PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
PENSION BUILDER - GROUP VARIABLE ANNUITY CONTRACTS
FOR TAX-DEFERRED RETIREMENT PLANS
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 B, 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 Contracts, 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 24 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 ........................................................... 5
Example .................................................................. 6
Condensed Financial Information ........................................... 6
Summary ................................................................ 8
Introduction .............................................................. 8
Description of Principal Mutual Life Insurance Company .................... 9
Principal Mutual Life Insurance Company Separate Account B ................ 10
Deductions under the Contracts ............................................ 10
Contingent Deferred Sales Charge...................................... 10
Administration Charge ................................................ 11
Separate Payment of Administration Charge ............................ 11
Mortality and Expense Risks Charge ................................... 12
Premium Taxes ........................................................ 12
Surplus Distribution at Sole Discretion of the Company .................... 12
The Contract ............................................................. 12
Contract Values and Accounting Before Annuity Commencement Date ...... 12
Participant's Investment Accounts ................................ 12
Unit Value ....................................................... 13
Net Investment Factor ............................................ 13
Hypothetical Example of Calculation of Unit Value for the
Capital Accumulation Division and Government
Securities Division.......................................... 13
Hypothetical Example of Calculation of Unit Value for
the Money Market Division................................... 14
Annuity Benefits .................................................... 14
Selecting a Variable Annuity ..................................... 14
Forms of Variable Annuities ...................................... 14
Basis of Annuity Conversion Rates ................................ 15
Determining the Amount of the First Monthly Annuity Payment ...... 16
Determining the Amount of the Second and Subsequent
Monthly Annuity Payments .................................... 16
Hypothetical Example of Calculation of Annuity Payments .......... 16
Payment on Death of Participant ...................................... 17
Prior to Annuity Commencement Date ............................... 17
Subsequent to Annuity Commencement Date .......................... 17
Withdrawals and Transfers ............................................ 17
Cash Withdrawals ................................................. 17
Transfers to the Contract ........................................ 18
Transfers Between Divisions ...................................... 18
Transfers to the Associated Fixed Contract ....................... 18
Special Situation Involving Alternate Funding Agents ............. 18
Postponement of Cash Withdrawal or Transfer ...................... 19
Other Contractual Provisions ......................................... 19
Contribution Limits .............................................. 19
Assignment ....................................................... 19
Cessation of Contributions ....................................... 19
Limitation as to Participants..................................... 19
Substitution of Securities........................................ 19
Changes in a Contract ............................................ 20
Statement of Values............................................... 20
Distribution of these Contracts............................................ 20
Voting Rights ......................................................... 20
Federal Tax Status......................................................... 21
Page
State Regulation .......................................................... 22
Legal Opinions ........................................................... 22
Legal Proceedings ......................................................... 22
Registration Statement..................................................... 22
Other Variable Annuity Contracts........................................... 22
Independent Auditors ...................................................... 22
Financial Statements....................................................... 22
Appendix 1 ............................................................... 23
Appendix 2 ............................................................... 23
Contractholders' Inquiries................................................. 23
Table of Contents of the Statement of Additional Information............... 24
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 B for these Contracts.
Associated Fixed Contract -- A fixed-dollar annuity contract issued by the
Company for use in connection with tax-deferred retirement plans or programs.
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.
Compensation -- The amount derived from personal services which is includable in
the gross income of the Participant for the taxable year.
Contingent Deferred Sales Charge -- The charge deducted from certain cash
withdrawals from a Participant's Investment Accounts before the Annuity
Commencement Date.
Contract-- Each contract issued by the Company with any of the following form
numbers: GP A 5921, GP A 5925 and GP A 5927.
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 subject to Sections 403(b), 408 or 219 of the Internal
Revenue Code.
Contribution Year --
(a) For Individual Retirement Annuities designed for ongoing deductible
Contributions -- the taxable year of a Participant. The first Contribution
Year of a Participant will commence the date the Company receives an
initial Contribution and terminate at the end of that taxable year.
(b) For Rollover Individual Retirement Annuities -- the twelve-month period
commencing on the date the Participant's first Contribution is received and
each twelve-month period thereafter.
(c) For Tax Deferred Annuities -- the twelve-month period which coincides with
the Plan Year.
Division -- The part of Separate Account B which is invested in shares of a
single Mutual Fund.
Employer -- The person or entity which employs a Participant. For an unemployed
Participant for whom Contributions are made by a spouse, the term Employer means
the person or entity which employs that spouse. For a Participant covered by a
Tax Deferred Annuity arrangement, the term Employer means such Participant's
employer which is either an organization described in Section 501(c)(3) of the
Internal Revenue Code or which is a public school or other agency or
instrumentality of a state or political subdivision of a state described in
Internal Revenue Code Sections 403(b) or 170(b)(1)(A)(ii) and which has made the
Tax Deferred Annuity arrangement available to its employees.
Individual Retirement Annuity-- A plan or program adopted by or on behalf of
individuals pursuant to Section 408 of the Internal Revenue Code.
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 B.
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 Fund -- Principal Capital Accumulation Fund, Inc., Principal Government
Securities Fund, Inc., Principal Money Market 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.
Participant -- A natural person for whom Contributions have been or are being
made under the Contract.
Plan Year -- For Tax Deferred Annuities 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 retirement plan or program under which benefits are to be
provided to Participants pursuant to a Contract described herein.
Rollover Individual Retirement Annuity -- An Individual Retirement Annuity
designed for single premium rollover Contributions pursuant to Internal Revenue
Code Sections 402(a)(5), 402(a)(7), 403(a)(4), 403(b)(8), 408(d)(3) or
409(b)(3)(c).
Separate Account B -- 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 Capital Accumulation
Division (formerly known as 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.
Tax Deferred Annuity -- A plan or program adopted by public school systems or
other Employers pursuant to Section 403(b) of the Internal Revenue Code.
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 an Investment Account.
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 B for the Contract.
Written Notification -- Actual delivery to the Company at its home office in Des
Moines, Iowa of an appropriate writing 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 ------------------------------
of Participant Investment Accounts
Total Value of all
Investment Accounts
of Participant(1)
Separate Account Annual Expenses
(as a percentage of average account
value)
Mortality and Expense Risk Fees 1.4965% (1.0001% for Rollover Individual
Retirement Annuity)
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% .
(1) If Contributions for a Participant are made under the Contract as part of a
Retirement Plan sponsored by, or program of, the Employer of the
Participant and the Company receives all of that portion of the
contributions under such a plan or program directed to annuity contracts
for all employees participating in the plan or program, then the
denominator will be the aggregate value of all the accounts of all the
Participants of the Employer.
