SUPPLEMENT DATED NOVEMBER 27, 2000
TO THE PROSPECTUS FOR
SURVIVORSHIP VARIABLE UNIVERSAL LIFE INSURANCE
DATED MAY 1, 2000
Effective November 27, 2000, the Prospectus for Survivorship Variable Universal
Life Insurance is amended as follows:
1. On page 7 under the heading Transfers the first sentence will now read:
"You may transfer amounts between the Investment Accounts and/or
the Fixed Account."
2. On page 7 under the heading Transfers remove the second paragraph.
3. On page 17 under the heading Allocation of Premiums, in the second
paragraph the fourth sentence will now read:
"The percentage allocation for future premium payments may be change
without charge, at any time by:
o sending a written notice to us;
o calling us at 1-800-247-9988 (if telephone privileges
apply); or
o visiting www.principal.com (if internet privileges apply)."
4. On page 19 under the heading Investment Account Transfers, the first
sentence will now read:
"You may request an unscheduled transfer or set up a periodic
transfer by:
o sending a written notice to us;
o calling us at 1-800-247-9988 (if telephone privileges
apply); or
o visiting www.principal.com (if internet privileges apply)."
5. On page 19 under the heading of Investment Account Transfers - Unscheduled
Transfers, remove the second, third and fourth bullet points.
6. On page 20 under the heading Fixed Account Transfers - Scheduled Transfers
(dollar cost averaging (DCA)), in the second paragraph the second sentence
will now read:
"You may change the amount of the transfer once each policy year by:
o sending a written notice to us;
o calling us at 1-800-247-9988 (if telephone privileges
apply); or
o visiting www.principal.com (if internet privileges
apply)."
7. On page 20 under the heading Automatic Portfolio Rebalancing (APR), in the
second paragraph the fourth bullet point will now read:
"Are done without charge;"
8. On page 20 under the heading Automatic Portfolio Rebalancing (APR), in the
second paragraph the eighth bullet point will now read:
"May be done by:
o sending a written notice to us;
o calling us at 1-800-247-9988 (if telephone privileges apply);
o visiting www.principal.com (if internet privileges apply); or
o faxing a request to us."
9. On page 28 under the heading Transaction Charge, remove the second
paragraph.
10. On page 32 under the heading Telephone Instructions, the first sentenc will
now read:
"If you elect telephone privileges, instructions for the following
transactions may be given to us via the telephone:"
11. On page 32 insert the following after the fourth paragraph:
"Internet
Internet access is available for you at www.principal.com. For security
purposes, you need a personal identification number (PIN) to use any of
the new Internet services, including viewing your policy information
online. If you don't have a PIN, you can obtain one at
www.principal.com. You may also elect Internet authorization for your
sales representative by providing us written notice."
12. All references to the following names should now read as follows:
Old Name New Name
-------- --------
Stock Index 500 Division/Account LargeCap Stock Index Division/Account
Fidelity Contrafund Division Fidelity VIP Contrafund Division
Fidelity Equity-Income Division Fidelity VIP Equity-Income Division
Fidelity High Income Division Fidelity VIP High Income Division
Putnam Global Asset Allocation Division Putnam VT Global Asset Allocation
Division
Putnam Vista Division Putnam VT Vista Division
Putnam Voyager Division Putnam VT Voyager Division
LV 111 S-3
Survivorship Flexible Premium Variable Universal Life Insurance Policy
The Survivorship Flexible Premium Variable Universal Life Insurance Policy (the
"Policy") is issued by Principal Life Insurance Company (the "Company"). The
Policy provides:
o a death benefit payable on the death of the surviving insured;
o policy loans; and
o a net surrender value which may be accessed by a partial or total surrender
of the Policy.
This prospectus provides information that you should know before buying a
Policy. It is accompanied by a current prospectus for the underlying mutual
funds that are available under the Policy. Please read these prospectuses
carefully and keep them for future reference.
The investment options available under the Policy are:
<TABLE>
<S> <C>
Principal Variable Contracts Fund, Inc. Fidelity Variable Insurance Products Fund II
Aggressive Growth Account Contrafund Portfolio
Asset Allocation Account Fidelity Variable Insurance Products Fund:
Balanced Account Equity-Income Portfolio
Bond Account High Income Portfolio
Capital Value Account Putnam Variable Trust
Government Securities Account Global Asset Allocation Fund
Growth Account Vista Fund
International Account Voyager Fund
International SmallCap Account
MicroCap Account
MidCap Account
MidCap Growth Account
Money Market Account
Real Estate Account
SmallCap Account
SmallCap Growth Account
SmallCap Value Account
Stock Index 500 Account
Utilities Account
</TABLE>
As in the case of other life insurance policies, it may not be in your best
interest to buy this Policy as a replacement for, or in addition to, existing
insurance coverage.
This Policy is NOT:
o a bank deposit
o endorsed by a bank or government agency
o federally insured
The Policy involves investment risk, including possible loss of principal.
You should be aware that the Securities and Exchange Commission ("SEC") has not
reviewed the Policy for its investment merit, and does not guarantee that the
information in this prospectus is accurate or complete. It is a criminal offense
to say otherwise.
This prospectus is dated May 1, 2000.
<PAGE>
TABLE OF CONTENTS
GLOSSARY............................................................... 4
SUMMARY................................................................ 6
THE COMPANY............................................................ 10
PRINCIPAL LIFE INSURANCE COMPANY VARIABLE LIFE SEPARATE ACCOUNT........ 10
THE FUNDS.............................................................. 11
THE POLICY............................................................. 16
To Buy a Policy.................................................... 16
Payment of Premiums................................................ 17
Premium Limitations................................................ 17
Allocation of Premiums............................................. 17
Ten Day Examination Offer.......................................... 18
Policy Values...................................................... 18
Investment Account Transfers....................................... 19
Fixed Account Transfers............................................ 20
Automatic Portfolio Rebalancing (APR).............................. 20
Policy Loans....................................................... 21
Loan Account....................................................... 21
Surrenders......................................................... 22
DEATH BENEFITS AND RIGHTS.............................................. 23
Death Proceeds..................................................... 23
Death Benefit Options.............................................. 23
Change in Death Benefit Option..................................... 25
Adjustment Options................................................. 25
CHARGES AND DEDUCTIONS................................................. 26
Premium Expense Charge............................................. 26
Monthly Policy Charge.............................................. 26
Cost of Insurance Charge........................................... 27
Administration Charge.............................................. 27
Mortality and Expense Risk Charge.................................. 27
Transaction Charge................................................. 28
Surrender Charge................................................... 28
Other Charges...................................................... 28
THE FIXED ACCOUNT...................................................... 29
POLICY TERMINATION AND REINSTATEMENT................................... 30
Policy Termination................................................. 30
Reinstatement.......................................................... 31
OTHER MATTERS.......................................................... 32
Voting Rights...................................................... 32
Statement of Values................................................ 32
Services Available by Telephone.................................... 33
GENERAL PROVISIONS..................................................... 34
The Contract....................................................... 34
Optional Insurance Benefits........................................ 34
Misstatement of Age or Gender...................................... 35
Assignment......................................................... 35
Ownership.......................................................... 35
Beneficiary........................................................ 35
Benefit Instructions............................................... 35
Benefit Payment Options............................................ 36
Rights to Exchange Policy.......................................... 36
Non-Participating Policy........................................... 36
Incontestability................................................... 36
Suicide............................................................ 36
Delay of Payments.................................................. 37
Addition, Deletion or Substitution of Investments.................. 37
OFFICERS AND DIRECTORS OF PRINCIPAL MANAGEMENT CORPORATION............. 38
OFFICERS AND DIRECTORS OF PRINCIPAL LIFE INSURANCE COMPANY............. 38
DISTRIBUTION OF THE POLICY............................................. 40
STATE REGULATION....................................................... 40
FEDERAL TAX MATTERS.................................................... 41
Tax Status of the Company and the Separate Account..................... 41
Charges for Taxes.................................................. 41
Diversification Standards.......................................... 41
IRS Definition of Life Insurance................................... 41
Modified Endowment Contract Status................................. 41
Policy Surrenders and Partial Surrenders........................... 42
Policy Loans and Loan Interest..................................... 42
Corporate Alternative Minimum Taxes................................ 42
Exchange or Assignment of Policies................................. 42
Withholding........................................................ 42
Other Tax Issues................................................... 42
EMPLOYEE BENEFIT PLANS................................................. 43
LEGAL OPINIONS......................................................... 43
LEGAL PROCEEDINGS...................................................... 43
REGISTRATION STATEMENT................................................. 43
OTHER VARIABLE INSURANCE CONTRACTS..................................... 43
Reservation of Rights.................................................. 43
CUSTOMER INQUIRIES..................................................... 44
INDEPENDENT AUDITORS................................................... 44
FINANCIAL STATEMENTS................................................... 44
APPENDIX A SAMPLE ILLUSTRATIONS ....................................... 142
APPENDIX B TARGET PREMIUMS............................................. 147
The Policy offered by this prospectus may not be available in all states. This
prospectus is not an offer to sell, or solicitation of an offer to buy, the
Policy in states in which the offer or solicitation may not be lawfully made. No
person is authorized to give any information or to make any representation in
connection with this Policy other than those contained in this prospectus.
GLOSSARY
adjustment - change to your policy resulting from an increase or decrease in
policy face amount or a change in: smoking status; death benefit option; rating
or riders.
adjustment date - the monthly date on or next following the Company's approval
of a requested adjustment.
attained age - for each insured, it is the insured's age on the birthday on or
preceding the last policy anniversary.
business day - any date that the New York Stock Exchange is open for trading and
trading is not restricted.
division - a part of the Separate Account which invests in shares of a mutual
fund.
effective date - the date on which all requirements for issuance of a Policy
have been satisfied.
Fixed Account - that part of the dollar amount in the policy that reflects value
in the General Account of the Company.
General Account - assets of the Company other than those allocated to any of our
Separate Accounts.
insureds - the persons named as the "insureds" on the application for the
Policy. The insureds may or may not be the owners.
Investment Account - that part of the dollar amount in the policy that reflects
your investment in one of the divisions of the Separate Account.
Loan Account - that part of the dollar amount in the policy that reflects the
value transferred from the Investment Account(s) and/or Fixed Account as
collateral for a policy loan.
monthly date - the day of the month which is the same day as the policy date.
Example: If the policy date is September 5, 2000, the first monthly date is
October 5, 2000.
monthly policy charge - the amount subtracted from the policy value on each
monthly date equal to the sum of the cost of insurance and of additional
benefits provided by any rider plus the monthly administration charge and
mortality and expense risks charge in effect on the monthly date.
mutual fund - a registered open-end investment company, or a separate investment
account or portfolio thereof, in which a division of the Separate Account
invests.
net premium - the gross premium less the deductions for the premium expense
charge. It is the amount of premium allocated to the Investment Accounts and/or
Fixed Account.
net surrender value - policy value minus any surrender charge minus any policy
loans and unpaid loan interest.
notice - any form of communication received in our home office which provides
the information we need which may be in writing or another manner which we
approve in advance.
owner - the person, including joint owner, who owns all the rights and
privileges of this Policy.
policy date - the date from which monthly dates, policy years and policy
anniversaries are determined.
policy value - an amount equal to the Fixed Account value plus the Investment
Account value(s) plus the Loan Account value.
policy year - the one-year period beginning on the policy date and ending one
day before the policy anniversary and any subsequent one year period beginning
on a policy anniversary. Example: If the policy date is September 5, 2000, the
first policy year ends on September 4, 2001. The first policy anniversary falls
on September 5, 2001.
premium expense charge - the charge deducted from premium payments to cover a
sales charge, state and local premium taxes and federal taxes.
prorated basis - in the proportion that the value of a particular Investment
Account or the Fixed Account bears to the total value of all Investment Accounts
and the Fixed Account.
surrender value - policy value minus any surrender charge.
surviving insured - the insured who is living at the death of the other insured.
If both insureds die simultaneously, then the term "surviving insured" means the
younger of the two insureds.
target premium - a premium amount which is used to determine the maximum sales
charge that is included as part of the premium expense charge and any applicable
surrender charge under a Policy. Target premiums are provided in Appendix B.
unit - the accounting measure used to calculate the value of the Separate
Account divisions.
valuation date - the date as of which the net asset value of a mutual fund is
determined.
valuation period - the period of time between determination of net asset value
on one valuation date and the next valuation date.
written request - actual delivery to the Company at our home office of a written
notice or request, signed and dated, on a form we supply or approve.
Your notices may be mailed to us at:
Principal Life Insurance Company
P O Box 9296
Des Moines, Iowa 50306-9296
SUMMARY
This prospectus describes a survivorship flexible variable universal life policy
offered by the Company. This is a brief summary of the Policy's features. More
detailed information follows later in this prospectus.
The Policy
The Policy is designed to provide you with:
o insurance protection covering two individuals;
o a death benefit payable at the death of the surviving insured; and
o flexibility in:
o the amount and frequency of premium payments (subject to certain
limitations); and
o the amount of life insurance proceeds payable under the Policy.
You may allocate your net premium payments to divisions of the Separate Account
and/or the Fixed Account. Not all divisions are available in all states. A
current list of divisions available in your state may be obtained from a sales
representative or our home office.
Each division invests in shares of an underlying mutual fund. More detailed
information about the underlying mutual funds may be found in the current
prospectus for each underlying mutual fund.
The underlying mutual funds are NOT available to the general public directly.
The underlying mutual funds are available only as investment options in variable
life insurance policies or variable annuity contracts issued by life insurance
companies. Some of the underlying mutual funds have been established by
investment advisers that manage publicly traded mutual funds having similar
names and investment objectives. While some of the underlying mutual funds may
be similar to, and may in fact be modeled after publicly traded mutual funds,
you should understand that the underlying mutual funds are not otherwise
directly related to any publicly traded mutual fund. Consequently, the
investment performance of publicly traded mutual funds and of any underlying
mutual fund may differ substantially.
<TABLE>
<CAPTION>
Division: the division invests in:
<S> <C>
Principal Variable Contracts Fund, Inc.
Aggressive Growth Aggressive Growth Account
Asset Allocation Asset Allocation Account
Balanced Balanced Account
Bond Bond Account
Capital Value Capital Value Account
Government Securities Government Securities Account
Growth Growth Account
International International Account
International SmallCap International SmallCap Account
MicroCap MicroCap Account
MidCap MidCap Account
MidCap Growth MidCap Growth Account
Money Market Money Market Account
Real Estate Real Estate Account
SmallCap SmallCap Account
SmallCap Growth SmallCap Growth Account
SmallCap Value SmallCap Value Account
Stock Index 500 Stock Index 500 Account
Utilities Utilities Account
Fidelity Contrafund Fidelity VIP II Contrafund Portfolio Initial
Class
Fidelity Equity-Income Fidelity VIP Equity-Income Portfolio Initial
Class
Fidelity High Income Fidelity VIP High Income Portfolio Initial Class
Putnam Global Asset Allocation Putnam VT Global Asset Allocation Fund - Class IB
Putnam Vista Putnam VT Vista Fund - Class IB
Putnam Voyager Putnam VT Voyager Fund - Class IB
</TABLE>
Premiums
The Company guarantees that the Policy will stay in force if you have paid
enough premium to meet the grace period provision (see THE POLICY - Payment of
Premiums).
Your net premiums are allocated to divisions of the Separate Account and/or the
Fixed Account. Your initial net premium is allocated to the Money Market
division at the end of the valuation date we receive the premium. Twenty-one
days after the effective date of the Policy, the money is reallocated using your
allocation instructions (see THE POLICY - Allocation of Premiums).
Policy Value
Your Policy value is:
o the value(s) of your Investment Account(s)
o plus the value of your Fixed Account
o plus the value of your Loan Account.
Investment Account
An Investment Account is set up for each division to which you allocate a
portion of your net premium. The value of an Investment Account reflects the
investment experience of the division that you choose.
Fixed Account
The Company guarantees that net premiums allocated to the Fixed Account earn
interest at a guaranteed rate. In no event will the guaranteed interest rate be
less than 3% compounded annually.
Transfers
You may transfer amounts between the Investment Accounts and/or the Fixed
Account subject to certain limitations. Transfers in and out of the Fixed
Account are subject to specific limitations described in THE POLICY - Fixed
Account Transfers.
We reserve the right to charge a transfer fee on each unscheduled transfer after
the 12th such transfer in a policy year. The fee will not be more than $25 per
unscheduled transfer.
Policy Loans
You may borrow against your policy value any time the Policy has a net surrender
value. The minimum amount of a loan is $500.
Loan Account
When you take a policy loan, we establish a Loan Account. An amount equal to the
amount of the policy loan is transferred to the Loan Account from your
Investment Accounts and/or Fixed Account. Interest is paid on the amount in the
Loan Account.
Surrenders (total and partial)
Total Surrender
o You may surrender your Policy and receive the net surrender value.
o We calculate the net surrender value as of the date we receive your written
request.
o A surrender charge is imposed on total surrenders within ten years of the
policy date (another date may apply if the Policy has been reinstated or
the face amount increased).
Partial Surrender
o After the second policy year, you may request a partial surrender of the
net surrender value.
o The minimum amount of partial surrender is $500.
o The total of your partial surrenders during a policy year may not be
greater than 75% of the net surrender value (as of the date of the request
for the first partial surrender in that policy year).
o Surrenders are taken from premiums paid into the Policy on a last-in,
first-out basis.
o Partial surrenders are limited to no more than two in each policy year.
Charges and Deductions
Premium Expense Charge
Deductions from premiums during each of the first ten years (and with respect to
premiums made because of a face amount increase, during the first ten years
after the increase) equal:
o sales load of 5.0% of premiums paid which are less than or equal to target
premiums (2.0% of premiums in excess of target premiums)
o plus 2.20% for state and local taxes
o plus 1.25% for federal taxes.
Deductions after the first ten policy years (and after ten years of a face
amount increase) include:
o sales load of 2.0% of premiums paid
o plus 2.20% for state and local taxes
o plus 1.25% for federal taxes.
Surrender Charges
A surrender charge is imposed on Policy termination or total surrender during
the first ten policy years (and ten years after an increase in the face amount)
(see CHARGES AND DEDUCTIONS - Surrender Charge).
Surrender Charge Percentage
The surrender charge during any policy year is equal to the number of target
premiums from the table below multiplied by the applicable surrender charge
percentage also shown below:
Joint Equivalent Age (JEA)
on policy or Number of
adjustment date target premiums
75 or less 1.00
76 through 80 0.90
81 through 85 0.75
86 or greater 0.65
Surrender Charge Percentage Table
Number of years since policy date The following percentage of
and/or the adjustment date surrender charge is payable
1 through 5 100.00%
6 95.24
7 85.71
8 71.43
9 52.38
10 28.57
11 and later 00.00
The surrender charge on a face amount increase is calculated by multiplying the
increase in target premium due to the face increase by the applicable number of
target premiums from the table above. This result is multiplied by the
percentage from the Surrender Charge Percentage Table to get the increase in
surrender charges for all years.
Monthly Policy Charges
o Administration charge:
o The current monthly administration charge is $8.00 per month.
o An additional monthly administration charge is imposed in the first ten
policy years (and ten years after an increase in the face amount) of
$.07 per $1,000 of face amount. The charge of $.07 per $1,000 of face
amount is increased by $.005 per $1,000 for each insured that is
classified as a smoker.
o Cost of insurance charge.
o Mortality and expense risks charge:
o in the first nine policy years, 0.80% of your Investment Accounts per
year;
o after the ninth policy year, 0.30% of your Investment Accounts per
year.
o Supplemental benefit rider(s) charge(s).
Other Charges
o Transaction charge of the lesser of $25 or 2% of the amount surrendered for
each partial surrender.
o Investment management fees and other operating expenses for the mutual fund
underlying an Investment Account.
Death Benefits and Proceeds
The death proceeds are paid to the beneficiary(ies) when the surviving insured
dies. Death proceeds are calculated as of the date of death of the surviving
insured. The amount of the death proceeds is:
o the death benefit plus interest (as explained in DEATH BENEFITS AND RIGHTS
- Death Proceeds);
o plus proceeds from any benefit riders on the life of the surviving insured;
o minus policy loans and unpaid loan interest;
o minus any overdue monthly policy charges.
The Policy provides for two death benefit options - a level amount and a
variable amount. You choose an option on your application. Subject to certain
conditions, you may change your option after the Policy has been issued.
Death proceeds are paid in cash or applied under a benefit payment option. We
pay interest on the death proceeds from the date of death of the surviving
insured until the date of payment or application under a benefit payment option.
Maturity Proceeds
If either insured is living on the maturity date, we will pay you (the owner) an
amount equal to the death proceeds as described above. The Policy then
terminates. Maturity proceeds are paid in cash lump sum or applied under a
benefit payment option.
Adjustment Options
You may send us a written request to increase or decrease the face amount of the
Policy. No request is approved if the Policy is in a grace period or if monthly
policy charges are being waived under a rider.
The minimum amount of a face amount increase is $100,000 and is subject to our
underwriting guidelines in effect at the time you request the increase.
You may only request a decrease in face amount:
o after the second policy anniversary; and
o if the request does not decrease the face amount below $100,000.
Termination and Reinstatement
The Policy terminates when:
o you make a total policy surrender;
o death proceeds are paid;
o maturity proceeds are paid; or
o you do not make additional premium payments (after the expiration of a
61-day grace period).
Subject to certain conditions, you may reinstate a Policy that terminated
because insufficient values.
Ten Day Examination Offer (Free-look Provision)
o You may return the Policy during the free-look period that is generally 10
days but may be longer in certain states.
o We return either all premiums paid or the policy value, whichever is
required by applicable state law.
CONDENSED FINANCIAL INFORMATION
The policy was first offered on July 1, 1999. The following unit values are for
the period from July 1, 1999 through December 31, 1999.
<TABLE>
<CAPTION>
Number of
Accumulation Unit Value Accumulation Units
--------------------------------------------------- Outstanding
Beginning End Percentage of Change End of Period
of Period of Period from Prior Period (in thousands)
<S> <C> <C> <C> <C>
Aggressive Growth Division
1999 $10.000 $12.368 23.68% 7,135
Asset Allocation Division
1999 10.000 11.106 11.06 14,900
Balanced Division
1999 10.000 9.944 (0.56) 8,042
Bond Division
1999 10.000 10.023 0.23 4,061
Capital Value Division
1999 10.000 9.189 (8.11) 4,293
Government Securities Division
1999 10.000 10.154 1.54 3,244
Growth Division
1999 10.000 10.918 9.18 4,532
International Division
1999 10.000 11.567 15.67 3,520
International SmallCap Division
1999 10.000 14.921 49.21 1,467
MicroCap Division
1999 10.000 9.112 (8.88) 2,578
MidCap Division
1999 10.000 11.162 11.62 228
MidCap Growth Division
1999 10.000 11.145 11.45 221
Money Market Division
1999 10.000 10.202 2.02 183,318
Real Estate Division
1999 10.000 8.935 (1.07) 0
SmallCap Division
1999 10.000 11.943 19.43 986
SmallCap Growth Division
1999 10.000 15.900 59.00 1,404
SmallCap Value Division
1999 10.000 11.079 10.79 3,687
Stock Index 500 Division
1999 10.000 11.093 10.93 2,528
Utilities Division
1999 10.000 9.825 (1.75) 1,566
Fidelity Contrafund Division
1999 10.000 11.356 13.56% 13,718
Fidelity Equity-Income Division
1999 10.000 9.724 (2.76) 6,608
Fidelity High Income Division
1999 10.000 11.918 1.92 0
Putnam Global Asset Allocation Division
1999 10.000 10.860 8.60 3,887
Putnam Vista Division
1999 10.000 13.917 39.17 776
Putnam Voyager Division
1999 10.000 14.245 42.45 10,333
</TABLE>
THE COMPANY
The Company is a stock life insurance company with its home office at: Principal
Financial Group, Des Moines, Iowa 50306. It is authorized to transact life and
annuity business in all of the United States and the District of Columbia. The
Company is a wholly owned subsidiary of Principal Financial Services, Inc.
On June 24, 1879, the Company was incorporated under Iowa law as a mutual life
insurance company named Bankers Life Association. It changed its name to Bankers
Life Company in 1911 and then to Principal Mutual Life Insurance Company in
1986. The name change to Principal Life Insurance Company and reorganization
into a mutual holding company structure took place July 1, 1998.
PRINCIPAL LIFE INSURANCE COMPANY VARIABLE LIFE SEPARATE ACCOUNT
The Separate Account was established under Iowa law on November 2, 1987. It was
then registered as a unit investment trust with the Securities and Exchange
Commission ("SEC"). This registration does not involve SEC supervision of the
investments or investment policies of the Separate Account.
The income, gains, and losses, whether or not realized, of the Separate Account
are credited to or charged against the Separate Account without regard to other
income, gains, or losses of the Company. Obligations arising from the Policy,
including the promise to make benefit option payments, are our general corporate
obligations. However, the Policy provides that the portion of the Separate
Account's assets equal to the reserves and other liabilities under the Policy
are not charged with any liabilities arising out of any other business of the
Company.
The assets of each division invest in a corresponding account of a mutual fund.
New accounts may be added and made available. Accounts may also be eliminated
from the Separate Account.
THE FUNDS
The funds are mutual funds registered under the Investment Company Act of 1940
as open-end diversified management investment companies. The funds provide the
investment vehicle for the Separate Account. A full description of the funds,
their investment objectives, policies and restrictions, charges and expenses and
other operational information is contained in the attached prospectuses (which
should be read carefully before investing). Additional copies of these documents
are available from a sales representative or our home office.
The following is a brief summary of the investment objectives of each division:
<TABLE>
<CAPTION>
Division Division Invests In Investment Advisor Investment Objective
<S> <C> <C> <C>
Principal Variable Contracts
Fund, Inc.
Aggressive Growth Aggressive Growth Account Morgan Stanley Asset to provide long-term capital appreciation
Management Inc. through by investing primarily in growth-oriented
a sub-advisory agreement common stocks of medium and large
capitalization U.S. corporations and, to a
limited extent, foreign corporations.
Asset Allocation Asset Allocation Account Morgan Stanley Asset to generate a total investment return
Management Inc. through consistent with the preservation of capital.
a sub-advisory agreement The Account intends to pursue a flexible
investment policy in seeking to achieve this
investment objective.
Balanced Balanced Account Invista Capital Management, LLC to generate a total return consisting of
through a sub-advisory agreementcurrent income and capital appreciation while
assuming reasonable risks in furtherance of
this objective.
Bond Bond Account Principal Management Corporationto provide as high a level of income as is
consistent with preservation of capital and
prudent investment risk.
Capital Value Capital Value Account Invista Capital Management, LLC to provide long-term capital appreciation and
through a sub-advisory agreementsecondarily growth of investment income. The
Account seeks to achieve its investment
objectives through the purchase primarily of
common stocks, but the Account may invest in
other securities.
Government Securities Government Securities Invista Capital Management, LLC to seek a high level of current income,
Account through a sub-advisory agreementliquidity and safety of principal.The Account
seeks to achieve its objective through the
purchase of obligations issued or guaranteed
by the United States Government or its
agencies, with emphasis on Government
National Mortgage Association Certificates
("GNMA Certificates"). Account shares are
not guaranteed by the United States
Government.
Growth Growth Account Invista Capital Management, LLC to seek growth of capital. The Account seeks
through a sub-advisory agreementto achieve its objective through the purchase
primarily of common stocks, but the Account
may invest in other securities.
International International Account Invista Capital Management, LLC to seek long-term growth of capital by
through a sub-advisory agreementinvesting in a portfolio of equity securities
domiciled in any of the nations of the world.
International SmallCap International SmallCap Invista Capital Management, LLC seeks long-term growth of capital. The
Account through a sub-advisory agreementAccount will attempt to achieve its objective
by investing primarily in equity securities
of non-United States companies with
comparatively smaller market capitalizations.
MicroCap MicroCap Account Goldman Sachs Asset seeks long-term growth of capital. The
Management through a Account will attempt to achieve its
sub-advisory agreement objective by investing primarily in value and
growth oriented companies with small market
capitalizations, generally less than $700
million.
MidCap MidCap Account Invista Capital Management, LLC to achieve capital appreciation by investing
through a sub-advisory agreementprimarily in securities of emerging and other
growth-oriented companies.
MidCap Growth MidCap Growth Account Dreyfus Corporation through a seeks long-term growth of capital. The
sub-advisory agreement Account will attempt to achieve its objective
by investing primarily in growth stocks of
companies with market capitalizations in the
$1 billion to $10 billion range.
Money Market Money Market Account Principal Management Corporationto seek as high a level of current income
available from short-term securities as is
considered consistent with preservation of
principal and maintenance of liquidity by
investing all of its assets in a portfolio of
money market instruments.
Real Estate Real Estate Account Principal Management Corporationseeks to generate a high total return. The
Account will attempt to achieve its objective
by investing primarily in equity securities
of companies principally engaged in
the real estate industry.
SmallCap SmallCap Account Invista Capital Management, LLC seeks long-term growth of capital. The
through a sub-advisory agreementAccount will attempt to achieve its objective
by investing primarily in equity securities
of both growth and value oriented
companies with comparatively smaller market
capitalizations.
SmallCap Growth SmallCap Growth Account Berger Associates through a seeks long-term growth of capital. The
sub-advisory agreement Account will attempt to achieve its objective
by investing primarily in equity securities
of small growth companies with
comparatively smaller market capitalizations.
SmallCap Value SmallCap Value Account J.P. Morgan Investment seeks long-term growth of capital. The
Management, Inc. Account will attempt to achieve its objective
by investing through a sub-advisory agreement
primarily in equity securities of small
growth companies with value characteristics
and comparatively smaller market
capitalizations.
Stock Index 500 Stock Index 500 Invista Capital Management, LLC seeks long-term growth of capital. The
Account through a sub-advisory agreementAccount attempts to mirror the investment
results of the Standard & Poor's 500 Index.
Utilities Utilities Account Invista Capital Management, LLC seeks to provide current income and long-term
through a sub-advisory agreementgrowth of income and capital. The Account
will attempt to achieve its objective by
investing primarily in equity and
fixed-income securities of companies in the
public utilities industry.
Fidelity Fidelity VIP II Contrafund Fidelity Management and seeks long-term capital appreciation.
Contrafund Portfolio Research Company
Fidelity Fidelity VIP Equity-Income Fidelity Management and seeks reasonable income by investing
Equity-Income Portfolio Research Company primarily in income-producing
equity securities.
Fidelity Fidelity VIP High Income Fidelity Management and seeks a high level of current income by
High Income Portfolio Research Company investing primarily in high yielding, lower
quality, fixed income securities, while also
considering growth of capital.
Putnam Global Putnam VT Global Asset Putnam Investment seeks a high level of long-term total return
Asset Allocation Allocation Fund Management, Inc. consistent with preservation of capital.
Putnam Vista Putnam VT Vista Fund Putnam Investment seeks capital appreciation.
Management, Inc.
Putnam Voyager Putnam VT Voyager Fund Putnam Investment seeks capital appreciation.
Management, Inc.
</TABLE>
The Company purchases and sells fund shares for the Separate Account at their
net asset value without any sales or redemption charge. The Separate Account has
divisions that correspond to interests in the Investment Accounts. The assets of
each Investment Account are separate from the others. An Investment Account's
performance has no effect on the investment performance of any other Investment
Account.
The annual expenses of Investment Accounts (as a percentage of average net
assets) as of December 31, 1999 were:
<TABLE>
<CAPTION>
Management 12b-1 Other Total Account
Account Fees Fees Expenses Annual Expenses
Principal Variable Contracts Fund
<S> <C> <C> <C> <C>
Aggressive Growth 0.75% N/A 0.02% 0.77%
Asset Allocation 0.80 N/A 0.05 0.85
Balanced 0.57 N/A 0.01 0.58
Bond 0.49 N/A 0.01 0.50
Capital Value(1) 0.43 N/A 0.00 0.43
Government Securities 0.49 N/A 0.01 0.50
Growth(1) 0.45 N/A 0.00 0.45
International(1) 0.73 N/A 0.05 0.78
International SmallCap 1.20 N/A 0.12 1.32
MicroCap(2) 1.00 N/A 0.28 1.28
MidCap 0.61 N/A 0.00 0.61
MidCap Growth(2) 0.90 N/A 0.19 1.09
Money Market 0.50 N/A 0.02 0.52
Real Estate 0.90 N/A 0.09 0.99
SmallCap 0.85 N/A 0.06 0.91
SmallCap Growth(2) 1.00 N/A 0.07 1.07
SmallCap Value(2) 1.10 N/A 0.34 1.44
Stock Index 500(2) 0.35 N/A 0.14 0.49(3)
Utilities 0.60 N/A 0.04 0.64
Fidelity
Fidelity Contrafund 0.58 N/A 0.09 0.67
Fidelity Equity-Income 0.48 N/A 0.09 0.57
Fidelity High Income 0.58 N/A 0.11 0.69
Putnam Class IB Shares
Putnam Global Asset Allocation 0.65 0.15% 0.12 0.92(4)
Putnam Vista 0.65 0.15 0.10 0.90(4)
Putnam Voyager 0.53 0.15 0.04 0.72(4)
<FN>
(1) Based on th management fee schedule in effect during the fiscal year. Modifications to the schedule were effective
1/1/2000.
(2) Manager has agreed to reimburse expenses, if necessary, so that total Account operating expenses for the
year ending December 31, 2000 will be no more than:
MicroCap 1.06% SmallCap Growth 1.06% Stock Index 500 0.40%
MidCap Growth 0.96% SmallCap Value 1.16%
(3) Expenses for the period from May 1, 1999 through December 31, 1999.
(4) The Company and Princor Financial Services Corporation may receive a
portion of the fund expenses for recordkeeping, marketing and
distribution services.
</FN>
</TABLE>
THE POLICY
The descriptions that follow are based on provisions of the Policy offered by
this prospectus.
