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

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

The following analysis discusses our financial condition as of September 30, 2021, compared with December 31, 2020, and our consolidated results of operations for the three and nine months ended September 30, 2021 and 2020, prepared in conformity with U.S. GAAP. The discussion and analysis includes, where appropriate, factors that may affect our future financial performance. The discussion should be read in conjunction with our Form 10-K, for the year ended December 31, 2020, filed with the SEC and the unaudited condensed consolidated financial statements and the related notes to the financial statements and the other financial information included elsewhere in this Form 10-Q.

Forward-Looking Information

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

Actual results may differ materially from those included in the forward-looking statements as a result of risks and uncertainties including, but not limited to, the following: (1) adverse capital and credit market conditions may significantly affect our ability to meet liquidity needs, as well as our access to capital and cost of capital; (2) conditions in the global capital markets and the economy generally may materially and adversely affect our business and results of operations; (3) volatility or declines in the equity, bond or real estate markets could reduce our AUM and may result in investors withdrawing from the markets or decreasing their rates of investment, all of which could reduce our revenues and net income; (4) changes in interest rates or credit spreads or a sustained low interest rate environment may adversely affect our results of operations, financial condition and liquidity, and our net income can vary from period to period; (5) the elimination of LIBOR may affect the value of certain derivatives and floating rate securities we hold or have issued and the profitability of certain real estate lending activity or businesses; (6) our investment portfolio is subject to several risks that may diminish the value of our invested assets and the investment returns credited to customers, which could reduce our sales, revenues, AUM and net income; (7) our valuation of investments and the determinations of the amount of allowances and impairments taken on our investments may include methodologies, estimations and assumptions which are subject to differing interpretations and, if changed, could materially adversely affect our results of operations or financial condition; (8) any impairments of or valuation allowances against our deferred tax assets could adversely affect our results of operations and financial condition; (9) we may face losses on our insurance and annuity products if our actual experience differs significantly from our pricing and reserving assumptions; (10) the pattern of amortizing our DAC asset and other actuarial balances on our universal life-type insurance contracts, participating life insurance policies and certain investment contracts may change, impacting both the level of our DAC asset and other actuarial balances and the timing of our net income; (11) changes in laws or regulations may reduce our profitability or impact how we do business; (12) our ability to pay stockholder dividends and meet our obligations may be constrained by the limitations on dividends Iowa insurance laws impose on Principal Life; (13) changes in accounting standards may adversely affect our reported results of operations and financial condition; (14) litigation and regulatory investigations may affect our financial strength or reduce our profitability; (15) from time to time we may become subject to tax audits, tax litigation or similar proceedings, and as a result we may owe additional taxes, interest and penalties in amounts that may be material; (16) applicable laws and our certificate of incorporation and by-laws may discourage takeovers and business combinations that some stockholders might consider in their best interests; (17) competition, including from companies that may have greater financial resources, broader arrays of products, higher ratings and stronger financial performance, may impair our ability to retain existing customers, attract new customers and maintain our profitability; (18) a downgrade in our financial strength or credit ratings may increase policy surrenders and withdrawals, reduce new sales, terminate relationships with distributors, impact existing liabilities and increase our cost of capital, any of which could adversely affect our profitability and financial condition; (19) client terminations or withdrawals or changes in investor preferences may lead to a reduction in revenues for our asset management and accumulation businesses; (20) guarantees within certain of our products that protect policyholders may decrease our net income or increase the volatility of our results of operations or financial position under U.S. GAAP if our hedging or risk management strategies prove ineffective or insufficient; (21) our international businesses face political, legal, operational and other risks that could reduce our profitability in those businesses; (22) we face risks arising from our participation in joint ventures; (23) we may need to fund deficiencies in our Closed Block assets; (24) the ongoing COVID-19 pandemic and the resulting financial market impacts could adversely affect our business, results of operations, financial condition and liquidity; (25) our reinsurers could default on their obligations or increase their rates, which could adversely impact our net income and financial condition; (26) we face risks related to our acquisition of Wells Fargo Bank, N.A.’s IRT business; (27) we face risks arising from future acquisitions of businesses; (28) a pandemic, terrorist attack, military action or other catastrophic event could adversely affect our operations, net income or financial condition; (29) our financial results may be adversely impacted by global climate changes; (30) technological and societal changes may disrupt our business model and impair our ability to retain existing customers, attract new customers and maintain our profitability; (31) damage to our reputation may adversely affect our revenues and profitability; (32) we may not be able to protect our intellectual property and may be subject to infringement claims; (33) if we are unable to attract, develop and retain qualified employees and sales representatives and develop new distribution sources, our results of operations, financial condition and sales of our products may be adversely impacted; (34) interruptions in information technology, infrastructure or other internal or external systems used for our business operations, or a failure to maintain the confidentiality, integrity or availability of data residing on such systems, could disrupt our business, damage our reputation and adversely impact our profitability; (35) loss of key vendor relationships or failure of a vendor to protect information of our customers or employees could adversely affect our business or result in losses and (36) our enterprise risk management framework may not be fully effective in identifying or mitigating all of the risks to which we are exposed.

Overview

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

	●	Retirement and Income Solutions is organized into Retirement and Income Solutions – Fee, which includes full service accumulation, trust services, individual variable annuities, the pieces of the Acquired Business that have not yet migrated to Principal (migration of retirement business completed in second quarter 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. We offer a comprehensive portfolio of products and services for retirement savings and retirement income:

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

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

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

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

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

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

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

Strategic Review

On June 28, 2021, we announced changes to our portfolio and capital management strategy to drive profitable growth, reduce capital intensity, sharpen our strategic focus and generate long-term value for shareholders. These changes were approved by our Board following a comprehensive review of our business mix and capital management options (the “Strategic Review”) that was undertaken as a part of our entry into a cooperation agreement with one of our largest investors, Elliott Investment Management, LP.

The Strategic Review, initiated in February 2021, was led by the Finance Committee of the Board, which is comprised entirely of independent directors. Key results of the Strategic Review include (1) discontinuing sales of U.S. retail fixed annuities and consumer life insurance products; (2) investing and expanding in growth areas for fee-based businesses: retirement in the U.S. and emerging markets, global asset management and U.S. specialty benefits and protection in the small-to-medium-sized business market and (3) strengthening our capital management strategy, which includes additional share repurchases. For share repurchase information, see Item 1. “Financial Statements, Notes to Unaudited Condensed Consolidated Financial Statements, Note 9, Stockholders’ Equity.”

As of September 30, 2021, we discontinued sales of U.S. retail fixed annuities and consumer life insurance products, as outlined in the Strategic Review. We continue to evaluate strategic alternatives for our universal life insurance products with lifetime secondary guarantee provisions along with our U.S. retail fixed annuities business. Therefore, the future impact of the Strategic Review on our consolidated financial statements has not been fully assessed.

Transactions Affecting Comparability of Results of Operations

Actuarial Assumption Updates

We periodically review and update actuarial assumptions that are inputs to the models for DAC and other actuarial balances and make model refinements as necessary. During the third quarter of 2021, assumption updates and model refinements were made resulting in an unlocking of DAC and other actuarial balances that decreased consolidated net income attributable to Principal Financial Group, Inc. by $14.2 million for the three months ended September 30, 2021. During the third quarter of 2020, assumption updates and model refinements were made resulting in an unlocking of DAC and other actuarial balances that decreased consolidated net income attributable to Principal Financial Group, Inc. by $118.2 million for the three months ended September 30, 2020.

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


	For the three months ended
	September 30,
	2021		2020

	(in millions)
Retirement and Income Solutions	$	(67.3)	$	70.1
Principal International		—		2.7
U.S. Insurance Solutions		34.6		(215.1)

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


	For the three months ended
	September 30,
	2021		2020

	(in millions)
Pre-tax operating earnings	$	32.1	$	(215.1)
Fees and other revenues		(10.0)		22.4
Benefits, claims and settlement expenses		(13.0)		154.1
Dividends to policyholders		—		1.1
Operating expenses		(29.1)		82.3

Other Factors Affecting Comparability of Results of Operations

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

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

Foreign currency exchange rate fluctuations create variances in our financial statement line items. The most significant impact occurs within our Principal International segment where pre-tax operating earnings were positively impacted $3.7 million and $13.4 million for the three and nine months ended September 30, 2021, respectively, as a result of fluctuations in foreign currency to U.S. dollar exchange rates. This impact was calculated by comparing (a) the difference between current year results and prior year results to (b) the difference between current year results and prior year results translated using current year exchange rates for both periods. We use this approach to calculate the impact of exchange rates on all revenue and expense line items. For a discussion of our approaches to managing foreign currency exchange rate risk, see Item 3. “Quantitative and Qualitative Disclosures About Market Risk — Foreign Currency Risk.”

Variable Investment Income

Variable investment income includes certain types of investment returns such as prepayment fees and income (loss) from certain elements of our other alternative asset classes, including results of value-add real estate sales activity. Due to its unpredictable nature, variable investment income may or may not be material to our financial results for a given reporting period and may create variances when comparing different reporting periods. For additional information, see “Investment Results.”

Recent Accounting Changes

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

Results of Operations

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


	For the three months ended September 30,						For the nine months ended September 30,
					Increase						Increase
	2021		2020		(decrease)		2021		2020		(decrease)

	(in millions)
Revenues:
Premiums and other considerations	$	1,230.5	$	1,184.3	$	46.2	$	3,335.3	$	4,628.4	$	(1,293.1)
Fees and other revenues		1,251.8		1,143.0		108.8		3,711.0		3,332.6		378.4
Net investment income		1,093.4		917.9		175.5		3,167.0		2,846.1		320.9
Net realized capital gains (losses)		(152.0)		65.5		(217.5)		(41.7)		169.5		(211.2)
Total revenues		3,423.7		3,310.7		113.0		10,171.6		10,976.6		(805.0)
Expenses:
Benefits, claims and settlement expenses		1,770.9		1,839.8		(68.9)		4,958.4		6,299.8		(1,341.4)
Dividends to policyholders		28.2		29.9		(1.7)		75.3		90.2		(14.9)
Operating expenses		1,196.5		1,165.9		30.6		3,663.3		3,484.7		178.6
Total expenses		2,995.6		3,035.6		(40.0)		8,697.0		9,874.7		(1,177.7)
Income before income taxes		428.1		275.1		153.0		1,474.6		1,101.9		372.7
Income taxes		63.8		39.2		24.6		222.4		164.9		57.5
Net income		364.3		235.9		128.4		1,252.2		937.0		315.2
Net income (loss) attributable to noncontrolling interest		4.4		(0.1)		4.5		13.4		13.8		(0.4)
Net income attributable to Principal Financial Group, Inc.	$	359.9	$	236.0	$	123.9	$	1,238.8	$	923.2	$	315.6

Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020

Net Income Attributable to Principal Financial Group, Inc.

Net income attributable to Principal Financial Group, Inc. increased primarily due to a less unfavorable impact of actuarial assumption updates and model refinements in 2021 compared to 2020.

Total Revenues

Premiums increased for the U.S. Insurance Solutions segment $37.7 million due to growth in our Specialty Benefits insurance business and $21.5 million from dental premium credits associated with COVID-19 that lowered premiums in 2020. Premiums increased $20.0 million for the Principal International segment primarily due to higher single premium annuity sales in Chile. Partially offsetting these increases was a $35.7 million decrease in premiums for the Retirement and Income Solutions segment primarily due to lower sales of single premium group and individual annuities with life contingencies. The single premium group annuity product, which is typically used to fund defined benefit plan terminations, can generate large premiums from very few customers and therefore premiums tend to vary from period to period.

Fees and other revenues increased for the Principal Global Investors segment primarily due to $59.7 million higher management fee revenue as a result of increased average AUM and an $11.1 million increase in performance fee revenue primarily in our real estate business. Fees and other revenues increased $41.7 million for the Retirement and Income Solutions segment primarily related to higher fees stemming from an increase in mean account values, which resulted from continued growth in the equity markets.

For net investment income and net realized capital gains (losses) variance information, see “Investments — Investment Results” under the captions “Net Investment Income” and “Net Realized Capital Gains (Losses),” respectively.

Total Expenses

Benefits, claims and settlement expenses decreased for the U.S. Insurance Solutions segment primarily due to a $169.6 million impact associated with actuarial assumption updates and model refinements, which were favorable in 2021 compared to unfavorable in 2020. This decrease was partially offset by $31.4 million due to growth in the business and $14.9 million in higher non-COVID-19 claims. Benefits, claims and settlement expenses decreased $43.3 million for the Retirement and Income Solutions segment primarily due to a lower increase in reserves, stemming from lower sales of single premium group and individual annuities with life contingencies. Benefits, claims and settlement expenses increased for the Principal International segment primarily due to $49.5 million higher inflation-based interest crediting rates to customers and a $19.8 million increase in reserves from higher single premium annuity sales in Chile.

