PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
SEPARATE ACCOUNT C
PENSION BUILDER -- GROUP VARIABLE ANNUITY CONTRACTS
FOR QUALIFIED PLANS FOR SELF-EMPLOYED
INDIVIDUALS AND THEIR EMPLOYEES
Issued by Principal Mutual Life Insurance Company (the "Company")
Prospectus dated May 1, 1996
This Prospectus concisely sets forth information about Principal Mutual
Life Insurance Company Separate Account C, Pension Builder - Group Variable
Annuity Contracts (the "Contract" or the "Contracts") that an investor ought to
know before investing. It should be read and retained for future reference.
Additional information about the Contract, including a Statement of
Additional Information, dated May 1, 1996, has been filed with the Securities
and Exchange Commission. The Statement of Additional Information is incorporated
by reference into this Prospectus. The table of contents of the Statement of
Additional Information appears on page 20 of this Prospectus. A copy of the
Statement of Additional Information can be obtained, free of charge, upon
request by writing or telephoning:
Princor Financial Services Corporation
a Member of
The Principal Financial Group
Des Moines, IA 50392-0200
Telephone: 1-800-247-4123
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
This Prospectus is valid only when accompanied by the current prospectus
for Principal Capital Accumulation Fund, Inc., Principal Government Securities
Fund, Inc. and Principal Money Market Fund, Inc. These prospectuses should be
kept for future reference.
TABLE OF CONTENTS
Page
Glossary of Special Terms ............................................. 3
Expense Table.......................................................... 4
Example .............................................................. 5
Condensed Financial Information ....................................... 6
Summary .............................................................. 6
Introduction .......................................................... 7
Description of Principal Mutual Life Insurance Company ................ 8
Principal Mutual Life Insurance Company Separate Account C ............ 8
Deductions Under the Contracts ........................................ 8
Contingent Deferred Sales Charge ................................. 9
Administration Charge ............................................. 9
Separate Payment of Administration Charge ......................... 10
Mortality and Expense Risks Charge ................................ 10
Premium Taxes ..................................................... 10
Surplus Distribution at Sole Discretion of the Company ................ 10
The Contract........................................................... 10
Contract Values and Accounting Before Annuity Commencement Date ... 11
Participant's Investment Accounts ............................ 11
Unit Value ................................................... 11
Net Investment Factor ........................................ 11
Hypothetical Example of Calculation of Unit Value for the
Common Stock Division and Government Securities Division ... 11
Hypothetical Example of Calculation of Unit Value for
the Money Market Division .................................. 12
Annuity Benefits .................................................. 12
Selecting a Variable Annuity ................................. 12
Forms of Variable Annuities .................................. 12
Basis of Annuity Conversion Rates ............................ 13
Determining the Amount of the First Monthly Annuity Payment .. 14
Determining the Amount of the Second and Subsequent
Monthly Annuity Payments .................................... 14
Hypothetical Example of Calculation of Annuity Payments ...... 14
Payment on Death of Participant ................................... 14
Prior to Annuity Commencement Date ........................... 14
Subsequent to Annuity Commencement Date ...................... 15
Withdrawals and Transfers ......................................... 15
Cash Withdrawals ............................................. 15
Transfers to the Contract .................................... 15
Transfers Between Divisions .................................. 15
Transfers to the Associated Fixed Contract ................... 16
Special Situation Involving Alternate Funding Agents ......... 16
Postponement of Cash Withdrawal or Transfer .................. 16
Other Contractual Provisions ...................................... 16
Contribution Limits .......................................... 16
Assignment ................................................... 16
Cessation of Contributions ................................... 16
Limitation as to Participants ................................ 17
Substitution of Securities ................................... 17
Changes in a Contract ........................................ 17
Statement of Values .......................................... 17
Voting Rights ................................................ 17
Distribution of these Contracts ................................... 17
Federal Tax Status ................................................ 18
State Regulation .................................................. 18
Legal Opinions .................................................... 18
Legal Proceedings ................................................. 18
Registration Statement ............................................ 19
Other Variable Annuity Contracts .................................. 19
Independent Auditors ............................................. 19
Financial Statements............................................... 19
Appendix 1 ........................................................ 19
Appendix 2 ........................................................ 19
Contractholders' Inquiries ........................................ 19
Table of Contents of the Statement of Additional Information ...... 20
This Prospectus does not constitute an offer of, or solicitation of any
offer to acquire, any interest or participation in the Contracts in any
jurisdiction in which such an offer or solicitation may not lawfully be made. No
person is authorized to give any information or to make any representations in
connection with the Contracts other than those contained in this Prospectus.
GLOSSARY OF SPECIAL TERMS
Administration Charge -- A charge deducted once each Contribution Year
prior to the Annuity Commencement Date from the Investment Accounts of each
Participant, either on the last day of the Contribution Year or the date the
Investment Accounts are applied or paid in full (a total redemption).
Annuity Change Factor -- The factor used to determine the change in value
of a Variable Annuity in the course of payment.
Annuity Commencement Date -- The first day of any month on which Annuity
Payments to a Participant begin, as provided by the Retirement Plan.
Annuity Payments -- Periodic payments made to a Participant pursuant to the
annuity certificate issued to the Participant at the commencement of benefits.
Annuity Reserve Account -- The reserve held for Variable Annuities in
course of payment in a Division of Separate Account C for these Contracts.
Associated Fixed Contract -- A fixed-dollar annuity contract issued by the
Company for use in connection with HR-10 retirement plans.
Commuted Value -- The dollar value, as of a given date, of remaining
Annuity Payments. It is determined by the Company using the interest rate
assumed in determining the initial amount of monthly income and assuming no
variation in the amount of monthly payments after the date of determination.
Contingent Deferred Sales Charge -- The charge deducted from certain cash
withdrawals from a Participant's Investment Accounts before the Annuity
Commencement Date.
Contract -- Contract issued by the Company with the following form number:
GP A 5923.
Contractholder -- The entity to which the Contract will be issued, which
will normally be an Employer, an association, or a trust established for the
benefit of Participants and their beneficiaries.
Contribution -- Amounts contributed under the Contracts by or on behalf of
Participants which are permitted or required by the Retirement Plan.
Contribution Year -- The twelve-month period which coincides with the Plan
Year. The first Contribution Year of a Participant will commence on the date the
Company receives an initial Contribution on behalf of the Participant and will
terminate at the end of the Plan Year in which such Contribution is received.
Division -- The part of Separate Account C which is invested in shares of a
single Mutual Fund.
Employer -- The sole proprietorship or partnership which establishes or
adopts a Retirement Plan.
HR-10 -- The Self-Employed Individuals Tax Retirement Act of 1962, as
amended.
Internal Revenue Code -- The Internal Revenue Code of 1954, as amended, and
regulations promulgated thereunder. Reference to the Internal Revenue Code means
such Internal Revenue Code or the corresponding provisions of any subsequent
revenue code and any regulations thereunder.
Investment Account -- An account established under a Contract for a
Participant with respect to a Division of Separate Account C.
Investment Account Value -- The value of an Investment Account on any date
is equal to the number of units then credited to such Investment Account
multiplied by the Unit Value for that Division for the Valuation Period in which
such date occurs.
Mutual Funds -- Principal Capital Accumulation Fund, Inc., Principal Money
Market Fund, Inc., or Principal Government Securities Fund, Inc., or shares of
other registered open-end investment companies substituted therefor.
Net Investment Factor -- The factor used to determine the change in Unit
Value during a Valuation Period.
Normal Income Form -- The form of annuity option provided for in the
Retirement Plan if the Participant has not elected one. If the Retirement Plan
does not so provide, then the Normal Income Form is Variable Life Annuity with
Monthly Payments Certain for Ten Years for an unmarried Participant and is
Variable Life Annuity with One-Half Survivorship for a married Participant.
Participant -- A natural person for whom Contributions have been or are
being made under the Contract.
Plan Year -- The accounting year of the Retirement Plan. If the Retirement
Plan does not have any accounting year, the Company will establish a
twelve-month period as the Plan Year.
Retirement Plan -- A pension or profit-sharing "HR-10" plan which qualifies
under the Self-Employed Individuals Tax Retirement Act of 1962, as amended,
under which all or part of the benefits are to be provided to Participants
pursuant to a Contract described herein.
Separate Account C -- A separate account established by the Company under
Iowa law to receive Contributions under the Contracts offered by this Prospectus
and other contracts issued by the Company. It is divided into a Common Stock
Division (invested in Principal Capital Accumulation Fund, Inc.), a Money Market
Division (invested in Principal Money Market Fund, Inc.) and a Government
Securities Division (invested in Principal Government Securities Fund, Inc.).
Additional Divisions may be added in the future.
Total and Permanent Disability -- The condition of a Participant when, as
the result of sickness or injury, the participant is prevented from engaging in
any substantial gainful activity and is eligible for and receiving a disability
benefit under Title II of the Federal Social Security Act.
Unit Value -- A measure used to determine the value of a Participant's
Investment Accounts.
Valuation Date -- The date as of which the net asset value of a Mutual Fund
is determined.
Valuation Period -- The period between the time as of which the net asset
value of a Mutual Fund is determined on one Valuation Date and the time as of
which such value is determined on the next following Valuation Date.
Variable Annuity -- A series of periodic payments, the amounts of which
will increase or decrease to reflect the investment experience of a Division of
Separate Account C for the Contract.
Written Notification -- Actual delivery to the Company at its home office
in Des Moines, Iowa of an appropriate writing from the person or persons
specified by the Retirement Plan, on a form supplied or approved by the Company.
EXPENSE TABLE
The following tables depict fees and expenses applicable to a Participant's
account under the Contract. The purpose of the table is to assist the
contractowner in understanding the various costs and expenses that a
contractowner will bear directly or indirectly. The table reflects expenses of
the separate account as well as the expenses of the mutual funds in which the
separate account invests. In certain circumstances, state premium taxes will
also be applicable. The example below should not be considered a representation
of past or future expenses; actual expenses may be greater or lesser than those
shown. See "Deductions under the Contracts."
Contractowner Transaction Expenses
Sales Load Imposed on
Purchases (as a percentage
of purchase payments) None
Deferred Sales Load (as a
percentage of amount
surrendered)
For Withdrawals Occurring During Year:
1 2 3 4 5 6 7 8 9 10 Thereafter
- - - - - - - - - -- ----------
7% 6.3% 5.6% 4.9% 4.2% 3.5% 2.8% 2.1% 1.4% .7% 0%
Surrender Fees None
Exchange Fee None
Annual Contract Fee $25 plus an amount equal to the following:
- ----------------------
.5% of the First
Total Value of All x $50,000 of the Participant's
Investment Accounts Investment Accounts
of Participant _______________________________
Total Value of all Investment
Accounts Under the
Retirement Plan
Separate Account Annual Expenses
(as a percentage of average account value)
Mortality and Expense Risk Fees 1.4965%
Account Fees and Expenses None
Total Separate Account Annual Expenses 1.4965%
Annual Expenses of Mutual Funds
(as a percentage of average net
assets of the following
mutual funds)
Principal Capital Principal Government Principal Money
Accumulation Fund Securities Fund Market Fund
Management Fees .49% .50% .50%
Other Expenses .02% .05% .08%
Total Mutual Fund
Annual Expenses .51% .55% .58%
<TABLE>
<CAPTION>
EXAMPLE
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
If you surrender your contract at the Common Stock
end of the applicable time period: Division $95 $132 $171 $272
You would pay the following Government
expenses on a $1,000 investment, Securities
assuming 5% annual return on Division $95 $133 $172 $276
assets:
Money Market
Division $96 $134 $174 $279
If you annuitize at the end of the Common Stock
applicable time period or do not Division $23 $72 $123 $263
surrender your contract:
You would pay the following Government
expenses on a $1,000 investment, Securities
assuming 5% annual return on Division $24 $73 $125 $267
assets:
Money Market
Division $24 $74 $126 $270
</TABLE>
CONDENSED FINANCIAL INFORMATION
Selected data for a Pension Builder accumulation unit outstanding
throughout the period ended December 31:
<TABLE>
<CAPTION>
Common Stock Division
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation unit value:
Beginning of period $2.624 $2.650 $2.495 $2.313 $1.693 $1.907 $1.665 $1.477 $1.409 $1.231
End of period 3.409 2.624 2.650 2.495 2.313 1.693 1.907 1.665 1.477 1.409
Number of accumulation 696 3,570 4,812 4,485 3,880 3,429 3,006 2,521 2,188 1,107
units outstanding at end
of period (in thousands)
</TABLE>
<TABLE>
<CAPTION>
Government Securities Division (1)
1995 1994 1993 1992 1991 1990 1989 1988 1987
---------------------------------------------------------------------------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation unit value:
Beginning of period $1.570 $1.669 $1.539 $1.462 $1.269 $1.176 $1.032 $ .967 $1.000
End of period 1.841 1.570 1.669 1.539 1.462 1.269 1.176 1.032 .967
Number of accumulation 453 1,722 2,501 2,178 1,770 1,398 1,072 507 210
units outstanding at end
of period (in thousands)
<FN>
(1) Commenced operations on April 14, 1987.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Money Market Division
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
---------------------------------------------------------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation unit value:
Beginning of period $1.696 $1.659 $1.640 $1.608 $1.541 $1.448 $1.348 $1.276 $1.217 $1.163
End of period 1.764 1.696 1.659 1.640 1.608 1.541 1.448 1.348 1.276 1.217
Number of accumulation 564 1,452 1,694 2,009 2,479 2,626 2,609 1,274 536 172
units outstanding at end
of period (in thousands)
</TABLE>
Financial statements are contained in the Statement of Additional Information.
SUMMARY
How can I invest in a Contract?
The Pension Builder Group variable annuity contracts (the "Contract" or the
"Contracts") described in this Prospectus are designed for use in connection
with pension or profit-sharing plans which qualify under the Self-Employed
Individuals Retirement Act of 1962 ("HR-10") as amended. These Contracts, which
are no longer offered, were sold primarily by insurance agents of or brokers for
Principal Mutual Life Insurance Company. In addition, these persons were usually
registered representatives of Princor Financial Services Corporation, which acts
as distributor for the Contract. See "Distribution of these Contracts."
What is the minimum amount that may be invested?
There is no required minimum. See "Other Contractual Provisions".
Do I get an initial ten-day free look at a newly purchased Contract?
Yes. A Participant may terminate initial participation under the Contract
without penalty by returning the certificate issued when the Contract is first
purchased to the home office of the Company within ten days after the
Participant's initial receipt of the certificate. See "Introduction."
How can I withdraw my investment?
