Item 1. Financial Statements

Principal Financial Group, Inc. Condensed Consolidated Statements of Financial Position

​	​	​	​	​	​	​
​	​	September 30,		​	December 31,
​		2021			2020
​	​	(Unaudited)		​	​	​
​	​	(in millions)
Assets	​	​	​	​	​	​
Fixed maturities, available-for-sale	​	$	76,557.1	​	$	78,710.3
Fixed maturities, trading	​		413.5	​		532.1
Equity securities (2021 and 2020 include $789.1 million and $902.5 million related to consolidated variable interest entities)	​		2,428.2	​		2,013.4
Mortgage loans (2021 and 2020 include $1,334.1 million and $319.0 million related to consolidated variable interest entities)	​		19,426.0	​		17,343.0
Real estate (2021 and 2020 include $653.3 million and $476.8 million related to consolidated variable interest entities)	​		1,965.6	​		1,797.3
Policy loans	​		762.1	​		784.0
Other investments (2021 and 2020 include $437.5 million and $348.5 million related to consolidated variable interest entities and $0.0 million and $28.5 million measured at fair value under the fair value option)	​		5,341.9	​		5,126.8
Total investments	​		106,894.4	​		106,306.9
Cash and cash equivalents (2021 and 2020 include $52.1 million and $28.8 million related to consolidated variable interest entities)	​		3,145.4	​		2,849.8
Accrued investment income	​		727.7	​		710.6
Premiums due and other receivables	​		1,713.2	​		1,723.8
Deferred acquisition costs	​	​	3,696.9	​		3,409.7
Property and equipment	​	​	1,065.4	​		1,019.0
Goodwill	​	​	1,648.4	​		1,711.0
Other intangibles	​	​	1,629.4	​		1,723.0
Separate account assets (2021 and 2020 include $34,420.2 million and $41,138.9 million related to consolidated variable interest entities)	​		177,850.5	​		175,951.4
Other assets	​		537.1	​		1,222.5
Total assets	​	$	298,908.4	​	$	296,627.7
Liabilities	​	​	​	​	​	​
Contractholder funds (2021 and 2020 include $350.7 million and $388.6 million related to consolidated variable interest entities)	​	$	43,828.9	​	$	43,237.7
Future policy benefits and claims	​		43,784.0	​		45,207.2
Other policyholder funds	​		1,063.8	​		1,059.4
Short-term debt	​		74.3	​		84.7
Long-term debt	​		4,279.7	​		4,279.2
Income taxes currently payable	​		8.2	​		22.3
Deferred income taxes	​		2,345.6	​		2,330.8
Separate account liabilities (2021 and 2020 include $34,420.2 million and $41,138.9 million related to consolidated variable interest entities)	​		177,850.5	​		175,951.4
Other liabilities (2021 and 2020 include $76.6 million and $24.5 million related to consolidated variable interest entities)	​		9,200.9	​		7,582.1
Total liabilities	​		282,435.9	​	​	279,754.8
​	​	​	​	​	​	​
Redeemable noncontrolling interest (2021 and 2020 include $309.7 million and $226.8 million related to consolidated variable interest entities)	​		343.3	​		255.6
​	​	​	​	​	​	​
Stockholders' equity	​	​	​	​	​	​
Common stock, par value $0.01 per share; 2,500.0 million shares authorized; 484.3 million and 481.9 million shares issued as of 2021 and 2020; 266.1 million and 273.3 million shares outstanding as of 2021 and 2020	​		4.8	​		4.8
Additional paid-in capital	​		10,436.5	​		10,321.6
Retained earnings	​		12,583.9	​		11,838.0
Accumulated other comprehensive income	​		1,619.2	​		2,383.1
Treasury stock, at cost (218.2 million and 208.6 million shares as of 2021 and 2020)	​		(8,573.7)	​		(7,988.6)
Total stockholders' equity attributable to Principal Financial Group, Inc.	​		16,070.7	​		16,558.9
Noncontrolling interest	​		58.5	​		58.4
Total stockholders' equity	​		16,129.2	​		16,617.3
Total liabilities and stockholders' equity	​	$	298,908.4	​	$	296,627.7

​

See accompanying notes.

​

​

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

​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	For the three months ended					​	For the nine months ended
​	​	September 30,					​	September 30,
​		2021			2020			2021			2020
​	​	(in millions, except per share data)
Revenues	​	​	​	​	​	​	​	​	​	​	​	​
Premiums and other considerations	​	$	1,230.5	​	$	1,184.3	​	$	3,335.3	​	$	4,628.4
Fees and other revenues	​		1,251.8	​		1,143.0	​	​	3,711.0	​	​	3,332.6
Net investment income	​		1,093.4	​		917.9	​	​	3,167.0	​	​	2,846.1
Net realized capital gains (losses)	​		(152.0)	​		65.5	​	​	(41.7)	​	​	169.5
Total revenues	​		3,423.7	​		3,310.7	​	​	10,171.6	​	​	10,976.6
Expenses	​	​	​	​	​	​	​	​	​	​	​	​
Benefits, claims and settlement expenses	​		1,770.9	​		1,839.8	​	​	4,958.4	​	​	6,299.8
Dividends to policyholders	​		28.2	​		29.9	​	​	75.3	​	​	90.2
Operating expenses	​		1,196.5	​		1,165.9	​	​	3,663.3	​	​	3,484.7
Total expenses	​		2,995.6	​		3,035.6	​	​	8,697.0	​	​	9,874.7
Income before income taxes	​		428.1	​		275.1	​	​	1,474.6	​	​	1,101.9
Income taxes	​		63.8	​		39.2	​	​	222.4	​	​	164.9
Net income	​		364.3	​		235.9	​	​	1,252.2	​	​	937.0
Net income (loss) attributable to noncontrolling interest	​		4.4	​		(0.1)	​	​	13.4	​	​	13.8
Net income attributable to Principal Financial Group, Inc.	​	$	359.9	​	$	236.0	​	$	1,238.8	​	$	923.2
​	​	​	​	​	​	​	​	​	​	​	​	​
Earnings per common share	​	​	​	​	​	​	​	​	​	​	​	​
Basic earnings per common share	​	$	1.34	​	$	0.86	​	$	4.58	​	$	3.36
​	​	​	​	​	​	​	​	​	​	​	​	​
Diluted earnings per common share	​	$	1.32	​	$	0.85	​	$	4.51	​	$	3.34

​

See accompanying notes.

​

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

​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	For the three months ended					​	For the nine months ended
​	​	September 30,					​	September 30,
​		2021			2020			2021			2020
​	​	(in millions)
Net income	​	$	364.3	​	$	235.9	​	$	1,252.2	​	$	937.0
Other comprehensive income (loss), net:	​	​	​	​	​	​	​	​	​	​	​	​
Net unrealized gains (losses) on available-for-sale securities	​		(23.6)	​		226.7	​		(606.1)	​		852.8
Net unrealized gains (losses) on derivative instruments	​		20.7	​		(25.1)	​		32.4	​		7.1
Foreign currency translation adjustment	​		(193.3)	​		94.3	​		(214.1)	​		(183.6)
Net unrecognized postretirement benefit obligation	​		9.3	​		10.5	​		21.2	​		31.9
Other comprehensive income (loss)	​		(186.9)	​		306.4	​		(766.6)	​		708.2
Comprehensive income	​		177.4	​		542.3	​		485.6	​		1,645.2
Comprehensive income attributable to noncontrolling interest	​		2.1	​		9.9	​		10.7	​		12.8
Comprehensive income attributable to Principal Financial Group, Inc.	​	$	175.3	​	$	532.4	​	$	474.9	​	$	1,632.4

​

See accompanying notes.

​

​

Principal Financial Group, Inc. Condensed Consolidated Statements of Stockholders’ Equity**(Unaudited)**

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	Accumulated		​	​	​	​	​	​	​	​	​
​	​	​	​	​	Additional		​	​	​	​	other		​	​	​	​	​	​	​	Total
​	​	Common		​	paid-in		​	Retained		​	comprehensive		​	Treasury		​	Noncontrolling		​	stockholders'
​		stock			capital			earnings			income			stock			interest			equity
​		(in millions)
Balances as of July 1, 2020	​	$	4.8	​	$	10,259.6	​	$	11,441.4	​	$	1,450.7	​	$	(7,913.4)	​	$	67.9	​	$	15,311.0
Common stock issued	​		—	​		11.5	​		—	​		—	​		—	​		—	​		11.5
Stock-based compensation	​		—	​		21.9	​		(2.3)	​		—	​		—	​		—	​		19.6
Treasury stock acquired, common	​	​	—	​	​	—	​	​	—	​	​	—	​	​	(0.2)	​	​	—	​	​	(0.2)
Dividends to common stockholders	​		—	​		—	​		(153.7)	​		—	​		—	​		—	​		(153.7)
Distributions to noncontrolling interest	​		—	​		—	​		—	​		—	​		—	​		(1.1)	​		(1.1)
Contributions from noncontrolling interest	​		—	​		—	​		—	​		—	​		—	​		1.0	​		1.0
Adjustments to redemption amount of redeemable noncontrolling interest	​		—	​		(1.8)	​		—	​		—	​		—	​		0.1	​		(1.7)
Net income (1)	​		—	​		—	​		236.0	​		—	​		—	​		1.4	​		237.4
Other comprehensive income (1)	​		—	​		—	​		—	​		296.4	​		—	​		0.9	​		297.3
Balances as of September 30, 2020	​	$	4.8	​	$	10,291.2	​	$	11,521.4	​	$	1,747.1	​	$	(7,913.6)	​	$	70.2	​	$	15,721.1
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Balances as of July 1, 2021	​	$	4.8	​	$	10,399.7	​	$	12,395.0	​	$	1,803.8	​	$	(8,370.2)	​	$	58.4	​	$	16,291.5
Common stock issued	​	​	—	​	​	14.4	​	​	—	​	​	—	​	​	—	​	​	—	​	​	14.4
Stock-based compensation	​	​	—	​	​	23.5	​	​	(2.8)	​	​	—	​	​	—	​	​	0.1	​	​	20.8
Treasury stock acquired, common	​	​	—	​	​	—	​	​	—	​	​	—	​	​	(203.5)	​	​	—	​	​	(203.5)
Dividends to common stockholders	​	​	—	​	​	—	​	​	(168.2)	​	​	—	​	​	—	​	​	—	​	​	(168.2)
Distributions to noncontrolling interest	​	​	—	​	​	—	​	​	—	​	​	—	​	​	—	​	​	(1.4)	​	​	(1.4)
Contributions from noncontrolling interest	​	​	—	​	​	—	​	​	—	​	​	—	​	​	—	​	​	1.6	​	​	1.6
Purchase of subsidiary shares from noncontrolling interest (1)	​	​	—	​	​	(1.1)	​	​	—	​	​	—	​	​	—	​	​	—	​	​	(1.1)
Net income (1)	​	​	—	​	​	—	​	​	359.9	​	​	—	​	​	—	​	​	1.7	​	​	361.6
Other comprehensive loss (1)	​	​	—	​	​	—	​	​	—	​	​	(184.6)	​	​	—	​	​	(1.9)	​	​	(186.5)
Balances as of September 30, 2021	​	$	4.8	​	$	10,436.5	​	$	12,583.9	​	$	1,619.2	​	$	(8,573.7)	​	$	58.5	​	$	16,129.2

(1)	Excludes amounts attributable to redeemable noncontrolling interest. See Note 9, Stockholders’ Equity, for further details.

See accompanying notes.

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

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	Accumulated		​	​	​	​	​	​	​	​	​
​	​	​	​	​	Additional		​	​	​	​	other		​	​	​	​	​	​	​	Total
​	​	Common		​	paid-in		​	Retained		​	comprehensive		​	Treasury		​	Noncontrolling		​	stockholders'
​		stock			capital			earnings			income			stock			interest			equity
​	​	(in millions)
Balances as of January 1, 2020	​	$	4.8	​	$	10,182.6	​	$	11,074.3	​	$	1,037.9	​	$	(7,681.6)	​	$	67.8	​	$	14,685.8
Common stock issued	​	​	—	​	​	34.6	​		—	​		—	​		—	​		—	​		34.6
Stock-based compensation	​	​	—	​	​	74.4	​		(6.9)	​		—	​		—	​		—	​		67.5
Treasury stock acquired, common	​	​	—	​	​	—	​		—	​		—	​		(232.0)	​		—	​		(232.0)
Dividends to common stockholders	​	​	—	​	​	—	​		(460.8)	​		—	​		—	​		—	​		(460.8)
Distributions to noncontrolling interest	​	​	—	​	​	—	​		—	​		—	​		—	​		(24.3)	​		(24.3)
Contributions from noncontrolling interest	​	​	—	​	​	—	​		—	​		—	​		—	​		4.7	​		4.7
Purchase of subsidiary shares from noncontrolling interest (1)	​	​	—	​	​	(0.6)	​	​	—	​	​	—	​	​	—	​	​	(0.3)	​	​	(0.9)
Adjustments to redemption amount of redeemable noncontrolling interest	​	​	—	​	​	0.2	​		—	​		—	​		—	​		—	​		0.2
Effects of implementation of accounting change related to credit losses, net	​	​	—	​	​	—	​	​	(8.4)	​	​	—	​	​	—	​	​	—	​	​	(8.4)
Net income (1)	​	​	—	​	​	—	​		923.2	​		—	​		—	​		23.3	​		946.5
Other comprehensive income (1)	​	​	—	​	​	—	​		—	​		709.2	​		—	​		(1.0)	​		708.2
Balances as of September 30, 2020	​	$	4.8	​	$	10,291.2	​	$	11,521.4	​	$	1,747.1	​	$	(7,913.6)	​	$	70.2	​	$	15,721.1
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Balances as of January 1, 2021	​	$	4.8	​	$	10,321.6	​	$	11,838.0	​	$	2,383.1	​	$	(7,988.6)	​	$	58.4	​	$	16,617.3
Common stock issued	​	​	—	​	​	57.3	​		—	​		—	​		—	​		—	​		57.3
Stock-based compensation	​	​	—	​	​	82.2	​		(7.3)	​		—	​		—	​		0.1	​		75.0
Treasury stock acquired, common	​	​	—	​	​	—	​		—	​		—	​		(585.1)	​		—	​		(585.1)
Dividends to common stockholders	​	​	—	​	​	—	​		(485.6)	​		—	​		—	​		—	​		(485.6)
Distributions to noncontrolling interest	​	​	—	​	​	—	​	​	—	​	​	—	​	​	—	​	​	(4.8)	​	​	(4.8)
Contributions from noncontrolling interest	​	​	—	​	​	—	​		—	​		—	​		—	​		5.4	​		5.4
Purchase of subsidiary shares from noncontrolling interest (1)	​	​	—	​	​	(16.4)	​		—	​		—	​		—	​		(1.7)	​		(18.1)
Adjustments to redemption amount of redeemable noncontrolling interest	​	​	—	​	​	(8.2)	​	​	—	​	​	—	​	​	—	​	​	(0.4)	​	​	(8.6)
Net income (1)	​	​	—	​	​	—	​		1,238.8	​		—	​		—	​		3.9	​		1,242.7
Other comprehensive loss (1)	​	​	—	​	​	—	​		—	​		(763.9)	​		—	​		(2.4)	​		(766.3)
Balances as of September 30, 2021	​	$	4.8	​	$	10,436.5	​	$	12,583.9	​	$	1,619.2	​	$	(8,573.7)	​	$	58.5	​	$	16,129.2

(1)	Excludes amounts attributable to redeemable noncontrolling interest. See Note 9, Stockholders’ Equity, for further details.

See accompanying notes.

​

​

​

​

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

​	​	​	​	​	​	​
​	​	For the nine months ended
​	​	September 30,
​		2021			2020
​	​	(in millions)
Net cash provided by operating activities	​	$	2,107.0	​	$	3,110.4
Investing activities	​	​	​	​	​	​
Fixed maturities available-for-sale and equity securities with intent to hold:	​	​	​	​	​	​
Purchases	​		(11,065.1)	​		(12,060.6)
Sales	​		2,383.5	​		2,677.3
Maturities	​		8,162.3	​		6,247.7
Mortgage loans acquired or originated	​		(4,277.1)	​		(2,281.7)
Mortgage loans sold or repaid	​		2,142.3	​		1,877.0
Real estate acquired	​		(187.8)	​		(177.1)
Real estate sold	​	​	43.5	​	​	—
Net purchases of property and equipment	​		(108.9)	​		(82.9)
Net change in other investments	​		40.0	​		160.4
Net cash used in investing activities	​		(2,867.3)	​		(3,639.9)
Financing activities	​	​	​	​	​	​
Issuance of common stock	​		57.3	​		34.6
Acquisition of treasury stock	​		(585.1)	​		(232.0)
Payments for financing element derivatives	​		(27.6)	​		(22.2)
Purchase of subsidiary shares from noncontrolling interest	​	​	(24.2)	​	​	(0.9)
Dividends to common stockholders	​	​	(485.6)	​	​	(460.8)
Issuance of long-term debt	​	​	—	​	​	608.8
Principal repayments of long-term debt	​	​	(1.4)	​	​	(65.3)
Net proceeds from (repayments of) short-term borrowings	​		0.2	​		(12.3)
Investment contract deposits	​		7,341.8	​		7,798.7
Investment contract withdrawals	​		(6,566.4)	​		(6,520.3)
Net increase in banking operation deposits	​		1,346.9	​		441.8
Other	​		—	​		0.2
Net cash provided by financing activities	​		1,055.9	​		1,570.3
Net increase in cash and cash equivalents	​		295.6	​		1,040.8
Cash and cash equivalents at beginning of period	​	​	2,849.8	​	​	2,515.9
Cash and cash equivalents at end of period	​	$	3,145.4	​	$	3,556.7
​	​	​	​	​	​	​
Supplemental disclosure of non-cash activities:	​	​	​	​	​	​
Changes from re-designation of other postretirement employee benefits (“OPEB”) plan assets to cover non-retiree benefits:	​	​	​	​	​	​
Increases in equity securities re-designated from funded status of OPEB plan	​	$	548.1	​	$	—
Increases in other investments re-designated from funded status of OPEB plan	​	​	117.5	​	​	—
Decrease in tax receivable re-designated from funded status of OPEB plan	​	​	(9.1)	​	​	—
Decrease in accumulated other comprehensive income (“AOCI”) due to reclassifying excess assets out of funded status of OPEB plan	​	​	9.1	​	​	—
Decrease in other assets due to reclassifying excess assets out of funded status of OPEB plan	​	​	(665.6)	​	​	—
Assets received in kind from pension risk transfer transaction	​	​	109.5	​	​	1,062.4

​

See accompanying notes.

​

​

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements September 30, 2021 (Unaudited)

1. Nature of Operations and Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed 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 nine months ended September 30, 2021, are not necessarily indicative of the results that may be expected for the year ended December 31, 2021, especially when considering risks and uncertainties, including those associated with the novel coronavirus (“COVID-19”), that may impact our business, results of operations, financial condition and liquidity. Our use of estimates and assumptions affect amounts reported and disclosed and includes, but is not limited to, the fair value of investments in the absence of quoted market values, investment impairments and valuation allowances, the fair value of derivatives, deferred acquisition costs (“DAC”) and other actuarial balances, measurement of goodwill and intangible assets, the liability for future policy benefits and claims, the value of pension and other postretirement benefits and accounting for income taxes and the valuation of deferred tax assets. Our estimates and assumptions could change in the future as more information becomes known about the impact of COVID-19. Our results of operations and financial condition may also be impacted by other uncertainties including evolving regulatory, legislative and standard-setter accounting interpretations and guidance.

These interim unaudited condensed consolidated financial statements should be read in conjunction with our annual audited financial statements as of December 31, 2020, included in our Form 10-K for the year ended December 31, 2020, filed with the United States Securities and Exchange Commission (“SEC”). The accompanying condensed consolidated statement of financial position as of December 31, 2020, 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, 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.

​

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

Recent Accounting Pronouncements

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 contracts or contract features that provide protection to the policyholder from capital market risk and expose us to other-than-nominal capital market risk, are measured at fair value. The periodic change in fair value is recognized in net income with the exception of the periodic change in fair value related to our own nonperformance risk, which is recognized in OCI. 3. DAC and other actuarial balances 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 as well as 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, 2023	​	​	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; ● building models and evaluating preliminary output as models are developed; ● evaluating and finalizing our key accounting policies; ● assessing the impact to our chart of accounts; ● developing format and content of new disclosures; ● conducting operational dry runs using model output and updated chart of accounts; ● evaluating transition requirements and impacts and ● establishing and documenting appropriate internal controls. ​ 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.

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

Description			Date of adoption			Effect on our consolidated financial statements or other significant matters
Standards adopted:	​	​	​	​	​	​
Simplifying the accounting for income taxes This authoritative guidance simplifies the accounting for income taxes by removing certain exceptions, including exceptions related to the incremental approach for intraperiod tax allocation, calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. Also, the guidance clarifies the accounting for franchise taxes, transactions that result in a step-up in the tax basis of goodwill and enacted changes in tax laws or rates. It specifies that an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements, although an entity may elect to do so. The guidance will be applied based on varying transition methods defined by amendment. Early adoption is permitted.	​	​	January 1, 2021	​	​	This guidance did not have a material impact on our consolidated financial statements.
​	​	​	​	​	​	​
Facilitation of the effects of reference rate reform on financial reporting This authoritative guidance provides optional expedients and exceptions for contracts and hedging relationships affected by reference rate reform. An entity may elect not to apply certain modification accounting requirements to contracts affected by reference rate reform and instead account for the modified contract as a continuation of the existing contract. Also, an entity may apply optional expedients to continue hedge accounting for hedging relationships in which the critical terms change due to reference rate reform. This guidance eases the financial reporting impacts of reference rate reform on contracts and hedging relationships and is effective until December 31, 2022.	​	​	March 12, 2020	​	​	We adopted the guidance upon issuance prospectively and elected the applicable optional expedients and exceptions for contracts and hedging relationships impacted by reference rate reform through December 31, 2022. The guidance did not have an impact on our consolidated financial statements upon adoption.
​	​	​	​	​	​	​
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.	​	​	January 1, 2020	​	​	This guidance reduces complexity and costs associated with performing a Step 2 test, should one be needed in the future. This guidance did not have a material impact on our consolidated financial statements at adoption.
​	​	​	​	​	​	​

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (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; however, the credit loss calculation and subsequent recoveries for available-for-sale securities are required to be recorded through an allowance. This guidance also expands the required credit loss disclosures.	​	​	January 1, 2020	​	​	We adopted the guidance using the modified retrospective approach. A cumulative effect adjustment of $8.4 million was recorded as a decrease to retained earnings. We recorded an offsetting increase in the allowance for credit loss for mortgage loans, reinsurance recoverables and commitments and a decrease for deferred tax impacts. See Note 3, Investments, for further details.
​	​	​	​	​	​	​

​

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.

