| | For the year ended December 31, | Increase (decrease) | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2008 | 2007 | 2006 | 2008 vs. 2007 | 2007 vs. 2006 | |||||||||||||
| | (in millions) | |||||||||||||||||
Revenues: | ||||||||||||||||||
Premiums and other considerations | $ | 4,209.2 | $ | 4,634.1 | $ | 4,305.3 | $ | (424.9 | ) | $ | 328.8 | |||||||
Fees and other revenues | 2,426.5 | 2,634.7 | 1,902.5 | (208.2 | ) | 732.2 | ||||||||||||
Net investment income | 3,994.3 | 3,966.5 | 3,620.6 | 27.8 | 345.9 | |||||||||||||
Net realized capital gains (losses) | (694.1 | ) | (328.8 | ) | 44.7 | (365.3 | ) | (373.5 | ) | |||||||||
Total revenues | 9,935.9 | 10,906.5 | 9,873.1 | (970.6 | ) | 1,033.4 | ||||||||||||
Expenses: | ||||||||||||||||||
Benefits, claims and settlement expenses | 6,219.9 | 6,435.3 | 5,692.4 | (215.4 | ) | 742.9 | ||||||||||||
Dividends to policyholders | 267.3 | 293.8 | 290.7 | (26.5 | ) | 3.1 | ||||||||||||
Operating expenses | 2,995.1 | 3,129.2 | 2,558.7 | (134.1 | ) | 570.5 | ||||||||||||
Total expenses | 9,482.3 | 9,858.3 | 8,541.8 | (376.0 | ) | 1,316.5 | ||||||||||||
Income from continuing operations before income taxes | 453.6 | 1,048.2 | 1,331.3 | (594.6 | ) | (283.1 | ) | |||||||||||
Income taxes (benefits) | (4.5 | ) | 208.1 | 295.9 | (212.6 | ) | (87.8 | ) | ||||||||||
Income from continuing operations, net of related income taxes | 458.1 | 840.1 | 1,035.4 | (382.0 | ) | (195.3 | ) | |||||||||||
Income from discontinued operations, net of related income taxes | — | 20.2 | 28.9 | (20.2 | ) | (8.7 | ) | |||||||||||
Net income | 458.1 | 860.3 | 1,064.3 | (402.2 | ) | (204.0 | ) | |||||||||||
Preferred stock dividends | 33.0 | 33.0 | 33.0 | — | — | |||||||||||||
Net income available to common stockholders | $ | 425.1 | $ | 827.3 | $ | 1,031.3 | $ | (402.2 | ) | $ | (204.0 | ) | ||||||
Year Ended December 31, 20062008 Compared to Year Ended December 31, 20052007
Net Income Available to Common Stockholders
Net income available to common stockholders decreased primarily due to a $248.4 million after-tax increase in net realized capital losses. The change in net realized capital losses was primarily driven by higher impairments, net of recoveries from sales, on fixed maturity and equity securities and mark to market losses versus gains on fixed maturity and equity securities classified as trading. In addition, net income available to common stockholders for the U.S. Asset Accumulation segment decreased primarily due to a decline in account values in our full service accumulation business stemming from poor equity markets in 2008 and shifts in the mix of business.
Total Revenues
Premiums decreased $195.5 million for the Life and Health Insurance segment primarily due to a reduction in average covered medical members in our health insurance business. In addition, U.S. Asset Accumulation segment premiums decreased $187.6 million primarily due to a decrease in sales of single premium group annuities with life contingencies within our full service payout business, which was partially offset by an increase in our individual payout annuities business primarily relating to increased sales of annuities with life contingencies.
Fees decreased $244.9 million for our U.S. Asset Accumulation segment due to a decline in account values stemming from poor equity markets in 2008 and shifts in the mix of business.
Net investment income increased due to a slight increase in the average annualized yield on invested assets and cash, which was 6.3% and 6.2% for the years ended December 31, 2008 and 2007, respectively.
Net realized capital gains (losses) can be volatile due to mark to market adjustments of certain invested assets, other considerationsthan temporary impairments of invested assets, and our decision to sell appreciated invested assets. Net realized capital losses increased $330.3primarily due to higher impairments, net of recoveries from sales, on fixed maturity and equity securities and mark to market losses versus gains on fixed maturity and equity securities classified as trading. For additional information, see "Investments — Investment Results."
Total Expenses
Benefits, claims and settlement expenses decreased $189.6 million or 8%,for the Life and Health Insurance segment, primarily due to $4,305.3a decrease in average covered medical members in our health insurance business.
Operating expenses decreased $83.1 million for the Corporate segment, primarily due to a decline in amounts credited to employee accounts in a nonqualified defined contribution pension plan, which was offset by a corresponding reduction in net realized capital gains related to the assets backing this nonqualified plan. In addition, U.S. Asset Accumulation operating expenses decreased $69.6 million, primarily due to a comprehensive assumption study in our full service accumulation business that was completed during the third quarter of 2007, which resulted in the unlocking of our unearned revenue and DPAC assumptions and led to the recognition of previously deferred expenses in 2007.
Income Taxes
The effective income tax rates were -1% and 20% for the years ended December 31, 2008 and 2007, respectively. The effective income tax rate for the year ended December 31, 2006,2008, was lower than the U.S. corporate income tax rate of 35% ("U.S. statutory rate") primarily due to income tax deductions allowed for corporate dividends received, interest exclusion from $3,975.0 milliontaxable income and additional U.S. foreign tax credits resulting from the second quarter 2008 enactment of legislation to increase the Brazilian tax rate. The effective income tax rate for the year ended December 31, 2005.2007, was lower than the U.S. statutory rate primarily due to income tax deductions allowed for corporate dividends received and interest exclusion from taxable income. The effective income tax rate decreased to -1% from 20% for the years ended December 31, 2008 and 2007, respectively, primarily due to an increase reflected a $331.6 million increasein our net realized capital losses with no proportionate change in permanent items, additional U.S. foreign tax credits resulting from the Lifeaforementioned Brazilian tax rate increase and Healthtax refinements made in 2007 related to prior years. The net increase in deferred tax liabilities associated with the newly enacted Brazilian income tax rate is reflected in net investment income because the equity method of accounting is applied to our Brazilian operations; however, the benefit from additional U.S. foreign tax credits is reflected in income tax expense.
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
Net Income Available to Common Stockholders
Net income available to common stockholders decreased primarily due to a $240.0 million after-tax change in net realized capital losses. The change in net realized capital losses was primarily driven by higher other than temporary impairments, net of recoveries, of fixed maturity securities and as well as higher mark to market losses on derivative activities.
Total Revenues
Premiums increased $248.5 million for the U.S. Asset Accumulation segment primarily due to strongan increase in sales of single premium group annuities with life contingencies within our full service payout business and stable retentionan increase in our individual payout annuities business primarily relating to increased sales from certain distribution channels. In addition, Life and Health Insurance segment premiums increased $72.9 million primarily due to growth in our specialty benefits business and growth in our health insurance business.
Fees and other revenues increased $184.7 million, or 11%, to $1,902.5$590.7 million for the year endedour U.S. Asset Accumulation segment due to higher management and distribution fees for Principal Funds stemming from an increase in average account values resulting from our December 31, 2006, acquisition of WM Advisors, Inc. In addition, fees from $1,717.8 million forour full service accumulation business increased due to a comprehensive assumption study that was completed during the year ended December 31, 2005. U.S. Asset Management and Accumulation fees and other revenues increased $192.1 million primarily related to an increase in account values stemming from continued strong net cash flow and strong performancethird quarter 2007 which resulted in the equity markets resulting in an increase in asset management fees.unlocking of our unearned revenue and DPAC assumptions and led to the recognition of previously deferred revenue.
Net investment income increased $257.9 million, or 8%, to $3,618.0 million for the year ended December 31, 2006, from $3,360.1 million for the year ended December 31, 2005. The increase was relateddue to a $2,331.9$3,376.8 million or 4%, increase in average invested assets and cash and to an increase in the annualized investment yields.yield. The yield on average invested assets and cash was 6.2% for the year ended December 31, 2007, compared to 6.0% for the year ended December 31, 2006, compared to 5.8% for the year ended December 31, 2005.2006.
Net realized/unrealizedrealized capital gains increased $55.9 million to $44.7 million of net realized/unrealized capital gains for the year ended December 31, 2006, from $11.2 million of net realized/unrealized capital losses for the year ended December 31, 2005. The increase in net realized gains was(losses) can be volatile due to the gain on the sale of stock of an equity method investment ($44.3 million), fewer losses on the mark to market adjustment relatedadjustments of certain invested assets, our decision to derivatives activities ($15.2 million), the non-recurrencesell appreciated invested assets and other than temporary impairments of an impairmentinvested assets. Net realized capital losses increased primarily due to higher impairments, net of an equity partnership interest ($14.4 million), the recovery of previously impairedrecoveries, on fixed maturity securities as the result of a litigation claim received in 2006 ($12.9 million), more gains from thewell as higher mark to market and sales of activities of equity securities ($12.5 million), fewer losses on credit triggered bond sales ($7.3 million), a software impairment in 2005 with no corresponding activity in 2006 ($5.9 million), and more gains as the result of the mark to market of certain seed money investments ($4.4 million). Offsetting these increases were more other than temporary declines in the value of fixed maturity securities resulting from the determination that we no longer had the ability and intent to hold these securities until recovery due to our need to finance the acquisition of WM Advisors ($12.4 million) and a large recovery of previously impaired securities as the result of a litigation settlement that occurred in 2005 ($52.1 million).derivative activities. For additional information, see "Investments — Investment Results."
(1)Impairments include $14.6 million of credit impairment write-downs and $16.5 million in realized credit recoveries on the sale of previously impaired assets. As the result of the need to fund the acquisition of WM Advisors, impairments also include $12.4 million of write-downs that resulted from our determination that we no longer had the ability and intent to hold certain fixed maturity securities until they recovered in value. This loss is net of the recovery realized on the subsequent sale of the securities. Credit losses include $0.6 million in realized gains and $22.2 million in realized losses related to credit triggered sales. Other gains (losses) include $5.9 million in net gains as the result of prepayment activity, gross realized gains of $12.1 million and gross realized losses of $8.0 million. Included in the gross realized losses of $8.0 million is $6.3 million that resulted from the sale of certain hybrid securities that had a regulatory classification change that resulted in increased capital requirements.(2)Impairments include $1.0 million in realized recoveries on sale of previously impaired assets. Other gains (losses) include $21.8 million in mark to market of net realized/unrealized gains on trading equity securities, gross realized gains of $1.4 million and gross realized losses of $0.8 million.(3)Impairments include $2.5 million in realized losses due to the sale of commercial mortgage loans, $3.6 million in realized recoveries on the sale of previously impaired commercial mortgage loans, a $2.1 million decrease in the commercial mortgage valuation allowance, and a $0.7 million increase in the residential mortgage valuation allowance held by our international operations.(4)Other gains (losses) include a $44.3 million realized gain on the sale of stock of an equity method investment and $16.2 million in mark to market of net realized/unrealized gains on certain seed money investments.
The following table highlights the contributors to net realized/unrealized capital gains and losses for the year ended December 31, 2006.Total Expenses
| | For the year ended December 31, 2006 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Impairments and credit losses | Other gains (losses) | Hedging adjustments | Net realized/ unrealized capital gains (losses) | ||||||||||
| | (in millions) | |||||||||||||
| Fixed maturity securities(1) | $ | (32.1 | ) | $ | 10.0 | $ | (14.6 | ) | $ | (36.7 | ) | |||
| Fixed maturity securities, trading | — | 1.0 | — | 1.0 | ||||||||||
| Equity securities(2) | 1.0 | 22.4 | — | 23.4 | ||||||||||
| Mortgage loans on real estate(3) | 2.4 | — | — | 2.4 | ||||||||||
| Derivatives | — | — | (4.7 | ) | (4.7 | ) | ||||||||
| Other(4) | — | 64.3 | (5.0 | ) | 59.3 | |||||||||
| Total | $ | (28.7 | ) | $ | 97.7 | $ | (24.3 | ) | $ | 44.7 | ||||
Benefits, claims and settlement expenses increased $409.5 million, or 8%, to $5,692.4$416.4 million for the year ended December 31, 2006, from $5,282.9 million for the year ended December 31, 2005. The increase wasU.S. Asset Accumulation segment, primarily due to an increase in reserves related to higher sales of individual payout annuities and higher cost of interest credited related to a $290.1growing block in our individual annuities business. In addition, in full service payout, benefit reserves and expense increased primarily due to strong sales of single premium group annuities with life contingencies. Benefits, claims and settlement expenses also increased $201.1 million increase fromfor the Life and Health Insurance segment, primarily due to growth in the our specialty benefits business and due to higher medical costs and unfavorable prior year claim development in our health insurance businesses. The increase also reflected a $130.9 million increase from thebusiness.
U.S. Asset Management and Accumulation segment,operating expenses increased $461.4 million, primarily due to an increase in cost of interest credited,within Principal Funds relating to higher benefit payments, andcosts associated with an increase in reserves stemmingstaff and infrastructure needed to support the growth in the business and the impact from anthe WM Advisors, Inc. acquisition. In addition, a $108.6 million increase from the Global Asset Management segment, primarily in sales relatedour fee mandate business, was due to our payout annuities with life contingencies.continued growth in staff and staff-related costs as a result of continued growth in AUM and the acquisitions of Edge Asset Management and Morley Financial Services.
Income Taxes
Dividends to policyholders decreased $2.3 million, or 1%, to $290.7 millionThe effective income tax rates were 20% and 22% for the years ended December 31, 2007 and 2006, respectively. The effective income tax rate for the year ended December 31, 2006, from $293.0 million for the year ended December 31, 2005. The decrease2007, was due to a $4.1 million decrease fromlower than the U.S. Asset Management and Accumulation segment related to our participating pension full-service accumulation products. The lower dividends werestatutory rate primarily due to lower dividend payouts stemming from a lower interest rate environment and a dividend reserve methodology change implemented in the second quarter of 2006. Partially offsetting the decrease was a $1.8 million increase in dividends to policyholders from the Life and Health Insurance segment related to the dividend scale changes effective in February 2006.
Operating expenses increased $216.6 million, or 9%, to $2,558.7 million for the year ended December 31, 2006, from $2,342.1 million for the year ended December 31, 2005. The increase reflected a $124.7 million increase from the U.S. Asset Management and Accumulation segment, primarily due to increases in staff related costs, management fees paid and DPAC amortization. The increase was also primarily due to a $39.7 million increase from the Life and Health Insurance segment primarily resulting from growth in our specialty benefits and insured medical businesses partially offset by lower DPAC amortization from the individual universal and variable universal life business. In addition, the increase reflected a $36.3 million increase from the Corporate and Other segment, primarily due to a contribution to the Principal Financial Group Foundation, Inc., an increase in interest expense related to issuance of corporate debt, and increased interest expense on federal income tax activities.
Income taxes increased $62.8 million, or 27%, to $295.0 milliondeductions allowed for the year ended December 31, 2006,corporate dividends received and interest exclusion from $232.2 million for the year ended December 31, 2005. The effective income tax rate was 22% for the year ended December 31, 2006, and 21% for the year ended December 31, 2005.taxable income. The effective income tax rate for the year ended December 31, 2006, was lower than the corporate income taxU.S. statutory rate of 35% primarily due to income tax deductions allowed for corporate dividends received, interest exclusion from taxable income and tax refinements in Mexico and Chile. The effective income tax rate for the year ended December 31, 2005 was lower than the corporate income tax rate of 35% primarily due to income tax deductions allowed for corporate dividends received, tax credits on our investment in a synthetic fuel production facility, and interest exclusion from taxable income.
As a result of the foregoing factors and the inclusion of income from discontinued operations, net of related income taxes, net income increased $145.3 million, or 16% to $1,064.3 million for the year ended December 31, 2006, from $919.0 million for the year ended December 31, 2005. In 2006, the income from discontinued operations was related to our sale of certain real estate properties previously held for investment purposes. In 2005, the income from discontinued operations was related to gains on the sales and operating revenues of real estate properties that qualify for discontinued operations treatment and changes to the estimated loss on the disposal of BT Financial Group partially offset by the negative impact of a change in the estimated gain from the discontinued operations for Principal Residential Mortgage, Inc.
Preferred stock dividends increased $15.3 million, or 86%, to $33.0 million for the year ended December 31, 2006, from $17.7 million for the year ended December 31, 2005. The preferred stock dividends increase was a result of issuing preferred stock in June 2005.
Net income available to common stockholders increased $130.0 million, or 14%, to $1,031.3 million for the year ended December 31, 2006, from $901.3 million for the year ended December 31, 2005.
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
Premiums and other considerations increased $265.0 million, or 7%, to $3,975.0 million for the year ended December 31, 2005, from $3,710.0 million for the year ended December 31, 2004. The increase was primarily due to a $170.5 million increase from the Life and Health Insurance segment, primarily related to strong sales and stable persistency in our specialty benefits business and higher premium per member in our health insurance business partially offset by a decline in premiums resulting from the continuation of a shift in marketing emphasis from individual traditional life insurance products to individual universal and variable universal life insurance products. The increase also reflected an $85.1 million increase from the U.S. Asset Management and Accumulation segment, primarily a result of an increase in premiums from single premium group annuities with life contingencies, which are typically used to fund defined benefit pension plan terminations. The premium income we receive from these contracts fluctuates due to the variability in the number and size of pension plan terminations in the market, the interest rate environment and our ability to attract new sales.
Fees and other revenues increased $226.1 million, or 15%, to $1,717.8 million for the year ended December 31, 2005, from $1,491.7 million for the year ended December 31, 2004. The increase was primarily due to a $194.1 million increase from the U.S. Asset Management and Accumulation segment primarily related to an increase in account values and assets under management, modest performance in the equity markets and our acquisitions of Principal Services Trust Company and Columbus Circle.
Net investment income increased $136.1 million, or 4%, to $3,360.1 million for the year ended December 31, 2005, from $3,224.0 million for the year ended December 31, 2004. The increase was primarily related to a $2,343.2 million, or 4%, increase in average invested assets and cash. The yield on average invested assets and cash was 5.8% for the years ended December 31, 2005 and 2004.
Net realized/unrealized capital losses decreased $93.6 million, or 89%, to $11.2 million for the year ended December 31, 2005, from $104.8 million for the year ended December 31, 2004. The decrease is due to fewer other than temporary impairments of fixed maturity securities ($90.2 million) including a $52.1 million recovery of previously impaired securities received as the result of a litigation settlement, fewer losses related to the mark to market of derivative activities ($56.8 million), and gains versus losses on mortgage loans and real estate ($24.5 million) offset in part by fewer mark to market gains on certain seed money investments ($30.4 million), fewer gains on the sales of other fixed maturity securities ($13.9 million), more credit losses related to the sales of fixed maturity securities ($23.3 million), and the impairment of an equity partnership interest ($14.4 million).
The following table highlights the contributors to net realized/unrealized capital gains and losses for the year ended December 31, 2005.
| | For the year ended December 31, 2005 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Impairments and credit losses | Other gains (losses) | Hedging adjustments | Net realized/unrealized capital gains (losses) | ||||||||||
| | (in millions) | |||||||||||||
| Fixed maturity securities(1) | $ | 16.6 | $ | 10.6 | $ | (45.8 | ) | $ | (18.6 | ) | ||||
| Fixed maturity securities, trading | — | (2.4 | ) | — | (2.4 | ) | ||||||||
| Equity securities(2) | (3.0 | ) | 9.9 | — | 6.9 | |||||||||
| Mortgage loans on real estate(3) | 1.3 | — | — | 1.3 | ||||||||||
| Derivatives | — | — | 17.2 | 17.2 | ||||||||||
| Other(4) | (14.4 | ) | 9.8 | (11.0 | ) | (15.6 | ) | |||||||
| Total | $ | 0.5 | $ | 27.9 | $ | (39.6 | ) | $ | (11.2 | ) | ||||
(1)Impairments include $28.6 million of credit impairment write-downs and $74.0 million in realized credit recoveries on the sale of previously impaired assets. Credit losses include $2.0 million in realized gains and $30.8 million in realized losses related to credit triggered sales. Other gains (losses) include $16.2 million in net gains as the result of prepayment activity, gross realized gains of $21.5 million and gross realized losses of $27.1 million. Included in the $27.1 million of losses is an $11.0 million loss related to a large investment that was called from us in September.(2)Impairments include $3.0 million of credit impairment write-downs. Other gains (losses) include $9.3 million in mark to market of net realized/unrealized gains on trading equity securities, gross realized gains of $3.1 million and gross realized losses of $2.5 million.(3)Impairments include $6.3 million in realized losses due to the sale of commercial mortgage loans and a $7.6 million decrease in the commercial mortgage valuation allowance.(4)Impairments include $14.4 million in realized losses related to an equity partnership interest. Other gains (losses) include $11.8 million in mark to market of net realized/unrealized gains on certain seed money investments.
Benefits, claims and settlement expenses increased $323.4 million, or 7%, to $5,282.9 million for the year ended December 31, 2005, from $4,959.5 million for the year ended December 31, 2004. The increase was primarily due to a $165.6 million increase from the U.S. Asset Management and Accumulation segment, primarily reflecting the increase in reserves resulting from an increase in sales of single premium group annuities with life contingencies and an increase in interest credited on our investment only block of business stemming from an increase in account values. The increase also reflected a $105.5 million increase from the Life and Health Insurance segment, primarily due to increased claim costs per medical member, an increase in medical members, and growth in the specialty benefits business.
Dividends to policyholders decreased $3.7 million, or 1%, to $293.0 million for the year ended December 31, 2005, from $296.7 million for the year ended December 31, 2004. The decrease was primarily due to a $3.3 million decrease from the Life and Health Insurance segment, resulting from a declining interest rate environment.
Operating expenses increased $156.5 million, or 7%, to $2,342.1 million for the year ended December 31, 2005, from $2,185.6 million for the year ended December 31, 2004. The increase reflected a $160.4 million increase from the U.S. Asset Management and Accumulation segment, primarily due to growth in our asset management business, an increase in compensation costs and due to our acquisitions of Principal Services Trust Company and Columbus Circle.
Income taxes increased $54.0 million, or 30%, to $232.2 million for the year ended December 31, 2005, from $178.2 million for the year ended December 31, 2004. The effective income tax rate was 21% for the year ended December 31, 2005, and 20% for the year ended December 31, 2004. The effective income tax rates for the year ended December 31, 2005 and 2004, were lower than the corporate income tax rate of 35% primarily due to income tax deductions allowed for corporate dividends received, tax credits on our investment in a synthetic fuel production facility, and interest exclusion from taxable income.
As a result of the foregoing factors and the inclusion of income from discontinued operations and the cumulative effect of accounting change, net of related income taxes, net income increased $93.4 million, or 11%, to $919.0 million for the year ended December 31, 2005, from $825.6 million for the year ended December 31, 2004. The income from discontinued operations for the year ended December 31, 2005, was related to gains on the sales and operating revenues of real estate properties that qualify for discontinued operations treatment and changes to the estimated loss on the disposal of BT Financial Group partially offset by the negative impact of a change in the estimated gain from the discontinued operations for Principal Residential Mortgage, Inc. The income from discontinued operations for the year ended December 31, 2004, was related to our sale of Principal Residential Mortgage, Inc., the sale of our Argentine companies, and operating revenues of real estate properties that qualify for discontinued operations treatment. The cumulative effect of accounting change was related to our implementation of Statement of Position 03-1Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long Duration Contracts and for Separate Accounts in 2004.
Preferred stock dividends were $17.7 million for the year ended December 31, 2005, with no corresponding activity for the year ended December 31, 2004.
Net income available to common stockholders increased $75.7 million, or 9%, to $901.3 million for the year ended December 31, 2005, from $825.6 million for the year ended December 31, 2004.
Results of Operations by Segment
We use segment operating earnings, which exclude the effect of net realized/unrealized capital gains and losses, as adjusted, and other after-tax adjustments, for goal setting, determining employee compensation, and evaluating performance on a basis comparable to that used by securities analysts. Segment operating earnings are determined by adjusting U.S. GAAP net income available to common stockholders for net realized/unrealized capital gains and losses, as adjusted, and other after-tax adjustments we believe are not indicative of overall operating trends. Note that after-tax adjustments have occurred in the past and could recur in future reporting periods. While these items may be significant components in understanding and assessing our consolidated financial performance, we believe the presentation of segment operating earnings enhances the understanding of ourFor results of operations by highlightingsegment see Item 8. "Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 19, Segment Information."
U.S. Asset Accumulation Segment
U.S. Asset Accumulation Trends
Account values are a key indicator of earnings attributablegrowth for the segment, as account values are the base by which the segment generates its fee and spread-based profits. Net cash flow and market performance are the two main drivers of account value growth. Net cash flow reflects the segment's ability to attract and retain client deposits. Market performance reflects not only the normal, ongoing operationsequity market performance, but also the investment performance of fixed income investments supporting our businesses.spread business. The percentage growth in earnings of the segment should generally track the percentage growth in account values. This trend may vary due to changes in business and/or product mix.
The following table presents segment information as of orthe U.S. Asset Accumulation account value rollforward for the years ended December 31, 2006, 2005 and 2004:indicated:
| | As of or for the year ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2006 | 2005 | 2004 | ||||||||
| | (in millions) | ||||||||||
| Operating revenues by segment | |||||||||||
| U.S. Asset Management and Accumulation | $ | 4,511.6 | $ | 4,133.8 | $ | 3,761.6 | |||||
| International Asset Management and Accumulation | 605.4 | 604.5 | 518.4 | ||||||||
| Life and Health Insurance | 4,736.2 | 4,387.5 | 4,181.3 | ||||||||
| Corporate and Other(1) | (27.4 | ) | (59.1 | ) | (23.0 | ) | |||||
| Total segment operating revenues | 9,825.8 | 9,066.7 | 8,438.3 | ||||||||
| Add: | |||||||||||
| Net realized/unrealized capital gains (losses), including recognition of front-end fee revenues and certain market value adjustments to fee revenues(2) | 44.2 | (22.2 | ) | (114.9 | ) | ||||||
| Subtract: | |||||||||||
| Operating revenues from discontinued real estate investments | (0.5 | ) | 2.8 | 2.5 | |||||||
| Total revenue per consolidated statements of operations | $ | 9,870.5 | $ | 9,041.7 | $ | 8,320.9 | |||||
Operating earnings (loss) by segment, net of related income taxes: | |||||||||||
| U.S. Asset Management and Accumulation | $ | 645.1 | $ | 538.4 | $ | 499.0 | |||||
| International Asset Management and Accumulation | 71.8 | 71.0 | 40.3 | ||||||||
| Life and Health Insurance | 282.5 | 274.4 | 256.2 | ||||||||
| Mortgage Banking(3) | — | — | (10.3 | ) | |||||||
| Corporate and Other | (27.3 | ) | (21.4 | ) | (20.4 | ) | |||||
| Total segment operating earnings, net of related income taxes | 972.1 | 862.4 | 764.8 | ||||||||
| Net realized/unrealized capital gains (losses), as adjusted(2) | 18.0 | (20.6 | ) | (62.3 | ) | ||||||
| Other after-tax adjustments(4) | 41.2 | 59.5 | 123.1 | ||||||||
| Net income available to common stockholders per consolidated statements of operations | $ | 1,031.3 | $ | 901.3 | $ | 825.6 | |||||
Assets by segment: | |||||||||||
| U.S. Asset Management and Accumulation(5) | $ | 117,950.0 | $ | 103,506.1 | $ | 94,394.6 | |||||
| International Asset Management and Accumulation | 8,101.0 | 6,856.2 | 3,642.0 | ||||||||
| Life and Health Insurance | 14,364.5 | 14,080.2 | 13,185.4 | ||||||||
| Corporate and Other(6) | 3,242.6 | 2,592.9 | 2,576.1 | ||||||||
| Total consolidated assets | $ | 143,658.1 | $ | 127,035.4 | $ | 113,798.1 | |||||
| | For the year ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2008 | 2007 | 2006 | |||||||
| | (in billions) | |||||||||
Account values, beginning of period | $ | 180.8 | $ | 163.3 | $ | 120.3 | ||||
Net cash flow | 5.0 | 6.7 | 6.9 | |||||||
Credited investment performance | (37.6 | ) | 10.3 | 13.0 | ||||||
Other | (2.1 | ) | 0.5 | 23.1 | (1) | |||||
Account values, end of period | $ | 146.1 | $ | 180.8 | $ | 163.3 | ||||
- (1)
- Includes
inter-segment eliminations primarily related$22.5 billion relating tointernal investment management fee revenues and commission fee revenues paid to U.S. Asset Management and Accumulation agents for selling Life and Health Insurance segment insurance products. (2)In addition to sales activity and other than temporary impairments, net realized/unrealized capital gains (losses) include unrealized gains (losses) on mark to market changes in certain seed money investments and investments classified as trading securities, as well as unrealized gains (losses) on certain derivatives. Net realized/unrealized capital gains (losses), as adjusted, are net of income taxes, net realized capital gains and losses distributed, minority interest capital gains and losses, related changes intheamortization pattern of
deferred policy acquisition and sales inducement costs, recognition of front-end fee revenues for sales charges on pension products and services and certain market value adjustments to fee revenues.
| | For the year ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2006 | 2005 | 2004 | ||||||||
| | (in millions) | ||||||||||
| Net realized/unrealized capital gains (losses) | $ | 44.7 | $ | (11.2 | ) | $ | (104.8 | ) | |||
| Certain market value adjustments to fee revenues | (1.3 | ) | (12.1 | ) | (8.0 | ) | |||||
| Recognition of front-end fee revenues | 0.8 | 1.1 | (2.1 | ) | |||||||
| Net realized/unrealized capital gains (losses), including recognition of front-end fee revenues and certain market value adjustments to fee revenues | 44.2 | (22.2 | ) | (114.9 | ) | ||||||
| Amortization of deferred policy acquisition and sales inducement costs related to net realized capital gains (losses) | 5.4 | (0.7 | ) | 6.2 | |||||||
| Capital gains distributed | (11.8 | ) | (5.8 | ) | (4.4 | ) | |||||
| Minority interest capital gains | (7.7 | ) | (2.5 | ) | (0.3 | ) | |||||
| Net realized/unrealized capital gains (losses), including recognition of front-end fee revenues and certain market value adjustments to fee revenues, net of related amortization of deferred policy acquisition costs and sales inducement costs, capital gains distributed, and minority interest capital gains | 30.1 | (31.2 | ) | (113.4 | ) | ||||||
| Income tax effect | (12.1 | ) | 10.6 | 51.1 | |||||||
| Net realized/unrealized capital gains (losses), as adjusted | $ | 18.0 | $ | (20.6 | ) | $ | (62.3 | ) | |||
(3)Corporate overhead allocated to our Mortgage Banking segment does not qualify for discontinued operations treatment and was included in our results of continuing operations and segment operating earnings prior to July 1, 2004.(4)For the year endedDecember 31, 2006,other after-tax adjustmentsacquisition of$41.2 million included (1) the positive effects of: income from discontinued operations related to (a) a gain on the sale of a real estate property that qualifies for discontinued operations treatment ($30.9 million) and (b) a favorable court ruling on a contested IRS issue for 1991 and later years ($18.8 million) and (2) the negative effect of a contribution to the Principal Financial Group Foundation,WM Advisors, Inc.($8.5 million). For the year ended December 31, 2005, other after-tax adjustments of $59.5 million included (1) the positive effects of: (a) a release of income tax reserves related to IRS tax matters ($33.8 million); (b) gains on sales of real estate properties that qualify for discontinued operations treatment ($22.3 million) and (c) a change in the estimated loss on disposal of BT Financial Group ($8.4 million) and (2) the negative effect from a change in the estimated gain on disposal of Principal Residential Mortgage, Inc. ($5.0 million). For the year ended December 31, 2004, other after-tax adjustments of $123.1 million included (1) the positive effects of: (a) the discontinued operations and estimated gain on disposal of Principal Residential Mortgage, Inc. ($118.8 million) and (b) the discontinued operations and estimated gain on disposal of our Argentine companies ($10.0 million) and (2) the negative effect from a cumulative change in accounting principle related to the implementation of SOP 03-1 ($5.7 million).(5)U.S. Asset Management and Accumulation separate account assets include shares of the Principal Financial Group stock allocated to a separate account, a result of our demutualization. The value of the separate account was $768.4 million, $726.6 million, and $782.8 million at December 31, 2006, 2005, and 2004, respectively. Changes in the fair value of the separate account are reflected in both separate account assets and separate account liabilities.(6)Includes inter-segment elimination amounts related to an internal line of credit and internally generated mortgage loans. The Corporate and Other segment managed a revolving line of credit used by other segments. The U.S. Asset Management and Accumulation segment and Life and Health Insurance segment reported mortgage loan assets issued for real estate joint ventures. These mortgage loans were reported as liabilities in the Corporate and Other segment.
U.S. Asset Management and Accumulation Segment
Asset Accumulation Trends
Our sales of pension, institutional and other asset accumulation products and services in the U.S. have been affected by overall trends in the U.S. retirement services industry, as our customers rely less on defined benefit retirement plans,
social security and other government programs. Continuing trends in the work environment include a more mobile workforce and the desire of employers to shift the market risk of retirement investments to employees by offering defined contribution plans rather than defined benefit plans. The graying of the population and recent market volatility are also driving growing interest in products generating stable income during retirement. These trends are increasing the demand for defined contribution pension arrangements such as 401(k) plans, mutual funds, annuities and bank IRAs. The "baby-boom" generation of U.S. workers has reached an age at which saving for retirement is critical and it continues to seek increased retirement savings using additional tax-advantaged investment products for retirement. Considering these trends, asset accumulation account values increased as of December 31, 2006, primarily due to significant additional gross new deposits, solid performance of the equity markets and retention of assets from existing clients. The interest rate environment remained relatively low despite an increase in interest rates that was more pronounced at the shorter durations. The S&P 500 posted a 15.8% total return contributing to a strong increase in total account values and assets under management by the end of 2006.
The following table provides a summary of U.S. Asset Accumulation account values as of December 31, 2006, 2005 and 2004:
| As of | U.S. Asset Accumulation Total account values | ||
|---|---|---|---|
| | (in billions) | ||
| December 31, 2006 | $ | 163.3 | |
| December 31, 2005 | 120.3 | ||
| December 31, 2004 | 108.6 | ||
Asset Management Trends
Asset management services have been among the most profitable and rapidly growing sectors of the financial services industry, at both the retail and institutional level. We seek to take advantage of current trends, which indicate that both retail and institutional investors embrace specialization, providing increased fees to successful active managers with expertise in specialty and niche areas. We have experienced very good success in winning institutional asset management mandates and expect to see continued growth in this area. Our U.S. third-party assets under management increased $18.0 billion during 2006.
The following table provides a summary of Principal Global Investors' affiliated and third-party assets under management as of December 31, 2006, 2005 and 2004:
| | Principal Global Investors | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| As of | Affiliated assets under management | Third-party assets under management | Total assets under management | ||||||
| | (in billions) | ||||||||
| December 31, 2006 | $ | 132.3 | $ | 59.1 | $ | 191.4 | |||
| December 31, 2005 | 103.4 | 41.1 | 144.5 | ||||||
| December 31, 2004 | 97.0 | 29.4 | 126.4 | ||||||
U.S. Asset Management and Accumulation Segment Summary Financial Data
The following table presents certain summary financial data relating to the U.S. Asset Management and Accumulation segment for the years indicated:
| | For the year ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2006 | 2005 | 2004 | |||||||||
| | (in millions) | |||||||||||
| Operating Earnings Data: | ||||||||||||
| Operating revenues(1): | ||||||||||||
| Premiums and other considerations | $ | 462.3 | $ | 455.2 | $ | 370.1 | ||||||
| Fees and other revenues | 1,412.5 | 1,230.9 | 1,035.9 | |||||||||
| Net investment income | 2,636.8 | 2,447.7 | 2,355.6 | |||||||||
| Total operating revenues | 4,511.6 | 4,133.8 | 3,761.6 | |||||||||
| Expenses: | ||||||||||||
| Benefits, claims and settlement expenses, including dividends to policyholders | 2,392.1 | 2,265.3 | 2,099.8 | |||||||||
| Operating expenses | 1,288.4 | 1,167.9 | 1,014.2 | |||||||||
| Total expenses | 3,680.5 | 3,433.2 | 3,114.0 | |||||||||
| Operating earnings before income taxes | 831.1 | 700.6 | 647.6 | |||||||||
| Income taxes | 186.0 | 162.2 | 148.6 | |||||||||
| Operating earnings | 645.1 | 538.4 | 499.0 | |||||||||
| Net realized/unrealized capital losses, as adjusted | (23.1 | ) | (12.8 | ) | (97.1 | ) | ||||||
| Other after-tax adjustments | — | — | (5.0 | ) | ||||||||
| U.S. GAAP Reported: | ||||||||||||
| Net income available to common stockholders | $ | 622.0 | $ | 525.6 | $ | 396.9 | ||||||
(1)Excludes net realized/unrealized capital losses and their impact on recognition of front-end fee revenues and certain market value adjustments to fee revenues.
- (1)
- Includes acquisition of Morley Financial Services in 2007 and acquisition of WM Advisors, Inc. in 2006.
- (1)
- Other increases to AUM include $2.2 billion from our SBB acquisition in Malaysia in 2007.
(1)Excludes net realized/unrealized capital gains.- (1)
- Includes separate account liabilities for policies with variable investment options.
(1)Excludes net realized/unrealized capital losses.(1)Excludes net realized/unrealized capital gains (losses).•- of (i) 10% of Principal Life's statutory policyholder surplus as of the previous
year-end;year-end or •- (ii) the statutory net gain from operations from the previous calendar year.
(1)Book Value Out: The amount equal to the sum of deposits less withdrawals with interest accrued at the contractual interest rate.(2)Market Value Out: The amount equal to the book value out plus a market value adjustment to adjust for changes in interest rates.- (1)
- Excludes short-term liabilities, other policyholder funds, taxes and short-term debt as these are not long-term and/or not contractual in nature. Also excludes obligations under our pension and other postretirement benefit plans as we do not anticipate contributions will be needed to satisfy the minimum funding requirements of ERISA for our
operations,qualified pension plan. In addition, separate account liabilities are excluded. Separate account liabilities represent the fair market value of funds that are separately administered by us. Generally, the separate account contract owner, rather than us, bears the investment risk of these funds. The separate account liabilities are legally segregated and are not subject to claims that arise out of any other business of ours. Net deposits, net investment income and realized and unrealized capital gains and losses on the separate accounts are not reflected in the consolidated statement of operations. The separate account obligations will be fully funded by cash flows from the separate account assets. - (2)
- Includes GICs, funding agreements, individual fixed annuities, universal life insurance and other investment-type contracts. See Item 8. "Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 11, Insurance Liabilities" for additional information.
Amounts included in the contractholder funds line item reflect estimated cash payments to be made to policyholders. The sum of the cash outflows shown for all years in the table exceeds the corresponding liability amount included in our consolidated financial statements as
well as satisfy interestof December 31, 2008. The liability amount in our consolidated financial statements reflects estimated cash payments to policyholders, assumptions with regard to the timing of cash payments andanydiscounting for interest. - (3)
- Amounts included in the future policy benefits and claims line item reflect estimated cash payments to be made to policyholders. The sum of the cash outflows shown for all years in the table exceeds the corresponding liability amount included in our consolidated financial statements as of December 31, 2008. The liability amount in our consolidated financial statements reflects estimated cash payments to policyholders, reductions for expected future premiums, assumptions with regard to the timing of cash payments and discounting for interest.
- (4)
- For long-term debt information, see Item 8. "Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 12, Debt."
- (5)
- Amounts included in the certificates of deposit line item reflect estimated cash payments to be made, including expected interest payments. Certificates of deposit are reported as other liabilities on our consolidated statement of financial position.
- (6)
- Other long-term liabilities include other liabilities reflected in the consolidated statement of financial position that are contractual, non-cancelable and long-term in nature. The total payments primarily related to
debt servicing.checking and savings deposits. This line item excludes accruals, short-term items and items not contractual in nature. - (7)
- As a lessee, we lease office space, data processing equipment and office furniture and equipment under various operating leases.
- (8)
- Purchase obligations include material contracts where we have a non-cancelable commitment to purchase goods and services in addition to commitments to originate loans and purchase investments.
•earnings to fixed charges before interest credited on investment products; and•earnings to fixed charges.(1)Excludes short-term liabilities, other policyholder funds, taxes and short-term debt as these are not long-term and/or not contractual in nature. Also excludes obligations under our pension and other postretirement benefit plans as benefit payments will be made under a funded plan and will not require company contributions or payments within a five-year period. In addition, separate account liabilities are excluded. Separate account liabilities represent the fair market value of funds that are separately administered by the Company. Generally, the separate account contract owner, rather than the Company, bears the investment risk of these funds. The separate account liabilities are legally segregated and are not subject to claims that arise out of any other business of the Company. Net deposits, net investment income and realized and unrealized capital gains and losses on the separate accounts are not reflected in the consolidated statement of operations. The separate account obligations will be fully funded by cash flows from the separate account assets.(2)Includes GICs, funding agreements (described below), individual fixed annuities, universal life insurance, and other investment-type contracts.(3)Amounts included in the future policy benefits and claims line item reflect estimated cash payments to be made to policyholders. The sum of the cash outflows shown for all years in the table exceeds the corresponding liability amount included in our consolidated financial statements as of December 31,2006. The liability amount in our consolidated financial statements reflects estimated cash payments to policyholders, reductions for expected future premiums, assumptions with regard to the timing of cash payments and discounting for interest.(4)The following are included in long-term debt:(5)Amounts included in the certificates of deposit line item reflect estimated cash payments to be made, including expected interest payments. Certificates of deposits are reported asotherliabilities on our consolidated statement of financial position.(6)Other long-term liabilities include other liabilities reflected in the consolidated statement of financial position that are contractual, non-cancelable and long-term in nature. This line item excludes accruals and short-term items in the amount of $3,209.4 million.(7)As a lessee, we lease office space, data processing equipment and office furniture and equipment under various operating leases.(8)Purchase obligations include material contractsentities where we have anon-cancelable commitmentvariable interest as described in Item 8. "Financial Statements and Supplementary Data, Notes topurchase goodsConsolidated Financial Statements, Note 5, Variable Interest Entities." We do not have a direct or contingent obligation related to our unconsolidated variable interest entities ("VIE") other than described below.Retained Interests in Securitized Assets. Previously, we, along with other contributors, sold commercial mortgage loans in securitization transactions to trusts. As these trusts are classified as qualifying special purpose entities, they are not subject to the VIE consolidation rules. We may retain interests in the securitization transactions. At December 31, 2008 and
services in addition2007, the fair values of retained interests related tocommitmentsthe securitizations of commercial mortgage loans were $133.2 million and $315.8 million, respectively. The investors and the securitization entities have no recourse tooriginate loansour assets for failure of debtors to pay when due. The value of our retained interests is subject primarily to credit risk. During the third quarter of 2008, we made a decision to terminate our commercial mortgage securities issuance operation.Guarantees and
purchase investments.- •
- Level 1 — Fair values are based on unadjusted quoted prices in active markets for identical assets or liabilities. Our Level 1 assets and liabilities primarily include exchange traded equity securities, mutual funds and U.S. Treasury bonds. Prices are obtained from readily available sources for market transactions involving identical assets or liabilities.
- •
- Level 2 — Fair values are based on inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly. Observable inputs include market prices for identical or similar assets or liabilities and other market observable inputs such as interest rate, credit spread and foreign currency exchange rates observable in the marketplace or derived from market transactions. Our Level 2 assets and liabilities primarily include fixed maturity securities (including public and private bonds), equity securities, over-the-counter derivatives and other investments. These
agreementsfair values are generallyexpireobtained from third-party pricing services or determined through2019. The maximum exposure under these agreementsthe use of valuation models or methodologies, including matrix pricing, using substantially all observable inputs. Prices are validated through an investment analyst review process including direct interaction with external sources, recent trade activity or through the use of internal models. - •
- Level 3 — Fair values are based on at least one significant unobservable input for the asset or liability and as a result considerable judgment may be used in determining the fair values. Our Level 3 assets and liabilities include certain fixed maturity securities, private equity securities, complex derivatives and embedded derivatives. These fair values are generally obtained through the use of valuation models or methodologies using a significant unobservable input or broker quote. In circumstances where broker quotes are used to value an instrument we generally receive one non-binding quote. Fixed maturity securities and equity securities priced using broker quotes represent 0.9% of the total and all are classified as Level 3. Broker quotes are validated through an investment analyst review process including direct interaction with external sources, through the use of internal models or other relevant information.
- (1)
- Gains and
therefore havelosses for separate account assets do notaccruedimpact net income as the change in value of separate account assets is offset by a change in value of separate account liabilities. - (1)
- Impairments include $421.6 million of credit impairment write-downs and $23.1 million in realized credit recoveries on the sale of previously impaired assets. Credit losses include $13.7 million in realized losses related to credit triggered sales.
- (2)
- Impairments include $55.3 million of credit impairment write-downs and $9.1 million in realized credit recoveries on the sale of previously impaired assets.
- (3)
- Impairments include $27.8 million in realized losses due to the foreclosure of commercial mortgage loans and a $16.5 million increase in the commercial mortgage loan valuation allowance.
- (4)
- Derivatives include $526.8 million of net losses related to mark to market adjustments on derivatives used in fair value hedges of fixed maturity securities and $156.7 million of net losses related to mark to market adjustments on derivatives used in fair value hedges of liabilities. The remainder of the net loss resulted primarily from mark to market adjustments on derivatives not designated as hedging instruments, with the largest components being $121.0 million of net losses on credit default swaps, $56.1 million of net gains on interest rate swaps, $115.5 million of net gains on index options and the remainder relating to net gains from other risk management activities.
- (5)
- Impairments include $7.3 million in realized losses on the investment in a money market mutual fund. Other gains (losses) primarily include net losses related to mark to market adjustments on certain seed money investments. Hedging adjustments primarily include net gains on certain liabilities in fair value hedging relationships.
- (1)
- Impairments include $215.7 million of credit impairment write-downs and $8.4 million in realized credit recoveries on the sale of previously impaired assets. Certain fixed maturity securities moved into a loss position during the second quarter of 2007, and we determined that we did not have the ability and intent to hold these securities. As a result, we recognized impairment losses on these securities of $24.5 million, net of recoveries on the subsequent sale, primarily due to a change in interest rates. Credit losses include $32.3 million in realized losses and $2.0 million in realized gains related to credit triggered sales.
- (2)
- Impairments include $52.6 million of credit impairment write-downs and $1.3 million in realized credit recoveries on the sale of previously impaired assets.
- (3)
- Impairments include $2.7 million in realized gains that resulted from the sale of a commercial mortgage loan for which we had credit concerns and a $9.8 million increase in the commercial mortgage loan valuation allowance.
- (4)
- Derivatives include $153.5 million of net losses related to mark to market adjustments on derivatives used in fair value hedges of fixed maturity securities and $39.4 million of net gains related to mark to market adjustment on derivatives used in fair value hedges of liabilities. The remainder of the net loss resulted primarily from mark to market adjustments on derivatives not designated as hedging instruments, with the largest component being $81.1 million of net losses on credit default swaps and the remainder relating to net losses from other risk management activities.
- (5)
- Other gains (losses) include a $24.6 million realized gain on the sale of stock of an equity method investment. Hedging adjustments primarily include net losses on certain liabilities in fair value hedging relationships.
- •
- credit risk, relating to the uncertainty associated with the continued ability of a given obligor to make timely payments of principal and interest;
- •
- interest rate risk, relating to the market price and/or cash flow variability associated with changes in market yield
curves;curves and - •
- equity risk, relating to adverse fluctuations in a particular common stock.
- •
- material declines in the issuer's revenues or margins;
- •
- significant management or organizational changes;
- •
- significant uncertainty regarding the issuer's industry;
- •
- debt service coverage or cash flow ratios that fall below industry-specific thresholds;
- •
- violation of financial
covenants;covenants and - •
- other business factors that relate to the issuer.
(1)Includes a $238.0 million investment classified aswere rated anequity security for U.S. GAAP. The investment issuer engages in managing investment grade third party bond investments and HSBC paper. All non-HSBC paper has the ultimate benefit of price support protection provided by HSBC Bank, PLC. Since Principal Life Insurance Company has the senior priority in the issuer, we believe many third party bonds could be liquidated to satisfy our claim. While we calculate our exposure on a gross basis, the value we attribute to the underlying collateral is $125.0 million.(2)Includes approved counterparty limit. The actual and the stressed potential exposures are less than the approved limit.(3)MBIA Inc. exposure is predominately comprised of the guarantee of underlying securities that are rated"A-" equivalent or better by the rating agencieson a stand alone basis. The MBIA wrap guarantees performance in the event of default of the underlying securities bringing the combined rating to AAA.(1)Includes a $238.2 million investment classified as an equity security for U.S. GAAP. The investment issuer engages in managing investment grade third party bond investmentsandHSBC paper. All non-HSBC paper has the ultimate benefit of price support protection provided by HSBC Bank, PLC. Since Principal Life Insurance Company has senior priority in the issuer, we believe many third party bonds could be liquidated to satisfy our claim. While we calculate our exposure on a gross basis, the value we attribute to the underlying collateral is $125.0 million.(2)Includes approved counterparty limit. The actual and the stressed potential exposures are less than the approved limit.(3)MBIA Inc. exposure is predominately comprised of the guarantee of underlying securities which are rated "A-" equivalent or better by the rating agencies on a stand alone basis. The MBIA wrap guarantees performance in the event of a default of the underlying securities bringing the combined rating to AAA.- (1)
- Includes actual counterparty exposure.
(1)Includes 43maturity securities include 16 securities with an amortized cost of$505.8$135.1 million, gross gains of$9.6$2.3 million, gross losses of$2.2$7.4 million and a carrying amount of$513.2$130.0 million as of December 31,2006,2008, that are still pending a review and assignment of a rating by the SVO. Due to the timing of when fixed maturity securities are purchased, legal documents are filed and the review by the SVO is completed, there will always be securities in our portfolio that are unrated over a reporting period. In these instances, an equivalent rating is assigned based on our fixed income analyst's assessment.- (1)
- As of December 31, 2008, 56% of the 2006 vintage are rated AAA and
December 31, 2005.12% are rated AA, and 63% of the 2007 vintage are rated AAA and 18% are rated AA. - (1)
- The problem fixed maturity securities carrying amount is net of other than temporary impairment losses recorded as net realized capital losses in the consolidated statements of operations.
- (1)
- Includes exposure to Alt-a mortgage loans with an amortized cost of $67.3 million, gross unrealized losses of $17.3 million and a carrying amount of $50.0 million. The Alt-a portfolio has a weighted average rating of AA and 66% are 2005 and prior vintages.
- (2)
- This exposure is all related to sub-prime mortgage loans.
- (3)
- Includes exposure to sub-prime mortgage loans with an amortized cost of $66.4 million, gross unrealized gains of $0.1 million, gross unrealized losses of $46.6 million and a carrying amount of $19.9 million.
- (1)
- Includes exposure to Alt-a mortgage loans with an amortized cost of $78.7 million, gross unrealized gains of $0.4 million, gross unrealized losses
on our fixed maturity securities available-for-sale were $299.9of $4.1 million and$243.5a carrying amount of $75.0 million. All of these securities are rated AAA and 62% are 2005 and prior vintages. - (2)
- This exposure is all related to sub-prime mortgage loans.
- (3)
- Includes exposure to sub-prime mortgage loans with an amortized cost of $79.1 million,
asgross unrealized losses ofDecember 31, 2006$28.8 million and2005, respectively.a carrying amount of $50.3 million. - •
- providing strong risk-adjusted relative value in comparison to other investment alternatives;
- •
- enhancing total
returns;returns and - •
- providing strategic portfolio diversification.
- (1)
- Includes three mortgages held within the Global Asset Management segment as of December 31, 2008 and two mortgages held within the Global Asset Management segment as of December 31, 2007. One of these loans totaling $26.0 million was in foreclosure as of December 31, 2008, and one mortgage loan totaling $13.0 million was in
- (2)
- Potential problem commercial mortgages include $48.0 million in mortgages held by the Global Asset Management segment at December 31, 2008, and $14.5 million at December 31, 2007.
- (3)
- Includes one mortgage held within the Global Asset Management segment totaling $5.5 million at December 31, 2008, and $8.1 million at December 31, 2007.
(1)Problem commercial mortgages include mortgage loans in foreclosure of $10.6 million as of December 31, 2006. This is the same mortgage loan that was in foreclosure as of December 31, 2005.- •
- rebalance our existing asset or liability portfolios;
- •
- control the risk structure of newly acquired assets and
liabilities;liabilities or - •
- use derivative instruments to modify the market risk characteristics of existing assets or liabilities or assets expected to be purchased.
- (1)
- Based on maturity date of swap.
- (2)
- Based on
option date of swaption.
maturity date. - (3)
- Based on
maturity date. (4)Based on settlementoption date.- •
- establishing exposure limits which 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;
- •
- limiting exposure to A+ credit or better;
- •
- conducting stress-test analysis to determine the maximum exposure created during the life of a prospective transaction;
- •
- implementing credit support annex (collateral) agreements with selected counterparties to further limit counterparty
exposures;exposures and - •
- daily monitoring of counterparty credit ratings.
- •
- the fair value of investments in the
assets exchanged. However, APB 29 provided an exception that allowed certain exchangesabsence ofsimilar productive assets to be recorded at book value. SFAS 153 amends APB 29 to eliminate this exception and requires non-monetary exchanges that meet certain criteria to be accounted for at fair value. We adopted SFAS 153 and are applying its guidelines to nonmonetary exchanges occurring on or after July 1, 2005.On March 9, 2004, the SEC Staff issued SAB No.105,quoted market values;Application of Accounting Principles to Loan Commitments - •
- investment impairments;
("SAB 105"), in which the SEC Staff expressed their view that - •
- the fair value of
recorded loan commitments, including interest rate lock commitments ("IRLCs"),and accounting for derivatives; - •
- the liability for contractholder funds and future policy benefits and claims;
- •
- the capitalization and amortization of DPAC;
- •
- the value of our pension and other postretirement benefit obligations;
- •
- accounting for income taxes and the valuation of deferred tax assets; and
- •
- the measurement of goodwill, indefinite lived intangible assets, finite lived intangible assets and related impairments, if any.
- (a)
- a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, including those denominated in a foreign currency ("fair
value" hedge)value hedge"); - (b)
- a hedge of a forecasted transaction or the exposure to variability of cash flows to be received or paid related to a recognized asset or liability, including those denominated in a foreign currency ("cash
flow" hedge)flow hedge"); - (c)
- a hedge of a net investment in a foreign operation; or
- (d)
- a derivative not designated as a hedging instrument.
(1)The 2004 summary results of operations information is for the six months ended prior to the July 2, 2004, sale of PI Argentina and, accordingly, there is no statement of operations data to present subsequent to the date of the sale.(1)The 2004 summary results of operations information is for the six months ended prior to the July 1, 2004, sale of Principal Residential Mortgage, Inc. and, accordingly, there is no statement of operations data to present subsequent to the date of the sale.- (1)
- Excludes net unrealized gains (losses) on fixed maturities, available-for-sale included in fair value hedging relationships.
(1)Due to the January 1, 2004 adoption of SOP 03-1, we reclassified $30.3 million of sales inducements from DPAC to other assets.*The discount rate used to calculate the benefit expense for the first three quarters of 2004 expense related to the home office pension and other postretirement benefit plans and retiree medical plans was 6.25%. The discount rate used to calculate the benefit expense for the last quarter of 2004 was 6.50%. The change in rates occurred due to the third quarter 2004 remeasurement for the Principal Residential Mortgage, Inc. divestiture and Medicare Modernization Act. A remeasurement did not occur on the agents and managers pension and other non-medical postretirement benefit plans.- •
- Obtain a reasonable long-term return consistent with the level of risk assumed and at a cost of operation within prudent levels. Performance benchmarks are monitored.
- •
- Ensure sufficient liquidity to meet the emerging benefit liabilities for the plan.
- •
- Provide for diversification of assets in an effort to avoid the risk of large losses and maximize the investment return to the pension plan consistent with market and economic risk.
- •
- Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities. Our Level 1 assets and liabilities primarily include exchange traded equity securities, mutual funds and highly liquid U.S. Treasury bonds.
- •
- Level 2 — Inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly. Our Level 2 assets and liabilities primarily include fixed maturity securities (including public and private bonds), equity securities, over-the-counter derivatives and other investments for which public quotations are not available but that are priced by third-party pricing services or internal models using observable inputs.
- •
- Level 3 — Significant unobservable inputs for the asset or liability. Our Level 3 assets and liabilities include certain fixed maturity securities, private equity securities, complex derivatives and embedded derivatives that must be priced using broker quotes or other valuation methods that utilize significant unobservable inputs.
- (1)
- The fair value of our derivative instruments classified as assets and liabilities at December 31, 2008, was $1,877.8 million and $2,139.1 million, respectively. Within the consolidated statements of financial position, derivative assets are reported with other investments and derivative liabilities are reported with other liabilities.
- (2)
- Primarily includes seed money investments reported at fair value.
- (3)
- Includes short-term investments with a maturity date of three months or less when purchased.
- (4)
- Includes bifurcated embedded derivatives that are reported at fair value within the same line item in the consolidated statements of financial position in which the host contract is reported.
- (1)
- Both realized gains (losses) and mark-to-market unrealized gains (losses) for the year ended December 31, 2008, are generally reported in net realized capital gains (losses) within the consolidated statements of operations. Gains and losses for separate account assets do not impact net income as the change in value of separate account assets is offset by a change in value of separate account liabilities.
- (2)
- Certain embedded derivatives reported in other liabilities are part of a cash flow hedge, with the effective portion of the unrealized gains (losses) recorded in accumulated other comprehensive income.
- (1)
- Net realized capital gains (losses), as adjusted, is derived as follows:
- (2)
- In 2008, other after-tax adjustments of $(12.3) million included (1) the negative effect of losses associated with our terminated commercial mortgage securities issuance operation that has been exited but does not qualify for
- (3)
- The amounts in periods prior to 2007 were not material.
- (1)
- Reflects inter-segment revenues of $225.0 million, $229.2 million and $169.0 million in 2008, 2007 and 2006, respectively. These revenues are eliminated within the Corporate segment.
(1)The Employee Stock Purchase Plan, the Stock Incentive Plan, the Long-Term Performance Plan and the Directors Stock Plan were each approvedis incorporated herein bythe Company's sole stockholder, Principal Mutual Holding Company, prior to the Company's initial public offering of Common Stock on October 22, 2001. The 2005 Stock Incentive Plan and the 2005 Directors Stock Plan were each approved by the Company's stockholders on May 17, 2005.(2)Includes 8,376,213 options outstanding under the employee stock incentive plans, 99,775 options outstanding under the directors stock plans, 793,149 performance shares under the employee stock incentive plans, 816,944 restricted stock units under the employee stock incentive plans, 18,712 restricted stock units under the directors stock plans, 61,670 units deferred in shares of Common Stock under the Long-Term Performance Plan, and 24,668 other stock-based awards under the Directors 2005 Stock Plan for obligations under the Deferred Compensation Plan for Non-Employee Directors of Principal Financial Group, Inc.(3)The weighted-average exercise price relates only to outstanding stock options, not to outstanding performance shares, restricted stock units, units deferred in shares of Common Stock under the Long-Term Performance Plan, or other stock-based awards.(4)This number includes 3,322,616 shares remaining for issuance under the Employee Stock Purchase Plan, 21,227,757 shares available for issuance in respect of future awards of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, and other stock-based awards under the 2005 Stock Incentive Plan and 433,477 shares available for issuance in respect of future awards of stock options, restricted stock, restricted stock units, and other stock-based awards under the 2005 Directors Stock Plan.- a.
- Documents filed as part of this report.
- 1.
- Financial Statements (see Item 8. Financial Statements and Supplementary Data)
- 2.
- Report of Independent Registered Public Accounting Firm on Schedules
Schedule I — Summary of Investments — Other Than Investments in Related Parties
Schedule II — Condensed Financial Information of Registrant (Parent Only)
Schedule III — Supplementary Insurance Information
Schedule IV — Reinsurance - 3.
- Exhibits — Please refer to the Exhibit Index on page 206.
(1)Incorporated by reference to exhibit filed with Principal Financial Group, Inc.'s Registration Statement on Form S-1, as amended (Commission File No. 333-62558).(2)Incorporated by reference to exhibit filed with Principal Financial Group, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 (Commission File No. 1-16725).(3)Incorporated by reference to exhibit filed with Principal Financial Group, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 (Commission File No. 1-16725).(4)Incorporated by reference to exhibit filed with Principal Financial Group, Inc.'s Current Report on Form 8-K filed on June 17, 2005 (Commission File No. 1-16725).(5)Incorporated by reference to exhibit filed with Principal Financial Group, Inc.'s Current Report on Form 8-K filed on October 16, 2006 (Commission File No. 1-16725).(6)Incorporated by reference to exhibit filed with Principal Financial Group, Inc.'s Current Report on Form 8-K filed on December 6, 2006 (Commission File No. 1-16725).(7)Incorporated by reference to the exhibit filed with Principal Financial Group, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2002 (Commission File No. 1-16725).(8)Incorporated by reference to exhibit filed with Principal Financial Group, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2004 (Commission File No. 1-16725).(9)Incorporated by reference to exhibit filed with Principal Financial Group, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 (Commission File No. 1-16725).(10)Incorporated by reference to exhibit filed with Principal Financial Group, Inc.'s Current Report on Form 8-K filed on March 7, 2005 (Commission File No. 1-16725).(11)Incorporated by reference to exhibit filed with Principal Financial Group, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005 (Commission File No. 1-16725).(12)Incorporated by reference to exhibit filed with Principal Financial Group, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 (Commission File No. 1-16725).(13)Incorporated by reference to the written description of such arrangement included in Principal Financial Group, Inc.'s Current Report on Form 8-K filed on August 28, 2006 (Commission File 1-16725).(14)Incorporated by reference to exhibit filed with Principal Financial Group, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2005 (Commission File No. 1-16725).(15)Incorporated by reference to exhibit filed with Principal Group, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 (Commission File No. 1-16725).(16)Incorporated by reference to exhibit filed with Principal Financial Group, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006 (Commission File No. 1-16725).(17)Incorporated by reference to exhibit filed with Principal Financial Group, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 (Commission File No. 1-16725).- (1)
- The amount shown in the Statement of Financial Position for mortgage loans differs from cost as mortgage loans are generally reported at cost adjusted for amortization of premiums and accrual of discounts, computed using the interest method and net of valuation allowances.
- (2)
- The amounts shown in the Statement of Financial Position for real estate differ from cost due to properties which were determined to be impaired. The cost bases of these properties are reduced to fair value. Real estate expected to be disposed is carried at the lower of cost or fair value, less cost to sell, with valuation allowances established.
- (3)
- The amount shown in the Statement of Financial Position for other investments differs from cost due to accumulated earnings from minority interests in unconsolidated entities and properties owned jointly with venture partners and operated by the partners. Other investments also includes derivatives and certain seed money investments, which are reported at fair value.
- (1)
- Allocations of net investment income and certain operating expenses are based on a number of assumptions and estimates, and reported operating results would change by segment if different methods were applied.
- (1)
- Incorporated by reference to exhibit filed with Principal Financial Group, Inc.'s Registration Statement on Form S-1, as amended (Commission File No. 333-62558).
- (2)
- Incorporated by reference to exhibit filed with Principal Financial Group, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 (Commission File No. 1-16725).
- (3)
- Incorporated by reference to exhibit filed with Principal Financial Group, Inc.'s Quarterly Report on Form
10-Q10 Q for the quarter ended September 30, 2006 (Commission File No. 1-16725). - (4)
Filed herewith.Incorporated by reference to exhibit filed with Principal Financial Group, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2006 (Commission File No. 1-16725).- (5)
- Incorporated by reference to exhibit filed with Principal Financial Group, Inc.'s Current Report on Form 8-K filed on June 17, 2005 (Commission File No. 1-16725).
- (6)
- Incorporated by reference to exhibit filed with Principal Financial Group, Inc.'s Current Report on Form
8-K8 K filed on October 16, 2006 (Commission File No. 1-16725). - (7)
- Incorporated by reference to exhibit filed with Principal Financial Group, Inc.'s Current Report on Form
8-K8 K filed on December 6, 2006 (Commission File No. 1-16725). - (8)
- Incorporated by reference to the exhibit filed with Principal Financial Group, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2002 (Commission File No. 1-16725).
- (9)
- Incorporated by reference to exhibit filed with Principal Financial Group, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2004 (Commission File No. 1-16725).
- (10)
- Incorporated by reference to exhibit filed with Principal Financial Group, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 (Commission File No. 1-16725).
- (11)
- Incorporated by reference to exhibit filed with Principal Financial Group, Inc.'s Current Report on Form 8-K filed on March 7, 2005 (Commission File No. 1-16725).
- (12)
- Incorporated by reference to exhibit filed with Principal Financial Group, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005 (Commission File No. 1-16725).
- (13)
- Incorporated by reference to exhibit filed with Principal Financial Group, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 (Commission File No. 1-16725).
- (14)
- Incorporated by reference to the written description of such arrangement included in Principal Financial Group, Inc.'s Current Report on Form
8-K8 K filed on August 28, 2006 (Commission File 1-16725). - (15)
- Incorporated by reference to exhibit filed with Principal Financial Group, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008 (Commission File No. 1-16725).
- (16)
- Incorporated by reference to the exhibit filed with Principal Financial Group, Inc.'s Annual Report on Form
10-K10 K for the year ended December 31, 2005 (Commission File 1-16725). (16)(17)- Incorporated by reference to exhibit filed with Principal Financial Group, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 (Commission File No. 1-16725).
- (18)
- Incorporated by reference to exhibit filed with Principal Financial Group, Inc.'s Quarterly Report on Form 10 Q for the quarter ended March 31, 2006 (Commission File No. 1-16725).
(17)(19)- Incorporated by reference to exhibit filed with Principal Financial Group, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31,
20062008 (Commission File No. 1-16725). (18)(20)- Incorporated by reference to exhibit filed with Principal Financial Group, Inc.'s Current Report on Form 8-K filed on December 2, 2008 (Commission File No. 1-16725).
- (21)
- Incorporated by reference to exhibit filed with Principal Financial Group, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 (Commission File No. 1-16725).
- (22)
- Incorporated by reference to exhibit filed with Principal Financial Group, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008 (Commission File No. 1-16725).
- (23)
- Filed herewith.
| | For the year ended December 31, | Increase (decrease) | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2008 | 2007 | 2006 | 2008 vs. 2007 | 2007 vs. 2006 | |||||||||||||
| | (in millions) | |||||||||||||||||
Operating revenues: | ||||||||||||||||||
Premiums and other considerations | $ | 523.2 | $ | 710.8 | $ | 462.3 | $ | (187.6 | ) | $ | 248.5 | |||||||
Fees and other revenues | 1,455.1 | 1,691.4 | 1,105.9 | (236.3 | ) | 585.5 | ||||||||||||
Net investment income | 2,820.1 | 2,748.0 | 2,538.8 | 72.1 | 209.2 | |||||||||||||
Total operating revenues | 4,798.4 | 5,150.2 | 4,107.0 | (351.8 | ) | 1,043.2 | ||||||||||||
Expenses: | ||||||||||||||||||
Benefits, claims and settlement expenses, including dividends to policyholders | 2,711.5 | 2,812.6 | 2,392.1 | (101.1 | ) | 420.5 | ||||||||||||
Operating expenses | 1,417.4 | 1,510.1 | 1,040.8 | (92.7 | ) | 469.3 | ||||||||||||
Total expenses | 4,128.9 | 4,322.7 | 3,432.9 | (193.8 | ) | 889.8 | ||||||||||||
Operating earnings before income taxes | 669.5 | 827.5 | 674.1 | (158.0 | ) | 153.4 | ||||||||||||
Income taxes | 138.2 | 171.7 | 131.5 | (33.5 | ) | 40.2 | ||||||||||||
Operating earnings | $ | 531.3 | $ | 655.8 | $ | 542.6 | $ | (124.5 | ) | $ | 113.2 | |||||||
Year Ended December 31, 20062008 Compared to Year Ended December 31, 20052007
Operating Earnings
Operating earnings in our full service accumulation business decreased $95.1 million primarily due to a decrease in account values stemming from poor equity markets in 2008 and the shifts in mix of business. Furthermore, 2007 results benefited from the third quarter 2007 completion of a comprehensive assumption study, which resulted in the unlocking of our unearned revenue and DPAC assumptions and led to the recognition of a $30.1 million after-tax operating earnings benefit. To a lesser extent, operating earnings were reduced by a decline in the tax benefits associated with the dividend received deduction stemming from a declining equity environment. In addition, operating earnings in our Principal Funds business decreased $18.7 million primarily due to lower management fees stemming from a decrease in average account values due to the poor equity markets in 2008.
Operating Revenues
Premiums and other considerations increased $7.1in our full service payout business decreased $253.3 million or 2%, to $462.3 million for the year ended December 31, 2006, from $455.2 million for the year ended December 31, 2005. The increase resulted from a $44.9 million increase in individual payout annuity business primarily due to increased sales from certain distribution channels. Partially offsetting the overall increase was a $37.8 million decrease in full-service payout sales primarily related toof single premium group annuities with life contingencies,contingencies. The single premium group annuity product, which areis typically used to fund defined benefit plan terminations. The premium income receivedterminations, can generate large premiums from these contracts fluctuatesvery few customers and therefore tends to vary from period to period. Partially offsetting this decrease was a $65.7 million increase in premiums from our individual payout annuities business due to increased sales of annuities with life contingencies.
Fees in our full service accumulation business decreased $190.7 million primarily due to the variabilitythird quarter 2007 completion of a comprehensive assumption study, which resulted in the numberunlocking of our unearned revenue assumptions and sizeled to the recognition of pension plan terminations,previously deferred revenue in 2007. Furthermore, fees decreased due to a decline in account values stemming from poor equity markets in 2008 and shifts in the interest rate environmentmix of business. Fees in our Principal Funds
business decreased $65.2 million primarily due to lower management and the abilitydistribution fees stemming from a decrease in average account values due to attract new sales.poor equity markets in 2008.
FeesNet investment income increased primarily due to an $802.6 million increase in average invested assets and other revenues increased $181.6 million, or 15%, to $1,412.5 millioncash. Average annualized yield on invested assets and cash was 5.8% for both the yearyears ended December 31, 2006,2008 and 2007.
Total Expenses
Benefits, claims and settlement expenses decreased $252.8 million within our full service payout business primarily due to a decrease in single premium group annuity sales. In addition, our investment only business decreased $55.0 million primarily due to a decrease in cost of interest credited on this block of business resulting from $1,230.9a decrease in account values and lower crediting rates. Partially offsetting the decrease was a $190.4 million increase within our individual annuities business primarily due to an increase in cost of interest credited on fixed deferred annuities related to normal growth in the block and, to a lesser extent, an increase in reserves related to higher sales of individual payout annuities with life contingencies.
Operating expenses in our full service accumulation business decreased $101.0 million primarily due to the third quarter 2007 completion of a comprehensive assumption study, which resulted in the unlocking of our DPAC assumptions and led to the recognition of previously deferred expenses in 2007. Also contributing to lower operating expenses were decreases in normal DPAC amortization due to lower current period earnings and lower asset management expense stemming from a decrease in account values. Operating expenses decreased $34.8 million within Principal Funds primarily due to lower asset based expenses stemming from a decrease in average account values, which resulted from poor equity markets in 2008. Partially offsetting the overall decrease was a $48.8 million increase in our individual annuities business primarily due to increased DPAC amortization expense on variable annuities as a result of the negative equity market performance experienced throughout 2008 and, to a lesser extent, increased expenses related to the normal growth in the block of fixed annuities.
Income Taxes
The effective income tax rate for the yearsegment was 21% for both the years ended December 31, 2005. Full-service2008 and 2007. The effective income tax rates were lower than the U.S. statutory rate, primarily due to income tax deductions allowed for corporate dividends received and interest exclusion from taxable income.
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
Operating Earnings
Full service accumulation fees and other revenueoperating earnings increased $98.9$68.1 million primarily due to an increase in account values stemming from continuedsolid investment performance and strong net cash flow and strong performanceflows. In addition, the 2007 results benefited from the third quarter 2007 completion of a comprehensive assumption study, which resulted in the equity markets.unlocking of our unearned revenue and DPAC assumptions and led to the recognition of an operating earnings benefit of $30.1 million after-tax. Principal Global Investors fees and other revenuesFunds operating earnings increased $49.0$23.4 million primarily due to continued growth in management fees related to our real estate, fixedhigher net commission income and equity businesses. In addition, our mutual fund fees and other revenue contributed $29.0 million to the segment increase primarily due to higher management fees stemming from an increase in sales and an increase in average assets underaccount values.
Operating Revenues
Premiums in our full service payout business increased $140.0 million primarily due to an increase in sales of single premium group 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 tends to vary from period to period. Premiums in our individual payout annuities business increased $108.5 million primarily due to increased sales from certain distribution channels.
Fees in our Principal Funds business increased $346.0 primarily due to higher management and distribution fees stemming from an increase in average account values resulting from our December 31, 2006, acquisition of WM Advisors, Inc. Fees in our full service accumulation business increased sales.$208.6 million primarily due to a comprehensive assumption study that was completed during the third quarter 2007, which resulted in the unlocking of our unearned revenue and DPAC assumptions and led to the recognition of previously deferred revenue. Higher fees generated from the increase in account values also contributed to the increase.
Net investment income increased $189.1primarily due to a $3,097.4 million or 8%, to $2,636.8 million for the year ended December 31, 2006, from $2,447.7 million for the year ended December 31, 2005. The increase reflects an increase in the average invested assets and cash. Average annualized yield on invested assets and cash which was 5.9%5.8% for both the yearyears ended December 31, 2006, compared to 5.7% for the year ended December 31, 2005. In addition, the increase in net investment income resulted from a $1,860.3 million, or 4%, increase in average invested assets2007 and cash for the segment.2006.
Total Expenses
Benefits, claims and settlement expenses including dividendsincreased $195.9 million within our individual annuities business primarily due to policyholders, increased $126.8 million, or 6%, to $2,392.1 million for the year ended December 31, 2006, from $2,265.3 million for the year ended December 31, 2005. The increase primarily resulted from an $82.6 million increase in ourreserves related to higher sales of individual annuity business due to several factors, including an increase inpayout annuities. Also, as a result of a growing block of
individual annuities, cost of interest credited higheron fixed deferred annuities increased. In addition, in full service payout, benefit payments,reserves and an increase in reserves stemming from an increase inexpenses increased $141.9 million, primarily due to strong sales related to our payoutof single premium group annuities with life contingencies. In addition,Furthermore, our investment only benefits, claims and settlement expensesbusiness increased $68.9$81.9 million primarily due to an increase in cost of interest credited on this block of business as a result ofresulting from an increase in account values and an increase in the rate of interest credited, as a result of market
conditions. Partially offsetting the overall increase was a $35.2 million decrease in our full-service payout business as a result of decreased sales of single premium group annuities with life contingencies.higher crediting rates.
Operating expenses increased $120.5$305.5 million or 10%,within Principal Funds primarily due to $1,288.4 million for the year ended December 31, 2006, from $1,167.9 million for the year ended December 31, 2005. The increase primarily resulted from a $66.1 millionhigher costs associated with an increase in staff and infrastructure needed to support the growth in the business and the impact from the WM Advisors, Inc. acquisition. Operating expenses in our full-servicefull service accumulation operating expensesbusiness increased $120.9 million primarily due to a comprehensive assumption study that was completed during the third quarter 2007, which resulted in the unlocking of our unearned revenue and DPAC assumptions and led to the recognition of previously deferred expenses. Also contributing to the increase was growth in the business, which drove increases in staff related costs and management fees paid and DPAC amortization. In addition, Principal Global Investors operating expenses increased $27.8 million due to an increase in expenses associated with growth in average assets under management and, to a lesser extent, the fact that expenses associated with the origination of securitized mortgages are now expensed rather than deferred and recognized as a reduction in securitization revenue, as was the case prior to the U.S. Bank joint venture. Furthermore, individual annuity operating expenses increased $15.4 million primarily due to strong growth in our block of business.paid.
Income taxes increased $23.8 million, or 15%, to $186.0 million for the year ended December 31, 2006, from $162.2 million for the year ended December 31, 2005. The effective income tax rate for this segment was 22% for the year ended December 31, 2006, and 23% for the year ended December 31, 2005.Taxes
The effective income tax rates for the segment were 21% and 20% for the years ended December 31, 2007 and 2006, and 2005,respectively. The effective income tax rates were lower than the corporate income taxU.S. statutory rate, of 35%, as a result ofprimarily due to income tax deductions allowed for corporate dividends received and interest exclusion from taxable income.
AsGlobal Asset Management Segment
Global Asset Management Trends
While we have experienced success in winning institutional asset management mandates and expect to see continued growth in this area, the market conditions have impacted our overall AUM growth across all asset classes. Our third-party AUM decreased $17.0 billion during 2008 primarily as a result of market performance.
The following table provides a summary of Global Asset Management's affiliated and third-party AUM as of December 31, 2008, 2007 and 2006:
| | Principal Global Investors | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| As of | Affiliated AUM | Third-party AUM | Total AUM | |||||||
| | (in billions) | |||||||||
December 31, 2008 | $ | 119.7 | $ | 70.3 | $ | 190.0 | ||||
December 31, 2007 | 148.7 | 87.3 | 236.0 | |||||||
December 31, 2006 | 132.3 | 59.1 | 191.4 | |||||||
Global Asset Management Segment Summary Financial Data
AUM is a key indicator of earnings growth for our Global Asset Management segment, as AUM is the base by which we generate revenues. Net cash flow and market performance are the two main drivers of AUM growth. Net cash flow reflects our ability to attract and retain client deposits. Market performance reflects equity, fixed income and real estate market performance. The percentage growth in earnings of the segment will generally track with the percentage growth in AUM. This trend may vary due to changes in business and/or product mix.
The following table presents AUM rollforward for assets managed by Global Asset Management for the years indicated:
| | For the year ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2008 | 2007 | 2006 | |||||||
| | (in billions) | |||||||||
AUM, beginning of period | $ | 236.0 | $ | 191.4 | $ | 144.5 | ||||
Net cash flow | 3.3 | 15.8 | 12.8 | |||||||
Investment performance | (46.0 | ) | 12.5 | 13.7 | ||||||
Operations acquired (1) | — | 13.7 | 22.6 | |||||||
Other | (3.3 | ) | 2.6 | (2.2 | ) | |||||
AUM, end of period | $ | 190.0 | $ | 236.0 | $ | 191.4 | ||||
The following table presents certain summary financial data relating to the Global Asset Management segment for the years indicated:
| | For the year ended December 31, | Increase (decrease) | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2008 | 2007 | 2006 | 2008 vs. 2007 | 2007 vs. 2006 | |||||||||||||
| | (in millions) | |||||||||||||||||
Operating revenues: | ||||||||||||||||||
Fees and other revenues | $ | 577.3 | $ | 536.8 | $ | 392.7 | $ | 40.5 | $ | 144.1 | ||||||||
Net investment income | 21.2 | 36.1 | 34.8 | (14.9 | ) | 1.3 | ||||||||||||
Total operating revenues | 598.5 | 572.9 | 427.5 | 25.6 | 145.4 | |||||||||||||
Expenses: | ||||||||||||||||||
Total expenses | 453.2 | 414.4 | 314.7 | 38.8 | 99.7 | |||||||||||||
Operating earnings before income taxes | 145.3 | 158.5 | 112.8 | (13.2 | ) | 45.7 | ||||||||||||
Income taxes | 50.9 | 55.7 | 39.0 | (4.8 | ) | 16.7 | ||||||||||||
Operating earnings | $ | 94.4 | $ | 102.8 | $ | 73.8 | $ | (8.4 | ) | $ | 29.0 | |||||||
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
Operating Earnings
Operating earnings in our spread business decreased $5.6 million primarily due to lower earnings as a result of lower investment income and loan volumes in 2008 compared to 2007. Operating earnings in our fee mandate business decreased $2.8 million as a decline in borrower fees and transaction fees from our real estate line of business was partially offset by an increase in management and performance fee revenues.
Operating Revenues
Fees in our fee mandate business increased $44.1 million due to higher management fees and performance fees despite the adverse market conditions, which have dampened our overall growth. In addition to the acquisition of Morley Financial Services, we continued to see growth in management fees from our fixed income and equity lines of business, however, borrower fees and transaction fees have decreased due to lower real estate activity. Partially offsetting the fee mandate business increase is a decrease in our spread business of $3.6 million due to lower loan origination fees in 2008 compared to 2007.
Net investment income decreased $7.7 million in our spread business due to lower investment income earned on our loan portfolio. Net investment income decreased $7.2 million in our fee mandate business as a result of the foregoing factors, operating earningsdeclining interest rate environment.
Total Expenses
Total expenses increased $106.7$41.3 million or 20%,in our fee mandate business due to $645.1 milliongrowth in staff related costs, primarily as a result of incentive compensation paid on performance fees received during the fourth quarter of 2008, as well as the acquisition of Morley Financial Services in the third quarter of 2007.
Income Taxes
The effective income tax rate for the yearsegment was 35% for both the years ended December 31, 2006, from $538.4 million for the year ended December 31, 2005.
Net realized/unrealized capital losses, as adjusted, increased $10.3 million, or 80%, to $23.1 million for the year ended December 31, 2006, from $12.8 million for the year ended December 31, 2005. The increase in net realized losses was due to a $24.3 million recovery of previously impaired securities in 2005 as the result of litigation. In addition, the increase was due to fewer gains on commercial mortgages offset by fewer mark to market losses related to derivatives activities, the recovery of previously impaired securities as the result of a litigation claim received in 2006, more gains from the mark to market2008 and sales activities of equity securities, and fewer other than temporary declines in the value of certain fixed maturity securities.
As a result of the foregoing factors net income available to common stockholders increased $96.4 million, or 18%, to $622.0 million for the year ended December 31, 2006, from $525.6 million for the year ended December 31, 2005.2007.
Year Ended December 31, 20052007 Compared to Year Ended December 31, 20042006
Operating Earnings
Premiums and other considerationsOperating earnings increased $85.1$28.9 million or 23%, to $455.2 million for the year ended December 31, 2005, from $370.1 million for the year ended December 31, 2004. The increase primarily resulted from a $61.2 million increase in full-service payout sales of single premium group annuities with life contingencies, which are typically used to fund defined benefit plan terminations. The premium income received from these contracts fluctuates due to the variability in the number and size of pension plan terminations, the interest rate environment and the ability to attract new sales. In addition, individual fixed annuity premiums and other considerations increased $23.9 million due to increased sales from certain distribution channels and due to higher sales of larger sized contracts in 2005.
Fees and other revenues increased $195.0 million, or 19%, to $1,230.9 million for the year ended December 31, 2005, from $1,035.9 million for the year ended December 31, 2004. Full-service accumulation fees and other revenues increased $118.3 millionour fee mandate business primarily due to continued strong net cash flow, modest performance in the equity markets and our acquisition of Principal Services Trust Company. Also contributing to the overall increase was a $69.4 million increase in Principal Global Investors fees and other revenues, which was primarily due to our acquisition of Columbus Circle, higher real estate transaction fees,flows that drove an increase in assets underAUM.
Operating Revenues
Fees increased $142.6 million in our fee mandate business due to continued growth in management fees across all lines of business, as a result of growth in AUM, in addition to the acquisition of Edge Asset Management and an increase in loans securitized in 2005.Morley Financial Services.
Net investment income increased $92.1$1.5 million or 4%, to $2,447.7 million for the year ended December 31, 2005, from $2,355.6 million for the year ended December 31, 2004. The increase reflects a $1,749.6 million, or 4%, increase in average invested assets and cash for the segment. The average annualized yield on invested assets and cash was 5.7% for the years ended December 31, 2005 and 2004.
Benefits, claims and settlement expenses, including dividends to policyholders, increased $165.5 million, or 8%, to $2,265.3 million for the year ended December 31, 2005, from $2,099.8 million for the year ended December 31, 2004. The increase primarily resulted from a $73.4 million increase in our full-service payoutfee mandate business due to earnings on cash and other investments.
Total Expenses
Total expenses increased $99.2 million in our fee mandate business due to growth in staff and staff related costs as a result of increased sales of single premium group annuities with life contingencies. Also contributing to the increase was a $68.5 million increase in investment-only business due primarily to an increase in interest credited on this block of business stemming from higher account values. In addition, individual annuity benefits, claims and settlement expenses increased $56.3 million primarily due to an increase in cost of interest credited and amortization related to sale inducements associated with our deferred annuity business, higher benefit payments and an increase in reserves stemming from an increase in sales related to our life payout annuity business. Partially offsetting the overall increase was a $32.3 million decrease in full-service accumulation benefits, claims and settlement expenses primarily due to lower interest credited on our non-participating deposit type business and, to a lesser extent decreases in cost of interest credited on our participating block.
Operating expenses increased $153.7 million, or 15%, to $1,167.9 million for the year ended December 31, 2005, from $1,014.2 million for the year ended December 31, 2004. The increase primarily resulted from a $92.4 million
increase in full-service accumulation operating expenses due to our acquisition of Principal Services Trust Company, an increase in compensation costs and an increase in amortization of DPAC in 2005. In addition, Principal Global Investors operating expenses increased $46.1 million primarily due to our acquisition of Columbus Circle,continued growth in existing operationsAUM and an increase in allocated expenses.the acquisitions of Edge Asset Management and Morley Financial Services.
Income taxes increased $13.6 million, or 9%, to $162.2 million for the year ended December 31, 2005, from $148.6 million for the year ended December 31, 2004.Taxes
The effective income tax rate for thisthe segment was 23%35% for both the years ended December 31, 20052007 and 2004. The effective income tax rates for the years ended December 31, 2005 and 2004, were lower than the corporate income tax rate of 35%, as a result of income tax deductions allowed for corporate dividends received and interest exclusion from taxable income.
As a result of the foregoing factors, operating earnings increased $39.4 million, or 8%, to $538.4 million for the year ended December 31, 2005, from $499.0 million for the year ended December 31, 2004.
Net realized/unrealized capital losses, as adjusted, decreased $84.3 million, or 87%, to $12.8 million for the year ended December 31, 2005, from $97.1 million for the year ended December 31, 2004. The decrease is due to fewer other than temporary impairments of fixed maturity securities including a $24.3 million recovery of previously impaired securities received as the result of a litigation settlement, fewer losses related to the mark to market of derivative activities, and gains versus losses on mortgage loans offset in part by losses versus gains on the sale of fixed maturity securities.
As a result of the foregoing factors and the inclusion of other after-tax adjustments net income available to common stockholders increased $128.7 million, or 32%, to $525.6 million for the year ended December 31, 2005, from $396.9 million for the year ended December 31, 2004. For the year ended December 31, 2004, net income available to common stockholders included the negative effect of other after-tax adjustments totaling $5.0 million related to: (1) a loss from discontinued operations associated with the sale of Principal Residential Mortgage, Inc. ($3.5 million) and (2) a cumulative effect of accounting change due to our implementation of SOP 03-1 ($1.5 million).2006.
International Asset Management and Accumulation Segment
International Asset Management and Accumulation Trends
Our international asset management and accumulation businesses focus on countries with a trend toward private sectorfavorable demographics and growing long-term savings and defined contribution pension systems, including privatization of public retirement pension systems.markets. With variations depending upon the specific country, we have targeted these markets for sales of retirement and related products and services, including defined contribution pension plans, annuities and long-term mutual funds to businesses and individuals. In some of our international markets, we complement our sales of these products with sales ofinstitutional asset management and life insurance accumulation products.
We have pursued our international strategy through a combination of start-ups, acquisitions and joint ventures, which require infusions of capital consistent with our strategy of long-term growth and profitability.
The following table provides a summary of our international asset management and accumulation business's assets under management as of December 31, 2006, 2005 and 2004:
| As of | Principal International Total assets under management | ||
|---|---|---|---|
| | (in billions) | ||
| December 31, 2006 | $ | 19.1 | |
| December 31, 2005 | 15.4 | ||
| December 31, 2004 | 10.2 | ||
International Asset Management and Accumulation Segment Summary Financial Data
AUM is a key indicator of earnings growth for the segment, as AUM is the base by which we can generate profits. Net cash flow and market performance are the two main drivers of AUM growth. Net cash flow reflects our ability to attract and retain client deposits. Market performance reflects the investment returns on our underlying AUM. The percentage growth in the earnings of our International Asset Management and Accumulation segment will generally track with the percentage growth in AUM. This trend may vary due to changes in business and/or product mix. Our financial results are also impacted by fluctuations of the foreign currency to U.S. dollar exchange rates for the countries in which we have business.
The following table presents the International Asset Management and Accumulation AUM rollforward for the years indicated:
| | For the year ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2008 | 2007 | 2006 | |||||||
| | (in billions) | |||||||||
AUM, beginning of period | $ | 28.7 | $ | 19.1 | $ | 15.4 | ||||
Net cash flow | 1.0 | 2.1 | 2.0 | |||||||
Investment performance | (1.6 | ) | 3.0 | 2.0 | ||||||
Effect of exchange rates | (5.0 | ) | 2.3 | 0.1 | ||||||
Other (1) | — | 2.2 | (0.4 | ) | ||||||
AUM, end of period | $ | 23.1 | $ | 28.7 | $ | 19.1 | ||||
The following table presents certain summary financial data of the International Asset Management and Accumulation segment for the years indicated:
| | For the year ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2006 | 2005 | 2004 | ||||||||
| | (in millions) | ||||||||||
| Operating Earnings Data: | |||||||||||
| Operating revenues(1): | |||||||||||
| Premiums and other considerations | $ | 239.1 | $ | 247.6 | $ | 241.0 | |||||
| Fees and other revenues | 114.0 | 109.2 | 85.9 | ||||||||
| Net investment income | 252.3 | 247.7 | 191.5 | ||||||||
| Total operating revenues | 605.4 | 604.5 | 518.4 | ||||||||
| Expenses: | |||||||||||
| Benefits, claims and settlement expenses | 399.1 | 409.3 | 357.3 | ||||||||
| Operating expenses | 144.5 | 128.7 | 112.2 | ||||||||
| Total expenses | 543.6 | 538.0 | 469.5 | ||||||||
| Operating earnings before income taxes | 61.8 | 66.5 | 48.9 | ||||||||
| Income taxes (benefits) | (10.0 | ) | (4.5 | ) | 8.6 | ||||||
| Operating earnings | 71.8 | 71.0 | 40.3 | ||||||||
| Net realized/unrealized capital gains, as adjusted | 10.3 | 8.1 | 17.3 | ||||||||
| Other after-tax adjustments | — | — | 6.7 | ||||||||
| U.S. GAAP Reported: | |||||||||||
| Net income available to common stockholders | $ | 82.1 | $ | 79.1 | $ | 64.3 | |||||
| | For the year ended December 31, | Increase (decrease) | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2008 | 2007 | 2006 | 2008 vs. 2007 | 2007 vs. 2006 | |||||||||||||
| | (in millions) | |||||||||||||||||
Operating revenues: | ||||||||||||||||||
Premiums and other considerations | $ | 204.1 | $ | 246.4 | $ | 239.1 | $ | (42.3 | ) | $ | 7.3 | |||||||
Fees and other revenues | 123.1 | 136.4 | 114.0 | (13.3 | ) | 22.4 | ||||||||||||
Net investment income | 521.8 | 413.5 | 252.3 | 108.3 | 161.2 | |||||||||||||
Total operating revenues | 849.0 | 796.3 | 605.4 | 52.7 | 190.9 | |||||||||||||
Expenses: | ||||||||||||||||||
Benefits, claims and settlement expenses | 586.6 | 526.7 | 399.1 | 59.9 | 127.6 | |||||||||||||
Operating expenses | 150.6 | 141.4 | 144.5 | 9.2 | (3.1 | ) | ||||||||||||
Total expenses | 737.2 | 668.1 | 543.6 | 69.1 | 124.5 | |||||||||||||
Operating earnings before income taxes | 111.8 | 128.2 | 61.8 | (16.4 | ) | 66.4 | ||||||||||||
Income taxes (benefits) | (14.5 | ) | 17.5 | (10.0 | ) | (32.0 | ) | 27.5 | ||||||||||
Operating earnings | $ | 126.3 | $ | 110.7 | $ | 71.8 | $ | 15.6 | $ | 38.9 | ||||||||
Year Ended December 31, 20062008 Compared to Year Ended December 31, 20052007
Operating Earnings
Operating earnings in our equity method investment in Brazil increased $11.1 million primarily due to the strengthening of the Brazilian real versus the U.S. dollar, coupled with pricing changes resulting in higher fees and net unlocking and true-up adjustments that lowered DPAC and PVFP amortization. Operating earnings in Chile increased $6.1 million primarily due to higher inflation-based investment returns net of interest crediting to customers.
Operating Revenues
Premiums and other considerationsin Chile decreased $8.5$40.6 million or 3%, to $239.1 million for the year ended December 31, 2006, from $247.6 million for the year ended December 31, 2005. The decrease primarily resulted from a $19.5 million decrease in Mexico and Chile due to decreasedlower sales of single premium annuities with life contingencies. Partially offsetting this decrease was an $11.0 million increase in Chile due to the strengthening of the peso versus the U.S. dollar.
Fees and other revenues increased $4.8decreased $10.0 million or 4%, to $114.0 million for the year ended December 31, 2006, from $109.2 million for the year ended December 31, 2005. Fees and other revenues in India and Hong Kong increased $4.8 million and $4.1 million, respectively,primarily due to an increaselower AUM and reduced fee charges for our operations in fees from growth in assets under management.India. In addition, fees and other revenues decreased $4.0 million in Chile increased $2.2 million primarily due to growth in assets under management2008 unlocking adjustments, which lowered unearned revenue accruals, and increased fees from universal life insurance. Partially offsetting the increase was a $5.5 million decrease in Mexico primarily due to a refinement of accrued fee income in 2005.lower AUM.
Net investment income increased $4.6 million, or 2%, to $252.3 million for the year ended December 31, 2006, from $247.7 million for the year ended December 31, 2005. The increase was primarily due to an increase of $367.8 million, or 14%, in average invested assets and cash, excluding our equity method investments, the strengthening of the Chilean peso and Brazilian real versus the U.S. dollar, anda higher earnings from our equity method investments. Partially offsetting the increase was a decrease in the annualized yield on average invested assets and cash, excluding our equity method investments, which was 7.1% for the year ended December 31, 2006, compared to 8.5% for the year ended December 31, 2005.
Benefits, claims and settlement expenses decreased $10.2 million, or 2%, to $399.1 million for the year ended December 31, 2006, from $409.3 million for the year ended December 31, 2005. The decrease primarily resulted from a $23.2 million decrease in Chile as a result of lower interest credited to customers. In addition, the decrease in reserves of $4.4 million in Mexico was a result of decreased sales of single premium annuities with life contingencies. Partially offsetting this decrease is an increase of $17.5 million due to the strengthening of the Chilean peso versus U.S. dollar.
Operating expenses increased $15.8 million, or 12%, to $144.5 million for the year ended December 31, 2006, from $128.7 million for the year ended December 31, 2005. The increase was primarily due to a $5.4 million increaselarger inflation-based investment returns in India due to higher compensation costs in the asset management company coupled with costs from PPIAC. Hong Kong operating expenses increased $2.9 million primarily due to increased incentive compensation costs, commission expenses,
and occupancy costs. Mexico operating expenses increased $1.7 million due to increased amortization related to a refinement of present value of future profits ("PVFP"), higher professional fees expenses and sales compensation in 2006. In addition, Chile operating expenses increased $1.5 million primarily due to increased compensation costs.
Income tax benefits increased $5.5 million to $10.0 million for the year ended December 31, 2006, from $4.5 million for the year ended December 31, 2005. The increase in income tax benefits was primarily due to tax refinements in Mexico and Chile. The increase was partially offset due to a tax benefit associated with the liquidation of the Japan joint venture in 2005 and the benefit from the American Jobs Creation Act in 2005 at International headquarters.
As a result of the foregoing factors, operating earnings increased $0.8 million, or 1%, to $71.8 million for the year ended December 31, 2006, from $71.0 million for the year ended December 31, 2005.
Net realized/unrealized capital gains, as adjusted, increased $2.2 million, or 27%, to $10.3 million for the year ended December 31, 2006, from $8.1 million for the year ended December 31, 2005. The increase was primarily related to a $1.3 million increase in Mexico due to realized gains on fixed maturity securities. In addition, net realized/unrealized capital gains, as adjusted, increased $0.8 million in Chile. Unrealized gains on trading fixed maturities were partially offset by mark-to-market losses in 2006 on derivatives that are held to more effectively match the invested asset portfolio to our policyholder liability risks.
As a result of the foregoing factors net income available to common stockholders increased $3.0 million, or 4%, to $82.1 million for the year ended December 31, 2006, from $79.1 million for the year ended December 31, 2005.
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
Premiums and other considerations increased $6.6 million, or 3%, to $247.6 million for the year ended December 31, 2005, from $241.0 million for the year ended December 31, 2004. The increase primarily resulted from an $18.4 million increase in Chile and Mexico due to the strengthening of the peso versus the U.S. dollar. Partially offsetting this increase was a $10.6 million decrease in Chile due to decreased sales of single premium annuities with life contingencies.
Fees and other revenues increased $23.3 million, or 27%, to $109.2 million for the year ended December 31, 2005, from $85.9 million for the year ended December 31, 2004. The increase was primarily due to a $15.3 million increase in Mexico resulting from a refinement of accrued fee income, improved net transfers of pension customers from competitors, and the strengthening of the peso versus the U.S. dollar. Futhermore, fees and other revenue in India increased $3.4 million due to an increase in fees from PPIAC that began operations in February 2005 and an increase in fees from growth in assets under management. In addition, fees and other revenue in Chile increased $3.3 million primarily due to an increase in mortgage loan servicing revenue, increased fees caused by growth in assets under management and the strengthening of the peso.
Net investment income increased $56.2 million, or 29%, to $247.7 million for the year ended December 31, 2005, from $191.5 million for the year ended December 31, 2004. The increase was primarily due to an increase of $473.5 million, or 22%, in average invested assets and cash, excluding our equity investments in subsidiaries. In addition, the increase was related to an increase in the annualized yield on average invested assets and cash, excluding our equity method investments, in subsidiaries, which was 8.5%13.8% and 10.3% for the yearyears ended December 31, 2005, compared to 8.1% for the year ended December 31, 2004.2008 and 2007, respectively.
Total Expenses
Benefits, claims and settlement expenses increased $52.0$54.4 million or 15%, to $409.3 million for the year ended December 31, 2005, from $357.3 million for the year ended December 31, 2004. The increase primarily resulted from a $54.5 million increase in Chile, the result of the strengthening of the peso versus the U.S. dollar, andprimarily due to higher interest credited to customerscrediting rates in 2008, which was partially offset by a lower change in reservesreserve expense associated with decreased sales of single premium annuities with life contingencies.
Operating expenses in Mexico increased $13.8 million primarily due to net unlocking and true-up adjustments resulting in lower DPAC and PVFP amortization in 2007 related to enacted legislation. This increase in operating expenses was partially offset by lower compensation costs for our corporate headquarters.
Income Taxes
The effective income tax rates for the segment were -13% and 14% for the years ended December 31, 2008 and 2007, respectively. The effective income tax rate for the year ended December 31, 2008, was lower than the U.S. statutory rate primarily due to additional U.S. foreign tax credits resulting from the second quarter 2008 enactment of legislation to increase the Brazilian tax rate, taxes on our share of earnings generated from our equity method investments being reflected in net investment income and the lower tax rates of foreign jurisdictions. The Brazilian tax rate change caused a one-time increase in the net deferred tax liabilities within our equity method investment during the second quarter that was offset by U.S. foreign tax credits, which reduced income tax expenses. There was no total impact to operating earnings. The effective income tax rate for the year ended December 31, 2007, was lower than the U.S. statutory rate
primarily due to taxes on our share of earnings generated from our equity method investments that are included in net investment income and the lower tax rates of foreign jurisdictions.
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
Operating Earnings
Operating earnings increased $19.5 million primarily due to higher earnings from our equity method investments in Brazil and China and the strengthening of the Brazilian real versus the U.S. dollar. Operating earnings in Chile and Hong Kong increased primarily due to higher annualized investment yields in Chile and growth in AUM in Hong Kong and Chile.
Operating Revenues
Premiums in Chile increased $31.0 million primarily due to higher sales of single premium annuities with life contingencies. This increase was partially offset by a $23.7 million decrease in Mexico resulting from lower sales of single premium annuities with life contingencies due to our decision to not sell these annuities in 2005.Mexico in 2007 due to unfavorable market conditions.
Operating expensesFees and other revenues in our Hong Kong, Chile and India operations increased $16.5primarily due to growth in AUM in these countries. In addition, fees and other revenues increased in Hong Kong due to performance-based fees.
Net investment income increased primarily due to a higher annualized yield on average invested assets and cash, excluding our equity method investments, and to a lesser extent due to a $418.0 million or 15%, to $128.7 millionincrease in average invested assets and cash, excluding our equity method investments, coupled with higher earnings from our equity method subsidiaries in Brazil, China and Malaysia. The annualized yield on average invested assets and cash, excluding our equity method investments, was 10.3% for the year ended December 31, 2005, from $112.2 million2007, compared to 7.1% for the year ended December 31, 2004. The increase was2006.
Total Expenses
Benefits, claims and settlement expenses increased $152.1 million in Chile, primarily due to a $4.3 million increasehigher interest crediting rates in Chile2007 and Mexico resulting from strengtheningincreased sales of the peso versus the U.S. dollar. In addition, Mexico operatingsingle premium annuities with life contingencies.
Operating expenses increased $3.0 million due to increased marketing efforts and asset retention training for agents and employees. Furthermore, Chile operating expenses increased $2.2 million due to the impact of an impairment of PVFP stemming from declining interest rates. Also, India operating expenses increased $2.3 million due to higher compensation costs in the asset management company coupled with costs from PPIAC, which startedwithin our Mexican operations in February 2005. Finally, Hong Kong operating expenses increased $2.1decreased $20.9 million primarily due to increased coststhe unlocking of assumptions surrounding PVFP related to consolidationnewly enacted legislation of the mandatory privatized social security system. This decrease was partially offset by higher operating expenses in our mutual fund products, marketing costs, and compensation costs as well as DPAC unlocking.other international operations due to continued growth.
Income Taxes
Income tax benefits increased $13.1 million to anThe effective income tax benefit of $4.5 millionrates for the segment were 14% and -16% for the years ended December 31, 2007 and 2006, respectively. The effective income tax rate for the year ended December 31, 2005,2007, was lower than the U.S. statutory rate primarily due to taxes on our share of earnings generated from our equity method investments that are included in net investment income and the lower tax rates of foreign jurisdictions. The effective income tax expense of $8.6 millionrate for the year ended December 31, 2004. A decrease of $8.9 million in Japan2006, was lower than the U.S. statutory rate, primarily due to a tax benefit associated with the liquidationrefinements in Mexico and Chile and taxes on our share of the business in 2005. A decrease of $7.3 million at corporate headquarters was due to the benefitearnings generated from the American Jobs Creation Act in 2005 and foreign dividend activity that generated tax expense in 2004.
As a result of the foregoing factors, operating earnings increased $30.7 million, or 76%, to $71.0 million for the year ended December 31, 2005, from $40.3 million for the year ended December 31, 2004.
Net realized/unrealized capital gains, as adjusted, decreased $9.2 million, or 53%, to $8.1 million for the year ended December 31, 2005, from $17.3 million for the year ended December 31, 2004. The decrease was primarily related to a $4.7 million decrease in Chile due to lower realized gains on derivativesour equity method investments that are held to more effectively match the invested asset portfolio to our policyholder liability risks. In addition, Indiaincluded in net realized/unrealized capital gains, as adjusted, decreased $2.4 million due to a realized gain in 2004 on recovery of a previously impaired debt security.
As a result of the foregoing factors and the inclusion of other after-tax adjustments, net income available to common stockholders increased $14.8 million, or 23%, to $79.1 million for the year ended December 31, 2005, from $64.3 million for the year ended December 31, 2004. For the year ended December 31, 2004, net income included the positive effect of other after-tax adjustments totaling $6.7 million, related to: (1) the positive effect of income from discontinued operations related to the sale of our Argentine companies ($10.0 million) and (2) the negative effect of cumulative effect of an accounting change related to the implementation of SOP 03-1 ($3.3 million).investment income.
Life and Health Insurance Segment
Individual Life Insurance Trends
Our life insurance premiums have beenare influenced by both economic and industry trends. In addition, we have continuedexperienced increased sales of universal and variable universal life insurance as we continue to shift our marketing emphasis to universal and variable universal life insurance products from traditional life insurance products. Due to this shift in marketing emphasis, premiums related to our traditional life insurance products have declined, while fee revenues from our universal and variable universal life insurance products have grown.
The following table provides a summary of our individual universal and variable universal life insurance fee revenues and our individual traditional life insurance premiums for the years ended December 31, 2006, 2005 and 2004:indicated:
| | Individual life insurance | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Individual universal and variable universal life insurance | | |||||||||||
| | Individual traditional life insurance | Universal and variable universal life insurance | Traditional life insurance | ||||||||||
| For the year ended | Fee revenues | Premiums | |||||||||||
| Fee revenues | Premiums | ||||||||||||
| | (in millions) | (in millions) | |||||||||||
December 31, 2008 | $ | 338.8 | $ | 591.7 | |||||||||
December 31, 2007 | 282.6 | 611.7 | |||||||||||
| December 31, 2006 | $ | 225.3 | $ | 624.4 | 225.3 | 624.4 | |||||||
| December 31, 2005 | 212.6 | 645.2 | |||||||||||
| December 31, 2004 | 182.8 | 675.8 | |||||||||||
The following table provides a summary of our individual life insurance policyholder liabilities as of December 31, 2006, 2005 and 2004:for the years indicated:
| | Individual life insurance | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Individual universal and variable universal life insurance | Individual traditional life insurance | Universal and variable universal life insurance | Traditional life insurance | |||||||||
| As of | Policyholder liabilities(1) | Policyholder liabilities | Policyholder liabilities(1) | Policyholder liabilities | |||||||||
| | (in millions) | (in millions) | |||||||||||
December 31, 2008 | $ | 4,692.5 | $ | 5,856.7 | |||||||||
December 31, 2007 | 4,544.2 | 5,910.9 | |||||||||||
| December 31, 2006 | $ | 3,948.6 | $ | 5,921.5 | 3,948.6 | 5,921.5 | |||||||
| December 31, 2005 | 3,493.8 | 5,955.4 | |||||||||||
| December 31, 2004 | 2,880.0 | 6,042.2 | |||||||||||
In 2006, we experienced good growth in group medical premiumour health insurance and fees and members due to improved pricing and market focus. Whilefee-for-service businesses, we continue to sell group medical business in 35 states plus the District of Columbia, we have sharpened our focus on 13 states. Premium revenue has grownexperience membership declines due to both pricelower sales and membership increases. The fee-for-service portion of our business had a drop in medical members and fees because of our competitive position in the market. Our fee-for-service offering is available in all 50 states plus the District of Columbia.higher lapses.
Our health insurance premium and fees were as follows for the years ended December 31, 2006, 2005 and 2004 were as follows:indicated:
| | Premium and fees | Premium and fees | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| For the year ended | Group medical insurance | Fee-for-service | Group medical insurance | Fee-for-service | |||||||||
| | (in millions) | (in millions) | |||||||||||
December 31, 2008 | $ | 1,617.0 | $ | 143.0 | |||||||||
December 31, 2007 | 1,808.7 | 167.3 | |||||||||||
| December 31, 2006 | $ | 1,861.4 | $ | 172.5 | 1,861.4 | 172.5 | |||||||
| December 31, 2005 | 1,676.5 | 176.6 | |||||||||||
| December 31, 2004 | 1,586.9 | 178.8 | |||||||||||
Our covered medical members as of December 31, 2006, 2005 and 2004 were as follows:follows for the years indicated:
| | Covered medical members | Covered medical members | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| As of | Group medical insurance | Fee-for-service | Group medical insurance | Fee-for-service | |||||||
| | (in thousands) | (in thousands) | |||||||||
December 31, 2008 | 449.3 | 543.9 | |||||||||
December 31, 2007 | 566.1 | 669.2 | |||||||||
| December 31, 2006 | 642.5 | 758.0 | 642.5 | 758.0 | |||||||
| December 31, 2005 | 620.1 | 861.5 | |||||||||
| December 31, 2004 | 574.8 | 986.6 | |||||||||
Specialty Benefits Insurance Trends
Premium and fee growth for the individual disability line of our specialty benefits insurance business is being driven by growingsolid sales and stable retention. Thisretention, while growth of the group lines has beenslowed compared to prior years as we maintain pricing discipline in a result of growing and more focused distribution supporting these product lines, increasing focus on marketing products to individuals at employer worksites ("voluntary/worksite"), and the introduction of new products.very competitive environment.
The following table provides a summary of our specialty benefits insurance premium and fees for the years ended December 31, 2006, 2005 and 2004:indicated:
| | Premium and fees | Premium and fees | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| For the year ended | Group dental and vision insurance | Group life insurance | Group disability insurance | Individual disability insurance | Group dental and vision insurance | Group life insurance | Group disability insurance | Individual disability insurance | |||||||||||||||||
| | (in millions) | (in millions) | |||||||||||||||||||||||
December 31, 2008 | $ | 557.3 | $ | 348.2 | $ | 303.5 | $ | 172.6 | |||||||||||||||||
December 31, 2007 | 541.0 | 344.2 | 304.6 | 160.0 | |||||||||||||||||||||
| December 31, 2006 | $ | 496.3 | $ | 310.4 | $ | 254.9 | $ | 141.6 | 496.3 | 310.4 | 254.9 | 141.6 | |||||||||||||
| December 31, 2005 | 434.5 | 259.9 | 200.3 | 130.8 | |||||||||||||||||||||
| December 31, 2004 | 383.2 | 239.1 | 170.1 | 113.3 | |||||||||||||||||||||
Life and Health Insurance Segment Summary Financial Data
There are several key indicators for earnings growth in our Life and Health insurance business. The ability of our distribution channels to generate new sales and retain existing business drives growth in our block of business, premium revenue and fee revenues. Our earnings growth also depends on our ability to price our products at a level that enables us to earn a margin over the cost of providing benefits and the expense of acquiring and administering those products. Factors impacting pricing decisions include competitive conditions, persistency, our ability to assess and manage trends in mortality and morbidity experience and our ability to manage operating expenses.
The following table presents certain summary financial data relating to the Life and Health Insurance segment for the years indicated:
| | For the year ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2006 | 2005 | 2004 | |||||||||
| | (in millions) | |||||||||||
| Operating Earnings Data: | ||||||||||||
| Operating revenues(1): | ||||||||||||
| Premiums and other considerations | $ | 3,598.7 | $ | 3,267.1 | $ | 3,096.6 | ||||||
| Fees and other revenues | 444.2 | 444.3 | 421.9 | |||||||||
| Net investment income | 693.3 | 676.1 | 662.8 | |||||||||
| Total operating revenues | 4,736.2 | 4,387.5 | 4,181.3 | |||||||||
| Expenses: | ||||||||||||
| Benefits, claims and settlement expenses | 2,910.3 | 2,620.2 | 2,514.7 | |||||||||
| Dividends to policyholders | 290.3 | 288.5 | 291.8 | |||||||||
| Operating expenses | 1,110.8 | 1,066.3 | 988.7 | |||||||||
| Total expenses | 4,311.4 | 3,975.0 | 3,795.2 | |||||||||
| Operating earnings before income taxes | 424.8 | 412.5 | 386.1 | |||||||||
| Income taxes | 142.3 | 138.1 | 129.9 | |||||||||
| Operating earnings | 282.5 | 274.4 | 256.2 | |||||||||
Net realized/unrealized capital losses, as adjusted | (3.4 | ) | (2.3 | ) | (8.9 | ) | ||||||
| Other after-tax adjustments | — | — | (0.9 | ) | ||||||||
| U.S. GAAP Reported: | ||||||||||||
| Net income available to common stockholders | $ | 279.1 | $ | 272.1 | $ | 246.4 | ||||||
| | For the year ended December 31, | Increase (decrease) | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2008 | 2007 | 2006 | 2008 vs. 2007 | 2007 vs. 2006 | |||||||||||||
| | (in millions) | |||||||||||||||||
Operating revenues: | ||||||||||||||||||
Premiums and other considerations | $ | 3,476.1 | $ | 3,671.6 | $ | 3,598.7 | $ | (195.5 | ) | $ | 72.9 | |||||||
Fees and other revenues | 528.9 | 495.4 | 444.2 | 33.5 | 51.2 | |||||||||||||
Net investment income | 677.0 | 690.1 | 693.3 | (13.1 | ) | (3.2 | ) | |||||||||||
Total operating revenues | 4,682.0 | 4,857.1 | 4,736.2 | (175.1 | ) | 120.9 | ||||||||||||
Expenses: | ||||||||||||||||||
Benefits, claims and settlement expenses | 2,909.0 | 3,110.2 | 2,910.3 | (201.2 | ) | 199.9 | ||||||||||||
Dividends to policyholders | 265.7 | 290.1 | 290.3 | (24.4 | ) | (0.2 | ) | |||||||||||
Operating expenses | 1,104.7 | 1,129.5 | 1,110.8 | (24.8 | ) | 18.7 | ||||||||||||
Total expenses | 4,279.4 | 4,529.8 | 4,311.4 | (250.4 | ) | 218.4 | ||||||||||||
Operating earnings before income taxes | 402.6 | 327.3 | 424.8 | 75.3 | (97.5 | ) | ||||||||||||
Income taxes | 132.2 | 106.2 | 142.3 | 26.0 | (36.1 | ) | ||||||||||||
Operating earnings | $ | 270.4 | $ | 221.1 | $ | 282.5 | $ | 49.3 | $ | (61.4 | ) | |||||||
Year Ended December 31, 20062008 Compared to Year Ended December 31, 20052007
Operating Earnings
Operating earnings in our health insurance business increased $27.6 million primarily due to favorable prior year claim developments in 2008 compared to unfavorable prior year claim development in 2007. At the end of a reporting period, we recognize a liability for the estimate of claims incurred but not reported. In subsequent periods, an adjustment to prior period claim development is made to reflect actual or updated estimates of incurred claims. Operating earnings in our specialty benefits insurance business increased $18.3 million, primarily due to favorable claims experience in our disability businesses. Operating earnings in our individual life insurance business increased $3.4 million due to updating the dividend scale to reflect the experience of the Closed Block and growth in the business, partially offset by an increase in DPAC amortization.