EXAMPLE
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------- ------- ------- --------
If you surrender your contract Capital
at the end of the applicable Accumulation
time period: Division $96 $136 $177 $285
You would pay the following Government
expenses on a $1,000 investment, Securities
assuming 5% annual return on Division $97 $137 $179 $289
assets:
Money Market
Division $97 $138 $180 $292
If you annuitize at the end Capital
of the applicable time period Accumulation
or do not surrender your Division $25 $75 $129 $276
contract:
You would pay the following Government
expenses on a $1,000 investment, Securities
assuming 5% annual return on Division $25 $77 $131 $280
assets:
Money Market
Division $25 $78 $133 $283
<TABLE>
<CAPTION>
CONDENSED FINANCIAL INFORMATION
Selected data for a Pension Builder accumulation unit outstanding
throughout the period ended December 31:
Capital Accumulation Division
Pension Builder --
IRA/TSA
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
------------------------------------------------ ---- ---- ---- ----
Accumulation unit value:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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 9,967 16,649 21,269 20,148 18,477 18,109 16,256 14,236 12,703 7,190
units outstanding at end
of period (in thousands)
Pension Builder --
Rollover IRA
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
------------------------------------------------ ---- ---- ---- ----
Accumulation unit value:
Beginning of period $2.845 $2.859 $2.679 $2.471 $1.800 $2.017 $1.753 $1.547 $1.468 $1.276
End of period 3.715 2.845 2.859 2.679 2.471 1.800 2.017 1.753 1.547 1.468
Number of accumulation 2,115 5,598 8,602 8,207 7,535 6,750 6,111 5,328 4,824 2,212
units outstanding at end
of period (in thousands)
</TABLE>
<TABLE>
<CAPTION>
Government Securities Division
Pension Builder--
IRA/TSA(1)
1995 1994 1993 1992 1991 1990 1989 1988 1987
------------------------------------------------ ---- ---- ----
Accumulation unit value:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 3,738 5,947 7,432 6,200 4,912 3,732 2,782 2,115 1,001
units outstanding at end
of period (in thousands)
Pension Builder--
Rollover IRA(1)
1995 1994 1993 1992 1991 1990 1989 1988 1987
------------------------------------------------ ---- ---- ----
Accumulation unit value:
Beginning of period $1.631 $1.726 $1.584 $1.497 $1.293 $1.192 $1.041 $ .971 $1.000
End of period 1.923 1.631 1.726 1.584 1.497 1.293 1.192 1.041 .971
Number of accumulation 1,772 4,117 7,878 5,933 4,602 3,356 2,086 1,369 886
units outstanding at end
of period (in thousands)
<FN>
(1) Commenced operations on April 14, 1987.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Money Market Division
Pension Builder --
IRA/TSA
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
------------------------------------------------ ---- ---- ---- ----
Accumulation unit value:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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 1,327 1,997 2,905 3,841 4,639 5,366 5,302 3,142 2,070 752
units outstanding at end
of period (in thousands)
Pension Builder--
Rollover IRA
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
------------------------------------------------ ---- ---- ---- ----
Accumulation unit value:
Beginning of period $1.739 $1.692 $1.664 $1.624 $1.548 $1.447 $1.341 $1.263 $1.199 $1.140
End of period 1.817 1.739 1.692 1.664 1.624 1.548 1.447 1.341 1.263 1.199
Number of accumulation 440 2,227 2,894 3,699 3,999 3,300 3,865 1,509 747 381
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 tax-deferred Retirement Plans in the form of (1) Tax Deferred Annuity plans
or programs adopted by public school systems or other agencies of a state or its
subdivisions or certain tax exempt organizations pursuant to Section 403(b) of
the Internal Revenue Code of 1954, and (2) Individual Retirement Annuity plans
or programs adopted pursuant to Section 408 of the Internal Revenue Code. These
Contracts will be sold primarily by persons who are insurance agents of or
brokers for Principal Mutual Life Insurance Company. In addition, these persons
will usually be 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?
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. For tax years
beginning after December 31, 1988, distributions from Tax Deferred Annuities may
begin only after the Participant attains age 59 1/2, separates from service,
dies or becomes disabled, or incurs a hardship. See "Withdrawals and Transfers."
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 tax-deferred Retirement Plans in the form of (1) Tax Deferred
Annuity plans or programs adopted by public school systems or other agencies of
a state or its subdivisions or certain tax exempt organizations pursuant to
Section 403(b) of the Internal Revenue Code and (2) Individual Retirement
Annuity plans or programs adopted pursuant to Section 408 of the Internal
Revenue Code. 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 B. Currently there are three Divisions: the
Capital Accumulation Division (formerly known as 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 Capital Accumulation 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 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
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
affect the market value of the certificate, and actual prepayments can affect
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 B 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 50392,
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. It is a member of The Principal Financial Group, a
diversified family of insurance and financial services corporations.
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 offers a full range of products and services for
businesses, groups and individuals including individual insurance, pension plans
and group/employee benefits. The Company has ranked in the upper one percent of
life insurers in assets and premium income and has consistently received
excellent ratings from the major rating firms based upon the Company's claims
paying ability. The Company has $51.3 billion in assets under management and
serves more than 9.3 million individuals and their families.
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT B
Separate Account B was established on January 12, 1970 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 B are credited to or
charged against the assets of Separate Account B 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 B 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 B. Furthermore, the assets of each Division
of Separate Account B 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 B. 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 B. Also, although the
assets maintained in Separate Account B 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.
Separate Account B was registered on July 17, 1970 with the Securities and
Exchange Commission as a unit investment trust under the Investment Company Act
of 1940, as amended. Such registration does not involve supervision by the
Commission of the investments or investment policies of Separate Account B.
The Company is taxed as an insurance company under the Internal Revenue
Code. The operations of Separate Account B 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 B 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 B are not
taxed. The Company reserves the right to charge Separate Account B with, and to
create a reserve for, any tax liability which the Company determines may result
from maintenance of Separate Account B. 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 1.91% of the average
net assets.
There are also deductions from and expenses paid out of the assets of
Principal Capital Accumulation Fund, Principal Money Market Fund, and Principal
Government Securities Fund. 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 Sales
Covered Under the Contract 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 or an Alternate Funding Vehicle
that participates in an exchange offer for which an SEC order has been
obtained.
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. An amount equal to a percentage of the total value of all Investment
Accounts of the Participant 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.)
Individual Retirement Annuities established under the Contract by a working
and a nonworking spouse Participant will be combined for purposes of
calculating the Administration Charge.
If Contributions for a Participant are made under the Contract as part of a
Retirement Plan sponsored by, or program of, the Employer of the
Participant and the Company receives all of that portion of the
contributions under such a plan or program directed to annuity contracts
for all employees participating in the plan or program, then the percentage
determined in 2. above will be based on the value of the aggregate of all
accounts of all the Participants of the Employer. By this means, the charge
determined by 2. will be deducted pro rata from the Investment Accounts of
all the Participants based on their proportionate value of the aggregate of
the accounts. The portion of the charge determined by 1. will be deducted
from Participant's Investment Accounts on a per capita basis.
The Administration Charge applicable to each Participant will be deducted
from the Participant's Investment Accounts on the earlier of (i) the date
the accounts are paid or applied in full (a total redemption) or (ii) the
last day of the Contribution Year. The 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. A Participant in an
Individual Retirement Annuity (but not a Rollover Individual Retirement
Annuity) may similarly agree, by a revocable written agreement with the
Company, to pay separately all or a portion of the Administration Charge.
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 B held with respect to the Contract. The charge is
equivalent to a simple annual rate of 1.4965% (1.0001% for a Rollover
Individual Retirement Annuity). 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%
(0.7511% for a Rollover Individual Retirement Annuity) 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, the charge may not exceed 2.00% on an annual
basis, and only one change may be made in any one year period. Further, no
increase in the charge in excess of 1.75% on an annual basis may be made
without the prior approval of the Securities and Exchange Commission. 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 B. For Tax Deferred Annuities the types of
Contributions are Contributions by the Employer pursuant to a salary
modification agreement, other Employer Contributions or other
Contributions that the Company agrees to accept.
For Individual Retirement Annuities, the types of Contributions are
generally Employer Contributions, Participant Contributions or rollover
Contributions arising from amounts previously deducted by the
Participant and accumulated under an account, annuity or bond as
provided for in Internal Revenue Code Sections 408 or 409.
For Rollover Individual Retirement Annuities, generally the only type
of Contribution is a rollover Contribution pursuant to Internal Revenue
Code Sections 402(a)(5), 402(a)(7), 403(a)(4), 403(b)(8), 408(d)(3) or
409(b)(3)(C).
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 B 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 B 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 that 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 B.
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% (1.0001% for a Rollover Individual
Retirement Annuity).
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 B at the discretion of the Company.
