FinanceLooker

Excrept from filing document 2024-12-31

The information required to be furnished pursuant to Part III of this Form 10 K is set forth in and is hereby incorporated by reference herein from the registrant s definitive proxy statement for the annual meeting of stockholders to be held on May 20 2025 to be filed by the registrant with the United States Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the year ended December 31 2024
This Annual Report on Form 10 K including the Management s Discussion and Analysis of Financial Condition and Results of Operations contains statements that constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including statements relating to trends in operations and financial results and the business and the products of the Registrant and its subsidiaries as well as other statements including words such as anticipate believe plan estimate expect intend and other similar expressions Forward looking statements are made based upon management s current expectations and beliefs concerning future developments and their potential effects on us Such forward looking statements are not guarantees of future performance
Principal Financial Group Inc PFG is a leader in global financial services offering businesses individuals and institutional clients a wide range of financial products and services including retirement asset management and workplace benefits and protection solutions through our diverse family of financial services companies We had 1 663 9 billion in assets under administration AUA including 712 1 billion in assets under management AUM as of December 31 2024
Our global asset management businesses serve a broad range of institutional retirement high net worth and retail investors worldwide Our focused investment teams provide diverse long term investment capabilities including equity fixed income real estate and other alternative investments as well as fund offerings Our international asset management and accumulation businesses focus on the opportunities created as aging populations around the world drive increased demand for retirement accumulation retirement asset management and retirement income management solutions
In the U S we offer a broad array of retirement and employee benefit and insurance solutions to meet the needs of the business owner and their employees We are a leading provider of defined contribution plans nonqualified plans defined benefit plans and pension risk transfer services We are also a leading employee stock ownership plan ESOP consultant In addition we are one of the largest providers of specialty benefits and insurance solutions for business owners and their employees We believe small and medium sized businesses are an underserved market offering attractive growth opportunities in the retirement and employee benefit markets
In the fourth quarter of 2024 we implemented changes to our Principal Asset Management segment to align the global operations by business function Prior to the fourth quarter of 2024 our Principal Asset Management segment was organized into Principal Global Investors and Principal International The Principal Asset Management segment is now organized into Investment Management and International Pension The change has been applied retrospectively which did not have an impact on our consolidated financial statements
WSRS products respond to the needs of plan sponsors seeking both administrative and investment services for defined contribution plans or defined benefit plans The investment component of both the defined contribution and defined benefit plans may be in the form of a guaranteed account separate account a mutual fund offering or a collective investment trust In addition defined contribution plan sponsors may also offer their own employer securities as an investment option under the plan
We deliver both administrative and investment services to our defined contribution plan and defined benefit plan customers through annuity contracts collective investment trusts and mutual funds Group annuity contracts and collective investment trusts used to fund qualified plans are not required to be registered with the United States Securities and Exchange Commission SEC Our mutual fund service platform is called Principal Advantage It is a qualified plan service package based on our series mutual fund Principal Funds Inc PFI We offer investments covering the full range of stable value equity fixed income real estate and international investment options managed by our Principal Asset Management segment as well as third party asset managers In addition WSRS offers plan sponsors trust services through an affiliated trust company
As of December 31 2024 we provided WSRS products to a over 43 000 defined contribution plans including 550 7 billion in assets and covering approximately 11 3 million eligible plan participants and b to over 1 600 defined benefit plans including 17 3 billion in assets and covering over 404 000 eligible plan participants As of December 31 2024 approximately 31 of our WSRS account values were managed by our Principal Asset Management segment 65 were managed entirely by the third party asset managers that were not under contract to sub advise a PFG product 2 were sub advised and 2 represented employer securities
We offer our WSRS products and services to plans including qualified and nonqualified defined contribution plans and defined benefit plans These products and services are offered to businesses of all sizes including plans sponsored by small and mid sized businesses which we believe remains underpenetrated and large institutional clients We distribute our WSRS products and services nationally primarily through a captive retirement services sales force Retirement services sales representatives are an integral part of the sales process alongside the referring consultant or independent advisor We compensate retirement services sales representatives through a blend of salary and production based incentives We administer on behalf of the plan commission or fee payments to independent advisors consultants and agents
In addition we have a staff of service and education specialists located across the U S These specialists play a key role in the ongoing servicing of plans by providing local services to our customers such as reviewing plan performance investment options and plan design communicating the customers needs and feedback to us and helping employees understand the benefits of their plans The following summarizes our distribution channels
We believe our approach to WSRS plan services distribution which gives us a targeted sales and service presence along with our offering of PrincipalÒ Total Retirement Solutions differentiates us from many of our competitors We have also established a number of marketing and distribution relationships to increase the sales of our products and services
Our individual variable deferred annuities provide customers with the flexibility to allocate their deposits to mutual funds managed by the Principal Asset Management segment or unaffiliated third party asset managers with variable and guaranteed options Generally speaking the customers bear the investment risk for the variable options and have the right to allocate their assets among various separate mutual funds The value of the annuity fluctuates in accordance with the experience of the mutual funds chosen by the customer Customers have the option to allocate all or a portion of their account to our guaranteed option in which case we credit interest at rates we determine subject to contractual minimums As of December 31 2024 of our 8 3 billion variable annuity account balances invested in mutual funds 90 was allocated to mutual funds managed by the Principal Asset Management segment and our guaranteed option The remaining balance was allocated to mutual funds managed by unaffiliated third party asset managers
Customers may elect a living benefit guarantee commonly known in the industry as a guaranteed minimum withdrawal benefit or GMWB We bear the GMWB investment risk Our goal is to hedge the GMWB investment risk through the use of sophisticated risk management techniques As of December 31 2024 5 6 billion of the 8 3 billion of variable annuity separate account values had the GMWB rider Our major source of revenue from individual variable annuities is mortality and expense fees we charge to the customer generally determined as a percentage of the market value of the assets held in a separate investment sub account Account balances of variable annuity contracts with the GMWB rider were invested in separate account investment options as follows
In addition we offer RILAs which provide policyholders with index linked investment options and a fixed interest investment option with different available term lengths The index linked investment options minimize negative index performance through floors or buffers Customers may elect a GMWB We bear the GMWB investment risk Our goal is to hedge the GMWB investment risk through the use of risk management techniques
Our target markets for individual variable annuities and RILAs include owners executives and employees of small and medium sized businesses and individuals seeking to accumulate and or eventually receive distributions of assets for retirement We market variable annuities and RILAs to individuals for both qualified and nonqualified retirement savings
We sell our individual variable annuity products and RILAs primarily through our affiliated financial representatives who accounted for 70 85 and 87 of annuity sales for the years ended December 31 2024 2023 and 2022 respectively The remaining sales were made primarily through unaffiliated broker dealer firms
GICs and funding agreements pay a specified rate of return The rate of return can be a floating rate based on an external market index or a fixed rate Our investment only products contain provisions disallowing or limiting early surrenders including penalties for early surrenders and minimum notice requirements
Deposits to investment only products are predominantly in the form of single payments As a result the level of new deposits can fluctuate from one fiscal quarter to another The amounts earned by us are derived in part from the difference between the investment income earned by us and the amount credited to the customer The Principal Asset Management segment manages the assets supporting the contractual promises
Funding agreements are issued directly to non qualified institutions the Federal Home Loan Bank of Des Moines FHLB Des Moines and unconsolidated special purpose entities As part of our funding agreement backed note programs U S and foreign institutional investors purchase debt obligations from the special purpose entity which in turn purchases the funding agreement from us with terms similar to those of the debt obligations The strength of this market is dependent on debt capital market conditions As a result our sales through this channel can vary widely from one quarter to another
Pension risk transfer products respond primarily to the needs of pension plan sponsors in the form of single premium group annuities which are immediate or deferred annuities that provide a current or future specific income amount fully guaranteed by us The majority of our business originates from defined benefit plans that are being terminated In these situations the plan sponsor transfers all its obligations under the plan to an insurer by paying a single premium Generally plan sponsors restrict their purchases to insurance companies with superior or excellent financial quality ratings because the Department of Labor DOL has mandated that annuities be purchased only from the safest available insurers
Since premium received from pension risk transfer products is generally in the form of single payments the level of premiums can fluctuate depending on the number of large scale annuity sales in a particular quarter The Principal Asset Management segment manages the assets supporting pension risk transfer account values
Our primary distribution channel for pension risk transfer products is comprised of several specialized home office sales consultants working through consultants and brokers that specialize in this type of business Our sales consultants also make sales directly to institutions Our nationally dispersed retirement services sales representatives act as a secondary distribution channel for these products
Principal Bank is a U S federal savings bank that was formed in February 1998 As of December 31 2024 Principal Bank had nearly 772 000 customers and approximately 8 8 billion in assets Principal Bank operates under a limited purpose charter and may only accept deposits held in a fiduciary capacity and may not hold demand deposits It also may not own commercial loans or originate loans
Principal Custody Solutions PCS is a division of Principal Bank that provides trust and or custodial support services to clients in a variety of market segments including corporations endowments foundations health care organizations insurance and financial institutions public entities and government institutions
Principal Trust Company the trade name for Delaware Charter Guarantee Trust is a non deposit trust company chartered in 1899 in the State of Delaware As of December 31 2024 Principal Trust Company has over 35 000 accounts and approximately 658 6 billion in assets under administration Principal Trust Company provides trust and custodial services to certain retirement benefit plans and personal trusts
Individual retirement accounts IRAs are provided by Principal Bank primarily funded by retirement savings rolled over from qualified retirement plans Principal Bank offers Federal Deposit Insurance Corporation FDIC insured cash solutions for customers in the form of savings accounts money market accounts and certificates of deposit The deposit products provide a relatively stable source of funding and liquidity for Principal Bank and are backed by purchases of investment securities and residential mortgage loans In addition Principal Bank serves as a trustee and or custodian for institutional customers within its PCS division and facilitates cash sweep services for these customers as well as cash sweep services for customers of affiliates
Principal Bank offers products and services primarily to participants rolling out of qualified retirement plans largely serviced by affiliates of PFG Principal Bank services customers by telephone mail and internet Principal Bank also serves as trustee and or custodian for the non retirement plan clients within the PCS business line
Principal Trust Company offers services through brokerage and financial institution relationships services primarily through affiliates of PFG and also leverages some unaffiliated partners Principal Trust Company also acts as trustee and or custodian for the retirement plan clients that fall into the PCS business line
Our Investment Management operations manages assets for sophisticated investors around the world using global and local investment teams that provide diverse investment capabilities including equity fixed income asset allocation real estate and other alternative investments We focus on providing services to our other segments in addition to our retail mutual fund and third party institutional clients Our products and services are provided for a fee as defined by client mandates Our fees are generally driven by AUM The Investment Management teams managed 559 1 billion in assets as of December 31 2024
Fixed Income Investments Our experience in fixed income management spans multiple economic and credit market cycles and encompasses all major fixed income security types and sectors Our research and risk management capabilities in worldwide debt markets provide a strong foundation for broadly diversified multi sector portfolios tailored to specific client objectives
Asset Allocation Asset Allocation is a specialized asset allocation investment team offering multi asset and or multi manager portfolio construction services that aim to deliver reliable risk adjusted investment outcomes to individual investors institutional investors and participants in employer sponsored plans
To effectively reach and cater to a diverse range of investors we employ a multi channel distribution strategy Our Global Institutional Advisory Services and Global Wealth Advisory Services teams relationship managers and client service professionals collaborate with consultants and directly interact with investors to acquire and retain institutional retail and other investors These teams are organized into three geographic groups U S Europe clients Asia Pacific Middle East clients and Latin America clients Additionally we leverage partnerships with independent broker dealers to further broaden our distribution reach
China We offer mutual funds and asset management services to individuals and institutions through a joint venture CCB Principal Asset Management Co Ltd CCBPAM We owned 25 0 of CCBPAM as of December 31 2024 China Construction Bank CCB is the majority partner with 65 0 ownership China Huadian Capital Holdings owns 10 0 CCBPAM distributes its mutual funds through CCB and third party distributors such as banks securities brokers and e channels
Southeast Asia We offer mutual funds asset management services and retirement solutions through our joint ventures in Malaysia Principal Asset Management Berhad PAM and Principal Islamic Asset Management Sdn Bhd PIAM The partner is CIMB Group CIMB a leading ASEAN universal bank that has strong presence in the region
PAM offers conventional and Islamic mutual funds retirement solutions through the branches of CIMB and through its agency sales force selling to retail customers PAM also distributes its mutual funds and retirement solutions through third party institutions including banks security houses and digital platforms such as digital wallet and online marketplaces PAM has subsidiaries in Singapore Principal Asset Management S Pte Ltd Indonesia PT Principal Asset Management and Thailand Principal Asset Management Company Limited
Our International Pension operations offer pension accumulation income annuities and life insurance accumulation products in Latin America and Asia We focus on locations with growing middle classes and affluent segments favorable demographics and increasing long term savings ideally with defined contribution retirement markets We also focus on markets with relevant size where we have competitive advantages We entered these locations through acquisitions start up operations and joint ventures
Brazil We offer pension accumulation income annuity and life insurance accumulation products through a co managed joint venture Brasilprev Seguros e Previdencia S A Brasilprev with our partner with Banco do Brasil Banco We owned 25 0 of the economic interest and 50 0 of the voting shares as of December 31 2024
Brasilprev has the exclusive distribution rights of its pension accumulation and income annuity products through the Banco network until October 2032 Our joint venture provides products for the retirement needs of individuals and employers Banco s employees sell these products directly to individual clients through its bank branches and digital channels In addition our joint venture reaches corporate clients through two wholesale distribution channels 1 a network of independent brokers who sell to the public and 2 Banco s corporate account executives who sell to existing and prospective corporate clients
Chile We offer mandatory employee funded pension and voluntary savings plans through Administradora de Fondos de Pensiones Cuprum S A Cuprum We owned 98 0 of Cuprum as of December 31 2024 and the rest is publicly floated Cuprum s products are sold through digital means and via a proprietary sales network
We offer income annuity and life insurance accumulation solutions through Principal Compañía de Seguros de Vida Chile S A our wholly owned life insurance company The annuity products are distributed directly by our sales teams and through a network of brokers and independent agents Life insurance accumulation products are offered to individuals through brokers and financial advisors and through digital means
Mexico We offer mandatory and voluntary pension plans through Principal Afore S A de C V Principal Grupo Financiero We manage and administer individual retirement accounts under the mandatory privatized social security system for formal employees in Mexico We distribute products and services through a proprietary sales force as well as independent brokers who sell directly to individuals
China We offer entrust account services and investment management for individual and group retirement security products through a joint venture CCB Pension Management Co Ltd CCBP We owned 17 6 of CCBP as of December 31 2024 CCB is the majority partner with 70 0 ownership The Social Security Fund of China owns 12 4
Hong Kong Special Administrative Region We offer two types of pension saving schemes Mandatory Provident Fund MPF Schemes and Occupational Retirement Schemes Ordinance which we distribute through third party intermediaries such as insurance companies independent financial advisors brokers and employee benefit consultants Our most significant partnership is with AXA Hong Kong with whom we have a 15 year distribution partnership through 2030 On January 16 2025 we announced the signing of an agreement with Bank Consortium Trust Company BCT to expand our investment management capabilities and exit our sponsor and trustee pension roles in Hong Kong for MPF Schemes For additional information see Item 8 Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Note 24 Subsequent Event
Our Benefits and Protection segment activities date back to 1879 when we first began selling individual life insurance products We expanded our offering to include group insurance products in the 1940s and have continued to expand our product portfolio over time We are uniquely positioned to protect businesses through our broad set of solutions our expertise and the experiences we offer
Specialty Benefits which includes group dental vision life critical illness accident hospital indemnity paid family and medical leave PFML disability insurance and individual disability insurance is an important component of the employee benefit offering primarily at small and medium sized businesses
Group Dental and Vision Insurance Our plans provide partial reimbursement for dental and vision expenses As of December 31 2024 we had over 123 000 group dental and vision insurance policies in force covering over 3 0 million employees According to Life Insurance and Market Research Association LIMRA we were the 3rd largest group dental insurer in terms of number of contracts employer groups in force in 2023 In addition to indemnity and preferred provider organization dental offered on both an employer paid and voluntary basis we offer a prepaid dental plan in Arizona through our Employers Dental Services Inc subsidiary We also offer a discount dental product nationally Our indemnity vision and our managed care vision products are offered on both an employer paid and voluntary basis
Group Life and Other Insurance Our group life insurance provides coverage to employees and their dependents for a specified period As of December 31 2024 we had over 99 000 group policies providing nearly 186 billion of group life insurance in force covering approximately 3 1 million employee lives According to LIMRA in 2023 we were ranked 1st in the U S in terms of the number of group life insurance contracts in force We currently sell traditional group life insurance that does not provide for accumulation of cash values on both an employer paid and voluntary basis Our group life insurance business remains focused on the traditional annually renewable term product Group term life and group universal life accounted for 99 and 1 respectively of our total group life insurance in force as of December 31 2024 We no longer market group universal life insurance to new employer groups We sell PFML on a limited basis which provides paid time off to care for specified family needs or an employee s own serious health condition As of December 31 2024 we have sold PFML in three states We plan to expand to other states in the future We also offer voluntary critical illness insurance which provides a lump sum benefit to pay for additional expenses associated with common critical illnesses voluntary accident insurance which pays a lump sum benefit when covered injuries occur because of an accident and hospital indemnity insurance which provides a lump sum benefit associated with hospitalization
Group Disability Insurance Our group disability insurance provides benefits to insured employees who become disabled In most instances this benefit is in the form of a monthly or weekly income Our group disability products include both short term and long term disability offered on both an employer paid and voluntary basis As of December 31 2024 long term disability represented 59 of total group disability premium while short term disability represented 41 of total group disability premium We also provide disability management services called rehabilitation services to assist individuals in returning to work as quickly as possible following disability We work with disability claimants to improve the approval rate of Social Security benefits thereby reducing payment of benefits by the amount of Social Security payments received As of December 31 2024 we served approximately 2 2 million employee lives through over 69 000 contracts According to LIMRA our group short term disability business was ranked 4th and our group long term disability business was ranked 2nd in the U S as of December 31 2023 in terms of number of contracts employer groups in force
Individual Disability Insurance Individual disability insurance has been sold since the early 1950s Our individual disability insurance products provide income protection to the insured member and or business in the event of disability In most instances this benefit is in the form of a monthly income In addition to income replacement we offer products to pay business related costs such as overhead expenses for a disabled business owner buy out costs for business owners purchasing a disabled owner s interest in the business expenditures for replacement of a key person and business loan payments We also offer a product to protect retirement savings in the event of disability As of December 31 2024 we served approximately 219 000 individual disability policyholders According to LIMRA our individual disability business was ranked 4th in the U S in terms of premium in force in the non cancellable segment of the market and 4th overall as of December 31 2023
We specialize in providing solutions primarily for small to medium sized businesses to protect against risk and loss assist with succession planning and wealth transfer and to build and protect wealth for retirement We also provide solutions to meet the personal needs of business owners executives and key employees In 2021 we narrowed our focus to the business market and ceased sales to the retail consumer market In 2022 we reinsured our universal life with secondary guarantee ULSG block of business Our U S operations administered approximately 716 000 individual life insurance policies with over 555 0 billion of individual life insurance in force as of December 31 2024
Our Business Owner Solutions platform as well as our nonqualified deferred compensation offering combines administration and consulting to service our clients needs We focus on the business and personal insurance needs of owners executives and key employees primarily of small and medium sized businesses with an emphasis on providing insurance solutions for nonqualified executive benefits We no longer market our products to retail customers We offer a variety of individual life insurance products both interest sensitive including universal life variable universal life and indexed universal life insurance and traditional
Interest Sensitive Interest sensitive includes universal life UL variable universal life and indexed universal life insurance products however we no longer market universal life insurance with lifetime secondary guarantee provisions These products offer the policyholder the option of adjusting both the premium and the death benefit amounts of the insurance contract Universal life insurance typically includes a cash value account that accumulates at a credited interest rate based on the investment returns of the block of business Variable universal life insurance is credited with the investment returns of the various investment options selected by the policyholder Indexed universal life is credited with investment returns tied to an external index subject to a contractual minimum and maximum For the year ended December 31 2024 interest sensitive products represented 18 of individual life insurance in force and generated 72 of individual life insurance annualized first year premium sales
After a deduction for policy level expenses we credit net deposits to an account maintained for the policyholder For universal life contracts the entire account balance is invested in the general account Interest is credited to the policyholder s account based on the earnings on general account investments subject to contractual minimums For variable universal life contracts the policyholder may allocate the account balance among our general account and a variety of separate accounts underlying the contract Interest is credited on amounts allocated to the general account in the same manner as for universal life Net investment performance on separate accounts is allocated directly to the policyholder accounts the policyholder bears the investment risk For indexed universal life the policyholder may allocate the account balance among our general account and two index accounts Interest is credited on amounts allocated to the general account in the same manner as for universal life Net investment performance on the index accounts is allocated directly to the policyholder accounts subject to the contractual minimum and maximum Some of our interest sensitive contracts contain what are commonly referred to as secondary or no lapse guarantee provisions These no lapse guarantees keep the contract in force even if the policyholder s account balance is insufficient to cover all of the contract charges provided that the policyholder has continually paid a specified minimum premium
Traditional Life Insurance Traditional life insurance includes term whole and adjustable life insurance products however we no longer market whole and adjustable life insurance products Term insurance products provide a guaranteed death benefit for a specified period of time in return for the payment of a fixed premium Term life insurance products represented 80 of individual life insurance in force as of December 31 2024 and 28 of our individual life insurance annualized first year premium sales for the year ended December 31 2024 Whole life policies provide a guaranteed death benefit and a cash surrender value in return for payment of fixed premiums Adjustable life insurance products provide a guaranteed benefit in return for the payment of a fixed premium while allowing the policyholder to set the coverage period premium and face amount combination
We market our group insurance products primarily to small and medium sized businesses through brokers and consultants We sell our group insurance products in all 50 states and the District of Columbia We continually adapt our products and pricing to meet local market conditions and to comply with state and federal legislation We market our fee for service capabilities to employers that self insure their employees dental disability and vision benefits We market our fee for service businesses in all 50 states and the District of Columbia
The group insurance market continues to see a shift to voluntary worksite products due to various pressures on employers In keeping with this market change which shifts the funding of such products from the employer to the employee we continue to place an enhanced focus on our voluntary benefits platform We believe the voluntary worksite market presents growth opportunities and we will continue to develop strategies to capitalize on this expanding market
As of December 31 2024 we had 145 sales representatives and 187 service representatives in 26 local markets Our sales representatives accounted for 100 of our group insurance sales for the year ended December 31 2024 The service representatives play a key role in servicing the case by providing local responsive services to our customers and their brokers such as renewing contracts revising plans solving administrative issues and communicating the customers needs and feedback to us
We sell our individual life and individual disability insurance products in all 50 states and the District of Columbia primarily targeting owners executives and key employees of small and medium sized businesses Small and medium sized business sales represented 100 of individual life sales and 71 of individual disability sales for the year ended December 31 2024 Our life insurance sales efforts focus on the Nonqualified Deferred Compensation and the Business Solutions market This strategy offers solutions to address business owner financial challenges such as exiting the business business transition retaining key employees and retirement planning Key employees also have needs to supplement retirement income survivor income and business protection We believe the Business Owner Solutions segment offers growth opportunities and we will continue to develop strategies to capitalize on this expanding market
We distribute our individual life and individual disability insurance products through our affiliated financial representatives and independent brokers as well as other marketing and distribution alliances To meet the needs of the various marketing channels particularly the independent brokers we employ wholesale distributors Regional Vice Presidents for nonqualified business solutions and individual disability
Our Corporate segment manages the assets representing capital that has not been allocated to any other segment Financial results of the Corporate segment primarily reflect our financing activities including financing costs income on capital not allocated to other segments inter segment eliminations income tax risks and certain income expenses and other adjustments not allocated to the segments based on the nature of such items Results of Principal Securities Inc our retail broker dealer and registered investment advisor and our exited group medical and long term care insurance businesses are reported in this segment
Competition is based on several factors including customer segments product types and features external peer comparisons go to market strategies compensation structure price performance capital markets capital liquidity and financial strength ratings We compete with many financial services companies such as banks mutual funds institutional trust companies broker dealers insurers recordkeepers asset managers and wealth managers Some of these companies may offer a broader array of products more competitive pricing greater diversity of distribution sources better brand recognition or with respect to insurers higher financial strength ratings Some may have greater financial resources with which to compete or have better investment performance at various times We distinguish ourselves from our competitors through three positional advantages
Insurance companies are assigned financial strength ratings by rating agencies based upon factors relevant to policyholders Financial strength ratings are generally defined as opinions as to an insurer s financial strength and ability to meet ongoing obligations to policyholders Information about ratings provides both industry participants and insurance consumers meaningful insights on specific insurance companies Higher ratings generally indicate financial stability and a stronger ability to pay claims
A M Best Company Inc A M Best ratings for insurance companies range from A to S A M Best indicates that A and A ratings are assigned to those companies that in A M Best s opinion have superior ability to meet ongoing insurance obligations Fitch Ratings Ltd Fitch ratings for insurance companies range from AAA to C Fitch AA ratings indicate very strong capacity to meet policyholder and contract obligations Moody s Investors Service Moody s ratings for insurance companies range from Aaa to C Moody s indicates that A ratings are assigned to those companies that offer good financial security S P Global Ratings S P has ratings that range from AAA to D for insurance companies S P indicates that A ratings are assigned to those companies that have strong financial security characteristics In evaluating a company s financial and operating performance these rating agencies review its profitability leverage and liquidity as well as its book of business the adequacy and soundness of its reinsurance the quality and estimated market value of its assets the adequacy of its policy reserves the soundness of its risk management programs the experience and competency of its management and other factors
We believe our strong ratings are an important factor in marketing our products to our distributors and customers as ratings information is broadly disseminated and generally used throughout the industry Our ratings reflect each rating agency s opinion of our financial strength operating performance and ability to meet our obligations to policyholders and are not evaluations directed toward the protection of investors Such ratings are neither a rating of securities nor a recommendation to buy hold or sell any security including our common stock For more information on ratings see Item 7 Management s Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources Financial Strength and Credit Ratings
Our businesses are subject to regulation and supervision by U S federal state and broker dealer regulatory authorities as well as non U S regulatory authorities for our operations and customers outside the U S Our businesses are also subject to U S federal state and local tax laws as well as tax laws for jurisdictions outside the U S As we continue to expand our global footprint we are subject to laws and regulations of jurisdictions where we register and sell products even if we do not have a physical operating presence
PFG our parent holding company is not licensed as an insurer investment advisor broker dealer bank or other regulated entity However because it is the holding company for our collective operations it is subject to regulation in connection with our regulated entities including as an insurance holding company We are subject to legal and regulatory requirements applicable to public companies including public reporting and disclosure securities trading accounting and financial reporting and corporate governance
We are subject to the insurance holding company laws in the states where our insurance companies are domiciled Principal Life and PNLIC are domiciled in Iowa and their principal insurance regulatory authority is the Insurance Division of the Department of Commerce of the State of Iowa Our other U S insurance companies are principally regulated by the insurance departments of the states in which they are domiciled These laws require each insurance company directly or indirectly owned by the holding company to register with the insurance department in the insurance company s state of domicile and to furnish financial and other information about the operations of the companies within the holding company system Transactions affecting the insurers in the holding company system must be fair and at arm s length Most states have insurance laws that require regulatory approval of a direct or indirect change in control of an insurer or an insurer s holding company and laws that require prior notification to state insurance departments of a change in control of a non domiciliary insurance company doing business in that state
Annually our U S insurance companies must submit an opinion from a board appointed qualified actuary to state insurance regulators where licensed on whether the statutory assets backing statutory reserves are sufficient to meet contractual obligations and related expenses of the insurer If such an opinion cannot be rendered noting the sufficiency of assets the insurance company must set up additional statutory reserves drawing from available statutory surplus until such an opinion can be given
State insurance departments have broad administrative powers over the insurance business including insurance company licensing and examination agent licensing establishment of reserve requirements and solvency standards premium rate regulation admittance of assets to statutory surplus policy form approval unfair trade and claims practices regulation and other matters State insurance statutes also typically place restrictions and limitations on the amount of dividends or other distributions payable by insurance company subsidiaries to their parent companies See Item 7 Management s Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources for further details
To enhance the regulation of insurer solvency the National Association of Insurance Commissioners NAIC has established risk based capital RBC standards The standards require life insurers to report annually to state regulators regarding their RBC based upon categories of risk including the following asset risk insurance risk interest rate risk and business and operational risk As of December 31 2024 the statutory surplus of each of our U S life insurance companies exceeded the minimum RBC requirements
Each state has insurance guaranty association laws under which insurers doing business in a state can be assessed up to prescribed limits to cover contractual benefit obligations of insolvent insurance companies The guaranty associations of each state levy assessments on member insurers doing business in their states based on the proportionate share of the premiums written by such insurer in the lines of business in which the insolvent insurer is engaged Some states permit the member insurers to recover the assessments paid through full or partial premium tax offsets
The President of the United States manages the operations of the Executive branch of Government through Executive orders As a U S based business we are subject to certain Executive orders that could affect our business operations regional footprint risk management strategies and investments and increase our costs of compliance
Insurance and investment products that require registration with the SEC such as variable annuities RILA variable life insurance and some funding agreements that constitute securities and mutual fund products are subject to securities laws and regulations including U S state securities regulation as well as U S federal regulation under the SEC FINRA and other regulatory authorities These regulations affect investment advice sales and related activities for these products and the compliance oversight construct
As we own and operate real property we are subject to U S federal state and local environmental laws as well as international environmental laws and could be subject to environmental liabilities and costs associated with required remediation of our properties We routinely have environmental assessments performed for real estate being acquired or used as collateral for commercial mortgages we use for investment
Our international businesses are supervised by regulatory authorities in the jurisdictions in which they operate including regulation and supervision by insurance securities tax and privacy regulatory authorities The purpose of these regulations aligns with the purpose and intent of U S regulations and is primarily focused on consumer protection and prudency of the overall financial system
Like all financial services companies we are exposed to a wide variety of financial operational and other risks as described in Item 1A Risk Factors Our enterprise risk management approach enables us to have the right people culture tools knowledge information processes and controls in place to effectively identify measure monitor communicate and manage risks within established limits and tolerances helping us
We utilize an integrated risk management framework to help us identify analyze and mitigate internal and external risks The framework delivers important perspective used in strategic and tactical decision making and is adaptable to changes in our businesses and the external environments in which we operate We are committed to continuous improvement and ongoing validation
Our governance structure includes Board of Directors Board oversight internal risk committees an enterprise risk management function and dedicated risk professionals with expertise representing each business area The Board and its committees which include Audit Committee Finance Committee Human Resources Committee and Nominating and Governance Committee provide oversight no less frequently than quarterly addressing relevant aspects of our risk profile
Our internal risk committees meet regularly to facilitate the management of issues and review the risk profile of their responsibilities Each business area and functional area has its own committee responsible for oversight of the material risks within the area We also have internal committees that provide oversight around certain types of risks across the organization This matrix approach helps maintain comprehensive risk coverage and preserve an integrated view of risks The Enterprise Risk Management Committee comprised of members from the Executive Management Group EMG exercises enterprise wide oversight for the most significant risk profiles
Business areas and functional areas have primary responsibility for identifying assessing monitoring reporting and managing their own risks Our enterprise risk management staff independent of the business areas work closely with the dedicated risk professionals aligned to the business areas and functional areas to provide objective oversight framework enablement and aggregated risk analysis This results in a model where risk management can be closer to actual risks while also facilitating effective oversight and consolidation at the enterprise level
Internal Audit provides independent risk based objective assurance and advice designed to add value and improve our operations It helps us accomplish our objectives by bringing a systematic disciplined approach to evaluate and improve the effectiveness of risk management internal control and governance processes and by promoting continuous improvement The Chief Internal Auditor reports functionally to the Board Audit Committee and administratively to our Chief Risk Officer
Risk appetites tolerances and limits have been established from an enterprise wide and business area perspective for specific risk categories where appropriate We monitor a variety of risk metrics on an ongoing basis and take appropriate steps to manage our established risk appetites and tolerances Quarterly risk reporting provides a feedback loop between business areas functional areas our internal risk committees and the enterprise risk management function This reporting also includes perspectives on emerging risk To the extent potentially significant business activities or operational initiatives are considered analysis of the possible impact on our risk profile takes place This analysis includes but is not limited to the capital implications the impact on near term and long term earnings the ability to meet our targets with respect to return on equity liquidity debt capital cash coverage business risk and operational risk and the impact to our reputation
As of December 31 2024 we employed approximately 19 700 people across the globe including approximately 12 000 employees who work in the U S and 7 700 employees who work outside the U S Our employees work from many locations across multiple businesses and are united through a common purpose to help more people and businesses around the world gain greater access to financial security We begin by listening to our customers to understand their needs goals and barriers From there we leverage our global expertise to provide personalized insights financial tools and resources to create opportunities for more people to save invest and protect their financial futures Our purpose provides a foundation for attracting retaining and developing a workforce motivated by quality employment and purposeful work
In 2024 our commitment to enabling high performing teams remained strong We continued to attract retain and develop the talent needed to deliver our enterprise strategy Our talent initiatives focus on fostering a caring community enabling a tailored approach to life and work providing meaningful work and granting access to boundless opportunity across the enterprise Grounded in a clear and compelling employee value proposition we are confident in our ability to build inclusive teams with the global talent necessary to succeed
We invest in employee development in several ways including experiential learning growth assignments relationships with colleagues formal programming and just in time resources We have an enterprise learning platform that allows us to curate learning content aligned with enterprise priorities to ensure employees have the skills necessary to contribute to our success now and into the future These investments also ensure our employees can develop the skills most critical to their current and future career aspirations We continue to pilot new programs to create the space for employees to learn new skills and navigate their career Additional targeted development opportunities exist for leaders and employees identified as high potential talent
We know an inclusive culture makes us stronger and we remain committed to providing a work environment where every employee feels welcomed is respected and has an opportunity to thrive We are committed to providing our leaders across the globe with regular training with the goal of establishing more productive connections between teams and enabling thoughtful decision making As of December 31 2024 we had eight employee resource groups ERGs comprised of employees motivated to listen reflect and provide cultural insights Our ERGs which are open to all employees play an integral role in providing insights into our products services workplace and community In 2024 our global mentoring program continued enabling colleagues from around the world to build relationships support and educate each other In addition at our Global Inclusion Summit senior executives and employees hosted sessions on a variety of inclusion related topics
In 2024 we measured in multiple ways the progress of our efforts to attract and retain employees with a variety of lived experiences and perspectives We also surveyed employees about their sense of belonging and reported the results through our Global People Inclusion Index On an annual basis we partner with an external consultant to conduct a global pay equity study we believe the results of this study place us in a best in class category as compared to financial services industry peers
We continuously strive to evolve our human capital policies and processes To better understand and improve upon talent trends we use an enterprise people scorecard where we report employee data and insights on retention learning hiring engagement and productivity In 2024 we provided company wide exit surveys to departing employees and their leaders enabling us to better understand turnover trends and rationales Leaders conducted proactive employee stay conversations and quarterly performance check ins In addition we actively monitored our Engagement Index which is a clear indicator of employee engagement across the organization These tools allowed us to gather insights and create actions to manage turnover including tailored development opportunities and compensation increases for roles in high demand Our customer focus commitment to ethical practices continuous learning opportunities and inclusive environment drive a strong culture where employees can thrive
Our competitive total rewards offerings are critical components of our employee value proposition The programs for the broader employee population include our employee stock purchase plan and our annual incentive program For select roles we offer a long term incentive plan which is a stock based compensation plan Critical talent and high performing employees are eligible to receive stock awards under our discretionary stock program Retirement programming for U S employees includes eligibility for our 401 k plan with a robust company match Additionally employees outside our asset management business are eligible to participate in a cash balance defined benefit plan Outside the U S retirement programming varies by country and commonly exceeds statutory requirements We also offer employees a comprehensive suite of health and welfare benefits designed to offer support through all stages of their career and life We put special emphasis on employee wellbeing by offering a wide range of programming aimed at improving overall health including a state of the art wellness center at our global headquarters in Des Moines Iowa and gym reimbursement at other locations
In addition to providing competitive total rewards we provide our global workforce with a myriad of opportunities to support their communities and the causes important to them We encourage in person and virtual volunteerism through our volunteer time off policy As an example of this at the Community Learning Center housed at our global headquarters employees have ready access to a variety of volunteer opportunities including the ability to mentor students provide professional development coaching and teach future ready job skills such as coding A generous Dollars for Doers program provides employees a microgrant credit based on volunteer hours they record in our Corporate Social Responsibility platform enabling employees to contribute earned credits to any nonprofit they choose We also offer a giving program through which Principal Foundation provides a 50 match on employee monetary contributions with the match going directly to the organization to which the employee has donated
Our internet website can be found at www principal com We make available free of charge on or through our internet website access to our Annual Report on Form 10 K quarterly reports on Form 10 Q current reports on Form 8 K and amendments to those reports filed or furnished pursuant to Section 13 a or 15 d of the Securities Exchange Act of 1934 as soon as reasonably practicable after such material is filed with or furnished to the SEC These reports are also available on the SEC s website at www sec gov Also available free of charge on our internet website is our code of business conduct and ethics corporate governance guidelines and charters for the Audit Finance Human Resources and Nominating and Governance committees of the Board Also see Item 10 Directors Executive Officers and Corporate Governance
In general economic and market conditions can cause variability in the following factors demand for our products and services short term and long term interest rates inflation and deflation equity returns credit spreads liquidity of investments level of premiums and deposits level of delinquencies and defaults level of claims level of surrenders and withdrawals and foreign exchange rates The net effect of this variability can include reductions in business volumes or AUM reductions in revenues additional operating expenses reductions or volatility in net income inability to meet liquidity needs inability to access capital and increased cost of capital
We use financial models to price our products calculate reserves and other actuarial balances value our investments and determine the amount of allowances or impairments taken on our investments These models include the use of methodologies assumptions and estimates If actual experience is different than our models our financial results could be impacted This could impact the timing of our net income or adversely affect our results of operations and financial condition
