to changes in fair value subsequent to the impairment date, which are included in gross unrealized gains and gross unrealized losses.

(2)	Primarily consists of collateralized loan obligations backed by secured corporate loans.

The amortized cost and fair value of fixed maturities, available-for-sale as of ~~June~~September 30, 2019, by expected maturity, were as follows:

Amortized cost

Fair value

Amortized cost

Fair value

(in millions)

Due in one year or less

2,729.6

2,751.4

2,421.7

2,441.7

Due after one year through five years

10,019.9

10,333.8

10,072.6

10,429.1

Due after five years through ten years

10,564.6

11,185.6

10,788.7

11,593.6

Due after ten years

20,637.1

23,406.2

21,350.1

25,197.4

Subtotal

43,951.2

47,677.0

44,633.1

49,661.8

Mortgage-backed and other asset-backed securities

17,319.2

17,591.1

18,010.7

18,409.4

Total

61,270.4

65,268.1

62,643.8

68,071.2

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

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
September 30, 2019
(Unaudited)

Net Realized Capital Gains and Losses

Net realized capital gains and losses on sales of investments are determined on the basis of specific identification. In general, in addition to realized capital gains and losses on investment sales and periodic settlements on derivatives not designated as hedges, we report gains and losses related to the following in net realized capital gains (losses): ~~other-than-~~

~~Table of Contents~~

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June 30, 2019~~
~~(Unaudited)~~

~~temporary~~other-than-temporary impairments of securities and subsequent realized recoveries, mark-to-market adjustments on equity securities, mark-to-market adjustments on certain fixed maturities, trading, mark-to-market adjustments on sponsored investment funds, mark-to-market adjustments on derivatives not designated as hedges, changes in the mortgage loan valuation allowance provision, impairments of real estate held for investment and impairments on equity method investments. Investment gains and losses on sales of certain real estate held for sale due to investment strategy and mark-to-market adjustments on certain securities carried at fair value with an investment objective to realize economic value through mark-to-market changes are reported as net investment income and are excluded from net realized capital gains (losses). The major components of net realized capital gains (losses) on investments were as follows:


	For the three months ended				For the six months ended				For the three months ended				For the nine months ended
	June 30,				June 30,				September 30,				September 30,
	2019		2018		2019		2018		2019		2018		2019		2018
	(in millions)								(in millions)
Fixed maturities, available-for-sale:
Gross gains	$	6.2	$	0.7	$	8.7	$	5.0	$	3.0	$	32.9	$	11.7	$	37.9
Gross losses		(7.9)		(18.5)		(9.4)		(45.2)		(1.3)		(9.5)		(10.7)		(54.7)
Net impairment losses		(17.3)		(9.0)		(24.1)		(18.9)		(11.1)		(3.6)		(35.2)		(22.5)
Hedging, net (1)		(9.3)		(2.9)		(9.3)		(8.0)		—		(4.7)		(9.3)		(12.7)
Fixed maturities, trading (2)		17.5		(2.7)		31.7		(13.4)		18.1		(0.3)		49.8		(13.7)
Equity securities (3)		14.7		5.6		35.7		3.6		33.2		13.5		68.9		17.1
Mortgage loans		0.3		2.5		0.6		2.9		(0.1)		1.3		0.5		4.2
Derivatives (1)		4.6		(37.4)		9.6		(28.0)		(11.7)		41.7		(2.1)		13.7
Other		(12.8)		129.1		37.0		144.3		(72.5)		(76.8)		(35.5)		67.5
Net realized capital gains (losses)	$	(4.0)	$	67.4	$	80.5	$	42.3	$	(42.4)	$	(5.5)	$	38.1	$	36.8

(1)

Upon adoption of authoritative guidance effective January 1, 2019, the change in fair value of fixed maturities, available-for-sale and the change in fair value of derivative hedging instruments in fair value hedging relationships are reported in net investment income with the earnings effect of fixed maturities, available-for-sale. Prior to 2019, the change in fair value of fixed maturities, available-for-sale and the change in fair value of derivative hedging instruments in fair value hedging relationships were reported in net realized capital gains (losses). See Note 4,5, Derivative Financial Instruments, for further details.

(2)

Unrealized gains (losses) on fixed maturities, trading still held at the reporting date were ~~$17.6~~$17.9 million and ~~$(2.7)~~$(3.4) million for the three months ended ~~June~~September 30, 2019 and 2018, respectively, and ~~$31.8~~$49.7 million and ~~$(13.4)~~$(16.7) million for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, respectively.

(3)

Unrealized gains (losses) on equity securities still held at the reporting date were ~~$9.7~~$24.7 million and ~~$0.1~~$8.8 million for the three months ended ~~June~~September 30, 2019 and 2018, respectively, and ~~$29.7~~$55.1 million and ~~$(14.1)~~$(5.2) million for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, respectively. This excludes ~~$18.7~~$21.1 million and ~~$3.3~~$9.6 million for the three months ended ~~June~~September 30, 2019 and 2018, respectively, and ~~$41.3~~$62.3 million and ~~$3.2~~$12.8 million for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, respectively, of unrealized gains on equity securities still held at the reporting date that were reported in net investment income.

Proceeds from sales of investments (excluding call and maturity proceeds) in fixed maturities, available-for-sale were ~~$1,028.0~~$176.1 million and ~~$525.9~~$613.3 million for the three months ended ~~June~~September 30, 2019 and 2018, and ~~$1,191.0~~$1,367.1 million and ~~$1,737.7~~$2,351.0 million for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, respectively.

Other-Than-Temporary Impairments

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

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
September 30, 2019
(Unaudited)

Each reporting period, all securities are reviewed to determine whether an other-than-temporary decline in value exists and whether losses should be recognized. We consider relevant facts and circumstances in evaluating whether a credit or interest rate related impairment of a security is other than temporary. Relevant facts and circumstances considered include: (1) the extent and length of time the fair value has been below cost; (2) the reasons for the decline in value; (3) the financial

~~Table of Contents~~

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June 30, 2019~~
~~(Unaudited)~~

position and access to capital of the issuer, including the current and future impact of any specific events; (4) for structured securities, the adequacy of the expected cash flows and (5) our intent to sell a security or whether it is more likely than not we will be required to sell the security before the recovery of its amortized cost which, in some cases, may extend to maturity. To the extent we determine a security is deemed to be other than temporarily impaired, an impairment loss is recognized.

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

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


	For the three months ended				For the six months ended				For the three months ended				For the nine months ended
	June 30,				June 30,				September 30,				September 30,
	2019		2018		2019		2018		2019		2018		2019		2018
	(in millions)								(in millions)
Net other-than-temporary impairment recoveries	$	(17.0)	$	(8.2)	$	(26.6)	$	(6.9)
Other-than-temporary impairment losses on fixed maturities, available-for-sale reclassified to (from) OCI (1)		(0.3)		(0.8)		2.5		(12.0)
Net impairment losses on fixed maturities, available-for-sale	$	(17.3)	$	(9.0)	$	(24.1)	$	(18.9)
Net other-than-temporary impairment losses									$	(4.7)	$	(1.4)	$	(31.3)	$	(8.3)
Other-than-temporary impairment losses on fixed maturities, available-for-sale reclassified from OCI (1)										(6.4)		(2.2)		(3.9)		(14.2)
Net impairment losses on available-for-sale securities									$	(11.1)	$	(3.6)	$	(35.2)	$	(22.5)

(1)

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

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

2425

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

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


	For the three months ended				For the six months ended				For the three months ended				For the nine months ended
	June 30,				June 30,				September 30,				September 30,
	2019		2018		2019		2018		2019		2018		2019		2018
	(in millions)								(in millions)
Beginning balance	$	(102.3)	$	(129.2)	$	(117.5)	$	(124.3)	$	(100.3)	$	(131.1)	$	(117.5)	$	(124.3)
Credit losses for which an other-than-temporary impairment was not previously recognized		(0.8)		(5.5)		(2.8)		(10.1)		(3.2)		(1.2)		(6.0)		(11.3)
Credit losses for which an other-than-temporary impairment was previously recognized		(4.6)		(1.9)		(8.9)		(11.7)		(1.0)		(1.2)		(9.9)		(12.9)
Reduction for credit losses previously recognized on fixed maturities now sold, paid down or intended to be sold		8.0		2.7		28.4		10.0		4.7		12.5		33.1		22.5
Net reduction (increase) for positive changes in cash flows expected to be collected and amortization (1)		(0.6)		2.8		0.5		5.0		(0.3)		2.5		0.2		7.5
Ending balance	$	(100.3)	$	(131.1)	$	(100.3)	$	(131.1)	$	(100.1)	$	(118.5)	$	(100.1)	$	(118.5)

(1)	Amounts are recognized in net investment income.

Gross Unrealized Losses for Available-for-Sale Securities

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

June 30, 2019

September 30, 2019

Less than

Greater than or

Less than

Greater than or

twelve months

equal to twelve months

Total

twelve months

equal to twelve months

Total

Gross

Fair

unrealized

Fair

unrealized

Fair

unrealized

Fair

unrealized

Fair

unrealized

Fair

unrealized

value

losses

value

losses

value

losses

value

losses

value

losses

value

losses

(in millions)

Fixed maturities, available-for-sale:

��

U.S. government and agencies

5.7

—

160.8

3.9

166.5

3.9

13.9

—

99.0

1.0

112.9

1.0

Non-U.S. governments

13.2

0.2

47.9

2.3

61.1

2.5

18.4

0.2

12.3

—

30.7

0.2

States and political subdivisions

2.3

—

509.8

5.6

512.1

5.6

198.2

1.5

139.6

1.0

337.8

2.5

Corporate

579.1

9.7

2,556.0

71.6

3,135.1

81.3

790.0

7.8

711.0

43.4

1,501.0

51.2

Residential mortgage-backed pass-through securities

1.0

—

747.4

8.8

748.4

8.8

194.6

0.7

272.2

2.4

466.8

3.1

Commercial mortgage-backed securities

127.3

2.1

625.6

19.0

752.9

21.1

231.5

2.8

292.6

11.4

524.1

14.2

Collateralized debt obligations (1)

975.5

2.7

1,063.9

10.9

2,039.4

13.6

573.1

1.8

1,341.0

11.4

1,914.1

13.2

Other debt obligations

110.9

0.5

1,677.0

13.9

1,787.9

14.4

691.0

1.8

984.8

8.2

1,675.8

10.0

Total fixed maturities, available-for-sale

1,815.0

15.2

7,388.4

136.0

9,203.4

151.2

2,710.7

16.6

3,852.5

78.8

6,563.2

95.4

~~(1)~~

~~Primarily consists of collateralized loan obligations backed by secured corporate loans.~~

(1) Primarily consists of collateralized loan obligations backed by secured corporate loans.

Of the total amounts, Principal Life’s consolidated portfolio represented $~~9,072.5~~6,464.9 million in available-for-sale fixed maturities with gross unrealized losses of ~~$148.1~~$93.9 million. Of the available-for-sale fixed maturities within Principal Life's consolidated portfolio in a gross unrealized loss position, ~~94%~~95% were investment grade (rated AAA through BBB-) with an average price of 9899 (carrying value/amortized cost) as of ~~June~~September 30, 2019. Gross unrealized losses in our fixed maturities portfolio decreased during the ~~six~~nine months ended ~~June~~September 30, 2019, primarily due to a decrease in interest rates and tightening of credit spreads.

~~For those securities that had been in a continuous unrealized loss position for less than twelve months, Principal Life's consolidated portfolio held~~ ~~177~~ ~~securities with a carrying value of~~ ~~$1,768.2 million and unrealized losses of $14.3~~

2526

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

For those securities that had been in a continuous unrealized loss position for less than twelve months, Principal Life's consolidated portfolio held 344 securities with a carrying value of $2,667.0 million and unrealized losses of $16.0 million reflecting an average price of 99 as of ~~June~~September 30, 2019. Of this portfolio, ~~84%~~96% was investment grade (rated AAA through BBB-) as of ~~June~~September 30, 2019, with associated unrealized losses of ~~$8.8~~$15.2 million. The unrealized losses on these securities can primarily be attributed to changes in market interest rates and changes in credit spreads since the securities were acquired.

For those securities that had been in a continuous unrealized loss position greater than or equal to twelve months, Principal Life’s consolidated portfolio held ~~1,081~~616 securities with a carrying value of ~~$7,304.3~~$3,797.9 million and unrealized losses of ~~$133.8~~$77.9 million. The average credit rating of this portfolio was ~~AA-~~AA with an average price of 98 as of ~~June~~September 30, 2019. Of the ~~$133.8~~$77.9 million in unrealized losses, the corporate sector accounts for ~~$69.7~~$42.6 million in unrealized losses with an average price of 9794 and an average credit rating of ~~BBB+.~~BBB. The remaining unrealized losses also include ~~$18.8~~$11.3 million within the commercial mortgage-backed securities sector with an average price of 9796 and an average credit rating of ~~AA+.~~AAA. The unrealized losses on these securities can primarily be attributed to changes in market interest rates and changes in credit spreads since the securities were acquired.

Because we expected to recover our amortized cost, it was not our intent to sell the fixed maturity available-for-sale securities with unrealized losses and it was not more likely than not that we would be required to sell these securities before recovery of the amortized cost, which may be at maturity, we did not consider these investments to be other-than-temporarily impaired as of ~~June~~September 30, 2019.


	December 31, 2018
	Less than				Greater than or
	twelve months				equal to twelve months				Total
			Gross				Gross				Gross
	Fair		unrealized		Fair		unrealized		Fair		unrealized
	value		losses		value		losses		value		losses
	(in millions)
Fixed maturities, available-for-sale:
U.S. government and agencies	$	101.8	$	1.6	$	500.3	$	15.4	$	602.1	$	17.0
Non-U.S. governments		210.2		4.7		191.5		9.9		401.7		14.6
States and political subdivisions		1,359.9		33.9		1,590.3		61.4		2,950.2		95.3
Corporate		13,198.4		476.0		6,865.0		369.2		20,063.4		845.2
Residential mortgage-backed pass-through securities		236.7		1.0		1,410.2		48.8		1,646.9		49.8
Commercial mortgage-backed securities		790.3		11.6		2,223.2		83.0		3,013.5		94.6
Collateralized debt obligations (1)		2,233.3		24.0		162.6		6.5		2,395.9		30.5
Other debt obligations		985.5		4.9		3,665.1		77.8		4,650.6		82.7
Total fixed maturities, available-for-sale	$	19,116.1	$	557.7	$	16,608.2	$	672.0	$	35,724.3	$	1,229.7

~~(1)~~

~~Primarily consists of collateralized loan obligations backed by secured corporate loans.~~

(1) Primarily consists of collateralized loan obligations backed by secured corporate loans.

Of the total amounts, Principal Life’s consolidated portfolio represented $35,051.9 million in available-for-sale fixed maturities with gross unrealized losses of $1,202.9 million. Of the available-for-sale fixed maturities within Principal Life's consolidated portfolio in a gross unrealized loss position, 95% were investment grade (rated AAA through BBB-) with an average price of 97 (carrying value/amortized cost) as of December 31, 2018. Gross unrealized losses in our fixed maturities portfolio increased during the year ended December 31, 2018, primarily due to widening of credit spreads and an increase in interest rates.

For those securities that had been in a continuous unrealized loss position for less than twelve months, Principal Life's consolidated portfolio held 2,076 securities with a carrying value of $18,764.0 million and unrealized losses of $541.3 million reflecting an average price of 97 as of December 31, 2018. Of this portfolio, 92% was investment grade (rated AAA through BBB-) as of December 31, 2018, with associated unrealized losses of $473.7 million. The unrealized losses on these securities can primarily be attributed to changes in market interest rates and changes in credit spreads since the securities were acquired.

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
September 30, 2019
(Unaudited)

For those securities that had been in a continuous unrealized loss position greater than or equal to twelve months, Principal Life's consolidated portfolio held 2,335 securities with a carrying value of $16,287.9 million and unrealized losses of $661.6 million. The average credit rating of this portfolio was AA- with an average price of 96 as of December 31, 2018. Of the $661.6 million in unrealized losses, the corporate sector accounts for $360.4 million in unrealized losses with an average price of 95 and an average credit rating of A-. The remaining unrealized losses also include $82.2 million within the commercial

~~Table of Contents~~

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June 30, 2019~~
~~(Unaudited)~~

mortgage-backed securities sector with an average price of 96 and an average credit rating of AA+. The unrealized losses on these securities can primarily be attributed to changes in market interest rates and changes in credit spreads since the securities were acquired.

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

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


	June 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018
	(in millions)				(in millions)
Net unrealized gains on fixed maturities, available-for-sale (1)	$	4,029.5	$	400.8	$	5,436.9	$	400.8
Noncredit component of impairment losses on fixed maturities, available-for-sale		(56.1)		(53.6)		(49.7)		(53.6)
Net unrealized gains on derivative instruments		108.0		118.5		123.0		118.5
Adjustments for assumed changes in amortization patterns		(208.1)		30.3		(269.9)		30.3
Adjustments for assumed changes in policyholder liabilities		(1,051.4)		(293.7)		(1,392.7)		(293.7)
Net unrealized gains on other investments and noncontrolling interest adjustments		97.6		68.8		85.3		68.8
Provision for deferred income taxes		(628.8)		(63.8)		(838.0)		(63.8)
Net unrealized gains on available-for-sale securities and derivative instruments	$	2,290.7	$	207.3	$	3,094.9	$	207.3

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

Mortgage Loans

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


	June 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018
	(in millions)				(in millions)
Commercial mortgage loans	$	14,830.6	$	13,996.3	$	15,018.6	$	13,996.3
Residential mortgage loans		1,334.3		1,368.0		1,501.8		1,368.0
Total amortized cost		16,164.9		15,364.3		16,520.4		15,364.3

Valuation allowance		(28.1)		(27.4)		(28.8)		(27.4)
Total carrying value	$	16,136.8	$	15,336.9	$	16,491.6	$	15,336.9

2728

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

We periodically purchase mortgage loans as well as sell mortgage loans we have originated. Mortgage loans purchased and sold were as follows:

For the three months ended

For the six months ended

For the three months ended

For the nine months ended

June 30,

September 30,

2019

2018

2019

2018

2019

2018

2019

2018

(in millions)

Commercial mortgage loans:

Purchased

103.0

—

115.9

—

40.0

34.1

155.9

34.1

Sold

—

1.6

0.5

1.6

1.1

—

1.6

1.6

Residential mortgage loans:

Purchased

66.2

92.6

99.4

204.8

279.4

87.4

378.8

292.2

Sold

21.2

27.7

32.1

51.3

13.3

9.6

45.4

60.9

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


	June 30, 2019				December 31, 2018				September 30, 2019				December 31, 2018
	Amortized		Percent		Amortized		Percent		Amortized		Percent		Amortized		Percent
	cost		of total		cost		of total		cost		of total		cost		of total
	($ in millions)								($ in millions)
Geographic distribution
New England	$	652.6	4.4	%	$	640.6	4.6	%	$	621.5	4.1	%	$	640.6	4.6	%
Middle Atlantic		4,263.9	28.7			3,927.3	28.0			4,289.2	28.7			3,927.3	28.0
East North Central		604.9	4.1			592.8	4.2			601.3	4.0			592.8	4.2
West North Central		200.5	1.4			205.8	1.5			209.3	1.4			205.8	1.5
South Atlantic		2,338.0	15.8			2,206.5	15.8			2,316.9	15.4			2,206.5	15.8
East South Central		444.8	3.0			422.5	3.0			442.4	2.9			422.5	3.0
West South Central		1,463.1	9.9			1,213.8	8.7			1,515.7	10.1			1,213.8	8.7
Mountain		897.2	6.0			968.6	6.9			921.2	6.1			968.6	6.9
Pacific		3,686.2	24.9			3,567.6	25.5			3,841.3	25.6			3,567.6	25.5
International		279.4	1.8			250.8	1.8			259.8	1.7			250.8	1.8
Total	$	14,830.6	100.0	%	$	13,996.3	100.0	%	$	15,018.6	100.0	%	$	13,996.3	100.0	%

Property type distribution
Office	$	4,960.6	33.4	%	$	4,625.8	33.0	%	$	4,977.4	33.2	%	$	4,625.8	33.0	%
Retail		2,118.9	14.3			2,305.6	16.5			2,119.2	14.1			2,305.6	16.5
Industrial		2,350.5	15.8			2,312.9	16.5			2,272.0	15.1			2,312.9	16.5
Apartments		4,850.1	32.7			4,250.5	30.4			5,120.7	34.1			4,250.5	30.4
Hotel		97.9	0.7			99.8	0.7			97.0	0.6			99.8	0.7
Mixed use/other		452.6	3.1			401.7	2.9			432.3	2.9			401.7	2.9
Total	$	14,830.6	100.0	%	$	13,996.3	100.0	%	$	15,018.6	100.0	%	$	13,996.3	100.0	%

Our residential mortgage loan portfolio is composed of first lien mortgages with an amortized cost of $~~1,321.6~~1,490.0 million and $1,352.9 million and home equity mortgages with an amortized cost of ~~$12.7~~$11.8 million and $15.1 million as of ~~June~~September 30, 2019 and December 31, 2018, respectively. Our first lien loans are concentrated in Chile and the United States. Our residential home equity mortgages are concentrated in the United States and are generally second lien mortgages comprised of closed-end loans and lines of credit.

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
September 30, 2019
(Unaudited)

Mortgage Loan Credit Monitoring

Commercial Credit Risk Profile Based on Internal Rating

We actively monitor and manage our commercial mortgage loan portfolio. All commercial mortgage loans are analyzed regularly and substantially all are internally rated, based on a proprietary risk rating cash flow model, in order to monitor the financial quality of these assets. The model stresses expected cash flows at various levels and at different points

~~Table of Contents~~

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June 30, 2019~~
~~(Unaudited)~~

in time depending on the durability of the income stream, which includes our assessment of factors such as location (macro and micro markets), tenant quality and lease expirations. Our internal rating analysis presents expected losses in terms of an S&P Global (“S&P”) bond equivalent rating. As the credit risk for commercial mortgage loans increases, we adjust our internal ratings downward with loans in the category “B+ and below” having the highest risk for credit loss. Internal ratings on commercial mortgage loans are updated at least annually and potentially more often for certain loans with material changes in collateral value or occupancy and for loans on an internal “watch list”.

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

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

June 30, 2019

September 30, 2019

Brick and mortar

CTL

Total

Brick and mortar

CTL

Total

(in millions)

A- and above

13,714.8

80.6

13,795.4

13,860.8

78.9

13,939.7

BBB+ thru BBB-

855.0

89.9

944.9

939.4

86.8

1,026.2

BB+ thru BB-

84.7

—

84.7

47.5

—

47.5

B+ and below

5.6

—

5.6

5.2

—

5.2

Total

14,660.1

170.5

14,830.6

14,852.9

165.7

15,018.6


	December 31, 2018
	Brick and mortar		CTL		Total
	(in millions)
A- and above	$	12,735.2	$	84.3	$	12,819.5
BBB+ thru BBB-		977.3		105.7		1,083.0
BB+ thru BB-		88.3		—		88.3
B+ and below		5.5		—		5.5
Total	$	13,806.3	$	190.0	$	13,996.3

Residential Credit Risk Profile Based on Performance Status

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

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

June 30, 2019

September 30, 2019

First liens

Home equity

Total

First liens

Home equity

Total

(in millions)

Performing

1,310.4

9.3

1,319.7

1,480.4

8.5

1,488.9

Non-performing

11.2

3.4

14.6

9.6

3.3

12.9

Total

1,321.6

12.7

1,334.3

1,490.0

11.8

1,501.8


	December 31, 2018
	First liens		Home equity		Total
	(in millions)
Performing	$	1,340.3	$	10.8	$	1,351.1
Non-performing		12.6		4.3		16.9
Total	$	1,352.9	$	15.1	$	1,368.0

2930

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

Non-Accrual Mortgage Loans

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

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


	June 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018
	(in millions)				(in millions)
Residential:
First liens	$	9.2	$	10.1	$	7.8	$	10.1
Home equity		3.4		4.3		3.3		4.3
Total	$	12.6	$	14.4	$	11.1	$	14.4

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

June 30, 2019

September 30, 2019

Recorded

investment

90 days or

30-59 days

60-89 days

more past

Total past

more and

30-59 days

60-89 days

more past

Total past

more and

past due

due

Current

Total loans

accruing

past due

due

Current

Total loans

accruing

(in millions)

Commercial-brick and mortar

—

14,660.1

—

14,852.9

—

Commercial-CTL

—

170.5

—

165.7

—

Residential-first liens

42.2

7.3

10.0

59.5

1,262.1

1,321.6

2.0

41.9

9.7

9.2

60.8

1,429.2

1,490.0

1.8

Residential-home equity

0.7

—

0.7

12.0

12.7

—

0.8

0.3

0.1

1.2

10.6

11.8

—

Total

42.9

7.3

10.0

60.2

16,104.7

16,164.9

2.0

42.7

10.0

9.3

62.0

16,458.4

16,520.4

1.8


	December 31, 2018
													Recorded
													investment
					90 days or								90 days or
	30-59 days		60-89 days		more past		Total past						more and
	past due		past due		due		due		Current		Total loans		accruing
	(in millions)
Commercial-brick and mortar	$	—	$	—	$	—	$	—	$	13,806.3	$	13,806.3	$	—
Commercial-CTL		—		—		—		—		190.0		190.0		—
Residential-first liens		44.3		8.4		12.1		64.8		1,288.1		1,352.9		2.5
Residential-home equity		0.8		0.6		0.4		1.8		13.3		15.1		—
Total	$	45.1	$	9.0	$	12.5	$	66.6	$	15,297.7	$	15,364.3	$	2.5

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
September 30, 2019
(Unaudited)

Mortgage Loan Valuation Allowance

We establish a valuation allowance to provide for the risk of credit losses inherent in our portfolio. The valuation allowance includes loan specific reserves for loans that are deemed to be impaired as well as reserves for pools of loans with similar risk characteristics where a property risk or market specific risk has not been identified but for which we anticipate a loss may occur. Mortgage loans on real estate are considered impaired when, based on current information and events, it is probable we will be unable to collect all amounts due according to contractual terms of the loan agreement. When we determine a loan is impaired, a valuation allowance is established equal to the difference between the carrying amount of the mortgage loan and the estimated value reduced by the cost to sell. Estimated value is based on either the present value of the

~~Table of Contents~~

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June 30, 2019~~
~~(Unaudited)~~

expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price or fair value of the collateral. Subsequent changes in the estimated value are reflected in the valuation allowance. Amounts on loans deemed to be uncollectible are charged off and removed from the valuation allowance. The change in the valuation allowance provision is included in net realized capital gains (losses) on our consolidated statements of operations.

The valuation allowance is maintained at a level believed adequate by management to absorb estimated probable credit losses. Management's periodic evaluation and assessment of the valuation allowance adequacy is based on known and inherent risks in the portfolio, adverse situations that may affect a borrower's ability to repay, the estimated value of the underlying collateral, composition of the loan portfolio, portfolio delinquency information, underwriting standards, peer group information, current economic conditions, loss experience and other relevant factors. The evaluation of our impaired loan component is subjective, as it requires the estimation of timing and amount of future cash flows expected to be received on impaired loans.

We review our commercial mortgage loan portfolio and analyze the need for a valuation allowance for any loan that is delinquent for 60 days or more, in process of foreclosure, restructured, on the internal “watch list” or that currently has a valuation allowance. In addition to establishing allowance levels for specifically identified impaired commercial mortgage loans, management determines an allowance for all other loans in the portfolio for which historical experience and current economic conditions indicate certain losses exist. These loans are segregated by risk rating level with an estimated loss ratio applied against each risk rating level. The loss ratio is generally based upon historical loss experience for each risk rating level as adjusted for certain current environmental factors management believes to be relevant.

For our residential mortgage loan portfolio, we separate the loans into several homogeneous pools, each of which consist of loans of a similar nature including but not limited to loans similar in collateral, term and structure and loan purpose or type. We evaluate loan pools based on aggregated risk ratings, estimated specific loss potential in the different classes of credits, and historical loss experience by pool type. We adjust these quantitative factors for qualitative factors of present conditions. Qualitative factors include items such as economic and business conditions, changes in the portfolio, value of underlying collateral and concentrations. Residential mortgage loan pools exclude loans that have been restructured or impaired, as those loans are evaluated individually.

A rollforward of our valuation allowance and ending balances of the allowance and loan balance by basis of impairment method was as follows:

For the three months ended June 30, 2019

For the three months ended September 30, 2019

Commercial

Residential

Total

Commercial

Residential

Total

(in millions)

Beginning balance

24.7

2.9

27.6

25.4

2.7

28.1

Provision

0.7

(0.8)

(0.1)

0.9

(0.9)

—

Charge-offs

—

(0.3)

Recoveries

—

0.9

—

0.7

Ending balance

25.4

2.7

28.1

26.3

2.5

28.8

3132

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

For the six months ended June 30, 2019


Commercial

Residential

Total

(in millions)
Beginning balance

$
24.3

$
3.1

$
27.4
Provision

1.1

(1.6)

(0.5)
Charge-offs

—

(0.4)

(0.4)
Recoveries

—

1.6

1.6
Ending balance

$
25.4

$
2.7

$
28.1

Allowance ending balance by basis of impairment method:

Individually evaluated for impairment

$
—

$
1.5

$
1.5
Collectively evaluated for impairment

25.4

1.2

26.6
Allowance ending balance

$
25.4

$
2.7

$
28.1

Loan balance by basis of impairment method:

Individually evaluated for impairment

$
—

$
13.3

$
13.3
Collectively evaluated for impairment

14,830.6

1,321.0

16,151.6
Loan ending balance

$
14,830.6

$
1,334.3

$
16,164.9

For the three months ended June 30, 2018


Commercial

Residential

Total

(in millions)
Beginning balance

$
26.6

$
6.4

$
33.0
Provision

(0.8)

(1.8)

(2.6)
Charge-offs

—

(1.1)

(1.1)
Recoveries

—

0.8

0.8
Ending balance

$
25.8

$
4.3

$
30.1


	For the six months ended June 30, 2018						For the nine months ended September 30, 2019
	Commercial		Residential		Total		Commercial		Residential		Total
	(in millions)						(in millions)
Beginning balance	$	25.8	$	6.9	$	32.7	$	24.3	$	3.1	$	27.4
Provision		—		(2.8)		(2.8)		2.0		(2.5)		(0.5)
Charge-offs		—		(1.6)		(1.6)		—		(0.4)		(0.4)
Recoveries		—		1.8		1.8		—		2.3		2.3
Ending balance	$	25.8	$	4.3	$	30.1	$	26.3	$	2.5	$	28.8

Allowance ending balance by basis of impairment method:
Individually evaluated for impairment	$	—	$	2.0	$	2.0	$	—	$	1.5	$	1.5
Collectively evaluated for impairment		25.8		2.3		28.1		26.3		1.0		27.3
Allowance ending balance	$	25.8	$	4.3	$	30.1	$	26.3	$	2.5	$	28.8

Loan balance by basis of impairment method:
Individually evaluated for impairment	$	—	$	11.0	$	11.0	$	—	$	12.4	$	12.4
Collectively evaluated for impairment		13,071.9		1,315.1		14,387.0		15,018.6		1,489.4		16,508.0
Loan ending balance	$	13,071.9	$	1,326.1	$	14,398.0	$	15,018.6	$	1,501.8	$	16,520.4

~~Impaired Mortgage Loans~~


	For the three months ended September 30, 2018
	Commercial		Residential		Total
	(in millions)
Beginning balance	$	25.8	$	4.3	$	30.1
Provision		(0.5)		(0.9)		(1.4)
Charge-offs		—		(0.3)		(0.3)
Recoveries		—		0.7		0.7
Ending balance	$	25.3	$	3.8	$	29.1

Impaired mortgage loans are loans with a related specific valuation allowance, loans whose carrying amount has been reduced to the expected collectible amount because the imp been considered other than temporary or a loan modification has been classified as a troubled debt restructuring (“TDR”). Based on an assessment as to the collectability of the principal, a determination is made to apply any payments received either against the principal, against the valuation allowance or according to the contractual terms of the loan. Our recorded investment in and unpaid principal balance of


	For the nine months ended September 30, 2018
	Commercial		Residential		Total
	(in millions)
Beginning balance	$	25.8	$	6.9	$	32.7
Provision		(0.5)		(3.7)		(4.2)
Charge-offs		—		(1.9)		(1.9)
Recoveries		—		2.5		2.5
Ending balance	$	25.3	$	3.8	$	29.1

Allowance ending balance by basis of impairment method:
Individually evaluated for impairment	$	—	$	1.9	$	1.9
Collectively evaluated for impairment		25.3		1.9		27.2
Allowance ending balance	$	25.3	$	3.8	$	29.1

Loan balance by basis of impairment method:
Individually evaluated for impairment	$	—	$	10.9	$	10.9
Collectively evaluated for impairment		13,595.3		1,342.6		14,937.9
Loan ending balance	$	13,595.3	$	1,353.5	$	14,948.8

3233

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

Impaired Mortgage Loans

Impaired mortgage loans are loans with a related specific valuation allowance, loans whose carrying amount has been reduced to the expected collectible amount because the impairment has been considered other than temporary or a loan modification has been classified as a troubled debt restructuring (“TDR”). Based on an assessment as to the collectability of the principal, a determination is made to apply any payments received either against the principal, against the valuation allowance or according to the contractual terms of the loan. Our recorded investment in and unpaid principal balance of impaired loans along with the related loan specific allowance for losses, if any, and the average recorded investment and interest income recognized during the time the loans were impaired were as follows:

June 30, 2019

September 30, 2019

Unpaid

Recorded

principal

Related

Recorded

principal

Related

investment

balance

allowance

investment

balance

allowance

(in millions)

With no related allowance recorded:

Residential-first liens

0.9

—

1.2

—

With an allowance recorded:

Residential-first liens

7.7

0.2

7.1

0.2

Residential-home equity

4.7

5.7

1.3

4.1

5.3

1.3

Total:

Residential

13.3

14.3

1.5

12.4

13.6

1.5


	December 31, 2018
			Unpaid
	Recorded		principal		Related
	investment		balance		allowance
	(in millions)
With no related allowance recorded:
Residential-first liens	$	1.6	$	1.6	$	—
With an allowance recorded:
Residential-first liens		2.2		2.2		—
Residential-home equity		5.4		6.5		1.4
Total:
Residential	$	9.2	$	10.3	$	1.4

For the three months ended

For the six months ended

June 30, 2019

June 30, 2019


Average


Average



recorded

Interest income

recorded

Interest income

investment

recognized

investment

recognized

(in millions)
With no related allowance recorded:

Residential-first liens

$
0.9

$
—

$
1.3

$
—
With an allowance recorded:

Residential-first liens

4.9

—

5.0

—
Residential-home equity

4.9

0.1

5.1

0.1
Total:

Residential

$
10.7

$
0.1

$
11.4

$
0.1


	For the three months ended				For the six months ended				For the three months ended				For the nine months ended
	June 30, 2018				June 30, 2018				September 30, 2019				September 30, 2019
	Average				Average				Average				Average
	recorded		Interest income		recorded		Interest income		recorded		Interest income		recorded		Interest income
	investment		recognized		investment		recognized		investment		recognized		investment		recognized
	(in millions)								(in millions)
With no related allowance recorded:
Residential-first liens	$	0.8	$	—	$	0.8	$	—	$	1.1	$	—	$	1.4	$	—
With an allowance recorded:
Residential-first liens		3.9		0.1		3.9		0.1		7.4		—		4.7		—
Residential-home equity		6.9		—		7.1		0.1		4.4		—		4.8		0.1
Total:
Residential	$	11.6	$	0.1	$	11.8	$	0.2	$	12.9	$	—	$	10.9	$	0.1

3334

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)


	For the three months ended				For the nine months ended
	September 30, 2018				September 30, 2018
	Average				Average
	recorded		Interest income		recorded		Interest income
	investment		recognized		investment		recognized
	(in millions)
With no related allowance recorded:
Residential-first liens	$	0.9	$	—	$	1.0	$	—
With an allowance recorded:
Residential-first liens		3.7		—		3.9		0.1
Residential-home equity		6.4		—		6.9		0.1
Total:
Residential	$	11.0	$	—	$	11.8	$	0.2

Mortgage Loan Modifications

Our commercial and residential mortgage loan portfolios can include loans that have been modified. We assess loan modifications on a case-by-case basis to evaluate whether a TDR has occurred. When we have commercial mortgage loan TDRs, they are modified to delay or reduce principal payments and to reduce or delay interest payments. The commercial mortgage loan modifications result in delayed cash receipts, a decrease in interest income and loan rates that are considered below market. When we have residential mortgage loan TDRs, they include modifications of interest-only payment periods, delays in principal balloon payments and interest rate reductions. Residential mortgage loan modifications result in delayed or decreased cash receipts and a decrease in interest income.

When we have commercial mortgage loan TDRs, they are reserved for in the mortgage loan valuation allowance at the estimated fair value of the underlying collateral reduced by the cost to sell.

When we have residential mortgage loan TDRs, they are specifically reserved for in the mortgage loan valuation allowance if losses result from the modification. Residential mortgage loans that have defaulted or have been discharged through bankruptcy are reduced to the expected collectible amount.

We did not have any significant loans that were modified and met the criteria of a TDR for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018.

Securities Posted as Collateral

As of ~~June~~September 30, 2019 and December 31, 2018, we posted ~~$3,681.9~~$4,091.1 million and $3,761.3 million, respectively, in commercial mortgage loans and residential first lien mortgages to satisfy collateral requirements associated with our obligation under funding agreements with Federal Home Loan Bank of Des Moines (“FHLB Des Moines”). In addition, as of ~~June~~September 30, 2019 and December 31, 2018, we posted ~~$2,911.3~~$2,782.9 million and $2,402.5 million, respectively, in fixed maturities, available-for-sale and trading securities to satisfy collateral requirements primarily associated with a reinsurance arrangement, our derivative credit support annex (collateral) agreements, Futures Commission Merchant (“FCM”) agreements, a lending arrangement and our obligation under funding agreements with FHLB Des Moines. Since we did not relinquish ownership rights on these instruments, they are reported as mortgage loans, fixed maturities, available-for-sale and fixed maturities, trading, respectively, on our consolidated statements of financial position. Of the securities posted as collateral, as of ~~June~~September 30, 2019 and December 31, 2018, ~~$149.1~~$237.8 million and $124.2 million, respectively, could be sold or repledged by the secured party.

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
September 30, 2019
(Unaudited)

Balance Sheet Offsetting

Financial assets subject to master netting agreements or similar agreements were as follows:


			Gross amounts not offset in the								Gross amounts not offset in the
			consolidated statements								consolidated statements
			of financial position								of financial position
	Gross amount								Gross amount
	of recognized		Financial		Collateral				of recognized		Financial		Collateral
	assets (1)		instruments (2)		received		Net amount		assets (1)		instruments (2)		received		Net amount
	(in millions)								(in millions)
June 30, 2019
September 30, 2019
Derivative assets	$	280.4	$	(80.9)	$	(188.3)	$	11.2	$	365.8	$	(96.3)	$	(261.9)	$	7.6
Reverse repurchase agreements		74.6		—		(74.6)		—		78.6		—		(78.6)		—
Total	$	355.0	$	(80.9)	$	(262.9)	$	11.2	$	444.4	$	(96.3)	$	(340.5)	$	7.6

December 31, 2018
Derivative assets	$	186.3	$	(70.5)	$	(108.1)	$	7.7	$	186.3	$	(70.5)	$	(108.1)	$	7.7
Reverse repurchase agreements		53.0		—		(53.0)		—		53.0		—		(53.0)		—
Total	$	239.3	$	(70.5)	$	(161.1)	$	7.7	$	239.3	$	(70.5)	$	(161.1)	$	7.7

(1)

The gross amount of recognized derivative and reverse repurchase agreement assets are reported with other investments and cash and cash equivalents, respectively, on the consolidated statements of financial position. The above excludes ~~$11.1~~$8.4 million and $7.7 million of derivative assets as of ~~June~~September 30, 2019 and December 31, 2018, respectively, that are not subject to master netting agreements or similar agreements. The gross amounts of derivative and reverse repurchase

~~Table of Contents~~

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June 30, 2019~~
~~(Unaudited)~~

agreement assets are not netted against offsetting liabilities for presentation on the consolidated statements of financial position.

(2)	Represents amount of offsetting derivative liabilities that are subject to an enforceable master netting agreement or similar agreement that are not netted against the gross derivative assets for presentation on the consolidated statements of financial position.

Financial liabilities subject to master netting agreements or similar agreements were as follows:

Gross amounts not offset in the

consolidated statements

of financial position

Gross amount

of recognized

Financial

Collateral

��

of recognized

Financial

Collateral

liabilities (1)

instruments (2)

pledged

Net amount

liabilities (1)

instruments (2)

pledged

Net amount

(in millions)

June 30, 2019

September 30, 2019

Derivative liabilities

166.4

(80.9)

(76.4)

9.1

179.9

(96.3)

(71.2)

12.4

December 31, 2018

Derivative liabilities

153.4

(70.5)

(52.3)

30.6

153.4

(70.5)

(52.3)

30.6

(1)

The gross amount of recognized derivative liabilities is reported with other liabilities on the consolidated statements of financial position. The above excludes ~~$215.5~~$420.5 million and $138.3 million of derivative liabilities as of ~~June~~September 30, 2019 and December 31, 2018, respectively, which are primarily embedded derivatives that are not subject to master netting agreements or similar agreements. The gross amounts of derivative liabilities are not netted against offsetting assets for presentation on the consolidated statements of financial position.

(2)	Represents amount of offsetting derivative assets that are subject to an enforceable master netting agreement or similar agreement that are not netted against the gross derivative liabilities for presentation on the consolidated statements of financial position.

The financial instruments that are subject to master netting agreements or similar agreements include right of setoff provisions. Derivative instruments include provisions to setoff positions covered under the agreements with the same counterparties and provisions to setoff positions outside of the agreements with the same counterparties in the event of default by one of the parties. Derivative instruments also include collateral or variation margin provisions, which are generally settled daily with each counterparty. See Note 4,5, Derivative Financial Instruments, for further details.

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
September 30, 2019
(Unaudited)

Repurchase and reverse repurchase agreements include provisions to setoff other repurchase and reverse repurchase balances with the same counterparty. Repurchase and reverse repurchase agreements also include collateral provisions with the counterparties. For reverse repurchase agreements we require the counterparties to pledge collateral with a value greater than the amount of cash transferred. We have the right but do not sell or repledge collateral received in reverse repurchase agreements. Repurchase agreements are structured as secured borrowings for all counterparties. We pledge fixed maturities available-for-sale, which the counterparties have the right to sell or repledge. Interest incurred on repurchase agreements is reported as part of operating expenses on the consolidated statements of operations. Net proceeds related to repurchase agreements are reported as a component of financing activities on the consolidated statements of cash flows. We did not have any outstanding repurchase agreements as of ~~June~~September 30, 2019 and December 31, 2018.

4.5. Derivative Financial Instruments

Derivatives are generally used to hedge or reduce exposure to market risks associated with assets held or expected to be purchased or sold and liabilities incurred or expected to be incurred. Derivatives are used to change the characteristics of our asset/liability mix consistent with our risk management activities. Derivatives are also used in asset replication strategies.

Types of Derivative Instruments

Interest Rate Contracts

Interest rate risk is the risk we will incur economic losses due to adverse changes in interest rates. Sources of interest rate risk include the difference between the maturity and interest rate changes of assets with the liabilities they support,

~~Table of Contents~~

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June 30, 2019~~
~~(Unaudited)~~

timing differences between the pricing of liabilities and the purchase or procurement of assets and changing cash flow profiles from original projections due to prepayment options embedded within asset and liability contracts. We use various derivatives to manage our exposure to fluctuations in interest rates.

Interest rate swaps are contracts in which we agree with other parties to exchange, at specified intervals, the difference between fixed rate and/or floating rate interest amounts based upon designated market rates or rate indices and an agreed upon notional principal amount. Generally, no0 cash is exchanged at the outset of the contract and no0 principal payments are made by any party. Cash is paid or received based on the terms of the swap. We use interest rate swaps primarily to more closely match the interest rate characteristics of assets and liabilities and to mitigate the risks arising from timing mismatches between assets and liabilities (including duration mismatches). We also use interest rate swaps to hedge against changes in the value of assets we anticipate acquiring and other anticipated transactions and commitments. Interest rate swaps are used to hedge against changes in the value of the guaranteed minimum withdrawal benefit (“GMWB”) liability. The GMWB rider on our variable annuity products provides for guaranteed minimum withdrawal benefits regardless of the actual performance of various equity and/or fixed income funds available with the product.

Interest rate options, including interest rate caps and interest rate floors, which can be combined to form interest rate collars, are contracts that entitle the purchaser to pay or receive the amounts, if any, by which a specified market rate exceeds a cap strike interest rate, or falls below a floor strike interest rate, respectively, at specified dates. We use interest rate options to manage prepayment risks in our assets and minimum guaranteed interest rates and lapse risks in our liabilities.

A swaption is an option to enter into an interest rate swap at a future date. We purchase swaptions to hedge interest rate exposure for certain assets and liabilities. Swaptions not only hedge against the downside risk, but also allow us to take advantage of any upside benefits.

In exchange-traded futures transactions, we agree to purchase or sell a specified number of contracts, the values of which are determined by the values of designated classes of securities, and to post variation margin on a daily basis in an amount equal to the difference in the daily market values of those contracts. We enter into exchange-traded futures with regulated futures commissions merchants who are members of a trading exchange. We have used exchange-traded futures to reduce market risks from changes in interest rates and to alter mismatches between the assets in a portfolio and the liabilities supported by those assets.

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
September 30, 2019
(Unaudited)

Foreign Exchange Contracts

Foreign currency risk is the risk we will incur economic losses due to adverse fluctuations in foreign currency exchange rates. This risk arises from foreign currency -denominated funding agreements issued to nonqualified institutional investors in the international market, foreign currency-denominated fixed maturity and equity securities, and our international operations, including expected cash flows and potential acquisition and divestiture activity. We use various derivatives to manage our exposure to fluctuations in foreign currency exchange rates.

Currency swaps are contracts in which we agree with other parties to exchange, at specified intervals, a series of principal and interest payments in one currency for that of another currency. Generally, the principal amount of each currency is exchanged at the beginning and termination of the currency swap by each party. The interest payments are primarily fixed-to-fixed rate; however, they may also be fixed-to-floating rate or floating-to-fixed rate. These transactions are entered into pursuant to master agreements that provide for a single net payment to be made by one counterparty for payments made in the same currency at each due date. We use currency swaps to reduce market risks from changes in currency exchange rates with respect to investments or liabilities denominated in foreign currencies that we either hold or intend to acquire or sell.

Currency forwards are contracts in which we agree with other parties to deliver or receive a specified amount of an identified currency at a specified future date. Typically, the price is agreed upon at the time of the contract and payment for such a contract is made at the specified future date. We use currency forwards to reduce market risks from changes in currency exchange rates with respect to investments or liabilities denominated in foreign currencies that we either hold or intend to acquire or sell. We sometimes use currency forwards to hedge the currency risk associated with a business combination or to hedge certain net equity investments in or expected cash flows from our foreign operations.

~~Table of Contents~~

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June 30, 2019~~
~~(Unaudited)~~

Currency options are contracts that give the holder the right, but not the obligation to buy or sell a specified amount of the identified currency within a limited period of time at a contracted price. The contracts are net settled in cash, based on the differential in the current foreign exchange rate and the strike price. Purchased and sold options can be combined to form a foreign currency collar where we receive a payment if the foreign exchange rate is below the purchased option strike price and make a payment if the foreign exchange rate is above the sold option strike price. We use currency options to hedge expected cash flows from our foreign operations.

Equity Contracts

Equity risk is the risk that we will incur economic losses due to adverse fluctuations in common stock prices. We use various derivatives to manage our exposure to equity risk, which arises from products in which the interest we credit is tied to an external equity index as well as products subject to minimum contractual guarantees.

We purchase equity call spreads (“option collars”) to hedge the equity participation rates promised to contractholders in conjunction with our fixed deferred annuity and universal life products that credit interest based on changes in an external equity index. We use exchange-traded futures and equity put options to hedge against changes in the value of the GMWB liability related to the GMWB rider on our variable annuity product. The premium associated with certain options is paid quarterly over the life of the option contract.

Credit Contracts

Credit risk relates to the uncertainty associated with the continued ability of a given obligor to make timely payments of principal and interest. We use credit default swaps to enhance the return on our investment portfolio by providing comparable exposure to fixed income securities that might not be available in the primary market. They are also used to hedge credit exposures in our investment portfolio. Credit derivatives are used to sell or buy credit protection on an identified name or names on an unfunded or synthetic basis in return for receiving or paying a quarterly premium. The premium generally corresponds to a referenced name’s credit spread at the time the agreement is executed. In cases where we sell protection, we also buy a quality cash bond to match against the credit default swap, thereby entering into a synthetic transaction replicating a cash security. When selling protection, if there is an event of default by the referenced name, as defined by the agreement, we are obligated to pay the counterparty the referenced amount of the contract and receive in return the referenced security in a principal amount equal to the notional value of the credit default swap.

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
September 30, 2019
(Unaudited)

Other Contracts

Embedded Derivatives. We purchase or issue certain financial instruments or products that contain a derivative instrument that is embedded in the financial instrument or product. When it is determined that the embedded derivative possesses economic characteristics that are not clearly or closely related to the economic characteristics of the host contract and a separate instrument with the same terms would qualify as a derivative instrument, the embedded derivative is bifurcated from the host instrument for measurement purposes. The embedded derivative, which is reported with the host instrument in the consolidated statements of financial position, is carried at fair value.

We offer group annuity contracts that have guaranteed separate accounts as an investment option. We also offer funds with embedded fixed-rate guarantees as investment options in our defined contribution plans in Hong Kong.

We have structured investment relationships with trusts we have determined to be VIEs, which are consolidated in our financial statements. The notes issued by these trusts include obligations to deliver an underlying security to residual interest holders and the obligations contain an embedded derivative of the forecasted transaction to deliver the underlying security.

We have fixed deferred annuities and universal life products that credit interest based on changes in an external equity index. We also have certain variable annuity products with a GMWB rider, which allows the customer to make withdrawals of a specified annual amount, either for a fixed number of years or for the lifetime of the customer, even if the account value is fully exhausted. Declines in the equity markets may increase our exposure to benefits under contracts with the GMWB. We economically hedge the exposure in these contracts, as previously explained.

~~Table of Contents~~

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June 30, 2019~~
~~(Unaudited)~~

Exposure

Our risk of loss is typically limited to the fair value of our derivative instruments and not to the notional or contractual amounts of these derivatives. We are also exposed to credit losses in the event of nonperformance of the counterparties. Our current credit exposure is limited to the value of derivatives that have become favorable to us. This credit risk is minimized by purchasing such agreements from financial institutions with high credit ratings and by establishing and monitoring exposure limits. We also utilize various credit enhancements, including collateral and credit triggers to reduce the credit exposure to our derivative instruments.

Derivatives may be exchange-traded or they may be privately negotiated contracts, which are usually referred to as over-the-counter (“OTC”) derivatives. Certain of our OTC derivatives are cleared and settled through central clearing counterparties (“OTC cleared”), while others are bilateral contracts between two counterparties (“bilateral OTC”). Our derivative transactions are generally documented under International Swaps and Derivatives Association, Inc. (“ISDA”) Master Agreements. Management believes that such agreements provide for legally enforceable set-off and close-out netting of exposures to specific counterparties. Under such agreements, in connection with an early termination of a transaction, we are permitted to set off our receivable from a counterparty against our payables to the same counterparty arising out of all included transactions. For reporting purposes, we do not offset fair value amounts of bilateral OTC derivatives for the right to reclaim cash collateral or the obligation to return cash collateral against fair value amounts recognized for derivative instruments executed with the same counterparties under master netting agreements. OTC cleared derivatives have variation margin that is legally characterized as settlement of the derivative exposure, which reduces their fair value in the consolidated statements of financial position.

We posted ~~$170.1~~$237.9 million and $106.6 million in cash and securities under collateral arrangements as of ~~June~~September 30, 2019 and December 31, 2018, respectively, to satisfy collateral and initial margin requirements associated with our derivative credit support agreements and FCM agreements.

Certain of our derivative instruments contain provisions that require us to maintain an investment grade rating from each of the major credit rating agencies on our debt. If the ratings on our debt were to fall below investment grade, it would be in violation of these provisions and the counterparties to the derivative instruments could request immediate payment or demand immediate and ongoing full overnight collateralization on derivative instruments in net liability positions. The aggregate fair value, inclusive of accrued interest, of all derivative instruments with credit-risk-related contingent features that were in a liability position without regard to netting under derivative credit support annex agreements as of ~~June~~September 30, 2019 and December 31, 2018, was ~~$143.9~~$135.6 million and $109.7 million, respectively. Cleared derivatives have contingent features that require us to post excess margin as required by the FCM. The terms surrounding excess margin vary by FCM agreement. With respect to derivatives containing collateral triggers, we posted collateral and initial margin of ~~$170.1~~$237.9 million and $106.6 million as of ~~June~~September 30, 2019 and December 31, 2018, respectively, in the normal course of business, which reflects netting under derivative agreements. If the credit-risk-related contingent features underlying these agreements were triggered on ~~June~~September 30, 2019, we would be required to post an additional ~~$32.4~~$68.3 million of collateral to our counterparties.

As of June 30, 2019 and December 31, 2018, we had received $115.5 million and $79.5 million, respectively, of cash collateral associated with our derivative credit support annex agreements and FCM agreements, for which we recorded a corresponding liability reflecting our obligation to return the collateral.

3839

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

As of September 30, 2019 and December 31, 2018, we had received $183.7 million and $79.5 million, respectively, of cash collateral associated with our derivative credit support annex agreements and FCM agreements, for which we recorded a corresponding liability reflecting our obligation to return the collateral.

Notional amounts are used to express the extent of our involvement in derivative transactions and represent a standard measurement of the volume of our derivative activity. Notional amounts represent those amounts used to calculate contractual flows to be exchanged and are not paid or received, except for contracts such as currency swaps. Credit exposure represents the gross amount owed to us under derivative contracts as of the valuation date. The notional amounts and credit exposure of our derivative financial instruments by type were as follows:


	June 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018
	(in millions)				(in millions)
Notional amounts of derivative instruments
Interest rate contracts:
Interest rate swaps	$	34,178.3	$	34,393.7	$	35,359.6	$	34,393.7
Interest rate options		1,126.9		1,126.9		1,126.9		1,126.9
Interest rate futures		270.0		260.0		103.5		260.0
Swaptions		62.0		—		62.0		—
Foreign exchange contracts:
Currency swaps						1,011.0		898.6
Currency forwards		915.1		863.6		996.1		863.6
Currency swaps		903.8		898.6
Currency options		469.2		525.2		562.0		525.2
Equity contracts:
Equity options		1,581.5		1,522.5		1,633.7		1,522.5
Equity futures		316.1		491.7		321.6		491.7
Credit contracts:
Credit default swaps		370.0		420.0		195.0		420.0
Other contracts:
Embedded derivatives		9,476.5		9,452.3		9,718.5		9,452.3
Total notional amounts at end of period	$	49,669.4	$	49,954.5	$	51,089.9	$	49,954.5

Credit exposure of derivative instruments
Interest rate contracts:
Interest rate swaps	$	174.3	$	95.4	$	232.7	$	95.4
Interest rate options		29.5		16.3		37.3		16.3
Swaptions		0.1		—
Foreign exchange contracts:
Currency swaps		68.5		71.2		81.5		71.2
Currency forwards		1.3		2.8		5.2		2.8
Currency options		0.5		1.9		1.2		1.9
Equity contracts:
Equity options		22.2		7.7		24.6		7.7
Credit contracts:
Credit default swaps		1.0		2.4		0.6		2.4
Total gross credit exposure		297.4		197.7		383.1		197.7
Less: collateral received		200.0		122.9		274.7		122.9
Net credit exposure	$	97.4	$	74.8	$	108.4	$	74.8

3940

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

The fair value of our derivative instruments classified as assets and liabilities was as follows:


	Derivative assets (1)				Derivative liabilities (2)				Derivative assets (1)				Derivative liabilities (2)
	June 30, 2019		December 31, 2018		June 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018
	(in millions)								(in millions)
Derivatives designated as hedging instruments
Interest rate contracts	$	—	$	—	$	22.0	$	16.1	$	—	$	—	$	24.4	$	16.1
Foreign exchange contracts		29.2		37.6		10.2		13.5		45.7		37.6		6.9		13.5
Total derivatives designated as hedging instruments	$	29.2	$	37.6	$	32.2	$	29.6	$	45.7	$	37.6	$	31.3	$	29.6

Derivatives not designated as hedging instruments
Interest rate contracts	$	198.9	$	108.0	$	19.7	$	22.6	$	261.3	$	108.0	$	20.2	$	22.6
Foreign exchange contracts		40.3		38.4		63.0		72.9		42.0		38.4		86.3		72.9
Equity contracts		22.2		7.7		51.9		27.6		24.6		7.7		44.2		27.6
Credit contracts		0.9		2.3		1.1		4.4		0.6		2.3		1.2		4.4
Other contracts		—		—		214.0		134.6		—		—		417.2		134.6
Total derivatives not designated as hedging instruments		262.3		156.4		349.7		262.1		328.5		156.4		569.1		262.1

Total derivative instruments	$	291.5	$	194.0	$	381.9	$	291.7	$	374.2	$	194.0	$	600.4	$	291.7

(1)	The fair value of derivative assets is reported with other investments on the consolidated statements of financial position.

(2)

The fair value of derivative liabilities is reported with other liabilities on the consolidated statements of financial position, with the exception of certain embedded derivative liabilities. Embedded derivatives with a net liability fair value of ~~$118.7~~$320.8 million and $45.2 million as of ~~June~~September 30, 2019 and December 31, 2018, respectively, are reported with contractholder funds on the consolidated statements of financial position.

Credit Derivatives Sold

When we sell credit protection, we are exposed to the underlying credit risk similar to purchasing a fixed maturity security instrument. Our credit derivative contracts sold reference a single name or reference security (referred to as “single name credit default swaps”). These instruments are either referenced in an OTC credit derivative transaction or embedded within an investment structure that has been fully consolidated into our financial statements.

These credit derivative transactions are subject to events of default defined within the terms of the contract, which normally consist of bankruptcy, failure to pay, or modified restructuring of the reference entity and/or issue. If a default event occurs for a reference name or security, we are obligated to pay the counterparty an amount equal to the notional amount of the credit derivative transaction. As a result, our maximum future payment is equal to the notional amount of the credit derivative. In certain cases, we also may have purchased credit protection with identical underlyings to certain of our sold protection transactions. As of ~~June~~September 30, 2019 and December 31, 2018, we did not purchase credit protection relating to our sold protection transactions. In certain circumstances, our potential loss could also be reduced by any amount recovered in the default proceedings of the underlying credit name.

