4. Investments

Fixed Maturities and Equity Securities

The amortized cost, gross unrealized gains and losses, other-than-temporary impairments in AOCI and fair value of fixed maturities and equity securities available-for-sale were as follows:

	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value		Other-than- temporary impairments in AOCI (1)
	(in millions)
December 31, 2017
Fixed maturities, available-for-sale:
U.S. government and agencies	$	1,314.5	$	44.9	$	7.7	$	1,351.7	$	—
Non-U.S. governments		820.5		84.6		3.6		901.5		—
States and political subdivisions		6,446.1		371.4		15.9		6,801.6		—
Corporate		34,673.0		2,464.2		104.1		37,033.1		0.5
Residential mortgage-backed pass-through securities		2,493.8		50.8		21.3		2,523.3		—
Commercial mortgage-backed securities		3,734.0		32.7		58.4		3,708.3		50.6
Collateralized debt obligations		1,372.1		2.7		15.5		1,359.3		0.3
Other debt obligations		5,708.1		42.0		40.5		5,709.6		41.9

Total fixed maturities, available-for-sale	$	56,562.1	$	3,093.3	$	267.0	$	59,388.4	$	93.3


Total equity securities, available-for-sale	$	94.0	$	7.4	$	5.4	$	96.0


December 31, 2016
Fixed maturities, available-for-sale:
U.S. government and agencies	$	1,426.7	$	17.2	$	10.9	$	1,433.0	$	—
Non-U.S. governments		781.7		119.3		7.4		893.6		—
States and political subdivisions		5,463.9		192.4		87.1		5,569.2		1.1
Corporate		32,699.7		1,843.5		350.8		34,192.4		17.2
Residential mortgage-backed pass-through securities		2,798.0		67.3		30.6		2,834.7		—
Commercial mortgage-backed securities		4,153.2		31.2		87.9		4,096.5		77.5
Collateralized debt obligations		780.1		2.8		24.3		758.6		0.3
Other debt obligations		5,080.9		37.0		49.8		5,068.1		50.3

Total fixed maturities, available-for-sale	$	53,184.2	$	2,310.7	$	648.8	$	54,846.1	$	146.4


Total equity securities, available-for-sale	$	104.9	$	4.9	$	10.9	$	98.9

(1) Excludes $103.0 million and $120.9 million as of December 31, 2017 and December 31, 2016, respectively, of net unrealized gains on impaired fixed maturities, available-for-sale related to changes in fair value subsequent to the impairment date, which are included in gross unrealized gains and gross unrealized losses.

The amortized cost and fair value of fixed maturities available-for-sale as of December 31, 2017, by expected maturity, were as follows:

	Amortized cost		Fair value
	(in millions)
Due in one year or less	$	2,652.6	$	2,669.2
Due after one year through five years		11,417.8		11,728.4
Due after five years through ten years		10,047.6		10,399.7
Due after ten years		19,136.1		21,290.6

Subtotal		43,254.1		46,087.9
Mortgage-backed and other asset-backed securities		13,308.0		13,300.5

Total	$	56,562.1	$	59,388.4

Actual maturities may differ because borrowers may have the right to call or prepay obligations. Our portfolio is diversified by industry, issuer and asset class. Credit concentrations are managed to established limits.

Net Investment Income

Major components of net investment income were as follows:

	For the year ended December 31,
	2017			2016			2015
	(in millions)
Fixed maturities, available-for-sale	$	2,342.3		$	2,253.8		$	2,131.8
Fixed maturities, trading		12.6			20.2			21.4
Equity securities, available-for-sale		21.7			20.1			15.0
Equity securities, trading		46.1			31.4			35.2
Mortgage loans		605.9			573.9			575.1
Real estate		129.4			127.9			97.1
Policy loans		45.6			46.3			46.3
Cash and cash equivalents		28.6			14.2			8.5
Derivatives (1)		(3.2	)		(36.1	)		(66.6	)
Other		319.6			329.2			265.3

Total		3,548.6			3,380.9			3,129.1
Investment expenses		(89.3	)		(84.4	)		(77.0	)

Net investment income	$	3,459.3		$	3,296.5		$	3,052.1

(1) Relates to periodic settlements of derivatives used in fair value and cash flow hedges of fixed maturities, available-for-sale. See Note 5, Derivative Financial Instruments, for further details.

Net Realized Capital Gains and Losses

Major components of net realized capital gains (losses) on investments were as follows:

	For the year ended December 31,
	2017			2016			2015
	(in millions)
Fixed maturities, available-for-sale:
Gross gains	$	14.7		$	74.6		$	20.9
Gross losses		(27.2	)		(28.6	)		(6.7	)
Net impairment losses		(81.7	)		(96.7	)		(30.5	)
Hedging, net		(28.5	)		(37.9	)		(58.3	)
Fixed maturities, trading		(8.0	)		4.1			(12.3	)
Equity securities, available-for-sale:
Gross gains		0.2			—			1.2
Gross losses		—			—			(1.8	)
Net impairment (losses) recoveries		(0.1	)		(1.7	)		0.3
Equity securities, trading		65.0			6.8			(3.4	)
Mortgage loans		9.0			4.5			(0.1	)
Derivatives		(149.8	)		210.1			38.1
Other (1)		730.6			35.9			1.5

Net realized capital gains (losses)	$	524.2		$	171.1		$	(51.1	)

(1) See Note 4, Investments — Real Estate Transactions, for further details.

Proceeds from sales of investments (excluding call and maturity proceeds) in fixed maturities, available-for-sale were $1,345.8 million, $1,916.9 million and $1,537.5 million in 2017, 2016 and 2015, respectively.