To Buy a Policy
A completed application and required supplements must be submitted to us through
an agent or broker selling the Policy.
The minimum face amount of a Policy when originally issued is $100,000. We
reserve the right to increase or decrease the minimum face amount.
To issue a Policy, we require at least one insured to be age 85 or younger as of
the policy date. Neither insured may be older than age 90 as of the policy date.
Other underwriting restrictions may apply.
Applicants for the Policy must:
o furnish satisfactory evidence of insurability of both insureds; and
o meet our insurance underwriting guidelines and suitability rules.
If you want insurance coverage to start at the time the application is
submitted, you must send a payment of at least the required minimum initial
premium amount with your completed application. The required minimum initial
premium amount is shown on the policy illustration. If this amount is submitted
with the application, a conditional receipt is given to you. The receipt
acknowledges the initial payment and details any interim conditional insurance
coverage.
We reserve the right to reject any application or related premium if we
determine that our underwriting guidelines, suitability rules or procedures have
not been met.
Policy Date
If we issue a Policy, a policy date is determined. Policies will not be dated on
the 29th, 30th or 31st of any month. Policies that would otherwise be dated on
these dates are dated on the 28th of the same month. Policies that are issued on
a COD basis and that would otherwise be dated on the 29th, 30th or 31st of a
month will be dated on the first day of the following month. Your policy date is
shown on the current data pages.
Upon specific request and our approval, your Policy may be backdated. The policy
date may not be more than six months prior to the date of application (or
shorter period if required by state law). Payment of minimum monthly premium is
required for the backdated period. Monthly policy charges are deducted from the
policy value for the backdated period.
Effective Date
The policy date and the effective date are the same unless:
o a backdated policy date is requested; or
o a Policy is applied for on a COD basis or the application was not
accompanied by a payment of at least the minimum monthly premium; or
o additional premiums are required (the effective date is the date we
receive, review and accept the required premium); or
o application amendments are required (the effective date is the date we
receive, review and accept amendments).
The insurance coverage does not take effect until you actually receive the
Policy. If both insureds were to die before the owner actually receives the
Policy, there is no coverage under the Policy (coverage is determined solely
under the terms of conditional receipt, if any).
Payment of Premiums
The amount and frequency of your premium payments affects the policy value, the
net surrender value and how long the Policy remains in force. After the initial
premium, you may determine the amount and timing of subsequent premium payments
within certain restrictions. The minimum monthly premium is shown on the current
data pages for your Policy. You must pay premiums to us at our home office.
If the net surrender value on any monthly date is less than the monthly policy
charge, a 61-day grace period begins. However, during the first 60 policy
months, the Policy will stay in force if (a minus b) is greater than or equal to
(c) where:
(a) is the sum of the premiums paid;
(b) is the sum of all existing policy loans, unpaid loan interest, partial
surrenders and transaction charges; and
(c) is the sum of the minimum monthly premiums since the policy date to the
most recent monthly date.
After the first 60 policy months, making premium payments under your planned
periodic premium schedule does not guarantee that your Policy will stay in force
unless:
o your Policy's net surrender value is at least equal to the monthly policy
charge on the current monthly date, or
o the death benefit guarantee rider is in effect.
We send premium reminder notices to you if you establish an annual, semiannual
or quarterly premium payment schedule. Preauthorized withdrawals may be set up
on a monthly basis (to allow us to automatically deduct premium payments from
your checking or other financial institution account). You may also make
unscheduled payments to us at our home office or by payroll deduction (where
permitted by state law and approved by us).
During the six month period ended December 31, 1999, we received premium
payments totaling $2,990,685 for these Policies.
Premium Limitations
In no event may the total of all premiums paid, both scheduled and unscheduled,
be more than the current maximum premium payments allowed for life insurance
under the Internal Revenue Code (the "Code"). If you make a premium payment that
would result in total premiums exceeding the current maximum limitation, we only
accept that portion of the payment that makes total premiums equal the maximum.
Any excess will be returned and no further premiums are accepted until allowed
by the current maximum premium limitations.
Allocation of Premiums
Your initial net premium (and other net premiums we receive prior to the
effective date and twenty days after the effective date) is allocated to the
Money Market division at the end of the valuation date we receive the premium.
Twenty-one days after the effective date, the money is reallocated to the
divisions of the Separate Account and/or to the Fixed Account according to your
instructions. Generally, the twenty day period corresponds to the maximum
free-look period (except for policies purchased in California by applicants over
age 60) (see, Ten Day Examination Offer (Free-Look Provision)). If the
twenty-first day is not a business day, the transfer will occur on the first
business day following the twenty-first day from the effective date.
Example: The effective date of your policy is February 1st. Your net
premium is allocated to the Money Market division at the
end of the valuation period we receive the premium. At the
close of business on February 21st, the net premium is
reallocated to the Investment Account and/or Fixed Account
that you selected.
Net premium payments received after the twenty-day period are allocated to the
Investment Accounts or to the Fixed Account according to your instructions. For
each Investment Account and the Fixed Account, the allocation percentage must be
zero or a whole number. The total of all the percentages for the Investment
Account and the Fixed Account must equal 100. The percentage allocation for
future premium payments may be changed, without charge, at any time by sending a
written request to us or, if telephone privileges apply, calling us at
1-800-247-9988. The allocation changes are effective at the end of the valuation
period in which your new instructions are received.
Ten Day Examination Offer (Free-Look Provision)
Under state law, you have the right to return the Policy for any reason during
the free-look period and receive your premiums paid. (If you apply for your
Policy in California, the amount refunded is described below.) Your request to
return the Policy must be in writing. The request and the Policy must be mailed
to us or returned to the agent (as determined by the postmark) no later than the
last day of the free-look period as shown below.
The free-look period is the later of:
o 10 days* after the Policy is delivered to you;
o 10 days* after a written notice is delivered or mailed to you which tells
about the cancellation right; or
o 45 days after you complete the application.
*Different free-look periods apply if your Policy is issued in:
o California and you are age 60 and over (30 day free-look period);
o Colorado (15 day free-look period); or
o Idaho or North Dakota (20 day free-look period).
If you applied for your Policy in California, the amount refunded is:
o the policy value as of the date we receive your written request for
cancellation;
o plus the premium expense charge(s) deducted from the premium;
o plus the monthly policy charge(s) deducted from the policy value.
NOTE:
o See GENERAL PROVISIONS - Delay of Payments.
o If the purchase of this Policy is a replacement for another life insurance
policy or an annuity contract, different free-look periods may apply. We
reserve the right to keep the initial premium payment in the Money Market
division longer than 20 days to correspond to the free-look periods of a
particular state's replacement requirements.
Policy Values
Your policy value is equal to the sum of the values in your Investment Accounts,
Fixed Account and Loan Account (see THE FIXED ACCOUNT and THE POLICY - Loan
Account). The policy value also reflects your premium payments, partial
surrenders, policy loans and the Policy expenses deducted from the Separate
Account.
There is no guaranteed minimum Investment Account value. Its value reflects the
investment experience of the Investment Accounts that you choose. It is possible
that the investment performance could cause a loss of the entire amount
allocated to the Investment Accounts. Without additional premium payments or
investments in the Fixed Account or a death benefit guarantee rider, this could
result in no death benefit upon the surviving insured's death.
At the end of any valuation period, your value in an Investment Account is:
o the number of units you have in a division
o multiplied by the value of a unit in the division.
The number of units is the total of units purchased by allocations to the
division from:
o your initial premium payment (less premium expense charges);
o plus subsequent premium payments (less premium expense charges);
o plus transfers from another division or the Fixed Account
minus units sold:
o for partial surrenders from the division;
o as part of a transfer to another division, the Fixed Account or the Loan
Account; and
o to pay monthly policy charges and fees.
Unit values are calculated each valuation date. To calculate the unit value of a
division, the unit value from the previous valuation date is multiplied by the
division's net investment factor for the current valuation period. The number of
units does not change due to a change in unit value.
The net investment factor measures the performance of each division. The net
investment factor for a valuation period is calculated as follows:
<TABLE>
<S> <C>
[{the share price of the underlying mutual fund account at the end of the valuation period
before that day's transactions
plus
the per share amount of the dividend (or other distribution) made by the mutual fund account during the
valuation period}
divided by
the share price of the underlying mutual fund account at the end of the
previous valuation period after that day's transactions].
</TABLE>
When an investment owned by an Account pays a dividend, the dividend increases
the net asset value of a share of the Account as of the date the dividend is
recorded. As the net asset value of a share of an Account increases, the unit
value of the corresponding division also reflects an increase. Payment of a
dividend under these circumstances does not increase the number of units you own
in the Account.
Investment Account Transfers
You may request an unscheduled transfer or set up a periodic transfer by sending
us a written request or calling us if telephone privileges apply
(1-800-247-9988)(see OTHER MATTERS - Services Available by Telephone). You must
specify the dollar amount or percentage to transfer from each Investment
Account. In states where allowed, we reserve the right to reject transfer
instructions from someone providing them for multiple Policies for which he or
she is not the owner.
You may not make a transfer to the Fixed Account if:
o a transfer has been made from the Fixed Account to an Investment Account
within six months; or
o immediately after the transfer, the Fixed Account value would be more than
$1,000,000 (without our prior approval).
Unscheduled Transfers
You may make unscheduled transfers from an Investment Account to another
Investment Account or to the Fixed Account. The transfer is made, and values
determined, as of the end of the valuation period in which we receive your
request.
o The transfer amount must be at least $100 or the value of your Investment
Account, which ever is less.
o We reserve the right to charge a transfer fee on each unscheduled transfer
after the 12th such transfer in a policy year.
o The fee will not be more than $25 per unscheduled transfer.
o Unscheduled transfers from the Fixed Account to an Investment Account
would count in determining any transfer fee.
Scheduled Transfers (dollar cost averaging (DCA))
You may elect to have automatic transfers made on a periodic basis.
o The amount of the transfer is:
o the dollar amount you select (the minimum is the lesser of $100 or the
value of the Investment Account); or
o a percentage of the Investment Account value as of the date you specify
(other than the 29th, 30th or 31st).
o You select the transfer date (other than the 29th, 30th or 31st) and the
transfer frequency (annually, semi-annually, quarterly or monthly).
o If the selected date is not a valuation date, the transfer is completed on
the next valuation date.
o The value of the Investment Account must be equal to or more than $2,500
when your scheduled transfers begin.
o Transfers continue until your interest in the Investment Account has a zero
balance or we receive notice to stop them.
o We reserve the right to limit the number of Separate Account divisions from
which simultaneous transfers are made. In no event will it ever be less
than two.
Fixed Account Transfers
Transfers from your investment in the Fixed Account to your Investment
Account(s) are subject to certain limitations. You may transfer amounts by
making either a scheduled or unscheduled Fixed Account transfer. You may not
make both a scheduled and unscheduled Fixed Account transfer in the same policy
year. In states where allowed, we reserve the right to reject transfer
instructions from someone providing them for multiple Policies for which he or
she is not the owner.
Unscheduled Transfers
You may make one unscheduled Fixed Account transfer to an Investment Account(s)
within the 30 day period following the policy date and each policy anniversary.
The transfer is made, and values determined, as of the end of the valuation
period in which we receive your request.
o You must specify the dollar amount or percentage to be transferred (not to
exceed 25% of the Fixed Account value as of the latter of the policy date
or the most recent policy anniversary).
o The minimum transfer amount must be at least $100 (or the entire value of
your Fixed Account if less).
Scheduled Transfers (dollar cost averaging (DCA))
You may make scheduled transfers on a monthly basis from the Fixed Account to
your Investment Account(s) as follows:
o The value of your Fixed Account must be equal to or more than $2,500 when
your scheduled transfers begin. We reserve the right to change this amount
but it will never be more than $10,000.
o The amount of the transfer is:
o the dollar amount you select (minimum of $50); or
o a percentage of the Fixed Account value (the maximum amount of the
transfer is 2% of the Fixed Account value as of the specified date) as
of the date you specify which may be:
o the later of the policy date or most recent policy anniversary
date; or
o the date the Company receives your request.
o Transfers occur on a date you specify (other than the 29th, 30th or 31st of
any month).
o If the selected date is not a valuation date, the transfer is completed on
the next valuation date.
Scheduled transfers continue until your value in the Fixed Account has a zero
balance or we receive your notice to stop them. You may change the amount of the
transfer once each policy year by sending us a written request or calling us if
telephone privileges apply (1-800-247-9988). If you stop the transfers, you may
not start them again until six months after the last scheduled transfer.
Automatic Portfolio Rebalancing (APR)
APR allows you to maintain a specific percentage of your policy value in your
Investment Accounts over time.
EXAMPLE: You may choose to rebalance so that 50% of your policy values are
in the Bond division and 50% in the Capital Value division. At
the end of the specified period, market changes may have caused
60% of your value to be in the Bond division and 40% in the
Capital Value division. By rebalancing, units from the Bond
division are sold and the proceeds are used to purchase units in
the Capital Value division so that 50% of the policy values are
once again invested in each division.
o You may elect APR at the time of application or after the Policy has been
issued.
o APR transfers:
o do not begin until the expiration of the free-look period;
o are done without charge (and are not counted as unscheduled transfers
when determining any transfer fee);
o may be done on the frequency you specify:
o quarterly APR transfers may be done on a calendar year or policy
year basis,
o semiannual or annual APR transfers may only be done on a policy
year basis.
o may be done, if telephone privileges apply, by calling us at
1-800-247-9988, mailing us your written request or faxing your request
to us.
o The transfers are made at the end of the next valuation period after we
receive your instruction.
o APR is not available for values in the Fixed Account. If you have scheduled
transfers from Investment Accounts, APR is not available for those
Investment Accounts.
Policy Loans
While your Policy is in effect and has a net surrender value, you may borrow
money from us with the Policy as the security for the policy loan.
o The minimum policy loan is $500*.
o The maximum amount you may borrow is 90% of the net surrender value as of
the date we process the policy loan.
o If telephone privileges apply, you may request a policy loan of $5,000 or
less by calling us at 1-800-247-9988. If you do not have telephone
privileges or are requesting a policy loan of more than $5,000, your
request must be made in writing.
o Generally, policy loan proceeds are sent within five business days from the
date we receive your request (see GENERAL PROVISIONS - Delay of Payments).
o Requests for policy loans from any joint owner are binding on all joint
owners.
* The minimum policy loan amount of $500 does not apply to Policies
issued in Connecticut.
Loan Account
When a policy loan is taken, an amount equal to the loan is transferred from
your Investment Account(s) and Fixed Account to your Loan Account. Loan Accounts
are part of our General Account. You may instruct us on the proportions to be
taken from your accounts. If you do not provide such instruction, the loan
amount is withdrawn in the same proportion as the allocation used for the most
recent monthly policy charge. Any loan interest due and unpaid is transferred in
the same manner.
Your Loan Account earns interest from the date of transfer. During the first ten
policy years, the loan account interest rate is 6% per year. After the tenth
policy year, the loan account interest rate is 7.75% per year.
You pay interest on your policy loan at the annual rate of 8%. Interest accrues
daily and is due and payable at the end of the policy year. If interest is not
paid when due, it is added to the loan amount. Adding unpaid interest to the
policy loan amount causes additional amounts to be withdrawn from your Fixed
Account and/or Investment Account(s) and transferred to the Loan Account.
Withdrawals are made in the same proportions as described above.
Policy loans and unpaid loan interest reduce your net surrender value. If the
net surrender value is less than the monthly policy charges on a monthly date,
the 61-day grace period provision applies (see POLICY TERMINATION AND
REINSTATEMENT - Policy Termination).
While the Policy is in force and before the surviving insured dies, policy loans
and loan interest may be repaid as follows:
o policy loans may be repaid totally or in part;
o repayments are allocated to the Investment Account(s) and Fixed Account in
the proportions used for allocation of premium payments; and
o payments that we receive that are not designated as premium payments are
applied as loan repayments if a policy loan is outstanding.
A policy loan generally has a permanent effect on policy values. If a policy
loan had not been made, the policy value would reflect the investment experience
of the Investment Account(s) and the interest credited to the Fixed Account. In
addition, policy loans and unpaid loan interest are subtracted from:
o death proceeds at the death of the surviving insured;
o surrender value upon total surrender or termination of a Policy; and
o maturity proceeds payable at maturity.
Surrenders
You must send us a written request for any surrender. The request must be signed
by all owners, irrevocable beneficiary(ies), if any, and any assignees.
Total surrender
You may surrender the Policy on or before the maturity date while the Policy is
in effect. You receive the net surrender value at the end of the valuation
period during which we receive your surrender request. The net surrender value
is the total of the values of your Investment Accounts plus your Fixed Account
plus your Loan Account minus any applicable surrender charge, policy loans and
unpaid loan interest (see CHARGES AND DEDUCTIONS - Surrender Charge).
o The written consent of all collateral assignees and irrevocable
beneficiaries must be obtained prior to surrender.
o We reserve the right to require you to return the Policy to us prior to
making any payment though this does not affect the amount of the cash
surrender value.
o If the total surrender is within ten years of the policy date or a face
amount increase, a surrender charge is imposed.
Partial surrender
After the second policy anniversary and prior to the maturity date, you may
surrender a part of the Fixed Account and/or Investment Account value by sending
us a written request. The surrender is effective at the end of the valuation
period during which we receive your written request for surrender. You may not
request more than two partial surrenders in each policy year.
The minimum amount of a partial surrender is $500. The total of your two partial
surrenders during a policy year may not be greater than 75% of the net surrender
value (as of the date of the request for the first partial surrender in that
policy year).
You pay a transaction fee on each partial surrender. The fee is the lesser of
$25 or two percent of the amount surrendered. It is withdrawn in the same
proportion as your monthly policy charge allocation.
Your policy value is reduced by the amount of the surrender and the transaction
fee. We surrender units from the Investment Account divisions and/or values from
the Fixed Account to equal the dollar amount of the surrender request and
transaction fee. The surrender is deducted from your Fixed Account value and/or
your Investment Account(s) according to the surrender allocation percentages you
specify. If surrender allocation percentages are not specified, we use your
monthly policy charge allocation percentages. The amount surrendered is taken
from the premiums paid on a last-in, first-out basis. No surrender charge is
imposed on a partial surrender.
If Option 1 death benefit is in effect and a partial surrender is made, the face
amount of the policy is also reduced by the amount of the surrender and the
transaction fee. Total and partial surrenders from the Policy are generally paid
within five business days of our receipt of your written request for surrender.
Certain delays in payment are permitted (see GENERAL PROVISIONS - Delay of
Payments).
DEATH BENEFITS AND RIGHTS
Death Proceeds
While the Policy remains in force and before the maturity date, we pay death
proceeds upon the death of the surviving insured. If both insureds die
simultaneously, then surviving insured shall mean the younger of the two
insureds. No benefit is paid on the first death of an insured unless such
benefit exists under a rider.
o You must notify us of the first death of an insured as soon as possible
after it occurs. (This facilitates the timely payment of death proceeds at
the death of the surviving insured and may affect the status of any
riders.)
o We must receive proof of the deaths of both insureds and all other required
documents.
o Payments are made to your named beneficiary(ies) under your designated
death benefit option (see GENERAL PROVISIONS - Beneficiary).
The payments are made in cash lump sum or under a benefit payment option
selected by the beneficiary(ies). Death proceeds are calculated as of the date
of the surviving insured's death and include:
o the death benefit described below;
o plus proceeds from any benefit rider on the surviving insured's life;
o minus policy loans and unpaid loan interest;
o minus any overdue monthly policy charges if the surviving insured died
during a grace period;
o plus interest on the death proceeds from date of death of the surviving
insured until date of payment or application under a benefit payment
option. (We determine the interest rate which will not be less than the
rate required by state law.)
Death Benefit Options
You choose death benefit Option 1 or Option 2 at the time of application.
Option 1 (level amount option)
The death benefit is the greater of 1) the Policy's current face amount or 2)
the policy value on the date of death of the surviving insured multiplied by the
applicable percentage. The applicable percentage is 250% if the younger insured
is age 40 or below and the percentage declines with increasing ages. The death
benefit remains level unless the applicable percentage of policy value exceeds
the current face amount (in which case the death benefit varies as the policy
value varies).
Illustration of Option 1
Assume that the younger insured is under age 40 and that there is no loan amount
and that the policy face amount is $500,000.
Under Option 1, the death benefit must be equal or greater than 250% of the
policy value. If the policy value is more than $200,000, the death benefit is
greater than $500,000. Each additional dollar added to the policy value above
$200,000 increases the death benefit by $2.50. If the policy value exceeds
$200,000 and increases by $100 because of investment performance or premium
payments, the death benefit increases by $250.
Similarly, if the policy value exceeds $200,000, each dollar taken out of the
policy value reduces the death benefit by $2.50. For example, if the policy
value is reduced from $500,000 to $450,000 because of partial surrenders,
charges or negative investment performance, the death benefit is reduced from
$1,250,000 to $1,125,000. However, if at any time the policy value multiplied by
the applicable percentage is less than the face amount, the death benefit equals
the current face amount of the Policy.
The applicable percentage lowers as the younger insured's age increases. If the
current age of the younger insured in the illustration is 50 (rather than age
40), the applicable percentage would be 185%. The death benefit would not be
greater than the $500,000 face amount unless the policy value exceeded $270,270
rather than $200,000. Each dollar added to or taken from the policy value
changes the death benefit by $1.85 (rather than $2.50).
Option 2 (variable amount option)
The death benefit is equal to 1) the greater of the current face amount plus the
policy value on the date of death of the surviving insured or 2) the policy
value on the date of death of the surviving insured multiplied by the applicable
percentage.
Illustration of Option 2
Assume that the younger insured is under age 40 and that there is no loan amount
and that the policy face amount is $500,000.
A policy with a policy value of $100,000 has a death benefit of $600,000
($500,000 plus $100,000); a policy value of $300,000 has a death benefit of
$800,000 ($500,000 plus $300,000). The death benefit however must be at least
250% of the policy value. As a result, if the policy value exceeds $333,334, the
death benefit is greater than the face amount plus policy value. Each additional
dollar of policy value above $333,334 increases the death benefit by $2.50. If
the policy value exceeds $333,334 and increases by $100 because of investment
performance or premium payments, the death benefit increases by $250.
If the policy value exceeds $333,334, each dollar taken out of the policy value
reduces the death benefit by $2.50. For example, the policy value is reduced
from $400,000 to $340,000 because of partial surrenders, charges or negative
investment performance, the death benefit is reduced from $1,000,000 to
$850,000. However, if the policy value multiplied by the applicable percentage
is less than the policy face amount plus the policy value, then the death
benefit is the current face amount plus the policy value on the date of death of
the surviving insured.
The applicable percentage lowers as the younger insured's age increases. If the
current age of the younger insured in the illustration is 50 (rather than age
40), the applicable percentage would be 185%. The death benefit would be the sum
of the policy value plus $500,000 unless the policy value exceeded $588,237
rather than $333,334. Each dollar added to or taken from the policy value
changes the death benefit by $1.85 (rather than $2.50).
APPLICABLE PERCENTAGES*
(For ages not shown, the applicable percentages decrease by a pro rata
portion for each full year.)
Younger insured's attained age percentage
------------------------------ ----------
40 and under 250
45 215
50 185
55 150
60 130
65 120
70 115
75 through 90 105
95 and older 101
*We reserve the right, where allowed by law, to change or delete the
percentages as required by changes to the Code.
Change in Death Benefit Option
You may change the death benefit option on or after the second policy
anniversary. Up to two changes are allowed per policy year. Your request must be
made in writing and approved by us. The effective date of the change will be the
monthly date that coincides with or next follows our approval. Changing the
death benefit option changes the future cost of insurance.
If you change from Option 1 to Option 2, the new face amount is the old face
amount decreased by the policy value (as of the effective date of the change).
The change is not allowed if it would result in a face amount of less than
$100,000. A change from Option 1 to Option 2 may require evidence of
insurability for the new death benefit if required by our underwriting
guidelines in place at the time of your request.
If you change from Option 2 to Option 1, the new face amount is the old face
amount increased by the policy value (as of the effective date of the change). A
change from Option 2 to Option 1 does not require evidence of insurability.
Adjustment Options
Increase in policy face amount
You may request an increase at any time provided that the policy is not in a
grace period, and monthly policy charges are not being waived under a rider. The
minimum increase in face amount is $100,000. A face amount increase request made
in the first 60 policy months will increase the minimum monthly premium for the
remainder of the 60 months.
The request must be made on an adjustment application. The application must be
signed by the owner(s) and the insureds. If your request is not approved, no
changes are made to your Policy.
We will approve your request if:
o both insureds are alive at the time of your request; and
o the attained age of the older insured is age 90 or less and of the younger
insured is 85 or less at the time of the request; and
o we receive evidence satisfactory to us that at least one of the insureds is
insurable under our underwriting guidelines in place at the time of your
request.
The increase in face amount is in a risk classification determined by us. The
adjustment is effective on the monthly date on or next following our approval of
your request. No free-look period applies to an increase in face amount.
We calculate an "adjustment conditional receipt premium deposit" based on your
request for an increase. If you make a payment with your adjustment application
of at least as much as the adjustment conditional receipt premium deposit, we
issue a conditional receipt. The conditional receipt shows receipt of the
payment and outlines any interim insurance coverage.
Any payment made with the adjustment application is held in our General Account
without interest. If we approve the adjustment, on the effective date of the
adjustment, the amount of the premium payment being held minus the premium
expense charge, is moved to the Investment Accounts and/or Fixed Account. Your
current premium allocation percentages are used to make this allocation.
Decrease in policy face amount
After the first two policy years, you may request a decrease in the policy face
amount. No transaction fee is imposed on decreases in the policy face amount. A
decrease is requested as follows:
o the request must be made on an adjustment application;
o the application must be signed by both the owner(s) and the insured(s);
o the policy is not in a grace period;
o monthly policy charges are not being waived under a waiver rider; and
o the decrease may not reduce the policy face amount below $100,000.
CHARGES AND DEDUCTIONS
We make certain charges and deductions to support operation of the Policy and
the Separate Account. Some charges are deducted from premium payments when they
are received. Other charges are deducted on a monthly basis while others are
deducted at the time a Policy is surrendered or terminated. Fees for
administrative expenses are also charged on certain transfers and all partial
surrenders.
Premium Expense Charge
When we receive your premium payment, we deduct a premium expense charge.
Deductions from premiums during each of the first ten years and with respect to
premiums made because of a face amount increase, during the first ten years
after the increase, equal:
o sales load of 5.0% of premiums paid which are less than or equal to target
premiums (2.0% of premiums in excess of target premiums) (See Appendix B
for additional information on target premiums.)
o plus 2.20% for state and local taxes
o plus 1.25% for federal taxes.
Deductions from premiums after the tenth policy year (and after ten years of a
face amount increase) equal:
o sales load of 2.0% of premiums made*
o plus 2.20% for state and local taxes
o plus 1.25% for federal taxes.
* quaranteed not to exceed 5.0% of premiums paid which are less than or
equal to target premium (2.0% of premiums in excess of target premiums)
for New Jersey.
The sales load is intended to pay us for distribution expenses. These expenses
include commissions paid to registered representatives, printing of prospectuses
and sales literature, and advertising. Sales loads charged in any policy year
are not necessarily related to actual distribution expenses incurred in that
year. We expect that the majority of these expenses are incurred in the early
years of a Policy and that any deficit is made up during the life of the Policy.
If distribution expenses are more than the sales load (including the sales load
portion of the surrender charge), the deficit is made up from our other assets
or surplus in our General Account.
For the six month period ended December 31, 1999, we collected $127,056 in
premium expense charges and $87,669 in premium tax charges from these Policies.
Monthly Policy Charge
The monthly policy charge is intended to cover certain charges and expenses
incurred in connection with the Policy. Deductions are made up of:
o a charge for the cost of insurance;
o a charge for any optional benefit added by rider(s);
o a monthly administration charge; and
o a mortality and expense risks charge (applies only to the Investment
Accounts).
On the policy date and each monthly date thereafter, we deduct the charge from
your policy value in the Investment Accounts and/or Fixed Account (but not your
Loan Account). The deduction is made using your current monthly policy charge
allocation percentages. Your allocation percentages may be:
o the same as allocation percentages for premium payments;
o determined on a prorated basis; or
o determined by any other allocation method which we agree upon.
For each Investment Account and/or the Fixed Account must be zero or a whole
number. The total of the allocation percentages must equal 100. Allocation
percentages may be changed without charge. A request for an allocation change is
effective on the date we receive the request. If we cannot follow your
instructions because of insufficient value in any Investment Account and/or the
Fixed Account, the monthly policy charge is deducted on a prorated basis.
For the six month period ended December 31, 1999, administrative and cost of
insurance charges totaled $56,232 for these Policies.
Cost of Insurance Charge
Your monthly cost of insurance charge is (a) multiplied by (b minus c) where:
(a) is the cost of insurance rate described below divided by 1,000;
(b) is the death benefit at the beginning of the policy month, divided by
1.0024663 (the sum of one plus the monthly guaranteed fixed account
interest rate); and
(c) is the policy value at the beginning of the policy month calculated as if
the monthly policy charge was zero.
The cost of insurance rate is based on the gender*, issue age, duration since
issue, smoking status, and risk classification of each insured. We determine the
rate based on our expectation as to mortality experience. Changes in the cost of
insurance rates apply to all individuals of the same age, gender* and risk
classification. The rate will never exceed the rate shown in the Table of
Guaranteed Maximum Cost of Insurance Rates in the Policy. The guaranteed maximum
cost of insurance rate is based on the gender*, attained age and risk
classification of each insured.
Different cost of insurance rates may apply to face amount increases. The cost
of insurance for the increase is based on each insured's gender*, issue age,
duration since issue, smoking status, and risk classification at the time of the
increase. The guaranteed maximum cost of insurance rate for the increase is
based on each insured's gender*, attained age and risk classification at the
time of the increase.
* The cost of insurance rate for Policies issued in states which require
unisex pricing or in connection with employment related insurance and
benefit plans is not based on the gender of the insured.
Administration Charge
Current charges
o The current monthly administration charge is $8.00 per month.
o An additional monthly administration charge is imposed in the first ten
policy years (and ten years after an increase in the face amount) of $.07
per $1,000 of face amount. The charge of $.07 per $1,000 of face amount is
increased by $.005 per $1,000 for each insured that is classified as a
smoker.
Guaranteed administration charges
In all policy years, the guaranteed maximum monthly administration charge is
$8.00 per month plus ($.08 per $1,000 of face amount). The charge of $.08 per
$1,000 of face amount is increased by $.005 per $1,000 for each insured that is
classified as a smoker.
The monthly administration charge reimburses us for the administrative expenses
of the Policy and the Separate Account. Administration expenses do not include
the cost of selling the Policy. They do include the costs of: processing
applications; conducting medical examinations; determining insurability;
establishing and maintaining records; processing death benefit claims and policy
changes, reporting and overhead. We do not expect to collect more from the
administration charges than our actual accumulated expenses.
Mortality and Expense Risks Charge
The mortality risk we assume is that insureds may live for a shorter period of
time than we estimate. As a result, we would have to pay a greater amount in
death benefits than we collect in premium payments. The expense risk we assume
is that expenses incurred in issuing and administering the policy are greater
than we estimated. The Company expects to make a profit from this charge to the
extent it is not needed to provide benefits and pay expenses under the Policies.
Each month during the first nine policy years, we deduct a charge for these
risks at an annual rate of 0.80% of your Investment Account(s). Each month
thereafter, we deduct a charge at an annual rate of 0.30% of your Investment
Account(s).
We reserve the right to increase the annual rate but guarantee that the maximum
annual rate will not exceed 0.80%. If we increase the annual rate, the increase
will only apply to policies issued on or after the date of the increase.
For the six month period ended December 31, 1999, mortality and expense risks
charges totaled $3,970 for the Policies.
Transaction Charge
A transaction fee of the lesser of $25 or 2% of the surrender amount applies to
each partial surrender. The fee is withdrawn in the same proportion as the
allocation used for the most recent monthly policy charge.
We reserve the right to charge a transfer fee on each unscheduled transfer after
the 12th such transfer in a policy year. The fee will not be more than $25 per
unscheduled transfer.
Surrender Charge
Surrender charges vary based on the target premium of the policy and the
premiums paid. The charge applies only during the first ten policy years unless
there is a face amount increase. A face amount increase has its own surrender
charge period that begins on the adjustment date. The total surrender charge on
the policy is the sum of the surrender charges for the face amount at issue and
each face amount increase. The surrender charge is not affected by any decrease
in face amount or any change in face amount resulting from a change of death
benefit options.
The surrender charge compensates us for expenses relating to the sale of the
Policy. These include commissions, advertising and printing of prospectuses and
sales literature. The surrender charge also reimburses us for expenses incurred
in issuing the Policy. These expenses include processing the application
(primarily underwriting) and setting up records. This charge is intended to
cover the average anticipated issue expenses for all Policies. There may not be
a direct relationship between the amount of the charge for any given Policy and
the amount of expenses attributable to that Policy.
The surrender charge on an early surrender or Policy lapse is significant. As a
result, you should purchase a Policy only if you have the financial capacity to
keep it in force for a substantial period of time.
Surrender charge percentage
The surrender charge during any policy year is equal to the number of target
premiums from the table below multiplied by the applicable surrender charge
percentage also shown below. A description of how to calculate Joint Equivalent
Age (JEA) can be found in Appendix B.
Joint Equivalent Age (JEA) Number of
on policy or adjustment date target premiums
75 or less 1.00
76 through 80 0.90
81 through 85 0.75
86 or greater 0.65
Surrender Charge Percentage Table
Number of years since policy date The following percentage of
and/or the adjustment date surrender charge is payable
1 through 5 100.00%
6 95.24
7 85.71
8 71.43
9 52.38
10 28.57
11 and later 00.00
The surrender charge on a face amount increase is calculated by multiplying the
increase in target premium due to the face increase by the applicable number of
target premiums from the table above. This result is multiplied by the
applicable percentage from the Surrender Charge Percentage Table to get the
increase in surrender charges for all years.