Operating expenses increased for the Retirement and Income Solutions segment primarily due to a $39.8 million increase in DAC amortization due to less favorable financial markets in the third quarter of 2021 compared to the third quarter of 2020 and a $24.3 million increase in variable compensation expense. Operating expenses increased for the Principal Global Investors segment primarily due to a $14.8 million increase in variable compensation expense, a $7.0 million increase in variable expenses related to increased AUM and a $6.1 million increase in non-variable staff costs. Operating expenses increased $12.3 million for the Corporate segment primarily related to interest income on tax settlements recorded in 2020. Operating expenses decreased $91.6 million for the U.S. Insurance Solutions segment primarily due to the impact associated with actuarial assumption updates and model refinements in the Individual Life insurance business, which were favorable in 2021 compared to unfavorable in 2020.

Income Taxes

The effective income tax rates were 15% and 14% for the three months ended September 30, 2021 and 2020, respectively. See Item 1. “Financial Statements, Notes to Unaudited Condensed Consolidated Financial Statements, Note 6, Income Taxes” for a reconciliation between the U.S. corporate income tax rate and the effective income tax rate.

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

Net Income Attributable to Principal Financial Group, Inc.

Net income attributable to Principal Financial Group, Inc. increased primarily due to a $208.9 million after-tax increase in variable investment income and a $104.0 million less unfavorable impact of actuarial assumption updates and model refinements in 2021 compared to 2020.

Total Revenues

Premiums decreased $1,388.7 million for the Retirement and Income Solutions segment primarily due to lower sales of single premium group and individual annuities with life contingencies.

Fees and other revenues increased for the Principal Global Investors segment primarily due to $165.2 million higher management fee revenue as a result of increased average AUM and a $19.5 million increase in performance fee revenue primarily in our real estate business. Fees and other revenues increased $127.4 million for the Retirement and Income Solutions segment primarily due to higher fees stemming from an increase in mean account values, which resulted from continued growth in the equity markets. Fees and other revenues increased for the Principal International segment primarily due to $19.9 million foreign currency tailwinds in Latin America, $13.5 million in Asia primarily due to continued growth in the business and $8.1 million in Chile primarily due to an increase in deposits for which we collect fees.

Total Expenses

Benefits, claims and settlement expenses decreased $1,484.8 million for the Retirement and Income Solutions segment primarily due to a lower increase in reserves, stemming from lower sales of single premium group and individual annuities with life contingencies.

Operating expenses increased for the Retirement and Income Solutions segment primarily due to a $34.5 million increase due to variable compensation expense, a $29.9 million impact from growth in the business and a $20.3 million increase in expenses associated with the integration of the Acquired Business. Operating expenses increased for the Corporate segment primarily due to a $41.0 million increase in amounts credited to employee accounts in a nonqualified defined contribution pension plan, a $16.7 million increase in compensation costs largely due to an increase in incentive compensation and $14.1 million related to interest income on tax settlements recorded in 2020. Operating expenses increased for the Principal Global Investors segment primarily due to a $20.1 million increase in variable compensation expense, a $17.2 million increase in variable expenses related to increased AUM and a $9.2 million increase in non-variable staff costs. Partially offsetting these increases was a $112.4 million decrease in the U.S. Insurance Solutions segment primarily due to the impact associated with actuarial assumption updates and model refinements, which were favorable in 2021 compared to unfavorable in 2020.

Income Taxes

The effective income tax rate was 15% for both the nine months ended September 30, 2021 and 2020. See Item 1. “Financial Statements, Notes to Unaudited Condensed Consolidated Financial Statements, Note 6, Income Taxes” for a reconciliation between the U.S. corporate income tax rate and the effective income tax rate.

Results of Operations by Segment

For results of operations by segment see Item 1. “Financial Statements, Notes to Unaudited Condensed Consolidated Financial Statements, Note 11, Segment Information.”

Retirement and Income Solutions Segment

Retirement and Income Solutions Segment Summary Financial Data

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

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


	For the three months ended						For the nine months ended
	September 30,						September 30,
					Increase						Increase
	2021		2020		(decrease)		2021		2020		(decrease)

	(in millions)
Retirement and Income Solutions – Fee	$	448.2	$	530.2	$	(82.0)	$	1,486.8	$	1,481.2	$	5.6
Retirement and Income Solutions – Spread		240.5		166.4		74.1		678.5		466.8		211.7
Total Retirement and Income Solutions	$	688.7	$	696.6	$	(7.9)	$	2,165.3	$	1,948.0	$	217.3

The following table presents certain summary financial data relating to the Retirement and Income Solutions segment for the periods indicated:


	For the three months ended						For the nine months ended
	September 30,						September 30,
					Increase						Increase
	2021		2020		(decrease)		2021		2020		(decrease)

	(in millions)
Operating revenues:
Premiums and other considerations	$	482.1	$	517.8	$	(35.7)	$	1,112.4	$	2,501.1	$	(1,388.7)
Fees and other revenues		472.8		430.9		41.9		1,412.1		1,284.1		128.0
Net investment income		698.0		631.2		66.8		2,023.3		1,880.4		142.9
Total operating revenues		1,652.9		1,579.9		73.0		4,547.8		5,665.6		(1,117.8)
Expenses:
Benefits, claims and settlement expenses, including dividends to policyholders		964.2		883.3		80.9		2,382.5		3,717.6		(1,335.1)
Operating expenses		445.5		415.5		30.0		1,353.9		1,247.9		106.0
Total expenses		1,409.7		1,298.8		110.9		3,736.4		4,965.5		(1,229.1)
Pre-tax operating earnings	$	243.2	$	281.1	$	(37.9)	$	811.4	$	700.1	$	111.3

Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020

Pre-Tax Operating Earnings

Pre-tax operating earnings decreased in our Fee business primarily due to a $104.1 million impact associated with actuarial assumption updates and model refinements, which were unfavorable in 2021 versus favorable in 2020. Pre-tax operating earnings increased in our Spread business primarily due to a $74.7 million increase in variable investment income partially offset by a $33.3 million favorable impact associated with actuarial assumption updates and model refinements in 2020.

Net Revenue

Net revenue decreased in our Fee business primarily due to a $131.2 million impact associated with actuarial assumption updates and model refinements, which were unfavorable in 2021 versus favorable in 2020 partially offset by a $41.4 million increase related to higher fees stemming from an increase in mean account values, which resulted from continued growth in the equity markets. Net revenue increased in our Spread business primarily due to a $74.7 million increase in variable investment income.

Operating Expenses

Operating expenses increased in our Fee business primarily due to a $15.3 million impact from growth in the business and a $13.5 million increase due to variable compensation expense. These increases were partially offset by a $27.1 million impact associated with actuarial assumption updates and model refinements, which were favorable in 2021 versus unfavorable in 2020. Operating expenses increased in our Spread business primarily due to a $24.4 million favorable impact associated with actuarial assumption updates and model refinements in 2020.

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

Pre-Tax Operating Earnings

Pre-tax operating earnings decreased in our Fee business primarily due to a $104.1 million impact associated with actuarial assumption updates and model refinements, which were unfavorable in 2021 versus favorable in 2020, and an $84.7 million increase in operating expenses, which is described below. The decrease in our Fee business pre-tax operating earnings was partially offset by a $128.0 million increase related to higher fees stemming from an increase in mean account values, which resulted from continued growth in the equity markets. Pre-tax operating earnings increased in our Spread business primarily due to a $165.8 million increase in variable investment income.

Net Revenue

Net revenue increased in our Fee business primarily due to a $128.0 million increase related to higher fees stemming from an increase in mean account values, which resulted from continued growth in the equity markets, and a $9.5 million increase in variable investment income. These increases were largely offset by a $131.2 million impact associated with actuarial assumption updates and model refinements, which were unfavorable in 2021 versus favorable in 2020. Net revenue increased in our Spread business primarily due to a $165.8 million increase in variable investment income and a $49.4 million increase primarily due to COVID-19 related reserve gains.

Operating Expenses

Operating expenses increased in our Fee business due to a $34.5 million increase due to variable compensation expense, a $29.9 million impact from growth in the business and a $20.3 million increase in expenses associated with the integration of the Acquired Business. These increases were partially offset by a $27.1 million impact associated with actuarial assumption updates and model refinements, which were favorable in 2021 versus unfavorable in 2020. Operating expenses increased in our Spread business primarily due to a $24.4 million favorable impact associated with actuarial assumption updates and model refinements in 2020.

Principal Global Investors Segment

Principal Global Investors Segment Summary Financial Data

AUM is the base by which we generate management fee revenues. Market performance and net cash flow are the two main drivers of AUM growth. Market performance reflects equity, fixed income, real estate and other alternative investment performance. Net cash flow reflects client deposits and withdrawals. The fee levels on these client deposits and withdrawals are increasingly becoming the more important factor to revenue growth and will vary widely based on business and/or product mix.

The following table presents the AUM rollforward for assets managed by Principal Global Investors for the periods indicated:


	For the three months ended September 30,				For the nine months ended September 30,
	2021		2020		2021		2020

	(in billions)
AUM, beginning of period	$	532.3	$	450.1	$	502.1	$	458.6
Net cash flow		2.2		(0.4)		3.3		2.4
Investment performance		2.1		19.3		31.9		9.6
Operations disposed (1)		—		(0.8)		—		(0.9)
Other		(1.2)		0.2		(1.9)		(1.3)
AUM, end of period	$	535.4	$	468.4	$	535.4	$	468.4

(1)	During the third quarter of 2020, we made the decision to close our large cap strategy managed by Columbus Circle Investors and we returned the balance of the credit fund managed by the Finisterre emerging market debt team, which announced the fund’s closure in the second quarter of 2020.

The following table presents certain summary financial data relating to the Principal Global Investors segment for the periods indicated:


	For the three months ended September 30,						For the nine months ended September 30,
					Increase						Increase
	2021		2020		(decrease)		2021		2020		(decrease)

	(in millions)
Operating revenues:
Fees and other revenues	$	464.5	$	381.8	$	82.7	$	1,330.7	$	1,122.3	$	208.4
Net investment income		0.7		1.0		(0.3)		3.4		4.2		(0.8)
Total operating revenues		465.2		382.8		82.4		1,334.1		1,126.5		207.6
Expenses:
Total expenses		273.3		240.4		32.9		813.7		760.9		52.8

Pre-tax operating earnings attributable to noncontrolling interest		1.8		1.5		0.3		4.8		4.6		0.2
Pre-tax operating earnings	$	190.1	$	140.9	$	49.2	$	515.6	$	361.0	$	154.6

Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020

Pre-Tax Operating Earnings

Pre-tax operating earnings increased primarily due to $59.7 million higher management fee revenue as a result of increased average AUM and an $11.1 million increase in performance fee revenue primarily in our real estate business. This was partially offset by a $14.8 million increase in variable compensation expense.

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

Pre-Tax Operating Earnings

Pre-tax operating earnings increased primarily due to $165.2 million higher management fee revenue as a result of increased average AUM and a $19.5 million increase in performance fee revenue primarily in our real estate business. This was partially offset by a $20.1 million increase in variable compensation expense.

Principal International Segment

Principal International Segment Summary Financial Data

AUM is generally a key indicator of earnings growth for the segment, as AUM is the base by which we can generate local currency profits. The Cuprum business in Chile differs in that the majority of fees are collected with each deposit by the mandatory retirement customers, based on a capped salary level, as opposed to asset levels. Net customer cash flow and market performance are the two main drivers of local currency AUM growth. Net customer cash flow reflects our ability to attract and retain client deposits. Market performance reflects the investment returns on our underlying AUM. Our financial results are also impacted by fluctuations of the foreign currency to U.S. dollar exchange rates for the locations in which we have business. AUM of our foreign subsidiaries is translated into U.S. dollar equivalents at the end of the reporting period using the spot foreign exchange rates. Revenue and expenses for our foreign subsidiaries are translated into U.S. dollar equivalents at the average foreign exchange rates for the reporting period.

