2. Variable Interest Entities

We have relationships with and may have a variable interest in various types of special purpose entities. Following is a discussion of our interest in entities that meet the definition of a VIE. When we are the primary beneficiary, we are required to consolidate the entity in our financial statements. The primary beneficiary of a VIE is defined as the enterprise with (1) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (2) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. For VIEs that are investment companies, the primary beneficiary is the enterprise who absorbs the majority of the entity’s expected losses, receives a majority of the expected residual returns or both. On an ongoing basis, we assess whether we are the primary beneficiary of VIEs in which we have a relationship.

Consolidated Variable Interest Entities

Grantor Trusts

We contributed undated subordinated floating rate notes to three grantor trusts. The trusts separated the cash flows by issuing an interest-only certificate and a residual certificate related to each note contributed. Each interest-only certificate entitles the holder to interest on the stated note for a specified term, while the residual certificate entitles the holder to interest payments subsequent to the term of the interest-only certificate and to all principal payments. We retained the interest-only certificates and the residual certificates were subsequently sold to third parties. We have determined these grantor trusts are VIEs due to insufficient equity to sustain them. We determined we are the primary beneficiary as a result of our contribution of securities into the trusts and our continuing interest in the trusts.

Collateralized Private Investment Vehicles

We invest in synthetic collateralized debt obligations, collateralized bond obligations, collateralized loan obligations and other collateralized structures, which are VIEs due to insufficient equity to sustain the entities (collectively known as “collateralized private investment vehicles”). The performance of the notes of these structures is primarily linked to a synthetic portfolio by derivatives; each note has a specific loss attachment and detachment point. The notes and related derivatives are collateralized by a pool of permitted investments. The investments are held by a trustee and can only be liquidated to settle obligations of the trusts. These obligations primarily include derivatives and the notes due at maturity or termination of the trusts. We determined we are the primary beneficiary for one of these entities because we act as the investment manager of the underlying portfolio and we have an ownership interest.

Commercial Mortgage-Backed Securities

We sold commercial mortgage loans to a real estate mortgage investment conduit trust. The trust issued various commercial mortgage-backed securities (“CMBS”) certificates using the cash flows of the underlying commercial mortgages it purchased. This is considered a VIE due to insufficient equity to sustain itself. We have determined we are the primary beneficiary as we retained the special servicing role for the assets within the trust as well as the ownership of the bond class that controls the unilateral kick out rights of the special servicer.

Mandatory Retirement Savings

We hold an equity interest in Chilean mandatory privatized social security funds in which we provide asset management services. We determined that the mandatory privatized social security funds, which also include contributions for voluntary pension savings, voluntary non-pension savings and compensation savings accounts, are VIEs. This is because the equity holders as a group lack the power, due to voting rights or similar rights, to direct the activities of the entity that most significantly impact the entity’s economic performance and also because equity investors are protected from below-average market investment returns relative to the industry’s return, due to a regulatory guarantee that we provide. Further we concluded that we are the primary beneficiary through our power to make decisions and our variable interest in the funds. The purpose of the funds, which reside in legally segregated entities, is to provide long-term retirement savings. The obligation to the client is directly related to the assets held in the funds and, as such, we present the assets as separate account assets and the obligation as separate account liabilities within our consolidated statements of financial position.

Principal International Hong Kong offers retirement pension schemes in which we provide trustee, administration and asset management services to employers and employees under the Hong Kong MPF and ORSO pension schemes. Each pension scheme has various guaranteed and non-guaranteed constituent funds, or investment options, in which customers can invest their money. The guaranteed funds provide either a guaranteed rate of return to the customer or a minimum guarantee on withdrawals under certain qualifying events. We have determined the guaranteed funds are VIEs due to the fact the equity holders, as a group, lack the obligation to absorb expected losses due to the guarantee we provide. We concluded that we are the primary beneficiary because we have the obligation to absorb losses that could be potentially significant to the VIE. Therefore, we consolidate the underlying assets and liabilities of the funds and present as separate accounts or within the general account, depending on the terms of the guarantee.

Real Estate

We invest in several real estate limited partnerships and limited liability companies. The entities invest in real estate properties. Certain of these entities are VIEs based on the combination of our significant economic interest and related voting rights. We determined we are the primary beneficiary as a result of our power to control the entities through our significant ownership. Due to the nature of these real estate investments, the investment balance will fluctuate as we purchase and sell interests in the entities and as capital expenditures are made to improve the underlying real estate.

The carrying amounts of our consolidated VIE assets, which can only be used to settle obligations of consolidated VIEs, and liabilities of consolidated VIEs for which creditors do not have recourse are as follows:

			Collateralized
			private				Mandatory
	Grantor		investment				retirement
	trusts		vehicles		CMBS		savings		Real estate			Total
	(in millions)
September 30, 2015
Fixed maturities, available-for-sale	$	261.1	$	—	$	—	$	—	$	—		$	261.1
Fixed maturities, trading	—		100.4		—		—		—			100.4
Equity securities, available-for-sale	—		—		—		315.8		—			315.8
Equity securities, trading	—		—		—		321.2		—			321.2
Real estate	—		—		—		—		298.9			298.9
Other investments	—		—		25.1		—		11.7			36.8
Cash	—		—		—		—		7.8			7.8
Accrued investment income	0.4		—		0.2		—		1.9			2.5
Premiums due and other receivables	—		—		—		—		2.0			2.0
Separate account assets	—		—		—		32,827.6		—			32,827.6
Other assets	—		—		—		—		(0.9		)	(0.9		)