Many different regulatory bodies govern our company We are required to comply with securities laws insurance regulations employee benefit plan regulations financial services regulations U S and international tax regulations environmental social and governance ESG requirements and cybersecurity and privacy regulations Complying with the various regulations can increase our cost of doing business limit our available capital or impact how we do business We could also face potential fines or reputational risk if we do not comply In addition changes in tax laws can reduce sales of certain tax advantaged products or increase our operating expenses Changes in accounting standards may adversely impact reported results of operations and financial condition Litigation and tax audits can increase costs and create adverse publicity
Business risks include risks associated with competition products fraud external business partner relationships and acquisitions In general the risks related to our business can cause variability in the following factors demand for our products and services level of premiums and deposits level of claims and level of surrenders and withdrawals The net effect of this variability can include reductions in business volumes disruptions in business operations reductions in revenues increased claims or operating expenses reduced economic activity reductions or volatility in net income or adverse effects on our results of operations and financial condition
These risks are of a general nature and include the risk of catastrophic event the risk of global climate change the risk of technological and societal changes reputational risk intellectual property risk risks associated with attracting developing and retaining qualified employees the risk of interruptions in information technology infrastructure or other systems loss of or disruption in key vendor relationships and risks associated with our enterprise risk management framework General risks can result in reductions in business volumes reductions in revenues additional operating expenses reductions or volatility in net income or adverse effects on our results of operations and financial condition
In the discussion below when providing details related to our investment portfolio we have excluded discussion of investments held as part of coinsurance with funds withheld reinsurance agreements We believe the details of the composition of our investment portfolio excluding the funds withheld are most relevant to an understanding of our risks that are pertinent to investors because all funds withheld assets support obligations and liabilities relating to the reinsurance agreements
We maintain a level of cash and securities which combined with expected cash inflows from investments and operations is believed 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 such as changes in economic conditions or changes in our claims paying ability and financial strength ratings For additional information regarding our exposure to interest rate risk and the impact of a downgrade in our financial strength ratings see risk factors entitled Changes in interest rates or credit spreads or a prolonged low interest rate environment may adversely affect our results of operations financial condition and liquidity and our net income can vary from period to period and A downgrade in our financial strength or credit ratings may increase policy surrenders and withdrawals reduce new sales terminate relationships with distributors impact existing liabilities and increase our cost of capital any of which could adversely affect our profitability and financial condition In addition mark to market adjustments on our investments and derivative instruments may lead to fluctuations in our reported capital Volatility uncertainty or disruptions in the capital or credit markets may result in the need for additional capital to maintain a targeted level of U S statutory capital relative to the NAIC s RBC requirements 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 The availability of additional financing will depend on a variety of factors such as market conditions the general availability of credit the volume of trading activities the overall availability of credit to the financial services industry our credit ratings and credit capacity as well as customers or lenders perception of our long or short term financial prospects Similarly our access to funds may be impaired if regulatory authorities or rating agencies take negative actions against us
Disruptions uncertainty or volatility in the capital and credit markets may limit our access to capital required to operate our business most significantly our insurance operations 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
In addition we maintain credit facilities with various financial institutions as a potential source of excess liquidity These facilities are in place to bridge timing in cash flows to minimize the cost of meeting our obligations particularly during periods when alternative sources of liquidity are limited Our ability to borrow funds under these facilities is conditioned on our satisfaction of covenants and other requirements contained in the facilities Our failure to comply with these covenants or the failure of lenders to fund their lending commitments would restrict our ability to access these credit facilities and consequently could limit our flexibility in meeting our cash flow needs
Our results of operations are materially affected by conditions in the global capital markets and the economy generally both in the U S and elsewhere around the world Continued adverse economic conditions may result in a decline in our AUM AUA and revenues and erosion of our profit margins In addition in the event of extreme prolonged market events and economic downturns we could incur significant losses Even in the absence of a market downturn we are exposed to substantial risk of loss due to market volatility
Because the revenues of our asset accumulation and management businesses are largely based on the value of AUM and AUA a decline in domestic and global equity bond or real estate markets will decrease our revenues Turmoil in these markets could lead investors to withdraw from these markets decrease their rates of investment or refrain from making new investments which may reduce our AUM AUA revenues and net income
Factors such as consumer spending business investment government spending the volatility and strength of the capital markets investor and consumer confidence foreign currency exchange rates inflation levels and our ability to manage inflation risk effectively all affect the business and economic environment and ultimately the amount and profitability of our business In an economic downturn characterized by higher unemployment lower family income lower corporate earnings lower business investment negative investor sentiment and lower consumer spending the demand for our financial and insurance products may be adversely affected In addition we may experience an elevated incidence of claims and lapses or surrenders of policies Our policyholders may choose to defer paying insurance premiums or stop paying insurance premiums altogether In addition reductions in employment levels of our existing employer customers may result in a reduction in membership levels and premium income for our specialty benefits products Participants within the retirement plans for which we provide administrative services may elect to reduce or stop their payroll deferrals to these plans which would reduce AUM AUA and revenues In addition reductions in employment levels may result in a decline in employee deposits into retirement plans Adverse changes in the economy could affect net income negatively and could have a material adverse effect on our business results of operations and financial condition
An economic downturn may also lead to weakening of foreign currencies against the U S dollar which would adversely affect the translation of segment pre tax operating earnings and equity of our international operations into our consolidated financial statements For further discussion on foreign currency exchange risk see Item 7A Quantitative and Qualitative Disclosures About Market Risk Foreign Currency Risk
During periods of declining interest rates or prolonged low interest rates the interest rates we earn on our assets may be lower than the rates assumed in pricing our products thereby reducing our profitability For some of our products such as GICs and funding agreements we are unable to lower the rate we credit to customers in response to the lower return we will earn on our investments In addition guaranteed minimum interest rates on our life insurance and annuity products may constrain our ability to lower the rate we credit to customers Declining interest rates may also lead to a reduction in revenues related to our trust and custody business Declining interest rates may result in increases in our reserves and other actuarial balances potentially reducing net income or other comprehensive income OCI During periods of declining interest rates borrowers may prepay or redeem mortgages and bonds that we own which would force us to reinvest the proceeds at lower interest rates Furthermore declining interest rates may reduce the rate of policyholder surrenders and withdrawals on our life insurance and annuity products thus increasing the duration of the liabilities and creating asset and liability duration mismatches Low interest rates may also increase the cost of hedging certain product features or riders Declining interest rates or a prolonged low interest rate environment may also result in changes to the discount rate used for valuing our pension and other postretirement employee benefit OPEB obligations which could negatively impact our results of operations and financial condition In addition certain statutory capital and reserve requirements are based on formulas or models that consider interest rates and a prolonged period of low interest rates may increase the statutory capital we are required to hold as well as the amount of assets we must maintain to support statutory reserves Declining interest rates may cause a decrease in the value of market risk benefit MRB assets and an increase in the value of MRB liabilities and other liabilities held at fair value on our consolidated statements of financial position potentially reducing net income or OCI
Increases in market interest rates may also adversely affect our results of operations financial condition and liquidity During periods of increasing market interest rates we may offer higher crediting rates on our insurance and annuity products to keep these products competitive Because returns on our portfolio of invested assets may not increase as quickly as current interest rates we may have to accept lower spreads thus reducing our profitability Rapidly rising interest rates may also result in an increase in policy surrenders withdrawals and requests for policy loans as customers seek to achieve higher returns In addition rising interest rates may cause a decrease in the value of financial assets held at fair value on our consolidated statements of financial position We may be required to sell assets to raise the cash necessary to respond to an increase in surrenders withdrawals and loans thereby realizing capital losses on the assets sold An increase in policy surrenders and withdrawals may also require us to accelerate amortization of our deferred acquisition cost DAC asset relating to these products Rising interest rates may also cause a decline in the value of the fixed income assets we manage resulting in a reduction in our fee revenue in the short term In addition a significant increase in interest rates may cause a reduction in the fair value of intangible assets in our reporting units potentially leading to an impairment of goodwill or other intangible assets
Our exposure to credit spreads primarily relates to market price variability and reinvestment risk associated with changes in credit spreads A widening of credit spreads would cause unrealized losses in our investment portfolio would increase losses associated with credit based derivatives we have sold that do not qualify or have not been designated for hedge accounting where we assume credit exposure and if issuer credit spreads increase as a result of fundamental credit deterioration would likely result in higher allowances Credit spread tightening will reduce net investment income associated with new purchases of fixed maturities Credit spread tightening may also cause an increase in the reported value of certain liabilities that are valued using a discount rate that reflects our own credit spread In addition market volatility may make it difficult to value certain of our securities if trading becomes less frequent As such valuations may include assumptions or estimates that may have significant period to period changes from market volatility which could have a material adverse effect on our results of operations or financial condition
We are subject to the risk that the issuers of the fixed maturities we own will default on principal and interest payments As of December 31 2024 our U S investment operations held 53 0 billion of fixed maturities or 66 of total U S invested assets of which approximately 5 were below investment grade and 164 8 million or 0 31 of our total fixed maturities were classified as either problem potential problem or restructured See Item 7 Management s Discussion and Analysis of Financial Condition and Results of Operations Investments U S Investment Operations Fixed Maturities
As of December 31 2024 the international investment operations of our fully consolidated subsidiaries held 2 5 billion of fixed maturities or 41 of total international invested assets of which 8 are government bonds Some non government bonds have been rated on the basis of the issuer s country credit rating However the ratings relationship between national ratings and global ratings is not linear with the U S The starting point for national ratings differs by country which makes the assessment of credit quality more difficult See Item 7 Management s Discussion and Analysis of Financial Condition and Results of Operations Investments International Investment Operations
Our commercial mortgage loan portfolio faces both delinquency and default risk Commercial mortgage loans of 14 7 billion represented 17 of our total invested assets as of December 31 2024 As of December 31 2024 there were no loans in the process of foreclosure in our commercial mortgage loan portfolio The performance of our commercial mortgage loan investments however may fluctuate in the future An increase in the delinquency rate of and defaults under our commercial mortgage loan portfolio could harm our financial strength and decrease our profitability
As of December 31 2024 approximately 12 3 billion or 85 of our U S investment operations commercial mortgage loans before valuation allowance had balloon payment maturities A balloon maturity is a loan with all or a meaningful portion of the loan amount due at the maturity of the loan The default rate on commercial mortgage loans with balloon payment maturities has historically been higher than commercial mortgage loans with a fully amortizing loan structure Since a significant portion of the principal is repaid at maturity the amount of loss on a default is generally greater than fully amortizing commercial mortgage loans
Our investment portfolio includes equity securities trading securities and derivative instruments that are reported at fair value on the consolidated statements of financial position with changes in fair value reported in net income Mark to market adjustments on these investments may reduce our profitability or cause our net income to vary from period to period We anticipate that acquisition and investment activities may increase the number and magnitude of these investments in the future
If we require significant amounts of cash on short notice we may have difficulty selling these investments in a timely manner be forced to sell them for less than we otherwise would have been able to realize or both The reported value of our relatively illiquid types of investments our investments in the asset classes described above and at times our high quality generally liquid asset classes do not necessarily reflect the lowest possible price for the asset If we were forced to sell certain of our assets in the current market there can be no assurance we will be able to sell them for the prices at which we have recorded them and we may be forced to sell them at significantly lower prices
We use derivative instruments to hedge various risks we face in our businesses See Item 7A Quantitative and Qualitative Disclosures About Market Risk We enter into a variety of derivative instruments with a number of counterparties in the financial services industry including brokers and dealers commercial banks investment banks clearinghouses exchanges and other institutions For transactions where we are in the money we are exposed to credit risk in the event of default of our counterparty We establish collateral agreements with nominal thresholds for a large majority of our counterparties to limit our exposure However our credit risk may be exacerbated when the collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount of the derivative exposure With regard to our derivative exposure we have over collateralization requirements on the portion of collateral we hold based on the risk profile of the assets posted as collateral We also have exposure to these financial institutions in the form of unsecured debt instruments and equity investments Such losses or impairments to the carrying value of these assets may materially and adversely affect our business and results of operations
Many of our derivative transactions with financial and other institutions specify the circumstances under which the parties are required to post collateral We are also required to post collateral in connection with funding agreements with the FHLB Des Moines reinsurance agreements and various other transactions The amount of collateral we may be required to post under these agreements may increase under certain circumstances which could adversely affect our liquidity In addition under the terms of some of our transactions we may be required to make payment to our counterparties related to any decline in the market value of the specified assets Such payments could have an adverse effect on our liquidity Furthermore with respect to any such payments we will have unsecured risk to the counterparty as these amounts are not required to be segregated from the counterparty s other funds are not held in a third party custodial account and are not required to be paid to us by the counterparty until the termination of the transaction
Liability under environmental protection laws resulting from our commercial mortgage loan portfolio and real estate investments may harm our financial strength and reduce our profitability Under the laws of several states and other jurisdictions contamination of a property may give rise to a lien on the property to secure recovery of the costs of cleanup In some states this kind of lien has priority over the lien of an existing mortgage against the property which would impair our ability to foreclose on that property should the related loan be in default In addition under the laws of some states and under the U S Comprehensive Environmental Response Compensation and Liability Act of 1980 we may be liable for costs of addressing releases or threatened releases of hazardous substances that require remedy at a property securing a mortgage loan held by us if our agents or employees have become sufficiently involved in the hazardous waste aspects of the operations of the related obligor on that loan regardless of whether or not the environmental damage or threat was caused by the obligor We also may face this liability after foreclosing on a property securing a mortgage loan held by us This may harm our financial strength and decrease our profitability
Commercial mortgage lending in the state of California accounted for 24 or 3 4 billion of our U S investment operations commercial mortgage loan portfolio before valuation allowance as of December 31 2024 Due to this concentration of commercial mortgage loans in California we are exposed to potential losses resulting from the risk of an economic downturn in California as well as to catastrophes including but not limited to earthquakes fires drought extreme heat flooding and tsunamis that may affect the region Like other lenders property insurance is required for all borrowers on which we make commercial mortgage loans Insurance coverage typically includes real property business interruption terrorism wind hail fire named storm flood and others as applicable Earthquake insurance is required for those California assets with a high risk scenario expected loss percentage as determined by an engineering report we obtain for each property Maintaining appropriate insurance coverage is a requirement by us as the lender and is monitored appropriately If economic conditions in California deteriorate or catastrophes occur we may in the future experience delinquencies or defaults on the portion of our commercial mortgage loan portfolio located in California which may harm our financial strength and reduce our profitability See Item 7 Management s Discussion and Analysis of Financial Condition and Results of Operations Investments U S Investment Operations Mortgage Loans
Fixed maturities that are classified as available for sale AFS are reported on the consolidated statements of financial position at fair value Unrealized gains or losses on AFS securities excluding those in fair value hedging relationships are recognized as a component of accumulated other comprehensive income AOCI and are therefore excluded from net income Our U S investment operations had gross unrealized losses on fixed maturities of 4 246 2 million pre tax as of December 31 2024 and the component of gross unrealized losses for securities in a continuous unrealized loss position for over twelve months and for which an allowance for credit loss has not been recorded was 4 081 7 million pre tax The accumulated change in fair value of the AFS securities is recognized in net income when the gain or loss is realized upon the sale of the asset or in the event that the decline in fair value requires an allowance for credit loss Realized losses or credit losses may have a material adverse impact on our net income in a particular quarterly or annual period
We are exposed to foreign currency risk in our international operations as we sell products denominated in various local currencies and generally invest the associated assets in local currencies For diversification purposes assets backing the products may be partially invested in non local currencies In our U S operations we also issue foreign currency denominated funding agreements to nonqualified investors in the institutional market or invest in foreign currency denominated investments The associated foreign currency exchange risk in each instance is hedged or managed to specific risk tolerances Although our investment and hedging strategies limit the effect of currency exchange rate fluctuation on operating results weakening of foreign currencies against the U S dollar would adversely affect the translation of the results of our international operations into our consolidated financial statements For further discussion on foreign currency exchange risk see Item 7A Quantitative and Qualitative Disclosures About Market Risk Foreign Currency Risk
Our valuation of investments and the determinations of the amount of allowances and impairments taken on our investments may include methodologies estimations and assumptions that are subject to differing interpretations and if changed could materially adversely affect our results of operations or financial condition
Fixed maturities equity securities and derivatives represent most assets and liabilities reported at fair value on our consolidated statements of financial position excluding separate account assets and market risk benefit assets and liabilities Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date an exit price Fair value estimates are made based on available market information and judgments about the financial instrument at a specific point in time Considerable judgment is often required to develop estimates of fair value and the use of different assumptions or valuation methodologies may have a material effect on the estimated fair value amounts
During periods of market disruption including periods of significantly rising or high interest rates rapidly widening credit spreads or illiquidity it may be difficult to value certain securities for example collateralized mortgage obligations and collateralized debt obligations if trading becomes less frequent and or market data becomes less observable There may be certain asset classes that were in active markets with significant observable data that become illiquid due to the current financial environment In such cases the valuation process may require more subjectivity and management judgment As such valuations may include inputs and assumptions that are less observable or require greater estimation as well as valuation methods that require greater estimation which could result in values that are different from the value at which the investments may be ultimately sold Further rapidly changing credit and equity market conditions could materially impact the valuation of securities as reported within our consolidated financial statements and the period to period changes in value could vary significantly Decreases in value may have a material adverse effect on our results of operations or financial condition
The determination of the amount of allowances and impairments varies by investment type and is based upon our periodic evaluation and assessment of known and inherent risks associated with the respective asset class Such evaluations and assessments require significant judgment and are revised as conditions change and new information becomes available Additional impairments may need to be taken or allowances provided for in the future and the ultimate loss may exceed management s current loss estimates
Additionally our management considers a wide range of factors about the instrument issuer and uses its best judgment in evaluating the cause of the decline in the estimated fair value of the instrument and in assessing the prospects for recovery Inherent in management s evaluation of the instrument are assumptions and estimates about the operations of the issuer and its future earnings potential For further information regarding our impairment and allowance methodologies see Item 7 Management s Discussion and Analysis of Financial Condition and Results of Operations Investments U S Investment Operations under the captions Fixed Maturities and Mortgage Loans and Item 7 Management s Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies and Estimates Valuation and Allowance for Credit Loss of Fixed Income Investments
Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates expected to be in effect during the years in which the basis differences reverse We are required to evaluate the recoverability of our deferred tax assets each quarter and establish a valuation allowance if necessary to reduce our deferred tax assets to an amount that is more likely than not to be realizable In determining the need for a valuation allowance we consider many factors including future reversals of existing taxable temporary differences future taxable income exclusive of reversing temporary differences and carryforwards taxable income in prior carryback years and implementation of any feasible and prudent tax planning strategies management would employ to realize the tax benefit
Inherent in the provision for income taxes are estimates regarding the deductibility of certain items the timing of income and expense recognition and the current or future realization of operating losses capital losses and certain tax credits In the event these estimates differ from our prior estimates due to the receipt of new information we may be required to significantly change the provision for income taxes recorded in the consolidated financial statements Any such change could significantly affect the amounts reported in the consolidated financial statements in the year these estimates change Future enacted changes in applicable tax rates as well as the tax base could lead to adverse effects in the consolidated financial statements within the year of enactment A significant decline in value of assets incorporated into our tax planning strategies could lead to an increase of our valuation allowance on deferred tax assets having an adverse effect on current and future results
The profitability of our insurance and annuity products depends significantly upon the extent to which our actual experience is consistent with the assumptions used in setting prices for our products and establishing liabilities for future insurance and annuity policy benefits and claims The premiums we charge and the liabilities we hold for future policy benefits are based on assumptions reflecting several factors including the amount of premiums we will receive in the future rate of return on assets we purchase with premiums received expected claims mortality morbidity lapse rates and expenses However due to the nature of the underlying risks and the high degree of uncertainty associated with the determination of the liabilities for unpaid policy benefits and claims we cannot precisely determine the amounts we will ultimately pay to settle these liabilities the timing of such payments or whether the assets supporting the liabilities together with any future premiums will be sufficient to satisfy the liabilities As a result we may experience volatility in the level of our profitability and our reserves from period to period To the extent that actual experience is less favorable than our underlying assumptions we may have to update our assumptions and increase our liabilities which may harm our financial strength and reduce our profitability
Our results of operations may also be adversely impacted if our actual investment earnings differ from our pricing and reserve assumptions Changes in economic conditions may lead to changes in market interest rates or changes in our investment strategies either of which could cause our actual investment earnings to differ from our pricing and reserve assumptions
Amortization of our DAC asset and other actuarial balances depends on several assumptions including but not limited to mortality and policy lapse Due to the uncertainty associated with establishing these assumptions we cannot with precision determine the exact pattern of amortization To the extent actual experience emerges less favorably than expected the amortization pattern of our DAC asset and other actuarial balances may be adjusted which may impact the timing of our net income
Our businesses are subject to comprehensive regulation and supervision throughout the U S and in the international markets in which we operate We are also impacted by federal legislation and administrative policies in areas such as securities laws employee benefit plan regulations financial services regulations U S federal taxation and international taxation Changes in laws or regulations or the interpretation thereof could significantly increase our compliance costs and reduce our profitability Failure to comply with applicable regulations may expose us to significant penalties the suspension or revocation of licenses to conduct business and reputational damage Certain Executive orders could affect our business operations regional footprint risk management strategies and investments and increase our costs of compliance
State insurance regulators federal regulators and the NAIC continually reexamine existing laws and regulations and may impose changes in the future New interpretations of existing laws and the passage of new legislation may harm our ability to sell new policies increase our claims exposure on policies we issued previously and adversely affect our profitability and financial strength
State insurance guaranty associations have the right to assess insurance companies doing business in their state for funds to help pay the obligations of insolvent insurance companies to policyholders and claimants Because the amount and timing of an assessment is beyond our control the liabilities we have established for these potential assessments may not be adequate
The NAIC regularly reviews and updates its U S statutory reserve and RBC requirements Changes to these requirements may increase the amount of reserves and capital our U S insurance companies are required to hold and may adversely impact Principal Life s ability to pay dividends or other distributions to its parent See Item 7 Management s Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources for a discussion of regulatory restrictions on Principal Life s ability to pay dividends or other distributions In addition changes in statutory reserve or RBC requirements may adversely impact our financial strength ratings See the risk factor entitled A downgrade in our financial strength or credit ratings may increase policy surrenders and withdrawals reduce new sales terminate relationships with distributors impact existing liabilities and increase our cost of capital any of which could adversely affect our profitability and financial condition for a discussion of risks relating to our financial strength ratings
The NAIC implemented a principle based reserving PBR approach to valuation of life insurance and variable annuities Regulators plan to implement a new economic scenario generator for use in PBR models as early as 2026 In addition PBR for non variable annuities may be implemented as early as 2026 The ultimate financial impact of these changes is uncertain but they could result in more volatile and less predictable reserve and capital levels for these products
We have implemented or may implement at any time reinsurance transactions utilizing affiliated and unaffiliated reinsurers to reinsure or finance a portion of the reserves for certain products Our ability to enter new reinsurance or reserve financing transactions will continue to be dependent on the cost and forms of transactions available in the market and our ability to obtain required regulatory approvals For additional information regarding our use of affiliated reinsurance transactions see Item 8 Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Note 19 Statutory Insurance Financial Information
Our international insurance businesses are also subject to comprehensive regulation and supervision from central and or local governmental authorities in each country in which we operate New interpretations of existing laws and regulations or the adoption of new laws and regulations may harm our international businesses increase the cost of compliance and reduce our profitability in those businesses
The International Association of Insurance Supervisors has adopted its common framework for the supervision of Internationally Active Insurance Groups IAIGs We currently are not designated as an IAIG If we were so designated in the future we may be subject to supervision and capital requirements beyond those applicable to any competitors without those designations These international frameworks may influence the regulatory capital requirements in the jurisdictions in which we operate potentially leading to an increase in our capital requirements
Our asset management and accumulation and life insurance businesses are subject to various levels of regulation under federal state and international securities laws These laws and regulations are primarily intended to protect investors in the securities markets or investment advisory or brokerage clients and generally grant supervisory agencies and self regulatory organizations broad administrative powers including the power to limit or restrict the conduct of business for failure to comply with such laws and regulations In addition we are subject to local laws and regulations in the global jurisdictions in which we offer or provide asset management services and products Changes to these laws or regulations or the interpretation thereof that restrict the conduct of our business could significantly increase our compliance costs and reduce our profitability
We provide products and services to certain employee benefit plans that are subject to ERISA or the Internal Revenue Code of 1986 as amended The U S Congress has from time to time considered legislation relating to changes in ERISA to permit application of state law remedies such as consequential and punitive damages in lawsuits for wrongful denial of benefits which if adopted could increase our liability for damages in future litigation In addition reductions in contribution levels to defined contribution plans may decrease our profitability
We collect process store share disclose and use personal information from and about our customers employees and plan participants as well as our website mobile and application users Any actual or perceived failure by us or our service providers to comply with our privacy policies privacy related obligations to customers employees or third parties data disclosure consent obligations and data protection obligations may result in governmental enforcement actions litigation or public statements critical of us Such actual or perceived failures could also cause our customers suppliers and employees to lose trust in us which may have an adverse effect on our business See the risk factor entitled Loss of or disruption in key vendor relationships and services or failure of a vendor to protect information of our customers or employees could adversely affect our business or result in losses for further discussion of third party impacts
We are subject to numerous federal state and international regulations regarding the privacy and security of personal information These laws vary widely by jurisdiction The laws and regulations that affect our business include but are not limited to the EU GDPR U S federal state and local data protection laws such as the New York Department of Financial Services Part 500 cybersecurity requirements for financial services companies the California Consumer Privacy Act and California Privacy Rights Act China s Cybersecurity Law and the China Personal Information Protection Law Ongoing global developments in artificial intelligence AI regulations such as the EU AI Act Colorado AI Act and other AI related legislation will continue to increase and require attention and investments Regulations such as these which are designed to protect privacy and prevent misuse of personal information are complex and change frequently The public consumer and privacy advocates legislatures and regulators are increasingly concerned about the collection use sharing and cross border transfer of personal data especially personal information that may be deemed sensitive such as U S Social Security Numbers other federal identifiers non U S financial information behavioral data biometric data and health data Additional legislative or regulatory action in the United States and globally could further regulate our collection use sharing and other processing of personal data Changes in existing cybersecurity and privacy regulations or the enactment of new regulations may increase our compliance costs and failure to comply with these regulations may lead to reputational damage fines or civil damages and increased regulatory scrutiny and oversight
Our financial and operational results could be impacted by emerging risk and changes to the regulatory landscape in areas like ESG requirements While we closely monitor and respond to topics like social environmental and demographic changes that include longer lifespans income and wealth inequalities environmental challenges and opportunities to expand global access to the financial system across all segments of the population updated and changing regulatory and societal environment requirements could impact financial and operational results
Changes and uncertainty in U S and non U S legislation policy or regulation regarding climate risk management or other ESG practices may result in higher regulatory costs compliance costs and increased capital expenditures Changes in regulations may also impact market conditions and our financial results leading to realized or unrealized losses and decreased revenues Actual or perceived failure to adequately address ESG expectations of our various stakeholders which continue to evolve and may at times be in conflict could lead to a tarnished reputation loss of customers and clients and could negatively impact our access to capital
Many of the insurance annuity and investment products we issue receive favorable tax treatment under current U S federal income tax laws Changes in U S federal income tax laws could reduce or eliminate the tax advantages of certain of our products thus making these products less attractive to our customers This may lead to a reduction in sales and deposits which may adversely impact our profitability
In addition we benefit from certain tax items including but not limited to dividends received deductions tax credits such as foreign tax credits tax exempt bond interest and insurance reserve deductions From time to time the U S Congress as well as foreign state and local governments consider legislative changes that could reduce or eliminate the benefits associated with these and other tax items The Organisation for Economic Co operation and Development has released proposed policies around base erosion and profit shifting and modernizing global tax systems originally designed to only account for physical presence Our profitability could be negatively impacted as legislation is adopted by participating countries We continue to evaluate the impact potential tax reform proposals may have on our future results of operations and financial condition
On August 16 2022 the Inflation Reduction Act of 2022 IRA 2022 was enacted by the U S government IRA 2022 contains several provisions including the implementation of a new corporate alternative minimum tax CAMT and an excise tax on stock repurchases by certain corporations which became effective January 1 2023 Uncertainty remains regarding the continued implementation of and potential adjustments to IRA 2022 and until regulations are finalized it remains uncertain as to whether IRA 2022 will result in a material effect on our business operations profitability or our ability to engage in certain capital expenditures
We are an insurance holding company whose assets include all the outstanding shares of the common stock of Principal Life and other subsidiaries Our ability to pay dividends to our stockholders make share repurchases and meet our obligations including paying operating expenses and any debt service depends upon the receipt of dividends or other distributions from Principal Life Iowa insurance laws impose limitations on the ability of Principal Life to pay dividends or make other distributions to its parent Any inability of Principal Life to pay dividends or make other distributions in the future may cause us to be unable to pay dividends to our stockholders and meet our other obligations See Item 7 Management s Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources for a discussion of regulatory restrictions on Principal Life s ability to pay dividends or make other distributions
Our consolidated financial statements are prepared in conformity with U S generally accepted accounting principles U S GAAP From time to time we are required to adopt new or revised accounting standards issued by the Financial Accounting Standards Board The required adoption of future accounting standards may adversely affect our reported results of operations and financial condition and may result in significant incremental costs associated with initial implementation and ongoing compliance For a discussion of the impact of accounting pronouncements issued but not yet implemented see Item 8 Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Note 1 Nature of Operations and Significant Accounting Policies
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 insurance and specialty benefits products and services and our investment activities We are from time to time also involved in various governmental regulatory and administrative proceedings and inquiries
Legal liability or adverse publicity with respect to current or future legal or regulatory actions whether or not involving us may affect our financial strength or reduce our profitability For further discussion on litigation and regulatory investigation risk see Item 8 Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Note 16 Contingencies Guarantees Indemnifications and Leases under the caption Litigation and Regulatory Contingencies and Item 8 Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Note 14 Income Taxes under the caption Other Tax Information
We are subject to income taxes in the United States as well as many other jurisdictions In determining our provisions for income taxes and our accounting for tax related matters in general we are required to exercise judgment We regularly make estimates where the ultimate tax determination is uncertain The final determination of any tax audit appeal of the decision of a taxing authority tax litigation or similar proceedings may be materially different from that reflected in our historical financial statements The assessment of additional taxes interest and penalties could be materially adverse to our current and future results of operations and financial condition
State laws and our certificate of incorporation and by laws may delay defer prevent or render more difficult a takeover attempt that some stockholders might consider in their best interests For instance they may prevent our stockholders from receiving the benefit from any premium to the market price of our common stock offered by a bidder in a takeover context Even in the absence of a takeover attempt the existence of these provisions may adversely affect the prevailing market price of our common stock if they are viewed as discouraging takeover attempts in the future
State laws and our certificate of incorporation and by laws may also make it difficult for stockholders to replace or remove our management These provisions may facilitate management entrenchment which may delay defer or prevent a change in our control which may not be in the best interests of our stockholders
Retirement and Income Solutions segment and Principal Asset Management segment primarily compete with asset managers wealth managers banks mutual funds institutional trust companies broker dealers recordkeepers and insurers Our ability to increase and retain AUM is directly related to the quality of our recordkeeping system and services and the performance of our investments as measured against market averages and the performance of our competitors Even when securities prices are generally rising performance can be affected by investment styles
Benefits and Protection segment primarily competes with other insurance companies In the event competitors charge lower premiums or fees for substantially similar products we may face pressure to lower our prices to attract and retain customers and distributors Reductions in the premiums and fees we charge may adversely affect our revenues and profitability
A M Best Fitch Moody s and S P publish financial strength ratings on U S life insurance companies as well as some of our international insurance companies These ratings indicate the applicable rating agency s opinion regarding an insurance company s ability to meet contractholder and policyholder obligations These rating agencies also assign credit ratings on non life insurance entities such as PFG and Principal Financial Services Inc PFS Credit ratings indicate the applicable rating agency s opinion regarding 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
Ratings are important factors in establishing the competitive position of insurance companies and maintaining public confidence in products being offered Our ratings could be downgraded at any time without advance notice by any rating agency A ratings downgrade or the potential for such a downgrade could among other things
Revenues from our asset management and accumulation products are primarily fee based Our asset based fees are typically calculated as a percentage of the market value of AUM Our asset management and accumulation clients may elect to terminate their relationship with us or withdraw funds generally on short notice Client terminations and withdrawals may be driven by a variety of factors including economic conditions investment performance investor preferences or changes in our reputation in the marketplace Significant terminations or withdrawals may reduce our AUM thus adversely affecting our revenues and profitability
In addition fee levels can vary significantly among different types of investments We generally earn higher fees on liquid alternatives and equity investments vs fixed income investments and on actively managed investments vs indexed or passive investment strategies Therefore our fee revenue is impacted by both the value and the composition of our AUM Investor preferences with respect to asset classes and investment strategies may shift over time due to market conditions tax law changes regulatory changes and various other factors Changes in the composition of our AUM may adversely affect our revenues and profitability
Certain of our variable annuity products include guaranteed minimum death benefits and or guaranteed minimum withdrawal benefits We use derivative instruments to attempt to mitigate changes in the exposure related to interest rate equity market and volatility movements and the volatility of net income associated with the liabilities for such products However we remain liable for the guaranteed benefits in the event that derivative counterparties are unable or unwilling to pay The liability exposure and volatility of net income or OCI may also be influenced by changes in market credit spreads reflecting our own creditworthiness for which we do not attempt to hedge In addition we are subject to the risk that hedging and other management procedures prove ineffective or that unanticipated policyholder behavior or mortality combined with adverse market events produces economic losses beyond the scope of the risk management techniques employed These individually or collectively may have a material adverse effect on our net income financial condition or liquidity We are also subject to the risk that the cost of hedging these guaranteed minimum benefits increases as implied volatilities increase and or interest rates decrease resulting in a reduction to net income
Our international businesses face political legal operational and other risks differentiated from those currently faced in our operations in the U S We face the risk of discriminatory regulation nationalization or expropriation of assets price controls and exchange controls or other restrictions that prevent us from transferring funds from these operations out of the locations in which they operate or converting local currencies we hold into U S dollars or other currencies Our international businesses could also be negatively impacted by rising geopolitical tension competing legal requirements and increased strategic competition between the U S and other countries such as China In addition our international businesses face the risk of political instability and social unrest which heightens our risks as those may lead to disruptions to those businesses and to local financial markets and commerce and reduced economic activity in the countries in which we operate Some of our international businesses are and are likely to continue to be in emerging or potentially volatile markets For example recent judicial and regulatory reforms in Mexico may create uncertainty for investors regarding the rule of law The Chilean government is taking its first steps to reform the country s pension system which includes a proposed increase in contributions and modification of pension fund administration The impact on the overall competitive environment for private pension fund managers is still to be determined In addition we rely on local staff including local sales forces in those locations where there is a risk and we may encounter labor problems with local staff especially in locations where workers associations and trade unions are strong
Our policyholders may submit fraudulent requests for claim payments This can result in higher claims expense and higher operational expenses associated with preventing and detecting fraudulent claim requests and other fraudulent activities Our retirement product participants and individual product owners may themselves be the target of theft by fraudulent means by threat actors This can result in financial risks in circumstances where we make our customers and participants whole if the theft occurred by a defeat of our fraud prevention and detection processes Finally successful thefts can also result in reputational and regulatory risks if we fail to adopt reasonable processes and systems needed to safeguard our customers assets
We participate in joint ventures primarily in our international businesses and real estate investment operations In these joint ventures we lack complete management and operational control over the operations and our joint venture partners may have objectives that are not fully aligned with our interests These factors may limit our ability to take action to protect or increase the value of our investment in the joint venture
In connection with its conversion in 1998 into a stock life insurance company Principal Life established an accounting mechanism known as a Closed Block for the benefit of participating ordinary life insurance policies that had a dividend scale in force on July 1 1998 We allocated assets to the Closed Block as of July 1 1998 in an amount such that we expected the cash flows together with anticipated revenues from the policies in the Closed Block to be sufficient to support the Closed Block business including payment of claims certain direct expenses charges and taxes and to provide for the continuation of aggregate dividend scales in accordance with the 1997 policy dividend scales if the experience underlying such scales continued and to allow for appropriate adjustments in such scales if the experience changed We will continue to pay guaranteed benefits under the policies included in the Closed Block in accordance with their terms The Closed Block assets cash flows generated by the Closed Block assets and anticipated revenues from policies included in the Closed Block may not be sufficient to provide for the benefits guaranteed under these policies If they are not sufficient we must fund the shortfall Even if they are sufficient we may choose for business reasons to support dividend payments on policies in the Closed Block with our general account funds
The Closed Block assets cash flows generated by the Closed Block assets and anticipated revenues from policies in the Closed Block will benefit only the holders of those policies In addition to the extent these amounts are greater than the amounts estimated at the time we funded the Closed Block dividends payable in respect of the policies included in the Closed Block may be greater than they would have been in the absence of a Closed Block Any excess net income will be available for distribution over time to Closed Block policyholders but will not be available to our stockholders See Item 8 Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Note 6 Closed Block for further details
We cede life annuity disability medical and long term care insurance to other insurance companies through reinsurance See Item 8 Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Note 12 Reinsurance The collectability of reinsurance recoverables is largely dependent on the solvency of the individual insurers We remain liable to the policyholder even if the reinsurer defaults on its obligations with respect to the ceded business In addition a reinsurer s insolvency may cause us to lose our reserve credits on the ceded business in which case we would be required to establish additional reserves
