PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
FLEXIBLE VARIABLE ANNUITY ("FVA") CONTRACT
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 and the Flexible Variable Annuity Contract
(the "Contract") that an investor ought to know before investing. It should be
read and retained for future reference.
Contributions to the Contract are not deposits or obligations of, or guaranteed
by or endorsed by any bank nor are contributions to the Contract federally
insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board
or any other governmental agency.
Additional information about the Contract, including a Statement of Additional
Information, dated May 1, 1996, has been filed with the Securities and Exchange
Commission. The Statement of Additional Information is incorporated by reference
into this Prospectus. The table of contents of the Statement of Additional
Information appears on page 27 of this Prospectus. A copy of the Statement of
Additional Information can be obtained, free of charge, upon request by writing
or telephoning:
Variable Annuity
The Principal Financial Group
P.O. Box 9382
Des Moines, IA 50306-9382
Telephone: 1-800-852-4450
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 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. These prospectuses should be
kept for future reference.
TABLE OF CONTENTS
Page
Glossary of Special Terms ................................................. 3
Expense Table and Example.................................................. 5
Condensed Financial Information............................................ 6
Summary .................................................................. 7
Description of Principal Mutual Life Insurance Company .................... 9
Principal Mutual Life Insurance Company Separate Account B ................ 9
Mutual Funds............................................................... 10
Surplus Distribution at Sole Discretion of the Company .................... 10
The Contract .............................................................. 10
Purchasing a Contract................................................... 10
Purchase Payment Limitations.......................................... 11
Allocation of Purchase Payments....................................... 11
Right to Examine the Contract......................................... 12
Prior to the Retirement Date............................................ 12
Determining the Accumulated Value of the Contract..................... 12
Allocation of Purchase Payments and Transfers......................... 13
Total and Partial Surrenders.......................................... 14
Benefit Payable on Death of Annuitant or Owner........................ 15
After the Retirement Date............................................... 16
Retirement Date ...................................................... 16
Benefit Options ...................................................... 16
Death of Annuitant or Payee........................................... 17
Charges and Deductions .................................................... 17
Annual Fee.............................................................. 17
Mortality and Expense Risks Charge ..................................... 18
Transaction Fee......................................................... 18
Premium Taxes .......................................................... 18
Surrender Charge........................................................ 18
Administrative Expense Charge........................................... 20
Fixed Account.............................................................. 20
General Description .................................................... 20
Fixed Account Value .................................................... 20
Fixed Account Transfers, Total and Partial Surrenders................... 20
General Provisions ........................................................ 21
The Contract............................................................ 21
Postponement of Payments................................................ 21
Misstatement of Age or Sex and Other Errors............................. 22
Assignment ............................................................. 22
Change of Owner......................................................... 22
Beneficiary............................................................. 22
Reports ............................................................... 22
Rights Reserved by the Company............................................. 22
Distribution of the Contract............................................... 23
Performance Calculation.................................................... 23
Voting Rights.............................................................. 23
Federal Tax Matters........................................................ 24
Non-Qualified Contracts................................................. 24
Required Distributions for Non-Qualified Contracts...................... 25
IRA, SEP and SAR/SEP.................................................... 25
Withholding............................................................. 25
Mutual Fund Diversification............................................. 25
State Regulation........................................................... 26
Legal Opinions............................................................. 26
Legal Proceedings.......................................................... 26
Registration Statement..................................................... 26
Other Variable Annuity Contracts........................................... 26
Experts .................................................................. 26
Financial Statements....................................................... 26
Contractholders' Inquiries................................................. 26
Table of Contents of the Statement of Additional Information............... 27
Appendix A................................................................. 28
This Prospectus does not constitute an offer of, or solicitation of any offer to
acquire, any interest in the Contract 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 Contract other
than those contained in this Prospectus.
GLOSSARY OF SPECIAL TERMS
Accumulated Value -- An amount equal to the Fixed Account Value plus the
Separate Account Value.
Anniversary -- The same date and month of each year following the Contract Date.
Annual Fee -- A charge deducted once each Contract Year prior to the Retirement
Date, either on the last day of the Contract Year or the date the Contract is
surrendered in full (a total redemption).
Annuitant -- The person, including any Joint Annuitant, on whose life the
Benefit Option payment is based. This person may or may not be the Owner.
Benefit Option -- The options described in the Benefit Options section of this
Prospectus.
Contract Date -- The date the contract is issued as shown on the current Data
Page of the contract.
Contract Year -- The one-year period beginning on the Contract Date and ending
one day before the Anniversary and any subsequent one-year period beginning on
an Anniversary.
Example: If the Contract Date is June 5, 2000, the first Contract Year ends
on June 4, 2001, and the first Anniversary falls on June 5, 2001. The
second Contract Year ends on June 4, 2002, and the second Anniversary falls
on June 5, 2002, etc.
Critical Need -- The Owner's or Annuitant's confinement to a Health Care
Facility, Terminal Illness diagnosis or Total and Permanent Disability.
Division -- A part of the Separate Account to which Purchase Payments may be
allocated which invests in shares of a single Mutual Fund. The value of an
investment in a Division is variable and not guaranteed.
Division may sometimes be referred to as a Subaccount.
Fixed Account -- An account to which Purchase Payments may be allocated which
earns guaranteed interest.
Fixed Account Value -- The amount of an Owner's Accumulated Value which is in
the Fixed Account.
Health Care Facility -- A licensed hospital or inpatient nursing facility
providing daily medical treatment and keeping daily medical records for each
patient (not primarily providing just residency or retirement care). This does
not include a facility that primarily provides drug or alcohol treatment, or a
facility owned or operated by the Owner or Annuitant or a member of their
immediate families.
Internal Revenue Code ("Code") -- The Internal Revenue Code of 1986, as amended,
and regulations thereunder. Reference to the Internal Revenue Code means such
Code or the corresponding provisions of any subsequent revenue code and any
regulations thereunder.
Joint Annuitant -- An additional Annuitant. The Joint Annuitants must be husband
and wife, and must be named as Owner and Joint Owner. Any reference to the
Annuitant's death means the death of the last surviving Annuitant.
Joint Owners -- An Owner who has an undivided interest with the right of
survivorship in this contract with another Owner. The Joint Owners must be
husband and wife, and must be named as Annuitant and Joint Annuitant. Any
reference to the Owner's death means the death of the last surviving Owner.
Joint ownership is not available for Contracts issued to residents of
Pennsylvania or New York.
Mutual Fund -- A registered open-end investment company in which a Division
invests.
Net Investment Factor -- The factor used to determine the change in the value of
a Unit during a Valuation Period.
Notice -- Any form of written communication received by the Company at its home
office or in another form approved in advance by the Company.
Owner -- The person, including any Joint Owner, who owns all rights and
privileges of this contract. If the Owner is not a natural person, the Owner
must be an entity with its own taxpayer identification number.
Purchase Payments -- The gross amount contributed to the Contract less any
applicable premium taxes or similar governmental assessments.
Retirement Date -- The date the Owner's Accumulated Value is applied under a
Benefit Option to make income payments.
Separate Account B -- A separate account established by the Company under Iowa
law to receive Purchase Payments under the contract offered by this Prospectus
and other contracts issued by the Company. It is divided into ten Divisions each
of which invests in shares of a Mutual Fund. Divisions may be added, eliminated
or combined in the future.
Separate Account Value -- The amount of an Owner's Accumulated Value in all the
Divisions of the Separate Account.
Surrender Charge -- The charge deducted upon any partial or total surrender of
the Contract before the Retirement Date.
Terminal Illness -- A sickness or injury that results in the Owner's or
Annuitant's life expectancy being 12 months or less from the date notice to
receive a distribution from the Contract is provided to the Company.
Total and Permanent Disability -- A disability that occurs after the Contract
Date and that qualifies the Owner or Annuitant to receive Social Security
disability benefits.
Transaction Fee -- A charge deducted due to unscheduled partial surrenders from
the Contract after the first such surrender in a Contract Year and from
unscheduled transfers from a Separate Account Division after the twelfth such
transfer in a Contract Year.
Unit -- The accounting measure used to calculate the value of the Separate
Account Value prior to the Retirement Date.
Unit Value -- A measure used to determine the value of an investment in a
Division.
Valuation Date -- The date as of which the net asset value of a Mutual Fund is
determined.
Valuation Period -- The period of time between when the net asset value of a
Mutual Fund is determined on one Valuation Date and when such value is
determined on the next following Valuation Date.
EXPENSE TABLE AND EXAMPLE
The following tables depict fees and expenses applicable to the Contract.
The example below should not be considered a representation of past or future
expenses; actual expenses may be greater or less than those shown. See "Charges
and Deductions."
EXPENSE TABLE
Transaction Expenses
- --------------------
Sales Load Imposed on Purchases
(as a percentage of Purchase Payments) None
Surrender Charge
Surrender Charge Number of Completed Contract Applied to all Purchase
(as a percentage Years Since Surrender Payments Received
of amount surrendered) Purchase Payment was made in that Contract Year
---------------------------- -----------------------
0 (year of Purchase Payment) 6%
1 6%
2 6%
3 5%
4 4%
5 3%
6 2%
7 and later 0%
Transaction Fee (a) No fee on first unscheduled partial surrender
during a Contract Year; $30 on each unscheduled
surrender thereafter.
Annual Contract Fee The lesser of $30 or 2% of the Accumulated Value.
- -------------------
Separate Account Annual Expenses (b)
- --------------------------------
(as a percentage of average account value)
Mortality and Expense Risk Fees 1.25%
Other Separate Account Expenses 0
-----
Total Separate Account Annual Expenses 1.25%
Annual Expenses of Mutual Funds
- -------------------------------
(as a percentage of average net assets)
Management Total Mutual Fund
Fees Other Expenses Annual Expenses
---------- -------------- -----------------
Aggressive Growth Fund .80% .10% .90%
Asset Allocation Fund .80% .09% .89%
Balanced Fund .60% .06% .66%
Bond Fund .50% .06% .56%
Capital Accumulation Fund .49% .02% .51%
Emerging Growth Fund .65% .05% .70%
Government Securities Fund .50% .05% .55%
Growth Fund .50% .08% .58%
Money Market Fund .50% .08% .58%
World Fund .75% .20% .95%
(a) A $30 transaction fee will be assessed on each unscheduled transfer
after the twelfth such transfer during a Contract Year.
(b) The Company has reserved the right to assess a daily administrative
charge at a nominal annual rate of .15% of the average daily net assets
of each Division of the Separate Account.
<TABLE>
<CAPTION>
EXAMPLE
Separate Account Division 1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
If you surrender your contract at the end Aggressive Growth Division $84 $122 $151 $251
of the applicable time period: Asset Allocation Division $84 $122 $151 $250
Balanced Division $82 $116 $139 $226
You would pay the following Bond Division $81 $113 $134 $216
expenses on a $1,000 investment, Capital Accumulation Division $80 $111 $132 $210
assuming 5% annual return on assets: Emerging Growth Division $82 $117 $141 $230
Government Securities Division $80 $112 $134 $214
Growth Division $81 $113 $135 $218
Money Market Division $81 $113 $135 $218
World Division $84 $124 $154 $256
If you annuitize at the end of the Aggressive Growth Division $22 $68 $117 $251
applicable time period or do not Asset Allocation Division $22 $68 $116 $250
---
surrender your contract: Balanced Division $20 $61 $105 $226
Bond Division $19 $58 $99 $216
Capital Accumulation Division $18 $56 $97 $210
You would pay the following Emerging Growth Division $20 $62 $107 $230
expenses on a $1,000 investment, Government Securities Division $19 $57 $99 $214
assuming 5% annual return on assets:
Growth Division $19 $58 $100 $218
Money Market Division $19 $58 $100 $218
World Division $23 $70 $119 $256
</TABLE>
The purpose of the above table is to assist the Owner in understanding the
various costs and expenses that a Owner 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. See "Charges and Deductions."
