PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
PERSONAL VARIABLE
(A Group Variable Annuity Contract
For Employer Sponsored Qualified
And Non-Qualified Retirement Plans)
Issued by Principal Mutual Life Insurance Company (the "Company")
Prospectus dated May 1, 1997
This Prospectus concisely sets forth information about Principal Mutual
Life Insurance Company Separate Account B and Personal Variable (a Group
Variable Annuity Contract) (the "Contract") that an investor ought to know
before investing. It should be read and retained for future reference.
Additional information about the Contracts, including a Statement of
Additional Information, dated May 1, 1997, 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 32 of this Prospectus. A copy of the
Statement of Additional Information can be obtained, free of charge, upon
request by writing or telephoning:
Princor Financial Services Corporation
A Member of
The Principal Financial Group
Des Moines, IA 50392
Telephone: 1-800-633-1373
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 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. The Funds' prospectus should be
kept for future reference.
TABLE OF CONTENTS
Page
Glossary of Special Terms ................................................. 4
Expense Table and Example.................................................. 6
Condensed Financial Information............................................ 7
Summary ................................................................. 8
Description of Principal Mutual Life Insurance Company .................... 10
Principal Mutual Life Insurance Company Separate Account B ................ 10
Deductions under the Contract ............................................. 12
Contingent Deferred Sales Charge...................................... 12
Contract Administration Expense/Recordkeeping Charge ................. 13
Mortality and Expense Risks Charge ................................... 14
Other Expenses .......................................................... 14
Application Fee and Transfer Fee...................................... 15
Documentation Expense................................................. 15
Location Fee ......................................................... 15
Outside Asset Recordkeeping Charge.................................... 15
Special Services...................................................... 16
Surplus Distribution at Sole Discretion of the Company .................... 16
The Contract ............................................................. 16
Contract Values and Accounting Before Annuity Commencement Date ...... 16
Investment Accounts .............................................. 16
Unit Value ....................................................... 16
Net Investment Factor ............................................ 17
Hypothetical Example of Calculation of Unit Value for All
Divisions Except the Money Market Division................... 17
Hypothetical Example of Calculation of Unit Value for
the Money Market Division................................... 17
Income Benefits ...................................................... 17
Variable Annuity Payments......................................... 17
Selecting a Variable Annuity .................................... 18
Forms of Variable Annuities ..................................... 18
Basis of Annuity Conversion Rates ............................... 19
Determining the Amount of the First Variable Annuity Payment .... 20
Determining the Amount of the Second and Subsequent
Monthly Variable Annuity Payments ............................. 20
Hypothetical Example of Calculation of Variable Annuity Payments. 20
Flexible Income Option............................................ 21
Payment on Death of Plan Participant.................................. 22
Prior to Annuity Purchase Date ................................... 22
Subsequent to Annuity Purchase Date .............................. 22
Page
Withdrawals and Transfers ............................................ 22
Cash Withdrawals ................................................. 22
Transfers Between Divisions ...................................... 23
Transfers to the Contract ........................................ 23
Transfers to Companion Contract .................................. 23
Special Situation Involving Alternate Funding Agents ............. 24
Postponement of Cash Withdrawal or Transfer ...................... 24
Loans ........................................................... 24
Other Contractual Provisions ......................................... 24
Contribution Limits .............................................. 24
Assignment ....................................................... 24
Cessation of Contributions ....................................... 24
Substitution of Securities........................................ 25
Changes in the Contract .......................................... 25
Statement of Values........................................................ 25
Services Available by Telephone............................................ 25
Distribution of the Contract............................................... 26
Performance Calculation.................................................... 26
Voting Rights ............................................................ 27
Federal Tax Status......................................................... 27
Taxes Payable by Owners of Benefits and Annuitants.................... 27
Tax-Deferred Annuity Plans........................................ 28
Public Employee Deferred Compensation Plans....................... 29
401(a) Plans...................................................... 29
Creditor-Exempt Non-Qualified Plans............................... 30
General Creditor Non-Qualified Plans.............................. 31
Fund Diversification.................................................. 31
State Regulation ......................................................... 31
Legal Opinions ........................................................... 31
Legal Proceedings ......................................................... 32
Registration Statement..................................................... 32
Independent Auditors....................................................... 32
Contractholders' Inquiries................................................. 32
Table of Contents of the Statement of Additional Information............... 32
This Prospectus does not constitute an offer of, or solicitation of any
offer to acquire, any interest or participation in the Contracts in any
jurisdiction in which such an offer or solicitation may not lawfully be made. No
person is authorized to give any information or to make any representations in
connection with the Contracts other than those contained in this Prospectus.
GLOSSARY OF SPECIAL TERMS
Aggregate Investment Account Value -- The sum of the Investment Account Values
for Investment Accounts which correlate to a Plan Participant.
Annual Average Balance -- The total value at the beginning of the Deposit Year
of all Investment Accounts which correlate to a Plan Participant under the
contract and other Plan assets that correlate to a Plan Participant that are not
allocated to the contract or an Associated or Companion Contract but for which
the Company provides recordkeeping services ("Outside Assets"), adjusted by the
time weighted average of Contributions to, and withdrawals from, Investment
Accounts and Outside Assets (if any) which correlate to the Plan Participant
during the period.
Annuity Change Factor -- The factor used to determine the change in value of a
Variable Annuity in the course of payment.
Annuity Commencement Date -- The beginning date for Annuity Payments.
Annuity Premium -- The amount applied under the contract to purchase an annuity.
Annuity Purchase Date -- The date an Annuity Premium is applied to purchase an
annuity.
Associated Contract -- An annuity contract issued by the Company to the same
Contractholder to fund the same or a comparable Plan as determined by the
Company.
Commuted Value -- The dollar value, as of a given date, of remaining Variable
Annuity Payments. It is determined by the Company using the interest rate
assumed in determining the initial amount of monthly income and assuming no
variation in the amount of monthly payments after the date of determination.
Companion Contract -- An unregistered group annuity contract offering guaranteed
interest crediting rates and which is issued by the Company to the
Contractholder for the purpose of funding benefits under the Plan. The Company
must agree in writing that a contract is a Companion Contract.
Contingent Deferred Sales Charge -- The charge deducted from certain cash
withdrawals from an Investment Account before the Annuity Purchase Date,
payments made because of a Termination of Employment or amounts transferred to
an Alternate Funding Agent.
Contract Administration/Recordkeeping Charge -- A charge deducted or paid
separately by the Contractholder on a quarterly basis each Deposit Year prior to
the Annuity Commencement Date or on a complete redemption of Investment Accounts
which correlate to a Plan Participant from the Aggregate Investment Accounts
that correlate to each Plan Participant.
Contract Date -- The date this contract is effective, as shown on the face page
of the contract.
Contract Year -- A period beginning on a Yearly Date and ending on the day
before the next Yearly Date.
Contractholder -- The entity to which the contract will be issued, which will
normally be an Employer, an association, or a trust established for the benefit
of Plan Participants and their beneficiaries.
Contributions -- Amounts contributed under the contract which are accepted by
the Company.
Deposit Year -- The twelve-month period ending on a day selected by the
Contractholder.
Division -- The part of Separate Account B which is invested in shares of a
single Mutual Fund.
Employer -- The corporation, sole proprietor, firm, organization, agency or
political subdivision named as employer in the Plan and any successor.
Flexible Income Option -- A periodic distribution from the contract in an amount
equal to the minimum annual amount determined in accordance with the minimum
distribution rules of the Internal Revenue Code, or a greater amount as
requested by the Owner of Benefits.
Funding Agent -- An insurance company, custodian or trustee designated by the
Contractholder and authorized to receive any amount or amounts transferred from
the contract described in this prospectus. Funding Agent will also mean
Principal Mutual Life Insurance Company where the Contractholder directs the
Company to transfer such amounts from the contract described in this prospectus
to another group annuity contract issued by the Company to the Contractholder.
Internal Revenue Code ("Code") -- The Internal Revenue Code of 1986, as amended,
and the regulations thereunder. Reference to the Internal Revenue Code means
such Code or the corresponding provisions of any subsequent revenue code and any
regulations thereunder.
Investment Account -- An account that correlates to a Plan Participant
established under the contract for each type of Contribution and for each
Division in which the Contribution is invested.
Investment Account Value -- The value of an Investment Account for a Division
which on any date will be equal to the number of units then credited to such
account multiplied by the Unit Value of this series of contracts for that
Division for the Valuation Period in which such date occurs.
Mutual Fund -- A registered open-end investment company in which a Division of
Separate Account B invests.
Net Investment Factor -- The factor used to determine the change in Unit Value
of a Division during a Valuation Period.
Normal Income Form -- The form of benefit to be provided under the Plan if the
Owner of Benefits does not elect some other form. If the Plan does not specify a
Normal Income Form, the Normal Income Form shall be: (a) for an unmarried Plan
Participant, the single life with ten years certain annuity option described in
this Prospectus, (b) for a married Plan Participant, the joint one-half survivor
annuity option described in this Prospectus.
Notification -- Any form of notice received by the Company at the Company's home
office and approved in advance by the Company including written forms,
electronic transmissions, telephone transmissions, facsimiles or photocopies.
Owner of Benefits -- The entity or individual that has the exclusive right to be
paid benefits and exercise rights and privileges pursuant to such benefits. The
Owner of Benefits is the Plan Participant under all contracts except contracts
used to fund General Creditor Non-Qualified Plans (see "Summary") wherein the
Contractholder is the Owner of Benefits.
Plan -- The plan established by the Employer in effect on the date the contract
is executed and as amended from time to time, which the Employer has designated
to the Company in writing as the Plan funded by the contract.
Plan Participant -- A person who is (i) a participant under the Plan, (ii) a
beneficiary of a deceased participant, or (iii) an alternative payee under a
Qualified Domestic Relations Order, in whose name an Investment Account has been
established under this contract.
Qualified Domestic Relations Order -- A Qualified Domestic Relations Order as
defined in Internal Revenue Code Section 414(p)(1)(A).
Quarterly Date -- The last Valuation Date of the third, sixth, ninth and twelfth
month of each Deposit Year.
SEPARATE ACCOUNT B -- A separate account established by the Company under Iowa
law to receive Contributions under the Contract offered by this Prospectus and
other contracts issued by the Company. It is divided into a Balanced Division,
Bond Division, Capital Accumulation Division, Emerging Growth Division,
Government Securities Division, Growth Division, Money Market Division and a
World Division. Additional Divisions may be added in the future.
Termination of Employment -- A Plan Participant's termination of employment with
the Employer, determined under the Plan and as reported to the Company.
Total and Permanent Disability -- The condition of a Plan Participant when, as
the result of sickness or injury, the Plan Participant is prevented from
engaging in any substantial gainful activity and such total disability has been
continuous for a period of at least six months. For contracts sold in the state
of Pennsylvania, this term shall have the same meaning as defined in the Plan.
The Plan Participant must submit due proof thereof which is acceptable to the
Company.
Unit Value -- The value of a unit of a Division of Separate Account B.
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.
Variable Annuity Payments -- A series of periodic payments, the amounts of which
are not guaranteed but which will increase or decrease to reflect the investment
experience of the Capital Accumulation Division of Separate Account B. Periodic
payments made pursuant to the Flexible Income Option are not Variable Annuity
Payments.
Variable Annuity Reserves -- The reserves held for annuities in the course of
payment for the Contract.
Yearly Date -- The Contract Date and the same day of each year thereafter.
EXPENSE TABLE AND EXAMPLE
The following tables depict fees and expenses applicable to the aggregate
of all Investment Accounts that correlate to a Plan Participant established
under the Contract. The purpose of the table is to assist the Owner of Benefits
in understanding the various costs and expenses that an Owner of Benefits 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. The example below should not be considered a representation of past or
future expenses; actual expenses may be greater or lesser than those shown. See
"Deductions under the Contract."
EXPENSE TABLE(1)
Transaction Expenses
Sales Load Imposed on Purchases
(as a percentage of purchase payments) None
Deferred Sales Load (2)
(as a percentage of amount surrendered)
For Withdrawals Occurring During
Plan Participant's Year of Coverage
1 2 3 4 5 6 7 Thereafter
- ------------------------------------------------------------------------
5.00% 4.25% 3.50% 2.75% 2.00% 1.25% 0.50% 0%
Surrender Fees None
Exchange Fee None
Annual Contract Fee (3)
Contract Administration Expense/ $31 per Plan Participant + .35% of the
Recordkeeping Charge (2) Annual Average Balance of the
Investment Accounts and Outside Assets
which correlate to the Plan Participant
(4) (5)
Separate Account Annual Expenses
(as a percentage of average account value)
Mortality and Expense Risk Charge (2) .64%
Annual Expenses of Mutual Funds
(as a percentage of average net assets of the following mutual funds)
Management Other Total Mutual Fund
Fees Expenses Annual Expenses
Principal Balanced Fund .60% .03% .63%
Principal Bond Fund .50 .03 .53
Principal Capital Accumulation Fund .48 .01 .49
Principal Emerging Growth Fund .64 .02 .66
Principal Government Securities Fund .50 .02 .52
Principal Growth Fund .50 .02 .52
Principal Money Market Fund .50 .06 .56
Principal World Fund .75 .15 .90
(1) In addition to the expenses described in the Expense Table, the
Contractholder must pay a $825 application fee. If plan records are
transferred from another recordkeeper, a transfer fee of $500 plus $3 per
Plan Participant (maximum $1,000) must also be paid. The Contractholder
must also pay a documentation expense (if applicable) and, if services are
provided to multiple employee group locations, a location fee. If the
Company provides recordkeeping services for plan assets other than assets
under this contract or an Associated or Companion Contract, the
Contractholder must pay an outside asset recordkeeping charge that varies
depending on the number of Plan Participants to which such Outside Assets
correlate and whether ongoing Contributions will be allocated to such
Outside Assets. None of these fees are deductible from Investment Accounts.
See "Other Expenses."
(2) The Contingent Deferred Sales Charge, Contract Administration
Expense/Recordkeeping Charge and mortality and expense risks charge may be
changed on 60-days notice subject to certain limitations.
(3) Annual contract fees are charged on a quarterly basis or assessed upon a
complete redemption of all Investment Accounts which correlate to a Plan
Participant. The amount of the quarterly charge deducted from Investment
Accounts which correlate to a Plan Participant will not exceed 1% of the
aggregate value of such accounts as of the date the charges are deducted.
The 1% limitation on the Contract Administration Expense/Recordkeeping
Charge does not apply if the annual contract fees are paid by the
Contractholder. See "Deductions Under the Contract."
(4) If benefit plan reports are mailed to the Plan Participants' home address,
the $31 charge will be increased to $34. If more than two 401(k) or 401(m)
non-discrimination tests are provided by the Company in any Deposit Year,
the $31 ($34) per Plan Participant Contract Administration Expense may be
increased by 3% for each additional test. If benefit plan reports are
mailed monthly instead of quarterly, the $31($34) charge will be increased
by 24%. The $31($34) charge will be reduced by 10% if data, investment
elections and ongoing Contributions are reported to the Company in the
Company's standard format on magnetic tapes or computer diskettes. See
"Deductions Under the Contract."
(5) An additional $25 annual charge will be made for aggregate Investment
Account Values which correlate to the Plan Participant for which a Flexible
Income Option has been selected. See "Deductions Under the Contract."
EXAMPLE
<TABLE>
<CAPTION>
Separate Account
Division 1 Year 3 Years 5 Years 10 Years
------------------------------------------------------------------------- ------- ------- --------
If the Investments Accounts which correlate to a Plan
Participant are surrendered at the end of the applicable time period:
<S> <C> <C> <C> <C> <C>
The Owner of Benefits would pay the Balanced $70 $97 $123 $217
following expenses on a $1,000 invest-Bond $69 $93 $118 $205
ment, assuming a 5% annual return on Capital Accumulation $69 $92 $116 $201
assets: Emerging Growth $71 $97 $125 $220
Government Securities $69 $93 $117 $204
Growth $69 $93 $117 $204
Money Market $70 $94 $119 $208
World $73 $105 $137 $246
</TABLE>
<TABLE>
<CAPTION>
If the Investment Accounts which correlate to a Plan Participant are annuitized
at the end of the applicable time period or rate not surrendered:
<S> <C> <C> <C> <C> <C>
The Owner of Benefits would pay the Balanced $19 $58 $100 $217
following expenses on a $1,000 invest-Bond $18 $55 $94 $205
ment, assuming a 5% annual return on Capital Accumulation $17 $54 $92 $201
assets: Emerging Growth $19 $59 $102 $220
Government Securities $18 $54 $94 $204
Growth $18 $54 $94 $204
Money Market $18 $56 $96 $208
World $22 $67 $114 $246
</TABLE>
CONDENSED FINANCIAL INFORMATION
Financial statements are included in the Statement of Additional
Information. Following are Unit Values for the Personal Variable Annuity
Contract for the periods ended December 31.
<TABLE>
<CAPTION>
Accumulation Unit Value Number of Accumulation Units
Beginning End Outstanding at End of Period
of period of period (in thousands)
Balanced Division
Year Ended December 31
<S> <C> <C> <C> <C>
1996 $1 .208 $1.359 1,015
1995 .975 1.208 327
Period Ended December 31, 1994 (1) 1.000 .975 101
Bond Division
Year Ended December 31
1996 1.229 1.251 274
1995 1.012 1.229 124
Period Ended December 31, 1994 (1) 1.000 1.012 0
Capital Accumulation Division
Year Ended December 31
1996 1.498 1.840 2,915
1995 1.142 1.498 2,336
1994 1.143 1.142 1,638
1993 1.066 1.143 504
1992 (2) 1.000 1.066 14
Emerging Growth Division
Year Ended December 31
1996 1.270 1.530 830
1995 .990 1.270 288
Period Ended December 31, 1994 (1) 1.000 .990 14
(1) Commenced operations on October 3, 1994.
(2) Commenced operations on July 15, 1992.
</TABLE>
<TABLE>
<CAPTION>
Accumulation Unit Value Number of Accumulation Units
Beginning End Outstanding at End of Period
of period of period (in thousands)
Government Securities Division
Year Ended December 31
<S> <C> <C> <C> <C>
1996 $1.255 $1.289 1,936
1995 1.060 1.255 1,890
1994 1.116 1.060 1,575
1993 1.020 1.116 809
1992 (2) 1.000 1.020 15
Growth Division
Year Ended December 31
1996 1.249 1.397 814
1995 1.000 1.249 278
Period Ended December 31, 1994 (1) 1.000 1.000 5
Money Market Division
Year Ended December 31
1996 1.119 1.169 841
1995 1.066 1.119 1,143
1994 1.033 1.066 742
1993 1.011 1.033 183
1992 (2) 1.000 1.011 29
World Division
Year Ended December 31
1996 1.087 1.352 487
1995 .957 1.087 160
Period Ended December 31, 1994 (1) 1.000 .957 21
(1) Commenced operations on October 3, 1994.
(2) Commenced operations on July 15, 1992.
</TABLE>
SUMMARY
The following summary should be read in conjunction with the detailed
information appearing elsewhere in this Prospectus.
Contract Offered
The group variable annuity contract offered by this Prospectus is issued by
the Company and designed to aid in retirement planning. The contract provides
for the accumulation of Contributions and the payment of Variable Annuity
Payments on a completely variable basis.
The Contract is generally available to fund the following types of plans:
1. Tax Deferred Annuity Plans ("TDA Plan"). Annuity purchase plans adopted
pursuant to Section 403(b) of the Code by certain organizations that qualify for
tax-exempt status under Section 501(c)(3) of the Code or are eligible public
schools or colleges. Contracts are issued to Contractholders, which typically
are such tax-exempt organizations or an association representing such
organization or its employees. Plan Participants may obtain certain Federal
income tax benefits provided under Section 403(b) of the Code (see "Federal Tax
Status").
2. Public Employee Deferred Compensation Plans ("PEDC Plan"). Public
Employee Deferred Compensation plans or programs adopted by a unit of a state or
local government and non-profit organizations pursuant to Section 457 of the
Code. (See "Federal Tax Status"). Note: The contract is not currently offered to
fund government 457 Plans in the state of New York.
3. Qualified Pension or Profit-Sharing Plans ("401(a) Plans"). Plans
adopted pursuant to Section 401(a) of the Code. Participants of 401(a) Plans
obtain income tax benefits provided under the Code as qualified pension plans.
4. Creditor-Exempt or General Creditor Non-Qualified Plans
("Creditor-Exempt" or "General Creditor" Plan). Employer sponsored savings,
compensation or other plans the contributions for which are made without
Internal Revenue Code restrictions generally applicable to qualified retirement
plans. (See "Federal Tax Status").
The Contract will be sold primarily by persons who are insurance agents of
or brokers for Principal Mutual Life Insurance Company. In addition, these
persons will usually be registered representatives of Princor Financial Services
Corporation, which acts as distributor for the Contract. See "Distribution of
the Contract."
Contributions
The contract prescribes no limits on the minimum Contribution which may be
made to an Investment Account. Plan Participant maximum Contributions are
discussed under "Federal Tax Status." Contributions may also be limited by the
Plan. The Company may also limit Contributions on 60-days notice.
All Contributions made pursuant to the contract are allocated to one or
more Investment Accounts which correlate to a Plan Participant. An Investment
Account is established for each type of Contribution for each Division of
Separate Account B as directed by the Owner of Benefits. Currently Separate
Account B has eight Divisions: a Balanced Division, Bond Division, Capital
Accumulation Division, Emerging Growth Division, Government Securities Division,
Growth Division, Money Market Division and a World Division. The Contractholder
may choose to limit the number of Divisions available to the Owner of Benefits,
but the Money Market Division may not be so restricted to the extent the
Division is necessary to permit the Company to allocate initial Contributions
and the Capital Accumulation Division may not be so restricted to the extent the
Division is necessary to permit the Company to pay Variable Annuity Payments.
Additional Divisions may be added in the future. If no direction is provided for
a particular Contribution, such Contribution will be allocated to an Investment
Account which is invested in the Money Market Division.
Separate Account B
Each of the Divisions corresponds to one of the Mutual Funds in which
Contributions may be invested. The objective of the contract is to provide a
return on amounts contributed that will reflect the investment experience of the
Funds in which the Divisions to which Contributions are directed are invested.
The value of the Contributions accumulated in Separate Account B prior to the
Annuity Commencement Date will vary with the investment experience of the Mutual
Funds.
Each of the Divisions invests only in shares of a Mutual Fund as indicated
in the table below.
