Investments

6 Months Ended

Jun. 30, 2012

Investments.

Investments

3.  Investments

Fixed Maturities and Equity Securities

Fixed maturities include bonds, ABS, redeemable preferred stock and certain nonredeemable preferred stock. Equity securities include mutual funds, common stock and nonredeemable preferred stock. We classify fixed maturities and equity securities as either available-for-sale or trading at the time of the purchase and, accordingly, carry them at fair value. See Note 9, Fair Value Measurements, for methodologies related to the determination of fair value. Unrealized gains and losses related to available-for-sale securities, excluding those in fair value hedging relationships, are reflected in stockholders’ equity, net of adjustments related to DPAC, sales inducements, unearned revenue reserves, policyholder liabilities, derivatives in cash flow hedge relationships and applicable income taxes. Unrealized gains and losses related to hedged portions of available-for-sale securities in fair value hedging relationships and mark-to-market adjustments on certain trading securities are reflected in net realized capital gains (losses). We also have a minimal amount of assets within trading securities portfolios that support investment strategies that involve the active and frequent purchase and sale of fixed maturities. Mark-to-market adjustments related to these trading securities are reflected in net investment income.

The cost of fixed maturities is adjusted for amortization of premiums and accrual of discounts, both computed using the interest method. The cost of fixed maturities and equity securities classified as available-for-sale is adjusted for declines in value that are other than temporary. Impairments in value deemed to be other than temporary are primarily reported in net income as a component of net realized capital gains (losses), with noncredit impairment losses for certain fixed maturities, available-for-sale reported in OCI. For loan-backed and structured securities, we recognize income using a constant effective yield based on currently anticipated cash flows.

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 are summarized as follows:

	Amortized cost		Gross unrealized gains		Gross unrealized losses		Other-than- temporary impairments in AOCI (1)		Fair value
	(in millions)
June 30, 2012
Fixed maturities, available-for-sale:
U.S. government and agencies	$	790.9	$	34.1	$	0.9	$	—	$	824.1
Non-U.S. government and agencies	918.0		242.1		0.9		—		1,159.2
States and political subdivisions	2,638.4		232.4		1.4		—		2,869.4
Corporate	31,992.8		2,601.6		523.5		19.4		34,051.5
Residential mortgage-backed pass-through securities	3,095.7		202.7		0.2		—		3,298.2
Commercial mortgage-backed securities	4,128.1		161.1		351.6		192.7		3,744.9
Collateralized debt obligations	438.4		2.9		67.2		8.0		366.1
Other debt obligations	3,525.5		60.4		19.1		86.6		3,480.2
Total fixed maturities, available-for-sale	$	47,527.8	$	3,537.3	$	964.8	$	306.7	$	49,793.6
Total equity securities, available-for-sale	$	140.3	$	12.2	$	13.5			$	139.0
December 31, 2011
Fixed maturities, available-for-sale:
U.S. government and agencies	$	772.3	$	32.8	$	—	$	—	$	805.1
Non-U.S. government and agencies	917.6		180.5		1.4		—		1,096.7
States and political subdivisions	2,670.0		218.2		5.5		—		2,882.7
Corporate	31,954.2		2,321.3		699.5		19.5		33,556.5
Residential mortgage-backed pass-through securities	3,155.8		187.9		0.7		—		3,343.0
Commercial mortgage-backed securities	3,894.3		117.0		429.4		168.2		3,413.7
Collateralized debt obligations	399.7		1.9		55.8		7.0		338.8
Other debt obligations	3,606.9		100.3		47.0		90.0		3,570.2
Total fixed maturities, available-for-sale	$	47,370.8	$	3,159.9	$	1,239.3	$	284.7	$	49,006.7
Total equity securities, available-for-sale	$	75.2	$	8.4	$	6.5			$	77.1

(1)Excludes $29.0 million and $28.9 million as of June 30, 2012 and December 31, 2011, respectively, of net unrealized gains on impaired fixed maturities, available-for-sale related to changes in fair value subsequent to the impairment date.

