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Part I - FINANCIAL INFORMATION

Item 1.

Financial Statements

3

Consolidated Statements of Financial Position as of September 30, 2018 (Unaudited) and December 31, 2017

3

Unaudited Consolidated Statements of Operations for the three and nine months ended September 30, 2018 and 2017

4

Unaudited Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2018 and 2017

5

Unaudited Consolidated Statements of Stockholders’ Equity for the nine months ended September 30, 2018 and 2017

6

Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017

7

Notes to Unaudited Consolidated Financial Statements — September 30, 2018

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

97

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

132

Item 4.

Controls and Procedures

137

Part II — OTHER INFORMATION

Item 1.

Legal Proceedings

138

Item 1A.

Risk Factors

138

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

138

Item 6.

Exhibits

139

Signature

140

For the three months ended

For the nine months ended

September 30,

September 30,

2018

2017

2018

2017

(in millions, except per share data)

Revenues

Premiums and other considerations

$

2,172.4

$

2,126.1

$

4,433.4

$

4,826.8

Fees and other revenues

1,261.8

987.1

3,285.7

2,882.8

Net investment income

919.4

838.0

2,710.7

2,581.8

Net realized capital gains (losses), excluding impairment losses on available-for-sale securities

(1.9)

693.2

59.3

623.7

Net other-than-temporary impairment (losses) recoveries on available-for-sale securities

(1.4)

2.6

(8.3)

(27.1)

Other-than-temporary impairment losses on fixed maturities, available-for-sale reclassified from other comprehensive income

(2.2)

(19.2)

(14.2)

(32.5)

Net impairment losses on available-for-sale securities

(3.6)

(16.6)

(22.5)

(59.6)

Net realized capital gains (losses)

(5.5)

676.6

36.8

564.1

Total revenues

4,348.1

4,627.8

10,466.6

10,855.5

Expenses

Benefits, claims and settlement expenses

2,642.1

2,504.6

5,752.4

6,020.7

Dividends to policyholders

31.9

32.6

92.6

92.7

Operating expenses

1,105.0

932.8

3,080.1

2,804.7

Total expenses

3,779.0

3,470.0

8,925.1

8,918.1

Income before income taxes

569.1

1,157.8

1,541.5

1,937.4

Income taxes

109.1

344.6

219.5

455.8

Net income

460.0

813.2

1,322.0

1,481.6

Net income attributable to noncontrolling interest

3.7

3.0

12.0

13.0

Net income attributable to Principal Financial Group, Inc.

$

456.3

$

810.2

$

1,310.0

$

1,468.6

Earnings per common share

Basic earnings per common share

$

1.60

$

2.80

$

4.57

$

5.08

Diluted earnings per common share

$

1.59

$

2.76

$

4.52

$

5.02

Dividends declared per common share

$

0.53

$

0.47

$

1.56

$

1.38

For the three months ended

For the nine months ended

September 30,

September 30,

2018

2017

2018

2017

(in millions)

Net income

$

460.0

$

813.2

$

1,322.0

$

1,481.6

Other comprehensive income (loss), net:

Net unrealized gains (losses) on available-for-sale securities

(199.2)

70.1

(1,470.8)

569.1

Noncredit component of impairment losses on fixed maturities, available-for-sale

2.0

13.3

12.1

21.0

Net unrealized gains (losses) on derivative instruments

2.7

(11.1)

8.6

(29.3)

Foreign currency translation adjustment

(22.9)

88.6

(193.2)

151.3

Net unrecognized postretirement benefit obligation

8.7

4.2

26.2

12.8

Other comprehensive income (loss)

(208.7)

165.1

(1,617.1)

724.9

Comprehensive income (loss)

251.3

978.3

(295.1)

2,206.5

Comprehensive income attributable to noncontrolling interest

3.1

5.0

8.6

15.7

Comprehensive income attributable to Principal Financial Group, Inc.