Investments

Loan modifications related to COVID-19

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 troubled debt restructuring (“TDR”) has occurred. In response to COVID-19, the Coronavirus Aid, Relief and Economic Security Act, which was subsequently amended by the Consolidated Appropriations Act, 2021, (collectively the “CARES Act”) provides a temporary suspension of TDR accounting for certain COVID-19 related loan modifications where the loan was not more than 30 days past due as of December 31, 2019. We elected the TDR relief in the CARES Act beginning in the second quarter of 2020. The CARES Act TDR relief does not apply to modifications completed subsequent to the earlier of 60 days after the national emergency related to COVID-19 ends, or January 1, 2022. In addition, the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (As Revised on April 7, 2020) (“Interagency Statement”) provides additional guidance to determine if a short-term COVID-19 related loan modification is a TDR. We consider the CARES Act and the Interagency Statement when assessing loan modifications to determine whether a TDR has occurred. See Note 3, Investments, under the caption “Mortgage Loan Modifications” for further details.

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 10, 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.

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

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. Cash flows associated with derivatives are included within operating and financing activities in the consolidated statements of cash flows.

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 consolidated statements of operations 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. 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. Certain fair value hedges use the last-of-layer method to hedge a designated amount (the "last layer") within a closed portfolio of prepayable assets that is expected to remain outstanding for the length of the hedging relationship and is not expected to be impacted by prepayments, defaults or other factors that affect the timing and amount of cash flows. Prepayment risk is excluded when measuring the change in fair value attributable to the hedged risk under the last-of-layer method.

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. Documentation of fair value hedges that use the last-of-layer method supports the expectation that the hedged last layer amount is anticipated to be outstanding at the end of the hedging relationship and includes expectations of prepayments, defaults or other factors that affect the timing and amount of cash flows. 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.

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

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. For last-of-layer method hedges, the assessment of hedge effectiveness includes confirming we expect the hedged last layer amount to be outstanding at the end of the hedging relationship.

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. If a last-of-layer method hedging relationship is discontinued, the outstanding basis adjustment is allocated to the individual assets in the closed portfolio and those amounts are amortized consistent with the amortization of other discounts or premiums associated with those assets.

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.

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 September 30, 2021 and December 31, 2020, the separate accounts included a separate account valued at $94.5 million and $80.4 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. 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.

​

​

​

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

2. 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 September 30, 2021 and December 31, 2020.

Consolidated Variable Interest Entities

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-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.

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

Residential Mortgage Loans

We invest in ABS trusts. The trusts issue various collateralized mortgage obligation certificates and purchase residential mortgage loans. The trusts are considered VIEs due to insufficient equity to sustain themselves. We concluded we are the primary beneficiary as we purchase substantially all of the certificates and have the obligation to absorb losses that could potentially be significant to the VIEs.

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:

​

​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	September 30, 2021					​	December 31, 2020
​	​	Total		​	Total		​	Total		​	Total
​		assets			liabilities			assets			liabilities
​	​	(in millions)
Mandatory retirement savings funds (1)	​	$	35,161.0	​	$	34,771.0	​	$	41,995.2	​	$	41,527.9
Real estate (2)	​		691.0	​		42.8	​		499.0	​		21.3
Sponsored investment funds (3)	​		525.9	​		13.3	​		419.5	​		3.2
Residential mortgage loans (4)	​		1,337.5	​		21.0	​		319.8	​		—
Total	​	$	37,715.4	​	$	34,848.1	​	$	43,233.5	​	$	41,552.4

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

(2)	The assets of the real estate VIEs primarily include real estate and cash. Liabilities primarily include other liabilities.

(3)	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 $309.7 million and $226.8 million redeemable noncontrolling interest for sponsored investment funds as of September 30, 2021 and December 31, 2020, respectively.

(4)	The assets of the residential mortgage loans VIEs primarily include residential mortgage loans. The liabilities include other liabilities as of September 30, 2021. Prior to 2021, the liabilities were eliminated in our consolidated results.

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 commercial mortgage-backed securities (“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.

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

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.

As previously discussed, we sponsor and invest 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.

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

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

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​	​	​	​	​	​	​
​	​	​	​	​	Maximum exposure to
​		Asset carrying value			loss (1)
​	​	(in millions)
September 30, 2021	​	​	​	​	​	​
Fixed maturities, available-for-sale:	​	​	​	​	​	​
Corporate	​	$	294.3	​	$	286.0
Residential mortgage-backed pass-through securities	​	​	2,882.6	​	​	2,816.2
Commercial mortgage-backed securities	​	​	5,283.2	​	​	5,086.5
Collateralized debt obligations (2)	​	​	3,566.3	​	​	3,569.6
Other debt obligations	​	​	7,080.5	​	​	6,942.3
Fixed maturities, trading:	​	​	​	​	​	​
Residential mortgage-backed pass-through securities	​	​	133.3	​	​	133.3
Commercial mortgage-backed securities	​	​	26.3	​	​	26.3
Collateralized debt obligations (2)	​	​	10.9	​	​	10.9
Other debt obligations	​	​	8.5	​	​	8.5
Equity securities	​	​	123.5	​		123.5
Other investments:	​	​	​	​	​	​
Other limited partnership and fund interests (3)	​	​	1,159.6	​	​	1,996.0
​	​	​	​	​	​	​
December 31, 2020	​	​	​	​	​	​
Fixed maturities, available-for-sale:	​	​	​	​	​	​
Corporate	​	$	296.9	​	$	285.7
Residential mortgage-backed pass-through securities	​	​	2,986.8	​	​	2,857.6
Commercial mortgage-backed securities	​	​	4,942.3	​	​	4,741.2
Collateralized debt obligations (2)	​	​	4,027.5	​	​	4,045.9
Other debt obligations	​	​	7,045.9	​	​	6,832.6
Fixed maturities, trading:	​	​	​	​	​	​
Residential mortgage-backed pass-through securities	​	​	190.5	​	​	190.5
Commercial mortgage-backed securities	​	​	27.1	​	​	27.1
Collateralized debt obligations (2)	​	​	20.6	​	​	20.6
Other debt obligations	​	​	9.4	​	​	9.4
Equity securities	​	​	121.7	​		121.7
Other investments:	​	​	​	​	​	​
Other limited partnership and fund interests (3)	​	​	999.1	​	​	1,739.0

(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. A carrying value of zero is used if distributions have been received in excess of our investment, resulting in a negative carrying value for the investment. 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.

(3)	As of September 30, 2021 and December 31, 2020, the maximum exposure to loss for other limited partnership and fund interests includes $133.2 million and $141.2 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.

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (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 September 30, 2021 and December 31, 2020, money market mutual funds we manage held $5.1 billion and $4.4 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.

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3. 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 10, 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 and mark-to-market adjustments on certain fixed maturities, trading are reflected in net realized capital gains (losses). 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 excludes accrued interest receivable. Accrued interest receivable is reported in accrued investment income on the consolidated statements of financial position. Fixed maturities, available-for-sale are subject to an allowance for credit loss and changes in the allowance are reported in net income as a component of net realized capital gains (losses). Interest income, as well as prepayment fees and the amortization of the related premium or discount, is reported in net investment income. For loan-backed and structured securities, we recognize income using a constant effective yield based on currently anticipated cash flows.

​

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

The amortized cost, gross unrealized gains and losses, allowance for credit loss and fair value of fixed maturities, available-for-sale were as follows:

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	Gross		​	Gross		​	Allowance		​	​	​
​	​	Amortized		​	unrealized		​	unrealized		​	for credit		​	​	​
​		cost (1)			gains			losses			loss			Fair value
​	​	(in millions)
September 30, 2021	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Fixed maturities, available-for-sale:	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
U.S. government and agencies	​	$	1,821.7	​	$	140.6	​	$	40.5	​	$	—	​	$	1,921.8
Non-U.S. governments	​	​	906.3	​	​	139.3	​	​	0.8	​	​	—	​	​	1,044.8
States and political subdivisions	​	​	8,255.6	​	​	1,004.3	​	​	26.9	​	​	—	​	​	9,233.0
Corporate	​	​	41,412.9	​	​	4,350.9	​	​	203.0	​	​	15.9	​	​	45,544.9
Residential mortgage-backed pass-through securities	​	​	2,816.2	​	​	82.8	​	​	16.4	​	​	—	​	​	2,882.6
Commercial mortgage-backed securities	​	​	5,086.5	​	​	219.2	​	​	22.2	​	​	0.3	​	​	5,283.2
Collateralized debt obligations (2)	​	​	3,569.6	​	​	7.3	​	​	10.6	​	​	—	​	​	3,566.3
Other debt obligations	​	​	6,942.3	​	​	162.1	​	​	23.8	​	​	0.1	​	​	7,080.5
Total fixed maturities, available-for-sale	​	$	70,811.1	​	$	6,106.5	​	$	344.2	​	$	16.3	​	$	76,557.1

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	Gross		​	Gross		​	Allowance		​	​
​	​	Amortized		​	unrealized		​	unrealized		​	for credit		​	​
​	​	cost (1)		​	gains		​	losses		​	loss		​	Fair value
​	​	​	(in millions)
December 31, 2020	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Fixed maturities, available-for-sale:	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
U.S. government and agencies	​	$	1,893.1	​	$	228.9	​	$	10.5	​	$	—	​	$	2,111.5
Non-U.S. governments	​	​	881.6	​	​	192.1	​	​	—	​	​	—	​	​	1,073.7
States and political subdivisions	​	​	8,004.9	​	​	1,175.5	​	​	12.6	​	​	—	​	​	9,167.8
Corporate	​	​	41,289.9	​	​	6,160.9	​	​	95.1	​	​	0.9	​	​	47,354.8
Residential mortgage-backed pass-through securities	​	​	2,857.6	​	​	129.4	​	​	0.2	​	​	—	​	​	2,986.8
Commercial mortgage-backed securities	​	​	4,741.2	​	​	241.3	​	​	35.9	​	​	4.3	​	​	4,942.3
Collateralized debt obligations (2)	​	​	4,045.9	​	​	8.7	​	​	24.9	​	​	2.2	​	​	4,027.5
Other debt obligations	​	​	6,832.6	​	​	243.2	​	​	29.9	​	​	—	​	​	7,045.9
Total fixed maturities, available-for-sale	​	$	70,546.8	​	$	8,380.0	​	$	209.1	​	$	7.4	​	$	78,710.3

(1)	Amortized cost excludes accrued interest receivable of $570.1 million and $552.5 million as of September 30, 2021 and December 31, 2020, respectively.

(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 September 30, 2021, by expected maturity, were as follows:

​

​	​	​	​	​	​	​
​		Amortized cost			Fair value
​	​	(in millions)
Due in one year or less	​	$	2,216.3	​	$	2,245.6
Due after one year through five years	​		10,723.2	​		11,323.9
Due after five years through ten years	​		14,142.4	​		15,275.6
Due after ten years	​		25,314.6	​		28,899.4
Subtotal	​		52,396.5	​		57,744.5
Mortgage-backed and other asset-backed securities	​		18,414.6	​		18,812.6
Total	​	$	70,811.1	​	$	76,557.1

​

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

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

​

Net Realized Capital Gains and Losses

Net realized capital gains and losses on sales of investments are determined on the basis of specific identification. In general, in addition to realized capital gains and losses on investment sales and periodic settlements on derivatives not designated as hedges, we report gains and losses related to the following in net realized capital gains (losses) on the consolidated statements of operations: mark-to-market adjustments on certain 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, cash flow hedge gains (losses) when the hedged item impacts realized capital gains (losses), changes in the valuation allowance for fixed maturities available-for-sale and certain financing receivables, 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 nine months ended
​	​	September 30,					​	September 30,
​		2021			2020			2021			2020
​	​	(in millions)
Fixed maturities, available-for-sale:	​	​	​	​	​	​	​	​	​	​	​	​
Gross gains	​	$	13.0	​	$	22.3	​	$	61.2	​	$	128.6
Gross losses	​		(0.9)	​		(12.8)	​		(29.0)	​		(38.6)
Net credit losses	​		(9.6)	​		(9.1)	​		(27.4)	​		(25.3)
Hedging, net (1)	​		—	​		(0.2)	​		(1.0)	​		(9.8)
Fixed maturities, trading (2)	​		(4.0)	​		(1.5)	​		(28.7)	​		7.2
Equity securities (3)	​		31.2	​		52.8	​		85.5	​		28.4
Mortgage loans	​		2.6	​		(0.3)	​		14.2	​		(15.3)
Derivatives (1)	​		(173.7)	​		(42.5)	​		(153.9)	​		52.3
Other	​		(10.6)	​		56.8	​		37.4	​		42.0
Net realized capital gains (losses)	​	$	(152.0)	​	$	65.5	​	$	(41.7)	​	$	169.5

(1)

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. Gains (losses) for fixed maturities, available-for-sale related to terminated cash flow hedges continue to be reflected in net realized capital gains (losses).

(2)	Unrealized gains (losses) on fixed maturities, trading still held at the reporting date were $(4.1) million and $(1.5) million for the three months ended September 30, 2021 and 2020, respectively, and $(27.6) million and $8.7 million for the nine months ended September 30, 2021 and 2020, respectively.

(3)

Unrealized gains (losses) on equity securities still held at the reporting date were $21.5 million and $48.0 million for the three months ended September 30, 2021 and 2020, respectively, and $54.0 million and $30.0 million for the nine months ended September 30, 2021 and 2020, respectively. This excludes $3.7 million and $2.7 million for the three months ended September 30, 2021 and 2020, respectively, and $9.6 million and $13.2 million for the nine months ended September 30, 2021 and 2020, 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 $273.6 million and $628.6 million for the three months ended September 30, 2021 and 2020, and $1,870.7 million and $2,176.2 million for the nine months ended September 30, 2021 and 2020, respectively.

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

Allowance for Credit Loss

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

Each reporting period, all securities in an unrealized loss position are reviewed to determine whether a decline in value is due to credit. Relevant facts and circumstances considered include: (1) the extent the fair value is 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 and (4) for structured securities, the adequacy of the expected cash flows. To the extent we determine an unrealized loss is due to credit, an allowance for credit loss is recognized through a reduction to net income.

We estimate the amount of the allowance for credit loss 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. We do not measure a credit loss allowance on accrued interest receivable because we write off the accrued interest receivable balance to net investment income in a timely manner when we have concern regarding collectability.

Amounts on fixed maturities, available-for-sale deemed to be uncollectible are written off and removed from the allowance for credit loss. A write-off may also occur if we intend 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.

A rollforward of the allowance for credit loss by major security type was as follows.

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	For the three months ended September 30, 2021
​	​	​	​	​	​	​	​	​	​	​	​	​	​	Residential		​	​	​	​	​	​	​	​	​		​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	mortgage-		​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	backed		​	Commercial		​	Collateralized		​	​	​	​	​	​
​	​	U.S.		​	​	​	​	States and		​	​	​	​	pass-		​	mortgage-		​	debt		​	Other		​	​	​
​	​	government		​	Non-U.S.		​	political		​	​	​	​	through		​	backed		​	obligations		​	debt		​	​	​
​		and agencies			governments			subdivisions			Corporate			securities			securities			(1)			obligations			Total
​	​	(in millions)
Beginning balance	​	$	—	​	$	—	​	$	—	​	$	8.5	​	$	—	​	$	0.2	​	$	—	​	$	—	​	$	8.7
Additions for credit losses not previously recorded		​	—		​	—		​	—		​	7.8	​	​	—		​	0.1		​	—		​	0.1		​	8.0
Foreign currency translation adjustment	​	​	—	​	​	—	​	​	—	​	​	(0.4)	​	​	—	​	​	—	​	​	—	​	​	—	​	​	(0.4)
Ending balance		$	—		$	—		$	—		$	15.9	​	$	—		$	0.3		$	—		$	0.1		$	16.3

​

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	For the three months ended September 30, 2020
​	​	​	​	​	​	​	​	​	​	​	​	​	​	Residential		​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	mortgage-		​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	backed		​	Commercial		​	Collateralized		​	​	​	​	​	​
​	​	U.S.		​	​	​	​	States and		​	​	​	​	pass-		​	mortgage-		​	debt		​	Other		​	​	​
​	​	government		​	Non-U.S.		​	political		​	​	​	​	through		​	backed		​	obligations		​	debt		​	​	​
​		and agencies			governments			subdivisions			Corporate			securities			securities			(1)			obligations			Total
​	​	(in millions)
Beginning balance		$	—		$	—		$	—		$	2.8	​	$	—		$	3.4		$	1.0		$	—		$	7.2
Additions for credit losses not previously recorded		​	—		​	—		​	—		​	3.4	​	​	—		​	1.2		​	—		​	—		​	4.6
Additional increases (decreases) for credit losses on securities with an allowance recorded in the previous period		​	—		​	—		​	—		​	—	​	​	—		​	1.0	​	​	0.9	​	​	—	​	​	1.9
Write-offs charged against allowance		​	—		​	—		​	—		​	—	​	​	—		​	(1.6)		​	—		​	—		​	(1.6)
Ending balance		$	—		$	—		$	—		$	6.2	​	$	—		$	4.0		$	1.9		$	—		$	12.1

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	For the nine months ended September 30, 2021
​	​	​	​	​	​	​	​	​	​	​	​	​	​	Residential		​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	mortgage-		​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	backed		​	Commercial		​	Collateralized		​	​	​	​	​	​
​	​	U.S.		​	​	​	​	States and		​	​	​	​	pass-		​	mortgage-		​	debt		​	Other		​	​	​
​	​	government		​	Non-U.S.		​	political		​	​	​	​	through		​	backed		​	obligations		​	debt		​	​	​
​		and agencies			governments			subdivisions			Corporate			securities			securities			(1)			obligations			Total
​	​	(in millions)
Beginning balance		$	—		$	—		$	—		$	0.9	​	$	—		$	4.3		$	2.2		$	—		$	7.4
Additions for credit losses not previously recorded		​	—		​	—		​	—		​	15.4	​	​	—		​	0.4		​	—		​	0.1		​	15.9
Additional increases (decreases) for credit losses on securities with an allowance recorded in the previous period		​	—		​	—		​	—		​	—	​	​	—		​	2.4	​	​	0.4	​	​	—	​	​	2.8
Write-offs charged against allowance	​	​	—	​	​	—	​	​	—	​	​	—	​	​	—	​	​	(6.8)	​	​	(2.6)	​	​	—	​	​	(9.4)
Foreign currency translation adjustment	​	​	—	​	​	—	​	​	—	​	​	(0.4)	​	​	—	​	​	—	​	​	—	​	​	—	​	​	(0.4)
Ending balance		$	—		$	—		$	—		$	15.9	​	$	—		$	0.3		$	—		$	0.1		$	16.3
Accrued interest written off to net investment income	​	$	—	​	$	—	​	$	—	​	$	0.2	​	$	—	​	$	—	​	$	—	​	$	—	​	$	0.2

​

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	For the nine months ended September 30, 2020
​	​	​	​	​	​	​	​	​	​	​	​	​	​	Residential		​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	mortgage-		​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	backed		​	Commercial		​	Collateralized		​	​	​	​	​	​
​	​	U.S.		​	​	​	​	States and		​	​	​	​	pass-		​	mortgage-		​	debt		​	Other		​	​	​
​	​	government		​	Non-U.S.		​	political		​	​	​	​	through		​	backed		​	obligations		​	debt		​	​	​
​		and agencies			governments			subdivisions			Corporate			securities			securities			(1)			obligations			Total
​	​	(in millions)
Beginning balance (2)		$	—		$	—		$	—		$	—	​	$	—		$	—		$	—		$	—		$	—
Additions for credit losses not previously recorded		​	—		​	—		​	—		​	13.2	​	​	—		​	2.9		​	0.1		​	0.1		​	16.3
Reductions for securities sold during the period		​	—		​	—		​	—		​	(7.0)	​	​	—		​	—		​	—		​	—		​	(7.0)
Additional increases (decreases) for credit losses on securities with an allowance recorded in the previous period		​	—		​	—		​	—		​	—	​	​	—		​	2.7	​	​	1.8	​	​	(0.1)	​	​	4.4
Write-offs charged against allowance	​	​	—	​	​	—	​	​	—	​	​	—	​	​	—	​	​	(1.6)	​	​	—	​	​	—	​	​	(1.6)
Ending balance		$	—		$	—		$	—		$	6.2	​	$	—		$	4.0		$	1.9		$	—		$	12.1

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

(2)	The allowance for credit loss associated with fixed maturities, available-for-sale was applied prospectively upon adoption of authoritative guidance effective January 1, 2020.

We did not write off any accrued interest to net investment income during the three months ended September 30, 2021 or during 2020.

Available-for-Sale Securities in Unrealized Loss Positions Without an Allowance for Credit Loss

For available-for-sale securities with unrealized losses for which an allowance for credit loss has not been recorded, 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:

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	September 30, 2021
​	​	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 (1):	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
U.S. government and agencies	​	$	400.1	​	$	14.9	​	$	150.8	​	$	25.7	​	$	550.9	​	$	40.6
Non-U.S. governments	​	​	47.7	​	​	0.8	​	​	—	​	​	—	​	​	47.7	​	​	0.8
States and political subdivisions	​	​	632.3	​	​	10.9	​	​	245.1	​	​	15.9	​	​	877.4	​	​	26.8
Corporate	​	​	4,287.4	​	​	141.3	​	​	448.6	​	​	48.6	​	​	4,736.0	​	​	189.9
Residential mortgage-backed pass-through securities	​	​	1,229.4	​	​	15.9	​	​	21.8	​	​	0.6	​	​	1,251.2	​	​	16.5
Commercial mortgage-backed securities	​	​	480.6	​	​	4.9	​	​	321.6	​	​	14.1	​	​	802.2	​	​	19.0
Collateralized debt obligations (2)	​	​	1,235.9	​	​	2.9	​	​	461.3	​	​	7.7	​	​	1,697.2	​	​	10.6
Other debt obligations	​	​	2,334.4	​	​	17.3	​	​	177.4	​	​	6.5	​	​	2,511.8	​	​	23.8
Total fixed maturities, available-for-sale	​	$	10,647.8	​	$	208.9	​	$	1,826.6	​	$	119.1	​	$	12,474.4	​	$	328.0

(1)	Fair value and gross unrealized losses are excluded for available-for-sale securities for which an allowance for credit loss has been recorded.

