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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following analysis discusses our financial condition as of December 31, 2023, compared with December 31, 2022, our consolidated results of operations for the years ended December 31, 2023, 2022 and 2021, 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. On January 1, 2023, we adopted the guidance commonly referred to as long-duration targeted improvements (“LDTI”). Results for 2022 and 2021 are also presented under the new LDTI guidance in this Form 10-K.

Forward-Looking Information

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

Actual results may differ materially from those included in the forward-looking statements as a result of risks and uncertainties. Those risks and uncertainties include, but are not limited to, the risk factors listed in Item 1A. “Risk Factors.”

Overview

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

● Retirement and Income Solutions;

● Principal Asset Management and

● Benefits and Protection.

We also have a Corporate segment, which consists of the assets and activities that have not been allocated to any other segment. See Item 1. “Business” for a description of our reportable segments.

Economic Factors and Trends

Positive market performance led to an increase in account values in our Retirement and Income Solutions segment in 2023. Since account values are the base by which this business generates revenues, market performance volatility may impact our revenues in future quarters.

Positive market performance led to an increase in AUM managed by our Principal Global Investors operations in 2023. Since AUM is the base by which this business generates revenues, market performance volatility may impact our revenues in future quarters. Also included in revenues are borrower fees, transaction fees and performance fees, which can fluctuate between years. In our Principal International operations, local currency AUM is a key indicator of earnings growth. AUM and revenues were positively impacted by foreign currency fluctuations in 2023.

In our Benefits and Protection segment, premium and fee growth is a key indicator of earnings growth. Higher levels of unemployment may impact new sales in our businesses and reduce in-group growth in our Specialty Benefits business in the short-term.

Profitability

Our profitability depends in large part upon our amount of AUM and our ability to:

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● manage our operating expenses.

Critical Accounting Policies and Estimates

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.

Valuation and Allowance for Credit Loss of Fixed Income Investments

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, 15% of our invested asset portfolio as of December 31, 2023, 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, 2023, 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 $1,517.5 million decrease in net unrealized losses from U.S. investment operations for the year ended December 31, 2023, can primarily be attributed to 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.

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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, 2023, we had $48,178.6 million in AFS fixed maturities with gross unrealized losses totaling $5,872.9 million. Included in the gross unrealized losses are losses attributable to both movements in market interest rates as well as movement in credit spreads.

For more detailed information concerning allowances for credit loss, see Item 8. “Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 4, Investments” under the caption, “Allowance for Credit Loss.”

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.

For more detailed information concerning mortgage loan valuation allowances, see Item 8. “Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 4, Investments” under the caption, “Financing Receivables Valuation Allowance.”

Derivatives

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, 2023, the majority of our OTC derivative assets and liabilities were valued using pricing valuation models using market observable data with less than 1% 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 $4.9 million, net of income taxes, based on December 31, 2023, 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.

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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.

Market Risk Benefits

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 $113.1 million, net of income taxes, based on December 31, 2023, 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

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.

The key inputs, judgments and assumptions necessary in determining estimated fair value include:

● weighted average cost of capital

● long-term growth rate

● corporate income tax rate

● AUM growth rate

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● net revenue growth rate

● business margins on AUM and net revenue

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.

For information about our goodwill and other intangible assets, see Item 8. “Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 1, Nature of Operations and Significant Accounting Policies,” and “Note 2, Goodwill and Other Intangible Assets.”

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 $1,608.5 million and $1,469.8 million, respectively, as of December 31, 2023. 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.

Insurance Reserves

Reserves are liabilities representing estimates of the amounts that will come due, at some point in the future, to or on behalf of our policyholders. U.S. GAAP, allowing for some degree of managerial judgment, provides guidance for establishing reserves.

Future policy benefits and claims include reserves for individual traditional and group life insurance, disability, medical and long-term care 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, individual disability income contracts and individual and group long-term care 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 $2.3 billion, net of income taxes, based on December 31, 2023, 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.

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Future policy benefits and claims also include reserves for incurred but unreported disability, medical, dental, vision, critical illness, accident, hospital indemnity, PFML 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. 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.

See Item 8. “Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 10, Future Policy Benefits and Claims” for further discussion.

We periodically review and update actuarial assumptions that are used to project cash flows that are used to compute reserves. For more information see ‘‘Transactions Affecting Comparability of Results of Operations — Actuarial Assumption Updates.”

Benefit Plans

The reported expense and liability associated with pension and OPEB 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, health care claim costs, health care cost trends, 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 rates were 4.90% for our pension plans and 4.80% for our OPEB plans as of December 31, 2023. Typically, a 0.25% decrease in the discount rate would increase the pension benefits Projected Benefit Obligation by approximately $96.4 million and increase the Net Periodic Pension Cost (“NPPC”) by approximately $7.2 million. Typically, a 0.25% decrease in the discount rate would increase the OPEB accumulated postretirement benefit obligation by approximately $1.3 million and would have a nominal impact on the Net Periodic Benefit Cost (“NPBC”). Typically, a 0.25% increase in the discount rate would result in decreases in benefit obligations and changes in expenses 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 2023 NPPC and 2023 NPBC, a 6.20% and 5.05% weighted average long-term rate of return was used, respectively. For the 2024 NPPC and 2024 NPBC, a 6.10% and 4.65% weighted average long-term rate of return assumption, respectively, will be used. Typically, a 0.25% decrease in the assumed long-term rate of return would increase the NPPC by approximately $7.0 million and the NPBC by approximately $0.2 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, 2023.