4041

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

The following tables show our credit default swap protection sold by types of contract, types of referenced/underlying asset class and external agency rating for the underlying reference security. The maximum future payments are undiscounted and have not been reduced by the effect of any offsetting transactions, collateral or recourse features described above.

June 30, 2019

September 30, 2019

Weighted

Maximum

average

Maximum

average

Notional

Fair

future

expected life

Notional

Fair

future

expected life

amount

value

payments

(in years)

amount

value

payments

(in years)

(in millions)

Single name credit default swaps

Corporate debt

AAA

10.0

—

10.0

0.2

15.0

0.1

15.0

0.5

5.0

—

5.0

0.7

BBB

165.0

0.2

165.0

1.5

70.0

0.3

70.0

2.9

Government/municipalities

20.0

0.1

20.0

0.5

20.0

—

20.0

0.2

Sovereign

10.0

—

10.0

0.2

BBB

55.0

0.4

55.0

0.8

15.0

0.3

15.0

2.2

Total credit default swap protection sold

275.0

0.8

275.0

1.1

110.0

0.6

110.0

2.2

December 31, 2018

Weighted

Maximum

average

Notional

Fair

future

expected life


amount

value

payments

(in years)

(in millions)
Single name credit default swaps

Corporate debt

AAA

$
10.0

$
0.1

$
10.0

0.7
A

15.0

0.1

15.0

1.0
BBB

190.0

0.4

190.0

1.7
BB

10.0

—

10.0

0.5
CCC

15.0

(3.6)

15.0

0.9
Government/municipalities

AA

20.0

0.2

20.0

1.0
Sovereign

A

10.0

0.1

10.0

0.7
BBB

55.0

0.4

55.0

1.3
Total credit default swap protection sold

$
325.0

$
(2.3)

$
325.0

1.4


	December 31, 2018
							Weighted
					Maximum		average
	Notional		Fair		future		expected life
	amount		value		payments		(in years)
	(in millions)
Single name credit default swaps
Corporate debt
AAA	$	10.0	$	0.1	$	10.0	0.7
A		15.0		0.1		15.0	1.0
BBB		190.0		0.4		190.0	1.7
BB		10.0		—		10.0	0.5
CCC		15.0		(3.6)		15.0	0.9
Government/municipalities
AA		20.0		0.2		20.0	1.0
Sovereign
A		10.0		0.1		10.0	0.7
BBB		55.0		0.4		55.0	1.3
Total credit default swap protection sold	$	325.0	$	(2.3)	$	325.0	1.4

Fair Value and Cash Flow Hedges

Fair Value Hedges

We use fixed-to-floating rate interest rate swaps to more closely align the interest rate characteristics of certain assets and have used them to align the interest rate characteristics of certain liabilities. In general, these swaps are used in asset and liability management to modify duration, which is a measure of sensitivity to interest rate changes.

The net interest effect of interest rate swap transactions for derivatives in fair value hedges is recorded as an adjustment to income or expense of the underlying hedged item in our consolidated statements of operations.

4142

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

The following amounts were recorded on the consolidated statements of financial position related to cumulative basis adjustments for fair value hedges. The amortized cost includes the amortized cost basis and the fair value hedging basis adjustment.


					Cumulative amount of fair								Cumulative amount of fair
					value hedging basis adjustment								value hedging basis adjustment
Line item in the consolidated statements					included in the amortized cost								included in the amortized cost
of financial position in which the	Amortized cost of hedged item				of the hedged item				Amortized cost of hedged item				of the hedged item
hedged item is included	June 30, 2019		December 31, 2018		June 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018
	(in millions)								(in millions)
Fixed maturities, available-for-sale:
Active hedging relationships	$	143.3	$	137.0	$	19.0	$	12.4	$	145.9	$	137.0	$	21.8	$	12.4
Discontinued hedging relationships		248.7		298.9		9.6		13.3		214.0		298.9		8.7		13.3
Total fixed maturities, available-for-sale in active or discontinued hedging relationships	$	392.0	$	435.9	$	28.6	$	25.7	$	359.9	$	435.9	$	30.5	$	25.7

Cash Flow Hedges

We utilized floating-to-fixed rate interest rate swaps to eliminate the variability in cash flows of recognized financial assets and liabilities and forecasted transactions.

We enter into currency exchange swap agreements to convert both principal and interest payments of certain foreign denominated assets and liabilities into U.S. dollar denominated fixed-rate instruments to eliminate the exposure to future currency volatility on those items.

The net interest effect of interest rate swap and currency swap transactions for derivatives in cash flow hedges is recorded as an adjustment to income or expense of the underlying hedged item in our consolidated statements of operations.

The maximum length of time we are hedging our exposure to the variability in future cash flows for forecasted transactions, excluding those related to the payments of variable interest on existing financial assets and liabilities, is ~~1.0~~0.8 years. As of ~~June~~September 30, 2019, we had $0.0 million of net gains reported in AOCI on the consolidated statements of financial position related to active hedges of forecasted transactions. If a hedged forecasted transaction is no longer probable of occurring, cash flow hedge accounting is discontinued. If it is probable that the hedged forecasted transaction will not occur, the deferred gain or loss is immediately reclassified from AOCI into net income.

The following table shows the effect of derivatives in cash flow hedging relationships on the consolidated statements of financial position.




		Amount of gain (loss) recognized in AOCI on derivatives									Amount of gain (loss) recognized in AOCI on derivatives
		For the three months ended				For the six months ended					For the three months ended				For the nine months ended
Derivatives in cash		June 30,				June 30,					September 30,				September 30,
flow hedging relationships	Related hedged item	2019		2018		2019		2018		Related hedged item	2019		2018		2019		2018
		(in millions)				(in millions)					(in millions)				(in millions)
Interest rate contracts	Fixed maturities, available-for-sale	$	0.9	$	34.8	$	(3.3)	$	30.2	Fixed maturities, available-for-sale	$	0.3	$	2.4	$	(3.0)	$	32.6
Foreign exchange contracts	Fixed maturities, available-for-sale		3.4		27.2		(5.2)		8.4	Fixed maturities, available-for-sale		19.9		(3.2)		14.7		5.2
Foreign exchange contracts	Investment contracts		—		—		—		(0.1)	Investment contracts		—		—		—		(0.1)
Total		$	4.3	$	62.0	$	(8.5)	$	38.5		$	20.2	$	(0.8)	$	11.7	$	37.7

We expect to reclassify net gains of $23.5 million from AOCI into net income in the next 12 months, which includes both net deferred gains on discontinued hedges and net losses on periodic settlements of active hedges. Actual amounts may vary from this amount as a result of market conditions.

4243

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

Effect of Fair Value and Cash Flow Hedges on Consolidated Statements of Operations

The following tables show the effect of derivatives in fair value and cash flow hedging relationships and the related hedged items on the consolidated statements of operations.

For the three months ended June 30, 2019

For the three months ended September 30, 2019

Benefits,

Net investment

Net realized

claims and

Net investment

Net realized

claims and

income related

capital gains

settlement

income related

capital losses

settlement

to hedges

(losses) related to

expenses

to hedges

related to

expenses

of fixed

hedges of fixed

related to

Operating

of fixed

hedges of fixed

related to

Operating

maturities,

hedges of

expenses

maturities,

hedges of

expenses

available-

investment

related to

available-

investment

related to

for-sale

contracts

hedges of debt

for-sale

contracts

hedges of debt

(in millions)

Total amounts of consolidated statement of operations line items in which the effects of fair value and cash flow hedges are reported

1,037.1

(4.0)

2,446.1

1,046.3

996.6

(42.4)

2,840.1

1,242.3

Losses on fair value hedging relationships:

Interest rate contracts:

Gain recognized on hedged item

4.2

—

2.8

—

Loss recognized on derivatives

(4.3)

—

(2.8)

—

Amortization of hedged item basis adjustments

(1.2)

—

(0.9)

—

Amounts related to periodic settlements on derivatives

(0.7)

—

(0.9)

—

Total loss recognized for fair value hedging relationships

(2.0)

—

(1.8)

—

Gains (losses) on cash flow hedging relationships:

Interest rate contracts:

Gain (loss) reclassified from AOCI on derivatives

4.9

—

(2.0)

5.0

—

(0.1)

—

Gain reclassified from AOCI into net income as a result that a forecasted transaction is no longer probable of occurring

—

0.1

—

Foreign exchange contracts:

Gain reclassified from AOCI on derivatives

—

9.5

—

Amounts related to periodic settlements on derivatives

1.7

—

2.0

—

Total gain (loss) recognized for cash flow hedging relationships

6.6

9.6

—

(2.0)

7.0

—

(0.1)

—

4344

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)


	For the three months ended September 30, 2018
					Benefits,
	Net investment		Net realized		claims and
	income related		capital gains		settlement
	to hedges		(losses) related to		expenses
	of fixed		hedges of fixed		related to		Operating
	maturities,		maturities,		hedges of		expenses
	available-		available-		investment		related to
	for-sale		for-sale		contracts		hedges of debt
	(in millions)
Total amounts of consolidated statement of operations line items in which the effects of fair value and cash flow hedges are reported	$	919.4	$	(5.5)	$	2,642.1	$	1,105.0

Losses on fair value hedging relationships:
Interest rate contracts:
Loss recognized on hedged item	$	—	$	(2.4)	$	—	$	—
Gain recognized on derivatives		—		2.3		—		—
Amortization of hedged item basis adjustments		(1.6)		—		—		—
Amounts related to periodic settlements on derivatives		(1.2)		—		—		—
Total loss recognized for fair value hedging relationships	$	(2.8)	$	(0.1)	$	—	$	—

Gains (losses) on cash flow hedging relationships:
Interest rate contracts:
Gain (loss) reclassified from AOCI on derivatives	$	5.1	$	—	$	—	$	(2.7)

Foreign exchange contracts:
Gain reclassified from AOCI on derivatives		—		2.3		—		—
Amounts related to periodic settlements on derivatives		1.5		—		—		—
Total gain (loss) recognized for cash flow hedging relationships	$	6.6	$	2.3	$	—	$	(2.7)

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
September 30, 2019
(Unaudited)

For the three months ended June 30, 2018

Benefits,

Net investment

Net realized

claims and

income related

capital gains

settlement

to hedges

related to

expenses

of fixed

hedges of fixed

related to

Operating

maturities,

maturities,

hedges of

expenses

available-

available-

investment

related to


for-sale

for-sale

contracts

hedges of debt

(in millions)
Total amounts of consolidated statement of operations line items in which the effects of fair value and cash flow hedges are reported

$
889.1

$
67.4

$
1,699.2

$
990.1

Losses on fair value hedging relationships:








Interest rate contracts:








Loss recognized on hedged item

$
—

$
(2.3)

$
—

$
—
Gain recognized on derivatives

—

2.2

—

—
Amortization of hedged item basis adjustments

(1.7)

—

—

—
Amounts related to periodic settlements on derivatives

(1.7)

—

—

—
Total loss recognized for fair value hedging relationships

$
(3.4)

$
(0.1)

$
—

$
—

Gains (losses) on cash flow hedging relationships:








Interest rate contracts:








Gain (loss) reclassified from AOCI on derivatives

$
5.3

$
—

$
—

$
(2.6)
Gain reclassified from AOCI as a result that a forecasted transaction is no longer probable of occurring

—

0.1

—

—

Foreign exchange contracts:








Gain reclassified from AOCI on derivatives

—

0.6

—

—
Amounts related to periodic settlements on derivatives

1.5

—

—

—
Total gain (loss) recognized for cash flow hedging relationships

$
6.8

$
0.7

$
—

$
(2.6)

For the nine months ended September 30, 2019

Benefits,

Net investment

Net realized

claims and

income related

capital gains

settlement

to hedges

related to

expenses

of fixed

hedges of fixed

related to

Operating

maturities,

hedges of

expenses

available-

investment

related to

for-sale

contracts

hedges of debt

(in millions)

Total amounts of consolidated statement of operations line items in which the effects of fair value and cash flow hedges are reported

2,994.7

38.1

7,481.3

3,281.3

Losses on fair value hedging relationships:

Interest rate contracts:

Gain recognized on hedged item

9.4

—

Loss recognized on derivatives

(9.6)

—

Amortization of hedged item basis adjustments

(3.4)

—

Amounts related to periodic settlements on derivatives

(2.4)

—

Total loss recognized for fair value hedging relationships

(6.0)

—

Gains (losses) on cash flow hedging relationships:

Interest rate contracts:

Gain (loss) reclassified from AOCI on derivatives

15.0

—

(0.1)

(4.8)

Gain reclassified from AOCI into net income as a result that a forecasted transaction is no longer probable of occurring

—

0.1

—

Foreign exchange contracts:

Gain reclassified from AOCI on derivatives

—

9.5

—

Amounts related to periodic settlements on derivatives

5.3

—

Total gain (loss) recognized for cash flow hedging relationships

20.3

9.6

(0.1)

(4.8)

4446

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

For the six months ended June 30, 2019

Benefits,

Net investment

Net realized

claims and

income related

capital gains

settlement

to hedges

related to

expenses

of fixed

hedges of fixed

related to

Operating

maturities,

maturities,

hedges of

expenses

available-

available-

investment

related to


for-sale

for-sale

contracts

hedges of debt

(in millions)
Total amounts of consolidated statement of operations line items in which the effects of fair value and cash flow hedges are reported

$
1,998.1

$
80.5

$
4,641.2

$
2,039.0

Losses on fair value hedging relationships:








Interest rate contracts:








Gain recognized on hedged item

$
6.6

$
—

$
—

$
—
Loss recognized on derivatives

(6.8)

—

—

—
Amortization of hedged item basis adjustments

(2.5)

—

—

—
Amounts related to periodic settlements on derivatives

(1.5)

—

—

—
Total loss recognized for fair value hedging relationships

$
(4.2)

$
—

$
—

$
—

Gains (losses) on cash flow hedging relationships:








Interest rate contracts:








Gain (loss) reclassified from AOCI on derivatives

$
10.0

$
—

$
—

$
(4.8)
Gain reclassified from AOCI into net income as a result that a forecasted transaction is no longer probable of occurring

—

0.1

—

—

Foreign exchange contracts:








Gain reclassified from AOCI on derivatives

—

9.5

—

—
Amounts related to periodic settlements on derivatives

3.3

—

—

—
Total gain (loss) recognized for cash flow hedging relationships

$
13.3

$
9.6

$
—

$
(4.8)

~~Table of Contents~~

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June 30, 2019~~
~~(Unaudited)~~


	For the six months ended June 30, 2018								For the nine months ended September 30, 2018
					Benefits,								Benefits,
	Net investment		Net realized		claims and				Net investment		Net realized		claims and
	income related		capital gains		settlement				income related		capital gains		settlement
	to hedges		related to		expenses				to hedges		(losses) related to		expenses
	of fixed		hedges of fixed		related to		Operating		of fixed		hedges of fixed		related to		Operating
	maturities,		maturities,		hedges of		expenses		maturities,		maturities,		hedges of		expenses
	available-		available-		investment		related to		available-		available-		investment		related to
	for-sale		for-sale		contracts		hedges of debt		for-sale		for-sale		contracts		hedges of debt
	(in millions)								(in millions)
Total amounts of consolidated statement of operations line items in which the effects of fair value and cash flow hedges are reported	$	1,791.3	$	42.3	$	3,110.3	$	1,975.1	$	2,710.7	$	36.8	$	5,752.4	$	3,080.1

Losses on fair value hedging relationships:
Interest rate contracts:
Loss recognized on hedged item	$	—	$	(7.8)	$	—	$	—	$	—	$	(10.2)	$	—	$	—
Gain recognized on derivatives		—		7.6		—		—		—		9.9		—		—
Amortization of hedged item basis adjustments		(3.5)		—		—		—		(5.1)		—		—		—
Amounts related to periodic settlements on derivatives		(3.7)		—		—		—		(4.9)		—		—		—
Total loss recognized for fair value hedging relationships	$	(7.2)	$	(0.2)	$	—	$	—	$	(10.0)	$	(0.3)	$	—	$	—

Gains (losses) on cash flow hedging relationships:
Interest rate contracts:
Gain (loss) reclassified from AOCI on derivatives	$	10.7	$	—	$	—	$	(5.2)	$	15.8	$	—	$	—	$	(7.9)
Gain reclassified from AOCI as a result that a forecasted transaction is no longer probable of occurring		—		0.2		—		—		—		0.2		—		—

Foreign exchange contracts:
Gain reclassified from AOCI on derivatives		—		0.2		—		—		—		2.5		—		—
Amounts related to periodic settlements on derivatives		3.1		—		(0.1)		—		4.6		—		(0.1)		—
Total gain (loss) recognized for cash flow hedging relationships	$	13.8	$	0.4	$	(0.1)	$	(5.2)	$	20.4	$	2.7	$	(0.1)	$	(7.9)

Derivatives Not Designated as Hedging Instruments

Our use of futures, certain swaptions and swaps, option collars, options and forwards are effective from an economic standpoint, but they have not been designated as hedges for financial reporting purposes. As such, periodic changes in the market value of these instruments, which includes mark-to-market gains and losses as well as periodic and final settlements, primarily flow directly into net realized capital gains (losses) on the consolidated statements of operations.

4647

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

The following table shows the effect of derivatives not designated as hedging instruments, including fair value changes of embedded derivatives that have been bifurcated from the host contract, on the consolidated statements of operations.


	Amount of gain (loss) recognized in				Amount of gain (loss) recognized in				Amount of gain (loss) recognized in				Amount of gain (loss) recognized in
	net income on derivatives for the				net income on derivatives for the				net income on derivatives for the				net income on derivatives for the
	three months ended June 30,				six months ended June 30,				three months ended September 30,				nine months ended September 30,
Derivatives not designated as hedging instruments	2019		2018		2019		2018		2019		2018		2019		2018
	(in millions)								(in millions)
Interest rate contracts	$	94.1	$	(19.8)	$	161.4	$	(67.8)	$	211.1	$	(33.6)	$	372.5	$	(101.4)
Foreign exchange contracts		5.4		(24.2)		10.0		(15.4)		(37.8)		(6.4)		(27.8)		(21.8)
Equity contracts		(15.8)		(43.0)		(90.8)		(58.2)		(2.5)		(46.1)		(93.3)		(104.3)
Credit contracts		(4.8)		1.2		(3.5)		1.3		—		—		(3.5)		1.3
Other contracts		(76.1)		52.1		(71.4)		115.8		(187.2)		122.2		(258.6)		238.0
Total	$	2.8	$	(33.7)	$	5.7	$	(24.3)	$	(16.4)	$	36.1	$	(10.7)	$	11.8

5.6. Insurance Liabilities

Liability for Unpaid Claims

The liability for unpaid claims is reported in future policy benefits and claims within our consolidated statements of financial position. Activity associated with unpaid claims was as follows:


	For the six months ended June 30,				For the nine months ended September 30,
	2019		2018		2019		2018
	(in millions)				(in millions)
Balance at beginning of period	$	2,252.7	$	2,130.5	$	2,252.7	$	2,130.5
Less: reinsurance recoverable		404.3		375.8		404.3		375.8
Net balance at beginning of period		1,848.4		1,754.7		1,848.4		1,754.7
Incurred:
Current year		653.6		617.3		1,009.8		939.6
Prior years		29.0		17.9		19.9		11.1
Total incurred		682.6		635.2		1,029.7		950.7
Payments:
Current year		387.8		358.3		624.6		582.6
Prior years		238.1		231.8		316.5		301.4
Total payments		625.9		590.1		941.1		884.0
Net balance at end of period		1,905.1		1,799.8		1,937.0		1,821.4
Plus: reinsurance recoverable		403.7		388.2		404.7		390.9
Balance at end of period	$	2,308.8	$	2,188.0	$	2,341.7	$	2,212.3

Amounts not included in the rollforward above:
Claim adjustment expense liabilities	$	55.1	$	51.9	$	56.9	$	54.1

Incurred liability adjustments relating to prior years, which affected current operations during 2019 and 2018, resulted in part from developed claims for prior years being different than were anticipated when the liabilities for unpaid claims were originally estimated. These trends have been considered in establishing the current year liability for unpaid claims.

4748

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

6.7. Long-Term Debt

June 30, 2019

September 30, 2019

Net unamortized

discount,

premium and

debt issuance

Carrying

debt issuance

Carrying

Principal

costs

amount

Principal

costs

amount

(in millions)

3.3% notes payable, due 2022

300.0

(1.3)

298.7

300.0

(1.2)

298.8

3.125% notes payable, due 2023

300.0

(1.1)

298.9

300.0

(1.0)

299.0

3.4% notes payable, due 2025

400.0

(2.8)

397.2

400.0

(2.7)

397.3

3.1% notes payable, due 2026

350.0

(2.6)

347.4

350.0

(2.5)

347.5

3.7% notes payable, due in 2029

500.0

(6.4)

493.6

3.7% notes payable, due 2029

500.0

(6.1)

493.9

6.05% notes payable, due 2036

505.6

(2.5)

503.1

505.6

(2.5)

503.1

4.625% notes payable, due 2042

300.0

(3.2)

296.8

300.0

(3.2)

296.8

4.35% notes payable, due 2043

300.0

(3.3)

296.7

300.0

(3.3)

296.7

4.3% notes payable, due 2046

300.0

(3.3)

296.7

300.0

(3.3)

296.7

4.7% notes payable, due 2055

400.0

(4.9)

395.1

400.0

(4.9)

395.1

Non-recourse mortgages and notes payable

137.0

1.2

138.2

137.8

1.2

139.0

Total long-term debt

3,792.6

(30.2)

3,762.4

3,793.4

(29.5)

3,763.9

December 31, 2018

Net unamortized

discount,

premium and

debt issuance

Carrying


Principal

costs

amount

(in millions)
3.3% notes payable, due 2022

$
300.0

$
(1.5)

$
298.5
3.125% notes payable, due 2023

300.0

(1.2)

298.8
3.4% notes payable, due 2025

400.0

(3.0)

397.0
3.1% notes payable, due 2026

350.0

(2.7)

347.3
6.05% notes payable, due 2036

505.6

(2.6)

503.0
4.625% notes payable, due 2042

300.0

(3.3)

296.7
4.35% notes payable, due 2043

300.0

(3.3)

296.7
4.3% notes payable, due 2046

300.0

(3.3)

296.7
4.7% notes payable, due 2055

400.0

(4.9)

395.1
Non-recourse mortgages and notes payable

128.5

1.3

129.8
Total long-term debt

$
3,284.1

$
(24.5)

$
3,259.6


	December 31, 2018
			Net unamortized
			discount,
			premium and
			debt issuance		Carrying
	Principal		costs		amount
	(in millions)
3.3% notes payable, due 2022	$	300.0	$	(1.5)	$	298.5
3.125% notes payable, due 2023		300.0		(1.2)		298.8
3.4% notes payable, due 2025		400.0		(3.0)		397.0
3.1% notes payable, due 2026		350.0		(2.7)		347.3
6.05% notes payable, due 2036		505.6		(2.6)		503.0
4.625% notes payable, due 2042		300.0		(3.3)		296.7
4.35% notes payable, due 2043		300.0		(3.3)		296.7
4.3% notes payable, due 2046		300.0		(3.3)		296.7
4.7% notes payable, due 2055		400.0		(4.9)		395.1
Non-recourse mortgages and notes payable		128.5		1.3		129.8
Total long-term debt	$	3,284.1	$	(24.5)	$	3,259.6

Net discount, premium and issuance costs associated with issuing these notes are amortized to expense over the respective terms using the interest method.

On May 7, 2019, we issued $500.0 million of senior notes. The notes bear interest at 3.7% and will mature in 2029. Interest on the notes is payable semi-annually on May 15 and November 15 each year, beginning on November 15, 2019. The proceeds from these notes, along with available cash, ~~will be~~were used to fund the acquisition of the ~~Institutional Retirement & Trust business of Wells Fargo Bank, N.A.~~Acquired Business.

4849

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

7.8. Income Taxes

Effective Income Tax Rate

Our provision for income taxes may not have the customary relationship of taxes to income. A reconciliation between the U.S. corporate income tax rate and the effective income tax rate was as follows:


	For the three months ended				For the six months ended				For the three months ended				For the nine months ended
	June 30,				June 30,				September 30,				September 30,
	2019		2018		2019		2018		2019		2018		2019		2018
U.S. corporate income tax rate	21	%	21	%	21	%	21	%	21	%	21	%	21	%	21	%
Dividends received deduction	(4)		(3)		(5)		(3)		(6)		(3)		(5)		(3)
Tax credits	(3)		(3)		(2)		(3)		(3)		(2)		(3)		(3)
Impact of equity method presentation	(1)		(1)		(1)		(1)		(2)		—		(1)		(1)
Impact of the Tax Cuts and Jobs Act	—		(4)		—		(3)		(1)		(2)		—		(3)
Local country permanent tax adjustments									5		3		1		1
State income taxes	—		1		1		1		2		2		1		1
Other	—		—		—		(1)		2		—		1		1
Effective income tax rate	13	%	11	%	14	%	11	%	18	%	19	%	15	%	14	%

Unrecognized Tax Benefits

Our changes in unrecognized tax benefits were as follows:


	For the six months ended		For the year ended		For the nine months ended		For the year ended
	June 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018
	(in millions)				(in millions)
Balance at beginning of period	$	42.1	$	194.1	$	42.1	$	194.1
Additions based on tax positions related to the current year		23.2		0.8		—		0.8
Additions for tax positions of prior years		—		43.7		23.2		43.7
Reductions for tax positions related to the current year		(2.2)		(10.6)		(2.7)		(10.6)
Reductions for tax positions of prior years		(0.5)		(23.2)		(0.5)		(23.2)
Settlements		—		(162.7)		—		(162.7)
Balance at end of period	$	62.6	$	42.1	$	62.1	$	42.1

Deferred tax liabilities are recognized for taxes payable on the unremitted earnings from foreign operations of our subsidiaries, except where it is our intention to indefinitely reinvest a portion or all of these undistributed earnings. During the second quarter of 2019, foreign undistributed earnings of $250.0 million previously indefinitely reinvested were repatriated from the United Kingdom. No applicable taxes were recorded with the distribution nor were there any further changes to our repatriation and reinvestment plans.

8.9. Employee and Agent Benefits

Components of Net Periodic Benefit Cost


					Other postretirement								Other postretirement
	Pension benefits				benefits				Pension benefits				benefits
	For the three months ended				For the three months ended				For the three months ended				For the three months ended
	June 30,				June 30,				September 30,				September 30,
	2019		2018		2019		2018		2019		2018		2019		2018
	(in millions)								(in millions)
Service cost	$	16.7	$	18.2	$	—	$	—	$	16.3	$	18.3	$	—	$	—
Interest cost		32.1		29.9		1.0		0.8		30.8		29.8		0.9		0.9
Expected return on plan assets		(36.4)		(39.3)		(8.3)		(8.4)		(38.5)		(39.2)		(8.3)		(8.4)
Amortization of prior service benefit		(2.0)		(0.8)		(0.3)		(3.4)		(4.2)		(0.8)		(0.3)		(3.5)
Recognized net actuarial (gain) loss		17.2		16.9		—		(0.4)		18.1		17.0		—		(0.4)
Net periodic benefit cost (income)	$	27.6	$	24.9	$	(7.6)	$	(11.4)	$	22.5	$	25.1	$	(7.7)	$	(11.4)

4950

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)


					Other postretirement								Other postretirement
	Pension benefits				benefits				Pension benefits				benefits
	For the six months ended				For the six months ended				For the nine months ended				For the nine months ended
	June 30,				June 30,				September 30,				September 30,
	2019		2018		2019		2018		2019		2018		2019		2018
	(in millions)								(in millions)
Service cost	$	33.5	$	36.5	$	—	$	—	$	49.8	$	54.8	$	—	$	—
Interest cost		64.9		59.8		1.9		1.7		95.7		89.6		2.8		2.6
Expected return on plan assets		(71.9)		(78.5)		(16.6)		(16.8)		(110.4)		(117.7)		(24.9)		(25.2)
Amortization of prior service benefit		(2.9)		(1.7)		(0.6)		(6.9)		(7.1)		(2.5)		(0.9)		(10.4)
Recognized net actuarial (gain) loss		34.1		33.8		—		(0.7)		52.2		50.8		—		(1.1)
Net periodic benefit cost (income)	$	57.7	$	49.9	$	(15.3)	$	(22.7)	$	80.2	$	75.0	$	(23.0)	$	(34.1)

The components of net periodic benefit cost including the service cost component are included in operating expenses on the consolidated statements of operations.

During the second quarter of 2019, we amended The Principal Pension Plan and The Principal Financial Group Nonqualified Defined Benefit Plan for Employees to end traditional benefit accruals as of December 31, 2022, and begin cash balance accruals January 1, 2023. We remeasured the associated plan assets and pension benefit obligations as of May 31, 2019, resulting in a net actuarial loss of $59.0 million and a total plan amendment gain of $122.4 million. The net actuarial loss is composed of an increase in benefit obligation of $237.6 million resulting from the reduction in discount rate compared to December 31, 2018, partially offset by a $178.6 million asset gain. The net plan amendment gain was recorded in AOCI and will be amortized over the average future working lifetimes of the plans.

Contributions

Our funding policy for our qualified pension plan is to fund the plan annually in an amount at least equal to the minimum annual contribution required under the Employee Retirement Income Security Act (“ERISA”) and, generally, not greater than the maximum amount that can be deducted for federal income tax purposes. It is too early to determine, but we do not anticipate that we will be required to fund a minimum required contribution under ERISA. Regardless, it is possible that we may fund the qualified and nonqualified pension plans in 2019 for a combined total of up to $25.0 million. During the three and ~~six~~nine months ended ~~June~~September 30, 2019, we contributed $5.7 million and ~~$11.4~~$17.1 million to these plans, respectively.

9.10. Contingencies, Guarantees, Indemnifications and Leases

Litigation and Regulatory Contingencies

We are regularly involved in litigation, both as a defendant and as a plaintiff, but primarily as a defendant. Litigation naming us as a defendant ordinarily arises out of our business operations as a provider of asset management and accumulation products and services, individual life insurance, specialty benefits insurance and our investment activities. Some of the lawsuits may be class actions, or purport to be, and some may include claims for unspecified or substantial punitive and treble damages.

We may discuss such litigation in one of three ways. We accrue a charge to income and disclose legal matters for which the chance of loss is probable and for which the amount of loss can be reasonably estimated. We may disclose contingencies for which the chance of loss is reasonably possible and provide an estimate of the possible loss or range of loss or a statement that such an estimate cannot be made. Finally, we may voluntarily disclose loss contingencies for which the chance of loss is remote in order to provide information concerning matters that potentially expose us to possible losses.

In addition, regulatory bodies such as state insurance departments, the SEC, the Financial Industry Regulatory Authority (“FINRA”), the Department of Labor (“DOL”) and other regulatory agencies in the U.S. and in international locations in which we do business, regularly make inquiries and conduct examinations or investigations concerning our compliance with, among other things, insurance laws, securities laws, ERISA and laws governing the activities of broker-dealers. We receive requests from regulators and other governmental authorities relating to industry issues and may receive additional requests, including subpoenas and interrogatories, in the future.

As of ~~June~~September 30, 2019, we had no litigation or regulatory contingencies for which we believe disclosure is appropriate.

5051

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

Guarantees and Indemnifications

In the normal course of business, we have provided guarantees to third parties primarily related to former subsidiaries and joint ventures. The terms of these agreements range in duration and often are not explicitly defined. The maximum exposure under these agreements as of ~~June~~September 30, 2019, was approximately $118.0 million. At inception, the fair value of such guarantees was insignificant. In addition, we believe the likelihood is remote that material payments will be required. Therefore, any liability accrued within our consolidated statements of financial position is insignificant. Should we be required to perform under these guarantees, we generally could recover a portion of the loss from third parties through recourse provisions included in agreements with such parties, the sale of assets held as collateral that can be liquidated in the event performance is required under the guarantees or other recourse generally available to us; therefore, such guarantees would not result in a material adverse effect on our business or financial position. While the likelihood is remote, such outcomes could materially affect net income in a particular quarter or annual period. Furthermore, in connection with contingent funding agreements, we are required to purchase any principal and interest strips of U.S. Treasury securities that are due and not paid from the associated unconsolidated trusts. The maximum exposure under these agreements as of ~~June~~September 30, 2019, was $750.0 million.

We manage mandatory privatized social security funds in Chile. By regulation, we have a required minimum guarantee on the funds’ relative return. Because the guarantee has no limitation with respect to duration or amount, the maximum exposure of the guarantee in the future is indeterminable.

We are also subject to various other indemnification obligations issued in conjunction with divestitures, acquisitions and financing transactions whose terms range in duration and often are not explicitly defined. Certain portions of these indemnifications may be capped, while other portions are not subject to such limitations; therefore, the overall maximum amount of the obligation under the indemnifications cannot be reasonably estimated. At inception, the fair value of such indemnifications was insignificant. In addition, we believe the likelihood is remote that material payments will be required. Therefore, any liability accrued within our consolidated statements of financial position is insignificant. While we are unable to estimate with certainty the ultimate legal and financial liability with respect to these indemnifications, we believe that performance under these indemnifications would not result in a material adverse effect on our business or financial position. While the likelihood is remote, performance under these indemnifications could materially affect net income in a particular quarter or annual period.

Leases

As a lessee, we lease office space, data processing equipment, office furniture and office equipment under various operating leases. We also lease buildings and hardware storage equipment under finance leases. Lease assets and liabilities are recognized at the commencement of a lease based on the present value of lease payments over the lease term. We generally use our incremental borrowing rate based on the information available at the lease commencement date to determine the present value of lease payments. Lease term may include options to extend or terminate the lease when it is reasonably certain we will exercise the option. Leases with an initial term of twelve months or less are not recorded on the consolidated statements of financial position. We recognize lease expense for leases on a straight-line basis over the lease term. Some of our lease agreements include payments for property taxes, insurance, utilities or common area maintenance, which are not based on an index or rate. These payments are recognized in net income in the period in which the obligation has occurred.

We sublease certain office space to third parties, which are primarily operating leases. We record sublease income on a straight-line basis over the lease term.

5152

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

The lease assets and liabilities were as follows:


	June 30, 2019		September 30, 2019
	(in millions)		(in millions)
Assets
Operating lease assets (1)	$	195.2	$	190.3
Finance lease assets (1)		32.8		33.2
Total lease assets	$	228.0	$	223.5

Liabilities
Operating lease liabilities (2)	$	204.4	$	198.5
Finance lease liabilities (2)		33.0		33.5
Total lease liabilities	$	237.4	$	232.0

(1)	Operating and finance lease assets are primarily reported within property and equipment on the consolidated statements of financial position.

(2)	Operating and finance lease liabilities are reported within other liabilities on the consolidated statements of financial position.

The lease cost was as follows:

For the three months ended

For the six months ended

For the three months ended

For the nine months ended

June 30, 2019

September 30, 2019

(in millions)

Finance lease cost (1):

Amortization of right-of-use assets

3.5

7.0

3.8

10.8

Interest on lease liabilities

0.2

0.5

0.3

0.8

Operating lease cost (1)

14.4

27.8

14.0

41.8

Other lease cost (1) (2)

1.8

4.6

2.0

6.6

Sublease income (3)

(0.4)

(0.8)

(0.5)

(1.3)

Total lease cost

19.5

39.1

19.6

58.7

(1)	Finance, operating and other lease costs are primarily included in operating expenses on the consolidated statements of operations.

(2)	Other lease cost primarily reflects variable and short-term lease costs.

(3)	Sublease income is included in fees and other revenues on the consolidated statements of operations.

The following represents payments due by period for lease obligations:

Operating leases

Finance leases

Total

Operating leases

Finance leases

Total

(in millions)

For the twelve months ending June 30:

For the twelve months ending September 30:

2020

52.5

14.4

66.9

52.2

14.9

67.1

2021

45.4

11.5

56.9

43.7

11.7

55.4

2022

35.3

6.7

42.0

34.8

5.5

40.3

2023

28.0

1.3

29.3

26.2

1.8

28.0

2024

17.7

0.2

17.9

17.6

0.7

18.3

2025 and thereafter

50.8

0.2

51.0

48.0

0.2

48.2

Total lease payments

229.7

34.3

264.0

222.5

34.8

257.3

Less: interest

25.3

1.3

26.6

24.0

1.3

25.3

Present value of lease liabilities

204.4

33.0

237.4

198.5

33.5

232.0

5253

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

The weighted-average remaining lease term and weighted-average discount rates were as follows:


	For the ~~six~~nine months ended
	~~June~~September 30, 2019
Weighted-average remaining lease term (in years):
Operating leases	6.9
Finance leases	2.7

Weighted-average discount rate:
Operating leases	4.0	%
Finance leases	~~2.9~~2.8	%

~~10.~~11. Stockholders’ Equity

Common Stock Dividends

For the three months ended

For the six months ended

For the three months ended

For the nine months ended

June 30,

September 30,

2019

2018

2019

2018

2019

2018

2019

2018

Dividends declared per common share

0.54

0.52

1.08

1.03

0.55

0.53

1.63

1.56

Reconciliation of Outstanding Common Shares

For the three months ended

For the six months ended

For the three months ended

For the nine months ended

June 30,

September 30,

2019

2018

2019

2018

2019

2018

2019

2018

(in millions)

Beginning balance

278.2

287.7

279.5

289.0

278.6

284.6

279.5

289.0

Shares issued

0.4

0.3

2.2

2.2

0.2

0.1

2.4

2.3

Treasury stock acquired

—

(3.4)

(3.1)

(6.6)

(0.8)

(1.1)

(3.9)

(7.7)

Ending balance

278.6

284.6

278.6

284.6

278.0

283.6

278.0

283.6

In February 2016, our Board of Directors authorized a share repurchase program of up to $400.0 million of our outstanding common stock, which was completed in February 2018. In May 2017, our Board of Directors authorized a share repurchase program of up to $250.0 million of our outstanding common stock, which was completed in April 2018. In May 2018, our Board of Directors authorized a share repurchase program of up to $300.0 million of our outstanding common stock, which was completed in December 2018. In November 2018, our Board of Directors authorized a share repurchase program of up to $500.0 million of our outstanding common stock. In the ~~first~~third quarter of 2019, we ~~suspended purchases of the remaining $295.3 million available under~~reinstated the November 2018 ~~authorization.~~share repurchase program, which had previously been suspended. Shares repurchased under these programs are accounted for as treasury stock, carried at cost and reflected as a reduction to stockholders’ equity.

5354

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

Other Comprehensive Income (Loss)

For the three months ended

For the six months ended

For the three months ended

For the nine months ended

June 30, 2019

September 30, 2019

Pre-Tax

Tax

After-Tax

Pre-Tax

Tax

After-Tax

Pre-Tax

Tax

After-Tax

Pre-Tax

Tax

After-Tax

(in millions)

Net unrealized gains on available-for-sale securities during the period

1,804.0

(394.9)

1,409.1

3,621.0

(787.4)

2,833.6

1,391.9

(301.5)

1,090.4

5,012.9

(1,088.9)

3,924.0

Reclassification adjustment for losses included in net income (1)

27.9

(5.5)

22.4

36.6

(7.2)

29.4

3.1

(0.4)

2.7

39.7

(7.6)

32.1

Adjustments for assumed changes in amortization patterns

(117.6)

24.7

(92.9)

(239.7)

50.4

(189.3)

(60.9)

12.7

(48.2)

(300.6)

63.1

(237.5)

Adjustments for assumed changes in policyholder liabilities

(462.3)

108.6

(353.7)

(762.6)

178.1

(584.5)

(342.3)

84.5

(257.8)

(1,104.9)

262.6

(842.3)

Net unrealized gains on available-for-sale securities

1,252.0

(267.1)

984.9

2,655.3

(566.1)

2,089.2

991.8

(204.7)

787.1

3,647.1

(770.8)

2,876.3

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

0.3

—

0.3

(2.5)

0.6

(1.9)

6.4

(1.4)

5.0

3.9

(0.8)

3.1

Adjustments for assumed changes in amortization patterns

(0.8)

0.1

(0.7)

(1.2)

0.2

(1.0)

(0.8)

0.2

(0.6)

(2.0)

0.4

(1.6)

Adjustments for assumed changes in policyholder liabilities

0.1

—

0.1

—

0.1

(0.2)

0.1

(0.1)

0.1

—

Noncredit component of impairment losses on fixed maturities, available-for-sale (2)

(0.4)

0.1

(0.3)

(3.6)

0.8

(2.8)

5.4

(1.1)

4.3

1.8

(0.3)

1.5

Net unrealized gains on derivative instruments during the period

12.8

(2.7)

10.1

4.3

(0.9)

3.4

19.9

(4.3)

15.6

24.2

(5.2)

19.0

Reclassification adjustment for gains included in net income (3)

(12.5)

2.5

(10.0)

(14.8)

2.8

(12.0)

(4.9)

1.1

(3.8)

(19.7)

3.9

(15.8)

Adjustments for assumed changes in amortization patterns

0.6

(0.1)

0.5

2.5

(0.5)

2.0

(0.1)

—

(0.1)

2.4

(0.5)

1.9

Adjustments for assumed changes in policyholder liabilities

1.2

(0.2)

1.0

4.8

(1.1)

3.7

1.2

(0.2)

1.0

6.0

(1.3)

4.7

Net unrealized gains (losses) on derivative instruments

2.1

(0.5)

1.6

(3.2)

0.3

(2.9)

Net unrealized gains on derivative instruments

16.1

(3.4)

12.7

12.9

(3.1)

9.8

Foreign currency translation adjustment during the period

4.6

(2.2)

2.4

45.5

(4.8)

40.7

(163.0)

5.2

(157.8)

(117.5)

0.4

(117.1)

Reclassification adjustment for losses included in net income (4)

26.5

—

26.5

26.1

—

26.1

—

26.1

—

26.1

Foreign currency translation adjustment

31.1

(2.2)

28.9

71.6

(4.8)

66.8

(163.0)

5.2

(157.8)

(91.4)

0.4

(91.0)

Unrecognized postretirement benefit obligation during the period

63.4

(17.1)

46.3

63.4

(17.1)

46.3

—

63.4

(17.1)

46.3

Amortization of amounts included in net periodic benefit cost (5)

14.9

(4.0)

10.9

30.6

(8.2)

22.4

13.6

(3.6)

10.0

44.2

(11.8)

32.4

Net unrecognized postretirement benefit obligation

78.3

(21.1)

57.2

94.0

(25.3)

68.7

13.6

(3.6)

10.0

107.6

(28.9)

78.7

Other comprehensive income

1,363.1

(290.8)

1,072.3

2,814.1

(595.1)

2,219.0

863.9

(207.6)

656.3

3,678.0

(802.7)

2,875.3

5455

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)


	For the three months ended						For the six months ended						For the three months ended						For the nine months ended
	June 30, 2018						June 30, 2018						September 30, 2018						September 30, 2018
	Pre-Tax		Tax		After-Tax		Pre-Tax		Tax		After-Tax		Pre-Tax		Tax		After-Tax		Pre-Tax		Tax		After-Tax
	(in millions)												(in millions)
Net unrealized losses on available-for-sale securities during the period	$	(777.8)	$	158.1	$	(619.7)	$	(2,081.5)	$	438.5	$	(1,643.0)	$	(282.9)	$	54.4	$	(228.5)	$	(2,364.4)	$	492.9	$	(1,871.5)
Reclassification adjustment for losses included in net income (1)		26.5		(5.6)		20.9		47.2		(10.0)		37.2
Reclassification adjustment for (gains) losses included in net income (1)														(19.7)		7.0		(12.7)		27.5		(3.0)		24.5
Adjustments for assumed changes in amortization patterns		54.2		(11.4)		42.8		140.4		(29.5)		110.9		12.1		(2.5)		9.6		152.5		(32.0)		120.5
Adjustments for assumed changes in policyholder liabilities		102.2		(12.3)		89.9		280.7		(57.4)		223.3		41.7		(9.3)		32.4		322.4		(66.7)		255.7
Net unrealized losses on available-for-sale securities		(594.9)		128.8		(466.1)		(1,613.2)		341.6		(1,271.6)		(248.8)		49.6		(199.2)		(1,862.0)		391.2		(1,470.8)

Noncredit component of impairment losses on fixed maturities, available-for-sale during the period		0.8		(0.2)		0.6		12.0		(2.6)		9.4		2.2		(0.4)		1.8		14.2		(3.0)		11.2
Adjustments for assumed changes in amortization patterns		—		0.1		0.1		1.3		(0.2)		1.1		0.3		(0.1)		0.2		1.6		(0.3)		1.3
Adjustments for assumed changes in policyholder liabilities		0.1		—		0.1		(0.5)		0.1		(0.4)		—		—		—		(0.5)		0.1		(0.4)
Noncredit component of impairment losses on fixed maturities, available-for-sale (2)		0.9		(0.1)		0.8		12.8		(2.7)		10.1		2.5		(0.5)		2.0		15.3		(3.2)		12.1

Net unrealized gains on derivative instruments during the period		27.7		(5.8)		21.9		8.5		(1.8)		6.7		3.7		2.8		6.5		12.2		1.0		13.2
Reclassification adjustment for gains included in net income (3)		(3.3)		0.5		(2.8)		(5.7)		0.9		(4.8)		(4.9)		0.8		(4.1)		(10.6)		1.7		(8.9)
Adjustments for assumed changes in amortization patterns		—		—		—		0.9		(0.2)		0.7		(1.0)		0.2		(0.8)		(0.1)		—		(0.1)
Adjustments for assumed changes in policyholder liabilities		1.4		(0.2)		1.2		4.2		(0.9)		3.3		1.3		(0.2)		1.1		5.5		(1.1)		4.4
Net unrealized gains on derivative instruments		25.8		(5.5)		20.3		7.9		(2.0)		5.9		(0.9)		3.6		2.7		7.0		1.6		8.6

Foreign currency translation adjustment		(247.0)		10.9		(236.1)		(180.1)		9.8		(170.3)		(32.4)		9.5		(22.9)		(212.5)		19.3		(193.2)

Amortization of amounts included in net periodic benefit cost (5)		12.3		(3.5)		8.8		24.5		(7.0)		17.5		12.3		(3.6)		8.7		36.8		(10.6)		26.2
Net unrecognized postretirement benefit obligation		12.3		(3.5)		8.8		24.5		(7.0)		17.5		12.3		(3.6)		8.7		36.8		(10.6)		26.2

Other comprehensive loss	$	(802.9)	$	130.6	$	(672.3)	$	(1,748.1)	$	339.7	$	(1,408.4)	$	(267.3)	$	58.6	$	(208.7)	$	(2,015.4)	$	398.3	$	(1,617.1)

(1)	Pre-tax reclassification adjustments relating to available-for-sale securities are reported in net realized capital gains (losses) on the consolidated statements of operations.

(2)

Represents the net impact of (1) unrealized gains resulting from reclassification of previously recognized noncredit impairment losses from OCI to net realized capital gains (losses) for fixed maturities with bifurcated OTTI that had additional credit losses or fixed maturities that previously had bifurcated OTTI that have now been sold or are intended to be sold and (2) unrealized losses resulting from reclassification of noncredit impairment losses for fixed maturities with bifurcated OTTI from net realized capital gains (losses) to OCI.

(3)	See Note 4,5, Derivative Financial Instruments – Effect of Fair Value and Cash Flow Hedges on Consolidated Statements of Operations, for further details.

(4)

Pre-tax reclassification adjustments primarily relate to deconsolidated sponsored investment funds and are reported in net realized capital gains (losses) on the consolidated statements of operations. For ~~both~~ the ~~three and six~~nine months ended ~~June~~September 30, 2019, $5.7 million of this reclassification relates to noncontrolling interest and is reported in net income attributable to noncontrolling interest on the consolidated statements of operations.

5556

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

(5)

Amount is comprised of amortization of prior service cost (benefit) and recognized net actuarial (gain) loss, which is reported in operating expenses on the consolidated statements of operations. See Note 8,9, Employee and Agent Benefits – Components of Net Periodic Benefit Cost, for further details.

Accumulated Other Comprehensive Income (Loss)

Noncredit

Net unrealized

component of

Net unrealized

Foreign

Unrecognized

Accumulated

gains on

impairment losses

gains

currency

postretirement

other

available-for-sale

on fixed maturities

on derivative

translation

benefit

comprehensive


securities

available-for-sale

instruments

adjustment

obligation

income (loss)

(in millions)
Balances as of April 1, 2018

$
914.0

$
(64.2)

$
34.0

$
(909.8)

$
(443.3)

$
(469.3)
Other comprehensive loss during the period, net of adjustments

(487.0)

—

23.1

(232.4)

—

(696.3)
Amounts reclassified from AOCI

20.9

0.8

(2.8)

—

8.8

27.7
Other comprehensive loss

(466.1)

0.8

20.3

(232.4)

8.8

(668.6)
Balances as of June 30, 2018

$
447.9

$
(63.4)

$
54.3

$
(1,142.2)

$
(434.5)

$
(1,137.9)

Balances as of April 1, 2019

$
1,294.3

$
(49.6)

$
59.9

$
(1,222.1)

$
(501.4)

$
(418.9)
Other comprehensive income during the period, net of adjustments

962.4

(0.3)

11.6

2.5

46.3

1,022.5
Amounts reclassified from AOCI

22.4

—

(10.0)

20.8

10.9

44.1
Other comprehensive income

984.8

(0.3)

1.6

23.3

57.2

1,066.6
Balances as of June 30, 2019

$
2,279.1

$
(49.9)

$
61.5

$
(1,198.8)

$
(444.2)

$
647.7


			Noncredit
	Net unrealized		component of		Net unrealized		Foreign		Unrecognized		Accumulated
	gains on		impairment losses		gains		currency		postretirement		other
	available-for-sale		on fixed maturities		on derivative		translation		benefit		comprehensive
	securities		available-for-sale		instruments		adjustment		obligation		income (loss)
	(in millions)
Balances as of July 1, 2018	$	447.9	$	(63.4)	$	54.3	$	(1,142.2)	$	(434.5)	$	(1,137.9)
Other comprehensive loss during the period, net of adjustments		(186.5)		—		6.8		(22.3)		—		(202.0)
Amounts reclassified to AOCI		(12.7)		2.0		(4.1)		—		8.7		(6.1)
Other comprehensive loss		(199.2)		2.0		2.7		(22.3)		8.7		(208.1)
Purchase of subsidiary shares from noncontrolling interest		—		—		—		(1.6)		—		(1.6)
Balances as of September 30, 2018	$	248.7	$	(61.4)	$	57.0	$	(1,166.1)	$	(425.8)	$	(1,347.6)

Balances as of July 1, 2019	$	2,279.1	$	(49.9)	$	61.5	$	(1,198.8)	$	(444.2)	$	647.7
Other comprehensive income during the period, net of adjustments		784.5		—		16.5		(154.8)		—		646.2
Amounts reclassified from AOCI		2.7		4.3		(3.8)		—		10.0		13.2
Other comprehensive income		787.2		4.3		12.7		(154.8)		10.0		659.4
Balances as of September 30, 2019	$	3,066.3	$	(45.6)	$	74.2	$	(1,353.6)	$	(434.2)	$	1,307.1

5657

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

Noncredit

Net unrealized

component of

Net unrealized

Foreign

Unrecognized

Accumulated

gains on

impairment losses

gains

currency

postretirement

other

available-for-sale

on fixed maturities

on derivative

translation

benefit

comprehensive


securities

available-for-sale

instruments

adjustment

obligation

income (loss)

(in millions)
Balances as of January 1, 2018

$
1,470.7

$
(58.3)

$
42.7

$
(918.5)

$
(371.1)

$
165.5
Other comprehensive loss during the period, net of adjustments

(1,308.8)

—

10.7

(167.5)

—

(1,465.6)
Amounts reclassified from AOCI

37.2

10.1

(4.8)

—

17.5

60.0
Other comprehensive loss

(1,271.6)

10.1

5.9

(167.5)

17.5

(1,405.6)
Effects of implementation of accounting change related to equity investments, net

(1.0)

—

—

—

—

(1.0)
Effects of implementation of accounting change accounting change related to revenue recognition, net

—

—

—

25.6

—

25.6
Effects of implementation of accounting change related to the reclassification of certain tax effects, net

249.8

(15.2)

5.7

(81.8)

(80.9)

77.6
Balances as of June 30, 2018

$
447.9

$
(63.4)

$
54.3

$
(1,142.2)

$
(434.5)

$
(1,137.9)

Balances as of January 1, 2019

$
190.0

$
(47.1)

$
64.4

$
(1,259.5)

$
(512.9)

$
(1,565.1)
Other comprehensive income during the period, net of adjustments

2,059.7

(2.8)

9.1

40.3

46.3

2,152.6
Amounts reclassified from AOCI

29.4

—

(12.0)

20.4

22.4

60.2
Other comprehensive income

2,089.1

(2.8)

(2.9)

60.7

68.7

2,212.8
Balances as of June 30, 2019

$
2,279.1

$
(49.9)

$
61.5

$
(1,198.8)

$
(444.2)

$
647.7


			Noncredit
	Net unrealized		component of		Net unrealized		Foreign		Unrecognized		Accumulated
	gains on		impairment losses		gains		currency		postretirement		other
	available-for-sale		on fixed maturities		on derivative		translation		benefit		comprehensive
	securities		available-for-sale		instruments		adjustment		obligation		income (loss)
	(in millions)
Balances as of January 1, 2018	$	1,470.7	$	(58.3)	$	42.7	$	(918.5)	$	(371.1)	$	165.5
Other comprehensive loss during the period, net of adjustments		(1,495.3)		—		17.5		(189.8)		—		(1,667.6)
Amounts reclassified from AOCI		24.5		12.1		(8.9)		—		26.2		53.9
Other comprehensive loss		(1,470.8)		12.1		8.6		(189.8)		26.2		(1,613.7)
Purchase of subsidiary shares from noncontrolling interest		—		—		—		(1.6)		—		(1.6)
Effects of implementation of accounting change related to equity investments, net		(1.0)		—		—		—		—		(1.0)
Effects of implementation of accounting change accounting change related to revenue recognition, net		—		—		—		25.6		—		25.6
Effects of implementation of accounting change related to the reclassification of certain tax effects, net		249.8		(15.2)		5.7		(81.8)		(80.9)		77.6
Balances as of September 30, 2018	$	248.7	$	(61.4)	$	57.0	$	(1,166.1)	$	(425.8)	$	(1,347.6)

Balances as of January 1, 2019	$	190.0	$	(47.1)	$	64.4	$	(1,259.5)	$	(512.9)	$	(1,565.1)
Other comprehensive income during the period, net of adjustments		2,844.2		—		25.6		(114.5)		46.3		2,801.6
Amounts reclassified from AOCI		32.1		1.5		(15.8)		20.4		32.4		70.6
Other comprehensive income		2,876.3		1.5		9.8		(94.1)		78.7		2,872.2
Balances as of September 30, 2019	$	3,066.3	$	(45.6)	$	74.2	$	(1,353.6)	$	(434.2)	$	1,307.1

Noncontrolling Interest

Interests held by unaffiliated parties in consolidated entities are reflected in noncontrolling interest, which represents the noncontrolling partners’ share of the underlying net assets of our consolidated subsidiaries. Noncontrolling interest that is not redeemable is reported in the equity section of the consolidated statements of financial position.

The noncontrolling interest holders in certain of our consolidated entities maintain an equity interest that is redeemable at the option of the holder, which may be exercised on varying dates. Since redemption of the noncontrolling interest is outside of our control, this interest is excluded from stockholders’ equity and reported separately as redeemable noncontrolling interest on the consolidated statements of financial position. Our redeemable noncontrolling interest primarily relates to consolidated sponsored investment funds for which interests are redeemed at fair value from the net assets of the funds.

For our redeemable noncontrolling interest related to other consolidated subsidiaries, redemptions are required to be purchased at fair value or a value based on a formula that management intended to reasonably approximate fair value based on a fixed multiple of earnings over a measurement period. The carrying value of the redeemable noncontrolling interest is compared to the redemption value at each reporting period. Any adjustments to the carrying amount of the redeemable noncontrolling interest for changes in redemption value prior to exercise of the redemption option are determined after the attribution of net income or loss of the subsidiary and are recognized in the redemption value as they occur. Adjustments to the carrying value of redeemable noncontrolling interest result in adjustments to additional paid-in capital and/or retained earnings. Adjustments are recorded in retained earnings to the extent the redemption value of the redeemable noncontrolling interest exceeds its fair value and will impact the numerator in our earnings per share calculations. All other adjustments to the redeemable noncontrolling interest are recorded in additional paid-in capital.

5758

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

Following is a reconciliation of the changes in the redeemable noncontrolling interest (in millions):

For the three months ended

For the six months ended

June 30,

June 30,


2019

2018

2019

2018

(in millions)
Balance at beginning of period

$
537.7

$
127.8

$
391.2

$
101.3
Net income attributable to redeemable noncontrolling interest

4.0

1.3

24.3

2.1
Redeemable noncontrolling interest of deconsolidated entities (1)

(370.0)

—

(370.0)

(3.2)
Contributions from redeemable noncontrolling interest

154.0

17.4

297.7

56.4
Distributions to redeemable noncontrolling interest

(25.8)

(5.8)

(46.1)

(15.7)
Change in redemption value of redeemable noncontrolling interest

(1.0)

—

1.7

(0.6)
Stock-based compensation attributable to redeemable noncontrolling interest

0.1

—

0.1

—
Other comprehensive income (loss) attributable to redeemable noncontrolling interest

5.5

(1.8)

5.6

(1.4)
Balance at end of period

$
304.5

$
138.9

$
304.5

$
138.9


	For the three months ended				For the nine months ended
	September 30,				September 30,
	2019		2018		2019		2018
	(in millions)
Balance at beginning of period	$	304.5	$	138.9	$	391.2	$	101.3
Net income attributable to redeemable noncontrolling interest		2.6		2.0		26.9		4.1
Redeemable noncontrolling interest of deconsolidated entities (1)		—		(6.5)		(370.0)		(9.7)
Contributions from redeemable noncontrolling interest		75.7		32.6		373.4		89.0
Distributions to redeemable noncontrolling interest		(10.6)		(9.1)		(56.7)		(24.8)
Purchase of subsidiary shares from redeemable noncontrolling interest		(1.1)		(7.1)		(1.1)		(7.1)
Change in redemption value of redeemable noncontrolling interest		(0.4)		(2.1)		1.3		(2.7)
Stock-based compensation attributable to redeemable noncontrolling interest		—		0.1		0.1		0.1
Other comprehensive income (loss) attributable to redeemable noncontrolling interest		(1.4)		(0.3)		4.2		(1.7)
Balance at end of period	$	369.3	$	148.5	$	369.3	$	148.5

(1)	We deconsolidated certain sponsored investment funds as they no longer met the requirements for consolidation.