Division Mutual Fund
- ---------------- ------------------
Balanced Division Principal Balanced Fund, Inc.
Bond Division Principal Bond Fund, Inc.
Capital Accumulation Division Principal Capital Accumulation Fund, Inc.
Emerging Growth Division Principal Emerging Growth Fund, Inc.
Government Securities Division Principal Government Securities Fund, Inc.
Growth Division Principal Growth Fund, Inc.
Money Market Division Principal Money Market Fund, Inc.
World Division Principal World Fund, Inc.
Distributions, Transfers and Withdrawals
Variable Annuity Payments will be made on and after a Plan Participant's
Annuity Commencement Date. All Variable Annuity Payments will reflect the
performance of the Mutual Fund underlying the Capital Accumulation Division and
therefore the annuitant is subject to the risk that the amount of variable
annuity payments may decline. (See "Income Benefits.")
Generally, at any time prior to the Annuity Purchase Date, the Owner of
Benefits may transfer all or any portion of an Investment Account which
correlates to a Plan Participant to another available Investment Account
correlating to such Plan Participant. If a Companion Contract has been issued to
the Contractholder to fund the Plan, and if permitted by the Plan and Companion
Contract, amounts transferred from such Companion Contract may be invested in
this Contract to establish Investment Accounts which correlate to a Plan
Participant at any time at least one month before the Annuity Commencement Date.
Similarly, if the Company has issued a Companion Contract to the Contractholder,
and if permitted by the Plan and the Companion Contract, the Owner of Benefits,
subject to certain limitations, may file a Notification with the Company to
transfer all or a portion of the Investment Account values which correlate to a
Plan Participant to the Companion Contract. (See "Withdrawals and Transfers").
In addition, subject to any Plan limitations or any reduction for vesting
provided for in the Plan as to amounts available, the Owner of Benefits may
withdraw cash from the Investment Accounts that correlate to the Plan
Participant at any time prior to the Plan Participant's Termination of
Employment, disability, retirement or the Annuity Purchase Date subject to any
charges that may be applied. See "Withdrawals and Transfers." Note that
withdrawals before age 59 1/2 may involve an income tax penalty. See "Federal
Tax Status." No withdrawals are permitted after the Annuity Purchase Date.
DESCRIPTION OF PRINCIPAL MUTUAL LIFE INSURANCE COMPANY (The "Company")
Principal Mutual Life Insurance Company is a mutual life insurance company
with its home office at The Principal Financial Group, Des Moines, Iowa 50392,
telephone number 515-247-5111. It was originally incorporated under the laws of
the State of Iowa in 1879 as Bankers Life Association, changed its name to
Bankers Life Company in 1911 and changed its name to Principal Mutual Life
Insurance Company in 1986. It is a member of The Principal Financial Group, a
diversified family of insurance and financial services corporations.
Principal Mutual Life Insurance Company is authorized to do business in the
50 states of the United States, the District of Columbia, the Commonwealth of
Puerto Rico, and the Canadian Provinces of Alberta, British Columbia, Manitoba,
Ontario and Quebec. The Company offers a full range of products and services for
businesses, groups and individuals including individual insurance, pension plans
and group/employee benefits. The Company has ranked in the upper one percent of
life insurers in assets and premium income and has consistently received
excellent ratings from the major rating firms based upon the Company's claims
paying ability. The Company has $56.8 billion in assets under management and
serves more than 9.7 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 contract 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 Variable Annuity Payments, are general
corporate obligations of the Company.
Separate Account B was registered on July 17, 1970 with the Securities and
Exchange Commission as a unit investment trust under the Investment Company Act
of 1940, as amended. Such registration does not involve supervision by the
Commission of the investments or investment policies of Separate Account B.
Currently, Separate Account B has a Balanced Division, Bond Division,
Capital Accumulation Division, Emerging Growth Division, Government Securities
Division, Growth Division, Money Market Division and a World Division.
Each of the Divisions invests only in shares of a Mutual Fund as indicated
in the table below.
Division Mutual Fund
- ---------------- ------------------
Balanced Division Principal Balanced Fund, Inc.
Bond Division Principal Bond Fund, Inc.
Capital Accumulation Division Principal Capital Accumulation Fund, Inc.
Emerging Growth Division Principal Emerging Growth Fund, Inc.
Government Securities Division Principal Government Securities Fund, Inc.
Growth Division Principal Growth Fund, Inc.
Money Market Division Principal Money Market Fund, Inc.
World Division Principal World Fund, Inc.
The Mutual Funds are diversified, open-end management investment
companies. The investment Manager for the Mutual Funds is Princor Management
Corporation. Some of the Mutual Funds are also used to fund variable life
insurance contracts. See "Eligible Purchasers and Purchase of Shares" in the
Funds' prospectus for a discussion of the potential risks associated with "mixed
funding."
The investment objective of Principal Balanced Fund is to generate a total
return consisting of current income and capital appreciation while assuming
reasonable risks in furtherance of the investment objective. In seeking to
achieve the investment objective, the Fund invests primarily in growth and
income-oriented common stocks (including securities convertible into common
stocks), corporate bonds and debentures and short-term money market instruments.
The portions of the Fund's total assets invested in equity securities, debt
securities and short-term money market instruments are not fixed, although
ordinarily 40% to 70% of the Fund's portfolio will be invested in equity
securities with the balance of the portfolio invested in debt securities.
The investment objective of Principal Bond Fund is to provide as high a
level of income as is consistent with preservation of capital and prudent
investment risk. In seeking to achieve the investment objective, the Fund
predominantly invests in marketable fixed-income securities. Investments will be
made generally on a long-term basis, but the Fund may make short-term
investments from time to time as deemed prudent by the Fund's Manager. Longer
maturities typically provide better yields but will subject the Fund to a
greater possibility of substantial changes in the values of its portfolio
securities as interest rates change.
The investment objective of Principal Capital Accumulation Fund is
primarily long-term capital appreciation and secondarily growth of investment
income. The Fund invests primarily in common stocks, but it may invest in other
equity securities. In making selections for the Fund's investment portfolio, the
Manager uses an approach described broadly as that of fundamental analysis. In
pursuit of the Fund's investment objectives, investments will be made in
securities which as a group appear to offer long-term prospects for capital and
income growth. Securities chosen for investment may include those of companies
which the Fund's Manager believes can reasonably be expected to share in the
growth of the nation's economy over the long term.
The objective of Principal Emerging Growth Fund is to achieve capital
appreciation. The strategy of this Fund is to invest primarily in common stocks
and securities (both debt and preferred stock) convertible into common stocks of
emerging and other growth-oriented companies that, in the judgment of the Fund's
Manager, are responsive to changes within the marketplace and have the
fundamental characteristics to support growth. In pursuing its objective of
capital appreciation, the Emerging Growth Fund may invest, for any period of
time, in any industry, in any kind of growth-oriented company, whether new and
unseasoned or well known and established.
Principal Government Securities Fund has an investment objective of a high
level of current income, liquidity and safety of principal. The Fund seeks to
achieve this objective through the purchase of obligations issued or guaranteed
by the United States Government or its agencies, with up to 55% of the Fund's
assets invested in Government National Mortgage Association Certificates ("GNMA
Certificates"). Fund shares, however, are not guaranteed by the United States
Government. The value of the Fund's investments fluctuates as interest rates
change. The value rises when rates decline and falls when rates increase.
Expected prepayments of mortgages included in a GNMA certificate can affect the
market value of the certificate, and actual prepayments can affect the return
ultimately received.
The objective of Principal Growth Fund is growth of capital. Realization of
current income will be incidental to the objective of growth of capital. The
Fund will invest primarily in common stocks, but it may invest in other equity
securities. In pursuit of the Fund's investment objective, investments will be
made in securities which as a group appear to possess potential for appreciation
in market value. Common stocks chosen for investment may include those of
companies which have a record of sales and earnings growth that exceeds the
growth rate of corporate profits of the S&P 500 or which offer new products or
new services. The policy of investing in securities which have a high potential
for growth of capital can mean that the assets of the Fund may be subject to
greater risk than securities which do not have such potential.
Principal Money Market Fund has an investment objective of obtaining
maximum current income available from short-term securities consistent with
preservation of principal and maintenance of liquidity by investing all of its
assets in a portfolio of money market instruments. This mutual fund invests in
United States dollar denominated instruments having a maturity of 397 days or
less that the Manager, subject to the oversight of the Fund's board of
directors, determines present minimal credit risks and which at the time of
acquisition are "Eligible Securities" as that term is defined in regulations
issued under the Investment Company Act of 1940. See the Fund's prospectus for
details. The value of the investments held by this Mutual Fund may fluctuate,
although the net asset value per share is normally expected to remain at $1.00.
However, its yield will vary with changes in short-term interest rates. Over the
last two decades there has been a general correlation between short-term
interest rates and the cost of living, but there has been no exact correlation
and for some periods such rates have declined while the cost of living has
risen.
The investment objective of Principal World Fund is to seek long-term
growth of capital through investment in a portfolio of equity securities of
companies domiciled in any of the nations of the world. The Fund intends that
its investments normally will be allocated among various countries. Although
there is no limitation on the percentage of assets that may be invested in any
one country or denominated in any one currency, the Fund intends under normal
market conditions to have at least 65% of its assets invested in securities
issued by corporations of at least three countries, one of which may be the
United States. Investments may be made anywhere in the world, but it is expected
that primary consideration will be given to investing in the securities issued
by corporations of Western Europe, North America and Australasia (Australia,
Japan and Far East Asia) that have developed economies. Changes in investments
may be made as prospects change for particular countries, industries or
companies.
Additional information concerning these Mutual Funds, including their
investment policies and restrictions, investment management fees and operating
expenses is given in the prospectus for the Funds. A Prospectus for the Mutual
Funds is attached to and follows this Prospectus. It should be read carefully in
conjunction with this Prospectus before investing.
Each Division purchases shares of the Mutual Funds at net asset value. In
addition, all distributions made by a Mutual Fund with respect to shares held by
Divisions of Separate Account B are reinvested at net asset value in additional
shares of the same Mutual Fund. Contract benefits are provided and charges are
made in effect by redeeming Mutual Fund shares at net asset value. Values under
the contract, both before and after the commencement of Variable Annuity
Payments, will increase or decrease to reflect the investment performance of the
Mutual Funds and Owners of Benefits assume the risks of such change in values.
The Company is taxed as an insurance company under the Internal Revenue
Code. The operations of Separate Account B are part of the total operations of
the Company but are treated separately for accounting and financial statement
purposes and are considered separately in computing the Company's tax liability.
Separate Account B is not affected by federal income taxes paid by the Company
with respect to its other operations, and under existing federal income tax law,
investment income and capital gains attributable to Separate Account B are not
taxed. The Company reserves the right to charge Separate Account B with, and to
create a reserve for, any tax liability which the Company determines may result
from maintenance of Separate Account B. To the best of the Company's knowledge,
there is no current prospect of any such liability.
DEDUCTIONS UNDER THE CONTRACT
A Contract Administration Expense/Recordkeeping Charge and a mortality and
expense risks charge are deducted under the contract. Also, in certain
circumstances, a Contingent Deferred Sales Charge may be deducted from certain
cash withdrawals and transfers to alternate Funding Agents from an Investment
Account before the Annuity Purchase Date.
There are also deductions from and expenses paid out of the assets of the
Mutual Funds. These expenses are described in the Funds' prospectus.
A. Contingent Deferred Sales Charge
There is no initial sales charge. However, any cash withdrawal from an
Investment Account which correlates to a Plan Participant before the
Annuity Purchase Date, may be subject to a Contingent Deferred Sales Charge
equal to a percentage of the amount being withdrawn. The percentage will be
determined according to the following table:
Number of Years From The
Date First Contribution
Which Correlates to a Plan
Participant is Accepted Contingent Deferred Sales
by the Company Charge Percentage
Less than 1 5.00%
1 but less than 2 4.25
2 but less than 3 3.50
3 but less than 4 2.75
4 but less than 5 2.00
5 but less than 6 1.25
6 but less than 7 0.50
7 or more None
The charge will be made by redeeming a sufficient number of units from the
Investment Account or Accounts from which the withdrawal is made by an
amount equal to the charge (see "Cash Withdrawals"). If the Investment
Account or Accounts from which the withdrawal is made are insufficient to
permit the full amount of the charge to be made, a sufficient number of
units from other Investment Accounts which correlate to the Plan
Participant will be redeemed on a pro rata basis in an amount equal to the
charge. If the amounts in the Investment Accounts which correlate to the
Plan Participant are insufficient to permit the full amount of the charge
to be made, the amount of the withdrawal will be reduced by an amount equal
to the charge.
The Contingent Deferred Sales Charge does not apply to withdrawals made as
a result of the Plan Participant's death or Total and Permanent Disability.
The charge also does not apply to amounts paid pursuant to the Flexible
Income Option that do not exceed the greater of (i) the minimum annual
amount determined in accordance with the minimum distribution rules of the
Internal Revenue Code, or (ii) 10% of the aggregate value of the Investment
Accounts which correlate to a Plan Participant determined as of the last
Valuation Date in the preceding Deposit Year. The charge also does not
apply to transfers between Investment Accounts or transfers to a Companion
Contract, transfers from a Premier Annuity Contract or to amounts applied
to provide Variable Annuity Payments. The charge may apply to amounts
transferred to an alternate Funding Agent. The charge does not apply to
amounts redeemed to assure the plan complies with Sections 401(k) and
401(m) of the Internal Revenue Code.
The amount of any Contingent Deferred Sales Charge will never exceed 9% of
Contributions which correlate to a Plan Participant. For this purpose, a
transfer from a Companion Contract will be considered a Contribution to
this contract.
The Contingent Deferred Sales Charge, when applicable, will be applied by
the Company to defray sales and distribution expenses incurred by the
Company. The Company may decrease or eliminate the Contingent Deferred
Sales Charge if it estimates that its sales expenses will be lower. The
Company will waive the Contingent Deferred Sales Charge on Contracts
(except Contracts sold in the state of New York) acquired directly from the
Company upon a recommendation of an independent pension consultant who
charges a fee for its pension consulting services and who receives no
remuneration from the Company in association with the sale of the contract.
If revenues from the Contingent Deferred Sales Charge are not sufficient to
cover sales expenses, the short fall could be viewed as being provided for
out of other revenues or the Company's surplus, including revenues
attributable to the mortality and expense risks charge.
B. Contract Administration Expense/Recordkeeping Charge
An annual Contract Administration Expense/Recordkeeping Charge of $31 per
Plan Participant plus .35% of the Annual Average Balance will be assessed
on a quarterly basis during each Deposit Year. The Average Annual Balance
used to compute the charge is the aggregate value of Investment Accounts
which correlate to a Plan Participant, and other Plan assets that correlate
to a Plan Participant that are not allocated to the contract or an
Associated or Companion Contract but for which the Company provides
recordkeeping services ("Outside Assets"), at the beginning of the Deposit
Year adjusted by the time weighted average of Contributions to, and
withdrawals from, such accounts and Outside Assets (if any) during the
period. The $31 per Plan Participant charge is increased to $34 if the
Company distributes benefit plan reports directly to the homes of the Plan
Participants.
The Contract Administration Expense/Recordkeeping Charge will be assessed
on the earlier of (i) the date the Investment Accounts are paid in full (a
total redemption) or (ii) each Quarterly Date. One-fourth of the annual
charge is normally assessed on each Quarterly Date.
If the accounts are paid in full (a total redemption) at any time during
the Deposit Year, that portion of the $31 ($34) per Plan Participant charge
for the Deposit Year in which such total redemption occurs not yet paid to
the Company will be assessed in full. However, the remaining part of the
Contract Administration Expense/Recordkeeping Charge consisting of the .35%
of the Average Annual Balance will be assessed on a pro rata basis for any
fractional part of the Deposit Year.
The $31 ($34) charge will be reduced by 10% if Plan Participant data,
investment elections, and ongoing Contributions are reported to the Company
in the Company's standard format by modem, diskette or magnetic tapes. In
addition, if benefit plan reports are mailed on other than a quarterly
basis the $31 ($34) per Plan Participant charge is adjusted according to
the following schedule:
Reporting Frequency Adjustment to $31 ($34) Charge
------------------------------------------------------------------
Annual 9% decrease
Semi-Annual 6% decrease
Monthly 24% increase
The $31 ($34) per Plan Participant charge is also adjusted if the Company
performs more (or less) than two 401(k) and 401(m) non-discrimination tests
in a Deposit Year. Such a charge is increased by 3% for each additional
test and is reduced by 3% for each test not performed by the Company.
The .35% portion of the Contract Administration Expense/Recordkeeping
charge will be reduced by 10% if the Company has issued an Associated
Contract to the Contractowner.
If the Owner of Benefits chooses the Flexible Income Option, an additional
charge of $25 will be assessed annually.
The Company does not expect to recover from the charge to the extent
deducted from the Investment Account Values, any amount above its
accumulated expenses associated with the administration of the contracts.
However, since a portion of the charge is based on a percent of Investment
Account Values, amounts derived from larger Investment Accounts may to an
extent cover expenses associated with smaller Investment Accounts depending
upon the relative degree of Investment Account activity.
As part of the Company's policy of ensuring client satisfaction with the
services it provides, the Company may agree to waive the assessment of all
or a portion of the Contract Administration Expense/Recordkeeping Charge in
response to any reasonably-based complaint the Company is unable to rectify
from the Contractholder as to the quality of the services covered by such
charge.
A Contractholder may agree to pay all or a portion of the Contract
Administration Expense/Recordkeeping Charge separately or have the fees
deducted from Investment Accounts which correlate to a Plan Participant. If
the Contractholder elects to deduct these charges, the amount of the
quarterly charge so deducted will not exceed 1% of the aggregate Investment
Account Values which correlate to the Plan Participant at the time the
charge is made.
If deducted from Investment Accounts, the charge will be allocated among
Investment Accounts which correlate to the Plan Participant in proportion
to the relative values of such Accounts and will be effected by cancelling
a number of units in each such Investment Account equal to such Account's
proportionate share of the deduction.
If the Contractholder pays the Contract Administration
Expense/Recordkeeping Charge separately, the 1% limitation described above
will not apply. If the Contractholder does not pay these expenses, they
will be deducted from Investment Accounts.
If the Company provides recordkeeping services for any Outside Assets, the
Contractholder can elect to deduct from Investment Accounts only the $31
($34) portion of the Contract Administration Expense/Recordkeeping Charges
which correlate to inactive Plan Participants (Plan Participants who have
died, retired or terminated employment or who are totally and Permanently
Disabled and alternate payees under a Qualified Domestic Relations Order);
Contract Administration Expense/Recordkeeping Charges for active Plan
Participants must be paid separately by the Contractholder.
C. Mortality and Expense Risks Charge
Variable Annuity Payments will not be affected by adverse mortality
experience or by any excess in the actual sales and administrative expenses
over the charges provided for in the Contract. The Company assumes the
risks that (i) Variable Annuity Payments will continue for a longer period
than anticipated and (ii) the allowance for administration expenses in the
annuity conversion rates will be insufficient to cover the actual costs of
administration relating to Variable Annuity Payments. For assuming these
risks, the Company, in determining Unit Values and Variable Annuity
Payments, makes a charge as of the end of each Valuation Period against the
assets of Separate Account B held with respect to the Contract. The charge
is equivalent to a simple annual rate of .64%. The Company does not believe
that it is possible to specifically identify that portion of the .64%
deduction applicable to the separate risks involved, but estimates that a
reasonable approximate allocation would be .43% for the mortality risks and
.21% for the expense risks. The mortality and expense risks charge may be
changed by the Company at any time by giving not less than 60-days prior
written notice to the Contractholder. However, the charge may not exceed
1.25% on an annual basis, and only one change may be made in any one-year
period. If the charge is insufficient to cover the actual costs of the
mortality and expense risks assumed, the financial loss will fall on the
Company; conversely, if the charge proves more than sufficient, the excess
will be a gain to the Company.
OTHER EXPENSES
The Contractholder is obligated to pay additional expenses associated with
the acquisition and servicing of the contract in accordance with the terms of a
Service and Expense Agreement between the Contractholder and the Company. In no
event are these expenses deductible from Investment Accounts which correlate to
Plan Participants. The expenses which the Contractholder must pay if applicable
include an application fee, a transfer fee, documentation expense, a location
fee, Outside Asset Recordkeeping Charge and charges for special services
requested by the Contractholder. As part of the Company's policy of ensuring
client satisfaction with the services it provides, the Company may agree to
waive the assessment of all of these expenses or charges in response to any
reasonably-based complaint from the Contractholder as to the quality of the
services covered by such expenses or charges that the Company is unable to
rectify.
A. Application Fee and Transfer Fee
A $825 application fee is charged to the Contractholder in the first
Contract Year. If a Companion Contract has been issued by the Company to
the Contractholder to fund the Plan, the application fee will be assessed
to the Companion Contract. The total application fee paid by the
Contractholder to obtain both contracts will not exceed $825. If the
Company has issued an Associated Contract to the Contractholder to fund an
employee benefit plan administered by the Company, the application fee for
the contract described in this prospectus will be waived by the Company.
A transfer fee of $500 plus $3 per Plan Participant (maximum of $1,000) is
charged to the Contractholder if Plan records are transferred to the
Company from another recordkeeper. The transfer fee is reduced by 20% if
Plan data is reported to the Company in the Company's standard format on
magnetic tapes, modem or computer diskettes. The transfer fee may be
increased if Plan records are not current when transferred.
B. Documentation Expense
The Company can provide a sample Plan document and summary plan
descriptions to the Contractholder. The Contractholder will be billed $125
if the Contractholder uses a Principal Mutual Prototype Plus or
Standardized Plan. If the Company provides a sample custom-written Plan,
the Contractholder will be billed $700 for the initial Plan or for any
restatement thereof, $300 for any amendments thereto, and $500 for standard
summary plan description booklets. If the Contractholder adopts a Plan
other than one provided by the Company, a $900 charge will be made for
summary plan description booklets requested by the Contractholder, if any.
C. Location Fee
Contractholders may request the Company to provide services to groups of
employees at multiple locations. If the Company agrees to provide such
services, the Contractholder will be billed $150 on a quarterly basis ($600
annually) for each additional employee group or location. In addition,
separate contract administration/recordkeeping charges and documentation
fees may apply for each employee group or location requiring separate
government reports and/or sample plan documents.
D. Outside Asset Recordkeeping Charge
If the Company provides recordkeeping services for Plan assets which
correlate to a Plan Participant other than assets under this contract or an
Associated or Companion Contract ("Outside Assets"), the Company will bill
the Contractholder an Outside Asset Recordkeeping Charge. The annual charge
is calculated based upon the following table.
