Registration No. 333-63401
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. _____ __1__
Post-Effective Amendment No. _____ _____
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. ___ _____
(Check appropriate box or boxes)
Principal Life Insurance Company Separate Account B
- --------------------------------------------------------------------------------
(Exact Name of Registrant)
Principal 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)
Approximate Date of Proposed Public Offering: As soon as practicable
after the effective date of the Registration Statement
Title of Securities Being Registered: Principal Freedom Variable Annuity
Contract
<PAGE>
PRINCIPAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT B
PRINCIPAL FREEDOM(sm) VARIABLE ANNUITY CONTRACT
Registration Statement on Form N-4
Cross Reference Sheet
Form N-4 Item Caption in Prospectus
Part A
1. Cover Page Principal Freedom(sm) Variable
Annuity Contract
2. Definitions Glossary
3. Synopsis Summary of Expense Information
Summary
4. Condensed Financial Performance Calculation,
Information Independent Auditors,
Financial Statements
5. General Description of Summary, The Company, The
Registrant Separate Account, Fixed
Account, Voting Rights
6. Deductions Summary, Charges and
Deductions, Mortality and
Expense Risks Charge,
Transaction Fee, Premium Taxes,
Fixed Account Surrender Charge
and Transfer Fee,
Administrative Charge, Special
Provisions for Group or
Sponsored Arrangements,
Distribution of the
Contract
7. General Description of Summary, Investment Limita-
Variable Annuity Contract tions, Separate Account Invest-
ment Options, Transfers,
Surrenders, Charges and
Deductions, Standard Death
Benefit, Benefit Option Pay-
ments, Free-Look Provision, The
Separate Account, The Contract,
To Buy a Contract, The
Accumulation Period, The
Retirement Period, General
Provisions, Rights Reserved By
The Company, Customer Inquiries
8. Annuity Period The Accumulation Period, The
Retirement Period
9. Death Benefit Standard Death Benefit, The
Accumulation Period, The
Retirement Period, Mortality
and Expense Risks Charge, Fixed
Account Surrender Charge and
Transfer Fee, Delay of Payments
Non-Qualified Contracts,
Required Distributions for Non-
Qualified Contracts, IRA & SEP
10. Purchase and Contract Value Summary, Free-Look Provision,
The Contract, To Buy a
Contract, The Accumulation
Period, The Retirement Period,
Delay of Payments, Distribution
of the Contract
11. Redemptions Summary, Benefit Option
Payments, The Accumulation
Period, Charges and Deductions,
Transaction Fee, Fixed Account
Surrender Charge and Transfer
Fee, Delay of Payments,
Contract Termination
12. Taxes Summary, Benefit Options,
Federal Tax Matters,
Non-Qualified Contracts,
Required Distributions for
Non-Qualified Contracts, IRA
and SEP, Withholding, Mutual
Fund Diversification
13. Legal Proceedings Legal Proceedings
14. Table of Contents of the Table of Contents of the
Statement of Additional Statement of Additional
Information Information
Part B Statement of Additional
Information
Caption**
15. Cover Page Principal Freedom(sm)
Variable Annuity Contract
16. Table of Contents Table of Contents
17. General Information and General Information and
History History
18. Services Independent Auditors**,
Independent Auditors
19. Purchase of Securities Summary**, To Buy a Contract**
Being Offered Distribution of the Contract**
20. Underwriters Summary**, Distribution of the
Contract**
21. Calculation of Performance Calculation of Yield and
Data Total Return
22. Annuity Payments Benefit Options Payments**,
Delay of Payments**
23. Financial Statements Financial Statements
** Prospectus caption given where appropriate.
<PAGE>
Principal FreedomSM Variable Annuity
Issued by Principal Life Insurance Company (the "Company")
This Prospectus is dated May 1, 1999.
The individual deferred annuity contract ("Contract") described in this
Prospectus is funded with the Principal Life Insurance Company Separate Account
B ("Separate Account") and a fixed account ("Fixed Account"). The assets of the
divisions of the Separate Account are invested in a corresponding Account of the
Principal Variable Contracts Fund, Inc., the American Century Variable
Portfolios, Inc. - VP Income & Growth or the Templeton Variable Products Series
Fund - Templeton Stock Fund Class 2. The Fixed Account is a part of the General
Account of the Company.
This prospectus provides information about the Contract and the Separate Account
that you ought to know before investing. It should be read and retained for
future reference. Additional information about the Contract is included in the
Statement of Additional Information ("SAI"), dated May 1, 1999 which has been
filed with the Securities and Exchange Commission (the "Commission"). The SAI is
a part of this prospectus. The table of contents of the SAI is on page 30 of
this prospectus. You may obtain a free copy of the SAI by writing or
telephoning:
Principal FreedomSM Variable Annuity
Principal Financial Group
P. O. Box 9382
Des Moines, Iowa 50306-9382
Telephone: 1-800-247-9988
An investment in the Contract is not a deposit in any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
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 attached to the current prospectuses for the
Principal Variable Contracts Fund, Inc., the American Century Variable
Portfolios, Inc. VP Income & Growth and the Templeton Variable Products Series
Fund - Templeton Stock Fund Class 2 (the "Funds").