~~11.~~12. Fair Value Measurements

We use fair value measurements to record fair value of certain assets and liabilities and to estimate fair value of financial instruments not recorded at fair value but required to be disclosed at fair value. Certain financial instruments, particularly policyholder liabilities other than investment contracts, are excluded from these fair value disclosure requirements.

Valuation Hierarchy

● Level 1 – Fair values are based on unadjusted quoted prices in active markets for identical assets or liabilities.

● Level 2 – Fair values are based on inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly.

● Level 3 – Fair values are based on at least one significant unobservable input for the asset or liability.

Determination of Fair Value

The following discussion describes the valuation methodologies and inputs used for assets and liabilities measured at fair value on a recurring basis or disclosed at fair value. The techniques utilized in estimating the fair value of financial instruments are reliant on the assumptions used. Care should be exercised in deriving conclusions about our business, its value or financial position based on the fair value information of financial instruments presented below.

Fair value estimates are made based on available market information and judgments about the financial instrument at a specific point in time. Such estimates do not consider the tax impact of the realization of unrealized gains or losses. In addition, the disclosed fair value may not be realized in the immediate settlement of the financial instrument. We validate prices through an investment analyst review process, which includes validation through direct interaction with external sources, review of recent trade activity or use of internal models. In circumstances where broker quotes are used to value an instrument, we generally receive one non-binding quote. Broker quotes are validated through an investment analyst review process, which includes validation through direct interaction with external sources and use of internal models or other relevant information. We did not make any significant changes to our valuation processes during 2019.

5859

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

Fixed Maturities

Fixed maturities include bonds, ABS, redeemable preferred stock and certain non-redeemable preferred securities. When available, the fair value of fixed maturities is based on quoted prices of identical assets in active markets. These are reflected in Level 1 and primarily include U.S. Treasury bonds and actively traded redeemable corporate preferred securities.

When quoted prices of identical assets in active markets are not available, our first priority is to obtain prices from third party pricing vendors. We have regular interaction with these vendors to ensure we understand their pricing methodologies and to confirm they are utilizing observable market information. Their methodologies vary by asset class and include inputs such as estimated cash flows, benchmark yields, reported trades, broker quotes, credit quality, industry events and economic events. Fixed maturities with validated prices from pricing services, which includes the majority of our public fixed maturities in all asset classes, are generally reflected in Level 2. Also included in Level 2 are corporate bonds when quoted market prices are not available, for which an internal model using substantially all observable inputs or a matrix pricing valuation approach is used. In the matrix approach, securities are grouped into pricing categories that vary by sector, rating and average life. Each pricing category is assigned a risk spread based on studies of observable public market data from the investment professionals assigned to specific security classes. The expected cash flows of the security are then discounted back at the current Treasury curve plus the appropriate risk spread. Although the matrix valuation approach provides a fair valuation of each pricing category, the valuation of an individual security within each pricing category may also be impacted by company specific factors.

If we are unable to price a fixed maturity security using prices from third party pricing vendors or other sources specific to the asset class, we may obtain a broker quote or utilize an internal pricing model specific to the asset utilizing relevant market information, to the extent available and where at least one significant unobservable input is utilized. These are reflected in Level 3 in the fair value hierarchy and can include fixed maturities across all asset classes. As of ~~June~~September 30, 2019, less than 1% of our total fixed maturities were Level 3 securities valued using internal pricing models.

The primary inputs, by asset class, for valuations of the majority of our Level 2 investments from third party pricing vendors or our internal pricing valuation approach are described below.

U.S. Government and Agencies/Non-U.S. Governments. Inputs include recently executed market transactions, interest rate yield curves, maturity dates, market price quotations and credit spreads relating to similar instruments.

States and Political Subdivisions. Inputs include Municipal Securities Rulemaking Board reported trades, U.S. Treasury and other benchmark curves, material event notices, new issue data and obligor credit ratings.

Corporate. Inputs include recently executed transactions, market price quotations, benchmark yields, issuer spreads and observations of equity and credit default swap curves related to the issuer. For private placement corporate securities valued through the matrix valuation approach inputs include the current Treasury curve and risk spreads based on sector, rating and average life of the issuance.

RMBS, CMBS, Collateralized Debt Obligations and Other Debt Obligations. Inputs include cash flows, priority of the tranche in the capital structure, expected time to maturity for the specific tranche, reinvestment period remaining and performance of the underlying collateral including prepayments, defaults, deferrals, loss severity of defaulted collateral and, for RMBS, prepayment speed assumptions. Other inputs include market indices and recently executed market transactions.

Equity Securities

Equity securities include mutual funds, common stock, non-redeemable preferred stock and required regulatory investments. Fair values of equity securities are determined using quoted prices in active markets for identical assets when available, which are reflected in Level 1. When quoted prices are not available, we may utilize internal valuation methodologies appropriate for the specific asset that use observable inputs such as underlying share prices or the net asset value (“NAV”), which are reflected in Level 2. Fair values might also be determined using broker quotes or through the use of internal models or analysis that incorporate significant assumptions deemed appropriate given the circumstances and consistent with what other market participants would use when pricing such securities, which are reflected in Level 3.

5960

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

~~consistent with what other market participants would use when pricing such securities, which are reflected in Level 3.~~

Derivatives

The fair values of exchange-traded derivatives are determined through quoted market prices, which are reflected in Level 1. Exchange-traded derivatives include futures that are settled daily, which reduces their fair value in the consolidated statements of financial position. The fair values of OTC cleared derivatives are determined through market prices published by the clearinghouses, which are reflected in Level 2. The clearinghouses may utilize the overnight indexed swap (“OIS”) curve in their valuation. Variation margin associated with OTC cleared derivatives is settled daily, which reduces their fair value in the consolidated statements of financial position. The fair values of bilateral OTC derivative instruments are determined using either pricing valuation models that utilize market observable inputs or broker quotes. The majority of our bilateral OTC derivatives are valued with models that use market observable inputs, which are reflected in Level 2. Significant inputs include contractual terms, interest rates, currency exchange rates, credit spread curves, equity prices and volatilities. These valuation models consider projected discounted cash flows, relevant swap curves and appropriate implied volatilities. Certain bilateral OTC derivatives utilize unobservable market data, primarily independent broker quotes that are nonbinding quotes based on models that do not reflect the result of market transactions, which are reflected in Level 3.

Our non-cleared derivative contracts are generally documented under ISDA Master Agreements, which provide for legally enforceable set-off and close-out netting of exposures to specific counterparties. Collateral arrangements are bilateral and based on current ratings of each entity. We utilize the LIBOR interest rate curve to value our positions, which includes a credit spread. This credit spread incorporates an appropriate level of nonperformance risk into our valuations given the current ratings of our counterparties, as well as the collateral agreements in place. Counterparty credit risk is routinely monitored to ensure our adjustment for non-performance risk is appropriate. Our centrally cleared derivative contracts are conducted with regulated centralized clearinghouses, which provide for daily exchange of cash collateral or variation margin equal to the difference in the daily market values of those contracts that eliminates the non-performance risk on these trades.

Interest Rate Contracts. For non-cleared contracts we use discounted cash flow valuation techniques to determine the fair value of interest rate swaps and swaptions using observable swap curves as the inputs. These are reflected in Level 2. For centrally cleared contracts we use published prices from clearinghouses. These are reflected in Level 2. In addition, we have interest rate options and have had swaptions that are valued using broker quotes. These are reflected in Level 3.

Foreign Exchange Contracts. We use discounted cash flow valuation techniques that utilize observable swap curves and exchange rates as the inputs to determine the fair value of foreign currency swaps. These are reflected in Level 2. Currency forwards and currency options are valued using observable market inputs, including forward currency exchange rates. These are reflected in Level 2. In addition, we have a limited number of non-standard currency swaps and currency options that are valued using broker quotes. These are reflected within Level 3.

Equity Contracts. We use an option pricing model using observable implied volatilities, dividend yields, index prices and swap curves as the inputs to determine the fair value of equity options. These are reflected in Level 2.

Credit Contracts. We use either the ISDA Credit Default Swap Standard discounted cash flow model that utilizes observable default probabilities and recovery rates as inputs or broker prices to determine the fair value of credit default swaps. These are reflected in Level 3.

Other Investments

Other investments reported at fair value include invested assets of consolidated sponsored investment funds, unconsolidated sponsored investment funds, other investment funds reported at fair value, commercial mortgage loans of consolidated VIEs for which the fair value option was elected, equity method real estate investments for which the fair value option was elected and certain redeemable and nonredeemable preferred stock.

Invested assets of consolidated sponsored investment funds include equity securities, fixed maturities and other investments, for which fair values are determined as previously described, and are reflected in Level 1 and Level 2.

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
September 30, 2019
(Unaudited)

The fair value of unconsolidated sponsored investment funds and other investment funds is determined using the NAV of the fund. The NAV of the fund represents the price at which we would be able to initiate a transaction. Investments

~~Table of Contents~~

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June 30, 2019~~
~~(Unaudited)~~

for which the NAV represents a quoted price in an active market for identical assets are reflected in Level 1. Investments that do not have a quoted price in an active market are reflected in Level 2.

Commercial mortgage loans of a consolidated ~~VIEs are~~VIE were valued using the more observable fair value of the liabilities of the consolidated collateralized financing ~~entities~~entity (“~~CCFEs”~~CCFE”) under the measurement alternative guidance and ~~are~~were reflected in Level 2. The liabilities ~~are~~were affiliated so ~~are~~were not reflected in our consolidated results. The trust was unwound in the third quarter of 2019.

Equity method real estate investments for which the fair value option was elected are reflected in Level 3. The equity method real estate investments consist of underlying real estate and debt. The real estate fair value is estimated using a discounted cash flow valuation model that utilizes public real estate market data inputs such as transaction prices, market rents, vacancy levels, leasing absorption, market cap rates and discount rates. The debt fair value is estimated using a discounted cash flow analysis based on our incremental borrowing rate for similar borrowing arrangements.

The fair value of certain redeemable and nonredeemable preferred stock is based on an internal model using unobservable inputs, which is reflected in Level 3. In 2018, the fair value of redeemable preferred stock was based on observable inputs and was reflected in Level 2.

Cash Equivalents

Certain cash equivalents are reported at fair value on a recurring basis and include money market instruments and other short-term investments with maturities of three months or less. Fair values of these cash equivalents may be determined using public quotations, when available, which are reflected in Level 1. When public quotations are not available, because of the highly liquid nature of these assets, carrying amounts may be used to approximate fair values, which are reflected in Level 2.

Separate Account Assets

Separate account assets include equity securities, debt securities, cash equivalents and derivative instruments, for which fair values are determined as previously described, and are reflected in Level 1, Level 2 and Level 3. Separate account assets also include commercial mortgage loans, for which the fair value is estimated by discounting the expected total cash flows using market rates that are applicable to the yield, credit quality and maturity of the loans. The market clearing spreads vary based on mortgage type, weighted average life, rating and liquidity. These are reflected in Level 3. Finally, separate account assets include real estate, for which the fair value is estimated using discounted cash flow valuation models that utilize various public real estate market data inputs. In addition, each property is appraised annually by an independent appraiser. The real estate included in separate account assets is recorded net of related mortgage encumbrances for which the fair value is estimated using discounted cash flow analysis based on our incremental borrowing rate for similar borrowing arrangements. The real estate within the separate accounts is reflected in Level 3.

Investment and Universal Life Contracts

Certain universal life, annuity ~~contracts~~ and other investment contracts include embedded derivatives that have been bifurcated from the host contract and are measured at fair value on a recurring basis, which are reflected in Level 3. The key assumptions for calculating the fair value of the embedded derivative liabilities are market assumptions (such as equity market returns, interest rate levels, market volatility and correlations) and policyholder behavior assumptions (such as lapse, mortality, utilization and withdrawal patterns). Risk margins are included in the policyholder behavior assumptions. The assumptions are based on a combination of historical data and actuarial judgment. The embedded derivative liabilities are valued using ~~stochastic~~ models that incorporate a spread reflecting our own creditworthiness.

The assumption for our own non-performance risk for investment contracts and any embedded derivatives bifurcated from certain universal life, annuity and investment contracts is based on the current market credit spreads for debt-like instruments we have issued and are available in the market.

~~Other Liabilities~~

Certain obligations reported in other liabilities include embedded derivatives to deliver underlying securities of structured investments to third parties. The fair value of the embedded derivatives is calculated based on the value of the underlying securities that are valued based on prices obtained from third party pricing vendors as utilized and described in our discussion of how fair value is determined for fixed maturities, which are reflected in Level 2.

6162

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

Other Liabilities

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis were as follows:

June 30, 2019

September 30, 2019

Assets/

Amount

Assets/

Amount

(liabilities)

measured at

(liabilities)

measured at

net asset

Fair value hierarchy level

measured at

net asset

Fair value hierarchy level

fair value

value (4)

Level 1

Level 2

Level 3

fair value

value (4)

Level 1

Level 2

Level 3

(in millions)

Assets

Fixed maturities, available-for-sale:

U.S. government and agencies

1,536.4

—

1,125.6

410.8

—

1,745.9

—

1,324.0

421.9

—

Non-U.S. governments

1,000.7

—

2.0

994.8

3.9

1,025.7

—

1.6

1,020.6

3.5

States and political subdivisions

6,968.6

—

6,968.6

—

7,377.2

—

7,377.2

—

Corporate

38,171.3

—

19.1

38,107.5

44.7

39,513.0

—

18.8

39,451.1

43.1

Residential mortgage-backed securities

2,437.0

—

2,437.0

—

2,516.3

—

2,516.3

—

Commercial mortgage-backed securities

4,569.9

—

4,556.8

13.1

4,882.6

—

4,868.8

13.8

Collateralized debt obligations (1)

2,759.4

—

2,724.6

34.8

2,922.6

—

2,841.4

81.2

Other debt obligations

7,824.8

—

7,764.9

59.9

8,087.9

—

7,994.1

93.8

Total fixed maturities, available-for-sale

65,268.1

—

1,146.7

63,965.0

156.4

68,071.2

—

1,344.4

66,491.4

235.4

Fixed maturities, trading

686.8

—

686.3

0.5

673.0

—

672.6

0.4

Equity securities

1,895.2

—

633.5

1,261.7

—

1,907.3

—

655.1

1,252.2

—

Derivative assets (2)

291.5

—

261.3

30.2

374.2

—

336.9

37.3

Other investments

812.5

84.2

201.7

497.5

29.1

891.3

79.6

235.1

542.7

33.9

Cash equivalents

2,123.6

—

36.6

2,087.0

—

1,991.5

—

59.9

1,931.6

—

Sub-total excluding separate account assets

71,077.7

84.2

2,018.5

68,758.8

216.2

73,908.5

79.6

2,294.5

71,227.4

307.0

Separate account assets

162,848.6

129.7

91,789.6

62,239.5

8,689.8

161,046.7

131.7

91,803.6

60,350.5

8,760.9

Total assets

233,926.3

213.9

93,808.1

130,998.3

8,906.0

234,955.2

211.3

94,098.1

131,577.9

9,067.9

Liabilities

Investment contracts (3)

(118.7)

—

(118.7)

Investment and universal life contracts (3)

(320.8)

—

(320.8)

Derivative liabilities (2)

(168.0)

—

(153.6)

(14.4)

(183.2)

—

(162.8)

(20.4)

Other liabilities (3)

(96.0)

—

(96.0)

—

(97.8)

—

(97.8)

—

Total liabilities

(382.7)

—

(249.6)

(133.1)

(601.8)

—

(260.6)

(341.2)

Net assets

233,543.6

213.9

93,808.1

130,748.7

8,772.9

234,353.4

211.3

94,098.1

131,317.3

8,726.7

6263

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)


	December 31, 2018										December 31, 2018
	Assets/		Amount								Assets/		Amount
	(liabilities)		measured at								(liabilities)		measured at
	measured at		net asset		Fair value hierarchy level						measured at		net asset		Fair value hierarchy level
	fair value		value (4)		Level 1		Level 2		Level 3		fair value		value (4)		Level 1		Level 2		Level 3
	(in millions)										(in millions)
Assets
Fixed maturities, available-for-sale:
U.S. government and agencies	$	1,441.0	$	—	$	1,027.8	$	413.2	$	—	$	1,441.0	$	—	$	1,027.8	$	413.2	$	—
Non-U.S. governments		890.5		—		2.7		883.2		4.6		890.5		—		2.7		883.2		4.6
States and political subdivisions		6,225.7		—		—		6,225.7		—		6,225.7		—		—		6,225.7		—
Corporate		35,539.3		—		19.2		35,462.2		57.9		35,539.3		—		19.2		35,462.2		57.9
Residential mortgage-backed securities		2,460.6		—		—		2,460.6		—		2,460.6		—		—		2,460.6		—
Commercial mortgage-backed securities		3,945.6		—		—		3,936.1		9.5		3,945.6		—		—		3,936.1		9.5
Collateralized debt obligations (1)		2,420.8		—		—		2,412.5		8.3		2,420.8		—		—		2,412.5		8.3
Other debt obligations		7,185.0		—		—		7,126.5		58.5		7,185.0		—		—		7,126.5		58.5
Total fixed maturities, available-for-sale		60,108.5		—		1,049.7		58,920.0		138.8		60,108.5		—		1,049.7		58,920.0		138.8
Fixed maturities, trading		636.1		—		—		636.1		—		636.1		—		—		636.1		—
Equity securities		1,843.7		—		661.2		1,182.5		—		1,843.7		—		661.2		1,182.5		—
Derivative assets (2)		194.0		—		—		175.4		18.6		194.0		—		—		175.4		18.6
Other investments		828.6		75.4		125.9		610.1		17.2		828.6		75.4		125.9		610.1		17.2
Cash equivalents		1,775.9		—		46.3		1,729.6		—		1,775.9		—		46.3		1,729.6		—
Sub-total excluding separate account assets		65,386.8		75.4		1,883.1		63,253.7		174.6		65,386.8		75.4		1,883.1		63,253.7		174.6
Separate account assets		144,987.9		124.6		79,572.0		56,675.8		8,615.5		144,987.9		124.6		79,572.0		56,675.8		8,615.5
Total assets	$	210,374.7	$	200.0	$	81,455.1	$	119,929.5	$	8,790.1	$	210,374.7	$	200.0	$	81,455.1	$	119,929.5	$	8,790.1

Liabilities
Investment contracts (3)	$	(45.2)	$	—	$	—	$	—	$	(45.2)
Investment and universal life contracts (3)											$	(45.2)	$	—	$	—	$	—	$	(45.2)
Derivative liabilities (2)		(157.1)		—		—		(141.6)		(15.5)		(157.1)		—		—		(141.6)		(15.5)
Other liabilities (3)		(91.5)		—		—		(91.5)		—		(91.5)		—		—		(91.5)		—
Total liabilities	$	(293.8)	$	—	$	—	$	(233.1)	$	(60.7)	$	(293.8)	$	—	$	—	$	(233.1)	$	(60.7)

Net assets	$	210,080.9	$	200.0	$	81,455.1	$	119,696.4	$	8,729.4	$	210,080.9	$	200.0	$	81,455.1	$	119,696.4	$	8,729.4

(1)	Primarily consists of collateralized loan obligations backed by secured corporate loans.

(2)

Within the consolidated statements of financial position, derivative assets are reported with other investments and derivative liabilities are reported with other liabilities. The amounts are presented gross in the tables above to reflect the presentation on the consolidated statements of financial position; however, are presented net for purposes of the rollforward in the Changes in Level 3 Fair Value Measurements tables. Refer to Note 4,5, Derivative Financial Instruments, for further information on fair value by class of derivative instruments.

(3)	Includes bifurcated embedded derivatives that are reported at net asset (liability) fair value within the same line item in the consolidated statements of financial position in which the host contract is reported.

(4)

Certain investments are measured at fair value using the NAV per share (or its equivalent) practical expedient and have not been classified in the fair value hierarchy. Other investments using the NAV practical expedient consist of certain fund interests that are restricted until maturity with unfunded commitments totaling ~~$24.7~~$21.2 million and $32.0 million as of ~~June~~September 30, 2019 and December 31, 2018, respectively. Separate account assets using the NAV practical expedient consist of hedge funds with varying investment strategies that also have a variety of redemption terms and conditions. We do not have unfunded commitments associated with these hedge funds.

6364

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

Changes in Level 3 Fair Value Measurements

The reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) was as follows:

For the three months ended June 30, 2019

For the three months ended September 30, 2019

Changes in

Total realized/unrealized

Changes in

Beginning

Net

Ending

unrealized

Beginning

gains (losses)

Net

Ending

unrealized

asset/

Total realized/unrealized

purchases,

asset/

gains (losses)

asset/

purchases,

asset/

gains (losses)

(liability)

gains (losses)

sales,

(liability)

included in

(liability)

sales,

(liability)

included in

balance

Included in

issuances

balance

net income

balance

Included in

issuances

balance

net income

as of

net

other

and

Transfers

as of

relating to

as of

net

other

and

Transfers

as of

relating to

April 1,

income

comprehensive

settlements

into

out of

June 30,

positions still

July 1,

income

comprehensive

settlements

into

out of

September 30,

positions still

2019

(1)

income (3)

(4)

Level 3

2019

held (1)

2019

(1)

income (3)

(4)

Level 3

2019

held (1)

(in millions)

Assets

Fixed maturities, available-for-sale:

Non-U.S. governments

4.2

—

(0.3)

—

3.9

—

3.9

—

(0.4)

—

3.5

—

Corporate

58.5

—

(13.8)

—

44.7

—

44.7

—

0.3

(1.9)

—

43.1

—

Commercial mortgage-backed securities

12.0

(3.2)

2.9

—

3.7

(2.3)

13.1

(2.1)

13.1

—

0.6

0.1

—

13.8

—

Collateralized debt obligations

5.9

—

0.5

(1.6)

30.0

—

34.8

—

34.8

—

0.4

46.0

—

81.2

—

Other debt obligations

43.4

—

0.5

16.0

—

59.9

—

59.9

—

(0.6)

41.8

—

(7.3)

93.8

—

Total fixed maturities, available-for-sale

124.0

(3.2)

3.9

0.3

33.7

(2.3)

156.4

(2.1)

156.4

—

0.7

85.6

—

(7.3)

235.4

—

Fixed maturities,trading

—

0.5

—

0.5

—

0.5

—

(0.1)

—

0.4

—

Equity securities

0.4

—

(0.4)

—

Other investments

29.4

0.1

—

(0.4)

—

29.1

0.1

29.1

—

4.8

—

33.9

—

Separate account assets (2)

8,718.7

138.9

0.5

4.2

—

(172.5)

8,689.8

126.4

8,689.8

233.1

—

(162.0)

—

8,760.9

188.3

Liabilities

Investment contracts

(40.5)

(76.2)

(0.2)

(1.8)

—

(118.7)

(75.5)

Investment and universal life contracts

(118.7)

(180.1)

0.2

(22.2)

—

(320.8)

(180.8)

Derivatives

Net derivative assets (liabilities)

3.4

6.6

—

5.8

—

15.8

11.2

15.8

1.0

—

0.1

—

16.9

1.5

6465

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)


	For the three months ended June 30, 2018																For the three months ended September 30, 2018
															Changes in				Total realized/unrealized												Changes in
	Beginning						Net						Ending		unrealized		Beginning		gains (losses)				Net						Ending		unrealized
	asset/		Total realized/unrealized				purchases,						asset/		gains (losses)		asset/						purchases,						asset/		gains (losses)
	(liability)		gains (losses)				sales,						(liability)		included in		(liability)						sales,						(liability)		included in
	balance		Included in		Included in		issuances						balance		net income		balance		Included in		Included in		issuances						balance		net income
	as of		net		other		and		Transfers		Transfers		as of		relating to		as of		net		other		and		Transfers		Transfers		as of		relating to
	April 1,		income		comprehensive		settlements		into		out of		June 30,		positions still		July 1,		income		comprehensive		settlements		into		out of		September 30,		positions still
	2018		(1)		income (3)		(4)		Level 3		Level 3		2018		held (1)		2018		(1)		income (3)		(4)		Level 3		Level 3		2018		held (1)
	(in millions)																(in millions)
Assets
Fixed maturities, available-for-sale:
Non-U.S. governments	$	7.0	$	—	$	—	$	(0.4)	$	—	$	—	$	6.6	$	—	$	6.6	$	—	$	—	$	(0.4)	$	—	$	(1.3)	$	4.9	$	—
Corporate		103.8		—		(0.7)		(6.0)		0.4		(11.5)		86.0		—		86.0		(0.8)		0.2		(11.2)		—		(9.5)		64.7		(1.0)
Commercial mortgage-backed securities		11.1		—		(0.1)		—		—		(0.9)		10.1		—		10.1		—		(0.3)		—		—		—		9.8		—
Collateralized debt obligations		80.7		—		(0.4)		27.8		12.0		(39.9)		80.2		—		80.2		(0.2)		(0.2)		64.4		42.5		(68.1)		118.6		(0.1)
Other debt obligations		2.1		(0.1)		0.3		92.5		—		—		94.8		—		94.8		—		(0.5)		3.0		—		(48.9)		48.4		—
Total fixed maturities, available-for-sale		204.7		(0.1)		(0.9)		113.9		12.4		(52.3)		277.7		—		277.7		(1.0)		(0.8)		55.8		42.5		(127.8)		246.4		(1.1)
Fixed maturities, trading		—		—		—		3.7		—		—		3.7		—		3.7		—		—		—		—		(3.7)		—		—
Equity securities		14.9		0.7		—		(15.6)		—		—		—		—
Other investments		9.3		0.3		—		3.6		—		—		13.2		0.3		13.2		(0.1)		—		4.1		—		—		17.2		—
Separate account assets (2)		7,991.9		245.4		0.1		54.5		—		(0.4)		8,291.5		257.9		8,291.5		315.6		0.4		(88.4)		2.3		(36.2)		8,485.2		304.4

Liabilities
Investment contracts		(96.2)		52.0		(0.1)		1.5		—		—		(42.8)		51.6
Investment and universal life contracts																		(42.8)		122.0		(0.1)		2.8		—		—		81.9		121.6

Derivatives
Net derivative assets (liabilities)		16.8		(11.1)		—		(0.3)		—		—		5.4		(12.4)		5.4		(5.2)		—		0.8		—		—		1.0		(5.0)

6566

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

For the six months ended June 30, 2019

Changes in

Beginning

Net

Ending

unrealized

asset/

Total realized/unrealized

purchases,

asset/

gains (losses)

(liability)

gains (losses)

sales,

(liability)

included in

balance

Included

Included in

issuances

balance

net income

as of

in net

other

and

Transfers

Transfers

as of

relating to

January 1,

income

comprehensive

settlements

into

out of

June 30,

positions still


2019

(1)

income (3)

(4)

Level 3

Level 3

2019

held (1)

(in millions)
Assets

Fixed maturities, available-for-sale:

Non-U.S. governments

$
4.6

$
—

$
—

$
(0.7)

$
—

$
—

$
3.9

$
—
Corporate

57.9

—

0.4

(13.6)

—

—

44.7

—
Commercial mortgage-backed securities

9.5

(3.2)

3.2

2.2

3.7

(2.3)

13.1

(2.1)
Collateralized debt obligations

8.3

(2.5)

0.3

(1.3)

30.0

—

34.8

(2.5)
Other debt obligations

58.5

—

1.6

25.8

—

(26.0)

59.9

—
Total fixed maturities, available-for-sale

138.8

(5.7)

5.5

12.4

33.7

(28.3)

156.4

(4.6)
Fixed maturities, trading

—

—

—

0.5

—

—

0.5

—
Other investments

17.2

2.3

—

(0.4)

10.0

—

29.1

2.3
Separate account assets (2)

8,615.5

313.5

0.1

(66.1)

—

(173.2)

8,689.8

327.2

Liabilities

Investment contracts

(45.2)

(71.9)

(0.1)

(1.5)

—

—

(118.7)

(70.3)

Derivatives

Net derivative assets (liabilities)

3.1

5.0

—

7.7

—

—

15.8

8.9

For the nine months ended September 30, 2019

Total realized/unrealized

Changes in

Beginning

gains (losses)

Net

Ending

unrealized

asset/

purchases,

asset/

gains (losses)

(liability)

sales,

(liability)

included in

balance

Included

Included in

issuances

balance

net income

as of

in net

other

and

Transfers

as of

relating to

January 1,

income

comprehensive

settlements

into

out of

September 30,

positions still

2019

(1)

income (3)

(4)

Level 3

2019

held (1)

(in millions)

Assets

Fixed maturities, available-for-sale:

Non-U.S. governments

4.6

—

(1.1)

—

3.5

—

Corporate

57.9

—

0.7

(15.5)

—

43.1

—

Commercial mortgage-backed securities

9.5

(3.2)

3.8

2.3

3.7

(2.3)

13.8

(2.3)

Collateralized debt obligations

8.3

(2.5)

0.7

44.7

30.0

—

81.2

(2.5)

Other debt obligations

58.5

—

1.0

67.6

—

(33.3)

93.8

—

Total fixed maturities, available-for-sale

138.8

(5.7)

6.2

98.0

33.7

(35.6)

235.4

(4.8)

Fixed maturities, trading

—

0.4

—

0.4

—

Other investments

17.2

2.3

—

4.4

10.0

—

33.9

2.3

Separate account assets (2)

8,615.5

546.6

0.1

(228.1)

—

(173.2)

8,760.9

505.6

Liabilities

Investment and universal life contracts

(45.2)

(252.0)

0.1

(23.7)

—

(320.8)

(251.1)

Derivatives

Net derivative assets (liabilities)

3.1

6.0

—

7.8

—

16.9

10.8

6667

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

For the six months ended June 30, 2018

Changes in

Beginning

Net

Ending

unrealized

asset/

Total realized/unrealized

purchases,

asset/

gains (losses)

(liability)

gains (losses)

sales,

(liability)

included in

balance

Included

Included in

issuances

balance

net income

as of

in net

other

and

Transfers

Transfers

as of

relating to

January 1,

income

comprehensive

settlements

into

out of

June 30,

positions still


2018

(1)

income (3)

(4)

Level 3

Level 3

2018

held (1)

(in millions)
Assets

Fixed maturities, available-for-sale:

Non-U.S. governments

$
7.4

$
—

$
(0.1)

$
(0.7)

$
—

$
—

$
6.6

$
—
Corporate

128.0

1.1

(0.3)

(3.6)

1.0

(40.2)

86.0

—
Commercial mortgage-backed securities

10.6

(2.5)

0.5

(0.1)

2.5

(0.9)

10.1

—
Collateralized debt obligations

125.0

(0.6)

0.6

2.3

12.1

(59.2)

80.2

(0.6)
Other debt obligations

2.3

—

0.2

92.3

—

—

94.8

—
Total fixed maturities, available-for-sale

273.3

(2.0)

0.9

90.2

15.6

(100.3)

277.7

(0.6)
Fixed maturities, trading

—

—

—

3.7

—

—

3.7

—
Equity securities

2.7

12.9

—

(15.6)

—

—

—

—
Other investments

6.5

1.8

—

4.9

—

—

13.2

1.8
Separate account assets (2)

7,651.4

409.8

(0.6)

231.3

—

(0.4)

8,291.5

402.6

Liabilities

Investment contracts

(160.3)

115.7

0.1

1.7

—

—

(42.8)

115.3

Derivatives

Net derivative assets (liabilities)

18.1

(16.1)

—

3.4

—

—

5.4

(16.0)


	For the nine months ended September 30, 2018
			Total realized/unrealized												Changes in
	Beginning		gains (losses)				Net						Ending		unrealized
	asset/						purchases,						asset/		gains (losses)
	(liability)						sales,						(liability)		included in
	balance		Included		Included in		issuances						balance		net income
	as of		in net		other		and		Transfers		Transfers		as of		relating to
	January 1,		income		comprehensive		settlements		into		out of		September 30,		positions still
	2018		(1)		income (3)		(4)		Level 3		Level 3		2018		held (1)
	(in millions)
Assets
Fixed maturities, available-for-sale:
Non-U.S. governments	$	7.4	$	—	$	(0.1)	$	(1.1)	$	—	$	(1.3)	$	4.9	$	—
Corporate		128.0		0.3		(0.1)		(14.8)		1.0		(49.7)		64.7		(1.0)
Commercial mortgage-backed securities		10.6		(2.5)		0.2		(0.1)		2.5		(0.9)		9.8		—
Collateralized debt obligations		125.0		(0.8)		0.4		66.7		54.6		(127.3)		118.6		(0.7)
Other debt obligations		2.3		—		(0.3)		95.3		—		(48.9)		48.4		—
Total fixed maturities, available-for-sale		273.3		(3.0)		0.1		146.0		58.1		(228.1)		246.4		(1.7)
Fixed maturities, trading		—		—		—		3.7		—		(3.7)		—		—
Equity securities		2.7		12.9		—		(15.6)		—		—		—		—
Other investments		6.5		1.7		—		9.0		—		—		17.2		1.8
Separate account assets (2)		7,651.4		725.4		(0.2)		142.9		2.3		(36.6)		8,485.2		696.0

Liabilities
Investment and universal life contracts		(160.3)		237.7		—		4.5		—		—		81.9		237.7

Derivatives
Net derivative assets (liabilities)		18.1		(21.3)		—		4.2		—		—		1.0		(20.3)

(1)

Both realized gains (losses) and mark-to-market unrealized gains (losses) are generally reported in net realized capital gains (losses) within the consolidated statements of operations. Realized and unrealized gains (losses) on certain securities with an investment objective to realize economic value through mark-to-market changes are reported in net investment income within the consolidated statements of operations.

(2)

Gains and losses for separate account assets do not impact net income as the change in value of separate account assets is offset by a change in value of separate account liabilities. Foreign currency translation adjustments related to the Principal International segment separate account assets are recorded in AOCI and are offset by foreign currency translation adjustments of the corresponding separate account liabilities.

(3)	Includes foreign currency translation adjustments related to our Principal International segment.

6768

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

(4)	Gross purchases, sales, issuances and settlements were:

For the three months ended June 30, 2019

For the three months ended September 30, 2019

Net purchases,

sales, issuances

Purchases

Sales

Issuances

Settlements

and settlements

Purchases

Sales

Issuances

Settlements

and settlements

(in millions)

Assets

Fixed maturities, available-for-sale:

Non-U.S. governments

—

(0.3)

—

(0.4)

Corporate

5.2

(0.2)

—

(18.8)

(13.8)

0.5

(0.6)

—

(1.8)

(1.9)

Commercial mortgage-backed securities

—

0.1

Collateralized debt obligations

—

(1.6)

47.0

—

(1.0)

46.0

Other debt obligations

16.8

—

(0.8)

16.0

45.9

—

(4.1)

41.8

Total fixed maturities, available-for-sale

22.0

(0.2)

—

(21.5)

0.3

93.4

(0.6)

—

(7.2)

85.6

Fixed maturities, trading

0.5

—

0.5

—

(0.1)

Other investments

4.5

(4.9)

—

(0.4)

4.8

—

4.8

Separate account assets (5)

41.0

(112.8)

(156.5)

232.5

4.2

94.3

(307.2)

(30.7)

81.6

(162.0)

Liabilities

Investment contracts

—

(3.5)

1.7

(1.8)

Investment and universal life contracts

—

(24.0)

1.8

(22.2)

Derivatives

Net derivative assets (liabilities)

—

5.8

—

5.8

—

0.1

—

0.1

For the three months ended June 30, 2018

Net purchases,

sales, issuances


Purchases

Sales

Issuances

Settlements

and settlements

(in millions)
Assets

Fixed maturities, available-for-sale:

Non-U.S. governments

$
—

$
—

$
—

$
(0.4)

$
(0.4)
Corporate

0.7

—

—

(6.7)

(6.0)
Collateralized debt obligations

28.1

—

—

(0.3)

27.8
Other debt obligations

94.4

—

—

(1.9)

92.5
Total fixed maturities, available-for-sale

123.2

—

—

(9.3)

113.9
Fixed maturities, trading

3.7

—

—

—

3.7
Equity securities

—

(15.6)

—

—

(15.6)
Other investments

3.6

—

—

—

3.6
Separate account assets (5)

231.4

(124.1)

(60.0)

7.2

54.5

Liabilities

Investment contracts

—

—

0.7

0.8

1.5

Derivatives

Net derivative assets (liabilities)

(1.2)

0.9

—

—

(0.3)


	For the three months ended September 30, 2018
									Net purchases,
									sales, issuances
	Purchases		Sales		Issuances		Settlements		and settlements
	(in millions)
Assets
Fixed maturities, available-for-sale:
Non-U.S. governments	$	—	$	—	$	—	$	(0.4)	$	(0.4)
Corporate		0.6		(5.7)		—		(6.1)		(11.2)
Collateralized debt obligations		65.5		—		—		(1.1)		64.4
Other debt obligations		4.4		—		—		(1.4)		3.0
Total fixed maturities, available-for-sale		70.5		(5.7)		—		(9.0)		55.8
Other investments		4.1		—		—		—		4.1
Separate account assets (5)		42.0		(276.0)		(28.0)		173.6		(88.4)

Liabilities
Investment and universal life contracts		—		—		1.4		1.4		2.8

Derivatives
Net derivative assets (liabilities)		(0.1)		0.9		—		—		0.8

6869

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

For the six months ended June 30, 2019

For the nine months ended September 30, 2019

Net purchases,

sales, issuances

Purchases

Sales

Issuances

Settlements

and settlements

Purchases

Sales

Issuances

Settlements

and settlements

(in millions)

Assets

Fixed maturities, available-for-sale:

Non-U.S. governments

—

(0.7)

—

(1.1)

Corporate

5.7

(0.4)

—

(18.9)

(13.6)

6.2

(1.0)

—

(20.7)

(15.5)

Commercial mortgage-backed securities

2.4

—

(0.2)

2.2

2.4

—

(0.1)

2.3

Collateralized debt obligations

—

(1.3)

47.0

—

(2.3)

44.7

Other debt obligations

26.8

—

(1.0)

25.8

72.7

—

(5.1)

67.6

Total fixed maturities, available-for-sale

34.9

(0.4)

—

(22.1)

��

12.4

128.3

(1.0)

—

(29.3)

98.0

Fixed maturities, trading

0.5

—

0.5

—

(0.1)

0.4

Other investments

4.5

(4.9)

—

(0.4)

9.3

(4.9)

—

4.4

Separate account assets (5)

120.0

(214.5)

(203.8)

232.2

(66.1)

214.3

(521.7)

(234.5)

313.8

(228.1)

Liabilities

Investment contracts

—

(4.8)

3.3

(1.5)

Investment and universal life contracts

—

(28.8)

5.1

(23.7)

Derivatives

Net derivative assets (liabilities)

—

7.7

—

7.7

—

7.8

—

7.8

For the six months ended June 30, 2018

Net purchases,

sales, issuances


Purchases

Sales

Issuances

Settlements

and settlements

(in millions)
Assets

Fixed maturities, available-for-sale:

Non-U.S. governments

$
—

$
—

$
—

$
(0.7)

$
(0.7)
Corporate

12.0

(4.2)

—

(11.4)

(3.6)
Commercial mortgage-backed securities

—

—

—

(0.1)

(0.1)
Collateralized debt obligations

28.1

—

—

(25.8)

2.3
Other debt obligations

94.4

—

—

(2.1)

92.3
Total fixed maturities, available-for-sale

134.5

(4.2)

—

(40.1)

90.2
Fixed maturities, trading

3.7

—

—

—

3.7
Equity securities

—

(15.6)

—

—

(15.6)
Other investments

4.9

—

—

—

4.9
Separate account assets (5)

571.8

(228.5)

(105.5)

(6.5)

231.3

Liabilities

Investment contracts

—

—

0.2

1.5

1.7

Derivatives

Net derivative assets (liabilities)

1.9

1.5

—

—

3.4


		For the nine months ended September 30, 2018
										Net purchases,
										sales, issuances
		Purchases		Sales		Issuances		Settlements		and settlements
		(in millions)
Assets
Fixed maturities, available-for-sale:
Non-U.S. governments		$	—	$	—	$	—	$	(1.1)	$	(1.1)
Corporate			12.6		(9.9)		—		(17.5)		(14.8)
Commercial mortgage-backed securities			—		—		—		(0.1)		(0.1)
Collateralized debt obligations			93.6		—		—		(26.9)		66.7
Other debt obligations			98.8		—		—		(3.5)		95.3
Total fixed maturities, available-for-sale			205.0		(9.9)		—		(49.1)		146.0
Fixed maturities, trading			3.7		—		—		—		3.7
Equity securities			—		(15.6)		—		—		(15.6)
Other investments			9.0		—		—		—		9.0
Separate account assets (5)			613.8		(504.5)		(133.5)		167.1		142.9

Liabilities	��
Investment and universal life contracts			—		—		1.6		2.9		4.5

Derivatives
Net derivative assets (liabilities)			1.8		2.4		—		—		4.2

(5)	Issuances and settlements include amounts related to mortgage encumbrances associated with real estate in our separate accounts.

6970

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

Transfers

Transfers of assets and liabilities measured at fair value on a recurring basis between fair value hierarchy levels were as follows:

For the three months ended June 30, 2019


Transfers out

Transfers out

Transfers out

Transfers out

Transfers out

Transfers out

of Level 1 into

of Level 1 into

of Level 2 into

of Level 2 into

of Level 3 into

of Level 3 into

Level 2

Level 3

Level 1

Level 3

Level 1

Level 2

(in millions)
Assets

Fixed maturities, available-for-sale:

Commercial mortgage-backed securities

$
—

$
—

$
—

$
3.7

$
—

$
2.3
Collateralized debt obligations

—

—

—

30.0

—

—
Total fixed maturities, available-for-sale

—

—

—

33.7

—

2.3
Separate account assets

102.7

—

—

—

—

172.5

For the three months ended September 30, 2019

Transfers out

of Level 1 into

of Level 2 into

of Level 3 into

Level 2

Level 3

Level 1

Level 3

Level 1

Level 2

(in millions)

Assets

Fixed maturities, available-for-sale:

Other debt obligations

—

7.3

Total fixed maturities, available-for-sale

—

7.3

For the three months ended June 30, 2018


Transfers out

Transfers out

Transfers out

Transfers out

Transfers out

Transfers out

of Level 1 into

of Level 1 into

of Level 2 into

of Level 2 into

of Level 3 into

of Level 3 into

Level 2

Level 3

Level 1

Level 3

Level 1

Level 2

(in millions)
Assets

Fixed maturities, available-for-sale:

Corporate

$
—

$
—

$
—

$
0.4

$
—

$
11.5
Commercial mortgage-backed securities

—

—

—

—

—

0.9
Collateralized debt obligations

—

—

—

12.0

—

39.9
Total fixed maturities, available-for-sale

—

—

—

12.4

—

52.3
Separate account assets

0.1

—

0.1

—

0.2

0.2


	For the six months ended June 30, 2019												For the three months ended September 30, 2018
	Transfers out		Transfers out		Transfers out		Transfers out		Transfers out		Transfers out		Transfers out		Transfers out		Transfers out		Transfers out		Transfers out		Transfers out
	of Level 1 into		of Level 1 into		of Level 2 into		of Level 2 into		of Level 3 into		of Level 3 into		of Level 1 into		of Level 1 into		of Level 2 into		of Level 2 into		of Level 3 into		of Level 3 into
	Level 2		Level 3		Level 1		Level 3		Level 1		Level 2		Level 2		Level 3		Level 1		Level 3		Level 1		Level 2
	(in millions)												(in millions)
Assets
Fixed maturities, available-for-sale:
U.S. government and agencies	$	—	$	—	$	1.1	$	—	$	—	$	—
Commercial mortgage-backed securities		—		—		—		3.7		—		2.3
Non-U.S. governments													$	—	$	—	$	—	$	—	$	—	$	1.3
Corporate														—		—		—		—		—		9.5
Collateralized debt obligations		—		—		—		30.0		—		—		—		—		—		42.5		—		68.1
Other debt obligations		—		—		1.1		—		—		26.0		—		—		—		—		—		48.9
Total fixed maturities, available-for-sale		—		—		2.2		33.7		—		28.3		—		—		—		42.5		—		127.8
Other investments		—		—		—		10.0		—		—
Fixed maturities, trading														—		—		—		—		—		3.7
Separate account assets		102.7		—		—		—		—		173.2		0.7		—		—		2.3		—		36.2

For the nine months ended September 30, 2019

Transfers out

of Level 1 into

of Level 2 into

of Level 3 into

Level 2

Level 3

Level 1

Level 3

Level 1

Level 2

(in millions)

Assets

Fixed maturities, available-for-sale:

U.S. government and agencies

—

1.1

—

Commercial mortgage-backed securities

—

3.7

—

2.3

Collateralized debt obligations

—

30.0

—

Other debt obligations

—

33.3

Total fixed maturities, available-for-sale

—

1.1

33.7

—

35.6

Other investments

—

10.0

—

Separate account assets

102.7

—

173.2

7071

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

For the six months ended June 30, 2018


Transfers out

Transfers out

Transfers out

Transfers out

Transfers out

Transfers out

of Level 1 into

of Level 1 into

of Level 2 into

of Level 2 into

of Level 3 into

of Level 3 into

Level 2

Level 3

Level 1

Level 3

Level 1

Level 2

(in millions)
Assets

Fixed maturities, available-for-sale:

Corporate

$
—

$
—

$
—

$
1.0

$
—

$
40.2
Commercial mortgage-backed securities

—

—

—

2.5

—

0.9
Collateralized debt obligations

—

—

—

12.1

—

59.2
Total fixed maturities, available-for-sale

—

—

—

15.6

—

100.3
Separate account assets

292.5

—

0.8

—

0.2

0.2


	For the nine months ended September 30, 2018
	Transfers out		Transfers out		Transfers out		Transfers out		Transfers out		Transfers out
	of Level 1 into		of Level 1 into		of Level 2 into		of Level 2 into		of Level 3 into		of Level 3 into
	Level 2		Level 3		Level 1		Level 3		Level 1		Level 2
	(in millions)
Assets
Fixed maturities, available-for-sale:
Non-U.S. governments	$	—	$	—	$	—	$	—	$	—	$	1.3
Corporate		—		—		—		1.0		—		49.7
Commercial mortgage-backed securities		—		—		—		2.5		—		0.9
Collateralized debt obligations		—		—		—		54.6		—		127.3
Other debt obligations		—		—		—		—		—		48.9
Total fixed maturities, available-for-sale		—		—		—		58.1		—		228.1
Fixed maturities, trading		—		—		—		—		—		3.7
Separate account assets		293.2		—		0.8		2.3		0.2		36.4

Transfers between fair value hierarchy levels are recognized at the beginning of the reporting period.

Separate account assets transferred from Level 1 to Level 2 during the ~~three and six~~nine months ended ~~June~~September 30, 2019, included certain separate accounts we now value using the unit trust approved pooled investment fund (“APIF”) as the unit of account that were previously valued using the underlying investments of the unit trust APIF. Separate account assets transferred from Level 1 to Level 2 during the ~~six~~nine months ended ~~June~~September 30, 2018, primarily included cash equivalents as a result of additional analysis to clarify the source of the price.

Assets transferred into Level 3 during the three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, primarily included those assets for which we are now unable to obtain pricing from a recognized third party pricing vendor as well as assets that were previously priced using a matrix valuation approach that may no longer be relevant when applied to asset-specific situations. In addition, other investments transferred from Level 2 into Level 3 during the ~~six~~nine months ended ~~June~~September 30, 2019, included certain redeemable preferred stock for which at least one significant unobservable input is now used to determine fair value.

Assets transferred out of Level 3 during the ~~three and six~~nine months ended ~~June~~September 30, 2019, primarily included certain separate accounts we now value using the unit trust APIF as the unit of account that were previously valued using the underlying investments of the unit trust APIF. Assets transferred out of Level 3 during the three and ~~six~~nine months ended ~~June~~September 30, 2018, primarily included those assets for which we are now able to obtain pricing from a recognized third party pricing vendor or from internal models using substantially all market observable information.

Quantitative Information about Level 3 Fair Value Measurements

The following table provides quantitative information about the significant unobservable inputs used for recurring fair value measurements categorized within Level 3, excluding assets and liabilities for which significant quantitative unobservable inputs are not developed internally, which primarily consists of those valued using broker quotes or the measurement alternative for CCFEs. Refer to “Assets and liabilities measured at fair value on a recurring basis” for a complete valuation hierarchy summary.

~~Table of Contents~~

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June 30, 2019~~
~~(Unaudited)~~

June 30, 2019


Assets /








(liabilities)

measured at

Valuation

Unobservable

Input/range of

Weighted

fair value

technique(s)

input description

inputs

average

(in millions)

Assets

Fixed maturities, available-for-sale:

Non-U.S. governments

$
3.9

Discounted cash flow

Discount rate (1)

2.6%

2.6%

Illiquidity premium

50 basis points ("bps")

50bps

Comparability adjustment

(25)bps

(25)bps
Corporate

30.9

Discounted cash flow

Discount rate (1)

2.3%
-
6.0%

3.1%

Illiquidity premium

0bps
-
60bps

31bps

Comparability adjustment

0bps
-
130bps

21bps
Commercial mortgage-backed securities

2.8

Discounted cash flow

Discount rate (1)

35.0%

35.0%

Probability of default

100.0%

100.0%

Potential loss severity

44.8%

44.8%
Other debt obligations

1.9

Discounted cash flow

Discount rate (1)

5.0%

5.0%

Illiquidity premium

500bps

500bps
Separate account assets

8,689.0

Discounted cash flow -
mortgage loans

Discount rate (1)

3.2%

3.2%

Illiquidity premium

60bps

60bps

Credit spread rate

138bps

138bps

Discounted cash flow -
real estate

Discount rate (1)

5.6%
-
14.0%

6.7%

Terminal capitalization rate

4.3%
-
9.3%

5.7%

Average market rent growth rate

1.8%
-
4.6%

2.9%

Discounted cash flow -
real estate debt

Loan to value

11.0%
-
68.6%

46.2%

Market interest rate

3.2%
-
6.0%

3.7%

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)


Liabilities
Investment contracts (5)	(118.7)	Discounted cash flow	Long duration interest rate	2.2%	-	2.3%	(2)
			Long-term equity market volatility	15.0%	-	26.6%
			Non-performance risk	0.4%	-	1.4%		September 30, 2019
			Utilization rate	See note (3)				Assets /
			Lapse rate	1.3%	-	16.0%		(liabilities)
			Mortality rate	See note (4)				measured at		Valuation	Unobservable	Input/range of				Weighted
								fair value		technique(s)	input description	inputs				average
								(in millions)
Assets
Fixed maturities, available-for-sale:
Non-U.S. governments								$	3.5	Discounted cash flow	Discount rate (1)			2.4	%	2.4	%
											Illiquidity premium			50	basis points ("bps")	50	bps
											Comparability adjustment			(25)	bps	(25)	bps
Corporate									31.1	Discounted cash flow	Discount rate (1)	2.1	% -	5.7	%	2.8	%
											Illiquidity premium	0	bps -	130	bps	51	bps
Commercial mortgage-backed securities									2.9	Discounted cash flow	Probability of default			100.0	%	100.0	%
											Potential loss severity			43.8	%	43.8	%
Other debt obligations									1.8	Discounted cash flow	Discount rate (1)			5.0	%	5.0	%
											Illiquidity premium			500	bps	500	bps
Separate account assets									8,761.0	Discounted cash flow - mortgage loans	Discount rate (1)			3.0	%	3.0	%
											Illiquidity premium			60	bps	60	bps
											Credit spread rate			133	bps	133	bps
										Discounted cash flow - real estate	Discount rate (1)	4.8	% -	12.0	%	6.7	%
											Terminal capitalization rate	4.5	% -	9.3	%	5.7	%
											Average market rent growth rate	2.0	% -	4.6	%	3.0	%
										Discounted cash flow - real estate debt	Loan to value	11.0	% -	81.4	%	46.3	%
											Market interest rate	3.4	% -	6.0	%	3.6	%


Liabilities
Investment and universal life contracts (5)									(320.8)	Discounted cash flow	Long duration interest rate	1.6	% -	1.7	% (2)
											Long-term equity market volatility	16.9	% -	26.2	%
	December 31, 2018										Non-performance risk	0.4	% -	1.5	%
	Assets /										Utilization rate	See note (3)
	(liabilities)										Lapse rate	0.0	% -	18.0	%
	measured at		Valuation	Unobservable	Input/range of			Weighted			Mortality rate	See note (4)
	fair value		technique(s)	input description	inputs			average
	(in millions)
Assets
Fixed maturities, available-for-sale:
Non-U.S. governments	$	4.6	Discounted cash flow	Discount rate (1)			3.2%	3.2%
				Illiquidity premium			50bps	50bps
				Comparability adjustment			(25)bps	(25)bps
Corporate		25.4	Discounted cash flow	Discount rate (1)	3.3%	-	4.5%	3.9%
				Illiquidity premium	0bps	-	60bps	36bps
Other debt obligations		1.7	Discounted cash flow	Discount rate (1)			5.0%	5.0%
				Illiquidity premium			500bps	500bps
Separate account assets		8,440.8	Discounted cash flow - mortgage loans	Discount rate (1)	3.3%	-	4.7%	4.2%
				Illiquidity premium	0bps	-	60bps	56bps
				Credit spread rate	85bps	-	172bps	168bps
			Discounted cash flow - real estate	Discount rate (1)	5.6%	-	11.5%	6.7%
				Terminal capitalization rate	4.3%	-	9.3%	5.8%
				Average market rent growth rate	2.0%	-	4.7%	2.9%
			Discounted cash flow - real estate debt	Loan to value	11.0%	-	69.3%	45.9%
				Market interest rate	3.9%	-	6.0%	4.3%

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

Liabilities










Investment contracts (5)

(45.2)

Discounted cash flow

Long duration interest rate

2.8%
-
2.9%
(2)

Long-term equity market volatility

16.7%
-
27.8%

Non-performance risk

0.6%
-
1.6%

Utilization rate

See note (3)

Lapse rate

1.3%
-
16.0%

Mortality rate

See note (4)


	December 31, 2018
	Assets /
	(liabilities)
	measured at		Valuation	Unobservable	Input/range of					Weighted
	fair value		technique(s)	input description	inputs					average
	(in millions)
Assets
Fixed maturities, available-for-sale:
Non-U.S. governments	$	4.6	Discounted cash flow	Discount rate (1)				3.2	%	3.2	%
				Illiquidity premium				50	bps	50	bps
				Comparability adjustment				(25)	bps	(25)	bps
Corporate		25.4	Discounted cash flow	Discount rate (1)		3.3	% -	4.5	%	3.9	%
				Illiquidity premium		0	bps -	60	bps	36	bps
Other debt obligations		1.7	Discounted cash flow	Discount rate (1)				5.0	%	5.0	%
				Illiquidity premium				500	bps	500	bps
Separate account assets		8,440.8	Discounted cash flow - mortgage loans	Discount rate (1)		3.3	% -	4.7	%	4.2	%
				Illiquidity premium		0	bps -	60	bps	56	bps
				Credit spread rate		85	bps -	172	bps	168	bps
			Discounted cash flow - real estate	Discount rate (1)		5.6	% -	11.5	%	6.7	%
				Terminal capitalization rate		4.3	% -	9.3	%	5.8	%
				Average market rent growth rate		2.0	% -	4.7	%	2.9	%
			Discounted cash flow - real estate debt	Loan to value		11.0	% -	69.3	%	45.9	%
				Market interest rate		3.9	% -	6.0	%	4.3	%


Liabilities
Investment and universal life contracts (5)	(45.2)	Discounted cash flow	Long duration interest rate	2.8	% -	2.9	% (2)
			Long-term equity market volatility	16.7	% -	27.8	%
			Non-performance risk	0.6	% -	1.6	%
			Utilization rate	See note (3)
			Lapse rate	1.3	% -	16.0	%
			Mortality rate	See note (4)

(1)	Represents market comparable interest rate or an index adjusted rate used as the base rate in the discounted cash flow analysis prior to any illiquidity or other adjustments, where applicable.

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements �� (continued)
September 30, 2019
(Unaudited)

(2)	Represents the range of rate curves used in the valuation analysis that we have determined market participants would use when pricing the instrument. Derived from interpolation between various observable swap rates.

(3)	This input factor is the number of contractholders taking withdrawals as well as the amount and timing of the withdrawals and a range does not provide a meaningful presentation.

(4)	This input is based on an appropriate industry mortality table and a range does not provide a meaningful presentation.

(5)	Includes bifurcated embedded derivatives that are reported at net asset (liability) fair value within the same line item in the consolidated statements of financial position in which the host contract is reported.

Market comparable discount rates are used as the base rate in the discounted cash flows used to determine the fair value of certain assets. Increases or decreases in the credit spreads on the comparable assets could cause the fair value of the assets to significantly decrease or increase, respectively. Additionally, we may adjust the base discount rate or the modeled price by applying an illiquidity premium given the highly structured nature of certain assets. Increases or decreases in this illiquidity premium could cause significant decreases or increases, respectively, in the fair value of the asset.

Embedded derivatives within our investment and universal life contracts liability can be in either an asset or liability position, depending on certain inputs at the reporting date. Increases to an asset or decreases to a liability are described as increases to fair value. Increases or decreases in market volatilities could cause significant decreases or increases, respectively, in the fair value of embedded derivatives in investment contracts. Long duration interest rates are used as the mean return when projecting the growth in the value of associated account value and impact the discount rate used in the discounted future cash flows valuation. The amount of claims will increase if account value is not sufficient to cover guaranteed withdrawals. Increases or decreases in risk-free rates could cause the fair value of the embedded derivative to significantly increase or decrease, respectively. Increases or decreases in our own credit risks, which impact the rates used to discount future cash flows, could significantly increase or decrease, respectively, the fair value of the embedded derivative. All of these changes in fair value would impact net income.

Decreases or increases in the mortality rate assumption could cause the fair value of the embedded derivative to decrease or increase, respectively. Decreases or increases in the overall lapse rate assumption could cause the fair value of the embedded derivative to decrease or increase, respectively. The lapse rate assumption ~~varies~~may vary dynamically based on the relationship of the guarantee and associated account value. A stronger or weaker dynamic lapse rate assumption could cause the fair value of the embedded derivative to decrease or increase, respectively. The utilization rate assumption includes how many contractholders will take withdrawals, when they will take them and how much of their benefit they will take. Increases or decreases in the assumption of the number of contractholders taking withdrawals could cause the fair value of the embedded derivative to decrease or increase, respectively. Assuming contractholders take withdrawals earlier or later could cause the fair value of the embedded derivative to decrease or increase, respectively. Assuming contractholders take more or less of their benefit could cause the fair value of the embedded derivative to decrease or increase, respectively.