During the six month period ended December 31, 1999 we collected $0.00 in
surrender charges from these Policies.
Other Charges
The Investment Accounts represent shares of divisions of the Separate Account.
The assets of each division are used to purchase shares in a corresponding
mutual fund at net asset value. The net asset value of the mutual fund reflects
management fees and operating expenses already deducted from the assets of the
mutual fund. Current management fees and operating expenses for each mutual fund
are shown in the section entitled THE FUNDS.
THE FIXED ACCOUNT
You may allocate net premiums and transfers from your Investment Account(s) to
the Fixed Account. The Fixed Account is part of our General Account. Because of
exemptions and exclusions contained in the Securities Act of 1933 and the
Investment Company Act of 1940, the Fixed Account has not been registered under
these acts. Neither the Fixed Account nor any interest in it is subject to the
provisions of these acts. As a result the SEC has not reviewed the disclosures
in this prospectus relating to the Fixed Account. However, disclosures relating
to the Fixed Account are subject to generally applicable provisions of the
federal securities laws relating to the accuracy and completeness of statements
made in prospectuses. You may obtain more information regarding the Fixed
Account from our home office or from a sales representative.
Our obligations with respect to the Fixed Account are supported by our General
Account. Subject to applicable law, we have sole discretion over the investment
of assets in the General Account.
We guarantee that net premiums allocated to the Fixed Account accrue interest
daily at an effective annual rate of 3% compounded annually. We may, in our sole
discretion, credit interest at a higher rate.
The mortality and expense risks charge is not imposed on amounts in the Fixed
Account. The value of your Fixed Account on any valuation day is:
o net premiums allocated to the Fixed Account
o plus transfers from the Investment Account(s)
o plus interest credited to the Fixed Account
o minus surrenders, surrender charges and monthly policy charges
o minus transaction fees allocated to the Fixed Account
o minus transfers to the Loan Account
o minus transfers to the Separate Account.
POLICY TERMINATION AND REINSTATEMENT
Policy Termination
You must make an initial minimum premium payment to have coverage under the
Policy.
If the net surrender value on any monthly date is less than the monthly policy
charge, a 61-day grace period begins. However, during the first 60 policy
months, the Policy will stay in force if (a minus b) is greater than or equal to
(c) where:
(a) is the sum of the premiums paid;
(b) is the sum of all existing policy loans, unpaid loan interest, partial
surrenders and transactions charges; and
(c) is the sum of the minimum monthly premiums since the policy date to the
most recent monthly date.
After the first 60 policy months, making premium payments under your planned
periodic premium schedule does not guarantee that your Policy will stay in force
unless:
o your Policy's net surrender value is at least equal to the monthly policy
charge on the current monthly date; or
o the death benefit guarantee rider is in effect.
Grace Period
The grace period begins when we send you a notice of pending lapse. The notice:
o is mailed to your last known post office address;
o shows the minimum payment required to keep the Policy in force; and
o shows the 61-day period during which we will accept the required payment.
If you are in a grace period, the minimum payment is equal to (a) plus (b)
divided by (c) where:
(a) is the amount by which the surrender charge is more than the policy value
on the monthly date at the start of the grace period before the monthly
policy charge is deducted;
(b) is three monthly policy charges; and
(c) is one minus the maximum premium expense charge percentage (see CHARGES AND
DEDUCTIONS - Premium Expense Charge).
This payment is intended to a) reimburse us for the monthly policy charges
during the grace period, and b) provide enough policy value to pay the monthly
policy charge on the first monthly date after the grace period. To cover past
due policy charges, if the grace period ends before we receive the minimum
payment, we keep any remaining value in the Policy.
Due to possible adverse market fluctuations, there is no guarantee that the
amount requested at the beginning of the grace period is enough to pay the
monthly policy charges as they are processed. If the net surrender value is not
at least as much as the monthly policy charge on any monthly date, a new 61-day
grace period starts.
The Policy is in force during a grace period. If we do not receive the required
payment, the Policy terminates as of the monthly date on or immediately
preceding the start of the grace period. If the surviving insured dies during a
grace period, policy proceeds are reduced by:
o all monthly policy charges due and unpaid at the death of the surviving
insured; and o any policy loans and unpaid loan interest.
The Policy also terminates when:
o you make a total policy surrender;
o death proceeds are paid; and
o maturity proceeds are paid.
When the Policy terminates, all of the owners' policy rights and privileges end.
Reinstatement
Subject to certain conditions, you may reinstate a Policy that terminated
because of insufficient value. The Policy may only be reinstated:
o prior to the maturity date and while at least one insured is alive;
o upon our receipt of satisfactory evidence of insurability (according to our
underwriting guidelines then in effect);
o if you make a payment of a reinstatement premium which is equal to (a) plus
(b) divided by (c) where:
(a) is the amount by which the surrender charge is more than the policy
value on the monthly date at the start of the grace period before the
monthly policy charge is deducted,
(b) is three monthly policy charges, and
(c) is one minus the maximum premium expense charge percentage (see CHARGES
AND DEDUCTIONS - Premium Expense Charge); and
o if the application for reinstatement is mailed to us within three years of
the Policy termination (in some states, we must provide a longer period of
time for Policy reinstatement).
If a policy loan or loan interest was unpaid when the Policy terminated, the
policy loan must be reinstated or repaid (loan interest is not collected for the
period the Policy was terminated).
We do not require payment of monthly policy charges during the period the Policy
was terminated. Reinstatement is effective on the next monthly date following
our approval of the reinstatement application. Premiums received with your
reinstatement application are held without interest until the reinstatement
date. They are allocated to your selected Investment Accounts and/or Fixed
Account on the reinstatement date. We will use the premium allocation
percentages in effect at the time of termination of the Policy unless you
provide new allocation instructions. The reinstated Policy has the same policy
date as the original Policy. Your rights and privileges as owner(s) are restored
upon reinstatement.
If you reinstate your Policy and then it is totally surrendered, a surrender
charge may be imposed. The charge, if any, is calculated based on the number of
years the Policy was in force. The period of time during which the Policy was
terminated is not credited toward the number of policy years to make this
calculation.
OTHER MATTERS
Voting Rights
We vote Investment Account shares held in the Separate Account at shareholder
meetings of the underlying mutual funds. We follow the voting instructions
received from people having the voting interest in the Account shares.
You have a voting interest under a Policy. You have one vote for each $100 of
policy value in the Investment Accounts. Fractional votes are allocated for
amounts less than $100. The number of votes on which you have the right to
instruct us is determined as of a date established by the mutual fund for
setting the shareholders eligible to vote.
According to procedures adopted by the mutual fund, voting instructions are
solicited by a written proxy statement before a shareholder meeting. We vote
other Account shares, for which no voting instructions are received, in the same
proportion as the shares for which we receive voting instructions. Account
shares held in our General Account are voted in proportion to instructions that
are received with respect to the participating contracts.
If we determine, under applicable law, that Account shares need not be voted
according to the instructions received, we may vote Account shares held in the
Separate Account in our own right.
We may, when required by state insurance regulatory authorities, disregard
voting instructions. This may be done if the instructions would require shares
to be voted to:
o change a subclassification or investment objective of the Account; or
o disapprove an investment advisory contract of the fund or Account; or
o approve changes initiated by an owner in the investment policy or
investment advisor of the Account or mutual fund if we reasonably
disapprove of the changes.
The change would be disapproved only if:
o the proposed change is contrary to state law;
o prohibited by state regulatory authorities; or
o we determine the change is inconsistent with the investment objectives of
the mutual fund.
If we disregard voting instructions, a summary of the action and the reason for
the actions will be included in the next semiannual report from the underlying
fund to owners.
Statement of Values
You receive an annual statement at the end of each policy year. The statement
will show:
o current death benefit;
o current policy value and surrender value;
o all premiums paid since the last statement;
o all charges since the last statement;
o any policy loans and unpaid loan interest;
o any partial surrenders since the last statement;
o the number of units and unit value;
o total value of each of your Investment Accounts and the Fixed Account;
o designated beneficiary(ies); and
o all riders included in the Policy.
You will also receive a statement as of the end of each calendar quarter. At any
time, you may request a current statement by telephoning 1-800-247-9988.
We also send you the reports required by the Investment Company Act of 1940.
Services Available by Telephone
Telephone Instructions
Unless you decline telephone privileges, instructions for the following
transactions may be given to us via the telephone:
o request a policy loan (loan proceeds are only mailed to the owner's address
of record);
o change in allocations of future premium payments;
o change in allocation of the monthly policy charge;
o change to your APR instructions;
o change to your DCA instructions; and
o provide instructions for unscheduled Investment Account and/or Fixed
Account transfers.
Instructions:
o may be given by calling us at 1-800-247-9988 between 7 a.m. and 9 p.m.
Central Time on any day that the New York Stock Exchange is open;
o must be received by us before the close of the New York Stock Exchange
(generally 3:00 p.m. Central Time) to be effective the day you call;
o are effective the next valuation day if not received until after the close
of the New York Stock Exchange; and
o from one joint owner are binding on all joint owners.
Although neither the Separate Account nor the Company is responsible for the
authenticity of telephone transaction requests, the Separate Account and the
Company reserve the right to refuse telephone orders. You are liable for a loss
resulting from a fraudulent telephone order that we reasonably believe is
genuine. We use reasonable procedures to assure instructions are genuine. If the
procedures are not followed, we may be liable for loss due to unauthorized or
fraudulent transactions. The procedures include: recording all telephone
instructions, requesting personal identification information (name, phone
number, social security number, birth date, etc.) and sending written
confirmation to the owner's address of record.
Direct Dial
You may receive information about your policy from our Direct Dial system
between 7 a.m. and 9 p.m. Central Time, Monday through Saturday. The Direct Dial
number is 1-800-247-9988. Through this automated system, you can:
o obtain information about unit values and policy values;
o initiate certain changes to your policy; and
o change your personal identification number.
Instructions from one joint owner are binding on all joint owners.
GENERAL PROVISIONS
The Contract
The entire contract is made up of applications, amendments, riders and
endorsements attached to the Policy, current data pages, copies of any
supplemental applications, amendments, endorsements and revised Policy or data
pages which are mailed to you. No statement, unless made in an application, is
used to void a Policy (or void an adjustment in the case of an adjustment
application). Only our corporate officers can agree to change or waive any
provisions of a Policy. Any change or waiver must be in writing and signed by an
officer of the Company.
Optional Insurance Benefits
Subject to certain conditions, you may add one or more supplemental benefits to
your Policy. These include:
o four year term insurance rider
o policy split option rider
o single life term insurance rider
o enhanced death benefit rider
o extended coverage rider
o death benefit guarantee rider
Detailed information concerning supplemental benefits may be obtained from an
authorized agent or our home office. Not all supplemental benefits are available
in all states. The cost, if any, of an optional insurance benefit is deducted as
part of your monthly policy charge.
Death Benefit Guarantee Rider (also known as the "no lapse guarantee")*
This rider provides that if the rider premium is paid, the Policy does not lapse
even if the net surrender value is not enough to pay the monthly policy charges
on a monthly date. This rider is automatically made a part of the policy if the
planned periodic premium is equal to or greater than the death benefit guarantee
premium or if the first year paid premium is large enough to satisfy the death
benefit (no lapse) guarantee premium requirement for one year.
The death benefit (no lapse) guarantee premium requirement is met if:
o the sum of all premiums paid
o minus any partial surrenders
o minus any policy loans and unpaid loan interest
is at least as much as the sum of death benefit guarantee monthly premiums from
the policy date to the most recent monthly date. Your most recent death benefit
(no lapse) guarantee premium is shown on your current data page.
The death benefit (no lapse) guarantee premium is based on the issue age, gender
(where permitted by law) and risk classification of each insured. The monthly
death benefit (no lapse) guarantee premium is considered to be zero for any
month that deductions are being waived. This premium may change if:
o the Policy face amount is changed;
o the death benefit option is changed;
o a rider is added or deleted; or o an adjustment is made to your Policy.
As a result of a change, an additional premium may be required to satisfy the
new death benefit (no lapse) guarantee premium.
If on any monthly date, the death benefit (no lapse) guarantee premium
requirement is not met, we send you a notice stating the premium required to
reinstate the rider. If the premium required to maintain the guarantee is not
received in our home office before the expiration of the 61-day grace period
(which begins when the notice is mailed), the death benefit (no lapse) guarantee
is no longer in effect and the rider is terminated. If the rider terminates, it
may not be reinstated.
* For Policies issued in New York only. This is not a rider but is included
as a separate provision of the policy form. There is no separate charge or
fee for this provision.
Extended Coverage Rider
This rider allows, under certain conditions, the Policy to remain in force until
the death of the surviving insured - with a death benefit being paid rather than
maturing the Policy.
This rider is not available on Policies issued in New York.
Misstatement of Age or Gender
If the age or, where applicable, gender of either of the insureds has been
misstated, we adjust the death benefit payable under your Policy to reflect the
amount that would have been payable at the correct age and gender.
Assignment
You may assign your Policy. Each assignment is subject to any payments made or
action taken by the Company prior to our notification of the assignment. We
assume no responsibility for the validity of any assignment.
An assignment must be made in writing and filed with us at our home office. The
irrevocable beneficiary(ies), if any, must authorize any assignment in writing.
Your rights, as well as those of the beneficiary(ies), are subject to any
assignment on file with us.
Ownership
You may change your ownership designation at any time. Your request must be in
writing and approved by us. After approval, the change is effective as of the
date you signed the request for change. We reserve the right to require that you
send us the Policy so that we can record the change.
Unless changed, the owner(s) is as named in the application. The owner(s) may
exercise every right and privilege of the Policy, subject to the rights of any
irrevocable beneficiary(ies) and any assignee(s).
All rights and privileges of ownership of a Policy end if the Policy is
surrendered, death or maturity proceeds are paid, or if the grace period ends
without our receiving the payment required to keep the Policy in force. The
rights and privileges end as of the monthly date on or immediately preceding the
start of the grace period.
If an owner dies before the Policy terminates, the surviving owner(s), if any,
succeeds to that person's ownership interest, unless otherwise specified. If all
owners die before the policy terminates, the Policy passes to the estate of the
last surviving owner. With our consent, you may specify a different arrangement
for contingent ownership.
Beneficiary
You have the right to name a beneficiary(ies) and contingent beneficiary(ies).
This may be done as part of the application process or by sending us a written
request. Unless you have named an irrevocable beneficiary, you may change your
beneficiary designation by sending us a written request. After approval, the
change is effective as of the date you signed the request for change. We reserve
the right to require that you send us the Policy so that we can record the
change.
If no beneficiary(ies) survives the death of the surviving insured, the death
proceeds are paid to the owner(s) or the estate of the owner(s) in equal
percentages unless otherwise specified.
Benefit Instructions
While either insured is alive, you may give us instructions for payment of death
proceeds under one of the benefit options of the Policy. The instructions or
changes to the instructions must be in writing. If you change the
beneficiary(ies), prior benefit instructions are revoked.
Benefit Payment Options
While the surviving insured is alive, you may arrange for death proceeds to be
paid in a lump sum or under one of several fixed benefit payment options. These
choices are also available if the Policy is surrendered or matures.
o Special Benefit Arrangement
A specially designed benefit option may be arranged with our approval.
o Proceeds left at interest
We hold the amount of the benefit on deposit. Interest payments are made
annually, semiannually, quarterly or monthly as selected.
o Fixed Income
We pay income of a fixed amount for a fixed period (not exceeding 30
years).
o Life Income
We pay income during a person's lifetime. A minimum guaranteed period may
be used.
o Joint and Survivor Life Income
We pay income during the lifetime of two people and continue until the
death of the survivor. This option includes a minimum guaranteed period of
10 years.
o Joint and Two-thirds Survivor Life Income
We pay an income during the lifetime of two people and two-thirds of the
original amount during the remaining lifetime of the survivor.
Interest at a rate set by us, but never less than required by state law, will be
applied to calculate the above benefit payment options.
Right to Exchange Policy
During the first 24 months after the policy date (except during a grace period),
you have the right to make an irrevocable, one-time election to transfer all of
your Investment Account values to the Fixed Account. No charge is imposed on
this transfer.
Your request must be in writing and be signed by the owner(s). The request must
be postmarked or delivered to our home office before the end of the 24-month
period. The transfer is effective when we receive your written request.
Non-Participating Policy
The Policies do not share in any divisible surplus of the Company.
Incontestability
We will not contest the insurance coverage provided by the Policy, except for
any increases in face amount, after the Policy has been in force during the
lifetime of either insured for a period of two years from the policy date. Any
face amount increase has its own two-year contestability period that begins on
the effective date of the adjustment. In many states, the time limit in the
incontestability period does not apply to fraudulent misrepresentations.
Suicide
Death proceeds are not paid if either insured dies by suicide, while sane or
insane, within two years of the policy date (or two years from the date of face
amount increase with respect to such increase). In the event of the suicide of
either insured within two years of the policy date, our only liability is a
refund of premiums paid, without interest, minus any policy loans and unpaid
loan interest and partial surrenders. In the event of suicide within two years
of a face amount increase, our only liability with respect to that increase is a
refund of the cost of insurance for the increase. If the suicide occurs at the
death of the first insured, this amount will be paid to the owner(s) of the
Policy. If the suicide occurs at the death of the surviving insured, this amount
will be paid to the beneficiary(ies).
For Policies issued in New York only, the above paragraph is not applicable. The
following provision applies only for Policies issued in New York.
If either insured dies by suicide, while sane or insane, within two years of the
policy date (of two years from the date of face amount increase with respect to
such increase), we will issue a single life variable life insurance policy to
the survivor without evidence of good health. The face amount of the new policy
will be one-half of the face amount of the original policy. We will refund
one-half of the premium received for the original policy.
Delay of Payments
Payment due to exercise of your rights under the free-look provision,
surrenders, policy loans, death or maturity proceeds, and transfers to or from
an Investment Account are generally made within five days after we receive your
instructions in a form acceptable to us. This period may be shorter where
required by law. However, payment of any amount upon return of the Policy, total
or partial surrender, policy loan, death, maturity or the transfer to or from a
division of the Separate Account may be deferred during any period when the
right to sell mutual fund shares is suspended as permitted under provisions of
the Investment Company Act of 1940 (as amended).
The right to sell shares may be suspended during any period when:
o trading on the New York Stock Exchange is restricted as determined by the
SEC or when the Exchange is closed for other than weekends and holidays, or
o an emergency exists, as determined by the SEC, as a result of which:
o disposal by a fund of securities owned by it is not reasonably
practicable;
o it is not reasonably practicable for a fund to fairly determine the
value of its net assets; or
o the SEC permits suspension for the protection of security holders.
If payments are delayed and your instruction is not canceled by your written
instruction, the amount of the transaction is determined the first valuation
date following the expiration of the permitted delay. The transaction is made
within five days thereafter.
In addition, payments on surrenders attributable to a premium payment made by
check may be delayed up to 15 days. This permits payment to be collected on the
check.
Addition, Deletion or Substitution of Investments
We reserve the right to make certain changes if, in our judgement, they best
serve your interests or are appropriate in carrying out the purpose of the
Policy. Any changes are made only to the extent and in the manner permitted by
applicable laws. Also, when required by law, we will obtain your approval of the
changes and approval from any appropriate regulatory authority. Approvals may
not be required in all cases. Examples of the changes we may make include:
o transfer assets in any division to another division or to the Fixed
Account;
o add, combine or eliminate divisions in the Separate Account; or
o substitute the shares of an Investment Account for the Investment Account
shares in any division:
o if shares of an Investment Account are no longer available for
investment; or
o if in our judgement, investment in an Investment Account becomes
inappropriate considering the purposes of the Separate Account.
If we eliminate or combine existing divisions or transfer assets from one
division to another, you may change allocation percentages and transfer any
value in an affected division to another Investment Account(s) and/or the Fixed
Account without charge. You may exercise this exchange privilege until the
latter of 60 days after a) the effective date of the change, or b) the date you
receive notice of the options available. You may only exercise this right if you
have an interest in the affected division(s).
OFFICERS AND DIRECTORS OF PRINCIPAL MANAGEMENT CORPORATION
The officers and directors of the investment advisor, Principal Management
Corporation, are shown below. This list includes some of the same people
(designated by *), who are serving in the same capacities as officers and
directors of the underwriter, Princor Financial Services Corporation. The
principal business address for each officer and director is: Principal Financial
Group, Des Moines, Iowa 50392.
*JOHN E. ASCHENBRENNER Director
CRAIG R. BARNES Vice President
*CRAIG L. BASSETT Treasurer
*MICHAEL J. BEER Executive Vice President
*
*DAVID J. DRURY Director
*RALPH C. EUCHER Director and President
*ARTHUR S. FILEAN Senior Vice President
*DENNIS P. FRANCIS Director
*PAUL N. GERMAIN Vice President - Mutual Fund
Operations
*ERNEST H. GILLUM Vice President - Product Development
*THOMAS J. GRAF Director
*J. BARRY GRISWELL Chairman of the Board and Director
*JOYCE N. HOFFMAN Vice President and Corporate
Secretary
*ELLEN Z. LAMALE Director
*JULIA M. LAWLER Director
*
*RICHARD L. PREY Director
*LAYNE A. RASMUSSEN Controller - Mutual Funds
*ELIZABETH R. RING Controller
*MICHAEL J. ROUGHTON Counsel
*JEAN B. SCHUSTEK Assistant Vice President -
Registered Products
EXECUTIVE OFFICERS OF PRINCIPAL LIFE INSURANCE COMPANY (OTHER THAN DIRECTORS):
JOHN EDWARD ASCHENBRENNER Executive Vice President
PAUL FRANCIS BOGNANNO Senior Vice President
GARY MERLYN CAIN Senior Vice President
CHARLES ROBERT DUNCAN Senior Vice President
DENNIS PAUL FRANCIS Senior Vice President
MICHAEL HARRY GERSIE Executive Vice President and Chief
Financial Officer
THOMAS JOHN GRAF Senior Vice President
ROBB BRYAN HILL Senior Vice President
DANIEL JOSEPH HOUSTON Senior Vice President
ELLEN ZISLIN LAMALE Senior Vice President and Chief Actuary
MARY AGNES O'KEEFE Senior Vice President
RICHARD LEO PREY Senior Vice President
KAREN ELIZABETH SHAFF Senior Vice President and General Counsel
ROBERT ALLEN SLEPICKA Senior Vice President
NORMAN RAUL SORENSEN Senior Vice President
CARL CHANSON WILLIAMS Senior Vice President and Chief
Information Officer
LARRY DONALD ZIMPLEMAN Senior Vice President
DIRECTORS OF PRINCIPAL LIFE INSURANCE COMPANY
Principal Life Insurance Company is managed by a Board of Directors. The
directors of the Company, their positions with the Company, including Board
Committee memberships, and their principal occupation during the last five
years, are as follows:
<TABLE>
<CAPTION>
Name, Positions and Offices Principal Occupation During Last 5 Years
<S> <C>
BETSY JANE BERNARD Executive Vice President, U.S. West since 1998. President and Chief
Director Executive Officer, since 1998. President and Chief Executive
Member, Nominating Committee Officer, AVIRNEX Communications Group since 1997. President and
Chief Executive Officer, Pacific Bell Communications since 1995.
JOCELYN CARTER-MILLER Corporate Vice President and Chief Marketing Officer, Motorola, Inc.since 1999.
Director Vice President, 1998-1999; Vice President and General Manager, since 1997.
Member, Audit Committee Prior thereto, Vice President of Latin American and Caribbean Operations of
Motorola.
DAVID JAMES DRURY Chairman, Principal Life Insurance Company since 2000. Chairman and Chief
Director Executive Officer 1995-2000.
Chairman of the Board
Chair, Executive Committee
CHARLES DANIEL GELATT, JR. President, NMT Corporation.
Director
Member, Executive Committee
Chair, Human Resources Committee
JOHN BARRY GRISWELL President and Chief Executive Officer, Principal Life Insurance
Director President 1998-200; Executive Vice President 1996-1998;
Senior Vice President 1991-1996.
GERALD DAVID HURD Retired. Chairman and Chief Executive Officer, Principal Life Insurance
Director Company 1989-1994.
Member, Executive and
Nominating Committees
CHARLES SAMUEL JOHNSON Retired. Executive Vice President of DuPont 1999-2000. Chairman,
Director President and Chief Executive Officer, Pioneer Hi-Bred International, Inc.
Member, Audit Committee 1996-1999. President and Chief Executive Officer 1995-1996. President and
Chief Operating Officer 1995.
WILLIAM TURNBALL KERR Chairman, President & Chief Executive Officer, Meredith Corporation since 1998.
Director President and Chief Executive Officer, 1997-1998; President and
Member, Executive Committee and Chief Operating Officer 1994-1997. Prior thereto, Executive Vice President.
Chair, Nominating Committee
LEE LIU Chairman Alliant Energy Corporation since 1998. Chairman and Chief Executive
Director Officer, IES Industries, Inc., 1996-1998. Prior thereto, Chairman, President
Member, Executive and Human and Chief Executive Officer.
Resources Committees
VICTOR HENDRIK LOEWENSTEIN Managing Partner, Egon Zehnder International since 1979.
Director
Member, Nominating Committee
RONALD DALE PEARSON Chairman, President and Chief Executive Officer, Hy-Vee, Inc. since
1989.
Director
Member, Human Resources Committee
FEDERICO FABIAN PENA Senior Advisor of Vestar Capital Partners since 1998. Secretary,
Director U.S. Department of Energy 1996-1998; Secretary, U.S. Department of
Member, Audit Committee Transportation 1993-1996.
JOHN ROY PRICE Managing Director, The Chase Manhattan Corporation since 1996. Prior thereto,
Director Managing Director, Chemical Banking Corporation.
Member, Nominating Committee
DONALD MITCHELL STEWART Senior Program Officer and Special Advisor to the President at the Carnegie
Director Corporation of New York since 1999. President, The College Board, 1986-1999.
Member, Human Resources Committee
ELIZABETH EDITH TALLETT President & CEO of Dioscor, Inc. & Serex, Inc. since 1996. President and Chief
Director Executive Officer, Transcell Technologies, Inc. 1992-1996.
Chair, Audit Committee
FRED WILLIAM WEITZ President and Chief Executive Officer, Essex Meadows, Inc. since 1995.
Director
Member, Human Resources Committee
</TABLE>
DISTRIBUTION OF THE POLICY
We intend to sell the Policies in all jurisdictions where we are licensed. The
Policies will be sold by licensed insurance agents who are also registered
representatives of broker-dealers registered with the SEC under the Securities
Exchange Act of 1934 who are members of the National Association of Securities
Dealers, Inc. (NASD).
The Policies will be distributed by the general distributor, Princor Financial
Services Corporation (Princor), which is an affiliate of ours. Princor is a
securities broker-dealer registered with the SEC and a member of the NASD. The
Policies may also be sold through other broker-dealers authorized by Princor and
applicable law to do so. Registered representatives of such broker-dealers may
be paid on a different basis than described below.
For Policies sold through Princor, commissions generally will be no more than
50% of premium received in the first policy year or the first year following an
adjustment up to the planned periodic premium (not to exceed target premium). In
addition, a commission of up to 3% of premium above the lesser of planned
periodic or target premium received in the first policy year (or first year
following an adjustment) may be paid. In the second through tenth years
following the policy date (or adjustment date), commissions range from 0% to 2%
of premiums received. A service fee of up to 2% is paid on premiums received
after the second policy year. Expense allowances may be paid to agents and
brokers based on premiums received.
For the six month period ended December 31, 1999, we paid Princor $813,793 to
compensate registered representatives of Princor for sale of these Policies.
STATE REGULATION
The Company is subject to the laws of the State of Iowa governing insurance
companies and to regulation by the Insurance Department of the State of Iowa. An
annual statement in a prescribed form must be filed by March 1 in each year
covering our operations for the preceding year and our financial condition on
December 31 of the prior year. Our books and assets are subject to examination
by the Commissioner of Insurance of the State of Iowa or her representatives at
all times. A full examination of our operations is conducted periodically by the
National Association of Insurance Commissioners. Iowa law and regulations also
prescribe permissible investments, but this does not involve supervision of the
investment management or policy of the Company.
In addition, we are subject to the insurance laws and regulations of other
states and jurisdictions where we are licensed to operate. Generally, the
insurance departments of these states and jurisdictions apply the laws of the
state of domicile in determining the field of permissible investments.
FEDERAL TAX MATTERS
The following description is a general summary of the tax rules, primarily
related to federal income taxes, which in our opinion are currently in effect.
These rules are based on laws, regulations and interpretations that are subject
to change at any time. This summary is not comprehensive and is not intended as
tax advice. While we reserve the right to change the Policy to assure it
continues to qualify as life insurance for tax purposes, we cannot make any
guarantee regarding the future tax treatment of any Policy. You should consult a
qualified tax adviser about the tax implications of taking action under a
Policy.
Tax Status of the Company and the Separate Account
We are taxed as an insurance company under subchapter L of the Code. The
Separate Account is not a separate taxable entity. Its operations are taken into
account by us in determining our tax liability. All Separate Account investment
income and realized net capital gains are reinvested and taken into account in
determining policy values and are automatically applied to increase the book
reserves associated with the Policies.
Charges for Taxes
We impose a federal tax charge equal to 1.25% of premiums received under the
Policy to compensate us for the federal income tax liability we incur by reason
of receiving those premiums. We believe that this charge is reasonable in
relation to the increased tax burden the Company incurs as a result of Section
848 of the Code. No other charge is currently made to the Separate Account for
federal income taxes of the Company that may be attributable to the Separate
Account. Periodically, we review the appropriateness of charges to the Separate
Account for federal income taxes. In the future, a charge may be made for
federal income taxes incurred by us and attributable to the Separate Account. In
addition, depending on the method of calculating interest on policy values
allocated to the Fixed Account, a charge may be imposed for the Policy's share
of our federal income taxes attributable to the Fixed Account.
Under current law, we may incur state or local taxes (in addition to premium
taxes) in several states. At present, these taxes are not significant. If there
is a material change attributable to state or local taxes, we reserve the right
to charge the Separate Account for the portion of taxes, if any, attributable to
the Separate Account.
Diversification Standards
The Policy should qualify as a life insurance contract as long as the underlying
investments for the Policy satisfy diversification requirements of Section
817(h) of the Code.
IRS Definition of Life Insurance
The Policy should qualify as a life insurance contract as long as it satisfies
certain tests under Section 7702 of the Code.
o The Policy qualifies if it satisfies a cash value accumulation test or a
guideline premium requirement and falls within a cash value corridor.
o If at any time a premium is paid which would result in total premiums
exceeding the current maximum premium allowed, we only accept that portion
of the premium which would make the total premiums equal the maximum.
Modified Endowment Contract Status
Section 7702A of the Code sets forth a classification of life insurance policies
known as "Modified Endowment Contracts." Policy loans and partial surrenders
from a policy that is classified as a modified endowment contract are taxable as
ordinary income to the owner in an amount equal to the lesser of the amount of
the loan/partial surrender or the excess of policy value over the owner's
investment in the Policy. Additionally, taxable distributions are subject to a
federal income tax penalty of 10% unless the payment is:
o made after the owner attains age 59 1/2;
o attributable to the taxpayer becoming disabled; or
o part of a series of substantially equal periodic payments (made not less
frequently than annually) made for the life or life expectancy of the
taxpayer.
Modified endowment contract classification may be avoided by limiting the amount
of premiums paid under the Policy. If you contemplate a large premium payment
under this Policy, and you wish to avoid modified endowment contract status, you
may contact us before making the payment and we will tell you the maximum amount
which can be paid into the Policy before it would become a modified endowment
contract.
Policy Surrenders and Partial Surrenders
A surrender or lapse of the Policy may have income tax consequences. Upon
surrender, the owner(s) is not taxed on the cash surrender value except for the
amount, if any, that exceeds the gross premiums paid less the untaxed portion of
any prior surrenders. The amount of any policy loan, upon surrender or lapse, is
added to the cash surrender value and treated, for this purpose, as if it had
been received. A loss incurred upon surrender is generally not deductible. The
tax consequences of a surrender may differ if the proceeds are received under
any income payment settlement option.
A total surrender of the Policy will, and a partial surrender may, be included
in your gross income to the extent that the distribution exceeds your investment
in the Policy. Partial surrenders generally are not taxable unless the total of
such surrenders exceeds total premiums paid to the date of partial surrender
less the untaxed portion of any prior partial surrenders. During the first 15
policy years, an amount may be taxable prior to your tax-free recovery of your
investment in the Policy if the partial surrender results in or is necessitated
by a reduction in death benefits. A qualified tax advisor should be consulted
regarding the tax consequences of any partial surrender during the first 15
policy years.
The increase in policy value of the Policy is not included in gross income
unless and until there is a total surrender or partial surrender under the
Policy. A complete surrender of the Policy will, and a partial surrender may, be
included in your gross income to the extent the distribution exceeds your
investment in the Policy. Transfers between the Investment Accounts and/or the
Fixed Account are not considered as distributions from the Policy and would not
be considered taxable income.
Policy Loans and Loan Interest
Loans received under the Policy are generally recognized as loans for tax
purposes and are not considered to be distributions subject to tax. Interest
paid to us as a result of a policy loan may or may not be deductible depending
on a number of factors. Due to the complexity of these factors, you should
consult a competent tax advisor as to the deductibility of interest paid on
policy loans. If the Policy is a modified endowment contract, a policy loan is
taxable to an amount equal to the lesser of the amount of the loan or the excess
of policy value over the owner's investment in the Policy.