Operating Revenues
Premiums decreased $189.1 million in our health insurance business, as a reduction in average covered medical members was partially offset by an increase in premium per member. Premiums decreased $36.9 million in our individual life insurance business due to the expected continued decline from the decreasing block of traditional life insurance business. These decreases were partially offset by a $30.5 million increase in our specialty benefits insurance business due to growth in the individual disability line of business and dental trend (premium increase resulting from higher costs and utilization).
Fees and other considerationsrevenues increased $331.6$58.6 million or 10%,in our individual life insurance business due to $3,598.7growth in the universal life and variable universal life lines of business. This increase in fees more than offset the decline in individual life insurance premiums. Partially offsetting this increase in fees and other revenues was a $26.9 million fordecrease in our health insurance business, largely due to a change in classification in 2008 of the year ended December 31, 2006,reimbursement of certain pass-through expenses, which removed them from $3,267.1both fee revenues and operating expenses, and a decrease in average fee-for-service medical members.
Total Expenses
Benefits, claims and settlement expenses decreased $216.2 million for the year ended December 31, 2005. Healthin our health insurance premiums increased $185.8 million, primarily from increasedbusiness due to a decrease in average covered medical members and favorable prior period claim development in 2008 compared to unfavorable prior year claim development in 2007.
Dividends to policyholders decreased $24.4 million, primarily from updating the policyholder dividend scale to reflect the experience of the Closed Block.
Operating expenses decreased $53.2 million in our health insurance business due to actively managing to lower expenses associated with a decline in insured medical and fee-for-service members and due to a change in classification in 2008 of the reimbursement of certain pass-through expenses, removing them from both fee revenues and operating expenses. Partially offsetting this decrease was a $15.9 million increase in our individual life insurance business primarily related to higher DPAC amortization due to reduced equity market performance and worse mortality experience. Individual life insurance operating expenses also increased due to sales growth. Additionally, operating expenses increased $12.0 million in our specialty benefits insurance business in line with moderate growth in the business.
Income Taxes
The effective income tax rates for the segment were 33% and 32% for the years ended December 31, 2008 and 2007, respectively. The effective income tax rates were lower than the U.S. statutory rate as a result of interest exclusion from taxable income and income tax deductions allowed for corporate dividends received.
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
Operating Earnings
Operating earnings in our health insurance business decreased $47.7 million due to increases in the cost of medical care, unfavorable prior year claim developments and an overall decline in covered members. These increases in cost were partially offset by increases in premium per member and lower operating expense ratios in our health insurance business Operating earnings in our individual life insurance business decreased $18.8 million, due to favorable DPAC adjustments in 2006 compared to unfavorable DPAC adjustments in 2007, coupled with a decrease in investment income from a lower asset base related to capital reductions, which more than offset growth in the universal life and variable universal life businesses. Operating earnings in our specialty benefits insurance business increased $5.1 million, as growth in premiums and improvement in expense ratios were partially offset by higher loss ratios.
Operating Revenues
Premiums increased $149.0 million in our specialty benefits insurance business primarily due to growth in the business resulting from solid sales and retention in all product lines. Premiums decreased $52.7 million in our health insurance business as a reduction in covered members was partially offset by an increase in premium per member. Specialty benefitsFurthermore, premiums decreased $23.4 million in our individual life insurance premiums increased $180.4 million primarilybusiness due to strong sales and stable retention.the expected continued decline from the decreasing block of traditional life insurance business.
Fees and other revenues decreased $0.1increased $59.7 million in our individual life insurance business due to $444.2growth in the universal life and variable universal life lines of business. This increase in fees more than offset the decline in individual life insurance premiums.
Total Expenses
Benefits, claims and settlement expenses increased $132.4 million for the year ended December 31, 2006, from $444.3 million for the year ended December 31, 2005. Healthin our specialty benefits insurance fees and other revenues decreased $8.0 millionbusiness primarily due to growth in the business. Benefits, claims and settlement expenses increased $51.2 million in our health insurance business, as higher claims costs per member and unfavorable prior year claim development were partially offset by a decrease in fee-for-service medicalcovered members. In addition, specialty benefits fees and other revenues decreased $2.7
Operating expenses increased $40.1 million due to lower dental fees resulting from the sale of the dental offices in June 2006. Partially offsetting the decreases was a $10.6 million increase from our individual life insurance business primarily due to growth in our fee-based universal and variable universal life insurance business.
Net investment income increased $17.2 million, or 3%, to $693.3 million for the year ended December 31, 2006, from $676.1 million for the year ended December 31, 2005. The increase primarily relates to an increase in DPAC amortization, which was largely the average annualized yield on invested assetsresult of unfavorable unlocking relative to 2006 and cash and to a $118.3 million, or 1%, increasehigher amortization in average invested assets and cash for the segment. The yield on average invested assets and cash was 6.3% for the year ended December 31, 2006, compared to 6.2% for the year ended December 31, 2005.
Benefits, claims and settlement expenses increased $290.1 million, or 11%, to $2,910.3 million for the year ended December 31, 2006, from $2,620.2 million for the year ended December 31, 2005. Health insurance benefits, claims and settlement expenses increased $155.1 million primarily due to higher claim costs per member and growth, somewhat offset by reserve refinements. Despite generally lower loss ratios, specialty benefits insurance benefits, claims and settlement expenses increased $115.7 million, primarily2007 due to growth in the business.
Dividends to policyholders increased $1.8 million, or 1%, to $290.3 million forbusiness and higher lapses early in the year ended December 31, 2006, from $288.5 million for the year ended December 31, 2005. The increase is primarily related to the dividend scale changes effective in February 2006.
year. Operating expenses increased $44.5$14.8 million or 4%, to $1,110.8 million for the year ended December 31, 2006, from $1,066.3 million for the year ended December 31, 2005. Specialtyin our specialty benefits insurance operating expenses increased $46.1 millionbusiness due to continued growth in the business. Health insurance operatingOperating expenses increased $25.5 million, primarily thedecreased
result of growth$36.2 million in the insured medical business. Partially offsetting these increases was a $27.1 million decrease in the individual lifeour health insurance operating expensesbusiness primarily due to lower DPAC amortization related to lower single premium salesstaff and changesother reductions associated with the decline in claims experience in 2006.insured medical and fee-for-service medical covered members.
Income taxes increased $4.2 million, or 3%, to $142.3 million for the year ended December 31, 2006, from $138.1 million for the year ended December 31, 2005.Taxes
The effective income tax raterates for the segment waswere 32% and 33% for the years ended December 31, 2007 and 2006, and 2005.respectively. The effective income tax rates for the years ended December 31, 2006 and 2005, were lower than the corporate income taxU.S. statutory rate as a result of 35% primarily due to interest exclusion from taxable income.
As a result of the foregoing factors, operating earnings increased $8.1 million, or 3%, to $282.5 million for the year ended December 31, 2006, from $274.4 million for the year ended December 31, 2005.
Net realized/unrealized capital losses, as adjusted, increased $1.1 million, or 48%, to $3.4 million for the year ended December 31, 2006, from $2.3 million for the year ended December 31, 2005. The increase primarily resulted from increased impairments in 2006 as the result of a change in our abilityincome and intent to hold certain fixed maturity securities until recovery due to the need to fund our acquisition of WM Advisors, a $7.5 million recovery of previously impaired securities received in 2005 related to a litigation settlement, and more losses related to derivative activities. These increases were partially offset by gains in 2006 versus losses in 2005 on the sale and call activity of fixed maturity securities, a software impairment in 2005 with no corresponding activity in 2006, the recovery of previously impaired securities as the result of a litigation claim received in 2006, and increased DPAC amortization associated with losses on invested assets.
As a result of the foregoing factors, net income available to common stockholders increased $7.0 million, or 3%, to $279.1 million for the year ended December 31, 2006, from $272.1 million for the year ended December 31, 2005.
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
Premiums and other considerations increased $170.5 million, or 6%, to $3,267.1 million for the year ended December 31, 2005, from $3,096.6 million for the year ended December 31, 2004. Specialty benefits insurance premiums increased $119.5 million primarily due to strong sales and steady retention. Health insurance premiums increased $94.9 million, primarily resulting from higher premium per member and an increase in average insured medical members. Partially offsetting these increases was a decrease of $43.9 million in individual life insurance premiums, primarily a result of the continuation of a shift in marketing emphasis to universal and variable universal life insurance products from traditional life insurance products and an increase in ceded reinsurance premium. Unlike traditional premium-based products, individual universal and variable universal life insurance premiums are not reported as U.S. GAAP revenue.
Fees and other revenues increased $22.4 million, or 5%, to $444.3 million for the year ended December 31, 2005, from $421.9 million for the year ended December 31, 2004. Fee revenues from our individual life insurance business increased $30.0 million, primarily due to growth in our fee-based universal and variable universal life insurance business. Fee revenues from our health insurance business decreased $7.9 million, primarily due to a decrease in average fee-for-service medical members.
Net investment income increased $13.3 million, or 2%, to $676.1 million for the year ended December 31, 2005, from $662.8 million for the year ended December 31, 2004. The increase primarily relates to a $518.4, or 5%, increase in average invested assets and cash for the segment. The increase was partially offset by a decrease in the average annualized yield on invested assets and cash, which was 6.2% for the year ended December 31, 2005, compared to 6.4% for the year ended December 31, 2004. This reflects lower yields on fixed maturity securities and commercial mortgages due in part to a lower interest rate environment.
Benefits, claims and settlement expenses increased $105.5 million, or 4%, to $2,620.2 million for the year ended December 31, 2005, from $2,514.7 million for the year ended December 31, 2004. Health insurance benefits, claims and settlement expenses increased $66.0 million primarily due to increases in claim costs per member and average members, even though loss ratios decreased. Likewise, despite lower loss ratios, specialty benefits insurance benefits, claims and settlement expenses increased $58.9 million, primarily due to growth in the business.
Dividends to policyholders decreased $3.3 million, or 1%, to $288.5 million for the year ended December 31, 2005, from $291.8 million for the year ended December 31, 2004. The decrease is primarily related to a decrease in the individual life insurance dividend interest crediting rates resulting from a declining interest rate environment.
Operating expenses increased $77.6 million, or 8%, to $1,066.3 million for the year ended December 31, 2005, from $988.7 million for the year ended December 31, 2004. Specialty benefits insurance operating expenses increased $45.7 million due to growth in the business. Health insurance operating expenses increased $29.5 million, primarily due to growth in the insured medical and wellness businesses and additional salary and benefit-related expenses.
Income taxes increased $8.2 million, or 6%, to $138.1 million for the year ended December 31, 2005, from $129.9 million for the year ended December 31, 2004. The effective income tax ratedeductions allowed for the segment was 33% for the year ended December 31, 2005 and 34% for the year ended December 31, 2004. The effective income tax rates for the years
ended December 31, 2005 and 2004, were lower than the corporate income tax rate of 35% primarily due to the interest exclusion from taxable income.
As a result of the foregoing factors, operating earnings increased $18.2 million, or 7%, to $274.4 million for the year ended December 31, 2005, from $256.2 million for the year ended December 31, 2004.
Net realized/unrealized capital losses, as adjusted, decreased $6.6 million, or 74%, to $2.3 million for the year ended December 31, 2005, from $8.9 million for the year ended December 31, 2004. The decrease is due to fewer other than temporary impairments of fixed maturity securities including a $7.5 million recovery of previously impaired securities received as the result of a litigation settlement offset in part by more losses related to the mark to market of derivative activities, a software impairment, and losses versus gains on the sale of fixed maturity securities.
As a result of the foregoing factors and the inclusion of a 2004 other after-tax adjustment, net income available to common stockholders increased $25.7 million, or 10%, to $272.1 million for the year ended December 31, 2005, from $246.4 million for the year ended December 31, 2004. The other after-tax adjustment for the year ended December 31, 2004, had a negative impact on net income of $0.9 million due to the cumulative effect of accounting change, a result of our implementation of SOP 03-1.dividends received.
Corporate and Other Segment
Corporate and Other Segment Summary Financial Data
The following table presents certain summary financial data relating to the Corporate and Other segment for the years indicated:
| | For the year ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2006 | 2005 | 2004 | ||||||||
| | (in millions) | ||||||||||
| Operating Earnings Data: | |||||||||||
| Operating Revenues(1): | |||||||||||
| Total operating revenues | $ | (27.4 | ) | $ | (59.1 | ) | $ | (23.0 | ) | ||
| Expenses: | |||||||||||
| Total expenses | (11.4 | ) | (6.9 | ) | 47.9 | ||||||
| Operating loss before income taxes and preferred stock dividends | (16.0 | ) | (52.2 | ) | (70.9 | ) | |||||
| Income tax benefits | (21.7 | ) | (48.5 | ) | (50.5 | ) | |||||
| Preferred stock dividends | 33.0 | 17.7 | — | ||||||||
| Operating loss | (27.3 | ) | (21.4 | ) | (20.4 | ) | |||||
| Net realized/unrealized capital gains (losses), as adjusted | 34.2 | (13.6 | ) | 26.4 | |||||||
| Other after-tax adjustments | 41.2 | 64.5 | — | ||||||||
| U.S. GAAP Reported: | |||||||||||
| Net income available to common stockholders | $ | 48.1 | $ | 29.5 | $ | 6.0 | |||||
| | For the year ended December 31, | Increase (decrease) | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2008 | 2007 | 2006 | 2008 vs. 2007 | 2007 vs. 2006 | ||||||||||||
| | (in millions) | ||||||||||||||||
Operating revenues: | |||||||||||||||||
Total operating revenues | $ | (202.8 | ) | $ | (156.8 | ) | $ | (110.9 | ) | $ | (46.0 | ) | $ | (45.9 | ) | ||
Expenses: | |||||||||||||||||
Total expenses | (113.2 | ) | (120.8 | ) | (94.9 | ) | 7.6 | (25.9 | ) | ||||||||
Operating loss before income taxes and preferred | (89.6 | ) | (36.0 | ) | (16.0 | ) | (53.6 | ) | (20.0 | ) | |||||||
Income tax benefits | (42.9 | ) | (31.3 | ) | (21.7 | ) | (11.6 | ) | (9.6 | ) | |||||||
Preferred stock dividends | 33.0 | 33.0 | 33.0 | — | — | ||||||||||||
Operating loss | $ | (79.7 | ) | $ | (37.7 | ) | $ | (27.3 | ) | $ | (42.0 | ) | $ | (10.4 | ) | ||
Year Ended December 31, 20062008 Compared to Year Ended December 31, 20052007
Operating Loss
Total operating revenuesOperating loss increased $31.7 million, or 54%,primarily due to a negative $27.4 million for the year ended December 31, 2006, from a negative $59.1 million for the year ended December 31, 2005. Net investment income increased $35.3 million reflecting an increasedecline in average annualized investment yields and to a smaller extent by a decrease in average invested assets for the segment. The decline in average annualized investment yields was primarily due to a decrease in earnings from equity real estate investments and an increase in losses from certain equity method partnership interests.
Operating Revenues
Operating revenues decreased due to a decline in average annualized investment yields, resulting mostly from above average gains on equity real estate sales activity in the prior year, as well as lower earnings on certain equity method partnership interests where the underlying assets are marked to market. In addition, operating revenues decreased due to lower average invested assets for the segment. These decreases were offset in part by lower investment expenses due to the unwinding of our variable interest in a synthetic fuel production facility in 2008, as well as a decrease in investment expenses related to a significant variable interestinter-segment eliminations included in a coal-based synthetic fuel production facility. The decrease in investment expense from this investment largely corresponds to an increase in income taxes due to fewer estimated synthetic fuel tax credits generated from fuel production. Partially offsetting the increase in total revenuessegment, which was a decrease of $3.5 million in fee revenue for transitional services provided to CitiMortgage, Inc., in the prior year, related to the sale of Principal Residential Mortgage, Inc., which is mostly offset by a corresponding change in total expense.expenses.
Total Expenses
Total expenses decreased $4.5 million, or 65%, to a negative $11.4 million for the year ended December 31, 2006, from a negative $6.9 million for the year ended December 31, 2005. The decrease in total expenses was primarilyincreased due to a $9.8 million decrease inhigher interest expense related to federal income tax activities as well as a $3.4 million decrease in transitional services provided to CitiMortgage, Inc., in the prior year, related to the sale of Principal Residential Mortgage, which is mostly offset in total revenue. The decrease inand interest expense on corporate debt. In addition, total expenses was largely offset by $12.2 million increase in interest related to the issuance of corporate debt.
Income tax benefits decreased $26.8 million, or 55%, to $21.7 million for the year ended December 31, 2006, from $48.5 million for the year ended December 31, 2005. The decrease was primarilyincreased due to a decrease in the estimated synthetic fuelinter-segment eliminations included in this segment, which was offset by a corresponding change in operating revenues. These increases were partially offset by a decline in amounts credited to employee accounts in a nonqualified defined contribution pension plan.
Income Taxes
Income tax credits in 2006, as well as a decreasebenefits increased due to an increase in operating loss before income taxes and preferred stock dividends.
Preferred stock dividendstaxes. Also contributing to the increased $15.3 million, or 86%,income tax benefits was the release of state deferred income tax liabilities associated with the reorganization of certain subsidiaries in 2008. The increased income tax benefits were offset in part by the reduction of synthetic fuel tax credits due to $33.0 million for the year endedtheir expiration as of December 31, 2006, from $17.7 million for the year ended December 31, 2005. The preferred stock dividends were a result of issuing preferred stock in June 2005.2007.
As a result of the foregoing factors, operating loss increased $5.9 million, or 28%, to $27.3 million for the year ended December 31, 2006, from $21.4 million for the year ended December 31, 2005.
Net realized/unrealized capital gains, as adjusted, increased $47.8 million to $34.2 million for the year ended December 31, 2006, from $13.6 million net realized/unrealized losses for the year ended December 31, 2005. The increase was primarily due to the gain on sale of stock of an equity method investment, fewer losses on sales of invested assets, and the prior year impairment of an equity partnership interest.
As a result of the foregoing factors and the inclusion of other after-tax adjustments, net income available to common stockholders increased $18.6 million, or 63%, to $48.1 million for the year ended December 31, 2006, from $29.5 million for the year ended December 31, 2005. For the year ended December 31, 2006, net income included other after-tax adjustments totaling $41.2 million related to positive effects of: (1) gains on sales of real estate properties that qualify for discontinued operations treatment ($30.9 million) (2) a favorable court ruling on contested IRS issues for 1991 and later years ($18.8 million) and the negative effect of a contribution to the Principal Financial Group Foundation, Inc. ($8.5 million).
Year Ended December 31, 20052007 Compared to Year Ended December 31, 20042006
Operating Loss
Total operating revenues decreased $36.1 million to a negative $59.1 million for the year ended December 31, 2005, from a negative $23.0 million for the year ended December 31, 2004. Net investment income decreased $21.5 millionOperating loss increased primarily due to the increase in investment expenseshigher interest expense, largely related to the acquisitionissuance of a significant variable interestcorporate debt in a coal-based synthetic fuel production facility in June 2004. The increase in investment expense from this investment is more thanthe fourth quarter of 2006, partially offset by a decrease in income taxeshigher annualized investment yields driven by the joint venture real estate portfolio.
Operating Revenues
Operating revenues decreased primarily due to synthetic fuel tax credits generated from fuel production. In addition, the decrease in total revenues was partially due to a decrease of $7.7 million in fee revenue for transitional services provided to CitiMortgage, Inc., in the prior year, related to the sale of Principal Residential Mortgage, Inc., which is mostly offset by a corresponding change in total expense. Furthermore, the decrease in total revenues was due to a $5.5 millionan increase in inter-segment eliminations included in this segment, which was offset by a corresponding change in total expenses. This decrease was partially offset by an increase in average annualized investment yields driven by the joint venture real estate portfolio.
Total Expenses
Total expenses decreased $54.8 million to a negative $6.9 million for the year ended December 31, 2005, from a positive $47.9 million for the year ended December 31, 2004. The decrease in total expenses was partiallyprimarily due to a $23.0 million decreasean increase in interest related to federal income tax audit activities as well as a $13.5 million decrease in interest related to the reduction of corporate debt. Furthermore, the decrease in total expenses was due to a $7.3 million decrease in transitional services provided to CitiMortgage, Inc., in the prior year, related to the sale of Principal Residential Mortgage, which is mostly offset in total revenue. Further contributing to the overall decrease was a $7.2 million decrease related to a prior year prepayment penalty recognized on the redemption of our surplus notes due 2024. In addition, inter-segment eliminations included in this segment, increased $5.5 million, resultingwhich was offset by a corresponding change in aoperating revenues. This decrease was partially offset by an increase in total expenses.interest expense on corporate debt and interest expense related to federal income tax activities.
Income Taxes
Income tax benefits decreased $2.0 million, or 4%, to $48.5 million for the year ended December 31, 2005, from $50.5 million for the year ended December 31, 2004. The decrease wasincreased primarily due to a decreasean increase in operating loss before income taxes and preferred stock dividends, a change in income tax reserves established for IRS tax matters, as well as a tax benefit associated with the sale of a foreign investment in 2004. Largely offsetting these decreases in income tax benefits are a full year of synthetic fuel tax credits.
Preferred stock dividends were $17.7 million for the year ended December 31, 2005, with no corresponding activity for the year ended December 31, 2004. The preferred stock dividends were a result of issuing preferred stock in June 2005.
As a result of the foregoing factors, operating loss increased $1.0 million, or 5%, to $21.4 million for the year ended December 31, 2005, from $20.4 million for the year ended December 31, 2004.
Net realized/unrealized capital losses, as adjusted, increased $40.0 million to $13.6 million for the year ended December 31, 2005, from $26.4 million net realized/unrealized gains for the year ended December 31, 2004. The increase in net realized/unrealized capital losses was primarily due to less mark to market gains on certain seed money investments, increased losses on sales of invested assets, and the impairment of an equity partnership interest.
As a result of the foregoing factors and the inclusion of other after-tax adjustments, net income available to common stockholders increased $23.5 million to $29.5 million for the year ended December 31, 2005, from $6.0 million for the
year ended December 31, 2004. For the year ended December 31, 2005, net income included the positive effect of other after-tax adjustments totaling $64.5 million related to: (1) a decrease in income tax reserves and associated interest related to IRS tax matters ($42.2 million) and (2) gains on sales of real estate properties that qualify for discontinued operations treatment ($22.3 million).taxes.
Liquidity and Capital Resources
Liquidity and capital resources represent the overall strength of a company and its ability to generate strong cash flows, borrow funds at a competitive rate and raise new capital to meet operating and growth needs. Our legal entity organizational 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 that cash flows from these sources are sufficient to satisfy the current liquidity requirements of our operations, including reasonably foreseeable contingencies. However, there can be no assurance that future experience regarding benefits and surrenders will be similar to historic experience or our forecasts of reasonably possible liquidity scenarios, since benefits and surrender levels are influenced by such factors as the interest rate environment, our claims paying ability and our financial strength ratings.
We maintain a level of cash and securities which, combined with expected cash inflows from investments and operations, is believed to be adequate to meet anticipated short-term and long-term benefit and expense payment obligations. However, withdrawal and surrender levels may differ from anticipated levels for a variety of reasons. In the event our current internal sources of liquidity do not satisfy our needs, we may have to seek additional financing and, in such case, we may not be able to successfully obtain additional financing on favorable terms, or at all.
With the uncertainty surrounding the length and severity of the current global recession, we believe it is prudent capital management to continue to explore any and all options available to us to maximize capital flexibility, including accessing the capital markets, utilizing our commercial paper program, cost cutting and internal efficiency initiatives, U.S. government sources of funding and transactions with strategic and other investors. Disruptions, uncertainty or volatility in the capital and credit markets may limit our access to capital required to operate our business. Such market conditions may limit our ability to replace, in a timely manner, maturing liabilities; satisfy statutory capital requirements; fund redemption requests on insurance or other financial products; generate fee income and market-related revenue to meet liquidity needs and access the capital necessary to grow our business. As such, we may be forced to delay raising capital, issue shorter tenor securities than we prefer, utilize available internal resources or bear an unattractive cost of capital which could decrease our profitability and significantly reduce our financial flexibility and liquidity. We will closely
monitor market opportunities to issue securities at favorable terms, explore other capital raising transactions, and continue to follow developments of government programs.
Despite the fact that approximately $19.1 billion, or 98%, of our institutional GICs and funding agreements cannot be redeemed by contractholders prior to maturity and that our life insurance and annuity liabilities contain provisions limiting early surrenders, given market conditions we have built additional liquidity by increasing cash and cash equivalent holdings to $2.6 billion as of December 31, 2008. Actions to increase liquidity and manage capital include: (i) investing new cash flows into more liquid securities, (ii) reducing our common stock dividend from prior year levels to $0.45 per share and (iii) suspending purchases of our common stock under the existing share repurchase authorization, effective October 13, 2008. Currently, new cash inflows are primarily being invested in cash, short-term government-backed securities and other liquid investments. As a result of increased cash holdings, current yields will be lower than historically experienced. This trend will continue as long as market conditions remain strained and we continue to invest new cash inflows in cash and liquid investments.
As a savings and loan holding company subject to oversight of the Office of Thrift Supervision, we have applied to participate in TCPP. If we participate in TCPP, we would issue preferred shares and warrants to the Treasury. The amount for which a company can apply is prescribed by the application. We have applied for and could participate in up to $2.0 billion under the program. As a diversified financial services company providing investment, banking, retirement and insurance products to businesses and individuals, the company is a significant provider of credit and liquidity to U.S. corporate and consumer markets. Receipt of TCPP proceeds would allow us to continue to fulfill that role by supporting our ongoing organic growth needs, including Principal Bank, our federal savings bank subsidiary.
If we were to participate in the TCPP, we would be subject to certain limitations. Prior to the third anniversary of our participation, unless we had redeemed all of the preferred stock issued under the TCPP or the U.S. Treasury had transferred all of the preferred stock to a third party, the consent of the U.S. Treasury would be required for us to, among other things, increase our common stock dividend or repurchase our common stock or other preferred stock (with certain exceptions, including the repurchase of our common stock to offset share dilution from equity-based employee compensation awards).
PFS was accepted for the Federal Reserve's Commercial Paper Funding Facility ("CPFF"). The CPFF is intended to serve as a funding backstop to facilitate the issuance of term commercial paper by eligible issuers. Through CPFF, the Federal Reserve Bank of New York will finance the purchase of unsecured and asset-backed highly rated, U.S.-dollar denominated, three-month commercial paper from eligible issuers through its primary dealers. The facility has been recently extended and is now expected to expire on October 31, 2009. Our available funding under the CPFF is approximately $233.0 million, and as of December 31, 2008, PFS had used its available capacity under the CPFF.
As of December 31, 2008, we had credit facilities with various financial institutions in an aggregate amount of $792.4 million. As of December 31, 2008 and 2007, we had $500.9 million and $290.8 million of outstanding borrowings related to our credit facilities, with zero and $30.3 million of assets pledged as support, respectively. Assets pledged consisted primarily of commercial mortgages and securities. Our credit facilities include a $600.0 million commercial paper program, of which we issued $482.3 million as of December 31, 2008, $233.0 million of which was issued under the Federal Reserve's CPFF. Our commercial paper program has a back-stop facility to provide 100% support for our commercial paper program, of which there were no outstanding balances as of December 31, 2008. On October 5, 2008, Lehman Commercial Paper Inc. ("LCP"), a subsidiary of Lehman Brothers Holdings Inc., filed for protection under Chapter 11 of the Federal Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York. LCP is a lender under our credit facilities and had committed to provide $21.0 million under each facility. We are uncertain whether LCP will fulfill its commitments under the credit facilities in light of its bankruptcy filing.
The Holding Companies: Principal Financial Group, Inc. and Principal Financial Services, Inc.
Liquidity describes the ability The principal sources of a companyfunds available to generate sufficient cash flows to meet the cash requirements of business operations. Ourour parent holding company, Principal Financial Group, Inc., is a Delaware business corporation, whose assets primarily consist of the outstanding capital stock of its subsidiaries. As a holding company, Principal Financial Group Inc.'s abilityPFG, to meet cash requirements,its obligations, including the payments of dividends on common stock, debt service and the repurchase of stock, substantially depends uponare dividends from subsidiaries primarily Principal Life.
as well as its ability to borrow funds at competitive rates and raise capital to meet operating and growth needs. Dividends from Principal Life,
The payment of stockholder dividends by Principal Life to its parent company is our primary subsidiary, are limited by Iowa laws.law. Under Iowa laws, Principal Life may pay dividends only from the earned surplus arising from its business and must receive the prior approval of the Insurance Commissioner of the State of Iowa ("the Commissioner") to pay a stockholder dividend if such a stockholder dividend would exceed certain statutory limitations. TheIn general, the current statutory limitation is the greater of:
Iowa law gives the Commissioner discretion to disapprove requests for dividends in excess of these limits. Based on this limitation and 20062008 statutory results, Principal Life could pay approximately $660.4$651.3 million in stockholder dividends in 20072009 without exceeding the statutory limitation.
Principal Life was ablecould have paid approximately $686.5 million in statutory dividends in 2008 based on its 2007 statutory financial results without being subject to paythe restrictions on payment of stockholder dividends. Total stockholder dividends paid by Principal Life to its parent company in 2008 were $5.5 million, which consisted of a non-cash dividend of an equity method investment.
Principal Life could have paid approximately $660.4 million in statutory dividends in 2007 based on its 2006 statutory financial results without being subject to the restrictions on payment of stockholder dividends. Total stockholder dividends paid by Principal Life to its parent company in 2007 were $650.0 million.
Principal Life could have paid approximately $630.7 million in statutory dividends in 2006 based on its 2005 statutory financial results without being subject to the restrictions on payment of extraordinary stockholder dividends.
On February 28, 2006, Principal Life declared a common stock dividend to its parent company of up to $625.0 million. The ordinary stockholder dividends paid by Principal Life to its parent company in 2006 were $426.2 million. In addition, Principal Life requested and received permission from the Commissioner to pay an extraordinary dividend in the amount of $750.0 million. The extraordinary stockholder dividends paid by Principal Life to its parent in 2006 were $750.0 million.
On November 2, 2005, Principal Life declared a dividend of up to $300.0 million. Total stockholder dividends paid by Principal Life to its parent company in 2005 were $200.0 million.
On May 19, 2004, Principal Life declared a dividend of up to $1.2 billion. Total ordinary stockholder dividends paid by Principal Life to its parent company in 2004 were $494.0 million. In March 2004, Principal Life redeemed $200.0 million of its surplus notes at a cost of $207.2 million. Principal Life and the Commissioner have agreed that this $207.2 million will be applied against Principal Life's 2004 ordinary dividend capacity. Principal Life requested and received permission from the Commissioner to pay an extraordinary dividend in the amount of $700.0 million, of which $630.0 million was paid in 2004.
Shelf Registration
Registration Statement.Operations. Although we generate adequate cash flow to meet the needs of our normal operations, periodically the need may arise to issue debt to fund internal expansion, acquisitions, investment opportunities and retirement of existing debt and equity. In December 2003, we filed a shelf registration statement with the Securities and Exchange Commission, which became effective on June 30, 2004. The shelf registration totals $3.0 billion, with the ability to issue debt securities, preferred stock, common stock, warrants, stock purchase contracts and stock purchase units of PFG and trust preferred securities of three subsidiary trusts. If we issue additional securities, we intend to use the proceeds from the sale of the securities for general corporate purposes, including working capital, capital expenditures, investments in subsidiaries, share repurchase, acquisitions and refinancing of debt, including commercial paper and other short-term indebtedness. Principal Financial Services, Inc. unconditionally guarantees our obligations with respect to one or more series of debt securities described in the shelf registration statement.
Senior Note Issuance. On October 16 and December 5, 2006, we issued $500.0 million and $100.0 million, respectively, of senior notes from our shelf registration, for net proceeds of $597.5 million. The notes will bear interest at a rate of 6.05% per year. Interest on the notes is payable semi-annually on April 15 and October 15, beginning on April 15, 2007. The notes will mature on October 15, 2036. A portion of the proceeds was used to fund the acquisition of WM Advisors, Inc., with the remaining proceeds being used for general corporate purposes. Following our senior note issuance, we now have the ability to issue up to $1.85 billion of debt securities, preferred stock, common stock, warrants, stock purchase contracts and stock purchase units of PFG and trust preferred securities of three subsidiary trusts, under the shelf registration.
Preferred Stock Issuances. On June 16, 2005, we issued 13.0 million shares of non-cumulative perpetual preferred stock under our shelf registration for net proceeds of $542.0 million. Substantially all of the preferred securities proceeds were used to repurchase shares of outstanding common stock.
Preferred Stock Dividend Restrictions and Payments. The certificates of designations for the preferred stock restrict the declaration of preferred dividends if we fail to meet specified capital adequacy, net income or stockholders' equity levels. As of December 31, 2006, we have no preferred dividend restrictions.
On March 30, 2006, June 30, 2006, October 2, 2006, and January 2, 2007, we paid a dividend of $8.3 million, $8.2 million, $8.3 million and $8.2 million, respectively, equal to $1.39 per share on Series A non-cumulative perpetual preferred stock and equal to $0.41 per share on Series B non-cumulative perpetual preferred stock. Dividends were paid to stockholders of record as of March 15, 2006, June 15, 2006, September 14, 2006, and December 14, 2006, respectively.
On September 30, 2005, and December 30, 2005, we paid a dividend of $9.4 million, and $8.3 million, respectively, equal to $1.59 per share and $1.39 per share, respectively, on Series A non-cumulative perpetual preferred stock and equal to $0.47 per share and $0.41 per share, respectively, on Series B non-cumulative perpetual preferred stock, to stockholders of record as of September 1, 2005, and December 15, 2005, respectively.
Common Stock Issued and Treasury Stock Acquired
Another source of liquidity is issuance of our common stock. Proceeds from the issuance of our common stock were $66.2 million and $59.9 million in 2006 and 2005, respectively.
In 2006, we paid $214.7 million in dividends to common stockholders. We paid a dividend of $0.80 per share on December 15, 2006, to stockholders of record as of November 22, 2006. In 2005, we paid $182.2 million, or $0.65 per share, in dividends to common stockholders. In 2004, we paid $166.5 million, or $0.55 per share, in dividends to common stockholders.
Our Board of Directors has authorized various repurchase programs under which we are allowed to purchase shares of our outstanding common stock. Shares repurchased under these programs are accounted for as treasury stock, carried at cost and reflected as a reduction to stockholders' equity. The repurchases are made in the open market or through privately negotiated transactions, from time to time, depending on market conditions.
On November 28, 2006, our Board of Directors authorized a repurchase program of up to $250.0 million of our outstanding common stock. As of December 31, 2006, no purchases have been made under this program.
On May 19, 2006, following our Board of Directors' share repurchase authorization, we entered into an accelerated common stock repurchase agreement with a third party investment bank for an aggregate purchase price of $500.0 million. On this date, we paid $500.0 million and received the initial delivery of 7.7 million common shares, while retaining the right to receive additional common shares depending on the volume weighted average share price of our common stock over the program's duration. The program was completed in November 2006. Under this program, we purchased 9.3 million common shares at an average price of $53.59.
In November 2005, our Board of Directors authorized a repurchase program of up to $250.0 million of our outstanding common stock. This program was completed in May 2006. Under this program, we acquired 5.1 million shares in the open market at an aggregate cost of $250.0 million in 2006.
In June 2005, following our Board of Directors authorization of the repurchase of up to 15.0 million shares of our outstanding common stock, we entered into an accelerated stock repurchase agreement with a third party investment banker for approximately 13.7 million shares of our common stock with an initial payment of $542.3 million. This transaction was subject to a market pricing adjustment provision based on the volume weighted average market price over the execution period, which could be settled in shares or cash. On October 3, 2005, we elected to settle in cash. On November 10, 2005, the transaction was completed for an additional payment of $84.0 million. We do not intend to make further purchases under this program.
In March 2005, our Board of Directors authorized a repurchase program of up to $250.0 million of our outstanding common stock. This program began after the completion of the May 2004 repurchase program, which authorized the repurchase of up to $700.0 million of our outstanding common stock. Under the May 2004 and March 2005 repurchase programs, we acquired 8.4 million shares in the open market at an aggregate cost of $325.0 million in 2005. Of that amount, $75.0 million was acquired under the May 2004 repurchase program and $250.0 million was acquired under the March 2005 repurchase program. The share repurchase program announced in March 2005 was completed in May 2005.
Our Board of Directors authorized a repurchase program of up to $700.0 million of our outstanding common stock in May 2004. We acquired 21.7 million common shares in the open market at an aggregate cost of $772.0 million during the year ended December 31, 2004. Of that amount, $625.0 million was acquired under the May 2004 repurchase program and $147.0 million was acquired under the May 2003 repurchase program which was completed in 2004.
Sources of liquidity also include facilities for short-term and long-term borrowing as needed, arranged through our intermediate holding company, Principal Financial Services Inc. ("PFSI"), and its subsidiaries. See "Contractual Obligations and Commercial Commitments" below.
Principal Life
Historically, the primary consolidated cash flow sources for Principal Life have beenare premiums from life and health 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, long-term debt and short-term borrowings.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, payment of dividends to parent, and payments relating to policy and contract surrenders, withdrawals, policy loans, interest expense and repayment of short-term borrowingsdebt and long-term debt.
Principal Life maintains Our investment strategies are generally intended to provide adequate funds to pay benefits without forced sales of investments. Products having liabilities with longer lives, such as life insurance and full-service payout pension products, are matched with assets having similar estimated lives such as mortgage loans, long-term bonds and private placement bonds. Shorter-term liabilities are matched with investments such as short and medium-term fixed maturities. In addition, highly liquid, high quality short-term investments are held to fund anticipated operating expenses, surrenders, withdrawals and development and maintenance expenses associated with new products and technologies. Our privately placed fixed maturity securities, commercial mortgage loans and real estate investments are generally less liquid than our publicly traded fixed maturity securities. These asset classes represented approximately 41% and 40% of the valueFor a discussion of our consolidated invested assetsinvestment objectives, strategies and a discussion of duration matching, see "Investments" as of December 31, 2006 and 2005 respectively. Seewell as Item 7A. "Quantitative and Qualitative Disclosures about Market Risk — Interest Rate Risk" for a discussion of duration matching.Risk."
Life insurance companies generally produce a positive cash flow from operations, as measured by the amount by which cash inflows are adequate to meet benefit obligations to policyholders and normal operating expenses as they are incurred. The remaining cash flow is generally used to increase the asset base to provide funds to meet the need for future policy benefit payments and for writing and acquiring new business. It is important to match the investment portfolio maturities to the cash flow demands of the type of annuity, investment or insurance product being provided. Principal Life continuously monitors benefits, surrenders and maturities to provide projections of future cash requirements. As part of this monitoring process, Principal Life performs cash flow testing of many of its assets and liabilities under various scenarios to evaluate the adequacy of reserves. In developing its investment strategy, Principal Life establishes a level of cash and securities which, combined with expected net cash inflows from operations, maturities of fixed maturity investments and principal payments on mortgage-backed securities and commercial mortgage loans, are believed adequate to meet anticipated short-term and long-term benefit and expense payment obligations. There can be no assurance that future experience regarding benefits and surrenders will be similar to historic experience since withdrawal and surrender levels are influenced by such factors as the interest rate environment and the claims paying ability and financial strength ratings of Principal Life.
Principal Life takes into account asset-liability management considerations in the product development and design process. Contract terms of 98% of Principal Life's universal and variable universal life insurance products as of December 31, 2006 and 2005, include surrender and withdrawal provisions which mitigate the risk of losses due to early withdrawals. These provisions generally do one or more of the following: limit the amount of penalty-free withdrawals; limit the circumstances under which withdrawals are permitted; or assess a surrender charge or market value adjustment relating to the underlying assets. The market value adjustment feature in Principal Life's fixed annuity products adjusts
the surrender value of a contract in the event of surrender prior to the end of the contract period to protect Principal Life against losses due to higher interest rates at the time of surrender.
Our GICs and funding agreements contain provisions limiting early surrenders, including penalties for early surrenders and minimum notice requirements.
The following table presents U.S. GAAP reserves for guaranteed investment contracts and funding agreements by withdrawal provisions as of December 31, 2006 and 2005:
| | December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| | 2006 | 2005 | |||||||
| | (in millions) | ||||||||
| Book Value Out(1) | |||||||||
| Surrenderable: | |||||||||
| Book value out without surrender charge | $ | 3.1 | $ | 3.7 | |||||
| Book value out with surrender charge | 2,322.4 | 2,189.0 | |||||||
| Total surrenderable | 2,325.5 | 2,192.7 | |||||||
| Total book value out | 2,325.5 | 2,192.7 | |||||||
Market Value Out(2) | |||||||||
| Less than 30 days' notice | — | — | |||||||
| 30 to 89 days' notice | — | 23.8 | |||||||
| 90 to 180 days' notice | 950.1 | 335.7 | |||||||
| More than 180 days' notice | 3,261.1 | 3,591.8 | |||||||
| No active surrender provision | 314.8 | 252.3 | |||||||
| Total market value out | 4,526.0 | 4,203.6 | |||||||
| Not puttable or surrenderable | 19,698.2 | 18,037.3 | |||||||
| Total GICs and funding agreements | $ | 26,549.7 | $ | 24,433.6 | |||||
International Asset Management and Accumulation Operations Cash Flows.
Our Brazilian, Hong Kong, Indian, and Mexican operations produced positive cash flow from operations for the year ended December 31, 2006. For the years ended December 31, 2005 and 2004, our Chilean, Indian and Mexican operations produced positive cash flow from operations. These cash flows have been historically maintained at the local country level for strategic expansion purposes and local capital requirements. Our international operations have required infusions of capital primarily to fund acquisitions and to a lesser extent, to meet the cash outflow and capital requirements of certain operations. Our capital funding of these operations is consistent with our long-term strategy to establish viable companies that can sustain future growth from internally generated sources. Based on reviews of our current capital needs and strategic opportunities within our foreign operations, we repatriated a portion of the capital from certain countries in 2006, 2005, and 2004.
Sources and Uses of Cash of Consolidated Operations
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 our discontinued operations, which were as follows:
| | For the year ended December 31, | For the year ended December 31, | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Cash flows attributable to discontinued operations: | 2008 | 2007 | 2006 | |||||||||||||||||
| 2006 | 2005 | 2004 | ||||||||||||||||||
| | (in millions) | (in millions) | ||||||||||||||||||
| Net cash provided by (used in) operating activities | $ | (1.1 | ) | $ | 125.1 | $ | 627.7 | |||||||||||||
Net cash provided by operating activities | $ | — | $ | 2.5 | $ | 1.9 | ||||||||||||||
| Net cash used in investing activities | (0.9 | ) | (125.0 | ) | (473.7 | ) | — | (1.3 | ) | (3.4 | ) | |||||||||
| Net cash provided by financing activities | — | — | 600.0 | |||||||||||||||||
Net cash used in financing activities | — | (0.5 | ) | (0.6 | ) | |||||||||||||||
Net cash provided by operating activities was $2,278.5$2,224.8 million, $2,126.2$2,960.0 million and $2,031.5$2,275.5 million for the years ended December 31, 2008, 2007 and 2006, 2005,respectively. As an insurance business, we typically generate positive cash flows from operating activities, as premiums collected from our insurance products and 2004, respectively.income received from our investments exceed policy 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 expenses paid. The decrease in cash provided by operating activities in 2008 compared to 2007 was primarily the result of the fluctuations in receivables and payables associated with timing of settlements. The increase in cash provided by operating activities in 20062007 compared to 20052006 was primarily related to the paymentfluctuations in 2005 of an IRS deficiency related to the examination for 1999 - 2001. Also contributing to the increase in cash provided by operating activities was an increase in proceeds in the net mortgage loans held for sale activity, due to the transition of our CMBS platform from Principal Commercial Funding I to a newly created entity, Principal Commercial Funding II, which is accounted for under the equity method of accounting. The increase in cash provided by operating activities in 2005 compared to 2004 is due to an increase in premiumsoperational receivables and fees and other revenues received. This increase is partially offset by increased taxes paid in 2005, largely due to the 2005 payment of an Internal Revenue Service deficiency related to the examination for 1999-2001.payables.
Net cash used in investing activities was $3,912.9$2,917.2 million, $1,483.7$4,499.2 million and $3,184.6$3,910.4 million for the years ended December 31, 2008, 2007 and 2006, 2005,respectively. The decrease in cash used in investing activities was primarily the result of a decrease in net purchases of investments as we have held and 2004, respectively.are holding higher cash balances to cover potential near term obligations and to further reposition our investment portfolio as necessary. The increase in cash used in investing activities in 20062007 compared to 20052006 was primarily due to a decrease in sales and fewer maturities of available-for-sales securities, partially offset by a decrease in purchases of available-for-sale securities. Also contributing to the increase was an increase in net purchases of mortgage loans, acquired and a decrease in mortgage loans sold. The acquisition of WM Advisors in the fourth quarter of 2006 also contributed to the increase in cash used in investing activities. The decrease in cash used in 2005 for investing activities compared to 2004 is primarily due to a decrease in the net acquisitions of available-for-sale securities and mortgage loans. Offsetting this was the sale of subsidiaries, including the sale of Principal Residential Mortgage, Inc.real estate as well as additional contributions in 2007 to CitiMortgage, Inc., in 2004,an equity method investment with no corresponding activity in 2005.2006. This increase was partially offset by larger acquisitions in 2006 relative to 2007.
Net cash provided by financing activities was $1,585.9$1,956.0 million, $546.2$1,292.1 million and $414.1$1,586.5 million for the years ended December 31, 2006, 2005,2008, 2007 and 2004,2006, respectively. The increase in cash provided by financing activities in 20062008 compared to 20052007 is primarily due to our actions to increase liquidity and manage capital risk via a reduction in the acquisition of treasury stock as well as the reduction of our common stock dividend from prior year levels. The decrease in cash provided by financing activities in 2007 compared to 2006 was primarily due to the issuance of $600.0 million of senior notes from our shelf registration in the fourth quarter of 2006, in addition to an increase in net deposits of investment contracts and a decrease in treasury stock acquisitions in 2006 compared to 2005. Offsetting these increases in cash provided were repayments of short-term borrowings, as well as the preferred stock issuance in 2005, with no corresponding activity in 2006. The increase in cash provided by financing activities in 2005 compared to 2004 was primarily due to a preferred stock issuance in 2005, increases in short term borrowing2007 as well as a reduction in long term debt repayments in 2005. These increases were partially offset by a decrease in net deposits of investment contracts, offset in part by proceeds from short-term debt in the current year, compared to payments of short-term debt in the previous year. We will have $454.9 million of long-term debt due in 2009; our plan is to refinance this debt. We have applied to participate in the FDIC Temporary Liquidity Guarantee Program ("TLGP") program. If we do not qualify for the FDIC TLGP, we may not be able to issue debt into the capital markets on terms that are favorable to us or at all due to, among other things, the continuing disruptions in the financial markets and/or investor preference for debt issued by participants in the TLGP. If the public debt markets are not accessible to us, we believe that we have several options to refinance this debt, including: use of our commercial paper program, reduction of our common dividend, or a dividend of excess liquidity from Principal Life, funded by either cash or selling cash
equivalents. In the event that no debt sources are available to refinance the $454.9 million of long-term debt, we may have to recognize a gain or loss on certain interest rate hedges. For more information regarding the derivatives, see Item 8. "Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 8, Derivative Financial Instruments" under the caption, "Cash Flow Hedges."
Shelf Registration. We currently have an increaseeffective shelf registration which allows us the ability to issue, in treasuryunlimited amounts, unsecured senior debt securities or subordinated debt securities, junior subordinated debt, preferred stock, acquisitionscommon stock, warrants, depository shares, stock purchase contracts and stock purchase units of PFG, trust preferred securities of three subsidiary trusts and guarantees by PFG of these trust preferred securities. 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. For information on senior notes issued from our shelf registration, see Item 8. "Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 12, Debt."
Short-Term Debt and Long-Term Debt. For debt information, see Item 8. "Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 12, Debt."
Stockholders' Equity. Proceeds from the issuance of our common stock were $36.4 million, $73.6 million and $66.2 million in 2008, 2007 and 2006, respectively.
The following table summarizes our return of capital to common stockholders in 2008, 2007 and 2006.
| | For the year ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2008 | 2007 | 2006 | ||||||||
| | (in millions) | ||||||||||
Dividends to stockholders | $ | 116.7 | $ | 235.6 | $ | 214.7 | |||||
Repurchase of common stock | 6.4 | 756.3 | 755.8 | ||||||||
Total cash returned to stockholders | $ | 123.1 | $ | 991.9 | $ | 970.5 | |||||
Number of shares repurchased | 1.0 | 11.5 | 14.5 | ||||||||
To enhance our liquidity and capital position in the current market, our Board of Directors decided to suspend repurchases of our common stock under our stock repurchase program and reduce our common stock dividend from prior year levels. The resumption of our stock repurchase program and the accelerateddeclaration and payment of future dividends to the holders of our common stock repurchase settlement.
Givenwill be at the historical cash flowdiscretion of our Board of Directors and will depend on many factors including dividends from our operating subsidiaries, our financial condition and net income, the capital requirements of our subsidiaries, legal requirements, regulatory constraints, our credit and financial strength ratings and such other factors as the Board of Directors deems relevant.
For additional stockholders' equity information, see Item 8. "Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 16, Stockholders' Equity."
Capitalization
Our capital structure as of December 31, 2008 and 2007, consisted of debt and equity summarized as follows:
| | December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| | 2008 | 2007 | |||||||
| | (in millions) | ||||||||
Debt: | |||||||||
Short-term debt | $ | 500.9 | $ | 290.8 | |||||
Long-term debt | 1,290.5 | 1,398.8 | |||||||
Total debt | 1,791.4 | 1,689.6 | |||||||
Stockholders' equity: | |||||||||
Equity excluding accumulated other comprehensive income | 7,384.4 | 7,001.5 | |||||||
Total capitalization excluding accumulated other comprehensive income | $ | 9,175.8 | $ | 8,691.1 | |||||
Debt to equity excluding accumulated other comprehensive income | 24 | % | 24 | % | |||||
Debt to capitalization excluding accumulated other comprehensive income | 20 | % | 19 | % | |||||
As of December 31, 2008, between the life and the financial resultsholding companies, we had approximately $800.0 million of capital in excess of levels needed to maintain our current credit rating. In addition to the previously mentioned suspension of share repurchases and the adjustment of the current year common stock dividend, we are taking other actions to maximize internally generated capital, above and beyond what is currently being generated from ongoing operations. This includes: managing growth of capital intensive businesses and new expense initiatives, including limitations on new hiring, reducing 2009 merit increases by more than 75%, and the reduction of approximately 550 existing positions. We expect these subsidiaries, we believe the cash flow from our consolidated operating activitiesefforts to be a source of additional capital over the next yearseveral quarters. Excess capital levels will provide sufficient liquidityhelp position us to capitalize on organic growth and acquisition opportunities.
Contractual Obligations
The following table presents payments due by period for long-term contractual obligations as of December 31, 2008:
| | | Payments due in year ending | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Contractual Obligations (1) | Total Payments | 2009 | 2010-2011 | 2012-2013 | 2014 and thereafter | |||||||||||
| | (in millions) | |||||||||||||||
Contractholder funds (2) | $ | 61,476.0 | $ | 7,898.5 | $ | 11,829.0 | $ | 13,560.3 | $ | 28,188.2 | ||||||
Future policy benefits and claims (3) | 39,492.7 | 2,084.6 | 3,475.5 | 3,341.2 | 30,591.4 | |||||||||||
Long-term debt (4) | 1,290.5 | 466.5 | 92.5 | 17.5 | 714.0 | |||||||||||
Certificates of deposit (5) | 1,272.4 | 1,029.6 | 170.7 | 69.6 | 2.5 | |||||||||||
Other long-term liabilities (6) | 1,315.8 | 1,102.1 | — | — | 213.7 | |||||||||||
Capital leases | 11.5 | 5.7 | 5.6 | 0.2 | — | |||||||||||
Long-term debt interest | 1,338.3 | 74.2 | 97.5 | 95.5 | 1,071.1 | |||||||||||
Operating leases (7) | 198.5 | 53.9 | 73.8 | 34.8 | 36.0 | |||||||||||
Purchase obligations (8) | 226.4 | 189.8 | 30.0 | 6.6 | — | |||||||||||
Total contractual obligations | $ | 106,622.1 | $ | 12,904.9 | $ | 15,774.6 | $ | 17,125.7 | $ | 60,816.9 | ||||||
Pension and Other Postretirement Plan Funding
We have defined benefit pension plans covering substantially all of our U.S. employees and certain agents. See Item 8. "Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 14, Employee and Agent Benefits" for a complete discussion of these plans and their effect on the consolidated financial statements.
We report the net funded status of our pension and other postretirement plans in the Consolidated Statements of Financial Condition as a component of accumulated other comprehensive income in stockholders' equity. It represents the differences between the fair value of plan assets and the projected benefit obligation for pension plans and the accumulated postretirement benefit obligation for other postretirement plans that have not yet been recognized as a component of net periodic cost. The measurement of the net funded status can vary based upon the fluctuations in the fair value of the plan assets and the actuarial assumptions used for the plans as discussed below. The net underfunded status of the pension and other post-retirement benefit obligation at December 31, 2008, was $404.8 million pre-tax, a decrease of $881.9 million from a net funded status of $477.1 million pre-tax at December 31, 2007. The decline in the net funded status of the pension and other postretirement benefit obligation in 2008 is primarily related to market conditions experienced in 2008.
Our funding policy for the qualified pension plan is to fund the plan annually in an amount at least equal to the minimum annual contributions required under ERISA and, generally, not greater than the maximum amount that can be deducted for federal income tax purposes. We do not anticipate contributions will be needed to satisfy the minimum funding requirements of ERISA for our qualified pension plan. At this time, it is too early to estimate the amount that may be contributed, but it is possible that we may fund the plans in 2009 in the range of $20-$50 million. This includes funding for both our qualified and nonqualified pension plans. We may contribute to our other postretirement benefit plans in 2009 pending further analysis.
Contractual Commitments
In connection with our banking business, we make additional commitments to extend credit, which are agreements to lend to a customer as long as there is no violation of any conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. A majority of these commitments are lines of credit and are expected to expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash funding requirements. We evaluate each customer's creditworthiness on a case-by-case basis. The total commitments to fund loans were $193.8 million as of December 31, 2008.
We have made commitments to fund certain limited partnerships in which we are a limited partner. As of December 31, 2008, the amount of unfunded commitments was $90.6 million. We are only required to fund additional equity under these commitments when called upon to do so by the general partner, therefore these commitments are not liabilities on our consolidated statements of financial position.
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 8. "Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 5, Variable Interest Entities." We do not have a direct or contingent obligation related to our unconsolidated variable interest entities ("VIE") other than described below.
Retained Interests in Securitized Assets. Previously, we, along with other contributors, sold commercial mortgage loans in securitization transactions to trusts. As these trusts are classified as qualifying special purpose entities, they are not subject to the VIE consolidation rules. We may retain interests in the securitization transactions. At December 31, 2008 and 2007, the fair values of retained interests related to the securitizations of commercial mortgage loans were $133.2 million and $315.8 million, respectively. The investors and the securitization entities have no recourse to our assets for failure of debtors to pay when due. The value of our retained interests is subject primarily to credit risk. During the third quarter of 2008, we made a decision to terminate our commercial mortgage securities issuance operation.
Guarantees and Indemnifications. For guarantee and indemnification information, see Item 8. "Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 15, Contingencies, Guarantees and Indemnifications" under the caption, "Guarantees and Indemnifications."
Financial Strength Rating and Credit Ratings
Our ratings are influenced by many factors including our operating and financial performance, asset quality, liquidity, asset/liability management, overall portfolio mix, financial leverage (i.e., debt), risk exposures, operating leverage, ratings and other factors.
NRSROs publish financial strength ratings on U.S. life insurance companies that are indicators of an insurance company's ability to meet contractholder and policyholder obligations. NRSROs also assign credit ratings on non-life
insurance entities, such as PFG and PFS. Credit ratings are indicators of a debt issuer's ability to meet the terms of debt obligations in a timely manner, and are important factors in overall funding profile and ability to access external capital. Such ratings are not a recommendation to buy, sell or hold securities. Ratings are subject to revision or withdrawal at any time by the assigning NRSRO, and each rating should be evaluated independently of any other rating.
Ratings are important factors in establishing the competitive position of insurance companies and maintaining public confidence in products being offered. A ratings downgrade, or the potential for such a downgrade, could, among other things: (i) materially increase the number of surrenders for all or a portion of the net cash values by the owners of policies, contracts, general account GICs we have issued, and materially increase the number of withdrawals by policyholders of cash values from their policies; (ii) result in the termination of our relationships with broker-dealers, banks, agents, wholesalers and other distributors of our products and services; (iii) reduce new sales, particularly with respect to general account GICs and funding agreements purchased by pension plans and other institutions; (iv) cause some of our existing liabilities to be subject to acceleration, additional collateral support, changes in terms, or creation of additional financial obligations and (v) increase our cost of capital and limit our access to the capital markets. Any of these consequences could adversely affect our profitability and financial condition.
In recent months, each of A.M. Best Company, Inc., Fitch Ratings Ltd., Moody's Investors Service, and Standard & Poor's has revised its outlook for the U.S. life insurance industry from stable to negative. Of the many issues cited, the negative outlook is primarily based on expectations for higher-than-normal credit losses, negative impact of the volatile equity market on earnings and reduced financial flexibility.
These outlook revisions signal increased review of U.S. life insurance companies by A.M. Best Company, Inc., Fitch Ratings, Ltd., Moody's Investors Service, and Standard & Poor's. As a result, it is possible there will be changes in the benchmarks for capital, liquidity, earnings and other factors used by these NRSROs that are critical to a ratings assignment at a particular rating level. If any such changes are made, it is possible that such changes could have an impact on the ratings of U.S. life insurance companies, including ours, which could adversely impact our profitability and financial condition.
As a reflection of the change by the rating agencies of their view of the market and the impact on life insurance companies, on February 10, 2009, Moody's Investors Service affirmed Principal Life's insurance financial strength rating, with a negative outlook, and Standard & Poor's also affirmed Principal Life's insurance financial strength rating, with a credit watch — negative outlook. While the affirmations reflect our financial strength, operating performance and ability to meet obligations, the negative and credit watch — negative outlooks reflect Moody's Investors Service and Standard & Poor's expectations that equity market risk will have an impact on our earnings, and that there will be additional asset impairments. On February 13, 2009, Fitch Ratings Ltd. downgraded Principal Life's insurance financial strength rating to AA-, with a rating watch — negative outlook. While the AA- rating is still considered strong, macroeconomic pressure is impacting the outlook for the rating. The following table summarizes our significant financial ratings from the major independent rating organizations:
| A.M. Best | Fitch | Standard & Poor's | Moody's | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
Principal Financial Group | ||||||||||
Senior Unsecured Debt | A | A3 | ||||||||
Preferred Stock | BBB+ | Baa2 | ||||||||
Principal Financial Services | ||||||||||
Senior Unsecured Debt | A | A2 | ||||||||
Commercial Paper | A-1 | P-1 | ||||||||
Principal Life Insurance Company | ||||||||||
Insurer Financial Strength | A+ | AA- | AA | Aa2 | ||||||
Enterprise Risk Management Rating | Strong | |||||||||
Impacts of Income Taxes
The Internal Revenue Service (the "Service") has completed examinations of the U.S. consolidated federal income tax returns for 2003 and prior years. The Service's completion of the examinations for the years 1999 - 2001 resulted in notices of deficiency dated December 29, 2004, and March 1, 2005. We paid the deficiencies (approximately $444.0 million for 1999 and 2000, and $1.3 million for 2001, including interest) in the first quarter of 2005 and have filed, or will file, claims for refund relating to the disputed adjustments. The examination for the years 2002 and 2003 resulted in a refund of approximately $176.7 million (including interest) of which $161.5 million related to deficiencies previously paid as a result of the 1999-2001 examination. We believe that we have adequate defenses against, or sufficient provisions for, the contested issues, but final resolution of the contested issues could take several years while legal remedies are pursued. Consequently, we do not expect the ultimate resolution of issues in tax years 1999 - 2003 to have a material impact on our net income. Similarly, we believe there are adequate defenses against, or sufficient provisions for, any challenges that might arise in tax years subsequent to 2003.
On October 22, 2004, the American Jobs Creation Act of 2004 (the "Act") was signed into law. The Act included a repatriation provision granting U.S. corporations a special deduction of 85% of certain qualifying dividends from their foreign subsidiaries. A company could elect to apply this provision to qualifying earnings that were repatriated in its 2005 tax year. Pursuant to the Act, we implemented two domestic reinvestment plans in 2005. In accordance with the provisions of the Internal Revenue Code, we elected an 85% dividend received deduction on eligible cash dividends totaling $28.8 million.
Ratio of Earnings to Fixed Charges
The ratio of earnings to fixed charges is a measure of our ability to cover fixed costs with current period earnings. A high ratio indicates that earnings are sufficiently covering committed expenses. The following table sets forth, for the years indicated, our ratios of:
| | For the year ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2006 | 2005 | 2004 | 2003 | 2002 | |||||
| Ratio of earnings to fixed charges before interest credited on investment products | 10.2 | 11.1 | 9.5 | 7.5 | 4.5 | |||||
| Ratio of earnings to fixed charges | 2.2 | 2.1 | 2.0 | 1.9 | 1.4 | |||||
We calculate the ratio of "earnings to fixed charges before interest credited on investment products" by dividing the sum of income from continuing operations before income taxes (BT), interest expense (I), interest factor of rental expense (IF) less undistributed income from equity investees (E) by the sum of interest expense (I), interest factor of rental expense (IF), preferred stock dividends by the registrant (PD) and dividends on majority-owned subsidiary redeemable preferred securities (non-intercompany) (D). The formula for this ratio is: (BT+I+IF-E)/(I+IF+PD+D).
We calculate the ratio of "earnings to fixed charges" by dividing the sum of income from continuing operations before income taxes (BT), interest expense (I), interest factor of rental expense (IF) less undistributed income from equity investees (E) and the addition of interest credited on investment products (IC) by interest expense (I), interest factor of rental expense (IF), preferred stock dividends by the registrant (PD), dividends on majority-owned subsidiary redeemable preferred securities (non-intercompany) (D) and interest credited on investment products (IC). The formula for this ratio is: (BT+I+IF-E+IC)/(I+IF+PD+D+IC). "Interest credited on investment products" includes interest paid on guaranteed investment contracts, funding agreements and other investment-only pension products. Similar to debt, these products have a total fixed return and a fixed maturity date.
Contractual Obligations and Commercial Commitments
In connection with our banking business, we make additional commitments to extend credit, which are agreements to lend to a customer as long as there is no violation of any conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. A majority of these commitments are lines of credit and are expected to expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash funding requirements. We evaluate each customer's creditworthiness on a case-by-case basis. The following table presents payments due by period for long-term contractual obligationstotal commitments to fund loans were $193.8 million as of December 31, 2006:
| | | Payments due in year ending | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Contractual Obligations(1) | Total Payments | 2007 | 2008- 2009 | 2010- 2011 | 2012 and thereafter | ||||||||||
| | (in millions) | ||||||||||||||
| Contractholder funds(2) | $ | 57,615.5 | $ | 8,653.1 | $ | 12,054.9 | $ | 8,661.3 | $ | 28,246.2 | |||||
| Future policy benefits and claims(3) | 38,503.6 | 1,945.2 | 3,231.3 | 3,126.5 | 30,200.6 | ||||||||||
| Long-term debt(4) | 1,553.8 | 143.5 | 94.8 | 578.7 | 736.8 | ||||||||||
| Certificates of deposit(5) | 870.9 | 430.6 | 376.2 | 60.0 | 4.1 | ||||||||||
| Other long-term liabilities(6) | 674.2 | 457.1 | — | — | 217.1 | ||||||||||
| Capital leases | 17.9 | 0.9 | 2.1 | 2.3 | 12.6 | ||||||||||
| Long-term debt interest | 1,624.9 | 104.2 | 184.8 | 164.9 | 1,171.0 | ||||||||||
| Operating leases(7) | 215.5 | 56.4 | 85.1 | 43.8 | 30.2 | ||||||||||
| Purchase obligations(8) | 739.3 | 707.2 | 23.1 | 9.0 | — | ||||||||||
| Total contractual obligations | $ | 101,815.6 | $ | 12,498.2 | $ | 16,052.3 | $ | 12,646.5 | $ | 60,618.6 | |||||
Our guaranteed investment contracts and funding agreements contain provisions limiting early surrenders, which typically include penalties for early surrenders, minimum notice requirements or, in the case of funding agreements with survivor options, minimum pre-death holding periods and specific maximum amounts.
Funding agreements include those issued directly to nonqualified institutional investors, as well as to three separate programs where the funding agreements have been issued directly or indirectly to unconsolidated special
purpose entities. Claims for principal and interest under funding agreements are afforded equal priority to claims of life insurance and annuity policyholders under insolvency provisions of Iowa Insurance Laws.2008.
We have made commitments to fund certain limited partnerships in which we are authorized to issue up to $4.0 billion of funding agreements under a program established in 1998 to support the prospective issuance of medium term notes by an unaffiliated entity in non-U.S. markets.limited partner. As of December 31, 2006 and 2005, $3,770.4 million and $3,203.6 million, respectively, of liabilities are being held with respect to the issuance outstanding under this program. We do not anticipate any new issuance activity under this program as we are authorized to issue up to Euro 4.0 billion (approximately USD$5.3 billion) of funding agreements under a program established in 2006 to support the prospective issuance of medium term notes by an unaffiliated entity in non-U.S. markets. The unaffiliated entity is an unconsolidated special purpose vehicle. As of December 31, 2006, $474.1 million of liabilities are outstanding with respect to the issuance outstanding under this new program.
In addition, we are authorized to issue up to $7.0 billion of funding agreements under a program established in 2001 to support the prospective issuance of medium term notes by an unaffiliated entity in both domestic and international markets. As of December 31, 2006 and 2005, $3,747.9 million and $4,744.5 million, respectively, of liabilities were being held with respect to the issuance outstanding under this program. We do not anticipate any new issuance activity under this program, given our December 2005 termination of the dealership agreement for this program and the availability of the SEC-registered program described in the following paragraph.
We are authorized to issue up to $4.0 billion of funding agreements under a program established in March 2004 to support the prospective issuance of medium term notes by unaffiliated entities in both domestic and international markets. In recognition of the use of nearly all $4.0 billion of initial issuance authorization, the program was amended in February 2006 to authorize issuance of up to an additional $5.0 billion. Under this program, both the notes and the supporting funding agreements are registered with the SEC. As of December 31, 2006 and 2005, $5,831.4 million and $3,667.9 million, respectively, of liabilities are being held with respect to the issuance outstanding under this program. In contrast with direct funding agreements, GIC issuances and the other two funding agreement-backed medium term note programs described above, Principal Life's payment obligations on each funding agreement issued under this SEC-registered program are guaranteed by Principal Financial Group, Inc.
Amounts included in the contractholder funds line item reflect estimated cash payments to be made to policyholders. The sum of the cash outflows shown for all years in the table exceeds the corresponding liability amount included in our consolidated financial statements as of December 31, 2006. The liability amount in our consolidated financial statements reflects estimated cash payments to policyholders, assumptions with regard to the timing of cash payments and discounting for interest.
On October 16 and December 5, 2006, we issued $500.0 million and $100.0 million, respectively, of senior notes from our shelf registration, which was filed with the SEC in December 2003. The notes will bear interest at a rate of 6.05% per year. Interest on the notes is payable semi-annually on April 15 and October 15, beginning on April 15, 2007. The notes will mature on October 15, 2036. A portion of the proceeds was used to fund the acquisition of WM Advisors, Inc., with the remaining proceeds being used for general corporate purposes.
On November 3, 2005, Principal International de Chile S.A., a wholly owned indirect subsidiary, entered into long-term borrowing agreements with two Chilean banks in2008, the amount of US $93.9unfunded commitments was $90.6 million. This debt is denominated in Unidades de Formento ("UF"), a Chilean inflation-indexed, peso-denominated monetary unit. Of this amount, US $49.0 million of UF +4.59% notes and US $44.9 million of UF +4.93% notes mature on November 3, 2011. Interest on the notes is payable semi-annually on May 3 and November 3 each year. The debt outstanding and interest expense will vary dueWe are only required to fluctuations in the Chilean pesofund additional equity under these commitments when called upon to US dollar exchange rates and Chilean inflation.
On August 25, 1999, Principal Financial Group (Australia) Holdings Pty. Limited, a wholly owned indirect subsidiary, issued $665.0 million of unsecured redeemable long-term debt. Of this amount, $200.0 million of 7.95% notes matured on August 15, 2004, with the remaining $465.0 million in 8.2% notes due August 15, 2009. On December 28, 2001, all of the long-term debt obligations of Principal Financial Group (Australia) Holdings Pty. Limited were assumed by its parent, Principal Financial Services, Inc.
On March 10, 1994, Principal Life issued $100.0 million of surplus notes due March 1, 2044, at an 8% annual interest rate. None of our affiliates hold any portion of the notes. Each payment of interest and principal on the notes, however, may be made only with the prior approval of the Commissioner and only to the extent that Principal Life has sufficient surplus earnings to make such payments.
Subject to Commissioner approval, the notes due March 1, 2044, may be redeemed at Principal Life's election on or after March 1, 2014, in whole or in part at a redemption price of approximately 102.3% of par. The approximate 2.3% premium is scheduled to gradually diminish over the following ten years. These notes may be redeemed on or after March 1, 2024, at a redemption price of 100% of the principal amount plus interest accrued to the date of redemption.
Long-term debt also includes $298.0 million of mortgages and other notes payable related to real estate developments. We, including certain subsidiaries, had $135.0 million in credit facilities as of December 31, 2006, with various financial institutions, in addition to obtaining loans with various lenders to finance these developments. Outstanding principal balances as of December 31, 2006, range from $0.3 million to $96.2 million per development with interest rates generally ranging from 5.5% to 8.6%. Outstanding principal balances as of December 31, 2005, range from $0.3 million to $97.5 million per development with interest rates generally ranging from 5.5% to 8.6%. Outstanding debt is secureddo so by the underlying real estate properties, which were reported as real estategeneral partner, therefore these commitments are not liabilities on our consolidated statements of financial positionposition.
Off-Balance Sheet Arrangements
Variable Interest Entities. We have relationships with a carrying valuevarious types of $246.2 millionspecial purpose entities and $284.1 million as of December 31, 2006 and 2005, respectively.
In addition to the mortgages and notes payable noted above, we assumed a long-term debt obligation with the purchase of WM Advisors, Inc. As part of the purchase, we will be bound by a class B share financing agreement previously entered into by WM Advisors, Inc. and a third party, which was assigned a value of $86.9 million at purchase. Load mutual fund shares sold without a front end load are referred to as "B shares". In exchange for paying the selling commission, the company receives fees in the future to recover the up-front commission cost incurred. Prior to our purchase, WM Advisors, Inc. had entered into a purchase and sale agreement whereby the third party would purchase the rights to future cash flow streams in exchange for funding the sales commissions. The fair value of these relinquished fees is reported as a long-term debt liability. There will be no additional sales under this agreement following the effective date of the purchase. Therefore, this liability will be extinguished within eight years, which equates to the contractual term in which the fund can recover fees to cover the upfront commission costs.
Financial Strength Rating and Credit Ratings
Our ratings are influenced by many factors including our operating and financial performance, asset quality, liquidity, asset/liability management, overall portfolio mix, financial leverage (i.e., debt), risk exposures, operating leverage, ratings and other factors.
NRSROs publish financial strength ratings on U.S. life insurance companies that are indicators of an insurance company's ability to meet contractholder and policyholder obligations. NRSROs also assign credit ratings on non-life
insurance entities, such as PFG and PFS. Credit ratings are indicators of a debt issuer's ability to meet the terms of debt obligations in a timely manner, and are important factors in overall funding profile and ability to access external capital. Such ratings are not a recommendation to buy, sell or hold securities. Ratings are subject to revision or withdrawal at any time by the assigning NRSRO, and each rating should be evaluated independently of any other rating.
Ratings are important factors in establishing the competitive position of insurance companies and maintaining public confidence in products being offered. A ratings downgrade, or the potential for such a downgrade, could, among other things: (i) materially increase the number of surrenders for all or a portion of the net cash values by the owners of policies, contracts, general account GICs we have issued, and materially increase the number of withdrawals by policyholders of cash values from their policies; (ii) result in the termination of our relationships with broker-dealers, banks, agents, wholesalers and other distributors of our products and services; (iii) reduce new sales, particularly with respect to general account GICs and funding agreements purchased by pension plans and other institutions; (iv) cause some of our existing liabilities to be subject to acceleration, additional collateral support, changes in terms, or creation of additional financial obligations and (v) increase our cost of capital and limit our access to the capital markets. Any of these consequences could adversely affect our profitability and financial condition.
In recent months, each of A.M. Best Company, Inc., Fitch Ratings Ltd., Moody's Investors Service, and Standard & Poor's has revised its outlook for the U.S. life insurance industry from stable to negative. Of the many issues cited, the negative outlook is primarily based on expectations for higher-than-normal credit losses, negative impact of the volatile equity market on earnings and reduced financial flexibility.
These outlook revisions signal increased review of U.S. life insurance companies by A.M. Best Company, Inc., Fitch Ratings, Ltd., Moody's Investors Service, and Standard & Poor's. As a result, it is possible there will be changes in the benchmarks for capital, liquidity, earnings and other factors used by these NRSROs that are critical to a ratings assignment at a particular rating level. If any such changes are made, it is possible that such changes could have an impact on the ratings of U.S. life insurance companies, including ours, which could adversely impact our profitability and financial condition.
As a reflection of the change by the rating agencies of their view of the market and the impact on life insurance companies, on February 10, 2009, Moody's Investors Service affirmed Principal Life's insurance financial strength rating, with a negative outlook, and Standard & Poor's also affirmed Principal Life's insurance financial strength rating, with a credit watch — negative outlook. While the affirmations reflect our financial strength, operating performance and ability to meet obligations, the negative and credit watch — negative outlooks reflect Moody's Investors Service and Standard & Poor's expectations that equity market risk will have an impact on our earnings, and that there will be additional asset impairments. On February 13, 2009, Fitch Ratings Ltd. downgraded Principal Life's insurance financial strength rating to AA-, with a rating watch — negative outlook. While the AA- rating is still considered strong, macroeconomic pressure is impacting the outlook for the rating. The following table summarizes our significant financial ratings from the major independent rating organizations:
| A.M. Best | Fitch | Standard & Poor's | Moody's | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
Principal Financial Group | ||||||||||
Senior Unsecured Debt | A | A3 | ||||||||
Preferred Stock | BBB+ | Baa2 | ||||||||
Principal Financial Services | ||||||||||
Senior Unsecured Debt | A | A2 | ||||||||
Commercial Paper | A-1 | P-1 | ||||||||
Principal Life Insurance Company | ||||||||||
Insurer Financial Strength | A+ | AA- | AA | Aa2 | ||||||
Enterprise Risk Management Rating | Strong | |||||||||
Contractual Commitments
In connection with our banking business, we make additional commitments to extend credit, which are agreements to lend to a customer as long as there is no violation of any conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. A majority of these commitments are lines of credit and are expected to expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash funding requirements. We evaluate each customer's creditworthiness on a case-by-case basis. The total commitments to fund loans were $135.7$193.8 million as of December 31, 2006.2008.
Short-Term Debt
The components of short-term debt as of December 31, 2006 and 2005We have made commitments to fund certain limited partnerships in which we are as follows:
| | December 31, | ||||||
|---|---|---|---|---|---|---|---|
| | 2006 | 2005 | |||||
| | (in millions) | ||||||
| Commercial paper | $ | — | $ | 349.9 | |||
| Other recourse short-term debt | 23.1 | 55.1 | |||||
| Non-recourse short-term debt | 61.0 | 71.4 | |||||
| Total short-term debt | $ | 84.1 | $ | 476.4 | |||
a limited partner. As of December 31, 2006, we had credit facilities with various financial institutions in an aggregate2008, the amount of $887.7unfunded commitments was $90.6 million. AsWe are only required to fund additional equity under these commitments when called upon to do so by the general partner, therefore these commitments are not liabilities on our consolidated statements of December 31, 2006 and 2005, we had $84.1 million and $476.4 million of outstanding borrowings related to our credit facilities, with $74.5 million and $110.6 million of assets pledged as support, respectively. Assets
pledged consisted primarily of commercial mortgages and securities. Our credit facilities also include a $600.0 million back-stop facility to provide 100% support for our commercial paper program, of which there were no outstanding balances as of December 31, 2006.
The weighted-average interest rates on short-term borrowings as of December 31, 2006 and 2005, were 5.6% and 4.5% respectively.financial position.
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 8,8. "Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 5, Variable Interest Entities." We do not have a direct or contingent obligation related to our unconsolidated variable interest entities ("VIE") other than described below.
Synthetic Fuel Production Facility. In June 2004, we acquired a significant variable interest in a coal-based synthetic fuel production facility where we are not the primary beneficiary. Our minority ownership interest was acquired in exchange for consideration of $37.0 million, which is primarily comprised of a non-recourse note payable for $36.0 million, as well as a commitment to fund our pro-rata share of the operations. We have also agreed to make additional payments to the seller based on our pro-rata allocation of the tax credits generated by the facility. The synthetic fuel produced at the facility through 2007 qualifies for tax credits pursuant to Section 29 of the Internal Revenue Code (currently credits are not available for fuel produced after 2007). Our obligation to support the entity's future operations is, therefore, limited to the tax benefit we expect to receive.
Retained Interests in Securitized Assets. We,Previously, we, along with other contributors, sellsold commercial mortgage loans in securitization transactions to trusts. As these trusts are classified as a qualifying special purpose entity,entities, they are not subject to the VIE consolidation rules. We may retain interests in the securitization transaction.transactions. At December 31, 20062008 and 2005,2007, the fair values of retained interests related to the securitizations of commercial mortgage loans were $345.3$133.2 million and $321.0$315.8 million, respectively. The investors and the securitization entities have no recourse to our assets for failure of debtors to pay when due. The value of our retained interests is subject primarily to credit risk. During the third quarter of 2008, we made a decision to terminate our commercial mortgage securities issuance operation.
Guarantees and Indemnifications. InFor guarantee and indemnification information, see Item 8. "Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 15, Contingencies, Guarantees and Indemnifications" under the normal coursecaption, "Guarantees and Indemnifications."
Financial Strength Rating and Credit Ratings
Our ratings are influenced by many factors including our operating and financial performance, asset quality, liquidity, asset/liability management, overall portfolio mix, financial leverage (i.e., debt), risk exposures, operating leverage, ratings and other factors.
NRSROs publish financial strength ratings on U.S. life insurance companies that are indicators of business,an insurance company's ability to meet contractholder and policyholder obligations. NRSROs also assign credit ratings on non-life
insurance entities, such as PFG and PFS. Credit ratings are indicators of a debt issuer's ability to meet the terms of debt obligations in a timely manner, and are important factors in overall funding profile and ability to access external capital. Such ratings are not a recommendation to buy, sell or hold securities. Ratings are subject to revision or withdrawal at any time by the assigning NRSRO, and each rating should be evaluated independently of any other rating.
Ratings are important factors in establishing the competitive position of insurance companies and maintaining public confidence in products being offered. A ratings downgrade, or the potential for such a downgrade, could, among other things: (i) materially increase the number of surrenders for all or a portion of the net cash values by the owners of policies, contracts, general account GICs we have provided guaranteesissued, and materially increase the number of withdrawals by policyholders of cash values from their policies; (ii) result in the termination of our relationships with broker-dealers, banks, agents, wholesalers and other distributors of our products and services; (iii) reduce new sales, particularly with respect to third partiesgeneral account GICs and funding agreements purchased by pension plans and other institutions; (iv) cause some of our existing liabilities to be subject to acceleration, additional collateral support, changes in terms, or creation of additional financial obligations and (v) increase our cost of capital and limit our access to the capital markets. Any of these consequences could adversely affect our profitability and financial condition.
In recent months, each of A.M. Best Company, Inc., Fitch Ratings Ltd., Moody's Investors Service, and Standard & Poor's has revised its outlook for the U.S. life insurance industry from stable to negative. Of the many issues cited, the negative outlook is primarily relatedbased on expectations for higher-than-normal credit losses, negative impact of the volatile equity market on earnings and reduced financial flexibility.
These outlook revisions signal increased review of U.S. life insurance companies by A.M. Best Company, Inc., Fitch Ratings, Ltd., Moody's Investors Service, and Standard & Poor's. As a result, it is possible there will be changes in the benchmarks for capital, liquidity, earnings and other factors used by these NRSROs that are critical to a former subsidiary, joint venturesratings assignment at a particular rating level. If any such changes are made, it is possible that such changes could have an impact on the ratings of U.S. life insurance companies, including ours, which could adversely impact our profitability and industrial revenuefinancial condition.
As a reflection of the change by the rating agencies of their view of the market and the impact on life insurance companies, on February 10, 2009, Moody's Investors Service affirmed Principal Life's insurance financial strength rating, with a negative outlook, and Standard & Poor's also affirmed Principal Life's insurance financial strength rating, with a credit watch — negative outlook. While the affirmations reflect our financial strength, operating performance and ability to meet obligations, the negative and credit watch — negative outlooks reflect Moody's Investors Service and Standard & Poor's expectations that equity market risk will have an impact on our earnings, and that there will be additional asset impairments. On February 13, 2009, Fitch Ratings Ltd. downgraded Principal Life's insurance financial strength rating to AA-, with a rating watch — negative outlook. While the AA- rating is still considered strong, macroeconomic pressure is impacting the outlook for the rating. The following table summarizes our significant financial ratings from the major independent rating organizations:
| A.M. Best | Fitch | Standard & Poor's | Moody's | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
Principal Financial Group | ||||||||||
Senior Unsecured Debt | A | A3 | ||||||||
Preferred Stock | BBB+ | Baa2 | ||||||||
Principal Financial Services | ||||||||||
Senior Unsecured Debt | A | A2 | ||||||||
Commercial Paper | A-1 | P-1 | ||||||||
Principal Life Insurance Company | ||||||||||
Insurer Financial Strength | A+ | AA- | AA | Aa2 | ||||||
Enterprise Risk Management Rating | Strong | |||||||||
Impacts of Income Taxes
For income tax information, see Item 8. "Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 13, Income Taxes."
Fair Value Measurement
As discussed in Item 8. "Financial Statements, Notes to Consolidated Financial Statements, Note 17, Fair Value Measurement" we adopted SFAS 157 effective January 1, 2008. SFAS 157 defines fair value 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) and establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels for disclosure purposes. The fair value hierarchy gives the highest priority (Level 1) to quoted prices in active markets for identical assets or liabilities and gives the lowest priority to unobservable
inputs (Level 3). An asset or liability's classification within the fair value hierarchy is based on the lowest level of significant input to its valuation. The levels of the fair value hierarchy are as follows:
We did not make any significant changes to our valuation process during the year of 2008. For further information on investments and derivatives, see Item 8. "Financials Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 6, Investments, and Note 8, Derivative Financial Instruments."
Assets and liabilities measured at fair value on a recurring basis as of December 31, 2006, was approximately $180.0 million; however, we believe2008, are summarized below.
| | As of December 31, 2008 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Assets / (liabilities) measured at fair value | Fair value hierarchy level | ||||||||||||
| | Level 1 | Level 2 | Level 3 | |||||||||||
| | (in millions) | |||||||||||||
Assets | ||||||||||||||
Fixed maturities, available-for-sale | $ | 40,117.2 | $ | 126.7 | $ | 38,817.5 | $ | 1,173.0 | ||||||
Fixed maturities, trading | 843.4 | — | 782.7 | 60.7 | ||||||||||
Equity securities, available-for-sale | 242.7 | 176.4 | 10.1 | 56.2 | ||||||||||
Equity securities, trading | 158.0 | 61.3 | 96.7 | — | ||||||||||
Net derivative assets and liabilities | (261.3 | ) | — | (95.1 | ) | (166.2 | ) | |||||||
Other investments | 75.9 | 13.2 | 62.7 | — | ||||||||||
Cash equivalents | 1,807.9 | 656.3 | 1,151.6 | — | ||||||||||
Sub-total excluding separate account assets | 42,983.8 | 1,033.9 | 40,826.2 | 1,123.7 | ||||||||||
Separate account assets | 55,142.6 | 30,693.4 | 18,406.9 | 6,042.3 | ||||||||||
Total assets | $ | 98,126.4 | $ | 31,727.3 | $ | 59,233.1 | $ | 7,166.0 | ||||||
Liabilities | ||||||||||||||
Investment-type insurance contracts | $ | (60.2 | ) | $ | — | $ | — | $ | (60.2 | ) | ||||
Other liabilities | (109.3 | ) | — | (5.5 | ) | (103.8 | ) | |||||||
Total liabilities | $ | (169.5 | ) | $ | — | $ | (5.5 | ) | $ | (164.0 | ) | |||
Net assets | $ | 97,956.9 | $ | 31,727.3 | $ | 59,227.6 | $ | 7,002.0 | ||||||
% of net assets | 32 | % | 61 | % | 7 | % | ||||||||
% of net assets, excluding separate account assets | 2 | % | 95 | % | 3 | % | ||||||||
Changes in Level 3 fair value measurements
The reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the likelihoodyear ended December 31, 2008, is remote that material payments will be requiredas follows:
| | For the year ended December 31, 2008 | | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Total realized/unrealized gains (losses) | | | | | ||||||||||||||||
| | Beginning asset/ (liability) balance as of January 1, 2008 | | | Ending asset/ (liability) balance as of December 31, 2008 | | |||||||||||||||||
| | Purchases, sales, issuances and settlements | | | |||||||||||||||||||
| | Included in net income (1) | Included in other comprehensive income | Transfers in (out) of Level 3 | Net increase (decrease) | ||||||||||||||||||
| | (in millions) | |||||||||||||||||||||
Assets | ||||||||||||||||||||||
Fixed maturities, available-for-sale | $ | 2,201.3 | $ | (148.5 | ) | $ | (507.8 | ) | $ | (567.2 | ) | $ | 195.2 | $ | 1,173.0 | $ | (1,028.3 | ) | ||||
Fixed maturities, trading | 92.3 | (19.1 | ) | — | (11.4 | ) | (1.1 | ) | 60.7 | (31.6 | ) | |||||||||||
Equity securities, available-for-sale | 51.1 | (41.5 | ) | (12.1 | ) | 20.7 | 38.0 | 56.2 | 5.1 | |||||||||||||
Net derivative assets and liabilities | (8.0 | ) | (125.3 | ) | (23.9 | ) | (9.0 | ) | — | (166.2 | ) | (158.2 | ) | |||||||||
Separate account assets | 7,313.2 | (958.9 | ) | 1.0 | (209.5 | ) | (103.5 | ) | 6,042.3 | (1,270.9 | ) | |||||||||||
Liabilities | ||||||||||||||||||||||
Investment-type insurance contracts | (49.3 | ) | (58.4 | ) | (0.1 | ) | 47.6 | — | (60.2 | ) | (10.9 | ) | ||||||||||
Other liabilities | (155.6 | ) | — | 70.0 | (18.2 | ) | — | (103.8 | ) | 51.8 | ||||||||||||
Net total | $ | 9,445.0 | $ | (1,351.7 | ) | $ | (472.9 | ) | $ | (747.0 | ) | $ | 128.6 | $ | 7,002.0 | $ | (2,443.0 | ) | ||||
The decrease in the fair value of Level 3 instruments for the year ended December 31, 2008, is primarily attributed to separate account assets and fixed maturities, available-for-sale securities. The decrease in separate account assets is primarily a liability on ourresult of unrealized losses, which does not impact net income in the consolidated statements of financial position. Should we be required to perform under these guarantees, we generally could recoveroperations, as the change in value of separate account assets is offset by a portionchange in value of separate account liabilities. The decrease in fixed maturities, available-for-sale securities resulted from the settlement of certain credit collateralized debt obligations and unrealized losses recognized in other comprehensive income. Most of the loss from third parties through recourse provisionsfixed maturity available-for-sale securities unrealized losses included in agreementsother comprehensive income are related to corporate bonds, with such parties, the sale of assets held as collateral that can be liquidated in the event that performance is required under the guarantees or other recourse generally availablelesser amounts attributed to us. Therefore, such guarantees would not result in a material adverse effect on our business or financial position. It is possible that such outcomes could materially affect net income in a particular quarter or annual period. The fair value of such guarantees is not material.
We are also subject to various other indemnificationcollateralized debt obligations, issued in conjunction with certain transactions, primarily the sale of Principal Residential Mortgage, Inc.commercial mortgage-backed securities and other divestitures, acquisitions and financing transactions whose terms range in duration and often are not explicitly defined. Certain portions of these indemnifications may be capped, while other portions are not subject to such limitations; therefore, the overall maximum amount of the obligation under the indemnifications cannot be reasonably estimated. While we are unable to estimate with certainty the ultimate legal and financial liability with respect to these indemnifications, we believe the likelihood is remote that material payments would be required under such indemnifications and therefore such indemnifications would not result in a material adverse effect on our business or financial position. It is possible that such outcomes could materially affect net income in a particular quarter or annual period. The fair value of such indemnifications was determined to be insignificant.asset-backed securities.
Investments
We had total consolidated assets as of December 31, 2006,2008, of $143.7$128.2 billion, of which $60.3$59.1 billion were invested assets. The rest of our total consolidated assets are comprised primarily of separate account assets for which we do not bear investment risk. Because we generally do not bear any investment risk on assets held in separate accounts, the discussion and financial information below does not include such assets.
Overall Composition of Invested Assets
Invested assets as of December 31, 2008, were predominantly high quality and broadly diversified across asset class, individual credit, industry and geographic location. Asset allocation is determined based on cash flow and the risk/return requirements of our products. As shown in the following table, the major categories of invested assets are fixed maturity
securities and commercial mortgage loans. The remainder is invested in residential mortgage loans, real estate, equity securities and other assets. In addition, policy loans are included in our invested assets.
| | December 31, 2008 | December 31, 2007 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Carrying amount | % of total | Carrying amount | % of total | ||||||||||
| | ($ in millions) | |||||||||||||
Fixed maturity securities: | ||||||||||||||
Public | $ | 28,786.7 | 49 | % | $ | 31,847.2 | 50 | % | ||||||
Private | 12,173.9 | 21 | 15,421.0 | 24 | ||||||||||
Equity securities | 400.7 | 1 | 586.2 | 1 | ||||||||||
Mortgage loans: | ||||||||||||||
Commercial | 11,279.3 | 19 | 10,763.5 | 17 | ||||||||||
Residential | 1,834.3 | 3 | 1,896.1 | 3 | ||||||||||
Real estate held for sale | 139.6 | — | 82.4 | — | ||||||||||
Real estate held for investment | 779.8 | 1 | 780.1 | 1 | ||||||||||
Policy loans | 896.4 | 1 | 869.9 | 1 | ||||||||||
Other investments | 2,816.6 | 5 | 2,118.6 | 3 | ||||||||||
Total invested assets | 59,107.3 | 100 | % | 64,365.0 | 100 | % | ||||||||
Cash and cash equivalents | 2,608.0 | 1,344.4 | ||||||||||||
Total invested assets and cash | $ | 61,715.3 | $ | 65,709.4 | ||||||||||
Investment Results
The following table presents the yield and investment income, excluding net realized capital gains and losses for our invested assets. We calculate annualized yields using a simple average of asset classes at the beginning and end of the reporting period.
| | For the year ended December 31, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2008 | 2007 | ||||||||||||
| | Yield | Amount | Yield | Amount | ||||||||||
| | ($ in millions) | |||||||||||||
Fixed maturity securities | 7.0 | % | $ | 3,105.8 | 6.2 | % | $ | 2,869.2 | ||||||
Equity securities | 3.8 | 18.9 | 3.8 | 27.0 | ||||||||||
Mortgage loans — commercial | 6.1 | 666.8 | 6.6 | 688.9 | ||||||||||
Mortgage loans — residential | 8.3 | 154.8 | 7.5 | 129.7 | ||||||||||
Real estate | 6.1 | 54.6 | 8.9 | 74.9 | ||||||||||
Policy loans | 6.6 | 58.3 | 6.1 | 52.6 | ||||||||||
Cash and cash equivalents | 2.9 | 57.0 | 7.2 | 105.9 | ||||||||||
Other investments | 0.9 | 21.8 | 9.3 | 165.1 | ||||||||||
Total before investment expenses | 6.5 | 4,138.0 | 6.4 | 4,113.3 | ||||||||||
Investment expenses | 0.2 | (143.7 | ) | 0.2 | (146.8 | ) | ||||||||
Net investment income | 6.3 | % | $ | 3,994.3 | 6.2 | % | $ | 3,966.5 | ||||||
The following tables present the contributors to net realized capital gains and losses for our invested assets for the years ended December 31, 2008 and 2007.
| | For the year ended December 31, 2008 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Impairments and credit losses | Other gains (losses) | Hedging adjustments | Net realized capital gains (losses) | ||||||||||
| | (in millions) | |||||||||||||
Fixed maturity securities (1) | $ | (411.0 | ) | $ | 23.1 | $ | 496.3 | $ | 108.4 | |||||
Fixed maturity securities, trading | — | (61.7 | ) | — | (61.7 | ) | ||||||||
Equity securities (2) | (46.2 | ) | 1.6 | — | (44.6 | ) | ||||||||
Equity securities, trading | — | (65.7 | ) | — | (65.7 | ) | ||||||||
Mortgage loans on real estate (3) | (44.8 | ) | — | — | (44.8 | ) | ||||||||
Derivatives (4) | — | — | (645.1 | ) | (645.1 | ) | ||||||||
Other (5) | (7.3 | ) | (46.0 | ) | 112.7 | 59.4 | ||||||||
Total | $ | (509.3 | ) | $ | (148.7 | ) | $ | (36.1 | ) | $ | (694.1 | ) | ||
| | For the year ended December 31, 2007 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Impairments and credit losses | Other gains (losses) | Hedging adjustments | Net realized capital gains (losses) | ||||||||||
| | (in millions) | |||||||||||||
Fixed maturity securities (1) | $ | (262.8 | ) | $ | 17.1 | $ | 151.8 | $ | (93.9 | ) | ||||
Fixed maturity securities, trading | — | 1.7 | — | 1.7 | ||||||||||
Equity securities (2) | (51.3 | ) | 5.0 | — | (46.3 | ) | ||||||||
Equity securities, trading | — | 23.0 | — | 23.0 | ||||||||||
Mortgage loans on real estate (3) | (7.1 | ) | — | — | (7.1 | ) | ||||||||
Derivatives (4) | — | — | (228.5 | ) | (228.5 | ) | ||||||||
Other (5) | — | 34.6 | (12.3 | ) | 22.3 | |||||||||
Total | $ | (321.2 | ) | $ | 81.4 | $ | (89.0 | ) | $ | (328.8 | ) | |||
U.S. Investment Operations
Of our invested assets, $57.0$55.8 billion were held by our U.S. operations and the remaining $3.3 billion were held by our International Asset Management and Accumulation segment.
U.S. Investment Operations
as of December 31, 2008. Our U.S. invested assets are managed primarily by Principal Global Investors, a subsidiary of Principal Life.Investors. Our primary investment objective is to maximize after-tax returns consistent with acceptable risk parameters. We seek to protect policyholders' benefits by optimizing the risk/return relationship on an ongoing basis, through asset/liability matching,
reducing the 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 three primary sources of investment risk:
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. Our Investment Committee, appointed by our Board of Directors, is responsible for establishing all investment policies and approving or authorizing all investments, except the Executive Committee of the Board must approve any investment transaction exceeding $500.0 million. As of December 31, 2006,2008, there are ten members on the Investment Committee, two of whom are members of our Board of Directors. The remaining members are senior management members representing various areas of our company.
We also seek to reduce call or prepayment risk arising from changes in interest rates in individual investments. We limit our exposure to investments that are prepayable without penalty prior to maturity at the option of the issuer and we require additional yield on these investments to compensate for the risk that the issuer will exercise such option. We assess option risk in all investments we make and, when we take that risk, we price for it accordingly.
Our Fixed Income Securities Committee, consisting of fixed income securities senior management members, approves the credit rating for the fixed maturity securities we purchase. Teams of security analysts, organized by industry, focus either on the public or private markets and analyze and monitor these investments. In addition, we have teams who specialize in residential mortgage-backed securities, commercial mortgage-backed securities ("CMBS"), asset-backed securities ("ABS") and public below investment grade securities. We establish a credit reviewed list of approved public issuers to provide an efficient way for our portfolio managers to purchase liquid bonds for which credit review has already been completed. Issuers remain on the list for one year unless removed by our analysts. Our analysts monitor issuers on the list on a continuous basis with a formal review documented annually or more frequently if material events affect the issuer. The analysis includes both fundamental and technical factors. The fundamental analysis encompasses both quantitative and qualitative analysis of the issuer.
The qualitative analysis includes an assessment of both accounting and management aggressiveness.aggressiveness of the issuer. In addition, technical indicators such as stock price volatility and credit default swap levels are monitored.
Our Fixed Income Securities Committee also reviews private transactions on a continuous basis to assess the quality ratings of our privately placed investments. We regularly review our investments to determine whether we should re-rate them, employing the following criteria:
A dedicated risk management team is responsible for centralized monitoring of the commercial mortgage loan portfolio. We apply a variety of strategies to minimize credit risk in our commercial mortgage loan portfolio. When considering the origination of new commercial mortgage loans, we review the cash flow fundamentals of the property, make a physical assessment of the underlying security, conduct a comprehensive market analysis and compare against industry lending practices. We use a proprietary risk rating model to evaluate all new and a majority of 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 designed to encourage 75% or less loan-to-value ratios 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 weighted average loan-to-value ratio at origination for brick and mortar commercial mortgages in our portfolio was 67%59% and the65% as of December 31, 2008 and 2007, respectively. The debt service coverage ratio at loan inception was 1.7 times as of both December 31, 2006.2008 and 2007.
We have limited exposure to equity risk in our common stock portfolio. Equity securities accounted for only 1% of our U.S. invested assets as of December 31, 2006.
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 7A,7A. "Quantitative and Qualitative Disclosures aboutAbout Market Risk".Risk — Interest Rate Risk."
Overall Composition of U.S. Invested Assets
U.S. invested assets as of December 31, 2006,2008, were predominantly of 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 U.S. invested assets are fixed maturity securities and commercial mortgages.mortgage loans. The remainder is invested in real estate, residential mortgage loans, real estate, equity securities and other assets. In addition, policy loans are included in our invested assets. The following discussion analyzes the composition of U.S. invested assets, but excludes invested assets of the participating separate accounts.
| | December 31, 2006 | December 31, 2005 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Carrying Amount | % of Total | Carrying Amount | % of Total | ||||||||
| | ($ in millions) | |||||||||||
| Fixed maturity securities: | ||||||||||||
| Public | $ | 28,772.4 | 51 | % | $ | 27,826.3 | 51 | % | ||||
| Private | 13,651.4 | 24 | 12,289.4 | 23 | ||||||||
| Equity securities | 795.7 | 1 | 764.0 | 2 | ||||||||
| Mortgage loans: | ||||||||||||
| Commercial | 10,090.3 | 18 | 9,890.7 | 18 | ||||||||
| Residential | 1,051.6 | 2 | 1,088.5 | 2 | ||||||||
| Real estate held for sale | 118.2 | — | 133.8 | — | ||||||||
| Real estate held for investment | 736.6 | 1 | 754.6 | 1 | ||||||||
| Policy loans | 850.7 | 1 | 827.7 | 2 | ||||||||
| Other investments | 972.6 | 2 | 755.3 | 1 | ||||||||
| Total invested assets | 57,039.5 | 100 | % | 54,330.3 | 100 | % | ||||||
| Cash and cash equivalents | 1,535.8 | 1,583.1 | ||||||||||
| Total invested assets and cash | $ | 58,575.3 | $ | 55,913.4 | ||||||||
U.S. Investment Results
The following tables present the yield and investment income, excluding net realized/unrealized gains and losses for our U.S. invested assets. The annualized yield on U.S. invested assets and on cash and cash equivalents was 5.9% for the year ended December 31, 2006, compared to 5.7% for the year ended December 31, 2005. We calculate annualized yields using a simple average of asset classes at the beginning and end of the reporting period.
| | December 31, 2008 | December 31, 2007 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Carrying amount | % of total | Carrying amount | % of total | ||||||||||
| | ($ in millions) | |||||||||||||
Fixed maturity securities: | ||||||||||||||
Public | $ | 26,652.5 | 48 | % | $ | 29,127.7 | 48 | % | ||||||
Private | 12,173.9 | 22 | 15,421.0 | 26 | ||||||||||
Equity securities | 359.9 | 1 | 533.5 | 1 | ||||||||||
Mortgage loans: | ||||||||||||||
Commercial | 11,279.3 | 20 | 10,763.5 | 18 | ||||||||||
Residential | 1,354.4 | 2 | 1,337.5 | 2 | ||||||||||
Real estate held for sale | 135.4 | — | 82.4 | — | ||||||||||
Real estate held for investment | 779.8 | 1 | 777.2 | 1 | ||||||||||
Policy loans | 881.4 | 2 | 853.7 | 2 | ||||||||||
Other investments | 2,162.4 | 4 | 1,391.4 | 2 | ||||||||||
Total invested assets | 55,779.0 | 100 | % | 60,287.9 | 100 | % | ||||||||
Cash and cash equivalents | 2,537.0 | 1,261.5 | ||||||||||||
Total invested assets and cash | $ | 58,316.0 | $ | 61,549.4 | ||||||||||
U.S. Invested AssetsInvestment Income Yields by Asset Type
| | For the year ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2006 | 2005 | |||||||||
| | Yield | Amount | Yield | Amount | |||||||
| | ($ in millions) | ||||||||||
| Fixed maturity securities | 6.0 | % | $ | 2,478.3 | 5.8 | % | $ | 2,302.5 | |||
| Equity securities | 7.1 | 55.1 | 6.5 | 48.5 | |||||||
| Mortgage loans — commercial | 6.5 | 653.3 | 6.7 | 671.7 | |||||||
| Mortgage loans — residential | 5.1 | 54.9 | 4.7 | 51.9 | |||||||
| Real estate | 7.4 | 64.7 | 7.0 | 64.0 | |||||||
| Policy loans | 6.1 | 50.9 | 6.1 | 50.3 | |||||||
| Cash and cash equivalents | 4.1 | 64.3 | 3.3 | 32.1 | |||||||
| Other investments | 8.9 | 76.4 | 2.4 | 25.0 | |||||||
| Total before investment expenses | 6.1 | 3,497.9 | 5.9 | 3,246.0 | |||||||
| Investment expenses | 0.2 | 132.2 | 0.2 | 133.6 | |||||||
| Net investment income | 5.9 | % | $ | 3,365.7 | 5.7 | % | $ | 3,112.4 | |||
Fixed Maturity Securities
Fixed maturity securities consist of short-term investments, publicly traded debt securities, privately placed debt securities and redeemable preferred stock, and represented 75% and 74% of total U.S. invested assets as of December 31, 2006 and December 31, 2005, respectively. The fixed maturity securities portfolio was comprised, based on carrying amount, of 68% in publicly traded fixed maturity securities and 32% in privately placed fixed maturity securities as of December 31, 2006 and 69% in publicly traded fixed maturity securities and 31% in privately placed fixed maturity securities as of December 31, 2005.stock. Included in the privately placed category as of December 31, 2006,2008 and December 31, 2005,2007, were $7.6$6.1 billion and $6.7$8.4 billion, respectively, of securities eligible for resale to qualified institutional buyers under Rule 144A under the Securities Act of 1933.
Fixed maturity securities were diversified by category of issuer as of December 31, 2006,2008 and December 31, 2005,2007, as shown in the following table:
U.S. Invested AssetsFixed Maturity Securities by Type of Issuer
| | | December 31, 2006 | December 31, 2005 | | December 31, 2008 | December 31, 2007 | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Carrying Amount | % of Total | Carrying Amount | % of Total | | Carrying amount | % of total | Carrying amount | % of total | ||||||||||||||||
| | | ($ in millions) | | ($ in millions) | ||||||||||||||||||||||
| U.S. Government and agencies | U.S. Government and agencies | $ | 551.6 | 1 | % | $ | 555.5 | 1 | % | U.S. Government and agencies | $ | 595.2 | 1 | % | $ | 672.3 | 2 | % | ||||||||
| States and political subdivisions | States and political subdivisions | 1,663.5 | 4 | 1,283.4 | 3 | States and political subdivisions | 2,176.7 | 6 | 2,071.5 | 5 | ||||||||||||||||
| Non-U.S. governments | Non-U.S. governments | 420.7 | 1 | 463.0 | 1 | Non-U.S. governments | 478.5 | 1 | 453.9 | 1 | ||||||||||||||||
| Corporate — public | Corporate — public | 19,791.1 | 47 | 19,590.8 | 49 | Corporate — public | 17,224.9 | 44 | 19,517.9 | 44 | ||||||||||||||||
| Corporate — private | Corporate — private | 10,596.5 | 25 | 9,901.5 | 25 | Corporate — private | 10,365.4 | 27 | 12,170.4 | 27 | ||||||||||||||||
| Residential pass-through securities | Residential pass-through securities | 1,557.6 | 4 | 1,526.0 | 4 | Residential pass-through securities | 2,187.9 | 6 | 1,496.1 | 3 | ||||||||||||||||
| Commercial mortgage-backed securities | Commercial mortgage-backed securities | 4,499.6 | 11 | 4,118.6 | 10 | Commercial mortgage-backed securities | 3,607.1 | 9 | 4,665.6 | 10 | ||||||||||||||||
| Residential collateralized mortgage obligations | Residential collateralized mortgage obligations | 940.4 | 2 | 752.5 | 2 | Residential collateralized mortgage obligations | 768.6 | 2 | 936.9 | 2 | ||||||||||||||||
| Asset-backed securities | Asset-backed securities | 2,402.8 | 5 | 1,924.4 | 5 | Asset-backed securities | 1,422.1 | 4 | 2,564.1 | 6 | ||||||||||||||||
| Total fixed maturities | $ | 42,423.8 | 100 | % | $ | 40,115.7 | 100 | % | Total fixed maturity securities | $ | 38,826.4 | 100 | % | $ | 44,548.7 | 100 | % | |||||||||
We held $9,400.4 million of mortgage-backed and asset-backed securities as of December 31, 2006, and $8,321.5 million as of December 31, 2005.
We believe that 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 GNMA, FNMAGovernment National Mortgage Association ("GNMA"), Federal National Mortgage Association ("FNMA") and FHLMCFederal Home Loan Mortgage Corporation ("FHLMC") pass-through securities. In addition, our residential collateralized mortgage obligation portfolio offers structural features that allow cash flows to be matched to our liabilities.
Commercial mortgage-backed securitiesCMBS provide highvarying levels of credit protection, diversification and reduced event risk depending on the securities owned and enhanced liquidity. Commercial mortgage-backed securitiescomposition of the loan pool. CMBS are predominantly comprised of rated large pool securitizations that are individually and collectively diverse by property type, borrower and geographic dispersion. The risks to any CMBS deal are determined by the credit quality of the underlying loans and how those loans perform over time. Another key risk is the vintage of the underlying loans and the state of the markets during a particular vintage. In the CMBS market, there is a material difference in the
outlook for the performance of loans originated in 2005 and earlier relative to loans originated in 2006 through 2008. For loans originated prior to 2006, underwriting assumptions were more conservative regarding required debt service coverage and loan-to-value ratios. For the 2006 and 2007 vintages, real estate values peaked and the underwriting expectations were that income would continue to increase which make those loan values more sensitive to market declines.
We purchase asset-backed securities ("ABS")ABS to diversify the overall credit risks of the fixed maturity securities portfolio and to provide attractive returns. The principal risks in holding asset-backed securitiesABS 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 issuer/servicer risk where collateral values can become impaired in the event of servicer credit deterioration.
Our ABS portfolio is diversified both by type of asset and by issuer. We actively monitor holdings of asset-backed securitiesABS to ensure that the risk profile of each security improves or remains consistent. Prepayments in the ABS portfolio are, in general, insensitive to changes in interest rates or are insulated to such changes by call protection features. In the event that we are subject to prepayment risk, we monitor the factors that impact the level of prepayment and prepayment speed for those asset-backed securities.ABS. In addition, we diversify the risks of asset-backed securitiesABS by holding a diverse class of securities, which limits our exposure to any one security.
The international exposure held in our U.S. operation's fixed maturity securities portfolio totaled $8,691.4$8,178.3 million, or 20%21%, and $10,046.5 million, or 23%, of total fixed maturity securities, as of December 31, 2006,2008 and 2007, respectively. It is comprised of corporate and foreign government fixed maturity securities. OfThe following table presents our international exposure for our U.S. operation's fixed maturity securities portfolio for the $8,691.4 millionperiods indicated.
| | December 31, 2008 | December 31, 2007 | ||||||
|---|---|---|---|---|---|---|---|---|
| | (in millions) | |||||||
European Union | $ | 2,432.9 | $ | 2,843.1 | ||||
United Kingdom | 2,049.5 | 2,641.7 | ||||||
Asia | 973.3 | 1,059.0 | ||||||
Australia | 743.5 | 954.1 | ||||||
South America | 500.8 | 594.6 | ||||||
Mexico | 264.9 | 340.3 | ||||||
Japan | 50.8 | 59.4 | ||||||
Other countries (1) | 1,162.6 | 1,554.3 | ||||||
Total | $ | 8,178.3 | $ | 10,046.5 | ||||
(1) Includes exposure from 24 countries as of both December 31, 2006, investments totaled $2,383.1 million in the United Kingdom, $2,232.2 million in the continental European Union, $1,007.4 million in Asia, $827.8 million in Australia, $615.3 million in South America, $401.0 million in Mexico2008 and $59.0 million in Japan. The remaining $1,165.6 million is invested in 17 other countries.December 31, 2007.
All international fixed maturity securities 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 maturity securities investments to 18%20% of total statutory general account assets with a 4% limit in emerging markets. Exposure to Canada is not included in our international exposure. As of December 31, 2006,2008 and 2007, our investments in Canada totaled $1,451.6 million.$1,402.2 million and $1,576.4 million, respectively.