<TABLE>
<CAPTION>
CONDENSED FINANCIAL INFORMATION
Financial statements are included in the Statement of Additional
Information. Following are Unit Values for the Flexible Variable Annuity
Contract for the periods ended December 31.
Accumulation Unit Value Number of Accumulation Units
Beginning End Outstanding at End of Period
of period of period (in thousands)
Aggressive Growth Division
<S> <C> <C> <C>
Year Ended December 31, 1995 10.184 14.503 1,324
Period Ended December 31, 1994 (1) 10.075 10.184 362
Asset Allocation Division
Year Ended December 31, 1995 9.978 11.891 912
Period Ended December 31, 1994 (1) 10.075 9.978 303
Balanced Division
Year Ended December 31, 1995 9.972 12.270 1,373
Period Ended December 31, 1994 (1) 10.266 9.972 370
Bond Division
Year Ended December 31, 1995 10.064 12.143 1,401
Period Ended December 31, 1994 (1) 10.050 10.064 301
Capital Accumulation Division
Year Ended December 31, 1995 10.234 13.333 2,232
Period Ended December 31, 1994 (1) 10.328 10.234 699
Emerging Growth Division
Year Ended December 31, 1995 10.108 12.880 3,059
Period Ended December 31, 1994 (1) 10.157 10.108 973
Government Securities Division
Year Ended December 31, 1995 9.973 11.728 2,023
Period Ended December 31, 1994 (1) 10.133 9.973 572
Growth Division
Year Ended December 31, 1995 10.454 12.970 2,619
Period Ended December 31, 1994 (1) 10.336 10.454 764
Money Market Division
Year Ended December 31, 1995 10.194 10.628 1,370
Period Ended December 31, 1994 (1) 10.027 10.194 702
World Division
Year Ended December 31, 1995 9.582 10.804 2,146
Period Ended December 31, 1994 (1) 9.624 9.582 936
<FN>
(1) Commenced operations on June 16, 1994.
</FN>
</TABLE>
SUMMARY
The following summary should be read in conjunction with the detailed
information in this Prospectus. This Prospectus generally describes only the
portion of the Contract involving the Separate Account. For a brief description
of the Fixed Account, please refer to the heading "Fixed Account" in this
Prospectus.
The Flexible Variable Annuity Contract (also known as the Principal Variable
Annuity Contract) (the "Contract") described in this Prospectus is designed to
provide individuals with retirement benefits in connection with (1) Individual
Retirement Annuity plans or programs ("IRA Plans"), Simplified Employee Pension
Plans ("SEPs") and Salary Reduction Simplified Employee Pension Plans
("SAR/SEPs") adopted pursuant to Section 408 of the Internal Revenue Code and
(2) non-qualified retirement plans.
Minimum Investment Amount
For Contracts issued in connection with non-qualified retirement plans, the
initial Purchase Payment must be at least $2,500. The initial Purchase Payment
for all other Contracts must be at least $1,000. The minimum subsequent
investment is $100. A $100 monthly minimum for initial and subsequent
investments is available for Contracts to which Purchase Payments are made on a
monthly basis through a payroll deduction plan or through an account of bank or
similar financial institution under an Automatic Investment Program. Forms and
preauthorized check agreements to establish an Automatic Investment Program are
available from Princor Financial Services Corporation. For Contracts which are
issued in connection with a retirement plan covering more than four people, the
initial and subsequent monthly Purchase Payment under each Contract must at all
times average at least $100 and in no case be less than $50. The Company
reserves the right to terminate a Contract and distribute the Accumulated Value,
less any applicable charges, if no Purchase Payments are paid during two
consecutive calendar years and the Accumulated Value or total Purchase Payments
less partial surrenders and applicable surrender charges is less than $2,000.
See "Purchase Payment Limitations."
The initial Purchase Payment is allocated, as specified by the Owner in the
Contract application, among one or more of the Divisions of the Separate
Account, or to the Fixed Account, or to both. Subsequent Purchase Payments are
allocated in the same way, or pursuant to different allocation percentages that
the Owner may subsequently specify.
Separate Account Investment Options
Each of the ten Divisions (or Subaccounts) of the Separate Account invests in
shares of a corresponding Mutual Fund. The Accumulated Value in each of the
Divisions of the Separate Account will vary to reflect the investment experience
of each of the corresponding Mutual Funds as well as deductions for certain
charges.
Each Mutual Fund has a separate and distinct investment objective and is managed
by Princor Management Corporation ("Manager"). For providing investment
management services to the Mutual Funds, the Manager receives fees from each
Fund based on the average daily net assets of the Fund. Each Mutual Fund also
bears most of its other expenses. A full description of the Mutual Funds and
their investment objectives, policies and risks can be found in the current
Prospectus for the Funds, which accompanies this Prospectus.
Transfers
Subject to restrictions described in this Prospectus, an Owner can transfer all
or part of the Accumulated Value among the Contract's investment options prior
to the Retirement Date. Transfers from one Division to another or into the Fixed
Account can be made by the Owner on an unscheduled or scheduled basis. Owners
may transfer limited amounts once each Contract Year from the Fixed Account to
the Separate Account or may elect to make scheduled monthly transfers.
Total or Partial Surrenders
All or part of the Accumulated Value of a Contract may be surrendered by the
Owner prior to the Retirement Date. Amounts surrendered may be subject to a
Surrender Charge and total surrenders will be subject to the Annual Fee, if
applicable. The Surrender Charge does not apply to certain withdrawals including
the withdrawal during any Contract Year of an amount not to exceed the greater
of the earnings in the Contract or 10% of the Purchase Payments otherwise
subject to the Surrender Charge. See "Total and Partial Surrenders," "Surrender
Charge" and "Annual Fee." Particular attention should be paid to the tax
implications of any surrender, including possible penalties for premature
distributions. See "Federal Tax Matters."
Charges and Deductions
The Company deducts daily charges at a rate of 1.25% per annum of the value of
the average net assets of the Separate Account for the mortality and expense
risks it assumes. The Company has reserved the right to assess a daily charge at
a rate of .15% per annum of the value of the average net assets in the Separate
Account to cover certain administrative expenses. See "Mortality and Expense
Risks Charge" and "Administrative Expense Charge."
To permit investment of the entire Purchase Payment, the Company does not deduct
sales charges at the time of investment. However, a Surrender Charge is imposed
on certain total or partial surrenders of the Contract to help defray expenses
relating to the sale of the Contract, including commissions to registered
representatives and other promotional expenses. Certain amounts may be
surrendered without the imposition of any Surrender Charge. See "Surrender
Charge."
There is also an Annual Fee for Contract administration and maintenance. This
charge is the lesser of $30 or 2% of the Owner's Accumulated Value (subject to
any applicable state law limitations) and is deducted on each Anniversary and
upon total surrender of the Contract. This charge is not deducted during the
Benefit Option period. The Company currently waives the Annual Fee for Contracts
that have an Accumulated Value on the last day of the Contract Year of at least
$30,000.
Certain states and other jurisdictions impose premium taxes or similar
assessments upon the Company, either at the time Purchase Payments are made or
when the Accumulated Value is surrendered or applied under a Benefit Option. The
Company reserves the right to deduct an amount from Purchase Payments or
Accumulated Value to cover such taxes or assessments, if any, when applicable.
Benefit Option Payments
The Contract provides several types of fixed payment Benefit Options to
Annuitants or their Beneficiaries. The Owner has considerable flexibility in
choosing the Retirement Date. However, the tax implications of distributions
must be carefully considered, including the possibility of penalties for
commencing benefits either too soon or too late. See "Benefit Options" and
"Federal Tax Matters."
Death Benefit
In the event that the Annuitant or Owner dies prior to the Retirement Date, an
enhanced death benefit is payable to the Beneficiary of the Contract. The death
benefit may be paid as either a single sum cash benefit or under a Benefit
Option. See "Benefit Payable on Death of Annuitant or Owner." In the event the
Annuitant dies on or after the Retirement Date, the Beneficiary will receive
only any continuing payments which may be provided by the Benefit Option in
effect.
Right to Examine the Contract
The Owner has a right to examine the Contract. The Owner can cancel the Contract
by delivering or mailing it, together with a written request, to the Company's
home office or to the sales representative through whom it was purchased, before
the close of business on the tenth day (or such later date as provided by
applicable state law) after receipt of the Contract. If these items are sent by
mail, properly addressed and postage prepaid, they will be deemed to be received
by the Company on the date postmarked. The Company will return either all
Purchase Payments made, without interest or appreciation, or the Accumulated
Value of the Contract, whichever is required by applicable state law.
Tax Implications
The tax implications for Owners, Annuitants and Beneficiaries can be quite
important. A brief discussion of some of these is set out under "Federal Tax
Matters" in this Prospectus, but such discussion is not comprehensive.
Therefore, an Owner should consider these matters carefully and consult a
qualified tax advisor before making Purchase Payments or taking any other action
in connection with the Contract. Failure to do so could result in serious
adverse tax consequences which might otherwise have been avoided.
Questions and Other Communications
Any question about procedures or the Contract should be directed to a sales
representative, or the Company's home office: Variable Annuity, The Principal
Financial Group, P.O. Box 9382, Des Moines, Iowa 50306-9382; 1-800-852-4450.
Purchase Payments and written requests should be mailed or delivered to the same
home office address. All communications should include the Contract number, the
Owner's name and, if different, the Annuitant's name.
Any Purchase Payment or other communication, except a cancellation notice
described above under "Right to Examine the Contract," is deemed received at the
Company's home office on the actual date of receipt there in proper form unless
received (1) after the close of regular trading on the New York Stock Exchange,
or (2) on a date that is not a Valuation Date. In either of these two cases, the
date of receipt will be deemed to be the next Valuation Date.
Total or Partial Surrenders
An Owner may withdraw cash from the Contract at any time prior to the
Retirement Date subject to any charges that may be applied. See "Total and
Partial Surrenders." Note that withdrawals before age 59 1/2 may involve an
income tax penalty. See "Federal Tax Matters."
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 50306,
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. Although the assets of Separate Account B equal
to the reserves and liabilities arising under the contracts issued thereunder
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 Contract, including the promise to make payments under the
Benefit Options, 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.
There are currently ten Divisions (or Subaccounts) in Separate Account B. The
assets of Divisions are invested exclusively in shares of a Principal Mutual
Fund. New Divisions may be added and made available to Owners of the Contract.
Divisions may also be eliminated from the Separate Account.
MUTUAL FUNDS
The Divisions of Separate Account B currently invest exclusively in shares of a
Principal Mutual Fund. The ten Principal Mutual Funds available for investment
are as follows: Aggressive Growth Fund, Asset Allocation Fund, Balanced Fund,
Bond Fund, Capital Accumulation Fund, Emerging Growth Fund, Government
Securities Fund, Growth Fund, Money Market Fund and World Fund. A full
description of the Mutual Funds, their investment policies and restrictions,
their charges, the risks attendant to investing in them, and other aspects of
their operations is contained in the Prospectus for the Funds accompanying this
Prospectus and in the Statement of Additional Information for the Funds referred
to therein. Additional copies of these documents may be obtained from a sales
representative or from the Company's home office.