Total assets	$	261.5	$	100.4	$	25.3	$	33,464.6	$	321.4		$	34,173.2

Contractholder funds	$	—	$	—	$	—	$	329.2	$	—		$	329.2
Long-term debt	—		—		—		—		38.2			38.2
Income taxes currently payable	—		—		—		—		(0.1		)	(0.1		)
Deferred income taxes	1.6		—		—		—		(1.0		)	0.6
Separate account liabilities	—		—		—		32,827.6		—			32,827.6
Other liabilities (1)	236.7		87.2		—		—		16.8			340.7

Total liabilities	$	238.3	$	87.2	$	—	$	33,156.8	$	53.9		$	33,536.2

December 31, 2014
Fixed maturities, available-for-sale	$	278.2	$	—	$	—	$	—	$	—		$	278.2
Fixed maturities, trading	—		100.4		—		—		—			100.4
Equity securities, trading	—		—		—		345.3		—			345.3
Real estate	—		—		—		—		284.9			284.9
Other investments	—		—		35.0		—		5.6			40.6
Cash	—		—		—		—		4.7			4.7
Accrued investment income	0.4		—		0.2		—		1.4			2.0
Separate account assets	—		—		—		34,655.4		—			34,655.4
Other assets	—		—		—		—		0.3			0.3

Total assets	$	278.6	$	100.4	$	35.2	$	35,000.7	$	296.9		$	35,711.8

Long-term debt	$	—	$	—	$	—	$	—	$	82.3		$	82.3
Income taxes currently payable	—		—		—		—		10.6			10.6
Deferred income taxes	1.5		—		—		—		(0.4		)	1.1
Separate account liabilities	—		—		—		34,655.4		—			34,655.4
Other liabilities (1)	239.1		85.6		4.8		—		14.5			344.0

Total liabilities	$	240.6	$	85.6	$	4.8	$	34,655.4	$	107.0		$	35,093.4

(1)

Grantor trusts contain an embedded derivative of a forecasted transaction to deliver the underlying securities; the collateralized private investment vehicle includes derivative liabilities and an obligation to redeem notes at maturity or termination of the trusts.

We did not provide financial or other support to investees designated as VIEs for the periods ended September 30, 2015 and December 31, 2014.

Unconsolidated Variable Interest Entities

Invested Securities

We hold a variable interest in a number of VIEs where we are not the primary beneficiary. Our investments in these VIEs are reported in fixed maturities, available-for-sale; fixed maturities, trading and other investments in the consolidated statements of financial position and are described below.

Unconsolidated VIEs include CMBS, residential mortgage-backed pass-through securities (“RMBS”) and other asset-backed securities (“ABS”). All of these entities were deemed VIEs because the equity within these entities is insufficient to sustain them. We determined we are not the primary beneficiary in the entities within these categories of investments. This determination was based primarily on the fact we do not own the class of security that controls the unilateral right to replace the special servicer or equivalent function.

As previously discussed, we invest in several types of collateralized private investment vehicles, which are VIEs. These include cash and synthetic structures that we do not manage. We have determined we are not the primary beneficiary of these collateralized private investment vehicles primarily because we do not control the economic performance of the entities and were not involved with the design of the entities.

We have invested in various VIE trusts as a debt holder. All of these entities are classified as VIEs due to insufficient equity to sustain them. We have determined we are not the primary beneficiary primarily because we do not control the economic performance of the entities and were not involved with the design of the entities.

We have invested in partnerships and other funds, some of which are classified as VIEs. Some of these entities have returns in the form of income tax credits. These entities are classified as VIEs as the general partners do not have equity investments at risk in the entities. We have determined we are not the primary beneficiary because we are not the general partner, who makes all the significant decisions for the entities. Other limited partnerships and fund interests have returns from investment income. These entities are classified as VIEs as the decision makers do not have equity investments at risk in the entities. We have determined we are not the primary beneficiary because we do not make the significant decisions for the entities or our variable interest does not absorb the majority of the variability of the entities’ net assets.

The carrying value and maximum loss exposure for our unconsolidated VIEs were as follows:

			Maximum exposure to
	Asset carrying value		loss (1)
	(in millions)
September 30, 2015
Fixed maturities, available-for-sale:
Corporate	$	462.3	$	358.6
Residential mortgage-backed pass-through securities	2,680.2		2,572.2
Commercial mortgage-backed securities	3,861.2		3,808.8
Collateralized debt obligations	633.0		655.9
Other debt obligations	4,535.6		4,494.5
Fixed maturities, trading:
Residential mortgage-backed pass-through securities	27.6		27.6
Commercial mortgage-backed securities	44.1		44.1
Collateralized debt obligations	38.6		38.6
Other investments:
Other limited partnership and fund interests	210.7		210.7

December 31, 2014
Fixed maturities, available-for-sale:
Corporate	$	456.7	$	353.3
Residential mortgage-backed pass-through securities	2,822.9		2,702.9
Commercial mortgage-backed securities	3,975.5		3,896.9
Collateralized debt obligations	504.1		521.2
Other debt obligations	4,616.4		4,583.4
Fixed maturities, trading:
Residential mortgage-backed pass-through securities	34.4		34.4
Commercial mortgage-backed securities	1.5		1.5
Collateralized debt obligations	39.4		39.4
Other debt obligations	0.2		0.2
Other investments:
Other limited partnership and fund interests	188.2		188.2

(1)

Our risk of loss is limited to our initial investment measured at amortized cost for fixed maturities, available-for-sale and other investments. Our risk of loss is limited to our investment measured at fair value for our fixed maturities, trading.