TABLE OF CONTENTS
GLOSSARY................................................................... 4
SUMMARY OF EXPENSE INFORMATION............................................. 5
SUMMARY.................................................................... 6
Investment Limitations................................................ 6
Separate Account Investment Options................................... 6
Transfers............................................................. 7
Surrenders............................................................ 7
Charges and Deductions................................................ 8
Standard Death Benefit................................................ 8
Annuity Payments Options.............................................. 8
Ten Day Examination Offer............................................. 8
THE PRINCIPAL FREEDOMSM VARIABLE ANNUITY................................... 8
THE COMPANY................................................................ 8
THE SEPARATE ACCOUNT....................................................... 9
THE FUNDS.................................................................. 9
THE CONTRACT............................................................... 11
To Buy a Contract..................................................... 11
The Accumulation Period............................................... 13
The Retirement Period................................................. 16
CHARGES AND DEDUCTIONS..................................................... 17
Morality and Expense Risks Charge..................................... 17
Transaction Fee....................................................... 17
Premium Taxes......................................................... 17
Fixed Account Surrender Charge and Transfer Fee....................... 17
Waiver of Fixed Account Surrender Charger Rider....................... 19
Administration Charge................................................. 20
Special Provisions for Group or Sponsored Arrangements................ 20
FIXED ACCOUNT.............................................................. 21
General Description................................................... 21
Fixed Account Value................................................... 21
Fixed Account Transfers, Total and Partial Surrenders................. 21
GENERAL PROVISIONS......................................................... 22
Telephone Services.................................................... 22
The Contract.......................................................... 23
Delay of Payments..................................................... 23
Misstatement of Age or Gender......................................... 23
Assignment............................................................ 23
Change of Owner....................................................... 23
Beneficiary........................................................... 24
Contract Termination.................................................. 24
RIGHTS RESERVED BY THE COMPANY............................................. 24
DISTRIBUTION OF THE CONTRACT............................................... 24
PERFORMANCE CALCULATION.................................................... 24
VOTING RIGHTS.............................................................. 25
FEDERAL TAX MATTERS........................................................ 26
Non-Qualified Contracts............................................... 26
Required Distributions for Non-Qualified Contracts.................... 26
IRA and SEP........................................................... 27
Withholding........................................................... 27
Mutual Fund Diversification........................................... 27
STATE REGULATION........................................................... 28
LEGAL OPINIONS............................................................. 28
LEGAL PROCEEDINGS.......................................................... 28
REGISTRATION STATEMENT..................................................... 28
OTHER VARIABLE ANNUITY CONTRACTS........................................... 28
INDEPENDENT AUDITORS....................................................... 28
FINANCIAL STATEMENTS....................................................... 29
YEAR 2000 READINESS DISCLOSURE............................................. 29
CUSTOMER INQUIRIES......................................................... 30
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION............... 30
The Contract offered by this prospectus may not be available in all states. This
prospectus is not an offer to sell, or solicitation of an offer to buy, the
Contract in states in which the offer or solicitation may not be lawfully made.
No person is authorized to give any information or to make any representation in
connection with this Contract other than those contained in this prospectus.
GLOSSARY
account - series or portfolio of a mutual fund in which a Separate Account
division invests.
accumulated value - an amount equal to the Fixed Account value plus the Separate
Account value.
annuitant - the person, including any joint annuitant, on whose life the annuity
payment is based. This person may or may not be the owner.
annuity payment date - the date the owner's accumulated value is applied, under
an annuity payment option, to make income payments.
contract date - the date that the Contract is issued and which is used to
determine contract years.
contract year - the one-year period beginning on the contract date and ending
one day before the Contract anniversary and any subsequent one-year period
beginning on a Contract anniversary.
division - a part of the Separate Account which invests in shares of an account
of a mutual fund.
Fixed Account - an account which earns guaranteed interest.
joint annuitant - additional annuitant. Joint annuitants must be husband and
wife and must be named as owner and joint owner. Any reference to the
annuitant's death means the death of the last surviving annuitant.
joint owner - an owner who has an undivided interest with the right of
survivorship in this Contract with another owner. Joint owners must be husband
and wife and must be named as annuitant and joint annuitant. Any reference to
the owner's death means the death of the last surviving owner.
mutual fund - a registered open-end investment company in which a division
invests.
owner - the person, including joint owner, who owns all the rights and
privileges of this contract.
purchase payments - the gross amount contributed to the contract. Fixed Account
purchase payments include transfers into the Fixed Account from any Separate
Account division.
unit - the accounting measure used to calculate the value of the Separate
Account prior to annuity payment date.
unit value - a measure used to determine the value of an investment in a
division.
valuation date - the date as of which the net asset value of a mutual fund is
determined.
valuation period - the period of time between determination of net asset value
on one valuation date and the next valuation date.
written request - actual delivery to the Company at our home office of a written
notice or request, signed and dated, on a form we supply or approve. Your notice
may be mailed to:
Principal FreedomSM Variable Annuity
Principal Financial Group
P. O. Box 9382
Des Moines, Iowa 50306-9382
SUMMARY OF EXPENSE INFORMATION
The purpose of these tables is to assist you in understanding the various costs
and expenses of the Contract. This information includes expenses of the Contract
as well as the Accounts but does not include any premium taxes that may apply.
For a more complete description of the Contract expenses, see CHARGES AND
DEDUCTIONS.
Contract owner Transaction Expenses:
o There is no sales charge imposed on purchases.
o Deferred sales charge:
o No deferred sales charge applies to surrenders from the Separate
Account.
o The deferred sales charge (as a percentage of amounts surrendered from
the Fixed Account) is as follows:
number of completed contract surrender charge applied to
years since each Fixed Account Fixed Account surrenders
purchase* was made beyond Free Transaction Amount
0 (year of purchase payment) 6%
1 6%
2 6%
3 5%
4 4%
5 3%
6 2%
7 and later 0
* Includes amounts transferred to Fixed Account from Separate Account
divisions.
Each Fixed Account purchase payment begins in year 0 for purposes of
calculating the percentage applied to that payment.
o Transfer fees may apply to transfers from the Fixed Account to any division
of the Separate Account (see Fixed Account Surrender Charge and Transfer
Fee).
o Transaction fee - a $30 fee is charged on:
o each unscheduled transfer after the 12th unscheduled transfer, and
o each unscheduled partial surrender after the 12th unscheduled partial
surrender in a contract year.
o There is no annual contract fee.
o Separate Account annual expenses (as a percentage of average account
value):
o mortality and expense risks charge 0.85%
o other Separate Account expenses 0
----
o total Separate Account annual expenses 0.85%
Annual expense of Accounts (as a percentage of average net assets) as of
December 31, 1998.
<TABLE>
<CAPTION>
Management Rule Other Total Account
Account Fees 12(b)1 Fees Expenses Annual Expenses
------- ---------- ----------- -------- ---------------
<S> <C> <C> <C> <C>
American Century VP Income & Growth 0.70% N/A 0.00% 0.70%
Bond 0.49 N/A 0.02 0.51
Capital Value 0.43 N/A 0.01 0.44
International 0.73 N/A 0.04 0.77
MidCap 0.61 N/A 0.01 0.62
MidCap Growth 0.90 N/A 0.37 1.27
Money Market 0.50 N/A 0.02 0.52
SmallCap 0.85 N/A 0.13 0.98
SmallCap Growth 1.01 N/A 0.30 1.31
Templeton VP Stock 0.70 0.25% 0.19 1.14
</TABLE>
Example
The purpose of the following example is to assist you in understanding the
various costs and expenses that a contract owner bears directly or indirectly.
It reflects expenses of the Separate Account as well as the expenses of the
Account in which the Separate Account invests, both as of the calendar year
ended December 31, 1998. In certain circumstances, state premium taxes also
apply.
