Market Risk Benefits

3 Months Ended

Mar. 31, 2024

Market Risk Benefits

Market Risk Benefits

9. Market Risk Benefits

Contracts or contract features that provide protection to the policyholder from capital market risk, including equity, interest rate or foreign exchange risk, and expose us to other-than-nominal capital market risk are classified as MRBs. We issue certain annuity contracts and other investment contracts that include MRBs that have been bifurcated from the host contract. The Retirement and Income Solutions segment offers variable annuity products with GMWB riders and GMDB riders, including the GMDB for its RILA products that offer return-of-premium death benefits. The Principal Asset Management segment offers defined contribution plans in Asia with a guarantee on the minimum account balance under certain qualifying events.

MRBs are measured at fair value at the contract level and can be in either an asset or liability position, depending on certain inputs at the reporting date. MRB assets and liabilities are presented separately within the consolidated statements of financial position. Increases to an asset or decreases to a liability are described as favorable changes to fair value.

Changes in fair value are reported in MRB remeasurement (gain) loss on the consolidated statements of operations. However, the change in fair value related to our own nonperformance risk is reported in OCI. For contracts that contain multiple MRB features, the MRBs are valued on a combined basis using an integrated model.

MRBs are classified as Level 3 fair value measurements as the fair value is based on unobservable inputs. The key assumptions for calculating the fair value of the MRBs are market assumptions such as equity market returns, interest rate levels, market volatility and correlations and policyholder behavior assumptions such as lapse, mortality, utilization and withdrawal patterns. Risk margins are included in the policyholder behavior assumptions. The assumptions are based on a combination of historical data and actuarial judgment. The MRBs are valued using stochastic models that incorporate a spread reflecting our own nonperformance risk.

The assumption for our own nonperformance risk for MRBs is based on the current market credit spreads for debt-like instruments we have issued and are available in the market. Increases (decreases) in our own nonperformance risk, which impacts the rates used to discount future cash flows, could lead to favorable (unfavorable) changes in the fair value of the MRBs.

Long-term interest rates are used as the mean return when projecting the growth in the value of the associated account value and impact the discount rate used in the discounted future cash flows valuation. The amount of claims will increase if account value is not sufficient to cover guaranteed withdrawals. An increase (decrease) in risk-free rates could cause a favorable (unfavorable) change in the fair value of the MRBs. A decrease (increase) in market volatilities could cause a favorable (unfavorable) change in the fair value of the MRBs.

An increase (decrease) in mortality rates or the overall lapse rate assumptions could cause a favorable (unfavorable) change in the fair value of the MRBs. The lapse rate assumption may vary dynamically based on the relationship between the guarantee and associated account value. A weaker (stronger) dynamic lapse rate assumption could lead to favorable (unfavorable) changes in the fair value of the MRBs.

The utilization rate assumption includes how many contractholders will take withdrawals, when they will take them and how much of their benefit they will take. A decrease (increase) in the number of contractholders taking withdrawals, contractholders taking withdrawals earlier versus later, or contractholders taking more versus less of their benefit could lead to favorable (unfavorable) changes in the fair value of the MRBs.

The following tables summarize disaggregated MRB amounts in an asset and liability position reported in the consolidated statements of financial position.

	March 31, 2024						December 31, 2023
					Net asset						Net asset
	Asset		Liability		(liability)		Asset		Liability		(liability)
	(in millions)
Retirement and Income Solutions:
Individual variable annuities	$	201.9	$	79.3	$	122.6	$	153.4	$	111.9	$	41.5
Principal Asset Management – Principal International:
Asia:
Guaranteed pension		—		20.3		(20.3)		—		21.3		(21.3)
Total MRB per consolidated statements of financial position	$	201.9	$	99.6	$	102.3	$	153.4	$	133.2	$	20.2

Retirement and Income Solutions

The net asset (liability) balances and the changes in the valuation of the MRBs for Individual variable annuities were as follows:

	For the three months ended		For the year ended
	March 31, 2024		December 31, 2023
	($ in millions)
Balance at beginning of period	$	41.5	$	(72.2)
Effect of changes in nonperformance risk at beginning of period		7.7		(31.7)
Adjusted balance at beginning of period		49.2		(103.9)
Effect of:
Interest accrual and expected policyholder behavior		(20.3)		(80.9)
Benefit payments		0.3		0.4
Changes in interest rates		44.6		39.9
Changes in equity markets		54.8		155.1
Changes in equity index volatility		12.8		47.9
Actual policyholder behavior different from expected behavior		(0.4)		(4.0)
Changes in other future expected assumptions		—		(5.3)
Adjusted balance at end of period		141.0		49.2
Effect of changes in nonperformance risk at end of period		(18.4)		(7.7)
Balance at end of period	$	122.6	$	41.5
Weighted-average attained age of policyholders (years) (1)		67.7		67.7
Net amount at risk (2)	$	54.4	$	111.2

(1) The weighted-average attained age is calculated at the contract level using the total contributions since inception and the age of the contractholders.