Other-Than-Temporary Impairments

We have a process in place to identify fixed maturity and equity securities that could potentially have an impairment that is other than temporary. This process involves monitoring market events that could impact issuers' credit ratings, business climate, management changes, litigation and government actions and other similar factors. This process also involves monitoring late payments, pricing levels, downgrades by rating agencies, key financial ratios, financial statements, revenue forecasts and cash flow projections as indicators of credit issues.

Each reporting period, all securities are reviewed to determine whether an other-than-temporary decline in value exists and whether losses should be recognized. We consider relevant facts and circumstances in evaluating whether a credit or interest rate related impairment of a security is other than temporary. Relevant facts and circumstances considered include: (1) the extent and length of time the fair value has been below cost; (2) the reasons for the decline in value; (3) the financial position and access to capital of the issuer, including the current and future impact of any specific events; (4) for structured securities, the adequacy of the expected cash flows; (5) for fixed maturities, our intent to sell a security or whether it is more likely than not we will be required to sell the security before the recovery of its amortized cost which, in some cases, may extend to maturity and (6) for equity securities, our ability and intent to hold the security for a period of time that allows for the recovery in value. To the extent we determine a security is deemed to be other than temporarily impaired, an impairment loss is recognized.

Impairment losses on equity securities are recognized in net income and are measured as the difference between amortized cost and fair value. The way in which impairment losses on fixed maturities are recognized in the financial statements is dependent on the facts and circumstances related to the specific security. If we intend to sell a security or it is more likely than not that we would be required to sell a security before the recovery of its amortized cost, we recognize an other-than-temporary impairment in net income for the difference between amortized cost and fair value. If we do not expect to recover the amortized cost basis, we do not plan to sell the security and if it is not more likely than not that we would be required to sell a security before the recovery of its amortized cost, the recognition of the other-than-temporary impairment is bifurcated. We recognize the credit loss portion in net income and the noncredit loss portion in OCI ("bifurcated OTTI").

Total other-than-temporary impairment losses, net of recoveries from the sale of previously impaired securities, were as follows:

	For the year ended December 31,
	2017			2016			2015
	(in millions)
Fixed maturities, available-for-sale	$	(28.6	)	$	(97.1	)	$	(1.1	)
Equity securities, available-for-sale		(0.1	)		(1.7	)		0.3

Total other-than-temporary impairment losses, net of recoveries from the sale of previously impaired securities		(28.7	)		(98.8	)		(0.8	)
Other-than-temporary impairment losses on fixed maturities, available-for-sale reclassified to (from) OCI (1)		(53.1	)		0.4			(29.4	)

Net impairment losses on available-for-sale securities	$	(81.8	)	$	(98.4	)	$	(30.2	)

(1) Represents the net impact of (a) gains resulting from reclassification of noncredit impairment losses for fixed maturities with bifurcated OTTI from net realized capital gains (losses) to OCI and (b) losses resulting from reclassification of previously recognized noncredit impairment losses from OCI to net realized capital gains (losses) for fixed maturities with bifurcated OTTI that had additional credit losses or fixed maturities that previously had bifurcated OTTI that have now been sold or are intended to be sold.

We estimate the amount of the credit loss component of a fixed maturity security impairment as the difference between amortized cost and the present value of the expected cash flows of the security. The present value is determined using the best estimate cash flows discounted at the effective interest rate implicit to the security at the date of purchase or the current yield to accrete an asset-backed or floating rate security. The methodology and assumptions for establishing the best estimate cash flows vary depending on the type of security. The ABS cash flow estimates are based on security specific facts and circumstances that may include collateral characteristics, expectations of delinquency and default rates, loss severity and prepayment speeds and structural support, including subordination and guarantees. The corporate security cash flow estimates are derived from scenario-based outcomes of expected corporate restructurings or liquidations using bond specific facts and circumstances including timing, security interests and loss severity.

The following table provides a rollforward of accumulated credit losses for fixed maturities with bifurcated credit losses. The purpose of the table is to provide detail of (1) additions to the bifurcated credit loss amounts recognized in net realized capital gains (losses) during the period and (2) decrements for previously recognized bifurcated credit losses where the loss is no longer bifurcated and/or there has been a positive change in expected cash flows or accretion of the bifurcated credit loss amount.

	For the year ended December 31,
	2017			2016			2015
	(in millions)
Beginning balance	$	(139.9	)	$	(131.5	)	$	(144.4	)
Credit losses for which an other-than-temporary impairment was not previously recognized		(15.0	)		(43.4	)		(6.1	)
Credit losses for which an other-than-temporary impairment was previously recognized		(42.5	)		(31.7	)		(13.8	)
Reduction for credit losses previously recognized on fixed maturities now sold, paid down or intended to be sold		63.3			60.5			24.7
Net reduction for positive changes in cash flows expected to be collected and amortization (1)		10.0			6.4			7.5
Foreign currency translation adjustment		(0.2	)		(0.2	)		0.6

Ending balance	$	(124.3	)	$	(139.9	)	$	(131.5	)

(1) Amounts are recognized in net investment income.