4. Hypothetical Example of Calculation of Unit Value for the Capital
Accumulation Division and Government Securities Division (excluding
Rollover Individual Retirement Annuity)
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 (excluding Rollover Individual Retirement Annuity)
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 Plan allows which is at least one month
after the Written Notification. For Participants in a Tax Deferred
Annuity, after 1988, the annuity commencement date cannot begin before
the participant is age 59 1/2, separated from service, or is totally
disabled.
As a general rule the annuity commencement for Individual Retirement
Annuities and Tax Deferred Annuities cannot be later than April 1 of
the calendar year following the calendar year in which the Participant
attains age 70 1/2. Participants in Individual Retirement Annuities may
delay the commencement date if they notify us in writing that the
distribution requirements are being met by distributions from other
individual retirement arrangements. Until 1989, a Tax Deferred Annuity
Participant may delay the Annuity Commencement Date until April 1 of
the calendar year following the calendar year in which the Participant
terminated employment. In addition, Tax Deferred Annuity benefits which
accrued before January 1, 1987 do not have to be distributed until age
75 or the first day of the month after termination of employment.
Beginning January 1, 1989, amounts which were required to be
distributed under the rules of the Internal Revenue Code, but were not
distributed, are subject to a 50% excise tax.
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, and if the Retirement Plan does
not provide one, payments to an unmarried Participant will be made
under the annuity option providing Variable Life Annuity with Monthly
Payments Certain for Ten Years, i.e. providing monthly payments for
life with the provision that if the Participant dies prior to receiving
all payments due in the first ten years, any remaining payments due in
that period will be paid to the designated beneficiary unless the
beneficiary requests in writing that the Commuted Value of the
remaining payments be paid in a single sum. Payments to a married
Participant will be made under the annuity option providing a Variable
Life Annuity with One-Half Survivorship, i.e. payments during the
Participant's lifetime and providing further that one-half of the
amount otherwise payable to the Participant will be continued to the
Participant's spouse as contingent annuitant so long as the spouse
survives the Participant.
2. Forms of Variable Annuities
Because of certain restrictions contained in the Internal Revenue Code
and regulations thereunder, an annuity option is not available under a
Tax Deferred Annuity unless (i) the joint or contingent annuitant is
the Participant's spouse or (ii) on the Participant's Annuity
Commencement Date, the present value of the amount to be paid to the
Participant while living is greater than 50% of the present value of
the total benefit to the Participant and the Participant's beneficiary
(or joint or contingent annuitant, if applicable).
Similarly, for Individual Retirement Annuities and Rollover Individual
Retirement Annuities, 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 ruled 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.
It is unclear at this time what degree of employer involvement will
result in an Individual Retirement Annuity or Tax Deferred Annuity
being considered a benefit of employment and therefore subject to the
Court's ruling.
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 B 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 (excluding
Individual Rollover Retirement Annuity)
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 $1,750, 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.
If a Participant under a Contract funding a Tax Deferred Annuity dies
prior to Annuity Commencement Date, the Company, upon receipt of due
proof of death, will, in accordance with prior instructions from the
Participant, either (i) pay the value of the Participant's Investment
Accounts to the beneficiary in a single sum or (ii) if an Associated
Fixed Contract has been issued, cancel all Investment Account units as
of the date of receipt of the 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. Prior to any payment or transfer by the Company, the
beneficiary may change the election made by the Participant or,
alternatively, elect to have the Participant's Investment Account
Values applied to purchase a supplementary contract from the Company
for annuity benefits. Such a purchase must conform to the requirements
of the supplementary contract.
Under all Contracts, a beneficiary must begin to receive Annuity
Payments or receive a single sum payment not later than five years
after 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 the 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,
any restrictions imposed by provisions of the Internal Revenue Code 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. Distributions from Tax
Deferred Annuities may begin only after the Participant attains age 59
1/2, separates from service, dies or becomes disabled, or in the case
of hardship.
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 B for the Valuation Period in
which the cancellation is effective. Units will also be cancelled to
cover any charges assessed under (c) above.
(Special Note: Under the Texas Education Code, Participants under
contracts issued in connection with Optional Retirement Programs for
certain employees of Texas institutions of higher education are
prohibited from making withdrawals except in the event of termination
of employment, retirement or death of the Participant.)
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 may be subject to provisions of an Employer sponsored
Retirement Plan which allows 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 for Tax
Deferred Annuities are limited to (a) amounts excludable from gross
income of Participants pursuant to the exclusion allowance provision of
Section 403(b) of the Internal Revenue Code, and (b) the contribution
limitation as specified in Section 415(c) of the Internal Revenue Code
unless otherwise allowed by the Company. Maximum Contributions for
Individual Retirement Annuities are limited to (a) amounts deductible
by a Participant under Internal Revenue Code Section 219 or (b) amounts
previously deducted by the Participant under Internal Revenue Code
Section 219 and accumulated in another funding vehicle, unless
otherwise allowed by the Company. Maximum Contributions for Rollover
Individual Retirement Annuities are limited to amounts the Participant
is entitled to roll over under Internal Revenue Code Sections
402(a)(5), 402(a)(7), 403(a)(4), 403(b)(8), 408(d)(3), or 409(b)(3)(C).
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. Any necessary approval of the
Securities and Exchange Commission or of owners of or participants
under contracts participating in Separate Account B shall be obtained
before any substitution is made.
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.
DISTRIBUTION OF THESE CONTRACTS
These Contracts, which are continuously offered, will be sold primarily by
persons who are 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 will usually be 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 receives from the Company
an overwriting and expense fee of 1% of Contributions received under the
Contracts. These Contracts may also be sold through other selected
broker-dealers registered under the Securities Exchange Act of 1934. Princor
Financial Services Corporation is also the principal underwriter for various
registered investment companies organized by the Company. Princor Financial
Services Corporation is a wholly-owned subsidiary of Principal Holding Company.
Principal Holding Company is a holding company and a wholly-owned subsidiary of
the Company.
VOTING RIGHTS
The Company shall vote Mutual Fund shares held in Separate Account B at
regular and special meetings of shareholders of each Mutual Fund, but will
follow voting instructions received from persons having the voting interest in
the Mutual Fund shares.
The number of Mutual Fund shares as to which a person has the voting
interest will be determined by the Company as of a date which will not be more
than ninety days prior to the meeting of the Mutual Fund, and voting
instructions will be solicited by written communication at least ten days prior
to the meeting.
During the accumulation period, the Participant is the person having the
voting interest in the Mutual Fund shares attributable to each Investment
Account. The number of Mutual Fund shares held in Separate Account B which are
attributable to each Investment Account is determined by dividing the Investment
Account Value by the net asset value of one Mutual Fund share.
During the annuity period, the person then entitled to Annuity Payments has
the voting interest in the Mutual Fund shares attributable to the Variable
Annuity. The number of Mutual Fund shares held in Separate Account B which are
attributable to each Variable Annuity is determined by dividing the reserve for
the Variable Annuity by the net asset value of one Mutual Fund share. The
Participant's voting interest in the Mutual Fund shares attributable to the
Variable Annuity will ordinarily decrease during the annuity period since the
reserve for the Variable Annuity decreases due to the reduction in the expected
payment period.
Mutual Fund shares for which participants or payees of variable annuities
are entitled to give voting instructions, but for which none are received, and
shares of the Fund owned by the Company will be voted in the same proportion as
the aggregate shares for which voting instructions have been received.
Proxy material will be provided to each person having a voting interest
together with an appropriate form which may used to give voting instructions to
the Company.
If the Company determines pursuant to applicable law that Mutual Fund
shares held in Separate Account B need not be voted pursuant to instructions
received from persons otherwise having the voting interest as provided above,
then the Company may vote Mutual Fund shares held in Separate Account B in its
own right.
FEDERAL TAX STATUS
Investment gains of the Mutual Funds credited to Separate Account B 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 Annuity Payments at the
time of retirement will be in a lower income tax bracket due to reduced income
and larger exemptions.