~~Table of Contents~~

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June 30, 2019~~
~~(Unaudited)~~

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

No significant assets and liabilities were measured at fair value on a nonrecurring basis for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018.

Fair Value Option

We elected fair value accounting for:

●

Certain commercial mortgage loans of a consolidated VIE for which it was not practicable for us to determine the carrying value. The consolidated VIE was unwound in the third quarter of 2019.

●

Certain real estate ventures that are subject to the equity method of accounting because the nature of the investments is to add value to the properties and generate income from the operations of the properties. Other equity method real estate investments are not fair valued because the investments mainly generate income from the operations of the underlying properties.

● ~~Certain commercial mortgage loans~~Table of ~~consolidated VIEs for which it was not practicable for us~~Contents

Principal Financial Group, Inc.
Notes to ~~determine the carrying value.~~Consolidated Financial Statements — (continued)
September 30, 2019
(Unaudited)

● Certain real estate ventures that are subject to the equity method of accounting because the nature of the investments is to add value to the properties and generate income from the operations of the properties. Other equity method real estate investments are not fair valued because the investments mainly generate income from the operations of the underlying properties.

The following tables present information regarding the assets and liabilities for which the fair value option was elected.


	June 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018
	(in millions)				(in millions)
Commercial mortgage loans of consolidated VIEs (1) (2)
Fair value	$	5.4	$	6.4	$	—	$	6.4
Aggregate contractual principal		5.4		6.5		—		6.5

Real estate ventures (1)
Fair value		19.1		17.2		19.1		17.2

(1)	Reported with other investments in the consolidated statements of financial position.

(2)	~~None~~NaN of the loans were more than 90 days past due or in non-accrual status.


	For the three months ended June 30,				For the six months ended June 30,				For the three months ended September 30,				For the nine months ended September 30,
	2019		2018		2019		2018		2019		2018		2019		2018
	(in millions)								(in millions)
Commercial mortgage loans of consolidated VIEs
Change in fair value pre-tax loss (1) (2)	$	—	$	—	$	—	$	(0.1)
Change in fair value pre-tax gain (loss) (1) (2)									$	0.1	$	(0.1)	$	0.1	$	(0.2)
Interest income (3)		0.1		0.2		0.2		0.4		0.1		0.1		0.3		0.5

Real estate ventures
Change in fair value pre-tax gain (4)		0.1		0.3		2.3		1.8		—		—		2.3		1.8

(1)	None of the change in fair value related to instrument-specific credit risk.

(2)	Reported in net realized capital gains (losses) on the consolidated statements of operations.

(3)	Reported in net investment income on the consolidated statements of operations and recorded based on the effective interest rates as determined at the closing of the loan.

(4)	Reported in net investment income on the consolidated statements of operations.

~~Table of Contents~~

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June 30, 2019~~
~~(Unaudited)~~

Financial Instruments Not Reported at Fair Value

The carrying value and estimated fair value of financial instruments not recorded at fair value on a recurring basis but required to be disclosed at fair value were as follows:

June 30, 2019

September 30, 2019

Fair value hierarchy level

Carrying amount

Fair value

Level 1

Level 2

Level 3

Carrying amount

Fair value

Level 1

Level 2

Level 3

(in millions)

Assets (liabilities)

Mortgage loans

16,136.8

16,805.7

—

16,805.7

16,491.6

17,360.3

—

17,360.3

Policy loans

800.9

1,038.1

—

1,038.1

799.1

1,070.7

—

1,070.7

Other investments

261.8

266.1

—

175.0

91.1

298.4

306.9

—

200.1

106.8

Cash and cash equivalents

1,192.3

1,117.7

74.6

—

1,206.5

1,127.9

78.6

—

Investment contracts

(32,386.1)

(32,182.8)

—

(3,880.9)

(28,301.9)

(32,793.8)

(32,819.6)

—

(4,168.3)

(28,651.3)

Short-term debt

(76.8)

—

(76.8)

—

(96.1)

—

(96.1)

—

Long-term debt

(3,762.4)

(4,023.6)

—

(3,887.4)

(136.2)

(3,763.9)

(4,175.8)

—

(4,038.7)

(137.1)

Separate account liabilities

(149,038.5)

(147,848.3)

—

(147,848.3)

(147,260.6)

(146,107.8)

—

(146,107.8)

Bank deposits (1)

(485.1)

(481.3)

—

(481.3)

—

(482.1)

(481.0)

—

(481.0)

—

Cash collateral payable

(116.1)

—

(183.7)

—

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
September 30, 2019
(Unaudited)


	December 31, 2018
					Fair value hierarchy level
	Carrying amount		Fair value		Level 1		Level 2		Level 3
	(in millions)
Assets (liabilities)
Mortgage loans	$	15,336.9	$	15,383.6	$	—	$	—	$	15,383.6
Policy loans		801.4		965.5		—		—		965.5
Other investments		247.4		239.8		—		157.5		82.3
Cash and cash equivalents		1,201.6		1,201.6		1,148.6		53.0		—
Investment contracts		(32,572.1)		(31,428.2)		—		(4,085.7)		(27,342.5)
Short-term debt		(42.9)		(42.9)		—		(42.9)		—
Long-term debt		(3,259.6)		(3,257.1)		—		(3,129.3)		(127.8)
Separate account liabilities		(132,562.9)		(131,491.4)		—		—		(131,491.4)
Bank deposits (1)		(500.0)		(489.1)		—		(489.1)		—
Cash collateral payable		(79.5)		(79.5)		(79.5)		—		—

(1)	Excludes deposit liabilities without defined or contractual maturities.

~~12.~~13. Segment Information

We provide financial products and services through the following segments: Retirement and Income Solutions, Principal Global Investors, Principal International and U.S. Insurance Solutions. In addition, we have a Corporate segment. The segments are managed and reported separately because they provide different products and services, have different strategies or have different markets and distribution channels.

The Retirement and Income Solutions segment provides retirement and related financial products and services primarily to businesses, their employees and other individuals. The segment is organized into Retirement and Income Solutions – Fee, which includes full service accumulation, trust services, ~~and~~ individual variable ~~annuities;~~annuities and revenues and expenses associated with the Acquired Business; and Retirement and Income Solutions – Spread, which includes individual fixed annuities, investment only, pension risk transfer and banking services.

The Principal Global Investors segment provides asset management services to our asset accumulation business, our insurance operations, the Corporate segment and third party clients. This segment also includes our mutual fund business.

The Principal International segment has operations in Latin America (Brazil, Chile and Mexico) and Asia (China, Hong Kong Special Administrative Region, India and Southeast Asia). We focus on locations with large middle classes, favorable demographics and growing long-term savings, ideally with voluntary or mandatory pension markets. We entered

~~Table of Contents~~

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June 30, 2019~~
~~(Unaudited)~~

these locations through acquisitions, start-up operations and joint ventures.

The U.S. Insurance Solutions segment focuses on solutions for individuals and small-to-medium sized businesses and their employees. The segment is organized into Specialty Benefits insurance, which provides group dental and vision insurance, individual and group disability insurance, critical illness, accident, group life insurance and non-medical fee-for-service claims administration; and Individual Life insurance, which provides universal life, variable universal life, indexed universal life and traditional life insurance.

Our Corporate segment manages the assets representing capital that has not been allocated to any other segment. Financial results of the Corporate segment primarily reflect our financing activities (including financing costs), income on capital not allocated to other segments, inter-segment eliminations, income tax risks and certain income, expenses and other adjustments not allocated to the segments based on the nature of such items. Results of Principal Securities, Inc. (“PSI”), our retail broker-dealer and registered investment advisor ("RIA”); RobustWealth, Inc. (“RobustWealth”), our financial technology company; and our exited group medical and long-term care insurance businesses are reported in this segment.

Effective January 1, 2019, we made changes to the allocation of certain compensation and other expenses and net investment income among the reportable segments. These allocation changes were made as a result of a global financial process improvement project. The expense allocation changes simplify the allocation processes, increase transparency and allow for more effective expense management across the enterprise. The net investment income allocation changes better align our internal capital allocation with enterprise capital targets. Segment results for prior periods were recast so they are reported on a comparable basis, with no impact to total company financial results.

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
September 30, 2019
(Unaudited)

Management uses segment pre-tax operating earnings in evaluating performance, which is consistent with the financial results provided to and discussed with securities analysts. We determine segment pre-tax operating earnings by adjusting U.S. GAAP income before income taxes for pre-tax net realized capital gains (losses), as adjusted, pre-tax other adjustments that management believes are not indicative of overall operating trends and certain adjustments related to equity method investments and noncontrolling interest. While these items may be significant components in understanding and assessing the consolidated financial performance, management believes the presentation of pre-tax operating earnings enhances the understanding of our results of operations by highlighting pre-tax earnings attributable to the normal, ongoing operations of the business.

The pre-tax net realized capital gains (losses), as adjusted, excluded from pre-tax operating earnings reflects consolidated U.S. GAAP pre-tax net realized capital gains (losses) excluding the following items that are included in pre-tax operating earnings:

●

Periodic settlements and accruals on derivative instruments not designated as hedging instruments,

●

Certain market value adjustments of derivatives and embedded derivatives and

●

Certain market value adjustments of derivative instruments used to economically hedge embedded derivatives.

Pre-tax net realized capital gains (losses), as adjusted, are further adjusted for:

●

Amortization of hedge accounting book value adjustments for certain discontinued hedges,

●

Certain hedge accounting market value revenue adjustments,

●

Certain market value adjustments to fee revenues,

●

Pre-tax net realized capital gains (losses) adjustments related to equity method investments,

●

Pre-tax net realized capital gains (losses) adjustments related to sponsored investment funds,

●

Recognition of deferred front-end fee revenues for sales charges on retirement and life insurance products and services,

●

Related changes in the amortization pattern of DAC and related actuarial balances,

●

Certain hedge accounting market value expense adjustments and

●

Net realized capital gains (losses) distributed.

Segment operating revenues reflect consolidated U.S. GAAP total revenues excluding:

●

Net realized capital gains (losses), except periodic settlements and accruals on derivatives not designated as hedging instruments and certain market value adjustments of derivative instruments used to economically hedge embedded derivatives, and their impact on:

●

Amortization of hedge accounting book value adjustments for certain discontinued hedges,

●

Certain hedge accounting market value revenue adjustments,

~~Table of Contents~~

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June 30, 2019~~
~~(Unaudited)~~

●

Certain market value adjustments to fee revenues,

●

Pre-tax net realized capital gains (losses) adjustments related to equity method investments,

●

Pre-tax net realized capital gains (losses) adjustments related to sponsored investment funds and

●

Recognition of deferred front-end fee revenues for sales charges on retirement and life insurance products and services.

●

Pre-tax other adjustments and income taxes of equity method investments and

●

Pre-tax other adjustments management believes are not indicative of overall operating trends.

The accounting policies of the segments are consistent with the accounting policies for the consolidated financial statements, with the exception of: (1) pension and other postretirement employee benefits (“OPEB”) cost allocations, (2) certain expenses deemed to benefit the entire organization and (3) income tax allocations. For purposes of determining pre-tax operating earnings, the segments are allocated the service component of pension and other postretirement benefit costs. The Corporate segment reflects the non-service components of pension and other postretirement benefit costs as assumptions are established and funding decisions are managed from a company-wide perspective. Additionally, the Corporate segment reflects expenses that benefit the entire organization for which the segments are not able to influence the spend. This includes expenses such as public company costs, executive management costs, acquisition and disposition costs, among others. The Corporate segment functions to absorb the risk inherent in interpreting and applying tax law. For purposes of determining non-GAAP operating earnings, the segments are allocated tax adjustments consistent with the positions we took on tax returns. The Corporate segment results reflect any differences between the tax returns and the estimated resolution of any disputes.

The following tables summarize select financial information by segment, including operating revenues for our products and services, and reconcile segment totals to those reported in the consolidated financial statements:

June 30, 2019

December 31, 2018

(in millions)
Assets:

Retirement and Income Solutions

$
181,663.0

$
163,833.6
Principal Global Investors

2,312.9

2,301.0
Principal International

51,285.8

46,701.2
U.S. Insurance Solutions

27,178.3

25,388.2
Corporate

5,478.0

4,812.1
Total consolidated assets

$
267,918.0

$
243,036.1

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

For the three months ended

For the six months ended

June 30,

June 30,


2019

2018

2019

2018

(in millions)
Operating revenues by segment:

Retirement and Income Solutions:

Retirement and Income Solutions – Fee

$
450.5

$
446.5

$
881.3

$
894.3
Retirement and Income Solutions – Spread

1,709.1

1,003.4

3,170.2

1,734.5
Total Retirement and Income Solutions (1)

2,159.6

1,449.9

4,051.5

2,628.8
Principal Global Investors (2)

359.5

379.6

698.5

748.1
Principal International

411.6

389.6

792.1

772.7
U.S. Insurance Solutions:

Specialty Benefits insurance

625.8

572.2

1,227.6

1,137.6
Individual Life insurance

461.6

432.0

927.9

883.3
Eliminations

(0.1)

(0.1)

(0.1)

(0.1)
Total U.S. Insurance Solutions

1,087.3

1,004.1

2,155.4

2,020.8
Corporate

(15.8)

(17.0)

(14.6)

(17.0)
Total segment operating revenues

4,002.2

3,206.2

7,682.9

6,153.4
Net realized capital gains (losses), net of related revenue adjustments

(13.2)

50.6

70.5

8.4
Adjustments related to equity method investments

(16.4)

(21.9)

(36.9)

(43.3)
Total revenues per consolidated statements of operations

$
3,972.6

$
3,234.9

$
7,716.5

$
6,118.5

Pre-tax operating earnings (losses) by segment:

Retirement and Income Solutions

$
256.2

$
227.6

$
496.8

$
471.5
Principal Global Investors

115.6

129.2

216.3

242.9
Principal International

93.2

86.3

204.3

177.8
U.S. Insurance Solutions

146.3

113.3

257.0

228.3
Corporate

(98.1)

(70.7)

(182.5)

(138.3)
Total segment pre-tax operating earnings

513.2

485.7

991.9

982.2
Pre-tax net realized capital gains (losses), as adjusted (3)

(48.6)

48.6

17.0

25.0
Adjustments related to equity method investments and noncontrolling interest

(14.3)

(18.9)

(32.6)

(34.8)
Income before income taxes per consolidated statements of operations

$
450.3

$
515.4

$
976.3

$
972.4


	September 30, 2019		December 31, 2018
	(in millions)
Assets:
Retirement and Income Solutions	$	186,731.2	$	163,833.6
Principal Global Investors		2,238.9		2,301.0
Principal International		48,927.4		46,701.2
U.S. Insurance Solutions		27,838.4		25,388.2
Corporate		4,502.5		4,812.1
Total consolidated assets	$	270,238.4	$	243,036.1


	For the three months ended				For the nine months ended
	September 30,				September 30,
	2019		2018		2019		2018
	(in millions)
Operating revenues by segment:
Retirement and Income Solutions:
Retirement and Income Solutions – Fee	$	559.4	$	454.0	$	1,440.7	$	1,348.3
Retirement and Income Solutions – Spread		2,013.7		1,980.7		5,183.9		3,715.2
Total Retirement and Income Solutions (1)		2,573.1		2,434.7		6,624.6		5,063.5
Principal Global Investors (2)		369.9		632.8		1,068.4		1,380.9
Principal International		404.6		287.4		1,196.7		1,060.1
U.S. Insurance Solutions:
Specialty Benefits insurance		629.8		591.3		1,857.4		1,728.9
Individual Life insurance		562.8		441.9		1,490.7		1,325.2
Eliminations		—		—		(0.1)		(0.1)
Total U.S. Insurance Solutions		1,192.6		1,033.2		3,348.0		3,054.0
Corporate		(16.4)		(21.4)		(31.0)		(38.4)
Total segment operating revenues		4,523.8		4,366.7		12,206.7		10,520.1
Net realized capital gains (losses), net of related revenue adjustments		(46.6)		(20.2)		23.9		(11.8)
Adjustments related to equity method investments		(18.8)		1.6		(55.7)		(41.7)
Total revenues per consolidated statements of operations	$	4,458.4	$	4,348.1	$	12,174.9	$	10,466.6

Pre-tax operating earnings (losses) by segment:
Retirement and Income Solutions	$	169.7	$	266.8	$	666.5	$	738.3
Principal Global Investors		123.0		216.8		339.3		459.7
Principal International		108.9		37.0		313.2		214.8
U.S. Insurance Solutions		120.1		125.7		377.1		354.0
Corporate		(102.1)		(52.9)		(284.6)		(191.2)
Total segment pre-tax operating earnings		419.6		593.4		1,411.5		1,575.6
Pre-tax net realized capital losses, as adjusted (3)		(60.2)		(27.9)		(43.2)		(2.9)
Adjustments related to equity method investments and noncontrolling interest		(13.7)		3.6		(46.3)		(31.2)
Income before income taxes per consolidated statements of operations	$	345.7	$	569.1	$	1,322.0	$	1,541.5

(1)

Reflects inter-segment revenues of ~~$88.5~~$92.2 million and ~~$98.9~~$103.9 million for the three months ended ~~June~~September 30, 2019 and 2018, respectively, ~~$174.2~~$266.4 million and ~~$200.6~~$304.5 million for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, respectively.

~~(2)~~

Reflects inter-segment revenues of $66.2 million and $67.8 million for the three months ended June 30, 2019 and 2018, respectively, $127.7 million and $130.0 million for the six months ended June 30, 2019 and 2018, respectively.

~~(3)~~

~~Pre-tax net realized capital gains (losses), as adjusted, is derived as follows:~~

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

For the three months ended

For the six months ended

June 30,

June 30,


2019

2018

2019


2018

(in millions)
Net realized capital gains (losses):

Net realized capital gains (losses)

$
(4.0)

$
67.4

$
80.5

$
42.3
Derivative and hedging-related revenue adjustments

(21.4)

(14.9)

(32.9)

(32.7)
Market value adjustments to fee revenues

—

0.1

—

0.1
Adjustments related to equity method investments

1.2

(4.2)

0.8

(4.0)
Adjustments related to sponsored investment funds

6.8

3.0

14.8

5.1
Recognition of front-end fee revenue

4.2

(0.8)

7.3

(2.4)
Net realized capital gains (losses), net of related revenue adjustments

(13.2)

50.6

70.5

8.4
Amortization of deferred acquisition costs and other actuarial balances

(29.1)

1.2

(45.5)

6.8
Capital (gains) losses distributed

(15.2)

(8.3)

(23.9)

2.3
Market value adjustments of embedded derivatives

8.9

5.1

15.9

7.5
Pre-tax net realized capital gains (losses), as adjusted (a)

$
(48.6)

$
48.6

$
17.0

$
25.0

(2)	Reflects inter-segment revenues of $67.5 million and $69.2 million for the three months ended September 30, 2019 and 2018, respectively, $195.2 million and $199.2 million for the nine months ended September 30, 2019 and 2018, respectively.

(3)	Pre-tax net realized capital gains (losses), as adjusted, is derived as follows:


	For the three months ended				For the nine months ended
	September 30,				September 30,
	2019		2018		2019			2018
	(in millions)
Net realized capital gains (losses):
Net realized capital gains (losses)	$	(42.4)	$	(5.5)	$	38.1	$	36.8
Derivative and hedging-related revenue adjustments		(17.9)		(15.8)		(50.8)		(48.5)
Market value adjustments to fee revenues		—		—		—		0.1
Adjustments related to equity method investments		1.7		(0.9)		2.5		(4.9)
Adjustments related to sponsored investment funds		6.2		2.9		21.0		8.0
Recognition of front-end fee revenue		5.8		(0.9)		13.1		(3.3)
Net realized capital gains (losses), net of related revenue adjustments		(46.6)		(20.2)		23.9		(11.8)
Amortization of deferred acquisition costs and other actuarial balances		(34.6)		5.9		(80.1)		12.7
Capital gains distributed		(30.0)		(17.7)		(53.9)		(15.4)
Market value adjustments of embedded derivatives		51.0		4.1		66.9		11.6
Pre-tax net realized capital losses, as adjusted (a)	$	(60.2)	$	(27.9)	$	(43.2)	$	(2.9)

(a)

As adjusted before noncontrolling interest capital gains (losses).

~~13.~~14. Revenues from Contracts with Customers

The following tables summarize disaggregation of revenues from contracts with customers, including select financial information by segment, and reconcile totals to those reported in the consolidated financial statements. Revenues from contracts with customers are included in fees and other revenues on the consolidated statements of operations.


	For the three months ended				For the six months ended				For the three months ended				For the nine months ended
	June 30,				June 30,				September 30,				September 30,
	2019		2018		2019			2018	2019		2018		2019			2018
	(in millions)								(in millions)
Revenue from contracts with customers by segment:
Retirement and Income Solutions:
Retirement and Income Solutions – Fee	$	63.9	$	66.9	$	122.3	$	128.6	$	156.0	$	63.7	$	278.3	$	192.3
Retirement and Income Solutions – Spread		2.3		2.7		5.2		5.4		2.3		2.8		7.5		8.2
Total Retirement and Income Solutions		66.2		69.6		127.5		134.0		158.3		66.5		285.8		200.5
Principal Global Investors		346.2		371.1		678.5		731.4		362.8		623.4		1,041.3		1,354.8
Principal International		116.2		123.1		231.1		244.2		114.8		118.0		345.9		362.2
U.S. Insurance Solutions:
Specialty Benefits insurance		3.6		3.8		7.3		7.5		3.8		3.6		11.1		11.1
Individual Life insurance		12.6		9.8		24.6		19.2		12.8		11.0		37.4		30.2
Eliminations		(0.1)		(0.1)		(0.1)		(0.1)		—		—		(0.1)		(0.1)
Total U.S. Insurance Solutions		16.1		13.5		31.8		26.6		16.6		14.6		48.4		41.2
Corporate		42.5		37.0		79.5		80.9		39.5		40.2		119.0		121.1
Total segment revenue from contracts with customers		587.2		614.3		1,148.4		1,217.1		692.0		862.7		1,840.4		2,079.8
Adjustments for fees and other revenues not within the scope of revenue recognition guidance (1)		415.2		399.0		824.4		809.1		532.2		400.0		1,356.6		1,209.1
Pre-tax other adjustments (2)		4.2		(0.7)		7.3		(2.3)		5.8		(0.9)		13.1		(3.2)
Total fees and other revenues per consolidated statements of operations	$	1,006.6	$	1,012.6	$	1,980.1	$	2,023.9	$	1,230.0	$	1,261.8	$	3,210.1	$	3,285.7

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
September 30, 2019
(Unaudited)

(1)	Fees and other revenues not within the scope of the revenue recognition guidance primarily represent revenue on contracts accounted for under the financial instruments or insurance contracts standards.

(2)	Pre-tax other adjustments relate to the recognition of deferred front-end fee revenues for sales charges on retirement and life insurance products and certain market value adjustments to fee revenues.

~~Table of Contents~~

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June 30, 2019~~
~~(Unaudited)~~

Retirement and Income Solutions - Fee

Retirement and Income Solutions - Fee offers service and trust agreements for defined contribution plans, including 401(k) plans, 403(b) plans, and employee stock ownership plans. The investment components of these service agreements are in the form of mutual fund offerings. In addition, plan sponsor trust services are also available through an affiliated trust company.

Fees and other revenues are earned for administrative activities performed for the defined contribution plans including recordkeeping and reporting as well as trust, asset management and investment services. The majority of these activities are performed daily over time. Fee-for-service transactions are also provided upon client request. These services are considered distinct or grouped into a bundle until a distinct performance obligation is identified. Some performance obligations are considered a series of distinct services, which are substantially the same and have the same pattern of transfer to the customer.

Fees and other revenues can be based on a fixed contractual rate for these services or can be variable based upon contractual rates applied to the market value of the client's investment portfolio each day. If the consideration for this series of performance obligations is based on daily market value, it is considered variable each day as the services are performed over time. The consideration becomes unconstrained and thus recognized as revenue for each day’s series of distinct services once the market value of the clients’ investment portfolios is determined at market close or carried over at the end of the day for days when the market is closed. Additionally, fixed fees and other revenues are recognized point-in-time as fee-for-service transactions upon completion.

The types of revenues from contracts with customers were as follows:


	For the three months ended				For the six months ended				For the three months ended				For the nine months ended
	June 30,				June 30,				September 30,				September 30,
	2019		2018		2019			2018	2019		2018		2019			2018
	(in millions)								(in millions)
Administrative service fee revenue	$	63.3	$	66.3	$	121.5	$	127.9	$	155.5	$	63.2	$	277.0	$	191.1
Other fee revenue		0.6		0.6		0.8		0.7		0.5		0.5		1.3		1.2
Total revenues from contracts with customers		63.9		66.9		122.3		128.6		156.0		63.7		278.3		192.3
Fees and other revenues not within the scope of revenue recognition guidance		281.6		282.8		553.4		569.2		301.2		288.3		854.6		857.5
Total fees and other revenues		345.5		349.7		675.7		697.8		457.2		352.0		1,132.9		1,049.8
Premiums and other considerations		0.6		0.9		1.7		2.4		1.0		1.1		2.7		3.5
Net investment income		104.4		95.9		203.9		194.1		101.2		100.9		305.1		295.0
Total operating revenues	$	450.5	$	446.5	$	881.3	$	894.3	$	559.4	$	454.0	$	1,440.7	$	1,348.3

Retirement and Income Solutions - Spread

Retirement and Income Solutions – Spread offers individual retirement accounts (“IRAs”) through Principal Bank, which are primarily funded by retirement savings rolled over from qualified retirement plans. The IRAs are held in savings accounts, money market accounts and certificates of deposit. Revenues are earned through fees as the performance of establishing and maintaining IRA accounts is completed. Fee-for-service transactions are also provided upon client request. The establishment fees and annual maintenance fees are accrued into earnings over a period of time using the average account life. Upfront and recurring bank fees are related to performance obligations that have the same pattern of transfer to the customer and are recognized in income over time with control transferred to the customers utilizing the output method. These fees are based on a fixed contractual rate. Fixed fees and other revenues are also recognized point-in-time as fee-for-service transactions upon completion.

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

The types of revenues from contracts with customers were as follows:


	For the three months ended				For the six months ended				For the three months ended				For the nine months ended
	June 30,				June 30,				September 30,				September 30,
	2019		2018		2019			2018	2019		2018		2019		2018
	(in millions)								(in millions)
Deposit account fee revenue	$	2.3	$	2.7	$	5.2	$	5.4	$	2.3	$	2.8	$	7.5	$	8.2
Total revenues from contracts with customers		2.3		2.7		5.2		5.4		2.3		2.8		7.5		8.2
Fees and other revenues not within the scope of revenue recognition guidance		4.2		2.9		9.1		5.6		2.6		3.4		11.7		9.0
Total fees and other revenues		6.5		5.6		14.3		11.0		4.9		6.2		19.2		17.2
Premiums and other considerations		1,171.5		555.1		2,129.0		843.4		1,499.3		1,495.7		3,628.3		2,339.1
Net investment income		531.1		442.7		1,026.9		880.1		509.5		478.8		1,536.4		1,358.9
Total operating revenues	$	1,709.1	$	1,003.4	$	3,170.2	$	1,734.5	$	2,013.7	$	1,980.7	$	5,183.9	$	3,715.2

Principal Global Investors

Fees and other revenues earned for asset management, investment advisory and distribution services provided to institutional and retail clients are based largely upon contractual rates applied to the specified amounts of the clients’ portfolios. Each service is a distinct performance obligation, or a series of distinct services that are a single performance obligation in that the services are substantially the same and have the same pattern of transfer to the customer. Fees and other revenues received for performance obligations such as asset management and other services are typically recognized over time utilizing the output method as the service is performed. Performance fees and transaction fees on certain accounts are recognized in income when the probability of significant reversal will not occur upon resolution of the uncertainty, which could be based on a variety of factors such as market performance or other internal metrics. Asset management fees are accrued each month based on the fee terms within the applicable agreement and are generally billed quarterly when values used for the calculation are available. Management fees and performance fees are variable consideration as they are subject to fluctuation based on assets under management (“AUM”) and other constraints. These fees are not recognized until unconstrained at the end of each reporting period.

The types of revenues from contracts with customers were as follows:


	For the three months ended				For the six months ended				For the three months ended				For the nine months ended
	June 30,				June 30,				September 30,				September 30,
	2019		2018		2019			2018	2019		2018		2019		2018
	(in millions)								(in millions)
Management fee revenue	$	304.2	$	312.2	$	597.0	$	628.5	$	315.3	$	317.6	$	912.3	$	946.1
Other fee revenue(1)		42.0		58.9		81.5		102.9		47.5		305.8		129.0		408.7
Total revenues from contracts with customers		346.2		371.1		678.5		731.4		362.8		623.4		1,041.3		1,354.8
Fees and other revenues not within the scope of revenue recognition guidance		10.4		7.3		14.7		14.0		5.1		8.4		19.8		22.4
Total fees and other revenues		356.6		378.4		693.2		745.4		367.9		631.8		1,061.1		1,377.2
Net investment income		2.9		1.2		5.3		2.7		2.0		1.0		7.3		3.7
Total operating revenues	$	359.5	$	379.6	$	698.5	$	748.1	$	369.9	$	632.8	$	1,068.4	$	1,380.9

(1)	During the third quarter of 2018, we recognized a $253.1 million accelerated performance fee resulting from the realignment of a real estate investment team.

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
September 30, 2019
(Unaudited)

Principal International

Fees and other revenues are earned for asset management and distribution services provided to retail and institutional clients in addition to trustee and/or administrative services performed for retirement savings plans. Each service is considered a distinct performance obligation; however, if the services are not distinct on their own, we combine them into a distinct bundle or we have a series of distinct services that are substantially the same and have the same pattern of transfer to the customer. Fees and other revenues are typically based upon contractual rates applied to the market value of the clients’ investment portfolios and are considered variable consideration. The transaction price generally includes the amount determined at the end of the reporting period, whereby fees are deducted from the clients’ investment portfolios and are recognized as revenue when no longer constrained and satisfied as the services are performed over time utilizing the output method. In addition, payments to customers can take the form of an incentive given by us to entice the customer to purchase

~~Table of Contents~~

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June 30, 2019~~
~~(Unaudited)~~

its goods or services. Incentives offered to customers are recognized as part of the transaction price as a reduction of revenue either over the period the customer remains in order to receive the incentive or monthly throughout the life of the contract.

Incentive-based fees are recognized in income when the probability of significant reversal will not occur upon the resolution of the uncertainty, which is based on market performance.

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 contracts as services are performed over the life of the contract and review annually.

The types of revenues from contracts with customers were as follows:


	For the three months ended				For the six months ended				For the three months ended				For the nine months ended
	June 30,				June 30,				September 30,				September 30,
	2019		2018		2019			2018	2019		2018		2019		2018
	(in millions)								(in millions)
Management fee revenue	$	115.5	$	121.8	$	229.8	$	241.9	$	114.0	$	117.2	$	343.8	$	359.1
Other fee revenue		0.7		1.3		1.3		2.3		0.8		0.8		2.1		3.1
Total revenues from contracts with customers		116.2		123.1		231.1		244.2		114.8		118.0		345.9		362.2
Fees and other revenues not within the scope of revenue recognition guidance		1.7		1.8		3.4		3.8		1.6		1.7		5.0		5.5
Total fees and other revenues		117.9		124.9		234.5		248.0		116.4		119.7		350.9		367.7
Premiums and other considerations		109.5		101.6		227.0		199.5		115.8		55.6		342.8		255.1
Net investment income		184.2		163.1		330.6		325.2		172.4		112.1		503.0		437.3
Total operating revenues	$	411.6	$	389.6	$	792.1	$	772.7	$	404.6	$	287.4	$	1,196.7	$	1,060.1

Revenues from contracts with customers by region:
Latin America	$	88.6	$	96.5	$	176.7	$	189.0	$	87.0	$	92.0	$	263.7	$	281.0
Asia		27.6		26.7		54.6		55.4		27.8		26.0		82.4		81.4
Principal International corporate / regional offices		0.2		0.3		0.4		0.6		0.3		0.2		0.7		0.8
Eliminations		(0.2)		(0.4)		(0.6)		(0.8)		(0.3)		(0.2)		(0.9)		(1.0)
Total revenues from contracts with customers	$	116.2	$	123.1	$	231.1	$	244.2	$	114.8	$	118.0	$	345.9	$	362.2

U.S. Insurance Solutions

Fees and other revenues are earned for administrative services performed including recordkeeping and reporting services for fee-for-service products, nonqualified benefit plans, separate accounts and dental networks. Services within contracts are not distinct on their own; however, we combine the services into a distinct bundle and account for the bundle as a single performance obligation, which is satisfied over time utilizing the output method as services are rendered. The transaction price corresponds with the performance completed to date, for which the value is recognized as revenue during the period. Variability of consideration is resolved at the end of each period and payments are due when billed.

Commission income is earned through sponsored brokerage services. Performance obligations are satisfied at a point in time, upon delivery of a placed case, and the transaction price calculated per the compensation schedule is recognized as revenue.

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

The types of revenues from contracts with customers were as follows:


	For the three months ended				For the six months ended				For the three months ended				For the nine months ended
	June 30,				June 30,				September 30,				September 30,
	2019		2018		2019			2018	2019		2018		2019		2018
	(in millions)								(in millions)
Specialty Benefits Insurance:
Specialty Benefits insurance:
Administrative service fees	$	3.6	$	3.8	$	7.3	$	7.5	$	3.8	$	3.6	$	11.1	$	11.1
Total revenues from contracts with customers		3.6		3.8		7.3		7.5		3.8		3.6		11.1		11.1
Fees and other revenues not within the scope of revenue recognition guidance		4.9		5.2		9.8		10.4		4.8		5.2		14.6		15.6
Total fees and other revenues		8.5		9.0		17.1		17.9		8.6		8.8		25.7		26.7
Premiums and other considerations		571.6		527.7		1,127.5		1,044.7		579.0		539.2		1,706.5		1,583.9
Net investment income		45.7		35.5		83.0		75.0		42.2		43.3		125.2		118.3
Total operating revenues	$	625.8	$	572.2	$	1,227.6	$	1,137.6	$	629.8	$	591.3	$	1,857.4	$	1,728.9

For the three months ended

For the six months ended

June 30,

June 30,


2019

2018

2019


2018

(in millions)
Individual Life Insurance:

Administrative service fees

$
6.2

$
5.8

$
12.1

$
11.6
Commission income

6.4

4.0

12.5

7.6
Total revenues from contracts with customers

12.6

9.8

24.6

19.2
Fees and other revenues not within the scope of revenue recognition guidance

190.3

177.7

382.5

363.4
Total fees and other revenues

202.9

187.5

407.1

382.6
Premiums and other considerations

79.7

80.5

172.6

171.0
Net investment income

179.0

164.0

348.2

329.7
Total operating revenues

$
461.6

$
432.0

$
927.9

$
883.3


	For the three months ended				For the nine months ended
	September 30,				September 30,
	2019		2018		2019		2018
	(in millions)
Individual Life insurance:
Administrative service fees	$	6.1	$	5.6	$	18.2	$	17.2
Commission income		6.7		5.4		19.2		13.0
Total revenues from contracts with customers		12.8		11.0		37.4		30.2
Fees and other revenues not within the scope of revenue recognition guidance		292.1		177.3		674.6		540.7
Total fees and other revenues		304.9		188.3		712.0		570.9
Premiums and other considerations		79.1		80.8		251.7		251.8
Net investment income		178.8		172.8		527.0		502.5
Total operating revenues	$	562.8	$	441.9	$	1,490.7	$	1,325.2

Corporate

Fees and other revenues are earned on the performance of selling and servicing of securities and related products offered through PSI, an introducing broker-dealer registered with the FINRA.

PSI enters into selling and distribution agreements with the obligation to sell or distribute the securities products, such as mutual funds, annuities and products sold through RIAs, to individual clients in return for a front-end sales charges, 12b-1 service fees, annuity fees and asset-based fees. Front-end sales charges, 12b-1 fees and annuity fees are related to a single sale and are earned at the time of sale. PSI also enters into agreements with individual customers to provide securities trade execution and custody through a brokerage services platform in return for ticket charge and other service fee revenue. These services are bundled as one single distinct service referred to as brokerage services. This revenue is related to distinct transactions and is earned at a point in time.

PSI also enters into agreements with individual customers to provide trade execution, clearing services, custody services and investment research services through our proprietary offered fee-based products. These services are bundled as one single distinct service referred to as advisory services. In addition, for outside RIA business PSI performs sales and distribution services only. The revenues are earned over time as the service is performed utilizing the output method.

A majority of our revenue is based upon contractual rates applied to the market value of the clients’ portfolios and considered variable consideration.

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

The Corporate segment also includes inter-segment eliminations of fees and other revenues. The types of revenues from contracts with customers were as follows:


	For the three months ended				For the six months ended				For the three months ended				For the nine months ended
	June 30,				June 30,				September 30,				September 30,
	2019		2018		2019			2018	2019		2018		2019			2018
	(in millions)								(in millions)
Commission income	$	78.7	$	78.5	$	154.5	$	157.5	$	82.0	$	78.7	$	236.5	$	236.2
Other fee revenue		11.2		9.2		20.0		17.2		12.5		8.8		32.5		26.0
Eliminations		(47.4)		(50.7)		(95.0)		(93.8)		(55.0)		(47.3)		(150.0)		(141.1)
Total revenues from contracts with customers		42.5		37.0		79.5		80.9		39.5		40.2		119.0		121.1
Fees and other revenues not within the scope of revenue recognition guidance		(77.9)		(78.7)		(148.5)		(157.3)		(75.2)		(84.3)		(223.7)		(241.6)
Total fees and other revenues		(35.4)		(41.7)		(69.0)		(76.4)		(35.7)		(44.1)		(104.7)		(120.5)
Net investment income		19.6		24.7		54.4		59.4		19.3		22.7		73.7		82.1
Total operating revenues	$	(15.8)	$	(17.0)	$	(14.6)	$	(17.0)	$	(16.4)	$	(21.4)	$	(31.0)	$	(38.4)

Contract Costs

Sales compensation and other incremental costs of obtaining a contract are capitalized and amortized over the period of contract benefit if the costs are expected to be recovered. The contract cost asset, which is included in other assets on the consolidated statements of financial position, was ~~$147.4~~$149.4 million and $137.6 million as of ~~June~~September 30, 2019 and December 31, 2018, respectively.

We apply the practical expedient for certain costs where we recognize the incremental costs of obtaining these contracts as an expense when incurred if the amortization period of the assets is one year or less. These costs, along with costs that are not deferrable, are included in operating expenses on the consolidated statements of operations.

Deferred contract costs consist primarily of commissions and variable compensation. We amortize capitalized contract costs on a straight-line basis over the expected contract life, reflecting lapses as they are incurred. Deferred contract costs are subject to impairment testing on an annual basis, or when a triggering event occurs that could warrant an impairment. To the extent future revenues less future maintenance expenses are not adequate to cover the asset balance, an impairment is recognized. Amortization expense of ~~$6.2~~$6.4 million and ~~$5.9~~$6.1 million for the three months ended ~~June~~September 30, 2019 and 2018 and ~~$11.8~~$18.2 million and ~~$11.6~~$17.7 million for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, respectively, was recorded in operating expenses on the consolidated statements of operations and no0 impairment loss was recognized in relation to the costs capitalized.

~~14.~~15. Stock-Based Compensation Plans

As of ~~June~~September 30, 2019, we had the 2014 Stock Incentive Plan, the Employee Stock Purchase Plan, the 2014 Directors Stock Plan, the Amended and Restated 2010 Stock Incentive Plan, the 2005 Directors Stock Plan, the Stock Incentive Plan and the Directors Stock Plan ("Stock-Based Compensation Plans"). As of May 20, 2014, no0 new grants will be made under the Amended and Restated 2010 Stock Incentive Plan or the 2005 Directors Stock Plan. NoNaN grants have been made under the Stock Incentive Plan or the Directors Stock Plan since at least 2005. Under the terms of the 2014 Stock Incentive Plan, grants may be nonqualified stock options, incentive stock options qualifying under Section 422 of the Internal Revenue Code, restricted stock, restricted stock units, stock appreciation rights, performance shares, performance units or other stock-based awards. The 2014 Directors Stock Plan provides for the grant of nonqualified stock options, restricted stock, restricted stock units or other stock-based awards to our nonemployee directors. To date, we have not granted any incentive stock options, restricted stock or performance units under any plans.

As of ~~June~~September 30, 2019, the maximum number of new shares of common stock available for grant under the 2014 Stock Incentive Plan and the 2014 Directors Stock Plan was ~~6.8~~6.7 million.

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

For awards with graded vesting, we use an accelerated expense attribution method. The compensation cost that was charged against net income for stock-based awards granted under the Stock-Based Compensation Plans was as follows:

For the six months ended June 30,

For the nine months ended September 30,

2019

2018

2019

2018

(in millions)

Compensation cost

44.4

42.7

63.9

60.7

Related income tax benefit

9.3

9.3

13.6

13.2

Capitalized as part of an asset

1.0

1.1

1.3

1.5

Nonqualified Stock Options

Nonqualified stock options were granted to certain employees under the 2014 Stock Incentive Plan. Total options granted were 1.2 million for the ~~six~~nine months ended ~~June~~September 30, 2019. The fair value of stock options is estimated using the Black-Scholes option pricing model. The following is a summary of the assumptions used in this model for the stock options granted during the period:


	For the six months ended			For the nine months ended
	June 30, 2019			September 30, 2019

Expected volatility		23.3	%		23.3	%
Expected term (in years)		7.0			7.0
Risk-free interest rate		2.6	%		2.6	%
Expected dividend yield		4.07	%		4.07	%
Weighted average estimated fair value per common share	$	10.00		$	10.00

As of ~~June~~September 30, 2019, we had ~~$7.4~~$4.5 million of total unrecognized compensation cost related to nonvested stock options. The cost is expected to be recognized over a weighted-average service period of approximately ~~1.2~~1.1 years.

Performance Share Awards

Performance share awards were granted to certain employees under the 2014 Stock Incentive Plan. Total performance share awards granted were 0.2 million for the ~~six~~nine months ended ~~June~~September 30, 2019. The performance share awards granted represent initial target awards and do not reflect potential increases or decreases resulting from the final performance results to be determined at the end of the performance period. The actual number of common shares to be awarded at the end of each performance period will range between 0% and 150% of the initial target awards. The fair value of performance share awards is determined based on the closing stock price of our common shares on the grant date. The weighted-average grant date fair value of these performance share awards granted was $53.09 per common share.

As of ~~June~~September 30, 2019, we had ~~$8.0~~$5.2 million of total unrecognized compensation cost related to nonvested performance share awards granted. The cost is expected to be recognized over a weighted-average service period of approximately ~~1.2~~1.1 years.

Restricted Stock Units

Restricted stock units were issued to certain employees pursuant to the 2014 Stock Incentive Plan and non-employee directors pursuant to the 2014 Directors Stock Plan. Total restricted stock units granted were ~~1.0~~1.1 million for the ~~six~~nine months ended ~~June~~September 30, 2019. The fair value of restricted stock units is determined based on the closing stock price of our common shares on the grant date. The weighted-average grant date fair value of these restricted stock units granted was ~~$53.14~~$53.16 per common share.

As of ~~June~~September 30, 2019, we had ~~$68.8~~$58.8 million of total unrecognized compensation cost related to nonvested restricted stock unit awards granted. The cost is expected to be recognized over a weighted-average period of approximately ~~1.9~~1.8 years.

~~Employee Stock Purchase Plan~~

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

Employee Stock Purchase Plan

Under the Employee Stock Purchase Plan, employees purchased ~~0.6~~0.7 million shares for the ~~six~~nine months ended ~~June~~September 30, 2019. The weighted average fair value of the discount on the stock purchased was ~~$12.89~~$12.07 per share.

As of ~~June~~September 30, 2019, a total of ~~1.7~~1.5 million of new shares were available to be made issuable by us for this plan.

~~15.~~16. Earnings Per Common Share

The computations of the basic and diluted per share amounts were as follows:


	For the three months ended				For the six months ended				For the three months ended				For the nine months ended
	June 30,				June 30,				September 30,				September 30,
	2019		2018		2019		2018		2019		2018		2019		2018
	(in millions, except per share data)								(in millions, except per share data)
Net income	$	392.1	$	459.5	$	844.2	$	862.0	$	284.6	$	460.0	$	1,128.8	$	1,322.0
Subtract:
Net income attributable to noncontrolling interest		5.8		2.9		28.0		8.3		7.5		3.7		35.5		12.0
Total	$	386.3	$	456.6	$	816.2	$	853.7	$	277.1	$	456.3	$	1,093.3	$	1,310.0
Weighted-average shares outstanding:
Basic		279.0		286.4		278.8		287.9		279.0		284.9		278.9		286.9
Dilutive effects:
Stock options		0.9		1.0		0.9		1.2		0.9		0.9		0.9		1.1
Restricted stock units		1.2		1.6		1.3		1.8		1.4		1.7		1.4		1.7
Performance share awards		0.1		0.2		0.2		0.2		0.1		0.3		0.1		0.3
Diluted		281.2		289.2		281.2		291.1		281.4		287.8		281.3		290.0
Net income per common share:
Basic	$	1.38	$	1.59	$	2.93	$	2.97	$	0.99	$	1.60	$	3.92	$	4.57
Diluted	$	1.37	$	1.58	$	2.90	$	2.93	$	0.98	$	1.59	$	3.89	$	4.52

The calculation of diluted earnings per share for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, excludes the incremental effect related to certain outstanding stock-based compensation grants due to their anti-dilutive effect.

Table of Contents

~~16.~~Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
September 30, 2019
(Unaudited)

17. Condensed Consolidating Financial Information

Principal Life has established special purpose entities to issue secured medium-term notes. Under the program, the payment obligations of principal and interest on the notes are secured by funding agreements issued by Principal Life. Principal Life's payment obligations on the funding agreements are fully and unconditionally guaranteed by PFG. All of the outstanding stock of Principal Life is indirectly owned by PFG and PFG is the only guarantor of the payment obligations of the funding agreements.

The following tables set forth condensed consolidating financial information of (i) PFG, (ii) Principal Life, (iii) Principal Financial Services, Inc. (“ PFS”) and all other direct and indirect subsidiaries of PFG on a combined basis and (iv) the eliminations necessary to arrive at the information for PFG on a consolidated basis as of ~~June~~September 30, 2019 and December 31, 2018, and for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018.

In presenting the condensed consolidating financial statements, the equity method of accounting has been applied to (i) PFG’s interest in all direct subsidiaries of PFG, (ii) Principal Life’s interest in all direct subsidiaries of Principal Life and (iii) PFS’s interest in Principal Life even though all such subsidiaries meet the requirements to be consolidated under U.S. GAAP. Earnings of subsidiaries are, therefore, reflected in the parent’s investment and earnings. All intercompany balances and transactions, including elimination of the parent’s investment in subsidiaries, between PFG, Principal Life and PFS and all other subsidiaries have been eliminated, as shown in the column “Eliminations.” These condensed consolidating financial statements should be read in conjunction with the consolidated financial statements. The financial information may not necessarily be indicative of results of operations, cash flows or financial position had the subsidiaries operated as independent entities.

PFG sponsors nonqualified benefit plans for select employees and agents and is responsible for the obligations of these plans. Nonqualified plan assets are held in Rabbi trusts for the benefit of all nonqualified plan participants. The Rabbi trusts are separate legal entities and are not a part of PFG on a stand-alone basis. The plan assets are available to satisfy the claims of general creditors only in the event of bankruptcy and are, therefore, consolidated in our statements of financial position.

8788

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

Condensed Consolidating Statements of Financial Position

~~June~~September 30, 2019

Principal

Principal Life

Principal Financial

Principal

Principal Life

Principal Financial

Principal

Financial

Insurance

Services, Inc. and

Financial

Insurance

Services, Inc. and

Financial

Group, Inc.

Company

Other Subsidiaries

Group, Inc.

Company

other subsidiaries

Group, Inc.

Parent Only

Only

Combined (1)

Eliminations

Consolidated

parent only

only

combined (1)

Eliminations

consolidated

(in millions)

Assets

Fixed maturities, available-for-sale

206.4

57,676.6

7,749.6

(364.5)

65,268.1

193.0

60,065.5

8,174.5

(361.8)

68,071.2

Fixed maturities, trading

297.0

223.6

166.2

—

686.8

282.9

229.2

160.9

—

673.0

Equity securities

—

82.8

1,812.4

—

1,895.2

—

84.2

1,823.1

—

1,907.3

Mortgage loans

—

15,279.1

1,610.9

(753.2)

16,136.8

—

15,473.4

1,759.0

(740.8)

16,491.6

Real estate

—

3.3

1,737.1

—

1,740.4

—

3.4

1,733.4

—

1,736.8

Policy loans

��

—

748.8

52.1

—

800.9

—

747.6

51.5

—

799.1

Investment in unconsolidated entities

16,723.4

1,930.3

9,074.5

(26,796.8)

931.4

17,853.7

2,746.2

9,064.7

(28,819.4)

845.2

Other investments

10.5

6,669.6

2,518.8

(5,463.3)

3,735.6

10.4

6,178.9

2,694.1

(4,995.2)

3,888.2

Cash and cash equivalents

615.8

805.0

2,758.5

(863.4)

3,315.9

301.2

1,808.6

1,768.3

(680.1)

3,198.0

Accrued investment income

1.8

578.7

85.6

(2.3)

663.8

1.3

611.7

80.5

(2.4)

691.1

Premiums due and other receivables

—

1,969.9

4,087.1

(4,507.8)

1,549.2

—

2,005.3

4,300.4

(4,670.0)

1,635.7

Deferred acquisition costs

—

3,506.3

13.2

—

3,519.5

—

3,412.7

12.2

—

3,424.9

Property and equipment

—

739.5

220.0

—

959.5

—

741.8

219.9

—

961.7

Goodwill

—

54.3

1,057.2

—

1,111.5

—

54.3

1,636.4

—

1,690.7

Other intangibles

—

18.7

1,282.0

—

1,300.7

—

18.2

1,783.5

—

1,801.7

Separate account assets

—

121,368.4

41,480.2

—

162,848.6

—

121,823.7

39,223.0

—

161,046.7

Other assets

353.3

1,190.6

4,839.4

(4,929.2)

1,454.1

360.9

1,130.1

5,168.1

(5,283.6)

1,375.5

Total assets

18,208.2

212,845.5

80,544.8

(43,680.5)

267,918.0

19,003.4

217,134.8

79,653.5

(45,553.3)

270,238.4

Liabilities

Contractholder funds

—

36,703.3

3,312.1

(356.6)

39,658.8

—

37,314.4

3,345.7

(360.1)

40,300.0

Future policy benefits and claims

—

32,840.2

6,892.8

(1,253.5)

38,479.5

—

34,351.4

7,037.6

(1,329.6)

40,059.4

Other policyholder funds

—

821.2

177.7

(2.7)

996.2

—

792.1

156.9

(3.0)

946.0

Short-term debt

—

76.8

—

76.8

—

96.1

—

96.1

Long-term debt

3,624.2

—

852.1

(713.9)

3,762.4

3,624.9

—

839.5

(700.5)

3,763.9

Income taxes currently payable

2.0

—

85.5

(67.7)

19.8

—

86.2

(64.6)

21.6

Deferred income taxes

7.1

1,065.4

1,111.6

(496.6)

1,687.5

8.2

1,091.3

1,325.1

(496.5)

1,928.1

Separate account liabilities

—

121,368.4

41,480.2

—

162,848.6

—

121,823.7

39,223.0

—

161,046.7

Other liabilities

540.2

9,260.6

9,593.3

(13,412.2)

5,981.9

566.1

10,076.6

9,386.9

(13,195.1)

6,834.5

Total liabilities

4,173.5

202,059.1

63,582.1

(16,303.2)

253,511.5

4,199.2

205,449.5

61,497.0

(16,149.4)

254,996.3

Redeemable noncontrolling interest

—

304.5

—

304.5

—

369.3

—

369.3

Stockholders' equity

Common stock

4.8

2.5

—

(2.5)

4.8

2.5

—

(2.5)

4.8

Additional paid-in capital

10,130.7

6,321.0

9,500.0

(15,821.0)

10,130.7

10,162.6

6,326.6

10,047.3

(16,373.9)

10,162.6

Retained earnings

10,805.8

2,396.3

6,554.6

(8,950.9)

10,805.8

10,927.8

2,474.0

6,512.6

(8,986.6)

10,927.8

Accumulated other comprehensive income

647.7

2,066.6

536.3

(2,602.9)

647.7

1,307.1

2,882.2

1,158.7

(4,040.9)

1,307.1

Treasury stock, at cost

(7,554.3)

—

(7,554.3)

(7,598.1)

—

(7,598.1)

Total stockholders' equity attributable to PFG

14,034.7

10,786.4

16,590.9

(27,377.3)

14,034.7

14,804.2

11,685.3

17,718.6

(29,403.9)

14,804.2

Noncontrolling interest

—

67.3

—

67.3

—

68.6

—

68.6

Total stockholders’ equity

14,034.7

10,786.4

16,658.2

(27,377.3)

14,102.0

14,804.2

11,685.3

17,787.2

(29,403.9)

14,872.8

Total liabilities and stockholders' equity

18,208.2

212,845.5

80,544.8

(43,680.5)

267,918.0

19,003.4

217,134.8

79,653.5

(45,553.3)

270,238.4

(1)	PFG sponsors nonqualified benefit plans. Nonqualified benefit plan assets and liabilities held in Rabbi trusts were ~~$699.1~~$720.4 million and ~~$566.7~~$585.4 million, respectively.

8889

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

Condensed Consolidating Statements of Financial Position

December 31, 2018


	Principal		Principal Life		Principal Financial				Principal		Principal		Principal Life		Principal Financial				Principal
	Financial		Insurance		Services, Inc. and				Financial		Financial		Insurance		Services, Inc. and				Financial
	Group, Inc.		Company		Other Subsidiaries				Group, Inc.		Group, Inc.		Company		other subsidiaries				Group, Inc.
	Parent Only		Only		Combined (1)		Eliminations		Consolidated		parent only		only		combined (1)		Eliminations		consolidated
	(in millions)										(in millions)
Assets
Fixed maturities, available-for-sale	$	211.5	$	53,401.7	$	6,857.9	$	(362.6)	$	60,108.5	$	211.5	$	53,401.7	$	6,857.9	$	(362.6)	$	60,108.5
Fixed maturities, trading		308.9		165.5		161.7		—		636.1		308.9		165.5		161.7		—		636.1
Equity securities		—		84.8		1,758.9		—		1,843.7		—		84.8		1,758.9		—		1,843.7
Mortgage loans		—		14,478.0		1,615.5		(756.6)		15,336.9		—		14,478.0		1,615.5		(756.6)		15,336.9
Real estate		—		1.9		1,727.8		—		1,729.7		—		1.9		1,727.8		—		1,729.7
Policy loans		—		755.9		45.5		—		801.4		—		755.9		45.5		—		801.4
Investment in unconsolidated entities		13,862.4		2,324.4		6,853.8		(22,171.8)		868.8		13,862.4		2,324.4		6,853.8		(22,171.8)		868.8
Other investments		10.7		5,549.1		2,517.6		(4,635.9)		3,441.5		10.7		5,549.1		2,517.6		(4,635.9)		3,441.5
Cash and cash equivalents		334.9		1,323.9		2,014.8		(696.1)		2,977.5		334.9		1,323.9		2,014.8		(696.1)		2,977.5
Accrued investment income		1.4		563.2		77.5		(5.9)		636.2		1.4		563.2		77.5		(5.9)		636.2
Premiums due and other receivables		—		1,818.1		3,781.3		(4,186.3)		1,413.1		—		1,818.1		3,781.3		(4,186.3)		1,413.1
Deferred acquisition costs		—		3,680.2		13.3		—		3,693.5		—		3,680.2		13.3		—		3,693.5
Property and equipment		—		661.3		106.0		—		767.3		—		661.3		106.0		—		767.3
Goodwill		—		54.3		1,045.7		—		1,100.0		—		54.3		1,045.7		—		1,100.0
Other intangibles		—		19.7		1,295.4		—		1,315.1		—		19.7		1,295.4		—		1,315.1
Separate account assets		—		107,343.0		37,644.9		—		144,987.9		—		107,343.0		37,644.9		—		144,987.9
Other assets		375.0		1,135.1		4,418.3		(4,549.5)		1,378.9		375.0		1,135.1		4,418.3		(4,549.5)		1,378.9
Total assets	$	15,104.8	$	193,360.1	$	71,935.9	$	(37,364.7)	$	243,036.1	$	15,104.8	$	193,360.1	$	71,935.9	$	(37,364.7)	$	243,036.1
Liabilities
Contractholder funds	$	—	$	36,861.7	$	3,189.2	$	(351.2)	$	39,699.7	$	—	$	36,861.7	$	3,189.2	$	(351.2)	$	39,699.7
Future policy benefits and claims		—		30,690.3		6,128.6		(1,154.1)		35,664.8		—		30,690.3		6,128.6		(1,154.1)		35,664.8
Other policyholder funds		—		725.7		165.3		(2.6)		888.4		—		725.7		165.3		(2.6)		888.4
Short-term debt		—		—		42.9		—		42.9		—		—		42.9		—		42.9
Long-term debt		3,129.8		—		851.2		(721.4)		3,259.6		3,129.8		—		851.2		(721.4)		3,259.6
Income taxes currently payable		—		—		80.7		(55.4)		25.3		—		—		80.7		(55.4)		25.3
Deferred income taxes		—		405.3		1,056.4		(503.3)		958.4		—		405.3		1,056.4		(503.3)		958.4
Separate account liabilities		—		107,343.0		37,644.9		—		144,987.9		—		107,343.0		37,644.9		—		144,987.9
Other liabilities		585.0		8,503.2		8,586.5		(12,012.8)		5,661.9		585.0		8,503.2		8,586.5		(12,012.8)		5,661.9
Total liabilities		3,714.8		184,529.2		57,745.7		(14,800.8)		231,188.9		3,714.8		184,529.2		57,745.7		(14,800.8)		231,188.9

Redeemable noncontrolling interest		—		—		391.2		—		391.2		—		—		391.2		—		391.2

Stockholders' equity
Common stock		4.8		2.5		—		(2.5)		4.8		4.8		2.5		—		(2.5)		4.8
Additional paid-in capital		10,060.7		6,331.6		9,461.2		(15,792.8)		10,060.7		10,060.7		6,331.6		9,461.2		(15,792.8)		10,060.7
Retained earnings		10,290.2		2,441.2		5,855.0		(8,296.2)		10,290.2		10,290.2		2,441.2		5,855.0		(8,296.2)		10,290.2
Accumulated other comprehensive income (loss)		(1,565.1)		55.6		(1,583.2)		1,527.6		(1,565.1)		(1,565.1)		55.6		(1,583.2)		1,527.6		(1,565.1)
Treasury stock, at cost		(7,400.6)		—		—		—		(7,400.6)		(7,400.6)		—		—		—		(7,400.6)
Total stockholders' equity attributable to PFG		11,390.0		8,830.9		13,733.0		(22,563.9)		11,390.0		11,390.0		8,830.9		13,733.0		(22,563.9)		11,390.0
Noncontrolling interest		—		—		66.0		—		66.0		—		—		66.0		—		66.0
Total stockholders’ equity		11,390.0		8,830.9		13,799.0		(22,563.9)		11,456.0		11,390.0		8,830.9		13,799.0		(22,563.9)		11,456.0
Total liabilities and stockholders' equity	$	15,104.8	$	193,360.1	$	71,935.9	$	(37,364.7)	$	243,036.1	$	15,104.8	$	193,360.1	$	71,935.9	$	(37,364.7)	$	243,036.1

(1)	PFG sponsors nonqualified benefit plans. Nonqualified benefit plan assets and liabilities held in Rabbi trusts were $671.7 million and $542.4 million, respectively.