The premium rates we charge are based in part on the assumption that reinsurance will be available at a certain cost Most of our reinsurance contracts contain provisions that limit the reinsurer s ability to increase rates on in force business however some do not If a reinsurer raises the rates it charges on a block of in force business our profitability may be negatively impacted if we are not able to pass the increased costs on to the customer If reinsurers raise the rates they charge on new business we may be forced to raise the premiums we charge which could have a negative impact on our competitive position
We have acquired businesses in the past and expect to continue to do so in the future We face a number of risks arising from future acquisition transactions including difficulties in integrating the acquired business into our operations difficulties in assimilating and retaining employees and intermediaries difficulties in retaining the existing customers of the acquired entity unforeseen liabilities that arise in connection with the acquired business unfavorable market conditions that could negatively impact our growth expectations for the acquired business and sustained declines in the equity market that could reduce the AUM and fee revenues for certain acquired businesses These risks may prevent us from realizing the expected benefits from future acquisitions and could result in the impairment of goodwill and or intangible assets recognized at the time of acquisition
We have coinsurance with funds withheld reinsurance agreements with Talcott Life Annuity Re Ltd a limited liability company organized under the laws of the Cayman Islands and an affiliate of Talcott Resolution Life Inc a subsidiary of Sixth Street pursuant to which we ceded our in force U S retail fixed annuity and ULSG blocks of business We face a number of ongoing risks including managing the relationships under the reinsurance agreements managing a smaller portfolio of general account assets and managing relationships with our distribution channels These risks may prevent us from realizing the expected benefits from the reinsurance agreements and could result in the recapture of the ceded business upon the occurrence and continuation of certain events and higher costs related to managing the reinsured blocks of business
The occurrence of pandemic disease man made disasters such as terrorist attacks and military actions and natural disasters could adversely affect our operations net income or financial condition For example our mortality and morbidity experience could be adversely impacted by a catastrophic event In addition a severe catastrophic event may cause significant volatility in global financial markets disruptions to commerce and reduced economic activity Ongoing economic disruptions may lead to declines and volatility in interest rates or equity prices either of which could adversely affect our results of operations and financial condition The resulting macroeconomic conditions could adversely affect our cash flows as well as the value and liquidity of our invested assets We may also experience operational disruptions if our employees or third party service providers are unable or unwilling to work due to a catastrophic event
Atmospheric concentrations of carbon dioxide and other greenhouse gases have increased dramatically since the industrial revolution resulting in a gradual increase in global average temperatures and an increase in the frequency and severity of natural disasters These trends are expected to continue in the future and have the potential to impact nearly all sectors of the economy We cannot predict the long term impacts of climate change but we will continue to monitor new developments in the future
Technological advances innovation in the financial services industry and societal changes may impact our business model and competitive position These changes led by rapidly evolving AI capabilities may lead to significant changes in the marketing distribution underwriting and pricing of financial services products In addition technological and societal changes may lead to changes in customers preferences as to how they want to interact with us and the types of products they want to buy We may need to change our distribution channels our customer service model or our product offerings to accommodate evolving customer preferences Implementing these changes may require significant expenditures To the extent our competitors are more successful than us at adapting to technological changes and evolving customer preferences our competitive position and profitability may be adversely impacted
Advances in medical technology may also adversely impact our profitability Increases in the availability and accuracy of genetic testing may increase our exposure to anti selection risk In addition medical advances may lead to increased longevity As a result we may be required to pay annuity benefits over a longer period of time than we had projected thereby reducing the profitability of our annuity products
Our continued success is dependent upon our ability to earn and maintain the trust and confidence of customers distributors advisors employees and other stakeholders Damage to our reputation may arise from a variety of sources including but not limited to litigation or regulatory actions compliance failures employee misconduct conduct of third parties working on our behalf cybersecurity incidents or other fraudulent activities unfavorable press coverage and unfavorable comments on social media Adverse developments within our industry may also by association negatively impact our reputation or result in greater regulatory or legislative scrutiny and increased operating costs Any damage to our reputation could adversely affect our ability to attract and retain customers distributors and employees potentially leading to a reduction in our revenues and profitability
We rely on a combination of contractual rights and copyright trademark patent and trade secret laws to establish and protect our intellectual property Third parties may infringe or misappropriate our intellectual property We may have to litigate to enforce and protect our copyrights trademarks patents trade secrets and know how or to determine their scope validity or enforceability which represents a diversion of resources that may be significant in amount and may not prove successful The loss of intellectual property protection or the inability to secure or enforce the protection of our intellectual property assets could have a material adverse effect on our business and our ability to compete
We also may be subject to costly litigation in the event another party alleges our operations or activities infringe upon such other party s intellectual property rights Third parties may have or may eventually be issued patents or other protections that could be infringed by our products methods processes or services or could otherwise limit our ability to offer certain product features Any party that holds such a patent could make a claim of infringement against us We may also be subject to claims by third parties for breach of copyright trademark license usage rights or misappropriation of trade secret rights Any such claims and any resulting litigation could result in significant liability for damages If we were found to have infringed or misappropriated a third party patent or other intellectual property rights we could incur substantial liability and in some circumstances could be enjoined from providing certain products or services to our customers or utilizing and benefiting from certain methods processes copyrights trademarks trade secrets or licenses or alternatively could be required to enter into costly licensing arrangements with third parties all of which could have a material adverse effect on our business results of operations and financial condition
Our continued success is largely dependent on our ability to attract develop and retain qualified employees We face intense competition in attracting and retaining key employees including investment marketing finance actuarial data analytics information security technology client service and other professionals If we are unable to attract develop and retain qualified employees our results of operations and financial condition may be adversely impacted
We distribute our asset accumulation asset management life insurance and specialty benefits products and services through a variety of distribution channels including our own internal digital channels sales representatives independent brokers banks broker dealers and other third party marketing organizations We must attract and retain sales representatives to sell our products and digital professionals to build and enhance our customers digital experience Strong competition exists among financial services companies for these roles We compete with other financial services companies for sales representatives primarily on the basis of our financial position support services and compensation and product features If we are unable to attract and retain sufficient sales representatives to sell our products our ability to compete and revenues from new sales would suffer
Our ability to increase and retain AUM is directly related to the performance of our investments as measured against market averages and the performance of our competitors If we are unable to attract and retain qualified portfolio managers we may face reduced sales and increased cash outflows in our asset accumulation and asset management businesses
Interruptions in information technology infrastructure or other internal or external systems used for our business operations or a failure to maintain the confidentiality integrity or availability of data residing on such systems could disrupt our business damage our reputation and adversely impact our profitability
We rely on external infrastructure proprietary information technology and third party systems and services to conduct business including customer service marketing and sales activities customer relationship management producing financial statements and technology data centers In addition we store and process confidential and proprietary business information on both company owned and third party and or vendor managed systems including cloud service providers We increasingly rely on the internet to conduct business and may be adversely impacted by outages in critical infrastructure such as electric grids undersea cables satellites or other communications used by us or our third parties
Financial services companies are regularly targeted by cyber criminals and face various cybersecurity risks resulting in unauthorized access theft of funds extortion disruption or degradation of service or other damage These attacks may take a variety of forms including web application attacks denial of service attacks ransomware malware and social engineering including phishing We may also be adversely impacted by successful cyberattacks of partners vendors and others in our supply chain with whom we conduct business or share information Information security incidents may also occur due to the failure to control access to and use of sensitive systems or information by our workforce The tactics and techniques used by cyber criminals to obtain unauthorized access or otherwise impact our business negatively change frequently and we and our supply chain partners may be unable to anticipate their schemes to implement preventative measures The failure of our controls such as policies procedures monitoring software testing incident response and backup plans designed to prevent or limit the effect of failure inadvertent use or abuse could result in disruptions reputational damage legal liability regulatory actions remediation costs and competitive disadvantage
We increasingly rely on services and products provided by many vendors in the United States and abroad These include for example vendors of computer hardware and software and vendors of services In the event that one or more of our vendors suffers a bankruptcy or otherwise becomes unable to continue to provide products or services or fails to protect personal information of our customers or employees we may suffer operational impairments reputational damage and financial losses
We utilize an integrated risk management framework which is designed to manage material risks within established thresholds Nonetheless our policies and procedures may not be fully effective in identifying or mitigating every risk to which we are exposed Many of our methods for managing and mitigating risk rely on models and assumptions that are based in part on observed historical data As a result these methods models or assumptions may not accurately predict future exposures which may be significantly greater than our historical measures indicate We may be exposed to unanticipated risks as a result of changes in market conditions new products or new business strategies catastrophes or other unforeseen circumstances If our risk management framework proves ineffective we may suffer unexpected losses which may adversely affect our results of operations and financial condition
Risk management is an essential component of our culture and business model Guarding against the specific risks posed by cybersecurity threats has been and will continue to be very dynamic in nature requiring that we remain agile and aware of internal and external changes We recognize that cybersecurity threats can be among the most critical risks facing large companies As a result cybersecurity is treated as a Board level matter and overseen by the Board However both the Board and management have an integral role in the identification assessment and management of cybersecurity risk
The Board oversees management s execution and performance of its risk management responsibilities which includes cybersecurity threats The Board receives at least one cybersecurity report every quarter from our Chief Information Officer our Chief Information Security Officer our Chief Risk Officer or other professionals The Board also reviews and approves the business resiliency and information security programs intended to guard against cybersecurity and related risks Lastly the Board receives input on cybersecurity issues from external entities such as our independent auditor regulators and consultants Each of these steps further the Board s efforts to ensure we have established and are proactively maintaining an enterprise wide cybersecurity risk program with appropriate policies practices and controls designed to ensure resiliency in the face of emerging threats
Management holds relevant expertise in assessing and managing cybersecurity threats Numerous members of management and employees across the information security and risk functions hold nationally recognized designations and certifications including the Certified Information Systems Security Professional designation Global Information Assurance Certifications and Amazon Web Services Cloud Certifications We also provide role based security training to workers with assigned information security related roles and responsibilities This includes topics on social engineering tactics and other general threats posed for system compromise and data loss The initiatives and processes discussed further below also contribute to the expertise and experience of management
The framework for our overall process for managing risk encompasses the management of risks posed by cybersecurity threats Management s role responsibilities and processes for identifying assessing monitoring reporting and managing risks which includes cybersecurity risks is discussed further in Item 1 Business Risk Management As a general matter we take a proactive approach to assessing and monitoring cybersecurity specific risks that is oriented around monitoring emerging external threats ensuring controls are in place to identify and manage risk within our technology environment and creating a culture of vigilance across the organization
We test for and resolve vulnerabilities within our systems and applications by using network and infrastructure vulnerability testing and adversary emulation also known as red teaming and hire a third party to do the same at least once a year We maintain a vulnerability disclosure program to enhance discovery and remediation of external facing vulnerabilities We also undergo a third party maturity assessment of our information security program every two years and a third party enterprise penetration test annually We leverage external resources to help define information security and technology standards for our environment
Our cybersecurity controls are monitored and refined based on learnings from regular red team engagements and analysis by third party threat hunters All cyber defense operations are supported through a dedicated cybersecurity threat intelligence function We collaborate with information security peers across the industry to augment threat intelligence Our threat intelligence program helps create awareness and understanding of potential cybersecurity threats and adversaries
We proactively assess potential risks presented by new services or systems integrated with our network or data and ensure appropriate controls are applied under such circumstances We have proactive security controls built into our software development life cycle that help engineers identify and resolve security issues at every stage of software development Our identity verification processes which include multi factor authentication and other identity verification technologies provide further protection for clients and customers We perform due diligence and monitor third party relationships to assess the suitability of their cybersecurity controls and protocols based on risk profile for the business operations or services for which they are engaged
Our awareness and training program is designed to create a risk aware culture to ensure employees understand cybersecurity threats and are accountable for completing required training We have trained our employees to recognize and resist phishing attempts with our simulated phishing program At least quarterly our employees are presented with simulated phishing scenarios that deliver hands on experience and on the spot education opportunities All engineers and employees holding equivalent roles who are involved in software development also receive mandated secure software development training
We have an enterprise incident management plan that provides a framework for preparing for managing and responding to cybersecurity incidents that may arise The plan ensures stakeholders across the organization are identified who have the appropriate experience training and expertise in incident management and that the organization is well positioned to address incidents For example we carry out cybersecurity incident response exercises to develop widespread familiarity and experience in responding to cybersecurity incidents
No risks from any known cybersecurity incidents have materially affected or are reasonably likely to materially affect our business strategy results of operations or financial condition For further discussion related to how cybersecurity risks may impact our performance in the future see Item 1A Risk Factors
Disclosure concerning legal proceedings can be found in Item 8 Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Note 16 Contingencies Guarantees Indemnifications and Leases under the caption Litigation and Regulatory Contingencies and Item 8 Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Note 14 Income Taxes under the caption Other Tax Information which are incorporated here by this reference
Vivek Agrawal 57 has been Executive Vice President and Chief Growth Officer of the Company and Principal Life since March 2023 Prior to joining the Company and Principal Life he was a senior partner at McKinsey Company where he led consulting practices in both the United States and Asia and contributed to the growth of top tier asset management retirement wealth management and insurance organizations
Kamal Bhatia 53 has been the President and Chief Executive Officer of Principal Asset Management of the Company and Principal Life since February 10 2024 and President and Chief Executive Officer of Principal Funds since August 2019 Prior to his current position he was the Global Head of Investments for Principal Asset Management from 2023 to February 2024 and Chief Operating Officer of Principal Asset Management from 2020 to 2023 Previously he held leadership roles at OC Private Capital OppenheimerFunds TIAA Mellon Asset Management and Citigroup
Thomas Cheong 56 has been Executive Vice President of the Company since January 2021 and President Principal Asia of the Company since March 2019 Thomas is from Singapore and is located in our Hong Kong office Prior to his current position he was Senior Vice President of the Company from 2019 to 2020 and served as Vice President Head of North Asia of the Company from 2015 to 2019 Previously he held several leadership roles in various Asia markets at Manulife Financial Corporation and Prudential UK
Daniel Houston 63 was a director of the Company and Principal Life and Chief Executive Officer of the Company and Principal Life from August 2015 until his retirement effective January 7 2025 Prior to holding these positions he held the same positions except was Chief Operating Officer and not Chief Executive Officer from 2014 to 2015 and was President of the Company and Principal Life from 2014 to August 2024 Previously he served as President Retirement Insurance and Financial Services of the Company and Principal Life from 2010 to 2014 and held several leadership roles in Retirement and Income Solutions of the Company and Principal Life He currently serves as Executive Chairman of the Company and Principal Life
Kathleen Kay 62 has been Executive Vice President of the Company and Principal Life since March 2022 and Chief Information Officer of the Company and Principal Life since May 2020 Prior to her current position she was Senior Vice President of the Company and Principal Life from 2020 to 2022 Previously she was Senior Vice President and Chief Information Officer of Pacific Gas Electric Company from 2015 to 2020 Enterprise Chief Technology Officer at SunTrust from 2012 to 2015 and held leadership roles at Comerica Bank and OnStar of General Motors
Natalie Lamarque 48 has been Executive Vice President and General Counsel of the Company and Principal Life since July 2022 and Secretary of the Company and Principal Life since October 2022 Prior to her current position she was with New York Life Insurance Company in various roles including General Counsel from 2020 to 2022 and Deputy General Counsel from 2019 to 2020 both while a Senior Vice President Vice President in Corporate Compliance from 2016 to 2019 and Associate General Counsel from 2014 to 2016 Previously she served as an Assistant U S Attorney in the Criminal Division of the U S Attorney s Office of the Southern District of New York and worked as an attorney at Debevoise Plimpton LLP
Christopher Littlefield 58 has been President Retirement and Income Solutions since March 2022 Prior to his current position he was Executive Vice President and General Counsel of the Company and Principal Life from 2020 to 2022 and Secretary of the Company and Principal Life from 2020 to 2022 Previously he served as President and Chief Executive Officer of Fidelity Guaranty Life Insurance Holdings from 2014 to 2018 and held several leadership roles at Aviva USA Corporation and AmerUS Group Co
Kenneth McCullum 60 has been Executive Vice President and Chief Risk Officer of the Company and Principal Life since April 2023 Prior to his current position he was Senior Vice President and Chief Risk Officer from 2020 to 2023 and Vice President and Chief Actuary from 2015 to 2020 Previously he served as Executive Vice President responsible for business development and in force management at Delaware Life Insurance Company from 2013 to 2015 and held several leadership roles at Sun Life Financial and the Hartford
Joel Pitz 52 has been the Interim Chief Financial Officer of the Company and Principal Life since August 20 2024 Prior to his current position he was Senior Vice President and Controller of the Company and Principal Life from 2021 to August 2024 Previously he served as Vice President and Chief Financial Officer of Principal International from May 2016 to August 2021
Deanna Strable Soethout 56 served as President and Chief Operating Officer of the Company and Principal Life from August 20 2024 to January 7 2025 at which time she assumed the role of President and Chief Executive Officer of the Company and Principal Life Prior to her current position she was Executive Vice President and Chief Financial Officer of the Company and Principal Life from February 2017 to August 2024 Previously she was Executive Vice President of the Company and Principal Life from 2016 to 2017 President U S Insurance Solutions of the Company and Principal Life from 2015 to 2017 and Senior Vice President of the Company and Principal Life from 2006 to 2015
Our common stock began trading on the New York Stock Exchange under the symbol PFG on October 23 2001 Prior to such date there was no established public trading market for our common stock Effective December 15 2017 we changed our listing to the Nasdaq Global Select Market and continue trading under the symbol PFG On January 30 2025 there were 201 942 stockholders of record of our common stock
We have historically paid cash dividends on our common stock Future dividend decisions will be based on and affected by a number of factors including our results and financial requirements and the impact of regulatory restrictions See Item 7 Management s Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources for a discussion of regulatory restrictions on Principal Life s ability to pay dividends or make other distributions
The following analysis discusses our financial condition as of December 31 2024 compared with December 31 2023 our consolidated results of operations for the years ended December 31 2024 and 2023 and where appropriate factors that may affect our future financial performance The discussion should be read in conjunction with our audited consolidated financial statements and the related notes to the financial statements and the other financial information included elsewhere in this Form 10 K
For information and analysis relating to our financial condition and consolidated results of operations as of and for the year ended December 31 2022 as well as for the year ended December 31 2023 compared with the year ended December 31 2022 see Item 7 Management s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10 K for the year ended December 31 2023
Our narrative analysis below contains forward looking statements intended to enhance the reader s ability to assess our future financial performance Forward looking statements include but are not limited to statements that represent our beliefs concerning future operations strategies financial results or other developments and contain words and phrases such as anticipate believe plan estimate expect intend and similar expressions Forward looking statements are made based upon management s current expectations and beliefs concerning future developments and their potential effects on us Such forward looking statements are not guarantees of future performance
In the fourth quarter of 2024 we implemented changes to our Principal Asset Management segment to align the global operations by business function Prior to the fourth quarter of 2024 our Principal Asset Management segment was organized into Principal Global Investors and Principal International The Principal Asset Management segment is now organized into Investment Management and International Pension The change has been applied retrospectively which did not have an impact on our consolidated financial statements
Positive market performance led to an increase in AUM in our Principal Asset Management segment in 2024 which was partially offset by foreign currency headwinds Since AUM is the base by which this business generates revenues market performance and fluctuations in foreign currency exchange rates may impact our revenues in future quarters Also included in revenues are borrower fees transaction fees and performance fees which can fluctuate between years
The increasing complexity of the business environment and applicable authoritative accounting guidance requires us to closely monitor our accounting policies Our significant accounting policies are described in Item 8 Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Note 1 Nature of Operations and Significant Accounting Policies We have identified critical accounting policies that are complex and require significant judgment and estimates about matters that are inherently uncertain A summary of our critical accounting policies is intended to enhance the reader s ability to assess our financial condition and results of operations and the potential volatility due to changes in estimates and changes in guidance The identification selection and disclosure of critical accounting policies and estimates have been discussed with the Board Audit Committee
Fixed Maturities Fixed maturities include bonds asset backed securities ABS redeemable preferred stock and certain non redeemable preferred securities We classify our fixed maturities as either AFS or trading and accordingly carry them at fair value in the consolidated statements of financial position Volatility in net income can result from changes in fair value of fixed maturities classified as trading Volatility in other comprehensive income can result from changes in fair value of fixed maturities classified as AFS
We measure the fair value of our financial assets and liabilities based on assumptions used by market participants in pricing the asset or liability which may include inherent risk restrictions on the sale or use of an asset or nonperformance risk including our own credit risk For additional details concerning the methodologies assumptions and inputs utilized see Item 8 Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Note 18 Fair Value Measurements under the caption Determination of Fair Value
The fair values of our public fixed maturities are primarily based on market prices from third party pricing vendors We have regular interactions with these vendors to ensure we understand their pricing methodologies and to confirm they are utilizing observable market information In addition 16 of our invested asset portfolio as of December 31 2024 was invested in privately placed fixed maturities with no readily available market quotes to determine the fair market value The majority of these assets are valued using a matrix pricing valuation approach that utilizes observable market inputs In the matrix approach securities are grouped into pricing categories that vary by sector rating and average life Each pricing category is assigned a risk spread based on observable public market data 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 be impacted by company specific factors This excludes privately placed securities subject to Rule 144A of the Securities Act of 1933 that are primarily based on market prices from third party pricing vendors similar to public fixed maturities
If we are unable to price a fixed maturity security using prices from third party pricing vendors or other sources specific to the asset class we may obtain a broker quote or utilize an internal pricing model specific to the asset utilizing relevant market information to the extent available and where at least one significant unobservable input is utilized In addition there may be certain securities managed by external managers where we obtain the valuation from the external manager when we are unable to obtain prices from third party pricing vendors or other sources These are reflected in Level 3 in the fair value hierarchy and can include fixed maturities across all asset classes As of December 31 2024 approximately 3 of our total fixed maturities were Level 3 securities valued using internal pricing models See Item 8 Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Note 18 Fair Value Measurements for further discussion
The 227 0 million increase in net unrealized losses from U S investment operations for the year ended December 31 2024 can primarily be attributed to an increase in interest rates which was partially offset by a tightening of credit spreads For additional information about interest rate risk see Item 7A Quantitative and Qualitative Disclosures About Market Risk
We have a process in place to identify fixed maturity securities that could potentially require an allowance for credit loss This process involves monitoring market events that could impact issuers credit ratings business climate management changes litigation and government actions and other similar factors This process also involves monitoring late payments pricing levels downgrades by rating agencies key financial ratios financial statements revenue forecasts and cash flow projections as indicators of credit issues
Each reporting period all securities in an unrealized loss position are reviewed to determine whether a decline in value is due to credit Relevant facts and circumstances considered include 1 the extent the fair value is below cost 2 the reasons for the decline in value 3 the financial position and access to capital of the issuer including the current and future impact of any specific events and 4 for structured securities the adequacy of the expected cash flows To the extent we determine an unrealized loss is due to credit an allowance for credit loss is recognized through a reduction to net income See Item 8 Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Note 4 Investments under the caption Allowance for Credit Loss for further discussion
A number of significant risks and uncertainties are inherent in the process of monitoring credit losses and determining the allowance for credit loss These risks and uncertainties include 1 the risk that our assessment of an issuer s ability to meet all of its contractual obligations will change based on changes in the credit characteristics of that issuer 2 the risk that the economic outlook will be worse than expected or have more of an impact on the issuer than anticipated 3 the risk that our investment professionals are making decisions based on fraudulent or misstated information in the financial statements provided by issuers and 4 the risk that new information obtained by us or changes in other facts and circumstances lead us to change our intent to not sell the security prior to recovery of its amortized cost Any of these situations could result in a charge to net income in a future period As of December 31 2024 we had 46 367 3 million in AFS fixed maturities with gross unrealized losses totaling 6 475 2 million Included in the gross unrealized losses are losses attributable to both movements in market interest rates as well as movement in credit spreads
Mortgage Loans Mortgage loans consist primarily of commercial mortgage loans on real estate 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 We establish a valuation allowance for the risk of credit losses inherent in our mortgage loans which is maintained at a level believed adequate by management to absorb estimated expected credit losses The valuation allowance is based on amortized cost excluding accrued interest receivable and includes reserves for pools of financing receivables with similar risk characteristics Amounts on loans deemed to be uncollectible are charged off and removed from the valuation allowance The change in the valuation allowance provision is included in net realized capital gains losses on our consolidated statements of operations
We use derivatives primarily to hedge or reduce exposure to market risks The fair values of exchange traded derivatives are determined through quoted market prices Exchange traded derivatives include futures that are settled daily which reduces their fair value in the consolidated statements of financial position The fair values of privately negotiated contracts which are usually referred to as over the counter OTC derivatives that are cleared through centralized clearinghouses are determined through market prices published by the clearinghouses Variation margin associated with OTC cleared derivatives is settled daily which reduces their fair value in the consolidated statements of financial position The fair values of non cleared OTC derivatives are determined using either pricing valuation models that utilize market observable inputs or broker quotes On an absolute fair value basis as of December 31 2024 the majority of our OTC derivative assets and liabilities were valued using pricing valuation models using market observable data with approximately 3 using broker quotes See Item 8 Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Note 18 Fair Value Measurements for further discussion The fair values of our derivative instruments can be impacted by changes in interest rates foreign exchange rates credit spreads equity indices and volatility as well as other contributing factors For additional information see Item 7A Quantitative and Qualitative Disclosures About Market Risk
We also issue certain annuity universal life and other contracts that include embedded derivatives that have been bifurcated from the host contract They are valued using a combination of historical data and actuarial judgment See Item 8 Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Note 18 Fair Value Measurements for further discussion We include our assumption for own nonperformance risk in the valuation of these embedded derivatives As our credit spreads widen or tighten the fair value of the embedded derivative liabilities decrease or increase leading to an increase or decrease in net income If the current market credit spreads reflecting our own creditworthiness move to zero tighten the reduction to net income would be approximately 35 1 million net of income taxes based on December 31 2024 reported amounts In addition the policyholder behavior assumptions used in the valuation of embedded derivatives include risk margins which increase the fair value of the embedded derivative liabilities
We have entered into coinsurance with funds withheld reinsurance arrangements For funds withheld agreements the economic benefit of the assets flow to reinsurance counterparties however we retain legal ownership of the assets within the funds withheld account Therefore the assets held under funds withheld agreements are included on our consolidated statements of financial position with a corresponding funds withheld payable The funds withheld payable also includes an embedded derivative that has been bifurcated from the host contract The fair value of the embedded derivative is based on the change in the fair value of the underlying funds withheld investments using the valuation methods and assumptions described for our investments held
The accounting for derivatives is complex and interpretations of the applicable accounting standards continue to evolve Judgment is applied in determining the availability and application of hedge accounting designations and the appropriate accounting treatment Judgment and estimates are used to determine the fair value of some of our derivatives Volatility in net income can result from changes in fair value of derivatives that do not qualify or are not designated for hedge accounting and changes in fair value of embedded derivatives
MRBs are contracts or contract features that provide protection to the policyholder from capital market risk such as equity interest rate or foreign exchange risk and expose us to other than nominal capital market risk We have certain annuity and other investment contracts that have GMWB and GMDB riders or a guarantee on the minimum account balance under certain qualifying events These MRBs have been bifurcated from the host contract and are measured at fair value The change in fair value is recognized in net income with the exception of the change in fair value related to our own nonperformance risk which is recognized in OCI We use various derivative instruments to hedge against changes in fair value of MRBs related to market risk
MRBs are valued using a combination of historical data and actuarial judgment See Item 8 Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Note 11 Market Risk Benefits and Note 18 Fair Value Measurements for further discussion We include our assumption for own nonperformance risk in the valuation of these MRBs which is based on the current market credit spreads for debt like instruments we have issued and are available in the market As our credit spreads widen or tighten the fair value of MRB assets increase or decrease and the fair value of MRB liabilities decrease or increase leading to an increase or decrease in OCI respectively If the current market credit spreads reflecting our own creditworthiness move to zero tighten the reduction to OCI would be approximately 42 0 million net of income taxes based on December 31 2024 reported amounts In addition the policyholder behavior assumptions used in the valuation of MRBs include risk margins which decrease the fair value of MRB assets and increase the fair value of MRB liabilities
Goodwill and other intangible assets with indefinite lives are not amortized Intangibles with finite lives are amortized over their estimated useful lives We formally conduct our annual goodwill and other intangible asset impairment testing during the third quarter or more frequently if events or circumstances change that would more likely than not create an impairment Goodwill is tested at the reporting unit level which is one level below the operating segment
Annual goodwill impairment testing consists of qualitative or quantitative assessments In the qualitative assessment we assess relevant events and circumstances that could affect the significant inputs used to determine the fair value of the reporting unit If when reviewing the qualitative factors it is determined it is more likely than not that the fair value of a reporting unit is less than its carrying amount a quantitative impairment test is performed
The determination of fair value for our reporting units is primarily based on an income approach whereby we use discounted cash flows for each reporting unit We apply significant judgment to our discounted cash flow models when determining the estimated fair value of our reporting units The valuation methodologies utilized are subject to key judgments and assumptions that are sensitive to change Estimates of fair value are inherently uncertain and represent only management s reasonable expectation regarding future developments These estimates and the judgments and assumptions upon which the estimates are based will in all likelihood differ in some responses from actual future results
For reporting units that performed a qualitative test of goodwill we concluded the estimated fair values of all such reporting units were in excess of their carrying values and therefore goodwill was not impaired Similarly for reporting units that performed a quantitative test of goodwill the estimated fair values of all such reporting units were in excess of their carrying values and therefore goodwill was not impaired
Sensitivities In connection with our annual impairment testing process we performed a sensitivity analysis for goodwill impairment with respect to each of our reporting units and determined that a hypothetical 10 decline in the fair value would not result in an impairment of goodwill for any reporting unit We cannot predict certain future events that might adversely affect the reported value of goodwill and other intangible assets that totaled 1 549 7 million and 1 389 9 million respectively as of December 31 2024 Such events include but are not limited to strategic decisions made in response to economic and competitive conditions the impact of the economic environment on our customer base interest rate movements declines in the equity markets the legal environment in which the businesses operate or a material negative change in our relationships with significant customers
Future policy benefits and claims include reserves for individual traditional life insurance disability insurance and individual and group annuities that provide periodic income payments These reserves are computed using assumptions of mortality interest morbidity and lapse These assumptions are based on our experience industry results emerging trends and future expectations
For long duration insurance contracts reserves for individual and group annuities are generally equal to the present value of expected future policy benefit payments while the reserves for non participating term life insurance and individual disability income contracts is generally equal to the present value of expected future policy benefits less the present value of expected net premiums Issue year cohorts are used for the reserve calculation and assumptions are periodically reviewed and updated Separate cohorts are used for the calculation of ceded reserves An interest accretion rate is determined for an identified cohort and remains unchanged after the issue year Reserves are remeasured as of each reporting date to reflect the current upper medium grade fixed income instruments yields with the impact reported in OCI If the current upper medium grade yields decrease 100 basis points the reduction in OCI would be approximately 2 2 billion net of income taxes based on December 31 2024 reported amounts
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
For short duration contracts significant changes in experience or assumptions may require us to provide for expected future losses on a product by establishing premium deficiency reserves Our reserve levels are reviewed throughout the year using internal analysis including among other things experience studies claim development analysis and annual loss recognition analysis To the extent experience indicates potential loss recognition we recognize losses on certain lines of business The ultimate accuracy of the assumptions on these insurance products cannot be determined until the obligation of the entire block of business on which the assumptions were made is extinguished Short term variances of actual results from the assumptions used in the computation of the reserves are reflected in current period net income and can impact quarter to quarter net income
Future policy benefits and claims also include reserves for incurred but unreported disability claims We recognize claims costs in the period the service was provided to our policyholders However claims costs incurred in a particular period are not known with certainty until after we receive process and pay the claims We determine the amount of this liability using actuarial methods based on historical claim payment patterns as well as emerging cost trends where applicable to determine our estimate of claim liabilities We also look back to assess how our prior periods estimates developed To the extent appropriate changes in such development are recorded as a change to current period claim expense Historically the amount of the claim reserve adjustment made in subsequent reporting periods for prior period estimates have been within a reasonable range given our normal claim fluctuations
Future policy benefits and claims also include benefit reserves that are established for universal life type contracts that provide benefit features that are expected to produce gains in early years followed by losses in later years The liabilities are accrued in relation to estimated contract assessments
The reported expense and liability associated with pension plans requires the use of assumptions Numerous assumptions are made regarding the discount rate expected long term rate of return on plan assets turnover expected compensation increases retirement rates and mortality The discount rate and the expected return on plan assets have the most significant impact on the level of expense
The assumed discount rate is determined by projecting future benefit payments inherent in the Projected Benefit Obligation and discounting those cash flows using a spot yield curve for high quality corporate bonds Our assumed discount rate was 5 50 for our pension plans as of December 31 2024 Typically a 0 25 decrease in the discount rate would increase the pension benefits Projected Benefit Obligation by approximately 84 8 million and increase the Net Periodic Pension Cost NPPC by approximately 6 1 million Typically a 0 25 increase in the discount rate would result in a decrease in the benefit obligation and expense at a level generally commensurate with those noted above
The assumed long term rate of return on plan assets is set at the long term rate expected to be earned based on the long term investment policy of the plans and the various classes of the invested funds Historical and future expected returns of multiple asset classes were analyzed to develop a risk free real rate of return and risk premiums for each asset class The overall long term rate for each asset class was developed by combining a long term inflation component the real risk free rate of return and the associated risk premium A weighted average rate was developed based on long term returns for each asset class the plan s target asset allocation policy and the tax structure of the trusts For the 2024 NPPC a 6 10 weighted average long term rate of return was used For the 2025 NPPC a 6 40 weighted average long term rate of return assumption will be used Typically a 0 25 decrease in the assumed long term rate of return would increase the NPPC by approximately 6 7 million Typically a 0 25 increase in this rate would result in a decrease to expense at the same levels The assumed return on plan assets is based on the fair market value of plan assets as of December 31 2024
For pension costs actuarial gains and losses are amortized using a straight line amortization method over the average remaining service period of plan participants which is approximately 10 years The qualified pension plan does not utilize the allowable corridor while the nonqualified pension plans utilize the 10 corridor Prior service costs are amortized on a weighted average basis over approximately 4 years for pension costs See Item 8 Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Note 15 Employee and Agent Benefits for further discussion
We provide for income taxes based on our estimate of the liability for taxes due Our tax accounting represents management s best estimate of various events and transactions such as completion of tax audits or establishment of or changes to a valuation allowance associated with certain deferred tax assets which could affect our estimates and effective income tax rate in a particular quarter or annual period Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates expected to be in effect during the years in which the basis differences reverse We are required to evaluate the recoverability of our deferred tax assets each quarter and establish a valuation allowance if necessary to reduce our deferred tax assets to an amount that is more likely than not to be realizable In determining the need for a valuation allowance we consider many factors including future reversals of existing taxable temporary differences future taxable income exclusive of reversing temporary differences and carryforwards taxable income in prior carryback years and implementation of any feasible and prudent tax planning strategies management would employ to realize the tax benefit
Deferred income taxes including federal state and foreign withholding have not been provided on approximately 1 276 3 million of accumulated but undistributed earnings from operations of foreign subsidiaries as of December 31 2024 We do not record deferred income taxes on foreign earnings not expected to be distributed to the U S We apply an exception to the general rule which under U S GAAP otherwise requires the recording of deferred income taxes on the anticipated repatriation of foreign earnings as recognized for financial reporting purposes The exception permits us to not record a deferred income tax liability on foreign earnings we expect to be indefinitely reinvested in our foreign operations The related deferred income taxes will be recorded in the period it becomes apparent we can no longer positively assert some or all the undistributed earnings will remain invested into the foreseeable future
The amount of income taxes paid is subject to audits in the U S as well as various state and foreign jurisdictions Tax benefits are recognized for book purposes when the more likely than not threshold is met with regard to the validity of an uncertain tax position Once this threshold is met for each uncertain tax position we recognize in earnings the largest amount of benefit that is greater than 50 likely of being realized upon ultimate settlement with the Internal Revenue Service or other income taxing authorities for audits ongoing or not yet commenced We do not anticipate the ultimate resolution of audits ongoing or not yet commenced to have a material impact on our net income
On January 16 2025 we announced the signing of an agreement with BCT to expand our investment management capabilities and exit our sponsor and trustee pension roles in Hong Kong for MPF Schemes BCT will be assuming the role as sponsor and trustee for the Principal MPF Schemes The transaction is expected to close during the first quarter of 2026 subject to regulatory approval and will be reported within the Principal Asset Management segment We expect to record a one time charge of approximately 140 0 million in the first quarter of 2025 primarily attributable to the write down of certain intangible assets and deferred contract cost assets which will reduce pre tax net income For segment reporting purposes the charge will be reported as exited business and net realized capital loss from exiting our roles as MPF Scheme sponsor and trustee As such it will have no impact on segment pre tax operating earnings
Actuarial Assumption Updates We periodically review and update actuarial assumptions that are inputs to the models for the liability for future policy benefits for traditional limited payment long duration contracts and other actuarial balances Assumption updates model refinements and other updates made resulted in a change in cash flow assumptions that decreased consolidated net income attributable to Principal Financial Group Inc by 78 0 million and 9 7 million for the years ended December 31 2024 and 2023 respectively
Fluctuations in foreign currency to U S dollar exchange rates for locations in which we have operations can affect reported financial results In years when foreign currencies weaken against the U S dollar translating foreign currencies into U S dollars results in fewer U S dollars to be reported When foreign currencies strengthen translating foreign currencies into U S dollars results in more U S dollars to be reported
Foreign currency exchange rate fluctuations create variances in our financial statement line items The most significant impact occurs within our Principal Asset Management segment where pre tax operating earnings were negatively impacted 25 2 million for the year ended December 31 2024 as a result of fluctuations in foreign currency to U S dollar exchange rates This impact was calculated by comparing a the difference between current year results and prior year results to b the difference between current year results and prior year results translated using current year exchange rates for both periods We use this approach to calculate the impact of exchange rates on all revenue and expense line items For a discussion of our approaches to managing foreign currency exchange rate risk see Item 7A Quantitative and Qualitative Disclosures About Market Risk Foreign Currency Risk
Variable investment income includes certain types of investment returns such as prepayment fees and income loss from certain elements of our other alternative asset classes including results of value add real estate sales activity Due to its unpredictable nature variable investment income may or may not be material to our financial results for a given reporting period and may create variances when comparing different reporting periods For additional information see Investment Results
Net income attributable to Principal Financial Group Inc increased primarily due to a 1 211 2 million after tax favorable change in fair value of the funds withheld embedded derivative This increase was partially offset by a 170 4 million unfavorable one time impact of the YRT Reinsurance Transactions in 2024