Participant withdrawals are subject to any Retirement Plan limitations or
any reduction for vesting provided for in the Retirement Plan as to amounts
available, and will be subject to any charges that may be applied. See
"Withdrawals and Transfers." However, note that withdrawals before age 59 1/2
may involve an income tax penalty. See "Federal Tax Status."
INTRODUCTION
The Contracts described in this Prospectus are designed for use in
connection with pension or profit-sharing plans which qualify under the
Self-Employed Individuals Tax Retirement Act of 1962, as amended. The Contracts
provide for the accumulation of values and the payment of annuity benefits on a
variable basis. A certificate is issued to each Participant describing the
benefits under the Contract. A Participant may terminate initial participation
under the Contract without penalty by returning the certificate issued when the
Contract is first purchased to the home office of the Company within ten days
after the Participant's initial receipt of the certificate.
All Contributions for Participants are allocated to one or more of the
Divisions of Separate Account C. Currently there are three Divisions: the Common
Stock Division, the Money Market Division and the Government Securities
Division. Additional Divisions may be added in the future. Each Participant
controls the allocation by filing a Written Notification with the Company.
The Common Stock Division invests only in shares of Principal Capital
Accumulation Fund, Inc., the Money Market Division invests only in shares of
Principal Money Market Fund, Inc. and the Government Securities Division invests
only in shares of Principal Government Securities Fund, Inc. These three
corporations are diversified, open-end investment management companies typically
known as Mutual Funds. The Investment Manager for the Mutual Funds is Princor
Management Corporation. Principal Capital Accumulation Fund and Principal Money
Market Fund are also used to fund variable life insurance contracts. See
"Eligible Purchasers and Purchase of Shares" in the Funds' prospectus for a
discussion of the potential risks associated with "mixed funding."
The investment objective of Principal Capital Accumulation Fund, Inc. is
long-term capital appreciation and growth of future investment income. The
assets of this Mutual Fund consist principally of a portfolio of common stocks.
The value of the investments held by this Mutual Fund fluctuates daily and is
subject to the risks of changing economic conditions as well as the risks
inherent in the ability of this Mutual Fund's management to anticipate changes
in such investments necessary to meet changes in economic conditions.
Historically, the value of a diversified portfolio of common stocks such as
invested in by Principal Capital Accumulation Fund, Inc. held for an extended
period of time has tended to rise during periods of inflation. There has,
however, been no exact correlation, and for some periods the values of such
common stocks declined while the rate of inflation increased.
Principal Money Market Fund, Inc. has an investment objective of obtaining
maximum current income available from short-term securities consistent with
preservation of principal and maintenance of liquidity by investing all of its
assets in a portfolio of money market instruments. This Mutual Fund invests in
United States dollar denominated instruments having a maturity of 397 days or
less that the Manager, subject to the oversight of the Fund's board of
directors, determines present minimal credit risks and which at the time of the
acquisition are "eligible securities" as that term is defined in regulations
issued under the Investment Company Act of 1940. See the Fund's prospectus for
details. The value of the investments held by this Mutual Fund may fluctuate,
although the net asset value per share is normally expected to remain at $1.00.
However, its yield will vary with changes in short-term interest rates. Over the
last two decades there has been a general correlation between short-term
interest rates and the cost of living, but there has been no exact correlation
and for some periods such rates have declined while the cost of living has
risen.
Principal Government Securities Fund, Inc. has an investment objective of
a high level of current income, liquidity and safety of principal. The Fund
seeks to achieve this objective through the purchase of obligations issued or
guaranteed by the United States Government or its agencies, with up to 55% of
the Fund's assets invested in Government National Mortgage Association
Certificates ("GNMA Certificates"). Fund shares, however, are not guaranteed by
the United States Government. The value of the Fund's investments fluctuates as
interest rates change. The value rises when rates decline and falls when rates
increase. Expected prepayments of mortgages included in a GNMA certificate can
offset the market value of the certificate, and actual prepayments can effect
the return ultimately received.
Additional information concerning these Mutual Funds, including their
investment policies and restrictions, investment management fees and operating
expenses is given in the prospectus for the Funds. A Prospectus for the Mutual
Funds is attached to and follows this Prospectus. It should be read carefully in
conjunction with this Prospectus before investing.
Each Division purchases shares of the Mutual Funds at net asset value. In
addition, all distributions made by a Mutual Fund with respect to shares held by
Divisions of Separate Account C are reinvested in additional shares of the same
Mutual Fund. Contract benefits are provided and charges are made in effect by
redeeming Mutual Fund shares at net asset value. Values under the Contracts,
both before and after the commencement of Annuity Payments, will increase or
decrease to reflect the investment performance of the Mutual Funds and
Participants assume the risks of such change in values.
From time to time the Separate Account advertises its Money Market
Division's "yield" and "effective yield." Both yield figures are based on
historical earnings and are not intended to indicate future performance. The
"yield" of the division refers to the income generated by an investment in the
division over a seven-day period (which period will be stated in the
advertisement). This income is then "annualized." That is, the amount of income
generated by the investment during that week is assumed to be generated each
week over a 52-week period and is shown as a percentage of the investment. The
"effective yield" is calculated similarly but, when annualized, the income
earned by an investment in the division is assumed to be reinvested. The
"effective yield" will be slightly higher than the "yield" because of the
compounding effect of this assumed reinvestment. Neither yield quotation
reflects sales load deducted from purchase payments which, if included, would
reduce the "yield" and "effective yield."
Also, from time to time, the Separate Account will advertise the average
annual total return of its various divisions. The average annual total return
for any of the divisions is computed by calculating the average annual
compounded rate of return over the stated period that would equate an initial
$1,000 investment to the ending redeemable contract value. In this calculation
the ending value is reduced by a contingent deferred sales charge that decreases
from 7% to 0% over a period of 10 years. The Separate Account may also advertise
total return figures of its Divisions for a specified period that do not take
into account the sales charge in order to illustrate the change in the
Division's unit value over time. See "Deductions Under the Contracts" for a
discussion of contingent deferred sales charges.
See the Statement of Additional Information for further information
regarding the computation of yield, effective yield and total return.
DESCRIPTION OF PRINCIPAL MUTUAL LIFE INSURANCE COMPANY (THE "COMPANY")
Principal Mutual Life Insurance Company is a mutual life insurance company
with its home office at The Principal Financial Group, Des Moines, Iowa,
telephone number 515-247-5111. It was originally incorporated under the laws of
the State of Iowa in 1879 as Bankers Life Association, changed its name to
Bankers Life Company in 1911 and changed its name to Principal Mutual Life
Insurance Company in 1986.
Principal Mutual Life Insurance Company is authorized to do business in the
50 states of the United States, the District of Columbia, the Commonwealth of
Puerto Rico, and the Canadian Provinces of Alberta, British Columbia, Manitoba,
Ontario and Quebec. The Company sells life, disability, and health insurance,
and annuities written both on an individual and a group basis.
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT C
Separate Account C was established on April 12, 1971 pursuant to a
resolution (as amended) of the Executive Committee of the Board of Directors of
the Company. Under Iowa insurance laws and regulations the income, gains or
losses, whether or not realized, of Separate Account C are credited to or
charged against the assets of Separate Account C without regard to the other
income, gains or losses of the Company. In addition, all income, gains or
losses, whether or not realized, and expenses with respect to a Division of
Separate Account C for these Contracts shall be credited to or charged against
that Division without regard to income, gains or losses, or expenses of any
other Division of Separate Account C. Furthermore, the assets of each Division
of Separate Account C for these Contracts shall not be charged by the Company
with any liabilities arising from any other contracts issued by the Company or
from any other Division of Separate Account C. These assets are held with
relation to the Contracts described in this Prospectus and such other variable
annuity contracts as may be issued by the Company and designated as
participating in the various Divisions of Separate Account C. Also, although the
assets maintained in Separate Account C attributable to the Contracts will not
be charged with any liabilities arising out of any other business conducted by
the Company, the reverse is not true. Hence, all obligations arising under the
Contracts, including the promise to make Annuity Payments, are general corporate
obligations of the Company.
Pursuant to amendments enacted in 1970 to the Investment Company Act of
1940, Separate Account C is not an investment company for purposes of the Act
and hence certain provisions of the Act do not apply to it.
The Company is taxed as an insurance company under the Internal Revenue
Code. The operations of Separate Account C are part of the total operations of
the Company but are treated separately for accounting and financial statement
purposes and are considered separately in computing the Company's tax liability.
Separate Account C is not affected by federal income taxes paid by the Company
with respect to its other operations, and under existing federal income tax law,
investment income and capital gains attributable to Separate Account C are not
taxed. The Company reserves the right to charge Separate Account C with, and to
create a reserve for, any tax liability which the Company determines may result
from maintenance of Separate Account C. To the best of the Company's knowledge,
there is no current prospect of any such liability.
DEDUCTIONS UNDER THE CONTRACTS
An Administration Charge, a mortality and expense risks charge and, in
certain circumstances, state premium taxes are deducted under the Contract.
Also, in certain circumstances, a Contingent Deferred Sales Charge may be
deducted from certain cash withdrawals from a Participant's Investment
Account(s) before the Annuity Commencement Date. Total expenses of the
Registrant for the fiscal year ended December 31, 1995 were 1.78% of the average
net assets.
There are also deductions from and expenses paid out of the assets of
Principal Money Market Fund, Inc., Principal Capital Accumulation Fund, Inc. and
Principal Government Securities Fund, Inc. These are described in the
prospectus.
A. Contingent Deferred Sales Charge
There is no initial sales charge. However, any cash withdrawal before the
Annuity Commencement Date on behalf of a Participant may be subject to a
Contingent Deferred Sales Charge equal to a percentage of the amount being
withdrawn. The percentage will be determined according to the following
table:
Number of Contribution
Years A Participant Has Been Contingent Deferred
Covered Under the Contract Sales Charge Percentage
-------------------------- -----------------------
Less than 1 7.0%
1 but less than 2 6.3
2 but less than 3 5.6
3 but less than 4 4.9
4 but less than 5 4.2
5 but less than 6 3.5
6 but less than 7 2.8
7 but less than 8 2.1
8 but less than 9 1.4
9 but less than 10 0.7
10 or more 0.0
The charge will be made by reducing the Investment Account Value from which
the withdrawal is made by an amount equal to the charge (see "Cash
Withdrawals").
The Contingent Deferred Sales Charge does not apply to withdrawals made as
a result of the Participant's death or Total and Permanent Disability. The
charge also does not apply to transfers between Investment Accounts or
transfers to an Associated Fixed Contract or to amounts applied to provide
Variable Annuity payments. The charge may apply to amounts transferred to
an Alternate Funding Agent or Alternate Funding Vehicle, except transfers
to an Alternate Funding Vehicle that is an annuity contract issued by
Principal Mutual Life Insurance Company.
The Contingent Deferred Sales Charge will be waived by the Company for
withdrawals of the entire value of a Participant's Investment Accounts
under the Contract. This waiver will not apply to withdrawals of less than
the entire value of a Participant's Investment Accounts under the Contract.
The amount of any Contingent Deferred Sales Charge will never exceed 9% of
the purchase payments to which the charge relates. For this purpose,
withdrawals will be related to purchase payments on a first-in, first-out
basis and "purchase payments" will include purchase payments made under any
Associated Fixed Contract from which transfers have been made. See
"Transfers to the Contract."
The Contingent Deferred Sales Charge, when applicable, will be applied by
the Company to unamortized expenses relating to the sale of the Contracts
including but not limited to commissions paid to sales personnel, the costs
of preparation of sales literature and other promotional activity. If
revenues from the Contingent Deferred Sales Charge are not sufficient to
cover sales expenses, the short fall could be viewed as being provided for
out of other revenues or the Company's surplus, including revenues
attributable to the mortality and expense risks charge.
B. Administration Charge
An Administration Charge will be deducted once each Contribution Year
proportionately from the Investment Accounts of each Participant and will
be equal to the sum of 1. and 2.:
1. $25.
2. The Participant's proportionate share of an amount equal to a
percentage of the total value of all Investment Accounts under the
Retirement Plan under the Contract. This percentage shall be 0.5% of
the first $50,000 in such accounts divided by the total value of such
accounts. (See Appendix 2 for example of computation of Administration
Charge.)
The Administration Charge applicable to each Participant will be deducted
from the Participant's Investment Accounts on the earlier of (i) the date
such accounts are paid or applied in full (a total redemption) or (ii) the
last day of the Contribution Year. Such deduction will be effected by
cancelling a number of the units in each Investment Account of the
Participant equal to its proportionate share of the Administration Charge
divided by the Unit Value for the Contract for the applicable Division for
the Valuation Period in which the charge is made.
A pro rata Administration Charge will be made for any fractional part of a
Contribution Year of a Participant. The Company does not expect to recover
from the charge any amount above its accumulated expenses associated with
the Contracts. However, since a portion of the charge is based on a percent
of a Participant's Investment Account Values, amounts derived from larger
Investment Accounts may to an extent cover expenses associated with smaller
Investment Accounts depending upon the relative degree of Investment
Account activity.
C. Separate Payment of Administration Charge
An Employer may, by a revocable written agreement with the Company, agree
to pay separately all or a portion of the Administration Charge for
Participants who are employees of the Employer.
D. Mortality and Expense Risks Charge
Variable Annuity Payments will not be affected by adverse mortality
experience or by any excess in the actual sales and administrative expenses
over the charges provided for in the Contract. The Company assumes the
risks that (i) Annuity Payments will continue for a longer period than
anticipated and (ii) the deductions under the Contracts will be
insufficient to cover the actual costs. For assuming these risks, the
Company, in determining Unit Values and Variable Annuity Payments, makes a
charge as of the end of each Valuation Period against the assets of
Separate Account C held with respect to the Contract. The charge is
equivalent to a simple annual rate of 1.4965%. The Company does not believe
that it is possible to specifically identify that portion of the 1.4965%
deduction applicable to the separate risks involved, but estimates that a
reasonable approximate allocation would be .2490% for the mortality risks
and 1.2475% for the expense risks. The mortality and expense risks charge
may be changed by the Company at any time at least one year after the
Contract has been issued by giving not less than 60 days prior written
notice to the Contractholder, Employer and Participants. However, during
the first five years following issuance of the Contracts, the charge may
not exceed 2.00% on an annual basis, and further only one change may be
made in any one year period. Any change in the mortality and expense risks
charge will not affect Variable Annuities in the course of payment. If the
charge is insufficient to cover the actual costs of the mortality and
expense risks assumed, the financial loss will fall on the Company;
conversely, if the charge proves more than sufficient, the excess will be a
gain to the Company.