The following table presents the Principal International segment AUM rollforward for the periods indicated:


	For the three months ended September 30,				For the nine months ended September 30,
	2021		2020		2021		2020

	(in billions)
AUM, beginning of period	$	167.1	$	143.5	$	165.2	$	169.7
Net cash flow		0.4		1.8		1.8		3.0
Investment performance		(0.6)		1.7		1.8		2.5
Effect of exchange rates		(10.8)		1.4		(10.7)		(26.1)
Other		(0.3)		(1.4)		(2.3)		(2.1)
AUM, end of period	$	155.8	$	147.0	$	155.8	$	147.0

Net revenue is a key metric used to understand the earnings growth for the Principal International segment. The following table presents the net revenue of the Principal International segment for the periods indicated:


	For the three months ended September 30,						For the nine months ended September 30,
					Increase						Increase
	2021		2020		(decrease)		2021		2020		(decrease)

	(in millions)
Net revenue	$	196.3	$	165.4	$	30.9	$	548.6	$	491.8	$	56.8

The following table presents certain summary financial data relating to the Principal International segment for the periods indicated:


	For the three months ended September 30,						For the nine months ended September 30,
					Increase						Increase
	2021		2020		(decrease)		2021		2020		(decrease)

	(in millions)
Operating revenues:
Premiums and other considerations	$	36.6	$	16.6	$	20.0	$	105.8	$	130.2	$	(24.4)
Fees and other revenues		126.1		112.5		13.6		376.6		326.4		50.2
Net investment income		165.4		96.2		69.2		459.9		345.6		114.3
Total operating revenues		328.1		225.3		102.8		942.3		802.2		140.1
Expenses:
Benefits, claims and settlement expenses		131.8		59.9		71.9		393.7		310.4		83.3
Operating expenses		114.7		106.2		8.5		342.5		306.1		36.4
Total expenses		246.5		166.1		80.4		736.2		616.5		119.7

Pre-tax operating earnings attributable to noncontrolling interest		0.6		0.5		0.1		2.3		1.7		0.6
Pre-tax operating earnings	$	81.0	$	58.7	$	22.3	$	203.8	$	184.0	$	19.8

Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020

Pre-Tax Operating Earnings

Pre-tax operating earnings increased in Latin America primarily due to $23.9 million favorable variable investment income in Chile.

Net Revenue

Net revenue increased in Latin America primarily due to $23.9 million favorable variable investment income in Chile and $5.3 million foreign currency tailwinds.

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

Pre-Tax Operating Earnings

Pre-tax operating earnings increased in Latin America primarily due to $9.8 million foreign currency tailwinds. Pre-tax operating earnings increased $8.2 million in Asia primarily due to continued growth in the business.

Net Revenue

Net revenue increased in Latin America primarily due to $25.1 million foreign currency tailwinds and $8.7 million higher inflation-based investment returns on average invested assets and cash. Net revenue increased $15.3 million in Asia primarily due to continued growth in the business.

U.S. Insurance Solutions Segment

U.S. Insurance Solutions Segment Summary Financial Data

Premium and fees are a key metric for growth in the U.S. Insurance Solutions segment. We receive premiums on our specialty benefits insurance products as well as our traditional life insurance products. Fees are generated from our specialty benefits fee-for-service products as well as our universal life, variable universal life and indexed universal life insurance products. We use several reinsurance programs to help manage the mortality and morbidity risk. Premium and fees are reported net of reinsurance premiums.

The following table presents the U.S. Insurance Solutions segment premium and fees for the periods indicated:


	For the three months ended September 30,						For the nine months ended September 30,
					Increase						Increase
	2021		2020		(decrease)		2021		2020		(decrease)

	(in millions)
Premium and fees:
Specialty Benefits insurance	$	638.9	$	579.7	$	59.2	$	1,878.0	$	1,767.4	$	110.6
Individual Life insurance		302.1		323.6		(21.5)		945.7		925.5		20.2

The following table presents certain summary financial data relating to the U.S. Insurance Solutions segment for the periods indicated:


	For the three months ended September 30,						For the nine months ended September 30,
					Increase						Increase
	2021		2020		(decrease)		2021		2020		(decrease)

	(in millions)
Operating revenues:
Premiums and other considerations	$	711.8	$	649.9	$	61.9	$	2,117.1	$	1,997.1	$	120.0
Fees and other revenues (1)		229.2		253.4		(24.2)		706.5		695.7		10.8
Net investment income		249.1		218.1		31.0		723.3		640.0		83.3
Total operating revenues		1,190.1		1,121.4		68.7		3,546.9		3,332.8		214.1
Expenses:
Benefits, claims and settlement expenses (1)		744.0		864.8		(120.8)		2,247.7		2,168.9		78.8
Dividends to policyholders (1)		28.2		29.7		(1.5)		75.1		90.0		(14.9)
Operating expenses (1)		266.3		361.0		(94.7)		850.7		923.5		(72.8)
Total expenses		1,038.5		1,255.5		(217.0)		3,173.5		3,182.4		(8.9)

Pre-tax operating earnings (losses) (1)	$	151.6	$	(134.1)	$	285.7	$	373.4	$	150.4	$	223.0

(1)	For further details related to the impact associated with actuarial assumption updates and model refinements for the three months ended September 30, 2021 and 2020, see “Transactions Affecting Comparability of Results of Operations — Actuarial Assumption Updates.”

Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020

Pre-Tax Operating Earnings (Losses)

Pre-tax operating earnings in our Specialty Benefits insurance business increased $21.0 million from less unfavorable COVID-19 impacts in 2021 compared to 2020, $5.8 million in higher variable investment income and $5.6 million due to lower non-COVID-19 claims. Pre-tax operating earnings in our Individual Life insurance business increased $247.2 million due to the impact associated with actuarial assumption updates and model refinements, which were favorable in 2021 compared to unfavorable in 2020.

Operating Revenues

Premium and fees increased in our Specialty Benefits Insurance business due to $37.7 million from growth in the business and $21.5 million in dental premium credits associated with COVID-19 that lowered premium and fees in 2020. Premium and fees decreased in our Individual Life insurance business primarily due to a $32.4 million impact associated with actuarial assumption updates and model refinements, which were unfavorable in 2021 compared to favorable in 2020, partially offset by a $10.9 million increase from growth in the business.

Net investment income increased primarily from higher variable investment income.

Total Expenses

Benefits, claims and settlement expenses in our Specialty Benefits insurance business increased $23.6 million due to growth in the business partially offset by $5.6 million in lower claims. Benefits, claims and settlement expenses decreased in our Individual Life insurance business primarily due to a $167.1 million impact associated with actuarial assumption updates and model refinements, which were favorable in 2021 compared to unfavorable in 2020, partially offset by $20.5 million in higher non-COVID-19 claims and $11.0 million in higher COVID-19 claims.

Operating expenses decreased primarily due to the impact associated with actuarial assumption updates and model refinements in our Individual Life insurance business, which were favorable in 2021 compared to unfavorable in 2020.

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

Pre-Tax Operating Earnings

Pre-tax operating earnings decreased in our Specialty Benefits insurance business due to a $101.6 million impact related to COVID-19, which was unfavorable in 2021 compared to favorable in 2020, primarily due to temporary dental and vision office closures in 2020. This decrease was partially offset by $25.6 million in lower non-COVID-19 claims and $10.3 million in growth of the business. Pre-tax operating earnings in our Individual Life insurance business increased $279.4 million primarily due to the impact associated with actuarial assumption updates and model refinements, which were favorable in 2021 compared to unfavorable in 2020.

Operating Revenues

Premiums and fees increased primarily due to growth in the business.

Net investment income increased $54.0 million from higher variable investment income and $15.3 million from growth in average invested assets.

Total Expenses

Benefits claims and settlement expenses in our Specialty Benefits insurance business increased $130.3 million from unfavorable COVID-19 impacts in 2021 compared to favorable in 2020 primarily associated with lower claims due to temporary dental and vision office closures in 2020. Benefits, claims and settlement expenses decreased in our Individual Life insurance business $170.1 million due to the impact associated with actuarial assumption updates and model refinements, which were favorable in 2021 compared to unfavorable in 2020. This decrease was partially offset by $35.8 million in more unfavorable COVID-19 related impacts in 2021 compared to 2020, $33.8 million due to growth in the business and $12.8 million in higher non-COVID-19 claims.

Dividends to policyholders in our Individual Life insurance business decreased $8.4 million due to the normal decline in the Closed Block business and $6.4 million due to a decrease in the policyholder dividend obligation resulting from higher claims.

Operating expenses in our Specialty Benefits business increased $25.9 million primarily due to growth in business. Operating expenses in our Individual Life insurance business decreased $98.7 million primarily due to the impact associated with actuarial assumption updates and model refinements, which were favorable in 2021 compared to unfavorable in 2020.

Corporate Segment

Corporate Segment Summary Financial Data

The following table presents certain summary financial data relating to the Corporate segment for the periods indicated:


	For the three months ended September 30,						For the nine months ended September 30,
					Increase						Increase
	2021		2020		(decrease)		2021		2020		(decrease)

	(in millions)
Operating revenues:
Total operating revenues	$	(14.3)	$	(17.0)	$	2.7	$	(21.8)	$	(24.0)	$	2.2
Expenses:
Total expenses		82.3		53.1		29.2		252.5		202.9		49.6

Pre-tax operating earnings (losses) attributable to noncontrolling interest		0.5		(0.4)		0.9		(0.7)		17.9		(18.6)
Pre-tax operating losses	$	(97.1)	$	(69.7)	$	(27.4)	$	(273.6)	$	(244.8)	$	(28.8)

Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020

Pre-Tax Operating Losses

Pre-tax operating losses increased primarily due to expense increases, including $12.3 million related to interest income on tax settlements recorded in 2020 and a $6.1 million increase in compensation costs largely due to an increase in incentive compensation.

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

Pre-Tax Operating Losses

Pre-tax operating losses increased primarily due to a $16.7 million increase in compensation costs largely due to an increase in incentive compensation and $14.1 million related to interest income on tax settlements recorded in 2020.

Liquidity and Capital Resources

Liquidity and capital resources represent the overall strength of a company and its ability to generate strong cash flows, borrow funds at a competitive rate and raise new capital to meet operating and growth needs. We are in a strong capital and liquidity position as we face the uncertain, volatile and potentially material adverse economic disruptions to our business brought on by the COVID-19 pandemic. We are monitoring our liquidity closely and feel confident in our ability to meet all long-term obligations to customers, policyholders and debt holders. Our sources of strength include our laddered long-term debt maturities with the next maturity not until 2022, access to revolving credit facility and contingent funding arrangements, a strong risk-based capital position and our available cash and liquid assets. The combination of these financial levers will enable us to manage through this period of economic volatility. Our legal entity structure has an impact on our ability to meet cash flow needs as an organization. Following is a simplified organizational structure.

Liquidity

Our liquidity requirements have been and will continue to be met by funds from consolidated operations as well as the issuance of commercial paper, common stock, debt or other capital securities and borrowings from credit facilities. We believe the cash flows from these sources are sufficient to satisfy the current liquidity requirements of our operations, including reasonably foreseeable contingencies.

We maintain a level of cash and securities which, combined with expected cash inflows from investments and operations, we believe to be adequate to meet anticipated short-term and long-term payment obligations. We will continue our prudent capital management practice of regularly exploring options available to us to maximize capital flexibility, including accessing the capital markets and careful attention to and management of expenses.

We perform rigorous liquidity stress testing to ensure our asset portfolio includes sufficient high quality liquid assets that could be utilized to bolster our liquidity position under increasingly stressed market conditions. These assets could be utilized as collateral for secured borrowing transactions with various third parties or by selling the securities in the open market if needed.

We also manage liquidity risk by limiting the sales of liabilities with features such as puts or other options that can be exercised at inopportune times. For example, as of September 30, 2021, approximately $13.4 billion, or 99%, of our institutional guaranteed investment contracts and funding agreements cannot be redeemed by contractholders prior to maturity. Our individual annuity liabilities also contain surrender charges and other provisions limiting early surrenders.

The following table summarizes the withdrawal characteristics of our domestic general account investment contracts as of September 30, 2021.


	Contractholder funds		Percentage
	(in millions)
Not subject to discretionary withdrawal	$	14,660.8	41.4	%
Subject to discretionary withdrawal with adjustments:
Specified surrender charges		9,741.9	27.5
Market value adjustments		5,932.9	16.7
Subject to discretionary withdrawal without adjustments		5,087.9	14.4
Total domestic investment contracts	$	35,423.5	100.0	%

Universal life insurance and certain traditional life insurance policies are also subject to discretionary withdrawals by policyholders. However, life insurance policies tend to be less susceptible to withdrawal than our investment contracts because policyholders may be subject to a new underwriting process in order to obtain a new life insurance policy. In addition, our life insurance liabilities include surrender charges to discourage early surrenders.

We had the following short-term credit facilities with various financial institutions as of September 30, 2021:


	Financing				Amount
Obligor/Applicant	structure	Maturity	Capacity		outstanding (3)

			(in millions)
PFG, PFS, and Principal Life as co-borrowers (1)	Credit facility	November 2023	$	600.0	$	—
PFG, PFS, Principal Financial Services V (UK) LTD and Principal Life as co-borrowers (1)	Credit facility	November 2023		200.0		—
Principal International Chile (2)	Unsecured lines of credit			213.9		74.3
Total			$	1,013.9	$	74.3

(1)	The credit facility is supported by eighteen banks.