Number of Annual Expense Annual Expense
Members with Ongoing Contributions No Ongoing Contributions
Outside Accounts to Outside Account to any Outside Account
1-19 $21.00 per member + $285 $10.50 per member + $142.50
20-49 $18.60 per member + $318 $9.30 per member + $159.00
50-99 $16.80 per member + $408 $8.40 per member + $204.00
100-299 $15.00 per member + $588 $7.50 per member + $294.00
300-499 $12.60 per member + $1,308 $6.30 per member + $654.00
500-999 $10.20 per member + $2,508 $5.10 per member + $1,254.00
1000-2499 $7.80 per member + $4,908 $3.90 per member + $2,454.00
2500-4999 $6.60 per member + $7,908 $3.30 per member + $3,954.00
5000 and over $5.40 per member + $13,908 $2.70 per member + $6,954.00
The charge calculated in accordance with the above table will be increased
by 15% for the second and each additional Outside Asset for which the
Company provides recordkeeping services. One-fourth of the annual Outside
Asset Recordkeeping Charge will be billed on a quarterly basis. This charge
does not apply if the Outside Assets which correlate to the Plan
Participant consist solely of shares of mutual funds for which a subsidiary
of the Company serves as investment adviser.
E. Special Services
If requested by the Contractholder, the Company may provide services not
provided as part of the contract administration/recordkeeping services. The
Company will charge the Contractholder the cost of providing such services.
SURPLUS DISTRIBUTION AT SOLE DISCRETION OF THE COMPANY
It is not anticipated that any divisible surplus will ever be distributable
to the contract in the future because the contract is 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 Investment
Accounts in the form of additional units.
THE CONTRACT
The contract will normally be issued to an Employer or association or a
trust established for the benefit of Plan Participants and their beneficiaries.
The Company will issue a pre-retirement certificate describing the benefits
under the contract to Plan Participants who reside in a state that requires the
issuance of such certificates. The initial Contribution which correlates to a
Plan Participant will be invested in the Division or Divisions that are chosen
as of the end of the Valuation Period in which such Contribution is received by
the Company at its home office in Des Moines, Iowa. If the allocation
instructions are late, or not completed, the Company will invest such
unallocated Contributions in the Money Market Division on the date such
Contributions are received. Subsequently, the Company will transfer all or a
portion of such Contributions as of the date complete allocation instructions
are received by the Company in accordance with the allocation specified therein.
After complete allocation instructions have been received by the Company, all
current and future Contributions will be allocated to the chosen Divisions as of
the end of the Valuation Period in which such Contributions are received. If
complete allocation instructions are not received by the Company within 105 days
after the initial Contributions are allocated to the Money Market Division, the
Company will remit the Contributions plus any earnings thereon to the
Contractholder. The Contractholder may limit the number of Divisions available
to the Owner of Benefits, but the Money Market Division may not be so restricted
to the extent the Division is necessary to permit the Company to allocate
initial Contributions and the Capital Accumulation Division may not be so
restricted to the extent the Division is necessary to permit the Company to pay
Variable Annuity Payments.
A. Contract Values and Accounting Before Annuity Commencement Date
1. Investment Accounts
An Investment Account or Accounts correlating to a Plan Participant
will be established for each type of Contribution and for each Division
of Separate Account B in which such Contribution is invested.
Investment Accounts will be maintained until the Investment Account
Values are either (a) applied to effect Variable Annuity Payments (b)
paid to the Owner of Benefits or the beneficiary or (c) transferred in
accordance with the provisions of the contract.
Each Contribution will be allocated to the Division or Divisions
designated by the Notification on file with the Company and will result
in a credit of units to the appropriate Investment Account. The number
of units so credited will be determined by dividing the portion of the
Contributions allocated to a Division by the Unit Value for such
Division for the Valuation Period within which the Contribution was
received by the Company at its home office in Des Moines, Iowa.
2. Unit Value
The Unit Value for a contract which participates in a Division of
Separate Account B determines the value of an Investment Account
consisting of Contributions allocated to that Division. The Unit Value
for each Division for the contract is determined on each day on which
the net asset value of its underlying Mutual Fund is determined. The
Unit Value for a Valuation Period is determined as of the end of that
period. The investment performance of the underlying Mutual Fund and
deducted expenses affect the Unit Value.
For this series of contracts, the Unit Value for each Division will be
fixed at $1.00 for the Valuation Period in which the first amount of
money is credited to the Division. A Division's Unit Value for any
later Valuation Period is equal to its Unit Value for the immediately
preceding Valuation Period multiplied by the Net Investment Factor (see
below) for that Division for this series of contracts for the later
Valuation Period.
3. Net Investment Factor
Each Net Investment Factor is the quantitative measure of the
investment performance of each Division of Separate Account B.
For any specified Valuation Period the Net Investment Factor for a
Division for this series of contracts 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, equal to a simple interest
rate for the number of days within the Valuation Period at an
annual rate of .64%.
The amounts derived from applying the rate specified in subparagraph
(b) above and the amount of any taxes referred to in subparagraph (a)
above will be accrued daily and will be transferred from Separate
Account B at the discretion of the Company.
4. Hypothetical Example of Calculation of Unit Value for All Divisions
Except the Money Market Division
The computation of the Unit Value may be illustrated by the following
hypothetical example. Assume that the current net asset value of a
Mutual Fund share is $14.8000; that there were no dividends or other
distributions made by the Mutual Fund and no adjustment for taxes since
the last determination; that the net asset value of a Mutual Fund share
last determined was $14.7800; that the last Unit Value was $1.0185363;
and that the Valuation Period was one day. To determine the current Net
Investment Factor, divide $14.8000 by $14.7800 which produces 1.0013532
and deduct from this amount the mortality and expense risks charge of
0.0000175, which is the rate for one day that is equivalent to a simple
annual rate of 0.64%. The result, 1.0013381, is the current Net
Investment Factor. The last Unit Value ($1.0185363) is then multiplied
by the current Net Investment Factor (1.0013381) which produces a
current Unit Value of $1.0198992.
5. Hypothetical Example of Calculation of Unit Value for the Money Market
Division
The computation of the Unit Value may be illustrated by the following
hypothetical example. Assume that the current net asset value of a
Mutual Fund share is $1.0000; that a dividend of .0328767 cents per
share was declared by the Mutual Fund prior to calculation of the net
asset value of the Mutual Fund share and that no other distributions
and no adjustment for taxes were made since the last determination;
that the net asset value of a Mutual Fund share last determined was
$1.0000; that the last Unit Value was $1.0162734; and that the
Valuation Period was one day.
To determine the current Net Investment Factor, add the current net
asset value ($1.0000) to the amount of the dividend ($.000328767) and
divide by the last net asset value ($1.0000), which when rounded to
seven places equals 1.0003288. Deduct from this amount the mortality
and expense risks charge of .0000175 (the proportionate rate for one
day based on a simple annual rate of 0.64%). The result (1.0003137) is
the current Net Investment Factor. The last Unit Value ($1.0162734) is
then multiplied by the current Net Investment Factor (1.0003137),
resulting in a current Unit Value of $1.0165922.
B. Income Benefits
Income Benefits consist of either monthly Variable Annuity Payments or
periodic payments made on a monthly, quarterly, semi-annual or annual basis
pursuant to the Flexible Income Option.
1. Variable Annuity Payments
The amount applied to provide Variable Annuity Payments must be at
least $1,750. Variable Annuity Payments will be provided by the
Investment Accounts which correlate to the Plan Participant held under
the Capital Accumulation Division. Thus, if the Owner of Benefits
elects Variable Annuity Payments, any amounts that are to be used to
provide Variable Annuity Payments will be transferred to Investment
Accounts held under the Capital Accumulation Division as of the last
Valuation Date in the month which begins two months before the Annuity
Commencement Date. After any such transfer, the value of the Capital
Accumulation Division Investment Accounts will be applied on the
Annuity Purchase Date to provide Variable Annuity Payments. The Annuity
Commencement Date, which will be one month following the Annuity
Purchase Date, will be the first day of a month. Thus, if the Annuity
Commencement Date is August 1, the Annuity Purchase Date will be July
1, and the date of any transfers to a Capital Accumulation Division
Investment Account will be the Valuation Date immediately preceding
July 1.
The Annuity Commencement Date must be no later than April 1 of the
calendar year following the calendar year in which the Plan
Participant attains age 70 1/2. See "Federal Tax Status."
a. Selecting a Variable Annuity
Variable Annuity Payments will be made to an Owner of Benefits
beginning on the Annuity Commencement Date and continuing
thereafter on the first day of each month. An Owner of
Benefits may select an Annuity Commencement Date by
Notification to the Company. The date selected may be the
first day of any month the Plan allows which is at least one
month after the Notification. Generally, the Annuity
Commencement Date cannot begin before the Plan Participant is
age 59 1/2, separated from service, or is totally disabled.
See "Federal Tax Status" for a discussion of required
distributions and the federal income tax consequences of
distributions.
At any time not less than one month preceding the desired
Annuity Commencement Date, an Owner of Benefits may, by
Notification, select one of the annuity options described
below (see "Forms of Variable Annuities"). If no annuity
option has been selected at least one month before the Annuity
Commencement Date, and if the Plan does not provide one,
payments which correlate to an unmarried Plan Participant will
be made under the annuity option providing Variable Life
Annuity with Monthly Payments Certain for Ten Years. Payments
which correlate to a married Plan Participant will be made
under the annuity option providing a Variable Life Annuity
with One-Half Survivorship.
b. Forms of Variable Annuities
Because of certain restrictions contained in the Internal
Revenue Code and regulations thereunder, an annuity option is
not available under a Contract used to fund a TDA Plan, PEDC
Plan or 401(a) Plan unless (i) the contingent annuitant is the
Plan Participant's spouse or (ii) on the Plan Participant's
Annuity Commencement Date, the present value of the amount to
be paid while the Plan Participant is living is greater than
50% of the present value of the total benefit to the Plan
Participant and the Plan Participant's beneficiary (or
contingent annuitant, if applicable).
An Owner of Benefits may elect to have all or a portion of
Investment Account Values applied under one of the following
annuity options. However, if the monthly Variable Annuity
Payment at any time would be less than $20, the Company may,
at its sole option, pay the Variable Annuity Reserves in full
settlement of all benefits otherwise available.
Variable Life Annuity with Monthly Payments Certain for Zero,
Five, Ten, Fifteen or Twenty Years or Installment Refund
Period -- a variable annuity which provides monthly payments
during the Plan Participant's lifetime, and further provides
that if, at the death of the Plan Participant, monthly
payments have been made for less than a minimum period, e.g.
five years, any remaining payments for the balance of such
period shall be paid to the Owner of Benefits, if the Owner of
Benefits is not the Plan Participant, or to a designated
beneficiary unless the Owner of Benefits or the beneficiary
requests in writing that the Commuted Value of the remaining
payments be paid in a single sum. (Persons entitled to take
the remaining payments or the Commuted Value thereof rather
than continuing monthly payments should consult with their tax
advisor to be made aware of the differences in tax treatment.)
The minimum period may be either zero, five, ten, fifteen or
twenty years or the period (called "installment refund
period") consisting of the number of months determined by
dividing the amount applied under the option by the initial
payment. If, for example, $14,400 is applied under a life
option with an installment refund period, and if the first
monthly payment provided by that amount, as determined from
the applicable annuity conversion rates, would be $100, the
minimum period would be 144 months ($14,400 divided by $100
per month) or 12 years. A variable life annuity with an
installment refund period guarantees a minimum number of
payments, but not the amount of any monthly payment or the
amount of aggregate monthly payments. The longer the minimum
period selected, the smaller will be the amount of the first
annuity payment.
Under the Variable Life Annuity with Zero Years Certain, which
provides monthly payments to the Owner of Benefits during the
Plan Participant's lifetime, it would be possible for the
Owner of Benefits to receive no Annuity Payments if the Plan
Participant died prior to the due date of the first payment
since payment is made only during the lifetime of the Plan
Participant.
Joint and Survivor Variable Life Annuity with Monthly Payments
Certain for Ten Years -- a variable annuity which provides
monthly payments for a minimum period of ten years and
thereafter during the joint lifetimes of the Plan Participant
on whose life the annuity is based and the contingent
annuitant named at the time this option is elected, and
continuing after the death of either of them for the amount
that would have been payable while both were living during the
remaining lifetime of the survivor. In the event the Plan
Participant and the contingent annuitant do not survive beyond
the minimum ten year period, any remaining payments for the
balance of such period will be paid to the Owner of Benefits,
if the owner of Benefits is not the Plan Participant, or to a
designated beneficiary unless the Owner of Benefits or the
beneficiary requests in writing that the Commuted Value of the
remaining payments be paid in a single sum. (Persons entitled
to take the remaining payments or the Commuted Value thereof
rather than continuing monthly payments should consult with
their tax advisor to be made aware of the differences in tax
treatment.)
Joint and Two-Thirds Survivor Variable Life Annuity -- a
variable annuity which provides monthly payments during the
joint lives of a Plan Participant and the person designated as
contingent annuitant with two-thirds of the amount that would
have been payable while both were living continuing until the
death of the survivor.
Variable Life Annuity with One-Half Survivorship -- a variable
annuity which provides monthly payments during the life of the
Plan Participant with one-half of the amount otherwise payable
continuing so long as the contingent annuitant lives.
Under the Joint and Two-thirds Survivor Variable Life Annuity
and under the Variable Life Annuity with One-Half
Survivorship, it would be possible for the Owner of Benefits
and/or contingent annuitant to receive no annuity payments if
the Plan Participant and contingent annuitant both died prior
to the due date of the first payment since payment is made
only during their lifetimes.
Other Options -- Other variable annuity options permitted
under the applicable Plan may be arranged by mutual agreement
of the Owner of Benefits and the Company.
c. Basis of Annuity Conversion Rates
Because women as a class live longer than men, it has been
common that retirement annuities of equal cost for women and
men of the same age will provide women less periodic income at
retirement. The Supreme Court of the United States ruled in
Arizona Governing Committee vs. Norris that sex distinct
annuity tables under an employer-sponsored benefit plan result
in discrimination that is prohibited by Title VII of the
Federal Civil Rights Act of 1964. The Court further ruled that
sex distinct annuity tables will be deemed discriminatory only
when used with values accumulated from employer contributions
made after August 1, 1983, the date of the ruling.
Title VII applies only to employers with 15 or more employees.
However, certain State Fair Employment Laws and Equal Payment
Laws may apply to employers with less than 15 employees.
The contract described in this Prospectus offers both sex
distinct and sex neutral annuity conversion rates. The annuity
rates are used to convert a Plan Participant's pre-retirement
Investment Account Values to a monthly lifetime income at
retirement. Usage of either sex distinct or sex neutral
annuity rates will be determined by the Contractholder.
For each form of variable annuity, the annuity conversion
rates determine how much the first monthly Variable Annuity
Payment will be for each $1,000 of the Investment Account
Value applied to effect the variable annuity. The conversion
rates vary with the form of annuity, date of birth, and, if
distinct rates are used, the sex of the Plan Participant and
the contingent annuitant, if any. The sex neutral guaranteed
annuity conversion rates are based upon (i) an interest rate
of 2.5% per annum and (ii) mortality according to the "1983
Table a for Individual Annuity Valuation" projected with Scale
G to the year 2001 set back five years in age. The sex
distinct female rates are determined for all Plan Participants
in the same way as sex neutral rates, as described above. The
sex distinct male rates are determined for all Plan
Participants in the same way as the sex neutral rates, as
described above, except mortality is not set back five years
in age. The guaranteed annuity conversion rates may be
changed, but no change which would be less favorable to the
Owner of Benefits will take effect for a current Plan
Participant.
The contract provides that an interest rate of not less than
2.5% per annum will represent the assumed investment return.
Currently the assumed investment return used in determining
the amount of the first monthly payment is 4% per annum. This
rate may be increased or decreased by the Company in the
future but in no event will it be less than 2.5% per annum.
If, under the contract, the actual investment return (as
measured by an Annuity Change Factor, defined below) should
always equal the assumed investment return, Variable Annuity
Payments would remain level. If the actual investment return
should always exceed the assumed investment return, Variable
Annuity Payments would increase; conversely, if it should
always be less than the assumed investment return, Variable
Annuity Payments would decrease.
The current 4% assumed investment return is higher than the
2.5% interest rate reflected in the annuity conversion rates
contained in the contract. With a 4% assumption, Variable
Annuity Payments will commence at a higher level, will
increase less rapidly when actual investment return exceeds
4%, and will decrease more rapidly when actual investment
return is less than 4%, than would occur with a lower
assumption.
d. Determining the Amount of the First Variable Annuity Payment
The initial amount of monthly annuity income shall be based on
the option selected, the age of the Plan Participant and
contingent annuitant, if any, and the Investment Account
Values applied as of the Annuity Purchase Date. The initial
monthly income payment will be determined on the basis of the
annuity conversion rates applicable on such date to such
conversions under all contracts of this class issued by the
Company. However, the basis for the annuity conversion rates
will not produce payments less beneficial to the Owner of
Benefits than the annuity conversion rate basis described
above.
e. Determining the Amount of the Second and Subsequent Monthly
Variable Annuity Payments
The second and subsequent monthly Variable Annuity Payments
will increase or decrease in response to the investment
experience of the Mutual Fund underlying the Capital
Accumulation Division. The amount of each payment will be
determined by multiplying the amount of the monthly Variable
Annuity Payment due in the immediately preceding calendar
month by the Annuity Change Factor for the Capital
Accumulation Division for the Contract for the calendar month
in which the Variable Annuity Payment is due.
The Annuity Change Factor for the Capital Accumulation
Division for a calendar month is the quotient of (1) divided
by (2), below:
(1) The number which results from dividing (i) the Contract's
Unit Value for the Capital Accumulation Division for the
first Valuation Date in the calendar month beginning one
month before the given calendar month by (ii) the
Contract's Unit Value for such Division for the first
Valuation Date in the calendar month beginning two months
before the given calendar month.
(2) An amount equal to one plus the effective interest rate
for the number of days between the two Valuation Dates
specified in subparagraph (1) above at the interest rate
assumed to determine the initial payment of variable
benefits to the Owner of Benefits.
f. Hypothetical Example of Calculation of Variable Annuity
Payments
Assume that on the date one month before the Annuity
Commencement Date the Investment Account Value that is
invested in the Capital Accumulation Division which correlates
to a Plan Participant is $37,592. Using the appropriate
annuity conversion factor (assuming $5.88 per $1,000 applied)
the Investment Account Value provides a first monthly Variable
Annuity Payment of $221.04. To determine the amount of the
second monthly payment assume that the Capital Accumulation
Division Unit Value as of the first Valuation Date in the
preceding calendar month was $1.3712044 and the Unit Value as
of the first Valuation Date in the second preceding calendar
month was $1.3273110. The Annuity Change Factor is determined
by dividing $1.3712044 by $1.3273110, which equals 1.0330694,
and dividing the result by an amount corresponding to the
amount of one increased by an assumed investment return of 4%
(which for a thirty day period is 1.0032288). 1.0330694
divided by 1.0032288 results in an Annuity Change Factor for
the month of 1.0297446. Applying this factor to the amount of
Variable Annuity Payment for the previous month results in a
current monthly payment of $227.61 ($221.04 multiplied by
1.0297446 equals $227.61).
2. Flexible Income Option
Instead of Variable Annuity Payments an Owner of Benefits may choose to
receive income benefits under the Flexible Income Option. Unlike
Variable Annuity Payments, payments under the Flexible Income Option
may be made from any Division of the Separate Account. Under the
Flexible Income Option, the Company will pay to the Owner of Benefits a
portion of the Aggregate Investment Accounts on a monthly, quarterly,
semi-annual or annual basis on the date or dates requested each Year
and continuing for a period not to exceed the life or life expectancy
of the Plan Participant, or the joint lives or life expectancy of such
Plan Participant and the contingent annuitant, if the contingent
annuitant is the Plan Participant's spouse. If the Notification does
not specify from which Investment Accounts payments are to be made,
amounts will be withdrawn on a pro rata basis from all Investment
Accounts which correlate to the Plan Participant. Payments will end,
however, on the date no amounts remain in such Accounts or the date
such Accounts are paid or applied in full as described below. Payments
will be subject to the following:
a. The life expectancy of the Plan Participant and the Plan
Participant's spouse, if applicable, will be determined in
accordance with the life expectancy tables contained in Internal
Revenue Regulation Section 1.72-9. Life expectancy will be
determined as of the date on which the first payment is made. Life
expectancy will be redetermined annually thereafter.
b. Payments may begin any time after the Flexible Income Option is
requested. Payments must begin no later than the latest date
permitted or required by the Plan or regulation to be the Owner of
Benefit's Annuity Commencement Date.
c. Payments will be made annually, semiannually, quarterly, or
monthly as requested by the Owner of Benefits and agreed to by the
Company. The annual amount payable will be the lesser of the
Aggregate Investment Account Value which correlates to the Plan
Participant or the minimum annual amount determined in accordance
with the minimum distribution rules of the Internal Revenue Code.
d. If the Plan Participant should die before the Aggregate Investment
Account Value has been paid or applied in full, the remaining
Investment Account Values will be treated as benefits payable at
death as described in this Prospectus.
e. Year for purposes of determining payments under the Flexible
Income Option means the twelve month period starting on the
installment payment starting date and each corresponding twelve
month period thereafter.
An Owner of Benefits may request a payment in excess of the minimum
described above. Such payment may be equal to all or any portion of the
Investment Accounts which correlate to the Plan Participant; provided,
however, that if the requested payment would reduce the total value of
such accounts to a total balance of less than $1,750 then such request
will be a request for the total of such Investment Accounts. Payments
in excess of the minimum described above may be subject to the
Contingent Deferred Sales Charge.
The Owner of Benefits may terminate the Flexible Income Payments by
giving the Company Notification (i) requesting an excess payment equal
to the remaining balance of the Aggregate Investment Account Values
which correlate to a Plan Participant, (ii) requesting that the
remaining balance of the Aggregate Investment Account Values be applied
to provide Variable Annuity Payments or (iii) a combination of (i) and
(ii), as long as the amount applied to provide an annuity is at least
$1,750. The Company will make such excess payment on the later of (i)
the date requested, or (ii) the date seven (7) calendar days after the
Company receives the Notification. The Annuity Commencement Date for
amounts so applied will be one month after the Annuity Purchase Date.