The compensation increase assumption is generally set at a rate consistent with current and expected long-term compensation and salary policy, including inflation.

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. For OPEB costs, actuarial gains and losses are amortized using a straight-line amortization method over the average future lifetime of the remaining covered group of retirees, which is approximately 14 years. The qualified pension plan does not utilize the allowable corridor, while the nonqualified pension plan and OPEB plans utilize the 10% corridor. Prior service costs are amortized on a weighted average basis over approximately 4 years for pension costs and 4 years for OPEB costs. See Item 8. “Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 15, Employee and Agent Benefits” for further discussion.

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Income Taxes

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 $1,362.6 million of accumulated but undistributed earnings from operations of foreign subsidiaries as of December 31, 2023. 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.

Inherent in the provision for income taxes are estimates and our expectations regarding the deductibility of certain items, the timing of income and expense recognition, future performance and the current or future realization of operating losses, capital losses and certain tax credits. We regularly evaluate the capital needs of our domestic and foreign operations considering all available information, including operating and capital plans, regulatory capital requirements, parent company financing and cash flow needs, as well as tax laws applicable to our domestic and foreign subsidiaries. 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. A significant decline in value of financial assets could lead to establishment of a valuation allowance on deferred tax assets having an adverse effect on current and future results. In management’s judgment, total deferred income tax assets are more-likely-than-not to be realized.

In addition, 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 had $223.8 million of current income tax payables associated with outstanding audit issues as of December 31, 2023. We believe there are adequate defenses against, or sufficient provisions for, the contested issues, but final resolution of contested issues could take several years while legal remedies are pursued. Consequently, we do not anticipate the ultimate resolution of audits ongoing or not yet commenced to have a material impact on our net income.

See Item 8. “Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 14, Income Taxes” for further discussion.

Transactions Affecting Comparability of Results of Operations

Acquisition

China Pension Joint Venture. On December 28, 2022, we finalized the acquisition of a 17.647% interest in CCB Pension Management Co., Ltd. (“CCBP”), China Construction Bank’s pension business with the Social Security Fund of China. CCBP is the first and only asset manager to be permitted to run all types of pension investment portfolios within the country. The joint venture investment is reported using the equity method within the Principal Asset Management segment.

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Other

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 and model refinements made during the third quarter resulted in a change in cash flow assumptions that increased (decreased) consolidated net income attributable to Principal Financial Group, Inc. by $(9.7) million, $51.2 million and $(44.4) million for the years ended December 31, 2023, 2022 and 2021, respectively.

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

For the year ended December 31,

(in millions)

Retirement and Income Solutions $ 53.4 $ 1.8 $ (96.6)

Benefits and Protection 9.8 61.2 3.4

Talcott Reinsurance Transaction. During the second quarter of 2022, we closed a coinsurance with funds withheld reinsurance transaction with Talcott Life & Annuity Re, a limited liability company organized under the laws of the Cayman Islands and an affiliate of Talcott Resolution Life, Inc., a subsidiary of Sixth Street, pursuant to which we ceded our in-force U.S. retail fixed annuity and ULSG blocks of business. The economics of the Talcott Reinsurance Transaction were effective as of January 1, 2022.

Other Factors Affecting Comparability

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

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

Foreign currency exchange rate fluctuations create variances in our financial statement line items. The most significant impact occurs within our Principal International operations where pre-tax operating earnings were positively impacted $6.8 million and negatively impacted $17.1 million for the years ended December 31, 2023 and 2022, respectively, as a result of fluctuations in foreign currency to U.S. dollar exchange rates. These impacts were 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.”

Effects of Inflation

The impact of inflation has not had a material effect on our annual consolidated results of operations over the past three years. However, we may be materially affected by inflation in the future.

Variable Investment Income

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

Recent Accounting Changes

For recent accounting changes, see Item 8. “Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 1, Nature of Operations and Significant Accounting Policies” under the captions, “Recent Accounting Pronouncements” and “Adoption of Targeted Improvements to the Accounting for Long-Duration Insurance Contracts Guidance.”

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Results of Operations

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

For the year ended December 31, Increase (decrease)

(in millions)

Revenues:

Expenses:

Dividends to policyholders 89.2 94.8 94.8 (5.6) —

Year Ended December 31, 2023 Compared to Year Ended December 31, 2022

Net Income Attributable to Principal Financial Group, Inc.

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

Total Revenues

Premiums and other considerations increased $975.3 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.

Fees and other revenues decreased for the Principal Asset Management segment due to $62.7 million lower management fee revenue as a result of decreased average AUM managed by our Principal Global Investors operations and $35.4 million lower performance fee revenue for our Principal Global Investors operations primarily in our real estate business. These decreases were partially offset by $22.0 million foreign currency tailwinds for our Principal International operations in the Principal Asset Management segment and a $21.1 million increase to fees and other revenues for the Benefits and Protection segment primarily due to growth in the Life Insurance business.