The following tables present the amortized cost Fixed Maturity Securities Credit Concentrations. One aspect of ourmanaging credit risk is through industry issuer and asset class diversification. Our credit concentrations are managed to established limits. Our top ten exposures including approved counterparty exposure limits as of December 31, 2006, and December 31, 2005.
| | December 31, 2006 | |||
|---|---|---|---|---|
| | Amortized Cost | |||
| | (in millions) | |||
| HSBC Holdings PLC(1) | $ | 387.1 | ||
| American International Group Inc.(2) | 329.5 | |||
| Bank of America Corp.(2) | 328.3 | |||
| MBIA Inc.(3) | 311.5 | |||
| AT&T Inc. | 272.9 | |||
| JP Morgan Chase & Co.(2) | 271.7 | |||
| Royal Bank of Scotland Group PLC(2) | 255.6 | |||
| Deutsche Bank AG(2) | 255.0 | |||
| General Electric Co | 239.2 | |||
| ABN AMRO Holding NV(2) | 229.6 | |||
| Total top ten exposures | $ | 2,880.4 | ||
| | December 31, 2005 | |||
|---|---|---|---|---|
| | Amortized Cost | |||
| | (in millions) | |||
| HSBC Holdings PLC(1) | $ | 381.6 | ||
| Bank of America Corp.(2) | 332.5 | |||
| American International Group Inc.(2) | 330.7 | |||
| JP Morgan Chase & Co.(2) | 316.3 | |||
| Royal Bank of Scotland Group PLC(2) | 315.6 | |||
| MBIA Inc.(3) | 311.6 | |||
| General Electric Co | 247.5 | |||
| Citigroup Inc.(2) | 235.0 | |||
| Banco Santander Central Hispano SA | 227.4 | |||
| AT&T Inc. | 219.9 | |||
| Total top ten exposures | $ | 2,918.1 | ||
Our top ten exposures were rated an "A" equivalent or better by the rating agencies as of December 31, 2006 and 2005. As of December 31, 2006 and 2005, no individual non-government issuer represented more than 1% of U.S. invested assets.assets as of December 31, 2008. The exposure that had been attributed to monoline bond and mortgage insurers from investments we own that are guaranteed by them is no longer included in the evaluation of our top ten
exposures. We are no longer relying on said guarantors and are directly evaluating exposure to these investments. The following table presents our top ten exposures as of December 31, 2008.
| | December 31, 2008 | ||||
|---|---|---|---|---|---|
| | Amortized cost | ||||
| | (in millions) | ||||
Bank of America Corp. | $ | 385.9 | |||
JP Morgan Chase & Co. (1) | 316.5 | ||||
Wells Fargo & Co. (1) | 261.9 | ||||
General Electric Co. | 242.6 | ||||
AT&T Inc. | 213.2 | ||||
American International Group, Inc. | 191.9 | ||||
Credit Suisse Group AG | 157.7 | ||||
Deutsche Bank AG (1) | 155.1 | ||||
Berkshire Hathaway Inc. | 152.8 | ||||
Royal Bank of Scotland Group PLC | 146.8 | ||||
Total top ten exposures | $ | 2,224.4 | |||
We have exposure to monoline bond and mortgage insurers with an amortized cost of $753.0 million and a carrying amount of $734.0 million as of December 31, 2008. The $753.0 million includes wrapped guarantees on $704.7 million of underlying municipal bonds, corporate credit or ABS. Our direct exposure to these insurers was $48.3 million. Of the $704.7 million in wrapped guarantees, 47% was municipal bonds, of which 99% was investment grade; 37% was investment grade bank perpetual preferred securities; 10% was ABS backed by sub-prime first lien mortgages, of which 53% was investment grade; and 6% was corporate fixed maturities, of which 91% was investment grade.
On September 7, 2008, the United States Treasury announced that FNMA and FHLMC had been placed into conservatorship. As of December 31, 2008, our direct exposure consisted of fixed maturity securities with an amortized cost of $578.0 million and a carrying value of $623.2 million and equity securities with a cost of $0.6 million and carrying value of $0.1 million. For the year ended December 31, 2008, we recorded a $6.0 million realized capital loss on the equity securities. We had sold $20.0 million notional of credit default swap ("CDS") protection referencing FNMA and FHLMC debt. This CDS was terminated during the fourth quarter 2008 and a realized capital loss of $1.3 million was recorded.
On September 14, 2008, Lehman Brothers Holdings Inc. ("Lehman Brothers") declared bankruptcy. For the year ended December 31, 2008, we recorded a $112.6 million realized capital loss due to impairment of fixed maturity and equity securities. Our exposure to Lehman Brothers includes fixed maturity securities with both an amortized cost and carrying value of $6.7 million as of December 31, 2008. We had purchased CDS protection on Lehman Brothers with a notional of $15.0 million. This CDS was terminated during the fourth quarter of 2008 and a realized capital gain of $13.2 million was recorded.
On September 16, 2008, the United States government took control of AIG, which is one of our top ten exposures. As of December 31, 2008, our exposure to AIG included fixed maturity securities and equity securities with a cost of $206.9 million and a carrying value of $132.8 million. The fixed maturity securities include $59.4 million of amortized cost and $49.9 million of carrying value of International Lease Finance Corp, $107.5 million of amortized cost and $65.3 million of carrying value of American General Finance Corp, $6.7 million of amortized cost and $2.4 million of carrying value of AIG Life Holdings (US), Inc., $15.0 million of amortized cost and $10.2 million of carrying value of 21st Century Insurance Group, and $3.3 million of amortized cost and $3.6 million of carrying value of American International Specialty Lines Insurance Company. The equity securities consist of $15.0 million of cost and $1.4 million of carrying value of International Lease Finance Corp. We have credit default swap protection on International Lease Finance Corp with a notional of $15.0 million and a fair value of $3.3 million recorded as a realized capital gain.
On September 25, 2008, the United States Office of Thrift Supervision seized Washington Mutual Savings Bank ("WMSB") from Washington Mutual, Inc. ("Washington Mutual"), placed WMSB into receivership and sold WMSB to JPMorgan Chase. On September 26, 2008, Washington Mutual declared bankruptcy. As of September 30, 2008, our remaining exposure to Washington Mutual fixed maturity securities was written off. For the year ended December 31, 2008, we recorded a $69.7 million realized capital loss through the sales of fixed maturity securities and the final impairment of remaining securities.
Fixed Maturity Securities Credit Quality. Valuation techniques for the fixed maturity securities portfolio vary by security type and the availability of market data. Pricing models and their underlying assumptions impact the amount and timing of unrealized gains and losses recognized, and the use of different pricing models or assumptions could produce different financial results. Interactive Data Corporation ("IDC") or directValuations are generally obtained from third-party pricing services and broker quotes are our sources for external prices for our publicwhen
available. For corporate bonds and those private placement securities that are actively traded in the secondary market. In cases where quoted market prices are not available, a matrix pricing valuation approach is used. Securities are grouped into pricing categories that vary by asset class, sector, rating and average life. Each pricing category is assigned a risk spread based on studies of observable public market data or market clearing data from the investment professionals assigned to specific security classes. The expected cash flows of the security are then discounted back at the current Treasury curve plus the appropriate risk spread. Although the matrix valuation approach provides a fair valuation of each pricing category, the valuation of an individual security within each pricing category may actually be impacted by company specific factors. Certain market events that could impact the valuation of securities include issuer credit ratings, business climate, management changes, litigation and government actions, among others. The resulting pricesInternal models specific to the asset class may also be used. Prices are then reviewed by pricing analysts. All loansanalysts for reasonableness based on asset class given observable market data. In addition, investment analysts who are familiar with specific securities review prices for reasonableness through direct interaction with external sources, recent trade activity or internal models. Monthly, all bonds placed on the "watch list" are valued individuallyanalyzed by the investment analysts or the analysts that focus on troubled securities ("Workout Group"). Although we believe our estimates reasonably reflect the fair value of those securities, the key assumptions about risk premiums, performance of underlying collateral (if any) and other factors involve significant assumptions and may not reflect those of an active market. To the extent that bonds have longer maturity dates, management's estimate of fair value may involve greater subjectivity since they involve judgment about events well into the future. Every month, there is a comprehensive review of all impaired securities and problem loans by aThis group consisting ofthen meets with the Chief Investment Officer and the Portfolio Managers and the Workout Group.to determine reasonableness of prices. The valuation of impaired bonds for which there is no quoted price is typically based on the present value of the future cash flows expected to be received. IfAlthough we believe these values reasonably reflect the company is likely to continue operations, the estimate of future cash flows is typically based on the expected operating cash flows of the company that are available to make payments of the bonds. If the company is likely to liquidate, the estimate of future cash flows is based on an estimate of the liquidationfair value of its net assets.those securities, the key assumptions about risk premiums, performance of underlying collateral (if any) and other market factors involve qualitative inputs.
The Securities Valuation Office ("SVO") of the National Association of Insurance Commissioners ("NAIC") evaluates most of the fixed maturity securities that we and other U.S. insurance companies hold. The SVONAIC evaluates the bond investments of insurers for regulatory reporting purposes and assigns securities to one of six investment categories. The NAIC designations closely mirror the nationally recognized securities rating organizations'NRSROs' credit ratings for
marketable bonds. NAIC designations 1 and 2 include bonds 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 Standard & Poor's. NAIC designations 3 through 6 are 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 Standard & Poor's. As of December 31, 2006,2008, the percentage, based on estimated fair value, of total publicly traded and privately placed fixed maturity securities that were investment grade with an NAIC designation 1 or 2 was 95%.
We also monitor the credit drift of our corporate fixed maturity securities portfolio. Credit drift is defined as the ratio of the percentage of rating downgrades, including defaults, divided by the percentage of rating upgrades. We measure credit drift once each fiscal year, assessing the changes in our internally developed credit ratings that have occurred during the year. Standard & Poor's annual credit ratings drift ratio measures the credit rating change, within a specific year, of companies that have been assigned ratings by Standard & Poor's. The annual internal credit drift ratio on corporate fixed maturity securities we held in our general account was a more favorable ratio at 0.55 times compared to the Standard & Poor's drift ratio of 0.74 times, as of December 31, 2006.
The following table presents our total fixed maturity securities by NAIC designation and the equivalent ratings of the nationally recognized securities rating organizationsNRSROs as of December 31, 2006,2008 and December 31, 2005,2007, as well as the percentage, based on estimated fair value, that each designation comprises:
| | | December 31, 2008 | December 31, 2007 | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
NAIC rating | Rating agency equivalent | Amortized cost | Carrying amount | % of total carrying amount | Amortized cost | Carrying amount | % of total carrying amount | ||||||||||||||
| | | ($ in millions) | |||||||||||||||||||
1 | Aaa/Aa/A | $ | 25,981.0 | $ | 22,116.9 | 57 | % | $ | 25,635.0 | $ | 25,644.1 | 57 | % | ||||||||
2 | Baa | 17,669.2 | 14,675.2 | 38 | 16,661.8 | 16,742.0 | 38 | ||||||||||||||
3 | Ba | 2,469.8 | 1,760.6 | 5 | 1,904.7 | 1,872.0 | 4 | ||||||||||||||
4 | B | 254.2 | 163.9 | — | 179.0 | 179.4 | 1 | ||||||||||||||
5 | Caa and lower | 109.7 | 62.3 | — | 103.1 | 99.3 | — | ||||||||||||||
6 | In or near default | 71.2 | 47.5 | — | 12.0 | 11.9 | — | ||||||||||||||
Total fixed maturity | $ | 46,555.1 | $ | 38,826.4 | 100 | % | $ | 44,495.6 | $ | 44,548.7 | 100 | % | |||||||||
U.S. Invested Assets
Fixed Maturity Securities by Credit Quality(1)
| | | December 31, 2006 | December 31, 2005 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| NAIC Rating | Rating Agency Equivalent | Amortized Cost | Carrying Amount | % of Total Carrying Amount | Amortized Cost | Carrying Amount | % of Total Carrying Amount | ||||||||||||
| | | ($ in millions) | |||||||||||||||||
| 1 | Aaa/Aa/A | $ | 23,716.0 | $ | 24,231.9 | 57 | % | $ | 21,593.3 | $ | 22,361.9 | 56 | % | ||||||
| 2 | Baa | 15,769.9 | 16,205.5 | 38 | 14,978.4 | 15,590.7 | 39 | ||||||||||||
| 3 | Ba | 1,586.8 | 1,657.1 | 4 | 1,701.7 | 1,801.6 | 4 | ||||||||||||
| 4 | B | 290.5 | 302.6 | 1 | 258.5 | 271.2 | 1 | ||||||||||||
| 5 | Caa and lower | 19.1 | 19.5 | — | 14.3 | 14.4 | — | ||||||||||||
| 6 | In or near default | 5.5 | 7.2 | — | 76.2 | 75.9 | — | ||||||||||||
| Total fixed maturities | $ | 41,387.8 | $ | 42,423.8 | 100 | % | $ | 38,622.4 | $ | 40,115.7 | 100 | % | |||||||
We believe that our long-term fixed maturity securities portfolio is well diversified among industry types Commercial Mortgage-Backed Securities and between publicly traded and privately placed securities. Each year, we direct the majority of our net cash inflows into investment grade fixed maturity securities. Our current policy is to limit the percentage of cash flow invested in below investment grade assets to 7% of cash flow.Home Equity Asset-Backed Securities Portfolios. As of December 31, 2006, we2008, based on amortized cost, 89% of our CMBS portfolio had invested 3.3%ratings of new cash flow for the yearA or higher and 60% was issued in below investment grade assets. While the general account investment returns have improved due to the below investment grade asset class, we manage its growth strategically by limiting it to 10%2005 or before and 78% of the total fixed maturity securities portfolios.
We investour ABS home equity portfolio had ratings of A or higher and 85% was issued in privately placed fixed maturity securities 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 federal and state securities laws and illiquid trading markets.2005 or before.
The following table shows the carrying amountpresents credit quality and year of issuance ("vintage") for our corporate fixed maturity securities by Salomon industry category, as well as the percentage of the total corporate portfolio that each Salomon industry category comprises asCMBS:
| | December 31, 2008 | December 31, 2007 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Amortized cost | Carrying amount | Amortized cost | Carrying amount | ||||||||||
| | (in millions) | |||||||||||||
Lowest agency rating | ||||||||||||||
AAA | $ | 3,558.3 | $ | 2,757.0 | $ | 2,818.8 | $ | 2,829.6 | ||||||
AA | 812.7 | 373.4 | 645.3 | 631.3 | ||||||||||
A | 673.0 | 270.8 | 636.4 | 601.4 | ||||||||||
BBB | 555.3 | 179.7 | 569.8 | 504.8 | ||||||||||
BB and below | 86.0 | 26.2 | 84.1 | 98.5 | ||||||||||
Total by lowest agency rating | $ | 5,685.3 | $ | 3,607.1 | $ | 4,754.4 | $ | 4,665.6 | ||||||
Vintage | ||||||||||||||
2003 and prior | $ | 1,888.6 | $ | 1,587.2 | $ | 2,092.9 | $ | 2,174.9 | ||||||
2004 | 586.3 | 393.5 | 545.6 | 523.4 | ||||||||||
2005 | 913.6 | 547.9 | 716.2 | 683.4 | ||||||||||
2006 (1) | 563.4 | 282.8 | 428.2 | 389.7 | ||||||||||
2007 (1) | 1,642.3 | 750.4 | 971.5 | 894.2 | ||||||||||
2008 | 91.1 | 45.3 | — | — | ||||||||||
Total by vintage | $ | 5,685.3 | $ | 3,607.1 | $ | 4,754.4 | $ | 4,665.6 | ||||||
The following table presents our exposure to ABS home equity portfolio supported by subprime first lien mortgages by credit quality and vintage:
| | December 31, 2008 | December 31, 2007 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Amortized cost | Carrying amount | Amortized cost | Carrying amount | ||||||||||
| | (in millions) | |||||||||||||
Lowest agency rating | ||||||||||||||
AAA | $ | 281.8 | $ | 201.5 | $ | 454.4 | $ | 434.1 | ||||||
AA | 94.0 | 56.0 | 105.1 | 90.9 | ||||||||||
A | 47.6 | 28.2 | 31.4 | 27.4 | ||||||||||
BBB | 89.3 | 43.8 | 8.1 | 4.6 | ||||||||||
BB and below | 32.4 | 17.2 | — | — | ||||||||||
Total by lowest agency rating | $ | 545.1 | $ | 346.7 | $ | 599.0 | $ | 557.0 | ||||||
Vintage | ||||||||||||||
2003 and prior | $ | 270.2 | $ | 197.9 | $ | 307.6 | $ | 290.2 | ||||||
2004 | 91.1 | 53.7 | 104.3 | 100.2 | ||||||||||
2005 | 101.8 | 54.9 | 107.6 | 97.6 | ||||||||||
2006 | 18.8 | 10.3 | 16.3 | 15.7 | ||||||||||
2007 | 63.2 | 29.9 | 63.2 | 53.3 | ||||||||||
Total by vintage | $ | 545.1 | $ | 346.7 | $ | 599.0 | $ | 557.0 | ||||||
U.S. Invested AssetsCorporate Fixed Maturity Securities by Salomon Industry
Watch List.
| | December 31, 2006 | December 31, 2005 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Carrying Amount | % of Total | Carrying Amount | % of Total | ||||||||
| | ($ in millions) | |||||||||||
| Industry Class | ||||||||||||
| Finance — Bank | $ | 3,659.2 | 12 | % | $ | 3,451.0 | 12 | % | ||||
| Finance — Insurance | 3,119.1 | 10 | 3,010.3 | 10 | ||||||||
| Finance — Other | 4,792.2 | 16 | 4,090.1 | 14 | ||||||||
| Industrial — Consumer | 1,100.0 | 4 | 1,067.2 | 4 | ||||||||
| Industrial — Energy | 2,683.2 | 9 | 2,718.4 | 9 | ||||||||
| Industrial — Manufacturing | 5,518.4 | 18 | 5,223.3 | 18 | ||||||||
| Industrial — Other | 105.3 | — | 106.4 | — | ||||||||
| Industrial — Service | 4,462.3 | 15 | 4,548.7 | 15 | ||||||||
| Industrial — Transport | 836.9 | 3 | 848.6 | 3 | ||||||||
| Utility — Electric | 2,417.9 | 8 | 2,568.6 | 9 | ||||||||
| Utility — Other | 47.6 | — | 47.9 | — | ||||||||
| Utility — Telecom | 1,645.5 | 5 | 1,811.8 | 6 | ||||||||
| Total | $ | 30,387.6 | 100 | % | $ | 29,492.3 | 100 | % | ||||
We monitor any decline in the credit quality of fixed maturity securities through the designation of "problem securities",securities," "potential problem securities" and "restructured securities". We define problem securities in our fixed maturity portfolio as securities: (i) as to which principal and/or interest payments are 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, at the time of restructure,
the present value of the new future 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 maturity securities portfolio, as well as its problem, potential problem and restructured fixed maturities for the periods indicated:
| | December 31, 2008 | December 31, 2007 | ||||||
|---|---|---|---|---|---|---|---|---|
| | ($ in millions) | |||||||
Total fixed maturity securities (public and private) | $ | 38,826.4 | $ | 44,548.7 | ||||
Problem fixed maturity securities (1) | $ | 83.3 | $ | 13.1 | ||||
Potential problem fixed maturity securities | 165.7 | 29.2 | ||||||
Restructured fixed maturity securities | 3.1 | 5.9 | ||||||
Total problem, potential problem and restructured fixed maturity securities | $ | 252.1 | $ | 48.2 | ||||
Total problem, potential problem and restructured fixed maturity securities as a percent of total fixed maturity securities | .65 | % | .11 | % | ||||
Fixed Maturity Securities Impairments. We have a process in place to identify securities that could potentially have a credit impairment that is other than temporary. This process involves monitoring market events that could impact issuers' credit ratings, business climate, management changes, litigation and government actions and other similar factors. This process also involves monitoring late payments, pricing levels, downgrades by rating agencies, key financial ratios, financial statements, revenue forecasts and cash flow projections as indicators of credit issues.
Every month, a group of individuals including the Chief Investment Officer, our Portfolio Managers, members of our Workout Group and representatives from Investment Accounting review all securities to determine whether an other than temporary decline in value exists and whether losses should be recognized. The analysis focuses on each issuer's ability to service its debts in a timely fashion and the length of time the security has been trading below cost.fashion. Formal documentation of the analysis and the Company'sour decision is prepared and approved by management.
We consider relevant facts and circumstances in evaluating whether thea credit or interest-rate related impairment of a security is other than temporary. Relevant facts and circumstances considered include: (1) the extent and length of time the fair value has been below cost; (2) the reasons for the decline in value; (3) the financial position and access to capital of the issuer, including the current and future impact of any specific events;events and (3)(4) our ability and intent to hold the security for a period of time that allows for the recovery in value which, in some cases, may extend to maturity or until it recovers in value.maturity. To the extent we determine that a security is deemed to be other than temporarily impaired, the difference between amortized cost and fair value would be charged to earnings.net income.
There are a number of significant risks and uncertainties inherent in the process of monitoring credit impairments and determining if an impairment is other than temporary. These risks and uncertainties include: (1) the risk that our assessment of an issuer's ability to meet all of its contractual obligations will change based on changes in the credit
characteristics of that issuer, (2) the risk that the economic outlook will be worse than expected or have more of an impact on the issuer than anticipated, (3) the risk that our investment professionals are making decisions based on fraudulent or misstated information in the financial statements provided by issuers and (4) the risk that new information obtained by us or changes in other facts and circumstances lead us to change our intent to hold the security to maturity or until it recovers in value. Any of these situations could result in a charge to earningsnet income in a future period.
The net realized gainloss relating to other than temporary credit impairments of fixed maturity securities was $1.9$397.0 million and $207.3 million for the year ended December 31, 2006. The single largest other than temporary credit impairment represented less than 0.1% of U.S. fixed maturity securities as of December 31, 2006. To fund the acquisition of WM Advisors, we also recognized $12.4 million of impairment write-downs for the year ended December 31, 2006, that resulted from our determination that we no longer had the ability2008 and intent to hold certain fixed maturity securities until they recovered in value. This loss is net of any recovery realized on the subsequent sale of the securities.2007, respectively.
For the year ended December 31, 2006,2008 and 2007, we realized $30.2$16.1 million and $34.6 million of gross realized losses upon disposal of bonds excluding hedging adjustments. Included in this $30.2 millionthe 2008 loss is $22.2$13.7 million related to sales of thirty-twosixteen names that experienced credit deterioration during the period. Included in the 2007 loss is $32.3 million related to sales of forty-two credit impaired and credit related names. We generally intend to hold securities in unrealized loss positions until they mature or recover. However, we do sell bonds under certain circumstances, such as when we have evidence of a significant deterioration in the issuer's creditworthiness, 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. Also included in the $30.2 million is $6.3 million resulting from the sale of certain hybrid securities that had a regulatory classification change that resulted in increased capital requirements. Sales generate both gains and losses.
Fixed Maturity Securities Available-for-Sale
The following tables present our fixed maturity securities available-for-sale by industry category and the associated gross unrealized gains and losses as of December 31, 2006,2008 and December 31, 2005.2007.
Finance — Banking Finance — Brokerage Finance — Finance Companies Finance — Financial Other Finance — Insurance Finance — REITS Industrial — Basic Industry Industrial — Capital Goods Industrial — Communications Industrial — Consumer Cyclical Industrial — Consumer Non-Cyclical Industrial — Energy Industrial — Other Industrial — Technology Industrial — Transportation Utility — Electric Utility — Natural Gas Utility — Other Government guaranteed Total corporate securities Residential pass-through securities Commercial mortgage-backed securities Residential collateralized mortgage obligations (1) Asset-backed securities — Home equity (2) Asset-backed securities — All other Collateralized debt obligations — Credit Collateralized debt obligations — CMBS Collateralized debt obligations — Loans Collateralized debt obligations — ABS (3) Total mortgage-backed and other asset-backed securities U.S. Government and agencies States and political subdivisions Non-U.S. governments Total fixed maturity securities, available-for-sale December 31, 2008 Amortized
cost Gross
unrealized
gains Gross
unrealized
losses Carrying
amount (in millions) $ 4,248.7 $ 14.9 $ 1,095.1 $ 3,168.5 785.4 0.9 128.5 657.8 418.6 0.1 84.7 334.0 753.3 6.8 104.6 655.5 2,885.8 38.1 706.6 2,217.3 1,412.5 — 430.6 981.9 2,030.0 10.6 303.8 1,736.8 2,322.3 15.1 316.8 2,020.6 2,943.7 32.3 297.0 2,679.0 2,023.8 18.7 338.7 1,703.8 3,184.7 31.2 298.5 2,917.4 1,958.0 9.6 224.5 1,743.1 952.8 2.4 117.6 837.6 876.7 2.2 115.3 763.6 992.2 10.3 124.5 878.0 2,473.4 22.8 199.2 2,297.0 1,142.0 4.9 110.7 1,036.2 156.7 2.3 14.3 144.7 799.5 75.0 57.0 817.5 32,360.1 298.2 5,068.0 27,590.3
1,627.5
50.5
0.5
1,677.5 5,682.7 3.7 2,081.9 3,604.5 950.8 6.4 188.6 768.6 545.1 0.1 198.5 346.7 816.1 16.8 137.2 695.7 202.8 — 123.6 79.2 302.2 — 173.3 128.9 91.4 — 54.4 37.0 100.0 0.2 53.5 46.7 10,318.6 77.7 3,011.5 7,384.8
548.4
46.9
0.1
595.2 2,113.8 32.6 120.9 2,025.5 462.1 31.5 15.1 478.5 $ 45,803.0 $ 486.9 $ 8,215.6 $ 38,074.3 U.S. Invested AssetsFixed Maturity Securities Available-for-Sale by Industry Category
| | December 31, 2006 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Amortized Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Carrying Amount | |||||||||
| | (in millions) | ||||||||||||
| Finance — Bank | $ | 3,592.1 | $ | 78.3 | $ | 21.9 | $ | 3,648.5 | |||||
| Finance — Insurance | 3,057.4 | 83.0 | 21.8 | 3,118.6 | |||||||||
| Finance — Other | 4,661.3 | 166.9 | 36.5 | 4,791.7 | |||||||||
| Industrial — Consumer | 1,082.1 | 29.1 | 11.3 | 1,099.9 | |||||||||
| Industrial — Energy | 2,552.2 | 145.5 | 15.7 | 2,682.0 | |||||||||
| Industrial — Manufacturing | 5,406.1 | 155.8 | 44.0 | 5,517.9 | |||||||||
| Industrial — Other | 104.7 | 1.3 | 0.7 | 105.3 | |||||||||
| Industrial — Service | 4,344.3 | 143.9 | 26.9 | 4,461.3 | |||||||||
| Industrial — Transport | 796.0 | 46.2 | 5.3 | 836.9 | |||||||||
| Utility — Electric | 2,343.5 | 91.9 | 17.7 | 2,417.7 | |||||||||
| Utility — Other | 41.0 | 6.6 | — | 47.6 | |||||||||
| Utility — Telecom | 1,569.0 | 87.6 | 11.3 | 1,645.3 | |||||||||
| Total corporate securities | 29,549.7 | 1,036.1 | 213.1 | 30,372.7 | |||||||||
| U.S. Government and agencies | 530.8 | 0.8 | 3.8 | 527.8 | |||||||||
| States and political subdivisions | 1,557.7 | 45.4 | 4.9 | 1,598.2 | |||||||||
| Non-U.S. governments | 384.9 | 36.1 | 0.3 | 420.7 | |||||||||
| Mortgage-backed and other asset-backed securities | 9,165.6 | 217.4 | 77.8 | 9,305.2 | |||||||||
| Total fixed maturity securities, available-for-sale | $ | 41,188.7 | $ | 1,335.8 | $ | 299.9 | $ | 42,224.6 | |||||
U.S. Invested AssetsFixed Maturity Securities Available-for-Sale by Industry Category
| | December 31, 2005 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Carrying Amount | |||||||||
| | (in millions) | ||||||||||||
| Finance — Bank | $ | 3,354.9 | $ | 110.6 | $ | 14.5 | $ | 3,451.0 | |||||
| Finance — Insurance | 2,915.0 | 111.3 | 16.0 | 3,010.3 | |||||||||
| Finance — Other | 3,932.5 | 181.5 | 23.9 | 4,090.1 | |||||||||
| Industrial — Consumer | 1,038.0 | 36.5 | 7.3 | 1,067.2 | |||||||||
| Industrial — Energy | 2,506.5 | 220.2 | 8.3 | 2,718.4 | |||||||||
| Industrial — Manufacturing | 5,060.9 | 201.4 | 39.0 | 5,223.3 | |||||||||
| Industrial — Other | 104.4 | 2.3 | 0.3 | 106.4 | |||||||||
| Industrial — Service | 4,369.6 | 204.4 | 25.3 | 4,548.7 | |||||||||
| Industrial — Transport | 795.1 | 57.0 | 3.5 | 848.6 | |||||||||
| Utility — Electric | 2,455.3 | 123.8 | 10.5 | 2,568.6 | |||||||||
| Utility — Other | 41.2 | 6.7 | — | 47.9 | |||||||||
| Utility — Telecom | 1,701.8 | 118.6 | 8.6 | 1,811.8 | |||||||||
| Total corporate securities | 28,275.2 | 1,374.3 | 157.2 | 29,492.3 | |||||||||
| U.S. Government and agencies | 557.9 | 1.8 | 4.2 | 555.5 | |||||||||
| States and political subdivisions | 1,222.6 | 45.7 | 3.8 | 1,264.5 | |||||||||
| Non-U.S. governments | 416.2 | 47.2 | 0.4 | 463.0 | |||||||||
| Mortgage-backed and other asset-backed securities | 8,045.5 | 267.8 | 77.9 | 8,235.4 | |||||||||
| Total fixed maturity securities, available-for-sale | $ | 38,517.4 | $ | 1,736.8 | $ | 243.5 | $ | 40,010.7 | |||||
The total
| | December 31, 2007 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Amortized cost | Gross unrealized gains | Gross unrealized losses | Carrying amount | ||||||||||
| | (in millions) | |||||||||||||
Finance — Banking | $ | 4,228.8 | $ | 46.0 | $ | 176.7 | $ | 4,098.1 | ||||||
Finance — Brokerage | 1,041.2 | 9.9 | 25.7 | 1,025.4 | ||||||||||
Finance — Finance Companies | 572.0 | 5.4 | 46.4 | 531.0 | ||||||||||
Finance — Financial Other | 685.1 | 43.3 | 7.6 | 720.8 | ||||||||||
Finance — Insurance | 2,954.6 | 90.8 | 65.8 | 2,979.6 | ||||||||||
Finance — REITS | 1,424.6 | 7.4 | 57.3 | 1,374.7 | ||||||||||
Industrial — Basic Industry | 1,814.4 | 52.5 | 35.9 | 1,831.0 | ||||||||||
Industrial — Capital Goods | 2,176.2 | 71.9 | 23.7 | 2,224.4 | ||||||||||
Industrial — Communications | 3,033.4 | 142.4 | 31.9 | 3,143.9 | ||||||||||
Industrial — Consumer Cyclical | 1,941.7 | 34.7 | 53.9 | 1,922.5 | ||||||||||
Industrial — Consumer Non-Cyclical | 2,744.3 | 93.2 | 35.2 | 2,802.3 | ||||||||||
Industrial — Energy | 1,866.4 | 96.9 | 11.3 | 1,952.0 | ||||||||||
Industrial — Other | 1,046.4 | 14.6 | 13.9 | 1,047.1 | ||||||||||
Industrial — Technology | 611.8 | 8.1 | 7.7 | 612.2 | ||||||||||
Industrial — Transportation | 1,086.9 | 44.3 | 24.4 | 1,106.8 | ||||||||||
Utility — Electric | 2,168.1 | 79.6 | 18.4 | 2,229.3 | ||||||||||
Utility — Natural Gas | 1,049.8 | 47.7 | 10.1 | 1,087.4 | ||||||||||
Utility — Other | 87.0 | 5.6 | 3.7 | 88.9 | ||||||||||
Government guaranteed | 819.1 | 68.2 | 6.4 | 880.9 | ||||||||||
Total corporate securities | 31,351.8 | 962.5 | 656.0 | 31,658.3 | ||||||||||
Residential pass-through securities | 1,481.5 | 23.6 | 9.0 | 1,496.1 | ||||||||||
Commercial mortgage-backed securities | 4,754.4 | 107.4 | 196.2 | 4,665.6 | ||||||||||
Residential collateralized mortgage obligations (1) | 947.7 | 3.3 | 14.1 | 936.9 | ||||||||||
Asset-backed securities — Home equity (2) | 599.0 | 0.1 | 42.1 | 557.0 | ||||||||||
Asset-backed securities — All other | 892.6 | 19.1 | 8.3 | 903.4 | ||||||||||
Collateralized debt obligations — Credit | 735.4 | 0.1 | 123.6 | 611.9 | ||||||||||
Collateralized debt obligations — CMBS | 332.7 | 1.4 | 71.6 | 262.5 | ||||||||||
Collateralized debt obligations — Loans | 88.8 | — | 5.7 | 83.1 | ||||||||||
Collateralized debt obligations — ABS (3) | 94.1 | — | 30.1 | 64.0 | ||||||||||
Total mortgage-backed and other asset-backed securities | 9,926.2 | 155.0 | 500.7 | 9,580.5 | ||||||||||
U.S. Government and agencies | 628.5 | 29.0 | 0.1 | 657.4 | ||||||||||
States and political subdivisions | 1,867.6 | 39.1 | 10.2 | 1,896.5 | ||||||||||
Non-U.S. governments | 419.4 | 35.7 | 1.2 | 453.9 | ||||||||||
Total fixed maturity securities, available-for-sale | $ | 44,193.5 | $ | 1,221.3 | $ | 1,168.2 | $ | 44,246.6 | ||||||
Of the $299.9$8,215.6 million in gross unrealized losses as of December 31, 2006,2008, there were $4.9$46.3 million in losses attributed to securities scheduled to mature in one year or less, $60.9$1,191.7 million is attributed to securities scheduled to mature between one to five years, $96.3$1,826.9 million is attributed to securities scheduled to mature between five to ten years, $60.0$2,139.2 million is attributed to securities scheduled to mature after ten years and $77.8$3,011.5 million is related to mortgage-backed and other asset-backed securities.ABS that are not classified by maturity year.
The grosscredit disruption in the market that began in the last half of 2007 from concerns in the sub-prime markets, and continued into 2008 with concerns in the leveraged finance markets has led to reduced liquidity and wider credit spreads. These credit concerns led to a widespread forced selling into a very thinly traded market which further strained market liquidity. This market disruption lowered valuations and, as a result, we have seen an increase in unrealized losses in our securities portfolio. The losses were more pronounced in the Finance sectors and in structured products such as collateralized debt obligations, ABS and CMBS. The decline in value in large part reflects the illiquid markets. Future changes in the fair value of these securities will be dependent on the return of market liquidity and changes in general
market conditions, including interest rates and credit spread movements. Due to the issuers' continued satisfaction of the securities' obligations in accordance with their contractual terms, the expectation that they will continue to do so given the evaluation of the fundamentals of the issuers' financial condition and other objective evidence and management's intent and ability to hold these securities to recovery, we concluded that the prices of the securities in our securities portfolio were temporarily depressed.
As discussed previously, a significant contributor to the low investment valuations and the resulting unrealized losses is market illiquidity. We have estimated the effect of the market illiquidity on significant portions of our investment portfolio by measuring the difference between valuations provided by the cash bond market and those provided by the synthetic market for a portion of the corporate bond and CMBS securities held in our investment portfolio. In the current market environment the synthetic market has more liquidity than the cash bond market.
Corporate Bonds. The population for the corporate bond analysis included corporate debentures we own from the Finance, Industrial and Utility sectors and excluded redeemable preferred stock, government guaranteed securities, securities with a structured component, and other securities without the necessary relevant data. This population had an amortized cost of $30,269.8 million, carrying value of $25,689.4 million, and a net unrealized loss of $4,580.4 million as of December 31, 2006 were concentrated primarily2008. The market illiquidity was estimated using CDS spreads. For 62% of the population we used name specific CDS spreads and for the remainder we used relevant sector specific CDS spreads. We estimated that the decline in the Mortgage-backedvalue of this population attributable to market illiquidity was $3,372.5 million.
Commercial Mortgage-Backed Securities. The population for our CMBS analysis included principal and other asset-backed securities, Industrial — Manufacturing, Financial — Other, and Industrial — Services sectors. The gross unrealized lossesinterest bonds but excluded interest only bonds as of December 31, 2005 were concentrated primarily2008. This population had an amortized cost of $4,585.7 million, carrying value of $2,806.0 million, and a net unrealized loss of $1,779.7 million. The market illiquidity was estimated using the commercial mortgage-backed security index (CMBX) spreads for various vintage and rating buckets. We estimated that the decline in value of this population attributable to market illiquidity was $814.6 million.
Fixed Maturity Available-for-Sale Securities Unrealized Losses. We believe that our long-term fixed maturity securities portfolio is well diversified among industry types and between publicly traded and privately placed securities. Each year, we direct the Mortgage-backedmajority of our net cash inflows into investment grade fixed maturity securities. The net cash inflows into investment grade fixed maturity securities are less than prior years due to us investing in more liquid investments. Our current policy is to limit the percentage of cash flow invested in below investment grade assets to 10% of cash flow. As of December 31, 2008, we had invested 4.2% of new cash flow for the year in below investment grade assets. While the general account investment returns have improved due to the below investment grade asset class, we manage its growth strategically by limiting it to no more than 10% of the total fixed maturity securities portfolios.
We invest in privately placed fixed maturity securities to enhance the overall value of the portfolio, increase diversification and other asset-backedobtain 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 federal and state securities Industrial — Manufacturing, Industrial — Services,laws and Financial — Other sectors.illiquid trading markets.
The following tables presenttable presents our fixed maturity securities available-for-sale by investment grade and below investment grade and the associated gross unrealized gains and losses as of December 31, 2006, and 2005.for the time periods indicated.
U.S. Invested AssetsFixed Maturity Securities Available-for-Sale by Quality
| | December 31, 2006 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Carrying Amount | |||||||||
| | (in millions) | ||||||||||||
| Investment Grade: | |||||||||||||
| Public | $ | 26,995.7 | $ | 770.7 | $ | 201.5 | $ | 27,564.9 | |||||
| Private | 12,292.4 | 469.5 | 87.3 | 12,674.6 | |||||||||
| Below Investment Grade: | |||||||||||||
| Public | 1,070.5 | 44.2 | 6.0 | 1,108.7 | |||||||||
| Private | 830.1 | 51.4 | 5.1 | 876.4 | |||||||||
| Total fixed maturity securities, available-for-sale | $ | 41,188.7 | $ | 1,335.8 | $ | 299.9 | $ | 42,224.6 | |||||
| | December 31, 2008 | December 31, 2007 | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Amortized cost | Gross unrealized gains | Gross unrealized losses | Carrying amount | Amortized cost | Gross unrealized gains | Gross unrealized losses | Carrying amount | ||||||||||||||||||
| | (in millions) | |||||||||||||||||||||||||
Investment grade: | ||||||||||||||||||||||||||
Public | $ | 28,981.9 | $ | 308.3 | $ | 4,253.1 | $ | 25,037.1 | $ | 27,623.6 | $ | 747.4 | $ | 563.9 | $ | 27,807.1 | ||||||||||
Private | 13,916.2 | 175.9 | 3,089.2 | 11,002.9 | 14,371.1 | 415.7 | 509.9 | 14,276.9 | ||||||||||||||||||
Below investment grade: | ||||||||||||||||||||||||||
Public | 1,319.4 | 1.6 | 385.5 | 935.5 | 1,117.2 | 27.3 | 63.7 | 1,080.8 | ||||||||||||||||||
Private | 1,585.5 | 1.1 | 487.8 | 1,098.8 | 1,081.6 | 30.9 | 30.7 | 1,081.8 | ||||||||||||||||||
Total fixed maturity securities, available-for-sale | $ | 45,803.0 | $ | 486.9 | $ | 8,215.6 | $ | 38,074.3 | $ | 44,193.5 | $ | 1,221.3 | $ | 1,168.2 | $ | 44,246.6 | ||||||||||
U.S. Invested AssetsFixed Maturity Securities Available-for-Sale by Quality
| | December 31, 2005 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Carrying Amount | |||||||||
| | (in millions) | ||||||||||||
| Investment Grade: | |||||||||||||
| Public | $ | 25,638.9 | $ | 1,024.9 | $ | 164.3 | $ | 26,499.5 | |||||
| Private | 10,827.8 | 584.5 | 64.2 | 11,348.1 | |||||||||
| Below Investment Grade: | |||||||||||||
| Public | 1,263.4 | 54.4 | 9.9 | 1,307.9 | |||||||||
| Private | 787.3 | 73.0 | 5.1 | 855.2 | |||||||||
| Total fixed maturity securities, available-for-sale | $ | 38,517.4 | $ | 1,736.8 | $ | 243.5 | $ | 40,010.7 | |||||
U.S. Invested AssetsUnrealized Losses on Investment Grade Fixed Maturity SecuritiesAvailable-for-Sale by Aging Category
| | December 31, 2006 | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Public | Private | Total | ||||||||||||||||
| | Carrying Amount | Gross Unrealized Losses | Carrying Amount | Gross Unrealized Losses | Carrying Amount | Gross Unrealized Losses | |||||||||||||
| | (in millions) | ||||||||||||||||||
| Three months or less | $ | 2,730.4 | $ | 17.6 | $ | 1,471.2 | $ | 9.1 | $ | 4,201.6 | $ | 26.7 | |||||||
| Greater than three to six months | 30.3 | 0.4 | 22.7 | 0.3 | 53.0 | 0.7 | |||||||||||||
| Greater than six to nine months | 224.8 | 1.6 | 107.1 | 1.3 | 331.9 | 2.9 | |||||||||||||
| Greater than nine to twelve months | 1,502.6 | 28.2 | 549.9 | 8.2 | 2,052.5 | 36.4 | |||||||||||||
| Greater than twelve to twenty-four months | 5,688.9 | 126.0 | 1,938.1 | 52.2 | 7,627.0 | 178.2 | |||||||||||||
| Greater than twenty-four to thirty-six months | 843.4 | 22.9 | 365.5 | 10.2 | 1,208.9 | 33.1 | |||||||||||||
| Greater than thirty-six months | 101.5 | 4.8 | 113.9 | 6.0 | 215.4 | 10.8 | |||||||||||||
| Total fixed maturities, available-for-sale | $ | 11,121.9 | $ | 201.5 | $ | 4,568.4 | $ | 87.3 | $ | 15,690.3 | $ | 288.8 | |||||||
U.S. Invested AssetsUnrealized Losses on Investment Grade Fixed Maturity SecuritiesAvailable-for-Sale by Aging Category
| | December 31, 2005 | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Public | Private | Total | ||||||||||||||||
| | Carrying Amount | Gross Unrealized Losses | Carrying Amount | Gross Unrealized Losses | Carrying Amount | Gross Unrealized Losses | |||||||||||||
| | (in millions) | ||||||||||||||||||
| Three months or less | $ | 1,907.9 | $ | 11.3 | $ | 774.3 | $ | 6.3 | $ | 2,682.2 | $ | 17.6 | |||||||
| Greater than three to six months | 4,332.5 | 79.6 | 1,574.5 | 29.3 | 5,907.0 | 108.9 | |||||||||||||
| Greater than six to nine months | 416.3 | 12.9 | 109.5 | 2.8 | 525.8 | 15.7 | |||||||||||||
| Greater than nine to twelve months | 1,032.0 | 22.3 | 212.3 | 5.2 | 1,244.3 | 27.5 | |||||||||||||
| Greater than twelve to twenty-four months | 1,191.2 | 33.3 | 457.2 | 14.7 | 1,648.4 | 48.0 | |||||||||||||
| Greater than twenty-four to thirty-six months | 118.5 | 4.8 | 161.8 | 5.9 | 280.3 | 10.7 | |||||||||||||
| Greater than thirty-six months | 1.4 | 0.1 | — | — | 1.4 | 0.1 | |||||||||||||
| Total fixed maturities, available-for-sale | $ | 8,999.8 | $ | 164.3 | $ | 3,289.6 | $ | 64.2 | $ | 12,289.4 | $ | 228.5 | |||||||
U.S. Invested AssetsUnrealized Losses on Below Investment Grade Fixed Maturity SecuritiesAvailable-for-Sale by Aging Category
| | December 31, 2006 | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Public | Private | Total | ||||||||||||||||
| | Carrying Amount | Gross Unrealized Losses | Carrying Amount | Gross Unrealized Losses | Carrying Amount | Gross Unrealized Losses | |||||||||||||
| | (in millions) | ||||||||||||||||||
| Three months or less | $ | 64.0 | $ | 0.2 | $ | 83.5 | $ | 0.5 | $ | 147.5 | $ | 0.7 | |||||||
| Greater than three to six months | — | — | — | — | — | — | |||||||||||||
| Greater than six to nine months | 38.7 | 1.0 | — | — | 38.7 | 1.0 | |||||||||||||
| Greater than nine to twelve months | 56.6 | 1.3 | — | — | 56.6 | 1.3 | |||||||||||||
| Greater than twelve to twenty-four months | 152.8 | 3.5 | 117.8 | 3.0 | 270.6 | 6.5 | |||||||||||||
| Greater than twenty-four to thirty-six months | — | — | 27.3 | 1.5 | 27.3 | 1.5 | |||||||||||||
| Greater than thirty-six months | — | — | 0.6 | 0.1 | 0.6 | 0.1 | |||||||||||||
| Total fixed maturities, available-for-sale | $ | 312.1 | $ | 6.0 | $ | 229.2 | $ | 5.1 | $ | 541.3 | $ | 11.1 | |||||||
U.S. Invested AssetsUnrealized Losses on Below Investment Grade Fixed Maturity SecuritiesAvailable-for-Sale by Aging Category
| | December 31, 2005 | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Public | Private | Total | ||||||||||||||||
| | Carrying Amount | Gross Unrealized Losses | Carrying Amount | Gross Unrealized Losses | Carrying Amount | Gross Unrealized Losses | |||||||||||||
| | (in millions) | ||||||||||||||||||
| Three months or less | $ | 121.9 | $ | 0.7 | $ | 55.8 | $ | 1.8 | $ | 177.7 | $ | 2.5 | |||||||
| Greater than three to six months | 81.9 | 4.7 | 36.4 | 0.8 | 118.3 | 5.5 | |||||||||||||
| Greater than six to nine months | 50.8 | 0.8 | 36.8 | 1.2 | 87.6 | 2.0 | |||||||||||||
| Greater than nine to twelve months | 49.2 | 1.9 | 18.4 | 0.5 | 67.6 | 2.4 | |||||||||||||
| Greater than twelve to twenty-four months | 36.9 | 1.2 | 8.5 | 0.3 | 45.4 | 1.5 | |||||||||||||
| Greater than twenty-four to thirty-six months | — | — | 0.6 | 0.1 | 0.6 | 0.1 | |||||||||||||
| Greater than thirty-six months | 49.9 | 0.6 | 19.8 | 0.4 | 69.7 | 1.0 | |||||||||||||
| Total fixed maturities, available-for-sale | $ | 390.6 | $ | 9.9 | $ | 176.3 | $ | 5.1 | $ | 566.9 | $ | 15.0 | |||||||
Of total The following tables present our investment grade fixed maturity securities available-for-sale and the associated gross unrealized losses as of December 31, 2006 and December 31, 2005, $288.8 million and $228.5 million were related to investment grade securities, respectively. Gross unrealized losses related toby aging category for the time periods indicated.
| | December 31, 2008 | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Public | Private | Total | |||||||||||||||||
| | Carrying amount | Gross unrealized losses | Carrying amount | Gross unrealized losses | Carrying amount | Gross unrealized losses | ||||||||||||||
| | (in millions) | |||||||||||||||||||
Three months or less | $ | 3,086.0 | $ | 194.4 | $ | 1,188.1 | $ | 99.5 | $ | 4,274.1 | $ | 293.9 | ||||||||
Greater than three to six months | 4,213.7 | 467.9 | 1,673.6 | 236.4 | 5,887.3 | 704.3 | ||||||||||||||
Greater than six to nine months | 3,014.0 | 620.7 | 1,566.6 | 290.6 | 4,580.6 | 911.3 | ||||||||||||||
Greater than nine to twelve months | 2,321.0 | 743.0 | 1,259.7 | 460.1 | 3,580.7 | 1,203.1 | ||||||||||||||
Greater than twelve to twenty-four months | 3,042.0 | 1,507.5 | 2,217.1 | 1,519.7 | 5,259.1 | 3,027.2 | ||||||||||||||
Greater than twenty-four to thirty-six months | 1,045.2 | 296.1 | 312.5 | 217.1 | 1,357.7 | 513.2 | ||||||||||||||
Greater than thirty-six months | 1,363.8 | 423.5 | 698.2 | 265.8 | 2,062.0 | 689.3 | ||||||||||||||
Total fixed maturity securities, available-for-sale | $ | 18,085.7 | $ | 4,253.1 | $ | 8,915.8 | $ | 3,089.2 | $ | 27,001.5 | $ | 7,342.3 | ||||||||
| | December 31, 2007 | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Public | Private | Total | |||||||||||||||||
| | Carrying amount | Gross unrealized losses | Carrying amount | Gross unrealized losses | Carrying amount | Gross unrealized losses | ||||||||||||||
| | (in millions) | |||||||||||||||||||
Three months or less | $ | 2,829.6 | $ | 69.3 | $ | 1,585.5 | $ | 38.6 | $ | 4,415.1 | $ | 107.9 | ||||||||
Greater than three to six months | 1,233.1 | 86.4 | 1,075.4 | 123.0 | 2,308.5 | 209.4 | ||||||||||||||
Greater than six to nine months | 1,460.9 | 109.3 | 1,285.7 | 123.1 | 2,746.6 | 232.4 | ||||||||||||||
Greater than nine to twelve months | 993.2 | 74.6 | 719.4 | 107.0 | 1,712.6 | 181.6 | ||||||||||||||
Greater than twelve to twenty-four months | 1,511.2 | 98.4 | 614.7 | 47.8 | 2,125.9 | 146.2 | ||||||||||||||
Greater than twenty-four to thirty-six months | 3,049.7 | 104.3 | 1,119.6 | 58.0 | 4,169.3 | 162.3 | ||||||||||||||
Greater than thirty-six months | 607.9 | 21.6 | 364.2 | 12.4 | 972.1 | 34.0 | ||||||||||||||
Total fixed maturity securities, available-for-sale | $ | 11,685.6 | $ | 563.9 | $ | 6,764.5 | $ | 509.9 | $ | 18,450.1 | $ | 1,073.8 | ||||||||
The following tables present our below investment grade fixed maturity securities were $11.1 millionavailable-for-sale and $15.0 million as of December 31, 2006 and December 31, 2005, respectively.the associated gross unrealized losses by aging category for the time periods indicated.
| | December 31, 2008 | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Public | Private | Total | |||||||||||||||||
| | Carrying amount | Gross unrealized losses | Carrying amount | Gross unrealized losses | Carrying amount | Gross unrealized losses | ||||||||||||||
| | (in millions) | |||||||||||||||||||
Three months or less | $ | 133.1 | $ | 56.5 | $ | 114.6 | $ | 32.1 | $ | 247.7 | $ | 88.6 | ||||||||
Greater than three to six months | 88.8 | 12.7 | 297.1 | 74.3 | 385.9 | 87.0 | ||||||||||||||
Greater than six to nine months | 102.5 | 42.9 | 129.1 | 46.5 | 231.6 | 89.4 | ||||||||||||||
Greater than nine to twelve months | 163.0 | 65.9 | 44.5 | 43.7 | 207.5 | 109.6 | ||||||||||||||
Greater than twelve to twenty-four months | 242.0 | 151.7 | 351.8 | 239.5 | 593.8 | 391.2 | ||||||||||||||
Greater than twenty-four to thirty-six months | 41.2 | 26.1 | 13.3 | 21.4 | 54.5 | 47.5 | ||||||||||||||
Greater than thirty-six months | 100.3 | 29.7 | 100.9 | 30.3 | 201.2 | 60.0 | ||||||||||||||
Total fixed maturity securities, available-for-sale | $ | 870.9 | $ | 385.5 | $ | 1,051.3 | $ | 487.8 | $ | 1,922.2 | $ | 873.3 | ||||||||
| | December 31, 2007 | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Public | Private | Total | |||||||||||||||||
| | Carrying amount | Gross unrealized losses | Carrying amount | Gross unrealized losses | Carrying amount | Gross unrealized losses | ||||||||||||||
| | (in millions) | |||||||||||||||||||
Three months or less | $ | 95.4 | $ | 4.0 | $ | 187.0 | $ | 5.5 | $ | 282.4 | $ | 9.5 | ||||||||
Greater than three to six months | 62.8 | 2.6 | 115.6 | 5.4 | 178.4 | 8.0 | ||||||||||||||
Greater than six to nine months | 123.2 | 22.7 | 98.6 | 3.1 | 221.8 | 25.8 | ||||||||||||||
Greater than nine to twelve months | 91.5 | 11.3 | 17.3 | 0.7 | 108.8 | 12.0 | ||||||||||||||
Greater than twelve to twenty-four months | 57.0 | 11.1 | 21.7 | 13.0 | 78.7 | 24.1 | ||||||||||||||
Greater than twenty-four to thirty-six months | 138.3 | 11.4 | 72.9 | 2.1 | 211.2 | 13.5 | ||||||||||||||
Greater than thirty-six months | 16.5 | 0.6 | 26.6 | 0.9 | 43.1 | 1.5 | ||||||||||||||
Total fixed maturity securities, available-for-sale | $ | 584.7 | $ | 63.7 | $ | 539.7 | $ | 30.7 | $ | 1,124.4 | $ | 94.4 | ||||||||
The following tables present the carrying amount and the gross unrealized losses on fixed maturity securities available-for-sale where the estimated fair value has declined and remained below amortized cost by 20% or more as of December 31, 2006, and December 31, 2005.the time periods indicate.
U.S. Invested AssetsUnrealized Losses on Fixed Maturity SecuritiesAvailable-for-Sale by Aging Category
| | December 31, 2006 | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Problem, Potential Problem, and Restructured | All Other Fixed Maturity Securities | Total | ||||||||||||||||
| | Carrying Amount | Gross Unrealized Losses | Carrying Amount | Gross Unrealized Losses | Carrying Amount | Gross Unrealized Losses | |||||||||||||
| | (in millions) | ||||||||||||||||||
| Three months or less | $ | — | $ | — | $ | 0.7 | $ | 0.2 | $ | 0.7 | $ | 0.2 | |||||||
| Greater than three to six months | — | — | 0.3 | 0.2 | 0.3 | 0.2 | |||||||||||||
| Greater than six to nine months | — | — | — | — | — | — | |||||||||||||
| Greater than nine to twelve months | — | — | — | — | — | — | |||||||||||||
| Greater than twelve months | — | — | — | — | — | — | |||||||||||||
| Total fixed maturity securities, available-for-sale | $ | — | $ | — | $ | 1.0 | $ | 0.4 | $ | 1.0 | $ | 0.4 | |||||||
U.S. Invested AssetsUnrealized Losses on Fixed Maturity Securities Available-for-Sale by Aging Category
| | | December 31, 2005 | | December 31, 2008 | |||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Problem, Potential Problem, and Restructured | All Other Fixed Maturity Securities | Total | | Problem, potential problem, and restructured | All other fixed maturity securities | Total | |||||||||||||||||||||||||||||||
| | | Carrying Amount | Gross Unrealized Losses | Carrying Amount | Gross Unrealized Losses | Carrying Amount | Gross Unrealized Losses | | Carrying amount | Gross unrealized losses | Carrying amount | Gross unrealized losses | Carrying amount | Gross unrealized losses | |||||||||||||||||||||||||
| | | (in millions) | | (in millions) | |||||||||||||||||||||||||||||||||||
| Three months or less | Three months or less | $ | — | $ | — | $ | 4.2 | $ | 2.1 | $ | 4.2 | $ | 2.1 | Three months or less | $ | 53.7 | $ | 70.2 | $ | 6,433.5 | $ | 3,133.6 | $ | 6,487.2 | $ | 3,203.8 | |||||||||||||
| Greater than three to six months | Greater than three to six months | — | — | — | — | — | — | Greater than three to six months | 27.5 | 28.5 | 1,374.2 | 1,314.6 | 1,401.7 | 1,343.1 | |||||||||||||||||||||||||
| Greater than six to nine months | Greater than six to nine months | — | — | — | — | — | — | Greater than six to nine months | 6.1 | 14.5 | 279.3 | 415.5 | 285.4 | 430.0 | |||||||||||||||||||||||||
| Greater than nine to twelve months | Greater than nine to twelve months | — | — | — | — | — | — | Greater than nine to twelve months | 11.5 | 10.3 | 486.8 | 904.1 | 498.3 | 914.4 | |||||||||||||||||||||||||
| Greater than twelve months | Greater than twelve months | — | — | — | — | — | — | Greater than twelve months | 3.5 | 6.5 | 111.3 | 435.2 | 114.8 | 441.7 | |||||||||||||||||||||||||
| Total fixed maturity securities, available-for-sale | $ | — | $ | — | $ | 4.2 | $ | 2.1 | $ | 4.2 | $ | 2.1 | Total fixed maturity securities, available-for-sale | $ | 102.3 | $ | 130.0 | $ | 8,685.1 | $ | 6,203.0 | $ | 8,787.4 | $ | 6,333.0 | ||||||||||||||
Gross unrealized losses on fixed maturity securities where the estimated fair value has been 20% or more below amortized cost were $0.4 million as of December 31, 2006 and $2.1 million as of December 31, 2005. There were no gross unrealized losses attributed to those securities considered to be "problem", "potential problem" or "restructured" as of December 31, 2006 and December 31, 2005.
The following table presents the total carrying amount of our fixed maturity portfolio, as well as its problem, potential problem and restructured fixed maturities for the periods indicated:
U.S. Invested AssetsProblem, Potential Problem and Restructured Fixed Maturities at Carrying Amount
| | December 31, | |||||||
|---|---|---|---|---|---|---|---|---|
| | 2006 | 2005 | ||||||
| | ($ in millions) | |||||||
| Total fixed maturity securities (public and private) | $ | 42,423.8 | $ | 40,115.7 | ||||
| Problem fixed maturity securities | $ | 3.5 | $ | 42.0 | ||||
| Potential problem fixed maturity securities | 2.2 | 101.6 | ||||||
| Restructured fixed maturity securities | 11.2 | — | ||||||
| Total problem, potential problem and restructured fixed maturity securities | $ | 16.9 | $ | 143.6 | ||||
| Total problem, potential problem and restructured fixed maturity securities as a percent of total fixed maturity securities | .04 | % | .36 | % | ||||
| | December 31, 2007 | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Problem, potential problem, and restructured | All other fixed maturity securities | Total | |||||||||||||||||
| | Carrying amount | Gross unrealized losses | Carrying amount | Gross unrealized losses | Carrying amount | Gross unrealized losses | ||||||||||||||
| | (in millions) | |||||||||||||||||||
Three months or less | $ | — | $ | — | $ | 670.2 | $ | 240.2 | $ | 670.2 | $ | 240.2 | ||||||||
Greater than three to six months | — | — | 110.7 | 80.9 | 110.7 | 80.9 | ||||||||||||||
Greater than six to nine months | — | — | 0.5 | 0.3 | 0.5 | 0.3 | ||||||||||||||
Greater than nine to twelve months | — | — | — | — | — | — | ||||||||||||||
Greater than twelve months | — | — | — | — | — | — | ||||||||||||||
Total fixed maturity securities, available-for-sale | $ | — | $ | — | $ | 781.4 | $ | 321.4 | $ | 781.4 | $ | 321.4 | ||||||||
Mortgage Loans
Mortgage loans consist primarily of commercial mortgage loans on real estate. AtThe carrying amount of our commercial mortgage loan portfolio was $11,279.3 million and $10,763.5 million as of December 31, 2006, commercial mortgage loans aggregated to $10,090.3 million.2008 and 2007, respectively. Commercial mortgage loans on real estate are generally reported at cost adjusted for amortization of premiums and accrual of discounts, computed using the interest method and net of valuation allowances. Commercial mortgage loans held for sale are carried at the lower of cost or fair value, less cost to sell, and reported as mortgage loans in the statements of financial position.
Commercial mortgagesmortgage loans play an important role in our investment strategy by:
As a result, we have focused on constructing a solid, high quality portfolio of mortgages. Our portfolio is generally comprised of mortgages 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 of primarily non-recourse, fixed rate mortgages on fully or near fully leased properties. The mortgage portfolio is comprised primarily of general-purpose industrialcredit oriented retail properties, manufacturing office properties and credit oriented retailgeneral-purpose industrial properties. In addition, we have a $261.3 million short-term high rate portfolio of mortgages held by the spread business within the Global Asset Management segment. For geographic and property type distribution of our commercial mortgage loans, see Item 8. "Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 6, Investments."
Credit extensions in the state of California accounted for 17%20% of our commercial mortgage loan portfolio as of December 31, 2006.2008. 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.
Our commercial loan portfolio is highly diversified by borrower. As of December 31, 2006, 38%2008, 30% of the U.S. commercial mortgage loan portfolio was comprised of mortgage loans with principal balances of less than $10.0 million. The total number of commercial mortgage loans outstanding was 1,223 and 1,254 as of December 31, 20062008 and 2005 was 1,262 and 1,309,2007, respectively. The average loan size of our commercial mortgage portfolio was $8.0$9.3 million as of December 31, 2006.2008.
Commercial Mortgage Loan Credit Monitoring. We actively monitor and manage our commercial mortgage loan portfolio. Substantially all loans within the portfolio are analyzed regularly and are internally rated, based on a proprietary risk rating cash flow model, in order to monitor the financial quality of these assets. Based on ongoing monitoring, mortgage loans with a likelihood of becoming delinquent are identified and placed on an internal "watch list". Among criteria which would indicate a potential problem are: imbalances in ratios of loan to value or contract rents to debt service, major tenant vacancies or bankruptcies, borrower sponsorship problems, late payments, delinquent taxes and loan relief/restructuring requests.
We review our mortgage loan portfolio and analyze the need for a valuation allowance for any loan which is delinquent for 60 days or more, in process of foreclosure, restructured, on the "watch list", or which currently has a valuation allowance. We categorize loans whichthat are 60 days or more delinquent, loans in process of foreclosure, and loans to borrowers in
bankruptcy that are delinquent as "problem" loans. Valuation allowances have been recognized on problem loans. Potential problem loans are loans placed on an internal "watch list" for which management has concerns as to the ability of the borrower to comply with the present loan payment terms and which may result in the loan becoming a problem or being restructured. The decision whether to classify a performing loan 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 termsNote Rate or Pay Rate of the mortgages have been modified or for which interest or principal payments have been deferredreduced as "restructured" loans. We also consider matured loans that are refinanced at below market rates as restructured.
The following table presents the carrying amounts of problem, potential problem and restructured commercial mortgages relative to the carrying amount of all commercial mortgages for the periods indicated:
| | December 31, 2008 | December 31, 2007 | ||||||
|---|---|---|---|---|---|---|---|---|
| | ($ in millions) | |||||||
Total commercial mortgages | $ | 11,279.3 | $ | 10,763.5 | ||||
Problem commercial mortgages (1) | $ | 69.0 | $ | 35.8 | ||||
Potential problem commercial mortgages (2) | 110.0 | 14.5 | ||||||
Restructured commercial mortgages (3) | 5.5 | 14.8 | ||||||
Total problem, potential problem and restructured commercial mortgages | $ | 184.5 | $ | 65.1 | ||||
Total problem, potential problem and restructured commercial mortgages as a percent of total commercial mortgages | 1.64 | % | .60 | % | ||||
foreclosure as of December 31, 2007. The loan in foreclosure as of December 31, 2008, was not in foreclosure as of December 31, 2007.
Commercial Mortgage Loan Valuation Allowance The valuation allowance for commercial mortgage loans includes a loan specific allowance for impaired loans and a provision for losses based on past loss experience believed to be adequate to absorb estimated probable credit losses. The changes in thisthe valuation allowance are reported as ain net realized/unrealized capital lossincome on our consolidated statements of operations.
Commercial mortgage loans on real estate are considered impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to contractual terms of the loan agreement. When we determine that a loan is impaired, a valuation allowance is established or a direct write-down of the loan is recorded for the difference between the carrying amount of the mortgage loan and the estimated value. Estimated value is based on either the present value of the expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price or fair value of the collateral.
When a valuation allowance is established, subsequent recoveries are chargedcredited to the valuation allowance and subsequent losses may be charged to the valuation allowance or as a direct write-down of the loan.
allowance. The determination of the calculation and the adequacy of the mortgage loan loss provision based on past experience and mortgage impairments iscurrent portfolio statistics are subjective. Our periodic evaluation and assessment of the adequacy of the provision for losses and the need for mortgage impairments is based on known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of the underlying collateral, composition of the loan portfolio, current economic conditions, loss experience and other relevant factors. The current portfolio statistics and past loss experience produced a provision for the Principal Life general account totaling $30.7 million. The evaluation of our impaired loan component of the allowance is subjective, as it requires estimating the amounts and timing of future cash flows expected to be received on impaired loans.
The current portfolio statistics and past loss experience produced a commercial mortgage loan general valuation allowance for the Principal Life general account totaling $30.1 million. Our financial position is sensitive to changes in estimated cash flows from mortgages, the value of the collateral and changes in the economic environment in general. Decreases in theThe valuation allowance aggregated to $1.0for PFG increased by $14.2 million for the year ended December 31, 2006,2008, and $9.2increased by $10.6 million for the year ended December 31, 2005.2007. These increases are primarily related to net specific reserves taken on certain problem loans of $16.2 million and $10.0 million as of December 31, 2008, and December 31, 2007, respectively.
The following table represents our commercial mortgage valuation allowance for the periods indicated:
U.S. Invested AssetsCommercial Mortgage Valuation Allowance
| | December 31, | ||||||
|---|---|---|---|---|---|---|---|
| | 2006 | 2005 | |||||
| | ($ in millions) | ||||||
| Beginning balance | $ | 33.2 | $ | 42.4 | |||
| Provision | 1.3 | 6.7 | |||||
| Release | (2.3 | ) | (15.9 | ) | |||
| Ending balance | $ | 32.2 | $ | 33.2 | |||
| Valuation allowance as % of carrying value before reserves | .32 | % | .33 | % | |||
| | December 31, 2008 | December 31, 2007 | |||||
|---|---|---|---|---|---|---|---|
| | ($ in millions) | ||||||
Balance, beginning of period | $ | 42.8 | $ | 32.2 | |||
Provision | 42.9 | 10.8 | |||||
Releases | (28.7 | ) | (0.2 | ) | |||
Balance, end of period | $ | 57.0 | $ | 42.8 | |||
Valuation allowance as % of carrying value before reserves | .50 | % | .40 | % | |||
The following table presents the carrying amounts of problem, potential problem and restructured commercial mortgages relative to the carrying amount of all commercial mortgages for the periods indicated:
U.S. Invested AssetsProblem, Potential Problem and Restructured Commercial Mortgages at Carrying Amount
| | December 31, | |||||||
|---|---|---|---|---|---|---|---|---|
| | 2006 | 2005 | ||||||
| | ($ in millions) | |||||||
| Total commercial mortgages | $ | 10,090.3 | $ | 9,890.7 | ||||
| Problem commercial mortgages(1) | $ | 10.7 | $ | 10.4 | ||||
| Potential problem commercial mortgages | 9.1 | 10.2 | ||||||
| Restructured commercial mortgages | 6.8 | 65.1 | ||||||
| Total problem, potential problem and restructured commercial mortgages | $ | 26.6 | $ | 85.7 | ||||
| Total problem, potential problem and restructured commercial mortgages as a percent of total commercial mortgages | .26 | % | .87 | % | ||||
Equity Real Estate
We holdReal estate consists primarily of commercial equity real estate as part of our investment portfolio.estate. As of December 31, 2006,2008 and 2005,2007, the carrying amount of equity real estate investment was $854.8$915.2 million and $888.4$859.6 million, respectively, or 1% and 1%, of U.S. invested assets, respectively.assets. 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".sale." Real estate held for investment totaled $736.6$779.8 million and $777.2 million as of December 31, 2006,2008 and $754.6 million as of December 31, 2005.2007, respectively. The carrying value of real estate held for investment is generally adjusted for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Such impairment adjustments are recorded as net realized investment losses and, accordingly, are reflected in our consolidated results of operations. For the years ended December 31, 20062008 and 2005,2007, there were no such impairment adjustments.
The carrying amount of real estate held for sale as of December 31, 2006, and 2005,2008, was $118.2 million and $133.8$135.4 million, net of valuation allowancesallowance of $4.7 million and $4.2 million, respectively.$3.5 million. The carrying amount of real estate held for sale as of December 31, 2007, was $82.4 million. There was no valuation allowance at December 31, 2007. Once we identify a real estate property to be sold and commence a plan for marketing the property, 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.
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 with larger concentrations in the South Atlantic, Pacific, and West South Central and Pacific regions of the United States as of December 31, 2006.2008. By property type, there is a concentration in office, industrial site buildings, and industrial sitesretail that represented approximately 63%79% of the equity real estate portfolio as of December 31, 2006.2008.
Other Investments
Our other investments totaled $972.6$2,162.4 million as of December 31, 2006,2008, compared to $755.3$1,391.4 million as of December 31, 2005.2007. Derivatives accounted for $699.2$1,873.2 million in other investments as of December 31, 2006.2008. The remaining invested assets include equity method investments, which include properties owned jointly with venture partners and operated by the partners.
International Investment Operations
AsOf our invested assets, $3.3 billion were held by our International Asset Management and Accumulation segment as of December 31, 2006, our2008. Our international investment operations consist of the investments of Principal International comprised of $3.3 billion in invested assets.International. Principal Global Investors advises each Principal International affiliate on investment policies and strategies that are consistent with the products they offer. Due to the regulatory constraints in each country, each company maintains its own investment policies.
Overall Composition of International Invested Assets
As shown in the following table, the major categories of international invested assets as of December 31, 2006,2008 and December 31, 2005,2007, were fixed maturity securities, other investments and residential mortgage loans:loans. The following discussion analyzes the composition of general account assets, but excludes invested assets of the separate accounts.
| | December 31, 2008 | December 31, 2007 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Carrying amount | % of total | Carrying amount | % of total | ||||||||||
| | ($ in millions) | |||||||||||||
Fixed maturity securities — Public | $ | 2,134.2 | 64 | % | $ | 2,719.5 | 67 | % | ||||||
Equity securities | 40.8 | 1 | 52.7 | 1 | ||||||||||
Mortgage loans — Residential | 479.9 | 14 | 558.6 | 14 | ||||||||||
Real estate | 4.2 | — | 2.9 | — | ||||||||||
Policy loans | 15.0 | 1 | 16.2 | — | ||||||||||
Other investments | 654.2 | 20 | 727.2 | 18 | ||||||||||
Total invested assets | 3,328.3 | 100 | % | 4,077.1 | 100 | % | ||||||||
Cash and cash equivalents | 71.0 | 82.9 | ||||||||||||
Total invested assets and cash | $ | 3,399.3 | $ | 4,160.0 | ||||||||||
Investments in equity method subsidiaries and direct financing leases accounted for $377.2 million and $265.4 million, respectively, of other investments as of December 31, 2008. Investments in equity method subsidiaries and direct financing leases accounted for $455.6 million and $256.3 million, respectively, of other investments as of December 31, 2007. The remaining invested assets as of December 31, 2008, and December 31, 2007, are primarily related to derivatives and seed money.
| | December 31, 2006 | December 31, 2005 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Carrying Amount | % of Total | Carrying Amount | % of Total | ||||||||
| | ($ in millions) | |||||||||||
| Fixed maturity securities | ||||||||||||
| Public | $ | 2,303.1 | 69 | % | $ | 2,114.1 | 69 | % | ||||
| Private | — | — | 0.6 | — | ||||||||
| Equity securities | 51.9 | 2 | 50.7 | 2 | ||||||||
| Mortgage loans | ||||||||||||
| Residential | 522.0 | 16 | 505.1 | 17 | ||||||||
| Real estate held for investment | 12.2 | — | 11.7 | — | ||||||||
| Other investments | 438.1 | 13 | 358.2 | 12 | ||||||||
| Total invested assets | 3,327.3 | 100 | % | 3,040.4 | 100 | % | ||||||
| Cash and cash equivalents | 55.0 | 56.2 | ||||||||||
| Total invested assets and cash | $ | 3,382.3 | $ | 3,096.6 | ||||||||
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Risk Exposures and Risk Management
Market risk is the risk that we will incur losses due to adverse fluctuations in market rates and prices. Our primary market risk exposure is to changes in interest rates, although we also have exposures to changes in equity prices and foreign currency exchange rates.
We enter into market-sensitive instruments for purposes other than trading. The active management of market risk is an integral part of our operations. We manage our overall market risk exposure within established risk tolerance ranges by using the following approaches:
Interest Rate Risk
Interest rate risk is the risk that we will incur economic losses due to adverse changes in interest rates. One source of interest rate risk is the inherent difficulty in obtaining assets that mature or have their rate reset at the exact same time as the liabilities they support. Assets may have to be reinvested or sold in the future to meet the liability cashflowscash flows in unknown interest rate environments. Also,Secondly, there may be timing differences between when new liabilities are priced and when assets are purchased or procured that can cause fluctuations in profitability if interest rates move materially in the interim. A third source of interest rate risk is the prepayment options embedded within asset and liability contracts that can alter the cash flow profiles from what was originally expected.
One of the measures we use to quantify our exposure to interest rate risk is duration. To calculate duration, we project asset and liability cashflows.cash flows. These cash flows are discounted to a net present value basis using a spot yield curve, which is a blend of the spot yield curves for each of the asset types in the portfolio. Duration is calculated by re-calculating these cashflows,cash flows, re-determining the net present value based upon an alternative level of interest rates, and determining the percentage change in fair value.
We manage interest rate risks in a number of ways. Differences in durations between assets and liabilities are measured and kept within acceptable tolerances. Derivatives are also commonly used to mitigate interest rate risk due to cashflowcash flow mismatches and timing differences. Prepayment risk is controlled by limiting our exposure to investments that are prepayable without penalty prior to maturity at the option of the issuer. We also require additional yield on these investments to compensate for the risk the issuer will exercise such option. Prepayment risk is also controlled by limiting the sales of liabilities with features such as puts or other options that can be exercised against the company at inopportune times. For example, approximately $19.1 billion, or 98%, of our institutional GICs and funding agreements cannot be redeemed by contractholders prior to maturity.
We are also exposed to interest rate risk based upon the discount rate assumption used for purposes of valuing our pension and other postretirement benefit obligations. For further discussion of interest rate risk associated with these obligations, see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operation — Critical Accounting Policies and Estimates — Benefit Plans."
Duration-Managed. Our exposure to interest rate risk stems largely from our substantial holdings of guaranteed fixed rate liabilities in our U.S. Asset Management and Accumulation segment. We actively manage the duration of assets and liabilities in these products by minimizing the difference between the two. We have established a maximum tolerance for this difference and seek to stay within this tolerance.
As of December 31, 2006,2008, the difference between the asset and liability durations on our primary duration managedduration-managed portfolio was +.03.-0.17, as compared to -0.01 as of December 31, 2007. This duration gap indicates that, as of this date,December 31, 2008, the sensitivity of the fair value of our assets to interest rate movements is greaterless than that of the fair value of our liabilities. Our goal is to minimize the duration gap. Currently, our guidelines indicate that total duration gaps between the asset and liability portfolios should be within +/-0.25. The value of the assets in this portfolio was $33,027.5$29,440.1 million and $33,183.4 million as of December 31, 2006.2008 and 2007, respectively.
Duration-Monitored. For products such as whole life insurance and term life insurance that are less sensitive to interest rate risk, and for other products such as individual single premium deferred annuities, we manage interest rate risk based on a modeling process that considers the target average life, maturities, crediting rates and assumptions of policyholder behavior. As of December 31, 2006,2008, the weighted-average difference between the asset and liability durations on these portfolios was +.51.+0.09, as compared to +0.22 as of December 31, 2007. This duration gap indicates that, as of this date,December 31, 2008, the sensitivity of the fair value of our assets to interest rate movements is greater than that of the fair value of our liabilities. We attempt to monitor this duration gap consistent with our overall risk/reward tolerances. The value of the assets in these portfolios was $16,314.3$18,017.3 million and $17,990.9 million as of December 31, 2006.2008 and 2007, respectively.
Non Duration-Managed. We also have a block of participating general account pension business that passes most of the actual investment performance of the assets to the customer. The investment strategy of this block is to maximize investment return to the customer on a "best efforts" basis, and there is little or no attempt to manage the duration of
this portfolio since there is little or no interest rate risk. The value of the assets in these portfolios was $4,875.7$4,866.0 million and $5,234.0 million as of December 31, 2006.2008 and 2007, respectively.
Using the assumptions and data in effect as of December 31, 2006,2008, we estimate that a 100 basis point immediate, parallel increase in interest rates decreasesincreases the net fair value of our portfolio by approximately $92.5 million.$34.0 million, compared with an estimated $36.3 million decrease as of December 31, 2007. The following table details the estimated changes by risk management strategy. The table also gives the weighted-average duration of the asset portfolio for each category, and the net duration gap (i.e., the weighted-average difference between the asset and liability durations).
| | December 31, 2006 | | December 31, 2008 | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Risk Management Strategy | Value of Total Assets | Duration of Assets | Net Duration Gap | Net Fair Value Change | Risk Management Strategy | Value of total assets | Duration of assets | Net duration gap | Net fair value change | ||||||||||||||||
| | (in millions) | | | (in millions) | | (in millions) | | | (in millions) | ||||||||||||||||
| Primary duration-managed | $ | 33,027.5 | 3.76 | .03 | $ | (9.9 | ) | Primary duration-managed | $ | 29,440.1 | 3.05 | (0.17 | ) | $ | 50.0 | ||||||||||
| Duration-monitored | 16,314.3 | 4.84 | .51 | (82.6 | ) | Duration-monitored | 18,017.3 | 4.53 | 0.09 | (16.0 | ) | ||||||||||||||
| Non duration-managed | 4,875.7 | 4.09 | N/A | N/A | Non duration-managed | 4,866.0 | 5.07 | N/A | N/A | ||||||||||||||||
| Total | $ | 54,217.5 | $ | (92.5 | ) | ||||||||||||||||||||
Total | $ | 52,323.4 | $ | 34.0 | |||||||||||||||||||||
Our selection of a 100 basis point immediate, parallel increase or decrease in interest rates is a hypothetical rate scenario we use to demonstrate potential risk. While a 100 basis point immediate, parallel increase does not represent our view of future market changes, it is a near term reasonably possible hypothetical change that illustrates the potential impact of such events. While these fair value measurements provide a representation of interest rate sensitivity, they are based on our portfolio exposures at a point in time and may not be representative of future market results. These exposures will change as a result of ongoing portfolio transactions in response to new business, management's assessment of changing market conditions and available investment opportunities.
See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operation — Critical Accounting Policies and Estimates — Valuation of Invested Assets" for additional discussion of the impact interest rate increases would have on fixed maturities, available-for-sale.
Debt Issued and Outstanding. As of December 31, 2006,2008 and 2007, the aggregate fair value of long-term debt was $1,622.7 million. A$1,096.1 million and $1,423.6 million, respectively. As of December 31, 2008, a 100 basis point immediate, parallel decrease in interest rates would increase the fair value of debt by approximately $124.0 million.$59.4 million, as compared to an estimated $106.3 million increase as of December 31, 2007. Debt is not recorded at fair value on the statement of financial position.
| | December 31, 2006 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | Fair Value (no accrued interest) | |||||||||
| | -100 Basis Point Change | No Change | +100 Basis Point Change | |||||||
| | (in millions) | |||||||||
| 8.2% notes payable, due 2009 | $ | 509.7 | $ | 497.7 | $ | 486.2 | ||||
| 4.59% notes payable, due 2011 | 57.3 | 54.9 | 52.5 | |||||||
| 4.93% notes payable, due 2011 | 47.4 | 45.4 | 43.5 | |||||||
| 6.05% notes payable, due 2036 | 710.0 | 614.2 | 536.9 | |||||||
| 8% surplus notes payable, due 2044 | 116.7 | 108.3 | 99.6 | |||||||
| Non-recourse mortgages and notes payable | 264.6 | 261.6 | 258.7 | |||||||
| Other mortgages and notes payable | 41.0 | 40.6 | 40.2 | |||||||
| Total long-term debt | $ | 1,746.7 | $ | 1,622.7 | $ | 1,517.6 | ||||
Using the assumptions and data in effect as of December 31, 2008, we estimate that a 100 basis point immediate, parallel decrease or increase in interest rates would increase or decrease, respectively, the fair value for each category of long-term debt as presented in the following table.
| | December 31, 2008 Fair value (no accrued interest) | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | -100 basis point change | No change | +100 basis point change | ||||||||
| | (in millions) | ||||||||||
8.2% notes payable, due 2009 | $ | 469.3 | $ | 468.7 | $ | 466.0 | |||||
3.31% notes payable, due 2011 | 51.8 | 50.4 | 49.1 | ||||||||
3.63% notes payable, due 2011 | 26.7 | 26.0 | 25.4 | ||||||||
6.05% notes payable, due 2036 | 450.7 | 404.4 | 365.4 | ||||||||
8% surplus notes payable, due 2044 | 99.1 | 89.6 | 81.1 | ||||||||
Non-recourse mortgages and notes payable | 57.3 | 56.4 | 55.6 | ||||||||
Other mortgages and notes payable | 0.6 | 0.6 | 0.6 | ||||||||
Total long-term debt | $ | 1,155.5 | $ | 1,096.1 | $ | 1,043.2 | |||||
Our selection of a 100 basis point immediate, parallel increase or decrease in interest rates is a hypothetical rate scenario we use to demonstrate potential risk. While a 100 basis point immediate, parallel increase or decrease does not represent our view of future market changes, it is a near term reasonably possible hypothetical change that illustrates the potential impact of such events. While these fair value measurements provide a representation of interest rate sensitivity, they are based on our long-term debt obligations at a point in time and may not be representative of future obligations. These exposures will change as a result of ongoing changes to our outstanding long-term debt obligations.
Use of Derivatives to Manage Interest Rate Risk. We use various derivative financial instruments to manage our exposure to fluctuations in interest rates, including interest rate swaps, swaptions, futures, total return swaps, mortgage-backed forwardstreasury lock agreements and
options. We use interest rate swaps and futures contracts and mortgage-backed forwards to hedge changes in interest rates subsequent to the issuance of an insurance liability, such as a guaranteed investment contract, but prior to the purchase of a supporting asset, or during periods of holding assets in anticipation of near term liability sales. We use interest rate swaps primarily to more closely match the interest rate characteristics of assets and liabilities. They can be used to change the sensitivity to the interest rate of specific assets and liabilities as well as an entire portfolio. We also usePrior to the termination of our commercial mortgage securities operation, we used these instruments to hedge the interest rate exposure in our commercial mortgage-backed securitization operations.within the operation. Occasionally, we will sell a callable investment-type agreement and will use written interest rate swaptions to transform the callable liability into a fixed term liability.
Foreign Currency Risk
Foreign currency risk is the risk that we will incur economic losses due to adverse fluctuations in foreign currency exchange rates. This risk arises from foreign currency-denominated funding agreements issued to non-qualifiednonqualified institutional investors in the international market, foreign currency-denominated fixed maturity securities and demand deposits purchased and our international operations.
We estimate that as of December 31, 2006,2008, a 10% immediate unfavorable change in each of the foreign currency exchange rates to which we are exposed would result in no material change to the net fair value of our foreign currency denominated instruments identified above including the currency swap agreements, because we effectively hedge foreign currency denominated instruments to minimize exchange rate impacts.impacts, which is consistent with our estimate as of December 31, 2007. However, fluctuations in foreign currency exchange rates do affect the translation of local operating earnings and equity into our consolidated financial statements.
For our International Asset Management and Accumulation segment, we estimate that a 10% immediate unfavorable change in each of the foreign currency exchange rates to which we were exposed would have resulted in a $100.3 million, or 10%, reduction in the total equity of our international operations as of December 31, 2008, as compared to an estimated $143.2 million, or 10%, reduction as of December 31, 2007. In addition, a 10% unfavorable change in the average foreign currency exchange rates to which we were exposed through our international operations would have resulted in a $12.7 million, or 10%, reduction in the annual operating earnings of our international operations for the years ended December 31, 2008, as compared to an estimated $13.1 million, or 12%, reduction for the year ended December 31, 2007.
The selection of a 10% immediate unfavorable change in all currency exchange rates should not be construed as a prediction by us of future market events, but rather as an illustration of the potential impact of such an event. These exposures will change as a result of a change in the size and mix of our foreign operations.
Use of Derivatives to Manage Foreign Currency Risk. The foreign currency risk on funding agreements and fixed maturity securities is eliminatedmitigated by using currency swaps that swap the foreign currency interest and principal payments to our functional currency. The notional amount of our currency swap agreements associated with foreign- denominatedforeign-denominated liabilities was $4,269.2 million and $4,351.7 million as of December 31, 2006, was $3,578.9 million.2008 and 2007, respectively. The notional amount of our currency swap agreements associated with foreign-denominated fixed maturity securities was $2,005.4 million and $1,973.4 million as of December 31, 2006, was $1,728.2 million.2008 and 2007, respectively.
With regard to our international operations, we attempt to do as much of our business as possible in the functional currency of the country of operation. At times, however, we are unable to do so, and in these cases, we use foreign exchange derivatives to economically hedge the resulting risks. As of December 31, 2006, ourOur operations in Chile had currency swaps with a notional amount of $24.0$24.1 million as of both December 31, 2008 and 2007, that arewere used to swap cash flows on U.S. dollar-denominated bonds to a local currency. Chile also utilized currency forwards with a notional amount of $53.5$52.1 million and $134.1 million as of December 31, 2008 and 2007, respectively, in order to mitigate currency exposure related to U.S. dollar-denominated bonds. Additionally, Principal International Corporate headquarters utilized currency forwards with a notional amount of $53.9 millionbonds denominated in order to mitigate currency exposure related to planned capital flows for our joint venture company in Malaysia.currencies other than Chilean pesos.
Additionally, from time to time we may take measures to hedge our net equity investments in our foreign subsidiaries from currency risks. Currently, there areThere were no outstanding net equity investment hedges.
Equity Risk
Equity risk is the risk that we will incur economic losses due to adverse fluctuations in a particular common stock. As of December 31, 2006,2008 and 2007, the fair value of our equity securities was $847.6 million. A$400.7 million and $586.2 million, respectively. As of December 31, 2008, a 10% decline in the value of the equity securities would result in an unrealized loss of $84.8 million.$40.1 million, as compared to an estimated unrealized loss of $58.6 million as of December 31, 2007.
We are also exposed to the risk that asset-based fees decrease as a result of declines in assets under management due to change in investment prices and the risk that asset management fees calculated by reference to performance could be lower. We estimate that an immediate 10% decline in the Standard & Poor's index, followed by a 2% per quarter increase would reduce our annual operating earnings by approximately four to six percent. The risk of decreased asset-based and asset management fees could also impact our estimates of total gross profits used as a basis for amortizing deferred policy
acquisition and other costs. For further discussion, see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operation — Critical Accounting Policies and Estimates — Deferred Policy Acquisition Costs and Other Actuarial Balances."
The selection of a 10% unfavorable change in the equity markets should not be construed as a prediction by us of future market events, but rather as an illustration of the potential impact of such an event. Our exposure will change as a result of changes in our mix of business.
We also have equity risk associated with (1) fixed deferred annuity productscontracts that credit interest to customers based on changes in an external equity index; (2) variable annuity contracts that have a GMWB rider that allows the customer to receive at least the principal deposit back through withdrawals of a specified annual amount, even if the account value is reduced to zero; (3) variable annuity contacts that have a guaranteed minimum death benefit ("GMDB")GMDB that allows the death benefit to be paid, even if the account value has fallen below the GMDB amount; (4) investment-type contracts in which the return is tied to an external equity index;index and (5) investment-type contracts in which the return is subject to minimum contractual guarantees. We are also subject to equity risk based upon the assets that support our benefit plans. For further discussion of equity risk associated with these plans, see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operation — Critical Accounting Policies and Estimates — Benefit Plans."
Use of Derivatives to Manage Equity Risk. We economically hedge the fixed deferred annuity product by purchasing options that match the product's profile. We economically hedge the GMWB exposure using futures, options and interest rate swaps. We economically hedge the investment contract exposure to an external equity index using equity call options.
The fair value of both the GMWB embedded derivative and associated hedging instruments are sensitive to financial market conditions and the variance related to the change in fair value of these items for a given period is largely dependent on market conditions at the end of the period. For the year ended December 31, 2008, we recognized a $37.4 million pre-tax loss on the change in fair value of the GMWB embedded derivative and a $171.5 million pre-tax gain on the derivatives used to economically hedge our GMWB market risk, which includes equity risk. The implementation of SFAS 157 in 2008 resulted in the incorporation of a spread reflecting our own creditworthiness and additional risk margins in the valuation of the GMWB embedded derivative. Throughout 2008, the spread reflecting our own credit risk increased, which drove a significant increase in the discount rates applied, thereby reducing the level of pre-tax loss from fair value changes in the embedded derivative. This resulted in the pre-tax loss from the fair value of the embedded derivative being significantly different than the pre-tax gain from the fair value changes in the associated hedging instruments. Additionally, the net gain from the change in value of the GMWB embedded derivative and the associated hedging instruments resulted in a $45.4 million pre-tax increase in DPAC amortization.
Credit Risk
Credit risk relates to the uncertainty associated with the continued ability of a given obligor to make timely payments of principal and interest. Our ability to manage credit risk is essential to our business and our profitability. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations — Investments" for additional information about credit risk.
Use of Derivatives to Diversify or Hedge Credit Risk. We sometimes purchase credit default swaps to hedge credit exposures in our investment portfolio. We sell credit default swaps to offer credit protection to investors. IfWhen 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 8. "Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 8, Derivative Financial Instruments."
We economically hedged credit exposure in our portfolio by purchasing credit default swaps with a notional amount of $549.0 million and $63.4 million as of December 31, 2008 and 2007, respectively. As of December 31, 2008, we did not have increasedany credit default swaps hedging spread risk in our portfolio. At December 31, 2007, we utilized credit default swaps with a notional amount of $69.5 million to economically hedge spread risk in our portfolio. We had credit exposure through credit default swaps with a notional amount of $200.0 million as of both December 31, 2008 and 2007, by investing in $127.5$200.0 million ofin various tranches of synthetic collateralized debt obligations. The outstanding notional amount as of December 31, 2006 was $565.0 million. We also invested inIn addition, we sold credit default swaps creating replicated assets with a notional amount of $855.9$1,199.9 million and $801.9 million as of December 31, 2006.
In addition, on May 26, 2005, we invested $130.0 million in a secured limited recourse credit linked note issued by a grantor trust. The trust entered into a credit default swap providing credit protection on the first 45% of loss of seven mezzanine tranches totaling $288.9 million of seven synthetic reference portfolios. The risk of loss for the seven referenced mezzanine tranches begins at 4.85%2008 and ends at 10.85% of loss on each of the seven synthetic reference portfolios. Therefore, defaults in an underlying reference portfolio will only affect the credit-linked note if cumulative losses exceed 4.85% of a synthetic reference portfolio. As of December 31, 2006, the credit default swap entered into by the trust had an outstanding notional amount of $130.0 million. The creditors of the grantor trusts have no recourse to the assets of our company.2007, respectively.
Derivative Summary
Notional amounts are used to express the extent of our involvement in derivative transactions and represent a standard measurement of the volume of our derivative activity. Notional amount is not a quantification of market risk or credit risk and it may not necessarily be recorded on the balance sheet.statement of financial position. Notional amounts represent those amounts used to calculate contractual flows to be exchanged and are not paid or received, except for contracts such as currency swaps. Actual credit exposure represents the amount owed to us under derivative contracts as of the valuation
date. The following tables present our position in, and credit exposure to, derivative financial instruments as of December 31, 2006,2008 and December 31, 2005.2007.
Derivative Financial Instruments — Notional Amounts
| | | December 31, 2006 | December 31, 2005 | | December 31, 2008 | December 31, 2007 | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Notional Amount | % of Total | Notional Amount | % of Total | | Notional amount | % of total | Notional amount | % of total | ||||||||||||||||
| | | ($ in millions) | | ($ in millions) | ||||||||||||||||||||||
| Interest rate swaps | Interest rate swaps | $ | 12,365.5 | 55 | % | $ | 8,531.3 | 50 | % | Interest rate swaps | $ | 24,148.6 | 66 | % | $ | 18,627.3 | 62 | % | ||||||||
| Foreign currency swaps | Foreign currency swaps | 5,331.1 | 24 | 3,854.5 | 23 | Foreign currency swaps | 6,298.7 | 17 | 6,349.2 | 21 | ||||||||||||||||
| Embedded derivative financial instruments | Embedded derivative financial instruments | 1,679.4 | 8 | 1,199.5 | 7 | Embedded derivative financial instruments | 2,940.4 | 8 | 2,088.9 | 7 | ||||||||||||||||
| Credit default swaps | Credit default swaps | 1,550.9 | 7 | 1,297.6 | 8 | Credit default swaps | 1,948.9 | 6 | 1,134.8 | 4 | ||||||||||||||||
Options | Options | 797.5 | 2 | 572.0 | 2 | |||||||||||||||||||||
Futures | Futures | 161.0 | 1 | 57.7 | — | |||||||||||||||||||||
| Swaptions | Swaptions | 643.4 | 3 | 684.5 | 4 | Swaptions | 94.8 | — | 488.8 | 2 | ||||||||||||||||
| Currency forwards | Currency forwards | 342.7 | 2 | 566.6 | 4 | Currency forwards | 52.1 | — | 361.9 | 1 | ||||||||||||||||
| Call options | 314.0 | 1 | 189.8 | 1 | ||||||||||||||||||||||
| Futures | 55.0 | — | 58.9 | — | ||||||||||||||||||||||
| Bond options | 21.0 | — | 38.5 | — | ||||||||||||||||||||||
| Commodity swaps | Commodity swaps | 20.0 | — | — | — | Commodity swaps | 40.0 | — | 40.0 | — | ||||||||||||||||
| Interest rate lock commitments | 8.8 | — | 392.3 | 2 | ||||||||||||||||||||||
| Total return swaps | — | — | 100.0 | 1 | ||||||||||||||||||||||
| Mortgage-backed forwards and options | — | — | 39.3 | — | ||||||||||||||||||||||
Treasury lock agreements | Treasury lock agreements | — | — | 150.0 | 1 | |||||||||||||||||||||
| Total | $ | 22,331.8 | 100 | % | $ | 16,952.8 | 100 | % | Total | $ | 36,482.0 | 100 | % | $ | 29,870.6 | 100 | % | |||||||||
Derivative Financial Instruments — Credit Exposures
| | | December 31, 2006 | December 31, 2005 | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Credit Exposure | % of Total | Credit Exposure | % of Total | | December 31, 2008 | December 31, 2007 | ||||||||||||||||||
| | | ($ in millions) | | Credit exposure | % of total | Credit exposure | % of total | |||||||||||||||||||
| | | ($ in millions) | ||||||||||||||||||||||||
Interest rate swaps | Interest rate swaps | $ | 1,105.1 | 56 | % | $ | 286.0 | 24 | % | |||||||||||||||||
| Foreign currency swaps | Foreign currency swaps | $ | 564.6 | 75 | % | $ | 339.6 | 72 | % | Foreign currency swaps | 562.5 | 29 | 805.5 | 69 | ||||||||||||
| Interest rate swaps | 132.8 | 18 | 89.3 | 19 | ||||||||||||||||||||||
| Call options | 30.6 | 4 | 18.0 | 4 | ||||||||||||||||||||||
Options | Options | 222.1 | 11 | 64.4 | 5 | |||||||||||||||||||||
| Credit default swaps | Credit default swaps | 15.7 | 2 | 14.0 | 3 | Credit default swaps | 70.7 | 4 | 5.6 | 1 | ||||||||||||||||
| Currency forwards | Currency forwards | 7.6 | 1 | 11.4 | 2 | Currency forwards | 0.2 | — | 6.2 | 1 | ||||||||||||||||
| Commodity swaps | Commodity swaps | 0.7 | — | — | — | Commodity swaps | — | — | 0.3 | — | ||||||||||||||||
| Bond options | 0.4 | — | 0.6 | — | ||||||||||||||||||||||
| Total credit exposure | 752.4 | 100 | % | 472.9 | 100 | % | Total credit exposure | 1,960.6 | 100 | % | 1,168.0 | 100 | % | |||||||||||||
| Less: Collateral received | Less: Collateral received | (197.5 | ) | (97.6 | ) | Less: Collateral received | 278.5 | 326.5 | ||||||||||||||||||
| Total | $ | 554.9 | $ | 375.3 | Total | $ | 1,682.1 | $ | 841.5 | |||||||||||||||||
The following table shows the interest rate sensitivity of our derivatives measured in terms of fair value. These exposures will change as a result of ongoing portfolio and risk management activities.
| | | December 31, 2006 | | December 31, 2008 | |||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | Fair Value (no accrued interest) | | | | Fair value (no accrued interest) | |||||||||||||||||||||||||
| | | Notional Amount | Weighted Average Term (Years) | -100 Basis Point Change | No Change | +100 Basis Point Change | | Notional amount | Weighted average term (years) | -100 basis point change | No change | +100 basis point change | |||||||||||||||||||||
| | | ($ in millions) | | ($ in millions) | |||||||||||||||||||||||||||||
| Interest rate swaps | Interest rate swaps | $ | 12,365.5 | 5.70 | (1) | $ | (135.9 | ) | $ | 46.0 | $ | 204.1 | Interest rate swaps | $ | 24,148.6 | 5.93 | (1) | $ | (420.9 | ) | $ | (362.5 | ) | $ | (312.1 | ) | |||||||
Futures | Futures | 97.3 | 0.22 | (2) | (5.9 | ) | 3.1 | 12.0 | |||||||||||||||||||||||||
| Swaptions | Swaptions | 643.4 | 6.64 | (2) | (41.8 | ) | (19.0 | ) | (7.8 | ) | Swaptions | 94.8 | 11.74 | (3) | (15.8 | ) | (25.3 | ) | (16.2 | ) | |||||||||||||
| Futures | 38.2 | .21 | (3) | (2.5 | ) | (0.1 | ) | 2.4 | |||||||||||||||||||||||||
| Bond options | 21.0 | 1.24 | (4) | 0.1 | 0.4 | 0.8 | |||||||||||||||||||||||||||
| Total | $ | 13,068.1 | $ | (180.1 | ) | $ | 27.3 | $ | 199.5 | Total | $ | 24,340.7 | $ | (442.6 | ) | $ | (384.7 | ) | $ | (316.3 | ) | ||||||||||||
We use U.S. Treasury futures to manage our over/under commitment position, and our position in these contracts changes daily.
Counterparty Risk
In conjunction with our use of derivatives, we are exposed to counterparty risk, or the risk that the counterparty fails to perform the terms of the derivative contract. We actively manage this risk by:
All new derivative counterparties are approved by the Investment Committee. We believe the risk of incurring losses due to nonperformance by our counterparties is manageable.
Effects of Inflation
We do not believe thatThe impact of inflation in the United States or in the other countries in which we operate, has not had a material effect on our annual consolidated operations over the past five years. In the future, however,However, we may be materially affected by inflation toin the extent it causes interest rates to rise.future.
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting | 91 | ||||
Report of Independent Registered Public Accounting Firm | 92 | ||||
Audited Consolidated Financial Statements | |||||
Consolidated Statements of Financial Position | 93 | ||||
Consolidated Statements of Operations | 94 | ||||
Consolidated Statements of Stockholders' Equity | 95 | ||||
Consolidated Statements of Cash Flows | 97 | ||||
Notes to Consolidated Financial Statements | 99 | ||||
Report of Independent Registered Public Accounting Firm
on Internal Control Over Financial Reporting
The Board of Directors and Stockholders
Principal Financial Group, Inc.
We have audited management's assessment, included in the accompanying Management's Report on Internal Control Over Financial Reporting, that Principal Financial Group, Inc. ("the Company") maintained effective's internal control over financial reporting as of December 31, 2006,2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("the COSO criteria"). Management of Principal Financial Group, Inc. ("the Company") is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting.reporting included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment,assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that Principal Financial Group, Inc. maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Principal Financial Group, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006,2008, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial position of Principal Financial Group, Inc. as of December 31, 20062008 and 2005,2007, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2006,2008, and our report dated February 20, 200716, 2009, expressed an unqualified opinion thereon.
| /s/ Ernst & Young LLP | ||
Des Moines, Iowa February |
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Principal Financial Group, Inc.
We have audited the accompanying consolidated statements of financial position of Principal Financial Group, Inc. ("the Company") as of December 31, 20062008 and 2005,2007, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2006.2008. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Principal Financial Group, Inc. at December 31, 20062008 and 2005,2007, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2006,2008, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in response to new accounting standards, the Company changed its methods of accounting for certain fixed and variable contract features effective January 1, 2004, certain non-monetary exchanges of similar productive assets (primarily real estate) effective July 1, 2005, and its pension and other post-retirement benefits effective December 31, 2006.2006 and January 1, 2008, and for the treatment of modifications or exchanges of insurance contracts and income tax contingencies effective January 1, 2007.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of December 31, 2006,2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 20, 200716, 2009, expressed an unqualified opinion thereon.
| /s/ Ernst & Young LLP | ||
Des Moines, Iowa February |
Principal Financial Group, Inc.
Consolidated Statements of Financial Position
| | | December 31, | | December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | 2006 | 2005 | | 2008 | 2007 | ||||||||||
| | | (in millions) | | (in millions) | ||||||||||||
| Assets | Assets | Assets | ||||||||||||||
| Fixed maturities, available-for-sale | Fixed maturities, available-for-sale | $ | 44,403.5 | $ | 42,117.2 | Fixed maturities, available-for-sale | $ | 40,117.2 | $ | 46,738.9 | ||||||
| Fixed maturities, trading | Fixed maturities, trading | 323.4 | 113.2 | Fixed maturities, trading | 843.4 | 529.3 | ||||||||||
| Equity securities, available-for-sale | Equity securities, available-for-sale | 666.6 | 724.4 | Equity securities, available-for-sale | 242.7 | 316.4 | ||||||||||
| Equity securities, trading | Equity securities, trading | 181.0 | 90.3 | Equity securities, trading | 158.0 | 269.8 | ||||||||||
| Mortgage loans | Mortgage loans | 11,663.9 | 11,484.3 | Mortgage loans | 13,113.6 | 12,659.6 | ||||||||||
| Real estate | Real estate | 867.0 | 900.1 | Real estate | 919.4 | 862.5 | ||||||||||
| Policy loans | Policy loans | 850.7 | 827.7 | Policy loans | 896.4 | 869.9 | ||||||||||
| Other investments | Other investments | 1,410.7 | 1,113.5 | Other investments | 2,816.6 | 2,118.6 | ||||||||||
| Total investments | 60,366.8 | 57,370.7 | Total investments | 59,107.3 | 64,365.0 | |||||||||||
| Cash and cash equivalents | Cash and cash equivalents | 1,590.8 | 1,639.3 | Cash and cash equivalents | 2,608.0 | 1,344.4 | ||||||||||
| Accrued investment income | Accrued investment income | 723.5 | 682.3 | Accrued investment income | 750.7 | 774.1 | ||||||||||
| Premiums due and other receivables | Premiums due and other receivables | 1,252.3 | 592.7 | Premiums due and other receivables | 988.1 | 951.2 | ||||||||||
| Deferred policy acquisition costs | Deferred policy acquisition costs | 2,418.9 | 2,174.1 | Deferred policy acquisition costs | 4,153.0 | 2,810.1 | ||||||||||
| Property and equipment | Property and equipment | 422.5 | 419.8 | Property and equipment | 518.2 | 469.0 | ||||||||||
| Goodwill | Goodwill | 361.9 | 282.3 | Goodwill | 375.5 | 374.7 | ||||||||||
| Other intangibles | Other intangibles | 981.0 | 202.6 | Other intangibles | 925.3 | 1,006.9 | ||||||||||
| Separate account assets | Separate account assets | 73,779.6 | 62,070.0 | Separate account assets | 55,142.6 | 80,486.8 | ||||||||||
| Assets of discontinued operations | — | 103.2 | ||||||||||||||
| Other assets | Other assets | 1,760.8 | 1,498.4 | Other assets | 3,613.7 | 1,938.0 | ||||||||||
| Total assets | $ | 143,658.1 | $ | 127,035.4 | Total assets | $ | 128,182.4 | $ | 154,520.2 | |||||||
Liabilities | Liabilities | Liabilities | ||||||||||||||
| Contractholder funds | Contractholder funds | $ | 36,799.0 | $ | 33,612.1 | Contractholder funds | $ | 43,086.6 | $ | 40,288.9 | ||||||
| Future policy benefits and claims | Future policy benefits and claims | 17,332.6 | 16,825.5 | Future policy benefits and claims | 18,494.2 | 18,454.7 | ||||||||||
| Other policyholder funds | Other policyholder funds | 619.4 | 657.1 | Other policyholder funds | 536.2 | 540.5 | ||||||||||
| Short-term debt | Short-term debt | 84.1 | 476.4 | Short-term debt | 500.9 | 290.8 | ||||||||||
| Long-term debt | Long-term debt | 1,553.8 | 898.8 | Long-term debt | 1,290.5 | 1,398.8 | ||||||||||
| Income taxes currently payable | Income taxes currently payable | 4.2 | — | Income taxes currently payable | 1.9 | 41.6 | ||||||||||
| Deferred income taxes | Deferred income taxes | 917.2 | 974.8 | Deferred income taxes | 102.8 | 576.3 | ||||||||||
| Separate account liabilities | Separate account liabilities | 73,779.6 | 62,070.0 | Separate account liabilities | 55,142.6 | 80,486.8 | ||||||||||
| Liabilities of discontinued operations | — | 4.5 | ||||||||||||||
| Other liabilities | Other liabilities | 4,707.4 | 3,709.0 | Other liabilities | 6,553.9 | 5,020.1 | ||||||||||
| Total liabilities | 135,797.3 | 119,228.2 | Total liabilities | 125,709.6 | 147,098.5 | |||||||||||
Stockholders' equity | Stockholders' equity | Stockholders' equity | ||||||||||||||
| Series A preferred stock, par value $.01 with liquidation preference of $100 per share — 3.0 million shares authorized, issued and outstanding at December 31, 2006 and 2005 | — | — | ||||||||||||||
| Series B preferred stock, par value $.01 with liquidation preference of $25 per share — 10.0 million shares authorized, issued and outstanding at December 31, 2006 and 2005 | 0.1 | 0.1 | ||||||||||||||
| Common stock, par value $.01 per share — 2,500.0 million shares authorized, 383.6 million and 381.3 million shares issued, and 268.4 million and 280.6 million shares outstanding at December 31, 2006 and 2005, respectively | 3.8 | 3.8 | ||||||||||||||
Series A preferred stock, par value $.01 with liquidation preference of $100 per share — 3.0 million shares authorized, issued and outstanding at December 31, 2008 and 2007 | Series A preferred stock, par value $.01 with liquidation preference of $100 per share — 3.0 million shares authorized, issued and outstanding at December 31, 2008 and 2007 | — | — | |||||||||||||
Series B preferred stock, par value $.01 with liquidation preference of $25 per share — 10.0 million shares authorized, issued and outstanding at December 31, 2008 and 2007 | Series B preferred stock, par value $.01 with liquidation preference of $25 per share — 10.0 million shares authorized, issued and outstanding at December 31, 2008 and 2007 | 0.1 | 0.1 | |||||||||||||
Common stock, par value $.01 per share — 2,500.0 million shares authorized, 387.0 million and 385.8 million shares issued, and 259.3 million and 259.1 million shares outstanding at December 31, 2008 and 2007, respectively | Common stock, par value $.01 per share — 2,500.0 million shares authorized, 387.0 million and 385.8 million shares issued, and 259.3 million and 259.1 million shares outstanding at December 31, 2008 and 2007, respectively | 3.9 | 3.9 | |||||||||||||
| Additional paid-in capital | Additional paid-in capital | 8,141.8 | 8,000.0 | Additional paid-in capital | 8,376.5 | 8,295.4 | ||||||||||
| Retained earnings | Retained earnings | 2,824.1 | 2,008.6 | Retained earnings | 3,722.5 | 3,414.3 | ||||||||||
| Accumulated other comprehensive income | 846.9 | 994.8 | ||||||||||||||
| Treasury stock, at cost (115.2 million and 100.7 million shares at December 31, 2006 and 2005, respectively) | (3,955.9 | ) | (3,200.1 | ) | ||||||||||||
Accumulated other comprehensive income (loss) | Accumulated other comprehensive income (loss) | (4,911.6 | ) | 420.2 | ||||||||||||
Treasury stock, at cost (127.7 million and 126.7 million shares at December 31, 2008 and 2007, respectively) | Treasury stock, at cost (127.7 million and 126.7 million shares at December 31, 2008 and 2007, respectively) | (4,718.6 | ) | (4,712.2 | ) | |||||||||||
| Total stockholders' equity | 7,860.8 | 7,807.2 | Total stockholders' equity | 2,472.8 | 7,421.7 | |||||||||||
| Total liabilities and stockholders' equity | $ | 143,658.1 | $ | 127,035.4 | Total liabilities and stockholders' equity | $ | 128,182.4 | $ | 154,520.2 | |||||||
See accompanying notes.
Principal Financial Group, Inc.
Consolidated Statements of Operations
| | | For the year ended December 31, | | For the year ended December 31, | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | 2006 | 2005 | 2004 | | 2008 | 2007 | 2006 | ||||||||||||||
| | | (in millions, except per share data) | | (in millions, except per share data) | ||||||||||||||||||
| Revenues | Revenues | Revenues | ||||||||||||||||||||
| Premiums and other considerations | Premiums and other considerations | $ | 4,305.3 | $ | 3,975.0 | $ | 3,710.0 | Premiums and other considerations | $ | 4,209.2 | $ | 4,634.1 | $ | 4,305.3 | ||||||||
| Fees and other revenues | Fees and other revenues | 1,902.5 | 1,717.8 | 1,491.7 | Fees and other revenues | 2,426.5 | 2,634.7 | 1,902.5 | ||||||||||||||
| Net investment income | Net investment income | 3,618.0 | 3,360.1 | 3,224.0 | Net investment income | 3,994.3 | 3,966.5 | 3,620.6 | ||||||||||||||
| Net realized/unrealized capital gains (losses) | 44.7 | (11.2 | ) | (104.8 | ) | |||||||||||||||||
Net realized capital gains (losses) | Net realized capital gains (losses) | (694.1 | ) | (328.8 | ) | 44.7 | ||||||||||||||||
| Total revenues | 9,870.5 | 9,041.7 | 8,320.9 | Total revenues | 9,935.9 | 10,906.5 | 9,873.1 | |||||||||||||||
| Expenses | Expenses | Expenses | ||||||||||||||||||||
| Benefits, claims, and settlement expenses | 5,692.4 | 5,282.9 | 4,959.5 | |||||||||||||||||||
Benefits, claims and settlement expenses | Benefits, claims and settlement expenses | 6,219.9 | 6,435.3 | 5,692.4 | ||||||||||||||||||
| Dividends to policyholders | Dividends to policyholders | 290.7 | 293.0 | 296.7 | Dividends to policyholders | 267.3 | 293.8 | 290.7 | ||||||||||||||
| Operating expenses | Operating expenses | 2,558.7 | 2,342.1 | 2,185.6 | Operating expenses | 2,995.1 | 3,129.2 | 2,558.7 | ||||||||||||||
| Total expenses | 8,541.8 | 7,918.0 | 7,441.8 | Total expenses | 9,482.3 | 9,858.3 | 8,541.8 | |||||||||||||||
| Income from continuing operations before income taxes | Income from continuing operations before income taxes | 1,328.7 | 1,123.7 | 879.1 | Income from continuing operations before income taxes | 453.6 | 1,048.2 | 1,331.3 | ||||||||||||||
| Income taxes | 295.0 | 232.2 | 178.2 | |||||||||||||||||||
Income taxes (benefits) | Income taxes (benefits) | (4.5 | ) | 208.1 | 295.9 | |||||||||||||||||
| Income from continuing operations, net of related income taxes | Income from continuing operations, net of related income taxes | 1,033.7 | 891.5 | 700.9 | Income from continuing operations, net of related income taxes | 458.1 | 840.1 | 1,035.4 | ||||||||||||||
| Income from discontinued operations, net of related income taxes | Income from discontinued operations, net of related income taxes | 30.6 | 27.5 | 130.4 | Income from discontinued operations, net of related income taxes | — | 20.2 | 28.9 | ||||||||||||||
| Income before cumulative effect of accounting change | 1,064.3 | 919.0 | 831.3 | |||||||||||||||||||
| Cumulative effect of accounting change, net of related income taxes | — | — | (5.7 | ) | ||||||||||||||||||
| Net income | Net income | 1,064.3 | 919.0 | 825.6 | Net income | 458.1 | 860.3 | 1,064.3 | ||||||||||||||
| Preferred stock dividends | Preferred stock dividends | 33.0 | 17.7 | — | Preferred stock dividends | 33.0 | 33.0 | 33.0 | ||||||||||||||
| Net income available to common stockholders | Net income available to common stockholders | $ | 1,031.3 | $ | 901.3 | $ | 825.6 | Net income available to common stockholders | $ | 425.1 | $ | 827.3 | $ | 1,031.3 | ||||||||
| Earnings per common share | Earnings per common share | Earnings per common share | ||||||||||||||||||||
| Basic earnings per common share: | Basic earnings per common share: | Basic earnings per common share: | ||||||||||||||||||||
| Income from continuing operations, net of related income taxes | $ | 3.67 | $ | 3.03 | $ | 2.24 | Income from continuing operations, net of related income taxes | $ | 1.64 | $ | 3.04 | $ | 3.67 | |||||||||
| Income from discontinued operations, net of related income taxes | 0.11 | 0.10 | 0.42 | Income from discontinued operations, net of related income taxes | — | 0.08 | 0.11 | |||||||||||||||
| Income before cumulative effect of accounting change | 3.78 | 3.13 | 2.66 | Net income | $ | 1.64 | $ | 3.12 | $ | 3.78 | ||||||||||||
| Cumulative effect of accounting change, net of related income taxes | — | — | (0.02 | ) | ||||||||||||||||||
| Net income | $ | 3.78 | $ | 3.13 | $ | 2.64 | ||||||||||||||||
| Diluted earnings per common share: | Diluted earnings per common share: | Diluted earnings per common share: | ||||||||||||||||||||
| Income from continuing operations, net of related income taxes | $ | 3.63 | $ | 3.01 | $ | 2.23 | Income from continuing operations, net of related income taxes | $ | 1.63 | $ | 3.01 | $ | 3.64 | |||||||||
| Income from discontinued operations, net of related income taxes | 0.11 | 0.10 | 0.41 | Income from discontinued operations, net of related income taxes | — | 0.08 | 0.10 | |||||||||||||||
| Income before cumulative effect of accounting change | 3.74 | 3.11 | 2.64 | Net income | $ | 1.63 | $ | 3.09 | $ | 3.74 | ||||||||||||
| Cumulative effect of accounting change, net of related income taxes | — | — | (0.02 | ) | ||||||||||||||||||
| Net income | $ | 3.74 | $ | 3.11 | $ | 2.62 | ||||||||||||||||
See accompanying notes.