The Mutual Funds are separately incorporated, diversified, open-end investment
management companies, typically known as Mutual Funds. The Manager for the
Mutual Funds is Princor Management Corporation. Some of the Mutual Funds are
also used to fund variable life insurance contracts issued by the Company. Each
such Fund's Board of Directors will monitor events in order to identify any
material irreconcilable conflicts between the interests of the variable annuity
contract owners and life insurance policyowners that may develop and to
determine what action, if any, should be taken in response thereto. If it
becomes necessary for any separate account to replace shares of any Mutual Fund
with another investment, the Mutual Fund may have to liquidate securities on a
disadvantageous basis. See "Eligible Purchasers and Purchase of Shares" in the
Funds' prospectus for a discussion of the potential risks associated with "mixed
funding."
The Company purchases and redeems shares of the Mutual Funds for the Separate
Account at their net asset value without the imposition of any sales or
redemption charges. Such shares represent interests in the ten Mutual Funds
available for investment by the Separate Account. Each Mutual Fund corresponds
to one of the Divisions of the Separate Account. The assets of each Mutual Fund
are separate from the others and each is a separate corporation whose
performance has no effect on the investment performance of any other Mutual
Fund.
Any dividend or capital gain distributions attributable to the Contract are
automatically reinvested in shares of the Mutual Fund from which they are
received at that Mutual Fund's net asset value on the date paid. Such dividends
and distributions will have the effect of reducing the net asset value of each
share of the corresponding Mutual Fund and increasing, by an equivalent value,
the number of shares outstanding of that Mutual Fund. However, the value of the
interests of Owners in the corresponding Division will not change as a result of
any such dividends and distributions.
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 Owners in the form
of cash.
THE CONTRACT
The Contract described in this Prospectus is designed to provide individuals
with retirement benefits in connection with (1) Individual Retirement Annuity
plans or programs ("IRA Plans"), Simplified Employee Pension Plans ("SEPs") and
Salary Reduction Simplified Employee Pension Plans ("SAR/SEPs") adopted pursuant
to Section 408 of the Internal Revenue Code and (2) non-qualified retirement
plans. The Contract provides for the accumulation of values on a fixed and
variable basis and the payment of annuity benefits in the form of Benefit
Options on a fixed basis.
A. Purchasing a Contract
Persons wishing to purchase a Contract must complete an application and
make an initial Purchase Payment. The application is forwarded to the
Company for processing. Acceptance is subject to underwriting and
suitability rules and procedures. The Company reserves the right to reject
any application or any Purchase Payment if, in the view of the Company, the
Company's underwriting and suitability rules and procedures are not
satisfied.
Purchase Payments which are remitted through an employer for multiple
employee-Owner/Annuitants must also be accompanied by information
identifying the proper Contracts and accounts to be credited with Purchase
Payments.
If the application can be accepted in the form received, the initial
Purchase Payment will be credited within two Valuation Dates after the
later of receipt of the application or receipt of the initial Purchase
Payment at the Company's home office. If the initial Purchase Payment
cannot be credited within five Valuation Dates after receipt because the
application or other issuing requirements are incomplete, the initial
Purchase Payment will be returned unless the applicant consents to our
retaining the initial Purchase Payment and crediting it within two
Valuation Dates after the necessary requirements are fulfilled.
The date that the Contract is issued is the Contract Date. The Contract
Date is the date used to determine Contract Years, regardless of when the
Contract is delivered. The crediting of investment experience in the
Separate Account, or a fixed rate of return in the Fixed Account, begins as
of the Contract Date, even if that date is delayed due to underwriting or
administrative requirements.
Generally, additional Purchase Payments will be accepted at any time after
the Contract Date and prior to the Retirement Date, as long as the
Annuitant is living. Purchase Payments (together with any required
information identifying the proper Contracts and accounts to be credited
with Purchase Payments) must be delivered to the Company's home office.
Additional Purchase Payments are credited to the Contract and added to the
Accumulated Value as of the end of the Valuation Period in which they are
received.
1. Purchase Payment Limitations
For Contracts issued in connection with non-qualified retirement Plans,
the initial Purchase Payment must be at least $2,500. The initial
Purchase Payment for all other Contracts must be at least $1,000. The
minimum subsequent investment is $100. A $100 monthly minimum for
initial and subsequent investments is available for Contracts to which
Purchase Payments are made on a monthly basis through an account of a
bank or similar financial institution under an Automatic Investment
Program. Forms and preauthorized check agreements to establish an
Automatic Investment Program are available from Princor Financial
Services Corporation. For Contracts which are issued in connection with
a retirement plan covering more than four people, the initial and
subsequent monthly Purchase Payments under each Contract must at all
times average at least $100 and in no case be less than $50. The
Company reserves the right to increase the minimum amount for each
Purchase Payment to not more than $1,000. The Company reserves the
right to terminate a Contract and distribute the Accumulated Value,
less any applicable charges, if no premiums are paid during two
consecutive calendar years and the Accumulated Value or total Purchase
Payments less partial surrenders and applicable surrender charges is
less than $2,000. The Company will notify the Owner of its intent to
exercise this right and provide the Owner a 60 day period to increase
the Accumulated Value to $2,000.
The total of all Purchase Payments may not exceed $1,000,000 without
the Company's prior approval.
2. Allocation of Purchase Payments
The initial Purchase Payment is allocated, as specified by the Owner in
the Contract application, among one or more of the Divisions of the
Separate Account, or to the Fixed Account, or to both. Subsequent
Purchase Payments are allocated in the same way, or pursuant to
different allocation percentages that the Owner may subsequently
specify. Allocations to the Fixed Account are not allowed if the Fixed
Account Value immediately after the allocation exceeds $1,000,000,
except with our prior approval.
Some states require the Company to return the initial Purchase
Payment to an Owner who reconsiders the decision to purchase the
Contract within a certain time period. See "Right to Examine the
Contract."
The states in which Purchase Payments are returned are
listed below:
State
-----
Colorado Kentucky North Carolina
Connecticut* Louisiana Oklahoma
Georgia Maryland Rhode Island
Hawaii Michigan South Carolina
Idaho Missouri Utah
Indiana Nebraska Washington
* Purchase Payments are refunded if the Contract is
cancelled prior to its delivery, otherwise the account value
is refunded.
Initial Purchase Payments for a Contract issued in one of the states in
the above table are allocated to the Money Market Division until 15
days (20 days for Contracts issued in the State of Idaho) after the
Contract Date at which time they are reallocated in accordance with the
Owner's allocation instructions.
3. Right to Examine the Contract
Under state law, the Owner has the right to examine the Contract. The
right is often referred to as a "free look" period. The "free look"
period is 10 days after the date the contract is delivered to the Owner
in all states except as follows:
a. Contracts issued in California to Owenrs age 60 and over have a 30
day "free look" period;
b. Contracts issued in Colorado have a 15 day "free look" period; and
c. Contracts issued in Idaho and North Dakota have a 20 day "free
look" period.
The Owner can cancel the Contract by delivering or mailing it, together
with a written request, to the Company's home office or to the sales
representative through whom it was purchased, before the close of
business on the last day of the "free look" period. If these items are
sent by mail, properly addressed and postage prepaid, they will be
deemed to be received by the Company on the date postmarked for the
purpose of determining whether the "free look" period has elapsed. If
the Purchase Payments are allocated to the Money Market Division as
described above under "Allocation of Purchase Payments," the Company
will return the greater of the Contract's value or Purchase Payments
paid if the Contract is cancelled. Otherwise, the Company will return
the Accumulated Value of the Contract.
B. Prior to the Retirement Date
1. Determining the Accumulated Value of the Contract
The Owner's Accumulated Value is the total of any Separate Account
Value plus any Fixed Account Value under the Contract. For a discussion
of how Fixed Account Value is calculated, see "Fixed Account."
There is no guaranteed minimum Separate Account Value. The Separate
Account Value will reflect the investment experience of the chosen
Divisions of the Separate Account, all Purchase Payments made, any
partial surrenders, and all charges assessed in connection with the
Contract. Therefore, the Separate Account Value changes from Valuation
Period to Valuation Period. To the extent Accumulated Value is
allocated to the Separate Account, the Owner bears the entire
investment risk.
A Contract's Separate Account Value is based on Unit Values, which are
determined on each Valuation Date. The value of a Unit for a Division
on any Valuation Date is equal to the previous value of that Division's
Unit multiplied by that Division's Net Investment Factor (discussed
directly below) for the Valuation Period ending on that Valuation Date.
Net Purchase Payments applied to a given Division will be used to
purchase Units at the Unit Value of that Division next determined after
receipt of a Purchase Payment. See "Allocation of Purchase Payments and
Transfers."
At the end of any Valuation Period, a Contract's Separate Account Value
in a Division is equal to:
o The number of Units in the Division; times
o The value of one Unit for that Division.
The number of Units in each Division is equal to:
o The initial Units purchased on the Contract Date; plus
o Units purchased at the time that additional Purchase
Payments are allocated to the Division; plus
o Units purchased through transfers from another Division or
from the Fixed Account; less
o Units redeemed to pay for the portion of any partial
surrenders allocated to the Division; less
o Units redeemed as part of a transfer to another Division or
to the Fixed Account; less
o Units redeemed to pay charges under the Contract.
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 in an amount equal to a
simple interest rate for the number of days within the
Valuation Period equivalent to an annual rate of 1.25%. The
Company has reserved the right to assess a daily
administrative expense charge at an annual rate of up to .15%
of the value of the average Separate Account net assets. If
and to the extent such a charge is assessed, such charge will
be included in the calculation of the Net Investment Factor in
the same manner as the mortality and expense risks charge.
The amount of any taxes referred to in subparagraph (a) above
(currently none) and the amounts derived from applying the rate
specified in subparagraph (b) above will be accrued daily and will be
transferred from Separate Account B at the discretion of the Company.
2. Allocation of Purchase Payments and Transfers
Allocation of Purchase Payments. In the application for a Contract, the
Owner can allocate Purchase Payments, or portions thereof, to the
available Divisions of the Separate Account or to the Fixed Account, or
both. Percentages must be in whole numbers and the total allocation
must equal 100%. The percentage allocations for future Purchase
Payments may be changed, without charge, at any time by sending a
written request to the Company's home office or by telephone as
described below. Changes in the allocation of future Purchase Payments
will be effective at the end of the Valuation Period in which the
Company receives the Owner's request.
Unscheduled Transfers. Transfers of amounts from one available Division
of the Separate Account to another or into the Fixed Account can be
made by the Owner. A transfer from a Division of the Separate Account
to the Fixed Account may not be made if a transfer from the Fixed
Account to a Division of the Separate Account has been made within the
six-month period prior to the date of the requested transfer to the
Separate Account or if immediately after the transfer to the Fixed
Account the Owner's Fixed Account Value exceeds $1 million. The amount
to be transferred may be stated as a dollar amount or as a percentage
of the Separate Account Value of the Division from which the transfer
is to be made. The amount transferred from each Division must equal or
exceed the lesser of $100 or 100% of the Owner's interest in the
Division. Transfers may be completed by sending a written request to
the Company at its home office, or by telephone as described below.
All or part of the values in one or more Divisions of the Separate
Account may be transferred at one time. Transfers from the Fixed
Account are restricted on both amount and timing. See "Fixed Account
Transfers, Total and Partial Surrenders." Transfers from a Division of
the Separate Account will be executed and values will be determined in
connection with the transfers as of the end of the Valuation Period in
which the Company receives the transfer request. There is currently no
charge for the transfer but the Company reserves the right to impose
charges (not to exceed $30 per transfer) on unscheduled transfers after
the twelfth such transfer during a Contract year. For this purpose, all
transfers between and among the Divisions of the Separate Account and
the Fixed Account will be treated as one transfer, if all the transfer
requests are made at the same time as part of one request. The Company
also reserves the right to reject transfer instructions provided by a
person providing them for multiple contracts.