The example should not be considered a representation of past or future
expenses. Actual expenses may be more or less than those shown.
You would pay the following expenses on a $1,000 investment, assuming 5% annual
return on assets. There is no surrender charge imposed on total or partial
surrenders from divisions of the Separate Account.
Division 1 Year 3 Years 5 Years 10 Years
-------- ------ ------- ------- --------
American Century VP Income & Growth $16 $49 $84 $185
Blue Chip 18 55 n/a n/a
Bond 14 43 74 164
Capital Value 13 41 71 156
International 16 51 88 192
LargeCap Growth 21 64 n/a n/a
MidCap 15 46 80 176
MidCap Growth 18 57 98 213
MidCap Value 21 64 N/A N/A
Money Market 14 43 75 165
SmallCap 19 58 99 215
SmallCap Growth 19 60 103 223
Stock Index 500 13 40 N/A N/A
Templeton VP Stock 20 62 107 232
SUMMARY
This prospectus describes a flexible variable annuity offered by the Company.
The Contract is designed to provide individuals with retirement benefits,
including plans and trusts that do not qualify for special tax treatment under
the Internal Revenue Code of 1986, as amended (the "Code") and for purchase by
persons participating in individual retirement annuity plans that meet the
requirements of Section 408 of the Code.
This is a brief summary of the Contract's features. More detailed information
follows later in this prospectus.
Investment Limitations
o Initial purchase payment must be $10,000 or more.
o Each subsequent investment must be $50 or more.
o The total purchase payments made during the life of the Contract may not be
greater than $2 million.
Separate Account Investment Options (see THE FUNDS):
You may allocate your net premium payments to divisions of the Separate Account
and/or the Fixed Account. Currently there are fourteen divisions available to
you. Not all divisions are available in all states. A current list of divisions
available in your state may be obtained from a sales representative or our home
office.
Each division invests in shares of an underlying mutual fund. More detailed
information about the underlying mutual funds may be found in the current
prospectus for each underlying mutual fund.
The underlying mutual funds are NOT available to the general public directly.
The underlying mutual funds are available only as investment options in variable
life insurance policies or variable annuity contracts issued by life insurance
companies. Some of the underlying mutual funds have been established by
investment advisers that manage publicly traded mutual funds having similar
names and investment objectives. While some of the underlying mutual funds may
be similar to, and may in fact be modeled after publicly traded mutual funds,
you should understand that the underlying mutual funds are not otherwise
directly related to any publicly traded mutual fund. Consequently, the
investment performance of publicly traded mutual funds and of any underlying
mutual fund may differ substantially.
Division invests in:
- -------- -----------
American Century Variable Portfolios, Inc.
American Century VP Growth & Income VP Income & Growth
Principal Variable Contracts Fund, Inc.
Blue Chip Blue Chip Account
Bond Bond Account
Capital Value Capital Value Account
International International Account
LargeCap Growth LargeCap Growth Account
MidCap MidCap Account
MidCap Growth MidCap Growth Account
MidCap Value MidCap Value Account
Money Market Money Market Account
SmallCap SmallCap Account
SmallCap Growth SmallCap Growth Account
Stock Index 500 Stock Index 500 Account
Templeton Variable Products Series Fund -
Templeton VP Stock Templeton Stock Fund Class 2.
Transfers (see Separate Account Transfers for additional restrictions)
o During the accumulation period:
o from the Separate Account divisions:
o dollar amount or percentage of transfer must be specified; and
o transfer may occur on scheduled or unscheduled basis (a $30 fee is
imposed on each unscheduled transfer after the 12th unscheduled
transfer in a contract year).
o from the Fixed Account:
o percentage or dollar amount of transfer must be specified; and
o amounts available for transfer without payment of transfer fee are
limited (see Fixed Account Transfers, Total and Partial
Surrenders).
o During the annuity payment period, transfers are not permitted.
Surrenders (total or partial) (see Separate Account Surrender and Fixed Account
Transfers, Total and Partial Surrenders)
o During the accumulation period:
o a dollar amount must be specified;
o withdrawals before age 59 1/2 may involve an income tax penalty;
o full surrender permitted prior to the annuity payment date; and
o partial surrender permitted prior to annuity payment date (a $30 fee is
imposed on each unscheduled partial surrender after the 12th
unscheduled partial surrender in a contract year).
o During the annuity payment period, surrenders are not permitted.
Charges and Deductions
o No sales charge on purchase payment at the time of investment.
o A contingent deferred surrender charge is imposed on certain total or
partial surrenders from the Fixed Account.
o A transfer fee applies to certain transfers from the Fixed Account to
divisions of the Separate Account.
o A mortality and expense risks daily charge equal to 0.85% per year applies
to amounts in the Separate Account. The Company reserves the right to
increase this charge but guarantees that it will not exceed 1.25% per year.
o Daily Separate Account administration charge is currently zero but the
Company reserves the right to assess a charge not to exceed 0.15% annually.
o Certain states and local governments impose a premium tax. The Company
reserves the right to deduct the amount of the tax from purchase payments
or accumulated values.
Standard Death Benefit
o During the accumulation period:
o death benefit is the greater of:
o accumulated value, or
o purchase payments minus partial surrenders, surrender charges and
transfer fees.
o You may choose to have death benefit payments made under a benefit
option.
o During the annuity period:
o your named beneficiary receives only the continuing payments provided
by the benefit option selected.
Annuity Payment Options
o You may choose from several fixed payment options which start on your
selected annuity payment date.
o Payments are made to the annuitant (or beneficiary depending on benefit
option selected).
Ten Day Examination Offer (Free-look period)
o You may surrender the Contract during the free-look period which is
generally 10 days from the date you receive your Contract. The free-look
period may be longer in certain states.
o We return either all purchase payments made or the accumulated value,
whichever is required by applicable state law.
THE PRINCIPAL FREEDOMSM VARIABLE ANNUITY
The Principal FreedomSM Variable Annuity is significantly different from a fixed
annuity. As the owner of a variable annuity, you assume the risk of investment
gain or loss (as to amounts in the Separate Account divisions) rather than the
insurance company. The amount of the annuity payment under a variable annuity is
not guaranteed. Payments vary with the investment performance of the portfolio
securities of the underlying Account.
Based on your investment objectives, you direct the allocation of purchase
payments and accumulated values. There can be no assurance that your investment
objectives will be achieved.
THE COMPANY
The Company is a stock life insurance company with its home office at: Principal
Financial Group, Des Moines, Iowa 50306-9382. It is authorized to transact life
and annuity business in all of the United States and the District of Columbia.