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

Net realized capital gains on funds withheld assets decreased due to lower net gains on sales of funds withheld assets as a result of lower sales in 2023 resulting from less portfolio re-positioning by the external reinsurer.

The change in the fair value of the funds withheld embedded derivative resulted in a loss in 2023 due primarily to a tightening of credit spreads as compared to a gain in 2022 due primarily to increased interest rates.

Total Expenses

Benefits, claims and settlement expenses increased $1,325.4 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.

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Liability for future policy benefits remeasurement gain decreased primarily due to re-cohorting in the UL business in 2022 within the Benefits and Protection segment with no corresponding activity in 2023. See Item 1. “Financial Statements, Notes to Consolidated Financial Statements, Note 1, Nature of Operations and Significant Accounting Policies - Actuarial Balance Re-Cohorting” for further discussion.

The market risk benefit remeasurement loss decreased primarily due to a $226.0 million favorable impact from periodic and final settlements for derivatives used to hedge MRBs. This change was partially offset by a $129.9 million unfavorable impact from the change in fair value of the MRB asset (liability), excluding impacts of nonperformance risk, primarily driven by changes in market movements. See Item 8. “Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 11, Market Risk Benefits” for further information on market effects.

Operating expenses increased primarily due to a $122.6 million increase in compensation costs and a $105.6 million increase in amounts credited to employee accounts in a nonqualified defined contribution pension plan. These increases were partially offset by $160.5 million in strategic review costs and impacts related to the exited business incurred in 2022 with no corresponding activity in 2023.

Income Taxes

The effective income tax rate decreased to 9% for the year ended December 31, 2023 from 20% for the year ended December 31, 2022 primarily due to a decrease 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.

Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

Net Income Attributable to Principal Financial Group, Inc.

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

Total Revenues

Premiums and other considerations increased for the Benefits and Protection segment primarily due to a $274.7 million increase from growth in the Specialty Benefits business and a $201.9 million increase in premiums in the Life Insurance business primarily related to the retrocession of ceded premiums as a result of the Talcott Reinsurance Transaction in 2022.

Fees and other revenues decreased $559.1 million for the Benefits and Protection segment primarily due to the Talcott Reinsurance Transaction. Fees and other revenues decreased $142.3 million for the Retirement and Income Solutions segment primarily resulting from declining financial markets. Fees and other revenues decreased for the Principal Asset Management segment largely due to $79.4 million lower management fee revenue as a result of decreased average AUM managed by our Principal Global Investors operations.

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

The change in the fair value of the funds withheld embedded derivative increased due to an increase in interest rates following the establishment of the funds withheld payable associated with the Talcott Reinsurance Transaction in 2022.

Total Expenses

Benefits, claims and settlement expenses decreased $515.6 million for the Benefits and Protection segment primarily due to the Talcott Reinsurance Transaction. Benefits, claims and settlement expenses decreased $219.2 million for the Retirement and Income Solutions segment primarily due to a decrease in reserves, stemming from the impact of our exited retail fixed annuity business.

Liability for future policy benefits remeasurement gain increased primarily due to a $201.1 million benefit from re-cohorting in the UL business in 2022 within the Benefits and Protection segment with no corresponding activity in 2021 and a $43.3 million favorable effect of changes in cash flow assumptions for the Benefits and Protection segment driven by actuarial assumption updates and model refinements. See Item 1. “Financial Statements, Notes to Consolidated Financial Statements, Note 1, Nature of Operations and Significant Accounting Policies - Actuarial Balance Re-Cohorting” for further discussion.

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The market risk benefit remeasurement loss increased primarily due to a $199.1 million unfavorable impact from periodic and final settlements for derivatives used to hedge MRBs. This change was partially offset by a $172.0 million favorable impact from the change in fair value of the MRB asset (liability), excluding impacts of nonperformance risk, primarily driven by changes in market movements. See Item 8. “Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 11, Market Risk Benefits” for further information on market effects.

Operating expenses decreased primarily due to $157.0 million of lower incentive compensation costs and a $139.5 million decrease in amounts credited to employee accounts in a nonqualified defined contribution pension plan. These decreases were partially offset by $160.5 million in strategic review costs and impacts related to the exited business incurred in 2022 with no corresponding activity in 2021.

Income Taxes

The effective income tax rate increased to 20% for the year ended December 31, 2022, from 15% for the year ended December 31, 2021, primarily due to a 3% impact related to a decrease of available foreign tax credits on the U.S. taxation of international operations and a 2% impact of an increase in pre-tax income with no proportionate increase 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.

Results of Operations by Segment

For results of operations by segment see Item 8. “Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 20, Segment Information.” Beginning in 2022, segment pre-tax operating earnings excludes amounts associated with our exited U.S. retail fixed annuity and ULSG businesses, including strategic review costs and impacts, amortization of reinsurance gain (loss), other impacts of reinsured businesses, net realized capital gains (losses) on funds withheld assets and the change in fair value of the funds withheld embedded derivative.

Retirement and Income Solutions Segment

Retirement and Income Solutions Trends

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.