Principal Financial Group, Inc.
Consolidated Statements of Stockholders' Equity
| | | Series A preferred stock | Series B preferred stock | Common stock | Additional paid-in capital | Retained earnings | Accumulated other comprehensive income | Treasury stock | Total stockholders' equity | |||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | (in millions) | | Series A preferred stock | Series B preferred stock | Common stock | Additional paid-in capital | Retained earnings | Accumulated other comprehensive income (loss) | Treasury stock | Total stockholders' equity | |||||||||||||||||||||||||||||||||||||||||
| Balances at January 1, 2004 | $ | — | $ | — | $ | 3.8 | $ | 7,153.2 | $ | 630.4 | $ | 1,171.3 | $ | (1,559.1 | ) | $ | 7,399.6 | |||||||||||||||||||||||||||||||||||
| | | (in millions) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Balances at January 1, 2006 | Balances at January 1, 2006 | $ | — | $ | 0.1 | $ | 3.8 | $ | 8,000.0 | $ | 2,008.6 | $ | 994.8 | $ | (3,200.1 | ) | $ | 7,807.2 | ||||||||||||||||||||||||||||||||||
| Common stock issued | Common stock issued | — | — | — | 41.2 | — | — | — | 41.2 | Common stock issued | — | — | — | 66.2 | — | — | — | 66.2 | ||||||||||||||||||||||||||||||||||
| Capital transactions of equity method investee, net of related income taxes | Capital transactions of equity method investee, net of related income taxes | — | — | — | 20.4 | — | — | — | 20.4 | Capital transactions of equity method investee, net of related income taxes | — | — | — | 1.7 | — | — | — | 1.7 | ||||||||||||||||||||||||||||||||||
| Stock-based compensation and additional related tax benefits | Stock-based compensation and additional related tax benefits | — | — | — | 46.2 | — | — | — | 46.2 | Stock-based compensation and additional related tax benefits | — | — | — | 73.9 | (1.1 | ) | — | — | 72.8 | |||||||||||||||||||||||||||||||||
| Tax benefits related to initial public offering costs | — | — | — | 8.4 | — | — | — | 8.4 | ||||||||||||||||||||||||||||||||||||||||||||
| Treasury stock acquired | — | — | — | — | — | — | (772.6 | ) | (772.6 | ) | ||||||||||||||||||||||||||||||||||||||||||
Treasury stock acquired, common | Treasury stock acquired, common | — | — | — | — | — | — | (755.8 | ) | (755.8 | ) | |||||||||||||||||||||||||||||||||||||||||
| Dividends to common stockholders | Dividends to common stockholders | — | — | — | — | (166.5 | ) | — | — | (166.5 | ) | Dividends to common stockholders | — | — | — | — | (214.7 | ) | — | — | (214.7 | ) | ||||||||||||||||||||||||||||||
Dividends to preferred stockholders | Dividends to preferred stockholders | — | — | — | — | (33.0 | ) | — | — | (33.0 | ) | |||||||||||||||||||||||||||||||||||||||||
Transition adjustment related to post-retirement benefit obligations, net of related income taxes | Transition adjustment related to post-retirement benefit obligations, net of related income taxes | — | — | — | — | — | 23.3 | — | 23.3 | |||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income: | Comprehensive income: | Comprehensive income: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 825.6 | — | — | 825.6 | Net income | — | — | — | — | 1,064.3 | — | — | 1,064.3 | |||||||||||||||||||||||||||||||||||
| Net unrealized gains, net | — | — | — | — | — | 112.5 | — | 112.5 | Net unrealized losses, net | — | — | — | — | — | (168.9 | ) | — | (168.9 | ) | |||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment, net of related income taxes | — | — | — | — | — | 32.3 | — | 32.3 | Foreign currency translation adjustment, net of related income taxes | — | — | — | — | — | (5.0 | ) | — | (5.0 | ) | |||||||||||||||||||||||||||||||||
| Minimum pension liability, net of related income taxes | — | — | — | — | — | (2.8 | ) | — | (2.8 | ) | Minimum pension liability, net of related income taxes | — | — | — | — | — | 2.7 | — | 2.7 | |||||||||||||||||||||||||||||||||
| Comprehensive income | Comprehensive income | 967.6 | Comprehensive income | 893.1 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balances at December 31, 2004 | — | — | 3.8 | 7,269.4 | 1,289.5 | 1,313.3 | (2,331.7 | ) | 7,544.3 | |||||||||||||||||||||||||||||||||||||||||||
| Series A preferred stock issued | — | — | — | 296.0 | — | — | — | 296.0 | ||||||||||||||||||||||||||||||||||||||||||||
| Series B preferred stock issued | — | 0.1 | — | 245.9 | — | — | — | 246.0 | ||||||||||||||||||||||||||||||||||||||||||||
Balances at December 31, 2006 | Balances at December 31, 2006 | — | 0.1 | 3.8 | 8,141.8 | 2,824.1 | 846.9 | (3,955.9 | ) | 7,860.8 | ||||||||||||||||||||||||||||||||||||||||||
| Common stock issued | Common stock issued | — | — | — | 59.9 | — | — | — | 59.9 | Common stock issued | — | — | 0.1 | 73.5 | — | — | — | 73.6 | ||||||||||||||||||||||||||||||||||
| Capital transactions of equity method investee, net of related income taxes | Capital transactions of equity method investee, net of related income taxes | — | — | — | (0.1 | ) | — | — | — | (0.1 | ) | Capital transactions of equity method investee, net of related income taxes | — | — | — | 1.1 | — | — | — | 1.1 | ||||||||||||||||||||||||||||||||
| Stock-based compensation and additional related tax benefits | Stock-based compensation and additional related tax benefits | — | — | — | 49.1 | — | — | — | 49.1 | Stock-based compensation and additional related tax benefits | — | — | — | 79.0 | (1.5 | ) | — | — | 77.5 | |||||||||||||||||||||||||||||||||
| Tax benefits related to demutualization | — | — | — | 163.8 | — | — | — | 163.8 | ||||||||||||||||||||||||||||||||||||||||||||
| Treasury stock acquired | — | — | — | — | — | — | (868.4 | ) | (868.4 | ) | ||||||||||||||||||||||||||||||||||||||||||
| Accelerated stock repurchase settlement | — | — | — | (84.0 | ) | — | — | — | (84.0 | ) | ||||||||||||||||||||||||||||||||||||||||||
Treasury stock acquired, common | Treasury stock acquired, common | — | — | — | — | — | — | (756.3 | ) | (756.3 | ) | |||||||||||||||||||||||||||||||||||||||||
| Dividends to common stockholders | Dividends to common stockholders | — | — | — | — | (182.2 | ) | — | — | (182.2 | ) | Dividends to common stockholders | — | — | — | — | (235.6 | ) | — | — | (235.6 | ) | ||||||||||||||||||||||||||||||
| Dividends to preferred stockholders | Dividends to preferred stockholders | — | — | — | — | (17.7 | ) | — | — | (17.7 | ) | Dividends to preferred stockholders | — | — | — | — | (33.0 | ) | — | — | (33.0 | ) | ||||||||||||||||||||||||||||||
| Comprehensive income: | Comprehensive income: | Comprehensive income: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 919.0 | — | — | 919.0 | Net income | — | — | — | — | 860.3 | — | — | 860.3 | |||||||||||||||||||||||||||||||||||
| Net unrealized losses, net | — | — | — | — | — | (376.0 | ) | — | (376.0 | ) | Net unrealized losses, net | — | — | — | — | — | (541.9 | ) | — | (541.9 | ) | |||||||||||||||||||||||||||||||
| Foreign currency translation adjustment, net of related income taxes | — | — | — | — | — | 63.7 | — | 63.7 | Foreign currency translation adjustment, net of related income taxes | — | — | — | — | — | 62.5 | — | 62.5 | |||||||||||||||||||||||||||||||||||
| Minimum pension liability, net of related income taxes | — | — | — | — | — | (6.2 | ) | — | (6.2 | ) | Unrecognized post-retirement benefit obligation, net of related income taxes | — | — | — | — | — | 52.7 | — | 52.7 | |||||||||||||||||||||||||||||||||
| Comprehensive income | Comprehensive income | 600.5 | Comprehensive income | 433.6 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balances at December 31, 2005 | $ | — | $ | 0.1 | $ | 3.8 | $ | 8,000.0 | $ | 2,008.6 | $ | 994.8 | $ | (3,200.1 | ) | $ | 7,807.2 | |||||||||||||||||||||||||||||||||||
Balances at December 31, 2007 | Balances at December 31, 2007 | $ | — | $ | 0.1 | $ | 3.9 | $ | 8,295.4 | $ | 3,414.3 | $ | 420.2 | $ | (4,712.2 | ) | $ | 7,421.7 | ||||||||||||||||||||||||||||||||||
Principal Financial Group, Inc.
Consolidated Statements of Stockholders' Equity — (continued)
| | Series A preferred stock | Series B preferred stock | Common stock | Additional paid-in capital | Retained earnings | Accumulated other comprehensive income | Treasury stock | Total stockholders' equity | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | |||||||||||||||||||||||||
| Balances at January 1, 2006 | $ | — | $ | 0.1 | $ | 3.8 | $ | 8,000.0 | $ | 2,008.6 | $ | 994.8 | $ | (3,200.1 | ) | $ | 7,807.2 | |||||||||
| Common stock issued | — | — | — | 66.2 | — | — | — | 66.2 | ||||||||||||||||||
| Capital transactions of equity method investee, net of related income taxes | — | — | — | 1.7 | — | — | — | 1.7 | ||||||||||||||||||
| Stock-based compensation and additional related tax benefits | — | — | — | 73.9 | (1.1 | ) | — | — | 72.8 | |||||||||||||||||
| Treasury stock acquired | — | — | — | — | — | — | (755.8 | ) | (755.8 | ) | ||||||||||||||||
| Dividends to common stockholders | — | — | — | — | (214.7 | ) | — | — | (214.7 | ) | ||||||||||||||||
| Dividends to preferred stockholders | — | — | — | — | (33.0 | ) | — | — | (33.0 | ) | ||||||||||||||||
| Transition adjustment related to post-retirement benefit obligations, net of related income taxes | — | — | — | — | — | 23.3 | — | 23.3 | ||||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||
| Net income | — | — | — | — | 1,064.3 | — | — | 1,064.3 | ||||||||||||||||||
| Net unrealized losses, net | — | — | — | — | — | (168.9 | ) | — | (168.9 | ) | ||||||||||||||||
| Foreign currency translation adjustment, net of related income taxes | — | — | — | — | — | (5.0 | ) | — | (5.0 | ) | ||||||||||||||||
| Minimum pension liability, net of related income taxes | — | — | — | — | — | 2.7 | — | 2.7 | ||||||||||||||||||
| Comprehensive income | 893.1 | |||||||||||||||||||||||||
| Balances at December 31, 2006 | $ | — | $ | 0.1 | $ | 3.8 | $ | 8,141.8 | $ | 2,824.1 | $ | 846.9 | $ | (3,955.9 | ) | $ | 7,860.8 | |||||||||
| | Series A preferred stock | Series B preferred stock | Common stock | Additional paid-in capital | Retained earnings | Accumulated other comprehensive income (loss) | Treasury stock | Total stockholders' equity | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | |||||||||||||||||||||||||
Balances at January 1, 2008 | $ | — | $ | 0.1 | $ | 3.9 | $ | 8,295.4 | $ | 3,414.3 | $ | 420.2 | $ | (4,712.2 | ) | $ | 7,421.7 | |||||||||
Common stock issued | — | — | — | 36.4 | — | — | — | 36.4 | ||||||||||||||||||
Capital transactions of equity method investee, net of related income taxes | — | — | — | 0.6 | — | — | — | 0.6 | ||||||||||||||||||
Stock-based compensation and additional related tax benefits | — | — | — | 44.1 | (1.1 | ) | — | — | 43.0 | |||||||||||||||||
Treasury stock acquired, common | — | — | — | — | — | — | (6.4 | ) | (6.4 | ) | ||||||||||||||||
Dividends to common stockholders | — | — | — | — | (116.7 | ) | — | — | (116.7 | ) | ||||||||||||||||
Dividends to preferred stockholders | — | — | — | — | (33.0 | ) | — | — | (33.0 | ) | ||||||||||||||||
Effects of changing post-retirement benefit plan measurement date, net of related income taxes | — | — | — | — | 0.9 | (2.0 | ) | — | (1.1 | ) | ||||||||||||||||
Comprehensive income (loss): | ||||||||||||||||||||||||||
Net income | — | — | — | — | 458.1 | — | — | 458.1 | ||||||||||||||||||
Net unrealized losses, net | — | — | — | — | — | (4,487.9 | ) | — | (4,487.9 | ) | ||||||||||||||||
Foreign currency translation adjustment, net of related income taxes | — | — | — | — | — | (209.4 | ) | — | (209.4 | ) | ||||||||||||||||
Unrecognized post-retirement benefit obligation, net of related income taxes | — | — | — | — | — | (632.5 | ) | — | (632.5 | ) | ||||||||||||||||
Comprehensive loss | (4,871.7 | ) | ||||||||||||||||||||||||
Balances at December 31, 2008 | $ | — | $ | 0.1 | $ | 3.9 | $ | 8,376.5 | $ | 3,722.5 | $ | (4,911.6 | ) | $ | (4,718.6 | ) | $ | 2,472.8 | ||||||||
See accompanying notes.
Principal Financial Group, Inc.
Consolidated Statements of Cash Flows
| | | For the year ended December 31, | | For the year ended December 31, | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | 2006 | 2005 | 2004 | | 2008 | 2007 | 2006 | ||||||||||||||
| | | (in millions) | | (in millions) | ||||||||||||||||||
| Operating activities | Operating activities | Operating activities | ||||||||||||||||||||
| Net income | Net income | $ | 1,064.3 | $ | 919.0 | $ | 825.6 | Net income | $ | 458.1 | $ | 860.3 | $ | 1,064.3 | ||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | Adjustments to reconcile net income to net cash provided by operating activities: | Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||||||
| Income from discontinued operations, net of related income taxes | (30.6 | ) | (27.5 | ) | (130.4 | ) | ||||||||||||||||
| Cumulative effect of accounting change, net of related income taxes | — | — | 5.7 | Income from discontinued operations, net of related income taxes | — | (20.2 | ) | (28.9 | ) | |||||||||||||
| Amortization of deferred policy acquisition costs | 239.2 | 246.6 | 210.8 | Amortization of deferred policy acquisition costs | 373.7 | 357.3 | 239.2 | |||||||||||||||
| Additions to deferred policy acquisition costs | (498.9 | ) | (482.1 | ) | (477.7 | ) | Additions to deferred policy acquisition costs | (680.3 | ) | (606.1 | ) | (498.9 | ) | |||||||||
| Accrued investment income | (41.2 | ) | (4.9 | ) | (21.5 | ) | Accrued investment income | 23.4 | (52.1 | ) | (41.1 | ) | ||||||||||
| Net cash flows from (for) trading securities | (200.3 | ) | (37.3 | ) | 6.3 | Net cash flows for trading securities | (348.0 | ) | (258.2 | ) | (200.3 | ) | ||||||||||
| Premiums due and other receivables | (419.1 | ) | (70.8 | ) | (24.9 | ) | Premiums due and other receivables | (39.2 | ) | 191.8 | (419.1 | ) | ||||||||||
| Contractholder and policyholder liabilities and dividends | 1,851.8 | 2,006.8 | 1,749.9 | Contractholder and policyholder liabilities and dividends | 2,394.2 | 2,276.7 | 1,925.8 | |||||||||||||||
| Current and deferred income taxes | 169.6 | (453.3 | ) | 38.0 | Current and deferred income taxes | (219.7 | ) | (70.3 | ) | 169.6 | ||||||||||||
| Net realized/unrealized capital (gains) losses | (44.7 | ) | 11.2 | 104.8 | Net realized capital (gains) losses | 694.1 | 328.8 | (44.7 | ) | |||||||||||||
| Depreciation and amortization expense | 105.3 | 99.7 | 105.7 | Depreciation and amortization expense | 145.0 | 130.2 | 101.3 | |||||||||||||||
| Mortgage loans held for sale, acquired or originated | (427.3 | ) | (2,262.0 | ) | (1,142.4 | ) | Mortgage loans held for sale, acquired or originated | (92.0 | ) | (83.8 | ) | (427.3 | ) | |||||||||
| Mortgage loans held for sale, sold or repaid, net of gain | 761.4 | 2,326.8 | 940.3 | Mortgage loans held for sale, sold or repaid, net of gain | 73.7 | 166.8 | 761.4 | |||||||||||||||
| Real estate acquired through operating activities | (82.3 | ) | (44.6 | ) | (45.8 | ) | Real estate acquired through operating activities | (77.5 | ) | (48.2 | ) | (82.3 | ) | |||||||||
| Real estate sold through operating activities | 88.6 | 41.9 | 84.7 | Real estate sold through operating activities | 24.5 | 43.7 | 88.6 | |||||||||||||||
| Stock-based compensation | 71.8 | 48.8 | 43.4 | Stock-based compensation | 31.5 | 72.8 | 71.8 | |||||||||||||||
| Other | (329.1 | ) | (192.1 | ) | (241.0 | ) | Other | (536.7 | ) | (329.5 | ) | (403.9 | ) | |||||||||
| Net adjustments | Net adjustments | 1,214.2 | 1,207.2 | 1,205.9 | Net adjustments | 1,766.7 | 2,099.7 | 1,211.2 | ||||||||||||||
| Net cash provided by operating activities | Net cash provided by operating activities | 2,278.5 | 2,126.2 | 2,031.5 | Net cash provided by operating activities | 2,224.8 | 2,960.0 | 2,275.5 | ||||||||||||||
| Investing activities | Investing activities | Investing activities | ||||||||||||||||||||
| Available-for-sale securities: | Available-for-sale securities: | Available-for-sale securities: | ||||||||||||||||||||
| Purchases | (7,765.4 | ) | (8,955.1 | ) | (10,301.6 | ) | Purchases | (6,605.8 | ) | (10,520.3 | ) | (7,765.4 | ) | |||||||||
| Sales | 1,438.9 | 3,300.5 | 2,327.1 | Sales | 1,343.5 | 3,039.6 | 1,438.9 | |||||||||||||||
| Maturities | 3,595.8 | 3,903.2 | 4,411.0 | Maturities | 3,207.9 | 4,461.6 | 3,595.8 | |||||||||||||||
| Mortgage loans acquired or originated | Mortgage loans acquired or originated | (2,600.2 | ) | (2,485.5 | ) | (2,760.4 | ) | Mortgage loans acquired or originated | (3,484.9 | ) | (3,108.0 | ) | (2,600.2 | ) | ||||||||
| Mortgage loans sold or repaid | Mortgage loans sold or repaid | 2,102.6 | 2,704.5 | 2,499.6 | Mortgage loans sold or repaid | 2,902.0 | 2,112.8 | 2,102.6 | ||||||||||||||
| Real estate acquired | Real estate acquired | (29.1 | ) | (92.2 | ) | (341.5 | ) | Real estate acquired | (33.3 | ) | (115.2 | ) | (26.6 | ) | ||||||||
| Real estate sold | Real estate sold | 174.1 | 319.8 | 345.6 | Real estate sold | 70.6 | 53.0 | 174.1 | ||||||||||||||
| Net purchases of property and equipment | Net purchases of property and equipment | (50.5 | ) | (44.4 | ) | (47.5 | ) | Net purchases of property and equipment | (105.0 | ) | (98.4 | ) | (50.5 | ) | ||||||||
| Net proceeds from sales of subsidiaries | — | — | 694.7 | |||||||||||||||||||
| Purchases of interest in subsidiaries, net of cash acquired | Purchases of interest in subsidiaries, net of cash acquired | (769.2 | ) | (58.1 | ) | (128.1 | ) | Purchases of interest in subsidiaries, net of cash acquired | (20.3 | ) | (76.1 | ) | (769.2 | ) | ||||||||
| Net change in other investments | Net change in other investments | (9.9 | ) | (76.4 | ) | 116.5 | Net change in other investments | (191.9 | ) | (248.2 | ) | (9.9 | ) | |||||||||
| Net cash used in investing activities | Net cash used in investing activities | $ | (3,912.9 | ) | $ | (1,483.7 | ) | $ | (3,184.6 | ) | Net cash used in investing activities | $ | (2,917.2 | ) | $ | (4,499.2 | ) | $ | (3,910.4 | ) | ||
Principal Financial Group, Inc.
Consolidated Statements of Cash Flows — (continued)
| | | For the year ended December 31, | | For the year ended December 31, | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | 2006 | 2005 | 2004 | | 2008 | 2007 | 2006 | ||||||||||||||
| | | (in millions) | | (in millions) | ||||||||||||||||||
| Financing activities | Financing activities | Financing activities | ||||||||||||||||||||
| Issuance of common stock | Issuance of common stock | $ | 66.2 | $ | 59.9 | $ | 41.2 | Issuance of common stock | $ | 36.4 | $ | 73.6 | $ | 66.2 | ||||||||
| Issuance of preferred stock | — | 542.0 | — | |||||||||||||||||||
| Accelerated stock repurchase settlement | — | (84.0 | ) | — | ||||||||||||||||||
| Acquisition and sales of treasury stock, net | (755.8 | ) | (868.4 | ) | (772.6 | ) | ||||||||||||||||
Acquisition of treasury stock | Acquisition of treasury stock | (6.4 | ) | (756.3 | ) | (755.8 | ) | |||||||||||||||
| Proceeds from financing element derivatives | Proceeds from financing element derivatives | 132.1 | 168.4 | 110.6 | Proceeds from financing element derivatives | 142.2 | 128.7 | 132.1 | ||||||||||||||
| Payments for financing element derivatives | Payments for financing element derivatives | (141.0 | ) | (123.2 | ) | (84.6 | ) | Payments for financing element derivatives | (114.6 | ) | (137.2 | ) | (141.0 | ) | ||||||||
| Excess tax benefits from share-based payment arrangements | Excess tax benefits from share-based payment arrangements | 8.4 | — | — | Excess tax benefits from share-based payment arrangements | 3.1 | 10.2 | 8.4 | ||||||||||||||
| Dividends to common stockholders | Dividends to common stockholders | (214.7 | ) | (182.2 | ) | (166.5 | ) | Dividends to common stockholders | (116.7 | ) | (235.6 | ) | (214.7 | ) | ||||||||
| Dividends to preferred stockholders | Dividends to preferred stockholders | (24.7 | ) | (17.7 | ) | — | Dividends to preferred stockholders | (33.0 | ) | (41.2 | ) | (24.7 | ) | |||||||||
| Issuance of long-term debt | Issuance of long-term debt | 601.7 | 137.5 | 12.1 | Issuance of long-term debt | 7.9 | 0.2 | 601.7 | ||||||||||||||
| Principal repayments of long-term debt | Principal repayments of long-term debt | (21.0 | ) | (72.6 | ) | (447.2 | ) | Principal repayments of long-term debt | (83.3 | ) | (115.0 | ) | (20.4 | ) | ||||||||
| Net proceeds (repayments) of short-term borrowings | Net proceeds (repayments) of short-term borrowings | (390.5 | ) | 199.1 | (291.4 | ) | Net proceeds (repayments) of short-term borrowings | 217.4 | 203.9 | (390.5 | ) | |||||||||||
| Investment contract deposits | Investment contract deposits | 8,925.7 | 7,250.0 | 7,312.4 | Investment contract deposits | 11,349.0 | 9,958.9 | 8,925.7 | ||||||||||||||
| Investment contract withdrawals | Investment contract withdrawals | (6,859.4 | ) | (6,504.5 | ) | (5,294.9 | ) | Investment contract withdrawals | (9,813.7 | ) | (8,209.9 | ) | (6,859.4 | ) | ||||||||
| Net increase (decrease) in banking operation deposits | 258.9 | 41.9 | (5.0 | ) | ||||||||||||||||||
Net increase in banking operation deposits | Net increase in banking operation deposits | 373.1 | 417.1 | 258.9 | ||||||||||||||||||
Other | Other | (5.4 | ) | (5.3 | ) | — | ||||||||||||||||
| Net cash provided by financing activities | Net cash provided by financing activities | 1,585.9 | 546.2 | 414.1 | Net cash provided by financing activities | 1,956.0 | 1,292.1 | 1,586.5 | ||||||||||||||
| Discontinued operations | Discontinued operations | Discontinued operations | ||||||||||||||||||||
| Net cash provided by (used in) operating activities | (1.1 | ) | 125.1 | (627.7 | ) | |||||||||||||||||
Net cash provided by operating activities | Net cash provided by operating activities | — | 2.5 | 1.9 | ||||||||||||||||||
| Net cash used in investing activities | Net cash used in investing activities | (0.9 | ) | (125.0 | ) | (473.7 | ) | Net cash used in investing activities | — | (1.3 | ) | (3.4 | ) | |||||||||
| Net cash provided by financing activities | — | — | 600.0 | |||||||||||||||||||
Net cash used in financing activities | Net cash used in financing activities | — | (0.5 | ) | (0.6 | ) | ||||||||||||||||
| Net cash provided by (used in) discontinued operations | Net cash provided by (used in) discontinued operations | (2.0 | ) | 0.1 | (501.4 | ) | Net cash provided by (used in) discontinued operations | — | 0.7 | (2.1 | ) | |||||||||||
Net increase (decrease) in cash and cash equivalents | Net increase (decrease) in cash and cash equivalents | (50.5 | ) | 1,188.8 | (1,240.4 | ) | Net increase (decrease) in cash and cash equivalents | 1,263.6 | (246.4 | ) | (50.5 | ) | ||||||||||
| Cash and cash equivalents at beginning of year | Cash and cash equivalents at beginning of year | 1,641.3 | 452.5 | 1,692.9 | Cash and cash equivalents at beginning of year | 1,344.4 | 1,590.8 | 1,641.3 | ||||||||||||||
| Cash and cash equivalents at end of year | Cash and cash equivalents at end of year | $ | 1,590.8 | $ | 1,641.3 | $ | 452.5 | Cash and cash equivalents at end of year | $ | 2,608.0 | $ | 1,344.4 | $ | 1,590.8 | ||||||||
Cash and cash equivalents of discontinued operations included above | Cash and cash equivalents of discontinued operations included above | Cash and cash equivalents of discontinued operations included above | ||||||||||||||||||||
| At beginning of year | $ | 2.0 | $ | 1.9 | $ | 503.3 | At beginning of year | $ | — | $ | (0.7 | ) | $ | 1.4 | ||||||||
| At end of year | $ | — | $ | 2.0 | $ | 1.9 | At end of year | $ | — | $ | — | $ | (0.7 | ) | ||||||||
Schedule of noncash transactions | ||||||||||||||||||||||
| Tax benefits related to demutualization | $ | — | $ | 163.8 | $ | — | ||||||||||||||||
Supplemental Information: | Supplemental Information: | |||||||||||||||||||||
Cash paid for interest | Cash paid for interest | $ | 111.3 | $ | 115.1 | $ | 80.1 | |||||||||||||||
Cash paid for income taxes | Cash paid for income taxes | $ | 206.1 | $ | 245.9 | $ | 139.5 | |||||||||||||||
See accompanying notes.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements
December 31, 20062008
1. Nature of Operations and Significant Accounting Policies
Description of Business
Principal Financial Group, Inc. ("the Company"PFG"), along with its consolidated subsidiaries, is a diversified financial services organization engaged in promoting retirement savings and investment and insurance products and services in the U.S. and selected international markets.
Basis of Presentation
The accompanying consolidated financial statements, which include our majority-owned subsidiaries and consolidated variable interest entities ("VIEs"), have been prepared in conformity with U.S. generally accepted accounting principles ("U.S. GAAP"). Less than majority-owned entities in which we hadhave at least a 20% interest and LLCs,limited liability companies ("LLCs"), partnerships and real estate joint ventures in which we hadhave at least a 5% interest, are reported on the equity basis in the consolidated statements of financial position as other investments. Investments in LLCs, partnerships and real estate joint ventures in which we have an ownership percentage of 3% to 5% are accounted for under the equity or cost method depending upon the specific facts and circumstances of our ownership and involvement. All significant intercompany accounts and transactions have been eliminated. Information included in the notes to the financial statements excludes information applicable to less than majority-owned entities reported on the equity and cost methods, unless otherwise noted.
Closed Block
Principal Life Insurance Company ("Principal Life") operates a closed block ("Closed Block") for the benefit of individual participating dividend-paying policies in force at the time of the 1998 mutual insurance holding company ("MIHC") formation. See Note 9, Closed Block, for further details.
Use of Estimates in the Preparation of Financial Statements
The preparation of our consolidated financial statements and accompanying notes requires management to make estimates and assumptions that affect the amounts reported and disclosed. These estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported and disclosed in the consolidated financial statements and accompanying notes.
Recent Accounting Pronouncements
TheOn January 12, 2009, the Financial Accounting Standards Board (the "FASB"("FASB") issued FASB Staff Position ("FSP") Emerging Issues Task Force ("EITF") 99-20-1, Amendments to the Impairment Guidance of EITF Issue No. 99-20 ("FSP EITF 99-20-1"). This FSP amends EITF Issue No. 99-20,Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets, by eliminating the requirement that a holder's best estimate of cash flows be based upon those that a market participant would use. Instead, FSP EITF 99-20-1 eliminates the use of market participant assumptions and requires the use of management's judgment in the determination of whether it is probable there has been an adverse change in estimated cash flow. This FSP was effective for reporting periods ending after December 15, 2008, and did not have a material impact on our consolidated financial statements.
On December 11, 2008, the FASB issued FSP FAS 140-4 and FASB Interpretation ("FIN") 46(R)-8,Disclosures about Transfers of Financial Assets and Interests in Variable Interest Entities ("FSP FAS 140-4 and FIN 46(R)-8"). This FSP requires additional disclosures by public entities with continuing involvement in transfers of financial assets to special purpose entities and with variable interests in VIEs. FSP FAS 140-4 and FIN 46(R)-8 was effective for reporting periods ending after December 15, 2008. We have included the required disclosures in our consolidated financial statements for the year ended December 31, 2008. See Note 5, Variable Interest Entities, and Note 7, Securitization Transactions, for further details.
On September 12, 2008, the FASB issued FSP FAS 133-1 and FIN 45-4,Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161 ("FSP FAS 133-1 and FIN 45-4"). FSP FAS 133-1 and FIN 45-4 (1) amends Statement of Financial Accounting Standards ("SFAS") No. 133,Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), to require disclosures by sellers of credit derivatives, including credit derivatives embedded in a hybrid instrument; (2) amends FASB Interpretation No. 45,Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, to require an additional disclosure about the current status of the payment/performance risk of a guarantee and (3) clarifies the FASB's intent about the effective date of SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133 ("SFAS 161"). FSP FAS 133-1 and FIN 45-4 is effective for reporting periods ending after November 15, 2008. We have included the required disclosures in our consolidated financial statements for the year ended December 31, 2008. See Note 8, Derivative Financial Instruments, for further details relating to our credit derivatives.
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Notes to Consolidated Financial Statements — (continued)
1. Nature of Operations and Significant Accounting Policies — (continued)
On March 19, 2008, the FASB issued SFAS 161. This statement requires (1) qualitative disclosures about objectives and strategies for using derivatives, (2) quantitative disclosures about fair value amounts of gains and losses on derivative instruments and related hedged items and (3) disclosures about credit-risk-related contingent features in derivative instruments. The disclosures are intended to provide users of financial statements with an enhanced understanding of how and why derivative instruments are used, how they are accounted for and the financial statement impacts. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We plan to make the required disclosures in our consolidated financial statements beginning in first quarter 2009.
On December 4, 2007, the FASB issued SFAS No. 141(R),Business Combinations ("SFAS 141(R)"). Among the changes, the standard requires that the acquiring entity in a business combination establish the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed, including any noncontrolling interests, and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. In addition, SFAS 141(R) requires direct acquisition costs to be expensed. This statement is effective for the first annual reporting period beginning on or after December 15, 2008. All requirements of SFAS 141(R) should be applied prospectively.
Also on December 4, 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements — an Amendment of Accounting Research Bulletin No. 51 ("SFAS 160"). Under this statement, noncontrolling interests are to be treated as a separate component of equity, rather than as a liability or other items outside of equity. In addition, SFAS 160 changes the way the consolidated income statement is presented. Net income will include the total income of all consolidated subsidiaries, with separate disclosures on the face of the income statement of the income attributable to controlling and noncontrolling interests. Previously, net income attributable to the noncontrolling interest was reported as an operating expense in arriving at consolidated net income. Finally, SFAS 160 revises the accounting requirements for changes in a parent's ownership interest while the parent retains control and for changes in a parent's ownership interest that results in deconsolidation. This statement is effective for the first annual reporting period beginning on or after December 15, 2008. Presentation and disclosure requirements should be applied retrospectively for all periods presented. All other requirements of SFAS 160 should be applied prospectively. Certain separate account arrangements involve ownership of mutual funds to support the investment objective of the separate account. It is possible that, through a separate account arrangement, greater than 50% of the mutual fund shares could be owned. The accounting guidance for this circumstance is not well defined, but we, like many other insurers, do not consolidate the mutual fund as we believe the arrangement qualifies for the exemption afforded investment companies. In January, the FASB asked the EITF to consider a topic entitled "Consideration of an Insurer's Accounting for Majority Owned Investments When the Ownership is through a Separate Account". It is anticipated that the EITF will consider the issue in 2009. It is not possible to predict the outcome of the deliberations with any certainty; however, one outcome could be the recognition of the portion of the mutual fund not held via the separate account arrangement as a non-controlling interest in equity. The value of non-controlling interest is dependent on the daily changes to mutual fund share ownership levels. Therefore, we are still evaluating the impact this guidance will have on our consolidated financial statements.
On June 11, 2007, the American Institute of Certified Public Accountants (the "AICPA") issued Statement of Position ("SOP") 07-1,Clarification of the Scope of the Audit and Accounting Guide "Investment Companies" and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies ("SOP 07-1"). This SOP provides guidance for determining whether an entity is within the scope of the AICPAAudit and Accounting Guide for Investment Companies (the "Guide"). This SOP also addresses whether the specialized industry accounting principles of the Guide should be retained by a parent company in consolidation or by an investor that has the ability to exercise significant influence over the investment company and applies the equity method of accounting to its investment in the entity. In addition, this SOP includes certain disclosure requirements for parent companies and equity method investors in investment companies that retain investment company accounting in the parent company's consolidated financial statements or the financial statements of an equity method investor. The provisions of this SOP were effective for fiscal years beginning on or after December 15, 2007. However, on February 14, 2008, the FASB issued FSP SOP 07-1-1,Effective Date of AICPA Statement of Position 07-1, to indefinitely defer the effective date of SOP 07-1.
On February 15, 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115 ("SFAS 159"). SFAS 159 permits entities to choose, at specified election dates, to measure eligible financial instruments and certain other items at fair value that are not currently required to be reported at fair value. Unrealized gains and losses on items for which the fair value option is elected shall be reported in net income. The decision about whether to elect the fair value option (1) is applied instrument by instrument, with certain exceptions (2) is irrevocable and (3) is applied to an entire instrument and not only to specified risks, specific cash flows, or portions of that instrument. SFAS 159 also requires additional disclosures
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
1. Nature of Operations and Significant Accounting Policies — (continued)
that are intended to facilitate comparisons between entities that choose different measurement attributes for similar assets and liabilities and between assets and liabilities in the financial statements of an entity that selects different measurement attributes for similar assets and liabilities. At the effective date, the fair value option may be elected for eligible items that exist at that date and the effect of the first remeasurement to fair value for those items should be reported as a cumulative effect adjustment to retained earnings. We adopted SFAS 159 on January 1, 2008, and the cumulative effect of the change in accounting principle as a result of adopting SFAS 159 was immaterial. Therefore, the pre-tax cumulative effect of the change in accounting principle is reflected in net realized capital gains (losses). Election of this option upon acquisition or assumption of eligible items could introduce period to period volatility in net income.
On September 29, 2006, the FASB issued SFAS No. 158,Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132R ("SFAS 158"), on September 29, 2006. SFAS 158 requires an entity. The requirement to recognize in its statementthe funded status of financial position an asset for a defined benefit postretirement plan's overfunded status orplan and the disclosure requirements were effective for fiscal years ending after December 15, 2006, and did not have a liabilitymaterial impact on our consolidated financial statements. Effective for a plan's underfunded status. This statementfiscal years ending after December 15, 2008, SFAS 158 also eliminates the ability to choose a measurement date by requiring that plan assets and benefit obligations be measured as of the annual balance sheet date. The requirement to recognizeFor 2007, we used a measurement date of October 1 for the funded statusmeasurement of a defined benefit postretirement plan and the disclosure requirements are effective for fiscal years ending after December 15, 2006, and did not have a material impact on our consolidated financial statements. The requirement to measure plan assets and benefit obligationsobligations. Two transition methods were available when implementing the change in measurement date for 2008. We chose the alternative that allowed us to use the October 1, 2007, measurement date as a basis for determining the 2008 expense and transition adjustment. The effect of changing the annual balance sheetmeasurement date is effective for fiscal years ending after December 15,resulted in a $0.9 million increase to retained earnings and a $2.0 million decrease to accumulated other comprehensive income in the first quarter of 2008. See Note 14, Employee and Agent Benefits, for further details.
On September 15, 2006, the FASB issued SFAS No. 157,Fair Value Measurements ("SFAS 157"). This standard, which provides guidance for using fair value to measure assets and liabilities, applies whenever other standards require or permit assets or liabilities to be measured at fair value, but does not expand the use of fair value in any new circumstances.measurement. SFAS 157 establishes a fair value hierarchy that gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data, and requires fair value measurements to be separately disclosed by level within the hierarchy. On February 12, 2008, the FASB issued FSP FAS 157-2,Effective Date of Statement No. 157 ("FSP FAS 157-2") to defer the effective date of the standard for one year for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value on a nonrecurring basis. On February 14, 2008, the FASB issued FSP FAS 157-1,Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement Under Statement 13, which amends SFAS 157 to exclude instruments covered by SFAS No. 13,Accounting for Leases, and its related interpretive guidance from the scope of SFAS 157. On October 10, 2008, the FASB issued FSP FAS 157-3,Determining the Fair Value of a Financial Asset in a Market That Is Not Active ("FSP FAS 157-3"), which clarifies the application of SFAS 157 in an inactive market and provides an illustrative example to demonstrate how the fair value of a financial asset is effectivedetermined when the market for that financial statements issuedasset is inactive. Our adoption of SFAS 157 on January 1, 2008, for fiscal years beginning after November 15, 2007.assets and liabilities measured at fair value on a recurring basis and financial assets and liabilities measured at fair value on a nonrecurring basis did not have a material impact on our consolidated financial statements. We are still evaluatingdeferring the impactadoption of SFAS 157 for nonfinancial assets and liabilities measured at fair value on a nonrecurring basis until January 1, 2009, in accordance with FSP FAS 157-2. We do not anticipate this guidance will have a material impact on our consolidated financial statements. FSP FAS 157-3 was effective upon issuance and did not have a material impact on our consolidated financial statements. See Note 17, Fair Value of Financial Instruments, for further details.
The staff of the United States Securities and Exchange Commission ("SEC") published Staff Accounting Bulletin ("SAB") No. 108,Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements ("SAB 108"), on September 13, 2006. SAB 108 addresses quantifying the financial statement effects of misstatements, specifically, how the effects of prior year uncorrected errors must be considered in quantifying misstatements in the current year financial statements. Under SAB 108, registrants are required to quantify the effects on the current year financial statements of correcting all misstatements, including both the carryover and reversing effects of
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Notes to Consolidated Financial Statements — (continued)
1. Nature of Operations and Significant Accounting Policies — (continued)
uncorrected prior year misstatements. After considering all relevant quantitative and qualitative factors, if a misstatement is material, a registrant's prior year financial statements must be restated. SAB 108 offers special transition provisions only for circumstances where its application would have altered previous materiality conclusions. When applying the special transition provisions, instead of restating prior period financial statements, a registrant must record the effect as a cumulative-effect adjustment to beginning-of-year retained earnings. SAB 108 iswas effective for fiscal years ending after November 15, 2006. SAB 1082006, and did not have a material impact on our consolidated financial statements.
On July 13, 2006, the FASB issued FASB Interpretation ("FIN")FIN No. 48,Accounting for Uncertainty in Income Taxes ("FIN 48"). FIN 48, which is an interpretation of SFAS No. 109, Accounting for Income Taxes, prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. FIN 48 requires the affirmative evaluation that it is more likely than not, based on the technical merits of a tax position, that an enterprise is entitled to economic benefits resulting from positions taken in income tax returns. If a tax
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Notes to Consolidated Financial Statements — (continued)
1. Nature of Operations and Significant Accounting Policies — (continued)
position does not meet the more-likely-than-not recognition threshold, the benefit of that position is not recognized in the financial statements. FIN 48 also requires companies to disclose additional quantitative and qualitative information in their financial statements about uncertain tax positions. We adopted FIN 48 is effective for fiscal years beginning after December 15, 2006, and the cumulative effect of applying this Interpretation shall be reported as an adjustment to the opening balance of retained earnings for that fiscal year. FIN 48 ison January 1, 2007, which did not expected to have a material impact on our consolidated financial statements. See Note 13, Income Taxes, for further details.
On March 17, 2006, the FASB issued SFAS No. 156,Accounting for Servicing of Financial Assets(" ("SFAS 156"), which amends SFAS No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities ("SFAS 140"). This Statementstatement (1) requires an entity to recognize a servicing asset or liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in specified situations, (2) requires all separately recognized servicing assets and liabilities to be initially measured at fair value, (3) for subsequent measurement of each class of separately recognized servicing assets and liabilities, allows an entity tocan elect either the amortization or fair value measurement method, (4) permits a one-time reclassification of available-for-sale ("AFS") securities to trading securities by an entity with recognized servicing rights, without calling into question the treatment of other AFSavailable-for-sale securities, provided the AFSavailable-for-sale securities are identified in some manner as offsetting the entity's exposure to changes in fair value of servicing assets or liabilities that a servicer elects to subsequently measure at fair value, and (5) requires separate presentation of servicing assets and liabilities measured at fair value in the statement of financial position and also requires additional disclosures. The initial measurement requirements of this statement should be applied prospectively to all transactions entered into after the fiscal year beginning after September 15, 2006. The election related to the subsequent measurement of servicing assets and liabilities iswas also effective the first fiscal year beginning after September 15, 2006. We adopted SFAS 156 iseffective January 1, 2007, and did not expectedelect to have a material impact onsubsequently measure any of our consolidated financial statements.servicing rights at fair value or reclassify any available-for-sale securities to trading.
On February 16, 2006, the FASB issued SFAS No. 155,Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140 ("SFAS 155"), which amends SFAS No. 133Accounting for Derivative Instruments and Hedging Activities ("SFAS 133") and SFAS 140. SFAS 155 (1) permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, (2) clarifies which interest-only and principal-only strips are not subject to the requirements of SFAS 133, (3) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, (4) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and (5) amends SFAS 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. This Statement isstatement was effective for all financial instruments acquired or issued after the beginning of an entity's fiscal year that begins after September 15, 2006. At adoption, the fair value election maycould also be applied to hybrid financial instruments that havehad been bifurcated under SFAS 133 prior to adoption of this Statement. Any changes resulting fromstatement. We adopted SFAS 155 on January 1, 2007, and did not apply the fair value election to any existing hybrid financial instruments that had been bifurcated under SFAS 133 prior to adoption of this Statement should be recognized as a cumulative effect adjustment to beginning retained earnings. SFAS 155 is not expected to have a material impact on our consolidated financial statements.155.
On September 19, 2005, the Accounting Standards Executive Committee ("AcSEC")AICPA issued Statement of Position ("SOP")SOP 05-1,Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With Modifications or Exchanges of Insurance Contracts ("SOP 05-1"). AcSECAICPA defines an internal replacement as a modification in product benefits, features, rights, or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. An internal replacement that is determined to result in a replacement contract that is substantially unchanged from the replaced contract should be accounted for as a continuation of the replaced contract. Contract modifications resulting in a replacement contract
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Notes to Consolidated Financial Statements — (continued)
1. Nature of Operations and Significant Accounting Policies — (continued)
that is substantially changed from the replaced contract should be accounted for as an extinguishment of the replaced contract and any unamortized deferred policy acquisition costs ("DPAC"), unearned revenue liabilities, and deferred sales inducement costs from the replaced contract should be written off and acquisition costs on the new contracts capitalizeddeferred as appropriate. This SOP iswas effective for internal replacements occurring in fiscal years beginning after December 15, 2006. As of January 1, 2007, we adopted SOP 05-1, iswhich did not expected to have a material impact on our consolidated financial statements.
On May 30, 2005, the FASB issued SFAS No. 154,Accounting Changes and Error Corrections, a replacement of APBAccounting Principles Board Opinion No. 20 and FASB Statement No. 3 ("SFAS 154"), which changes the requirements for the accounting and reporting of a change in accounting principle. Under SFAS 154, a change in accounting principle should be retrospectively applied to all prior periods, unless it is impracticable to do so. This retrospective application requirement replaces the requirement of Accounting Principles Board ("APB") Opinion No. 20,Accounting Changes ("APB 20"), requirement to recognize changes in accounting principle by including the cumulative effect of the change in net income during the current period. SFAS 154 applies to all voluntary changes in accounting principles where we are changing to a more preferable accounting method, as well as to changes required by an accounting pronouncement that does not contain
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Notes to Consolidated Financial Statements — (continued)
1. Nature of Operations and Significant Accounting Policies — (continued)
specific transition provisions. SFAS 154 carries forward without change the guidance contained in APB 20 for reporting the correction of an error in previously issued financial statements and a change in accounting estimate. SFAS 154 iswas effective for accounting changes on or after January 1, 2006. SFAS 154 does not change the transition provisions of any existing accounting pronouncements.
On December 21, 2004, the FASB issued FASB Staff Position ("FSP") No. 109-2,Accounting and Disclosure Guidance for the Foreign Earning Repatriation Provision within the American Jobs Creation Act of 2004 ("FSP 109-2"). The American Jobs Creation Act of 2004 was enacted on October 22, 2004, and introduces, among other things, a special one-time dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer ("repatriation provision"), provided certain criteria are met. FSP 109-2 was issued to allow additional time for companies to determine whether any foreign earnings will be repatriated under the Act's repatriation provision, given the law was enacted late in the year and certain provisions were unclear. Under FSP 109-2, companies that took the additional time were required to provide disclosures about the status of the company's evaluation and the potential effects of its decision. FSP 109-2 was effective for the year ended December 31, 2004. See Note 13, Income Taxes, for further details.
On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004),Share-Based Payment ("SFAS 123R"). SFAS 123R requires all share-based payments to employees to be recognized at fair value in the financial statements. SFAS 123R replaces SFAS No. 123,Accounting for Stock-Based Compensation ("SFAS 123"), supersedes APB Opinion No. 25,Accounting for Stock Issued to Employees ("APB 25"), and SFAS No. 148,Accounting for Stock-Based Compensation-Transition and Disclosure — an Amendment of FASB Statement No. 123, and amends SFAS No. 95,Statement of Cash Flows. On April 14, 2005, the SEC approved a new rule delaying the effective date of SFAS 123R to annual periods that begin after June 15, 2005. Accordingly, we adopted SFAS 123R effective January 1, 2006, using the modified-prospective method.
The provisions of our stock awards allow approved retirees to retain all or a portion of their awards if they retire prior to the end of the required service period. SFAS 123R considers this to be a nonsubstantive service condition. Accordingly, it is appropriate to recognize compensation cost either immediately for stock awards granted to retirement eligible employees, or over the period from the grant date to the date retirement eligibility is achieved, if retirement eligibility is expected to occur during the nominal vesting period. OurPrior to adopting SFAS 123R, our approach was to follow the widespread practice of recognizing compensation cost over the explicit service period (up to the date of actual retirement). For any awards that are granted after our adoption of SFAS 123R on January 1, 2006, we recognize compensation cost through the period that the employee first becomes eligible to retire and is no longer required to provide service to earn the award. If we had applied the nonsubstantive vesting provisions of SFAS 123R to awards granted prior to January 1, 2006, our consolidated financial statements would not have been materially impacted.
SFAS 123R requires that the benefits of tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than as an operating cash flow. This requirement reduces net operating cash flows and increases net financing cash flows in periods after the effective date.
Under the modified-prospective method, any excess income tax deduction realized for awards accounted for under SFAS 123R (regardless of the type of award or the jurisdiction in which the tax benefit is generated) is eligible to absorb write-offs of deferred income tax assets for any awards accounted for under SFAS 123R. SFAS 123R does not require separate pools of excess income tax benefits for separate types of awards, rather the excess income tax benefits of employee and nonemployee awards may be combined in a single pool of excess tax benefits. Our policy is to pool the employee and nonemployee awards together in this manner. Deferred income tax asset write-offs resulting from deficient
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Notes to Consolidated Financial Statements — (continued)
1. Nature of Operations and Significant Accounting Policies — (continued)
deductions on employee awards may be offset against previous excess income tax benefits arising from nonemployee awards, and vice versa.
This Statement did not have a material impact on our consolidated financial statements as we began expensing all stock options using a fair-value based method effective for the year beginning January 1, 2002. In addition, any stock options granted prior to January 1, 2002, were fully vested at the time of adoption of SFAS 123R. We use the Black-Scholes formula to estimate the value of stock options granted to employees. We applied the prospective method of transition as prescribed by SFAS 123 when we elected to begin expensing stock-based compensation in 2002. The cumulative effect of the change in accounting principle as a result of adopting SFAS 123R iswas immaterial. Therefore, the pre-tax cumulative effect of the change in accounting principle is reflected in operating expenses.
See Note 20, Stock-Based Compensation Plans, for further details.
In December, 2004, SFAS No. 153,ExchangeUse of Nonmonetary Assets, an amendmentEstimates in the Preparation of APB Opinion No. 29Financial Statements ("SFAS 153"), was issued. APB Opinion No. 29,Accounting for Nonmonetary Transactions ("APB 29"), provided
The preparation of our consolidated financial statements and accompanying notes requires management to make estimates and assumptions that affect the basic principle that exchanges of nonmonetary assets should be measured based on amounts reported and disclosed. These estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported and disclosed in the consolidated financial statements and accompanying notes. The most critical estimates include those used in determining:
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
1. Nature of Operations and Significant Accounting Policies — (continued)
A description of such critical estimates is incorporated within the discussion of the related accounting policies which follow. In applying these policies, management makes subjective and complex judgments that frequently require estimates about matters that are required to follow derivative accounting under SFAS 133, should not consider the expected future cash flowsinherently uncertain. Many of these policies, estimates and related to the associated servicing of the loan. We record IRLCs at zero value at date of issuance with subsequent gains or losses measured by changesjudgments are common in market interest rates. Therefore, this SAB did not have a material impact on our consolidated financial statements.
On July 7, 2003, the AcSEC issued SOP 03-1,Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long Duration Contracts and for Separate Accounts ("SOP 03-1"). This SOP addresses an insurance enterprise's accounting for certain fixed and variable contract features not covered by other authoritative accounting guidance. We adopted SOP 03-1 effective January 1, 2004, and recorded a cumulative effect of accounting change of $(5.7) million, which is net of income tax benefits of $3.0 million. The accounting change impacted our Life and Health Insurance, U.S. Asset Management and Accumulation and International Asset Management and Accumulation segments.
SOP 03-1 addresses the classification of contracts and calculation of an additional liability for contracts that contain significant insurance features. The adoption of the guidance required the recognition of an additional liability in cases where the insurance benefit feature resulted in gains in early years followed by losses in later years. The accrual and release of the additional liability also impacted the amortization of deferred policy acquisition costs ("DPAC"). As of January 1, 2004, we increased future policyholder benefits duefinancial services industries; others are specific to our no lapse guarantee feature of our universal lifebusinesses and variable universal life products within our Life and Health Insurance segment and for variable annuities with guaranteed minimum death benefits in our U.S. Asset Management and Accumulation segment. This resulted in an after-tax cumulative effect of $(0.9) million in the Life and Health Insurance segment and $(1.5) million in the U.S. Asset Management and Accumulation segment.
SOP 03-1 also requires contracts which provide for potential benefits in addition to the account balance that are payable only upon annuitization to establish an additional liability if the present value of the annuitized benefits exceeds the expected account balance at the expected annuitization date. In that regard, we also had an after-tax cumulative effect related to an equity method investment within our International Asset Management and Accumulation segment of $(3.3) million, net of income taxes, as of January 1, 2004, for select deferred annuity products, which include guaranteed annuitization purchase rates.
In addition, the guidance clarifies the accounting and classification for sales inducements. Although the valuation impacts were immaterial, we reclassified $30.3 million of sales inducementsoperations. Actual results could differ from DPAC to other assets as of January 1, 2004.these estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, money market instruments and other debt issues with a maturity date of three months or less when purchased.
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Notes to Consolidated Financial Statements — (continued)
1. Nature of Operations and Significant Accounting Policies — (continued)
Investments
We classify our fixed maturity and equity investments into one of two categories: available-for-sale or trading. We determine the appropriate classification of fixed maturity securities at the time of purchase. Fixed maturity securities include bonds, mortgage-backed securities, redeemable preferred stock and redeemablecertain nonredeemable preferred stock. Equity securities include mutual funds, common stock and nonredeemable preferred stock. We classify fixed maturity securities and equity securities as either available-for-sale or trading at the time of the purchase and, accordingly, carry them at fair value. (SeeSee Note 17, Fair Value of Financial Instruments, for policies related to the determination of fair value.) Unrealized gains and losses related to available-for-sale securities, excluding those in fair value hedging relationships, are reflected in stockholders' equity, net of adjustments related to DPAC, sales inducements, unearned revenue reserves, policyholder dividend obligation ("PDO"), derivatives in cash flow hedge relationships and applicable income taxes. Unrealized gains and losses related to trading securities and available-for-sale securities in fair value hedging relationships are reflected in net income as net realized/unrealizedrealized capital gains (losses).
The cost of fixed maturity securities is adjusted for amortization of premiums and accrual of discounts, both computed using the interest method. The cost of fixed maturity securities is adjusted for declines in value that are other than temporary. Impairments in value deemed to be other than temporary are reported in net income as a component of net realized/unrealized capital gains (losses). For loan-backed and structured securities, we recognize income using a constant effective yield based on currently anticipated prepayments using a tool which models the prepayment behavior of the underlying collateral based on the current interest rate environment.
Equity securities include mutual funds, common stock and nonredeemable preferred stock. The cost of equity securities is adjusted for declines in value that are other than temporary. Impairments in value deemed to be other than temporary are reported in net income as a component of net realized/unrealizedrealized capital gains (losses). EquityFor loan-backed and structured securities, are classified as available-for-sale or trading and, accordingly, are carried at fair value. (See Note 17, Fair Valuewe recognize income using a constant effective yield based on currently anticipated prepayments using a tool that models the prepayment behavior of Financial Instruments, for policies related to the determination of fair value.) Unrealized gains and losses related to available-for-sale securities are reflected in stockholders' equity, net of related DPAC, sales inducements, unearned revenue reserves, PDO, and applicable income taxes. Unrealized gains and losses related to trading securities are reflected in net income as net realized/unrealized capital gains (losses).underlying collateral based on the current interest rate environment.
Real estate investments are reported at cost less accumulated depreciation. The initial cost bases of properties acquired through loan foreclosures are the lower of the fair market values of the properties at the time of foreclosure or the outstanding loan balance. Buildings and land improvements are generally depreciated on the straight-line method over the estimated useful life of improvements, and tenant improvement costs are depreciated on the straight-line method over the term of the related lease. We recognize impairment losses for properties when indicators of impairment are present and a property's expected undiscounted cash flows are not sufficient to recover the property's carrying value. In such cases, the cost bases of the properties are reduced to fair value. Real estate expected to be disposed is carried at the lower of cost or fair value, less cost to sell, with valuation allowances established accordingly and depreciation no longer recognized. The carrying amount of real estate held for sale was $139.6 million and $82.4 million as of December 31, 2008 and 2007, respectively. Any impairment losses and any changes in valuation allowances are reported in net income.
Commercial and residential mortgage loans are generally reported at cost adjusted for amortization of premiums and accrual of discounts, computed using the interest method, net of valuation allowances, and direct write-downs for impairment. Any changes in the valuation allowances are reported in net income as net realized/unrealizedrealized capital gains (losses). We measure impairment based upon the present value of expected cash flows discounted at the loan's effective interest rate or the loan's observable market price. If foreclosure is probable, the measurement of any valuation allowance is based upon the fair value of the collateral. We have commercial mortgage loans held-for-saleheld for sale in the amount of $77.3$16.7 million and $412.1$2.9 million at December 31, 20062008 and 2005,2007, respectively, which are carried at lower of cost or fair value, less cost to sell, and reported as mortgage loans in the consolidated statements of financial position.
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Notes to Consolidated Financial Statements — (continued)
1. Nature of Operations and Significant Accounting Policies — (continued)
Net realized capital gains and losses on sales of investments are determined on the basis of specific identification. In general, in addition to realized capital gains and losses on investment sales unrealizedand periodic settlements on derivatives not designated as hedges, gains and losses related to other than temporary impairments, trading securities, certain seed money investments, fair value hedge ineffectiveness, mark-to-market adjustments on derivatives not designated as hedges, and changes in the mortgage loan valuation allowance and impairments of real estate held for investment are reported in net income as net realized/unrealizedrealized capital gains (losses). Investment gains and losses on sales of certain real estate held-for-sale,held for sale, which do not meet the criteria for classification as a discontinued operation, are reported as net investment income and are excluded from net realized/unrealizedrealized capital gains (losses).
Policy loans and other investments, excluding investments in unconsolidated entities, are primarily reported at cost.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
1. Nature of Operations and Significant Accounting Policies — (continued)
Securitizations
We, Previously, we, along with other contributors, sellsold commercial mortgage loans in securitization transactions to trusts that, in turn, securitize the assets.trusts. As these trusts are classified as qualifying special purpose entities ("QSPE"QSPEs") pursuant to the guidance of SFAS 140,, we recognize the gain on the sale of the loans to the trust and the trusts are not required to be consolidated under the provisions of FIN No. 46 (Revised 2003),Consolidation of Variable Interest Entities ("FIN 46R").consolidated. There is significant judgment used to determine whether a trust is a QSPE. To maintain QSPE status, the trust must continue to meet the QSPE criteria both initially and in subsequent periods. We have analyzedanalyze the governing pooling and servicing agreements for each of our securitizations and believe that the terms are industry standard and are consistent with the QSPE criteria. If at any time we determine a trust no longer qualifies as a QSPE, each trust willwould need to be reviewed to determine if there is a need to recognize the commercial mortgage loan asset in the statementconsolidated statements of financial position along with the offsetting liability. In addition, certain industry practices related to the qualifying status of QSPE's are being discussed by the FASB and could impact the accountingSee Note 7, Securitization Transactions, for existing and/or future transactions.further details.
Derivatives
Overview. Derivatives are financial instruments whose values are derived from interest rates, foreign exchange rates, financial indices or the values of securities. Derivatives generally used by us include interest rate swaps, swaptions, futures, currency swaps, currency forwards, credit default swaps, total return swaps, interest ratetreasury lock commitments, bond forwards, mortgage-backed forwards,agreements, commodity swaps and options. Derivatives may be exchange traded or contracted in the over-the-counter market. Derivative positions are either assets or liabilities in the consolidated statements of financial position and are measured at fair value, generally by obtaining quoted market prices or through the use of pricing models. Fair values can be affected by changes in interest rates, foreign exchange rates, financial indices, values of securities, credit spreads, and market volatility and liquidity.
Accounting and Financial Statement Presentation. We designate derivatives as either:
Our accounting for the ongoing changes in fair value of a derivative depends on the intended use of the derivative and the designation, as described above, and is determined when the derivative contract is entered into or at the time of redesignation under SFAS 133. Hedge accounting is used for derivatives that are specifically designated in advance as hedges and that reduce our exposure to an indicated risk by having a high correlation between changes in the value of the derivatives and the items being hedged at both the inception of the hedge and throughout the hedge period.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
1. Nature of Operations and Significant Accounting Policies — (continued)
Fair Value Hedges. When a derivative is designated as a fair value hedge and is determined to be highly effective, changes in its fair value, along with changes in the fair value of the hedged asset, liability or firm commitment attributable to the hedged risk, are reported in net realized/unrealizedrealized capital gains (losses). Any difference between the net change in fair value of the derivative and the hedged item represents hedge ineffectiveness.
Cash Flow Hedges. When a derivative is designated as a cash flow hedge and is determined to be highly effective, changes in its fair value are recorded as a component of other comprehensive income. Any hedge ineffectiveness is recorded immediately in net income. At the time the variability of cash flows being hedged impactimpacts net income, the related portion of deferred gains or losses on the derivative instrument is reclassified and reported in net income.
Net Investment in a Foreign Operation Hedges. When a derivative is used as a hedge of a net investment in a foreign operation, its change in fair value, to the extent effective as a hedge, is recorded as a component of other comprehensive income. Any hedge ineffectiveness is recorded immediately in net income. If the foreign operation is sold or upon complete or substantially complete liquidation, the deferred gains or losses on the derivative instrument are reclassified into net income.
Non-Hedge Derivatives. If a derivative does not qualify or is not designated for hedge accounting, all changes in fair value are reported in net income without considering the changes in the fair value of the economically associated assets or liabilities.
In our commercial mortgage backed securitization operation, we enter into commitments to fund commercial mortgage loans at specified interest rates and other applicable terms within specified periods of time. These commitments are legally binding agreements to extend credit to a counterparty. Loan commitments that will be held for sale are recognized as derivatives and are recorded at fair value.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
1. Nature of Operations and Significant Accounting Policies — (continued)
Hedge Documentation and Effectiveness Testing. WeAt inception, we formally document all relationships between hedging instruments and hedged items, as well as our risk management objective and strategy for undertaking various hedge transactions. This process includes associating all derivatives designated as fair value or cash flow hedges with specific assets or liabilities on the statement of financial position or with specific firm commitments or forecasted transactions. Effectiveness of the hedge is formally assessed at inception and throughout the life of the hedging relationship. Even if a derivative is highly effective and qualifies for hedge accounting treatment, the hedge might have some ineffectiveness.
We use qualitative and quantitative methods to assess hedge effectiveness. Qualitative methods may include monitoring changes to terms and conditions and counterparty credit ratings. Quantitative methods may include statistical tests including regression analysis and minimum variance and dollar offset techniques. If we determine a derivative is no longer highly effective as a hedge, we prospectively discontinue hedge accounting.
Termination of Hedge Accounting. We prospectively discontinue hedge accounting when (1) the criteria to qualify for hedge accounting is no longer met, e.g., a derivative is determined to no longer be highly effective in offsetting the change in fair value or cash flows of a hedged item; (2) the derivative expires, is sold, terminated or exercised; or (3) we remove the designation of the derivative being the hedging instrument for a fair value or cash flow hedge.
If it is determined that a derivative no longer qualifies as an effective hedge, the derivative will continue to be carried on the statementconsolidated statements of financial position at its fair value, with changes in fair value recognized currentlyprospectively in net realized/unrealizedrealized capital gains (losses). The asset or liability under a fair value hedge will no longer be adjusted for changes in fair value pursuant to hedging rules and the existing basis adjustment is amortized to the statementconsolidated statements of operations line associated with the asset or liability. The component of other comprehensive income related to discontinued cash flow hedges that are no longer highly effective is amortized to the statementconsolidated statements of operations consistent with the net income impacts of the original hedged cash flows. If a cash flow hedge is discontinued because a hedged forecasted transaction is no longer probable, the deferred gain or loss is immediately reclassified from other comprehensive income into net income.
Embedded Derivatives. We purchase and issue certain financial instruments and products that contain a derivative that is embedded in the financial instrument or product. We assess whether this embedded derivative is clearly and closely related to the asset or liability that serves as its host contract. If we deem that the embedded derivative's terms are not clearly and closely related to the host contract, and a separate instrument with the same terms would qualify as a derivative instrument, the derivative is bifurcated from that contract and held at fair value on the statementconsolidated statements of financial position, with changes in fair value reported in net income.
Contractholder and Policyholder Liabilities
Contractholder and policyholder liabilities (contractholder funds, future policy benefits and claims and other policyholder funds) include reserves for investment contracts and reserves for universal life, limited payment, term life insurance,
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
1. Nature of Operations and Significant Accounting Policies — (continued)
participating traditional andindividual life insurance, group life insurance, accident and health insurance and disability income policies, as well as a provision for dividends on participating policies.
Investment contracts are contractholders' funds on deposit with us and generally include reserves for pension and annuity contracts. Reserves on investment contracts are equal to the cumulative deposits less any applicable charges and withdrawals plus credited interest. Reserves for universal life insurance contracts are equal to cumulative deposits less charges plus credited interest, which represents the account balances that accrue to the benefit of the policyholders.
We hold additional reserves on certain long duration contracts where benefit features result in gains in early years followed by losses in later years, universal life/variable universal life contracts that contain no lapse guarantee features, or annuities with guaranteed minimum death benefits.
Reserves for nonparticipating term life insurance and disability income contracts are computed on a basis of assumed investment yield, mortality, morbidity and expenses, including a provision for adverse deviation, which generally varies by plan, year of issue and policy duration. Investment yield is based on our experience. Mortality, morbidity and withdrawal rate assumptions are based on our experience and are periodically reviewed against both industry standards and experience.
Reserves for participating life insurance contracts are based on the net level premium reserve for death and endowment policy benefits. This net level premium reserve is calculated based on dividend fund interest rates and mortality rates guaranteed in calculating the cash surrender values described in the contract.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
1. Nature of Operations and Significant Accounting Policies — (continued)
Participating business represented approximately 20%17%, 24%18% and 28%20% of our life insurance in force and 59%57%, 62%57% and 64%59% of the number of life insurance policies in force at December 31, 2006, 20052008, 2007 and 2004,2006, respectively. Participating business represented approximately 56%54%, 58%53% and 60%56% of life insurance premiums for the years ended December 31, 2006, 20052008, 2007 and 2004,2006, respectively. The amount of dividends to policyholders is approveddeclared annually by Principal Life's Board of Directors. The amount of dividends to be paid to policyholders is determined after consideration of several factors including interest, mortality, morbidity and other expense experience for the year and judgment as to the appropriate level of statutory surplus to be retained by Principal Life. At the end of the reporting period, Principal Life establishes a dividend liability for the pro rata portion of the dividends expected to be paid on or before the next policy anniversary date.
Some of our policies and contracts require payment of fees in advance for services that will be rendered over the estimated lives of the policies and contracts. These payments are established as unearned revenue reserves upon receipt and included in other policyholder funds in the consolidated statements of financial position. These unearned revenue reserves are amortized to operations over the estimated lives of these policies and contracts in relation to the emergence of estimated gross profit margins.
The liability for unpaid accident and health claims is an estimate of the ultimate net cost of reported and unreported losses not yet settled. This liability is estimated using actuarial analyses and case basis evaluations. Although considerable variability is inherent in such estimates, we believe that the liability for unpaid claims is adequate. These estimates are continually reviewed and, as adjustments to this liability become necessary, such adjustments are reflected in current operations.net income.
Recognition of Premiums and Other Considerations, Fees and Other Revenues and Benefits
Traditional individual life insurance products include those products with fixed and guaranteed premiums and benefits and consist principally of whole life and term life insurance policies. Premiums from these products are recognized as premium revenue when due. Related policy benefits and expenses for individual life and annuity products are associated with earned premiums and result in the recognition of profits over the expected term of the policies and contracts.
Immediate annuities with life contingencies include products with fixed and guaranteed annuity considerations and benefits and consist principally of group and individual single premium annuities with life contingencies. Annuity considerations from these products are recognized as revenue. However, the collection of these annuity considerations does not represent the completion of the earnings process, as we establish annuity reserves, using estimates for mortality and investment assumptions, which include provision for adverse deviation as required by U.S. GAAP. We anticipate profits to emerge over the life of the annuity products as we earn investment income, pay benefits and release reserves.
Group life and health insurance premiums are generally recorded as premium revenue over the term of the coverage. Certain group contracts contain experience premium refund provisions based on a pre-defined formula that reflects their claim experience. Experience premium refunds are recognized as revenue over the term of the coverage and
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
1. Nature of Operations and Significant Accounting Policies — (continued)
adjusted to reflect current experience. Fees for contracts providing claim processing or other administrative services are recorded as revenue over the period the service is provided. Related policy benefits and expenses for group life and health insurance products are associated with earned premiums and result in the recognition of profits over the term of the policies and contracts.
Universal life-type policies are insurance contracts with terms that are not fixed. Amounts received as payments for such contracts are not reported as premium revenues. Revenues for universal life-type insurance contracts consist of policy charges for the cost of insurance, policy initiation and administration, surrender charges and other fees that have been assessed against policy account values and investment income. Policy benefits and claims that are charged to expense include interest credited to contracts and benefit claims incurred in the period in excess of related policy account balances.
Investment contracts do not subject us to significant risks arising from policyholder mortality or morbidity and consist primarily of Guaranteed Investment Contracts ("GICs"), funding agreements and certain deferred annuities. Amounts received as payments for investment contracts are established as investment contract liability balances and are not reported as premium revenues. Revenues for investment contracts consist of investment income and policy administration charges. Investment contract benefits that are charged to expense include benefit claims incurred in the period in excess of related investment contract liability balances and interest credited to investment contract liability balances.
Fees and other revenues are earned for asset management services provided to retail and institutional clients based largely upon contractual rates applied to the market value of the client's portfolio. Additionally, fees and other revenues
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
1. Nature of Operations and Significant Accounting Policies — (continued)
are earned for administrative services performed including recordkeeping and reporting services for retirement savings plans. Fees and other revenues received for performance of asset management and administrative services are recognized as revenue when earned, typically when the service is performed or earned.performed.
Deferred Policy Acquisition Costs
Commissions and other costs (underwriting, issuance and field expenses) that vary with and are primarily related to the acquisition of new and renewal insurance policies and investment contract business are capitalized to the extent recoverable. Maintenance costs and acquisition costs that are not deferrable are charged to operations as incurred.
DPAC for universal life-type insurance contracts, participating life insurance policies and certain investment contracts are being amortized over the lives of the policies and contracts in relation to the emergence of estimated gross profit margins. This amortization is adjusted in the current period when estimates of estimated gross profit are revised. For investment contracts pertaining to individual variable life insurance, individual variable annuities and group annuities which have separate account equity investment options, we utilize a mean reversion method (reversion to the mean assumption), a common industry practice, to determine the future domestic equity market growth assumption used for the amortization of DPAC. This amortization is adjusted in the current period when estimates of estimated gross profit are revised. The DPAC of nonparticipating term life insurance and individual disability policies are being amortized over the premium-paying period of the related policies using assumptions consistent with those used in computing policyholder liabilities.
DPAC are subject to recoverability testing at the time of policy issue and loss recognition testing on an annual basis, or when an event occurs that may warrant loss recognition. If loss recognition is necessary, DPAC would be written off to the extent that it is determined that future policy premiums and investment income or gross profits are not adequate to cover related losses and expenses.
Deferred Policy Acquisition Costs on Internal Replacements
SOP 05-1 applies to all modifications and replacements made to contracts defined by SFAS No. 60,Accounting and Reporting by Insurance Enterprises and SFAS No. 97,Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments. The SOP lists criteria that assist in defining an internal replacement transaction as involving a substantially changed or substantially unchanged contract. We review all modifications and replacements that meet the definition of an internal replacement. If an internal replacement results in a substantially changed contract, the acquisition costs, sales inducements and unearned revenue associated with the new contract are deferred and amortized over the lifetime of the new contract. In addition, the existing DPAC, sales inducement, and unearned revenue balances associated with the replaced contract are written off.
If an internal replacement results in a substantially unchanged contract, the acquisition costs, sales inducements and unearned revenue associated with the new contract are not deferred. All acquisition costs, sales inducements and unearned revenue associated with the new contract are immediately recognized in the period incurred. In addition, the
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
1. Nature of Operations and Significant Accounting Policies — (continued)
existing DPAC, sales inducement, or unearned revenue balance associated with the replaced contract is not written off, but instead is carried over to the new contract.
Long-Term Debt
Long-term debt includes notes payable, nonrecourse mortgages and other debt with a maturity date greater than one year at the date of issuance. Current maturities of long termlong-term debt are classified as long-term debt in our statement of financial position.
Reinsurance
We enter into reinsurance agreements with other companies in the normal course of business. We may assume reinsurance from or cede reinsurance to other companies. Assets and liabilities related to reinsurance ceded are reported on a gross basis. Premiums and expenses are reported net of reinsurance ceded. The cost of reinsurance related to long-duration contracts is accounted for over the life of the underlying reinsured policies using assumptions consistent with those used to account for the underlying policies. We are contingently liable with respect to reinsurance ceded to other companies in the event the reinsurer is unable to meet the obligations it has assumed. At December 31, 2006, 20052008 and 2004, respectively, we had reinsured $21.7 billion, $21.22007, our largest exposures to a single third-party reinsurer were $18.5 billion and $20.1$19.9 billion of life insurance in force, respectively, representing 13%, 14%, and 14%, respectively,11% of total net life insurance in force through a single third-party reinsurer.force. To minimize the possibility of losses, we regularly evaluate the financial condition of our reinsurers and monitor concentrations of credit risk.
The effects of reinsurance on premiums and other considerations and policy and contract benefits were as follows:
| | | For the year ended December 31, | | For the year ended December 31, | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | 2006 | 2005 | 2004 | | 2008 | 2007 | 2006 | ||||||||||||||
| | | (in millions) | | (in millions) | ||||||||||||||||||
| Premiums and other considerations: | Premiums and other considerations: | Premiums and other considerations: | ||||||||||||||||||||
| Direct | $ | 4,468.8 | $ | 4,214.6 | $ | 3,934.8 | Direct | $ | 4,495.1 | $ | 4,751.3 | $ | 4,468.8 | |||||||||
| Assumed | 117.3 | 56.6 | 67.0 | Assumed | 9.7 | 160.0 | 117.3 | |||||||||||||||
| Ceded | (280.8 | ) | (296.2 | ) | (291.8 | ) | Ceded | (295.6 | ) | (277.2 | ) | (280.8 | ) | |||||||||
| Net premiums and other considerations | Net premiums and other considerations | $ | 4,305.3 | $ | 3,975.0 | $ | 3,710.0 | Net premiums and other considerations | $ | 4,209.2 | $ | 4,634.1 | $ | 4,305.3 | ||||||||
| Benefits, claims and settlement expenses: | Benefits, claims and settlement expenses: | Benefits, claims and settlement expenses: | ||||||||||||||||||||
| Direct | $ | 5,871.3 | $ | 5,472.3 | $ | 5,099.0 | Direct | $ | 6,440.8 | $ | 6,489.7 | $ | 5,871.3 | |||||||||
| Assumed | 141.8 | 77.0 | 83.2 | Assumed | 43.5 | 190.4 | 141.8 | |||||||||||||||
| Ceded | (320.7 | ) | (266.4 | ) | (222.7 | ) | Ceded | (264.4 | ) | (244.8 | ) | (320.7 | ) | |||||||||
| Net benefits, claims and settlement expenses | Net benefits, claims and settlement expenses | $ | 5,692.4 | $ | 5,282.9 | $ | 4,959.5 | Net benefits, claims and settlement expenses | $ | 6,219.9 | $ | 6,435.3 | $ | 5,692.4 | ||||||||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
1. Nature of Operations and Significant Accounting Policies — (continued)
Separate Accounts
The separate account assets and liabilities presented in the consolidated financial statements represent the fair market value of funds that are separately administered by us for contracts with equity, real estate and fixed-incomefixed income investments. The separate account contract owner, rather than us, bears the investment risk of these funds. The separate account assets are legally segregated and are not subject to claims that arise out of any of our other business. We receive fees for mortality, withdrawal, and expense risks, as well as administrative, maintenance and investment advisory services, that are included in the consolidated statements of operations. Net deposits, net investment income and realized and unrealized capital gains and losses on the separate accounts are not reflected in the consolidated statements of operations.
At December 31, 20062008 and 2005,2007, the separate accounts include a separate account valued at $768.4$207.4 million and $726.6$748.8 million, respectively, which primarily includes shares of our stock that were allocated and issued to eligible participants of qualified employee benefit plans administered by us as part of the policy credits issued under our 2001 demutualization. These shares are included in both basic and diluted earnings per share calculations. TheIn the consolidated statements of financial position, the separate account shares are recorded at fair value and are reported as separate account assets andwith a corresponding separate account liabilities inliability to eligible participants of the consolidated statements of financial position.qualified plan. Changes in fair value of the separate account shares are reflected in both the separate account assets and separate account liabilities and do not impact our results of operations.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
1. Nature of Operations and Significant Accounting Policies — (continued)
Income Taxes
We file a U.S. consolidated income tax return that includes all of our qualifying subsidiaries. Our policy of allocating income tax expenses and benefits to companies in the group is generally based upon pro rata contribution of taxable income or operating losses. We are taxed at U.S. corporate rates on taxable income based on existing tax laws. Current income taxes are charged or credited to operationsnet income based upon amounts estimated to be payable or recoverable as a result of taxable operations for the current year. Deferred income taxes are provided for the tax effect of temporary differences in the financial reporting and income tax bases of assets and liabilities and net operating losses using enacted income tax rates and laws. The effect on deferred income tax assets and deferred income tax liabilities of a change in tax rates is recognized in operations in the period in which the change is enacted.
Foreign Exchange
Assets and liabilities of our foreign subsidiaries and affiliates denominated in non-U.S. dollars, where the U.S. dollar is not the functional currency, are translated into U.S. dollar equivalents at the year-end spot foreign exchange rates. Resulting translation adjustments are reported as a component of stockholders' equity, along with any related hedge and tax effects. Revenues and expenses for these entities are translated at the weighted-average exchange rates for the year. Revenue, expense and other foreign currency transaction and translation adjustments for foreign subsidiaries and affiliates with the U.S. dollar as the functional currency that affect cash flows are reported in current operations,net income, along with related hedge and tax effects.
Goodwill and Other Intangibles
Goodwill and other intangibles include the cost of acquired subsidiaries in excess of the fair value of the net tangible assets recorded in connection with acquisitions. Goodwill and indefinite-lived intangible assets are not amortized. Rather, goodwill and indefinite-lived intangible assetsthey are tested for impairment at one level below our operating segments on an annual basis during the fourth quarter each year, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Impairment testing for indefinite-lived intangible assets consists of a comparison of the fair value of the intangible asset with its carrying value.
Intangible assets with a finite useful life are amortized as related benefits emerge over a period of 1 to 30 years and are reviewed periodically for indicators of impairment in value. If facts and circumstances suggest possible impairment, the sum of the estimated undiscounted future cash flows expected to result from the use of the asset is compared to the current carrying value of the asset. If the undiscounted future cash flows are less than the carrying value, an impairment loss is recognized for the excess of the carrying amount of assets over their fair value.
Earnings Per Common Share
Basic earnings per common share is calculated by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period and excludes the dilutive effect of equity awards. Diluted earnings per common share reflects the potential dilution that could occur if dilutive securities, such as options and non-vested stock grants, were exercised or resulted in the issuance of common stock.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
1. Nature of Operations and Significant Accounting Policies — (continued)
Stock-Based Compensation
At December 31, 2006, we have several stock-based compensation plans, which are described more fully in Note 20, Stock-Based Compensation Plans. We apply the fair value method to all stock-based awards granted subsequent to January 1, 2002. For stock-based awards granted prior to this date, we used the intrinsic value method.
Awards under our plans vest over periods ranging from one year to three years. The cost related to stock-based compensation included in the determination of net income for 2004 is less than that which would have been recognized if the fair value based method had been applied to all awards since the inception of our stock-based compensation plans. Had compensation expense for our stock option awards and employees' purchase rights been determined based upon fair values at the grant dates for awards under the plans in accordance with SFAS 123, our net income and earnings per share would have been reduced to the pro forma amounts indicated below. For the purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period.
| | For the year ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2006 | 2005 | 2004 | ||||||||
| | (in millions, except per share data) | ||||||||||
| Net income available to common stockholders, as reported | $ | 1,031.3 | $ | 901.3 | $ | 825.6 | |||||
| Add: Stock-based compensation expense included in reported net income, net of related tax effects | 42.1 | 33.1 | 29.2 | ||||||||
| Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects | 42.1 | 33.1 | 32.3 | ||||||||
| Pro forma net income available to common stockholders | $ | 1,031.3 | $ | 901.3 | $ | 822.5 | |||||
| Earnings per common share | |||||||||||
| Basic earnings per common share: | |||||||||||
| As reported | $ | 3.78 | $ | 3.13 | $ | 2.64 | |||||
| Pro forma | $ | 3.78 | $ | 3.13 | $ | 2.63 | |||||
| Diluted earnings per common share: | |||||||||||
| As reported | $ | 3.74 | $ | 3.11 | $ | 2.62 | |||||
| Pro forma | $ | 3.74 | $ | 3.11 | $ | 2.61 | |||||
Reclassifications
Reclassifications have been made to the 20052007 and 20042006 notes to consolidated financial statements to conform to the 20062008 presentation.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
2. Acquisition
On December 31, 2006, we completed the purchase of WM Advisors, Inc., a leading mutual fund manager, for a total cost of $741.1 million in cash subject to closing adjustments.at the time of closing. The acquisition representsrepresented a strategic fit for us by adding scale to one of our key asset accumulation businesses, further strengthening our global asset management capability and increasing our presence with independent financial advisors.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
2. Acquisition — (continued)
A summary of the fair values of the net assets acquired as of December 31, 2006, based upon the current valuation estimates at the time of acquisition, is as follows (in millions):
Assets | ||||||
Cash and cash equivalents | $ | 9.1 | ||||
Premiums due and other receivables | 26.0 | |||||
Property, plant, and equipment | 0.4 | |||||
Goodwill | 62.7 | |||||
Other intangibles | 751.9 | |||||
Other assets | 0.5 | |||||
Total assets acquired | 850.6 | |||||
Liabilities | ||||||
Long-term debt | 86.9 | |||||
Other liabilities | 22.6 | |||||
Total liabilities assumed | 109.5 | |||||
Net assets acquired | $ | 741.1 | ||||
Of the $751.9 million of acquired intangible assets, $608.0 million was assigned to investment management contracts associated with retail mutual funds that are not subject to amortization. The remainder of the acquired intangibles will beare subject to amortization and consist of: $86.9 million of customer-based intangibles (eight-year useful life); $51.0 million of asset management contracts associated with institutional clients (three-year useful life); $5.0 million ascribed to the distribution channel (18-year useful life); and $1.0 million ascribed to non-compete agreements (one-year useful life).
Consistent with the acquired intangibles, the $62.7$52.1 million of goodwill was assigned to theour U.S. Asset Management and Accumulation segment and will be$10.6 million to our Global Asset Management segment. The goodwill amounts are deductible for tax purposes. The allocation of the purchase price is preliminary and could change when final information becomes available.
The following (unaudited) pro forma consolidated results of operations have been prepared as if the acquisition of WM Advisors, Inc., had occurred as of January 1, 2004:2006:
| | For the year ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2006 | 2005 | 2004 | For the year ended December 31, 2006 | |||||||||
| | (in millions, except per share data) | (in millions, except per share data) | |||||||||||
| Total revenues | $ | 10,148.2 | $ | 9,353.6 | $ | 8,541.9 | $ | 10,150.8 | |||||
| Net income | 1,092.5 | 947.6 | 849.1 | 1,092.5 | |||||||||
| Basic earnings per common share | 3.88 | 3.23 | 2.71 | 3.88 | |||||||||
| Diluted earnings per common share | 3.85 | 3.21 | 2.70 | 3.85 | |||||||||
The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisition been consummated as of that time, nor is it intended to be a projection of future results.
3. Discontinued Operations
Real Estate Investments
In 20052007 and 2006, we sold certain real estate properties previously held for investment purposes. These properties qualify for discontinued operations treatment. Therefore, the income from discontinued operations has been removed from our results of continuing operations for all periods presented. The gains on disposal, which are reported as other after-tax adjustments in our Corporate and Other segment.segment, are excluded from segment operating earnings for all periods presented. All assets, including cash, and liabilities of the discontinued operations have been reclassified to separate discontinued asset and liability line items on the consolidated statements of financial position. We have separately disclosed the operating, investing and financing
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
3. Discontinued Operations — (continued)
portions of the cash flows attributable to our discontinued operations in our consolidated statements of cash flows. Additionally, the information included in the notes to the financial statements excludes information applicable to these properties, unless otherwise noted.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
3. Discontinued Operations — (continued)
The properties were sold to take advantage of positive real estate market conditions in specific geographic locations and to further diversify our real estate portfolio.
Selected financial information for the discontinued operations is as follows:
| | December 31, | ||||||
|---|---|---|---|---|---|---|---|
| | 2006 | 2005 | |||||
| | (in millions) | ||||||
| Assets | |||||||
| Real estate | $ | — | $ | 99.3 | |||
| All other assets | — | 3.9 | |||||
| Total assets | $ | — | $ | 103.2 | |||
| Liabilities | |||||||
| All other liabilities | $ | — | $ | 4.5 | |||
| Total liabilities | $ | — | $ | 4.5 | |||
| | | For the year ended December 31, | | For the year ended December 31, | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | 2006 | 2005 | 2004 | | 2008 | 2007 | 2006 | |||||||||||||
| | | (in millions) | | (in millions) | |||||||||||||||||
| Total revenues | Total revenues | $ | (0.5 | ) | $ | 2.8 | $ | 2.5 | Total revenues | $ | — | $ | 0.3 | $ | (3.1 | ) | |||||
| Income from discontinued operations: | Income from discontinued operations: | Income from discontinued operations: | |||||||||||||||||||
| Income (loss) before income taxes | $ | (0.5 | ) | $ | 2.8 | $ | 2.5 | Income (loss) before income taxes | $ | — | $ | 0.3 | $ | (3.1 | ) | ||||||
| Income taxes (benefits) | (0.2 | ) | 1.0 | 0.9 | Income taxes (benefits) | — | 0.1 | (1.1 | ) | ||||||||||||
| Gain on disposal of discontinued operations | 47.5 | 34.3 | — | Gain on disposal of discontinued operations | — | 32.8 | 47.5 | ||||||||||||||
| Income taxes on disposal | 16.6 | 12.0 | — | Income taxes on disposal | — | 12.8 | 16.6 | ||||||||||||||
| Net income | Net income | $ | 30.6 | $ | 24.1 | $ | 1.6 | Net income | $ | — | $ | 20.2 | $ | 28.9 | |||||||
Principal International Argentina S.A.4. Goodwill and Other Intangible Assets
On July 2, 2004, we closed the sale of Principal International Argentina S.A. ("PI Argentina"), our subsidiary in Argentina, and its wholly owned subsidiaries, Principal Life Compañía de Seguros, S.A. and Principal Retiro Compañía de Seguros de Retiro, S.A. Our total after-tax proceeds from the sale were approximately U.S. $29.2 million.Goodwill
The decision to sell PI Argentina was made with a view toward focusing our resources, executingchanges in core strategic priorities and markets and meeting stockholders expectations. Changing market dynamics since the 2001 economic crisis in Argentina led us to conclude that the interestscarrying amount of our stockholders would best be served by our exit of this market.
PI Argentina qualified for discontinued operations treatment, therefore, the income from discontinued operations has been removed from our results of continuing operations and segment operating earnings for all periods presentedgoodwill reported in our International Asset Managementsegments for 2007 and Accumulation segment. We have separately disclosed the operating, investing and financing portions2008 were as follows:
| | U.S. Asset Accumulation | Global Asset Management | International Asset Management and Accumulation | Life and Health Insurance | Corporate | Consolidated | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | ||||||||||||||||||
Balances at January 1, 2007 | $ | 71.7 | $ | 147.8 | $ | 53.9 | $ | 88.4 | $ | 0.1 | $ | 361.9 | |||||||
Goodwill from acquisitions | — | 9.1 | — | — | — | 9.1 | |||||||||||||
Foreign currency translation | — | — | 3.7 | — | — | 3.7 | |||||||||||||
Balances at December 31, 2007 | 71.7 | 156.9 | 57.6 | 88.4 | 0.1 | 374.7 | |||||||||||||
Goodwill from acquisitions | 2.1 | 12.1 | — | — | — | 14.2 | |||||||||||||
Foreign currency translation | — | — | (12.2 | ) | — | — | (12.2 | ) | |||||||||||
Other | (1.2 | ) | — | — | 0.1 | (0.1 | ) | (1.2 | ) | ||||||||||
Balances at December 31, 2008 | $ | 72.6 | $ | 169.0 | $ | 45.4 | $ | 88.5 | $ | — | $ | 375.5 | |||||||
Finite Lived Intangibles
Amortized intangible assets that continue to be subject to amortization over a weighted average remaining expected life of the cash flows attributable to our discontinued operations in our consolidated statements of cash flows. Additionally, the information included in the notes to the financial statements excludes information applicable to PI Argentina, unless otherwise noted.12 years were as follows:
| | December 31, | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2008 | 2007 | |||||||||||||||||
| | Gross carrying amount | Accumulated amortization | Net carrying amount | Gross carrying amount | Accumulated amortization | Net carrying amount | |||||||||||||
| | (in millions) | ||||||||||||||||||
Present value of future profits | $ | 135.7 | $ | 51.3 | $ | 84.4 | $ | 172.5 | $ | 58.9 | $ | 113.6 | |||||||
Other finite lived intangibles | 292.0 | 119.7 | 172.3 | 299.3 | 75.7 | 223.6 | |||||||||||||
Total amortized intangibles | $ | 427.7 | $ | 171.0 | $ | 256.7 | $ | 471.8 | $ | 134.6 | $ | 337.2 | |||||||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
3. Discontinued Operations — (continued)
Selected financial information for the discontinued operations of PI Argentina is as follows:
| | For the year ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2006 | 2005 | 2004 | ||||||||
| | (in millions) | ||||||||||
| Total revenues | $ | — | $ | — | $ | 5.8 | |||||
| Income from discontinued operations: | |||||||||||
| Income before income taxes(1) | $ | — | $ | — | $ | 0.3 | |||||
| Income taxes(1) | — | — | 0.1 | ||||||||
| Loss on disposal of discontinued operations | — | — | (15.9 | ) | |||||||
| Income tax benefits on disposal | — | — | (25.7 | ) | |||||||
| Net income | $ | — | $ | — | $ | 10.0 | |||||
Principal Residential Mortgage, Inc.
On July 1, 2004, we closed the sale of Principal Residential Mortgage, Inc. to CitiMortgage, Inc. Our total after-tax proceeds from the sale were approximately $620.0 million. Our Mortgage Banking segment, which included Principal Residential Mortgage, Inc., is accounted for as a discontinued operation, and therefore, the income from discontinued operations (excluding corporate overhead) has been removed from our results of continuing operations and segment operating earnings for all periods presented. We have separately disclosed the operating, investing and financing portions of the cash flows attributable to our discontinued operations in our consolidated statements of cash flows. Corporate overhead allocated to our Mortgage Banking segment does not qualify for discontinued operations treatment and is included in our results of continuing operations and segment operating earnings for all periods prior to July 1, 2004. Additionally, the information included in the notes to the financial statements excludes information applicable to Principal Residential Mortgage, Inc., unless otherwise noted.
The decision to sell Principal Residential Mortgage, Inc. was made with a view toward intensifying our strategic focus on our core retirement and risk protection business as well as achieving our longer-term financial objectives. In addition, the sale was also viewed as a positive move for our stockholders as it enabled us to move forward from an improved capital position, with better financial flexibility and greater stability of earnings.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
3. Discontinued Operations — (continued)
Selected financial information for the discontinued operations of our Mortgage Banking segment is as follows:
| | For the year ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2006 | 2005 | 2004 | ||||||||
| | (in millions) | ||||||||||
| Total revenues | $ | — | $ | — | $ | 446.1 | |||||
| Loss from continuing operations, net of related income taxes (represents corporate overhead) | $ | — | $ | — | $ | (10.3 | ) | ||||
| Income from discontinued operations | |||||||||||
| Income before income taxes(1) | — | — | 48.3 | ||||||||
| Income taxes(1) | — | — | 18.3 | ||||||||
| Gain (loss) on disposal of discontinued operations | — | (1.7 | ) | 134.7 | |||||||
| Income taxes on disposal | — | 3.3 | 42.4 | ||||||||
| Income (loss) from discontinued operations, net of related income taxes | — | (5.0 | ) | 122.3 | |||||||
| Net income (loss) | $ | — | $ | (5.0 | ) | $ | 112.0 | ||||
Our U.S. Asset Management and Accumulation segment held residential mortgage banking escrow deposits (reported as other liabilities) as of December 31, 2003. The purchaser (or acquirer) closed out the banking escrow deposit accounts as a result of the sale. U.S. Asset Management and Accumulation total revenues from this arrangement reclassified to discontinued operations for the year ended December 31, 2004 was $(5.6) million. Loss from discontinued operations net of related income taxes, for the year ended December 31, 2004 was $3.5 million.
BT Financial Group
On October 31, 2002, we sold substantially all of BT Financial Group to Westpac Banking Corporation ("Westpac"). Our total after-tax proceeds from the sale were approximately U.S. $900.0 million. This amount includes cash proceeds from Westpac, tax benefits and a gain from unwinding the hedged asset associated with our investment in BT Financial Group.
The decision to sell BT Financial Group was made with a view toward focusing our resources, executing on core strategic priorities and meeting stockholder expectations. Changing market dynamics since our acquisition of BT Financial Group, including industry consolidation, led us to conclude that the interests of BT Financial Group clients and staff would be best served under Westpac's ownership.
Changes to the loss on discontinued operations due to the close of a tax audit resulted in an increase to net income of $8.4 million in 2005. We have separately disclosed the operating, investing and financing portions of the cash flows attributable to our discontinued operations in our consolidated statements of cash flows.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
4. Goodwill and Other Intangible Assets — (continued)
The changes in the carrying amount Present Value of goodwill reported in our operating segments for 2005 and 2006 were as follows:
| | U.S. Asset Management and Accumulation | International Asset Management and Accumulation | Life and Health Insurance | Corporate and Other | Consolidated | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | |||||||||||||||
| Balances at January 1, 2005 | $ | 91.8 | $ | 52.6 | $ | 88.5 | $ | — | $ | 232.9 | ||||||
| Goodwill from acquisitions | 46.5 | — | — | — | 46.5 | |||||||||||
| Foreign currency translation | — | 2.9 | — | — | 2.9 | |||||||||||
| Other | — | — | (0.1 | ) | 0.1 | — | ||||||||||
| Balances at December 31, 2005 | 138.3 | 55.5 | 88.4 | 0.1 | 282.3 | |||||||||||
| Goodwill from acquisitions | 81.2 | — | — | — | 81.2 | |||||||||||
| Foreign currency translation | — | (1.6 | ) | — | — | (1.6 | ) | |||||||||
| Balances at December 31, 2006 | $ | 219.5 | $ | 53.9 | $ | 88.4 | $ | 0.1 | $ | 361.9 | ||||||
Amortized intangible assets were as follows:
| | December 31, | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2006 | 2005 | ||||||||||||||||
| | Gross carrying amount | Accumulated amortization | Net carrying amount | Gross carrying amount | Accumulated amortization | Net carrying amount | ||||||||||||
| | (in millions) | |||||||||||||||||
| Present value of future profits | $ | 172.8 | $ | 66.1 | $ | 106.7 | $ | 125.1 | $ | 41.3 | $ | 83.8 | ||||||
| Other | 288.7 | 26.4 | 262.3 | 131.8 | 16.9 | 114.9 | ||||||||||||
| Total amortized intangibles | $ | 461.5 | $ | 92.5 | $ | 369.0 | $ | 256.9 | $ | 58.2 | $ | 198.7 | ||||||
The amortization expense for intangible assets with finite useful lives was $22.6 million, $17.5 million and $12.2 million for 2006, 2005 and 2004, respectively. At December 31, 2006, the estimated amortization expense for the next five years is as follows (in millions):
| Year ending December 31: | ||||
| 2007 | $ | 33.7 | ||
| 2008 | 31.0 | |||
| 2009 | 30.9 | |||
| 2010 | 13.9 | |||
| 2011 | 13.6 | |||
Future Profits. Present value of future profits ("PVFP") represents the present value of estimated future profits to be generated from existing insurance contracts in-force at the date of acquisition and is amortized over the expected policy or contract duration.duration in relation to estimated gross profits. Interest rates used to calculate the estimated interest accruals were 9.00% for all years related to PVFP generated from Mexico acquisitions and 6.36% in 2007, and 6.43% declining to 6.36% in 2006, 6.51% declining to 6.43% in 2005 and 6.51% for 2004, related to PVFP generated from Chile acquisitions.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
4. Goodwill and Other Intangible Assets — (continued)
The changes in the carrying amount of present value of future profitsPVFP, reported in our operating segmentsInternational Asset Management and Accumulation segment for 2004, 20052006, 2007 and 20062008, were as follows (in millions):
| | International Asset Management and Accumulation | |||||||
|---|---|---|---|---|---|---|---|---|
| Balance at January 1, 2004 | $ | 93.7 | ||||||
| Interest accrued | 7.7 | |||||||
| Amortization | (13.8 | ) | ||||||
| Foreign currency translation | 0.8 | |||||||
| Balance at December 31, 2004 | 88.4 | |||||||
| Interest accrued | 7.8 | |||||||
| Amortization | (14.7 | ) | ||||||
| Impairments | (2.3 | ) | ||||||
| Foreign currency translation | 4.3 | |||||||
| Other | 0.3 | |||||||
| Balance at December 31, 2005 | 83.8 | |||||||
Balance at January 1, 2006 | $ | 83.8 | ||||||
| Interest accrued | 7.3 | 7.3 | ||||||
| Amortization | (18.4 | ) | (18.4 | ) | ||||
| Impairments | (2.0 | ) | (2.0 | ) | ||||
| Foreign currency translation | (1.5 | ) | (1.5 | ) | ||||
| Other | 37.5 | 37.5 | ||||||
| Balance at December 31, 2006 | $ | 106.7 | 106.7 | |||||
Interest accrued | 9.4 | |||||||
Amortization | (0.1 | ) | ||||||
Impairments | (1.3 | ) | ||||||
Foreign currency translation | (0.8 | ) | ||||||
Other | (0.3 | ) | ||||||
Balance at December 31, 2007 | 113.6 | |||||||
Interest accrued | 9.5 | |||||||
Amortization | (15.8 | ) | ||||||
Foreign currency translation | (22.9 | ) | ||||||
Balance at December 31, 2008 | $ | 84.4 | ||||||
At December 31, 2006,2008, the estimated amortization expense related to PVFP for the next five years is as follows (in millions):
| Year ending December 31: | ||||
| 2007 | $ | 6.5 | ||
| 2008 | 4.8 | |||
| 2009 | 4.6 | |||
| 2010 | 4.5 | |||
| 2011 | 4.7 | |||
Year ending December 31: | ||||||
2009 | $ | 2.0 | ||||
2010 | 2.2 | |||||
2011 | 2.8 | |||||
2012 | 3.4 | |||||
2013 | 4.1 | |||||
Other Finite Lived Intangible Assets. During 2008, we recognized an impairment of $12.3 million associated with a customer-based intangible acquired as part of our acquisition of WM Advisors, Inc. This impairment had no impact on our consolidated statement of operations for the U.S. Asset Accumulation segment, as the cash flows associated with this intangible are credited to an outside party. We recorded no significant impairments in 2007 and 2006. The amortization expense for intangible assets with finite useful lives was $44.6 million, $50.0 million and $9.5 million for 2008, 2007 and 2006, respectively. At December 31, 2008, the estimated amortization expense for the next five years is as follows (in millions):
Year ending December 31: | ||||||
2009 | $ | 34.9 | ||||
2010 | 15.5 | |||||
2011 | 13.4 | |||||
2012 | 11.1 | |||||
2013 | 8.6 | |||||
Indefinite Lived Intangible Assets
The net carrying amount of unamortized indefinite-lived intangible assets were $612.0was $668.6 million and $3.9$669.7 million as of December 31, 20062008 and 2005,2007, respectively. Due
Principal Financial Group, Inc.
Notes to the December 31, 2006, acquisition of WM Advisors, Inc., we assigned $608.0 million to investment management contracts that are not subject to amortization. See Note 2, Acquisitions.Consolidated Financial Statements — (continued)
5. Variable Interest Entities
We have relationships with various types of special purpose entities and other entities where we have a variable interest. The following serves as a discussion of investments in entities that meet the definition of a VIE.
Consolidated Variable Interest Entities
Synthetic Collateralized Debt Obligation. On May 26, 2005, we invested $130.0 million in a secured limited recourse credit linkedcredit-linked note issued by a grantor trust. The trust entered into a credit default swap providing credit protection on the first 45% of loss of seven mezzanine tranches totaling $288.9 million of seven synthetic reference portfolios. Our risk of lossSubordination for the seven referenced mezzanine tranches begins at 4.85% and ends at 10.85% of loss on each of the seven synthetic reference portfolios.ranges from 1.29% to 4.79%. Therefore, defaults in an underlying reference portfolio will only affect the credit-linked note if cumulative losses exceed 4.85%the subordination of a synthetic reference portfolio.
We have determined that this grantor trust is a variable interest entityVIE and that we are the primary beneficiary of the trust due to our interestas we are the sole investor in the variable interest entitytrust and managementthe manager of the synthetic reference portfolios. Upon consolidation of the trust, as of December 31, 20062008 and 2005,2007, our consolidated statements of financial position include $130.3$93.5 million and $130.0$127.2 million, respectively, of available-for-sale fixed maturity securities, which represent the collateral held by the trust. The assets of the trust are held by a trustee and can only be liquidated to settle obligations of the trust. These obligations include losses on the synthetic reference portfolio and the return of investments due to maturity or termination of the trust. As of December 31, 20062008 and 2005,2007, our consolidated statements of financial position include $53.4 million and $0.2 million, respectively, of other liabilities representing derivative market values of the trust. As of December 31, 2007, we also reported $1.1 million of other investments in our consolidated statements of financial position relating to derivative market values of the trust.
As of December 31, 2008 and 2007, the credit default swap entered into by the trust hashad an outstanding notional amount of $130.0 million. During the years ended December 31, 20062008, 2007 and 2005,2006, the credit default swaps had a change in fair value that resulted in a $54.5 million pre-tax loss, $3.2 million pre-tax loss and $4.4 million pre-tax gain, and a $0.4 million pre-tax loss, respectively. The creditorscredit default swap counterparties of the grantor trusts have no recourse to our assets.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
5. Variable Interest Entities — (continued)
Grantor Trusts. We contributed undated subordinated floating rate notes to three grantor trusts. The trusts separated the cash flows of the underlying $425.9 million par value notes by issuing an interest-only certificate and a residual certificate related to each note contributed. Each interest-only certificate entitles the holder to interest on the stated note for a specified term while the residual certificate entitles the holder to interest payments subsequent to the term of the interest-only certificate and to all principal payments. We retained the interest-only certificate and the residual certificates were subsequently sold to a third party.
We have determined that these grantor trusts are VIEs as our interest-only certificates are exposed to the majority of the risk of loss.loss due to interest rate risk. The restricted interest periods end between 2016 and 2020 and, at that time, the residual certificate holders' certificates are redeemed by the trust in return for the notes. We have determined that it will be necessary for us to consolidate these entities until the expiration of the interest-only period. As of December 31, 20062008 and 2005,2007, our consolidated statements of financial position include $366.2$212.2 million and $364.1$332.1 million, respectively, of undated subordinated floating rate notes of the grantor trusts, which are classified as available-for-sale fixed maturity securities and represent the collateral held by the trust. The obligation to deliver the underlying securities to the residual certificate holders of $156.8$103.8 million and $147.4$155.6 million as of December 31, 20062008 and 2005,2007, respectively, is classified as an other liability and contains an embedded derivative of the forecasted transaction to deliver the underlying securities. The creditors of the grantor trusts have no recourse to our assets.
Other. In addition to the entities above, we have a number of relationships with a disparate group of entities, which meet the criteria for VIEs. Due to the nature of our direct investment in the equity and/or debt of these VIEs, we are the primary beneficiary of such entities, which requires us to consolidate them. These entities include seven private investment trusts, a financial services companyvehicles and aseveral hedge fund.funds. The consolidation of these VIEs did not have a material effect on either our consolidated statementstatements of financial position as of December 31, 20062008 or 2005,2007, or results of operations and for the years ended December 31, 2006, 20052008, 2007 and 2004.2006. For the majority of these entities, the creditors have no recourse to our assets.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
5. Variable Interest Entities — (continued)
The carrying amount and classification of other consolidated VIE assets that are pledged as collateral that the VIEs have designated for their ownother obligations and the debt of the VIEs are as follows:
| | | December 31, | | December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | 2006 | 2005 | | 2008 | 2007 | |||||||||
| | | (in millions) | | (in millions) | |||||||||||
| Fixed maturity securities, available-for-sale | Fixed maturity securities, available-for-sale | $ | 178.0 | $ | 88.3 | Fixed maturity securities, available-for-sale | $ | 103.8 | $ | 116.2 | |||||
| Fixed maturity securities, trading | Fixed maturity securities, trading | 14.0 | — | Fixed maturity securities, trading | 17.2 | 34.7 | |||||||||
| Equity securities, available-for-sale | — | 39.6 | |||||||||||||
| Equity securities, trading | Equity securities, trading | 59.5 | — | Equity securities, trading | 30.7 | 90.1 | |||||||||
| Real estate | — | 12.4 | |||||||||||||
| Cash and other assets | Cash and other assets | 83.2 | 71.6 | Cash and other assets | 140.8 | 93.8 | |||||||||
| Total assets pledged as collateral | $ | 334.7 | $ | 211.9 | Total assets pledged as collateral | $ | 292.5 | $ | 334.8 | ||||||
| Long-term debt | $ | 206.4 | $ | 123.9 | |||||||||||
Long-term debt and other obligations | Long-term debt and other obligations | $ | 334.2 | $ | 327.2 | ||||||||||
As of December 31, 20062008 and 2005, $334.72007, $292.5 million and $211.9$334.8 million, respectively, of assets were pledged as collateral for the VIE entities' other obligations. Additionally, asobligations and debt. The assets of the trusts are held by a trustee and can only be liquidated to settle obligations of the trusts. These obligations primarily include unrealized losses on derivatives, the synthetic reference portfolios or financial guarantees and the return of investments due to maturity or termination of the trusts. As of December 31, 20062008 and 2005,2007, these entities had long-term debt of $206.4$142.6 million and $123.9$175.6 million, respectively, all of which $206.4 million and $110.6 million, respectively, was issued to our affiliates and, therefore, eliminated upon consolidation.
Significant Unconsolidated Variable Interest Entities
We hold a significant variable interest in a number of VIEs where we are not the primary beneficiary. These entities include private investment trusts and custodial relationshipsvehicles that have issued trust certificates or custodial receipts that are recorded as available-for-sale fixed maturity securities in the consolidated statements of financial statements.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
5. Variable Interest Entities — (continued)position.
On June 21, 2006, we invested $285.0 million in a secured limited recourse note issued by a segregated portfolio company. The note represents Class B notes. Class A notes are senior and Class C through Class F notes are subordinated to Class B notes. The entity entered into a credit default swap with a third party providing credit protection in exchange for a fee. Defaults in an underlying reference portfolio will only affect the note if cumulative losses of a synthetic reference portfolio exceed the loss attachment point on the portfolio. We have determined we are not the primary beneficiary, as we do not hold the majority of the risk of loss. Our maximum exposure to loss as a result of our involvement with this entity is our recorded investment of $285.3 million as of December 31, 2006.
Between October 3, 1996 and September 21, 2001, we entered into seven separate but similar transactionsa transaction where variousa third partiesparty transferred funds to either a custodial account or a trust. The custodians or truststrust purchased shares of a specific money market fundsfund and then separated the cash flows of the money market shares into share receipts and dividend receipts. The dividend receipts entitle the holder to dividends paid for a specified term while the share receipts, purchased at a discount, entitle the holder to dividend payments subsequent to the term of the dividend receipts and the rights to the underlying shares. We have purchased $150.0 million par value of the share receipts.receipts at a significant discount. After the restricted dividend period ends between 2017 andon December 21, 2021, we, as the share receipt holder, have the right to terminate the custodial account or trust agreement and will receive the underlying money market fund shares. We determined the primary beneficiary is the dividend receipt holder, which has the majority of the risk of loss. Our maximum exposure to loss as a result of our involvement with these entitiesthis entity is our recorded investment of $235.7 millionin the share receipts as measured by amortized cost and $224.5 million as of December 31, 2006 and 2005, respectively.indicated in the following table.
On June 20, 1997, we entered into a transaction in which we purchased a residual trust certificate.certificate with a par value of $100.0 million. The trust separated the cash flows of an underlying security into an interest-only certificate that entitles the third party certificate holder to the stated interest on the underlying security through May 15, 2017, and into a residual certificate entitling the holder to interest payments subsequent to the term of the interest-only certificates and any principal payments. Subsequent to the restricted interest period, we, as the residual certificate holder, have the right to terminate the trust agreement and will receive the underlying security. We determined the primary beneficiary is the interest-only certificate holder, which has the majority of the risk of loss. Our maximum exposure to loss as a result of our involvement with this entity is our recorded investment in the residual trust certificate as measured by amortized cost and indicated in the following table. The only assets of $78.7 millionthe trust are corporate bonds which are guaranteed by a foreign government.