Gross Unrealized Losses for Fixed Maturities and Equity Securities

For fixed maturities and equity securities available-for-sale with unrealized losses, including other-than-temporary impairment losses reported in OCI, the gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position were as follows:

	December 31, 2017
	Less than twelve months				Greater than or equal to twelve months				Total
	Fair value		Gross unrealized losses		Fair value		Gross unrealized losses		Fair value		Gross unrealized losses
	(in millions)
Fixed maturities, available-for-sale:
U.S. government and agencies	$	294.2	$	2.2	$	180.9	$	5.5	$	475.1	$	7.7
Non-U.S. governments		111.0		1.7		22.1		1.9		133.1		3.6
States and political subdivisions		720.0		5.0		437.7		10.9		1,157.7		15.9
Corporate		3,871.5		43.4		1,644.3		60.7		5,515.8		104.1
Residential mortgage-backed pass- through securities		354.4		2.0		734.5		19.3		1,088.9		21.3
Commercial mortgage-backed securities		1,342.7		19.9		820.3		38.5		2,163.0		58.4
Collateralized debt obligations		460.9		2.1		38.3		13.4		499.2		15.5
Other debt obligations		2,667.6		16.0		956.8		24.5		3,624.4		40.5

Total fixed maturities, available-for-sale	$	9,822.3	$	92.3	$	4,834.9	$	174.7	$	14,657.2	$	267.0


Total equity securities, available-for-sale	$	—	$	—	$	40.4	$	5.4	$	40.4	$	5.4

Of the total amounts, Principal Life Insurance Company's ("Principal Life's") consolidated portfolio represented $14,059.5 million in available-for-sale fixed maturities with gross unrealized losses of $239.7 million. Of the available-for-sale fixed maturities within Principal Life's consolidated portfolio in a gross unrealized loss position, 97% were investment grade (rated AAA through BBB–) with an average price of 98 (carrying value/amortized cost) as of December 31, 2017. Gross unrealized losses in our fixed maturities portfolio decreased during the year ended December 31, 2017, primarily due to tightening of credit spreads.

For those securities that had been in a continuous unrealized loss position for less than twelve months, Principal Life's consolidated portfolio held 1,209 securities with a carrying value of $9,360.9 million and unrealized losses of $75.4 million reflecting an average price of 99 as of December 31, 2017. Of this portfolio, 98% was investment grade (rated AAA through BBB–) as of December 31, 2017, with associated unrealized losses of $71.5 million. The unrealized losses on these securities can primarily be attributed to changes in market interest rates and changes in credit spreads since the securities were acquired.

For those securities that had been in a continuous unrealized loss position greater than or equal to twelve months, Principal Life's consolidated portfolio held 775 securities with a carrying value of $4,698.6 million and unrealized losses of $164.3 million. The average credit rating of this portfolio was AA– with an average price of 97 as of December 31, 2017. Of the $164.3 million in unrealized losses, the corporate sector accounts for $52.2 million in unrealized losses with an average price of 97 and an average credit rating of BBB+. The remaining unrealized losses also include $38.1 million within the commercial mortgage-backed securities sector with an average price of 96 and an average credit rating of AA+. The unrealized losses on these securities can primarily be attributed to changes in market interest rates and changes in credit spreads since the securities were acquired.

Because we expected to recover our amortized cost, it was not our intent to sell the fixed maturity available-for-sale securities with unrealized losses and it was not more likely than not that we would be required to sell these securities before recovery of the amortized cost, which may be at maturity, we did not consider these investments to be other-than-temporarily impaired as of December 31, 2017.

	December 31, 2016
	Less than twelve months				Greater than or equal to twelve months				Total
	Fair value		Gross unrealized losses		Fair value		Gross unrealized losses		Fair value		Gross unrealized losses
	(in millions)
Fixed maturities, available-for-sale:
U.S. government and agencies	$	570.3	$	10.9	$	8.2	$	—	$	578.5	$	10.9
Non-U.S. governments		198.0		5.4		12.2		2.0		210.2		7.4
States and political subdivisions		2,229.4		86.6		4.8		0.5		2,234.2		87.1
Corporate		6,559.7		189.2		1,285.6		161.6		7,845.3		350.8
Residential mortgage-backed pass-through securities		1,265.6		29.8		16.0		0.8		1,281.6		30.6
Commercial mortgage-backed securities		1,637.2		41.0		612.5		46.9		2,249.7		87.9
Collateralized debt obligations		265.7		0.9		195.6		23.4		461.3		24.3
Other debt obligations		2,229.4		32.8		376.2		17.0		2,605.6		49.8

Total fixed maturities, available-for-sale	$	14,955.3	$	396.6	$	2,511.1	$	252.2	$	17,466.4	$	648.8


Total equity securities, available-for-sale	$	18.2	$	0.4	$	35.4	$	10.5	$	53.6	$	10.9

Of the total amounts, Principal Life's consolidated portfolio represented $16,918.9 million in available-for-sale fixed maturities with gross unrealized losses of $615.1 million. Of the available-for-sale fixed maturities within Principal Life's consolidated portfolio in a gross unrealized loss position, 94% were investment grade (rated AAA through BBB–) with an average price of 96 (carrying value/amortized cost) as of December 31, 2016. Gross unrealized losses in our fixed maturities portfolio decreased during the year ended December 31, 2016, primarily due to tightening of credit spreads partially offset by an increase in interest rates.

For those securities that had been in a continuous unrealized loss position for less than twelve months, Principal Life's consolidated portfolio held 1,911 securities with a carrying value of $14,549.4 million and unrealized losses of $384.6 million reflecting an average price of 97 as of December 31, 2016. Of this portfolio, 98% was investment grade (rated AAA through BBB–) as of December 31, 2016, with associated unrealized losses of $374.1 million. The unrealized losses on these securities can primarily be attributed to changes in market interest rates and changes in credit spreads since the securities were acquired.

For those securities that had been in a continuous unrealized loss position greater than or equal to twelve months, Principal Life's consolidated portfolio held 453 securities with a carrying value of $2,369.5 million and unrealized losses of $230.5 million. The average credit rating of this portfolio was A– with an average price of 91 as of December 31, 2016. Of the $230.5 million in unrealized losses, the corporate sector accounts for $141.9 million in unrealized losses with an average price of 89 and an average credit rating of BBB–. The remaining unrealized losses consist primarily of $46.9 million within the commercial mortgage-backed securities sector with an average price of 93 and an average credit rating of AA–. The unrealized losses on these securities can primarily be attributed to changes in market interest rates and changes in credit spreads since the securities were acquired.