(2)	The unsecured lines of credit can be used for repurchase agreements or other borrowings. Each line has a maturity of less than one year.

(3)	The amount outstanding is reported in short-term debt on the consolidated statements of financial position.

The revolving credit facilities are committed and available for general corporate purposes. These credit facilities also provide 100% back-stop support for our commercial paper program, of which we had no outstanding balances as of September 30, 2021 and December 31, 2020. Most of the banks supporting the credit facilities have other relationships with us. Due to the financial strength and the strong relationships we have with these providers, we are comfortable we have very low risk the financial institutions would be unable or unwilling to fund these facilities.

The Holding Companies: PFG and PFS. The principal sources of funds available to our parent holding company, PFG, are dividends from subsidiaries as well as its ability to borrow funds at competitive rates and raise capital to meet operating and growth needs. These funds are used by PFG to meet its obligations, which include the payment of dividends on common stock, debt service and the repurchase of stock. The declaration and payment of common stock dividends is subject to the discretion of our Board and will depend on our overall financial condition, results of operations, capital levels, cash requirements, future prospects, receipt of dividends from Principal Life (as described below), risk management considerations and other factors deemed relevant by the Board. No significant restrictions limit the payment of dividends by PFG, except those generally applicable to corporations incorporated in Delaware.

Dividends from Principal Life, our primary subsidiary, are limited by Iowa law. Under Iowa law, Principal Life may pay dividends only from the earned surplus arising from its business and must receive the prior approval of the Commissioner of Insurance of the State of Iowa (the “Commissioner”) to pay stockholder dividends or make any other distribution if such distribution would exceed certain statutory limitations. Iowa law gives the Commissioner discretion to disapprove requests for distributions in excess of these limitations. Extraordinary dividends include those made, together with dividends and other distributions, within the preceding twelve months that exceed the greater of (i) 10% of statutory policyholder surplus as of the previous year-end or (ii) the statutory net gain from operations from the previous calendar year, not to exceed earned surplus. Based on statutory results for the year ended December 31, 2020, the ordinary stockholder dividend limitation for Principal Life is approximately $932.5 million in 2021. However, because the dividend test is based on dividends previously paid over rolling 12-month periods, if paid before a specified date during 2021, some or all of such dividends may be extraordinary and require regulatory approval.

Total stockholder dividends paid by Principal Life to its parent for the nine months ended September 30, 2021, were $900.0 million, $600.0 million of which was extraordinary and approved by the Commissioner. As of September 30, 2021, we had $2,466.2 million of cash and liquid assets held in our holding companies and other subsidiaries, which is available for corporate purposes. This includes assets in excess of targeted statutory capital ratios and immediate working capital needs. Corporate balances held in foreign holding companies meet the indefinite reinvestment exception.

Operations. Our primary consolidated cash flow sources are premiums from insurance products, pension and annuity deposits, asset management fee revenues, administrative services fee revenues, income from investments and proceeds from the sales or maturity of investments. Cash outflows consist primarily of payment of benefits to policyholders and beneficiaries, income and other taxes, current operating expenses, payment of dividends to policyholders, payments in connection with investments acquired, payments made to acquire subsidiaries, payments relating to policy and contract surrenders, withdrawals, policy loans, interest payments and repayment of short-term debt and long-term debt. Our investment strategies are generally intended to provide adequate funds to pay benefits without forced sales of investments. For a discussion of our investment objectives and strategies, see “Investments.”

Cash Flows. Cash flow activity, as reported in our consolidated statements of cash flows, provides relevant information regarding our sources and uses of cash. The following discussion of our operating, investing and financing portions of the cash flows excludes cash flows attributable to the separate accounts.

Net cash provided by operating activities was $2,107.0 million and $3,110.4 million for the nine months ended September 30, 2021 and 2020, respectively. Our insurance business typically generates positive cash flows from operating activities, as premiums collected from our insurance products and income received from our investments exceed acquisition costs, benefits paid, redemptions and operating expenses. These positive cash flows are then invested to support the obligations of our insurance and investment products and required capital supporting these products. Our cash flows from operating activities are affected by the timing of premiums, fees and investment income received and benefits and expenses paid. The decrease in cash provided by operating activities was primarily due to fluctuations in receivables and payables associated with the timing of settlements in 2021 as compared to 2020. Additionally, increases in net income were offset in part by proceeds from real estate sold in 2020 with no corresponding activity in 2021.

Net cash used in investing activities was $2,867.3 million and $3,639.9 million for the nine months ended September 30, 2021 and 2020, respectively. The decrease in cash used in investing activities was primarily due to lower net purchases of available-for-sale securities in 2021 as compared to 2020. The decrease was offset in part by increased net purchases of mortgage loans and lower Chile direct financing lease maturities in in 2021 as compared to 2020.

Net cash provided by financing activities was $1,055.9 million and $1,570.3 million for the nine months ended September 30, 2021 and 2020, respectively. The decrease in cash provided by financing activities was due to proceeds from long-term debt issued in 2020 with no corresponding activity in 2021 and lower net investment contract deposits in 2021 as compared to 2020. These decreases were partially offset by increased banking operation deposits due to a new bank sweep product launched in the third quarter of 2021 associated with the Acquired Business.

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

Guarantors and Issuers of Guaranteed Securities. PFG has issued certain notes pursuant to transactions registered under the Securities Act of 1933. Such notes include all currently outstanding senior notes and junior subordinated notes, which are subordinated to all our senior debt (collectively, the “registered notes”). For additional information on the senior notes and junior subordinated notes, see Item 8. “Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 9, Debt” in our Annual Report on Form 10-K for the year ended December 31, 2020.

PFS, a wholly owned subsidiary of PFG, has guaranteed each of the registered notes on a full and unconditional basis. The full and unconditional guarantees require PFS to satisfy the obligations of the guaranteed security immediately, if and when PFG has failed to make a scheduled payment thereunder. If PFS does not make such payment, any holder of the guaranteed security may immediately bring suit directly against PFS for payment of amounts due and payable. No other subsidiary of PFG has guaranteed any of the registered notes.

Summary financial information is presented below on a combined basis for PFG and PFS (the “obligor group”) and transactions between the obligor group have been eliminated. The summary financial information excludes subsidiaries that are not issuers or guarantors. Any investments by the obligor group in other subsidiaries have been excluded.


	September 30, 2021		December 31, 2020

	(in millions)
Summary Statements of Financial Position Information:
Total investments	$	1,350.7	$	1,254.9
Cash and cash equivalents		803.8		661.6
Goodwill		618.5		618.5
Other intangibles		482.5		503.6
Other assets		435.8		457.8
Due from non-obligor subsidiaries		78.3		169.5
Total assets		3,821.9		3,757.3
Long-term debt		4,225.2		4,223.3
Other liabilities		696.7		806.7
Due to non-obligor subsidiaries		934.9		843.4
Total liabilities		5,900.5		5,904.7


	For the nine months ended		For the year ended
	September 30, 2021		December 31, 2020

	(in millions)
Summary Statements of Operations Information:
Total revenues	$	178.3	$	396.2
Total expenses		505.7		731.7
Net loss		(249.1)		(243.6)

Short-Term Debt. The components of short-term debt were as follows:


	September 30, 2021		December 31, 2020

	(in millions)
Other recourse short-term debt	$	74.3	$	84.7
Total short-term debt	$	74.3	$	84.7

The short-term credit facilities are used for general corporate purposes and borrowings outstanding can fluctuate as part of working capital management.

Long-Term Debt. On June 12, 2020, we issued $500.0 million of senior notes at a discount. On August 3, 2020, we issued an additional $100.0 million of senior notes at a premium. The proceeds from these notes were used for general corporate purposes.

Contingent Funding Agreements for Senior Debt Issuance. In March 2018, we entered into two contingent funding agreements that give us the right at any time over a ten-year or thirty-year period to issue up to $400.0 million or $350.0 million, respectively, of senior notes.

Stockholders’ Equity. The following table summarizes our return of capital to common stockholders.


	For the nine months ended		For the year ended
	September 30, 2021		December 31, 2020

	(in millions)
Dividends to stockholders	$	485.6	$	614.5
Repurchase of common stock (1)		585.1		307.0
Total cash returned to common stockholders	$	1,070.7	$	921.5

(1)	Includes common stock utilized to execute certain stock incentive awards and shares purchased as part of publicly announced programs.

For additional stockholders’ equity information, see Item 1. “Financial Statements, Notes to Unaudited Condensed Consolidated Financial Statements, Note 9, Stockholders’ Equity.”

Capitalization

The following table summarizes our capital structure:


	September 30, 2021			December 31, 2020

	($ in millions)
Debt:
Short-term debt	$	74.3		$	84.7
Long-term debt		4,279.7			4,279.2
Total debt		4,354.0			4,363.9

Total stockholders’ equity attributable to PFG		16,070.7			16,558.9
Total capitalization	$	20,424.7		$	20,922.8
Debt to equity		27	%		26	%
Debt to capitalization		21	%		21	%

Contractual Obligations and Contractual Commitments

As of September 30, 2021, no significant changes to contractual obligations and contractual commitments have occurred since December 31, 2020.

Off-Balance Sheet Arrangements

Variable Interest Entities. We have relationships with various types of special purpose entities and other entities where we have a variable interest as described in Item 1. “Financial Statements, Notes to Unaudited Condensed Consolidated Financial Statements, Note 2, Variable Interest Entities.” We have made commitments to fund certain limited partnerships, some of which are classified as unconsolidated variable interest entities.

Guarantees and Indemnifications. As of September 30, 2021, no significant changes to guarantees and indemnifications have occurred since December 31, 2020. For guarantee and indemnification information, see Item 1. “Financial Statements, Notes to Unaudited Condensed Consolidated Financial Statements, Note 8, Contingencies, Guarantees and Indemnifications” under the caption, “Guarantees and Indemnifications.”

Financial Strength and Credit Ratings

Our ratings are influenced by the relative ratings of our peers/competitors as well as many other factors including our operating and financial performance, capital levels, asset quality, liquidity, asset/liability management, overall portfolio mix, financial leverage (i.e., debt), risk exposures, operating leverage and other factors.

In June 2021, Fitch affirmed the ‘AA-’ financial strength ratings of Principal Life and Principal National Life Insurance Company (“PNLIC”). Fitch also affirmed PFG’s senior unsecured debt at ‘A-’. The outlook on all ratings was revised from ‘negative’ to ‘stable’. The rating affirmation and revision of the outlook follows our announcement of the results of the Strategic Review.

In June 2021, Moody’s commented that our ratings and positive outlook remain unchanged after completion of the Strategic Review.

In June 2021, S&P affirmed the financial strength rating of Principal Life and PNLIC at ‘A+’. S&P also affirmed the issuer credit ratings of PFG and PFS at ‘A-‘. The outlook on all ratings changed from ‘negative’ to ‘stable’. The rating affirmation and revision of the outlook follows our announcement of the result of the Strategic Review.

In May 2021, Fitch and Moody’s revised their U.S. life insurance industry outlooks to ‘stable’ from ‘negative’. S&P continues to have a ‘stable’ industry outlook, while A.M. Best’s outlook remains ‘negative’.

In February 2021, A.M. Best affirmed the financial strength ratings of Principal Life and PNLIC at ‘A+’. Concurrently, A.M. Best affirmed the long-term issuer credit ratings at ‘aa’. The outlook remains ‘stable’ for all credit ratings. The affirmation reflects the strength of our consolidated statement of financial position as well as our strong operating performance, favorable business profile and very strong enterprise risk management.

The following table summarizes our significant financial strength and debt ratings from the major independent rating organizations. A rating is not a recommendation to buy, sell or hold securities. Such a rating may be subject to revision or withdrawal at any time by the assigning rating agency. Each rating should be evaluated independently of any other rating.


	A.M. Best	Fitch	Moody’s	S&P
Principal Financial Group
Senior Unsecured Debt	a	A-	Baa1	A-
Junior Subordinated Debt	a-		Baa2	BBB
Long-Term Issuer Default Rating		A
Principal Life Insurance Company
Insurer Financial Strength	A+	AA-	A1	A+
Issuer Credit Rating	aa
Commercial Paper	AMB‑1+		P-1	A-1+
Principal National Life Insurance Company
Insurer Financial Strength	A+	AA-	A1	A+

Fair Value Measurement

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels. The fair value hierarchy gives the highest priority (Level 1) to unadjusted quoted prices in active markets for identical assets or liabilities and gives the lowest priority (Level 3) to unobservable inputs. The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety considering factors specific to the asset or liability. See Item 1. “Financial Statements, Notes to Unaudited Condensed Consolidated Financial Statements, Note 10, Fair Value Measurements” for further details, including a reconciliation of changes in Level 3 fair value measurements.