The Annuity Purchase Date for amounts so applied will be the first
Valuation Date in the month following the Company's receipt of the
Notification or the first Valuation Date of such subsequent month as
requested.
If the Owner of Benefits chooses the Flexible Income Option, an
additional charge $25.00 will be deducted annually on a pro rata basis
from the Investment Accounts which correlate to the Plan Participant.
C. Payment on Death of Plan Participant
1. Prior to Annuity Purchase Date
If a Plan Participant dies prior to the Annuity Purchase Date, the
Company (upon receipt of due proof of death and any waiver or consent
required by applicable state law) will pay the death benefit in
accordance with the provisions of the Plan. The Owner of Benefits may
elect to either (1) leave the assets in the contract to the extent
permitted by applicable laws; (2) receive such value as a single sum
benefit; or (3) apply the Investment Account Values which correlate to
the Plan Participant to purchase Variable Annuity Payments for the
beneficiary if the aggregate value of such Investment Accounts is at
least $1,750. If the beneficiary does not provide Notification to the
Company within 120 days of the date the Company receives due proof of
death (i.e. a certified copy of the death certificate, a certified copy
of a decree of a court of competent jurisdiction as to the finding of
death, a written statement by a medical doctor who attended the
deceased during his last illness), the beneficiary will be deemed a
Plan Participant under the contract described in the Prospectus.
A beneficiary may elect to have all or a part of the amount available
under this contract transferred to any Companion Contract.
Alternatively, this contract may accept all or part of the amount
available under a Companion Contract to establish an Investment Account
or Accounts for a beneficiary under this contract. If the aggregate
value of such Investment Accounts is less than $1,750, the Company may
at its option pay the beneficiary the value of such accounts in lieu of
all other benefits.
An election to receive Variable Annuity Payments must be made prior to
the single sum payment to the beneficiary. The amount of the death
benefit is determined by the terms of the Plan. Annuity income must be
payable as lifetime annuity income with no benefits beyond the
beneficiary's life or life expectancy. In addition, the amount of the
monthly Variable Annuity Payments must be at least $20, or the Company
may at its option pay the beneficiary the value of the Variable Annuity
Reserves in lieu of all other benefits. The beneficiary's Annuity
Purchase Date will be the first day of the calendar month specified in
the election, but in no event prior to the first day of the calendar
month following the date Notification is received by the Company. The
amount to be applied will be determined as of the Annuity Purchase
Date. The beneficiary's Annuity Commencement Date will be the first day
of the calendar month following the Annuity Purchase Date. The
beneficiary must be a natural person in order to elect Variable Annuity
Payments. The annuity conversion rates applicable to a beneficiary
shall be the annuity conversion rates the Company makes available to
Owners of Benefits under this contract. The beneficiary will receive a
written description of the options available.
2. Subsequent to Annuity Purchase Date
Upon the death of a Plan Participant subsequent to the Annuity Purchase
Date, no benefits will be available except as may be provided under the
form of annuity selected. If provided for under the form of annuity,
the Owner of Benefits or the beneficiary will continue receiving any
remaining payments unless the Owner of Benefits or the beneficiary
requests in writing that the Commuted Value of the remaining payments
be paid in a single sum.
D. Withdrawals and Transfers
1. Cash Withdrawals
The contract is designed for and intended to be used to fund retirement
Plans. However, subject to any Plan limitations or any reduction for
vesting provided for in the Plan as to amounts available, the Owner of
Benefits may withdraw cash from the Investment Accounts which correlate
to a Plan Participant at any time prior to the Annuity Purchase Date
subject to any charges that may be applied. The Internal Revenue Code
generally provides that distributions from the contracts (except those
used to fund Creditor Exempt or General Creditor Non-qualified Plans)
may begin only after the Plan Participant attains age 59 1/2,
terminates employment, dies or becomes disabled, or in the case of
deemed hardship (or, for PEDC Plans, unforeseen emergencies).
Withdrawals before age 59 1/2 may involve an income tax penalty. See
"Federal Tax Status."
The procedure with respect to cash withdrawals is as follows:
(a) The Plan must allow for such withdrawal.
(b) The Company must receive a Notification requesting a cash
withdrawal from the Owner of Benefits on a form either furnished
or approved by the Company. The Notification must specify the
amount to be withdrawn for each Investment Account from which
withdrawals are to be made. If no specification is made,
withdrawals from Investment Accounts will be made on a pro rata
basis.
(c) If a certificate has been issued to the Owner of Benefits the
Company may require that any Notification be accompanied by such
certificate.
(d) The amount withdrawn may be subject to the Contingent Deferred
Sales Charge and, in the case of a withdrawal of the Aggregate
Investment Account Value, will be subject to the Contract
Administration Expense/Recordkeeping Charge. If the Aggregate
Investment Account Values are insufficient to satisfy the amount
of the requested withdrawal and applicable charges, the amount
paid will be reduced to satisfy such charges.
Any cash withdrawal will result in the cancellation of a number of
units from each Investment Account from which values have been
withdrawn. The number of units cancelled from an Investment Account
will be equal to the amount withdrawn from that Account divided by the
Unit Value for the Division of Separate Account B in which the Account
is invested for the Valuation Period in which the cancellation is
effective. Units will also be cancelled to cover any charges assessed
under (d) above. (Special Note: Under the Texas Education Code, Plan
Participants under contracts issued in connection with Optional
Retirement Programs for certain employees of Texas institutions of
higher education are prohibited from making withdrawals except in the
event of termination of employment, retirement or death of the Plan
Participant. Also, see "Federal Tax Status" for a description of
further withdrawal restrictions.)
2. Transfers Between Divisions
Upon Notification, all or a portion of the value of an Investment
Account which correlates to a Plan Participant may be transferred to
another available Investment Account correlating to such Plan
Participant for the same type of Contribution.
Transfers may be made at any time before the Annuity Purchase Date.
A transfer will be effective as of the end of the Valuation Period in
which the request is received. Any amount transferred will result in
the cancellation of units in the Investment Account from which the
transfer is made. The number of units cancelled will be equal to the
amount transferred from that account divided by the Unit Value of the
Division for the Valuation Period in which the transfer is effective.
The transferred amount will result in the crediting of Units in the
Investment Account to which the transfer is made. The number of Units
credited will be equal to the amount transferred to that account
divided by the Unit Value of the Division for the Valuation Period in
which the transfer is effective.
3. Transfers to the Contract
If a Companion Contract has been issued by the Company to fund the
Plan, and except as otherwise provided by the applicable Plan, the
contract described in this prospectus may accept all or a portion of
the proceeds available under the Companion Contract at any time at
least one month before Annuity Commencement Date, subject to the terms
of the Companion Contract.
4. Transfers to Companion Contract
If a Companion Contract has been issued by the Company to fund the
Plan, except as otherwise provided by the applicable Plan and the
provisions of the Companion Contract, an Owner of Benefits may by
Notification transfer all or a portion of the Investment Account Values
which correlate to a Plan Participant to the Companion Contract. If the
Notification does not state otherwise, amounts will be transferred on a
pro rata basis from the Investment Accounts which correlate to the Plan
Participant. Transfers with respect to a Plan Participant from this
contract to the Companion Contract will not be permitted if this
contract has accepted, within the six-month period preceding the
proposed transfer from this contract to the Companion Contract, a
transfer from an unmatured Investment Account which correlates to the
Plan Participant established under the Companion Contract. An unmatured
Investment Account is an Investment Account which has not reached the
end of its interest guarantee period. In all other respects, such
transfers are subject to the same provisions regarding frequency of
transfer, effective date of transfer and cancellation of units as
described above in "Transfers Between Divisions".
5. Special Situation Involving Alternate Funding Agents
The contract allows the Investment Account Values of all Plan
Participants to be transferred to an alternate Funding Agent with or
without the consent of the Plan Participants. Transfers to an alternate
Funding Agent require Notification from the Contractholder.
The amount to be transferred will be equal to the Investment Account
Values determined as of the end of the Valuation Period in which the
Notification is received. Such transfers may be subject to the
Contingent Deferred Sales Charge and will be subject to the Contract
Administration Expense/Recordkeeping Charge.
6. Postponement of Cash Withdrawal or Transfer
Any cash withdrawal or transfer to be made from the contract or between
Investment Accounts in accordance with the preceding paragraphs will be
made (i) within seven calendar days after Notification for such payment
or transfer is received by the Company at its Home Office or (ii) on
the requested date of payment or transfer, if later. However, such
withdrawal or transfer may be deferred during any period when the right
to redeem Mutual Fund shares is suspended as permitted under provisions
of the Investment Company Act of 1940, as amended. The right to redeem
shares may be suspended during any period when (a) trading on the New
York Stock Exchange is restricted as determined by the Securities and
Exchange Commission or such Exchange is closed for other than weekends
and holidays; (b) an emergency exists, as determined by the Securities
and Exchange Commission, as a result of which (i) disposal by the
Mutual Fund of securities owned by it is not reasonably practicable or
(ii) it is not reasonably practicable for the Mutual Fund fairly to
determine the value of its net assets; or (c) the Commission by order
so permits for the protection of security holders. If any deferment of
transfer or withdrawal is in effect and has not been cancelled by
Notification to the Company within the period of deferment, the amount
to be transferred or withdrawn shall be determined as of the first
Valuation Date following expiration of the permitted deferment, and
transfer or withdrawal will be made within seven calendar days
thereafter. The Company will notify the Contractholder of any deferment
exceeding 30 days.
7. Loans.
The Company will not make available a loan option for the contract
described in this Prospectus.
E. Other Contractual Provisions
1. Contribution Limits
The contract prescribes no limits on the minimum Contribution which may
be made to an Investment Account which correlates to a Plan
Participant. Plan Participant maximum Contributions are discussed under
"Federal Tax Status." Contributions may also be limited by the Plan.
The Company may also limit Contributions on 60-days notice.
2. Assignment
No benefits in the course of payment under a contract used to fund a
TDA Plan, 401(a) Plan or Creditor-Exempt Non-Qualified Plan are
assignable, by any Owner of Benefits, Plan Participant, beneficiary or
contingent annuitant and all such benefits under such contracts, shall
be exempt from the claims of creditors to the maximum extent permitted
by law. Benefits in the course of payment for contracts used to fund
PEDC plans and General Creditor Non-Qualified Plans are assignable only
by the Contractholder and such benefits are subject to the claims of
the Contractholder's general creditors.
Investment Account Values which correlate to a Plan Participant are
non-forfeitable by the Owner of Benefits; provided, however, if the
Plan specifically so provides, Investment Account Values which
correlate to a Plan Participant shall be reduced to the extent required
by the vesting provisions of the Plan as of the date the Company
receives Notification of the event requiring the reduction.
3. Cessation of Contributions
A cessation of Contributions with respect to all Plan Participants
shall occur at the election of the Contractholder upon Notification to
the Company, on the date the Plan terminates or on the date no
Investment Account Values remain under the contract or at the election
of the Company upon 60-days notice to the Contractholder. Following a
cessation of Contributions all terms of the Contract will continue to
apply except that no further Contributions may be made.
4. Substitution of Securities
If shares of a Mutual Fund are not available at some time in the
future, or if in the judgment of the Company further investment in such
shares would no longer be appropriate, there may be substituted
therefor, or Contributions received after a date specified by the
Company may be applied to purchase (i) shares of another registered
open-end investment company or (ii) securities or other property as the
Company should in its discretion select. In the event of any investment
pursuant to clause (ii) above, the Company can make such changes as in
its judgment are necessary or appropriate in the frequency and methods
of determination of Unit Values, Net Investment Factors, Annuity Change
Factors, and Investment Account Values, including any changes in the
foregoing which will provide for the payment of an investment advisory
fee; provided, however, that any such changes shall be made only after
approval by the Insurance Department of the State of Iowa. The Company
will give written notice to each Owner of Benefits of any substitution
or such change and any substitution will be subject to the rules and
regulations of the Securities and Exchange Commission.
5. Changes in the Contract
The terms of a contract may be changed at any time by written agreement
between the Company and the Contractholder without the consent of any
Plan Participant, Owner of Benefits, beneficiary, or contingent
annuitant. However, except as required by law or regulation, no such
change shall apply to variable annuities which were in the course of
payment prior to the effective date of the change. The Company will
notify any Contractholder affected by any change under this paragraph.
The Company may unilaterally change the contract at any time, including
retroactive changes, in order to meet the requirements of any law or
regulation issued by any governmental agency to which the Company is
subject. The Company may also add additional Divisions to Separate
Account B at any time. In addition, the Company may, on 60-days prior
notice to the Contractholder, unilaterally change the basis for
determining Investment Account Values, Net Investment Factors, Annuity
Change Factors; the guaranteed annuity conversion rates; the provisions
with respect to transfers to or from a Companion Contract or between
Investment Accounts; the Contingent Deferred Sales Charge; and the
Contract Administration Expense/Recordkeeping Charge.
However, no amendment or change will apply to annuities in the course
of payment except to the extent necessary to meet the requirements of
any law or regulation issued by any governmental agency to which the
company is subject. In addition, no change on the guaranteed annuity
conversion rates or the Contingent Deferred Sales Charge will be
effective for any current Plan Participant if the effect of such
amendment or change would be less favorable to the Owner of Benefits.
Also, any change in the Contract Administration Expense/Recordkeeping
Charge will not take affect as to any Investment Accounts to be
transferred to an Alternate Funding Agent if, prior to the date of the
amendment or change is to take affect, the Company receives a written
request from the Contractholder for payment of all such Investment
Account Values to the Alternate Funding Agent and such request is not
revoked.
Furthermore, the Company may, on 60-days notice to the Contractholder,
unilaterally change the mortality and expense risks charge provided
that (a) the charge shall in no event exceed 1.25%, (b) the charge
shall not be changed more frequently than once in any one year period
and (c) no change shall apply to annuities which were in the course of
payment prior to the effective date of the change.
STATEMENT OF VALUES
The Company will furnish each Owner of Benefits at least once during each
year a statement showing the number of units credited to the Investment Account
or Accounts which correlate to the Plan Participant, Unit Values for such
Investment Accounts and the resulting Investment Account Values.
SERVICES AVAILABLE BY TELEPHONE
The following transactions may be exercised by telephone by any Owner of
Benefits: 1) transfers between Investment Accounts; and 2) changes in
Contribution allocation percentages. The telephone transactions may be exercised
by telephoning 1-800-633-1373. 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 of Benefits 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 of Benefits' address of record. Owners of Benefits may obtain
additional information and assistance by telephoning the toll free number.
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, A Member of 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 for the distribution of the Contract in accordance with two
separate schedules one of which provides for payment of 4.5% of Contributions
scaling down for Contributions in excess of $5,000 and one which provides for
payments of 3.0% of Contributions scaling down for Contributions in excess of
$50,000. The contract may also be sold through other selected broker-dealers
registered under the Securities Exchange Act of 1934. Princor Financial Services
Corporation is also the principal underwriter for various registered investment
companies organized by the Company. Princor Financial Services Corporation is an
indirect 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 July 15, 1992.
However, shares of some of the 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 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 contingent deferred sales charges which, if included, would
reduce the "yield" and "effective yield."
In addition, from time to time, the Separate Account will advertise its
"yield" for the Bond Division and Government Securities Division for these
contracts. The "yield" of these Divisions 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 for these contracts. 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 5% 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 contingent deferred sales charge in
order to illustrate the change in the Division's unit value over time. See
"Deductions Under the Contract" for a discussion of contingent deferred sales
charges. The Separate Account may also advertise total return figures of its
Divisions for a specified period that do not take into account the Contract
Administration Expense/Recordkeeping Charge in order to illustrate performance
applicable to Owners of Benefits when this charge is not deducted from
Investment Accounts.
VOTING RIGHTS
The Company shall vote Mutual Fund shares held in Separate Account B at
regular and special meetings of shareholders of each Mutual Fund, but will
follow voting instructions received from persons having the voting interest in
the Mutual Fund shares.
The number of Mutual Fund shares as to which a person has the voting
interest will be determined by the Company as of a date which will not be more
than ninety days prior to the meeting of the Mutual Fund, and voting
instructions will be solicited by written communication at least ten days prior
to the meeting.
During the accumulation period, the Owner of Benefits is the person having
the voting interest in the Mutual Fund shares attributable to the Investment
Accounts which correlate to the Plan Participant. The number of Mutual Fund
shares held in Separate Account B which are attributable to each Investment
Account is determined by dividing the Investment Account Value attributable to a
Division of Separate Account B by the net asset value of one share of the
underlying Mutual Fund.
During the annuity period, the person then entitled to Variable Annuity
Payments has the voting interest in the Mutual Fund shares attributable to the
variable annuity. The number of Mutual Fund shares held in Separate Account B
which are attributable to each variable annuity is determined by dividing the
reserve for the variable annuity by the net asset value of one Mutual Fund
share. The voting interest in the Mutual Fund shares attributable to the
variable annuity will ordinarily decrease during the annuity period since the
reserve for the variable annuity decreases due to the reduction in the expected
payment period.
Mutual Fund shares for which Owners of Benefits or payees of variable
annuities are entitled to give voting instructions, but for which none are
received, and shares of the Fund owned by the Company will be voted in the same
proportion as the aggregate shares for which voting instructions have been
received.
Proxy material will be provided to each person having a voting interest
together with an appropriate form which may be used to give voting instructions
to the Company.
If the Company determines pursuant to applicable law that Mutual Fund
shares held in Separate Account B need not be voted pursuant to instructions
received from persons otherwise having the voting interest as provided above,
then the Company may vote Mutual Fund shares held in Separate Account B in its
own right.
FEDERAL TAX STATUS
It should be recognized that the descriptions below of the federal income
tax status of amounts received under the contracts are not exhaustive and do not
purport to cover all situations. A qualified tax advisor should be consulted for
complete information. (For the federal tax status of the Company and Separate
Account B, see "Principal Mutual Life Insurance Company Separate Account B".)
A. Taxes Payable by Owners of Benefits and Annuitants
The contract offered in connection with this prospectus is used with
retirement programs which receive favorable tax deferred treatment under
Federal income tax law and deferred annuity contracts purchased with after
tax dollars. Annuity payments or other amounts received under the contract
are subject to income tax withholding. 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.
Contributions to contracts used to fund Creditor-Exempt and General
Creditor Non-Qualified Plans do not enjoy the advantages available to
qualified retirement plans, but Contributions invested in contracts used to
fund Creditor-Exempt Non-qualified Retirement Plans may receive tax
deferred treatment of the earnings , until distributed from the contract as
retirement benefits.
1. Tax Deferred Annuity Plans-- (Section 403(b) Annuities for Employees
of Certain Tax-Exempt Organizations or Public Educational Institutions)
Contributions. Under section 403(b) of the Code, payments made by
certain employers (i.e., tax-exempt organizations, meeting the
requirements of section 501(c)(3) of the Code and public educational
institutions) to purchase annuity contracts for their employees are
excludable from the gross income of employees to the extent that the
aggregate Contributions do not exceed the limitations prescribed by
section 402(g), section 403(b)(2), and section 415 of the Code. This
gross income exclusion applies to employer contributions and voluntary
salary reduction contributions.
An individual's voluntary salary reduction contributions under section
403(b) are generally limited to the lesser of $9,500 or 25 percent of
net salary (or 20 percent of gross salary); additional catch-up
contributions are permitted under certain circumstances. Combined
employer and salary reduction contributions are generally limited to
approximately 25 percent of net salary. In addition, for plan years
beginning after December 31, 1988, employer contributions must comply
with various nondiscrimination rules; these rules may have the effect
of further limiting the rate of employer contributions for highly
compensated employees.
Taxation of Distributions. Distributions are restricted. The
restrictions apply to amounts accumulated after December 31, 1988
(including voluntary contributions after that date and earnings on
prior and current voluntary contributions). These restrictions require
that no distributions will be permitted prior to one of the following
events: (1) attainment of age 59 1/2, (2) separation from service, (3)
death, (4) disability, or (5) hardship (hardship distributions will be
limited to the amount of salary reduction contributions exclusive of
earnings thereon).
All distributions, other than distributions from after-tax
Contributions, from a section 403(b) annuity Plan are taxed as ordinary
income of the recipient in accordance with section 72 of the Code and
are subject to 20% income tax withholding. Distributions received
before the recipient attains age 59 1/2 generally are subject to a 10%
penalty tax in addition to regular income tax. Certain distributions
are excepted from this penalty tax, including distributions following
(1) death, (2) disability, (3) separation from service during or after
the year the Plan Participant reaches age 55, (4) separation from
service at any age if the distribution is in the form of payments over
the life (or life expectancy) of the Plan Participant (or the Plan
Participant and beneficiary), and (5) distributions not in excess of
tax deductible medical expenses.
Required Distributions. Generally, distributions from section 403(b)
Plans must commence no later than April 1 of the calendar year
following the calendar year in which the Plan Participant attains age
70 1/2 and such distributions must be made over a period that does not
exceed the life expectancy of the Plan Participant (or the Plan
Participant and beneficiary). Plan Participants employed by
governmental entities and certain church organizations may delay the
commencement of payments until April 1 of the calendar year following
retirement if they remain employed after attaining age 70 1/2. However,
upon the death of the Plan Participant prior to the commencement of
annuity payments, the amount accumulated under the contract must be
distributed within five years or, if distributions to a beneficiary
designated under the contract commence within one year of the Plan
Participant's death, distributions are permitted over the life of the
beneficiary or over a period not extending beyond the beneficiary's
life expectancy. If the Plan Participant has commenced receiving
annuity distributions prior to the Plan Participant's death,
distributions must continue at least as rapidly as under the method in
effect at the date of death. Amounts accumulated under a contract on
December 31, 1986, are not subject to these minimum distributions
requirements. A penalty tax of 50% will be imposed on the amount by
which the minimum required distribution in any year exceeds the amount
actually distributed in that year.
Tax-Free Transfers and Rollovers. The Code provides for the tax-free
exchange of one annuity contract for another annuity contract, and the
IRS has ruled that total or partial amounts transferred between section
403(b) annuity contracts and/or 403(b)(7) custodial accounts may
qualify as tax-free exchanges under certain circumstances. In addition,
section 403(b) of the Code permits tax-free rollovers of eligible
rollover distributions from section 403(b) programs to Individual
Retirement Accounts (IRAs) under certain circumstances. If an eligible
rollover distribution is taken as a direct rollover to an IRA (or
another 403(b) plan) the mandatory 20% income tax withholding does not
apply. However, the 20% mandatory withholding requirement does apply to
an eligible rollover distribution that is not made as a direct
rollover. In addition, such a rollover must be completed within 60 days
of receipt of the distribution.
