Registration No. 02-78001
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. ______ _____
Post-Effective Amendment No. __20__ __X__
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. __16__ _____
(Check appropriate box or boxes)
Principal Mutual Life Insurance Company Separate Account B
- --------------------------------------------------------------------------------
(Exact Name of Registrant)
Principal Mutual Life Insurance Company
- --------------------------------------------------------------------------------
(Name of Depositor)
The Principal Financial Group, Des Moines, Iowa 50392
- --------------------------------------------------------------------------------
(Address of Depositor's Principal Executive Offices) (Zip Code)
Depositor's Telephone Number, including Area Code (515) 248-3842
M. D. Roughton, The Principal Financial Group Des Moines, Iowa 50392
- --------------------------------------------------------------------------------
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box)
___ immediately upon filing pursuant to paragraph (b) of Rule 485
_X_ on May 1, 1998 pursuant to paragraph (b) of Rule 485
___ 60 days after filing pursuant to paragraph (a)(1) of Rule 485
___ on (date) pursuant to paragraph (a)(1) of Rule 485
___ 75 days after filing pursuant to paragraph (a)(2) of Rule 485
___ on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
___ This post-effective amendment designates a new effective date for
a previously filed post- effective amendment.
<PAGE>
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT B
PENSION BUILDER - GROUP VARIABLE ANNUITY CONTRACTS
FOR TAX-DEFERRED RETIREMENT PLANS
Registration Statement on Form N-4
Cross Reference Sheet
Form N-4 Item Caption in Prospectus
Part A
1. Cover Page Principal Mutual Life Insurance
Company Separate Account B
Pension Builder - Group
Variable Annuity Contracts
For Tax-Deferred Retirement Plans
2. Definitions Glossary of Special Terms
3. Synopsis Summary, Expense Table, Example
4. Condensed Financial Information Condensed Financial Information
5. General Description of Registrant, Summary, Introduction, Description of
Depositor, and Portfolio Companies Principal Mutual Life Insurance
Company, Principal Mutual Life
Insurance Company Separate Account
B, Voting Rights
6. Deductions Summary, Deductions Under the Contracts,
Contingent Deferred Sales Charge,
Administration Charge, Separate
Payment of Administration Charge,
Mortality and Expense Risks Charge,
Premium Taxes, Distribution of These
Contracts
7. General Description of Variable Summary, The Contract, Contract Values
Annuity Contracts and Accounting Before Annuity
Commencement Date, Annuity Benefits,
Payment on Death of Participant,
Withdrawals and Transfers, Other
Contractual Provisions,
Contractowners' Inquiries
8. Annuity Period Annuity Benefits
9. Death Benefit Payment on Death of Participant,
Federal Tax Status
10. Purchases and Contract Value Summary, Introduction, The Contract,
Contract Values and Accounting Before
Annuity Commencement Date, Other
Contractual Provisions, Distribution
of These Contracts
11. Redemptions Summary, Introduction, Annuity Benefits,
Withdrawals and Transfers
12. Taxes Summary, Introduction, Annuity Benefits,
Federal Tax Status
13. Legal Proceedings Legal Proceedings
14. Table of Contents of the State- Table of Contents of the Statement
ment of Additional Information of Additional Information
Part B Statement of Additional Information
Caption**
15. Cover Page Principal Mutual Life Insurance
Company Separate Account B
Pension Builder-Group Variable Annuity
Contracts Issued By Principal Mutual
Life Insurance Company
16. Table of Contents Table of Contents
17. General Information and History General Information and History
18. Services Independent Auditors
19. Purchase of Securities Being Deductions Under the Contracts**,
Offered Summary**, Withdrawals and
Transfers**, Distribution of These
Contracts**
20. Underwriters Summary**, Distribution of These
Contracts**, Underwriting Commissions
21. Calculation of Performance Data Calculation of Yield and Total Return
22. Annuity Payments Annuity Benefits**
23. Financial Statements Financial Statements
** Prospectus caption given where appropriate.
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
PENSION BUILDER -- GROUP VARIABLE ANNUITY CONTRACTS
FOR TAX-DEFERRED RETIREMENT PLANS
Issued by Principal Mutual Life Insurance Company (the "Company")
Prospectus dated May 1, 1998
This Prospectus concisely sets forth information about Principal Mutual
Life Insurance Company Separate Account B, Pension Builder Group Variable
Annuity Contracts (the "Contract" or the "Contracts") that an investor ought to
know before investing. It should be read and retained for future reference.
Additional information about the Contracts, including a Statement of
Additional Information, dated May 1, 1998, has been filed with the Securities
and Exchange Commission. The Statement of Additional Information is incorporated
by reference into this Prospectus. The table of contents of the Statement of
Additional Information appears on page 24 of this Prospectus. A copy of the
Statement of Additional Information can be obtained, free of charge, upon
request by writing or telephoning:
Princor Financial Services Corporation
a Member of
The Principal Financial Group
Des Moines, IA 50392-0200
Telephone: 1-800-247-9988
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 Variable Contracts Fund, Inc. These prospectuses should be kept
for future reference.
TABLE OF CONTENTS
Page
Glossary of Special Terms ............................................... 3
Expense Table ........................................................... 5
Example.................................................................. 6
Summary ................................................................ 6
Condensed Financial Information ......................................... 6
Introduction ............................................................ 8
Description of Principal Mutual Life Insurance Company .................. 9
Principal Mutual Life Insurance Company Separate Account B .............. 10
Deductions under the Contracts .......................................... 10
Contingent Deferred Sales Charge.................................... 11
Administration Charge .............................................. 11
Separate Payment of Administration Charge .......................... 12
Mortality and Expense Risks Charge ................................. 12
Premium Taxes ...................................................... 12
Surplus Distribution at Sole Discretion of the Company .................. 12
The Contract ........................................................... 13
Contract Values and Accounting Before Annuity Commencement Date .... 13
Participant's Investment Accounts .............................. 13
Unit Value ..................................................... 13
Net Investment Factor .......................................... 13
Hypothetical Example of Calculation of Unit Value for the
Capital Accumulation Division and Government Securities
Division ..................................................... 14
Hypothetical Example of Calculation of Unit Value for
the Money Market Division..................................... 14
Annuity Benefits .................................................. 14
Selecting a Variable Annuity ................................... 14
Forms of Variable Annuities .................................... 15
Basis of Annuity Conversion Rates .............................. 16
Determining the Amount of the First Monthly Annuity Payment .... 16
Determining the Amount of the Second and Subsequent
Monthly Annuity Payments .................................. 16
Hypothetical Example of Calculation of Annuity Payments ........ 17
Payment on Death of Participant .................................... 17
Prior to Annuity Commencement Date ............................. 17
Subsequent to Annuity Commencement Date ........................ 18
Withdrawals and Transfers .......................................... 18
Cash Withdrawals ............................................... 18
Transfers to the Contract ...................................... 18
Transfers Between Divisions .................................... 18
Transfers to the Associated Fixed Contract ..................... 19
Special Situation Involving Alternate Funding Agents ........... 19
Postponement of Cash Withdrawal or Transfer .................... 19
Other Contractual Provisions ....................................... 19
Contribution Limits ............................................ 19
Assignment ..................................................... 19
Cessation of Contributions ..................................... 20
Limitation as to Participants................................... 20
Substitution of Securities...................................... 20
Changes in a Contract .......................................... 20
Statement of Values............................................. 20
Distribution of these Contracts.......................................... 20
Voting Rights ........................................................... 20
Federal Tax Status....................................................... 21
State Regulation ........................................................ 22
Page
Legal Opinions ......................................................... 22
Legal Proceedings ....................................................... 22
Registration Statement................................................... 22
Other Variable Annuity Contracts......................................... 22
Independent Auditors .................................................... 22
Financial Statements..................................................... 23
Appendix 1 ............................................................. 23
Appendix 2 ............................................................. 23
Contractholders' Inquiries............................................... 23
Table of Contents of the Statement of Additional Information............. 24
This Prospectus does not constitute an offer of, or solicitation of any
offer to acquire, any interest or participation in the Contracts in any
jurisdiction in which such an offer or solicitation may not lawfully be made. No
person is authorized to give any information or to make any representations in
connection with the Contracts other than those contained in this Prospectus.
GLOSSARY OF SPECIAL TERMS
Account -- Series or portfolio of a Mutual Fund in which a Separate Account
division invests.
Administration Charge -- A charge deducted once each Contribution Year prior to
the Annuity Commencement Date from the Investment Accounts of each Participant,
either on the last day of the Contribution Year or the date the Investment
Accounts are applied or paid in full (a total redemption).
Annuity Change Factor -- The factor used to determine the change in value of a
Variable Annuity in the course of payment.
Annuity Commencement Date -- The first day of any month on which Annuity
Payments to a Participant begin, as provided by the Retirement Plan.
Annuity Payments -- Periodic payments made to a Participant pursuant to the
annuity certificate issued to the Participant at the commencement of benefits.
Annuity Reserve Account -- The reserve held for Variable Annuities in course of
payment in a Division of Separate Account B for these Contracts.
Associated Fixed Contract -- Investment in the Fixed Account option available
for contracts issued pursuant to this prospectus.
Commuted Value -- The dollar value, as of a given date, of remaining Annuity
Payments. It is determined by the Company using the interest rate assumed in
determining the initial amount of monthly income and assuming no variation in
the amount of monthly payments after the date of determination.
Compensation -- The amount derived from personal services which is includable in
the gross income of the Participant for the taxable year.
Contingent Deferred Sales Charge -- The charge deducted from certain cash
withdrawals from a Participant's Investment Accounts before the Annuity
Commencement Date.
Contract-- Each contract issued by the Company with any of the following form
numbers: GP A 5921, GP A 5925 and GP A 5927.
Contractholder -- The entity to which the Contract will be issued, which will
normally be an Employer, an association, or a trust established for the benefit
of Participants and their beneficiaries.
Contribution-- Amounts contributed under the Contracts by or on behalf of
Participants which are subject to Sections 403(b), 408 or 219 of the Internal
Revenue Code.
Contribution Year --
(a) For Individual Retirement Annuities designed for ongoing deductible
Contributions -- the taxable year of a Participant.
(b) For Rollover Individual Retirement Annuities -- the twelve-month period
commencing on the date the Participant's first Contribution is received and
each twelve-month period thereafter.
(c) For Tax Deferred Annuities -- the twelve-month period which coincides with
the Plan Year.
Division -- The part of Separate Account B which is invested in shares of a
series of a Mutual Fund.
Employer -- The person or entity which employs a Participant. For an unemployed
Participant for whom Contributions are made by a spouse, the term Employer means
the person or entity which employs that spouse. For a Participant covered by a
Tax Deferred Annuity arrangement, the term Employer means such Participant's
employer which is either an organization described in Section 501(c)(3) of the
Internal Revenue Code or which is a public school or other agency or
instrumentality of a state or political subdivision of a state described in
Internal Revenue Code Sections 403(b) or 170(b)(1)(A)(ii) and which has made the
Tax Deferred Annuity arrangement available to its employees.
Fixed Account -- Account to which Contributions may be allocated which earns
guaranteed interest.
Individual Retirement Annuity-- A plan or program adopted by or on behalf of
individuals pursuant to Section 408 of the Internal Revenue Code.
Internal Revenue Code -- The Internal Revenue Code of 1954, as amended, and
regulations promulgated thereunder. Reference to the Internal Revenue Code means
such Internal Revenue Code or the corresponding provisions of any subsequent
revenue code and any regulations thereunder.
Investment Account -- An account established under a Contract for a Participant
with respect to a Division of Separate Account B.
Investment Account Value -- The value of an Investment Account on any date is
equal to the number of units then credited to such Investment Account multiplied
by the Unit Value for that Division for the Valuation Period in which such date
occurs.
Mutual Fund -- The Principal Variable Contracts Fund, Inc., or shares of other
registered open-end investment companies substituted therefor.
Net Investment Factor -- The factor used to determine the change in Unit Value
during a Valuation Period.
Participant -- A natural person for whom Contributions have been or are being
made under the Contract.
Plan Year -- For Tax Deferred Annuities the accounting year of the Retirement
Plan. If the Retirement Plan does not have any accounting year, the Company will
establish a twelve-month period as the Plan Year.
Retirement Plan -- A retirement plan or program under which benefits are to be
provided to Participants pursuant to a Contract described herein.
Rollover Individual Retirement Annuity -- An Individual Retirement Annuity
designed for single premium rollover Contributions pursuant to Internal Revenue
Code Sections 402(a)(5), 402(a)(7), 403(a)(4), 403(b)(8), 408(d)(3) or
409(b)(3)(c).
Separate Account B -- A separate account established by the Company under Iowa
law to receive Contributions under the Contracts offered by this Prospectus and
other contracts issued by the Company.
Tax Deferred Annuity-- A plan or program adopted by public school systems or
other Employers pursuant to Section 403(b) of the Internal Revenue Code.
Total and Permanent Disability -- The condition of a Participant when, as the
result of sickness or injury, the participant is prevented from engaging in any
substantial gainful activity and is eligible for and receiving a disability
benefit under Title II of the Federal Social Security Act.
Unit Value -- A measure used to determine the value of an Investment Account.
Valuation Date -- The date as of which the net asset value of a series of a
Mutual Fund is determined.
Valuation Period -- The period between the time as of which the net asset value
of a series of a Mutual Fund is determined on one Valuation Date and the time as
of which such value is determined on the next following Valuation Date.
Variable Annuity -- A series of periodic payments, the amounts of which will
increase or decrease to reflect the investment experience of a Division of
Separate Account B for the Contract.
Written Notification -- Actual delivery to the Company at its home office in Des
Moines, Iowa of an appropriate writing on a form supplied or approved by the
Company.
EXPENSE TABLE
The following tables depict fees and expenses applicable to a Participant's
account under the Contract. The purpose of the table is to assist the
contractowner in understanding the various costs and expenses that a
contractowner will bear directly or indirectly. The table reflects expenses of
the separate account as well as the expenses of the accounts in which the
separate account invests. In certain circumstances, state premium taxes will
also be applicable. The example below should not be considered a representation
of past or future expenses; actual expenses may be greater or lesser than those
shown. See "Deductions under the Contracts."
Contractowner Transaction Expenses
Sales Load Imposed on
Purchases (as a percentage
of purchase payments) None
Deferred Sales Load (as a
percentage of amount
surrendered)
For Withdrawals Occurring During Year:
1 2 3 4 5 6 7 8 9 10 Thereafter
- - - - - - - - - -- ----------
7% 6.3% 5.6% 4.9% 4.2% 3.5% 2.8% 2.1% 1.4% .7% 0%
Surrender Fees None
Exchange Fee None
Annual Contract Fee $25 plus an amount equal to the following:
- ----------------------
.5% of the First
Total Value of All x $50,000 of the Participant's
Investment Accounts Investment Accounts
of Participant Total Value of all
Investment Accounts
of Participant (1)
Separate Account Annual Expenses
(as a percentage of average account
value)
Mortality and Expense Risk Fees 1.4965% (1.0001% for Rollover Individual
Retirement Annuity)
Account Fees and Expenses None
Total Separate Account Annual
Expenses 1.4965%
Annual Expenses of Accounts
(as a percentage of average net
assets of the following accounts)
Capital Government Money
Value Account Securities Account Market Account
Management Fees .46% .50% .50%
Other Expenses .01% .02% .05%
Total Account
Annual Expenses .47% .52% .55% .
(1) If Contributions for a Participant are made under the Contract as part of a
Retirement Plan sponsored by, or program of, the Employer of the
Participant and the Company receives all of that portion of the
contributions under such a plan or program directed to annuity contracts
for all employees participating in the plan or program, then the
denominator will be the aggregate value of all the accounts of all the
Participants of the Employer.
<TABLE>
<CAPTION>
EXAMPLE
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------------- ------- ------- --------
If you surrender your contract at the Capital Value
<S> <C> <C> <C> <C>
end of the applicable time period: Division $97 $136 $178 $287
You would pay the following Government
expenses on a $1,000 investment, Securities
assuming 5% annual return on Division $97 $138 $180 $292
assets:
Money Market
Division $97 $139 $182 $295
If you annuitize at the end of the Capital Value
applicable time period or do not Division $25 $76 $130 $278
---
surrender your contract:
You would pay the following Government
expenses on a $1,000 investment, Securities
assuming 5% annual return on Division $25 $78 $133 $283
assets:
Money Market
Division $26 $78 $134 $286
</TABLE>
SUMMARY
How can I invest in a Contract?
The Pension Builder Group variable annuity contracts (the "Contract" or the
"Contracts") described in this Prospectus are designed for use in connection
with tax-deferred Retirement Plans in the form of (1) Tax Deferred Annuity plans
or programs adopted by public school systems or other agencies of a state or its
subdivisions or certain tax exempt organizations pursuant to Section 403(b) of
the Internal Revenue Code of 1954, and (2) Individual Retirement Annuity plans
or programs adopted pursuant to Section 408 of the Internal Revenue Code. These
Contracts are no longer offered for sale. They were sold primarily by persons
who are insurance agents of or brokers for Principal Mutual Life Insurance
Company. In addition, these persons will usually be registered representatives
of Princor Financial Services Corporation, which acts as distributor for the
Contract. See "Distribution of these Contracts."
How can I withdraw my investment?
Subject to any Retirement Plan limitations or any reduction for vesting
provided for in the Retirement Plan as to amounts available, the Participant may
withdraw cash from the Investment Accounts at any time prior to the Annuity
Commencement Date subject to any charges that may be applied. Distributions from
Tax Deferred Annuities may begin only after the Participant attains age 59 1/2,
separates from service, dies or becomes disabled, or incurs a hardship. See
"Withdrawals and Transfers." Note that withdrawals before age 59 1/2 may involve
an income tax penalty. See "Federal Tax Status."
CONDENSED FINANCIAL INFORMATION
Selected data for a Pension Builder accumulation unit outstanding
throughout the period ended December 31:
<TABLE>
<CAPTION>
Capital Value Division
Pension Builder --
IRA/TSA
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
------------------------------------------------------------------ ---- ----
Accumulation unit value:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning of period $4.148 $3.409 $2.624 $2.650 $2.495 $2.313 $1.693 $1.907 $1.665 $1.477
End of period 5.252 4.148 3.409 2.624 2.650 2.495 2.313 1.693 1.907 1.665
Number of accumulation 1,624 3,538 9,967 16,649 21,269 20,148 18,477 18,109 16,256 14,236
units outstanding at end
of period (in thousands)
</TABLE>
<TABLE>
<CAPTION>
Pension Builder --
Rollover IRA
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
------------------------------------------------------------------ ---- ----
Accumulation unit value:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning of period $4.543 $3.715 $2.845 $2.859 $2.679 $2.471 $1.800 $2.017 $1.753 $1.547
End of period 5.785 4.543 3.715 2.845 2.859 2.679 2.471 1.800 2.017 1.753
Number of accumulation 338 513 2,115 5,598 8,602 8,207 7,535 6,750 6,111 5,328
units outstanding at end
of period (in thousands)
</TABLE>
<TABLE>
<CAPTION>
Government Securities Division
Pension Builder--
IRA/TSA
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
------------------------------------------------------------------ ---- ----
Accumulation unit value:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning of period $1.875 $1.841 $1.570 $1.669 $1.539 $1.462 $1.269 $1.176 $1.032 $ .967
End of period 2.039 1.875 1.841 1.570 1.669 1.539 1.462 1.269 1.176 1.032
Number of accumulation 630 1,178 3,738 5,947 7,432 6,200 4,912 3,732 2,782 2,115
units outstanding at end
of period (in thousands)
</TABLE>
<TABLE>
<CAPTION>
Pension Builder--
Rollover IRA
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
------------------------------------------------------------------ ---- ----
Accumulation unit value:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning of period $1.968 $1.923 $1.631 $1.726 $1.584 $1.497 $1.293 $1.192 $1.041 $ .971
End of period 2.150 1.968 1.923 1.631 1.726 1.584 1.497 1.293 1.192 1.041
Number of accumulation 192 399 1,772 4,117 7,878 5,933 4,602 3,356 2,086 1,369
units outstanding at end
of period (in thousands)
</TABLE>
<TABLE>
<CAPTION>
Money Market Division
Pension Builder --
IRA/TSA
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
------------------------------------------------------------------ ---- ----
Accumulation unit value:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning of period $1.826 $1.764 $1.696 $1.659 $1.640 $1.608 $1.541 $1.448 $1.348 $ .276
End of period 1.891 1.826 1.764 1.696 1.659 1.640 1.608 1.541 1.448 1.348
Number of accumulation 419 590 1,327 1,997 2,905 3,841 4,639 5,366 5,302 3,142
units outstanding at end
of period (in thousands)
</TABLE>
<TABLE>
<CAPTION>
Pension Builder--
Rollover IRA
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
------------------------------------------------------------------ ---- ----
Accumulation unit value:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning of period $1.890 $1.817 $1.739 $1.692 $1.664 $1.624 $1.548 $1.447 $1.341 $ .263
End of period 1.968 1.890 1.817 1.739 1.692 1.664 1.624 1.548 1.447 1.341
Number of accumulation 18 27 440 2,227 2,894 3,699 3,999 3,300 3,865 1,509
units outstanding at end
of period (in thousands)
</TABLE>
Financial statements are contained in the Statement of Additional Information.