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

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

Of the total amounts, Principal Life Insurance Company’s (“Principal Life”) consolidated portfolio represented $10,793.0 million in available-for-sale fixed maturities with gross unrealized losses of $231.9 million. Of the available-for-sale fixed maturities within Principal Life’s consolidated portfolio in a gross unrealized loss position, 91% were investment grade (rated AAA through BBB-) with an average price of 98 (carrying value/amortized cost) as of September 30, 2021. Gross unrealized losses in our fixed maturities portfolio increased during the nine months ended September 30, 2021, primarily due to an increase in interest rates, partially offset by 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 1,400 securities with a carrying value of $9,056.8 million and unrealized losses of $136.9 million reflecting an average price of 99 as of September 30, 2021. Of this portfolio, 91% was investment grade (rated AAA through BBB-) as of September 30, 2021, with associated unrealized losses of $124.8 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 280 securities with a carrying value of $1,736.2 million and unrealized losses of $95.0 million as of September 30, 2021. The average credit rating of this portfolio was AA- with an average price of 95 as of September 30, 2021. Of the $95.0 million in unrealized losses, the corporate sector accounts for $25.5 million in unrealized losses with an average price of 94 and an average credit rating of BBB-. Furthermore, unrealized losses include $13.8 million within the commercial mortgage-backed security sector with an average of price of 96 and an average credit rating of AAA and $7.7 million within the collateralized debt obligation sector with an average price of 98 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.

Because we expected to recover our amortized cost, we did not record an allowance for credit loss on these securities as of September 30, 2021. Because 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 write down these investments to fair value.

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	December 31, 2020
​	​	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 (1):	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
U.S. government and agencies	​	$	351.1	​	$	10.4	​	$	—	​	$	—	​	$	351.1	​	$	10.4
States and political subdivisions	​		363.5	​		12.5	​		—	​		—	​		363.5	​		12.5
Corporate	​		1,578.7	​		54.4	​		267.9	​		40.6	​		1,846.6	​		95.0
Residential mortgage-backed pass-through securities	​		92.3	​		0.2	​		1.6	​		—	​		93.9	​		0.2
Commercial mortgage-backed securities	​		970.9	​		22.1	​		137.4	​		12.2	​		1,108.3	​		34.3
Collateralized debt obligations (2)	​		1,750.6	​		11.1	​		931.1	​		12.9	​		2,681.7	​		24.0
Other debt obligations	​		802.3	​		28.1	​		61.1	​		1.7	​		863.4	​		29.8
Total fixed maturities, available-for-sale	​	$	5,909.4	​	$	138.8	​	$	1,399.1	​	$	67.4	​	$	7,308.5	​	$	206.2

(1)	Fair value and gross unrealized losses are excluded for available-for-sale securities for which an allowance for credit loss has been recorded.

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

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

Of the total amounts, Principal Life’s consolidated portfolio represented $7,029.6 million in available-for-sale fixed maturities with gross unrealized losses of $173.9 million. Of the available-for-sale fixed maturities within Principal Life’s consolidated portfolio in a gross unrealized loss position, 89% were investment grade (rated AAA through BBB-) with an average price of 98 (carrying value/amortized cost) as of December 31, 2020. Gross unrealized losses in our fixed maturities portfolio increased during the year ended December 31, 2020, primarily due to widening of credit spreads, partially offset by a decrease in interest rates.

For those securities that had been in a continuous unrealized loss position for less than twelve months, Principal Life’s consolidated portfolio held 619 securities with a carrying value of $5,638.3 million and unrealized losses of $122.4 million reflecting an average price of 98 as of December 31, 2020. Of this portfolio, 89% was investment grade (rated AAA through BBB-) as of December 31, 2020, with associated unrealized losses of $98.4 million. The unrealized losses on these securities can primarily be attributed to changes in market interest rates and changes in credit spreads since the securities were acquired.

For those securities that had been in a continuous unrealized loss position greater than or equal to twelve months, Principal Life’s consolidated portfolio held 198 securities with a carrying value of $1,391.3 million and unrealized losses of $51.5 million as of December 31, 2020. The average credit rating of this portfolio was AA- with an average price of 96 as of December 31, 2020. Of the $51.5 million in unrealized losses, the corporate sector accounts for $24.9 million in unrealized losses with an average price of 92 and an average credit rating of BB+. Furthermore, unrealized losses include $12.9 million within the collateralized debt obligation sector with an average price of 99 and an average credit rating of AA+ and $11.9 million within commercial mortgage-backed security sector with an average of price of 92 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.

Because we expected to recover our amortized cost, we did not record an allowance for credit loss on these securities as of December 31, 2020. Because 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 write down these investments to fair value.

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 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:

​

​	​	​	​	​	​	​
​		September 30, 2021			December 31, 2020
​	​	(in millions)
Net unrealized gains on fixed maturities, available-for-sale (1)	​	$	5,749.7	​	$	8,193.0
Net unrealized gains on derivative instruments	​		79.6	​		38.9
Adjustments for assumed changes in amortization patterns	​		(316.5)	​		(437.3)
Adjustments for assumed changes in policyholder liabilities	​		(1,029.2)	​		(2,603.9)
Net unrealized gains on other investments and noncontrolling interest adjustments	​		55.9	​		78.0
Provision for deferred income taxes	​		(956.7)	​		(1,112.2)
Net unrealized gains on available-for-sale securities and derivative instruments	​	$	3,582.8	​	$	4,156.5

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

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

Financing Receivables

Mortgage Loans

Mortgage loans consist of commercial and residential mortgage loans. Our commercial mortgage loan portfolio consists primarily of non-recourse, fixed rate mortgages on stabilized properties. Our residential mortgage loan portfolio is composed of first lien and home equity mortgages concentrated in Chile and the United States.

Commercial and residential mortgage loans are generally reported at cost adjusted for amortization of premiums and accrual of discounts, computed using the interest method and net of valuation allowances. Amortized cost excludes accrued interest receivable. Interest income is accrued on the principal amount of the loan based on the loan’s contractual interest rate. Interest income, as well as prepayment of fees and the amortization of the related premium or discount, is reported in net investment income on the consolidated statements of operations. Accrued interest receivable is reported in accrued investment income on the consolidated statements of financial position. Any changes in the loan valuation allowances are reported in net realized capital gains (losses) on the consolidated statements of operations. Further details relating to our valuation allowance are included under the caption “Financing Receivables Valuation Allowance.”

Direct Financing Leases

Our direct financing leases are concentrated in Chile. Our Chilean operations enter into private placement contracts for commercial, industrial and office space properties whereby our Chilean operations purchase the real estate and/or building from the seller-lessee but then lease the property back to the seller-lessee. Ownership of the property is transferred to the lessee by the end of the lease term. Direct financing leases are reported as a component of other investments in the consolidated statements of financial position.

Reinsurance Recoverables

Our reinsurance recoverables include amounts due from reinsurers for paid or unpaid claims, claims incurred but not reported or policy benefits. We cede life, disability, medical and long-term care insurance to other insurance companies through reinsurance. Reinsurance recoverables are reported with premiums due and other receivables in the consolidated statements of financial position.

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

Credit Quality Information for Financing Receivables

The amortized cost of our financing receivables by credit risk and vintage was as follows:

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	As of September 30, 2021
​		2021			2020			2019			2018			2017			Prior			Total
​	​	​	(in millions)
Commercial mortgage loans:	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
A- and above		$	1,852.4		$	1,812.6		$	2,447.0		$	2,411.6		$	1,623.0		$	4,504.4		$	14,651.0
BBB+ thru BBB-		​	233.1		​	296.9		​	294.0		​	160.5		​	183.3		​	384.8		​	1,552.6
BB+ thru BB-		​	23.8		​	5.4		​	—		​	—		​	—		​	56.1		​	85.3
B+ and below		​	—		​	—		​	—		​	9.0		​	—		​	34.7		​	43.7
Total		$	2,109.3		$	2,114.9		$	2,741.0		$	2,581.1		$	1,806.3		$	4,980.0		$	16,332.6
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Direct financing leases:		​	​		​	​		​	​		​	​		​	​		​	​		​	​
A- and above		$	—		$	44.1		$	1.4		$	40.3		$	17.1		$	255.0		$	357.9
BBB+ thru BBB-		​	25.1		​	59.4		​	22.7		​	18.3		​	16.0		​	53.1		​	194.6
BB+ thru BB-		​	51.6		​	13.8		​	1.9		​	—		​	—		​	2.1		​	69.4
B+ and below		​	1.5		​	—		​	—		​	—		​	—		​	—		​	1.5
Total		$	78.2		$	117.3		$	26.0		$	58.6		$	33.1		$	310.2		$	623.4
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Residential mortgage loans:		​	​		​	​		​	​		​	​		​	​		​	​		​	​
Performing		$	1,665.2		$	585.2		$	181.5		$	101.5		$	117.5		$	470.3		$	3,121.2
Non-performing		​	0.7		​	1.8		​	1.3		​	0.6		​	0.8		​	4.0		​	9.2
Total		$	1,665.9		$	587.0		$	182.8		$	102.1		$	118.3		$	474.3		$	3,130.4
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Reinsurance recoverables		​	​		​	​		​	​		​	​		​	​		​	​		$	1,122.7

​

​

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​		As of December 31, 2020
​		2020		​	2019		​	2018		​	2017		​	2016		​	Prior		​	Total
​	​	(in millions)
Commercial mortgage loans:		​			​			​			​			​			​			​
A- and above	​	$	1,807.6	​	$	2,486.8	​	$	2,464.7	​	$	1,780.8	​	$	1,417.8	​	$	3,697.0	​	$	13,654.7
BBB+ thru BBB-	​		149.1	​		194.1	​		352.5	​		262.7	​		75.8	​		499.7	​		1,533.9
BB+ thru BB-	​		23.7	​		69.0	​		—	​		—	​		9.1	​		43.9	​		145.7
B+ and below	​		39.4	​		20.0	​		—	​		5.8	​		6.6	​		35.5	​		107.3
Total	​	$	2,019.8	​	$	2,769.9	​	$	2,817.2	​	$	2,049.3	​	$	1,509.3	​	$	4,276.1	​	$	15,441.6
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Direct financing leases:	​			​			​			​			​			​			​
A- and above	​	$	43.9	​	$	1.6	​	$	42.6	​	$	19.2	​	$	15.3	​	$	202.9	​	$	325.5
BBB+ thru BBB-	​		94.9	​		5.5	​		11.3	​		18.4	​		3.0	​		35.5	​		168.6
BB+ thru BB-	​		13.3	​		—	​		—	​		—	​		—	​		1.9	​		15.2
B+ and below	​		57.6	​		22.5	​		11.9	​		—	​		1.0	​		108.5	​		201.5
Total	​	$	209.7	​	$	29.6	​	$	65.8	​	$	37.6	​	$	19.3	​	$	348.8	​	$	710.8
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Residential mortgage loans:	​			​			​			​			​			​			​
Performing	​	$	699.1	​	$	336.7	​	$	167.0	​	$	165.1	​	$	167.6	​	$	398.7	​	$	1,934.2
Non-performing	​		—	​		2.0	​		0.8	​		1.4	​		0.4	​		12.7	​		17.3
Total	​	$	699.1	​	$	338.7	​	$	167.8	​	$	166.5	​	$	168.0	​	$	411.4	​	$	1,951.5
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Reinsurance recoverables	​	​	​	​			​			​			​			​			​	$	1,098.0

​

The amortized cost of commercial mortgage loans, direct financing leases and residential mortgage loans excluded accrued interest receivable of $59.3 million, $1.1 million and $16.5 million, respectively, as of September 30, 2021. The amortized cost of commercial mortgage loans, direct financing leases and residential mortgage loans excluded accrued interest receivable of $60.0 million, $0.5 million and $2.0 million, respectively, as of December 31, 2020.

Financing Receivables Credit Monitoring

Commercial Mortgage Loan Credit Risk Profile Based on Internal Rating

We actively monitor and manage our commercial mortgage loan and direct financing lease portfolios. All commercial mortgage loans and direct financing leases 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 models stress expected cash flows at various levels and at different points in time depending on the durability of the income stream, which includes our assessment of factors such as location (macro and micro markets), tenant quality and lease expirations. Our internal rating analysis presents expected losses in terms of an S&P Global (“S&P”) bond equivalent rating for domestic commercial mortgage loans and Feller rate equivalent for Chilean commercial mortgage loans and direct financing leases. As the credit risk for commercial mortgage loans and direct financing leases 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 and direct financing leases are updated at least annually and potentially more often for certain investments with material changes in collateral value or occupancy and for investments on an internal “watch list”.

Commercial mortgage loans and direct financing leases that require more frequent and detailed attention are identified and placed on an internal “watch list”. Among the criteria that may 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.

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

Residential Mortgage Loan 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 domestic residential mortgage loans as loans 90 days or greater delinquent or on non-accrual status. We define non-performing residential first lien mortgages in the Chilean market as loans that have missed a specified number of coupon payments based on the nature of the loans and collection practices in that market.

Non-Accrual Financing Receivables

Financing receivables are placed on non-accrual status if we have concern regarding the collectability of future payments or if a financing receivable 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 and direct financing leases 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. When a financing receivable 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. Financing receivables in the Chilean market are carried on accrual for a longer period of delinquency than domestic financing receivables, as assessment of collectability is based on the nature of the financing receivables and collection practices in that market.

The amortized cost of financing receivables on non-accrual status was as follows:

​

​	​	​	​	​	​	​	​	​	​
​	​	​	September 30, 2021
​	​	​		​	​	​	​	Amortized cost
​	​	Beginning		​	Ending		​	of nonaccrual
​	​	amortized cost		​	amortized cost		​	assets without
​	​	on nonaccrual		​	on nonaccrual		​	a valuation
​		status			status			allowance
​	​	​	(in millions)
Commercial mortgage loans	​	$	10.7	​	$	4.6	​	$	—
Residential mortgage loans	​	​	10.8	​	​	6.2	​	​	0.7
Total	​	$	21.5	​	$	10.8	​	$	0.7

​

​	​	​	​	​	​	​	​	​	​
​	​	December 31, 2020
​	​	​		​	​	​	​	Amortized cost
​	​	Beginning		​	Ending		​	of nonaccrual
​	​	amortized cost		​	amortized cost		​	assets without
​	​	on nonaccrual		​	on nonaccrual		​	a valuation
​		status			status			allowance
​	​	​	(in millions)
Commercial mortgage loans	​	$	5.0	​	$	10.7	​	$	—
Residential mortgage loans		​	6.8		​	10.8		​	0.7
Total		$	11.8		$	21.5		$	0.7

​

No interest income was recognized on non-accrual financing receivables during 2021 and 2020.

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

The aging of our financing receivables, based on amortized cost, was as follows:

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	September 30, 2021
​		​	​		​	​		​	​		​	​		​	​		​	​		Amortized
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	cost
​	​	​	​	​	​	​	​	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 (1)		​	accruing
​	​	(in millions)
Commercial mortgage loans	​	$	5.3	​	$	0.1	​	$	7.3	​	$	12.7	​	$	16,319.9	​	$	16,332.6	​	$	2.7
Direct financing leases	​	​	—	​	​	—	​	​	3.6	​	​	3.6	​	​	619.8	​	​	623.4	​	​	3.6
Residential mortgage loans	​	​	34.8	​	​	7.4	​	​	7.4	​	​	49.6	​	​	3,080.8	​	​	3,130.4	​	​	3.0
Total	​	$	40.1	​	$	7.5	​	$	18.3	​	$	65.9	​	$	20,020.5	​	$	20,086.4	​	$	9.3

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	December 31, 2020
​		​	​		​	​		​	​		​	​		​	​		​	​		Amortized
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	cost
​	​	​	​	​	​	​	​	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 (1)		​	accruing
​	​	(in millions)
Commercial mortgage loans	​	$	42.1	​	$	9.2	​	$	12.0	​	$	63.3	​	$	15,378.3	​	$	15,441.6	​	$	1.3
Direct financing leases	​		—	​		3.2	​		—	​		3.2	​		707.6	​		710.8	​		—
Residential mortgage loans	​		66.6	​		8.8	​		10.9	​		86.3	​		1,865.2	​		1,951.5	​		6.5
Total	​	$	108.7	​	$	21.2	​	$	22.9	​	$	152.8	​	$	17,951.1	​	$	18,103.9	​	$	7.8

(1)	As of both September 30, 2021 and December 31, 2020, no reinsurance recoverables were considered past due.

Financing Receivables Valuation Allowance

We establish a valuation allowance to provide for the risk of credit losses inherent in our financing receivables. The valuation allowance is maintained at a level believed adequate by management to absorb estimated expected credit losses. The valuation allowance is based on amortized cost excluding accrued interest receivable and includes reserves for pools of financing receivables with similar risk characteristics. We do not measure a credit loss allowance on accrued interest receivable because we write off the uncollectible accrued interest receivable balance to net investment income in a timely manner, generally within 90 days domestically or, in the Chilean market, based on the nature of the loans and collection practices in that market. During 2021 and 2020, we did not write off any commercial mortgage loan accrued interest receivable or residential mortgage loan accrued interest receivable.

For commercial and residential mortgage loans and direct financing leases, 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 portfolio, portfolio delinquency information, underwriting standards, peer group information, current and forecasted economic conditions, loss experience and other relevant factors. For reinsurance recoverables, management’s periodic evaluation and assessment of the valuation allowance adequacy is based on known and inherent risks, adverse situations that may affect a reinsurer’s ability to repay, current and forecasted economic conditions, industry loss experience and other relevant factors.

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

Our commercial mortgage loans and direct financing leases are pooled 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 and forecasted environmental factors management believes to be relevant. Environmental factors are forecasted for two years or less with immediate reversion to historical experience. The allowance for direct financing leases is also adjusted for the residual value of the leased assets. A commercial mortgage loan or direct financing lease is evaluated individually if it does not continue to share similar risk characteristics of a pool. We analyze the need for an individual evaluation for any domestic commercial mortgage loan that is delinquent for 60 days or more, in process of foreclosure, restructured, on the internal “watch list” or that currently is evaluated individually. We analyze the need for an individual evaluation for any Chilean commercial mortgage loan or direct financing lease that is considered past due based on collection practices in the Chilean market and the nature of the loan or lease.

We estimate expected credit losses for certain commercial mortgage loan or direct financing lease commitments where we have a contractual obligation to extend credit. The expected credit losses are estimated based on the commercial mortgage loan or direct financing lease valuation allowance process described previously, adjusted for probability of funding. The estimated expected credit losses for commercial mortgage loan and direct financing lease commitments are reported in other liabilities on the consolidated statements of financial position. The change in the credit loss liability for commitments is included in net realized capital gains (losses) on the consolidated statements of operations. Once funded, expected credit losses for commercial mortgage loans or direct financing leases are included within the commercial mortgage loan or direct financing lease valuation allowance described previously.

We evaluate residential mortgage loans based on aggregated risk factors and historical loss experience by pool type. We adjust these quantitative factors for qualitative factors of present and forecasted conditions. Qualitative factors include items such as economic and business conditions, changes in the portfolio, value of underlying collateral and concentrations. A residential mortgage loan is evaluated individually if it does not continue to share similar risk characteristics of a pool. We analyze the need for an individual evaluation for any domestic residential mortgage loan that is delinquent for 60 days or more, in process of foreclosure, restructured, on the internal “watch list” or that currently is evaluated individually. We analyze the need for an individual evaluation for any Chilean residential mortgage loan that is considered past due based on collection practices in the Chilean market and the nature of the loan.

As discussed previously, commercial and residential mortgage loans and direct financing leases are evaluated individually if the asset does not continue to share similar risk characteristics of a pool. When we determine a commercial or residential mortgage loan is probable of foreclosure, a valuation allowance is established equal to the difference between the carrying amount of the mortgage loan and the estimated value of the collateral reduced by the cost to sell. For certain commercial mortgage loans where repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty, we elect to establish a valuation allowance equal to the difference between the carrying amount of the mortgage loan and the estimated value of the real estate collateral, which may be reduced by the cost to sell. Estimated value may also be based on either the present value of the expected future cash flows discounted at the asset’s effective interest rate or the asset’s observable market price. Subsequent changes in the estimated value are reflected in the valuation allowance. Amounts on financing receivables deemed to be uncollectible are charged off and removed from the valuation allowance. The change in the valuation allowance for loans and direct financing leases is included in net realized capital gains (losses) on the consolidated statements of operations.

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

Our reinsurance recoverables are pooled by reinsurer risk rating with an estimated loss ratio applied against each risk rating level. The loss ratio is generally based upon industry historical loss experience and expected recovery timing as adjusted for certain current and forecasted environmental factors management believes to be relevant. Environmental factors are forecasted for five years or less with immediate reversion to industry historical experience. A reinsurance recoverable is evaluated individually if it does not continue to share similar risk characteristics of a pool. We analyze the need for an individual evaluation for any reinsurance recoverable based on past due payments and changes in reinsurer risk ratings. The change in the valuation allowance for reinsurance recoverables is included in benefits, claims and settlement expenses on the consolidated statements of operations.