Net Unrealized Gains and Losses on Available-for-Sale Securities and Derivative Instruments

The net unrealized gains and losses on investments in available-for-sale securities, the noncredit component of impairment losses on fixed maturities available-for-sale and the net unrealized gains and losses on derivative instruments in cash flow hedge relationships are reported as separate components of stockholders' equity. The cumulative amount of net unrealized gains and losses on available-for-sale securities and derivative instruments in cash flow hedge relationships net of adjustments related to DAC and related actuarial balances and applicable income taxes was as follows:

	December 31, 2017			December 31, 2016
	(in millions)
Net unrealized gains on fixed maturities, available-for-sale (1)	$	2,898.5		$	1,727.8
Noncredit component of impairment losses on fixed maturities, available-for-sale		(93.3	)		(146.4	)
Net unrealized gains (losses) on equity securities, available-for-sale		2.0			(6.0	)
Adjustments for assumed changes in amortization patterns		(150.6	)		(121.9	)
Adjustments for assumed changes in policyholder liabilities		(645.5	)		(469.2	)
Net unrealized gains on derivative instruments		108.2			186.5
Net unrealized gains on equity method subsidiaries and noncontrolling interest adjustments		31.3			68.0
Provision for deferred income taxes		(695.5	)		(411.8	)

Net unrealized gains on available-for-sale securities and derivative instruments	$	1,455.1		$	827.0

(1) Excludes net unrealized gains (losses) on fixed maturities, available-for-sale included in fair value hedging relationships.

Mortgage Loans

Mortgage loans consist of commercial and residential mortgage loans. We evaluate risks inherent in our commercial mortgage loans in two classes: (1) brick and mortar property loans, including mezzanine loans, where we analyze the property's rent payments as support for the loan, and (2) credit tenant loans ("CTL"), where we rely on the credit analysis of the tenant for the repayment of the loan. We evaluate risks inherent in our residential mortgage loan portfolio in two classes: (1) home equity mortgages and (2) first lien mortgages. The carrying amount of our mortgage loan portfolio was as follows:

	December 31, 2017			December 31, 2016
	(in millions)
Commercial mortgage loans	$	12,897.3		$	12,055.2
Residential mortgage loans		1,285.9			1,219.9

Total amortized cost		14,183.2			13,275.1
Valuation allowance		(32.7	)		(44.9	)

Total carrying value	$	14,150.5		$	13,230.2

We periodically purchase mortgage loans as well as sell mortgage loans we have originated. Mortgage loans purchased and sold were as follows:

	For the year ended December 31,
	2017		2016		2015
	(in millions)
Commercial mortgage loans:
Purchased	$	144.2	$	163.3	$	223.4
Sold		28.9		0.3		21.6
Residential mortgage loans:
Purchased		346.0		290.3		295.3
Sold		152.2		48.4		79.3

Our commercial mortgage loan portfolio consists primarily of non-recourse, fixed rate mortgages on stabilized properties. Our commercial mortgage loan portfolio is diversified by geographic region and specific collateral property type as follows:

	December 31, 2017					December 31, 2016
	Amortized cost		Percent of total			Amortized cost		Percent of total
	($ in millions)
Geographic distribution
New England	$	591.8		4.6	%	$	532.1		4.4	%
Middle Atlantic		3,623.0		28.1			3,317.3		27.5
East North Central		675.2		5.2			652.6		5.4
West North Central		174.9		1.4			185.6		1.5
South Atlantic		2,325.3		18.0			2,189.5		18.2
East South Central		375.7		2.9			239.3		2.0
West South Central		1,072.4		8.3			1,211.7		10.1
Mountain		1,039.3		8.1			932.6		7.7
Pacific		2,849.0		22.1			2,707.2		22.5
International		170.7		1.3			87.3		0.7

Total	$	12,897.3		100.0	%	$	12,055.2		100.0	%


Property type distribution
Office	$	4,700.2		36.4	%	$	4,417.6		36.6	%
Retail		2,612.7		20.3			2,671.1		22.2
Industrial		1,881.5		14.6			1,802.4		15.0
Apartments		3,301.9		25.6			2,741.4		22.7
Hotel		130.9		1.0			260.7		2.2
Mixed use/other		270.1		2.1			162.0		1.3

Total	$	12,897.3		100.0	%	$	12,055.2		100.0	%

Our residential mortgage loan portfolio is composed of home equity mortgages with an amortized cost of $23.0 million and $165.6 million and first lien mortgages with an amortized cost of $1,262.9 million and $1,054.3 million as of December 31, 2017 and December 31, 2016, respectively. Our home equity mortgages decreased due to sales during the fourth quarter of 2017. Our residential home equity mortgages are concentrated in the United States and are generally second lien mortgages comprised of closed-end loans and lines of credit. Our first lien loans are concentrated in Chile and the United States.

Mortgage Loan Credit Monitoring

Commercial Credit Risk Profile Based on Internal Rating

We actively monitor and manage our commercial mortgage loan portfolio. All commercial mortgage loans are analyzed regularly and substantially all are internally rated, based on a proprietary risk rating cash flow model, in order to monitor the financial quality of these assets. The model stresses expected cash flows at various levels and at different points in time depending on the durability of the income stream, which includes our assessment of factors such as location (macro and micro markets), tenant quality and lease expirations. Our internal rating analysis presents expected losses in terms of an S&P Global ("S&P") bond equivalent rating. As the credit risk for commercial mortgage loans increases, we adjust our internal ratings downward with loans in the category "B+ and below" having the highest risk for credit loss. Internal ratings on commercial mortgage loans are updated at least annually and potentially more often for certain loans with material changes in collateral value or occupancy and for loans on an internal "watch list".