INTRODUCTION
The Contracts described in this Prospectus are designed for use in
connection with tax-deferred Retirement Plans in the form of (1) Tax Deferred
Annuity plans or programs adopted by public school systems or other agencies of
a state or its subdivisions or certain tax exempt organizations pursuant to
Section 403(b) of the Internal Revenue Code and (2) Individual Retirement
Annuity plans or programs adopted pursuant to Section 408 of the Internal
Revenue Code. The Contracts provide for the accumulation of values and the
payment of annuity benefits on a variable basis. A certificate is issued to each
Participant describing the benefits under the Contract.
All Contributions for Participants are allocated to one or more of the
Divisions of Separate Account B. Currently there are three Divisions available
to Participants: the Capital Value Division (formerly known as the Capital
Accumulation Division), the Money Market Division and the Government Securities
Division. Each Participant controls the allocation by filing a Written
Notification with the Company.
Each of the Divisions invests only in shares of an Account of Principal
Variable Contracts Fund, Inc. (the "Fund") as indicated in the table below:
Division Account
Capital Value Division Capital Value Account
Government Securities Division Government Securities Account
Money Market Division Money Market Account
The Investment Manager for the Fund is Principal Management Corporation
(the "Manager"). The Accounts are also used to fund variable life insurance
contracts. See "Eligible Purchasers and Purchase of Shares" in the Fund's
prospectus for a discussion of the potential risks associated with "mixed
funding."
The investment objective of Capital Value Account is long-term capital
appreciation and growth of future investment income. The assets of this Account
consist principally of a portfolio of common stocks. The value of the
investments held by this Account fluctuates daily and is subject to the risks of
changing economic conditions as well as the risks inherent in the ability of
this Account's management to anticipate changes in such investments necessary to
meet changes in economic conditions. Historically, the value of a diversified
portfolio of common stocks such as invested in by the Capital Value Account held
for an extended period of time has tended to rise during periods of inflation.
There has, however, been no exact correlation, and for some periods the values
of such common stocks declined while the rate of inflation increased.
The Money Market Account 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 Account 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 Account 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 Government Securities Account has an investment objective of a high
level of current income, liquidity and safety of principal. The Account 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 Account's
assets invested in Government National Mortgage Association Certificates ("GNMA
Certificates"). Account shares, however, are not guaranteed by the United States
Government. The value of the Account's investments fluctuates as interest rates
change. The value rises when rates decline and falls when rates increase.
Expected prepayments of mortgages included in a GNMA certificate can affect the
market value of the certificate, and actual prepayments can affect the return
ultimately received.
Additional information concerning these Accounts, including their
investment policies and restrictions, investment management fees and operating
expenses is given in the prospectus for the Fund. A Prospectus for the Fund 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 Accounts at net asset value. In
addition, all distributions made by an Account with respect to shares held by
Divisions of Separate Account B are reinvested in additional shares of the same
Account. Contract benefits are provided and charges are made in effect by
redeeming Account shares at net asset value. Values under the Contracts, both
before and after the commencement of Annuity Payments, will increase or decrease
to reflect the investment performance of the Accounts and Participants assume
the risks of such change in values.
From time to time the Separate Account advertises its Money Market
Division's "yield" and "effective yield." Both yield figures are based on
historical earnings and are not intended to indicate future performance. The
"yield" of the division refers to the income generated by an investment in the
division over a seven-day period (which period will be stated in the
advertisement). This income is then "annualized." That is, the amount of income
generated by the investment during that week is assumed to be generated each
week over a 52-week period and is shown as a percentage of the investment. The
"effective yield" is calculated similarly but, when annualized, the income
earned by an investment in the division is assumed to be reinvested. The
"effective yield" will be slightly higher than the "yield" because of the
compounding effect of this assumed reinvestment. Neither yield quotation
reflects sales load deducted from purchase payments which, if included, would
reduce the "yield" and "effective yield."
Also, from time to time, the Separate Account will advertise the average
annual total return of its various divisions. The average annual total return
for any of the divisions is computed by calculating the average annual
compounded rate of return over the stated period that would equate an initial
$1,000 investment to the ending redeemable contract value. In this calculation
the ending value is reduced by a contingent deferred sales charge that decreases
from 7% to 0% over a period of 10 years. The Separate Account may also advertise
total return figures of its Divisions for a specified period that do not take
into account the sales charge in order to illustrate the change in the
Division's unit value over time. See "Deductions Under the Contracts" for a
discussion of contingent deferred sales charges.
See the Statement of Additional Information for further information
regarding the computation of yield, effective yield and total return.
DESCRIPTION OF PRINCIPAL MUTUAL LIFE INSURANCE COMPANY (The "Company")
Principal Mutual Life Insurance Company is a mutual life insurance company
with its home office at The Principal Financial Group, Des Moines, Iowa 50392,
telephone number 515-247-5111. It was originally incorporated under the laws of
the State of Iowa in 1879 as Bankers Life Association, changed its name to
Bankers Life Company in 1911 and changed its name to Principal Mutual Life
Insurance Company in 1986. It is a member of The Principal Financial Group, a
diversified family of insurance and financial services corporations.
The Board of Directors of the Company has approved a Plan of Reorganization
(the "Plan") pursuant to which the Company will adopt a mutual insurance holding
company structure. The Plan was approved by the owners of annuity contracts and
life insurance policies issued by the Company and has been submitted to the
Commissioner of Insurance of the State of Iowa (the "Iowa Commissioner") for
approval.
Under the Plan, the Company will form a mutual insurance holding company
named "Principal Mutual Holding Company" and will convert to a stock life
insurance company. As part of such conversion, the Company will change its name
to "Principal Life Insurance Company" ("Principal Life"). Principal Mutual
Holding Company will be the ultimate parent company in the family of companies
known as the Principal Financial Group(R).
Because the Company currently is a mutual life insurance company,
Contractholders have, in addition to contract rights related to the Contract,
certain membership interests in the Company, consisting principally of the right
to vote on the election of directors of the Company and on other matters and the
right to receive distributions of the Company's surplus upon liquidation or
dissolution of the Company. The Plan will preserve but separate these contract
rights and membership interests. Contract rights will remain with Principal
Life, and Contractholders on the date the Plan becomes effective (the "Effective
Date") will automatically become members of Principal Mutual Holding Company and
such Contractholder's membership interests in the Company will be extinguished.
Under the terms of the Plan, the membership interests of members of Principal
Mutual Holding Company will consist principally of the right to vote on the
election of directors of Principal Mutual Holding Company and on other matters
and to receive distributions of Principal Mutual Holding Company's assets upon
liquidation or dissolution of Principal Mutual Holding Company. The Plan will
not, in any way, increase premium payments or reduce Contract benefits, values,
guarantees or other Contract obligations owed to Contractholders. Contract
obligations will be the responsibility of Principal Life.
The Company believes that adoption of the Plan will result in a corporate
structure that, among other things, will provide the Company with flexibility in
raising capital through various means that are not currently available to it,
including stock offerings. Any initial offering of voting stock to third parties
will be subject to the approval of the Iowa Commissioner. Although there are no
current plans to offer voting stock, in the event voting stock was sold to third
parties, it is possible that the interests of such third party shareholders and
Contractholders could diverge on certain issues. The Company, however, believes
that such shareholders and Contractholders will generally have a greater
commonality of interests than the potential for conflict and will endeavor to
minimize the occurrence of such conflicts and to operate the companies in the
best interests of all constituencies.
The Effective Date is scheduled to be July 1, 1998, but the Iowa
Commissioner must first approve the Plan. In addition, insurance regulatory
authorities in each state must issue an amendment to the Company's Certificate
of Authority (to reflect the name change from Principal Mutual Life Insurance
Company to Principal Life Insurance Company) and must approve the forms which
support the Contract. Should the Effective Date be other than July 1, 1998 or if
states other than Iowa have not completed action by that date, the Company will
notify existing Owners by supplementing this prospectus.
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. As of December 31, 1997, the Company had $63.2 billion in assets
under management and served 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. In addition, all income, gains or
losses, whether or not realized, and expenses with respect to a Division of
Separate Account B for these Contracts shall be credited to or charged against
that Division without regard to income, gains or losses, or expenses of any
other Division of Separate Account B. Furthermore, the assets of each Division
of Separate Account B for these Contracts shall not be charged by the Company
with any liabilities arising from any other contracts issued by the Company or
from any other Division of Separate Account B. These assets are held with
relation to the Contracts described in this Prospectus and such other variable
annuity contracts as may be issued by the Company and designated as
participating in the various Divisions of Separate Account B. Also, although the
assets maintained in Separate Account B attributable to the Contracts will not
be charged with any liabilities arising out of any other business conducted by
the Company, the reverse is not true. Hence, all obligations arising under the
Contracts, including the promise to make Annuity Payments, are general corporate
obligations of the Company.
Separate Account B was registered on July 17, 1970 with the Securities and
Exchange Commission as a unit investment trust under the Investment Company Act
of 1940, as amended. Such registration does not involve supervision by the
Commission of the investments or investment policies of Separate Account B.
The Company is taxed as an insurance company under the Internal Revenue
Code. The operations of Separate Account B are part of the total operations of
the Company but are treated separately for accounting and financial statement
purposes and are considered separately in computing the Company's tax liability.
Separate Account B is not affected by federal income taxes paid by the Company
with respect to its other operations, and under existing federal income tax law,
investment income and capital gains attributable to Separate Account B are not
taxed. The Company reserves the right to charge Separate Account B with, and to
create a reserve for, any tax liability which the Company determines may result
from maintenance of Separate Account B. To the best of the Company's knowledge,
there is no current prospect of any such liability.
DEDUCTIONS UNDER THE CONTRACTS
An Administration Charge, a mortality and expense risks charge and, in
certain circumstances, state premium taxes are deducted under the Contract.
Also, in certain circumstances, a Contingent Deferred Sales Charge may be
deducted from certain cash withdrawals from a Participant's Investment
Account(s) before the Annuity Commencement Date. Total expenses of the
Registrant for the fiscal year ended December 31, 1997 were 1.97% of the average
net assets.
There are also deductions from and expenses paid out of the assets of
Capital Value Account, Money Market Account, and Government Securities Account.
These are described in the Fund's prospectus.
A. Contingent Deferred Sales Charge
There is no initial sales charge. However, any cash withdrawal before the
Annuity Commencement Date on behalf of a Participant may be subject to a
Contingent Deferred Sales Charge equal to a percentage of the amount being
withdrawn. The percentage will be determined according to the following
table:
Number of Contribution Years
A Participant Has Been Contingent Deferred Sales
Covered Under the Contract Charge Percentage
Less than 1 7.0%
1 but less than 2 6.3
2 but less than 3 5.6
3 but less than 4 4.9
4 but less than 5 4.2
5 but less than 6 3.5
6 but less than 7 2.8
7 but less than 8 2.1
8 but less than 9 1.4
9 but less than 10 0.7
10 or more 0.0
The charge will be made by reducing the Investment Account Value from which
the withdrawal is made by an amount equal to the charge (see "Cash
Withdrawals").
The Contingent Deferred Sales Charge does not apply to withdrawals made as
a result of the Participant's death or Total and Permanent Disability. The
charge also does not apply to transfers between Investment Accounts or
transfers to an Associated Fixed Contract or to amounts applied to provide
Variable Annuity payments. The charge may apply to amounts transferred to
an Alternate Funding Agent or Alternate Funding Vehicle, except transfers
to an Alternate Funding Vehicle that is an annuity contract issued by
Principal Mutual Life Insurance Company or an Alternate Funding Vehicle
that participates in an exchange offer for which an SEC order has been
obtained.
The amount of any Contingent Deferred Sales Charge will never exceed 9% of
the purchase payments to which the charge relates. For this purpose,
withdrawals will be related to purchase payments on a first-in, first-out
basis and "purchase payments" will include purchase payments made under any
Associated Fixed Contract from which transfers have been made. See
"Transfers to the Contract."
The Contingent Deferred Sales Charge, when applicable, will be applied by
the Company to unamortized expenses relating to the sale of the Contracts
including but not limited to commissions paid to sales personnel, the costs
of preparation of sales literature and other promotional activity. If
revenues from the Contingent Deferred Sales Charge are not sufficient to
cover sales expenses, the short fall could be viewed as being provided for
out of other revenues or the Company's surplus, including revenues
attributable to the mortality and expense risks charge.
B. Administration Charge
An Administration Charge will be deducted once each Contribution Year
proportionately from the Investment Accounts of each Participant and will
be equal to the sum of 1. and 2.:
1. $25.
2. An amount equal to a percentage of the total value of all Investment
Accounts of the Participant under the Contract. This percentage shall
be 0.5% of the first $50,000 in such accounts divided by the total
value of such accounts. (See Appendix 2 for example of computation of
Administration Charge.)
Individual Retirement Annuities established under the Contract by a working
and a nonworking spouse Participant will be combined for purposes of
calculating the Administration Charge.
If Contributions for a Participant are made under the Contract as part of a
Retirement Plan sponsored by, or program of, the Employer of the
Participant and the Company receives all of that portion of the
contributions under such a plan or program directed to annuity contracts
for all employees participating in the plan or program, then the percentage
determined in 2. above will be based on the value of the aggregate of all
accounts of all the Participants of the Employer. By this means, the charge
determined by 2. will be deducted pro rata from the Investment Accounts of
all the Participants based on their proportionate value of the aggregate of
the accounts. The portion of the charge determined by 1. will be deducted
from Participant's Investment Accounts on a per capita basis.
The Administration Charge applicable to each Participant will be deducted
from the Participant's Investment Accounts on the earlier of (i) the date
the accounts are paid or applied in full (a total redemption) or (ii) the
last day of the Contribution Year. The deduction will be effected by
cancelling a number of the units in each Investment Account of the
Participant equal to its proportionate share of the Administration Charge
divided by the Unit Value for the Contract for the applicable Division for
the Valuation Period in which the charge is made.
A pro rata Administration Charge will be made for any fractional part of a
Contribution Year of a Participant. The Company does not expect to recover
from the charge any amount above its accumulated expenses associated with
the Contracts. However, since a portion of the charge is based on a percent
of a Participant's Investment Account Values, amounts derived from larger
Investment Accounts may to an extent cover expenses associated with smaller
Investment Accounts depending upon the relative degree of Investment
Account activity.
C. Separate Payment of Administration Charge
An Employer may, by a revocable written agreement with the Company, agree
to pay separately all or a portion of the Administration Charge for
Participants who are employees of the Employer. A Participant in an
Individual Retirement Annuity (but not a Rollover Individual Retirement
Annuity) may similarly agree, by a revocable written agreement with the
Company, to pay separately all or a portion of the Administration Charge.
D. Mortality and Expense Risks Charge
Variable Annuity Payments will not be affected by adverse mortality
experience or by any excess in the actual sales and administrative expenses
over the charges provided for in the Contract. The Company assumes the
risks that (i) Annuity Payments will continue for a longer period than
anticipated and (ii) the deductions under the Contracts will be
insufficient to cover the actual costs. For assuming these risks, the
Company, in determining Unit Values and Variable Annuity Payments, makes a
charge as of the end of each Valuation Period against the assets of
Separate Account B held with respect to the Contract. The charge is
equivalent to a simple annual rate of 1.4965% (1.0001% for a Rollover
Individual Retirement Annuity). The Company does not believe that it is
possible to specifically identify that portion of the 1.4965% deduction
applicable to the separate risks involved, but estimates that a reasonable
approximate allocation would be .2490% for the mortality risks and 1.2475%
(0.7511% for a Rollover Individual Retirement Annuity) for the expense
risks. The mortality and expense risks charge may be changed by the Company
at any time at least one year after the Contract has been issued by giving
not less than 60 days prior written notice to the Contractholder, Employer
and Participants. However, the charge may not exceed 2.00% on an annual
basis, and only one change may be made in any one year period. Further, no
increase in the charge in excess of 1.75% on an annual basis may be made
without the prior approval of the Securities and Exchange Commission. Any
change in the mortality and expense risks charge will not affect Variable
Annuities in the course of payment. If the charge is insufficient to cover
the actual costs of the mortality and expense risks assumed, the financial
loss will fall on the Company; conversely, if the charge proves more than
sufficient, the excess will be a gain to the Company.
E. Premium Taxes
Certain state and local governments impose a premium tax upon annuity
considerations received by insurance companies. The Company will charge
against the Participant's Investment Account Values the amount of any
premium taxes levied by a state or any other government entity. Premium
taxes currently imposed by states range from 0% (in more than 40 states) to
2.25%. (See Appendix 1 for premium tax rates.) Unless otherwise required by
law, the deduction will be made at the time Investment Account Values are
applied to effect the form of variable annuity selected by the Participant.
The applicable rates imposed by the states and other governmental entities
which impose premium taxes on annuity considerations are subject to being
changed or amended by the respective legislative body or by administrative
interpretations or by judicial acts. IT IS NOT POSSIBLE TO DESCRIBE
PRECISELY THE AMOUNT OF PREMIUM TAX PAYABLE ON ANY TRANSACTION INVOLVING
THE CONTRACTS. Such premium taxes will depend, among other things, on the
state of residence of the Participant and the insurance tax laws of such
states.
SURPLUS DISTRIBUTION AT SOLE DISCRETION OF THE COMPANY
It is not anticipated that any divisible surplus will ever be distributable
to these Contracts in the future because the Contracts are not expected to
result in a contribution to the divisible surplus of the Company. However, if
any distribution of divisible surplus is made, it will be made to Participants'
Investment Accounts in the form of additional units.
THE CONTRACT
The Contract will normally be issued to an Employer or association or a
trust established for the benefit of Participants and their beneficiaries. The
Company will also issue a pre-retirement certificate to each Participant
describing the benefits under the Contract. If the Company Home Office in Des
Moines, Iowa receives and accepts a completed application for a Contract with or
before the initial purchase payment, it will, within two days after receiving
that payment, invest the entire amount in the Division or Divisions that are
chosen. (If no Division is chosen on the completed application for a Contract,
the Company will invest the entire amount in the Money Market Division.) If the
application for the purchase of a Contract is not received and accepted within
five business days after the Company receives the initial purchase payment, the
Company will return the payment. If the application is received and accepted
within the five-day period, that payment will be invested in the Division or
Divisions of choice at the Unit Value or Values next calculated after the
application has been accepted.
A. Contract Values and Accounting Before Annuity Commencement Date
1. Participant's Investment Accounts
During the period of time before the commencement of Annuity Payments,
an Investment Account will be established for each Participant for each
type of Contribution permitted under the Contract for each Division of
Separate Account B. For Tax Deferred Annuities the types of
Contributions are Contributions by the Employer pursuant to a salary
modification agreement, other Employer Contributions or other
Contributions that the Company agrees to accept.
For Individual Retirement Annuities, the types of Contributions are
generally Employer Contributions, Participant Contributions or rollover
Contributions arising from amounts previously deducted by the
Participant and accumulated under an account, annuity or bond as
provided for in Internal Revenue Code Sections 408 or 409.
For Rollover Individual Retirement Annuities, generally the only type
of Contribution is a rollover Contribution pursuant to Internal Revenue
Code Sections 402(a)(5), 402(a)(7), 403(a)(4), 403(b)(8), 408(d)(3) or
409(b)(3)(C).
Investment Accounts will be maintained until the Investment Account
Values are either (a) applied to effect Variable Annuity benefits for
the Participant, (b) paid to the Participant or Participant's
beneficiary or (c) transferred in accordance with the provisions of the
Contract.
Each Contribution for a Participant will be allocated to the Division
or Divisions of Separate Account B designated by Written Notification
and will result in a credit of units to the appropriate Investment
Account. The number of units so credited will be determined by dividing
the portion of the Contributions allocated to a Division by the Unit
Value for that Division for the Valuation Period within which the
Contribution was received by the Company at its home office in Des
Moines, Iowa.
2. Unit Value
The Unit Value for a Contract which participates in a Division of
Separate Account B determines a Participant's Investment Account
Values. The Unit Value for each Contract in each Division is determined
on each day on which the net asset value of its underlying Account is
determined. The Unit Value for a Valuation Period is determined as of
the end of that period. The investment performance of the underlying
Account and deducted expenses affect the Unit Value.
For these Contracts, the Unit Value for each Division was fixed at
$1.00 for the Valuation Period in which the first amount of money was
credited to the Division. A Division's Unit Value for any later
Valuation Period is equal to its Unit Value for the immediately
preceding Valuation Period multiplied by the Net Investment Factor (see
below) for that Division for the later Valuation Period.
3. Net Investment Factor
Each Net Investment Factor is the quantitative measure of the
investment performance of each Division of Separate Account B.