The classification of the asset, carrying value and $77.0 millionmaximum loss exposure for our significant unconsolidated VIEs as of December 31, 2006 and 2005, respectively.2008, are as follows (in millions):
| | Classification of asset | Asset carrying value | Maximum exposure to loss | ||||||
|---|---|---|---|---|---|---|---|---|---|
$150.0 million Trust Share Receipts | Fixed maturities — available-for-sale | $ | 61.2 | $ | 73.7 | ||||
$100.0 million Residual Trust Certificate | Fixed maturities — available-for-sale | $ | 101.9 | $ | 61.3 | ||||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
5. Variable Interest Entities — (continued)
The classification of the asset, carrying value and maximum loss exposure for our significant unconsolidated VIEs as of December 31, 2007, are as follows (in millions):
| | Classification of asset | Asset carrying value | Maximum exposure to loss | ||||||
|---|---|---|---|---|---|---|---|---|---|
$150.0 million Trust Share Receipts | Fixed maturities — available-for-sale | $ | 66.1 | $ | 69.6 | ||||
$100.0 million Residual Trust Certificate | Fixed maturities — available-for-sale | $ | 83.4 | $ | 56.8 | ||||
6. Investments
Fixed Maturities and Equity Securities
The cost, gross unrealized gains and losses and fair value of fixed maturities and equity securities available-for-sale as of December 31, 20062008 and 2005,2007, are summarized as follows:
| | | Cost | Gross unrealized gains | Gross unrealized losses | Fair value | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | (in millions) | | Cost | Gross unrealized gains | Gross unrealized losses | Fair value | ||||||||||||||||||||
| December 31, 2006 | |||||||||||||||||||||||||||
| | | (in millions) | |||||||||||||||||||||||||
December 31, 2008 | December 31, 2008 | ||||||||||||||||||||||||||
| Fixed maturities, available-for-sale: | Fixed maturities, available-for-sale: | Fixed maturities, available-for-sale: | |||||||||||||||||||||||||
| U.S. government and agencies | $ | 530.8 | $ | 0.8 | $ | 3.8 | $ | 527.8 | U.S. government and agencies | $ | 548.4 | $ | 46.9 | $ | 0.1 | $ | 595.2 | ||||||||||
| Non-U.S. governments | 766.0 | 135.0 | 0.4 | 900.6 | Non-U.S. governments | 757.7 | 96.2 | 15.4 | 838.5 | ||||||||||||||||||
| States and political subdivisions | 1,557.7 | 45.4 | 4.9 | 1,598.2 | States and political subdivisions | 2,113.8 | 32.6 | 120.9 | 2,025.5 | ||||||||||||||||||
| Corporate — public | 20,742.1 | 852.1 | 145.9 | 21,448.3 | Corporate — public | 21,743.4 | 200.1 | 3,064.9 | 18,878.6 | ||||||||||||||||||
| Corporate — private | 10,287.9 | 373.9 | 75.7 | 10,586.1 | Corporate — private | 12,315.9 | 153.8 | 2,104.3 | 10,365.4 | ||||||||||||||||||
| Mortgage-backed and other asset-backed securities | 9,199.1 | 221.2 | 77.8 | 9,342.5 | Mortgage-backed and other asset-backed securities | 10,346.1 | 79.6 | 3,011.7 | 7,414.0 | ||||||||||||||||||
| Total fixed maturities, available-for-sale | Total fixed maturities, available-for-sale | $ | 43,083.6 | $ | 1,628.4 | $ | 308.5 | $ | 44,403.5 | Total fixed maturities, available-for-sale | $ | 47,825.3 | $ | 609.2 | $ | 8,317.3 | $ | 40,117.2 | |||||||||
| Total equity securities, available-for-sale | Total equity securities, available-for-sale | $ | 657.7 | $ | 13.5 | $ | 4.6 | $ | 666.6 | Total equity securities, available-for-sale | $ | 308.1 | $ | 28.9 | $ | 94.3 | $ | 242.7 | |||||||||
| December 31, 2005 | |||||||||||||||||||||||||||
December 31, 2007 | December 31, 2007 | ||||||||||||||||||||||||||
| Fixed maturities, available-for-sale: | Fixed maturities, available-for-sale: | Fixed maturities, available-for-sale: | |||||||||||||||||||||||||
| U.S. government and agencies | $ | 557.9 | $ | 1.8 | $ | 4.2 | $ | 555.5 | U.S. government and agencies | $ | 628.5 | $ | 29.0 | $ | 0.1 | $ | 657.4 | ||||||||||
| Non-U.S. governments | 804.6 | 110.8 | 0.8 | 914.6 | Non-U.S. governments | 799.9 | 145.5 | 1.3 | 944.1 | ||||||||||||||||||
| States and political subdivisions | 1,222.6 | 45.7 | 3.8 | 1,264.5 | States and political subdivisions | 1,867.6 | 39.1 | 10.2 | 1,896.5 | ||||||||||||||||||
| Corporate — public | 20,297.3 | 1,014.3 | 117.1 | 21,194.5 | Corporate — public | 21,127.6 | 777.7 | 454.0 | 21,451.3 | ||||||||||||||||||
| Corporate — private | 9,470.1 | 484.3 | 52.3 | 9,902.1 | Corporate — private | 12,023.4 | 368.3 | 221.3 | 12,170.4 | ||||||||||||||||||
| Mortgage-backed and other asset-backed securities | 8,093.3 | 270.7 | 78.0 | 8,286.0 | Mortgage-backed and other asset-backed securities | 9,961.7 | 158.2 | 500.7 | 9,619.2 | ||||||||||||||||||
| Total fixed maturities, available-for-sale | Total fixed maturities, available-for-sale | $ | 40,445.8 | $ | 1,927.6 | $ | 256.2 | $ | 42,117.2 | Total fixed maturities, available-for-sale | $ | 46,408.7 | $ | 1,517.8 | $ | 1,187.6 | $ | 46,738.9 | |||||||||
| Total equity securities, available-for-sale | Total equity securities, available-for-sale | $ | 704.1 | $ | 26.1 | $ | 5.8 | $ | 724.4 | Total equity securities, available-for-sale | $ | 320.3 | $ | 11.6 | $ | 15.5 | $ | 316.4 | |||||||||
The cost and fair value of fixed maturities available-for-sale at December 31, 2006,2008, by expected maturity, were as follows:
| | Cost | Fair value | Cost | Fair value | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | (in millions) | |||||||||||
| Due in one year or less | $ | 2,282.7 | $ | 2,282.7 | $ | 1,854.7 | $ | 1,814.8 | |||||
| Due after one year through five years | 9,313.6 | 9,491.8 | 12,827.1 | 11,731.9 | |||||||||
| Due after five years through ten years | 11,222.2 | 11,402.5 | 10,646.1 | 8,893.2 | |||||||||
| Due after ten years | 11,066.0 | 11,883.9 | 12,151.3 | 10,263.3 | |||||||||
| 33,884.5 | 35,060.9 | 37,479.2 | 32,703.2 | ||||||||||
| Mortgage-backed and other asset-backed securities | 9,199.1 | 9,342.6 | 10,346.1 | 7,414.0 | |||||||||
| Total | $ | 43,083.6 | $ | 44,403.5 | $ | 47,825.3 | $ | 40,117.2 | |||||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
6. Investments — (continued)
The above summarized activity is based on expected maturities. Actual maturities may differ because borrowers may have the right to call or prepay obligations.
Corporate private placement bonds represent a primary area of credit risk exposure. The corporate private placement bondOur portfolio is diversified by industry, issuer and industry. We monitor the restrictive bond covenants, whichasset class. Credit concentrations are intendedmanaged to regulate the activities of issuers and control their leveraging capabilities.established limits.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
6. Investments — (continued)
Net Investment Income
Major categories of net investment income are summarized as follows:
| | For the year ended December 31, | For the year ended December 31, | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2006 | 2005 | 2004 | 2008 | 2007 | 2006 | ||||||||||||||
| | (in millions) | (in millions) | ||||||||||||||||||
| Fixed maturities, available-for-sale | $ | 2,620.4 | $ | 2,453.1 | $ | 2,317.2 | $ | 3,054.5 | $ | 2,836.2 | $ | 2,620.4 | ||||||||
| Fixed maturities, trading | 16.0 | 7.6 | 9.4 | 51.3 | 33.0 | 16.0 | ||||||||||||||
| Equity securities, available-for-sale | 55.5 | 50.8 | 46.9 | 16.3 | 24.2 | 55.5 | ||||||||||||||
| Equity securities, trading | 2.5 | 4.9 | 3.1 | 2.6 | 2.8 | 2.5 | ||||||||||||||
| Mortgage loans | 744.0 | 764.1 | 762.5 | 821.6 | 818.6 | 744.3 | ||||||||||||||
| Real estate | 64.5 | 63.9 | 82.3 | 54.6 | 74.9 | 63.2 | ||||||||||||||
| Policy loans | 50.9 | 50.3 | 51.1 | 58.3 | 52.6 | 50.9 | ||||||||||||||
| Cash and cash equivalents | 64.4 | 32.1 | 25.9 | 57.0 | 105.9 | 64.4 | ||||||||||||||
| Derivatives | 40.2 | 17.9 | 17.5 | (49.1 | ) | 41.7 | 40.2 | |||||||||||||
| Other | 92.0 | 49.4 | 36.9 | 70.9 | 123.4 | 92.0 | ||||||||||||||
| Total | 3,750.4 | 3,494.1 | 3,352.8 | 4,138.0 | 4,113.3 | 3,749.4 | ||||||||||||||
| Less investment expenses | (132.4 | ) | (134.0 | ) | (128.8 | ) | (143.7 | ) | (146.8 | ) | (128.8 | ) | ||||||||
| Net investment income | $ | 3,618.0 | $ | 3,360.1 | $ | 3,224.0 | $ | 3,994.3 | $ | 3,966.5 | $ | 3,620.6 | ||||||||
Net Realized/UnrealizedRealized Capital Gains and Losses
The major components of net realized/unrealizedrealized capital gains (losses) on investments are summarized as follows:
| | | For the year ended December 31, | | For the year ended December 31, | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | 2006 | 2005 | 2004 | | 2008 | 2007 | 2006 | ||||||||||||||
| | | (in millions) | | (in millions) | ||||||||||||||||||
| Fixed maturities, available-for-sale: | Fixed maturities, available-for-sale: | Fixed maturities, available-for-sale: | ||||||||||||||||||||
| Gross gains | $ | 42.9 | $ | 114.5 | $ | 58.9 | Gross gains | $ | 50.8 | $ | 35.2 | $ | 42.9 | |||||||||
| Gross losses | (65.0 | ) | (87.3 | ) | (86.0 | ) | Gross losses | (438.7 | ) | (280.9 | ) | (65.0 | ) | |||||||||
| Hedging (net) | (14.6 | ) | (45.8 | ) | (0.7 | ) | Hedging (net) | 496.3 | 151.8 | (14.6 | ) | |||||||||||
| Fixed maturities, trading | Fixed maturities, trading | 1.0 | (2.4 | ) | (1.1 | ) | Fixed maturities, trading | (61.7 | ) | 1.7 | 1.0 | |||||||||||
| Equity securities, available-for-sale: | Equity securities, available-for-sale: | Equity securities, available-for-sale: | ||||||||||||||||||||
| Gross gains | 2.5 | 9.1 | 17.1 | Gross gains | 12.0 | 8.0 | 2.5 | |||||||||||||||
| Gross losses | (0.9 | ) | (8.8 | ) | (12.0 | ) | Gross losses | (56.6 | ) | (54.3 | ) | (0.9 | ) | |||||||||
| Equity securities, trading | Equity securities, trading | 21.8 | 6.6 | 4.4 | Equity securities, trading | (65.7 | ) | 23.0 | 21.8 | |||||||||||||
| Mortgage loans | Mortgage loans | 2.4 | 1.3 | (12.5 | ) | Mortgage loans | (44.8 | ) | (7.1 | ) | 2.4 | |||||||||||
| Derivatives | Derivatives | (4.7 | ) | 17.2 | (101.4 | ) | Derivatives | (645.1 | ) | (228.5 | ) | 91.4 | ||||||||||
| Other | Other | 59.3 | (15.6 | ) | 28.5 | Other | 59.4 | 22.3 | (36.8 | ) | ||||||||||||
| Net realized/unrealized capital gains (losses) | $ | 44.7 | $ | (11.2 | ) | $ | (104.8 | ) | ||||||||||||||
Net realized capital gains (losses) | Net realized capital gains (losses) | $ | (694.1 | ) | $ | (328.8 | ) | $ | 44.7 | |||||||||||||
Proceeds from sales of investments (excluding call and maturity proceeds) in fixed maturities, available-for-sale were $1.2 billion, $2.4 billion and $1.5 billion $2.6 billionin 2008, 2007 and $1.9 billion in 2006, 2005 and 2004, respectively.
We recognize impairment losses for fixed maturities and equity securities when declines in value are other than temporary. Gross realized losses related to other than temporary impairments of fixed maturity securities were $421.6 million, $215.7 million and $14.6 million $28.6in 2008, 2007 and 2006, respectively. Certain fixed maturity securities
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
6. Investments — (continued)
moved into a loss position during the second quarter of 2007, and we determined that we did not have the ability and intent to hold these securities. As a result, we also recognized impairment losses on these securities of $24.5 million, and $60.6 millionnet of recoveries on the subsequent sale, primarily due to a change in 2006, 2005 and 2004, respectively.interest rates. As a result of the need to fund our acquisition of WM Advisors, Inc., we also recognized $17.2 million of write-downs in 2006 that resulted from our determination that we no longer had the ability and intent to hold certain fixed maturity securities until they recovered in value. We also recognized gross realized losses as the result of credit triggered sales of $13.7 million, $32.3 million and $22.2 million $30.8in 2008, 2007 and 2006, respectively. Gross realized losses related to other than temporary impairments of equity securities were $55.3 million and $18.9$52.6 million in 2006, 20052008 and 2004,2007, respectively. In 2005, we also recognized an $11.0 million loss related to a large investment that was called from us.We did not recognize any impairment losses on equity securities in 2006.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
6. Investments — (continued)
Gross Unrealized Losses for Fixed Maturities and Equity Securities
For fixed maturities and equity securities available-for-sale with unrealized losses as of December 31, 20062008 and 2005,2007, the gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position are summarized as follows:
| | | December 31, 2006 | | December 31, 2008 | |||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Less than twelve months | Greater than or equal to twelve months | Total | | Less than twelve months | Greater than or equal to twelve months | Total | |||||||||||||||||||||||||||||||
| | | Carrying value | Gross unrealized losses | Carrying value | Gross unrealized losses | Carrying value | Gross unrealized losses | | Carrying value | Gross unrealized losses | Carrying value | Gross unrealized losses | Carrying value | Gross unrealized losses | |||||||||||||||||||||||||
| | | (in millions) | | (in millions) | |||||||||||||||||||||||||||||||||||
| Fixed maturities, available-for-sale: | Fixed maturities, available-for-sale: | Fixed maturities, available-for-sale: | |||||||||||||||||||||||||||||||||||||
| U.S. government and agencies | $ | 32.0 | $ | 0.2 | $ | 320.8 | $ | 3.6 | $ | 352.8 | $ | 3.8 | U.S. government and agencies | $ | 6.0 | $ | 0.1 | $ | — | $ | — | $ | 6.0 | $ | 0.1 | ||||||||||||||
| Non-U.S. governments | 45.9 | 0.1 | 13.8 | 0.3 | 59.7 | 0.4 | Non-U.S. governments | 128.8 | 12.3 | 18.0 | 3.1 | 146.8 | 15.4 | ||||||||||||||||||||||||||
| States and political subdivisions | 278.1 | 0.7 | 347.0 | 4.2 | 625.1 | 4.9 | States and political subdivisions | 1,137.4 | 82.1 | 162.8 | 38.8 | 1,300.2 | 120.9 | ||||||||||||||||||||||||||
| Corporate — public | 2,697.0 | 35.9 | 4,617.8 | 110.0 | 7,314.8 | �� | 145.9 | Corporate — public | 11,382.4 | 1,351.5 | 4,922.9 | 1,713.4 | 16,305.3 | 3,064.9 | |||||||||||||||||||||||||
| Corporate — private | 1,635.2 | 11.4 | 2,375.8 | 64.3 | 4,011.0 | 75.7 | Corporate — private | 5,308.2 | 849.7 | 3,150.2 | 1,254.6 | 8,458.4 | 2,104.3 | ||||||||||||||||||||||||||
| Mortgage-backed and other asset-backed securities | 1,349.3 | 9.7 | 2,751.6 | 68.1 | 4,100.9 | 77.8 | Mortgage-backed and other asset-backed securities | 2,883.6 | 819.3 | 2,328.1 | 2,192.4 | 5,211.7 | 3,011.7 | ||||||||||||||||||||||||||
| Total fixed maturities, available-for-sale | Total fixed maturities, available-for-sale | $ | 6,037.5 | $ | 58.0 | $ | 10,426.8 | $ | 250.5 | $ | 16,464.3 | $ | 308.5 | Total fixed maturities, available-for-sale | $ | 20,846.4 | $ | 3,115.0 | $ | 10,582.0 | $ | 5,202.3 | $ | 31,428.4 | $ | 8,317.3 | |||||||||||||
| Total equity securities, available-for-sale | Total equity securities, available-for-sale | $ | 4.5 | $ | 0.3 | $ | 134.0 | $ | 4.3 | $ | 138.5 | $ | 4.6 | Total equity securities, available-for-sale | $ | 95.6 | $ | 68.7 | $ | 57.3 | $ | 25.6 | $ | 152.9 | $ | 94.3 | |||||||||||||
As of December 31, 2006,2008, we held $16,464.3$31,428.4 million in available-for-sale fixed maturity securities with unrealized losses of $308.5$8,317.3 million. Of these amounts, Principal Life's consolidated portfolio represented $16,224.8$28,923.7 million in available-for-sale fixed maturity securities with unrealized losses of $299.7$8,215.6 million. Principal Life's consolidated portfolio consists of fixed maturity securities where 98%94% are investment grade (rated AAA through BBB-) with an average price of 9878 (carrying value/amortized cost). at December 31, 2008. Due to the credit disruption that began in the last half of 2007 and continued into 2008 which reduced liquidity and led to wider credit spreads, we saw an increase in unrealized losses in our securities portfolio. The unrealized losses were more pronounced in the Corporate-public and Corporate-private finance sectors and in structured products, such as collateralized debt obligations, asset-backed securities and commercial mortgage-backed securities.
For those securities that have been in a loss position for less than twelve months, Principal Life's consolidated portfolio holds 6432,105 securities with a carrying value of $5,831.9$18,488.0 million and unrealized losses of $49.8$3,037.6 million reflecting an average price of 99.86 at December 31, 2008. Of this portfolio, 97%95% was investment grade (rated AAA through BBB-) at December 31, 2006,2008, with associated unrealized losses of $48.3$2,701.9 million. The losses on these securities can primarily be attributed to changes in market interest rates and changes in credit spreads since the securities were acquired.
For those securities that have been in a continuous loss position greater than or equal to twelve months, Principal Life's consolidated portfolio holds 1,1861,526 securities with a carrying value of $10,392.9$10,435.7 million and unrealized losses of $249.9$5,178.0 million. The average rating of this portfolio is AA- with an average price of 9867 at December 31, 2006.2008. Of the $249.9$5,178.0 million in unrealized losses, the Corporate-public and Corporate-private sectors account for $173.9$2,943.8 million in unrealized losses with an average price of 9873 and an average credit rating of BBB+. The remaining unrealized losses consist primarily of $68.1$2,192.3 million in unrealized losses within the mortgage-backed and other asset-backed securities sector. The average price of the mortgage-backed and other asset-backed securities sector is 98 and the average credit
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
6. Investments — (continued)
sector at December 31, 2008. The average price of the mortgage-backed and other asset-backed securities sector is 52 and the average credit rating is AA+.AA-. The losses on these securities can primarily be attributed to changes in market interest rates and changes in credit spreads since the securities were acquired.
| | December 31, 2005 | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Less than twelve months | Greater than or equal to twelve months | Total | ||||||||||||||||
| | Carrying value | Gross unrealized losses | Carrying value | Gross unrealized losses | Carrying value | Gross unrealized losses | |||||||||||||
| | (in millions) | ||||||||||||||||||
| Fixed maturities, available-for-sale: | |||||||||||||||||||
| U.S. government and agencies | $ | 411.1 | $ | 3.7 | $ | 43.5 | $ | 0.5 | $ | 454.6 | $ | 4.2 | |||||||
| Non-U.S. governments | 23.7 | 0.5 | 15.1 | 0.3 | 38.8 | 0.8 | |||||||||||||
| States and political subdivisions | 374.2 | 2.9 | 55.2 | 0.9 | 429.4 | 3.8 | |||||||||||||
| Corporate — public | 4,912.6 | 92.9 | 890.0 | 24.2 | 5,802.6 | 117.1 | |||||||||||||
| Corporate — private | 2,298.0 | 36.3 | 488.9 | 16.0 | 2,786.9 | 52.3 | |||||||||||||
| Mortgage-backed and other asset-backed securities | 2,853.4 | 53.8 | 797.9 | 24.2 | 3,651.3 | 78.0 | |||||||||||||
| Total fixed maturities, available-for-sale | $ | 10,873.0 | $ | 190.1 | $ | 2,290.6 | $ | 66.1 | $ | 13,163.6 | $ | 256.2 | |||||||
| Total equity securities, available-for-sale | $ | 145.3 | $ | 2.6 | $ | 287.7 | $ | 3.2 | $ | 433.0 | $ | 5.8 | |||||||
Because we have the ability and intent to hold the available-for-sale securities with unrealized losses until a recovery of fair value, which may be maturity, we do not consider these investments to be other-than-temporarily impaired at December 31, 2008.
| | December 31, 2007 | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Less than twelve months | Greater than or equal to twelve months | Total | |||||||||||||||||
| | Carrying value | Gross unrealized losses | Carrying value | Gross unrealized losses | Carrying value | Gross unrealized losses | ||||||||||||||
| | (in millions) | |||||||||||||||||||
Fixed maturities, available-for-sale: | ||||||||||||||||||||
U.S. government and agencies | $ | 4.2 | $ | 0.1 | $ | 19.3 | $ | — | $ | 23.5 | $ | 0.1 | ||||||||
Non-U.S. governments | 61.4 | 1.1 | 13.7 | 0.2 | 75.1 | 1.3 | ||||||||||||||
States and political subdivisions | 375.2 | 7.1 | 205.7 | 3.1 | 580.9 | 10.2 | ||||||||||||||
Corporate — public | 5,076.0 | 243.7 | 3,558.2 | 210.3 | 8,634.2 | 454.0 | ||||||||||||||
Corporate — private | 3,386.5 | 133.5 | 1,801.9 | 87.8 | 5,188.4 | 221.3 | ||||||||||||||
Mortgage-backed and other asset-backed securities | 3,310.5 | 405.1 | 2,177.8 | 95.6 | 5,488.3 | 500.7 | ||||||||||||||
Total fixed maturities, available-for-sale | $ | 12,213.8 | $ | 790.6 | $ | 7,776.6 | $ | 397.0 | $ | 19,990.4 | $ | 1,187.6 | ||||||||
Total equity securities, available-for-sale | $ | 110.2 | $ | 12.3 | $ | 26.5 | $ | 3.2 | $ | 136.7 | $ | 15.5 | ||||||||
As of December 31, 2005,2007, we held $13,163.6$19,990.4 million in available-for-sale fixed maturity securities with unrealized losses of $256.2$1,187.6 million. Of these amounts, Principal Life's consolidated portfolio represented $12,822.1$19,574.5 million in available-for-sale fixed maturity securities with unrealized losses of $243.0$1,168.2 million. Principal Life's consolidated portfolio consisted of fixed maturity securities where 97% are95% were investment grade (rated AAA through BBB-) with an average price of 9894 (carrying value/amortized cost). at December 31, 2007. Due to the credit disruption in the last half of 2007 that led to reduced liquidity and wider credit spreads, we saw an increase in unrealized losses in our securities portfolio. The unrealized losses were more pronounced in structured products such as collateralized debt obligations and asset-backed securities.
For those securities that had been in a loss position for less than twelve months, Principal Life's consolidated portfolio held 1,1991,268 securities with a carrying value of $10,550.8$11,897.8 million and unrealized losses of $177.1$785.5 million reflecting an average price of 98.94 at December 31, 2007. Of this portfolio, 97%93% was investment grade (rated AAA through BBB-) at December 31, 2005,2007, with associated unrealized losses of $167.1$738.0 million. The losses on these securities can primarily be attributed to changes in market interest rates and changes in credit spreads since the securities were acquired.
For those securities that had been in a continuous loss position greater than or equal to twelve months, Principal Life's consolidated portfolio held 337945 securities with a carrying value of $2,271.3$7,676.7 million and unrealized losses of $66.0$382.7 million. The average rating of this portfolio was A+A with an average price of 9795 at December 31, 2005.2007. Of the $66.0$382.7 million in unrealized losses, the Corporate-public and Corporate-private sectors accountaccounted for $40.1$283.8 million in unrealized losses with an average price of 9795 and an average credit rating of BBB+. The remaining unrealized losses consistconsisted primarily of $24.2$95.6 million in unrealized losses within the mortgage-backed and other asset-backed securities sector.sector at December 31, 2007. The average price of the mortgage-backed and other asset-backed securities sector is 97was 96 and the average credit rating iswas AA+.
We closely monitor our below investment grade holdings and those investment grade names where we have concerns. While we are in an unrealized loss position The losses on these securities allcan primarily be attributed to changes in market interest rates and changes in credit spreads since the securities except those identified as previously impaired continue to make payments. We consider relevant facts and circumstances in evaluating whetherwere acquired.
Because we had the impairment of a security is other than temporary. Relevant facts and circumstances considered include: (1) the length of time the fair value has been below cost; (2) the financial position and access to capital of the issuer, including the current and future impact of any specific events; and (3) our ability and intent to hold the security toavailable-for-sale securities with unrealized losses until a recovery of fair value, which may be maturity, or until it recovers in value. To the extent we determine that a security is deemeddid not consider these investments to be other than temporarilyother-than-temporarily impaired the difference between amortized cost and fair value is charged to earnings.at December 31, 2007.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
6. Investments — (continued)
Net Unrealized Gains and Losses on Available-for-Sale Securities and Derivative Instruments
The net unrealized gains and losses on investments in fixed maturities andavailable-for-sale, equity securities available-for-sale and derivative instruments are reported as a separate component of stockholders' equity. The cumulative amount of net unrealized gains and losses on available-for-sale securities and derivative instruments net of adjustments related to DPAC, sales inducements, unearned revenue reserves, changes in policyholder benefits and claims and applicable income taxes was as follows:
| | December 31, | ||||||
|---|---|---|---|---|---|---|---|
| | 2006 | 2005 | |||||
| | (in millions) | ||||||
| Net unrealized gains on fixed maturities, available-for-sale(1) | $ | 1,321.1 | $ | 1,670.8 | |||
| Net unrealized gains on equity securities, available-for-sale | 8.9 | 20.3 | |||||
| Adjustments for assumed changes in amortization patterns | (128.1 | ) | (136.2 | ) | |||
| Net unrealized gains on derivative instruments | 46.4 | 39.6 | |||||
| Net unrealized losses on policyholder dividend obligation | — | (33.7 | ) | ||||
| Net unrealized gains (losses) on equity method subsidiaries and minority interest adjustments | 6.8 | (19.9 | ) | ||||
| Provision for deferred income taxes | (396.1 | ) | (513.0 | ) | |||
| Net unrealized gains on available-for-sale securities | $ | 859.0 | $ | 1,027.9 | |||
| | December 31, | ||||||
|---|---|---|---|---|---|---|---|
| | 2008 | 2007 | |||||
| | (in millions) | ||||||
Net unrealized gains (losses) on fixed maturities, available-for-sale(1) | $ | (7,708.2 | ) | $ | 329.7 | ||
Net unrealized losses on equity securities, available-for-sale | (65.2 | ) | (3.9 | ) | |||
Adjustments for assumed changes in amortization patterns | 1,175.2 | 2.2 | |||||
Adjustments for assumed changes in liability for policyholder benefits and claims | 3.3 | — | |||||
Net unrealized gains on derivative instruments | 50.0 | 20.7 | |||||
Net unrealized gains on equity method subsidiaries and minority interest adjustments | 102.4 | 75.2 | |||||
Provision for deferred income taxes | 2,271.7 | (106.8 | ) | ||||
Net unrealized gains (losses) on available-for-sale securities and derivative instruments | $ | (4,170.8 | ) | $ | 317.1 | ||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
6. Investments — (continued)
Commercial Mortgage Loans
Commercial mortgage loans represent a primary area of credit risk exposure. At December 31, 20062008 and 2005,2007, the commercial mortgage portfolio is diversified by geographic region and specific collateral property type as follows:
| | December 31, | December 31, | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2006 | 2005 | 2008 | 2007 | ||||||||||||||||||||
| | Carrying amount | Percent of total | Carrying amount | Percent of total | Carrying amount | Percent of total | Carrying amount | Percent of total | ||||||||||||||||
| | ($ in millions) | ($ in millions) | ||||||||||||||||||||||
| Geographic distribution | ||||||||||||||||||||||||
| New England | $ | 397.6 | 3.9 | % | $ | 353.0 | 3.6 | % | $ | 459.4 | 4.1 | % | $ | 481.2 | 4.5 | % | ||||||||
| Middle Atlantic | 1,817.4 | 18.0 | 1,822.3 | 18.4 | 1,794.8 | 15.9 | 1,815.5 | 16.9 | ||||||||||||||||
| East North Central | 847.0 | 8.4 | 775.2 | 7.8 | 974.9 | 8.6 | 960.2 | 8.9 | ||||||||||||||||
| West North Central | 525.6 | 5.2 | 458.3 | 4.6 | 550.0 | 4.9 | 513.2 | 4.8 | ||||||||||||||||
| South Atlantic | 2,550.9 | 25.3 | 2,531.2 | 25.7 | 2,849.9 | 25.2 | 2,876.2 | 26.7 | ||||||||||||||||
| East South Central | 285.6 | 2.8 | 348.0 | 3.5 | 323.2 | 2.9 | 339.0 | 3.1 | ||||||||||||||||
| West South Central | 682.4 | 6.8 | 674.1 | 6.8 | 775.9 | 6.9 | 692.9 | 6.4 | ||||||||||||||||
| Mountain | 845.5 | 8.4 | 823.7 | 8.3 | 900.3 | 8.0 | 794.7 | 7.4 | ||||||||||||||||
| Pacific | 2,170.5 | 21.5 | 2,138.1 | 21.6 | 2,707.9 | 24.0 | 2,333.4 | 21.7 | ||||||||||||||||
| Valuation allowance | (32.2 | ) | (0.3 | ) | (33.2 | ) | (0.3 | ) | (57.0 | ) | (0.5 | ) | (42.8 | ) | (0.4 | ) | ||||||||
| Total | $ | 10,090.3 | 100.0 | % | $ | 9,890.7 | 100.0 | % | $ | 11,279.3 | 100.0 | % | $ | 10,763.5 | 100.0 | % | ||||||||
| Property type distribution | ||||||||||||||||||||||||
| Office | $ | 2,672.3 | 26.5 | % | $ | 2,706.5 | 27.4 | % | $ | 2,894.7 | 25.7 | % | $ | 2,647.8 | 24.6 | % | ||||||||
| Retail | 2,808.8 | 27.7 | 3,036.5 | 30.6 | 3,004.5 | 26.7 | 2,915.5 | 27.1 | ||||||||||||||||
| Industrial | 2,740.1 | 27.2 | 2,812.3 | 28.4 | 2,688.1 | 23.8 | 2,756.0 | 25.6 | ||||||||||||||||
| Apartments | 1,440.3 | 14.3 | 1,078.5 | 10.9 | 1,832.6 | 16.2 | 1,698.3 | 15.8 | ||||||||||||||||
| Hotel | 41.7 | 0.4 | 44.8 | 0.5 | 507.0 | 4.5 | 273.3 | 2.5 | ||||||||||||||||
| Mixed use/other | 419.3 | 4.2 | 245.3 | 2.5 | 409.4 | 3.6 | 515.4 | 4.8 | ||||||||||||||||
| Valuation allowance | (32.2 | ) | (0.3 | ) | (33.2 | ) | (0.3 | ) | (57.0 | ) | (0.5 | ) | (42.8 | ) | (0.4 | ) | ||||||||
| Total | $ | 10,090.3 | 100.0 | % | $ | 9,890.7 | 100.0 | % | $ | 11,279.3 | 100.0 | % | $ | 10,763.5 | 100.0 | % | ||||||||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
6. Investments — (continued)
Commercial Mortgage Loan LossValuation Allowance
Mortgage loans on real estate are considered impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to contractual terms of the loan agreement. When we determine that a loan is impaired, a valuation allowance is established equal to the difference between the carrying amount of the mortgage loan and the estimated value. Estimated value is based on either the present value of the expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price or fair value of the collateral. The change in the valuation allowance is included in net realized/unrealizedrealized capital gains (losses) on our consolidated statements of operations.
The valuation allowance for losses is maintained at a level believed adequate by management to absorb estimated probable credit losses. Management's periodic evaluation and assessment of the adequacy of the valuation allowance for losses and the need for mortgage impairments is based on known and inherent risks in the portfolio, adverse situations that may affect a borrower's ability to repay, the estimated value of the underlying collateral, composition of the loan portfolio, current economic conditions, loss experience and other relevant factors. The evaluation of our impaired loan specific reserve component is also subjective,
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
6. Investments — (continued)
as it requires estimating the amountsestimation and timing of future cash flows expected to be received on impaired loans. Impaired mortgage loans, along with the related loan specific allowance for losses, were as follows:
| | December 31, | December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2006 | 2005 | 2008 | 2007 | ||||||||||
| | (in millions) | (in millions) | ||||||||||||
| Impaired loans | $ | 0.1 | $ | 23.8 | $ | 175.7 | $ | 45.8 | ||||||
| Allowance for losses | — | (2.3 | ) | 26.2 | 10.0 | |||||||||
| Net impaired loans | $ | 0.1 | $ | 21.5 | $ | 149.5 | $ | 35.8 | ||||||
The average recorded investment in impaired mortgage loans and the interest income recognized on impaired mortgage loans were as follows:
| | For the year ended December 31, | For the year ended December 31, | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2006 | 2005 | 2004 | 2008 | 2007 | 2006 | |||||||||||||
| | (in millions) | (in millions) | |||||||||||||||||
| Average recorded investment in impaired loans | $ | 4.3 | $ | 51.6 | $ | 105.2 | $ | 68.3 | $ | 11.5 | $ | 4.3 | |||||||
| Interest income recognized on impaired loans | 0.5 | 5.1 | 7.0 | 17.4 | 3.4 | 0.5 | |||||||||||||
When it is determined that a loan is impaired, interest accruals are stopped and all interest income is recognized on the cash basis.
A summary of the changes in the commercial mortgage loan valuation allowance for losses is as follows:
| | For the year ended December 31, | For the year ended December 31, | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2006 | 2005 | 2004 | 2008 | 2007 | 2006 | ||||||||||||||
| | (in millions) | (in millions) | ||||||||||||||||||
| Balance at beginning of year | $ | 33.2 | $ | 42.4 | $ | 49.6 | $ | 42.8 | $ | 32.2 | $ | 33.2 | ||||||||
| Provision for losses | 1.3 | 6.7 | 14.4 | |||||||||||||||||
| Releases due to write-downs, sales and foreclosures | (2.3 | ) | (15.9 | ) | (21.6 | ) | ||||||||||||||
Provision | 42.9 | 10.7 | 1.3 | |||||||||||||||||
Releases | (28.7 | ) | (0.1 | ) | (2.3 | ) | ||||||||||||||
| Balance at end of year | $ | 32.2 | $ | 33.2 | $ | 42.4 | $ | 57.0 | $ | 42.8 | $ | 32.2 | ||||||||
Real Estate
Depreciation expense on invested real estate was $34.4$32.1 million, $28.0$30.4 million and $32.0$30.5 million in 2006, 20052008, 2007 and 2004,2006, respectively. Accumulated depreciation was $228.3$248.1 million and $199.7$226.3 million as of December 31, 20062008 and 2005,2007, respectively.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
6. Investments — (continued)
Other Investments
Other investments include minority interests in unconsolidated entities, domestic and international joint ventures and partnerships and properties owned jointly with venture partners and operated by the partners. Such investments are generally accounted for using the equity method. In applying the equity method, we record our share of income or loss reported by the equity investees. Changes in the value of our investment in equity investees attributable to capital transactions of the investee, such as an additional offering of stock, are recorded directly to stockholders' equity. Total assets of the unconsolidated entities were $12,010.2$17,392.7 million and $9,331.6$17,290.8 million at December 31, 20062008 and 2005,2007, respectively. Total revenues of the unconsolidated entities were $3,844.2 million, $3,382.1 million and $2,174.1 million $1,785.6in 2008, 2007 and 2006, respectively. During 2008, 2007 and 2006, we included $14.2 million, $106.1 million and $1,302.7 million in 2006, 2005 and 2004, respectively. During 2006, 2005 and 2004, we included $94.3 million, $89.3 million and $61.0 million, respectively, in net investment income representing our share of current year net income of the unconsolidated entities. In 2008, we experienced losses compared to gains in 2007 associated with certain equity method investments resulting from adverse market conditions. At December 31, 20062008 and 2005,2007, our net investment in unconsolidated entities was $387.0$501.0 million and $321.7$604.9 million, respectively.
In the ordinary course of our business and as part of our investment operations, we have also entered into long termlong-term contracts to make and purchase investments aggregating $677.2$121.7 million and $882.8$402.2 million at December 31, 20062008 and 2005,2007, respectively.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
6. Investments — (continued)
Derivative assets are carried at fair value and reported as a component of other investments. Certain seed money investments are carried at fair value with changes in fair value included in net income as net realized/unrealizedrealized capital gains (losses) on our consolidated statements of operations.
Securities Lending
During the third quarter of 2008, we decided to temporarily unwind the securities lending program due to a downturn in current economic conditions. Prior to that time, we participated in a securities lending program whereby certain fixed maturity securities from the investment portfolio were loaned to other institutions for a short period of time. We maintained ownership of the loaned securities. Securities loaned under such transactions could be sold or losses.repledged by the transferee. Both we and the borrower could request or return the loaned securities at any time. We required initial cash collateral, which we could not repledge, equal to 102 percent of the market value of the loaned securities. The collateral was invested by the lending agent in accordance with our guidelines. Net returns on the investments, after payment of a rebate to the borrower, were shared between the agent and us and reported in net investment income on the consolidated statements of operations. The transaction was accounted for as a secured borrowing and the collateral was included in other assets on our statements of financial position, with a corresponding liability reflecting our obligation to return the collateral upon the return of the loaned securities recorded in other liabilities.
As of December 31, 2008, we held no cash collateral on securities lending. As of December 31, 2007, we had received $622.7 million of cash collateral on securities lending. As of December 31, 2008, we had loaned no securities. As of December 31, 2007, we had loaned securities with a fair value of $608.9 million.
Securities Posted as Collateral
We posted $869.4 million in fixed maturities, available-for-sale securities at December 31, 2008, to satisfy collateral requirements primarily associated with our derivative credit support annex (collateral) agreements and a reinsurance arrangement. In addition, we posted $1,498.5 million in commercial mortgage loans as of December 31, 2008, to satisfy collateral requirements associated with our obligation under funding agreements with the Federal Home Loan Bank of Des Moines. Since we did not relinquish ownership rights on these securities, they are reported as fixed maturities, available-for-sale and commercial mortgage loans, respectively, on our consolidated statements of financial position.
7. Securitization Transactions
We,Previously, we, along with other contributors, sellsold commercial mortgage loans in securitization transactions to trusts. As these trusts are classified as a qualifying special purpose entity,QSPEs, they are not subject to the VIE consolidation rules. We purchasepurchased primary servicing responsibilities and may retainhave retained other immaterial interests. The investors and the securitization entities have no recourse to our other assets for failure of debtors to pay when due. The value of our retained interests is subject primarily to credit risk. In 2006, we began transitioning our securitization platform to a new joint venture company that we report using the equity method of accounting. The transition was complete by the end of 2007 such that all of our commercial mortgage loan securitization transactions after that point were conducted through the joint venture. During the third quarter of 2008, we made a decision to terminate our commercial mortgage securities issuance operation.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
7. Securitization Transactions — (continued)
In 2006, 2005,2008, no gains from securitizations were recognized as we had no new securitizations. In 2007 and 2004,2006, we recognized gains of $13.6 million, $39.8$2.2 million and $14.4$13.6 million, respectively, on the securitization of commercial mortgage loans.
Key economic assumptions used in measuring the other retained interests at the date of securitization resulting from transactions completed included a cumulative foreclosure rate between 1% and 7% during 2007 and 2% and 10% during 2006, 5% and 18% during 2005, and 4% and 10% during 2004.2006. The assumed range of the loss severity, as a percentage of defaulted loans, was between 1% and 27% during 2007 and 2% and 31% during 2006, 3% and 29% during 2005, and 13% and 31% during 2004.2006. The low end of the loss severity range relates to a portfolio of seasoned loans. The high end of the loss severity range relates to a portfolio of newly issued loans.
At December 31, 20062008 and 2005,2007, the fair values of other retained interests related to the securitizations of commercial mortgage loans were $345.3$133.2 million and $321.0$315.8 million, respectively. Only $0.5 million in 2006 and $0.8 million in 2005 represented equity investments. All otherOur interests are primarily classified as fixed maturities, available-for-sale securitieson our consolidated statements of financial position and are carried at fair value. At December 31, 2006 and 2005, respectively, $156.2 million and $181.3 million of these available-for-sale securities were interest-only investments. Cash flows are continuously monitored for adverse deviations from original expectations and impairments are recorded when necessary. Key economic assumptions and the sensitivity of the current fair values of residual cash flows were tested to one and two standard deviations from the expected rates. The changes in the fair values at December 31, 2006 and 2005, as a result of this sensitivity analysis were not significant.
The table below summarizes cash flows for securitization transactions:
| | For the year ended December 31, | For the year ended December 31, | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2006 | 2005 | 2004 | 2008 | 2007 | 2006 | |||||||||||||
| | (in millions) | (in millions) | |||||||||||||||||
| Proceeds from new securitizations | $ | 698.6 | $ | 2,270.4 | $ | 871.1 | $ | — | $ | 105.2 | $ | 698.6 | |||||||
| Servicing fees received | 1.3 | 1.1 | 1.1 | 2.0 | 1.9 | 1.3 | |||||||||||||
| Other cash flows received on retained interests | 37.4 | 36.0 | 31.1 | 39.3 | 35.7 | 37.4 | |||||||||||||
8. Derivative Financial Instruments
Derivatives are generally used to hedge or reduce exposure to market risks (primarily interest rate and foreign currency risks) associated with assets held or expected to be purchased or sold and liabilities incurred or expected to be incurred. Derivatives are used to change the characteristics of our asset/liability mix consistent with our risk management activities. Additionally, derivatives are also used in asset replication strategies. We do not buy, sell or hold these investments for trading purposes.
Types of Derivative Instruments
Interest rate swaps are contracts in which we agree with other parties to exchange, at specified intervals, the difference between fixed rate and floating rate interest amounts based upon designated market rates or rate indices and an agreed upon notional principal amount. Generally, no cash is exchanged at the outset of the contract and no principal payments are made by either party. Cash is paid or received based on the terms of the swap. These transactions are entered into pursuant to master agreements that provide for a single net payment to be made by one counterparty at each due date. We use interest rate swaps primarily to more closely match the interest rate characteristics of assets and liabilities arising from timing mismatches between assets and liabilities (including duration mismatches). We also use interest rate swaps to hedge against changes in the value of assets we anticipate acquiring and other anticipated transactions and commitments. Interest rate swaps are used to hedge against changes in the value of the guaranteed minimum withdrawal benefit ("GMWB") liability. The GMWB rider on our variable annuity products provides for guaranteed minimum withdrawal benefits regardless of the actual performance of various equity and/or fixed income funds available with the product.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
8. Derivative Financial Instruments — (continued)
In exchange-traded futures transactions, we agree to purchase or sell a specified number of contracts, the values of which are determined by the values of designated classes of securities, and to post variation margin on a daily basis in an amount equal to the difference in the daily market values of those contracts. We enter into exchange-traded futures with regulated futures commissions merchants who are members of a trading exchange. In a mortgage-backed securities ("MBS") forward transaction, we agree to purchase or sell a specified MBS on a future date. We have used exchange-traded futures and MBS forwards to reduce market risks from changes in interest rates, to alter mismatches between the assets in a portfolio and the liabilities supported by those assets, and to hedge against changes in the value of securities we own or anticipate acquiring or selling. We use exchange-traded futures to hedge against changes in the value of the GMWB liability related to the GMWB rider on our variable annuity product, as previously explained.
A swaption is an option to enter into an interest rate swap at a future date. We write these options and receive a premium in order to transform our callable liabilities into fixed term liabilities. Swaptions provide us the benefit of the agreed-upon strike rate if the market rates for liabilities are higher, with the flexibility to enter into the current market rate swap if the market rates for liabilities are lower. Swaptions not only hedge against the downside risk, but also allow
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
8. Derivative Financial Instruments — (continued)
us to take advantage of any upside benefits. In addition, we may sell an investment-type contract with attributes tied to market indices (an embedded derivative as noted below), in which case we write an equity call option to convert the overall contract into a fixed-rate liability, essentially eliminating the equity component altogether. EquityWe purchase equity call spreads are purchased to fundhedge the equity participation rates promised to contractholders in conjunction with our fixed deferred annuity products that credit interest based on changes in an external equity index. Equity put options are used to hedge against changes in the value of the GMWB liability related to the GMWB rider on our variable annuity products, as previously explained.
Total return swaps are contracts in which we agree with other parties to exchange, at specified intervals, an amount determined by the difference between the previous spread and the current spread on referenced indices based upon an agreed upon notional principal amount plus an additional amount determined by the financing spread. Generally, no cash is exchanged at the outset of the contract and no principal payments are made by either party. Cash is paid or received based on the terms of the swap. These transactions are entered into pursuant to master agreements that provide for a single net payment to be made by one counterparty at each due date. These derivatives have been used in our commercial mortgage securitization operation to hedge its long spread position.
Currency forwards are contracts in which we agree with other parties to deliver a specified amount of an identified currency at a specified future date. Typically, the price is agreed upon at the time of the contract and payment for such a contract is made at the specified future date. Currency swaps are contracts in which we agree with other parties to exchange, at specified intervals, the difference between one currency and another at a forward exchange rate as calculated by reference to an agreed principal amount. Generally, the principal amount of each currency is exchanged at the beginning and termination of the currency swap by each party. These transactions are entered into pursuant to master agreements that provide for a single net payment to be made by one counterparty for payments made in the same currency at each due date. We use currency forwards and currency swaps to reduce market risks from changes in currency exchange rates with respect to investments or liabilities denominated in foreign currencies that we either hold or intend to acquire or sell. We have also used currency forwards to hedge the currency risk associated with net investments in foreign operations and anticipated earnings of our foreign operations.
We use credit default swaps to enhance the return on our investment portfolio by providing comparable exposure to fixed income securities that might not be available in the primary market. They are also occasionally used to hedge credit exposures in our investment portfolio. Credit derivatives are used to sell or buy credit protection on an identified name or names on an unfunded or synthetic basis in return for receiving or paying a quarterly premium. At the same time we enter into these synthetic transactions, we buy a quality cash bond to match against the credit default swap. The premium generally corresponds to a referenced name's credit spread at the time the agreement is executed. When selling protection, if there is an event of default by the referenced name, as defined by the agreement, we are obligated to pay the counterparty the referenced amount of the contract and receive in return the referenced security in an amount equal to the notional value of the credit default swap.
In our commercial mortgage backed securitization operation, we enter into commitmentsA treasury lock is an agreement that allows the holder to fund commercial mortgage loans at specifiedlock in an interest ratesrate. If the interest rate increases, the holder is entitled to receive a payment from the counterparty to the agreement equal to the present value of the difference in the current interest rate and other applicable terms within specified periodsthe locked-in interest rate. If the interest rate decreases, the holder must pay the counterparty to the agreement an amount equal to the present value of time. These commitments are legally bindingthe difference in the current interest rate and the locked-in interest rate. We use treasury lock agreements to extend credit to a counterparty. Loan commitments that will be held for sale are recognized as interest rate lock commitment derivatives that are recorded at fair value. Fairhedge against changes in the value is determined by discounting the expected total cash flows using market rates that are applicable to the yield, credit qualityof anticipated transactions and maturity of each commitment. Loan commitments that are related to the origination of mortgage loans that will be held for investment are not accounted for as derivatives and, accordingly, are not recognized in our financial statements.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
8. Derivative Financial Instruments — (continued)commitments.
Commodity swaps are used to sell or buy protection on commodity prices in return for receiving or paying a quarterly premium. We purchased a AAA rated secured limited recourse notenotes from a VIEVIEs that isare consolidated in our financial results. This VIE usesThese VIEs use a commodity swap to enhance the return on an investment portfolio by selling protection on a static portfolio of commodity trigger swaps, each referencing a base or precious metal. The portfolio of commodity trigger swaps is a portfolio of deep out-of-the-money European puts on various base or precious metals. The VIE providesVIEs provide mezzanine protection that the average spot rate will not fall below a certain trigger price on each commodity trigger swap in the portfolio and receives guaranteed quarterly premiums in return until maturity. At the same time the VIE entersVIEs enter into this synthetic transaction, it buysthey buy a quality cash bond to match against the commodity swap.swaps.
Exposure
Our risk of loss is typically limited to the fair value of our derivative instruments and not to the notional or contractual amounts of these derivatives. Risk arises from changes in the fair value of the underlying instruments. We are also exposed to credit losses in the event of nonperformance of the counterparties. Our current credit exposure is limited to the value of derivatives that have become favorable to us. This credit risk is minimized by purchasing such agreements from financial institutions with high credit ratings and by establishing and monitoring exposure limits. We also utilize various credit enhancements, including collateral and credit triggers to reduce the credit exposure to our derivative instruments.
Our derivative transactions are generally documented under International Swaps and Derivatives Association, Inc. Master Agreements. Management believes that such agreements provide for legally enforceable set-off and close-out
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
8. Derivative Financial Instruments — (continued)
netting of exposures to specific counterparties. Under such agreements, in connection with an early termination of a transaction, we are permitted to set off our receivable from a counterparty against our payables to the same counterparty arising out of all included transactions.
Prior We do not offset fair value amounts recognized for the right to reclaim cash collateral or the application of the aforementioned credit enhancements, the gross exposureobligation to credit risk with respect to thesereturn cash collateral against fair value amounts recognized for derivative instruments was $752.4executed with the same counterparties under master netting agreements.
We posted $372.8 million and $472.9$126.8 million atin cash and securities under collateral arrangements as of December 31, 20062008 and 2005, respectively. Subsequent2007, respectively, to the applicationsatisfy collateral requirements associated with our derivative credit support agreements.
As of such credit enhancements, the net exposure to credit risk was $554.9December 31, 2008 and 2007, we had received $257.2 million and $375.3$314.8 million, at December 31, 2006 and 2005, respectively.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
8. Derivative Financial Instruments — (continued)respectively of cash collateral associated with our derivative credit support annex agreements.
The notional amounts and credit exposure of our derivative financial instruments by type were as follows:
| | December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2006 | 2005 | December 31, | ||||||||||
| | (in millions) | 2008 | 2007 | ||||||||||
| Notional amounts of derivative instruments with regard to U.S. operations | |||||||||||||
| | (in millions) | ||||||||||||
Notional amounts of derivative instruments | |||||||||||||
| Interest rate swaps | $ | 12,365.5 | $ | 8,531.3 | $ | 24,148.6 | $ | 18,627.3 | |||||
| Foreign currency swaps | 5,307.0 | 3,830.4 | 6,298.7 | 6,349.2 | |||||||||
Embedded derivative financial instruments | 2,940.4 | 2,088.9 | |||||||||||
| Credit default swaps | 1,550.9 | 1,297.6 | 1,948.9 | 1,134.8 | |||||||||
| Embedded derivative financial instruments | 1,277.6 | 802.5 | |||||||||||
Options | 797.5 | 572.0 | |||||||||||
Futures | 161.0 | 57.7 | |||||||||||
| Swaptions | 643.4 | 684.5 | 94.8 | 488.8 | |||||||||
| Call options | 314.0 | 189.8 | |||||||||||
| Currency forwards | 235.3 | 509.2 | 52.1 | 361.9 | |||||||||
| Futures | 55.0 | 58.9 | |||||||||||
| Bond options | 21.0 | 38.5 | |||||||||||
| Commodity swaps | 20.0 | — | 40.0 | 40.0 | |||||||||
| Interest rate lock commitments | 8.8 | 392.3 | |||||||||||
| Total return swaps | — | 100.0 | |||||||||||
| Mortgage-backed forwards and options | — | 39.3 | |||||||||||
| 21,798.5 | 16,474.3 | ||||||||||||
Notional amounts of derivative instruments with regard to international operations | |||||||||||||
| Embedded derivative financial instruments | 401.8 | 397.0 | |||||||||||
| Currency forwards | 107.4 | 57.4 | |||||||||||
| Foreign currency swaps | 24.1 | 24.1 | |||||||||||
Treasury lock agreements | — | 150.0 | |||||||||||
| Total notional amounts at end of year | $ | 22,331.8 | $ | 16,952.8 | $ | 36,482.0 | $ | 29,870.6 | |||||
Gross credit exposure of derivative instruments with regard to U.S. operations | |||||||||||||
Credit exposure of derivative instruments | |||||||||||||
Interest rate swaps | $ | 1,105.1 | $ | 286.0 | |||||||||
| Foreign currency swaps | $ | 560.5 | $ | 338.4 | 562.5 | 805.5 | |||||||
| Interest rate swaps | 132.8 | 89.3 | |||||||||||
| Call options | 30.6 | 18.0 | |||||||||||
Options | 222.1 | 64.4 | |||||||||||
| Credit default swaps | 15.7 | 14.0 | 70.7 | 5.6 | |||||||||
Currency forwards | 0.2 | 6.2 | |||||||||||
| Commodity swaps | 0.7 | — | — | 0.3 | |||||||||
| Bond options | 0.4 | 0.6 | |||||||||||
| Currency forwards | 0.3 | 1.6 | |||||||||||
| Total credit exposure at end of year | 741.0 | 461.9 | 1,960.6 | 1,168.0 | |||||||||
Gross credit exposure of derivative instruments with regard to international operations | |||||||||||||
| Currency forwards | 7.3 | 9.8 | |||||||||||
| Foreign currency swaps | 4.1 | 1.2 | |||||||||||
Less: Collateral received | 278.5 | 326.5 | |||||||||||
| Total credit exposure at end of year | $ | 752.4 | $ | 472.9 | |||||||||
Net credit exposure at end of year | $ | 1,682.1 | $ | 841.5 | |||||||||
The net interest effect of interest rate swap, currency swap and credit default swap transactions is recorded as an adjustment to net investment income or interest expense, as appropriate, over the periods covered by the agreements.
The fair value of our derivative instruments classified as assets at December 31, 20062008 and 2005,2007, was $710.6$1,877.8 million and $430.3$1,076.0 million, respectively, and was reported with other investments on the consolidated statements of financial position. The fair value of derivative instruments classified as liabilities at December 31, 20062008 and 2005,2007, was $269.0$2,139.1 million and $190.1$607.7 million, respectively, and was reported with other liabilities on the consolidated statements of financial position. The fair value of embedded derivative liabilities reported with contractholder funds on the consolidated statements of financial position at December 31, 2008 and 2007, was $60.2 million and $49.3 million, respectively. The fair value of embedded derivative liabilities reported with other liabilities on the consolidated statements of financial position at December 31, 2008 and 2007, was $109.3 million and $166.2 million, respectively.
Credit Derivatives Sold
When we sell credit protection, we are exposed to the underlying credit risk similar to purchasing a fixed maturity security instrument. The majority of our credit derivative contracts sold reference a single name or reference security (referred to as "single name credit default swaps"). The remainder of our credit derivatives reference either a basket or index of securities. These instruments are either referenced in an over-the-counter credit derivative transaction, or embedded within an investment structure that has been fully consolidated into our financial statements.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
8. Derivative Financial Instruments — (continued)
These credit derivative transactions are subject to events of default defined within the terms of the contract, which normally consist of bankruptcy, failure to pay, or modified restructuring of the reference entity and/or issue. If a default event occurs for a reference name or security, we are obligated to pay the counterparty an amount equal to the notional amount of the credit derivative transaction. As a result, our maximum future payment is equal to the notional amount of the credit derivative. In certain cases, we also have purchased credit protection with identical underlyings to certain of our sold protection transactions. The effect of this purchased protection would reduce our total maximum future payments by $60.8 million and $10.0 million and these credit derivative transactions have a net fair value of $21.2 million and $0.2 million at December 31, 2008 and 2007, respectively. Our potential loss could also be reduced by any amount recovered in the default proceedings of the underlying credit name.
We purchased certain investment structures with embedded credit features that are fully consolidated into our financial statements. This consolidation results in recognition of the underlying credit derivatives and collateral within the structure, typically high quality fixed maturity securities that are owned by a special purpose vehicle. These credit derivatives reference a single name or several names in a basket structure. In the event of default, the collateral within the structure would typically be liquidated to pay the claims of the credit derivative counterparty.
The following tables show our credit default swap protection sold by types of contract, types of referenced/underlying asset class and external agency rating for the underlying reference security as of December 31, 2008 and 2007. The maximum future payments are undiscounted and have not been reduced by the effect of any offsetting transactions, collateral or recourse features described above.
| | December 31, 2008 | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Notional amount | Fair value | Maximum future payments | Weighted average expected life (in years) | |||||||||||
| | (in millions) | | |||||||||||||
Single name credit default swaps | |||||||||||||||
Corporate debt | |||||||||||||||
AAA | $ | 10.0 | $ | (1.0 | ) | $ | 10.0 | 4.5 | |||||||
AA | 135.0 | (4.6 | ) | 135.0 | 5.4 | ||||||||||
A | 554.0 | (25.8 | ) | 554.0 | 4.8 | ||||||||||
BBB | 305.0 | (24.4 | ) | 305.0 | 2.7 | ||||||||||
BB | 33.0 | (1.4 | ) | 33.0 | 0.5 | ||||||||||
Structured finance | |||||||||||||||
A | 9.9 | (7.9 | ) | 9.9 | 3.5 | ||||||||||
BBB | 16.0 | (15.0 | ) | 16.0 | 22.5 | ||||||||||
BB | 22.0 | (18.1 | ) | 22.0 | 7.1 | ||||||||||
Total single name credit default swaps | 1,084.9 | (98.2 | ) | 1,084.9 | 4.4 | ||||||||||
Basket and index credit default swaps | |||||||||||||||
Corporate debt | |||||||||||||||
AAA | 35.0 | (0.2 | ) | 35.0 | 1.0 | ||||||||||
A | 20.0 | (1.4 | ) | 20.0 | 1.6 | ||||||||||
BBB | 35.0 | (16.3 | ) | 35.0 | 2.6 | ||||||||||
BB | 130.0 | (53.3 | ) | 130.0 | 1.5 | ||||||||||
CCC | 20.0 | (20.0 | ) | 20.0 | 3.0 | ||||||||||
Government/municipalities | |||||||||||||||
AA | 50.0 | (19.3 | ) | 50.0 | 6.2 | ||||||||||
Structured finance | |||||||||||||||
AA | 25.0 | (15.4 | ) | 25.0 | 8.6 | ||||||||||
Total basket and index credit default swaps | 315.0 | (125.9 | ) | 315.0 | 3.0 | ||||||||||
Total credit default swap protection sold | $ | 1,399.9 | $ | (224.1 | ) | $ | 1,399.9 | 4.1 | |||||||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
8. Derivative Financial Instruments — (continued)
| | December 31, 2007 | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Notional amount | Fair value | Maximum future payments | Weighted average expected life (in years) | |||||||||||
| | (in millions) | | |||||||||||||
Single name credit default swaps | |||||||||||||||
Corporate debt | |||||||||||||||
AA | $ | 100.0 | $ | 0.1 | $ | 100.0 | 6.4 | ||||||||
A | 166.0 | (0.5 | ) | 166.0 | 3.7 | ||||||||||
BBB | 231.0 | (2.3 | ) | 231.0 | 3.9 | ||||||||||
BB | 48.0 | (0.1 | ) | 48.0 | 2.3 | ||||||||||
Structured finance | |||||||||||||||
AA | 9.9 | (1.2 | ) | 9.9 | 4.6 | ||||||||||
BBB | 37.0 | (15.1 | ) | 37.0 | 5.1 | ||||||||||
BB | 45.0 | (12.1 | ) | 45.0 | 12.4 | ||||||||||
Total single name credit default swaps | 636.9 | (31.2 | ) | 636.9 | 4.8 | ||||||||||
Baskets and index credit default swaps | |||||||||||||||
Corporate debt | |||||||||||||||
AAA | 55.0 | (7.0 | ) | 55.0 | 2.8 | ||||||||||
AA | 35.0 | (2.9 | ) | 35.0 | 3.7 | ||||||||||
A | 209.5 | (0.1 | ) | 209.5 | 3.0 | ||||||||||
BBB | 20.0 | 0.2 | 20.0 | 2.5 | |||||||||||
Government/municipalities | |||||||||||||||
AA | 80.0 | (6.6 | ) | 80.0 | 6.3 | ||||||||||
Structured finance | |||||||||||||||
AA | 20.0 | (5.6 | ) | 20.0 | 7.5 | ||||||||||
BBB | 5.0 | (1.4 | ) | 5.0 | 18.2 | ||||||||||
Total baskets and index credit default swaps | 424.5 | (23.4 | ) | 424.5 | 4.0 | ||||||||||
Total credit default swap protection sold | $ | 1,061.4 | $ | (54.6 | ) | $ | 1,061.4 | 4.5 | |||||||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
8. Derivative Financial Instruments — (continued)
We also have invested in available-for-sale fixed maturity securities that contain credit default swaps that do not require bifurcation. These securities are subject to the credit risk of the issuer, normally a special purpose vehicle, which consists of the underlying credit default swaps and high quality fixed maturity securities that serve as collateral. A default event occurs if the cumulative losses exceed a specified attachment point, which is typically not the first loss of the portfolio. If a default event occurs that exceeds the specified attachment point, our investment may not be fully returned. We would have no future potential payments under these investments. The following tables show by the types of referenced/underlying asset class and external rating of the available-for-sale fixed maturity security our fixed maturity securities with nonbifurcatable embedded credit derivatives as of December 31, 2008 and 2007.
| | December 31, 2008 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | Amortized cost | Carrying value | Weighted average expected life (in years) | ||||||||
| | (in millions) | | |||||||||
Corporate debt | |||||||||||
AAA | $ | 55.0 | $ | 25.9 | 4.5 | ||||||
AA | 5.0 | 4.0 | 1.3 | ||||||||
A | 35.0 | 19.0 | 3.1 | ||||||||
BB | 44.9 | 16.5 | 5.9 | ||||||||
B | 1.4 | 1.4 | 8.7 | ||||||||
C | 8.8 | 5.7 | 8.0 | ||||||||
Structured finance | |||||||||||
AAA | 32.0 | 17.1 | 5.5 | ||||||||
AA | 47.4 | 18.4 | 5.6 | ||||||||
A | 66.0 | 15.1 | 5.5 | ||||||||
BBB | 34.4 | 14.4 | 6.5 | ||||||||
BB | 54.8 | 7.0 | 8.2 | ||||||||
CCC | 0.4 | 0.4 | 3.0 | ||||||||
Total fixed maturity securities with credit derivatives | $ | 385.1 | $ | 144.9 | 5.8 | ||||||
| | December 31, 2007 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | Amortized cost | Carrying value | Weighted average expected life (in years) | ||||||||
| | (in millions) | | |||||||||
Corporate debt | |||||||||||
AAA | $ | 68.3 | $ | 68.0 | 1.4 | ||||||
AA | 216.8 | 181.3 | 7.3 | ||||||||
A | 90.3 | 75.7 | 6.4 | ||||||||
Structured finance | |||||||||||
AAA | 67.4 | 58.2 | 7.9 | ||||||||
AA | 42.5 | 23.7 | 5.6 | ||||||||
A | 89.0 | 62.4 | 5.4 | ||||||||
BBB | 94.6 | 62.2 | 8.7 | ||||||||
Total fixed maturity securities with credit derivatives | $ | 668.9 | $ | 531.5 | 6.5 | ||||||
Fair Value Hedges
We use fixed-to-floating rate interest rate swaps to more closely align the interest rate characteristics of certain assets and liabilities. In general, these swaps are used in asset and liability management to modify duration.duration, which is a measure of sensitivity to interest rate changes.
We enter into currency exchange swap agreements to convert certain foreign denominated assets and liabilities into U.S. dollar floating-rate denominated instruments to eliminate the exposure to future currency volatility on those items.
We use interest rates swaps and have used total return swaps
Principal Financial Group, Inc.
Notes to hedge interest rate and spread risk in our commercial mortgage securitization operations.Consolidated Financial Statements — (continued)
8. Derivative Financial Instruments — (continued)
We also sell callable investment-type agreements and use cancellable interest rate swaps and written interest rate swaptions to transformhedge the changes in fair value of the callable liability into a fixed term liability.feature.
The net interest effect of interest rate swap and currency swap transactions for derivatives in fair value hedges is recorded as an adjustment to income or expense of the underlying hedged item in our consolidated statements of operations.
We recognized a pre-tax net gain (loss) of $(12.5) million, $(7.9) million and $4.7 million $(11.8) millionin 2008, 2007, and $(28.7) million in 2006, 2005 and 2004, respectively, relating to the ineffective portion of our fair value hedges, which was reported with net realized/unrealizedrealized capital gains (losses) onin our consolidated statements of operations. All gains or losses on derivatives were included in the assessment of hedge effectiveness.
Cash Flow Hedges
We also utilize floating-to-fixed rate interest rate swaps to eliminate the variability in cash flows of recognized financial assets and liabilities and forecasted transactions. We have also utilized treasury lock agreements to eliminate the variability in cash flows of forecasted transactions.
We enteredenter into currency exchange swap agreements to convert both principal and interest payments of certain foreign denominated assets and liabilities into U.S. dollar denominated fixed-rate instruments to eliminate the exposure to future currency volatility on those items.
The net interest effect of interest rate swap and currency swap transactions for derivatives in cash flow hedges is recorded as an adjustment to income or expense of the underlying hedged item in our consolidated statements of operations.
In 2006, 20052008, 2007 and 2004,2006, we recognized a $4.4pre-tax increase (decrease) in fair value of $29.3 million, $27.0$(25.7) million and $57.8$6.8 million, after-tax increase in value, respectively, related to cash flow hedges in accumulated other comprehensive income. During this time period, none of our cash flow hedges have been discontinued because it was probable that the original forecasted transaction would not occur by the end of the originally specified time period. We reclassified $0.7pre-tax net losses of $3.0 million, $21.3$3.6 million, and $5.2$0.7 million in net losses from accumulated comprehensive income into net income during 2006, 2005,2008, 2007 and 20042006, respectively, which are the portion of deferred losses related to the variability in hedged cash flows that were hedged and impacted net income in those periods. We expect to reclassify net lossesgains of $3.6$21.6 million in the next 12 months.
For the years ended December 31, 2006, 20052008, 2007 and 2004,2006, we recognized a pre-tax gain (loss) of $2.5$(1.4) million, $1.2$2.0 million, and $1.9$2.5 million in net income due to cash flow hedge ineffectiveness, respectively. All gains or losses on derivatives were included in the assessment of hedge effectiveness.
The maximum length of time that we are hedging our exposure to the variability in future cash flows for forecasted transactions, excluding those related to the payments of variable interest on existing financial assets and liabilities, is 12.511.5 years. At December 31, 2008, we had $162.3 million of gross unrealized gains and $149.3 million of gross unrealized losses reported in accumulated other comprehensive income on the consolidated statements of financial position related to hedges of forecasted transactions.
Net Investment in Foreign Operations Hedges
From time to time, we may take measures to hedge our net investments in our foreign subsidiaries from currency risks. In 2005, we used currency forwards to hedge a portion of our net investment in our Mexican operations and our net investment in our Chilean operations. We did not use any currency forwards during 2006 and did not have any currency forwards outstanding at December 31, 20062008 or 2007 to hedge our net investment in foreign operations. We recognized a $2.7 million pre-tax loss in other comprehensive income from these contracts for the years ended December 31, 2005. There was no ineffectiveness recorded for the year ended December 31, 2005. All gains or losses on derivatives were included in the assessment of hedge effectiveness.
Derivatives Not Designated as Hedging Instruments
Our use of futures, MBS forwards, certain swaptions and swaps, equity call options bond options,and currency forwards and interest rate lock commitments are effective from an economic standpoint, but they have not been designated as hedges under SFAS 133.for financial reporting purposes. As such, periodic changes in the market value of these instruments, which includes unrealized gains and losses as well as periodic and final settlements, flow directly into net income.realized capital gains (losses). For the years ended December 31, 2008, 2007 and 2006, 2005 and 2004,pre-tax gains (losses) of $11.1$(153.5) million, $13.1$(70.6) million and $(59.0)$10.4 million, respectively, were recognized in net income from market value changes of derivatives not receiving hedge accounting treatment.treatment, including market value changes of embedded derivatives that have been bifurcated from the host contract.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
8. Derivative Financial Instruments — (continued)
Embedded Derivatives
We may purchase or issue certain financial instruments or products that contain a derivative instrument that is embedded in the financial instrument or product. When it is determined that the embedded derivative possesses economic characteristics that are not clearly or closely related to the economic characteristics of the host contract and a separate instrument with the same terms would qualify as a derivative instrument, the embedded derivative is bifurcated from the host for measurement purposes. The embedded derivative, which is reported with the host instrument in the consolidated statements of financial position, is carried at fair value with changes in fair value reported in net income.
We sell investment-type liability contracts in which the return is tied to an external equity index, a leveraged inflation index or leveraged reference swap. These returns are embedded options that are bifurcated from the host investment-type contract and accounted for separately. We economically hedge the embedded equity derivative by writing equity call options with identical features to convert the overall contract into a fixed-rate liability, effectively eliminating the equity component altogether. For the years ended December 31, 2006, 20052008, 2007 and 2004,2006, respectively, we recognized a $3.1pre-tax gain (loss) of $(8.1) million, $1.0$0.1 million and $3.2$3.1 million pre-tax gain on the purchased equity call options and a $3.1pre-tax gain (loss) of $8.1 million, $1.0$(0.1) million and $3.2$(3.1) million pre-tax loss on the change in fair value of the embedded derivatives.derivatives in net realized capital gains (losses). We economically hedge the leveraged embedded derivatives with interest rate swaps and currency swaps to convert them to a fixed-rate liability or floating rate U.S. dollar liability. For the yearyears ended December 31, 2008, 2007 and 2006, respectively, we recognized a $2.6pre-tax gain (loss) of $2.7 million, pre-tax loss$4.6 million and $(2.6) million on the swaps and a pre-tax gain (loss) of $(6.3) million, $(4.6) million and $6.0 million pre-tax gain on the change in fair value of the embedded derivatives.derivatives in net realized capital gains (losses).
We offer a guaranteed fund as an investment option in our defined contribution plans in Hong Kong. This fund contains an embedded option, or guarantee, that has been bifurcated and accounted for separately, with changesseparately. This embedded derivative has a fair value only when the fair value of future benefits paid under the guarantee exceeds the fair value of future assessments charged for providing the guarantee. For the year ended December 31, 2008, we recognized a $20.2 million pre-tax loss on the change in fair value reportedof the embedded derivative in net realized/unrealizedrealized capital gains (losses). There was no pre-tax gain or loss recognized for the years ended December 31, 20062007 and 2005, because the fair value of the guarantees2006.
We have group benefit plan contracts that have guaranteed separate accounts as an investment option. These contracts contain an embedded option, or guarantee, that has been less than the fair value of the benefits. We recognized a $0.1 million pre-tax gainbifurcated and accounted for separately. For the year ended December 31, 2004.2008, we recognized a $7.6 million pre-tax loss on the change in fair value of the embedded derivative in net realized capital gains (losses). There was no pre-tax gain or loss recognized for the years ended December 31, 2007 and 2006.
We contributed undated subordinated floating rate notes to three grantor trusts. The trusts separated the cash flows of the underlying notes by issuing an interest-only certificate and a residual certificate related to each note contributed. We retained the interest-only certificates and the residual certificates were subsequently sold to a third party. We have determined these grantor trusts are variable interest entitiesVIEs and it is necessary for us to consolidate these entities. The obligation to deliver the underlying securities to residual certificate holders of $156.8$103.8 million and $155.6 million as of December 31, 2006,2008 and $147.4 million as of December 31, 20052007, respectively is classified as an other liability and contains an embedded derivative of the forecasted transaction to deliver the underlying securities. For the years ended December 31, 2006, 20052008, 2007 and 2004,2006, respectively, we recognized a $7.2 million pre-tax gain a $2.7of $70.0 million, pre-tax gain$19.6 million and a $28.2$7.2 million pre-tax loss on the change in fair value of the obligation, which is reflected in accumulated other comprehensive income on the consolidated statements of financial position.
During 2005, we purchased existing Class A units of a trust that represent interest payments on the underlying security within the trust. The trust also issued Class B units representing the residual interests in the underlying security. We have determined that this trust is a variable interest entityVIE and subsequent to this purchase it is necessary for us to consolidate this entity. The obligation to deliver the underlying security to the Class B unit holder of $12.0$5.5 million and $10.5$10.6 million as of December 31, 20062008 and 2005,2007, respectively, is classified as an other liability and contains an embedded derivative of the forecasted transaction to deliver the underlying security. For the years ended December 31, 20062008, 2007 and 2005,2006, respectively, we recognized a $0.5pre-tax gain (loss) of $6.1 million, $2.3 million and $0.4$(0.5) million pre-tax loss on the change in fair value of the obligation, which is reflected in accumulated other comprehensive income on the consolidated statements of financial position.
We offer a fixed deferred annuity product that credits interest based on changes in an external equity index. It contains an embedded derivative that has been bifurcated and accounted for separately, with changes in fair value reported in net realized/unrealizedrealized capital gains (losses). We economically hedge the fixed deferred annuity product by purchasing options that match the product's profile. For the years ended December 31, 2006, 20052008, 2007 and 2004,2006, respectively, we recognized a $5.3pre-tax gain (loss) of $(12.6) million, $1.5$1.2 million and $0.5$5.3 million pre-tax gain on the call spread options purchased and a $6.1 million, $2.3 million and $0.2 million pre-tax loss on the change in fair value of the embedded derivatives.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
8. Derivative Financial Instruments — (continued)
a pre-tax gain (loss) of $13.1 million, $(2.7) million and $(6.1) million on the change in fair value of the embedded derivatives.
We offer certain variable annuity products with a GMWB rider. The GMWB provides that the contractholder will receive at least their principal deposit back through withdrawals of up to a specified annual amount, even if the account value is reduced to zero. The GMWB represents an embedded derivative in the variable annuity contract that is required to be reported separately from the host variable annuity contract. Declines in the equity market may increase our exposure to benefits under contracts with the GMWB. We economically hedge the GMWB exposure using futures, options and interest rate swaps. For the years ended December 31, 2006,2008, 2007 and 2005,2006, respectively, we recognized in net income a $4.2pre-tax gain (loss) of $171.5 million, $8.9 million and $0.5$(4.2) million pre-tax loss on the hedging instruments and a $2.8 million pre-tax gain (loss) of $(37.4) million, $(19.7) million and $0.2$2.8 million pre-tax loss on the change in fair value of the embedded derivatives, respectively. The adoption of SFAS 157 during 2008 resulted in the incorporation of our own non-performance risk and additional risk margins in the valuation of the GMWB. In 2008, the difference in the gain on the hedging instruments and the loss on the GMWB is largely attributable to the inclusion of our own non-performance risk in the valuation of the GMWB, which is a risk we do not attempt to hedge.
9. Closed Block
In connection with the 1998 MIHC formation, Principal Life formed a Closed Block to provide reasonable assurance to policyholders included therein that, after the formation of the MIHC, assets would be available to maintain dividends in aggregate in accordance with the 1997 policy dividend scales, if the experience underlying such scales continued. Assets of Principal Life were allocated to the Closed Block in an amount that produces cash flows which, together with anticipated revenue from policies and contracts included in the Closed Block, were expected to be sufficient to support the Closed Block policies, including, but not limited to, provisions for payment of claims, certain expenses, charges and taxes, and to provide for continuation of policy and contract dividends in aggregate in accordance with the 1997 dividend scales, if the experience underlying such scales continues, and to allow for appropriate adjustments in such scales, if such experience changes. Due to adjustable life policies being included in the Closed Block, the Closed Block is charged with amounts necessary to properly fund for certain adjustments, such as face amount and premium increases, that are made to these policies after the Closed Block inception date. These amounts are referred to as Funding Adjustment Charges and are treated as capital transfers from the Closed Block.
Assets allocated to the Closed Block inure solely to the benefit of the holders of policies included in the Closed Block. Closed Block assets and liabilities are carried on the same basis as other similar assets and liabilities. Principal Life will continue to pay guaranteed benefits under all policies, including the policies within the Closed Block, in accordance with their terms. If the assets allocated to the Closed Block, the investment cash flows from those assets and the revenues from the policies included in the Closed Block, including investment income thereon, prove to be insufficient to pay the benefits guaranteed under the policies included in the Closed Block, Principal Life will be required to make such payments from their general funds. No additional policies were added to the Closed Block, nor was the Closed Block affected in any other way, as a result of the demutualization.
A PDOpolicyholder dividend obligation ("PDO") is required to be established for earnings in the Closed Block that are not available to stockholders. A model of the Closed Block was established to produce the pattern of expected earnings in the Closed Block (adjusted to eliminate the impact of related amounts in accumulated other comprehensive income).
If actual cumulative earnings of the Closed Block are greater than the expected cumulative earnings of the Closed Block, only the expected cumulative earnings will be recognized in income with the excess recorded as a PDO. This PDO represents undistributed accumulated earnings that will be paid to Closed Block policyholders as additional policyholder dividends unless offset by future performance of the Closed Block that is less favorable than originally expected. If actual cumulative performance is less favorable than expected, only actual earnings will be recognized in income. At December 31, 20062008 and 2005,2007, cumulative actual earnings have been less than cumulative expected earnings. As of December 31, 2006,Additionally, cumulative net unrealized gains were(losses) did not greater than expected.exceed the cumulative expected earnings. Therefore, there was no PDO liability as of December 31, 2006. However, cumulative net unrealized gains were greater than expected, resulting in the recognition of a PDO of $33.7 million,2008 and $118.5 million as of December 31, 2005 and 2004, respectively.2007.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
9. Closed Block — (continued)
Closed Block liabilities and assets designated to the Closed Block were as follows:
| | | December 31, | | December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | 2006 | 2005 | | 2008 | 2007 | |||||||||
| | | (in millions) | | (in millions) | |||||||||||
| Closed Block liabilities | Closed Block liabilities | Closed Block liabilities | |||||||||||||
| Future policy benefits and claims | Future policy benefits and claims | $ | 5,376.0 | $ | 5,387.1 | Future policy benefits and claims | $ | 5,309.9 | $ | 5,362.1 | |||||
| Other policyholder funds | Other policyholder funds | 26.4 | 27.3 | Other policyholder funds | 25.9 | 26.7 | |||||||||
| Policyholder dividends payable | Policyholder dividends payable | 357.4 | 361.0 | Policyholder dividends payable | 328.9 | 351.1 | |||||||||
| Policyholder dividend obligation | — | 33.7 | |||||||||||||
| Other liabilities | Other liabilities | 61.5 | 57.0 | Other liabilities | 47.1 | 71.1 | |||||||||
| Total Closed Block liabilities | 5,821.3 | 5,866.1 | Total Closed Block liabilities | 5,711.8 | 5,811.0 | ||||||||||
Assets designated to the Closed Block | Assets designated to the Closed Block | Assets designated to the Closed Block | |||||||||||||
| Fixed maturities, available-for-sale | Fixed maturities, available-for-sale | 3,023.7 | 2,989.8 | Fixed maturities, available-for-sale | 2,429.5 | 3,032.4 | |||||||||
Fixed maturities, trading | Fixed maturities, trading | 32.8 | 10.2 | ||||||||||||
| Equity securities, available-for-sale | Equity securities, available-for-sale | 65.9 | 71.5 | Equity securities, available-for-sale | 15.9 | 22.2 | |||||||||
| Mortgage loans | Mortgage loans | 640.3 | 716.4 | Mortgage loans | 618.1 | 638.1 | |||||||||
| Policy loans | Policy loans | 755.2 | 754.6 | Policy loans | 758.2 | 753.4 | |||||||||
| Other investments | Other investments | 84.4 | 47.7 | Other investments | 183.8 | 122.8 | |||||||||
| Total investments | 4,569.5 | 4,580.0 | Total investments | 4,038.3 | 4,579.1 | ||||||||||
| Cash and cash equivalents | Cash and cash equivalents | 50.9 | 34.3 | Cash and cash equivalents | 39.4 | — | |||||||||
| Accrued investment income | Accrued investment income | 70.8 | 71.0 | Accrued investment income | 70.1 | 73.3 | |||||||||
| Deferred income tax asset | Deferred income tax asset | 72.8 | 73.6 | Deferred income tax asset | 270.4 | 94.8 | |||||||||
| Premiums due and other receivables | Premiums due and other receivables | 17.7 | 20.2 | Premiums due and other receivables | 18.2 | 20.1 | |||||||||
| Other assets | Other assets | 42.3 | 35.9 | Other assets | — | 39.2 | |||||||||
| Total assets designated to the Closed Block | 4,824.0 | 4,815.0 | Total assets designated to the Closed Block | 4,436.4 | 4,806.5 | ||||||||||
| Excess of Closed Block liabilities over assets designated to the Closed Block | Excess of Closed Block liabilities over assets designated to the Closed Block | 997.3 | 1,051.1 | Excess of Closed Block liabilities over assets designated to the Closed Block | 1,275.4 | 1,004.5 | |||||||||
| Amounts included in other comprehensive income | 55.7 | 61.5 | |||||||||||||
Amounts included in accumulated other comprehensive income (loss) | Amounts included in accumulated other comprehensive income (loss) | (307.7 | ) | 10.9 | |||||||||||
| Maximum future earnings to be recognized from Closed Block assets and liabilities | Maximum future earnings to be recognized from Closed Block assets and liabilities | $ | 1,053.0 | $ | 1,112.6 | Maximum future earnings to be recognized from Closed Block assets and liabilities | $ | 967.7 | $ | 1,015.4 | |||||
Closed Block revenues and expenses were as follows:
| | For the year ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2008 | 2007 | 2006 | ||||||||
| | (in millions) | ||||||||||
Revenues | |||||||||||
Premiums and other considerations | $ | 550.4 | $ | 576.6 | $ | 596.7 | |||||
Net investment income | 280.9 | 288.3 | 293.2 | ||||||||
Net realized capital losses | (12.7 | ) | (12.9 | ) | (0.9 | ) | |||||
Total revenues | 818.6 | 852.0 | 889.0 | ||||||||
Expenses | |||||||||||
Benefits, claims and settlement expenses | 467.6 | 485.8 | 497.0 | ||||||||
Dividends to policyholders | 261.8 | 286.4 | 287.0 | ||||||||
Operating expenses | 7.4 | 12.1 | 5.5 | ||||||||
Total expenses | 736.8 | 784.3 | 789.5 | ||||||||
Closed Block revenue, net of Closed Block expenses, before income taxes | 81.8 | 67.7 | 99.5 | ||||||||
Income taxes | 25.6 | 20.7 | 32.2 | ||||||||
Closed Block revenue, net of Closed Block expenses and income taxes | 56.2 | 47.0 | 67.3 | ||||||||
Funding adjustment charges | (8.5 | ) | (9.4 | ) | (7.7 | ) | |||||
Closed Block revenue, net of Closed Block expenses, income taxes and funding | $ | 47.7 | $ | 37.6 | $ | 59.6 | |||||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
9. Closed Block — (continued)
Closed Block revenues and expenses were as follows:
| | For the year ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2006 | 2005 | 2004 | ||||||||
| | (in millions) | ||||||||||
| Revenues | |||||||||||
| Premiums and other considerations | $ | 596.7 | $ | 617.7 | $ | 648.7 | |||||
| Net investment income | 293.2 | 294.4 | 301.6 | ||||||||
| Net realized/unrealized capital gains (losses) | (0.9 | ) | 2.3 | (4.1 | ) | ||||||
| Total revenues | 889.0 | 914.4 | 946.2 | ||||||||
| Expenses | |||||||||||
| Benefits, claims and settlement expenses | 497.0 | 518.8 | 515.1 | ||||||||
| Dividends to policyholders | 287.0 | 285.3 | 289.1 | ||||||||
| Operating expenses | 5.5 | 9.1 | 11.6 | ||||||||
| Total expenses | 789.5 | 813.2 | 815.8 | ||||||||
| Closed Block revenue, net of Closed Block expenses, before income taxes | 99.5 | 101.2 | 130.4 | ||||||||
| Income taxes | 32.2 | 32.4 | 42.6 | ||||||||
| Closed Block revenue, net of Closed Block expenses and income taxes | 67.3 | 68.8 | 87.8 | ||||||||
| Funding adjustment charges | (7.7 | ) | (8.7 | ) | (10.1 | ) | |||||
| Closed Block revenue, net of Closed Block expenses, income tax and funding adjustment charges | $ | 59.6 | $ | 60.1 | $ | 77.7 | |||||
The change in maximum future earnings of the Closed Block was as follows:
| | For the year ended December 31, | For the year ended December 31, | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2006 | 2005 | 2004 | 2008 | 2007 | 2006 | ||||||||||||||
| | (in millions) | (in millions) | ||||||||||||||||||
| Beginning of year | $ | 1,112.6 | $ | 1,172.7 | $ | 1,250.4 | $ | 1,015.4 | $ | 1,053.0 | $ | 1,112.6 | ||||||||
| End of year | 1,053.0 | 1,112.6 | 1,172.7 | 967.7 | 1,015.4 | 1,053.0 | ||||||||||||||
| Change in maximum future earnings | $ | (59.6 | ) | $ | (60.1 | ) | $ | (77.7 | ) | $ | (47.7 | ) | $ | (37.6 | ) | $ | (59.6 | ) | ||
Principal Life charges the Closed Block with federal income taxes, payroll taxes, state and local premium taxes and other state or local taxes, licenses and fees as provided in the plan of reorganization.
10. Deferred Policy Acquisition Costs
Policy acquisition costs deferred and amortized in 2006, 20052008, 2007 and 20042006 were as follows:
| | For the year ended December 31, | For the year ended December 31, | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2006 | 2005 | 2004 | 2008 | 2007 | 2006 | ||||||||||||||
| | (in millions) | (in millions) | ||||||||||||||||||
| Balance at beginning of year | $ | 2,174.1 | $ | 1,837.6 | $ | 1,568.9 | $ | 2,810.1 | $ | 2,418.9 | $ | 2,174.1 | ||||||||
| Cost deferred during the year | 498.9 | 482.1 | 477.7 | 680.3 | 606.1 | 498.9 | ||||||||||||||
| Amortized to expense during the year | (239.2 | ) | (246.6 | ) | (210.8 | ) | (373.7 | ) | (357.3 | ) | (239.2 | ) | ||||||||
| Effect of unrealized gains (losses) | (14.9 | ) | 101.0 | 32.1 | ||||||||||||||||
| Other(1) | — | — | (30.3 | ) | ||||||||||||||||
Adjustments related to unrealized (gains) losses on available-for-sale securities and derivatives | 1,036.3 | 143.1 | (14.9 | ) | ||||||||||||||||
Other | — | (0.7 | ) | — | ||||||||||||||||
| Balance at end of year | $ | 2,418.9 | $ | 2,174.1 | $ | 1,837.6 | $ | 4,153.0 | $ | 2,810.1 | $ | 2,418.9 | ||||||||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
11. Insurance Liabilities
Contractholder Funds
Major components of contractholder funds in the consolidated statements of financial position are summarized as follows:
| | | December 31, | | December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | 2006 | 2005 | | 2008 | 2007 | |||||||||
| | | (in millions) | | (in millions) | |||||||||||
| Liabilities for investment-type contracts: | Liabilities for investment-type contracts: | Liabilities for investment-type contracts: | |||||||||||||
| GICs | $ | 12,307.3 | $ | 12,601.6 | GICs | $ | 11,857.4 | $ | 11,698.8 | ||||||
| Funding agreements | 14,242.4 | 11,832.0 | Funding agreements | 15,757.3 | 16,193.4 | ||||||||||
| Other investment-type contracts | 1,277.8 | 1,362.9 | Other investment-type contracts | 987.1 | 1,236.8 | ||||||||||
| Total liabilities for investment-type contracts | Total liabilities for investment-type contracts | 27,827.5 | 25,796.5 | Total liabilities for investment-type contracts | 28,601.8 | 29,129.0 | |||||||||
Liabilities for individual annuities | Liabilities for individual annuities | 6,429.1 | 5,414.0 | Liabilities for individual annuities | 11,131.1 | 8,261.5 | |||||||||
| Universal life and other reserves | Universal life and other reserves | 2,542.4 | 2,401.6 | Universal life and other reserves | 3,353.7 | 2,898.4 | |||||||||
| Total contractholder funds | Total contractholder funds | $ | 36,799.0 | $ | 33,612.1 | Total contractholder funds | $ | 43,086.6 | $ | 40,288.9 | |||||
Our GICs and funding agreements contain provisions limiting early surrenders, which typically include penalties for early surrenders, minimum notice requirements or, in the case of funding agreements with survivor options, minimum pre-death holding periods and specific maximum amounts.
Funding agreements include those issued directly to nonqualified institutional investors, as well as to threefour separate programs where the funding agreements have been issued directly or indirectly to unconsolidated special purpose entities. Claims for principal and interest under funding agreements are afforded equal priority to claims of life insurance and annuity policyholders under insolvency provisions of Iowa Insurance Laws.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
11. Insurance Liabilities — (continued)
We are authorized to issue up to $4.0 billion of funding agreements under a program established in 1998 to support the prospective issuance of medium term notes by an unaffiliated entity in non-U.S. markets. As of December 31, 20062008 and 2005, $3,770.42007, $3,159.1 million and $3,203.6$3,935.3 million, respectively, of liabilities are outstanding with respect to the issuance outstanding under this program. We do not anticipate any new issuance activity under this program as we are authorized to issue up to Euro 4.0 billion (approximately USD$5.3 billion) of funding agreements under a program established in 2006 to support the prospective issuance of medium term notes by an unaffiliated entity in non-U.S. markets. The unaffiliated entity is an unconsolidated special purpose vehicle. As of December 31, 2006, $474.12008 and 2007, $1,415.2 million and $1,469.8 million, respectively, of liabilities are outstanding with respect to the issuance outstanding under this new program.
In addition, we were authorized to issue up to $7.0 billion of funding agreements under a program established in 2001 to support the prospective issuance of medium term notes by an unaffiliated entity in both domestic and international markets. The unaffiliated entity is an unconsolidated qualifying special purpose entity. As of December 31, 20062008 and 2005, $3,747.92007, $2,468.7 million and $4,744.5$3,109.9 million, respectively, of liabilities are being held with respect to the issuance outstanding under this program. We do not anticipate any new issuance activity under this program, given our December 2005 termination of the dealership agreement for this program and the availability of the SEC-registered program described in the following paragraph.
We were authorized to issue up to $4.0 billion of funding agreements under a program established in March 2004 to support the prospective issuance of medium term notes by unaffiliated entities in both domestic and international markets. In February 2006, this program was amended to authorize issuance of up to an additional $5.0 billion in recognition of the use of nearly all $4.0 billion of initial issuance authorization,authorization. In recognition of the use of nearly all $9.0 billion, this program was amended in February 2006November 2007 to authorize issuance of up to an additional $5.0 billion. Under this program, both the notes and the supporting funding agreements are registered with the SEC. As of December 31, 20062008 and 2005, $5,831.42007, $7,655.5 million and $3,667.9$6,748.5 million, respectively, of liabilities are being held with respect to the issuance outstanding under this program. In contrast with direct funding agreements, GIC issuances and the other twothree funding agreement-backed medium term note programs described above, Principal Life's payment obligations on each funding agreement issued under this SEC-registered program are guaranteed by Principal Financial Group, Inc.
Principal Financial Group, Inc.
Notes Due to Consolidated Financial Statements — (continued)a downturn in the credit market, we reduced the amount of medium term note issuances in 2008. As economic conditions change, we will reassess the use of our medium term note programs.
11. Insurance Liabilities — (continued)
Future Policy Benefits and Claims
Activity in the liability forassociated with unpaid accident and health claims which is included with future policy benefits and claims in the consolidated statements of financial position, is summarized as follows:
| | | For the year ended December 31, | | For the year ended December 31, | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | 2006 | 2005 | 2004 | | 2008 | 2007 | 2006 | ||||||||||||||
| | | (in millions) | | (in millions) | ||||||||||||||||||
| Balance at beginning of year | Balance at beginning of year | $ | 814.8 | $ | 747.6 | $ | 719.5 | Balance at beginning of year | $ | 964.3 | $ | 877.2 | $ | 814.8 | ||||||||
| Incurred: | Incurred: | Incurred: | ||||||||||||||||||||
| Current year | 2,047.5 | 1,787.0 | 1,682.9 | Current year | 1,994.5 | 2,160.6 | 2,047.5 | |||||||||||||||
| Prior years | (37.5 | ) | (22.0 | ) | (28.8 | ) | Prior years | (56.7 | ) | (12.8 | ) | (37.5 | ) | |||||||||
| Total incurred | Total incurred | 2,010.0 | 1,765.0 | 1,654.1 | Total incurred | 1,937.8 | 2,147.8 | 2,010.0 | ||||||||||||||
| Payments: | Payments: | Payments: | ||||||||||||||||||||
| Current year | 1,666.9 | 1,444.0 | 1,376.2 | Current year | 1,588.6 | 1,738.5 | 1,666.9 | |||||||||||||||
| Prior years | 280.7 | 253.8 | 249.8 | Prior years | 321.7 | 322.2 | 280.7 | |||||||||||||||
| Total payments | Total payments | 1,947.6 | 1,697.8 | 1,626.0 | Total payments | 1,910.3 | 2,060.7 | 1,947.6 | ||||||||||||||
| Balance at end of year: | Balance at end of year: | Balance at end of year: | ||||||||||||||||||||
| Current year | 380.6 | 343.0 | 306.7 | Current year | 405.9 | 422.1 | 380.6 | |||||||||||||||
| Prior years | 496.6 | 471.8 | 440.9 | Prior years | 585.9 | 542.2 | 496.6 | |||||||||||||||
| Total balance at end of year | Total balance at end of year | $ | 877.2 | $ | 814.8 | $ | 747.6 | Total balance at end of year | $ | 991.8 | $ | 964.3 | $ | 877.2 | ||||||||
The activity summary in the liability for unpaid accident and health claims shows a decrease of $37.5$56.7 million, $22.0$12.8 million and $28.8$37.5 million for the years ended December 31, 2006, 20052008, 2007 and 2004,2006, respectively, relating to prior years. Such liability adjustments, which affected current operations during 2006, 20052008, 2007 and 2004,2006, respectively, resulted in part from developed claims for prior years being different than were anticipated when the liabilities for unpaid accident
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
11. Insurance Liabilities — (continued)
and health claims were originally estimated. These trends have been considered in establishing the current year liability for unpaid accident and health claims. We also had claim adjustment expense liabilities of $33.4$39.1 million, $30.6$37.0 million and $28.3$33.4 million, and related reinsurance recoverables of $4.3 million, $4.2 million and $4.9 million $3.5 millionin 2008, 2007 and $3.6 million in 2006, 2005 and 2004, respectively, which are not included in the rollforward above.
12. Debt
Short-Term Debt
The components of short-term debt as of December 31, 20062008 and 2005,2007, were as follows:
| | December 31, | December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2006 | 2005 | 2008 | 2007 | |||||||||
| | (in millions) | (in millions) | |||||||||||
| Commercial paper | $ | — | $ | 349.9 | $ | 482.3 | $ | 233.3 | |||||
| Other recourse short-term debt | 23.1 | 55.1 | 18.6 | 57.5 | |||||||||
| Nonrecourse short-term debt | 61.0 | 71.4 | |||||||||||
| Total short-term debt | $ | 84.1 | $ | 476.4 | $ | 500.9 | $ | 290.8 | |||||
As of December 31, 2006,2008, we had credit facilities with various financial institutions in an aggregate amount of $887.7$792.4 million. As of December 31, 20062008 and 2005,2007, we had $84.1$500.9 million and $476.4$290.8 million of outstanding borrowings related to our credit facilities, with $74.5 millionzero and $110.6$30.3 million of assets pledged as support, respectively. Assets pledged consisted primarily of commercial mortgages and securities. Our credit facilities also include a $600.0 million commercial paper program, of which we issued $482.3 million as of December 31, 2008, $233.0 million of which was issued under the Federal Reserve's Commercial Paper Funding Facility. Our commercial paper program has a back-stop facility to provide 100% support for our commercial paper program, of which there were no outstanding balances as of December 31, 2006.2008. On October 5, 2008, Lehman Commercial Paper Inc. ("LCP"), a subsidiary of Lehman Brothers Holdings Inc., filed for protection under Chapter 11 of the Federal Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York. LCP is a lender under our credit facilities and had committed to provide $21.0 million under each facility. We are uncertain whether LCP will fulfill its commitments under the credit facilities in light of its bankruptcy filing.
The weighted-average interest rates on short-term borrowings as of December 31, 20062008 and 2005,2007, were 5.6%2.7% and 4.5%5.1% respectively.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
12. Debt — (continued)
Long-Term Debt
The components of long-term debt as of December 31, 20062008 and 2005,2007, were as follows:
| | December 31, | December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2006 | 2005 | 2008 | 2007 | |||||||||
| | (in millions) | (in millions) | |||||||||||
| 8.2% notes payable, due 2009 | $ | 464.5 | $ | 464.3 | $ | 454.9 | $ | 454.7 | |||||
| 4.59% notes payable, due 2011 | 49.7 | 51.6 | |||||||||||
| 4.93% notes payable, due 2011 | 40.5 | 47.3 | |||||||||||
3.31% notes payable, due 2011 | 49.9 | 58.4 | |||||||||||
3.63% notes payable, due 2011 | 25.6 | 29.9 | |||||||||||
| 6.05% notes payable, due 2036 | 601.9 | — | 601.8 | 601.9 | |||||||||
| 8% surplus notes payable, due 2044 | 99.2 | 99.2 | 99.2 | 99.2 | |||||||||
| Nonrecourse mortgages and notes payable | 258.0 | 184.0 | |||||||||||
Non-recourse mortgages and notes payable | 58.7 | 129.8 | |||||||||||
| Other mortgages and notes payable | 40.0 | 52.4 | 0.4 | 24.9 | |||||||||
| Total long-term debt | $ | 1,553.8 | $ | 898.8 | $ | 1,290.5 | $ | 1,398.8 | |||||
The amounts included above are net of the discount and premium associated with issuing these notes, which are being amortized to expense over their respective terms using the interest method.
On October 16 and December 5, 2006, we issued $500.0 million and $100.0 million, respectively, of senior notes from our shelf registration, which was filed with the SEC in December 2003.notes. The notes will bear interest at a rate of 6.05% per year. Interest on the notes is payable semi-annually on April 15 and October 15 beginningeach year and began on April 15, 2007. The notes will mature on October 15, 2036. A portion of the proceeds waswere used to fund the acquisition of WM Advisors, Inc., with the remaining proceeds being used for general corporate purposes.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
12. Debt — (continued)
On November 3, 2005, Principal International de Chile S.A., a wholly owned indirect subsidiary, entered into long-term borrowing agreements with two Chilean banks in the amount of US $93.9 million. This debt is denominated in Unidades de Formento ("UF"), a Chilean inflation-indexed, peso-denominated monetary unit. Of this amount, US $49.0 million of UF +3.31% notes, which was refinanced from +4.59% notesduring 2007, and US $44.9 million of UF +3.63% notes, which was refinanced from +4.93% notesin 2007, mature on November 3, 2011. In November 2007, we paid down US $17.7 million on the UF +3.63% notes. Interest on the notes is payable semi-annually on May 3 and November 3 each year. The debt outstanding and interest expense will vary due to fluctuations in the Chilean peso to US dollar exchange rates and Chilean inflation.
On August 25, 1999, Principal Financial Group (Australia) Holdings Pty. Limited, a wholly owned indirect subsidiary, issued $665.0 million of unsecured redeemable long-term debt. Of this amount, $200.0 million of 7.95% notes matured on August 15, 2004, with the remaining $465.0 million in 8.2% notes due August 15, 2009. In August 2007, we repurchased $10.0 million of the remaining notes, leaving $455.0 million in 8.2% notes due on August 15, 2009. Interest on the notes is payable semiannually on February 15 and August 15 of each year. Principal Financial Group (Australia) Holdings Pty. Limited used the net proceeds from the notes to partially fund the purchase of the outstanding stock of several companies affiliated with Bankers Trust Australia Group. On December 28, 2001, all of the long-term debt obligations of Principal Financial Group (Australia) Holdings Pty. Limited were assumed by its parent, Principal Financial Services, Inc.
On March 10, 1994, Principal Life issued $100.0 million of surplus notes due March 1, 2044, at an 8% annual interest rate. None of our affiliates hold any portion of the notes. Each payment of interest and principal on the notes, however, may be made only with the prior approval of the Commissioner of Insurance of the State of Iowa (the "Commissioner") and only to the extent that Principal Life has sufficient surplus earnings to make such payments. Interest of $8.0 million for each of the years ended December 31, 2006, 20052008, 2007 and 2004 of $8.0 million, $8.0 million and $10.6 million, respectively,2006 was approved by the Commissioner, and charged to expense.
Subject to Commissioner approval, the notes due March 1, 2044, may be redeemed at Principal Life's election on or after March 1, 2014, in whole or in part at a redemption price of approximately 102.3% of par. The approximate 2.3% premium is scheduled to gradually diminish over the following ten years. These notes may be redeemed on or after March 1, 2024, at a redemption price of 100% of the principal amount plus interest accrued to the date of redemption.
The non-recourse mortgages, other mortgages and notes payable are primarily financings for real estate developments. We, including certain subsidiaries, had $135.0 million in credit facilities as of December 31, 2006, with various financial institutions, in addition to obtaining loans with various lenders to finance these developments. Outstanding principal balances as of December 31, 2006, range2008, ranged from $0.3$6.0 million to $96.2$9.3 million per development with interest rates generally ranging from 5.5% to 8.6%5.8%. Outstanding principal balances as of December 31, 2005, range2007, ranged from $0.3$3.0 million to $97.5$41.2 million per development with interest rates generally ranging from 5.5% to 8.6%8.1%. Outstanding debt is secured by the underlying real estate properties, which were reported as real estate on our consolidated statements of financial position with a carrying value of $246.2$30.4 million and $284.1$141.1 million as of December 31, 20062008 and 2005,2007, respectively.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
12. Debt — (continued)
Also included in non-recourse mortgages and notes payable is a long-term debt obligation we assumed with the purchase of WM Advisors, Inc. As part of the purchase, we will beare bound by a class B share financing agreement previously entered into by WM Advisors, Inc. and a third party, which was assigned a value of $86.9 million at purchase. Load mutual fund shares sold without a front end load are referred to as "B shares". In exchange for paying the selling commission, the company receiveswe receive fees in the future to recover the up-front commission cost incurred. Prior to our purchase, WM Advisors, Inc. had entered into a purchase and sale agreement whereby the third party would purchase the rights to future cash flow streams in exchange for funding the sales commissions. The fair value of these relinquished fees is reported as a long-term debt liability. There will be no additional sales under this agreement following the effective date of the purchase. Therefore, this liability will be extinguished within eightsix years, which equates to the contractual term in which the fund can recover fees to cover the upfront commission costs. The value of this obligation as of December 31, 2008 and 2007, was $36.8 million and $66.6 million, respectively.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
12. Debt — (continued)
At December 31, 2006,2008, future annual maturities of the long-term debt were as follows (in millions):
| Year ending December 31: | ||||
| 2007 | $ | 143.5 | ||
| 2008 | 79.8 | |||
| 2009 | 15.0 | |||
| 2010 | 13.7 | |||
| 2011 | 565.0 | |||
| Thereafter | 736.8 | |||
| Total future maturities of the long-term debt | $ | 1,553.8 | ||
Year ending December 31: | ||||||
2009 | $ | 466.5 | ||||
2010 | 9.5 | |||||
2011 | 83.0 | |||||
2012 | 5.6 | |||||
2013 | 11.9 | |||||
Thereafter | 714.0 | |||||
Total future maturities of the long-term debt | $ | 1,290.5 | ||||
Cash paid for interest for 2006, 2005 and 2004, was $83.6 million, $138.9 million and $102.5 million, respectively. These amounts include interest paid on taxes during these years.
13. Income Taxes
Our income tax expense (benefit) from continuing operations was as follows:
| | | For the year ended December 31, | | For the year ended December 31, | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | 2006 | 2005 | 2004 | | 2008 | 2007 | 2006 | ||||||||||||||
| | | (in millions) | | (in millions) | ||||||||||||||||||
| Current income taxes: | Current income taxes: | Current income taxes: | ||||||||||||||||||||
| U.S. federal | $ | 210.9 | $ | 135.0 | $ | 245.1 | U.S. federal | $ | 118.9 | $ | 214.6 | $ | 211.8 | |||||||||
| State and foreign | 52.8 | 44.2 | 41.7 | State and foreign | (4.0 | ) | 64.3 | 52.8 | ||||||||||||||
| Total current income taxes | Total current income taxes | 263.7 | 179.2 | 286.8 | Total current income taxes | 114.9 | 278.9 | 264.6 | ||||||||||||||
| Deferred income taxes (benefits) | 31.3 | 53.0 | (108.6 | ) | ||||||||||||||||||
Deferred income taxes | Deferred income taxes | (119.4 | ) | (70.8 | ) | 31.3 | ||||||||||||||||
| Total income taxes | $ | 295.0 | $ | 232.2 | $ | 178.2 | ||||||||||||||||
Total income taxes (benefits) | Total income taxes (benefits) | $ | (4.5 | ) | $ | 208.1 | $ | 295.9 | ||||||||||||||
Our provision for income taxes may not have the customary relationship of taxes to income. A reconciliation between the U.S. corporate income tax rate and the effective tax rate from continuing operations is as follows:
| | For the year ended December 31, | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2006 | 2005 | 2004 | For the year ended December 31, | |||||||||||||
| Statutory corporate tax rate | 35 | % | 35 | % | 35 | % | |||||||||||
| | 2008 | 2007 | 2006 | ||||||||||||||
U.S. corporate income tax rate | 35 | % | 35 | % | 35 | % | |||||||||||
| Dividends received deduction | (8 | ) | (7 | ) | (9 | ) | (19 | ) | (11 | ) | (8 | ) | |||||
| Interest exclusion from taxable income | (1 | ) | (2 | ) | (2 | ) | (6 | ) | (2 | ) | (1 | ) | |||||
| Federal tax settlement for prior years | (1 | ) | (1 | ) | — | ||||||||||||
| Synthetic fuel tax credits | (1 | ) | (3 | ) | — | — | (1 | ) | (1 | ) | |||||||
Impact of equity method presentation | (7 | ) | (2 | ) | — | ||||||||||||
| Other | (2 | ) | (1 | ) | (4 | ) | (4 | ) | 1 | (3 | ) | ||||||
| Effective tax rate | 22 | % | 21 | % | 20 | % | |||||||||||
Effective income tax rate | (1 | )% | 20 | % | 22 | % | |||||||||||
We adopted the provisions of FIN 48 on January 1, 2007. The application of FIN 48 did not have a material impact on our consolidated financial statements. As of December 31, 2008, the total unrecognized benefits were $62.9 million. Of this amount, $24.4 million, if recognized, would reduce the 2008 effective tax rate. We recognize interest and penalties related to uncertain tax positions in operating expenses. As of December 31, 2008 and 2007, we had recognized $21.3 million and $26.0 million of accumulated pre-tax interest and penalties related to unrecognized tax benefits, respectively. Due to a favorable settlement during 2008, the accumulated pre-tax interest and penalties related to unrecognized tax benefits decreased during the year, resulting in a net $4.7 million increase to net income.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
13. Income Taxes — (continued)
A summary of the changes in unrecognized tax benefits follows.
| | For the year ended December 31, | |||||||
|---|---|---|---|---|---|---|---|---|
| | 2008 | 2007 | ||||||
Balance at beginning of year | $ | 98.8 | $ | 60.0 | ||||
Additions based on tax positions related to the current year | 1.7 | 10.4 | ||||||
Additions for tax positions of prior years | 4.1 | 29.0 | ||||||
Reductions for tax positions related to the current year | (2.1 | ) | — | |||||
Reductions for tax positions of prior years | (0.3 | ) | (0.6 | ) | ||||
Settlements | (39.3 | ) | — | |||||
Balance at end of year | $ | 62.9 | $ | 98.8 | ||||
Significant components of our net deferred income taxes were as follows:
| | December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| | 2006 | 2005 | |||||||
| | (in millions) | ||||||||
| Deferred income tax assets (liabilities): | |||||||||
| Insurance liabilities | $ | 299.4 | $ | 322.6 | |||||
| Other deferred tax assets | 88.6 | 124.3 | |||||||
| Total deferred tax assets | 388.0 | 446.9 | |||||||
| Deferred policy acquisition costs | (732.8 | ) | (651.5 | ) | |||||
| Net unrealized gains on available-for-sale securities | (395.8 | ) | (512.9 | ) | |||||
| Other deferred tax liabilities | (161.8 | ) | (247.7 | ) | |||||
| Total deferred tax liabilities | (1,290.4 | ) | (1,412.1 | ) | |||||
| Total net deferred income tax liabilities | $ | (902.4 | ) | $ | (965.2 | ) | |||
| | December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| | 2008 | 2007 | |||||||
| | (in millions) | ||||||||
Deferred income tax assets: | |||||||||
Net unrealized losses on available-for-sale securities | $ | 2,271.9 | $ | — | |||||
Insurance liabilities | 368.9 | 334.4 | |||||||
Net operating loss carryforwards | 197.9 | 147.3 | |||||||
Post-retirement benefits | 482.8 | 56.4 | |||||||
Stock-based compensation | 57.6 | 53.2 | |||||||
Other deferred income tax assets | 73.5 | 71.1 | |||||||
Gross deferred income tax assets | 3,452.6 | 662.4 | |||||||
Valuation allowance | (5.6 | ) | (25.8 | ) | |||||
Total deferred income tax assets | 3,447.0 | 636.6 | |||||||
Deferred income tax liabilities: | |||||||||
Deferred policy acquisition costs | (858.4 | ) | (782.2 | ) | |||||
Real estate | (150.5 | ) | (170.5 | ) | |||||
Net unrealized gains on available-for-sale securities | — | (106.6 | ) | ||||||
Intangible assets | (76.7 | ) | (68.7 | ) | |||||
Other deferred income tax liabilities | (78.7 | ) | (78.4 | ) | |||||
Total deferred income tax (liabilities) | (1,164.3 | ) | (1,206.4 | ) | |||||
Total net deferred income tax assets (liabilities) | $ | 2,282.7 | $ | (569.8 | ) | ||||
AtNet deferred tax income taxes by jurisdiction are as follows:
| | December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| | 2008 | 2007 | |||||||
| | (in millions) | ||||||||
Deferred income tax assets: | |||||||||
U.S. | $ | 2,372.2 | $ | — | |||||
State | 2.8 | — | |||||||
International | 10.5 | 6.5 | |||||||
Net deferred income tax assets | 2,385.5 | 6.5 | |||||||
Deferred income tax liabilities: | |||||||||
U.S. | — | (379.8 | ) | ||||||
State | — | (14.4 | ) | ||||||
International | (102.8 | ) | (182.1 | ) | |||||
Net deferred income tax liabilities | (102.8 | ) | (576.3 | ) | |||||
Total net deferred income tax assets (liabilities) | $ | 2,282.7 | $ | (569.8 | ) | ||||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
13. Income Taxes — (continued)
In management's judgment, the total deferred income tax asset is more likely than not to be realized. Included in the deferred income tax asset is the expected income tax benefit attributable to net unrealized losses on available-for-sale securities. There is no valuation allowance provided for the deferred tax asset attributable to unrealized losses on available-for-sale securities. Management expects to recover the unrealized losses by holding the securities until maturity or recovery in value; therefore, the related deferred tax asset is expected to reverse over time.
The total deferred income tax asset also includes capital and net operating loss carryforwards for tax purposes available to offset future capital gains and taxable income, respectively. The capital loss carryforward was $110.0 million as of December 31, 20062008 and 2005, respectively, ourwill expire if unused by 2013. Domestic state net operating loss carryforwards were $231.6 million as of December 31, 2008, and will expire between 2009 and 2023. Foreign net operating loss carryforwards generated in various foreign countries were $55.9 million as of December 31, 2008, with some operating loss carryforwards scheduled to expire beginning in 2014 while others never expire. We maintain valuation allowances by jurisdiction against the deferred income tax liability includes internationalassets related to certain of these carryforwards, as utilization of these income tax benefits fail the more likely than not criteria in certain jurisdictions. A valuation allowance has been recorded on income tax benefits associated with state net operating loss carryforwards and foreign net operating loss carryforwards. Adjustments to the valuation allowance will be made if there is a change in management's assessment of the amount of the deferred income tax liabilitiesasset that is more likely than not to be realized.