As of September 30, 2021, 45% of our net assets (liabilities) were Level 1, 54% were Level 2 and 1% were Level 3. Excluding separate account assets as of September 30, 2021, 4% of our net assets (liabilities) were Level 1, 95% were Level 2 and 1% were Level 3.

As of December 31, 2020, 41% of our net assets (liabilities) were Level 1, 56% were Level 2 and 3% were Level 3. Excluding separate account assets as of December 31, 2020, 3% of our net assets (liabilities) were Level 1, 97% were Level 2 and 0% were Level 3.

Changes in Level 3 Fair Value Measurements

Net assets (liabilities) measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of September 30, 2021, were $1,807.3 million as compared to $8,812.6 million as of December 31, 2020. The decrease was primarily related to net sales in our separate account assets due to the restructure of certain separate account real estate assets into a partnership entity that is carried at NAV.

Investments

We had total consolidated assets as of September 30, 2021, of $298,908.4 million, of which $106,894.4 million were invested assets. The rest of our total consolidated assets are comprised primarily of separate account assets for which we do not bear investment risk; therefore, the discussion and financial information below does not include such assets.

Overall Composition of Invested Assets

Invested assets as of September 30, 2021, were predominantly high quality and broadly diversified across asset class, individual credit, industry and geographic location. Asset allocation is determined based on cash flow and the risk/return requirements of our products. As shown in the following table, the major categories of invested assets are fixed maturities and commercial mortgage loans.


	September 30, 2021				December 31, 2020
	Carrying amount		% of total		Carrying amount		% of total

	($ in millions)
Fixed maturities:
Public	$	49,054.9	46	%	$	51,966.5	49	%
Private		27,915.7	26			27,275.9	26
Equity securities		2,428.2	2			2,013.4	2
Mortgage loans:
Commercial		16,298.2	15			15,398.4	14
Residential		3,127.8	3			1,944.6	2
Real estate held for sale		57.2	—			2.0	—
Real estate held for investment		1,908.4	2			1,795.3	2
Policy loans		762.1	1			784.0	1
Other investments		5,341.9	5			5,126.8	4
Total invested assets		106,894.4	100	%		106,306.9	100	%
Cash and cash equivalents		3,145.4				2,849.8
Total invested assets and cash	$	110,039.8			$	109,156.7

Investment Results

Net Investment Income

The following table presents the yield and investment income, excluding net realized capital gains and losses, for our invested assets for the periods indicated. We calculate annualized yields using a simple average of asset classes at the beginning and end of the reporting period. The yields for available-for-sale fixed maturities are calculated using amortized cost. All other yields are calculated using carrying amounts.


	For the three months ended September 30,												For the nine months ended September 30,
	2021				2020				Increase (decrease)				2021				2020				Increase (decrease)
	Yield		Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Amount

	($ in millions)
Fixed maturities	4.0	%	$	706.2	3.8	%	$	651.3	0.2	%	$	54.9	3.9	%	$	2,071.4	3.9	%	$	1,995.4	—	%	$	76.0
Equity securities	1.5			9.2	1.6			7.5	(0.1)			1.7	2.0			34.2	2.5			35.3	(0.5)			(1.1)
Mortgage loans - commercial	3.9			159.7	4.3			161.6	(0.4)			(1.9)	4.0			475.1	4.2			480.0	(0.2)			(4.9)
Mortgage loans - residential	4.5			30.8	3.8			16.0	0.7			14.8	4.6			87.5	4.6			55.4	—			32.1
Real estate	10.2			49.8	5.7			24.8	4.5			25.0	7.8			110.4	9.5			124.8	(1.7)			(14.4)
Policy loans	5.0			9.6	5.2			10.3	(0.2)			(0.7)	5.0			29.3	5.3			31.5	(0.3)			(2.2)
Cash and cash equivalents	0.1			1.0	0.2			2.0	(0.1)			(1.0)	0.1			2.8	0.7			15.8	(0.6)			(13.0)
Other investments	11.6			156.0	6.0			70.5	5.6			85.5	11.2			441.2	5.4			190.8	5.8			250.4
Total	4.3			1,122.3	3.8			944.0	0.5			178.3	4.2			3,251.9	4.0			2,929.0	0.2			322.9
Investment expenses	(0.1)			(28.9)	(0.1)			(26.1)	—			(2.8)	(0.1)			(84.9)	(0.1)			(82.9)	—			(2.0)
Net investment income	4.2	%	$	1,093.4	3.7	%	$	917.9	0.5	%	$	175.5	4.1	%	$	3,167.0	3.9	%	$	2,846.1	0.2	%	$	320.9

Three and Nine Months Ended September 30, 2021 Compared to Three and Nine Months Ended September 30, 2020

Net investment income increased primarily due to favorable U.S. market performance on certain alternative investments and higher bond prepayments included in variable investment income and higher inflation-based investment returns on our Latin America average invested assets and cash.

Net Realized Capital Gains (Losses)

The following table presents the contributors to net realized capital gains and losses for the periods indicated.


	For the three months ended September 30,						For the nine months ended September 30,
					Increase						Increase
	2021		2020		(decrease)		2021		2020		(decrease)

	(in millions)
Fixed maturities, available-for-sale – credit losses, including credit sales (1)	$	(9.6)	$	(20.8)	$	11.2	$	(27.6)	$	(58.0)	$	30.4
Commercial mortgage loans – credit gains (losses)		1.5		(0.5)		2.0		8.0		(14.1)		22.1
Other – credit losses		1.1		0.3		0.8		6.2		(1.1)		7.3
Fixed maturities, available-for-sale and trading – noncredit		9.2		15.9		(6.7)		7.3		125.9		(118.6)
Derivatives and related hedge activities (2)		(174.3)		(34.0)		(140.3)		(143.5)		83.2		(226.7)
Other gains (losses)		20.1		104.6		(84.5)		107.9		33.6		74.3
Net realized capital gains (losses) (3)	$	(152.0)	$	65.5	$	(217.5)	$	(41.7)	$	169.5	$	(211.2)

(1)	Includes credit sales, adjustments to the credit loss valuation allowance, write-offs and recoveries on available-for-sale securities.

(2)	Includes fixed maturities, trading net gains (losses) of $(1.1) million and $3.8 million for the three months ended September 30, 2021 and 2020, and $(3.6) million and $4.0 million for the nine months ended September 30, 2021 and 2020, respectively, which are a component of the GMWB embedded derivative hedging program net realized capital gains (losses) reflected in this line.

(3)	Net realized capital gains (losses) can be volatile due to credit losses from invested assets, mark-to-market adjustments of certain invested assets and our decision to sell invested assets.

Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020

Net realized capital losses in 2021 as compared to gains in 2020 were primarily due to higher losses on currency derivatives not designated as hedging instruments due to changes in exchange rates and net losses in 2021 as compared to net gains in 2020 for GMWB embedded derivatives, including changes in the spread reflecting our own creditworthiness, and related hedging instruments. Additionally, other gains decreased primarily due to prior year activity including gains on the sale of joint venture real estate investments and on equity securities related to mark-to-market changes.

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

Net realized capital losses in 2021 as compared to gains in 2020 were primarily due to increased net losses from GMWB embedded derivatives, including changes in the spread reflecting our own creditworthiness, and related hedging instruments and losses in 2021 compared to gains in 2020 on currency derivatives not designated as hedging instruments due to changes in exchange rates. Additionally, decreased gains were seen in fixed maturities, available-for-sale and trading - noncredit due to noncredit gains related to portfolio rebalancing in 2020 and lower mark-to-market gains on trading fixed maturities. These decreases were largely offset by an increase in other gains from sponsored investment funds and equity securities related primarily to mark-to-market changes combined with the sale of joint venture real estate investments in 2020.

U.S. Investment Operations

Of our invested assets, $99,660.9 million were held by our U.S. operations as of September 30, 2021. Our U.S. invested assets are managed primarily by our Principal Global Investors segment. Our Investment Committee, appointed by our Board, is responsible for establishing investment policies and monitoring risk limits and tolerances. Our primary investment objective is to maximize after-tax returns consistent with acceptable risk parameters. We seek to protect customers’ benefits by optimizing the risk/return relationship on an ongoing basis, through asset/liability matching, reducing credit risk, avoiding high levels of investments that may be redeemed by the issuer, maintaining sufficiently liquid investments and avoiding undue asset concentrations through diversification. We are exposed to two primary sources of investment risk:

	●	credit risk, relating to the uncertainty associated with the continued ability of an obligor to make timely payments of principal and interest and

	●	interest rate risk, relating to the market price and/or cash flow variability associated with changes in market yield curves.

Our ability to manage credit risk is essential to our business and our profitability. We devote considerable resources to the credit analysis of each new investment. We manage credit risk through industry, issuer and asset class diversification.

A dedicated committee, comprised of senior investment professional staff members, approves the credit rating for the fixed maturities we purchase. We have teams of security analysts, organized by industry and asset class, that analyze and monitor these investments. Investments held in the portfolio are monitored on a continuous basis with a formal review annually or more frequently if material events affect the issuer. The analysis includes both fundamental and technical factors. The fundamental analysis encompasses both quantitative and qualitative analysis of the issuer. The qualitative analysis includes an assessment of both accounting and management aggressiveness of the issuer. In addition, technical indicators such as stock price volatility and credit default swap levels are monitored. We regularly review our investments to determine whether we should re-rate them, employing the following criteria:

	●	material changes in the issuer’s revenues, margins, capital structure or collateral values;

	●	significant management or organizational changes;

	●	significant changes regarding the issuer’s industry;

	●	debt service coverage or cash flow ratios that fall below industry-specific thresholds;

	●	violation of financial covenants and

	●	other business factors that relate to the issuer.

We purchase credit default swaps to hedge certain credit exposures in our investment portfolio. We economically hedged credit exposure in our portfolio by purchasing credit default swaps with a notional amount of $145.0 million and $125.0 million as of September 30, 2021 and December 31, 2020, respectively. We sell credit default swaps to offer credit protection to investors when entering into synthetic replicating transactions. When selling credit protection, if there is an event of default by the referenced name, we are obligated to pay the counterparty the referenced amount of the contract and receive in return the referenced security. For further information on credit derivatives sold, see Item 1. “Financial Statements, Notes to Unaudited Condensed Consolidated Financial Statements, Note 4, Derivative Financial Instruments” under the caption, “Credit Derivatives Sold.”

Our use of derivatives exposes us to counterparty risk, or the risk that the counterparty fails to perform the terms of the derivative contract. We actively manage this risk by:

	●	obtaining approval of all new counterparties by the Investment Committee;

	●	establishing exposure limits that take into account non-derivative exposure we have with the counterparty as well as derivative exposure;

	●	performing similar credit analysis prior to approval on each derivatives counterparty that we do when lending money on a long-term basis;

	●	diversifying our risk across numerous approved counterparties;

	●	implementing credit support annex (collateral) agreements (“CSAs”) for over-the-counter derivative transactions or similar agreements with a majority of our counterparties to further limit counterparty exposures, which provide for netting of exposures;

	●	limiting exposure to A credit or better for over-the-counter derivative counterparties without CSAs;

	●	conducting stress-test analysis to determine the maximum exposure created during the life of a prospective transaction;

	●	daily monitoring of counterparty credit ratings, exposures and associated collateral levels and

	●	trading mandatorily cleared contracts through centralized clearinghouses.

We manage our exposure on a net basis, whereby we net positive and negative exposures for each counterparty with agreements in place. For further information on derivative exposure, see Item 1. “Financial Statements, Notes to Unaudited Condensed Consolidated Financial Statements, Note 3, Investments” under the caption, “Balance Sheet Offsetting.”

A dedicated risk management team is responsible for centralized monitoring of the commercial mortgage loan portfolio. We apply a variety of guidelines to minimize credit risk in our commercial mortgage loan portfolio. When considering new commercial mortgage loans, we review the cash flow fundamentals of the property, make a physical assessment of the underlying commercial real estate, conduct a comprehensive market analysis and compare against industry lending practices. We use a proprietary risk rating model to evaluate all new and substantially all existing loans within the portfolio. The proprietary risk model is designed to stress projected cash flows under simulated economic and market downturns. Our lending guidelines are typically 75% or less loan-to-value ratio and a debt service coverage ratio of at least 1.2 times. We analyze investments outside of these guidelines based on cash flow quality, tenancy and other factors. The following table presents loan-to-value and debt service coverage ratios for our brick and mortar commercial mortgage loans:


	Weighted average loan-to-value ratio				Debt service coverage ratio
	September 30, 2021		December 31, 2020		September 30, 2021		December 31, 2020
New mortgages	49	%	49	%	3.4	x	2.5	x
Entire mortgage portfolio	47	%	49	%	2.6	x	2.5	x

We also seek to manage call or prepayment risk arising from changes in interest rates. We assess and price for call or prepayment risks in all of our investments and monitor these risks in accordance with asset/liability management policies.