$

248.2

$

973.3

$

(303.7)

$

2,190.8

Accumulated

Additional

other

Total

Common

paid-in

Retained

comprehensive

Treasury

Noncontrolling

stockholders’

stock

capital

earnings

income (loss)

stock

interest

equity

(in millions)

Balances as of January 1, 2017

$

4.7

$

9,686.0

$

7,720.4

$

(675.2)

$

(6,508.6)

$

66.5

$

10,293.8

Common stock issued

—

143.1

—

—

—

—

143.1

Stock-based compensation

—

68.1

(5.9)

—

—

0.2

62.4

Treasury stock acquired, common

—

—

—

—

(218.1)

—

(218.1)

Dividends to common stockholders

—

—

(398.5)

—

—

—

(398.5)

Distributions to noncontrolling interest

—

—

—

—

—

(6.1)

(6.1)

Contributions from noncontrolling interest

—

—

—

—

—

4.2

4.2

Purchase of subsidiary shares from noncontrolling interest (1)

—

(7.6)

—

—

—

(1.3)

(8.9)

Adjustments to redemption amount of redeemable noncontrolling interest

—

(2.8)

—

—

—

—

(2.8)

Net income (1)

—

—

1,468.6

—

—

6.1

1,474.7

Other comprehensive income (1)

—

—

—

722.2

—

1.3

723.5

Balances as of September 30, 2017

$

4.7

$

9,886.8

$

8,784.6

$

47.0

$

(6,726.7)

$

70.9

$

12,067.3

Balances as of January 1, 2018

$

4.7

$

9,925.2

$

9,482.9

$

165.5

$

(6,729.0)

$

72.6

$

12,921.9

Common stock issued

0.1

52.3

—

—

—

—

52.4

Stock-based compensation

—

65.7

(5.6)

—

—

(0.4)

59.7

Treasury stock acquired, common

—

—

—

—

(461.5)

—

(461.5)

Dividends to common stockholders

—

—

(446.5)

—

—

—

(446.5)

Distributions to noncontrolling interest

—

—

—

—

—

(10.5)

(10.5)

Contributions from noncontrolling interest

—

—

—

—

—

2.2

2.2

Purchase of subsidiary shares from noncontrolling interest (1)

—

(20.0)

—

(1.6)

—

(1.6)

(23.2)

Adjustments to redemption amount of redeemable noncontrolling interest

—

3.0

—

—

—

(0.3)

2.7

Effects of implementation of accounting change related to equity investments, net

—

—

1.0

(1.0)

—

—

—

Effects of implementation of accounting change related to revenue recognition, net

—

—

(65.0)

25.6

—

(0.3)

(39.7)

Effects of implementation of accounting change related to intra-entity asset transfer taxes, net

—

—

8.7

—

—

—

8.7

Effects of implementation of accounting change related to the reclassification of certain tax effects, net

—

—

(77.6)

77.6

—

—

—

Net income (1)

—

—

1,310.0

—

—

7.9

1,317.9

Other comprehensive loss (1)

—

—

—

(1,613.7)

—

(1.7)

(1,615.4)

Balances as of September 30, 2018

$

4.8

$

10,026.2

$

10,207.9

$

(1,347.6)

$

(7,190.5)

$

67.9

$

11,768.7

Description

Date of
adoption

Effect on our consolidated
financial statements or other
significant matters

Standards not yet adopted:

Targeted improvements to the accounting for long-duration insurance contracts

This authoritative guidance updates certain requirements in the accounting for long-duration insurance and annuity contracts. The assumptions used to calculate the liability for future policy benefits on traditional and limited-payment contracts will be reviewed and updated periodically. Cash flow assumptions will be reviewed and updated at least annually with the change recognized in net income. Discount rate assumptions will be updated quarterly with the change recognized in other comprehensive income. Market risk benefits, which are certain market-based options or guarantees associated with deposit or account balance contracts, will be measured at fair value. The periodic change in fair value related to instrument-specific credit risk will be recognized in other comprehensive income while the remaining change in fair value will be recognized in net income. Deferred acquisition costs for all insurance and annuity contracts will be amortized on a constant basis over the expected term of the related contracts. Additional disclosures, including rollforwards of significant insurance and account balances and disclosures about significant inputs, judgments, assumptions and methods used in measurement, are required. The guidance for the liability for future policy benefits for traditional and limited-payment contracts and deferred acquisition costs will be applied on a modified retrospective basis; that is, to contracts in force as of the beginning of the earliest period presented based on their existing carrying amounts. An entity may elect to apply the changes retrospectively. The guidance for market risk benefits will be applied retrospectively. Early adoption is permitted.