For any specified Valuation period the Net Investment Factor for a
Division for a Contract is equal to
(a) the quotient obtained by dividing (i) the net asset value of a
share of the underlying Account as of the end of the Valuation
Period, plus the per share amount of any dividend or other
distribution made by the Account during the Valuation Period (less
an adjustment for taxes, if any) by (ii) the net asset value of a
share of the Account as of the end of the immediately preceding
Valuation Period,
reduced by
(b) a mortality and expense risks charge of a number equal to a simple
interest rate for the number of days within the Valuation Period
at an annual rate of 1.4965% (1.0001% for a Rollover Individual
Retirement Annuity).
The amounts derived from applying the rate specified in subparagraph
(b) above and the amount of any taxes referred to in subparagraph (a)
above will be accrued daily and will be transferred from Separate
Account B at the discretion of the Company.
4. Hypothetical Example of Calculation of Unit Value for the Capital
Value Division and Government Securities Division (excluding Rollover
Individual Retirement Annuity)
The computation of the Unit Value may be illustrated by the following
hypothetical example. Assume that the current net asset value of an
Account share is $14.8000; that there were no dividends or other
distributions made by the Account and no adjustment for taxes since the
last determination; that the net asset value of an Account share last
determined was $14.7800; that the last Unit Value was $1.0185363; and
that the Valuation Period was one day. To determine the current Net
Investment Factor, divide $14.8000 by $14.7800 which produces 1.0013532
and deduct from this amount the mortality and expense risks charge of
0.0000410, which is the rate for one day that is equivalent to a simple
annual rate of 1.4965%. The result, 1.0013122, is the current Net
Investment Factor. The last Unit Value ($1.0185363) is then multiplied
by the current Net Investment Factor (1.0013122) which produces a
current Unit Value of $1.0198728.
5. Hypothetical Example of Calculation of Unit Value for the Money Market
Division (excluding Rollover Individual Retirement Annuity)
The computation of the Unit Value may be illustrated by the following
hypothetical example. Assume that the current net asset value of an
Account share is $1.0000; that a dividend of .0328767 cents per share
was declared by the Account prior to calculation of the net asset value
of the Account share and that no other distributions and no adjustment
for taxes were made since the last determination; that the net asset
value of an Account share last determined was $1.0000; that the last
Unit Value was $1.0162734; and that the Valuation Period was one day.
To determine the current Net Investment Factor, add the current net
asset value ($1.0000) to the amount of the dividend ($.000328767) and
divide by the last net asset value ($1.0000), which when rounded to
seven places equals 1.0003288. Deduct from this amount the mortality
and expense risks charge of .0000410 (the proportionate rate for one
day based on a simple annual rate of 1.4965%). The result (1.0002878)
is the current Net Investment Factor. The last Unit Value ($1.0162734)
is then multiplied by the current Net Investment Factor (1.0002878),
resulting in a current Unit Value of $1.0165659.
B. Annuity Benefits
1. Selecting a Variable Annuity
Variable Annuity Payments will be made to a Participant beginning on
the Annuity Commencement Date and continuing thereafter on the first
day of each month. A Participant may select an Annuity Commencement
Date by Written Notification to the Company. The date selected may be
the first day of any month the Plan allows which is at least one month
after the Written Notification. For Participants in a Tax Deferred
Annuity, after 1988, the annuity commencement date cannot begin before
the participant is age 59 1/2, separated from service, or is totally
disabled.
As a general rule the annuity commencement for Individual Retirement
Annuities and Tax Deferred Annuities cannot be later than April 1 of
the calendar year following the calendar year in which the Participant
attains age 70 1/2. Participants in Individual Retirement Annuities may
delay the commencement date if they notify us in writing that the
distribution requirements are being met by distributions from other
individual retirement arrangements. Tax Deferred Annuity benefits which
accrued before January 1, 1987 do not have to be distributed until age
75 or the first day of the month after termination of employment.
At any time not less than one month preceding the desired Annuity
Commencement Date, a Participant may, by Written Notification, select
one of the annuity options described below (see "Forms of Variable
Annuities"). If no annuity option has been selected at least one month
before the Annuity Commencement Date, and if the Retirement Plan does
not provide one, payments to an unmarried Participant will be made
under the annuity option providing Variable Life Annuity with Monthly
Payments Certain for Ten Years, i.e. providing monthly payments for
life with the provision that if the Participant dies prior to receiving
all payments due in the first ten years, any remaining payments due in
that period will be paid to the designated beneficiary unless the
beneficiary requests in writing that the Commuted Value of the
remaining payments be paid in a single sum. Payments to a married
Participant will be made under the annuity option providing a Variable
Life Annuity with One-Half Survivorship, i.e. payments during the
Participant's lifetime and providing further that one-half of the
amount otherwise payable to the Participant will be continued to the
Participant's spouse as contingent annuitant so long as the spouse
survives the Participant.
2. Forms of Variable Annuities
Because of certain restrictions contained in the Internal Revenue Code
and regulations thereunder, an annuity option is not available under a
Tax Deferred Annuity unless (i) the joint or contingent annuitant is
the Participant's spouse or (ii) on the Participant's Annuity
Commencement Date, the present value of the amount to be paid to the
Participant while living is greater than 50% of the present value of
the total benefit to the Participant and the Participant's beneficiary
(or joint or contingent annuitant, if applicable).
Similarly, for Individual Retirement Annuities and Rollover Individual
Retirement Annuities, an annuity option is not available unless (i) no
benefits are provided which extend beyond the life of the Participant
or the lives of the Participant and the Participant's spouse or (ii) no
benefits are provided which extend over a period longer than the life
expectancy of the Participant or the life expectancy of the Participant
and spouse.
A Participant may elect to have Investment Account Values applied under
one of the following annuity options. However, if the monthly Annuity
Payment would be less than $20, the Company may, at its sole option,
pay the Investment Account Values in full settlement of all benefits
otherwise available.
Variable Life Annuity with Monthly Payments Certain for Zero, Five,
Ten, Fifteen or Twenty Years or Installment Refund Period -- a Variable
Annuity which provides monthly payments to the Participant during the
Participant's lifetime, and further provides that if, at the death of
the Participant, monthly payments have been made for less than a
minimum period selected by the Participant, any remaining payments for
the balance of such period shall be paid to a designated beneficiary
unless the beneficiary requests in writing that the Commuted Value of
the remaining payments be paid in a single sum. (Designated
beneficiaries entitled to take the remaining payments or the Commuted
Value thereof rather than continuing monthly payments should consult
with their tax advisor to be made aware of the differences in tax
treatment.)
The minimum period may be either zero, five, ten, fifteen or twenty
years or the period (called "installment refund period") consisting of
the number of months determined by dividing the amount applied under
the option by the initial payment. If, for example, a Participant had
$14,400 to apply under a life option with an installment refund period,
and if the first monthly payment provided by that amount, as determined
from the applicable annuity conversion rates, would be $100, the
minimum period would be 144 months ($14,400 divided by $100 per month)
or 12 years. A variable life annuity with an installment refund period
guarantees a minimum number of payments, but not the amount of any
monthly payment or the amount of aggregate monthly payments.
Under the Variable Life Annuity with Zero Years Certain, which provides
monthly payments to the Participant during the Participant's lifetime,
it would be possible for the Participant to receive only one Annuity
Payment if the Participant died prior to the due date of the second
payment since payment is made only during the lifetime of the
Participant.
Joint and Survivor Variable Life Annuity with Monthly Payments Certain
for Ten Years -- a Variable Annuity which provides monthly payments for
a minimum period of ten years and thereafter during the joint lifetimes
of that participant and the joint annuitant named at the time this
option is elected, and continuing after the death of either payee for
the amount that would have been payable to them jointly during the
remaining lifetime of the survivor. In the event the Participant and
the joint annuitant do not survive beyond the minimum ten year period,
any remaining payments for the balance of such period will be paid to a
designated beneficiary unless the beneficiary requests in writing that
the Commuted Value of the remaining payments be paid in a single sum.
(Designated beneficiaries entitled to take the remaining payments or
the Commuted Value thereof rather than continuing monthly payments
should consult with their tax advisor to be made aware of the
differences in tax treatment.)
Joint and Two-Thirds Survivor Variable Life Annuity -- a Variable
Annuity which provides monthly payments during the joint lives of the
Participant and the person designated by the Participant as joint
annuitant with two-thirds of the amount that would have been payable to
them jointly continuing to the survivor upon the death of either.
Variable Life Annuity with One-Half Survivorship -- a Variable Annuity
which provides monthly payments during the life of the Participant with
one-half of the amount otherwise payable continuing to the contingent
annuitant designated by the Participant so long as the contingent
annuitant lives.
Under the Joint and Two-thirds Survivor Variable Life Annuity and under
the Variable Life Annuity with One-Half Survivorship, it would be
possible for the Participant and/or contingent or joint annuitant to
receive only one annuity payment if both died prior to the due date of
the second payment since payment is made only during their lifetimes.
Other Options -- Other Variable Annuity options permitted under the
applicable Retirement Plan may be arranged by mutual agreement of the
Participant and the Company.
3. Basis of Annuity Conversion Rates
Because women as a class live longer than men, it has been common that
retirement annuities of equal cost for women and men of the same age
will provide women less periodic income at retirement. The Supreme
Court of the United States ruled in Arizona Governing Committee vs.
Norris that sex distinct annuity tables under an employer-sponsored
benefit plan result in discrimination that is prohibited by Title VII
of the Federal Civil Rights Act of 1964. The Court further ruled that
sex distinct annuity tables will be deemed discriminatory only when
used with values accumulated from employer contributions made after
August 1, 1983, the date of the ruling.
Title VII applies only to employers with 15 or more employees. However,
certain State Fair Employment Laws and Equal Payment Laws may apply to
employers with less than 15 employees.
It is unclear at this time what degree of employer involvement will
result in an Individual Retirement Annuity or Tax Deferred Annuity
being considered a benefit of employment and therefore subject to the
Court's ruling.
The Variable Annuity Contracts described in this Prospectus offer both
sex distinct and sex neutral annuity conversion rates. The annuity
rates are used to convert a Participant's pre-retirement account value
to a monthly lifetime income at retirement. Usage of either sex
distinct or sex neutral annuity rates will be determined by the
Employer.
For each form of Variable Annuity, the annuity conversion rates
determine how much the first monthly Annuity Payment will be for each
$1,000 of the Participant's Investment Account Value applied to effect
the Variable Annuity. The conversion rates vary with the form of
annuity, date of birth, and (unless sex neutral rates are used) the sex
of the Participant and the joint or contingent annuitant, if any. The
sex distinct guaranteed annuity conversion rates are based upon (i) an
interest rate of 2.5% per annum and (ii) mortality according to the
"1983 Table a for Individual Annuity Valuation" projected with Scale G
to the year 2020, females set back six years in age. The sex neutral
rates are determined for all Participants in the same way as female
rates, as described above. The guaranteed annuity conversion rates may
be changed, but no change which would provide less initial monthly
Annuity Payment will take effect for a current Participant.
The Contract provides that an interest rate of not less than 2.5% per
annum will represent the assumed investment return. Currently the
assumed investment return used in determining the amount of the first
monthly payment is 4% per annum. This rate may be increased or
decreased by the Company in the future but in no event will it be less
than 2.5% per annum. If, under the Contract, the actual investment
return (as measured by an Annuity Change Factor, defined below) should
always equal the assumed investment return, Variable Annuity Payments
would remain level. If the actual investment return should always
exceed the assumed investment return, Variable Annuity Payments would
increase; conversely, if it should always be less than the assumed
investment return, Variable Annuity Payments would decrease.
The current 4% assumed investment return is higher than the 2.5%
interest rate reflected in the annuity conversion rates contained in
the Contract. With a 4% assumption, Variable Annuity Payments will
commence at a higher level, will increase less rapidly when actual
investment return exceeds 4%, and will decrease more rapidly when
actual investment return is less than 4%, than would occur with a lower
assumption.
4. Determining the Amount of the First Monthly Annuity Payment
For each Investment Account the initial amount of monthly annuity
income provided by each $1,000 applied to effect a Variable Annuity
shall be based on the option selected and the Investment Account Value,
after reduction for any premium tax, determined as of the end of the
Valuation Period one month before the Annuity Commencement Date. The
initial monthly income payment will be determined on the basis of the
annuity conversion rates applicable on such date to such conversions
under all contracts of this class issued by the Company. However, the
basis for the annuity conversion rates will not produce less initial
monthly income than the annuity conversion rate basis described above.
5. Determining the Amount of the Second and Subsequent Monthly Annuity
Payments
The second and subsequent monthly Annuity Payments will be computed
separately for each Division of Separate Account B selected by the
Participant and will increase or decrease in response to the investment
experience of the Account underlying the Division. The amount of each
payment will be determined by multiplying the amount of the monthly
Annuity Payment due in the immediately preceding calendar month by the
Annuity Change Factor for the Division for the Contract for the
calendar month in which the Annuity Payment is due.
Each Annuity Change Factor for a Division for a calendar month is the
quotient of (a) divided by (b), below:
(a) The number which results from dividing (i) the Contract's Unit
Value for the Division for the first Valuation Date in the
calendar month beginning one month before the given calendar month
by (ii) the Contract's Unit Value for the Division for the first
Valuation Date in the calendar month beginning two months before
the given calendar month.
(b) An amount equal to one plus the effective interest rate for the
number of days between the two Valuation Dates specified in
subparagraph (a) above at the interest rate assumed to determine
the initial payment of variable benefits to the Participant.
6. Hypothetical Example of Calculation of Annuity Payments (excluding
Individual Rollover Retirement Annuity)
Assume that on the date one month before the Annuity Commencement Date
the Participant has an Investment Account Value of $37,592. Using the
appropriate annuity conversion factor (assuming $5.88 per $1,000
applied) the Investment Account Value provides a first monthly Annuity
Payment of $221.04. To determine the amount of the Participant's second
monthly payment assume that the Unit Value as of the first Valuation
Date in the preceding calendar month was $1.3712044 and the Unit Value
as of the first Valuation Date in the second preceding calendar month
was $1.3273110. The Annuity Change Factor is determined by dividing
$1.3712044 by $1.3273110, which equals 1.0330694, and dividing the
result by an amount corresponding to the amount of one increased by an
assumed investment return of 4% (which for a thirty day period is
1.0032288). 1.0330694 divided by 1.0032288 results in an Annuity Change
Factor for the month of 1.0297446. Applying this factor to the amount
of Annuity Payment for the previous month results in a current monthly
payment of $227.61 ($221.04 multiplied by 1.0297446 equals $227.61).
C. Payment on Death of Participant
1. Prior to Annuity Commencement Date
If a Participant dies prior to the Annuity Commencement Date, the
Company, upon receipt of due proof of death, will, in accordance with
prior instructions from the Participant, either (i) establish
Investment Accounts for the beneficiary to hold the Investment Account
Values of the Participant or (ii) if an Associated Fixed Contract has
been issued, cancel all Investment Account units as of the date of
receipt of proof of death and transfer the Investment Account Values
(determined as of the end of the Valuation Period in which proof of
death was received) to the Associated Fixed Contract. In lieu of the
foregoing, the Company may pay all or part of the Investment Account
values to the beneficiary in a single sum, provided that if the
Participant had elected that the Investment Account Values be
transferred to an Associated Fixed Contract, the beneficiary's written
request for the payment must be given before the date the transfer is
to be effective.
A beneficiary of a Participant may elect to have all or a part of the
amount available under any Associated Fixed Contract transferred to
this Contract to establish Investment Accounts for the beneficiary or
to have all or a part of the amount available under this Contract
transferred to any Associated Fixed Contract. If the value of the
Investment Accounts is less than $1,750, the Company may at its option
pay the beneficiary the value of such accounts in lieu of all other
benefits. A spouse beneficiary may elect to have the Investment Account
Values applied to provide Annuity Payments or paid in a single sum. A
beneficiary other than the Participant's spouse must receive a
distribution of all values within five years of the Participant's
death.
If a Participant under a Contract funding a Tax Deferred Annuity dies
prior to Annuity Commencement Date, the Company, upon receipt of due
proof of death, will, in accordance with prior instructions from the
Participant, either (i) pay the value of the Participant's Investment
Accounts to the beneficiary in a single sum or (ii) if an Associated
Fixed Contract has been issued, cancel all Investment Account units as
of the date of receipt of the proof of death and transfer the
Investment Account Values (determined as of the end of the Valuation
Period in which proof of death was received) to the Associated Fixed
Contract. Prior to any payment or transfer by the Company, the
beneficiary may change the election made by the Participant or,
alternatively, elect to have the Participant's Investment Account
Values applied to purchase a supplementary contract from the Company
for annuity benefits. Such a purchase must conform to the requirements
of the supplementary contract.
Under all Contracts, a beneficiary must begin to receive Annuity
Payments or receive a single sum payment not later than five years
after the Participant's death. An election to receive Annuity Payments
must be made prior to the single sum payment to the beneficiary.
Annuity income must be payable as lifetime annuity income with no
benefits beyond the beneficiary's life or life expectancy. In addition,
the amount of the monthly Annuity Payments must be at least $20, or the
Company may at its option pay the beneficiary the value of the
Investment Accounts in lieu of all other benefits. The first Annuity
Payment will be made on the first day of the calendar month specified
in the election, but in no event prior to the date one month after any
transfer from any Associated Fixed Contract is effective. The amount to
be applied will be determined as of one month prior to the date the
first monthly payment is due. The beneficiary must be a natural person
in order to elect Annuity Payments. The election must be by Written
Notification. The annuity conversion rates applicable to a beneficiary
shall be the annuity conversion rates the Company makes available to
all beneficiaries under contracts of this class. The beneficiary will
receive a written description of the options available.
2. Subsequent to Annuity Commencement Date
Upon the death of a Participant receiving monthly Annuity Payments, no
benefits will be available except as may be provided under the form of
annuity selected. If provided for under the form of annuity, the
beneficiary will continue receiving any remaining payments unless the
beneficiary requests in writing that the Commuted Value of the
remaining payments be paid in a single sum.
D. Withdrawals and Transfers
1. Cash Withdrawals
The Contracts are designed for and intended to be used to fund
Retirement Plans. However, subject to any Retirement Plan limitations,
any restrictions imposed by provisions of the Internal Revenue Code or
any reduction for vesting provided for in the Retirement Plan as to
amounts available, the Participant may withdraw cash from the
Investment Accounts at any time prior to the Annuity Commencement Date
subject to any charges that may be applied. Distributions from Tax
Deferred Annuities may begin only after the Participant attains age 59
1/2, separates from service, dies or becomes disabled, or in the case
of hardship.
The procedure with respect to cash withdrawals is as follows:
(a) The Participant's Investment Account Values will be determined at
the end of the Valuation Period in which the withdrawal request is
received and will be paid to the Participant within seven days
thereafter. The Company may require that any request be
accompanied by the certificate issued to the Participant.
(b) No more than two partial cash withdrawals can be made in a
twelve-month period without the Company's express consent.
(c) The amount available may be subject to the Contingent Deferred
Sales Charge and, in the case of a total withdrawal, will be
subject to the Administration Charge.
(d) The amount available is also subject to any restriction in the
Participant's Retirement Plan.
Any cash withdrawal made will result in the cancellation of a number of
units in each Investment Account of the Participant from which values
have been withdrawn. The number of units cancelled from the Investment
Account will be equal to the amount withdrawn divided by the Unit Value
for its Division of Separate Account B for the Valuation Period in
which the cancellation is effective. Units will also be cancelled to
cover any charges assessed under (c) above.
(Special Note: Under the Texas Education Code, Participants under
contracts issued in connection with Optional Retirement Programs for
certain employees of Texas institutions of higher education are
prohibited from making withdrawals except in the event of termination
of employment, retirement or death of the Participant.)
2. Transfers to the Contract
If an Associated Fixed Contract has been issued by the Company, and
except as otherwise provided by the applicable Retirement Plan, a
Participant may, by Written Notification, transfer all or a portion of
the proceeds available under the Associated Fixed Contract to the
Investment Account(s) under the Contract at any time at least one month
before Annuity Commencement Date, subject to the terms of the
Associated Fixed Contract.
3. Transfers Between Divisions
Upon Written Notification, all or a portion of the value of an
Investment Account in one Division may be transferred to an Investment
Account in another Division available under the Contract. Transfers may
be made at any time at least one month before the Annuity Commencement
Date. However, only two transfers from any Investment Account may be
made in a twelve-month period without the express consent of the
Company.
A transfer will be effective as of the end of the Valuation Period in
which the request is received. Any amount transferred will result in
the cancellation of units in the Investment Account from which the
transfer is made. The number of units cancelled will be equal to the
amount transferred from that account divided by the Unit Value of the
Division for the Valuation Period in which the transfer is effective.
The transferred amount will result in the crediting of units in the
Investment Account to which the transfer is made. The number of units
credited will be equal to the amount transferred to that account
divided by the Unit Value of the Division for the Valuation Period in
which the transfer is effective.
4. Transfers to the Associated Fixed Contract
Except as otherwise provided by the applicable Retirement Plan, a
Participant may by Written Notification transfer all or a portion of
available Investment Account Values to the Associated Fixed Contract at
any time at least one month before Annuity Commencement Date. Such
transfers are subject to the same provisions regarding frequency of
transfer, effective date of transfer and cancellation of units as
described above in "Transfers Between Divisions".