2. Public Employee Deferred Compensation Plans-- (Section 457 Unfunded
Deferred Compensation Plans of Public Employers and Tax-Exempt
Organizations)
Contributions. Under section 457 of the Code, individuals who perform
services for a unit of a state or local government may participate in a
deferred compensation program. Tax-exempt employers may establish
deferred compensation plans under section 457 only for a select group
of management or highly compensated employees and/or independent
contractors.
This type of program allows individuals to defer the receipt of
compensation which would otherwise be presently payable and to
therefore defer the payment of Federal income taxes on the amounts.
Assuming that the program meets the requirements to be considered a
Public Employee Deferred Compensation Plan (an "PEDC Plan"), an
individual may contribute (and thereby defer from current income for
tax purposes) the lesser of $7,500 or 33 1/3% of the individuals
includible compensation. (Includible compensation means compensation
from the employer which is current includible in gross income for
Federal tax purposes.) During the last three years before an individual
attains normal retirement age, additional catch-up deferrals are
permitted.
The amounts which are deferred may be used by the employer to purchase
the contract offered by this prospectus. The contract is owned by the
employer and, in fact, is subject to the claims of the employer's
creditors. The employee has no present rights or vested interest in the
contract and is only entitled to payment in accordance with the PEDC
Plan provisions.
Taxation of Distributions. Amounts received by an individual from an
PEDC Plan are includible in gross income for the taxable year in which
such amounts are paid or otherwise made available.
Distributions Before Separation from Service. Distributions generally
are not permitted under an PEDC Plan prior to separation from service
except for unforeseeable emergencies. Emergency distributions are
includible in the gross income of the individual in the year in which
paid.
Required Distributions. Beginning January 1, 1989, the minimum
distribution requirements for PEDC Plans are generally the same as
those for qualified plans and section 403(b) Plans, except that no
amounts are exempted from minimum distribution requirements.
Tax Free Transfers and Rollovers. Federal income tax law permits the
tax free transfer of PEDC Plan amounts to another PEDC Plan, but not to
an IRA or other type of plan.
3. 401(a) Plans
Contributions. Payments made by employers to purchase annuity contracts
for qualified pension and profit sharing plans, under Section 401(a) of
the Code, are excludable from the gross income of employees to the
extent that the aggregate Contributions do not exceed the limitations
prescribed by section 402(g), and section 415 of the Code. This gross
income exclusion applies to employer contributions and voluntary salary
reduction contributions.
An individual's voluntary salary reduction contributions for a 401(k)
plan are generally limited to $9,500 (1997 limit).
For 401(a) qualified plans, the maximum annual contribution that a
member can receive is limited to the lesser of 25% of includible
compensation or $30,000.
Taxation of Distributions. Distributions are restricted. These
restrictions require that no distributions of employer contributions or
salary deferrals will be permitted prior to one of the following
events: (1) attainment of age 59 1/2, (2) separation from service, (3)
death, (4) disability, or (5) for certain 401(a) Plans, hardship
(hardship distributions will be limited to the amount of salary
reduction contributions exclusive of earnings thereon). In-service
distributions may be permitted under various circumstances in certain
plans.
All distributions from a section 401(a) Plan are taxed as ordinary
income of the recipient in accordance with section 72 of the Code.
Distributions received before the recipient attains age 59 1/2
generally are subject to a 10% penalty tax in addition to regular
income tax. Certain distributions are excepted from this penalty tax,
including distributions following (1) death, (2) disability, 3)
separation from service during or after the year the Plan Participant
reaches age 55, (4) separation from service at any age if the
distribution is in the form of payments over the life (or life
expectancy) of the Plan Participant (or the Plan Participant and
beneficiary), and (5) distributions not in excess of tax deductible
medical expenses.
Required Distributions. Generally, distributions from section 401(a)
Plans must commence no later than April 1 of the calendar year
following the calendar year in which the Plan Participant attains age
70 1/2 and such distributions must be made over a period that does not
exceed the life expectancy of the Plan Participant (or the Plan
Participant and beneficiary). Following the death of the Plan
Participant, the distribution requirements are generally the same as
those described with respect to 403(b) Plans. A penalty tax of 50% will
be imposed on the amount by which the minimum required distribution in
any year exceeds the amount actually distributed in that year.
Tax-Free Transfers and Rollovers. The Code provides for the tax-free
exchange of one annuity contract for another annuity contract.
Distributions from a 401(a) Plan may also be transferred to a Rollover
IRA.
4. Creditor-Exempt Non-Qualified Plans
Certain employers may establish Creditor-Exempt Non-Qualified Plans.
Under such Plans the employer formally funds the Plan either by
purchasing an annuity contract or by transferring funds on behalf of
Plan Participants to a trust established for the benefit of such Plan
Participants with a direction to the trustee to use the funds to
purchase an annuity contract. The Trustee is the Contractholder and is
considered the nominal owner of the contract. Each Plan Participant as
a Trust beneficiary, is an Owner of Benefits under the contract and is
treated as the owner for income tax purposes.
Taxation of Contract Earnings. Since each Plan Participant for income
tax purposes is considered the owner of the Investment Account or
Accounts which correlate to such Participant, any increase in a
Participant's Investment Account Value resulting from the investment
performance of the contract is not taxable to the Plan Participant
until received by such Plan Participant.
Contributions. Payments made by the employer to the Trust on behalf of
a Plan Participant are currently includible in the Plan Participant's
gross income as additional compensation and, if such payments coupled
with the Plan Participant's other compensation is reasonable in amount,
such payments are currently deductible as compensation by the Employer.
Taxation of Distributions. In general, partial withdrawals from an
Investment Account that are not received by a Plan Participant as an
annuity under the contract allocated to post-August 13, 1982
Contributions under a pre-existing contract are taxed as ordinary
income to the extent of the accumulated income or gain under the
contract. Partial redemptions from a contract that are allocated to
pre-August 14, 1982 Contributions under a pre-existing contract are
taxed only after the Plan Participant has received all of the
"investment in the contract" (Contributions less any amounts previously
received and excluded from gross income).
In the case of a complete redemption of an Investment Account under the
contract (regardless of the date of purchase), the amount received will
be taxed as ordinary income to the extent that it exceeds the Plan
Participant's investment in the contract.
If a Contractholder purchases two or more contracts from the Company
(or an affiliated company) within any twelve month period after October
21, 1988, those contracts are treated as a single contract for purposes
of measuring the income on a partial redemption or complete surrender.
When payments are received as an annuity, the Plan Participant's
investment in the contract is treated as received ratably over the
expected payment period of the annuity and excluded from gross income
as a tax-free return of capital. Individuals who commence receiving
annuity payments on or after January 1, 1987, can exclude from income
only their unrecovered investment in the contract. Where such
individuals die before they have recovered their entire investment in
the contract on a tax-free basis, they are entitled to a deduction of
the unrecovered amount on their final tax return.
In addition to regular income taxes, there is a 10% penalty tax on the
taxable portion of a distribution received before the Plan Participant
attains age 59 1/2 under the contract, unless the distribution is; (1)
made to a beneficiary on or after death of the Plan Participant, (2)
made upon the disability of the Plan Participant; (3) part of a series
of substantially equal annuity payments for the life or life expectancy
of the Plan Participant or the Plan Participant and beneficiary; (4)
made under an immediate annuity contract, or (5) allocable to
Contributions made prior to August 14, 1982.
Required Distributions. The Internal Revenue Code does not require a
Plan Participant under a Creditor-Exempt Non-Qualified Plan to commence
receiving distributions at any particular time and does not limit the
duration of annuity payments. However, the contract provides the
Annuity Commencement Date must be no later than the April 1 of the
calendar year following the calendar year in which the Plan Participant
attains age 70 1/2. However, upon the death of the Plan Participant
prior to the commencement of annuity payments, the amount accumulated
under the contract for the Plan Participant must be distributed within
five years or, if distributions to a beneficiary designated under the
contract commence within one year of the Plan Participant's death,
distributions are permitted over the life of the beneficiary or over a
period not extending beyond the beneficiary's life expectancy. If the
Plan Participant has commenced receiving annuity distributions prior to
the Plan Participant's death, distributions must continue at least as
rapidly as under the method in effect at the date of death.
Tax-Free Exchanges. Under Section 1035 of the Code, the exchange of
one annuity contract for another is not a taxable transaction, but is
reportable to the IRS. Transferring Investment Account Values from
this contract to a Companion Contract would fall within the provisions
of Section 1035 of the Code.
5. General Creditor Non-Qualified Plans
Contributions. Private taxable employers may establish informally
funded, General Creditor Non-Qualified Plans for a select group of
management or highly compensated employees and/or independent
contractors. Certain arrangements of nonprofit employers entered into
prior to August 16, 1989, and not subsequently modified, are subject to
the rules discussed below.
Informally funded General Creditor Non-Qualified Plans represent a bare
contractual promise on the part of the employer to pay wages at some
future time. The contract used to informally fund the employer's
obligation is owned by the employer and is subject to the claims of the
employer's creditors. The Plan Participant has no present right or
vested interest in the contract and is only entitled to payment in
accordance with Plan provisions. If the Employer who is the
Contractholder, is not a natural person, the contract does not receive
tax-deferred treatment afforded other Contractholders under the
Internal Revenue Code.
Taxation of Distributions. Amounts received by an individual from a
General Creditor Non-Qualified Plan are includible in the employee's
gross income for the taxable year in which such amounts are paid or
otherwise made available. Such amounts are deductible by the employer
when paid to the individual.
B. Fund Diversification
Separate Account B investments must be adequately diversified in order for
the increase in the value of Creditor-Exempt 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
Creditor-Exempt Non-Qualified Contractholders.
The investment opportunities of the Funds could conceivably be limited by
adhering to the above diversification requirements. This would affect all
Contractholders, 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 Narber, Vice President and General Counsel of the Company.
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.
INDEPENDENT AUDITORS
The financial statements of Principal Mutual Life Insurance Company
Separate Account B and the consolidated financial statements of the Principal
Financial Group (R) (comprised of Principal Mutual Life Insurance Company and
its subsidiaries) 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.
CONTRACTHOLDERS' INQUIRIES
Contractholders' inquiries should be directed to Princor Financial Services
Corporation, A Member of The Principal Financial Group, Des Moines, Iowa
50392-0200, (515) 247-5711.
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
The table of contents for the Statement of Additional Information is
provided below.
TABLE OF CONTENTS
Page
Independent Auditors...............................................3
Underwriting Commissions...........................................3
Calculation of Yield and Total Return..............................3
Principal Mutual Life Insurance Company Separate Account B
Report of Independent Auditors............................5
Financial Statements......................................6
The Principal Financial Group(R)
Report of Independent Auditors...........................23
Financial Statements.....................................24
To obtain a copy of the Statement of Additional Information, free of
charge, write or telephone:
Princor Financial Services Corporation
a Member of
The Principal Financial Group
Des Moines, IA 50392-0200
Telephone: 1-800-633-1373
<PAGE>
PART B
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT B
PERSONAL VARIABLE - A GROUP VARIABLE ANNUITY CONTRACT FOR
EMPLOYER SPONSORED QUALIFIED AND NON-QUALIFIED RETIREMENT PLANS
ISSUED BY PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
Statement of Additional Information
dated May 1, 1997
This Statement of Additional Information provides information about Principal
Mutual Life Insurance Company Separate Account B Personal Variable - Group
Variable Annuity Contracts (the "Contract" or the "Contracts") in addition to
the information that is contained in the Contract's Prospectus, dated May 1,
1997.
This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the Prospectus, a copy of which can be obtained free of
charge by writing or telephoning:
Princor Financial Services Corporation
a Member of
The Principal Financial Group
Des Moines Iowa 50392-0200
Telephone: 1-800-633-1373
<PAGE>
TABLE OF CONTENTS
Independent Auditors ............................................. 3
Underwriting Commissions ......................................... 3
Calculation of Yield and Total Return............................. 3
Principal Mutual Life Insurance Company Separate Account B
Report of Independent Auditors............................ 5
Financial Statements...................................... 6
The Principal Financial Group
Report of Independent Auditors............................ 23
Financial Statements...................................... 24
<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.
UNDERWRITING COMMISSIONS
Aggregate dollar amount of underwriting commissions paid to and retained by
Princor Financial Services Corporation for all Separate Account B contracts:
Year Paid To Retained by
1996 $11,090,837.12 $14,528.47
1995 $5,326,848.77 $26,014.78
1994 $2,347,858.73 $60,600.11
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 July 15, 1992.
However, shares of some of the 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 sales load deducted from purchase payments which, if included, would
reduce the "yield" and "effective yield." For the period ending December 31,
1996, the 7-day annualized and effective yields were 4.24% and 4.33%,
respectively.
From time to time, the Separate Account will advertise the average annual total
return of its various divisions for these contracts. 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 5% 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 does not take
into account the sales charge in order to illustrate the change in the
Division's unit value over time. See "Deductions Under the Contract" for a
discussion of contingent deferred sales charges.
Assuming the contract had been offered as of the dates indicated in the table
below, the hypothetical average annual total returns for the periods ending
December 31, 1996 are:
<TABLE>
<CAPTION>
With Contingent Deferred Without Contingent Deferred
Sales Charge Sales Charge
-------------------------- ---------------------------
One Five Ten One Five Ten
Year Year Year Year Year Year
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Balanced Division 7.41 10.23 10.93(1) 12.19 10.52 10.93(1)
Bond Division (2.82) 6.90 8.34(1) 1.50 7.18 8.34(1)
Capital Accumulation Division 17.24 12.72 11.83 22.46 13.00 11.83
Emerging Growth Division 14.98 15.24 16.58(1) 20.09 15.53 16.58(1)
Government Securities Division (1.89) 5.40 7.49(2) 2.48 5.67 7.49(2)
Growth Division 6.81 13.59(3) N/A 11.56 15.13(3) N/A
Money Market Division (0.25) 2.89 4.55 4.19 3.15 4.55
World Division 18.76 10.37(3) N/A 24.04 11.87(3) N/A
(1) Period from December 18, 1987 - December 31, 1996
(2) Period from April 9, 1987 - December 31, 1996
(3) Period from May 2, 1994 - December 31, 1996
</TABLE>
Assuming the contract had been offered as of the dates indicated in the table
below and assuming the Contract Administration Expense/Recordkeeping Charge is
not deducted from Investment Accounts, the hypothetical average annual total
returns for the periods ending December 31, 1996 are:
<TABLE>
<CAPTION>
With Contingent Deferred Without Contingent Deferred
Sales Charge Sales Charge
-------------------------- ---------------------------
One Five Ten One Five Ten
Year Year Year Year Year Year
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Balanced Division 7.68 10.67 11.54(1) 12.46 10.95 11.54(1)
Bond Division (2.57) 7.33 8.94(1) 1.76 7.60 8.94(1)
Capital Accumulation Division 17.55 13.17 12.45 22.77 13.45 12.45
Emerging Growth Division 15.28 15.70 17.07(1) 20.40 15.99 17.07(1)
Government Securities Division (1.63) 5.82 8.04(2) 2.73 6.09 8.04(2)
Growth Division 7.09 13.93(3) N/A 11.84 15.46(3) N/A
Money Market Division 0.01 3.30 5.13 4.45 3.56 5.13
World Division 19.07 10.70(3) N/A 24.35 12.19(3) N/A
(1) Period from December 18, 1987 - December 31, 1996
(2) Period from April 9, 1987 - December 31, 1996
(3) Period from May 2, 1994 - December 31, 1996
</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, 1996, 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, 1996, 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, 1996, 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.
/s/ Ernst & Young
Des Moines, Iowa
February 7, 1997
<PAGE>
<TABLE>
<CAPTION>
Principal Mutual Life Insurance
Company Separate Account B
Statement of Net Assets
December 31, 1996
Assets
Investments:
Aggressive Growth Division:
Principal Aggressive Growth Fund, Inc. - 5,015,647 shares at net asset
<S> <C>
value of $14.52 per share (cost - $68,556,580) $ 72,827,189
Asset Allocation Division:
Principal Asset Allocation Fund, Inc. - 2,615,216 shares at net asset
value of $11.48 per share(cost - $29,412,890) 30,022,679
Balanced Division:
Principal Balanced Fund, Inc. - 5,227,046 shares at net asset value
of $14.44 per share (cost - $72,961,005) 75,478,532
Bond Division:
Principal Bond Fund, Inc. - 4,515,157 shares at net asset value
of $11.33 per share (cost - $51,557,619) 51,156,727
Capital Accumulation Division:
Principal Capital Accumulation Fund, Inc. - 5,502,884 shares at net
asset value of $29.84 per share (cost - $152,349,374) 164,206,061
Emerging Growth Division:
Principal Emerging Growth Fund, Inc. - 4,111,887 shares at net
asset value of $29.74 per share (cost - $104,926,679) 122,287,543
Government Securities Division:
Principal Government Securities Fund, Inc. - 7,800,306 shares at
net asset value of $10.31 per share (cost - $80,859,708) 80,421,152
Growth Division:
Principal Growth Fund, Inc. - 7,137,809 shares at net asset
value of $13.79 per share (cost - $87,379,604) 98,430,386
Money Market Division:
Principal Money Market Fund, Inc. - 40,738,362 shares at net
asset value (cost) of $1.00 per share 40,738,362
World Division:
Principal World Fund, Inc. - 5,416,972 shares at net asset value
of $13.02 per share (cost - $60,038,392) 70,528,972
=====================
Net assets $806,097,603
=====================
</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:
<S> <C> <C> <C>
The Principal Variable Annuity 3,970,831 $18.34 $ 72,827,189
Asset Allocation Division:
Contracts in accumulation period:
The Principal Variable Annuity 2,263,999 13.26 30,022,679
Balanced Division:
Contracts in accumulation period:
Personal Variable 1,015,409 1.36 1,379,720
Premier Variable 7,466,712 1.37 10,195,711
The Principal Variable Annuity 4,661,481 13.71 63,903,101
---------------------
---------------------
75,478,532
Bond Division:
Contracts in accumulation period:
Personal Variable 274,142 1.25 342,860
Premier Variable 2,612,249 1.26 3,283,167
The Principal Variable Annuity 3,872,056 12.28 47,530,700
---------------------
---------------------
51,156,727
Capital Accumulation Division:
Currently payable annuity contracts:
Bankers Flexible Annuity 8,376 21.75 182,179
Pension Builder Plus - Rollover IRA 62,760 4.54 285,099
Contracts in accumulation period:
Bankers Flexible Annuity 279,871 21.75 6,087,431
Pension Builder Plus 3,538,347 4.15 14,676,410
Pension Builder Plus - Rollover IRA 513,388 4.54 2,332,142
Personal Variable 2,914,582 1.84 5,361,512
Premier Variable 17,961,848 1.86 33,366,293
The Principal Variable Annuity 6,267,307 16.26 101,914,995
---------------------
---------------------
164,206,061
Emerging Growth Division:
Contracts in accumulation period:
Personal Variable 829,824 1.53 1,269,228
Premier Variable 5,722,211 1.54 8,795,394
The Principal Variable Annuity 7,284,770 15.41 112,222,921
---------------------
---------------------
122,287,543
</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 1,177,927 $ 1.87 $ 2,208,125
Pension Builder Plus - Rollover IRA 399,361 1.97 785,763
Personal Variable 1,936,349 1.29 2,496,826
Premier Variable 7,513,193 1.30 9,783,076
The Principal Variable Annuity 5,442,706 11.97 65,147,362
---------------------
---------------------
80,421,152
Growth Division:
Contracts in accumulation period:
Personal Variable 813,860 1.40 1,137,156
Premier Variable 6,802,207 1.40 9,551,201
The Principal Variable Annuity 6,088,570 14.41 87,742,029
---------------------
---------------------
98,430,386
Money Market Division:
Contracts in accumulation period:
Pension Builder Plus 590,285 1.83 1,077,889
Pension Builder Plus - Rollover IRA 26,921 1.89 50,788
Personal Variable 841,211 1.17 981,411
Premier Variable 5,379,334 1.18 6,337,610
The Principal Variable Annuity 2,928,858 11.03 32,290,664
---------------------
---------------------
40,738,362
World Division:
Contracts in accumulation period:
Personal Variable 487,316 1.35 658,659
Premier Variable 4,298,126 1.36 5,838,045
The Principal Variable Annuity 4,797,313 13.35 64,032,268
---------------------
---------------------
70,528,972
=====================
Net assets $806,097,603
=====================
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Principal Mutual Life Insurance
Company Separate Account B
Statement of Operations
Year ended December 31, 1996
Aggressive Asset Allocation
Growth Division Division Balanced Division
Combined
---------------- ----------------- ------------------ ------------------
---------------- ----------------- ------------------ ------------------
Investment income
Income:
<S> <C> <C> <C> <C>
Dividends $18,172,373 $ 509,777 $ 856,100 $1,925,027
Capital gains distributions 32,450,453 6,549,914 1,528,766 3,811,144
---------------- ----------------- ------------------ ------------------
---------------- ----------------- ------------------ ------------------
50,622,826 7,059,691 2,384,866 5,736,171
Expenses:
Mortality and expense risks 6,754,861 566,830 267,227 552,989
Administration charges 522,693 28,925 3,394 9,695
Contingent sales charges 379,429 25,052 18,520 20,237
---------------- ----------------- ------------------ ------------------
---------------- ----------------- ------------------ ------------------
7,656,983 620,807 289,141 582,921
---------------- ----------------- ------------------ ------------------
---------------- ----------------- ------------------ ------------------
Net investment income 42,965,843 6,438,884 2,095,725 5,153,250
Realized and unrealized gains (losses) on investments
Net realized gains on investments 11,061,913 1,143,445 188,720 98,838
Change in net unrealized appreciation/
depreciation of investments 32,048,646 3,397,775 206,378 1,366,906
---------------- ----------------- ------------------ ------------------
================ ================= ================== ==================
Net increase in net assets resulting from operations
$86,076,402 $10,980,104 $2,490,823 $6,618,994
================ ================= ================== ==================
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Capital Emerging Growth Government Money Market
Bond Division Accumulation Division Securities Growth Division Division World Division
Division Division
- ----------------- ------------------- ----------------- ----------------- ---------------- ---------------- -----------------
- ----------------- ------------------- ----------------- ----------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
$2,883,564 $ 2,824,460 $ 889,099 $4,377,421 $1,130,290 $1,648,495 $ 1,128,140
- 17,683,076 1,921,631 - 236,417 - 719,505
- ----------------- ------------------- ----------------- ----------------- ---------------- ---------------- -----------------
- ----------------- ------------------- ----------------- ----------------- ---------------- ---------------- -----------------
2,883,564 20,507,536 2,810,730 4,377,421 1,366,707 1,648,495 1,847,645
454,051 1,416,717 980,616 758,402 808,416 396,012 553,601
3,582 318,880 36,468 66,615 17,437 29,567 8,130
22,229 97,937 41,369 47,306 41,516 39,803 25,460
- ----------------- ------------------- ----------------- ----------------- ---------------- ---------------- -----------------
- ----------------- ------------------- ----------------- ----------------- ---------------- ---------------- -----------------
479,862 1,833,534 1,058,453 872,323 867,369 465,382 587,191
- ----------------- ------------------- ----------------- ----------------- ---------------- ---------------- -----------------
- ----------------- ------------------- ----------------- ----------------- ---------------- ---------------- -----------------
2,403,702 18,674,002 1,752,277 3,505,098 499,338 1,183,113 1,260,454
84,385 7,614,291 1,000,612 266,471 216,275 - 448,876
(906,639) 1,107,485 12,364,939 (1,358,430) 7,137,078 - 8,733,154
- ----------------- ------------------- ----------------- ----------------- ---------------- ---------------- -----------------
- ----------------- ------------------- ----------------- ----------------- ---------------- ---------------- -----------------
$1,581,448 $27,395,778 $15,117,828 $2,413,139 $7,852,691 $1,183,113 $10,442,484
================= =================== ================= ================= ================ ================ =================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Principal Mutual Life Insurance
Company Separate Account B
Statements of Changes in Net Assets
Aggressive Asset Allocation
Combined Growth Division Division Balanced 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 Division Securities Growth Division Division World 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>
<TABLE>
<CAPTION>
Principal Mutual Life Insurance
Company Separate Account B
Statements of Changes in Net Assets (continued)
Aggressive Asset Allocation
Combined Growth Division Division Balanced Division
------------------ ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Net assets at January 1, 1996 $346,611,319 $19,198,047 $10,841,100 $21,263,022
Increase (decrease) in net assets
Operations:
Net investment income 42,965,843 6,438,884 2,095,725 5,153,250
Net realized gains on investments 11,061,913 1,143,445 188,720 98,838
Change in net unrealized appreciation/ depreciation
of investments 32,048,646 3,397,775 206,378 1,366,906
------------------ ----------------- ------------------ -----------------
------------------ ----------------- ------------------ -----------------
Net increase in net assets resulting from operations
86,076,402 10,980,104 2,490,823 6,618,994
Changes from principal transactions:
Purchase payments, less sales charges, per payment
fees and applicable premium taxes 694,702,137 55,392,385 19,059,581 52,586,838
Contract terminations (66,787,528) (1,366,444) (1,010,182) (1,643,846)
Death benefit payments (668,045) (2,653) - (126,235)
Flexible withdrawal option payments (3,510,262) (159,580) (189,515) (377,428)
Transfer payments to other contracts (250,275,882) (11,214,670) (1,169,128) (2,842,813)
Annuity payments (50,538) - - -
------------------ ----------------- ------------------ -----------------
------------------ ----------------- ------------------ -----------------
Increase in net assets from principal transactions
373,409,882 42,649,038 16,690,756 47,596,516
------------------ ----------------- ------------------ -----------------
------------------ ----------------- ------------------ -----------------
Total increase 459,486,284 53,629,142 19,181,579 54,215,510
------------------ ----------------- ------------------ -----------------
================== ================= ================== =================
Net assets at December 31, 1996 $806,097,603 $72,827,189 $30,022,679 $75,478,532
================== ================= ================== =================
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Capital Emerging Growth Government Money Market
Bond Division Accumulation Division Securities Growth Division Division World Division
Division Division
- ------------------ ------------------ ------------------- ----------------- ----------------- ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
$18,628,633 $103,657,763 $ 42,184,948 $45,442,936 $37,903,233 $ 22,309,488 $25,182,149
2,403,702 18,674,002 1,752,277 3,505,098 499,338 1,183,113 1,260,454
84,385 7,614,291 1,000,612 266,471 216,275 - 448,876
(906,639) 1,107,485 12,364,939 (1,358,430) 7,137,078 - 8,733,154
- ------------------ ------------------ ------------------- ----------------- ----------------- ------------------ ------------------
- ------------------ ------------------ ------------------- ----------------- ----------------- ------------------ ------------------
1,581,448 27,395,778 15,117,828 2,413,139 7,852,691 1,183,113 10,442,484
38,496,000 82,813,992 73,546,898 53,225,139 59,193,247 219,306,074 41,081,983
(1,339,557) (38,943,389) (2,654,193) (10,402,344) (3,020,145) (4,638,362) (1,769,066)
(137,325) (44,752) (23,654) (97,177) (49,795) (155,982) (30,472)
(515,754) (358,969) (309,539) (698,302) (305,373) (433,930) (161,872)
(5,556,718) (10,263,824) (5,574,745) (9,462,239) (3,143,472) (196,832,039) (4,216,234)
- (50,538) - - - - -
- ------------------ ------------------ ------------------- ----------------- ----------------- ------------------ ------------------
- ------------------ ------------------ ------------------- ----------------- ----------------- ------------------ ------------------
30,946,646 33,152,520 64,984,767 32,565,077 52,674,462 17,245,761 34,904,339
- ------------------ ------------------ ------------------- ----------------- ----------------- ------------------ ------------------
- ------------------ ------------------ ------------------- ----------------- ----------------- ------------------ ------------------
32,528,094 60,548,298 80,102,595 34,978,216 60,527,153 18,428,874 45,346,823
- ------------------ ------------------ ------------------- ----------------- ----------------- ------------------ ------------------
================== ================== =================== ================= ================= ================== ==================
$51,156,727 $164,206,061 $122,287,543 $80,421,152 $98,430,386 $ 40,738,362 $70,528,972
================== ================== =================== ================= ================= ================== ==================
</TABLE>
<PAGE>
Principal Mutual Life Insurance
Company Separate Account B
Notes to Financial Statements
December 31, 1996
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, 1996.