Scheduled Transfers. The owner may elect to have automatic transfers
completed on a periodic basis from any Division of the Separate
Account. Scheduled transfers are available from a Division only if the
value of the Separate Account Value in such Division equals or exceeds
$5,000. An Owner may establish scheduled transfers by sending a written
request to the Company at its home office or by telephone as described
below. Scheduled transfers will be completed on a monthly, quarterly,
semi-annual or annual basis on the date (other than the 29th, 30th or
31st) specified by the Owner. If the requested date is not a Valuation
Date, the transfer will be completed on the next valuation date
following such specified date. Scheduled transfers of the dollar amount
specified by the Owner (minimum of $100) will continue until the
Separate Account Value in the Division from which such transfers are
made is exhausted or until the Owner notifies the Company to
discontinue such transfers. The Company reserves the right to limit the
number of Divisions from which transfers will be made simultaneously,
but in no event will such limitation be less than two Divisions.
Telephone Services. Unless telephone transaction services are declined
on the application for a Contract, or at any subsequent time the Owner
notifies the Company in writing to remove telephone transaction
services, changes in the allocation of future Purchase Payments and
transfers may be made pursuant to telephone instructions, subject to
the above terms. The telephone transactions may be exercised by
telephoning 1-800-852-4450. Telephone transfer requests must be
received by the close of the New York Stock Exchange on a day when the
Company is open for business to be effective that day. Requests made
after that time or on a day when the Company is not open for business
will be effective the next business day. Although neither the Separate
Account nor the Company is responsible for the authenticity of
telephone transaction requests, the right is reserved to refuse to
accept telephone requests when in the opinion of the Company it seems
prudent to do so. The Owner bears the risk of loss caused by fraudulent
telephone instructions the Company reasonably believes to be genuine.
The Company will employ reasonable procedures to assure telephone
instructions are genuine and if such procedures are not followed, the
Company may be liable for losses due to unauthorized or fraudulent
transactions. Such procedures include recording all telephone
instructions, requesting personal identification information such as
the caller's name, daytime telephone number, social security number
and/or birthdate and sending a written confirmation of the transaction
to the Owner's address of record. Owners may obtain additional
information and assistance by telephoning the toll free number. The
Company may modify or terminate telephone transfer procedures at any
time.
3. Total and Partial Surrenders
Total Surrenders. The Owner may surrender all of the cash surrender
value at any time during the life of the Annuitant and prior to the
Retirement Date by a written request sent to the Company's home office.
The Company reserves the right to require that the Contract be returned
to the Company prior to making payment, although this will not affect
the determination of the amount of the cash surrender value. Cash
surrender value is the Accumulated Value at the end of the Valuation
Period during which the written request for the total surrender is
received by the Company at its home office, less any applicable
Surrender Charge, Annual Fee and Transaction Fee. For discussion of
these charges and the circumstances under which they apply, see "Annual
Fee," "Surrender Charge," and "Transaction Fee."
The written consent of all collateral assignees and irrevocable
beneficiaries of a non-qualified Contract must be obtained prior to any
total surrender. Surrenders from the Separate Account will generally be
paid within seven days of the date of receipt by the Company's home
office of the written request, or such earlier date as required by law.
Postponement of payments may occur, however, in certain circumstances.
See "Postponement of Payments."
Since the Owner assumes the investment risk with respect to amounts
allocated to the Separate Account, and because certain surrenders are
subject to a Surrender Charge, the amount paid upon total surrender of
the cash surrender value (taking into account any prior partial
surrenders) may be more or less than the total Purchase Payments made.
Unscheduled Partial Surrenders. At any time prior to the Retirement
Date and during the lifetime of the Annuitant, the Owner may surrender
a portion of the Fixed Account Value and/or the Separate Account Value
by sending a written request to the Company's home office. The minimum
unscheduled partial surrender amount is $100 and the Accumulated Value
of the Contract must be $5,000 or more immediately after the partial
surrender. The Company reserves the right to increase the minimum
$5,000 remaining Accumulated Value but in no event will it exceed
$10,000.
In order for a request to be processed, the Owner must specify the
dollar amount of the Accumulated Value to surrender. The amount
surrendered will be deducted from the Owner's Fixed Account Value
and/or interest in a Division according to the surrender allocation
percentages provided by the Owner. Percentages may be either zero or
any whole number and must total 100%.
The Company will surrender Units from the Separate Account and/or
dollar amounts from the Fixed Account so that the total amount of the
partial surrender equals the dollar amount of the partial surrender
request plus any applicable Surrender Charge. The partial surrender
will be effective at the end of the Valuation Period in which the
Company receives the written request for partial surrender at its home
office. Payments will generally be made within seven days of the
effective date of such request or such earlier date as required by law,
although certain delays are permitted. See "Postponement of Payments."
Scheduled Partial Surrenders. The owner may elect to have partial
surrenders completed on a periodic basis from any Division of the
Separate Account and/or Fixed Account. Scheduled partial surrenders
(sometimes referred to as a "Flexible Withdrawal Option") are available
only if the value of the Accumulated Value is at least $5,000 at the
time the surrenders begin. Scheduled partial surrenders may be
established by the Owner by providing written notice to the Company at
the Company's home office. The Owner may specify monthly, quarterly,
semi-annual or annual partial surrenders to be completed on any date
other than 29th, 30th or 31st. If the specified date is not a Valuation
Date, surrenders will be completed on the next Valuation Date following
such specified date. Partial surrenders will continue until the
Accumulated Value is exhausted or until the Owner notifies the Company
to discontinue the scheduled surrenders.
The Internal Revenue Code provides that a penalty tax will be imposed
on certain premature surrenders. For a discussion of this and other tax
implications of total and partial surrenders, including withholding
requirements, see "Federal Tax Matters."
4. Benefit Payable on Death of Annuitant or Owner
If the Annuitant or Owner dies prior to the Retirement Date, a death
benefit will be paid to the deceased's Beneficiary. The amount of the
death benefit will be the greater of:
(1) the Accumulated Value on the date the Company receives Notice
(including proof) of death; or
(2) total Purchase Payments less any partial surrenders (and
Surrender Charges incurred) as of the date the
Company receives Notice (including proof) of death; or
(3) the death benefit that was in effect on any prior Anniversary
that is divisible equally by seven, plus any Purchase Payments
and less any partial surrenders (and Surrender Charges incurred)
made after that Anniversary.
The death benefit generally will be paid within seven days after the
Company receives Notice (including proof) of death and written
instructions as to the manner of payment to the Beneficiary, or such
earlier date as required by law. Under certain circumstances, payment
of the death benefit may be postponed. See "Postponement of Payments."
The death benefit will be paid according to benefit instructions
provided by the deceased. If benefit instructions have not been
provided the death benefit will be paid upon receipt of a written
request for settlement method. The Company will pay interest (at an
annual rate equal to or greater than 3% or such other rate required by
state law) on the death benefit from the date it receives proof of
death (or such other date required by state law) until the date of
payment or until the date the death benefit is applied under a Benefit
Option.
If the Owner dies before the Annuitant and the Owner's Beneficiary is
the surviving spouse, the Company will continue the Contract with the
spouse as the new Owner unless the spouse elects to receive the death
benefit. If benefit instructions have not been provided, the
Beneficiary may (a) receive a single sum payment, which terminates the
Contract, or (b) select a Benefit Option. If the beneficiary selects a
Benefit Option, he or she will have all the rights and privileges of an
Annuitant under the Contract. If the Beneficiary desires a Benefit
Option, the election should be made within 60 days of the date the
death benefit becomes payable. Failure to make a timely election can
result in unfavorable tax consequences. For further information, see
"Federal Tax Matters."
We accept any of the following as proof of death: a certified copy of a
death certificate; a copy of a certified decree of a court of competent
jurisdiction as to the finding of death; a written statement by a
medical doctor who attended the deceased at the time of death; or any
other proof satisfactory to us.
If the Owner dies before the Annuitant and before the Retirement Date
with respect to a Contract not issued in connection with retirement
plans qualified under Section 408 of the Internal Revenue Code, certain
additional requirements are mandated by the Internal Revenue Code,
which are discussed under "Required Distributions for Non-Qualified
Contracts." It is imperative that written notice of the death of the
Owner be promptly transmitted to the Company at its home office, so
that arrangements can be made for distribution of the entire interest
in the Contract to the Beneficiary in a manner that satisfies the
Internal Revenue Code requirements. Failure to satisfy these
requirements may result in the Contract not being treated as an annuity
for federal income tax purposes, which could have adverse tax
consequences.
C. After the Retirement Date
1. Retirement Date
The Owner may specify a Retirement Date in the application. The
Retirement Date marks the beginning of the period during which an
Annuitant receives Benefit Option payments under the Contract. The
Company may not permit a Retirement Date which is on or after the later
of the Annuitant's 85th birthday or ten years after the Contract Date
(but no later than age 88 in Pennsylvania and age 85 in New York).
Depending on the type of retirement arrangement in connection with
which a Contract is issued, amounts that are distributed either too
soon or too late may be subject to penalty taxes under the Internal
Revenue Code. See "Federal Tax Matters." Owners should consider this
carefully in selecting or changing a Retirement Date.
The Owner may change the Retirement Date with the Company's prior
approval, by written request any time prior to the issuance of a
supplementary contract which provides a Benefit Option. The new
Retirement Date must be any Anniversary on or before the maximum
Retirement Date.
2. Benefit Options
The Company currently offers only fixed Benefit Option payments;
variable Benefit Option payments are not currently offered. If the
Accumulated Value at the end of the Valuation Period which contains the
Retirement Date is less than $5,000 or if the amount applied under a
Benefit Option would result in a periodic payment below the Company's
minimum requirements in effect at that time, the Company may pay the
entire Accumulated Value, without the imposition of any charges, in a
single sum payment to the Annuitant or other properly designated payee
and cancel the Contract. Otherwise, the Company will apply the
Accumulated Value to provide a fixed Benefit Option.
Benefit Option payments will be made as elected by the Owner on a
monthly, quarterly, semi-annual or annual basis to the Annuitant or
other properly-designated payee. The dollar amount of any Benefit
Option payment is specified during the entire period of payments
according to the provisions of the Benefit Option selected. There is no
right to make any total or partial surrender after Benefit Option
payments commence.
The amount of each Benefit Option payment will depend on the amount of
Accumulated Value applied to the Benefit Option, the form of Benefit
Option selected and, for Benefit Options other than Fixed Income
described below, the age of the Annuitant. The amount of each Benefit
Option payment ordinarily will be higher for a male Annuitant than for
a female Annuitant with an otherwise identical Contract. This is
because, statistically, females tend to have longer life expectancies
than males. However, there will be no differences between male and
female Annuitants in any jurisdiction where such differences are not
permitted. The Company will also make available Contracts with no such
differences in connection with certain employer-sponsored benefit
plans. Employers should be aware that, under most such plans, Contracts
that make distinctions based on gender are prohibited by law.
The Owner may select a Benefit Option form or change a previous
selection by written request, which must be received by the Company on
or before the Retirement Date. If no Benefit Option form is chosen by
the Owner, the Company automatically applies a Life Income Benefit
Option (described below), with payments guaranteed for 10 years. If an
Annuitant and Joint Annuitant have been designated under the Contract,
payments will be made pursuant to a Joint and Full Survivor Income
Benefit Option (described below) with payments guaranteed for 10 years,
unless otherwise elected. Tax laws and regulations may impose further
restrictions on Benefit Options.