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

For the year ended December 31, Increase (decrease)

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Retirement and Income Solutions Segment Summary Financial Data

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

For the year ended December 31, Increase (decrease)

(in millions)

Operating revenues:

Expenses:

Year Ended December 31, 2023 Compared to Year Ended December 31, 2022

Pre-Tax Operating Earnings

Pre-tax operating earnings increased primarily due to an increase in net revenue and a decrease in operating expenses as described below.

Net Revenue

Net revenue increased $83.4 million primarily due to the rising interest rate environment and a $51.6 million impact associated with actuarial assumption updates and model refinements, which were more favorable in 2023 compared to 2022. These increases were partially offset by a $63.6 million decrease in variable investment income.

Operating Expenses

Operating expenses decreased primarily due to a $13.9 million decrease associated with the integration of the IRT business of Wells Fargo Bank, N.A., which was completed in the second quarter of 2022.

Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

Pre-Tax Operating Earnings

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

Net Revenue

Net revenue decreased primarily due to a $285.6 million decrease associated with the impacts of our exited retail fixed annuity business, a $152.7 million decrease in fee revenue primarily resulting from declining financial markets and a $149.9 million decrease in variable investment income. These decreases were partially offset by a $229.0 million increase associated with higher net yields, a $133.8 million impact associated with actuarial assumption updates and model refinements, which were favorable in 2022 compared to unfavorable in 2021 and a $46.0 million increase in revenue from our Principal Deposit Sweep program resulting from growth in the business.

Operating Expenses

Operating expenses decreased primarily due to a $75.1 million impact from our exited retail fixed annuity business and a $67.6 million decrease associated with the integration of the IRT business of Wells Fargo Bank, N.A., which was completed in the second quarter of 2022.

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Principal Asset Management Segment

Principal Global Investors AUM

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

Our overall AUM increased $34.8 billion in 2023 driven by positive market performance. We continue to expand our global presence and believe we are well positioned to capture changing market conditions and client needs.

The following table provides a summary of AUM managed by Principal Global Investors by the business area that sourced or generated the AUM. Principal Global Investors sourced represents institutional and fund platform AUM sourced by Principal Global Investors’ distribution teams. General account represents general account assets of domestic insurance companies and other balance sheet assets. Other affiliated sources represents AUM sourced by other PFG businesses (e.g., separate account assets). The amounts include assets managed by Principal Global Investors on behalf of Principal International, which are also reported in the Principal International AUM table below.

(in billions)

Principal Global Investors sourced $ 255.0 $ 241.6 $ 275.9

The following table presents the AUM rollforward for assets managed by Principal Global Investors for the periods indicated. The amounts include assets managed by Principal Global Investors on behalf of Principal International, which are also reported in the Principal International AUM table below.

For the year ended December 31,

(in billions)

Net cash flow (10.6) 4.4 (0.5)

Market performance 45.8 (81.1) 53.3

Operations acquired (1) — 18.6 —

Operations disposed (2) (0.2) (23.1) (1.2)

Principal International AUM

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

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The following table presents the Principal International AUM rollforward for the periods indicated. The amounts include assets managed by Principal Global Investors on behalf of Principal International, which are also reported in the Principal Global Investors AUM table above, as well as assets managed by other managers.

For the year ended December 31,

(in billions)

Net cash flow 2.1 (0.8) 2.0

Market performance 15.3 2.7 4.3

Operations disposed (1) (0.2) — (1.2)

Effect of exchange rates 7.0 2.8 (13.7)

Principal Asset Management Segment Summary Financial Data

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

For the year ended December 31, Increase (decrease)

(in millions)

Operating revenues:

Expenses:

Year Ended December 31, 2023 Compared to Year Ended December 31, 2022

Pre-Tax Operating Earnings

Pre-tax operating earnings decreased in our Principal Global Investors operations primarily due to $62.7 million lower management fee revenue as a result of decreased average AUM and $35.4 million lower performance fee revenue primarily in our real estate business.

Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

Pre-Tax Operating Earnings

Pre-tax operating earnings decreased in our Principal Global Investors operations primarily due to $79.4 million lower management fee revenue as a result of decreased average AUM and a $28.3 million increase in non-variable staff costs. Pre-tax operating earnings decreased in our Principal International operations primarily due to $27.3 million of unfavorable relative market performance on our required regulatory investments.

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Benefits and Protection Segment

Benefits and Protection Segment Summary Financial Data

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.

The following table presents the Benefits and Protection segment premium and fees for the years indicated:

For the year ended December 31, Increase (decrease)

(in millions)

The following table presents certain summary financial data relating to the Benefits and Protection segment for the years indicated:

For the year ended December 31, Increase (decrease)

(in millions)

Operating revenues:

Expenses:

Dividends to policyholders 89.0 94.6 94.6 (5.6) —

Year Ended December 31, 2023 Compared to Year Ended December 31, 2022

Pre-Tax Operating Earnings

Pre-tax operating earnings in our Specialty Benefits business increased $32.4 million due to growth in the business. Pre-tax operating earnings in our Life Insurance business decreased $35.6 million due to lower investment income ($17.8 million resulting from the impacts of 2022 reserve financing transactions and $17.8 million from lower variable investment income) and $12.0 million due to unfavorable actuarial assumption updates in 2023 compared to favorable impacts in 2022.