January 1, 2021

We are currently evaluating the impact this guidance will have on our consolidated financial statements. We expect this guidance to significantly change how we account for many of our insurance and annuity products.

Goodwill impairment testing

This authoritative guidance simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 (which measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill to the carrying amount of that goodwill) from the goodwill impairment test. A goodwill impairment loss will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. Early adoption is permitted.

January 1, 2020

We are currently evaluating the impact this guidance will have on our consolidated financial statements. 

Description

Date of
adoption

Effect on our consolidated
financial statements or other
significant matters

Credit losses

This authoritative guidance requires entities to use a current expected credit loss (“CECL”) model to measure impairment for most financial assets that are not recorded at fair value through net income. Under the CECL model, an entity will estimate lifetime expected credit losses considering available relevant information about historical events, current conditions and reasonable and supportable forecasts. The CECL model does not apply to available-for-sale debt securities. This guidance also expands the required credit loss disclosures and will be applied using a modified retrospective approach by recording a cumulative effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. Early adoption is permitted.

January 1, 2020

We are currently evaluating the impact this guidance will have on our consolidated financial statements. We believe estimated credit losses under the CECL model will generally result in earlier loss recognition for loans and other receivables.

Implementation costs in a cloud computing arrangement that is a service contract

This authoritative guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.  This guidance can be applied either retrospectively or prospectively and early adoption is permitted.

January 1, 2020

We are currently evaluating the impact this guidance will have on our consolidated financial statements.

Targeted improvements to accounting for hedging activities

This authoritative guidance updates certain recognition and measurement requirements for hedge accounting. The objective of the guidance is to more closely align the economics of a company’s risk management activities in its financial results and reduce the complexity of applying hedge accounting. The updates include the expansion of hedging strategies that are eligible for hedge accounting, elimination of the separate measurement and reporting of hedge ineffectiveness, presentation of the changes in the fair value of the hedging instrument in the same consolidated statement of operations line as the earnings effect of the hedged item and simplification of hedge effectiveness assessments. This guidance also includes new disclosures and will be applied using a modified retrospective approach by recording a cumulative effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. Early adoption is permitted.

January 1, 2019

We have nearly completed our evaluation of this guidance and do not expect it to have a material impact on our consolidated financial statements.

Premium amortization on purchased callable debt securities

This authoritative guidance applies to entities that hold certain non-contingently callable debt securities, where the amortized cost basis is at a premium to the price repayable by the issuer at the earliest call date. Under the guidance the premium will be amortized to the first call date. This guidance requires adoption through a cumulative effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. Early adoption is permitted.

January 1, 2019

We have nearly completed our evaluation of this guidance and do not expect it to have a material impact on our consolidated financial statements.

Description

Date of
adoption

Effect on our consolidated
financial statements or other
significant matters

Nonemployee share-based payment accounting

This authoritative guidance simplifies the accounting for share-based payments to nonemployees by generally aligning it with the accounting for share-based payments to employees. Under the guidance, the measurement of equity-classified nonemployee awards will be fixed at the grant date, where today the measurement is fixed at performance completion date. The guidance will be applied to equity-classified nonemployee awards for which a measurement date has not been established as of the date of adoption. Early adoption is permitted.

January 1, 2019

We have nearly completed our evaluation of this guidance and do not expect it to have a material impact on our consolidated financial statements.

