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 June 30, 2022, compared with December 31, 2021, and our consolidated results of operations for the three and six months ended June 30, 2022 and 2021, 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, 2021, 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 AUA 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 that 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, make share repurchases and meet our obligations may be constrained by the limitations on dividends or other distributions 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 fraudulent activities; (23) we face risks arising from our participation in joint ventures; (24) we may need to fund deficiencies in our Closed Block assets; (25) the ongoing COVID-19 pandemic and the resulting financial market impacts could adversely affect our business, results of operations, financial condition and liquidity; (26) our reinsurers could default on their obligations or increase their rates, which could adversely impact our net income and financial condition; (27) we face risks related to our acquisition of Wells Fargo Bank, N.A.’s Institutional Retirement & Trust (“IRT”) business; (28) we face risks arising from future acquisitions of businesses; (29) we face risks in completing the Reinsurance Transaction within the terms or timing contemplated; (30) a pandemic, terrorist attack, military action or other catastrophic event could adversely affect our operations, net income or financial condition; (31) our financial results may be adversely impacted by global climate changes; (32) technological and societal changes may disrupt our business model and impair our ability to retain existing customers, attract new customers and maintain our profitability; (33) damage to our reputation may adversely affect our revenues and profitability; (34) we may not be able to protect our intellectual property and may be subject to infringement claims; (35) 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; (36) 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; (37) 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 (38) 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, individual variable annuities, trust and custody services and the acquisition, integration and migration expenses associated with the purchase of the IRT business of Wells Fargo Bank, N.A.; and Retirement and Income Solutions – Spread, which includes investment only, pension risk transfer, banking services and our exited individual fixed annuities business. 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”);

	●	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; and

	●	To non-retirement businesses, we offer trust and custody services.

	●	Principal Global Investors provides asset management solutions using focused investment teams and U.S. and global fund platforms to deliver diverse investment capabilities including equity, fixed income, multi-asset, real estate and alternatives. Services are provided to clients in our retirement businesses in the U.S. and select emerging markets, U.S. benefits and protection, to our Corporate segment and for third-party 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 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, group life insurance, critical illness, accident, paid family and medical leave and non-medical fee-for-service claims administration; and Individual Life insurance, which includes universal life, variable universal life, indexed universal life, traditional life insurance and our exited ULSG business. We focus our solutions on small-to-medium sized businesses and their employees with an emphasis on business owners, executives and key employees.

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

Transactions Affecting Comparability of Results of Operations

Reinsurance Transaction

During the second quarter of 2022, we closed a coinsurance with funds withheld reinsurance transaction with Talcott Life & Annuity Re, a limited liability company organized under the laws of the Cayman Islands and an affiliate of Talcott Resolution Life, Inc., a subsidiary of Sixth Street, pursuant to which we ceded our in-force U.S. retail fixed annuity and ULSG blocks of business. The economics of the Reinsurance Transaction were effective as of January 1, 2022. As such, we recorded impacts for January through June 2022 in our second quarter 2022 results. Therefore, results for the three months ended June 30, 2022, are not comparable to prior periods.

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

Foreign currency exchange rate fluctuations create variances in our financial statement line items. The most significant impact occurs within our Principal International segment where pre-tax operating earnings were negatively impacted $4.7 million and $8.6 million for the three and six months ended June 30, 2022, 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 June 30,						For the six months ended June 30,
					Increase						Increase
	2022		2021		(decrease)		2022		2021		(decrease)

	(in millions)
Revenues:
Premiums and other considerations	$	1,366.2	$	1,269.7	$	96.5	$	2,253.6	$	2,104.8	$	148.8
Fees and other revenues		947.6		1,265.3		(317.7)		2,162.6		2,459.2		(296.6)
Net investment income		816.5		1,045.5		(229.0)		1,934.6		2,073.6		(139.0)
Net realized capital gains (losses)		(227.9)		(41.1)		(186.8)		(338.4)		110.3		(448.7)
Net realized capital gains on funds withheld assets		689.0		—		689.0		689.0		—		689.0
Change in fair value of funds withheld embedded derivative		3,067.3		—		3,067.3		3,067.3		—		3,067.3
Total revenues		6,658.7		3,539.4		3,119.3		9,768.7		6,747.9		3,020.8
Expenses:
Benefits, claims and settlement expenses		1,278.6		1,812.8		(534.2)		2,738.5		3,187.5		(449.0)
Dividends to policyholders		24.5		28.9		(4.4)		47.6		47.1		0.5
Operating expenses		1,458.5		1,265.1		193.4		2,657.5		2,466.8		190.7
Total expenses		2,761.6		3,106.8		(345.2)		5,443.6		5,701.4		(257.8)
Income before income taxes		3,897.1		432.6		3,464.5		4,325.1		1,046.5		3,278.6
Income taxes		822.5		61.0		761.5		869.8		158.6		711.2
Net income		3,074.6		371.6		2,703.0		3,455.3		887.9		2,567.4
Net income attributable to noncontrolling interest		15.2		9.8		5.4		19.7		9.0		10.7
Net income attributable to Principal Financial Group, Inc.	$	3,059.4	$	361.8	$	2,697.6	$	3,435.6	$	878.9	$	2,556.7

Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021

Net Income Attributable to Principal Financial Group, Inc.

Net income attributable to Principal Financial Group, Inc. increased primarily due to the change in fair value of the funds withheld embedded derivative.

Total Revenues

Premiums increased $167.5 million for the U.S. Insurance Solutions segment primarily due to a $70.0 million increase in growth in the Specialty Benefits business, as well as a $97.6 million increase in Individual Life premiums related to the Reinsurance Transaction. Partially offsetting this increase was a $58.0 million decrease in premiums for the Retirement and Income Solutions segment primarily due to lower sales of single premium group and our exited individual annuities with life contingencies. The single premium group annuity product, which is typically used to fund defined benefit plan terminations, can generate large premiums from very few customers and therefore premiums tend to vary from period to period.

Fees and other revenues decreased $247.7 million for the U.S. Insurance Solutions segment primarily due to the Reinsurance Transaction. Fees and other revenues decreased $42.0 million for the Retirement and Income Solutions segment primarily resulting from declining financial 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.

Net realized capital gains on funds withheld assets increased as a result of the sale of funds withheld assets associated with the Reinsurance Transaction in 2022.

The change in the fair value of the funds withheld embedded derivative increased due to the establishment of the funds withheld payable associated with the Reinsurance Transaction in 2022.

Total Expenses

Benefits, claims and settlement expenses decreased $392.4 million for the U.S. Insurance Solutions segment primarily due to the Reinsurance Transaction. Benefits, claims and settlement expenses decreased $245.8 million for the Retirement and Income Solutions segment primarily due to a decrease in reserves, stemming from lower sales of single premium group and our exited individual annuities with life contingencies. Benefits, claims and settlement expenses increased $103.7 million for the Principal International segment primarily due to $127.0 million higher inflation based interest crediting rates to customers partially offset by $20.5 million of foreign currency headwinds in Latin America.

Operating expenses increased primarily due to $243.7 million of strategic review costs and impacts related to the exited business, which were partially offset by a $55.6 million decrease in amounts credited to employee accounts in a nonqualified defined contribution pension plan.

Income Taxes

The effective income tax rate increased to 21% for the three months ended June 30, 2022, from 14% for the three months ended 2021, primarily due to an increase in pre-tax income with no proportionate increase in permanent tax differences. See Item 1. “Financial Statements, Notes to Unaudited Condensed Consolidated Financial Statements, Note 8, Income Taxes” for a reconciliation between the U.S. corporate income tax rate and the effective income tax rate.

Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021

Net Income Attributable to Principal Financial Group, Inc.

Net income attributable to Principal Financial Group, Inc. increased primarily due to the change in fair value of the funds withheld embedded derivative.

Total Revenues

Premiums increased $219.3 million for the U.S. Insurance Solutions segment primarily due to $130.3 million from growth in the Specialty Benefits business and $89.2 million in our Individual Life insurance business, primarily related to the Reinsurance Transaction. Partially offsetting this increase was a $40.0 million decrease in premiums for the Retirement and Income Solutions segment primarily due to lower sales of single premium group and our exited individual annuities with life contingencies.

Fees and other revenues decreased $234.4 million for the U.S. Insurance Solutions segment primarily due to the Reinsurance Transaction. Fees and other revenues decreased $37.8 million for the Retirement and Income Solutions segment primarily resulting from declining financial markets.

Net realized capital gains on funds withheld assets increased as a result of the sale of funds withheld assets associated with the Reinsurance Transaction in 2022.

The change in the fair value of the funds withheld embedded derivative increased due to the establishment of the funds withheld payable associated with the Reinsurance Transaction in 2022.

Total Expenses

Benefits, claims and settlement expenses decreased $343.1 million for the U.S. Insurance Solutions segment primarily due to the Reinsurance Transaction. Benefits, claims and settlement expenses decreased $214.8 million for the Retirement and Income Solutions segment primarily due to a decrease in reserves, stemming from lower sales of single premium group and our exited individual annuities with life contingencies.

Operating expenses increased primarily due to the exited business, including $243.7 million of strategic review costs and impacts and $27.4 million of actuarial balance impacts. Theses increases were partially offset by a $118.4 million decrease in amounts credited to employee accounts in a nonqualified defined contribution pension plan.

Income Taxes

The effective income tax rate increased to 20% for the six months ended June 30, 2022 from 15% for the six months ended 2021, primarily due to an increase in pre-tax income with no proportionate increase in permanent tax differences. See Item 1. “Financial Statements, Notes to Unaudited Condensed Consolidated Financial Statements, Note 8, Income Taxes” for a reconciliation between the U.S. corporate income tax rate and the effective income tax rate.

Results of Operations by Segment

For results of operations by segment see Item 1. “Financial Statements, Notes to Unaudited Condensed Consolidated Financial Statements, Note 13, Segment Information.” Beginning in the second quarter of 2022, segment pre-tax operating earnings excludes amounts associated with our exited U.S. retail fixed annuity and ULSG businesses, including strategic review costs and impacts, amortization of reinsurance gain (loss), impacts to actuarial balances of reinsured businesses, net realized capital gains (losses) on funds withheld assets and the change in fair value of the funds withheld embedded derivative.

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 six months ended
	June 30,						June 30,
					Increase						Increase
	2022		2021		(decrease)		2022		2021		(decrease)

	(in millions)
Retirement and Income Solutions – Fee	$	503.6	$	527.0	$	(23.4)	$	1,034.5	$	1,038.6	$	(4.1)
Retirement and Income Solutions – Spread		162.5		209.9		(47.4)		407.7		438.0		(30.3)
Total Retirement and Income Solutions	$	666.1	$	736.9	$	(70.8)	$	1,442.2	$	1,476.6	$	(34.4)

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


	For the three months ended						For the six months ended
	June 30,						June 30,
					Increase						Increase
	2022		2021		(decrease)		2022		2021		(decrease)

	(in millions)
Operating revenues:
Premiums and other considerations	$	467.0	$	525.0	$	(58.0)	$	590.3	$	630.3	$	(40.0)
Fees and other revenues		432.3		479.3		(47.0)		896.1		939.3		(43.2)
Net investment income		437.6		666.6		(229.0)		1,133.5		1,325.3		(191.8)
Total operating revenues		1,336.9		1,670.9		(334.0)		2,619.9		2,894.9		(275.0)
Expenses:
Benefits, claims and settlement expenses, including dividends to policyholders		670.8		934.0		(263.2)		1,177.7		1,418.3		(240.6)
Operating expenses		410.2		456.7		(46.5)		868.4		908.4		(40.0)
Total expenses		1,081.0		1,390.7		(309.7)		2,046.1		2,326.7		(280.6)
Pre-tax operating earnings	$	255.9	$	280.2	$	(24.3)	$	573.8	$	568.2	$	5.6

Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021

Pre-Tax Operating Earnings

Pre-tax operating earnings decreased in our Fee business primarily due to a decrease in net revenue partially offset by a decrease in operating expenses as described below. Pre-tax operating earnings decreased in our Spread business primarily due to a decrease in net revenue partially offset by a decrease in operating expenses as described below.

Net Revenue

Net revenue decreased in our Fee business primarily due to a $44.8 million decrease in fee revenue primarily resulting from declining financial markets. This decrease was partially offset by a $13.6 million increase stemming from revenue associated with our Principal Deposit Sweep program resulting from increased deposits and a $7.6 million increase in variable investment income. Net revenue decreased in our Spread business primarily due to a $99.8 million decrease resulting from the impacts of our exited individual fixed annuity business. This decrease was partially offset by a $32.5 million increase in variable investment income and a $15.1 million increase due to higher net yields.

Operating Expenses

Operating expenses decreased in our Fee business primarily due to a $20.2 million decrease in expenses associated with the integration of the Institutional Retirement & Trust business of Wells Fargo Bank, N.A. (“Acquired Business”) and an $8.8 million decrease in nondeferrable asset-based commission expense stemming from declining equity markets. These decreases were partially offset by a $17.8 million increase in DAC amortization expense resulting from unfavorable market performance in 2022 compared to favorable in 2021. Operating expenses decreased $31.8 million in our Spread business primarily due to the impacts of our exited individual fixed annuity business.

Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021

Pre-Tax Operating Earnings

Pre-tax operating earnings decreased in our Fee business due to the changes in net revenue and operating expenses described below. Pre-tax operating earnings increased in our Spread business primarily due to a decrease in operating expenses largely offset by a decrease in net revenue as described below.

Net Revenue

Net revenue decreased in our Fee business primarily due to a $40.4 million decrease in fee revenue primarily resulting from declining financial markets. These changes were partially offset by a $24.8 million increase stemming from revenue associated with our Principal Deposit Sweep program resulting from increased deposits and a $8.2 million increase in variable investment income. Net revenue decreased in our Spread business primarily due to a $148.2 million decrease resulting from the impacts of our exited individual fixed annuity business. This decrease was partially offset by a $79.1 million increase in variable investment income and a $32.6 million increase due to higher net yields.

Operating Expenses

Operating expenses were flat in our Fee business primarily due to a $32.8 million increase in DAC amortization expense resulting from unfavorable market performance in 2022 compared to favorable in 2021 offset by a $29.6 million decrease in expenses associated with the integration of the Acquired Business. Operating expenses decreased $40.1 million in our Spread business primarily due to the impacts of our exited individual fixed annuity business.

Principal Global Investors Segment

Principal Global Investors Segment Summary Financial Data

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

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


	For the three months ended June 30,				For the six months ended June 30,
	2022		2021		2022		2021

	(in billions)
AUM, beginning of period	$	537.4	$	507.7	$	546.5	$	502.1
Net cash flow		1.4		1.6		4.6		1.1
Investment performance		(48.1)		23.3		(77.2)		29.8
Operations acquired (1)		—		—		18.6		—
Operations disposed (2)		(23.1)		—		(23.1)		—
Other (3)		2.2		(0.3)		0.4		(0.7)
AUM, end of period	$	469.8	$	532.3	$	469.8	$	532.3

(1)	Effective in the first quarter of 2022, includes the integration of Institutional Asset Advisory, which is associated with our IRT business.