Premiums and other considerations increased 201 9 million for the Retirement and Income Solutions segment primarily due to higher 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 premiums tend to vary from period to period Premiums and other considerations increased 168 4 million for the Benefits and Protection segment primarily due to growth in the Specialty Benefits business
Fees and other revenues increased 109 6 million for the Retirement and Income Solutions segment primarily due to an increase in fee revenue stemming from an increase in average monthly account values which largely resulted from more favorable financial markets Fees and other revenues increased for the Principal Asset Management segment due to 92 7 million higher management fee revenue as a result of increased average AUM managed by our Investment Management operations which was partially offset by 24 2 million lower performance fee revenue for our Investment Management operations primarily in our real estate business
Benefits claims and settlement expenses increased 530 0 million for the Retirement and Income Solutions segment primarily due to an increase in reserves stemming from higher sales of single premium group annuities with life contingencies Benefits claims and settlement expenses increased 122 0 million for the Benefits and Protection segment due to growth in the Specialty Benefits business This increase was partially offset by a 345 4 million decrease for the Benefits and Protection segment due to a favorable one time impact of the YRT Reinsurance Transactions in 2024
The liability for future policy benefits remeasurement gain loss change was primarily due to the unfavorable effect of changes in cash flow assumptions related to a 544 5 million one time impact of the YRT Reinsurance Transactions in 2024 and a 131 6 million impact driven by actuarial assumption updates and model refinements
The effective income tax rate increased to 15 for the year ended December 31 2024 from 9 for the year ended December 31 2023 primarily due to an increase in pre tax income with no proportionate change in permanent tax differences See Item 8 Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Note 14 Income Taxes under the caption Effective Income Tax Rate for further discussion
Several key factors impact revenue and earnings growth in the Retirement and Income Solutions segment These factors include the ability of our distribution channels to generate new sales and retain existing business pricing decisions that take account of competitive conditions persistency investment returns mortality trends and operating expense levels investment management performance equity market returns and interest rate changes Profitability ultimately depends on our ability to price products and invest assets 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
Net revenue and average monthly account values are key metrics used to understand Retirement and Income Solutions earnings growth Net revenue which is used only at the segment level is defined as operating revenues less benefits claims and settlement expenses liability for future policy benefits remeasurement gain loss market risk benefit remeasurement gain loss and dividends to policyholders Net revenue is impacted by 1 changes in the equity markets and interest rates and 2 the difference between investment income earned on the underlying general account assets and the interest rate credited to the contracts Average monthly account values include the net balances that customers have accumulated within their account along with future policy benefits for retirement payout products Average monthly account values are primarily impacted by net customer cash flows and credit market performance
Net revenue increased primarily due to a 115 4 million increase in fee revenue stemming from an increase in average monthly account values which largely resulted from more favorable financial markets and a 62 1 million increase in variable investment income These increases were partially offset by a 70 1 million impact associated with actuarial assumption updates and model refinements which was unfavorable in 2024 compared to favorable in 2023
AUM forms the basis for generating our management fee revenues However in Chile the Cuprum business operates differently as most fees are collected with each deposit made by mandatory retirement customers based on a capped salary level rather than asset levels AUM growth is primarily driven by two factors market performance and net cash flow Market performance encompasses the returns from equity fixed income real estate and other alternative investments while net cash flow reflects client deposits and withdrawals Revenue growth increasingly depends on the fee levels associated with these deposits and withdrawals which can vary significantly depending on the business or product mix Additionally our non U S results are influenced by fluctuations in foreign currency exchange rates relative to the U S dollar The AUM of our foreign subsidiaries is converted to U S dollars at the end of the reporting period using spot exchange rates while revenue and expenses are translated using average exchange rates for the reporting period
Pre tax operating earnings increased in our Investment Management operations primarily due to 92 7 million higher management fee revenue as a result of increased average AUM This was partially offset by 24 2 million lower performance fee revenue primarily in our real estate business a 17 0 million increase in variable compensation expense a 10 9 million increase in variable AUM expenses and a 5 8 million increase in non variable staff costs Pre tax operating earnings increased in our International Pension operations primarily due to 33 2 million of increased earnings from our equity method investments in Brazil primarily as a result of our actuarial assumption review and other updates and 7 4 million of favorable relative market performance on our required regulatory investments These improvements were partially offset by 25 7 million of foreign currency headwinds
Premium and fees are a key metric for growth in the Benefits and Protection segment We receive premiums on our specialty benefits insurance products as well as our traditional life insurance products Fees are generated from our universal life variable universal life and indexed universal life insurance products We use several reinsurance programs to help manage the mortality and morbidity risk Premium and fees are reported net of reinsurance premiums
Pre tax operating earnings in our Specialty Benefits business increased 28 2 million due to growth in the business partially offset by 10 9 million due to unfavorable actuarial assumptions and model refinements in 2024 compared to favorable in 2023 Pre tax operating earnings in our Life Insurance business decreased 68 4 million due to more unfavorable actuarial assumption updates model refinements and other updates in 2024 compared to 2023 and 11 0 million due to an increase in the policyholder dividend obligation
Benefits claims and settlement expenses in our Specialty Benefits business increased 122 0 million due to growth in the business offset by 8 7 million due to more favorable actuarial assumption updates and model refinements in 2024 compared to 2023 Benefits claims and settlement expenses in our Life Insurance business decreased 65 0 million due to the one time impacts of the YRT Reinsurance Transactions in 2024 offset by 12 1 million due to growth in business and 4 0 million due to unfavorable actuarial assumption updates model refinements and other updates in 2024 compared to favorable in 2023
Liability for future policy benefits remeasurement loss in our Specialty Benefits business increased 18 5 million due to unfavorable actuarial assumption updates and model refinements in 2024 compared to favorable in 2023 Liability for future policy benefits remeasurement loss in our Life Insurance business increased 55 9 million due to more unfavorable actuarial assumption updates model refinements and other updates in 2024 compared to 2023 and 44 8 million due to the one time impacts of the YRT Reinsurance Transactions in 2024
Liquidity and capital resources represent the overall strength of a company and its ability to generate strong cash flows borrow funds at a competitive rate and raise new capital to meet operating and growth needs We are monitoring our liquidity closely and feel confident in our ability to meet all long term obligations to customers policyholders and debt holders Our sources of strength include our laddered long term debt maturities with the next maturity occurring in May 2025 access to revolving credit facility and contingent funding arrangements a strong risk based capital position and our available cash and liquid assets Our legal entity structure has an impact on our ability to meet cash flow needs as an organization Following is a simplified organizational structure
Our liquidity requirements have been and will continue to be met by funds from consolidated operations as well as the issuance of commercial paper common stock debt or other capital securities and borrowings from credit facilities We believe the cash flows from these sources are sufficient to satisfy the current liquidity requirements of our operations including reasonably foreseeable contingencies
We maintain a level of cash and securities which combined with expected cash inflows from investments and operations we believe to be adequate to meet anticipated short term and long term payment obligations We will continue our prudent capital management practice of regularly exploring options available to us to maximize capital flexibility including accessing the capital markets and careful attention to and management of expenses
We perform rigorous liquidity stress testing to ensure our asset portfolio includes sufficient high quality liquid assets that could be utilized to bolster our liquidity position under increasingly stressed market conditions These assets could be utilized as collateral for secured borrowing transactions with various third parties or by selling the securities in the open market if needed
We also manage liquidity risk by limiting the sales of liabilities with features such as puts or other options that can be exercised at inopportune times For example as of December 31 2024 approximately 14 9 billion or 99 of our institutional guaranteed investment contracts and funding agreements cannot be redeemed by contractholders prior to maturity Our individual annuity liabilities also contain surrender charges and other provisions limiting early surrenders
Universal life insurance and certain traditional life insurance policies are also subject to discretionary withdrawals by policyholders However life insurance policies tend to be less susceptible to withdrawal than our investment contracts because policyholders may be subject to a new underwriting process in order to obtain a new life insurance policy In addition our life insurance liabilities include surrender charges to discourage early surrenders
The revolving credit facility is committed and available for general corporate purposes The credit facility also provides 100 back stop support for our commercial paper program of which we had no outstanding balances as of December 31 2024 and December 31 2023 Most of the banks supporting the credit facility have other relationships with us Due to the financial strength and the strong relationships we have with these providers we are comfortable we have very low risk the financial institutions would be unable or unwilling to fund this facility
The Holding Companies PFG and PFS The principal sources of funds available to our parent holding company PFG are dividends from subsidiaries as well as its ability to borrow funds at competitive rates and raise capital to meet operating and growth needs These funds are used by PFG to meet its obligations which include the payment of dividends on common stock debt service and the repurchase of stock The declaration and payment of common stock dividends is subject to the discretion of our Board and will depend on our overall financial condition results of operations capital levels cash requirements future prospects receipt of dividends or other distributions from Principal Life as described below risk management considerations and other factors deemed relevant by the Board No significant restrictions limit the payment of dividends by PFG except those generally applicable to corporations incorporated in Delaware
Dividends or other distributions from Principal Life our primary subsidiary are limited by Iowa law Under Iowa law Principal Life may pay dividends or make other distributions only from the earned surplus arising from its business and must receive the prior approval of the Commissioner of Insurance of the State of Iowa the Commissioner to pay stockholder dividends or make any other distribution if such distribution would exceed certain statutory limitations Iowa law gives the Commissioner discretion to disapprove requests for distributions in excess of these limitations Extraordinary dividends include those made together with dividends and other distributions within the preceding twelve months that exceed the greater of i 10 of statutory policyholder surplus as of the previous year end excluding admitted disallowed interest maintenance reserve or ii the statutory net gain from operations from the previous calendar year not to exceed earned surplus Based on statutory results for the year ended December 31 2024 the ordinary stockholder dividend limitation for Principal Life is approximately 1 313 1 million in 2025 However because the dividend test is based on dividends previously paid over rolling twelve month periods if paid before a specified date during 2025 some or all of such dividends may be extraordinary and require regulatory approval
Total stockholder dividends paid by Principal Life to its parent in 2024 were 1 010 0 million all of which was extraordinary and approved by the Commissioner As of December 31 2024 we had 1 941 5 million of cash and liquid assets held in our holding companies and other subsidiaries which is available for corporate purposes Corporate balances held in foreign holding companies meet the indefinite reinvestment exception
Operations Our primary consolidated cash flow sources are premiums from insurance products pension and annuity deposits asset management fee revenues administrative services fee revenues income from investments and proceeds from the sales or maturity of investments Cash outflows consist primarily of payment of benefits to policyholders and beneficiaries income and other taxes current operating expenses payment of dividends to policyholders payments in connection with investments acquired payments made to acquire subsidiaries payments relating to policy and contract surrenders withdrawals policy loans interest payments and repayment of short term debt and long term debt Our investment strategies are generally intended to provide adequate funds to pay benefits without forced sales of investments For a discussion of our investment objectives and strategies see Investments
Cash Flows Cash flow activity as reported in our consolidated statements of cash flows provides relevant information regarding our sources and uses of cash The following discussion of our operating investing and financing portions of the cash flows excludes cash flows attributable to the separate accounts
Net cash provided by operating activities was 4 602 9 million and 3 792 4 million for the years ended December 31 2024 and 2023 respectively Our insurance business typically generates positive cash flows from operating activities as premiums collected from our insurance products and investment income received exceed acquisition costs benefits paid redemptions and operating expenses These positive cash flows are then invested to support the obligations of our insurance and investment products and required capital supporting these products Our cash flows from operating activities are affected by the timing of premiums fees and investment income received and benefits and expenses paid The increase in cash provided by operating activities in 2024 compared to 2023 was primarily due to fluctuations in receivables and payables associated with the timing of settlements and due to a one time impact of the YRT Reinsurance Transactions in 2024
Net cash provided by financing activities was 300 3 million for the year ended December 31 2024 compared to net cash used in financing activities of 2 585 8 million for the year ended December 31 2023 The increase in cash provided by financing activities was due to net investment contract deposits in 2024 as compared to net investment contract withdrawals in 2023 and an increase in banking operation deposits in 2024 as compared to a decrease in 2023 These were partially offset by higher acquisitions of treasury stock in 2024 as compared to 2023
Guarantors and Issuers of Guaranteed Securities PFG has issued certain notes pursuant to transactions registered under the Securities Act of 1933 Such notes include all currently outstanding senior notes the registered notes For additional information on the senior notes see Item 8 Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Note 13 Debt
PFS a wholly owned subsidiary of PFG has guaranteed each of the registered notes on a full and unconditional basis The full and unconditional guarantees require PFS to satisfy the obligations of the guaranteed security immediately if and when PFG has failed to make a scheduled payment thereunder If PFS does not make such payment any holder of the guaranteed security may immediately bring suit directly against PFS for payment of amounts due and payable No other subsidiary of PFG has guaranteed any of the registered notes
Summary financial information is presented below on a combined basis for PFG and PFS the obligor group and transactions between the obligor group have been eliminated The summary financial information excludes subsidiaries that are not issuers or guarantors Any investments by the obligor group in other subsidiaries have been excluded
Shelf Registration Under our current shelf registration we have the ability to issue in unlimited amounts unsecured senior debt securities or subordinated debt securities junior subordinated debt preferred stock common stock warrants depositary shares purchase contracts and purchase units of PFG Our wholly owned subsidiary PFS may guarantee fully and unconditionally or otherwise our obligations with respect to any non convertible securities other than common stock described in the shelf registration For information on senior notes issued from our shelf registration see Item 8 Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Note 13 Debt
In February 2024 our Board authorized a share repurchase program of up to 1 5 billion of our outstanding common stock which has no expiration date In February 2025 our Board authorized a share repurchase program of up to 1 5 billion of our outstanding common stock which has no expiration date See Item 5 Market for Registrant s Common Equity Related Stockholder Matters and Issuer Purchases of Equity Securities for information about our share repurchase authorizations For additional stockholders equity information see Item 8 Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Note 17 Stockholders Equity
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 11 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 OPEB plans in the consolidated statements of financial position The net funded status represents the difference between the fair value of plan assets and the projected benefit obligation for pension and OPEB plans 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 OPEB obligation was 391 8 million pre tax and 449 9 million pre tax as of December 31 2024 and 2023 respectively Nonqualified pension plan assets are not included as part of the funding status mentioned above The nonqualified pension plan assets are held in Rabbi trusts 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 under U S GAAP The market value of assets held in these trusts was 348 8 million and 342 2 million as of December 31 2024 and 2023 respectively
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 U S federal income tax purposes We do not anticipate contributions will be needed in 2025 to satisfy the minimum funding requirements of ERISA for our qualified pension plan We are unable to estimate the amount that may be contributed but it is possible that we may fund the plans in 2025 up to 70 0 million This includes funding for both our qualified and nonqualified pension plans We may contribute to our other postretirement benefit plans in 2025 pending future analysis
We have contractual obligations identified within Item 8 Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Note 9 Contractholder Funds Note 10 Future Policy Benefits and Claims Note 12 Reinsurance Note 13 Debt and Note 16 Contingencies Guarantees Indemnifications and Leases As of December 31 2024 we had no unique material cash requirements from known contractual and other obligations
We have made commitments to fund certain limited partnerships and other funds As of December 31 2024 the amount of unfunded commitments was 1 882 1 million We are only required to fund additional equity under these commitments when called upon to do so by the partnership or fund therefore these commitments are not liabilities on our consolidated statements of financial position
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 3 Variable Interest Entities We have made commitments to fund certain limited partnerships as previously discussed in Contractual Obligations and Contractual Commitments some of which are classified as unconsolidated variable interest entities
Guarantees and Indemnifications As of December 31 2024 no significant changes to guarantees and indemnifications have occurred since December 31 2023 For guarantee and indemnification information see Item 8 Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Note 16 Contingencies Guarantees Indemnifications and Leases under the caption Guarantees and Indemnifications
Our ratings are influenced by the relative ratings of our peers competitors as well as many other factors including our operating and financial performance capital levels asset quality liquidity asset liability management overall portfolio mix financial leverage i e debt risk exposures operating leverage and other factors
The following table summarizes our significant financial strength and debt ratings from the major independent rating organizations A rating is not a recommendation to buy sell or hold securities Such a rating may be subject to revision or withdrawal at any time by the assigning rating agency Each rating should be evaluated independently of any other rating
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date an exit price The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels The fair value hierarchy gives the highest priority Level 1 to unadjusted quoted prices in active markets for identical assets or liabilities and gives the lowest priority Level 3 to unobservable inputs The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety considering factors specific to the asset or liability See Item 8 Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Note 18 Fair Value Measurements for further details including a reconciliation of changes in Level 3 fair value measurements
Net assets liabilities measured at fair value on a recurring basis using significant unobservable inputs Level 3 as of December 31 2024 were 8 046 3 million as compared to 7 447 8 million as of December 31 2023 The increase was primarily related to an increase in the funds withheld payable embedded derivative net asset
We had total consolidated assets as of December 31 2024 of 313 663 6 million of which 103 375 8 million were invested assets A portion of our invested assets represent funds withheld backing reserves as part of coinsurance with funds withheld reinsurance agreements The funds withheld assets and associated net investment income and net realized capital gains losses are not included in the discussions below as the investment risk is passed to the reinsurer See Item 8 Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Note 12 Reinsurance for more information on the funds withheld assets The rest of our total consolidated assets are comprised primarily of separate account assets for which we do not bear investment risk therefore the discussion and financial information below does not include such assets
Invested assets as of December 31 2024 were predominantly high quality and broadly diversified across asset class individual credit industry and geographic location Asset allocation is determined based on cash flow and the risk return requirements of our products As shown in the following table the major categories of invested assets are fixed maturities and mortgage loans
The following table presents the yield and investment income excluding net realized capital gains and losses for our invested assets for the years indicated We calculate annualized yields using a simple average of asset classes at the beginning and end of the reporting period The yields for available for sale fixed maturities are calculated using amortized cost All other yields are calculated using carrying amounts
Net investment income increased primarily due to higher yields and average invested assets in fixed maturities commercial mortgages and cash in our U S operations and higher income on derivatives associated with fair value hedges These increases were partially offset by foreign currency headwinds impacting our Latin American business
The following table presents the contributors to net realized capital gains and losses for the periods indicated The amounts below do not include net realized capital gains losses on funds withheld assets that are not passed to the reinsurer which are separately reported on the consolidated statements of operations
Net realized capital losses decreased primarily due to reduced non credit losses on available for sale fixed maturities increased gains on currency derivatives and reduced losses on non hedged interest rate derivatives due to changes in interest rates These decreases were partially offset increased losses on commercial mortgage loans reserve changes increased losses on GMWB RILA activities and reduced gains on equity securities and sponsored investment funds due to equity market movement
In the following sections we provide details about U S Investment Operations excluding investments held as part of coinsurance with funds withheld agreements We believe the details of the composition of our investment portfolio excluding the funds withheld are most relevant to an understanding of our operations that are pertinent to investors because all funds withheld assets support obligations and liabilities relating to reinsurance agreements Guidelines are in place to ensure the investment risk associated with these fund withheld assets are appropriately managed See Note 12 Reinsurance for further information on the funds withheld assets
Of our invested assets 80 073 4 million were held by our U S operations as of December 31 2024 Our U S invested assets are managed primarily by Principal Asset Management Investment Management Our Investment Committee appointed by our Board is responsible for establishing investment policies and monitoring risk limits and tolerances Our primary investment objective is to maximize after tax returns consistent with acceptable risk parameters We seek to protect customers benefits by optimizing the risk return relationship on an ongoing basis through asset liability matching reducing credit risk avoiding high levels of investments that may be redeemed by the issuer maintaining sufficiently liquid investments and avoiding undue asset concentrations through diversification We are exposed to two primary sources of investment risk
A dedicated committee comprised of senior investment professional staff members approves the credit rating for the fixed maturities we purchase We have teams of security analysts organized by industry and asset class that analyze and monitor these investments Investments held in the portfolio are monitored on a continuous basis with a formal review annually or more frequently if material events affect the issuer The analysis includes both fundamental and technical factors The fundamental analysis encompasses both quantitative and qualitative analysis of the issuer The qualitative analysis includes an assessment of both accounting and management aggressiveness of the issuer In addition technical indicators such as stock price volatility and credit default swap levels are monitored We regularly review our investments to determine whether we should re rate them employing the following criteria
We purchase credit default swaps to hedge certain credit exposures in our investment portfolio We economically hedged credit exposure in our portfolio by purchasing credit default swaps with a notional amount of 155 0 million and 85 0 million as of December 31 2024 and December 31 2023 respectively We sell credit default swaps and total return swaps to offer credit protection to investors when entering into synthetic replicating transactions When selling credit protection if there is an event of default by the referenced name we are obligated to pay the counterparty the referenced amount of the contract and receive in return the referenced security When selling total return swaps if there is an event of default by the referenced name we are obligated to compensate the protection buyer for any decline in the price of the referenced security For further information on credit derivatives sold see Item 8 Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Note 5 Derivative Financial Instruments under the caption Credit Derivatives Sold
We manage our exposure on a net basis whereby we net positive and negative exposures for each counterparty with agreements in place For further information on derivative exposure see Item 8 Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Note 4 Investments under the caption Balance Sheet Offsetting
A dedicated risk management team is responsible for centralized monitoring of the commercial mortgage loan portfolio We apply a variety of guidelines to minimize credit risk in our commercial mortgage loan portfolio When considering new commercial mortgage loans we review the cash flow fundamentals of the property make a physical assessment of the underlying commercial real estate conduct a comprehensive market analysis and compare against industry lending practices We use a proprietary risk rating model to evaluate all new and substantially all existing loans within the portfolio The proprietary risk model is designed to stress projected cash flows under simulated economic and market downturns Our lending guidelines are typically 75 or less loan to value ratio and a debt service coverage ratio of at least 1 2 times We analyze investments outside of these guidelines based on cash flow quality tenancy and other factors The following table presents loan to value and debt service coverage ratios for our brick and mortar commercial mortgage loans
The amortized cost and weighted average yield calculated using amortized cost of non structured fixed maturity securities that will be callable at the option of the issuer excluding securities with a make whole provision were 2 091 5 million and 4 0 respectively as of December 31 2024 and 2 159 0 million and 4 0 respectively as of December 31 2023 In addition the amortized cost and weighted average yield of residential mortgage backed pass through securities RMBS residential collateralized mortgage obligations and asset backed securities home equity with material prepayment risk were 8 401 9 million and 4 1 respectively as of December 31 2024 and 6 959 0 million and 3 7 respectively as of December 31 2023
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 Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risk
We believe it is desirable to hold residential mortgage backed pass through securities due to their credit quality and liquidity as well as portfolio diversification characteristics Our portfolio is comprised of Government National Mortgage Association Federal National Mortgage Association and Federal Home Loan Mortgage Corporation pass through securities In addition our residential collateralized mortgage obligation portfolio offers structural features that allow cash flows to be matched to our liabilities
We purchase commercial mortgage backed securities CMBS to diversify the overall credit risks of the fixed maturities portfolio and to provide attractive returns The primary risks in holding CMBS are structural and credit risks Structural risks include the security s priority in the issuer s capital structure the adequacy of and ability to realize proceeds from the collateral and the potential for prepayments Credit risks involve collateral and issuer servicer risk where collateral and servicer performance may deteriorate CMBS are predominantly comprised of large pool securitizations that are diverse by property type borrower and geographic dispersion The risks to any CMBS deal are determined by the credit quality of the underlying loans and how those loans perform over time Another key risk is the vintage of the underlying loans and the state of the markets during a particular vintage
Similar to CMBS we purchase ABS for diversification and to provide attractive returns The primary risks in holding ABS are also structural and credit risks which are similar to those noted above for CMBS Our ABS portfolio is diversified by type of asset issuer and vintage We actively monitor holdings of ABS to recognize adverse changes in the risk profile of each security Prepayments in the ABS portfolio are in general insensitive to changes in interest rates or are insulated from such changes by call protection features In the event we are subject to prepayment risk we monitor the factors that impact the level of prepayment and prepayment speed for those ABS In addition we hold a diverse class of securities which limits our exposure to any one security
International fixed maturities exposure is determined by the country of risk of the obligor entity All international fixed maturities held by our U S operations are either denominated in U S dollars or have been swapped into U S dollar equivalents Our international investments are analyzed internally by country and industry credit investment professionals We control concentrations using issuer and country level exposure benchmarks which are based on the credit quality of the issuer and the country Our investment policy limits total international fixed maturities investments and we are within those internal limits Exposure to Canada is not included in our international exposure As of December 31 2024 and December 31 2023 our investments in Canada totaled 966 1 million and 958 0 million respectively
Fixed Maturities Credit Concentrations One aspect of managing credit risk is through industry issuer and asset class diversification Our credit concentrations are managed to established limits The top 10 exposures comprised 5 4 of single name credit fixed maturity exposures as of December 31 2024 and 4 8 as of December 31 2023
Fixed Maturities Valuation and Credit Quality Valuation techniques for the fixed maturities portfolio vary by security type and the availability of market data The use of different pricing techniques and their assumptions could produce different financial results See Item 8 Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Note 18 Fair Value Measurements for further details regarding our pricing methodology Once prices are determined they are reviewed by pricing analysts for reasonableness based on asset class and observable market data Investment analysts who are familiar with specific securities review prices for reasonableness through direct interaction with external sources review of recent trade activity or use of internal models All fixed maturities placed on the watch list are periodically analyzed by investment analysts These analysts periodically meet with the Chief Investment Officer and the Portfolio Managers to determine reasonableness of the analysts prices The valuation of bonds for which a credit loss exists and there is no quoted price is typically based on relative value analysis and the present value of the future cash flows expected to be received Although we believe these values reasonably reflect the fair value of those securities the key assumptions about risk premiums performance of underlying collateral if any and other market factors involve qualitative and unobservable inputs
The Securities Valuation Office SVO of the NAIC monitors the bond investments of insurers for regulatory capital and reporting purposes and when required assigns securities to one of six categories referred to as NAIC designations Although NAIC designations are not produced to aid the investment decision making process NAIC designations may serve as a reasonable proxy for Nationally Recognized Statistical Rating Organizations NRSRO credit ratings for certain bonds For most corporate bonds NAIC designations 1 and 2 include bonds generally considered investment grade by such rating organizations Bonds are considered investment grade when rated Baa3 or higher by Moody s or BBB or higher by S P NAIC designations 3 through 6 include bonds generally referred to as below investment grade Bonds are considered below investment grade when rated Ba1 or lower by Moody s or BB or lower by S P
For loan backed and structured securities as defined by the NAIC the NAIC designation is not always a reasonable indication of an NRSRO rating as described below For CMBS and non agency RMBS Blackrock Solutions undertakes the modeling of those NAIC designations This may result in a final designation being higher or lower than the NRSRO credit rating
Fixed maturities included 43 securities with an amortized cost of 622 7 million gross gains of 3 7 million gross losses of 6 3 million valuation allowance of 0 0 million and a carrying amount of 620 1 million as of December 31 2024 that were still pending a review and assignment of a designation by the SVO or NRSRO ratings to be assigned Due to the timing of when fixed maturities are purchased legal documents are filed and the review by the SVO is completed or NRSRO ratings that have expired or been withdrawn we will always have securities in our portfolio that are unrated over a reporting period In these instances an equivalent designation is assigned based on our fixed income analyst s assessment
Fixed Maturities Watch List We monitor any decline in the credit quality of fixed maturities through the designation of problem securities potential problem securities and restructured securities We define problem securities in our fixed maturity portfolio as securities i with principal and or interest payments in default or where default is perceived to be imminent in the near term or ii issued by a company that went into bankruptcy subsequent to the acquisition of such securities We define potential problem securities in our fixed maturity portfolio as securities included on an internal watch list for which management has concerns as to the ability of the issuer to comply with the present debt payment terms and which may result in the security becoming a problem or being restructured The decision whether to classify a performing fixed maturity security as a potential problem involves significant subjective judgments by our management as to the likely future industry conditions and developments with respect to the issuer We define restructured securities in our fixed maturity portfolio as securities where a concession has been granted to the borrower related to the borrower s financial difficulties that would not have otherwise been considered We determine that restructures should occur in those instances where greater economic value will be realized under the new terms than through liquidation or other disposition and may involve a change in contractual cash flows If the present value of the restructured cash flows is less than the current cost of the asset being restructured a realized capital loss is recorded in net income and a new cost basis is established
Fixed Maturities Credit Losses Each reporting period a group of individuals including the Chief Investment Officer our Portfolio Managers the assigned analysts and representatives from Investment Accounting review all securities to determine whether a credit loss exists The analysis focuses on each issuer s ability to service its debts in a timely fashion Formal documentation of the analysis and our decision is prepared and approved by management For additional details regarding our process to identify and evaluate securities with credit losses see Item 8 Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Note 4 Investments under the caption Allowance for Credit Loss
We would not consider a security with unrealized losses to have a decline in value due to credit when it is not our intent to sell the security it is not more likely than not that we would be required to sell the security before recovery of the amortized cost which may be maturity and we expect to recover the amortized cost basis However we do sell securities under certain circumstances such as when we have evidence of a change in the issuer s creditworthiness when we anticipate poor relative future performance of securities when a change in regulatory requirements modifies what constitutes a permissible investment or the maximum level of investments held or when there is an increase in capital requirements or a change in risk weights of debt securities Sales generate both gains and losses
A number of significant risks and uncertainties are inherent in the process of monitoring credit losses and determining the allowance for credit loss These risks and uncertainties include 1 the risk that our assessment of an issuer s ability to meet all of its contractual obligations will change based on changes in the credit characteristics of that issuer 2 the risk that the economic outlook will be worse than expected or have more of an impact on the issuer than anticipated 3 the risk that our investment professionals are making decisions based on fraudulent or misstated information in the financial statements provided by issuers and 4 the risk that new information obtained by us or changes in other facts and circumstances lead us to change our intent to not sell the security prior to recovery of its amortized cost Any of these situations could result in a charge to net income in a future period
Of the 4 246 2 million in gross unrealized losses as of December 31 2024 5 3 million in losses were attributed to securities scheduled to mature in one year or less 222 4 million attributed to securities scheduled to mature between one to five years 572 5 million attributed to securities scheduled to mature between five to ten years 2 384 7 million attributed to securities scheduled to mature after ten years and 1 061 3 million related to mortgage backed and other ABS that are not classified by maturity year As of December 31 2024 we were in a 3 769 9 million net unrealized loss position as compared to a 3 542 9 million net unrealized loss position as of December 31 2023 The 227 0 million increase in net unrealized losses for the year ended December 31 2024 can be attributed to an increase in interest rates partially offset by tightening of credit spreads
Fixed Maturities Available For Sale Unrealized Losses We believe our long term fixed maturities portfolio is well diversified among industry types and between publicly traded and privately placed securities Each year we direct the majority of our net cash inflows into investment grade fixed maturities Our current policy is to limit the percentage of fixed maturities invested in below investment grade assets to 15
We invest in privately placed fixed maturities to enhance the overall value of the portfolio increase diversification and obtain higher yields than are possible with comparable quality public market securities Generally private placements provide broader access to management information strengthened negotiated protective covenants call protection features and where applicable a higher level of collateral They are however generally not freely tradable because of restrictions imposed by U S federal and state securities laws and illiquid trading markets
The following tables present the fair value and the gross unrealized losses on our fixed maturities available for sale for which an allowance for credit loss has not been recorded by investment category and length of time that individual securities have been in a continuous unrealized loss position as of December 31 2024 and December 31 2023 respectively
Mortgage loans consist of commercial mortgage loans on real estate and residential mortgage loans For further details about residential mortgage loans see Item 8 Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Note 4 Investments under the caption Financing Receivables
Our commercial mortgage loan portfolio is diversified by geography and specific collateral property type Commercial mortgage lending in the state of California accounted for 24 and 25 of our commercial mortgage loan portfolio before valuation allowance as of December 31 2024 and December 31 2023 respectively We are therefore exposed to potential losses resulting from the risk of catastrophes including but not limited to earthquakes fires drought extreme heat flooding and tsunamis that may affect the region For the years ended December 31 2024 and December 31 2023 we did not experience any material losses due to the aforementioned catastrophe risks
The typical borrower in our commercial mortgage loan portfolio is a single purpose entity or single asset entity As of December 31 2024 and December 31 2023 the total number of commercial mortgage loans outstanding were 620 and 596 of which 35 and 38 were for loans with principal balances less than 10 0 million as of December 31 2024 and December 31 2023 respectively The average loan size of our commercial mortgage portfolio was 23 2 million and 22 9 million as of December 31 2024 and December 31 2023 respectively
Commercial Mortgage Loan Credit Monitoring For further details on monitoring and management of our commercial mortgage loan portfolio see Item 8 Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Note 4 Investments under the caption Financing Receivables Credit Monitoring
We categorize loans that are 60 days or more delinquent loans in process of foreclosure and loans with borrowers or credit tenants in bankruptcy that are delinquent as problem loans We categorize loans that are delinquent less than 60 days where the default is expected to be cured and loans with borrowers or credit tenants in bankruptcy that are current as potential problem loans The decision whether to classify a loan delinquent less than 60 days as a potential problem involves significant subjective judgments by management as to the likely future economic conditions and developments with respect to the borrower We categorize loans for which the original note rate has been reduced below market and loans for which the principal has been reduced as restructured loans We also consider loans that are refinanced more than one year beyond the original maturity or call date at below market rates as restructured
We had three delinquent problem commercial mortgage loans with a carrying amount of 20 6 million for which we had a valuation allowance of 18 9 million as of December 31 2024 We also had two potential problem commercial mortgage loans with a carrying amount of 140 5 million for which we had a valuation allowance of 33 0 million and one restructured problem commercial mortgage loan with a carrying amount of 34 1 million for which we had a valuation allowance of 34 1 million as of December 31 2024 We had one delinquent problem commercial mortgage loan with a carrying amount of 7 9 million for which we had a valuation allowance of 7 9 million as of December 31 2023 We also had two potential problem commercial mortgage loans with a carrying amount of 95 4 million for which we had a valuation allowance of 11 9 million and two restructured problem commercial mortgage loans with a carrying amount of 92 7 million for which we had a valuation allowance of 34 1 million as of December 31 2023
Commercial Mortgage Loan Valuation Allowance We establish the commercial mortgage loan valuation allowance at levels considered adequate to absorb estimated expected credit losses within the portfolio For further details on the commercial mortgage loan valuation allowance see Item 8 Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Note 4 Investments under the caption Financing Receivables Valuation Allowance
Real estate consists primarily of commercial equity real estate As of December 31 2024 and December 31 2023 the carrying amount of our equity real estate investment was 2 463 7 million and 2 343 4 million respectively Our commercial equity real estate is held in the form of wholly owned real estate real estate acquired upon foreclosure of commercial mortgage loans and majority owned interests in real estate joint ventures
Equity real estate is categorized as either real estate held for investment or real estate held for sale The carrying value of real estate held for investment is generally adjusted for impairments whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable Such impairment adjustments are recorded as net realized capital losses in our consolidated results of operations No such impairment adjustments were recorded for the year ended December 31 2024 or for the year ended December 31 2023
Once we identify a real estate property to be sold and it is probable that it will be sold we classify the property as held for sale We establish a valuation allowance subject to periodic revisions if necessary to adjust the carrying value of the property to reflect the lower of its current carrying value or the fair value less associated selling costs The valuation allowance did not change for the year ended December 31 2024 or for the year ended December 31 2023
Equity real estate is distributed across geographic regions of the country As of December 31 2024 our largest equity real estate portfolio concentration was in the Pacific 47 region of the United States By property type our largest concentrations were in Industrial 33 and Office 32 as of December 31 2024
Our other investments totaled 4 844 7 million as of December 31 2024 compared to 4 121 2 million as of December 31 2023 Other investments include interests in unconsolidated entities which include real estate properties owned jointly with venture partners and operated by the partners sponsored investment funds the cash surrender value of company owned and trust owned life insurance derivative assets and other investments
Of our invested assets 6 127 9 million were held by our international operations as of December 31 2024 Due to the regulatory constraints in each location each company maintains its own investment policies As shown in the following table the major category of international invested assets is fixed maturities The following table excludes invested assets of the separate accounts
Regulations in certain locations require investment in the funds we manage These required regulatory investments are classified as equity securities within our consolidated statements of financial position with all mark to market changes reflected in net investment income Our investment is primarily dictated by client activity and all investment performance is retained by us
Market risk is the risk we will incur losses due to adverse fluctuations in market rates and prices Our primary market risk exposures are to interest rates equity markets and foreign currency exchange rates The active management of market risk is an integral part of our operations We manage our overall market risk exposure within established risk tolerance ranges using several approaches including
Lower interest rates generally result in lower profitability in the long term Conversely higher interest rates generally result in higher profitability in the long term However an increase in market interest rates may cause a decline in the value of financial assets held at fair value on our consolidated statements of financial position
We use long term interest rate assumptions to calculate MRBs certain reserves and benefit plan obligations in accordance with U S GAAP In setting these assumptions we consider a variety of factors including historical experience emerging trends and future expectations We evaluate our assumptions on at least an annual basis Due to the long term nature of our assumptions we generally do not revise our assumptions in response to short term fluctuations in market interest rates However we will consider revising our assumptions if a significant change occurs in the factors noted above
We estimate a hypothetical 100 basis point immediate parallel decrease in U S interest rates would impact segment pre tax operating earnings between 1 and 1 over the next twelve months This estimate reflects the impact of routine management actions in response to changes in interest rates such as reducing the interest rates we credit on contractholder account balances but does not reflect the impact of other actions management may consider such as curtailing sales of certain products
The selection of a 100 basis point immediate parallel decrease in U S interest rates should not be construed as a prediction by us of future market events but rather as an illustration of the impact of such an event Our exposure will change as a result of ongoing portfolio transactions in response to new business management s assessment of changing market conditions and changes in our mix of business
If market rates increase rapidly policy surrenders withdrawals and requests for policy loans may increase as customers seek to achieve higher returns Excess lapses may result in an acceleration of amortization for our DAC and other actuarial balances We may be required to sell assets to raise the cash necessary to respond to such surrenders withdrawals and loans thereby realizing capital losses on the assets sold
Guaranteed Minimum Interest Rate Exposure The following table provides detail on the differences between the interest rates being credited to contractholders as of December 31 2024 and the respective guaranteed minimum interest rates GMIRs Amounts for contracts without significant fee revenues such as GICs funding agreements retail fixed income annuities and guaranteed pension contracts are excluded Additionally amounts for contracts that are reinsured are also excluded Account values are broken down by GMIR level within the Retirement and Income Solutions and Benefits and Protection segments
Impact of Rising Interest Rates on the Fair Value of Financial Assets An increase in market interest rates may cause a decline in the value of financial assets held at fair value on our consolidated statements of financial position Although changes in the fair value of our financial assets due to changes in interest rates may impact the amount of equity reported in our consolidated statements of financial position these changes will not cause an economic gain or loss unless we sell investments terminate derivative positions record an allowance for credit loss or determine a derivative instrument is no longer an effective hedge
We estimate a hypothetical 100 basis point immediate parallel increase in interest rates would reduce the net reported fair value of our financial assets and derivatives by 2 670 8 million as of December 31 2024 compared to 2 670 3 million as of December 31 2023 This estimate only reflects the change in fair value for financial assets and derivatives reported at fair value on our consolidated statements of financial position Assets and liabilities not reported at fair value on our consolidated statements of financial position including mortgage loans liabilities relating to insurance contracts investment contracts debt and bank deposits are excluded from this sensitivity analysis We believe the excluded liability items would economically serve as a partial offset to the net interest rate risk of the financial instruments included in the sensitivity analysis Separate account assets and liabilities are also excluded from this estimate as any interest rate risk is borne by the holder of the separate account Assets backing reserves as part of a coinsurance with funds withheld agreement are excluded from this estimate as any interest rate risk is passed to the reinsurer For more information on fair value measurements see Item 8 Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Note 18 Fair Value Measurements