Under Section 403(b) of the Internal Revenue Code, contributions for
employees made under a Tax Deferred Annuity by a public school or other Employer
are excludable from the gross income of the employees in the year made to the
extent that the aggregate contributions per year for such employees do not
exceed the exclusion allowance set forth in Section 403(b)(2) of the Internal
Revenue Code. (In addition, contributions are limited by the restrictions of
Section 415(c) of the Internal Revenue Code.) Adjustments in the tax base are
allowed where a portion of the cost of the benefit being distributed has been
paid by the Participant out of funds not excludable from the Participant's gross
income tax in the year made, rather than having been paid by the Participant's
Employer out of funds that were excludable from the Participant's gross income
tax in the year made.
Distributions from a Tax Deferred Annuity may begin only after the
participant attains age 59 1/2, separates from service, dies or becomes
disabled, or in the case of hardship.
Under Sections 219 and 408 of the Internal Revenue Code, an individual who
has earned income may establish an Individual Retirement Annuity plan or program
for the accumulation of retirement savings on a tax-deferred basis for such
individual and such individual's nonemployed spouse. The individual may
establish and make contributions into such a plan or this may be done by the
individual's employer or union. These contributions may be invested in, among
other things, annuity contracts including the variable annuity contract offered
by this Prospectus. The law provides that such contributions will be deductible,
though only to the extent allowed by the Internal Revenue Code. No deduction is
allowed for contributions made during or after the year in which the individual
attains age 70 1/2, and contributions during or after that year, as well as
contributions in excess of the limits, are excess contributions and may result
in certain adverse tax consequences.
All distributions under Individual Retirement Annuities and Tax Deferred
Annuities will be taxed as ordinary income. Thus, these distributions will not
be eligible for capital gains treatment or the special averaging rules
applicable to lump sum distributions from some types of qualifying plans. As a
general rule, any distribution that is not in the form of a life annuity, made
before the participant attains age 59 1/2 (except in the event of death or
disability) will be a premature distribution and be subject to a 10% penalty.
There is an exception to this rule for Tax Deferred Annuities. Distributions
from Tax Deferred Annuities which are due to separation from service after age
55 or which are used for certain medical expenses are not subject to the
penalty.
Distributions from Individual Retirement Annuities and Tax Deferred
Annuities must begin before April 1 of the calendar year following the calendar
year in which the participant attains age 70 1/2. There is an exception to this
rule for Tax Deferred Annuities. Tax Deferred Annuity benefits which accrued
prior to January 1, 1987 do not have to be distributed until age 75 or
termination of employment.
If a participant fails to make a required distribution a 50% excise tax may
be assessed on the amount required to be distributed. In addition, as a general
rule, distributions over $150,000 a year, and lump sum distributions greater
than $750,000 are subject to a 15% excise tax.
When a Participant under an Individual Retirement Annuity or Tax Deferred
Annuity dies before the Annuity Commencement Date, all values must be
distributed to the Participant's beneficiary within five years. The 5-year
payout rule does not apply to benefits paid to a surviving spouse under a joint
and survivor annuity option, nor to benefits paid to a surviving beneficiary
under a permitted term certain period. If the surviving spouse is the designated
beneficiary, distribution of benefits need not begin until the date on which the
Participant would have attained age 70 1/2 years, and the benefits must be
distributed over the life of the surviving spouse or over a period not exceeding
the life expectancy of the spouse. A similar rule applies to other designated
beneficiaries, except that the distribution of benefits must commence not later
than one year after the date of death of the participant.
It should be recognized that the description 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 B, see "Principal
Mutual Life Insurance Company Separate Account B".)
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 law 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 B is a
party or which would materially affect Separate Account B.
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 B. In the future, additional group or individual
variable annuity contracts may be designated by the Company as participating in
Separate Account B.
INDEPENDENT AUDITORS
The financial statements of Principal Mutual Life Insurance Company
Separate Account B 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:
403(b) 408 Individual
Tax Deferred Retirement
Annuities Accounts
Alabama 1.00% 1.00%
California 0.50 0.50
District of Columbia 2.25 2.25
Kentucky 2.00 2.00
West Virginia 1.00 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 a
charge equal to 0.5% of the first $50,000 of a Participant's Investment Account
Values. The amount of the percentage 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 and the denominator of which is
the total value of the Investment Accounts. Assume that a Participant's
Investment Account Value based on the Capital Accumulation Division is $40,000
and the Investment Account Value based on the Money Market Division is $60,000.
In this case, the total Investment Account Value of $100,000 is multiplied by
0.25% ($250/$100,000) resulting in a charge of $250. The combined charge of $275
($25 plus $250) is deducted proportionately from the Investment Accounts of the
Participant, $110 (40% of $275) from the Investment Account Value based on the
Capital Accumulation Division and $165 (60% of $275) from the Investment Account
Value based on the Money Market Division.
Assume that in the example above all of the annuity contributions under the
Retirement Plan of the Employer are payable to the Company. As a result, the
percentage used to determine the second component of the charge is based on the
aggregate Investment Account Values of all Participants of the Employer. For
example, assume that there is one other Participant with a total Investment
Account Value of $200,000. The total Investment Account Value of each
Participant is multiplied by a percentage the numerator of which is $250 (0.5% x
$50,000) and the denominator of which is $300,000, or 0.08333%. The Participant
with a total Investment Account Value of $100,000 is subject to an
Administration Charge of $108.33, $25 plus $83.33 (0.0008333 x $100,000), and
the Participant with a total Investment Account Value of $200,000 is subject to
an Administration Charge of $191.67, $25 plus $166.67 (0.0008333 x $200,000). In
effect, the $250 charge based on the Participants' aggregate Investment Account
Values has been allocated proportionately between them.
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.
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 B ......... 5
Report of Independent Auditors ............................... 22
Principal Mutual Life Insurance Company ........................... 23
Report of Independent Auditors ................................ 45
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 B
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 B 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
BB 4363 B-7
<PAGE>
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 B............ 5
Report of Independent Auditors.................................... 22
Principal Mutual Life Insurance Company............................... 23
Report of Independent Auditors.................................... 45
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 B and Principal Mutual Life
Insurance Company and perform audit and accounting services for Separate Account
B 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 $5,326,848.77 $26,014.78
1994 $2,347,858.73 $60,600.11
1993 $443,683.87 $95,009.83
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." The
7-day yields of the Money Market Division for the period ending December 31,
1995 are:
Annualized Yield Effective Yield
---------------- ---------------
TSA/IRA 3.56% 3.62%
Rollover IRA 4.06% 4.14%
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 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.