Commercial mortgage loans that require more frequent and detailed attention than other loans in our portfolio are identified and placed on an internal "watch list". Among the criteria that would indicate a potential problem are significant negative changes in ratios of loan to value or contract rents to debt service, major tenant vacancies or bankruptcies, borrower sponsorship problems, late payments, delinquent taxes and loan relief/restructuring requests.

The amortized cost of our commercial mortgage loan portfolio by credit risk, as determined by our internal rating system expressed in terms of an S&P bond equivalent rating, was as follows:

	December 31, 2017
	Brick and mortar		CTL		Total
	(in millions)
A– and above	$	11,636.2	$	129.0	$	11,765.2
BBB+ thru BBB–		884.4		102.4		986.8
BB+ thru BB–		138.7		—		138.7
B+ and below		6.3		0.3		6.6

Total	$	12,665.6	$	231.7	$	12,897.3

	December 31, 2016
	Brick and mortar		CTL		Total
	(in millions)
A– and above	$	10,612.8	$	158.5	$	10,771.3
BBB+ thru BBB–		1,009.8		100.6		1,110.4
BB+ thru BB–		160.5		—		160.5
B+ and below		12.1		0.9		13.0

Total	$	11,795.2	$	260.0	$	12,055.2

Residential Credit Risk Profile Based on Performance Status

Our residential mortgage loan portfolio is monitored based on performance of the loans. Monitoring on a residential mortgage loan increases when the loan is delinquent or earlier if there is an indication of potential impairment. We define non-performing residential mortgage loans as loans 90 days or greater delinquent or on non-accrual status.

The amortized cost of our performing and non-performing residential mortgage loans was as follows:

	December 31, 2017
	Home equity		First liens		Total
	(in millions)
Performing	$	16.5	$	1,251.4	$	1,267.9
Non-performing		6.5		11.5		18.0

Total	$	23.0	$	1,262.9	$	1,285.9

	December 31, 2016
	Home equity		First liens		Total
	(in millions)
Performing	$	156.8	$	1,043.1	$	1,199.9
Non-performing		8.8		11.2		20.0

Total	$	165.6	$	1,054.3	$	1,219.9

Non-Accrual Mortgage Loans

Commercial and residential mortgage loans are placed on non-accrual status if we have concern regarding the collectability of future payments or if a loan has matured without being paid off or extended. Factors considered may include conversations with the borrower, loss of major tenant, bankruptcy of borrower or major tenant, decreased property cash flow for commercial mortgage loans or number of days past due and other circumstances for residential mortgage loans. Based on an assessment as to the collectability of the principal, a determination is made to apply any payments received either against the principal or according to the contractual terms of the loan. When a loan is placed on non-accrual status, the accrued unpaid interest receivable is reversed against interest income. Accrual of interest resumes after factors resulting in doubts about collectability have improved. Residential first lien mortgages in the Chilean market are carried on accrual for a longer period of delinquency than domestic loans, as assessment of collectability is based on the nature of the loans and collection practices in that market.

The amortized cost of mortgage loans on non-accrual status was as follows:

	December 31, 2017		December 31, 2016
	(in millions)
Residential:
Home equity	$	6.5	$	8.8
First liens		3.9		5.6

Total	$	10.4	$	14.4

The aging of our mortgage loans, based on amortized cost, was as follows:

	December 31, 2017
	30 - 59 days past due		60 - 89 days past due		90 days or more past due		Total past due		Current		Total loans		Recorded investment 90 days or more and accruing
	(in millions)
Commercial-brick and mortar	$	—	$	—	$	—	$	—	$	12,665.6	$	12,665.6	$	—
Commercial-CTL		—		—		—		—		231.7		231.7		—
Residential-home equity		1.9		0.7		0.8		3.4		19.6		23.0		—
Residential-first liens		37.2		7.9		10.6		55.7		1,207.2		1,262.9		7.6

Total	$	39.1	$	8.6	$	11.4	$	59.1	$	14,124.1	$	14,183.2	$	7.6

	December 31, 2016
	30 - 59 days past due		60 - 89 days past due		90 days or more past due		Total past due		Current		Total loans		Recorded investment 90 days or more and accruing
	(in millions)
Commercial-brick and mortar	$	—	$	—	$	—	$	—	$	11,795.2	$	11,795.2	$	—
Commercial-CTL		—		—		—		—		260.0		260.0		—
Residential-home equity		1.9		1.1		1.4		4.4		161.2		165.6		—
Residential-first liens		40.1		11.3		10.0		61.4		992.9		1,054.3		5.6

Total	$	42.0	$	12.4	$	11.4	$	65.8	$	13,209.3	$	13,275.1	$	5.6

Mortgage Loan Valuation Allowance

We establish a valuation allowance to provide for the risk of credit losses inherent in our portfolio. The valuation allowance includes loan specific reserves for loans that are deemed to be impaired as well as reserves for pools of loans with similar risk characteristics where a property risk or market specific risk has not been identified but for which we anticipate a loss may occur. Mortgage loans on real estate are considered impaired when, based on current information and events, it is probable we will be unable to collect all amounts due according to contractual terms of the loan agreement. When we determine a loan is impaired, a valuation allowance is established equal to the difference between the carrying amount of the mortgage loan and the estimated value reduced by the cost to sell. Estimated value is based on either the present value of the expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price or fair value of the collateral. Subsequent changes in the estimated value are reflected in the valuation allowance. 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.