Leases

This authoritative guidance requires lessee recognition of lease assets and lease liabilities on the balance sheet. The concept of an operating lease, where the lease assets and liabilities are off balance sheet, is eliminated under the new guidance. For lessors, the guidance modifies lease classification criteria and accounting for certain types of leases. Other key aspects of the guidance relate to the removal of the current real estate-specific guidance and new presentation and disclosure requirements. Lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, which includes certain optional practical expedients that may be elected. An alternative transition method allows entities to initially apply the new standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.

January 1, 2019

Our evaluation process includes, but is not limited to, identifying leases that are within the scope of the guidance, reviewing and documenting our accounting for these contracts, implementing system and process changes and determining disclosure impacts.

The guidance requires us to establish a lease asset and liability for our operating leases. As we continue to progress with our implementation process, we believe the impact will not be significant to our consolidated financial statements.

Standards adopted:

Reclassification of certain tax effects from accumulated other

comprehensive income
This authoritative guidance permits a reclassification from accumulated other comprehensive income (“AOCI”) to retained earnings for the stranded tax effects resulting from U.S. tax legislation enacted on December 22, 2017, which is referred to as the ‘‘Tax Cuts and Jobs Act’’ (‘‘U.S. tax reform’’). The amount of that reclassification includes the change in corporate income tax rate, as well as an election to include other income tax effects related to the application of U.S. tax reform. The guidance also requires disclosures about stranded tax effects.

January 1, 2018

We elected to early adopt the guidance. The guidance was applied at the beginning of the period of adoption and comparative periods were not restated. We reclassified the stranded tax effects in AOCI resulting from U.S. tax reform, which includes the change in corporate income tax rate and an election to reclassify the tax effects of the one-time deemed repatriation tax. A reclassification of $77.6 million was recorded as an increase to AOCI and a decrease to retained earnings.

Description

Date of
adoption

Effect on our consolidated
financial statements or other
significant matters

Revenue recognition

This authoritative guidance replaces all general and most industry specific revenue recognition guidance currently prescribed by U.S. GAAP. The core principle is that an entity recognizes revenue to reflect the transfer of a promised good or service to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for that good or service. This guidance also provides clarification on when an entity is a principal or an agent in a transaction. In addition, the guidance updates the accounting for certain costs associated with obtaining and fulfilling a customer contract. The guidance may be applied using one of the following two methods: (1) retrospectively to each prior reporting period presented, or (2) retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial application.

January 1, 2018

We adopted the guidance using the modified retrospective approach. The guidance did not have a material impact on our consolidated financial statements. Further details are included under the caption “Adoption of Revenue Recognition Guidance” and in Note 13, Revenues from Contracts with Customers.

Income tax - intra-entity transfers of assets

This authoritative guidance requires entities to recognize current and deferred income tax resulting from an intra-entity asset transfer when the transfer occurs. Prior to issuance of this guidance, U.S. GAAP did not allow recognition of income tax consequences until the asset had been sold to a third party. This guidance requires adoption through a cumulative effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption with early adoption permitted.

January 1, 2018

We adopted the guidance using the modified retrospective approach. A cumulative effect adjustment of $8.7 million was recorded as an increase to retained earnings. In addition, other assets and deferred income taxes decreased $21.1 million and $29.8 million, respectively, due to the adoption of this guidance.

Financial instruments - recognition and measurement

This authoritative guidance addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The guidance eliminated the classification of equity securities into different categories (trading or available-for-sale) and requires equity investments to be measured at fair value with changes in the fair value recognized through net income. The guidance also updated certain financial instrument disclosures and eliminated the requirement to disclose the methods and significant assumptions used to estimate the fair value of financial instruments that are measured at amortized cost on the balance sheet.

January 1, 2018

We adopted this guidance using the modified retrospective approach. A cumulative effect adjustment of $1.0 million was recorded as a decrease to AOCI and a corresponding increase to retained earnings. The guidance did not have a material impact on our consolidated financial statements. As of December 31, 2017, we had $96.0 million of equity securities classified as available-for-sale and $1,770.6 million classified as trading. The consolidated statements of financial position have been updated to eliminate these classifications and present only equity securities. See Note 3, Investments, for further details.