The amortized cost and fair value of fixed maturities available-for-sale at June 30, 2012, by expected maturity, were as follows:

	Amortized cost		Fair value
	(in millions)
Due in one year or less	$	3,605.4	$	3,657.7
Due after one year through five years	12,713.2		13,231.7
Due after five years through ten years	9,131.5		10,058.0
Due after ten years	10,890.0		11,956.8
Subtotal	36,340.1		38,904.2
Mortgage-backed and other asset-backed securities	11,187.7		10,889.4
Total	$	47,527.8	$	49,793.6

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 Realized Capital Gains and Losses

Net realized capital gains and losses on sales of investments are determined on the basis of specific identification. In general, in addition to realized capital gains and losses on investment sales and periodic settlements on derivatives not designated as hedges, we report gains and losses related to the following in net realized capital gains (losses): other-than-temporary impairments of securities and subsequent realized recoveries, mark-to-market adjustments on certain trading securities, mark-to-market adjustments on certain seed money investments, fair value hedge and cash flow hedge ineffectiveness, mark-to-market adjustments on derivatives not designated as hedges, changes in the mortgage loan valuation allowance provision and impairments of real estate held for investment. Investment gains and losses on sales of certain real estate held for sale, which do not meet the criteria for classification as a discontinued operation and mark-to-market adjustments on trading securities that support investment strategies that involve the active and frequent purchase and sale of fixed maturities are reported as net investment income and are excluded from net realized capital gains (losses). The major components of net realized capital gains (losses) on investments are summarized as follows:

	For the three months ended June 30,						For the six months ended June 30,
	2012			2011			2012			2011
	(in millions)
Fixed maturities, available-for-sale:
Gross gains	$	4.4		$	5.7		$	19.7		$	18.2
Gross losses	(50.8		)	(37.9		)	(86.9		)	(61.2		)
Other-than-temporary impairment losses reclassified to (from) OCI	17.1			(9.7		)	22.0			(48.1		)
Hedging, net	23.4			59.7			6.7			29.5
Fixed maturities, trading	(2.0		)	3.3			1.0			(1.3		)
Equity securities, available-for-sale:
Gross gains	—			—			0.1			2.2
Gross losses	—			(4.5		)	—			(4.5		)
Equity securities, trading	(3.5		)	26.5			30.7			56.6
Mortgage loans	(10.2		)	(12.1		)	(21.3		)	(22.0		)
Derivatives	2.8			(64.6		)	30.4			(55.7		)
Other	19.0			71.3			(8.9		)	66.0
Net realized capital gains (losses)	$	0.2		$	37.7		$	(6.5	)	$	(20.3	)

Proceeds from sales of investments (excluding call and maturity proceeds) in fixed maturities, available-for-sale were $0.3 billion and $0.2 billion for the three months ended June 30, 2012 and 2011, and $0.7 billion and $0.7 billion for the six months ended June 30, 2012 and 2011, respectively.

Other-Than-Temporary Impairments

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

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-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 that 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 three months ended June 30,						For the six months ended June 30,
	2012			2011			2012			2011
	(in millions)
Fixed maturities, available-for-sale	$	(49.1	)	$	(36.4	)	$	(82.8	)	$	(52.6	)
Equity securities, available-for-sale	—			(4.5		)	—			(2.3		)
Total other-than-temporary impairment losses, net of recoveries from the sale of previously impaired securities	(49.1		)	(40.9		)	(82.8		)	(54.9		)
Other-than-temporary impairment losses on fixed maturities, available-for-sale reclassified to (from) OCI (1)	17.1			(9.7		)	22.0			(48.1		)
Net impairment losses on available-for-sale securities	$	(32.0	)	$	(50.6	)	$	(60.8	)	$	(103.0	)