5. Special Situation Involving Alternate Funding Agents
The Contracts may be subject to provisions of an Employer sponsored
Retirement Plan which allows the Investment Account Values of all
Participants of the Retirement Plan to be transferred to an Alternate
Funding Agent with or without the consent of the Participants.
Transfers to an Alternate Funding Agent require Written Notification
from the person or persons specified by the Retirement Plan.
The amount to be transferred will be equal to the Investment Account
Values determined as of the end of the Valuation Period in which the
Written Notification is received. Such transfers may be subject to the
Contingent Deferred Sales Charge.
Alternate Funding Agent means an insurance company or custodian
designated by Written Notification and authorized to receive any amount
or amounts transferred from the Contract as to a Participant or
Participants and to apply such amount or amounts for the exclusive
benefit of the Participant or Participants under a retirement plan
which continues to meet the requirements of the Internal Revenue Code,
without any obligation on the part of the Company in regard to the
application.
6. Postponement of Cash Withdrawal or Transfer
Any cash withdrawal or transfer to be made from the Contract or between
Divisions in accordance with the preceding paragraphs will be made
within seven days after Written Notification for such payment or
transfer is received by the Company. However, such withdrawal or
transfer may be deferred during any period when the right to redeem
Account 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
Account of securities owned by it is not reasonably practicable or (ii)
it is not reasonably practicable for the Account fairly to determine
the value of its net assets; or (c) the Commission by order so permits
for the protection of security holders. If any deferment of transfer or
withdrawal is in effect and has not been cancelled by Written
Notification to the Company within the period of deferment, the amount
to be transferred or withdrawn shall be determined as of the first
Valuation Date following expiration of the permitted deferment, and
transfer or withdrawal will be made within seven days thereafter.
E. Other Contractual Provisions
1. Contribution Limits
The Contract prescribes no limits on the minimum Contributions which
may be made on behalf of a Participant. Maximum Contributions for Tax
Deferred Annuities are limited to (a) amounts excludable from gross
income of Participants pursuant to the exclusion allowance provision of
Section 403(b) of the Internal Revenue Code, and (b) the contribution
limitation as specified in Section 415(c) of the Internal Revenue Code
unless otherwise allowed by the Company. Maximum Contributions for
Individual Retirement Annuities are limited to (a) amounts deductible
by a Participant under Internal Revenue Code Section 219 or (b) amounts
previously deducted by the Participant under Internal Revenue Code
Section 219 and accumulated in another funding vehicle, unless
otherwise allowed by the Company. Maximum Contributions for Rollover
Individual Retirement Annuities are limited to amounts the Participant
is entitled to roll over under Internal Revenue Code Sections
402(a)(5), 402(a)(7), 403(a)(4), 403(b)(8), 408(d)(3), or 409(b)(3)(C).
2. Assignment
No rights available or benefits payable under the Contract to any
Participant, beneficiary or contingent or joint annuitant are
assignable, transferable or subject to pledge, and all such rights and
benefits shall be exempt from the claims of creditors to the maximum
extent permitted by law.
A Participant's Investment Account Values are non-forfeitable;
provided, however, if the Retirement Plan specifically so provides, a
Participant's Investment Account Values shall be reduced to the extent
required by the vesting provisions of the Retirement Plan as of the
date the Company receives Written Notification of the event requiring
the reduction.
3. Cessation of Contributions
A cessation of Contributions with respect to all Participants under a
Retirement Plan shall occur at the election of the Employer upon
Written Notification to the Company or as of the date on which no
Investment Accounts subject to the Retirement Plan remain under the
Contract. Following a cessation of Contributions all terms of the
Contract will continue to apply except that no further Contributions
may be made.
4. Limitation as to Participants
If at any time Principal Management Corporation is not the investment
manager of the Mutual Fund, the Company may give written notice to the
Contractholder that no additional persons may be covered under the
Contract as Participants.
5. Substitution of Securities
If shares of an Account are not available at some time in the future,
or if in the judgment of the Company further investment in such shares
would be no longer appropriate, there may be substituted therefor, or
Contributions received after a date specified by the Company may be
applied to purchase (i) shares of another Account of Principal Variable
Contracts Fund, Inc. (ii) shares of another registered open-end
investment company, or (iii) securities or other property as the
Company should in its discretion select. Any necessary approval of the
Securities and Exchange Commission or of owners of or participants
under contracts participating in Separate Account B shall be obtained
before any substitution is made.
6. Changes in a Contract
The terms of a Contract may be changed at any time by written agreement
between the Company and the Contractholder without the consent of any
Participant, beneficiary, or joint or contingent annuitant. However,
except as required by law or regulation, no such change shall apply to
Variable Annuities which were in the course of payment prior to the
effective date of the change. If the Contractholder is the trustee of
the trust established to hold a Contract for the benefit of
participating units, the Contractholder may be limited in its exercise
of this amendment right. A majority of the participating units which
are Employers under the Contract may have to agree to the proposed
change in the Contract before the change can be made. The Company will
notify any Participant affected by any change under this paragraph.
The Company may unilaterally change the Contract at any time in order
to meet the requirements of any law or regulation issued by any
governmental agency to which the Company is subject. In addition, the
Company may, on 60 days prior notice to the Contractholder, the
Employer, and each Participant, unilaterally change the basis for
determining Investment Account Values, the Net Investment Factor and
the Annuity Change Factor; the guaranteed annuity conversion rates; and
the provisions with respect to transfers to or from an Associated Fixed
Contract or between Divisions. However, no change in the guaranteed
annuity conversion rates will take effect for a current Participant
which would reduce the amount of the Participant's minimum initial
monthly payment.
Furthermore, the Company may, on 60 days notice to the Contractholder,
the Employer, and each Participant affected by the change, unilaterally
change the mortality and expense risks charge. However, such a change
can only be made after the Contract has been in effect for at least one
year and provided that (a) the charge shall in no event exceed 2.00%
within the period of five years from the issuance of the Contract, (b)
the charge shall not be changed more frequently than once in any one
year period and (c) no change shall apply to annuities which were in
the course of payment prior to the effective date of the change.
Finally, the Company reserves the right to limit or refuse further
Contributions under the Contract upon 60 days notice to the
Contractholder, the Employer, and each Participant.
7. Statement of Values
The Company will furnish each Participant at least once during each
year a statement showing the number of units credited to the
Participant's Investment Accounts, Unit Values for the accounts and the
resulting Investment Account Values.
DISTRIBUTION OF THESE CONTRACTS
These Contracts are no longer being offered for sale.
VOTING RIGHTS
The Company shall vote Account shares held in Separate Account B at regular
and special meetings of shareholders of each Account, but will follow voting
instructions received from persons having the voting interest in the Account
shares.
The number of Account 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 Account, and voting instructions will be
solicited by written communication at least ten days prior to the meeting.
During the accumulation period, the Participant is the person having the
voting interest in the Account shares attributable to each Investment Account.
The number of Account shares held in Separate Account B which are attributable
to each Investment Account is determined by dividing the Investment Account
Value by the net asset value of one Account share.
During the annuity period, the person then entitled to Annuity Payments has
the voting interest in the Account shares attributable to the Variable Annuity.
The number of Account 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 Account share. The Participant's voting
interest in the Account 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.
Account shares for which participants or payees of variable annuities are
entitled to give voting instructions, but for which none are received, and
shares of the Fund owned by the Company will be voted in the same proportion as
the aggregate shares for which voting instructions have been received.
Proxy material will be provided to each person having a voting interest
together with an appropriate form which may used to give voting instructions to
the Company.
If the Company determines pursuant to applicable law that Account 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 Account shares held in Separate Account B in its own right.
FEDERAL TAX STATUS
Investment gains of the Accounts credited to Separate Account B are not
taxable to a Participant until received in the form of a cash withdrawal from an
Investment Account or in the form of Variable Annuity Payments. Cash withdrawals
will generally be taxed as ordinary income in the year received, but may be
eligible for the income averaging provisions of the Internal Revenue Code. Each
Variable Annuity Payment will be taxed as ordinary income in accordance with
Section 72 of the Internal Revenue Code.
As a general rule, however, a Participant receiving Annuity Payments at the
time of retirement will be in a lower income tax bracket due to reduced income
and larger exemptions.
Under Section 403(b) of the Internal Revenue Code, contributions for
employees made under a Tax Deferred Annuity by a public school or other Employer
are excludable from the gross income of the employees in the year made to the
extent that the aggregate contributions per year for such employees do not
exceed the exclusion allowance set forth in Section 403(b)(2) of the Internal
Revenue Code. (In addition, contributions are limited by the restrictions of
Section 415(c) of the Internal Revenue Code.) Adjustments in the tax base are
allowed where a portion of the cost of the benefit being distributed has been
paid by the Participant out of funds not excludable from the Participant's gross
income tax in the year made, rather than having been paid by the Participant's
Employer out of funds that were excludable from the Participant's gross income
tax in the year made.
Distributions from a Tax Deferred Annuity may begin only after the
participant attains age 59 1/2, separates from service, dies or becomes
disabled, or in the case of hardship.
Under Sections 219 and 408 of the Internal Revenue Code, an individual who
has earned income may establish an Individual Retirement Annuity plan or program
for the accumulation of retirement savings on a tax-deferred basis for such
individual and such individual's nonemployed spouse. The individual may
establish and make contributions into such a plan or this may be done by the
individual's employer or union. These contributions may be invested in, among
other things, annuity contracts including the variable annuity contract offered
by this Prospectus. The law provides that such contributions will be deductible,
though only to the extent allowed by the Internal Revenue Code. No deduction is
allowed for contributions made during or after the year in which the individual
attains age 70 1/2, and contributions during or after that year, as well as
contributions in excess of the limits, are excess contributions and may result
in certain adverse tax consequences.
All distributions under Individual Retirement Annuities and Tax Deferred
Annuities will be taxed as ordinary income. Thus, these distributions will not
be eligible for capital gains treatment or the special averaging rules
applicable to lump sum distributions from some types of qualifying plans. As a
general rule, any distribution that is not in the form of a life annuity, made
before the participant attains age 59 1/2 (except in the event of death or
disability) will be a premature distribution and be subject to a 10% penalty.
There is an exception to this rule for Tax Deferred Annuities. Distributions
from Tax Deferred Annuities which are due to separation from service after age
55 or which are used for certain medical expenses are not subject to the
penalty.
Distributions from Individual Retirement Annuities and Tax Deferred
Annuities must begin before April 1 of the calendar year following the calendar
year in which the participant attains age 70 1/2. There is an exception to this
rule for Tax Deferred Annuities. Tax Deferred Annuity benefits which accrued
prior to January 1, 1987 do not have to be distributed until age 75 or
termination of employment.
If a participant fails to make a required distribution a 50% excise tax may
be assessed on the amount required to be distributed. In addition, as a general
rule, distributions over $150,000 a year, and lump sum distributions greater
than $750,000 are subject to a 15% excise tax.
When a Participant under an Individual Retirement Annuity or Tax Deferred
Annuity dies before the Annuity Commencement Date, all values must be
distributed to the Participant's beneficiary within five years. The 5-year
payout rule does not apply to benefits paid to a surviving spouse under a joint
and survivor annuity option, nor to benefits paid to a surviving beneficiary
under a permitted term certain period. If the surviving spouse is the designated
beneficiary, distribution of benefits need not begin until the date on which the
Participant would have attained age 70 1/2 years, and the benefits must be
distributed over the life of the surviving spouse or over a period not exceeding
the life expectancy of the spouse. A similar rule applies to other designated
beneficiaries, except that the distribution of benefits must commence not later
than one year after the date of death of the participant.
It should be recognized that the description of the federal income tax
status of amounts received under the Contracts are not exhaustive and do not
purport to cover all situations.
A qualified tax advisor should be consulted for complete information. (For
the federal tax status of the Company and Separate Account B, see "Principal
Mutual Life Insurance Company Separate Account B".)
STATE REGULATION
The Company is subject to the laws of the State of Iowa governing insurance
companies and to regulation by the Insurance Department of the State of Iowa. An
annual statement in a prescribed form must be filed by March 1 in each year
covering the operations of the Company for the preceding year and its financial
condition on December 31st of such year. Its books and assets are subject to
review or examination by the Commissioner of Insurance of the State of Iowa or
his representatives at all times, and a full examination of its operations is
conducted periodically by the National Association of Insurance Commissioners.
Iowa law and regulations also prescribe permissible investments, but this does
not involve supervision of the investment management or policy of the Company.
In addition, the Company is subject to the insurance laws and regulations
of other states and jurisdictions in which it is licensed to operate. Generally,
the insurance departments of these states and jurisdictions apply the laws of
the state of domicile in determining the field of permissible investments.
LEGAL OPINIONS
Legal matters applicable to the issue and sale of the Contracts, including
the right of the Company to issue Contracts under Iowa Insurance Law, have been
passed upon by Gregg R. Narber, Senior Vice President and General Counsel.
LEGAL PROCEEDINGS
There are no legal proceedings pending to which Separate Account B is a
party or which would materially affect Separate Account B.
REGISTRATION STATEMENT
This Prospectus omits some information contained in the Statement of
Additional Information (or Part B of the Registration Statement) and Part C of
the Registration Statement which the Company has filed with the Securities and
Exchange Commission. The Statement of Additional Information is hereby
incorporated by reference into this Prospectus. A copy of the Statement of
Additional Information can be obtained upon request, free of charge, by writing
or telephoning Princor Financial Services Corporation. You may obtain a copy of
Part C of the Registration Statement filed with the Securities and Exchange
Commission, Washington, D.C. from the Commission upon payment of the prescribed
fees.
OTHER VARIABLE ANNUITY CONTRACTS
The Company currently offers other variable annuity contracts that
participate in Separate Account B. In the future, additional group or individual
variable annuity contracts may be designated by the Company as participating in
Separate Account B.
INDEPENDENT AUDITORS
The financial statements of Principal Mutual Life Insurance Company
Separate Account B and 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.
FINANCIAL STATEMENTS
The consolidated financial statements of The Principal Financial Group(R)
(comprised of the Company and its subsidiaries) which are included in this
Prospectus should be considered only as bearing on the ability of the Company to
meet its obligations under the Policy. They should not be considered as bearing
on the investment performance of the assets held in the Separate Account.
APPENDIX 1
Premium taxes applicable to Contracts described in this Prospectus:
403(b) 408 Individual
Tax Deferred Retirement
Annuities Accounts
California 0.50% 0.50%
District of Columbia 2.25 2.25
Kentucky 2.00 2.00
West Virginia 1.00 1.00
All other states -- --
APPENDIX 2
Set forth below is an example of the manner in which the Administration
Charge is computed.
The Administration Charge has two components -- a fixed charge of $25 and a
charge equal to 0.5% of the first $50,000 of a Participant's Investment Account
Values. The amount of the percentage charge is determined by multiplying the
total value of the Participant's Investment Accounts by a percentage the
numerator of which is 0.5% of the first $50,000 and the denominator of which is
the total value of the Investment Accounts. Assume that a Participant's
Investment Account Value based on the Capital Value Division is $40,000 and the
Investment Account Value based on the Money Market Division is $60,000. In this
case, the total Investment Account Value of $100,000 is multiplied by 0.25%
($250/$100,000) resulting in a charge of $250. The combined charge of $275 ($25
plus $250) is deducted proportionately from the Investment Accounts of the
Participant, $110 (40% of $275) from the Investment Account Value based on the
Capital Value Division and $165 (60% of $275) from the Investment Account Value
based on the Money Market Division.
Assume that in the example above all of the annuity contributions under the
Retirement Plan of the Employer are payable to the Company. As a result, the
percentage used to determine the second component of the charge is based on the
aggregate Investment Account Values of all Participants of the Employer. For
example, assume that there is one other Participant with a total Investment
Account Value of $200,000. The total Investment Account Value of each
Participant is multiplied by a percentage the numerator of which is $250 (0.5% x
$50,000) and the denominator of which is $300,000, or 0.08333%. The Participant
with a total Investment Account Value of $100,000 is subject to an
Administration Charge of $108.33, $25 plus $83.33 (0.0008333 x $100,000), and
the Participant with a total Investment Account Value of $200,000 is subject to
an Administration Charge of $191.67, $25 plus $166.67 (0.0008333 x $200,000). In
effect, the $250 charge based on the Participants' aggregate Investment Account
Values has been allocated proportionately between them.
CONTRACTHOLDERS' INQUIRIES
Contractholders' inquiries should be directed to Princor Financial Services
Corporation, a Member of The Principal Financial Group, Des Moines, Iowa
50392-0200, (515) 247-5711.
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
The table of contents for the Statement of Additional Information is
provided below.
TABLE OF CONTENTS
Page
General Information and History ..................................... 3
Independent Auditors ............................................... 3
Underwriting Commissions ........................................... 3
Calculation of Yield and Total Return .............................. 3
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, Iowa 50392-0200
Telephone: 1-800-247-9988
PART B
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT B
PENSION BUILDER - GROUP VARIABLE ANNUITY CONTRACTS
FOR TAX-DEFERRED RETIREMENT PLANS
Statement of Additional Information
dated May 1, 1998
This Statement of Additional Information provides information about
Principal Mutual Life Insurance Company Separate Account B Pension Builder -
Group Variable Annuity Contracts (the "Contract" or the "Contracts") in addition
to the information that is contained in the Contract's Prospectus, dated May 1,
1998.
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with the Prospectus, a copy of which can be obtained free of
charge by writing or telephoning:
Princor Financial Services Corporation
a Member of
The Principal Financial Group
Des Moines Iowa 50392-0200
Telephone: 1-800-247-9988
TABLE OF CONTENTS
Page
General Information and History ............................... 3
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
GENERAL INFORMATION AND HISTORY
Principal Mutual Life Insurance Company was formerly known as Bankers Life
Company. The Company's name was changed to Principal Mutual Life Insurance
Company effective July 1, 1986.
INDEPENDENT AUDITORS
Ernst & Young LLP, Des Moines, Iowa, serve as independent auditors for Principal
Mutual Life Insurance Company Separate Account B and The Principal Financial
Group perform audit and accounting services for Separate Account B and The
Principal Financial Group.
UNDERWRITING COMMISSIONS
Aggregate dollar amount of underwriting commissions paid to and retained by
Princor Financial Services Corporation:
Year Paid To Retained by
1997 $11,491,356.06 $ 340.24
1996 $11,090,837.12 $14,528.47
1995 $ 5,326,848.77 $26,014.78
CALCULATION OF YIELD AND TOTAL RETURN
From time to time the Account advertises its Money Market Division's "yield" and
"effective yield." Both yield figures are based on historical earnings and are
not intended to indicate future performance. The "yield" of the division refers
to the income generated by an investment in the division over a seven-day period
(which period will be stated in the advertisement). This income is then
"annualized." That is, the amount of income generated by the investment during
that week is assumed to be generated each week over a 52-week period and is
shown as a percentage of the investment. The "effective yield" is calculated
similarly but, when annualized, the income earned by an investment in the
division is assumed to be reinvested. The "effective yield" will be slightly
higher than the "yield" because of the compounding effect of this assumed
reinvestment. Neither yield quotation reflects sales load deducted from purchase
payments which, if included, would reduce the "yield" and "effective yield." The
7-day yields of the Money Market Division for the period ending December 31,
1997 are:
Annualized Yield Effective Yield
TSA/IRA 3.59% 3.65%
Rollover IRA 4.09% 4.18%
From time to time, the Separate Account will advertise the average annual total
return of its various divisions. The average annual total return for any of the
divisions is computed by calculating the average annual compounded rate of
return over the stated period that would equate an initial $1,000 investment to
the ending redeemable contract value. In this calculation the ending value is
reduced by a contingent deferred sales charge that decreases from 7% to 0% over
a period of 10 years. The Separate Account may also advertise total return
figures of its Divisions for a specified period that does not take into account
the sales charge in order to illustrate the change in the Division's unit value
over time. See "Deductions Under the Contracts" for a discussion of contingent
deferred sales charges.
The average annual total returns for the period ending December 31, 1997 are:
<TABLE>
<CAPTION>
With Contingent Without Contingent
Deferred Sales Charge Deferred Sales Charge
One Year Five Year Ten Year One Year Five Year Ten Year
Capital Value Division
<S> <C> <C> <C> <C> <C> <C>
TSA/IRA 16.81 14.45 12.91 25.60 15.44 12.99
Rollover IRA 17.48 15.04 13.48 26.33 16.03 13.56
Government Securities Division
TSA/IRA 0.26 4.30 7.14 7.81 5.20 7.22
Rollover IRA 0.76 4.82 7.67 8.35 5.73 7.75
</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
[formerly Common Stock], Emerging Growth, Government Securities, Growth, Money
Market and World Divisions) as of December 31, 1997, 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, 1997, 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, 1997, 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 LLP
Des Moines, Iowa
February 6, 1998
Principal Mutual Life Insurance
Company Separate Account B
Statement of Net Assets
December 31, 1997
Assets
Investments:
Aggressive Growth Division:
Principal Aggressive Growth Fund, Inc.