The following Benefit Options are available:
Fixed Income. Payments of a fixed amount or payments for a fixed
period of at least 5 years but not more than 30 years, are made as
of the first day of each payment period starting with the
Retirement Date. Payments will stop after all guaranteed payments
are made.
Life Income. Payments are made as of the first day of each payment
period during the Annuitant's life, starting with the Retirement
Date. No payments will be made after the Annuitant dies. It is
possible for the payee to receive only one payment under this
option if the Annuitant dies before the second payment is due.
Life Income with Payments Guaranteed for a Period of 5 to 20
Years. Payments are made as of the first day of each payment
period starting on the Retirement Date. Payments will continue as
long as the Annuitant lives. If the Annuitant dies before all of
the guaranteed payments have been made, the Company will continue
installments of the guaranteed payments to the Beneficiary.
Joint and Full Survivor Income with Payments Guaranteed for a
Period of 10 Years. Payments are made as of the first day of each
payment period starting with the Retirement Date. Payments will
continue as long as either the Annuitant or the Joint Annuitant is
alive. If the Annuitant and Joint Annuitant die before all of the
guaranteed payments have been made, the Company will continue
installments of the guaranteed payments to the Beneficiary.
Joint and Two-Thirds Survivor Life Income. Payments are made as of
the first day of each payment period starting with the Retirement
Date. Payments will continue as long as either the Annuitant or
the Joint Annuitant is alive. If either the Annuitant or the Joint
Annuitant dies, payments will continue to the survivor at
two-thirds the original amount. Payments will stop when both the
Annuitant and Joint Annuitant have died. It is possible for the
payee or payees under this option to receive only one payment if
both Annuitants die before the second payment is due.
Other Benefit Options may be made available with the Company's
approval.
In order to avoid tax penalties, distributions from any Contract that
is not a non-qualified contract must begin no later than April 1st
following the calendar year in which the Owner attains age 70 1/2. The
minimum distribution requirement is a distribution in equal or
substantially equal amounts over the Owner's life or over the joint
lives of the Owner and Owner's designated beneficiary, or a period not
extending beyond the Owner's life expectancy, or the joint life
expectancy of the Owner and Owner's designated beneficiary. In
addition, distribution payments must be made at least annually. Tax
penalties may also apply at the Owner's death on certain excess
accumulations. Owners should consider potential tax penalties with
their tax advisors when electing a Benefit Option or taking other
distributions from the Contract.
3. Death of Annuitant or Other Payee
Under the Benefit Options offered by the Company, the amounts, if any,
payable on the death of the Annuitant during the Benefit Option payment
period are the continuation of payments for any remaining guarantee
period or for the life of any Joint Annuitant. In all cases, the person
entitled to receive payments also receives any rights and privileges
under the Benefit Option.
Additional rules applicable to such distributions under Non-Qualified
Contracts are described under "Required Distributions for Non-Qualified
Contracts." Though the rules there described do not apply to Contracts
issued in connection with IRAs, SEPs or SAR/SEPs, similar rules apply
to the plans, themselves.
CHARGES AND DEDUCTIONS
An Annual Fee, a mortality and expense risks charge and, in certain
circumstances, a Transaction Fee and state premium taxes are deducted under the
Contract. Also, in certain circumstances, a Surrender Charge may be deducted
from certain cash withdrawals before the Retirement Date. The Company has also
reserved the right to assess a daily Administrative Expense Charge.
There are also deductions from and expenses paid out of the assets of the Mutual
Funds which are described in the Mutual Funds' prospectus.
A. Annual Fee
An Annual Fee equal to the lesser of $30 or 2% of the Owner's Accumulated
Value is deducted on the day before each Contract Anniversary prior to the
Retirement Date. (This charge will be lower to the extent legally required
in some states.) The Annual Fee will be deducted from either the Fixed
Account Value or the Owner's interest in a Separate Account Division,
whichever has the greatest value on the date the fee is deducted. If the
Contract is fully surrendered, the full amount of the Annual Fee will be
deducted at the time of surrender. The Annual Fee currently does not apply
to Contracts that have an Accumulated Value of at least $30,000 on the day
before the Contract Anniversary. This charge is to help cover
administrative costs such as those incurred in issuing Contracts,
establishing and maintaining the records relating to Contracts, making
regulatory filings and furnishing confirmation notices, voting materials
and other communications, providing computer, actuarial and accounting
services, and processing Contract transactions. The Company does not
anticipate any profit from this charge.
B. Mortality and Expense Risks Charge
The Company will assess each Division of the Separate Account with a daily
charge for mortality and expense risks at a nominal annual rate of 1.25% of
the average daily net assets of the Separate Account (consisting of
approximately .80% for mortality risk and approximately .45% for expense
risk). This charge is assessed only prior to the Retirement Date. The
Company guarantees not to increase this charge for the duration of the
Contract. This charge is assessed daily when determining the value of an
accumulation Unit.
The mortality risk borne by the Company arises from its obligation to make
Benefit Options payments (determined in accordance with the annuity tables
and other provisions contained in the Contract) for the full life of all
Annuitants regardless of how long all Annuitants or any individual
Annuitant might live. This undertaking assures that neither an Annuitant's
own longevity, nor an improvement in life expectancy generally, will have
any adverse effect on the Benefit Option payments the Annuitant will
receive under the Contract. This, therefore, relieves the Annuitant of the
risk that he or she will outlive the funds accumulated for retirement. The
Benefit Option tables contained in the Contract are based on the Annuity
Mortality 1983 Table a. These tables are guaranteed for the life of the
Contract.
In addition, the Company bears a mortality risk in that it guarantees to
pay a death benefit in a single sum (which may also be taken in the form of
a Benefit Option) upon the death of an Annuitant or Owner prior to the
Retirement Date. No Surrender Charge is imposed upon the payment of a death
benefit, which places a further mortality risk on the Company.
The expense risk assumed is that actual expenses incurred in connection
with issuing and administering the Contracts will exceed the limits on
administrative charges set in the Contracts.
If the mortality and expense risk charge is insufficient to cover the costs
assumed, the loss will be borne by the Company. Conversely, if the amount
deducted proves more than sufficient, the excess will be profit to the
Company. The Company expects a profit from the mortality and expense risks
charge.
C. Transaction Fee
A Transaction Fee of $30 applies to each unscheduled partial surrender
after the first such surrender made during a Contract Year. The Company
reserves the right to apply the Transaction Fee to each unscheduled
transfer from a Division after the twelfth such transfer in a Contract
Year. The Transaction Fee will be deducted from the Fixed Account Value
and/or the Owner's interest in a Separate Account Division from which the
amount is surrendered or transferred, on a pro rata basis.
D. Premium Taxes
The Company has reserved the right to deduct amounts to cover any premium
taxes that are imposed by states or other jurisdictions, when applicable.
Any such deduction will be made from either a Purchase Payment when
received by the Company, or the Accumulated Value when surrendered (in
whole or part) or applied under a Benefit Option.
E. Surrender Charge
No sales charge is collected or deducted at the time Purchase Payments are
applied under a Contract. A Surrender Charge will be assessed on certain
total or partial surrenders. The amounts obtained from the Surrender Charge
will be used to partially defray expenses incurred in the sale of the
Contract, including commissions and other promotional or distribution
expenses associated with the marketing of the Contract. If the Surrender
Charge is insufficient to cover the actual cost of distribution, such costs
will be paid from the Company's General Account assets, which will include
profit, if any, derived from the mortality and expense risks charge.
The Surrender Charge for any full or partial surrender is a percentage of
the Purchase Payments withdrawn or surrendered which were received by us
during the seven completed Contract Year period prior to the withdrawal or
surrender. The applicable percentage which is applied to the sum of the
Purchase Payments paid during each Contract Year, is determined in
accordance with the following table.
TABLE OF SURRENDER CHARGES
Number of Completed Contract Years Surrender Charge Applied to all Purchase
Since Purchase Payment was Paid Payments Received in that Contract Year
0-2 6%
3 5%
4 4%
5 3%
6 2%
7 and later 0%
For this purpose, it is assumed that amounts are withdrawn in the following
order: (1) From Purchase Payments received by the Company more than seven
completed Contract Years prior to the withdrawal or surrender; (2) From the
Free Surrender Privilege described below (from contract earnings first, if
any, and then from Purchase Payments on a first-in, first-out basis); and
(3) From Purchase Payments received by the Company within the seven
completed Contract Year period prior to the withdrawal or surrender on a
first-in first-out basis. There is no Surrender Charge, under these
guidelines, on withdrawals of Purchase Payments made more than seven
completed Contract Years prior to the withdrawal or surrender, nor are
there Surrender Charges imposed on withdrawals of the Free Surrender
Privilege.
Waiver of the Surrender Charge. The Surrender Charge will not apply:
1. To any amount applied under a Benefit Option;
2. To the payment of a Death Benefit, but the Surrender Charge will
apply to Purchase Payments made by the participant's surviving
spouse after the participant's date of death occurring on or
after July 1, 1996;
3. To any amount distributed to satisfy the minimum distribution
requirement of Sec. 401(a)9 of the Internal Revenue Code;
4. Where permitted by state law, to a withdrawal made after the
first Anniversary as a result of the Owner's or Annuitant's
Critical Need provided that:
(a) the Owner or Annuitant to which the Critical Need applies is
the original Owner or Annuitant;
(b) the Critical Need did not exist prior to the Contract Date;
and
(c) if the Critical Need is Confinement to a Health Care
Facility, the confinement must continue for at least 60
consecutive days after Contract Date and the withdrawal must
occur within 90 days after confinement ends. No additional
Purchase Payments may be made to the Contract if the Company
waives the Surrender Charge due to a Critical Need.
5. To the Free Surrender Privilege which is an amount surrendered
during a Contract Year in an amount not to exceed the greater of:
(a) Earnings in the Contract (Earnings = Accumulated Value less
unsurrendered Purchase Payments as of the surrender date);
or
(b) 10% of the Purchase Payments still subject to the Surrender
Charge, decreased by any partial surrenders since the last
Anniversary.
6. To any amount transferred from the Contract to a Single Premium
Immediate Annuity issued by the Company after the seventh Contract
Year.
7. To any amount transferred from a Contract used to fund an IRA to
another annuity contract issued by the Company to fund an IRA of
the participant's spouse when the distribution is made pursuant to
a divorce decree.
8. Where prohibited by state law.
F. Administrative Expense Charge
The Company reserves the right to assess each Division of the Separate
Account with a daily charge at a nominal annual rate of .15% of the average
daily net assets of the Division. This charge would be imposed only prior
to the Retirement Date. The daily Administrative Expense Charge would be
assessed to help cover administrative expenses such as those described
under "Annual Fee." The daily Administrative Expense Charge, like the
Annual Fee, is designed to defray expenses actually incurred, without
profit. Even if the Administrative Expense Charge was imposed, the total
anticipated revenues from both charges are not expected to exceed the
actual administrative costs incurred by the Company.
FIXED ACCOUNT
Owners may allocate Purchase Payments and transfer amounts from the Separate
Account to the Fixed Account, in which case such amounts are held in the General
Account of the Company. Because of exemptive and exclusionary provisions,
interests in the Fixed Account have not been registered under the Securities Act
of 1933 and the General Account has not been registered as an investment company
under the Investment Company Act of 1940. Accordingly, neither the Fixed Account
nor any interests therein are subject to the provisions of these acts and, as a
result, the staff of the Securities and Exchange Commission has not reviewed the
disclosures in this Prospectus relating to the Fixed Account. Disclosures
regarding the Fixed Account may, however, be subject to certain generally
applicable provisions of the federal securities laws relating to the accuracy
and completeness of statements made in prospectuses. This Prospectus is
generally intended to serve as a disclosure document only for the aspects of the
Contract involving the Separate Account and contains only selected information
regarding the Fixed Account. More information regarding the Fixed Account may be
obtained from the Company's home office or from a sales representative.