The valuation allowance is maintained at a level believed adequate by management to absorb estimated probable credit losses. Management's periodic evaluation and assessment of the valuation allowance adequacy is based on known and inherent risks in the portfolio, adverse situations that may affect a borrower's ability to repay, the estimated value of the underlying collateral, composition of the loan portfolio, portfolio delinquency information, underwriting standards, peer group information, current economic conditions, loss experience and other relevant factors. The evaluation of our impaired loan component is subjective, as it requires the estimation of timing and amount of future cash flows expected to be received on impaired loans.

We review our commercial mortgage loan portfolio and analyze the need for a valuation allowance for any loan that is delinquent for 60 days or more, in process of foreclosure, restructured, on the internal "watch list" or that currently has a valuation allowance. In addition to establishing allowance levels for specifically identified impaired commercial mortgage loans, management determines an allowance for all other loans in the portfolio for which historical experience and current economic conditions indicate certain losses exist. These loans are segregated by risk rating level with an estimated loss ratio applied against each risk rating level. The loss ratio is generally based upon historical loss experience for each risk rating level as adjusted for certain current environmental factors management believes to be relevant.

For our residential mortgage loan portfolio, we separate the loans into several homogeneous pools, each of which consist of loans of a similar nature including but not limited to loans similar in collateral, term and structure and loan purpose or type. We evaluate loan pools based on aggregated risk ratings, estimated specific loss potential in the different classes of credits, and historical loss experience by pool type. We adjust these quantitative factors for qualitative factors of present conditions. Qualitative factors include items such as economic and business conditions, changes in the portfolio, value of underlying collateral and concentrations. Residential mortgage loan pools exclude loans that have been restructured or impaired, as those loans are evaluated individually.

A rollforward of our valuation allowance and ending balances of the allowance and loan balance by basis of impairment method was as follows:

	Commercial			Residential			Total
	(in millions)
For the year ended December 31, 2017
Beginning balance	$	27.4		$	17.5		$	44.9
Provision		(1.6	)		(10.4	)		(12.0	)
Charge-offs		—			(5.1	)		(5.1	)
Recoveries		—			4.9			4.9

Ending balance	$	25.8		$	6.9		$	32.7


Allowance ending balance by basis of impairment method:
Individually evaluated for impairment	$	—		$	4.5		$	4.5
Collectively evaluated for impairment		25.8			2.4			28.2

Allowance ending balance	$	25.8		$	6.9		$	32.7


Loan balance by basis of impairment method:
Individually evaluated for impairment	$	—		$	12.5		$	12.5
Collectively evaluated for impairment		12,897.3			1,273.4			14,170.7

Loan ending balance	$	12,897.3		$	1,285.9		$	14,183.2


For the year ended December 31, 2016
Beginning balance	$	27.5		$	24.1		$	51.6
Provision		1.4			(5.6	)		(4.2	)
Charge-offs		(1.5	)		(4.6	)		(6.1	)
Recoveries		—			3.6			3.6

Ending balance	$	27.4		$	17.5		$	44.9


Allowance ending balance by basis of impairment method:
Individually evaluated for impairment	$	—		$	5.9		$	5.9
Collectively evaluated for impairment		27.4			11.6			39.0

Allowance ending balance	$	27.4		$	17.5		$	44.9


Loan balance by basis of impairment method:
Individually evaluated for impairment	$	—		$	19.2		$	19.2
Collectively evaluated for impairment		12,055.2			1,200.7			13,255.9

Loan ending balance	$	12,055.2		$	1,219.9		$	13,275.1


For the year ended December 31, 2015
Beginning balance	$	26.9		$	29.6		$	56.5
Provision		3.9			—			3.9
Charge-offs		(3.4	)		(9.0	)		(12.4	)
Recoveries		0.1			3.6			3.7
Effect of exchange rates		—			(0.1	)		(0.1	)

Ending balance	$	27.5		$	24.1		$	51.6


Allowance ending balance by basis of impairment method:
Individually evaluated for impairment	$	—		$	7.5		$	7.5
Collectively evaluated for impairment		27.5			16.6			44.1

Allowance ending balance	$	27.5		$	24.1		$	51.6


Loan balance by basis of impairment method:
Individually evaluated for impairment	$	—		$	23.2		$	23.2
Collectively evaluated for impairment		11,265.3			1,102.5			12,367.8

Loan ending balance	$	11,265.3		$	1,125.7		$	12,391.0

Impaired Mortgage Loans

Impaired mortgage loans are loans with a related specific valuation allowance, loans whose carrying amount has been reduced to the expected collectible amount because the impairment has been considered other than temporary or a loan modification has been classified as a troubled debt restructuring ("TDR"). Based on an assessment as to the collectability of the principal, a determination is made to apply any payments received either against the principal or according to the contractual terms of the loan. Our recorded investment in and unpaid principal balance of impaired loans along with the related loan specific allowance for losses, if any, and the average recorded investment and interest income recognized during the time the loans were impaired were as follows:

	December 31, 2017
	Recorded investment		Unpaid principal balance		Related allowance
	(in millions)
With no related allowance recorded:
Residential-first liens	$	0.9	$	0.8	$	—
With an allowance recorded:
Residential-home equity		7.6		8.6		4.3
Residential-first liens		4.0		4.0		0.2
Total:
Residential	$	12.5	$	13.4	$	4.5

	December 31, 2016
	Recorded investment		Unpaid principal balance		Related allowance
	(in millions)
With no related allowance recorded:
Residential-first liens	$	1.5	$	1.5	$	—
With an allowance recorded:
Residential-home equity		13.0		14.1		5.5
Residential-first liens		4.7		4.6		0.4
Total:
Residential	$	19.2	$	20.2	$	5.9