- 8,837,189 shares at net asset value of
$16.29 per share (cost - $130,476,835) $ 143,957,816
Asset Allocation Division:
Principal Asset Allocation Fund, Inc.
- 4,062,978 shares at net asset value of
$11.94 per share (cost - $47,157,543) 48,511,958
Balanced Division:
Principal Balanced Fund, Inc.
- 8,194,665 shares at net asset value
of $15.51 per share (cost - $119,970,977) 127,099,255
Bond Division:
Principal Bond Fund, Inc.
- 6,238,528 shares at net asset value of $11.78 per
share (cost - $72,060,219) 73,489,868
Capital Accumulation Division:
Principal Capital Accumulation Fund, Inc.
- 7,779,594 shares at net asset value
of $34.61 per share (cost - $229,832,981) 269,251,746
Emerging Growth Division:
Principal Emerging Growth Fund, Inc.
- 5,753,822 shares at net
asset value of $35.47 per share (cost - $160,618,242) 204,088,063
Government Securities Division:
Principal Government Securities Fund, Inc.
- 8,661,755 shares at net
asset value of $10.72 per share (cost - $90,494,835) 92,854,016
Growth Division:
Principal Growth Fund, Inc.
- 9,634,743 shares at net asset value of $17.21 per
share (cost - $127,634,315) 165,813,925
Money Market Division:
Principal Money Market Fund, Inc.
- 41,680,409 shares at net asset value (cost)
of $1.00 per share 41,680,409
World Division:
Principal World Fund, Inc.
- 8,736,413 shares at net asset value of $13.90 per
share (cost - $108,352,082) 121,436,154
==================
Net assets $1,288,183,210
==================
<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 6,076,848 $23.69 $ 143,957,816
Asset Allocation Division:
Contracts in accumulation period:
The Principal Variable Annuity 3,134,106 15.48 48,511,958
Balanced Division:
Contracts in accumulation period:
Personal Variable 1,774,584 1.59 2,825,449
Premier Variable 10,616,578 1.60 17,024,170
The Principal Variable Annuity 6,717,196 15.97 107,249,636
-----------------
-----------------
127,099,255
Bond Division:
Contracts in accumulation period:
Personal Variable 487,134 1.37 669,514
Premier Variable 4,008,632 1.38 5,548,762
The Principal Variable Annuity 5,017,212 13.41 67,271,592
-----------------
-----------------
73,489,868
Capital Accumulation Division:
Currently payable annuity contracts:
Bankers Flexible Annuity 4,940 27.86 137,623
Pension Builder Plus - Rollover IRA 58,464 5.79 338,216
Contracts in accumulation period:
Bankers Flexible Annuity 253,763 27.86 7,072,314
Pension Builder Plus 1,623,560 5.25 8,527,296
Pension Builder Plus - Rollover IRA 337,900 5.79 1,957,469
Personal Variable 3,443,348 2.35 8,089,748
Premier Variable 21,339,196 2.38 50,737,614
The Principal Variable Annuity 9,319,979 20.64 192,391,466
-----------------
-----------------
269,251,746
Emerging Growth Division:
Contracts in accumulation period:
Personal Variable 1,477,705 1.87 2,756,807
Premier Variable 9,535,648 1.88 17,916,711
The Principal Variable Annuity 9,820,491 18.68 183,414,545
-----------------
-----------------
204,088,063
</TABLE>
<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 630,389 $ 2.04 $ 1,285,125
Pension Builder Plus - Rollover IRA 191,639 2.15 412,091
Personal Variable 1,815,860 1.41 2,568,214
Premier Variable 7,686,485 1.43 11,002,038
The Principal Variable Annuity 5,945,573 13.05 77,586,548
---------------
---------------
92,854,016
Growth Division:
Contracts in accumulation period:
Personal Variable 1,575,071 1.76 2,776,351
Premier Variable 11,441,482 1.78 20,311,716
The Principal Variable Annuity 7,898,308 18.07 142,725,858
---------------
---------------
165,813,925
Money Market Division:
Contracts in accumulation period:
Pension Builder Plus 419,049 1.89 791,079
Pension Builder Plus - Rollover IRA 15,736 1.97 30,919
Personal Variable 1,056,335 1.22 1,288,642
Premier Variable 6,514,874 1.24 8,043,427
The Principal Variable Annuity 2,752,166 11.46 31,526,342
---------------
---------------
41,680,409
World Division:
Contracts in accumulation period:
Personal Variable 1,014,143 1.51 1,528,673
Premier Variable 7,683,950 1.52 11,665,158
The Principal Variable Annuity 7,315,787 14.80 108,242,323
---------------
---------------
121,436,154
===============
Net assets $1,288,183,210
===============
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
Principal Mutual Life Insurance
Company Separate Account B
Statement of Operations
Year ended December 31, 1997
Aggressive Asset
Growth Allocation Balanced
Combined Division Division Division
----------------------------------------------------------------
----------------------------------------------------------------
Investment income
Income:
<S> <C> <C> <C> <C>
Dividends $ 26,459,170 $ 312,225 $1,077,121 $ 3,376,218
Capital gains distributions 56,985,223 18,029,173 4,384,438 7,773,294
----------------------------------------------------------------
----------------------------------------------------------------
83,444,393 18,341,398 5,461,559 11,149,512
Expenses:
Mortality and expense risks 11,823,513 1,304,906 483,755 1,111,972
Administration charges 428,566 70,552 5,431 23,650
Contingent sales charges 910,028 90,527 33,143 70,179
----------------------------------------------------------------
----------------------------------------------------------------
13,162,107 1,465,985 522,329 1,205,801
----------------------------------------------------------------
----------------------------------------------------------------
Net investment income 70,282,286 16,875,413 4,939,230 9,943,711
Realized and unrealized gains on investments
Net realized gains on investments 5,671,902 464,006 63,749 453,888
Change in net unrealized appreciation/
depreciation of investments 102,587,382 9,210,372 744,626 4,610,751
----------------------------------------------------------------
================================================================
Net increase in net assets resulting from
operations $ 178,541,570 $ 26,549,791 $5,747,605 $ 15,008,350
================================================================
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
Capital Emerging Government
Bond Accumulation Growth Securities Growth Money Market World
Division Division Division Division Division Division Division
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$4,339,765 $ 4,842,536 $ 1,294,027 $5,339,599 $ 1,759,897 $2,092,152 $2,025,630
- 18,095,200 4,080,946 994 992,232 - 3,628,946
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
4,339,765 22,937,736 5,374,973 5,340,593 2,752,129 2,092,152 5,654,576
711,411 2,217,279 1,927,784 951,497 1,503,368 439,153 1,172,388
10,673 148,936 65,058 30,496 32,657 15,637 25,476
49,219 157,869 148,402 79,876 103,766 92,239 84,808
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
771,303 2,524,084 2,141,244 1,061,869 1,639,791 547,029 1,282,672
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
3,568,462 20,413,652 3,233,729 4,278,724 1,112,338 1,545,123 4,371,904
110,974 2,848,843 507,365 274,681 452,453 - 495,943
1,830,541 27,562,078 26,108,957 2,797,737 27,128,828 - 2,593,492
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
$5,509,977 $ 50,824,573 $ 29,850,051 $7,351,142 $ 28,693,619 $1,545,123 $7,461,339
============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Principal Mutual Life Insurance
Company Separate Account B
Statements of Changes in Net Assets
Aggressive Asset
Growth Allocation Balanced
Combined Division Division 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>
<TABLE>
<CAPTION>
Capital Emerging Government Money
Bond Accumulation Growth Securities Growth Market World
Divison Division Divison Division 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>
<TABLE>
<CAPTION>
Principal Mutual Life Insurance
Company Separate Account B
Statements of Changes in Net Assets (continued)
Aggressive Asset
Growth Division Allocation Balanced
Combined Division Division
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net assets at January 1, 1997 $ 806,097,603 $ 72,827,189 $30,022,679 $ 75,478,532
Increase (decrease) in net assets
Operations:
Net investment income 70,282,286 16,875,413 4,939,230 9,943,711
Net realized gains on investments 5,671,902 464,006 63,749 453,888
Change in net unrealized appreciation/
depreciation of investments 102,587,382 9,210,372 744,626 4,610,751
--------------------------------------------------------------------
--------------------------------------------------------------------
Net increase in net assets resulting from
operations 178,541,570 26,549,791 5,747,605 15,008,350
Changes from principal transactions:
Purchase payments, less sales charges, per
payment fees and applicable premium taxes 627,937,841 59,917,348 16,705,667 53,714,866
Contract terminations (55,874,169) (3,178,242) (1,163,611) (4,281,984)
Death benefit payments (4,316,597) (405,803) (51,804) (958,828)
Flexible withdrawal option payments (7,524,649) (555,143) (424,697) (1,011,471)
Transfer payments to other contracts (256,636,172) (11,197,324) (2,323,881) (10,850,210)
Annuity payments (42,217) - - -
--------------------------------------------------------------------
--------------------------------------------------------------------
Increase (decrease) in net assets from principal
transactions 303,544,037 44,580,836 12,741,674 36,612,373
--------------------------------------------------------------------
--------------------------------------------------------------------
Total increase 482,085,607 71,130,627 18,489,279 51,620,723
--------------------------------------------------------------------
====================================================================
Net assets at December 31, 1997 $ 1,288,183,210 $ 143,957,816 $48,511,958 $ 127,099,255
====================================================================
See accompanying notes.
</TABLE>
<TABLE>
Capital Emerging Government Money
Bond Accumulation Growth Securities Growth Market World
Division Division Division Division Division Division Division
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$51,156,727 $164,206,061 $122,287,543 $80,421,152 $ 98,430,386 $ 40,738,362 $ 70,528,972
3,568,462 20,413,652 3,233,729 4,278,724 1,112,338 1,545,123 4,371,904
110,974 2,848,843 507,365 274,681 452,453 - 495,943
1,830,541 27,562,078 26,108,957 2,797,737 27,128,828 - 2,593,492
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
5,509,977 50,824,573 29,850,051 7,351,142 28,693,619 1,545,123 7,461,339
29,283,340 88,457,676 71,186,197 25,613,735 53,502,269 172,161,862 57,394,881
(2,130,683) (18,056,258) (6,477,064) (5,656,444) (4,866,079) (6,125,231) (3,938,573)
(265,662) (501,663) (451,603) (615,089) (543,121) (189,873) (333,151)
(880,841) (965,075) (790,604) (1,128,199) (731,944) (598,084) (438,591)
(9,182,990) (14,671,351) (11,516,457) (13,132,281) (8,671,205) (165,851,750) (9,238,723)
- (42,217) - - - - -
- ------------------------------------------------------------------------------------------------------------------
16,823,164 54,221,112 51,950,469 5,081,722 38,689,920 (603,076) 43,445,843
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
22,333,141 105,045,685 81,800,520 12,432,864 67,383,539 942,047 50,907,182
- ------------------------------------------------------------------------------------------------------------------
==================================================================================================================
$73,489,868 $269,251,746 $204,088,063 $92,854,016 $165,813,925 $ 41,680,409 $121,436,154
==================================================================================================================
</TABLE>
Principal Mutual Life Insurance
Company Separate Account B
Notes to Financial Statements
December 31, 1997
1. Investment and Accounting Policies
Principal Mutual Life Insurance Company Separate Account B (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,
1997.
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.
Use of Estimates in the Preparation of Financial Statements
The preparation of Separate Account B's financial statements and accompanying
notes requires management to make estimates and assumptions that affect the
amounts reported and disclosed. These estimates and assumptions could change in
the future as more information becomes known, which could impact the amounts
reported and disclosed in the financial statements and accompanying notes.
2. Expenses
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 $32,396 and $1,078, respectively, during the year ended December 31,
1997.
Pension Builder Plus and Pension Builder Plus - Rollover IRA Contracts -
Mortality and expense risks assumed by Principal Mutual are compensated for by a
charge equivalent to an annual rate of 1.4965% (1.0001% for a Rollover
Individual Retirement Annuity) of the asset value of each contract. A contingent
sales charge of up to 7% may be deducted from withdrawals made during the first
10 years of a contract, except for death or permanent disability. An annual
administration charge will be deducted ranging from a minimum of $25 to a
maximum of $275 depending upon a participant's investment account values and the
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 $202,742, $28,880, and
$80,841, respectively, during the year ended December 31, 1997.
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% of
the asset value of each contract. A contingent sales charge of up to 5% may be
deducted from withdrawals from an investment account 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 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 $116,668, $43,044, and
$41,157, respectively, during the year ended December 31, 1997.
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% 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 $491,751 and $12,365, respectively, during the year ended December
31, 1997. 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 $10,979,956, $838,104,
and $293,125, respectively, during the year ended December 31, 1997.
3. Federal Income Taxes
The 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 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, 1997
----------------------------------------------------------------------
Units Amount Units Amount
Purchased Purchased Redeemed Redeemed
----------------------------------------------------------------------
----------------------------------------------------------------------
Aggressive Growth Division:
<S> <C> <C> <C> <C>
The Principal Variable Annuity 2,866,842 $ 78,258,746 760,825 $ 16,802,497
Asset Allocation Division:
The Principal Variable Annuity 1,151,186 22,167,226 281,079 4,486,322
Balanced Division:
Personal Variable 1,121,294 1,881,609 362,119 541,564
Premier Variable 6,824,153 11,562,751 3,674,287 5,395,069
The Principal Variable Annuity 2,815,600 51,420,018 759,885 12,371,661
----------------------------------------------------------------------
----------------------------------------------------------------------
10,761,047 64,864,378 4,796,291 18,308,294
Bond Division:
Personal Variable 345,135 485,073 132,143 174,058
Premier Variable 2,547,619 3,651,845 1,151,236 1,516,914
The Principal Variable Annuity 2,004,124 29,486,187 858,968 11,540,507
----------------------------------------------------------------------
----------------------------------------------------------------------
4,896,878 33,623,105 2,142,347 13,231,479
Capital Accumulation Division:
Bankers Flexible Annuity - 683,529 29,544 773,974
Pension Builder Plus 68,140 1,235,130 1,982,927 8,819,318
Pension Builder Plus - Rollover IRA 1,995 221,006 181,779 925,026
Personal Variable 1,387,651 3,539,847 858,885 1,776,616
Premier Variable 8,035,489 21,108,357 4,658,141 9,954,051
The Principal Variable Annuity 3,744,285 84,607,543 691,613 14,511,663
----------------------------------------------------------------------
----------------------------------------------------------------------
13,237,560 111,395,412 8,402,889 36,760,648
Emerging Growth Division:
Personal Variable 979,972 1,752,787 332,091 581,993
Premier Variable 6,044,928 10,752,356 2,231,491 3,852,324
The Principal Variable Annuity 3,406,355 64,056,027 870,634 16,942,655
----------------------------------------------------------------------
----------------------------------------------------------------------
10,431,255 76,561,170 3,434,216 21,376,972
Government Securities Division:
Pension Builder Plus 23,169 $ 118,925 570,707 $ 1,099,325
Pension Builder Plus - Rollover IRA
617 24,244 208,339 426,973
Personal Variable 633,713 990,854 754,202 1,021,076
Premier Variable 2,966,089 4,655,507 2,792,797 3,804,557
The Principal Variable Annuity 1,669,224 25,164,798 1,166,357 15,241,951
----------------------------------------------------------------------
----------------------------------------------------------------------
5,292,812 30,954,328 5,492,402 21,593,882
Growth Division:
Personal Variable 1,072,567 1,734,898 311,356 500,397
Premier Variable 7,226,323 11,858,111 2,587,048 4,197,408
The Principal Variable Annuity 2,442,934 42,661,389 633,196 11,754,335
----------------------------------------------------------------------
----------------------------------------------------------------------
10,741,824 56,254,398 3,531,600 16,452,140
Money Market Division:
Pension Builder Plus 285,405 558,229 456,641 845,039
Pension Builder Plus - Rollover IRA
2,628 7,254 13,813 27,122
Personal Variable 6,785,344 8,146,664 6,570,220 7,839,434
Premier Variable 32,145,080 39,119,749 31,009,540 37,413,932
The Principal Variable Annuity 11,093,609 126,422,118 11,270,301 127,186,440
----------------------------------------------------------------------
----------------------------------------------------------------------
50,312,066 174,254,014 49,320,515 173,311,967
World Division:
Personal Variable 759,933 1,208,340 233,106 354,907
Premier Variable 5,217,093 8,423,719 1,831,269 2,787,221
The Principal Variable Annuity 3,256,925 53,417,398 738,451 12,089,582
----------------------------------------------------------------------
----------------------------------------------------------------------
9,233,951 63,049,457 2,802,826 15,231,710
----------------------------------------------------------------------
======================================================================
118,925,421 $711,382,234 80,964,990 $ 337,555,911
======================================================================
</TABLE>
<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
----------------------------------------------------------------------
----------------------------------------------------------------------
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
Common Stock 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
Government Securities Division:
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>
Purchases include reinvested dividends and capital gains. Mortality adjustments
are included in purchases and redemptions, as applicable.
Money Market purchases include transactions where investment allocations are not
known at the time of the deposit. Redemptions reflect subsequent allocations to
directed investment divisions.
5. Net Assets
Net assets at December 31, 1997 consisted of the following:
<TABLE>
<CAPTION>
Accumulated Net
Net Unrealized
Unit Investment Appreciation
Combined Transactions Income of Investments
----------------------------------------------------------------------
Aggressive Growth Division:
<S> <C> <C> <C> <C>
The Principal Variable Annuity $ 143,957,816 $ 108,890,994 $21,585,841 $ 13,480,981
Asset Allocation Division:
The Principal Variable Annuity 48,511,958 40,247,801 6,909,742 1,354,415
Balanced Division:
Personal Variable 2,825,449 2,519,909 187,228 118,312
Premier Variable 17,024,170 15,053,670 1,082,488 888,012
The Principal Variable Annuity 107,249,636 89,193,848 11,933,834 6,121,954
----------------------------------------------------------------------
----------------------------------------------------------------------
127,099,255 106,767,427 13,203,550 7,128,278
Bond Division:
Personal Variable 669,514 640,323 26,316 2,875
Premier Variable 5,548,762 5,227,610 243,569 77,583
The Principal Variable Annuity 67,271,592 60,752,616 5,160,785 1,349,191
----------------------------------------------------------------------
----------------------------------------------------------------------
73,489,868 66,620,549 5,439,670 1,429,649
Capital Accumulation Division:
Bankers Flexible Annuity 7,209,937 4,264,632 591,008 2,354,297
Pension Builder Plus 8,527,296 6,093,197 338,019 2,096,080
Pension Builder Plus - Rollover IRA 2,295,685 1,572,298 146,933 576,454
Personal Variable 8,089,748 6,277,077 519,933 1,292,738
Premier Variable 50,737,614 38,321,310 3,492,172 8,924,132
The Principal Variable Annuity 192,391,466 143,480,187 24,736,215 24,175,064
----------------------------------------------------------------------
----------------------------------------------------------------------
269,251,746 200,008,701 29,824,280 39,418,765
Emerging Growth Division:
Personal Variable 2,756,807 2,291,146 40,448 425,213
Premier Variable 17,916,711 14,378,199 326,697 3,211,815
The Principal Variable Annuity 183,414,545 138,974,347 4,607,405 39,832,793
----------------------------------------------------------------------
----------------------------------------------------------------------
204,088,063 155,643,692 4,974,550 43,469,821
Government Securities Division:
Pension Builder Plus 1,285,125 1,213,588 22,100 49,437
Pension Builder Plus - Rollover IRA 412,091 392,360 7,875 11,856
Personal Variable 2,568,214 2,429,363 85,654 53,197
Premier Variable 11,002,038 10,292,437 440,378 269,223
The Principal Variable Annuity 77,586,548 69,356,911 6,254,169 1,975,468
----------------------------------------------------------------------
----------------------------------------------------------------------
92,854,016 83,684,659 6,810,176 2,359,181
Growth Division:
Personal Variable $ 2,776,351 $ $ 20,876 $ 469,224
2,286,251
Premier Variable 20,311,716 16,189,532 218,455 3,903,729
The Principal Variable Annuity 142,725,858 107,312,599 1,606,602 33,806,657
----------------------------------------------------------------------
165,813,925 125,788,382 1,845,933 38,179,610
Money Market Division:
Pension Builder Plus 791,079 784,580 6,499 -
Pension Builder Plus - Rollover IRA 30,919 30,241 678 -
Personal Variable 1,288,642 1,282,189 6,453 -
Premier Variable 8,043,427 7,979,328 64,099 -
The Principal Variable Annuity 31,526,342 31,250,687 275,655 -
-------------------------------------------------------------------
-------------------------------------------------------------------
41,680,409 41,327,025 353,384 -
World Division:
Personal Variable 1,528,673 1,402,339 47,855 78,479
Premier Variable 11,665,158 10,404,975 403,057 857,126
The Principal Variable Annuity 108,242,323 91,434,654 4,659,202 12,148,467
----------------------------------------------------------------------
----------------------------------------------------------------------
121,436,154 103,241,968 5,110,114 13,084,072
----------------------------------------------------------------------
======================================================================
$1,288,183,210 $1,032,221,198 $96,057,240 $ 159,904,772
======================================================================
</TABLE>
6. Year 2000 Issues (Unaudited)
Like other investment funds, financial and business organizations and
individuals around the world, Separate Account B could be adversely affected if
the computer systems used by Principal Mutual and other service providers do not
properly process and calculate date-related information and data from and after
January 1, 2000. In 1996, Principal Mutual completed its assessment of the Year
2000 impact on its systems, procedures, customers and business processes. At
December 31, 1997, management estimates that approximately 95% of the identified
modifications have been completed for its Year 2000 project. System testing,
using an isolated test environment, will begin early in 1998. Ultimate project
completion is targeted for early 1999, which is prior to any anticipated impact
on Principal Mutual operations.