General Description
The Company's obligations with respect to the Fixed Account are supported by the
Company's General Account. Subject to applicable law, the Company has sole
discretion over the investment of the assets in the General Account.
The Company guarantees that Purchase Payments allocated to the Fixed Account
will accrue interest at a guaranteed interest rate. In no event will the
guaranteed interest rate be less than 3% compounded annually. Each Purchase
Payment or amount transferred to the Fixed Account earns interest at the
guaranteed rate in effect on the date it is received or transferred. This rate
applies to each Purchase Payment or amount transferred until the end of the
Contract Year.
Each Anniversary the Company declares a renewal interest rate that is guaranteed
and applies to the Fixed Account Value in existence at that time. This rate
applies until the end of the Contract Year. Interest is earned daily and
compounded annually at the end of each Contract Year. Once credited, such
interest will be guaranteed and will become part of the Accumulated Value in the
Fixed Account from which deductions for fees and charges may be made.
Charges under the Contract are the same as when the Separate Account is being
used, except that the 1.25% per annum charged for mortality and expense risks
and, if applicable, the .15% per annum charged for administrative expenses are
not imposed on amounts of Accumulated Value in the Fixed Account.
Fixed Account Value
The Contract's Fixed Account Value on any Valuation Date is the sum of the
Purchase Payments allocated to the Fixed Account, plus any transfers from the
Separate Account, plus interest credited to the Fixed Account, less any
surrenders, Surrender Charges, Annual Fees or Transaction Fees allocated to the
Fixed Account or transfers to the Separate Account.
Fixed Account Transfers, Total and Partial Surrenders
Amounts in the Fixed Account are generally subject to the same rights and
limitations and will be subject to the same charges as are amounts allocated to
the Divisions of the Separate Account with respect to total and partial
surrenders. See "Total and Partial Surrenders."
Transfers out of the Fixed Account have special limitations. No transfers from
the Fixed Account may be made after the Retirement Date. Prior to the Retirement
Date, Owners may transfer part or all of the Accumulated Value from the Fixed
Account to the Separate Account in one of two ways, a single transfer or
pursuant to scheduled transfers, both of which are described below. An Owner may
not make both a single transfer and scheduled transfers during the same Contract
Year.
Single Transfer. A single transfer in an amount not to exceed 25% of
the Owner's Fixed Account Value as of the later of the Contract Date or
the last Anniversary, may be made each Contract Year during the 30-day
period following the Contract Date or Anniversary. A transfer request
must be made by the owner within such 30-day period. An Owner may
transfer up to the entire Fixed Account Value if the Owner's Fixed
Account Value is less than $1,000 or the renewal interest rate declared
for the Owner's Fixed Account Value is more than one percentage point
lower than the average of the Owner's total Fixed Account Value
earnings for the preceding Contract Year. The Company will notify the
Owner if the renewal interest rate falls to that threshold. The minimum
transfer amount is $100 (or, if less, the entire amount of the Fixed
Account Value).
Scheduled Transfers. During the 30-day period following the later of
the Contract Date or any Anniversary, the Owner may elect to have
automatic transfers completed on a monthly basis from the Fixed Account
to any Division of the Separate Account. Scheduled transfers are
available from the Fixed Account only if the Owner's Fixed Account
Value equals or exceeds $5,000 at the time scheduled transfers are
initiated. (The Company reserves the right to change that amount but it
will never exceed $10,000.) An Owner may establish scheduled transfers
by sending a written request to the Company at its home office or by
telephone. Scheduled transfers will be completed on a monthly basis on
the date (other than the 29th, 30th or 31st) specified by the Owner. If
the requested date is not a Valuation Date, the transfer will be
completed on the next valuation date following such specified date.
Scheduled monthly transfers of an amount equal to 2% of the Owner's
Fixed Account Value as of the later of the Contract Date or the Last
Anniversary will continue until the Fixed Account Value is exhausted or
until the Owner notifies the Company to discontinue the scheduled
transfers. If the Owner discontinues the scheduled transfers, transfers
may not begin again without the Company's prior approval.
GENERAL PROVISIONS
The Contract
The Contract, copies of any applications, amendments, riders, or endorsements
attached to the Contract, the Contract current data page, and copies of any
supplemental applications, amendments, endorsements, or revised Contract pages
or Contract data pages which are mailed to the Owner are the entire Contract.
Only the Company's corporate officers can agree to change or waive any
provisions of a Contract. Any change or waiver must be in writing and signed by
one of these representatives of the Company.
Postponement of Payments
Any partial surrender to be made from the Contract will be made within seven
days after acceptable Notice for such payment is received by the Company, or
such earlier date as required by law. However, such surrender 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 to fairly 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 a surrender is in effect and has not been cancelled
by written notification to the Company within the period of deferment, the
amount to be withdrawn shall be determined as of the first Valuation Date
following expiration of the permitted deferment, and the surrender will be made
within seven days thereafter.
The Company may also defer for up to 15 days the payment of any amount
attributable to a Purchase Payment made by check to allow the check reasonable
time to clear. The Company may also defer payment of surrender proceeds payable
out of the Fixed Account for a period of up to 6 months.
Misstatement of Age or Sex and Other Errors
If the age or , where applicable, gender of the Annuitant has been misstated,
any amount payable will be that which would have been purchased at the correct
age and gender. If the Company has made any overpayments because of incorrect
information about age or gender, or any error or miscalculation, it will deduct
the overpayment from the next payment or payments due. Underpayments are added
to the next payment.
Assignment
Ownership of a non-qualified contract may be assigned. The Company assumes no
responsibility for the validity of any assignment. An assignment or pledge of a
Contract may have adverse tax consequences.
See "Federal Tax Matters."
An assignment must be made in writing and filed with the Company at its home
office. Owner, Annuitant and Beneficiary rights are subject to any assignment of
record at the Company's home office. Any amount paid to an assignee will be
treated as a partial surrender and will be paid in a single sum.
Change of Owner
The Owner may change ownership of the Contract at any time. A request to change
ownership must be in writing and must be approved by the Company. After the
Company approves of the change, the change is effective as of the date the
written request for the change was signed by the Owner. The waiver of the
Contingent Deferred Sales Charge for withdrawals made due to a Critical Need of
the Owner, is not available if Ownership is changed. See "Surrender Charge."
Beneficiary
Before the Retirement Date and while the Annuitant is living, the Owner may name
or change the Owner's or Annuitant's Beneficiary or a successor Beneficiary by
sending a written request of the change to the Company. Under certain retirement
programs, however, spousal consent may be required to name or change a
Beneficiary, and the right to name a Beneficiary other than the spouse may be
subject to applicable tax laws and regulations. The Company is not responsible
for the validity of any change. A change will take effect as of the date it is
signed but will not affect any payments made or action taken before the Company
receives and approves the written request. The Company also needs the consent of
any irrevocably named person before making a requested change.
If no Beneficiary designated as the Annuitant's Beneficiary is living at the
time of the Annuitant's death, any benefits otherwise payable under the Contract
to the Beneficiary will be paid to the Owner, if living, otherwise to the
Annuitant's estate. If a Beneficiary dies while receiving payments under the
Contract, and if no other Beneficiary is then living, any remaining benefits
owed under the Contract will be paid to such Beneficiary's estate.
Reports
We will mail to the Owner at the last known address of record a statement of the
Owner's current Accumulated Value at least once each year prior to the
Retirement Date and any reports required by any applicable law or regulation.
After the Retirement Date, any reports will be mailed to the person receiving
Benefit Option payments, rather than to the Owner.
RIGHTS RESERVED BY THE COMPANY
The Company reserves the right to make certain changes if, in its judgement,
they would best serve the interests of Owners and Annuitants or would be
appropriate in carrying out the purpose of the Contract. Any changes will be
made only to the extent and in the manner permitted by applicable laws. Also,
when required by law, the Company will obtain the Owner's approval of the
changes and approval from any appropriate regulatory authority. Such approval
may not be required in all cases, however. Examples of the changes the Company
may make include:
o To transfer any assets in any Division to another Division, or
to the Fixed Account; or to add, combine or eliminate
Divisions in the Separate Account.
o To substitute, for the Mutual Fund shares held in any
Division, the shares of another Mutual Fund, if shares of a
Mutual Fund are no longer available for investment or if in
the Company's judgement, investment in a Mutual Fund becomes
inappropriate considering the purposes of the Separate
Account.
DISTRIBUTION OF THE CONTRACT
The Contract, which is 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, The Principal Financial Group, Des Moines, Iowa
50392-0200, 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, the principal underwriter, is paid 6.5% of
Purchase Payments by Principal Mutual Life Insurance Company for the
distribution of the Contract. The Contract may also be sold through other
selected broker-dealers registered under the Securities Exchange Act of 1934 or
firms that are exempt from such registration. 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.
PERFORMANCE CALCULATION
The Separate Account may publish advertisements containing information
(including graphs, charts, tables and examples) about the performance of one or
more of its Divisions. The Contract was not offered prior to June 16, 1994.
However, shares of Principal Mutual Funds in which Divisions of the Separate
Account invest, were offered prior to that date. Thus, the Separate Account may
publish advertisements containing information about the hypothetical performance
of one or more of its Divisions for this Contract had the Contract been issued
on or after the date the Mutual Fund in which such Division invests was first
offered. The yield and total return figures described below will vary depending
upon market conditions, the composition of the underlying Mutual Funds'
portfolios and operating expenses. These factors and possible differences in the
methods used in calculating yield and total return should be considered when
comparing the Separate Account performance figures to performance figures
published for other investment vehicles. The Separate Account may also quote
rankings, yields or returns as published by independent statistical services or
publishers and information regarding performance of certain market indices. Any
performance data quoted for the Separate Account represents only historical
performance and is not intended to indicate future performance. For further
information on how the Separate Account calculates yield and total return
figures, see the Statement of Additional Information.
From time to time the Separate Account advertises its Money Market Division's
"yield" and "effective yield" for these Contracts. 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 a sales load deducted from Purchase Payments which, if included, would
reduce the "yield" and "effective yield."
In addition, from time to time, the Separate Account will advertise the "yield"
for certain other Divisions for the Contract. The "yield" of a Division is
determined by annualizing the net investment income per unit for a specific,
historical 30-day period and dividing the result by the ending maximum offering
price of the unit for the same period. This yield quotation does not reflect a
contingent deferred sales charge which, if included, would reduce the "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 Surrender Charge that decreases from 6% to 0% over a period of 7
years. The Separate Account may also advertise total return figures of its
Divisions for a specified period that do not take into account the Surrender
Charge in order to illustrate the change in the Division's unit value over time.
See "Charges and Deductions" and "Surrender Charge."
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 Owners of the Contract whose Accumulated Value
includes amounts invested in the corresponding Division of the Separate Account.
The number of Mutual Fund shares as to which an Owner 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. The number of Mutual Fund shares held in Separate Account B which are
attributable to the Owner's interest in each Division is determined by dividing
the value of the Owner's interest in that Division by the net asset value of one
share of the underlying Mutual Fund. Mutual Fund shares for which Owners 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 Owner 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 Owners, then the Company may vote Mutual Fund shares held in Separate
Account B in its own right.