Our selection of a 100 basis point immediate parallel increase in interest rates is a hypothetical rate scenario we use to demonstrate potential risk While a 100 basis point immediate parallel increase does not represent our view of future market changes it is a near term reasonably possible hypothetical change that illustrates the potential impact of such events While this sensitivity analysis provides a representation of interest rate sensitivity it is based on our portfolio exposures at a point in time and may not be representative of future market results These exposures will change as a result of ongoing portfolio transactions in response to new business management s assessment of changing market conditions and available investment opportunities
We manage interest rate risk through the use of an integrated risk management framework This helps us identify assess monitor report and manage our risks within established limits and risk tolerances Our internal risk committees monitor and discuss our risk profile and identify necessary actions to mitigate impacts from interest rate risk
We also limit our exposure to interest rate risk through our business mix and strategy We have intentionally limited our exposure to specific products where investment margins are critical to the product s profitability and we continue to emphasize the sale of products that generate revenues in the form of fees for service or premiums for insurance coverage and expose us to minimal interest rate risk
Prepayment risk is controlled by limiting our exposure to investments that are prepayable without penalty prior to maturity at the option of the issuer We also require additional yield on these investments to compensate for the risk the issuer will exercise such option Prepayment risk is also controlled by limiting the sales of liabilities with features such as puts or other options that can be exercised at inopportune times We manage the interest rate risk associated with our long term borrowings by monitoring the interest rate environment and evaluating refinancing opportunities as maturity dates approach
The plan fiduciaries use a Dynamic Asset Allocation strategy for our qualified defined benefit pension plan which strategically allocates an increasing portion of the assets of the pension plan to fixed income securities as the funding status improves The intended purpose of using the Dynamic Asset Allocation strategy is that the expected change in the value of the plan assets and the change in pension benefit obligation due to market movements are more likely to have more correlation versus a static allocation of assets between categories For more information see Item 7 Management s Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies and Estimates Benefit Plans and Item 8 Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Note 15 Employee and Agent Benefits
Use of Derivatives to Manage Interest Rate Risk We use or have used various derivative financial instruments to manage our exposure to fluctuations in interest rates including interest rate swaps interest rate options to be announced TBA forwards bond forwards treasury forwards swaptions and futures We use interest rate swaps treasury forwards and futures contracts to hedge against changes in the value of the GMWB MRB We use interest rate swaps treasury forwards and have used TBA forwards primarily to more closely match the interest rate characteristics of assets and liabilities They can be used to change the sensitivity to the interest rate of specific assets and liabilities as well as an entire portfolio We use interest rate swaps to manage our exposure to cash flow variability on recognized assets due to fluctuations in market interest rates We use bond forwards to fix the purchase price of a bond at a specified date in the future We use interest rate options to manage prepayment risks in our assets and minimum guaranteed interest rates and lapse risks in our liabilities We have purchased swaptions to hedge interest rate exposure for certain assets and liabilities
Foreign currency risk is the risk we will incur economic losses due to adverse fluctuations in foreign currency exchange rates This risk arises from foreign currency denominated funding agreements issued to nonqualified institutional investors in the international market foreign currency denominated fixed maturity and equity securities and our international operations including expected cash flows and potential acquisition and divestiture activity
We estimate as of December 31 2024 a 10 immediate unfavorable change in each of the foreign currency exchange rates to which we are exposed would result in no material change to the net fair value of our foreign currency denominated instruments identified above because we effectively hedge foreign currency denominated instruments to minimize exchange rate impacts which is consistent with our estimate as of December 31 2023 However fluctuations in foreign currency exchange rates do affect the translation of segment pre tax operating earnings and equity of our international operations into our consolidated financial statements
For our international operations we estimate a 10 immediate unfavorable change in each of the foreign currency exchange rates to which we were exposed would have resulted in a 277 0 million or 7 reduction in the total equity excluding noncontrolling interests of our international operations as of December 31 2024 as compared to an estimated 324 1 million or 8 reduction as of December 31 2023 We estimate a 10 unfavorable change in the average foreign currency exchange rates to which we were exposed through our international operations would have resulted in a 43 7 million or 5 reduction in segment pre tax operating earnings of our international operations for the year ended December 31 2024 as compared to an estimated 40 9 million or 5 reduction for the year ended December 31 2023
The selection of a 10 immediate unfavorable change in all currency exchange rates should not be construed as a prediction by us of future market events but rather as an illustration of the potential impact of such an event These exposures will change as a result of a change in the size and mix of our foreign operations
Use of Derivatives to Manage Foreign Currency Risk The foreign currency risk on funding agreements and fixed maturities in our U S operations is mitigated by using currency swaps that swap the foreign currency interest and principal payments to our functional currency We did not have currency swap agreements associated with foreign denominated liabilities as of December 31 2024 and December 31 2023 The notional amount of our currency swap agreements associated with foreign denominated fixed maturities was 2 669 3 million and 1 888 5 million as of December 31 2024 and December 31 2023 respectively
With regard to our international operations in order to enhance the diversification of our investment portfolios we may invest in bonds denominated in a currency that is different than the currency of our liabilities We use foreign exchange derivatives to economically hedge the currency mismatch Our international operations had currency swaps with a notional amount of 214 5 million and 217 3 million as of December 31 2024 and December 31 2023 respectively Our international operations also utilized currency forwards with a notional amount of 694 8 million and 711 9 million as of December 31 2024 and December 31 2023 respectively
Equity risk is the risk we will incur economic losses due to adverse fluctuations in equity markets As of December 31 2024 and December 31 2023 the fair value of our equity securities was 2 295 0 million and 1 478 1 million respectively We estimate a 10 decline in the prices of the equity securities would result in a decline in fair value of our equity securities of 229 5 million as of December 31 2024 as compared to a decline in fair value of our equity securities of 147 8 million as of December 31 2023
We also have equity risk associated with 1 universal life contracts that credit interest to customers based on changes in an external equity index 2 variable annuity contracts that have a GMWB rider that allows the customer to make withdrawals of a specified annual amount either for a fixed number of years or for the lifetime of the customer even if the account value is reduced to zero 3 variable annuity contracts that have a GMDB that allows the death benefit to be paid even if the account value has fallen below the GMDB amount 4 SEC registered annuity contracts with returns linked to an external equity index and 5 investment contracts in which the return is subject to minimum contractual guarantees We are also subject to equity risk based upon the assets that support our employee benefit plans For further discussion of equity risk associated with these plans see Item 7 Management s Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies and Estimates Benefit Plans
We estimate an immediate 10 downward equity shock followed by a 2 per quarter increase would reduce our annual segment pre tax operating earnings by approximately 5 to 8 over the next twelve months The selection of a 10 unfavorable equity shock 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
Separate and distinct from our equity risk associated with a decline in the S P index we also have equity risk associated with certain domestic alternative investments These investments are comprised of several asset categories including hedge funds private equity infrastructure and direct lending that provide an attractive asset match to our long dated liabilities and create diversification benefits to our fixed income investments The risk profile of these investments is actively monitored by our Investment Committee and our corporate risk management function Changes in the value of these investments will impact earnings We estimate an immediate 10 decline in the value of those assets followed by a 2 per quarter increase would reduce our annual segment pre tax operating earnings by less than 8 The selection of a 10 unfavorable change in the value of those assets should not be construed as a prediction of future market events but rather as an illustration of the potential impact of such a decline in value of those assets
Use of Derivatives to Manage Equity Risk We economically hedge the universal life products where the interest credited is linked to an external equity index by purchasing options that match the product s profile or selling options to offset existing exposures We economically hedge certain investments using total return swaps to swap the equity risk for income enhancement We economically hedge RILA index credit exposure using options and futures We economically hedge the GMWB rider MRB exposure which includes interest rate risk and equity risk using futures options treasury forwards and interest rate swaps with notional amounts of 7 678 0 million and 8 600 5 million as of December 31 2024 and December 31 2023 respectively The fair value of both MRBs 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
We have audited Principal Financial Group Inc s internal control over financial reporting as of December 31 2024 based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission 2013 framework the COSO criteria In our opinion Principal Financial Group Inc the Company maintained in all material respects effective internal control over financial reporting as of December 31 2024 based on the COSO criteria
We also have audited in accordance with the standards of the Public Company Accounting Oversight Board United States PCAOB the consolidated statements of financial position of the Company as of December 31 2024 and 2023 the related consolidated statements of operations comprehensive income stockholders equity and cash flows for each of the three years in the period ended December 31 2024 and the related notes and financial statement schedules listed in the Index at Item 15 a and our report dated February 19 2025 expressed an unqualified opinion thereon
The Company s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management s Report on Internal Control Over Financial Reporting Our responsibility is to express an opinion on the Company s internal control over financial reporting based on our audit We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U S federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB
Our audit included obtaining an understanding of internal control over financial reporting 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 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 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
We have audited the accompanying consolidated statements of financial position of Principal Financial Group Inc the Company as of December 31 2024 and 2023 the related consolidated statements of operations comprehensive income stockholders equity and cash flows for each of the three years in the period ended December 31 2024 and the related notes and financial statement schedules listed in the Index at Item 15 a collectively referred to as the consolidated financial statements In our opinion the consolidated financial statements present fairly in all material respects the financial position of the Company at December 31 2024 and 2023 and the results of its operations and its cash flows for each of the three years in the period ended December 31 2024 in conformity with U S generally accepted accounting principles
We also have audited in accordance with the standards of the Public Company Accounting Oversight Board United States PCAOB the Company s internal control over financial reporting as of December 31 2024 based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission 2013 framework and our report dated February 19 2025 expressed an unqualified opinion thereon
These financial statements are the responsibility of the Company s management Our responsibility is to express an opinion on the Company s financial statements based on our audits We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U S federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB
We conducted our audits in accordance with the standards of the PCAOB Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement whether due to error or fraud Our audits included performing procedures to assess the risks of material misstatement of the financial statements whether due to error or fraud and performing procedures that respond to those risks Such procedures included examining on a test basis evidence regarding the amounts and disclosures in the financial statements Our audits also included evaluating the accounting principles used and significant estimates made by management as well as evaluating the overall presentation of the financial statements We believe that our audits provide a reasonable basis for our opinion
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that 1 relate to accounts or disclosures that are material to the financial statements and 2 involved our especially challenging subjective or complex judgments The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements taken as a whole and we are not by communicating the critical audit matters below providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate
A subset of the Company s 69 3 billion fixed income securities portfolio exhibits higher estimation uncertainty when determining fair value The fixed income securities which include bonds asset backed securities redeemable preferred stock and certain non redeemable preferred securities are classified as either available for sale or trading and accordingly are carried at fair value in the consolidated statements of financial position As discussed in Note 18 of the consolidated financial statements for certain securities the Company obtains prices from third party pricing vendors a subset of which exhibit higher estimation uncertainty given the characteristics of the security In addition the Company uses a matrix priced internal model to develop the fair value for a subset of corporate bonds The fair value is developed using a risk spread which creates higher estimation uncertainty
We obtained an understanding evaluated the design and tested the operating effectiveness of controls over management s valuation process for the fixed income securities portfolio that exhibits higher estimation uncertainty This included among others testing the review and approval process that management has in place over validating the fair value from third party pricing sources and the assumptions used in determining the fair value for matrix priced securities
To test the fair value calculation we utilized the support of our valuation specialists which included among others independently calculating a reasonable range of fair values for a sample of securities by using a cash flow model and cash flow and yield assumptions based on independently obtained information or available transaction data for similar securities We compared these ranges to management s estimates of fair value for the selected securities
The future policy benefits liability related to these products is based on estimates of how much the Company will need to pay for future benefits and the amount of fees to be collected from policyholders for these policy features As described in Note 10 there is uncertainty inherent in estimating this liability because there is a significant amount of management judgment involved in developing certain assumptions that impact the liability balance which include mortality rates and lapse termination rates
Auditing the valuation of future policy benefits liabilities related to these products was complex and required the involvement of our actuarial specialist due to the high degree of judgment used by management in setting the assumptions used in the estimate of the future policy benefits liability related to these products
We obtained an understanding evaluated the design and tested the operating effectiveness of controls over the future policy benefits liability estimation processes including among others controls related to the review and approval processes that management has in place for the assumptions used in the valuation of the future policy benefits liability This included testing controls related to management s evaluation of the need to update assumptions based on the comparison of actual company experience to previous assumptions
We involved actuarial specialists to assist with our audit procedures which included among others an evaluation of the methodology applied by management with those methods used in prior periods To assess the significant assumptions used by management we compared the significant assumptions noted above to historical experience industry data or management s estimates of prospective changes in these assumptions In addition we performed an independent recalculation of cash flows related to the future policy benefit reserves for a sample of cohorts or contracts which we compared to the actuarial model used by management
The accompanying consolidated financial statements include the accounts of PFG and all other entities in which we directly or indirectly have a controlling financial interest as well as those variable interest entities VIEs in which we are the primary beneficiary The consolidated financial statements have been prepared in conformity with U S generally accepted accounting principles U S GAAP All significant intercompany accounts and transactions have been eliminated
Uncertainties may impact our business results of operations financial condition and liquidity See Use of Estimates in the Preparation of Financial Statements for additional details Our estimates and assumptions could change in the future Our results of operations and financial condition may also be impacted by other uncertainties including evolving regulatory legislative and standard setter accounting interpretations and guidance
We have relationships with various special purpose entities and other legal entities that must be evaluated to determine if the entities meet the criteria of a VIE or a voting interest entity VOE This assessment is performed by reviewing contractual ownership and other rights including involvement of related parties and requires use of judgment First we determine if we hold a variable interest in an entity by assessing if we have the right to receive expected losses and expected residual returns of the entity If we hold a variable interest then the entity is assessed to determine if it is a VIE An entity is a VIE if the equity at risk is not sufficient to support its activities if the equity holders lack a controlling financial interest or if the entity is structured with non substantive voting rights In addition to the previous criteria if the entity is a limited partnership or similar entity it is a VIE if the limited partners do not have the power to direct the entity s most significant activities through substantive kick out rights or participating rights A VIE is evaluated to determine the primary beneficiary The primary beneficiary of a VIE is the enterprise with 1 the power to direct the activities of a VIE that most significantly impact the entity s economic performance and 2 the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE When we are the primary beneficiary we are required to consolidate the entity in our financial statements We reassess our involvement with VIEs on a quarterly basis For further information about VIEs refer to Note 3 Variable Interest Entities
If an entity is not a VIE it is considered a VOE VOEs are generally consolidated if we own a greater than 50 voting interest If we determine our involvement in an entity no longer meets the requirements for consolidation under either the VIE or VOE models the entity is deconsolidated Entities in which we have management influence over the operating and financing decisions but are not required to consolidate other than investments accounted for at fair value under the fair value option are reported using the equity method
The guidance for the liability for future policy benefits for traditional and limited payment contracts and DAC was applied on a modified retrospective basis that is to contracts in force as of the beginning of the earliest period presented January 1 2021 also referred to as the transition date based on their existing carrying amounts An entity could elect to apply the changes retrospectively The guidance for MRBs was applied retrospectively
This authoritative guidance eliminated the accounting requirements for troubled debt restructurings TDRs by creditors and enhanced the disclosure requirements for certain loan refinancing and restructuring by creditors when a borrower is experiencing financial difficulty The update required entities to disclose current period gross write offs by year of origination for financing receivables and net investments in leases The amendments in this update were applied prospectively except for the transition method related to the recognition and measurement of TDRs for which an entity had the option to apply a modified retrospective transition method Early adoption was permitted
This authoritative guidance is intended to further align the economics of a company s risk management activities in its financial statements with hedge accounting requirements The guidance expanded the current single layer method to allow multiple hedge layers of a single closed portfolio Non prepayable assets can also be included in the same portfolio This guidance also clarified the current guidance on accounting for fair value basis adjustments applicable to both a single hedged layer and multiple hedged layers Upon adoption the application of these hedge strategies was applied prospectively Early adoption was permitted
This authoritative guidance provided optional expedients and exceptions for contracts and hedging relationships affected by reference rate reform An entity could elect not to apply certain modification accounting requirements to contracts affected by reference rate reform and instead account for the modified contract as a continuation of the existing contract Also an entity could apply optional expedients to continue hedge accounting for hedging relationships in which the critical terms changed due to reference rate reform This guidance eased the financial reporting impacts of reference rate reform on contracts and hedging relationships and was effective until December 31 2022 A subsequent amendment issued in December 2022 extended the relief date from December 31 2022 to December 31 2024 and was effective upon issuance
We adopted the guidance upon issuance prospectively and elected the applicable optional expedients and exceptions for contracts and hedging relationships impacted by reference rate reform through December 31 2024 The guidance did not have an impact on our consolidated financial statements upon adoption
When we adopt new accounting standards we have a process in place to perform a thorough review of the pronouncement identify the financial statement and system impacts and create an implementation plan among our impacted business units to ensure we are compliant with the pronouncement on the date of adoption This includes having effective processes and controls in place to support the reported amounts Each of the standards listed above is in varying stages in our implementation process based on its issuance and adoption dates We are on track to implement guidance by the respective effective dates
We include disaggregated rollforwards for DAC the unearned revenue liability separate account liabilities policyholder account balances the liability for future policy benefits the additional liability for certain benefit features and MRBs Further for certain actuarial balances disclosures are required for the significant inputs judgments assumptions and methods used in measurement including changes in those inputs judgments and assumptions and the effect of those changes on measurement
Amounts from different reportable segments cannot be aggregated for disclosures Factors to consider in determining the level of aggregation for disclosures include the type of coverage geography and market or type of customer We have identified the following levels of aggregation for long duration insurance contract disclosures
Pension Certain retirement accumulation products where the segregated funds and associated obligation to the client are consolidated within our financial statements as separate account assets and liabilities and are only in the scope of long duration insurance contracts disclosures for separate accounts
For the separate account liability disclosures our Retirement and Income Solutions segment uses a Group retirement contracts level of aggregation This consists primarily of separate account liabilities for the workplace savings and retirement solutions business as well as amounts for the investment only and pension risk transfer businesses
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 The most critical estimates include those used in determining
A description of such critical estimates is incorporated within the discussion of the related accounting policies that follow In applying these policies management makes subjective and complex judgments that frequently require estimates about matters that are inherently uncertain Actual results could differ from these estimates
Fixed maturities include bonds asset backed securities ABS redeemable preferred stock and certain non redeemable preferred securities Equity securities include mutual funds common stock non redeemable preferred stock and required regulatory investments We classify fixed maturities as either available for sale or trading at the time of the purchase and accordingly carry them at fair value Equity securities are also carried at fair value See Note 18 Fair Value Measurements for methodologies related to the determination of fair value Unrealized gains and losses related to fixed maturities available for sale excluding those in fair value hedging relationships are reflected in stockholders equity net of adjustments associated with related actuarial balances derivatives in cash flow hedge relationships and applicable income taxes Mark to market adjustments on certain equity securities and mark to market adjustments on certain fixed maturities trading are reflected in net realized capital gains losses Mark to market adjustments on certain fixed maturities trading are reflected in market risk benefit remeasurement gain loss Unrealized gains and losses related to hedged portions of fixed maturities available for sale in fair value hedging relationships are reflected in net investment income Mark to market adjustments related to certain securities carried at fair value with an investment objective to realize economic value through mark to market changes are reflected in net investment income
The amortized cost of fixed maturities includes cost adjusted for amortization of premiums and discounts computed using the interest method The amortized cost of fixed maturities available for sale is adjusted for changes in fair value of the hedged portions of securities in fair value hedging relationships and excludes accrued interest receivable Accrued interest receivable is reported in accrued investment income on the consolidated statements of financial position Fixed maturities available for sale are subject to an allowance for credit loss and changes in the allowance are reported in net income as a component of net realized capital gains losses Interest income as well as prepayment fees and the amortization of the related premium or discount is reported in net investment income For loan backed and structured securities we recognize income using a constant effective yield based on currently anticipated cash flows
Commercial and residential mortgage loans are generally reported at cost adjusted for amortization of premiums and accrual of discounts computed using the interest method and net of valuation allowances Amortized cost excludes accrued interest receivable Interest income is accrued on the principal amount of the loan based on the loan s contractual interest rate Interest income as well as prepayment of fees and the amortization of the related premium or discount is reported in net investment income on the consolidated statements of operations Accrued interest receivable is reported in accrued investment income on the consolidated statements of financial position Any changes in the loan valuation allowances are reported in net realized capital gains losses on the consolidated statements of operations See Note 4 Investments for further details of our valuation allowance
Our commercial and residential mortgage loan portfolios can include loans that have been modified We assess loan modifications on a case by case basis to evaluate whether a change to the valuation allowance and or write off is needed See Note 4 Investments under the caption Mortgage Loan Modifications for further details Prior to the implementation of authoritative guidance in 2023 we assessed loan modifications to determine if a TDR had occurred See Note 4 Investments under the caption Troubled Debt Restructuring for further details
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 basis of the property is 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 219 3 million and 230 6 million as of December 31 2024 and 2023 respectively Any impairment losses and any changes in valuation allowances are reported in net income
Net realized capital gains and losses on sales of investments are determined on the basis of specific identification In general in addition to realized capital gains and losses on investment sales and periodic settlements on derivatives not designated as hedges we report gains and losses related to the following in net realized capital gains losses on the consolidated statements of operations mark to market adjustments on certain equity securities mark to market adjustments on certain fixed maturities trading mark to market adjustments on sponsored investment funds mark to market adjustments on derivatives not designated as hedges cash flow hedge gains losses when the hedged item impacts realized capital gains losses changes in the valuation allowance for fixed maturities available for sale and certain financing receivables impairments of real estate held for investment and impairments of equity method investments Investment gains and losses on sales of certain real estate held for sale due to investment strategy and mark to market adjustments on certain securities carried at fair value with an investment objective to realize economic value through mark to market changes are reported as net investment income and are excluded from net realized capital gains losses
Policy loans and certain other investments are reported at cost Interests in unconsolidated entities joint ventures and partnerships are generally accounted for using the equity method We had certain real estate ventures for which the fair value option had been elected in prior periods See Note 18 Fair Value Measurements for detail on these investments
Derivatives are financial instruments whose values are derived from interest rates foreign exchange rates financial indices or the values of securities Derivatives generally used by us include swaps options futures and forwards Derivative positions are either assets or liabilities in the consolidated statements of financial position and are measured at fair value generally by obtaining quoted market prices or through the use of pricing models See Note 18 Fair Value Measurements for policies related to the determination of fair value Fair values can be affected by changes in interest rates foreign exchange rates financial indices values of securities credit spreads and market volatility and liquidity
Our accounting for the ongoing changes in fair value of a derivative depends on the intended use of the derivative and the designation as described above and is determined when the derivative contract is entered into or at the time of redesignation Hedge accounting is used for derivatives that are specifically designated in advance as hedges and that reduce our exposure to an indicated risk by having a high correlation between changes in the value of the derivatives and the items being hedged at both the inception of the hedge and throughout the hedge period Cash flows associated with derivatives are included within operating activities in the consolidated statements of cash flows with the exception of cash paid for certain options with deferred premiums Those derivatives are included in payments for financing element derivatives within financing activities in the consolidated statements of cash flows
Fair Value Hedges When a derivative is designated as a fair value hedge and is determined to be highly effective changes in its fair value along with changes in the fair value of the hedged asset liability or firm commitment attributable to the hedged risk are reported in the same consolidated statements of operations line item that is used to report the earnings effect of the hedged item For fair value hedges of fixed maturities available for sale these changes in fair value are reported in net investment income or net realized capital gains losses For fair value hedges of liabilities changes in fair value are reported in cost of interest credited The change in the fair value of excluded components is recorded in OCI and is recognized in net income through periodic settlements A fair value hedge determined to be highly effective may still result in a mismatch between the change in the fair value of the hedging instrument and the change in the fair value of the hedged item attributable to the hedged risk Certain fair value hedges use the portfolio layer method to hedge a designated layer amount within a closed portfolio of prepayable assets that is expected to remain outstanding for the length of the hedging relationship and is not expected to be impacted by prepayments defaults or other factors that affect the timing and amount of cash flows Prepayment risk is excluded when measuring the change in fair value attributable to the hedged risk under the portfolio layer method
Cash Flow Hedges When a derivative is designated as a cash flow hedge and is determined to be highly effective changes in its fair value are recorded as a component of OCI At the time the variability of cash flows being hedged impacts net income the related portion of deferred gains or losses on the derivative instrument is reclassified and reported in net income
Net Investment in a Foreign Operation Hedge When a derivative is used as a hedge of a net investment in a foreign operation its change in fair value to the extent effective as a hedge is recorded as a component of OCI If the foreign operation is sold or upon complete or substantially complete liquidation the deferred gains or losses on the derivative instrument are reclassified into net income
Hedge Documentation and Effectiveness Testing At inception we formally document all relationships between hedging instruments and hedged items as well as our risk management objective and strategy for undertaking various hedge transactions This process includes associating all derivatives designated as fair value or cash flow hedges with specific assets or liabilities on the consolidated statements of financial position or with specific firm commitments or forecasted transactions Documentation of fair value hedges that use the portfolio layer method supports the expectation that the hedged layer amount is anticipated to be outstanding at the end of the hedging relationship and includes expectations of prepayments defaults or other factors that affect the timing and amount of cash flows Effectiveness of the hedge is formally assessed at inception and throughout the life of the hedging relationship Even if a hedge is determined to be highly effective the hedge may still result in a mismatch between the change in the fair value of the hedging instrument and the change in the fair value of the hedged item attributable to the hedged risk
We use qualitative and quantitative methods to assess hedge effectiveness Qualitative methods may include monitoring changes to terms and conditions and counterparty credit ratings Quantitative methods may include statistical tests including regression analysis and minimum variance and dollar offset techniques For portfolio layer method hedges the assessment of hedge effectiveness includes confirming we expect the hedged layer amount to be outstanding at the end of the hedging relationship
Termination of Hedge Accounting We prospectively discontinue hedge accounting when 1 the criteria to qualify for hedge accounting is no longer met e g a derivative is determined to no longer be highly effective in offsetting the change in fair value or cash flows of a hedged item 2 the derivative expires is sold terminated or exercised or 3 we remove the designation of the derivative being the hedging instrument for a fair value or cash flow hedge
If it is determined that a derivative no longer qualifies as an effective hedge the derivative will continue to be carried on the consolidated statements of financial position at its fair value with changes in fair value recognized prospectively in net realized capital gains losses The asset or liability under a fair value hedge will no longer be adjusted for changes in fair value pursuant to hedging rules and the existing basis adjustment is amortized to the consolidated statements of operations line associated with the asset or liability If a portfolio layer method hedging relationship is discontinued the outstanding basis adjustment is allocated to the individual assets in the closed portfolio and those amounts are amortized consistent with the amortization of other discounts or premiums associated with those assets
The component of accumulated other comprehensive income AOCI related to discontinued cash flow hedges that are no longer highly effective is amortized to the consolidated statements of operations consistent with the net income impacts of the original hedged cash flows If a cash flow hedge is discontinued because it is probable the hedged forecasted transaction will not occur the deferred gain or loss is immediately reclassified from AOCI into net income
Embedded Derivatives We purchase and issue certain financial instruments and products that contain a derivative that is embedded in the financial instrument or product We assess whether this embedded derivative is clearly and closely related to the asset or liability that serves as its host contract If we deem that the embedded derivative s terms are not clearly and closely related to the host contract and a separate instrument with the same terms would qualify as a derivative instrument the derivative is bifurcated from that contract and held at fair value on the consolidated statements of financial position with changes in fair value reported in net income
Contractholder and policyholder liabilities contractholder funds future policy benefits and claims MRBs and other policyholder funds include reserves for investment contracts individual and group annuities that provide periodic income payments universal life insurance variable universal life insurance indexed universal life insurance term life insurance participating traditional individual life insurance group dental and vision insurance group critical illness group accident group hospital indemnity paid family and medical leave PFML group short term and long term disability insurance group life insurance individual disability insurance and long term care insurance It also includes 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 variable universal life and indexed 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 See Note 9 Contractholder Funds for additional details
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
Participating business represented approximately 2 3 and 3 of our life insurance in force and 15 16 and 17 of the number of life insurance policies in force as of December 31 2024 2023 and 2022 respectively Participating business represented approximately 15 16 and 17 of life insurance premiums for the years ended December 31 2024 2023 and 2022 respectively The amount of dividends to policyholders is declared 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 or other policyholder assessments in advance for services that will be rendered over the estimated lives of the policies and contracts See Note 7 Deferred Acquisition Costs and Other Actuarial Balances under the caption Unearned Revenue Liability for additional details
We include the following group products in our short duration insurance contracts disclosures long term disability LTD group life waiver dental vision short term disability STD critical illness accident PFML hospital indemnity and group life Refer to Note 10 Future Policy Benefits and Claims under the caption Short Duration Contracts for additional details
The liability for unpaid claims for both long duration and short duration contracts 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 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 net income
Products with fixed and guaranteed premiums and benefits consist principally of whole life and term life insurance policies and individual disability income Premiums from these products are recognized as premium revenue when due Related policy benefits and expenses for individual life 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 premium 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 interest assumptions We anticipate profits to emerge over the life of the annuity products as we earn investment income pay benefits and release reserves Any gross premium received in excess of the net premium is recognized as a deferred profit liability and amortized in relation to the expected future benefit payments See Note 10 Future Policy Benefits and Claims for additional details
Group life dental vision critical illness accident PFML hospital indemnity and disability 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 reduce revenue over the term of the coverage and are adjusted to reflect current experience Related policy benefits and expenses are associated with earned premiums and result in the recognition of profits over the term of the policies and contracts Fees for contracts providing claim processing or other administrative services are recorded as revenue over the period the service is provided
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 investment advisory and distribution services provided to retail and institutional clients based largely upon contractual rates applied to the specified amounts in the clients portfolios which include various platforms such as mutual funds collective investment trusts and business trusts Additionally fees and other revenues are earned for administrative services performed including recordkeeping trust and custody and reporting services for retirement savings plans insurance companies endowments and other financial institutions and other products 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
Fees for managing customers mandatory retirement savings accounts in Chile are collected with each monthly deposit made by our customers If a customer stops contributing before retirement age we collect no fees but services are still provided We recognize revenue from these long term service contracts as services are performed over the life of the contract
All insurance and investment contract modifications and replacements are reviewed to determine if the internal replacement results in a substantially changed contract If so 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 DAC sales inducement costs 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 immediately recognized in the period incurred In addition the existing DAC sales inducement costs 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 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 term debt are classified as long term debt in our consolidated statements of financial position Long term debt is primarily recorded at the unpaid principal balance net of unamortized discount premium and issuance costs
We evaluate each insurance agreement to determine whether the agreement provides indemnification against loss or liability related to insurance risk For agreements that expose the reinsurer to reasonable possibility of significant loss from insurance risk the reinsurance method of accounting is used for the agreement Assets and liabilities related to reinsurance ceded are reported on a gross basis on the consolidated statements of financial position Insurance liabilities are reported before the effects of reinsurance and we record an offsetting reinsurance recoverable net of valuation allowance Premiums and expenses are reported net of reinsurance ceded on the consolidated statements of operations
If an agreement does not expose the reinsurer to reasonable possibility of significant loss from insurance risk the deposit method of accounting is used for the agreement We record a deposit receivable net of valuation allowance if necessary The deposit receivable is adjusted as amounts are paid or received on the underlying contracts Accretion on the deposit receivable is calculated using an effective interest method and is reported in fees and other revenues and operating expense on the consolidated statements of operations
We have entered into coinsurance with funds withheld reinsurance agreements in which we record a funds withheld payable that contains an embedded derivative for which the fair value is estimated based on the change in fair value of the assets supporting the funds withheld payable The change in fair value of the funds withheld embedded derivative is separately reported on the consolidated statements of operations Gains and losses that do not flow to the reinsurer are reported in net realized capital gains losses on funds withheld assets on the consolidated statements of operations
We file a U S consolidated income tax return that includes all of our qualifying subsidiaries In addition we file income tax returns in all states and foreign jurisdictions in which we conduct business 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 corporate rates on taxable income based on existing tax laws Current income taxes are charged or credited to net 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 net operating loss carryforwards and tax credit carryforwards 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 net income in the period in which the change is enacted Subsequent to a change in tax rates and laws any stranded tax effects remaining in AOCI will be released only if an entire portfolio is liquidated sold or extinguished
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 average exchange rates Revenue expense and other foreign currency transaction and translation adjustments that affect cash flows are reported in net income along with related hedge and tax effects
Goodwill and other intangible assets 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 they are tested for impairment during the third quarter each year or more frequently if events or changes in circumstances indicate that the asset might be impaired Goodwill is tested at the reporting unit level which is one level below the operating segment if financial information is prepared and regularly reviewed by management at that level Once goodwill has been assigned to a reporting unit it is no longer associated with a particular acquisition therefore all of the activities within a reporting unit whether acquired or organically grown are available to support the goodwill value
Intangible assets with a finite useful life are amortized as related benefits emerge 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
Basic earnings per common share is calculated by dividing net 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 For any time period in which we have a net loss available to common stockholders we use the weighted average number of common shares used in our basic earnings per share calculation to calculate the diluted earnings per share as dilutive shares would have an antidilutive effect and result in a lower loss per share
In 2021 we completed a comprehensive review of our business mix and capital management options the Strategic Review We made the decision to exit our U S retail ULSG business The ULSG business was previously managed together with our other universal life UL business within our Benefits and Protection segment As such calculations of actuarial balances included UL and ULSG in the same cohorts which are the unit of account used for measurement As a result of the Strategic Review we made the decision in the second quarter of 2022 to manage the ULSG business separately from our other UL business effective as of January 1 2022 This led to us re cohorting the UL business resulting in separate cohorts for the ULSG business vs the remaining UL business
Amortized intangible assets primarily relate to customer relationship intangibles associated with our acquisition of the Institutional Retirement Trust business of Wells Fargo Bank N A and previous acquisitions in Chile Mexico and Hong Kong The finite lived intangible assets that continue to be subject to amortization over a weighted average remaining expected life of 15 years were as follows
The net carrying amount of unamortized indefinite lived intangible assets was 755 1 million and 767 4 million as of December 31 2024 and 2023 respectively As of both December 31 2024 and 2023 608 0 million relates to investment management contracts associated with our acquisition of WM Advisors Inc in 2006 The remaining balance primarily relates to the trade name intangible associated with our acquisition of Administradora de Fondos de Pensiones Cuprum S A Cuprum in 2013
We have relationships with various types of entities which may be VIEs Certain VIEs are consolidated in our financial results See Note 1 Nature of Operations and Significant Accounting Policies under the caption Consolidation for further details of our consolidation accounting policies We did not provide financial or other support to investees designated as VIEs for the periods ended December 31 2024 and December 31 2023
We hold an equity interest in Chilean mandatory privatized social security funds in which we provide asset management services We determined the mandatory privatized social security funds which also include contributions for voluntary pension savings voluntary non pension savings and compensation savings accounts are VIEs This is because the equity holders as a group lack the power due to voting rights or similar rights to direct the activities of the entity that most significantly impact the entity s economic performance and also because equity investors are protected from below average market investment returns relative to the industry s return due to a regulatory guarantee that we provide Further we concluded we are the primary beneficiary through our power to make decisions and our significant variable interest in the funds The purpose of the funds which reside in legally segregated entities is to provide long term retirement savings The obligation to the customer is directly related to the assets held in the funds and as such we present the assets as separate account assets and the obligation as separate account liabilities within our consolidated statements of financial position
Principal Asset Management offers retirement pension schemes in Hong Kong in which we provide trustee administration and asset management services to employers and employees under the Hong Kong Mandatory Provident Fund and Occupational Retirement Schemes Ordinance pension schemes The Occupational Retirement Schemes Ordinance pension scheme has various guaranteed and non guaranteed constituent funds or investment options in which customers can invest their money The guaranteed funds provide either a guaranteed rate of return to the customer or a minimum guarantee on withdrawals under certain qualifying events We determined the guaranteed funds are VIEs due to the fact the equity holders as a group lack the obligation to absorb expected losses due to the guarantee we provide We concluded we are the primary beneficiary because we have the power to make decisions and to receive benefits and the obligation to absorb losses that could be potentially significant to the VIE Therefore we consolidate the underlying assets and liabilities of the funds and present as separate accounts or within the general account depending on the terms of the guarantee The guaranteed constituent funds offered under the Hong Kong Mandatory Provident Fund and the Occupational Retirement Schemes Ordinance were closed in the fourth quarter of 2023 and the second quarter of 2024 respectively
We invest in several real estate limited partnerships and limited liability companies The entities invest in real estate properties Certain of these entities are VIEs based on the combination of our significant economic interest and related voting rights We determined we are the primary beneficiary as a result of our power to control the entities through our significant ownership Due to the nature of these real estate investments the investment balance will fluctuate as we purchase and sell interests in the entities and as capital expenditures are made to improve the underlying real estate
We sponsor and invest in certain investment funds for which we provide asset management services Although our asset management fee is commensurate with the services provided and consistent with fees for similar services negotiated at arms length we have a variable interest for funds where our other interests are more than insignificant The funds are VIEs as the equity holders lack power through voting rights to direct the activities of the entity that most significantly impact its economic performance We determined we are the primary beneficiary of the VIEs where our interest in the entity is more than insignificant and we are the asset manager