Corporate Alternative Minimum Tax
Ownership of a Policy by certain corporations may affect the owner's exposure to
the corporate alternative minimum tax. In determining whether it is subject to
alternative minimum tax, the corporate owner must make two computations. First,
the corporation must take into account a portion of the current year's increase
in the built-in gain in its corporate owned policies. Second, the corporation
must take into account a portion of the amount by which the death benefits
received under any Policy exceed the sum of a) the premiums paid on that Policy
in the year of death, and b) the corporation's basis in the Policy (as measured
for alternative minimum tax purposes) as of the end of the corporation's tax
year immediately preceding the year of death. The corporate alternative minimum
tax does not apply to S Corporations. Such tax also does not apply to "Small
Corporations" as defined by Section 55(c) of the Code. Corporations with gross
receipts of $5,000,000 or less for their first taxable year after 1996, with
gross receipts not exceeding $7,500,000 after the first taxable year, will meet
this definition.
Exchange or Assignment of Policies
A change of policy, or an exchange or assignment of a Policy may have tax
consequences. An assignment or exchange may result in taxable income to the
transferring owner. For complete information with respect to policy assignments
and exchanges, a qualified tax advisor should be consulted.
Withholding
Withholding is generally required on certain taxable distributions under
insurance contracts. In the case of periodic payments, the withholding is at
graduated rates. With respect to non-periodic distributions, withholding is a
flat rate of 10%. You may elect to have either non-periodic or periodic payments
made without withholding except if your tax identification number has not been
furnished to us or if the IRS has notified us that the number you furnished is
incorrect.
Other Tax Issues
Federal estate taxes and state and local estate, inheritance and other taxes may
become due depending on applicable law and your circumstances or the
circumstances of the policy beneficiary(ies) if you or the insured dies. Any
person concerned about the estate implications of the Policy should consult a
competent tax advisor.
EMPLOYEE BENEFIT PLANS
The United States Supreme Court has held that optional annuity benefits under a
qualified deferred compensation plan cannot vary on the basis of gender. Polices
are available for use in connection with employment related insurance or benefit
plans which do not vary between male and female insured of a particular age and
underwriting classification. A competent tax advisor should be consulted on
these matters.
LEGAL OPINIONS
Legal matters applicable to the issue and sale of the Policies, including our
right to issue Policies under Iowa Insurance Law, have been passed upon by Karen
E. Shaff, Senior Vice President and General Counsel.
LEGAL PROCEEDINGS
There are no legal proceedings pending to which the Separate Account is a party
or which would materially affect the Separate Account.
REGISTRATION STATEMENT
This prospectus omits some information contained in the registration statement
that we have filed with the SEC. Statements contained in this prospectus are
summaries of the contents of the Policy and other legal documents.
OTHER VARIABLE INSURANCE CONTRACTS
The Company currently offers other variable life contracts that participate in
the Separate Account. In the future, we may designate additional group or
individual variable annuity contracts as participating in the Separate Account.
RESERVATION OF RIGHTS
The Company reserves the right to amend or terminate the special plans described
in this prospectus. Such plans include preauthorized premium payments, dollar
cost averaging (DCA) and automatic portfolio rebalancing (APR). In addition, we
reserve the right to charge a transfer fee of no more than $25 for each
unscheduled transfer after the 12th such transfer in a policy year. You would be
notified of any such action to the extent required by law.
CUSTOMER INQUIRIES
Your questions should be directed to: Survivorship Flexible Premium Variable
Universal Life, Principal Financial Group, P.O. Box 9296, Des Moines, Iowa
50306-9296, 1-800-247-9988.
INDEPENDENT AUDITORS
The financial statements of the Principal Life Insurance Company Variable Life
Separate Account and the consolidated financial statements of the Principal Life
Insurance Company are included in this prospectus. Those statements have been
audited by Ernst & Young LLP, independent auditors, 801 Grand Avenue, Des
Moines, Iowa 50309, for the periods indicated in their reports.
FINANCIAL STATEMENTS
The consolidated financial statements of Principal Life Insurance Company which
are included in this prospectus should be considered only as it relates to our
ability to meet our obligations under the Policy. They do not relate to
investment performance of the assets held in the Separate Account.
Report of Independent Auditors
Board of Directors and Participants
Principal Life Insurance Company
We have audited the accompanying individual and combined statements of net
assets of Principal Life Insurance Company Variable Life Separate Account
(comprised of the Aggressive Growth, Asset Allocation, Balanced, Bond, Capital
Value, Fidelity Contrafund, Fidelity Equity Income, Fidelity High Income,
Government Securities, Growth, High Yield, International, International
SmallCap, MicroCap, MidCap, MidCap Growth, Money Market, Putnam Global Asst
Allocation, Putnam Vista, Putnam Voyager, Real Estate, SmallCap, SmallCap
Growth, SmallCap Value, Stock Index 500, and Utilities Divisions) as of December
31, 1999, and the related statements of operations and changes in net assets for
each of the three years in the period then ended, except for those divisions
operating for portions of such periods as disclosed in the financial statements.
These financial statements are the responsibility of the management of Principal
Life Insurance Company. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of December 31, 1999, by
correspondence with the transfer agents. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the individual and combined financial position of the
respective divisions of Principal Life Insurance Company Variable Life Separate
Account at December 31, 1999, and the individual and combined results of their
operations and the changes in their net assets for the periods described above,
in conformity with accounting principles generally accepted in the United
States.
/s/ Ernst & Young LLP
Des Moines, Iowa
January 31, 2000
<PAGE>
Principal Life Insurance Company
Variable Life Separate Account
Statements of Net Assets
December 31, 1999
<TABLE>
<S> <C>
Assets
Investments:
Aggressive Growth Division:
Aggressive Growth Account - 1,385,242 shares at net asset value of $23.89 per
share (cost - $26,190,593) $ 33,093,420
Asset Allocation Division:
Asset Allocation Account - 236,770 shares at net asset value of $13.23 per share
(cost - $3,009,639) 3,132,463
Balanced Division:
Balanced Account - 798,006 shares at net asset value of $15.41 per share
(cost - $12,455,324) 12,297,279
Bond Division:
Bond Account - 610,444 shares at net asset value of $10.89 per share
(cost - $7,173,434) 6,647,735
Capital Value Division:
Capital Value Account - 925,617 shares at net asset value of $30.74 per share (cost
- $31,698,075) 28,453,464
Fidelity Contrafund Division:
Fidelity Variable Insurance Products Fund II: Contrafund Portfolio - 743,845
shares at net asset value of $29.15 per share (cost - $17,327,632) 21,683,086
Fidelity Equity Income Division:
Fidelity Variable Insurance Products Fund: Equity Income Portfolio - 364,586
shares at net asset value of $25.71 per share (cost - $9,030,110) 9,373,498
Fidelity High Income Division:
Fidelity Variable Insurance Products Fund: High Income Portfolio - 137,990 shares
at net asset value of $11.31 per share (cost - $1,611,305) 1,560,663
Government Securities Division:
Government Securities Account - 303,850 shares at net asset value
of $10.26 per share (cost - $3,306,124) 3,117,503
Growth Division:
Growth Account - 455,791 shares at net asset value of $23.56 per share
(cost - $9,133,648) 10,738,427
High Yield Division:
High Yield Account - 227,025 shares at net asset value of $7.44 per share
(cost - $1,968,898) 1,689,069
International Division:
International Account - 827,049 shares at net asset value of $15.95
per share (cost - $12,422,326) 13,191,433
See accompanying notes.
Assets (continued)
Investments (continued):
International SmallCap Division:
International SmallCap Account - 117,676 shares at net asset value of $16.66 per
share (cost - $1,374,646) $ 1,960,477
MicroCap Division:
MicroCap Account - 56,101 shares at net asset value of $8.07 per share
(cost - $456,520) 452,739
MidCap Division:
MidCap Account - 833,798 shares at net asset value of $36.90 per share
(cost - $26,646,772) 30,767,163
MidCap Growth Division:
MidCap Growth Account - 91,749 shares at net asset value of $10.66 per share
(cost - $867,453) 978,046
Money Market Division:
Money Market Account - 14,455,480 shares at net asset value of $1.00 per share
(cost - $14,455,480) 14,455,480
Putnam Global Asset Allocation Division:
Putnam Variable Trust Global Asset Allocation Fund - 21,555 shares at
net asset value of $19.60 per share (cost - $394,980) 422,470
Putnam Vista Division:
Putnam Variable Trust Vista Fund - 43,349 shares at net asset value of
$20.65 per share (cost - $692,872) 895,165
Putnam Voyager Division:
Putnam Variable Trust Voyager Fund - 132,239 shares at net asset value
of $66.11 per share (cost - $692,872) 8,742,337
Real Estate Division:
Real Estate Account - 8,978 shares at net asset value of $8.20 per share
(cost - $78,960) 73,623
SmallCap Division:
SmallCap Account - 102,338 shares at net asset value of $10.74 per share
(cost - $942,023) 1,099,108
SmallCap Growth Division:
SmallCap Growth Account - 110,493 shares at net asset value of $19.56 per share
(cost - $1,423,453) 2,161,250
SmallCap Value Division:
SmallCap Value Account - 61,984 shares at net asset value of $10.06 per share
(cost - $539,668) 623,561
Stock Index 500 Division:
Stock Index 500 Account - 626,024 shares at net asset value of $10.71 per share
(cost - $6,383,685) 6,704,714
Utilities Division:
Utilities Account - 40,118 shares at net asset value of $10.90 per share
(cost - $438,345) 437,284
Combined net assets $214,751,457
</TABLE>
Principal Life Insurance Company
Variable Life Separate Account
Statements of Net Assets (continued)
<TABLE>
December 31, 1999
<CAPTION>
Units Unit
Value
<S> <C> <C> <C>
Net assets are represented by:
Aggressive Growth Division:
PrinFlex Life 1,604,692 $20.47 $33,005,183
Survivorship Variable Universal Life 7,135 12.37 88,237
33,093,420
Asset Allocation Division:
PrinFlex Life 197,598 15.02 2,966,990
Survivorship Variable Universal Life 14,900 11.11 165,473
3,132,463
Balanced Division:
Flex Variable Life 128,714 30.14 3,879,380
PrinFlex Life 629,662 13.24 8,337,935
Survivorship Variable Universal Life 8,042 9.94 79,964
12,297,279
Bond Division:
Flex Variable Life: 78,892 23.11 1,823,458
PrinFlex Life 415,598 11.51 4,783,580
Survivorship Variable Universal Life 4,061 10.02 40,697
6,647,735
Capital Value Division:
Flex Variable Life 244,078 36.02 8,791,449
PrinFlex Life 1,441,876 13.61 19,622,569
Survivorship Variable Universal Life 4,293 9.19 39,446
28,453,464
Fidelity Contrafund Division:
PrinFlex Life 1,100,301 19.56 21,527,307
Survivorship Variable Universal Life 13,718 11.36 155,779
21,683,086
Fidelity Equity Income Division:
PrinFlex Life 639,599 14.55 9,309,245
Survivorship Variable Universal Life 6,608 9.72 64,253
9,373,498
Fidelity High Income Division - PrinFlex Life 130,948 11.92 1,560,663
Government Securities Division:
PrinFlex Life 261,482 11.80 3,084,559
Survivorship Variable Universal Life 3,244 10.16 32,944
3,117,503
See accompanying notes.
<CAPTION>
Units Unit
Value
<S> <C> <C> <C>
Net assets are represented by (continued):
Growth Division:
PrinFlex Life 623,469 $17.14 $10,688,949
Survivorship Variable Universal Life 4,532 10.92 49,478
10,738,427
High Yield Division - Flex Variable Life 78,154 21.65 1,689,069
International Division:
PrinFlex Life 866,405 15.18 13,150,716
Survivorship Variable Universal Life 3,520 11.57 40,717
13,191,433
International SmallCap Division:
PrinFlex Life 110,487 17.55 1,938,585
Survivorship Variable Universal Life 1,467 14.92 21,892
1,960,477
MicroCap Division:
PrinFlex Life 53,079 8.09 429,246
Survivorship Variable Universal Life 2,578 9.11 23,493
452,739
MidCap Division:
Flex Variable Life 270,266 46.06 12,447,196
PrinFlex Life 1,299,467 14.10 18,317,426
Survivorship Variable Universal Life 228 11.14 2,541
30,767,163
MidCap Growth Division:
PrinFlex Life 90,805 10.74 975,645
Survivorship Variable Universal Life 221 10.86 2,401
978,046
Money Market Division:
Flex Variable Life 36,477 17.04 621,512
PrinFlex Life 1,036,582 11.54 11,963,764
Survivorship Variable Universal Life 183,318 10.20 1,870,204
14,455,480
Putnam Global Asset Allocation Division:
PrinFlex Life 33,053 11.50 380,256
Survivorship Variable Universal Life 3,887 10.86 42,214
422,470
Putnam Vista Division:
PrinFlex Life 55,171 16.03 884,360
Survivorship Variable Universal Life 776 13.92 10,805
895,165
Principal Life Insurance Company
Variable Life Separate Account
Statements of Net Assets (continued)
December 31, 1999
<CAPTION>
Units Unit
Value
<S> <C> <C> <C>
Net assets are represented by (continued):
Putnam Voyager Division:
PrinFlex Life 501,679 $17.13 $ 8,595,141
Survivorship Variable Universal Life 10,333 14.25 147,196
8,742,337
Real Estate Division - PrinFlex Life 8,240 8.93 73,623
SmallCap Division:
PrinFlex Life 94,724 11.48 1,087,335
Survivorship Variable Universal Life 986 11.94 11,773
1,099,108
SmallCap Growth Division:
PrinFlex Life 106,489 20.09 2,138,929
Survivorship Variable Universal Life 1,404 15.90 22,321
2,161,250
SmallCap Value Division:
PrinFlex Life 56,377 10.34 582,707
Survivorship Variable Universal Life 3,687 11.08 40,854
623,561
Stock Index 500 Division:
PrinFlex Life 604,329 11.05 6,676,666
Survivorship Variable Universal Life 2,528 11.09 28,048
6,704,714
Utilities Division:
PrinFlex Life 35,670 11.83 421,894
Survivorship Variable Universal Life 1,566 9.83 15,390
437,284
Combined net assets $214,751,457
</TABLE>
See accompanying notes.
Principal Life Insurance Company
Variable Life Separate Account
Statements of Operations
<TABLE>
Years ended December 31, 1999, 1998 and 1997
<CAPTION>
Aggressive
Growth
Combined Division (1)
<S> <C> <C>
Year ended December 31, 1999 Investment income (loss) Income:
Dividends $ 3,065,326 $ -
Capital gains distributions 9,306,861 2,005,405
12,372,187 2,005,405
Expenses:
Mortality and expense risks 1,367,910 182,021
Net investment income (loss) 11,004,277 1,823,384
Realized and unrealized gains (losses) on investments
Net realized gains (losses) on investments 646,392 88,148
Change in net unrealized appreciation or depreciation of investments 11,074,319 6,010,958
Net increase (decrease) in net assets resulting from operations $22,724,988 $7,922,490
Year ended December 31, 1998
Investment income (loss) Income:
Dividends $ 1,927,629 $ 25,269
Capital gains distributions 3,545,632 576,813
5,473,261 602,082
Expenses:
Mortality and expense risks 736,803 74,911
Net investment income (loss) 4,736,458 527,171
Realized and unrealized gains (losses) on investments
Net realized gains (losses) on investments 1,677,430 11,214
Change in net unrealized appreciation or depreciation of investments 1,393,781 947,122
Net increase (decrease) in net assets resulting from operations $ 7,807,669 $1,485,507
Year ended December 31, 1997
Investment income (loss) Income:
Dividends $ 980,811 $ 8,174
Capital gains distributions 2,062,456 410,207
3,043,267 418,381
Expenses:
Mortality and expense risks 323,452 12,033
Net investment income (loss) 2,719,815 406,348
Realized and unrealized gains (losses) on investments
Net realized gains on investments 1,992,490 2,207
Change in net unrealized appreciation or depreciation of investments 2,414,101 (55,253)
Net increase (decrease) in net assets resulting from operations $ 7,126,406 $ 353,302
<FN>
(1) Commenced operations February 1, 1997.
</FN>
</TABLE>
See accompanying notes
<TABLE>
<CAPTION>
Asset Capital Fidelity Fidelity Equity Fidelity High
Allocation Balanced Bond Valule Contrafund Income Income
Division (1) Division Division Division Division (1) Division (1) Division (1)
<S> <C> <C> <C> <C> <C> <C>
$ 72,994 $421,363 $ 423,106 $ 631,298 $ 45,256 $ 81,671 $107,614
220,018 458,007 - 3,121,167 331,881 180,535 4,023
293,012 879,370 423,106 3,752,465 377,137 262,206 111,637
20,257 93,638 47,388 227,884 115,541 66,774 12,593
272,755 785,732 375,718 3,524,581 261,596 195,432 99,044
18,368 77,332 (8,182) 207,213 36,522 26,811 (18,366)
136,643 (695,498) (552,153) (5,167,258) 3,000,192 51,551 9,792
$427,766 $167,566 $(184,617) $(1,435,464) $3,298,310 $273,794 $ 90,470
$ 37,595 $278,168 $ 200,418 $ 398,541 $ 17,790 $ 18,251 $ 31,106
39,061 298,323 2,083 748,100 130,883 64,952 19,765
76,656 576,491 202,501 1,146,641 148,673 83,203 50,871
9,173 63,126 24,494 136,738 37,872 24,478 7,171
67,483 513,365 178,007 1,009,903 110,801 58,725 43,700
(1,770) 161,523 33,503 281,655 12,594 5,628 (11,177)
10,057 118,060 (19,726) 461,090 1,240,221 219,300 (81,364)
$ 75,770 $792,948 $ 191,784 $ 1,752,648 $1,363,616 $283,653 $(48,841)
$ 11,857 $150,137 $ 136,267 $ 211,818 $ - $ - $ -
42,154 346,134 - 794,643 - - -
54,011 496,271 136,267 1,006,461 - - -
1,700 38,702 14,802 69,600 6,014 3,260 1,353
52,311 457,569 121,465 936,861 (6,014) (3,260) (1,353)
549 236,637 18,598 342,684 850 630 3,224
(23,876) 104,396 55,567 895,157 115,040 72,538 20,931
$ 28,984 $798,602 $ 195,630 $ 2,174,702 $ 109,876 $ 69,908 $ 22,802
</TABLE>
<PAGE>
Principal Life Insurance Company
Variable Life Separate Account
Statements of Operations (continued)
<TABLE>
Years ended December 31, 1999, 1998 and 1997
<CAPTION>
Government
Securities Growth
Division (1) Division (1)
<S> <C> <C>
Year ended December 31, 1999 Investment income (loss) Income:
Dividends $181,309 $ 61,438
Capital gains distributions - 26,610
181,309 88,048
Expenses:
Mortality and expense risks 29,098 65,974
Net investment income (loss) 152,211 22,074
Realized and unrealized gains (losses) on investments
Net realized gains (losses) on investments (23,023) 35,999
Change in net unrealized appreciation or depreciation of investments (179,101) 1,136,770
Net increase (decrease) in net assets resulting from operations $ (49,913) $1,194,843
Year ended December 31, 1998 Investment income (loss) Income:
Dividends $111,671 $ 46,962
Capital gains distributions - 44,586
111,671 91,548
Expenses:
Mortality and expense risks 14,161 22,163
Net investment income (loss) 97,510 69,385
Realized and unrealized gains (losses) on investments
Net realized gains (losses) on investments 1,370 8,386
Change in net unrealized appreciation or depreciation of investments (6,358) 437,013
Net increase (decrease) in net assets resulting from operations $ 92,522 $ 514,784
Year ended December 31, 1997 Investment income (loss) Income:
Dividends $ 5,365 $ 9,349
Capital gains distributions - 5,271
5,365 14,620
Expenses:
Mortality and expense risks 138 2,499
Net investment income (loss) 5,227 12,121
Realized and unrealized gains (losses) on investments
Net realized gains on investments 15 299
Change in net unrealized appreciation or depreciation of investments (3,162) 30,996
Net increase (decrease) in net assets resulting from operations $ 2,080 $ 43,416
<FN>
(1) Commenced operations February 1, 1997.
(2) Commenced operations May 1, 1998.
</FN>
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
High International MidCap Money
Yield International SmallCap MicroCap MidCap Growth Market
Division Division (1) Division (2) Division (2) Division Division (2) Division
<S> <C> <C> <C> <C> <C> <C>
$ 156,525 $ 331,297 $ - $ 614 $ 93,198 $ 1,567 $407,602
- 1,187,285 77,693 - 1,313,207 - -
156,525 1,518,582 77,693 614 1,406,405 1,567 407,602
15,977 88,959 6,069 2,622 228,629 5,079 93,734
140,548 1,429,623 71,624 (2,008) 1,177,776 (3,512) 313,868
(83,063) 34,900 29,313 539 142,810 9,001 -
(35,529) 942,834 570,819 (4,874) 2,019,372 82,583 -
$ 21,956 $2,407,357 $671,756 $(6,343) $3,339,958 $88,072 $313,868
$202,766 $ 118,274 $ 851 $ 620 $ 146,679 $ - $290,641
- 238,049 - - 1,383,017 - -
202,766 356,323 851 620 1,529,696 - 290,641
16,917 47,404 732 326 185,626 637 67,849
185,849 308,919 119 294 1,344,070 (637) 222,792
(1,713) 5,582 (148) (681) 1,170,701 249 -
(222,572) (8,068) 15,012 1,093 (1,927,129) 28,009 -
$ (38,436) $ 306,433 $ 14,983 $ 706 $ 587,642 $27,621 $222,792
$ 162,794 $ 44,308 $ - $ - $ 121,340 $ - $119,402
- 73,919 - - 390,128 - -
162,794 118,227 - - 511,468 - 119,402
11,434 9,278 - - 127,942 - 24,697
151,360 108,949 - - 383,526 - 94,705
19,548 678 - - 1,366,571 - -
(27,928) (165,660) - - 1,395,355 - -
$142,980 $ (56,033) $ - $ - $3,145,452 $ - $ 94,705
</TABLE>
<PAGE>
Principal Life Insurance Company
Variable Life Separate Account
Statements of Operations (continued)
<TABLE>
Years ended December 31, 1999 and 1998
<CAPTION>
Putnam Global Putnam
Asset Allocation Vista
Division (2) Division (2)
<S> <C> <C>
Year ended December 31, 1999 Investment income (loss) Income:
Dividends $ 3,412 $ -
Capital gains distributions 9,719 62,859
13,131 62,859
Expenses:
Mortality and expense risks 2,385 2,960
Net investment income (loss) 10,746 59,899
Realized and unrealized gains (losses) on investments
Net realized gains (losses) on investments 4,668 5,780
Change in net unrealized appreciation or depreciation of investments 23,177 181,556
Net increase (decrease) in net assets resulting from operations $38,591 $247,235
Year ended December 31, 1998 Investment income (loss) Income:
Dividends $ - $ -
Capital gains distributions - -
- -
Expenses:
Mortality and expense risks 120 174
Net investment income (loss) (120) (174)
Realized and unrealized gains (losses) on investments
Net realized gains (losses) on investments 140 252
Change in net unrealized appreciation or depreciation of investments 4,313 20,737
Net increase (decrease) in net assets resulting from operations $ 4,333 $ 20,815
<FN>
(2) Commenced operations May 1, 1998.
(3) Commenced operations May 1, 1999.
</FN>
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
Putnam SmallCap SmallCap Stock
Voyager Real Estate SmallCap Growth Value Index 500 Utilities
Division (2) Division (2) Division (2) Division (2) Division (2) Division (3) Division (2)
<S> <C> <C> <C> <C> <C> <C>
$ 1,764 $ 3,569 $ 331 $ - $ 3,592 $ 27,669 $8,137
163,482 - 88,145 19,242 - 35,810 1,773
165,246 3,569 88,476 19,242 3,592 63,479 9,910
29,437 376 4,836 5,327 2,821 15,615 1,916
135,809 3,193 83,640 13,915 771 47,864 7,994
16,417 (785) 10,826 30,664 2,968 377 1,155
2,300,449 (5,017) 145,118 705,827 78,477 321,029 (3,398)
$2,452,675 $(2,609) $239,584 $750,406 $82,216 $369,270 $5,751
$ - $ 867 $ 24 $ - $ 512 - $ 624
- - - - - - -
- 867 24 - 512 - 624
1,414 56 557 385 255 - 64
(1,414) 811 (533) (385) 257 - 560
45 (64) (75) (20) (136) - 372
105,601 (320) 11,967 31,970 5,416 - 2,337
$ 104,232 $ 427 $ 11,359 $ 31,565 $ 5,537 - $3,269
</TABLE>
<PAGE>
Principal Life Insurance Company
Variable Life Separate Account
Statements of Changes in Net Assets
<TABLE>
Year ended December 31, 1999
<CAPTION>
Aggressive
Growth
Combined Division
<S> <C> <C>
Net assets at January 1, 1999 $121,091,275 $14,244,041
Increase (decrease) in net assets
Operations:
Net investment income (loss) 11,004,277 1,823,384
Net realized gains (losses) on investments 646,392 88,148
Change in net unrealized appreciation or depreciation of investments 11,074,319 6,010,958
Net increase (decrease) in net assets resulting from operations 22,724,988 7,922,490
Policy related transactions:
Net premium payments, less sales charges and applicable premium
taxes 152,891,171 16,297,188
Contract terminations and surrenders (5,315,548) (453,060)
Death benefit payments (63,672) (7,313)
Policy loan transfers (2,471,181) (393,765)
Transfers to other contracts (54,484,314) (1,675,940)
Cost of insurance and administration charges (18,231,821) (2,653,004)
Surrender charges (1,389,441) (187,217)
Increase in net assets from policy related transactions 70,935,194 10,926,889
Total increase 93,660,182 18,849,379
Net assets at December 31, 1999 $214,751,457 $33,093,420
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
Asset Capital Fidelity Fidelity Fidelity High
Allocation Balanced Bond Valule Contrafund Equity Income Income
Division Division Division Division Division Division Division
<S> <C> <C> <C> <C> <C> <C>
$1,592,829 $9,879,189 $3,953,245 $22,971,942 $8,023,001 $4,905,541 $1,064,791
272,755 785,732 375,718 3,524,581 261,596 195,432 99,044
18,368 77,332 (8,182) 207,213 36,522 26,811 (18,366)
136,643 (695,498) (552,153) (5,167,258) 3,000,192 51,551 9,792
427,766 167,566 (184,617) (1,435,464) 3,298,310 273,794 90,470
1,835,680 6,113,533 5,045,651 14,665,546 13,567,422 6,456,166 1,004,457
(41,872) (449,646) (341,883) (779,500) (229,535) (156,447) (70,361)
(2,944) (4,689) (1,456) (16,643) (4,835) (221) (36)
(64,353) (147,452) 69,090 (159,843) (182,637) (174,979) 8,724
(337,090) (2,132,506) (1,149,010) (4,080,476) (1,002,866) (976,597) (360,193)
(260,250) (1,020,029) (691,942) (2,533,293) (1,690,923) (889,111) (148,114)
(17,303) (108,687) (51,343) (178,805) (94,851) (64,648) (29,075)
1,111,868 2,250,524 2,879,107 6,916,986 10,361,775 4,194,163 405,402
1,539,634 2,418,090 2,694,490 5,481,522 13,660,085 4,467,957 495,872
$3,132,463 $12,297,279 $6,647,735 $28,453,464 $21,683,086 $9,373,498 $1,560,663
</TABLE>
<PAGE>
Principal Life Insurance Company
Variable Life Separate Account
Statements of Changes in Net Assets (continued)
<TABLE>
Year ended December 31, 1999
<CAPTION>
Government
Securities Growth
Division Division
<S> <C> <C>
Net assets at January 1, 1999 $3,266,712 $4,760,835
Increase (decrease) in net assets
Operations:
Net investment income (loss) 152,211 22,074
Net realized gains (losses) on investments (23,023) 35,999
Change in net unrealized appreciation or depreciation of investments (179,101) 1,136,770
Net increase (decrease) in net assets resulting from operations (49,913) 1,194,843
Policy related transactions:
Net premium payments, less sales charges and applicable premium
taxes 2,370,343 7,116,531
Contract terminations and surrenders (11,368) (174,656)
Death benefit payments (90) (80)
Policy loan transfers 3,547 (137,542)
Transfers to other contracts (2,222,249) (933,539)
Cost of insurance and administration charges (234,781) (1,015,792)
Surrender charges (4,698) (72,173)
Increase (decrease) in net assets from policy related transactions (99,296) 4,782,749
Total increase (149,209) 5,977,592
Net assets at December 31, 1999 $3,117,503 $10,738,427
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
International MidCap Money
High Yield International SmallCap MicroCap MidCap Growth Market
Division Division Division Division Division Division Division
<S> <C> <C> <C> <C> <C> <C>
$2,269,099 $ 7,800,249 $ 316,190 $149,378 $25,463,610 $315,903 $ 8,335,116
140,548 1,429,623 71,624 (2,008) 1,177,776 (3,512) 313,868
(83,063) 34,900 29,313 539 142,810 9,001 -
(35,529) 942,834 570,819 (4,874) 2,019,372 82,583 -
21,956 2,407,357 671,756 (6,343) 3,339,958 88,072 313,868
435,443 6,417,856 1,229,935 368,670 11,141,276 878,861 40,630,667
(706,562) (171,017) (11,949) (1,103) (1,108,369) (10,284) (526,416)
(1,481) (403) - - (23,450) - (31)
(19,235) (167,118) (97,474) (6,935) (579,695) (5,191) (280,402)
(136,183) (1,986,291) (49,357) (8,950) (4,628,585) (195,196) (31,813,986)
(128,426) (1,038,531) (93,687) (41,522) (2,628,217) (89,869) (1,987,469)
(45,542) (70,669) (4,937) (456) (209,365) (4,250) (215,867)
(601,986) 2,983,827 972,531 309,704 1,963,595 574,071 5,806,496
(580,030) 5,391,184 1,644,287 303,361 5,303,553 662,143 6,120,364
$1,689,069 $13,191,433 $1,960,477 $452,739 $30,767,163 $978,046 $14,455,480
</TABLE>
<PAGE>
Principal Life Insurance Company
Variable Life Separate Account
Statements of Changes in Net Assets (continued)
<TABLE>
Year ended December 31, 1999
<CAPTION>
Putnam Global Putnam
Asset Allocation Vista
Division Division
<S> <C> <C>
Net assets at January 1, 1999 $ 75,231 $123,051
Increase (decrease) in net assets
Operations:
Net investment income (loss) 10,746 59,899
Net realized gains (losses) on investments 4,668 5,780
Change in net unrealized appreciation or depreciation of investments 23,177 181,556
Net increase (decrease) in net assets resulting from operations 38,591 247,235
Policy related transactions:
Net premium payments, less sales charges and applicable premium
taxes 441,210 628,024
Contract terminations and surrenders (2,330) (6,403)
Death benefit payments - -
Policy loan transfers (601) (5,925)
Transfers to other contracts (85,053) (32,861)
Cost of insurance and administration charges (43,615) (55,310)
Surrender charges (963) (2,646)
Increase in net assets from policy related transactions 308,648 524,879
Total increase 347,239 772,114
Net assets at December 31, 1999 $422,470 $895,165
<FN>
(1) Commenced operations May 1, 1999.
</FN>
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
Putnam SmallCap SmallCap Stock
Voyager Real Estate SmallCap Growth Value Index 500 Utilities
Division Division Division Division Division Division (1) Division
<S> <C> <C> <C> <C> <C> <C>
$ 899,548 $31,709 $ 250,636 $ 209,695 $144,138 $ - $ 45,596
135,809 3,193 83,640 13,915 771 47,864 7,994
16,417 (785) 10,826 30,664 2,968 377 1,155
2,300,449 (5,017) 145,118 705,827 78,477 321,029 (3,398)
2,452,675 (2,609) 239,584 750,406 82,216 369,270 5,751
6,453,995 62,476 782,251 1,479,309 496,663 6,494,864 477,154
(30,704) (586) (2,802) (7,272) (6,635) (13,946) (842)
- - - - - - -
(47,124) (75) 17,498 (95,917) (518) 5,779 (9,038)
(354,009) (6,771) (121,595) (79,325) (36,013) (44,128) (35,545)
(619,356) (10,279) (65,306) (92,641) (53,548) (101,362) (45,444)
(12,688) (242) (1,158) (3,005) (2,742) (5,763) (348)
5,390,114 44,523 608,888 1,201,149 397,207 6,335,444 385,937
7,842,789 41,914 848,472 1,951,555 479,423 6,704,714 391,688
$8,742,337 $73,623 $1,099,108 $2,161,250 $623,561 $6,704,714 $437,284
</TABLE>
<PAGE>
Principal Life Insurance Company
Variable Life Separate Account
Statements of Changes in Net Assets (continued)
<TABLE>
Year ended December 31, 1998
<CAPTION>
Aggressive
Growth
Combined Division
<S> <C> <C>
Net assets at January 1, 1998 $ 57,094,676 $ 3,915,455
Increase (decrease) in net assets
Operations:
Net investment income (loss) 4,736,458 527,171
Net realized gains (losses) on investments 1,677,430 11,214
Change in net unrealized appreciation or depreciation of investments 1,393,781 947,122
Net increase (decrease) in net assets resulting from operations 7,807,669 1,485,507
Policy related transactions:
Net premium payments, less sales charges and applicable premium taxes 120,735,689 11,625,624
Contract terminations and surrenders (9,524,969) (103,562)
Death benefit payments (30,033) (2,799)
Policy loan transfers (1,569,958) (179,094)
Transfers to other contracts (42,264,927) (1,075,297)
Cost of insurance and administration charges (10,698,734) (1,364,250)
Surrender charges (458,138) (57,543)
Increase in net assets from policy related transactions 56,188,930 8,843,079
Total increase 63,996,599 10,328,586
Net assets at December 31, 1998 $121,091,275 $14,244,041
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
Asset Capital Fidelity Fidelity Equity Fidelity High
Allocation Balanced Bond Valule Contrafund Income Income
Division Division Division Division Division Division Division
<S> <C> <C> <C> <C> <C> <C>
$ 561,781 $5,707,028 $2,270,847 $11,822,941 $2,089,509 $1,018,314 $ 329,510
67,483 513,365 178,007 1,009,903 110,801 58,725 43,700
(1,770) 161,523 33,503 281,655 12,594 5,628 (11,177)
10,057 118,060 (19,726) 461,090 1,240,221 219,300 (81,364)
75,770 792,948 191,784 1,752,648 1,363,616 283,653 (48,841)
1,591,693 7,040,409 3,302,871 16,284,235 6,142,338 4,698,442 1,259,486
(4,085) (1,368,274) (302,397) (2,480,693) (74,844) (17,461) (4,697)
- (517) (1,856) (6,646) (402) (3,431) (1,170)
(10,991) (244,822) (81,085) (170,516) (145,298) (69,698) (53,013)
(480,701) (1,287,295) (1,034,053) (2,543,349) (678,221) (572,136) (318,315)
(138,368) (718,018) (377,536) (1,611,497) (632,111) (422,440) (95,559)
(2,270) (42,270) (15,330) (75,181) (41,586) (9,702) (2,610)
955,278 3,379,213 1,490,614 9,396,353 4,569,876 3,603,574 784,122
1,031,048 4,172,161 1,682,398 11,149,001 5,933,492 3,887,227 735,281
$1,592,829 $9,879,189 $3,953,245 $22,971,942 $8,023,001 $4,905,541 $1,064,791
</TABLE>
<PAGE>
Principal Life Insurance Company
Variable Life Separate Account
Statements of Changes in Net Assets (continued)
<TABLE>
Year ended December 31, 1998
<CAPTION>
Government
Securities Growth
Division Division
<S> <C> <C>
Net assets at January 1, 1998 $ 104,221 $ 921,533
Increase (decrease) in net assets
Operations:
Net investment income (loss) 97,510 69,385
Net realized gains (losses) on investments 1,370 8,386
Change in net unrealized appreciation or depreciation of investments (6,358) 437,013
Net increase (decrease) in net assets resulting from operations 92,522 514,784
Policy related transactions:
Net premium payments, less sales charges and applicable premium taxes 3,283,931 4,050,726
Contract terminations and surrenders (1,547) (24,252)
Death benefit payments - -
Policy loan transfers (9,130) (33,585)
Transfers to other contracts (93,010) (235,746)
Cost of insurance and administration charges (109,416) (419,150)
Surrender charges (859) (13,475)
Increase in net assets from policy related transactions 3,069,969 3,324,518
Total increase 3,162,491 3,839,302
Net assets at December 31, 1998 $3,266,712 $4,760,835
<FN>
(1) Commenced operations May 1, 1998.