(2) The net amount at risk for our GMDB riders is defined as the current GMDB amount in excess of the current account balance. The net amount at risk for our GMWB riders is defined as the greater of the present value of the GMWB payments less the current account balance or zero. For contracts with both GMDB and GMWB riders, the net amount at risk is the greater of the GMDB or GMWB net amount at risk. A decrease in the net amount at risk in 2024 as a result of increases in the equity markets was partially offset by an increase in the net amount at risk as a result of increases in interest rates. A decrease in the net amount at risk in 2023 as a result of increases in the equity markets was partially offset by an increase in the net amount at risk as a result of increases in interest rates.

Significant changes to inputs and assumptions that impacted the change in the MRB fair value measurement shown above were as follows:

	For the three months ended		For the year ended
	March 31, 2024		December 31, 2023
		Change in net		Change in net
	Change in input	MRB asset (liability)	Change in input	MRB asset (liability)
Long-term interest rate	Increased	Favorable	Increased	Favorable
Equity markets	Increased	Favorable	Increased	Favorable
Equity market volatilities	Decreased	Favorable	Decreased	Favorable
Own nonperformance risk	Decreased	Unfavorable	Decreased	Unfavorable

See “Unobservable Inputs for Fair Value Measurement” for additional details on the inputs.

Principal Asset Management – Principal International

The net asset (liability) balances and the changes in the valuation of the MRBs for Asia – Guaranteed pension were as follows:

	For the three months ended		For the year ended
	March 31, 2024		December 31, 2023
	($ in millions)
Balance at beginning of period	$	(21.3)	$	(26.0)
Effect of changes in nonperformance risk at beginning of period		1.0		1.2
Adjusted balance at beginning of period		(20.3)		(24.8)
Effect of:
Interest accrual and expected policyholder behavior		(0.2)		(10.1)
Benefit payments		1.2		13.8
Changes in interest rates		(0.6)		1.2
Changes in equity markets		0.7		0.2
Actual policyholder behavior different from expected behavior		0.2		(0.6)
Adjusted balance at end of period		(19.0)		(20.3)
Effect of changes in nonperformance risk at end of period		(1.3)		(1.0)
Balance at end of period	$	(20.3)	$	(21.3)
Weighted-average attained age of policyholders (years) (1)		54.3		54.0
Net amount at risk (2)	$	23.3	$	25.1

(1) The weighted-average attained age is calculated at the contract level using the guarantee amounts and the age of the underlying members of the contracts.

(2) The net amount at risk for the minimum guarantee on withdrawal is defined as the current guaranteed balance in excess of the current account balance.

Unobservable Inputs for Fair Value Measurement

The following table provides quantitative information about the significant unobservable inputs used for fair value measurements of MRBs. The utilization rate and mortality rate inputs are omitted from the table as a range does not provide meaningful presentation. The utilization rate represents the number of contractholders taking withdrawals in addition to the amount and timing of the withdrawals. The mortality rate is an input based on an appropriate industry mortality table.

	March 31, 2024						December 31, 2023
					Weighted-						Weighted-
	Range of inputs				Average		Range of inputs				Average
Retirement and Income Solutions:
Individual variable annuities
Long-term interest rate (1)	4.34	-	4.44	%	4.39	%	4.00	-	4.20	%	4.10	%
Long-term equity market volatility	18.30	-	33.34	%	21.65	%	18.00	-	33.00	%	22.00	%
Nonperformance risk	0.60	-	1.34	%	1.15	%	0.80	-	1.60	%	1.30	%
Lapse rate	1.10	-	55.00	%	6.01	%	1.10	-	55.00	%	5.90	%
Principal Asset Management - Principal International:
Asia:
Guaranteed pension
Long-term interest rate (1)	4.38	-	4.50	%	4.43	%	4.54	-	4.70	%	4.61	%
Long-term equity market volatility	15.56	-	24.42	%	19.48	%	16.39	-	23.75	%	19.64	%
Nonperformance risk	0.61	-	1.37	%	1.18	%	0.90	-	1.77	%	1.51	%
Lapse rate	4.95	-	19.35	%	16.86	%	4.95	-	19.35	%	16.80	%

(1) Represents the range of rate curves used in the valuation analysis that we have determined market participants would use when pricing the instrument. The rate curves are derived from an interpolation between various observable swap rates.