The average annual total returns for the period ending December 31, 1995 are:
With Contingent Without Contingent
Deferred Sales Charge Deferred Sales Charge
--------------------- ---------------------
One Five Ten One Five Ten
Year Year Year Year Year Year
---- ---- ---- ---- ---- ----
Capital Accumulation
Division
TSA/IRA 20.25% 13.49% 10.13% 29.31% 14.47% 10.21%
Rollover IRA 20.85% 14.06% 10.68% 29.95% 15.04% 10.76%
Government Securities
Division
TSA/IRA 8.52% 6.28% 7.34%(1) 16.69% 7.19% 7.52%(1)
Rollover IRA 9.06% 6.80% 7.88%(1) 17.27% 7.72% 8.05%(1)
(1) Period from April 14, 1987 - December 31, 1995
<TABLE>
<CAPTION>
Principal Mutual Life Insurance
Company Separate Account B
Statement of Net Assets
December 31, 1995
Assets
Investments (Note 1):
Aggressive Growth Division:
Principal Aggressive Growth Fund, Inc. - 1,483,620 shares at net asset value of
<S> <C>
$12.94 per share (cost - $18,325,213) $ 19,198,047
Asset Allocation Division:
Principal Asset Allocation Fund, Inc. - 975,797 shares at net asset value of
$11.11 per share (cost - $10,437,689) 10,841,100
Balanced Division:
Principal Balanced Fund, Inc. - 1,522,049 shares at net asset value
of $13.97 per share (cost - $20,112,401) 21,263,022
Bond Division:
Principal Bond Fund, Inc. - 1,588,119 shares at net asset value of $11.73 per
share (cost - $18,122,886) 18,628,633
Capital Accumulation Division:
Principal Capital Accumulation Fund, Inc. - 3,728,696 shares at net asset value
of $27.80 per share (cost - $92,908,561) 103,657,763
Emerging Growth Division:
Principal Emerging Growth Fund, Inc. - 1,665,414 shares at net
asset value of $25.33 per share (cost - $37,189,023) 42,184,948
Government Securities Division:
Principal Government Securities Fund, Inc. - 4,307,388 shares at
net asset value of $10.55 per share (cost - $44,523,062) 45,442,936
Growth Division:
Principal Growth Fund, Inc. - 3,049,334 shares at net asset value of $12.43 per
share (cost - $33,989,529) 37,903,233
Money Market Division:
Principal Money Market Fund, Inc. - 22,309,488 shares at net asset value (cost)
of $1.00 per share 22,309,488
World Division:
Principal World Fund, Inc. - 2,349,081 shares at net asset value of $10.72 per
share (cost - $23,424,723) 25,182,149
===================
Net assets $346,611,319
===================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Principal Mutual Life Insurance
Company Separate Account B
Statement of Net Assets (continued)
Unit
Units Value
----------------------------
----------------------------
Net assets are represented by:
Aggressive Growth Division:
Contracts in accumulation period - The Principal
<S> <C> <C> <C>
Variable Annuity 1,323,663 $14.50 $ 19,198,047
Asset Allocation Division:
Contracts in accumulation period - The Principal
Variable Annuity 911,657 11.89 10,841,100
Balanced Division:
Contracts in accumulation period:
Personal Variable 327,372 1.21 395,555
Premier Variable 3,316,975 1.21 4,018,252
The Principal Variable Annuity 1,373,157 12.27 16,849,215
-------------------
-------------------
21,263,022
Bond Division:
Contracts in accumulation period:
Personal Variable 101,036 1.23 124,183
Premier Variable 1,207,749 1.23 1,488,447
The Principal Variable Annuity 1,401,301 12.14 17,016,003
-------------------
-------------------
18,628,633
Capital Accumulation Division:
Currently payable annuity contracts:
Bankers Flexible Annuity 10,014 17.70 177,260
Pension Builder Plus - Rollover IRA 67,563 3.72 251,017
Contracts in accumulation period:
Bankers Flexible Annuity 324,861 17.70 5,751,347
Pension Builder Plus 9,967,305 3.41 33,981,462
Pension Builder Plus - Rollover IRA 2,115,464 3.72 7,859,055
Personal Variable 2,336,347 1.50 3,500,687
Premier Variable 14,824,208 1.51 22,380,360
The Principal Variable Annuity 2,231,777 13.33 29,756,575
-------------------
-------------------
103,657,763
Emerging Growth Division:
Contracts in accumulation period:
Personal Variable 287,939 1.27 365,808
Premier Variable 1,895,863 1.27 2,415,033
The Principal Variable Annuity 3,059,324 12.88 39,404,107
-------------------
-------------------
42,184,948
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Principal Mutual Life Insurance
Company Separate Account B
Statement of Net Assets (continued)
Unit
Units Value
----------------------------
Net assets are represented by (continued):
Government Securities Division:
Contracts in accumulation period:
<S> <C> <C> <C>
Pension Builder Plus 3,738,233 $ 1.84 $ 6,882,964
Pension Builder Plus - Rollover IRA 1,771,981 1.92 3,407,555
Personal Variable 1,889,788 1.26 2,371,868
Premier Variable 7,159,023 1.26 9,053,348
The Principal Variable Annuity 2,023,123 11.73 23,727,201
-------------------
-------------------
45,442,936
Growth Division:
Contracts in accumulation period:
Personal Variable 277,708 1.25 346,944
Premier Variable 2,859,893 1.25 3,582,532
The Principal Variable Annuity 2,619,339 12.97 33,973,757
-------------------
-------------------
37,903,233
Money Market Division:
Contracts in accumulation period:
Pension Builder Plus 1,327,197 1.76 2,339,446
Pension Builder Plus - Rollover IRA 439,501 1.82 797,914
Personal Variable 1,143,063 1.12 1,278,235
Premier Variable 2,958,777 1.13 3,335,350
The Principal Variable Annuity 1,370,204 10.63 14,558,543
-------------------
-------------------
22,309,488
World Division:
Contracts in accumulation period:
Personal Variable 159,698 1.09 173,584
Premier Variable 1,672,346 1.09 1,822,554
The Principal Variable Annuity 2,145,969 10.80 23,186,011
-------------------
-------------------
25,182,149
===================
Net assets $346,611,319
===================
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Principal Mutual Life Insurance
Company Separate Account B
Statement of Operations
Year ended December 31, 1995
Aggressive Asset
Growth Allocation Balanced
Combined Division Division Division
--------------------------------------------------------------
--------------------------------------------------------------
Investment income
Income:
<S> <C> <C> <C> <C>
Dividends (Note 1) $ 8,765,352 $ 169,797 $ 363,337 $ 636,546
Capital gains distributions 11,188,947 1,879,337 270,245 392,158
--------------------------------------------------------------
--------------------------------------------------------------
19,954,299 2,049,134 633,582 1,028,704
Expenses (Note 2):
Mortality and expense risks 2,690,588 125,688 80,633 122,571
Administration charges 345,587 7,043 1,214 1,975
Contingent sales charges 227,015 4,176 2,173 4,526
--------------------------------------------------------------
--------------------------------------------------------------
3,263,190 136,907 84,020 129,072
--------------------------------------------------------------
--------------------------------------------------------------
Net investment income 16,691,109 1,912,227 549,562 899,632
Realized and unrealized gains (losses) on
investments (Note 4)
Net realized gains (losses) on investments 2,865,382 448,426 74,402 103,410
Change in net unrealized appreciation/
depreciation of investments 31,314,846 912,921 490,584 1,347,509
--------------------------------------------------------------
==============================================================
Net increase in net assets resulting from
operations $50,871,337 $3,273,574 $1,114,548 $2,350,551
==============================================================
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Capital
Accumulation Emerging Government Money Market
Bond Division Division Growth Securities Growth Division Division World Division
Division Division
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
$ 918,871 $ 2,051,110 $ 353,883 $2,482,944 $ 495,175 $879,065 $ 414,624
- 8,040,992 330,442 - 257,829 - 17,944
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
918,871 10,092,102 684,325 2,482,944 753,004 879,065 432,568
103,748 950,830 306,214 357,325 258,835 171,164 213,580
1,284 223,785 13,050 64,967 4,604 25,185 2,480
7,310 114,476 10,588 38,738 10,167 26,112 8,749
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
112,342 1,289,091 329,852 461,030 273,606 222,461 224,809
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
806,529 8,803,011 354,473 2,021,914 479,398 656,604 207,759
50,961 1,908,275 241,047 (303,527) 254,149 - 88,239
679,932 12,768,964 5,294,039 3,801,338 3,955,502 - 2,064,057
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
$1,537,422 $23,480,250 $5,889,559 $5,519,725 $4,689,049 $656,604 $2,360,055
===========================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Principal Mutual Life Insurance
Company Separate Account B
Statements of Changes in Net Assets
Years ended December 31, 1995 and 1994
Aggressive Asset