FEDERAL TAX MATTERS
The following description is a general summary of the tax rules, primarily
related to federal income taxes, which in the opinion of the Company are
currently in effect. These rules are based on laws, regulations and
interpretations which are subject to change at any time. This summary is not
comprehensive and is not intended as tax advice. Federal estate and gift tax
considerations, as well as state and local taxes, may also be material. Owners
should consult a qualified tax adviser as to the tax implications of taking
action under a Contract or related retirement plan.
Non-Qualified Contracts
Section 72 of the Internal Revenue Code ("Code") governs the taxation of
annuities in general. Purchase Payments made under non-qualified contracts are
not excludible or deductible from the gross income of the Owner or any other
person. However, any increase in the Accumulated Value of a non-qualified
contract resulting from the investment performance of the Separate Account or
interest credit to the Fixed Account is generally not taxable to the Owner or
other payee until received by him or her, as surrender proceeds, death benefit
proceeds, or otherwise. The exception to this rule is that, generally, Owners
who are not natural persons are immediately taxed on any increase in the
Accumulated Value.
However, this exception does not apply in all cases.
The following discussion applies generally to Contracts owned by natural
persons.
In general, surrenders or partial surrenders under Contracts are taxed as
ordinary income to the extent of the accumulated income or gain under the
Contract. If an Owner assigns or pledges any part of the value of a Contract,
the value so pledged or assigned is taxed to the Owner as ordinary income to the
same extent as a partial withdrawal.
With respect to Benefit Options payments, although the tax consequences may vary
depending on the option elected under the Contract, until the investment in the
Contract is recovered, generally only the portion of the payment that represents
the amount by which the Accumulated Value exceeds the "investment in the
contract" will be taxed. In general, an Annuitant's or other payee's "investment
in the contract" is the aggregate amount of Purchase Payments made by him or
her. After the "investment in the contract" is recovered, the full amount of any
additional Benefit Option payments is taxable. Prior to recovery of the
"investment in the contract," there is no tax on the amount of each payment
which bears the same ratio to such payment that the "investment in the contract"
bears to the total expected return under the Contract. The remainder of each
Benefit Option payment is taxable. The taxable portion of a distribution is
taxed as ordinary income.
For purposes of determining the amount of taxable income resulting from
distributions, all Contracts and other annuity contracts issued by the Company
or its affiliates to the same Owner within the same calendar year will be
treated as if they were a single contract.
There is a 10% penalty under the Code on the taxable portion of a "premature
distribution." Generally, an amount is a "premature distribution" unless the
distribution is (1) made on or after the Owner reaches age 59 1/2, (2) made to a
Beneficiary on or after death of the Owner, (3) made upon the disability of the
Owner, or (4) part of a series of substantially equal periodic payments for the
life or life expectancy of the Owner or the Owner and Beneficiary. Premature
distributions may result, for example, from an early Retirement Date, any early
surrender, partial surrender or assignment of a Contract or the death of an
Annuitant who is not the Owner prior to the Owner attaining age 59 1/2.
A transfer of ownership of a Contract, or designation of an Annuitant or other
payee who is not also the Owner, may result in a certain income or gift tax
consequences to the Owner that are beyond the scope of this discussion. An Owner
contemplating any transfer or assignment of a Contract should contact a
competent tax advisor with respect to the potential tax effects of such
transactions.
Required Distributions for Non-Qualified Contracts
In order for a non-qualified contract to be treated as an annuity contract for
federal income tax purposes, Section 72(s) of the Code requires (a) if the
person receiving payments dies on or after the Retirement Date but prior to the
time the entire interest in the Contract has been distributed, the remaining
portion of such interest will be distributed at least as rapidly as under the
method of distribution being used as of the date of that person's death; and (b)
if any Owner dies prior to the Retirement Date, the entire interest in the
Contract will be distributed (1) within five years after the date of that
Owner's death or (2) as annuity payments which will begin within one year of
that Owner's death and which will be made over the life of the Owner's
designated Beneficiary or over a period not extending beyond the life expectancy
of that Beneficiary. However, if the Owner's designated Beneficiary is the
surviving spouse of the Owner, the Contract may be continued with the surviving
spouse deemed to be the new Owner for purposes of Section 72(s). Where the Owner
or other person receiving payments is not a natural person, the required
distributions provided for in Section 72(s) apply upon the death of the primary
Annuitant.
Generally, unless the Beneficiary elects otherwise, the above requirements will
be satisfied prior to the Retirement Date by paying the death benefit in a
single sum, subject to proof of the Owner's death. The Beneficiary, however, may
elect by written request to receive a Benefit Option instead of a lump sum
payment. However, if the election is not made within 60 days of the date the
single sum death benefit otherwise becomes payable, the IRS may disregard the
election for tax purposes and tax the Beneficiary as if a single sum payment had
been made.
IRA, SEP and SAR/SEP
The Contract may be used to fund IRAs, SEPs and SAR/SEPs. The tax rules
applicable to Owners, Annuitants and other payees vary according to the type of
plan and the terms and conditions of the plan itself. In general, Purchase
Payments made under a retirement program recognized under the Code by or on
behalf of an individual are excludible from the individual's gross income for
tax purposes prior to the Retirement Date. The portion, if any, of any Purchase
Payment made by or on behalf of an individual under a Contract that is not
excluded from the individuals' gross income for tax purposes constitutes the
individual's "investment in the contract." Aggregate deferrals under all plans
at the employee's option may be subject to limitations. The tax implications of
these plans are further discussed in the Statement of Additional Information
under the heading "Taxation Under Certain Retirement Plans."
Withholding
Benefit Option payments and other amounts received under the Contract are
subject to income tax withholding unless the recipient elects not to have taxes
withheld. The amounts withheld will vary among recipients depending on the tax
status of the individual and the type of payments from which taxes are withheld.
Notwithstanding the recipient's election, withholding may be required with
respect to certain payments to be delivered outside the United States. Moreover,
special "backup withholding" rules may require the Company to disregard the
recipient's election if the recipient fails to supply the Company with a "TIN"
or taxpayer identification number (social security number for individuals), or
if the Internal Revenue Service notifies the Company that the TIN provided by
the recipient is incorrect.
Mutual Fund Diversification
The United States Treasury Department has adopted regulations under Section
817(h) of the Code which establishes standards of diversification for the
investment underlying the Contracts. Under this Code Section, Separate Account B
investments must be adequately diversified in order for the increase in the
value of non-qualified contracts to receive tax-deferred treatment. In order to
be adequately diversified, the portfolio of each underlying Mutual Fund must, as
of the end of each calendar quarter or within 30 days thereafter, have no more
than 55% of its assets invested in any one investment, 70% in any two
investments, 80% in any three investments and 90% in any four investments.
Failure of a Fund to meet the diversification requirements could result in tax
liability to non-qualified contractholders.
The investment opportunities of the Funds could conceivably be limited by
adhering to the above diversification requirements. This would affect all
Owners, including those Owners of contracts for whom diversification is not a
requirement for tax-deferred treatment.
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.
EXPERTS
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 the Statement of
Additional Information should be considered only as bearing on the ability of
the Company to meet its obligations under the Contract. They should not be
considered as bearing on the investment performance of the assets held in the
Separate Account.
CONTRACTHOLDERS' INQUIRIES
Contractholders' inquiries should be directed to: Variable Annuity, The
Principal Financial Group, P.O. Box 9382, Des Moines, Iowa 50306-9382,
1-800-852-4450.
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
Independent Auditors ................................................. 3
Calculation of Yield and Total Return ................................ 3
Taxation Under Certain Retirement Plans................................. 4
Financial Statements
Principal Mutual Life Insurance Company Separate Account B............ 6
Report of Independent Auditors ..................................... 22
Principal Mutual Life Insurance Company............................... 23
Report of Independent Auditors ..................................... 42
To obtain a copy of the Statement of Additional Information, free of charge,
write or telephone:
Variable Annuity
The Principal Financial Group
P.O. Box 9382
Des Moines, Iowa 50306-9382
Telephone: 1-800-852-4450
APPENDIX A
The Company hereby offers to exchange the Contract described in this Prospectus
("PVA Contract") for certain outstanding Pension Builder Plus Variable Annuity
Contracts ("Pension Builder Plus Contracts") issued in connection with
Individual Retirement Annuity ("IRA") plans or programs, including SEPs and
SAR-SEPs (but excluding employer-sponsored IRAs) adopted pursuant to Section 408
of the Internal Revenue Code or for such Pension Builder Plus Contracts the
withdrawals from which may be transferred to the Contract described in this
prospectus to fund an IRA. The Company reserves the right to terminate this
exchange offer at any time. In considering whether to accept the exchange offer
you should consult the Pension Builder Plus Contract Prospectus since the
provisions and charges of the Pension Builder Plus Contract differ from those of
the PVA Contract.
The Pension Builder Plus Contract may be exchanged at net asset value for the
PVA Contract. To effect an exchange, the Company must receive from you (1) a
completed application for the PVA Contract, (2) a written request and release
for the exchange, and (3) the Pension Builder Plus Contract to be exchanged. The
exchange will become effective as of the close of the Valuation Period in which
all of these three items are received by the Company at its home office. A
Participant's Investment Account Value of the Pension Builder Plus Contract will
be determined as of the time the exchange becomes effective and will be
transferred to the PVA Contract. No surrender charge otherwise applicable to the
Pension Builder Plus Contract will apply to the surrender affecting the
exchange. The PVA Contract's contingent deferred sales charge will be computed
as if prior Purchase Payments for the Pension Builder Plus Contract have been
made for the PVA Contract on the date of issue of the Pension Builder Plus
Contract. The contingent deferred sales charge for additional Purchase Payments
made under the PVA Contract after the transfer of the Accumulated Value from the
Pension Builder Plus Contract will be computed based on the number of years that
the additional Purchase Payments to which the withdrawal is attributed has been
credited under the PVA Contract, as provided in this Prospectus.
Summary of Differences between Contracts
The Pension Builder Plus Contract and the PVA Contract differ substantially, as
summarized below. There may be additional differences important to you and the
prospectuses of both contracts should be reviewed carefully before making the
exchange.
Contingent Deferred Sales Charge. The contingent deferred sales charge under the
PVA Contract applies to all Purchase Payments received during any Contract Year.
The contingent deferred sales charge for the Pension Builder Plus Contract is
based upon the number of Contribution Years a Participant has been covered under
the Contract (rather than on the year in which the Contribution was made). Thus,
for certain Participants of the Pension Builder Plus Contracts, new Purchase
Payments made after accepting the exchange offer would be subject to the
contingent deferred sales charge under the PVA Contract, but new Purchase
Payments made under the Pension Builder Plus Contract would not have been
subject to such a charge, or would have been subject to a lesser charge had the
offer been rejected.
The contingent deferred sales charge of the PVA Contract will be waived under
all of the circumstances under which the contingent deferred sales charge to the
Pension Builder Plus Contract would be waived and, in addition the PVA
Contract's charge does not apply to:
1. any amount distributed to satisfy the minimum distribution
requirements of Section 401(a)9 of the Internal Revenue Code;
2. where permitted by state law, to a withdrawal made after the first
Anniversary as a result of the Owner's or Annuitant's Critical Need,
as described in this Prospectus; and
3. to the Free Surrender Privilege as defined in this Prospectus.
Annual Fee versus Administration Charge. The PVA Contract is subject to an
Annual Fee equal to the lesser of $30 or 2% of the Owner's Accumulated Value.