E. Premium Taxes
Certain state and local governments impose a premium tax upon annuity
considerations received by insurance companies. The Company will charge
against the Participant's Investment Account Values the amount of any
premium taxes levied by a state or any other government entity. Premium
taxes currently imposed by states range from 0% (in more than 40 states) to
2.25%. (See Appendix 1 for premium tax rates.) Unless otherwise required by
law, the deduction will be made at the time Investment Account Values are
applied to effect the form of variable annuity selected by the Participant.
The applicable rates imposed by the states and other governmental entities
which impose premium taxes on annuity considerations are subject to being
changed or amended by the respective legislative body or by administrative
interpretations or by judicial acts. IT IS NOT POSSIBLE TO DESCRIBE
PRECISELY THE AMOUNT OF PREMIUM TAX PAYABLE ON ANY TRANSACTION INVOLVING
THE CONTRACTS. Such premium taxes will depend, among other things, on the
state of residence of the Participant and the insurance tax laws of such
states.
SURPLUS DISTRIBUTION AT SOLE DISCRETION OF THE COMPANY
It is not anticipated that any divisible surplus will ever be distributable
to these Contracts in the future because the Contracts are not expected to
result in a contribution to the divisible surplus of the Company. However, if
any distribution of divisible surplus is made, it will be made to Participants'
Investment Accounts in the form of additional units.
THE CONTRACT
The Contract will normally be issued to an Employer or association or a
trust established for the benefit of Participants and their beneficiaries. The
Company will also issue a pre-retirement certificate to each Participant
describing the benefits under the Contract. If the Company Home Office in Des
Moines, Iowa receives and accepts a completed application for a Contract with or
before the initial purchase payment, it will, within two days after receiving
that payment, invest the entire amount in the Division or Divisions that are
chosen. (If no Division is chosen on the completed application for a Contract,
the Company will invest the entire amount in the Money Market Division.) If the
application for the purchase of a Contract is not received and accepted within
five business days after the Company receives the initial purchase payment, the
Company will return the payment. If the application is received and accepted
within the five-day period, that payment will be invested in the Division or
Divisions of choice at the Unit Value or Values next calculated after the
application has been accepted.
A. Contract Values and Accounting Before Annuity Commencement Date
1. Participant's Investment Accounts
During the period of time before the commencement of Annuity Payments,
an Investment Account will be established for each Participant for each
type of Contribution permitted under the Contract for each Division of
Separate Account C. The types of Contributions are: Contributions by
the Employer pursuant to the Retirement Plan, voluntary non-deductible
Participant Contributions, Contributions which represent a transfer
from a prior funding arrangement, or other Contributions that the
Company agrees to accept.
Investment Accounts will be maintained until the Investment Account
Values are either (a) applied to effect Variable Annuity benefits for
the Participant, (b) paid to the Participant or Participant's
beneficiary or (c) transferred in accordance with the provisions of the
Contract.
Each Contribution for a Participant will be allocated to the Division
or Divisions of Separate Account C designated by Written Notification
and will result in a credit of units to the appropriate Investment
Account. The number of units so credited will be determined by dividing
the portion of the Contributions allocated to a Division by the Unit
Value for that Division for the Valuation Period within which the
Contribution was received by the Company at its home office in Des
Moines, Iowa.
2. Unit Value
The Unit Value for a Contract which participates in a Division of
Separate Account C determines a Participant's Investment Account
Values. The Unit Value for each Contract in each Division is determined
on each day on which the net asset value of its underlying Mutual Fund
is determined. The Unit Value for a Valuation Period is determined as
of the end of the period. The investment performance of the underlying
Mutual Fund and deducted expenses affect the Unit Value.
For these Contracts, the Unit Value for each Division was fixed at
$1.00 for the Valuation Period in which the first amount of money was
credited to the Division. A Division's Unit Value for any later
Valuation Period is equal to its Unit Value for the immediately
preceding Valuation Period multiplied by the Net Investment Factor (see
below) for that Division for the later Valuation Period.
3. Net Investment Factor
Each Net Investment Factor is the quantitative measure of the
investment performance of each Division of Separate Account C.
For any specified Valuation period the Net Investment Factor for a
Division for a Contract is equal to
(a) the quotient obtained by dividing (i) the net asset value of a
share of the underlying Mutual Fund as of the end of the Valuation
Period, plus the per share amount of any dividend or other
distribution made by the Mutual Fund during the Valuation Period
(less an adjustment for taxes, if any) by (ii) the net asset value
of a share of the Mutual Fund as of the end of the immediately
preceding Valuation Period,
reduced by
(b) a mortality and expense risks charge of a number equal to a simple
interest rate for the number of days within the Valuation Period
at an annual rate of 1.4965%.
The amounts derived from applying the rate specified in subparagraph
(b) above and the amount of any taxes referred to in subparagraph (a)
above will be accrued daily and will be transferred from Separate
Account C at the discretion of the Company.
4. Hypothetical Example of Calculation of Unit Value for the Common Stock
Division and Government Securities Division
The computation of the Unit Value may be illustrated by the following
hypothetical example. Assume that the current net asset value of a
Mutual Fund share is $14.8000; that there were no dividends or other
distributions made by the Mutual Fund and no adjustment for taxes since
the last determination; that the net asset value of a Mutual Fund share
last determined was $14.7800; that the last Unit Value was $1.0185363;
and that the Valuation Period was one day. To determine the current Net
Investment Factor, divide $14.8000 by $14.7800 which produces 1.0013532
and deduct from this amount the mortality and expense risks charge of
0.0000410, which is the rate for one day that is equivalent to a simple
annual rate of 1.4965%. The result, 1.0013122, is the current Net
Investment Factor. The last Unit Value ($1.0185363) is then multiplied
by the current Net Investment Factor (1.0013122) which produces a
current Unit Value of $1.0198728.
5. Hypothetical Example of Calculation of Unit Value for the Money Market
Division
The computation of the Unit Value may be illustrated by the following
hypothetical example. Assume that the current net asset value of a
Mutual Fund share is $1.0000; that a dividend of .0328767 cents per
share was declared by the Mutual Fund prior to calculation of the net
asset value of the Mutual Fund share and that no other distributions
and no adjustment for taxes were made since the last determination;
that the net asset value of a Mutual Fund share last determined was
$1.0000; that the last Unit Value was $1.0162734; and that the
Valuation Period was one day.
To determine the current Net Investment Factor, add the current net
asset value ($1.0000) to the amount of the dividend ($.000328767) and
divide by the last net asset value ($1.0000), which when rounded to
seven places equals 1.0003288. Deduct from this amount the mortality
and expense risks charge of .0000410 (the proportionate rate for one
day based on a simple annual rate of 1.4965%). The result (1.0002878)
is the current Net Investment Factor. The last Unit Value ($1.0162734)
is then multiplied by the current Net Investment Factor (1.0002878),
resulting in a current Unit Value of $1.0165659.
B. Annuity Benefits
1. Selecting a Variable Annuity
Variable Annuity Payments will be made to a Participant beginning on
the Annuity Commencement Date and continuing thereafter on the first
day of each month. A Participant may select an Annuity Commencement
Date by Written Notification to the Company. The date selected may be
the first day of any month the Retirement Plan allows which is at least
one month after the Written Notification.
The Annuity Commencement Date for all Participants cannot be later than
April 1 following the end of the taxable year in which the Participant
attains age 70 1/2. There are certain exceptions for employees who are
not 5% owners and who attain age 70 1/2 by January 1, 1988.
The Annuity Commencement Date cannot be earlier than age 59 1/2 except
in the event of Total and Permanent Disability. Early distribution for
any other reason prior to age 59 1/2 may be subject to certain
penalties (see "Federal Tax Status").
At any time not less than one month preceding the desired Annuity
Commencement Date, a Participant may, by Written Notification, select
one of the annuity options described below (see "Forms of Variable
Annuities"). If no annuity option has been selected at least one month
before the Annuity Commencement Date, the Normal Income Form will be
provided.
2. Forms of Variable Annuities
Because of certain restrictions contained in the Internal Revenue Code
and regulations thereunder, an annuity option is not available unless
(i) no benefits are provided which extend beyond the life of the
Participant or the lives of the Participant and the Participant's
spouse or (ii) no benefits are provided which extend over a period
longer than the life expectancy of the Participant or the life
expectancy of the Participant and spouse.
A Participant may elect to have Investment Account Values applied under
one of the following annuity options. However, if the monthly Annuity
Payment would be less than $20, the Company may, at its sole option,
pay the Investment Account Values in full settlement of all benefits
otherwise available.
Variable Life Annuity with Monthly Payments Certain for Zero, Five,
Ten, Fifteen or Twenty Years or Installment Refund Period -- a Variable
Annuity which provides monthly payments to the Participant during the
Participant's lifetime, and further provides that if, at the death of
the Participant, monthly payments have been made for less than a
minimum period selected by the Participant, any remaining payments for
the balance of such period shall be paid to a designated beneficiary
unless the beneficiary requests in writing that the Commuted Value of
the remaining payments be paid in a single sum. (Designated
beneficiaries entitled to take the remaining payments or the Commuted
Value thereof rather than continuing monthly payments should consult
with their tax advisor to be made aware of the differences in tax
treatment.)
The minimum period may be either zero, five, ten, fifteen or twenty
years or the period (called "installment refund period") consisting of
the number of months determined by dividing the amount applied under
the option by the initial payment. If, for example, a Participant had
$14,400 to apply under a life option with an installment refund period,
and if the first monthly payment provided by that amount, as determined
from the applicable annuity conversion rates, would be $100, the
minimum period would be 144 months ($14,400 divided by $100 per month)
or 12 years. A variable life annuity with an installment refund period
guarantees a minimum number of payments, but not the amount of any
monthly payment or the amount of aggregate monthly payments.
Under the Variable Life Annuity with Zero Years Certain, which provides
monthly payments to the Participant during the Participant's lifetime,
it would be possible for the Participant to receive only one Annuity
Payment if the Participant died prior to the due date of the second
payment since payment is made only during the lifetime of the
Participant.
Joint and Survivor Variable Life Annuity with Monthly Payments Certain
for Ten Years -- a Variable Annuity which provides monthly payments for
a minimum period of ten years and thereafter during the joint lifetimes
of that participant and the joint annuitant named at the time this
option is elected, and continuing after the death of either payee for
the amount that would have been payable to them jointly during the
remaining lifetime of the survivor. In the event the Participant and
the joint annuitant do not survive beyond the minimum ten year period,
any remaining payments for the balance of such period will be paid to a
designated beneficiary unless the beneficiary requests in writing that
the Commuted Value of the remaining payments be paid in a single sum.
(Designated beneficiaries entitled to take the remaining payments or
the Commuted Value thereof rather than continuing monthly payments
should consult with their tax advisor to be made aware of the
differences in tax treatment.)
Joint and Two-Thirds Survivor Variable Life Annuity -- a Variable
Annuity which provides monthly payments during the joint lives of the
Participant and the person designated by the Participant as joint
annuitant with two-thirds of the amount that would have been payable to
them jointly continuing to the survivor upon the death of either.
Variable Life Annuity with One-Half Survivorship -- a Variable Annuity
which provides monthly payments during the life of the Participant with
one-half of the amount otherwise payable continuing to the contingent
annuitant designated by the Participant so long as the contingent
annuitant lives.
Under the Joint and Two-Thirds Survivor Variable Life Annuity and under
the Variable Life Annuity with One-Half Survivorship, it would be
possible for the Participant and/or contingent or joint annuitant to
receive only one annuity payment if both died prior to the due date of
the second payment since payment is made only during their lifetimes.
Other Options -- Other Variable Annuity options permitted under the
applicable Retirement Plan may be arranged by mutual agreement of the
Participant and the Company.
3. Basis of Annuity Conversion Rates
Because women as a class live longer than men, it has been common that
retirement annuities of equal cost for women and men of the same age
will provide women less periodic income at retirement. The Supreme
Court of the United States ruled in Arizona Governing Committee vs.
Norris that sex distinct annuity tables under an employer-sponsored
benefit plan result in discrimination that is prohibited by Title VII
of the Federal Civil Rights Act of 1964. The Court further rules that
sex distinct annuity tables will be deemed discriminatory only when
used with values accumulated from employer contributions made after
August 1, 1983, the date of the ruling.
Title VII applies only to employers with 15 or more employees. However,
certain State Fair Employment Laws and Equal Payment Laws may apply to
employers with less than 15 employees.
The Variable Annuity Contracts described in this Prospectus offer both
sex distinct and (effective August 1, 1983) sex neutral annuity
conversion rates. The annuity rates are used to convert a Participant's
pre-retirement account value to a monthly lifetime income at
retirement. Usage of either sex distinct or sex neutral annuity rates
will be determined by the Employer.
For each form of Variable Annuity, the annuity conversion rates
determine how much the first monthly Annuity Payment will be for each
$1,000 of the Participant's Investment Account Value applied to effect
the Variable Annuity. The conversion rates vary with the form of
annuity, date of birth, and (unless sex neutral rates are used) the sex
of the Participant and the joint or contingent annuitant, if any. The
sex distinct guaranteed annuity conversion rates are based upon (i) an
interest rate of 2.5% per annum and (ii) mortality according to the
"1983 Table A for Individual Annuity Valuation" projected with Scale G
to the year 2020, females set back six years in age. The sex neutral
rates are determined for all Participants in the same way as female
rates, as described above. The guaranteed annuity conversion rates may
be changed, but no change which would provide less initial monthly
Annuity Payment will take effect for a current Participant.
The Contract provides that an interest rate of not less than 2.5% per
annum will represent the assumed investment return. Currently the
assumed investment return used in determining the amount of the first
monthly payment is 4% per annum. This rate may be increased or
decreased by the Company in the future but in no event will it be less
than 2.5% per annum. If, under the Contract, the actual investment
return (as measured by an Annuity Change Factor, defined below) should
always equal the assumed investment return, Variable Annuity Payments
would remain level. If the actual investment return should always
exceed the assumed investment return, Variable Annuity Payments would
increase; conversely, if it should always be less than the assumed
investment return, Variable Annuity Payments would decrease.
The current 4% assumed investment return is higher than the 2.5%
interest rate reflected in the annuity conversion rates contained in
the Contract. With a 4% assumption, Variable Annuity Payments will
commence at a higher level, will increase less rapidly when actual
investment return exceeds 4%, and will decrease more rapidly when
actual investment return is less than 4%, than would occur with a lower
assumption.
4. Determining the Amount of the First Monthly Annuity Payment
For each Investment Account the initial amount of monthly annuity
income provided by each $1,000 applied to effect a Variable Annuity
shall be based on the option selected and the Investment Account Value,
after reduction for any premium tax, determined as of the end of the
Valuation Period one month before the Annuity Commencement Date. The
initial monthly income payment will be determined on the basis of the
annuity conversion rates applicable on such date to such conversions
under all contracts of this class issued by the Company. However, the
basis for the annuity conversion rates will not produce less initial
monthly income than the annuity conversion rate basis described above.