A rollforward of our valuation allowance was as follows:

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	For the three months ended September 30, 2021
​	​	​	​	​	Direct		​	​		​	​	​	​	​	​
​	​	Commercial		​	financing		​	Residential		​	Reinsurance		​	​	​
​		mortgage loans			leases			mortgage loans			recoverables			Total
​	​	​	(in millions)
Beginning balance	​	$	36.6	​	$	0.3	​	$	3.2	​	$	2.6	​	$	42.7
Provision (1)		​	(2.1)		​	—		​	(1.4)		​	0.1		​	(3.4)
Charge-offs		​	—		​	—		​	(0.2)		​	—		​	(0.2)
Recoveries		​	—		​	—		​	1.0		​	—		​	1.0
Foreign currency translation adjustment	​	​	(0.1)	​	​	—	​	​	—	​	​	—	​	​	(0.1)
Ending balance		$	34.4		$	0.3		$	2.6		$	2.7		$	40.0

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	For the three months ended September 30, 2020
​	​	​	​	​	Direct		​	​		​	​	​	​	​	​
​	​	Commercial		​	financing		​	Residential		​	Reinsurance		​	​	​
​		mortgage loans			leases			mortgage loans			recoverables			Total
​	​	​	(in millions)
Beginning balance	​	$	40.4	​	$	0.2	​	$	5.6	​	$	2.5	​	$	48.7
Provision		​	1.7		​	(0.1)		​	(0.3)		​	0.1		​	1.4
Charge-offs		​	—		​	—		​	(0.1)		​	—		​	(0.1)
Recoveries		​	—		​	—		​	0.6		​	—		​	0.6
Ending balance		$	42.1		$	0.1		$	5.8		$	2.6		$	50.6

​

​

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	For the nine months ended September 30, 2021
​	​	​	​	​	Direct		​	​		​	​	​	​	​	​
​	​	Commercial		​	financing		​	Residential		​	Reinsurance		​	​	​
​		mortgage loans			leases			mortgage loans			recoverables			Total
​	​	​	(in millions)
Beginning balance	​	$	43.2	​	$	0.1	​	$	6.9	​	$	2.7	​	$	52.9
Provision (1)		​	(8.6)		​	0.2		​	(6.5)		​	—		​	(14.9)
Charge-offs		​	—		​	—		​	(0.5)		​	—		​	(0.5)
Recoveries		​	—		​	—		​	2.7		​	—		​	2.7
Foreign currency translation adjustment	​	​	(0.2)	​	​	—	​	​	—	​	​	—	​	​	(0.2)
Ending balance		$	34.4		$	0.3		$	2.6		$	2.7		$	40.0

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	For the nine months ended September 30, 2020
​	​	​	​	​	Direct		​	​		​	​	​	​	​	​
​		Commercial		​	financing		​	Residential		​	Reinsurance		​	​	​
​	​	mortgage loans			leases			mortgage loans			recoverables			Total
​		​	(in millions)
Beginning balance (2)	​	$	27.3	​	$	—	​	$	3.3	​	$	2.5	​	$	33.1
Provision (3)		​	14.8		​	0.1		​	1.0		​	0.1		​	16.0
Charge-offs		​	—		​	—		​	(0.3)		​	—		​	(0.3)
Recoveries		​	—		​	—		​	1.8		​	—		​	1.8
Ending balance		$	42.1		$	0.1		$	5.8		$	2.6		$	50.6

(1)	During the three and nine months ended September 30, 2021, certain valuation allowances for commercial and residential mortgage loans were released. This release was a result of further adjustments to our current and forecasted environmental factors management believed to be relevant as global economic activity improved from previously adverse impacts due to COVID-19.

(2)

Upon adoption of authoritative guidance effective January 1, 2020, we updated accounting policies and methodology, adjusted the commercial and residential mortgage loan valuation allowance and established a valuation allowance for reinsurance recoverables. See Note 1, Nature of Operations and Significant Accounting Policies under the caption, “Recent Accounting Pronouncements” for further details.

(3)

During the nine months ended September 30, 2020, COVID-19 adversely impacted global economic activity and contributed to significant volatility in financial markets. As a result, certain current and forecasted environmental factors management believed to be relevant were adjusted, resulting in an increase in the valuation allowance for commercial and residential mortgage loans and direct financing leases.

​

Mortgage Loans

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 nine months ended
​	​	September 30,					​	September 30,
​		2021			2020			2021			2020
​	​	(in millions)
Commercial mortgage loans:		​			​		​	​			​
Purchased	​	$	1.5	​	$	65.0	​	$	106.3	​	$	151.3
Sold	​	​	—	​	​	3.3	​	​	66.3	​	​	4.4
Residential mortgage loans:	​		​	​		​	​		​	​		​
Purchased (1)	​		1,142.0	​		242.0	​		1,955.0	​		736.5
Sold	​		29.5	​		24.6	​		73.1	​		98.0

(1)	Includes mortgage loans purchased by residential mortgage loan VIEs established in 2021.

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

Our commercial mortgage loan portfolio is diversified by geographic region and specific collateral property type as follows:

​

​	​	​	​	​	​	​	​	​	​	​	​
​	​	September 30, 2021				​	December 31, 2020
​		Amortized			Percent		Amortized			Percent
​	​	cost		​	of total	​	cost		​	of total
​	​	($ in millions)
Geographic distribution	​	​	​	​	​	​	​	​	​	​	​
New England	​	$	588.4	​	3.6	%	$	593.9	​	3.8	%
Middle Atlantic	​		4,508.0	​	27.5	​		4,438.2	​	28.8	​
East North Central	​		596.4	​	3.7	​		572.6	​	3.7	​
West North Central	​		290.4	​	1.8	​		267.5	​	1.7	​
South Atlantic	​		2,455.1	​	15.0	​		2,368.9	​	15.3	​
East South Central	​		374.9	​	2.3	​		316.6	​	2.1	​
West South Central	​		1,249.6	​	7.7	​		1,315.9	​	8.5	​
Mountain	​		1,006.9	​	6.2	​		936.2	​	6.1	​
Pacific	​		4,825.0	​	29.5	​		4,183.0	​	27.1	​
International	​		437.9	​	2.7	​		448.8	​	2.9	​
Total	​	$	16,332.6	​	100.0	%	$	15,441.6	​	100.0	%
​	​	​	​	​	​	​	​	​	​	​	​
Property type distribution	​	​	​	​	​	​	​	​	​	​	​
Office	​	$	4,839.0	​	29.7	%	$	4,491.7	​	29.0	%
Retail	​		1,689.7	​	10.3	​		1,815.3	​	11.8	​
Industrial	​		2,970.6	​	18.2	​		2,488.7	​	16.1	​
Apartments	​		6,059.0	​	37.1	​		5,958.0	​	38.6	​
Hotel	​		86.6	​	0.5	​		89.4	​	0.6	​
Mixed use/other	​		687.7	​	4.2	​		598.5	​	3.9	​
Total	​	$	16,332.6	​	100.0	%	$	15,441.6	​	100.0	%

​

Mortgage Loan Modifications

We assess COVID-19 related loan modifications to determine if they are in scope of the CARES Act TDR relief and the Interagency Statement guidance, which was effective in the second quarter of 2020. See Note 1, Nature of Operations and Significant Accounting Policies, under the caption “Investments” for further details. COVID-19 related loan modifications typically include delayed principal and interest payments. Based on the terms of the delayed principal and interest payments, past due status generally will not advance and loans generally will not be placed on non-accrual status during the delay. We did not have a significant amount of COVID-19 related loan modifications that were in scope of the CARES Act TDR relief or the Interagency Statement guidance for the three and nine months ended September 30, 2021 and 2020.

We assess loan modifications outside the scope of the CARES Act TDR relief or Interagency Statement guidance 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.

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

We did not have any significant loans that were modified and met the criteria of a TDR for the three and nine months ended September 30, 2021 and 2020.

Securities Posted as Collateral

As of September 30, 2021 and December 31, 2020, we posted $5,010.7 million and $4,604.9 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 September 30, 2021 and December 31, 2020, we posted $2,561.9 million and $2,563.9 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 September 30, 2021 and December 31, 2020, $227.7 million and $133.4 million, respectively, could be sold or repledged by the secured party.

​

Balance Sheet Offsetting

Financial assets 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		​	​	​
​		assets (1)			instruments (2)			received			Net amount
​	​	(in millions)
September 30, 2021	​	​	​	​	​	​	​	​	​	​	​	​
Derivative assets	​	$	328.1	​	$	(112.1)	​	$	(208.1)	​	$	7.9
Reverse repurchase agreements	​	​	24.2	​	​	—	​	​	(24.2)	​	​	—
Total	​	$	352.3	​	$	(112.1)	​	$	(232.3)	​	$	7.9
December 31, 2020	​	​	​	​	​	​	​	​	​	​	​	​
Derivative assets	​	$	463.5	​	$	(132.5)	​	$	(293.5)	​	$	37.5
Reverse repurchase agreements	​		63.7	​	​	—	​	​	(63.7)	​	​	—
Total	​	$	527.2	​	$	(132.5)	​	$	(357.2)	​	$	37.5

(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 gross amounts of derivative and reverse repurchase 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.

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

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		​	​	​
​		liabilities (1)			instruments (2)			pledged			Net amount
​	​	(in millions)
September 30, 2021	​	​	​	​	​	​	​	​	​	​	​	​
Derivative liabilities	​	$	242.2	​	$	(112.1)	​	$	(73.9)	​	$	56.2
December 31, 2020	​	​	​	​	​	​	​	​	​	​	​	​
Derivative liabilities	​	$	186.2	​	$	(132.5)	​	$	(45.7)	​	$	8.0

(1)

The gross amount of recognized derivative liabilities is reported with other liabilities on the consolidated statements of financial position. The above excludes $356.1 million and $467.8 million of derivative liabilities as of September 30, 2021 and December 31, 2020, 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, Derivative Financial Instruments, for further details.

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 September 30, 2021 and December 31, 2020.

​

4. 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, 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.

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

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, no cash is exchanged at the outset of the contract and no 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 have purchased 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.

Interest rate forwards, including to be announced (“TBA”) forwards and treasury forwards, are contracts to take delivery of a fixed income security at a specified price at a future date. TBA forwards deliver government guaranteed mortgage-backed securities and treasury forwards deliver U.S. Treasury bonds. At inception of these forward contracts we do not intend to take physical delivery. We have used TBA forwards to gain exposure to the investment risk and return of agency mortgage-backed security pools in order to reduce asset and liability duration mismatch. Treasury forwards are used to hedge against changes in the value of the GMWB liability.

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 use currency forwards to hedge certain net equity investments in foreign operations, including certain sponsored investment funds.

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (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 return or 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.

We also use exchange-traded futures in various fund strategies to manage an absolute return and volatility reduction objective for equity risk against respective benchmarks.

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.

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 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.

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (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 $232.3 million and $148.3 million in cash and securities under collateral arrangements as of September 30, 2021 and December 31, 2020, 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 September 30, 2021 and December 31, 2020, was $165.9 million and $180.2 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 $232.3 million and $148.3 million as of September 30, 2021 and December 31, 2020, 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 September 30, 2021, we would be required to post an additional $57.8 million of collateral to our counterparties.

As of September 30, 2021 and December 31, 2020, we had received $176.9 million and $225.2 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.

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

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:

​

​	​	​	​	​	​	​
​		September 30, 2021			December 31, 2020
​	​	(in millions)
Notional amounts of derivative instruments	​	​	​	​	​	​
Interest rate contracts:	​	​	​	​	​	​
Interest rate swaps	​	$	44,028.9	​	$	44,472.1
Interest rate options	​		2,373.9	​		2,083.9
Interest rate forwards	​	​	2,181.6	​	​	1,000.0
Interest rate futures	​		1,585.0	​		188.5
Swaptions	​		—	​	​	62.0
Foreign exchange contracts:	​	​	​	​	​	​
Currency swaps	​	​	1,152.6	​	​	1,045.5
Currency forwards	​	​	1,006.7	​	​	1,115.8
Equity contracts:	​	​	​	​	​	​
Equity options	​		2,284.4	​		1,857.8
Equity futures	​		117.4	​		218.1
Credit contracts:	​	​	​	​	​	​
Credit default swaps	​		310.0	​		295.0
Other contracts:	​	​	​	​	​	​
Embedded derivatives	​		10,141.6	​		9,953.8
Total notional amounts at end of period	​	$	65,182.1	​	$	62,292.5
​	​	​	​	​	​	​
Credit exposure of derivative instruments	​	​	​	​	​	​
Interest rate contracts:	​	​	​	​	​	​
Interest rate swaps	​	$	215.1	​	$	291.0
Interest rate options	​		31.9	​		51.0
Interest rate forwards	​	​	—	​	​	6.2
Foreign exchange contracts:	​	​	​	​	​	​
Currency swaps	​		46.0	​		43.3
Currency forwards	​		8.9	​		45.4
Equity contracts:	​	​	​	​	​	​
Equity options	​		36.2	​		33.2
Credit contracts:	​	​	​	​	​	​
Credit default swaps	​		3.0	​		3.4
Total gross credit exposure	​		341.1	​		473.5
Less: collateral received	​		217.9	​		294.7
Net credit exposure	​	$	123.2	​	$	178.8

​

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

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

​

​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	Derivative assets (1)					​	Derivative liabilities (2)
​		September 30, 2021			December 31, 2020			September 30, 2021			December 31, 2020
​	​	(in millions)
Derivatives designated as hedging instruments	​	​	​	​	​	​	​	​	​	​	​	​
Interest rate contracts	​	$	0.6	​	$	—	​	$	21.2	​	$	27.8
Foreign exchange contracts	​		46.2	​		21.1	​		15.2	​		44.7
Total derivatives designated as hedging instruments	​	$	46.8	​	$	21.1	​	$	36.4	​	$	72.5
​	​	​	​	​	​	​	​	​	​	​	​	​
Derivatives not designated as hedging instruments	​	​	​	​	​	​	​	​	​	​	​	​
Interest rate contracts	​	$	234.2	​	$	339.3	​	$	62.6	​	$	33.0
Foreign exchange contracts	​		7.9	​		66.5	​		78.8	​		29.2
Equity contracts	​		36.3	​		33.2	​		62.6	​		49.0
Credit contracts	​		2.9	​		3.4	​		2.6	​		2.5
Other contracts	​		—	​		—	​		355.3	​		467.8
Total derivatives not designated as hedging instruments	​		281.3	​		442.4	​		561.9	​		581.5
​	​	​	​	​	​	​	​	​	​	​	​	​
Total derivative instruments	​	$	328.1	​	$	463.5	​	$	598.3	​	$	654.0

(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 $355.3 million and $467.8 million as of September 30, 2021 and December 31, 2020, 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 September 30, 2021 and December 31, 2020, 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.

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (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.

​

​	​	​	​	​	​	​	​	​	​	​	​
​	​	September 30, 2021
​	​	​	​	​	​	​	​	​	​	​	Weighted
​	​	​	​	​	​	​	​	Maximum		​	average
​	​	Notional		​	Fair		​	future		​	expected life
​		amount			value			payments			(in years)
​	​	(in millions)								​	​
Single name credit default swaps	​	​	​	​	​	​	​	​	​	​	​
Corporate debt	​	​	​	​	​	​	​	​	​	​	​
A	​	$	20.0	​	$	0.4	​	$	20.0		3.7
BBB	​	​	110.0	​	​	2.0	​	​	110.0		3.3
Sovereign	​	​	​	​	​	​	​	​	​	​	​
A	​	​	20.0	​	​	0.5	​	​	20.0	​	3.7
BBB	​	​	15.0	​	​	—	​	​	15.0	​	0.2
Total credit default swap protection sold	​	$	165.0	​	$	2.9	​	$	165.0		3.1

​

​	​	​	​	​	​	​	​	​	​	​	​
​	​	December 31, 2020
​	​	​	​	​	​	​	​	​	​	​	Weighted
​	​	​	​	​	​	​	​	Maximum		​	average
​	​	Notional		​	Fair		​	future		​	expected life
​		amount			value			payments			(in years)
​	​	(in millions)								​	​
Single name credit default swaps	​	​	​	​	​	​	​	​	​	​	​
Corporate debt	​	​	​	​	​	​	​	​	​	​	​
A	​	$	20.0	​	$	0.5	​	$	20.0		4.5
BBB	​		115.0	​	​	2.1	​	​	115.0		3.9
Sovereign	​	​	​	​	​	​	​	​	​	​	​
A	​	​	20.0	​	​	0.6	​	​	20.0	​	4.5
BBB	​		15.0	​	​	0.1	​	​	15.0	​	1.0
Total credit default swap protection sold	​	$	170.0	​	$	3.3	​	$	170.0		3.8

​

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.

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (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
​	​	​					​	value hedging basis adjustment
Line item in the consolidated statements	​	​					​	increase included in the
of financial position in which the	​	Amortized cost of hedged item					​	amortized cost of the hedged item
hedged item is included		September 30, 2021			December 31, 2020			September 30, 2021			December 31, 2020
​	​	(in millions)
Fixed maturities, available-for-sale (1):	​	​	​	​	​	​	​	​	​	​	​	​
Active hedging relationships	​	$	829.2	​	$	476.1	​	$	1.0	​	$	21.4
Discontinued hedging relationships	​	​	80.2	​	​	135.1	​	​	3.1	​	​	5.2
Total fixed maturities, available-for-sale in active or discontinued hedging relationships	​	$	909.4	​	$	611.2	​	$	4.1	​	$	26.6

(1)

These amounts include the amortized cost basis of closed portfolios used to designate last-of-layer hedging relationships in which the hedged last layer amount is expected to remain at the end of the hedging relationship. As of September 30, 2021 and December 31, 2020, the amortized cost basis of the closed portfolios used in these hedging relationships was $347.7 million and $0.0 million, respectively, the cumulative basis adjustments associated with these hedging relationships was $(1.9) million and $0.0 million, respectively, and the amount of the designated hedged items were $210.0 million and $0.0 million, respectively.

​

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 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
​	​	​	​	For the three months ended					​	For the nine months ended
Derivatives in cash	​	​	​	September 30,					​	September 30,
flow hedging relationships		Related hedged item		2021			2020			2021			2020
​	​	​	​	(in millions)
Interest rate contracts		Fixed maturities, available-for-sale	​	$	—	​	$	—	​	$	—	​	$	(3.0)
Interest rate contracts		Investment contracts	​		0.6	​	​	—	​		0.6	​		—
Foreign exchange contracts		Fixed maturities, available-for-sale	​		30.5	​	​	(29.3)	​		52.3	​		17.2
Total	​	​	​	$	31.1	​	$	(29.3)	​	$	52.9	​	$	14.2

​

We expect to reclassify net gains of $22.1 million from AOCI into net income in the next 12 months, which includes both net deferred gains on discontinued hedges and net gains on periodic settlements of active hedges. Actual amounts may vary from this amount as a result of market conditions.

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (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 September 30, 2021
​	​	​		​	​	​	​	Benefits,
​	​	Net investment		​	Net realized		​	claims and
​	​	income related		​	capital gains (losses)		​	settlement
​	​	to hedges		​	related to		​	expenses
​	​	of fixed		​	hedges of fixed		​	related to
​	​	maturities,		​	maturities,		​	hedges of
​	​	available-		​	available-		​	investment
​		for-sale			for-sale			contracts
​	​	(in millions)
Total amounts of consolidated statement of operations line items in which the effects of fair value and cash flow hedges are reported	​	$	1,093.4	​	$	(152.0)	​	$	1,770.9
​	​	​	​	​	​	​	​	​	​
Losses on fair value hedging relationships:	​	​	​	​	​	​	​	​	​
Interest rate contracts:	​	​	​	​	​	​	​	​	​
Loss recognized on hedged item	​	$	(4.0)	​	$	—	​	$	—
Gain recognized on derivatives	​	​	5.4	​	​	—	​	​	—
Amortization of hedged item basis adjustments	​	​	(0.5)	​	​	—	​	​	—
Amounts related to periodic settlements on derivatives	​	​	(2.4)	​	​	—	​	​	(0.1)
Total loss recognized for fair value hedging relationships	​	$	(1.5)	​	$	—	​	$	(0.1)
​	​	​	​	​	​	​	​	​	​
Gains on cash flow hedging relationships:	​	​	​	​	​	​	​	​	​
Interest rate contracts:	​	​	​	​	​	​	​	​	​
Gain reclassified from AOCI on derivatives	​	$	3.8	​	$	—	​	$	—
Gain reclassified from AOCI as a result that a forecasted transaction is no longer probable of occurring	​	​	—	​	​	0.1	​	​	—
​	​	​	​	​	​	​	​	​	​
Foreign exchange contracts:	​	​	​	​	​	​	​	​	​
Amounts related to periodic settlements on derivatives	​	​	2.6	​	​	—	​	​	—
Total gain recognized for cash flow hedging relationships	​	$	6.4	​	$	0.1	​	$	—

​

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

​	​	​	​	​	​	​	​	​	​
​	​	For the three months ended September 30, 2020
​	​	​		​	​	​	​	Benefits,
​	​	Net investment		​	Net realized		​	claims and
​	​	income related		​	capital gains		​	settlement
​	​	to hedges		​	related to		​	expenses
​	​	of fixed		​	hedges of fixed		​	related to
​	​	maturities,		​	maturities,		​	hedges of
​	​	available-		​	available-		​	investment
​		for-sale			for-sale			contracts
​	​	(in millions)
Total amounts of consolidated statement of operations line items in which the effects of fair value and cash flow hedges are reported	​	$	917.9	​	$	65.5	​	$	1,839.8
​	​	​	​	​	​	​	​	​	​
Losses on fair value hedging relationships:	​	​	​	​	​	​	​	​	​
Interest rate contracts:	​	​	​	​	​	​	​	​	​
Loss recognized on hedged item	​	$	(2.1)	​	$	—	​	$	—
Gain recognized on derivatives	​	​	1.8	​	​	—	​	​	—
Amortization of hedged item basis adjustments	​	​	(0.6)	​	​	—	​	​	—
Amounts related to periodic settlements on derivatives	​	​	(1.8)	​	​	—	​	​	—
Total loss recognized for fair value hedging relationships	​	$	(2.7)	​	$	—	​	$	—
​	​	​	​	​	​	​	​	​	​
Gains (losses) on cash flow hedging relationships:	​	​	​	​	​	​	​	​	​
Interest rate contracts:	​	​	​	​	​	​	​	​	​
Gain (loss) reclassified from AOCI on derivatives	​	$	4.4	​	$	0.1	​	$	(0.1)
​	​	​	​	​	​	​	​	​	​
Foreign exchange contracts:	​	​	​	​	​	​	​	​	​
Gain reclassified from AOCI on derivatives	​	​	—	​	​	0.2	​	​	—
Amounts related to periodic settlements on derivatives	​	​	2.0	​	​	—	​	​	—
Total gain (loss) recognized for cash flow hedging relationships	​	$	6.4	​	$	0.3	​	$	(0.1)