(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 three months ended						For the six months ended
	June 30,						June 30,
	2012			2011			2012			2011
	(in millions)
Beginning balance	$	(404.7	)	$	(312.1	)	$	(434.9	)	$	(325.7	)
Credit losses for which an other-than-temporary impairment was not previously recognized	(9.5		)	(12.8		)	(16.9		)	(15.0		)
Credit losses for which an other-than-temporary impairment was previously recognized	(19.1		)	(34.2		)	(39.9		)	(68.7		)
Reduction for credit losses previously recognized on fixed maturities now sold, paid down or intended to be sold	56.5			0.5			113.9			51.7
Net reduction (increase) for positive changes in cash flows expected to be collected and amortization (1)	1.3			(1.1		)	2.3			(2.0		)
Ending balance	$	(375.5	)	$	(359.7	)	$	(375.5	)	$	(359.7	)

(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 are summarized as follows:

	June 30, 2012
	Less than				Greater than or
	twelve months				equal to twelve months				Total
			Gross				Gross				Gross
	Fair		unrealized		Fair		unrealized		Fair		unrealized
	value		losses		value		losses		value		losses
	(in millions)
Fixed maturities, available-for-sale:
U.S. government and agencies	$	39.3	$	0.9	$	—	$	—	$	39.3	$	0.9
Non-U.S. governments	61.3		0.9		0.4		—		61.7		0.9
States and political subdivisions	73.6		0.2		34.9		1.2		108.5		1.4
Corporate	1,740.8		47.9		2,659.4		495.0		4,400.2		542.9
Residential mortgage-backed pass-through securities	53.8		0.1		2.4		0.1		56.2		0.2
Commercial mortgage-backed securities	248.8		9.5		899.1		534.8		1,147.9		544.3
Collateralized debt obligations	135.8		4.4		139.9		70.8		275.7		75.2
Other debt obligations	185.6		2.4		560.6		103.3		746.2		105.7
Total fixed maturities, available-for-sale	$	2,539.0	$	66.3	$	4,296.7	$	1,205.2	$	6,835.7	$	1,271.5
Total equity securities, available-for-sale	$	20.7	$	3.8	$	46.7	$	9.7	$	67.4	$	13.5

Of the total amounts, Principal Life’s consolidated portfolio represented $6,404.9 million in available-for-sale fixed maturities with gross unrealized losses of $1,213.5 million. Of those fixed maturity assets in Principal Life’s consolidated portfolio with a gross unrealized loss position, 72% were investment grade (rated AAA through BBB-) with an average price of 84 (carrying value/amortized cost) at June 30, 2012. Gross unrealized losses in our fixed maturities portfolio decreased during the six months ended June 30, 2012, due to a tightening of credit spreads, primarily in the corporate and commercial mortgage-backed securities sectors.

For those securities that had been in a continuous unrealized loss position for less than twelve months, Principal Life’s consolidated portfolio held 268 securities with a carrying value of $2,226.0 million and unrealized losses of $55.2 million reflecting an average price of 98 at June 30, 2012. Of this portfolio, 84% was investment grade (rated AAA through BBB-) at June 30, 2012, with associated unrealized losses of $45.9 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 609 securities with a carrying value of $4,178.9 million and unrealized losses of $1,158.3 million. The average rating of this portfolio was BBB- with an average price of 78 at June 30, 2012. Of the $1,158.3 million in unrealized losses, the commercial mortgage-backed securities sector accounts for $534.8 million in unrealized losses with an average price of 63 and an average credit rating of BBB-. The remaining unrealized losses consist primarily of $448.1 million within the corporate sector at June 30, 2012. The average price of the corporate sector was 85 and the average credit rating was BBB. 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 maturity, we did not consider these investments to be other-than-temporarily impaired at June 30, 2012.

	December 31, 2011
	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:
Non-U.S. governments	$	68.5	$	1.4	$	0.3	$	—	$	68.8	$	1.4
States and political subdivisions	5.7		0.1		51.7		5.4		57.4		5.5
Corporate	3,445.6		140.9		2,403.9		578.1		5,849.5		719.0
Residential mortgage-backed pass-through securities	77.8		0.5		3.7		0.2		81.5		0.7
Commercial mortgage-backed securities	608.4		57.3		858.9		540.3		1,467.3		597.6
Collateralized debt obligations	107.2		2.5		204.4		60.3		311.6		62.8
Other debt obligations	708.1		13.0		508.1		124.0		1,216.2		137.0
Total fixed maturities, available-for-sale	$	5,021.3	$	215.7	$	4,031.0	$	1,308.3	$	9,052.3	$	1,524.0
Total equity securities, available-for-sale	$	14.3	$	3.2	$	15.6	$	3.3	$	29.9	$	6.5