(2)	In the second quarter of 2022, $23.1 billion of Principal Global Investors managed AUM was transferred to third parties per the Reinsurance Transaction.

(3)	Second quarter of 2022 includes $3.2 billion of commercial mortgage loans and private credit assets managed by Principal Global Investors on behalf of the Reinsurance Transaction counterparty.

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


	For the three months ended June 30,						For the six months ended June 30,
					Increase						Increase
	2022		2021		(decrease)		2022		2021		(decrease)

	(in millions)
Operating revenues:
Fees and other revenues	$	460.5	$	452.1	$	8.4	$	895.4	$	866.2	$	29.2
Net investment income		3.1		1.6		1.5		3.5		2.7		0.8
Total operating revenues		463.6		453.7		9.9		898.9		868.9		30.0
Expenses:
Total expenses		282.4		267.7		14.7		572.8		540.4		32.4

Pre-tax operating earnings attributable to noncontrolling interest		1.2		1.6		(0.4)		2.7		3.0		(0.3)
Pre-tax operating earnings	$	180.0	$	184.4	$	(4.4)	$	323.4	$	325.5	$	(2.1)

Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021

Pre-Tax Operating Earnings

Pre-tax operating earnings decreased primarily due to $9.5 million lower management fee revenue as a result of decreased average AUM, an $8.4 million increase in non-variable staff costs and a $3.1 million increase in variable compensation expense. This was offset by a $21.5 million increase in performance fee revenue primarily in our real estate business.

Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021

Pre-Tax Operating Earnings

Pre-tax operating earnings decreased primarily due to a $15.5 million increase in variable compensation expense and a $14.4 million increase in non-variable staff costs. This was offset by an $18.8 million increase in performance fee revenue primarily in our real estate business and $13.5 million higher management fee revenue as a result of increased average AUM.

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 June 30,				For the six months ended June 30,
	2022		2021		2022		2021

	(in billions)
AUM, beginning of period	$	163.5	$	160.3	$	152.1	$	165.2
Net cash flow		—		—		(0.5)		1.4
Investment performance		—		1.7		(1.4)		2.4
Effect of exchange rates		(14.5)		6.7		(0.9)		0.1
Other		(0.1)		(1.6)		(0.4)		(2.0)
AUM, end of period	$	148.9	$	167.1	$	148.9	$	167.1

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


	For the three months ended June 30,						For the six months ended June 30,
					Increase						Increase
	2022		2021		(decrease)		2022		2021		(decrease)

	(in millions)
Net revenue	$	200.3	$	166.0	$	34.3	$	367.2	$	352.3	$	14.9

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


	For the three months ended June 30,						For the six months ended June 30,
					Increase						Increase
	2022		2021		(decrease)		2022		2021		(decrease)

	(in millions)
Operating revenues:
Premiums and other considerations	$	30.1	$	41.9	$	(11.8)	$	40.4	$	69.2	$	(28.8)
Fees and other revenues		110.3		127.6		(17.3)		221.9		250.5		(28.6)
Net investment income		298.7		136.7		162.0		491.7		294.5		197.2
Total operating revenues		439.1		306.2		132.9		754.0		614.2		139.8
Expenses:
Benefits, claims and settlement expenses		238.8		140.2		98.6		386.8		261.9		124.9
Operating expenses		107.2		117.3		(10.1)		215.6		227.8		(12.2)
Total expenses		346.0		257.5		88.5		602.4		489.7		112.7

Pre-tax operating earnings attributable to noncontrolling interest		1.0		1.0		—		1.4		1.7		(0.3)
Pre-tax operating earnings	$	92.1	$	47.7	$	44.4	$	150.2	$	122.8	$	27.4

Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021

Pre-Tax Operating Earnings

Pre-tax operating earnings increased in Latin America primarily due to $23.4 million higher earnings from our equity method investments in Brazil, $12.7 million higher inflation-based investment returns on average invested assets and cash and $7.6 million favorable relative market performance on our required regulatory investments. These were partially offset by $4.3 million foreign currency headwinds.

Net Revenue

Net revenue increased in Latin America primarily due to $23.4 million higher earnings from our equity method investments in Brazil, $12.7 million higher inflation-based investment returns on average invested assets and cash and $7.9 million favorable relative market performance on our required regulatory investments. These were partially offset by $11.2 million foreign currency headwinds.

Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021

Pre-Tax Operating Earnings

Pre-tax operating earnings increased in Latin America primarily due to $37.4 million higher earnings from our equity method investments in Brazil. This was partially offset by $8.1 million foreign currency headwinds.

Net Revenue

Net revenue increased in Latin America primarily due to $37.4 million higher earnings from our equity method investments in Brazil and $4.6 million favorable variable investment income in Chile. These were partially offset by $19.6 million foreign currency headwinds. Net revenue decreased in Asia primarily due to $6.4 million lower management fee revenue as a result of lower average AUM in Hong Kong and $4.3 million due to exiting the India business in the prior year.

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 June 30,						For the six months ended June 30,
					Increase						Increase
	2022		2021		(decrease)		2022		2021		(decrease)

	(in millions)
Premium and fees:
Specialty Benefits insurance	$	695.0	$	625.3	$	69.7	$	1,369.3	$	1,239.1	$	130.2
Individual Life insurance		135.8		312.5		(176.7)		466.0		643.6		(177.6)

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


	For the three months ended June 30,						For the six months ended June 30,
					Increase						Increase
	2022		2021		(decrease)		2022		2021		(decrease)

	(in millions)
Operating revenues:
Premiums and other considerations	$	870.3	$	702.8	$	167.5	$	1,624.6	$	1,405.3	$	219.3
Fees and other revenues		(39.7)		234.9		(274.6)		210.4		477.3		(266.9)
Net investment income		78.0		244.2		(166.2)		314.6		474.2		(159.6)
Total operating revenues		908.6		1,181.9		(273.3)		2,149.6		2,356.8		(207.2)
Expenses:
Benefits, claims and settlement expenses		435.8		732.9		(297.1)		1,231.0		1,503.7		(272.7)
Dividends to policyholders		24.5		28.7		(4.2)		47.6		46.9		0.7
Operating expenses		296.6		293.7		2.9		603.5		584.4		19.1
Total expenses		756.9		1,055.3		(298.4)		1,882.1		2,135.0		(252.9)

Pre-tax operating earnings	$	151.7	$	126.6	$	25.1	$	267.5	$	221.8	$	45.7

Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021

Pre-Tax Operating Earnings (Losses)

Pre-tax operating earnings in our Specialty Benefits insurance business increased $15.6 million from improved claim experience, $12.3 million from higher variable investment income, and $7.8 million from growth in the business. Pre-tax operating earnings in our Individual Life insurance business decreased primarily due to a $7.5 million actuarial model refinement in 2021 as well as $4.5 million due to the impact of our exited ULSG business.

Operating Revenues

Premium and fees increased in our Specialty Benefits Insurance business due to $69.7 million from growth in the business. Premium and fees decreased in our Individual Life insurance business $176.7 million, primarily due to the impact of our exited ULSG business.