​

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

​	​	​	​	​	​	​	​	​	​
​	​	For the nine months ended September 30, 2021
​	​	​		​	​	​	​	Benefits,
​	​	Net investment		​	Net realized		​	claims and
​	​	income related		​	capital gains (losses)		​	settlement
​	​	to hedges		​	related to		​	expenses
​	​	of fixed		​	hedges of fixed		​	related to
​	​	maturities,		​	maturities,		​	hedges of
​	​	available-		​	available-		​	investment
​		for-sale			for-sale			contracts
​	​	(in millions)
Total amounts of consolidated statement of operations line items in which the effects of fair value and cash flow hedges are reported	​	$	3,167.0	​	$	(41.7)	​	$	4,958.4
​	​	​	​	​	​	​	​	​	​
Losses on fair value hedging relationships:	​	​	​	​	​	​	​	​	​
Interest rate contracts:	​	​	​	​	​	​	​	​	​
Loss recognized on hedged item	​	$	(20.5)	​	$	—	​	$	—
Gain recognized on derivatives	​	​	22.2	​	​	—	​	​	—
Amortization of hedged item basis adjustments	​	​	(1.5)	​	​	—	​	​	—
Amounts related to periodic settlements on derivatives	​	​	(6.8)	​	​	—	​	​	(0.1)
Total loss recognized for fair value hedging relationships	​	$	(6.6)	​	$	—	​	$	(0.1)
​	​	​	​	​	​	​	​	​	​
Gains (losses) on cash flow hedging relationships:	​	​	​	​	​	​	​	​	​
Interest rate contracts:	​	​	​	​	​	​	​	​	​
Gain (loss) reclassified from AOCI on derivatives	​	$	11.9	​	$	—	​	$	(0.1)
Gain reclassified from AOCI as a result that a forecasted transaction is no longer probable of occurring	​	​	—	​	​	0.5	​	​	—
​	​	​	​	​	​	​	​	​	​
Foreign exchange contracts:	​	​	​	​	​	​	​	​	​
Gain reclassified from AOCI on derivatives	​	​	—	​	​	0.7	​	​	—
Amounts related to periodic settlements on derivatives	​	​	7.0	​	​	—	​	​	—
Total gain (loss) recognized for cash flow hedging relationships	​	$	18.9	​	$	1.2	​	$	(0.1)

​

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

​ ​	​	​	​	​	​	​	​	​	​
​	​	For the nine months ended September 30, 2020
​	​	​		​	​	​	​	Benefits,
​	​	Net investment		​	Net realized		​	claims and
​	​	income related		​	capital gains		​	settlement
​	​	to hedges		​	related to		​	expenses
​	​	of fixed		​	hedges of fixed		​	related to
​	​	maturities,		​	maturities,		​	hedges of
​	​	available-		​	available-		​	investment
​		for-sale			for-sale			contracts
​	​	(in millions)
Total amounts of consolidated statement of operations line items in which the effects of fair value and cash flow hedges are reported	​	$	2,846.1	​	$	169.5	​	$	6,299.8
​	​	​	​	​	​	​	​	​	​
Losses on fair value hedging relationships:	​			​			​
Interest rate contracts:	​			​			​
Gain recognized on hedged item	​	$	9.1	​	$	—	​	$	—
Loss recognized on derivatives	​		(9.7)	​		—	​		—
Amortization of hedged item basis adjustments	​		(1.9)	​		—	​		—
Amounts related to periodic settlements on derivatives	​		(4.1)	​		—	​		—
Total loss recognized for fair value hedging relationships	​	$	(6.6)	​	$	—	​	$	—
​	​	​	​	​	​	​	​	​	​
Gains (losses) on cash flow hedging relationships:	​			​			​
Interest rate contracts:	​			​			​
Gain (loss) reclassified from AOCI on derivatives	​	$	13.8	​	$	2.7	​	$	(0.1)
​	​	​	​	​	​	​	​	​	​
Foreign exchange contracts:	​			​			​
Gain reclassified from AOCI on derivatives	​		—	​		6.4	​		—
Amounts related to periodic settlements on derivatives	​		6.2	​		—	​		—
Total gain (loss) recognized for cash flow hedging relationships	​	$	20.0	​	$	9.1	​	$	(0.1)

​

Net Investment Hedges

We may take measures to hedge our net equity investments in our foreign operations from currency risk. This is accomplished with the use of currency forwards.

Gains and losses associated with net investment hedges are recorded in AOCI and will be released into net income if our investment in the foreign operation is sold or substantially liquidated.

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

The following tables show the effect of foreign exchange contracts used to hedge a portion of our net investment in certain sponsored investment funds on the consolidated financial statements.

​

​	​	​	​	​	​	​	​	​	​	​	​	​
​		​	​		​	​		Amount of gain
​	​	Amount of gain recognized					​	reclassified from AOCI into
​	​	in AOCI on derivatives					​	net realized capital gains (losses)
​	​	for the three months ended					​	for the three months ended
​	​	September 30,					​	September 30,
Derivatives in net investment hedging relationships	​	2021		​	2020		​	2021		​	2020
​	​	(in millions)
Foreign exchange contracts	​	$	1.3	​	$	0.8	​	$	—	​	$	(7.1)
Total	​	$	1.3	​	$	0.8	​	$	—	​	$	(7.1)

​

​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	Amount of gain
​	​	Amount of gain					​	reclassified from AOCI into
​	​	recognized in AOCI on derivatives					​	net realized capital gains (losses)
​	​	for the nine months ended					​	for the nine months ended
​		September 30,						September 30,
Derivatives in net investment hedging relationships		2021			2020			2021			2020
​		​	(in millions)
Foreign exchange contracts	​	$	2.3	​	$	10.1	​	$	—	​	$	(7.1)
Total	​	$	2.3	​	$	10.1	​	$	—	​	$	(7.1)

​

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.

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
​	​	net income on derivatives for the					​	net income on derivatives for the
​	​	three months ended September 30,					​	nine months ended September 30,
Derivatives not designated as hedging instruments		2021		​	2020		​	2021			2020
​	​	(in millions)
Interest rate contracts	​	$	(29.7)	​	$	(73.5)	​	$	(131.4)	​	$	407.0
Foreign exchange contracts	​	​	(91.9)	​	​	27.2	​		(117.9)	​		(5.4)
Equity contracts	​	​	18.9	​	​	(27.6)	​		(26.8)	​		(38.7)
Credit contracts	​	​	0.1	​	​	0.3	​		—	​		1.3
Other contracts	​	​	(75.2)	​	​	23.1	​		106.5	​		(339.2)
Total	​	$	(177.8)	​	$	(50.5)	​	$	(169.6)	​	$	25.0

​

​

​

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

5. 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 nine months ended September 30,
​		2021			2020
​	​	(in millions)
Balance at beginning of period	​	$	2,534.9	​	$	2,365.5
Less: reinsurance recoverable	​		436.9	​		403.8
Net balance at beginning of period	​		2,098.0	​		1,961.7
Incurred:	​		​	​		​
Current year	​		736.0	​		985.5
Prior years	​		441.7	​		37.9
Total incurred	​		1,177.7	​		1,023.4
Payments:	​		​	​		​
Current year	​		313.6	​		595.7
Prior years	​		773.2	​		335.1
Total payments	​		1,086.8	​		930.8
Net balance at end of period	​		2,188.9	​		2,054.3
Plus: reinsurance recoverable	​		437.9	​		425.4
Balance at end of period	​	$	2,626.8	​	$	2,479.7
​	​	​	​	​	​	​
Amounts not included in the rollforward above:	​		​	​		​
Claim adjustment expense liabilities	​	$	59.5	​	$	58.0

​

Incurred liability adjustments relating to prior years, which affected current operations during 2021 and 2020, 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.

​

6. 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 nine months ended
​	​	September 30,				​	​	September 30,				​
​		2021		​	2020		​	2021		​	2020	​
U.S. corporate income tax rate	​	21	%	​	21	%	​	21	%	​	21	%
Dividends received deduction	​	(4)		​	(7)	​	​	(4)		​	(5)	​
Tax credits	​	(3)	​	​	(5)	​	​	(2)	​	​	(3)	​
Interest exclusion from taxable income	​	(1)	​	​	(1)	​	​	(1)	​	​	(1)	​
Foreign country statutory rate differential	​	(1)	​	​	1	​	​	—	​	​	—	​
Impact of equity method presentation	​	—	​	​	(2)	​	​	(1)	​	​	(1)	​
State income taxes	​	1	​	​	2	​	​	1	​	​	1	​
Low income housing tax credit amortization	​	1	​	​	1	​	​	1	​	​	1	​
Other	​	1		​	4	​	​	—		​	2	​
Effective income tax rate	​	15	%	​	14	%	​	15	%	​	15	%

​

​

​

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

7. Employee and Agent Benefits

Components of Net Periodic Benefit Cost

​

​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	Other postretirement
​	​	Pension benefits					​	benefits
​	​	For the three months ended					​	For the three months ended
​	​	September 30,					​	September 30,
​		2021			2020			2021			2020
​	​	(in millions)
Service cost	​	$	20.8	​	$	18.2	​	$	—	​	$	—
Interest cost	​	​	25.8	​		29.3	​		0.5	​		0.7
Expected return on plan assets	​	​	(45.7)	​		(39.1)	​		(1.1)	​		(9.0)
Amortization of prior service benefit	​	​	(4.2)	​		(4.3)	​		(0.3)	​		(0.3)
Recognized net actuarial (gain) loss	​	​	17.5	​		18.9	​		(0.2)	​		—
Net periodic benefit cost (income)	​	$	14.2	​	$	23.0	​	$	(1.1)	​	$	(8.6)

​

​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	Other postretirement
​	​	Pension benefits					​	benefits
​	​	For the nine months ended					​	For the nine months ended
​	​	September 30,					​	September 30,
​		2021			2020			2021			2020
​	​	(in millions)
Service cost	​	$	62.4	​	$	54.5	​	$	—	​	$	—
Interest cost	​		77.4	​		88.0	​		1.6	​		2.1
Expected return on plan assets	​		(137.0)	​		(117.5)	​		(3.5)	​		(27.0)
Amortization of prior service benefit	​		(12.6)	​		(12.7)	​		(0.8)	​		(0.8)
Recognized net actuarial (gain) loss	​		52.6	​		56.6	​		(0.4)	​		—
Net periodic benefit cost (income)	​	$	42.8	​	$	68.9	​	$	(3.1)	​	$	(25.7)

​

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

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 2021 for a combined total of up to $125.0 million. During the three and nine months ended September 30, 2021, we contributed $20.7 million and $92.1 million to these plans, respectively.

Other Postretirement Plan Changes

Effective January 1, 2021, $656.5 million of assets in excess of the expected liability to cover the postretirement medical benefits for retirees were re-designated for non-retiree benefits. The elections were made pursuant to plan provisions, which provide for assets in excess of 125% of expected liabilities to fund other benefits covered under the plans. The re-designated assets, net of associated tax receivable impacts related to a tax adjustment to accumulated other comprehensive income, are not included as part of the asset balances presented in the footnote as they no longer qualify as plan assets in accordance with U.S. GAAP. The re-designated assets are included in equity securities and other investments on our consolidated statements of financial position beginning January 1, 2021.

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

Change in Plan Assets

The other postretirement benefits plans’ change in plan assets, reconciled to amounts recognized in the consolidated statements of financial position, was as follows:

​

​	​	​	​	​	​	​
​		September 30,			December 31,
​	​	2021		​	2020
​	​	(in millions)
Change in plan assets		​			​
Fair value of plan assets, beginning balance	​	$	780.6	​	$	732.8
Actual return on plan assets	​		(2.9)	​		53.1
Employer contribution	​		1.1	​		1.5
Participant contributions	​		4.6	​		6.0
Benefits paid	​		(10.2)	​		(12.8)
Assets re-designated for non-retiree benefits	​		(656.5)	​		—
Fair value of plan assets, ending balance	​	$	116.7	​	$	780.6
​	​	​	​	​	​	​
Amount recognized in statement of financial position	​			​
Other assets	​	$	11.7	​	$	675.5
Other liabilities	​		(1.8)	​		(2.9)
Total	​	$	9.9	​	$	672.6

​

​

8. Contingencies, Guarantees and Indemnifications

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.

On November 12, 2014, Frederick Rozo filed a class action lawsuit in the United States District Court for the Southern District of Iowa against Principal Life and us. We were later dismissed as a defendant. The Plaintiff alleged that defendants breached fiduciary duties and engaged in prohibited transactions under ERISA in connection with a general account guaranteed product known as the Principal Fixed Income Option (“PFIO”). On May 12, 2017, the district court certified a nationwide class of participants and beneficiaries who had funds invested in one of the PFIO contracts. On September 25, 2018, the district court granted Principal Life’s motion for summary judgment. On February 3, 2020, the Eighth Circuit Court of Appeals reversed that ruling and remanded the case back to the district court. A bench trial was held before the district court November 3-10, 2020. The court issued its ruling on April 8, 2021, and found in favor of Principal Life on all claims. The Plaintiff has appealed this ruling to the Eighth Circuit Court of Appeals. Principal Life will continue to aggressively defend the case.

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

While the outcome of any pending or future litigation or regulatory matter cannot be predicted, management does not believe any such matter will have a material adverse effect on our business or financial position. As of September 30, 2021, we had no estimated loss accrued related to the legal matter discussed above because we believe the chance of loss from this matter is not probable and the amount of loss cannot be reasonably estimated.

To the extent such matters present a reasonably possible chance of loss, we are generally not able to estimate the possible loss or range of loss associated therewith. The outcome of such matters is always uncertain and unforeseen results can occur. It is possible that such outcomes could require us to pay damages or make other expenditures or establish accruals in amounts that we could not estimate at September 30, 2021.

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 September 30, 2021, was approximately $104.0 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 our 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 September 30, 2021, 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.

​

​

​

9**. Stockholders’ Equity**

Common Stock Dividends

​

​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	For the three months ended					​	For the nine months ended
​	​	September 30,					​	September 30,
​		2021			2020			2021			2020
Dividends declared per common share	​	$	0.63		$	0.56	​	$	1.80		$	1.68

​

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

Reconciliation of Outstanding Common Shares

​

​	​	​	​	​	​	​	​	​
​	​	For the three months ended			​	For the nine months ended
​	​	September 30,			​	September 30,
​		2021		2020		2021		2020
​	​	(in millions)
Beginning balance		269.0		274.0		273.3		276.6
Shares issued		0.3		0.6		2.4		2.4
Treasury stock acquired		(3.2)		(0.1)		(9.6)		(4.5)
Ending balance		266.1		274.5		266.1		274.5

​

In November 2018, our Board of Directors (“Board”) authorized a share repurchase program of up to $500.0 million of our outstanding common stock, which was completed in February 2020. In February 2020, our Board authorized a share repurchase program of up to $900.0 million of our outstanding common stock, which has no expiration date. In June 2021, our Board authorized a share repurchase program of up to $1.2 billion of our outstanding common stock, which has no expiration date. Shares repurchased under these programs are accounted for as treasury stock, carried at cost and reflected as a reduction to stockholders’ equity.

Other Comprehensive Income (Loss)

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	For the three months ended									For the nine months ended
​	​	September 30, 2021								​	September 30, 2021
​		Pre-Tax			Tax			After-Tax			Pre-Tax			Tax			After-Tax
​	​	(in millions)
Net unrealized losses on available-for-sale securities during the period	​	$	(546.4)	​	$	127.4	​	$	(419.0)	​	$	(2,461.6)	​	$	554.9	​	$	(1,906.7)
Reclassification adjustment for gains included in net income (1)	​		(2.6)	​	​	0.2	​	​	(2.4)	​	​	(3.8)	​	​	0.2	​	​	(3.6)
Adjustments for assumed changes in amortization patterns	​		32.2	​	​	(6.8)	​	​	25.4	​	​	121.3	​	​	(25.5)	​	​	95.8
Adjustments for assumed changes in policyholder liabilities	​		477.2	​	​	(104.8)	​	​	372.4	​	​	1,573.7	​	​	(365.3)	​	​	1,208.4
Net unrealized losses on available-for-sale securities	​		(39.6)	​	​	16.0	​	​	(23.6)	​	​	(770.4)	​	​	164.3	​	​	(606.1)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net unrealized gains on derivative instruments during the period	​		31.2	​	​	(6.6)	​	​	24.6	​	​	53.7	​	​	(11.3)	​	​	42.4
Reclassification adjustment for gains included in net income (2)	​		(3.9)	​	​	0.8	​	​	(3.1)	​	​	(13.0)	​	​	2.7	​	​	(10.3)
Adjustments for assumed changes in amortization patterns	​		(0.5)	​	​	0.1	​	​	(0.4)	​	​	(0.5)	​	​	0.1	​	​	(0.4)
Adjustments for assumed changes in policyholder liabilities	​		(0.4)	​	​	—	​	​	(0.4)	​	​	1.0	​	​	(0.3)	​	​	0.7
Net unrealized gains on derivative instruments	​	​	26.4	​	​	(5.7)	​	​	20.7	​	​	41.2	​	​	(8.8)	​	​	32.4
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Foreign currency translation adjustment	​	​	(189.3)	​	​	(4.0)	​	​	(193.3)	​	​	(209.5)	​	​	(4.6)	​	​	(214.1)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Unrecognized postretirement benefit obligation during the period	​	​	—	​	​	—	​	​	—	​	​	(9.1)	​	​	1.9	​	​	(7.2)
Amortization of amounts included in net periodic benefit cost (4)	​		12.8	​	​	(3.5)	​	​	9.3	​	​	38.8	​	​	(10.4)	​	​	28.4
Net unrecognized postretirement benefit obligation	​		12.8	​	​	(3.5)	​	​	9.3	​	​	29.7	​	​	(8.5)	​	​	21.2
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Other comprehensive loss	​	$	(189.7)	​	$	2.8	​	$	(186.9)	​	$	(909.0)	​	$	142.4	​	$	(766.6)

​

​

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	For the three months ended								​	For the nine months ended
​	​	September 30, 2020								​	September 30, 2020
​		Pre-Tax			Tax			After-Tax			Pre-Tax			Tax			After-Tax
​	​	(in millions)
Net unrealized gains on available-for-sale securities during the period	​	$	960.1	​	$	(200.0)	​	$	760.1	​	$	2,378.1	​	$	(500.1)	​	$	1,878.0
Reclassification adjustment for (gains) losses included in net income (1)	​		2.9	​		(1.0)	​		1.9	​		(54.5)	​		12.6	​		(41.9)
Adjustments for assumed changes in amortization patterns	​		(109.0)	​		22.9	​		(86.1)	​		(112.9)	​		23.7	​		(89.2)
Adjustments for assumed changes in policyholder liabilities	​		(565.7)	​		116.5	​		(449.2)	​		(1,136.0)	​		241.9	​		(894.1)
Net unrealized gains on available-for-sale securities	​		288.3	​		(61.6)	​		226.7	​		1,074.7	​		(221.9)	​		852.8
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net unrealized gains (losses) on derivative instruments during the period	​		(29.2)	​		6.2	​		(23.0)	​		26.2	​		(4.9)	​		21.3
Reclassification adjustment for gains included in net income (2)	​		(4.6)	​		0.9	​		(3.7)	​		(22.8)	​		4.2	​		(18.6)
Adjustments for assumed changes in amortization patterns	​		0.2	​		—	​		0.2	​		0.9	​		(0.2)	​		0.7
Adjustments for assumed changes in policyholder liabilities	​		1.7	​		(0.3)	​		1.4	​		4.6	​		(0.9)	​		3.7
Net unrealized gains (losses) on derivative instruments	​		(31.9)	​		6.8	​		(25.1)	​		8.9	​		(1.8)	​		7.1
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Foreign currency translation adjustment during the period	​	​	75.5	​	​	5.5	​	​	81.0	​	​	(231.1)	​	​	2.7	​	​	(228.4)
Reclassification adjustment for losses included in net income (3)	​	​	11.5	​	​	1.8	​	​	13.3	​	​	43.0	​	​	1.8	​	​	44.8
Foreign currency translation adjustment	​		87.0	​		7.3	​		94.3	​		(188.1)	​		4.5	​		(183.6)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Unrecognized postretirement benefit obligation during the period	​	​	—	​	​	—	​	​	—	​	​	0.6	​	​	(0.2)	​	​	0.4
Amortization of amounts included in net periodic benefit cost (4)	​		14.3	​		(3.8)	​		10.5	​		43.1	​		(11.6)	​		31.5
Net unrecognized postretirement benefit obligation	​		14.3	​		(3.8)	​		10.5	​		43.7	​		(11.8)	​		31.9
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Other comprehensive income	​	$	357.7	​	$	(51.3)	​	$	306.4	​	$	939.2	​	$	(231.0)	​	$	708.2

(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)	See Note 4, Derivative Financial Instruments, under the caption “Effect of Fair Value and Cash Flow Hedges on Consolidated Statements of Operations” for further details.

(3)

The 2020 pre-tax reclassification adjustment primarily related to the release of the cumulative translation adjustment from the dissolution of a foreign subsidiary. The adjustment was reported in net realized capital gains (losses) on the consolidated statements of operations. For both the three and nine months ended September 30, 2020, $8.7 million of this reclassification relates to noncontrolling interest and is reported in net income attributable to noncontrolling interest on the consolidated statements of operations.

(4)	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 7, Employee and Agent Benefits, under the caption “Components of Net Periodic Benefit Cost” for further details.