Of the total amounts, Principal Life’s consolidated portfolio represented $8,540.7 million in available-for-sale fixed maturities with gross unrealized losses of $1,470.3 million. Of those fixed maturity assets in Principal Life’s consolidated portfolio with a gross unrealized loss position, 76% were investment grade (rated AAA through BBB-) with an average price of 85 (carrying value/amortized cost) at December 31, 2011. Gross unrealized losses in our fixed maturities portfolio increased slightly during the year ended December 31, 2011, due to a widening of credit spreads primarily in the corporate and commercial mortgage-backed securities sectors.

For those securities that had been in a continuous unrealized loss position for less than twelve months, Principal Life’s consolidated portfolio held 477 securities with a carrying value of $4,573.6 million and unrealized losses of $198.7 million reflecting an average price of 96 at December 31, 2011. Of this portfolio, 86% was investment grade (rated AAA through BBB-) at December 31, 2011, with associated unrealized losses of $128.5 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 628 securities with a carrying value of $3,967.1 million and unrealized losses of $1,271.6 million. The average rating of this portfolio was BBB with an average price of 76 at December 31, 2011. Of the $1,271.6 million in unrealized losses, the commercial mortgage-backed securities sector accounts for $540.3 million in unrealized losses with an average price of 61 and an average credit rating of BBB-. The remaining unrealized losses consist primarily of $541.4 million within the corporate sector at December 31, 2011. The average price of the corporate sector was 81 and the average credit rating was BBB. 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 maturity, we did not consider these investments to be other-than-temporarily impaired at December 31, 2011.

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

The net unrealized gains and losses on investments in fixed maturities available-for-sale, equity securities available-for-sale and derivative instruments are reported as a separate component of stockholders’ equity. The cumulative amount of net unrealized gains and losses on available-for-sale securities and derivative instruments net of adjustments related to DPAC, sales inducements, unearned revenue reserves, changes in policyholder liabilities and applicable income taxes was as follows:

	June 30, 2012			December 31, 2011
	(in millions)
Net unrealized gains on fixed maturities, available-for-sale (1)	$	2,566.6		$	1,920.6
Noncredit component of impairment losses on fixed maturities, available-for-sale	(306.7		)	(284.7		)
Net unrealized gains (losses) on equity securities, available-for-sale	(1.3		)	1.9
Adjustments for assumed changes in amortization patterns	(420.3		)	(376.1		)
Adjustments for assumed changes in policyholder liabilities	(645.3		)	(442.7		)
Net unrealized gains on derivative instruments	153.4			113.2
Net unrealized gains on equity method subsidiaries and noncontrolling interest adjustments	173.6			150.3
Provision for deferred income taxes	(495.0		)	(354.1		)
Net unrealized gains on available-for-sale securities and derivative instruments	$	1,025.0		$	728.4

(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, 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:

	June 30, 2012			December 31, 2011
	(in millions)
Commercial mortgage loans	$	9,874.0		$	9,461.4
Residential mortgage loans	1,370.8			1,367.9
Total amortized cost	11,244.8			10,829.3
Valuation allowance	(86.2		)	(102.1		)
Total carrying value	$	11,158.6		$	10,727.2

We periodically purchase mortgage loans as well as sell mortgage loans we have originated. We purchased $50.9 million and $14.7 million of residential mortgage loans during the three months ended June 30, 2012 and 2011, and $62.3 million and $30.0 million during the six months ended June 30, 2012 and 2011, respectively. We sold $6.3 million and $3.6 million of residential mortgage loans during the three months ended June 30, 2012 and 2011, and $12.1 million and $8.3 million during the six months ended June 30, 2012 and 2011, respectively. We sold $4.0 million of commercial mortgage loans during both the three and six months ended June 30, 2012.