8990

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

Condensed Consolidating Statements of Operations

For the ~~six~~nine months ended ~~June~~September 30, 2019

Principal

Principal Life

Principal Financial

Principal

Principal Life

Principal Financial

Principal

Financial

Insurance

Services, Inc. and

Financial

Insurance

Services, Inc. and

Financial

Group, Inc.

Company

Other Subsidiaries

Group, Inc.

Company

other subsidiaries

Group, Inc.

Parent Only

Only

Combined

Eliminations

Consolidated

parent only

only

combined

Eliminations

consolidated

(in millions)

Revenues

Premiums and other considerations

—

3,293.1

364.7

—

3,657.8

—

5,379.1

552.9

—

5,932.0

Fees and other revenues

—

1,102.5

1,067.7

(190.1)

1,980.1

—

1,770.6

1,732.1

(292.6)

3,210.1

Net investment income

10.9

1,419.2

1,151.0

(583.0)

1,998.1

14.3

2,115.9

1,717.8

(853.3)

2,994.7

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

9.2

411.8

(316.4)

—

104.6

11.6

(427.2)

488.9

—

73.3

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

—

(24.1)

(2.5)

—

(26.6)

—

(28.8)

(2.5)

—

(31.3)

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

—

2.6

(0.1)

—

2.5

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

—

(3.6)

(0.3)

—

(3.9)

Net impairment losses on available-for-sale securities

—

(21.5)

(2.6)

—

(24.1)

—

(32.4)

(2.8)

—

(35.2)

Net realized capital gains (losses)

9.2

390.3

(319.0)

—

80.5

11.6

(459.6)

486.1

—

38.1

Total revenues

20.1

6,205.1

2,264.4

(773.1)

7,716.5

25.9

8,806.0

4,488.9

(1,145.9)

12,174.9

Expenses

Benefits, claims and settlement expenses

—

4,116.2

530.7

(5.7)

4,641.2

—

6,701.2

788.7

(8.6)

7,481.3

Dividends to policyholders

—

60.0

—

60.0

—

90.3

—

90.3

Operating expenses

110.1

1,189.3

917.0

(177.4)

2,039.0

160.2

1,869.1

1,527.5

(275.5)

3,281.3

Total expenses

110.1

5,365.5

1,447.7

(183.1)

6,740.2

160.2

8,660.6

2,316.2

(284.1)

10,852.9

Income (loss) before income taxes

(90.0)

839.6

816.7

(590.0)

976.3

(134.3)

145.4

2,172.7

(861.8)

1,322.0

Income taxes (benefits)

(22.3)

110.7

44.8

(1.1)

132.1

(33.2)

(65.5)

293.3

(1.4)

193.2

Equity in the net income (loss) of subsidiaries

883.9

(131.6)

134.5

(886.8)

—

1,194.4

664.7

(657.6)

(1,201.5)

—

Net income

816.2

597.3

906.4

(1,475.7)

844.2

1,093.3

875.6

1,221.8

(2,061.9)

1,128.8

Net income attributable to noncontrolling interest

—

25.6

2.4

28.0

—

33.1

2.4

35.5

Net income attributable to PFG

816.2

597.3

880.8

(1,478.1)

816.2

1,093.3

875.6

1,188.7

(2,064.3)

1,093.3

Net income

816.2

597.3

906.4

(1,475.7)

844.2

1,093.3

875.6

1,221.8

(2,061.9)

1,128.8

Other comprehensive income

2,201.1

2,011.1

2,227.8

(4,221.0)

2,219.0

2,833.4

2,826.7

2,877.0

(5,661.8)

2,875.3

Comprehensive income

3,017.3

2,608.4

3,134.2

(5,696.7)

3,063.2

3,926.7

3,702.3

4,098.8

(7,723.7)

4,004.1

9091

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

Condensed Consolidating Statements of Operations

For the ~~six~~nine months ended ~~June~~September 30, 2018


	Principal		Principal Life		Principal Financial				Principal		Principal		Principal Life		Principal Financial				Principal
	Financial		Insurance		Services, Inc. and				Financial		Financial		Insurance		Services, Inc. and				Financial
	Group, Inc.		Company		Other Subsidiaries				Group, Inc.		Group, Inc.		Company		other subsidiaries				Group, Inc.
	Parent Only		Only		Combined		Eliminations		Consolidated		parent only		only		combined		Eliminations		consolidated
	(in millions)										(in millions)
Revenues
Premiums and other considerations	$	—	$	1,941.7	$	319.3	$	—	$	2,261.0	$	—	$	3,996.4	$	437.0	$	—	$	4,433.4
Fees and other revenues		—		1,091.3		1,126.7		(194.1)		2,023.9		—		1,632.2		1,944.9		(291.4)		3,285.7
Net investment income		11.8		1,282.0		1,152.8		(655.3)		1,791.3		16.8		1,957.6		1,770.2		(1,033.9)		2,710.7
Net realized capital gains (losses), excluding impairment losses on available-for-sale securities		(8.6)		(98.6)		168.4		—		61.2		(11.3)		(114.7)		185.3		—		59.3
Net other-than-temporary impairment losses recoveries on available-for-sale securities		—		(4.6)		(2.3)		—		(6.9)		—		(5.9)		(2.4)		—		(8.3)
Other-than-temporary impairment losses on fixed maturities, available-for-sale reclassified from other comprehensive income		—		(11.4)		(0.6)		—		(12.0)		—		(13.6)		(0.6)		—		(14.2)
Net impairment losses on available-for-sale securities		—		(16.0)		(2.9)		—		(18.9)		—		(19.5)		(3.0)		—		(22.5)
Net realized capital gains (losses)		(8.6)		(114.6)		165.5		—		42.3		(11.3)		(134.2)		182.3		—		36.8
Total revenues		3.2		4,200.4		2,764.3		(849.4)		6,118.5		5.5		7,452.0		4,334.4		(1,325.3)		10,466.6
Expenses
Benefits, claims and settlement expenses		—		2,640.6		475.3		(5.6)		3,110.3		—		5,095.7		664.8		(8.1)		5,752.4
Dividends to policyholders		—		60.7		—		—		60.7		—		92.6		—		—		92.6
Operating expenses		95.2		1,144.3		916.7		(181.1)		1,975.1		143.7		1,665.0		1,541.6		(270.2)		3,080.1
Total expenses		95.2		3,845.6		1,392.0		(186.7)		5,146.1		143.7		6,853.3		2,206.4		(278.3)		8,925.1

Income (loss) before income taxes		(92.0)		354.8		1,372.3		(662.7)		972.4		(138.2)		598.7		2,128.0		(1,047.0)		1,541.5
Income taxes (benefits)		(41.0)		7.2		144.5		(0.3)		110.4		(52.6)		13.9		259.4		(1.2)		219.5
Equity in the net income (loss) of subsidiaries		904.7		313.2		(320.3)		(897.6)		—		1,395.6		456.1		(471.1)		(1,380.6)		—
Net income		853.7		660.8		907.5		(1,560.0)		862.0		1,310.0		1,040.9		1,397.5		(2,426.4)		1,322.0
Net income attributable to noncontrolling interest		—		—		8.3		—		8.3		—		—		12.0		—		12.0
Net income attributable to PFG	$	853.7	$	660.8	$	899.2	$	(1,560.0)	$	853.7	$	1,310.0	$	1,040.9	$	1,385.5	$	(2,426.4)	$	1,310.0

Net income	$	853.7	$	660.8	$	907.5	$	(1,560.0)	$	862.0	$	1,310.0	$	1,040.9	$	1,397.5	$	(2,426.4)	$	1,322.0
Other comprehensive loss		(1,398.2)		(1,219.2)		(1,500.5)		2,709.5		(1,408.4)		(1,605.4)		(1,413.4)		(1,740.8)		3,142.5		(1,617.1)
Comprehensive loss	$	(544.5)	$	(558.4)	$	(593.0)	$	1,149.5	$	(546.4)	$	(295.4)	$	(372.5)	$	(343.3)	$	716.1	$	(295.1)

9192

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

Condensed Consolidating Statements of Cash Flows

For the ~~six~~nine months ended ~~June~~September 30, 2019

Principal

Principal Life

Principal Financial

Principal

Principal Life

Principal Financial

Principal

Financial

Insurance

Services, Inc. and

Financial

Insurance

Services, Inc. and

Financial

Group, Inc.

Company

Other Subsidiaries

Group, Inc.

Company

other subsidiaries

Group, Inc.

Parent Only

Only

Combined

Eliminations

Consolidated

parent only

only

combined

Eliminations

consolidated

(in millions)

Operating activities

Net cash provided by operating activities

16.3

2,742.1

803.9

(883.9)

2,678.4

52.9

3,577.2

1,029.8

(195.1)

4,464.8

Investing activities

Fixed maturities available-for-sale and equity securities with intent to hold:

Purchases

(150.2)

(4,703.3)

(922.7)

4.4

(5,771.8)

(150.2)

(6,899.5)

(1,649.1)

2.5

(8,696.3)

Sales

—

1,065.7

411.5

—

1,477.2

—

1,215.2

600.9

—

1,816.1

Maturities

158.1

2,581.4

286.4

—

3,025.9

171.9

4,098.6

459.2

—

4,729.7

Mortgage loans acquired or originated

—

(1,894.5)

(121.4)

7.4

(2,008.5)

—

(2,481.6)

(400.7)

9.8

(2,872.5)

Mortgage loans sold or repaid

—

1,088.5

162.9

(7.5)

1,243.9

—

1,484.0

257.9

(21.0)

1,720.9

Real estate acquired

—

(0.1)

(48.4)

—

(48.5)

—

(0.3)

(88.9)

—

(89.2)

Real estate sold

—

57.0

—

57.0

—

96.3

—

96.3

Net purchases of property and equipment

—

(25.1)

(40.3)

—

(65.4)

(0.1)

(40.5)

(57.5)

—

(98.1)

Purchase of business or interests in subsidiaries, net of cash acquired

—

(1,209.6)

—

(1,209.6)

Dividends and returns of capital received from unconsolidated entities

208.9

1.2

668.9

(879.0)

—

59.1

1.8

869.1

(930.0)

—

Net change in other investments

(13.6)

(317.3)

(627.7)

704.8

(253.8)

(40.7)

451.1

(932.7)

198.8

(323.5)

Net cash provided by (used in) investing activities

203.2

(2,203.5)

(173.8)

(169.9)

(2,344.0)

40.0

(2,171.2)

(2,055.1)

(739.9)

(4,926.2)

Financing activities

Issuance of common stock

22.1

—

22.1

30.9

—

30.9

Acquisition of treasury stock

(153.7)

—

(153.7)

(197.5)

—

(197.5)

Payments for financing element derivatives

—

(13.1)

—

(13.1)

—

(19.7)

—

(19.7)

Purchase of subsidiary shares from noncontrolling interest

—

(1.1)

—

(1.1)

Dividends to common stockholders

(300.6)

—

(300.6)

(453.6)

—

(453.6)

Issuance of long-term debt

493.6

—

9.1

—

502.7

493.6

—

10.4

—

504.0

Principal repayments of long-term debt

—

(8.2)

7.5

(0.7)

—

(22.0)

21.0

(1.0)

Net proceeds from short-term borrowings

—

33.1

—

33.1

—

58.6

—

58.6

Dividends and capital paid to parent

—

(668.9)

(210.1)

879.0

—

(869.1)

(60.9)

930.0

—

Investment contract deposits

—

3,401.8

225.6

—

3,627.4

—

5,878.5

324.0

—

6,202.5

Investment contract withdrawals

—

(3,783.1)

(17.7)

—

(3,800.8)

—

(5,916.9)

(25.4)

—

(5,942.3)

Net increase in banking operation deposits

—

82.0

—

82.0

—

495.6

—

495.6

Other

—

5.8

(0.2)

—

5.6

—

5.9

(0.4)

—

5.5

Net cash provided by (used in) financing activities

61.4

(1,057.5)

113.6

886.5

4.0

(126.6)

(921.3)

778.8

951.0

681.9

Net increase (decrease) in cash and cash equivalents

280.9

(518.9)

743.7

(167.3)

338.4

(33.7)

484.7

(246.5)

16.0

220.5

Cash and cash equivalents at beginning of period

334.9

1,323.9

2,014.8

(696.1)

2,977.5

334.9

1,323.9

2,014.8

(696.1)

2,977.5

Cash and cash equivalents at end of period

615.8

805.0

2,758.5

(863.4)

3,315.9

301.2

1,808.6

1,768.3

(680.1)

3,198.0

9293

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

Condensed Consolidating Statements of Cash Flows

For the ~~six~~nine months ended ~~June~~September 30, 2018


	Principal		Principal Life		Principal Financial				Principal		Principal		Principal Life		Principal Financial				Principal
	Financial		Insurance		Services, Inc. and				Financial		Financial		Insurance		Services, Inc. and				Financial
	Group, Inc.		Company		Other Subsidiaries				Group, Inc.		Group, Inc.		Company		other subsidiaries				Group, Inc.
	Parent Only		Only		Combined		Eliminations		Consolidated		parent only		only		combined		Eliminations		consolidated
	(in millions)										(in millions)
Operating activities
Net cash provided by (used in) operating activities	$	(81.4)	$	1,891.4	$	805.3	$	(977.1)	$	1,638.2	$	(164.6)	$	3,686.0	$	688.9	$	(496.4)	$	3,713.9
Investing activities
Fixed maturities available-for-sale and equity securities with intent to hold:
Purchases		(200.8)		(6,188.8)		(980.3)		5.5		(7,364.4)		(200.8)		(9,301.2)		(1,496.7)		6.4		(10,992.3)
Sales		—		1,623.7		498.3		—		2,122.0		—		1,978.3		922.1		—		2,900.4
Maturities		0.8		3,005.7		285.6		—		3,292.1		1.6		4,288.0		413.9		—		4,703.5
Mortgage loans acquired or originated		—		(1,207.9)		(204.8)		86.5		(1,326.2)		—		(2,126.7)		(326.4)		105.7		(2,347.4)
Mortgage loans sold or repaid		—		960.7		158.0		(24.7)		1,094.0		—		1,379.6		223.3		(35.3)		1,567.6
Real estate acquired		—		—		(36.4)		—		(36.4)		—		—		(53.7)		—		(53.7)
Real estate sold		—		—		63.5		—		63.5		—		—		63.5		—		63.5
Net purchases of property and equipment		—		(25.4)		(18.2)		—		(43.6)		—		(42.3)		(31.1)		—		(73.4)
Purchase of interests in subsidiaries, net of cash acquired		—		—		(141.5)		—		(141.5)
Purchase of business or interests in subsidiaries, net of cash acquired												—		—		(184.7)		—		(184.7)
Dividends and returns of capital received from unconsolidated entities		336.5		42.6		371.5		(750.6)		—		686.6		43.2		601.6		(1,331.4)		—
Net change in other investments		0.5		(207.1)		(786.7)		992.3		(1.0)		0.5		12.6		(365.1)		359.8		7.8
Net cash provided by (used in) investing activities		137.0		(1,996.5)		(791.0)		309.0		(2,341.5)		487.9		(3,768.5)		(233.3)		(894.8)		(4,408.7)
Financing activities
Issuance of common stock		44.6		—		—		—		44.6		52.4		—		—		—		52.4
Acquisition of treasury stock		(396.5)		—		—		—		(396.5)		(461.5)		—		—		—		(461.5)
Payments for financing element derivatives		—		(37.9)		—		—		(37.9)		—		(53.7)		—		—		(53.7)
Purchase of subsidiary shares from noncontrolling interest		—		—		(23.0)		—		(23.0)		—		—		(30.3)		—		(30.3)
Dividends to common stockholders		(295.8)		—		—		—		(295.8)		(446.5)		—		—		—		(446.5)
Issuance of long-term debt		—		—		123.9		(82.6)		41.3		—		—		164.9		(98.1)		66.8
Principal repayments of long-term debt		—		—		(25.4)		24.7		(0.7)		—		—		(36.3)		35.3		(1.0)
Net proceeds from short-term borrowings		—		—		27.6		—		27.6
Net repayments of short-term borrowings												—		—		(0.8)		—		(0.8)
Dividends and capital paid to parent		—		(371.5)		(379.1)		750.6		—		—		(601.6)		(729.8)		1,331.4		—
Investment contract deposits		—		3,985.9		211.0		—		4,196.9		—		5,923.4		305.1		—		6,228.5
Investment contract withdrawals		—		(3,066.7)		(43.3)		—		(3,110.0)		—		(4,300.0)		(61.6)		—		(4,361.6)
Net increase in banking operation deposits		—		—		126.0		—		126.0		—		—		159.5		—		159.5
Other		—		2.0		—		—		2.0		—		(1.1)		—		—		(1.1)
Net cash provided by (used in) financing activities		(647.7)		511.8		17.7		692.7		574.5		(855.6)		967.0		(229.3)		1,268.6		1,150.7
Net increase (decrease) in cash and cash equivalents		(592.1)		406.7		32.0		24.6		(128.8)		(532.3)		884.5		226.3		(122.6)		455.9
Cash and cash equivalents at beginning of period		842.8		426.7		1,526.4		(325.1)		2,470.8		842.8		426.7		1,526.4		(325.1)		2,470.8
Cash and cash equivalents at end of period	$	250.7	$	833.4	$	1,558.4	$	(300.5)	$	2,342.0	$	310.5	$	1,311.2	$	1,752.7	$	(447.7)	$	2,926.7

9394

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

Under our current shelf registration that was filed with the SEC and became effective May 3, 2017, we have the ability to issue, in unlimited amounts, unsecured senior debt securities or subordinated debt securities, junior subordinated debt, preferred stock, common stock, warrants, depositary shares, purchase contracts and purchase units of PFG. Our wholly owned subsidiary, PFS, may guarantee, fully and unconditionally or otherwise, our obligations with respect to any non-convertible securities, other than common stock, described in the shelf registration.

The following tables set forth condensed consolidating financial information of (i) PFG, (ii) PFS, (iii) Principal Life and all other direct and indirect subsidiaries of PFG on a combined basis and (iv) the eliminations necessary to arrive at the information for PFG on a consolidated basis as of ~~June~~September 30, 2019 and December 31, 2018, and for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018.

In presenting the condensed consolidating financial statements, the equity method of accounting has been applied to (i) PFG’s interest in all direct subsidiaries of PFG and (ii) PFS’s interest in Principal Life and all other subsidiaries, where applicable, even though all such subsidiaries meet the requirements to be consolidated under U.S. GAAP. Earnings of subsidiaries are, therefore, reflected in the parent’s investment and earnings. All intercompany balances and transactions, including elimination of the parent’s investment in subsidiaries, between PFG, PFS and Principal Life and all other subsidiaries have been eliminated, as shown in the column “Eliminations.” These condensed consolidating financial statements should be read in conjunction with the consolidated financial statements. The financial information may not necessarily be indicative of results of operations, cash flows or financial position had the subsidiaries operated as independent entities.

9495

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

Condensed Consolidating Statements of Financial Position

~~June~~September 30, 2019

Principal Life

Principal

Insurance Company

Principal

Insurance Company

Principal

Financial

and Other

Financial

and other

Financial

Group, Inc.

Services, Inc.

Subsidiaries

Group, Inc.

Services, Inc.

subsidiaries

Group, Inc.

Parent Only

Only

Combined (1)

Eliminations

Consolidated

parent only

only

combined (1)

Eliminations

consolidated

(in millions)

Assets

Fixed maturities, available-for-sale

206.4

—

65,061.7

—

65,268.1

193.0

—

67,878.2

—

68,071.2

Fixed maturities, trading

297.0

—

389.8

—

686.8

282.9

—

390.1

—

673.0

Equity securities

—

14.0

1,881.2

—

1,895.2

—

41.1

1,866.2

—

1,907.3

Mortgage loans

—

16,136.8

—

16,136.8

—

16,491.6

—

16,491.6

Real estate

—

1,740.4

—

1,740.4

—

1,736.8

—

1,736.8

Policy loans

—

800.9

—

800.9

—

799.1

—

799.1

Investment in unconsolidated entities

16,723.4

16,318.6

766.7

(32,877.3)

931.4

17,853.7

17,020.0

676.7

(34,705.2)

845.2

Other investments

10.5

161.2

3,563.9

—

3,735.6

10.4

162.3

3,715.5

—

3,888.2

Cash and cash equivalents

615.8

1,603.0

2,365.2

(1,268.1)

3,315.9

301.2

592.4

3,364.2

(1,059.8)

3,198.0

Accrued investment income

1.8

3.0

659.0

—

663.8

1.3

0.1

689.7

—

691.1

Premiums due and other receivables

—

13.5

1,880.4

(344.7)

1,549.2

—

109.2

1,864.4

(337.9)

1,635.7

Deferred acquisition costs

—

3,519.5

—

3,519.5

—

3,424.9

—

3,424.9

Property and equipment

—

959.5

—

959.5

—

961.7

—

961.7

Goodwill

—

1,111.5

—

1,111.5

—

618.5

1,072.2

—

1,690.7

Other intangibles

—

1,300.7

—

1,300.7

—

538.7

1,263.0

—

1,801.7

Separate account assets

—

162,848.6

—

162,848.6

—

161,046.7

—

161,046.7

Other assets

353.3

61.0

1,600.3

(560.5)

1,454.1

360.9

39.6

1,538.8

(563.8)

1,375.5

Total assets

18,208.2

18,174.3

266,586.1

(35,050.6)

267,918.0

19,003.4

19,121.9

268,779.8

(36,666.7)

270,238.4

Liabilities

Contractholder funds

—

39,658.8

—

39,658.8

—

40,300.0

—

40,300.0

Future policy benefits and claims

—

38,479.5

—

38,479.5

—

40,059.4

—

40,059.4

Other policyholder funds

—

996.2

—

996.2

—

946.0

—

946.0

Short-term debt

—

76.8

—

76.8

—

96.1

—

96.1

Long-term debt

3,624.2

343.8

138.1

(343.7)

3,762.4

3,624.9

336.8

139.0

(336.8)

3,763.9

Income taxes currently payable

2.0

—

65.0

(47.2)

19.8

—

1.6

68.7

(48.7)

21.6

Deferred income taxes

7.1

21.6

2,154.0

(495.2)

1,687.5

8.2

18.6

2,397.8

(496.5)

1,928.1

Separate account liabilities

—

162,848.6

—

162,848.6

—

161,046.7

—

161,046.7

Other liabilities

540.2

1,217.8

5,277.6

(1,053.7)

5,981.9

566.1

1,046.2

6,000.6

(778.4)

6,834.5

Total liabilities

4,173.5

1,583.2

249,694.6

(1,939.8)

253,511.5

4,199.2

1,403.2

251,054.3

(1,660.4)

254,996.3

Redeemable noncontrolling interest

—

304.5

—

304.5

—

369.3

—

369.3

Stockholders' equity

Common stock

4.8

—

11.0

(11.0)

4.8

—

11.0

(11.0)

4.8

Additional paid-in capital

10,130.7

9,123.0

11,927.8

(21,050.8)

10,130.7

10,162.6

9,645.4

12,019.5

(21,664.9)

10,162.6

Retained earnings

10,805.8

6,412.8

3,343.3

(9,756.1)

10,805.8

10,927.8

6,368.8

3,368.4

(9,737.2)

10,927.8

Accumulated other comprehensive income

647.7

1,055.3

1,239.6

(2,294.9)

647.7

1,307.1

1,704.5

1,890.7

(3,595.2)

1,307.1

Treasury stock, at cost

(7,554.3)

—

(2.0)

2.0

(7,554.3)

(7,598.1)

—

(2.0)

2.0

(7,598.1)

Total stockholders' equity attributable to PFG

14,034.7

16,591.1

16,519.7

(33,110.8)

14,034.7

14,804.2

17,718.7

17,287.6

(35,006.3)

14,804.2

Noncontrolling interest

—

67.3

—

67.3

—

68.6

—

68.6

Total stockholders’ equity

14,034.7

16,591.1

16,587.0

(33,110.8)

14,102.0

14,804.2

17,718.7

17,356.2

(35,006.3)

14,872.8

Total liabilities and stockholders' equity

18,208.2

18,174.3

266,586.1

(35,050.6)

267,918.0

19,003.4

19,121.9

268,779.8

(36,666.7)

270,238.4

~~(1) PFG sponsors nonqualified benefit plans. Nonqualified benefit plan assets and liabilities held in Rabbi trusts were $699.1 million and $566.7 million, respectively.~~

(1)	PFG sponsors nonqualified benefit plans. Nonqualified benefit plan assets and liabilities held in Rabbi trusts were $720.4 million and $585.4 million, respectively.

9596

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

Condensed Consolidating Statements of Financial Position

December 31, 2018


					Principal Life										Principal Life
	Principal		Principal		Insurance Company				Principal		Principal		Principal		Insurance Company				Principal
	Financial		Financial		and Other				Financial		Financial		Financial		and other				Financial
	Group, Inc.		Services, Inc.		Subsidiaries				Group, Inc.		Group, Inc.		Services, Inc.		subsidiaries				Group, Inc.
	Parent Only		Only		Combined (1)		Eliminations		Consolidated		parent only		only		combined (1)		Eliminations		consolidated
	(in millions)										(in millions)
Assets
Fixed maturities, available-for-sale	$	211.5	$	—	$	59,897.0	$	—	$	60,108.5	$	211.5	$	—	$	59,897.0	$	—	$	60,108.5
Fixed maturities, trading		308.9		—		327.2		—		636.1		308.9		—		327.2		—		636.1
Equity securities		—		11.9		1,831.8		—		1,843.7		—		11.9		1,831.8		—		1,843.7
Mortgage loans		—		—		15,336.9		—		15,336.9		—		—		15,336.9		—		15,336.9
Real estate		—		—		1,729.7		—		1,729.7		—		—		1,729.7		—		1,729.7
Policy loans		—		—		801.4		—		801.4		—		—		801.4		—		801.4
Investment in unconsolidated entities		13,862.4		14,325.5		726.0		(28,045.1)		868.8		13,862.4		14,325.5		726.0		(28,045.1)		868.8
Other investments		10.7		100.9		3,329.9		—		3,441.5		10.7		100.9		3,329.9		—		3,441.5
Cash and cash equivalents		334.9		649.0		3,096.8		(1,103.2)		2,977.5		334.9		649.0		3,096.8		(1,103.2)		2,977.5
Accrued investment income		1.4		0.3		634.5		—		636.2		1.4		0.3		634.5		—		636.2
Premiums due and other receivables		—		0.5		1,779.6		(367.0)		1,413.1		—		0.5		1,779.6		(367.0)		1,413.1
Deferred acquisition costs		—		—		3,693.5		—		3,693.5		—		—		3,693.5		—		3,693.5
Property and equipment		—		—		767.3		—		767.3		—		—		767.3		—		767.3
Goodwill		—		—		1,100.0		—		1,100.0		—		—		1,100.0		—		1,100.0
Other intangibles		—		—		1,315.1		—		1,315.1		—		—		1,315.1		—		1,315.1
Separate account assets		—		—		144,987.9		—		144,987.9		—		—		144,987.9		—		144,987.9
Other assets		375.0		38.7		1,521.9		(556.7)		1,378.9		375.0		38.7		1,521.9		(556.7)		1,378.9
Total assets	$	15,104.8	$	15,126.8	$	242,876.5	$	(30,072.0)	$	243,036.1	$	15,104.8	$	15,126.8	$	242,876.5	$	(30,072.0)	$	243,036.1
Liabilities
Contractholder funds	$	—	$	—	$	39,699.7	$	—	$	39,699.7	$	—	$	—	$	39,699.7	$	—	$	39,699.7
Future policy benefits and claims		—		—		35,664.8		—		35,664.8		—		—		35,664.8		—		35,664.8
Other policyholder funds		—		—		888.4		—		888.4		—		—		888.4		—		888.4
Short-term debt		—		—		42.9		—		42.9		—		—		42.9		—		42.9
Long-term debt		3,129.8		366.7		129.9		(366.8)		3,259.6		3,129.8		366.7		129.9		(366.8)		3,259.6
Income taxes currently payable		—		9.8		61.5		(46.0)		25.3		—		9.8		61.5		(46.0)		25.3
Deferred income taxes		—		13.9		1,446.4		(501.9)		958.4		—		13.9		1,446.4		(501.9)		958.4
Separate account liabilities		—		—		144,987.9		—		144,987.9		—		—		144,987.9		—		144,987.9
Other liabilities		585.0		1,002.9		4,838.1		(764.1)		5,661.9		585.0		1,002.9		4,838.1		(764.1)		5,661.9
Total liabilities		3,714.8		1,393.3		227,759.6		(1,678.8)		231,188.9		3,714.8		1,393.3		227,759.6		(1,678.8)		231,188.9

Redeemable noncontrolling interest		—		—		391.2		—		391.2		—		—		391.2		—		391.2

Stockholders' equity
Common stock		4.8		—		11.0		(11.0)		4.8		4.8		—		11.0		(11.0)		4.8
Additional paid-in capital		10,060.7		9,100.0		12,004.5		(21,104.5)		10,060.7		10,060.7		9,100.0		12,004.5		(21,104.5)		10,060.7
Retained earnings		10,290.2		5,716.8		3,549.8		(9,266.6)		10,290.2		10,290.2		5,716.8		3,549.8		(9,266.6)		10,290.2
Accumulated other comprehensive loss		(1,565.1)		(1,083.3)		(903.6)		1,986.9		(1,565.1)		(1,565.1)		(1,083.3)		(903.6)		1,986.9		(1,565.1)
Treasury stock, at cost		(7,400.6)		—		(2.0)		2.0		(7,400.6)		(7,400.6)		—		(2.0)		2.0		(7,400.6)
Total stockholders' equity attributable to PFG		11,390.0		13,733.5		14,659.7		(28,393.2)		11,390.0		11,390.0		13,733.5		14,659.7		(28,393.2)		11,390.0
Noncontrolling interest		—		—		66.0		—		66.0		—		—		66.0		—		66.0
Total stockholders’ equity		11,390.0		13,733.5		14,725.7		(28,393.2)		11,456.0		11,390.0		13,733.5		14,725.7		(28,393.2)		11,456.0
Total liabilities and stockholders' equity	$	15,104.8	$	15,126.8	$	242,876.5	$	(30,072.0)	$	243,036.1	$	15,104.8	$	15,126.8	$	242,876.5	$	(30,072.0)	$	243,036.1

(1)	PFG sponsors nonqualified benefit plans. Nonqualified benefit plan assets and liabilities held in Rabbi trusts were $671.7 million and $542.4 million, respectively.

9697

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

Condensed Consolidating Statements of Operations

For the ~~six~~nine months ended ~~June~~September 30, 2019

Principal Life

Principal

Insurance

Principal

Insurance Company

Principal

Financial

Company and

Financial

and other

Financial

Group, Inc.

Services, Inc.

Other Subsidiaries

Group, Inc.

Services, Inc.

subsidiaries

Group, Inc.

Parent Only

Only

Combined

Eliminations

Consolidated

parent only

only

combined (1)

Eliminations

consolidated

(in millions)

Revenues

Premiums and other considerations

—

3,657.8

—

3,657.8

—

5,932.0

—

5,932.0

Fees and other revenues

—

0.3

1,985.8

(6.0)

1,980.1

—

104.3

3,114.5

(8.7)

3,210.1

Net investment income (loss)

10.9

(4.1)

1,987.3

4.0

1,998.1

14.3

(5.6)

2,979.2

6.8

2,994.7

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

9.2

5.9

89.5

—

104.6

11.6

16.0

45.7

—

73.3

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

—

(26.6)

—

(26.6)

—

(31.3)

—

(31.3)

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

—

2.5

—

2.5

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

—

(3.9)

—

(3.9)

Net impairment losses on available-for-sale securities

—

(24.1)

—

(24.1)

—

(35.2)

—

(35.2)

Net realized capital gains

9.2

5.9

65.4

—

80.5

11.6

16.0

10.5

—

38.1

Total revenues

20.1

2.1

7,696.3

(2.0)

7,716.5

25.9

114.7

12,036.2

(1.9)

12,174.9

Expenses

Benefits, claims and settlement expenses

—

4,641.2

—

4,641.2

—

7,481.3

—

7,481.3

Dividends to policyholders

—

60.0

—

60.0

—

90.3

—

90.3

Operating expenses

110.1

60.1

1,873.9

(5.1)

2,039.0

160.2

205.5

2,923.2

(7.6)

3,281.3

Total expenses

110.1

60.1

6,575.1

(5.1)

6,740.2

160.2

205.5

10,494.8

(7.6)

10,852.9

Income (loss) before income taxes

(90.0)

(58.0)

1,121.2

3.1

976.3

(134.3)

(90.8)

1,541.4

5.7

1,322.0

Income taxes (benefits)

(22.3)

(11.8)

166.2

—

132.1

(33.2)

(15.2)

241.6

—

193.2

Equity in the net income of subsidiaries

883.9

927.0

—

(1,810.9)

—

1,194.4

1,264.3

—

(2,458.7)

—

Net income

816.2

880.8

955.0

(1,807.8)

844.2

1,093.3

1,188.7

1,299.8

(2,453.0)

1,128.8

Net income attributable to noncontrolling interest

—

28.0

—

28.0

—

35.5

—

35.5

Net income attributable to PFG

816.2

880.8

927.0

(1,807.8)

816.2

1,093.3

1,188.7

1,264.3

(2,453.0)

1,093.3

Net income

816.2

880.8

955.0

(1,807.8)

844.2

1,093.3

1,188.7

1,299.8

(2,453.0)

1,128.8

Other comprehensive income

2,201.1

2,127.0

2,149.5

(4,258.6)

2,219.0

2,833.4

2,749.2

2,797.6

(5,504.9)

2,875.3

Comprehensive income

3,017.3

3,007.8

3,104.5

(6,066.4)

3,063.2

3,926.7

3,937.9

4,097.4

(7,957.9)

4,004.1

9798

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

Condensed Consolidating Statements of Operations

For the ~~six~~nine months ended ~~June~~September 30, 2018


					Principal Life										Principal Life
	Principal		Principal		Insurance				Principal		Principal		Principal		Insurance Company				Principal
	Financial		Financial		Company and				Financial		Financial		Financial		and other				Financial
	Group, Inc.		Services, Inc.		Other Subsidiaries				Group, Inc.		Group, Inc.		Services, Inc.		subsidiaries				Group, Inc.
	Parent Only		Only		Combined		Eliminations		Consolidated		parent only		only		combined (1)		Eliminations		consolidated
	(in millions)										(in millions)
Revenues
Premiums and other considerations	$	—	$	—	$	2,261.0	$	—	$	2,261.0	$	—	$	—	$	4,433.4	$	—	$	4,433.4
Fees and other revenues		—		0.3		2,030.5		(6.9)		2,023.9		—		2.5		3,295.3		(12.1)		3,285.7
Net investment income (loss)		11.8		(3.0)		1,776.1		6.4		1,791.3		16.8		(4.9)		2,687.5		11.3		2,710.7
Net realized capital gains (losses), excluding impairment losses on available-for-sale securities		(8.6)		(0.5)		70.2		0.1		61.2		(11.3)		1.3		69.3		—		59.3
Net other-than-temporary impairment losses on available-for-sale securities		—		—		(6.9)		—		(6.9)		—		—		(8.3)		—		(8.3)
Other-than-temporary impairment losses on fixed maturities, available-for-sale reclassified from other comprehensive income		—		—		(12.0)		—		(12.0)		—		—		(14.2)		—		(14.2)
Net impairment losses on available-for-sale securities		—		—		(18.9)		—		(18.9)		—		—		(22.5)		—		(22.5)
Net realized capital gains (losses)		(8.6)		(0.5)		51.3		0.1		42.3		(11.3)		1.3		46.8		—		36.8
Total revenues		3.2		(3.2)		6,118.9		(0.4)		6,118.5		5.5		(1.1)		10,463.0		(0.8)		10,466.6
Expenses
Benefits, claims and settlement expenses		—		—		3,110.3		—		3,110.3		—		—		5,752.4		—		5,752.4
Dividends to policyholders		—		—		60.7		—		60.7		—		—		92.6		—		92.6
Operating expenses		95.2		16.7		1,869.1		(5.9)		1,975.1		143.7		23.1		2,924.2		(10.9)		3,080.1
Total expenses		95.2		16.7		5,040.1		(5.9)		5,146.1		143.7		23.1		8,769.2		(10.9)		8,925.1

Income (loss) before income taxes		(92.0)		(19.9)		1,078.8		5.5		972.4		(138.2)		(24.2)		1,693.8		10.1		1,541.5
Income taxes (benefits)		(41.0)		(2.9)		154.3		—		110.4		(52.6)		6.2		265.9		—		219.5
Equity in the net income of subsidiaries		904.7		916.2		—		(1,820.9)		—		1,395.6		1,415.9		—		(2,811.5)		—
Net income		853.7		899.2		924.5		(1,815.4)		862.0		1,310.0		1,385.5		1,427.9		(2,801.4)		1,322.0
Net income attributable to noncontrolling interest		—		—		8.3		—		8.3		—		—		12.0		—		12.0
Net income attributable to PFG	$	853.7	$	899.2	$	916.2	$	(1,815.4)	$	853.7	$	1,310.0	$	1,385.5	$	1,415.9	$	(2,801.4)	$	1,310.0

Net income	$	853.7	$	899.2	$	924.5	$	(1,815.4)	$	862.0	$	1,310.0	$	1,385.5	$	1,427.9	$	(2,801.4)	$	1,322.0
Other comprehensive loss		(1,398.2)		(1,424.8)		(1,447.6)		2,862.2		(1,408.4)		(1,605.4)		(1,645.1)		(1,668.9)		3,302.3		(1,617.1)
Comprehensive loss	$	(544.5)	$	(525.6)	$	(523.1)	$	1,046.8	$	(546.4)	$	(295.4)	$	(259.6)	$	(241.0)	$	500.9	$	(295.1)

9899

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

Condensed Consolidating Statements of Cash Flows

For the ~~six~~nine months ended ~~June~~September 30, 2019

Principal Life

Principal

Insurance

Principal

Insurance Company

Principal

Financial

Company and

Financial

and other

Financial

Group, Inc.

Services, Inc.

Other Subsidiaries

Group, Inc.

Services, Inc.

subsidiaries

Group, Inc.

Parent Only

Only

Combined

Eliminations

Consolidated

parent only

only

combined (1)

Eliminations

consolidated

(in millions)

Operating activities

Net cash provided by (used in) operating activities

16.3

(8.0)

2,800.6

(130.5)

2,678.4

52.9

(168.3)

4,500.1

80.1

4,464.8

Investing activities

Fixed maturities available-for-sale and equity securities with intent to hold:

Purchases

(150.2)

(0.2)

(5,621.4)

—

(5,771.8)

(150.2)

(0.2)

(8,545.9)

—

(8,696.3)

Sales

—

0.2

1,477.0

—

1,477.2

—

0.2

1,815.9

—

1,816.1

Maturities

158.1

—

2,867.8

—

3,025.9

171.9

—

4,557.8

—

4,729.7

Mortgage loans acquired or originated

—

(2,008.5)

—

(2,008.5)

—

(2,872.5)

—

(2,872.5)

Mortgage loans sold or repaid

—

1,243.9

—

1,243.9

—

1,720.9

—

1,720.9

Real estate acquired

—

(48.5)

—

(48.5)

—

(89.2)

—

(89.2)

Real estate sold

—

57.0

—

57.0

—

96.3

—

96.3

Net purchases of property and equipment

—

(1.0)

(64.4)

—

(65.4)

(0.1)

(1.5)

(96.5)

—

(98.1)

Purchase of business or interests in subsidiaries, net of cash acquired

—

(1,209.6)

—

(1,209.6)

Dividends and returns of capital received from unconsolidated entities

208.9

1,246.3

—

(1,455.2)

—

59.1

1,474.5

—

(1,533.6)

—

Net change in other investments

(13.6)

(51.5)

(131.4)

(57.3)

(253.8)

(40.7)

(62.8)

(153.5)

(66.5)

(323.5)

Net cash provided by (used in) investing activities

203.2

1,193.8

(2,228.5)

(1,512.5)

(2,344.0)

40.0

200.6

(3,566.7)

(1,600.1)

(4,926.2)

Financing activities

Issuance of common stock

22.1

—

22.1

30.9

—

30.9

Acquisition of treasury stock

(153.7)

—

(153.7)

(197.5)

—

(197.5)

Payments for financing element derivatives

—

(13.1)

—

(13.1)

—

(19.7)

—

(19.7)

Purchase of subsidiary shares from noncontrolling interest

—

(1.1)

—

(1.1)

Dividends to common stockholders

(300.6)

—

(300.6)

(453.6)

—

(453.6)

Issuance of long-term debt

493.6

5.1

9.1

(5.1)

502.7

493.6

7.5

10.4

(7.5)

504.0

Principal repayments of long-term debt

—

(28.0)

(0.7)

28.0

(0.7)

—

(37.3)

(1.0)

37.3

(1.0)

Net proceeds from short-term borrowings

—

33.1

—

33.1

—

58.6

—

58.6

Dividends and capital paid to parent

—

(208.9)

(1,246.3)

1,455.2

—

(59.1)

(1,474.5)

1,533.6

—

Investment contract deposits

—

3,627.4

—

3,627.4

—

6,202.5

—

6,202.5

Investment contract withdrawals

—

(3,800.8)

—

(3,800.8)

—

(5,942.3)

—

(5,942.3)

Net increase in banking operation deposits

—

82.0

—

82.0

—

495.6

—

495.6

Other

—

5.6

—

5.6

—

5.5

—

5.5

Net cash provided by (used in) financing activities

61.4

(231.8)

(1,303.7)

1,478.1

4.0

(126.6)

(88.9)

(666.0)

1,563.4

681.9

Net increase (decrease) in cash and cash equivalents

280.9

954.0

(731.6)

(164.9)

338.4

(33.7)

(56.6)

267.4

43.4

220.5

Cash and cash equivalents at beginning of period

334.9

649.0

3,096.8

(1,103.2)

2,977.5

334.9

649.0

3,096.8

(1,103.2)

2,977.5

Cash and cash equivalents at end of period

615.8

1,603.0

2,365.2

(1,268.1)

3,315.9

301.2

592.4

3,364.2

(1,059.8)

3,198.0

99100

Table of Contents

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June~~September 30, 2019
(Unaudited)

Condensed Consolidating Statements of Cash Flows

For the ~~six~~nine months ended ~~June~~September 30, 2018


					Principal Life										Principal Life
	Principal		Principal		Insurance				Principal		Principal		Principal		Insurance Company				Principal
	Financial		Financial		Company and				Financial		Financial		Financial		and other				Financial
	Group, Inc.		Services, Inc.		Other Subsidiaries				Group, Inc.		Group, Inc.		Services, Inc.		subsidiaries				Group, Inc.
	Parent Only		Only		Combined		Eliminations		Consolidated		parent only		only		combined (1)		Eliminations		consolidated
	(in millions)										(in millions)
Operating activities							��
Net cash provided by (used in) operating activities	$	(81.4)	$	87.1	$	1,675.4	$	(42.9)	$	1,638.2	$	(164.6)	$	420.9	$	3,810.4	$	(352.8)	$	3,713.9
Investing activities
Fixed maturities available-for-sale and equity securities with intent to hold:
Purchases		(200.8)		—		(7,163.6)		—		(7,364.4)		(200.8)		—		(10,791.5)		—		(10,992.3)
Sales		—		—		2,122.0		—		2,122.0		—		—		2,900.4		—		2,900.4
Maturities		0.8		—		3,291.3		—		3,292.1		1.6		—		4,701.9		—		4,703.5
Mortgage loans acquired or originated		—		—		(1,326.2)		—		(1,326.2)		—		—		(2,347.4)		—		(2,347.4)
Mortgage loans sold or repaid		—		—		1,094.0		—		1,094.0		—		—		1,567.6		—		1,567.6
Real estate acquired		—		—		(36.4)		—		(36.4)		—		—		(53.7)		—		(53.7)
Real estate sold		—		—		63.5		—		63.5		—		—		63.5		—		63.5
Net purchases of property and equipment		—		—		(43.6)		—		(43.6)		—		—		(73.4)		—		(73.4)
Purchase of interests in subsidiaries, net of cash acquired		—		—		(141.5)		—		(141.5)
Purchase of business or interests in subsidiaries, net of cash acquired												—		—		(184.7)		—		(184.7)
Dividends and returns of capital received from unconsolidated entities		336.5		259.8		—		(596.3)		—		686.6		546.9		—		(1,233.5)		—
Net change in other investments		0.5		(74.4)		(49.7)		122.6		(1.0)		0.5		(162.5)		(20.3)		190.1		7.8
Net cash provided by (used in) investing activities		137.0		185.4		(2,190.2)		(473.7)		(2,341.5)		487.9		384.4		(4,237.6)		(1,043.4)		(4,408.7)
Financing activities
Issuance of common stock		44.6		—		—		—		44.6		52.4		—		—		—		52.4
Acquisition of treasury stock		(396.5)		—		—		—		(396.5)		(461.5)		—		—		—		(461.5)
Payments for financing element derivatives		—		—		(37.9)		—		(37.9)		—		—		(53.7)		—		(53.7)
Purchase of subsidiary shares from noncontrolling interest		—		—		(23.0)		—		(23.0)		—		—		(30.3)		—		(30.3)
Dividends to common stockholders		(295.8)		—		—		—		(295.8)		(446.5)		—		—		—		(446.5)
Issuance of long-term debt		—		5.7		41.3		(5.7)		41.3		—		8.5		66.8		(8.5)		66.8
Principal repayments of long-term debt		—		(28.7)		(0.7)		28.7		(0.7)		—		(38.2)		(1.0)		38.2		(1.0)
Net proceeds from short-term borrowings		—		—		27.6		—		27.6
Net repayments of short-term borrowings												—		—		(0.8)		—		(0.8)
Dividends and capital paid to parent		—		(336.5)		(259.8)		596.3		—		—		(686.6)		(546.9)		1,233.5		—
Investment contract deposits		—		—		4,196.9		—		4,196.9		—		—		6,228.5		—		6,228.5
Investment contract withdrawals		—		—		(3,110.0)		—		(3,110.0)		—		—		(4,361.6)		—		(4,361.6)
Net increase in banking operation deposits		—		—		126.0		—		126.0		—		—		159.5		—		159.5
Other		—		—		2.0		—		2.0		—		—		(1.1)		—		(1.1)
Net cash provided by (used in) financing activities		(647.7)		(359.5)		962.4		619.3		574.5		(855.6)		(716.3)		1,459.4		1,263.2		1,150.7
Net increase (decrease) in cash and cash equivalents		(592.1)		(87.0)		447.6		102.7		(128.8)		(532.3)		89.0		1,032.2		(133.0)		455.9
Cash and cash equivalents at beginning of period		842.8		617.4		2,001.1		(990.5)		2,470.8		842.8		617.4		2,001.1		(990.5)		2,470.8
Cash and cash equivalents at end of period	$	250.7	$	530.4	$	2,448.7	$	(887.8)	$	2,342.0	$	310.5	$	706.4	$	3,033.3	$	(1,123.5)	$	2,926.7

~~100~~

~~Table of Contents~~

Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
~~June 30, 2019~~
~~(Unaudited)~~

~~17. Subsequent Event~~

On July 1, 2019, we closed on our agreement with Wells Fargo Bank, N.A. to acquire its Institutional Retirement & Trust business (the “Business”), which includes defined contribution, defined benefit, executive deferred compensation, employee stock ownership plans, institutional trust and custody, and institutional asset advisory businesses. The purchase price consisted of (i) $1.2 billion cash paid at closing and (ii) an additional earn-out payment of up to $150.0 million based upon the retention of fee revenue of the Business through December 31, 2020. The transaction was funded with available cash and debt financing.

101

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following analysis discusses our financial condition as of ~~June~~September 30, 2019, compared with December 31, 2018, and our consolidated results of operations for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, prepared in conformity with U.S. GAAP. The discussion and analysis includes, where appropriate, factors that may affect our future financial performance. The discussion should be read in conjunction with our Form 10-K, for the year ended December 31, 2018, filed with the SEC and the unaudited consolidated financial statements and the related notes to the financial statements and the other financial information included elsewhere in this Form 10-Q.

Forward-Looking Information

Our narrative analysis below contains forward-looking statements intended to enhance the reader’s ability to assess our future financial performance. Forward-looking statements include, but are not limited to, statements that represent our beliefs concerning future operations, strategies, financial results or other developments, and contain words and phrases such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend” and similar expressions. Forward-looking statements are made based upon management’s current expectations and beliefs concerning future developments and their potential effects on us. Such forward-looking statements are not guarantees of future performance.

Actual results may differ materially from those included in the forward-looking statements as a result of risks and uncertainties including, but not limited to, the following: (1) adverse capital and credit market conditions may significantly affect our ability to meet liquidity needs, as well as our access to capital and cost of capital; (2) conditions in the global capital markets and the economy generally may materially and adversely affect our business and results of operations; (3) volatility or declines in the equity, bond or real estate markets could reduce our AUM and may result in investors withdrawing from the markets or decreasing their rates of investment, all of which could reduce our revenues and net income; (4) changes in interest rates or credit spreads or a sustained low interest rate environment may adversely affect our results of operations, financial condition and liquidity, and our net income can vary from period to period; (5) our investment portfolio is subject to several risks that may diminish the value of our invested assets and the investment returns credited to customers, which could reduce our sales, revenues, AUM and net income; (6) our valuation of investments and the determinations of the amount of allowances and impairments taken on our investments may include methodologies, estimations and assumptions which are subject to differing interpretations and, if changed, could materially adversely affect our results of operations or financial condition; (7) any impairments of or valuation allowances against our deferred tax assets could adversely affect our results of operations and financial condition; (8) we may face losses on our insurance and annuity products if our actual experience differs significantly from our pricing and reserving assumptions; (9) the pattern of amortizing our DAC asset and other actuarial balances on our universal life-type insurance contracts, participating life insurance policies and certain investment contracts may change, impacting both the level of our DAC asset and other actuarial balances and the timing of our net income; (10) changes in laws or regulations may reduce our profitability; (11) we may not be able to protect our intellectual property and may be subject to infringement claims; (12) our ability to pay stockholder dividends and meet our obligations may be constrained by the limitations on dividends Iowa insurance laws impose on Principal Life; (13) changes in accounting standards may adversely affect our reported results of operations and financial condition; (14) litigation and regulatory investigations may affect our financial strength or reduce our profitability; (15) from time to time we may become subject to tax audits, tax litigation or similar proceedings, and as a result we may owe additional taxes, interest and penalties in amounts that may be material; (16) applicable laws and our certificate of incorporation and by-laws may discourage takeovers and business combinations that some stockholders might consider in their best interests; (17) competition, including from companies that may have greater financial resources, broader arrays of products, higher ratings and stronger financial performance may impair our ability to retain existing customers, attract new customers and maintain our profitability; (18) technological and societal changes may disrupt our business model and impair our ability to retain existing customers, attract new customers and maintain our profitability; (19) damage to our reputation may adversely affect our revenues and profitability; (20) a downgrade in our financial strength or credit ratings may increase policy surrenders and withdrawals, reduce new sales and terminate relationships with distributors, impact existing liabilities and increase our cost of capital, any of which could adversely affect our profitability and financial condition; (21) client terminations or withdrawals or changes in investor preferences may lead to a reduction in revenues for our asset management and accumulation businesses; (22) guarantees within certain of our products that protect policyholders may decrease our net income or increase the volatility of our results of operations or financial position under U.S. GAAP if our hedging or risk management strategies prove ineffective or insufficient; (23) if we are unable to attract and retain qualified employees and sales representatives and develop new distribution sources, our results of operations, financial condition and sales of our products may be adversely impacted; (24) an interruption in telecommunication, information technology, or other systems, or a failure to maintain the confidentiality, integrity, or availability of data residing on such systems, could disrupt our business, damage our reputation and adversely impact our profitability; (25) our international businesses face political, legal, operational and other risks that could reduce our profitability in those businesses; (26) we face risks arising from our participation in joint ventures; (27) we may need to fund deficiencies in our Closed Block assets; (28) a pandemic, terrorist

~~102~~

~~Table of Contents~~

attack, military action or other catastrophic event could adversely affect our net income;

102

Table of Contents

(29) our reinsurers could default on their obligations or increase their rates, which could adversely impact our net income and financial condition; (30) we face risks arising from acquisitions of businesses; (31) loss of key vendor relationships or failure of a vendor to protect information of our customers or employees could adversely affect our business or result in losses; (32) our enterprise risk management framework may not be fully effective in identifying or mitigating all of the risks to which we are exposed and (33) our financial results may be adversely impacted by global climate changes. With respect to the acquisition of the Acquired Business (the “Acquisition”) in particular, additional risks and uncertainties that could cause actual results to differ materially from results anticipated in forward-looking statements include, but are not limited to: risks related to purchase price adjustments and the failure to realize the expected synergies and benefits of the Acquisition or any delay in the realization thereof.

Overview

We provide financial products and services through the following reportable segments:

●

Retirement and Income Solutions is organized into Retirement and Income Solutions – Fee, which includes full service accumulation, trust services, ~~and~~ individual variable ~~annuities;~~annuities and revenues and expenses associated with the Acquired Business; and Retirement and Income Solutions – Spread, which includes individual fixed annuities, investment only, pension risk transfer and banking services. We offer a comprehensive portfolio of products and services for retirement savings and retirement income:

●

To businesses of all sizes, ~~with a concentration on small and medium-sized businesses,~~ we offer products and services for defined contribution plans, including 401(k) and 403(b) plans, defined benefit pension plans, nonqualified executive benefit plans, employee stock ownership plan services and pension closeout services. For more basic retirement services, we offer SIMPLE IRAs and payroll deduction plans;

●

To large institutional clients, we also offer investment only products, including investment only guaranteed investment contracts (“GICs”); and

●

To employees of businesses and other individuals, we offer the ability to accumulate savings for retirement and other purposes through mutual funds, individual annuities and bank products, along with retirement income options.

●

Principal Global Investors, which includes our mutual fund business, manages assets for sophisticated investors around the world, using a multi-boutique strategy that provides diverse investment capabilities including equity, fixed income, real estate and other alternative investments. We also have experience in asset allocation, stable value management and other structured investment strategies. We focus on providing services to our other segments in addition to our retail mutual fund and third party institutional clients.

●

Principal International, which offers pension accumulation products and services, mutual funds, asset management, income annuities and life insurance accumulation products through operations in Latin America (Brazil, Chile and Mexico) and Asia (China, Hong Kong Special Administrative Region, India and Southeast Asia).

●

U.S. Insurance Solutions is organized into Specialty Benefits insurance, which provides group dental and vision insurance, individual and group disability insurance, critical illness, accident, group life insurance and non-medical fee-for-service claims administration; and Individual Life insurance, which provides universal life, variable universal life, indexed universal life and traditional life insurance. We focus on solutions for individuals and small-to-medium sized businesses and their employees.

●

Corporate, which manages the assets representing capital that has not been allocated to any other segment. Financial results of the Corporate segment primarily reflect our financing activities (including financing costs), income on capital not allocated to other segments, inter-segment eliminations, income tax risks and certain income, expenses and other adjustments not allocated to the segments based on the nature of such items. Results of PSI, our retail broker-dealer and RIA; RobustWealth, our financial technology company; and our exited group medical and long-term care insurance businesses are reported in this segment.

103

Table of Contents

~~Recent Event~~

~~Wells Fargo Institutional Retirement & Trust Business~~

On July 1, 2019, we closed on our agreement with Wells Fargo Bank, N.A. to acquire its Institutional Retirement & Trust business, which includes defined contribution, defined benefit, executive deferred compensation, employee stock ownership plans, institutional trust and custody, and institutional asset advisory businesses. The results of this acquisition will be reflected in the Retirement and Income Solutions segment. The purchase price consisted of (i) $1.2 billion cash paid at closing and (ii) an additional earn-out payment of up to $150.0 million based upon the retention of fee revenue of the Business through December 31, 2020. The transaction was funded with available cash and debt financing. For additional information regarding the debt issuance, see Item 1. “Financial Statements, Notes to Unaudited Consolidated Financial Statements, Note 6, Long-Term Debt.”

Transactions Affecting Comparability of Results of Operations

Acquisitions

Wells Fargo Institutional Retirement & Trust Business. On July 1, 2019, we closed on our agreement with Wells Fargo Bank, N.A. to acquire its Institutional Retirement & Trust business, which includes defined contribution, defined benefit, executive deferred compensation, employee stock ownership plans, institutional trust and custody, and institutional asset advisory businesses. The results of this acquisition are reflected in the Retirement and Income Solutions segment. The purchase price consisted of (i) $1.2 billion cash paid at closing and (ii) an additional earn-out payment of up to $150.0 million based upon the retention of fee revenue of the Acquired Business through December 31, 2020. The transaction was funded with available cash and debt financing. For additional information regarding the debt issuance, see Item 1. “Financial Statements, Notes to Unaudited Consolidated Financial Statements, Note 7, Long-Term Debt.”

RobustWealth. On July 2, 2018, we finalized the acquisition of RobustWealth, a financial technology company. The acquisition adds RobustWealth’s digital capabilities to our industry knowledge, asset management experience and technology to help consumers meet their financial goals on an enhanced digital advice platform. The RobustWealth platform will retain its open architecture philosophy, and RobustWealth will continue to sell its platform to outside firms as part of its growth strategy. RobustWealth is consolidated within the Corporate segment due to its strategic benefits across the organization with the majority of goodwill allocated to the Principal Global Investors segment.