We invest in ABS trusts The trusts issue various collateralized mortgage obligation certificates and purchase residential mortgage loans The trusts are considered VIEs due to insufficient equity to sustain themselves We concluded we are the primary beneficiary as we purchase substantially all of the certificates and have the obligation to absorb losses that could potentially be significant to the VIEs We deconsolidated trusts in 2023 as we no longer held substantially all of the certificates
We invest in an ABS limited partnership The limited partnership issues multiple notes and purchases consumer loans auto loans other loans and credit facilities The limited partnership is considered a VIE due to insufficient equity to sustain itself We concluded we are the primary beneficiary as we have purchased all of the notes and have the obligation to absorb losses and residual returns that could potentially be significant to the VIE
We hold a variable interest in a number of VIEs where we are not the primary beneficiary Our investments in these VIEs are reported in fixed maturities available for sale fixed maturities trading equity securities and other investments in the consolidated statements of financial position and are described below
Unconsolidated VIEs include certain commercial mortgage backed securities CMBS residential mortgage backed pass through securities RMBS and other ABS All of these entities were deemed VIEs because the equity within these entities is insufficient to sustain them We determined we are not the primary beneficiary in the entities within these categories of investments This determination was based primarily on the fact we do not own the class of security that controls the unilateral right to replace the special servicer or equivalent function
We invest in cash collateralized debt obligations collateralized bond obligations collateralized loan obligations and other collateralized structures which are VIEs due to insufficient equity to sustain the entities We have determined we are not the primary beneficiary of these entities primarily because we do not control the economic performance of the entities and were not involved with the design of the entities or because we do not have a potentially significant variable interest in the entities for which we are the asset manager
We have invested in various VIE trusts and similar entities as a debt holder Most of these entities are classified as VIEs due to insufficient equity to sustain them In addition we have an entity classified as a VIE based on the combination of our significant economic interest and lack of voting rights We have determined we are not the primary beneficiary primarily because we do not control the economic performance of the entities and were not involved with the design of the entities
We have invested in partnerships and other funds which are classified as VIEs The entities are VIEs as equity holders lack the power to control the most significant activities of the entities because the equity holders do not have either the ability by a simple majority to exercise substantive kick out rights or substantive participating rights We have determined we are not the primary beneficiary because we do not have the power to direct the most significant activities of the entities
We hold an equity interest in Mexican mandatory privatized social security funds in which we provide asset management services Our equity interest in the funds is considered a variable interest We concluded the funds are VIEs because the equity holders as a group lack decision making ability through their voting rights We are not the primary beneficiary of the VIEs because although we as the asset manager have the power to direct the activities of the VIEs we do not have a potentially significant variable interest in the funds
We are the investment manager for certain money market mutual funds These types of funds are exempt from assessment under any consolidation model due to a scope exception for money market funds registered under Rule 2a 7 of the Investment Company Act of 1940 or similar funds As of December 31 2024 and December 31 2023 money market mutual funds we manage held 4 5 billion and 3 8 billion in total assets respectively We have no contractual obligation to contribute to these funds however we provide support through the waiver of fees and through expense reimbursements The amount of fees waived and expenses reimbursed was insignificant
Our investments include assets backing reserves as part of a coinsurance with funds withheld agreement The funds withheld invested assets are reported within their respective line items primarily consisting of fixed maturities available for sale mortgage loans and other investments See Note 12 Reinsurance for more information on the funds withheld invested assets
The major components of net realized capital gains losses on investments are shown below and are net of amounts on funds withheld invested assets that are passed directly to the reinsurer See Note 12 Reinsurance for further details The amounts below do not include net realized capital gains losses on funds withheld assets that are not passed to the reinsurer which are separately reported on the consolidated statements of operations Net realized capital gains losses on funds withheld assets includes gains losses realized upon sale of assets put into the funds withheld at the start of a reinsurance transaction for the unrealized gain losses on the date of transfer into the funds withheld the change in the valuation allowance on funds withheld commercial mortgage loans and unrealized gains and losses related to the change in fair value of funds withheld fixed maturities trading and equity securities
We have a process in place to identify fixed maturity securities that could potentially require an allowance for credit loss This process involves monitoring market events that could impact issuers credit ratings business climate management changes litigation and government actions and other similar factors This process also involves monitoring late payments pricing levels downgrades by rating agencies key financial ratios financial statements revenue forecasts and cash flow projections as indicators of credit issues
Each reporting period all securities in an unrealized loss position are reviewed to determine whether a decline in value is due to credit Relevant facts and circumstances considered include 1 the extent the fair value is below cost 2 the reasons for the decline in value 3 the financial position and access to capital of the issuer including the current and future impact of any specific events and 4 for structured securities the adequacy of the expected cash flows To the extent we determine an unrealized loss is due to credit an allowance for credit loss is recognized through a reduction to net income
We estimate the amount of the allowance for credit loss as the difference between amortized cost and the present value of the expected cash flows of the security The present value is determined using the best estimate cash flows discounted at the effective interest rate implicit to the security at the date of purchase or the current yield to accrete an asset backed or floating rate security The methodology and assumptions for establishing the best estimate cash flows vary depending on the type of security The ABS cash flow estimates are based on security specific facts and circumstances that may include collateral characteristics expectations of delinquency and default rates loss severity and prepayment speeds and structural support including subordination and guarantees The corporate security cash flow estimates are derived from scenario based outcomes of expected corporate restructurings or liquidations using bond specific facts and circumstances including timing security interests and loss severity We do not measure a credit loss allowance on accrued interest receivable because we write off the accrued interest receivable balance to net investment income in a timely manner when we have concern regarding collectability
Amounts on fixed maturities available for sale deemed to be uncollectible are written off and removed from the allowance for credit loss A write off may also occur if we intend to sell a security or whether it is more likely than not we will be required to sell the security before the recovery of its amortized cost which in some cases may extend to maturity
For available for sale securities with unrealized losses for which an allowance for credit loss has not been recorded the gross unrealized losses and fair value aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position were as follows
Of the total amounts Principal Life s consolidated portfolio represented 44 950 7 million in available for sale fixed maturities with gross unrealized losses of 6 373 8 million Of the available for sale fixed maturities within Principal Life s consolidated portfolio in a gross unrealized loss position 97 were investment grade rated AAA through BBB with an average price of 88 carrying value amortized cost as of December 31 2024 Gross unrealized losses in our fixed maturities portfolio increased during the year ended December 31 2024 primarily due to an increase in interest rates which was partially offset by a tightening of credit spreads
For those securities that had been in a continuous unrealized loss position for less than twelve months Principal Life s consolidated portfolio held 1 747 securities with a carrying value of 10 805 4 million and unrealized losses of 252 3 million reflecting an average price of 98 as of December 31 2024 Of this portfolio 96 was investment grade rated AAA through BBB as of December 31 2024 with associated unrealized losses of 245 4 million The unrealized losses on these securities can primarily be attributed to changes in market interest rates and changes in credit spreads since the securities were acquired
For those securities that had been in a continuous unrealized loss position greater than or equal to twelve months Principal Life s consolidated portfolio held 6 219 securities with a carrying value of 34 145 3 million and unrealized losses of 6 121 5 million as of December 31 2024 The average credit rating of this portfolio was A with an average price of 85 as of December 31 2024 Of the 6 121 5 million in unrealized losses the corporate sector accounts for 3 470 0 million in unrealized losses with an average price of 85 and an average credit rating of BBB Furthermore unrealized losses include 1 108 0 million within the states and political subdivisions sector with an average price of 81 and an average credit rating of AA 490 8 million within the collateralized mortgage obligation security sector with an average price of 83 and an average credit rating of AAA and 441 5 million within the CMBS sector with an average price of 90 and an average credit rating of AA The unrealized losses on these securities can primarily be attributed to changes in market interest rates and changes in credit spreads since the securities were acquired
Because we expected to recover our amortized cost we did not record an allowance for credit loss on these securities as of December 31 2024 Because it was not our intent to sell the fixed maturity available for sale securities with unrealized losses and it was not more likely than not that we would be required to sell these securities before recovery of the amortized cost which may be at maturity we did not write down these investments to fair value
Of the total amounts Principal Life s consolidated portfolio represented 46 553 9 million in available for sale fixed maturities with gross unrealized losses of 5 717 1 million Of the available for sale fixed maturities within Principal Life s consolidated portfolio in a gross unrealized loss position 94 were investment grade rated AAA through BBB with an average price of 89 carrying value amortized cost as of December 31 2023 Gross unrealized losses in our fixed maturities portfolio decreased during the year ended December 31 2023 primarily due to a tightening of credit spreads
For those securities that had been in a continuous unrealized loss position for less than twelve months Principal Life s consolidated portfolio held 983 securities with a carrying value of 5 836 0 million and unrealized losses of 140 5 million reflecting an average price of 98 as of December 31 2023 Of this portfolio 91 was investment grade rated AAA through BBB as of December 31 2023 with associated unrealized losses of 131 2 million The unrealized losses on these securities can primarily be attributed to changes in market interest rates and changes in credit spreads since the securities were acquired
For those securities that had been in a continuous unrealized loss position greater than or equal to twelve months Principal Life s consolidated portfolio held 7 042 securities with a carrying value of 40 717 9 million and unrealized losses of 5 576 6 million as of December 31 2023 The average credit rating of this portfolio was A with an average price of 88 as of December 31 2023 Of the 5 576 6 million in unrealized losses the corporate sector accounts for 2 968 9 million in unrealized losses with an average price of 88 and an average credit rating of BBB Furthermore unrealized losses include 906 9 million within the states and political subdivisions sector with an average price of 85 and an average credit rating of AA 645 6 million within the CMBS sector with an average price of 87 and an average credit rating of AA and 472 9 million within the collateralized mortgage obligation security sector with an average price of 85 and an average credit rating of AAA The unrealized losses on these securities can primarily be attributed to changes in market interest rates and changes in credit spreads since the securities were acquired
Because we expected to recover our amortized cost we did not record an allowance for credit loss on these securities as of December 31 2023 Because it was not our intent to sell the fixed maturity available for sale securities with unrealized losses and it was not more likely than not that we would be required to sell these securities before recovery of the amortized cost which may be at maturity we did not write down these investments to fair value
The net unrealized gains and losses on investments in available for sale securities and the net unrealized gains and losses on derivative instruments in cash flow hedge relationships are reported as separate components of stockholders equity The cumulative amount of net unrealized gains and losses on available for sale securities and derivative instruments in cash flow hedge relationships net of adjustments related to actuarial balances policyholder liabilities noncontrolling interest and applicable income taxes was as follows
Mortgage loans consist of commercial and residential mortgage loans Our commercial mortgage loan portfolio consists primarily of non recourse fixed rate mortgages on stabilized properties Our residential mortgage loan portfolio is composed of first lien and home equity mortgages concentrated in Chile and the United States
Commercial and residential mortgage loans are generally reported at cost adjusted for amortization of premiums and accrual of discounts computed using the interest method and net of valuation allowances Amortized cost excludes accrued interest receivable The amortized cost of our residential mortgage loans also includes basis adjustments related to fair value hedges in a closed portfolio See Note 5 Derivative Financial Instruments for further information Interest income is accrued on the principal amount of the loan based on the loan s contractual interest rate Interest income as well as prepayment of fees and the amortization of the related premium or discount is reported in net investment income on the consolidated statements of operations Accrued interest receivable is reported in accrued investment income on the consolidated statements of financial position Any changes in the loan valuation allowances are reported in net realized capital gains losses on the consolidated statements of operations Further details relating to our valuation allowance are included under the caption Financing Receivables Valuation Allowance
Our direct financing leases are concentrated in Chile Our Chilean operations enter into private placement contracts for commercial industrial and office space properties whereby our Chilean operations purchase the real estate and or building from the seller lessee but then lease the property back to the seller lessee Ownership of the property is transferred to the lessee by the end of the lease term Direct financing leases are reported as a component of other investments in the consolidated statements of financial position
Our reinsurance recoverables include amounts due from reinsurers for paid or unpaid claims claims incurred but not reported or policy benefits We cede life disability medical and long term care insurance as well as fixed annuity contracts with significant life insurance risk to other insurance companies through reinsurance Deposit receivables include amounts due from the reinsurer for fixed annuity contracts without significant life insurance risk recorded using the deposit method of accounting
Our other loans include consumer auto and other loans other loans of a consolidated VIE for which the fair value option was elected as well as consumer loans for which the fair value option was not elected Other loans are generally subject to amortized cost accounting and a valuation allowance if the fair value option is not elected Other loans are reported as a component of other investments in the consolidated statements of financial position
The amortized cost of commercial mortgage loans direct financing leases residential mortgage loans and other loans excluded accrued interest receivable of 69 2 million 1 2 million 12 0 million and 1 3 million respectively as of December 31 2024 and 58 3 million 1 2 million 11 4 million and 1 6 million respectively as of December 31 2023
We actively monitor and manage our commercial mortgage loan and direct financing lease portfolios All commercial mortgage loans and direct financing leases are analyzed regularly and substantially all are internally rated based on a proprietary risk rating cash flow model in order to monitor the financial quality of these assets The models stress expected cash flows at various levels and at different points in time depending on the durability of the income stream which includes our assessment of factors such as location macro and micro markets tenant quality and lease expirations Our internal rating analysis presents expected losses in terms of an S P Global S P bond equivalent rating for domestic commercial mortgage loans and Feller rate equivalent for Chilean commercial mortgage loans and direct financing leases As the credit risk for commercial mortgage loans and direct financing leases increases we adjust our internal ratings downward with loans in the category B and below having the highest risk for credit loss Internal ratings on commercial mortgage loans and direct financing leases are updated at least annually and potentially more often for certain investments with material changes in collateral value or occupancy and for investments on an internal watch list
Commercial mortgage loans and direct financing leases that require more frequent and detailed attention are identified and placed on an internal watch list Among the criteria that may indicate a potential problem are significant negative changes in ratios of loan to value or contract rents to debt service major tenant vacancies or bankruptcies borrower sponsorship problems late payments delinquent taxes and loan relief restructuring requests
Our residential mortgage loan portfolio is monitored based on performance of the loans Monitoring on a residential mortgage loan increases when the loan is delinquent or earlier if there is an indication of potential impairment We define non performing domestic residential mortgage loans as loans 90 days or greater delinquent or on non accrual status We define non performing residential first lien mortgages in the Chilean market as loans that have missed a specified number of coupon payments based on the nature of the loans and collection practices in that market
Financing receivables are placed on non accrual status if we have concern regarding the collectability of future payments or if a financing receivable has matured without being paid off or extended Factors considered may include conversations with the borrower loss of major tenant bankruptcy of borrower or major tenant decreased property cash flow for commercial mortgage loans and direct financing leases or number of days past due and other circumstances for residential mortgage loans Based on an assessment as to the collectability of the principal a determination is made to apply any payments received either against the principal against the valuation allowance or according to the contractual terms When a financing receivable is placed on non accrual status the accrued unpaid interest receivable is reversed against interest income Accrual of interest resumes after factors resulting in doubts about collectability have improved Financing receivables in the Chilean market are carried on accrual for a longer period of delinquency than domestic financing receivables as assessment of collectability is based on the nature of the financing receivables and collection practices in that market
We establish a valuation allowance to provide for the risk of credit losses inherent in our financing receivables The valuation allowance is maintained at a level believed adequate by management to absorb estimated expected credit losses The valuation allowance is based on amortized cost excluding accrued interest receivable and includes reserves for pools of financing receivables with similar risk characteristics We do not measure a credit loss allowance on accrued interest receivable because we write off the uncollectible accrued interest receivable balance to net investment income in a timely manner generally within 90 days domestically or in the Chilean market based on the nature of the loans and collection practices in that market During 2024 and 2023 we did not write off any commercial mortgage loan accrued interest or residential mortgage loan accrued interest
For commercial and residential mortgage loans and direct financing leases management s periodic evaluation and assessment of the valuation allowance adequacy is based on known and inherent risks in the portfolio adverse situations that may affect a borrower s ability to repay the estimated value of the underlying collateral composition of the portfolio portfolio delinquency information underwriting standards peer group information current and forecasted economic conditions loss experience and other relevant factors For reinsurance recoverables and deposit receivables management s periodic evaluation and assessment of the valuation allowance adequacy is based on known and inherent risks adverse situations that may affect a reinsurer s ability to repay current and forecasted economic conditions industry loss experience and other relevant factors
Our commercial mortgage loans and direct financing leases are pooled by risk rating level with an estimated loss ratio applied against each risk rating level The loss ratio is generally based upon historical loss experience for each risk rating level as adjusted for certain current and forecasted environmental factors management believes to be relevant Environmental factors are forecasted for two years or less with immediate reversion to historical experience The allowance for direct financing leases is also adjusted for the residual value of the leased assets A commercial mortgage loan or direct financing lease is evaluated individually if it does not continue to share similar risk characteristics of a pool We analyze the need for an individual evaluation for any domestic commercial mortgage loan that is delinquent for 60 days or more in process of foreclosure restructured on the internal watch list or that currently is evaluated individually We analyze the need for an individual evaluation for any Chilean commercial mortgage loan or direct financing lease that is considered past due based on collection practices in the Chilean market and the nature of the loan or lease
We estimate expected credit losses for certain commercial mortgage loan or direct financing lease commitments where we have a contractual obligation to extend credit The expected credit losses are estimated based on the commercial mortgage loan or direct financing lease valuation allowance process described previously adjusted for probability of funding The estimated expected credit losses for commercial mortgage loan and direct financing lease commitments are reported in other liabilities on the consolidated statements of financial position The change in the credit loss liability for commitments is included in net realized capital gains losses on the consolidated statements of operations Once funded expected credit losses for commercial mortgage loans or direct financing leases are included within the commercial mortgage loan or direct financing lease valuation allowance described previously
We evaluate residential mortgage loans based on aggregated risk factors and historical loss experience by pool type We adjust these quantitative factors for qualitative factors of present and forecasted conditions Qualitative factors include items such as economic and business conditions changes in the portfolio value of underlying collateral and concentrations A residential mortgage loan is evaluated individually if it does not continue to share similar risk characteristics of a pool We analyze the need for an individual evaluation for any domestic residential mortgage loan that is delinquent for 60 days or more in process of foreclosure restructured on the internal watch list or that currently is evaluated individually We analyze the need for an individual evaluation for any Chilean residential mortgage loan that is considered past due based on collection practices in the Chilean market and the nature of the loan
As discussed previously commercial and residential mortgage loans and direct financing leases are evaluated individually if the asset does not continue to share similar risk characteristics of a pool When we determine a commercial or residential mortgage loan is probable of foreclosure a valuation allowance is established equal to the difference between the carrying amount of the mortgage loan and the estimated value of the collateral reduced by the cost to sell For certain commercial mortgage loans where repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty we elect to establish a valuation allowance equal to the difference between the carrying amount of the mortgage loan and the estimated value of the real estate collateral which may be reduced by the cost to sell Estimated value may also be based on either the present value of the expected future cash flows discounted at the asset s effective interest rate or the asset s observable market price Subsequent changes in the estimated value are reflected in the valuation allowance Amounts on financing receivables deemed to be uncollectible are charged off and removed from the valuation allowance The change in the valuation allowance for loans and direct financing leases is included in net realized capital gains losses on the consolidated statements of operations
Our reinsurance recoverables and deposit receivable are pooled by reinsurer risk rating with an estimated loss ratio applied against each risk rating level The loss ratio is generally based upon industry historical loss experience and expected recovery timing as adjusted for certain current and forecasted environmental factors management believes to be relevant Environmental factors are forecasted for five years or less with immediate reversion to industry historical experience A reinsurance recoverable or deposit receivable is evaluated individually if it does not continue to share similar risk characteristics of a pool We analyze the need for an individual evaluation for any reinsurance recoverable or deposit receivable based on past due payments and changes in reinsurer risk ratings The change in the valuation allowance for reinsurance recoverables and deposit receivable is included in benefits claims and settlement expenses on the consolidated statements of operations
Our commercial and residential mortgage loan portfolios include loans that have been modified We assess loan modifications that are related to our borrowers experiencing financial difficulty in the form of principal forgiveness an interest rate reduction an other than insignificant payment delay or a term extension or a combination thereof Generally an assessment of whether a borrower is experiencing financial difficulty is made on the date of the modification
The financing receivables valuation allowance utilizes an estimate of lifetime expected credit losses and it is recorded on each loan upon origination or acquisition The starting point for the estimate of the valuation allowance is historical loss information which includes losses from modification of receivables to borrowers experiencing financial difficulty Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the valuation allowance because of the measurement methodologies used to estimate the allowance a change to the valuation allowance is generally not recorded upon modification
Occasionally a modification of a loan from a borrower experiencing financial difficulty is in the form of principal forgiveness When principal forgiveness is provided as a modification the amount of the principal forgiven is deemed uncollectible Therefore that portion of the loan is written off which results in a reduction of the amortized cost and a corresponding adjustment to the valuation allowance
Prior to the implementation of authoritative guidance in 2023 we assessed loan modifications on a case by case basis to evaluate whether a TDR has occurred When we had commercial mortgage loan TDRs they were modified to delay or reduce principal payments and to reduce or delay interest payments The commercial mortgage loan modifications result in delayed cash receipts a decrease in interest income and loan rates that were considered below market When we had residential mortgage loan TDRs they included modifications of interest only payment periods delays in principal balloon payments and interest rate reductions Residential mortgage loan modifications resulted in delayed or decreased cash receipts and a decrease in interest income
Other investments include 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 in net investment income Summarized financial information for these unconsolidated entities was as follows
Derivative assets are carried at fair value and reported as a component of other investments See Note 5 Derivative Financial Instruments for further details Certain sponsored investment funds are also carried at fair value and reported as a component of other investments with changes in fair value included in net realized capital gains losses on our consolidated statements of operations The fair value of these funds was 667 7 million and 576 9 million as of December 31 2024 and 2023 respectively
As of December 31 2024 and 2023 we posted 6 748 8 million and 6 616 8 million respectively in commercial mortgage loans and residential first lien mortgages to satisfy collateral requirements associated with our obligation under funding agreements with Federal Home Loan Bank of Des Moines FHLB Des Moines In addition as of December 31 2024 and 2023 we posted 3 636 7 million and 4 139 7 million respectively in fixed maturities available for sale and trading securities to satisfy collateral requirements primarily associated with a reinsurance arrangement our derivative credit support annex collateral agreements Futures Commission Merchant FCM agreements a lending arrangement and our obligation under funding agreements with FHLB Des Moines Since we did not relinquish ownership rights on these instruments they are reported as mortgage loans fixed maturities available for sale and fixed maturities trading respectively on our consolidated statements of financial position Of the securities posted as collateral as of December 31 2024 and 2023 206 0 million and 519 9 million respectively could be sold or repledged by the secured party
The financial instruments that are subject to master netting agreements or similar agreements include right of setoff provisions Derivative instruments include provisions to setoff positions covered under the agreements with the same counterparties and provisions to setoff positions outside of the agreements with the same counterparties in the event of default by one of the parties Derivative instruments also include collateral or variation margin provisions which are generally settled daily with each counterparty See Note 5 Derivative Financial Instruments for further details
Repurchase and reverse repurchase agreements include provisions to setoff other repurchase and reverse repurchase balances with the same counterparty Repurchase and reverse repurchase agreements also include collateral provisions with the counterparties For reverse repurchase agreements we require the counterparties to pledge collateral with a value greater than the amount of cash transferred We have the right but do not sell or repledge collateral received in reverse repurchase agreements Repurchase agreements are structured as secured borrowings for all counterparties We pledge fixed maturities available for sale which the counterparties have the right to sell or repledge Interest incurred on repurchase agreements is reported as part of operating expenses on the consolidated statements of operations Net proceeds related to repurchase agreements are reported as a component of financing activities on the consolidated statements of cash flows We did not have any outstanding repurchase agreements as of December 31 2024 and December 31 2023
Derivatives are generally used to hedge or reduce exposure to market risks associated with assets held or expected to be purchased or sold and liabilities incurred or expected to be incurred Derivatives are used to change the characteristics of our asset liability mix consistent with our risk management activities Derivatives are also used in asset replication and income generation strategies
Interest rate risk is the risk we will incur economic losses due to adverse changes in interest rates Sources of interest rate risk include the difference between the maturity and interest rate changes of assets with the liabilities they support timing differences between the pricing of liabilities and the purchase or procurement of assets and changing cash flow profiles from original projections due to prepayment options embedded within asset and liability contracts We use various derivatives to manage our exposure to fluctuations in interest rates
Interest rate swaps are contracts in which we agree with other parties to exchange at specified intervals the difference between fixed rate and or floating rate interest amounts based upon designated market rates or rate indices and an agreed upon notional principal amount Generally no cash is exchanged at the outset of the contract and no principal payments are made by any party Cash is paid or received based on the terms of the swap We use interest rate swaps primarily to more closely match the interest rate characteristics of assets and liabilities and to mitigate the risks arising from timing mismatches between assets and liabilities including duration mismatches We use interest rate swaps to hedge against changes in the value of assets we anticipate acquiring and other anticipated transactions and commitments We use interest rate swaps to hedge against cash variability related to forecasted transactions Interest rate swaps are used to hedge against changes in the value of the guaranteed minimum withdrawal benefit GMWB MRB 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 Additionally we utilize interest rate swaps to replicate the returns of floating rate assets
Interest rate options including interest rate caps and interest rate floors which can be combined to form interest rate collars are contracts that entitle the purchaser to pay or receive the amounts if any by which a specified market rate exceeds a cap strike interest rate or falls below a floor strike interest rate respectively at specified dates We use interest rate options to manage prepayment risks in our assets and minimum guaranteed interest rates and lapse risks in our liabilities
In exchange traded futures transactions we agree to purchase or sell a specified number of contracts the values of which are determined by the values of designated classes of securities and to post variation margin on a daily basis in an amount equal to the difference in the daily market values of those contracts We enter into exchange traded futures with regulated futures commissions merchants who are members of a trading exchange We use exchange traded interest rate futures to hedge against changes in value of the GMWB MRB in addition to the economic exposure to certain fund closures in process
Interest rate forwards including to be announced TBA forwards bond forwards and treasury forwards are contracts to take delivery of a fixed income security at a specified price at a future date TBA forwards deliver government guaranteed mortgage backed securities Bond forwards and treasury forwards deliver corporate or municipal and U S Treasury bonds respectively At inception of the TBA and certain treasury forward contracts we do not intend to take physical delivery We intend to take delivery of the bond forwards referencing corporate municipal and certain treasury bonds We have used TBA forwards to gain exposure to the investment risk and return of agency mortgage backed security pools in order to reduce asset and liability duration mismatch Treasury forwards are used to hedge against changes in the value of the GMWB MRB and to more closely match the interest rate characteristics of assets and liabilities Bond forwards are used to gain leverage through synthetic exposure during the forward period and fix the purchase price of a bond at a specified date in future
Foreign currency risk is the risk we will incur economic losses due to adverse fluctuations in foreign currency exchange rates This risk arises from foreign currency denominated funding agreements issued to nonqualified institutional investors in the international market foreign currency denominated fixed maturity and equity securities and our international operations including expected cash flows and potential acquisition and divestiture activity We use various derivatives to manage our exposure to fluctuations in foreign currency exchange rates
Currency swaps are contracts in which we agree with other parties to exchange at specified intervals a series of principal and interest payments in one currency for that of another currency Generally the principal amount of each currency is exchanged at the beginning and termination of the currency swap by each party The interest payments are primarily fixed to fixed rate however they may also be fixed to floating rate or floating to fixed rate These transactions are entered into pursuant to master agreements that provide for a single net payment to be made by one counterparty for payments made in the same currency at each due date We use currency swaps to reduce market risks from changes in currency exchange rates with respect to investments or liabilities denominated in foreign currencies that we either hold or intend to acquire or sell
Currency forwards are contracts in which we agree with other parties to deliver or receive a specified amount of an identified currency at a specified future date Typically the price is agreed upon at the time of the contract and payment for such a contract is made at the specified future date We use currency forwards to reduce market risks from changes in currency exchange rates with respect to investments or liabilities denominated in foreign currencies that we either hold or intend to acquire or sell We use currency forwards to hedge certain foreign denominated real estate funds in our domestic operations and net equity investments in foreign operations including certain sponsored investment funds
Equity risk is the risk that we will incur economic losses due to adverse fluctuations in common stock prices We use various derivatives to manage our exposure to equity risk which arises from products in which the return or interest we credit is tied to an external equity index as well as products subject to minimum contractual guarantees
We use equity put options to hedge against changes in the value of the GMWB MRB related to the GMWB rider on our variable annuity products We also use equity options to hedge returns credited to policyholder accounts related to our RILA products The premium associated with certain options is paid quarterly over the life of the option contract
Credit risk relates to the uncertainty associated with the continued ability of a given obligor to make timely payments of principal and interest We use credit default swaps to enhance the return on our investment portfolio by providing comparable exposure to fixed income securities that might not be available in the primary market They are also used to hedge credit exposures in our investment portfolio Credit derivatives are used to sell or buy credit protection on an identified name or names on an unfunded or synthetic basis in return for receiving or paying a quarterly premium The premium generally corresponds to a referenced name s credit spread at the time the agreement is executed
In cases where we sell protection we also buy a quality cash bond to match against the swap thereby entering into a synthetic transaction replicating a cash security When selling protection if there is an event of default by the referenced name as defined by the agreement we are obligated to pay the counterparty the referenced amount of the contract and receive in return the referenced security in a principal amount equal to the notional value of the swap
Embedded Derivatives We purchase or issue certain financial instruments or products that contain a derivative instrument that is embedded in the financial instrument or product When it is determined that the embedded derivative possesses economic characteristics that are not clearly or closely related to the economic characteristics of the host contract and a separate instrument with the same terms would qualify as a derivative instrument the embedded derivative is bifurcated from the host instrument for measurement purposes The embedded derivative which is reported with the host instrument in the consolidated statements of financial position is carried at fair value
Our risk of loss is typically limited to the fair value of our derivative instruments and not to the notional or contractual amounts of these derivatives We are also exposed to credit losses in the event of nonperformance of the counterparties Our current credit exposure is limited to the value of derivatives that have become favorable to us This credit risk is minimized by purchasing such agreements from financial institutions with high credit ratings and by establishing and monitoring exposure limits We also utilize various credit enhancements including collateral and credit triggers to reduce the credit exposure to our derivative instruments
Derivatives may be exchange traded or they may be privately negotiated contracts which are usually referred to as over the counter OTC derivatives Certain of our OTC derivatives are cleared and settled through central clearing counterparties OTC cleared while others are bilateral contracts between two counterparties bilateral OTC Our derivative transactions are generally documented under International Swaps and Derivatives Association Inc ISDA Master Agreements Management believes that such agreements provide for legally enforceable set off and close out netting of exposures to specific counterparties Under such agreements in connection with an early termination of a transaction we are permitted to set off our receivable from a counterparty against our payables to the same counterparty arising out of all included transactions For reporting purposes we do not offset fair value amounts of bilateral OTC derivatives for the right to reclaim cash collateral or the obligation to return cash collateral against fair value amounts recognized for derivative instruments executed with the same counterparties under master netting agreements OTC cleared derivatives have variation margin that is legally characterized as settlement of the derivative exposure which reduces their fair value in the consolidated statements of financial position
Certain of our derivative instruments contain provisions that require us to maintain an investment grade rating from each of the major credit rating agencies on our debt If the ratings on our debt were to fall below investment grade it would be in violation of these provisions and the counterparties to the derivative instruments could request immediate payment or demand immediate and ongoing full overnight collateralization on derivative instruments in net liability positions The aggregate fair value inclusive of accrued interest of all derivative instruments with credit risk related contingent features that were in a liability position without regard to netting under derivative credit support annex agreements as of December 31 2024 and December 31 2023 was 472 3 million and 482 3 million respectively Cleared derivatives have contingent features that require us to post excess margin as required by the FCM The terms surrounding excess margin vary by FCM agreement With respect to derivatives containing collateral provisions we posted collateral and initial margin of 533 7 million and 544 2 million as of December 31 2024 and December 31 2023 respectively in the normal course of business which reflects netting under derivative agreements If the credit risk related contingent features underlying these agreements were triggered on December 31 2024 we would be required to post up to an additional 95 7 million of collateral to our counterparties
As of December 31 2024 and December 31 2023 we had received 358 9 million and 103 3 million respectively of cash collateral associated with our derivative credit support annex agreements and FCM agreements for which we recorded a corresponding liability reflecting our obligation to return the collateral
Notional amounts are used to express the extent of our involvement in derivative transactions and represent a standard measurement of the volume of our derivative activity Notional amounts represent those amounts used to calculate contractual flows to be exchanged and are not paid or received except for contracts such as currency swaps Credit exposure represents the gross amount owed to us under derivative contracts as of the valuation date The notional amounts and credit exposure of our derivative financial instruments by type were as follows
When we sell credit protection we are exposed to the underlying credit risk similar to purchasing a fixed maturity security instrument Our credit derivative contracts sold reference a single name or reference security referred to as single name credit default swaps or single name total return swaps These instruments are either referenced in an OTC credit derivative transaction or embedded within an investment structure that has been fully consolidated into our financial statements
These credit derivative transactions are subject to events of default defined within the terms of the contract which normally consist of bankruptcy failure to pay or modified restructuring of the reference entity and or issue If a default event occurs for a reference name or security we are obligated to pay the counterparty an amount equal to the notional amount of the credit derivative transaction As a result our maximum future payment is equal to the notional amount of the credit derivative In certain cases we also may have purchased credit protection with identical underlyings to certain of our sold protection transactions As of December 31 2024 and December 31 2023 we did not purchase credit protection relating to our sold protection transactions In certain circumstances our potential loss could also be reduced by any amount recovered in the default proceedings of the underlying credit name
The following tables show our derivative protection sold by types of contract types of referenced underlying asset class and external agency rating for the underlying reference security The maximum future payments are undiscounted and have not been reduced by the effect of any offsetting transactions collateral or recourse features described above
We use fixed to floating rate interest rate swaps to more closely align the interest rate characteristics of certain assets and also use them to align the interest rate characteristics of certain liabilities In general these swaps are used in asset and liability management to modify duration which is a measure of sensitivity to interest rate changes
The net interest effect of interest rate swap 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 The currency related impacts of currency swap transactions for derivatives in fair value hedges is recorded as an adjustment to net realized capital gains or losses of the underlying hedged item in our consolidated statements of operations
The maximum length of time we are hedging our exposure to the variability in future cash flows for forecasted transactions excluding those related to the payments of variable interest on existing financial assets and liabilities is 2 2 years As of December 31 2024 we had 10 8 million of net losses reported in AOCI on the consolidated statements of financial position related to active hedges of forecasted transactions If a hedged forecasted transaction is no longer probable of occurring cash flow hedge accounting is discontinued If it is probable that the hedged forecasted transaction will not occur the deferred gain or loss is immediately reclassified from AOCI into net income
We use futures certain swaptions and swaps option collars options and forwards in effective economic hedges that have not been designated as hedges for financial reporting purposes As such periodic changes in the market value of these instruments which includes mark to market gains and losses as well as periodic and final settlements primarily flow directly into net realized capital gains losses on the consolidated statements of operations However the change in fair value of the funds withheld embedded derivative is separately reported on the consolidated statements of operations Additionally mark to market gains and losses as well as periodic and final settlements for derivatives used to hedge market risk benefits are reported in market risk benefit gain loss on the consolidated statements of operations
The following table shows the effect of derivatives not designated as hedging instruments including fair value changes of embedded derivatives that have been bifurcated from the host contract on the consolidated statements of operations and are net of amounts on funds withheld invested assets that are passed directly to the reinsurer See Note 12 Reinsurance for further details
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 This includes but is 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
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 its 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 policyholder dividend obligation PDO is required to be established for higher than expected earnings in the Closed Block that will need to be paid as dividends unless future performance of the Closed Block is less favorable than originally expected A model of the Closed Block was established to produce the pattern of expected earnings assets and liabilities in the Closed Block These projections are utilized to determine ratios that will allow us to compare actual cumulative earnings to expected cumulative earnings and determine the amount of the PDO As of December 31 2024 and 2023 the PDO was 0 0 million and 0 0 million respectively
Incremental direct costs of contract acquisition as well as certain costs directly related to acquisition activities underwriting policy issuance and processing medical and inspection and sales force contract selling for the successful acquisition of new and renewal insurance policies and investment contracts are capitalized in the period they are incurred Maintenance costs and acquisition costs that are not deferrable are charged to operating expenses as incurred
For our long duration insurance products and certain investment contracts DAC is amortized on a constant level basis over the expected life of the contracts using groupings and assumptions consistent with those used in computing policyholder liabilities For each of our long duration insurance products we select an inforce measure as a basis for amortization that will result in a constant level amortization pattern for the expected life of the contract If our actual contract terminations differ from our expectation the amortization pattern is adjusted on a prospective basis
Some of our life and disability products within the Benefits and Protection segment have renewal commissions resulting in new DAC capitalizations in the years following the initial capitalization We also have life products that allow for underwritten death benefit increases and cost of living adjustments resulting in an immaterial amount of new DAC capitalizations each year The new capitalizations are added to the existing DAC balance when incurred and amortized over the remaining life of the business
We review and update actuarial experience assumptions such as mortality surrenders lapse and premium persistency serving as inputs to the models that establish the expected life for DAC and other actuarial balances during the third quarter of each year or more frequently if evidence suggests assumptions should be revised We make model refinements as necessary and any changes resulting from these assumption updates are applied prospectively
An unearned revenue liability is established when we collect fees or other policyholder assessments inclusive of cost of insurance charges administrative charges and other similar fees for services to be provided in future periods These unearned front end fees are deferred and the amortization is recorded using an approach consistent with DAC
The unearned revenue liability is included within other policyholder funds in the consolidated statements of financial position The following table summarizes disaggregated unearned revenue liability amounts and reconciles the totals to those reported in the consolidated statements of financial position
The separate accounts are legally segregated and are not subject to claims that arise out of any of our other business The client rather than us directs the investments and bears the investment risk of these funds The separate account assets represent the fair value of funds that are separately administered by us for contracts with equity real estate and fixed income investments and are presented as a summary total within the consolidated statements of financial position An equivalent amount is reported as separate account liabilities which represent the obligation to return the monies to the client Refer to Note 18 Fair Value Measurements for further information on the valuation methodologies
We receive fees for mortality withdrawal and expense risks as well as administrative maintenance and investment advisory services that are included in the consolidated statements of operations Net deposits net investment income and realized and unrealized capital gains and losses of the separate accounts are not reflected in the consolidated statements of operations
The Retirement and Income Solutions segment offers variable annuity contracts that allow the policyholder to allocate deposits into various investment options in a separate account The variable annuity contracts can also include GMWB riders and guaranteed minimum death benefit GMDB riders that are accounted for as MRBs Retirement and Income Solutions also offers certain group annuity contracts that have separate accounts as an investment option