</FN>
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
High International MidCap Money
Yield International SmallCap MicroCap MidCap Growth Market
Division Division Division (1) Division (1) Division Division (1) Division
<S> <C> <C> <C> <C> <C> <C>
$2,092,182 $2,716,270 $ - $ - $19,216,629 $ - $ 4,328,456
185,849 308,919 119 294 1,344,070 (637) 222,792
(1,713) 5,582 (148) (681) 1,170,701 249 -
(222,572) (8,068) 15,012 1,093 (1,927,129) 28,009 -
(38,436) 306,433 14,983 706 587,642 27,621 222,792
654,374 6,275,718 334,028 158,559 15,747,739 306,597 36,243,366
(223,218) (52,096) (509) - (4,608,554) (24) (258,565)
- (2,388) - - (9,498) - (1,326)
(2,756) (93,812) - (2,410) (462,004) - (8,878)
(82,650) (623,489) (18,167) (2,484) (2,445,385) (4,378) (30,709,128)
(126,865) (697,441) (13,862) (4,993) (2,424,710) (13,899) (1,455,420)
(3,532) (28,946) (283) - (138,249) (14) (26,181)
215,353 4,777,546 301,207 148,672 5,659,339 288,282 3,783,868
176,917 5,083,979 316,190 149,378 6,246,981 315,903 4,006,660
$2,269,099 $7,800,249 $316,190 $149,378 $25,463,610 $315,903 $ 8,335,116
</TABLE>
<PAGE>
Principal Life Insurance Company
Variable Life Separate Account
Statements of Changes in Net Assets (continued)
<TABLE>
Year ended December 31, 1998
<CAPTION>
Putnam Global Putnam
Asset Allocation Vista
Division (1) Division (1)
<S> <C> <C>
Net assets at January 1, 1998 $ - $ -
Increase (decrease) in net assets
Operations:
Net investment income (loss) (120) (174)
Net realized gains (losses) on investments 140 252
Change in net unrealized appreciation or depreciation of investments 4,313 20,737
Net increase in net assets resulting from operations 4,333 20,815
Policy related transactions:
Net premium payments, less sales charges and applicable premium
taxes 76,196 114,287
Contract terminations and surrenders - -
Death benefit payments - -
Policy loan transfers - -
Transfers to other contracts (1,426) (7,306)
Cost of insurance and administration charges (3,872) (4,745)
Surrender charges - -
Increase in net assets from policy related transactions 70,898 102,236
Total increase 75,231 123,051
Net assets at December 31, 1998 $75,231 $123,051
<FN>
(1) Commenced operations May 1, 1998.
</FN>
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
Putnam SmallCap
Voyager Real Estate SmallCap Growth SmallCap Value Utilities
Division (1) Division (1) Division (1) Division (1) Division (1) Division (1)
<S> <C> <C> <C> <C> <C>
$ - $ - $ - $ - $ - $ -
(1,414) 811 (533) (385) 257 560
45 (64) (75) (20) (136) 372
105,601 (320) 11,967 31,970 5,416 2,337
104,232 427 11,359 31,565 5,537 3,269
868,001 33,346 251,162 193,803 145,362 53,396
(93) (23) (25) (22) (28) -
- - - - - -
(2,429) - (241) - - (196)
(32,669) (406) (3,354) (6,641) (828) (8,493)
(37,442) (1,622) (8,251) (8,998) (5,889) (2,380)
(52) (13) (14) (12) (16) -
795,316 31,282 239,277 178,130 138,601 42,327
899,548 31,709 250,636 209,695 144,138 45,596
$899,548 $31,709 $250,636 $209,695 $144,138 $45,596
</TABLE>
<PAGE>
Principal Life Insurance Company
Variable Life Separate Account
Statements of Changes in Net Assets (continued)
<TABLE>
Year ended December 31, 1997
<CAPTION>
Aggressive
Growth
Combined Division (1)
<S> <C> <C>
Net assets at January 1, 1997 $29,345,018 $ -
Increase (decrease) in net assets
Operations:
Net investment income (loss) 2,719,814 406,348
Net realized gains on investments 1,992,490 2,207
Change in net unrealized appreciation or depreciation of investments 2,414,102 (55,253)
Net increase in net assets resulting from operations 7,126,406 353,302
Policy related transactions:
Net premium payments, less sales charges and applicable premium taxes 51,193,569 3,869,959
Contract terminations and surrenders (10,340,289) (5,409)
Death benefit payments (35,772) -
Policy loan transfers (990,280) (12,314)
Transfers to other contracts (14,297,011) (56,802)
Cost of insurance and administration charges (4,726,082) (225,959)
Surrender charges (180,883) (7,322)
Increase in net assets from policy related transactions 20,623,252 3,562,153
Total increase 27,749,658 3,915,455
Net assets at December 31, 1997 $57,094,676 $3,915,455
<FN>
(1) Commenced operations February 1, 1997.
</FN>
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
Asset Capital Fidelity Fidelity Equity Fidelity High
Allocation Balanced Bond Valule Contrafund Income Income
Division (1) Division Division Division Division (1) Division (1) Division (1)
<S> <C> <C> <C> <C> <C> <C>
$ - $4,344,657 $1,642,800 $ 7,021,808 $ - $ - $ -
52,311 457,569 121,465 936,861 (6,014) (3,260) (1,353)
549 236,637 18,598 342,684 850 630 3,224
(23,876) 104,396 55,567 895,157 115,040 72,538 20,931
28,984 798,602 195,630 2,174,702 109,876 69,908 22,802
562,968 3,035,179 1,595,001 6,782,066 2,125,905 1,018,045 369,108
(15) (1,398,821) (414,701) (2,651,564) (666) (740) (262)
- - - (8,829) - - -
(6,314) (145,315) (55,770) (183,175) (9,953) (800) (26,280)
(690) (454,671) (434,583) (441,824) (24,082) (9,962) (20,415)
(23,132) (450,585) (250,798) (827,795) (110,670) (57,135) (15,088)
(20) (22,018) (6,732) (42,448) (901) (1,002) (355)
532,797 563,769 432,417 2,626,431 1,979,633 948,406 306,708
561,781 1,362,371 628,047 4,801,133 2,089,509 1,018,314 329,510
$561,781 $5,707,028 $2,270,847 $11,822,941 $2,089,509 $1,018,314 $329,510
</TABLE>
<PAGE>
Principal Life Insurance Company
Variable Life Separate Account
Statements of Changes in Net Assets (continued)
<TABLE>
Year ended December 31, 1997
<CAPTION>
Government
Securities Growth
Division (1) Division (1)
<S> <C> <C>
Net assets at January 1, 1997 $ - $ -
Increase (decrease) in net assets
Operations:
Net investment income (loss) 5,227 12,121
Net realized gains on investments 15 299
Change in net unrealized appreciation or depreciation of investments (3,162) 30,996
Net increase (decrease) in net assets resulting from operations 2,080 43,416
Policy related transactions:
Net premium payments, less sales charges and applicable premium taxes 109,941 938,351
Contract terminations and surrenders - (168)
Death benefit payments - -
Policy loan transfers - (73)
Transfers to other contracts (1,786) (1,396)
Cost of insurance and administration charges (6,014) (58,369)
Surrender charges - (228)
Increase in net assets from policy related transactions 102,141 878,117
Total increase 104,221 921,533
Net assets at December 31, 1997 $104,221 $921,533
<FN>
(1) Commenced operations February 1, 1997.
</FN>
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
High Money
Yield International MidCap Market
Division Division (1) Division Division
<S> <C> <C> <C>
$1,325,273 $ - $13,704,998 $ 1,305,482
151,360 108,949 383,525 94,705
19,548 678 1,366,571 -
(27,928) (165,660) 1,395,356 -
142,980 (56,033) 3,145,452 94,705
1,100,347 3,053,987 11,608,767 15,023,945
(254,148) (1,601) (5,304,517) (307,677)
(1,913) - (25,030) -
(38,855) (20,879) (430,694) (59,858)
(56,489) (102,897) (1,619,014) (11,072,400)
(121,092) (154,140) (1,777,795) (647,510)
(3,921) (2,167) (85,538) (8,231)
623,929 2,772,303 2,366,179 2,928,269
766,909 2,716,270 5,511,631 3,022,974
$2,092,182 $2,716,270 $19,216,629 $ 4,328,456
</TABLE>
<PAGE>
Principal Life Insurance Company
Variable Life Separate Account
Notes to Financial Statements
December 31, 1999
1. Investment and Accounting Policies
Principal Life Insurance Company Variable Life Separate Account (the Separate
Account) is a segregated investment account of Principal Life Insurance Company
(Principal Life) and is registered under the Investment Company Act of 1940 as a
unit investment trust, with no stated limitations on the number of authorized
units. As directed by eligible contractholders, each division of the Separate
Account invests exclusively in shares representing interests in a corresponding
investment option. As of December 31, 1999, contractholder investment options
include the following diversified open-end management investment companies:
<TABLE>
<S> <C>
Principal Variable Contracts Fund, Inc. (4): Principal Variable Contracts Fund, Inc. (4)
Aggressive Growth Account (1) (continued):
Asset Allocation Account (1) Small Cap Account (2)
Balanced Account SmallCap Growth Account (2)
Bond Account SmallCap Value Account (2)
Capital Value Account Stock Index 500 Account (3)
Government Securities Account (1) Utilities Account (2)
Growth Account (1) Fidelity Variable Insurance Products Fund:
High Yield Account Equity Income Portfolio (1)
International Account (1) High Income Portfolio (1)
International SmallCap Account (2) Fidelity Variable Insurance Products Fund
MicroCap Account (2) II - Contrafund Portfolio (1)
MidCap Account Putnam Variable Trust:
MidCap Growth Account (2) Global Asset Allocation Fund (2)
Money Market Account Vista Fund (2)
Real Estate Account (2) Voyager Fund (2)
<FN>
(1) Additional investment option available to contractholders as of February 1,
1997.
(2) Additional investment option available to contractholders as of May 1,
1998.
(3) Additional investment option available to contractholders as of May 1,
1999.
(4) Organized by Principal Life Insurance Company.
</FN>
</TABLE>
Investments are stated at the closing net asset values per share on December 31,
1999. The average cost method is used to determine realized gains and losses on
investments. Dividends are taken into income on an accrual basis as of the
ex-dividend date.
The Separate Account supports the following variable life insurance contracts of
Principal Life: Flex Variable Life Contracts and PrinFlex Life Contracts. On
July 1, 1999, Principal Life introduced a new product, Survivorship Variable
Universal Life Insurance, which invests in the Separate Account.
<PAGE>
Principal Life Insurance Company
Variable Life Separate Account
Notes to Financial Statements (continued)
1. Investment and Accounting Policies (continued)
Use of Estimates in the Preparation of Financial Statements
The preparation of the Separate Account's financial statements and accompanying
notes requires management to make estimates and assumptions that affect the
amounts reported and disclosed. These estimates and assumptions could change in
the future as more information becomes known, which could impact the amounts
reported and disclosed in the financial statements and accompanying notes.
2. Expenses and Policy Charges
Principal Life is compensated for the following expenses and charges:
Flex Variable Life Contracts - Mortality and expense risks assumed by
Principal Life are compensated for by a charge equivalent to an annual rate
of .75% of the asset value of each policy. An annual administration charge of
$57 for each policy and a cost of insurance charge, which is based on the
Company's expected future mortality experience, is deducted as compensation
for administrative and insurance expenses, respectively. The mortality and
expense risk, annual administration, and insurance charges amounted to
$214,984, $174,324, and $1,994,681, respectively, in 1999; $227,302,
$210,067, and $2,225,738, respectively, in 1998; and $236,727, $277,142, and
$2,832,278, respectively, in 1997. A sales charge of 5.0% and a tax charge of
2.0% is deducted from each payment made on behalf of each participant. The
sales and tax charge is deducted from the payments by Principal Life prior to
their transfer to the Separate Account. In addition, a surrender charge up to
a maximum of 25% of the minimum first year premium may be imposed upon total
surrender or termination of a policy for insufficient value.
PrinFlex Life Contracts (beginning in 1997) - Mortality and expense risks
assumed by Principal Life are compensated for by a charge equivalent to an
annual rate of .90% of the asset value of each policy. A monthly
administration charge of $.40 for each $1,000 of policy face amount will be
deducted from policies in their first year. After the first policy year, the
monthly administration charge is $6.00 per month. A cost of insurance charge,
which is based on the Company's expected future mortality experience, is also
deducted as compensation for insurance charges. The mortality and expense
risk, administration, and insurance charges amounted to: $1,148,956,
$1,744,117 and $14,262,468, respectively, in 1999; $509,501, $995,778 and
$7,267,150, respectively, in 1998; and $86,725, $230,502 and $1,386,160,
respectively, in 1997. A sales charge of 2.75% of premiums less than or equal
to target premium and .75% of premiums in excess of target is deducted from
each payment on behalf of each participant. A tax charge of 2.2% for state
and local taxes and 1.25% for federal taxes is also deducted from each
payment on behalf of each participant. The sales and tax charge is deducted
from contributions by Principal Life prior to their transfer to the Separate
Account.
<PAGE>
Principal Life Insurance Company
Variable Life Separate Account
Notes to Financial Statements (continued)
2. Expenses and Policy Charges (continued)
Survivorship Variable Universal Life Contracts (beginning in 1999) -
Mortality and expenses risk assumed by Principal Life are compensated for
by a charge equivalent to an annual rate of .80% of the asset value of each
policy. There is a monthly administration charge of $8.00. An additional
monthly administration charge in the first ten years (and ten years after
an increase in the face amount) of $.07 per $1,000 of face amount. The
charge of $.07 is increased by $.005 per $1,000 for each insurer classified
as smoker. A cost of insurance charge, which is based on the Company's
expected future mortality experience, is also deducted as compensation for
insurance charges. The mortality and expense risk, administration and
insurance charges amounted to $3,970, $30,083 and $26,149, respectively,
during the year ended December 31, 1999. A sales charge of 5.0% of premiums
less than or equal to target premium and 2.0% of premiums in excess of
target is deducted from each payment on behalf of each participant. A tax
charge of 2.2% for state and local taxes and 1.25% for federal taxes is
deducted from each payment on behalf of each participant. The sale and tax
charge is deducted from contributions by Principal Life prior to their
transfer to the Separate Account.
3. Federal Income Taxes
The operations of the Separate Account are a part of the operations of Principal
Life. Under current practice, no federal income taxes are allocated by Principal
Life to the operations of the Separate Account.
<PAGE>
Principal Life Insurance Company
Variable Life Separate Account
Notes to Financial Statements (continued)
4. Purchases and Sales of Investment Securities
The aggregate units and cost of purchases and proceeds from sales of investments
were as follows:
<TABLE>
Year ended December 31, 1999
<CAPTION>
Units Amount Units Amount
Purchased Purchased Redeemed Redeemed
<S> <C> <C> <C> <C>
Aggressive Growth Division:
PrinFlex Life 970,302 $18,208,064 331,686 $5,543,887
Survivorship Variable Universal Life 7,867 94,528 732 8,432
978,169 18,302,592 332,418 5,552,319
Asset Allocation Division:
PrinFlex Life 126,145 1,964,356 55,304 741,949
Survivorship Variable Universal Life 15,103 164,337 203 2,120
141,248 2,128,693 55,507 744,069
Balanced Division:
Flex Variable Life 32,343 1,253,440 31,633 977,440
PrinFlex Life 385,145 5,654,313 225,867 2,977,675
Survivorship Variable Universal Life 8,197 85,151 155 1,532
425,685 6,992,904 257,655 3,956,647
Bond Division:
Flex Variable Life 21,722 638,489 24,329 584,331
PrinFlex Life 385,603 4,786,951 139,681 1,628,875
Survivorship Variable Universal Life 4,133 43,317 72 726
411,458 5,468,757 164,082 2,213,932
Capital Value Division:
Flex Variable Life 58,379 3,417,091 44,706 1,759,412
PrinFlex Life 865,446 14,950,191 424,784 6,209,297
Survivorship Variable Universal Life 5,115 50,729 822 7,735
928,940 18,418,011 470,312 7,976,444
Fidelity Contrafund Division:
PrinFlex Life 784,899 13,802,563 194,124 3,317,646
Survivorship Variable Universal Life 14,058 141,995 340 3,542
798,957 13,944,558 194,464 3,321,188
Fidelity Equity Income Division:
PrinFlex Life 442,641 6,654,870 161,414 2,328,152
Survivorship Variable Universal Life 6,673 63,501 65 624
449,314 6,718,371 161,479 2,328,776
Fidelity High Income Division:
PrinFlex Life 86,113 1,116,094 51,793 611,648
Government Securities Division:
PrinFlex Life 194,406 2,480,309 209,054 2,462,106
Survivorship Variable Universal Life 6,834 71,341 3,590 36,630
201,240 2,551,650 212,644 2,498,736
</TABLE>
<PAGE>
Principal Life Insurance Company
Variable Life Separate Account
Notes to Financial Statements (continued)
4. Purchases and Sales of Investment Securities (continued)
<TABLE>
Year ended December 31, 1999
<CAPTION>
Units Amount Units Amount
Purchased Purchased Redeemed Redeemed
<S> <C> <C> <C> <C>
Growth Division:
PrinFlex Life 454,302 $7,156,190 154,162 $2,398,898
Survivorship Variable Universal Life 4,616 48,392 84 860
458,918 7,204,582 154,246 2,399,758
High Yield Division:
Flex Variable Life 20,298 591,968 48,184 1,053,406
International Division:
PrinFlex Life 492,014 7,894,576 272,765 3,522,604
Survivorship Variable Universal Life 3,556 41,864 36 386
495,570 7,936,440 272,801 3,522,990
International SmallCap Division:
PrinFlex Life 95,274 1,287,791 19,712 263,257
Survivorship Variable Universal Life 1,484 19,838 17 217
96,758 1,307,629 19,729 263,474
MicroCap Division:
PrinFlex Life 42,361 346,589 7,556 61,540
Survivorship Variable Universal Life 2,583 22,694 5 47
44,944 369,283 7,561 61,587
MidCap Division:
Flex Variable Life 69,891 3,419,307 78,806 3,282,474
PrinFlex Life 669,400 9,125,936 492,907 6,123,791
Survivorship Variable Universal Life 232 2,437 4 44
739,523 12,547,680 571,717 9,406,309
MidCap Growth Division:
PrinFlex Life 90,323 878,244 32,058 309,719
Survivorship Variable Universal Life 236 2,184 15 150
90,559 880,428 32,073 309,869
Money Market Division:
Flex Variable Life 22,657 399,399 8,313 140,760
PrinFlex Life 3,259,754 37,186,165 2,946,933 33,194,646
Survivorship Variable Universal Life 339,308 3,452,703 155,990 1,582,499
3,621,719 41,038,267 3,111,236 34,917,905
Putnam Global Asset Allocation Division:
PrinFlex Life 37,942 413,030 12,194 134,797
Survivorship Variable Universal Life 3,901 41,312 14 151
41,843 454,342 12,208 134,948
Putnam Vista Division:
PrinFlex Life 52,210 681,239 8,751 106,029
Survivorship Variable Universal Life 782 9,644 6 76
52,992 690,883 8,757 106,105
</TABLE>
<PAGE>
Principal Life Insurance Company
Variable Life Separate Account
Notes to Financial Statements (continued)
4. Purchases and Sales of Investment Securities (continued)
<TABLE>
Year ended December 31, 1999
<CAPTION>
Units Amount Units Amount
Purchased Purchased Redeemed Redeemed
<S> <C> <C> <C> <C>
Putnam Voyager Division:
PrinFlex Life 505,025 $ 6,504,503 86,311 $ 1,091,791
Survivorship Variable Universal Life 10,457 114,740 124 1,528
515,482 6,619,243 86,435 1,093,319
Real Estate Division:
PrinFlex Life 6,892 65,261 2,042 18,329
SmallCap Division:
PrinFlex Life 82,373 858,971 19,001 178,081
Survivorship Variable Universal Life 997 11,754 11 117
83,370 870,725 19,012 178,198
SmallCap Growth Division:
PrinFlex Life 105,937 1,480,349 19,878 283,342
Survivorship Variable Universal Life 1,414 18,203 10 146
107,351 1,498,552 19,888 283,488
SmallCap Value Division:
PrinFlex Life 50,737 461,462 11,295 102,194
Survivorship Variable Universal Life 3,695 38,793 8 83
54,432 500,255 11,303 102,277
Stock Index 500 Division:
PrinFlex Life 621,329 6,531,558 17,000 174,277
Survivorship Variable Universal Life 2,600 26,786 72 759
623,929 6,558,344 17,072 175,036
Utilities Division:
PrinFlex Life 39,617 471,468 7,891 93,083
Survivorship Variable Universal Life 1,571 15,596 5 50
41,188 487,064 7,896 93,133
11,516,892 $165,262,576 6,302,514 $83,323,890
</TABLE>
<PAGE>
Principal Life Insurance Company
Variable Life Separate Account
Notes to Financial Statements (continued)
4. Purchases and Sales of Investment Securities (continued)
<TABLE>
Year ended December 31, 1998
<CAPTION>
Units Amount Units Amount
Purchased Purchased Redeemed Redeemed
<S> <C> <C> <C> <C>
Aggressive Growth Division:
PrinFlex Life 861,317 $12,227,704 211,314 $2,857,454
Asset Allocation Division:
PrinFlex Life 131,206 1,668,350 53,260 645,589
Balanced Division:
Flex Variable Life 36,816 1,264,339 71,643 2,030,576
PrinFlex Life 490,842 6,352,561 138,126 1,693,746
527,658 7,616,900 209,769 3,724,322
Bond Division:
Flex Variable Life 55,198 1,406,724 53,470 1,271,250
PrinFlex Life 174,764 2,098,649 49,437 565,502
229,962 3,505,373 102,907 1,836,752
Capital Value Division:
Flex Variable Life 69,516 2,942,517 96,955 3,533,172
PrinFlex Life 1,007,229 14,488,359 257,693 3,491,448
1,076,745 17,430,876 354,648 7,024,620
Fidelity Contrafund Division:
PrinFlex Life 457,546 6,291,010 120,504 1,610,333
Fidelity Equity Income Division:
PrinFlex Life 361,409 4,781,646 86,079 1,119,347
Fidelity High Income Division:
PrinFlex Life 109,968 1,310,358 41,948 482,536
Government Securities Division:
PrinFlex Life 286,524 3,395,601 19,932 228,122
Growth Division:
PrinFlex Life 303,006 4,142,276 55,628 748,373
High Yield Division:
Flex Variable Life 29,675 857,141 20,132 455,939
International Division:
PrinFlex Life 530,953 6,632,041 131,554 1,545,576
International SmallCap Division:
PrinFlex Life 38,901 334,880 3,976 33,554
MicroCap Division:
PrinFlex Life 19,585 159,179 1,311 10,213
MidCap Division:
Flex Variable Life 103,942 4,846,657 183,301 7,449,571
PrinFlex Life 943,646 12,430,779 229,365 2,824,456
1,047,588 17,277,436 412,666 10,274,027
Mid-Cap Growth Division:
PrinFlex Life 34,735 306,597 2,195 18,952
Money Market Division:
Flex Variable Life 39,955 657,300 49,712 795,271
PrinFlex Life 3,322,020 35,876,706 2,964,012 31,732,075
3,361,975 36,534,006 3,013,724 32,527,346
</TABLE>
Principal Life Insurance Company
Variable Life Separate Account
Notes to Financial Statements (continued)
4. Purchases and Sales of Investment Securities (continued)
<TABLE>
Year ended December 31, 1998
<CAPTION>
Units Amount Units Amount
Purchased Purchased Redeemed Redeemed
<S> <C> <C> <C> <C>
Putnam Global Asset Allocation Division:
PrinFlex Life 7,867 $ 76,195 562 $ 5,417
Putnam Vista Division;
PrinFlex Life 13,042 114,287 1,330 12,225
Putnam Voyager Division:
PrinFlex Life 90,896 868,001 7,931 74,099
Real Estate Division:
PrinFlex Life 3,623 34,212 233 2,119
SmallCap Division:
PrinFlex Life 33,031 251,186 1,679 12,442
SmallCap Growth Division:
PrinFlex Life 22,252 193,803 1,822 16,058
SmallCap Value Division:
PrinFlex Life 17,813 145,873 878 7,015
Utilities Division:
PrinFlex Life 4,976 54,019 1,032 11,132
9,602,253 $126,208,950 4,857,014 $65,283,562
<CAPTION>
Year ended December 31, 1997
Units Amount Units Amount
Purchased Purchased Redeemed Redeemed
<S> <C> <C> <C> <C>
Aggressive Growth Division:
PrinFlex Life 343,834 $ 4,288,340 27,761 $ 319,839
Asset Allocation Division:
PrinFlex Life 51,667 616,979 2,856 31,871
Balanced Division:
Flex Variable Life 67,360 2,010,011 95,006 2,391,024
PrinFlex Life 128,270 1,521,439 10,602 119,088
195,630 3,531,450 105,608 2,510,112
Bond Division:
Flex Variable Life 51,436 1,162,750 52,293 1,098,247
PrinFlex Life 51,729 568,518 7,380 79,139
103,165 1,731,268 59,673 1,177,386
Capital Value Division:
Flex Variable Life 119,379 4,364,014 127,882 3,865,122
PrinFlex Life 281,944 3,424,513 30,266 360,113
401,323 7,788,527 158,148 4,225,235
Fidelity Contrafund Division:
PrinFlex Life 185,497 2,125,905 13,013 152,286
Fidelity Equity Income Division:
PrinFlex Life 89,263 1,018,045 6,221 72,899
Fidelity High Income Division:
PrinFlex Life 34,237 369,108 5,629 63,753
Principal Life Insurance Company
Variable Life Separate Account
Notes to Financial Statements (continued)
4. Purchases and Sales of Investment Securities
(continued)
<CAPTION>
Year ended December 31, 1997
Units Amount Units Amount
Purchased Purchased Redeemed Redeemed
<S> <C> <C> <C> <C>
Government Securities Division:
PrinFlex Life 10,283 $ 115,306 745 $ 7,938
Growth Division:
PrinFlex Life 81,327 952,971 5,376 62,733
High Yield Division:
Flex Variable Life 52,320 1,263,141 23,011 487,852
International Division:
PrinFlex Life 273,767 3,172,214 26,010 290,962
MidCap Division:
Flex Variable Life 180,420 6,880,578 240,515 8,968,075
PrinFlex Life 442,300 5,239,657 33,607 402,455
622,720 12,120,235 274,122 9,370,530
Money Market Division:
Flex Variable Life 158,768 2,472,127 213,736 3,276,766
PrinFlex Life 1,225,077 12,671,220 859,324 8,843,607
1,383,845 15,143,347 1,073,060 12,120,373
3,828,878 $54,236,836 1,781,233 $30,893,769
</TABLE>
5. Year 2000 Issues (Unaudited)
As of January 31, 2000, virtually all of the major technology systems, processes
and infrastructure, including those which rely on third party vendors used by
Principal Life and other service providers of the Separate Account appear to be
operating smoothly following the rollover to the Year 2000. Principal Life has
experienced no significant interruptions to normal business operations,
including the processing of customer account data and transactions. Principal
Life will continue its Year 2000 vigilance into early 2001.
Based on the performance of its major technology systems to date, ongoing plans
to deal with external relationships, and contingency plans, Principal Life
believes that in the worst case scenario it will experience, at most, isolated
and insignificant disruptions of business processes as a result of Year 2000
issues. Such disruptions are not expected to have a material effect on the
Separate Account's future results of operations, liquidity, or financial
condition.
Report of Independent Auditors
The Board of Directors
Principal Life Insurance Company
We have audited the accompanying consolidated statements of financial position
of Principal Life Insurance Company (the Company, an indirect wholly-owned
subsidiary of Principal Mutual Holding Company) as of December 31, 1999 and
1998, and the related consolidated statements of operations, stockholder's
equity and cash flows for each of the three years in the period ended December
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Principal Life
Insurance Company at December 31, 1999 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
/s/Ernst & Young LLP
Des Moines, Iowa
January 31, 2000
Principal Life Insurance Company
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
------------------------------------------
(In Millions)
<S> <C> <C> <C>
Revenues
Premiums and other considerations $3,152 $3,409 $4,668
Fees and other revenue 1,125 992 881
Net investment income 2,777 2,806 2,937
Net realized capital gains 459 466 176
Contribution from closed block 11 13 -
------------------------------------------
Total revenues 7,524 7,686 8,662
Expenses
Policy and contract benefits 4,210 4,500 5,271
Change in future policy benefits and
contractholder funds 415 277 361
Dividends to policyholders 9 155 299
Operating expenses 1,757 2,015 2,036
------------------------------------------
------------------------------------------
Total expenses 6,391 6,947 7,967
------------------------------------------
Income before income taxes 1,133 739 695
Income taxes 323 44 241
------------------------------------------
==========================================
Net income $ 810 $ 695 $ 454
==========================================
</TABLE>
See accompanying notes.
Principal Life Insurance Company
Consolidated Statements of Financial Position
<TABLE>
<CAPTION>
December 31
1999 1998
---------------------------
---------------------------
(In Millions)
<S> <C> <C>
Assets
Fixed maturities, available-for-sale $21,660 $21,006
Equity securities, available-for-sale 864 1,102
Mortgage loans 12,296 12,091
Real estate 2,212 2,585
Policy loans 28 25
Other investments 637 349
---------------------------
Total investments 37,697 37,158
Cash and cash equivalents 362 461
Accrued investment income 408 375
Deferred policy acquisition costs 792 456
Property and equipment 458 451
Goodwill and other intangibles 152 161
Premiums due and other receivables 284 261
Mortgage loan servicing rights 1,081 778
Closed block assets 4,318 4,251
Separate account assets 33,307 29,009
Other assets 451 582
---------------------------
===========================
Total assets $79,310 $73,943
===========================
===========================
Liabilities
Contractholder funds $24,523 $23,339
Future policy benefits and claims 7,623 7,082
Other policyholder funds 271 293
Short-term debt - 200
Long-term debt 834 671
Income taxes currently payable 15 27
Deferred income taxes 159 497
Closed block liabilities 5,395 5,299
Separate account liabilities 33,307 29,009
Other liabilities 2,232 2,057
---------------------------
---------------------------
Total liabilities 74,359 68,474
Stockholder's equity
Common stock, par value $1 per share - authorized 5,000,000 shares, issued and
outstanding 2,500,000 shares (wholly owned indirectly by Principal Mutual
Holding Company) 3 3
Retained earnings 5,110 4,749
Accumulated other comprehensive income (loss):
Net unrealized gains (losses) on available-for-sale securities (102) 746
Net foreign currency translation adjustment (60) (29)
---------------------------
---------------------------
Total stockholder's equity 4,951 5,469
---------------------------
===========================
Total liabilities and stockholder's equity $79,310 $73,943
===========================
</TABLE>
See accompanying notes.