The average cost method is used to determine realized gains and losses on
investments. Dividends are taken into income on an accrual basis as of the
ex-dividend date.
After December 31, 1996, Principal Mutual no longer accepted contributions for
Pension Builder Plus contracts. Contractholders are being given the option of
withdrawing their funds or transferring to another contract. In addition,
Principal Mutual no longer accepts contributions for Bankers Flexible Annuity
contracts.
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 $29,412 and $1,281, respectively, during the year ended December 31,
1996. 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
<PAGE>
Principal Mutual Life Insurance
Company Separate Account B
Notes to Financial Statements (continued)
2. Expenses (continued)
participant's investment account values and the number of participants under the
retirement plan and their participant investment account value. The charges for
mortality and expense risks, contingent sales, and annual administration
amounted to $553,979, $70,529, and $345,900, respectively, during the year ended
December 31, 1996.
Personal Variable Contracts - Mortality and expense risks assumed by Principal
Mutual are compensated for by a charge equivalent to an annual rate of 0.64%
(0.55% through June 30, 1996) 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 (1995 - $31) 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 $68,986,
$42,892, and $27,281, respectively, during the year ended December 31, 1996.
Premier Variable Contracts - Mortality and expense risks assumed by Principal
Mutual are compensated for by a charge equivalent to an annual rate of 0.42%
(0.33% through June 30, 1996) 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 $261,025 and $9,158, respectively, during the
year ended December 31, 1996. There were no contingent sales charges provided
for in these contracts.
The Principal Variable Annuity - 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 $5,841,459, $266,007,
and $139,074, respectively, during the year ended December 31, 1996.
<PAGE>
Principal Mutual Life Insurance
Company Separate Account B
Notes to Financial Statements (continued)
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.
4. Purchases and Sales of Investment Securities
The aggregate units and cost of purchases and proceeds from sales of investments
were as follows:
<TABLE>
<CAPTION>
Year ended December 31, 1996
----------------------------------------------------------------------------
Units Amount Units Amount
Purchased Purchased Redeemed Redeemed
-------------- ----------------- ------------------ -----------------
-------------- ----------------- ------------------ -----------------
Aggressive Growth Division:
<S> <C> <C> <C> <C>
The Principal Variable Annuity 3,416,591 $ 62,452,075 769,423 $ 13,364,153
Asset Allocation Division:
The Principal Variable Annuity 1,544,152 21,444,448 191,810 2,657,967
Balanced Division:
Personal Variable 900,014 1,242,103 211,977 272,089
Premier Variable 5,270,554 7,416,331 1,120,817 1,444,677
The Principal Variable Annuity 3,548,083 49,664,576 259,759 3,856,478
-------------- ----------------- ------------------ -----------------
-------------- ----------------- ------------------ -----------------
9,718,651 58,323,010 1,592,553 5,573,244
Bond Division:
Personal Variable 285,136 369,062 112,030 138,062
Premier Variable 1,952,308 2,549,386 547,808 675,630
The Principal Variable Annuity 3,045,208 38,461,117 574,453 7,215,525
-------------- ----------------- ------------------ -----------------
-------------- ----------------- ------------------ -----------------
5,282,652 41,379,565 1,234,291 8,029,217
Capital Accumulation Division:
Bankers Flexible Annuity 11,898 852,606 58,526 965,050
Pension Builder Plus 613,448 4,544,826 7,042,406 27,014,157
Pension Builder Plus - Rollover IRA
34,576 622,428 1,641,455 6,423,138
Personal Variable 1,293,441 2,795,547 715,206 1,184,726
Premier Variable 6,804,423 15,405,949 3,666,783 6,140,022
The Principal Variable Annuity 4,618,190 79,100,172 582,660 9,767,913
-------------- ----------------- ------------------ -----------------
-------------- ----------------- ------------------ -----------------
13,375,976 103,321,528 13,707,036 51,495,006
Emerging Growth Division:
Personal Variable 716,271 1,017,826 174,386 241,556
Premier Variable 4,583,657 6,499,991 757,309 1,081,357
The Principal Variable Annuity 4,746,934 68,839,812 521,488 8,297,672
-------------- ----------------- ------------------ -----------------
-------------- ----------------- ------------------ -----------------
10,046,862 76,357,629 1,453,183 9,620,585
</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, 1996
--------------------------------------------------------------------------------
Units Amount Units Amount
Purchased Purchased Redeemed Redeemed
------------------ --------------------- ------------------ --------------------
Government Securities Division:
<S> <C> <C> <C> <C>
Pension Builder Plus 224,490 $ 525,632 2,784,796 $ 5,186,539
Pension Builder Plus - Rollover IRA
1,918 49,120 1,374,538 2,618,548
Personal Variable 723,523 1,041,512 676,962 867,506
Premier Variable 3,069,889 4,387,401 2,715,719 3,448,465
The Principal Variable Annuity 4,181,060 51,598,893 761,477 9,411,325
------------------ --------------------- ------------------ --------------------
------------------ --------------------- ------------------ --------------------
8,200,880 57,602,558 8,313,492 21,532,383
Growth Division:
Personal Variable 713,466 950,832 177,314 234,080
Premier Variable 5,218,991 6,959,663 1,276,677 1,711,826
The Principal Variable Annuity 3,810,008 52,649,457 340,777 5,440,246
------------------ --------------------- ------------------ --------------------
------------------ --------------------- ------------------ --------------------
9,742,465 60,559,952 1,794,768 7,386,152
Money Market Division:
Pension Builder Plus 172,768 392,894 909,680 1,654,451
Pension Builder Plus - Rollover IRA 35 13,779 412,615 760,905
Personal Variable 3,693,865 4,468,236 3,995,717 4,765,060
Premier Variable 31,816,273 36,988,147 29,395,716 33,985,887
The Principal Variable Annuity 16,446,056 179,091,511 14,887,402 161,359,390
------------------ --------------------- ------------------ --------------------
------------------ --------------------- ------------------ --------------------
52,128,997 220,954,567 49,601,130 202,525,693
World Division:
Personal Variable 423,219 522,642 95,601 114,884
Premier Variable 3,372,385 4,182,033 746,605 929,782
The Principal Variable Annuity 3,081,130 38,224,953 429,786 5,720,169
------------------ --------------------- ------------------ --------------------
------------------ --------------------- ------------------ --------------------
6,876,734 42,929,628 1,271,992 6,764,835
------------------ --------------------- ------------------ --------------------
================== ===================== ================== ====================
120,333,960 $745,324,960 79,929,678 $328,949,235
================== ===================== ================== ====================
</TABLE>
<PAGE>
Principal Mutual Life Insurance
Company Separate Account B
Notes to Financial Statements (continued)
4. Purchases and Sales of Investment Securities (continued)
<TABLE>
<CAPTION>
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>
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>
<TABLE>
<CAPTION>
Principal Mutual Life Insurance
Company Separate Account B
Notes to Financial Statements (continued)
5. Net Assets
Net assets at December 31, 1996 consisted of the following:
Net Unrealized
Appreciation
Accumulated Net (Depreciation)
Combined Unit Transactions Investment Income of Investments
------------------ ------------------ ------------------- --------------------
Aggressive Growth Division:
<S> <C> <C> <C> <C>
The Principal Variable Annuity $ 72,827,189 $ 61,520,104 $ 7,036,476 $ 4,270,609
Asset Accumulation Division:
The Principal Variable Annuity 30,022,679 26,903,818 2,509,072 609,789
Balanced Division:
Personal Variable 1,379,720 1,256,243 98,597 24,880
Premier Variable 10,195,711 9,039,835 790,665 365,211
The Principal Variable Annuity 63,903,101 56,916,021 4,859,644 2,127,436
------------------ ------------------ ------------------- --------------------
------------------ ------------------ ------------------- --------------------
75,478,532 67,212,099 5,748,906 2,517,527
Bond Division:
Personal Variable 342,860 337,692 16,621 (11,453)
Premier Variable 3,283,167 3,137,358 188,841 (43,032)
The Principal Variable Annuity 47,530,700 45,146,759 2,730,348 (346,407)
------------------ ------------------ ------------------- --------------------
------------------ ------------------ ------------------- --------------------
51,156,727 48,621,809 2,935,810 (400,892)
Capital Accumulation Division:
Bankers Flexible Annuity 6,269,610 1,223,652 3,467,049 1,578,909
Pension Builder Plus 14,676,410 9,061,050 3,383,150 2,232,210
Pension Builder Plus - Rollover IRA 2,617,241 1,601,037 608,334 407,870
Personal Variable 5,361,512 4,111,369 797,887 452,256
Premier Variable 33,366,293 24,904,371 5,188,107 3,273,815
The Principal Variable Annuity 101,914,995 85,550,057 12,453,311 3,911,627
------------------ ------------------ ------------------- --------------------
------------------ ------------------ ------------------- --------------------
164,206,061 126,451,536 25,897,838 11,856,687
Emerging Growth Division:
Personal Variable 1,269,228 1,106,793 19,852 142,583
Premier Variable 8,795,394 7,458,640 186,583 1,150,171
The Principal Variable Annuity 112,222,921 94,053,742 2,101,069 16,068,110
------------------ ------------------ ------------------- --------------------
------------------ ------------------ ------------------- --------------------
122,287,543 102,619,175 2,307,504 17,360,864
Government Securities Division:
Pension Builder Plus 2,208,125 1,895,024 305,297 7,804
Pension Builder Plus - Rollover IRA 785,763 663,396 128,582 (6,215)
Personal Variable 2,496,826 2,321,860 205,773 (30,807)
Premier Variable 9,783,076 8,955,630 855,616 (28,170)
The Principal Variable Annuity 65,147,362 61,690,559 3,837,971 (381,168)
------------------ ------------------ ------------------- --------------------
------------------ ------------------ ------------------- --------------------
80,421,152 75,526,469 5,333,239 (438,556)
</TABLE>
<PAGE>
<TABLE>
Principal Mutual Life Insurance
Company Separate Account B
Notes to Financial Statements (continued)
5. Net Assets (continued)
Net Unrealized
Appreciation
Accumulated Net (Depreciation)
Combined Unit Transactions Investment Income of Investments
------------------ ------------------ ------------------- --------------------
Growth Division:
<S> <C> <C> <C> <C>
Personal Variable $ 1,137,156 $ 1,039,273 $ 10,425 $ 87,458
Premier Variable 9,551,201 8,421,782 136,389 993,030
The Principal Variable Annuity 87,742,029 76,959,897 811,838 9,970,294
------------------ ------------------ ------------------- --------------------
98,430,386 86,420,952 958,652 11,050,782
Money Market Division:
Pension Builder Plus 1,077,889 985,117 92,772 -
Pension Builder Plus - Rollover IRA 50,788 46,119 4,669 -
Personal Variable 981,411 975,322 6,089 -
Premier Variable 6,337,610 6,303,955 33,655 -
The Principal Variable Annuity 32,290,664 32,119,647 171,017 -
------------------ ------------------ ------------------- --------------------
------------------ ------------------ ------------------- --------------------
40,738,362 40,430,160 308,202 -
World Division:
Personal Variable 658,659 565,011 12,253 81,395
Premier Variable 5,838,045 4,891,233 136,780 810,032
The Principal Variable Annuity 64,032,268 53,176,031 1,257,084 9,599,153
------------------ ------------------ ------------------- --------------------
------------------ ------------------ ------------------- --------------------
70,528,972 58,632,275 1,406,117 10,490,580
------------------ ------------------ ------------------- --------------------
================== ================== =================== ====================
$806,097,603 $694,338,397 $54,441,816 $57,317,390
================== ================== =================== ====================
</TABLE>
<PAGE>
Report of Independent Auditors
The Board of Directors
Principal Mutual Life Insurance Company
We have audited the accompanying consolidated statements of financial position
of The Principal Financial Group (the Company) as of December 31, 1996 and
1995, and the related consolidated statements of operations, equity and cash
flows for the years 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Principal
Financial Group at December 31, 1996 and 1995, and the consolidated results of
its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 1996 the
Company adopted certain accounting changes to conform with generally accepted
accounting principles for mutual life insurance enterprises, and retroactively
restated the 1995 financial statements for the change.
/s/ Ernst & Young
Des Moines, Iowa
February 7, 1997
<PAGE>
The Principal Financial Group
Consolidated Statements of Operations
Year ended December 31
1996 1995*
----------------------------
----------------------------
(In Millions)
Revenue
Premiums and annuity and other considerations $5,121 $5,243
Policy and contract charges 655 580
Net investment income 2,780 2,693
Net realized capital gains 436 122
Commissions and other income 150 143
----------------------------
Total revenue 9,142 8,781
Expenses
Benefits, claims and settlement expenses 6,087 6,142
Dividends to policyowners 299 307
Operating expenses 1,926 1,781
----------------------------
----------------------------
Total expenses 8,312 8,230
----------------------------
Income before income taxes 830 551
Income taxes 304 207
----------------------------
============================
Net income $ 526 $ 344
============================
* As restated. See Note 1.
See accompanying notes.
<PAGE>
The Principal Financial Group
Consolidated Statements of Financial Position
December 31
1996 1995*
------------------------
------------------------
(In Millions)
Assets
Debt securities, available-for-sale $21,974 $21,837
Equity securities, available-for-sale 1,023 1,446
Mortgage loans 12,409 11,380
Real estate 2,474 2,263
Policy loans 736 711
Other investments 68 79
Cash and cash equivalents 271 295
Accrued investment income 464 479
Deferred acquisition costs 1,058 938
Property held for Company use 222 210
Separate account assets 17,218 12,957
Other assets 1,225 1,369
------------------------
========================
Total assets $59,142 $53,964
========================
========================
Liabilities
Contractholder funds $23,194 $22,465
Future policy benefits and claims 10,575 10,058
Other policyowner funds 454 476
Policyowner dividends payable 447 455
Debt 399 361
Income taxes currently payable 283 214
Deferred income taxes 623 930
Separate account liabilities 17,166 12,891
Other liabilities 1,347 1,508
------------------------
------------------------
Total liabilities 54,488 49,358
Equity
Surplus 3,803 3,277
Net unrealized gains on available- securities 860 1,336
Foreign currency translation adjustment, net (9) (7)
------------------------
------------------------
Total equity 4,654 4,606
------------------------
========================
Total liabilities and equity $59,142 $53,964
========================
* As restated. See Note 1.
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
The Principal Financial Group
Consolidated Statements of Equity
Net Unrealized
Gains on Foreign Currency
Available-for-Sale Translation
Surplus Securities Adjustment, net Total Equity
---------------------------------------------------------------
(In Millions)
<S> <C> <C> <C> <C>
Balances at January 1, 1995* $2,933 $ 48 $(6) $2,975
Net income 344 - - 344
Increase in unrealized appreciation on debt
securities available-for-sale - 1,834 - 1,834
Increase in unrealized appreciation on equity
securities available-for-sale - 411 - 411
Adjustments for assumed changes in
amortization pattern:
Deferred acquisition costs - (315) - (315)
Unearned revenue reserves - 52 - 52
Provision for deferred income taxes - (694) - (694)
Change in foreign currency translation
adjustment, net - - (1) (1)
---------------------------------------------------------------
Balances at December 31, 1995 3,277 1,336 (7) 4,606
Net income 526 - - 526
Decrease in unrealized appreciation on debt
securities available-for-sale - (543) - (543)
Decrease in unrealized appreciation on equity
securities available-for-sale - (262) - (262)
Adjustments for assumed changes in
amortization pattern:
Deferred acquisition costs - 83 - 83
Unearned revenue reserves - (11) - (11)
Provision for deferred income tax benefit - 257 - 257
Change in foreign currency translation
adjustment, net - - (2) (2)
---------------------------------------------------------------
===============================================================
Balances at December 31, 1996 $3,803 $ 860 $(9) $4,654
===============================================================
* As restated. See Note 1.