Net investment income increased in our Specialty Benefits Insurance business primarily due to $12.3 million of higher variable investment income. Net investment income decreased in our Individual Life insurance business $180.2 million, primarily due to the impact of our exited ULSG business

Total Expenses

Benefits, claims and settlement expenses in our Specialty Benefits insurance business increased $45.2 million due to growth in the business partially offset by $15.6 million in improved claim experience. Benefits, claims and settlement expenses decreased in our Individual Life insurance business $326.7 million, primarily due to the impact of our exited ULSG business.

Operating expenses in our Specialty Benefits insurance business increased $17.0 million, primarily due to growth in the business. Operating expenses in our Individual Life insurance business decreased $14.0 million, primarily due to the impact of our exited ULSG business.

Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021

Pre-Tax Operating Earnings

Pre-tax operating earnings increased in our Specialty Benefits insurance business due to $25.8 million in improved claim experience, $11.8 million from growth in the business, $9.6 million in higher variable investment income and $8.8 million in expense management. Pre-tax operating earnings in our Individual Life insurance decreased primarily due to a $7.5 million actuarial model refinement in 2021.

Operating Revenues

Premiums and fees in our Specialty Benefits insurance business increased $130.2 million, primarily due to growth in the business. Premium and fees in our Individual Life insurance business decreased $177.6 million, primarily due to the impact of our exited ULSG business.

Net investment income in our Specialty Benefits insurance business increased due to $9.6 million in higher variable investment income and $7.6 million from growth in assets to support the business. Net investment income in our Individual Life insurance business decreased $175.2 million, primarily due to the impact of our exited ULSG business.

Total Expenses

Benefits claims and settlement expenses in our Specialty Benefits insurance business increased $84.9 million due to growth in the business, offset by $25.8 million from improved claim experience. Benefits, claims and settlement expenses in our Individual Life insurance business decreased $331.8 million, primarily due to the impact of our exited ULSG business

Operating expenses in our Specialty Benefits business increased $41.4 million primarily due to growth in business, offset by $8.8 million from expense management. Operating expenses in our Individual Life insurance business decreased $13.3 million, primarily due to the impact of our exited ULSG business.

Corporate Segment

Corporate Segment Summary Financial Data

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


	For the three months ended June 30,						For the six months ended June 30,
					Increase						Increase
	2022		2021		(decrease)		2022		2021		(decrease)

	(in millions)
Operating revenues:
Total operating revenues	$	(7.0)	$	1.1	$	(8.1)	$	(7.3)	$	(7.5)	$	0.2
Expenses:
Total expenses		108.9		84.3		24.6		223.7		170.2		53.5

Pre-tax operating earnings (losses) attributable to noncontrolling interest		37.0		(0.5)		37.5		50.9		(1.2)		52.1
Pre-tax operating losses	$	(152.9)	$	(82.7)	$	(70.2)	$	(281.9)	$	(176.5)	$	(105.4)

Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021

Pre-Tax Operating Losses

Pre-tax operating losses increased primarily due to $52.5 million lower net investment income largely resulting from mark-to-market losses on investments and $14.7 million stranded costs associated with reinsured businesses.

Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021

Pre-Tax Operating Losses

Pre-tax operating losses increased primarily due to $74.7 million lower net investment income largely resulting from mark-to-market losses on investments and $14.7 million stranded costs associated with reinsured businesses.

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 occurring September 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 June 30, 2022, approximately $14.4 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 June 30, 2022.


	Contractholder funds		Percentage
	(in millions)
Not subject to discretionary withdrawal	$	15,693.9	44.1	%
Subject to discretionary withdrawal with adjustments:
Specified surrender charges		9,966.3	28.0
Market value adjustments		5,043.1	14.2
Subject to discretionary withdrawal without adjustments		4,892.9	13.7
Total domestic investment contracts	$	35,596.2	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 June 30, 2022:


	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 Life and Principal Financial Services V (UK) Ltd as co-borrowers (1)	Credit facility	November 2023		200.0		—
Principal International Chile (2)	Unsecured lines of credit			122.5		66.9
Total			$	922.5	$	66.9

(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 June 30, 2022 and December 31, 2021. 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 or other distributions 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 or other distributions from Principal Life, our primary subsidiary, are limited by Iowa law. Under Iowa law, Principal Life may pay dividends or make other distributions 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, 2021, the ordinary stockholder dividend limitation for Principal Life is approximately $961.7 million in 2022. However, because the dividend test is based on dividends previously paid over rolling 12-month periods, if paid before a specified date during 2022, some or all of such dividends may be extraordinary and require regulatory approval.

Total stockholder dividends paid by Principal Life to its parent for the six months ended June 30, 2022, were $550.0 million, all of which was extraordinary and approved by the Commissioner. As of June 30, 2022, we had $1,723.9 million of cash and liquid assets held in our holding companies and other subsidiaries, which is available for corporate purposes. 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. All 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 $838.7 million and $1,133.6 million for the six months ended June 30, 2022 and 2021, 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 net purchases of fixed maturities trading securities.

Net cash used in investing activities was $97.9 million and $942.8 million for the six months ended June 30, 2022 and 2021, respectively. The decrease in cash used in investing activities was primarily due to real estate sold in 2022 and lower seed investment acquisitions in 2022 as compared to 2021.

Net cash provided by financing activities was $100.3 million for the six months ended June 30, 2022, compared to net cash used in financing activities of $623.2 million for the six months ended June 30, 2021. The increase in cash provided by financing activities was primarily due to increased banking operation deposits related to our Principal Deposit Sweep program and higher net investment contract deposits as compared to 2021. These increases were partially offset by increased share repurchases in 2022 primarily related to our 2022 accelerated share repurchase agreement.

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, 2021.

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.


	June 30, 2022		December 31, 2021

	(in millions)
Summary Statements of Financial Position Information:
Total investments	$	377.5	$	1,338.2
Cash and cash equivalents		1,100.5		516.4
Goodwill		618.5		618.5
Other intangibles		461.4		475.5
Other assets		377.9		385.7
Due from non-obligor subsidiaries		101.4		208.2
Total assets		3,067.7		3,593.8
Long-term debt		4,227.7		4,226.1
Other liabilities		526.1		563.6
Due to non-obligor subsidiaries		824.9		904.7
Total liabilities		5,634.5		5,741.2


	For the six months ended		For the year ended
	June 30, 2022		December 31, 2021

	(in millions)
Summary Statements of Operations Information:
Total revenues	$	(0.6)	$	223.7
Total expenses		313.1		649.7
Net loss		(256.2)		(335.3)

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


	June 30, 2022		December 31, 2021

	(in millions)
Other recourse short-term debt	$	66.9	$	79.8
Total short-term debt	$	66.9	$	79.8

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. As of June 30, 2022, no significant changes have occurred to long-term debt since December 31, 2021.

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 six months ended		For the year ended
	June 30, 2022		December 31, 2021

	(in millions)
Dividends to stockholders	$	328.7	$	654.1
Repurchase of common stock (1)		951.3		937.2
Total cash returned to common stockholders	$	1,280.0	$	1,591.3

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

In March 2022, we entered into an accelerated share repurchase program with a third party financial institution to repurchase $700.0 million of common stock. This program closed in June 2022.

For additional stockholders’ equity information, see Item 1. “Financial Statements, Notes to Unaudited Condensed Consolidated Financial Statements, Note 11, Stockholders’ Equity.”