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

	June 30, 2012				December 31, 2011
	Amortized cost		Percent of total		Amortized cost		Percent of total
	(in millions)
Geographic distribution
New England	$	475.8	4.8	%	$	454.0	4.8	%
Middle Atlantic	2,093.7		21.2		1,744.4		18.4
East North Central	663.3		6.7		774.8		8.2
West North Central	384.9		3.9		407.8		4.3
South Atlantic	2,163.3		21.9		2,099.8		22.2
East South Central	230.7		2.3		231.8		2.4
West South Central	774.7		7.8		648.6		6.9
Mountain	758.2		7.7		643.2		6.8
Pacific	2,318.7		23.6		2,446.4		25.9
International	10.7		0.1		10.6		0.1
Total	$	9,874.0	100.0	%	$	9,461.4	100.0	%
Property type distribution
Office	$	2,838.6	28.6	%	$	2,753.8	29.1	%
Retail	2,839.5		28.8		2,580.2		27.3
Industrial	1,872.1		19.0		2,070.7		21.9
Apartments	1,476.2		15.0		1,242.9		13.1
Hotel	514.1		5.2		467.7		4.9
Mixed use/other	333.5		3.4		346.1		3.7
Total	$	9,874.0	100.0	%	$	9,461.4	100.0	%

Our residential mortgage loan portfolio is composed of home equity mortgages with an amortized cost of $552.7 million and $611.0 million and first lien mortgages with an amortized cost of $818.1 million and $756.9 million as of June 30, 2012 and December 31, 2011, respectively. Most of 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. The majority of our first lien loans are concentrated in the Chilean market.

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 a Standard & Poor’s (“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 imbalances in ratios of loan to value or contract rents to debt service, major tenant vacancies or bankruptcies, borrower sponsorship problems, late payments, delinquent taxes and loan relief/restructuring requests.

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:

	June 30, 2012
	Brick and mortar		CTL		Total
	(in millions)
A- and above	$	6,539.0	$	329.2	$	6,868.2
BBB+ thru BBB-	1,998.9		212.6		2,211.5
BB+ thru BB-	366.6		15.0		381.6
B+ and below	407.8		4.9		412.7
Total	$	9,312.3	$	561.7	$	9,874.0

	December 31, 2011
	Brick and mortar		CTL		Total
	(in millions)
A- and above	$	5,682.5	$	308.6	$	5,991.1
BBB+ thru BBB-	2,112.3		238.8		2,351.1
BB+ thru BB-	403.7		16.4		420.1
B+ and below	693.3		5.8		699.1
Total	$	8,891.8	$	569.6	$	9,461.4

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 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 were as follows:

	June 30, 2012
	Home equity		First liens		Total
	(in millions)
Performing	$	524.6	$	795.2	$	1,319.8
Nonperforming	28.1		22.9		51.0
Total	$	552.7	$	818.1	$	1,370.8

	December 31, 2011
	Home equity		First liens		Total
	(in millions)
Performing	$	597.8	$	733.7	$	1,331.5
Nonperforming	13.2		23.2		36.4
Total	$	611.0	$	756.9	$	1,367.9

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 nonaccrual 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 were as follows:

	June 30, 2012		December 31, 2011
	(in millions)
Commercial:
Brick and mortar (1)	$	81.1	$	46.8
Residential:
Home equity (2)	28.1		13.2
First liens	14.6		15.7
Total	$	123.8	$	75.7

(1)The increase from December 31, 2011, was primarily due to certain loans that matured but were not paid off or extended near the end of the period ended June 30, 2012, for which resolution is pending and anticipated in the next quarter through either payoff, extension or foreclosure.

(2)The increase from December 31, 2011, was primarily due to a change in our assessment of a non-accrual loan to include the payment status of the related first lien loan. Non-accrual loans are already included in the mortgage loan valuation allowance analysis.