5. Determining the Amount of the Second and Subsequent Monthly Annuity
Payments
The second and subsequent monthly Annuity Payments will be computed
separately for each Division of Separate Account C selected by the
Participant and will increase or decrease in response to the investment
experience of the Mutual Fund underlying the Division. The amount of
each payment will be determined by multiplying the amount of the
monthly Annuity Payment due in the immediately preceding calendar month
by the Annuity Change Factor for the Division for the Contract for the
calendar month in which the Annuity Payment is due.
Each Annuity Change Factor for a Division for a calendar month is the
quotient of (a) divided by (b), below:
(a) The number which results from dividing (i) the Contract's Unit
Value for the Division for the first Valuation Date in the
calendar month beginning one month before the given calendar month
by (ii) the Contract's Unit Value for the Division for the first
Valuation Date in the calendar month beginning two months before
the given calendar month.
(b) An amount equal to one plus the effective interest rate for the
number of days between the two Valuation Dates specified in
subparagraph (a) above at the interest rate assumed to determine
the initial payment of variable benefits to the Participant.
6. Hypothetical Example of Calculation of Annuity Payments
Assume that on the date one month before the Annuity Commencement Date
the Participant has an Investment Account Value of $37,592. Using the
appropriate annuity conversion factor (assuming $5.88 per $1,000
applied) the Investment Account Value provides a first monthly Annuity
Payment of $221.04. To determine the amount of the Participant's second
monthly payment assume that the Unit Value as of the first Valuation
Date in the preceding calendar month was $1.3712044 and the Unit Value
as of the first Valuation Date in the second preceding calendar month
was $1.3273110. The Annuity Change Factor is determined by dividing
$1.3712044 by $1.3273110, which equals 1.0330694, and dividing the
result by an amount corresponding to the amount of one increased by an
assumed investment return of 4% (which for a thirty day period is
1.0032288). 1.0330694 divided by 1.0032288 results in an Annuity Change
Factor for the month of 1.0297446. Applying this factor to the amount
of Annuity Payment for the previous month results in a current monthly
payment of $227.61 ($221.04 multiplied by 1.0297446 equals $227.61).
C. Payment on Death of Participant
1. Prior to Annuity Commencement Date
If a Participant dies prior to the Annuity Commencement Date, the
Company, upon receipt of due proof of death, will, in accordance with
prior instructions from the Participant, either (i) establish
Investment Accounts for the beneficiary to hold the Investment Account
Values of the Participant or (ii) if an Associated Fixed Contract has
been issued, cancel all Investment Account units as of the date of
receipt of proof of death and transfer the Investment Account Values
(determined as of the end of the Valuation Period in which proof of
death was received) to the Associated Fixed Contract. In lieu of the
foregoing, the Company may pay all or part of the Investment Account
values to the beneficiary in a single sum, provided that if the
Participant had elected that the Investment Account Values be
transferred to an Associated Fixed Contract, the beneficiary's written
request for the payment must be given before the date the transfer is
to be effective.
A beneficiary of a Participant may elect to have all or a part of the
amount available under any Associated Fixed Contract transferred to
this Contract to establish Investment Accounts for the beneficiary or
to have all or a part of the amount available under this Contract
transferred to any Associated Fixed Contract. If the value of the
Investment Accounts is less than $3,500, the Company may at its option
pay the beneficiary the value of such accounts in lieu of all other
benefits. A spouse beneficiary may elect to have the Investment Account
Values applied to provide Annuity Payments or paid in a single sum. A
beneficiary other than the Participant's spouse must receive a
distribution of all values within five years of the Participant's
death. An election to receive Annuity Payments must be made prior to
the single sum payment to the beneficiary. Annuity income must be
payable as lifetime annuity income with no benefits beyond the
beneficiary's life or life expectancy. In addition, the amount of the
monthly Annuity Payments must be at least $20, or the Company may at
its option pay the beneficiary the value of the Investment Accounts in
lieu of all other benefits. The first Annuity Payment will be made on
the first day of the calendar month specified in the election, but in
no event prior to the date one month after any transfer from any
Associated Fixed Contract is effective. The amount to be applied will
be determined as of one month prior to the date the first monthly
payment is due. The beneficiary must be a natural person in order to
elect Annuity Payments. The election must be by Written Notification.
The annuity conversion rates applicable to a beneficiary shall be the
annuity conversion rates the Company makes available to all
beneficiaries under contracts of this class. The beneficiary will
receive a written description of the options available.
2. Subsequent to Annuity Commencement Date
Upon the death of a Participant receiving monthly Annuity Payments, no
benefits will be available except as may be provided under the form of
annuity selected. If provided for under such form of annuity, the
beneficiary will continue receiving any remaining payments unless the
beneficiary requests in writing that the Commuted Value of the
remaining payments be paid in a single sum.
D. Withdrawals and Transfers
1. Cash Withdrawals
The Contracts are designed for and intended to be used to fund
Retirement Plans. However, subject to any Retirement Plan limitations
or any reduction for vesting provided for in the Retirement Plan as to
amounts available, the Participant may withdraw cash from the
Investment Accounts at any time prior to the Annuity Commencement Date
subject to any charges that may be applied.
The procedure with respect to cash withdrawals is as follows:
(a) The Participant's Investment Account Values will be determined at
the end of the Valuation Period in which the withdrawal request is
received and will be paid to the Participant within seven days
thereafter. The Company may require that any request be
accompanied by the certificate issued to the Participant.
(b) No more than two partial cash withdrawals can be made in a
twelve-month period without the Company's express consent.
(c) The amount available may be subject to the Contingent Deferred
Sales Charge and, in the case of a total withdrawal, will be
subject to the Administration Charge.
(d) The amount available is also subject to any restriction in the
Participant's Retirement Plan.
Any cash withdrawal made will result in the cancellation of a number of
units in each Investment Account of the Participant from which values
have been withdrawn. The number of units cancelled from the Investment
Account will be equal to the amount withdrawn divided by the Unit Value
for its Division of Separate Account C for the Valuation Period in
which the cancellation is effective. Units will also be cancelled to
cover any charges assessed under (c) above.
2. Transfers to the Contract
If an Associated Fixed Contract has been issued by the Company, and
except as otherwise provided by the applicable Retirement Plan, a
Participant may, by Written Notification, transfer all or a portion of
the proceeds available under the Associated Fixed Contract to the
Investment Account(s) under the Contract at any time at least one month
before Annuity Commencement Date, subject to the terms of the
Associated Fixed Contract.
3. Transfers Between Divisions
Upon Written Notification, all or a portion of the value of an
Investment Account in one Division may be transferred to an Investment
Account in another Division available under the Contract. Transfers may
be made at any time at least one month before the Annuity Commencement
Date. However, only two transfers from any Investment Account may be
made in a twelve-month period without the express consent of the
Company.
A transfer will be effective as of the end of the Valuation Period in
which the request is received. Any amount transferred will result in
the cancellation of units in the Investment Account from which the
transfer is made. The number of units cancelled will be equal to the
amount transferred from that account divided by the Unit Value of the
Division for the Valuation Period in which the transfer is effective.
The transferred amount will result in the crediting of units in the
Investment Account to which the transfer is made. The number of units
credited will be equal to the amount transferred to that account
divided by the Unit Value of the Division for the Valuation Period in
which the transfer is effective.
4. Transfers to the Associated Fixed Contract
Except as otherwise provided by the applicable Retirement Plan, a
Participant may by Written Notification transfer all or a portion of
available Investment Account Values to the Associated Fixed Contract at
any time at least one month before Annuity Commencement Date. Such
transfers are subject to the same provisions regarding frequency of
transfer, effective date of transfer and cancellation of units as
described above in "Transfers Between Divisions".
5. Special Situation Involving Alternate Funding Agents
The Contracts are subject to provisions of the Retirement Plan which
allow the Investment Account Values of all Participants of the
Retirement Plan to be transferred to an Alternate Funding Agent with or
without the consent of the Participants. Transfers to an Alternate
Funding Agent require Written Notification from the person or persons
specified by the Retirement Plan.
The amount to be transferred will be equal to the Investment Account
Values determined as of the end of the Valuation Period in which the
Written Notification is received. Such transfers may be subject to the
Contingent Deferred Sales Charge.
Alternate Funding Agent means an insurance company or custodian
designated by Written Notification and authorized to receive any amount
or amounts transferred from the Contract as to a Participant or
Participants and to apply such amount or amounts for the exclusive
benefit of the Participant or Participants under a retirement plan
which continues to meet the requirements of the Internal Revenue Code,
without any obligation on the part of the Company in regard to the
application.
6. Postponement of Cash Withdrawal or Transfer
Any cash withdrawal or transfer to be made from the Contract or between
Divisions in accordance with the preceding paragraphs will be made
within seven days after Written Notification for such payment or
transfer is received by the Company. However, such withdrawal or
transfer may be deferred during any period when the right to redeem
Mutual Fund shares is suspended as permitted under provisions of the
Investment Company Act of 1940, as amended. The right to redeem shares
may be suspended during any period when (a) trading on the New York
Stock Exchange is restricted as determined by the Securities and
Exchange Commission or such Exchange is closed for other than weekends
and holidays; (b) an emergency exists, as determined by the Securities
and Exchange Commission, as a result of which (i) disposal by the
Mutual Fund of securities owned by it is not reasonably practicable or
(ii) it is not reasonably practicable for the Mutual Fund fairly to
determine the value of its net assets; or (c) the Commission by order
so permits for the protection of security holders. If any deferment of
transfer or withdrawal is in effect and has not been cancelled by
Written Notification to the Company within the period of deferment, the
amount to be transferred or withdrawn shall be determined as of the
first Valuation Date following expiration of the permitted deferment,
and transfer or withdrawal will be made within seven days thereafter.
E. Other Contractual Provisions
1. Contribution Limits
The Contract prescribes no limits on the minimum Contributions which
may be made on behalf of a Participant. Maximum Contributions are
limited to amounts permitted by the Retirement Plan.
2. Assignment
No rights available or benefits payable under the Contract to any
Participant, beneficiary or contingent or joint annuitant are
assignable, transferable or subject to pledge, and all such rights and
benefits shall be exempt from the claims of creditors to the maximum
extent permitted by law.
A Participant's Investment Account Values are non-forfeitable;
provided, however, if the Retirement Plan specifically so provides, a
Participant's Investment Account Values shall be reduced to the extent
required by the vesting provisions of the Retirement Plan as of the
date the Company receives Written Notification of the event requiring
the reduction.
3. Cessation of Contributions
A cessation of Contributions with respect to all Participants under a
Retirement Plan shall occur at the election of the Employer upon
Written Notification to the Company or as of the date on which no
Investment Accounts subject to the Retirement Plan remain under the
Contract. Following a cessation of Contributions all terms of the
Contract will continue to apply except that no further Contributions
may be made.
4. Limitation as to Participants
If at any time Princor Management Corporation is not the investment
manager of the Mutual Funds, the Company may give written notice to the
Contractholder that no additional persons may be covered under the
Contract as Participants.
5. Substitution of Securities
If shares of a Mutual Fund are not available at some time in the
future, or if in the judgment of the Company further investment in such
shares would be no longer appropriate, there may be substituted
therefor, or Contributions received after a date specified by the
Company may be applied to purchase (i) shares of another registered
open-end investment company or (ii) securities or other property as the
Company should in its discretion select.
6. Changes in a Contract
The terms of a Contract may be changed at any time by written agreement
between the Company and the Contractholder without the consent of any
Participant, beneficiary, or joint or contingent annuitant. However,
except as required by law or regulation, no such change shall apply to
Variable Annuities which were in the course of payment prior to the
effective date of the change. If the Contractholder is the trustee of
the trust established to hold a Contract for the benefit of
participating units, the Contractholder may be limited in its exercise
of this amendment right. A majority of the participating units which
are Employers under the Contract may have to agree to the proposed
change in the Contract before the change can be made. The Company will
notify any Participant affected by any change under this paragraph.
The Company may unilaterally change the Contract at any time in order
to meet the requirements of any law or regulation issued by any
governmental agency to which the Company is subject. In addition, the
Company may, on 60 days prior notice to the Contractholder, the
Employer, and each Participant, unilaterally change the basis for
determining Investment Account Values, the Net Investment Factor and
the Annuity Change Factor; the guaranteed annuity conversion rates; and
the provisions with respect to transfers to or from an Associated Fixed
Contract or between Divisions. However, no change in the guaranteed
annuity conversion rates will take effect for a current Participant
which would reduce the amount of the Participant's minimum initial
monthly payment.
Furthermore, the Company may, on 60 days notice to the Contractholder,
the Employer and each Participant affected by the change, unilaterally
change the mortality and expense risks charge. However, such a change
can only be made after the Contract has been in effect for at least one
year and provided that (a) the charge shall in no event exceed 2.00%
within the period of five years from the issuance of the Contract, (b)
the charge shall not be changed more frequently than once in any one
year period and (c) no change shall apply to annuities which were in
the course of payment prior to the effective date of the change.
Finally, the Company reserves the right to limit or refuse further
Contributions under the Contract upon 60 days notice to the
Contractholder, the Employer, and each Participant.
7. Statement of Values
The Company will furnish each Participant at least once during each
year a statement showing the number of units credited to the
Participant's Investment Accounts, Unit Values for the accounts and the
resulting Investment Account Values.
8. Voting Rights
Each Contractholder has one vote in the election of the Board of
Directors at annual meetings and upon other corporate matters, if any,
where a policyowner's vote is taken. An individual Participant
(certificate-holder) does not have a vote.
DISTRIBUTION OF THESE CONTRACTS
These Contracts, which are no longer offered, were sold primarily by
persons who were insurance agents of or brokers for the Company authorized by
applicable law to sell life and other forms of personal insurance and variable
annuities. In addition, these persons were usually registered representatives of
Princor Financial Services Corporation, A Member of The Principal Financial
Group, Des Moines, Iowa, a broker-dealer registered under the Securities
Exchange Act of 1934 and a member of the National Association of Securities
Dealers, Inc. Princor Financial Services Corporation received from the Company
an overwriting and expense fee of 1% of Contributions received under the
Contracts. These Contracts were also sold through other selected broker-dealers
registered under the Securities Exchange Act of 1934. Princor Financial Services
Corporation is the principal underwriter for various registered investment
companies organized by the Company. Princor Financial Services Corporation is a
wholly-owned subsidiary of Principal Financial Group, Inc. Principal Financial
Group, Inc. is a holding company and a wholly-owned subsidiary of the Company.