INTERNOS. On April 16, 2018, we finalized the acquisition of INTERNOS, a London-based European real estate investment manager. Upon acquisition, INTERNOS became Principal Real Estate Europe Limited and operates as our dedicated European real estate private equity investment boutique, expanding our global real estate capabilities. At the time of closing, the acquisition increased our AUM by $3.5 billion. Principal Real Estate Europe Limited is reported within the Principal Global Investors segment.

MetLife Afore, S.A. de C.V. On February 20, 2018, we finalized the acquisition of MetLife Afore, S.A. de C.V., which was MetLife, Inc.’s pension fund management business in Mexico. At the time of closing, the acquisition increased our AUM by $3.8 billion, making us the fifth largest AFORE in Mexico in terms of AUM. The results of this acquisition are reflected in the Principal International segment.

Other

Actuarial Assumption Updates. We periodically review and update actuarial assumptions that are inputs to the models for DAC and other actuarial balances and make model refinements as necessary. During the third quarter of 2019, assumption updates and model refinements were made resulting in an unlocking of DAC and other actuarial balances that decreased consolidated net income by $36.5 million for both the three and nine months ended September 30, 2019. During the third quarter of 2018, assumption updates and model refinements were made resulting in an unlocking of DAC and other actuarial balances that increased consolidated net income by $32.1 million for both the three and nine months ended September 30, 2018.

The following table presents the increase (decrease) impact on pre-tax operating earnings for each segment.


	For the three and nine months ended
	September 30,
	2019		2018
	(in millions)
Retirement and Income Solutions	$	(34.3)	$	19.2
Principal International		7.8		(53.5)
U.S. Insurance Solutions		(13.3)		(9.3)

104

Table of Contents

The Individual Life insurance business actuarial assumption updates and model refinements affected several line items within our income statement. The following table presents the increase (decrease) on the Individual Life insurance income statement line items.


	For the three and nine months ended
	September 30,
	2019		2018
	(in millions)
Pre-tax operating earnings	$	(33.8)	$	(15.5)
Fees and other revenues		100.2		(2.3)
Benefits, claims and settlement expenses		47.1		20.7
Dividends to policyholders		1.7		1.8
Operating expenses		85.2		(9.3)

Real Estate Realignment. Effective August 1, 2018, we agreed to a realignment of one of our real estate investment teams. With the realignment, we no longer manage $9.2 billion of assets for a large real estate client but accelerated the recognition of a significant performance fee that was earned due to our successful management of the assets, which drove market value appreciation of the real estate investments. During the third quarter of 2018 we recognized, within the Principal Global Investors segment, $253.1 million of fees and other revenue related to the performance fee. This was partially offset by $151.9 million of operating expenses related to revenue sharing arrangements, resulting in a $101.2 million increase to pre-tax operating earnings within the Principal Global Investors segment. Ongoing impacts to segment pre-tax operating earnings are not expected to be material.

CIMB Joint Ventures. On May 25, 2018, we and CIMB Group (“CIMB”) completed new ownership agreements in our joint ventures, CIMB-Principal Asset Management Berhad (“CPAM”) and CIMB-Principal Islamic Asset Management (“CPIAM”). With the completion we increased our ownership stake to 60% with CIMB retaining 40% ownership and co-management of both CPAM and CPIAM. Our investment in both entities will continue to be reported using the equity method within the Principal International segment.

~~104~~

~~Table of Contents~~

Other Factor Affecting Comparability of Results of Operations

Fluctuations in Foreign Currency to U.S. Dollar Exchange Rates

Fluctuations in foreign currency to U.S. dollar exchange rates for countries in which we have operations can affect reported financial results. In years when foreign currencies weaken against the U.S. dollar, translating foreign currencies into U.S. dollars results in fewer U.S. dollars to be reported. When foreign currencies strengthen, translating foreign currencies into U.S. dollars results in more U.S. dollars to be reported.

Foreign currency exchange rate fluctuations create variances in our financial statement line items. The most significant impact occurs within our Principal International segment where pre-tax operating earnings were negatively impacted ~~$6.9~~$3.5 million and ~~$16.9~~$20.3 million for the three and ~~six~~nine months ended ~~June~~September 30, 2019, respectively, as a result of fluctuations in foreign currency to U.S. dollar exchange rates. This impact was calculated by comparing (a) the difference between current year results and prior year results to (b) the difference between current year results and prior year results translated using current year exchange rates for both periods. We use this approach to calculate the impact of exchange rates on all revenue and expense line items. For a discussion of our approaches to managing foreign currency exchange rate risk, see Item 3. “Quantitative and Qualitative Disclosures About Market Risk — Foreign Currency Risk.”

Recent Accounting Changes

For recent accounting changes, see Item 1. “Financial Statements, Notes to Unaudited Consolidated Financial Statements, Note 1, Nature of Operations and Significant Accounting Policies” under the caption, “Recent Accounting Pronouncements.”

105

Table of Contents

Results of Operations

The following table presents summary consolidated financial information for the periods indicated:


	For the three months ended June 30,						For the six months ended June 30,						For the three months ended September 30,						For the nine months ended September 30,
					Increase						Increase						Increase						Increase
	2019		2018		(decrease)		2019		2018		(decrease)		2019		2018		(decrease)		2019		2018		(decrease)
	(in millions)												(in millions)
Revenues:
Premiums and other considerations	$	1,932.9	$	1,265.8	$	667.1	$	3,657.8	$	2,261.0	$	1,396.8	$	2,274.2	$	2,172.4	$	101.8	$	5,932.0	$	4,433.4	$	1,498.6
Fees and other revenues		1,006.6		1,012.6		(6.0)		1,980.1		2,023.9		(43.8)		1,230.0		1,261.8		(31.8)		3,210.1		3,285.7		(75.6)
Net investment income		1,037.1		889.1		148.0		1,998.1		1,791.3		206.8		996.6		919.4		77.2		2,994.7		2,710.7		284.0
Net realized capital gains, excluding impairment losses on available-for-sale securities		13.3		76.4		(63.1)		104.6		61.2		43.4
Net realized capital gains(losses), excluding impairment losses on available-for-sale securities														(31.3)		(1.9)		(29.4)		73.3		59.3		14.0
Net other-than-temporary impairment losses on available-for-sale securities		(17.0)		(8.2)		(8.8)		(26.6)		(6.9)		(19.7)		(4.7)		(1.4)		(3.3)		(31.3)		(8.3)		(23.0)
Other-than-temporary impairment losses on fixed maturities, available-for-sale reclassified to (from) other comprehensive income		(0.3)		(0.8)		0.5		2.5		(12.0)		14.5
Other-than-temporary impairment losses on fixed maturities, available-for-sale reclassified from other comprehensive income														(6.4)		(2.2)		(4.2)		(3.9)		(14.2)		10.3
Net impairment losses on available-for-sale securities		(17.3)		(9.0)		(8.3)		(24.1)		(18.9)		(5.2)		(11.1)		(3.6)		(7.5)		(35.2)		(22.5)		(12.7)
Net realized capital gains (losses)		(4.0)		67.4		(71.4)		80.5		42.3		38.2		(42.4)		(5.5)		(36.9)		38.1		36.8		1.3
Total revenues		3,972.6		3,234.9		737.7		7,716.5		6,118.5		1,598.0		4,458.4		4,348.1		110.3		12,174.9		10,466.6		1,708.3
Expenses:
Benefits, claims and settlement expenses		2,446.1		1,699.2		746.9		4,641.2		3,110.3		1,530.9		2,840.1		2,642.1		198.0		7,481.3		5,752.4		1,728.9
Dividends to policyholders		29.9		30.2		(0.3)		60.0		60.7		(0.7)		30.3		31.9		(1.6)		90.3		92.6		(2.3)
Operating expenses		1,046.3		990.1		56.2		2,039.0		1,975.1		63.9		1,242.3		1,105.0		137.3		3,281.3		3,080.1		201.2
Total expenses		3,522.3		2,719.5		802.8		6,740.2		5,146.1		1,594.1		4,112.7		3,779.0		333.7		10,852.9		8,925.1		1,927.8
Income before income taxes		450.3		515.4		(65.1)		976.3		972.4		3.9		345.7		569.1		(223.4)		1,322.0		1,541.5		(219.5)
Income taxes		58.2		55.9		2.3		132.1		110.4		21.7		61.1		109.1		(48.0)		193.2		219.5		(26.3)
Net income		392.1		459.5		(67.4)		844.2		862.0		(17.8)		284.6		460.0		(175.4)		1,128.8		1,322.0		(193.2)
Net income attributable to noncontrolling interest		5.8		2.9		2.9		28.0		8.3		19.7		7.5		3.7		3.8		35.5		12.0		23.5
Net income attributable to Principal Financial Group, Inc.	$	386.3	$	456.6	$	(70.3)	$	816.2	$	853.7	$	(37.5)	$	277.1	$	456.3	$	(179.2)	$	1,093.3	$	1,310.0	$	(216.7)

Three Months Ended ~~June~~September 30, 2019 Compared to Three Months Ended ~~June~~September 30, 2018

Net Income Attributable to Principal Financial Group, Inc.

Net income attributable to Principal Financial Group, Inc. decreased primarily due to ~~after-tax net realized capital losses~~a $73.9 million favorable impact in 2018 related to the realignment of a real estate investment team and $68.6 million related to actuarial assumption updates and model refinements that had an unfavorable impact in 2019 as compared to ~~after-tax net~~a favorable impact in 2018.

Total Revenues

Premiums increased $60.2 million for the Principal International segment primarily due to higher single premium annuity sales in Chile. Premiums increased $38.1 million for the U.S. Insurance Solutions segment primarily due to growth in the business.

Fees and other revenues decreased $263.9 million for the Principal Global Investors segment primarily due to the accelerated recognition of performance fees in 2018 from the realignment of a real estate investment team. Fees and other revenues increased $123.1 million for the U.S. Insurance Solutions segment primarily due to a favorable impact from actuarial assumption updates and model refinements in 2019 as compared to an unfavorable impact in 2018. Fees and other revenues increased $103.9 million for the Retirement and Income Solutions segment primarily due to the Acquired Business.

106

Table of Contents

Net investment income increased primarily due to a $40.1 million increase in earnings in our equity method investment in Brazil and $37.4 million attributable to higher average invested assets in our U.S. operations. For additional information, see “Investments — Investment Results – Net Investment Income.”

Net realized capital gains (losses) can be volatile due to other-than-temporary impairments of invested assets, mark-to-market adjustments of certain invested assets and our decision to sell invested assets. Net realized capital losses increased due primarily to a $74.0 million impairment of an equity method investment in 2019 and a $50.0 million change in derivatives not designated as hedging instruments that had losses in 2019 versus gains in 2018. These increases were partially offset by an $87.4 million loss from the sale of closed blocks of annuity business within our Principal International operating segment in 2018 and a $19.8 million increase in gains from equity securities. For additional information, see “Investments — Investment Results — Net Realized Capital Gains (Losses).”

Total Expenses

Benefits, claims and settlement expenses increased for the U.S. Insurance Solutions segment primarily due to$47.5 million primarily resulting from growth in the businesses and $38.8 million related to a more unfavorable impact from actuarial assumption updates and model refinements in 2019 as compared to 2018. Benefits, claims and settlement expenses increased $58.7 million for the Retirement and Income Solutions segment primarily due to a more unfavorable impact from actuarial assumption updates and model refinements in 2019 as compared to 2018. Benefits, claims and settlement expenses increased for the Principal International segment due to $58.9 million higher single premium annuity sales in Chile partially offset by an $11.1 million decrease as a result of lower inflation-based interest crediting rates to customers.

Operating expenses increased $142.6 million for the Retirement and Income Solutions segment primarily due to the Acquired Business. Operating expenses increased for the U.S. Insurance Solutions segment primarily due to $69.5 million related to an unfavorable impact from actuarial assumption updates and model refinements in 2019 as compared to a favorable impact in 2018 and $38.6 million primarily resulting from growth in the business. Operating expenses increased for the Corporate segment largely due to a $22.4 million increase related to interest on federal income taxes due to settlement agreements reached in the prior year and a $14.0 million increase in strategic initiatives. Operating expenses decreased $169.2 million for the Principal Global Investors segment primarily due to the 2018 expenses associated with the realignment of a real estate investment team.

Income Taxes

The effective income tax rate decreased to 18% for the three months ended September 30, 2019, from 19% for the three months ended September 30, 2018. See Item 1. “Financial Statements, Notes to Unaudited Consolidated Financial Statements, Note 8, Income Taxes” for a reconciliation between the U.S. corporate income tax rate and the effective income tax rate.

Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018

Net Income Attributable to Principal Financial Group, Inc.

Net income attributable to Principal Financial Group, Inc. decreased primarily due to a $99.5 million gain from the sale of an equity method investment in 2018, ~~partially offset by~~ a ~~$34.7~~$73.9 million ~~change~~favorable impact in ~~derivatives not designated as hedging instruments~~2018 related to the realignment of a real estate investment team and $68.6 million related to actuarial assumption updates and model refinements that had ~~gains~~an unfavorable impact in 2019 ~~versus losses~~as compared to a favorable impact in 2018.

Total Revenues

Premiums increased ~~$616.1~~$1,288.4 million for the Retirement and Income Solutions segment primarily due to higher sales of single premium group and individual annuities with life contingencies. The single premium group annuity product, which is typically used to fund defined benefit plan terminations, can generate large premiums from very few customers and therefore premiums tend to vary from period to period.

Fees and other revenues decreased $316.1 million for the Principal Global Investors segment primarily due to ~~$9.7 million lower pass-through commission income, $7.9 million lower management fee revenue largely due to a shift in~~ the ~~mix~~accelerated recognition of ~~business and $5.7 million of lower~~ performance fees ~~largely~~in 2018 from ~~our~~the realignment of a real estate ~~business.~~investment team. Fees and other revenues ~~decreased $7.0 million for the Principal International segment primarily due to a weakening of Latin American currencies against the U.S.~~

~~106~~

~~Table of Contents~~

~~dollar. Fees and other revenues~~ increased ~~$19.9 million~~ for the U.S. Insurance Solutions segment primarily due to ~~growth in the business.~~

~~Net investment income increased primarily due to a $50.8 million increase in variable investment income in our U.S. operations, $45.7~~$102.5 million related to ~~higher average invested assets~~a favorable impact from actuarial assumption updates and ~~cash and $12.6 million attributable to higher yields. For additional information, see “Investments — Investment Results – Net Investment Income.”~~

Net realized capital gains (losses) can be volatile due to other-than-temporary impairments of invested assets, mark-to-market adjustments of certain invested assets and our decision to sell invested assets. We had net realized capital lossesmodel refinements in 2019 as compared to ~~net realized capital gains~~an unfavorable impact in 2018 and $54.0 million primarily ~~due to a $126.0 million gain~~resulting from growth in the sale of an equity method investment in 2018. This decrease was partially offset by a $47.3 million change in derivatives not designated as hedging instruments that had gains in 2019 versus losses in 2018. For additional information, see “Investments — Investment Results — Net Realized Capital Gains (Losses).”

~~Total Expenses~~

~~Benefits, claims~~business. Fees and ~~settlement expenses~~other revenues increased ~~$669.4~~$85.0 million for the Retirement and Income Solutions segment primarily due to ~~a larger increase in reserves, stemming from higher sales~~the Acquired Business.

107

Table of ~~single premium group and individual annuities with life contingencies.~~Contents

Operating expenses increased $32.0 million for the U.S. Insurance Solutions segment primarily due to growth in the business. Operating expenses increased for the Corporate segment primarily due to a $7.8 million increase in pension and OPEB expenses, a $6.8 million increase related to RobustWealth expenses which we acquired in third quarter 2018 and a $5.6 million increase related to accrued interest on federal income taxes due to settlement agreements reached in the prior year.

~~Income Taxes~~

The effective income tax rate increased to 13% for the three months ended June 30, 2019, from 11% for the three months ended June 30, 2018. See Item 1. “Financial Statements, Notes to Unaudited Consolidated Financial Statements, Note 7, Income Taxes” for a reconciliation between the U.S. corporate income tax rate and the effective income tax rate.

~~Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018~~

~~Net Income Attributable to Principal Financial Group, Inc.~~

Net income attributable to Principal Financial Group, Inc. decreased largely due to a $99.5 million gain from the sale of an equity method investment in 2018 and a $27.9 million impact of U.S. tax reform not replicated in the current year, which were partially offset by a $71.4 million increase resulting from higher yields on average invested assets and cash.

~~Total Revenues~~

~~Premiums increased $1,284.9 million for the Retirement and Income Solutions segment primarily due to higher sales of single premium group and individual annuities with life contingencies.~~

Fees and other revenues decreased for the Principal Global Investors segment primarily due to $31.5 million lower management fee revenue largely due to a shift in the mix of business, $13.9 million lower pass-through commission income and $9.2 million of lower performance fees largely from our real estate business. Fees and other revenues decreased $18.9 million for the Retirement and Income Solutions segment primarily due to increased competitive pressures. Fees and other revenues increased $33.4 million for the U.S. Insurance Solutions segment primarily due to growth in the business.

Net investment income increased primarily due to ~~$90.4~~$122.0 million ~~related~~attributable to higher average invested assets, $39.3 million from higher yields and ~~cash,~~ a ~~$38.3~~$28.3 million increase in variable investment income in our U.S. ~~operations and $33.6~~operations. Net investment income increased $52.2 million ~~attributable~~due to ~~higher yields.~~favorable relative market performance on our required regulatory investments in our Latin America business. For additional information, see “Investments — Investment Results – Net Investment Income.”

Net realized capital gains (losses) can be volatile due to other-than-temporary impairments of invested assets, mark-to-market adjustments of certain invested assets and our decision to sell invested assets. Net realized capital gains increased primarily due to ~~changes~~an $87.4 million loss from the sale of ~~$69.4~~closed blocks of annuity business within our Principal International operating segment in 2018, $68.7 million from fixed maturities ~~$56.5 million from derivatives not designated as hedging instruments and $39.9 million from sponsored investment funds~~– noncredit that had gains in 2019 versus losses in ~~2018.~~2018 and a $51.8 million increase in gains from equity securities. These increases

~~107~~

~~Table of Contents~~

were partially offset by a $126.0 million gain from the sale of an equity method investment in ~~2018.~~2018 and a $74.0 million impairment of an equity method investment in 2019. For additional information, see “Investments — Investment Results — Net Realized Capital Gains (Losses).”

Total Expenses

Benefits, claims and settlement expenses increased ~~$1,381.9~~$1,440.6 million for the Retirement and Income Solutions segment primarily due to a larger increase in reserves, stemming from higher sales of single premium group and individual annuities with life contingencies.

Operating expenses increased ~~$54.1 million~~ for the U.S. Insurance Solutions segment primarily due to $92.7 million primarily resulting from growth in the ~~business.~~business and $69.5 million related to an unfavorable impact from actuarial assumption updates and model refinements in 2019 as compared to favorable impact in 2018. Operating expenses increased $147.3 million for the Retirement and Income Solutions segment primarily due to the Acquired Business. Operating expenses increased for the Corporate segment ~~primarily~~largely due to a ~~$18.0 million increase in pension and OPEB expenses, a $13.1~~$27.6 million increase related to ~~RobustWealth expenses which we acquired in third quarter 2018 and a $5.2 million increase related to accrued~~ interest on federal income taxes due to settlement agreements reached in the prior ~~year.~~year and a $21.1 million increase in pension and OPEB expenses. Operating expenses decreased for the Principal International segment primarily in Latin America due to $9.2 million attributable to weakening of the Latin American currencies against the U.S. dollar and $6.9 million due to the MetLife Afore integration costs in 2018. Operating expenses decreased $17.0$186.2 million for the Principal Global Investors segment primarily due to ~~lower pass-through commission expense.~~the 2018 expenses associated with the realignment of a real estate investment team.

Income Taxes

The effective income tax rate increased to 15% for the nine months ended September 30, 2019, from 14% for the ~~six~~nine months ended ~~June~~September 30, ~~2019, from 11% for the six months ended June 30, 2018, primarily due to the impact of U.S. tax reform not replicated in the current year.~~2018. See Item 1. “Financial Statements, Notes to Unaudited Consolidated Financial Statements, Note 7,8, Income Taxes” for a reconciliation between the U.S. corporate income tax rate and the effective income tax rate.

Results of Operations by Segment

For results of operations by segment see Item 1. “Financial Statements, Notes to Unaudited Consolidated Financial Statements, Note ~~12,~~13, Segment Information.”

Retirement and Income Solutions Segment

Retirement and Income Solutions Segment Summary Financial Data

Net revenue is a key metric used to understand Retirement and Income Solutions earnings growth. Net revenue is defined as operating revenues less benefits, claims and settlement expenses less dividends to policyholders. Net revenue from Retirement and Income Solutions – Fee is primarily fee based and is impacted by changes in the equity markets. Net revenue from Retirement and Income Solutions – Spread is driven by the difference between investment income earned on the underlying general account assets and the interest rate credited to the contracts.

108

Table of Contents

The following table presents the Retirement and Income Solutions net revenue for the periods indicated:


	For the three months ended						For the six months ended						For the three months ended						For the nine months ended
	June 30,						June 30,						September 30,						September 30,
					Increase						Increase						Increase						Increase
	2019		2018		(decrease)		2019		2018		(decrease)		2019		2018		(decrease)		2019		2018		(decrease)
	(in millions)												(in millions)
Retirement and Income Solutions – Fee	$	392.1	$	395.4	$	(3.3)	$	771.8	$	796.5	$	(24.7)	$	467.8	$	400.6	$	67.2	$	1,239.6	$	1,197.1	$	42.5
Retirement and Income Solutions – Spread		177.5		136.5		41.0		346.7		288.7		58.0		128.6		153.2		(24.6)		475.3		441.9		33.4
Total Retirement and Income Solutions	$	569.6	$	531.9	$	37.7	$	1,118.5	$	1,085.2	$	33.3	$	596.4	$	553.8	$	42.6	$	1,714.9	$	1,639.0	$	75.9

~~108~~

~~Table of Contents~~

The following table presents certain summary financial data relating to the Retirement and Income Solutions segment for the periods indicated:


	For the three months ended						For the six months ended						For the three months ended						For the nine months ended
	June 30,						June 30,						September 30,						September 30,
					Increase						Increase						Increase						Increase
	2019		2018		(decrease)		2019		2018		(decrease)		2019		2018		(decrease)		2019		2018		(decrease)
	(in millions)												(in millions)
Operating revenues:
Premiums and other considerations	$	1,172.1	$	556.0	$	616.1	$	2,130.7	$	845.8	$	1,284.9	$	1,500.3	$	1,496.8	$	3.5	$	3,631.0	$	2,342.6	$	1,288.4
Fees and other revenues		352.0		355.3		(3.3)		690.0		708.8		(18.8)		462.1		358.2		103.9		1,152.1		1,067.0		85.1
Net investment income		635.5		538.6		96.9		1,230.8		1,074.2		156.6		610.7		579.7		31.0		1,841.5		1,653.9		187.6
Total operating revenues		2,159.6		1,449.9		709.7		4,051.5		2,628.8		1,422.7		2,573.1		2,434.7		138.4		6,624.6		5,063.5		1,561.1
Expenses:
Benefits, claims and settlement expenses, including dividends to policyholders		1,590.0		918.0		672.0		2,933.0		1,543.6		1,389.4		1,976.7		1,880.9		95.8		4,909.7		3,424.5		1,485.2
Operating expenses		313.4		304.3		9.1		621.7		613.7		8.0		426.7		287.0		139.7		1,048.4		900.7		147.7
Total expenses		1,903.4		1,222.3		681.1		3,554.7		2,157.3		1,397.4		2,403.4		2,167.9		235.5		5,958.1		4,325.2		1,632.9

Pre-tax operating earnings	$	256.2	$	227.6	$	28.6	$	496.8	$	471.5	$	25.3	$	169.7	$	266.8	$	(97.1)	$	666.5	$	738.3	$	(71.8)

Three Months Ended ~~June~~September 30, 2019 Compared to Three Months Ended ~~June~~September 30, 2018

Pre-Tax Operating Earnings

Pre-tax operating earnings decreased in our Fee business primarily due to a $43.2 million impact associated with actuarial assumption updates and model refinements, which were unfavorable in 2019 compared to favorable in 2018. Pre-tax operating earnings decreased in our Spread business primarily due to a $13.3 million decrease in variable investment income, a $10.3 million impact associated with actuarial assumption updates and model refinements, which were less favorable in 2019 compared to 2018, and a $7.5 million impact associated with unfavorable mortality experience.

Net Revenue

Net revenue increased in our Fee business primarily due to a $104.0 million increase related to the Acquired Business. This increase was partially offset by a $34.9 million impact associated with actuarial assumption updates and model refinements, which were more unfavorable in 2019 compared to 2018. Net revenue decreased in our Spread business primarily due to a $13.3 million decrease in variable investment income and a $7.5 million impact associated with unfavorable mortality experience.

Operating Expenses

Operating expenses increased in our Fee business due to a $105.4 million increase related to the Acquired Business. Operating expenses increased in our Spread business due to a $12.0 million impact associated with actuarial assumption updates and model refinements, which were less favorable in 2019 compared to 2018.

109

Table of Contents

Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018

Pre-Tax Operating Earnings

Pre-tax operating earnings ~~increased~~decreased in our Fee business primarily due to a $43.2 million impact associated with actuarial assumption updates and model refinements, which were unfavorable in 2019 compared to favorable in 2018. Pre-tax operating earnings decreased in our Spread business primarily due to a ~~$30.3~~$15.7 million impact associated with unfavorable mortality experience and a $10.3 million impact associated with actuarial assumption updates and model refinements, which were less favorable in 2019 compared to 2018. These decreases were partially offset by a $16.9 million increase in variable investment income.

Net Revenue

Net revenue increased in our ~~Spread~~Fee business primarily due to a ~~$30.3~~$104.0 million increase ~~in variable investment income and a $10.7 million~~related to the Acquired Business. This increase ~~due to growth in the block of business.~~

~~Operating Expenses~~

Operating expenses decreased in our Fee business due to a $5.8 million decrease in DAC amortization expense resulting from more favorable equity markets in the second quarter of 2019 compared to 2018. Operating expenses increased in our Spread business due to an $18.9 million decrease in DAC capitalization resulting from lower fixed deferred annuity sales and a $6.3 million increase due to investments to support our businesses. The increase in our Spread operating expense was partially offset by a ~~$13.8~~$34.9 million impact associated with actuarial assumption updates and model refinements, which were more unfavorable in 2019 compared to 2018, and a $17.9 million decrease in ~~commission expense primarily due to lower fixed deferred annuity sales.~~

~~Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018~~

~~Pre-Tax Operating Earnings~~

~~Pre-tax operating earnings increased in our Spread business due to a $30.1 million increase in variable investment income.~~

~~Net Revenue~~

~~Net~~fee revenue ~~decreased $24.7 million in our Fee business~~ primarily due to increased competitive pressures. Net revenue increased in our Spread business primarily due to a ~~$30.1~~$16.9 million increase in variable investment income and a ~~$27.9~~$16.5 million increase due to growth in the block of business.

Operating Expenses

Operating expenses ~~decreased $27.8 million~~increased in our Fee business ~~primarily~~ due to ~~lower DAC amortization expense resulting from more favorable equity markets in 2019 compared~~a $107.7 million increase related to ~~2018.~~the Acquired Business. Operating expenses increased in our Spread business due to a ~~$15.3 million decrease in DAC capitalization resulting from lower fixed deferred annuity sales and a $13.3~~$16.8 million increase ~~due to~~resulting from investments to support our ~~businesses.~~business and a $12.0 million impact associated with actuarial assumption updates and model refinements, which were less favorable in 2019 compared to 2018.

~~109~~

~~Table of Contents~~

Principal Global Investors Segment

Principal Global Investors Segment Summary Financial Data

AUM is the base by which we generate management fee revenues. Market performance and net cash flow are the two main drivers of AUM growth. Market performance reflects equity, fixed income, real estate and other alternative investment performance. Net cash flow reflects client deposits and withdrawals. The fee levels on these client deposits and withdrawals are increasingly becoming the more important factor to revenue growth and will vary widely based on business and/or product mix.

The following table presents the AUM rollforward for assets managed by Principal Global Investors for the periods indicated:


	For the three months ended June 30,				For the six months ended June 30,				For the three months ended September 30,				For the nine months ended September 30,
	2019		2018		2019		2018		2019		2018		2019		2018
	(in billions)								(in billions)
AUM, beginning of period	$	423.1	$	423.8	$	393.5	$	430.9	$	431.8	$	429.8	$	393.5	$	430.9
Net cash flow		(5.0)		(0.6)		(4.5)		(6.8)		2.9		(1.7)		(1.6)		(8.5)
Investment performance (1)		13.5		3.7		41.7		2.5		7.0		8.0		48.7		10.5
Operations acquired (2)		—		3.5		—		3.5		—		—		—		3.5
Other (3)		0.2		(0.6)		1.1		(0.3)
Operations disposed (3)										(0.2)		(9.2)		(0.2)		(9.2)
Other (4)										0.4		(0.4)		1.5		(0.7)
AUM, end of period	$	431.8	$	429.8	$	431.8	$	429.8	$	441.9	$	426.5	$	441.9	$	426.5

(1)	Variations in investment performance are primarily the result of fluctuations in market performance over time.

(2)	Reflects assets managed by Principal Global Investors resulting from the acquisition of INTERNOS in April 2018.

(3)	Amounts for the three and nine months ended September 30, 2018, reflect outflows related to the August 2018 realignment of a real estate investment management team within the Principal Global Investors segment.

(4)	Primarily reflects the effect of exchange rates. Also includes the January 2019 movement of Claritas, our investment management company in Brazil, from the Principal International segment to the Principal Global Investors ~~segment and the effect of exchange rates.~~segment.

110

Table of Contents

The following table presents certain summary financial data relating to the Principal Global Investors segment for the periods indicated:


	For the three months ended June 30,						For the six months ended June 30,						For the three months ended September 30,						For the nine months ended September 30,
					Increase						Increase						Increase						Increase
	2019		2018		(decrease)		2019		2018		(decrease)		2019		2018		(decrease)		2019		2018		(decrease)
	(in millions)												(in millions)
Operating revenues:
Fees and other revenues	$	356.6	$	378.4	$	(21.8)	$	693.2	$	745.4	$	(52.2)	$	367.9	$	631.8	$	(263.9)	$	1,061.1	$	1,377.2	$	(316.1)
Net investment income		2.9		1.2		1.7		5.3		2.7		2.6		2.0		1.0		1.0		7.3		3.7		3.6
Total operating revenues		359.5		379.6		(20.1)		698.5		748.1		(49.6)		369.9		632.8		(262.9)		1,068.4		1,380.9		(312.5)
Expenses:
Total expenses		242.3		249.0		(6.7)		479.3		502.1		(22.8)		245.4		414.3		(168.9)		724.7		916.4		(191.7)

Pre-tax operating earnings attributable to noncontrolling interest		1.6		1.4		0.2		2.9		3.1		(0.2)		1.5		1.7		(0.2)		4.4		4.8		(0.4)
Pre-tax operating earnings	$	115.6	$	129.2	$	(13.6)	$	216.3	$	242.9	$	(26.6)	$	123.0	$	216.8	$	(93.8)	$	339.3	$	459.7	$	(120.4)

Three and Nine Months Ended ~~June~~September 30, 2019 Compared to Three and Nine Months Ended ~~June~~September 30, 2018

Pre-Tax Operating Earnings

Pre-tax operating earnings decreased due to $7.9 million lower management fee revenue largely due to a shift in the mix of business and $5.7 million of lower performance fees largely from our real estate business.

~~Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018~~

~~Pre-Tax Operating Earnings~~

Pre-tax operating earnings decreased primarily due to ~~$31.5~~the $101.2 million ~~lower~~net impact of the 2018 realignment of a real estate investment management team. The realignment resulted in a $253.1 million accelerated performance fee ~~revenue largely due to a shift in the mix of business and $9.2 million of lower performance fees. This~~that was partially offset by an ~~$8.8~~increase of $151.9 million ~~decrease~~ in ~~expenses, which included one-time items primarily consisting of a favorable legal settlement.~~operating expenses.

~~110~~

~~Table of Contents~~

Principal International Segment

Principal International Segment Summary Financial Data

AUM is generally a key indicator of earnings growth for the segment, as AUM is the base by which we can generate local currency profits. The Cuprum business in Chile differs in that the majority of fees are collected with each deposit by the mandatory retirement customers, based on a capped salary level, as opposed to asset levels. Net customer cash flow and market performance are the two main drivers of local currency AUM growth. Net customer cash flow reflects our ability to attract and retain client deposits. Market performance reflects the investment returns on our underlying AUM. Our financial results are also impacted by fluctuations of the foreign currency to U.S. dollar exchange rates for the countries in which we have business. AUM of our foreign subsidiaries is translated into U.S. dollar equivalents at the end of the reporting period using the spot foreign exchange rates. Revenue and expenses for our foreign subsidiaries are translated into U.S. dollar equivalents at the average foreign exchange rates for the reporting period.

The following table presents the Principal International segment AUM rollforward for the periods indicated:


	For the three months ended June 30,				For the six months ended June 30,				For the three months ended September 30,				For the nine months ended September 30,
	2019		2018		2019		2018		2019		2018		2019		2018
	(in billions)								(in billions)

AUM, beginning of period	$	161.4	$	171.1	$	155.5	$	160.7	$	168.0	$	156.3	$	155.5	$	160.7
Net cash flow		0.6		1.4		1.4		3.7		1.6		0.7		3.0		4.4
Investment performance (1)		4.7		—		10.2		2.2		4.1		2.1		14.3		4.3
Operations acquired (2)		—		—		—		3.8		—		—		—		3.8
Effect of exchange rates		1.4		(16.1)		2.4		(13.8)		(10.0)		(2.6)		(7.6)		(16.4)
Other (3)		(0.1)		(0.1)		(1.5)		(0.3)		0.2		0.1		(1.3)		(0.2)
AUM, end of period	$	168.0	$	156.3	$	168.0	$	156.3	$	163.9	$	156.6	$	163.9	$	156.6

(1)	Variations in investment performance are primarily the result of fluctuations in market performance over time.

(2)	Reflects the February 2018 acquisition of MetLife, Inc.’s pension fund management business in Mexico.

(3)	Primarily reflects the January 2019 movement of Claritas, our investment management company in Brazil, from the Principal International segment to the Principal Global Investors segment.

111

Table of Contents

Net revenue is a key metric used to understand the earnings growth for the Principal International segment. The following table presents the net revenue of the Principal International segment for the periods indicated.


	For the three months ended June 30,						For the six months ended June 30,						For the three months ended September 30,						For the nine months ended September 30,
					Increase						Increase						Increase						Increase
	2019		2018		(decrease)		2019		2018		(decrease)		2019		2018		(decrease)		2019		2018		(decrease)
	(in millions)												(in millions)

Net revenue	$	202.8	$	206.5	$	(3.7)	$	417.0	$	409.2	$	7.8	$	221.5	$	150.2	$	71.3	$	638.5	$	559.4	$	79.1

~~111~~

~~Table of Contents~~

The following table presents certain summary financial data relating to the Principal International segment for the periods indicated:


	For the three months ended June 30,						For the six months ended June 30,						For the three months ended September 30,						For the nine months ended September 30,
					Increase						Increase						Increase						Increase
	2019		2018		(decrease)		2019		2018		(decrease)		2019		2018		(decrease)		2019		2018		(decrease)
	(in millions)												(in millions)
Operating revenues:
Premiums and other considerations	$	109.5	$	101.6	$	7.9	$	227.0	$	199.5	$	27.5	$	115.8	$	55.6	$	60.2	$	342.8	$	255.1	$	87.7
Fees and other revenues		117.9		124.9		(7.0)		234.5		248.0		(13.5)		116.4		119.7		(3.3)		350.9		367.7		(16.8)
Net investment income		184.2		163.1		21.1		330.6		325.2		5.4		172.4		112.1		60.3		503.0		437.3		65.7
Total operating revenues		411.6		389.6		22.0		792.1		772.7		19.4		404.6		287.4		117.2		1,196.7		1,060.1		136.6
Expenses:
Benefits, claims and settlement expenses		208.8		183.1		25.7		375.1		363.5		11.6		183.1		137.2		45.9		558.2		500.7		57.5
Operating expenses		108.7		118.8		(10.1)		210.7		229.3		(18.6)		111.6		112.5		(0.9)		322.3		341.8		(19.5)
Total expenses		317.5		301.9		15.6		585.8		592.8		(7.0)		294.7		249.7		45.0		880.5		842.5		38.0

Pre-tax operating earnings attributable to noncontrolling interest		0.9		1.4		(0.5)		2.0		2.1		(0.1)		1.0		0.7		0.3		3.0		2.8		0.2
Pre-tax operating earnings	$	93.2	$	86.3	$	6.9	$	204.3	$	177.8	$	26.5	$	108.9	$	37.0	$	71.9	$	313.2	$	214.8	$	98.4

Three Months Ended ~~June~~September 30, 2019 Compared to Three Months Ended ~~June~~September 30, 2018

Pre-Tax Operating Earnings

Pre-tax operating earnings increased ~~$9.7~~$74.1 million in Latin America primarily due to ~~$15.8~~a $61.3 million ofimpact associated with actuarial assumption updates and model refinements in Brazil, which were favorable in 2019 compared to unfavorable in 2018, in addition to $13.4 million favorable relative market performance on our required regulatory ~~investments relative to the year earlier period, partially offset by $5.6~~investments.

Net Revenue

Net revenue increased $71.3 million ~~due to weakening of the~~in Latin ~~American currencies against the U.S. dollar. Pre-tax operating earnings decreased in Asia $1.5 million~~America primarily due to ~~weakening of the Asian currencies against the U.S. dollar.~~a $61.3 million impact associated with actuarial assumption updates and model refinements in Brazil, which were favorable in 2019 compared to unfavorable in 2018, in addition to $13.6 million favorable relative market performance on our required regulatory investments.

~~Six~~Nine Months Ended ~~June~~September 30, 2019 Compared to ~~Six~~Nine Months Ended ~~June~~September 30, 2018

Pre-Tax Operating Earnings

Pre-tax operating earnings increased ~~$29.8~~$103.9 million in Latin America primarily due to ~~$38.1~~a $61.3 million ofimpact associated with actuarial assumption updates and model refinements in Brazil, which were favorable in 2019 compared to unfavorable in 2018, and $51.3 million favorable relative market performance on our required regulatory ~~investments offset by foreign currency headwinds~~investments.

112

Table of ~~$14.7 million.~~Contents

Net Revenue

Net revenue increased ~~$8.5~~$79.7 million in Latin America primarily due to ~~$38.8~~a $61.3 million ofimpact associated with actuarial assumption updates and model refinements in Brazil, which were favorable in 2019 compared to unfavorable in 2018, in addition to $52.2 million favorable relative market performance on our required regulatory investments. ~~This was partially~~These impacts were offset by ~~a $24.1 million weakening~~foreign currency headwinds of the Latin American currencies against the U.S. dollar and $4.1 million as a result of the January 2019 movement of Claritas, our investment management company in Brazil, from the Principal International segment to the Principal Global Investors segment.$29.6 million.

U.S. Insurance Solutions Segment

U.S. Insurance Solutions Segment Summary Financial Data

Premium and fees are a key metric for growth in the U.S. Insurance Solutions segment. We receive premiums on our specialty benefits insurance products as well as our traditional life insurance products. Fees are generated from our specialty benefits fee-for-service products as well as our universal life, variable universal life and indexed universal life insurance products. We use several reinsurance programs to help manage the mortality and morbidity risk. Premium and fees are reported net of reinsurance premiums.

In our Specialty Benefits insurance business, premium and fees growth is a result of strong retention, sales and in-group growth. In our Individual Life insurance business, premium and fees growth is driven by recurring premiums and sales with a focus on maintaining a balanced product portfolio.

~~112~~

~~Table of Contents~~

The following table presents the U.S. Insurance Solutions segment premium and fees for the periods indicated:


	For the three months ended June 30,						For the six months ended June 30,						For the three months ended September 30,						For the nine months ended September 30,
					Increase						Increase						Increase						Increase
	2019		2018		(decrease)		2019		2018		(decrease)		2019		2018		(decrease)		2019		2018		(decrease)
	(in millions)												(in millions)
Premium and fees:
Specialty Benefits insurance	$	580.1	$	536.7	$	43.4	$	1,144.6	$	1,062.6	$	82.0	$	587.6	$	548.0	$	39.6	$	1,732.2	$	1,610.6	$	121.6
Individual Life insurance		282.6		268.0		14.6		579.7		553.6		26.1		384.0		269.1		114.9		963.7		822.7		141.0

The following table presents certain summary financial data relating to the U.S. Insurance Solutions segment for the periods indicated:


	For the three months ended June 30,						For the six months ended June 30,						For the three months ended September 30,						For the nine months ended September 30,
					Increase						Increase						Increase						Increase
	2019		2018		(decrease)		2019		2018		(decrease)		2019		2018		(decrease)		2019		2018		(decrease)
	(in millions)												(in millions)
Operating revenues:
Premiums and other considerations	$	651.3	$	608.2	$	43.1	$	1,300.1	$	1,215.7	$	84.4	$	658.1	$	620.0	$	38.1	$	1,958.2	$	1,835.7	$	122.5
Fees and other revenues(1)		211.3		196.4		14.9		424.1		400.4		23.7		313.5		197.1		116.4		737.6		597.5		140.1
Net investment income		224.7		199.5		25.2		431.2		404.7		26.5		221.0		216.1		4.9		652.2		620.8		31.4
Total operating revenues		1,087.3		1,004.1		83.2		2,155.4		2,020.8		134.6		1,192.6		1,033.2		159.4		3,348.0		3,054.0		294.0
Expenses:
Benefits, claims and settlement expenses(1)		633.3		602.1		31.2		1,286.9		1,208.9		78.0		702.4		628.2		74.2		1,989.3		1,837.1		152.2
Dividends to policyholders(1)		29.7		30.2		(0.5)		59.7		60.7		(1.0)		30.3		31.8		(1.5)		90.0		92.5		(2.5)
Operating expenses(1)		278.0		258.5		19.5		551.8		522.9		28.9		339.8		247.5		92.3		891.6		770.4		121.2
Total expenses		941.0		890.8		50.2		1,898.4		1,792.5		105.9		1,072.5		907.5		165.0		2,970.9		2,700.0		270.9

Pre-tax operating earnings(1)	$	146.3	$	113.3	$	33.0	$	257.0	$	228.3	$	28.7	$	120.1	$	125.7	$	(5.6)	$	377.1	$	354.0	$	23.1

(1)	For further details related to the impact associated with actuarial assumption updates and model refinements for the three and nine months ended September 30, 2019 and 2018, see “Transactions Affecting Comparability of Results of Operations — Other – Actuarial Assumption Updates.”

113

Table of Contents

Three Months Ended ~~June~~September 30, 2019 Compared to Three Months Ended ~~June~~September 30, 2018

Pre-Tax Operating Earnings

Pre-tax operating earnings decreased primarily due to a more unfavorable impact from actuarial assumption updates and model refinements in 2019 as compared to 2018.

Operating Revenues

Premium and fees increased $39.6 million in our Specialty Benefits insurance business primarily due to growth in the business. Premium and fees increased $114.9 million in our Individual Life insurance business primarily due to a favorable impact from actuarial assumption updates and model refinements in 2019 as compared to an unfavorable impact in 2018.

Total Expenses

Benefits, claims and settlement expenses increased primarily due to $38.8 million related to a more unfavorable impact from actuarial assumption updates and model refinements in 2019 as compared to 2018 and $32.8 million resulting from growth in the businesses.

Operating expenses decreased in our Specialty Benefits insurance business primarily due to $25.0 million related to a favorable impact from actuarial assumption updates and model refinements in 2019 as compared to an unfavorable impact in 2018. This decrease was partially offset by a $12.0 million increase associated with growth in the business. Operating expenses increased $104.0 million in our Individual Life insurance business primarily due to an unfavorable impact from actuarial assumption updates and model refinements in 2019 as compared to favorable impact in 2018.

Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018

Pre-Tax Operating Earnings

Pre-tax operating earnings increased in our Specialty Benefits insurance business primarily due to ~~$15.2 million related to favorable claims experience, $9.5 million due to higher variable investment income and $5.4~~$15.3 million resulting from growth in the ~~business.~~business and $14.3 million related to a more favorable impact from actuarial assumption updates and model refinements in 2019 as compared to 2018. Pre-tax operating earnings decreased $19.2 million in our Individual Life insurance business primarily due to a more unfavorable impact from actuarial assumption updates and model refinements in 2019 as compared to 2018.

Operating Revenues

Premium and fees increased $121.6 million in our Specialty Benefits insurance business primarily due to growth in the business.

~~Net investment income~~ Premium and fees increased in our Individual Life insurance business primarily due to ~~higher variable investment income.~~$102.5 million related to a favorable impact from actuarial assumption updates and model refinements in 2019 as compared to an unfavorable impact in 2018 and $38.3 million related to growth in the business.

Total Expenses

Benefits, claims and settlement expenses increased primarily due to $103.1 million resulting from growth in the businesses and $38.8 million related to a more unfavorable impact from actuarial assumption updates and model refinements in 2019 as compared to 2018.

Operating expenses increased in our Specialty Benefits insurance business primarily due to ~~$27.1~~$38.8 million resulting from growth in the ~~business,~~business. This increase was partially offset by ~~$15.2~~$25.0 million related to a favorable ~~claims experience. In addition, benefits, claims~~impact from actuarial assumption updates and ~~settlement~~model refinements in 2019 as compared to an unfavorable impact in 2018. Operating expenses increased $109.6 million in our Individual Life insurance business primarily due to ~~$10.7 million resulting~~an unfavorable impact from ~~growth~~actuarial assumption updates and model refinements in ~~the business and $8.5 million primarily due~~2019 as compared to a ~~return to expected claims in 2019 compared to very low claims~~favorable impact in 2018.

~~Operating expenses increased primarily due to growth in the business.~~

~~Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018~~

~~Pre-Tax Operating Earnings~~

Pre-tax operating earnings increased in our Specialty Benefits insurance business primarily due to $10.0 million resulting from growth in the business, $7.5 million related to favorable claims experience and $5.4 million due to higher variable investment income.

~~113~~114

Table of Contents

~~Operating Revenues~~

~~Premium and fees increased primarily due to growth in the business.~~

~~Net investment income increased primarily due to $15.3 million in higher variable investment income and a $10.2 million increase attributable to returns on higher average invested assets.~~

~~Total Expenses~~

Benefits, claims and settlement expenses increased in our Specialty Benefits insurance business primarily due to $51.0 million resulting from growth in the business, partially offset by $7.5 million related to favorable claims experience. Benefits, claims and settlement expenses increased in our Individual Life insurance business primarily due to $19.3 million resulting from growth in the business and $15.2 million primarily due to a return to expected claims in 2019 compared to very low claims in 2018.

~~Operating expenses increased primarily due to growth in the business.~~

Corporate Segment

Corporate Segment Summary Financial Data

The following table presents certain summary financial data relating to the Corporate segment for the periods indicated:


	For the three months ended June 30,						For the six months ended June 30,						For the three months ended September 30,						For the nine months ended September 30,
					Increase						Increase						Increase						Increase
	2019		2018		(decrease)		2019		2018		(decrease)		2019		2018		(decrease)		2019		2018		(decrease)
	(in millions)												(in millions)
Operating revenues:
Total operating revenues	$	(15.8)	$	(17.0)	$	1.2	$	(14.6)	$	(17.0)	$	2.4	$	(16.4)	$	(21.4)	$	5.0	$	(31.0)	$	(38.4)	$	7.4
Expenses:
Total expenses		82.7		53.5		29.2		168.5		118.0		50.5		83.1		31.9		51.2		251.6		149.9		101.7

Pre-tax operating earnings (losses) attributable to noncontrolling interest		(0.4)		0.2		(0.6)		(0.6)		3.3		(3.9)		2.6		(0.4)		3.0		2.0		2.9		(0.9)
Pre-tax operating losses	$	(98.1)	$	(70.7)	$	(27.4)	$	(182.5)	$	(138.3)	$	(44.2)	$	(102.1)	$	(52.9)	$	(49.2)	$	(284.6)	$	(191.2)	$	(93.4)

Three Months Ended ~~June~~September 30, 2019 Compared to Three Months Ended ~~June~~September 30, 2018

Pre-Tax Operating Losses

Pre-tax operating losses increased primarily due to operating expense increases, including a ~~$7.8 million increase in pension and OPEB expenses, a $6.8~~$22.4 million increase related to ~~RobustWealth expenses which we acquired in third quarter 2018 and a $5.6 million increase related to accrued~~ interest on federal income taxes due to settlement agreements reached in the prior year, a $14.0 million increase in strategic initiatives and a $4.8 million increase in our retail broker-dealer operations due to a favorable settlement in the prior year.

~~Six~~Nine Months Ended ~~June~~September 30, 2019 Compared to ~~Six~~Nine Months Ended ~~June~~September 30, 2018

Pre-Tax Operating Losses

Pre-tax operating losses increased primarily due to operating expense increases, including ~~an $18.0 million increase in pension and OPEB expenses,~~ a ~~$13.1~~$27.6 million increase related to ~~RobustWealth expenses which we acquired in third quarter 2018 and a $5.2 million increase related to accrued~~ interest on federal income taxes due to settlement agreements reached in the prior ~~year.~~year, a $21.1 million increase in pension and OPEB expenses, a $15.7 million increase in strategic initiatives and a $14.5 million increase related to RobustWealth, which we acquired in third quarter 2018.

~~114~~

~~Table of Contents~~

Liquidity and Capital Resources

Liquidity and capital resources represent the overall strength of a company and its ability to generate strong cash flows, borrow funds at a competitive rate and raise new capital to meet operating and growth needs. Our legal entity structure has an impact on our ability to meet cash flow needs as an organization. Following is a simplified organizational structure.

115

Table of Contents

Liquidity

Our liquidity requirements have been and will continue to be met by funds from consolidated operations as well as the issuance of commercial paper, common stock, debt or other capital securities and borrowings from credit facilities. We believe the cash flows from these sources are sufficient to satisfy the current liquidity requirements of our operations, including reasonably foreseeable contingencies.

We maintain a level of cash and securities which, combined with expected cash inflows from investments and operations, we believe to be adequate to meet anticipated short-term and long-term payment obligations. We will continue our prudent capital management practice of regularly exploring options available to us to maximize capital flexibility, including accessing the capital markets and careful attention to and management of expenses.

We perform rigorous liquidity stress testing to ensure our asset portfolio includes sufficient high quality liquid assets that could be utilized to bolster our liquidity position under increasingly stressed market conditions. These assets could be utilized as collateral for secured borrowing transactions with various third parties or by selling the securities in the open market if needed.

We also manage liquidity risk by limiting the sales of liabilities with features such as puts or other options that can be exercised at inopportune times. For example, as of ~~June~~September 30, 2019, approximately ~~$9.1~~$9.3 billion, or 99%, of our institutional guaranteed investment contracts and funding agreements cannot be redeemed by contractholders prior to maturity. Our individual annuity liabilities also contain surrender charges and other provisions limiting early surrenders.

The following table summarizes the withdrawal characteristics of our domestic general account investment contracts as of ~~June~~September 30, 2019.

Contractholder funds

Percentage

Contractholder funds

Percentage

(in millions)

Not subject to discretionary withdrawal

10,145.2

31.9

10,355.3

32.1

Subject to discretionary withdrawal with adjustments:

Specified surrender charges

8,899.6

28.0

8,913.5

27.5

Market value adjustments

7,193.7

22.7

7,619.9

23.5

Subject to discretionary withdrawal without adjustments

5,512.0

17.4

5,486.0

16.9

Total domestic investment contracts

31,750.5

100.0

32,374.7

100.0

Universal life insurance and certain traditional life insurance policies are also subject to discretionary withdrawals by policyholders. However, life insurance policies tend to be less susceptible to withdrawal than our investment contracts because policyholders may be subject to a new underwriting process in order to obtain a new life insurance policy. In addition, our life insurance liabilities include surrender charges to discourage early surrenders.

~~115~~

~~Table of Contents~~

We had the following short-term credit facilities with various financial institutions as of ~~June~~September 30, 2019:

Financing

Amount

Financing

Amount

Obligor/Applicant

structure

Maturity

Capacity

outstanding (3)

structure

Maturity

Capacity

outstanding (3)

(in millions)

PFG, Principal Financial Services, Inc., and Principal Life as co-borrowers (1)

Credit facility

November 2023

600.0

—

Credit facility

November 2023

600.0

—

PFG, Principal Financial Services, Inc., Principal Life and Principal Financial Services V (UK) LTD as co-borrowers (1)

Credit facility

November 2023

200.0

—

Credit facility

November 2023

200.0

—

Principal International Chile (2)

Unsecured lines of credit

147.1

76.8

Unsecured lines of credit

138.8

96.1

Principal Life

Unsecured line of credit

September 2019

60.0

—

Unsecured line of credit

September 2020

60.0

—

Total

1,007.1

76.8

998.8

96.1

(1)	The credit facility was extended during the fourth quarter of 2018 and is supported by eighteen banks.

(2)	The unsecured lines of credit can be used for repurchase agreements or other borrowings. Each line has a maturity of less than one year.

(3)	The amount outstanding is reported in short-term debt on the consolidated statements of financial position.

116

Table of Contents

The revolving credit facilities are committed and available for general corporate purposes. Most of the banks supporting the credit facilities have other relationships with us. Due to the financial strength and the strong relationships we have with these providers, we are comfortable we have very low risk the financial institutions would be unable or unwilling to fund these facilities.

The Holding Companies: Principal Financial Group, Inc. and Principal Financial Services, Inc. The principal sources of funds available to our parent holding company, PFG, are dividends from subsidiaries as well as its ability to borrow funds at competitive rates and raise capital to meet operating and growth needs. These funds are used by PFG to meet its obligations, which include the payment of dividends on common stock, debt service and the repurchase of stock. The declaration and payment of common stock dividends is subject to the discretion of our Board of Directors and will depend on our overall financial condition, results of operations, capital levels, cash requirements, future prospects, receipt of dividends from Principal Life (as described below), risk management considerations and other factors deemed relevant by the Board. No significant restrictions limit the payment of dividends by PFG, except those generally applicable to corporations incorporated in Delaware.

Dividends from Principal Life, our primary subsidiary, are limited by Iowa law. Under Iowa law, Principal Life may pay dividends only from the earned surplus arising from its business and must receive the prior approval of the Commissioner of Insurance of the State of Iowa (the “Commissioner”) to pay stockholder dividends or make any other distribution if such distribution would exceed certain statutory limitations. Iowa law gives the Commissioner discretion to disapprove requests for distributions in excess of these limitations. Extraordinary dividends include those made, together with dividends and other distributions, within the preceding twelve months that exceed the greater of (i) 10% of statutory policyholder surplus as of the previous year-end or (ii) the statutory net gain from operations from the previous calendar year, not to exceed earned surplus. Based on statutory results for the year ended December 31, 2018, the ordinary stockholder dividend limitation for Principal Life is approximately $1,085.7 million in 2019. However, because the dividend test is based on dividends previously paid over rolling 12-month periods, if paid before a specified date during 2019, some or all of such dividends may be extraordinary and require regulatory approval.

Total stockholder dividends paid by Principal Life to its parent for the ~~six~~nine months ended ~~June~~September 30, 2019, were ~~$645.0~~$845.0 million, ~~$475.0~~$675.0 million of which was extraordinary and approved by the Commissioner. As of ~~June~~September 30, 2019, we had ~~$2,463.4~~$1,500.5 million of cash and liquid assets held in our holding companies and other subsidiaries, which is available for corporate purposes. This includes assets in excess of targeted statutory capital ratios and immediate working capital needs.

Operations. Our primary consolidated cash flow sources are premiums from insurance products, pension and annuity deposits, asset management fee revenues, administrative services fee revenues, income from investments and proceeds from the sales or maturity of investments. Cash outflows consist primarily of payment of benefits to policyholders and beneficiaries, income and other taxes, current operating expenses, payment of dividends to policyholders, payments in connection with investments acquired, payments made to acquire subsidiaries, payments relating to policy and contract surrenders, withdrawals, policy loans, interest payments and repayment of short-term debt and long-term debt. Our

~~116~~

~~Table of Contents~~

investment strategies are generally intended to provide adequate funds to pay benefits without forced sales of investments. For a discussion of our investment objectives and strategies, see “Investments.”

Cash Flows. Cash flow activity, as reported in our consolidated statements of cash flows, provides relevant information regarding our sources and uses of cash. The following discussion of our operating, investing and financing portions of the cash flows excludes cash flows attributable to the separate accounts.

Net cash provided by operating activities was ~~$2,678.4~~$4,464.8 million and ~~$1,638.2~~$3,713.9 million for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, respectively. Our insurance business typically generates positive cash flows from operating activities, as premiums collected from our insurance products and income received from our investments exceed acquisition costs, benefits paid, redemptions and operating expenses. These positive cash flows are then invested to support the obligations of our insurance and investment products and required capital supporting these products. Our cash flows from operating activities are affected by the timing of premiums, fees and investment income received and benefits and expenses paid. The increase in cash provided by operating activities in 2019 compared to 2018 was primarily due to increased sales in the pension risk transfer and individual fixed annuities businesses resulting in higher reserves. Cash provided by operating activities also increased as a result of fluctuations in receivables and payables associated with the timing of settlements.

117

Table of Contents

Net cash used in investing activities was ~~$2,344.0~~$4,926.2 million and ~~$2,341.5~~$4,408.7 million for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, respectively. The ~~immaterial change~~increase in cash used in investing activities ~~included~~was primarily due to $1,209.6 million of cash paid for the Acquired Business. Additionally, cash used in investing activities increased as a result of portfolio mix variances, ~~such as~~including an increase in mortgage loans acquired or originated and increased investments in sponsored investment funds. These increases were partially offset ~~slightly~~ by decreased net purchases of fixed maturities available-for-sale and equity securities with intent to hold.

Net cash provided by financing activities was ~~$4.0~~$681.9 million and ~~$574.5~~$1,150.7 million for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, respectively. The decrease in cash provided by financing activities was the result of ~~net~~increased investment contract withdrawals in 2019 as compared to ~~net investment contract deposits in~~ 2018. This decrease was partly offset by the $500.0 million senior note issuance in 2019, which was issued to fund a portion of the ~~Wells Fargo Institutional Retirement & Trust business acquisition.~~Acquired Business.