The amortized cost and weighted average yield, calculated using amortized cost, of non-structured fixed maturity securities that will be callable at the option of the issuer, excluding securities with a make-whole provision, were $4,970.4 million and 4.0%, respectively, as of September 30, 2021, and $9,372.5 million and 4.0%, respectively, as of December 31, 2020. In addition, the amortized cost and weighted average yield of RMBS, residential collateralized mortgage obligations, and asset-backed securities - home equity with material prepayment risk were $6,294.9 million and 3.0%, respectively, as of September 30, 2021, and $6,122.7 million and 3.0%, respectively, as of December 31, 2020.

Our investment decisions and objectives are a function of the underlying risks and product profiles of each primary business operation. In addition, we diversify our product portfolio offerings to include products that contain features that will protect us against fluctuations in interest rates. Those features include adjustable crediting rates, policy surrender charges and market value adjustments on liquidations. For further information on our management of interest rate risk, see Item 3. “Quantitative and Qualitative Disclosures About Market Risk – Interest Rate Risk.”

Overall Composition of U.S. Invested Assets

As shown in the following table, the major categories of U.S. invested assets are fixed maturities and commercial mortgage loans. The following discussion analyzes the composition of U.S. invested assets, but excludes invested assets of the separate accounts.


	September 30, 2021				December 31, 2020
	Carrying amount		% of total		Carrying amount		% of total

	($ in millions)
Fixed maturities:
Public	$	45,905.1	46	%	$	47,818.3	49	%
Private		27,892.7	28			27,228.8	28
Equity securities		1,098.2	1			545.8	1
Mortgage loans:
Commercial		15,861.9	16			14,952.3	15
Residential		2,731.5	3			1,511.0	1
Real estate held for sale		40.6	—			1.2	—
Real estate held for investment		1,908.0	2			1,794.9	2
Policy loans		747.3	1			764.1	1
Other investments		3,475.6	3			3,214.7	3
Total invested assets		99,660.9	100	%		97,831.1	100	%
Cash and cash equivalents		2,896.2				2,607.2
Total invested assets and cash	$	102,557.1			$	100,438.3

Fixed Maturities

Fixed maturities include bonds, ABS, redeemable preferred stock and certain non-redeemable preferred securities. Included in the privately placed category as of September 30, 2021 and December 31, 2020, were $18.2 billion and $18.6 billion, respectively, of securities subject to certain holding periods and resale restrictions pursuant to Rule 144A of the Securities Act of 1933.

Fixed maturities were diversified by category of issuer, as shown in the following table for the periods indicated.


	September 30, 2021				December 31, 2020
	Carrying		Percent		Carrying		Percent
	amount		of total		amount		of total

	($ in millions)
U.S. government and agencies	$	1,900.0	3	%	$	2,086.1	3	%
Non-U.S. governments		952.7	1			950.3	1
States and political subdivisions		9,218.2	13			9,156.5	12
Corporate - public		22,905.6	31			24,944.6	33
Corporate - private		19,872.3	27			18,706.0	25
Residential mortgage-backed pass-through securities		3,007.1	4			3,165.0	4
Commercial mortgage-backed securities		5,277.2	7			4,936.9	7
Residential collateralized mortgage obligations		3,310.4	4			3,053.2	4
Asset-backed securities		7,354.3	10			8,048.5	11
Total fixed maturities	$	73,797.8	100	%	$	75,047.1	100	%

We believe it is desirable to hold residential mortgage-backed pass-through securities due to their credit quality and liquidity as well as portfolio diversification characteristics. Our portfolio is comprised of Government National Mortgage Association, Federal National Mortgage Association and Federal Home Loan Mortgage Corporation pass-through securities. In addition, our residential collateralized mortgage obligation portfolio offers structural features that allow cash flows to be matched to our liabilities.

We purchase CMBS to diversify the overall credit risks of the fixed maturities portfolio and to provide attractive returns. The primary risks in holding CMBS are structural and credit risks. Structural risks include the security’s priority in the issuer’s capital structure, the adequacy of and ability to realize proceeds from the collateral and the potential for prepayments. Credit risks involve collateral and issuer/servicer risk where collateral and servicer performance may deteriorate. CMBS are predominantly comprised of large pool securitizations that are diverse by property type, borrower and geographic dispersion. The risks to any CMBS deal are determined by the credit quality of the underlying loans and how those loans perform over time. Another key risk is the vintage of the underlying loans and the state of the markets during a particular vintage.

Similar to CMBS, we purchase ABS for diversification and to provide attractive returns. The primary risks in holding ABS are also structural and credit risks, which are similar to those noted above for CMBS. Our ABS portfolio is diversified by type of asset, issuer, and vintage. We actively monitor holdings of ABS to recognize adverse changes in the risk profile of each security. Prepayments in the ABS portfolio are, in general, insensitive to changes in interest rates or are insulated from such changes by call protection features. In the event we are subject to prepayment risk, we monitor the factors that impact the level of prepayment and prepayment speed for those ABS. In addition, we hold a diverse class of securities, which limits our exposure to any one security.

The international exposure held in our U.S. operation’s fixed maturities portfolio was 16% of total fixed maturities as of both September 30, 2021, and December 31, 2020. It is comprised of corporate and foreign government fixed maturities. The following table presents the carrying amount of our international exposure for our U.S. operation’s fixed maturities portfolio for the periods indicated.


	September 30, 2021		December 31, 2020

	(in millions)
European Union, excluding UK	$	2,831.1	$	3,015.5
United Kingdom		2,102.7		2,135.7
Australia/New Zealand		2,060.7		2,106.6
Latin America		1,615.0		1,502.0
Asia-Pacific		1,338.1		1,372.1
Middle East and Africa		946.8		907.5
Europe, non-European Union		749.0		849.5
Other (1)		244.0		224.8
Total	$	11,887.4	$	12,113.7

(1)	Includes exposure from two countries and various supranational organizations as of both September 30, 2021, and December 31, 2020.

International fixed maturities exposure is determined by the country of risk of the obligor entity. All international fixed maturities held by our U.S. operations are either denominated in U.S. dollars or have been swapped into U.S. dollar equivalents. Our international investments are analyzed internally by country and industry credit investment professionals. We control concentrations using issuer and country level exposure benchmarks, which are based on the credit quality of the issuer and the country. Our investment policy limits total international fixed maturities investments and we are within those internal limits. Exposure to Canada is not included in our international exposure. As of September 30, 2021 and December 31, 2020, our investments in Canada totaled $1,841.5 million and $2,037.9 million, respectively.

Fixed Maturities Credit Concentrations. One aspect of managing credit risk is through industry, issuer and asset class diversification. Our credit concentrations are managed to established limits. The following table presents our top ten exposures as of September 30, 2021.


	Amortized cost
	(in millions)
Berkshire Hathaway Inc.	$	289.1
NextEra Energy, Inc		237.6
Comcast Corporation		221.2
Emirate of Abu Dhabi		221.1
Sempra Energy		215.5
Bank of America Corporation		215.4
Duke Energy Corporation		213.0
JPMorgan Chase & Co.		211.7
Wells Fargo & Company		208.4
The Walt Disney Company		206.3
Total top ten exposures	$	2,239.3

Fixed Maturities Valuation and Credit Quality. Valuation techniques for the fixed maturities portfolio vary by security type and the availability of market data. The use of different pricing techniques and their assumptions could produce different financial results. See Item 1. “Financial Statements, Notes to Unaudited Condensed Consolidated Financial Statements, Note 10, Fair Value Measurements” for further details regarding our pricing methodology. Once prices are determined, they are reviewed by pricing analysts for reasonableness based on asset class and observable market data. Investment analysts who are familiar with specific securities review prices for reasonableness through direct interaction with external sources, review of recent trade activity or use of internal models. All fixed maturities placed on the “watch list” are periodically analyzed by investment analysts. These analysts periodically meet with the Chief Investment Officer and the Portfolio Managers to determine reasonableness of the analysts’ prices. The valuation of bonds for which a credit loss exists and there is no quoted price is typically based on relative value analysis and the present value of the future cash flows expected to be received. Although we believe these values reasonably reflect the fair value of those securities, the key assumptions about risk premiums, performance of underlying collateral (if any) and other market factors involve qualitative and unobservable inputs.

The Securities Valuation Office (“SVO”) of the National Association of Insurance Commissioners (“NAIC”) monitors the bond investments of insurers for regulatory capital and reporting purposes and, when required, assigns securities to one of six categories referred to as NAIC designations. Although NAIC designations are not produced to aid the investment decision making process, NAIC designations may serve as a reasonable proxy for Nationally Recognized Statistical Rating Organizations’ (“NRSRO”) credit ratings for certain bonds. For most corporate bonds, NAIC designations 1 and 2 include bonds generally considered investment grade by such rating organizations. Bonds are considered investment grade when rated ‘‘Baa3’’ or higher by Moody’s, or ‘‘BBB-’’ or higher by S&P. NAIC designations 3 through 6 include bonds generally referred to as below investment grade. Bonds are considered below investment grade when rated ‘‘Ba1’’ or lower by Moody’s, or ‘‘BB+’’ or lower by S&P.

For loan-backed and structured securities, as defined by the NAIC, the NAIC designation is not always a reasonable indication of an NRSRO rating as described below. For CMBS and non-agency RMBS, Blackrock Solutions undertakes the modeling of those NAIC designations. This may result in a final designation being higher or lower than the NRSRO credit rating.

The following table presents our total fixed maturities by NAIC designation as of the periods indicated as well as the percentage, based on fair value, that each designation comprises.


	September 30, 2021						December 31, 2020
					Percent of						Percent of
	Amortized		Carrying		carrying		Amortized		Carrying		carrying
NAIC designation	cost		amount		amount		cost		amount		amount

	($ in millions)
1	$	44,193.8	$	47,436.3	64	%	$	44,265.2	$	48,772.3	65	%
2		19,577.8		21,734.1	30			19,106.8		21,827.8	29
3		4,076.7		4,231.3	6			3,720.5		3,910.5	5
4		319.1		322.7	—			524.3		513.6	1
5		12.0		11.4	—			19.9		17.1	—
6		76.1		62.0	—			10.3		5.8	—
Total fixed maturities	$	68,255.5	$	73,797.8	100	%	$	67,647.0	$	75,047.1	100	%

Fixed maturities included 68 securities with an amortized cost of $766.3 million, gross gains of $22.8 million, gross losses of $0.8 million and a carrying amount of $788.3 million as of September 30, 2021, that were still pending a review and assignment of a designation by the SVO. Due to the timing of when fixed maturities are purchased, legal documents are filed and the review by the SVO is completed, we will always have securities in our portfolio that are unrated over a reporting period. In these instances, an equivalent designation is assigned based on our fixed income analyst’s assessment.

Commercial Mortgage-Backed Securities. As of September 30, 2021, based on amortized cost, 89% of our CMBS portfolio had an NAIC designation of 1.

The following table presents our exposure by credit quality based on NAIC designations for our CMBS portfolio as of the periods indicated.


	September 30, 2021				December 31, 2020
	Amortized		Carrying		Amortized		Carrying
NAIC designation	cost		amount		cost		amount

	(in millions)
1	$	4,509.4	$	4,666.4	$	4,148.4	$	4,315.3
2		134.8		144.0		114.5		122.7
3		352.4		377.5		378.7		403.8
4		82.9		88.0		87.3		90.5
5		—		—		4.4		2.9
6		1.7		1.3		3.2		1.7
Total (1)	$	5,081.2	$	5,277.2	$	4,736.5	$	4,936.9

(1)	The CMBS portfolio included agency CMBS with a $294.1 million amortized cost and a $301.9 million carrying amount as of September 30, 2021, and a $285.3 million amortized cost and a $297.3 million carrying amount as of December 31, 2020.

Fixed Maturities Watch List. We monitor any decline in the credit quality of fixed maturities through the designation of “problem securities,” “potential problem securities” and “restructured securities”. We define problem securities in our fixed maturity portfolio as securities: (i) with principal and/or interest payments in default or where default is perceived to be imminent in the near term, or (ii) issued by a company that went into bankruptcy subsequent to the acquisition of such securities. We define potential problem securities in our fixed maturity portfolio as securities included on an internal “watch list” for which management has concerns as to the ability of the issuer to comply with the present debt payment terms and which may result in the security becoming a problem or being restructured. The decision whether to classify a performing fixed maturity security as a potential problem involves significant subjective judgments by our management as to the likely future industry conditions and developments with respect to the issuer. We define restructured securities in our fixed maturity portfolio as securities where a concession has been granted to the borrower related to the borrower’s financial difficulties that would not have otherwise been considered. We determine that restructures should occur in those instances where greater economic value will be realized under the new terms than through liquidation or other disposition and may involve a change in contractual cash flows. If the present value of the restructured cash flows is less than the current cost of the asset being restructured, a realized capital loss is recorded in net income and a new cost basis is established.