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

Accumulated Other Comprehensive Income

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	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(1)			available-for-sale			instruments			adjustment			obligation			income
​	​	(in millions)
Balances as of July 1, 2020	​	$	3,388.2	​	$	—	​	$	85.6	​	$	(1,608.9)	​	$	(414.2)	​	$	1,450.7
Other comprehensive income during the period, net of adjustments	​		224.7	​	​	—	​	​	(21.4)	​	​	79.8	​	​	—	​	​	283.1
Amounts reclassified from AOCI	​		1.9	​	​	—	​	​	(3.7)	​	​	4.6	​	​	10.5	​	​	13.3
Other comprehensive income	​		226.6	​	​	—	​	​	(25.1)	​	​	84.4	​	​	10.5	​	​	296.4
Balances as of September 30, 2020	​	$	3,614.8	​	$	—	​	$	60.5	​	$	(1,524.5)	​	$	(403.7)	​	$	1,747.1
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Balances as of July 1, 2021	​	$	3,555.8	​	$	—	​	$	29.9	​	$	(1,333.3)	​	$	(448.6)	​	$	1,803.8
Other comprehensive loss during the period, net of adjustments	​		(21.2)	​	​	—	​	​	23.8	​	​	(191.0)	​	​	—	​	​	(188.4)
Amounts reclassified from AOCI	​		(2.4)	​	​	—	​	​	(3.1)	​	​	—	​	​	9.3	​	​	3.8
Other comprehensive loss	​		(23.6)	​	​	—	​	​	20.7	​	​	(191.0)	​	​	9.3	​	​	(184.6)
Balances as of September 30, 2021	​	$	3,532.2	​	$	—	​	$	50.6	​	$	(1,524.3)	​	$	(439.3)	​	$	1,619.2

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	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 (1)			available-for-sale (2)			instruments			adjustment			obligation			income
​	​	(in millions)
Balances as of January 1, 2020	​	$	2,806.0	​	$	(44.1)	​	$	53.4	​	$	(1,341.8)	​	$	(435.6)	​	$	1,037.9
Other comprehensive income during the period, net of adjustments	​		894.8	​	​	—	​	​	25.7	​	​	(218.8)	​	​	0.4	​	​	702.1
Amounts reclassified from AOCI	​		(41.9)	​	​	—	​	​	(18.6)	​	​	36.1	​	​	31.5	​	​	7.1
Other comprehensive income	​		852.9	​	​	—	​	​	7.1	​	​	(182.7)	​	​	31.9	​	​	709.2
Effects of implementation of accounting change related to credit losses, net	​	​	(44.1)	​	​	44.1	​	​	—	​	​	—	​	​	—	​	​	—
Balances as of September 30, 2020	​	$	3,614.8	​	$	—	​	$	60.5	​	$	(1,524.5)	​	$	(403.7)	​	$	1,747.1
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Balances as of January 1, 2021	​	$	4,138.3	​	$	—	​	$	18.2	​	$	(1,312.9)	​	$	(460.5)	​	$	2,383.1
Other comprehensive loss during the period, net of adjustments	​		(602.5)	​	​	—	​	​	42.7	​	​	(211.4)	​	​	(7.2)	​	​	(778.4)
Amounts reclassified from AOCI	​		(3.6)	​	​	—	​	​	(10.3)	​	​	—	​	​	28.4	​	​	14.5
Other comprehensive loss	​		(606.1)	​	​	—	​	​	32.4	​	​	(211.4)	​	​	21.2	​	​	(763.9)
Balances as of September 30, 2021	​	$	3,532.2	​	$	—	​	$	50.6	​	$	(1,524.3)	​	$	(439.3)	​	$	1,619.2

(1)	Net unrealized losses on available-for-sale debt securities for which an allowance for credit loss has been recorded were $16.2 million and $4.0 million as of September 30, 2021 and 2020, respectively.

(2)	Prior to the implementation of authoritative guidance in 2020, the noncredit component of impairment losses on fixed maturities, available-for-sale was included as a separate component of stockholders’ equity.

​

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.

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

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.

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

​

​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	For the three months ended					​	For the nine months ended
​	​	September 30,					​	September 30,
​	​	2021		​	2020			2021			2020
​	​	(in millions)
Balance at beginning of period	​	$	330.6	​	$	272.7	​	$	255.6	​	$	264.9
Net income (loss) attributable to redeemable noncontrolling interest	​	​	2.7	​	​	(1.5)	​		9.5	​		(9.5)
Redeemable noncontrolling interest of deconsolidated entities	​	​	(37.4)	​	​	(47.3)	​	​	(37.4)	​	​	(47.3)
Contributions from redeemable noncontrolling interest	​	​	60.2	​	​	49.7	​	​	148.2	​	​	124.3
Distributions to redeemable noncontrolling interest	​	​	(11.7)	​	​	(6.0)	​		(34.8)	​		(53.8)
Purchase of subsidiary shares from redeemable noncontrolling interest (1)	​	​	(0.7)	​	​	—	​	​	(6.1)	​	​	—
Change in redemption value of redeemable noncontrolling interest	​	​	—	​	​	1.7	​	​	8.6	​	​	(0.2)
Stock-based compensation attributable to redeemable noncontrolling interest	​	​	—	​	​	0.1	​	​	—	​	​	0.1
Other comprehensive income (loss) attributable to redeemable noncontrolling interest	​	​	(0.4)	​	​	9.1	​	​	(0.3)	​	​	—
Balance at end of period	​	$	343.3	​	$	278.5	​	$	343.3	​	$	278.5

(1)	In second quarter 2021, we acquired the remaining interest in Principal Innovations, Inc. and its wholly owned subsidiary, RobustWealth, Inc.

​

​

10. 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

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 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.

●	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.

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

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. 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 2021.

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 September 30, 2021, 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.

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

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.

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 utilize the secured overnight financing rate 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 nonperformance 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 nonperformance risk on these trades.

Interest Rate Contracts. For non-cleared contracts we use discounted cash flow valuation techniques for interest rate swaps and have used for swaptions to determine the fair value using observable swap curves as the inputs. These are reflected in Level 2. We have forward contracts for which we obtain prices from third party pricing vendors. 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 had interest rate options that were valued using broker quotes. These were 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 had a limited number of non-standard currency swaps that are valued using broker quotes. These were 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.

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

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 to determine the fair value of credit default swaps. These are reflected in Level 2. In addition, we have a limited number of credit default swaps that are valued using broker quotes. These are reflected within 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, equity method real estate investments for which the fair value option was elected and certain nonredeemable preferred stock.

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

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 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.

Equity method real estate investments for which the fair value option was elected were reflected in Level 3. The equity method real estate investments consisted of underlying real estate and debt. The real estate fair value was estimated using a discounted cash flow valuation model that utilized 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 was estimated using a discounted cash flow analysis based on our incremental borrowing rate for similar borrowing arrangements. The last equity method real estate investment for which the fair value option was elected was sold in the third quarter of 2021.

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. The redeemable preferred stock was sold in the third quarter of 2020.

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.

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

Investment and Universal Life Contracts

Certain universal life, annuity 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 models that incorporate a spread reflecting our own creditworthiness.

The assumption for our own nonperformance 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

Derivative liabilities of consolidated sponsored investment funds are reported at fair value within other liabilities. Fair values of these derivatives are determined as previously described and are reflected in Level 2.

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

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:

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	September 30, 2021
​	​	Assets/		​	Amount		​	​	​	​	​	​	​	​	​
​	​	(liabilities)		​	measured at		​	​	​	​	​	​	​	​	​
​	​	measured at		​	net asset		​	Fair value hierarchy level
​		fair value			value (4)			Level 1			Level 2			Level 3
​	​	(in millions)
Assets	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Fixed maturities, available-for-sale:	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
U.S. government and agencies	​	$	1,921.8	​	$	—	​	$	1,606.0	​	$	315.8	​	$	—
Non-U.S. governments	​	​	1,044.8	​	​	—	​	​	1.0	​	​	1,043.8	​	​	—
States and political subdivisions	​	​	9,233.0	​	​	—	​	​	—	​	​	9,233.0	​	​	—
Corporate	​	​	45,544.9	​	​	—	​	​	41.6	​	​	44,697.5	​	​	805.8
Residential mortgage-backed pass-through securities	​	​	2,882.6	​	​	—	​	​	—	​	​	2,882.6	​	​	—
Commercial mortgage-backed securities	​	​	5,283.2	​	​	—	​	​	—	​	​	5,269.0	​	​	14.2
Collateralized debt obligations (1)	​	​	3,566.3	​	​	—	​	​	—	​	​	3,515.9	​	​	50.4
Other debt obligations	​	​	7,080.5	​	​	—	​	​	—	​	​	7,058.3	​	​	22.2
Total fixed maturities, available-for-sale	​	​	76,557.1	​	​	—	​	​	1,648.6	​	​	74,015.9	​	​	892.6
Fixed maturities, trading	​	​	413.5	​	​	—	​	​	0.5	​	​	413.0	​	​	—
Equity securities	​	​	2,428.2	​	​	—	​	​	1,089.9	​	​	1,338.3	​	​	—
Derivative assets (2)	​	​	328.1	​	​	—	​	​	—	​	​	327.4	​	​	0.7
Other investments	​	​	784.4	​	​	92.6	​	​	312.0	​	​	377.1	​	​	2.7
Cash equivalents	​	​	1,786.9	​	​	—	​	​	65.9	​	​	1,721.0	​	​	—
Sub-total excluding separate account assets	​	​	82,298.2	​	​	92.6	​	​	3,116.9	​	​	78,192.7	​	​	896.0
Separate account assets	​	​	177,850.5	​	​	8,165.2	​	​	110,111.4	​	​	58,306.6	​	​	1,267.3
Total assets	​	$	260,148.7	​	$	8,257.8	​	$	113,228.3	​	$	136,499.3	​	$	2,163.3
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Liabilities	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Investment and universal life contracts (3)	​	$	(355.3)	​	$	—	​	$	—	​	$	—	​	$	(355.3)
Derivative liabilities (2)	​	​	(242.9)	​	​	—	​	​	—	​	​	(242.2)	​	​	(0.7)
Other liabilities	​	​	(1.8)	​	​	—	​	​	—	​	​	(1.8)	​	​	—
Total liabilities	​	$	(600.0)	​	$	—	​	$	—	​	$	(244.0)	​	$	(356.0)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net assets	​	$	259,548.7	​	$	8,257.8	​	$	113,228.3	​	$	136,255.3	​	$	1,807.3

​

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	December 31, 2020
​	​	Assets/		​	Amount		​	​	​	​	​	​	​	​	​
​	​	(liabilities)		​	measured at		​	​	​	​	​	​	​	​	​
​	​	measured at		​	net asset		​	Fair value hierarchy level
​		fair value			value (4)			Level 1			Level 2			Level 3
​	​	(in millions)
Assets	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Fixed maturities, available-for-sale:	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
U.S. government and agencies	​	$	2,111.5	​	$	—	​	$	1,768.3	​	$	343.2	​	$	—
Non-U.S. governments	​		1,073.7	​		—	​	​	1.1	​	​	1,072.6	​	​	—
States and political subdivisions	​		9,167.8	​		—	​	​	—	​	​	9,167.8	​	​	—
Corporate	​		47,354.8	​		—	​	​	—	​	​	47,064.0	​	​	290.8
Residential mortgage-backed pass-through securities	​		2,986.8	​		—	​	​	—	​	​	2,986.8	​	​	—
Commercial mortgage-backed securities	​		4,942.3	​		—	​	​	—	​	​	4,929.1	​	​	13.2
Collateralized debt obligations (1)	​		4,027.5	​		—	​	​	—	​	​	4,000.3	​	​	27.2
Other debt obligations	​		7,045.9	​		—	​	​	—	​	​	7,016.7	​	​	29.2
Total fixed maturities, available-for-sale	​		78,710.3	​		—	​	​	1,769.4	​	​	76,580.5	​	​	360.4
Fixed maturities, trading	​		532.1	​		—	​	​	0.5	​	​	531.6	​	​	—
Equity securities	​		2,013.4	​		—	​	​	659.7	​	​	1,353.7	​	​	—
Derivative assets (2)	​		463.5	​		—	​	​	—	​	​	462.9	​	​	0.6
Other investments	​		746.3	​		75.7	​	​	252.8	​	​	385.9	​	​	31.9
Cash equivalents	​		1,466.4	​		—	​	​	38.3	​	​	1,428.1	​	​	—
Sub-total excluding separate account assets	​		83,932.0	​		75.7	​	​	2,720.7	​	​	80,742.7	​	​	392.9
Separate account assets	​		175,951.4	​		155.8	​	​	102,550.5	​	​	64,351.9	​	​	8,893.2
Total assets	​	$	259,883.4	​	$	231.5	​	$	105,271.2	​	$	145,094.6	​	$	9,286.1
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Liabilities	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Investment and universal life contracts (3)	​	$	(467.8)	​	$	—	​	$	—	​	$	—	​	$	(467.8)
Derivative liabilities (2)	​		(186.1)	​		—	​	​	—	​	​	(180.4)	​	​	(5.7)
Other liabilities	​		(0.4)	​		—	​	​	—	​	​	(0.4)	​	​	—
Total liabilities	​	$	(654.3)	​	$	—	​	$	—	​	$	(180.8)	​	$	(473.5)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net assets	​	$	259,229.1	​	$	231.5	​	$	105,271.2	​	$	144,913.8	​	$	8,812.6

(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, 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 $10.8 million and $15.1 million as of September 30, 2021 and December 31, 2020, respectively. Separate account assets using the NAV practical expedient consist of hedge funds and a real estate fund with varying investment strategies that also have a variety of redemption terms and conditions. We do not have unfunded commitments associated with these funds.

​

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (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 September 30, 2021
​	​	Beginning		​	​	​	​	​	​	​	Net		​	​	​	​	​	​	​	Ending
​	​	asset/		​	Total realized/unrealized					​	purchases,		​	​	​	​	​	​	​	asset/
​	​	(liability)		​	gains (losses)					​	sales,		​	​	​	​	​	​	​	(liability)
​	​	balance		​	​		​	Included in		​	issuances		​	​	​	​	​	​	​	balance
​	​	as of		​	Included in		​	other		​	and		​	Transfers		​	Transfers		​	as of
​	​	July 1,		​	net income		​	comprehensive		​	settlements		​	into		​	out of		​	September 30,
​		2021			(2)			income (3)			(4)			Level 3			Level 3			2021
​	​	(in millions)
Assets	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Fixed maturities, available-for-sale:	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Corporate	​	$	549.0	​	$	(7.8)	​	$	10.5	​	$	229.0	​	$	25.1	​	$	—	​	$	805.8
Commercial mortgage-backed securities	​		11.6	​	​	—	​	​	(0.1)	​	​	2.7	​	​	—	​	​	—	​	​	14.2
Collateralized debt obligations	​		195.6	​	​	—	​	​	—	​	​	27.6	​	​	—	​	​	(172.8)	​	​	50.4
Other debt obligations	​		61.4	​	​	—	​	​	(0.2)	​	​	(14.0)	​	​	—	​	​	(25.0)	​	​	22.2
Total fixed maturities, available-for-sale	​		817.6	​	​	(7.8)	​	​	10.2	​	​	245.3	​	​	25.1	​	​	(197.8)	​	​	892.6
Other investments	​		44.5	​	​	(0.1)	​	​	(0.6)	​	​	(41.1)	​	​	—	​	​	—	​	​	2.7
Separate account assets (1)	​		1,217.4	​	​	71.0	​	​	—	​	​	(21.1)	​	​	—	​	​	—	​	​	1,267.3
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Liabilities	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Investment and universal life contracts	​		(281.6)	​	​	(80.4)	​	​	0.1	​	​	6.6	​	​	—	​	​	—	​	​	(355.3)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Derivatives	​		​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net derivative assets (liabilities)	​		(8.9)	​	​	(1.8)	​	​	—	​	​	10.7	​	​	—	​	​	—	​	​	—

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	For the three months ended September 30, 2020
​	​	Beginning		​	​	​	​	​	​	​	Net		​	​	​	​	​	​	​	Ending
​	​	asset/		​	Total realized/unrealized					​	purchases,		​	​	​	​	​	​	​	asset/
​	​	(liability)		​	gains (losses)					​	sales,		​	​	​	​	​	​	​	(liability)
​	​	balance		​	​		​	Included in		​	issuances		​	​	​	​	​	​	​	balance
​	​	as of		​	Included in		​	other		​	and		​	Transfers		​	Transfers		​	as of
​	​	July 1,		​	net income		​	comprehensive		​	settlements		​	into		​	out of		​	September 30,
​		2020			(2)			income (3)			(4)			Level 3			Level 3			2020
​	​	(in millions)
Assets	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Fixed maturities, available-for-sale:	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Corporate	​	$	275.0	​	$	(1.0)	​	$	4.3	​	$	27.5	​	$	—	​	$	(24.5)	​	$	281.3
Commercial mortgage-backed securities	​		13.1	​	​	(0.4)	​	​	—	​	​	—	​	​	0.3	​	​	—	​	​	13.0
Collateralized debt obligations	​		2.8	​	​	(0.9)	​	​	0.4	​	​	16.1	​	​	—	​	​	—	​	​	18.4
Other debt obligations	​		71.2	​	​	—	​	​	(0.2)	​	​	(35.1)	​	​	—	​	​	(6.8)	​	​	29.1
Total fixed maturities, available-for-sale	​		362.1	​	​	(2.3)	​	​	4.5	​	​	8.5	​	​	0.3	​	​	(31.3)	​	​	341.8
Other investments	​		38.7	​	​	2.7	​	​	—	​	​	(11.0)	​	​	—	​	​	—	​	​	30.4
Separate account assets (1)	​		8,821.3	​	​	72.3	​	​	—	​	​	(38.4)	​	​	—	​	​	—	​	​	8,855.2
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Liabilities	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Investment and universal life contracts	​		(576.0)	​	​	23.2	​	​	—	​	​	0.4	​	​	—	​	​	—	​	​	(552.4)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Derivatives	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net derivative assets (liabilities)	​		(14.2)	​	​	4.7	​	​	—	​	​	(0.9)	​	​	—	​	​	—	​	​	(10.4)

​

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	For the nine months ended September 30, 2021
​	​	Beginning		​	​	​	​	​	​	​	Net		​	​	​	​	​	​	​	Ending
​	​	asset/		​	Total realized/unrealized					​	purchases,		​	​	​	​	​	​	​	asset/
​	​	(liability)		​	gains (losses)					​	sales,		​	​	​	​	​	​	​	(liability)
​	​	balance		​	​		​	Included in		​	issuances		​	​	​	​	​	​	​	balance
​	​	as of		​	Included in		​	other		​	and		​	Transfers		​	Transfers		​	as of
​	​	January 1,		​	net income		​	comprehensive		​	settlements		​	into		​	out of		​	September 30,
​		2021			(2)			income (3)			(4)			Level 3			Level 3			2021
​	​	(in millions)
Assets	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Fixed maturities, available-for-sale:	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Corporate	​	$	290.8	​	$	(12.7)	​	$	5.8	​	$	354.3	​	$	167.6	​	$	—	​	$	805.8
Commercial mortgage-backed securities	​		13.2	​	​	(1.0)	​	​	(0.6)	​	​	2.6	​	​	—	​	​	—	​	​	14.2
Collateralized debt obligations	​		27.2	​	​	(2.0)	​	​	1.8	​	​	337.5	​	​	84.1	​	​	(398.2)	​	​	50.4
Other debt obligations	​		29.2	​	​	—	​	​	0.6	​	​	(3.2)	​	​	20.6	​	​	(25.0)	​	​	22.2
Total fixed maturities, available-for-sale	​		360.4	​	​	(15.7)	​	​	7.6	​	​	691.2	​	​	272.3	​	​	(423.2)	​	​	892.6
Other investments	​		31.9	​	​	12.5	​	​	(0.6)	​	​	(41.1)	​	​	—	​	​	—	​	​	2.7
Separate account assets (1)	​		8,893.2	​	​	215.6	​	​	—	​	​	(7,841.5)	​	​	—	​	​	—	​	​	1,267.3
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Liabilities	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Investment and universal life contracts	​		(467.8)	​	​	89.3	​	​	0.2	​	​	23.0	​	​	—	​	​	—	​	​	(355.3)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Derivatives	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net derivative assets (liabilities)	​		(5.1)	​	​	(6.2)	​	​	—	​	​	11.3	​	​	—	​	​	—	​	​	—

​

​

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	For the nine months ended September 30, 2020
​	​	Beginning		​	​	​	​	​	​	​	Net		​	​	​	​	​	​	​	Ending
​	​	asset/		​	Total realized/unrealized					​	purchases,		​	​	​	​	​	​	​	asset/
​	​	(liability)		​	gains (losses)					​	sales,		​	​	​	​	​	​	​	(liability)
​	​	balance		​	​		​	Included in		​	issuances		​	​	​	​	​	​	​	balance
​	​	as of		​	Included in		​	other		​	and		​	Transfers		​	Transfers		​	as of
​	​	January 1,		​	net income		​	comprehensive		​	settlements		​	into		​	out of		​	September 30,
​		2020			(2)			income (3)			(4)			Level 3			Level 3			2020
​	​	(in millions)
Assets	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Fixed maturities, available-for-sale:	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Corporate	​	$	81.7	​	$	(1.0)	​	$	(6.3)	​	$	38.3	​	$	342.0	​	$	(173.4)	​	$	281.3
Commercial mortgage-backed securities	​		12.9	​	​	(1.3)	​	​	1.1	​	​	—	​	​	0.3	​	​	—	​	​	13.0
Collateralized debt obligations	​		199.0	​	​	(1.9)	​	​	(22.2)	​	​	158.1	​	​	—	​	​	(314.6)	​	​	18.4
Other debt obligations	​		91.3	​	​	—	​	​	(1.6)	​	​	(37.8)	​	​	46.1	​	​	(68.9)	​	​	29.1
Total fixed maturities, available-for-sale	​		384.9	​	​	(4.2)	​	​	(29.0)	​	​	158.6	​	​	388.4	​	​	(556.9)	​	​	341.8
Fixed maturities, trading	​		0.3	​	​	—	​	​	—	​	​	—	​	​	—	​	​	(0.3)	​	​	—
Other investments	​		39.0	​	​	5.0	​	​	(2.9)	​	​	(10.7)	​	​	—	​	​	—	​	​	30.4
Separate account assets (1)	​		8,968.0	​	​	225.4	​	​	—	​	​	(338.2)	​	​	—	​	​	—	​	​	8,855.2
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Liabilities	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Investment and universal life contracts	​		(214.2)	​	​	(335.5)	​	​	(0.3)	​	​	(2.4)	​	​	—	​	​	—	​	​	(552.4)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Derivatives	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net derivative assets (liabilities)	​		13.0	​	​	6.5	​	​	—	​	​	(3.4)	​	​	—	​	​	(26.5)	​	​	(10.4)

(1)

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.