Shelf Registration. Under our current shelf registration, we have the ability to issue, in unlimited amounts, unsecured senior debt securities or subordinated debt securities, junior subordinated debt, preferred stock, common stock, warrants, depositary shares, purchase contracts and purchase units of PFG. Our wholly owned subsidiary, PFS, may guarantee, fully and unconditionally or otherwise, our obligations with respect to any non-convertible securities, other than common stock, described in the shelf registration.

Short-Term Debt. The components of short-term debt were as follows:


	June 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018
	(in millions)				(in millions)
Other recourse short-term debt	$	76.8	$	42.9	$	96.1	$	42.9
Total short-term debt	$	76.8	$	42.9	$	96.1	$	42.9

The short-term credit facilities are used for general corporate purposes and borrowings outstanding can fluctuate as part of working capital management.

Long-Term Debt. On May 7, 2019, we issued $500.0 million of senior notes. For additional long-term debt information regarding these debt issuances and all other outstanding long-term debt, see Item 1. "Financial Statements, Notes to Unaudited Consolidated Financial Statements, Note 6,7, Long-Term Debt" for further information.

Contingent Funding Agreements for Senior Debt Issuance. In March 2018, we entered into two contingent funding agreements that give us the right at any time over a ten-year or thirty-year period to issue up to $400.0 million or $350.0 million, respectively, of senior notes.

Stockholders’ Equity. The following table summarizes our dividends to stockholders and repurchase of common stock.


	For the six months ended		For the year ended		For the nine months ended		For the year ended
	June 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018
	(in millions)				(in millions)
Dividends to stockholders	$	300.6	$	598.6	$	453.6	$	598.6
Repurchase of common stock		153.7		671.6		197.5		671.6
Total cash returned to common stockholders	$	454.3	$	1,270.2	$	651.1	$	1,270.2

~~117~~

~~Table of Contents~~

For additional stockholders’ equity information, see Item 1. “Financial Statements, Notes to Unaudited Consolidated Financial Statements, Note ~~10,~~11, Stockholders’ Equity.”

118

Table of Contents

Capitalization

The following table summarizes our capital structure:


	June 30, 2019			December 31, 2018			September 30, 2019			December 31, 2018
	($ in millions)						($ in millions)
Debt:
Short-term debt	$	76.8		$	42.9		$	96.1		$	42.9
Long-term debt		3,762.4			3,259.6			3,763.9			3,259.6
Total debt		3,839.2			3,302.5			3,860.0			3,302.5

Total stockholders’ equity attributable to PFG		14,034.7			11,390.0			14,804.2			11,390.0
Total capitalization	$	17,873.9		$	14,692.5		$	18,664.2		$	14,692.5
Debt to equity		27	%		29	%		26	%		29	%
Debt to capitalization		21	%		22	%		21	%		22	%

Contractual Obligations and Contractual Commitments

As of ~~June~~September 30, 2019, no significant changes to contractual obligations and contractual commitments have occurred since December 31, 2018.

Off-Balance Sheet Arrangements

Variable Interest Entities. We have relationships with various types of special purpose entities and other entities where we have a variable interest as described in Item 1. “Financial Statements, Notes to Unaudited Consolidated Financial Statements, Note 2,3, Variable Interest Entities.” We have made commitments to fund certain limited partnerships, some of which are classified as unconsolidated variable interest entities.

Guarantees and Indemnifications. As of ~~June~~September 30, 2019, no significant changes to guarantees and indemnifications have occurred since December 31, 2018. For guarantee and indemnification information, see Item 1. “Financial Statements, Notes to Unaudited Consolidated Financial Statements, Note 9,10, Contingencies, Guarantees, Indemnifications and Leases” under the caption, “Guarantees and Indemnifications.”

Financial Strength and Credit Ratings

Our ratings are influenced by the relative ratings of our peers/competitors as well as many other factors including our operating and financial performance, capital levels, asset quality, liquidity, asset/liability management, overall portfolio mix, financial leverage (i.e., debt), risk exposures, operating leverage and other factors.

In July 2019, Fitch affirmed the ‘AA-’ financial strength ratings of Principal Life and Principal National Life Insurance Company (“PNLIC”). Fitch also affirmed PFG’s senior unsecured debt at ‘A-’. The outlook on all ratings remains ‘stable’. The rating reflects very strong and stable operating profitability and a very strong business profile, reflecting strong market position and significant operating scale focusing on small and midsize businesses in the retirement market.

In April 2019, we announced the signing of a definitive agreement with Wells Fargo Bank, N.A. to acquire its Institutional Retirement & Trust business. Following the acquisition announcement, Fitch and S&P affirmed our ratings and stable outlook. A.M. Best commented that ratings remain unchanged, while Moody’s commented the acquisition is a credit positive. The transaction closed on July 1, 2019. For ~~more~~additional information onregarding the acquisition, see Item 1. “Financial Statements, Notes to Unaudited Consolidated Financial Statements, Note ~~17, Subsequent Event.”~~2, Goodwill and Other Intangible Assets”.

In ~~April~~August 2019, S&P affirmed the financial strength ratings of Principal Life and PNLIC at ‘A+’. S&P also affirmed PFG’s senior unsecured debt rating at ‘A-’. The outlook remains ‘stable’ for all ratings. ~~Principal Life’s enterprise risk management rating was affirmed as ‘Strong’.~~ The rating affirmation reflects S&P’s view that we have a very strong competitive position as a leader in the U.S. small to midsize 401(k) market, with strong asset management and insurance solution capabilities.

In February 2019, A.M. Best affirmed the financial strength ratings of Principal Life and PNLIC at ‘A+’. The outlook remains ‘stable’ for all financial strength ratings. The affirmation reflects the strength of ~~Principal’s~~their balance ~~sheet~~sheets as

~~118~~

~~Table of Contents~~

well as ~~its~~their strong operating performance, favorable business profile and appropriate enterprise risk management. The outlook for the Long-Term Issuer credit rating was upgraded from ‘stable’ to ‘positive’. The outlook upgrade reflects ~~Principal’s~~their continued strength and evolution of enterprise risk management capabilities.

119

Table of Contents

In the fourth quarter of 2018, A.M. Best changed its outlook on the U.S. life insurance sector to ‘stable’ from ‘negative’ due to increased profitability, improved regulatory and tax environments and a strengthening U.S. economy, along with overall reduced balance sheet risk due to a proactive approach taken by companies in recent years. Fitch, S&P and Moody’s continue to maintain a 'stable' outlook as well.

The following table summarizes our significant financial strength and debt ratings from the major independent rating organizations. The debt ratings shown are indicative ratings. Outstanding issuances are rated the same as indicative ratings unless otherwise noted. Actual ratings can differ from indicative ratings based on contractual terms. A rating is not a recommendation to buy, sell or hold securities. Such a rating may be subject to revision or withdrawal at any time by the assigning rating agency. Each rating should be evaluated independently of any other rating.


	A.M. Best	Fitch	S&P	Moody’s
Principal Financial Group
Senior Unsecured Debt (1)	a-	A-	A-	Baa2
Junior Subordinated Debt (2)	bbb+		BBB+	Baa3
Long-Term Issuer Default Rating		A
Principal Financial Services
Senior Unsecured Debt	a-		A-	Baa1
Long-Term Issuer Default Rating		A
Principal Life Insurance Company
Insurer Financial Strength	A+	AA-	A+	A1
Issuer Credit Rating	aa-
Commercial Paper	AMB‑1+		A‑1+	P‑1
Enterprise Risk Management Rating			Strong
Principal National Life Insurance Company
Insurer Financial Strength	A+	AA-	A+	A1

(1)	Principal Financial Group’s senior debt issuance has been rated “Baa1” by Moody’s.

(2)	Principal Financial Group’s junior subordinated debt issuance has been rated “BBB” by S&P and “Baa2” by Moody’s.

Fair Value Measurement

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels. The fair value hierarchy gives the highest priority (Level 1) to unadjusted quoted prices in active markets for identical assets or liabilities and gives the lowest priority (Level 3) to unobservable inputs. The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety considering factors specific to the asset or liability. See Item 1. “Financial Statements, Notes to Unaudited Consolidated Financial Statements, Note ~~11,~~12, Fair Value Measurements” for further details, including a reconciliation of changes in Level 3 fair value measurements.

As of ~~June~~September 30, 2019, 40% of our net assets (liabilities) were Level 1, 56% were Level 2 and 4% were Level 3. Excluding separate account assets as of ~~June~~September 30, 2019, 3% of our net assets (liabilities) were Level 1, 97% were Level 2 and 0% were Level 3.

As of December 31, 2018, 39% of our net assets (liabilities) were Level 1, 57% were Level 2 and 4% were Level 3. Excluding separate account assets as of December 31, 2018, 3% of our net assets (liabilities) were Level 1, 97% were Level 2 and 0% were Level 3.

Changes in Level 3 Fair Value Measurements

Net assets (liabilities) measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of ~~June~~September 30, 2019, were ~~$8,772.9~~$8,726.7 million as compared to $8,729.4 million as of December 31, 2018. The increase was primarily related to gains in our separate account assets, partially offset by net transfers out of Level 3 into Level 2. Assets transferred out of Level 3 during 2019 primarily included certain separate accounts we now value using the unit trust APIF as

~~119~~

~~Table of Contents~~

the unit of account that were previously valued using the underlying investments of the unit trust APIF. The increase in separate account assets was largely offset by losses in our investment contracts.

Net assets (liabilities) measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of ~~June~~September 30, 2018, were ~~$8,548.7~~$8,831.7 million as compared to $7,791.7 million as of December 31, 2017. The increase was primarily related to gains and net purchases in our separate account ~~assets.~~assets and net purchases of certain structured securities.

120

Table of Contents

These increases were partially offset by net transfers out of Level 3 into Level 2 for certain fixed maturities, available-for-sale. The transfers out of Level 3 were due to our obtaining prices from recognized third party pricing vendors or from internal models using substantially all market observable information versus relying on broker quotes or utilizing significant unobservable inputs.

Investments

We had total consolidated assets as of ~~June~~September 30, 2019, of ~~$267,918.0~~$270,238.4 million, of which ~~$91,195.2~~$94,412.4 million were invested assets. The rest of our total consolidated assets are comprised primarily of separate account assets for which we do not bear investment risk; therefore, the discussion and financial information below does not include such assets.

Overall Composition of Invested Assets

Invested assets as of ~~June~~September 30, 2019, were predominantly high quality and broadly diversified across asset class, individual credit, industry and geographic location. Asset allocation is determined based on cash flow and the risk/return requirements of our products. As shown in the following table, the major categories of invested assets are fixed maturities and commercial mortgage loans. The remainder is invested in other investments, equity securities, real estate and residential mortgage loans. In addition, policy loans are included in our invested assets.


	June 30, 2019				December 31, 2018				September 30, 2019				December 31, 2018
	Carrying amount		% of total		Carrying amount		% of total		Carrying amount		% of total		Carrying amount		% of total
	($ in millions)								($ in millions)
Fixed maturities:
Public	$	43,347.3	48	%	$	40,168.2	48	%	$	45,563.1	48	%	$	40,168.2	48	%
Private		22,607.6	25			20,576.4	24			23,181.1	24			20,576.4	24
Equity securities		1,895.2	2			1,843.7	2			1,907.3	2			1,843.7	2
Mortgage loans:
Commercial		14,805.2	16			13,972.0	16			14,992.3	16			13,972.0	16
Residential		1,331.6	1			1,364.9	2			1,499.3	2			1,364.9	2
Real estate held for sale		220.0	—			209.6	—			211.8	—			209.6	—
Real estate held for investment		1,520.4	2			1,520.1	2			1,525.0	2			1,520.1	2
Policy loans		800.9	1			801.4	1			799.1	1			801.4	1
Other investments		4,667.0	5			4,310.3	5			4,733.4	5			4,310.3	5
Total invested assets		91,195.2	100	%		84,766.6	100	%		94,412.4	100	%		84,766.6	100	%
Cash and cash equivalents		3,315.9				2,977.5				3,198.0				2,977.5
Total invested assets and cash	$	94,511.1			$	87,744.1			$	97,610.4			$	87,744.1

~~120~~121

Table of Contents

Investment Results

Net Investment Income

The following table presents the yield and investment income, excluding net realized capital gains and losses, for our invested assets for the periods indicated. We calculate annualized yields using a simple average of asset classes at the beginning and end of the reporting period. The yields for available-for-sale fixed maturities are calculated using amortized cost. All other yields are calculated using carrying amounts.


	For the three months ended June 30,												For the six months ended June 30,												For the three months ended September 30,												For the nine months ended September 30,
	2019				2018				Increase (decrease)				2019				2018				Increase (decrease)				2019				2018				Increase (decrease)				2019				2018				Increase (decrease)
	Yield		Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Amount
	($ in millions)																								($ in millions)
Fixed maturities (1)	4.3	%	$	671.0	4.2	%	$	618.2	0.1	%	$	52.8	4.3	%	$	1,306.0	4.2	%	$	1,223.5	0.1	%	$	82.5	4.2	%	$	654.7	4.2	%	$	634.8	—	%	$	19.9	4.2	%	$	1,960.7	4.2	%	$	1,858.3	—	%	$	102.4
Equity securities	5.1			24.2	2.2			10.3	2.9			13.9	7.5			69.8	3.0			28.0	4.5			41.8	5.9			28.1	2.9			13.6	3.0			14.5	6.9			97.9	2.9			41.6	4.0			56.3
Mortgage loans - commercial	4.4			161.6	4.2			138.4	0.2			23.2	4.3			311.0	4.2			271.8	0.1			39.2	4.2			155.0	4.4			144.9	(0.2)			10.1	4.3			466.0	4.2			416.7	0.1			49.3
Mortgage loans - residential	6.9			23.2	5.5			18.5	1.4			4.7	5.7			38.1	5.5			36.1	0.2			2.0	5.4			18.9	5.4			17.9	—			1.0	5.3			57.0	5.5			54.0	(0.2)			3.0
Real estate	14.6			63.5	6.2			26.3	8.4			37.2	10.5			91.4	9.0			77.6	1.5			13.8	12.9			56.2	12.8			55.2	0.1			1.0	11.3			147.6	10.3			132.8	1.0			14.8
Policy loans	5.4			10.9	5.6			11.2	(0.2)			(0.3)	5.5			21.9	5.6			22.4	(0.1)			(0.5)	5.5			11.0	5.5			11.1	—			(0.1)	5.5			32.9	5.5			33.5	—			(0.6)
Cash and cash equivalents	2.5			17.5	2.1			12.0	0.4			5.5	2.1			33.7	1.8			21.5	0.3			12.2	2.0			16.2	2.5			16.6	(0.5)			(0.4)	2.1			49.9	1.9			38.1	0.2			11.8
Other investments (1)	8.0			94.1	8.7			79.4	(0.7)			14.7	8.2			183.7	8.8			159.5	(0.6)			24.2	7.3			85.9	5.7			51.2	1.6			34.7	7.9			269.6	7.8			210.7	0.1			58.9
Total	4.8			1,066.0	4.4			914.3	0.4			151.7	4.6			2,055.6	4.4			1,840.4	0.2			215.2	4.5			1,026.0	4.4			945.3	0.1			80.7	4.5			3,081.6	4.4			2,785.7	0.1			295.9
Investment expenses	(0.1)			(28.9)	(0.1)			(25.2)	—			(3.7)	(0.1)			(57.5)	(0.1)			(49.1)	—			(8.4)	(0.1)			(29.4)	(0.1)			(25.9)	—			(3.5)	(0.1)			(86.9)	(0.1)			(75.0)	—			(11.9)
Net investment income	4.7	%	$	1,037.1	4.3	%	$	889.1	0.4	%	$	148.0	4.5	%	$	1,998.1	4.3	%	$	1,791.3	0.2	%	$	206.8	4.4	%	$	996.6	4.3	%	$	919.4	0.1	%	$	77.2	4.4	%	$	2,994.7	4.3	%	$	2,710.7	0.1	%	$	284.0

(1)

Three Months Ended ~~June~~September 30, 2019 Compared to Three Months Ended ~~June~~September 30, 2018

Net investment income from fixed maturities increased primarily due to higher average invested assets and higher yields in our U.S. operations.

Net investment income from equity securities increased primarily due to favorable relative market performance on our required regulatory investments in our Latin America business.

Net investment income from commercial mortgage loans increased primarily due to higher average invested assets ~~and prepayments~~ in our U.S. operations.

Net investment income from ~~real estate~~other investments increased primarily due to ~~the sale of certain value-add real estate~~higher earnings in ~~the second quarter of 2019.~~our equity method investment in Brazil.

~~Six~~Nine Months Ended ~~June~~September 30, 2019 Compared to ~~Six~~Nine Months Ended ~~June~~September 30, 2018

Net investment income from fixed maturities increased primarily due to higher average invested assets and higher yields on invested assets in our U.S. operations.

Net investment income from equity securities increased primarily due to favorable relative market performance on our required regulatory investments in our Latin America business.

Net investment income from commercial mortgage loans increased primarily due to higher average invested assets and prepayments in our U.S. operations.

Net investment income from other investments increased primarily due to ~~the~~higher earnings in our equity method investment in Brazil, and an increase in variable investment income associated with the cash surrender value of company owned life insurance in ~~2019.~~2019 in our U.S. operations.

~~121~~122

Table of Contents

Net Realized Capital Gains (Losses)

The following table presents the contributors to net realized capital gains and losses for the periods indicated.


	For the three months ended June 30,						For the six months ended June 30,						For the three months ended September 30,						For the nine months ended September 30,
					Increase						Increase						Increase						Increase
	2019		2018		(decrease)		2019		2018		(decrease)		2019		2018		(decrease)		2019		2018		(decrease)
	(in millions)												(in millions)
Fixed maturities, available-for-sale – credit impairments (1)	$	(17.3)	$	(9.0)	$	(8.3)	$	(24.1)	$	(18.9)	$	(5.2)	$	(11.1)	$	(3.6)	$	(7.5)	$	(35.2)	$	(22.5)	$	(12.7)
Commercial mortgage loans – credit impairments		(0.6)		0.7		(1.3)		(1.1)		—		(1.1)		(0.9)		0.6		(1.5)		(2.0)		0.6		(2.6)
Other – credit impairments		0.9		1.7		(0.8)		1.7		2.8		(1.1)		0.8		0.8		—		2.5		3.6		(1.1)
Fixed maturities, available-for-sale and trading – noncredit		11.7		(19.5)		31.2		22.4		(52.2)		74.6		17.5		23.4		(5.9)		39.9		(28.8)		68.7
Derivatives and related hedge activities (2)		3.8		(43.5)		47.3		17.6		(38.9)		56.5		(11.7)		38.3		(50.0)		5.9		(0.6)		6.5
Other gains (losses)		(2.5)		137.0		(139.5)		64.0		149.5		(85.5)		(37.0)		(65.0)		28.0		27.0		84.5		(57.5)
Net realized capital gains (losses)	$	(4.0)	$	67.4	$	(71.4)	$	80.5	$	42.3	$	38.2	$	(42.4)	$	(5.5)	$	(36.9)	$	38.1	$	36.8	$	1.3

(1)

Includes credit impairments as well as losses on sales of fixed maturities to reduce credit risk, net of realized credit recoveries on the sale of previously impaired securities.

(2)

Includes fixed maturities, trading net gains (losses) of ~~$4.1~~$2.3 million and ~~$(1.0)~~$(0.3) million for the three months ended ~~June~~September 30, 2019 and 2018, and ~~$8.6~~$10.9 million and ~~$(1.4)~~$(1.7) million for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, respectively, which are a component of the GMWB embedded derivative hedging program net realized capital gains (losses) reflected in this line. Upon adoption of authoritative guidance effective January 1, 2019, the change in fair value of fixed maturities, available-for-sale and the change in fair value of derivative hedging instruments in fair value hedging relationships are reported in net investment income with the earnings effect of fixed maturities, available-for-sale. Prior to 2019, the change in fair value of fixed maturities, available-for-sale and the change in fair value of derivative hedging instruments in fair value hedging relationships were reported in net realized capital gains (losses).

Three Months Ended ~~June~~September 30, 2019 Compared to Three Months Ended ~~June~~September 30, 2018

Fixed maturities, available-for-sale and trading – noncredit has net gains in 2019 as compared to net losses in 2018 primarily due to higher available-for-sale noncredit losses related to portfolio rebalancing during 2018 and gains versus losses on trading securities related to changes in interest rates and credit spreads.

Derivatives and related hedge activities had net ~~gains~~losses in 2019 as compared to net ~~losses in 2018 primarily due to decreased losses on currency derivatives related to changes in exchange rates.~~

~~Other gains (losses) reflected losses in 2019 as compared to~~ gains in 2018 primarily due to ~~a gain from the sale of an equity method investment in 2018.~~

~~Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018~~

~~Fixed maturities, available-for-sale and trading – noncredit has net gains in 2019 as compared to net~~ losses in 2018 primarily due to higher available-for-sale noncredit losses related to portfolio rebalancing during 2018 and gains versus losses on trading securities related to changes in interest rates and credit spreads.

~~Derivatives and related hedge activities had net gains in 2019 as compared to net losses in 2018 primarily due to gains~~ in 2019 versus ~~losses~~gains in 2018 on interest rate swap derivatives not designated as hedging instruments due to changes in interest rates and on currency derivatives due to changes in exchange rates. These changes were partially offset by increased losses on the GMWB embedded derivatives, including changes in the spread reflecting our own creditworthiness, and related hedging instruments. Additionally, our Principal International segment had an increase in losses on currency derivatives and an embedded derivative due to changes in exchange rates and interest rates, respectively. These changes were partially offset by gains in 2019 versus losses in 2018 on interest rate swaps not designated as hedging instruments due to changes in interest rates.

Other losses decreased primarily due to a loss from the sale of closed blocks of annuity business within our Principal International operating segment in 2018 and increases from equity securities related primarily to mark-to-market changes. These changes were partially offset by an impairment of an equity method investment in 2019.

Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018

Fixed maturities, available-for-sale and trading – noncredit had net gains in 2019 as compared to net losses in 2018 primarily due to gains versus losses on trading securities related to changes in interest rates and credit spreads. Additionally, we had higher available-for-sale noncredit losses during 2018 related to portfolio rebalancing.

Other gains decreased primarily due to a gain from the sale of an equity method investment during 2018 and an impairment of an equity method investment in ~~2018. This decrease was~~2019. These decreases were partially offset by a loss from the sale of closed blocks of annuity business within our Principal International operating segment in 2018 and increases from ~~sponsored investment funds~~equity securities related primarily to mark-to-market changes.

~~122~~123

Table of Contents

U.S. Investment Operations

Of our invested assets, ~~$82,972.5~~$86,277.8 million were held by our U.S. operations as of ~~June~~September 30, 2019. Our U.S. invested assets are managed primarily by our Principal Global Investors segment. Our Investment Committee, appointed by our Board of Directors, is responsible for establishing investment policies and monitoring risk limits and tolerances. Our primary investment objective is to maximize after-tax returns consistent with acceptable risk parameters. We seek to protect customers’ benefits by optimizing the risk/return relationship on an ongoing basis, through asset/liability matching, reducing credit risk, avoiding high levels of investments that may be redeemed by the issuer, maintaining sufficiently liquid investments and avoiding undue asset concentrations through diversification. We are exposed to two primary sources of investment risk:

●

credit risk, relating to the uncertainty associated with the continued ability of an obligor to make timely payments of principal and interest and

●

interest rate risk, relating to the market price and/or cash flow variability associated with changes in market yield curves.

Our ability to manage credit risk is essential to our business and our profitability. We devote considerable resources to the credit analysis of each new investment. We manage credit risk through industry, issuer and asset class diversification.

A dedicated committee, comprised of senior investment professional staff members, approves the credit rating for the fixed maturities we purchase. We have teams of security analysts, organized by industry and asset class, that analyze and monitor these investments. Investments held in the portfolio are monitored on a continuous basis with a formal review documented annually or more frequently if material events affect the issuer. The analysis includes both fundamental and technical factors. The fundamental analysis encompasses both quantitative and qualitative analysis of the issuer. The qualitative analysis includes an assessment of both accounting and management aggressiveness of the issuer. In addition, technical indicators such as stock price volatility and credit default swap levels are monitored. We regularly review our investments to determine whether we should re-rate them, employing the following criteria:

●

material changes in the issuer’s revenues, margins, capital structure or collateral values;

●

significant management or organizational changes;

●

significant changes regarding the issuer’s industry;

●

debt service coverage or cash flow ratios that fall below industry-specific thresholds;

●

violation of financial covenants and

●

other business factors that relate to the issuer.

We purchase credit default swaps to hedge certain credit exposures in our investment portfolio. We economically hedged credit exposure in our portfolio by purchasing credit default swaps with a notional amount of $85.0 million and $95.0 million as of ~~both June~~September 30, 2019 and December 31, ~~2018.~~2018, respectively. We sell credit default swaps to offer credit protection to investors when entering into synthetic replicating transactions. When selling credit protection, if there is an event of default by the referenced name, we are obligated to pay the counterparty the referenced amount of the contract and receive in return the referenced security. For further information on credit derivatives sold, see Item 1. “Financial Statements, Notes to Unaudited Consolidated Financial Statements, Note 4,5, Derivative Financial Instruments” under the caption, “Credit Derivatives Sold.”

Our use of derivatives exposes us to counterparty risk, or the risk that the counterparty fails to perform the terms of the derivative contract. We actively manage this risk by:

●

obtaining approval of all new counterparties by the Investment Committee;

●

establishing exposure limits that take into account non-derivative exposure we have with the counterparty as well as derivative exposure;

●

performing similar credit analysis prior to approval on each derivatives counterparty that we do when lending money on a long-term basis;

●

diversifying our risk across numerous approved counterparties;

●

implementing credit support annex (collateral) agreements (“CSAs”) for over-the-counter derivative transactions or similar agreements with a majority of our counterparties to further limit counterparty exposures, which provide for netting of exposures;

●

limiting exposure to A credit or better for over-the-counter derivative counterparties without CSAs;

●

conducting stress-test analysis to determine the maximum exposure created during the life of a prospective transaction;

●

daily monitoring of counterparty credit ratings, exposures and associated collateral levels and

●

trading mandatorily cleared contracts through centralized clearinghouses.

~~123~~124

Table of Contents

We manage our exposure on a net basis, whereby we net positive and negative exposures for each counterparty with agreements in place. For further information on derivative exposure, see Item 1. “Financial Statements, Notes to Unaudited Consolidated Financial Statements, Note 3,4, Investments” under the caption, “Balance Sheet Offsetting.”

A dedicated risk management team is responsible for centralized monitoring of the commercial mortgage loan portfolio. We apply a variety of strategies to minimize credit risk in our commercial mortgage loan portfolio. When considering new commercial mortgage loans, we review the cash flow fundamentals of the property, make a physical assessment of the underlying commercial real estate, conduct a comprehensive market analysis and compare against industry lending practices. We use a proprietary risk rating model to evaluate all new and substantially all existing loans within the portfolio. The proprietary risk model is designed to stress projected cash flows under simulated economic and market downturns. Our lending guidelines are typically 75% or less loan-to-value ratio and a debt service coverage ratio of at least 1.2 times. We analyze investments outside of these guidelines based on cash flow quality, tenancy and other factors. The following table presents loan-to-value and debt service coverage ratios for our brick and mortar commercial mortgage loans:


	Weighted average loan-to-value ratio				Debt service coverage ratio				Weighted average loan-to-value ratio				Debt service coverage ratio
	June 30, 2019		December 31, 2018		June 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018

New mortgages	49	%	50	%	2.5	X	2.2	X	51	%	50	%	2.4	X	2.2	X
Entire mortgage portfolio	45	%	45	%	2.5	X	2.5	X	45	%	45	%	2.6	X	2.5	X

We also seek to manage call or prepayment risk arising from changes in interest rates. We assess and price for call or prepayment risks in all of our investments and monitor these risks in accordance with asset/liability management policies.

The amortized cost and weighted average yield, calculated using amortized cost, of non-structured fixed maturity securities that will be callable at the option of the issuer, excluding securities with a make-whole provision, were ~~$2,963.9~~$2,962.5 million and 3.7%, respectively, as of ~~June~~September 30, 2019, and $3,027.6 million and 3.6%, respectively, as of December 31, 2018. In addition, the amortized cost and weighted average yield of residential mortgage-backed pass-through securities (“RMBS”), residential collateralized mortgage obligations, and asset-backed securities - home equity with material prepayment risk were ~~$6,536.6~~$6,744.5 million and ~~3.3%~~3.2%, respectively, as of ~~June~~September 30, 2019, and $6,474.6 million and 3.3%, respectively, as of December 31, 2018.

Our investment decisions and objectives are a function of the underlying risks and product profiles of each primary business operation. In addition, we diversify our product portfolio offerings to include products that contain features that will protect us against fluctuations in interest rates. Those features include adjustable crediting rates, policy surrender charges and market value adjustments on liquidations. For further information on our management of interest rate risk, see Item 3. “Quantitative and Qualitative Disclosures About Market Risk – Interest Rate Risk.”

~~124~~125

Table of Contents

Overall Composition of U.S. Invested Assets

As shown in the following table, the major categories of U.S. invested assets are fixed maturities and commercial mortgage loans. The remainder is invested in other investments, real estate, residential mortgage loans and equity securities. In addition, policy loans are included in our invested assets. The following discussion analyzes the composition of U.S. invested assets, but excludes invested assets of the separate accounts.


	June 30, 2019				December 31, 2018				September 30, 2019				December 31, 2018
	Carrying amount		% of total		Carrying amount		% of total		Carrying amount		% of total		Carrying amount		% of total
	($ in millions)								($ in millions)
Fixed maturities:
Public	$	39,312.9	47	%	$	36,599.0	47	%	$	41,469.3	48	%	$	36,599.0	47	%
Private		22,550.8	27			20,527.8	27			23,141.3	27			20,527.8	27
Equity securities		436.9	1			418.6	1			479.9	1			418.6	1
Mortgage loans:
Commercial		14,525.8	18			13,721.2	18			14,732.5	17			13,721.2	18
Residential		864.6	1			905.8	1			1,064.7	1			905.8	1
Real estate held for sale		219.2	—			207.7	—			211.0	—			207.7	—
Real estate held for investment		1,520.0	2			1,518.6	2			1,524.6	2			1,518.6	2
Policy loans		779.0	1			779.8	1			778.7	1			779.8	1
Other investments		2,763.3	3			2,596.0	3			2,875.8	3			2,596.0	3
Total invested assets		82,972.5	100	%		77,274.5	100	%		86,277.8	100	%		77,274.5	100	%
Cash and cash equivalents		3,069.1				2,728.1				2,863.7				2,728.1
Total invested assets and cash	$	86,041.6			$	80,002.6			$	89,141.5			$	80,002.6

Fixed Maturities

Fixed maturities include bonds, ABS, redeemable preferred stock and certain non-redeemable preferred securities. Included in the privately placed category as of ~~June~~September 30, 2019 and December 31, 2018, were ~~$16.5~~$16.8 billion and $15.2 billion, respectively, of securities subject to certain holding periods and resale restrictions pursuant to Rule 144A of the Securities Act of 1933.

Fixed maturities were diversified by category of issuer, as shown in the following table for the periods indicated.


	June 30, 2019				December 31, 2018				September 30, 2019				December 31, 2018
	Carrying		Percent		Carrying		Percent		Carrying		Percent		Carrying		Percent
	amount		of total		amount		of total		amount		of total		amount		of total
	($ in millions)								($ in millions)

U.S. government and agencies	$	1,512.0	2	%	$	1,419.0	2	%	$	1,720.8	3	%	$	1,419.0	2	%
States and political subdivisions		6,956.3	11			6,214.1	11			7,364.8	11			6,214.1	11
Non-U.S. governments		839.1	1			732.0	1			875.3	1			732.0	1
Corporate - public		20,037.6	33			18,939.8	33			20,983.4	33			18,939.8	33
Corporate - private		14,601.8	24			13,502.8	24			14,944.2	23			13,502.8	24
Residential mortgage-backed pass-through securities		2,740.4	5			2,775.6	5			2,806.1	4			2,775.6	5
Commercial mortgage-backed securities		4,565.8	7			3,927.8	7			4,878.2	8			3,927.8	7
Residential collateralized mortgage obligations		3,669.1	6			3,368.7	6			3,856.4	6			3,368.7	6
Asset-backed securities		6,941.6	11			6,247.0	11			7,181.4	11			6,247.0	11
Total fixed maturities	$	61,863.7	100	%	$	57,126.8	100	%	$	64,610.6	100	%	$	57,126.8	100	%

We believe it is desirable to hold residential mortgage-backed pass-through securities due to their credit quality and liquidity as well as portfolio diversification characteristics. Our portfolio is comprised of Government National Mortgage Association, Federal National Mortgage Association and Federal Home Loan Mortgage Corporation pass-through securities. In addition, our residential collateralized mortgage obligation portfolio offers structural features that allow cash flows to be matched to our liabilities.

We purchase CMBS to diversify the overall credit risks of the fixed maturities portfolio and to provide attractive returns. The primary risks in holding CMBS are structural and credit risks. Structural risks include the security’s priority in the issuer’s capital structure, the adequacy of and ability to realize proceeds from the collateral and the potential for prepayments.

~~125~~126

Table of Contents

Credit risks involve collateral and issuer/servicer risk where collateral and servicer performance may deteriorate. CMBS are predominantly comprised of large pool securitizations that are diverse by property type, borrower and geographic dispersion. The risks to any CMBS deal are determined by the credit quality of the underlying loans and how those loans perform over time. Another key risk is the vintage of the underlying loans and the state of the markets during a particular vintage. In the CMBS market, there is a material difference in the outlook for the performance of loans originated in 2004 and earlier relative to loans originated in 2005 through 2008. For loans originated prior to 2005, underwriting assumptions were more conservative regarding required debt service coverage and loan-to-value ratios. For the 2005 through 2008 vintages, real estate values peaked and the underwriting expectations were that values would continue to increase, which makes those loan values more sensitive to market declines. The 2009 and later vintages represent a return to debt service coverage ratios and loan-to-value ratios that more closely resemble loans originated prior to 2005.

Similar to CMBS, we purchase ABS for diversification and to provide attractive returns. The primary risks in holding ABS are also structural and credit risks, which are similar to those noted above for CMBS. Our ABS portfolio is diversified by type of asset, issuer, and vintage. We actively monitor holdings of ABS to recognize adverse changes in the risk profile of each security. Prepayments in the ABS portfolio are, in general, insensitive to changes in interest rates or are insulated from such changes by call protection features. In the event we are subject to prepayment risk, we monitor the factors that impact the level of prepayment and prepayment speed for those ABS. In addition, we hold a diverse class of securities, which limits our exposure to any one security.

The international exposure held in our U.S. operation’s fixed maturities portfolio was 19% of total fixed maturities as of ~~June~~September 30, 2019 and 20% as of December 31, 2018. It is comprised of corporate and foreign government fixed maturities. The following table presents the carrying amount of our international exposure for our U.S. operation’s fixed maturities portfolio for the periods indicated.


	June 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018
	(in millions)				(in millions)
European Union, excluding UK	$	3,290.2	$	3,276.6	$	3,239.3	$	3,276.6
United Kingdom		2,439.8		2,343.5		2,499.4		2,343.5
Asia-Pacific		1,681.8		1,634.3		1,705.5		1,634.3
Australia/New Zealand		1,604.6		1,477.0		1,613.7		1,477.0
Latin America		1,202.8		1,014.5		1,270.8		1,014.5
Europe, non-European Union		783.1		759.2		799.4		759.2
Middle East and Africa		637.8		552.1		643.7		552.1
Other (1)		294.9		317.9		317.3		317.9
Total	$	11,935.0	$	11,375.1	$	12,089.1	$	11,375.1

(1)	Includes exposure from two countries and various supranational organizations as of both ~~June~~September 30, 2019, and December 31, 2018.

International fixed maturities exposure is determined by the country of domicile of the parent entity of an individual asset. All international fixed maturities held by our U.S. operations are either denominated in U.S. dollars or have been swapped into U.S. dollar equivalents. Our international investments are analyzed internally by country and industry credit investment professionals. We control concentrations using issuer and country level exposure benchmarks, which are based on the credit quality of the issuer and the country. Our investment policy limits total international fixed maturities investments and we are within those internal limits. Exposure to Canada is not included in our international exposure. As of ~~June~~September 30, 2019 and December 31, 2018, our investments in Canada totaled ~~$1,977.5~~$2,027.2 million and $1,833.6 million, respectively.

~~126~~127

Table of Contents

Fixed Maturities Credit Concentrations. One aspect of managing credit risk is through industry, issuer and asset class diversification. Our credit concentrations are managed to established limits. The following table presents our top ten exposures as of ~~June~~September 30, 2019.


	Amortized cost		Amortized cost
	(in millions)		(in millions)
Berkshire Hathaway Inc.			$	247.1
Mars, Incorporated	$	236.8		236.7
Berkshire Hathaway Inc.		231.0
People's Republic of China (1)		217.5		217.5
Wells Fargo & Company				198.9
Duke Energy Corporation				196.6
Comcast Corporation				195.4
The Walt Disney Company		194.8		191.6
Wells Fargo & Company		194.4
Comcast Corporation		192.0
Citigroup Inc.				188.3
JPMorgan Chase & Co.		188.3		188.1
Duke Energy Corporation		188.3
Microsoft Corporation		186.8		186.2
SBA Communications Corporation		182.3
Total top ten exposures	$	2,012.2	$	2,046.4

(1)	Primarily includes exposure to state-owned entities operating in the energy, electric and chemical sectors.

Fixed Maturities Valuation and Credit Quality. Valuation techniques for the fixed maturities portfolio vary by security type and the availability of market data. The use of different pricing techniques and their assumptions could produce different financial results. See Item 1. “Financial Statements, Notes to Unaudited Consolidated Financial Statements, Note ~~11,~~12, Fair Value Measurements” for further details regarding our pricing methodology. Once prices are determined, they are reviewed by pricing analysts for reasonableness based on asset class and observable market data. Investment analysts who are familiar with specific securities review prices for reasonableness through direct interaction with external sources, review of recent trade activity or use of internal models. All fixed maturities placed on the “watch list” are periodically analyzed by investment analysts. These analysts periodically meet with the Chief Investment Officer and the Portfolio Managers to determine reasonableness of the analysts’ prices. The valuation of impaired bonds for which there is no quoted price is typically based on relative value analysis and the present value of the future cash flows expected to be received. Although we believe these values reasonably reflect the fair value of those securities, the key assumptions about risk premiums, performance of underlying collateral (if any) and other market factors involve qualitative and unobservable inputs.

The Securities Valuation Office (“SVO”) of the National Association of Insurance Commissioners (“NAIC”) monitors the bond investments of insurers for regulatory capital and reporting purposes and, when required, assigns securities to one of six categories referred to as NAIC designations. Although NAIC designations are not produced to aid the investment decision making process, NAIC designations may serve as a reasonable proxy for Nationally Recognized Statistical Rating Organizations’ (“NRSRO”) credit ratings for certain bonds. For most corporate bonds, NAIC designations 1 and 2 include bonds generally considered investment grade by such rating organizations. Bonds are considered investment grade when rated ‘‘Baa3’’ or higher by Moody’s, or ‘‘BBB-’’ or higher by S&P. NAIC designations 3 through 6 include bonds generally referred to as below investment grade. Bonds are considered below investment grade when rated ‘‘Ba1’’ or lower by Moody’s, or ‘‘BB+’’ or lower by S&P.

However, for loan-backed and structured securities, as defined by the NAIC, the NAIC designation is not always a reasonable indication of an NRSRO rating as described below. For CMBS and non-agency RMBS, Blackrock Solutions undertakes the modeling of those NAIC designations. Prior to December 31, 2018, other loan-backed and structured securities may have also been subject to an intrinsic price matrix as provided by the NAIC. This may result in a final designation being higher or lower than the NRSRO credit rating.

~~127~~128

Table of Contents

The following table presents our total fixed maturities by NAIC designation as of the periods indicated as well as the percentage, based on fair value, that each designation comprises.


	June 30, 2019						December 31, 2018						September 30, 2019						December 31, 2018
					Percent of						Percent of						Percent of						Percent of
	Amortized		Carrying		carrying		Amortized		Carrying		carrying		Amortized		Carrying		carrying		Amortized		Carrying		carrying
NAIC designation	cost		amount		amount		cost		amount		amount		cost		amount		amount		cost		amount		amount
	($in millions)												($in millions)

1	$	40,618.6	$	42,826.0	69	%	$	39,482.7	$	39,638.6	69	%	$	41,770.2	$	44,832.5	69	%	$	39,482.7	$	39,638.6	69	%
2		15,767.5		16,812.1	27			15,332.9		15,293.1	27			16,120.5		17,527.1	27			15,332.9		15,293.1	27
3		1,877.3		1,939.0	3			1,932.9		1,873.3	3			1,875.7		1,953.2	3			1,932.9		1,873.3	3
4		243.8		230.4	1			288.2		266.7	1			255.7		242.5	1			288.2		266.7	1
5		40.7		39.8	—			48.6		32.6	—			48.1		45.8	—			48.6		32.6	—
6		21.2		16.4	—			24.2		22.5	—			9.3		9.5	—			24.2		22.5	—
Total fixed maturities	$	58,569.1	$	61,863.7	100	%	$	57,109.5	$	57,126.8	100	%	$	60,079.5	$	64,610.6	100	%	$	57,109.5	$	57,126.8	100	%

Fixed maturities included 1754 securities with an amortized cost of ~~$204.8~~$585.3 million, gross gains of ~~$10.4~~$13.2 million, gross losses of ~~$0.0~~$0.3 million and a carrying amount of ~~$215.2~~$598.2 million as of ~~June~~September 30, 2019, that were still pending a review and assignment of a designation by the SVO. Due to the timing of when fixed maturities are purchased, legal documents are filed and the review by the SVO is completed, we will always have securities in our portfolio that are unrated over a reporting period. In these instances, an equivalent designation is assigned based on our fixed income analyst’s assessment.

Commercial Mortgage-Backed Securities. As of ~~June~~September 30, 2019, based on amortized cost, 99% of our CMBS portfolio had an NAIC designation of 1 and ~~96%~~97% was issued during the more conservative underwriting periods prior to 2005 and after 2008.

The following tables present our exposure by credit quality, based on NAIC designations, and vintage for our CMBS portfolio as of the periods indicated.

June 30, 2019

September 30, 2019

2004 and prior

2005 to 2008

2009 and after

Total

2004 and prior

2005 to 2008

2009 and after

Total

Amortized

Carrying

Amortized

Carrying

Amortized

Carrying

Amortized

Carrying

Amortized

Carrying

Amortized

Carrying

Amortized

Carrying

Amortized

Carrying

NAIC designation

cost

amount

cost

amount

cost

amount

cost

amount

cost

amount

cost

amount

cost

amount

cost

amount

(in millions)

5.1

5.4

148.4

149.6

4,266.9

4,377.5

4,420.4

4,532.5

3.5

3.8

125.1

127.9

4,533.2

4,713.3

4,661.8

4,845.0

—

12.8

11.8

6.3

6.4

19.1

18.2

—

6.1

6.4

6.3

6.5

12.4

12.9

—

4.0

3.2

—

4.0

3.2

—

6.2

4.8

—

6.2

4.8

—

8.1

6.9

—

8.1

6.9

—

9.1

8.4

—

9.1

8.4

—

9.0

8.4

—

9.0

8.4

0.4

0.3

1.5

1.6

—

1.9

0.4

0.3

1.5

—

1.9

1.8

Total (1)

5.5

5.7

178.0

176.2

4,273.2

4,383.9

4,456.7

4,565.8

3.9

4.1

153.8

154.3

4,539.5

4,719.8

4,697.2

4,878.2

(1)	The CMBS portfolio included agency CMBS with a ~~$320.2~~$311.6 million amortized cost and a ~~$321.7~~$316.8 million carrying amount.


	December 31, 2018
	2004 and prior				2005 to 2008				2009 and after				Total
	Amortized		Carrying		Amortized		Carrying		Amortized		Carrying		Amortized		Carrying
NAIC designation	cost		amount		cost		amount		cost		amount		cost		amount
	(in millions)

1	$	27.0	$	27.6	$	176.4	$	179.4	$	3,763.6	$	3,686.7	$	3,967.0	$	3,893.7
2		—		—		5.5		5.2		6.3		5.9		11.8		11.1
3		—		—		5.8		4.6		—		—		5.8		4.6
4		—		—		5.9		5.7		—		—		5.9		5.7
5		0.1		—		10.0		9.6		—		—		10.1		9.6
6		0.9		0.6		2.8		2.5		—		—		3.7		3.1
Total (1)	$	28.0	$	28.2	$	206.4	$	207.0	$	3,769.9	$	3,692.6	$	4,004.3	$	3,927.8

(1)	The CMBS portfolio included agency CMBS with a $279.6 million amortized cost and a $272.6 million carrying amount.

~~128~~129

Table of Contents

Fixed Maturities Watch List. We monitor any decline in the credit quality of fixed maturities through the designation of “problem securities,” “potential problem securities” and “restructured securities”. We define problem securities in our fixed maturity portfolio as securities: (i) with principal and/or interest payments in default or where default is perceived to be imminent in the near term, or (ii) issued by a company that went into bankruptcy subsequent to the acquisition of such securities. We define potential problem securities in our fixed maturity portfolio as securities included on an internal “watch list” for which management has concerns as to the ability of the issuer to comply with the present debt payment terms and which may result in the security becoming a problem or being restructured. The decision whether to classify a performing fixed maturity security as a potential problem involves significant subjective judgments by our management as to the likely future industry conditions and developments with respect to the issuer. We define restructured securities in our fixed maturity portfolio as securities where a concession has been granted to the borrower related to the borrower’s financial difficulties that would not have otherwise been considered. We determine that restructures should occur in those instances where greater economic value will be realized under the new terms than through liquidation or other disposition and may involve a change in contractual cash flows. If the present value of the restructured cash flows is less than the current cost of the asset being restructured, a realized capital loss is recorded in net income and a new cost basis is established.

The following table presents the total carrying amount of our fixed maturities portfolio, as well as its problem, potential problem and restructured fixed maturities for the periods indicated.


	June 30, 2019			December 31, 2018			September 30, 2019			December 31, 2018
	($ in millions)						($ in millions)

Total fixed maturities (public and private)	$	61,863.7		$	57,126.8		$	64,610.6		$	57,126.8
Problem fixed maturities (1)	$	25.6		$	69.0		$	21.3		$	69.0
Potential problem fixed maturities		42.6			50.0			40.8			50.0
Restructured fixed maturities		2.6			2.5			2.6			2.5
Total problem, potential problem and restructured fixed maturities	$	70.8		$	121.5		$	64.7		$	121.5
Total problem, potential problem and restructured fixed maturities as a percent of total fixed maturities		0.11	%		0.21	%		0.10	%		0.21	%

(1)	The problem fixed maturities carrying amount is net of other-than-temporary impairment losses.

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

Each reporting period, a group of individuals including the Chief Investment Officer, our Portfolio Managers, the assigned analysts and representatives from Investment Accounting review all securities to determine whether an other-than-temporary decline in value exists and whether losses should be recognized. The analysis focuses on each issuer’s ability to service its debts in a timely fashion. Formal documentation of the analysis and our decision is prepared and approved by management.

We consider relevant facts and circumstances in evaluating whether a credit or interest rate- related impairment of a security is other than temporary. Relevant facts and circumstances considered include: (1) the extent and length of time the fair value has been below cost; (2) the reasons for the decline in value; (3) the financial position and access to capital of the issuer, including the current and future impact of any specific events; (4) for structured securities, the adequacy of the expected cash flows and (5) our intent to sell the security or whether it is more likely than not we will be required to sell the security before recovery of its amortized cost which, in some cases, may extend to maturity. To the extent we determine a security is deemed to be other than temporarily impaired, an impairment loss is recognized. For additional details, see Item 1. “Financial Statements, Notes to Unaudited Consolidated Financial Statements, Note 3,4, Investments.”

130

Table of Contents

We would not consider a security with unrealized losses to be other than temporarily impaired when it is not our intent to sell the security, it is not more likely than not that we would be required to sell the security before recovery of the amortized cost, which may be maturity, and we expect to recover the amortized cost basis. However, we do sell securities under certain circumstances, such as when we have evidence of a change in the issuer’s creditworthiness, when we anticipate poor relative future performance of securities, when a change in regulatory requirements modifies what constitutes a permissible investment or the maximum level of investments held or when there is an increase in capital requirements or a change in risk weights of debt securities. Sales generate both gains and losses.

~~129~~

~~Table of Contents~~

A number of significant risks and uncertainties are inherent in the process of monitoring impairments and determining if an impairment is other than temporary. These risks and uncertainties include: (1) the risk that our assessment of an issuer’s ability to meet all of its contractual obligations will change based on changes in the credit characteristics of that issuer, (2) the risk that the economic outlook will be worse than expected or have more of an impact on the issuer than anticipated, (3) the risk that our investment professionals are making decisions based on fraudulent or misstated information in the financial statements provided by issuers and (4) the risk that new information obtained by us or changes in other facts and circumstances lead us to change our intent to not sell the security prior to recovery of its amortized cost. Any of these situations could result in a charge to net income in a future period.

The net realized loss relating to other-than-temporary credit impairments and credit related sales of fixed maturities was ~~$17.3~~$11.1 million and ~~$9.0~~$3.6 million for the three months ended ~~June~~September 30, 2019 and 2018, respectively, and ~~$24.1~~$35.2 million and ~~$18.9~~$22.5 million for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, respectively.

131

Table of Contents

Fixed Maturities Available-for-Sale

The following tables present our fixed maturities available-for-sale by industry category and the associated gross unrealized gains and losses, including other-than-temporary impairment losses reported in AOCI, as of the periods indicated.

June 30, 2019

September 30, 2019

Gross

Amortized

unrealized

Carrying

Amortized

unrealized

Carrying

cost

gains

losses

amount

cost

gains

losses

amount

(in millions)

Finance — Banking

4,183.6

205.0

22.1

4,366.5

4,284.9

262.5

20.6

4,526.8

Finance — Brokerage

459.4

25.4

—

484.8

472.8

40.4

0.4

512.8

Finance — Finance Companies

325.5

13.0

0.1

338.4

340.1

15.5

—

355.6

Finance — Financial Other

503.4

23.7

3.2

523.9

487.7

24.7

1.5

510.9

Finance — Insurance

2,454.9

300.1

4.2

2,750.8

2,474.5

363.6

2.9

2,835.2

Finance — Real estate investment trusts (“REITs”)

1,565.6

77.7

0.6

1,642.7

1,566.7

114.1

—

1,680.8

Industrial — Basic Industry

1,108.5

83.6

1.1

1,191.0

1,137.1

102.8

0.2

1,239.7

Industrial — Capital Goods

2,028.1

110.9

4.2

2,134.8

2,038.1

151.0

0.4

2,188.7

Industrial — Communications

2,543.8

283.4

1.1

2,826.1

2,538.0

345.8

0.2

2,883.6

Industrial — Consumer Cyclical

1,564.4

87.4

4.6

1,647.2

1,544.5

102.1

3.8

1,642.8

Industrial — Consumer Non-Cyclical

4,132.7

286.1

10.0

4,408.8

4,184.2

402.0

3.7

4,582.5

Industrial — Energy

2,367.0

252.1

11.2

2,607.9

2,395.4

282.8

10.0

2,668.2

Industrial — Other

455.2

21.9

0.3

476.8

425.4

25.7

0.2

450.9

Industrial — Technology

1,879.8

104.2

3.6

1,980.4

1,982.1

154.4

3.6

2,132.9

Industrial — Transportation

1,682.4

89.0

1.2

1,770.2

1,938.1

151.9

0.4

2,089.6

Utility — Electric

3,038.8

230.7

7.8

3,261.7

3,091.5

339.5

0.8

3,430.2

Utility — Natural Gas

348.2

19.9

0.5

367.6

330.1

33.1

—

363.2

Utility — Other

256.8

12.1

0.9

268.0

257.8

18.2

—

276.0

Government guaranteed

1,313.7

138.0

2.3

1,449.4

1,246.7

164.0

1.5

1,409.2

Total corporate securities

32,211.8

2,364.2

79.0

34,497.0

32,735.7

3,094.1

50.2

35,779.6

Residential mortgage-backed pass-through securities

2,382.6

56.3

8.8

2,430.1

2,442.7

70.6

3.1

2,510.2

Commercial mortgage-backed securities

4,427.7

130.0

20.9

4,536.8

4,667.9

195.1

14.1

4,848.9

Residential collateralized mortgage obligations

3,588.7

82.9

8.8

3,662.8

3,749.0

107.7

5.9

3,850.8

Asset-backed securities — Home equity (1)

248.7

15.2

0.7

263.2

251.3

15.5

0.7

266.1

Asset-backed securities — All other

3,852.9

43.1

4.9

3,891.1

3,921.8

46.4

3.4

3,964.8

Collateralized debt obligations — Credit

16.8

—

4.2

12.6

16.8

—

4.8

12.0

Collateralized debt obligations — CMBS

0.1

—

0.1

—

0.6

—

0.6

Collateralized debt obligations — Loans

2,755.0

1.1

9.4

2,746.7

2,917.0

1.4

8.4

2,910.0

Total mortgage-backed and other asset-backed securities

17,272.5

328.6

57.7

17,543.4

17,966.5

437.3

40.4

18,363.4

U.S. government and agencies

1,434.1

81.8

3.9

1,512.0

1,582.9

138.9

1.0

1,720.8

States and political subdivisions

6,398.9

560.4

5.6

6,953.7

6,544.4

819.7

2.5

7,361.6

Non-U.S. governments

730.9

108.1

2.3

836.7

737.6

135.2

—

872.8

Total fixed maturities, available-for-sale

58,048.2

3,443.1

148.5

61,342.8

59,567.1

4,625.2

94.1

64,098.2

(1)	This exposure is all related to sub-prime mortgage loans.

~~130~~132

Table of Contents


	December 31, 2018
			Gross		Gross
	Amortized		unrealized		unrealized		Carrying
	cost		gains		losses		amount
	(in millions)

Finance — Banking	$	4,556.4	$	48.2	$	119.6	$	4,485.0
Finance — Brokerage		416.6		4.2		11.5		409.3
Finance — Finance Companies		342.5		2.7		9.0		336.2
Finance — Financial Other		415.5		15.2		9.2		421.5
Finance — Insurance		2,441.0		158.3		43.7		2,555.6
Finance — REITs		1,482.5		9.1		38.9		1,452.7
Industrial — Basic Industry		1,052.8		32.2		27.3		1,057.7
Industrial — Capital Goods		2,148.3		29.3		62.2		2,115.4
Industrial — Communications		2,567.7		137.4		46.1		2,659.0
Industrial — Consumer Cyclical		1,580.7		31.2		46.6		1,565.3
Industrial — Consumer Non-Cyclical		3,900.9		77.1		119.1		3,858.9
Industrial — Energy		2,377.9		115.9		55.8		2,438.0
Industrial — Other		424.2		5.2		8.7		420.7
Industrial — Technology		1,858.7		12.3		46.7		1,824.3
Industrial — Transportation		1,595.8		19.7		53.4		1,562.1
Utility — Electric		3,020.0		83.6		81.6		3,022.0
Utility — Natural Gas		476.7		14.1		16.4		474.4
Utility — Other		301.5		4.3		7.7		298.1
Government guaranteed		1,321.3		73.5		21.6		1,373.2
Total corporate securities		32,281.0		873.5		825.1		32,329.4

Residential mortgage-backed pass-through securities		2,481.3		21.5		49.8		2,453.0
Commercial mortgage-backed securities		3,990.5		17.1		93.6		3,914.0
Residential collateralized mortgage obligations		3,400.8		18.9		56.4		3,363.3
Asset-backed securities — Home equity (1)		264.5		12.0		2.9		273.6
Asset-backed securities — All other		3,551.5		8.4		23.4		3,536.5
Collateralized debt obligations — Credit		16.8		—		3.9		12.9
Collateralized debt obligations — CMBS		0.2		—		—		0.2
Collateralized debt obligations — Loans		2,434.3		—		26.6		2,407.7
Total mortgage-backed and other asset-backed securities		16,139.9		77.9		256.6		15,961.2

U.S. government and agencies		1,419.6		16.2		16.8		1,419.0
States and political subdivisions		6,110.7		195.9		95.0		6,211.6
Non-U.S. governments		683.5		61.2		13.9		730.8
Total fixed maturities, available-for-sale	$	56,634.7	$	1,224.7	$	1,207.4	$	56,652.0

(1)	This exposure is all related to sub-prime mortgage loans.

Of the ~~$148.5~~$94.1 million in gross unrealized losses as of ~~June~~September 30, 2019, ~~$1.4~~$1.0 million in losses were attributed to securities scheduled to mature in one year or less, ~~$9.4~~$5.8 million attributed to securities scheduled to mature between one to five years, ~~$15.5~~$8.6 million attributed to securities scheduled to mature between five to ten years, ~~$64.5~~$38.3 million attributed to securities scheduled to mature after ten years and ~~$57.7~~$40.4 million related to mortgage-backed and other ABS that are not classified by maturity year. As of ~~June~~September 30, 2019, we were in a ~~$3,294.6~~$4,531.1 million net unrealized gain position as compared to a $17.3 million net unrealized gain position as of December 31, 2018. The ~~$3,277.3~~$4,513.8 million increase in net unrealized gains for the ~~six~~nine months ended ~~June~~September 30, 2019, can be attributed to an approximate 6589 basis points decrease in interest rates and tightening of credit spreads.

Fixed Maturities Available-For-Sale Unrealized Losses. We believe our long-term fixed maturities portfolio is well diversified among industry types and between publicly traded and privately placed securities. Each year, we direct the majority of our net cash inflows into investment grade fixed maturities. Our current policy is to limit the percentage of fixed maturities invested in below investment grade assets to 15%.

~~131~~133

Table of Contents

We invest in privately placed fixed maturities to enhance the overall value of the portfolio, increase diversification and obtain higher yields than are possible with comparable quality public market securities. Generally, private placements provide broader access to management information, strengthened negotiated protective covenants, call protection features and, where applicable, a higher level of collateral. They are, however, generally not freely tradable because of restrictions imposed by U.S. federal and state securities laws and illiquid trading markets.

The following table presents our fixed maturities available-for-sale by investment grade and below investment grade and the associated gross unrealized gains and losses, including the other-than-temporary impairment losses reported in AOCI, as of the periods indicated.