FEDERAL TAX STATUS
Investment gains of the Mutual Funds credited to Separate Account C are not
taxable to a Participant until received in the form of a cash withdrawal from an
Investment Account or in the form of Variable Annuity Payments. Cash withdrawals
will generally be taxed as ordinary income in the year received, but may be
eligible for the income averaging provisions of the Internal Revenue Code. Each
Variable Annuity Payment will be taxed as ordinary income in accordance with
Section 72 of the Internal Revenue Code. As a general rule, however, a
Participant receiving Variable Annuity Payments at the time of retirement will
be in a lower income tax bracket due to reduced income and larger exemptions.
Adjustments in the tax base are allowed where a portion of the cost of the
benefit being distributed has been paid for by the Participant out of funds not
excludable from the Participant's gross income tax in the year made, rather than
having been paid for by the Employer out of funds that were excludable from the
Participant's gross income tax in the year made.
The Self-Employed Individuals Tax Retirement Act of 1962, as amended,
allows self-employed individuals to establish qualified pension and
profit-sharing plans and annuity plans. The employees of such persons are
treated as described for employees under a qualified pension plan.
The Tax Reform Act of 1986 made certain distributions from qualified plans
subject to special tax treatment. As a general rule, if a taxpayer receives an
early plan distribution, a 10% tax will be assessed against the distribution
unless it is in the form of a life annuity. Early plan distributions are any
plan distributions prior to age 59 1/2 unless the distribution was on account of
death, disability or separation from service after age 55.
The Tax Reform Act also requires distributions for all plan Participants
(with limited exceptions) to begin by April 1 of the calendar year following the
year the Participant turns 70 1/2. The sanction for failure to make a minimum
required distribution is a 50% nondeductible excise tax on the amount which
should have been distributed. This tax is imposed on the Participant.
Another excise tax of 15% is imposed on distributions from the plan that
are greater than $150,000 per year. If a lump sum distribution is made, the tax
is imposed on amounts greater than $750,000.
Special tax treatment, including special income averaging and limited
capital gains treatment may be available to Participants who receive all their
benefits in a single calendar year, if the distribution is made after age 59 1/2
or because of termination of employment, death, or disability. The tax treatment
available depends on the Participant's age, years of plan participation and the
year the distribution is made.
It should be recognized that the descriptions of the federal income tax
status of amounts received under the Contracts are not exhaustive and do not
purport to cover all situations.
A qualified tax advisor should be consulted for complete information. (For
the federal tax status of the Company and Separate Account C, see "Principal
Mutual Life Insurance Company Separate Account C")
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 the operations of the Company for the preceding year and its financial
condition on December 31st of such year. Its books and assets are subject to
review or examination by the Commissioner of Insurance of the State of Iowa or
his representatives at all times, and a full examination of its operations is
conducted periodically by the National Association of Insurance Commissioners.
Iowa laws and regulations also prescribe permissible investments, but this does
not involve supervision of the investment management or policy of the Company.
In addition, the Company is subject to the insurance laws and regulations
of other states and jurisdictions in which it is 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.
LEGAL OPINIONS
Legal matters applicable to the issue and sale of the Contracts, including
the right of the Company to issue Contracts under Iowa Insurance Law, have been
passed upon by Gregg R. Narber, Senior Vice President and General Counsel.
LEGAL PROCEEDINGS
There are no legal proceedings pending to which Separate Account C is a
party or which would materially affect Separate Account C.
REGISTRATION STATEMENT
This Prospectus omits some information contained in the Statement of
Additional Information (or Part B of the Registration Statement) and Part C of
the Registration Statement which the Company has filed with the Securities and
Exchange Commission. The Statement of Additional Information is hereby
incorporated by reference into this Prospectus. A copy of the Statement of
Additional Information can be obtained upon request, free of charge, by writing
or telephoning Princor Financial Services Corporation. You may obtain a copy of
Part C of the Registration Statement filed with the Securities and Exchange
Commission, Washington, D.C. from the Commission upon payment of the prescribed
fees.
OTHER VARIABLE ANNUITY CONTRACTS
The Company currently offers other Variable Annuity Contracts that
participate in Separate Account C. In the future, additional group or individual
variable annuity contracts may be designated by the Company as participating in
Separate Account C. All such contracts will initially meet the requirements of
Section 401 or 403(a) of the Internal Revenue Code.
INDEPENDENT AUDITORS
The financial statements of Principal Mutual Life Insurance Company
Separate Account C and Principal Mutual Life Insurance Company which are
included in the Statement of Additional Information have been audited by Ernst &
Young LLP, independent auditors, for the periods indicated in their reports
thereon which appear in the Statement of Additional Information.
FINANCIAL STATEMENTS
The financial statements of the Company which are included in this
Prospectus should be considered only as bearing on the ability of the Company to
meet its obligations under the Policy. They should not be considered as bearing
on the investment performance of the assets held in the Separate Account.
APPENDIX 1
Premium taxes applicable to Contracts described in this Prospectus:
Alabama 1.00%
California 0.50
District of Columbia 2.25
Kentucky 2.00
West Virginia 1.00
All other states ----
APPENDIX 2
Set forth below is an example of the manner in which the Administration
Charge is computed.
The Administration Charge has two components -- a fixed charge of $25 and
the Participant's proportionate share of an amount equal to 0.5% of the first
$50,000 of the value of all Investment Accounts under the Contract of all
Participants under the Retirement Plan. The Participant's proportionate share of
the charge is determined by multiplying the total value of the Participant's
Investment Accounts by a percentage the numerator of which is 0.5% of the first
$50,000 of the Investment Account Values of all Participants under the
Retirement Plan and the denominator of which is all such Investment Account
Values. Assume that the total value of a Participant's Investment Accounts is
$40,000 and that the Investment Account Values of all Accounts, $40,000, is
multiplied by a percentage the numerator of which is $250 (0.5% x $50,000) and
the denominator of which is $200,000, or 0.125%. The Administration Charge to
which the Participant is subject is $75, $25 plus $50 (0.125% x $40,000).
CONTRACTHOLDERS' INQUIRIES
Contractholders' inquiries should be directed to Princor Financial Services
Corporation, A Member of The Principal Financial Group, Des Moines, Iowa
50392-0200, (515) 247-5711. Separate Account C is subject to certain
informational requirements of the Securities Exchange Act of 1934 and in
accordance therewith files reports with the Securities and Exchange Commission.
Reports filed by Separate Account C with the Commission can be inspected and
copied at the public reference facilities maintained by the Commission at 450 -
5th Street, N. W., Washington, D.C. Copies of such reports can be obtained from
the Public Reference Section of the Commission, Washington, D.C. 20549 at
prescribed rates.
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
The table of contents for the Statement of Additional Information is
provided below.
TABLE OF CONTENTS
Page
General Information and History ................................ 3
Independent Auditors ........................................... 3
Underwriting Commissions ....................................... 3
Calculation of Yield and Total Return .......................... 3
Financial Statements:
Principal Mutual Life Insurance Company Separate Account C 4
Report of Independent Auditors ................... 10
Principal Mutual Life Insurance Company ................... 11
Report of Independent Auditors ................................. 33
To obtain a copy of the Statement of Additional Information, free of charge,
write or telephone:
Princor Financial Services Corporation
A Member of The Principal Financial Group
Des Moines, Iowa 50392-0200
Telephone: 1-800-247-4123
<PAGE>
PART B
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT C
PENSION BUILDER - GROUP VARIABLE ANNUITY CONTRACTS
ISSUED BY PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
Statement of Additional Information
dated May 1, 1996
This Statement of Additional Information provides information about
Principal Mutual Life Insurance Company Separate Account C Pension Builder -
Group Variable Annuity Contracts (the "Contract" or the "Contracts") in addition
to the information that is contained in the Contract's Prospectus, dated May 1,
1996.
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with the Prospectus, a copy of which can be obtained free of
charge by writing or telephoning:
Princor Financial Services Corporation
A Member of
The Principal Financial Group
Des Moines Iowa 50392-0200
Telephone: 1-800-247-4123
<PAGE>
TABLE OF CONTENTS
General Information and History.................................... 3
Independent Auditors ............................................ 3
Underwriting Commissions........................................... 3
Calculation of Yield and Total Return.............................. 3
Financial Statements
Principal Mutual Life Insurance Company Separate Account C.... 4
Report of Independent Auditors............................ 10
Principal Mutual Life Insurance Company....................... 11
Report of Independent Auditors............................ 33
GENERAL INFORMATION AND HISTORY
Principal Mutual Life Insurance Company was formerly known as Bankers Life
Company. The Company's name was changed to Principal Mutual Life Insurance
Company effective July 1, 1986.
INDEPENDENT AUDITORS
Ernst & Young LLP, Des Moines, Iowa, serve as independent auditors for Principal
Mutual Life Insurance Company Separate Account C and Principal Mutual Life
Insurance Company and perform audit and accounting services for Separate Account
C and The Company.
UNDERWRITING COMMISSIONS
Aggregate dollar amount of underwriting commissions paid to and retained by
Princor Financial Services Corporation:
Year Paid To Retained by
---- ---------- -----------
1995 $17,336.43 $6,431.18
1994 $79,118.96 $16,968.36
1993 $98,839.03 $21,771.32
CALCULATION OF YIELD AND TOTAL RETURN
From time to time the Account advertises its Money Market Division's "yield" and
"effective yield." Both yield figures are based on historical earnings and are
not intended to indicate future performance. The "yield" of the division refers
to the income generated by an investment in the division over a seven-day period
(which period will be stated in the advertisement). This income is then
"annualized." That is, the amount of income generated by the investment during
that week is assumed to be generated each week over a 52-week period and is
shown as a percentage of the investment. The "effective yield" is calculated
similarly but, when annualized, the income earned by an investment in the
division is assumed to be reinvested. The "effective yield" will be slightly
higher than the "yield" because of the compounding effect of this assumed
reinvestment. Neither yield quotation reflects sales load deducted from purchase
payments which, if included, would reduce the "yield" and "effective yield." For
the period ending December 31, 1995, the 7-day annualized and effective yields
were 3.64% and 3.70%, respectively.
From time to time, the Separate Account will advertise the average annual total
return of its various divisions. The average annual total return for any of the
divisions is computed by calculating the average annual compounded rate of
return over the stated period that would equate an initial $1,000 investment to
the ending redeemable contract value. In this calculation the ending value is
reduced by a contingent deferred sales charge that decreases from 7% to 0% over
a period of 10 years. The average annual total returns of the Common Stock
Division for the one-year, five-year and ten-year periods ending December 31,
1995 were 20.63%, 13.78%, and 10.31%, respectively. The average annual total
return of the Government Securities Division for the one-year and five-year
periods ending December 31, 1995 and for the period beginning April 14, 1987
(inception of Division) and ending December 31, 1995 were, 8.88%, 6.55% and
7.54%, respectively. The Separate Account may also advertise total return
figures of its Divisions for a specified period that does not take into account
the sales charge in order to illustrate the change in the Division's unit value
over time. See "Deductions Under the Contracts" for a discussion of contingent
deferred sales charges.
<PAGE>
<TABLE>
<CAPTION>
Principal Mutual Life Insurance
Company Separate Account C
Statement of Net Assets
December 31, 1995
Assets
Investments (Note 1):
Common Stock Division:
Principal Capital Accumulation Fund, Inc. - 146,582 shares at net asset value of
<S> <C>
$27.80 per share (cost - $3,431,031) $4,074,988
Government Securities Division:
Principal Government Securities Fund, Inc. - 79,117 shares at net asset value of
$10.55 per share (cost - $809,151) 834,687
Money Market Division:
Principal Money Market Fund, Inc. - 993,483 shares at net asset value (cost) of
$1.00 per share 993,483
==================
Net assets $5,903,158
</TABLE>
<TABLE>
<CAPTION>
==================
Unit
Units Value
----------------------------
----------------------------
Net assets are represented by:
Common Stock Division:
Currently payable annuity contracts:
<S> <C> <C> <C>
Bankers Flexible Annuity 11,970 $16.73 $ 200,283
Pension Builder Plus 4,658 3.41 15,880
Contracts in accumulation period:
Bankers Flexible Annuity 88,735 16.73 1,484,660
Pension Builder Plus 696,310 3.41 2,374,165
------------------
------------------
4,074,988
Government Securities Division:
Contracts in accumulation period - Pension Builder
Plus 453,405 1.84 834,687
Money Market Division:
Contracts in accumulation period - Pension Builder
Plus 563,649 1.76 993,483
==================
Net assets $5,903,158
==================
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Principal Mutual Life Insurance
Company Separate Account C
Statement of Operations
Year ended December 31, 1995
Common Government Money
Stock Securities Market
Combined Division Division Division
-------------------------------------------------------------
-------------------------------------------------------------
Investment income
Income:
<S> <C> <C> <C> <C>
Dividends (Note 1) $ 239,554 $ 86,599 $ 64,710 $88,245
Capital gains distributions 437,283 437,283 - -
-------------------------------------------------------------
-------------------------------------------------------------
676,837 523,882 64,710 88,245
Expenses (Note 2):
Mortality and expense risks 129,071 81,313 23,831 23,927
Administration charges 26,151 17,915 3,942 4,294
Contingent sales charges 2,714 1,215 276 1,223
-------------------------------------------------------------
-------------------------------------------------------------
157,936 100,443 28,049 29,444
-------------------------------------------------------------
-------------------------------------------------------------
Net investment income 518,901 423,439 36,661 58,801
Realized and unrealized gains (losses) on
investments (Note 4)
Net realized gains (losses) on investments 566,777 619,160 (52,383) -
Change in net unrealized appreciation/
depreciation of investments 955,515 665,019 290,496 -
-------------------------------------------------------------
=============================================================
Net increase in net assets resulting from
operations $2,041,193 $1,707,618 $274,774 $58,801
=============================================================
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Principal Mutual Life Insurance
Company Separate Account C
Statements of Changes in Net Assets
Years ended December 31, 1995 and 1994
Common Government Money
Stock Securities Market
Combined Division Division Division
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Net assets at January 1, 1994 $21,703,996 $14,721,884 $4,173,176 $2,808,936
Increase (decrease) in net assets
Operations:
Net investment income 595,116 414,809 126,297 54,010
Net realized gains (losses) on investments 84,364 133,140 (48,776) -
Change in net unrealized appreciation/
depreciation of investments (1,044,355) (685,613) (358,742) -
-------------------------------------------------------------
-------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations (364,875) (137,664) (281,221) 54,010
Changes from principal transactions:
Purchase payments, less sales charges, per
payment fees and applicable premium taxes 4,965,171 2,906,809 1,131,004 927,358
Contract terminations (3,146,785) (2,313,443) (563,441) (269,901)
Transfer payments to other contracts (6,921,308) (4,103,994) (1,757,872) (1,059,442)
Annuity payments (21,562) (21,562) - -
Mortality guarantee transfer 11,692 11,692 - -
-------------------------------------------------------------
-------------------------------------------------------------
Decrease in net assets from principal (5,112,792) (3,520,498) (1,190,309) (401,985)
transactions
-------------------------------------------------------------
-------------------------------------------------------------
Total decrease (5,477,667) (3,658,162) (1,471,530) (347,975)
-------------------------------------------------------------
Net assets at December 31, 1994 16,226,329 11,063,722 2,701,646 2,460,961
Increase (decrease) in net assets
Operations:
Net investment income 518,901 423,439 36,661 58,801
Net realized gains (losses) on investments 566,777 619,160 (52,383) -
Change in net unrealized appreciation/
depreciation of investments 955,515 665,019 290,496 -
-------------------------------------------------------------
-------------------------------------------------------------
Net increase in net assets resulting from 2,041,193 1,707,618 274,774 58,801
operations
Changes from principal transactions:
Purchase payments, less sales charges, per
payment fees and applicable premium taxes 3,592,629 1,872,882 801,970 917,777
Contract terminations (5,907,945) (4,319,096) (800,094) (788,755)
Transfer payments to other contracts (10,028,790) (6,229,880) (2,143,609) (1,655,301)
Annuity payments (20,258) (20,258) - -
-------------------------------------------------------------
Decrease in net assets from principal (12,364,364) (8,696,352) (2,141,733) (1,526,279)
transactions
-------------------------------------------------------------
-------------------------------------------------------------
Total decrease (10,323,171) (6,988,734) (1,866,959) (1,467,478)
-------------------------------------------------------------
=============================================================
Net assets at December 31, 1995 $ 5,903,158 $ 4,074,988 $ 834,687 $ 993,483
=============================================================
See accompanying notes.