The Company is a wholly owned subsidiary of Principal Financial Services, Inc.
In 1879, Principal Life Insurance Company was incorporated under Iowa law as a
mutual life insurance company named Bankers Life Association. It changed its
name to Bankers Life Company in 1911 and then to Principal Mutual Life Insurance
Company in 1986. The name change to Principal Life Insurance Company and
reorganization into a mutual holding company structure took place in 1998.
THE SEPARATE ACCOUNT
The Separate Account was established under Iowa law on January 12, 1970. It was
registered as a unit investment trust with the Commission on July 17, 1970. This
registration does not involve Commission supervision of the investments or
investment policies of the Separate Account.
The income, gains, and losses, whether or not realized, of the Separate Account
are credited to or charged against the Separate Account without regard to other
income, gains, or losses of the Company. Obligations arising from the Contract,
including the promise to make annuity payments, are general corporate
obligations of the Company. However, the Contract provides that the portion of
the Separate Account's assets equal to the reserves and other liabilities under
the Contract are not charged with any liabilities arising out of any other
business of the Company.
There currently are fourteen divisions in the Separate Account available to you.
The assets of each division invest in a corresponding Account of a mutual fund.
New Accounts may be added and made available. Accounts may also be eliminated
from the Separate Account.
THE FUNDS
The underlying funds are mutual funds registered under the Investment Company
Act of 1940 as open-end diversified management investment companies. They
provide the investment vehicle for the Separate Account. A full description of
the Funds, their investment objectives, policies and restrictions, charges and
expenses and other operational information is contained in the attached
prospectuses (which should be read carefully before investing) and the
Statements of Additional Information. Additional copies of these documents are
available from a sales representative or our home office.
The following is a brief summary of the investment objectives of each division:
<TABLE>
<CAPTION>
Division Division Invests in Investment Advisor
- -------- ------------------- ------------------
<S> <C> <C>
American Century Variable
Portfolios, Inc.
American Century VP VP Income & Growth American Century
Income & Growth Investment Management, Inc.
Principal Variable Contracts Fund,
Inc.
Blue Chip Blue Chip Account Invista Capital Management, LLC
through a sub-advisory agreement
Bond Bond Account Principal Management Corporation
Capital Value Capital Value Account Invista Capital Management, LLC
through a sub-advisory agreement
International International Account Invista Capital Management, LLC
through a sub-advisory agreement
LargeCap Growth LargeCap Growth Account Janus Capital Corporation
through a sub-advisory agreement
MidCap MidCap Account Invista Capital Management, LLC
through a sub-advisory agreement
MidCap Growth MidCap Growth Account Dreyfus Corporation
through a sub-advisory agreement
MidCap Value MidCap Value Account Neuberger & Berman Management, Inc.
through a sub-advisory agreement
Money Market Money Market Account Principal Management Corporation
SmallCap SmallCap Account Invista Capital Management, LLC
through a sub-advisory agreement
SmallCap Growth SmallCap Growth Account Berger Associates
through a sub-advisory agreement
Stock Index 500 Stock Index 500 Account Invista Capital Management, LLC
through a sub-advisory agreement
Templeton Variable Products Series
Fund
Templeton VP Stock Templeton Stock Fund Class 2 Templeton Investment Counsel, Inc.
</TABLE>
<TABLE>
<CAPTION>
Division Investment Objective
<S> <C>
American Century VP Seeks dividend growth, current income and capital appreciation. The Account
Income & Growth will seek to achieve its investment objective by investing in common stocks.
Blue Chip Seeks to achieve growth of capital and growth of income by investing primarily
in common stocks of well capitalized, established companies.
Bond To provide as high a level of income as is consistent with preservation of
capital and prudent investment risk.
Capital Value To provide long-term capital appreciation and secondarily growth of investment
income. The Account seeks to achieve its investment objectives through the
purchase primarily of common stocks, but the Account may invest in other
securities.
International Seeks long-term growth of capital by investing in a portfolio of equity
securities domiciled in any of the nations of the world.
LargeCap Growth Seeks long-term growth of capital by investing primarily in equity securities
of growth companies with market capitalization of greater than $10 billion.
MidCap To achieve capital appreciation by investing primarily in securities of
emerging and other growth-oriented companies.
Division Investment Objective
MidCap Growth Seeks long-term growth of capital by investing primarily in growth stocks of
companies with market capitalizations in the $1 billion to $10 billion range.
MidCap Value Seeks long-term growth of capital by investing primarily in equity securities
of companies with value characteristics and market capitalizations in the $1
billion to $10 billion range.
Money Market seeks as high a level of current income available from short-term securities
as is considered consistent with preservation of principal and maintenance of
liquidity by investing all of its assets in a portfolio of money market
instruments.
SmallCap Seeks long-term growth of capital. The Account attempts to achieve its
objective by investing primarily in equity securities of both growth and value
oriented companies with comparatively smaller market capitalizations.
SmallCap Growth Seeks long-term growth of capital by investing primarily in equity securities
of small growth companies with market capitalization of less than $1 billion.
Stock Index 500 Seeks long-term growth of capital. The Account attempts to mirror the
investment results of the Standard & Poors Stock Index.
Templeton VP Stock Capital growth through investing primarily in common and preferred stock
issued by companies, large and small, in various nations throughout the world.
</TABLE>
Principal Management Corporation (the "Manager") has executed agreements with
various sub-advisors. Under those sub-advisory agreements, the sub-advisor
agrees to assume the obligations of the Manager to provide investment advisory
services for a specific Account. For these services, each sub-advisor is paid a
fee by the Manager.
Accounts: Blue Chip, Capital Value, International, MidCap, SmallCap and
Stock Index 500
Sub-Advisor: Invista Capital Management, LLC ("Invista"), an indirectly
wholly-owned subsidiary of Principal Life Insurance Company and
an affiliate of the Manger was founded in 1985. It manages
investments for institutional investors, including Principal
Life. Assets under management as of December 31, 1998 were
approximately $31 billion. Invista's address is 1800 Hub Tower,
699 Walnut, Des Moines, Iowa 50309.
Account: LargeCap Growth
Sub-Advisor: Janus Capital Corporation ("Janus"), 100 Fillmore Street, Denver
CO 80206-4928, was formed in 1970. Kansas City Southern
Industries, Inc. owns approximately 82% of the outstanding
voting stock of Janus, most of which it acquired in 1984. As of
February 1, 1999, Janus managed or administered over $120
billion in assets.