Principal Life Insurance Company
Consolidated Statements of Stockholder's Equity
<TABLE>
<CAPTION>
Net Unrealized
Gains (Losses) on Net Foreign
Available-for-Sale Currency Total
Common Retained Securities Translation Stockholder's
Stock Earnings Adjustment Equity
-------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1997 $- $3,803 $ 860 $ (9) $4,654
Comprehensive income:
Net income - 454 - - 454
Net change in unrealized
gains and losses on fixed
maturities, - - 197 - 197
available-for-sale
Net change in unrealized
gains and losses on
equity securities, - - 118 - 118
available-for-sale
Adjustments for assumed
changes in amortization
patterns:
Deferred policy
acquisition costs - - (44) - (44)
Unearned revenue reserves - - 4 - 4
Provision for deferred
income taxes - - (97) - (97)
Change in net foreign
currency translation - - - (2) (2)
adjustment
----------------
Comprehensive income 630
-------------------------------------------------------------------------------
Balances at December 31, 1997 - 4,257 1,038 (11) 5,284
Issuance of 2,500,000 shares
of common stock to parent
holding company 3 (3) - - -
Dividend to parent holding - (200) - - (200)
company
Comprehensive income:
Net income - 695 - - 695
Net change in unrealized
gains and losses on fixed
maturities, - - (203) - (203)
available-for-sale
Net change in unrealized
gains and losses on
equity securities,
available-for-sale, - - (292) - (292)
including seed money in
separate accounts
Adjustments for assumed
changes in amortization
patterns:
Deferred policy
acquisition costs - - 37 - 37
Unearned revenue reserves - - (4) - (4)
Provision for deferred
income tax benefit - - 170 - 170
Change in net foreign
currency translation - - - (18) (18)
adjustment
----------------
Comprehensive income 385
-------------------------------------------------------------------------------
Balances at December 31, 1998 3 4,749 746 (29) 5,469
</TABLE>
Principal Life Insurance Company
Consolidated Statements of Stockholder's Equity (continued)
<TABLE>
<CAPTION>
Net Unrealized
Gains (Losses) on Net Foreign
Available-for-Sale Currency Total
Common Retained Securities Translation Stockholder's
Stock Earnings Adjustment Equity
-------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1999 $3 $4,749 $ 746 $ (29) $5,469
Dividend to parent holding - (449) - - (449)
company
Comprehensive loss:
Net income - 810 - - 810
Net change in unrealized
gains and losses on fixed
maturities, - - (1,375) - (1,375)
available-for-sale
Net change in unrealized
gains and losses on
equity securities,
available-for-sale, - - (142) - (142)
including seed money in
separate accounts
Adjustments for assumed
changes in amortization
patterns:
Deferred policy
acquisition costs - 246 - 246
Unearned revenue reserves - (30) - (30)
Provision for deferred
income tax benefit - 453 - 453
Change in net foreign
currency translation - - (31) (31)
adjustment
----------------
Comprehensive loss (69)
===============================================================================
Balances at December 31, 1999 $3 $5,110 $ (102) $(60) $4,951
===============================================================================
</TABLE>
See accompanying notes.
Principal Life Insurance Company
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
---------------------------------------
(In Millions)
<S> <C> <C> <C>
Operating activities
Net income $ 810 $ 695 $ 454
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of deferred policy acquisition costs 76 170 170
Additions to deferred policy acquisition costs (254) (229) (213)
Gain on sales of subsidiaries (11) (6) (14)
Accrued investment income (33) 24 7
Premiums due and other receivables (21) 87 (78)
Contractholder and policyholder liabilities and dividends
1,430 1,489 1,396
Current and deferred income taxes 103 (265) 96
Net realized capital gains (459) (466) (176)
Depreciation and amortization expense 72 100 117
Change in closed block operating assets and
liabilities, net 174 230 -
Other 163 115 (185)
---------------------------------------
Net adjustments 1,240 1,249 1,120
---------------------------------------
Net cash provided by operating activities 2,050 1,944 1,574
Investing activities Available-for-sale securities:
Purchases (10,956) (7,141) (7,478)
Sales 6,852 5,684 7,475
Maturities 2,500 1,377 1,204
Mortgage loans acquired or originated (16,503) (14,162) (9,925)
Mortgage loans sold or repaid 16,242 14,414 8,977
Net change in mortgage servicing rights (307) (387) (144)
Real estate acquired (449) (436) (309)
Real estate sold 870 662 198
Net change in property and equipment (20) (20) -
Change in closed block investments, net (169) (201) -
Proceeds from sales of subsidiaries 42 96 35
Purchases of interest in subsidiaries, net of cash acquired (13) (218) (99)
Net change in other investments (260) (249) (83)
---------------------------------------
Net cash used in investing activities (2,171) (581) (149)
</TABLE>
Principal Life Insurance Company
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
---------------------------------------
(In Millions)
<S> <C> <C> <C>
Financing activities
Issuance of debt $ 203 $ 243 $ 75
Principal repayments of debt (40) (51) (28)
Proceeds of short-term borrowings 4,952 8,628 5,089
Repayment of short-term borrowings (4,896) (8,924) (4,974)
Dividend paid to parent holding company (441) (140) -
Investment contract deposits 5,325 5,854 4,134
Investment contract withdrawals (5,081) (7,058) (5,446)
---------------------------------------
Net cash provided by (used in) financing activities 22 (1,448) (1,150)
---------------------------------------
Net increase (decrease) in cash and cash equivalents (99) (85) 275
Cash and cash equivalents at beginning of year 461 546 271
=======================================
Cash and cash equivalents at end of year $ 362 $ 461 $ 546
=======================================
Schedule of noncash operating and investing activities
Dividend of net noncash assets and liabilities of Princor Financial
Services Corporation to Principal Financial Services, Inc. on
April 1, 1999 $ 12
=============
Thefollowing noncash assets and liabilities were transferred to the Closed
Block as a result of the July 1, 1998 mutual holding company formation:
Operating activities:
Accrued investment income $ 59
Deferred policy acquisition costs 697
Other assets 12
Future policy benefits and claims (4,545)
Other policyholder funds (7)
Policyholder dividends payable (388)
Other liabilities (173)
-------------
Total noncash operating activities (4,345) Investing activities:
Fixed maturities, available-for-sale 1,562
Mortgage loans 1,027
Policy loans 736
Other investments 1
-------------
Total noncash investing activities 3,326
=============
Total noncash operating and investing activities $(1,019)
=============
Net transfer of noncash assets and liabilities of Principal Health
Care Inc. on April 1, 1998 in exchange for common shares of
Coventry Health Care, Inc. $ (160)
=============
See accompanying notes.
</TABLE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements
December 31, 1999
1. Nature of Operations and Significant Accounting Policies
Reorganization
Effective July 1, 1998, Principal Mutual Life Insurance Company formed a mutual
insurance holding company ("Principal Mutual Holding Company") and converted to
a stock life insurance company ("Principal Life Insurance Company"). All of the
shares of Principal Life Insurance Company were issued to Principal Mutual
Holding Company through two newly formed intermediate holding companies,
Principal Financial Group, Inc. and Principal Financial Services, Inc. The
reorganization itself did not have a material financial impact on Principal Life
Insurance Company and its consolidated subsidiaries, as the net assets so
transferred to achieve the change in legal organization were accounted for at
historical carrying amounts in a manner similar to that in pooling-of-interests
accounting.
Description of Business
Principal Life Insurance Company and its consolidated subsidiaries ("the
Company") is a diversified financial services organization engaged in the
marketing and management of life insurance, annuity, health, pension and other
financial products and services, primarily in the United States.
Basis of Presentation
The accompanying consolidated financial statements of the Company and its
majority-owned subsidiaries have been prepared in conformity with accounting
principles generally accepted in the United States ("GAAP"). Less than
majority-owned entities in which the Company has at least a 20% interest are
reported on the equity basis in the consolidated statements of financial
position as other investments. All significant intercompany accounts and
transactions have been eliminated.
Total assets of the unconsolidated entities amounted to $2.3 billion at December
31, 1999 and $2.2 billion at December 31, 1998. Total revenues of the
unconsolidated entities were $2.0 billion in 1999, $1.8 billion in 1998 and $294
million in 1997. During 1999, 1998 and 1997, the Company included $108 million,
$18 million and $19 million, respectively, in net investment income representing
the Company's share of current year net income of the unconsolidated entities.
Closed Block
In conjunction with the formation of the mutual insurance holding company, the
Company established a Closed Block for the benefit of certain classes of
individual participating and dividend-paying policies in force on that date. The
Closed Block was designed to provide reasonable assurance to policyholders
included therein that, after
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
the Reorganization, assets would be available to maintain the aggregate dividend
scales in effect for 1997 if the experience underlying such scales continued.
Assets were allocated to the Closed Block in amounts such that their cash flows
together with anticipated revenues from policies included in the Closed Block,
were reasonably expected to be sufficient to support such policies, including
provisions for payment of claims, certain expenses, charges and taxes, and to
provide for the continuation of aggregate dividend scales in accordance with the
1997 policy dividend scales if the experience underlying such scales continued,
and to allow for appropriate adjustments in such scales if the experience
changes.
Assets allocated to the Closed Block inure to the benefits of the holders of
policies included in the Closed Block. Closed Block assets and liabilities are
carried on the same basis as similar assets and liabilities held by the Company.
The Company will continue to pay guaranteed benefits under all policies,
including the policies included in the Closed Block, in accordance with their
terms. If the assets allocated to the Closed Block, the investment cash flows
from those assets and the revenues from the policies included in the Closed
Block, including investment income thereon, prove to be insufficient to pay the
benefits guaranteed under the policies included in the Closed Block, the Company
will be required to make such payments from its general funds.
The contribution to the operating income of the Company from the Closed Block is
reported as a single line item in the statement of operations. Accordingly,
premiums, net investment income, realized capital gains (losses), policyholder
benefits and dividends attributable to the Closed Block, less certain expenses
and charges and the amortization of deferred policy acquisition costs, are shown
as a net number under the caption "Contribution from the Closed Block." This
results in material reductions in the respective line items in the statement of
operations while having no effect on net income. All assets allocated to the
Closed Block are grouped together and shown as a separate item entitled "Closed
Block assets"; and all liabilities attributable to the Closed Block are combined
and disclosed as the "Closed Block liabilities". The excess of Closed Block
liabilities over Closed Block assets represents the expected future post-tax
contribution from the Closed Block which would be recognized in operating income
or other comprehensive income over the period the policies and contracts in the
Closed Block remain in force.
The Contribution from the Closed Block does not represent the total
profitability attributable to the policies included in the Closed Block. Certain
expenses attributable to the policies included in the Closed Block and
commissions on these policies are not included in the reported Contribution from
the Closed Block, but rather are included in operating expenses consistent with
the initial regulatory funding of the Closed Block. Consequently, the assets
needed to fund the Closed Block are less than the total accumulated assets
attributable to the policies included in the Closed Block. Income on the assets
held outside of the Closed Block is included in net investment income and not
included in the Contribution from the Closed Block.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Use of Estimates in the Preparation of Financial Statements
The preparation of the Company's consolidated financial statements and
accompanying notes requires management to make estimates and assumptions that
affect the amounts reported and disclosed. These estimates and assumptions could
change in the future as more information becomes known, which could impact the
amounts reported and disclosed in the consolidated financial statements and
accompanying notes.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, money market instruments and
other debt issues with a maturity date of three months or less when purchased.
Investments
Investments in fixed maturities and equity securities are classified as
available-for-sale and, accordingly, are carried at fair value. (See Note 12 for
policies related to the determination of fair value.) 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 is adjusted for declines in value that are other than temporary. For
the loan-backed and structured securities included in the bond portfolio, the
Company recognizes income using a constant effective yield based on currently
anticipated prepayments as determined by broker-dealer surveys or internal
estimates and the estimated lives of the securities.
Real estate investments are reported at cost less accumulated depreciation. The
initial cost bases of properties acquired through loan foreclosures are the
lower of the loan balances or fair market values of the properties at the time
of foreclosure. Buildings and land improvements are generally depreciated on the
straight-line method over the estimated useful life of improvements, and tenant
improvement costs are depreciated on the straight-line method over the term of
the related lease. The Company recognizes impairment losses for its properties
when indicators of impairment are present and a property's expected undiscounted
cash flows are not sufficient to recover the property's carrying value. In such
cases, the cost bases of the properties are reduced accordingly. Real estate
expected to be disposed is carried at the lower of cost or fair value, less cost
to sell, with valuation allowances established accordingly and depreciation no
longer recognized. Any impairment losses and any changes in valuation allowances
are reported as net realized capital losses.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Commercial and residential mortgage loans are reported at cost adjusted for
amortization of premiums and accrual of discounts, computed using the interest
method, and net of valuation allowances. Any changes in the valuation allowances
are reported as net realized capital gains (losses). The Company measures
impairment based upon the present value of expected cash flows discounted at the
loan's effective interest rate. If foreclosure is probable, the measurement of
any valuation allowance is based upon the fair value of the collateral. The
Company includes residential mortgage loans held for sale in the amount of $432
million and $743 million and commercial mortgage loans held for sale in the
amount of $280 million and $22 million at December 31, 1999 and 1998,
respectively, which are carried at lower of cost or fair value and reported as
mortgage loans in the statements of financial position.
Net realized capital gains and losses on investments are determined using the
specific identification basis.
Policy loans and other investments, excluding investments in unconsolidated
entities, are primarily reported at cost.
Derivatives
Derivatives are generally held for purposes other than trading and are primarily
used to hedge or reduce exposure to interest rate and foreign currency risks
associated with assets held or expected to be purchased or sold, and liabilities
incurred or expected to be incurred. Additionally, derivatives are used to
change the characteristics of the Company's asset/liability mix consistent with
the Company's risk management activities.
The Company's risk of loss is typically limited to the fair value of its
derivative instruments and not to the notional or contractual amounts of these
derivatives. Risk arises from changes in the fair value of the underlying
instruments. The Company is also exposed to credit losses in the event of
nonperformance of the counterparties. This credit risk is minimized by
purchasing such agreements from financial institutions with high credit ratings
and by establishing and monitoring exposure limits.
The Company's use of derivatives is further described in Note 4. The net
interest effect of interest rate and currency swap transactions is recorded as
an adjustment to net investment income or interest expense, as appropriate, over
the periods covered by the agreements. The cost of other derivative contracts is
amortized over the life of the contracts and classified with the results of the
underlying hedged item. Certain contracts are designated as hedges of specific
assets and, to the extent those assets are marked to market, the hedge contracts
are also marked to market and included as an adjustment of the underlying asset
value. Other contracts are designated and accounted for as hedges of certain
liabilities and are not marked to market.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Hedge accounting is used for derivatives that are specifically designated in
advance as hedges and that reduce the Company's exposure to an indicated risk by
having a high correlation between changes in the value of the derivatives and
the items being hedged at both the inception of the hedge and throughout the
hedge period. Should such criteria not be met or if the hedged items are sold,
terminated or matured, the changes in value of the derivatives are included in
net income.
Contractholder and Policyholder Liabilities
Contractholder and policyholder liabilities (contractholder funds, future policy
benefits and claims, and other policyholder funds) include reserves for
investment contracts and reserves for universal life, limited payment,
participating and traditional life insurance policies. Investment contracts are
contractholders' funds on deposit with the Company and generally include
reserves for pension and annuity contracts. Reserves on investment contracts are
equal to the cumulative deposits less any applicable charges plus credited
interest.
Reserves for universal life insurance contracts are equal to cumulative premiums
less charges plus credited interest which represents the account balances that
accrue to the benefit of the policyholders. Reserves for non-participating term
life insurance contracts are computed on a basis of assumed investment yield,
mortality, morbidity and expenses, including a provision for adverse deviation,
which generally vary by plan, year of issue and policy duration. Investment
yield is based on the Company's experience. Mortality, morbidity and withdrawal
rate assumptions are based on experience of the Company and are periodically
reviewed against both industry standards and experience.
Reserves for participating life insurance contracts are based on the net level
premium reserve for death and endowment policy benefits. This net level premium
reserve is calculated based on dividend fund interest rate and mortality rates
guaranteed in calculating the cash surrender values described in the contract.
Some of the Company's policies and contracts require payment of fees in advance
for services that will be rendered over the estimated lives of the policies and
contracts. These payments are established as unearned revenue reserves upon
receipt and included in other policyholder funds in the consolidated statements
of financial position. These unearned revenue reserves are amortized to
operations over the estimated lives of these policies and contracts.
The liability for unpaid accident and health claims is an estimate of the
ultimate net cost of reported and unreported losses not yet settled. This
liability is estimated using actuarial analyses and case basis evaluations.
Although considerable variability is inherent in such estimates, the Company
believes that the liability for unpaid claims is adequate. These estimates are
continually reviewed and, as adjustments to this liability become necessary,
such adjustments are reflected in current operations.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Recognition of Premiums, Fees and Benefits
Traditional individual life and health insurance products include those products
with fixed and guaranteed premiums and benefits, and consist principally of
whole life and term life insurance policies and certain immediate annuities with
life contingencies. Premiums from these products are recognized as premium
revenue when due.
Group life and health insurance premiums are generally recorded as premium
revenue over the term of the coverage. Some group contracts allow for premiums
to be adjusted to reflect emerging experience. Such adjusted premiums are
recognized in the period that the related experience emerges. Fees for contracts
providing claim processing or other administrative services are recorded over
the period the service is provided.
Related policy benefits and expenses for individual and group life and health
insurance products are associated with earned premiums and result in the
recognition of profits over the expected lives of the policies and contracts.
Universal life-type policies are insurance contracts with terms that are not
fixed and guaranteed. Amounts received as payments for such contracts are not
reported as premium revenues. Revenues for universal life-type insurance
contracts consist of policy charges for the cost of insurance, policy initiation
and administration, surrender charges and other fees that have been assessed
against policy account values. Policy benefits and claims that are charged to
expense include interest credited to contracts and benefit claims incurred in
the period in excess of related policy account balances.
Investment contracts do not subject the Company to risks arising from
policyholder mortality or morbidity, and consist primarily of Guaranteed
Investment Contracts ("GICs") and certain deferred annuities. Amounts received
as payments for investment contracts are established as investment contract
liability balances and are not reported as premium revenues. Revenues for
investment contracts consist of investment income and policy administration
charges. Investment contract benefits that are charged to expense include
benefit claims incurred in the period in excess of related investment contract
liability balances and interest credited to investment contract liability
balances.
Deferred Policy Acquisition Costs
Commissions and other costs (underwriting, issuance and agency expenses) that
vary with and are primarily related to the acquisition of new and renewal
insurance policies and investment contract business are capitalized to the
extent recoverable. Acquisition costs that are not deferrable and maintenance
costs are charged to operations as incurred.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Deferred policy acquisition costs for universal life-type insurance contracts
and participating life insurance policies and investment contracts are being
amortized over the lives of the policies and contracts in relation to the
emergence of estimated gross profit margins. This amortization is adjusted
retrospectively when estimates of current or future gross profits and margins to
be realized from a group of products and contracts are revised. The deferred
policy acquisition costs of non-participating term life insurance policies are
being amortized over the premium-paying period of the related policies using
assumptions consistent with those used in computing policyholder liabilities.
Deferred policy acquisition costs are subject to recoverability testing at the
time of policy issue and loss recognition testing at the end of each accounting
period. Deferred policy acquisition costs would be written off to the extent
that it is determined that future policy premiums and investment income or gross
profit margins would not be adequate to cover related losses and expenses.
Reinsurance
The Company enters into reinsurance agreements with other companies in the
normal course of business. The Company may assume reinsurance from or cede
reinsurance to other companies. Premiums and expenses are reported net of
reinsurance ceded. The Company is contingently liable with respect to
reinsurance ceded to other companies in the event the reinsurer is unable to
meet the obligations it has assumed. To minimize the possibility of losses, the
Company evaluates the financial condition of its reinsurers and continually
monitors concentrations of credit risk.
The effect of reinsurance on premiums and other considerations and policy and
contract benefits and changes in reserves is as follows (in millions):
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
Premiums and other considerations:
Direct $3,187 $3,390 $4,601
Assumed 4 59 106
Ceded (39) (40) (39)
==========================================
Net premiums and other considerations $3,152 $3,409 $4,668
==========================================
Policy and contract benefits and changes in reserves:
Direct $4,656 $4,739 $5,596
Assumed (1) 66 102
Ceded (30) (28) (66)
------------------------------------------
Net policy and contract benefits and changes in reserves
$4,625 $4,777 $5,632
==========================================
</TABLE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Effective July 1, 1998, the Company no longer participates in reinsurance pools
related to the Federal Employee Group Life Insurance and Service Group Life
Insurance programs. In 1997, the premium assumed from these arrangements was
approximately $85 million.
Guaranty-fund Assessments
Guaranty-fund assessments are accrued for anticipated assessments, which are
estimated using data available from various industry sources that monitor the
current status of open and closed insolvencies. The Company has also established
an other asset for assessments expected to be recovered through future premium
tax offsets.
Separate Accounts
The separate account assets and liabilities presented in the consolidated
financial statements represent the fair market value of funds that are
separately administered by the Company for contracts with equity, real estate
and fixed-income investments. Generally, the separate account contract owner,
rather than the Company, bears the investment risk of these funds. The separate
account assets are legally segregated and are not subject to claims that arise
out of any other business of the Company. The Company receives a fee for
administrative, maintenance and investment advisory services that is included in
the consolidated statements of operations. Deposits, net investment income and
realized and unrealized capital gains and losses on the separate accounts are
not reflected in the consolidated statements of operations.
Income Taxes
Principal Mutual Holding Company files a consolidated income tax return that
includes the Company and all of its qualifying subsidiaries and has a policy of
allocating income tax expenses and benefits to companies in the group based upon
pro rata contribution of taxable income or operating losses. The Company is
taxed at corporate rates on taxable income based on existing tax laws. Current
income taxes are charged or credited to operations based upon amounts estimated
to be payable or recoverable as a result of taxable operations for the current
year. Deferred income taxes are provided for the tax effect of temporary
differences in the financial reporting and income tax bases of assets and
liabilities and net operating losses using enacted income tax rates and laws.
The effect on deferred tax assets and deferred tax liabilities of a change in
tax rates is recognized in operations in the period in which the change is
enacted.
Foreign Exchange
The Company's foreign subsidiaries' statements of financial position and
operations are translated at the current exchange rates and average exchange
rates for the year, respectively. Resulting translation adjustments for foreign
subsidiaries and certain other transactions are reported as a component of
equity. Other translation adjustments for foreign currency transactions that
affect cash flows are reported in current operations.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Pension and Postretirement Benefits
The Company accounts for its pension benefits and postretirement benefits other
than pension (medical, life insurance and long-term care) using the full accrual
method.
Property and Equipment
Property and equipment includes home office properties, related leasehold
improvements, purchased and internally developed software and other fixed
assets. Property and equipment use is shown in the consolidated statements of
financial position at cost less allowances for accumulated depreciation.
Provisions for depreciation of property and equipment are computed principally
on the straight-line method over the estimated useful lives of the assets.
Property and equipment and related accumulated depreciation are as follows (in
millions):
December 31
1999 1998
-----------------------------
Property and equipment $777 $730
Accumulated depreciation (319) (279)
=============================
Property and equipment, net $458 $451
=============================
Goodwill and Other Intangibles
Goodwill and other intangibles include the cost of acquired subsidiaries in
excess of the fair value of the net assets (i.e., goodwill) and other intangible
assets which have been recorded in connection with acquisitions. These assets
are amortized on a straight-line basis generally over 10 to 15 years. The
carrying amount of goodwill and other intangibles is reviewed periodically for
indicators of impairment in value, which in the view of management are other
than temporary, including unexpected or adverse changes in the economic or
competitive environments in which the Company operates, profitability analyses
and the fair value of the relevant subsidiary. If facts and circumstances
suggest that a subsidiary's goodwill is impaired, the Company assesses the fair
value of the underlying business and reduces the goodwill to an amount that
results in the book value of the subsidiary approximating fair value.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Goodwill and other intangibles, and related accumulated amortization, are as
follows (in millions):
<TABLE>
<CAPTION>
December 31
1999 1998
-----------------------------
<S> <C> <C>
Goodwill $176 $185
Other intangibles 21 16
-----------------------------
197 201
Accumulated amortization (45) (40)
=============================
Total goodwill and other intangibles, net $152 $161
=============================
</TABLE>
Premiums Due and Other Receivables
Premiums due and other receivables include life and health insurance premiums
due, reinsurance recoveries, guaranty funds receivable or on deposit,
receivables from the sale of securities and other receivables.
Mortgage Loan Servicing Rights
Mortgage loan servicing rights represent the cost of purchasing or originating
the right to service mortgage loans. These costs are capitalized and amortized
to operations over the estimated remaining lives of the underlying loans using
the interest method and taking into account appropriate prepayment assumptions.
Capitalized mortgage loan servicing rights are periodically assessed for
impairment, which is recognized in the consolidated statements of operations
during the period in which impairment occurs by establishing a corresponding
valuation allowance.
Other Assets
Included in other assets are certain assets pending transfer or novation that
are carried at fair value (see Note 2). The remainder of other assets are
reported primarily at cost.
Comprehensive Income (Loss)
Comprehensive income (loss) includes all changes in stockholder's equity during
a period except those resulting from investments by shareholders and
distributions to shareholders.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
The following table sets forth the adjustments necessary to avoid duplication of
items that are included as part of net income for a year that had been part of
other comprehensive income in prior years (in millions):
<TABLE>
<CAPTION>
December 31
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
Unrealized gains (losses) on available-for-sale securities
arising during the year $(1,039) $(530) $106
Adjustment for realized gains on available-for-sale
securities included in net income 191 238 72
==========================================
Unrealized gains (losses) on available-for-sale securities,
as adjusted $ (848) $(292) $178
==========================================
</TABLE>
The above adjustment for net realized gains on available-for-sale securities
included in net income is presented net of tax, related changes in the
amortization patterns of deferred policy acquisition costs and unearned revenue
reserves.
Reclassifications
Certain reclassifications have been made to the 1997 and 1998 consolidated
financial statements to conform to the 1999 presentation.
Accounting Changes
In June 1998, the Financial Accounting Standards Board ("the FASB") issued
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities
("SFAS 133"). In June 1999, Statement No. 137, Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133, ("SFAS 137") was issued deferring the effective date of SFAS
133 by one year. The new effective date for the Company to adopt SFAS 133 is
January 1, 2001. SFAS 133 will require the Company to include all derivatives in
the consolidated statement of financial position at fair value. Changes in
derivative fair values will either be recognized in earnings as offsets to the
changes in fair value of related hedged assets, liabilities and firm commitments
or, for forecasted transactions, deferred and recorded as a component of equity
until the hedged transactions occur and are recognized in earnings. The
ineffective portion of a hedging derivative's change in fair value will be
immediately recognized in earnings. The impact of SFAS 133 on the Company's
financial statements will depend on a variety of factors, including future
interpretive guidance from the FASB, the future level of forecasted and actual
foreign currency transactions, the extent of the Company's hedging activities,
the types of hedging instruments used and the effectiveness of such instruments.
However, the Company does not believe the effect of adopting SFAS 133 will be
material to its consolidated financial position.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
On January 1, 1999, the Company implemented the Statement of Position ("SOP")
98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. SOP 98-1 defines internal use software and when the costs
associated with internal use should be capitalized. The implementation did not
have a material impact on the Company's consolidated financial statements.
2. Mergers, Acquisitions and Divestitures
During 1999, various acquisitions were made by the Company's subsidiaries at
purchase prices aggregating $13 million. The acquisitions were all accounted for
using the purchase method and the results of operations of the acquired
businesses have been included in the financial statements of the subsidiaries
from the dates of acquisition. Such acquired companies had total assets at
December 31, 1999 and total 1999 revenue of $17 million and $12 million,
respectively.
Effective April 1, 1998, the Company merged substantially all of its managed
care operations with Coventry Corporation in exchange for a non-majority
ownership position in the resulting entity, Coventry Health Care, Inc. The
Company's investment in Coventry Health Care, Inc. is accounted for using the
equity method. Net equity of the transferred business on April 1, 1998 was $170
million. Consolidated financial results for 1997 included total assets at
December 31, 1997, and total revenues and pretax loss for the year then ended of
approximately $419 million, $883 million and $(26) million, respectively, for
the transferred business.
During 1998, various acquisitions were made by the Company's subsidiaries at
purchase prices aggregating $224 million. The acquisitions were all accounted
for using the purchase method and the results of operations of the acquired
businesses have been included in the financial statements of the subsidiaries
from the dates of acquisition. Such acquired companies had total assets at
December 31, 1998 and total 1998 revenue of $459 million and $58 million,
respectively.
During 1998, various divestitures were made by certain of the Company's
subsidiaries at selling prices aggregating $118 million and $15 million in net
realized capital gains were realized as a result of these divestitures. In 1997,
the financial statements included $152 million in assets, $206 million in
revenues and $20 million of pretax losses related to these subsidiaries.
During 1997, various acquisitions were made by certain of the Company's
subsidiaries at purchase prices aggregating $101 million. The acquisitions were
all accounted for using the purchase method and the results of operations of the
acquired businesses have been included in the financial statements of the
subsidiaries from the dates of acquisition. Such acquired companies had total
assets at December 31, 1997 and total 1997 revenue of $459 million and $86
million, respectively.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. Investments
Under SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities, securities are generally classified as available-for-sale,
held-to-maturity, or trading. The Company has classified its entire fixed
maturities portfolio as available-for-sale, although it is generally the
Company's intent to hold these securities to maturity. The Company has also
classified all equity securities as available-for-sale. Securities classified as
available-for-sale are reported at fair value in the consolidated statements of
financial position with the related unrealized holding gains and losses on such
available-for-sale securities reported as a separate component of equity after
adjustments for related changes in deferred policy acquisition costs, unearned
revenue reserves and deferred income taxes.
The cost, gross unrealized gains and losses and fair value of fixed maturities
and equity securities available-for-sale as of December 31, 1999 and 1998, are
as follows (in millions):
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------------
---------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1999 Fixed maturities:
United States Government and agencies
$ 163 $ - $ 2 $ 161
Foreign governments 808 18 15 811
States and political subdivisions 139 1 9 131
Corporate - public 5,187 73 137 5,123
Corporate - private 10,300 95 332 10,063
Mortgage-backed and other asset-backed
securities 5,486 12 127 5,371
---------------------------------------------------------------
Total fixed maturities $22,083 $199 $622 $21,660
===============================================================
Total equity securities $ 721 $176 $ 33 $ 864
===============================================================
December 31, 1998 Fixed maturities:
United States Government and agencies
$ 615 $ - $ 10 $ 605
Foreign governments 340 29 5 364
States and political subdivisions 137 10 - 147
Corporate - public 3,841 249 84 4,006
Corporate - private 10,570 623 95 11,098
Mortgage-backed and other asset-backed
securities 4,659 138 11 4,786
---------------------------------------------------------------
===============================================================
Total fixed maturities $20,162 $1,049 $205 $21,006
===============================================================
Total equity securities $ 760 $ 395 $ 53 $ 1,102
===============================================================
</TABLE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
The cost and fair value of fixed maturities available-for-sale at December 31,
1999, by expected maturity, are as follows (in millions):
<TABLE>
<CAPTION>
Cost Fair Value
------------------------------
------------------------------
<S> <C> <C>
Due in one year or less $ 1,261 $ 1,260
Due after one year through five years 7,784 7,654
Due after five years through ten years 4,342 4,281
Due after ten years 3,210 3,094
------------------------------
------------------------------
16,597 16,289
Mortgage-backed and other asset-backed securities 5,486 5,371
------------------------------
==============================
Total $22,083 $21,660
==============================
</TABLE>
The above summarized activity is based on expected maturities. Actual maturities
may differ because borrowers may have the right to call or pre-pay obligations.
Major categories of net investment income are summarized as follows (in
millions):
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
Fixed maturities, available-for-sale $1,578 $1,525 $1,620
Equity securities, available-for-sale 46 32 39
Mortgage loans 1,025 1,100 1,084
Real estate 188 143 107
Policy loans 2 27 50
Cash and cash equivalents 19 9 9
Other 43 58 92
------------------------------------------
------------------------------------------
2,901 2,894 3,001
Less investment expenses (124) (88) (64)
------------------------------------------
==========================================
Net investment income $2,777 $2,806 $2,937
==========================================
</TABLE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
The major components of net realized capital gains on investments are summarized
as follows (in millions):
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
-------------------------------------------
<S> <C> <C> <C>
Fixed maturities, available-for-sale:
Gross gains $ 31 $ 67 $ 51
Gross losses (123) (31) (43)
Equity securities, available-for-sale:
Gross gains 409 329 132
Gross losses (26) (40) (26)
Mortgage loans (8) 8 (6)
Real estate 56 126 64
Other 120 7 4
===========================================
Net realized capital gains $459 $466 $176
===========================================
</TABLE>
Proceeds from sales of investments (excluding call and maturity proceeds) in
fixed maturities were $5.3 billion, $2.8 billion and $5.0 billion in 1999, 1998
and 1997 respectively. Of the 1999, 1998 and 1997 proceeds, $3.6 billion, $2.2
billion and $4.0 billion, respectively, relates to sales of mortgage-backed
securities. The Company actively manages its mortgage-backed securities
portfolio to control prepayment risk. Gross gains of $2 million, $23 million and
$29 million and gross losses of $57 million, $7 million and $10 million in 1999,
1998 and 1997, respectively, were realized on sales of mortgage-backed
securities. At December 31, 1999, the Company had security purchases payable
totaling $910 million relating to the purchases of mortgage-backed securities at
forward dates.