The Principal Asset Management segment offers retirement pension schemes in Asia that offer various non guaranteed constituent fund investment options to customers and has previously offered various guaranteed constituent funds The guaranteed constituent funds included a guaranteed rate of return to the customer or a minimum guarantee on withdrawals under certain qualifying events The minimum guarantee on withdrawals under certain qualifying events was accounted for as an MRB The guaranteed constituent funds were closed in the fourth quarter of 2023 and the second quarter of 2024 Principal Asset Management separate account assets and liabilities also include certain retirement accumulation products in Latin America where the segregated funds and associated obligation to the client are consolidated within the financial statements We have determined that summary totals are the most meaningful presentation for these funds
As of December 31 2024 and December 31 2023 the separate accounts included a separate account valued at 79 8 million and 88 2 million respectively which primarily included shares of our stock that were allocated and issued to eligible participants of qualified employee benefit plans administered by us as part of the policy credits issued under our 2001 demutualization These shares are included in both basic and diluted earnings per share calculations In the consolidated statements of financial position the separate account shares are recorded at fair value and are reported as separate account assets with a corresponding separate account liability Changes in fair value of the separate account shares are reflected in both the separate account assets and separate account liabilities and do not impact our results of operations
Includes insignificant balances for long duration contracts embedded derivative assets liabilities including associated host contract asset liability adjustments and amounts that are not accrued to the benefit of the contractholder and therefore are not included within the disaggregated rollforward or GMIR disclosures below Refer to Note 18 Fair Value Measurements for details on the changes in Level 3 fair value measurements of embedded derivatives
Funding agreements include those issued directly to nonqualified institutional investors and those issued to the FHLB Des Moines under their membership funding programs As of December 31 2024 and 2023 3 976 5 million and 3 981 8 million respectively of liabilities were outstanding with respect to issuances under the program with FHLB Des Moines In addition we have five 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 Life was 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 2024 and 2023 75 8 million and 75 9 million respectively of liabilities were outstanding with respect to the issuance outstanding under this program
In addition Principal Life was 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 special purpose entity As of December 31 2024 and 2023 202 0 million and 201 9 million respectively of liabilities were being held with respect to issuances outstanding under this program Principal Life does 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 program established in 2011 described below
Additionally Principal Life was authorized to issue up to 5 0 billion of funding agreements under a program that was originally established in 2011 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 special purpose entity In June 2015 this program was amended to authorize issuance of up to an additional 4 0 billion In November 2017 this program was amended to authorize issuance of up to an additional 4 0 billion In February 2021 this program was amended to authorize issuance of up to an additional 4 0 billion In November 2023 this program was amended to authorize issuance of up to an additional 4 0 billion As of December 31 2024 and 2023 8 335 8 million and 8 072 6 million respectively of liabilities were being held with respect to issuances outstanding under this program Principal Life s payment obligations on each funding agreement issued under this program are guaranteed by PFG The program established in 2011 is not registered with the United States Securities and Exchange Commission SEC
Within the separate account liabilities rollforwards in Note 8 Separate Account Balances these transfers for Individual variable annuities and Workplace savings and retirement solutions included in Group retirement contracts are reflected in premiums and deposits surrenders withdrawals and benefit payments and net transfers to from general account
Cash surrender value represents the amount of the contractholders account balances distributable at the end of the reporting period less surrender charges The cash surrender value for RILA products also includes an equity and bond adjustment that may result in cash surrender value being greater than account balance
The net amount at risk for policyholder account balances for Individual variable annuities is equal to the MRB net amount at risk as reported in Note 11 Market Risk Benefits Workplace savings and retirement solutions and Individual fixed deferred annuities do not have guarantees that provide for benefits in excess of the current policyholder account balances
The account values for contracts with significant insurance risk and investment contracts with significant fee revenue by range of GMIR and the related range of difference in basis points between rates credited to policyholders and the respective GMIR were as follows The amounts are before reinsurance impacts of our exited U S retail fixed annuity and ULSG businesses
Incurred liability adjustments relating to prior years which affected current operations during 2024 2023 and 2022 resulted in part from developed claims for prior years being different than were anticipated when the liabilities for unpaid claims were originally estimated These trends have been considered in establishing the current year liability for unpaid claims
Future policy benefits and claims include reserves for group life and disability insurance that provide periodic income payments These reserves are computed using assumptions of mortality morbidity and investment performance These assumptions are based on our experience industry results emerging trends and future expectations Future policy benefits and claims also include reserves for incurred but unreported group disability dental vision critical illness accident PFML hospital indemnity and life insurance claims We recognize claims costs in the period the service was provided to our policyholders However claims costs incurred in a particular period are not known with certainty until after we receive process and pay the claims We determine the amount of this liability using actuarial methods based on historical claim payment patterns as well as emerging cost trends where applicable to determine our estimate of claim liabilities Premium deficiency reserves may be established for short duration contracts to provide for expected future losses The premium deficiency reserve calculation considers among other factors anticipated investment income
The following tables present undiscounted information about claims development by incurral year including separate information about incurred claims and paid claims net of reinsurance for the periods indicated The tables also include information on incurred but not reported claims and the cumulative number of reported claims
The tables present information for the number of years for which claims incurred typically remain outstanding but do not exceed ten years The data is disaggregated into groupings of claims with similar characteristics such as duration of the claim payment period and average claim amount and with consideration to the overall size of the groupings Outstanding liabilities equal total net incurred claims less total net paid claims plus outstanding liabilities for net unpaid claims of prior years
The following table provides the carrying amount of liabilities reported at present value for short duration contract unpaid claims We use a range of discount rates to derive the present value of the unpaid claims The ranges of discount rates as well as the aggregate amount of discount deducted to derive the liabilities for unpaid claims and interest accretion recognized are also disclosed Interest accretion is included in benefits claims and settlement expenses within our consolidated statements of operations
The liability for future policy benefits LFPB for individual and group annuities is generally equal to the present value of expected future policy benefit payments The reserves are computed using assumptions for mortality and interest The LFPB for non participating term life insurance individual disability income contracts and individual and group long term care contracts is generally equal to the present value of expected future policy benefit payments less the present value of expected net premiums The reserves are computed using assumptions for mortality interest morbidity and lapse Cohorts are used as the unit of account for liability measurement Actual cash flows are grouped into issue year cohorts for the liability calculation and updated quarterly We review and update if necessary assumptions used to measure cash flows for the LFPB during the third quarter of each year or more frequently if evidence suggests assumptions should be revised The change in our liability estimate as a result of updating cash flow assumptions is recognized in net income
An interest accretion rate is determined for an identified cohort and remains unchanged after the issue year For policies issued on or prior to December 31 2020 the interest accretion rate is based on the assumed investment yield when the business was issued For policies issued after December 31 2020 the interest accretion rate is based on the upper medium grade fixed income instrument yields which is generally equivalent to a single A rated bond yield matched to the duration of our insurance liabilities when the business was issued
The LFPB is remeasured to reflect current upper medium grade fixed income instrument yields as of each reporting date The liability is calculated by discounting cash flows using rate curves reflecting the currency and duration of the insurance liabilities For discount rate tenors or points on the curves where the upper medium grade fixed income instrument yields are not liquid or limited observable market data is available we use various estimation techniques consistent with fair value measurement guidance
For our individual fixed income annuities in Latin America the discount rate methodology is designed to prioritize observable inputs based on market data available in the local debt markets where the respective policies are issued in the currency in which the policies are denominated For discount rate tenors where upper medium grade fixed income instrument yields based on international rating standards are not liquid or limited observable market data is available estimation techniques are used to determine a curve in the appropriate currency
We updated our actuarial assumptions during the third quarter of 2024 resulting in a 32 3 million increase in the LFPB and an 18 2 million decrease to income before taxes net of reinsurance for Individual disability This was primarily due to unfavorable updates to termination and lapse assumptions The updates also resulted in a 68 2 million increase in the LFPB and a 52 9 million decrease to income before taxes net of reinsurance for Term life This was primarily due to unfavorable updates to mortality and lapse assumptions
We updated our actuarial assumptions during the third quarter of 2023 resulting in a 13 9 million decrease in the LFPB and a 10 2 million increase to income before taxes net of reinsurance for Individual disability This was primarily due to favorable updates to claim incidence assumptions The updates also resulted in a 38 3 million increase in the LFPB and a 25 4 million decrease to income before taxes net of reinsurance for Term life This was primarily due to unfavorable updates to mortality assumptions
The LFPB also includes an additional reserve on certain universal life contracts where benefit features result in gains in early years followed by losses in later years The liability for these future losses is accrued in relation to estimated contract assessments A premium deficiency exists if the net liabilities together with future premiums are determined to be insufficient to provide for expected future policy benefits Premium deficiency testing considers among other factors anticipated investment income and does not include a provision for adverse deviation We did not have a premium deficiency reserve as of December 31 2024 or December 31 2023
We updated our actuarial assumptions during the third quarter of 2024 resulting in a 151 9 million increase in the additional liability for certain benefit features primarily due to mortality assumptions related to ULSG products resulting in a 0 3 million decrease to income before taxes net of reinsurance
We updated our actuarial assumptions during the third quarter of 2023 resulting in a 725 4 million increase in the additional liability for certain benefit features primarily due to policyholder lapse behavior assumptions related to ULSG products resulting in a 13 1 million decrease to income before taxes net of reinsurance
The interest accretion rate shown for each level of aggregation is an average of the cohort level accretion rates weighted by the reserve balance for each cohort within that level of aggregation The current discount rate is calculated at a cohort level based on current upper medium fixed income instrument yields and weighted by the reserve balance for each cohort within each level of aggregation The weighted average rates were as follows
Contracts or contract features that provide protection to the policyholder from capital market risk including equity interest rate or foreign exchange risk and expose us to other than nominal capital market risk are classified as MRBs We issue certain annuity contracts and other investment contracts that include MRBs that have been bifurcated from the host contract The Retirement and Income Solutions segment offers variable annuity products with GMWB riders and GMDB riders including return of premium GMDB and GMWB riders for its RILA products The Principal Asset Management segment offered defined contribution plans in Asia with a guarantee on the minimum account balance under certain qualifying events These were closed in the second quarter of 2024
MRBs are measured at fair value at the contract level and can be in either an asset or liability position depending on certain inputs at the reporting date MRB assets and liabilities are presented separately within the consolidated statements of financial position Increases to an asset or decreases to a liability are described as favorable changes to fair value
Changes in fair value are reported in MRB remeasurement gain loss on the consolidated statements of operations However the change in fair value related to our own nonperformance risk is reported in OCI For contracts that contain multiple MRB features the MRBs are valued on a combined basis using an integrated model
MRBs are classified as Level 3 fair value measurements as the fair value is based on unobservable inputs The key assumptions for calculating the fair value of the MRBs are market assumptions such as equity market returns interest rate levels market volatility and correlations and policyholder behavior assumptions such as lapse mortality utilization and withdrawal patterns Risk margins are included in the policyholder behavior assumptions The assumptions are based on a combination of historical data and actuarial judgment The MRBs are valued using stochastic models that incorporate a spread reflecting our own nonperformance risk
The assumption for our own nonperformance risk for MRBs is based on the current market credit spreads for debt like instruments we have issued and are available in the market Increases decreases in our own nonperformance risk which impacts the rates used to discount future cash flows could lead to favorable unfavorable changes in the fair value of the MRBs
Long term interest rates are used as the mean return when projecting the growth in the value of the associated account value and impact the discount rate used in the discounted future cash flows valuation The amount of claims will increase if account value is not sufficient to cover guaranteed withdrawals An increase decrease in risk free rates could cause a favorable unfavorable change in the fair value of the MRBs A decrease increase in market volatilities could cause a favorable unfavorable change in the fair value of the MRBs
An increase decrease in mortality rates or the overall lapse rate assumptions could cause a favorable unfavorable change in the fair value of the MRBs The lapse rate assumption may vary dynamically based on the relationship between the guarantee and associated account value A weaker stronger dynamic lapse rate assumption could lead to favorable unfavorable changes in the fair value of the MRBs
The utilization rate assumption includes how many contractholders will take withdrawals when they will take them and how much of their benefit they will take A decrease increase in the number of contractholders taking withdrawals contractholders taking withdrawals earlier versus later or contractholders taking more versus less of their benefit could lead to favorable unfavorable changes in the fair value of the MRBs
The net amount at risk for our GMDB riders is defined as the current GMDB amount in excess of the current account balance The net amount at risk for our GMWB riders is defined as the greater of the present value of the GMWB payments less the current account balance or zero For contracts with both GMDB and GMWB riders the net amount at risk is the greater of the GMDB or GMWB net amount at risk We had a decrease in the net amount at risk in 2024 primarily as a result of increases in the equity markets
The following table provides quantitative information about the significant unobservable inputs used for fair value measurements of MRBs The utilization rate and mortality rate inputs are omitted from the table as a range does not provide meaningful presentation The utilization rate represents the number of contractholders taking withdrawals in addition to the amount and timing of the withdrawals The mortality rate is an input based on an appropriate industry mortality table
We reinsure a portion of the insurance risks associated with our individual disability traditional life universal life medical and long term care insurance as well as retail fixed annuity contracts with significant life insurance risk through reinsurance agreements with unaffiliated reinsurance companies primarily on a quota share excess loss yearly renewable term YRT or coinsurance basis We have coinsurance with funds withheld reinsurance agreements in which we cede our U S retail fixed annuity and ULSG blocks of business using both the reinsurance and deposit methods of accounting
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 As of December 31 2024 and 2023 we had 14 592 6 million and 14 533 1 million of reinsurance recoverable assets respectively included in reinsurance recoverable and deposit receivable on the consolidated statements of financial position which does not reflect potentially offsetting impacts of collateral As of December 31 2024 and 2023 we had 60 3 million and 45 2 million of reinsurance recoverable liabilities respectively included in future policy benefits and claims on the consolidated statements of financial position As of December 31 2024 and 2023 14 371 7 million or 99 and 14 404 5 million or 99 were with our five largest ceded reinsurers respectively
A reinsurance asset or liability is established to spread the expected net reinsurance costs or profits over the expected term of the contracts The cost of reinsurance asset and liability are reported in premiums due and other receivables and liability for future policy benefits and claims respectively on the consolidated statements of financial position The cost of reinsurance asset and liability included on the consolidated statements of financial position were as follows
Cost of reinsurance amortization including the impact of remeasurement of 631 6 million 17 7 million and 19 3 million for the years ended December 31 2024 2023 and 2022 respectively was reported in benefits claims and settlement expenses and liability for future policy benefits remeasurement gain loss on the consolidated statements of operations The 2024 impacts of remeasurement include the one time impact of YRT reinsurance transactions
Certain assets are reported at amortized cost while the fair value of those assets is reflected in the funds withheld payable As of December 31 2024 and December 31 2023 we had a 18 103 7 million and 19 629 5 million funds withheld payable which was net of a 3 014 6 million and 2 567 1 million embedded derivative asset respectively The change in fair value of the embedded derivative was a gain loss of 447 4 million 1 085 7 million and 3 652 8 million for the years ended December 31 2024 2023 and 2022 respectively
While the economic benefits of the funds withheld assets flow to the reinsurer we retain legal ownership of the assets within the funds withheld account Guidelines are in place to ensure the investment risk is appropriately managed Net investment income and net realized capital gains losses related to the assets on the consolidated statements of operations is reported net of the amounts that flow to the reinsurer The realized gains and losses that do not flow to the reinsurer are reported in net realized capital gains losses on funds withheld assets on the consolidated statements of operations
Our revolving credit facility is committed and available for general corporate purposes This credit facility also provides 100 back stop support for our commercial paper program of which we had no outstanding balances as of December 31 2024 and 2023 The weighted average interest rate on short term borrowings as of December 31 2024 and 2023 was 7 6 and 15 6 respectively
The secured subscription facility provides for revolving loans up to a maximum aggregate availability of 150 0 million which are secured by outstanding capital commitments of Principal Life and an unaffiliated insurance company Borrowings are permitted for any purpose under the borrowers constituent documents and are required to be repaid within twelve months of issuance The weighted average interest rate on short term borrowings as of December 31 2024 was 6 84
On March 8 2023 we issued 700 0 million of senior notes We issued a 400 0 million series of notes that bear interest at 5 375 and will mature in 2033 and a 300 0 million series of notes that bear interest at 5 5 and will mature in 2053 Interest on the notes is payable semi annually on March 15 and September 15 each year beginning on September 15 2023 The proceeds from these notes were used to redeem our floating rate notes payable due in 2055 and to repay at maturity our 3 125 notes payable due in 2023 We incurred a one time cost to extinguish this debt before the scheduled maturity date which was recorded in operating expenses on the consolidated statements of operations
On June 12 2020 we issued 500 0 million of senior notes at a discount On August 3 2020 we issued an additional 100 0 million of senior notes at a premium These notes bear interest at 2 125 and will mature in 2030 Interest on the notes is payable semi annually on June 15 and December 15 each year beginning on December 15 2020 The proceeds from these notes were used for general corporate purposes
On May 7 2019 we issued 500 0 million of senior notes The notes bear interest at 3 7 and will mature in 2029 Interest on the notes is payable semi annually on May 15 and November 15 each year beginning on November 15 2019 The proceeds from these notes along with available cash were used to fund the acquisition of an institutional retirement and trust business
On November 10 2016 we issued 650 0 million of senior notes We issued a 350 0 million series of notes that bear interest at 3 1 and will mature in 2026 and a 300 0 million series of notes that bear interest at 4 3 and will mature in 2046 Interest on the notes is payable semi annually on May 15 and November 15 each year beginning on May 15 2017 The proceeds from these notes were used to redeem our notes payable due in 2017 and 2019 We incurred a one time cost to extinguish this debt before the scheduled maturity date
On May 7 2015 we issued 400 0 million of junior subordinated notes which were subordinated to all our senior debt The notes became callable in 2020 and had a maturity date in 2055 The notes initially bore a fixed rate of interest at 4 7 and converted to a floating rate at the date the notes became callable Interest on the notes was payable semi annually on May 15 and November 15 each year After the call date the notes bore interest at 3 month LIBOR plus 3 044 reset quarterly and payable in arrears in February May August and November each year We had the right to defer interest payments on the junior subordinated notes for up to 5 years without resulting in a default during which time interest will be compounded The junior subordinated notes were repaid following our March 2023 debt issuance In addition on May 7 2015 we issued 400 0 million of senior notes The notes bear interest at 3 4 and will mature in 2025 Interest on the notes is payable semi annually on May 15 and November 15 each year beginning on November 15 2015 The proceeds from both the junior subordinated notes and the senior notes were used to redeem preferred stock with the remainder available for general corporate purposes
On November 16 2012 we issued 900 0 million of senior notes We issued a 300 0 million series of notes that bore interest at 1 85 and were to mature in 2017 These notes were repaid following our November 2016 debt issuance We issued a 300 0 million series of notes that bore interest at 3 125 and matured in 2023 and a 300 0 million series of notes that bear interest at 4 35 and will mature in 2043 Interest on the notes is payable semi annually on May 15 and November 15 each year beginning on May 15 2013 The proceeds were used to fund our acquisition of Cuprum
On September 5 2012 we issued a 300 0 million series of senior notes that bear interest at 4 625 and will mature in 2042 Interest on the notes is payable semi annually on March 15 and September 15 each year beginning on March 15 2013 The proceeds were used for the repayment of the 400 0 million aggregate principal amount of notes due in 2014 and to partially fund our acquisition of Cuprum
On October 16 and December 5 2006 we issued 500 0 million and 100 0 million respectively of senior notes The notes bear interest at a rate of 6 05 per year Interest on the notes is payable semi annually on April 15 and October 15 each year and began on April 15 2007 The notes will mature on October 15 2036 A portion of the proceeds were used to fund the 2006 acquisition of WM Advisors Inc with the remaining proceeds being used for general corporate purposes A tender offer in the fourth quarter of 2016 resulted in redemption of 94 4 million of the senior notes We incurred a one time cost to extinguish this debt before the scheduled maturity date
Our secured credit facilities are primarily financings for real estate loans As of December 31 2024 the outstanding principal balance was 21 8 million for one loan with an interest rate of 6 47 Outstanding debt is secured by the underlying real estate loans which were reported as mortgage loans on our consolidated statements of financial position with a carrying value of 29 0 million as of December 31 2024
The non recourse mortgages and notes payable are primarily financings for a real estate development As of December 31 2024 and 2023 the notes had outstanding principal balances of 2 9 million and 3 0 million respectively with an interest rate of 4 0 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 14 3 million and 321 7 million as of December 31 2024 and 2023 respectively
On March 8 2018 we entered into two contingent funding agreements 1 a 10 year contingent funding agreement with a Delaware trust 2028 Trust formed by us in connection with the sale by the trust of 400 0 million pre capitalized trust securities redeemable February 15 2028 2028 P Caps in a Rule 144A private placement and 2 a 30 year contingent funding agreement with a Delaware trust 2048 Trust formed by us in connection with the sale by the trust of 350 0 million pre capitalized trust securities redeemable February 15 2048 2048 P Caps in a Rule 144A private placement The trusts invested the proceeds from the sale of the 2028 P Caps and 2048 P Caps in a portfolio of principal and interest strips of U S Treasury securities The contingent funding agreements provide us a put option that gives us the right to sell at any time 1 to the 2028 Trust up to 400 0 million of its 4 111 Senior Notes due 2028 4 111 Senior Notes and 2 to the 2048 Trust up to 350 0 million of its 4 682 Senior Notes due 2048 4 682 Senior Notes and receive in exchange a corresponding amount of the principal and interest strips of U S Treasury securities held by the trusts The 4 111 Senior Notes and 4 682 Senior Notes will not be issued unless and until a put option is exercised We agreed to pay a semi annual put premium of 1 275 and 1 580 per annum on the unexercised portion of the put option to the 2028 Trust and 2048 Trust respectively and to reimburse the trusts for expenses The put option premiums are recorded in operating expenses in the consolidated statements of operations The 4 111 Senior Notes and 4 682 Senior Notes will be fully irrevocably and unconditionally guaranteed by Principal Financial Services Inc PFS In addition our obligations under the put option agreement and the expense reimbursement agreement with the trusts are also guaranteed by PFS The contingent funding agreements with the trusts provide us with a source of liquid assets which could be used to meet future financial obligations or to provide additional capital
The put options described above will be exercised automatically in full if we fail to make certain payments to the trusts including any failure to pay the put option premium or expense reimbursements when due if such failure is not cured within 30 days and upon certain bankruptcy events involving us or PFS We are also required to exercise the put option in full i if we reasonably believe that our consolidated shareholders equity calculated in accordance with U S GAAP but excluding AOCI and noncontrolling interest has fallen below 4 0 billion subject to adjustment in certain cases ii upon the occurrence of an event of default under the 4 111 Senior Notes and 4 682 Senior Notes and iii if certain events occur relating to each trust s status as an investment company under the Investment Company Act of 1940 In addition we are required to purchase from the trusts any principal and interest strips of U S Treasury securities that are due and not paid
We have an unlimited right to unwind a prior voluntary exercise of the put options by repurchasing all of the 4 111 Senior Notes and 4 682 Senior Notes held by the trusts in exchange for a corresponding amount of principal and interest strips of U S Treasury securities If the put options have been fully exercised the 4 111 Senior Notes and 4 682 Senior Notes issued may be redeemed by us prior to their maturity at par or if greater at a make whole redemption price in each case plus accrued and unpaid interest to the date of redemption The 2028 P Caps are to be redeemed by the 2028 Trust on February 15 2028 or upon any early redemption of the 4 111 Senior Notes The 2048 P Caps are to be redeemed by the 2048 Trust on February 15 2048 or upon any early redemption of the 4 682 Senior Notes
As of December 31 2024 and 2023 we had recognized 2 0 million and 1 8 million of accumulated pre tax interest and penalties related to unrecognized tax benefits respectively We do not believe there is a reasonable possibility the total amount of the unrecognized tax benefits will significantly increase or decrease in the next twelve months considering recent settlements and the status of current and pending Internal Revenue Service IRS examinations
In management s judgment total deferred income tax assets are more likely than not to be realized Included in the deferred income tax asset are federal net operating loss capital loss and tax credit carryforwards available to offset future taxable income or income taxes As of December 31 2024 and 2023 we had net operating loss carryforwards for U S federal income tax purposes of 16 9 million and 0 0 million respectively which may be carried forward indefinitely In addition as of December 31 2024 and 2023 we had federal capital loss carryforwards of 69 9 million and 155 2 million respectively If unused these federal capital loss carryforwards will expire in 2028 Furthermore as of December 31 2024 and 2023 we had federal tax credit carryforwards of 15 2 million and 64 2 million respectively As of December 31 2024 these carryforwards are anticipated to be utilized and can be carried forward indefinitely therefore no valuation allowance has been provided for the related deferred income tax asset
As of December 31 2024 and 2023 state net operating loss carryforwards were 288 3 million and 312 3 million respectively and will expire between 2032 and 2040 As of December 31 2024 and 2023 foreign net operating loss carryforwards were 264 3 million and 257 3 million respectively with some expiring in 2024 while others never expire We maintain valuation allowances by jurisdiction against the deferred income tax assets related to some of these carryforwards and other items as utilization of these income tax benefits fail the more likely than not criteria in certain jurisdictions As of December 31 2024 and 2023 valuation allowances of 71 4 million and 58 8 million respectively had been recorded against the income tax benefits associated primarily with foreign net operating loss carryforwards and net unrealized capital losses on benefit plan trusts 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 assets that are more likely than not to be realized
Deferred tax liabilities are recognized for taxes payable on the unremitted earnings from foreign operations of our subsidiaries except where it is our intention to indefinitely reinvest a portion or all of these undistributed earnings As of December 31 2024 and 2023 any applicable taxes that would be due upon repatriation were not provided on approximately 1 276 3 million and 1 362 6 million respectively of such accumulated but undistributed earnings from operations of foreign subsidiaries We currently do not intend to repatriate these unremitted earnings because we have several liquidity options to fund our domestic operations and obligations These options include investing and financing activities such as issuing debt as well as cash flow and dividends from domestic operations As of December 31 2024 and 2023 it was not practicable to determine the amount of the unrecognized deferred tax liability that would arise if foreign earnings were remitted due to the complexity of our international holding company structure and other significant tax attributes and varying state tax laws Taxes on remittances would be limited to foreign currency gains or losses foreign withholding taxes and state income taxes which we would anticipate to be immaterial As of December 31 2024 deferred taxes were also not provided on the approximately 106 2 million of excess book carrying value over tax basis with respect to the original investment in our foreign subsidiaries A tax liability will be recognized when we no longer plan to indefinitely reinvest a portion or all of these earnings or when we plan to sell a portion or all of our ownership interest
We are currently monitoring global enactments of the Pillar Two model rules proposed by the Organisation for Economic Co operation and Development which brings forward a 15 global minimum tax Generally a company is required to consider the impact of new tax law on realizability of its deferred tax assets DTAs including determination of whether a change to its valuation allowance amounts is necessary We made an accounting policy election to disregard the Pillar Two model rules when evaluating DTAs and rather recognize a current period tax expense when incurred
The Inflation Reduction Act of 2022 IRA 2022 was enacted by the U S government on August 16 2022 The IRA 2022 implements a new corporate alternative minimum tax CAMT effective January 1 2023 We are an Applicable Corporation which requires computation of the U S federal income tax liability under two systems the U S regular corporate tax RCT and the CAMT Although the CAMT may apply in any given year when tentative minimum tax TMT exceeds the RCT liability as a prepayment the CAMT generates a corresponding alternative minimum tax credit AMTC The AMTC is accounted for as a DTA with an indefinite carryover life recoverable in years when the RCT liability exceeds TMT
The tax accounting consequences of a change in tax law is required to be recognized in the period legislation is enacted Generally a company is also required to consider the impact of new tax law on realizability of its DTAs including determination of whether a change to its valuation allowance amounts is necessary We made an accounting policy election to disregard our CAMT status when evaluating DTAs under the RCT system associated with the IRA 2022
Income tax returns are filed in U S federal jurisdiction as well as various states and foreign jurisdictions where we and one or more of our subsidiaries conduct business Although determined by jurisdiction with few exceptions our tax uncertainties relate primarily to U S federal income tax matters The IRS has completed examination of our consolidated U S federal income tax returns for years prior to 2015
The U S federal statute of limitations has expired for years prior to 2015 The IRS is currently auditing our U S federal income tax returns for tax years 2015 2018 and 2019 2022 The statutes remain open through normal statute extensions We do not expect the results of these audits subsequent related adjustments or developments in other tax areas for all open tax years to significantly change the possible increase in the amount of unrecognized tax benefits but the outcome of tax reviews is uncertain and unforeseen results can occur
We believe we have adequate defenses against or sufficient provisions for contested issues but final resolution could take several years depending on whether legal remedies are pursued Consequently we do not believe issues that might arise in tax years subsequent to 2014 will have a material impact on our net income
We provide a U S qualified defined benefit pension plan covering U S employees that meet certain eligibility requirements and certain agents contracted on or before December 31 2018 A final average pay benefit formula has been in place for plan participants employed prior to January 1 2002 For agents this formula ended on December 31 2018 and for employees the formula ended on December 31 2022 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 prior to the earliest of termination retirement or the formula end date A cash balance benefit was added on January 1 2002 A participant s cash balance account is credited with an amount based on the participant s salary age and service These credits accrue with interest For plan participants hired on and after January 1 2002 only the cash balance benefit applies For pre 2002 participants the pension benefit earned prior to the final average pay formula end date is the greater of the final average pay benefit or the cash balance benefit earned before the end date They will also earn a new cash balance benefit for service after the formula end date
In addition we sponsor non qualified defined benefit plans subject to Section 409A of the Internal Revenue Code This plan is for certain highly compensated employees and agents to replace the benefit that cannot be provided by the qualified defined benefit pension plan due to IRS limits These nonqualified plans generally parallel the qualified plan but offer different payment options No agent has been able to become a new participant in the nonqualified plan after 2018
We provide certain health care life insurance and long term care benefits for retired employees their beneficiaries and covered dependents other postretirement benefits While virtually all U S employees continue to have access to the postretirement health care and life insurance benefits only those U S employees that were hired prior to January 1 2002 and retired prior to January 1 2011 post 65 medical or January 1 2020 life insurance and pre 65 medical were eligible to receive subsidized benefits All others pay the full cost of coverage The long term care plan was subsidized only for those who retired prior to January 1 2000 and is no longer accessible The subsidy level for all benefits varies by plan age service and retirement date
The funding policy for all employee benefit plans is to fund the cost of providing pension benefits in the years that the employees and agents are providing service taking into account the funding status of the trust For the qualified defined benefit plan this policy will be subject to an amount no lower than 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 U S federal income tax purposes While we designate assets to cover the computed liability of the nonqualified pension 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
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 Rabbi trusts 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 under U S GAAP The market value of assets held in these trusts was 348 8 million and 342 2 million as of December 31 2024 and 2023 respectively
For the year ended December 31 2024 the other postretirement benefit plans had an actuarial gain primarily due to an increase in discount rates For the year ended December 31 2023 the other postretirement benefit plans had an actuarial loss primarily due to a decrease in the discount rates and actual medical claims costs being higher than previously expected
For 2024 and 2023 both the qualified and nonqualified plans had accumulated benefit obligations in excess of plan assets 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
The pension plans actuarial gains and losses are amortized using a straight line amortization method over the average remaining service period of plan participants The other postretirement plans use a straight line amortization over the average future lifetime of its remaining covered group of retirees For the qualified pension plan gains and losses are amortized without use of the 10 allowable corridor For the nonqualified pension plans and other postretirement benefit plans the corridors allowed are used
The assumed salary growth rates used to project benefits for the projected benefit obligation are age based for home office employees The rate labeled cash balance benefit relative to employees accruing a cash balance is the lifecount weighted average rate of salary growth in the coming year only as the impact of salary assumption for cash balance benefits are limited to the upcoming year service cost The rate labeled traditional benefit relative to employees still accruing a final average pay benefit is the lifecount weighted average at each age of the single annual growth rate at the age that is equivalent to applying the scale from that age to assumed termination or retirement ages For the pension benefit obligation one average rate of compensation increase is disclosed for all participants as the traditional benefit is frozen as of December 31 2022
For the pension benefits the discount rate is determined by projecting future benefit payments inherent in the projected benefit obligation and discounting those cash flows using a spot yield curve for high quality corporate bonds The plans expected benefit payments are discounted to determine a present value using the yield curve and the discount rate is the level rate that produces the same present value The expected return on plan assets is the long term rate we expect to be earned based on the long term investment policy of the plans and the various classes of invested funds A weighted average rate was developed based on those overall rates and the target asset allocation of the plans
For other postretirement benefits the discount rate is determined by projecting future benefit payments inherent in the accumulated postretirement benefit obligation and discounting those cash flows using a spot yield curve for high quality corporate bonds The plans expected benefit payments are discounted to determine a present value using the yield curve and the discount rate is the level rate that produces the same present value The 4 65 expected long term return on plan assets for 2024 was based on the weighted average expected long term asset returns for the plans The expected long term rates for the home office and agent pre 65 medical life plans and post 65 medical plans were 4 70 and 4 55 respectively
Our pension plan assets consist of investments in pooled separate accounts and single client separate accounts Net asset value NAV of the pooled separate accounts is calculated in a manner consistent with U S GAAP for investment companies and is determinative of their fair value Several of the pooled separate accounts invest in publicly quoted mutual funds or actively managed stocks The fair value of the underlying mutual funds or stocks is used to determine the NAV of the separate account which is not publicly quoted Some of the pooled separate accounts also invest in fixed income securities The fair value of the underlying securities is based on quoted prices of similar assets and used to determine the NAV of the separate account Some of the pooled separate accounts invest in real estate properties The fair value is based on discounted cash flow valuation models that utilize public real estate market data inputs such as transaction prices market rent growth vacancy levels leasing absorption market capitalization rates and discount rates
The single client separate accounts invest in fixed income securities hedge funds a pooled separate account investment and other assets The fixed income securities include U S Treasury bonds for which the fair value is based on quoted prices of identical assets in active markets The fair value of the other fixed income securities is determined either from prices obtained from third party pricing vendors who use observable market information to determine prices or from internal models using substantially all observable inputs or a matrix pricing valuation approach The hedge funds are measured at fair value using the NAV per share or its equivalent practical expedient and have not been classified in the fair value hierarchy The NAV of the pooled separate account investment is calculated in a manner consistent with U S GAAP for investment companies and is determinative of its fair value The carrying amounts of other assets which are highly liquid in nature are used to approximate fair value
Our other postretirement benefit plan assets consist of cash investments in fixed income security portfolios and investments in equity security portfolios Because of the nature of cash its carrying amount approximates fair value The fair value of fixed income investment funds U S equity portfolios and international equity portfolios is based on quoted prices in active markets for identical assets
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
Our funding policy for our qualified pension plan is to fund the plan annually in an amount at least equal to the minimum annual contribution required under ERISA and generally not greater than the maximum amount that can be deducted for U S federal income tax purposes We do not anticipate contributions will be needed to satisfy the minimum funding requirements of ERISA for our qualified plan We are unable to estimate the amount that may be contributed but it is possible that we may fund the plans in 2025 up to 70 0 million This includes funding for both our qualified and nonqualified pension plans While we designate assets to cover the computed liability of the nonqualified 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 may contribute to our other postretirement benefit plans in 2025 pending future analysis
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 23 000 of their compensation to the plans in 2024 For all participants we match the participant s contributions at a 75 contribution rate up to a maximum matching contribution of 6 of the participant s compensation The defined contribution plans allow employees to choose among various investment options including our common stock which is available through our Employee Stock Ownership Plan ESOP We contributed 75 4 million 74 1 million and 70 3 million in 2024 2023 and 2022 respectively to our qualified defined contribution plans
The number of shares of our common stock allocated to participants in the ESOP was 1 5 million and 1 7 million as of December 31 2024 and 2023 respectively As of December 31 2024 and 2023 the fair value of the ESOP which includes earned and unearned common stock was 119 7 million and 135 6 million respectively The ESOP s total assets include our common stock and cash The ESOP purchases our common stock on the open market The number of shares of our common stock held within the ESOP is treated as outstanding in both our basic and diluted earnings per share calculations
We also have nonqualified deferred compensation plans available to select employees and agents that allow them to defer compensation amounts in excess of limits imposed by U S federal tax law with respect to the qualified plans For certain nonqualified deferred compensation plans that include an employer matching contribution in 2024 we matched the Grandfathered Choice Participant s deferral at a 50 match deferral rate up to a maximum matching deferral of 3 of the participant s compensation For all other participants in nonqualified deferred compensation plans that include an employer matching contribution we matched the participant s deferral at a 75 match deferral rate up to a maximum matching deferral of 6 of the participant s compensation We contributed 3 6 million 3 1 million and 3 9 million in 2024 2023 and 2022 respectively to our nonqualified deferred compensation plans
We are regularly involved in litigation both as a defendant and as a plaintiff but primarily as a defendant Litigation naming us as a defendant ordinarily arises out of our business operations as a provider of asset management and accumulation products and services individual life insurance specialty benefits insurance and our investment activities Some of the lawsuits may be class actions or purport to be and some may include claims for unspecified or substantial punitive and treble damages
We may discuss such litigation in one of three ways We accrue a charge to income and disclose legal matters for which the chance of loss is probable and for which the amount of loss can be reasonably estimated We may disclose contingencies for which the chance of loss is reasonably possible and provide an estimate of the possible loss or range of loss or a statement that such an estimate cannot be made Finally we may voluntarily disclose loss contingencies for which the chance of loss is remote in order to provide information concerning matters that potentially expose us to possible losses
In addition regulatory bodies such as state insurance departments the SEC the Financial Industry Regulatory Authority FINRA the Department of Labor DOL and other regulatory agencies in the U S and in international locations in which we do business regularly make inquiries and conduct examinations or investigations concerning our compliance with among other things insurance laws securities laws ERISA and laws governing the activities of broker dealers We receive requests from regulators and other governmental authorities relating to industry issues and may receive additional requests including subpoenas and interrogatories in the future
While the outcome of any pending or future litigation or regulatory matter cannot be predicted management does not believe any such matter will have a material adverse effect on our business or financial position To the extent such matters present a reasonably possible chance of loss we are generally not able to estimate the possible loss or range of loss associated therewith The outcome of such matters is always uncertain and unforeseen results can occur It is possible that such outcomes could require us to pay damages or make other expenditures or establish accruals in amounts that we could not estimate as of December 31 2024
In the normal course of business we have provided guarantees to third parties primarily related to former subsidiaries and joint ventures The terms of these agreements range in duration and often are not explicitly defined The maximum exposure under these agreements as of December 31 2024 was approximately 74 0 million At inception the fair value of such guarantees was insignificant In addition we believe the likelihood is remote that material payments will be required Therefore any liability accrued within our consolidated statements of financial position is insignificant Should we be required to perform under these guarantees we generally could recover a portion of the loss from third parties through recourse provisions included in agreements with such parties the sale of assets held as collateral that can be liquidated in the event performance is required under the guarantees or other recourse generally available to us therefore such guarantees would not result in a material adverse effect on our business or financial position While the likelihood is remote such outcomes could materially affect net income in a particular quarter or annual period Furthermore in connection with our contingent funding agreements we are required to purchase any principal and interest strips of U S Treasury securities that are due and not paid from the associated unconsolidated trusts The maximum exposure under these agreements as of December 31 2024 was 750 0 million See Note 13 Debt for further details
We are also subject to various other indemnification obligations issued in conjunction with divestitures acquisitions financing and reinsurance transactions whose terms range in duration and often are not explicitly defined Certain portions of these indemnifications may be capped while other portions are not subject to such limitations therefore the overall maximum amount of the obligation under the indemnifications cannot be reasonably estimated At inception the fair value of such indemnifications was insignificant In addition we believe the likelihood is remote that material payments will be required Therefore any liability accrued within our consolidated statements of financial position is insignificant While we are unable to estimate with certainty the ultimate legal and financial liability with respect to these indemnifications we believe that performance under these indemnifications would not result in a material adverse effect on our business or financial position While the likelihood is remote performance under these indemnifications could materially affect net income in a particular quarter or annual period
Under state insurance guaranty fund laws insurers doing business in a state can be assessed up to prescribed limits for certain obligations of insolvent 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 engaged 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 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 2024 and 2023 the liability balance for guaranty fund assessments which is not discounted was 29 3 million and 21 9 million respectively and was reported within other liabilities in the consolidated statements of financial position As of December 31 2024 and 2023 17 5 million and 11 0 million respectively related to premium tax offsets were included in premiums due and other receivables in the consolidated statements of financial position