The Annual Fee currently does not apply to Contracts that have an Accumulated
Value of at least $30,000. In addition, the Company has reserved the right to
assess each Division of the Separate Account with a daily administrative expense
charge at an annual rate of .15% of the average daily net assets of the
Division. This charge is not currently imposed. The Pension Builder Plus
Contract is subject to annual Administration Charge equal to $25 plus an amount
equal to .5% of the first $50,000 of the value of all Investment Accounts of the
Participant under the Contract. Thus, the maximum annual Administration Charge
under the Pension Builder Plus Variable Annuity Contract is $275.
Mortality and Expense Risks Charge. The annual mortality and expense risks
charge of the PVA Contract is equal to 1.25% of the average daily net assets of
the Separate Account. The mortality and expense risks charges applicable to the
Pension Builder Plus Contract are 1.4965% (1.0001% for Roll-over Individual
Retirement Annuities) of the average daily net assets.
Death Benefit. The benefit payable on death of the annuitant or owner of the PVA
Contract is the greater of :
1. the Accumulated Value on the date the Company receives Notice of
death; or
2. Total Purchase Payments less any partial surrenders and Surrender
Charges as of the date the Company receives Notice of death; or
3. the death benefit that was in effect on any prior anniversary that is
divisible equally by 7, plus any Purchase Payments and less any
partial surrenders made after that Anniversary.
The death benefit payable under the Pension Builder Plus Contract is equal to
the market value of a Participant's Investment Account Values as of the date the
Company receives proof of death. The PVA Contract's death benefit thus will be
at least equal to, and perhaps greater than, that of the Pension Builder Plus
Contract.
Right to Examine after Exchange
Persons who, under the terms of this exchange offer, exchange their Pension
Builder Plus Contract for the PVA Contract and subsequently revoke the PVA
Contract within the time permitted, as described in the section of this
Prospectus captioned "Right to Examine the Contract," will have their Pension
Builder Plus Contract automatically reinstated as of the date of revocation. The
refunded amount will be applied as the new current Accumulated Value under the
reinstated Contract, which may be more or less than it would have been had no
exchange and reinstatement occurred. The refunded amount will be allocated
initially among the Divisions of the reinstated Pension Builder Plus Contract in
the same proportion that the value in each Division bore to the transferred
Accumulated Value on the date of the exchange of the PVA Contract. For purposes
of calculating any contingent deferred sales charge under the reinstated Pension
Builder Plus Contract, the reinstated Contract will be deemed to have been
issued and to have received past Purchase Payments as if there had been no
exchange.
<PAGE>
PART B
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT B
FLEXIBLE VARIABLE ANNUITY ("FVA") CONTRACT
Statement of Additional Information
dated May 1, 1996
This Statement of Additional Information provides information about Principal
Mutual Life Insurance Company Separate Account B Flexible Variable Annuity (the
"Contract") 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:
Variable Annuity
The Principal Financial Group
P.O. Box 9382
Des Moines Iowa 50306-9382
Telephone: 1-800-852-4450
RF 581 B-3
<PAGE>
TABLE OF CONTENTS
Independent Auditors ................................................... 3
Calculation of Yield and Total Return................................... 3
Taxation Under Certain Retirement Plans................................. 4
Financial Statements
Principal Mutual Life Insurance Company Separate Account B............ 6
Report of Independent Auditors ..................................... 22
Principal Mutual Life Insurance Company............................... 23
Report of Independent Auditors ..................................... 42
<PAGE>
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.
CALCULATION OF YIELD AND TOTAL RETURN
The Separate Account may publish advertisements containing information
(including graphs, charts, tables and examples) about the performance of one or
more of its Divisions. The Contract was not offered prior to June 16, 1994.
However, shares of some of the Principal Mutual Funds in which Divisions of the
Separate Account invest, were offered prior to that date. Thus, the Separate
Account may publish advertisements containing information about the hypothetical
performance of one or more of its Divisions for this Contract had the contract
been issued on or after the date the Mutual Fund in which such Division invests
was first offered. The yield and total return figures described below will vary
depending upon market conditions, the composition of the underlying Mutual
Funds' portfolios and operating expenses. These factors and possible differences
in the methods used in calculating yield and total return should be considered
when comparing the Separate Account performance figures to performance figures
published for other investment vehicles. The Separate Account may also quote
rankings, yields or returns as published by independent statistical services or
publishers and information regarding performance of certain market indices. Any
performance data quoted for the Separate Account represents only historical
performance and is not intended to indicate future performance.
From time to time the Account advertises its Money Market Division's "yield" and
"effective yield" for these Contracts. 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 under
the contract 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 a sales load deducted from purchase payments which, if included, would
reduce the "yield" and "effective yield."
In addition, from time to time, the Separate Account will advertise the "yield"
for certain other Divisions for the Contract. The "yield" of a Division is
determined by annualizing the net investment income per unit for a specific,
historical 30-day period and dividing the result by the ending maximum offering
price of the unit for the same period. This yield quotation does not reflect a
contingent deferred sales charge which, if included, would reduce the "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 6% to 0% over
a period of 7 years. The Separate Account may also advertise total return
figures for 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 "Charges and Deductions" in the Prospectus for a discussion of
contingent deferred sales charges.
<TABLE>
<CAPTION>
Following are the hypothetical average annual total returns for the period
ending December 31, 1995 assuming the contract had been offered as of the
effective dates of the underlying mutual funds in which the Divisions invest:
With Contingent Deferred Without Contingent
Sales Charge Deferred Sales Charge
Division One Year Five Year Ten Year One Year Five Year Ten Year
- ------------------------------ -------- --------- -------- -------- --------- --------
<PAGE>
<S> <C> <C> <C> <C> <C> <C>
Aggressive Growth Division 36.41 23.13(1) 23.13 42.41 26.46(1) 26.46
Asset Allocation Division 13.17 7.93(1) 7.93 19.17 11.51(1) 11.51
Balanced Division 17.04 13.57 10.66(2) 23.04 14.05 10.66(2)
Bond Division 14.66 9.15 9.11(2) 20.66 9.71 9.11(2)
Capital Accumulation Division 24.28 14.86 11.00 30.28 15.32 11.00
Emerging Growth Division 21.41 20.41 15.86(2) 27.41 20.79 15.86(2)
Government Securities Division 11.60 7.40 7.90(2) 17.60 8.00 7.90(3)
Growth Division 18.06 13.62(4) 13.62 24.06 16.90(4) 16.90
Money Market Division -1.40 2.32 4.52 4.26 3.04 4.52
World Division 6.75 1.25(4) 1.25 12.75 4.71(4) 4.71
<FN>
(1) Period from June 1, 1994 through December 31, 1995.
(2) Period from December 18, 1987 through December 31, 1995.
(3) Period from April 9, 1987 through December 31, 1995.
(4) Period from May 2, 1994 through December 31, 1995.
</FN>
</TABLE>
TAXATION UNDER CERTAIN RETIREMENT PLANS
INDIVIDUAL RETIREMENT ANNUITIES
Purchase Payments. Individuals may make contributions for individual retirement
annuity ("IRA") Contracts. Deductible contributions for any year may be made up
to the lesser of $2,000 or 100% of compensation for individuals who (1) are not
(and whose spouses are not) active participants in another retirement plan, (2)
are unmarried and have adjusted gross income of $25,000 or less, or (3) are
married and have adjusted gross income of $40,000 or less. Such individuals may
establish an IRA for a spouse who makes no contribution to an IRA for the tax
year. The annual purchase payments for both spouses' Contracts cannot exceed the
lesser of $2,250 or 100% of the working spouse's earned income, and no more than
$2,000 may be contributed to either spouse's IRA for any year. Individuals who
are active participants in other retirement plans and whose adjusted gross
income (with certain special adjustments) exceeds the cut-off point ($25,000 for
unmarried, $40,000 for married persons filing jointly, and $0 for married
persons filing a separate return) by less than $10,000 are entitled to make
deductible IRA contributions in proportionately reduced amounts. For example, a
married individual who is an active participant in another retirement plan and
files a separate tax return is entitled to a partial IRA deduction if the
individual's adjusted gross income is less than $10,000, and no IRA deduction if
his or her adjusted gross income is equal to or greater than $10,000.
An individual may make non-deductible IRA contributions to the extent of the
excess of (1) the lesser of $2,000 ($2,250 in the case of a spousal IRA) or 100%
of compensation over (2) the IRA deductible contributions made with respect to
the individual.
An individual may not make any contribution to his/her own IRA for the year in
which he/she reaches age 70 1/2 or for any year thereafter.
Taxation of Distributions. Distributions from IRA Contracts are taxed as
ordinary income to the recipient, although special rules exist for the tax-free
return of non-deductible contributions. In addition, taxable distributions
received under an IRA Contract prior to age 59 1/2 are subject to a 10% penalty
tax in addition to regular income tax. Certain distributions are exempted from
this penalty tax, including distributions following the owner's death or
disability if the distribution is paid as part of a series of substantially
equal periodic payments made for the life (or life expectancy) of the Owner or
the joint lives (or joint life expectancies) of Owner and the Owner's designated
Beneficiary.
Required Distributions. Generally, distributions from IRA Contracts must
commence not later than April 1 of the calendar year following the calendar year
in which the employee attains age 70 1/2, and such distributions must be made
over a period that does not exceed the life expectancy of the employee (or the
employee and Beneficiary). A penalty tax of 50% would be imposed on any amount
by which the minimum required distribution in any year exceeded the amount
actually distributed in that year. In addition, in the event that the employee
dies before his or her entire interest in the Contract has been distributed, the
employee's entire interest must be distributed in accordance with rules similar
to those applicable upon the death of the Contract Owner in the case of a
non-qualified contract, as described in the Prospectus.
Tax-Free Rollovers. The Code permits the taxable portion of funds to be
transferred in a tax-free rollover from a qualified employer pension,
profit-sharing, annuity, bond purchase or tax-deferred annuity plan to an IRA
Contract if certain conditions are met, and if the rollover of assets is
completed within 60 days after the distribution from the qualified plan is
received. A direct rollover of funds may avoid a 20% federal tax withholding
generally applicable to qualified plans or tax-deferred annuity plan
distributions. In addition, not more frequently than once every twelve months,
amounts may be rolled over tax-free from one IRA to another, subject to the
60-day limitation and other requirements. The once-per-year limitation on
rollovers does not apply to direct transfers of funds between IRA custodians or
trustees.
SIMPLIFIED EMPLOYEE PENSION PLANS AND SALARY REDUCTION SIMPLIFIED EMPLOYEE
PENSION PLANS
Purchase Payments. Under Section 408(k) of the Code, employers may establish a
type of IRA plan referred to as a simplified employee pension plan (SEP).
Employer contributions to a SEP cannot exceed the lesser of $22,500 or 15% or
the employee's earned income. Employees of certain small employers may have
contributions made to the salary reduction simplified employee pension plan
("SAR/SEP") on their behalf on a salary reduction basis. These salary reduction
contributions may not exceed $9,500 in 1996, which is indexed for inflation.
Employees of tax-exempt organizations and state and local government agencies
are not eligible for SAR/SEPs.
Taxation of Distributions. Generally, distribution payments from SEPs and
SAR/SEPs are subject to the same distribution rules described above for IRAs.
Required Distributions. SEP and SAR/SEP distributions are subject to the same
minimum required distribution rules described above for IRAs.
Tax-Free Rollovers. Generally, rollovers and direct transfers may be made to and
from SEPs and SAR/SEPs in the same manner as described above for IRAs, subject
to the same conditions and limitations.
<PAGE>
<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 Emerging Government Money Market
Bond Division Accumulation Growth Securities Growth Division Division World Division
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 Emerging Government Money Market
Bond Division Accumulation Growth Securities Growth Division Division World Division
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 Emerging Government Money Market
Bond Division Accumulation Growth Securities Growth Division World Division
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