(2)

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. Changes in unrealized gains (losses) included in net income relating to positions still held were:

​

​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	For the three months ended					​	For the nine months ended
​	​	September 30,					​	September 30,
​	​	2021		​	2020			2021			2020
​	​	(in millions)
Assets	​	​	​	​	​	​	​	​		​	​
Fixed maturities, available-for-sale:	​	​	​	​	​	​		​			​
Corporate	​	$	(7.8)	​	$	—	​	$	(12.6)	​	$	—
Commercial mortgage-backed securities	​	​	—	​	​	(0.4)	​	​	—	​	​	(1.3)
Collateralized debt obligations	​	​	—	​	​	(0.9)	​	​	(2.0)	​	​	(1.9)
Total fixed maturities, available-for-sale	​	​	(7.8)	​	​	(1.3)	​		(14.6)	​		(3.2)
Other investments	​	​	(0.1)	​	​	1.7	​		12.6	​		4.0
Separate account assets	​	​	71.5	​	​	72.3	​		215.6	​		211.2
​	​	​	​	​	​	​	​	​	​	​	​	​
Liabilities	​	​	​	​	​	​	​		​	​		​
Investment and universal life contracts	​	​	(76.4)	​	​	29.4	​		86.1	​		(344.8)
​	​	​	​	​	​	​	​	​	​	​	​	​
Derivatives	​	​	​	​	​	​	​	​	​	​	​	​
Net derivative assets (liabilities)	​	​	(0.7)	​	​	4.6	​	​	(0.6)	​	​	5.2

​

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

(3)	Changes in unrealized gains (losses) included in OCI, including foreign currency translation adjustments related to our Principal International segment, relating to positions still held were:

​

​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	For the three months ended					​	For the nine months ended
​	​	September 30,					​	September 30,
​	​	2021		​	2020		​	2021		​	2020
​	​	(in millions)
Assets		​		​	​	​		​		​	​	​
Fixed maturities, available-for-sale:	​	​	​	​	​	​	​	​	​	​	​	​
Corporate	​	$	10.6	​	$	3.6	​	$	4.4	​	$	(2.1)
Commercial mortgage-backed securities	​	​	(0.2)	​	​	—	​	​	(0.6)	​	​	1.1
Collateralized debt obligations	​	​	—	​	​	0.3	​	​	2.1	​	​	(0.6)
Total fixed maturities, available-for-sale	​	​	10.4	​	​	3.9	​	​	5.9	​	​	(1.6)
Other investments	​	​	(0.6)	​	​	—	​	​	(0.6)	​	​	(2.9)
​	​	​	​	​	​	​	​	​	​	​	​	​
Liabilities	​	​	​	​	​	​	​	​	​	​	​	​
Investment and universal life contracts	​	​	0.1	​	​	—	​	​	0.2	​	​	(0.3)

​

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

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	For the three months ended September 30, 2021
​	​	​	​	​	​	​	​	​	​	​	​	​	​	Net purchases,
​	​	​	​	​	​	​	​	​	​	​	​	​	​	sales, issuances
​		Purchases			Sales			Issuances		​	Settlements			and settlements
​	​	(in millions)
Assets	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Fixed maturities, available-for-sale:	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Corporate	​	$	268.5	​	$	(3.4)	​	$	—	​	$	(36.1)	​	$	229.0
Commercial mortgage-backed securities	​	​	2.7	​	​	—	​	​	—	​	​	—	​	​	2.7
Collateralized debt obligations	​	​	27.6	​	​	—	​	​	—	​	​	—	​	​	27.6
Other debt obligations	​	​	—	​	​	—	​	​	—	​	​	(14.0)	​	​	(14.0)
Total fixed maturities, available-for-sale	​	​	298.8	​	​	(3.4)	​	​	—	​	​	(50.1)	​	​	245.3
Other investments	​	​	—	​	​	(41.1)	​	​	—	​	​	—	​	​	(41.1)
Separate account assets (5)	​	​	—	​	​	(2.0)	​	​	(34.4)	​	​	15.3	​	​	(21.1)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Liabilities	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Investment and universal life contracts	​	​	—	​	​	—	​	​	(3.5)	​	​	10.1	​	​	6.6
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Derivatives	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net derivative assets (liabilities)	​	​	—	​	​	10.7	​	​	—	​	​	—	​	​	10.7

​

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	For the three months ended September 30, 2020
​	​	​	​	​	​	​	​	​	​	​	​	​	​	Net purchases,
​	​	​	​	​	​	​	​	​	​	​	​	​	​	sales, issuances
​		Purchases			Sales			Issuances		​	Settlements			and settlements
​	​	(in millions)
Assets	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Fixed maturities, available-for-sale:	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Corporate	​	$	42.6	​	$	(4.4)	​	$	—	​	$	(10.7)	​	$	27.5
Collateralized debt obligations	​	​	16.0	​	​	—	​	​	—	​	​	0.1	​	​	16.1
Other debt obligations	​	​	—	​	​	—	​	​	—	​	​	(35.1)	​	​	(35.1)
Total fixed maturities, available-for-sale	​	​	58.6	​	​	(4.4)	​	​	—	​	​	(45.7)	​	​	8.5
Other investments	​	​	—	​	​	(11.0)	​	​	—	​	​	—	​	​	(11.0)
Separate account assets (5)	​	​	4.2	​	​	(0.2)	​	​	(42.2)	​	​	(0.2)	​	​	(38.4)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Liabilities	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Investment and universal life contracts	​	​	—	​	​	—	​	​	(6.3)	​	​	6.7	​	​	0.4
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Derivatives	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net derivative assets (liabilities)	​	​	—	​	​	(0.9)	​	​	—	​	​	—	​	​	(0.9)

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	For the nine months ended September 30, 2021
​	​	​	​	​	​	​	​	​	​	​	​	​	​	Net purchases,
​	​	​	​	​	​	​	​	​	​	​	​	​	​	sales, issuances
​		Purchases			Sales			Issuances		​	Settlements			and settlements
​	​	(in millions)
Assets	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Fixed maturities, available-for-sale:	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Corporate	​	$	469.3	​	$	(14.3)	​	$	—	​	$	(100.7)	​	$	354.3
Commercial mortgage-backed securities	​	​	2.7	​	​	—	​	​	—	​	​	(0.1)	​	​	2.6
Collateralized debt obligations	​	​	362.0	​	​	—	​	​	—	​	​	(24.5)	​	​	337.5
Other debt obligations	​	​	25.1	​	​	—	​	​	—	​	​	(28.3)	​	​	(3.2)
Total fixed maturities, available-for-sale	​	​	859.1	​	​	(14.3)	​	​	—	​	​	(153.6)	​	​	691.2
Other investments	​	​	—	​	​	(41.1)	​	​	—	​	​	—	​	​	(41.1)
Separate account assets (5)	​	​	36.7	​	​	(7,795.2)	​	​	(175.4)	​	​	92.4	​	​	(7,841.5)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Liabilities	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Investment and universal life contracts	​	​	—	​	​	—	​	​	(11.7)	​	​	34.7	​	​	23.0
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Derivatives	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net derivative assets (liabilities)	​	​	—	​	​	11.3	​	​	—	​	​	—	​	​	11.3

​

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	For the nine months ended September 30, 2020
​	​	​	​	​	​	​	​	​	​	​	​	​	​	Net purchases,
​	​	​	​	​	​	​	​	​	​	​	​	​	​	sales, issuances
​		Purchases			Sales			Issuances		​	Settlements			and settlements
​	​	(in millions)
Assets	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Fixed maturities, available-for-sale:	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Corporate	​	$	77.5	​	$	(5.4)	​	$	—	​	$	(33.8)	​	$	38.3
Collateralized debt obligations	​	​	157.8	​	​	—	​	​	—	​	​	0.3	​	​	158.1
Other debt obligations	​	​	14.3	​	​	—	​	​	—	​	​	(52.1)	​	​	(37.8)
Total fixed maturities, available-for-sale	​	​	249.6	​	​	(5.4)	​	​	—	​	​	(85.6)	​	​	158.6
Other investments	​	​	0.3	​	​	(11.0)	​	​	—	​	​	—	​	​	(10.7)
Separate account assets (5)	​	​	72.2	​	​	(185.8)	​	​	(269.0)	​	​	44.4	​	​	(338.2)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Liabilities	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Investment and universal life contracts	​	​	—	​	​	—	​	​	(18.5)	​	​	16.1	​	​	(2.4)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Derivatives	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net derivative assets (liabilities)	​	​	—	​	​	(3.4)	​	​	—	​	​	—	​	​	(3.4)

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

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 September 30, 2021
​		Transfers out			Transfers out			Transfers out			Transfers out
​	​	of Level 1 into		​	of Level 2 into		​	of Level 3 into		​	of Level 3 into
​	​	Level 3		​	Level 3		​	Level 1		​	Level 2
​	​	(in millions)
Assets	​	​	​	​	​	​	​	​	​	​	​	​
Fixed maturities, available-for-sale:	​	​	​	​	​	​	​	​	​	​	​	​
Corporate	​	$	—	​	$	25.1	​	$	—	​	$	—
Collateralized debt obligations	​	​	—	​	​	—	​	​	—	​	​	172.8
Other debt obligations	​	​	—	​	​	—	​	​	—	​	​	25.0
Total fixed maturities, available-for-sale	​	​	—	​	​	25.1	​	​	—	​	​	197.8

​

​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	For the three months ended September 30, 2020
​		Transfers out			Transfers out			Transfers out			Transfers out
​	​	of Level 1 into		​	of Level 2 into		​	of Level 3 into		​	of Level 3 into
​	​	Level 3		​	Level 3		​	Level 1		​	Level 2
​	​	(in millions)
Assets	​	​	​	​	​	​	​	​	​	​	​	​
Fixed maturities, available-for-sale:	​	​	​	​	​	​	​	​	​	​	​	​
Corporate	​	$	—	​	$	—	​	$	—	​	$	24.5
Commercial mortgage-backed securities	​	​	—	​	​	0.3	​	​	—	​	​	—
Other debt obligations	​	​	—	​	​	—	​	​	—	​	​	6.8
Total fixed maturities, available-for-sale	​	​	—	​	​	0.3	​	​	—	​	​	31.3

​

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	For the nine months ended September 30, 2021
​		Transfers out			Transfers out			Transfers out			Transfers out
​	​	of Level 1 into		​	of Level 2 into		​	of Level 3 into		​	of Level 3 into
​	​	Level 3		​	Level 3		​	Level 1		​	Level 2
​	​	(in millions)
Assets	​	​	​	​	​	​	​	​	​	​	​	​
Fixed maturities, available-for-sale:	​	​	​	​	​	​	​	​	​	​	​	​
Corporate	​	$	—	​	$	167.6	​	$	—	​	$	—
Collateralized debt obligations	​	​	—	​	​	84.1	​	​	—	​	​	398.2
Other debt obligations	​	​	—	​	​	20.6	​	​	—	​	​	25.0
Total fixed maturities, available-for-sale	​	​	—	​	​	272.3	​	​	—	​	​	423.2

​

​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	For the nine months ended September 30, 2020
​		Transfers out			Transfers out			Transfers out			Transfers out
​	​	of Level 1 into		​	of Level 2 into		​	of Level 3 into		​	of Level 3 into
​	​	Level 3		​	Level 3		​	Level 1		​	Level 2
​	​	(in millions)
Assets	​	​	​	​	​	​	​	​	​	​	​	​
Fixed maturities, available-for-sale:	​	​	​	​	​	​	​	​	​	​	​	​
Corporate	​	$	—	​	$	342.0	​	$	—	​	$	173.4
Commercial mortgage-backed securities	​	​	—	​	​	0.3	​	​	—	​	​	—
Collateralized debt obligations	​	​	—	​	​	—	​	​	—	​	​	314.6
Other debt obligations	​	​	—	​	​	46.1	​	​	—	​	​	68.9
Total fixed maturities, available-for-sale	​		—	​		388.4	​		—	​		556.9
Fixed maturities, trading	​	​	—	​	​	—	​	​	—	​	​	0.3
​	​	​	​	​	​	​	​	​	​	​	​	​
Derivatives	​	​	​	​	​	​	​	​	​	​	​	​
Net derivative assets (liabilities)	​		—	​		—	​		—	​		26.5

​

Assets transferred into Level 3 during the three and nine months ended September 30, 2021 and 2020, 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.

Assets transferred out of Level 3 during the three and nine months ended September 30, 2021 and 2020, 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. Refer to “Assets and liabilities measured at fair value on a recurring basis” for a complete valuation hierarchy summary.

​

​

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	September 30, 2021													​
​		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:	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Corporate	​	$	746.9		Discounted cash flow		Discount rate (1)	​	0.7	% -	18.6	%	​	7.0	%
​	​	​	​	​	​		Illiquidity premium		0	basis points (“bps”)-	70	bps	​	7	bps
​	​		​		​		Potential loss severity		​	​	16.4	%	​	16.4	%
​	​	​	​	​	​	​	Probability of default		​	​	100.0	%	​	100.0	%
Commercial mortgage-backed securities	​		2.7		Discounted cash flow		Discount rate (1)		​	​	3.9	%	​	3.9	%
Collateralized debt obligations	​	​	1.0	​	Discounted cash flow	​	Discount rate (1)	​	​	​	3.0	%	​	3.0	%
​	​		​		​		Illiquidity premium	​	​	​	291	bps	​	291	bps
Other debt obligations	​		22.2		Discounted cash flow		Discount rate (1)		2.5	% -	10.0	%	​	2.8	%
​	​	​	​	​	​		Illiquidity premium		225	bps-	500	bps	​	235	bps
Other investments	​	​	1.3	​	Market comparables - other investments	​	Revenue multiples (2)	​	6.8	x -	9.1	x	​	8.0	x
Separate account assets	​		1,268.0		Discounted cash flow - mortgage loans		Discount rate (1)		​	​	1.2	%	​	1.2	%
​	​	​	​	​	​		Illiquidity premium		​	​	60	bps	​	60	bps
​	​	​	​	​	​		Credit spread rate		​	​	109	bps	​	109	bps
​	​	​	​		Discounted cash flow - real estate		Discount rate (1)		5.5	% -	11.9	%	​	7.5	%
​	​	​	​	​	​		Terminal capitalization rate		4.5	% -	9.3	%	​	5.9	%
​	​	​	​	​	​		Average market rent growth rate		1.5	% -	3.6	%	​	2.8	%
​	​	​	​		Discounted cash flow - real estate debt		Loan to value		29.0	% -	60.2	%	​	43.6	%
​	​	​	​	​	​		Market interest rate		2.3	% -	4.5	%	​	2.8	%

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Liabilities		​			​		​
Investment and universal life contracts (6)	​	​	(355.3)		Discounted cash flow		Long duration interest rate	​	1.9	% -	2.1	%	(3)	2.0%
​	​	​	​	​	​		Long-term equity market volatility		17.9	% -	32.0	%	​	22.1%
​	​	​	​	​	​		Nonperformance risk		0.2	% -	1.0	%	​	0.8%
​	​	​	​	​	​		Utilization rate		See note (4)				​	​
​	​	​	​	​	​		Lapse rate		0.0	% -	17.0	%	​	5.1%
​	​	​	​	​	​		Mortality rate		See note (5)				​	​

​

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	December 31, 2020														​
​		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:	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Corporate	​	$	286.1		Discounted cash flow		Discount rate (1)		​	0.9	% -	11.7	%	​	7.3	%
​	​	​	​	​	​	​	Illiquidity premium	​	​	0	bps-	60	bps	​	19	bps
​	​	​	​	​	​	​	Comparability adjustment	​	​	0	bps-	769	bps	​	359	bps
​	​	​	​	​	​	​	Potential loss severity	​	​	​	​	54.6	%	​	54.6	%
​	​	​	​	​	​		Probability of default		​	​	​	100.0	%	​	100.0	%
Commercial mortgage-backed securities	​		1.1		Discounted cash flow		Probability of default	​	​	​	​	100.0	%	​	100.0	%
​	​	​	​	​	​		Potential loss severity		​	​	​	78.4	%	​	78.4	%
Collateralized debt obligations	​		0.7		Discounted cash flow		Potential loss severity	​	​	​	​	40.5	%	​	40.5	%
​	​	​	​	​	​	​	Probability of default	​	​	​	​	100.0	%	​	100.0	%
Other debt obligations	​		0.8		Discounted cash flow		Discount rate (1)		​	​	​	10.0	%	​	10.0	%
​	​	​	​	​	​		Illiquidity premium		​	​	​	500	bps	​	500	bps
Other investments	​		30.4		Discounted cash flow - other investments		Discount rate (1)		​	25.0	% -	30.0	%	​	27.5	%
​	​	​	​	​	​	​	Terminal earnings before interest, taxes, depreciation and amortization multiple	​	​	3.8	x -	4.7	x	​	4.2	x
​	​	​	​	​	Market comparables - other investments		Revenue multiples (2)		​	6.0	x -	8.0	x	​	7.0	x
​	​	​	​	​	Discounted cash flow - real estate	​	Discount rate (1)	​	​	​	​	6.5	%	​	6.5	%
​	​	​	​	​	​	​	Terminal capitalization rate	​	​	​	​	5.3	%	​	5.3	%
​	​	​	​	​	​	​	Average market rent growth rate	​	​	​	​	2.6	%	​	2.6	%
​	​	​	​	​	Discounted cash flow - real estate debt	​	Loan to value	​	​	​	​	52.6	%	​	52.6	%
​	​	​	​	​	​	​	Credit spread	​	​	​	​	3.3	%	​	3.3	%
Separate account assets	​		8,893.2		Discounted cash flow - mortgage loans		Discount rate (1)		​	​	​	1.2	%	​	1.2	%
​	​	​	​	​	​		Illiquidity premium		​	​	​	60	bps	​	60	bps
​	​	​	​	​	​		Credit spread rate		​	​	​	110	bps	​	110	bps
​	​	​	​		Discounted cash flow - real estate		Discount rate (1)		​	5.6	% -	11.9	%	​	6.9	%
​	​	​	​	​	​		Terminal capitalization rate		​	4.5	% -	9.3	%	​	5.7	%
​	​	​	​	​	​		Average market rent growth rate		​	1.5	% -	4.8	%	​	3.0	%
​	​	​	​		Discounted cash flow - real estate debt		Loan to value		​	6.3	% -	74.2	%	​	47.5	%
​	​	​	​	​	​		Market interest rate		​	2.0	% -	5.0	%	​	3.4	%

​

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	December 31, 2020														​
​		Assets /			​		​		​	​	​	​	​		​	​
​	​	(liabilities)		​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	measured at		​	Valuation	​	Unobservable	​	Input/range of					​	Weighted
​	​	fair value		​	technique(s)	​	input description	​	inputs					​	average
​	​	(in millions)		​	​	​	​	​	​	​	​	​	​	​	​	​
Liabilities		​	​		​		​		​	​			​			​
Investment and universal life contracts (6)	​		(467.8)		Discounted cash flow		Long duration interest rate		​	1.2	% -	1.4	% (3)	​	1.3	%
​	​	​	​	​	​		Long-term equity market volatility		​	17.6	% -	26.9	%	​	19.6	%
​	​	​	​	​	​		Nonperformance risk		​	0.1	% -	1.4	%	​	0.9	%
​	​	​	​	​	​		Utilization rate		​	See note (4)					​	​
​	​	​	​	​	​		Lapse rate		​	0.0	% -	16.0	%	​	5.8	%
​	​	​	​	​	​		Mortality rate		​	See note (5)					​	​

(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.

(2)	Revenue multiples are amounts used when we have determined market participants would use such multiples to value the investments.

(3)	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.

(4)	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.

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

(6)	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. The use of a higher or lower discount rate would have caused 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. The use of a higher or lower illiquidity premium would have caused 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. The use of a higher or lower market volatility would have caused significant decreases or increases, respectively, in the fair value of embedded derivatives in investment and universal life 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. The use of higher or lower risk-free rates would have caused the fair value of the embedded derivative to significantly increase or decrease, respectively. The use of a higher or lower rate for our own credit risks, which impact the rates used to discount future cash flows, would have significantly increased or decreased, respectively, the fair value of the embedded derivative.

The use of a lower or higher mortality rate assumption would have caused the fair value of the embedded derivative to decrease or increase, respectively. The use of a lower or higher overall lapse rate assumption would have caused the fair value of the embedded derivative to decrease or increase, respectively. The lapse rate assumption may vary dynamically based on the relationship of the guarantee and associated account value. A stronger or weaker dynamic lapse rate assumption would have caused 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. The use of a higher or lower assumption of the number of contractholders taking withdrawals would have caused the fair value of the embedded derivative to decrease or increase, respectively. Assuming contractholders take withdrawals earlier or later would have caused the fair value of the embedded derivative to decrease or increase, respectively. Assuming contractholders take more or less of their benefit would have caused the fair value of the embedded derivative to decrease or increase, respectively.

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (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 nine months ended September 30, 2021 and 2020.

Fair Value Option

We elected fair value accounting for certain real estate ventures that were subject to the equity method of accounting because the nature of the investments was to add value to the properties and generate income from the operations of the properties. Other equity method real estate investments were not fair valued because the investments mainly generated income from the operations of the underlying properties. The last equity method real estate investment for which the fair value option was elected was sold in the third quarter of 2021.