Accumulated net operating losses of $162.6$376.6 million and $115.4$263.8 million and U.S. net deferred tax liabilities of $754.6 million and $859.4 million, which have been included in deferred income taxes in the consolidated statements of financial position. In addition, at December 31, 2006,2008 and 2005,2007, respectively, are attributed to captive reinsurance companies that are temporarily excluded from our net deferred tax liability included international net deferred tax assets of $10.2 million and $9.6 million andconsolidated U.S. net state deferred tax assets of $4.6 million and $0.0 million, which have been included in other assets in the consolidated statements of financial position.
The Internal Revenue Service (the "Service") has completed examinations of the U.S. consolidated federal income tax returns for 2003return. These net operating losses will expire between 2021 and prior years. The Service's completion2023. One of the examinationscaptive reinsurance companies will be able to join the consolidated U.S. federal income tax return in 2012 with the other in 2013. All accumulated net operating losses are anticipated to be utilized before expiration. Therefore, no valuation allowance has been provided for the years 1999 - 2001 resulted in notices of deficiency dated December 29, 2004, and March 1, 2005. We paid the deficiencies (approximately $444.0 million for 1999 and 2000, and $1.3 million for 2001, including interest) in the first quarter of 2005 and have filed, or will file, claims for refund relatingdeferred income tax assets attributable to the disputed adjustments. The examination for the years 2002 and 2003 resulted in a refund of approximately $176.7 million (including interest) of which $161.5 million related to deficiencies previously paid as a result of the 1999 through 2001 examination. We believe that we have adequate defenses against, or sufficient provisions for, the contested issues, but final resolution of the contested issues could take several years while legal remedies are pursued. Consequently, we do not expect the ultimate resolution of issues in tax years 1999 - 2003 to have a material impact on ourthese net income. Similarly, we believe there are adequate defenses against, or sufficient provisions for, any challenges that might arise in tax years subsequent to 2003.operating losses.
U.S. Federalfederal and state deferred income taxes have not been provided on approximately $247.8$369.2 million of accumulated but undistributed earnings from operations of foreign subsidiaries.subsidiaries at December 31, 2008. Such earnings are considered to be indefinitely reinvested in the business. It is not practical to determine the amount of the unrecognized deferred tax liability that would arise if these earnings were remitted due to foreign tax credits and exclusions that may become available at the time of remittance. A tax liability will be recognized when we no longer plan to indefinitely reinvest the earnings or when we plan to sell all or a portion of our ownership interest.
The Internal Revenue Service ("IRS") has completed examination of our consolidated federal income tax returns for years prior to 2004. The examination of tax returns for the years 2002 and 2003 resulted in a refund of $176.7 million (including interest) in December 2006, which was consistent with the receivable that we had established for these tax years. We are contesting other issues and have filed suit in the Court of Federal Claims, requesting refunds for the years 1995 - 2003. At December 31, 2008 and 2007, respectively, our accrual for current tax receivable included $226.2 million and $251.5 million associated with the requested refunds, as it is management's assessment the refunds will more likely than not be realized. These current tax receivables are included in other assets in the consolidated statements of financial position. We do not expect the litigation to be resolved within the next twelve months.
The IRS commenced examination of the U.S. consolidated federal income tax returns for 2004 - 2005 in March 2007. The fieldwork is substantially complete and the final report is expected to be received sometime in the third or fourth quarter 2009. The statute of limitations for the 2004 - 2005 tax years expires on September 15, 2009. The IRS will begin examination of the U.S. consolidated federal income tax returns for 2006 - 2007 in the first quarter 2009.
We believe it is reasonably possible that the amount of our unrecognized tax benefits could increase by $0.0 million to $11.0 million within the next twelve months. The uncertainty is associated with our affiliate's investment in a transaction that gave rise to foreign tax credits. We expect the IRS to disallow some or all of these foreign tax credits. We believe that we have adequate defenses against, or sufficient provisions for, the contested issues, but final resolution of the contested issues could take several years while legal remedies are pursued. Consequently, we do not expect the ultimate resolution of issues from tax years 1995 - 2003 to have a material impact on our net income. Similarly, we believe there are adequate defenses against, or sufficient provisions for, any challenges that might arise in tax years subsequent to 2003.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
13. Income Taxes — (continued)
On October 22, 2004, The American Jobs Creation Act of 2004 was signed into law. The American Jobs Creation Act of 2004 included a repatriation provision granting U.S. corporations a special deduction of 85% of certain qualifying dividends from their foreign subsidiaries. A company could elect to apply this provision to qualifying earnings that are repatriated in its 2005 tax year. Pursuant to The American Jobs Creation Act of 2004, we implemented two domestic reinvestment plans in 2005. In accordance with the provisions of the Internal Revenue Code, we elected an 85% dividend received deduction on eligible cash dividends totaling $28.8 million.
Net cash paid for income taxes was $139.5 million in 2006, which included a $155.1 million audit refund pertaining to prior tax years; $638.1 million in 2005, primarily due to the notices of deficiency noted above; and $599.3 million in 2004, of which $444.3 million was attributable to the sale of Principal Residential Mortgage, Inc.
14. Employee and Agent Benefits
We have defined benefit pension plans covering substantially all of our U.S. employees and certain agents. Some of these plans provide supplemental pension benefits to employees with salaries and/or pension benefits in excess of the qualified plan limits imposed by federal tax law. The employees and agents are generally first eligible for the pension plans when they reach age 21. For plan participants employed prior to January 1, 2002, the pension benefits are based on the greater of a final average pay benefit or a cash balance benefit. The final average pay benefit is based on the years of service and generally the employee's or agent's average annual compensation during the last five years of employment. Partial benefit accrual of final average pay benefits is recognized from first eligibility until retirement based on attained service divided by potential service to age 65 with a minimum of 35 years of potential service. The cash balance portion of the plan started on January 1, 2002. An employee's account will beis credited with an amount based on the employee's salary, age and service. These credits will accrue with interest. For plan participants hired on and after January 1, 2002, only the cash balance plan applies. Our policy is to fund the cost of providing pension benefits in the years that the employees and agents are providing service to us. Our funding policy for the qualified defined benefit plan is to contribute an amount annually at least equal to the minimum annual contribution required under the Employee Retirement Income Security Act ("ERISA"), and, generally, not greater than the maximum amount that can be deducted for federal income tax purposes. Our funding policy for the non-qualified benefit plan is to fund the plan in the years that the employees are providing service to us using a methodology similar to the calculation of the net periodic benefit cost under U.S. GAAP, but using long-term assumptions. However, if the plans are fully funded on a U.S. GAAP funded status is positive,basis, no deposit is made. While we designate assets to cover the computed liability of thisthe non-qualified plan, the assets are not included as part of the asset balances presented in this footnote as they do not qualify as plan assets in accordance with U.S. GAAP.
We also provide certain health care, life insurance and long-term care benefits for retired employees. Subsidized retiree health benefits are provided for employees hired prior to January 1, 2002. Employees hired after December 31, 2001, will have access to retiree health benefits but areit is intended tothat they pay for the full cost of the coverage. The health care plans are contributory with participants' contributions adjusted annually; theannually. The contributions are based on the number of years of service and age at retirement for those hired prior to January 1, 2002. As part of the substantive plan, the retiree health contributions are assumed to be adjusted in the future as claim levels change. The life insurance plans are contributory for a small group of previously grandfathered participants that have elected supplemental coverage and dependent coverage.
Covered employees are first eligible for the medicalhealth and life postretirement benefits when they reach age 57 and have completed ten years of service with us. Retiree long-term care benefits are provided for employees whose retirement was effective prior to July 1, 2000. Partial benefit accrual of these health, life and long-term care benefits is recognized from the employee's date of hire until retirement based on attained service divided by potential service to age 65 with a minimum of 35 years of potential service. Our policy is to fund the cost of providing retiree benefits in the years that the employees are providing service to us using a methodology similar to the calculation of the net periodic benefit cost under U.S. GAAP, but using long-term assumptions. However, if the plans are fully funded on a U.S. GAAP funded status is positive,basis, no deposit is made.
We useFor 2007, we used a measurement date of October 1 for the pension and other postretirement benefit plans. For 2008, we used a December 31 measurement date as required by SFAS 158.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
14. Employee and Agent Benefits — (continued)
Obligations and Funded Status
The plans' combined funded status, reconciled to amounts recognized in the consolidated statements of financial position and consolidated statements of operations, was as follows:
| | Pension benefits | Other postretirement benefits | Pension benefits | Other postretirement benefits | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | December 31, | December 31, | December 31, | December 31, | ||||||||||||||||||||||
| | 2006 | 2005 | 2006 | 2005 | 2008 | 2007 | 2008 | 2007 | ||||||||||||||||||
| | (in millions) | (in millions) | ||||||||||||||||||||||||
| Change in benefit obligation | ||||||||||||||||||||||||||
| Benefit obligation at beginning of year | $ | (1,441.7 | ) | $ | (1,312.1 | ) | $ | (287.3 | ) | $ | (287.8 | ) | $ | (1,603.8 | ) | $ | (1,480.6 | ) | $ | (271.9 | ) | $ | (257.9 | ) | ||
| Service cost | (47.0 | ) | (49.7 | ) | (9.5 | ) | (10.0 | ) | (62.0 | ) | (47.1 | ) | (10.5 | ) | (8.0 | ) | ||||||||||
| Interest cost | (81.6 | ) | (77.4 | ) | (16.2 | ) | (16.9 | ) | (124.3 | ) | (89.5 | ) | (20.9 | ) | (15.5 | ) | ||||||||||
| Actuarial gain (loss) | 43.0 | (121.1 | ) | 47.1 | 19.8 | (8.1 | ) | (33.3 | ) | (44.0 | ) | 1.2 | ||||||||||||||
| Participant contributions | — | — | (4.1 | ) | (3.6 | ) | — | — | (6.0 | ) | (4.5 | ) | ||||||||||||||
| Benefits paid | 47.3 | 44.7 | 13.0 | 11.2 | 86.1 | 51.0 | 19.1 | 13.6 | ||||||||||||||||||
| Plan amendments | (0.6 | ) | 73.9 | — | — | — | (4.3 | ) | — | — | ||||||||||||||||
| Other | — | — | (0.9 | ) | — | — | — | (0.8 | ) | (0.8 | ) | |||||||||||||||
| Benefit obligation at end of year | $ | (1,480.6 | ) | $ | (1,441.7 | ) | $ | (257.9 | ) | $ | (287.3 | ) | $ | (1,712.1 | ) | $ | (1,603.8 | ) | $ | (335.0 | ) | $ | (271.9 | ) | ||
| Change in plan assets | ||||||||||||||||||||||||||
| Fair value of plan assets at beginning of year | $ | 1,297.8 | $ | 1,156.4 | $ | 448.9 | $ | 408.5 | $ | 1,597.6 | $ | 1,410.1 | $ | 518.0 | $ | 466.7 | ||||||||||
| Actual return on plan assets | 129.8 | 165.7 | 26.2 | 47.5 | (556.3 | ) | 208.5 | (142.9 | ) | 59.7 | ||||||||||||||||
| Employer contribution | 29.8 | 20.4 | 0.5 | 0.5 | 55.3 | 30.0 | — | 0.7 | ||||||||||||||||||
| Participant contributions | — | — | 4.1 | 3.6 | — | — | 6.0 | 4.5 | ||||||||||||||||||
| Benefits paid | (47.3 | ) | (44.7 | ) | (13.0 | ) | (11.2 | ) | (86.1 | ) | (51.0 | ) | (19.1 | ) | (13.6 | ) | ||||||||||
| Fair value of plan assets at end of year | $ | 1,410.1 | $ | 1,297.8 | $ | 466.7 | $ | 448.9 | $ | 1,010.5 | $ | 1,597.6 | $ | 362.0 | $ | 518.0 | ||||||||||
Reconciliation of funded status to amount recognized | ||||||||||||||||||||||||||
| Funded (under funded) status | $ | — | $ | (143.9 | ) | $ | — | $ | 161.6 | |||||||||||||||||
| Unrecognized net actuarial (gain) loss | — | 201.2 | — | (18.3 | ) | |||||||||||||||||||||
| Unrecognized prior service benefit | — | (71.3 | ) | — | (17.2 | ) | ||||||||||||||||||||
| Net prepaid benefit asset (benefit obligation) | $ | — | $ | (14.0 | ) | $ | — | $ | 126.1 | |||||||||||||||||
| Amounts recognized in statement of financial position (Pre-SFAS 158) consist of | ||||||||||||||||||||||||||
| Prepaid benefit cost | $ | — | $ | 172.3 | $ | — | $ | 126.1 | ||||||||||||||||||
| Accrued benefit liability, including minimum liability | — | (203.9 | ) | — | — | |||||||||||||||||||||
| Accumulated other comprehensive income | — | 17.6 | — | — | ||||||||||||||||||||||
| Net amount recognized | $ | — | $ | (14.0 | ) | $ | — | $ | 126.1 | |||||||||||||||||
| Amount recognized in statement of financial position (Post-SFAS 158) | ||||||||||||||||||||||||||
Amount recognized in statement of financial position | ||||||||||||||||||||||||||
| Other assets | $ | 205.1 | $ | — | $ | 208.9 | $ | — | $ | — | $ | 304.4 | $ | 43.3 | $ | 246.2 | ||||||||||
| Other liabilities | (275.6 | ) | — | (0.1 | ) | — | (701.6 | ) | (310.6 | ) | (16.3 | ) | (0.1 | ) | ||||||||||||
| Total | $ | (70.5 | ) | $ | — | $ | 208.8 | $ | — | $ | (701.6 | ) | $ | (6.2 | ) | $ | 27.0 | $ | 246.1 | |||||||
| Amount recognized in accumulated other comprehensive income (Post-SFAS 158) | ||||||||||||||||||||||||||
Amount recognized in accumulated other comprehensive (income) loss | ||||||||||||||||||||||||||
| Total net actuarial (gain) loss | $ | 113.5 | $ | — | $ | (59.5 | ) | $ | — | $ | 768.2 | $ | 42.5 | $ | 152.9 | $ | (84.8 | ) | ||||||||
| Prior service benefit | (61.7 | ) | — | (14.6 | ) | — | (39.5 | ) | (49.1 | ) | (8.8 | ) | (12.0 | ) | ||||||||||||
| Pre-tax accumulated other comprehensive income (gain) loss | $ | 51.8 | $ | — | $ | (74.1 | ) | $ | — | |||||||||||||||||
Pre-tax accumulated other comprehensive (income) loss | $ | 728.7 | $ | (6.6 | ) | $ | 144.1 | $ | (96.8 | ) | ||||||||||||||||
Prior to SFAS 158, a company booked on its statement of financial position the net prepaid benefit asset orThe accumulated benefit obligation for the fiscal year end. Under SFAS 158, a company now recognizes the over funded or under funded status of theall defined benefit pension plans was $1,535.8 million and postretirement plans as an asset or liability in its statement of financial position.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
14. Employee and Agent Benefits — (continued)
The incremental effect of applying SFAS 158 on individual line items in the statement of financial position as of$1,363.1 million at December 31, 2006, is as follows:2008 and 2007, respectively.
| | Before application of SFAS 158 | Adjustment flows through accumulated other comprehensive income | After application of SFAS 158 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | |||||||||
| Assets for pension plans | $ | 184.2 | $ | 20.9 | $ | 205.1 | ||||
| Assets for other post-retirement benefit plans | 134.8 | 74.1 | 208.9 | |||||||
| Liability for pension plans | (203.0 | ) | (72.6 | ) | (275.6 | ) | ||||
| Liability for other post-retirement benefit plans | — | (0.1 | ) | (0.1 | ) | |||||
| Additional minimum pension liability | (13.4 | ) | 13.4 | — | ||||||
| Pre-tax accumulated other comprehensive income | (13.4 | ) | 35.7 | 22.3 | ||||||
Employer contributions to the pension plans include contributions made directly to the qualified pension plan assets and contributions from corporate assets to pay nonqualified pension benefits. Benefits paid from the pension plans include both qualified and nonqualified plan benefits. Nonqualified pension plan assets are not included as part of the asset balances presented in this footnote. The nonqualified pension plan assets are held in a Rabbi trust for the benefit of all nonqualified plan participants. The assets held in a Rabbi trust are available to satisfy the claims of general creditors only in the event of bankruptcy. Therefore, these assets are fully consolidated in our consolidated statements of financial position and are not reflected in our funded status as they do not qualify as plan assets.assets under U.S. GAAP. The market value of assets held in these trusts was $216.0$269.8 million and $237.2 million as of December 31, 2006,2008 and $198.3 million as of December 31, 2005.2007, respectively.
Pension Plan Changes and Plan Gains/Losses
As ofOn January 1, 2006, changes were made to our retirement program, including2008, the Principal Select Saving Plan ("401(k)"),vesting schedule for the Principal Pension Plan ("Pension Plan")qualified pension plan and to the corresponding nonqualified plans. The qualified and nonqualified pension plan changes include a reduction to the traditional and cash balance formulas, a change in the early retirement factors, and the removal of the cost of living adjustments for traditional benefits earned after January 1, 2006. The qualified and nonqualified 401(k) plan's company match increased from 50% of a contribution rate upplans changed to a maximumthree-year cliff schedule as required by the Pension Protection Act of 3% of the participant's compensation to 75% of a contribution rate up to a maximum of 6% of the participant's compensation. Employees who were at least 47 years old, with a minimum of 10 years of service as of December 31, 2005, were given the choice to remain under the current pension and 401(k) arrangement or move to the new plan design. The vast majority of this group chose to remain under the current pension and 401(k) arrangement. The Pension Plan changes were2006. This change was recognized as a prior service benefitcost and resulted in a reduction ofan increase in liabilities of $73.9 million.
For the year ended December 31, 2006, the pension plans had an actuarial gain of $43.0 million, this gain was primarily due to the increase in the discount rate and was partially offset by greater than expected salary increases. For the year ended December 31, 2005, the pension plans had an actuarial loss of $121.1 million, which was primarily due to the decrease in the discount rate.
The accumulated benefit obligation for all defined benefit pension plans was $1,274.3 million and $1,239.2$4.3 million at December 31, 2006, and 2005, respectively.
The Principal Residential Mortgage, Inc. divestiture in 2004 resulted in a curtailment for the plans that provided benefits to the Principal Residential Mortgage, Inc. participants. A mid-year re-measurement to reflect the curtailment occurred as of the date of sale, July 1, 2004. Curtailment gains of $25.1 million and $3.9 million occurred under the pension and other postretirement benefit plans, respectively in 2004. This did not affect the pension plans or other postretirement benefit plans covering agents and managers. In addition, this did not affect the long-term care plan because these plans consist of only retired participants.
Due to the Principal Residential Mortgage, Inc. divestiture, we provided for contractual termination benefits in connection with termination of employment for a select group of Principal Residential Mortgage, Inc. management employees. The pension plan recognized $1.8 million in special termination benefits liability in 2004.2007.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
14. Employee and Agent Benefits — (continued)
For the year ended December 31, 2008, the pension plans had an actuarial loss of $8.1 million, primarily due to a decrease in the discount rate offset by a change in certain actuarial assumptions and methods. For the year ended December 31, 2007, the pension plans had an actuarial loss of $33.3 million, primarily due to salary increases greater than assumed, which was partially offset by the increase in the discount rate.
Other Post Retirement Plan Changes and Plan Gains/Losses
On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Medicare Modernization Act") was signed into law. The Medicare Modernization Act introduced a prescription drug benefit under Medicare ("Medicare Part D") as well as a federal subsidy to sponsors of retiree medical benefit plans. The prescription drug benefits offered byDuring 2008, 2007 and 2006, the sponsor must be at least actuarially equivalent to benefits offered under Medicare Part D to qualifysubsidies we received and accrued for were $0.8 million, $0.8 million and $0.9 million, respectively, and included in service cost.
An actuarial loss of $44.0 million occurred during 2008 for the subsidy.other postretirement benefit plans. This subsidy is effectivewas due to a decrease in 2006the discount rate and would only apply to benefits paid for qualifying retirees who have not enrolleda less than expected increase in Medicare Part D.
retiree contributions, which was partially offset by a decrease in the trend assumption and a less than expected increase in health care claim costs. An actuarial gain of $47.1$1.2 million occurred during 20062007 for the other postretirement benefit plans. This was due to a less than assumed increase in health care claim costs, and trend assumption, as well as an increase in the discount rate. Retiree contributions also increased more than health care claim costs. An actuarial gain of $19.8 million occurred during 2005 for the other postretirement benefit plans. This was due to a less than assumed increase in health care claim costs and trend assumption, as well as a refinement in the recognition of Medicare Part D government subsidy. The gain was partially offset by a decrease in the discount rate.
On July 26, 2004, the Centers of Medicare and Medicaid Services issued proposed regulations that provided guidance on the definition of actuarially equivalent retiree prescription drug coverage. These regulations aided in our third quarter of 2004 determination that the majority of our retiree prescription drug benefit coverage is actuarially equivalent to Medicare's Part D prescription drug plan and thus makes us eligible for the tax-free subsidy beginning in 2006. Accordingly, we conducted a mid-year re-measurement during third quarter of 2004 of our retiree medical plans to reflect the recognitionan increase of the Medicare Modernization Act in accordance with FSP No. 106-2,Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. This caused an actuarial gain of approximately $22.5 million for the medical plans. In addition, it also caused the net periodic benefit cost for 2004 to change for the fourth quarter. The 2004 service cost decreased by approximately $0.2 million, interest cost decreased approximately $0.4 million and the actuarial loss amortization decreased by $0.1 million. During 2006, the total Medicare subsidies we received and accrued for were $0.9 million.trend assumption.
Information for pension plans with an accumulated benefit obligation in excess of plan assets:
TheFor 2008, both the qualified and nonqualified plans had accumulated benefit obligations in excess of plan assets. For 2007, the obligations below relate only to the nonqualified pension plan liabilities. As noted previously, the nonqualified plans have assets that are deposited in trusts that fail to meet the U.S. GAAP requirements to be included in plan assets; however, these assets are included in our consolidated statements of financial position.
| | December 31, | December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2006 | 2005 | 2008 | 2007 | |||||||||
| | (in millions) | (in millions) | |||||||||||
| Projected benefit obligation | $ | 275.6 | $ | 255.7 | $ | 1,712.1 | $ | 310.6 | |||||
| Accumulated benefit obligation | 216.4 | 203.9 | 1,535.8 | 239.1 | |||||||||
Fair value of plan assets | 1,010.5 | 1,597.6 | |||||||||||
Information for other postretirement benefit plans with an accumulated postretirement benefit obligation in excess of plan assets:
| | December 31, | December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2006 | 2005 | 2008 | 2007 | |||||||||
| | (in millions) | (in millions) | |||||||||||
| Accumulated postretirement benefit obligation | $ | 2.1 | $ | 2.3 | $ | 87.9 | $ | 2.0 | |||||
| Fair value of plan assets | 2.0 | 1.6 | 71.6 | 1.9 | |||||||||
Components of net periodic benefit cost:
| | Pension benefits | Other postretirement benefits | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | For the year ended December 31, | ||||||||||||||||||
| | 2008 | 2007 | 2006 | 2008 | 2007 | 2006 | |||||||||||||
| | (in millions) | ||||||||||||||||||
Service cost | $ | 62.0 | $ | 47.1 | $ | 47.0 | $ | 10.5 | $ | 8.0 | $ | 9.5 | |||||||
Interest cost | 124.3 | 89.5 | 81.6 | 20.9 | 15.5 | 16.2 | |||||||||||||
Expected return on plan assets | (162.8 | ) | (114.2 | ) | (105.4 | ) | (46.9 | ) | (33.7 | ) | (32.4 | ) | |||||||
Amortization of prior service benefit | (9.6 | ) | (8.3 | ) | (9.0 | ) | (3.1 | ) | (2.6 | ) | (2.6 | ) | |||||||
Recognized net actuarial (gain) loss | 1.5 | 10.0 | 20.4 | (4.0 | ) | (1.9 | ) | 0.2 | |||||||||||
Net periodic benefit cost (income) | $ | 15.4 | $ | 24.1 | $ | 34.6 | $ | (22.6 | ) | $ | (14.7 | ) | $ | (9.1 | ) | ||||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
14. Employee and Agent Benefits — (continued)
Components For 2007, we used a measurement date of October 1 for the pension and other postretirement plans. For 2008, we used a December 31 measurement date as required by SFAS 158. Net periodic benefit cost shown above for 2008 covers the period of 15 months from October 1, 2007, through December 31, 2008. Net periodic benefit cost for the period from October 1, 2007, to December 31, 2007, was recognized as a direct adjustment to retained earnings during 2008 as required by SFAS 158. The breakdown of 2008 net periodic benefit cost:cost between the two periods was as follows:
| | Pension benefits | Other postretirement benefits | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | For the year ended December 31, | ||||||||||||||||||
| | 2006 | 2005 | 2004 | 2006 | 2005 | 2004 | |||||||||||||
| | (in millions) | ||||||||||||||||||
| Service cost | $ | 47.0 | $ | 49.7 | $ | 49.6 | $ | 9.5 | $ | 10.0 | $ | 8.7 | |||||||
| Interest cost | 81.6 | 77.4 | 73.8 | 16.2 | 16.9 | 15.4 | |||||||||||||
| Expected return on plan assets | (105.4 | ) | (96.2 | ) | (87.4 | ) | (32.4 | ) | (29.4 | ) | (27.6 | ) | |||||||
| Amortization of prior service cost (benefit) | (9.0 | ) | 1.3 | 1.8 | (2.6 | ) | (2.6 | ) | (2.8 | ) | |||||||||
| Amortization of transition asset | — | — | (0.1 | ) | — | — | — | ||||||||||||
| Recognized net actuarial loss | 20.4 | 16.4 | 14.1 | 0.2 | 0.5 | 0.5 | |||||||||||||
| Special termination and benefits | — | — | 1.8 | — | — | — | |||||||||||||
| Curtailment gain | — | — | (13.8 | ) | — | — | (5.4 | ) | |||||||||||
| Net periodic benefit cost (income) | $ | 34.6 | $ | 48.6 | $ | 39.8 | $ | (9.1 | ) | $ | (4.6 | ) | $ | (11.2 | ) | ||||
| | Pension benefits | Other postretirement benefits | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 10/01/07- 12/31/07 | 1/1/08- 12/31/08 | Total | 10/01/07- 12/31/07 | 1/1/08- 12/31/08 | Total | |||||||||||||
| | (in millions) | ||||||||||||||||||
Net periodic benefit cost (income) | $ | 3.1 | $ | 12.3 | $ | 15.4 | $ | (4.5 | ) | $ | (18.1 | ) | $ | (22.6 | ) | ||||
The pension plans' actuarial gains and losses are amortized using a straight-line amortization method over the average remaining service period of employees.plan participants. For the qualified pension plan, there is no corridor recognized in determininggains and losses are amortized without use of the amount to amortize; for10% allowable corridor. For the nonqualified pension plans and other postretirement benefit plans, the corridorcorridors allowed under SFAS 87 isare used.
| | Pension benefits | Other postretirement benefits | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | For the year ended December 31, | |||||||||||
| | 2006 | 2005 | 2006 | 2005 | ||||||||
| | (in millions) | |||||||||||
| Other changes recognized in accumulated other comprehensive income (Post-SFAS 158) | ||||||||||||
| Net actuarial (gain)/loss | $ | 113.5 | $ | — | $ | (59.5 | ) | $ | — | |||
| Prior service benefit | (61.7 | ) | — | (14.6 | ) | — | ||||||
| Total recognized in accumulated other comprehensive income | $ | 51.8 | $ | — | $ | (74.1 | ) | $ | — | |||
| Total recognized in net periodic benefit cost and accumulated other comprehensive income | $ | 86.4 | $ | — | $ | (83.2 | ) | $ | — | |||
| | Pension benefits | Other postretirement benefits | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | For the year ended December 31, | ||||||||||||
| | 2008 | 2007 | 2008 | 2007 | |||||||||
| | (in millions) | ||||||||||||
Other changes recognized in accumulated other comprehensive (income) loss | |||||||||||||
Net actuarial (gain) loss | $ | 727.2 | $ | (61.0 | ) | $ | 233.8 | $ | (27.2 | ) | |||
Prior service cost | — | 4.3 | — | — | |||||||||
Amortization of net gain (loss) | (1.5 | ) | (10.0 | ) | 4.0 | 1.9 | |||||||
Amortization of prior service benefit | 9.6 | 8.3 | 3.1 | 2.6 | |||||||||
Total recognized in pre-tax accumulated other comprehensive (income) loss | $ | 735.3 | $ | (58.4 | ) | $ | 240.9 | $ | (22.7 | ) | |||
Total recognized in net periodic benefit cost and pre-tax accumulated other comprehensive (income) loss | $ | 750.7 | $ | (34.3 | ) | $ | 218.3 | $ | (37.4 | ) | |||
ForAs of and subsequent to December 31, 2006, net actuarial (gain) loss and net prior service benefits are immediatelycost benefit have been recognized in accumulated other comprehensive income.income due to the application of SFAS 158.
The estimated net actuarial (gain) loss and prior service cost (benefit) that will be amortized from accumulated other comprehensive income into net periodic benefit cost for the pension benefits during the 20072009 fiscal year are $10.0$92.6 million and $(8.3)$(7.7) million, respectively. The estimated net actuarial (gain) loss and prior service cost (benefit) for the postretirement benefits that will be amortized from accumulated other comprehensive income into net periodic benefit cost during the 20072009 fiscal year are $(1.9)$9.2 million and $(2.6)$(2.1) million, respectively.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
14. Employee and Agent Benefits — (continued)
Additional information:
| | Pension benefits | Other postretirement benefits | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | For the year ended December 31, | |||||||||
| | 2006 | 2005 | 2006 | 2005 | ||||||
| | (in millions) | |||||||||
| Increase (decrease) in minimum liability included in other comprehensive income (Pre-SFAS 158) | $ | (4.2 | ) | $ | 9.5 | $— | $— | |||
Assumptions:
Weighted-average assumptions used to determine benefit obligations as disclosed under the Obligations and Funded Status section
| | Pension benefits | Other postretirement benefits | Pension benefits | Other postretirement benefits | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | For the year ended December 31, | For the year ended December 31, | ||||||||||||||||||||
| | 2006 | 2005 | 2006 | 2005 | 2008 | 2007 | 2008 | 2007 | ||||||||||||||
| Discount rate | 6.15 | % | 5.75 | % | 6.15 | % | 5.75 | % | 6.00 | % | 6.30 | % | 6.00 | % | 6.30 | % | ||||||
| Rate of compensation increase | 5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % | ||||||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
14. Employee and Agent Benefits — (continued)
Weighted-average assumptions used to determine net periodic benefit cost
| | Pension benefits | Other postretirement benefits | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | For the year ended December 31, | |||||||||||
| | 2006 | 2005 | 2004 | 2006 | 2005 | 2004 | ||||||
| Discount rate | 5.75% | 6.00% | 6.25%/6.50%* | 5.75% | 6.00% | 6.25%/6.50%* | ||||||
| Expected long-term return on plan assets | 8.25% | 8.50% | 8.50% | 7.30% | 7.30% | 7.31% | ||||||
| Rate of compensation increase | 5.00% | 5.00% | 5.00% | 5.00% | 5.00% | 5.00% | ||||||
| | Pension benefits | Other postretirement benefits | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | For the year ended December 31, | ||||||||||||||||||
| | 2008 | 2007 | 2006 | 2008 | 2007 | 2006 | |||||||||||||
Discount rate | 6.30 | % | 6.15 | % | 5.75 | % | 6.30 | % | 6.15 | % | 5.75 | % | |||||||
Expected long-term return on plan assets | 8.25 | % | 8.25 | % | 8.25 | % | 7.30 | % | 7.30 | % | 7.30 | % | |||||||
Rate of compensation increase | 5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % | |||||||
For other postretirement benefits, the 7.30% rateexpected long-term return on plan assets for 20062008 is based on the weighted average expected long-term asset returns for the medical, life and long-term care plans. The expected long-term rates for the medical,health, life and long-term care plans are 7.25%, 7.75% and 5.85%, respectively.
The expected return on plan assets is the long-term rate we expect to be earned based on the plans' investment strategy. Historical and expected future returns of multiple asset classes were analyzed to develop a risk free rate of return and risk premiums for each asset class. The overall rate for each asset class was developed by combining a long-term inflation component, the risk free real rate of return and the associated risk premium. A weighted average rate was developed based on those overall rates and the target asset allocation of the plans. Based on a review in 2005,2008, the long termlong-term expected return on plan assets waswill be lowered to 8.00% for the 2006 pension2009 expense calculation.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
14. Employee and Agent Benefits — (continued)
Assumed health care cost trend rates
| | December 31, | December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2006 | 2005 | 2008 | 2007 | ||||||||
| Health care cost trend rate assumed for next year under age 65 | 12.0 | % | 13.0 | % | 10.5 | % | 12.0 | % | ||||
| Health care cost trend rate assumed for next year age 65 and over | 11.0 | % | 13.0 | % | 10.0 | % | 11.0 | % | ||||
| Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) | 5.0 | % | 5.0 | % | 5.0 | % | 5.0 | % | ||||
| Year that the rate reaches the ultimate trend rate | 2018 | 2017 | 2020 | 2019 | ||||||||
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
| | 1-percentage- point increase | 1-percentage- point decrease | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | 1-percentage- point increase | 1-percentage- point decrease | |||||||||||
| Effect on total of service and interest cost components | $ | 5.5 | $ | (4.3 | ) | |||||||||
| | (in millions) | |||||||||||||
Effect on total of service cost and interest cost components | $ | 4.8 | $ | (3.8 | ) | |||||||||
| Effect on accumulated postretirement benefit obligation | (44.8 | ) | 36.6 | (46.4 | ) | 37.2 | ||||||||
Pension Plan Assets
The qualified pension plan's weighted-average asset allocations by asset category as of the two most recent measurement dates are as follows:
| | | October 1, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Asset category | ||||||||||||||
| 2006 | 2005 | Asset category | December 31, 2008 | October 1, 2007 | ||||||||||
| Domestic equity securities | Domestic equity securities | 54 | % | 54 | % | Domestic equity securities | 50 | % | 53 | % | ||||
| International equity securities | International equity securities | 14 | 14 | International equity securities | 17 | 18 | ||||||||
| Domestic debt securities | Domestic debt securities | 23 | 23 | Domestic debt securities | 23 | 21 | ||||||||
| Real estate | Real estate | 9 | 9 | Real estate | 10 | 8 | ||||||||
| Total | 100 | % | 100 | % | Total | 100 | % | 100 | % | |||||
Our investment strategy is to achieve the following:
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
14. Employee and Agent Benefits — (continued)
In administering the qualified pension plan's asset allocation strategy, we consider the projected liability stream of benefit payments, the relationship between current and projected assets of the plan and the projected actuarial liabilities streams, the historical performance of capital markets adjusted for the perception of future short- and long-term capital market performance and the perception of future economic conditions.
The overall target asset allocation for the qualified plan assets is:
| Asset category | Target allocation | |
|---|---|---|
Domestic equity securities | 40% - 60% | |
International equity securities | 5% - | |
Domestic debt securities | 20% - 30% | |
International debt securities | 0% - 7% | |
Real estate | 3% - 10% | |
Other | 0% - 7% |
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
14. Employee and Agent Benefits — (continued)
For 2006 and 2005, respectively, the plan assets include none of our stock. Prior to April 30, 2005, the plan held our stock in a separate account under an annuity contract. These assets were received in the qualified defined benefit plan as a result of the 2001 demutualization. These holdings were liquidated as of April 30, 2005.
Other Postretirement Benefit Plan Assets
The other postretirement benefit plans' weighted-average asset allocations by asset category as of the two most recent measurement dates are as follows:
| | | October 1, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Asset category | ||||||||||||||
| 2006 | 2005 | Asset category | December 31, 2008 | October 1, 2007 | ||||||||||
| Equity securities | Equity securities | 58 | % | 55 | % | Equity securities | 53 | % | 63 | % | ||||
| Debt securities | Debt securities | 42 | 45 | Debt securities | 47 | 37 | ||||||||
| Total | 100 | % | 100 | % | Total | 100 | % | 100 | % | |||||
The weighted average target asset allocation for the other postretirement benefit plans is:
| Asset category | Target allocation | |||
|---|---|---|---|---|
Equity securities | 50 - 70 | % | ||
Debt securities | 30 - 50 | % | ||
The investment strategies and policies for the other postretirement benefit plans are similar to those employed by the qualified pension plan.
Contributions
We expect to contribute approximately $1.0 million to our other postretirement benefit plans in 2007. Our funding policy for the qualified pension plan is to fund the plan annually in an amount at least equal to the minimum annual contribution required under ERISA and, generally, not greater than the maximum amount that can be deducted for federal income tax purposes. We do not anticipate that wecontributions will be requiredneeded to fund asatisfy the minimum annual contribution underfunding requirements of ERISA for theour qualified pension plan. At this time, it is too early to estimate the amount that may be contributed, but it is possible that we may fund the plans in 20072009 in the range of $20-$50 million. This includes funding for both our qualified and nonqualified pension plans. We may contribute to our other postretirement benefit plans in 2009 pending future analysis.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
14. Employee and Agent Benefits — (continued)
Estimated Future Benefit Payments
The followingestimated future benefit payments, which reflect expected future service, expected to be paid and the expected amount of tax-free subsidy receipts under Medicare Part D expected to be received are:
| | Pension benefits | Other postretirement benefits (gross benefit payments, including prescription drug benefits) | Amount of Medicare Part D subsidy receipts | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | |||||||||
| Year ending December 31: | ||||||||||
| 2007 | $ | 51.5 | $ | 18.7 | $ | 1.0 | ||||
| 2008 | 55.1 | 20.5 | 1.2 | |||||||
| 2009 | 59.1 | 22.6 | 1.3 | |||||||
| 2010 | 63.9 | 25.0 | 1.5 | |||||||
| 2011 | 69.7 | 27.7 | 1.7 | |||||||
| 2012-2016 | 448.4 | 182.0 | 12.2 | |||||||
| | Pension benefits | Other postretirement benefits (gross benefit payments, including prescription drug benefits) | Amount of Medicare Part D subsidy receipts | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | ||||||||||
Year ending December 31: | |||||||||||
2009 | $ | 65.4 | $ | 21.6 | $ | 1.1 | |||||
2010 | 70.2 | 23.6 | 1.2 | ||||||||
2011 | 75.1 | 25.8 | 1.4 | ||||||||
2012 | 81.0 | 28.2 | 1.7 | ||||||||
2013 | 87.5 | 30.9 | 1.8 | ||||||||
2014-2018 | 533.5 | 201.1 | 13.2 | ||||||||
The above table reflects the total estimated future benefits to be paid from the plan, including both our share of the benefit cost and the participants' share of the cost, which is funded by their contributions to the plan.
The assumptions used in calculating the estimated future benefit payments are the same as those used to measure the benefit obligation for the year ended December 31, 2006.2008.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
14. Employee and Agent Benefits — (continued)
The information that follows shows supplemental information for our defined benefit pension plans. Certain key summary data is shown separately for qualified and non-qualified plans.
| | For the year ended December 31, | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2006 | 2005 | |||||||||||||||||
| | Qualified plan | Nonqualified plans | Total | Qualified plan | Nonqualified plans | Total | |||||||||||||
| | (in millions) | ||||||||||||||||||
| Reconciliation of funded status to amount recognized | |||||||||||||||||||
| Benefit obligation, end of the year | $ | — | $ | — | $ | — | $ | (1,186.0 | ) | $ | (255.7 | ) | $ | (1,441.7 | ) | ||||
| Fair value of plan assets, end of the year | — | — | — | 1,297.8 | — | 1,297.8 | |||||||||||||
| Funded (underfunded) status | — | — | — | 111.8 | (255.7 | ) | (143.9 | ) | |||||||||||
| Unrecognized net actuarial loss | — | — | — | 111.5 | 89.7 | 201.2 | |||||||||||||
| Unrecognized prior service benefit | — | — | — | (51.0 | ) | (20.3 | ) | (71.3 | ) | ||||||||||
| Net amount recognized | $ | — | $ | — | $ | — | $ | 172.3 | $ | (186.3 | ) | $ | (14.0 | ) | |||||
| Amounts recognized in statement of financial position (Pre-SFAS 158) | |||||||||||||||||||
| Prepaid benefit cost | $ | — | $ | — | $ | — | $ | 172.3 | $ | — | $ | 172.3 | |||||||
| Accrued benefit liability including minimum liability | — | — | — | — | (203.9 | ) | (203.9 | ) | |||||||||||
| Accumulated other comprehensive income | — | — | — | — | 17.6 | 17.6 | |||||||||||||
| Net amount recognized | $ | — | $ | — | $ | — | $ | 172.3 | $ | (186.3 | ) | $ | (14.0 | ) | |||||
| Amount recognized in statement of financial position (Post-SFAS 158) | |||||||||||||||||||
| Other assets | $ | 205.1 | $ | — | $ | 205.1 | $ | — | $ | — | $ | — | |||||||
| Other liabilities | — | (275.6 | ) | (275.6 | ) | — | — | — | |||||||||||
| Total | $ | 205.1 | $ | (275.6 | ) | $ | (70.5 | ) | $ | — | $ | — | $ | — | |||||
| Amount recognized in accumulated other comprehensive income (Post-SFAS 158) | |||||||||||||||||||
| Total net actuarial loss | $ | 24.2 | $ | 89.3 | $ | 113.5 | $ | — | $ | — | $ | — | |||||||
| Prior service benefit | (45.1 | ) | (16.6 | ) | (61.7 | ) | — | — | — | ||||||||||
| Total accumulated other comprehensive income (not adjusted for applicable tax) | $ | (20.9 | ) | $ | 72.7 | $ | 51.8 | $ | — | $ | — | $ | — | ||||||
| Components of net periodic benefit cost | |||||||||||||||||||
| Service cost | $ | 39.3 | $ | 7.7 | $ | 47.0 | $ | 41.9 | $ | 7.8 | $ | 49.7 | |||||||
| Interest cost | 67.2 | 14.4 | 81.6 | 63.7 | 13.7 | 77.4 | |||||||||||||
| Expected return on plan assets | (105.4 | ) | — | (105.4 | ) | (96.2 | ) | — | (96.2 | ) | |||||||||
| Amortization of prior service cost (benefit) | (5.9 | ) | (3.1 | ) | (9.0 | ) | 2.8 | (1.5 | ) | 1.3 | |||||||||
| Recognized net actuarial loss | 12.9 | 7.5 | 20.4 | 11.2 | 5.2 | 16.4 | |||||||||||||
| Net periodic benefit cost | $ | 8.1 | $ | 26.5 | $ | 34.6 | $ | 23.4 | $ | 25.2 | $ | 48.6 | |||||||
| Total recognized in net periodic benefit cost and accumulated other comprehensive income | $ | (12.8 | ) | $ | 99.2 | $ | 86.4 | $ | — | $ | — | $ | — | ||||||
| | For the year ended December 31, | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2008 | 2007 | |||||||||||||||||
| | Qualified plan | Nonqualified plans | Total | Qualified plan | Nonqualified plans | Total | |||||||||||||
| | (in millions) | ||||||||||||||||||
Amount recognized in statement of financial position | |||||||||||||||||||
Other assets | $ | — | $ | — | $ | — | $ | 304.4 | $ | — | $ | 304.4 | |||||||
Other liabilities | (399.1 | ) | (302.5 | ) | (701.6 | ) | — | (310.6 | ) | (310.6 | ) | ||||||||
Total | $ | (399.1 | ) | $ | (302.5 | ) | $ | (701.6 | ) | $ | 304.4 | $ | (310.6 | ) | $ | (6.2 | ) | ||
Amount recognized in accumulated other comprehensive (income) loss | |||||||||||||||||||
Total net actuarial (gain) loss | $ | 690.3 | $ | 77.9 | $ | 768.2 | $ | (59.7 | ) | $ | 102.2 | $ | 42.5 | ||||||
Prior service cost benefit | (28.6 | ) | (10.9 | ) | (39.5 | ) | (35.3 | ) | (13.8 | ) | (49.1 | ) | |||||||
Total pre-tax accumulated other comprehensive (income) loss | $ | 661.7 | $ | 67.0 | $ | 728.7 | $ | (95.0 | ) | $ | 88.4 | $ | (6.6 | ) | |||||
Components of net periodic benefit cost | |||||||||||||||||||
Service cost | $ | 50.5 | $ | 11.5 | $ | 62.0 | $ | 39.2 | $ | 7.9 | $ | 47.1 | |||||||
Interest cost | 100.2 | 24.1 | 124.3 | 72.9 | 16.6 | 89.5 | |||||||||||||
Expected return on plan assets | (162.8 | ) | — | (162.8 | ) | (114.2 | ) | — | (114.2 | ) | |||||||||
Amortization of prior service cost benefit | (6.7 | ) | (2.9 | ) | (9.6 | ) | (5.9 | ) | (2.4 | ) | (8.3 | ) | |||||||
Recognized net actuarial (gain) loss | (9.4 | ) | 10.9 | 1.5 | 2.8 | 7.2 | 10.0 | ||||||||||||
Net periodic benefit cost (income) | $ | (28.2 | ) | $ | 43.6 | $ | 15.4 | $ | (5.2 | ) | $ | 29.3 | $ | 24.1 | |||||
Other changes recognized in accumulated other comprehensive (income) loss | |||||||||||||||||||
Net actuarial (gain) loss | $ | 740.6 | $ | (13.4 | ) | $ | 727.2 | $ | (81.1 | ) | $ | 20.1 | $ | (61.0 | ) | ||||
Prior service cost | — | — | — | 4.0 | 0.3 | 4.3 | |||||||||||||
Amortization of net gain (loss) | 9.4 | (10.9 | ) | (1.5 | ) | (2.8 | ) | (7.2 | ) | (10.0 | ) | ||||||||
Amortization of prior service cost benefit | 6.7 | 2.9 | 9.6 | 5.9 | 2.4 | 8.3 | |||||||||||||
Total recognized in pre-tax accumulated other comprehensive (income) loss | $ | 756.7 | $ | (21.4 | ) | $ | 735.3 | $ | (74.0 | ) | $ | 15.6 | $ | (58.4 | ) | ||||
Total recognized in net periodic benefit cost and pre-tax accumulated other comprehensive (income) loss | $ | 728.5 | $ | 22.2 | $ | 750.7 | $ | (79.2 | ) | $ | 44.9 | $ | (34.3 | ) | |||||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
14. Employee and Agent Benefits — (continued)
In addition, we have defined contribution plans that are generally available to all U.S. employees and agents. Eligible participants could not contribute more than $15,000$15,500 of their compensation to the plans in 2006.2008. Effective January 1, 2006, we made several changes to the retirement programs. In general, the pension and supplemental executive retirement plan benefit formulas were reduced, and the 401(k) matching contribution was increased. Employees who were ageages 47 or older
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
14. Employee and Agent Benefits — (continued)
with at least ten years of service on December 31, 2005, could elect to retain the prior benefit provisions and forgo receipt of the additional matching contributions. The employees who elected to retain the prior benefit provisions are referred to as "Grandfathered Choice Participants". In 2006, we matched the Grandfathered Choice Participant's contribution at a 50% contribution rate up to a maximum contribution of 3% of the participant's compensation. For all other participants, we matched the participant's contributions at a 75% contribution rate up to a maximum of 6% of the participant's compensation. The defined contribution plans allow employees to choose among various investment options, including our common stock. We contributed $41.2 million, $40.0 million and $36.4 million $19.0 millionin 2008, 2007 and $18.6 million in 2006, 2005, and 2004, respectively, to our qualified defined contribution plans.
We also have a nonqualified defined contribution plan available to select employees and agents which allows them to contribute amounts in excess of limits imposed by federal tax law. In 2006,2008 and 2007, we matched the Grandfathered Choice Participant's Contribution at a 50% contribution rate up to a maximum contribution of 3% of the participant's compensation. For all other participants, we matched the participant's contributions at a 75% contribution rate up to a maximum contribution of 6% of the participant's compensation. We contributed $7.3 million, $7.5 million and $8.0 million $4.8 millionin 2008, 2007 and $4.5 million in 2006, 2005, and 2004, respectively, to our nonqualified defined contribution plans.
15. Contingencies, Guarantees and Indemnifications
Litigation and Regulatory Contingencies
We are regularly involved in litigation, both as a defendant and as a plaintiff, but primarily as a defendant. Litigation naming us as a defendant ordinarily arises out of our business operations as a provider of asset management and accumulation products and services, life, health and disability insurance. Some of the lawsuits are class actions, or purport to be, and some include claims for punitive damages. In addition, regulatory bodies, such as state insurance departments, the SEC, the National Association of Securities Dealers, Inc.,Financial Industry Regulatory Authority, the Department of Labor and other regulatory bodies regularly make inquiries and conduct examinations or investigations concerning our compliance with, among other things, insurance laws, securities laws, ERISA and laws governing the activities of broker-dealers.
Several lawsuits have been filed against other insurance companies and insurance brokers alleging improper conduct relating to the payment and non-disclosure of contingent compensation and bid-rigging activity. Several of these suits were filed as purported class actions. Several state attorneys general and insurance regulators have initiated industry-wide inquiries or other actions relating to compensation arrangements between insurance brokers and insurance companies and other industry issues. Beginning in March of 2005, we have received subpoenas and interrogatories from the offices of the Attorneys General of New York and Connecticut seeking information related to compensation agreements with brokers and agents and the sale of retirement products and services. We are cooperating with these inquiries. To date, none of these Attorneys General investigations has resulted in any action against us. We are, however, engaged in discussions with the Connecticut and New York Attorney General's Office with respect to broker payments relating to sales of our single premium group annuity products, which primarily fund terminating defined benefit plans. At this point, we cannot predict the outcome of these discussions. We have received otherreceive requests from regulators and other governmental authorities relating to other industry issues and may receive additional such requests, including subpoenas and interrogatories, in the future.
On December 23, 2004, a lawsuit was filed in Iowa state court against us and our wholly owned subsidiaries, Principal Life and Principal Financial Services, Inc., on behalf of a proposed class comprised of the settlement class in the Principal Life sales practices class action settlement, which was approved in April 2001 by the United States District Court for the Southern District of Iowa. This more recent lawsuit claims that the treatment of the settlement costs of that sales practices litigation in relation to the allocation of demutualization consideration to Principal Life policyholders was inappropriate. Demutualization allocation was done pursuant to the terms of a plan of demutualization approved by the policyholders in July 2001 and the Commissioner in August 2001. The lawsuit further claims that such allocation was not accurately described to policyholders during the demutualization process and is a breach of the sales practices settlement. On January 27, 2005, we filed a notice to remove the action from state court to the United States District Court for the Southern District of Iowa. On July 22, 2005, the plaintiff's motion to remand the action to state court was denied, and our motion to dismiss the lawsuit was granted. On September 21, 2005, the plaintiff's motion to alter or amend the judgment was denied. On October 4, 2005, the plaintiff filed a notice of appeal to the United States Court of Appeals for the Eighth Circuit. Oral argument was held on April 20, 2006. On October 20, 2006, the Court of Appeals affirmed our motion to dismiss.
On November 8, 2006, a trustee of Fairmount Park Inc. Retirement Savings Plan filed a putative class action lawsuit in the United States District Court for the Southern District of Illinois against Principal Life. Principal Life's Motion to Transfer Venue was granted and the case is now pending in the Southern District of Iowa. The complaint alleges,alleged, among other things, that Principal Life breached its alleged fiduciary duties while performing services to 401(k) plans by failing to disclose, or adequately disclose, to employers or plan participants the fact that Principal Life receives "revenue sharing fees from mutual funds that are included in its pre-packaged 401(k) plans" and allegedly failed to use the revenue to defray the expenses of the services provided to the plans. Principal Life has filed its Answer and a Motion to Transfer and intends to aggressively defend the lawsuit. Plaintiff further allegesalleged that these acts constitute prohibited transactions under ERISA. Plaintiff seekssought to certify a class of all retirement plans to which Principal Life was a service provider and for which Principal Life received and retained "revenue sharing" fees from mutual funds. On August 27, 2008, the Plaintiff's Motion for Class Certification was denied. The Plaintiff seeks declaratory, injunctivefiled a petition seeking permission to appeal that ruling. The petition was denied on October 28, 2008.
On August 28, 2007, two plaintiffs, "Walsh and monetary relief.Young", filed a putative class action lawsuit in the United States District Court for the Southern District of Iowa against Principal Life intendsand Princor Financial Services Corporation (the "Principal Defendants"). The lawsuit alleges that the Principal Defendants breached alleged fiduciary duties to participants in employer-sponsored 401(k) plans who were retiring or leaving their respective plans, including providing misleading information and failing to act solely in the interests of the participants, resulting in alleged violations of ERISA. The Principal Defendants are aggressively defenddefending the lawsuit.
On February 28, 2007, Luz Zapien ("Zapien") filed a securities class action against Washington Mutual, Inc. ("WaMu"), us and certain mutual fund-related entities. The Complaint alleged that WaMu had inadequately disclosed an alleged shelf-space arrangement that misled fund investors during the putative class period. We were named in the Complaint based on our December 2006 purchase of the distributor, investment advisor and assets of the relevant WaMu mutual funds ("the acquired business"). This action was dismissed with prejudice on June 17, 2008 and is on appeal to the Ninth Circuit Court of Appeals. In addition, on August 20, 2008, counsel for the Plaintiffs filed a new class action,
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
15. Contingencies, Guarantees and Indemnifications — (continued)
Robinson v. WM Trust I, et al., in the United States District Court for the Western District of Washington, making the same allegations that were contained inZapien. On September 26, 2008, the Robinson Plaintiffs filed a First Amended Complaint which dropped the WaMu defendants, added four directors of the Principal Mutual Funds entity in their individual capacity, and amended the putative class to include "all persons or entities that purchased or otherwise acquired shares, units or like interests in any of the WM Funds (including through the reinvestment of Fund dividends) between March 1, 2002, and December 31, 2006, inclusive". A new lead plaintiff, "Dumdie", has been substituted for Robinson. The Purchase Agreement of the acquired business contained an indemnification provision from WaMu that we believed would have significantly limited our exposure in these lawsuits. The bankruptcy filing by WaMu raises concerns as to the availability of any indemnification protection for us. We are aggressively defending both lawsuits.
While the outcome of any pending or future litigation or regulatory matter cannot be predicted, management does not believe that any pending litigation or regulatory matter will have a material adverse effect on our business or financial position. The outcome of litigationsuch matters is always uncertain, and unforeseen results can occur. It is possible that such outcomes could materially affect net income in a particular quarter or annual period.
Guarantees and Indemnifications
In the normal course of business, we have provided guarantees to third parties primarily related to a former subsidiary, joint ventures and industrial revenue bonds. These agreements generally expire through 2019. The maximum exposure under these agreements as of December 31, 2006,2008, was approximately $180.0 million; however,$221.0 million. At inception, the fair value of such guarantees was insignificant. In addition, we believe the likelihood is remote that material payments will be required and therefore have notrequired. Therefore, any liability accrued for a liability onwithin our consolidated statements of financial position.position is insignificant. Should we be required to perform under these guarantees, we generally could recover a portion of the loss from third parties through recourse provisions included in agreements with such parties, the sale of assets held as collateral that can be liquidated in the event that performance is required under the guarantees or other recourse generally available to us,us; therefore, such guarantees would not result in a material adverse effect on our business or financial position. ItWhile the likelihood is possible thatremote, such outcomes could materially affect net income in a particular quarter or annual period. The fair value of such guarantees is not material.
We are also subject to various other indemnification obligations issued in conjunction with certain transactions, primarily the sale of Principal Residential Mortgage, Inc. and other divestitures, acquisitions and financing transactions whose terms range in duration and often are not explicitly defined. Certain portions of these indemnifications may be capped, while other portions are not subject to such limitations; therefore, the overall maximum amount of the obligation under the indemnifications cannot be reasonably estimated. At inception, the fair value of such indemnifications was insignificant. In addition, we believe the likelihood is remote that material payments will be required. Therefore, any liability accrued within our consolidated statements of financial position is insignificant. While we are unable to estimate with certainty the ultimate legal and financial liability with respect to these indemnifications, we believe the likelihood is remote that material payments would be requiredperformance under such indemnifications and therefore suchthese indemnifications would not result in a material adverse effect on our business or financial position. ItWhile the likelihood is possible that such outcomesremote, performance under these indemnifications could materially affect net income in a particular quarter or annual period. The fair value
Guaranty Funds
Under state insurance guaranty fund laws, insurers doing business in a state can be assessed, up to prescribed limits, for certain obligations of such indemnificationsinsolvent insurance companies to policyholders and claimants. A state's fund assesses its members based on their pro rata market share of written premiums in the state for the classes of insurance for which the insolvent insurer was determinedengaged. Some states permit member insurers to recover assessments paid through full or partial premium tax offsets. We accrue liabilities for guaranty fund assessments when an assessment is probable, can be insignificant.reasonably estimated and when the event obligating us to pay has occurred. While we cannot predict the amount and timing of any future assessments, we have established reserves we believe are adequate for assessments relating to insurance companies that are currently subject to insolvency proceedings. As of December 31, 2008 and 2007, the liability balance for guaranty fund assessments, which is not discounted, was $16.2 million and $9.8 million, respectively, and was reported within other liabilities in the consolidated statements of financial position. As of December 31, 2008 and 2007, $8.1 million and $2.4 million, respectively, related to premium tax offsets were included in premiums due and other receivables in the consolidated statements of financial position.
Operating Leases
As a lessee, we lease office space, data processing equipment, office furniture and office equipment under various operating leases. Rental expense for the yearyears ended December 31, 2006, 20052008, 2007 and 2004,2006, respectively, was $47.5$54.4 million, $52.1$53.6 million and $46.2$54.8 million.
At December 31, 2006, the future minimum lease payments are $201.5 million. The following represents payments due by period for operating lease obligations as of December 31, 2006 (in millions).
| Year ending December 31: | ||||
| 2007 | $ | 56.4 | ||
| 2008 | 47.8 | |||
| 2009 | 37.3 | |||
| 2010 | 26.8 | |||
| 2011 | 17.0 | |||
| 2012 and thereafter | 30.2 | |||
| 215.5 | ||||
| Less future sublease rental income on noncancelable leases | 14.0 | |||
| Total future minimum lease payments | $ | 201.5 | ||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
15. Contingencies, Guarantees and Indemnifications — (continued)
At December 31, 2008, the future minimum lease payments are $193.4 million. The following represents payments due by period for operating lease obligations as of December 31, 2008 (in millions):
| | | ||||
|---|---|---|---|---|---|
Year ending December 31: | |||||
2009 | $ | 53.9 | |||
2010 | 44.0 | ||||
2011 | 29.8 | ||||
2012 | 19.6 | ||||
2013 | 15.2 | ||||
2014 and thereafter | 36.0 | ||||
| 198.5 | |||||
Less: Future sublease rental income on noncancelable leases | 5.1 | ||||
Total future minimum lease payments | $ | 193.4 | |||
Capital LeaseLeases
Beginning in 2007, we leased hardware storage equipment under capital leases. As of December 31, 2008 and 2007, these leases had a gross asset balance of $21.0 million and $15.2 million and accumulation depreciation of $10.5 million and $5.0 million, respectively. Depreciation expense for the years ended December 31, 2008 and 2007, was $6.2 million and $5.0 million, respectively.
As a lessee,of December 31, 2008, we leaseno longer leased an aircraft under a capital lease. As of December 31, 2006 and 2005, respectively, the2007, we leased an aircraft which had a gross asset balance of $14.4 million and accumulated depreciation of $1.1 million and $0.5$1.7 million. Depreciation expense for botheach of the years ended December 31, 2008, 2007 and 2006 was zero, $0.6 million and 2005, was $0.6 million.million, respectively.
At December 31, 2006, theThe following represents future minimum lease payments are $17.9 million. The following represents payments due by period for capital lease obligations as of December 31, 20062008 (in millions).
| Year ending December 31: | |||||
| 2007 | $ | 0.9 | |||
| 2008 | 1.0 | ||||
| 2009 | 1.1 | ||||
| 2010 | 1.1 | ||||
| 2011 | 1.2 | ||||
| 2012 and thereafter | 12.6 | ||||
| Total | $ | 17.9 | |||
| | | |||||
|---|---|---|---|---|---|---|
Year ending December 31: | ||||||
2009 | $ | 5.7 | ||||
2010 | 3.6 | |||||
2011 | 2.0 | |||||
2012 | 0.2 | |||||
2013 | — | |||||
2014 and thereafter | — | |||||
Total | 11.5 | |||||
Less: Amounts representing interest | 0.7 | |||||
Net present value of minimum lease payments | $ | 10.8 | ||||
Securities Posted as CollateralLetters of Credit
We posted $484.5have entered into agreements with third parties who issue standby letters of credit on behalf of a wholly-owned captive reinsurance subsidiary. The letters of credit are used to support the statutory reserves assumed by our captive reinsurance company. The letters of credit, which we guarantee, also allow Principal Life to take credit for ceded reserves on its statutory balance sheet. As of December 31, 2008 and 2007, there was a total of $429.0 million and $365.0 million in securities under collateral agreements at December 31, 2006, to satisfy collateral requirements primarily associated with our derivativesoutstanding letters of credit, support agreements and a reinsurance arrangement with our U.S. Asset Management and Accumulation segment.respectively.
16. Stockholders' Equity
Preferred Stock
As of December 31, 2006,2008, we had 13.0 million shares of preferred stock authorized, issued and outstanding under the two series described below. Preferred stockholders have dividend and liquidation priority over common stockholders.
Series A. On June 16, 2005, we issued 3.0 million shares of fixed rate, non-cumulative, Series A Perpetual Preferred Stock ("Series A Preferred Stock"), at an initial offering price of $100 per share. We received net proceeds of $296.0 million after offering costs. Dividends on the Series A Preferred Stock are non-cumulative and are payable
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
16. Stockholders' Equity — (continued)
quarterly when, and if, declared by our Board of Directors. Dividends commenced on September 30, 2005, at a rate of 5.563% per annum of the liquidation preference. On or after the dividend payment date in June 2015, the Series A initial distribution rate will become a floating rate, subject to reset, at our option, subject to certain conditions and parameters. If reset, the rate may be at fixed or floating rates. On or after the dividend payment date in June 2015, we may, at our option, redeem the shares at a price of $100 per share, or $300.0 million in the aggregate, plus accrued and unpaid dividends for the then current dividend period to the date of redemption, if any.
The Series A Preferred Stock has no stated maturity and is not convertible into any other of our securities. Series A Preferred Stock will have no voting rights, except with respect to certain fundamental changes in the terms of the shares and in the case of certain dividend non-payments.
Series B. On June 16, 2005, we issued 10.0 million shares of fixed rate, non-cumulative, Series B Perpetual Preferred Stock ("Series B Preferred Stock"), at an initial offering price of $25 per share. We received net proceeds of $246.0 million after offering costs. Dividends on the Series B Preferred Stock are non-cumulative and are payable quarterly when, and if, declared by the Board of Directors. Dividends commenced on September 30, 2005, at a rate of 6.518% per annum of the liquidation preference. On or after the dividend payment date in June 2035, the Series B initial distribution rate will become a floating rate, subject to reset, at our option, subject to certain conditions and parameters. If reset, the rate may be at fixed or floating rates. On or after the dividend payment date in June 2015, we may, at our option, redeem the shares at a price of $25 per share, or $250.0 million in the aggregate, plus accrued and unpaid dividends for the then current dividend period to the date of redemption, if any.
The Series B Preferred Stock has no stated maturity and is not convertible into any other of our securities. Series B Preferred Stock will have no voting rights, except with respect to certain fundamental changes in the terms of the shares and in the case of certain dividend non-payments.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
16. Stockholders' Equity — (continued)
Dividend Restrictions and Payments
The certificates of designationsdesignation for the Series A and B Preferred Stock restrict the declaration of preferred dividends if we fail to meet specified capital adequacy, net income or stockholders' equity levels. As of December 31, 2006,2008, we have no preferred dividend restrictions.
On March 31, 2008, June 30, 2008, September 30, 2008 and December 30, 2008, we paid a dividend of $8.2 million, $8.3 million, $8.2 million and $8.3 million, respectively, equal to $1.39 per share on Series A non-cumulative perpetual preferred stock and equal to $0.41 per share on Series B non-cumulative perpetual preferred stock. Dividends were paid to stockholders of record as of March 13, 2008, June 12, 2008, September 11, 2008 and December 11, 2008, respectively.
On March 30, 2007, July 2, 2007, October 1, 2007 and December 31, 2007, we paid a dividend of $8.2 million, $8.3 million, $8.2 million and $8.3 million, respectively, equal to $1.39 per share on Series A non-cumulative perpetual preferred stock and equal to $0.41 per share on Series B non-cumulative perpetual preferred stock. Dividends were paid to stockholders of record as of March 15, 2007, June 14, 2007, September 13, 2007 and December 13, 2007, respectively.
On March 30, 2006, June 30, 2006, October 2, 2006, and January 2, 2007, we paid a dividend of $8.3 million, $8.2 million, $8.3 million and $8.2 million, respectively, equal to $1.39 per share on Series A non-cumulative perpetual preferred stock and equal to $0.41 per share on Series B non-cumulative perpetual preferred stock. Dividends were paid to stockholders of record as of March 15, 2006, June 15, 2006, September 14, 2006, and December 14, 2006, respectively.
Common Stock
On September 30, 2005, and December 30, 2005,5, 2008, we paid aan annual dividend of $9.4$116.7 million, and $8.3 million, respectively, equal to $1.59$0.45 per share, and $1.39 per share, respectively, on Series A non-cumulative perpetual preferred stock and equal to $0.47 per share and $0.41 per share, respectively, on Series B non-cumulative perpetual preferred stock, to stockholders of record as of September 1, 2005, andNovember 14, 2008. On December 15, 2005, respectively.
Common Stock
7, 2007, we paid an annual dividend of $235.6 million, equal to $0.90 per share, to stockholders of record as of November 16, 2007. On December 15, 2006, we paid an annual dividend of $214.7 million, equal to $0.80 per share, to stockholders of record as of November 22, 2006.
During November 2007, our Board of Directors authorized a share repurchase program of up to $500.0 million of our outstanding common stock. On December 16, 2005,November 30, 2007, we entered into an accelerated common stock repurchase agreement with a third party investment bank for an aggregate purchase price of $250.0 million. On this date, we paid an annual dividend$250.0 million and received the initial delivery of $182.22.9 million equalcommon shares, while retaining the right to $0.65 per share,receive additional common shares over the program's execution period. The accelerated common stock repurchase agreement was completed in January 2008, at which time we received 0.9 million additional common shares under this agreement. As of December 31, 2008, $250.0 million remained available under the November 2007 authorization. In the fourth
Principal Financial Group, Inc.
Notes to stockholdersConsolidated Financial Statements — (continued)
16. Stockholders' Equity — (continued)
quarter of record as2008, we suspended purchases of the remaining $250.0 million available under the November 17, 2005. On December 17, 2004, we paid an annual dividend of $166.5 million, equal to $0.55 per share, to stockholders of record as of November 12, 2004.2007 authorization.
On May 19, 2006, following our Board of Directors' share repurchase authorization, we entered into an accelerated common stock repurchase agreement with a third party investment bank for an aggregate purchase price of $500.0 million. On this date, we paid $500.0 million and received the initial delivery of 7.7 million common shares, while retaining the right to receive additional common shares depending on the volume weighted average share price of our common stock over the program's duration. The program was completed in November 2006. Under this program, we purchased a total of 9.3 million common shares at an average price of $53.59.
In June 2005, following our Board of Directors' share repurchase authorization of up to 15.0 million shares, we entered into an accelerated stock repurchase agreement with a third party investment bank for approximately 13.7 million shares of our common stock with an initial payment of $542.3 million, using cash proceeds from the preferred stock issuance. The transaction was subject to a market price adjustment provision based on the volume weighted average market price over the execution period, which could be settled in shares or cash. On October 3, 2005, we elected to settle in cash. On November 10, 2005, the transaction was completed for an additional payment of $84.0 million.shares.
In the last three years, our Board of Directors has authorized various repurchase programs under which we are allowed to purchase shares of our outstanding common stock. Shares repurchased under these programs are accounted for as treasury stock, carried at cost and reflected as a reduction to stockholders' equity.
In November 2006, our BoardReconciliation of Directors authorized a repurchase program of up to $250.0 million of our outstanding common stock. As of December 31, 2006, no purchases have been made under this program.Outstanding Shares
| | Series A preferred stock | Series B preferred stock | Common stock | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | |||||||||
Outstanding shares at January 1, 2006 | 3.0 | 10.0 | 280.6 | |||||||
Shares issued | — | — | 2.3 | |||||||
Treasury stock acquired | — | — | (14.5 | ) | ||||||
Outstanding shares at December 31, 2006 | 3.0 | 10.0 | 268.4 | |||||||
Shares issued | — | — | 2.2 | |||||||
Treasury stock acquired | — | — | (11.5 | ) | ||||||
Outstanding shares at December 31, 2007 | 3.0 | 10.0 | 259.1 | |||||||
Shares issued | — | — | 1.2 | |||||||
Treasury stock acquired | — | — | (1.0 | ) | ||||||
Outstanding shares at December 31, 2008 | 3.0 | 10.0 | 259.3 | |||||||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
16. Stockholders' Equity — (continued)
Reconciliation of Outstanding Shares
| | Series A Preferred Stock | Series B Preferred Stock | Common Stock | ||||
|---|---|---|---|---|---|---|---|
| | (in millions) | ||||||
| Outstanding shares at January 1, 2004 | — | — | 320.7 | ||||
| Shares issued | — | — | 1.6 | ||||
| Treasury stock acquired | — | — | (21.7 | ) | |||
| Outstanding shares at December 31, 2004 | — | — | 300.6 | ||||
| Shares issued | 3.0 | 10.0 | 2.2 | ||||
| Treasury stock acquired | — | — | (22.2 | ) | |||
| Outstanding shares at December 31, 2005 | 3.0 | 10.0 | 280.6 | ||||
| Shares issued | — | — | 2.3 | ||||
| Treasury stock acquired | — | — | (14.5 | ) | |||
| Outstanding shares at December 31, 2006 | 3.0 | 10.0 | 268.4 | ||||
Accumulated Other Comprehensive Income (Loss)
Comprehensive income includes all changes in stockholders' equity during a period except those resulting from investments by stockholders and distributions to stockholders.
The components of accumulated other comprehensive income (loss) were as follows:
| | Net unrealized gains on available-for-sale securities | Net unrealized losses on derivative instruments | Foreign currency translation adjustment | Minimum pension liability | Accumulated other comprehensive income | ||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | Net unrealized gains on available-for-sale securities | Net unrealized gains on derivative instruments | Foreign currency translation adjustment | Unrecognized post-retirement benefit obligations | Minimum pension liability | Accumulated other comprehensive income | ||||||||||||||||||||||||||||
| Balances at January 1, 2004 | $ | 1,350.4 | $ | (59.0 | ) | $ | (117.6 | ) | $ | (2.5 | ) | $ | 1,171.3 | ||||||||||||||||||||||
| | (in millions) | ||||||||||||||||||||||||||||||||||
Balances at January 1, 2006 | $ | 1,004.0 | $ | 23.9 | $ | (21.6 | ) | $ | — | $ | (11.5 | ) | $ | 994.8 | |||||||||||||||||||||
| Net change in unrealized gains on fixed maturities, available-for-sale | 91.3 | — | — | — | 91.3 | (349.7 | ) | — | — | — | — | (349.7 | ) | ||||||||||||||||||||||
| Net change in unrealized gains on equity securities, available-for-sale | (4.1 | ) | — | — | — | (4.1 | ) | (11.4 | ) | — | — | — | — | (11.4 | ) | ||||||||||||||||||||
| Net change in unrealized gains on equity method subsidiaries and minority interest adjustments | (28.0 | ) | — | — | — | (28.0 | ) | 26.7 | — | — | — | — | 26.7 | ||||||||||||||||||||||
| Adjustments for assumed changes in amortization pattern | 28.2 | — | — | — | 28.2 | 8.1 | — | — | — | — | 8.1 | ||||||||||||||||||||||||
| Net change in unrealized losses on derivative instruments | — | 88.9 | — | — | 88.9 | ||||||||||||||||||||||||||||||
Net change in unrealized gains on derivative instruments | — | 6.8 | — | — | — | 6.8 | |||||||||||||||||||||||||||||
| Net change in unrealized gains on policyholder dividend obligation | (19.5 | ) | — | — | — | (19.5 | ) | 33.7 | — | — | — | — | 33.7 | ||||||||||||||||||||||
| Change in net foreign currency translation adjustment | — | — | 32.8 | — | 32.8 | — | — | (1.1 | ) | — | — | (1.1 | ) | ||||||||||||||||||||||
| Change in minimum pension liability adjustment | — | — | — | (4.3 | ) | (4.3 | ) | ||||||||||||||||||||||||||||
Change in minimum pension liability | — | — | — | — | 4.2 | 4.2 | |||||||||||||||||||||||||||||
Transition adjustment related to post-retirement benefit obligations | — | — | — | 22.3 | 13.4 | 35.7 | |||||||||||||||||||||||||||||
| Net change in provision for deferred income tax benefit (expense) | (13.2 | ) | (31.1 | ) | (0.5 | ) | 1.5 | (43.3 | ) | 119.3 | (2.4 | ) | (3.9 | ) | (7.8 | ) | (6.1 | ) | 99.1 | ||||||||||||||||
| Balances at December 31, 2004 | $ | 1,405.1 | $ | (1.2 | ) | $ | (85.3 | ) | $ | (5.3 | ) | $ | 1,313.3 | ||||||||||||||||||||||
Balances at December 31, 2006 | $ | 830.7 | $ | 28.3 | $ | (26.6 | ) | $ | 14.5 | $ | — | $ | 846.9 | ||||||||||||||||||||||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
16. Stockholders' Equity — (continued)
| | Net unrealized gains on available-for-sale securities | Net unrealized gains (losses) on derivative instruments | Foreign currency translation adjustment | Minimum pension liability | Accumulated other comprehensive income | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | |||||||||||||||
| Balances at January 1, 2005 | $ | 1,405.1 | $ | (1.2 | ) | $ | (85.3 | ) | $ | (5.3 | ) | $ | 1,313.3 | |||
| Net change in unrealized gains on fixed maturities, available-for-sale | (834.0 | ) | — | — | — | (834.0 | ) | |||||||||
| Net change in unrealized gains on equity securities, available-for-sale | 6.3 | — | — | — | 6.3 | |||||||||||
| Net change in unrealized gains on equity method subsidiaries and minority interest adjustments | 20.2 | — | — | — | 20.2 | |||||||||||
| Adjustments for assumed changes in amortization pattern | 94.7 | — | — | — | 94.7 | |||||||||||
| Net change in unrealized losses on derivative instruments | — | 41.6 | — | — | 41.6 | |||||||||||
| Net change in unrealized gains on policyholder dividend obligation | 84.7 | — | — | — | 84.7 | |||||||||||
| Change in net foreign currency translation adjustment | — | — | 62.1 | — | 62.1 | |||||||||||
| Change in minimum pension liability adjustment | — | — | — | (9.5 | ) | (9.5 | ) | |||||||||
| Net change in provision for deferred income tax benefit | 227.0 | (16.5 | ) | 1.6 | 3.3 | 215.4 | ||||||||||
| Balances at December 31, 2005 | $ | 1,004.0 | $ | 23.9 | $ | (21.6 | ) | $ | (11.5 | ) | $ | 994.8 | ||||
| | Net unrealized gains (losses) on available-for-sale securities | Net unrealized gains on derivative instruments | Foreign currency translation adjustment | Unrecognized post-retirement benefit obligations | Accumulated other comprehensive income (loss) | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | |||||||||||||||
Balances at January 1, 2007 | $ | 830.7 | $ | 28.3 | $ | (26.6 | ) | $ | 14.5 | $ | 846.9 | |||||
Net change in unrealized gains on fixed maturities, available-for-sale | (991.4 | ) | — | — | — | (991.4 | ) | |||||||||
Net change in unrealized gains on equity securities, available-for-sale | (12.8 | ) | — | — | — | (12.8 | ) | |||||||||
Net change in unrealized gains on equity method subsidiaries and minority interest adjustments | 68.4 | — | — | — | 68.4 | |||||||||||
Adjustments for assumed changes in amortization pattern | 130.3 | — | — | — | 130.3 | |||||||||||
Net change in unrealized gains on derivative instruments | — | (25.7 | ) | — | — | (25.7 | ) | |||||||||
Change in net foreign currency translation adjustment | — | — | 68.1 | — | 68.1 | |||||||||||
Change in unrecognized post-retirement benefit obligations | — | — | — | 81.1 | 81.1 | |||||||||||
Net change in provision for deferred income tax benefit (expense) | 277.7 | 11.6 | (5.6 | ) | (28.4 | ) | 255.3 | |||||||||
Balances at December 31, 2007 | 302.9 | 14.2 | 35.9 | 67.2 | 420.2 | |||||||||||
Net change in unrealized gains on fixed maturities, available-for-sale | (8,037.9 | ) | — | — | — | (8,037.9 | ) | |||||||||
Net change in unrealized gains on equity securities, available-for-sale | (61.3 | ) | — | — | — | (61.3 | ) | |||||||||
Net change in unrealized gains on equity method subsidiaries and minority interest adjustments | 27.2 | — | — | — | 27.2 | |||||||||||
Adjustments for assumed changes in amortization pattern | 1,173.0 | — | — | — | 1,173.0 | |||||||||||
Adjustment for assumed changes in liability for policyholder benefits and claims | 3.3 | — | — | — | 3.3 | |||||||||||
Net change in unrealized gains on derivative instruments | — | 29.3 | — | — | 29.3 | |||||||||||
Change in net foreign currency translation adjustment | — | — | (227.0 | ) | — | (227.0 | ) | |||||||||
Effects of changing post-retirement benefit plan measurement date | — | — | — | (3.1 | ) | (3.1 | ) | |||||||||
Change in unrecognized post-retirement benefit obligations | — | — | — | (973.1 | ) | (973.1 | ) | |||||||||
Net change in provision for deferred income tax benefit (expense) | 2,384.8 | (6.3 | ) | 17.6 | 341.7 | 2,737.8 | ||||||||||
Balances at December 31, 2008 | $ | (4,208.0 | ) | $ | 37.2 | $ | (173.5 | ) | $ | (567.3 | ) | $ | (4,911.6 | ) | ||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
16. Stockholders' Equity — (continued)
| | Net unrealized gains on available-for-sale securities | Net unrealized gains on derivative instruments | Foreign currency translation adjustment | Unrecognized post-retirement benefit obligations | Minimum pension liability | Accumulated other comprehensive income | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | | |||||||||||||||||
| Balances at January 1, 2006 | $ | 1,004.0 | $ | 23.9 | $ | (21.6 | ) | $ | — | $ | (11.5 | ) | $ | 994.8 | |||||
| Net change in unrealized gains on fixed maturities, available-for-sale | (349.7 | ) | — | — | — | — | (349.7 | ) | |||||||||||
| Net change in unrealized gains on equity securities, available-for-sale | (11.4 | ) | — | — | — | — | (11.4 | ) | |||||||||||
| Net change in unrealized gains on equity method subsidiaries and minority interest adjustments | 26.7 | — | — | — | — | 26.7 | |||||||||||||
| Adjustments for assumed changes in amortization pattern | 8.1 | — | — | — | — | 8.1 | |||||||||||||
| Net change in unrealized gains on derivative instruments | — | 6.8 | — | — | — | 6.8 | |||||||||||||
| Net change in unrealized gains on policyholder dividend obligation | 33.7 | — | — | — | — | 33.7 | |||||||||||||
| Change in net foreign currency translation adjustment | — | — | (1.1 | ) | — | — | (1.1 | ) | |||||||||||
| Change in minimum pension liability | — | — | — | — | 4.2 | 4.2 | |||||||||||||
| Transition adjustment related to post-retirement benefit obligations | — | — | — | 22.3 | 13.4 | 35.7 | |||||||||||||
| Net change in provision for deferred income tax benefit (expense) | 119.3 | (2.4 | ) | (3.9 | ) | (7.8 | ) | (6.1 | ) | 99.1 | |||||||||
| Balances at December 31, 2006 | $ | 830.7 | $ | 28.3 | $ | (26.6 | ) | $ | 14.5 | $ | — | $ | 846.9 | ||||||
The following table sets forth the adjustments necessary to avoid duplication of items that are included as part of net income for a year that had been part of other comprehensive income in prior years:
| | For the year ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2006 | 2005 | 2004 | |||||||
| | (in millions) | |||||||||
| Unrealized gains (losses) on available-for-sale securities arising during the year | $ | (164.7 | ) | $ | (366.8 | ) | $ | 122.6 | ||
| Adjustment for realized losses on available-for-sale securities included in net income | (4.2 | ) | (9.2 | ) | (10.1 | ) | ||||
| Unrealized gains (losses) on available-for-sale securities, as adjusted | $ | (168.9 | ) | $ | (376.0 | ) | $ | 112.5 | ||
| | For the year ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2008 | 2007 | 2006 | |||||||
| | (in millions) | |||||||||
Unrealized losses on available-for-sale securities and derivative instruments arising during the year | $ | (4,466.9 | ) | $ | (620.6 | ) | $ | (187.9 | ) | |
Adjustment for realized gains (losses) on available-for-sale securities and derivative instruments included in net income | (21.0 | ) | 78.7 | 19.0 | ||||||
Unrealized losses on available-for-sale securities and derivative instruments, as reported | $ | (4,487.9 | ) | $ | (541.9 | ) | $ | (168.9 | ) | |
The above table is presented net of income tax,includes unrealized gains (losses) on available-for-sale securities and derivatives in cash flow hedge relationships PDO andnet of adjustments related changes in the amortization patterns ofto DPAC, sales inducements, and unearned revenue reserves.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
16. Stockholders' Equity — (continued)reserves, changes in policyholder benefits and claims and applicable income taxes.
Dividend Limitations
Under Iowa law, Principal Life may pay stockholder dividends only from the earned surplus arising from its business and must receive the prior approval of the Commissioner to pay a stockholder dividend if such a stockholder dividend would exceed certain statutory limitations. The current statutory limitation is the greater of 10% of Principal Life's policyholder surplus as of the preceding year-end or the net gain from operations from the previous calendar year. Based on this limitation and 20062008 statutory results, Principal Life could pay approximately $660.4$651.3 million in stockholder dividends in 20072009 without exceeding the statutory limitation.
17. Fair Value of Financial Instruments
The following discussion describes the methods and assumptions we utilize in estimating our We use fair value disclosures formeasurements to record fair value of certain assets and liabilities and to estimate fair value of financial instruments.instruments not recorded at fair value but required to be disclosed at fair value under SFAS No. 107, Disclosure About Fair Value of Financial Instruments ("SFAS 107"). We follow SFAS 157 to determine SFAS 107 fair value disclosure amounts. Certain financial instruments, particularly policyholder liabilities other than investment-type contracts, are excluded from these fair value disclosure requirements.
Valuation hierarchy
SFAS 157 defines fair value 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). For SFAS 157 disclosures, SFAS 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
17. Fair Value of Financial Instruments — (continued)
Determination of fair value
The following discussion describes the valuation methodologies used for assets and liabilities measured or disclosed at fair value. The techniques utilized in estimating the fair values of financial instruments are affected byreliant on the assumptions used, including discount rates and estimates of the amount and timing of future cash flows. Care should be exercised in deriving conclusions about our business, its value or financial position based on the fair value information of financial instruments presented below. The estimates shown are not necessarily indicative of the amounts that would be realized in a one-time, current market exchange of all of our financial instruments.
We define fair value as the quoted market prices for those instruments that are actively traded in financial markets. In cases where quoted market prices are not available, fair values are estimated using present value or other valuation techniques. The fairFair value estimates are made at a specific point in time, based on available market information and judgments about the financial instrument, including estimates of timing, amount of expected future cash flows and the credit standing of counterparties.the issuer. Such estimates do not consider the tax impact of the realization of unrealized gains or losses. In manysome cases, the fair value estimates cannot be substantiated by comparison to independent markets. In addition, the disclosed fair value may not be realized in the immediate settlement of the financial instrument.
Fixed Maturities and Equity Securities
Fair values of equity securities are determined using public quotations, when available. Fair values of public debtbonds and equitythose private securities that are actively traded in the secondary market have been determined by us from public quotations, when available.through the use of third-party pricing services using market observable inputs. Private placement securities and other corporate fixed maturities and equity securitieswhere we do not receive a public quotation are valued by discounting the expected total cash flows. Market rates used are applicable to the yield, credit quality and average maturity of each security. Private equity securities may also utilize internal valuation methodologies appropriate for the specific asset. Fair values might also be determined using broker quotes or through the use of internal models or analysis.
Derivatives
Fair values of derivative instruments are determined using either pricing valuation models that utilize market observable inputs or broker quotes. The valuation models consider projected discounted cash flows, relevant swap curves and appropriate implied volatilities.
Mortgage Loans
Fair values of commercial and residential mortgage loans are determined by discounting the expected total cash flows using market rates that are applicable to the yield, credit quality and maturity of each loan.
Policy Loans
Fair values of policy loans are estimated by discounting expected cash flows using a risk-free rate based on the U.S. Treasury curve.
Other Investments
Other investments reported at fair value primarily include seed money investments, for which the fair value is determined using the net asset value of the fund. The fair values forcarrying amounts of other assets classified as other investments excluding equity investments in subsidiaries and cash and cash equivalents in the accompanying consolidated statements of financial position approximate their fair values.
Cash and Cash Equivalents
Because of the nature of these assets, carrying amounts.amounts approximate fair values. Fair values of cash equivalents may be determined using public quotations, when available.
Securities Lending Collateral and Securities Lending Payable
The carrying amounts of our securities lending cash collateral and securities lending payable approximate their fair value. During the third quarter of 2008, we decided to temporarily unwind the securities lending program due to a downturn in current economic conditions.
Separate Account Assets
Separate account assets include public equity, public and private debt securities and derivative instruments, for which fair values are determined as previously described. Separate account assets also include commercial mortgage loans, for which the fair value is estimated by discounting the expected total cash flows using market rates that are applicable to the yield, credit quality and maturity of the loans. Finally, separate account assets include real estate, for
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
17. Fair Value of Financial Instruments — (continued)
which the fair value is estimated using discounted cash flow valuation models that utilize public real estate market data inputs such as transaction prices, market rents, vacancy levels, leasing absorption, market cap rates and discount rates. In addition, each property is appraised annually by an independent appraiser.
Investment-Type Insurance Contracts
The fair values of our reserves and liabilities for investment-type insurance contracts are estimated using discounted cash flow analyses based on current interest rates being offered for similar contracts with maturities consistent with those remaining for the investment-type contracts being valued. Investment-type insurance contracts include insurance, annuity and other policy contracts that do not involve significant mortality or morbidity risk and that are only a portion of the policyholder liabilities appearing in the consolidated statements of financial position. Insurance contracts include insurance, annuity and other policy contracts that do involve significant mortality or morbidity risk. The fair values for our insurance contracts, other than investment-type contracts, are not required to be disclosed. We do consider, however, the various insurance and investment risks in choosing investments for both insurance and investment-type contracts. Certain annuity contracts and other investment-type insurance contracts include embedded derivatives that have been bifurcated from the host contract. The fair value of embedded derivatives is calculated based on actuarial and capital market assumptions, including non-performance risk, reflecting the projected cash flows over the life of the contract, incorporating expected policyholder behavior.
Short-Term Debt
The carrying amount of short-term debt approximates its fair value because of the relatively short time between origination of the debt instrument and its maturity.
Long-Term Debt
Fair values for debt issues are estimated using discounted cash flow analysis based on our incremental borrowing rate for similar borrowing arrangements.
Separate Account Liabilities
Fair values of separate account liabilities, excluding insurance-related elements, are estimated based on market assumptions around what a potential acquirer would pay for the associated block of business, including both the separate account assets and liabilities. As the applicable separate account assets are already reflected at fair value, any adjustment to the fair value of the block is an assumed adjustment to the separate account liabilities. To compute fair value, the separate account liabilities are originally set to equal separate account assets because these are pass-through contracts. The separate account liabilities are reduced by the amount of future fees expected to be collected that are intended to offset upfront acquisition costs already incurred that a potential acquirer would not have to pay. The estimated future fees are adjusted by an adverse deviation discount and the amount is then discounted at a risk-free rate as measured by the yield on U.S. Treasury securities at maturities aligned with the estimated timing of fee collection.
Other Liabilities
Certain obligations reported in other liabilities include embedded derivatives to deliver underlying securities of structured investments to third parties. The fair value of the embedded derivatives is calculated based the value of the underlying securities utilizing the yield, credit quality and average maturity of each security.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
17. Fair Value of Financial Instruments — (continued)
Assets and liabilities measured at fair value on a recurring basis
Assets and liabilities measured at fair value on a recurring basis are summarized below.
| | As of December 31, 2008 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Assets / (liabilities) measured at fair value | Fair value hierarchy level | ||||||||||||
| | Level 1 | Level 2 | Level 3 | |||||||||||
| | (in millions) | |||||||||||||
Assets | ||||||||||||||
Fixed maturities, available-for-sale | $ | 40,117.2 | $ | 126.7 | $ | 38,817.5 | $ | 1,173.0 | ||||||
Fixed maturities, trading | 843.4 | — | 782.7 | 60.7 | ||||||||||
Equity securities, available-for-sale | 242.7 | 176.4 | 10.1 | 56.2 | ||||||||||
Equity securities, trading | 158.0 | 61.3 | 96.7 | — | ||||||||||
Net derivative assets and liabilities (1) | (261.3 | ) | — | (95.1 | ) | (166.2 | ) | |||||||
Other investments (2) | 75.9 | 13.2 | 62.7 | — | ||||||||||
Cash equivalents (3) | 1,807.9 | 656.3 | 1,151.6 | — | ||||||||||
Sub-total excluding separate account assets | 42,983.8 | 1,033.9 | 40,826.2 | 1,123.7 | ||||||||||
Separate account assets | 55,142.6 | 30,693.4 | 18,406.9 | 6,042.3 | ||||||||||
Total assets | $ | 98,126.4 | $ | 31,727.3 | $ | 59,233.1 | $ | 7,166.0 | ||||||
Liabilities | ||||||||||||||
Investment-type insurance contracts (4) | $ | (60.2 | ) | $ | — | $ | — | $ | (60.2 | ) | ||||
Other liabilities (4) | (109.3 | ) | — | (5.5 | ) | (103.8 | ) | |||||||
Total liabilities | $ | (169.5 | ) | $ | — | $ | (5.5 | ) | $ | (164.0 | ) | |||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
17. Fair Value of Financial Instruments — (continued)
Changes in Level 3 fair value measurements
The reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2008, is as follows:
| | For the year ended December 31, 2008 | | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Total realized/unrealized gains (losses) | | | | Changes in unrealized gains (losses) included in net income relating to positions still held (1) | ||||||||||||||||
| | Beginning asset / (liability) balance as of January 1, 2008 | | | Ending asset / (liability) balance as of December 31, 2008 | ||||||||||||||||||
| | Purchases, sales, issuances and settlements | | ||||||||||||||||||||
| | Included in net income (1) | Included in other comprehensive income | Transfers in (out) of Level 3 | |||||||||||||||||||
| | (in millions) | |||||||||||||||||||||
Assets | ||||||||||||||||||||||
Fixed maturities, available-for-sale | $ | 2,201.3 | $ | (148.5 | ) | $ | (507.8 | ) | $ | (567.2 | ) | $ | 195.2 | $ | 1,173.0 | $ | (116.7 | ) | ||||
Fixed maturities, trading | 92.3 | (19.1 | ) | — | (11.4 | ) | (1.1 | ) | 60.7 | (19.1 | ) | |||||||||||
Equity securities, available-for-sale | 51.1 | (41.5 | ) | (12.1 | ) | 20.7 | 38.0 | 56.2 | (35.3 | ) | ||||||||||||
Net derivative assets and liabilities | (8.0 | ) | (125.3 | ) | (23.9 | ) | (9.0 | ) | — | (166.2 | ) | (130.5 | ) | |||||||||
Separate account assets | 7,313.2 | (958.9 | ) | 1.0 | (209.5 | ) | (103.5 | ) | 6,042.3 | (944.1 | ) | |||||||||||
Liabilities | ||||||||||||||||||||||
Investment-type insurance contracts | (49.3 | ) | (58.4 | ) | (0.1 | ) | 47.6 | — | (60.2 | ) | (70.4 | ) | ||||||||||
Other liabilities (2) | (155.6 | ) | — | 70.0 | (18.2 | ) | — | (103.8 | ) | — | ||||||||||||
Assets and liabilities measured at fair value on a nonrecurring basis
Certain assets are measured at fair value on a nonrecurring basis. During 2008, mortgage servicing rights with an aggregate cost of $14.9 million had been written down to fair value of $13.4 million, resulting in a charge of $1.5 million that was recorded in operating expenses. These mortgage servicing rights are a Level 3 fair value measurement, as fair value is determined by calculating the present value of the future servicing cash flows from the underlying mortgage loans.
Transition
In connection with our adoption of SFAS 157 on January 1, 2008, we recorded a $13.0 million pre-tax gain in net realized capital gains (losses) resulting from the incorporation of our own creditworthiness and additional risk margins in the valuation of certain embedded derivatives recorded at fair value.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
17. Fair Value of Financial Instruments — (continued)
SFAS 107 disclosures
The carrying amounts and estimated fair values of our financial instruments were as follows:
| | December 31, | December 31, | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2006 | 2005 | 2008 | 2007 | ||||||||||||||||||||||
| | Carrying amount | Fair value | Carrying amount | Fair value | Carrying amount | Fair value | Carrying amount | Fair value | ||||||||||||||||||
| | (in millions) | (in millions) | ||||||||||||||||||||||||
| Assets (liabilities) | ||||||||||||||||||||||||||
| Fixed maturities, available-for-sale | $ | 44,403.5 | $ | 44,403.5 | $ | 42,117.2 | $ | 42,117.2 | $ | 40,117.2 | $ | 40,117.2 | $ | 46,738.9 | $ | 46,738.9 | ||||||||||
| Fixed maturities, trading | 323.4 | 323.4 | 113.2 | 113.2 | 843.4 | 843.4 | 529.3 | 529.3 | ||||||||||||||||||
| Equity securities, available-for-sale | 666.6 | 666.6 | 724.4 | 724.4 | 242.7 | 242.7 | 316.4 | 316.4 | ||||||||||||||||||
| Equity securities, trading | 181.0 | 181.0 | 90.3 | 90.3 | 158.0 | 158.0 | 269.8 | 269.8 | ||||||||||||||||||
Net derivative assets and liabilities | (261.3 | ) | (261.3 | ) | 468.4 | 468.4 | ||||||||||||||||||||
| Mortgage loans | 11,663.9 | 12,166.7 | 11,484.3 | 12,319.7 | 13,113.6 | 13,350.5 | 12,659.6 | 13,391.2 | ||||||||||||||||||
| Policy loans | 850.7 | 930.7 | 827.7 | 925.6 | 896.4 | 1,134.7 | 869.9 | 956.5 | ||||||||||||||||||
| Other investments | 1,094.7 | 1,094.7 | 855.5 | 855.5 | 437.8 | 437.8 | 437.7 | 437.7 | ||||||||||||||||||
| Cash and cash equivalents | 1,590.8 | 1,590.8 | 1,639.3 | 1,639.3 | 2,608.0 | 2,608.0 | 1,344.4 | 1,344.4 | ||||||||||||||||||
Securities lending collateral | — | — | 622.7 | 622.7 | ||||||||||||||||||||||
Separate account assets | 55,142.6 | 55,142.6 | 80,486.8 | 80,486.8 | ||||||||||||||||||||||
| Investment-type insurance contracts | (34,256.6 | ) | (33,654.2 | ) | (31,210.5 | ) | (31,120.6 | ) | (39,732.9 | ) | (36,279.7 | ) | (37,390.5 | ) | (36,629.6 | ) | ||||||||||
| Short-term debt | (84.1 | ) | (84.1 | ) | (476.4 | ) | (476.4 | ) | (500.9 | ) | (500.9 | ) | (290.8 | ) | (290.8 | ) | ||||||||||
| Long-term debt | (1,553.8 | ) | (1,622.7 | ) | (898.8 | ) | (969.5 | ) | (1,290.5 | ) | (1,096.1 | ) | (1,398.8 | ) | (1,423.6 | ) | ||||||||||
Separate account liabilities | (49,256.5 | ) | (48,172.1 | ) | (72,394.2 | ) | (71,111.3 | ) | ||||||||||||||||||
Other liabilities | (109.3 | ) | (109.3 | ) | (166.2 | ) | (166.2 | ) | ||||||||||||||||||
Securities lending payable | — | — | (622.7 | ) | (622.7 | ) | ||||||||||||||||||||
18. Statutory Insurance Financial Information
Principal Life, the largest indirect subsidiary of Principal Financial Group, Inc.,PFG, prepares statutory financial statements in accordance with the accounting practices prescribed or permitted by the Insurance Division of the Department of Commerce of the State of Iowa (the "State of Iowa"). The State of Iowa recognizes only statutory accounting practices prescribed or permitted by the State of Iowa for determining and reporting the financial condition and results of operations of an insurance company to determine its solvency under the Iowa Insurance Law. The National Association of Insurance Commissioners' ("NAIC")Accounting Practices and Procedures Manual has been adopted as a component of prescribed practices by the State of Iowa. The Commissioner has the right to permit other specific practices that deviate from prescribed practices. Our use of prescribed and permitted statutory accounting practices has resulted in higher statutory surplus of $387.4 million relative to the accounting practices and procedures of the NAIC primarily due to a state prescribed practice associated with reinsurance of our univeral life "secondary" or "no lapse" guarantee provisions. Statutory accounting practices differ from U.S. GAAP primarily due to charging policy acquisition costs to expense as incurred, establishing reserves using different actuarial assumptions, valuing investments on a different basis and not admitting certain assets, including certain net deferred income tax assets.
Life and health insurance companies are subject to certain risk-based capital ("RBC") requirements as specified by the NAIC. Under those requirements, the amount of capital and surplus maintained by a life and health insurance company is to be determined based on the various risk factors related to it. At December 31, 2006,2008, Principal Life meets the minimum RBC requirements.
Statutory net income and statutory surplus of Principal Life were as follows:
| | As of or for the year ended December 31, | As of or for the year ended December 31, | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2006 | 2005 | 2004 | 2008 | 2007 | 2006 | |||||||||||||
| | (in millions) | (in millions) | |||||||||||||||||
| Statutory net income | $ | 684.9 | $ | 666.2 | $ | 512.7 | $ | 83.3 | $ | 540.2 | $ | 684.9 | |||||||
| Statutory surplus | 3,595.7 | 3,657.8 | 3,044.3 | 4,807.7 | 3,695.0 | 3,596.1 | |||||||||||||
19. Segment Information
We provide financial products and services through the following segments: U.S. Asset Accumulation, Global Asset Management, and Accumulation, International Asset Management and Accumulation and Life and Health Insurance. In addition, there is a Mortgage Banking (discontinued operations) and
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
19. Segment Information — (continued)
Corporate and Other segment. The segments are managed and reported separately because they provide different products and services, have different strategies or have different markets and distribution channels.
The U.S. Asset Management and Accumulation segment provides retirement and related financial products and services primarily to businesses, their employees and other individuals andindividuals.
The Global Asset Management segment provides asset management services to our asset accumulation business, theour life and health insurance operations, the Corporate and Other segment and third-party clients.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
19. Segment Information — (continued)
The International Asset Management and Accumulation segment consists of Principal International, which has operations in Brazil, Chile, Mexico,China, Hong Kong Brazil,Special Administrative Region, India, China,Indonesia, Malaysia, Mexico and Malaysia.Singapore. We focus on countries with large middle classes, favorable demographics and a trend toward private sectorgrowing long-term savings with defined contribution pension systems.markets. We entered these countries through acquisitions, start-up operations and joint ventures.
The Life and Health insurance segment provides individual life insurance, group health insurance and specialty benefits, which consists of group dental and vision insurance, individual and group disability insurance and group life insurance, throughout the United States.
On July 1, 2004, we closed the sale of Principal Residential Mortgage, Inc. to CitiMortgage, Inc. The results of operations (excluding corporate overhead) for our Mortgage Banking segment, which includes Principal Residential Mortgage, Inc., are reported as other after-tax adjustments for all periods presented. See Note 3, Discontinued Operations, for further explanation.
The Corporate and Other segment manages the assets representing capital that has not been allocated to any other segment. Financial results of the Corporate and Other segment primarily reflect our financing activities (including interest expense), income on capital not allocated to other segments, inter-segment eliminations, income tax risks and certain income, expenses and other after-tax adjustments not allocated to the segments based on the nature of such items.
Management uses segment operating earnings forin goal setting, as a basis for determining employee compensation and in evaluating performance on a basis comparable to that used by securities analysts. We determine segment operating earnings by adjusting U.S. GAAP net income available to common stockholders for net realized/unrealizedrealized capital gains and losses,(losses), as adjusted, and other after-tax adjustments which management believes are not indicative of overall operating trends. Net realized/unrealizedrealized capital gains and losses,(losses), as adjusted, are net of income taxes, related changes in the amortization pattern of DPAC and sales inducements, recognition of deferred front-end fee revenues for sales charges on pensionretirement products and services, net realized capital gains and losses distributed, minority interest capital gains and losses and certain market value adjustments to fee revenues. Net realized capital gains (losses), as adjusted, exclude periodic settlements and accruals on non-hedge derivative instruments and exclude certain market value adjustments of embedded derivatives. Segment operating revenues exclude net realized/unrealizedrealized capital gains (losses) (except periodic settlements and accruals on non-hedge derivatives), including their impact on recognition of front-end fee revenues and certain market value adjustments to fee revenues.revenues and revenue from our terminated commercial mortgage securities issuance operation. Segment operating revenues include operating revenues from real estate properties that qualify for discontinued operations. While these items may be significant components in understanding and assessing the consolidated financial performance, management believes the presentation of segment operating earnings enhances the understanding of our results of operations by highlighting earnings attributable to the normal, ongoing operations of the business.
The accounting policies of the segments are consistent with the accounting policies for the consolidated financial statements, with the exception of income tax allocation. The Corporate and Other segment functions to absorb the risk inherent in interpreting and applying tax law. The segments are allocated tax adjustments consistent with the positions we took on tax returns. The Corporate and Other segment results reflect any differences between the tax returns and the estimated resolution of any disputes.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
19. Segment Information — (continued)
The following tables summarize selected financial information by segment and reconcile segment totals to those reported in the consolidated financial statements:
| | | December 31, | | December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | 2006 | 2005 | | 2008 | 2007 | |||||||||
| | | (in millions) | | (in millions) | |||||||||||
| Assets: | Assets: | Assets: | |||||||||||||
| U.S. Asset Management and Accumulation | $ | 117,950.0 | $ | 103,506.1 | |||||||||||
U.S. Asset Accumulation | U.S. Asset Accumulation | $ | 100,468.8 | $ | 126,131.1 | ||||||||||
Global Asset Management | Global Asset Management | 1,320.6 | 1,438.9 | ||||||||||||
| International Asset Management and Accumulation | International Asset Management and Accumulation | 8,101.0 | 6,856.2 | International Asset Management and Accumulation | 7,878.4 | 9,350.5 | |||||||||
| Life and Health Insurance | Life and Health Insurance | 14,364.5 | 14,080.2 | Life and Health Insurance | 14,526.2 | 14,816.6 | |||||||||
| Corporate and Other | 3,242.6 | 2,592.9 | |||||||||||||
Corporate | Corporate | 3,988.4 | 2,783.1 | ||||||||||||
| Total consolidated assets | $ | 143,658.1 | $ | 127,035.4 | Total consolidated assets | $ | 128,182.4 | $ | 154,520.2 | ||||||
| | For the year ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2006 | 2005 | 2004 | ||||||||
| | (in millions) | ||||||||||
| Operating revenues by segment: | |||||||||||
| U.S. Asset Management and Accumulation | $ | 4,511.6 | $ | 4,133.8 | $ | 3,761.6 | |||||
| International Asset Management and Accumulation | 605.4 | 604.5 | 518.4 | ||||||||
| Life and Health Insurance | 4,736.2 | 4,387.5 | 4,181.3 | ||||||||
| Corporate and Other | (27.4 | ) | (59.1 | ) | (23.0 | ) | |||||
| Total segment operating revenues | 9,825.8 | 9,066.7 | 8,438.3 | ||||||||
| Add: | |||||||||||
| Net realized/unrealized capital gains (losses), including recognition of front-end fee revenues and certain market value adjustments to fee revenues | 44.2 | (22.2 | ) | (114.9 | ) | ||||||
| Subtract: | |||||||||||
| Operating revenues from discontinued real estate investments | (0.5 | ) | 2.8 | 2.5 | |||||||
| Total revenues per consolidated statements of operations | $ | 9,870.5 | $ | 9,041.7 | $ | 8,320.9 | |||||
| Operating earnings (loss) by segment, net of related income taxes: | |||||||||||
| U.S. Asset Management and Accumulation | $ | 645.1 | $ | 538.4 | $ | 499.0 | |||||
| International Asset Management and Accumulation | 71.8 | 71.0 | 40.3 | ||||||||
| Life and Health Insurance | 282.5 | 274.4 | 256.2 | ||||||||
| Mortgage Banking | — | — | (10.3 | ) | |||||||
| Corporate and Other | (27.3 | ) | (21.4 | ) | (20.4 | ) | |||||
| Total segment operating earnings, net of related income taxes | 972.1 | 862.4 | 764.8 | ||||||||
| Net realized/unrealized capital gains (losses), as adjusted | 18.0 | (20.6 | ) | (62.3 | ) | ||||||
| Other after-tax adjustments(1) | 41.2 | 59.5 | 123.1 | ||||||||
| Net income available to common stockholders per consolidated statements of operations | $ | 1,031.3 | $ | 901.3 | $ | 825.6 | |||||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
19. Segment Information — (continued)
| | For the year ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2008 | 2007 | 2006 | ||||||||
| | (in millions) | ||||||||||
Operating revenues by segment: | |||||||||||
U.S. Asset Accumulation | $ | 4,798.4 | $ | 5,150.2 | $ | 4,107.0 | |||||
Global Asset Management | 598.5 | 572.9 | 427.5 | ||||||||
International Asset Management and Accumulation | 849.0 | 796.3 | 605.4 | ||||||||
Life and Health Insurance | 4,682.0 | 4,857.1 | 4,736.2 | ||||||||
Corporate | (202.8 | ) | (156.8 | ) | (110.9 | ) | |||||
Total segment operating revenues | 10,725.1 | 11,219.7 | 9,765.2 | ||||||||
Add: | |||||||||||
Net realized capital gains (losses) (except periodic settlements and | (757.0 | ) | (343.0 | ) | 44.2 | ||||||
Terminated commercial mortgage securities issuance operation | (32.2 | ) | 30.1 | 60.6 | |||||||
Subtract: | |||||||||||
Operating revenues from discontinued real estate investments | — | 0.3 | (3.1 | ) | |||||||
Total revenues per consolidated statements of operations | $ | 9,935.9 | $ | 10,906.5 | $ | 9,873.1 | |||||
Operating earnings (loss) by segment, net of related income taxes: | |||||||||||
U.S. Asset Accumulation | $ | 531.3 | $ | 655.8 | $ | 542.6 | |||||
Global Asset Management | 94.4 | 102.8 | 73.8 | ||||||||
International Asset Management and Accumulation | 126.3 | 110.7 | 71.8 | ||||||||
Life and Health Insurance | 270.4 | 221.1 | 282.5 | ||||||||
Corporate | (79.7 | ) | (37.7 | ) | (27.3 | ) | |||||
Total segment operating earnings, net of related income taxes | 942.7 | 1,052.7 | 943.4 | ||||||||
Net realized capital gains (losses), as adjusted (1) | (505.3 | ) | (229.7 | ) | 18.0 | ||||||
Other after-tax adjustments (2) | (12.3 | ) | 4.3 | 69.9 | |||||||
Net income available to common stockholders per consolidated statements of operations | $ | 425.1 | $ | 827.3 | $ | 1,031.3 | |||||
| | For the year ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2008 | 2007 | 2006 | ||||||||
| | (in millions) | ||||||||||
Net realized capital gains (losses): | |||||||||||
Net realized capital gains (losses) | $ | (694.1 | ) | $ | (328.8 | ) | $ | 44.7 | |||
Periodic settlements and accruals on non-hedge derivatives (3) | (59.0 | ) | (18.9 | ) | — | ||||||
Certain market value adjustments to fee revenues | (3.9 | ) | (4.0 | ) | (1.3 | ) | |||||
Recognition of front-end fee revenues | — | 8.7 | 0.8 | ||||||||
Net realized capital gains (losses), net of related revenue adjustments | (757.0 | ) | (343.0 | ) | 44.2 | ||||||
Amortization of deferred policy acquisition and sales inducement costs related to net | (47.2 | ) | 10.4 | 5.4 | |||||||
Capital (gains) losses distributed | 50.3 | (11.0 | ) | (11.8 | ) | ||||||
Certain market value adjustments of embedded derivatives | (9.5 | ) | — | — | |||||||
Minority interest capital (gains) losses | 0.9 | (11.6 | ) | (7.7 | ) | ||||||
Income tax effect | 257.2 | 125.5 | (12.1 | ) | |||||||
Net realized capital gains (losses), as adjusted | $ | (505.3 | ) | $ | (229.7 | ) | $ | 18.0 | |||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
19. Segment Information — (continued)
discontinued operations accounting treatment under U.S. GAAP ($28.1 million) and (2) the positive effect of: (a) tax refinements related to prior years ($8.2 million) and (b) a change in an estimated loss related to a prior year legal contingency ($7.6 million).
In 2007, other after-tax adjustments of $4.3 million included (1) the positive effect of: (a) a gain on sale of a real estate property that qualifies for discontinued operations treatment ($20.0 million) and (b) gains associated with our terminated commercial mortgage securities issuance operation that has been exited but does not qualify for discontinued operation accounting treatment under U.S. GAAP ($5.7 million) and (2) the negative effect of tax refinements related to prior years ($21.4 million).
In 2006, other after-tax adjustments of $41.2$69.9 million included (1) the positive effect of: (a) gain on sales of real estate properties that qualify for discontinued operations treatment ($30.9 million); (b) gains associated with our terminated commercial mortgage securities issuance operation that has been exited but does not qualify for discontinued operations accounting treatment under U.S. GAAP ($28.7 million) and (b)(c) a favorable court ruling on a contested IRS issue for 1991 and later years ($18.8 million) and (2) the negative effect from a contribution to the Principal Financial Group, Inc. Foundation ($8.5 million).
In 2005, other after-tax adjustments of $59.5 million included (1) the positive effect of: (a) a decrease in income tax reserves established for IRS tax matters ($33.8 million); (b) gains on sales of real estate properties that qualify for discontinued operations treatment ($22.3 million); and (c) a change in the estimated loss on disposal of BT Financial Group ($8.4 million) and (2) the negative effect from a change in the estimated gain on disposal of Principal Residential Mortgage, Inc. ($5.0 million).
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
19. Segment Information — (continued)
In 2004, other after-tax adjustments of $123.1 million included (1) the positive effect of: (a) the discontinued operations and estimated gain on disposal of Principal Residential Mortgage, Inc. ($118.8 million) and (b) the discontinued operations and estimated gain on disposal of our Argentine companies ($10.0 million) and (2) the negative effect from a cumulative change in accounting principle related to the implementation of SOP 03-1 ($5.7 million).