Account: MidCap Growth
Sub-Advisor: The Dreyfus Corporation, located at 200 Park Avenue, New York,
NY 10166, was formed in 1947. The Dreyfus Corporation is a
wholly-owned subsidiary of Mellon Bank, N.A., which is a
wholly-owned subsidiary of Mellon Bank Corporation (Mellon). As
of December 31, 1998, the Dreyfus Corporation managed or
administered approximately $118.5 billion in assets for
approximately 1.7 million investor accounts nationwide.
Account: MidCap Value
Sub-Advisor: Neuberger Berman Management Inc. ("Neuberger Berman") is an
affiliate of Neuberger Berman, LLC. Neuberger Berman is located
at 605 Third Avenue, 2nd Floor, New York, NY 10158-0180.
Together with Neuberger Berman, the firms manage more than $49
billion in total assets (as of September 30, 1998) and continue
an asset management history that began in 1939.
Account: SmallCap Growth
Sub-Advisor: Berger Associates, Inc. Berger's address is 210 University
Boulevard, Suite 900, Denver CO 80206. It serves as investment
advisor, sub-advisor, administrator or sub-administrator to
mutual funds and institutional investors. Berger is a
wholly-owned subsidiary of Kansas City Southern Industries, Inc.
(KCSI). KCSI is a publicly traded holding company with principal
operations in rail transportation, through its subsidiary The
Kansas City Southern Railway Company, and financial asset
management businesses. Assets under management for Berger as of
December 31, 1998 were approximately $3.4 billion.
The Company purchases and sells Fund shares for the Separate Account at their
net asset value without any sales or redemption charge. Shares of the Funds
represent interests in the Accounts available for investment by the Separate
Account. Each Account corresponds to one of the divisions of the Separate
Account. The assets of each Account are separate from the others. An Account's
performance has no effect on the investment performance of any other Account.
THE CONTRACT
The descriptions that follow are based on provisions of the Contract offered by
this prospectus. You should refer to the actual Contract and the terms and
limitations of any tax qualified plan which is to be funded by the Contract. Tax
qualified plans are subject to several requirements and limitations which may
affect the terms of any particular Contract or the advisability of taking
certain action permitted by the Contract.
To Buy a Contract
If you want to buy a Contract, you must submit an application and make an
initial purchase payment. If the application is complete and the Contract
applied for is suitable, the Contract is issued. If the completed application is
received in proper order, the initial purchase payment is credited within two
valuation days after the later of receipt of the application or receipt of the
initial purchase payment at the Company's home office. If the initial purchase
payment is not credited within five valuation days, it is refunded unless we
have received your permission to retain the purchase payment until we receive
the information necessary to issue the Contract.
1. Purchase payments
The initial purchase payment must be at least $10,000. Subsequent payments must
be at least $50. The total of all purchase payments may not be greater than
$2,000,000 without our prior approval.
The Company reserves the right to:
o increase the minimum amount for each purchase payment to not more than
$1,000, and
o terminate a Contract and distribute the accumulated value if no premiums
are paid during two consecutive calendar years and the accumulated value
(or total purchase payments less partial surrenders and applicable
surrender charges and transfer fees) is less than $5,000. The Company will
first notify you of its intent to exercise this right and give you 60 days
to increase the accumulated value to at least $5,000.
2. Allocation of purchase payments and ten day examination offer
Your purchase payments are allocated to the divisions of the Separate Account
and/or to the Fixed Account according to your instructions. The percentage
allocation for future purchase payments may be changed, without charge, at any
time by sending a written request to or telephoning the Company. The allocation
changes are effective at the end of the valuation period in which your new
instructions are received. You may not allocate your investment to the Fixed
Account if it causes the value of the Fixed Account to be more than $1,000,000
(without our prior approval).
Under state law, you have the right to return the Contract for any reason during
the free-look period. Some states require us to return the initial purchase
payment. If your Contract is issued in one of those states, your initial
purchase payments are allocated to the Money Market Division for 15 days (20
days for contracts issued in Idaho) after the contract date. After the 15-day
period (20 days in Idaho), the initial purchase payment is reallocated according
to your allocation instructions. The states in which purchase payments are
returned are:
Colorado Kentucky North Carolina
Connecticut* Louisiana Oklahoma
Georgia Maryland Rhode Island
Hawaii Michigan South Carolina
Idaho Missouri Utah
Indiana Nebraska Washington
*Purchase payments are refunded if the Contract is canceled prior to its
delivery, otherwise accumulated value is refunded.
If your Contract is issued in a state not listed above and if you return the
Contract during the free-look period, you will receive the accumulated value.
The free-look period is 10 days after the Contract is delivered to you in all
states, unless your Contract is issued in: a. California and you are age 60
and over (your free-look period is 30 days); b. Colorado (15 day free-look
period); or c. Idaho or North Dakota (20 day free-look period).
You may return the Contract by sending it, and a written request to cancel the
Contract, to the Company's home office or to the sales representative who sold
it to you before the close of business on the last day of the free-look period.
If you send your request (properly addressed and postage prepaid) to the
Company, the date of the postmark is used to determine if the free-look period
has expired.
If the purchase of this Contract is a replacement for another annuity contract
or a life insurance policy, different free-look periods may apply. The Company
reserves the right to keep the initial purchase payment in the Money Market
division longer than 15 days to correspond to the free-look period of a
particular state's replacement requirements.
The Accumulation Period
1. The value of your Contract
The value of your Contract is the total of the Separate Account value plus any
Fixed Account value. The Fixed Account value is described in the section titled
FIXED ACCOUNT.
There is no guaranteed minimum Separate Account value. Its value reflects the
investment experience of the divisions of the Separate Accounts that you choose.
It also reflects your purchase payments, partial surrenders and the Contract
expenses deducted from the Separate Account. At the end of any valuation period,
your Contract's value in a division is:
o the number of units you have in a division multiplied by
o the value of a unit in the division.
The number of units is the total of units purchased by allocations to the
division from:
o your initial purchase payment;
o subsequent investments; and
o transfers from another division or the Fixed Account.
minus units sold:
o for partial surrenders from the division;
o as part of a transfer to another division or the Fixed Account; and
o to pay Contract charges and fees.
Unit values are calculated each valuation date. To calculate the unit value of a
division, the unit value from the previous valuation date is multiplied by the
divisions' net investment factor for the current valuation period. The number of
units does not change due to a change in unit value.