Description

Date of
adoption

Effect on our consolidated
financial statements or other
significant matters

Nonfinancial asset derecognition and partial sales of nonfinancial

assets

This authoritative guidance clarifies the scope of the recently established guidance on nonfinancial asset derecognition and the accounting for partial sales of nonfinancial assets. The guidance conforms the derecognition guidance on nonfinancial assets with the model for transactions in the new revenue recognition standard.

January 1, 2018

The guidance was adopted and did not have a material impact on our consolidated financial statements.

Presentation of net periodic pension cost and net periodic

postretirement benefit cost

This authoritative guidance requires that an employer disaggregate the service cost component from the other components of net benefit cost. The guidance also provides explicit guidance on the presentation of the service cost component and the other components of net benefit cost in the consolidated statement of operations and allows only the service cost component of net benefit cost to be eligible for capitalization.

January 1, 2018

The guidance was adopted and did not have a material impact on our consolidated financial statements.

Definition of a business

This authoritative guidance clarifies the definition of a business to assist with evaluating when transactions involving an integrated set of assets and activities (a “set”) should be accounted for as acquisitions or disposals of assets or businesses. The guidance requires that when substantially all of the fair value of the gross assets acquired or disposed of is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. The guidance also requires a set to include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output to be considered a business. Lastly, the guidance removes the evaluation of whether a market participant could replace missing elements and narrows the definition of outputs by more closely aligning it with how outputs are described in the revenue recognition guidance. The guidance will be applied prospectively. Early application is permitted in certain circumstances.

January 1, 2018

The guidance was adopted and did not have a material impact on our consolidated financial statements.

Employee share-based payment accounting

This authoritative guidance changes certain aspects of accounting for and reporting share-based payments to employees including changes related to the income tax effects of share-based payments, tax withholding requirements and accounting for forfeitures. Various transition methods will apply depending on the situation being addressed.

January 1, 2017

The guidance was adopted prospectively as indicated by the guidance for each area of change and did not have a material impact on our consolidated financial statements.

September 30, 2018

Impact of adopting

revenue recognition

As reported

As adjusted (1)

accounting guidance

(in millions)

Assets

Deferred acquisition costs (2)

$

3,671.9

$

3,873.3

$

(201.4)

Other assets (3)

1,421.3

1,279.9

141.4

Liabilities

Deferred income taxes

911.4

933.3

(21.9)

Stockholders’ equity

Total stockholders’ equity

11,768.7

11,806.8

(38.1)

September 30, 2018

December 31, 2017

Total

Total

Total

Total

assets

liabilities

assets

liabilities

(in millions)

Grantor trusts (1)

$

243.1

$

230.0

$

268.8

$

253.1

CMBS

6.9

—

9.4

—

Mandatory retirement savings funds (2)

40,390.3

40,028.6

42,311.4

41,921.4

Real estate (3)

368.5

64.3

387.1

19.5

Sponsored investment funds (4)

257.8

1.6

178.1

1.0

Total

$

41,266.6

$

40,324.5

$

43,154.8

$

42,195.0

(1)

The assets of grantor trusts are primarily fixed maturities, available-for-sale. The liabilities are primarily other liabilities that reflect an embedded derivative of the forecasted transaction to deliver the underlying securities.

(2)

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

(3)

The assets of the real estate VIEs primarily include real estate, other investments and cash. Liabilities primarily include long-term debt and other liabilities.

(4)

The assets of sponsored investment funds are primarily fixed maturities and equity securities, which are reported with other investments, and cash. The consolidated statements of financial position included a $75.4 million and $52.4 million redeemable noncontrolling interest for sponsored investment funds as of September 30, 2018 and December 31, 2017, respectively.

Maximum exposure to

Asset carrying value

loss (1)