Operating Revenues

Premiums and fees in our Specialty Benefits business increased $250.2 million primarily due to growth in business.

Total Expenses

Benefits, claims and settlement expenses in our Specialty Benefits business increased $154.3 million from growth in the business, offset by $41.2 million from improved claims experience and $29.8 million in lower COVID-19 claims. Benefits, claims and settlement expenses in our Life Insurance business increased $42.7 million from mark-to-mark changes on options associated with our indexed universal life insurance.

Liability for future policy benefits remeasurement (gain) loss changed due to less favorable actuarial assumption updates and model refinements in 2023 compared to favorable in 2022.

Operating expenses increased primarily due to growth in the business.

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Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

Pre-Tax Operating Earnings

Pre-tax operating earnings increased in our Specialty Benefits business due to $57.2 million in more favorable actuarial assumption updates and model refinements in 2022 compared to 2021, $55.4 million in lower COVID-19 claims in 2022 compared to 2021, $30.6 million due to growth in the business and $21.5 million from strong expense management.

Operating Revenues

Premium and fees in our Specialty Benefits business increased $274.5 million from growth in the business. Premium and fees decreased in our Life Insurance business $365.7 million primarily due to the impact of our exited ULSG business.

Net investment income in our Life Insurance business decreased $325.9 million primarily due to the impact of our exited ULSG business and $40.7 million due to lower variable investment income.

Total Expenses

Benefits, claims and settlement expenses in our Specialty Benefits business increased $174.3 million from growth in the business, partially offset by $55.4 million in lower COVID-19 claims and $51.1 million from improved claims experience. Benefits, claims and settlement expenses in our Life Insurance business decreased $604.9 million primarily due to the impact of our exited ULSG business, $27.0 million from mark-to-market changes on options associated with our indexed universal life insurance and $24.3 million due to lower COVID-19 claims.

Liability for future policy benefits remeasurement (gain) loss in our Specialty Benefits business changed $52.5 million due to more favorable actuarial assumption updates and model refinements in 2022 compared to 2021.

Operating expenses in our Specialty Benefits business increased $86.3 million primarily due to growth in the business, offset by $21.5 million from expense management. Operating expenses in our Life insurance business decreased $95.7 million primarily associated with the impact of our exited ULSG business.

Corporate Segment

Corporate Segment Summary Financial Data

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

For the year ended December 31, Increase (decrease)

(in millions)

Year Ended December 31, 2023 Compared to Year Ended December 31, 2022

Pre-Tax Operating Losses

Pre-tax operating losses decreased primarily due to higher net investment income largely resulting from mark-to-market gains on investments in 2023 relative to mark-to-market losses in 2022.

Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

Pre-Tax Operating Losses

Pre-tax operating losses increased primarily due to lower net investment income largely resulting from mark-to-market losses on investments in 2022 relative to mark-to-market gains in 2021.

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Liquidity and Capital Resources

Liquidity and capital resources represent the overall strength of a company and its ability to generate strong cash flows, borrow funds at a competitive rate and raise new capital to meet operating and growth needs. We are 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 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.

Liquidity

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

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

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

We also manage liquidity risk by limiting the sales of liabilities with features such as puts or other options that can be exercised at inopportune times. For example, as of December 31, 2023, approximately $14.8 billion, or 99%, of our institutional guaranteed investment contracts and funding agreements cannot be redeemed by contractholders prior to maturity. Our individual annuity liabilities also contain surrender charges and other provisions limiting early surrenders.

The following table summarizes the withdrawal characteristics of our domestic general account investment contracts as of December 31, 2023.

Contractholder funds,

net of reinsurance Percentage

(in millions)

Not subject to discretionary withdrawal $ 15,746.6 57.2 %

Subject to discretionary withdrawal with adjustments:

Specified surrender charges 7,084.7 25.8

Market value adjustments 4,666.1 17.0

Subject to discretionary withdrawal without adjustments 0.7 —

Total domestic investment contracts $ 27,498.1 100.0 %

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

We had the following short-term credit available with various financial institutions as of December 31, 2023:

Financing Amount

Obligor/Applicant structure Maturity Capacity outstanding (3)

(in millions)

Principal Life (1) Credit facility October 2027 $ 800.0 $ —

Principal International Chile (2) Unsecured lines of credit 130.9 58.6

Other short-term borrowings Uncollateralized debt 2.5 2.5

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

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, 2023 and December 31, 2022. 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 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, 2023, the ordinary stockholder dividend limitation for Principal Life is approximately $1,497.8 million in 2024.

Total stockholder dividends paid by Principal Life to its parent in 2023 were $1,200.0 million, all of which was extraordinary and approved by the Commissioner. As of December 31, 2023, we had $2,631.3 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 (see Item 8. “Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 10, Income Taxes”).

In 2022, total stockholder dividends paid by Principal Life to its parent were $1,425.0 million, all of which was extraordinary and approved by the Commissioner.

In 2021, total stockholder dividends paid by Principal Life to its parent were $1,250.0 million, $950.0 million of which was extraordinary and approved by the Commissioner.