Growth Allocation Balanced
Combined Division Division Division
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Net assets at January 1, 1994 $137,066,766 $ $ $ -
- -
Increase (decrease) in net assets
Operations:
Net investment income 6,189,070 28,335 66,422 151,699
Net realized gains (losses) on investments 145,940 316 (74) (635)
Change in net unrealized appreciation/
depreciation of investments (9,269,736) (40,087) (87,173) (196,888)
----------------------------------------------------------------
----------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations (2,934,726) (11,436) (20,825) (45,824)
Changes from principal transactions:
Purchase payments, less sales charges, per
payment fees and applicable premium taxes 162,307,213 3,729,494 3,048,277 3,914,946
Contract terminations (40,138,840) (3,855) (100) -
Death benefit payments (45,257) (4,629) - -
Flexible withdrawal option payments (98,120) (1,190) (1,931) (4,660)
Transfer payments to other contracts (78,225,382) (23,882) - (44,750)
Annuity payments (45,771) - - -
Mortality guarantee transfer (1,830) - - -
----------------------------------------------------------------
----------------------------------------------------------------
Increase (decrease) in net assets from principal
transactions 43,752,013 3,695,938 3,046,246 3,865,536
----------------------------------------------------------------
----------------------------------------------------------------
Total increase (decrease) 40,817,287 3,684,502 3,025,421 3,819,712
----------------------------------------------------------------
Net assets at December 31, 1994 177,884,053 3,684,502 3,025,421 3,819,712
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Capital
Accumulation Emerging Government Money Market
Bond Division Division Growth Securities Growth Division Division World Division
Division Division
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
$ $96,467,365 $ $29,762,953 $ $10,836,448 $
- - - -
194,093 3,292,499 322,224 1,751,663 51,605 277,374 53,156
267 671,701 (1,080) (527,977) 5,584 - (2,162)
(174,185) (4,877,919) (298,114) (3,246,941) (41,798) - (306,631)
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
20,175 (913,719) 23,030 (2,023,255) 15,391 277,374 (255,637)
3,076,098 29,730,601 10,224,130 19,469,052 8,448,347 71,213,235 9,453,033
- (26,290,355) (5,153) (10,515,456) (5,272) (3,308,423) (10,226)
- (11,029) (14,169) (3,039) (4,690) - (7,701)
(2,423) (3,620) (26,751) (7,540) (23,355) - (26,650)
(37,501) (9,201,231) (235,391) (6,409,017) (329,097) (61,909,148) (35,365)
- (45,771) - - - - -
- (1,830) - - - - -
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
3,036,174 (5,823,235) 9,942,666 2,534,000 8,085,933 5,995,664 9,373,091
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
3,056,349 (6,736,954) 9,965,696 510,745 8,101,324 6,273,038 9,117,454
- -----------------------------------------------------------------------------------------------------------
3,056,349 89,730,411 9,965,696 30,273,698 8,101,324 17,109,486 9,117,454
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Principal Mutual Life Insurance
Company Separate Account B
Statements of Changes in Net Assets (continued)
Aggressive Asset
Growth Allocation Balanced
Combined Division Division Division
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Net assets at January 1, 1995 $177,884,053 $ 3,684,502 $ 3,025,421 $ 3,819,712
Increase (decrease) in net assets
Operations:
Net investment income 16,691,109 1,912,227 549,562 899,632
Net realized gains (losses) on investments 2,865,382 448,426 74,402 103,410
Change in net unrealized appreciation/
depreciation of investments 31,314,846 912,921 490,584 1,347,509
----------------------------------------------------------------
----------------------------------------------------------------
Net increase in net assets resulting from
operations 50,871,337 3,273,574 1,114,548 2,350,551
Changes from principal transactions:
Purchase payments, less sales charges, per
payment fees and applicable premium taxes 283,284,033 14,908,019 7,493,760 17,579,517
Contract terminations (51,871,322) (147,494) (76,769) (243,855)
Death benefit payments (616,609) (111,616) (30,363) (22,485)
Flexible withdrawal option payments (591,573) (23,563) (12,654) (56,396)
Transfer payments to other contracts (112,300,367) (2,385,375) (672,843) (2,164,022)
Annuity payments (48,233) - - -
----------------------------------------------------------------
----------------------------------------------------------------
Increase (decrease) in net assets from principal
transactions 117,855,929 12,239,971 6,701,131 15,092,759
----------------------------------------------------------------
----------------------------------------------------------------
Total increase 168,727,266 15,513,545 7,815,679 17,443,310
----------------------------------------------------------------
================================================================
Net assets at December 31, 1995 $346,611,319 $19,198,047 $10,841,100 $21,263,022
================================================================
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Capital
Accumulation Emerging Government Money Market
Bond Division Division Growth Securities Growth Division World Division
Division Division Division
- -----------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 3,056,349 $ 89,730,411 $ 9,965,696 $30,273,698 $ 8,101,324 $17,109,486 $ 9,117,454
806,529 8,803,011 354,473 2,021,914 479,398 656,604 207,759
50,961 1,908,275 241,047 (303,527) 254,149 - 88,239
679,932 12,768,964 5,294,039 3,801,338 3,955,502 - 2,064,057
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
1,537,422 23,480,250 5,889,559 5,519,725 4,689,049 656,604 2,360,055
15,702,412 37,285,598 28,874,128 24,062,104 29,628,926 92,190,303 15,559,266
(274,508) (34,074,636) (420,250) (9,547,633) (428,438) (6,320,639) (337,100)
(44,089) (80,185) (14,885) (129,425) (44,665) (97,824) (41,072)
(73,005) (87,530) (52,968) (96,784) (50,522) (85,680) (52,471)
(1,275,948) (12,547,912) (2,056,332) (4,638,749) (3,992,441) (81,142,762) (1,423,983)
- (48,233) - - - - -
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
14,034,862 (9,552,898) 26,329,693 9,649,513 25,112,860 4,543,398 13,704,640
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
15,572,284 13,927,352 32,219,252 15,169,238 29,801,909 5,200,002 16,064,695
- -------------------------------------------------------------------------------------------------------------
=============================================================================================================
$18,628,633 $103,657,763 $42,184,948 $45,442,936 $37,903,233 $22,309,488 $25,182,149
=============================================================================================================
</TABLE>
<PAGE>
Principal Mutual Life Insurance
Company Separate Account B
Notes to Financial Statements
December 31, 1995
1. Investment and Accounting Policies
Principal Mutual Life Insurance Company Separate Account B is a segregated
investment account of Principal Mutual Life Insurance Company (Principal Mutual)
and is registered under the Investment Company Act of 1940 as a unit investment
trust, with no stated limitations on the number of authorized units. As directed
by eligible contractholders, Separate Account B invests solely in shares of
Principal Aggressive Growth Fund, Inc., Principal Asset Allocation Fund, Inc.,
Principal Balanced Fund, Inc., Principal Bond Fund, Inc., Principal Capital
Accumulation Fund, Inc., Principal Emerging Growth Fund, Inc., Principal
Government Securities Fund, Inc., Principal Growth Fund, Inc., Principal Money
Market Fund, Inc., and Principal World 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.
Principal Mutual no longer accepts contributions for Bankers Flexible Annuity
contracts. Beginning in early 1996, it is anticipated that contributions will
also no longer be accepted for Pension Builder Plus contracts, with transfer and
withdrawal options of affected contractholders to be communicated at that time.
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 $26,286 and $1,187, respectively, during the year ended December 31,
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 B.
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% (1.0001% for a Rollover Individual Retirement Annuity) 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
<PAGE>
Principal Mutual Life Insurance
Company Separate Account B
Notes to Financial Statements (continued)
2. Expenses (continued)
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 $836,135, $131,273, and
$285,909, respectively, during the year ended December 31, 1995.