​

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

​

​	​	​	​	​	​	​
​		September 30, 2021			December 31, 2020
​	​	(in millions)
Real estate ventures (1)	​			​
Fair value	​	$	—	​	$	28.5

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

​

​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	For the three months ended September 30,					​	For the nine months ended September 30,
​		2021			2020			2021			2020
​	​	(in millions)
Real estate ventures	​		​	​	​		​		​	​	​
Change in fair value pre-tax gain (1)	​	$	(0.1)	​	$	1.7	​	$	12.6	​	$	4.0

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

​

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:

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	September 30, 2021
​	​	​	​	​	​	​	​	Fair value hierarchy level
​		Carrying amount			Fair value			Level 1			Level 2			Level 3
​	​	(in millions)
Assets (liabilities)	​	​	​		​	​		​	​		​	​		​	​
Mortgage loans	​	$	19,426.0	​	$	20,504.4	​	$	—	​	$	—	​	$	20,504.4
Policy loans	​		762.1	​		961.7	​		—	​		—	​		961.7
Other investments	​		344.7	​		334.5	​		—	​		244.2	​		90.3
Cash and cash equivalents	​		1,358.5	​		1,358.5	​		1,334.4	​		24.1	​		—
Investment contracts	​		(36,067.9)	​	​	(36,717.2)	​	​	—	​	​	(7,500.2)	​	​	(29,217.0)
Short-term debt	​		(74.3)	​	​	(74.3)	​	​	—	​	​	(74.3)	​	​	—
Long-term debt	​		(4,279.7)	​	​	(4,827.7)	​	​	—	​	​	(4,788.3)	​	​	(39.4)
Separate account liabilities	​		(161,410.9)	​	​	(160,362.4)	​	​	—	​	​	—	​	​	(160,362.4)
Bank deposits (1)	​		(385.3)	​	​	(387.8)	​	​	—	​	​	(387.8)	​	​	—
Cash collateral payable	​		(176.9)	​	​	(176.9)	​	​	(176.9)	​	​	—	​	​	—

​

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	December 31, 2020
​	​	​	​	​	​	​	​	Fair value hierarchy level
​		Carrying amount			Fair value			Level 1			Level 2			Level 3
​	​	(in millions)
Assets (liabilities)	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Mortgage loans	​	$	17,343.0	​	$	18,762.6	​	$	—	​	$	—	​	$	18,762.6
Policy loans	​		784.0	​		1,037.7	​		—	​		—	​		1,037.7
Other investments	​		347.2	​		338.5	​		—	​		247.1	​		91.4
Cash and cash equivalents	​		1,383.4	​		1,383.4	​		1,369.7	​		13.7	​		—
Investment contracts	​		(35,449.9)	​	​	(36,738.7)	​	​	—	​	​	(5,276.9)	​	​	(31,461.8)
Short-term debt	​		(84.7)	​	​	(84.7)	​	​	—	​	​	(84.7)	​	​	—
Long-term debt	​		(4,279.2)	​	​	(4,949.9)	​	​	—	​	​	(4,908.7)	​	​	(41.2)
Separate account liabilities	​		(160,316.4)	​	​	(159,129.2)	​	​	—	​	​	—	​	​	(159,129.2)
Bank deposits (1)	​		(423.5)	​	​	(429.7)	​	​	—	​	​	(429.7)	​	​	—
Cash collateral payable	​		(224.6)	​	​	(224.6)	​	​	(224.6)	​	​	—	​	​	—

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

​

11. 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, individual variable annuities, the pieces of the Institutional Retirement & Trust (“IRT”) business of Wells Fargo Bank, N.A. (“Acquired Business”) that have not yet migrated to Principal (migration of retirement business completed in the second quarter of 2021; remaining migration estimated to be completed in 2022) and acquisition, integration and migration expenses associated with the purchase of 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 these locations through acquisitions, start-up operations and joint ventures.

The U.S. Insurance Solutions segment focuses on solutions for 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.

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (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,

	●	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 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.

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

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:

​

​	​	​	​	​	​	​
​		September 30, 2021			December 31, 2020
​	​	(in millions)
Assets:	​	​	​	​	​	​
Retirement and Income Solutions	​	$	216,039.3	​	$	207,288.4
Principal Global Investors	​		2,358.4	​		2,294.3
Principal International	​		43,524.9	​		51,707.6
U.S. Insurance Solutions	​		32,702.7	​		31,438.9
Corporate	​		4,283.1	​		3,898.5
Total consolidated assets	​	$	298,908.4	​	$	296,627.7

​

​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	For the three months ended					​	For the nine months ended
​	​	September 30,					​	September 30,
​		2021			2020			2021			2020
​	​	(in millions)
Operating revenues by segment:	​	​	​	​	​	​	​	​	​	​	​	​
Retirement and Income Solutions:	​	​	​	​	​	​	​	​	​	​	​	​
Retirement and Income Solutions – Fee	​	$	580.9	​	$	531.6	​	$	1,723.9	​	$	1,584.1
Retirement and Income Solutions – Spread	​		1,072.0	​		1,048.3	​	​	2,823.9	​		4,081.5
Total Retirement and Income Solutions (1)	​		1,652.9	​		1,579.9	​	​	4,547.8	​		5,665.6
Principal Global Investors (2)	​		465.2	​		382.8	​	​	1,334.1	​		1,126.5
Principal International	​		328.1	​		225.3	​	​	942.3	​		802.2
U.S. Insurance Solutions:	​		​	​		​	​	​	​	​		​
Specialty Benefits insurance	​	​	684.4	​	​	618.1	​	​	2,007.9	​	​	1,884.1
Individual Life insurance	​		505.7	​		503.3	​	​	1,539.1	​		1,448.8
Eliminations	​	​	—	​	​	—	​	​	(0.1)	​	​	(0.1)
Total U.S. Insurance Solutions	​	​	1,190.1	​	​	1,121.4	​	​	3,546.9	​	​	3,332.8
Corporate	​	​	(14.3)	​	​	(17.0)	​	​	(21.8)	​	​	(24.0)
Total segment operating revenues	​	​	3,622.0	​	​	3,292.4	​	​	10,349.3	​	​	10,903.1
Net realized capital gains (losses), net of related revenue adjustments	​	​	(188.2)	​	​	31.6	​	​	(157.0)	​	​	105.4
Adjustments related to equity method investments	​	​	(10.1)	​	​	(13.3)	​	​	(20.7)	​	​	(31.9)
Total revenues per consolidated statements of operations	​	$	3,423.7	​	$	3,310.7	​	$	10,171.6	​	$	10,976.6
​	​	​	​	​	​	​	​	​	​	​	​	​
Pre-tax operating earnings (losses) by segment:	​	​	​	​	​	​	​	​	​	​	​	​
Retirement and Income Solutions	​	$	243.2	​	$	281.1	​	$	811.4	​	$	700.1
Principal Global Investors	​		190.1	​		140.9	​	​	515.6	​		361.0
Principal International	​		81.0	​		58.7	​	​	203.8	​		184.0
U.S. Insurance Solutions	​		151.6	​		(134.1)	​	​	373.4	​		150.4
Corporate	​		(97.1)	​		(69.7)	​	​	(273.6)	​		(244.8)
Total segment pre-tax operating earnings	​		568.8	​		276.9	​	​	1,630.6	​		1,150.7
Pre-tax net realized capital gains (losses), as adjusted (3)	​		(133.5)	​		9.9	​	​	(141.7)	​		(41.1)
Adjustments related to equity method investments and noncontrolling interest	​	​	(7.2)	​	​	(11.7)	​	​	(14.3)	​	​	(7.7)
Income before income taxes per consolidated statements of operations	​	$	428.1	​	$	275.1	​	$	1,474.6	​	$	1,101.9

(1)	Reflects inter-segment revenues of $106.0 million and $87.5 million for the three months ended September 30, 2021 and 2020, respectively, $307.7 million and $249.1 million for the nine months ended September 30, 2021 and 2020, respectively.

(2)	Reflects inter-segment revenues of $79.7 million and $65.6 million for the three months ended September 30, 2021 and 2020, respectively, $223.9 million and $200.7 million for the nine months ended September 30, 2021 and 2020, respectively.

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

(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,
​		2021			2020			2021			2020
​	​	(in millions)
Net realized capital gains (losses):	​	​	​	​	​	​	​	​	​	​	​	​
Net realized capital gains (losses)	​	$	(152.0)	​	$	65.5	​	$	(41.7)	​	$	169.5
Derivative and hedging-related revenue adjustments	​	​	(30.6)	​	​	(37.0)	​	​	(108.4)	​		(85.7)
Market value adjustments to fee revenues	​	​	(0.2)	​	​	—	​	​	(0.6)	​	​	—
Adjustments related to equity method investments	​	​	(10.8)	​	​	0.2	​	​	(18.3)	​	​	(4.9)
Adjustments related to sponsored investment funds	​	​	5.8	​	​	5.1	​	​	15.9	​	​	12.5
Recognition of front-end fee revenue	​	​	(0.4)	​	​	(2.2)	​	​	(3.9)	​	​	14.0
Net realized capital gains (losses), net of related revenue adjustments	​		(188.2)	​		31.6	​	​	(157.0)	​		105.4
Amortization of deferred acquisition costs and other actuarial balances	​		9.9	​		62.1	​	​	22.8	​		(67.7)
Capital gains distributed	​		(33.0)	​		(43.7)	​	​	(86.3)	​		(15.7)
Market value adjustments of embedded derivatives	​		77.8	​		(40.1)	​	​	78.8	​		(63.1)
Pre-tax net realized capital gains (losses), as adjusted (a)	​	$	(133.5)	​	$	9.9	​	$	(141.7)	​	$	(41.1)

(a)	As adjusted before noncontrolling interest capital gains (losses).

​

​

​

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

12. 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 nine months ended
​	​	September 30,					​	September 30,
​		2021			2020			2021			2020
​	​	(in millions)
Revenue from contracts with customers by segment:	​	​	​	​	​	​	​	​	​	​	​	​
Retirement and Income Solutions:	​	​	​		​	​	​	​	​	​	​	​
Retirement and Income Solutions – Fee	​	$	144.2	​	$	133.4	​	$	433.8	​	$	441.0
Retirement and Income Solutions – Spread	​		2.4	​		2.1	​		7.2	​		6.2
Total Retirement and Income Solutions	​	​	146.6	​	​	135.5	​	​	441.0	​	​	447.2
Principal Global Investors	​		453.5	​		377.0	​		1,303.6	​		1,108.1
Principal International	​		125.1	​		111.1	​		373.5	​		322.2
U.S. Insurance Solutions:	​		​	​		​	​		​	​		​
Specialty Benefits insurance	​		3.9	​		3.9	​		11.4	​		11.2
Individual Life insurance	​		15.8	​		12.0	​		44.5	​		35.8
Eliminations	​	​	—	​	​	—	​	​	(0.1)	​	​	(0.1)
Total U.S. Insurance Solutions	​	​	19.7	​	​	15.9	​	​	55.8	​	​	46.9
Corporate	​		51.6	​		42.4	​		155.9	​		111.2
Total segment revenue from contracts with customers	​		796.5	​		681.9	​		2,329.8	​		2,035.6
Adjustments for fees and other revenues not within the scope of revenue recognition guidance (1)	​		455.9	​		463.3	​		1,385.7	​		1,283.0
Pre-tax other adjustments (2)	​		(0.6)	​		(2.2)	​		(4.5)	​		14.0
Total fees and other revenues per consolidated statements of operations	​	$	1,251.8	​	$	1,143.0	​	$	3,711.0	​	$	3,332.6

(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.

Retirement and Income Solutions – Fee

Retirement and Income Solutions – Fee offers service and trust agreements for defined contribution retirement 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 retirement plan trust and custody services are also available through an affiliated trust company. With the Acquired Business, services and trust agreements are also offered to non-retirement customers including insurance companies, endowments and other financial institutions.

Fees and other revenues are earned for administrative activities performed for the defined contribution retirement plans including recordkeeping and reporting as well as trust and custody, asset management and investment services. Fees and other revenues are earned for administrative activities performed for non-retirement plan customers including trust and custody services, defined benefit administration and investment management activities. 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.

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

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 nine months ended
​	​	September 30,					​	September 30,
​		2021			2020			2021			​	2020
​	​	(in millions)
Administrative service fee revenue	​	$	144.2	​	$	132.8	​	$	431.4	​	$	439.7
Other fee revenue	​	​	—	​	​	0.6	​	​	2.4	​	​	1.3
Total revenues from contracts with customers	​	​	144.2	​	​	133.4	​	​	433.8	​	​	441.0
Fees and other revenues not within the scope of revenue recognition guidance	​	​	324.1	​	​	293.5	​	​	964.3	​	​	829.1
Total fees and other revenues	​		468.3	​		426.9	​		1,398.1	​		1,270.1
Premiums and other considerations	​		—	​		0.7	​		0.5	​		3.4
Net investment income	​		112.6	​		104.0	​		325.3	​		310.6
Total operating revenues	​	$	580.9	​	$	531.6	​	$	1,723.9	​	$	1,584.1

​

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. Additionally, commission income is earned on advisory services provided to customers. The revenues are earned over time as the service is performed based upon contractual rates applied to the market value of the clients’ portfolios.

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

​

​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	For the three months ended					​	For the nine months ended
​	​	September 30,					​	September 30,
​		2021			2020			2021			2020
​	​	(in millions)
Deposit account fee revenue	​	$	2.2	​	$	2.1	​	$	6.7	​	$	6.2
Commission income	​	​	0.2	​	​	—	​	​	0.5	​	​	—
Total revenues from contracts with customers	​	​	2.4	​	​	2.1	​	​	7.2	​	​	6.2
Fees and other revenues not within the scope of revenue recognition guidance	​	​	2.1	​	​	1.9	​	​	6.8	​	​	7.8
Total fees and other revenues	​		4.5	​		4.0	​		14.0	​		14.0
Premiums and other considerations	​		482.1	​		517.1	​		1,111.9	​		2,497.7
Net investment income	​		585.4	​		527.2	​		1,698.0	​		1,569.8
Total operating revenues	​	$	1,072.0	​	$	1,048.3	​	$	2,823.9	​	$	4,081.5

​

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

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 nine months ended
​	​	September 30,					​	September 30,
​		2021			2020			2021			2020
​	​	(in millions)
Management fee revenue	​	$	389.9	​	$	330.2	​	$	1,119.9	​	$	954.7
Other fee revenue	​		63.6	​		46.8	​		183.7	​		153.4
Total revenues from contracts with customers	​		453.5	​		377.0	​		1,303.6	​		1,108.1
Fees and other revenues not within the scope of revenue recognition guidance	​	​	11.0	​	​	4.8	​	​	27.1	​	​	14.2
Total fees and other revenues	​		464.5	​		381.8	​		1,330.7	​		1,122.3
Net investment income	​		0.7	​		1.0	​		3.4	​		4.2
Total operating revenues	​	$	465.2	​	$	382.8	​	$	1,334.1	​	$	1,126.5

​

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 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.

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

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

​

​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	For the three months ended					​	For the nine months ended
​	​	September 30,					​	September 30,
​		2021			2020			2021			2020
​	​	(in millions)
Management fee revenue	​	$	123.0	​	$	110.1	​	$	367.8	​	$	319.3
Other fee revenue	​		2.1	​		1.0	​		5.7	​		2.9
Total revenues from contracts with customers	​		125.1	​		111.1	​		373.5	​		322.2
Fees and other revenues not within the scope of revenue recognition guidance	​	​	1.0	​	​	1.4	​	​	3.1	​	​	4.2
Total fees and other revenues	​		126.1	​		112.5	​		376.6	​		326.4
Premiums and other considerations	​		36.6	​		16.6	​		105.8	​		130.2
Net investment income	​		165.4	​		96.2	​		459.9	​		345.6
Total operating revenues	​	$	328.1	​	$	225.3	​	$	942.3	​	$	802.2
​	​	​	​	​	​	​	​	​	​	​	​	​
Revenues from contracts with customers by region:	​		​	​		​	​		​	​		​
Latin America	​	$	91.5	​	$	80.7	​	$	273.3	​	$	236.5
Asia	​		33.5	​		30.5	​		99.3	​		85.8
Principal International corporate / regional offices	​		0.5	​		0.2	​		2.0	​		0.7
Eliminations	​		(0.4)	​		(0.3)	​		(1.1)	​		(0.8)
Total revenues from contracts with customers	​	$	125.1	​	$	111.1	​	$	373.5	​	$	322.2

​

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.

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

​

​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	For the three months ended					​	For the nine months ended
​	​	September 30,					​	September 30,
​		2021			2020			2021			2020
​	​	(in millions)
Specialty Benefits insurance:	​	​	​		​		​	​	​	​	​	​
Administrative service fees	​	$	3.9	​	$	3.9	​	$	11.4	​	$	11.2
Total revenues from contracts with customers	​	​	3.9	​		3.9	​	​	11.4	​		11.2
Fees and other revenues not within the scope of revenue recognition guidance	​	​	5.4	​	​	4.9	​	​	14.9	​	​	14.4
Total fees and other revenues	​	​	9.3	​		8.8	​	​	26.3	​		25.6
Premiums and other considerations	​	​	629.6	​		570.9	​	​	1,851.7	​		1,741.8
Net investment income	​	​	45.5	​		38.4	​	​	129.9	​		116.7
Total operating revenues	​	$	684.4	​	$	618.1	​	$	2,007.9	​	$	1,884.1

​

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	For the three months ended					​	For the nine months ended
​	​	September 30,					​	September 30,
​		2021			2020			2021			2020
​	​	(in millions)
Individual Life insurance:	​	​	​	​		​	​	​	​	​		​
Administrative service fees	​	$	6.8	​	$	5.4	​	$	19.3	​	$	16.1
Commission income	​	​	9.0	​		6.6	​	​	25.2	​		19.7
Total revenues from contracts with customers	​	​	15.8	​		12.0	​	​	44.5	​		35.8
Fees and other revenues not within the scope of revenue recognition guidance	​	​	204.1	​	​	232.6	​	​	635.8	​	​	634.4
Total fees and other revenues	​	​	219.9	​		244.6	​	​	680.3	​		670.2
Premiums and other considerations	​	​	82.2	​		79.0	​	​	265.4	​		255.3
Net investment income	​	​	203.6	​		179.7	​	​	593.4	​		523.3
Total operating revenues	​	$	505.7	​	$	503.3	​	$	1,539.1	​	$	1,448.8

​

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 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.

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 nine months ended
​	​	September 30,					​	September 30,
​		2021			2020			2021			​	2020
​	​	(in millions)
Commission income	​	$	99.8	​	$	78.0	​	$	287.5	​	$	231.0
Other fee revenue	​		17.3	​		13.6	​	​	51.0	​	​	38.3
Eliminations	​		(65.5)	​		(49.2)	​	​	(182.6)	​	​	(158.1)
Total revenues from contracts with customers	​		51.6	​		42.4	​	​	155.9	​	​	111.2
Fees and other revenues not within the scope of revenue recognition guidance	​	​	(91.8)	​	​	(75.8)	​	​	(266.3)	​	​	(221.1)
Total fees and other revenues	​		(40.2)	​		(33.4)	​	​	(110.4)	​	​	(109.9)
Net investment income	​		25.9	​		16.4	​	​	88.6	​	​	85.9
Total operating revenues	​	$	(14.3)	​	$	(17.0)	​	$	(21.8)	​	$	(24.0)

​

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

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 $187.2 million and $173.0 million as of September 30, 2021 and December 31, 2020, 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 $8.0 million and $5.6 million for the three months ended September 30, 2021 and 2020 and $24.1 million and $17.6 million for the nine months ended September 30, 2021 and 2020, respectively, was recorded in operating expenses on the consolidated statements of operations and no impairment loss was recognized in relation to the costs capitalized.

​

13. Stock-Based Compensation Plans

As of September 30, 2021, we had the 2021 Stock Incentive Plan, the 2020 Directors Stock Plan, 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”). No new grants will be made under the 2020 Directors Stock Plan, the 2014 Stock Incentive Plan, the 2014 Directors Stock Plan, the Amended and Restated 2010 Stock Incentive Plan, the 2005 Directors Stock Plan, the Stock Incentive Plan or the Directors Stock Plan. Under the terms of the 2021 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. To date, we have not granted any incentive stock options, restricted stock or performance units under any plans.

As of September 30, 2021, the maximum number of new shares of common stock available for grant under the 2021 Stock Incentive Plan was 24.4 million.

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 nine months ended September 30,
​		2021			2020
​	​	(in millions)
Compensation cost	​	$	74.1	​	$	67.0
Related income tax benefit	​		15.3	​		13.1
Capitalized as part of an asset	​		1.1	​		1.2

​

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

Nonqualified Stock Options

Nonqualified stock options were granted to certain employees under the 2014 Stock Incentive Plan. Total options granted were 0.9 million for the nine months ended September 30, 2021. 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 nine months ended		​
​		September 30, 2021		​
Expected volatility		​	34.2	%
Expected term (in years)		​	7.0	​
Risk-free interest rate		​	1.2	%
Expected dividend yield		​	3.82	%
Weighted average estimated fair value per common share		$	15.67	​

​

As of September 30, 2021, we had $5.8 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 1.5 years.

Performance Share Awards

Performance share awards were granted to certain employees under the 2014 Stock Incentive Plan. Total performance share awards granted were 0.3 million for the nine months ended September 30, 2021. 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 $58.68 per common share.

As of September 30, 2021, we had $8.7 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 1.5 years.

Restricted Stock Units

Restricted stock units were issued to certain employees pursuant to the 2021 Stock Incentive Plan and the 2014 Stock Incentive Plan and were issued to non-employee directors pursuant to the 2021 Stock Incentive Plan and the 2020 Directors Stock Plan. Total restricted stock units granted were 1.1 million for the nine months ended September 30, 2021. 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 $59.11 per common share.

As of September 30, 2021, we had $63.9 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 1.7 years.

Employee Stock Purchase Plan

Under the Employee Stock Purchase Plan, employees purchased 0.8 million shares for the nine months ended September 30, 2021. The weighted average fair value of the discount on the stock purchased was $15.47 per share.

As of September 30, 2021, a total of 4.2 million of new shares were available to be made issuable by us for this plan.

​

Principal Financial Group, Inc. Notes to Condensed Consolidated Financial Statements — (continued) September 30, 2021 (Unaudited)

14. Earnings Per Common Share

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

​

​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	For the three months ended					​	For the nine months ended
​	​	September 30,					​	September 30,
​		2021			2020			2021			2020
​	​	(in millions, except per share data)
Net income	​	$	364.3	​	$	235.9	​	$	1,252.2	​	$	937.0
Subtract:	​	​	​	​	​	​	​	​	​	​	​	​
Net income attributable to noncontrolling interest	​	​	4.4	​	​	(0.1)	​	​	13.4	​	​	13.8
Total	​	$	359.9	​	$	236.0	​	$	1,238.8	​	$	923.2
Weighted-average shares outstanding:	​	​	​	​	​	​	​	​	​	​	​	​
Basic	​	​	268.0	​	​	274.8	​	​	270.7	​	​	274.7
Dilutive effects:	​	​	​	​	​	​	​	​	​	​	​	​
Stock options	​	​	1.3	​	​	0.4	​	​	1.2	​	​	0.3
Restricted stock units	​	​	2.2	​	​	1.5	​	​	2.0	​	​	1.3
Performance share awards	​	​	0.4	​	​	0.1	​	​	0.5	​	​	0.1
Diluted	​	​	271.9	​	​	276.8	​	​	274.4	​	​	276.4
Net income per common share:	​	​	​	​	​	​	​	​	​	​	​	​
Basic	​	$	1.34	​	$	0.86	​	$	4.58	​	$	3.36
Diluted	​	$	1.32	​	$	0.85	​	$	4.51	​	$	3.34

​

The calculation of diluted earnings per share for the three and nine months ended September 30, 2021 and 2020, excludes the incremental effect related to certain outstanding stock-based compensation grants due to their anti-dilutive effect.

​

​