The net investment factor measures the performance of each division. The net
investment factor for a valuation period is calculated as follows:
[{share price of the underlying mutual fund account at the end of the
valuation period
plus
per share amount of dividend (or other distribution) made by the mutual
fund account during the valuation period}
divided by
share price of the underlying mutual fund account at the end of the
previous valuation period]
subtract
{an administration charge (if any) plus the mortality and expense risks
charge}
The administration charge (if any) and the mortality and expense risks charge
are calculated by dividing the annual amount of the charge by 365 and
multiplying by the number of days in the valuation period.
When an investment owned by an Account pays a dividend, the dividend increases
the net asset value of a share of the Account as of the date the dividend is
recorded. As the net asset value of a share of an Account increases, the unit
value of the corresponding division also reflects an increase. Payment of a
dividend under these circumstances does not increase the number of units you own
in the Account.
2. Allocation of purchase payments
On your application for the Contract, you direct your purchase payments to be
allocated to divisions of the Separate Account, the Fixed Account or both.
Percentages must be in whole numbers and total 100%. Subsequent investments are
made using the same allocation percentages unless you change the allocations.
Using your allocation percentages, we will credit your purchase payments to the
Separate Account divisions and/or the Fixed Account. The payments are credited
to the Accounts using the unit value next calculated after we receive your
payment.
Changes to the allocation percentages may be made without charge. A change is
effective on the next valuation period after we receive your new instructions.
You can change the allocations by mailing your instructions to us, calling us at
1-800-247-9988, if telephone services apply, or faxing your instructions to us
at 1-515-248-9800.
3. Separate Account Division Transfers
You may request an unscheduled transfer or set up a periodic transfer by sending
us a written request, calling us if telephone services apply (1-800-247-9988) or
faxing your request at 1-515-248-9800. You must specify the dollar amount or
percentage to transfer from each Separate Account division. In states where
allowed, we reserve the right to reject transfer instructions from someone
providing them for multiple Contracts for which he or she is not the owner.
You may not make a transfer to the Fixed Account if:
o a transfer has been made from the Fixed Account to a division within six
months, or
o after the transfer, the Fixed Account value would be more than $1,000,000
(without our prior approval).
Unscheduled
- -----------
o You may make unscheduled Separate Account division transfers from a
division to another division or to the Fixed Account.
o The transfer is made, and values determined, as of the end of the valuation
period in which we receive your request.
o The transfer amount must be equal or greater than the lesser of $50 or the
value of your account(s) in the Separate Account divisions,
o A $30 fee is imposed on each unscheduled transfer after the 12th
unscheduled transfer in a contract year (for fee purposes, all transfers
based on a single instruction are considered to be a single transfer).
Scheduled
- ---------
o You may elect to have automatic transfers made on a periodic basis.
o You select the transfer date (other than the 29th, 30th or 31st) and the
transfer period.
o automatic portfolio rebalancing (annually, semi-annually or quarterly)
o dollar cost averaging (annually, semi-annually, quarterly or monthly)
o If the selected date is not a valuation date, the transfer is completed on
the next valuation date.
o Transfers continue until your interest in the division is zero or we
receive notice to stop them.
o We reserve the right to limit the number of Separate Account divisions from
which simultaneous transfers are made. In no event will it ever be less
than two.
4. Separate Account Surrenders
Surrenders from the Separate Account are generally paid within seven days of the
effective date of the request for surrender (or earlier if required by law).
However, certain delays in payment are permitted (see GENERAL PROVISIONS - Delay
of Payment). Surrenders before age 59 1/2 may involve an income tax penalty (see
FEDERAL TAX MATTERS). You must send us a written request for any surrender.
You may specify surrender allocations percentages with each partial surrender
request. If you don't provide us with specific percentages, we will use your
purchase payment allocation percentages for the partial surrender.
Total
- -----
o You may surrender the Contract on or before the annuity payment date.
o You receive the cash surrender value at the end of the valuation period
during which we receive your surrender request.
o The cash surrender value is the total of the values of your accounts in the
Separate Account divisions plus any amount you have in the Fixed Account
minus any applicable surrender charge or transaction fee.
o The written consent of all collateral assignees and irrevocable
beneficiaries must be obtained prior to surrender.
o We reserve the right to require you to return the Contract to us prior to
making any payment though this does not affect the amount of the cash
surrender value.
Unscheduled partial
- -------------------
o Prior to the annuity payment date, you may surrender a part of the Fixed
Account and/or Separate Account value by sending us a written request.
o You must specify the dollar amount of the surrender which must be $50 or
more.
o The surrender is effective at the end of the valuation period during which
we receive your written request for surrender.
o The surrender is deducted from your Fixed Account value and/or your account
in any Separate Account division according to the surrender allocation
percentages you specify.
o If surrender allocation percentages are not specified, we use your purchase
payment allocation percentages.
o We surrender units from the Separate Account divisions and/or Fixed Account
to equal the dollar amount of the surrender request plus any applicable
Fixed Account surrender charge.
o The accumulated value after the unscheduled partial surrender must be equal
or greater than $5,000 (we reserve the right to change the minimum
remaining accumulated value but it will not be greater than $10,000).
o A $30 fee is imposed on each unscheduled partial surrender after the 12th
unscheduled partial surrender in a contract year. Surrenders from multiple
divisions made at the same time are considered to be one surrender for
purposes of calculating this fee.
Scheduled partial
- -----------------
o You may elect partial surrenders on a periodic basis by sending us written
notice.
o Your accumulated value must be at least $5,000 when the surrenders begin.
o Surrenders are made from any of the Separate Account divisions and/or the
Fixed Account.
o You may specify monthly, quarterly, semi-annually or annually and pick a
surrender date (other than the 29th, 30th or 31st).
o If the selected date is not a valuation date, the transfer is completed on
the next valuation date.
o The surrender is deducted from your Fixed Account value and/or your account
in any Separate Account division according to the surrender allocation
percentages you specify.
o If surrender allocation percentages are not specified, we use your purchase
payment allocation percentages.
o We surrender units from the Separate Account divisions and/or Fixed Account
to equal the dollar amount of the surrender request plus any applicable
surrender charge.
o The surrenders continue until the accumulated value is zero or we receive
written notice to stop them.
5. Death Benefit
Before the annuity payment date, you may give us written instructions for
payment under a benefit option. If we do not receive your instructions, the
death benefit is paid according to instructions from the beneficiary. No
surrender charge applies when a death benefit is paid.
The beneficiary is the person or persons you name in the application to receive
benefits upon your death. If the owner is not a natural person, death benefits
are paid to the beneficiary upon the death of the annuitant.