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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 $3,792.4 million, $3,172.9 million and $3,254.4 million for the years ended December 31, 2023, 2022 and 2021, respectively. Our insurance business typically generates positive cash flows from operating activities, as premiums collected from our insurance products and income received from our investments exceed acquisition costs, benefits paid, redemptions and operating expenses. These positive cash flows are then invested to support the obligations of our insurance and investment products and required capital supporting these products. Our cash flows from operating activities are affected by the timing of premiums, fees and investment income received and benefits and expenses paid. The increase in cash provided by operating activities in 2023 compared to 2022 was primarily due to fluctuations in receivables and payables associated with the timing of settlements, and net sales of fixed maturity trading securities in 2023 as compared to net purchases in 2022. The decrease in cash provided by operating activities in 2022 compared to 2021 was primarily due to fluctuations in receivables and payables associated with the timing of settlements.

Net cash provided by (used in) investing activities was $(1,346.9) million, $1,058.5 million and $(5,693.7) million for the years ended December 31, 2023, 2022 and 2021, respectively. The increase in cash used in investing activities in 2023 compared to 2022 was due to net purchases of available-for sale securities in 2023 compared to net sales and maturities of available-for sale securities in 2022, our 2023 settlement for our acquisition of an interest in CCB Pension Management Co., Ltd., and net purchases of real estate in 2023 compared to net sales of real estate in 2022. These were partially offset by lower net acquisitions and originations of mortgage loans. The 2022 portfolio changes are due in part to the Talcott Reinsurance Transaction and the associated funds withheld portfolio activity. The increase in cash provided by investing activities in 2022 compared to 2021 was due to net sales and maturities of available-for sale securities in 2022 compared to net purchases of available-for sale securities in 2021 and decreased net purchases of mortgage loans. The portfolio changes are due in part to the Talcott Reinsurance Transaction and the associated funds withheld portfolio activity during 2022.

Net cash provided by (used in) financing activities was $(2,585.8) million, $(1,715.4) million and $1,921.5 million for the years ended December 31, 2023, 2022 and 2021, respectively. The increase in cash used in financing activities in 2023 compared to 2022 was due to a decrease in banking operation deposits due to interest rate changes and outflows to higher rate alternatives and net investment contract withdrawals, most pronounced in large market cases. The increase in cash used was partially offset by decreased share repurchases due to the accelerated share repurchase program in 2022. The increase in cash used in financing activities in 2022 compared to 2021 was due to a lower net increase in banking operation deposits and increased share repurchases primarily related to our accelerated share repurchase programs. Additionally, we paid off $300.0 million of long-term debt that matured during 2022.

Guarantors and Issuers of Guaranteed Securities. PFG has issued certain notes pursuant to transactions registered under the Securities Act of 1933. Such notes include all currently outstanding senior notes and junior subordinated notes, which are subordinated to all our senior debt (collectively, the “registered notes”). For additional information on the senior notes and junior subordinated notes, see Item 8. “Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 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.

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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.

(in millions)

Summary Statements of Financial Position Information:

Cash and cash equivalents 603.6 952.0

Due from non-obligor subsidiaries 59.5 47.7

Due to non-obligor subsidiaries 821.6 793.9

For the year ended For the year ended

(in millions)

Summary Statements of Operations Information:

Total revenues $ 61.8 $ (7.5)

Shelf Registration. On February 27, 2023, our shelf registration statement was filed with the SEC and became effective. The shelf registration replaced the shelf registration that had been in effect since April 2020. 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.”

Short-Term Debt. For short-term debt information, see “Liquidity” and Item 8. “Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 13, Debt.”

Long-Term Debt. For long-term debt information, see Item 8. “Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 13, Debt.”

Contingent Funding Agreements for Senior Debt Issuance. For information on the contingent funding agreements, see Item 8. “Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 13, Debt” under the caption “Contingent Funding Agreements for Senior Debt Issuance.”

Stockholders’ Equity. Proceeds from the issuance of our common stock were $57.8 million, $181.7 million and $86.7 million in 2023, 2022 and 2021, respectively.

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

For the year ended December 31,

($ in millions)

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

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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. 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.”

Capitalization

The following table summarizes our capital structure:

($ in millions)

Debt:

Short-term debt $ 61.1 $ 80.7

Total stockholders’ equity attributable to PFG 10,916.0 9,976.7

Debt to equity 37 % 41 %

Debt to capitalization 27 % 29 %

Pension and OPEB Plan Funding

We have defined benefit pension plans covering substantially all of our U.S. employees and certain agents. See Item 8. “Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 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 $449.9 million pre-tax and $459.7 million pre-tax as of December 31, 2023 and 2022, 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 $342.2 million and $336.7 million as of December 31, 2023 and 2022, 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 2024 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 2024 up to $75.0 million. This includes funding for both our qualified and nonqualified pension plans. We may contribute to our other postretirement benefit plans in 2024 pending future analysis.

Effective January 1, 2021, $656.5 million of assets in excess of the expected liability to cover the postretirement medical benefits for retirees were re-designated for non-retiree benefits. The elections were made pursuant to plan provisions which provide for assets in excess of 125% of expected liabilities to fund other benefits covered under the plans. As of December 31, 2023, $308.6 million of re-designated assets remained for non-retiree benefits.

Contractual Obligations and Contractual Commitments

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, 2023, 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, 2023, the amount of unfunded commitments was $1,536.2 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.