The net unrealized gains and losses on investments in fixed maturities and
equity securities available-for-sale is reported as a separate component of
equity, reduced by adjustments to deferred policy acquisition costs and unearned
revenue reserves that would have been required as a charge or credit to
operations had such amounts been realized and a provision for deferred income
taxes. The cumulative amount of net unrealized gains and losses on
available-for-sale securities, including the net unrealized gains and losses on
the Closed Block available-for-sale securities, is as follows (in millions):
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
<TABLE>
<CAPTION>
December 31
1999 1998
-----------------------------
<S> <C> <C>
Net unrealized gains and losses on fixed maturities, available-for-sale
$(436) $939
Net unrealized gains and losses on equity securities, available-for-sale,
including seed money in separate accounts 205 347
Adjustments for assumed changes in amortization patterns:
Deferred policy acquisition costs 79 (167)
Unearned revenue reserves (13) 17
Provision for deferred income (taxes) tax benefit 63 (390)
=============================
Net unrealized gains and losses on available-for-sale securities $(102) $746
=============================
</TABLE>
During 1998, the net change in unrealized gains and losses on fixed maturities,
available-for-sale, appearing in the consolidated statements of equity includes
the effect of a change in the method of estimating the fair value of certain
corporate bonds, net of related adjustments for assumed changes in amortization
patterns and deferred income taxes, of $116 million.
The corporate private placement bond portfolio is diversified by issuer and
industry. Restrictive bond covenants are monitored by the Company to regulate
the activities of issuers and control their leveraging capabilities.
Commercial mortgage loans and corporate private placement bonds originated or
acquired by the Company represent its primary areas of credit risk exposure. At
December 31, 1999 and 1998, the commercial mortgage portfolio is diversified by
geographic region and specific collateral property type as follows:
<TABLE>
<CAPTION>
Geographic Distribution Property Type Distribution
------------------------------------------------------ --------------------------------------------------
December 31 December 31
1999 1998 1999 1998
----------------------- -----------------------
----------------------- -----------------------
<S> <C> <C> <C> <C>
New England 5% 5% Office 30% 29%
Middle Atlantic 14 14 Retail 33 33
East North Central 10 10 Hotel 1 1
West North Central 4 5 Mixed use/other 2 2
South Atlantic 25 25 Industrial 32 33
East South Central 3 3 Apartments 3 3
West South Central 7 7 Valuation allowance (1) (1)
Mountain 5 4
Pacific 28 28
Valuation allowance (1) (1)
</TABLE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
Mortgage loans on real estate are considered impaired when, based on current
information and events, it is probable that the Company will be unable to
collect all amounts due according to contractual terms of the loan agreement.
When the Company determines that a loan is impaired, a provision for loss is
established for the difference between the carrying amount of the mortgage loan
and the estimated value. 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. The
provision for losses is reported as a net realized capital loss.
Mortgage loans deemed to be uncollectible are charged against the allowance for
losses and subsequent recoveries are credited to the allowance for losses. The
allowance for losses is maintained at a level believed adequate by management to
absorb estimated probable credit losses. Management's periodic evaluation of the
adequacy of the allowance for losses is based on the Company's past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay, the estimated value of the
underlying collateral, composition of the loan portfolio, current economic
conditions and other relevant factors. The evaluation is inherently subjective
as it requires estimating the amounts and timing of future cash flows expected
to be received on impaired loans that may change.
A summary of the changes in the mortgage loan allowance for losses is as follows
(in millions):
<TABLE>
<CAPTION>
December 31
1999 1998 1997
------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $104 $121 $121
Establishment of closed block (see Note 5) - (9) -
Provision for losses 5 4 8
Releases due to write-downs, sales and foreclosures (1) (12) (8)
====================================
Balance at end of year $108 $104 $121
====================================
</TABLE>
The Company was servicing approximately 555,000 and 484,000 residential mortgage
loans with aggregate principal balances of approximately $51.9 billion and $42.1
billion at December 31, 1999 and 1998, respectively. In connection with these
mortgage servicing activities, the Company held funds in trust for others
totaling approximately $334 million and $284 million at December 31, 1999 and
1998, respectively. In connection with its loan administration activities, the
Company advances payments of property taxes and insurance premiums and also
advances principal and interest payments to investors in advance of collecting
funds from specific mortgagors. In addition, the Company makes certain payments
of attorney fees and other costs related to loans in foreclosure. These amounts
receivable are recorded, at cost, as advances on serviced loans. Amounts
advanced are considered in management's evaluation of the adequacy of the
mortgage loan allowance for losses.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
Real estate holdings and related accumulated depreciation are as follows (in
millions):
December 31
1999 1998
-----------------------------
Investment real estate $1,461 $1,890
Accumulated depreciation (161) (183)
-----------------------------
1,300 1,707
Properties held for sale 912 878
=============================
Real estate, net $2,212 $2,585
=============================
Other investments include a temporarily controlled subsidiary. Also included in
other investments are properties owned jointly with venture partners and
operated by the partners. Joint ventures in which the Company has an interest
have mortgage loans with the Company of $760 million and $876 million at
December 31, 1999 and 1998, respectively. The Company is committed to providing
additional mortgage financing for such joint ventures aggregating $77 million at
December 31, 1999.
4. Derivatives Held or Issued for Purposes Other Than Trading
The Company uses exchange-traded interest rate futures and mortgage-backed
securities forwards to hedge against interest rate risks. The Company attempts
to match the timing of when interest rates are committed on insurance products
and on new investments. However, timing differences do occur and can expose the
Company to fluctuating interest rates. Interest rate futures and mortgage-backed
securities forwards are used to minimize these risks. In these contracts, the
Company is subject to the risk that the counterparties will fail to perform and
to the risks associated with changes in the value of the underlying securities;
however, such changes in value generally are offset by opposite changes in the
value of the hedged items. Futures contracts are marked to market and settled
daily, which minimizes the counterparty risk. The notional amounts of futures
contracts ($76 million at December 31, 1999, and $855 million at December 31,
1998) represent the extent of the Company's involvement. The Company had
outstanding mortgage-backed securities forwards of $149 million and $55 million
at December 31, 1999 and 1998, respectively.
The Company uses interest rate swaps to more closely match the interest rate
characteristics of its assets with those of its liabilities. Swaps are used in
asset and liability management to modify duration and match cash flows.
Occasionally, the Company will sell a callable investment-type contract and may
use interest rate swaptions or similar instruments to transform the callable
liability into a fixed term liability. In addition, the Company may sell an
investment-type contract with attributes tied to market indices in which case
the Company uses a call option to transform the liability into a
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
4. Derivatives Held or Issued for Purposes Other Than Trading (continued)
fixed rate liability. The notional principal amounts of the interest rate swaps
outstanding at December 31, 1999 and 1998 were $1,211 million and $1,533
million, respectively, and the credit exposure at December 31, 1999 and 1998 was
$19 million for both years. The notional principal amounts of the swaptions
outstanding at December 31, 1999 and 1998 were $470 million and $259 million,
respectively, and the credit exposure at December 31, 1999 and 1998 was $9
million and $6 million, respectively. The notional amounts of call options were
$30 million at both December 31, 1999 and 1998, and the credit exposure was $19
million and $6 million at December 31, 1999 and 1998, respectively. The
Company's current credit exposure on swaps is limited to the value of interest
rate swaps that have become favorable to the Company. The average unexpired
terms of the swaps were approximately five years at December 31, 1999 and six
years at December 31, 1998. The net amount payable or receivable from interest
rate swaps is accrued as an adjustment to interest income. The Company's
interest rate swap agreements include cross-default provisions when two or more
swaps are transacted with a given counterparty.
The Company enters into currency exchange swap agreements to convert certain
foreign denominated fixed rate assets and liabilities into U. S. dollar
denominated instruments to eliminate the exposure to future currency volatility
on those items. At December 31, 1999, the Company had various foreign currency
exchange agreements with maturities ranging from 2000 to 2018, with an aggregate
notional amount of approximately $1,571 million and a credit exposure of $69
million. At December 31, 1998, such maturities ranged from 1999 to 2018 with an
aggregate notional amount of approximately $486 million and a credit exposure of
$35 million. The average unexpired term of the swaps was approximately six years
at December 31, 1999 and seven years at December 31, 1998.
With regard to its foreign operations, the Company attempts to conduct much of
its business in the functional currency of the country of operation. At times,
the Company is unable to do so, and beginning in 1999 for these cases, it uses
foreign exchange derivatives to hedge the resulting currency risk. At December
31, 1999, the Company had foreign currency swaps with a notional amount of $5
million outstanding.
The Company manages the risk on its commercial mortgage loan pipeline by buying
and selling mortgage-backed securities in the forward markets, interest rate
swaps, and interest rate futures. The Company entered into mortgage-backed
forwards totaling $87 million and $27 million at December 31, 1999 and 1998,
respectively, and interest rate swaps with notional amounts of $88 million with
a credit exposure totaling $2 million at December 31, 1999. In addition, the
Company entered into interest rate futures contracts with notional amounts of
$211 million and $58 million at December 31, 1999 and 1998, respectively. Such
futures contracts are marked to market and settled daily.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
4. Derivatives Held or Issued for Purposes Other Than Trading (continued)
The Company manages risk on its residential mortgage loan pipeline by buying and
selling mortgage-backed securities in the forward markets, over-the-counter
options on mortgage-backed securities, U.S. Treasury futures contracts and
options on Treasury futures contracts. The Company entered into mandatory
forward, option and futures contracts totaling approximately $1,080 million and
$2,369 million at December 31, 1999 and 1998, respectively, to reduce interest
rate risk on certain mortgage loans held for sale and other commitments. The
forward contracts provide for the delivery of securities at a specified future
date at a specified price or yield. In the event the counterparty is unable to
meet its contractual obligations, the Company may be exposed to the risk of
selling mortgage loans at prevailing market prices. The effect of these
contracts was considered in the lower of cost or market calculation of mortgage
loans held for sale.
The Company has committed to originate approximately $372 million and $1,100
million of mortgage loans at December 31, 1999 and 1998, respectively, subject
to borrowers meeting the Company's underwriting guidelines. These commitments
call for the Company to fund such loans at a future date with a specified rate
at a specified price. Because the borrowers are not obligated to close the
loans, the Company is exposed to risks that it may not have sufficient mortgage
loans to deliver to its mandatory forward contracts and, thus, would be
obligated to purchase mortgage loans at prevailing market rates to meet such
commitments. Conversely, the Company is exposed to the risk that more loans than
expected will close, and the loans would then be sold at current market prices.
The Company uses interest rate floors and options on futures contracts in
hedging a portion of its portfolio of mortgage servicing rights from prepayment
risk associated with changes in interest rates. The Company had entered into
interest rate floor and option contracts with a notional value of $5,550 million
and $6,314 million at December 31, 1999 and 1998, respectively. The floors and
contracts provide for the receipt of payments when interest rates are below
predetermined interest rate levels. The premiums paid for floors are included in
other assets in the Company's consolidated statements of financial position.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
5. Closed Block
Summarized financial information of the Closed Block is as follows (in
millions):
<TABLE>
<CAPTION>
December 31
1999 1998
-----------------------------
<S> <C> <C>
Assets
Fixed maturities available-for-sale $1,782 $1,722
Mortgage loans 1,036 1,063
Policy loans 752 741
Other investments 1 1
-----------------------------
Total investments 3,571 3,527
Cash and cash equivalents 24 -
Accrued investment income 63 60
Deferred policy acquisition costs 639 649
Premiums due and other receivables 21 15
=============================
$4,318 $4,251
=============================
Liabilities
Future policy benefits and claims $4,864 $4,668
Other policyholder funds 406 399
Other liabilities 125 232
-----------------------------
$5,395 $5,299
=============================
</TABLE>
<TABLE>
<CAPTION>
For the six-month
For the year ended period from formation
December 31, 1999 to December 31, 1998
----------------------------------------------
<S> <C> <C>
Revenues and expenses
Premiums and other considerations $764 $390
Net investment income 269 127
Other income (expense) (2) 1
Policy and contract benefits (438) (196)
Change in future policy benefits and contractholder funds
(176) (110)
Dividends to policyholders (296) (143)
Operating expenses (110) (56)
==============================================
Contribution from Closed Block (before income taxes)
$ 11 $ 13
==============================================
</TABLE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
6. Deferred Policy Acquisition Costs
Policy acquisition costs deferred and amortized in 1999, 1998 and 1997 are as
follows (in millions):
<TABLE>
<CAPTION>
December 31
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $456 $1,057 $1,058
Balance transferred to the Closed Block - (697) -
Cost deferred during the year 254 229 213
Amortized to expense during the year (76) (170) (170)
Effect of unrealized (gains) losses 158 37 (44)
==========================================
Balance at end of year $792 $ 456 $1,057
==========================================
</TABLE>
7. Insurance Liabilities
Major components of contractholder funds in the consolidated statements of
financial position, are summarized as follows (in millions):
<TABLE>
<CAPTION>
December 31
1999 1998
-----------------------------
<S> <C> <C>
Liabilities for investment-type contracts:
Guaranteed investment contracts $15,941 $15,211
Domestic funding agreements 743 653
International funding agreements backing
medium-term notes 1,139 -
Other investment-type contracts 3,115 3,806
-----------------------------
Total liabilities for investment-type contracts 20,938 19,670
Liabilities for individual annuities 2,522 2,685
Universal life and other reserves 1,063 984
=============================
Total contractholder funds $24,523 $23,339
=============================
</TABLE>
The Company's contractholder funds, excluding universal life reserves, include
surrender and withdrawal provisions which mitigate the risk of losses due to
early withdrawals. Approximately 90% of such contractholder funds, include
surrender or market value adjustment provisions, or are not subject to
discretionary withdrawal. The remainder is subject to discretionary withdrawal
at book value with minimal or no surrender charge.
Approximately 3.0% of the Company's investment contract portfolio includes
puttable funding agreements, representing 1.3% of general account assets.
Approximately 2.5% of the portfolio includes contracts which require the
contractholder to give the Company a minimum of 90 days notice before contract
termination payment.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
7. Insurance Liabilities (continued)
Funding agreements are issued to non-qualified institutional investors both in
domestic and international markets. In late 1998, the Company established a $2
billion program under which an offshore special purpose entity was created to
issue nonrecourse medium-term notes. Under the program, the proceeds of each
note series issuance are used to purchase a funding agreement from the Company,
with the funding agreement so purchased then used to secure that particular
series of notes. In general, the payment terms of any particular series of notes
match the payment terms of the funding agreement that secures that series.
Claims for principal and interest under those international funding agreements
are afforded equal priority to claims of life insurance and annuity
policyholders under insolvency provisions of Iowa Insurance Laws. During 1999,
the Company began issuing international funding agreements to the offshore
special purpose vehicle under that program. The offshore special purpose vehicle
issued medium-term notes to investors in Europe, Asia and Australia. In general,
the medium-term note funding agreements do not give the contractholder the right
to terminate prior to contractually stated maturity dates, absent the existence
of certain circumstances which are largely within the Company's control. At
December 31, 1999, the contractual maturities were 2002 - $180 million; 2004 -
$358 million; 2008 - $36 million; and 2009 - $565 million.
Activity in the liability for unpaid accident and health claims, which is
included with future policy benefits and claims in the consolidated statements
of financial position, is summarized as follows (in millions):
<TABLE>
<CAPTION>
December 31
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 641 $ 770 $ 800
Incurred:
Current year 1,831 1,922 2,723
Prior years 32 (14) (21)
------------------------------------------
------------------------------------------
Total incurred 1,863 1,908 2,702
Reclassification for subsidiary merger
(see Note 2) - 155 -
Payments:
Current year 1,380 1,523 2,235
Prior years 405 359 497
------------------------------------------
Total payments 1,785 2,037 2,732
------------------------------------------
Balance at end of year:
Current year 451 349 476
Prior years 268 292 294
------------------------------------------
==========================================
Total balance at end of year $ 719 $ 641 $ 770
==========================================
</TABLE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
7. Insurance Liabilities (continued)
The activity summary in the liability for unpaid accident and health claims
shows an increase of $32 million, a decrease of $14 million and a decrease of
$21 million to the December 31, 1998, 1997 and 1996 liability for unpaid
accident and health claims, respectively, arising in prior years. Such liability
adjustments, which affected current operations during 1999, 1998 and 1997,
respectively, resulted from developed claims for prior years being different
than were anticipated when the liabilities for unpaid accident and health claims
were originally estimated. These trends have been considered in establishing the
current year liability for unpaid accident and health claims.
8. Debt
Short-term debt
Short-term debt consists primarily of commercial paper and outstanding balances
on credit facilities with various banks. At December 31, 1999, the Company and
certain subsidiaries had credit facilities with various banks in an aggregate
amount of $1.5 billion. The credit facilities may be used for general corporate
purposes and also to provide backup for the Company's commercial paper programs.
Long-term debt
The components of debt as of December 31, 1999 and December 31, 1998 are as
follows (in millions):
<TABLE>
<CAPTION>
December 31
1999 1998
------------------------------
<S> <C> <C> <C> <C>
7.875% surplus notes payable, due 2024 $199 199
8% surplus notes payable, due 2044 99 99
Non-recourse mortgages and notes payable 335 214
Other mortgages and notes payable 201 159
==============================
Total long-term debt $834 $671
==============================
</TABLE>
The amounts included above are net of the discount and direct costs associated
with issuing these notes which are being amortized to expense over their
respective terms using the interest method.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
8. Debt (continued)
On March 10, 1994, the Company issued $300 million of surplus notes, including
$200 million due March 1, 2024 at a 7.875% annual interest rate and the
remaining $100 million due March 1, 2044 at an 8% annual interest rate. No
affiliates of the Company hold any portion of the notes. Each payment of
interest and principal on the notes, however, may be made only with the prior
approval of the Commissioner of Insurance of the State of Iowa (the
"Commissioner") and only to the extent that the Company has sufficient surplus
earnings to make such payments. For each of the years ended December 31, 1999,
1998 and 1997, interest of $24 million was approved by the Commissioner, paid
and charged to expense.
Subject to Commissioner approval, the surplus notes due March 1, 2024 may be
redeemed at the Company's election on or after March 1, 2004 in whole or in part
at a redemption price of approximately 103.6% of par. The approximate 3.6%
premium is scheduled to gradually diminish over the following ten years. These
surplus notes may then be redeemed on or after March 1, 2014, at a redemption
price of 100% of the principal amount plus interest accrued to the date of
redemption.
In addition, subject to Commissioner approval, the notes due March 1, 2044 may
be redeemed at the Company's election on or after March 1, 2014, in whole or in
part at a redemption price of approximately 102.3% of par. The approximate 2.3%
premium is scheduled to gradually diminish over the following ten years. These
notes may be redeemed on or after March 1, 2024, at a redemption price of 100%
of the principal amount plus interest accrued to the date of redemption.
The mortgages and other notes payable are financings for real estate
developments. The Company has obtained loans with various lenders to finance
these developments. Outstanding principal balances as of December 31, 1999 range
from $1 million to $38 million per development with interest rates generally
ranging from 6.4% to 9.3%. Outstanding principal balances as of December 31,
1998 range from $1 million to $39 million per development with interest rates
generally ranging from 6.6% to 9.3%.
At December 31, 1999, future annual maturities of debt are as follows (in
millions):
2000 $124
2001 72
2002 19
2003 12
2004 12
Thereafter 595
----------
==========
Total future maturities of debt $834
==========
Cash paid for interest for 1999, 1998 and 1997 was $96 million, $97 million and
$67 million, respectively. These amounts include interest paid on taxes during
these years.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
9. Income Taxes
The Company's income tax expense (benefit) is as follows (in millions):
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
Current income taxes:
Federal $ 84 $ (80) $144
State and foreign 13 10 3
Net realized capital gains 162 107 11
------------------------------------------
Total current income taxes 259 37 158
Deferred income taxes 64 7 83
==========================================
Total income taxes $323 $44 $241
==========================================
</TABLE>
The Company's provision for income taxes may not have the customary relationship
of taxes to income. Differences between the prevailing corporate income tax rate
of 35% times the pre-tax income and the Company's effective tax rate on pre-tax
income are generally due to inherent differences between income for financial
reporting purposes and income for tax purposes, and the establishment of
adequate provisions for any challenges of the tax filings and tax payments to
the various taxing jurisdictions. A reconciliation between the corporate income
tax rate and the effective tax rate is as follows:
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
Statutory corporate tax rate 35% 35% 35%
Dividends received deduction (3) (4) (2)
Interest exclusion from taxable income - (1) (1)
Resolution of prior year tax issues - (20) -
Other (3) (4) 3
------------------------------------------
Effective tax rate 29% 6% 35%
==========================================
</TABLE>
Significant components of the Company's net deferred income taxes are as follows
(in millions):
<TABLE>
<CAPTION>
December 31
1999 1998
-----------------------------
<S> <C> <C>
Deferred income tax assets (liabilities):
Insurance liabilities $ 138 $ 117
Deferred policy acquisition costs (149) (111)
Net unrealized losses (gains) on available for sale
securities 88 (381)
Mortgage loan servicing rights (210) (111)
Other (26) (11)
=============================
$(159) $(497)
=============================
</TABLE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
9. Income Taxes (continued)
The Internal Revenue Service ("the Service") has completed examination of the
consolidated federal income tax returns of the Company and affiliated companies
through 1992. The Service is completing their examination of the Company's
returns for 1993 and 1994. The Service has also begun to examine returns for
1995 and 1996. The Company believes that there are adequate defenses against or
sufficient provisions for any challenges.
Undistributed earnings of certain foreign subsidiaries are considered
indefinitely reinvested by the Company. A tax liability will be recognized when
the Company expects distribution of earnings in the form of dividends, sale of
the investment or otherwise.
Cash paid for income taxes was $270 million in 1999, $309 million in 1998 and
$143 million in 1997.
10. Employee and Agent Benefits
The Company has defined benefit pension plans covering substantially all of its
employees and certain agents. The employees and agents are generally first
eligible for the pension plans when they reach age 21. The pension benefits are
based on the years of service and generally the employee's or agent's average
annual compensation during the last five years of employment. Partial benefit
accrual of pension benefits is recognized from first eligibility until
retirement based on attained service divided by potential service to age 65 with
a minimum of 35 years of potential service. The Company's policy is to fund the
cost of providing pension benefits in the years that the employees and agents
are providing service to the Company. The Company's funding policy is to deposit
the actuarial normal cost and any change in unfunded accrued liability over a
30-year period as a percentage of compensation.
The Company also provides certain health care, life insurance and long-term care
benefits for retired employees. Substantially all employees are first eligible
for these postretirement benefits when they reach age 57 and have completed ten
years of service with the Company. Partial benefit accrual of these health, life
and long-term care benefits is recognized from the employee's date of hire until
retirement based on attained service divided by potential service to age 65 with
a minimum of 35 years of potential service. The Company's policy is to fund the
cost of providing retiree benefits in the years that the employees are providing
service to the Company. The Company's funding policy is to deposit the actuarial
normal cost and an accrued liability over a 30-year period as a percentage of
compensation.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
10. Employee and Agent Benefits (continued)
The plans' combined funded status, reconciled to amounts recognized in the
consolidated statements of financial position and consolidated statements of
operations, is as follows (in millions):
<TABLE>
<CAPTION>
Other Postretirement
Pension Benefits Benefits
---------------------------------- ------------------------------
December 31 December 31
1999 1998 1997 1999 1998 1997
---------- ----------- ----------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of $ (827) $(700) $(732) $(206) $(214) $(218)
year
Service cost (42) (34) (41) (11) (12) (12)
Interest cost (55) (50) (52) (14) (15) (16)
Actuarial gain (loss) 163 (79) 101 (3) 20 19
Curtailment adjustment - - 7 - - -
Benefits paid 29 36 17 6 15 13
========== =========== =========== ========= ========== =========
Benefit obligation at end of year $ (732) $(827) $(700) $(228) $(206) $(214)
========== =========== =========== ========= ========== =========
Change in plan assets
Fair value of plan assets at
beginning of year $ 993 $ 980 $ 841 $ 326 $ 300 $ 247
Actual return on plan assets 90 23 130 5 15 41
Employer contribution 6 26 26 21 26 25
Benefits paid (29) (36) (17) (6) (15) (13)
---------- ----------- ----------- --------- ---------- ---------
Fair value of plan assets at end of $1,060 $ 993 $ 980 $ 346 $ 326 $ 300
year
========== =========== =========== ========= ========== =========
Funded status $ 328 $ 166 $ 280 $ 118 $ 120 $ 86
Unrecognized net actuarial gain (216) (38) (182) (46) (71) (53)
Unrecognized prior service cost 11 12 14 - - -
Unamortized transition obligation (26) (37) (49) 4 8 12
(asset)
========== =========== =========== ========= ========== =========
Prepaid benefit cost $ 97 $ 103 $ 63 $ 76 $ 57 $ 45
========== =========== =========== ========= ========== =========
Weighted-average assumptions as of
December 31
Discount rate 8.00% 6.75% 7.25% 8.00% 6.75% 7.25%
</TABLE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
10. Employee and Agent Benefits (continued)
<TABLE>
<CAPTION>
Other Postretirement
Pension Benefits Benefits
---------------------------------- ------------------------------
December 31 December 31
1999 1998 1997 1999 1998 1997
---------- ----------- ----------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic benefit
cost
Service cost $ 42 $ 34 $ 41 $ 11 $ 12 $ 12
Interest cost 55 50 52 14 15 16
Expected return on plan assets (76) (75) (80) (24) (16) (16)
Amortization of prior service cost 1 1 1 - - -
Amortization of transition (asset)
obligation (11) (11) (11) 4 4 4
Recognized net actuarial loss (gain) - (8) 2 (2) (1) -
---------- ----------- ----------- --------- ---------- ---------
Net periodic benefit cost (income) $ 11 $ (9) $ 5 $ 3 $ 14 $ 16
========== =========== =========== ========= ========== =========
</TABLE>
For 1999, 1998 and 1997, the expected long-term rates of return on plan assets
for pension benefits were approximately 5% in each of these years (after
estimated income taxes) for those trusts subject to income taxes. For trusts not
subject to income taxes, the expected long-term rates of return on plan assets
were approximately 8.1% in each of the years 1999, 1998 and 1997. The assumed
rate of increase in future compensation levels varies by age for both the
qualified and non-qualified pension plans.
For 1999, 1998 and 1997, the expected long-term rates of return on plan assets
for other post-retirement benefits were approximately 5% in each of these years
(after estimated income taxes) for those trusts subject to income taxes. For
trusts not subject to income taxes, the expected long-term rates of return on
plan assets were approximately 8.0%, 8.1% and 8.2% for 1999, 1998 and 1997,
respectively. These rates of return on plan assets vary by benefit type and
employee group.
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligations starts at 14.1% in 1999 and declines to an
ultimate rate of 6% in 2009. Assumed health care cost trend rates have a
significant effect on the amounts reported for the health care plans. A
one-percentage-point change in assumed health care cost trend rates would have
the following effects (in millions):
<TABLE>
<CAPTION>
1-Percentage-Point 1-Percentage-Point
Increase Decrease
---------------------- ---------------------
<S> <C> <C>
Effect on total of service and interest cost components
$ 8 $ (6)
Effect on accumulated postretirement benefit obligation
41 (33)
</TABLE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
10. Employee and Agent Benefits (continued)
In addition, the Company has defined contribution plans that are generally
available to all employees and agents who are age 21 or older. Eligible
participants may contribute up to 20% of their compensation, to a maximum of
$10,000 annually, to the plans in 1999 and 1998. Eligible participants were able
to contribute up to 15% of their compensation, to a maximum of $9,500 annually,
to the plans in 1997. The Company matches the participant's contribution at a
50% contribution rate up to a maximum Company contribution of 2% of the
participant's compensation. The Company contributed $11 million in both 1999 and
1998, and $15 million in 1997 to these defined contribution plans.
11. Other Commitments and Contingencies
The Company, as a lessor, leases industrial, office, retail and other
wholly-owned investment real estate properties under various operating leases.
Rental income for all operating leases totaled $357 million in 1999, $362
million in 1998 and $344 million in 1997. At December 31, 1999, future minimum
annual rental commitments under these noncancelable operating leases are as
follows (in millions):
<TABLE>
<CAPTION>
Held for Sale Held for Total Rental
Investment Commitments
---------------------------------------------------
<S> <C> <C> <C>
2000 $ 96 $ 150 $ 246
2001 87 137 224
2002 67 127 194
2003 53 117 170
2004 41 105 146
Thereafter 180 796 976
===================================================
Total future minimum lease receipts $524 $1,432 $1,956
===================================================
</TABLE>
The Company, as a lessee, leases office space, data processing equipment,
corporate aircraft and office furniture and equipment under various operating
leases. Rental expense for all operating leases totaled $73 million in 1999, $60
million in 1998 and $84 million in 1997. At December 31, 1999, future minimum
annual rental commitments under these noncancelable operating leases are as
follows (in millions):
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
11. Other Commitments and Contingencies (continued)
<TABLE>
<S> <C>
2000 $ 43
2001 32
2002 23
2003 16
2004 9
Thereafter 9
-----------
132
Less future sublease rental income on these noncancelable leases 3
===========
Total future minimum lease payments $129
===========
</TABLE>
The Company is a plaintiff or defendant in actions arising out of its insurance
business and investment operations. The Company is, from time to time, also
involved in various governmental and administrative proceedings. While the
outcome of any pending or future litigation cannot be predicted, management does
not believe that any pending litigation will have a material adverse effect on
the Company's business, financial condition or results of operations. However,
no assurances can be given that such litigation would not materially and
adversely affect the Company's business, financial condition or results of
operations.
Other companies in the life insurance industry have historically been subject to
substantial litigation resulting from claims disputes and other matters. Most
recently, such companies have faced extensive claims, including class-action
lawsuits, alleging improper life insurance sales practices. Negotiated
settlements of such class-action lawsuits have had a material adverse effect on
the business, financial condition and results of operations of certain of these
companies. The Company is currently a defendant in two purported class-action
lawsuits which allege improper life insurance sales practices. The Company
believes the claims are without merit and intends to vigorously contest such
suits. However, there can be no assurance that such sales practice litigation or
any future similar litigation will not have a material adverse effect on the
Company's business, financial condition or results of operations.
The Company is also subject to insurance guaranty laws in the states in which it
writes business. These laws provide for assessments against insurance companies
for the benefit of policyholders and claimants in the event of insolvency of
other insurance companies. The assessments may be partially recovered through a
reduction in future premium taxes in some states. The Company believes such
assessments in excess of amounts accrued would not materially affect its
financial condition or results of operations.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
12. Fair Value of Financial Instruments
The following discussion describes the methods and assumptions utilized by the
Company in estimating its fair value disclosures for financial instruments.
Certain financial instruments, particularly policyholder liabilities other than
investment contracts, are excluded from these fair value disclosure
requirements. The techniques utilized in estimating the fair values of financial
instruments are affected by the assumptions used, including discount rates and
estimates of the amount and timing of future cash flows. Care should be
exercised in deriving conclusions about the Company's business, its value or
financial position based on the fair value information of financial instruments
presented below. The estimates shown are not necessarily indicative of the
amounts that would be realized in a one-time, current market exchange of all of
the Company's financial instruments.
The Company defines fair value as the quoted market prices for those instruments
that are actively traded in financial markets. In cases where quoted market
prices are not available, fair values are estimated using present value or other
valuation techniques. The fair value estimates are made at a specific point in
time, based on available market information and judgments about the financial
instrument, including estimates of timing, amount of expected future cash flows
and the credit standing of counterparties. Such estimates do not consider the
tax impact of the realization of unrealized gains or losses. In many cases, the
fair value estimates cannot be substantiated by comparison to independent
markets. In addition, the disclosed fair value may not be realized in the
immediate settlement of the financial instrument.
Fair values of public debt and equity securities have been determined by the
Company from public quotations, when available. Private placement securities and
other fixed maturities and equity securities are valued by discounting the
expected total cash flows. Market rates used are applicable to the yield, credit
quality and average maturity of each security.
Fair values of commercial mortgage loans are determined by discounting the
expected total cash flows using market rates that are applicable to the yield,
credit quality and maturity of each loan. Fair values of residential mortgage
loans are determined by a pricing and servicing model using market rates that
are applicable to the yield, rate structure, credit quality, size and maturity
of each loan.
The fair values for assets classified as policy loans, other investments
excluding equity investments in subsidiaries, cash and cash equivalents and
accrued investment income in the accompanying consolidated statements of
financial position approximate their carrying amounts.
Mortgage servicing rights represent the present value of estimated future net
revenues from contractually specified servicing fees. The fair value was
estimated with a valuation model using current prepayment speeds and a market
discount rate.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
12. Fair Value of Financial Instruments (continued)
The fair values of the Company's reserves and liabilities for investment-type
insurance contracts (insurance, annuity and other policy contracts that do not
involve significant mortality or morbidity risk and that are only a portion of
the policyholder liabilities appearing in the consolidated statements of
financial position) are estimated using discounted cash flow analyses (based on
current interest rates being offered for similar contracts with maturities
consistent with those remaining for the investment-type contracts being valued).
The fair values for the Company's insurance contracts (insurance, annuity and
other policy contracts that do involve significant mortality or morbidity risk),
other than investment-type contracts, are not required to be disclosed. The
Company does consider, however, the various insurance and investment risks in
choosing investments for both insurance and investment-type contracts.
Fair values for debt issues are estimated using discounted cash flow analysis
based on the Company's incremental borrowing rate for similar borrowing
arrangements.
The carrying amounts and estimated fair values of the Company's financial
instruments at December 31, 1999 and 1998, are as follows (in millions):
<TABLE>
<CAPTION>
1999 1998
--------------------------- ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------------------- ----------------------------
<S> <C> <C> <C> <C>
Assets (liabilities)
Fixed maturities (see Note 3) $21,660 $21,660 $21,006 $21,006
Equity securities (see Note 3) 864 864 1,102 1,102
Mortgage loans 12,296 12,155 12,091 12,711
Policy loans 28 28 25 25
Other investments 465 465 198 198
Cash and cash equivalents 362 362 461 461
Accrued investment income 408 408 375 375
Financial instruments included in Closed
Block (see Note 5) 3,658 3,649 3,587 3,652
Mortgage servicing rights 1,081 1,288 778 821
Investment-type insurance contracts (23,563) (23,068) (22,127) (21,606)
Short-term debt - - (200) (200)
Long-term debt 834 790 (671) (708)
</TABLE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
13. Statutory Insurance Financial Information
The Company prepares statutory financial statements in accordance with the
accounting practices prescribed or permitted by the Insurance Division of the
Department of Commerce of the State of Iowa. Currently "prescribed" statutory
accounting practices include a variety of publications of the National
Association of Insurance Commissioners ("NAIC") as well as state laws,
regulations and general administrative rules. "Permitted" statutory accounting
practices encompass all accounting practices not so prescribed. The impact of
any permitted accounting practices on statutory surplus is not material. The
accounting practices used to prepare statutory financial statements for
regulatory filings differ in certain instances from GAAP. Prescribed or
permitted statutory accounting practices are used by state insurance departments
to regulate the Company.