Unless you have named an irrevocable beneficiary, you may change your
beneficiary by providing us with written notice. If a beneficiary dies before
you, on your death we will make equal payments to the surviving beneficiaries
unless you had provided us with other written instructions. If none of your
beneficiaries survives you, we will pay the death benefit to your estate in a
lump sum.
The death benefit is usually paid within seven days of our receiving all
documents (including proof of death) that we require to process the claim and
the beneficiary's written instructions. Some states require this payment to be
made in less than seven days. Under certain circumstances, this payment may be
delayed (see GENERAL PROVISIONS - Delay of Payments). We pay interest (at least
3% or as required by state law) on the death benefit from the date we receive
all required documents until payment is made or until the death benefit is
applied under a benefit option.
Standard Death Benefit
- ----------------------
The amount of the death benefit is the greater of:
o your accumulated value on the date we receive all required documents, or
o the total of purchase payments minus any partial surrenders, fees and
charges as of the date we receive all required documents and notice
(including proof) of death.
If you die before the annuitant and your beneficiary is your spouse, we will
continue the Contract with your spouse as the new owner. Alternatively, within
60 days of your death, your spouse may elect to:
o apply the death benefit under a benefit option, or
o receive the death benefit as a single payment.
If the annuitant dies before you and is not a joint owner, you may name a new
annuitant. If a new annuitant is not named within 60 days of our receiving
notice (including proof) of the annuitant's death, you will become the
annuitant. If the owner of the contract is not a natural person, the annuitant's
death is treated as the death of the owner.
If your beneficiary is a natural person but not your spouse, the death benefit
may be paid as:
o fixed income for a period of years that is not greater than the life
expectancy of the beneficiary;
o life income with no minimum guaranteed period or a minimum guaranteed
period that is not greater than the life expectancy of the beneficiary;
o lump sum, or
o an individual arrangement approved by us.
NOTE: If your beneficiary is not a natural person, the death benefit must be
paid out within five years of your death. If you die before the
annuitant and before the annuity payment date, there may be additional
requirements imposed by the Code (see FEDERAL TAX MATTERS).
The Retirement Period
1. Annuity payment date
You may specify an annuity payment date in your application. If the annuitant is
living and the Contract is in force on that date, we will notify you to begin
taking payments under the Contract. You may not select an annuity payment date
which is on or after the later of the Annuitant's 85th birthday or 10 years
after the contract date.
Depending on the type of retirement arrangement made when a Contract is issued,
payments that are made too early or too late may be subject to penalty taxes
(see FEDERAL TAX MATTERS). You should consider this carefully when you select or
change the annuity payment date.
You may change the annuity payment date with our prior approval. The request
must be in writing and approved before we issue a supplementary Contract which
provides a benefit option. The new annuity payment date must be any contract
anniversary on or before the maximum annuity payment date.
2. Annuity Payment Options
You may choose from several fixed payment options. Payments will be made on the
frequency you choose. You may elect to have your annuity payments made on a
monthly, quarterly, semiannual or annual basis. The dollar amount of the
payments is specified for the entire payment period according to the option
selected. There is no right to make any total or partial surrender after the
annuity payments start.
The amount of the annuity payment depends on:
o amount of accumulated value;
o option selected; and
o age of annuitant (unless fixed income option is selected).
Annuity payments generally are higher for male annuitants than for female
annuitants with an otherwise identical contract. This is because statistically
females have longer life expectancies than males. In certain states, this
difference may not be taken into consideration in fixing the payment amount.
Additionally, contracts with no gender distinctions are made available for
certain employer-sponsored plans because under most such plans, such contract
provisions are prohibited by law.
You may select an annuity payment option or change a previous selection by
written request. We must receive the request on or before the annuity payment
date. You may not change your option or make Separate Account division transfers
after the annuity payment date.
Payments under the annuity payment options are made as of the first day of each
payment period beginning with the annuity payment date. The available annuity
payment options are:
o Fixed Income. Payments of a fixed amount or payments for a fixed period of
at least five years but not more than 30 years. Payments stop after all
guaranteed payments are made.
o Life Income. Payments are made as of the first day of each payment period
during the annuitant's life, starting with the annuity payment date. No
payments are made after the annuitant dies. It is possible that you would
only receive one payment under this option if the annuitant dies before the
second payment is due. If you die after the payments begin and before the
end of the minimum guaranteed period (if applicable), the remaining
payments are made to the beneficiary named under your benefit option.
o Joint and Survivor Life Income. Payments are made during the life of the
annuitant and joint annuitant, continuing until the death of the survivor.
This option includes a minimum guaranteed period of 10 years. If both
persons die before the end of the minimum guaranteed period, the remaining
payments are made to the beneficiary under your benefit option.
o Joint and Two-thirds Survivor Life Income. Payments continue as long as
either the annuitant or the joint annuitant is alive. If either the
annuitant or joint annuitant dies, payments continue to the survivor at
two-thirds the original amount. Payments stop when both the annuitant and
joint annuitant have died. It is possible that only one payment is made
under this option if both annuitants die before the second payment is due.
o Other benefit options may be available with our approval.
If you do not select a payment option, your accumulated value will be applied as
follows to determine the annuity payment:
o life income with a ten year guarantee, or
o if there are joint annuitants, joint and survivor life income with a ten
year guarantee.
In order to avoid tax penalties, payments from at least one of your qualified
contracts must start no later than April 1 following the calendar year in which
you turn age 70 1/2. The required minimum payment is a distribution in equal (or
substantially equal) amounts over your life or over the joint lives of you and
your designated beneficiary. In addition, payments must be made at least once a
year. Tax penalties may also apply at your death on certain excess
accumulations. You should consider potential tax penalties with your tax advisor
when selecting a benefit option or taking other distributions from the Contract.
CHARGES AND DEDUCTIONS
A mortality and expense risks charge and in some circumstances a transaction fee
and state premium taxes are deducted under the Contract. A surrender charge (on
surrenders) and a transfer fee (on transfers to divisions of the Separate
Account) may also be deducted from certain withdrawals from the Fixed Account
made before the annuity payment date. We reserve the right to assess a daily
Separate Account administration charge. There are also deductions from and
expenses paid out of the assets of the Accounts which are described in the
Funds' prospectuses.
Mortality and Expense Risks Charge
We assess each division of the Separate Account with a daily charge for
mortality and expense risks. The annual rate of the charge is 0.85% of the
average daily net assets of the Separate Account. We reserve the right increase
this charge but guarantee that it will not exceed 1.25% per year. This charge is
assessed only prior to the annuity payment date. This charge is assessed daily
when the value of an accumulation unit is calculated.