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
The Principal Financial Group
Consolidated Statements of Cash Flows
Year ended December 31
1996 1995*
-----------------------------
-----------------------------
(In Millions)
Operating activities
<S> <C> <C>
Net income $526 $344
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization of deferred acquisition costs 178 145
Additions to deferred acquisition costs (215) (206)
Accrued investment income 15 6
Contractholder and policyowner liabilities and dividends 240 523
Current and deferred income taxes 20 93
Net realized capital gains (436) (122)
Depreciation and amortization expense 112 97
Other (230) 437
-----------------------------
-----------------------------
Net adjustments (316) 973
-----------------------------
Net cash provided by operating activities 210 1,317
Investing activities
Available-for-sale securities:
Purchases (11,762) (13,195)
Sales 8,949 9,333
Maturities 2,796 2,485
Mortgage loans acquired or originated (2,955) (2,837)
Mortgage loans sold or repaid 1,619 1,702
Real estate acquired (166) (143)
Real estate sold 253 38
Net change in policy loans (25) (28)
Net change in property held for company use (18) (44)
Net change in other investments (74) (11)
-----------------------------
Net cash used in investment activities (1,383) (2,700)
Financing activities
Issuance of debt 43 21
Principal repayments of debt (29) (71)
Proceeds of short-term borrowings 1,451 990
Repayment of short-term-borrowings (1,282) (990)
Investment contract deposits 7,496 6,756
Investment contract withdrawals (6,530) (5,310)
-----------------------------
Net cash provided by financing activities 1,149 1,396
-----------------------------
Net increase (decrease) in cash and cash equivalents (24) 13
Cash and cash equivalents at beginning of year 295 282
-----------------------------
=============================
Cash and cash equivalents at end of year $ 271 $ 295
=============================
* As restated. See Note 1.
See accompanying notes.
</TABLE>
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements
December 31, 1996
1. Nature of Operations and Significant Accounting Policies
Description of Business
The Principal Financial Group (the Company), comprised of Principal Mutual
Life Insurance Company (Principal Mutual) and its subsidiaries, is a diversified
financial services organization engaged in the marketing and management of life
insurance, annuity, health, pension and other financial products and services,
primarily in the United States.
Basis of Presentation
The accompanying consolidated financial statements of the Company and its
majority-owned subsidiaries have been prepared in conformity with generally
accepted accounting principles (GAAP). Less than majority-owned entities in
which the Company has at least a 20% interest are reported on the equity basis
in the consolidated statements of financial position as other investments. All
significant intercompany accounts and transactions have been eliminated.
Total assets of the unconsolidated entities amounted to $1.5 billion at December
31, 1996 and $1.7 billion at December 31, 1995, and total revenues were $349
million in 1996 and $320 million in 1995. During 1996 and 1995, the Company
included $(3) million and $(9) million, respectively, in net investment income
representing the Company's share of current year net losses of the
unconsolidated entities.
Accounting Changes
Prior to 1996, the Company prepared its financial statements in conformity with
reporting practices prescribed or permitted by the Insurance Division of the
Department of Commerce of the State of Iowa. Such practices were considered GAAP
for mutual life insurance companies through 1995. Financial Accounting Standards
Board (FASB) Interpretation (FIN) No. 40, Applicability of Generally Accepted
Accounting Principles to Mutual Life Insurance and Other Enterprises, as
amended, which is effective for 1996 annual financial statements, no longer
permits statutory-basis financial statements to be described as being prepared
in conformity with GAAP.
Accordingly, the Company has adopted GAAP, including various accounting
pronouncements but primarily Statement of Financial Accounting Standards (SFAS)
No. 120, Accounting and Reporting by Mutual Life Insurance Enterprises and by
Insurance Enterprises for Certain Long-Duration Participating Contracts and
Statement of Position (SOP) 95-1, Accounting for Certain Insurance Activities of
Mutual Life Insurance Enterprises, which address the accounting for
long-duration and short-duration insurance and reinsurance contracts, including
all participating business.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Pursuant to the requirements of FIN No. 40, SFAS No. 120 and SOP 95-1, the
effect of the changes from the statutory basis to GAAP accounting have been
applied retroactively and the previously issued 1995 financial statements have
been restated for the change. The effect of the changes applicable to years
prior to January 1, 1995, has been presented as a restatement of equity as
follows (in millions):
Equity at January 1, 1995, as previously reported $1,927
Adjustment for the cumulative effect on prior years of
retroactively adopting GAAP 1,048
---------------
===============
Equity at January 1, 1995, as restated $2,975
===============
The adoption of GAAP had the effect of increasing net income for 1996 and 1995
by approximately $111 million and $81 million, respectively.
Future Application of Accounting Standards
In June 1996, the FASB issued SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 125
provides consistent accounting standards for securitizations and other transfers
of financial assets, determines when financial assets (liabilities) should be
considered sold (settled) and removed from the statement of financial position,
and determines when related revenues and expenses should be recognized. SFAS No.
125 is generally effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996.
SFAS No. 125 was subsequently amended in December 1996 by SFAS No. 127, Deferral
of the Effective Date of Certain Provisions of FASB Statement No. 125. SFAS No.
127 deferred for one year the effective date for transfers and servicing of
repurchase agreements, dollar rolls, securities lending, secured borrowings and
collateral and similar transactions. These Statements will be applicable to the
Company. Management believes that they will not have a significant impact on the
Company's consolidated financial statements.
Use of Estimates in the Preparation of Financial Statements
The preparation of the Company's consolidated financial statements and
accompanying notes requires management to make estimates and assumptions that
affect the amounts reported and disclosed. These estimates and assumptions could
change in the future as more information becomes known, which could impact the
amounts reported and disclosed in the consolidated financial statements and
accompanying notes.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Significant Risks
The following is a description of the most significant risks facing diversified
financial service organizations and how the Company mitigates those risks:
Legal or regulatory risk is the risk that changes in the legal or regulatory
environment in which an insurer operates will create additional expenses not
anticipated by the insurer in pricing its products. The Company mitigates this
risk by offering a wide range of products and operating throughout the United
States and the world, thus reducing its exposure to any single product or
jurisdiction, and also by employing underwriting practices which identify and
minimize the adverse impact of this risk.
Credit risk is the risk that issuers of securities owned by the Company or
borrowers on mortgage loans on real estate will default or that other parties
that owe the Company money, will not pay. The Company minimizes this risk by
adhering to a conservative investment strategy, by maintaining sound credit and
collection policies and by providing for any amounts deemed uncollectible.
Interest rate risk is the risk that interest rates will change and cause a
decrease in the value of the Company's investments. This change in rates may
cause certain interest-sensitive products to become uncompetitive or may cause
disintermediation. The Company mitigates this risk by charging fees for
policyowners' contract terminations, by offering products that transfer this
risk to the purchaser and by attempting to match the maturity schedule of its
assets with the expected payout of its liabilities. To the extent that
liabilities come due more quickly than assets mature, an insurer would have to
borrow funds or sell assets prior to maturity and potentially recognize a gain
or loss.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, money market instruments and
other debt issues with a maturity date of three months or less when purchased.
Investments
Investments in debt and equity securities are classified as available-for-sale
and, accordingly, are carried at fair value. (See Note 10 for policies related
to the determination of fair value.) The cost of debt securities is adjusted for
amortization of premiums and accrual of discounts, both computed using the
interest method. The cost of debt and equity securities is adjusted for declines
in value that are other than temporary. For the loan-backed and structured
securities included in the bond portfolio, the Company recognizes income using a
constant effective yield based on currently anticipated prepayments as
determined by broker-dealer surveys or internal estimates and the estimated
lives of the securities.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Investment real estate is reported at cost less accumulated depreciation. Such
real estate is carried net of valuation allowances when indicators of impairment
are present and the undiscounted cash flows to be generated by the real estate
exceed carrying amounts. Properties acquired through loan foreclosures are
recorded at 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 amount reductions as a result of
depreciation and quarterly valuation determinations. Changes in the valuation
allowance are charged or credited to income. Depreciation expense is computed
primarily on the basis of accelerated and straight-line methods over the
estimated useful lives of the assets. Real estate expected to be disposed is
carried at the lower of cost or fair value, less cost to sell.
Commercial and residential mortgage loans are reported at cost adjusted for
amortization of premiums and accrual of discounts, computed using the interest
method, and net of valuation allowances. Any changes in the valuation allowances
are reported as realized gains (losses) on investments. The Company measures
impairment based upon the present value of expected cash flows discounted at the
loan's effective interest rate. If foreclosure is probable, the measurement of
impairment is based upon the fair value of the collateral.
Net realized capital gains and losses on investments are determined using the
specific identification basis.
Policy loans and other investments are primarily reported at cost.
Futures and Forward Contracts and Interest Rate and Equity Swaps (Derivatives)
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 both
those contracts that hedge risks associated with interest rate fluctuations and
equity swaps are recognized in the period incurred.
Contractholder and Policyowner Liabilities
Contractholder and policyowner liabilities (contractholder funds, future policy
benefits and claims and other policyowner funds) include reserves for investment
contracts and reserves for universal life, limited payment, participating and
traditional life insurance policies. Investment contracts are contractholders'
funds left with the Company and generally include reserves for pension and
annuity contracts. Reserves on investment contracts are equal to the cumulative
deposits less any applicable charges plus credited interest.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Reserves for universal life insurance contracts are equal to cumulative premiums
less charges plus credited interest which represents the account balances that
accrue to the benefit of the policyowners, excluding surrender charges. Reserves
for non-participating term life insurance contracts are computed on a basis of
assumed investment yield, mortality, morbidity and expenses, including a
provision for adverse deviation, which generally vary by plan, year of issue and
policy duration. Investment yield is based on the Company's experience.
Mortality, morbidity and withdrawal rate assumptions are based on experience of
the Company and are periodically reviewed against both industry standards and
experience.
Reserves for participating life insurance contracts are based on the net level
premium reserve for death and endowment policy benefits. This net level premium
reserve is calculated based on dividend fund interest rate and mortality rates
guaranteed in calculating the cash surrender values described in the contract.
Some of the Company's policies and contracts require payment of fees in advance
for services that will be rendered over the estimated lives of the policies and
contracts. These payments are established as unearned revenue reserves upon
receipt and included in other policyowner funds in the consolidated statements
of financial position. These unearned revenue reserves are amortized to
operations over the estimated lives of these policies and contracts.
The liability for unpaid accident and health claims is an estimate of the
ultimate net cost of reported and unreported losses not yet settled. This
liability is estimated using actuarial analyses and case basis evaluations.
Although considerable variability is inherent in such estimates, the Company
believes that the liability for unpaid claims is adequate. These estimates are
continually reviewed and, as adjustments to this liability become necessary,
such adjustments are reflected in current operations.
Recognition of Premiums, Fees and Benefits
Traditional individual life and health insurance products include those products
with fixed and guaranteed premiums and benefits, and consist principally of
whole life and term life insurance policies and certain immediate annuities with
life contingencies. Life insurance premiums and immediate annuity premiums are
recognized as premium revenue when due.
Group life and health insurance premiums are generally recorded as premium
revenue over the term of the coverage. Some group contracts allow for premiums
to be adjusted to reflect emerging experience. Such adjusted premiums are
recognized in the period that the related experience emerges. Fees for contracts
providing claim processing or other administrative services are recorded over
the period the service is provided.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Related policy benefits and expenses for individual and group life and health
insurance products are associated with earned premiums and result in the
recognition of profits over the expected lives of the policies and contracts.
Universal life-type policies are insurance contracts with terms that are not
fixed and guaranteed. Amounts received as payments for such contracts are not
reported as premium revenues. Revenues for universal life-type insurance
contracts consist of policy charges for the cost of insurance, policy initiation
and administration, surrender charges and other fees that have been assessed
against policy account values. Policy benefits and claims that are charged to
expense include interest credited to contracts and benefit claims incurred in
the period in excess of related policy account balances.
Investment contracts do not subject the Company to risks arising from
policyowner mortality or morbidity, and consist primarily of Guaranteed
Investment Contracts (GICs) and certain deferred annuities. Amounts received as
payments for investment contracts are established as investment contract
liability balances and are not reported as premium revenues. Revenues for
investment contracts consist of investment income and policy administration
charges. Investment contract benefits that are charged to expense include
benefit claims incurred in the period in excess of related investment contract
liability balances and interest credited to investment contract liability
balances.
Deferred Acquisition Costs
Commissions and other costs (underwriting, issuance and agency expenses) that
vary with and are primarily related to the acquisition of new and renewal
insurance policies and investment contract business are capitalized to the
extent recoverable. Acquisition costs that are not deferrable and maintenance
costs are charged to operations as incurred.
Deferred acquisition costs for universal life-type insurance contracts and
participating life insurance policies and investment contracts are being
amortized over the lives of the policies and contracts in relation to the
emergence of estimated gross profit margins. This amortization is adjusted
retrospectively when estimates of current or future gross profits and margins to
be realized from a group of products and contracts are revised. The deferred
acquisition costs of non-participating term life insurance policies are being
amortized over the premium-paying period of the related policies using
assumptions consistent with those used in computing policyowner liabilities.
Deferred acquisition costs are subject to recoverability testing at the time of
policy issue and loss recognition testing at the end of each accounting period.
Deferred acquisition costs would be written off to the extent that it is
determined that future policy premiums and investment income or gross profit
margins would not be adequate to cover related losses and expenses.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Reinsurance
The Company enters into reinsurance agreements with other companies in the
normal course of business. The Company may assume reinsurance from or cede
reinsurance to other companies. Reinsurance premiums, expenses, recoveries 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, reported on a gross basis. The Company is
contingently liable with respect to reinsurance ceded to other companies in the
event the reinsurer is unable to meet the obligations it has assumed.
Separate Accounts
The separate account assets and liabilities presented in the consolidated
financial statements represent the fair market value of funds that are
separately administered by the Company for contracts with equity, real estate
and fixed-income investments. The separate account contract owner, rather than
the Company, bears the investment risk of these funds. The separate account
assets are legally segregated and are not subject to claims that arise out of
any other business of the Company. The Company receives a fee for
administrative, maintenance and investment advisory services that is included in
the consolidated statements of operations. Deposits, net investment income and
realized and unrealized capital gains and losses on the separate accounts are
not reflected in the consolidated statements of operations.
Income Taxes
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. Current income taxes are charged or credited
to operations based upon amounts estimated to be payable or recoverable as a
result of taxable operations for the current year. Deferred income taxes are
provided for the tax effect of differences in the financial reporting and income
tax bases of assets and liabilities and net operating losses using enacted
income tax rates and laws. The effect on deferred tax assets and deferred tax
liabilities of a change in tax rates is recognized in operations in the period
in which the change is enacted.
Foreign Exchange
The Company's foreign subsidiaries' statements of financial position and
operations are translated at the current exchange rates and average exchange
rates for the year, respectively. Resulting translation adjustments are reported
as a component of equity. Other translation adjustments for foreign currency
transactions that affect cash flows are reported in current operations.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Pension and Postretirement Benefits
The Company accounts for its pension benefits and postretirement benefits other
than pension (medical, life insurance and long-term care) using the full accrual
method.
Property Held for Company Use
Property held for Company use includes home office properties and related
leasehold improvements. Property held for Company use is shown in the
consolidated statements of financial position at cost less allowances for
accumulated depreciation. Provisions for depreciation of property held for
Company use are computed principally on the straight-line method over the
estimated useful lives of the assets. Property held for Company use and related
accumulated depreciation are as follows (in millions):
December 31
1996 1995
-----------------------------
Property held for Company use $285 $266
Accumulated depreciation (63) (56)
=============================
Property held for Company use, net $222 $210
=============================
Other Assets
Intangible assets are included in other assets in the consolidated statements of
financial position. The cost of acquired subsidiaries in excess of the fair
value of the net assets (i.e., goodwill) and other intangible assets (primarily
customer lists and institutional customer relationships) have been recorded in
connection with acquisitions. These assets are amortized on a straight-line
basis primarily over 40 years with the exception of assets acquired after 1995
which are amortized over ten years. The carrying amount of goodwill and other
intangible assets is reviewed periodically for indicators of impairment in
value. Intangible assets and related accumulated amortization are as follows (in
millions):
December 31
1996 1995
-----------------------------
Goodwill $135 $113
Accumulated amortization (22) (31)
-----------------------------
Goodwill, net 113 82
Other intangible assets, net 34 56
-----------------------------
Total intangible assets $147 $138
=============================
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Mortgage servicing rights of $272 million and $176 million at December 31, 1996
and 1995, respectively, are included in other assets in the consolidated
statements of financial position and represent the cost of purchasing or
originating the right to service mortgage loans. These costs are capitalized and
amortized to operations over the estimated remaining lives of the underlying
loans using the interest method and taking into account appropriate prepayment
assumptions. Capitalized mortgage servicing rights are periodically assessed for
impairment, which is recognized in the consolidated statements of operations
during the period in which impairment occurs by establishing a corresponding
valuation allowance.
Other assets are reported primarily at cost.
Reclassifications
Certain reclassifications have been made to the 1995 financial statements to
conform to the 1996 consolidated presentation.
2. Investments
Under SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities, securities are generally classified as available-for-sale,
held-to-maturity, or trading. The Company has classified its entire debt
securities portfolio as available-for-sale, although it is generally the
Company's intent to hold these securities to maturity. The Company has also
classified all equity securities as available-for-sale. Securities classified as
available-for-sale are reported at fair value in the consolidated statements of
financial position with the related unrealized holding gains and losses on such
available-for-sale securities reported as a separate component of equity after
adjustments for related changes in deferred acquisition costs, unearned revenue
reserves and deferred income taxes.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
2. Investments (continued)
The cost, gross unrealized gains and losses and fair value of debt and equity
securities available-for-sale as of December 31, 1996 and 1995, are as follows
(in millions):
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------------
---------------------------------------------------------------
December 31, 1996
Bonds:
<S> <C> <C> <C> <C>
United States Government and agencies $ 246 $ 1 $ 1 $ 246
States and political subdivisions 303 13 - 316
Corporate - public 4,487 200 15 4,672
Corporate - private 12,876 737 25 13,588
Mortgage-backed securities 3,112 60 27 3,145
---------------------------------------------------------------
---------------------------------------------------------------
21,024 1,011 68 21,967
Redeemable preferred stocks 5 2 - 7
===============================================================
Total debt securities $21,029 $1,013 $68 $21,974
===============================================================
Total equity securities $ 502 $ 536 $15 $ 1,023
===============================================================
December 31, 1995
Bonds:
United States Government and agencies $ 294 $ 4 $ - $ 298
States and political subdivisions 281 19 - 300
Corporate - public 4,467 328 16 4,779
Corporate - private 12,211 1,081 57 13,235
Mortgage-backed securities 3,085 134 4 3,215
---------------------------------------------------------------
---------------------------------------------------------------
20,338 1,566 77 21,827
Redeemable preferred stocks 11 1 2 10
===============================================================
Total debt securities $20,349 $1,567 $79 $21,837
===============================================================
Total equity securities $ 663 $ 794 $11 $ 1,446
===============================================================
</TABLE>
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
2. Investments (continued)
The cost and fair value of debt securities available-for-sale at December 31,
1996, by expected maturity, are as follows (in millions):
Cost Fair Value
----------------------
----------------------
Due in one year or less $ 1,290 $ 1,314
Due after one year through five years 6,486 6,720
Due after five years through ten years 6,271 6,590
Due after ten years 3,865 4,198
----------------------
----------------------
17,912 18,822
Mortgage-backed and other securities without
a single maturity date 3,117 3,152
----------------------
======================
Total $21,029 $21,974
======================
The above summarized activity is based on expected maturities. Actual maturities
may differ because borrowers may have the right to call or pre-pay obligations.
Major categories of net investment income are summarized as follows (in
millions):
Year ended December 31
1996 1995
-----------------------------
Debt securities available-for-sale $1,608 $1,603
Equity securities available-for-sale 33 41
Mortgage loans 922 1,008
Real estate 338 162
Policy loans 49 48
Cash and cash equivalents 15 8
Other 60 24
-----------------------------
-----------------------------
3,025 2,894
Less investment expenses (245) (201)
-----------------------------
=============================
Net investment income $2,780 $2,693
=============================
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
2. Investments (continued)
The major components of realized capital gains (losses) on investments are
summarized as follows (in millions):
Year ended December 31
1996 1995
-----------------------------
Debt securities, available-for-sale:
Gross gains $121 $144
Gross losses (73) (40)
Equity securities, available-for-sale:
Gross gains 451 40
Gross losses (5) (9)
Mortgage loans (4) 3
Real estate 14 6
Other (68) (22)
=============================
Net realized capital gains $436 $122
=============================
Proceeds from sales of investments (excluding maturity proceeds) in debt
securities were $7.8 billion and $6.5 billion in 1996 and 1995, respectively.
Gross gains of $76 million and $93 million and gross losses of $69 million and
$54 million in 1996 and 1995, respectively, were realized on those sales. Of the
1996 and 1995 proceeds, $7.2 billion and $6.1 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 $64 million and $66 million and gross losses of
$53 million and $17 million in 1996 and 1995, respectively, were realized on
sales of mortgage-backed securities. At December 31, 1996, the Company had
security purchases payable totaling $331 million relating to the purchases of
mortgage-backed securities at forward dates.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
2. Investments (continued)
The unrealized appreciation on investments in debt and equity securities
available-for-sale is reported as a separate component of equity, reduced by
adjustments to deferred acquisition costs and unearned revenue reserves that
would have been required as a charge or credit to operations had such amounts
been realized and a provision for deferred income taxes. The amount of net
unrealized gains on available-for-sale securities is as follows (in millions):
<TABLE>
<CAPTION>
December 31
1996 1995
-----------------------------
<S> <C> <C>
Unrealized appreciation on debt securities, available-for-sale $945 $1,488
Unrealized appreciation on equity securities, available-for-sale 521 783
Adjustments for assumed changes in amortization pattern:
Deferred acquisition costs (160) (243)
Unearned revenue reserves 17 28
Provision for deferred income taxes (463) (720)
=============================
Net unrealized gains on available-for-sale securities $860 $1,336
=============================
</TABLE>
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, 1996 and 1995, the commercial mortgage portfolio is diversified by
geographic region and specific collateral property type as follows:
Geographic Distribution Property Type Distribution
December 31 December 31
----------------------- -----------------------
1996 1995 1996 1995
----------------------- -----------------------
----------------------- -----------------------
Pacific 30% 33% Industrial 35% 38%
South Atlantic 22 21 Retail 34 30
North Central 17 16 Office 28 29
Mid Atlantic 15 16 Other 3 3
South Central 7 6
New England 5 5
Mountain 4 3
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
2. Investments (continued)
Mortgage loans on real estate are considered impaired when, based on current
information and events, it is probable that the Company will be unable to
collect all amounts due according to contractual terms of the loan agreement.
When the Company determines that a loan is impaired, a provision for loss is
established for the difference between the carrying amount of the mortgage loan
and the estimated value. Estimated value is based on either the present value of
the expected future cash flows discounted at the loan's effective interest rate,
the loan's observable market price or fair value of the collateral. The
provision for losses is reported as realized gains (losses) on investments.