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

	June 30, 2012
	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	$	—	$	—	$	4.1	$	4.1	$	9,308.2	$	9,312.3	$	—
Commercial-CTL	—		—		—		—		561.7		561.7		—
Residential-home equity	4.8		0.7		4.6		10.1		542.6		552.7		—
Residential-first liens	19.8		4.7		21.5		46.0		772.1		818.1		8.3
Total	$	24.6	$	5.4	$	30.2	$	60.2	$	11,184.6	$	11,244.8	$	8.3
	December 31, 2011
	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	$	61.4	$	4.4	$	22.5	$	88.3	$	8,803.5	$	8,891.8	$	—
Commercial-CTL	—		—		—		—		569.6		569.6		—
Residential-home equity	7.8		2.6		6.2		16.6		594.4		611.0		—
Residential-first liens	15.8		6.0		22.2		44.0		712.9		756.9		7.5
Total	$	85.0	$	13.0	$	50.9	$	148.9	$	10,680.4	$	10,829.3	$	7.5

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 that we will be unable to collect all amounts due according to contractual terms of the loan agreement. When we determine that a loan is impaired, a valuation allowance is established equal to the difference between the carrying amount of the mortgage loan and the estimated value 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 major product type and/or risk level with an estimated loss ratio applied against each product type and/or risk level. The loss ratio is generally based upon historic loss experience for each loan type as adjusted for certain 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:

	For the three months ended June 30, 2012
	Commercial			Residential			Total
	(in millions)
Beginning balance	$	52.4		$	36.9		$	89.3
Provision	3.4			6.6			10.0
Charge-offs	(6.5		)	(7.3		)	(13.8		)
Recoveries	—			0.8			0.8
Effect of exchange rates	—			(0.1		)	(0.1		)
Ending balance	$	49.3		$	36.9		$	86.2

	For the six months ended June 30, 2012
	Commercial			Residential			Total
	(in millions)
Beginning balance	$	64.8		$	37.3		$	102.1
Provision	10.4			13.2			23.6
Charge-offs	(25.9		)	(15.6		)	(41.5		)
Recoveries	—			2.0			2.0
Ending balance	$	49.3		$	36.9		$	86.2
Allowance ending balance by basis of impairment method:
Individually evaluated for impairment	$	5.7		$	4.6		$	10.3
Collectively evaluated for impairment	43.6			32.3			75.9
Allowance ending balance	$	49.3		$	36.9		$	86.2
Loan balance by basis of impairment method:
Individually evaluated for impairment	$	37.9		$	31.6		$	69.5
Collectively evaluated for impairment	9,836.1			1,339.2			11,175.3
Loan ending balance	$	9,874.0		$	1,370.8		$	11,244.8

	For the three months ended June 30, 2011
	Commercial			Residential			Total
	(in millions)
Beginning balance	$	85.1		$	39.6		$	124.7
Provision	6.2			7.6			13.8
Charge-offs	(15.8		)	(9.2		)	(25.0		)
Recoveries	0.1			0.6			0.7
Effect of exchange rates	—			0.1			0.1
Ending balance	$	75.6		$	38.7		$	114.3

	For the six months ended June 30, 2011
	Commercial			Residential			Total
	(in millions)
Beginning balance	$	80.6		$	40.5		$	121.1
Provision	13.1			13.9			27.0
Charge-offs	(18.2		)	(17.2		)	(35.4		)
Recoveries	0.1			1.5			1.6
Ending balance	$	75.6		$	38.7		$	114.3
Allowance ending balance by basis of impairment method:
Individually evaluated for impairment	$	6.4		$	4.3		$	10.7
Collectively evaluated for impairment	69.2			34.4			103.6
Allowance ending balance	$	75.6		$	38.7		$	114.3
Loan balance by basis of impairment method:
Individually evaluated for impairment	$	28.0		$	23.6		$	51.6
Collectively evaluated for impairment	9,402.7			1,468.5			10,871.2
Loan ending balance	$	9,430.7		$	1,492.1		$	10,922.8

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 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:

	June 30, 2012
	Recorded investment		Unpaid principal balance		Related allowance
	(in millions)
With no related allowance recorded:
Commercial-brick and mortar	$	43.4	$	46.1	$	—
Residential-first liens	5.6		5.5		—
With an allowance recorded:
Commercial-brick and mortar	22.2		24.2		5.7
Residential-home equity	17.6		17.3		3.3
Residential-first liens	8.4		8.4		1.3
Total:
Commercial	$	65.6	$	70.3	$	5.7
Residential	$	31.6	$	31.2	$	4.6