Capitalization

The following table summarizes our capital structure:


	June 30, 2022			December 31, 2021

	($ in millions)
Debt:
Short-term debt	$	66.9		$	79.8
Long-term debt		4,280.7			4,280.2
Total debt		4,347.6			4,360.0

Total stockholders’ equity attributable to PFG (1)		11,036.8			16,069.4
Total capitalization	$	15,384.4		$	20,429.4
Debt to equity		39	%		27	%
Debt to capitalization		28	%		21	%

(1)	Decrease primarily due to change in AOCI during 2022

Contractual Obligations and Contractual Commitments

As of June 30, 2022, we had no unique material cash requirements from known contractual and other obligations.

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 June 30, 2022, no significant changes to guarantees and indemnifications have occurred since December 31, 2021. For guarantee and indemnification information, see Item 1. “Financial Statements, Notes to Unaudited Condensed Consolidated Financial Statements, Note 10, 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.

The following is a summary of the significant changes or actions in ratings and rating outlooks that have occurred from January 1, 2022, through the date of this filing:

In January 2022, Moody’s affirmed the ‘A1’ financial strength ratings of Principal Life and Principal National Life Insurance Company. Moody’s also affirmed PFG’s senior unsecured debt at ‘Baa1’, which is guaranteed by PFS. The outlook for PFG, Principal Life and its affiliates has been changed to ‘stable’ from ‘positive’. The rating action follows the announcement of the Reinsurance Transaction. The outlook revision reflects positive credit attributes offset by the introduction of counterparty risk and uncertainty with PFG’s operations in Chile.

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
Last review date	March 2022	June 2022	January 2022	June 2022
Current outlook	Stable	Stable	Stable	Stable
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 12, Fair Value Measurements” for further details, including a reconciliation of changes in Level 3 fair value measurements.

As of June 30, 2022, 44% of our net assets (liabilities) were Level 1, 54% were Level 2 and 2% were Level 3. Excluding separate account assets as of June 30, 2022, 4% of our net assets (liabilities) were Level 1, 90% were Level 2 and 6% were Level 3.

As of December 31, 2021, 46% of our net assets (liabilities) were Level 1, 53% were Level 2 and 1% were Level 3. Excluding separate account assets as of December 31, 2021, 4% of our net assets (liabilities) were Level 1, 95% were Level 2 and 1% were Level 3.

Changes in Level 3 Fair Value Measurements

Net assets (liabilities) measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of June 30, 2022, were $5,498.6 million as compared to $1,672.2 million as of December 31, 2021. The increase was primarily related to an increase in the embedded derivative related to the funds withheld agreement, partially offset by a decrease in manually priced private corporate credit securities and a reduction of variable annuity liabilities due to an increase in interest rates during the quarter.

Investments

We had total consolidated assets as of June 30, 2022, of $293,220.2 million, of which $97,841.7 million were invested assets. A portion of our invested assets represent funds withheld backing reserves as part of a coinsurance with funds withheld reinsurance agreement. The funds withheld assets and associated net investment income and net realized capital gains (losses) are not included in the discussions below as the investment risk is passed to the reinsurer. See Item 1. “Financial Statements, Notes to Unaudited Condensed Consolidated Financial Statements, Note 7, Reinsurance” for more information on the funds withheld assets. The rest of our total consolidated assets are comprised primarily of separate account assets for which we do not bear investment risk; therefore, the discussion and financial information below does not include such assets.

Overall Composition of Invested Assets

Invested assets as of June 30, 2022, 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.


	June 30, 2022
	Investments
	excluding		Funds
	funds withheld		withheld		Total

	(in millions)
Fixed maturities	$	48,218.0	$	19,378.9	$	67,596.9
Equity securities		1,689.8		10.0		1,699.8
Mortgage loans		17,487.3		2,789.9		20,277.2
Real estate		2,073.6		—		2,073.6
Policy loans		766.6		—		766.6
Other investments		5,425.8		1.8		5,427.6
Total invested assets		75,661.1		22,180.6		97,841.7
Cash and cash equivalents		2,772.8		400.3		3,173.1
Total invested assets and cash	$	78,433.9	$	22,580.9	$	101,014.8


	December 31, 2021
	Investments
	excluding		Funds
	funds withheld		withheld		Total

	(in millions)
Fixed maturities	$	78,576.7	$	—	$	78,576.7
Equity securities		2,347.2		—		2,347.2
Mortgage loans		19,668.7		—		19,668.7
Real estate		2,075.4		—		2,075.4
Policy loans		759.6		—		759.6
Other investments		5,478.3		—		5,478.3
Total invested assets		108,905.9		—		108,905.9
Cash and cash equivalents		2,332.0		—		2,332.0
Total invested assets and cash	$	111,237.9	$	—	$	111,237.9

Investment Results

Net Investment Income

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


	For the three months ended June 30,												For the six months ended June 30,
	2022				2021				Increase (decrease)				2022				2021				Increase (decrease)
	Yield		Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Amount

	(in millions)
Fixed maturities	4.2	%	$	354.5	3.9	%	$	692.7	0.3	%	$	(338.2)	3.9	%	$	1,009.6	3.9	%	$	1,365.1	—	%	$	(355.5)
Equity securities (1)	(1.2)			(5.9)	2.1			13.0	(3.3)			(18.9)	(1.0)			(9.7)	2.2			24.9	(3.2)			(34.6)
Mortgage loans — commercial	4.2			123.3	4.1			162.1	0.1			(38.8)	4.1			276.6	4.0			315.4	0.1			(38.8)
Mortgage loans — residential	7.7			64.6	4.9			28.4	2.8			36.2	6.7			110.8	5.3			56.6	1.4			54.2
Real estate	23.9			125.7	6.3			29.6	17.6			96.1	18.3			190.2	6.5			60.6	11.8			129.6
Policy loans	4.6			8.7	5.1			9.8	(0.5)			(1.1)	4.8			18.2	5.1			19.8	(0.3)			(1.6)
Cash and cash equivalents	0.9			5.9	0.2			0.8	0.7			5.1	0.6			7.6	0.1			1.9	0.5			5.7
Other investments	11.9			158.9	10.3			137.3	1.6			21.6	15.2			382.7	10.8			285.2	4.4			97.5
Total	5.1			835.7	4.2			1,073.7	0.9			(238.0)	4.9			1,986.0	4.2			2,129.5	0.7			(143.5)
Investment expenses	(0.1)			(19.2)	(0.1)			(28.2)	—			9.0	(0.1)			(51.4)	(0.1)			(55.9)	—			4.5
Net investment income	5.0	%	$	816.5	4.1	%	$	1,045.5	0.9	%	$	(229.0)	4.8	%	$	1,934.6	4.1	%	$	2,073.6	0.7	%	$	(139.0)

(1)	Negative due to negative market performance on non-OPEB mutual funds and required regulatory investments.

Three and Six Months Ended June 30, 2022 Compared to Three and Six Months Ended June 30, 2021

Excluding impacts of the Reinsurance Transaction described above, net investment income increased primarily due to higher inflation-based investment returns on our Latin America average invested assets and cash as well as the sale of certain value-add real estate.

Net Realized Capital Gains (Losses)

The following table presents the contributors to net realized capital gains and losses for the periods indicated. The amounts below do not include net realized capital gains (losses) on funds withheld assets that are not passed to the reinsurer, which are separately reported on the consolidated statements of operations.