The following table presents the total carrying amount of our fixed maturities portfolio, as well as its problem, potential problem and restructured fixed maturities for the periods indicated.


	September 30, 2021			December 31, 2020

	($ in millions)
Total fixed maturities (public and private)	$	73,797.8		$	75,047.1
Problem fixed maturities (1)	$	69.3		$	31.7
Potential problem fixed maturities		10.6			72.6
Total problem, potential problem and restructured fixed maturities	$	79.9		$	104.3
Total problem, potential problem and restructured fixed maturities as a percent of total fixed maturities		0.11	%		0.14	%

(1)	The problem fixed maturities carrying amount is net of the credit loss valuation allowance.

Fixed Maturities Credit Losses. Each reporting period, a group of individuals including the Chief Investment Officer, our Portfolio Managers, the assigned analysts and representatives from Investment Accounting review all securities to determine whether a credit loss exists. The analysis focuses on each issuer’s ability to service its debts in a timely fashion. Formal documentation of the analysis and our decision is prepared and approved by management. For additional details regarding our process to identify and evaluate securities with credit losses, see Item 1. “Financial Statements, Notes to Unaudited Condensed Consolidated Financial Statements, Note 3, Investments” under the caption “Allowance for Credit Loss.”

We would not consider a security with unrealized losses to have a decline in value due to credit when it is not our intent to sell the security, it is not more likely than not that we would be required to sell the security before recovery of the amortized cost, which may be maturity, and we expect to recover the amortized cost basis. However, we do sell securities under certain circumstances, such as when we have evidence of a change in the issuer’s creditworthiness, when we anticipate poor relative future performance of securities, when a change in regulatory requirements modifies what constitutes a permissible investment or the maximum level of investments held or when there is an increase in capital requirements or a change in risk weights of debt securities. Sales generate both gains and losses.

A number of significant risks and uncertainties are inherent in the process of monitoring credit losses and determining the allowance for credit loss. These risks and uncertainties include: (1) the risk that our assessment of an issuer’s ability to meet all of its contractual obligations will change based on changes in the credit characteristics of that issuer, (2) the risk that the economic outlook will be worse than expected or have more of an impact on the issuer than anticipated, (3) the risk that our investment professionals are making decisions based on fraudulent or misstated information in the financial statements provided by issuers and (4) the risk that new information obtained by us or changes in other facts and circumstances lead us to change our intent to not sell the security prior to recovery of its amortized cost. Any of these situations could result in a charge to net income in a future period.

The net realized loss relating to the change in the allowance for credit loss and credit related sales of fixed maturities was $9.6 million and $17.4 million for the three months ended September 30, 2021 and 2020, respectively, and $24.7 million and $51.9 million for the nine months ended September 30, 2021 and 2020, respectively.

Fixed Maturities Available-for-Sale

The following tables present our fixed maturities available-for-sale by industry category, as of the periods indicated.


	September 30, 2021
			Gross		Gross		Allowance
	Amortized		unrealized		unrealized		for credit		Carrying
	cost		gains		losses		loss		amount

	(in millions)
Finance — Banking	$	4,598.1	$	382.4	$	11.0	$	—	$	4,969.5
Finance — Brokerage		791.7		82.2		5.1		—		868.8
Finance — Finance Companies		599.7		30.4		3.3		12.5		614.3
Finance — Financial Other		850.7		28.2		0.1		—		878.8
Finance — Insurance		2,831.6		424.0		3.8		—		3,251.8
Finance — Real estate investment trusts (“REITs”)		2,322.7		175.8		1.7		—		2,496.8
Industrial — Basic Industry		1,794.7		190.4		2.2		—		1,982.9
Industrial — Capital Goods		2,175.0		222.3		8.0		—		2,389.3
Industrial — Communications		3,055.4		433.3		9.8		—		3,478.9
Industrial — Consumer Cyclical		1,879.8		110.9		7.7		—		1,983.0
Industrial — Consumer Non-Cyclical		4,486.5		518.2		14.0		—		4,990.7
Industrial — Energy		2,708.2		367.5		8.3		—		3,067.4
Industrial — Other		683.5		51.8		0.5		—		734.8
Industrial — Technology		2,477.7		221.7		11.1		—		2,688.3
Industrial — Transportation		2,125.9		208.1		1.7		—		2,332.3
Utility — Electric		3,947.0		468.7		16.6		—		4,399.1
Utility — Natural Gas		626.5		74.8		2.1		—		699.2
Utility — Other		473.0		34.0		3.7		—		503.3
Government guaranteed		261.2		41.6		—		—		302.8
Total corporate securities		38,688.9		4,066.3		110.7		12.5		42,632.0

Residential mortgage-backed pass-through securities		2,806.7		82.8		15.7		—		2,873.8
Commercial mortgage-backed securities		5,054.9		218.2		21.9		0.3		5,250.9
Residential collateralized mortgage obligations		3,223.7		103.0		16.4		—		3,310.3
Asset-backed securities — Home equity (1)		131.1		13.3		0.1		0.1		144.2
Asset-backed securities — All other		3,586.1		45.7		7.3		—		3,624.5
Collateralized debt obligations — Credit		16.8		—		5.1		—		11.7
Collateralized debt obligations — CMBS		—		1.0		—		—		1.0
Collateralized debt obligations — Loans		3,552.8		6.3		5.5		—		3,553.6
Total mortgage-backed and other asset-backed securities		18,372.1		470.3		72.0		0.4		18,770.0

U.S. government and agencies		1,801.3		138.7		40.5		—		1,899.5
States and political subdivisions		8,237.0		1,002.8		26.9		—		9,212.9
Non-U.S. governments		823.0		128.0		0.8		—		950.2
Total fixed maturities, available-for-sale	$	67,922.3	$	5,806.1	$	250.9	$	12.9	$	73,464.6

(1)	This exposure is all related to sub-prime mortgage loans.


	December 31, 2020
			Gross		Gross		Allowance
	Amortized		unrealized		unrealized		for credit		Carrying
	cost		gains		losses		loss		amount

	(in millions)
Finance — Banking	$	4,924.8	$	535.5	$	12.5	$	—	$	5,447.8
Finance — Brokerage		760.5		100.6		0.1		—		861.0
Finance — Finance Companies		469.7		22.1		7.5		—		484.3
Finance — Financial Other		420.9		28.3		—		—		449.2
Finance — Insurance		2,670.4		512.0		0.1		—		3,182.3
Finance — REITs		2,147.7		231.4		0.3		—		2,378.8
Industrial — Basic Industry		1,871.7		252.1		—		—		2,123.8
Industrial — Capital Goods		2,305.3		279.3		2.9		—		2,581.7
Industrial — Communications		3,129.7		559.6		2.7		—		3,686.6
Industrial — Consumer Cyclical		1,897.9		187.9		3.7		—		2,082.1
Industrial — Consumer Non-Cyclical		4,467.5		721.2		1.3		—		5,187.4
Industrial — Energy		2,873.1		433.4		14.2		—		3,292.3
Industrial — Other		677.0		77.5		0.6		—		753.9
Industrial — Technology		2,180.3		293.8		2.4		—		2,471.7
Industrial — Transportation		2,175.9		298.4		12.6		—		2,461.7
Utility — Electric		4,005.4		649.4		2.9		—		4,651.9
Utility — Natural Gas		615.1		110.4		—		—		725.5
Utility — Other		384.8		50.0		—		—		434.8
Government guaranteed		193.3		43.7		—		—		237.0
Total corporate securities		38,171.0		5,386.6		63.8		—		43,493.8

Residential mortgage-backed pass-through securities		2,845.7		129.0		0.2		—		2,974.5
Commercial mortgage-backed securities		4,709.4		240.0		35.3		4.3		4,909.8
Residential collateralized mortgage obligations		2,905.7		149.4		2.7		—		3,052.4
Asset-backed securities — Home equity (1)		180.0		15.4		0.8		—		194.6
Asset-backed securities — All other		3,745.3		78.3		26.4		—		3,797.2
Collateralized debt obligations — Credit		16.8		—		5.1		—		11.7
Collateralized debt obligations — CMBS		—		0.7		—		—		0.7
Collateralized debt obligations — Loans		4,029.1		8.0		19.8		2.2		4,015.1
Total mortgage-backed and other asset-backed securities		18,432.0		620.8		90.3		6.5		18,956.0

U.S. government and agencies		1,870.1		226.0		10.5		—		2,085.6
States and political subdivisions		7,990.3		1,174.1		12.6		—		9,151.8
Non-U.S. governments		771.4		176.3		—		—		947.7
Total fixed maturities, available-for-sale	$	67,234.8	$	7,583.8	$	177.2	$	6.5	$	74,634.9

(1)	This exposure is all related to sub-prime mortgage loans.

Of the $250.9 million in gross unrealized losses as of September 30, 2021, $0.2 million in losses were attributed to securities scheduled to mature in one year or less, $11.5 million attributed to securities scheduled to mature between one to five years, $46.5 million attributed to securities scheduled to mature between five to ten years, $120.7 million attributed to securities scheduled to mature after ten years and $72.0 million related to mortgage-backed and other ABS that are not classified by maturity year. As of September 30, 2021, we were in a $5,555.2 million net unrealized gain position as compared to a $7,406.6 million net unrealized gain position as of December 31, 2020. The $1,851.4 million decrease in net unrealized gains for the nine months ended September 30, 2021, can be attributed to an approximate 53 basis points increase in interest rates, partially offset by tightening of credit spreads.

Fixed Maturities Available-For-Sale Unrealized Losses. We believe our long-term fixed maturities portfolio is well diversified among industry types and between publicly traded and privately placed securities. Each year, we direct the majority of our net cash inflows into investment grade fixed maturities. Our current policy is to limit the percentage of fixed maturities invested in below investment grade assets to 15%.

We invest in privately placed fixed maturities to enhance the overall value of the portfolio, increase diversification and obtain higher yields than are possible with comparable quality public market securities. Generally, private placements provide broader access to management information, strengthened negotiated protective covenants, call protection features and, where applicable, a higher level of collateral. They are, however, generally not freely tradable because of restrictions imposed by U.S. federal and state securities laws and illiquid trading markets.

The following table presents our fixed maturities available-for-sale by investment grade and below investment grade as of the periods indicated.


	September 30, 2021										December 31, 2020
			Gross		Gross		Allowance						Gross		Gross		Allowance
	Amortized		unrealized		unrealized		for credit		Carrying		Amortized		unrealized		unrealized		for credit		Carrying
	cost		gains		losses		loss		amount		cost		gains		losses		loss		amount

	(in millions)
Investment grade:
Public	$	39,606.5	$	4,200.1	$	149.4	$	0.3	$	43,656.9	$	40,025.5	$	5,504.9	$	58.8	$	0.2	$	45,471.4
Private		23,846.1		1,415.4		66.9		0.1		25,194.5		22,951.9		1,855.2		71.7		1.3		24,734.1
Below investment grade:
Public		1,862.6		132.0		6.7		—		1,987.9		1,912.8		127.3		19.0		—		2,021.1
Private		2,607.1		58.6		27.9		12.5		2,625.3		2,344.6		96.4		27.7		5.0		2,408.3
Total fixed maturities, available-for-sale	$	67,922.3	$	5,806.1	$	250.9	$	12.9	$	73,464.6	$	67,234.8	$	7,583.8	$	177.2	$	6.5	$	74,634.9

The following tables present the carrying amount and the gross unrealized losses on our fixed maturities available-for-sale for which an allowance for credit loss has not been recorded by grade and aging category as of September 30, 2021 and December 31, 2020, respectively.