	December 31, 2011
	Recorded investment		Unpaid principal balance		Related allowance
	(in millions)
With no related allowance recorded:
Commercial-brick and mortar	$	—	$	0.3	$	—
Residential-first liens	4.4		4.2		—
With an allowance recorded:
Commercial-brick and mortar	114.0		114.0		16.3
Residential-home equity	14.5		14.2		1.9
Residential-first liens	8.5		8.5		1.3
Total:
Commercial	$	114.0	$	114.3	$	16.3
Residential	$	27.4	$	26.9	$	3.2

	For the three months ended June 30, 2012				For the six months ended June 30, 2012
	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
	(in millions)				(in millions)
With no related allowance recorded:
Commercial-brick and mortar	$	69.4	$	0.8	$	21.7	$	1.9
Residential-first liens	5.9		—		5.0		—
With an allowance recorded:
Commercial-brick and mortar	31.3		0.1		68.1		0.1
Residential-home equity	17.0		0.2		16.0		0.5
Residential-first liens	8.5		0.1		8.5		0.1
Total:
Commercial	$	100.7	$	0.9	$	89.8	$	2.0
Residential	$	31.4	$	0.3	$	29.5	$	0.6

	For the three months ended June 30, 2011				For the six months ended June 30, 2011
	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
	(in millions)				(in millions)
With no related allowance recorded:
Commercial-brick and mortar	$	36.6	$	0.2	$	35.8	$	0.5
Residential-first liens	4.0		—		4.7		—
With an allowance recorded:
Commercial-brick and mortar	34.0		0.4		28.9		0.6
Residential-home equity	12.4		0.2		12.3		0.3
Residential-first liens	10.9		—		10.3		0.1
Total:
Commercial	$	70.6	$	0.6	$	64.7	$	1.1
Residential	$	27.3	$	0.2	$	27.3	$	0.4

Mortgage Loan Modifications

Our commercial and residential mortgage loan portfolios include loans that have been modified. We assess loan modifications on a case-by-case basis to evaluate whether a TDR has occurred. The commercial mortgage loan TDRs were modified to delay or reduce principal payments and to increase, reduce or delay interest payments. For these TDR assessments, we have determined the loan rates are now considered below market based on current circumstances. The commercial mortgage loan modifications resulted in delayed cash receipts and a decrease in interest income. The residential mortgage loan TDRs include modifications of interest-only payment periods, delays in principal balloon payments, and interest rate reductions. Residential mortgage loan modifications resulted in delayed or decreased cash receipts and a decrease in interest income.

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 three months ended June 30, 2012
	TDRs			TDRs in payment default
	Number of Contracts	Recorded investment		Number of Contracts	Recorded investment
		(in millions)			(in millions)
Commercial-brick and mortar	2	$	41.4	—	$	—
Residential-home equity	54	2.2		1	—
Total	56	$	43.6	1	$	—

	For the six months ended June 30, 2012
	TDRs			TDRs in payment default
	Number of Contracts	Recorded investment		Number of Contracts	Recorded investment
		(in millions)			(in millions)
Commercial-brick and mortar	3	$	45.8	—	$	—
Residential-home equity	103	4.5		3	—
Total	106	$	50.3	3	$	—

Commercial mortgage loans that have been designated as a TDR have been previously reserved in the mortgage loan valuation allowance to 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 are reduced to the expected collectible amount.

Securities Posted as Collateral

We posted $1,461.7 million in fixed maturities, available-for-sale securities at June 30, 2012, to satisfy collateral requirements primarily associated with a reinsurance arrangement, our derivative credit support annex (collateral) agreements and our obligation under funding agreements with the Federal Home Loan Bank of Des Moines (“FHLB Des Moines”). In addition, we posted $1,741.4 million in commercial mortgage loans as of June 30, 2012, to satisfy collateral requirements associated with our obligation under funding agreements with the 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.