</TABLE>
<PAGE>
Principal Mutual Life Insurance
Company Separate Account C
Notes to Financial Statements
December 31, 1995
1. Investment and Accounting Policies
Principal Mutual Life Insurance Company Separate Account C was organized by
Principal Mutual Life Insurance Company (Principal Mutual) in accordance with
the provisions of the Iowa Insurance Laws and is a part of the total operations
of Principal Mutual. The assets and liabilities of Separate Account C are
clearly identified and distinguished from the other assets and liabilities of
Principal Mutual, with the remaining aggregate value of units registered with
the Securities and Exchange Commission under the current registration statement
(but not the authorized number of units) limited to $11.1 million. As directed
by eligible contractholders, Separate Account C invests solely in shares of
Principal Capital Accumulation Fund, Inc., Principal Government Securities Fund,
Inc. and Principal Money Market Fund, Inc., diversified open-end management
investment companies organized by Principal Mutual. Investments are stated at
the closing net asset values per share on December 31, 1995.
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.
After September 30, 1995, Principal Mutual no longer accepted contributions for
Pension Builder Plus contracts. Contractholders were given the options of
withdrawing their funds or transferring to another contract. Contingent sales
charges were waived for contracts transferred prior to November 30, 1995.
Contributions for Bankers Flexible Annuity contracts were previously
discontinued.
2. Expenses
Principal Mutual is compensated for the following expenses:
Bankers Flexible Annuity Contracts - Mortality and expense risks assumed by
Principal Mutual are compensated for by a charge equivalent to an annual rate
of 0.48% of the asset value of each contract. An annual administration charge
of $7 for each participant's account is deducted as compensation for
administrative expenses. The mortality and expense risk and annual
administration charges amounted to $9,346 and $224, respectively, during the
year 1995. A sales charge of up to 7% was deducted from each contribution
made on behalf of each participant. The sales charge was deducted from the
contributions by Principal Mutual prior to their transfer to Separate Account
C.
<PAGE>
Principal Mutual Life Insurance
Company Separate Account C
Notes to Financial Statements (continued)
2. Expenses (continued)
Pension Builder Plus Contracts - Mortality and expense risks assumed by
Principal Mutual are compensated for by a charge equivalent to an annual rate
of 1.4965% of the asset value of each contract. A contingent sales charge of
up to 7% may be deducted from withdrawals made during the first 10 years of a
contract, except for death or permanent disability. An annual administration
charge will be deducted ranging from a minimum of $25 to a maximum of $275
depending upon a participant's investment account values and the number of
participants under the retirement plan and their participant investment
account value. The charges for mortality and expense risks, contingent sales
and annual administration amounted to $119,725, $2,714, and $25,927,
respectively, during the year 1995.
3. Federal Income Taxes
Operations of Separate Account C are a part of the operations of Principal
Mutual. Under current practice, no federal income taxes are allocated by
Principal Mutual to the operations of Principal Mutual Life Insurance Company
Separate Account C.
4. Purchases and Sales of Investment Securities
<TABLE>
<CAPTION>
The aggregate units and cost of purchases and proceeds from sales of investments
were as follows:
For the year ended December 31, 1995
------------------------------------------------------------------
Units Purchased Amount Purchased Units Redeemed Amount Redeemed
------------------------------------------------------------------
------------------------------------------------------------------
Common Stock Division:
<S> <C> <C> <C> <C>
Bankers Flexible Annuity - $ 167,512 31,593 $ 441,825
Pension Builder Plus 650,439 2,229,252 3,524,489 10,227,852
------------------------------------------------------------------
------------------------------------------------------------------
650,439 2,396,764 3,556,082 10,669,677
Government Securities Division:
Pension Builder Plus 494,421 866,680 1,762,773 2,971,752
Money Market Division:
Pension Builder Plus 535,936 1,006,023 1,424,097 2,473,501
------------------------------------------------------------------
==================================================================
1,680,796 $4,269,467 6,742,952 $16,114,930
==================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Principal Mutual Life Insurance
Company Separate Account C
Notes to Financial Statements (continued)
4. Purchases and Sales of Investment Securities (continued)
For the year ended December 31, 1994
------------------------------------------------------------------
Units Purchased Amount Purchased Units Redeemed Amount Redeemed
------------------------------------------------------------------
------------------------------------------------------------------
Common Stock Division:
<S> <C> <C> <C> <C>
Bankers Flexible Annuity 917 $ 105,888 21,976 $ 287,677
Pension Builder Plus 1,103,649 3,461,092 2,346,403 6,384,992
------------------------------------------------------------------
------------------------------------------------------------------
1,104,566 3,566,980 2,368,379 6,672,669
Government Securities Division:
Pension Builder Plus 694,572 1,331,843 1,473,324 2,395,855
Money Market Division:
Pension Builder Plus 554,953 1,032,529 796,873 1,380,504
------------------------------------------------------------------
==================================================================
2,354,091 $5,931,352 4,638,576 $10,449,028
==================================================================
</TABLE>
Purchases include reinvested dividends and capital gains.
Money Market purchases include transactions where investment allocations are not
known at the time of the deposit. Redemptions reflect subsequent allocations to
directed investment divisions.
5. Net Assets
<TABLE>
<CAPTION>
Net assets at December 31, 1995 consisted of the following:
Net Unrealized
Accumulated Appreciation
Unit Net Investment of Investments
Combined Transactions Income
-------------------------------------------------------------------
-------------------------------------------------------------------
Common Stock Division:
<S> <C> <C> <C> <C>
Bankers Flexible Annuity $1,684,943 $ 295,274 $ 969,242 $420,427
Pension Builder Plus 2,390,045 1,824,492 342,023 223,530
-------------------------------------------------------------------
-------------------------------------------------------------------
4,074,988 2,119,766 1,311,265 643,957
Government Securities Division:
Pension Builder Plus 834,687 723,461 85,690 25,536
Money Market Division:
Pension Builder Plus 993,483 927,106 66,377 -
-------------------------------------------------------------------
===================================================================
$5,903,158 $3,770,333 $1,463,332 $669,493
===================================================================
</TABLE>
<PAGE>
Report of Independent Auditors
Board of Directors and Participants
Principal Mutual Life Insurance Company
We have audited the accompanying statement of net assets of Principal Mutual
Life Insurance Company Separate Account C (comprising, respectively, the Common
Stock, Government Securities, and Money Market Divisions) as of December 31,
1995, and the related statements of operations for the year then ended, and
changes in net assets for each of the two years in the period then ended. 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 generally accepted auditing
standards. 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, 1995, by correspondence with
the transfer agent. 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 financial position of Principal Mutual Life Insurance
Company Separate Account C at December 31, 1995, and the results of its
operations for the year then ended, and the changes in its net assets for each
of the two years in the period then ended, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
February 7, 1996
<PAGE>
Principal Mutual Life Insurance Company
Statements of Financial Position
December 31
1995 1994
---------------------------
(In Millions)
Assets
Bonds $21,798 $20,626
Preferred stocks 93 69
Common stocks 1,330 914
Investment in subsidiaries 546 501
Commercial mortgage loans 9,794 8,901
Residential mortgage loans 234 287
Investment real estate 1,313 1,155
Properties held for Company use 204 159
Policy loans 711 683
Cash and short-term investments 913 485
Accrued investment income 467 468
Separate account assets 12,957 9,197
Other assets 908 672
---------------------------
Total assets $51,268 $44,117
===========================
Liabilities
Insurance reserves $ 6,297 $ 6,007
Annuity reserves 25,770 24,311
Reserves for policy dividends 578 583
Other policy liabilities 748 618
Investment valuation reserves 1,041 792
Tax liabilities 241 189
Separate account liabilities 12,891 9,099
Other liabilities 1,494 591
---------------------------
Total liabilities 49,060 42,190
Surplus
Surplus notes 298 298
Unassigned and other surplus funds 1,910 1,629
---------------------------
Total surplus 2,208 1,927
---------------------------
Total liabilities and surplus $51,268 $44,117
===========================
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
Principal Mutual Life Insurance Company
Statements of Operations and Surplus
Year ended December 31
1995 1994 1993
------------------------------------------
(In Millions)
Income
<S> <C> <C> <C>
Premiums and annuity and other considerations $11,940 $10,718 $ 9,983
Net income from investments 2,651 2,520 2,369
Other income 25 505 18
------------------------------------------
Total income 14,616 13,743 12,370
Benefits and expenses
Benefit payments other than dividends 9,268 8,211 6,729
Dividends to policyowners 309 317 410
Additions to policyowner reserves 3,439 3,756 3,890
Insurance expenses and taxes 1,199 1,145 1,029
------------------------------------------
Total benefits and expenses 14,215 13,429 12,058
------------------------------------------
Income before federal income taxes and realized capital gains
(losses) 401 314 312
Federal income taxes 140 130 48
------------------------------------------
Net gain from operations before realized capital gains (losses)
261 184 264
Realized capital gains (losses) 2 (32) (52)
------------------------------------------
Net income $ 263 $ 152 $ 212
==========================================
Surplus
Surplus at beginning of year $ 1,927 $ 1,641 $ 1,440
Net income 263 152 212
Issuance of surplus notes - 298 -
Increase in investment valuation reserves (249) (131) (43)
Increase in non-admitted assets and related items (45) (51) (59)
Net unrealized capital gains 326 47 57
Adjustment for prior years' federal income taxes - (63) -
Net policyowner reserve adjustments 1 31 18
Other adjustments - net (15) 3 16
------------------------------------------
Surplus at end of year $ 2,208 $ 1,927 $ 1,641
==========================================
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Principal Mutual Life Insurance Company
Statements of Cash Flows
Year ended December 31
1995 1994 1993
------------------------------------------
(In Millions)
CASH PROVIDED
Proceeds from operating activities
<S> <C> <C> <C>
Premiums and annuity and other considerations received $11,923 $10,711 $ 9,967
Net investment income received 2,723 2,509 2,421
Benefit payments other than dividends (9,277) (8,186) (6,700)
Dividends paid to policyowners (317) (293) (396)
Insurance expenses and taxes paid (1,198) (1,159) (1,007)
Federal income taxes paid (125) (67) (119)
Transfers for separate account operations (1,549) (1,396) (1,120)
Other (3) 7 (5)
------------------------------------------
Net cash provided from operations 2,177 2,126 3,041
Proceeds from investments sold, matured or repaid
Bonds and stocks 12,028 10,951 20,072
Mortgage loans 1,276 2,043 6,852
Real estate and other invested assets 70 168 37
Tax on capital gains (22) (25) (29)
------------------------------------------
Total cash provided from investments 13,352 13,137 26,932
Issuance of surplus notes - 298 -
Other cash provided 793 - 85
------------------------------------------
Total cash provided 16,322 15,561 30,058
CASH APPLIED
Cost of investments acquired
Bonds and stocks acquired (13,234) (13,709) (22,434)
Mortgage loans acquired or originated (2,265) (1,611) (7,253)
Real estate and other invested assets acquired (195) (91) (132)
------------------------------------------
Total cash applied to investments (15,694) (15,411) (29,819)
Other cash applied (200) (135) (72)
------------------------------------------
Total cash applied (15,894) (15,546) (29,891)
SHORT-TERM BORROWINGS
Proceeds of short-term borrowings 990 3,152 1,743
Repayment of short-term borrowings (990) (3,152) (1,743)
------------------------------------------
Net cash provided by short-term borrowings - - -
------------------------------------------
Net increase in cash and short-term investments 428 15 167
Cash and short-term investments at beginning of year 485 470 303
------------------------------------------
Cash and short-term investments at end of year $ 913 $ 485 $ 470
==========================================
See accompanying notes.
</TABLE>
<PAGE>
Principal Mutual Life Insurance Company
Notes to Financial Statements
December 31, 1995
1. Nature of Operations and Significant Accounting Policies
Description of Business
Principal Mutual Life Insurance Company (the Company) is primarily engaged in
the marketing and management of life insurance, annuity, health and pension
products. In addition, the Company provides various other financial services
through its subsidiaries.
Use of Estimates in the Preparation of Financial Statements
The preparation of the Company'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.
Basis of Presentation
The Company's financial statements have been prepared on the basis of accounting
practices prescribed or permitted by the Insurance Division of the Department of
Commerce of the State of Iowa (statutory accounting practices), which practices
are currently regarded as generally accepted accounting principles (GAAP) for
mutual life insurance companies.
Beginning in 1996, however, under the requirements of Financial Accounting
Standards Board (FASB) Interpretation No. 40, "Applicability of Generally
Accepted Accounting Principles to Mutual Life Insurance and Other Enterprises,"
as amended, financial statements prepared on the basis of statutory accounting
practices will no longer be described as prepared "in conformity with GAAP." The
Accounting Standards Executive Committee of the American Institute of Certified
Public Accountants and the FASB issued authoritative accounting and reporting
pronouncements in January 1995, effective for calendar year 1996, addressing how
mutual life insurance companies should account for certain insurance activities.