	September 30, 2021
	Public				Private				Total
			Gross				Gross				Gross
	Carrying		unrealized		Carrying		unrealized		Carrying		unrealized
	amount		losses		amount		losses		amount		losses

	(in millions)
Investment grade:
Three months or less	$	3,001.5	$	28.5	$	2,622.2	$	14.4	$	5,623.7	$	42.9
Greater than three to six months		80.0		0.6		490.8		2.8		570.8		3.4
Greater than six to nine months		1,541.8		51.7		950.3		20.8		2,492.1		72.5
Greater than nine to twelve months		356.9		23.3		206.6		8.7		563.5		32.0
Greater than twelve to twenty-four months		481.4		36.7		470.3		12.5		951.7		49.2
Greater than twenty-four to thirty-six months		49.6		2.8		44.7		—		94.3		2.8
Greater than thirty-six months		64.4		3.7		205.4		6.7		269.8		10.4
Total fixed maturities, available-for-sale	$	5,575.6	$	147.3	$	4,990.3	$	65.9	$	10,565.9	$	213.2


	September 30, 2021
	Public				Private				Total
			Gross				Gross				Gross
	Carrying		unrealized		Carrying		unrealized		Carrying		unrealized
	amount		losses		amount		losses		amount		losses

	(in millions)
Below investment grade:
Three months or less	$	124.9	$	1.6	$	588.2	$	6.6	$	713.1	$	8.2
Greater than three to six months		7.7		0.2		19.6		0.4		27.3		0.6
Greater than six to nine months		6.8		0.4		141.2		3.9		148.0		4.3
Greater than nine to twelve months		—		—		14.9		0.2		14.9		0.2
Greater than twelve to twenty-four months		46.0		1.6		125.4		8.2		171.4		9.8
Greater than twenty-four to thirty-six months		33.2		2.8		—		—		33.2		2.8
Greater than thirty-six months		4.7		0.1		13.4		5.5		18.1		5.6
Total fixed maturities, available-for-sale	$	223.3	$	6.7	$	902.7	$	24.8	$	1,126.0	$	31.5


	September 30, 2021
	Problem, potential				All other fixed
	problem and restructured				maturity securities				Total
			Gross				Gross				Gross
	Carrying		unrealized		Carrying		unrealized		Carrying		unrealized
	amount		losses		amount		losses		amount		losses

	(in millions)
Estimated fair value had declined and remained below amortized cost by 20% or more:
Three months or less	$	1.6	$	0.4	$	4.3	$	1.3	$	5.9	$	1.7
Greater than three to six months		—		—		0.7		0.3		0.7		0.3
Greater than six to nine months		—		—		0.5		0.5		0.5		0.5
Greater than nine to twelve months		—		—		0.9		0.7		0.9		0.7
Greater than twelve months		0.2		0.4		14.6		6.5		14.8		6.9
Total fixed maturities, available-for-sale	$	1.8	$	0.8	$	21.0	$	9.3	$	22.8	$	10.1


	December 31, 2020
	Public				Private				Total
			Gross				Gross				Gross
	Carrying		unrealized		Carrying		unrealized		Carrying		unrealized
	amount		losses		amount		losses		amount		losses

	(in millions)
Investment Grade:
Three months or less	$	641.2	$	6.3	$	573.0	$	4.5	$	1,214.2	$	10.8
Greater than three to six months		490.8		12.8		414.4		5.1		905.2		17.9
Greater than six to nine months		119.7		4.5		92.2		5.1		211.9		9.6
Greater than nine to twelve months		849.2		21.4		1,944.7		38.9		2,793.9		60.3
Greater than twelve to twenty-four months		67.7		2.9		144.7		1.1		212.4		4.0
Greater than twenty-four to thirty-six months		27.4		2.9		693.3		5.5		720.7		8.4
Greater than thirty-six months		85.0		8.0		85.9		11.2		170.9		19.2
Total fixed maturities, available-for-sale	$	2,281.0	$	58.8	$	3,948.2	$	71.4	$	6,229.2	$	130.2


	December 31, 2020
	Public				Private				Total
			Gross				Gross				Gross
	Carrying		unrealized		Carrying		unrealized		Carrying		unrealized
	amount		losses		amount		losses		amount		losses

	(in millions)
Below investment grade:
Three months or less	$	10.2	$	0.1	$	75.6	$	0.2	$	85.8	$	0.3
Greater than three to six months		29.9		0.1		81.8		1.5		111.7		1.6
Greater than six to nine months		7.6		0.5		—		—		7.6		0.5
Greater than nine to twelve months		212.7		13.0		348.5		13.8		561.2		26.8
Greater than twelve to twenty-four months		23.2		3.8		13.4		1.6		36.6		5.4
Greater than twenty-four to thirty-six months		8.5		1.2		62.0		1.9		70.5		3.1
Greater than thirty-six months		5.8		0.3		16.8		6.3		22.6		6.6
Total fixed maturities, available-for-sale	$	297.9	$	19.0	$	598.1	$	25.3	$	896.0	$	44.3


	December 31, 2020
	Problem, potential				All other fixed
	problem and restructured				maturity securities				Total
			Gross				Gross				Gross
	Carrying		unrealized		Carrying		unrealized		Carrying		unrealized
	amount		losses		amount		losses		amount		losses

	(in millions)
Estimated fair value had declined and remained below amortized cost by 20% or more:
Three months or less	$	—	$	—	$	26.5	$	9.0	$	26.5	$	9.0
Greater than three to six months		—		—		12.3		3.6		12.3		3.6
Greater than six to nine months		1.6		0.4		0.1		0.3		1.7		0.7
Greater than nine to twelve months		—		—		19.6		8.6		19.6		8.6
Greater than twelve months		0.1		0.4		11.7		5.2		11.8		5.6
Total fixed maturities, available-for-sale	$	1.7	$	0.8	$	70.2	$	26.7	$	71.9	$	27.5

Mortgage Loans

Mortgage loans consist of commercial mortgage loans on real estate and residential mortgage loans. For further details about residential mortgage loans, see Item 1. “Financial Statements, Notes to Unaudited Condensed Consolidated Financial Statements, Note 3, Investments” under the caption, “Financing Receivables.”

Commercial Mortgage Loans. We generally report commercial mortgage loans on real estate at cost adjusted for amortization of premiums and accrual of discounts, computed using the interest method and net of valuation allowances.

Commercial mortgage loans play an important role in our investment strategy by:

	●	providing strong risk-adjusted relative value in comparison to other investment alternatives;

	●	enhancing total returns and

	●	providing strategic portfolio diversification.

As a result, we have focused on constructing a high quality portfolio of mortgages. Our portfolio is generally comprised of mortgages originated with conservative loan-to-value ratios, high debt service coverages and general purpose property types with a strong credit tenancy.

Our commercial mortgage loan portfolio consists primarily of non-recourse, fixed rate mortgages on fully or near fully leased properties. The mortgage portfolio is comprised primarily of office properties, apartments, well anchored retail properties and general-purpose industrial properties.

Our commercial mortgage loan portfolio is diversified by geography and specific collateral property type. Commercial mortgage lending in the state of California accounted for 23% and 22% of our commercial mortgage loan portfolio before valuation allowance as of September 30, 2021 and December 31, 2020, respectively. We are, therefore, exposed to potential losses resulting from the risk of catastrophes, such as earthquakes, that may affect the region. Like other lenders, we generally do not require earthquake insurance for properties on which we make commercial mortgage loans. With respect to California properties, however, we obtain an engineering report specific to each property. The report assesses the building’s design specifications, whether it has been upgraded to meet seismic building codes and the maximum loss that is likely to result from a variety of different seismic events. We also obtain a report that assesses, by building and geographic fault lines, the amount of loss our commercial mortgage loan portfolio might suffer under a variety of seismic events.

The typical borrower in our commercial loan portfolio is a single purpose entity or single asset entity. As of September 30, 2021 and December 31, 2020, the total number of commercial mortgage loans outstanding were 756 and 753, of which 42% and 44% were for loans with principal balances less than $10.0 million as of September 30, 2021 and December 31, 2020, respectively. The average loan size of our commercial mortgage portfolio was $21.0 million and $19.9 million as of September 30, 2021 and December 31, 2020, respectively.

Commercial Mortgage Loan Credit Monitoring. For further details on monitoring and management of our commercial mortgage loan portfolio, see Item 1. “Financial Statements, Notes to Unaudited Condensed Consolidated Financial Statements, Note 3, Investments” under the caption, “Financing Receivables Credit Monitoring.”

We categorize loans that are 60 days or more delinquent, loans in process of foreclosure and loans with borrowers or credit tenants in bankruptcy that are delinquent as “problem” loans. We categorize loans that are delinquent less than 60 days where the default is expected to be cured and loans with borrowers or credit tenants in bankruptcy that are current as “potential problem” loans. The decision whether to classify a loan delinquent less than 60 days as a potential problem involves significant subjective judgments by management as to the likely future economic conditions and developments with respect to the borrower. We categorize loans for which the original note rate has been reduced below market and loans for which the principal has been reduced as “restructured” loans. We also consider loans that are refinanced more than one year beyond the original maturity or call date at below market rates as restructured.

The following table presents the carrying amounts of problem, potential problem and restructured commercial mortgages relative to the carrying amount of all commercial mortgages for the periods indicated.


	September 30, 2021			December 31, 2020

	($ in millions)

Total commercial mortgages	$	15,861.9		$	14,952.3
Potential problem commercial mortgages	$	9.0		$	—
Total problem, potential problem and restructured commercial mortgages	$	9.0		$	—
Total problem, potential problem and restructured commercial mortgages as a percent of total commercial mortgages		0.06	%		—	%

Commercial Mortgage Loan Valuation Allowance. We establish the commercial mortgage loan valuation allowance at levels considered adequate to absorb estimated expected credit losses within the portfolio. For further details on the commercial mortgage loan valuation allowance, see Item 1. “Financial Statements, Notes to Unaudited Condensed Consolidated Financial Statements, Note 3, Investments” under the caption, “Financing Receivables Valuation Allowance.”

Real Estate

Real estate consists primarily of commercial equity real estate. As of September 30, 2021 and December 31, 2020, the carrying amount of our equity real estate investment was $1,948.6 million and $1,796.1 million, respectively. Our commercial equity real estate is held in the form of wholly owned real estate, real estate acquired upon foreclosure of commercial mortgage loans and majority owned interests in real estate joint ventures.

Equity real estate is categorized as either “real estate held for investment” or “real estate held for sale.” Real estate held for investment totaled $1,908.0 million and $1,794.9 million as of September 30, 2021 and December 31, 2020, respectively. The carrying value of real estate held for investment is generally adjusted for impairments whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. Such impairment adjustments are recorded as net realized capital losses in our consolidated results of operations. Impairment adjustments recorded for the year ended December 31, 2020, were $0.5 million. No such impairment adjustments were recorded for the nine months ended September 30, 2021.

The carrying amount of real estate held for sale was $40.6 million and $1.2 million as of September 30, 2021 and December 31, 2020, respectively. Once we identify a real estate property to be sold and it is probable that it will be sold, we classify the property as held for sale. We establish a valuation allowance subject to periodic revisions, if necessary, to adjust the carrying value of the property to reflect the lower of its current carrying value or the fair value, less associated selling costs. The valuation allowance did not change for the nine months ended September 30, 2021 or for the year ended December 31, 2020.

We use research, both internal and external, to recommend appropriate product and geographic allocations and changes to the equity real estate portfolio. We monitor product, geographic and industry diversification separately and together to determine the most appropriate mix.

Equity real estate is distributed across geographic regions of the country. As of September 30, 2021, our largest equity real estate portfolio concentration was in the Pacific (45%) region of the United States. By property type, our largest concentrations were in Apartments (37%) and Industrial (28%) as of September 30, 2021.

Other Investments

Our other investments totaled $3,475.6 million as of September 30, 2021, compared to $3,214.7 million as of December 31, 2020. Other investments include interests in unconsolidated entities, which include real estate properties owned jointly with venture partners and operated by the partners; sponsored investment funds; the cash surrender value of company owned and trust owned life insurance; derivative assets and other investments.

International Investment Operations

Of our invested assets, $7,233.5 million were held by our Principal International segment as of September 30, 2021. The assets are primarily managed by the local Principal International affiliate. Due to the regulatory constraints in each location, each company maintains its own investment policies. As shown in the following table, the major category of international invested assets is fixed maturities. The following table excludes invested assets of the separate accounts.


	September 30, 2021				December 31, 2020
	Carrying		Percent		Carrying		Percent
	amount		of total		amount		of total

	($ in millions)
Fixed maturities:
Public	$	3,149.8	44	%	$	4,148.2	49	%
Private		23.0	—			47.1	1
Equity securities		1,330.0	18			1,467.6	17
Mortgage loans:
Commercial		436.3	6			446.1	5
Residential		396.3	6			433.6	5
Real estate held for sale		16.6	—			0.8	—
Real estate held for investment		0.4	—			0.4	—
Policy loans		14.8	—			19.9	—
Other investments:
Direct financing leases		623.1	9			710.7	8
Investment in unconsolidated operating entities		858.1	12			808.3	10
Derivative assets and other investments		385.1	5			393.1	5
Total invested assets		7,233.5	100	%		8,475.8	100	%
Cash and cash equivalents		249.2				242.6
Total invested assets and cash	$	7,482.7			$	8,718.4

Regulations in certain locations require investment in the funds we manage. These required regulatory investments are classified as equity securities within our consolidated statements of financial position, with all mark-to-market changes reflected in net investment income. Our investment is primarily dictated by client activity and all investment performance is retained by us.

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