	June 30, 2019								December 31, 2018								September 30, 2019								December 31, 2018
			Gross		Gross						Gross		Gross						Gross		Gross						Gross		Gross
	Amortized		unrealized		unrealized		Carrying		Amortized		unrealized		unrealized		Carrying		Amortized		unrealized		unrealized		Carrying		Amortized		unrealized		unrealized		Carrying
	cost		gains		losses		amount		cost		gains		losses		amount		cost		gains		losses		amount		cost		gains		losses		amount
	(in millions)																(in millions)
Investment grade:
Public	$	35,520.0	$	2,530.8	$	74.9	$	37,975.9	$	35,064.8	$	938.0	$	729.4	$	35,273.4	$	36,777.1	$	3,436.5	$	40.3	$	40,173.3	$	35,064.8	$	938.0	$	729.4	$	35,273.4
Private		20,384.2		837.5		41.4		21,180.3		19,311.8		266.4		358.9		19,219.3		20,636.8		1,097.7		25.0		21,709.5		19,311.8		266.4		358.9		19,219.3
Below investment grade:
Public		882.1		34.6		17.0		899.7		974.7		6.4		62.5		918.6		841.6		42.5		13.3		870.8		974.7		6.4		62.5		918.6
Private		1,261.9		40.2		15.2		1,286.9		1,283.4		13.9		56.6		1,240.7		1,311.6		48.5		15.5		1,344.6		1,283.4		13.9		56.6		1,240.7
Total fixed maturities, available-for-sale	$	58,048.2	$	3,443.1	$	148.5	$	61,342.8	$	56,634.7	$	1,224.7	$	1,207.4	$	56,652.0	$	59,567.1	$	4,625.2	$	94.1	$	64,098.2	$	56,634.7	$	1,224.7	$	1,207.4	$	56,652.0

The following tables present the carrying amount and the gross unrealized losses, including other-than-temporary impairment losses reported in AOCI, on investment grade fixed maturities available-for-sale by aging category as of the periods indicated.

June 30, 2019

September 30, 2019

Public

Private

Total

Public

Private

Total

Gross

Carrying

unrealized

Carrying

unrealized

Carrying

unrealized

Carrying

unrealized

Carrying

unrealized

Carrying

unrealized

amount

losses

amount

losses

amount

losses

amount

losses

amount

losses

amount

losses

(in millions)

Three months or less

154.0

1.6

269.8

0.6

423.8

2.2

1,092.4

5.7

868.2

2.9

1,960.6

8.6

Greater than three to six months

31.6

0.3

29.7

—

61.3

0.3

84.0

2.6

133.9

0.3

217.9

2.9

Greater than six to nine months

68.0

2.7

647.2

2.0

715.2

4.7

21.9

0.3

7.4

—

29.3

0.3

Greater than nine to twelve months

58.4

2.1

530.5

3.5

588.9

5.6

52.5

2.0

492.3

1.8

544.8

3.8

Greater than twelve to twenty-four months

1,943.9

33.1

2,181.8

19.2

4,125.7

52.3

388.1

15.2

1,481.3

7.2

1,869.4

22.4

Greater than twenty-four to thirty-six months

1,575.3

24.1

682.6

8.1

2,257.9

32.2

610.6

4.7

445.6

5.2

1,056.2

9.9

Greater than thirty-six months

236.4

11.0

89.6

8.0

326.0

19.0

374.0

9.8

112.8

7.6

486.8

17.4

Total fixed maturities, available-for-sale

4,067.6

74.9

4,431.2

41.4

8,498.8

116.3

2,623.5

40.3

3,541.5

25.0

6,165.0

65.3

December 31, 2018

Public

Private

Total





Gross




Gross




Gross

Carrying

unrealized

Carrying

unrealized

Carrying

unrealized

amount

losses

amount

losses

amount

losses

(in millions)

Three months or less

$
1,615.5

$
31.8

$
1,874.6

$
26.4

$
3,490.1

$
58.2
Greater than three to six months

2,507.5

56.7

1,767.5

26.8

4,275.0

83.5
Greater than six to nine months

2,727.4

100.6

2,081.4

45.9

4,808.8

146.5
Greater than nine to twelve months

7,077.1

271.1

3,641.4

116.3

10,718.5

387.4
Greater than twelve to twenty-four months

4,002.7

119.5

2,553.6

91.7

6,556.3

211.2
Greater than twenty-four to thirty-six months

2,241.1

134.7

859.6

42.2

3,100.7

176.9
Greater than thirty-six months

287.2

15.0

96.7

9.6

383.9

24.6
Total fixed maturities, available-for-sale

$
20,458.5

$
729.4

$
12,874.8

$
358.9

$
33,333.3

$
1,088.3


	December 31, 2018
	Public				Private				Total
			Gross				Gross				Gross
	Carrying		unrealized		Carrying		unrealized		Carrying		unrealized
	amount		losses		amount		losses		amount		losses
	(in millions)

Three months or less	$	1,615.5	$	31.8	$	1,874.6	$	26.4	$	3,490.1	$	58.2
Greater than three to six months		2,507.5		56.7		1,767.5		26.8		4,275.0		83.5
Greater than six to nine months		2,727.4		100.6		2,081.4		45.9		4,808.8		146.5
Greater than nine to twelve months		7,077.1		271.1		3,641.4		116.3		10,718.5		387.4
Greater than twelve to twenty-four months		4,002.7		119.5		2,553.6		91.7		6,556.3		211.2
Greater than twenty-four to thirty-six months		2,241.1		134.7		859.6		42.2		3,100.7		176.9
Greater than thirty-six months		287.2		15.0		96.7		9.6		383.9		24.6
Total fixed maturities, available-for-sale	$	20,458.5	$	729.4	$	12,874.8	$	358.9	$	33,333.3	$	1,088.3

~~132~~134

Table of Contents

The following tables present the carrying amount and the gross unrealized losses, including other-than-temporary impairment losses reported in AOCI, on below investment grade fixed maturities available-for-sale by aging category as of the periods indicated.

June 30, 2019

September 30, 2019

Public

Private

Total

Public

Private

Total

Gross

Carrying

unrealized

Carrying

unrealized

Carrying

unrealized

Carrying

unrealized

Carrying

unrealized

Carrying

unrealized

amount

losses

amount

losses

amount

losses

amount

losses

amount

losses

amount

losses

(in millions)

Three months or less

10.3

—

127.0

1.0

137.3

1.0

2.0

0.1

38.9

0.3

40.9

0.4

Greater than six to nine months

17.9

1.7

119.8

0.7

137.7

2.4

Greater than three to six months

8.5

—

50.3

0.4

58.8

0.4

Greater than nine to twelve months

—

43.8

2.6

43.8

2.6

9.0

0.6

33.1

0.1

42.1

0.7

Greater than twelve to twenty-four months

67.7

7.0

119.8

2.6

187.5

9.6

30.7

4.2

73.4

5.5

104.1

9.7

Greater than twenty-four to thirty-six months

5.4

2.2

4.6

0.6

10.0

2.8

5.0

2.6

4.0

0.8

9.0

3.4

Greater than thirty-six months

37.1

6.1

29.4

7.7

66.5

13.8

23.1

5.8

26.7

8.4

49.8

14.2

Total fixed maturities, available-for-sale

138.4

17.0

444.4

15.2

582.8

32.2

78.3

13.3

226.4

15.5

304.7

28.8

December 31, 2018

Public

Private

Total





Gross




Gross




Gross

Carrying

unrealized

Carrying

unrealized

Carrying

unrealized

amount

losses

amount

losses

amount

losses

(in millions)

Three months or less

$
354.1

$
9.7

$
511.8

$
15.6

$
865.9

$
25.3
Greater than three to six months

73.4

3.7

93.8

6.3

167.2

10.0
Greater than six to nine months

76.1

6.8

148.2

7.6

224.3

14.4
Greater than nine to twelve months

146.6

15.0

227.9

14.1

374.5

29.1
Greater than twelve to twenty-four months

58.7

4.5

35.9

3.0

94.6

7.5
Greater than twenty-four to thirty-six months

6.4

2.3

4.3

0.2

10.7

2.5
Greater than thirty-six months

57.2

20.5

38.1

9.8

95.3

30.3
Total fixed maturities, available-for-sale

$
772.5

$
62.5

$
1,060.0

$
56.6

$
1,832.5

$
119.1


	December 31, 2018
	Public				Private				Total
			Gross				Gross				Gross
	Carrying		unrealized		Carrying		unrealized		Carrying		unrealized
	amount		losses		amount		losses		amount		losses
	(in millions)

Three months or less	$	354.1	$	9.7	$	511.8	$	15.6	$	865.9	$	25.3
Greater than three to six months		73.4		3.7		93.8		6.3		167.2		10.0
Greater than six to nine months		76.1		6.8		148.2		7.6		224.3		14.4
Greater than nine to twelve months		146.6		15.0		227.9		14.1		374.5		29.1
Greater than twelve to twenty-four months		58.7		4.5		35.9		3.0		94.6		7.5
Greater than twenty-four to thirty-six months		6.4		2.3		4.3		0.2		10.7		2.5
Greater than thirty-six months		57.2		20.5		38.1		9.8		95.3		30.3
Total fixed maturities, available-for-sale	$	772.5	$	62.5	$	1,060.0	$	56.6	$	1,832.5	$	119.1

The following tables present the carrying amount and the gross unrealized losses, including other-than-temporary impairment losses reported in AOCI, on fixed maturities available-for-sale where the estimated fair value had declined and remained below amortized cost by 20% or more as of the periods indicated.

June 30, 2019

September 30, 2019

Problem, potential

All other fixed

Problem, potential

All other fixed

problem and restructured

maturity securities

Total

problem and restructured

maturity securities

Total

Gross

Carrying

unrealized

Carrying

unrealized

Carrying

unrealized

Carrying

unrealized

Carrying

unrealized

Carrying

unrealized

amount

losses

amount

losses

amount

losses

amount

losses

amount

losses

amount

losses

(in millions)

Three months or less

6.7

2.2

10.2

3.2

16.9

5.4

—

15.4

5.8

15.4

5.8

Greater than three to six months

—

12.4

3.9

12.4

3.9

0.4

0.1

10.1

3.3

10.5

3.4

Greater than six to nine months

—

17.4

6.0

17.4

6.0

—

4.4

1.5

4.4

1.5

Greater than nine to twelve months

—

4.8

2.0

4.8

2.0

—

16.9

6.6

16.9

6.6

Greater than twelve months

5.8

3.7

5.7

2.4

11.5

6.1

1.9

1.1

10.0

4.8

11.9

5.9

Total fixed maturities, available-for-sale

12.5

5.9

50.5

17.5

63.0

23.4

2.3

1.2

56.8

22.0

59.1

23.2

~~133~~135

Table of Contents


	December 31, 2018												December 31, 2018
	Problem, potential				All other fixed								Problem, potential				All other fixed
	problem and restructured				maturity securities				Total				problem and restructured				maturity securities				Total
			Gross				Gross				Gross				Gross				Gross				Gross
	Carrying		unrealized		Carrying		unrealized		Carrying		unrealized		Carrying		unrealized		Carrying		unrealized		Carrying		unrealized
	amount		losses		amount		losses		amount		losses		amount		losses		amount		losses		amount		losses
	(in millions)												(in millions)

Three months or less	$	10.4	$	5.7	$	66.6	$	20.8	$	77.0	$	26.5	$	10.4	$	5.7	$	66.6	$	20.8	$	77.0	$	26.5
Greater than three to six months		6.5		5.8		14.9		6.1		21.4		11.9		6.5		5.8		14.9		6.1		21.4		11.9
Greater than six to nine months		0.4		0.5		11.7		3.6		12.1		4.1		0.4		0.5		11.7		3.6		12.1		4.1
Greater than twelve months		9.2		6.5		5.3		2.7		14.5		9.2		9.2		6.5		5.3		2.7		14.5		9.2
Total fixed maturities, available-for-sale	$	26.5	$	18.5	$	98.5	$	33.2	$	125.0	$	51.7	$	26.5	$	18.5	$	98.5	$	33.2	$	125.0	$	51.7

Mortgage Loans

Mortgage loans consist of commercial mortgage loans on real estate and residential mortgage loans. The carrying amount of our commercial mortgage loan portfolio was ~~$14,525.8~~$14,732.5 million and $13,721.2 million as of ~~June~~September 30, 2019 and December 31, 2018, respectively. The carrying amount of our residential mortgage loan portfolio was ~~$864.6~~$1,064.7 million and $905.8 million as of ~~June~~September 30, 2019 and December 31, 2018, respectively.

Commercial Mortgage Loans. We generally report commercial mortgage loans on real estate at cost adjusted for amortization of premiums and accrual of discounts, computed using the interest method and net of valuation allowances.

Commercial mortgage loans play an important role in our investment strategy by:

●

providing strong risk-adjusted relative value in comparison to other investment alternatives;

●

enhancing total returns and

●

providing strategic portfolio diversification.

As a result, we have focused on constructing a high quality portfolio of mortgages. Our portfolio is generally comprised of mortgages originated with conservative loan-to-value ratios, high debt service coverages and general purpose property types with a strong credit tenancy.

Our commercial mortgage loan portfolio consists primarily of non-recourse, fixed rate mortgages on fully or near fully leased properties. The mortgage portfolio is comprised primarily of office properties, apartments, well anchored retail properties and general-purpose industrial properties.

Our commercial mortgage loan portfolio is diversified by geography and specific collateral property type. Commercial mortgage lending in the state of California accounted for ~~20% and~~ 21% of our commercial mortgage loan portfolio before valuation allowance as of ~~June~~both September 30, 2019 and December 31, ~~2018, respectively.~~2018. We are, therefore, exposed to potential losses resulting from the risk of catastrophes, such as earthquakes, that may affect the region. Like other lenders, we generally do not require earthquake insurance for properties on which we make commercial mortgage loans. With respect to California properties, however, we obtain an engineering report specific to each property. The report assesses the building’s design specifications, whether it has been upgraded to meet seismic building codes and the maximum loss that is likely to result from a variety of different seismic events. We also obtain a report that assesses, by building and geographic fault lines, the amount of loss our commercial mortgage loan portfolio might suffer under a variety of seismic events.

The typical borrower in our commercial loan portfolio is a single purpose entity or single asset entity. As of ~~June~~September 30, 2019 and December 31, 2018, the total number of commercial mortgage loans outstanding was ~~781~~782 and 795, of which 46% and 48% were for loans with principal balances less than $10.0 million, respectively. The average loan size of our commercial mortgage portfolio was ~~$18.6~~$18.9 million and $17.3 million as of ~~June~~September 30, 2019 and December 31, 2018, respectively.

Commercial Mortgage Loan Credit Monitoring. For further details on monitoring and management of our commercial mortgage loan portfolio, see Item 1. “Financial Statements, Notes to Unaudited Consolidated Financial Statements, Note 3,4, Investments” under the caption, “Mortgage Loan Credit Monitoring.”

136

Table of Contents

We categorize loans that are 60 days or more delinquent, loans in process of foreclosure and loans with borrowers or credit tenants in bankruptcy that are delinquent as “problem” loans. Valuation allowances or charge-offs have been recognized on most problem loans. We categorize loans that are delinquent less than 60 days where the default is expected to be cured and loans with borrowers or credit tenants in bankruptcy that are current as “potential problem” loans. The decision

~~134~~

~~Table of Contents~~

whether to classify a loan delinquent less than 60 days as a potential problem involves significant subjective judgments by management as to the likely future economic conditions and developments with respect to the borrower. We categorize loans for which the original note rate has been reduced below market and loans for which the principal has been reduced as “restructured” loans. We also consider loans that are refinanced more than one year beyond the original maturity or call date at below market rates as restructured.

The following table presents the carrying amounts of problem, potential problem and restructured commercial mortgages relative to the carrying amount of all commercial mortgages for the periods indicated.


	June 30, 2019			December 31, 2018			September 30, 2019			December 31, 2018
	($ in millions)						($ in millions)

Total commercial mortgages	$	14,525.8		$	13,721.2		$	14,732.5		$	13,721.2
Potential problem commercial mortgages	$	—		$	5.9		$	—		$	5.9
Total problem, potential problem and restructured commercial mortgages	$	—		$	5.9		$	—		$	5.9
Total problem, potential problem and restructured commercial mortgages as a percent of total commercial mortgages		—	%		0.04	%		—	%		0.04	%

Commercial Mortgage Loan Valuation Allowance. The valuation allowance for commercial mortgage loans includes loan specific reserves for loans that are deemed to be impaired as well as reserves for pools of loans with similar risk characteristics where a property risk or market specific risk has not been identified but for which we anticipate a loss may occur. For further details on the commercial mortgage loan valuation allowance, see Item 1. “Financial Statements, Notes to Unaudited Consolidated Financial Statements, Note 3,4, Investments” under the caption, “ Mortgage Loan Valuation Allowance.”

The following table represents our commercial mortgage loan valuation allowance for the periods indicated.


	For the six months ended			For the year ended			For the nine months ended			For the year ended
	June 30, 2019			December 31, 2018			September 30, 2019			December 31, 2018
	($ in millions)						($ in millions)

Balance, beginning of period	$	24.3		$	25.8		$	24.3		$	25.8
Provision		1.1			(1.5)			2.0			(1.5)
Balance, end of period	$	25.4		$	24.3		$	26.3		$	24.3
Valuation allowance as % of carrying value before reserves		0.17	%		0.18	%		0.18	%		0.18	%

Residential Mortgage Loans. The residential mortgage loan portfolio is composed of first lien mortgages with an amortized cost of ~~$853.9~~$1,054.7 million and $893.3 million and home equity mortgages with an amortized cost of ~~$12.7~~$11.8 million and $15.1 million as of ~~June~~September 30, 2019 and December 31, 2018, respectively. The home equity loans are generally second lien mortgages made up of closed-end loans and lines of credit. Non-performing residential mortgage loans, which are defined as loans 90 days or greater delinquent plus non-accrual loans, totaled ~~$5.6~~$4.8 million and $7.2 million as of ~~June~~September 30, 2019 and December 31, 2018, respectively.

We establish the residential mortgage loan valuation allowance at levels considered adequate to absorb estimated probable losses within the portfolio based on management’s evaluation of the size and current risk characteristics of the portfolio. Such evaluation considers numerous factors, including, but not limited to net charge-off trends, loss forecasts, collateral values, geographic location, borrower credit scores, delinquency rates, industry condition and economic trends. The changes in the valuation allowance are reported in net realized capital gains (losses) on our consolidated statements of operations.

~~135~~137

Table of Contents

The following table represents our residential mortgage loan valuation allowance for the periods indicated.


	For the six months ended			For the year ended			For the nine months ended			For the year ended
	June 30, 2019			December 31, 2018			September 30, 2019			December 31, 2018
	($ in millions)						($ in millions)

Balance, beginning of period	$	2.6		$	6.4		$	2.6		$	6.4
Provision		(1.8)			(4.5)			(2.7)			(4.5)
Charge-offs		(0.4)			(2.4)			(0.4)			(2.4)
Recoveries		1.6			3.1			2.3			3.1
Balance, end of period	$	2.0		$	2.6		$	1.8		$	2.6
Valuation allowance as % of carrying value before reserves		0.23	%		0.29	%		0.17	%		0.29	%

Real Estate

Real estate consists primarily of commercial equity real estate. As of ~~June~~September 30, 2019 and December 31, 2018, the carrying amount of our equity real estate investment was ~~$1,739.2~~$1,735.6 million and $1,726.3 million, respectively. Our commercial equity real estate is held in the form of wholly owned real estate, real estate acquired upon foreclosure of commercial mortgage loans and majority owned interests in real estate joint ventures.

Equity real estate is categorized as either “real estate held for investment” or “real estate held for sale.” Real estate held for investment totaled ~~$1,520.0~~$1,524.6 million and $1,518.6 million as of ~~June~~September 30, 2019 and December 31, 2018, respectively. The carrying value of real estate held for investment is generally adjusted for impairments whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. Such impairment adjustments are recorded as net realized capital losses in our consolidated results of operations. No such impairment adjustments were recorded for the ~~six~~nine months ended ~~June~~September 30, 2019 or for the year ended December 31, 2018.

The carrying amount of real estate held for sale was ~~$219.2~~$211.0 million and $207.7 million as of ~~June~~September 30, 2019 and December 31, 2018, respectively. Once we identify a real estate property to be sold and it is probable that it will be sold, we classify the property as held for sale. We establish a valuation allowance subject to periodic revisions, if necessary, to adjust the carrying value of the property to reflect the lower of its current carrying value or the fair value, less associated selling costs. The valuation allowance did not change for the ~~six~~nine months ended ~~June~~September 30, 2019 or for the year ended December 31, 2018.

We use research, both internal and external, to recommend appropriate product and geographic allocations and changes to the equity real estate portfolio. We monitor product, geographic and industry diversification separately and together to determine the most appropriate mix.

Equity real estate is distributed across geographic regions of the country. As of ~~June~~September 30, 2019, our largest equity real estate portfolio concentration was in the Pacific ~~(43%~~(44%) region of the United States. By property type, our largest concentrations were in apartments ~~(33%~~(35%), office ~~(32%~~(29%), and industrial ~~(24%~~(25%) as of ~~June~~September 30, 2019.

Other Investments

Our other investments totaled ~~$2,763.3~~$2,875.8 million as of ~~June~~September 30, 2019, compared to $2,596.0 million as of December 31, 2018. Other investments include interests in unconsolidated entities, which include real estate properties owned jointly with venture partners and operated by the partners; sponsored investment funds; the cash surrender value of company owned life insurance; derivative assets and other investments.

~~136~~138

Table of Contents

International Investment Operations

Of our invested assets, ~~$8,222.7~~$8,134.6 million were held by our Principal International segment as of ~~June~~September 30, 2019. The assets are primarily managed by the local Principal International affiliate. Due to the regulatory constraints in each location, each company maintains its own investment policies. As shown in the following table, the major category of international invested assets is fixed maturities. The following table excludes invested assets of the separate accounts.


	June 30, 2019				December 31, 2018				September 30, 2019				December 31, 2018
	Carrying		Percent		Carrying		Percent		Carrying		Percent		Carrying		Percent
	amount		of total		amount		of total		amount		of total		amount		of total
	($ in millions)								($ in millions)
Fixed maturities:
Public	$	4,034.4	49	%	$	3,569.2	48	%	$	4,093.8	50	%	$	3,569.2	48	%
Private		56.8	1			48.6	1			39.8	1			48.6	1
Equity securities		1,458.3	18			1,425.1	19			1,427.4	18			1,425.1	19
Mortgage loans:
Commercial		279.4	4			250.8	3			259.8	3			250.8	3
Residential		467.0	6			459.1	6			434.6	5			459.1	6
Real estate held for sale		0.8	—			1.9	—			0.8	—			1.9	—
Real estate held for investment		0.4	—			1.5	—			0.4	—			1.5	—
Policy loans		21.9	—			21.6	—			20.4	—			21.6	—
Other investments:
Direct financing leases		858.9	10			830.7	11			798.1	10			830.7	11
Investment in unconsolidated entities		1,018.8	12			864.5	12			1,013.4	12			864.5	12
Derivative assets and other investments		26.0	—			19.1	—			46.1	1			19.1	—
Total invested assets		8,222.7	100	%		7,492.1	100	%		8,134.6	100	%		7,492.1	100	%
Cash and cash equivalents		246.8				249.4				334.3				249.4
Total invested assets and cash	$	8,469.5			$	7,741.5			$	8,468.9			$	7,741.5

Regulations in certain locations require investment in the funds we manage. These required regulatory investments are classified as equity securities within our consolidated statements of financial position, with all mark-to-market changes reflected in net investment income. Our investment is primarily dictated by client activity and all investment performance is retained by us.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market Risk Exposures and Risk Management

Market risk is the risk we will incur losses due to adverse fluctuations in market rates and prices. Our primary market risk exposures are to interest rates, equity markets and foreign currency exchange rates. The active management of market risk is an integral part of our operations. We manage our overall market risk exposure within established risk tolerance ranges using several approaches, including:

●

rebalancing our existing asset or liability portfolios;

●

controlling the risk structure of newly acquired assets and liabilities and

●

using derivative instruments to modify the market risk characteristics of existing assets or liabilities or assets expected to be purchased.

Interest Rate Risk

Interest rate risk is the risk of economic losses due to adverse changes in interest rates. Interest rate risk arises primarily from our holdings in interest sensitive assets and liabilities. Changes in interest rates impact numerous aspects of our operations, including but not limited to:

●

yield on our invested assets;

●

rate of interest we credit to contractholder account balances;

●

timing of cash flows on assets and liabilities containing embedded prepayment options;

●

cost of hedging our GMWB rider;

●

discount rate used in valuing our pension and OPEB obligations;

~~137~~139

Table of Contents

●

estimated gross profits and the amortization of our DAC asset and related actuarial balances;

●

statutory reserve and capital requirements;

●

asset-based fees earned on the fixed income assets we manage;

●

interest expense on our long-term borrowings;

●

fair value of intangible assets in our reporting units and

●

fair value of financial assets and liabilities held at fair value on our consolidated statements of financial position.

Lower interest rates generally result in lower profitability in the long-term. Conversely, higher interest rates generally result in higher profitability in the long-term. However, an increase in market interest rates may cause a decline in the value of financial assets held at fair value on our consolidated statements of financial position. In addition, we have interest rate risk related to spread revenue on our Acquired Business. This risk has been excluded from the following analysis and discussion.

Impact of Changes in Long-Term Interest Rate Assumptions

We use long-term interest rate assumptions to calculate reserves, DAC, other actuarial balances and benefit plan obligations in accordance with U.S. GAAP. In setting these assumptions, we consider a variety of factors, including historical experience, emerging trends and future expectations. We evaluate our assumptions on at least an annual basis. Due to the long-term nature of our assumptions, we generally do not revise our assumptions in response to short-term fluctuations in market interest rates. However, we will consider revising our assumptions if a significant change occurs in the factors noted above.

A reduction in our long-term interest rate assumptions may result in increases in our reserves and/or unlocking of our DAC asset and other actuarial balances. For additional information, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates — Deferred Acquisition Costs and Other Actuarial Balances” in our Annual Report on Form 10-K for the year ended December 31, 2018.

In addition, we have implemented reinsurance transactions utilizing affiliated reinsurers and highly rated third parties to finance a portion of the statutory reserves for our term life insurance policies and universal life insurance policies with secondary guarantees. We calculate an economic reserve, which represents an estimate of our liability associated with these contracts. The excess of the required statutory reserve over the economic reserve is secured by financing provided by highly rated third parties. The long-term interest rate assumption is a key input in the calculation of the economic reserve. A reduction in our long-term interest rate assumption would reduce the portion of the statutory reserve that can be financed through affiliated reinsurers, thus increasing the amount of invested assets we must maintain to support statutory reserves. For additional information, see Item 8. “Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 15, Statutory Insurance Financial Information” in our Annual Report on Form 10-K for the year ended December 31, 2018.

~~138~~140

Table of Contents

Impact of Changes in Interest Rates

Changes in interest rates or a sustained low interest rate environment may result in the following impacts, which would impact our financial position and results of operations:


Impact of Falling Interest Rates or Sustained Low Interest Rates			Impact of Rising Interest Rates
Adverse Impacts:			Positive Impacts:
A reduction in investment income, which may be partially offset by a reduction in the interest we credit on contractholder account balances; however, our ability to lower crediting rates may be constrained by guaranteed minimum interest rates and competitive pressures			An increase in investment income, which may be partially or fully offset by an increase in the interest we credit on contractholder account balances
An increase in the cost of hedging our GMWB rider			A decrease in the cost of hedging our GMWB rider
An increase in reserves and/or a true-up or unlocking of our DAC asset and other actuarial balances			A true-up or unlocking of our DAC asset and other actuarial balances
A reduction in the discount rate used in valuing our pension and OPEB obligations, leading to an increase in our Projected Benefit Obligation, Net Periodic Pension Cost, Accumulated Postretirement Benefit Obligation and Net Periodic Benefit Cost			An increase in the discount rate used in valuing our pension and OPEB obligations, leading to a decrease in our Projected Benefit Obligation, Net Periodic Pension Cost, Accumulated Postretirement Benefit Obligation and Net Periodic Benefit Cost
An increase in statutory capital we are required to hold as well as the amount of assets we must maintain to support statutory reserves			A decrease in statutory capital we are required to hold as well as the amount of assets we must maintain to support statutory reserves
An increase in prepayments or redemptions on mortgages and bonds we own, which would force us to reinvest the proceeds at lower interest rates

Positive Impacts:			Adverse Impacts:
An increase in the value of the fixed income assets we manage, resulting in an increase in our fee revenue in the short-term			A decrease in the value of the fixed income assets we manage, resulting in a decrease in our fee revenue in the short-term
A decrease in the interest expense on our long-term borrowings, to the extent we are able to refinance our obligations at lower interest rates			An increase in the interest expense on our long-term borrowings, to the extent we refinance our obligations at higher interest rates
An increase in the fair value of certain financial assets held at fair value on our consolidated statements of financial position			A decrease in the fair value of certain financial assets held at fair value on our consolidated statements of financial position, as discussed below
			A reduction in the fair value of intangible assets in our reporting units, potentially leading to an impairment of goodwill or other intangible assets

We estimate a hypothetical 100 basis point immediate, parallel decrease in interest rates would reduce segment pre-tax operating earnings by less than 1% over the next 12 months excluding the impact of any potential unlocking of our DAC asset and other actuarial balances. This estimate reflects the impact of routine management actions in response to a drop in interest rates, such as reducing the interest rates we credit on contractholder account balances; however, it does not reflect the impact of other actions management may consider, such as curtailing sales of certain products. We anticipate the adverse segment pre-tax operating earnings impacts of a decrease in market interest rates will grow over time as assets mature and we are forced to reinvest at lower interest rates.

The selection of a 100 basis point immediate, parallel decrease in interest rates should not be construed as a prediction by us of future market events, but rather as an illustration of the impact of such an event. Our exposure will change as a result of ongoing portfolio transactions in response to new business, management’s assessment of changing market conditions and changes in our mix of business.

If market rates increase rapidly, policy surrenders, withdrawals and requests for policy loans may increase as customers seek to achieve higher returns. This may result in unlocking of our DAC and other actuarial balances. We may be required to sell assets to raise the cash necessary to respond to such surrenders, withdrawals and loans, thereby realizing capital losses on the assets sold.

~~139~~141

Table of Contents

Guaranteed Minimum Interest Rate Exposure. The following table provides detail on the differences between the interest rates being credited to contractholders as of ~~June~~September 30, 2019, and the respective guaranteed minimum interest rates (“GMIRs”). Account values are broken down by GMIR level within the Retirement and Income Solutions and U.S. Insurance Solutions segments.

Account values (1)

Excess of crediting rates over GMIR:

Up to 0.50%

0.51% to 1.00%

1.01% to 2.00%

2.01% or more

Up to 0.50%

0.51% to 1.00%

1.01% to 2.00%

2.01% or more

At GMIR

above GMIR

Total

At GMIR

above GMIR

Total

($ in millions)

Guaranteed minimum interest rate

Retirement and Income Solutions

Up to 1.00%

178.8

333.5

783.0

3,738.3

2,639.8

7,673.4

149.9

341.0

732.1

3,991.8

2,642.0

7,856.8

1.01% - 2.00%

581.1

4,621.4

39.9

810.7

—

6,053.1

68.4

5,005.8

106.4

1,075.7

—

6,256.3

2.01% - 3.00%

5,146.7

0.2

—

0.1

—

5,147.0

5,065.4

0.2

—

5,065.6

3.01% - 4.00%

199.2

—

199.2

198.0

—

198.0

Subtotal

6,105.8

4,955.1

822.9

4,549.1

2,639.8

19,072.7

5,481.7

5,347.0

838.5

5,067.5

2,642.0

19,376.7

U.S. Insurance Solutions

Up to 1.00%

—

22.3

2.4

—

24.7

—

22.1

2.4

—

24.5

1.01% - 2.00%

336.2

—

283.0

363.4

128.4

1,111.0

336.5

—

290.7

377.6

138.3

1,143.1

2.01% - 3.00%

1,722.3

863.4

492.0

105.4

—

3,183.1

1,575.4

988.1

507.4

106.1

—

3,177.0

3.01% - 4.00%

1,727.0

54.4

16.8

23.6

3.4

1,825.2

1,724.8

52.6

16.4

23.3

3.3

1,820.4

4.01% - 5.00%

52.1

5.9

2.8

1.7

—

62.5

52.1

5.7

2.7

1.7

—

62.2

Subtotal

3,837.6

946.0

797.0

494.1

131.8

6,206.5

3,688.8

1,068.5

819.6

508.7

141.6

6,227.2

Total

9,943.4

5,901.1

1,619.9

5,043.2

2,771.6

25,279.2

9,170.5

6,415.5

1,658.1

5,576.2

2,783.6

25,603.9

Percentage of total

39.3

23.3

6.4

20.0

11.0

100.0

35.8

25.0

6.5

21.8

10.9

100.0

(1)	Includes only the account values, net of policy loans, for products with GMIRs and discretionary crediting rates.

In addition to the domestic account values shown in the table above, Principal International had ~~$633.5~~$626.6 million and ~~$528.9~~$488.5 million of account values with GMIRs in Hong Kong and Brazil, respectively, as of ~~June~~September 30, 2019. The Brazil amount includes account values from an equity method subsidiary, adjusted to reflect the proportion of the subsidiary’s results reflected in our net income. Our liabilities in Principal International are generally denominated in the functional currency of the location of operation. The pattern of interest rate movements in our international operations will likely differ from the pattern of interest rate movements in the U.S.

Impact of Rising Interest Rates on the Fair Value of Financial Assets. An increase in market interest rates may cause a decline in the value of financial assets held at fair value on our consolidated statements of financial position. Although changes in the fair value of our financial assets due to changes in interest rates may impact the amount of equity reported in our consolidated statements of financial position, these changes will not cause an economic gain or loss unless we sell investments, terminate derivative positions, determine an investment is other than temporarily impaired, or determine a derivative instrument is no longer an effective hedge.

We estimate a hypothetical 100 basis point immediate, parallel increase in interest rates would reduce the net reported fair value of our financial assets and derivatives by ~~$4,490.6~~$4,647.3 million as of ~~June~~September 30, 2019, compared to $3,893.7 million as of December 31, 2018. This estimate only reflects the change in fair value for financial assets and derivatives reported at fair value on our consolidated statements of financial position. Assets and liabilities not reported at fair value on our consolidated statements of financial position – including mortgage loans, liabilities relating to insurance contracts, investment contracts, debt and bank deposits – are excluded from this sensitivity analysis. We believe the excluded liability items would economically serve as a partial offset to the net interest rate risk of the financial instruments included in the sensitivity analysis. Separate account assets and liabilities are also excluded from this estimate, as any interest rate risk is borne by the holder of the separate account. For more information on fair value measurements, see Item 8. “Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 14, Fair Value Measurements" in our Annual Report on Form 10-K for the year ended December 31, 2018.

142

Table of Contents

Our selection of a 100 basis point immediate, parallel increase in interest rates is a hypothetical rate scenario we use to demonstrate potential risk. While a 100 basis point immediate, parallel increase does not represent our view of future

~~140~~

~~Table of Contents~~

market changes, it is a near term reasonably possible hypothetical change that illustrates the potential impact of such events. While this sensitivity analysis provides a representation of interest rate sensitivity, it is based on our portfolio exposures at a point in time and may not be representative of future market results. These exposures will change as a result of ongoing portfolio transactions in response to new business, management’s assessment of changing market conditions and available investment opportunities.

Our net estimated potential loss in fair value as of ~~June~~September 30, 2019, increased ~~$596.9~~$753.6 million from December 31, 2018, primarily due to an increase in the balance and duration of fixed maturities, available-for-sale. The increase in the balance of fixed maturities, available-for-sale was primarily driven by an increase in net unrealized gains resulting primarily from a decrease in interest rates and tightening of credit spreads, and net purchase activity. The increase in the duration of fixed maturities, available-for-sale was primarily driven by a decrease in interest rates and tightening of credit spreads.

Interest Rate Risk Management

We manage interest rate risk through the use of an integrated risk management framework. This helps us identify, assess, monitor, report and manage our risks within established limits and risk tolerances. Our internal risk committees monitor and discuss our risk profile and identify necessary actions to mitigate impacts from interest rate risk.

The product designs within our business units result in a variety of different interest rate risk profiles. Therefore, our business units use a variety of different approaches for managing their asset and liability interest rate risks.

●

Retirement Business Stable Cash Flows – For stable and predictable cash flow liabilities, such as pension risk transfer, full service accumulation, investment only, and newer fixed deferred annuities, we use investment strategy and hedges to tightly align the cash flow run off of these asset and liability cash flows. Immunization and embedded value analysis are also utilized in the management of interest rate risk.

●

Retirement Business Dynamic Cash Flows – Dynamic liability cash flows, such as older fixed deferred annuities, are sensitive to policyholder behavior and the current interest rate environment. The risk and return metrics from deterministic and stochastic interest rate scenarios are used to manage the interest rate risk for these liabilities.

●

U.S. Insurance Stable Cash Flows – Our insurance businesses in many instances contain long-term guarantees with stable and predictable liability cash flows and recurring premiums. We manage the interest rate risk through investment strategy, product crediting rates and analyzing duration and embedded value sensitivity.

●

Principal International – Our international businesses operate within local regulations and financial market conditions (e.g., derivative markets, assets available) to achieve similar asset and liability cash flow management objectives. In locations with a limited availability of long-dated assets and derivative markets, the duration gap is managed to risk tolerances specific to each location.

We also limit our exposure to interest rate risk through our business mix and strategy. We have intentionally limited our exposure to specific products where investment margins are critical to the product’s profitability, and we continue to emphasize the sale of products that generate revenues in the form of fees for service or premiums for insurance coverage and expose us to minimal interest rate risk.

Prepayment risk is controlled by limiting our exposure to investments that are prepayable without penalty prior to maturity at the option of the issuer. We also require additional yield on these investments to compensate for the risk the issuer will exercise such option. Prepayment risk is also controlled by limiting the sales of liabilities with features such as puts or other options that can be exercised at inopportune times. We manage the interest rate risk associated with our long-term borrowings by monitoring the interest rate environment and evaluating refinancing opportunities as maturity dates approach.

The plan fiduciaries use a Dynamic Asset Allocation strategy for our qualified defined benefit pension plan, which strategically allocates an increasing portion of the assets of the pension plan to fixed income securities as the funding status improves. The intended purpose of using the Dynamic Asset Allocation strategy is that the expected change in the value of the plan assets and the change in pension benefit obligation due to market movements are more likely to have more correlation versus a static allocation of assets between categories. For more information see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates — Benefit Plans” and Item 8. “Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 11, Employee and Agent Benefits” in our Annual Report on Form 10-K for the year ended December 31, 2018.

~~141~~143

Table of Contents

Use of Derivatives to Manage Interest Rate Risk. We use various derivative financial instruments to manage our exposure to fluctuations in interest rates, including interest rate swaps, interest rate options, swaptions and futures. We use interest rate swaps and futures contracts to hedge changes in interest rates subsequent to the issuance of an insurance liability, such as a guaranteed investment contract, but prior to the purchase of a supporting asset, or during periods of holding assets in anticipation of near term liability sales. We use interest rate swaps primarily to more closely match the interest rate characteristics of assets and liabilities. They can be used to change the sensitivity to the interest rate of specific assets and liabilities as well as an entire portfolio. We use interest rate options to manage prepayment risks in our assets and minimum guaranteed interest rates and lapse risks in our liabilities. We purchase swaptions to hedge interest rate exposure for certain assets and liabilities.

Foreign Currency Risk

Foreign currency risk is the risk we will incur economic losses due to adverse fluctuations in foreign currency exchange rates. This risk arises from foreign currency-denominated funding agreements issued to nonqualified institutional investors in the international market, foreign currency-denominated fixed maturity and equity securities, and our international operations, including expected cash flows and potential acquisition and divestiture activity.

We estimate as of ~~June~~September 30, 2019, a 10% immediate unfavorable change in each of the foreign currency exchange rates to which we are exposed would result in no material change to the net fair value of our foreign currency-denominated instruments identified above because we effectively hedge foreign currency-denominated instruments to minimize exchange rate impacts, which is consistent with our estimate as of December 31, 2018. However, fluctuations in foreign currency exchange rates do affect the translation of segment pre-tax operating earnings and equity of our international operations into our consolidated financial statements.

For our Principal International segment, we estimate that a 10% immediate unfavorable change in each of the foreign currency exchange rates to which we were exposed would have resulted in a ~~$331.7~~$319.1 million, or 10%, reduction in the total equity excluding noncontrolling interests of our international operations as of ~~June~~September 30, 2019, as compared to an estimated $313.9 million, or 10%, reduction as of December 31, 2018. We estimate a 10% unfavorable change in the average foreign currency exchange rates to which we were exposed through our international operations would have resulted in a ~~$11.2~~$12.8 million, or 12%, reduction in segment pre-tax operating earnings of our international operations for the three months ended ~~June~~September 30, 2019, as compared to an estimated ~~$10.4~~$5.4 million, or ~~13%~~17%, reduction for the three months ended ~~June~~September 30, 2018. In addition, we estimate that a 10% unfavorable change in the average foreign currency exchange rates to which we were exposed through our international operations would have resulted in a ~~$24.1~~$36.9 million, or 12%, reduction in segment pre-tax operating earnings of our international operations for the ~~six~~nine months ended ~~June~~September 30, 2019, as compared to an estimated ~~$21.3~~$26.7 million, or 13%, reduction for the ~~six~~nine months ended ~~June~~September 30, 2018.

The selection of a 10% immediate unfavorable change in all currency exchange rates should not be construed as a prediction by us of future market events, but rather as an illustration of the potential impact of such an event. These exposures will change as a result of a change in the size and mix of our foreign operations.

Use of Derivatives to Manage Foreign Currency Risk. The foreign currency risk on funding agreements and fixed maturities in our U.S. operations is mitigated by using currency swaps that swap the foreign currency interest and principal payments to our functional currency. The notional amount of our currency swap agreements associated with foreign-denominated liabilities was $128.3 million and $155.2 million as of ~~June~~September 30, 2019 and December 31, 2018, respectively. The notional amount of our currency swap agreements associated with foreign-denominated fixed maturities was ~~$588.4~~$629.1 million and $542.5 million as of ~~June~~September 30, 2019 and December 31, 2018, respectively. The notional amount of our currency forwards hedging foreign-denominated equity securities was ~~$50.9~~$53.3 million and $50.5 million as of ~~June~~September 30, 2019 and December 31, 2018, respectively.

With regard to our international operations, in order to enhance the diversification of our investment portfolios we may invest in bonds denominated in a currency that is different than the currency of our liabilities. We use foreign exchange derivatives to economically hedge the currency mismatch. Our Principal International operations had currency swaps with a notional amount of ~~$187.1~~$253.6 million and $200.9 million as of ~~June~~September 30, 2019 and December 31, 2018, respectively. Our Principal International operations also utilized currency forwards with a notional amount of ~~$818.3~~$892.0 million and $738.6 million as of ~~June~~September 30, 2019 and December 31, 2018, respectively.

We sometimes use derivatives to hedge currency risk associated with expected cash flows from our foreign operations. We held currency forwards with a notional amount of ~~$45.9~~$50.8 million and $74.5 million as ~~June~~September 30, 2019 and December 31, 2018, respectively. We also utilized currency options with a notional amount of ~~$469.2~~$562.0 million and $525.2 million as of ~~June~~September 30, 2019 and December 31, 2018, respectively.

~~142~~144

Table of Contents

Equity Risk

Equity risk is the risk we will incur economic losses due to adverse fluctuations in common stock prices. As of ~~June~~September 30, 2019 and December 31, 2018, the fair value of our equity securities was ~~$1,895.2~~$1,907.3 million and $1,843.7 million, respectively. We estimate a 10% decline in the prices of the equity securities would result in a decline in fair value of our equity securities of ~~$189.5~~$190.7 million as of ~~June~~September 30, 2019, as compared to a decline in fair value of our equity securities of $184.4 million as of December 31, 2018.

We are also exposed to the risk that asset-based fees decrease as a result of declines in assets under management due to changes in investment prices and the risk that asset management fees calculated by reference to performance could be lower. The risk of decreased asset-based and asset management fees could also impact our estimates of total gross profits used as a basis for amortizing DAC and other actuarial balances. For further discussion, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates — Deferred Acquisition Costs and Other Actuarial Balances” in our Annual Report on Form 10-K for the year ended December 31, 2018.

We also have equity risk associated with (1) fixed deferred annuity and universal life contracts that credit interest to customers based on changes in an external equity index; (2) variable annuity contracts that have a GMWB rider that allows the customer to make withdrawals of a specified annual amount, either for a fixed number of years or for the lifetime of the customer, even if the account value is reduced to zero; (3) variable annuity contracts that have a guaranteed minimum death benefit (“GMDB”) that allows the death benefit to be paid, even if the account value has fallen below the GMDB amount and (4) investment contracts in which the return is subject to minimum contractual guarantees. We are also subject to equity risk based upon the assets that support our employee benefit plans. For further discussion of equity risk associated with these plans, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates — Benefit Plans” in our Annual Report on Form 10-K for the year ended December 31, 2018.

We estimate an immediate 10% decline in the S&P 500 index, followed by a 2% per quarter increase would reduce our annual segment pre-tax operating earnings by approximately 4% to 6%. This estimate excludes the impact of any potential unlocking of our DAC asset and other actuarial balances. The selection of a 10% unfavorable change in the S&P 500 index should not be construed as a prediction by us of future market events, but rather as an illustration of the potential impact of such an event. Our exposure will change as a result of changes in our mix of business.

Use of Derivatives to Manage Equity Risk. We economically hedge the fixed deferred annuity and universal life products, where the interest credited is linked to an external equity index, by purchasing options that match the product’s profile or selling options to offset existing exposures. We economically hedged the GMWB exposure, which includes interest rate risk and equity risk, using futures, options and interest rate swaps with notional amounts of ~~$ 586.1~~$425.1 million, ~~$1,004.6~~$1,049.6 million, and ~~$3,965.8~~$4,753.1 million, respectively, as of ~~June~~September 30, 2019, and notional amounts of $751.7 million, $1,004.6 million, and $3,492.8 million, respectively, as of December 31, 2018. The fair value of both the GMWB embedded derivative and associated hedging instruments are sensitive to financial market conditions and the variance related to the change in fair value of these items for a given period is largely dependent on market conditions at the end of the period.

Item 4. Controls and Procedures

~~Changes in Internal Control Over Financial Reporting~~

We had no change in our internal control over financial reporting during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Disclosure Controls and Procedures

In order to ensure that the information that we must disclose in our filings with the SEC is recorded, processed, summarized and reported on a timely basis, we have adopted disclosure controls and procedures. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file with or submit to the SEC is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Our Chief Executive Officer, Daniel J. Houston, and our Chief Financial Officer, Deanna D. Strable-Soethout, have reviewed and evaluated our disclosure controls and procedures as of ~~June~~September 30, 2019, except as noted below, and have concluded our disclosure controls and procedures are effective.

~~143~~145

Table of Contents

Our assessment of the effectiveness of disclosure controls and procedures excludes the operations and related assets of the Acquired Business, which closed on July 1, 2019. For additional information regarding the acquisition, see Item 1. “Financial Statements, Notes to Unaudited Consolidated Financial Statements, Note 2, Goodwill and Other Intangible Assets”. We are in process of evaluating internal control over financial reporting for the Acquired Business and, accordingly, have excluded its controls from our evaluation of disclosure controls and procedures. For the three and nine months ended September 30, 2019, the Acquired Business’s revenues related to operations represented 2% and 1% of our consolidated total revenues, respectively. As of September 30, 2019, the Acquired Business’s assets related to operations represented less than 1% of our consolidated total assets.

Changes in Internal Control Over Financial Reporting

Other than the acquisition of the Acquired Business discussed above, we had no change in our internal control over financial reporting during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

Disclosure concerning legal proceedings can be found in Part I, Item 1. “Financial Statements, Notes to Unaudited Consolidated Financial Statements, Note 9,10, Contingencies, Guarantees, Indemnifications and Leases” under the caption, “Litigation and Regulatory Contingencies,” which is incorporated here by this reference.

Item 1A. Risk Factors

In addition to the other information set forth in this report, consideration should be given to the factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018. If any of those factors were to occur, they could materially adversely affect our business, financial condition or future results, and could cause actual results to differ materially from those expressed in forward-looking statements in this report. While we have not had material changes with respect to the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2018, we are adding risk factors set out below related to our acquisition of the Acquired Business offrom Wells Fargo Bank, N.A, (the “Seller”) as discussed in Part I, Item 1. “Financial Statements, Notes to Unaudited Consolidated Financial Statements, Note ~~17, Subsequent Event”~~2, Goodwill and Other Intangibles” and Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations”~~Operations, Transactions Affecting Comparability” under the caption ~~“Recent Event.~~“Acquisitions.”

We may not realize the expected benefits of the Acquisition because of integration difficulties, delays in the transfer of purchased assets and other challenges.

The success of the Acquisition will depend, in part, on our ability to successfully integrate and operate the Acquired Business in conjunction with our existing businesses. The integration process may be complex, costly and time-consuming. The potential difficulties of integrating the operations of the Acquired Business include, among others:

●

implementing our business plan for the combined business;

●

unanticipated issues in integrating logistics, information, communications and other systems;

●

retaining and integrating key employees of the Seller;

●

retaining and growing the ~~Business’ customers;~~customers of the Acquired Business;

●

changes in applicable laws and regulations or conditions imposed by regulators;

●

operating risks inherent in the Acquired Business and our existing businesses and

●

realizing revenue and expense synergies.

146

Table of Contents

We may not accomplish the integration of the Acquired Business smoothly, successfully or within the anticipated costs or timeframe. In particular, it is expected that the transfer to us of many of the purchased assets, including contracts with customers and vendors of the Acquired Business, will not be effectuated until sometime after the closing of the transaction (“Closing”) and, if the requisite consents of contractual counterparties of the Acquired Business or other third parties are not received, may not be effectuated at all. Furthermore, the Acquired Business will be reliant upon the Seller to continue to provide services to the Acquired Business for a transitional period following the Closing. Any difficulties or delays encountered in combining operations could prevent us from realizing the full benefits anticipated to result from the Acquisition and could adversely affect our business, results of operations and financial condition. In addition, the Acquired Business may not meet our expectations, causing our financial results to differ from our own or the investment community’s expectations. It is possible that the Acquired Business may be adversely affected by regulatory, political, economic, business or competitive factors ~~before or~~ after the Closing, which could prevent us from realizing the anticipated benefits of the Acquisition. The Acquisition may also divert our management’s attention from our current operations to the integration effort, which could have a negative effect on our business, results of operations and financial condition.

~~144~~

~~Table of Contents~~

The obligations and liabilities of the Seller, some of which may be unanticipated or unknown, may be greater than we have anticipated, which may diminish the value of the Acquired Business to us.

In connection with the Acquisition, we will assume certain liabilities of the Seller and its affiliates, including, among others: specified current liabilities; liabilities arising under the terms (or from the performance) of specified transferred contracts; liabilities arising out of the employment or termination of employment of employees of the Acquired Business and liabilities relating to certain purchased assets. The assumed liabilities may be greater than we have anticipated. The obligations and liabilities of the Seller could have a material adverse effect on the value of the Acquired Business to us or on our business, financial condition or results of operations. We have only limited indemnification rights from the Seller under the purchase agreement with respect to obligations or liabilities of the Seller, whether known or unknown.

The Acquired Business may present risks that could have a negative effect on our business, results of operations, or financial conditions.

As a result of the Acquisition, we will for the first time provide trust and custody services for non-retirement plan assets of corporations, foundations, municipalities and other institutions. In addition, as a result of the Acquisition, we will expand the size of the trust and custody services we currently provide to defined contribution 401(k), defined benefit, employee stock ownership and non-qualified plans. The entry into and expansion of these business lines may present risks and uncertainties that could have a negative effect on our business, results of operations or financial condition. ~~If we do not obtain all desired regulatory approvals, our ability to pursue the Business may be impaired. Moreover, even on~~On an ongoing basis, our bank regulators will closely watch our capability to successfully manage this expansion, and they may compel remediation activities and potentially impose fines if they find our compliance to be insufficient.

Trust and custody services primarily are a fee-based business, and fees for such trust and custody services may be based on the market value of assets under management, administration or custody; the volume of transactions processed and fees for other services rendered. Disruptions, uncertainty or volatility in the capital markets; weak economic conditions and/or declines in the financial markets may decrease our fee-based revenue, which may negatively impact our results of operations. The market for trust and custody business is highly competitive. In the event that competitors charge lower fees for substantially similar trust and custody services, we may face pressure to lower our prices in order to attract and retain customers, and any reductions in the fees we charge for these services may adversely affect our revenue, and, accordingly, negatively impact our results of operations. Trust and custody services also include spread-based revenues related to trust and custody cash management. Spread revenues will vary based on changes in economic interest rates.

The Acquired Business involves the risk that clients or others may sue us, claiming that we or third parties for whom they say we are responsible have failed to perform under a contract or otherwise failed to carry out a duty perceived to be owed to them, including perceived fiduciary or contractual duties. This risk may be heightened during periods when credit, equity or other financial markets are deteriorating in value or are particularly volatile, or when clients or investors are experiencing losses. Actions brought against us may result in lawsuits, enforcement actions, injunctions, settlements, damages, fines or penalties, which could have a negative effect on our financial condition or results of operations or require changes to our business. These risks could result in increased regulatory supervision and affect our ability to attract and retain customers.

~~145~~147

Table of Contents

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

The following table presents the amount of our common share purchase activity for the periods indicated.

Maximum dollar

Total number of

value of shares

Total number of

value of shares

shares purchased

that may yet be

shares purchased

that may yet be

Total number of

Average

as part of publicly

purchased under

Total number of

Average

as part of publicly

purchased under

shares

price paid

announced

the programs (in

shares

price paid

announced

the programs (in

Period

purchased (1)

per share

programs

millions) (2)

purchased (1)

per share

programs

millions) (2)

January 1, 2019 — January 31, 2019

1,468,212

47.10

1,467,368

355.9

1,468,212

47.10

1,467,368

355.9

February 1, 2019 — February 28, 2019

1,671,267

50.39

1,224,506

295.3

1,671,267

50.39

1,224,506

295.3

March 1, 2019 — March 31, 2019

4,050

52.99

—

295.3

4,050

52.99

—

295.3

April 1, 2019 — April 30, 2019

1,070

57.38

—

295.3

1,070

57.38

—

295.3

May 1, 2019 — May 31, 2019

53.09

—

295.3

53.09

—

295.3

June 1, 2019 — June 30, 2019

—

295.3

—

295.3

July 1, 2019 — July 31, 2019

1,903

59.70

—

295.3

August 1, 2019 — August 31, 2019

433,770

53.16

433,770

272.2

September 1, 2019 — September 30, 2019

387,940

53.31

387,299

251.6

Total

3,144,614

2,691,874

3,968,227

3,512,943

(1)	Includes the number of shares of common stock utilized to execute certain stock incentive awards and shares purchased as part of publicly announced programs.

(2)

In November 2018, our Board of Directors authorized a share repurchase program of up to $500.0 million of our outstanding common stock. In the ~~first~~third quarter of 2019, we ~~suspended purchases of the remaining amount available under~~reinstated the November 2018 ~~authorization.~~share repurchase program, which had previously been suspended.

~~146~~148

Table of Contents

Item 6. Exhibits

		Incorporated by reference herein
Exhibit Number	Description	Form	File Date
~~2.1~~	~~Purchase Agreement, dated as of April 9, 2019, by and between Wells Fargo Bank, N.A., Principal Financial Services, Inc. and (for certain limited purposes) Wells Fargo & Company~~	~~10-Q~~	~~May 2, 2019~~
31.1	Certification of Daniel J. Houston
31.2	Certification of Deanna D. Strable-Soethout
32.1	Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code – Daniel J. Houston
32.2	Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code – Deanna D. Strable-Soethout
101	The following materials from Principal Financial Group, Inc.’s Quarterly Report on Form 10-Q for the period ended ~~June~~September 30, 2019 formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Consolidated Statements of Financial Position, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Unaudited Consolidated Financial Statements.

104

The cover page from Principal Financial Group, Inc.’s Quarterly Report on Form 10-Q for the period ended September 30, 2019 formatted in iXBRL and contained in Exhibit 101.

~~147~~149

Table of Contents

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	PRINCIPAL FINANCIAL GROUP, INC.

Dated: ~~July 31,~~October 30, 2019	By	/s/ Deanna D. Strable-Soethout
		Deanna D. Strable-Soethout
		Executive Vice President and Chief Financial Officer

		Duly Authorized Officer, Principal Financial Officer, and Principal Accounting Officer

~~148~~150

Description

Date of
adoption

Effect on our consolidated
financial statements or other
significant matters

Standards not yet adopted:

Targeted improvements to the accounting for long-duration insurance contracts
This authoritative guidance updates certain requirements in the accounting for long-duration insurance and annuity contracts.
1.    The assumptions used to calculate the liability for future policy benefits on traditional and limited-payment contracts will be reviewed and updated periodically. Cash flow assumptions will be reviewed at least annually and updated when necessary with the impact recognized in net income. Discount rate assumptions are prescribed as the current upper-medium grade (low credit risk) fixed income instrument yield and will be updated quarterly with the impact recognized in other comprehensive income (“OCI”).
2.    Market risk benefits, which are certain market-based options or guarantees associated with deposit or account balance contracts, will be measured at fair value. The periodic change in fair value related to instrument-specific credit risk will be recognized in OCI while the remaining change in fair value will be recognized in net income.
3.    Deferred acquisition costs (“DAC”) for all insurance and annuity contracts will be amortized on a constant basis over the expected term of the related contracts.
4.    Additional disclosures are required, including disaggregated rollforwards of significant insurance liabilities and other account balances and disclosures about significant inputs, judgments, assumptions and methods used in measurement.
The guidance for the liability for future policy benefits for traditional and limited-payment contracts and DAC will be applied on a modified retrospective basis; that is, to contracts in force as of the beginning of the earliest period presented based on their existing carrying amounts. An entity may elect to apply the changes retrospectively. The guidance for market risk benefits will be applied retrospectively. Early adoption is permitted.

January 1,
2022, tentative

Our implementation and evaluation process to date includes, but is not limited to the following:

●
identifying and documenting contracts and contract features in scope of the guidance;
●
identifying the actuarial models, systems and processes to be updated;
●
evaluating and selecting our systems solutions for implementing the new guidance;
●
beginning to build key ~~models and~~ models;
●
evaluating our key accounting ~~policies.~~ policies;
●
assessing the impact to our chart of accounts;
●
developing format and content of new disclosures and
●
evaluating transition requirements and impacts.

As we progress through our implementation, we will be able to better assess the impact to our consolidated financial statements; however, we expect this guidance to significantly change how we account for many of our insurance and annuity products.