The NAIC has adopted the Codification of Statutory Accounting Principles
("Codification"), the result of which is expected to constitute the primary
source of "prescribed" statutory accounting practices upon formal adoption by
Iowa regulatory authorities. If adopted as proposed effective January 1, 2001,
Codification will likely change, to some extent, prescribed statutory accounting
practices and may result in changes to the accounting practices that the Company
uses to prepare its statutory-basis financial statements. Codification will
require adoption by the various states before it becomes the prescribed
statutory basis of accounting for insurance companies domiciled within those
states. The impact on the Company's statutory financial statements has not been
determined at this time.
Life/Health insurance companies are subject to certain risk-based capital
("RBC") requirements as specified by the NAIC. Under those requirements, the
amount of capital and surplus maintained by a life/health insurance company is
to be determined based on the various risk factors related to it. At December
31, 1999, the Company meets the RBC requirements.
Under Iowa law, the Company may pay dividends only from the earned surplus
arising from its business and must receive the prior approval of the Iowa
Commissioner to pay a dividend if such a dividend would exceed certain statutory
limitations. The current statutory limitation is the greater of 10% of the
Company's policyholder surplus as of the preceding year end or the net gain from
operations from the previous calendar year. Based on this limitation and 1999
statutory results, the Company could pay approximately $539 million in dividends
in 2000 without exceeding the statutory limitation. In 1999, the Company
notified the Iowa Commissioner in advance of all dividend payments and received
approval for an extraordinary dividend of $250 million. Total dividends paid to
its parent company in 1999 were $509 million. Dividends were composed of cash,
other assets and the net assets of the Company's subsidiary, Princor Financial
Services Corporation. The distribution of the Company's investment in Princor
Financial Services Corporation was recorded at fair market value of $77 million
and resulted in a gain of $56 million for a subsidiary of the Company.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
13. Statutory Insurance Financial Information (continued)
The following summary reconciles the assets and equity at December 31, 1999,
1998 and 1997, and net income for the years ended December 31, 1999, 1998 and
1997, in accordance with statutory reporting practices prescribed or permitted
by the Insurance Division of the Department of Commerce of the State of Iowa
with that reported in these consolidated GAAP financial statements (in
millions):
<TABLE>
<CAPTION>
Stockholder's Net
Assets Equity Income
------------------------------------------
------------------------------------------
<S> <C> <C> <C>
December 31, 1999
As reported in accordance with statutory accounting practices
- unconsolidated $76,018 $3,152 $714
Additions (deductions):
Unrealized loss on fixed maturities available-for-sale (357) (357) -
Other investment adjustments 2,088 995 10
Adjustments to insurance reserves and dividends (125) (236) 15
Deferral of policy acquisition costs 1,409 1,409 68
Surplus note reclassification as debt - (298) -
Provision for deferred federal income taxes and other tax
reclassifications - 33 18
Other - net 277 253 (15)
------------------------------------------
As reported in these consolidated GAAP financial statements $79,310 $4,951 $810
==========================================
December 31, 1998
As reported in accordance with statutory accounting practices
- unconsolidated $70,096 $3,032 $511
Additions (deductions):
Unrealized gain on fixed maturities available-for-sale 997 997 -
Other investment adjustments 1,620 1,081 176
Adjustments to insurance reserves and dividends (169) (192) (56)
Deferral of policy acquisition costs 1,105 1,105 -
Surplus note reclassification as debt - (298) -
Provision for deferred federal income taxes and other tax
reclassifications - (475) 165
Other - net 294 219 (101)
==========================================
As reported in these consolidated GAAP financial statements $73,943 $5,469 $695
==========================================
December 31, 1997
As reported in accordance with statutory accounting practices
- unconsolidated $63,957 $2,811 $432
Additions (deductions):
Unrealized gain on fixed maturities available-for-sale 1,176 1,176 -
Other investment adjustments 853 1,141 27
Adjustments to insurance reserves and dividends (173) (131) (41)
Deferral of policy acquisition costs 1,057 1,057 43
Surplus note reclassification as debt - (298) -
Provision for deferred federal income taxes and other tax
reclassifications - (643) 7
Other - net 184 171 (14)
==========================================
As reported in these consolidated GAAP financial statements $67,054 $5,284 $454
==========================================
</TABLE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
14. Non-domestic Operations
The Company's non-U.S. operations offer a variety of asset management and asset
accumulation products and services for businesses, groups and individuals, with
a focus on retirement savings.
The change in net foreign currency translation reflects decreases of $31
million, $18 million and $2 million for the years ended December 31, 1999, 1998
and 1997, respectively. Aggregate foreign exchange transaction gains and losses
were not material for the years ended December 31, 1999, 1998 and 1997. Total
revenues by geographic region are as follows (in millions):
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
Domestic (United States) $7,252 $7,449 $8,547
Non-domestic 272 237 115
------------------------------------------
Total revenues $7,524 $7,686 $8,662
==========================================
</TABLE>
Total assets by geographic region are as follows (in millions):
<TABLE>
<CAPTION>
December 31
1999 1998
-----------------------------
<S> <C> <C>
Domestic (United States) $77,856 $72,704
Non-domestic 1,454 1,239
=============================
Total assets $79,310 $73,943
=============================
</TABLE>
15. Year 2000 (Unaudited)
As of January 31, 2000, virtually all of the Company's major technology systems,
processes, and infrastructure, including those which rely on third party
vendors, appear to be operating smoothly following the rollover to the Year
2000. The Company has experienced no significant interruptions to normal
business operations, including the processing of customer account data and
transactions. The Company will continue its Year 2000 vigilance into early 2001.
The total cost for the project was approximately $24 million through December
31, 1999, with the costs expensed as incurred. Any additional costs to complete
activities related to internal processes, external relationships, contingency
plans and to maintain Year 2000 readiness are not expected to be material.
<PAGE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
15. Year 2000 (Unaudited) (continued)
Based on the performance of its major technology systems to date, ongoing plans
to deal with external relationships and contingency plans, the Company believes
that in the worst case scenario it will experience, at most, isolated and
insignificant disruptions of business processes as a result of Year 2000 issues.
Such disruptions are not expected to have a material effect on the Company's
future results of operations, liquidity or financial condition.
APPENDIX A
The following tables illustrate how the policy value, surrender value and death
proceeds of the Policy may change with the investment experience of the
Investment Accounts. The tables show how these amounts in the Policy vary over
time if planned periodic premiums are paid annually and if the investment return
of the assets in the Investment Accounts were a uniform, gross, after-tax,
annual rate of 0%, 6% or 12%. The death benefits and values would be different
from those shown if the return averaged 0%, 6% or 12%, but fluctuated above and
below those averages during the year. Both death benefit option 1 and option 2
are illustrated.
The illustrations reflect a hypothetical Policy issued to a 55 year-old male
preferred non-smoker and a 50 year-old female preferred non-smoker.
Illustrations for younger insureds would be more favorable than those presented.
Illustrations for older insureds or for smokers would be less favorable.
o Illustrations 1 and 3 reflect current administrative and cost of insurance
charges.
o Illustrations 2 and 4 reflect the guaranteed maximum administration and
cost of insurance charges.
The illustrations reflect all Policy charges including:
o deductions from premiums for sales load and state and federal taxes;
o monthly administration charges;
o cost of insurance charge;
o mortality and expense risks charge; and
o surrender charges that may be deducted if the Policy were fully surrendered
or lapsed.
In addition, the illustrations reflect the average of fees and expenses of the
Investment Accounts available through the Policy during the fiscal year ending
December 31, 1998. The Manager has agreed to reimburse operating expenses of
certain Accounts, if necessary, to limit total operating expenses for those
Accounts during the year ending December 31, 1999. The caps, if necessary, will
provide that total Account annual expenses will not exceed the rates shown:
MicroCap 1.06%, MidCap Growth 0.96%, SmallCap Growth 1.06% and SmallCap Value
1.16%. Actual total operating expenses for the period from May 1, 1998 (date
shares first offered to the public) through December 31, 1998 were as follows:
MicroCap 1.38%, MidCap Growth 1.27%, SmallCap Growth 1.31.% and SmallCap Value
1.56%. The Manager has also agreed to reimburse operating expenses of the Stock
Index 500 Account, if necessary, to limit total operating expenses during the
year ending December 31, 1999 to 0.40%. The Stock Index 500 Account was first
offered to the public on May 1, 1999. The effect of the reimbursements will be
to reduce the Accounts' annual operating expenses and increase their total
returns. If the reimbursement program is discontinued, annual operating expenses
of the effected Accounts may increase thus decreasing the Account's total
return.
There is no assurance that the fee reimbursement program will continue beyond
1999. In the future, fees and expenses of the Accounts may be more or less than
those shown. Such changes would make the operating expenses actually incurred by
an Account differ from the average rate used in the illustrations.
The illustrations are based on the assumption that:
o payments are made according to the $16,000 annual premium schedule;
o no values are allocated to the Fixed Account;
o no changes are made to the death benefit option or face amount;
o no policy loans and/or partial surrenders are made; and
o no riders are in effect.
Upon request, we will prepare a comparable illustration based upon the proposed
insureds' actual age, gender, smoking status, risk classification and desired
Policy features. For those illustrations, you have option of selecting which
Investment Accounts (and their specific fees and expenses) are used. If no
selection is made, the illustration is run using a hypothetical average.
In advertisements or sales literature for the Policies that include performance
data for one or more of the Investment Accounts, we may include policy values,
surrender values and death benefit figures computed using the same methods that
were used in creating the following illustrations. However, the actual average
total rate of return for the specific Investment Account(s) will be used instead
of the average used in the following illustrations. This information may be
shown in the form of graphs, charts, tables and examples. It may include data
for periods prior to the offering of the Policy for an Account that has had
performance during such prior period (with policy charges assumed to be equal to
current charges for any period(s) prior to the offering of the Policy).
PRINCIPAL LIFE INSURANCE COMPANY
SURVIVORSHIP VARIABLE UNIVERSAL LIFE
MALE AGE 55 PREFERRED NON-SMOKER, FEMALE AGE 50 PREFERRED NON-SMOKER
ASSUMING CURRENT CHARGES
Illustration 1 Initial Face Amount $1,000,000
PLANNED PREMIUM $16,000 Death Benefit Option 1
-------------------------------------------------------------------------------
Death Benefit (2)
Assuming Hypothetical Gross
Annual Investment Return of
----------------------------------------
End of Accumulated 0% 6% 12%
Year Premiums (1) (-.79% Net) (5.21% Net) (11.21% Net)
------ ----------- ----------- ----------- ------------
1 $16,800 $1,000,000 $1,000,000 $1,000,000
2 34,440 1,000,000 1,000,000 1,000,000
3 52,962 1,000,000 1,000,000 1,000,000
4 72,410 1,000,000 1,000,000 1,000,000
5 92,831 1,000,000 1,000,000 1,000,000
6 114,272 1,000,000 1,000,000 1,000,000
7 136,786 1,000,000 1,000,000 1,000,000
8 160,425 1,000,000 1,000,000 1,000,000
9 185,246 1,000,000 1,000,000 1,000,000
10 211,309 1,000,000 1,000,000 1,000,000
11 238,674 1,000,000 1,000,000 1,000,000
12 267,408 1,000,000 1,000,000 1,000,000
13 297,578 1,000,000 1,000,000 1,000,000
14 329,257 1,000,000 1,000,000 1,000,000
15 362,520 1,000,000 1,000,000 1,000,000
20 555,508 1,000,000 1,000,000 1,088,478
25 801,815 1,000,000 1,000,000 1,790,348
30 1,116,173 1,000,000 1,000,000 3,045,877
Accumulated Value (2)
Assuming Hypothetical Gross
Annual Investment Return of
-------------------------------------
End of Accumulated 0% 6% 12%
Year Premiums (1) (-.79% Net) (5.21% Net) (11.21% Net)
------ ----------- ---------- ---------- ------------
1 $16,800 $13,635 $14,488 $15,340
2 34,440 26,932 29,482 32,134
3 52,962 39,872 44,981 50,508
4 72,410 52,433 60,980 70,598
5 92,831 64,591 77,473 92,556
6 114,272 76,321 94,451 116,548
7 136,786 87,612 111,922 142,776
8 160,425 98,727 130,168 171,739
9 185,246 109,660 149,217 203,716
10 211,309 121,005 169,940 240,205
11 238,674 133,316 192,827 281,886
12 267,408 145,460 216,820 328,123
13 297,578 157,424 241,964 379,414
14 329,257 169,192 268,302 436,310
15 362,520 180,742 295,879 499,427
20 555,508 239,289 458,626 938,343
25 801,815 287,230 661,348 1,673,222
30 1,116,173 312,138 916,433 2,900,835
Surrender Value (2)
Assuming Hypothetical Gross
Annual Investment Return of
--------------------------------------
End of Accumulated 0% 6% 12%
Year Premiums (1) (-.79% Net) (5.21% Net) (11.21% Net)
------ ------------ ----------- ----------- ------------
1 $16,800 $4,135 $4,988 $5,840
2 34,440 17,432 19,982 22,634
3 52,962 30,372 35,481 41,008
4 72,410 42,933 51,480 61,098
5 92,831 55,091 67,973 83,056
6 114,272 67,274 85,403 107,500
7 136,786 79,470 103,779 134,634
8 160,425 91,941 123,382 164,953
9 185,246 104,683 144,241 198,739
10 211,309 118,291 167,226 237,491
11 238,674 133,316 192,827 281,886
12 267,408 145,460 216,820 328,123
13 297,578 157,424 241,964 379,414
14 329,257 169,192 268,302 436,310
15 362,520 180,742 295,879 499,427
20 555,508 239,289 458,626 938,343
25 801,815 287,230 661,348 1,673,222
30 1,116,173 312,138 916,433 2,900,835
(1) Assumes net interest of 5% compounded annually.
(2) Assumes no policy loan has been made.
The death benefit, accumulated value and surrender value will differ if premiums
are paid in different amounts or frequencies. It is emphasized that the
hypothetical investment results are illustrative only and should not be deemed
to be a representation of past or future investment results. Actual investment
results may be more or less than those shown. The death benefit, accumulated
value and surrender value for a policy would be different from those shown if
actual rates of investment return applicable to the policy averaged 0%, 6% or
12% over a period of years, but also fluctuated above or below that average for
individual policy years. The death benefit, accumulated value and surrender
value for a policy would also be different from those shown, depending on the
investment allocations made to the investment divisions of the separate account
and the different rates or return of the Fund portfolios, if the actual rates of
investment return applicable to the policy averaged 0%, 6% or 12%, but varied
above or below that average for individual divisions. No representations can be
made that these hypothetical rates of return can be achieved for any one year or
sustained over any period of time.
<PAGE>
PRINCIPAL LIFE INSURANCE COMPANY
SURVIVORSHIP VARIABLE UNIVERSAL LIFE
MALE AGE 55 PREFERRED NON-SMOKER, FEMALE AGE 50 PREFERRED NON-SMOKER
ASSUMING GUARANTEED CHARGES
Illustration 2 Initial Face Amount $1,000,000
PLANNED PREMIUM $16,000 Death Benefit Option 1
-------------------------------------------------------------------------------
Death Benefit (2)
Assuming Hypothetical Gross
Annual Investment Return of
----------------------------------------
End of Accumulated 0% 6% 12%
Year Premiums (1) (-.79% Net) (5.21% Net) (11.21% Net)
------ ----------- ----------- ----------- ------------
1 $16,800 $1,000,000 $1,000,000 $1,000,000
2 34,440 1,000,000 1,000,000 1,000,000
3 52,962 1,000,000 1,000,000 1,000,000
4 72,410 1,000,000 1,000,000 1,000,000
5 92,831 1,000,000 1,000,000 1,000,000
6 114,272 1,000,000 1,000,000 1,000,000
7 136,786 1,000,000 1,000,000 1,000,000
8 160,425 1,000,000 1,000,000 1,000,000
9 185,246 1,000,000 1,000,000 1,000,000
10 211,309 1,000,000 1,000,000 1,000,000
11 238,674 1,000,000 1,000,000 1,000,000
12 267,408 1,000,000 1,000,000 1,000,000
13 297,578 1,000,000 1,000,000 1,000,000
14 329,257 1,000,000 1,000,000 1,000,000
15 362,520 1,000,000 1,000,000 1,000,000
20 555,508 1,000,000 1,000,000 1,004,358
25 801,815 1,000,000 1,000,000 1,636,305
30 1,116,173 - 1,000,000 2,759,969
Accumulated Value (2)
Assuming Hypothetical Gross
Annual Investment Return of
-------------------------------------
End of Accumulated 0% 6% 12%
Year Premiums (1) (-.79% Net) (5.21% Net) (11.21% Net)
------ ----------- ---------- ---------- ------------
1 $16,800 $13,516 $14,365 $15,214
2 34,440 26,696 29,231 31,868
3 52,962 39,520 44,596 50,087
4 72,410 51,967 60,455 70,007
5 92,831 64,014 76,801 91,776
6 114,272 75,633 93,627 115,560
7 136,786 86,797 110,918 141,540
8 160,425 97,472 128,665 169,918
9 185,246 107,625 146,849 200,921
10 211,309 117,798 166,277 235,970
11 238,674 127,672 186,528 274,800
12 267,408 136,892 207,286 317,494
13 297,578 145,365 228,503 364,458
14 329,257 152,984 250,123 416,164
15 362,520 159,624 272,083 473,162
20 555,508 173,093 384,810 865,826
25 801,815 130,973 494,640 1,529,257
30 1,116,173 - 583,747 2,628,542
Surrender Value (2)
Assuming Hypothetical Gross
Annual Investment Return of
--------------------------------------
End of Accumulated 0% 6% 12%
Year Premiums (1) (-.79% Net) (5.21% Net) (11.21% Net)
------ ------------ ----------- ----------- ------------
1 $16,800 $4,016 $4,865 $5,714
2 34,440 17,196 19,731 22,368
3 52,962 30,020 35,096 40,587
4 72,410 42,467 50,955 60,507
5 92,831 54,514 67,301 82,276
6 114,272 66,586 84,579 106,513
7 136,786 78,654 102,776 133,398
8 160,425 90,687 121,879 163,133
9 185,246 102,649 141,873 195,945
10 211,309 115,084 163,563 233,255
11 238,674 127,672 186,528 274,800
12 267,408 136,892 207,286 317,494
13 297,578 145,365 228,503 364,458
14 329,257 152,984 250,123 416,164
15 362,520 159,624 272,083 473,162
20 555,508 173,093 384,810 865,826
25 801,815 130,973 494,640 1,529,257
30 1,116,173 - 583,747 2,628,542
(1) Assumes net interest of 5% compounded annually.
(2) Assumes no policy loan has been made.
The death benefit, accumulated value and surrender value will differ if premiums
are paid in different amounts or frequencies. It is emphasized that the
hypothetical investment results are illustrative only and should not be deemed
to be a representation of past or future investment results. Actual investment
results may be more or less than those shown. The death benefit, accumulated
value and surrender value for a policy would be different from those shown if
actual rates of investment return applicable to the policy averaged 0%, 6% or
12% over a period of years, but also fluctuated above or below that average for
individual policy years. The death benefit, accumulated value and surrender
value for a policy would also be different from those shown, depending on the
investment allocations made to the investment divisions of the separate account
and the different rates or return of the Fund portfolios, if the actual rates of
investment return applicable to the policy averaged 0%, 6% or 12%, but varied
above or below that average for individual divisions. No representations can be
made that these hypothetical rates of return can be achieved for any one year or
sustained over any period of time.
<PAGE>
PRINCIPAL LIFE INSURANCE COMPANY
SURVIVORSHIP VARIABLE UNIVERSAL LIFE
MALE AGE 55 PREFERRED NON-SMOKER, FEMALE AGE 50 PREFERRED NON-SMOKER
ASSUMING CURRENT CHARGES
Illustration 3 Initial Face Amount $1,000,000
PLANNED PREMIUM $16,000 Death Benefit Option 2
-------------------------------------------------------------------------------
Death Benefit (2)
Assuming Hypothetical Gross
Annual Investment Return of
----------------------------------------
End of Accumulated 0% 6% 12%
Year Premiums (1) (-.79% Net) (5.21% Net) (11.21% Net)
------ ----------- ----------- ----------- ------------
1 $16,800 $1,013,634 $1,014,487 $1,015,339
2 34,440 1,026,926 1,029,475 1,032,127
3 52,962 1,039,852 1,044,958 1,050,482
4 72,410 1,052,385 1,060,924 1,070,532
5 92,831 1,064,494 1,077,355 1,092,412
6 114,272 1,076,147 1,094,229 1,116,268
7 136,786 1,087,322 1,111,540 1,142,277
8 160,425 1,098,308 1,129,594 1,170,957
9 185,246 1,109,096 1,148,413 1,202,573
10 211,309 1,120,278 1,168,858 1,238,602
11 238,674 1,132,402 1,191,411 1,279,698
12 267,408 1,144,335 1,215,007 1,325,202
13 297,578 1,156,061 1,239,678 1,375,573
14 329,257 1,167,556 1,265,449 1,431,312
15 362,520 1,178,792 1,292,344 1,492,972
20 555,508 1,236,119 1,451,503 1,922,066
25 801,815 1,279,610 1,641,370 2,627,232
30 1,116,173 1,290,101 1,847,651 3,769,516
Accumulated Value (2)
Assuming Hypothetical Gross
Annual Investment Return of
-------------------------------------
End of Accumulated 0% 6% 12%
Year Premiums (1) (-.79% Net) (5.21% Net) (11.21% Net)
------ ----------- ---------- ---------- ------------
1 $16,800 $13,634 $14,487 $15,339
2 34,440 26,926 29,475 32,127
3 52,962 39,852 44,958 50,482
4 72,410 52,385 60,924 70,532
5 92,831 64,494 77,355 92,412
6 114,272 76,147 94,229 116,268
7 136,786 87,322 111,540 142,277
8 160,425 98,308 129,594 170,957
9 185,246 109,096 148,413 202,573
10 211,309 120,278 168,858 238,602
11 238,674 132,402 191,411 279,698
12 267,408 144,335 215,007 325,202
13 297,578 156,061 239,678 375,573
14 329,257 167,556 265,449 431,312
15 362,520 178,792 292,344 492,972
20 555,508 236,119 451,503 922,066
25 801,815 279,610 641,370 1,627,232
30 1,116,173 290,101 847,651 2,769,516
Surrender Value (2)
Assuming Hypothetical Gross
Annual Investment Return of
--------------------------------------
End of Accumulated 0% 6% 12%
Year Premiums (1) (-.79% Net) (5.21% Net) (11.21% Net)
------ ------------ ----------- ----------- ------------
1 $16,800 $4,134 $4,987 $5,839
2 34,440 17,426 19,975 22,627
3 52,962 30,352 35,458 40,982
4 72,410 42,885 51,424 61,032
5 92,831 54,994 67,855 82,912
6 114,272 67,099 85,182 107,221
7 136,786 79,180 103,398 134,135
8 160,425 91,522 122,808 164,171
9 185,246 104,120 143,437 197,597
10 211,309 117,564 166,144 235,888
11 238,674 132,402 191,411 279,698
12 267,408 144,335 215,007 325,202
13 297,578 156,061 239,678 375,573
14 329,257 167,556 265,449 431,312
15 362,520 178,792 292,344 492,972
20 555,508 236,119 451,503 922,066
25 801,815 279,610 641,370 1,627,232
30 1,116,173 290,101 847,651 2,769,516
(1) Assumes net interest of 5% compounded annually.
(2) Assumes no policy loan has been made.
The death benefit, accumulated value and surrender value will differ if premiums
are paid in different amounts or frequencies. It is emphasized that the
hypothetical investment results are illustrative only and should not be deemed
to be a representation of past or future investment results. Actual investment
results may be more or less than those shown. The death benefit, accumulated
value and surrender value for a policy would be different from those shown if
actual rates of investment return applicable to the policy averaged 0%, 6% or
12% over a period of years, but also fluctuated above or below that average for
individual policy years. The death benefit, accumulated value and surrender
value for a policy would also be different from those shown, depending on the
investment allocations made to the investment divisions of the separate account
and the different rates or return of the Fund portfolios, if the actual rates of
investment return applicable to the policy averaged 0%, 6% or 12%, but varied
above or below that average for individual divisions. No representations can be
made that these hypothetical rates of return can be achieved for any one year or
sustained over any period of time.
<PAGE>
PRINCIPAL LIFE INSURANCE COMPANY
SURVIVORSHIP VARIABLE UNIVERSAL LIFE
MALE AGE 55 PREFERRED NON-SMOKER, FEMALE AGE 50 PREFERRED NON-SMOKER
ASSUMING GUARANTEED CHARGES
Illustration 4 Initial Face Amount $1,000,000
PLANNED PREMIUM $16,000 Death Benefit Option 2
-------------------------------------------------------------------------------
Death Benefit (2)
Assuming Hypothetical Gross
Annual Investment Return of
----------------------------------------
End of Accumulated 0% 6% 12%
Year Premiums (1) (-.79% Net) (5.21% Net) (11.21% Net)
------ ----------- ----------- ----------- ------------
1 $16,800 $1,013,515 $1,014,364 $1,015,213
2 34,440 1,026,690 1,029,224 1,031,861
3 52,962 1,039,500 1,044,573 1,050,062
4 72,410 1,051,920 1,060,399 1,069,941
5 92,831 1,063,918 1,076,684 1,091,633
6 114,272 1,075,460 1,093,406 1,115,283
7 136,786 1,086,508 1,110,538 1,141,042
8 160,425 1,097,019 1,128,045 1,169,076
9 185,246 1,106,946 1,145,886 1,199,559
10 211,309 1,116,812 1,164,826 1,233,837
11 238,674 1,126,283 1,184,403 1,271,550
12 267,408 1,134,979 1,204,245 1,312,653
13 297,578 1,142,780 1,224,233 1,357,375
14 329,257 1,149,547 1,244,219 1,405,951
15 362,520 1,155,121 1,264,028 1,458,622
20 555,508 1,158,808 1,352,736 1,792,743
25 801,815 1,097,569 1,391,355 2,268,176
30 1,116,173 - 1,296,745 2,900,877
Accumulated Value (2)
Assuming Hypothetical Gross
Annual Investment Return of
-------------------------------------
End of Accumulated 0% 6% 12%
Year Premiums (1) (-.79% Net) (5.21% Net) (11.21% Net)
------ ----------- ---------- ---------- ------------
1 $16,800 $13,515 $14,364 $15,213
2 34,440 26,690 29,224 31,861
3 52,962 39,500 44,573 50,062
4 72,410 51,920 60,399 69,941
5 92,831 63,918 76,684 91,633
6 114,272 75,460 93,406 115,283
7 136,786 86,508 110,538 141,042
8 160,425 97,019 128,045 169,076
9 185,246 106,946 145,886 199,559
10 211,309 116,812 164,826 233,837
11 238,674 126,283 184,403 271,550
12 267,408 134,979 204,245 312,653
13 297,578 142,780 224,233 357,375
14 329,257 149,547 244,219 405,951
15 362,520 155,121 264,028 458,622
20 555,508 158,808 352,736 792,743
25 801,815 97,569 391,355 1,268,176
30 1,116,173 - 296,745 1,900,877
Surrender Value (2)
Assuming Hypothetical Gross
Annual Investment Return of
--------------------------------------
End of Accumulated 0% 6% 12%
Year Premiums (1) (-.79% Net) (5.21% Net) (11.21% Net)
------ ------------ ----------- ----------- ------------
1 $16,800 $4,015 $4,864 $5,713
2 34,440 17,190 19,724 22,361
3 52,962 30,000 35,073 40,562
4 72,410 42,420 50,899 60,441
5 92,831 54,418 67,184 82,133
6 114,272 66,412 84,359 106,235
7 136,786 78,365 102,396 132,899
8 160,425 90,233 121,259 162,290
9 185,246 101,970 140,910 194,583
10 211,309 114,098 162,112 231,122
11 238,674 126,283 184,403 271,550
12 267,408 134,979 204,245 312,653
13 297,578 142,780 224,233 357,375
14 329,257 149,547 244,219 405,951
15 362,520 155,121 264,028 458,622
20 555,508 158,808 352,736 792,743
25 801,815 97,569 391,355 1,268,176
30 1,116,173 - 296,745 1,900,877
(1) Assumes net interest of 5% compounded annually.
(2) Assumes no policy loan has been made.
The death benefit, accumulated value and surrender value will differ if premiums
are paid in different amounts or frequencies. It is emphasized that the
hypothetical investment results are illustrative only and should not be deemed
to be a representation of past or future investment results. Actual investment
results may be more or less than those shown. The death benefit, accumulated
value and surrender value for a policy would be different from those shown if
actual rates of investment return applicable to the policy averaged 0%, 6% or
12% over a period of years, but also fluctuated above or below that average for
individual policy years. The death benefit, accumulated value and surrender
value for a policy would also be different from those shown, depending on the
investment allocations made to the investment divisions of the separate account
and the different rates or return of the Fund portfolios, if the actual rates of
investment return applicable to the policy averaged 0%, 6% or 12%, but varied
above or below that average for individual divisions. No representations can be
made that these hypothetical rates of return can be achieved for any one year or
sustained over any period of time.
APPENDIX B
TARGET PREMIUMS
The target premiums for the Policy are based on the joint equivalent age (JEA)
of the insureds. The JEA takes into account the gender*, age, smoking status and
risk classification of each insured. The calculation is as follows:
1. Start with the unadjusted individual ages of insured #1 and insured #2.
Call this (X1) and (X2) respectively.
2. Take each individual age and adjust for gender.
-if Male the gender adjustment is 0
-if Female the gender adjustment is minus 5
-if Unisex rating is used, the gender adjustment is minus 2
3. Take resulting individual ages from step 2 and adjust for smokers if
applicable. -if Male Smoker the smoker adjustment is plus 3 -if Female
Smoker the smoker adjustment is plus 2 -if Unisex Smoker the smoker
adjustment is plus 3
4. Take resulting individual ages from step 3 and adjust for substandard
table ratings, if any. -if table A rating then add 2 -if table B rating
then add 4 -if table C rating then add 6 -if table D rating then add 8
-if table E rating then add 10 -if table F rating then add 12 -if table
G rating then add 14 -if table H rating then add 15 -if rating is
higher than table H then add 16.
5. The result of step 4 is the adjusted individual ages of insured #1 and
insured #1. Call this (X1A) and (X2A) respectively.
6. If (X1A) is greater than 100 then set (X1A) equal to 100.
7. If (X1B) is greater than 100 then set (X1B) equal to 100.
8. Take the difference between (X1A) and (X1B). Call this (XDIFF).
9. Look up (XDIFF) on the table below to find out what to add on to
youngest adjusted age.
XDIFF ADD ON
0 0
1 to 2 1
3 to 4 2
5 to 6 3
7 to 9 4
10 to 12 5
13 to 15 6
16 to 18 7
19 to 23 8
24 to 28 9
29 to 34 10
35 to 39 11
40 to 44 12
45 to 47 13
48 to 50 14
51 to 53 15
54 to 56 16
57 to 60 17
61 to 64 18
65 to 69 19
70 to 75 20
76 to 85 21
10. The JEA (Joint Equivalent Age) is equal to the Minimum of (X1A) and
(X1B) plus ADD ON from the table above.
Example:
Male Nonsmoker age 45 table rating A, Female Smoker age 57.
1. (X1) = 45 and (X2) = 57
2. (X1) = 45 + 0 = 45; and (X2) = 57 - 5 = 52
3. (X1) = 45 + 0 = 45; and (X2) = 52 + 2 = 54
4. (X1) = 45 + 2 = 47; and (X2) = 54 + 0 = 54
5. (XIA) = 47; (X2A) = 54
6. (XIA) is not greater than 100
7. (XIB) is not greater than 100
8. (XDIFF) = (X2A) - (X1A) = 54 - 47 = 7
9. ADD ON = 4
10. JEA = minimum of (XIA) and (X2A) + ADD ON = 47 + 4 = 51
SVUL Target Premium Rates per $1000 of Face
JEA Target JEA Target
---------------------------------------------------------------------
< 20 2.78 61 21.67
20 2.78 62 22.98
21 2.87 63 24.23
22 2.95 64 25.41
23 3.03 65 26.52
24 3.13 66 27.56
25 3.22 67 28.56
26 3.32 68 29.53
27 3.41 69 30.45
28 3.52 70 31.36
29 3.62 71 32.27
30 3.73 72 33.17
31 3.84 73 34.08
32 3.96 74 35.02
33 4.07 75 35.97
34 4.24 76 36.95
35 4.42 77 37.95
36 4.60 78 38.94
37 4.79 79 39.96
38 4.99 80 40.99
39 5.20 81 42.00
40 5.41 82 42.00
41 5.64 83 42.00
42 5.87 84 42.00
43 6.11 85 42.00
44 6.51 86 42.00
45 6.93 87 42.00
46 7.38 88 42.00
47 7.86 89 42.00
48 8.38 90 42.00
49 8.93 > 90 42.00
50 9.50
51 10.12
52 10.78
53 11.49
54 12.54
55 13.68
56 14.92
57 16.22
58 17.58
59 18.94
60 20.32
* The cost of insurance rate for Policies issued in states which require
unisex pricing or in connection with employment related insurance and
benefit plans is not based on the gender of the insured.