	Average recorded investment		Interest income recognized
	(in millions)
For the year ended December 31, 2017
With no related allowance recorded:
Residential-first liens	$	1.2	$	—
With an allowance recorded:
Residential-home equity		10.3		0.2
Residential-first liens		4.4		0.2
Total:
Residential	$	15.9	$	0.4
For the year ended December 31, 2016
With no related allowance recorded:
Residential-first liens	$	2.6	$	—
With an allowance recorded:
Residential-home equity		13.4		0.3
Residential-first liens		5.3		0.1
Total:
Residential	$	21.3	$	0.4
For the year ended December 31, 2015
With no related allowance recorded:
Commercial-brick and mortar	$	2.6	$	—
Residential-first liens		3.5		—
With an allowance recorded:
Commercial-brick and mortar		2.2		0.2
Residential-home equity		15.1		0.4
Residential-first liens		6.6		0.2
Total:
Commercial	$	4.8	$	0.2
Residential	$	25.2	$	0.6

Mortgage Loan Modifications

Our commercial and residential mortgage loan portfolios can include loans that have been modified. We assess loan modifications on a case-by-case basis to evaluate whether a TDR has occurred. When we have commercial mortgage loan TDRs, they are modified to delay or reduce principal payments and to reduce or delay interest payments. The commercial mortgage loan modifications result in delayed cash receipts, a decrease in interest income and loan rates that are considered below market. When we have residential mortgage loan TDRs, they include modifications of interest-only payment periods, delays in principal balloon payments and interest rate reductions. Residential mortgage loan modifications result in delayed or decreased cash receipts and a decrease in interest income.

The following table includes information about outstanding loans that were modified and met the criteria of a TDR during the periods indicated. In addition, the table includes information for loans that were modified and met the criteria of a TDR within the past twelve months that were in payment default during the periods indicated:

	For the year ended December 31, 2017
	TDRs				TDRs in payment default
	Number of contracts		Recorded investment		Number of contracts		Recorded investment
			(in millions)				(in millions)
Residential-home equity		10	$	0.5		—	$	—
Residential-first liens		1		0.1		1		0.1

Total		11	$	0.6		1	$	0.1

	For the year ended December 31, 2016
	TDRs				TDRs in payment default
	Number of contracts		Recorded investment		Number of contracts		Recorded investment
			(in millions)				(in millions)
Residential-home equity		9	$	0.5		—	$	—
Residential-first liens		1		0.1		—		—

Total		10	$	0.6		—	$	—

	For the year ended December 31, 2015
	TDRs				TDRs in payment default
	Number of contracts		Recorded investment		Number of contracts		Recorded investment
			(in millions)				(in millions)
Residential-home equity		14	$	0.6		2	$	—

Total		14	$	0.6		2	$	—

Commercial mortgage loans that have been designated as a TDR have been previously reserved for in the mortgage loan valuation allowance at the estimated fair value of the underlying collateral reduced by the cost to sell.

Residential mortgage loans that have been designated as a TDR are specifically reserved for in the mortgage loan valuation allowance if losses result from the modification. Residential mortgage loans that have defaulted or have been discharged through bankruptcy are reduced to the expected collectible amount.

Real Estate

Depreciation expense on invested real estate was $55.9 million, $52.0 million and $49.3 million in 2017, 2016 and 2015, respectively. Accumulated depreciation was $451.6 million and $450.4 million as of December 31, 2017 and 2016, respectively.

Real Estate Transactions

In September 2017, we entered an exchange agreement to exit certain real estate joint ventures. The transaction resulted in us transferring our interest in certain real estate properties in exchange for our joint venture partner's interest in certain other real estate properties. In a subsequent transaction we sold certain of these real estate properties to a third party. Both transactions closed in September 2017.

In September 2017, we recognized a net pre-tax realized capital gain of $690.9 million (net after-tax realized capital gain of $410.8 million) as a result of these transactions. The following consolidated statement of financial position line items were most significantly impacted by the transactions, each having a net increase as of September 30, 2017, (in millions):

Real estate	$	293.4
Other investments		222.4
Cash and cash equivalents		219.6
Long-term debt		49.4
Income taxes currently payable		179.1
Deferred income taxes		101.0

Other Investments

Other investments include interests in unconsolidated entities, domestic and international joint ventures and partnerships and properties owned jointly with venture partners and operated by the partners. Such investments are generally accounted for using the equity method. In applying the equity method, we record our share of income or loss reported by the equity investees in net investment income. Summarized financial information for these unconsolidated entities was as follows:

	December 31,
	2017		2016
	(in millions)
Total assets	$	136,171.8	$	123,621.2
Total liabilities		83,815.2		73,688.8

Total equity	$	52,356.6	$	49,932.4


Net investment in unconsolidated entities (1)	$	1,616.2	$	1,223.8

	For the year ended December 31,
	2017		2016		2015
	(in millions)
Total revenues	$	15,020.9	$	14,376.4	$	13,171.0
Net income		4,530.1		3,455.3		4,866.0
Our share of net income of unconsolidated entities (1)		232.7		232.7		165.3

(1) Our most significant equity investee is Brasilprev Seguros e Previdencia, a co-managed joint venture in Brazil.

In addition, other investments include $937.4 million and $875.2 million of direct financing leases as of December 31, 2017 and 2016, respectively. Our Chilean operations enter into private placement contracts for commercial, industrial and office space properties whereby our Chilean operations purchase the real estate and/or building from the seller-lessee but then lease the property back to the seller-lessee. Ownership of the property is transferred to the lessee by the end of the lease term. The direct financing lease receivables are carried at amortized cost. We actively monitor and manage our direct financing leases. All leases within the portfolio are analyzed regularly and internally rated, based on financial condition, payment history and loan-to-value.