The date on which Principal Mutual believes it will complete the Year 2000
modifications are based on management's best estimates, which were derived
utilizing numerous assumptions of future events. Principal Mutual also
recognizes there are outside influences and dependencies relative to its Year
2000 effort, over which it has little or no control. However, Principal Mutual
is putting effort into ensuring these considerations will have minimal impact.
These would include the continued availability of certain resources, third-party
modification plans and many other factors. However, there can be no guarantee
that these estimates will be achieved and actual results could differ from those
anticipated.
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(R) (the Company) as of December 31, 1997 and
1996, and the related consolidated statements of operations, equity and cash
flows for each of the three years in the period ended December 31, 1997. 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(R) at December 31, 1997 and 1996, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Des Moines, Iowa
January 30, 1998
<PAGE>
The Principal Financial Group(R)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended December 31
1997 1996 1995
------------------------------------------
(In Millions)
Revenue
<S> <C> <C> <C>
Premiums and annuity and other considerations $4,668 $5,121 $5,243
Policy and contract charges 658 555 491
Net investment income 2,922 2,869 2,741
Net realized capital gains 219 436 122
Commissions and other income 199 150 143
------------------------------------------
Total revenue 8,666 9,131 8,740
Expenses
Benefits, claims and settlement expenses 5,632 6,087 6,142
Dividends to policyowners 299 299 307
Operating expenses 2,040 1,915 1,740
------------------------------------------
------------------------------------------
Total expenses 7,971 8,301 8,189
------------------------------------------
Income before income taxes 695 830 551
Income taxes 241 304 207
------------------------------------------
==========================================
Net income $ 454 $ 526 $ 344
==========================================
See accompanying notes.
</TABLE>
<PAGE>
The Principal Financial Group(R)
Consolidated Statements of Financial Position
<TABLE>
<CAPTION>
December 31
1997 1996
---------------------------
---------------------------
(In Millions)
Assets
<S> <C> <C>
Debt securities, available-for-sale $21,546 $21,974
Equity securities, available-for-sale 1,273 1,023
Mortgage loans 13,286 12,409
Real estate 2,632 2,474
Policy loans 749 736
Other investments 130 102
Cash and cash equivalents 546 271
Accrued investment income 457 464
Deferred acquisition costs 1,057 1,058
Property held for Company use 232 222
Separate account assets 23,627 17,218
Other assets 1,519 1,191
---------------------------
===========================
Total assets $67,054 $59,142
===========================
===========================
Liabilities
Contractholder funds $23,179 $23,194
Future policy benefits and claims 11,239 10,575
Other policyowner funds 314 454
Policyowner dividends payable 444 447
Debt 459 399
Income taxes currently payable 298 283
Deferred income taxes 803 623
Separate account liabilities 23,560 17,166
Other liabilities 1,474 1,347
---------------------------
---------------------------
Total liabilities 61,770 54,488
Equity
Surplus 4,257 3,803
Net unrealized gains on available-for-sale securities 1,038 860
Foreign currency translation adjustment, net (11) (9)
---------------------------
---------------------------
Total equity 5,284 4,654
---------------------------
===========================
Total liabilities and equity $67,054 $59,142
===========================
See accompanying notes.
</TABLE>
<PAGE>
The Principal Financial Group(R)
Consolidated Statements of Equity
<TABLE>
<CAPTION>
Net Unrealized Foreign Currency
Gains on Translation
Available-for-Sale Adjustment, net Total Equity
Surplus Securities
---------------------------------------------------------------
(In Millions)
<S> <C> <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 patterns:
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 patterns:
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
Net income 454 - - 454
Increase in unrealized appreciation on debt
securities, available-for-sale - 197 - 197
Increase in unrealized appreciation on equity
securities, available-for-sale, including
seed money in separate accounts - 118 - 118
Adjustments for assumed changes in
amortization patterns:
Deferred acquisition costs - (44) - (44)
Unearned revenue reserves - 4 - 4
Provision for deferred income taxes - (97) - (97)
Change in foreign currency translation
adjustment, net - - (2) (2)
===============================================================
Balances at December 31, 1997 $4,257 $1,038 $(11) $5,284
===============================================================
See accompanying notes.
</TABLE>
<PAGE>
The Principal Financial Group(R)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
1997 1996 1995
------------------------------------
(In Millions)
Operating activities
<S> <C> <C> <C>
Net income $ 454 $ 526 $ 344
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of deferred acquisition costs 170 178 145
Additions to deferred acquisition costs (213) (215) (206)
Accrued investment income 7 15 6
Contractholder and policyowner liabilities and dividends 1,657 240 523
Current and deferred income taxes 96 20 93
Net realized capital gains (219) (436) (122)
Depreciation and amortization expense 117 112 74
Other (393) (230) 440
------------------------------------
------------------------------------
Net adjustments 1,222 (316) 953
------------------------------------
Net cash provided by operating activities 1,676 210 1,297
Investing activities Available-for-sale securities:
Purchases (7,827) (11,762) (13,195)
Sales 7,493 8,949 9,333
Maturities 1,204 2,796 2,485
Mortgage loans acquired or originated (9,925) (2,955) (2,837)
Mortgage loans sold or repaid 8,977 1,619 1,702
Real estate acquired (309) (166) (143)
Real estate sold 198 253 38
Net change in policy loans (13) (25) (28)
Net change in property held for Company use (11) (18) (23)
Net change in other investments (38) (74) (12)
------------------------------------
Net cash used in investment activities (251) (1,383) (2,680)
Financing activities
Issuance of debt 75 43 21
Principal repayments of debt (28) (29) (71)
Proceeds of short-term borrowings 5,089 1,451 990
Repayment of short-term borrowings (4,974) (1,282) (990)
Investment contract deposits 4,134 7,496 6,756
Investment contract withdrawals (5,446) (6,530) (5,310)
------------------------------------
Net cash provided by (used in) financing activities (1,150) 1,149 1,396
------------------------------------
Net increase (decrease) in cash and cash equivalents 275 (24) 13
Cash and cash equivalents at beginning of year 271 295 282
------------------------------------
====================================
Cash and cash equivalents at end of year $ 546 $ 271 $ 295
====================================
See accompanying notes.
</TABLE>
<PAGE>
The Principal Financial Group(R)
Notes to Consolidated Financial Statements
December 31, 1997
1. Nature of Operations and Significant Accounting Policies
Description of Business
The Principal Financial Group(R) (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.
Pending Reorganization
On September 18, 1997, the board of directors adopted a Plan of Reorganization
whereby Principal Mutual will form a new mutual insurance holding company
(Principal Mutual Holding Company) and convert to a stock life insurance company
(Principal Life Insurance Company). All of the shares of Principal Life
Insurance Company will be issued initially to Principal Mutual Holding Company
through two newly formed intermediate holding companies, and there are no
current plans to offer the stock of Principal Life Insurance Company or its
parent companies to third parties. The reorganization will not become effective
unless approved by policyowners and regulatory authorities. The reorganization
itself will not have a material financial impact on the Company.
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 $1.1 billion at December
31, 1997 and $1.5 billion at December 31, 1996, and total revenues were $294
million in 1997, $349 million in 1996 and $320 million in 1995. During 1997,
1996 and 1995, the Company included $19 million, $(3) million and $(9) million,
respectively, in net investment income representing the Company's share of
current year net income (losses) of the unconsolidated entities.
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(R)
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 through 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
also 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(R)
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. Valuation allowances are
established when indicators of impairment are present and the undiscounted cash
flows to be generated by the real estate fall below 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
net investment 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 has used 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 on deposit with the Company and generally include reserves for pension and
annuity contracts. Reserves on investment contracts are equal to the cumulative
deposits less any applicable charges plus credited interest.
<PAGE>
The Principal Financial Group(R)
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. 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. Premiums from these products are recognized as premium
revenue when due.
Group life and health insurance premiums are generally recorded as premium
revenue over the term of the coverage. Some group contracts allow for premiums
to be adjusted to reflect emerging experience. Such adjusted premiums are
recognized in the period that the related experience emerges. Fees for contracts
providing claim processing or other administrative services are recorded over
the period the service is provided.
Related policy benefits and expenses for individual and group life and health
insurance products are associated with earned premiums and result in the
recognition of profits over the expected lives of the policies and contracts.
<PAGE>
The Principal Financial Group(R)
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
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.
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.
<PAGE>
The Principal Financial Group(R)
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Guaranty-fund Assessments
Guaranty-fund assessments are accrued when the Company receives notice that an
amount is payable to a guaranty fund. The Company also accrues for possible
guaranty-fund assessments for which notices have not been received and for which
the Company does not anticipate receiving a premium tax credit.
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 for foreign
subsidiaries and certain other transactions are reported as a component of
equity. Other translation adjustments for foreign currency transactions that
affect cash flows are reported in current operations.
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.
<PAGE>
The Principal Financial Group(R)
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
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
1997 1996
-----------------------------
Property held for Company use $302 $285
Accumulated depreciation (70) (63)
=============================
Property held for Company use, net $232 $222
=============================
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
1997 1996
----------------------------
Goodwill $165 $135
Accumulated amortization (16) (22)
----------------------------
Goodwill, net 149 113
Other intangible assets, net 74 34
----------------------------
Total intangible assets $223 $147
============================
Mortgage servicing rights of $432 million and $272 million at December 31, 1997
and 1996, 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.
<PAGE>
The Principal Financial Group(R)
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Reclassifications
Certain reclassifications have been made to the 1995 and 1996 consolidated
financial statements to conform to the 1997 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.
The cost, gross unrealized gains and losses and fair value of debt and equity
securities available-for-sale as of December 31, 1997 and 1996, are as follows
(in millions):
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------------
---------------------------------------------------------------
December 31, 1997
Bonds:
<S> <C> <C> <C> <C>
United States Government and agencies $ 337 $ 1 $ - $ 338
States and political subdivisions 449 15 2 462
Corporate - public 4,014 224 18 4,220
Corporate - private 12,478 856 30 13,304
Mortgage-backed securities 3,124 99 3 3,220
---------------------------------------------------------------
---------------------------------------------------------------
20,402 1,195 53 21,544
Redeemable preferred stocks 2 - - 2
===============================================================
Total debt securities $20,404 $1,195 $53 $21,546
===============================================================
Total equity securities $ 639 $ 664 $30 $ 1,273
===============================================================
December 31, 1996
Bonds:
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
===============================================================
</TABLE>
<PAGE>
The Principal Financial Group(R)
Notes to Consolidated Financial Statements (continued)
2. Investments (continued)
The cost and fair value of debt securities available-for-sale at December 31,
1997, by expected maturity, are as follows (in millions):
Cost Fair Value
--------------------------
--------------------------
Due in one year or less $ 1,433 $ 1,444
Due after one year through five years 6,286 6,522
Due after five years through ten years 5,421 5,767
Due after ten years 4,133 4,586
--------------------------
--------------------------
17,273 18,319
Mortgage-backed and other securities without
a single maturity date 3,131 3,227
--------------------------
==========================
Total $20,404 $21,546
==========================
The above summarized activity is based on expected maturities. Actual maturities
may differ because borrowers may have the right to call or pre-pay obligations.
Major categories of net investment income are summarized as follows (in
millions):
<TABLE>
<CAPTION>
Year ended December 31
1997 1996 1995
------------------------------------------
<S> <C> <C> <C>
Debt securities available-for-sale $1,589 $1,608 $1,603
Equity securities available-for-sale 39 33 41
Mortgage loans 1,138 1,078 1,008
Real estate 350 356 317
Policy loans 50 49 48
Cash and cash equivalents 9 15 8
Other 109 60 24
------------------------------------------
------------------------------------------
3,284 3,199 3,049
Less investment expenses (362) (330) (308)
------------------------------------------
==========================================
Net investment income $2,922 $2,869 $2,741
==========================================
</TABLE>
<PAGE>
The Principal Financial Group(R)
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):
<TABLE>
<CAPTION>
Year ended December 31
1997 1996 1995
-------------------------------------------
Debt securities, available-for-sale:
<S> <C> <C> <C>
Gross gains $ 82 $121 $144
Gross losses (43) (73) (40)
Equity securities, available-for-sale:
Gross gains 132 451 40
Gross losses (26) (5) (9)
Mortgage loans 6 (4) 3
Real estate 64 14 6
Other 4 (68) (22)
===========================================
Net realized capital gains $219 $436 $122
===========================================
</TABLE>
Proceeds from sales of investments (excluding call and maturity proceeds) in
debt securities were $5.0 billion, $7.8 billion and $6.5 billion in 1997, 1996
and 1995, respectively. Gross gains of $48 million, $76 million and $93 million
and gross losses of $43 million, $69 million and $35 million in 1997, 1996 and
1995, respectively, were realized on those sales.
Of the 1997, 1996 and 1995 proceeds, $4.0 billion, $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 $29 million, $64 million and $66 million and
gross losses of $10 million, $53 million and $17 million in 1997, 1996 and 1995,
respectively, were realized on sales of mortgage-backed securities. At December
31, 1997, the Company had security purchases payable totaling $266 million
relating to the purchases of mortgage-backed securities at forward dates.
Prior to 1996, 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(R)
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 cumulative amount
of net unrealized gains on available-for-sale securities is as follows (in
millions):
<TABLE>
<CAPTION>
December 31
1997 1996
-----------------------------
<S> <C> <C>
Unrealized appreciation on debt securities, available-for-sale $1,142 $945
Unrealized appreciation on equity securities, available-for-sale,
including seed money in separate accounts 639 521
Adjustments for assumed changes in amortization patterns:
Deferred acquisition costs (204) (160)
Unearned revenue reserves 21 17
Provision for deferred income taxes (560) (463)
=============================
Net unrealized gains on available-for-sale securities $1,038 $860
=============================
</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, 1997 and 1996, 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
--------------- ----------------
1997 1996 1997 1996
----------------------- -----------------------
----------------------- -----------------------
Pacific 28% 30% Industrial 33% 35%
South Atlantic 24 22 Retail 33 34
North Central 16 17 Office 29 28
Mid Atlantic 14 15 Other 5 3
South Central 9 7
New England 5 5
Mountain 4 4
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.
<PAGE>
The Principal Financial Group(R)
Notes to Consolidated Financial Statements (continued)
2. Investments (continued)
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
1997 1996
-------------------------
Balance at beginning of year $121 $115
Provision for losses 8 16
Releases due to write-downs, sales and foreclosures (8) (10)
=========================
Balance at end of year $121 $121
=========================
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.
The Company was servicing approximately 371,000 and 328,000 residential mortgage
loans with aggregate principal balances of approximately $29.1 billion and $24.4
billion at December 31, 1997 and 1996, respectively. In connection with these
mortgage servicing activities, the Company held funds in trust for others
totaling approximately $210 million and $175 million at December 31, 1997 and
1996, 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.
<PAGE>
The Principal Financial Group(R)
Notes to Consolidated Financial Statements (continued)
2. Investments (continued)
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
1997 1996
-----------------------------
Real estate $2,985 $2,743
Accumulated depreciation (353) (269)
=============================
Real estate, net $2,632 $2,474
=============================
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 $1.2 billion and $1.4 billion at
December 31, 1997 and 1996, respectively. The Company is committed to providing
additional mortgage financing for such joint ventures aggregating $120 million
at December 31, 1997.
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 ($36
million at December 31, 1997, and $148 million at December 31, 1996) 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, 1997 and 1996, were $1,037 million and $970 million,
respectively, and the credit exposure at December 31, 1997 and 1996 was $21
million and $15 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 six years and three
years at December 31, 1997 and 1996, respectively. The net amount payable or
receivable from
<PAGE>
The Principal Financial Group(R)
Notes to Consolidated Financial Statements (continued)
3. Derivatives Held or Issued for Purposes Other Than Trading (continued)
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, 1997, the Company had various foreign currency
exchange agreements with maturities ranging from 1998 to 2018, with an aggregate
notional amount involved of approximately $410 million and the credit exposure
was $17 million. At December 31, 1996, such maturities ranged from 1997 to 2018
with an aggregate notional amount of approximately $373 million and a credit
exposure of $9 million. The average unexpired term of the swaps was
approximately seven years at both December 31, 1997 and 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 both December 31, 1997 and 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 in the
Company's consolidated statements of financial position.
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
1997 1996 1995
-----------------------------------------
Balance at beginning of year $ 800 $ 810 $ 824
Incurred:
Current year 2,723 3,051 3,179
Prior years (21) (29) (5)
-----------------------------------------
-----------------------------------------
Total incurred 2,702 3,022 3,174
Payments:
Current year 2,235 2,535 2,654
Prior years 497 497 534
-----------------------------------------
Total payments 2,732 3,032 3,188
-----------------------------------------
Balance at end of year:
Current year 476 516 525
Prior years 294 284 285
-----------------------------------------
=========================================
Total balance at end of year $ 770 $ 800 $ 810
=========================================
<PAGE>
The Principal Financial Group(R)
Notes to Consolidated Financial Statements (continued)
4. Accident and Health Reserves (continued)
The activity summary in the liability for unpaid accident and health claims
shows a decrease of $21 million, $29 million and $5 million to the December 31,
1996, 1995 and 1994 liability for unpaid accident and health claims,
respectively, arising in prior years. Such liability adjustments, which affected
current operations during 1997, 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 trends have been considered in establishing the current year liability for
unpaid accident and health claims.
5. Debt
The components of debt as of December 31, 1997 and December 31, 1996 are as
follows (in millions):
December 31
1997 1996
-----------------------------
7.875% notes payable, due 2024 $199 $199
8% notes payable, due 2044 99 99
Mortgages and other notes payable 161 101
=============================
Total debt $459 $399
=============================
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 each of the years ended December 31, 1997, 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 mortgages and other notes payable are financings for real estate
developments. The Company has obtained loans with various lenders to finance
these developments. Outstanding principal balances as of December 31, 1997 range
from $1 million to $10.7 million per development with interest rates generally
ranging from 6.6% to 8.0%. Outstanding principal balances as of December 31,
1996 range from $1 million to $9 million per development with interest rates
generally ranging from 5.9% to 7.7%.
<PAGE>
The Principal Financial Group(R)
Notes to Consolidated Financial Statements (continued)
5. Debt (continued)
At December 31, 1997, future annual maturities of debt are as follows (in
millions):
1998 $ 79
1999 20
2000 3
2001 3
2002 3
Thereafter 351
----------
==========
Total future maturities of debt $459
==========
Cash paid for interest for 1997, 1996 and 1995 was $63 million, $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 $225 million and $15 million at December
31, 1997 and 1996, respectively, and other outstanding borrowings from certain
financing transactions of $154 million at December 31, 1996. These outstanding
borrowings are included in other liabilities in the consolidated statements of
financial position.
6. Income Taxes
The Company's income tax expense (benefit) is as follows (in millions):
Year ended December 31
1997 1996 1995
----------------------------------------
Current income taxes:
Federal $144 $145 $104
State and foreign 3 (1) 5
Realized capital gains 11 210 41
----------------------------------------
Total current income taxes 158 354 150
Deferred income taxes 83 (50) 57
========================================
Total income taxes $241 $304 $207
========================================
The Company's provision for income taxes may not have the customary relationship
of taxes to income. Differences between the prevailing corporate income tax rate
of 35% times the pre-tax income and the Company's effective tax rate on pre-tax
income are generally due to inherent differences between income for financial
reporting purposes and income for tax purposes, and the establishment of
adequate provisions for any challenges of the tax filings and tax payments to
the various taxing jurisdictions.
<PAGE>
The Principal Financial Group(R)
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 is currently completing 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
1997 1996
-----------------------------
Deferred income tax liabilities $1,259 $1,110
Deferred income tax assets 456 487
=============================
Deferred income taxes, net $ 803 $ 623
=============================
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 1997, 1996 and 1995 was $143 million, $285 million
and $99 million, respectively.
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.