Applying the provisions of these authoritative accounting and reporting
pronouncements may result in surplus and net income that differ from the amounts
reported under existing statutory accounting practices. The Company has not yet
determined the impact of these pronouncements on its financial statements. The
Company plans to issue general-purpose financial statements for calendar year
1996 that follow these authoritative pronouncements and will be described as
prepared in conformity with GAAP. These statutory-basis financial statements,
however, will continue to be required by insurance regulatory authorities.
<PAGE>
Principal Mutual Life Insurance Company
Notes to Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
The National Association of Insurance Commissioners (NAIC) currently is in the
process of recodifying statutory accounting practices, the result of which is
expected to constitute the only source of "prescribed" statutory accounting
practices. Accordingly, that project, which is not expected to be completed
before 1997, 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.
Subsidiaries
Investment in subsidiaries is reported at equity in net assets determined on a
statutory basis for insurance subsidiaries and on the basis of prescribed
valuation alternatives for non-insurance subsidiaries, resulting in carrying
values periodically approved by the Securities Valuation Office of the NAIC.
Total assets of these unconsolidated subsidiaries amounted to $2.6 billion at
December 31, 1995 and $2.1 billion at December 31, 1994, and total revenues were
$1,190 million in 1995, $911 million in 1994 and $669 million in 1993. During
1995, 1994 and 1993, the Company included $(48) million, $(2) million and $(37)
million, respectively, in net income from investments representing the current
year net losses of its subsidiaries.
Investments
Investments in bonds, short-term investments, and commercial and residential
mortgage loans are reported principally at cost (unpaid principal balance),
adjusted for amortization of premiums and accrual of discounts, both computed
using the interest method; policy loans and investments in preferred stocks
primarily at cost; common stocks at market value based on the latest quoted
market prices; and investments in real estate and properties held for Company
use generally at cost less encumbrances and accumulated depreciation. For the
loan-backed and structured securities included in the bond portfolio, the
Company recognizes income using the prospective method which results in a new
constant effective yield based on currently anticipated prepayments as
determined by broker-dealer surveys or internal estimates. Properties acquired
through loan foreclosures with cumulative carrying values of $946 million at
December 31, 1995, and $830 million at December 31, 1994, are recorded at the
lower of cost (principal balance of the former mortgage loan) or fair market
value at the time of foreclosure or receipt of deed in lieu of foreclosure. This
becomes the new cost basis of the real estate and is subject to further
potential carrying value reductions as a result of depreciation and quarterly
valuation determinations. Depreciation expense is computed primarily on the
basis of accelerated and straight-line methods over the estimated useful lives
of the assets. Other admitted assets are valued as prescribed by the Iowa
Insurance laws. Net realized capital gains and losses on investments are
determined using the specific identification basis.
<PAGE>
Principal Mutual Life Insurance Company
Notes to Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
The Asset Valuation Reserve (AVR) provides a reserve for losses from investments
in bonds, preferred and common stocks, mortgage loans, real estate, and other
invested assets, with related increases or decreases being recorded directly to
surplus. At December 31, 1995 and 1994, the AVR was $1,041 million and $792
million, respectively. At both December 31, 1995 and 1994, other liabilities
include additional investment reserves of $36 million and $51 million,
respectively, of which $9 million is required by statutory accounting practices
as a provision for potential losses on specific mortgages in default. Unrealized
capital gains and losses on investments, including changes in mortgage and
security reserves, are recorded directly in surplus. Comparable adjustments are
also made to the AVR.
The Interest Maintenance Reserve (IMR) primarily defers certain interest-related
gains and losses (net of tax) on fixed income securities which are amortized
into net income from investments over the estimated remaining lives of the
investments sold. At December 31, 1995 and 1994, the IMR, which is included in
other liabilities, was $109 million and $52 million, respectively.
In connection with preparation of its statement of cash flows, the Company
considers all highly liquid investments with a maturity of one year or less when
purchased to be short-term investments.
Fair Values of Financial Instruments
The Company has accumulated information to disclose the fair values of certain
financial instruments, whether or not recognized in the statement of financial
position, as required by the FASB. The FASB excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
The aggregate fair value asset amounts for investments (including cash and
short-term investments, policy loans and accrued investment income and excluding
investment in subsidiaries and investment real estate) are presented in Note 2
(carrying value: 1995 - $35.3 billion, 1994 - $32.4 billion; fair value: 1995 -
$37.5 billion, 1994 - $31.9 billion). Fair value information for derivatives
held or issued for purposes other than trading is presented in Note 3.
Information for certain of the Company's reserves and liabilities that are
investment-type contracts (insurance, annuity and other policy contracts that do
not involve significant mortality or morbidity risk) is presented in Note 4
(carrying value: 1995 - $21.4 billion, 1994 - $20.0 billion; fair value: 1995 -
$22.0 billion, 1994 - $19.5 billion). Those referenced notes also describe the
methods and assumptions utilized by the Company in estimating its fair value
disclosures for financial instruments. Those 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
certain financial instruments presented in the referenced notes.
<PAGE>
Principal Mutual Life Insurance Company
Notes to Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Futures and Forward Contracts and Interest Rate and Equity Swaps
The Company uses financial futures contracts, forward purchase commitments and
interest rate swaps to hedge risks associated with interest rate fluctuations
and uses equity swaps to hedge risks associated with market fluctuations of
certain unaffiliated common stocks. Realized capital gains and losses on those
contracts which hedge risks associated with interest rate fluctuations are
amortized over the remaining lives of the underlying assets, primarily by
including them in the IMR. Realized capital gains and losses on equity swaps are
recognized in the period incurred.
Reserves for Insurance, Annuity and Accident and Health Policies
The reserves for life, health and annuity policies, all developed by actuarial
methods, are established and maintained on the basis of mortality and morbidity
tables using assumed interest rates and valuation methods that will provide, in
the aggregate, reserves that are greater than the minimum valuation required by
law or guaranteed policy cash values. The cumulative effects of changes in
valuation bases at the beginning of the year for previously established
policyowner reserves are included as adjustments to surplus. Significant
decreases in valuation bases are approved by the Insurance Division of the
Department of Commerce of the State of Iowa.
The liability for unpaid accident and health claims is determined using
statistical analyses and case basis evaluations. This liability is an estimate
of the ultimate net cost of all reported and unreported losses that are unpaid.
This liability is determined using estimates of future trends in claim severity,
frequency, and other factors that could vary as claims are ultimately settled.
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.
Recognition of Premium Revenues and Costs
For life and annuity contracts, premiums are recognized as revenues over the
premium-paying period, whereas commissions and other costs applicable to the
acquisition of new business are charged to operations as incurred.
<PAGE>
Principal Mutual Life Insurance Company
Notes to Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Reinsurance
The Company reinsures certain of its risks. Reinsurance premiums, expenses, and
reserves related to reinsured business are accounted for on bases consistent
with those used in accounting for the original policies issued and the terms of
the reinsurance contracts. Premiums ceded to other companies (1995 - $27
million, 1994 - $21 million and 1993 - $19 million) are reported as a reduction
of premium income, and insurance reserves applicable to reinsurance ceded have
also been reported as reductions of these items (1995 - $33 million and 1994 -
$24 million). The Company is contingently liable with respect to reinsurance
ceded to other companies in the event the reinsurer is unable to meet the
obligations that it has assumed.
Separate Accounts
The separate accounts presented in the 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. The separate
account contract owner, rather than the Company, bears the investment risk of
these funds. The Company receives a fee for administrative and investment
advisory services.
Separate account assets and liabilities are disclosed in the aggregate in the
statements of financial position. The statements of operations include the
premiums, increases in reserves, benefits, and other items arising from the
operations of the separate accounts of the Company. The statements of surplus
reflect the gain from operations and surplus of the separate accounts. Such gain
from operations and surplus arises from the transfer by the Company of funds to
the separate accounts to facilitate their operations.
Reclassifications
Certain reclassifications have been made to the 1994 and 1993 financial
statements to conform to the 1995 presentation.
2. Investments
Investments in debt securities, preferred stocks, and other fixed maturity
instruments are generally held for investment purposes to maturity, and,
therefore, are carried in the financial statements at amortized cost. The
Company's liabilities, to which such fixed maturity investments are closely
matched, are long-term in nature so the Company does not expect to be required
to sell such securities prior to maturity.
<PAGE>
<TABLE>
<CAPTION>
Principal Mutual Life Insurance Company
Notes to Financial Statements (continued)
2. Investments (continued)
The carrying values and estimated market values of investments in bonds and
preferred stocks as of December 31, 1995 and 1994, are as follows (in millions):
Gross Gross Estimated
Carrying Value Unrealized Unrealized Market
Gains Losses Value
---------------------------------------------------------------
December 31, 1995
Bonds:
<S> <C> <C> <C> <C>
United States Government and agencies $ 232 $ 4 $ - $ 236
States and political subdivisions 230 21 - 251
Corporate - public 4,374 328 16 4,686
Corporate - private 13,877 1,332 15 15,194
Mortgage-backed securities 3,085 134 4 3,215
---------------------------------------------------------------
21,798 1,819 35 23,582
Preferred stocks 93 12 - 105
---------------------------------------------------------------
$21,891 $1,831 $35 $23,687
===============================================================
December 31, 1994
Bonds:
United States Government and agencies $ 111 $ 1 $ 4 $ 108
States and political subdivisions 198 2 12 188
Corporate - public 3,986 74 142 3,918
Corporate - private 13,678 365 391 13,652
Mortgage-backed securities 2,653 2 166 2,489
---------------------------------------------------------------
20,626 444 715 20,355
Preferred stocks 69 4 2 71
---------------------------------------------------------------
$20,695 $448 $717 $20,426
===============================================================
</TABLE>
Market values of public bonds and preferred stocks have been determined by the
Company from public quotations, when available, or bonds have been assigned a
market rate by the Securities Valuation Office of the NAIC. Private placement
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.
<PAGE>
<TABLE>
<CAPTION>
Principal Mutual Life Insurance Company
Notes to Financial Statements (continued)
2. Investments (continued)
The carrying values and estimated market values of bonds at December 31, 1995,
by expected maturity, are as follows (in millions):
Carrying Value Estimated Market
Value
------------------------------------
<S> <C> <C>
Due in one year or less $ 747 $ 768
Due after one year through five years 6,878 7,271
Due after five years through ten years 6,189 6,695
Due after ten years 3,176 3,657
------------------------------------
16,990 18,391
Mortgage-backed and other securities without
a single maturity date 4,808 5,191
------------------------------------
Total $21,798 $23,582
====================================
</TABLE>
<TABLE>
<CAPTION>
The carrying value and estimated market value of mortgage loans at December 31,
1995 and 1994, are as follows (in millions):
1995 1994
----------------- -----------------
Estimated Estimated Market
Carrying Value Market Carrying Value Value
Value
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial mortgage loans $9,794 $10,129 $8,901 $8,580
Residential mortgage loans 234 262 287 299
</TABLE>
Market values of commercial mortgage loans are valued by discounting the
expected total cash flows using market rates that are applicable to the yield,
credit quality, and maturity of each loan. Market values of residential mortgage
loans are valued 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 carrying value for policy loans approximates the fair value.
<PAGE>
Principal Mutual Life Insurance Company
Notes to Financial Statements (continued)
2. Investments (continued)
Major categories of income from investments are summarized as follows (in
millions):
Year ended December 31
1995 1994 1993
------------------------------------------
Bonds $1,761 $1,622 $1,549
Preferred stocks 6 3 2
Common stocks 35 22 26
Investment in subsidiaries (48) (2) (37)
Mortgage loans 808 766 811
Investment real estate 211 179 129
Policy loans 48 44 44
Cash and short-term investments 29 20 6
Other 18 48 1
------------------------------------------
2,868 2,702 2,531
Less investment expenses 217 182 162
------------------------------------------
Net income from investments $2,651 $2,520 $2,369
==========================================
<TABLE>
<CAPTION>
The major components of realized capital gains (losses) on investments reflected
in operations, and unrealized capital gains (losses) on investments reflected
directly in surplus, are summarized as follows (in millions):
Realized Unrealized
1995 1994 1993 1995 1994 1993
--------------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Bonds $101 $(133) $150 $ (17) $32 $(32)
Preferred stocks (1) - (11) 1 (7) 11
Common stocks 32 6 29 398 7 23
Mortgage loans (24) (34) (81) 9 3 41
Investment real estate 7 3 1 5 6 (1)
Investment in subsidiaries 1 32 - (6) 6 (5)
Other 4 45 (44) (1) - 20
------------------------------ -----------------------------
Net capital gains (losses) 120 (81) 44 389 47 57
Related federal income taxes (41) 6 (26) (63) - -
Transferred (to) from interest
maintenance reserve (77) 43 (70) - - -
============================== =============================
Total capital gains (losses) $ 2 $ (32) $(52) $326 $47 $57
============================== =============================
</TABLE>
<PAGE>
Principal Mutual Life Insurance Company
Notes to Financial Statements (continued)
2. Investments (continued)
Proceeds from sales of investments (excluding maturity proceeds) in debt
securities were $6.5 billion in both 1995 and 1994, and $11.9 billion in 1993.
Gross gains of $93 million, $53 million and $173 million and gross losses of $54
million, $213 million and $65 million in 1995, 1994 and 1993, respectively, were
realized on those sales. Of the 1995, 1994 and 1993 proceeds, $6.1 billion, $5.7
billion and $11.5 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 $66 million, $19 million
and $152 million and gross losses of $17 million, $139 million and $29 million
in 1995, 1994 and 1993, respectively, were realized on sales of mortgage-backed
securities. At December 31, 1995, the Company had security purchases payable
totaling $426 million relating to the purchases of mortgage-backed securities at
forward dates.
The Company has a revolving credit agreement with Principal Residential
Mortgage, Inc., a wholly-owned subsidiary which conducts the Company's mortgage
banking operations, of up to $800 million, which had a balance of $458 million
outstanding at December 31, 1995.
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, 1995 and 1994, 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
1995 1994 1995 1994
----------------------- -----------------------
<S> <C> <C> <C> <C> <C>
South Atlantic 22% 21% Industrial 43% 47%
Pacific 34 38 Office 26 24
Mid Atlantic 17 17 Retail 26 24
North Central 14 13 Other 5 5
South Central 7 6
New England 4 3
Mountain 2 2
</TABLE>
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. Under the
NAIC bond classification system, 99.8% and 99.7% of the Company's bond portfolio
were carried at amortized cost at December 31, 1995 and 1994, respectively, with
the remainder carried at the lower of amortized cost or market value.