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Off-Balance Sheet Arrangements

Variable Interest Entities. We have relationships with various types of special purpose entities and other entities where we have a variable interest as described in Item 8. “Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 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, 2023, no significant changes to guarantees and indemnifications have occurred since December 31, 2022. 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.”

Financial Strength and Credit Ratings

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

We have had no significant changes or actions in ratings and rating outlooks that have occurred from January 1, 2023, through the date of this filing.

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

A.M. Best Fitch Moody’s S&P

Current outlook Stable Stable Stable Stable

Principal Financial Group

Senior Unsecured Debt a A- Baa1 A-

Junior Subordinated Debt a- Baa2 BBB

Long-Term Issuer Default Rating A

Principal Life Insurance Company

Insurer Financial Strength A+ AA- A1 A+

Issuer Credit Rating aa

Commercial Paper AMB-1+ P-1 A-1+

Principal National Life Insurance Company

Insurer Financial Strength A+ AA- A1 A+

Impacts of Income Taxes

For income tax information, see Item 8. “Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 14, Income Taxes.”

Fair Value Measurement

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels. The fair value hierarchy gives the highest priority (Level 1) to unadjusted quoted prices in active markets for identical assets or liabilities and gives the lowest priority (Level 3) to unobservable inputs. The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety considering factors specific to the asset or liability. See Item 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.

As of December 31, 2023, 46% of our net assets (liabilities) were Level 1, 51% were Level 2 and 3% were Level 3. Excluding separate account assets as of December 31, 2023, 3% of our net assets (liabilities) were Level 1, 88% were Level 2 and 9% were Level 3.

As of December 31, 2022, 43% of our net assets (liabilities) were Level 1, 54% were Level 2 and 3% were Level 3. Excluding separate account assets as of December 31, 2022, 4% of our net assets (liabilities) were Level 1, 88% were Level 2 and 8% were Level 3.

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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, 2023, were $7,447.8 million as compared to $6,842.2 million as of December 31, 2022. The increase was primarily related to net purchases and transfers into Level 3 for certain fixed maturities, available-for-sale, partially offset by a decrease in the funds withheld payable embedded derivative net asset.

Net assets (liabilities) measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of December 31, 2022, were $6,842.2 million as compared to $1,142.4 million as of December 31, 2021. The increase was primarily related to an increase in the funds withheld payable embedded derivative net asset, an increase in manually priced private corporate credit securities and a reduction of the market risk benefit net liability.

Investments

We had total consolidated assets as of December 31, 2023, of $305,046.7 million, of which $98,320.4 million were invested assets. A portion of our invested assets represent funds withheld backing reserves as part of a coinsurance with funds withheld reinsurance agreement. The funds withheld assets and associated net investment income and net realized capital gains (losses) are not included in the discussions below as the investment risk is passed to the reinsurer. See Item 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.

Overall Composition of Invested Assets

Invested assets as of December 31, 2023, 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.

Investments

excluding Funds

funds withheld withheld Total

(in millions)

Investments

excluding Funds

funds withheld withheld Total

(in millions)

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Investment Results

Net Investment Income

The following table presents the yield and investment income, excluding net realized capital gains and losses, for our invested assets for the 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.

For the year ended December 31, Increase (decrease)

($ in millions)

Year Ended December 31, 2023 Compared to Year Ended December 31, 2022

Net investment income increased primarily due to higher yields and average invested assets in fixed maturities and cash and due to foreign currency tailwinds. These increases were partially offset by lower income associated with derivatives in fair value hedges, lower value-add real estate sales in our U.S. operations and lower inflation-based investment returns on Latin America average invested assets.

Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

Net investment income decreased primarily due to impacts of the Talcott Reinsurance Transaction in 2022 partially offset by higher inflation-based investment returns on our Latin America average invested assets and cash.

Net Realized Capital Gains (Losses)

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

For the year ended December 31, Increase (decrease)

(in millions)

Other ̶ credit gains (losses) (0.1) (3.1) 7.7 3.0 (10.8)

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Year Ended December 31, 2023 Compared to Year Ended December 31, 2022

Net realized capital losses decreased primarily due to reduced non-credit losses on available-for-sale fixed maturities, gains versus losses on equity securities and sponsored investment funds due to equity market improvement, and increased gains on equity real estate sales. These decreases were partially offset by losses versus gains on interest rate derivatives not designated as hedging instruments due to changes in interest rates, increased losses from strengthening commercial mortgage loan reserves and increased losses on residential whole loan trust deconsolidations.

Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

Net realized capital losses increased primarily due to losses on equity securities and sponsored investment funds due to equity market declines, non-credit losses on available-for-sale fixed maturities and losses on a residential whole loan trust deconsolidation. These were partially offset by increased gains on interest rate swaps not designated as hedging instruments due to changes in interest rates, gains versus losses on currency derivatives and increased gains on real estate asset swaps.

U.S. Investment Operations

In the following sections, we provide details about U.S. Investment Operations, excluding investments held as part of the coinsurance with funds withheld agreement. We believe the details of the composition of our investment portfolio excluding the funds withheld are most relevant to an understanding of our operations that are pertinent to investors because all funds withheld assets support obligations and liabilities relating to the Talcott Reinsurance Transaction. Guidelines are in place to ensure the investment risk associated with these fund withheld assets are appropriately managed. See Footnote 12, Reinsurance, for further information on the funds withheld assets.