<PAGE>
The Principal Financial Group(R)
Notes to Consolidated Financial Statements (continued)
7. Employee and Agent Benefits (continued)
The pension plans' combined funded status, reconciled to amounts recognized in
the consolidated statements of financial position and consolidated statements of
operations, is as follows (in millions):
<TABLE>
<CAPTION>
December 31
1997 1996
------------------------------
------------------------------
Actuarial present value of benefit obligations:
<S> <C> <C>
Vested benefit obligation $515 $482
==============================
==============================
Accumulated benefit obligation $525 $495
==============================
==============================
Plan assets at fair value, primarily affiliated mutual funds
and investment contracts of the Company $980 $841
Projected benefit obligation 700 732
------------------------------
Plan assets in excess of projected benefit obligation 280 109
Unrecognized net gains and funding different from that assumed and from
changes in assumptions (182) (29)
Unrecognized prior service cost 14 17
Unrecognized net transition asset (49) (60)
------------------------------
==============================
Prepaid pension asset $ 63 $ 37
==============================
</TABLE>
Net periodic pension cost (income) included the following components (in
millions):
<TABLE>
<CAPTION>
Year ended December 31
1997 1996 1995
---------------------------------------------
<S> <C> <C> <C>
Service cost $ 41 $ 38 $ 25
Interest cost on projected benefit obligation 52 46 39
Actual return on plan assets (128) (118) (144)
Net amortization and deferral 40 42 79
---------------------------------------------
=============================================
Total net periodic pension cost (income) $ 5 $ 8 $ (1)
=============================================
</TABLE>
The weighted-average assumed discount rate used in determining the projected
benefit obligation was 7.25% at both December 31, 1997 and 1996, and 7% at
December 31, 1995. 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
1997, 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 9.5% for those trusts not subject to income taxes
in each year. The assumed rate of increase in future compensation levels varies
by age for both the qualified and non-qualified pension plans.
<PAGE>
The Principal Financial Group(R)
Notes to Consolidated Financial Statements (continued)
7. Employee and Agent Benefits (continued)
In addition, the Company has defined contribution plans that are generally
available to all employees and agents who are age 21 or older and have completed
one year of service. Eligible participants may contribute up to 15% of their
compensation, to a maximum of $9,500 annually to the plans in both 1997 and
1996, and $9,240 in 1995. The Company matches the participant's contribution at
a 50% contribution rate up to a maximum Company contribution of 2% of the
participant's compensation. The Company contributed $15 million in 1997, $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 the employee's date of hire until
retirement based on attained service divided by potential service to age 65 with
a minimum of 35 years of potential service. The Company's policy is to fund the
cost of providing retiree benefits in the years that the employees are providing
service to the Company. The Company's funding policy is to deposit the actuarial
normal cost and an accrued liability over a 30-year period as a percentage of
compensation.
The postretirement plans' combined funded status, reconciled to amounts
recognized in the consolidated statements of financial position and consolidated
statements of operations, is as follows (in millions):
<TABLE>
<CAPTION>
December 31
1997 1996
-------------------------------
Plan assets at fair value, primarily affiliated mutual funds and
<S> <C> <C>
investment contracts of the Company $300 $247
Accumulated postretirement benefit obligation:
Retirees (84) (87)
Eligible employees (33) (38)
Active employees not eligible to retire (97) (93)
-------------------------------
-------------------------------
Total accumulated postretirement benefit obligation (214) (218)
-------------------------------
-------------------------------
Excess of plan assets over accumulated postretirement benefit obligation
86 29
Unrecognized net gains and funding different from that assumed and from
changes in assumptions (53) (10)
Unrecognized net transition obligation 12 17
-------------------------------
===============================
Postretirement benefit asset $ 45 $ 36
===============================
</TABLE>
<PAGE>
The Principal Financial Group(R)
Notes to Consolidated Financial Statements (continued)
7. Employee and Agent Benefits (continued)
The net periodic postretirement benefit cost included the following components
(in millions):
<TABLE>
<CAPTION>
Year ended December 31
1997 1996 1995
----------------------------------------------
----------------------------------------------
<S> <C> <C> <C>
Service cost $12 $12 $ 7
Interest cost on accumulated postretirement benefit cost
16 15 14
Actual return on plan assets (41) (32) (43)
Amortization of transition obligation 4 4 4
Net amortization of gains and losses 25 19 34
==============================================
Total net periodic postretirement benefit cost $16 $18 $16
==============================================
</TABLE>
The weighted-average assumed discount rate used in determining the accumulated
postretirement benefit obligation was 7.25% at both December 31, 1997 and 1996,
and 7% at December 31, 1995. 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 1997, 1996 and 1995, the expected long-term rates of return on plan
assets were approximately 5% (after estimated income taxes) for those trusts
subject to income taxes and approximately 8% for those trusts not subject to
income taxes in each year. 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 9% in 1997, declines to 8.5% in
2002 and then declines to an ultimate rate of 6% in 2030. 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, 1997
would increase by 27.7% ($45 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, 1997 by 24% ($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(R)
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):
<TABLE>
<CAPTION>
Year ended
December 31
1997 1996 1995
----------------------------------------------
----------------------------------------------
Premiums and annuity and other considerations:
<S> <C> <C> <C>
Direct $4,601 $5,034 $5,171
Assumed 106 116 99
Ceded (39) (29) (27)
==============================================
Net premiums and annuity and other considerations $4,668 $5,121 $5,243
==============================================
==============================================
Benefits, claims and settlement expenses:
Direct $5,596 $6,003 $6,070
Assumed 102 109 99
Ceded (66) (25) (27)
==============================================
Net benefits, claims and settlement expenses $5,632 $6,087 $6,142
==============================================
</TABLE>
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 $344 million in 1997, $310 million in
1996 and $260 million in 1995. At December 31, 1997, future minimum annual
rental commitments under these noncancelable operating leases are as follows (in
millions):
1998 $ 274
1999 241
2000 201
2001 162
2002 117
Thereafter 448
-------------
=============
Total future minimum lease receipts $1,443
=============
<PAGE>
The Principal Financial Group(R)
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 both 1997 and 1996, and $69
million in 1995. At December 31, 1997, future minimum annual rental commitments
under these noncancelable operating leases are as follows (in millions):
1998 $ 44
1999 35
2000 26
2001 19
2002 14
Thereafter 22
-----------
Total future minimum lease payments $160
===========
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
December 31, 1997 and 1996, approximately $6 million and $15 million,
respectively, is accrued 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(R)
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 counterparties. Such estimates do not consider the
tax impact of the realization of unrealized gains or losses. In many cases, the
fair value estimates cannot be substantiated by comparison to independent
markets. In addition, the disclosed fair value may not be realized in the
immediate settlement of the financial instrument.
Fair values of public debt and equity securities have been determined by the
Company from public quotations, when available. Private placement securities and
other 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, cash
and cash equivalents and accrued investment income in the accompanying
consolidated statements of financial position approximate 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(R)
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, 1997 and 1996, are as follows (in millions):
<TABLE>
<CAPTION>
1997 1996
--------------------------- ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------------------- ----------------------------
--------------------------- ----------------------------
Assets (liabilities)
<S> <C> <C> <C> <C>
Debt securities (see Note 2) $21,546 $21,546 $21,974 $21,974
Equity securities (see Note 2) 1,273 1,273 1,023 1,023
Mortgage loans 13,286 14,291 12,409 12,823
Policy loans 749 749 736 736
Other investments 130 130 102 102
Cash and cash equivalents 546 546 271 271
Accrued investment income 457 457 464 464
Investment-type insurance contracts (22,115) (22,637) (22,196) (22,158)
Debt (459) (486) (399) (427)
</TABLE>
11. Statutory Insurance Financial Information
Principal Mutual, the largest member of The Principal Financial Group(R),
prepares statutory financial statements in accordance with the accounting
practices prescribed or permitted by the Insurance Division of the Department of
Commerce of the State of Iowa. Currently "prescribed" statutory accounting
practices include a variety of publications of the National Association of
Insurance Commissioners as well as state laws, regulations and general
administrative rules. "Permitted" statutory accounting practices encompass all
accounting practices not so prescribed. The impact of any permitted accounting
practices on statutory surplus is not material. The accounting practices used to
prepare statutory financial statements for regulatory filings differ in certain
instances from GAAP. Prescribed or permitted statutory accounting practices are
used by state insurance departments to regulate the Company.
The NAIC is in the process of codifying statutory accounting practices
(Codification), the result of which is expected to constitute the only source of
"prescribed" statutory accounting practices. Accordingly, that project, which is
expected to be approved by the NAIC in 1998, will likely change, to some extent,
prescribed statutory accounting practices and may result in changes to the
accounting practices that Principal Mutual uses to prepare its statutory-basis
financial statements. Codification will require adoption by the various states
before it becomes the prescribed statutory basis of accounting for insurance
companies domiciled within those states. The impact on Principal Mutual's 1997
statutory surplus has not yet been determined at this time.
<PAGE>
The Principal Financial Group(R)
Notes to Consolidated Financial Statements (continued)
11. Statutory Insurance Financial Information (continued)
Life/Health insurance companies are subject to certain risk-based capital (RBC)
requirements as specified by the NAIC. Under those requirements, the amount of
capital and surplus maintained by a life/health insurance company is to be
determined based on the various risk factors related to it. At December 31,
1997, Principal Mutual meets the RBC requirements.
The following summary reconciles the assets and equity at December 31, 1997,
1996 and 1995, and net income for the years ended December 31, 1997, 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, 1997
As reported in accordance with statutory accounting practices
<S> <C> <C> <C>
- unconsolidated $63,957 $2,811 $432
Additions (deductions):
Unrealized gain on debt securities available-for-sale 1,176 1,176 -
Other investment adjustments 853 1,141 27
Adjustments to insurance reserves and dividends (173) (131) (41)
Deferral of policy acquisition costs 1,057 1,057 43
Surplus note reclassification as debt - (298) -
Provision for deferred federal income taxes and other tax
reclassifications - (643) 7
Other - net 184 171 (14)
=========================================
As reported in these consolidated GAAP financial statements $67,054 $5,284 $454
=========================================
December 31, 1996
As reported in accordance with statutory accounting practices
- unconsolidated $56,837 $2,504 $415
Additions (deductions):
Unrealized gain on debt securities available-for-sale 964 964 -
Other investment adjustments 355 901 53
Adjustments to insurance reserves and dividends (156) (115) (41)
Deferral of policy acquisition costs 1,058 1,058 38
Surplus note reclassification as debt - (298) -
Provision for deferred federal income taxes and other tax
reclassifications (6) (493) 60
Other - net 90 133 1
-----------------------------------------
=========================================
As reported in these consolidated GAAP financial statements $59,142 $4,654 $526
=========================================
</TABLE>
<PAGE>
The Principal Financial Group(R)
Notes to Consolidated Financial Statements (continued)
11. Statutory Insurance Financial Information (continued)
<TABLE>
<CAPTION>
Assets Equity Net Income
-----------------------------------------
December 31, 1995
As reported in accordance with statutory accounting practices
<S> <C> <C> <C>
- unconsolidated $51,268 $2,208 $263
Additions (deductions):
Unrealized gain on debt securities available-for-sale 1,553 1,553 -
Other investment adjustments 228 911 60
Adjustments to insurance reserves and dividends (128) (28) (7)
Deferral of policy acquisition costs 937 937 61
Surplus note reclassification as debt - (298) -
Provision for deferred federal income taxes and other tax
reclassifications (9) (770) (20)
Other - net 115 93 (13)
=========================================
As reported in these consolidated GAAP financial statements $53,964 $4,606 $344
=========================================
</TABLE>
12. Business Acquisitions and Disposition
During 1997, various acquisitions were made by certain of the Company's
subsidiaries at purchase prices aggregating $101 million. The acquisitions were
all accounted for using the purchase method and the results of operations of the
acquired businesses have been included in the financial statements of the
subsidiaries from the dates of acquisition. Such acquisitions increased total
assets at December 31, 1997 and total 1997 revenue of the subsidiaries by $459
million and $88 million, respectively.
During 1997, the Company terminated a portion of its group medical business and
helped insureds find replacement coverage. The Company has retained
responsibility for the payment of claims incurred on this business prior to the
effective date of the termination and has included an estimate of the ultimate
liability for these claims in its financial statements. Annual premiums related
to this business were approximately $380 million at date of transfer.
13. Subsequent Events
On November 3, 1997, the Company entered into a definitive agreement with
Coventry Corporation to effectively merge substantially all of the Company's
managed health care operations with Coventry Corporation, a previously
unaffiliated managed care company. The closing of the definitive agreement is
subject to regulatory approvals and various other conditions. The Company will
own 40% of a resulting new company, Coventry Health Care, Inc., which will be
publicly traded, and will recognize no gain or loss on the transaction.
Subsequent to closing, which is expected in the first quarter of 1998, the
Company will account for its investment in the new entity using the equity
method and will no longer consolidate the
<PAGE>
The Principal Financial Group(R)
Notes to Consolidated Financial Statements (continued)
13. Subsequent Events (continued)
transferred businesses. Total assets at December 31, 1997, and total revenues
and pretax loss for the year then ended, were approximately $419 million, $883
million and $(26) million, respectively, for the transferred businesses. The
Company also intends to enter into a reinsurance agreement on January 1, 2000
whereby Coventry Health and Life Insurance Company, a subsidiary of Coventry
Corporation, will reinsure a portion of the Company's traditional group
indemnity health insurance business in overlapping markets (1997 revenue of
approximately $550 million) at that time.
In December 1997, the Company signed a definitive agreement with EVEREN Capital
Corporation to sell Principal Securities Holding Corporation and its subsidiary,
Principal Financial Securities, Inc., an investment banking and stock brokerage
firm for $75 million. The transaction, which required regulatory approval,
closed in January 1998. Total assets of Principal Securities Holding Corporation
at December 31, 1997, and total revenues and pretax loss for the year then
ended, were approximately $91 million, $144 million and $(10) million,
respectively.
14. Year 2000 Issues (Unaudited)
In 1995, the Company began investigating the potential impact of the year 2000
on its systems, procedures, customers and business processes. Some changes began
immediately, while others waited for an assessment that was completed in 1996.
The Year 2000 assessment provided information used to determine what system
components must be changed or replaced to minimize the impact of the calendar
change from 1999 to 2000. The goal of the Company is to have its systems and
procedures function correctly, regardless of the current date on the calendar.
The Company will continue to use internal and external resources to modify,
replace, and test the Year 2000 modifications. Management estimates
approximately 95% of the identified modifications have been completed for its
Year 2000 project. System testing, using an isolated test environment, will
begin early in 1998. Ultimate project completion is targeted for early 1999,
which is prior to any anticipated impact on Company operations. The total cost
for the project is estimated to be $20 million, with the costs being expensed as
incurred until completion.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events. The Company
also recognizes there are outside influences and dependencies relative to its
Year 2000 effort, over which it has little or no control. However, the Company
is putting effort into ensuring these considerations will have minimal impact.
These would include the continued availability of certain resources, third-party
modification plans and many other factors. However, there can be no guarantee
that these estimates will be achieved and actual results could differ from those
anticipated.
<PAGE>
PART C
PENSION BUILDER VARIABLE CONTRACT
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements included in the Registration Statement
(1) Part A:
Condensed Financial Information for each of the 10 years
ended December 31, 1997.
(2) Part B:
Principal Mutual Life Insurance Company Separate
Account B:
Report of Independent Auditors.
Statement of Net Assets, December 31, 1997.
Statement of Operations for the year ended
December 31, 1997.
Statements of Changes in Net Assets for the years
ended December 31, 1997 and 1996.
Notes to Financial Statements.
The Principal Financial Group(R):
Report of Independent Auditors.
Consolidated Statements of Operations for the years
ended December 31, 1997 and 1996.
Consolidated Statements of Financial Position,
December 31, 1997 and 1996.
Consolidated Statements of Equity for the years
ended December 31, 1997 and 1996.
Consolidated Statements of Cash Flows for the
years ended December 31, 1997 and 1996.
Notes to Consolidated Financial Statements.
(b) Exhibits
(1) Board resolution of Registrant. (Filed 4/12/96)
(3a) Distribution Agreement (Filed 4/12/96)
(3b) Selling Agreement (Filed 4/12/96)
(4a) Form of Variable Annuity Contract (Filed 4/12/96)
(4b) Form of Variable Annuity Contract (Filed 4/12/96)
(4c) Form of Variable Annuity Contract (Filed 4/12/96)
(5) Form of Variable Annuity Application (Filed 4/12/96)
(6a) Articles of Incorporation of Depositor (Filed 4/12/96)
(6b) Bylaws of Depositor (Filed 4/12/96)
(9) Opinion of Counsel (Filed 4/12/96)
(10a) Consent of Independent Auditors
(10b) Powers of Attorney
(13a) Total Return Calculation (Filed 4/12/96)
(13b) Annualized Yield for Separate Account B (Filed 4/12/96)
(27) Financial Data Schedule for Separate Account B
<PAGE>
Item 25. Officers and Directors of the Depositor
Principal Mutual Life Insurance Company is managed by a Board of
Directors which is elected by its policyowners. The directors and
executive officers of the Company, their positions with the Company,
including Board Committee memberships, and their principal business
address, are as follows:
DIRECTORS: Principal
Name, Positions and Offices Business Address
MARY VERMEER ANDRINGA Vermeer Manufacturing Company
Director Box 200
Member, Nominating Committee Pella, IA 50219-0200
RUTH M. DAVIS The Pymatuning Group, Inc.
Director Suite 570, 4900 Seminary Road
Member, Nominating Committee Alexandria, VA 22311
DAVID J. DRURY The Principal Financial Group
Director Des Moines, IA 50392
Chairman of the Board
Chief Executive Officer
Chair, Executive Committee
C. DANIEL GELATT, JR. NMT Corporation
Director 2004 Kramer Street
Member, Executive Committee La Crosse, WI 54603
Chair, Human Resources
Committee
J. BARRY GRISWELL The Principal Financial Group
Director and Des Moines, IA 50392
President
G. DAVID HURD The Principal Financial Group
Director Des Moines, IA 50392
Member, Executive and
Nominating Committees
THEODORE M. HUTCHISON 4019 Oak Forest Drive
Director Des Moines, IA 50312
Member, Nominating Committees
CHARLES S. JOHNSON Pioneer Hi-Bred International, Inc.
Director 400 Locust, Ste. 700 Capital Square
Member, Audit Committee Des Moines, IA 50309
WILLIAM T. KERR Meredith Corporation
Director 1716 Locust St.
Member, Executive Committee Des Moines, IA 50309-3023
and Chair, Nominating
Committee
LEE LIU IES Industries Inc.
Director Post Office Box 351
Member, Executive and Cedar Rapids, IA 52406
Human Resources Committees
VICTOR. H. LOEWENSTEIN Egon Zehnder International
Director 350 Park Avenue - 8th Floor
Member, Audit New York, NY 10022
Committee
RONALD D. PEARSON Hy-Vee, Inc.
Director 5820 Westown Parkway
Member, Human Resources West Des Moines, IA 50266
Committee
JOHN R. PRICE The Chase Manhattan Corporation
Director 270 Park Avenue - 44th Floor
Member, Nominating Committee New York, NY 10017
DONALD M. STEWART The College Board
Director 45 Columbus Avenue
Member, Human Resources New York, NY 10023-6992
Committee
ELIZABETH E. TALLETT Dioscor, Inc.
Director 48 Federal Twist Road
Chair, Audit Committee Stockton, NJ 08559
DEAN D. THORNTON 1602- 34 Court West
Director Seattle, WA 98199
Member, Audit Committee
FRED W. WEITZ Essex Meadows, Inc.
Director 800 Second Avenue, Suite 150
Member, Human Resources Des Moines, IA 50309
Committee
Executive Officers (Other than Directors):
JOHN E. ASCHENBRENNER Senior Vice President
DENNIS P. FRANCIS Senior Vice President
THOMAS J. GAARD Senior Vice President
MICHAEL H.GERSIE Senior Vice President
THOMAS J. GRAF Senior Vice President
RONALD E. KELLER Executive Vice President
GREGG R. NARBER Senior Vice President and
General Counsel
MARY A. O'KEEFE Senior Vice President
RICHARD L. PREY Senior Vice President
CARL C. WILLIAMS Senior Vice President and Chief
Information Officer
Item 26. Persons Controlled by or Under Common Control with Depositor
Principal Mutual Life Insurance Company (incorporated as a
mutual life insurance company under the laws of Iowa);
Sponsored the organization of the following mutual funds,
some of which it controls by virtue of owning voting
securities:
Principal Balanced Fund, Inc.(a Maryland Corporation) 0.74% of
shares outstanding owned by Principal Mutual Life Insurance
Company (including subsidiaries and affiliates) on January 30,
1998.
Principal Blue Chip Fund, Inc.(a Maryland Corporation) 0.95% of
shares outstanding owned by Principal Mutual Life Insurance
Company (including subsidiaries and affiliates) on January 30,
1998.
Principal Bond Fund, Inc.(a Maryland Corporation) 1.35% of shares
outstanding owned by Principal Mutual Life Insurance Company
(including subsidiaries and affiliates) on January 30, 1998.
Principal Capital Value Fund, Inc. (a Maryland Corporation)
27.36% of outstanding shares owned by Principal Mutual Life
Insurance Company (including subsidiaries and affiliates) on
January 30, 1998.
Principal Cash Management Fund, Inc. (a Maryland Corporation)
2.34% of outstanding shares owned by Principal Mutual Life
Insurance Company (including subsidiaries and affiliates) on
January 30, 1998.
Principal Government Securities Income Fund, Inc. (a Maryland
Corporation) 0.40% of shares outstanding owned by Principal
Mutual Life Insurance Company (including subsidiaries and
affiliates) on January 30, 1998.