	For the three months ended June 30,						For the six months ended June 30,
					Increase						Increase
	2022		2021		(decrease)		2022		2021		(decrease)

	(in millions)
Fixed maturities, available-for-sale – credit losses, including credit sales (1)	$	(16.7)	$	(13.4)	$	(3.3)	$	(22.8)	$	(18.0)	$	(4.8)
Commercial mortgage loans – credit gains (losses)		(1.5)		5.6		(7.1)		(21.7)		6.5		(28.2)
Other – credit gains (losses)		1.2		1.3		(0.1)		1.8		5.1		(3.3)
Fixed maturities, available-for-sale and trading – noncredit		(142.2)		(23.5)		(118.7)		(103.4)		(1.9)		(101.5)
Derivatives and related hedge activities (2)		58.7		(83.5)		142.2		100.5		30.8		69.7
Other gains (losses)		(127.4)		72.4		(199.8)		(292.8)		87.8		(380.6)
Net realized capital gains (losses) (3)	$	(227.9)	$	(41.1)	$	(186.8)	$	(338.4)	$	110.3	$	(448.7)

(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 $(5.1) million and $1.1 million for the three months ended June 30, 2022 and 2021, and $(13.0) million and $(2.5) million for the six months ended June 30, 2022 and 2021, 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 June 30, 2022 Compared to Three Months Ended June 30, 2021

Net realized capital gains decreased primarily due to losses on equity securities and sponsored investment funds due to equity market declines, non-credit losses on available-for-sale fixed maturities, losses from GMWB embedded derivatives, including changes in the spread reflecting our own creditworthiness, and related hedging instruments, and losses on currency derivatives due to changes in rates. These decreases were partially offset by an increase in interest rate swaps not designated as hedging instruments due to changes in interest rates.

Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021

Net realized capital gains decreased primarily due to losses on equity securities and sponsored investment funds due to equity market declines, non-credit losses on available-for-sale fixed maturities, and a current year increase in our commercial mortgage valuation allowance. These decreases were partially offset by gains versus losses from GMWB embedded derivatives, including changes in the spread reflecting our own creditworthiness, and related hedging instruments, and an increase in interest rate swaps not designated as hedging instruments due to changes in interest rates.

U.S. Investment Operations

In the following sections, we provide details about U.S. Investment Operations, excluding investments held as part of the funds withheld reinsurance agreement. We believe the details of the composition of our investment portfolio excluding the funds withheld are most relevant to an understanding of our operations that are pertinent to investors because all funds withheld assets support obligations and liabilities relating to the Reinsurance Transaction. Guidelines are in place to ensure the investment risk associated with these fund withheld assets are appropriately managed. See Footnote 7, Reinsurance, for further information on the funds withheld assets.

Of our invested assets, $69,031.8 million were held by our U.S. operations as of June 30, 2022. 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 $130.0 million and $145.0 million as of June 30, 2022 and December 31, 2021, 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
	June 30, 2022		December 31, 2021		June 30, 2022		December 31, 2021
New mortgages	49	%	50	%	2.5	x	3.2	x
Entire mortgage portfolio	45	%	46	%	2.5	x	2.5	x

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

The amortized cost and weighted average yield, calculated using amortized cost, of non-structured fixed maturity securities that will be callable at the option of the issuer, excluding securities with a make-whole provision, were $2,404.8 million and 3.7%, respectively, as of June 30, 2022, and $3,560.6 million and 3.4%, respectively, as of December 31, 2021. 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 $5,030.0 million and 2.5%, respectively, as of June 30, 2022, and $7,131.1 million and 2.2%, respectively, as of December 31, 2021.

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.


	June 30, 2022				December 31, 2021
	Carrying amount		% of total		Carrying amount		% of total

	(in millions)
Fixed maturities	$	45,389.1	66	%	$	75,553.4	74	%
Equity securities		547.3	1			1,051.5	1
Mortgage loans		16,662.0	24			18,862.7	19
Real estate		2,059.3	3			2,060.6	2
Policy loans		753.6	1			745.7	1
Other investments		3,620.5	5			3,671.7	3
Total invested assets		69,031.8	100	%		101,945.6	100	%
Cash and cash equivalents		2,579.9				2,074.8
Total invested assets and cash	$	71,611.7			$	104,020.4

Fixed Maturities

Fixed maturities include bonds, ABS, redeemable preferred stock and certain non-redeemable preferred securities. Included in the privately placed category as of June 30, 2022 and December 31, 2021, were $10.7 billion and $18.3 billion, respectively, of securities subject to certain holding periods and resale restrictions pursuant to Rule 144A of the Securities Act of 1933.

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


	June 30, 2022				December 31, 2021
	Carrying		Percent		Carrying		Percent
	amount		of total		amount		of total

	(in millions)
U.S. government and agencies	$	1,239.1	3	%	$	2,067.1	3	%
Non-U.S. governments		503.4	1			949.5	1
States and political subdivisions		4,892.2	11			9,289.9	12
Corporate - public		11,687.1	26			23,042.1	31
Corporate - private		14,142.2	31			20,251.8	27
Residential mortgage-backed pass-through securities		1,799.9	4			3,262.7	4
Commercial mortgage-backed securities		4,048.7	9			5,556.1	7
Residential collateralized mortgage obligations		2,742.9	6			3,834.8	5
Asset-backed securities		4,333.6	9			7,299.4	10
Total fixed maturities	$	45,389.1	100	%	$	75,553.4	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 15% of total fixed maturities as of June 30, 2022, and 16% as of December 31, 2021. It is comprised of corporate and foreign government fixed maturities.


	June 30, 2022		December 31, 2021

	(in millions)
European Union	$	1,591.9	$	2,876.6
United Kingdom		1,211.2		2,079.0
Australia/New Zealand		1,384.3		2,060.3
Latin America		1,049.7		1,578.6
Asia-Pacific		671.2		1,364.3
Middle East and Africa		469.8		920.7
Europe, non-European Union		343.0		713.7
Other (1)		134.6		253.7
Total	$	6,855.7	$	11,846.9

(1)	Includes exposure from one country and various supranational organizations as of both June 30, 2022 and December 31, 2021.

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 June 30, 2022 and December 31, 2021, our investments in Canada totaled $1,140.9 million and $1,839.5 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 top 10 exposures comprised 4.9% of total fixed maturities as of June 30, 2022, and 4.6% as of December 31, 2021.

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 12, Fair Value Measurements” for further details regarding our pricing methodology. Once prices are determined, they are reviewed by pricing analysts for reasonableness based on asset class and observable market data. Investment analysts who are familiar with specific securities review prices for reasonableness through direct interaction with external sources, review of recent trade activity or use of internal models. All fixed maturities placed on the “watch list” are periodically analyzed by investment analysts. These analysts periodically meet with the Chief Investment Officer and the Portfolio Managers to determine reasonableness of the analysts’ prices. The valuation of 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.


	June 30, 2022						December 31, 2021
					Percent of						Percent of
	Amortized		Carrying		carrying		Amortized		Carrying		carrying
NAIC designation	cost		amount		amount		cost		amount		amount

	(in millions)
1	$	30,905.1	$	28,859.6	64	%	$	46,117.2	$	49,166.2	65	%
2		14,552.0		13,615.6	30			20,140.8		22,094.8	29
3		2,939.6		2,685.5	6			3,909.7		4,016.5	6
4		222.4		203.8	—			245.2		242.2	—
5		17.0		15.8	—			34.4		28.9	—
6		13.6		8.8	—			3.6		4.8	—
Total fixed maturities	$	48,649.7	$	45,389.1	100	%	$	70,450.9	$	75,553.4	100	%

Fixed maturities included 56 securities with an amortized cost of $710.5 million, gross gains of $2.8 million, gross losses of $40.6 million and a carrying amount of $672.7 million as of June 30, 2022, that were still pending a review and assignment of a designation by the SVO. Due to the timing of when fixed maturities are purchased, legal documents are filed and the review by the SVO is completed, we will always have securities in our portfolio that are unrated over a reporting period. In these instances, an equivalent designation is assigned based on our fixed income analyst’s assessment.