Derivative assets are carried at fair value and reported as a component of other investments. Certain sponsored investment funds are also carried at fair value and reported as a component of other investments, with changes in fair value included in net realized capital gains (losses) on our consolidated statements of operations.

Securities Posted as Collateral

As of December 31, 2017 and 2016, we posted $2,807.4 million and $2,562.8 million, respectively, in commercial mortgage loans and home equity mortgages to satisfy collateral requirements associated with our obligation under funding agreements with Federal Home Loan Bank of Des Moines ("FHLB Des Moines"). In addition, as of December 31, 2017 and 2016, we posted $2,486.2 million and $2,233.2 million, respectively, in fixed maturities, available-for-sale securities to satisfy collateral requirements primarily associated with a reinsurance arrangement, our derivative credit support annex (collateral) agreements, Futures Commission Merchant ("FCM") agreements, a lending arrangement and our obligation under funding agreements with FHLB Des Moines. Since we did not relinquish ownership rights on these instruments, they are reported as fixed maturities, available-for-sale and mortgage loans, respectively, on our consolidated statements of financial position. Of the securities posted as collateral, as of December 31, 2017 and 2016, $173.3 million and $272.8 million, respectively, could be sold or repledged by the secured party.

Balance Sheet Offsetting

Financial assets subject to master netting agreements or similar agreements were as follows:

			Gross amounts not offset in the consolidated statements of financial position
	Gross amount of recognized assets (1)		Financial instruments (2)			Collateral received			Net amount
	(in millions)
December 31, 2017
Derivative assets	$	287.0	$	(116.3	)	$	(149.5	)	$	21.2
Reverse repurchase agreements		17.6		—			(17.6	)		—

Total	$	304.6	$	(116.3	)	$	(167.1	)	$	21.2


December 31, 2016
Derivative assets	$	887.2	$	(294.2	)	$	(582.0	)	$	11.0
Reverse repurchase agreements		41.1		—			(41.1	)		—

Total	$	928.3	$	(294.2	)	$	(623.1	)	$	11.0

(1) The gross amount of recognized derivative and reverse repurchase agreement assets are reported with other investments and cash and cash equivalents, respectively, on the consolidated statements of financial position. The above excludes $17.0 million and $6.4 million of derivative assets as of December 31, 2017 and December 31, 2016, respectively, that are not subject to master netting agreements or similar agreements. The gross amounts of derivative and reverse repurchase agreement assets are not netted against offsetting liabilities for presentation on the consolidated statements of financial position. See Note 1, Nature of Operations and Significant Accounting Policies, under the caption "Over-The-Counter Derivatives Cleared on Chicago Mercantile Exchange" for details of the CME variation margin rule change that impacted the amounts presented for 2017.

(2) Represents amount of offsetting derivative liabilities that are subject to an enforceable master netting agreement or similar agreement that are not netted against the gross derivative assets for presentation on the consolidated statements of financial position.

Financial liabilities subject to master netting agreements or similar agreements were as follows:

			Gross amounts not offset in the consolidated statements of financial position
	Gross amount of recognized liabilities (1)		Financial instruments (2)			Collateral pledged			Net amount
	(in millions)
December 31, 2017
Derivative liabilities	$	272.5	$	(116.3	)	$	(143.5	)	$	12.7

Total	$	272.5	$	(116.3	)	$	(143.5	)	$	12.7


December 31, 2016
Derivative liabilities	$	567.5	$	(294.2	)	$	(243.9	)	$	29.4
Repurchase agreements		9.7		—			(9.7	)		—

Total	$	577.2	$	(294.2	)	$	(253.6	)	$	29.4

(1) The gross amount of recognized derivative liabilities are reported with other liabilities on the consolidated statements of financial position. The above excludes $415.6 million and $394.3 million of derivative liabilities as of December 31, 2017 and December 31, 2016, respectively, which are primarily embedded derivatives that are not subject to master netting agreements or similar agreements. The gross amount of recognized repurchase agreement liabilities are reported with short-term debt on the consolidated statements of financial position. The gross amounts of derivative and repurchase agreement liabilities are not netted against offsetting assets for presentation on the consolidated statements of financial position. See Note 1, Nature of Operations and Significant Accounting Policies, under the caption "Over-The-Counter Derivatives Cleared on Chicago Mercantile Exchange" for details of the CME variation margin rule change that impacted the amounts presented for 2017.

(2) Represents amount of offsetting derivative assets that are subject to an enforceable master netting agreement or similar agreement that are not netted against the gross derivative liabilities for presentation on the consolidated statements of financial position.

The financial instruments that are subject to master netting agreements or similar agreements include right of setoff provisions. Derivative instruments include provisions to setoff positions covered under the agreements with the same counterparties and provisions to setoff positions outside of the agreements with the same counterparties in the event of default by one of the parties. Derivative instruments also include collateral or variation margin provisions, which are generally settled daily with each counterparty. See Note 5, Derivative Financial Instruments, for further details.

Repurchase and reverse repurchase agreements include provisions to setoff other repurchase and reverse repurchase balances with the same counterparty. Repurchase and reverse repurchase agreements also include collateral provisions with the counterparties. For reverse repurchase agreements we require the counterparties to pledge collateral with a value greater than the amount of cash transferred. We have the right but do not sell or repledge collateral received in reverse repurchase agreements. Repurchase agreements are structured as secured borrowings for all counterparties. We pledge fixed maturities available-for-sale, which the counterparties have the right to sell or repledge. Interest incurred on repurchase agreements is reported as part of operating expenses on the consolidated statements of operations. Net proceeds related to repurchase agreements are reported as a component of financing activities on the consolidated statements of cash flows.