Principal Growth Fund, Inc. (a Maryland Corporation) 0.48% of
outstanding shares owned by Principal Mutual Life Insurance
Company (including subsidiaries and affiliates) on January 30,
1998.
Principal High Yield Fund, Inc. (a Maryland Corporation) 16.72%
of shares outstanding owned by Principal Mutual Life Insurance
Company (including subsidiaries and affiliates) on January 30,
1998.
Principal International Emerging Markets Fund, Inc. (a Maryland
Corporation) 66.10% of shares outstanding owned by Principal
Mutual Life Insurance Company (including subsidiaries and
affiliates) on January 30, 1998.
Principal International Fund, Inc. (a Maryland Corporation)
23.63% of shares outstanding owned by Principal Mutual Life
Insurance Company (including subsidiaries and affiliates) on
January 30, 1998.
Principal International SmallCap Fund, Inc. (a Maryland
Corporation) 61.51% of shares outstanding owned by Principal
Mutual Life Insurance Company (including subsidiaries and
affiliates) on January 30, 1998.
Principal Limited Term Bond Fund, Inc. (a Maryland Corporation)
45.48% of shares outstanding owned by Principal Mutual Life
Insurance Company(including subsidiaries and affiliates) on
January 30, 1998.
Principal MidCap Fund, Inc. (a Maryland Corporation) 0.60% of
shares outstanding owned by Principal Mutual Life Insurance
Company (including subsidiaries and affiliates) on January 30,
1998
Principal Real Estate Fund, Inc. (a Maryland Corporation) 95.34%
of shares outstanding owned by Principal Mutual Life Insurance
Company (including subsidiaries and affiliates) on January 30,
1998
Principal SmallCap Fund, Inc.(a Maryland Corporation) 88.70% of
shares outstanding owned by Principal Mutual Life Insurance
Company (including subsidiaries and affiliates) on January 30,
1998
Principal Special Markets Fund, Inc. (a Maryland Corporation)
96.92% of shares outstanding of the International Emerging
Markets Portfolio, 50.28% of the shares outstanding of the
International Securities Portfolio, 96.87% of shares outstanding
of the International SmallCap Portfolio and 100% of the shares
outstanding of the Mortgage-Backed Securities Portfolio were
owned by Principal Mutual Life Insurance Company (including
subsidiaries and affiliates) on January 30, 1998
Principal Tax-Exempt Bond Fund, Inc. (a Maryland Corporation)
0.56% of shares outstanding owned by Principal Mutual Life
Insurance Company (including subsidiaries and affiliates) on
January 30, 1998.
Principal Tax-Exempt Cash Management Fund, Inc. (a Maryland
Corporation) 0.99% of shares outstanding owned by Principal
Mutual Life Insurance Company (including subsidiaries and
affiliates) on January 30, 1998.
Principal Utilities Fund, Inc. (a Maryland Corporation) 1.45% of
shares outstanding owned by Principal Mutual Life Insurance
Company (including subsidiaries and affiliates) on January 30,
1998.
Principal Variable Contracts Fund, Inc. (a Maryland Corporation)
100% of shares outstanding of the following Accounts owned by
Principal Mutual Life Insurance Company and its Separate Accounts
on January 30, 1998: Aggressive Growth, Asset Allocation,
Balanced, Bond, Capital Value, Government Securities, Growth,
High Yield, International, MidCap and Money Market.
Subsidiaries organized and wholly-owned by Principal Mutual Life
Insurance Company:
a. Principal Holding Company (an Iowa Corporation) A holding
company wholly-owned by Principal Mutual Life Insurance
Company.
b. PT Asuransi Jiwa Principal Egalita Indonesia (an Indonesia
Corporation)
Subsidiaries wholly-owned by Principal Holding Company:
a. Petula Associates, Ltd. (an Iowa Corporation) a real estate
development company.
b. Patrician Associates, Inc. (a California Corporation) a real
estate development company.
c. Principal Development Associates, Inc. (a California
Corporation) a real estate development company.
d. Princor Financial Services Corporation (an Iowa Corporation)
a registered broker-dealer.
e. Invista Capital Management, Inc. (an Iowa Corporation) a
registered investment adviser.
f. Principal Marketing Services, Inc. (a Delaware Corporation)
a corporation formed to serve as an interface between
marketers and manufacturers of financial services products.
g. The Principal Financial Group, Inc. (a Delaware corporation)
a general business corporation established in connection
with the new corporate identity. It is not currently active.
h. Delaware Charter Guarantee & Trust Company (a Delaware
Corporation) a nondepository trust company.
i. The Admar Group, Inc. (a Florida Corporation) a national
managed care service organization that developes and manages
preferred provider organizations.
j. Principal Health Care, Inc. (an Iowa Corporation) a
developer and administrator of managed care systems.
k. Principal Financial Advisors, Inc. (an Iowa Corporation) a
registered investment advisor.
l. Principal Asset Markets, Inc. (an Iowa Corporation) a
residential mortgage loan broker.
m. Principal Portfolio Services, Inc. (an Iowa Corporation) a
mortgage due diligence company.
n. Principal International, Inc. (an Iowa Corporation) a
company formed for the purpose of international business
development.
o. Principal Spectrum Associates, Inc. (a California
Corporation) a real estate development company.
p. Principal Commercial Advisors, Inc. (an Iowa Corporation) a
company that purchases, manages and sells commercial real
estate assets.
q. Principal FC, Ltd. (an Iowa Corporation) a limited purpose
investment corporation.
r. Principal Residential Mortgage, Inc. (an Iowa Corporation) a
residential mortgage loan broker.
s. Equity FC, Ltd. (an Iowa Corporation) engaged in investment
transactions including limited partnership and limited
liability companies.
t. Principal Bank (a Federal Corporation) a Federally chartered
direct delivery savings bank.
u. HealthRisk Resource Group, Inc. (an Iowa Corporation) a
management services organization.
Subsidiaries organized and wholly-owned by Princor Financial Services
Corporation:
a. Principal Management Corporation (an Iowa Corporation) a
registered investment advisor.
b. Principal Investors Corporation (a New Jersey Corporation) a
registered broker-dealer with the Securities Exchange
Commission. It is not currently active.
Subsidiary wholly owned by Delaware Charter Guarantee & Trust Company:
a. Trust Consultants, Inc. (a California Corporation) a
Consulting and Administration of Employee Benefit Plans.
Subsidiary organized and wholly-owned by Principal Health Care, Inc.:
a. Principal Health Care of Texas, Inc. ( a Texas Corporation)
a health maintenance organization.
Subsidiaries owned by The Admar Group, Inc.:
a. Admar Corporation (a California Corporation) a managed care
services organization.
b. Admar Insurance Marketing, Inc. (a California Corporation) a
managed care services organization.
c. Benefit Plan Administrators, Inc. (a Colorado Corporation) a
managed care services organization.
d. SelectCare Management Co., Inc. (a California Corporation) a
managed care services organization.
e. Image Financial & Insurance Services, Inc. (a California
Corporation) a managed care services organization.
f. WM. G. Hofgard & Co., Inc. (a California Corporation) a
managed care services organization.
Subsidiary owned by Petula Associates, Ltd.
a. Magnus Properties, Inc. (an Iowa Corporation) which owns
real estate.
Subsidiaries owned by Principal International, Inc.:
a. Principal Insurance Company (Hong Kong) Limited (a Hong Kong
Corporation) group life and group pension products.
b. Principal International Argentina, S.A. (an Argentina
services corporation).
c. Principal International Asia Limited (a Hong Kong
Corporation) a corporation operating as a regional
headquarters for Asia.
d. Principal International de Chile, S.A. (a Chile
Corporation) a holding company.
e. Principal International Espana, S.A. de Seguros de Vida (a
Spain Corporation) a life insurance company (individual
group), annuities and pension.
f. Principal Mexico Compania de Seguros, S.A. de C.V. (a Mexico
Corporation) a life insurance company (individual and
group), personal accidents.
g. Qualitas Medica, S.A. (an Argentina HMO) a health
maintenance organization.
h. Afore Confia-Principal, S.a. de C.V. (a Mexico Corporation),
pension.
i. Zao Principal International (a Russia Corporation) inactive.
j. Principal Trust Company (Asia) Limited (an Asia trust
company).
k. Principal Asset Management Company (Asia) Ltd. (Hong Kong)
a corporation which manages pension funds.
Subsidiaries owned by Principal International Argentina, S.A.:
a. Ethika Administradora de Fondos de Jubilaciones y Pensions
S.A. (an Argentina company) a pension company.
b. Principal Compania de Seguros de Retiro, S.A. (an Argentina
Corporation) an individual annuity/employee benefit company.
c. Principal Life Compania de Seguros, S.A. (an Argentina
Corporation) a life insurance company.
Subsidiary owned by Principal International de Chile, S.A.:
a. BanRenta Compania de Seguros de Vida, S.A. (a Chile
Corporation) group life and supplemental health, individual
annuities.
Subsidiary owned by Principal International Espana, S.A. de Seguros de
Vida:
a. Princor International Espana Sociedad Anonima de Agencia de
Seguros (a Spain Corporation) an insurance agency.
Subsidiary owned by Afore Confia-Principal, S.A. de C.V.:
a. Siefore Confia-Principal, S.A. de C.V. (a Mexico
Corporation) an investment fund company.
Item 27. Number of Contractowners - As of: March 31, 1998
(1) (2) (3)
Number of Plan Number of
Title of Class Participants Contractowners
-------------- -------------- --------------
BFA Variable Annuity Contracts 95 10
Pension Builder Contracts 1,192 1,340
Personal Variable Contracts 4,388 137
Premier Variable Contracts 17,789 270
Flexible Variable Annuity Contract 29,718 29,718
Item 28. Indemnification
None
Item 29. Principal Underwriters
(a) Princor Financial Services Corporation, principal underwriter for
Registrant, acts as principal underwriter for, Principal Balanced Fund, Inc.,
Principal Blue Chip Fund, Inc., Principal Bond Fund, Inc., Principal Capital
Value Fund, Inc., Principal Cash Management Fund, Inc., Principal Government
Securities Income Fund, Inc., Principal Growth Fund, Inc., Principal High Yield
Fund, Inc., Principal International Emerging Markets Fund, Inc., Principal
International Fund, Inc., Principal International SmallCap Fund, Inc., Principal
Limited Term Bond Fund, Inc., Principal MidCap Fund, Inc., Principal Real Estate
Fund, Inc., Principal SmallCap Fund, Inc., Principal Special Markets Fund, Inc.,
Principal Tax-Exempt Bond Fund, Inc., Principal Tax-Exempt Cash Management Fund,
Inc., Principal Utilities Fund, Inc., Principal Variable Contracts Fund, Inc.
and for variable annuity contracts participating in Principal Mutual Life
Insurance Company Separate Account B, a registered unit investment trust for
retirement plans adopted by public school systems or certain tax-exempt
organizations pursuant to Section 403(b) of the Internal Revenue Code, Section
457 retirement plans, Section 401(a) retirement plans, certain non- qualified
deferred compensation plans and Individual Retirement Annuity Plans adopted
pursuant to Section 408 of the Internal Revenue Code, and for variable life
insurance contracts issued by Principal Mutual Life Insurance Company Variable
Life Separate Account, a registered unit investment trust.
(b) (1) (2)
Positions
and offices
Name and principal with principal
business address underwriter
John E. Aschenbrenner Director
The Principal
Financial Group
Des Moines, IA 50392
Robert W. Baehr Marketing Services
The Principal Officer
Financial Group
Des Moines, IA 50392
Craig L. Bassett Treasurer
The Principal
Financial Group
Des Moines, IA 50392
Michael J. Beer Senior Vice President and
The Principal Chief Operating Officer
Financial Group
Des Moines, IA 50392
Mary L. Bricker Assistant Corporate
The Principal Secretary
Financial Group
Des Moines, IA 50392
Lynn A. Brones Vice President -
The Principal Investment Network
Financial Group
Des Moines, IA 50392
David J. Drury Director
The Principal
Financial Group
Des Moines, IA 50392
Arthur S. Filean Vice President
The Principal
Financial Group
Des Moines, IA 50392
Paul N. Germain Vice President -
The Principal Mutual Fund Operations
Financial Group
Des Moines, IA 50392
Ernest H. Gillum Assistant Vice President -
The Principal Registered Products
Financial Group
Des Moines, IA 50392
William C. Gordon Insurance License Officer
The Principal
Financial Group
Des Moines, IA 50392
Thomas J. Graf Director
The Principal
Financial Group
Des Moines, IA 50392
J. Barry Griswell Director and
The Principal Chairman of the
Financial Group Board
Des Moines, IA 50392
Joyce N. Hoffman Vice President and
The Principal Corporate Secretary
Financial Group
Des Moines, IA 50392
Stephan L. Jones Director and
The Principal President
Financial Group
Des Moines, IA 50392
Ronald E. Keller Director
The Principal
Financial Group
Des Moines, IA 50392
Ellen Z. Lamale Director
The Principal
Financial Group
Des Moines, IA 50392
John R. Lepley Senior Vice
The Principal President - Marketing
Financial Group and Distribution
Des Moines, IA 50392
Gregg R. Narber Director
The Principal
Financial Group
Des Moines, IA 50392
Mark M. Oswald Compliance Officer
The Principal
Financial Group
Des Moines, IA 50392
Kelly A. Paul Systems/Technology -
The Principal Officer
Financial Group
Des Moines, IA 50392
Richard L. Prey Director
The Principal
Financial Group
Des Moines, IA 50392
Layne A. Rasmussen Controller -
The Principal Mutual Funds
Financial Group
Des Moines, IA 50392
Martin R. Richardson Operations Officer -
The Principal Broker/Dealer Services
Financial Group
Des Moines, IA 50392
Elizabeth R. Ring Controller
The Principal
Financial Group
Des Moines, IA 50392
Michael D. Roughton Counsel
The Principal
Financial Group
Des Moines, IA 50392
Jean B. Schustek Product Compliance Officer -
The Principal Registered Products
Financial Group
Des Moines, IA 50392
Kyle R. Selberg Vice President-Marketing
The Principal
Financial Group
Des Moines, IA 50392
Susan R. Sorensen Marketing Officer
The Principal
Financial Group
Des Moines, IA 50392
Roger C. Stroud Assistant Director -
The Principal Marketing
Financial Group
Des Moines, IA 50392
(c) (1) (2)
Net Underwriting
Name of Principal Discounts and
Underwriter Commissions
Princor Financial $11,491,356.06
Services Corporation
(3) (4) (5)
Compensation on Brokerage
Redemption Commissions Compensation
0 0 0
Item 30. Location of Accounts and Records
All accounts, books or other documents of the Registrant are located
at the offices of the Depositor, The Principal Financial Group, Des
Moines, Iowa 50392.
Item 31. Management Services
Inapplicable
Item 32. Undertakings
The Registrant undertakes that in restricting cash withdrawals from
Tax Sheltered Annuities to prohibit cash withdrawals before the
Participant attains age 59 1/2, separates from service, dies, or
becomes disabled or in the case of hardship, Registrant acts in
reliance of SEC No Action Letter addressed to American Counsel of Life
Insurance (available November 28, 1988). Registrant further undertakes
that:
1. Registrant has included appropriate disclosure regarding the
redemption restrictions imposed by Section 403(b)(11) in its
registration statement, including the prospectus, used in
connection with the offer of the contract;
2. Registrant will include appropriate disclosure regarding the
redemption restrictions imposed by Section 403(b)(11) in any
sales literature used in connection with the offer of the
contract;
3. Registrant will instruct sales representatives who solicit Plan
Participants to purchase the contract specifically to bring the
redemption restrictions imposed by Section 403(b)(11) to the
attention of the potential Plan Participants; and
4. Registrant will obtain from each Plan Participant who purchases a
Section 403(b) annuity contract, prior to or at the time of such
purchase, a signed statement acknowledging the Plan Participant's
understanding of (a) the restrictions on redemption imposed by
Section 403(b)(11), and (b) the investment alternatives available
under the employer's Section 403(b) arrangement, to which the
Plan Participant may elect to transfer his contract value.
REPRESENTATION PURSUANT TO SECTION 26 OF THE INVESTMENT COMPANY ACT OF 1940
Principal Mutual Life Insurance Company represents the fees and charges deducted
under the Policy, in the aggregate, are reasonable in relation to the services
rendered, the expenses expected to be incurred, and the risks assumed by the
Company.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, Principal Mutual Life Insurance
Company Separate Account B, certifies that it meets the requirements of
Securities Act Rule 485(b) for effectiveness of the Registration Statement and
has duly caused this Amendment to the Registration Statement to be signed on its
behalf by the undersigned thereto duly authorized in the City of Des Moines and
State of Iowa, on the 13th day of April, 1998
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
(Registrant)
By: PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
(Depositor)
/s/ David J. Drury
By ______________________________________________
David J. Drury
Chairman and Chief Executive Officer
Attest:
/s/ Joyce N. Hoffman
- -----------------------------------
Joyce N. Hoffman
Vice President and
Corporate Secretary
As required by the Securities Act of 1933, this Amendment to the Registration
Statement has been signed by the following persons in the capacities and on the
date indicated.
Signature Title Date
/s/ D. J. Drury Chairman and April 13, 1998
- -------------------- Chief Executive Officer
D. J. Drury
/s/ D. C. Cunningham Vice President and April 13, 1998
- -------------------- Controller (Principal
D. C. Cunningham Accounting Officer)
/s/ M. H. Gersie Senior Vice President April 13, 1998
- -------------------- (Principal Financial
M. H. Gersie Officer)
(M. V. Andringa)* Director April 13, 1998
- --------------------
M. V. Andringa
(R. M. Davis)* Director April 13, 1998
- --------------------
R. M. Davis
(C. D. Gelatt, Jr.)* Director April 13, 1998
- --------------------
C. D. Gelatt, Jr.
(J. B. Griswell)* Director April 13, 1998
- --------------------
J. B. Griswell
(G. D. Hurd)* Director April 13, 1998
- --------------------
G. D. Hurd
(T. M. Hutchison)* Director April 13, 1998
- --------------------
T. M. Hutchison
(C. S. Johnson)* Director April 13, 1998
- --------------------
C. S. Johnson
(W. T. Kerr)* Director April 13, 1998
- --------------------
W. T. Kerr
(L. Liu)* Director April 13, 1998
- --------------------
L. Liu
(V. H. Loewenstein)* Director April 13, 1998
- --------------------
V. H. Loewenstein
(R. D. Pearson)* Director April 13, 1998
- --------------------
R. D. Pearson
(J. R. Price)* Director April 13, 1998
- --------------------
J. R. Price, Jr.
(D. M. Stewart)* Director April 13, 1998
- --------------------
D. M. Stewart
(E. E. Tallett)* Director April 13, 1998
- --------------------
E. E. Tallett
(D. D. Thornton)* Director April 13, 1998
- --------------------
D. D. Thornton
(F. W. Weitz)* Director April 13, 1998
- --------------------
F. W. Weitz
*By /s/ David J. Drury
------------------------------------
David J. Drury
Chairman and Chief Executive Officer
Pursuant to Powers of Attorney
Previously Filed or Included Herein
Consent of Independent Auditors
We consent to the reference to our firm under the captions "Independent
Auditors" and to the use of our reports dated February 6, 1998 (with respect to
Principal Mutual Life Insurance Company Separate Account B) and January 30, 1998
(with respect to The Principal Financial Group(R)), in Post-Effective Amendment
No. 20 to the Registration Statement (Form N-4 No. 02-78001) and related
Prospectus of Principal Mutual Life Insurance Company Separate Account B Pension
Builder - Group Variable Annuity Contracts for Tax-Deferred Retirement Plans.
/s/ Ernst & Young LLP
Des Moines, Iowa
April 15, 1998
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Principal
Mutual Life Insurance Company, an Iowa corporation (the "Company"), hereby
constitutes and appoints D. J. Drury, G. D. Hurd, T. M. Hutchison and F. W.
Weitz, and each of them (with full power to each of them to act alone), the
undersigned's true and lawful attorney-in-fact and agent, with full power of
substitution to each, for and on behalf and in the name, place and stead of the
undersigned, to execute and file any of the documents referred to below relating
to registration under the Securities Act of 1933 with respect to variable
annuity contracts, with premiums received in connection with such contracts held
in the Principal Mutual Life Insurance Company Separate Account B on Form N-4 or
other forms under the Securities Act of 1933, and any and all amendments thereto
and reports thereunder with all exhibits and all instruments necessary or
appropriate in connection therewith, each of said attorneys-in-fact and agents
and his or their substitutes being empowered to act with or without the others
or other, and to have full power and authority to do or cause to be done in the
name and on behalf of the undersigned each and every act and thing requisite and
necessary or appropriate with respect thereto to be done in and about the
premises in order to effectuate the same, as fully to all intents and purposes
as the undersigned might or could do in person; hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, may do or cause to
be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned director has hereunto set
his hand this 13th day of April, 1998.
/S/ J. B. GRISWELL
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<SHARES-COMMON-PRIOR> 16469536
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