Commercial Mortgage-Backed Securities. As of June 30, 2022, based on amortized cost, 95% 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.


	June 30, 2022				December 31, 2021
	Amortized		Carrying		Amortized		Carrying
NAIC designation	cost		amount		cost		amount

	(in millions)
1	$	4,199.8	$	3,866.1	$	5,169.9	$	5,285.8
2		134.7		122.2		169.5		176.3
3		62.7		56.0		84.2		87.4
4		4.7		4.1		5.1		5.3
5		—		—		—		—
6		0.6		0.3		1.6		1.3
Total (1)	$	4,402.5	$	4,048.7	$	5,430.3	$	5,556.1

(1)	The CMBS portfolio included agency CMBS with a $566.7 million amortized cost and a $542.5 million carrying amount as of June 30, 2022, and a $405.5 million amortized cost and a $410.3 million carrying amount as of December 31, 2021.

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

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


	June 30, 2022			December 31, 2021

	(in millions)
Total fixed maturities	$	45,389.1		$	75,553.4
Problem fixed maturities (1)	$	14.2		$	20.5
Potential problem fixed maturities		16.9			5.7
Total problem, potential problem and restructured fixed maturities	$	31.1		$	26.2
Total problem, potential problem and restructured fixed maturities as a percent of total fixed maturities		0.07	%		0.03	%

(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 $14.5 million and $10.5 million for the three months ended June 30, 2022 and 2021, respectively, and $19.6 million and $15.1 million for the six months ended June 30, 2022 and 2021, respectively.

Fixed Maturities Available-for-Sale

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


	June 30, 2022
			Gross		Gross		Allowance
	Amortized		unrealized		unrealized		for credit		Carrying
	cost		gains		losses		loss		amount

	(in millions)
Finance — Banking	$	2,444.4	$	15.7	$	162.2	$	—	$	2,297.9
Finance — Brokerage		541.1		2.1		53.4		—		489.8
Finance — Finance Companies		414.9		—		52.9		—		362.0
Finance — Financial Other		1,079.7		2.5		124.1		—		958.1
Finance — Insurance		1,919.8		67.8		137.5		—		1,850.1
Finance — Real estate investment trusts (“REITs”)		1,842.6		1.4		168.4		—		1,675.6
Industrial — Basic Industry		1,285.4		18.5		108.8		—		1,195.1
Industrial — Capital Goods		1,670.4		19.7		137.7		—		1,552.4
Industrial — Communications		2,385.1		94.0		162.1		—		2,317.0
Industrial — Consumer Cyclical		1,216.6		9.0		125.9		—		1,099.7
Industrial — Consumer Non-Cyclical		3,108.9		29.5		219.1		—		2,919.3
Industrial — Energy		1,973.3		60.8		135.0		—		1,899.1
Industrial — Other		708.3		1.7		45.3		—		664.7
Industrial — Technology		1,445.7		8.9		123.1		—		1,331.5
Industrial — Transportation		1,619.9		9.7		110.7		—		1,518.9
Utility — Electric		2,891.3		39.9		263.5		—		2,667.7
Utility — Natural Gas		396.2		2.9		41.6		—		357.5
Utility — Other		335.7		—		47.8		—		287.9
Government guaranteed		182.4		13.3		14.0		—		181.7
Total corporate securities		27,461.7		397.4		2,233.1		—		25,626.0

Residential mortgage-backed pass-through securities		1,865.0		3.8		132.0		—		1,736.8
Commercial mortgage-backed securities		4,381.3		1.7		355.5		—		4,027.5
Residential collateralized mortgage obligations		3,024.7		3.6		285.4		—		2,742.9
Asset-backed securities — Home equity (1)		79.5		4.7		2.5		—		81.7
Asset-backed securities — All other		1,413.5		(1.7)		92.5		—		1,319.3
Collateralized debt obligations — Credit		16.7		—		5.3		—		11.4
Collateralized debt obligations — CMBS		—		0.6		—		—		0.6
Collateralized debt obligations — Loans		2,997.7		0.7		89.5		—		2,908.9
Total mortgage-backed and other asset-backed securities		13,778.4		13.4		962.7		—		12,829.1

U.S. government and agencies		1,288.3		1.1		50.8		—		1,238.6
States and political subdivisions		5,317.3		40.1		470.1		—		4,887.3
Non-U.S. governments		497.1		38.6		34.5		—		501.2
Total fixed maturities, available-for-sale	$	48,342.8	$	490.6	$	3,751.2	$	—	$	45,082.2

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


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

	(in millions)
Finance — Banking	$	4,746.3	$	333.3	$	15.2	$	—	$	5,064.4
Finance — Brokerage		798.8		78.9		5.6		—		872.1
Finance — Finance Companies		524.9		24.8		0.7		—		549.0
Finance — Financial Other		987.4		36.5		1.1		—		1,022.8
Finance — Insurance		2,845.8		400.5		6.7		—		3,239.6
Finance — REITs		2,260.1		148.0		4.8		—		2,403.3
Industrial — Basic Industry		1,794.6		170.7		3.5		—		1,961.8
Industrial — Capital Goods		2,299.1		205.6		8.8		—		2,495.9
Industrial — Communications		3,140.3		407.0		10.6		—		3,536.7
Industrial — Consumer Cyclical		1,905.8		99.8		11.3		—		1,994.3
Industrial — Consumer Non-Cyclical		4,684.6		500.7		13.8		—		5,171.5
Industrial — Energy		2,669.8		335.6		7.1		—		2,998.3
Industrial — Other		760.6		44.5		0.7		—		804.4
Industrial — Technology		2,629.8		207.2		9.6		4.5		2,822.9
Industrial — Transportation		2,119.5		193.3		2.7		—		2,310.1
Utility — Electric		3,970.7		434.2		18.2		—		4,386.7
Utility — Natural Gas		644.6		72.4		2.8		—		714.2
Utility — Other		447.7		29.8		4.2		—		473.3
Government guaranteed		256.1		39.5		0.1		—		295.5
Total corporate securities		39,486.5		3,762.3		127.5		4.5		43,116.8

Residential mortgage-backed pass-through securities		3,113.1		59.0		26.8		—		3,145.3
Commercial mortgage-backed securities		5,404.7		157.0		30.9		0.3		5,530.5
Residential collateralized mortgage obligations		3,781.5		92.4		39.1		—		3,834.8
Asset-backed securities — Home equity (1)		119.1		12.0		0.1		0.1		130.9
Asset-backed securities — All other		3,585.7		26.7		19.2		—		3,593.2
Collateralized debt obligations — Credit		16.8		—		5.1		—		11.7
Collateralized debt obligations — CMBS		—		0.9		—		—		0.9
Collateralized debt obligations — Loans		3,547.9		3.6		4.5		—		3,547.0
Total mortgage-backed and other asset-backed securities		19,568.8		351.6		125.7		0.4		19,794.3

U.S. government and agencies		1,957.7		146.3		37.4		—		2,066.6
States and political subdivisions		8,272.0		1,029.0		16.6		—		9,284.4
Non-U.S. governments		821.6		127.5		2.1		—		947.0
Total fixed maturities, available-for-sale	$	70,106.6	$	5,416.7	$	309.3	$	4.9	$	75,209.1

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

Of the $3,751.2 million in gross unrealized losses as of June 30, 2022, $3.6 million in losses were attributed to securities scheduled to mature in one year or less, $192.7 million attributed to securities scheduled to mature between one to five years, $817.0 million attributed to securities scheduled to mature between five to ten years, $1,775.2 million attributed to securities scheduled to mature after ten years and $962.7 million related to mortgage-backed and other ABS that are not classified by maturity year. As of June 30, 2022, we were in a $3,260.6 million net unrealized loss position as compared to a $5,107.4 million net unrealized gain position as of December 31, 2021. The $8,368.0 million decrease in net unrealized gains for the six months ended June 30, 2022, can be attributed to an increase in interest rates plus widening 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.