The following is a summary of income tax expense (benefit) allocated to our segments for purposes of determining operating earnings. Segment income taxes are reconciled to income taxes reported on our consolidated statements of operations.
| | | For the year ended December 31, | | For the year ended December 31, | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | 2006 | 2005 | 2004 | | 2008 | 2007 | 2006 | ||||||||||||||
| | | (in millions) | | (in millions) | ||||||||||||||||||
| Income tax expense (benefit) by segment: | Income tax expense (benefit) by segment: | Income tax expense (benefit) by segment: | ||||||||||||||||||||
| U.S. Asset Management and Accumulation | $ | 186.0 | $ | 162.2 | $ | 148.6 | ||||||||||||||||
U.S. Asset Accumulation | U.S. Asset Accumulation | $ | 138.2 | $ | 171.7 | $ | 131.5 | |||||||||||||||
Global Asset Management | Global Asset Management | 50.9 | 55.7 | 39.0 | ||||||||||||||||||
| International Asset Management and Accumulation | International Asset Management and Accumulation | (10.0 | ) | (4.5 | ) | 8.6 | International Asset Management and Accumulation | (14.5 | ) | 17.5 | (10.0 | ) | ||||||||||
| Life and Health Insurance | Life and Health Insurance | 142.3 | 138.1 | 129.9 | Life and Health Insurance | 132.2 | 106.2 | 142.3 | ||||||||||||||
| Mortgage Banking | — | — | (6.4 | ) | ||||||||||||||||||
| Corporate and Other | (21.7 | ) | (48.5 | ) | (50.5 | ) | ||||||||||||||||
Corporate | Corporate | (42.9 | ) | (31.3 | ) | (21.7 | ) | |||||||||||||||
| Total segment income taxes from operating earnings | 296.6 | 247.3 | 230.2 | Total segment income taxes from operating earnings | 263.9 | 319.8 | 281.1 | |||||||||||||||
| Add: | Add: | Add: | ||||||||||||||||||||
| Tax expense (benefits) related to net realized/unrealized capital gains (losses), as adjusted | 12.1 | (10.6 | ) | (51.1 | ) | |||||||||||||||||
Tax expense (benefit) related to net realized capital gains (losses), as adjusted | (257.2 | ) | (125.5 | ) | 12.1 | |||||||||||||||||
Tax expense (benefit) related to other after-tax adjustments | 4.1 | 10.9 | (13.9 | ) | ||||||||||||||||||
| Tax benefits related to other after-tax adjustments | (13.9 | ) | (3.5 | ) | — | Tax expense (benefit) related to terminated commercial mortgage securities issuance operation | (15.3 | ) | 3.0 | 15.5 | ||||||||||||
| Subtract: | Subtract: | Subtract: | ||||||||||||||||||||
| Income tax expense (benefit) from discontinued real estate | (0.2 | ) | 1.0 | 0.9 | Income tax expense (benefit) from discontinued real estate | — | 0.1 | (1.1 | ) | |||||||||||||
| Total income tax expense per consolidated statements of operations | $ | 295.0 | $ | 232.2 | $ | 178.2 | Total income tax expense (benefit) per consolidated statements of operations | $ | (4.5 | ) | $ | 208.1 | $ | 295.9 | ||||||||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
19. Segment Information — (continued)
The following table summarizes operating revenues for our products and services:
| | | For the year ended December 31, | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | 2006 | 2005 | 2004 | | For the year ended December 31, | ||||||||||||||||||
| | | (in millions) | | 2008 | 2007 | 2006 | ||||||||||||||||||
| U.S. Asset Management and Accumulation: | ||||||||||||||||||||||||
| | | (in millions) | ||||||||||||||||||||||
U.S. Asset Accumulation: | U.S. Asset Accumulation: | |||||||||||||||||||||||
| Full-service accumulation | $ | 1,383.6 | $ | 1,267.4 | $ | 1,177.2 | Full-service accumulation | $ | 1,400.8 | $ | 1,595.0 | $ | 1,383.6 | |||||||||||
| Mutual funds | 344.9 | 206.6 | 182.1 | Principal Funds | 633.3 | 686.7 | 344.9 | |||||||||||||||||
| Individual annuities | 582.8 | 471.6 | 393.8 | Individual annuities | 1,017.1 | 799.8 | 582.8 | |||||||||||||||||
| Bank and trust services | 53.0 | 38.8 | 33.7 | Bank and trust services | 74.4 | 66.8 | 53.0 | |||||||||||||||||
| Eliminations | (168.8 | ) | (62.6 | ) | (53.3 | ) | Eliminations | (177.1 | ) | (163.8 | ) | (168.8 | ) | |||||||||||
| Total Accumulation | 2,195.5 | 1,921.8 | 1,733.5 | Total Accumulation | 2,948.5 | 2,984.5 | 2,195.5 | |||||||||||||||||
| Investment only | 1,080.7 | 1,002.3 | 931.6 | Investment only | 1,138.0 | 1,179.2 | 1,080.7 | |||||||||||||||||
| Full-service payout | 830.8 | 863.5 | 811.8 | Full-service payout | 711.9 | 986.5 | 830.8 | |||||||||||||||||
| Total Guaranteed | 1,911.5 | 1,865.8 | 1,743.4 | Total Guaranteed | 1,849.9 | 2,165.7 | 1,911.5 | |||||||||||||||||
| Total U.S. Asset Accumulation | 4,107.0 | 3,787.6 | 3,476.9 | Total U.S. Asset Accumulation | 4,798.4 | 5,150.2 | 4,107.0 | |||||||||||||||||
| Principal Global Investors | 488.1 | 417.3 | 343.4 | |||||||||||||||||||||
| Eliminations | (83.5 | ) | (71.1 | ) | (58.7 | ) | ||||||||||||||||||
| Total U.S. Asset Management and Accumulation | 4,511.6 | 4,133.8 | 3,761.6 | |||||||||||||||||||||
Global Asset Management (1) | Global Asset Management (1) | 598.5 | 572.9 | 427.5 | ||||||||||||||||||||
| International Asset Management and Accumulation | International Asset Management and Accumulation | 605.4 | 604.5 | 518.4 | International Asset Management and Accumulation | 849.0 | 796.3 | 605.4 | ||||||||||||||||
| Life and Health Insurance: | Life and Health Insurance: | Life and Health Insurance: | ||||||||||||||||||||||
| Individual life insurance | 1,344.7 | 1,361.7 | 1,370.4 | Individual life insurance | 1,393.4 | 1,370.1 | 1,344.7 | |||||||||||||||||
| Health insurance | 2,077.7 | 1,894.3 | 1,806.9 | Health insurance | 1,790.5 | 2,018.4 | 2,077.7 | |||||||||||||||||
| Specialty benefits insurance | 1,316.0 | 1,131.5 | 1,004.0 | Specialty benefits insurance | 1,500.2 | 1,471.2 | 1,316.0 | |||||||||||||||||
| Eliminations | (2.2 | ) | — | — | Eliminations | (2.1 | ) | (2.6 | ) | (2.2 | ) | |||||||||||||
| Total Life and Health Insurance | 4,736.2 | 4,387.5 | 4,181.3 | Total Life and Health Insurance | 4,682.0 | 4,857.1 | 4,736.2 | |||||||||||||||||
| Corporate and Other | (27.4 | ) | (59.1 | ) | (23.0 | ) | ||||||||||||||||||
Corporate | Corporate | (202.8 | ) | (156.8 | ) | (110.9 | ) | |||||||||||||||||
| Total operating revenues | Total operating revenues | $ | 9,825.8 | $ | 9,066.7 | $ | 8,438.3 | Total operating revenues | $ | 10,725.1 | $ | 11,219.7 | $ | 9,765.2 | ||||||||||
| Total operating revenues | Total operating revenues | $ | 9,825.8 | $ | 9,066.7 | $ | 8,438.3 | Total operating revenues | $ | 10,725.1 | $ | 11,219.7 | $ | 9,765.2 | ||||||||||
| Net realized/unrealized capital gains (losses), including recognition of front-end fee revenues and certain market value adjustments to fee revenues | 44.2 | (22.2 | ) | (114.9 | ) | |||||||||||||||||||
| Operating revenues from discontinued real estate investments | 0.5 | (2.8 | ) | (2.5 | ) | |||||||||||||||||||
Add: | Add: | |||||||||||||||||||||||
Net realized capital gains (losses) (except periodic settlements and | (757.0 | ) | (343.0 | ) | 44.2 | |||||||||||||||||||
Terminated commercial mortgage securities issuance operation | (32.2 | ) | 30.1 | 60.6 | ||||||||||||||||||||
Subtract: | Subtract: | |||||||||||||||||||||||
Operating revenues from discontinued real estate investments | — | 0.3 | (3.1 | ) | ||||||||||||||||||||
| Total revenues per consolidated statements of operations | Total revenues per consolidated statements of operations | $ | 9,870.5 | $ | 9,041.7 | $ | 8,320.9 | Total revenues per consolidated statements of operations | $ | 9,935.9 | $ | 10,906.5 | $ | 9,873.1 | ||||||||||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
20. Stock-Based Compensation Plans
As of December 31, 2006,2008, we have the 2005 Stock Incentive Plan, the Employee Stock Purchase Plan, the 2005 Directors Stock Plan, the Stock Incentive Plan, the Directors Stock Plan and the Long-Term Performance Plan ("Stock-Based Compensation Plans"). As of May 17, 2005, no new grants will be made under the Stock Incentive Plan, the Directors Stock Plan or the Long-Term Performance Plan. Under the terms of the 2005 Stock Incentive Plan, grants may be nonqualified stock options, incentive stock options qualifying under Section 422 of the Internal Revenue Code, restricted stock, restricted stock units, stock appreciation rights, performance shares, performance units or other stock based awards. The 2005 Directors Stock Plan provides for the grant of nonqualified stock options, restricted stock, restricted stock units or other stock-based awards to our nonemployee directors. To date, we have not granted any incentive stock options, restricted stock or performance units.
As of December 31, 2006,2008, the maximum number of new shares of common stock that were available for grant under the 2005 Stock Incentive Plan and the 2005 Directors Stock Plan was 21.716.5 million.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
20. Stock-Based Compensation Plans — (continued)
For awards with graded vesting, we use an accelerated expense attribution method. The compensation cost that was charged against income for the Stock-Based Compensation Plans is as follows:
| | For the year ended December 31, | For the year ended December 31, | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2006 | 2005 | 2004 | 2008 | 2007 | 2006 | |||||||||||||
| | (in millions) | (in millions) | |||||||||||||||||
| Compensation cost | $ | 65.5 | $ | 52.2 | $ | 47.5 | $ | 31.7 | $ | 65.2 | $ | 65.5 | |||||||
| Related income tax benefit | 21.3 | 16.9 | 15.1 | 10.0 | 21.5 | 21.3 | |||||||||||||
| Capitalized as part of an asset | 3.4 | 1.6 | 2.6 | 4.7 | 4.0 | 3.4 | |||||||||||||
Nonqualified Stock Options
Nonqualified stock options were granted to certain employees under the 2005 Stock Incentive Plan and the Stock Incentive Plan. Total options granted under the 2005 Stock Incentive Plan and the Stock Incentive Plan were 2.1 million, 2.7 million and 2.4 million for the year ended December 31, 2006, 2005 and 2004, respectively. Options outstanding under the 2005 Stock Incentive Plan and the Stock Incentive Plan were granted at an exercise price equal to the fair market value of our common stock on the date of grant, and expire ten years after the grant date. These options have graded or cliff vesting over a three-year period, except in the case of approved retirement. Total options granted under the 2005 Stock Incentive Plan and the Stock Incentive Plan were 1.6 million, 1.8 million and 2.1 million for the years ended December 31, 2008, 2007 and 2006, respectively.
Nonqualified stock options granted under the Directors stock plans have an exercise price equal to the fair market value of our common stock on the date of the grant and a contractual term equal to the earlier of five years from the date the participant ceases to provide service or the tenth anniversary of the date the option was granted. Beginning with the 2003 grant, options become exercisable in four approximately equal installments on the three, six and nine month anniversaries of the grant date, and on the date that the Director's full term of office expires. There were no options granted during the years ended December 31, 20062008, 2007 and 2005.2006.
AsThe following is a summary of the status of all of our stock option plans for the year ended December 31, 2008:
| | Number of options | Weighted- average exercise price | Intrinsic Value | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | | (in millions) | ||||||||
Options outstanding at January 1, 2008 | 8.8 | $ | 43.31 | ||||||||
Granted | 1.6 | 59.81 | |||||||||
Exercised | 0.2 | 36.47 | |||||||||
Canceled | 0.1 | 53.86 | |||||||||
Options outstanding at December 31, 2008 | 10.1 | $ | 45.96 | $ | 0.1 | ||||||
Options vested or expected to vest at December 31, 2008 | 9.7 | $ | 45.48 | $ | 0.1 | ||||||
Options exercisable at December 31, 2008 | 6.8 | $ | 39.74 | $ | 0.1 | ||||||
The total intrinsic value of stock options exercised was $3.7 million, $40.1 million and $32.8 million during 2008, 2007, and 2006, respectively.
The following is a summary of weighted-average remaining contractual lives for stock options outstanding and the range of exercise prices on the stock options as of December 31, 2006, there were $12.6 million2008:
| Range of exercise prices | Number of options outstanding | Weighted-average remaining contractual life | |||||
|---|---|---|---|---|---|---|---|
| | (in millions) | | |||||
$22.33 – $32.80 | 1.4 | 3 | |||||
$32.81 – $43.27 | 3.6 | 6 | |||||
$43.28 – $53.75 | 1.9 | 7 | |||||
$53.76 – $64.22 | 3.2 | 9 | |||||
$22.33 – $64.22 | 10.1 | 7 | |||||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
20. Stock-Based Compensation Plans — (continued)
The weighted-average remaining contractual lives for stock options exercisable is approximately 6 years as of total unrecognized compensations costs related to nonvested stock options. The cost is expected to be recognized over a weighted-average service period of approximately 1.8 years.December 31, 2008.
The fair value of stock options is estimated using the Black-Scholes option pricing model that usesmodel. The following is a summary of the assumptions notedused in this model for the following table. Expected volatilities arestock options granted during the period:
| | For the year ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Options | 2008 | 2007 | 2006 | |||||||
Expected volatility | 25.4 | % | 23.6 | % | 16.2 | % | ||||
Expected term (in years) | 6 | 6 | 6 | |||||||
Risk-free interest rate | 3.1 | % | 4.6 | % | 4.6 | % | ||||
Dividend yield | 1.51 | % | 1.28 | % | 1.32 | % | ||||
Weighted average estimated fair value | $ | 15.41 | $ | 17.98 | $ | 11.41 | ||||
We previously determined expected volatility for stock options granted based on, among other factors, historical volatility using monthly price observations. Beginning with stock options granted in 2007, we determine expected volatility based on, among other factors, historical volatility using daily price observations. We believe that daily price observations provide a better estimate of expected fluctuations in our stock and other factors. Due to our limited public company history, we use peer data to estimate option exercise and employee termination withinprice over the valuation model. Separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected term of stock options granted is estimated based on peer data andgranted. The expected term represents the period of time that options granted are expected to be outstanding. We previously determined expected term based on the simplified method as described by the SEC. Beginning with stock options granted in 2008, we determine expected term using historical exercise and employee termination data as we believe we now have sufficient data to provide a reasonable basis on which to estimate expected term. The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury risk-free interest rate in effect at the time of grant. The dividend yield is based on historical dividend distributions compared to the closing price of our common shares on the grant date.
As of December 31, 2008, there were $11.5 million of total unrecognized compensations costs related to nonvested stock options. The cost is expected to be recognized over a weighted-average service period of approximately 1.7 years.
Cash received from stock options exercised under these share-based payment arrangements during 2008, 2007 and 2006 was $7.8 million, $41.9 million and $37.7 million.million, respectively. The actual tax benefits realized for the tax deductions for option exercise of the share-based payment arrangements during 2008, 2007 and 2006 was $12.7 million.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
20. Stock-Based Compensation Plans — (continued)
The following is a summary of assumptions for the stock options granted during the period:
| | For the year ended December 31, | ||||||
|---|---|---|---|---|---|---|---|
| Options | |||||||
| 2006 | 2005 | 2004 | |||||
| Dividend yield | 1.32 | % | 1.41 | % | 1.26 | % | |
| Expected volatility | 16.2 | % | 19.1 | % | 39.2 | % | |
| Risk-free interest rate | 4.6 | % | 4.1 | % | 3.3 | % | |
| Expected life (in years) | 6 | 6 | 6 | ||||
Using the Black-Scholes option valuation model, the weighted-average estimated fair value of stock options granted was $11.41, $9.18 and $13.56 per share during 2006, 2005 and 2004, respectively.
The following is a summary of the status of all of our stock option plans for the year ended December 31, 2006:
| | Number of options | Weighted- average exercise price | Intrinsic Value | ||||||
|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | | (in millions) | ||||||
| Options outstanding at January 1, 2006 | 7.8 | $ | 33.06 | ||||||
| Granted | 2.1 | 49.28 | |||||||
| Exercised | 1.3 | 28.64 | |||||||
| Canceled | 0.1 | 40.43 | |||||||
| Options outstanding at December 31 2006 | 8.5 | $ | 37.65 | $ | 178.4 | ||||
| Options vested or expected to vest at December 31, 2006 | 8.3 | $ | 37.27 | $ | 178.6 | ||||
| Options exercisable at December 31, 2006 | 4.1 | $ | 31.70 | $ | 111.7 | ||||
The total intrinsic value of stock options exercised was $39.7$3.0 million, $29.5$12.0 million and $13.9$12.7 million, during 2006, 2005 and 2004, respectively.
The following is a summary of weighted-average remaining contractual lives for stock options outstanding and the range of exercise prices on the stock options as of December 31, 2006:
| Range of exercise prices | Number of options outstanding | Weighted-average remaining contractual life | ||
|---|---|---|---|---|
| | (in millions) | | ||
| $22.33 - $30.50 | 2.1 | 5 | ||
| $31.04 - $38.74 | 1.9 | 7 | ||
| $39.02 - $47.23 | 2.5 | 8 | ||
| $48.60 - $57.42 | 2.0 | 9 | ||
| $22.33 - $57.42 | 8.5 | 7 | ||
The weighted-average remaining contractual lives for stock options exercisable is approximately 7 years as of December 31, 2006.
Performance Share Awards
Beginning in 2006, we granted performance share awards to certain employees under the 2005 Stock Incentive Plan. The performance share awards are treated as an equity award and are paid in shares. Whether the performance shares are earned depends upon the participant's continued employment through the performance period (except in the case of an approved retirement) and our performance against three-year goals set at the beginning of the performance period. A return on equity objective and an earnings per share objective must be achieved for any of the performance shares to be earned. If the performance requirements are not met, the performance shares will be forfeited, and no compensation cost
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
20. Stock-Based Compensation Plans — (continued)
is recognized and any previously recognized compensation cost is reversed. There is no maximum contractual term on these awards. As of December 31, 2006, there were $17.6 million of total unrecognized compensation costs related to nonvested performance share awards granted. The cost is expected to be recognized over a weighted-average service period of approximately 2.0 years.
The fair value of performance share awards is determined based on the closing stock price of our shares on the grant date. The weighted-average grant-date fair value ofTotal performance share awards granted during 2006 was $49.40. Because no performance share awards vested or were paid out, the intrinsic value of performance share awards vested0.3 million, 0.3 million and the actual tax benefits realized for tax deductions for performance share award payouts are $0.00.4 million in 2006.2008, 2007 and 2006, respectively.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
20. Stock-Based Compensation Plans — (continued)
The following is a summary of activity for the nonvested performance share awards for the year ended December 31, 2006:2008:
| | Number of performance share awards | Weighted-average grant-date fair value | ||||
|---|---|---|---|---|---|---|
| | (in millions) | | ||||
| Nonvested performance share awards at January 1, 2006 | — | $ | — | |||
| Granted | 0.4 | 49.40 | ||||
| Vested | — | — | ||||
| Forfeited | — | — | ||||
| Nonvested performance share awards at December 31, 2006 | 0.4 | $ | 49.40 | |||
| | Number of performance share awards | Weighted-average grant-date fair value | ||||||
|---|---|---|---|---|---|---|---|---|
| | (in millions) | | ||||||
Nonvested performance share awards at January 1, 2008 | 0.7 | $ | 55.41 | |||||
Granted | 0.3 | 56.79 | ||||||
Forfeited | 0.1 | 58.04 | ||||||
Nonvested performance share awards at December 31, 2008 | 0.9 | $ | 55.73 | |||||
Performance share awards above represent initial target awards and do not reflect potential increases or decreases resulting from the final performance objectives to be determined at the end of the respective performance period. The actual number of shares to be awarded at the end of each performance period will range between 0% and 200% of the initial target awards.
The fair value of performance share awards is determined based on the closing stock price of our shares on the grant date. The weighted-average grant-date fair value of performance share awards granted during 2008, 2007 and 2006 were $56.79, $62.73 and $49.40, respectively.
As of December 31, 2008, there were no unrecognized compensation costs related to nonvested performance share awards granted.
Because no performance share awards vested or were paid out, the intrinsic value of performance share awards vested and the actual tax benefits realized for tax deductions for performance share award payouts were $0.0 million in 2008, 2007 and 2006.
Restricted Stock Units
We issue restricted stock units under the 2005 Stock Incentive Plan, 2005 Directors Stock Plan, Stock Incentive Plan, and Directors Stock Plan. Restricted stock units are treated as an equity award. The fair value of restricted stock units is determined based on the closing stock price of our common shares on the grant date. There is no maximum contractual term on these awards. In 2008, 2007, and 2006, 0.8 million, 0.4 million and 0.2 million restricted stock units were granted, respectively.
Restricted stock units were issued to certain employees and agents pursuant to the Stock Incentive Plan and 2005 Stock Incentive Plan. Under these plans, awards have a graded or cliff vesting over a three-year service period. When service for the CompanyPFG ceases (except in the case of an approved retirement), all vesting stops and unvested units are forfeited.
Beginning in 2005, pursuant to the 2005 Directors Stock Plan, restricted stock units are now granted to each non-employee director in office immediately following each annual meeting of stockholders and, at the discretion of the Nominating and Governance Committee, to each person who becomes a member of the Board other than on the date of the annual meeting of stockholders. Prior to this time, awards of restricted stock units were granted pursuant to the Directors Stock Plan on the date of each Board member's election or re-election date. Under the 2005 Directors Stock Plan, awards are granted on an annual basis and cliff vest over theafter a one-year service period. Non-vested awardsAwards under the prior plan havehad graded vesting over a three-year service period.period and are fully vested. When service to the CompanyPFG ceases, all vesting stops and unvested units are forfeited.
In 2006, 2005 and 2004, 0.2 million, 0.4 million and 0.4 millionThe following is a summary of activity for the nonvested restricted stock units were granted,in 2008:
| | Number of restricted stock units | Weighted-average grant-date fair value | ||||||
|---|---|---|---|---|---|---|---|---|
| | (in millions) | | ||||||
Nonvested restricted stock units at January 1, 2008 | 0.8 | $ | 51.11 | |||||
Granted | 0.8 | 57.76 | ||||||
Vested | 0.5 | 45.07 | ||||||
Nonvested restricted stock units at December 31, 2008 | 1.1 | $ | 58.15 | |||||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
20. Stock-Based Compensation Plans — (continued)
The total intrinsic value of restricted stock units vested was $26.3 million, $24.2 million and $16.7 million during 2008, 2007 and 2006, respectively.
The fair value of restricted stock units is determined based on the closing stock price of our common shares on the grant date. The weighted-average grant-date fair value of restricted stock units granted during 2006, 20052008, 2007 and 2004 was $50.42, $39.55 and $36.28, respectively.
The actual tax benefits realized for the tax deductions for restricted stock units payouts under these share-based payment arrangements for 2006 was $5.4 million.$57.76, $61.38 and $50.42, respectively.
As of December 31, 2006,2008, there were $10.3$30.3 million of total unrecognized compensation costs related to nonvested restricted stock unit awards granted under these plans. The cost is expected to be recognized over a weighted-average period of approximately 1.62.0 years.
The total intrinsic value ofactual tax benefits realized for the tax deductions for restricted stock units vestedunit payouts under these share-based payment arrangements for 2008, 2007 and 2006 was $16.7$6.2 million, $1.3$6.5 million and $1.2$5.4 million, during 2006, 2005 and 2004, respectively.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
20. Stock-Based Compensation Plans — (continued)
The following is a summary of activity for the nonvested restricted stock units in 2006:
| | Number of restricted stock units | Weighted-average grant-date fair value | ||||
|---|---|---|---|---|---|---|
| | (in millions) | | ||||
| Nonvested restricted stock units at January 1, 2006 | 0.9 | $ | 36.89 | |||
| Granted | 0.2 | 50.42 | ||||
| Vested | 0.3 | 34.52 | ||||
| Forfeited | — | — | ||||
| Nonvested restricted stock units at December 31, 2006 | 0.8 | $ | 41.47 | |||
Employee Stock Purchase Plan
Under our Employee Stock Purchase Plan, participating employees had the opportunity to purchase shares of our common stock on a quarterly basis through 2008. Beginning in 2009, participating employees have the opportunity to purchase shares of our common stock on a quarterlysemi-annual basis. Employees may purchase up to $25,000 worth of company stock each year. Employees may purchase shares of our common stock at a price equal to 85% of the shares' fair market value as of the beginning or end of the quarter,purchase period, whichever is lower. Under the Employee Stock Purchase Plan, employees purchased 0.70.8 million, 0.70.6 million and 0.80.7 million shares during 2006, 20052008, 2007, and 2004,2006, respectively.
We recognize compensation expense for the fair value of the discount granted to employees participating in the employee stock purchase plan in the quarterperiod of grant. Shares of the Employee Stock Purchase Plan are treated as an equity award. The weighted-average fair value of the discount on the stock purchased was $6.56, $10.45 and $10.39 $8.00during 2008, 2007 and $7.17 during 2006, 2005 and 2004, respectively. The total intrinsic value of the Employee Stock Purchase Plan shares settled was $5.1 million, $6.5 million and $6.9 million $5.8 millionduring 2008, 2007 and $5.9 million during 2006, 2005 and 2004, respectively.
Cash received from shares issued under these share-based payment arrangements for 2008, 2007 and 2006 was $28.8 million, $31.7 million and $28.5 million.million, respectively. The actual tax benefits realized for the tax deductions for the settlement of the share-based payment arrangements for 2008, 2007 and 2006 was $0.7 million, $1.0 million and $0.8 million.million, respectively.
The maximum number of shares of common stock that we may issue under the Employee Stock Purchase Plan is 2% of the number of shares outstanding immediately following the completion of the Initial Public Offering.our initial public offering. As of December 31, 2006,2008, a total of 3.31.9 million of new shares are available to be made issuable by us for this plan.
Long-Term Performance Plan
We also maintain the Long-Term Performance Plan, which provides the opportunity for eligible executives to receive additional awards if specified minimum corporate performance objectives are achieved over a three-year period. This plan utilizes stock as an option for payment and is treated as a liability award during vesting and a liability award or equity award subsequent to vesting, based on the participant payment election. Effective with stockholder approval of the 2005 Stock Incentive Plan, no further grants will be made under the Long-Term Performance Plan, and any future awards paid under the Long-Term Performance Plan will be issued under the 2005 Stock Incentive Plan. As of December 31, 2005, all awards under this plan were fully vested and no awards were granted under this plan in 2006 or 2005.2008, 2007 and 2006. There is no maximum contractual term on these awards.
The amount of cash used to settle Long-Term Performance Plan units granted was $10.8 million for 2006. The total intrinsic value of Long-Term Performance Plan units settled was $11.2 million, $6.5 million and $8.3 million during 2006, 2005 and 2004, respectively.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
20. Stock-Based Compensation Plans — (continued)
The fair value of Long-Term Performance Plan liability units is determined as of each reporting period based on the Black-Scholes option pricing model that uses the assumptions noted in the following table:
| | For the year ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Long-Term Performance Plan | 2008 | 2007 | 2006 | |||||||
Expected volatility | 104.1 | % | 25.2 | % | 11.2 | % | ||||
Expected term (in years) | 1 | 2 | 2 | |||||||
Risk-free interest rate | 0.5 | % | 3.2 | % | 4.8 | % | ||||
Dividend yield | — | % | — | % | — | % | ||||
The amount of cash used to settle Long-Term Performance Plan units granted was $2.7 million, $2.9 million and $10.8 million for 2008, 2007 and 2006, respectively. The total intrinsic value of Long-Term Performance Plan units settled was $4.3 million, $3.0 million and $11.2 million during 2008, 2007 and 2006, respectively.
21. Earnings Per Common Share
The computations of the basic and diluted per share amounts for our continuing operations were as follows:
| | | For the year ended December 31, | | For the year ended December 31, | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | 2006 | 2005 | 2004 | | 2008 | 2007 | 2006 | |||||||||||||||
| | | (in millions, except per share data) | | (in millions, except per share data) | |||||||||||||||||||
| Income from continuing operations, net of related income taxes | Income from continuing operations, net of related income taxes | $ | 1,033.7 | $ | 891.5 | $ | 700.9 | Income from continuing operations, net of related income taxes | $ | 458.1 | $ | 840.1 | $ | 1,035.4 | |||||||||
| Subtract: | Subtract: | Subtract: | |||||||||||||||||||||
| Preferred stock dividends | 33.0 | 17.7 | — | Preferred stock dividends | 33.0 | 33.0 | 33.0 | ||||||||||||||||
| Income from continuing operations available to common stockholders, net of related income taxes | Income from continuing operations available to common stockholders, net of related income taxes | $ | 1,000.7 | $ | 873.8 | $ | 700.9 | Income from continuing operations available to common stockholders, net of related income taxes | $ | 425.1 | $ | 807.1 | $ | 1,002.4 | |||||||||
| Weighted-average shares outstanding: | Weighted-average shares outstanding: | Weighted-average shares outstanding: | |||||||||||||||||||||
| Basic | 272.9 | 287.9 | 313.3 | Basic | 259.3 | 265.4 | 272.9 | ||||||||||||||||
| Dilutive effects: | Dilutive effects: | ||||||||||||||||||||||
| Stock options | 2.0 | 1.4 | 1.1 | Stock options | 1.1 | 2.3 | 2.0 | ||||||||||||||||
| Long term performance plan | — | 0.2 | 0.2 | Performance share awards | 0.4 | — | — | ||||||||||||||||
| Restricted stock units | 0.6 | 0.4 | 0.1 | Restricted stock units | 0.3 | 0.4 | 0.6 | ||||||||||||||||
| Diluted | 275.5 | 289.9 | 314.7 | Diluted | 261.1 | 268.1 | 275.5 | ||||||||||||||||
| Income from continuing operations per common share: | Income from continuing operations per common share: | Income from continuing operations per common share: | |||||||||||||||||||||
| Basic | $ | 3.67 | $ | 3.03 | $ | 2.24 | Basic | $ | 1.64 | $ | 3.04 | $ | 3.67 | ||||||||||
| Diluted | $ | 3.63 | $ | 3.01 | $ | 2.23 | Diluted | $ | 1.63 | $ | 3.01 | $ | 3.64 | ||||||||||
The calculation of diluted earnings per share for the years ended December 31, 2008, 2007 and 2006, excludes the incremental effect related to certain outstanding stock-based compensation grants due to their anti-dilutive effect.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
22. Quarterly Results of Operations (Unaudited)
The following is a summary of unaudited quarterly results of operations for 20062008 and 2005:2007:
| | For the three months ended | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | December 31 | September 30 | June 30 | March 31 | |||||||||
| | (in millions, except per share data) | ||||||||||||
| 2006 | |||||||||||||
| Total revenues | $ | 2,558.9 | $ | 2,449.6 | $ | 2,459.8 | $ | 2,402.2 | |||||
| Total expenses | 2,231.0 | 2,118.7 | 2,163.2 | 2,028.9 | |||||||||
| Income from continuing operations, net of related income taxes | 262.3 | 258.8 | 218.9 | 293.7 | |||||||||
| Income (loss) from discontinued operations, net of related income taxes | 30.1 | 0.4 | (0.1 | ) | 0.2 | ||||||||
| Preferred stock dividends | 8.3 | 8.2 | 8.3 | 8.2 | |||||||||
| Net income available to common stockholders | 284.1 | 251.0 | 210.5 | 285.7 | |||||||||
| Basic earnings per common share for income from continuing operations, net of related income taxes | 0.94 | 0.93 | 0.77 | 1.02 | |||||||||
| Basic earnings per common share for net income available to common stockholders | 1.05 | 0.93 | 0.77 | 1.02 | |||||||||
| Diluted earnings per common share for income from continuing operations, net of related income taxes | 0.93 | 0.92 | 0.76 | 1.01 | |||||||||
| Diluted earnings per common share for net income available to common stockholders | 1.04 | 0.92 | 0.76 | 1.01 | |||||||||
| 2005 | |||||||||||||
| Total revenues | $ | 2,455.6 | $ | 2,228.0 | $ | 2,207.9 | $ | 2,150.2 | |||||
| Total expenses | 2,180.1 | 1,941.7 | 1,925.6 | 1,870.6 | |||||||||
| Income from continuing operations, net of related income taxes | 244.2 | 219.2 | 223.2 | 204.9 | |||||||||
| Income from discontinued operations, net of related income taxes | 11.0 | 0.2 | 15.7 | 0.6 | |||||||||
| Preferred stock dividends | 8.3 | 9.4 | — | — | |||||||||
| Net income available to common stockholders | 246.9 | 210.0 | 238.9 | 205.5 | |||||||||
| Basic earnings per common share for income from continuing operations, net of related income taxes | 0.84 | 0.75 | 0.78 | 0.68 | |||||||||
| Basic earnings per common share for net income available to common stockholders | 0.88 | 0.75 | 0.83 | 0.69 | |||||||||
| Diluted earnings per share for income from continuing operations, net of related income taxes | 0.83 | 0.74 | 0.77 | 0.68 | |||||||||
| Diluted earnings per common share for net income available to common stockholders | 0.87 | 0.74 | 0.82 | 0.68 | |||||||||
| | For the three months ended | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | December 31 | September 30 | June 30 | March 31 | ||||||||||
| | (in millions, except per share data) | |||||||||||||
2008 | ||||||||||||||
Total revenues | $ | 2,279.2 | $ | 2,497.8 | $ | 2,658.2 | $ | 2,500.7 | ||||||
Total expenses | 2,339.7 | 2,401.7 | 2,452.2 | 2,288.7 | ||||||||||
Income from continuing operations, net of related income taxes | 0.8 | 98.3 | 176.6 | 182.4 | ||||||||||
Preferred stock dividends | 8.3 | 8.2 | 8.3 | 8.2 | ||||||||||
Net income (loss) available to common stockholders | (7.5 | ) | 90.1 | 168.3 | 174.2 | |||||||||
Basic earnings (loss) per common share for income from continuing operations, net of related income taxes | (0.03 | ) | 0.35 | 0.65 | 0.67 | |||||||||
Basic earnings (loss) per common share for net income available to common stockholders | (0.03 | ) | 0.35 | 0.65 | 0.67 | |||||||||
Diluted earnings (loss) per common share for income from continuing operations, net of related income taxes | (0.03 | ) | 0.35 | 0.64 | 0.67 | |||||||||
Diluted earnings (loss) per common share for net income available to common stockholders | (0.03 | ) | 0.35 | 0.64 | 0.67 | |||||||||
2007 | ||||||||||||||
Total revenues | $ | 2,564.1 | $ | 2,849.6 | $ | 2,831.8 | $ | 2,661.0 | ||||||
Total expenses | 2,594.5 | 2,518.0 | 2,419.1 | 2,326.7 | ||||||||||
Income from continuing operations, net of related income taxes | 21.8 | 240.7 | 312.3 | 265.3 | ||||||||||
Income (loss) from discontinued operations, net of related income taxes | 20.6 | (0.2 | ) | (0.2 | ) | — | ||||||||
Preferred stock dividends | 8.3 | 8.2 | 8.3 | 8.2 | ||||||||||
Net income available to common stockholders | 34.1 | 232.3 | 303.8 | 257.1 | ||||||||||
Basic earnings per common share for income from continuing operations, net of related income taxes | 0.05 | 0.88 | 1.14 | 0.96 | ||||||||||
Basic earnings per common share for net income available to common stockholders | 0.13 | 0.88 | 1.14 | 0.96 | ||||||||||
Diluted earnings per share for income from continuing operations, net of related income taxes | 0.05 | 0.87 | 1.12 | 0.95 | ||||||||||
Diluted earnings per common share for net income available to common stockholders | 0.13 | 0.87 | 1.12 | 0.95 | ||||||||||
23. Condensed Consolidating Financial Information
Principal Life has established special purpose entities to issue secured medium-term notes. Under the program, the payment obligations of principal and interest on the notes are secured by funding agreements issued by Principal Life. Principal Life's payment obligations on the funding agreements are fully and unconditionally guaranteed by Principal Financial Group, Inc.PFG. All of the outstanding stock of Principal Life is indirectly owned by Principal Financial Group, Inc.PFG and Principal Financial Group, Inc.PFG is the only guarantor of the payment obligations of the funding agreements.
We received a subpoena on March 31, 2005 from the Attorney General of West Virginia for documents and other information relating to funding agreement-backed securities, special purpose vehicles related to funding agreement-backed securities, and related subjects. A response has been sent. We understand that other U.S.-based life insurers that have funding agreement-backed note programs such as our on-goingongoing programs have received similar subpoenas from the Attorney General of West Virginia. Other than the subpoena, we have received no notification of any pending or threatened investigation or other proceeding by West Virginia governmental authorities involving funding agreement-backed securities.
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
23. Condensed Consolidating Financial Information — (continued)
The following tables set forth condensed consolidating financial information of Principal Life and Principal Financial Group, Inc.PFG as of December 31, 20062008 and 2005,2007, and for the years ended December 31, 2006, 20052008, 2007 and 2004.2006.
Condensed Consolidating Statements of Financial Position
December 31, 20062008
| | | Principal Financial Group, Inc. Parent Only | Principal Life Insurance Company Only | Principal Financial Services, Inc. and Other Subsidiaries Combined | Eliminations | Principal Financial Group, Inc. Consolidated | | Principal Financial Group, Inc. Parent Only | Principal Life Insurance Company Only | Principal Financial Services, Inc. and Other Subsidiaries Combined | Eliminations | Principal Financial Group, Inc. Consolidated | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | (in millions) | | (in millions) | ||||||||||||||||||||||||||||||
| Assets | Assets | Assets | ||||||||||||||||||||||||||||||||
| Fixed maturities, available-for-sale | Fixed maturities, available-for-sale | $ | — | $ | 40,330.8 | $ | 4,858.5 | $ | (785.8 | ) | $ | 44,403.5 | Fixed maturities, available-for-sale | $ | — | $ | 36,100.6 | $ | 4,509.1 | $ | (492.5 | ) | $ | 40,117.2 | ||||||||||
| Fixed maturities, trading | Fixed maturities, trading | — | 90.4 | 233.0 | — | 323.4 | Fixed maturities, trading | — | 732.3 | 111.1 | — | 843.4 | ||||||||||||||||||||||
| Equity securities, available-for-sale | Equity securities, available-for-sale | — | 640.7 | 25.9 | — | 666.6 | Equity securities, available-for-sale | — | 234.2 | 8.5 | — | 242.7 | ||||||||||||||||||||||
| Equity securities, trading | Equity securities, trading | — | 10.2 | 170.8 | — | 181.0 | Equity securities, trading | — | 0.4 | 157.6 | — | 158.0 | ||||||||||||||||||||||
| Mortgage loans | Mortgage loans | — | 9,661.6 | 2,237.7 | (235.4 | ) | 11,663.9 | Mortgage loans | — | 10,961.8 | 2,586.9 | (435.1 | ) | 13,113.6 | ||||||||||||||||||||
| Real estate | Real estate | — | 308.7 | 558.3 | — | 867.0 | Real estate | — | 20.1 | 899.3 | — | 919.4 | ||||||||||||||||||||||
| Policy loans | Policy loans | — | 850.7 | — | — | 850.7 | Policy loans | — | 881.4 | 15.0 | — | 896.4 | ||||||||||||||||||||||
| Investment in unconsolidated entities | Investment in unconsolidated entities | 8,191.4 | 235.0 | 4,480.5 | (12,608.8 | ) | 298.1 | Investment in unconsolidated entities | 3,101.8 | 2,811.0 | (497.7 | ) | (4,995.7 | ) | 419.4 | |||||||||||||||||||
| Other investments | Other investments | 3.6 | 3,057.1 | 235.5 | (2,183.6 | ) | 1,112.6 | Other investments | 5.5 | 2,431.9 | 734.8 | (775.0 | ) | 2,397.2 | ||||||||||||||||||||
| Cash and cash equivalents | Cash and cash equivalents | 30.9 | 1,399.8 | 261.1 | (101.0 | ) | 1,590.8 | Cash and cash equivalents | (2.0 | ) | 1,598.6 | 1,192.3 | (180.9 | ) | 2,608.0 | |||||||||||||||||||
| Accrued investment income | Accrued investment income | — | 677.0 | 51.6 | (5.1 | ) | 723.5 | Accrued investment income | — | 701.3 | 55.2 | (5.8 | ) | 750.7 | ||||||||||||||||||||
| Premiums due and other receivables | Premiums due and other receivables | — | 857.7 | 512.8 | (118.2 | ) | 1,252.3 | Premiums due and other receivables | 0.9 | 819.6 | 153.5 | 14.1 | 988.1 | |||||||||||||||||||||
| Deferred policy acquisition costs | Deferred policy acquisition costs | — | 2,265.9 | 153.0 | — | 2,418.9 | Deferred policy acquisition costs | — | 3,970.1 | 182.9 | — | 4,153.0 | ||||||||||||||||||||||
| Property and equipment | Property and equipment | — | 394.2 | 28.3 | — | 422.5 | Property and equipment | — | 447.1 | 71.1 | — | 518.2 | ||||||||||||||||||||||
| Goodwill | Goodwill | — | 77.2 | 284.7 | — | 361.9 | Goodwill | — | 96.7 | 278.8 | — | 375.5 | ||||||||||||||||||||||
| Other intangibles | Other intangibles | — | 38.4 | 942.6 | — | 981.0 | Other intangibles | — | 35.7 | 889.6 | — | 925.3 | ||||||||||||||||||||||
| Separate account assets | Separate account assets | — | 69,451.7 | 4,327.9 | — | 73,779.6 | Separate account assets | — | 51,069.1 | 4,073.5 | — | 55,142.6 | ||||||||||||||||||||||
| Other assets | Other assets | 256.1 | 1,327.0 | 382.9 | (205.2 | ) | 1,760.8 | Other assets | 27.0 | 570.6 | 530.9 | 2,485.2 | 3,613.7 | |||||||||||||||||||||
| Total assets | $ | 8,482.0 | $ | 131,674.1 | $ | 19,745.1 | $ | (16,243.1 | ) | $ | 143,658.1 | Total assets | $ | 3,133.2 | $ | 113,482.5 | $ | 15,952.4 | $ | (4,385.7 | ) | $ | 128,182.4 | |||||||||||
Liabilities | Liabilities | Liabilities | ||||||||||||||||||||||||||||||||
| Contractholder funds | Contractholder funds | $ | — | $ | 37,001.4 | $ | 16.3 | $ | (218.7 | ) | $ | 36,799.0 | Contractholder funds | $ | — | $ | 43,298.3 | $ | 40.2 | $ | (251.9 | ) | $ | 43,086.6 | ||||||||||
| Future policy benefits and claims | Future policy benefits and claims | — | 15,005.3 | 2,328.4 | (1.1 | ) | 17,332.6 | Future policy benefits and claims | — | 15,979.0 | 2,526.0 | (10.8 | ) | 18,494.2 | ||||||||||||||||||||
| Other policyholder funds | Other policyholder funds | — | 613.0 | 6.4 | — | 619.4 | Other policyholder funds | — | 517.9 | 18.3 | — | 536.2 | ||||||||||||||||||||||
| Short-term debt | Short-term debt | — | — | 199.1 | (115.0 | ) | 84.1 | Short-term debt | — | — | 500.9 | — | 500.9 | |||||||||||||||||||||
| Long-term debt | Long-term debt | 601.9 | 143.9 | 1,350.1 | (542.1 | ) | 1,553.8 | Long-term debt | 601.8 | 99.5 | 1,296.8 | (707.6 | ) | 1,290.5 | ||||||||||||||||||||
| Income taxes currently payable | Income taxes currently payable | (1.2 | ) | (270.7 | ) | 23.3 | 252.8 | 4.2 | Income taxes currently payable | (9.1 | ) | (322.5 | ) | 26.0 | 307.5 | 1.9 | ||||||||||||||||||
| Deferred income taxes | Deferred income taxes | 1.1 | 629.5 | 292.1 | (5.5 | ) | 917.2 | Deferred income taxes | (39.4 | ) | (2,352.0 | ) | 132.2 | 2,362.0 | 102.8 | |||||||||||||||||||
| Separate account liabilities | Separate account liabilities | — | 69,451.7 | 4,327.9 | — | 73,779.6 | Separate account liabilities | — | 51,069.1 | 4,073.5 | — | 55,142.6 | ||||||||||||||||||||||
| Other liabilities | Other liabilities | 19.4 | 2,298.7 | 3,010.1 | (620.8 | ) | 4,707.4 | Other liabilities | 107.1 | 3,143.2 | 4,236.7 | (933.1 | ) | 6,553.9 | ||||||||||||||||||||
| Total liabilities | 621.2 | 124,872.8 | 11,553.7 | (1,250.4 | ) | 135,797.3 | Total liabilities | 660.4 | 111,432.5 | 12,850.6 | 766.1 | 125,709.6 | ||||||||||||||||||||||
| Stockholders' equity | Stockholders' equity | Stockholders' equity | ||||||||||||||||||||||||||||||||
| Series A preferred stock | Series A preferred stock | — | — | — | — | — | Series A preferred stock | — | — | — | — | — | ||||||||||||||||||||||
| Series B preferred stock | Series B preferred stock | 0.1 | — | — | — | 0.1 | Series B preferred stock | 0.1 | — | — | — | 0.1 | ||||||||||||||||||||||
| Common stock | Common stock | 3.8 | 2.5 | — | (2.5 | ) | 3.8 | Common stock | 3.9 | 2.5 | — | (2.5 | ) | 3.9 | ||||||||||||||||||||
| Additional paid-in capital | Additional paid-in capital | 8,141.8 | 5,515.3 | 7,688.1 | (13,203.4 | ) | 8,141.8 | Additional paid-in capital | 8,376.5 | 5,626.6 | 7,797.7 | (13,424.3 | ) | 8,376.5 | ||||||||||||||||||||
| Retained earnings (deficit) | 2,824.1 | 670.9 | (339.5 | ) | (331.4 | ) | 2,824.1 | |||||||||||||||||||||||||||
| Accumulated other comprehensive income | 846.9 | 612.6 | 842.8 | (1,455.4 | ) | 846.9 | ||||||||||||||||||||||||||||
Retained earnings | Retained earnings | 3,722.5 | 1,158.5 | 150.8 | (1,309.3 | ) | 3,722.5 | |||||||||||||||||||||||||||
Accumulated other comprehensive income (loss) | Accumulated other comprehensive income (loss) | (4,911.6 | ) | (4,737.6 | ) | (4,846.7 | ) | 9,584.3 | (4,911.6 | ) | ||||||||||||||||||||||||
| Treasury stock, at cost | Treasury stock, at cost | (3,955.9 | ) | — | — | — | (3,955.9 | ) | Treasury stock, at cost | (4,718.6 | ) | — | — | — | (4,718.6 | ) | ||||||||||||||||||
| Total stockholders' equity | 7,860.8 | 6,801.3 | 8,191.4 | (14,992.7 | ) | 7,860.8 | Total stockholders' equity | 2,472.8 | 2,050.0 | 3,101.8 | (5,151.8 | ) | 2,472.8 | |||||||||||||||||||||
| Total liabilities and stockholders' equity | $ | 8,482.0 | $ | 131,674.1 | $ | 19,745.1 | $ | (16,243.1 | ) | $ | 143,658.1 | Total liabilities and stockholders' equity | $ | 3,133.2 | $ | 113,482.5 | $ | 15,952.4 | $ | (4,385.7 | ) | $ | 128,182.4 | |||||||||||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
23. Condensed Consolidating Financial Information — (continued)
Condensed Consolidating Statements of Financial Position
December 31, 20052007
| | | Principal Financial Group, Inc. Parent Only | Principal Life Insurance Company Only | Principal Financial Services, Inc. and Other Subsidiaries Combined | Eliminations | Principal Financial Group, Inc. Consolidated | | Principal Financial Group, Inc. Parent Only | Principal Life Insurance Company Only | Principal Financial Services, Inc. and Other Subsidiaries Combined | Eliminations | Principal Financial Group, Inc. Consolidated | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | (in millions) | | (in millions) | ||||||||||||||||||||||||||||||
| Assets | Assets | Assets | ||||||||||||||||||||||||||||||||
| Fixed maturities, available-for-sale | Fixed maturities, available-for-sale | $ | — | $ | 38,886.6 | $ | 3,896.5 | $ | (665.9 | ) | $ | 42,117.2 | Fixed maturities, available-for-sale | $ | — | $ | 42,178.6 | $ | 5,288.6 | $ | (728.3 | ) | $ | 46,738.9 | ||||||||||
| Fixed maturities, trading | Fixed maturities, trading | — | 18.9 | 94.3 | — | 113.2 | Fixed maturities, trading | — | 267.4 | 261.9 | — | 529.3 | ||||||||||||||||||||||
| Equity securities, available-for-sale | Equity securities, available-for-sale | — | 658.8 | 65.6 | — | 724.4 | Equity securities, available-for-sale | — | 305.0 | 11.4 | — | 316.4 | ||||||||||||||||||||||
| Equity securities, trading | Equity securities, trading | — | — | 90.3 | — | 90.3 | Equity securities, trading | — | — | 269.8 | — | 269.8 | ||||||||||||||||||||||
| Mortgage loans | Mortgage loans | — | 9,448.9 | 2,365.5 | (330.1 | ) | 11,484.3 | Mortgage loans | — | 10,284.2 | 2,693.1 | (317.7 | ) | 12,659.6 | ||||||||||||||||||||
| Real estate | Real estate | — | 313.5 | 586.6 | — | 900.1 | Real estate | — | 10.9 | 851.6 | — | 862.5 | ||||||||||||||||||||||
| Policy loans | Policy loans | — | 827.7 | — | — | 827.7 | Policy loans | — | 853.7 | 16.2 | — | 869.9 | ||||||||||||||||||||||
| Investment in unconsolidated entities | Investment in unconsolidated entities | 7,784.2 | 275.6 | 5,515.1 | (13,311.0 | ) | 263.9 | Investment in unconsolidated entities | 8,031.2 | 703.1 | 3,861.1 | (12,104.7 | ) | 490.7 | ||||||||||||||||||||
| Other investments | Other investments | — | 2,041.8 | 129.6 | (1,321.8 | ) | 849.6 | Other investments | — | 3,559.5 | 464.7 | (2,396.3 | ) | 1,627.9 | ||||||||||||||||||||
| Cash and cash equivalents | Cash and cash equivalents | 21.6 | 1,259.9 | 542.3 | (184.5 | ) | 1,639.3 | Cash and cash equivalents | (3.2 | ) | 927.8 | 536.4 | (116.6 | ) | 1,344.4 | |||||||||||||||||||
| Accrued investment income | Accrued investment income | — | 638.4 | 48.5 | (4.6 | ) | 682.3 | Accrued investment income | — | 722.9 | 59.2 | (8.0 | ) | 774.1 | ||||||||||||||||||||
| Premiums due and other receivables | Premiums due and other receivables | — | 589.2 | 112.7 | (109.2 | ) | 592.7 | Premiums due and other receivables | 0.9 | 696.8 | 267.2 | (13.7 | ) | 951.2 | ||||||||||||||||||||
| Deferred policy acquisition costs | Deferred policy acquisition costs | — | 2,069.9 | 104.2 | — | 2,174.1 | Deferred policy acquisition costs | — | 2,626.7 | 183.4 | — | 2,810.1 | ||||||||||||||||||||||
| Property and equipment | Property and equipment | — | 397.2 | 22.6 | — | 419.8 | Property and equipment | — | 421.6 | 47.4 | — | 469.0 | ||||||||||||||||||||||
| Goodwill | Goodwill | — | 50.4 | 231.9 | — | 282.3 | Goodwill | — | 94.6 | 280.1 | — | 374.7 | ||||||||||||||||||||||
| Other intangibles | Other intangibles | — | 39.2 | 163.4 | — | 202.6 | Other intangibles | — | 38.3 | 968.6 | — | 1,006.9 | ||||||||||||||||||||||
| Separate account assets | Separate account assets | — | 58,670.7 | 3,415.5 | (16.2 | ) | 62,070.0 | Separate account assets | — | 75,743.3 | 4,743.5 | — | 80,486.8 | |||||||||||||||||||||
| Assets of discontinued operations | — | 103.1 | — | 0.1 | 103.2 | |||||||||||||||||||||||||||||
| Other assets | Other assets | 3.5 | 1,360.0 | 258.1 | (123.2 | ) | 1,498.4 | Other assets | 6.3 | 1,371.2 | 395.3 | 165.2 | 1,938.0 | |||||||||||||||||||||
| Total assets | $ | 7,809.3 | $ | 117,649.8 | $ | 17,642.7 | $ | (16,066.4 | ) | $ | 127,035.4 | Total assets | $ | 8,035.2 | $ | 140,805.6 | $ | 21,199.5 | $ | (15,520.1 | ) | $ | 154,520.2 | |||||||||||
| Liabilities | Liabilities | Liabilities | ||||||||||||||||||||||||||||||||
| Contractholder funds | Contractholder funds | $ | — | $ | 33,797.0 | $ | 13.5 | $ | (198.4 | ) | $ | 33,612.1 | Contractholder funds | $ | — | $ | 40,511.7 | $ | 21.4 | $ | (244.2 | ) | $ | 40,288.9 | ||||||||||
| Future policy benefits and claims | Future policy benefits and claims | — | 14,650.3 | 2,175.2 | — | 16,825.5 | Future policy benefits and claims | — | 15,626.4 | 2,834.2 | (5.9 | ) | 18,454.7 | |||||||||||||||||||||
| Other policyholder funds | Other policyholder funds | — | 654.1 | 3.0 | — | 657.1 | Other policyholder funds | — | 526.0 | 14.5 | — | 540.5 | ||||||||||||||||||||||
| Short-term debt | Short-term debt | — | — | 565.6 | (89.2 | ) | 476.4 | Short-term debt | — | — | 371.9 | (81.1 | ) | 290.8 | ||||||||||||||||||||
| Long-term debt | Long-term debt | — | 151.3 | 1,223.8 | (476.3 | ) | 898.8 | Long-term debt | 601.8 | �� | 99.5 | 1,320.8 | (623.3 | ) | 1,398.8 | |||||||||||||||||||
| Income taxes currently payable | Income taxes currently payable | — | 0.1 | 0.3 | (0.4 | ) | — | Income taxes currently payable | (7.0 | ) | (255.0 | ) | 38.9 | 264.7 | 41.6 | |||||||||||||||||||
| Deferred income taxes | Deferred income taxes | — | 753.1 | 237.1 | (15.4 | ) | 974.8 | Deferred income taxes | (6.2 | ) | 253.1 | 340.3 | (10.9 | ) | 576.3 | |||||||||||||||||||
| Separate account liabilities | Separate account liabilities | — | 58,670.7 | 3,415.5 | (16.2 | ) | 62,070.0 | Separate account liabilities | — | 75,743.3 | 4,743.5 | — | 80,486.8 | |||||||||||||||||||||
| Liabilities of discontinued operations | — | 95.5 | — | (91.0 | ) | 4.5 | ||||||||||||||||||||||||||||
| Other liabilities | Other liabilities | 2.1 | 1,795.1 | 2,224.5 | (312.7 | ) | 3,709.0 | Other liabilities | 24.9 | 1,823.9 | 3,482.8 | (311.5 | ) | 5,020.1 | ||||||||||||||||||||
| Total liabilities | 2.1 | 110,567.2 | 9,858.5 | (1,199.6 | ) | 119,228.2 | Total liabilities | 613.5 | 134,328.9 | 13,168.3 | (1,012.2 | ) | 147,098.5 | |||||||||||||||||||||
| Stockholders' equity | Stockholders' equity | Stockholders' equity | ||||||||||||||||||||||||||||||||
| Series A preferred stock | Series A preferred stock | — | — | — | — | — | Series A preferred stock | — | — | — | — | — | ||||||||||||||||||||||
| Series B preferred stock | Series B preferred stock | 0.1 | — | — | — | 0.1 | Series B preferred stock | 0.1 | — | — | — | 0.1 | ||||||||||||||||||||||
| Common stock | Common stock | 3.8 | 2.5 | — | (2.5 | ) | 3.8 | Common stock | 3.9 | 2.5 | — | (2.5 | ) | 3.9 | ||||||||||||||||||||
| Additional paid-in capital | Additional paid-in capital | 8,000.0 | 5,354.8 | 7,071.3 | (12,426.1 | ) | 8,000.0 | Additional paid-in capital | 8,295.4 | 5,595.9 | 7,760.7 | (13,356.6 | ) | 8,295.4 | ||||||||||||||||||||
| Retained earnings (deficit) | Retained earnings (deficit) | 2,008.6 | 870.4 | (281.9 | ) | (588.5 | ) | 2,008.6 | Retained earnings (deficit) | 3,414.3 | 760.8 | (156.7 | ) | (604.1 | ) | 3,414.3 | ||||||||||||||||||
| Accumulated other comprehensive income | Accumulated other comprehensive income | 994.8 | 854.9 | 994.8 | (1,849.7 | ) | 994.8 | Accumulated other comprehensive income | 420.2 | 117.5 | 427.2 | (544.7 | ) | 420.2 | ||||||||||||||||||||
| Treasury stock, at cost | Treasury stock, at cost | (3,200.1 | ) | — | — | — | (3,200.1 | ) | Treasury stock, at cost | (4,712.2 | ) | — | — | — | (4,712.2 | ) | ||||||||||||||||||
| Total stockholders' equity | 7,807.2 | 7,082.6 | 7,784.2 | (14,866.8 | ) | 7,807.2 | Total stockholders' equity | 7,421.7 | 6,476.7 | 8,031.2 | (14,507.9 | ) | 7,421.7 | |||||||||||||||||||||
| Total liabilities and stockholders' equity | $ | 7,809.3 | $ | 117,649.8 | $ | 17,642.7 | $ | (16,066.4 | ) | $ | 127,035.4 | Total liabilities and stockholders' equity | $ | 8,035.2 | $ | 140,805.6 | $ | 21,199.5 | $ | (15,520.1 | ) | $ | 154,520.2 | |||||||||||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
23. Condensed Consolidating Financial Information — (continued)
Condensed Consolidating Statements of Operations
For the year ended December 31, 2008
| | Principal Financial Group, Inc. Parent Only | Principal Life Insurance Company Only | Principal Financial Services, Inc. and Other Subsidiaries Combined | Eliminations | Principal Financial Group, Inc. Consolidated | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | ||||||||||||||||
Revenues | |||||||||||||||||
Premiums and other considerations | $ | — | $ | 3,976.1 | $ | 233.1 | $ | — | $ | 4,209.2 | |||||||
Fees and other revenues | — | 1,458.2 | 1,400.0 | (431.7 | ) | 2,426.5 | |||||||||||
Net investment income (loss) | (0.3 | ) | 3,251.4 | 713.8 | 29.4 | 3,994.3 | |||||||||||
Net realized capital losses | (1.8 | ) | (389.0 | ) | (394.4 | ) | 91.1 | (694.1 | ) | ||||||||
Total revenues | (2.1 | ) | 8,296.7 | 1,952.5 | (311.2 | ) | 9,935.9 | ||||||||||
Expenses | |||||||||||||||||
Benefits, claims and settlement expenses | — | 5,636.6 | 599.0 | (15.7 | ) | 6,219.9 | |||||||||||
Dividends to policyholders | — | 267.3 | — | — | 267.3 | ||||||||||||
Operating expenses | 48.0 | 2,056.8 | 1,265.6 | (375.3 | ) | 2,995.1 | |||||||||||
Total expenses | 48.0 | 7,960.7 | 1,864.6 | (391.0 | ) | 9,482.3 | |||||||||||
Income (loss) from continuing operations before income taxes | (50.1 | ) | 336.0 | 87.9 | 79.8 | 453.6 | |||||||||||
Income taxes (benefits) | (20.0 | ) | 41.7 | (22.9 | ) | (3.3 | ) | (4.5 | ) | ||||||||
Equity in the net income of subsidiaries | 488.2 | 108.8 | 377.4 | (974.4 | ) | — | |||||||||||
Net income | 458.1 | 403.1 | 488.2 | (891.3 | ) | 458.1 | |||||||||||
Preferred stock dividends | 33.0 | — | — | — | 33.0 | ||||||||||||
Net income available to common stockholders | $ | 425.1 | $ | 403.1 | $ | 488.2 | $ | (891.3 | ) | $ | 425.1 | ||||||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
23. Condensed Consolidating Financial Information — (continued)
Condensed Consolidating Statements of Operations
For the year ended December 31, 2007
| | Principal Financial Group, Inc. Parent Only | Principal Life Insurance Company Only | Principal Financial Services, Inc. and Other Subsidiaries Combined | Eliminations | Principal Financial Group, Inc. Consolidated | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | ||||||||||||||||
Revenues | |||||||||||||||||
Premiums and other considerations | $ | — | $ | 4,360.6 | $ | 273.5 | $ | — | $ | 4,634.1 | |||||||
Fees and other revenues | — | 1,610.3 | 1,443.1 | (418.7 | ) | 2,634.7 | |||||||||||
Net investment income | 6.8 | 3,300.2 | 686.1 | (26.6 | ) | 3,966.5 | |||||||||||
Net realized capital gains (losses) | — | (390.8 | ) | 46.5 | 15.5 | (328.8 | ) | ||||||||||
Total revenues | 6.8 | 8,880.3 | 2,449.2 | (429.8 | ) | 10,906.5 | |||||||||||
Expenses | |||||||||||||||||
Benefits, claims and settlement expenses | — | 5,911.9 | 539.4 | (16.0 | ) | 6,435.3 | |||||||||||
Dividends to policyholders | — | 293.8 | — | — | 293.8 | ||||||||||||
Operating expenses | 48.2 | 2,113.9 | 1,340.2 | (373.1 | ) | 3,129.2 | |||||||||||
Total expenses | 48.2 | 8,319.6 | 1,879.6 | (389.1 | ) | 9,858.3 | |||||||||||
Income (loss) from continuing operations before income taxes | (41.4 | ) | 560.7 | 569.6 | (40.7 | ) | 1,048.2 | ||||||||||
Income taxes (benefits) | (17.4 | ) | 116.4 | 114.0 | (4.9 | ) | 208.1 | ||||||||||
Equity in the net income of subsidiaries, excluding discontinued operations | 864.1 | 296.8 | 408.5 | (1,569.4 | ) | — | |||||||||||
Income from continuing operations, net of related income taxes | 840.1 | 741.1 | 864.1 | (1,605.2 | ) | 840.1 | |||||||||||
Income from discontinued operations, net of related income taxes | 20.2 | — | 20.2 | (20.2 | ) | 20.2 | |||||||||||
Net income | 860.3 | 741.1 | 884.3 | (1,625.4 | ) | 860.3 | |||||||||||
Preferred stock dividends | 33.0 | — | — | — | 33.0 | ||||||||||||
Net income available to common stockholders | $ | 827.3 | $ | 741.1 | $ | 884.3 | $ | (1,625.4 | ) | $ | 827.3 | ||||||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
23. Condensed Consolidating Financial Information — (continued)
Condensed Consolidating Statements of Operations
For the year ended December 31, 2006
| | | Principal Financial Group, Inc. Parent Only | Principal Life Insurance Company Only | Principal Financial Services, Inc. and Other Subsidiaries Combined | Eliminations | Principal Financial Group, Inc. Consolidated | | Principal Financial Group, Inc. Parent Only | Principal Life Insurance Company Only | Principal Financial Services, Inc. and Other Subsidiaries Combined | Eliminations | Principal Financial Group, Inc. Consolidated | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | (in millions) | | (in millions) | |||||||||||||||||||||||||||||
| Revenues | Revenues | Revenues | |||||||||||||||||||||||||||||||
| Premiums and other considerations | Premiums and other considerations | $ | — | $ | 4,043.9 | $ | 261.4 | $ | — | $ | 4,305.3 | Premiums and other considerations | $ | — | $ | 4,043.9 | $ | 261.4 | $ | — | $ | 4,305.3 | |||||||||||
| Fees and other revenues | Fees and other revenues | — | 1,316.9 | 965.7 | (380.1 | ) | 1,902.5 | Fees and other revenues | — | 1,316.9 | 965.7 | (380.1 | ) | 1,902.5 | |||||||||||||||||||
| Net investment income | Net investment income | 11.9 | 3,124.6 | 506.2 | (24.7 | ) | 3,618.0 | Net investment income | 11.9 | 3,124.6 | 507.6 | (23.5 | ) | 3,620.6 | |||||||||||||||||||
| Net realized/unrealized capital gains (losses) | — | (84.0 | ) | 134.3 | (5.6 | ) | 44.7 | ||||||||||||||||||||||||||
Net realized capital gains (losses) | Net realized capital gains (losses) | — | (84.0 | ) | 134.3 | (5.6 | ) | 44.7 | |||||||||||||||||||||||||
| Total revenues | 11.9 | 8,401.4 | 1,867.6 | (410.4 | ) | 9,870.5 | Total revenues | 11.9 | 8,401.4 | 1,869.0 | (409.2 | ) | 9,873.1 | ||||||||||||||||||||
| Expenses | Expenses | Expenses | |||||||||||||||||||||||||||||||
| Benefits, claims, and settlement expenses | — | 5,298.4 | 409.4 | (15.4 | ) | 5,692.4 | |||||||||||||||||||||||||||
Benefits, claims and settlement expenses | Benefits, claims and settlement expenses | — | 5,298.4 | 409.4 | (15.4 | ) | 5,692.4 | ||||||||||||||||||||||||||
| Dividends to policyholders | Dividends to policyholders | — | 290.7 | — | — | 290.7 | Dividends to policyholders | — | 290.7 | — | — | 290.7 | |||||||||||||||||||||
| Operating expenses | Operating expenses | 18.2 | 1,932.9 | 937.7 | (330.1 | ) | 2,558.7 | Operating expenses | 18.2 | 1,932.9 | 937.7 | (330.1 | ) | 2,558.7 | |||||||||||||||||||
| Total expenses | 18.2 | 7,522.0 | 1,347.1 | (345.5 | ) | 8,541.8 | Total expenses | 18.2 | 7,522.0 | 1,347.1 | (345.5 | ) | 8,541.8 | ||||||||||||||||||||
| Income (loss) from continuing operations before income taxes | Income (loss) from continuing operations before income taxes | (6.3 | ) | 879.4 | 520.5 | (64.9 | ) | 1,328.7 | Income (loss) from continuing operations before income taxes | (6.3 | ) | 879.4 | 521.9 | (63.7 | ) | 1,331.3 | |||||||||||||||||
| Income taxes (benefits) | Income taxes (benefits) | (2.2 | ) | 203.0 | 92.5 | 1.7 | 295.0 | Income taxes (benefits) | (2.2 | ) | 203.0 | 93.0 | 2.1 | 295.9 | |||||||||||||||||||
| Equity in the net income of subsidiaries, excluding discontinued operations | Equity in the net income of subsidiaries, excluding discontinued operations | 1,037.8 | 270.6 | 609.8 | (1,918.2 | ) | — | Equity in the net income of subsidiaries, excluding discontinued operations | 1,039.5 | 270.6 | 610.6 | (1,920.7 | ) | — | |||||||||||||||||||
| Income from continuing operations, net of related income taxes | Income from continuing operations, net of related income taxes | 1,033.7 | 947.0 | 1,037.8 | (1,984.8 | ) | 1,033.7 | Income from continuing operations, net of related income taxes | 1,035.4 | 947.0 | 1,039.5 | (1,986.5 | ) | 1,035.4 | |||||||||||||||||||
| Income from discontinued operations, net of related income taxes | Income from discontinued operations, net of related income taxes | 30.6 | 30.6 | 30.6 | (61.2 | ) | 30.6 | Income from discontinued operations, net of related income taxes | 28.9 | 30.6 | 28.9 | (59.5 | ) | 28.9 | |||||||||||||||||||
| Net income | Net income | 1,064.3 | 977.6 | 1,068.4 | (2,046.0 | ) | 1,064.3 | Net income | 1,064.3 | 977.6 | 1,068.4 | (2,046.0 | ) | 1,064.3 | |||||||||||||||||||
| Preferred stock dividends | Preferred stock dividends | 33.0 | — | — | — | 33.0 | Preferred stock dividends | 33.0 | — | — | — | 33.0 | |||||||||||||||||||||
| Net income available to common stockholders | Net income available to common stockholders | $ | 1,031.3 | $ | 977.6 | $ | 1,068.4 | $ | (2,046.0 | ) | $ | 1,031.3 | Net income available to common stockholders | $ | 1,031.3 | $ | 977.6 | $ | 1,068.4 | $ | (2,046.0 | ) | $ | 1,031.3 | |||||||||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
23. Condensed Consolidating Financial Information — (continued)
Condensed Consolidating Statements of OperationsCash Flows
For the year ended December 31, 20052008
| | Principal Financial Group, Inc. Parent Only | Principal Life Insurance Company Only | Principal Financial Services, Inc. and Other Subsidiaries Combined | Eliminations | Principal Financial Group, Inc. Consolidated | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | ||||||||||||||||
| Revenues | |||||||||||||||||
| Premiums and other considerations | $ | — | $ | 3,705.7 | $ | 269.3 | $ | — | $ | 3,975.0 | |||||||
| Fees and other revenues | — | 1,198.8 | 786.3 | (267.3 | ) | 1,717.8 | |||||||||||
| Net investment income | 2.3 | 3,009.8 | 343.3 | 4.7 | 3,360.1 | ||||||||||||
| Net realized/unrealized capital gains (losses) | — | (34.5 | ) | 33.3 | (10.0 | ) | (11.2 | ) | |||||||||
| Total revenues | 2.3 | 7,879.8 | 1,432.2 | (272.6 | ) | 9,041.7 | |||||||||||
| Expenses | |||||||||||||||||
| Benefits, claims, and settlement expenses | — | 4,874.5 | 419.4 | (11.0 | ) | 5,282.9 | |||||||||||
| Dividends to policyholders | — | 293.0 | — | — | 293.0 | ||||||||||||
| Operating expenses | 10.6 | 1,787.8 | 774.8 | (231.1 | ) | 2,342.1 | |||||||||||
| Total expenses | 10.6 | 6,955.3 | 1,194.2 | (242.1 | ) | 7,918.0 | |||||||||||
| Income (loss) from continuing operations before income taxes | (8.3 | ) | 924.5 | 238.0 | (30.5 | ) | 1,123.7 | ||||||||||
| Income taxes (benefits) | (3.8 | ) | 221.4 | 16.8 | (2.2 | ) | 232.2 | ||||||||||
| Equity in the net income of subsidiaries, excluding discontinued operations | 896.0 | 104.9 | 674.7 | (1,675.6 | ) | — | |||||||||||
| Income from continuing operations, net of related income taxes | 891.5 | 808.0 | 895.9 | (1,703.9 | ) | 891.5 | |||||||||||
| Income from discontinued operations, net of related income taxes | 27.5 | 24.1 | 27.4 | (51.5 | ) | 27.5 | |||||||||||
| Net income | 919.0 | 832.1 | 923.3 | (1,755.4 | ) | 919.0 | |||||||||||
| Preferred stock dividends | 17.7 | — | — | — | 17.7 | ||||||||||||
| Net income available to common stockholders | $ | 901.3 | $ | 832.1 | $ | 923.3 | $ | (1,755.4 | ) | $ | 901.3 | ||||||
| | Principal Financial Group, Inc. Parent Only | Principal Life Insurance Company Only | Principal Financial Services, Inc. and Other Subsidiaries Combined | Eliminations | Principal Financial Group, Inc. Consolidated | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | ||||||||||||||||
Operating activities | |||||||||||||||||
Net cash provided by (used in) operating activities | $ | (60.2 | ) | $ | 1,805.9 | $ | 525.9 | $ | (46.8 | ) | $ | 2,224.8 | |||||
Investing activities | |||||||||||||||||
Available-for-sale securities: | |||||||||||||||||
Purchases | — | (5,783.4 | ) | (753.5 | ) | (68.9 | ) | (6,605.8 | ) | ||||||||
Sales | — | 1,084.6 | 258.9 | — | 1,343.5 | ||||||||||||
Maturities | — | 2,982.8 | 225.1 | — | 3,207.9 | ||||||||||||
Mortgage loans acquired or originated | — | (3,479.5 | ) | (189.6 | ) | 184.2 | (3,484.9 | ) | |||||||||
Mortgage loans sold or repaid | — | 2,781.9 | 186.9 | (66.8 | ) | 2,902.0 | |||||||||||
Real estate acquired | — | (0.8 | ) | (32.5 | ) | — | (33.3 | ) | |||||||||
Real estate sold | — | — | 70.6 | — | 70.6 | ||||||||||||
Net purchases of property and equipment | — | (75.3 | ) | (29.7 | ) | — | (105.0 | ) | |||||||||
Purchases of interest in subsidiaries, net of cash acquired | — | — | (20.3 | ) | — | (20.3 | ) | ||||||||||
Dividends received from unconsolidated entities | 181.1 | 17.6 | 7.5 | (206.2 | ) | — | |||||||||||
Net change in other investments | — | (213.8 | ) | 5.0 | 16.9 | (191.9 | ) | ||||||||||
Net cash provided by (used in) investing activities | $ | 181.1 | $ | (2,685.9 | ) | $ | (271.6 | ) | $ | (140.8 | ) | $ | (2,917.2 | ) | |||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
23. Condensed Consolidating Financial Information — (continued)
Condensed Consolidating Statements of OperationsCash Flows (continued)
For the year ended December 31, 20042008
| | Principal Financial Group, Inc. Parent Only | Principal Life Insurance Company Only | Principal Financial Services, Inc. and Other Subsidiaries Combined | Eliminations | Principal Financial Group, Inc. Consolidated | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | ||||||||||||||||
| Revenues | |||||||||||||||||
| Premiums and other considerations | $ | — | $ | 3,450.9 | $ | 259.1 | $ | — | $ | 3,710.0 | |||||||
| Fees and other revenues | — | 1,066.1 | 668.3 | (242.7 | ) | 1,491.7 | |||||||||||
| Net investment income | 4.8 | 2,905.2 | 292.2 | 21.8 | 3,224.0 | ||||||||||||
| Net realized/unrealized capital losses | — | (76.5 | ) | (33.9 | ) | 5.6 | (104.8 | ) | |||||||||
| Total revenues | 4.8 | 7,345.7 | 1,185.7 | (215.3 | ) | 8,320.9 | |||||||||||
| Expenses | |||||||||||||||||
| Benefits, claims, and settlement expenses | — | 4,602.7 | 367.1 | (10.3 | ) | 4,959.5 | |||||||||||
| Dividends to policyholders | — | 296.7 | — | — | 296.7 | ||||||||||||
| Operating expenses | 10.5 | 1,657.4 | 730.6 | (212.9 | ) | 2,185.6 | |||||||||||
| Total expenses | 10.5 | 6,556.8 | 1,097.7 | (223.2 | ) | 7,441.8 | |||||||||||
| Income (loss) from continuing operations before income taxes | (5.7 | ) | 788.9 | 88.0 | 7.9 | 879.1 | |||||||||||
| Income taxes (benefits) | (2.2 | ) | 185.7 | (8.7 | ) | 3.4 | 178.2 | ||||||||||
| Equity in the net income of subsidiaries, excluding discontinued operations and cumulative effect of accounting change | 704.4 | 168.7 | 607.7 | (1,480.8 | ) | — | |||||||||||
| Income from continuing operations, net of related income taxes | 700.9 | 771.9 | 704.4 | (1,476.3 | ) | 700.9 | |||||||||||
| Income (loss) from discontinued operations, net of related income taxes | 130.4 | (1.7 | ) | 130.4 | (128.7 | ) | 130.4 | ||||||||||
| Income before cumulative effect of accounting change | 831.3 | 770.2 | 834.8 | (1,605.0 | ) | 831.3 | |||||||||||
| Cumulative effect of accounting change, net of related income taxes | (5.7 | ) | (2.5 | ) | (5.7 | ) | 8.2 | (5.7 | ) | ||||||||
| Net income | $ | 825.6 | $ | 767.7 | $ | 829.1 | $ | (1,596.8 | ) | $ | 825.6 | ||||||
| | Principal Financial Group, Inc. Parent Only | Principal Life Insurance Company Only | Principal Financial Services, Inc. and Other Subsidiaries Combined | Eliminations | Principal Financial Group, Inc. Consolidated | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | |||||||||||||||
Financing activities | ||||||||||||||||
Issuance of common stock | $ | 36.4 | $ | — | $ | — | $ | — | $ | 36.4 | ||||||
Acquisition of treasury stock | (6.4 | ) | — | — | — | (6.4 | ) | |||||||||
Proceeds from financing element derivatives | — | 142.2 | — | — | 142.2 | |||||||||||
Payments for financing element derivatives | — | (114.6 | ) | — | — | (114.6 | ) | |||||||||
Excess tax benefits from share-based payment arrangements | — | 0.8 | 2.3 | — | 3.1 | |||||||||||
Dividends to common stockholders | (116.7 | ) | — | — | — | (116.7 | ) | |||||||||
Dividends to preferred stockholders | (33.0 | ) | — | — | — | (33.0 | ) | |||||||||
Issuance of long-term debt | — | — | 119.4 | (111.5 | ) | 7.9 | ||||||||||
Principal repayments of long-term debt | — | — | (110.5 | ) | 27.2 | (83.3 | ) | |||||||||
Net proceeds of short-term borrowings | — | — | 216.0 | 1.4 | 217.4 | |||||||||||
Dividends paid to parent | — | (7.5 | ) | (198.7 | ) | 206.2 | — | |||||||||
Investment contract deposits | — | 11,349.0 | — | — | 11,349.0 | |||||||||||
Investment contract withdrawals | — | (9,813.7 | ) | — | — | (9,813.7 | ) | |||||||||
Net increase in banking operation deposits | — | — | 373.1 | — | 373.1 | |||||||||||
Other | — | (5.4 | ) | — | — | (5.4 | ) | |||||||||
Net cash provided by (used in) financing activities | (119.7 | ) | 1,550.8 | 401.6 | 123.3 | 1,956.0 | ||||||||||
Net increase in cash and cash equivalents | 1.2 | 670.8 | 655.9 | (64.3 | ) | 1,263.6 | ||||||||||
Cash and cash equivalents at beginning of year | (3.2 | ) | 927.8 | 536.4 | (116.6 | ) | 1,344.4 | |||||||||
Cash and cash equivalents at end of year | $ | (2.0 | ) | $ | 1,598.6 | $ | 1,192.3 | $ | (180.9 | ) | $ | 2,608.0 | ||||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
23. Condensed Consolidating Financial Information — (continued)
Condensed Consolidating Statements of Cash Flows
For the year ended December 31, 2007
| | Principal Financial Group, Inc. Parent Only | Principal Life Insurance Company Only | Principal Financial Services, Inc. and Other Subsidiaries Combined | Eliminations | Principal Financial Group, Inc. Consolidated | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | ||||||||||||||||
Operating activities | |||||||||||||||||
Net cash provided by (used in) operating activities | $ | (30.8 | ) | $ | 2,105.2 | $ | 1,139.9 | $ | (254.3 | ) | $ | 2,960.0 | |||||
Investing activities | |||||||||||||||||
Available-for-sale securities: | |||||||||||||||||
Purchases | — | (9,833.1 | ) | (705.3 | ) | 18.1 | (10,520.3 | ) | |||||||||
Sales | — | 2,763.6 | 311.0 | (35.0 | ) | 3,039.6 | |||||||||||
Maturities | — | 4,149.9 | 311.7 | — | 4,461.6 | ||||||||||||
Mortgage loans acquired or originated | — | (2,546.5 | ) | (686.7 | ) | 125.2 | (3,108.0 | ) | |||||||||
Mortgage loans sold or repaid | — | 1,920.2 | 235.5 | (42.9 | ) | 2,112.8 | |||||||||||
Real estate acquired | — | — | (115.2 | ) | — | (115.2 | ) | ||||||||||
Real estate sold | — | 5.4 | 47.6 | — | 53.0 | ||||||||||||
Net purchases of property and equipment | (0.1 | ) | (64.0 | ) | (34.3 | ) | — | (98.4 | ) | ||||||||
Purchases of interest in subsidiaries, net of cash acquired | — | — | (76.1 | ) | — | (76.1 | ) | ||||||||||
Dividends received from unconsolidated entities | 956.3 | 115.6 | 656.4 | (1,728.3 | ) | — | |||||||||||
Net change in other investments | — | (176.1 | ) | (298.7 | ) | 226.6 | (248.2 | ) | |||||||||
Net cash provided by (used in) investing activities | $ | 956.2 | $ | (3,665.0 | ) | $ | (354.1 | ) | $ | (1,436.3 | ) | $ | (4,499.2 | ) | |||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
23. Condensed Consolidating Financial Information — (continued)
Condensed Consolidating Statements of Cash Flows (continued)
For the year ended December 31, 2007
| | Principal Financial Group, Inc. Parent Only | Principal Life Insurance Company Only | Principal Financial Services, Inc. and Other Subsidiaries Combined | Eliminations | Principal Financial Group, Inc. Consolidated | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | ||||||||||||||||
Financing activities | |||||||||||||||||
Issuance of common stock | $ | 73.6 | $ | — | $ | — | $ | — | $ | 73.6 | |||||||
Acquisition of treasury stock | (756.3 | ) | — | — | — | (756.3 | ) | ||||||||||
Proceeds from financing element derivatives | — | 128.7 | — | — | 128.7 | ||||||||||||
Payments for financing element derivatives | — | (137.2 | ) | — | — | (137.2 | ) | ||||||||||
Excess tax benefits from share-based payment arrangements | — | 7.1 | 3.1 | — | 10.2 | ||||||||||||
Dividends to common stockholders | (235.6 | ) | — | — | — | (235.6 | ) | ||||||||||
Dividends to preferred stockholders | (41.2 | ) | — | — | — | (41.2 | ) | ||||||||||
Issuance of long-term debt | — | 1.9 | 85.5 | (87.2 | ) | 0.2 | |||||||||||
Principal repayments of long-term debt | — | — | (115.0 | ) | — | (115.0 | ) | ||||||||||
Net proceeds of short-term borrowings | — | — | 170.0 | 33.9 | 203.9 | ||||||||||||
Dividends paid to parent | — | (656.4 | ) | (1,071.9 | ) | 1,728.3 | — | ||||||||||
Investment contract deposits | — | 9,958.9 | — | — | 9,958.9 | ||||||||||||
Investment contract withdrawals | — | (8,209.9 | ) | — | — | (8,209.9 | ) | ||||||||||
Net increase in banking operation deposits | — | — | 417.1 | — | 417.1 | ||||||||||||
Other | — | (5.3 | ) | — | — | (5.3 | ) | ||||||||||
Net cash provided by (used in) financing activities | (959.5 | ) | 1,087.8 | (511.2 | ) | 1,675.0 | 1,292.1 | ||||||||||
Discontinued operations | |||||||||||||||||
Net cash provided by operating activities | — | — | 2.5 | — | 2.5 | ||||||||||||
Net cash used in investing activities | — | — | (1.3 | ) | — | (1.3 | ) | ||||||||||
Net cash used in financing activities | — | — | (0.5 | ) | — | (0.5 | ) | ||||||||||
Net cash provided by discontinued operations | — | — | 0.7 | — | 0.7 | ||||||||||||
Net increase (decrease) in cash and cash equivalents | (34.1 | ) | (472.0 | ) | 275.3 | (15.6 | ) | (246.4 | ) | ||||||||
Cash and cash equivalents at beginning of year | 30.9 | 1,399.8 | 261.1 | (101.0 | ) | 1,590.8 | |||||||||||
Cash and cash equivalents at end of year | $ | (3.2 | ) | $ | 927.8 | $ | 536.4 | $ | (116.6 | ) | $ | 1,344.4 | |||||
Cash and cash equivalents of discontinued operations included above | |||||||||||||||||
At beginning of year | $ | — | $ | — | $ | (0.7 | ) | $ | — | $ | (0.7 | ) | |||||
At end of year | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
23. Condensed Consolidating Financial Information — (continued)
Condensed Consolidating Statements of Cash Flows
For the year ended December 31, 2006
| | | Principal Financial Group, Inc. Parent Only | Principal Life Insurance Company Only | Principal Financial Services, Inc. and Other Subsidiaries Combined | Eliminations | Principal Financial Group, Inc. Consolidated | | Principal Financial Group, Inc. Parent Only | Principal Life Insurance Company Only | Principal Financial Services, Inc. and Other Subsidiaries Combined | Eliminations | Principal Financial Group, Inc. Consolidated | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | (in millions) | | (in millions) | ||||||||||||||||||||||||||||||
| Operating activities | Operating activities | Operating activities | ||||||||||||||||||||||||||||||||
| Net cash provided by operating activities | Net cash provided by operating activities | $ | 7.2 | $ | 2,001.8 | $ | 115.3 | $ | 154.2 | $ | 2,278.5 | Net cash provided by operating activities | $ | 7.2 | $ | 2,001.8 | $ | 112.3 | $ | 154.2 | $ | 2,275.5 | ||||||||||||
| Investing activities | Investing activities | Investing activities | ||||||||||||||||||||||||||||||||
| Available-for-sale securities: | Available-for-sale securities: | Available-for-sale securities: | ||||||||||||||||||||||||||||||||
| Purchases | — | (6,585.5 | ) | (1,203.7 | ) | 23.8 | (7,765.4 | ) | Purchases | — | (6,585.5 | ) | (1,203.7 | ) | 23.8 | (7,765.4 | ) | |||||||||||||||||
| Sales | — | 1,075.6 | 363.3 | — | 1,438.9 | Sales | — | 1,075.6 | 363.3 | — | 1,438.9 | |||||||||||||||||||||||
| Maturities | — | 3,406.8 | 189.0 | — | 3,595.8 | Maturities | — | 3,406.8 | 189.0 | — | 3,595.8 | |||||||||||||||||||||||
| Mortgage loans acquired or originated | Mortgage loans acquired or originated | — | (2,198.7 | ) | (455.1 | ) | 53.6 | (2,600.2 | ) | Mortgage loans acquired or originated | — | (2,198.7 | ) | (455.1 | ) | 53.6 | (2,600.2 | ) | ||||||||||||||||
| Mortgage loans sold or repaid | Mortgage loans sold or repaid | — | 1,985.9 | 265.0 | (148.3 | ) | 2,102.6 | Mortgage loans sold or repaid | — | 1,985.9 | 265.0 | (148.3 | ) | 2,102.6 | ||||||||||||||||||||
| Real estate acquired | Real estate acquired | — | (12.4 | ) | (16.7 | ) | — | (29.1 | ) | Real estate acquired | — | (12.4 | ) | (14.2 | ) | — | (26.6 | ) | ||||||||||||||||
| Real estate sold | Real estate sold | — | 142.9 | 31.2 | — | 174.1 | Real estate sold | — | 142.9 | 31.2 | — | 174.1 | ||||||||||||||||||||||
| Net purchases of property and equipment | Net purchases of property and equipment | — | (31.3 | ) | (19.2 | ) | — | (50.5 | ) | Net purchases of property and equipment | — | (31.3 | ) | (19.2 | ) | — | (50.5 | ) | ||||||||||||||||
| Purchases of interest in subsidiaries, net of cash acquired | Purchases of interest in subsidiaries, net of cash acquired | — | — | (769.2 | ) | — | (769.2 | ) | Purchases of interest in subsidiaries, net of cash acquired | — | — | (769.2 | ) | — | (769.2 | ) | ||||||||||||||||||
| Dividends received from (contributions to) unconsolidated entities | Dividends received from (contributions to) unconsolidated entities | 331.1 | (511.9 | ) | 1,182.3 | (1,001.5 | ) | — | Dividends received from (contributions to) unconsolidated entities | 331.1 | (511.9 | ) | 1,182.3 | (1,001.5 | ) | — | ||||||||||||||||||
| Net change in other investments | Net change in other investments | — | (7.1 | ) | (92.7 | ) | 89.9 | (9.9 | ) | Net change in other investments | — | (7.1 | ) | (92.7 | ) | 89.9 | (9.9 | ) | ||||||||||||||||
| Net cash provided by (used in) investing activities | Net cash provided by (used in) investing activities | $ | 331.1 | $ | (2,735.7 | ) | $ | (525.8 | ) | $ | (982.5 | ) | $ | (3,912.9 | ) | Net cash provided by (used in) investing activities | $ | 331.1 | $ | (2,735.7 | ) | $ | (523.3 | ) | $ | (982.5 | ) | $ | (3,910.4 | ) | ||||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
23. Condensed Consolidating Financial Information — (continued)
Condensed Consolidating Statements of Cash Flows (continued)
For the year ended December 31, 2006
| | | Principal Financial Group, Inc. Parent Only | Principal Life Insurance Company Only | Principal Financial Services, Inc. and Other Subsidiaries Combined | Eliminations | Principal Financial Group, Inc. Consolidated | Principal Financial Group, Inc. Parent Only | Principal Life Insurance Company Only | Principal Financial Services, Inc. and Other Subsidiaries Combined | Eliminations | Principal Financial Group, Inc. Consolidated | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | (in millions) | (in millions) | ||||||||||||||||||||||||||||||
| Financing activities | Financing activities | ||||||||||||||||||||||||||||||||
| Issuance of common stock | Issuance of common stock | $ | 66.2 | $ | — | $ | — | $ | — | $ | 66.2 | $ | 66.2 | $ | — | $ | — | $ | — | $ | 66.2 | ||||||||||||
| Acquisition of treasury stock, net | (755.8 | ) | — | — | — | (755.8 | ) | ||||||||||||||||||||||||||
Acquisition of treasury stock | (755.8 | ) | — | — | — | (755.8 | ) | ||||||||||||||||||||||||||
| Proceeds from financing element derivatives | Proceeds from financing element derivatives | — | 132.1 | — | — | 132.1 | — | 132.1 | — | — | 132.1 | ||||||||||||||||||||||
| Payments for financing element derivatives | Payments for financing element derivatives | — | (141.0 | ) | — | — | (141.0 | ) | — | (141.0 | ) | — | — | (141.0 | ) | ||||||||||||||||||
| Excess tax benefits from share-based payment arrangements | Excess tax benefits from share-based payment arrangements | — | 6.0 | 2.4 | — | 8.4 | — | 6.0 | 2.4 | — | 8.4 | ||||||||||||||||||||||
| Dividends to common stockholders | Dividends to common stockholders | (214.7 | ) | — | — | — | (214.7 | ) | (214.7 | ) | — | — | — | (214.7 | ) | ||||||||||||||||||
| Dividends to preferred stockholders | Dividends to preferred stockholders | (24.7 | ) | — | — | — | (24.7 | ) | (24.7 | ) | — | — | — | (24.7 | ) | ||||||||||||||||||
| Issuance of long-term debt | Issuance of long-term debt | 600.0 | 6.4 | 85.0 | (89.7 | ) | 601.7 | 600.0 | 6.4 | 85.0 | (89.7 | ) | 601.7 | ||||||||||||||||||||
| Principal repayments of long-term debt | Principal repayments of long-term debt | — | (13.7 | ) | (7.3 | ) | — | (21.0 | ) | — | (13.7 | ) | (6.7 | ) | — | (20.4 | ) | ||||||||||||||||
| Net repayments of short-term borrowings | Net repayments of short-term borrowings | — | — | (390.5 | ) | — | (390.5 | ) | — | — | (390.5 | ) | — | (390.5 | ) | ||||||||||||||||||
| Capital received from (dividends paid to) parent | Capital received from (dividends paid to) parent | — | (1,182.3 | ) | 180.8 | 1,001.5 | — | — | (1,182.3 | ) | 180.8 | 1,001.5 | — | ||||||||||||||||||||
| Investment contract deposits | Investment contract deposits | — | 8,925.7 | — | — | 8,925.7 | — | 8,925.7 | — | — | 8,925.7 | ||||||||||||||||||||||
| Investment contract withdrawals | Investment contract withdrawals | — | (6,859.4 | ) | — | — | (6,859.4 | ) | — | (6,859.4 | ) | — | — | (6,859.4 | ) | ||||||||||||||||||
| Net increase in banking operation deposits | Net increase in banking operation deposits | — | — | 258.9 | — | 258.9 | — | — | 258.9 | — | 258.9 | ||||||||||||||||||||||
| Net cash provided by (used in) financing activities | Net cash provided by (used in) financing activities | (329.0 | ) | 873.8 | 129.3 | 911.8 | 1,585.9 | (329.0 | ) | 873.8 | 129.9 | 911.8 | 1,586.5 | ||||||||||||||||||||
| Discontinued operations | Discontinued operations | ||||||||||||||||||||||||||||||||
| Net cash used in operating activities | — | (1.1 | ) | — | — | (1.1 | ) | ||||||||||||||||||||||||||
Net cash provided by (used in) operating activities | — | (1.1 | ) | 3.0 | — | 1.9 | |||||||||||||||||||||||||||
| Net cash used in investing activities | Net cash used in investing activities | — | (0.9 | ) | — | — | (0.9 | ) | — | (0.9 | ) | (2.5 | ) | — | (3.4 | ) | |||||||||||||||||
| Net cash used in financing activities | Net cash used in financing activities | — | — | — | — | — | — | — | (0.6 | ) | — | (0.6 | ) | ||||||||||||||||||||
| Net cash used in discontinued operations | Net cash used in discontinued operations | — | (2.0 | ) | — | — | (2.0 | ) | — | (2.0 | ) | (0.1 | ) | — | (2.1 | ) | |||||||||||||||||
| Net increase (decrease) in cash and cash equivalents | Net increase (decrease) in cash and cash equivalents | 9.3 | 137.9 | (281.2 | ) | 83.5 | (50.5 | ) | 9.3 | 137.9 | (281.2 | ) | 83.5 | (50.5 | ) | ||||||||||||||||||
| Cash and cash equivalents at beginning of year | Cash and cash equivalents at beginning of year | 21.6 | 1,261.9 | 542.3 | (184.5 | ) | 1,641.3 | 21.6 | 1,261.9 | 542.3 | (184.5 | ) | 1,641.3 | ||||||||||||||||||||
| Cash and cash equivalents at end of year | Cash and cash equivalents at end of year | $ | 30.9 | $ | 1,399.8 | $ | 261.1 | $ | (101.0 | ) | $ | 1,590.8 | $ | 30.9 | $ | 1,399.8 | $ | 261.1 | $ | (101.0 | ) | $ | 1,590.8 | ||||||||||
| Cash and cash equivalents of discontinued operations included above | Cash and cash equivalents of discontinued operations included above | ||||||||||||||||||||||||||||||||
| At beginning of year | $ | — | $ | 2.0 | $ | — | $ | — | $ | 2.0 | |||||||||||||||||||||||
| At end of year | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||
At beginning of year | $ | — | $ | 2.0 | $ | (0.6 | ) | $ | — | $ | 1.4 | ||||||||||||||||||||||
At end of year | $ | — | $ | — | $ | (0.7 | ) | $ | — | $ | (0.7 | ) | |||||||||||||||||||||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
23. Condensed Consolidating Financial Information — (continued)
Condensed Consolidating Statements of Cash FlowsFor the year ended December 31, 2005
| | Principal Financial Group, Inc. Parent Only | Principal Life Insurance Company Only | Principal Financial Services, Inc. and Other Subsidiaries Combined | Eliminations | Principal Financial Group, Inc. Consolidated | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | ||||||||||||||||
| Operating activities | |||||||||||||||||
| Net cash provided by (used in) operating activities | $ | (4.5 | ) | $ | 1,797.8 | $ | 441.8 | $ | (108.9 | ) | $ | 2,126.2 | |||||
| Investing activities | |||||||||||||||||
| Available-for-sale securities: | |||||||||||||||||
| Purchases | — | (7,218.1 | ) | (1,892.8 | ) | 155.8 | (8,955.1 | ) | |||||||||
| Sales | — | 2,443.2 | 857.3 | — | 3,300.5 | ||||||||||||
| Maturities | — | 3,688.3 | 214.9 | — | 3,903.2 | ||||||||||||
| Mortgage loans acquired or originated | — | (2,112.2 | ) | (533.0 | ) | 159.7 | (2,485.5 | ) | |||||||||
| Mortgage loans sold or repaid | — | 2,475.9 | 359.6 | (131.0 | ) | 2,704.5 | |||||||||||
| Real estate acquired | — | (27.4 | ) | (64.8 | ) | — | (92.2 | ) | |||||||||
| Real estate sold | — | 249.5 | 70.3 | — | 319.8 | ||||||||||||
| Net purchases of property and equipment | — | (34.6 | ) | (9.8 | ) | — | (44.4 | ) | |||||||||
| Purchases of interest in subsidiaries, net of cash acquired | — | — | (58.1 | ) | — | (58.1 | ) | ||||||||||
| Dividends received from (contributions to) unconsolidated entities | 501.1 | (787.3 | ) | 166.1 | 120.1 | — | |||||||||||
| Net change in other investments | — | 44.6 | (93.7 | ) | (27.3 | ) | (76.4 | ) | |||||||||
| Net cash provided by (used in) investing activities | $ | 501.1 | $ | (1,278.1 | ) | $ | (984.0 | ) | $ | 277.3 | $ | (1,483.7 | ) | ||||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
23. Condensed Consolidating Financial Information — (continued)
Condensed Consolidating Statements of Cash Flows (continued)For the year ended December 31, 2005
| | Principal Financial Group, Inc. Parent Only | Principal Life Insurance Company Only | Principal Financial Services, Inc. and Other Subsidiaries Combined | Eliminations | Principal Financial Group, Inc. Consolidated | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | |||||||||||||||
| Financing activities | ||||||||||||||||
| Issuance of common stock | $ | 59.9 | $ | — | $ | — | $ | — | $ | 59.9 | ||||||
| Issuance of preferred stock | 542.0 | — | — | — | 542.0 | |||||||||||
| Accelerated stock repurchase settlement | (84.0 | ) | — | — | — | (84.0 | ) | |||||||||
| Acquisition of treasury stock, net | (868.4 | ) | — | — | — | (868.4 | ) | |||||||||
| Proceeds from financing element derivatives | — | 168.4 | — | — | 168.4 | |||||||||||
| Payments for financing element derivatives | — | (123.2 | ) | — | — | (123.2 | ) | |||||||||
| Dividends to common stockholders | (182.2 | ) | — | — | — | (182.2 | ) | |||||||||
| Dividends to preferred stockholders | (17.7 | ) | — | — | — | (17.7 | ) | |||||||||
| Issuance of long-term debt | — | 52.3 | 258.8 | (173.6 | ) | 137.5 | ||||||||||
| Principal repayments of long-term debt | — | (7.3 | ) | (65.3 | ) | — | (72.6 | ) | ||||||||
| Net proceeds of short-term borrowings | — | 40.7 | 152.9 | 5.5 | 199.1 | |||||||||||
| Capital received from (dividends paid to) parent | — | (166.1 | ) | 286.2 | (120.1 | ) | — | |||||||||
| Investment contract deposits | — | 7,250.0 | — | — | 7,250.0 | |||||||||||
| Investment contract withdrawals | — | (6,504.5 | ) | — | — | (6,504.5 | ) | |||||||||
| Net increase in banking operation deposits | — | — | 41.9 | — | 41.9 | |||||||||||
| Net cash provided by (used in) financing activities | (550.4 | ) | 710.3 | 674.5 | (288.2 | ) | 546.2 | |||||||||
| Discontinued operations | ||||||||||||||||
| Net cash provided by operating activities | — | 125.1 | — | — | 125.1 | |||||||||||
| Net cash used in investing activities | — | (125.0 | ) | — | — | (125.0 | ) | |||||||||
| Net cash used in financing activities | — | — | — | — | — | |||||||||||
| Net cash provided by discontinued operations | — | 0.1 | — | — | 0.1 | |||||||||||
| Net increase (decrease) in cash and cash equivalents | (53.8 | ) | 1,230.1 | 132.3 | (119.8 | ) | 1,188.8 | |||||||||
| Cash and cash equivalents at beginning of year | 75.4 | 31.8 | 410.0 | (64.7 | ) | 452.5 | ||||||||||
| Cash and cash equivalents at end of year | $ | 21.6 | $ | 1,261.9 | $ | 542.3 | $ | (184.5 | ) | $ | 1,641.3 | |||||
| Cash and cash equivalents of discontinued operations included above | ||||||||||||||||
| At beginning of year | $ | — | $ | 1.9 | $ | — | $ | — | $ | 1.9 | ||||||
| At end of year | $ | — | $ | 2.0 | $ | — | $ | — | $ | 2.0 | ||||||
| Schedule of noncash transactions | ||||||||||||||||
| Tax benefits related to demutualization | $ | — | $ | 163.8 | $ | — | $ | — | $ | 163.8 | ||||||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
23. Condensed Consolidating Financial Information — (continued)
Condensed Consolidating Statements of Cash FlowsFor the year ended December 31, 2004
| | Principal Financial Group, Inc. Parent Only | Principal Life Insurance Company Only | Principal Financial Services, Inc. and Other Subsidiaries Combined | Eliminations | Principal Financial Group, Inc. Consolidated | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | ||||||||||||||||
| Operating activities | |||||||||||||||||
| Net cash provided by (used in) operating activities | $ | (1.1 | ) | $ | 2,009.8 | $ | (463.3 | ) | $ | 486.1 | $ | 2,031.5 | |||||
| Investing activities | |||||||||||||||||
| Available-for-sale securities: | |||||||||||||||||
| Purchases | — | (8,881.3 | ) | (1,236.8 | ) | (183.5 | ) | (10,301.6 | ) | ||||||||
| Sales | — | 1,227.5 | 1,099.6 | — | 2,327.1 | ||||||||||||
| Maturities | — | 3,936.5 | 474.5 | — | 4,411.0 | ||||||||||||
| Mortgage loans acquired or originated | — | (2,708.7 | ) | (161.6 | ) | 109.9 | (2,760.4 | ) | |||||||||
| Mortgage loans sold or repaid | — | 2,323.6 | 267.3 | (91.3 | ) | 2,499.6 | |||||||||||
| Real estate acquired | — | (239.8 | ) | (101.7 | ) | — | (341.5 | ) | |||||||||
| Real estate sold | — | 261.2 | 84.4 | — | 345.6 | ||||||||||||
| Net purchases of property and equipment | — | (37.7 | ) | (9.8 | ) | — | (47.5 | ) | |||||||||
| Net proceeds from sales of subsidiaries | — | — | 694.7 | — | 694.7 | ||||||||||||
| Purchases of interest in subsidiaries, net of cash acquired | — | — | (128.1 | ) | — | (128.1 | ) | ||||||||||
| Dividends received from unconsolidated entities | 800.6 | 705.3 | 1,124.0 | (2,629.9 | ) | — | |||||||||||
| Net change in other investments | — | 93.0 | (28.9 | ) | 52.4 | 116.5 | |||||||||||
| Net cash provided by (used in) investing activities | $ | 800.6 | $ | (3,320.4 | ) | $ | 2,077.6 | $ | (2,742.4 | ) | $ | (3,184.6 | ) | ||||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
23. Condensed Consolidating Financial Information — (continued)
Condensed Consolidating Statements of Cash Flows (continued)For the year ended December 31, 2004
| | Principal Financial Group, Inc. Parent Only | Principal Life Insurance Company Only | Principal Financial Services, Inc. Other and Subsidiaries Combined | Eliminations | Principal Financial Group, Inc. Consolidated | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | ||||||||||||||||
| Financing activities | |||||||||||||||||
| Issuance of common stock | $ | 41.2 | $ | — | $ | — | $ | — | $ | 41.2 | |||||||
| Acquisition and sales of treasury stock, net | (772.6 | ) | — | — | — | (772.6 | ) | ||||||||||
| Proceeds from financing element derivatives | — | 110.6 | — | — | 110.6 | ||||||||||||
| Payments for financing element derivatives | — | (84.6 | ) | — | — | (84.6 | ) | ||||||||||
| Dividends to common stockholders | (166.5 | ) | — | — | — | (166.5 | ) | ||||||||||
| Issuance of long-term debt | — | 7.7 | 4.4 | — | 12.1 | ||||||||||||
| Principal repayments of long-term debt | — | (224.3 | ) | (215.5 | ) | (7.4 | ) | (447.2 | ) | ||||||||
| Net repayments of short-term borrowings | — | — | (231.9 | ) | (59.5 | ) | (291.4 | ) | |||||||||
| Dividends paid to parent | — | (1,124.0 | ) | (1,440.5 | ) | 2,564.5 | — | ||||||||||
| Investment contract deposits | — | 7,312.4 | — | — | 7,312.4 | ||||||||||||
| Investment contract withdrawals | — | (5,294.9 | ) | — | — | (5,294.9 | ) | ||||||||||
| Net decrease in banking operation deposits | — | — | (5.0 | ) | — | (5.0 | ) | ||||||||||
| Net cash provided by (used in) financing activities | (897.9 | ) | 702.9 | (1,888.5 | ) | 2,497.6 | 414.1 | ||||||||||
| Discontinued operations | |||||||||||||||||
| Net cash used in operating activities | — | (0.6 | ) | (594.6 | ) | (32.5 | ) | (627.7 | ) | ||||||||
| Net cash used in investing activities | — | (0.4 | ) | (681.7 | ) | 208.4 | (473.7 | ) | |||||||||
| Net cash provided by financing activities | — | — | 600.0 | — | 600.0 | ||||||||||||
| Net cash used in discontinued operations | — | (1.0 | ) | (676.3 | ) | 175.9 | (501.4 | ) | |||||||||
| Net decrease in cash and cash equivalents | (98.4 | ) | (608.7 | ) | (950.5 | ) | 417.2 | (1,240.4 | ) | ||||||||
| Cash and cash equivalents at beginning of year | 173.8 | 640.5 | 1,360.5 | (481.9 | ) | 1,692.9 | |||||||||||
| Cash and cash equivalents at end of year | $ | 75.4 | $ | 31.8 | $ | 410.0 | $ | (64.7 | ) | $ | 452.5 | ||||||
| Cash and cash equivalents of discontinued operations included above | |||||||||||||||||
| At beginning of year | $ | — | $ | 2.9 | $ | 676.3 | $ | (175.9 | ) | $ | 503.3 | ||||||
| At end of year | $ | — | $ | 1.9 | $ | — | $ | — | $ | 1.9 | |||||||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
23. Condensed Consolidating Financial Information — (continued)
On June 30, 2005,11, 2008, our shelf registration statement was filed with the SecuritiesSEC and Exchange Commission was declaredbecame effective. Following our October and November 2006 issuances of debt securities underThe shelf registration replaces the shelf registration that had been in effect since June 2004, as it was scheduled to expire in the fourth quarter of 2008. Under our current shelf registration, we now have the ability to issue up to $1.85 billion ofunsecured senior debt securities or subordinated debt securities, junior subordinated debt, preferred stock, common stock, warrants, depository shares, stock purchase contracts and stock purchase units of Principal Financial Group, Inc. andPFG, trust preferred securities of three subsidiary trusts. If we issue additional securities, we intend to use the proceeds from the saletrusts and guarantees by PFG of the securities offered by the prospectus, including the corresponding junior subordinated debentures issued to the trusts in connection with their investment of all the proceeds from the sale ofthese trust preferred securities, for general corporate purposes, including working capital, capital expenditures, investments in subsidiaries, share repurchase, acquisitions and refinancing of debt, including commercial paper and other short-term indebtedness.securities. Our wholly owned subsidiary, Principal Financial Services, Inc. ("PFS"), may guarantee, fully and unconditionally guaranteesor otherwise, our obligations with respect to one or more series of debtany non-convertible securities, other than common stock, described in the shelf registration statement.
The following tables set forth condensed consolidating financial information of Principal Financial Services, Inc.PFS and Principal Financial Group, Inc.PFG as of December 31, 20062008 and 2005,2007, and for the years ended December 31, 2006, 20052008, 2007 and 2004.2006.