Personal Variable Contracts - Mortality and expense risks assumed by Principal
Mutual are compensated for by a charge equivalent to an annual rate of 0.55% of
the asset value of each contract. A contingent sales charge of up to 5% may be
deducted from withdrawals from an investment account which correlates to a plan
participant made during the first seven years from the date the first
contribution which relates to such participant is accepted by Principal Mutual.
This charge does not apply to withdrawals made from investment accounts which
correlate to a plan participant as a result of the plan participant's death or
permanent disability. An annual administration charge of $31 (1994 - $28) for
each participant's account plus 0.35% of the annual average balance of
investment account values which correlate to a plan participant will be deducted
on a quarterly basis. The charges for mortality and expense risks, contingent
sales and annual administration amounted to $29,903, $16,882, and $17,673,
respectively, during the year ended December 31, 1995.
Premier Variable Contracts - Mortality and expense risks assumed by Principal
Mutual are compensated for by a charge equivalent to an annual rate of 0.33% of
the asset value of each contract. An annual administration charge of $300 for
each contract account plus .35% of the annual average balance of investment
account values under the contract will be billed or deducted on a quarterly
basis. The charges for mortality expense risks and annual administration
amounted to $117,935 and $1,813, respectively, during the year ended December
31, 1995. There were no contingent sales charges provided for in these
contracts.
The Principal Variable Annuity (initially available in 1994) - Mortality and
expense risks assumed by Principal Mutual are compensated for by a charge
equivalent to an annual rate of 1.25% of the asset value of each contract. A
contingent sales charge of up to 6% may be deducted from the withdrawals made
during the first six years of a contract, except for death, annuitization,
permanent disability, confinement in a health care facility, or terminal
illness. An annual administration charge of the lessor of two percent of the
accumulated value or $30 is deducted at the end of the contract year. Principal
Mutual reserves the right to charge an additional administrative fee of up to
0.15% of the asset value of each Division. This fee is currently being waived.
The mortality expense risks, contingent sales, and annual administration
amounted to $1,680,329, $78,860, and $39,005, respectively, during the year
ended December 31, 1995.
3. Federal Income Taxes
Operations of Separate Account B 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 B.
<PAGE>
Principal Mutual Life Insurance
Company Separate Account B
Notes to Financial Statements (continued)
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:
Year ended December 31, 1995
----------------------------------------------------------------------
Units Amount Units Amount
Purchased Purchased Redeemed Redeemed
----------------------------------------------------------------------
----------------------------------------------------------------------
Aggressive Growth Division:
<S> <C> <C> <C> <C>
The Principal Variable Annuity 1,162,971 $16,957,154 201,095 $ 2,804,956
Asset Allocation Division:
The Principal Variable Annuity 678,626 8,127,343 70,172 876,650
Balanced Division:
Personal Variable 334,553 385,447 11,639 14,109
Premier Variable 4,677,390 5,246,438 1,485,326 1,592,984
The Principal Variable Annuity 1,080,849 12,976,336 78,060 1,008,737
----------------------------------------------------------------------
----------------------------------------------------------------------
6,092,792 18,608,221 1,575,025 2,615,830
Bond Division:
Personal Variable 123,065 148,020 22,243 25,730
Premier Variable 1,840,967 2,123,674 663,884 722,145
The Principal Variable Annuity 1,184,200 14,349,589 83,479 1,032,017
----------------------------------------------------------------------
----------------------------------------------------------------------
3,148,232 16,621,283 769,606 1,779,892
Capital Accumulation Division:
Bankers Flexible Annuity (2,074) 586,673 26,790 484,160
Pension Builder Plus 1,177,659 6,843,608 7,859,266 22,762,416
Pension Builder Plus - Rollover IRA
1,886,220 1,378,668 5,357,391 11,244,730
Personal Variable 1,106,595 1,748,682 408,298 529,070
Premier Variable 9,404,706 13,956,170 8,547,118 10,455,522
The Principal Variable Annuity 1,739,038 22,863,899 206,288 2,651,689
----------------------------------------------------------------------
----------------------------------------------------------------------
15,312,144 47,377,700 22,405,151 48,127,587
Emerging Growth Division:
Personal Variable 292,833 348,128 18,735 22,981
Premier Variable 2,320,114 2,651,113 543,652 613,426
The Principal Variable Annuity 2,252,301 26,559,212 165,780 2,237,880
----------------------------------------------------------------------
----------------------------------------------------------------------
4,865,248 29,558,453 728,167 2,874,287
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Principal Mutual Life Insurance
Company Separate Account B
Notes to Financial Statements (continued)
4. Purchases and Sales of Investment Securities (continued)
Year ended December 31, 1995
----------------------------------------------------------------------
Units Amount Units Amount
Purchased Purchased Redeemed Redeemed
----------------------------------------------------------------------
Government Securities Division:
<S> <C> <C> <C> <C>
Pension Builder Plus 586,364 $ 1,344,275 2,795,319 $ 4,747,357
Pension Builder Plus - Rollover IRA
117,394 407,431 2,462,194 4,357,297
Personal Variable 724,111 966,857 408,940 483,072
Premier Variable 4,015,136 5,118,317 3,286,750 3,736,310
The Principal Variable Annuity 1,576,129 18,708,169 125,206 1,549,586
----------------------------------------------------------------------
----------------------------------------------------------------------
7,019,134 26,545,049 9,078,409 14,873,622
Growth Division:
Personal Variable 288,529 338,347 15,831 18,761
Premier Variable 3,384,751 3,805,395 634,749 707,988
The Principal Variable Annuity 2,193,600 26,238,189 338,161 4,062,924
----------------------------------------------------------------------
----------------------------------------------------------------------
5,866,880 30,381,931 988,741 4,789,673
Money Market Division:
Pension Builder Plus 259,307 585,027 928,805 1,623,965
Pension Builder Plus - Rollover IRA
73,307 206,073 1,861,305 3,275,611
Personal Variable 4,808,023 5,271,738 4,407,096 4,786,833
Premier Variable 19,308,743 21,221,953 18,140,572 19,805,796
The Principal Variable Annuity 6,262,716 65,784,577 5,594,373 58,377,161
----------------------------------------------------------------------
----------------------------------------------------------------------
30,712,096 93,069,368 30,932,151 87,869,366
World Division:
Personal Variable 147,751 154,436 9,257 10,003
Premier Variable 2,079,728 2,137,579 544,500 566,419
The Principal Variable Annuity 1,337,260 13,699,818 126,959 1,503,012
----------------------------------------------------------------------
----------------------------------------------------------------------
3,564,739 15,991,833 680,716 2,079,434
----------------------------------------------------------------------
======================================================================
78,422,862 $303,238,335 67,429,233 $168,691,297
======================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Principal Mutual Life Insurance
Company Separate Account B
Notes to Financial Statements (continued)
4. Purchases and Sales of Investment Securities (continued)
Year ended December 31, 1994
----------------------------------------------------------------------
Units Amount Units Amount
Purchased Purchased Redeemed Redeemed
----------------------------------------------------------------------
----------------------------------------------------------------------
Aggressive Growth Division:
<S> <C> <C> <C> <C>
The Principal Variable Annuity 365,021 $ 3,764,495 3,234 $ 40,222
Asset Allocation Division:
The Principal Variable Annuity 303,404 3,120,664 201 7,996
Balanced Division:
Personal Variable 4,458 4,510 - 1
Premier Variable 134,069 137,040 9,158 9,075
The Principal Variable Annuity 374,366 3,932,274 3,998 47,513
----------------------------------------------------------------------
----------------------------------------------------------------------
512,893 4,073,824 13,156 56,589