	June 30, 2022										December 31, 2021
			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	$	26,462.9	$	376.5	$	1,984.2	$	—	$	24,855.2	$	41,401.6	$	4,000.6	$	179.3	$	0.2	$	45,222.7
Private		18,765.3		99.8		1,474.0		—		17,391.1		24,557.3		1,276.7		94.8		—		25,739.2
Below investment grade:
Public		808.6		11.2		89.8		—		730.0		1,428.4		90.8		8.9		—		1,510.3
Private		2,306.0		3.1		203.2		—		2,105.9		2,719.3		48.6		26.3		4.7		2,736.9
Total fixed maturities, available-for-sale	$	48,342.8	$	490.6	$	3,751.2	$	—	$	45,082.2	$	70,106.6	$	5,416.7	$	309.3	$	4.9	$	75,209.1

The following tables present the fair value and the gross unrealized losses on our fixed maturities available-for-sale for which an allowance for credit loss has not been recorded by investment category and length of time that individual securities have been in a continuous unrealized loss position as of June 30, 2022 and December 31, 2021, respectively.


	June 30, 2022
	Less than				Greater than or
	twelve months				equal to twelve months				Total
			Gross				Gross				Gross
	Fair		unrealized		Fair		unrealized		Fair		unrealized
	value		losses		value		losses		value		losses

	(in millions)
Fixed maturities, available-for-sale (1):
U.S. government and agencies	$	1,003.1	$	20.9	$	122.6	$	29.9	$	1,125.7	$	50.8
Non-U.S. governments		246.6		33.4		2.7		1.1		249.3		34.5
States and political subdivisions		3,728.7		444.6		109.6		25.4		3,838.3		470.0
Corporate		18,972.7		2,019.9		886.1		213.2		19,858.8		2,233.1
Residential mortgage-backed pass-through securities		1,482.7		112.9		112.8		19.1		1,595.5		132.0
Commercial mortgage-backed securities		3,682.8		324.6		224.4		31.0		3,907.2		355.6
Collateralized debt obligations (2)		2,380.1		76.2		519.5		18.6		2,899.6		94.8
Other debt obligations		3,648.9		328.2		311.5		52.1		3,960.4		380.3
Total fixed maturities, available-for-sale	$	35,145.6	$	3,360.7	$	2,289.2	$	390.4	$	37,434.8	$	3,751.1

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

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


	December 31, 2021
	Less than				Greater than or
	twelve months				equal to twelve months				Total
			Gross				Gross				Gross
	Fair		unrealized		Fair		unrealized		Fair		unrealized
	value		losses		value		losses		value		losses

	(in millions)
Fixed maturities, available-for-sale (1):
U.S. government and agencies	$	129.3	$	3.4	$	482.9	$	34.0	$	612.2	$	37.4
Non-U.S. governments		57.5		2.0		—		—		57.5		2.0
States and political subdivisions		687.8		10.5		102.3		6.1		790.1		16.6
Corporate		4,557.7		59.3		1,262.9		67.8		5,820.6		127.1
Residential mortgage-backed pass-through securities		1,562.6		20.6		194.9		6.3		1,757.5		26.9
Commercial mortgage-backed securities		1,293.3		15.5		289.8		15.3		1,583.1		30.8
Collateralized debt obligations (2)		1,592.5		2.8		424.4		6.7		2,016.9		9.5
Other debt obligations		3,949.9		49.4		211.0		9.0		4,160.9		58.4
Total fixed maturities, available-for-sale	$	13,830.6	$	163.5	$	2,968.2	$	145.2	$	16,798.8	$	308.7

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

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

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 26% and 23% of our commercial mortgage loan portfolio before valuation allowance as of June 30, 2022 and December 31, 2021, 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 mortgage loan portfolio is a single purpose entity or single asset entity. As of June 30, 2022 and December 31, 2021, the total number of commercial mortgage loans outstanding were 615 and 750, of which 72% and 41% were for loans with principal balances less than $10.0 million as of June 30, 2022 and December 31, 2021, respectively. The average loan size of our commercial mortgage portfolio was $22.2 million and $21.3 million as of June 30, 2022 and December 31, 2021, 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.

We had two problem commercial mortgage loans with a carrying amount of $43.0 million for which we had a valuation allowance of $28.6 million as of June 30, 2022. We also had one problem commercial mortgage loan with a carrying amount of $8.8 million for which we also had a valuation allowance of $8.8 million as of December 31, 2021.


	June 30, 2022			December 31, 2021

	(in millions)

Total commercial mortgage loans	$	16,088.3		$	15,920.1
Restructured problem commercial mortgage loans		14.4			—
Total problem, potential problem and restructured commercial mortgage loans	$	14.4		$	—
Total problem, potential problem and restructured commercial mortgage loans as a percent of total commercial mortgage loans		0.09	%		—	%

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 June 30, 2022 and December 31, 2021, the carrying amount of our equity real estate investment was $2,059.3 million and $2,060.6 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. The carrying value of real estate held for investment is generally adjusted for impairments whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. Such impairment adjustments are recorded as net realized capital losses in our consolidated results of operations. No such impairment adjustments were recorded for the six months ended June 30, 2022 or for the year ended December 31, 2021.

Once we identify a real estate property to be sold and it is probable that it will be sold, we classify the property as held for sale. We establish a valuation allowance subject to periodic revisions, if necessary, to adjust the carrying value of the property to reflect the lower of its current carrying value or the fair value, less associated selling costs. The valuation allowance did not change for the six months ended June 30, 2022 or for the year ended December 31, 2021.

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

Equity real estate is distributed across geographic regions of the country. As of June 30, 2022, our largest equity real estate portfolio concentration was in the Pacific (41%) region of the United States. By property type, our largest concentrations were in Apartments (34%) and Industrial (28%) as of June 30, 2022.

Other Investments

Our other investments totaled $3,620.5 million as of June 30, 2022, compared to $3,671.7 million as of December 31, 2021. 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, $6,629.3 million were held by our Principal International segment as of June 30, 2022. The assets are primarily managed by the local Principal International affiliate. Due to the regulatory constraints in each location, each company maintains its own investment policies. As shown in the following table, the major category of international invested assets is fixed maturities. The following table excludes invested assets of the separate accounts.


	June 30, 2022				December 31, 2021
	Carrying		Percent		Carrying		Percent
	amount		of total		amount		of total

	(in millions)
Fixed maturities		2,828.9	43			3,023.3	43
Equity securities		1,142.5	17			1,295.7	20
Mortgage loans		825.3	13			806.0	11
Real estate		14.3	—			14.8	—
Policy loans		13.0	—			13.9	—
Other investments:
Direct financing leases		581.6	9			609.5	9
Investment in unconsolidated operating entities		880.2	13			849.9	12
Derivative assets and other investments		343.5	5			347.2	5
Total invested assets		6,629.3	100	%		6,960.3	100	%
Cash and cash equivalents		192.9				257.2
Total invested assets and cash	$	6,822.2			$	7,217.5

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

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