As a lessee we lease office space data processing equipment office furniture and office equipment under various operating leases We also lease buildings and hardware storage equipment under finance leases Lease assets and liabilities are recognized at the commencement of a lease based on the present value of lease payments over the lease term We generally use our incremental borrowing rate based on the information available at the lease commencement date to determine the present value of lease payments Lease term may include options to extend or terminate the lease when it is reasonably certain we will exercise the option Leases with an initial term of twelve months or less are not recorded on the consolidated statements of financial position We recognize lease expense for leases on a straight line basis over the lease term Some of our lease agreements include payments for property taxes insurance utilities or common area maintenance which are not based on an index or rate These payments are recognized in net income in the period in which the obligation has occurred
Payments for operating leases for the years ended December 31 2024 2023 and 2022 were 50 3 million 60 1 million and 58 3 million respectively Payments for finance leases for the years ended December 31 2024 2023 and 2022 were 32 0 million 34 3 million and 35 1 million respectively The following represents future payments due by period for lease obligations
In June 2021 our Board of Directors Board authorized a share repurchase program of up to 1 2 billion of our outstanding common stock which was completed in August 2022 In January 2022 our Board authorized a 1 6 billion increase to the June 2021 share repurchase program authorization which was completed in April 2024 In February 2024 our Board authorized a share repurchase program of up to 1 5 billion of our outstanding common stock which has no expiration date In February 2025 our Board authorized a share repurchase program of up to 1 5 billion of our outstanding common stock which has no expiration date Shares repurchased under these programs are accounted for as treasury stock carried at cost and reflected as a reduction to stockholders equity
In March 2022 we entered into an accelerated share repurchase program with a third party financial institution to repurchase 700 0 million of common stock We received approximately 8 5 million shares at an initial cost of 560 0 million from our counterparty as of March 31 2022 which was recorded in treasury stock The associated 140 0 million forward contract was recorded in additional paid in capital This program closed in June 2022 at which time an additional 1 4 million shares were delivered based on the 70 53 daily volume weighted average price of our common stock less a discount during the term of the program
In August 2022 we entered into an accelerated share repurchase program with a third party financial institution to repurchase 400 0 million of common stock We received approximately 4 1 million shares at an initial cost of 320 0 million from our counterparty as of August 16 2022 which was recorded in treasury stock This program closed in September 2022 at which time an additional 1 2 million shares were delivered based on the 76 48 daily volume weighted average price of our common stock less a discount during the term of the program
Interests held by unaffiliated parties in consolidated entities are reflected in noncontrolling interest which represents the noncontrolling partners share of the underlying net assets of our consolidated subsidiaries Noncontrolling interest that is not redeemable is reported in the equity section of the consolidated statements of financial position
The noncontrolling interest holders in certain of our consolidated entities maintain an equity interest that is redeemable at the option of the holder which may be exercised on varying dates Since redemption of the noncontrolling interest is outside of our control this interest is excluded from stockholders equity and reported separately as redeemable noncontrolling interest on the consolidated statements of financial position Our redeemable noncontrolling interest primarily relates to consolidated sponsored investment funds for which interests are redeemed at fair value from the net assets of the funds
For our redeemable noncontrolling interest related to other consolidated subsidiaries redemptions are required to be purchased at fair value or a value based on a formula that management intended to reasonably approximate fair value based on a fixed multiple of earnings over a measurement period The carrying value of the redeemable noncontrolling interest is compared to the redemption value at each reporting period Any adjustments to the carrying amount of the redeemable noncontrolling interest for changes in redemption value prior to exercise of the redemption option are determined after the attribution of net income or loss of the subsidiary and are recognized in the redemption value as they occur Adjustments to the carrying value of redeemable noncontrolling interest result in adjustments to additional paid in capital and or retained earnings Adjustments are recorded in retained earnings to the extent the redemption value of the redeemable noncontrolling interest exceeds its fair value and will impact the numerator in our earnings per share calculations All other adjustments to the redeemable noncontrolling interest are recorded in additional paid in capital
The declaration and payment of our common stock dividends is subject to the discretion of our Board of Directors and will depend on our overall financial condition results of operations capital levels cash requirements future prospects receipt of dividends or other distributions from Principal Life as described below risk management considerations and other factors deemed relevant by the Board No significant restrictions limit the payment of dividends by us except those generally applicable to corporations incorporated in Delaware
Under Iowa law Principal Life may pay dividends or make other distributions only from the earned surplus arising from its business and must receive the prior approval of the Commissioner of Insurance of the State of Iowa the Commissioner to pay stockholder dividends or make any other distribution if such distribution would exceed certain statutory limitations Iowa law gives the Commissioner discretion to disapprove requests for distributions in excess of these limitations Extraordinary dividends include those made together with dividends and other distributions within the preceding twelve months that exceed the greater of i 10 of Principal Life s statutory policyholder surplus as of the previous year end excluding admitted disallowed interest maintenance reserve or ii the statutory net gain from operations from the previous calendar year not to exceed earned surplus Based on this limitation and 2024 statutory results Principal Life could pay approximately 1 313 1 million in ordinary stockholder dividends in 2025 without prior regulatory approval However because the dividend test is based on dividends previously paid over rolling twelve month periods if paid before a specified date during 2025 some or all of such dividends may be extraordinary and require regulatory approval
We use fair value measurements to record fair value of certain assets and liabilities and to estimate fair value of financial instruments not recorded at fair value but required to be disclosed at fair value Certain financial instruments particularly policyholder liabilities other than investment contracts are excluded from these fair value disclosure requirements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date an exit price The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety considering factors specific to the asset or liability
The following discussion describes the valuation methodologies and inputs used for assets and liabilities measured at fair value on a recurring basis The techniques utilized in estimating the fair value of financial instruments are reliant on the assumptions used Care should be exercised in deriving conclusions about our business its value or financial position based on the fair value information of financial instruments presented below
Fair value estimates are made based on available market information and judgments about the financial instrument at a specific point in time Such estimates do not consider the tax impact of the realization of unrealized gains or losses In addition the disclosed fair value may not be realized in the immediate settlement of the financial instrument We validate prices through an investment analyst review process which includes validation through direct interaction with external sources review of recent trade activity or use of internal models In circumstances where broker quotes are used to value an instrument we generally receive one non binding quote Broker quotes are validated through an investment analyst review process which includes validation through direct interaction with external sources and use of internal models or other relevant information We did not make any significant changes to our valuation processes during 2024
Fixed maturities include bonds ABS redeemable preferred stock and certain non redeemable preferred securities When available the fair value of fixed maturities is based on quoted prices of identical assets in active markets These are reflected in Level 1 and primarily include U S Treasury bonds and actively traded redeemable corporate preferred securities
When quoted prices of identical assets in active markets are not available our first priority is to obtain prices from third party pricing vendors We have regular interaction with these vendors to ensure we understand their pricing methodologies and to confirm they are utilizing observable market information Their methodologies vary by asset class and include inputs such as estimated cash flows benchmark yields reported trades broker quotes credit quality industry events and economic events Fixed maturities with validated prices from pricing services which includes the majority of our public fixed maturities in all asset classes are generally reflected in Level 2 Also included in Level 2 are corporate bonds when quoted market prices are not available for which an internal model using substantially all observable inputs or a matrix pricing valuation approach is used In the matrix approach securities are grouped into pricing categories that vary by sector rating and average life Each pricing category is assigned a risk spread based on studies of observable public market data for specific security classes The expected cash flows of the security are then discounted back at the current Treasury curve plus the appropriate risk spread Although the matrix valuation approach provides a fair valuation of each pricing category the valuation of an individual security within each pricing category may also be impacted by company specific factors
If we are unable to price a fixed maturity security using prices from third party pricing vendors or other sources specific to the asset class we may obtain a broker quote or utilize an internal pricing model specific to the asset utilizing relevant market information to the extent available and where at least one significant unobservable input is utilized These are reflected in Level 3 in the fair value hierarchy and can include fixed maturities across all asset classes As of December 31 2024 approximately 3 of our total fixed maturities were Level 3 securities valued using internal pricing models
Corporate Inputs include recently executed transactions market price quotations benchmark yields issuer spreads and observations of equity and credit default swap curves related to the issuer For private placement corporate securities valued through the matrix valuation approach inputs include the current Treasury curve and risk spreads based on sector rating and average life of the issuance
RMBS CMBS Collateralized Debt Obligations and Other Debt Obligations Inputs include cash flows priority of the tranche in the capital structure expected time to maturity for the specific tranche reinvestment period remaining and performance of the underlying collateral including prepayments defaults deferrals loss severity of defaulted collateral and for RMBS prepayment speed assumptions Other inputs include market indices and recently executed market transactions
Equity securities include mutual funds common stock non redeemable preferred stock and required regulatory investments Fair values of equity securities are determined using quoted prices in active markets for identical assets when available which are reflected in Level 1 When quoted prices are not available we may utilize internal valuation methodologies appropriate for the specific asset that use observable inputs such as underlying share prices or the NAV which are reflected in Level 2 Fair values might also be determined using broker quotes or through the use of internal models or analysis that incorporate significant assumptions deemed appropriate given the circumstances and consistent with what other market participants would use when pricing such securities which are reflected in Level 3
Mortgage loans reported at fair value include those of a consolidated VIE for which the fair value option was elected Fair values of commercial mortgage loans are primarily determined by discounting the expected cash flows at current treasury rates plus an applicable risk spread which reflects credit quality and maturity of the loans The risk spread is based on market clearing levels for loans with comparable credit quality maturities and risk These are reflected in Level 3 Mortgage loans valued using securitized pricing based on observable market data should be reflected in Level 2 of the fair value hierarchy
The fair values of exchange traded derivatives are determined through quoted market prices which are reflected in Level 1 Exchange traded derivatives include futures that are settled daily which reduces their fair value in the consolidated statements of financial position The fair values of OTC cleared derivatives are determined through market prices published by the clearinghouses which are reflected in Level 2 The clearinghouses utilize the secured overnight financing rate SOFR curve in their valuation Variation margin associated with OTC cleared derivatives is settled daily which reduces their fair value in the consolidated statements of financial position The fair values of bilateral OTC derivative instruments are determined using either pricing valuation models that utilize market observable inputs or broker quotes The majority of our bilateral OTC derivatives are valued with models that use market observable inputs which are reflected in Level 2 Significant inputs include contractual terms interest rates currency exchange rates credit spread curves equity prices and volatilities These valuation models consider projected discounted cash flows relevant swap curves and appropriate implied volatilities Certain bilateral OTC derivatives utilize unobservable market data primarily independent broker quotes that are nonbinding quotes based on models that do not reflect the result of market transactions which are reflected in Level 3
Our non cleared derivative contracts are generally documented under ISDA Master Agreements which provide for legally enforceable set off and close out netting of exposures to specific counterparties Collateral arrangements are bilateral and based on current ratings of each entity We utilize the SOFR curve to value our positions Counterparty credit risk is routinely monitored to ensure our adjustment for nonperformance risk is appropriate Our centrally cleared derivative contracts are conducted with regulated centralized clearinghouses which provide for daily exchange of cash collateral or variation margin equal to the difference in the daily market values of those contracts that eliminates the nonperformance risk on these trades
Interest Rate Contracts For non cleared contracts which include interest rate swaps and interest rate options we use discounted cash flow valuation techniques to determine the fair value using observable swap curves as the inputs These are reflected in Level 2 We have forward contracts for which we obtain prices from third party pricing vendors These are reflected in Level 2 For centrally cleared contracts we use published prices from clearinghouses These are reflected in Level 2 In addition we have forward contracts that are valued using broker quotes These are reflected in Level 3
Foreign Exchange Contracts We use discounted cash flow valuation techniques that utilize observable swap curves and exchange rates as the inputs to determine the fair value of foreign currency swaps These are reflected in Level 2 Currency forwards are valued using observable market inputs including forward currency exchange rates These are reflected in Level 2 In addition we had a limited number of non standard currency swaps that were valued using broker quotes These were reflected within Level 3
Equity Contracts We use an option pricing model using observable implied volatilities dividend yields index prices and swap curves as the inputs to determine the fair value of equity options Certain total return swaps use an accrual method comparing both cash flows to determine fair value These are reflected in Level 2 Certain equity option contracts are valued using broker quotes These are reflected in Level 3
Credit Contracts We use either the ISDA Credit Default Swap Standard discounted cash flow model that utilizes observable default probabilities and recovery rates as inputs to determine the fair value of credit default swaps These are reflected in Level 2 In addition we have total return swaps and a limited number of credit default swaps that are valued using broker quotes These are reflected within Level 3
Other investments reported at fair value include invested assets of consolidated sponsored investment funds unconsolidated sponsored investment funds other investment funds reported at fair value other loans of a consolidated VIE for which the fair value option was elected and certain redeemable and nonredeemable preferred stock
The fair value of unconsolidated sponsored investment funds and other investment funds is determined using the NAV of the fund The NAV of the fund represents the price at which we would be able to initiate a transaction Investments for which the NAV represents a quoted price in an active market for identical assets are reflected in Level 1 Investments that do not have a quoted price in an active market are reflected in Level 2
Other loans of a consolidated VIE for which the fair value option was elected are reflected in Level 3 The fair value of these loans is estimated using a discounted cash flow valuation model that utilizes standard assumption setting methodology accepted by market participants in the industry The assumptions are formed based on historical performance of the loans and utilizes market data inputs such as charge off rates prepayment rates recovery rates and discount rates
Certain cash equivalents are reported at fair value on a recurring basis and include money market instruments and other short term investments with maturities of three months or less Fair values of these cash equivalents may be determined using public quotations when available which are reflected in Level 1 When public quotations are not available because of the highly liquid nature of these assets carrying amounts may be used to approximate fair values which are reflected in Level 2
Separate account assets include equity securities debt securities cash equivalents and derivative instruments for which fair values are determined as previously described and are reflected in Level 1 Level 2 and Level 3 Separate account assets also include commercial mortgage loans for which the fair value is estimated by discounting the expected total cash flows using market rates that are applicable to the yield credit quality and maturity of the loans The market clearing spreads vary based on mortgage type weighted average life rating and liquidity These are reflected in Level 3 Finally separate account assets include real estate for which the fair value is estimated using discounted cash flow valuation models that utilize various public real estate market data inputs In addition each property is appraised annually by an independent appraiser The real estate included in separate account assets is recorded net of related mortgage encumbrances for which the fair value is estimated using discounted cash flow analysis based on our incremental borrowing rate for similar borrowing arrangements The real estate within the separate accounts is reflected in Level 3
MRBs are measured at fair value at the contract level on a recurring basis and are reflected in Level 3 as either an asset or a liability depending on certain inputs at the reporting date The key assumptions for calculating the fair value are market assumptions and policyholder behavior Risk margins are included in the policyholder behavior assumptions The assumptions are based on a combination of historical data and actuarial judgment The MRBs are valued using stochastic models that incorporate a spread reflecting our own nonperformance risk
Certain universal life annuity and other investment contracts include embedded derivatives that have been bifurcated from the host contract and are measured at fair value on a recurring basis which are reflected in Level 3 The key assumptions for calculating the fair value of the embedded derivative liabilities are market assumptions such as equity market returns interest rate levels market volatility and correlations and policyholder behavior assumptions such as lapse and mortality Risk margins are included in the policyholder behavior assumptions The assumptions are based on a combination of historical data and actuarial judgment The embedded derivative liabilities are valued using models that incorporate a spread reflecting our own creditworthiness
The funds withheld payable includes an embedded derivative that has been bifurcated from the host contract and is measured at fair value on a recurring basis which is reflected in Level 3 The fair value is determined based on the change in the estimated fair value of the underlying funds withheld investments The fair value of these assets is determined as previously described
Long term debt reported at fair value includes that of a consolidated VIE for which the fair value option was elected The long term debt is a secured credit facility that is primarily financing for commercial real estate loans The fair value is estimated using discounted cash flow analysis based on our incremental borrowing rate for similar borrowing arrangements These are reflected in Level 2
Assets transferred into Level 3 during 2024 2023 and 2022 primarily included those assets for which we are now unable to obtain pricing from a recognized third party pricing vendor as well as assets that were previously priced using a matrix valuation approach that may no longer be relevant when applied to asset specific situations
The following table provides quantitative information about the significant unobservable inputs used for recurring fair value measurements categorized within Level 3 excluding assets and liabilities for which significant quantitative unobservable inputs are not developed internally which primarily consists of those valued using broker quotes The MRB asset and liability are excluded from the table Refer to Note 11 Market Risk Benefits for information on the unobservable inputs used for fair value measurement of MRBs The funds withheld payable embedded derivative is excluded from the table as the determination of its fair value incorporates the fair value of the invested assets supporting the reinsurance agreement The commercial mortgage loans of a consolidated VIE are excluded from the table as the determination of fair value was based on transaction price due to proximity of purchase to year end and thus no inputs to be provided Refer to Assets and liabilities measured at fair value on a recurring basis for a complete valuation hierarchy summary
Market comparable discount rates are used as the base rate in the discounted cash flows used to determine the fair value of certain assets The use of a higher or lower discount rate would have caused the fair value of the assets to significantly decrease or increase respectively Additionally we may adjust the base discount rate or the modeled price by applying an illiquidity premium given the highly structured nature of certain assets The use of a higher or lower illiquidity premium would have caused significant decreases or increases respectively in the fair value of the asset
Embedded derivatives within our investment and universal life contracts liability can be in either an asset or liability position depending on certain inputs at the reporting date Increases to an asset or decreases to a liability are described as increases to fair value The use of a higher or lower market volatility would have caused significant decreases or increases respectively in the fair value of embedded derivatives in investment and universal life contracts Long duration interest rates are used as the mean return when projecting the growth in the value of associated account value and impact the discount rate used in the discounted future cash flows valuation The use of higher or lower risk free rates would have caused the fair value of the embedded derivative to significantly increase or decrease respectively The use of a higher or lower rate for our own credit risks which impact the rates used to discount future cash flows would have significantly increased or decreased respectively the fair value of the embedded derivative The use of a lower or higher mortality rate assumption would have caused the fair value of the embedded derivative to decrease or increase respectively The use of a lower or higher overall lapse rate assumption would have caused the fair value of the embedded derivative to decrease or increase respectively
Principal Life the largest indirect subsidiary of 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 Iowa Insurance Division The Iowa Insurance Division 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 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
Principal Life cedes certain term universal life and Closed Block life insurance statutory reserves to its affiliated reinsurance subsidiaries on a funds withheld coinsurance basis The reserves are secured by cash invested assets and financing provided by highly rated third parties As of December 31 2024 and 2023 Principal Life s affiliated reinsurance subsidiaries assumed statutory reserves of 19 013 3 million and 18 474 2 million from Principal Life respectively In the states of Vermont and Delaware Principal Life s affiliated reinsurance subsidiaries had permitted and prescribed practices allowing for the admissibility of certain assets backing these reserves As of December 31 2024 and 2023 assets admitted under these practices totaled 4 254 5 million and 4 153 8 million respectively In addition as of December 31 2024 and 2023 one of Principal Life s affiliated reinsurance subsidiaries in Vermont ceded 10 847 6 million and 10 406 3 million respectively of the ULSG reserves it assumed from Principal Life to an unaffiliated reinsurance company
Beginning in the fourth quarter of 2023 Principal Life cedes certain pension risk transfer and term life reserves to an affiliated Bermuda reinsurer The reinsurer has permitted practices under Bermuda regulatory reporting allowing for the valuation of certain assets and liabilities to address mismatches in interest rate discounting used under U S GAAP These permitted practices were approved by the Bermuda Monetary Authority BMA for 2023 and we have requested this annual approval from the BMA for 2024 Use of these permitted practices resulted in a 22 2 million increase to the reinsurer s regulatory capital and surplus as of December 31 2023 and a 190 4 million decrease to the reinsurer s net income for the year ended December 31 2023
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 As of December 31 2024 Principal Life met the minimum RBC requirements
We provide financial products and services through the following segments Retirement and Income Solutions Principal Asset Management and Benefits and Protection In addition we have a Corporate segment The segments are managed and reported separately because they provide different products and services have different strategies or have different markets and distribution channels
In the fourth quarter of 2024 we implemented changes to our Principal Asset Management segment to align the global operations by business function Prior to the fourth quarter of 2024 our Principal Asset Management segment was organized into Principal Global Investors and Principal International The Principal Asset Management segment is now organized into Investment Management and International Pension The change has been applied retrospectively which did not have an impact on our consolidated financial statements
The Retirement and Income Solutions segment provides retirement and related financial products and services primarily to businesses their employees and other individuals The segment includes workplace savings and retirement solutions banking trust and custodial services individual variable annuities including RILAs pension risk transfer investment only and our exited retail fixed annuities business
The Principal Asset Management segment provides global investment solutions to institutional retirement retail and high net worth investors in the U S and select emerging markets The segment is organized into Investment Management which provides public multi asset and private market capabilities across all asset classes including equity fixed income real estate and alternatives to serve a breadth of client investment objectives and International Pension which provides long term savings and retirement solutions through pension accumulation and income annuities in Asia and Latin America
The Benefits and Protection segment focuses on solutions primarily for small to mid sized businesses and their employees The segment is organized into Specialty Benefits which provides group dental group life insurance group disability insurance including short term disability long term disability and paid family and medical leave supplemental health products including vision critical illness accident and hospital indemnity and individual disability insurance and Life Insurance which provides life insurance focused on the business market customer including universal life and variable universal life including indexed universal life and traditional life insurance including term life insurance All remaining customers are part of the legacy life block of business including universal and variable universal life insurance including indexed universal life traditional life insurance including participating whole life adjustable life products and term life insurance and our exited ULSG business
Our Corporate segment manages the assets representing capital that has not been allocated to any other segment Financial results of the Corporate segment primarily reflect our financing activities including financing costs income on capital not allocated to other segments inter segment eliminations income tax risks and certain income expenses and other adjustments not allocated to the segments based on the nature of such items Results of Principal Securities Inc PSI our retail broker dealer and registered investment advisor RIA and our exited group medical and long term care insurance businesses are reported in this segment
Our chief operating decision maker CODM is our chief executive officer Our CODM and management team use segment pre tax operating earnings in evaluating performance which is consistent with the financial results provided to and discussed with securities analysts In addition the financial information provided to our CODM is used in making decisions about the allocation of resources and determining annual incentive compensation paid to our employees We determine segment pre tax operating earnings by adjusting U S GAAP income before income taxes for pre tax net realized capital gains losses as adjusted pre tax income loss from exited business pre tax other adjustments that management believes are not indicative of overall operating trends and certain adjustments related to equity method investments and noncontrolling interest While these items may be significant components in understanding and assessing the consolidated financial performance management believes the presentation of pre tax operating earnings enhances the understanding of our results of operations by highlighting pre tax earnings attributable to the normal ongoing operations of the business
Pre tax income loss from exited business includes amounts associated with our exited U S retail fixed annuity and ULSG businesses including the change in fair value of the funds withheld embedded derivative net realized capital gains losses on funds withheld assets strategic review costs and impacts amortization of reinsurance gain loss and other impacts of reinsured business The strategic review costs and impacts primarily include actuarial balance re cohorting impacts resulting from the Strategic Review and costs to close the reinsurance transaction Other impacts of reinsured business primarily includes change in reserves and DAC amortization
The accounting policies of the segments are consistent with the accounting policies for the consolidated financial statements with the exception of 1 pension and other postretirement employee benefits cost allocations 2 certain expenses deemed to benefit the entire organization and 3 income tax allocations For purposes of determining pre tax operating earnings the segments are allocated the service component of pension and other postretirement benefit costs The Corporate segment reflects the non service components of pension and other postretirement benefit costs as assumptions are established and funding decisions are managed from a company wide perspective Additionally the Corporate segment reflects expenses that benefit the entire organization for which the segments are not able to influence the spend This includes expenses such as public company costs executive management costs acquisition and disposition costs among others The Corporate segment functions to absorb the risk inherent in interpreting and applying tax law For purposes of determining non GAAP operating earnings the segments are allocated tax adjustments consistent with the positions we took on tax returns The Corporate segment results reflect any differences between the tax returns and the estimated resolution of any disputes
The following tables summarize disaggregation of revenues from contracts with customers including select financial information by segment and reconcile totals to those reported in the consolidated financial statements Revenues from contracts with customers are included in fees and other revenues on the consolidated statements of operations
Retirement and Income Solutions offers service and trust agreements for defined contribution retirement plans including 401 k plans 403 b plans and employee stock ownership plans The investment components of these service agreements are in the form of mutual fund offerings In addition plan sponsor retirement plan trust and custody services are also available through our trust company Individual retirement accounts IRAs are offered through Principal Bank Furthermore services and trust agreements are offered to non retirement customers including insurance companies endowments and other financial institutions
Administrative service fee revenues are earned for administrative activities performed for the defined contribution retirement plans including recordkeeping and reporting as well as trust and custody asset management and investment services Administrative service fee revenues are earned for administrative activities performed for non retirement plan customers including trust and custody services defined benefit administration and investment management activities The majority of these activities are performed daily over time Fee for service transactions are also provided upon client request These services are considered distinct or grouped into a bundle until a distinct performance obligation is identified Some performance obligations are considered a series of distinct services which are substantially the same and have the same pattern of transfer to the customer
Administrative service fee revenues can be based on a fixed contractual rate for these services or can be variable based upon contractual rates applied to the market value of the client s investments or assets under administration If the consideration for this series of performance obligations is based on market value it is considered variable during the billing period as the services are performed over time The consideration becomes unconstrained and thus recognized as revenue for each billing period s series of distinct services once the market value of the client s investments or assets under administration is determined at market close Additionally fixed fees and other revenues are recognized point in time as fee for service transactions upon completion
IRAs are primarily funded by retirement savings rolled over from qualified retirement plans The IRAs are held in savings accounts money market accounts and certificates of deposit Deposit account fee revenues are earned as the performance of establishing and maintaining IRA accounts is completed Fee for service transactions are also provided upon client request The establishment fees and annual maintenance fees are accrued into earnings over a period of time using the average account life Upfront and recurring bank fees are related to performance obligations that have the same pattern of transfer to the customer and are recognized in income over time with control transferred to the customers utilizing the output method These fees are based on a fixed contractual rate Fixed fees and other revenues are also recognized point in time as fee for service transactions upon completion Additionally commission income is earned on advisory services provided to customers The revenues are earned over time as the service is performed based upon contractual rates applied to the market value of the clients portfolios
Fees and other revenues earned for asset management investment advisory and distribution services provided to institutional and retail clients in addition to trustee and or administrative services performed for retirement savings plans Fees are based largely upon contractual rates applied to the specified amounts of the clients portfolios Each service is a distinct performance obligation however if the services are not distinct on their own we combine them into a distinct bundle or we have a series of distinct services that are substantially the same and have the same pattern of transfer to the customer Fees and other revenues received for performance obligations such as asset management and other services are typically recognized over time utilizing the output method as the service is performed Performance fees and transaction fees on certain accounts are recognized in income when the probability of significant reversal will not occur upon resolution of the uncertainty which could be based on a variety of factors such as market performance or other internal metrics Asset management fees are accrued each month based on the fee terms within the applicable agreement and are generally billed quarterly when values used for the calculation are available Management fees and performance fees are variable consideration as they are subject to fluctuation based on assets under management AUM and other constraints These fees are not recognized until unconstrained at the end of each reporting period
Fees for managing customers mandatory retirement savings accounts in Latin America are collected with each monthly deposit made by our customers If a customer stops contributing before retirement age we collect no fees but services are still provided We recognize revenue from these contracts as services are performed over the life of the contract and review annually
Fees and other revenues are earned for administrative services performed including recordkeeping and reporting services for fee for service products nonqualified benefit plans separate accounts and dental networks Services within contracts are not distinct on their own however we combine the services into a distinct bundle and account for the bundle as a single performance obligation which is satisfied over time utilizing the output method as services are rendered The transaction price corresponds with the performance completed to date for which the value is recognized as revenue during the period Variability of consideration is resolved at the end of each period and payments are due when billed
PSI enters into selling and distribution agreements with the obligation to sell or distribute the securities products such as mutual funds annuities and products sold through RIAs to individual clients in return for front end sales charges 12b 1 service fees annuity fees and asset based fees Front end sales charges 12b 1 fees and annuity fees are related to a single sale and are earned at the time of sale PSI also enters into agreements with individual customers to provide securities trade execution and custody through a brokerage services platform in return for ticket charge and other service fee revenue These services are bundled as one single distinct service referred to as brokerage services This revenue is related to distinct transactions and is earned at a point in time
PSI also enters into agreements with individual customers to provide trade execution clearing services custody services and investment research services through our proprietary offered fee based products These services are bundled as one single distinct service referred to as advisory services In addition for outside RIA business PSI performs sales and distribution services only The revenues are earned over time as the service is performed utilizing the output method
Sales compensation and other incremental costs of obtaining a contract are capitalized and amortized over the period of contract benefit if the costs are expected to be recovered The contract cost asset which is included in other assets on the consolidated statements of financial position was 198 9 million and 219 2 million as of December 31 2024 and December 31 2023 respectively
We apply the practical expedient for certain costs where we recognize the incremental costs of obtaining these contracts as an expense when incurred if the amortization period of the assets is one year or less These costs along with costs that are not deferrable are included in operating expenses on the consolidated statements of operations
Deferred contract costs consist primarily of commissions and variable compensation We amortize capitalized contract costs on a straight line basis over the expected contract life reflecting lapses as they are incurred Deferred contract costs are subject to impairment testing on an annual basis or when a triggering event occurs that could warrant an impairment To the extent future revenues less future maintenance expenses are not adequate to cover the asset balance an impairment is recognized For the years ended December 31 2024 2023 and 2022 38 5 million 38 3 million and 35 5 million respectively of amortization expense was recorded in operating expenses on the consolidated statements of operations and no impairment loss was recognized in relation to the costs capitalized
As of December 31 2024 we had the 2021 Stock Incentive Plan the 2020 Directors Stock Plan the 2014 Stock Incentive Plan the Employee Stock Purchase Plan the 2014 Directors Stock Plan the Amended and Restated 2010 Stock Incentive Plan the 2005 Directors Stock Plan the Stock Incentive Plan and the Directors Stock Plan Stock Based Compensation Plans No new grants will be made under the 2020 Directors Stock Plan the 2014 Stock Incentive Plan the 2014 Directors Stock Plan the Amended and Restated 2010 Stock Incentive Plan the 2005 Directors Stock Plan the Stock Incentive Plan or the Directors Stock Plan Under the terms of the 2021 Stock Incentive Plan grants may be nonqualified stock options incentive stock options qualifying under Section 422 of the Internal Revenue Code restricted stock restricted stock units stock appreciation rights performance shares performance units or other stock based awards To date we have not granted any incentive stock options restricted stock or performance units under any plans As part of our fair value process we assess the impact of material nonpublic information on our share price or expected volatility as applicable at the time of grant No awards in 2024 required a fair value adjustment
No nonqualified stock options were granted to employees during 2024 2023 and 2022 Previously nonqualified stock options were granted to certain employees under the 2014 Stock Incentive Plan the Amended and Restated 2010 Stock Incentive Plan and the Stock Incentive Plan Options outstanding 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
Cash received from stock options exercised under these share based payment arrangements during 2024 2023 and 2022 was 36 4 million 25 0 million and 141 6 million respectively The actual tax benefits realized for the tax deductions for options exercised under these share based payment arrangements during 2024 2023 and 2022 was 8 4 million 5 5 million and 37 7 million respectively
We granted performance share awards to certain employees under the 2021 Stock Incentive Plan the 2014 Stock Incentive Plan and the Amended and Restated 2010 Stock Incentive Plan The performance share awards are treated as an equity award and are paid in shares The performance share awards include a relative total shareholder return modifier under which the number of shares ultimately awarded is also impacted by our actual shareholder return relative to our S P 500 Financial Sector Index peer group The fair value of performance share awards is determined using a Monte Carlo simulation model Whether the performance shares are earned depends upon the participant s continued employment through the performance period except in the case of specific types of terminations and our performance against three year goals set at the beginning of the performance period Performance goals based on various factors 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 no compensation cost will be recognized and any previously recognized compensation cost will be reversed These awards have no maximum contractual term Dividend equivalents are credited on performance shares outstanding as of the record date These dividend equivalents are only paid on the shares released Total performance share awards granted were 0 3 million 0 3 million and 0 3 million in 2024 2023 and 2022 respectively
Performance share awards above represent initial target awards and do not reflect potential increases or decreases resulting from the final performance results to be determined at the end of the respective performance period The actual number of common shares to be awarded at the end of each performance period will range between 0 and 180 0 and 150 prior to 2022 of the initial target awards
We issue restricted stock units under the 2021 Stock Incentive Plan 2020 Directors Stock Plan 2014 Stock Incentive Plan the 2014 Directors Stock Plan the Amended and Restated 2010 Stock Incentive Plan the 2005 Directors Stock Plan the Stock Incentive Plan and the Directors Stock Plan Restricted stock units are treated as an equity award and are paid in shares These awards have no maximum contractual term Dividend equivalents are credited on restricted stock units outstanding as of the record date These dividend equivalents are only paid on the shares released Restricted stock units granted were 1 1 million 0 9 million and 1 3 million in 2024 2023 and 2022 respectively
Restricted stock units were issued to certain employees and agents pursuant to the 2021 Stock Incentive Plan 2014 Stock Incentive Plan the Amended and Restated 2010 Stock Incentive Plan and Stock Incentive Plan Under these plans awards have graded or cliff vesting over a three year service period When service for PFG ceases except in the case of specific types of terminations all vesting stops and unvested units are forfeited
Pursuant to the 2021 Stock Incentive Plan 2020 Directors Stock Plan 2014 Directors Stock Plan and the 2005 Directors Stock Plan restricted stock units are granted to each non employee director in office immediately following each annual meeting of stockholders and at the discretion of the Board 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 Under these plans awards are granted on an annual basis and cliff vest after a one year service period When service to PFG ceases all vesting stops and unvested units are forfeited
Under our Employee Stock Purchase Plan participating employees have the opportunity to purchase shares of our common stock on a quarterly basis Employees may purchase up to 25 000 in stock value annually Employees may purchase shares of our common stock at a price equal to 90 of the shares fair market value as of the end of the purchase period Under the Employee Stock Purchase Plan employees purchased 0 4 million 0 5 million and 0 6 million shares during 2024 2023 and 2022 respectively
We recognize compensation expense for the fair value of the discount granted to employees participating in the employee stock purchase plan in the period 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 8 30 7 49 and 7 31 during 2024 2023 and 2022 respectively The total intrinsic value of the Employee Stock Purchase Plan shares settled was 3 4 million 3 6 million and 4 1 million during 2024 2023 and 2022 respectively
Cash received from shares issued under these share based payment arrangements for 2024 2023 and 2022 was 31 0 million 32 8 million and 37 3 million respectively The actual tax benefit realized for the tax deductions for the settlement of the share based payment arrangements for 2024 2023 and 2022 was 0 3 million 0 3 million and 0 8 million respectively
The calculation of diluted earnings per share for the years ended December 31 2024 2023 and 2022 excludes the incremental effect related to certain outstanding stock based compensation grants due to their anti dilutive effect When a net loss is reported our basic weighted average shares are used to calculate diluted earnings per share as dilutive shares would have an antidilutive effect and result in a lower loss per share
On January 16 2025 we announced the signing of an agreement with Bank Consortium Trust Company BCT to expand our investment management capabilities and exit our sponsor and trustee pension roles in Hong Kong for Mandatory Provident Fund Schemes MPF Schemes BCT will be assuming the role as sponsor and trustee for the Principal MPF Schemes We are evaluating the useful life of certain existing amortizing intangible assets related to distribution and customer relationships as well as contract costs from pension contracts and expect to incur a write down of these assets in the first quarter of 2025 reducing pre tax net income by approximately 140 0 million within the Principal Asset Management segment For segment reporting purposes the charge will be reported as exited business and net realized capital loss from exiting our roles as MPF Scheme sponsor and trustee As such it will have no impact on segment pre tax operating earnings The transaction is expected to close during the first quarter of 2026 subject to regulatory approval
In order to ensure the information 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 information required to be disclosed by us in the reports 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
Management of Principal Financial Group Inc is responsible for establishing and maintaining adequate internal control over financial reporting 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
Under the supervision and with the participation of management including our Chief Executive Officer Deanna D Strable Soethout and our Interim Chief Financial Officer Joel M Pitz we conducted an evaluation of the effectiveness of our internal control over financial reporting based on criteria established in the Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission 2013 Framework Based on our evaluation management has concluded that Principal Financial Group Inc s internal control over financial reporting was effective as of December 31 2024
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 its report on the effectiveness of our internal control over financial reporting The report is included in Item 8 Financial Statements and Supplementary Data
The information called for by Item 10 pertaining to directors is set forth in Principal Financial Group Inc s proxy statement relating to the 2025 annual meeting of stockholders the Proxy Statement which will be filed with the SEC on or about April 7 2025 under the captions Election of Directors Corporate Governance and Security Ownership of Certain Beneficial Owners and Management Delinquent Section 16 a Reports 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 Information about our Executive Officers 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 at www principal com We intend to satisfy disclosure requirements regarding amendments to or waivers from any provision of our code of ethics on our website
The Company has adopted an insider trading policy governing the purchase sale and or other disposition of Principal Financial Group Inc securities by directors officers and employees The Company s insider trading policy is reasonably designed to promote compliance with insider trading laws rules and regulations as well as the listing requirements and standards set forth by the Nasdaq Global Select Market The Company s insider trading policy is attached hereto as Exhibit 19
In general we have two compensation plans under which our equity securities are authorized for issuance to employees or directors not including our tax qualified pension plans the Principal Financial Group Inc 2021 Stock Incentive Plan and the Principal Financial Group Inc Employee Stock Purchase Plan The following table shows the number of shares of common stock issuable upon exercise of options outstanding as of December 31 2024 the weighted average exercise price of those options and the number of shares of common stock remaining available for future issuance as of December 31 2024 excluding shares issuable upon exercise of outstanding options
The information called for by Item 13 pertaining to certain relationships and related transactions is set forth in the Proxy Statement under the captions Corporate Governance Director Independence and Corporate Governance Certain Relationships and Related Party Transactions and is incorporated herein by reference
First Supplemental Indenture including the form of 4 700 Fixed to Floating Rate Junior Subordinated Note due 2055 dated as of May 7 2015 among Principal Financial Group Inc as issuer Principal Financial Services Inc as guarantor and The Bank of New York Mellon Trust Company as trustee relating to the 4 700 Fixed to Floating Rate Junior Subordinated Notes due 2055
The following materials from Principal Financial Group Inc s Annual Report on Form 10 K for the year ended December 31 2024 formatted in iXBRL Inline eXtensible Business Reporting Language i the Consolidated Statements of Financial Position ii the Consolidated Statements of Operations iii the Consolidated Statements of Comprehensive Income iv the Consolidated Statements of Stockholders Equity v the Consolidated Statements of Cash Flows vi the Notes to Consolidated Financial Statements vii Schedule I Summary of Investments Other Than Investments in Related Parties viii Schedule II Condensed Financial Information of Registrant Parent Only ix Schedule III Supplementary Insurance Information and x Schedule IV Reinsurance
Principal Financial Group Inc sponsors nonqualified benefit plans for select employees and agents and is responsible for the obligations of these plans Nonqualified plan assets are held in Rabbi trusts for the benefit of all nonqualified plan participants The invested assets and benefit plan liabilities reported in the statements of financial position exclude amounts held in these trusts The Rabbi trusts had 1 014 5 million and 896 1 million of plan assets and 827 0 million and 724 9 million of benefit plan liabilities as of December 31 2024 and 2023 respectively

Company Name	PRINCIPAL FINANCIAL GROUP INC Vist SEC web-site
Category	ACCIDENT & HEALTH INSURANCE
Trading Symbol	PFG