Bond Division:
Personal Variable 214 229 - -
Premier Variable 30,684 32,652 18 27
The Principal Variable Annuity 304,552 3,243,070 3,972 45,657
----------------------------------------------------------------------
----------------------------------------------------------------------
335,450 3,275,951 3,990 45,684
Capital Accumulation Division:
Bankers Flexible Annuity 2,374 301,977 51,727 734,507
Pension Builder Plus 2,446,494 9,006,081 7,066,481 19,561,666
Pension Builder Plus - Rollover IRA
949,817 3,764,900 3,969,948 11,681,145
Personal Variable 1,472,634 1,771,211 339,067 396,040
Premier Variable 10,159,761 12,414,226 4,172,940 4,837,072
The Principal Variable Annuity 704,037 7,483,988 5,010 62,689
----------------------------------------------------------------------
----------------------------------------------------------------------
15,735,117 34,742,383 15,605,173 37,273,119
Emerging Growth Division:
Personal Variable 13,841 14,069 - 6
Premier Variable 122,378 124,838 2,977 2,976
The Principal Variable Annuity 1,000,413 10,426,294 27,610 297,329
----------------------------------------------------------------------
----------------------------------------------------------------------
1,136,632 10,565,201 30,587 300,311
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Principal Mutual Life Insurance
Company Separate Account B
Notes to Financial Statements (continued)
4. Purchases and Sales of Investment Securities (continued)
Year ended December 31, 1994
----------------------------------------------------------------------
Units Amount Units Amount
Purchased Purchased Redeemed Redeemed
----------------------------------------------------------------------
Government Securities Division:
<S> <C> <C> <C> <C>
Pension Builder Plus 1,705,948 $ 3,472,965 3,191,017 $ 5,229,829
Pension Builder Plus - Rollover IRA
1,343,428 2,767,254 5,104,801 8,454,316
Personal Variable 1,592,426 1,856,027 826,327 909,485
Premier Variable 6,358,242 7,432,287 2,480,866 2,736,826
The Principal Variable Annuity 582,127 6,197,216 9,927 109,630
----------------------------------------------------------------------
----------------------------------------------------------------------
11,582,171 21,725,749 11,612,938 17,440,086
Growth Division:
Personal Variable 5,010 5,023 - 1
Premier Variable 109,908 110,749 17 35
The Principal Variable Annuity 798,340 8,399,024 34,440 377,222
----------------------------------------------------------------------
----------------------------------------------------------------------
913,258 8,514,796 34,457 377,258
Money Market Division:
Pension Builder Plus 824,944 1,537,336 1,733,074 2,976,732
Pension Builder Plus - Rollover IRA
658,567 1,300,232 1,324,777 2,327,495
Personal Variable 6,290,739 6,573,245 5,731,682 5,968,932
Premier Variable 31,282,964 32,799,567 30,393,364 31,815,309
The Principal Variable Annuity 2,902,432 29,495,563 2,200,571 22,344,437
----------------------------------------------------------------------
----------------------------------------------------------------------
41,959,646 71,705,943 41,383,468 65,432,905
World Division:
Personal Variable 21,212 21,051 8 18
Premier Variable 137,240 135,769 122 151
The Principal Variable Annuity 944,065 9,365,533 8,397 95,937
----------------------------------------------------------------------
----------------------------------------------------------------------
1,102,517 9,522,353 8,527 96,106
----------------------------------------------------------------------
======================================================================
73,946,109 $171,011,359 68,695,731 $121,070,276
======================================================================
</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.
<PAGE>
Principal Mutual Life Insurance
Company Separate Account B
Notes to Financial Statements (continued)
5. Net Assets
<TABLE>
<CAPTION>
Net assets at December 31, 1995 consisted of the following:
Accumulated Net Net Unrealized
Investment Appreciation
Unit Income of Investments
Combined Transactions
-------------------------------------------------------------------
Aggressive Growth Division:
<S> <C> <C> <C> <C>
The Principal Variable Annuity $ 19,198,047 $16,585,472 $ 1,739,741 $ 872,834
Asset Accumulation Division:
The Principal Variable Annuity 10,841,100 9,858,412 579,277 403,411
Balanced Division:
Personal Variable 395,555 359,859 16,939 18,757
Premier Variable 4,018,252 3,685,129 130,683 202,440
The Principal Variable Annuity 16,849,215 15,107,991 811,800 929,424
-------------------------------------------------------------------
-------------------------------------------------------------------
21,263,022 19,152,979 959,422 1,150,621
Bond Division:
Personal Variable 124,183 118,401 4,895 887
Premier Variable 1,488,447 1,397,785 50,150 40,512
The Principal Variable Annuity 17,016,003 15,672,902 878,753 464,348
-------------------------------------------------------------------
-------------------------------------------------------------------
18,628,633 17,189,088 933,798 505,747
Capital Accumulation Division:
Bankers Flexible Annuity 5,928,607 1,372,769 3,151,941 1,403,897
Pension Builder Plus 33,981,462 22,315,837 7,447,921 4,217,704
Pension Builder Plus - Rollover IRA
8,110,072 5,394,422 1,747,988 967,662
Personal Variable 3,500,687 2,876,197 329,409 295,081
Premier Variable 22,380,360 18,395,190 2,038,475 1,946,695
The Principal Variable Annuity 29,756,575 25,472,959 2,365,453 1,918,163
-------------------------------------------------------------------
-------------------------------------------------------------------
103,657,763 75,827,374 17,081,187 10,749,202
Emerging Growth Division:
Personal Variable 365,808 336,153 4,506 25,149
Premier Variable 2,415,033 2,161,763 31,411 221,859
The Principal Variable Annuity 39,404,107 34,039,475 615,715 4,748,917
-------------------------------------------------------------------
-------------------------------------------------------------------
42,184,948 36,537,391 651,632 4,995,925
Government Securities Division:
Pension Builder Plus 6,882,964 5,704,191 991,052 187,721
Pension Builder Plus - Rollover IRA
3,407,555 2,825,811 531,974 49,770
Personal Variable 2,371,868 2,174,499 165,545 31,824
Premier Variable 9,053,348 8,177,753 654,665 220,930
The Principal Variable Annuity 23,727,201 21,870,768 1,426,804 429,629
-------------------------------------------------------------------
-------------------------------------------------------------------
45,442,936 40,753,022 3,770,040 919,874
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Principal Mutual Life Insurance
Company Separate Account B
Notes to Financial Statements (continued)
5. Net Assets (continued)
Accumulated Net Net Unrealized
Investment Appreciation
Unit Income of Investments
Combined Transactions
-------------------------------------------------------------------
Growth Division:
<S> <C> <C> <C> <C>
Personal Variable $ 346,944 $ 320,239 $ 5,282 $ 21,423
Premier Variable 3,582,532 3,184,495 54,938 343,099
The Principal Variable Annuity 33,973,757 30,003,254 421,321 3,549,182
-------------------------------------------------------------------
37,903,233 33,507,988 481,541 3,913,704
Money Market Division:
Pension Builder Plus 2,339,446 2,142,956 196,490 -
Pension Builder Plus - Rollover IRA
797,914 727,279 70,635 -
Personal Variable 1,278,235 1,269,540 8,695 -
Premier Variable 3,335,350 3,314,495 20,855 -
The Principal Variable Annuity 14,558,543 14,487,342 71,201 -
-------------------------------------------------------------------
-------------------------------------------------------------------
22,309,488 21,941,612 367,876 -
World Division:
Personal Variable 173,584 163,826 2,034 7,724
Premier Variable 1,822,554 1,708,566 21,627 92,361
The Principal Variable Annuity 23,186,011 21,301,001 227,669 1,657,341
-------------------------------------------------------------------
-------------------------------------------------------------------
25,182,149 23,173,393 251,330 1,757,426
-------------------------------------------------------------------
===================================================================
$346,611,319 $294,526,731 $26,815,844 $25,268,744
===================================================================
</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 B (comprising, respectively, the
Aggressive Growth, Asset Allocation, Balanced, Bond, Capital Accumulation,
Emerging Growth, Government Securities, Growth, Money Market and World
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 B 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