Of our invested assets, $72,520.1 million were held by our U.S. operations as of December 31, 2023. Our U.S. invested assets are managed primarily by Principal Global Investors. 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:

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

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

● significant management or organizational changes;

● significant changes regarding the issuer’s industry;

● violation of financial covenants and

● other business factors that relate to the issuer.

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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 $85.0 million and $130.0 million as of December 31, 2023 and December 31, 2022, respectively. We sell credit default swaps to offer credit protection to investors when entering into synthetic replicating transactions. When selling credit protection, if there is an event of default by the referenced name, we are obligated to pay the counterparty the referenced amount of the contract and receive in return the referenced security. For further information on credit derivatives sold, see Item 8. “Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 5, Derivative Financial Instruments” under the caption, “Credit Derivatives Sold.”

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

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

● diversifying our risk across numerous approved counterparties;

● trading mandatorily cleared contracts through centralized clearinghouses.

We manage our exposure on a net basis, whereby we net positive and negative exposures for each counterparty with agreements in place. For further information on derivative exposure, see Item 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:

Weighted average loan‐to‐value ratio Debt service coverage ratio

Entire mortgage portfolio 49 % 46 % 2.5 x 2.5 x

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

The amortized cost and weighted average yield, calculated using amortized cost, of non-structured fixed maturity securities that will be callable at the option of the issuer, excluding securities with a make-whole provision, were $2,159.0 million and 4.0%, respectively, as of December 31, 2023, and $2,539.0 million and 3.9%, respectively, as of December 31, 2022. In addition, the amortized cost and weighted average yield of RMBS, residential collateralized mortgage obligations, and asset-backed securities - home equity with material prepayment risk were $6,959.0 million and 3.7%, respectively, as of December 31, 2023, and $5,546.1 million and 2.9%, respectively, as of December 31, 2022.

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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.”

Overall Composition of U.S. Invested Assets

As shown in the following table, the major categories of U.S. invested assets are fixed maturities and mortgage loans.

Carrying amount % of total Carrying amount % of total

($ in millions)

Cash and cash equivalents 3,668.8 2,894.5

Total invested assets and cash $ 76,188.9 $ 71,791.7

Fixed Maturities

Fixed maturities include bonds, ABS, redeemable preferred stock and certain non-redeemable preferred securities.

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

Carrying amount Percent of total Carrying amount Percent of total

($ in millions)

Residential mortgage-backed pass-through securities 3,061.8 5 2,172.3 5

Commercial mortgage-backed securities 3,854.5 8 3,861.9 9

Residential collateralized mortgage obligations 3,214.8 7 2,666.9 6

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

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

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

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The international exposure held in our U.S. operation’s fixed maturities portfolio was 14% of total fixed maturities as of both December 31, 2023 and December 31, 2022. It is comprised of corporate and foreign government fixed maturities.

(in millions)

Europe, non-European Union 258.1 302.5

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, 2023 and December 31, 2022, our investments in Canada totaled $958.0 million and $982.9 million, respectively.

Fixed Maturities Credit Concentrations. One aspect of managing credit risk is through industry, issuer and asset class diversification. Our credit concentrations are managed to established limits. The top 10 exposures comprised 4.8% of single-name credit fixed maturity exposures as of both December 31, 2023 and December 31, 2022.

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.

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

Percent of Percent of

Amortized Carrying carrying Amortized Carrying carrying

NAIC designation cost amount amount cost amount amount

($ in millions)

Fixed maturities included 39 securities with an amortized cost of $433.3 million, gross gains of $21.5 million, gross losses of $3.9 million, valuation allowance of $0.0 million and a carrying amount of $450.9 million as of December 31, 2023, 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.

Commercial Mortgage-Backed Securities. As of December 31, 2023, based on amortized cost, 96% of our CMBS portfolio had an NAIC designation of 1.

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

Amortized Carrying Amortized Carrying

NAIC designation cost amount cost amount

(in millions)

5 — — — —

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.

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

($ in millions)

Problem fixed maturities (1) $ 42.6 $ 20.9

Potential problem fixed maturities 66.7 21.8

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.

The net realized loss relating to the change in the allowance for credit loss and credit related sales of fixed maturities was $48.9 million, $29.7 million and $34.7 million for the years ended December 31, 2023, 2022 and 2021, respectively.

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Fixed Maturities Available-for-Sale

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

Gross Gross Allowance

Amortized unrealized unrealized for credit Carrying

cost gains losses loss amount

(in millions)

Commercial mortgage-backed securities 4,316.7 — 515.3 — 3,801.4

Asset-backed securities — Home equity (1) 139.0 2.9 4.3 — 137.6

Collateralized debt obligations — Credit 16.6 — 4.9 — 11.7

Collateralized debt obligations — Loans 3,669.6 6.1 20.3 — 3,655.4

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

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PFG US Equity

PFG · 10-K · period ended 2023-12-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

PFG US Equity☆

PFG · 10-K · period ended 2023-12-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

PFG US Equity