Mortgage loans deemed to be uncollectible are charged against the allowance for
losses and subsequent recoveries are credited to the allowance for losses. The
allowance for losses is maintained at a level believed adequate by management to
absorb estimated probable credit losses. Management's periodic evaluation of the
adequacy of the allowance for losses is based on the Company's past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay, the estimated value of the
underlying collateral, composition of the loan portfolio, current economic
conditions and other relevant factors. The evaluation is inherently subjective
as it requires estimating the amounts and timing of future cash flows expected
to be received on impaired loans that may change.
A summary of the changes in the mortgage loan allowance for losses is as follows
(in millions):
December 31
1996 1995
--------------------------
Balance at beginning of year $115 $127
Provision for losses 16 16
Releases due to write-downs, sales and foreclosures (10) (28)
==========================
Balance at end of year $121 $115
=======================
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.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
2. Investments (continued)
The Company was servicing approximately 328,000 and 286,000 loans with aggregate
principal balances of approximately $24.4 and $19.9 billion at December 31, 1996
and 1995, respectively. In connection with these mortgage servicing activities,
the Company held funds in trust for others totaling approximately $175 million
and $145 million at December 31, 1996 and 1995, respectively. In connection with
its loan administration activities, the Company advances payments of property
taxes and insurance premiums and also advances principal and interest payments
to investors in advance of collecting funds from specific mortgagors. In
addition, the Company makes certain payments of attorney fees and other costs
related to loans in foreclosure. These amounts receivable are recorded, at cost,
as advances on serviced loans. Amounts advanced are considered in management's
evaluation of the adequacy of the allowance for loan loss.
Real estate includes properties directly owned by the Company that are generally
held for investment purposes. Real estate holdings and related accumulated
depreciation are as follows (in millions):
December 31
1996 1995
-----------------------------
Real estate $2,743 $2,481
Accumulated depreciation (269) (218)
=============================
Real estate, net $2,474 $2,263
=============================
Other investments 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 $1.4 billion and $1.5 billion at
December 31, 1996 and 1995, respectively. The Company is committed to providing
additional mortgage financing for such joint ventures aggregating $146 million
at December 31, 1996.
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. The equity swaps were terminated during 1996
and a realized loss of $81 million recorded. Common stocks of $633 million
associated with these equity swaps were sold during 1996 and a gain of $402
million recorded, resulting in a net realized gain of $321 million.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
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 ($148
million at December 31, 1996, and $303 million at December 31, 1995) 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. 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, 1996 and 1995, were $970 million and $599 million, respectively,
and the credit exposure at December 31, 1996 and 1995 was $15 million and $8
million, respectively. The Company is exposed to credit loss in the event of
nonperformance of the counterparties. This credit risk is minimized by
purchasing such agreements from financial institutions with superior performance
records. 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,
1996 and 1995, 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.
The Company enters into currency exchange swap agreements to convert certain
foreign denominated fixed rate assets into U.S. dollar denominated fixed rate
assets and eliminate the exposure to future currency volatility on those
securities. At December 31, 1996, the Company had various foreign currency
exchange agreements with maturities ranging from 1997 to 2018, with an aggregate
notional amount involved of approximately $373 million and the credit exposure
was $9 million. The average unexpired term of the swaps was approximately seven
years at December 31, 1996.
The Company uses interest rate floors in hedging a portion of its portfolio of
mortgage servicing rights from prepayment risk associated with changes in
interest rates. At December 31, 1996, the Company had entered into interest rate
floors with a notional value of $1.3 billion. The floors provide for the receipt
of payments when interest rates are below predetermined interest rate levels.
The premiums paid for floors are included in other assets on the Company's
consolidated statements of financial position.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
4. Accident and Health Reserves
Activity in the liability for unpaid accident and health claims, which is
included with future policy benefits and claims in the consolidated statements
of financial position, is summarized as follows (in millions):
Year ended December 31
1996 1995
-----------------------------
Balance at beginning of year $ 810 $ 824
Incurred:
Current year 3,051 3,179
Prior years (29) (5)
-----------------------------
-----------------------------
Total incurred 3,022 3,174
Payments:
Current year 2,535 2,654
Prior years 497 534
-----------------------------
Total payments 3,032 3,188
-----------------------------
Balance at end of year:
Current year 516 525
Prior years 284 285
-----------------------------
=============================
Total balance at end of year $ 800 $ 810
=============================
The activity summary in the liability for unpaid accident and health claims
shows a decrease of $29 million and $5 million to the December 31, 1995 and 1994
liability for unpaid accident and health claims, respectively, arising in prior
years. Such liability adjustments, which affected current operations during 1996
and 1995, respectively, resulted from developed claims for prior years being
different than were anticipated when the liabilities for unpaid accident and
health claims were originally estimated. These favorable development trends have
been considered in establishing the current year liability for unpaid accident
and health claims.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
5. Debt
The components of debt as of December 31, 1996 and December 31, 1995 are as
follows (in millions):
December 31
1996 1995
------------------------------
7.875% notes payable, due 2024 $199 $199
8% notes payable, due 2044 99 99
Mortgages and other notes payable 101 63
==============================
Total debt $399 $361
==============================
On March 10, 1994, Principal Mutual issued $300 million of surplus notes,
including $200 million due March 1, 2024 at a 7.875% annual interest rate and
the remaining $100 million due March 1, 2044 at an 8% annual interest rate. No
affiliates of the Company hold any portion of the notes. The discount and direct
costs associated with issuing these notes are being amortized to expense over
their respective terms using the interest method. Each payment of interest and
principal on the notes, however, may be made only with the prior approval of the
Commissioner of Insurance of the State of Iowa (the Commissioner) and only to
the extent that Principal Mutual has sufficient surplus earnings to make such
payments. For both of the years ended December 31, 1996 and 1995, interest of
$24 million was approved by the Commissioner, paid and charged to expense.
Subject to Commissioner approval, the surplus notes due March 1, 2024 may be
redeemed at Principal Mutual's election on or after March 1, 2004 in whole or in
part at a redemption price of approximately 103.6% of par. The approximate 3.6%
premium is scheduled to gradually diminish over the following ten years. These
surplus notes may then be redeemed on or after March 1, 2014, at a redemption
price of 100% of the principal amount plus interest accrued to the date of
redemption.
In addition, subject to Commissioner approval, the notes due March 1, 2044 may
be redeemed at Principal Mutual's election on or after March 1, 2014, in whole
or in part at a redemption price of approximately 102.3% of par. The approximate
2.3% premium is scheduled to gradually diminish over the following ten years.
These notes may be redeemed on or after March 1, 2024, at a redemption price of
100% of the principal amount plus interest accrued to the date of redemption.
The other mortgages and notes payable are financings for real estate
developments. The Company has obtained loans with various lenders to finance
these developments. Outstanding principal balances as of December 31, 1996 range
from $1 million to $9 million with interest rates generally ranging from 5.9% to
7.7%.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
5. Debt (continued)
At December 31, 1996, future annual maturities of debt are as follows (in
millions):
1997 $ 29
1998 17
1999 2
2000 2
2001 2
Thereafter 347
----------
==========
Total future maturities of debt $399
==========
Cash paid for interest for 1996 and 1995 was $52 million and $50 million,
respectively.
The Company issues commercial paper periodically to meet its short-term
financing needs and also has credit facilities with various banks. The Company
had outstanding credit borrowings of $15 million at December 31, 1996 and other
outstanding borrowings of $154 million at December 31, 1996. These outstanding
borrowings are included in other liabilities in the consolidated statements of
financial position. There were no outstanding borrowings at December 31, 1995.
6. Income Taxes
The Company's income tax expense (benefit) is as follows (in millions):
Year ended December 31
1996 1995
-----------------------------
Current income taxes:
Federal $145 $104
State and foreign (1) 5
Realized capital gains 210 41
-----------------------------
Total current income taxes 354 150
Deferred income taxes (50) 57
=============================
Total income taxes $304 $207
=============================
Due to the inherent differences between income for financial reporting purposes
and income for tax purposes, the Company's provision for income taxes does not
have the customary relationship of taxes to income. This difference between the
prevailing corporate income tax rate of 35% times the pre-tax income and the
Company's effective tax rate on pre-tax income is generally due to the Company
making adequate provisions for any challenges of the tax filings and tax
payments to the various taxing jurisdictions.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
6. Income Taxes (continued)
The Internal Revenue Service (the Service) has completed examination of the
consolidated federal income tax returns of Principal Mutual and affiliated
companies through 1992. The Service has commenced its examination for the years
1993 and 1994. The Company believes that there are adequate defenses against or
sufficient provisions for any challenges.
The Company's deferred income tax liabilities and assets are as follows (in
millions):
December 31
1996 1995
-----------------------------
Deferred income tax liabilities $1,110 $1,319
Deferred income tax assets 487 389
=============================
Deferred income taxes, net $ 623 $ 930
=============================
The Company's significant deferred income tax liabilities and assets relate to
unrealized gains on available-for-sale debt and equity securities, deferred
acquisition costs, unrealized joint venture losses, policy liabilities and
accruals and contractholder funds and claims, policyowner dividend liability,
prepaid postretirement benefits other than pension, other investment related
items and premiums and fees receivable. No valuation allowances have been
recognized against deferred tax assets.
The Company has not recognized deferred taxes related to the undistributed
earnings of certain foreign subsidiaries that are considered to be indefinitely
reinvested because the Company does not expect to repatriate these earnings. A
tax liability will be recognized when the Company expects distribution of those
earnings in the form of dividends, sale of the investment or otherwise.
Cash paid for income taxes in 1996 and 1995 was $285 million and $99 million,
respectively.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
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. 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 consolidated statements of financial position and consolidated statements of
operations as of and for the years ended December 31, 1996 and 1995, is as
follows (in millions):
December 31
1996 1995
------------
------------
Actuarial present value of benefit obligations:
Vested benefit obligation $482 $439
============
============
Accumulated benefit obligation $495 $464
============
============
Plan assets at fair value, primarily affiliated mutual funds
and investment contracts of the Company $841 $723
Projected benefit obligation 732 670
------------
Plan assets in excess of projected benefit obligation 109 53
Unrecognized net (gains) losses and funding different from
that assumed and from changes in assumptions (29) 41
Unrecognized prior service cost 17 1
Unrecognized net transition asset (60) (70)
------------
============
Prepaid pension asset $ 37 $ 25
============
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
7. Employee and Agent Benefits (continued)
Net periodic pension expense (income) included the following components (in
millions):
Year ended
December 31
1996 1995
-------------------------
Service cost $ 38 $ 25
Interest cost on projected benefit obligation 46 39
Actual return on plan assets (118) (144)
Net amortization and deferral 42 79
-------------------------
=========================
Total net periodic pension expense (income) $ 8 $ (1)
=========================
The weighted-average assumed discount rate used in determining the projected
benefit obligation was 7.25% and 7% at December 31, 1996 and 1995, respectively.
Some of the trusts holding the plan assets are subject to income taxes at a 35%
tax rate while others are not subject to income taxes. For both 1996 and 1995,
the expected long-term rates of return on plan assets were approximately 6%
(after estimated income taxes) for those trusts subject to income taxes and
approximately 10% for those trusts not subject to 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 up to $ 9,500 in 1996 and $9,240 in 1995 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. The Company
contributed $13 million in 1996 and $11 million in 1995 to these defined
contribution plans.
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.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
7. Employee and Agent Benefits (continued)
The postretirement plans' combined funded status, reconciled to amounts
recognized in the consolidated statements of financial position and consolidated
statements of operations as of and for the years ended December 31, 1996 and
1995, is as follows (in millions):
<TABLE>
<CAPTION>
December 31
1996 1995
-------------------------------
Plan assets at fair value, primarily affiliated mutual funds and
<S> <C> <C>
investment contracts of the Company $247 $208
Accumulated postretirement benefit obligation:
Retirees (87) (84)
Eligible employees (38) (39)
Active employees not eligible to retire (93) (89)
-------------------------------
-------------------------------
Total accumulated postretirement benefit obligation (218) (212)
-------------------------------
-------------------------------
Excess (deficiency) of plan assets over (under) accumulated
postretirement benefit obligation 29 (4)
Unrecognized net losses and funding different from that assumed and
from changes in assumptions (10) 20
Unrecognized net transition obligation 17 21
-------------------------------
===============================
Postretirement benefit asset $ 36 $ 37
===============================
</TABLE>
The net periodic postretirement benefit cost included the following components
(in millions):
<TABLE>
<CAPTION>
Year ended
December 31
1996 1995
-------------------------------
-------------------------------
<S> <C> <C>
Service cost $12 $ 7
Interest cost on accumulated postretirement benefit cost 15 14
Actual return on plan assets (32) (43)
Amortization of transition obligation 4 4
Net amortization of gains and losses 19 34
===============================
Total net periodic postretirement benefit cost $18 $16
===============================
</TABLE>
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
7. Employee and Agent Benefits (continued)
The weighted-average assumed discount rate used in determining the accumulated
postretirement benefit obligation was 7.25% and 7% at December 31, 1996 and
1995, respectively. Some of the trusts holding the plan assets are subject to
income taxes at a 35% tax rate while others are not subject to income taxes. For
both 1996 and 1995, the expected long-term rates of return on plan assets were
approximately 6% (after estimated income taxes) for those trusts subject to
income taxes and approximately 9% for those trusts not subject to 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 1996, declines to 9.5% in
2001 and then declines to an ultimate rate of 6.5% in 2032. 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, 1996
would increase by 19.5% ($33 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, 1996 by 24.5% ($6 million).
8. Reinsurance
Reinsurance contracts do not relieve the Company from its obligations to
policyowners. Failure of reinsurers to honor their obligations could result in
losses to the Company. The Company evaluates the financial strength of potential
reinsurers and continually monitors the financial condition of present
reinsurers. The Company also monitors concentrations of credit risk arising from
similar geographic regions, activities or economic characteristics of the
reinsurers to minimize its exposure to significant losses from reinsurer
insolvencies.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
8. Reinsurance (continued)
The effect of reinsurance on premiums and annuity and other considerations and
benefits, claims and settlement expenses is as follows (in millions):
Year ended
December 31
1996 1995
-------------------------
-------------------------
Premiums and annuity and other considerations:
Direct $5,034 $5,171
Assumed 116 99
Ceded (29) (27)
=========================
Net premiums and annuity and other considerations $5,121 $5,243
=========================
=========================
Benefits, claims and settlement expenses:
Direct $6,003 $6,070
Assumed 109 99
Ceded (25) (27)
=========================
Net benefits, claims and settlement expenses $6,087 $6,142
=========================
9. Other Commitments and Contingencies
The Company, as a lessor, leases industrial, office, retail and other wholly
owned investment real estate properties under various operating leases. Rental
income for all operating leases totaled $310 million in 1996 and $260 million in
1995. At December 31, 1996, future minimum annual rental commitments under these
noncancelable operating leases are as follows (in millions):
1997 $ 273
1998 240
1999 200
2000 161
2001 116
Thereafter 444
-------------
=============
Total future minimum lease receipts $1,434
=============
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
9. Other Commitments and Contingencies (continued)
The Company, as a lessee, leases office space, data processing equipment and
office furniture and equipment under various operating leases. Rental expense
for all operating leases totaled $73 million in 1996 and $69 million in 1995. At
December 31, 1996, future minimum annual rental commitments under these
noncancelable operating leases are as follows (in millions):
1997 $ 58
1998 42
1999 32
2000 21
2001 14
Thereafter 28
-----------
195
Less future sublease rental income 4
-----------
Total future minimum lease payments $191
===========
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 the resolution of such actions would not have a material
effect on the Company's consolidated 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 policyowners and claimants in the event of
insolvency of other insurance companies. The assessments may be partially
recovered through a reduction in future premium taxes in some states. At both
December 31, 1996 and 1995, approximately $15 million is reserved in other
liabilities in the consolidated statements of financial position for possible
guarantee fund assessments for which notices have not been received and the
Company does not anticipate receiving a premium tax credit.
10. Fair Value of Financial Instruments
The following discussion describes the methods and assumptions utilized by the
Company in estimating its fair value disclosures for financial instruments.
Certain financial instruments, particularly policyowner liabilities other than
investment contracts, are excluded from these fair value disclosure
requirements. The techniques utilized in estimating the fair values of financial
instruments are affected by the assumptions used, including discount rates and
estimates of the amount and timing of future cash flows. Care should be
exercised in deriving conclusions about the Company's business, its value or
financial position based on the fair value information of financial instruments
presented below. The estimates shown are not necessarily indicative of the
amounts that would be realized in a one-time, current market exchange of all of
the Company's financial instruments.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
10. Fair Value of Financial Instruments (continued)
The Company defines fair value as the quoted market prices for those instruments
that are actively traded in financial markets. In cases where quoted market
prices are not available, fair values are estimated using present value or other
valuation techniques. The fair value estimates are made at a specific point in
time, based on available market information and judgments about the financial
instrument, including estimates of timing, amount of expected future cash flows
and the credit standing of counterparts. Such estimates do not consider the tax
impact of the realization of unrealized gains or losses. In many cases, the fair
value estimates cannot be substantiated by comparison to independent markets. In
addition, the disclosed fair value may not be realized in the immediate
settlement of the financial instrument.
Fair values of public debt and equity securities have been determined by the
Company from public quotations, when available. Private placement securities and
other debt and equity securities are valued by discounting the expected total
cash flows. Market rates used are applicable to the yield, credit quality and
average maturity of each security.
Fair values of commercial mortgage loans are determined by discounting the
expected total cash flows using market rates that are applicable to the yield,
credit quality and maturity of each loan. Fair values of residential mortgage
loans are determined by a pricing and servicing model using market rates that
are applicable to the yield, rate structure, credit quality, size and maturity
of each loan.
The fair values for assets classified as policy loans, other investments and
cash and cash equivalents in the accompanying consolidated statements of
financial position approximates their carrying amounts.
The fair values of the Company's reserves and liabilities for investment-type
insurance contracts (insurance, annuity and other policy contracts that do not
involve significant mortality or morbidity risk and that are only a portion of
the policyowner liabilities appearing in the consolidated statements of
financial position) are estimated using discounted cash flow analyses (based on
current interest rates being offered for similar contracts with maturities
consistent with those remaining for the investment-type contracts being valued).
The fair values for the Company's insurance contracts (insurance, annuity and
other policy contracts that do involve significant mortality or morbidity risk),
other than investment-type contracts, are not required to be disclosed. The
Company does consider, however, the various insurance and investment risks in
choosing investments for both insurance and investment-type contracts.
Fair values for debt issues are estimated using discounted cash flow analysis
based on the Company's incremental borrowing rate for similar borrowing
arrangements.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
10. Fair Value of Financial Instruments (continued)
The carrying amounts and estimated fair values of the Company's financial
instruments at December 31, 1996 and 1995, are as follows (in millions):
<TABLE>
<CAPTION>
1996 1995
--------------------------- ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------------------- ----------------------------
--------------------------- ----------------------------
Assets (liabilities)
<S> <C> <C> <C> <C>
Debt securities (see Note 2) $21,974 $21,974 $21,837 $21,837
Equity securities (see Note 2) 1,023 1,023 1,446 1,446
Mortgage loans 12,409 12,823 11,380 11,965
Policy loans 736 736 711 711
Other investments 68 68 79 79
Cash and cash equivalents 271 271 295 295
Investment-type insurance contracts (22,196) (22,158) (21,538) (21,960)
Debt (399) (427) (361) (401)
</TABLE>
11. Statutory Insurance Financial Information
Principal Mutual, the largest member of The Principal Financial Group,
prepares statutory financial statements in accordance with the accounting
practices prescribed or permitted by the Insurance Division of the Department of
Commerce of the State of Iowa. Prescribed statutory accounting practices include
a variety of publications of the National Association of Insurance Commissioners
as well as state laws, regulations and general administrative rules. Permitted
statutory accounting practices encompass all accounting practices not so
prescribed. The impact of any permitted accounting practices on statutory
surplus is not material. The accounting practices used to prepare statutory
financial statements for regulatory filings differ in certain instances from
GAAP. Prescribed or permitted statutory accounting practices are used by state
insurance departments to regulate the Company.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
11. Statutory Insurance Financial Information (continued)
The following summary reconciles the assets and equity at December 31, 1996 and
1995, and net income for the years ended December 31, 1996 and 1995, in
accordance with statutory reporting practices prescribed or permitted by the
Insurance Division of the Department of Commerce of the State of Iowa (Principal
Mutual only) with that reported in these consolidated GAAP financial statements
(in millions):
<TABLE>
<CAPTION>
Assets Equity Net Income
-----------------------------------------
-----------------------------------------
December 31, 1996
As reported in accordance with statutory accounting practices
<S> <C> <C> <C>
- unconsolidated $56,837 $2,504 $415
Additions (deductions):
Unrealized gain on debt securities available-for-sale 964 964 -
Consolidation and basis changes of certain subsidiaries (259) (10) -
Adjustment for cash and cash equivalents (152) - -
Adjustment to record statutory non-admitted assets 52 52 -
Investment adjustments other than debt securities 766 911 53
Adjustments to insurance reserves (156) (238) (40)
Deferral of policy acquisition costs 1,058 1,058 38
Adjustments for pension and postretirement accounting 78 78 (17)
Surplus note reclassification as debt - (298) -
Adjustments to dividend liabilities - 123 (1)
Provision for deferred federal income taxes (6) (493) 60
Other - net (40) 3 18
-----------------------------------------
=========================================
As reported in these consolidated GAAP financial statements $59,142 $4,654 $526
=========================================
December 31, 1995
As reported in accordance with statutory accounting practices
- unconsolidated $51,268 $2,208 $263
Additions (deductions):
Unrealized gain on debt securities available-for-sale 1,553 1,553 -
Consolidation and basis changes of certain subsidiaries (95) (10) 64
Adjustment for cash and cash equivalents (245) 4 -
Adjustment to record statutory non-admitted assets 73 73 -
Investment adjustments other than debt securities 568 917 (4)
Adjustments to insurance reserves (128) (152) (8)
Deferral of policy acquisition costs 937 937 61
Adjustments for pension and postretirement accounting 66 66 (11)
Surplus note reclassification as debt - (298) -
Adjustments to dividend liabilities - 124 1
Provision for deferred federal income taxes (9) (770) (20)
Other - net (24) (46) (2)
-----------------------------------------
=========================================
As reported in these consolidated GAAP financial statements $53,964 $4,606 $344
=========================================
</TABLE>