<PAGE>
Principal Mutual Life Insurance Company
Notes to Financial Statements (continued)
2. Investments (continued)
Effective December 29, 1995, the Company entered into short-term equity swap
agreements to mitigate its exposure to declines in the value of about one-half
of its marketable common stock portfolio. Under the agreements, the return on
that portion of the Company's marketable common stock portfolio was swapped for
a fixed short-term interest rate. At December 31, 1995, there was no realized or
unrealized gains or losses recorded on the equity swap agreements and,
accordingly, there was no credit exposure. The unrealized appreciation and
depreciation of marketable common stocks recognized in the Company's statement
of financial position were $814 million and $85 million, respectively, at
December 31, 1995.
Investment real estate includes properties directly owned by the Company and
investments in subsidiaries include 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 $2.2 billion at both
December 31, 1995 and December 31, 1994. The Company is committed to provide
additional mortgage financing for such joint ventures aggregating $304 million
at December 31, 1995.
3. Derivatives Held or Issued for Purposes Other Than Trading
The Company uses exchange-traded interest rate futures and forward contracts 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 forward contracts 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 and forward contracts ($303
million at December 31, 1995, and $80 million at December 31, 1994) represent
the extent of the Company's involvement but not the risk of loss.
The Company enters into interest rate swaps to minimize its exposure to
fluctuations in interest rates and to correct duration mismatches. The most
common use is to modify the duration of an asset or portfolio, a less common use
is to convert a floating rate asset into a fixed rate asset. The notional
principal amounts of the swaps outstanding at December 31, 1995 and 1994, were
$599 million and $586 million, respectively, and the credit exposure at December
31, 1995 and December 31, 1994 was $8 million. 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 three years at both December 31, 1995 and 1994, respectively. 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.
<PAGE>
Principal Mutual Life Insurance Company
Notes to Financial Statements (continued)
3. Derivatives Held or Issued for Purposes Other Than Trading (continued)
The Company enters into currency exchange swap agreements to convert certain
foreign denominated fixed rate assets into dollar denominated fixed rate assets
and eliminate the exposure to future currency volatility on those securities. At
December 31, 1995, the Company had various foreign currency exchange agreements
with maturities ranging from 1995 to 2002, with an aggregate notional amount
involved of approximately $312 million and the credit exposure was $4 million.
The average unexpired term of the swaps was approximately five years at December
31, 1995.
4. Insurance, Annuity and Accident and Health Reserves
The carrying values and fair values of the Company's reserves and liabilities
for investment-type insurance contracts (which are only a portion of the
insurance reserves, annuity reserves, and other policy liabilities appearing in
the statement of financial position) at December 31, 1995 and 1994, are
summarized as follows (in millions):
<TABLE>
<CAPTION>
1995 1994
----------------------------------------------------------------------
Carrying Value Fair Carrying Value Fair
Value Value
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Insurance reserves $ 30 $ 33 $ 30 $ 30
Annuity reserves 20,989 21,524 19,714 19,168
Other policy liabilities 398 403 270 270
----------------------------------------------------------------------
Total $21,417 $21,960 $20,014 $19,468
======================================================================
</TABLE>
The fair values for the Company's reserves and liabilities under investment-type
contracts (insurance, annuity and other policy contracts that do not involve
significant mortality or morbidity risk) 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) or surrender values.
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.
<PAGE>
Principal Mutual Life Insurance Company
Notes to Financial Statements (continued)
4. Insurance, Annuity and Accident and Health Reserves (continued)
Activity in the liability for unpaid accident and health claims, which is
included with insurance reserves in the statement of financial position, is
summarized as follows (in millions):
Year ended December 31
1995 1994 1993
------------------------------------------
Balance at beginning of year $ 844 $ 723 $ 657
Incurred:
Current year 2,665 2,735 2,307
Prior years (24) (105) (37)
------------------------------------------
Total incurred 2,641 2,630 2,270
Payments:
Current year 2,196 2,065 1,814
Prior years 481 444 390
------------------------------------------
Total payments 2,677 2,509 2,204
------------------------------------------
Balance at end of year:
Current year 469 670 493
Prior years 339 174 230
------------------------------------------
Total balance at end of year $ 808 $ 844 $ 723
==========================================
5. Federal Income Taxes
The Company files a consolidated income tax return that includes 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. Due to the inherent differences between
income for financial reporting purposes and income for tax purposes, the
Company's provision for federal income taxes may not have the customary
relationship of taxes to income.
Deferred income taxes are generally not recognized for the tax effects of
temporary differences between income for financial reporting purposes and income
for tax purposes. In 1993, 1994 and 1995, however, the Company recognized a
deferred tax asset and operating benefit for the tax effect of unamortized
deferred acquisition costs required for tax purposes. This deferred tax asset
was non-admitted in accordance with statutory accounting practices. In 1995, the
Company also recognized a deferred tax liability and surplus charge for the tax
effect of unrealized gains for common stocks identified for sale in 1996.
<PAGE>
Principal Mutual Life Insurance Company
Notes to Financial Statements (continued)
5. Federal Income Taxes (continued)
In December 1994, a U. S. Court of Appeals with jurisdiction over the Company
ruled that federal law did not permit mutual life insurance companies to use a
negative recomputed differential earnings rate to compute their equity tax
liability for the preceding year. Accordingly, the Company increased its
liability for federal income taxes attributable to its equity for years prior to
1994 and made a corresponding adjustment to surplus in the amount of $63
million.
6. Short-Term Borrowings
The Company issues commercial paper to meet its short-term financing needs.
There were no outstanding borrowings at December 31, 1995 or 1994. The Company
also maintains credit facilities with various banks for short-term borrowing
purposes.
7. 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.
During 1995, the Company adopted Statement of Financial Standards (SFAS) No. 87,
"Employers' Accounting for Pensions," and accordingly changed its method of
accounting for the costs of defined benefit pension plans to an accrual method.
Prior to this change, the cost of pension benefits was recognized as
contributions were made to the pension trusts. 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 pension plans' combined funded status, reconciled to amounts recognized in
the statements of financial position and statements of operations and surplus as
of and for the years ended December 31, 1995 and 1994, is as follows (in
millions):
<PAGE>
<TABLE>
<CAPTION>
Principal Mutual Life Insurance Company
Notes to Financial Statements (continued)
7. Employee and Agent Benefits (continued)
December 31
1995 1994
------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $437 $324
==============================
Accumulated benefit obligation $457 $338
==============================
Plan assets at fair value, primarily affiliated mutual funds
and investment contracts of the Company $719 $581
Projected benefit obligation 661 462
------------------------------
Plan assets in excess of projected benefit obligation 58 119
Unrecognized net (gains) losses and funding different from that assumed
and from changes in assumptions 42 (23)
Unrecognized net transition asset as of January 1, 1994 (72) (83)
------------------------------
Prepaid pension asset (non-admitted) $ 28 $ 13
==============================
Net periodic pension income included the following components (in millions):
Year ended December 31
1995 1994
------------------------------
Service cost $22 $26
Interest cost on projected benefit obligation 39 37
Actual return on plan assets (144) 6
Net amortization and deferral 79 (72)
------------------------------
Total net periodic pension income $ (4) $ (3)
==============================
</TABLE>
During 1994 and 1993, $10 million and $8 million, respectively, was charged to
expense and contributed to the trusts previously established to provide for
future costs of pension benefits. During 1995, $12 million was contributed to
these pension trusts. In addition, to adjust the pension accounting to the new
method required by SFAS No. 87 and to make the change effective as of January 1,
1994, surplus as of January 1, 1995 has been increased by $13 million. According
to the requirements of statutory accounting practices, pension expense for 1994
has not been restated and the 1994 pension amounts shown above are for
comparative purposes only. The pension asset at January 1, 1995 ($13 million)
and December 31, 1995 ($28 million) was non-admitted as prescribed by statutory
accounting practices.
<PAGE>
Principal Mutual Life Insurance Company
Notes to Financial Statements (continued)
7. Employee and Agent Benefits (continued)
The weighted-average assumed discount rate used in determining the projected
benefit obligation was 7% and 8.5% at December 31, 1995 and 1994, respectively.
Some of the trusts holding the plan assets are subject to federal income taxes
at a 35% tax rate while others are not subject to federal income taxes. For both
1995 and 1994, the expected long-term rates of return on plan assets were
approximately 6% (after estimated income taxes) for those trusts subject to
federal income taxes and approximately 10% for those trusts not subject to
federal income taxes. The assumed rate of increase in future compensation levels
varies by age for both the qualified and non-qualified pension plans.
In addition, the Company has defined contribution plans that are generally
available to all employees and agents who are age 21 or older and have completed
one year of service. Eligible participants may contribute up to 15% of their
compensation or $9,240 annually to the plans. The Company matches the
participant's contribution with a 50% contribution up to a maximum contribution
of 2% of the participant's compensation. During both 1995 and 1994, the Company
contributed $7 million to the defined contribution plans. During 1993, such
contributions totaled $6 million.
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 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 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.
The postretirement plans' combined funded status, reconciled to amounts
recognized in the statement of financial position and statement of operations
and surplus as of and for the years ended December 31, 1995 and 1994, is as
follows (in millions):
<PAGE>
<TABLE>
<CAPTION>
Principal Mutual Life Insurance Company
Notes to Financial Statements (continued)
7. Employee and Agent Benefits (continued)
December 31
1995 1994
<S> <C> <C>
-------------------------------
Plan assets at fair value, primarily affiliated mutual funds and
investment contracts of the Company $208 $155
Accumulated postretirement benefit obligation:
Retirees (83) (71)
Eligible employees (40) (31)
--------------------------------
Total accumulated postretirement benefit obligation (123) (102)
-------------------------------
Plan assets in excess of accumulated postretirement benefit obligation
85 53
Unrecognized net losses and funding different from that assumed and
from changes in assumptions 3 29
-------------------------------
Postretirement benefit asset (non-admitted) $ 88 $ 82
===============================
</TABLE>
<TABLE>
<CAPTION>
The net periodic postretirement benefit cost included the following components
(in millions):
Year ended
December 31
1995 1994 1993
--------------------------------
<S> <C> <C> <C>
Service cost $ 5 $ 4 $ 3
Interest cost on accumulated postretirement benefit cost 9 7 6
Expected return on plan assets (10) (10) (6)
Net amortization of gains and losses 1 - -
================================
Total net periodic postretirement benefit cost $ 5 $ 1 $ 3
================================
</TABLE>
The weighted-average assumed discount rate used in determining the accumulated
postretirement benefit obligation was 7% and 8.5% at December 31, 1995 and 1994,
respectively. Some of the trusts holding the plan assets are subject to federal
income taxes at a 35% tax rate while others are not subject to federal income
taxes. For both 1995 and 1994, the expected long-term rates of return on plan
assets were approximately 6% (after estimated income taxes) for those trusts
subject to federal income taxes and approximately 9% for those trusts not
subject to federal income taxes. 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 11.5% in 1995, declines to 9.5% in
2001, and then declines to an ultimate rate of 6.5% in 2036. If the health care
cost trend rate assumptions were increased by 1% in each year, the accumulated
postretirement benefits obligation for health plans as of December 31, 1995
would increase by 11.8% ($10 million). The effect of this 1% increase would also
increase the aggregate of the service cost and interest cost components of the
net periodic postretirement benefit cost of health plans for the year ended
December 31, 1995 by 13.5% ($1 million).
<PAGE>
Principal Mutual Life Insurance Company
Notes to Financial Statements (continued)
7. Employee and Agent Benefits (continued)
These statutory accounting provisions are similar to Statement of Financial
Accounting Standards (SFAS) No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," issued by the FASB except that SFAS No. 106
includes ineligible employees in the accumulated postretirement benefit
obligation calculations. The accumulated postretirement benefit obligation for
ineligible employees was $77 million and $48 million at December 31, 1995 and
1994, respectively.
8. Surplus Notes
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 surplus notes. The discount
and direct costs associated with issuing these surplus notes is being amortized
to expense over their respective terms using the interest method. For statutory
accounting purposes, these notes are considered a part of total surplus of the
Company. Each payment of interest and principal on the surplus notes 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 the years ended December 31, 1995
and 1994, interest of $24 million and $11 million, respectively, was approved by
the Commissioner, paid and charged to expense. Had the accrual of interest on
surplus notes not been subject to approval of the Commissioner, accrued interest
payable on surplus notes at both December 31, 1995 and 1994 would have been $8
million.
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. Non-insurance companies individually held over 10% of these surplus
notes (approximately $50 million and $73 million at December 31, 1995 and 1994,
respectively).
In addition, subject to Commissioner approval, the surplus 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 surplus 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. Non-insurance companies individually held over 10% of these
surplus notes (approximately $43 million and $62 million at December 31, 1995
and 1994, respectively).
<PAGE>
Principal Mutual Life Insurance Company
Notes to Financial Statements (continued)
9. Other Commitments and Contingencies
The Company leases office space and furniture and equipment under various
operating leases. Rental expense for all operating leases totaled $48 million in
1995, $43 million in 1994 and $44 million in 1993. At December 31, 1995, future
minimum rental commitments under noncancelable operating leases for office space
and electronic data processing equipment totaled approximately $97 million.
The Company is a defendant in various legal actions arising in the normal course
of its investment and insurance operations. In the opinion of management, any
losses resulting from such actions would not have a material effect on the
financial statements.
The Company is also subject to insurance guarantee 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. At December 31, 1995 and 1994,
approximately $18 million and $15 million, respectively, of surplus is
appropriated for possible guarantee fund assessments for which notices have not
been received.
In 1995, the Company sold its wholly-owned subsidiary, Principal National Life
Insurance Company (Principal National), at a gain of approximately $1 million.
At December 31, 1994, substantially all the assets ($513 million), liabilities
($470 million), and equity ($43 million) of Principal National were transferred
to and assumed by the Company. This resulted in increases in both other income
and additions to policyowner reserves of $470 million in 1994.
<PAGE>
Report of Independent Auditors
The Board of Directors
Principal Mutual Life Insurance Company
We have audited the accompanying statements of financial position of Principal
Mutual Life Insurance Company (the Company) as of December 31, 1995 and 1994,
and the related statements of operations and surplus and cash flows for each of
the three years in the period ended December 31, 1995. 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 generally accepted auditing
standards. 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 financial position of Principal Mutual Life Insurance
Company at December 31, 1995 and 1994, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles and with reporting
practices prescribed or permitted by the Insurance Division of the Department of
Commerce of the State of Iowa.
Ernst & Young LLP
Des Moines, Iowa
January 31, 1996