Condensed Consolidating Statements of Financial Position
December 31, 20062008
| | | Principal Financial Group, Inc. Parent Only | Principal Financial Services, Inc. Only | Principal Life Insurance Company and Other Subsidiaries Combined | Eliminations | Principal Financial Group, Inc. Consolidated | | Principal Financial Group, Inc. Parent Only | Principal Financial Services, Inc. Only | Principal Life Insurance Company and Other Subsidiaries Combined | Eliminations | Principal Financial Group, Inc. Consolidated | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | (in millions) | | (in millions) | |||||||||||||||||||||||||||||
| Assets | Assets | Assets | |||||||||||||||||||||||||||||||
| Fixed maturities, available-for-sale | Fixed maturities, available-for-sale | $ | — | $ | 14.1 | $ | 44,389.4 | $ | — | $ | 44,403.5 | Fixed maturities, available-for-sale | $ | — | $ | — | $ | 40,117.2 | $ | — | $ | 40,117.2 | |||||||||||
| Fixed maturities, trading | Fixed maturities, trading | — | 1.2 | 322.2 | — | 323.4 | Fixed maturities, trading | — | — | 843.4 | — | 843.4 | |||||||||||||||||||||
| Equity securities, available-for-sale | Equity securities, available-for-sale | — | 0.9 | 665.7 | — | 666.6 | Equity securities, available-for-sale | — | — | 242.7 | — | 242.7 | |||||||||||||||||||||
| Equity securities, trading | Equity securities, trading | — | 1.3 | 179.7 | — | 181.0 | Equity securities, trading | — | — | 158.0 | — | 158.0 | |||||||||||||||||||||
| Mortgage loans | Mortgage loans | — | — | 11,663.9 | — | 11,663.9 | Mortgage loans | — | — | 13,113.6 | — | 13,113.6 | |||||||||||||||||||||
| Real estate | Real estate | — | — | 867.0 | — | 867.0 | Real estate | — | — | 919.4 | — | 919.4 | |||||||||||||||||||||
| Policy loans | Policy loans | — | — | 850.7 | — | 850.7 | Policy loans | — | — | 896.4 | — | 896.4 | |||||||||||||||||||||
| Investment in unconsolidated entities | Investment in unconsolidated entities | 8,191.4 | 8,701.7 | 298.1 | (16,893.1 | ) | 298.1 | Investment in unconsolidated entities | 3,101.8 | 3,845.7 | 419.2 | (6,947.3 | ) | 419.4 | |||||||||||||||||||
| Other investments | Other investments | 3.6 | 4.4 | 1,109.0 | (4.4 | ) | 1,112.6 | Other investments | 5.5 | 129.4 | 2,340.1 | (77.8 | ) | 2,397.2 | |||||||||||||||||||
| Cash and cash equivalents | Cash and cash equivalents | 30.9 | 129.2 | 2,031.3 | (600.6 | ) | 1,590.8 | Cash and cash equivalents | (2.0 | ) | 546.0 | 2,728.5 | (664.5 | ) | 2,608.0 | ||||||||||||||||||
| Accrued investment income | Accrued investment income | — | 0.3 | 723.2 | — | 723.5 | Accrued investment income | — | — | 750.7 | — | 750.7 | |||||||||||||||||||||
| Premiums due and other receivables | Premiums due and other receivables | — | 353.5 | 898.8 | — | 1,252.3 | Premiums due and other receivables | 0.9 | 6.7 | 980.8 | (0.3 | ) | 988.1 | ||||||||||||||||||||
| Deferred policy acquisition costs | Deferred policy acquisition costs | — | — | 2,418.9 | — | 2,418.9 | Deferred policy acquisition costs | — | — | 4,153.0 | — | 4,153.0 | |||||||||||||||||||||
| Property and equipment | Property and equipment | — | — | 422.5 | — | 422.5 | Property and equipment | — | — | 518.2 | — | 518.2 | |||||||||||||||||||||
| Goodwill | Goodwill | — | — | 361.9 | — | 361.9 | Goodwill | — | — | 375.5 | — | 375.5 | |||||||||||||||||||||
| Other intangibles | Other intangibles | — | — | 981.0 | — | 981.0 | Other intangibles | — | — | 925.3 | — | 925.3 | |||||||||||||||||||||
| Separate account assets | Separate account assets | — | — | 73,779.6 | — | 73,779.6 | Separate account assets | — | — | 55,142.6 | — | 55,142.6 | |||||||||||||||||||||
| Other assets | Other assets | 256.1 | 9.2 | 1,749.3 | (253.8 | ) | 1,760.8 | Other assets | 27.0 | 64.4 | 3,506.2 | 16.1 | 3,613.7 | ||||||||||||||||||||
| Total assets | $ | 8,482.0 | $ | 9,215.8 | $ | 143,712.2 | $ | (17,751.9 | ) | $ | 143,658.1 | Total assets | $ | 3,133.2 | $ | 4,592.2 | $ | 128,130.8 | $ | (7,673.8 | ) | $ | 128,182.4 | ||||||||||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
23. Condensed Consolidating Financial Information — (continued)
Condensed Consolidating Statements of Financial Position (continued)
December 31, 20062008
| | | Principal Financial Group, Inc. Parent Only | Principal Financial Services, Inc. Only | Principal Life Insurance Company and Other Subsidiaries Combined | Eliminations | Principal Financial Group, Inc. Consolidated | | Principal Financial Group, Inc. Parent Only | Principal Financial Services, Inc. Only | Principal Life Insurance Company and Other Subsidiaries Combined | Eliminations | Principal Financial Group, Inc. Consolidated | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | (in millions) | | (in millions) | ||||||||||||||||||||||||||||||
| Liabilities | Liabilities | Liabilities | ||||||||||||||||||||||||||||||||
| Contractholder funds | Contractholder funds | $ | — | $ | — | $ | 36,799.0 | $ | — | $ | 36,799.0 | Contractholder funds | $ | — | $ | — | $ | 43,086.6 | $ | — | $ | 43,086.6 | ||||||||||||
| Future policy benefits and claims | Future policy benefits and claims | — | — | 17,332.6 | — | 17,332.6 | Future policy benefits and claims | — | — | 18,494.2 | — | 18,494.2 | ||||||||||||||||||||||
| Other policyholder funds | Other policyholder funds | — | — | 619.4 | — | 619.4 | Other policyholder funds | — | — | 536.2 | — | 536.2 | ||||||||||||||||||||||
| Short-term debt | Short-term debt | — | — | 435.3 | (351.2 | ) | 84.1 | Short-term debt | — | 482.3 | 309.8 | (291.2 | ) | 500.9 | ||||||||||||||||||||
| Long-term debt | Long-term debt | 601.9 | 464.5 | 487.4 | — | 1,553.8 | Long-term debt | 601.8 | 454.9 | 233.8 | — | 1,290.5 | ||||||||||||||||||||||
| Income taxes currently payable | Income taxes currently payable | (1.2 | ) | (2.0 | ) | 2.4 | 5.0 | 4.2 | Income taxes currently payable | (9.1 | ) | (7.0 | ) | 12.1 | 5.9 | 1.9 | ||||||||||||||||||
| Deferred income taxes | Deferred income taxes | 1.1 | 12.3 | 909.7 | (5.9 | ) | 917.2 | Deferred income taxes | (39.4 | ) | (10.5 | ) | 126.9 | 25.8 | 102.8 | |||||||||||||||||||
| Separate account liabilities | Separate account liabilities | — | — | 73,779.6 | — | 73,779.6 | Separate account liabilities | — | — | 55,142.6 | — | 55,142.6 | ||||||||||||||||||||||
| Other liabilities | Other liabilities | 19.4 | 549.6 | 4,645.1 | (506.7 | ) | 4,707.4 | Other liabilities | 107.1 | 570.7 | 6,342.9 | (466.8 | ) | 6,553.9 | ||||||||||||||||||||
| Total liabilities | 621.2 | 1,024.4 | 135,010.5 | (858.8 | ) | 135,797.3 | Total liabilities | 660.4 | 1,490.4 | 124,285.1 | (726.3 | ) | 125,709.6 | |||||||||||||||||||||
| Stockholders' equity | Stockholders' equity | Stockholders' equity | ||||||||||||||||||||||||||||||||
| Series A preferred stock | Series A preferred stock | — | — | — | — | — | Series A preferred stock | — | — | — | — | — | ||||||||||||||||||||||
| Series B preferred stock | Series B preferred stock | 0.1 | — | — | — | 0.1 | Series B preferred stock | 0.1 | — | — | — | 0.1 | ||||||||||||||||||||||
| Common stock | Common stock | 3.8 | — | 17.1 | (17.1 | ) | 3.8 | Common stock | 3.9 | — | 17.8 | (17.8 | ) | 3.9 | ||||||||||||||||||||
| Additional paid-in capital | Additional paid-in capital | 8,141.8 | 7,688.2 | 6,918.2 | (14,606.4 | ) | 8,141.8 | Additional paid-in capital | 8,376.5 | 7,797.7 | 7,178.2 | (14,975.9 | ) | 8,376.5 | ||||||||||||||||||||
| Retained earnings (deficit) | 2,824.1 | (339.5 | ) | 924.2 | (584.7 | ) | 2,824.1 | |||||||||||||||||||||||||||
| Accumulated other comprehensive income | 846.9 | 842.7 | 844.2 | (1,686.9 | ) | 846.9 | ||||||||||||||||||||||||||||
Retained earnings | Retained earnings | 3,722.5 | 150.8 | 1,494.4 | (1,645.2 | ) | 3,722.5 | |||||||||||||||||||||||||||
Accumulated other comprehensive income (loss) | Accumulated other comprehensive income (loss) | (4,911.6 | ) | (4,846.7 | ) | (4,842.7 | ) | 9,689.4 | (4,911.6 | ) | ||||||||||||||||||||||||
| Treasury stock, at cost | Treasury stock, at cost | (3,955.9 | ) | — | (2.0 | ) | 2.0 | (3,955.9 | ) | Treasury stock, at cost | (4,718.6 | ) | — | (2.0 | ) | 2.0 | (4,718.6 | ) | ||||||||||||||||
| Total stockholders' equity | 7,860.8 | 8,191.4 | 8,701.7 | (16,893.1 | ) | 7,860.8 | Total stockholders' equity | 2,472.8 | 3,101.8 | 3,845.7 | (6,947.5 | ) | 2,472.8 | |||||||||||||||||||||
| Total liabilities and stockholders' equity | $ | 8,482.0 | $ | 9,215.8 | $ | 143,712.2 | $ | (17,751.9 | ) | $ | 143,658.1 | Total liabilities and stockholders' equity | $ | 3,133.2 | $ | 4,592.2 | $ | 128,130.8 | $ | (7,673.8 | ) | $ | 128,182.4 | |||||||||||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
23. Condensed Consolidating Financial Information — (continued)
Condensed Consolidating Statements of Financial Position
December 31, 20052007
| | | Principal Financial Group, Inc. Parent Only | Principal Financial Services, Inc. Only | Principal Life Insurance Company and Other Subsidiaries Combined | Eliminations | Principal Financial Group, Inc. Consolidated | | Principal Financial Group, Inc. Parent Only | Principal Financial Services, Inc. Only | Principal Life Insurance Company and Other Subsidiaries Combined | Eliminations | Principal Financial Group, Inc. Consolidated | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | (in millions) | | (in millions) | ||||||||||||||||||||||||||||||
| Assets | Assets | Assets | ||||||||||||||||||||||||||||||||
| Fixed maturities, available-for-sale | Fixed maturities, available-for-sale | $ | — | $ | 14.7 | $ | 42,102.5 | $ | — | $ | 42,117.2 | Fixed maturities, available-for-sale | $ | — | $ | — | $ | 46,738.9 | $ | — | $ | 46,738.9 | ||||||||||||
| Fixed maturities, trading | Fixed maturities, trading | — | — | 113.2 | — | 113.2 | Fixed maturities, trading | — | — | 529.3 | — | 529.3 | ||||||||||||||||||||||
| Equity securities, available-for-sale | Equity securities, available-for-sale | — | 1.0 | 723.4 | — | 724.4 | Equity securities, available-for-sale | — | — | 316.4 | — | 316.4 | ||||||||||||||||||||||
| Equity securities, trading | Equity securities, trading | — | — | 90.3 | — | 90.3 | Equity securities, trading | — | — | 269.8 | — | 269.8 | ||||||||||||||||||||||
| Mortgage loans | Mortgage loans | — | — | 11,484.3 | — | 11,484.3 | Mortgage loans | — | — | 12,659.6 | — | 12,659.6 | ||||||||||||||||||||||
| Real estate | Real estate | — | — | 900.1 | — | 900.1 | Real estate | — | — | 862.5 | — | 862.5 | ||||||||||||||||||||||
| Policy loans | Policy loans | — | — | 827.7 | — | 827.7 | Policy loans | — | — | 869.9 | — | 869.9 | ||||||||||||||||||||||
| Investment in unconsolidated entities | Investment in unconsolidated entities | 7,784.2 | 8,168.9 | 263.8 | (15,953.0 | ) | 263.9 | Investment in unconsolidated entities | 8,031.2 | 8,713.7 | 490.7 | (16,744.9 | ) | 490.7 | ||||||||||||||||||||
| Other investments | Other investments | — | 8.4 | 841.2 | — | 849.6 | Other investments | — | 41.9 | 1,595.1 | (9.1 | ) | 1,627.9 | |||||||||||||||||||||
| Cash and cash equivalents | Cash and cash equivalents | 21.6 | 701.3 | 1,820.4 | (904.0 | ) | 1,639.3 | Cash and cash equivalents | (3.2 | ) | 349.1 | 1,665.1 | (666.6 | ) | 1,344.4 | |||||||||||||||||||
| Accrued investment income | Accrued investment income | — | 0.2 | 682.1 | — | 682.3 | Accrued investment income | — | — | 774.1 | — | 774.1 | ||||||||||||||||||||||
| Premiums due and other receivables | Premiums due and other receivables | — | 2.3 | 590.4 | — | 592.7 | Premiums due and other receivables | 0.9 | 7.7 | 951.8 | (9.2 | ) | 951.2 | |||||||||||||||||||||
| Deferred policy acquisition costs | Deferred policy acquisition costs | — | — | 2,174.1 | — | 2,174.1 | Deferred policy acquisition costs | — | — | 2,810.1 | — | 2,810.1 | ||||||||||||||||||||||
| Property and equipment | Property and equipment | — | — | 419.8 | — | 419.8 | Property and equipment | — | — | 469.0 | — | 469.0 | ||||||||||||||||||||||
| Goodwill | Goodwill | — | — | 282.3 | — | 282.3 | Goodwill | — | — | 374.7 | — | 374.7 | ||||||||||||||||||||||
| Other intangibles | Other intangibles | — | — | 202.6 | — | 202.6 | Other intangibles | — | — | 1,006.9 | — | 1,006.9 | ||||||||||||||||||||||
| Separate account assets | Separate account assets | — | — | 62,070.0 | — | 62,070.0 | Separate account assets | — | — | 80,486.8 | — | 80,486.8 | ||||||||||||||||||||||
| Assets of discontinued operations | — | — | 103.2 | — | 103.2 | |||||||||||||||||||||||||||||
| Other assets | Other assets | 3.5 | 15.0 | 1,498.4 | (18.5 | ) | 1,498.4 | Other assets | 6.3 | 9.0 | 1,897.5 | 25.2 | 1,938.0 | |||||||||||||||||||||
| Total assets | $ | 7,809.3 | $ | 8,911.8 | $ | 127,189.8 | $ | (16,875.5 | ) | $ | 127,035.4 | Total assets | $ | 8,035.2 | $ | 9,121.4 | $ | 154,768.2 | $ | (17,404.6 | ) | $ | 154,520.2 | |||||||||||
| Liabilities | Liabilities | Liabilities | ||||||||||||||||||||||||||||||||
| Contractholder funds | Contractholder funds | $ | — | $ | — | $ | 33,612.1 | $ | — | $ | 33,612.1 | Contractholder funds | $ | — | $ | — | $ | 40,288.9 | $ | — | $ | 40,288.9 | ||||||||||||
| Future policy benefits and claims | Future policy benefits and claims | — | — | 16,825.5 | — | 16,825.5 | Future policy benefits and claims | — | — | 18,454.7 | — | 18,454.7 | ||||||||||||||||||||||
| Other policyholder funds | Other policyholder funds | — | — | 657.1 | — | 657.1 | Other policyholder funds | — | — | 540.5 | — | 540.5 | ||||||||||||||||||||||
| Short-term debt | Short-term debt | — | 349.9 | 774.1 | (647.6 | ) | 476.4 | Short-term debt | — | 233.2 | 402.1 | (344.5 | ) | 290.8 | ||||||||||||||||||||
| Long-term debt | Long-term debt | — | 464.3 | 434.5 | — | 898.8 | Long-term debt | 601.8 | 454.7 | 342.3 | — | 1,398.8 | ||||||||||||||||||||||
Income taxes currently payable | Income taxes currently payable | (7.0 | ) | (2.4 | ) | 12.2 | 38.8 | 41.6 | ||||||||||||||||||||||||||
| Deferred income taxes | Deferred income taxes | — | 7.0 | 983.8 | (16.0 | ) | 974.8 | Deferred income taxes | (6.2 | ) | 17.0 | 576.3 | (10.8 | ) | 576.3 | |||||||||||||||||||
| Separate account liabilities | Separate account liabilities | — | — | 62,070.0 | — | 62,070.0 | Separate account liabilities | — | — | 80,486.8 | — | 80,486.8 | ||||||||||||||||||||||
| Liabilities of discontinued operations | — | — | 4.5 | — | 4.5 | |||||||||||||||||||||||||||||
| Other liabilities | Other liabilities | 2.1 | 306.4 | 3,659.3 | (258.8 | ) | 3,709.0 | Other liabilities | 24.9 | 387.7 | 4,950.7 | (343.2 | ) | 5,020.1 | ||||||||||||||||||||
| Total liabilities | 2.1 | 1,127.6 | 119,020.9 | (922.4 | ) | 119,228.2 | ||||||||||||||||||||||||||||
Total liabilities | 613.5 | 1,090.2 | 146,054.5 | (659.7 | ) | 147,098.5 | ||||||||||||||||||||||||||||
| Stockholders' equity | Stockholders' equity | Stockholders' equity | ||||||||||||||||||||||||||||||||
| Series A preferred stock | Series A preferred stock | — | — | — | — | — | Series A preferred stock | — | — | — | — | — | ||||||||||||||||||||||
| Series B preferred stock | Series B preferred stock | 0.1 | — | — | — | 0.1 | Series B preferred stock | 0.1 | — | — | — | 0.1 | ||||||||||||||||||||||
| Common stock | Common stock | 3.8 | — | 16.8 | (16.8 | ) | 3.8 | Common stock | 3.9 | — | 17.8 | (17.8 | ) | 3.9 | ||||||||||||||||||||
| Additional paid-in capital | Additional paid-in capital | 8,000.0 | 7,071.3 | 6,108.7 | (13,180.0 | ) | 8,000.0 | Additional paid-in capital | 8,295.4 | 7,760.7 | 7,125.6 | (14,886.3 | ) | 8,295.4 | ||||||||||||||||||||
| Retained earnings (deficit) | Retained earnings (deficit) | 2,008.6 | (281.9 | ) | 1,050.1 | (768.2 | ) | 2,008.6 | Retained earnings (deficit) | 3,414.3 | (156.7 | ) | 1,135.0 | (978.3 | ) | 3,414.3 | ||||||||||||||||||
| Accumulated other comprehensive income | Accumulated other comprehensive income | 994.8 | 994.8 | 995.3 | (1,990.1 | ) | 994.8 | Accumulated other comprehensive | 420.2 | 427.2 | 437.3 | (864.5 | ) | 420.2 | ||||||||||||||||||||
| Treasury stock, at cost | Treasury stock, at cost | (3,200.1 | ) | — | (2.0 | ) | 2.0 | (3,200.1 | ) | Treasury stock, at cost | (4,712.2 | ) | — | (2.0 | ) | 2.0 | (4,712.2 | ) | ||||||||||||||||
| Total stockholders' equity | 7,807.2 | 7,784.2 | 8,168.9 | (15,953.1 | ) | 7,807.2 | Total stockholders' equity | 7,421.7 | 8,031.2 | 8,713.7 | (16,744.9 | ) | 7,421.7 | |||||||||||||||||||||
| Total liabilities and stockholders' equity | $ | 7,809.3 | $ | 8,911.8 | $ | 127,189.8 | $ | (16,875.5 | ) | $ | 127,035.4 | Total liabilities and stockholders' | $ | 8,035.2 | $ | 9,121.4 | $ | 154,768.2 | $ | (17,404.6 | ) | $ | 154,520.2 | |||||||||||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
23. Condensed Consolidating Financial Information — (continued)
Condensed Consolidating Statements of Operations
For the year ended December 31, 2008
| | Principal Financial Group, Inc. Parent Only | Principal Financial Services, Inc. Only | Principal Life Insurance Company and Other Subsidiaries Combined | Eliminations | Principal Financial Group, Inc. Consolidated | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | ||||||||||||||||
Revenues | |||||||||||||||||
Premiums and other considerations | $ | — | $ | — | $ | 4,209.2 | $ | — | $ | 4,209.2 | |||||||
Fees and other revenues | — | 0.1 | 2,441.1 | (14.7 | ) | 2,426.5 | |||||||||||
Net investment income (loss) | (0.3 | ) | (2.3 | ) | 3,996.9 | — | 3,994.3 | ||||||||||
Net realized capital losses | (1.8 | ) | (0.5 | ) | (691.7 | ) | (0.1 | ) | (694.1 | ) | |||||||
Total revenues | (2.1 | ) | (2.7 | ) | 9,955.5 | (14.8 | ) | 9,935.9 | |||||||||
Expenses | |||||||||||||||||
Benefits, claims and settlement expenses | — | — | 6,219.9 | — | 6,219.9 | ||||||||||||
Dividends to policyholders | — | — | 267.3 | — | 267.3 | ||||||||||||
Operating expenses | 48.0 | 44.6 | 2,917.3 | (14.8 | ) | 2,995.1 | |||||||||||
Total expenses | 48.0 | 44.6 | 9,404.5 | (14.8 | ) | 9,482.3 | |||||||||||
Income (loss) from continuing operations before income taxes | (50.1 | ) | (47.3 | ) | 551.0 | — | 453.6 | ||||||||||
Income taxes (benefits) | (20.0 | ) | (33.5 | ) | 49.0 | — | (4.5 | ) | |||||||||
Equity in the net income of subsidiaries | 488.2 | 502.0 | — | (990.2 | ) | — | |||||||||||
Net income | 458.1 | 488.2 | 502.0 | (990.2 | ) | 458.1 | |||||||||||
Preferred stock dividends | 33.0 | — | — | — | 33.0 | ||||||||||||
Net income available to common stockholders | $ | 425.1 | $ | 488.2 | $ | 502.0 | $ | (990.2 | ) | $ | 425.1 | ||||||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
23. Condensed Consolidating Financial Information — (continued)
Condensed Consolidating Statements of Operations
For the year ended December 31, 2007
| | Principal Financial Group, Inc. Parent Only | Principal Financial Services, Inc. Only | Principal Life Insurance Company and Other Subsidiaries Combined | Eliminations | Principal Financial Group, Inc. Consolidated | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | ||||||||||||||||
Revenues | |||||||||||||||||
Premiums and other considerations | $ | — | $ | — | $ | 4,634.1 | $ | — | $ | 4,634.1 | |||||||
Fees and other revenues | — | — | 2,647.1 | (12.4 | ) | 2,634.7 | |||||||||||
Net investment income | 6.8 | 1.8 | 3,957.6 | 0.3 | 3,966.5 | ||||||||||||
Net realized capital gains (losses) | — | 4.9 | (333.8 | ) | 0.1 | (328.8 | ) | ||||||||||
Total revenues | 6.8 | 6.7 | 10,905.0 | (12.0 | ) | 10,906.5 | |||||||||||
Expenses | |||||||||||||||||
Benefits, claims and settlement expenses | — | — | 6,435.3 | — | 6,435.3 | ||||||||||||
Dividends to policyholders | — | — | 293.8 | — | 293.8 | ||||||||||||
Operating expenses | 48.2 | 40.6 | 3,052.4 | (12.0 | ) | 3,129.2 | |||||||||||
Total expenses | 48.2 | 40.6 | 9,781.5 | (12.0 | ) | 9,858.3 | |||||||||||
Income (loss) from continuing operations before income taxes | (41.4 | ) | (33.9 | ) | 1,123.5 | — | 1,048.2 | ||||||||||
Income taxes (benefits) | (17.4 | ) | (10.0 | ) | 235.5 | — | 208.1 | ||||||||||
Equity in the net income of subsidiaries, excluding discontinued operations | 864.1 | 888.0 | — | (1,752.1 | ) | — | |||||||||||
Income from continuing operations, net of related income taxes | 840.1 | 864.1 | 888.0 | (1,752.1 | ) | 840.1 | |||||||||||
Income from discontinued operations, net of related income taxes | 20.2 | 20.2 | 20.2 | (40.4 | ) | 20.2 | |||||||||||
Net income | 860.3 | 884.3 | 908.2 | (1,792.5 | ) | 860.3 | |||||||||||
Preferred stock dividends | 33.0 | — | — | — | 33.0 | ||||||||||||
Net income available to common stockholders | $ | 827.3 | $ | 884.3 | $ | 908.2 | $ | (1,792.5 | ) | $ | 827.3 | ||||||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
23. Condensed Consolidating Financial Information — (continued)
Condensed Consolidating Statements of Operations
For the year ended December 31, 2006
| | | Principal Financial Group, Inc. Parent Only | Principal Financial Services, Inc. Only | Principal Life Insurance Company and Other Subsidiaries Combined | Eliminations | Principal Financial Group, Inc. Consolidated | | Principal Financial Group, Inc. Parent Only | Principal Financial Services, Inc. Only | Principal Life Insurance Company and Other Subsidiaries Combined | Eliminations | Principal Financial Group, Inc. Consolidated | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | (in millions) | | (in millions) | |||||||||||||||||||||||||||||
| Revenues | Revenues | Revenues | |||||||||||||||||||||||||||||||
| Premiums and other considerations | Premiums and other considerations | $ | — | $ | — | $ | 4,305.3 | $ | — | $ | 4,305.3 | Premiums and other considerations | $ | — | $ | — | $ | 4,305.3 | $ | — | $ | 4,305.3 | |||||||||||
| Fees and other revenues | Fees and other revenues | — | — | 1,905.8 | (3.3 | ) | 1,902.5 | Fees and other revenues | — | — | 1,905.8 | (3.3 | ) | 1,902.5 | |||||||||||||||||||
| Net investment income | Net investment income | 11.9 | 12.5 | 3,593.5 | 0.1 | 3,618.0 | Net investment income | 11.9 | 12.5 | 3,596.1 | 0.1 | 3,620.6 | |||||||||||||||||||||
| Net realized/unrealized capital gains (losses) | — | (0.6 | ) | 45.3 | — | 44.7 | |||||||||||||||||||||||||||
Net realized capital gains (losses) | Net realized capital gains (losses) | — | (0.6 | ) | 45.3 | — | 44.7 | ||||||||||||||||||||||||||
| Total revenues | 11.9 | 11.9 | 9,849.9 | (3.2 | ) | 9,870.5 | Total revenues | 11.9 | 11.9 | 9,852.5 | (3.2 | ) | 9,873.1 | ||||||||||||||||||||
| Expenses | Expenses | Expenses | |||||||||||||||||||||||||||||||
| Benefits, claims, and settlement expenses | — | — | 5,692.4 | — | 5,692.4 | ||||||||||||||||||||||||||||
Benefits, claims and settlement expenses | Benefits, claims and settlement expenses | — | — | 5,692.4 | — | 5,692.4 | |||||||||||||||||||||||||||
| Dividends to policyholders | Dividends to policyholders | — | — | 290.7 | — | 290.7 | Dividends to policyholders | — | — | 290.7 | — | 290.7 | |||||||||||||||||||||
| Operating expenses | Operating expenses | 18.2 | 42.9 | 2,500.8 | (3.2 | ) | 2,558.7 | Operating expenses | 18.2 | 42.9 | 2,500.8 | (3.2 | ) | 2,558.7 | |||||||||||||||||||
| Total expenses | 18.2 | 42.9 | 8,483.9 | (3.2 | ) | 8,541.8 | Total expenses | 18.2 | 42.9 | 8,483.9 | (3.2 | ) | 8,541.8 | ||||||||||||||||||||
| Income (loss) from continuing operations before income taxes | Income (loss) from continuing operations before income taxes | (6.3 | ) | (31.0 | ) | 1,366.0 | — | 1,328.7 | Income (loss) from continuing operations before income taxes | (6.3 | ) | (31.0 | ) | 1,368.6 | — | 1,331.3 | |||||||||||||||||
| Income taxes (benefits) | Income taxes (benefits) | (2.2 | ) | (10.4 | ) | 307.6 | — | 295.0 | Income taxes (benefits) | (2.2 | ) | (10.4 | ) | 308.5 | — | 295.9 | |||||||||||||||||
| Equity in the net income of subsidiaries, excluding discontinued operations | Equity in the net income of subsidiaries, excluding discontinued operations | 1,037.8 | 1,058.4 | — | (2,096.2 | ) | — | Equity in the net income of subsidiaries, excluding discontinued operations | 1,039.5 | 1,060.1 | — | (2,099.6 | ) | — | |||||||||||||||||||
| Income from continuing operations, net of related income taxes | Income from continuing operations, net of related income taxes | 1,033.7 | 1,037.8 | 1,058.4 | (2,096.2 | ) | 1,033.7 | Income from continuing operations, net of related income taxes | 1,035.4 | 1,039.5 | 1,060.1 | (2,099.6 | ) | 1,035.4 | |||||||||||||||||||
| Income from discontinued operations, net of related income taxes | Income from discontinued operations, net of related income taxes | 30.6 | 30.6 | 30.6 | (61.2 | ) | 30.6 | Income from discontinued operations, net of related income taxes | 28.9 | 28.9 | 28.9 | (57.8 | ) | 28.9 | |||||||||||||||||||
| Net income | Net income | 1,064.3 | 1,068.4 | 1,089.0 | (2,157.4 | ) | 1,064.3 | Net income | 1,064.3 | 1,068.4 | 1,089.0 | (2,157.4 | ) | 1,064.3 | |||||||||||||||||||
| Preferred stock dividends | Preferred stock dividends | 33.0 | — | — | — | 33.0 | Preferred stock dividends | 33.0 | — | — | — | 33.0 | |||||||||||||||||||||
| Net income available to common stockholders | Net income available to common stockholders | $ | 1,031.3 | $ | 1,068.4 | $ | 1,089.0 | $ | (2,157.4 | ) | $ | 1,031.3 | Net income available to common stockholders | $ | 1,031.3 | $ | 1,068.4 | $ | 1,089.0 | $ | (2,157.4 | ) | $ | 1,031.3 | |||||||||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
23. Condensed Consolidating Financial Information — (continued)
Condensed Consolidating Statements of Cash Flows
For the year ended December 31, 2008
| | Principal Financial Group, Inc. Parent Only | Principal Financial Services, Inc. Only | Principal Life Insurance Company and Other Subsidiaries Combined | Eliminations | Principal Financial Group, Inc. Consolidated | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | ||||||||||||||||
Operating activities | |||||||||||||||||
Net cash provided by (used in) operating activities | $ | (60.2 | ) | $ | (47.6 | ) | $ | 2,342.5 | $ | (9.9 | ) | $ | 2,224.8 | ||||
Investing activities | |||||||||||||||||
Available-for-sale securities: | |||||||||||||||||
Purchases | — | 50.0 | (6,655.8 | ) | — | (6,605.8 | ) | ||||||||||
Sales | — | — | 1,343.5 | — | 1,343.5 | ||||||||||||
Maturities | — | — | 3,207.9 | — | 3,207.9 | ||||||||||||
Mortgage loans acquired or originated | — | — | (3,484.9 | ) | — | (3,484.9 | ) | ||||||||||
Mortgage loans sold or repaid | — | — | 2,902.0 | — | 2,902.0 | ||||||||||||
Real estate acquired | — | — | (33.3 | ) | — | (33.3 | ) | ||||||||||
Real estate sold | — | — | 70.6 | — | 70.6 | ||||||||||||
Net purchases of property and equipment | — | — | (105.0 | ) | — | (105.0 | ) | ||||||||||
Purchases of interest in subsidiaries, net of cash acquired | — | (2.3 | ) | (18.0 | ) | — | (20.3 | ) | |||||||||
Dividends received from unconsolidated entities | 181.1 | 92.1 | — | (273.2 | ) | — | |||||||||||
Net change in other investments | — | 36.4 | (187.0 | ) | (41.3 | ) | (191.9 | ) | |||||||||
Net cash provided by (used in) investing activities | $ | 181.1 | $ | 176.2 | $ | (2,960.0 | ) | $ | (314.5 | ) | $ | (2,917.2 | ) | ||||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
23. Condensed Consolidating Financial Information — (continued)
Condensed Consolidating Statements of OperationsCash Flows (continued)
For the year ended December 31, 20052008
| | Principal Financial Group, Inc. Parent Only | Principal Financial Services, Inc. Only | Principal Life Insurance Company and Other Subsidiaries Combined | Eliminations | Principal Financial Group, Inc. Consolidated | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | ||||||||||||||||
| Revenues | |||||||||||||||||
| Premiums and other considerations | $ | — | $ | — | $ | 3,975.0 | $ | — | $ | 3,975.0 | |||||||
| Fees and other revenues | — | — | 1,717.9 | (0.1 | ) | 1,717.8 | |||||||||||
| Net investment income | 2.3 | 7.3 | 3,350.5 | — | 3,360.1 | ||||||||||||
| Net realized/unrealized capital losses | — | (1.1 | ) | (10.1 | ) | — | (11.2 | ) | |||||||||
| Total revenues | 2.3 | 6.2 | 9,033.3 | (0.1 | ) | 9,041.7 | |||||||||||
| Expenses | |||||||||||||||||
| Benefits, claims, and settlement expenses | — | — | 5,282.9 | — | 5,282.9 | ||||||||||||
| Dividends to policyholders | — | — | 293.0 | — | 293.0 | ||||||||||||
| Operating expenses | 10.6 | 39.2 | 2,292.5 | (0.2 | ) | 2,342.1 | |||||||||||
| Total expenses | 10.6 | 39.2 | 7,868.4 | (0.2 | ) | 7,918.0 | |||||||||||
| Income (loss) from continuing operations before income taxes | (8.3 | ) | (33.0 | ) | 1,164.9 | 0.1 | 1,123.7 | ||||||||||
| Income taxes (benefits) | (3.8 | ) | (15.7 | ) | 251.7 | — | 232.2 | ||||||||||
| Equity in the net income of subsidiaries, excluding discontinued operations | 896.0 | 913.2 | — | (1,809.2 | ) | — | |||||||||||
| Income from continuing operations, net of related income taxes | 891.5 | 895.9 | 913.2 | (1,809.1 | ) | 891.5 | |||||||||||
| Income from discontinued operations, net of related income taxes | 27.5 | 27.5 | 18.9 | (46.4 | ) | 27.5 | |||||||||||
| Net income | 919.0 | 923.4 | 932.1 | (1,855.5 | ) | 919.0 | |||||||||||
| Preferred stock dividends | 17.7 | — | — | — | 17.7 | ||||||||||||
| Net income available to common stockholders | $ | 901.3 | $ | 923.4 | $ | 932.1 | $ | (1,855.5 | ) | $ | 901.3 | ||||||
| | Principal Financial Group, Inc. Parent Only | Principal Financial Services, Inc. Only | Principal Life Insurance Company and Other Subsidiaries Combined | Eliminations | Principal Financial Group, Inc. Consolidated | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | |||||||||||||||
Financing activities | ||||||||||||||||
Issuance of common stock | $ | 36.4 | $ | — | $ | — | $ | — | $ | 36.4 | ||||||
Acquisition of treasury stock | (6.4 | ) | — | — | — | (6.4 | ) | |||||||||
Proceeds from financing element derivatives | — | — | 142.2 | — | 142.2 | |||||||||||
Payments for financing element derivatives | — | — | (114.6 | ) | — | (114.6 | ) | |||||||||
Excess tax benefits from share-based payment arrangements | — | — | 3.1 | — | 3.1 | |||||||||||
Dividends to common stockholders | (116.7 | ) | — | — | — | (116.7 | ) | |||||||||
Dividends to preferred stockholders | (33.0 | ) | — | — | — | (33.0 | ) | |||||||||
Issuance of long-term debt | — | — | 7.9 | — | 7.9 | |||||||||||
Principal repayments of long-term debt | — | — | (83.3 | ) | — | (83.3 | ) | |||||||||
Net proceeds (repayments) of short-term borrowings | — | 249.4 | (85.3 | ) | 53.3 | 217.4 | ||||||||||
Dividends paid to parent | — | (181.1 | ) | (92.1 | ) | 273.2 | — | |||||||||
Investment contract deposits | — | — | 11,349.0 | — | 11,349.0 | |||||||||||
Investment contract withdrawals | — | — | (9,813.7 | ) | — | (9,813.7 | ) | |||||||||
Net increase in banking operation deposits | — | — | 373.1 | — | 373.1 | |||||||||||
Other | — | — | (5.4 | ) | — | (5.4 | ) | |||||||||
Net cash provided by (used in) financing activities | (119.7 | ) | 68.3 | 1,680.9 | 326.5 | 1,956.0 | ||||||||||
Net increase in cash and cash equivalents | 1.2 | 196.9 | 1,063.4 | 2.1 | 1,263.6 | |||||||||||
Cash and cash equivalents at beginning of year | (3.2 | ) | 349.1 | 1,665.1 | (666.6 | ) | 1,344.4 | |||||||||
Cash and cash equivalents at end of year | $ | (2.0 | ) | $ | 546.0 | $ | 2,728.5 | $ | (664.5 | ) | $ | 2,608.0 | ||||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
23. Condensed Consolidating Financial Information — (continued)
Condensed Consolidating Statements of OperationsCash Flows
For the year ended December 31, 20042007
| | Principal Financial Group, Inc. Parent Only | Principal Financial Services, Inc. Only | Principal Life Insurance Company and Other Subsidiaries Combined | Eliminations | Principal Financial Group, Inc. Consolidated | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | ||||||||||||||||
| Revenues | |||||||||||||||||
| Premiums and other considerations | $ | — | $ | — | $ | 3,710.0 | $ | — | $ | 3,710.0 | |||||||
| Fees and other revenues | — | — | 1,495.3 | (3.6 | ) | 1,491.7 | |||||||||||
| Net investment income | 4.8 | 8.1 | 3,210.6 | 0.5 | 3,224.0 | ||||||||||||
| Net realized/unrealized capital losses | — | (30.9 | ) | (73.9 | ) | — | (104.8 | ) | |||||||||
| Total revenues | 4.8 | (22.8 | ) | 8,342.0 | (3.1 | ) | 8,320.9 | ||||||||||
| Expenses | |||||||||||||||||
| Benefits, claims, and settlement expenses | — | — | 4,959.5 | — | 4,959.5 | ||||||||||||
| Dividends to policyholders | — | — | 296.7 | — | 296.7 | ||||||||||||
| Operating expenses | 10.5 | 52.2 | 2,126.0 | (3.1 | ) | 2,185.6 | |||||||||||
| Total expenses | 10.5 | 52.2 | 7,382.2 | (3.1 | ) | 7,441.8 | |||||||||||
| Income (loss) from continuing operations before income taxes | (5.7 | ) | (75.0 | ) | 959.8 | — | 879.1 | ||||||||||
| Income taxes (benefits) | (2.2 | ) | (32.6 | ) | 213.0 | — | 178.2 | ||||||||||
| Equity in the net income of subsidiaries, excluding discontinued operations and cumulative effect of accounting change | 704.4 | 746.8 | — | (1,451.2 | ) | — | |||||||||||
| Income from continuing operations, net of related income taxes | 700.9 | 704.4 | 746.8 | (1,451.2 | ) | 700.9 | |||||||||||
| Income from discontinued operations, net of related income taxes | 130.4 | 130.4 | 114.6 | (245.0 | ) | 130.4 | |||||||||||
| Income before cumulative effect of accounting change | 831.3 | 834.8 | 861.4 | (1,696.2 | ) | 831.3 | |||||||||||
| Cumulative effect of accounting change, net of related income taxes | (5.7 | ) | (5.7 | ) | (5.7 | ) | 11.4 | (5.7 | ) | ||||||||
| Net income | $ | 825.6 | $ | 829.1 | $ | 855.7 | $ | (1,684.8 | ) | $ | 825.6 | ||||||
| | Principal Financial Group, Inc. Parent Only | Principal Financial Services, Inc. Only | Principal Life Insurance Company and Other Subsidiaries Combined | Eliminations | Principal Financial Group, Inc. Consolidated | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | ||||||||||||||||
Operating activities | |||||||||||||||||
Net cash provided by (used in) operating activities | $ | (30.8 | ) | $ | 403.6 | $ | 2,638.4 | $ | (51.2 | ) | $ | 2,960.0 | |||||
Investing activities | |||||||||||||||||
Available-for-sale securities: | |||||||||||||||||
Purchases | — | (0.2 | ) | (10,520.1 | ) | — | (10,520.3 | ) | |||||||||
Sales | — | 13.4 | 3,026.2 | — | 3,039.6 | ||||||||||||
Maturities | — | — | 4,461.6 | — | 4,461.6 | ||||||||||||
Mortgage loans acquired or originated | — | — | (3,108.0 | ) | — | (3,108.0 | ) | ||||||||||
Mortgage loans sold or repaid | — | — | 2,112.8 | — | 2,112.8 | ||||||||||||
Real estate acquired | — | — | (115.2 | ) | — | (115.2 | ) | ||||||||||
Real estate sold | — | — | 53.0 | — | 53.0 | ||||||||||||
Net purchases of property and equipment | (0.1 | ) | — | (98.3 | ) | — | (98.4 | ) | |||||||||
Purchases of interest in subsidiaries, net of cash acquired | — | (75.0 | ) | (1.1 | ) | — | (76.1 | ) | |||||||||
Dividends received from unconsolidated entities | 956.3 | 622.2 | — | (1,578.5 | ) | — | |||||||||||
Net change in other investments | — | (10.9 | ) | (215.7 | ) | (21.6 | ) | (248.2 | ) | ||||||||
Net cash provided by (used in) investing activities | $ | 956.2 | $ | 549.5 | $ | (4,404.8 | ) | $ | (1,600.1 | ) | $ | (4,499.2 | ) | ||||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
23. Condensed Consolidating Financial Information — (continued)
Condensed Consolidating Statements of Cash Flows (continued)
For the year ended December 31, 2007
| | Principal Financial Group, Inc. Parent Only | Principal Financial Services, Inc. Only | Principal Life Insurance Company and Other Subsidiaries Combined | Eliminations | Principal Financial Group, Inc. Consolidated | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | ||||||||||||||||
Financing activities | |||||||||||||||||
Issuance of common stock | $ | 73.6 | $ | — | $ | — | $ | — | $ | 73.6 | |||||||
Acquisition of treasury stock | (756.3 | ) | — | — | — | (756.3 | ) | ||||||||||
Proceeds from financing element derivatives | — | — | 128.7 | — | 128.7 | ||||||||||||
Payments for financing element derivatives | — | — | (137.2 | ) | — | (137.2 | ) | ||||||||||
Excess tax benefits from share-based payment arrangements | — | — | 10.2 | — | 10.2 | ||||||||||||
Dividends to common stockholders | (235.6 | ) | — | — | — | (235.6 | ) | ||||||||||
Dividends to preferred stockholders | (41.2 | ) | — | — | — | (41.2 | ) | ||||||||||
Issuance of long-term debt | — | — | 0.2 | — | 0.2 | ||||||||||||
Principal repayments of long-term debt | — | (10.5 | ) | (104.5 | ) | — | (115.0 | ) | |||||||||
Net proceeds (repayments) of short-term borrowings | — | 233.6 | (36.5 | ) | 6.8 | 203.9 | |||||||||||
Dividends paid to parent | — | (956.3 | ) | (622.2 | ) | 1,578.5 | — | ||||||||||
Investment contract deposits | — | — | 9,958.9 | — | 9,958.9 | ||||||||||||
Investment contract withdrawals | — | — | (8,209.9 | ) | — | (8,209.9 | ) | ||||||||||
Net increase in banking operation deposits | — | — | 417.1 | — | 417.1 | ||||||||||||
Other | — | — | (5.3 | ) | — | (5.3 | ) | ||||||||||
Net cash provided by (used in) financing activities | (959.5 | ) | (733.2 | ) | 1,399.5 | 1,585.3 | 1,292.1 | ||||||||||
Discontinued operations | |||||||||||||||||
Net cash provided by operating activities | — | — | 2.5 | — | 2.5 | ||||||||||||
Net cash used in investing activities | — | — | (1.3 | ) | — | (1.3 | ) | ||||||||||
Net cash used in financing activities | — | — | (0.5 | ) | — | (0.5 | ) | ||||||||||
Net cash provided by discontinued operations | — | — | 0.7 | — | 0.7 | ||||||||||||
Net increase (decrease) in cash and cash equivalents | (34.1 | ) | 219.9 | (366.2 | ) | (66.0 | ) | (246.4 | ) | ||||||||
Cash and cash equivalents at beginning of year | 30.9 | 129.2 | 2,031.3 | (600.6 | ) | 1,590.8 | |||||||||||
Cash and cash equivalents at end of year | $ | (3.2 | ) | $ | 349.1 | $ | 1,665.1 | $ | (666.6 | ) | $ | 1,344.4 | |||||
Cash and cash equivalents of discontinued operations included above | |||||||||||||||||
At beginning of year | $ | — | $ | — | $ | (0.7 | ) | $ | — | $ | (0.7 | ) | |||||
At end of year | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
23. Condensed Consolidating Financial Information — (continued)
Condensed Consolidating Statements of Cash Flows
For the year ended December 31, 2006
| | | Principal Financial Group, Inc. Parent Only | Principal Financial Services, Inc. Only | Principal Life Insurance Company and Other Subsidiaries Combined | Eliminations | Principal Financial Group, Inc. Consolidated | | Principal Financial Group, Inc. Parent Only | Principal Financial Services, Inc. Only | Principal Life Insurance Company and Other Subsidiaries Combined | Eliminations | Principal Financial Group, Inc. Consolidated | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | (in millions) | | (in millions) | ||||||||||||||||||||||||||||||
| Operating activities | Operating activities | Operating activities | ||||||||||||||||||||||||||||||||
| Net cash provided by (used in) operating activities | Net cash provided by (used in) operating activities | $ | 7.2 | $ | (377.7 | ) | $ | 2,621.1 | $ | 27.9 | $ | 2,278.5 | Net cash provided by (used in) operating activities | $ | 7.2 | $ | (377.7 | ) | $ | 2,618.1 | $ | 27.9 | $ | 2,275.5 | ||||||||||
| Investing activities | Investing activities | Investing activities | ||||||||||||||||||||||||||||||||
| Available-for-sale securities: | Available-for-sale securities: | Available-for-sale securities: | ||||||||||||||||||||||||||||||||
| Purchases | — | (2.3 | ) | (7,763.1 | ) | — | (7,765.4 | ) | Purchases | — | (2.3 | ) | (7,763.1 | ) | — | (7,765.4 | ) | |||||||||||||||||
| Sales | — | 3.7 | 1,435.2 | — | 1,438.9 | Sales | — | 3.7 | 1,435.2 | — | 1,438.9 | |||||||||||||||||||||||
| Maturities | — | — | 3,595.8 | — | 3,595.8 | Maturities | — | — | 3,595.8 | — | 3,595.8 | |||||||||||||||||||||||
| Mortgage loans acquired or originated | Mortgage loans acquired or originated | — | — | (2,600.2 | ) | — | (2,600.2 | ) | Mortgage loans acquired or originated | — | — | (2,600.2 | ) | — | (2,600.2 | ) | ||||||||||||||||||
| Mortgage loans sold or repaid | Mortgage loans sold or repaid | — | — | 2,102.6 | — | 2,102.6 | Mortgage loans sold or repaid | — | — | 2,102.6 | — | 2,102.6 | ||||||||||||||||||||||
| Real estate acquired | Real estate acquired | — | — | (29.1 | ) | — | (29.1 | ) | Real estate acquired | — | — | (26.6 | ) | — | (26.6 | ) | ||||||||||||||||||
| Real estate sold | Real estate sold | — | — | 174.1 | — | 174.1 | Real estate sold | — | — | 174.1 | — | 174.1 | ||||||||||||||||||||||
| Net purchases of property and equipment | Net purchases of property and equipment | — | — | (50.5 | ) | — | (50.5 | ) | Net purchases of property and equipment | — | — | (50.5 | ) | — | (50.5 | ) | ||||||||||||||||||
| Purchases of interest in subsidiaries, net of cash acquired | Purchases of interest in subsidiaries, net of cash acquired | — | — | (769.2 | ) | — | (769.2 | ) | Purchases of interest in subsidiaries, net of cash acquired | — | — | (769.2 | ) | — | (769.2 | ) | ||||||||||||||||||
| Dividends received from unconsolidated entities | Dividends received from unconsolidated entities | 331.1 | 456.1 | — | (787.2 | ) | — | Dividends received from unconsolidated entities | 331.1 | 456.1 | — | (787.2 | ) | — | ||||||||||||||||||||
| Net change in other investments | Net change in other investments | — | 29.2 | (18.2 | ) | (20.9 | ) | (9.9 | ) | Net change in other investments | — | 29.2 | (18.2 | ) | (20.9 | ) | (9.9 | ) | ||||||||||||||||
| Net cash provided by (used in) investing activities | Net cash provided by (used in) investing activities | $ | 331.1 | $ | 486.7 | $ | (3,922.6 | ) | $ | (808.1 | ) | $ | (3,912.9 | ) | Net cash provided by (used in) investing activities | $ | 331.1 | $ | 486.7 | $ | (3,920.1 | ) | $ | (808.1 | ) | $ | (3,910.4 | ) | ||||||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
23. Condensed Consolidating Financial Information — (continued)
Condensed Consolidating Statements of Cash Flows (continued)
For the year ended December 31, 2006
| | | Principal Financial Group, Inc. Parent Only | Principal Financial Services, Inc. Only | Principal Life Insurance Company and Other Subsidiaries Combined | Eliminations | Principal Financial Group, Inc. Consolidated | | Principal Financial Group, Inc. Parent Only | Principal Financial Services, Inc. Only | Principal Life Insurance Company and Other Subsidiaries Combined | Eliminations | Principal Financial Group, Inc. Consolidated | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | (in millions) | | (in millions) | ||||||||||||||||||||||||||||||
| Financing activities | Financing activities | Financing activities | ||||||||||||||||||||||||||||||||
| Issuance of common stock | Issuance of common stock | $ | 66.2 | $ | — | $ | — | $ | — | $ | 66.2 | Issuance of common stock | $ | 66.2 | $ | — | $ | — | $ | — | $ | 66.2 | ||||||||||||
| Acquisition of treasury stock, net | (755.8 | ) | — | — | — | (755.8 | ) | |||||||||||||||||||||||||||
Acquisition of treasury stock | Acquisition of treasury stock | (755.8 | ) | — | — | — | (755.8 | ) | ||||||||||||||||||||||||||
| Proceeds from financing element derivatives | Proceeds from financing element derivatives | — | — | 132.1 | — | 132.1 | Proceeds from financing element derivatives | — | — | 132.1 | — | 132.1 | ||||||||||||||||||||||
| Payments for financing element derivatives | Payments for financing element derivatives | — | — | (141.0 | ) | — | (141.0 | ) | Payments for financing element derivatives | — | — | (141.0 | ) | — | (141.0 | ) | ||||||||||||||||||
| Excess tax benefits from share-based payment arrangements | Excess tax benefits from share-based payment arrangements | — | — | 8.4 | — | 8.4 | Excess tax benefits from share-based payment arrangements | — | — | 8.4 | — | 8.4 | ||||||||||||||||||||||
| Dividends to common stockholders | Dividends to common stockholders | (214.7 | ) | — | — | — | (214.7 | ) | Dividends to common stockholders | (214.7 | ) | — | — | — | (214.7 | ) | ||||||||||||||||||
| Dividends to preferred stockholders | Dividends to preferred stockholders | (24.7 | ) | — | — | — | (24.7 | ) | Dividends to preferred stockholders | (24.7 | ) | — | — | — | (24.7 | ) | ||||||||||||||||||
| Issuance of long-term debt | Issuance of long-term debt | 600.0 | — | 1.7 | — | 601.7 | Issuance of long-term debt | 600.0 | — | 1.7 | — | 601.7 | ||||||||||||||||||||||
| Principal repayments of long-term debt | Principal repayments of long-term debt | — | — | (21.0 | ) | — | (21.0 | ) | Principal repayments of long-term debt | — | — | (20.4 | ) | — | (20.4 | ) | ||||||||||||||||||
| Net repayments of short-term borrowings | Net repayments of short-term borrowings | — | (350.0 | ) | (336.9 | ) | 296.4 | (390.5 | ) | Net repayments of short-term borrowings | — | (350.0 | ) | (336.9 | ) | 296.4 | (390.5 | ) | ||||||||||||||||
| Dividends paid to parent | Dividends paid to parent | — | (331.1 | ) | (456.1 | ) | 787.2 | — | Dividends paid to parent | — | (331.1 | ) | (456.1 | ) | 787.2 | — | ||||||||||||||||||
| Investment contract deposits | Investment contract deposits | — | — | 8,925.7 | — | 8,925.7 | Investment contract deposits | — | — | 8,925.7 | — | 8,925.7 | ||||||||||||||||||||||
| Investment contract withdrawals | Investment contract withdrawals | — | — | (6,859.4 | ) | — | (6,859.4 | ) | Investment contract withdrawals | — | — | (6,859.4 | ) | — | (6,859.4 | ) | ||||||||||||||||||
| Net increase in banking operation deposits | Net increase in banking operation deposits | — | — | 258.9 | — | 258.9 | Net increase in banking operation deposits | — | — | 258.9 | — | 258.9 | ||||||||||||||||||||||
| Net cash provided by (used in) financing activities | Net cash provided by (used in) financing activities | (329.0 | ) | (681.1 | ) | 1,512.4 | 1,083.6 | 1,585.9 | Net cash provided by (used in) financing activities | (329.0 | ) | (681.1 | ) | 1,513.0 | 1,083.6 | 1,586.5 | ||||||||||||||||||
| Discontinued operations | Discontinued operations | Discontinued operations | ||||||||||||||||||||||||||||||||
| Net cash used in operating activities | — | — | (1.1 | ) | — | (1.1 | ) | |||||||||||||||||||||||||||
Net cash provided by operating activities | Net cash provided by operating activities | — | — | 1.9 | — | 1.9 | ||||||||||||||||||||||||||||
| Net cash used in investing activities | Net cash used in investing activities | — | — | (0.9 | ) | — | (0.9 | ) | Net cash used in investing activities | — | — | (3.4 | ) | — | (3.4 | ) | ||||||||||||||||||
| Net cash used in financing activities | Net cash used in financing activities | — | — | — | — | — | Net cash used in financing activities | — | — | (0.6 | ) | — | (0.6 | ) | ||||||||||||||||||||
| Net cash used in discontinued operations | Net cash used in discontinued operations | — | — | (2.0 | ) | — | (2.0 | ) | Net cash used in discontinued operations | — | — | (2.1 | ) | — | (2.1 | ) | ||||||||||||||||||
| Net increase (decrease) in cash and cash equivalents | Net increase (decrease) in cash and cash equivalents | 9.3 | (572.1 | ) | 208.9 | 303.4 | (50.5 | ) | Net increase (decrease) in cash and cash equivalents | 9.3 | (572.1 | ) | 208.9 | 303.4 | (50.5 | ) | ||||||||||||||||||
| Cash and cash equivalents at beginning of year | Cash and cash equivalents at beginning of year | 21.6 | 701.3 | 1,822.4 | (904.0 | ) | 1,641.3 | Cash and cash equivalents at beginning of year | 21.6 | 701.3 | 1,822.4 | (904.0 | ) | 1,641.3 | ||||||||||||||||||||
| Cash and cash equivalents at end of year | Cash and cash equivalents at end of year | $ | 30.9 | $ | 129.2 | $ | 2,031.3 | $ | (600.6 | ) | $ | 1,590.8 | Cash and cash equivalents at end of year | $ | 30.9 | $ | 129.2 | $ | 2,031.3 | $ | (600.6 | ) | $ | 1,590.8 | ||||||||||
| Cash and cash equivalents of discontinued operations included above | Cash and cash equivalents of discontinued operations included above | Cash and cash equivalents of discontinued operations included above | ||||||||||||||||||||||||||||||||
| At beginning of year | $ | — | $ | — | $ | 2.0 | $ | — | $ | 2.0 | At beginning of year | $ | — | $ | — | $ | 1.4 | $ | — | $ | 1.4 | |||||||||||||
| At end of year | $ | — | $ | — | $ | — | $ | — | $ | — | At end of year | $ | — | $ | — | $ | (0.7 | ) | $ | — | $ | (0.7 | ) | |||||||||||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
23. Condensed Consolidating Financial Information — (continued)
Condensed Consolidating Statements of Cash FlowsFor the year ended December 31, 2005
| | Principal Financial Group, Inc. Parent Only | Principal Financial Services, Inc. Only | Principal Life Insurance Company and Other Subsidiaries Combined | Eliminations | Principal Financial Group, Inc. Consolidated | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | ||||||||||||||||
| Operating activities | |||||||||||||||||
| Net cash provided by (used in) operating activities | $ | (4.5 | ) | $ | 51.4 | $ | 2,189.0 | $ | (109.7 | ) | $ | 2,126.2 | |||||
| Investing activities | |||||||||||||||||
| Available-for-sale securities: | |||||||||||||||||
| Purchases | — | (11.2 | ) | (8,943.9 | ) | — | (8,955.1 | ) | |||||||||
| Sales | — | 8.6 | 3,291.9 | — | 3,300.5 | ||||||||||||
| Maturities | — | — | 3,903.2 | — | 3,903.2 | ||||||||||||
| Mortgage loans acquired or originated | — | — | (2,485.5 | ) | — | (2,485.5 | ) | ||||||||||
| Mortgage loans sold or repaid | — | — | 2,704.5 | — | 2,704.5 | ||||||||||||
| Real estate acquired | — | — | (92.2 | ) | — | (92.2 | ) | ||||||||||
| Real estate sold | — | — | 319.8 | — | 319.8 | ||||||||||||
| Net purchases of property and equipment | — | — | (44.4 | ) | — | (44.4 | ) | ||||||||||
| Purchases of interest in subsidiaries, net of cash acquired | — | — | (58.1 | ) | — | (58.1 | ) | ||||||||||
| Dividends received from (contributions to) unconsolidated entities | 501.1 | 318.4 | (93.0 | ) | (726.5 | ) | — | ||||||||||
| Net change in other investments | — | 8.3 | (87.0 | ) | 2.3 | (76.4 | ) | ||||||||||
| Net cash provided by (used in) investing activities | $ | 501.1 | $ | 324.1 | $ | (1,584.7 | ) | $ | (724.2 | ) | $ | (1,483.7 | ) | ||||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
23. Condensed Consolidating Financial Information — (continued)
Condensed Consolidating Statements of Cash Flows (continued)For the year ended December 31, 2005
| | Principal Financial Group, Inc. Parent Only | Principal Financial Services, Inc. Only | Principal Life Insurance Company and Other Subsidiaries Combined | Eliminations | Principal Financial Group, Inc. Consolidated | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | |||||||||||||||
| Financing activities | ||||||||||||||||
| Issuance of common stock | $ | 59.9 | $ | — | $ | — | $ | — | $ | 59.9 | ||||||
| Issuance of preferred stock | 542.0 | — | — | — | 542.0 | |||||||||||
| Accelerated stock repurchase settlement | (84.0 | ) | — | — | — | (84.0 | ) | |||||||||
| Acquisition of treasury stock, net | (868.4 | ) | — | — | — | (868.4 | ) | |||||||||
| Proceeds from financing element derivatives | — | — | 168.4 | — | 168.4 | |||||||||||
| Payments for financing element derivatives | — | — | (123.2 | ) | — | (123.2 | ) | |||||||||
| Dividends to common stockholders | (182.2 | ) | — | — | — | (182.2 | ) | |||||||||
| Dividends to preferred stockholders | (17.7 | ) | — | — | — | (17.7 | ) | |||||||||
| Issuance of long-term debt | — | — | 137.7 | (0.2 | ) | 137.5 | ||||||||||
| Principal repayments of long-term debt | — | — | (72.6 | ) | — | (72.6 | ) | |||||||||
| Net proceeds of short-term borrowings | — | 275.0 | 24.7 | (100.6 | ) | 199.1 | ||||||||||
| Dividends paid to parent | — | (501.1 | ) | (225.4 | ) | 726.5 | — | |||||||||
| Investment contract deposits | — | — | 7,250.0 | — | 7,250.0 | |||||||||||
| Investment contract withdrawals | — | — | (6,504.5 | ) | — | (6,504.5 | ) | |||||||||
| Net increase in banking operation deposits | — | — | 41.9 | — | 41.9 | |||||||||||
| Net cash provided by (used in) financing activities | (550.4 | ) | (226.1 | ) | 697.0 | 625.7 | 546.2 | |||||||||
| Discontinued operations | ||||||||||||||||
| Net cash provided by operating activities | — | — | 125.1 | — | 125.1 | |||||||||||
| Net cash used in investing activities | — | — | (125.0 | ) | — | (125.0 | ) | |||||||||
| Net cash used in financing activities | — | — | — | — | — | |||||||||||
| Net cash provided by discontinued operations | — | — | 0.1 | — | 0.1 | |||||||||||
| Net increase (decrease) in cash and cash equivalents | (53.8 | ) | 149.4 | 1,301.4 | (208.2 | ) | 1,188.8 | |||||||||
| Cash and cash equivalents at beginning of year | 75.4 | 551.9 | 521.0 | (695.8 | ) | 452.5 | ||||||||||
| Cash and cash equivalents at end of year | $ | 21.6 | $ | 701.3 | $ | 1,822.4 | $ | (904.0 | ) | $ | 1,641.3 | |||||
| Cash and cash equivalents of discontinued operations included above | ||||||||||||||||
| At beginning of year | $ | — | $ | — | $ | 1.9 | $ | — | $ | 1.9 | ||||||
| At end of year | $ | — | $ | — | 2.0 | $ | — | $ | 2.0 | |||||||
| Schedule of noncash transactions | ||||||||||||||||
| Tax benefits related to demutualization | $ | — | $ | — | $ | 163.8 | $ | — | $ | 163.8 | ||||||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
23. Condensed Consolidating Financial Information — (continued)
Condensed Consolidating Statements of Cash FlowsFor the year ended December 31, 2004
| | Principal Financial Group, Inc. Parent Only | Principal Financial Services, Inc. Only | Principal Life Insurance Company and Other Subsidiaries Combined | Eliminations | Principal Financial Group, Inc. Consolidated | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | ||||||||||||||||
| Operating activities | |||||||||||||||||
| Net cash provided by (used in) operating activities | $ | (1.1 | ) | $ | (195.3 | ) | $ | 1,706.8 | $ | 521.1 | $ | 2,031.5 | |||||
| Investing activities | |||||||||||||||||
| Available-for-sale securities: | |||||||||||||||||
| Purchases | — | (222.0 | ) | (10,079.6 | ) | — | (10,301.6 | ) | |||||||||
| Sales | — | 172.9 | 2,154.2 | — | 2,327.1 | ||||||||||||
| Maturities | — | — | 4,411.0 | — | 4,411.0 | ||||||||||||
| Mortgage loans acquired or originated | — | — | (2,760.4 | ) | — | (2,760.4 | ) | ||||||||||
| Mortgage loans sold or repaid | — | — | 2,499.6 | — | 2,499.6 | ||||||||||||
| Real estate acquired | — | — | (341.5 | ) | — | (341.5 | ) | ||||||||||
| Real estate sold | — | — | 345.6 | — | 345.6 | ||||||||||||
| Net purchases of property and equipment | — | — | (47.5 | ) | — | (47.5 | ) | ||||||||||
| Net proceeds from sales of subsidiaries | — | 10.5 | 684.2 | — | 694.7 | ||||||||||||
| Purchases of interest in subsidiaries, net of cash acquired | — | (25.7 | ) | (102.4 | ) | — | (128.1 | ) | |||||||||
| Dividends received from unconsolidated entities | 800.6 | 1,147.0 | 5.8 | (1,953.4 | ) | — | |||||||||||
| Net change in other investments | — | 117.4 | (3.4 | ) | 2.5 | 116.5 | |||||||||||
| Net cash provided by (used in) investing activities | 800.6 | 1,200.1 | (3,234.4 | ) | (1,950.9 | ) | (3,184.6 | ) | |||||||||
| Financing activities | |||||||||||||||||
| Issuance of common stock | 41.2 | — | — | — | 41.2 | ||||||||||||
| Acquisition and sales of treasury stock, net | (772.6 | ) | — | — | — | (772.6 | ) | ||||||||||
| Proceeds from financing element derivatives | — | — | 110.6 | — | 110.6 | ||||||||||||
| Payments for financing element derivatives | — | — | (84.6 | ) | — | (84.6 | ) | ||||||||||
| Dividends to common stockholders | (166.5 | ) | — | — | — | (166.5 | ) | ||||||||||
| Issuance of long-term debt | — | — | 12.1 | — | 12.1 | ||||||||||||
| Principal repayments of long-term debt | — | (200.0 | ) | (247.2 | ) | — | (447.2 | ) | |||||||||
| Net proceeds (repayments) of short-term borrowings | — | (325.0 | ) | 368.8 | (335.2 | ) | (291.4 | ) | |||||||||
| Dividends paid to parent | — | (800.6 | ) | (1,152.8 | ) | 1,953.4 | — | ||||||||||
| Investment contract deposits | — | — | 7,312.4 | — | 7,312.4 | ||||||||||||
| Investment contract withdrawals | — | — | (5,294.9 | ) | — | (5,294.9 | ) | ||||||||||
| Net decrease in banking operation deposits | — | — | (5.0 | ) | — | (5.0 | ) | ||||||||||
| Net cash provided by (used in) financing activities | $ | (897.9 | ) | $ | (1,325.6 | ) | $ | 1,019.4 | $ | 1,618.2 | $ | 414.1 | |||||
Principal Financial Group, Inc.
Notes to Consolidated Financial Statements — (continued)
23. Condensed Consolidating Financial Information — (continued)
Condensed Consolidating Statements of Cash Flows (continued)For the year ended December 31, 2004
| | Principal Financial Group, Inc. Parent Only | Principal Financial Services, Inc. Only | Principal Life Insurance Company and Other Subsidiaries Combined | Eliminations | Principal Financial Group, Inc. Consolidated | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | ||||||||||||||||
| Discontinued operations | |||||||||||||||||
| Net cash used in operating activities | $ | — | $ | — | $ | (627.7 | ) | $ | — | $ | (627.7 | ) | |||||
| Net cash used in investing activities | — | — | (473.7 | ) | — | (473.7 | ) | ||||||||||
| Net cash provided by financing activities | — | — | 600.0 | — | 600.0 | ||||||||||||
| Net cash used in discontinued operations | — | — | (501.4 | ) | — | (501.4 | ) | ||||||||||
| Net decrease in cash and cash equivalents | (98.4 | ) | (320.8 | ) | (1,009.6 | ) | 188.4 | (1,240.4 | ) | ||||||||
| Cash and cash equivalents at beginning of year | 173.8 | 872.7 | 1,530.6 | (884.2 | ) | 1,692.9 | |||||||||||
| Cash and cash equivalents at end of year | $ | 75.4 | $ | 551.9 | $ | 521.0 | $ | (695.8 | ) | $ | 452.5 | ||||||
| Cash and cash equivalents of discontinued operations included above: | |||||||||||||||||
| At beginning of year | $ | — | $ | — | $ | 503.3 | $ | — | $ | 503.3 | |||||||
| At end of year | $ | — | $ | — | $ | 1.9 | $ | — | $ | 1.9 | |||||||
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Management's Report on Internal Control Over Financial Reporting
Management of Principal Financial Group, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;company and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of management, including our Chief Executive Officer, J. Barry Griswell,Larry D. Zimpleman, and our Chief Financial Officer, Michael H. Gersie,Terrance J. Lillis, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on criteria established inInternal Controls — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation, management has concluded that Principal Financial Group, Inc.'s internal control over financial reporting was effective as of December 31, 2006.2008.
Ernst & Young LLP, the independent registered public accounting firm that audited our financial statements included in this annual report on Form 10-K, has issued an attestation report regarding internal control over financial reporting. The attestation report is included in Item 8., "Financial Statements and Supplementary Data."
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Disclosure Controls and Procedures
In order to ensure that the information that we must disclose in our filings with the SEC is recorded, processed, summarized and reported on a timely basis, we have adopted disclosure controls and procedures. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file with or submit to the SEC is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Our Chief Executive Officer, J. Barry Griswell,Larry D. Zimpleman, and our Chief Financial Officer, Michael H. Gersie,Terrance J. Lillis, have reviewed and evaluated our disclosure controls and procedures as of December 31, 2006,2008, and have concluded that our disclosure controls and procedures are effective.
None
Item 10. Directors, Executive Officers and Corporate Governance
The information called for by Item 10 pertaining to directors is set forth in Principal Financial Group, Inc.'s proxy statement relating to the 20072009 annual stockholders meeting (the "Proxy Statement") which will be filed with the SEC on or about April 9, 2007,10, 2009, under the captions, "Election of Directors," "Governance of the Company — Audit Committee and Director Candidates Recommended by Shareholders""Corporate Governance," and "Security Ownership of Certain Beneficial Owners and Management — Section 16(a) Beneficial Ownership Reporting Compliance." Such information is incorporated herein by reference. The information called for by Item 10 pertaining to executive officers can be found in Part I of this Form 10-K under the caption, "Executive Officers of the Registrant." The Company has adopted a code of ethics that applies to our principal executive officer, principal financial officer and principal accounting officer. The code of ethics has been posted on our Internet website, found atwww.principal.com. We intend to satisfy disclosure requirements regarding amendments to, or waivers from, any provision of our code of ethics on our website.
Item 11. Executive Compensation
The information called for by Item 11 pertaining to executive compensation is set forth in the Proxy Statement under the captions,caption, "Executive Compensation," "Compensation Committee Interlocks and Insider Participation," and "Report of the Human Resources Committee," all of which is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information called for by Item 12 pertaining to security ownership of certain beneficial owners and management is set forth in the Proxy Statement under the caption, "Security Ownership of Certain Beneficial Owners and Management," and is incorporated herein by reference.
Equity Compensation Plan Information
In general, the Company has three The information pertaining to compensation plans under which itsthe Company's equity securities are authorized for issuance is set forth in the Proxy Statement under the caption, "Amendment to employees or directors (not including the Company's tax qualified pension plans): the 2005 Stock Incentive Plan, thePrincipal Financial Group, Inc. Employee Stock Purchase Plan," and the 2005 Directors Stock Plan. As of May 17, 2005, no new grants will be made under the Stock Incentive Plan, the Directors Stock Plan or the Long-Term Performance Plan. The following table shows the number of shares of Common Stock issuable upon exercise of share-based awards outstanding at December 31, 2006, the weighted average exercise price of those awards, and the number of shares of Common Stock remaining available for future issuance at December 31, 2006, excluding shares issuable upon exercise of outstanding share-based awards.
| | (a) | (b) | (c) | |||||
|---|---|---|---|---|---|---|---|---|
| Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |||||
| Equity compensation plans approved by the Company's stockholders(1) | 10,191,131 | (2) | $ | 37.65 | (3) | 24,983,850 | (4) | |
| Equity compensation plans not approved by the Company's stockholders | -0- | n/a | -0- | |||||
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information called for by Item 13 pertaining to certain relationships and related transactions is set forth in the Proxy Statement under the captions, "Governance of the Company — "Director Independence,"Corporate Governance," and "Certain Relationships and Related Transactions," and "Director Independence," and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
The information called for by Item 14 pertaining to principal accounting fees and services is set forth in the Proxy Statement under the caption, "Ratification of Appointment of Independent Auditors"Registered Public Accounting Firm," and is incorporated herein by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm
Audited Consolidated Financial Statements
Consolidated Statements of Financial Position
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.
Exhibits filed herewith
Exhibits incorporated by reference
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrantregistrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| PRINCIPAL FINANCIAL GROUP, INC. | ||||
| Dated: February 18, 2009 | By | /s/ | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrantregistrant and in the capacities and on the date indicated.
Dated: February 27, 200718, 2009
| By | /s/ LARRY D. ZIMPLEMAN Larry D. Zimpleman President, Chief Executive Officer and Director | By | /s/ C. DANIEL GELATT, JR. C. Daniel Gelatt, Jr. Director | |||
By | ||||||
/s/ Financial Officer Chief Accounting Officer) | By | /s/ SANDRA L. HELTON Sandra L. Helton Director | ||||
By | /s/ J. BARRY GRISWELL J. Barry Griswell Chairman of the Board and Director | By | /s/ WILLIAM T. KERR William T. Kerr Director | |||
By | /s/ BETSY J. BERNARD Betsy J. Bernard Director | By | ||||
/s/ RICHARD L. KEYSER Richard L. Keyser Director | ||||||
By | /s/ JOCELYN CARTER-MILLER Jocelyn Carter- Miller Director | By | /s/ ARJUN K. MATHRANI Arjun K. Mathrani Director | |||
By | /s/ GARY E. COSTLEY Gary E. Costley Director | By | ||||
/s/ ELIZABETH E. TALLETT Elizabeth E. Tallett Director | ||||||
By | /s/ | |||||
Director |
Report of Independent Registered Public Accounting Firm on Schedules
The Board of Directors and Stockholders
Principal Financial Group, Inc.
We have audited the consolidated financial statements of Principal Financial Group, Inc. ("the Company") as of December 31, 20062008 and 2005,2007, and for each of the three years in the period ended December 31, 2006,2008, and have issued our report thereon dated February 20, 200716, 2009 (included elsewhere in this Form 10-K). Our audits also included the financial statement schedules listed in the Index at Item 15.a.2. of this Form 10-K. These schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. As discussed in Note 1 to the consolidated financial statements, in response to new accounting standards, the Company changed its methods of accounting for certain fixed and variable contract features effective January 1, 2004, certain non-monetary exchanges of similar productive assets (primarily real estate) effective July 1, 2005, and its pension and other post-retirement benefits effective December 31, 2006.2006 and January 1, 2008, and for the treatment of modifications or exchanges of insurance contracts and income tax contingencies effective January 1, 2007.
/s/ Ernst & Young LLP
Des Moines, IowaFebruary 20, 2007
| /s/ ERNST & YOUNG LLP | ||
Des Moines, Iowa February 16, 2009 |
Schedule I — Summary of Investments — Other Than Investments in Related Parties
As of December 31, 20062008
| Type of Investment | Type of Investment | Cost | Value | Amount as shown in the Statement of Financial Position | Type of Investment | Cost | Value | Amount as shown in the Statement of Financial Position | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | (in millions) | | (in millions) | |||||||||||||||||||
| Fixed maturities, available-for-sale: | Fixed maturities, available-for-sale: | Fixed maturities, available-for-sale: | |||||||||||||||||||||
| U.S. Treasury securities and obligations of U.S. government corporations and agencies | $ | 530.8 | $ | 527.8 | $ | 527.8 | U.S. Treasury securities and obligations of U.S. government corporations and agencies | $ | 548.4 | $ | 595.2 | $ | 595.2 | ||||||||||
| States, municipalities and political subdivisions | 1,557.7 | 1,598.2 | 1,598.2 | States, municipalities and political subdivisions | 2,113.8 | 2,025.5 | 2,025.5 | ||||||||||||||||
| Foreign governments | 766.0 | 900.6 | 900.6 | Foreign governments | 757.7 | 838.5 | 838.5 | ||||||||||||||||
| Public utilities | 3,212.6 | 4,330.5 | 4,330.5 | Public utilities | 3,030.9 | 3,819.9 | 3,819.9 | ||||||||||||||||
| Redeemable preferred | 268.9 | 272.9 | 272.9 | Redeemable preferred | 116.8 | 85.0 | 85.0 | ||||||||||||||||
| All other corporate bonds | 27,548.5 | 27,431.0 | 27,431.0 | All other corporate bonds | 30,911.6 | 25,339.1 | 25,339.1 | ||||||||||||||||
| Mortgage-backed and other asset-backed securities | 9,199.1 | 9,342.5 | 9,342.5 | ||||||||||||||||||||
Mortgage-backed and other asset-backed securities | 10,346.1 | 7,414.0 | 7,414.0 | ||||||||||||||||||||
| Total fixed maturities, available-for-sale | 43,083.6 | 44,403.5 | 44,403.5 | Total fixed maturities, available-for-sale | 47,825.3 | 40,117.2 | 40,117.2 | ||||||||||||||||
| Fixed maturities, trading | Fixed maturities, trading | 323.4 | 323.4 | 323.4 | Fixed maturities, trading | 843.4 | 843.4 | 843.4 | |||||||||||||||
| Equity securities, available-for-sale: | Equity securities, available-for-sale: | Equity securities, available-for-sale: | |||||||||||||||||||||
| Common stocks: | Common stocks: | ||||||||||||||||||||||
| Banks, trust and insurance companies | 20.2 | 21.1 | 21.1 | Banks, trust and insurance companies | 0.8 | 0.6 | 0.6 | ||||||||||||||||
| Public utilities | 0.4 | 0.2 | 0.2 | Industrial, miscellaneous and all other | 13.1 | 24.4 | 24.4 | ||||||||||||||||
| Industrial, miscellaneous and all other | 12.5 | 19.5 | 19.5 | Non-redeemable preferred stock | 294.2 | 217.7 | 217.7 | ||||||||||||||||
| Non-redeemable preferred stock | 624.6 | 625.8 | 625.8 | ||||||||||||||||||||
Total equity securities, available-for-sale | 308.1 | 242.7 | 242.7 | ||||||||||||||||||||
| Total equity securities, available-for-sale | 657.7 | 666.6 | 666.6 | ||||||||||||||||||||
| Equity securities, trading | Equity securities, trading | 181.0 | 181.0 | 181.0 | Equity securities, trading | 158.0 | 158.0 | 158.0 | |||||||||||||||
| Mortgage loans(1) | 11,700.4 | xxxx | 11,663.9 | ||||||||||||||||||||
Mortgage loans (1) | Mortgage loans (1) | 13,183.5 | XXXX | 13,113.6 | |||||||||||||||||||
| Real estate, net: | Real estate, net: | Real estate, net: | |||||||||||||||||||||
| Real estate acquired in satisfaction of debt | 12.4 | xxxx | 12.6 | Real estate acquired in satisfaction of debt | 30.0 | XXXX | 29.8 | ||||||||||||||||
| Other real estate(2) | 859.0 | xxxx | 854.4 | Other real estate (2) | 892.9 | XXXX | 889.6 | ||||||||||||||||
| Policy loans | Policy loans | 850.7 | xxxx | 850.7 | Policy loans | 896.4 | XXXX | 896.4 | |||||||||||||||
| Other investments(3) | 973.1 | xxxx | 1,410.7 | ||||||||||||||||||||
Other investments (3) | Other investments (3) | 2,168.0 | XXXX | 2,816.6 | |||||||||||||||||||
| Total investments | $ | 58,641.3 | xxxx | $ | 60,366.8 | Total investments | $ | 66,305.6 | $ | XXXX | $ | 59,107.3 | |||||||||||
Schedule II — Condensed Financial Information of Registrant (Parent Only)
Statements of Financial Position
| | | December 31, | | December 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | 2006 | 2005 | | 2008 | 2007 | ||||||||||||
| | | (in millions) | | (in millions) | ||||||||||||||
| Assets | Assets | Assets | ||||||||||||||||
| Cash | $ | 30.9 | $ | 21.6 | ||||||||||||||
Cash (overdraft) | Cash (overdraft) | $ | (2.0 | ) | $ | (3.2 | ) | |||||||||||
| Other investments | Other investments | 3.6 | — | Other investments | 5.5 | — | ||||||||||||
| Income taxes receivable | Income taxes receivable | 1.2 | 3.5 | Income taxes receivable | 9.1 | 7.0 | ||||||||||||
Deferred income taxes | Deferred income taxes | 39.4 | 6.2 | |||||||||||||||
| Amounts receivable from subsidiary | Amounts receivable from subsidiary | 250.0 | — | Amounts receivable from subsidiary | 0.9 | 0.3 | ||||||||||||
| Other assets | Other assets | 6.1 | — | Other assets | 27.0 | 6.9 | ||||||||||||
| Investment in subsidiary | Investment in subsidiary | 8,191.4 | 7,784.2 | Investment in subsidiary | 3,101.8 | 8,031.2 | ||||||||||||
| Total assets | $ | 8,483.2 | $ | 7,809.3 | Total assets | $ | 3,181.7 | $ | 8,048.4 | |||||||||
| Liabilities | Liabilities | Liabilities | ||||||||||||||||
| Amounts payable to subsidiary | Amounts payable to subsidiary | $ | 2.6 | $ | 2.1 | Amounts payable to subsidiary | $ | 2.3 | $ | 2.0 | ||||||||
| Long-term debt | Long-term debt | 601.9 | — | Long-term debt | 601.8 | 601.8 | ||||||||||||
| Deferred income taxes | 1.1 | — | ||||||||||||||||
| Preferred stock dividend payable | 8.2 | — | ||||||||||||||||
| Accrued interest payable | Accrued interest payable | 7.6 | — | Accrued interest payable | 7.7 | 7.7 | ||||||||||||
| Other liabilities | Other liabilities | 1.0 | — | Other liabilities | 97.1 | 15.2 | ||||||||||||
| Total liabilities | 622.4 | 2.1 | Total liabilities | 708.9 | 626.7 | |||||||||||||
| Stockholders' equity | Stockholders' equity | Stockholders' equity | ||||||||||||||||
| Series A preferred stock, par value $.01 with liquidation preference of $100 per share — 3.0 million shares authorized, issued and outstanding at December 31, 2006 and 2005 | — | — | ||||||||||||||||
| Series B preferred stock, par value $.01 with liquidation preference of $25 per share — 10.0 million shares authorized, issued and outstanding at December 31, 2006 and 2005 | 0.1 | 0.1 | ||||||||||||||||
| Common stock, par value $.01 per share — 2,500.0 million shares authorized, 383.6 million and 381.3 million shares issued, and 268.4 million and 280.6 million shares outstanding in 2006 and 2005, respectively | 3.8 | 3.8 | ||||||||||||||||
Series A preferred stock, par value $.01 with liquidation preference of $100 per share — | Series A preferred stock, par value $.01 with liquidation preference of $100 per share — | — | — | |||||||||||||||
Series B preferred stock, par value $.01 with liquidation preference of $25 per share — | Series B preferred stock, par value $.01 with liquidation preference of $25 per share — | 0.1 | 0.1 | |||||||||||||||
Common stock, par value $.01 per share — 2,500.0 million shares authorized, 387.0 million | Common stock, par value $.01 per share — 2,500.0 million shares authorized, 387.0 million | 3.9 | 3.9 | |||||||||||||||
| Additional paid-in capital | Additional paid-in capital | 8,141.8 | 8,000.0 | Additional paid-in capital | 8,376.5 | 8,295.4 | ||||||||||||
| Retained earnings | Retained earnings | 2,824.1 | 2,008.6 | Retained earnings | 3,722.5 | 3,414.3 | ||||||||||||
| Accumulated other comprehensive income | 846.9 | 994.8 | ||||||||||||||||
| Treasury stock, at cost (115.2 million and 100.7 million shares at December 31, 2006 and 2005, respectively) | (3,955.9 | ) | (3,200.1 | ) | ||||||||||||||
Accumulated other comprehensive income (loss) | Accumulated other comprehensive income (loss) | (4,911.6 | ) | 420.2 | ||||||||||||||
Treasury stock, at cost (127.7 million and 126.7 million shares at December 31, 2008 and 2007, respectively) | Treasury stock, at cost (127.7 million and 126.7 million shares at December 31, 2008 and 2007, respectively) | (4,718.6 | ) | (4,712.2 | ) | |||||||||||||
| Total stockholders' equity | 7,860.8 | 7,807.2 | Total stockholders' equity | 2,472.8 | 7,421.7 | |||||||||||||
| Total liabilities and stockholders' equity | $ | 8,483.2 | $ | 7,809.3 | Total liabilities and stockholders' equity | $ | 3,181.7 | $ | 8,048.4 | |||||||||
See accompanying notes.
| | | For the year ended December 31, | | For the year ended December 31, | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | 2006 | 2005 | 2004 | | 2008 | 2007 | 2006 | ||||||||||||||
| | | (in millions) | | (in millions) | ||||||||||||||||||
| Revenues | Revenues | Revenues | ||||||||||||||||||||
| Net investment income | $ | 11.9 | $ | 2.3 | $ | 4.8 | ||||||||||||||||
Net investment income (loss) | Net investment income (loss) | $ | (0.3 | ) | $ | 6.8 | $ | 11.9 | ||||||||||||||
Net realized capital losses | Net realized capital losses | (1.8 | ) | — | — | |||||||||||||||||
| Total revenues | 11.9 | 2.3 | 4.8 | Total revenues | (2.1 | ) | 6.8 | 11.9 | ||||||||||||||
| Expenses | Expenses | Expenses | ||||||||||||||||||||
| Other operating costs and expenses | Other operating costs and expenses | 18.2 | 10.6 | 10.5 | Other operating costs and expenses | 48.0 | 48.2 | 18.2 | ||||||||||||||
| Total expenses | 18.2 | 10.6 | 10.5 | Total expenses | 48.0 | 48.2 | 18.2 | |||||||||||||||
| Loss before income taxes | Loss before income taxes | (6.3 | ) | (8.3 | ) | (5.7 | ) | Loss before income taxes | (50.1 | ) | (41.4 | ) | (6.3 | ) | ||||||||
| Income tax benefits | Income tax benefits | (2.2 | ) | (3.8 | ) | (2.2 | ) | Income tax benefits | (20.0 | ) | (17.4 | ) | (2.2 | ) | ||||||||
| Equity in the net income of subsidiaries, excluding discontinued operations and cumulative effect of accounting changes | 1,037.8 | 896.4 | 704.4 | |||||||||||||||||||
Equity in the net income of subsidiaries, excluding discontinued operations | Equity in the net income of subsidiaries, excluding discontinued operations | 488.2 | 864.1 | 1,039.5 | ||||||||||||||||||
| Income from continuing operations, net of related income taxes | Income from continuing operations, net of related income taxes | 1,033.7 | 891.9 | 700.9 | Income from continuing operations, net of related income taxes | 458.1 | 840.1 | 1,035.4 | ||||||||||||||
| Income from discontinued operations, net of related income taxes | Income from discontinued operations, net of related income taxes | 30.6 | 27.1 | 130.4 | Income from discontinued operations, net of related income taxes | — | 20.2 | 28.9 | ||||||||||||||
| Income before cumulative effect of accounting change | 1,064.3 | 919.0 | 831.3 | |||||||||||||||||||
| Cumulative effect of accounting change, net of related income taxes | — | — | (5.7 | ) | ||||||||||||||||||
| Net income | Net income | 1,064.3 | 919.0 | 825.6 | Net income | 458.1 | 860.3 | 1,064.3 | ||||||||||||||
| Preferred stock dividends | Preferred stock dividends | 33.0 | 17.7 | — | Preferred stock dividends | 33.0 | 33.0 | 33.0 | ||||||||||||||
| Net income available to common stockholders | Net income available to common stockholders | $ | 1,031.3 | $ | 901.3 | $ | 825.6 | Net income available to common stockholders | $ | 425.1 | $ | 827.3 | $ | 1,031.3 | ||||||||
See accompanying notes.
| | | For the year ended December 31, | | For the year ended December 31, | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | 2006 | 2005 | 2004 | | 2008 | 2007 | 2006 | ||||||||||||||||
| | | (in millions) | | (in millions) | ||||||||||||||||||||
| Net income | Net income | $ | 1,064.3 | $ | 919.0 | $ | 825.6 | Net income | $ | 458.1 | $ | 860.3 | $ | 1,064.3 | ||||||||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | Adjustments to reconcile net income to net cash provided by (used in) operating activities: | Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||||||||||||||||
| Income from discontinued operations, net of related income taxes | (30.6 | ) | (27.1 | ) | (130.4 | ) | Income from discontinued operations, net of related income taxes | — | (20.2 | ) | (28.9 | ) | ||||||||||||
| Cumulative effect of accounting change, net of related income taxes | — | — | 5.7 | Equity in the net income of subsidiary | (488.2 | ) | (864.1 | ) | (1,039.5 | ) | ||||||||||||||
| Equity in the net income of subsidiary | (1,037.8 | ) | (896.4 | ) | (704.4 | ) | Net realized capital losses | 1.8 | — | — | ||||||||||||||
| Increase (decrease) in income taxes | 1.4 | (1.3 | ) | 1.3 | Increase (decrease) in income taxes | 1.4 | (6.3 | ) | 1.4 | |||||||||||||||
| Stock-based compensation | 2.1 | 0.9 | 1.1 | Stock-based compensation | 1.0 | 1.2 | 2.1 | |||||||||||||||||
| Other | 7.8 | 0.4 | — | Other | (34.3 | ) | (1.7 | ) | 7.8 | |||||||||||||||
| Net cash provided by (used in) operating activities | 7.2 | (4.5 | ) | (1.1 | ) | Net cash provided by (used in) operating activities | (60.2 | ) | (30.8 | ) | 7.2 | |||||||||||||
| Cash flows from investing activities: | Cash flows from investing activities: | Cash flows from investing activities: | ||||||||||||||||||||||
| Dividend received from subsidiary | 331.1 | 501.1 | 800.6 | Net purchases of property and equipment | — | (0.1 | ) | — | ||||||||||||||||
Dividend received from subsidiary | 181.1 | 956.3 | 331.1 | |||||||||||||||||||||
| Net cash provided by investing activities | 331.1 | 501.1 | 800.6 | |||||||||||||||||||||
Net cash provided by investing activities | 181.1 | 956.2 | 331.1 | |||||||||||||||||||||
| Cash flows from financing activities: | Cash flows from financing activities: | Cash flows from financing activities: | ||||||||||||||||||||||
| Issuance of common stock | 66.2 | 59.9 | 41.2 | Issuance of common stock | 36.4 | 73.6 | 66.2 | |||||||||||||||||
| Issuance of preferred stock | — | 542.0 | — | Acquisition of treasury stock | (6.4 | ) | (756.3 | ) | (755.8 | ) | ||||||||||||||
| Accelerated stock repurchase settlement | — | (84.0 | ) | — | Dividends to common stockholders | (116.7 | ) | (235.6 | ) | (214.7 | ) | |||||||||||||
| Acquisition of treasury stock | (755.8 | ) | (868.4 | ) | (772.6 | ) | Dividends to preferred stockholders | (33.0 | ) | (41.2 | ) | (24.7 | ) | |||||||||||
| Dividends to common stockholders | (214.7 | ) | (182.2 | ) | (166.5 | ) | Issuance of long-term debt | — | — | 600.0 | ||||||||||||||
| Dividends to preferred stockholders | (24.7 | ) | (17.7 | ) | — | |||||||||||||||||||
| Issuance of long-term debt | 600.0 | — | — | Net cash used in financing activities | (119.7 | ) | (959.5 | ) | (329.0 | ) | ||||||||||||||
| Net cash used in financing activities | (329.0 | ) | (550.4 | ) | (897.9 | ) | Net increase (decrease) in cash and cash equivalents | 1.2 | (34.1 | ) | 9.3 | |||||||||||||
Cash and cash equivalents at beginning of year | (3.2 | ) | 30.9 | 21.6 | ||||||||||||||||||||
| Net decrease in cash and cash equivalents | 9.3 | (53.8 | ) | (98.4 | ) | |||||||||||||||||||
| Cash and cash equivalents at beginning of period | 21.6 | 75.4 | 173.8 | Cash and cash equivalents at end of year | $ | (2.0 | ) | $ | (3.2 | ) | $ | 30.9 | ||||||||||||
| Cash and cash equivalents at end of year | $ | 30.9 | $ | 21.6 | $ | 75.4 | ||||||||||||||||||
See accompanying notes.
Notes to Condensed Financial Statements
(1) Basis of Presentation
The accompanying condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto of Principal Financial Group, Inc.
In the parent company only financial statements, our investments in subsidiaries are stated at cost plus equity in undistributed earnings of subsidiaries.
(2) Cash Dividends from Subsidiary
The parent company received cash dividends totaling $181.1 million, $956.3 million and $331.1 million $501.1 millionin 2008, 2007 and $800.6 million in 2006, 2005 and 2004 respectively, from its subsidiary.
Schedule III — Supplementary Insurance Information
As of December 31, 2006, 20052008, 2007 and 20042006 and for each of the years then ended
| Segment | Segment | Deferred Policy Acquisition Costs | Future Policy Benefits and Claims | Contractholder and Other Policyholder Funds | Segment | Deferred policy acquisition costs | Future policy benefits and claims | Contractholder and other policyholder funds | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | (in millions) | | (in millions) | ||||||||||||||||||
| 2006: | ||||||||||||||||||||||
| U.S. Asset Management and Accumulation | $ | 985.6 | $ | 7,719.3 | $ | 34,570.0 | ||||||||||||||||
2008: | 2008: | |||||||||||||||||||||
U.S. Asset Accumulation | U.S. Asset Accumulation | $ | 1,837.4 | $ | 8,344.8 | $ | 39,983.6 | |||||||||||||||
Global Asset Management | Global Asset Management | — | — | — | ||||||||||||||||||
| International Asset Management and Accumulation | International Asset Management and Accumulation | 153.0 | 2,328.4 | 22.1 | International Asset Management and Accumulation | 182.9 | 2,520.0 | 57.9 | ||||||||||||||
| Life and Health Insurance | Life and Health Insurance | 1,280.3 | 7,282.2 | 3,045.0 | Life and Health Insurance | 2,132.7 | 7,626.9 | 3,833.3 | ||||||||||||||
| Corporate and Other | — | 2.7 | (218.7 | ) | ||||||||||||||||||
Corporate | Corporate | — | 2.5 | (252.0 | ) | |||||||||||||||||
| Total | $ | 2,418.9 | $ | 17,332.6 | $ | 37,418.4 | Total | $ | 4,153.0 | $ | 18,494.2 | $ | 43,622.8 | |||||||||
| 2005: | ||||||||||||||||||||||
| U.S. Asset Management and Accumulation | $ | 889.5 | $ | 7,516.7 | $ | 31,527.5 | ||||||||||||||||
2007: | 2007: | |||||||||||||||||||||
U.S. Asset Accumulation | U.S. Asset Accumulation | $ | 1,163.3 | $ | 8,147.7 | $ | 37,635.5 | |||||||||||||||
Global Asset Management | Global Asset Management | — | — | — | ||||||||||||||||||
| International Asset Management and Accumulation | International Asset Management and Accumulation | 104.3 | 2,175.2 | 16.5 | International Asset Management and Accumulation | 183.4 | 2,831.8 | 35.3 | ||||||||||||||
| Life and Health Insurance | Life and Health Insurance | 1,180.3 | 7,130.1 | 2,923.6 | Life and Health Insurance | 1,463.4 | 7,472.6 | 3,402.8 | ||||||||||||||
| Corporate and Other | — | 3.5 | (198.4 | ) | ||||||||||||||||||
Corporate | Corporate | — | 2.6 | (244.2 | ) | |||||||||||||||||
| Total | $ | 2,174.1 | $ | 16,825.5 | $ | 34,269.2 | Total | $ | 2,810.1 | $ | 18,454.7 | $ | 40,829.4 | |||||||||
| 2004: | ||||||||||||||||||||||
| U.S. Asset Management and Accumulation | $ | 738.3 | $ | 7,298.7 | $ | 30,434.6 | ||||||||||||||||
2006: | 2006: | |||||||||||||||||||||
U.S. Asset Accumulation | U.S. Asset Accumulation | $ | 985.6 | $ | 7,719.3 | $ | 34,570.0 | |||||||||||||||
Global Asset Management | Global Asset Management | — | — | — | ||||||||||||||||||
| International Asset Management and Accumulation | International Asset Management and Accumulation | 66.7 | 1,757.9 | 12.2 | International Asset Management and Accumulation | 153.0 | 2,328.4 | 22.1 | ||||||||||||||
| Life and Health Insurance | Life and Health Insurance | 1,032.6 | 6,983.2 | 2,649.6 | Life and Health Insurance | 1,280.3 | 7,282.2 | 3,045.0 | ||||||||||||||
| Corporate and Other | — | 2.8 | (178.2 | ) | ||||||||||||||||||
Corporate | Corporate | — | 2.7 | (218.7 | ) | |||||||||||||||||
| Total | $ | 1,837.6 | $ | 16,042.6 | $ | 32,918.2 | Total | $ | 2,418.9 | $ | 17,332.6 | $ | 37,418.4 | |||||||||
| Segment | Premiums and Other Considerations | Net Investment Income(1) | Benefits, Claims and Settlement Expenses | Amortization of Deferred Policy Acquisition Costs | Other Operating Expenses(1) | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | ||||||||||||||||
| 2006: | |||||||||||||||||
| U.S. Asset Management and Accumulation | $ | 462.3 | $ | 2,635.8 | $ | 2,391.3 | $ | 170.6 | $ | 1,124.9 | |||||||
| International Asset Management and Accumulation | 239.1 | 252.3 | 399.1 | 2.4 | 142.3 | ||||||||||||
| Life and Health Insurance | 3,598.7 | 692.5 | 2,910.3 | 66.2 | 1,040.0 | ||||||||||||
| Corporate and Other | 5.2 | 37.4 | (8.3 | ) | — | 12.3 | |||||||||||
| Total | $ | 4,305.3 | $ | 3,618.0 | $ | 5,692.4 | $ | 239.2 | $ | 2,319.5 | |||||||
2005: | |||||||||||||||||
| U.S. Asset Management and Accumulation | $ | 455.2 | $ | 2,451.0 | $ | 2,260.4 | $ | 148.7 | $ | 1,022.1 | |||||||
| International Asset Management and Accumulation | 247.6 | 247.7 | 409.3 | 7.7 | 121.1 | ||||||||||||
| Life and Health Insurance | 3,267.1 | 677.2 | 2,620.2 | 90.2 | 976.3 | ||||||||||||
| Corporate and Other | 5.1 | (15.8 | ) | (7.0 | ) | — | (24.0 | ) | |||||||||
| Total | $ | 3,975.0 | $ | 3,360.1 | $ | 5,282.9 | $ | 246.6 | $ | 2,095.5 | |||||||
2004: | |||||||||||||||||
| U.S. Asset Management and Accumulation | $ | 370.1 | $ | 2,354.0 | $ | 2,094.8 | $ | 112.0 | $ | 898.4 | |||||||
| International Asset Management and Accumulation | 241.0 | 191.5 | 357.3 | 3.1 | 109.0 | ||||||||||||
| Life and Health Insurance | 3,096.6 | 662.3 | 2,514.7 | 95.7 | 890.7 | ||||||||||||
| Mortgage Banking | — | — | — | — | 16.7 | ||||||||||||
| Corporate and Other | 2.3 | 16.2 | (7.3 | ) | — | 60.0 | |||||||||||
| Total | $ | 3,710.0 | $ | 3,224.0 | $ | 4,959.5 | $ | 210.8 | $ | 1,974.8 | |||||||
Schedule III — Supplementary Insurance Information — (continued)
As of December 31, 2008, 2007 and 2006 and for each of the years then ended
Segment | Premiums and other considerations | Net investment income (1) | Benefits, claims and settlement expenses | Amortization of deferred policy acquisition costs | Other operating expenses (1) | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | ||||||||||||||||
2008: | |||||||||||||||||
U.S. Asset Accumulation | $ | 523.2 | $ | 2,778.5 | $ | 2,723.2 | $ | 243.1 | $ | 1,189.1 | |||||||
Global Asset Management | — | (16.6 | ) | — | — | 463.5 | |||||||||||
International Asset Management and Accumulation | 204.1 | 521.5 | 585.9 | (1.3 | ) | 151.9 | |||||||||||
Life and Health Insurance | 3,476.1 | 669.3 | 2,921.8 | 131.9 | 989.5 | ||||||||||||
Corporate | 5.8 | 41.6 | (11.0 | ) | — | (172.6 | ) | ||||||||||
Total | $ | 4,209.2 | $ | 3,994.3 | $ | 6,219.9 | $ | 373.7 | $ | 2,621.4 | |||||||
2007: | |||||||||||||||||
U.S. Asset Accumulation | $ | 710.8 | $ | 2,735.5 | $ | 2,807.7 | $ | 255.0 | $ | 1,246.8 | |||||||
Global Asset Management | — | 35.2 | — | — | 447.2 | ||||||||||||
International Asset Management and Accumulation | 246.4 | 413.4 | 526.7 | 5.9 | 135.7 | ||||||||||||
Life and Health Insurance | 3,671.6 | 689.1 | 3,111.4 | 96.4 | 1,031.7 | ||||||||||||
Corporate | 5.3 | 93.3 | (10.5 | ) | — | (89.5 | ) | ||||||||||
Total | $ | 4,634.1 | $ | 3,966.5 | $ | 6,435.3 | $ | 357.3 | $ | 2,771.9 | |||||||
2006: | |||||||||||||||||
U.S. Asset Accumulation | $ | 462.3 | $ | 2,537.8 | $ | 2,391.3 | $ | 170.6 | $ | 869.8 | |||||||
Global Asset Management | — | 53.2 | — | — | 338.6 | ||||||||||||
International Asset Management and Accumulation | 239.1 | 252.3 | 399.1 | 2.4 | 142.3 | ||||||||||||
Life and Health Insurance | 3,598.7 | 692.5 | 2,910.3 | 66.2 | 1,040.0 | ||||||||||||
Corporate | 5.2 | 84.8 | (8.3 | ) | — | (71.2 | ) | ||||||||||
Total | $ | 4,305.3 | $ | 3,620.6 | $ | 5,692.4 | $ | 239.2 | $ | 2,319.5 | |||||||
Schedule IV — Reinsurance
As of December 31, 2006, 20052008, 2007 and 20042006 and for each of the years then ended
| | | Gross amount | Ceded to other companies | Assumed from other companies | Net amount | Percentage of amount assumed to net | |||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | (in millions) | |||||||||||||||||||||||||||||||||
2008: | 2008: | ||||||||||||||||||||||||||||||||||
Life insurance in force | Life insurance in force | $ | 243,735.9 | $ | 71,284.2 | $ | 2,593.2 | $ | 175,044.9 | 1.5 | % | ||||||||||||||||||||||||
Premiums: | Premiums: | ||||||||||||||||||||||||||||||||||
Life insurance | $ | 1,675.5 | $ | 121.6 | $ | 9.7 | $ | 1,563.6 | 0.6 | % | |||||||||||||||||||||||||
Accident and health insurance | 2,819.6 | 174.0 | — | 2,645.6 | — | % | |||||||||||||||||||||||||||||
Total | $ | 4,495.1 | $ | 295.6 | $ | 9.7 | $ | 4,209.2 | 0.2 | % | |||||||||||||||||||||||||
2007: | 2007: | ||||||||||||||||||||||||||||||||||
Life insurance in force | Life insurance in force | $ | 240,295.8 | $ | 62,552.2 | $ | 2,823.5 | $ | 180,567.1 | 1.6 | % | ||||||||||||||||||||||||
Premiums: | Premiums: | ||||||||||||||||||||||||||||||||||
Life insurance | $ | 1,774.9 | $ | 108.4 | $ | 160.1 | $ | 1,826.6 | 8.8 | % | |||||||||||||||||||||||||
Accident and health insurance | 2,976.4 | 168.8 | (0.1 | ) | 2,807.5 | — | % | ||||||||||||||||||||||||||||
| | | Gross Amount | Ceded to Other Companies | Assumed from Other Companies | Net Amount | Percentage of Amount Assumed to Net | Total | $ | 4,751.3 | $ | 277.2 | $ | 160.0 | $ | 4,634.1 | 3.5 | % | ||||||||||||||||||
| | | (in millions) | |||||||||||||||||||||||||||||||||
| 2006: | 2006: | 2006: | |||||||||||||||||||||||||||||||||
| Life insurance in force | Life insurance in force | $ | 218,946.9 | $ | 53,313.8 | $ | 3,078.9 | $ | 168,712.0 | 1.8 | % | Life insurance in force | $ | 218,946.9 | $ | 53,313.8 | $ | 3,078.9 | $ | 168,712.0 | 1.8 | % | |||||||||||||
| Premiums: | Premiums: | Premiums: | |||||||||||||||||||||||||||||||||
| Life insurance | $ | 1,541.7 | $ | 98.7 | $ | 117.2 | $ | 1,560.2 | 7.5 | % | Life insurance | $ | 1,541.7 | $ | 98.7 | $ | 117.2 | $ | 1,560.2 | 7.5 | % | ||||||||||||||
| Accident and health insurance | 2,927.1 | 182.1 | 0.1 | 2,745.1 | — | % | Accident and health insurance | 2,927.1 | 182.1 | 0.1 | 2,745.1 | — | % | ||||||||||||||||||||||
| Total | $ | 4,468.8 | $ | 280.8 | $ | 117.3 | $ | 4,305.3 | 2.7 | % | Total | $ | 4,468.8 | $ | 280.8 | $ | 117.3 | $ | 4,305.3 | 2.7 | % | ||||||||||||||
2005: | |||||||||||||||||||||||||||||||||||
| Life insurance in force | $ | 197,690.2 | $ | 49,934.4 | $ | 2,895.1 | $ | 150,650.9 | 1.9 | % | |||||||||||||||||||||||||
| Premiums: | |||||||||||||||||||||||||||||||||||
| Life insurance | $ | 1,571.7 | $ | 82.7 | $ | 56.6 | $ | 1,545.6 | 3.7 | % | |||||||||||||||||||||||||
| Accident and health insurance | 2,642.9 | 213.5 | — | 2,429.4 | — | % | |||||||||||||||||||||||||||||
| Total | $ | 4,214.6 | $ | 296.2 | $ | 56.6 | $ | 3,975.0 | 1.4 | % | |||||||||||||||||||||||||
2004: | |||||||||||||||||||||||||||||||||||
| Life insurance in force | $ | 180,343.5 | $ | 41,765.8 | $ | 2,566.2 | $ | 141,143.9 | 1.8 | % | |||||||||||||||||||||||||
| Premiums: | |||||||||||||||||||||||||||||||||||
| Life insurance | $ | 1,479.3 | $ | 69.2 | $ | 67.0 | $ | 1,477.1 | 4.5 | % | |||||||||||||||||||||||||
| Accident and health insurance | 2,455.5 | 222.6 | — | 2,232.9 | — | % | |||||||||||||||||||||||||||||
| Total | $ | 3,934.8 | $ | 291.8 | $ | 67.0 | $ | 3,710.0 | 1.8 | % | |||||||||||||||||||||||||
Exhibit Number | Description | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2.1 | Plan of Conversion(1) | ||||||||
| 2.2 | Share Sale Deed, dated as of June 17, 1999, among BT Investments (Australia) LLC, BT Foreign Investment Corporation, BT New Zealand Limited, BT International (Delaware), Inc., BT Nominees (H.K.) Limited, Deutsche Bank AG, Bankers Trust Corporation, Principal Financial Group (Australia) Pty Limited and Principal Financial Services, Inc.(1) | ||||||||
| 2.3 | Deed to Amend the Share Sale Deed, dated as of August 31, 1999, among BT Investments (Australia) LLC, BT Foreign Investment Corporation, BT New Zealand Limited, BT International (Delaware), Inc., BT Nominees (H.K.) Limited, Deutsche Bank AG, Bankers Trust Corporation, Principal Financial Group (Australia) Pty Limited and Principal Financial Services, Inc.(1) | ||||||||
| 2.4 | Second Amendment to the Share Sale Deed, dated as of March 14, 2001, among BT Investments (Australia) LLC, BT Foreign Investment Corporation, Deutsche New Zealand Limited (formerly called BT New Zealand Limited), BT International (Delaware), Inc., DB Nominees (H.K.) Limited (formerly called BT Nominees (H.K.) Limited), Deutsche Bank AG, Bankers Trust Corporation, Principal Financial Group (Australia) Pty Limited and Principal Financial Services, Inc.(1) | ||||||||
| 2.5 | Stock Purchase Agreement dated as of May 11, 2004 by and between Principal Holding Company and CitiMortgage, Inc.(2) | ||||||||
| 2.6 | Stock Purchase Agreement among Washington Mutual, Inc., New American Capital, Inc., Principal Financial Group, Inc., and Principal Management Corporation for the purchase and sale of the outstanding capital stock of WM Advisors, Inc., dated as of July 25, 2006.(3) | ||||||||
| 2.6.1 | Amendment No. 1 and Waiver, dated as of December 29, 2006, to the Stock Purchase Agreement, dated as of July 25, 2006, by and among Washington Mutual, Inc., New American Capital, Inc., Principal Financial Group, Inc., and Principal Management Corporation for the purchase and sale of the outstanding capital stock of WM Advisors, Inc.(4) | ||||||||
| 2.6.2 | Memorandum of Understanding dated as of December 29, 2006, amending and modifying the Stock Purchase Agreement by and among Washington Mutual, Inc., New American Capital, Inc., Principal Financial Group, Inc., and Principal Management Corporation for the purchase and sale of the outstanding capital stock of WM Advisors, Inc.(4) | ||||||||
| 3.1 | Form of Amended and Restated Certificate of Incorporation of Principal Financial Group, Inc. (included in Exhibit 2.1)(5) | ||||||||
| 3.2 | Form of | ||||||||
| 4.1 | Form of Certificate for the Common Stock of Principal Financial Group, Inc., par value $0.01 per share(1) | ||||||||
| 4.1.1 | Certificate of Designations of the Company's Series A | ||||||||
| 4.1.2 | Certificate of Designations of the Company's Series B | ||||||||
| 4.1.3 | Specimen Stock Certificate for the Company's Series A | ||||||||
| 4.1.4 | Specimen Stock Certificate for the Company's Series B | ||||||||
| 4.1.5 | Senior Indenture, dated as of October 11, 2006, between Principal Financial Group, Inc. and The Bank of New York, as Trustee.(6) | ||||||||
| 4.1.6 | First Supplemental Indenture, dated as of October 16, 2006, among Principal Financial Group, Inc., Principal Financial Services, Inc. and The Bank of New York, as Trustee.(6) | ||||||||
| 4.1.7 | 6.05% Senior Note ($500,000,000) due October 15, 2036.(6) | ||||||||
| 4.1.8 | 6.05% Senior Note ($100,000,000) due October 15, 2036.(7) | ||||||||
| 4.1.9 | Guarantee, dated as of October 16, 2006, by Principal Financial Services, Inc.(6) | ||||||||
| 4.2 | Amended and Restated Stockholder Rights Agreement, dated as of October 22, 2001(8) | ||||||||
| 4.2.1 | Amendment to the Amended and Restated Rights Agreement, dated as of January 17, 2005(9) | ||||||||
| 10.1 | Principal Financial Group, Inc. Stock Incentive Plan(10) | ||||||||
| 10.1.1 | Form of Restricted Stock Unit Award Agreement(11) | ||||||||
Exhibit Number | Description | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| 10.1.2 | Form of Stock Option Award Agreement(11) | ||||||||
| 10.1.3 | Principal Financial Group, Inc. 2005 Stock Incentive Plan(12) | ||||||||
| 10.2 | Principal Financial Group | ||||||||
| 10.3 | Resolution of Human Resources Committee of the Board of Directors of Principal Financial Group, Inc. amending the Principal Financial Group | ||||||||
| 10.4 | Principal Financial Group Incentive Pay Plan (PrinPay), amended and restated effective January 1, 2002(13) | ||||||||
| 10.5 | Principal Financial Group, Inc. Annual Incentive Plan(9) | ||||||||
| 10.6 | Summary of Standard Compensatory Arrangement for | ||||||||
| 10.6.1 | Revised Summary of Standard Compensatory Arrangement for Non Employee Directors of the Principal Financial Group, Inc. Board of Directors.(14) | ||||||||
| 10.6.2 | Revised Summary of Standard Compensatory Arrangement for Non-Employee Directors of the Principal Financial Group, Inc. Board of | ||||||||
| 10.7 | Principal Financial Group, Inc. Directors Stock Plan(1) | ||||||||
| 10.7.1 | Principal Financial Group, Inc. 2005 Directors Stock Plan(12) | ||||||||
| 10.8 | Deferred Compensation Plan for | ||||||||
| 10.9 | Principal Select Savings Excess Plan, restated as of January 1, | ||||||||
| 10.9.1 | Amendment No. 1 to Principal Select Savings Excess | ||||||||
| 10.10 | Supplemental Executive Retirement Plan for Employees, restated as of January 1, | ||||||||
| 10.10.1 | Amendment No. 1 to the Principal Supplemental Executive Retirement Plan for | ||||||||
| 10.11 | Employment Agreement, dated as of April 1, 2004, by and between Principal Financial Group, Inc., Principal Financial Services, Inc., Principal Life Insurance Company and J. Barry Griswell(2) | ||||||||
| 10.12 | |||||||||
| 10.12.1 | |||||||||
| 10.12.2 | Amendment to Employment Agreement dated as of March 20, 2008 by and between Principal Financial Group, Inc., Principal Financial Services, Inc., Principal Life Insurance Company and J. Barry Griswell(19) | ||||||||
| 10.13 | Form of Principal Mutual Holding Company and Principal Life Insurance Company Change of Control Employment Agreement (Tier One Executives) among Principal Mutual Holding Company, Principal Financial Group, Inc., Principal Financial Services, Inc., Principal Life Insurance Company and an Executive(1) | ||||||||
| 10.13.1 | Form of Principal Financial Group, Inc. and Principal Life Insurance Company | ||||||||
| 10.13.2 | Form of Principal Financial Group, Inc. and Principal Life Insurance Company Change-of-Control Employment Agreement (Tier One Executives)(20) | ||||||||
| 10.13.3 | Form of Principal Financial Group, Inc. Indemnification Agreement(20) | ||||||||
| 10.14 | Compensatory Arrangement, dated as of March 14, 2002, between Principal Life Insurance Company and James P. McCaughan. | ||||||||
| 10.15 | Fiscal Agency Agreement, dated as of August 25, 1999, among Principal Financial Group (Australia) Holdings Pty Limited, Principal Financial Services, Inc. and U.S. Bank Trust National Association(1) | ||||||||
| 10.16 | Employment Agreement dated as of June 1, 2006, by and between Principal Financial Group, Inc., Principal Financial Services, Inc., Principal Life Insurance Company, and Larry D. Zimpleman.(4) |
Exhibit Number | Description | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| 10.16.1 | Amended and Restated Employment Agreement dated as of May 1, 2008, by and between Principal Financial Group, Inc., Principal Financial Services, Inc., Principal Life Insurance Company and Larry D. Zimpleman(22) | ||||||||
| 12 | Computation of Earnings to Fixed Charges | ||||||||
| 21 | Principal Financial Group, Inc. Member Companies as of December 31, | ||||||||
| 23 | Consent of Independent Registered Public Accounting | ||||||||
| 31.1 | Certification of | ||||||||
| 31.2 | Certification of | ||||||||
| 32.1 | Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code | ||||||||
| 32.2 | Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code | ||||||||
PRINCIPAL FINANCIAL GROUP, INC. TABLE OF CONTENTS
NOTE CONCERNING FORWARD-LOOKING STATEMENTS
- PART I
Item 1. Business
- Item 1A. Risk Factors
- Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
- Item 6. Selected Financial Data
- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
- Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Derivative Financial Instruments — Credit Exposures
- Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
Principal Financial Group, Inc. Consolidated Statements of Financial Position
Principal Financial Group, Inc. Consolidated Statements of Operations
Principal Financial Group, Inc. Consolidated Statements of Stockholders' Equity
Principal Financial Group, Inc. Consolidated Statements of Cash Flows
Principal Financial Group, Inc. Notes to Consolidated Financial Statements — (continued)
Condensed Consolidating Statements of Financial Position December 31,
Condensed Consolidating Statements of Financial Position December 31,
Condensed Consolidating Statements of Operations For the year ended December 31, 2008
Condensed Consolidating Statements of Operations For the year ended December 31, 2007
Condensed Consolidating Statements of Operations For the year ended December 31, 2006
Condensed Consolidating Statements of
Condensed Consolidating Statements of
Condensed Consolidating Statements of Cash Flows For the year ended December 31, 2007
Condensed Consolidating Statements of Cash Flows (continued) For the year ended December 31, 2007
Condensed Consolidating Statements of Cash Flows For the year ended December 31, 2006
Condensed Consolidating Statements of Cash Flows (continued) For the year ended December 31, 2006
Condensed Consolidating Statements of
Condensed Consolidating Statements of Financial Position (continued) December 31,
Condensed Consolidating Statements of Financial Position December 31,
Condensed Consolidating Statements of Operations For the year ended December 31, 2008
Condensed Consolidating Statements of Operations For the year ended December 31, 2007
Condensed Consolidating Statements of Operations For the year ended December 31, 2006
Condensed Consolidating Statements of
Condensed Consolidating Statements of
Condensed Consolidating Statements of Cash Flows For the year ended December 31, 2007
Condensed Consolidating Statements of Cash Flows (continued) For the year ended December 31, 2007
Condensed Consolidating Statements of Cash Flows For the year ended December 31, 2006
Condensed Consolidating Statements of Cash Flows (continued) For the year ended December 31, 2006
- Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
- Item 15. Exhibits and Financial Statement Schedules
Report of Independent Registered Public Accounting Firm on Schedules
Schedule I — Summary of Investments — Other Than Investments in Related Parties As of December 31, 2008
Schedule II — Condensed Financial Information of Registrant (Parent Only) Statements of Financial Position
Statements of Operations
Statements of Cash Flows
Notes to Condensed Financial Statements
Schedule III — Supplementary Insurance Information As of December 31, 2008, 2007 and 2006 and for each of the years then ended
Schedule III — Supplementary Insurance Information — (continued) As of December 31, 2008, 2007 and 2006 and for each of the years then ended
Schedule IV — Reinsurance As of December 31,
Exhibit Index