We have a mortality risk in that we guarantee payment of a death benefit in a
single sum or under a benefit option. No surrender charge is imposed on a death
benefit payment which gives us an additional mortality risk.
The expense risk that we assume is that the actual expenses incurred in issuing
and administering the Contract exceed the Contract limits on administrative
charges.
If the mortality and expense risks charge is not enough to cover the costs, we
bear the loss. If the amount of mortality and expense risks charge deducted is
more than our costs, the excess is profit to the Company. We expect a profit
from the mortality and expense risks charge.
Transaction Fee
A transaction fee of $30 applies to each unscheduled partial surrender after the
twelfth unscheduled partial surrender in a contract year. A $30 transaction fee
is also charged to each unscheduled transfer from a division after the twelfth
such transfer in a contract year. The transaction fee is deducted from the Fixed
Account and/or your interest in a Separate Account division from which the
amount is surrendered or transferred, on a pro rata basis.
Premium Taxes
We reserve the right to deduct an amount to cover any premium taxes imposed by
states or other jurisdictions. Any deduction is made from either a purchase
payment when we receive it, or the accumulated value when you request a
surrender (total or partial) or it is applied under an annuity payment option.
Currently, premium taxes range from zero to 3.5%.
Fixed Account Surrender Charge and Transfer Fee
No sales charge is collected or deducted when purchase payments are applied
under the Contract to provide a benefit option. A surrender charge is assessed
on certain total or partial surrenders from the Fixed Account. The amounts we
receive from the surrender charge are used to cover some of the expenses of the
sale of the Contract (commissions and other promotional or distribution
expenses). If the surrender charge collected is not enough to cover the actual
costs of distribution, the costs are paid from the Company's General Account
assets which will include profit, if any, from the mortality and expense risks
charge.
The surrender charge for any total or partial surrender is a percentage of the
Fixed Account purchase payments withdrawn or surrendered which were received by
us during the seven contract years prior to the withdrawal or surrender. The
applicable percentage which is applied to the sum of the Fixed Account purchase
payments (which includes amounts transferred to the Fixed Account from any of
the Separate Account divisions) paid during each contract year is determined by
the following table.
The Fixed Account transfer fee is assessed on certain transfers from the Fixed
Account to the Separate Account.
<TABLE>
<CAPTION>
Table of Fixed Account Surrender Charges and Transfer Fees
----------------------------------------------------------
number of completed contract years surrender charge and transfer fee applied
since each Fixed Account to Fixed Account surrenders and transfers
purchase* was made beyond Free Transaction Amount
---------------------------------- -----------------------------------------
<S> <C> <C>
0 (year of purchase payment) 6%
1 6%
2 6%
3 5%
4 4%
5 3%
6 2%
7 and later 0
<FN>
* Includes amounts transferred to Fixed Account from Separate Account
divisions. Each Fixed Account purchase payment begins in year 0 for
purposes of calculating the percentage applied to that payment.
</FN>
</TABLE>
We assume that surrenders and transfers are made in the following order:
o first from Fixed Account purchase payments we received more than seven
completed contract years prior to the surrender (or transfer);
o then from the Fixed Account free transaction amount (first from the Fixed
Account's earnings, then from the oldest Fixed Account purchase payments
(first-in, first-out)) described below; and
o then from Fixed Account purchase payments we received within the seven
completed contract years before the surrender (or transfer) on a first-in,
first-out basis.
Where permitted by state law, we reserve the right to reduce:
o the surrender charge fee for any amounts surrendered from this Contract,
and/or
o transfer fees on amounts transferred from the Fixed Account to the Separate
These reductions would apply to Contracts that are attributable to a conversion
from other products issued by the Company and its subsidiaries and as otherwise
permitted by the Investment Company Act of 1940 (as amended).
Waiver of Fixed Account Surrender Charge Rider
The Fixed Account Surrender Charge will not apply to:
o amounts applied under a benefit option; or
o payment of death benefit; or
o amounts distributed to satisfy the minimum distribution requirement of
Section 401(a)9 of the Code (applies to qualified Contracts only) ; or
o after the seventh contract year, amounts transferred from the Contract to a
single premium immediate annuity issued by us; or
o any amount transferred from a Contract used to fund another annuity
contract issued by us to the contract owner's spouse when the distribution
is made under a divorce decree; or
o withdrawals made after the first Contract anniversary (if permitted by
state law) if the owner or annuitant has a critical need.
Waiver of the charge is available for critical need if the following conditions
are met:
o owner or annuitant has a critical need;
o the owner or annuitant to whom the critical need applies is the original
owner or annuitant; and
o the critical need did not exist before the contract date.
For the purposes of this section, the following definitions apply:
o critical need - owner's or annuitant's confinement to a health care
facility, terminal illness diagnosis or total and permanent disability. If
the critical need is confinement to a health care facility, the confinement
must continue for at least 60 consecutive days after the contract date and
the withdrawal must occur within 90 days of the confinement's end.
o health care facility - a licensed hospital or inpatient nursing facility
providing daily medical treatment and keeping daily medical records for
each patient (not primarily providing just residency or retirement care).
This does not include a facility primarily providing drug or alcohol
treatment, or a facility owned or operated by the owner, annuitant or a
member of their immediate families.
o terminal illness - sickness or injury that results in the owner's or
annuitant's life expectancy being 12 months or less from the date notice to
receive a distribution from the Contract is received by the Company.
o total and permanent disability - a disability that occurs after the
contract date and that qualifies the owner or annuitant to receive social
security disability payments.
This rider may not available in all states. Specific provisions and/or
definitions may have state variations. Contact us at 1-800-247-9988 for
additional information.
Administration Charge
We reserve the right to assess each division of the Separate Account with a
daily charge at the annual rate of 0.15% of the average daily net assets of the
division. This charge would only be imposed before the annuity payment date.
This charge would be assessed to help cover administrative expenses.
Administrative expenses include the cost of issuing the Contract, clerical,
recordkeeping and bookkeeping services, keeping the required financial and
accounting records, communicating with Contract owners and making regulatory
filings.
Special Provisions for Group or Sponsored Arrangements
Where permitted by state law, Contracts may be purchased under group or
sponsored arrangements as well as on an individual basis.
o group arrangement - program under which a trustee, employer or similar
entity purchases Contracts covering a group of individuals on a group
basis.
o sponsored arrangement - program under which an employer permits group
solicitation of its employees or an association permits group solicitation
of its members for the purchase of Contracts on an individual basis.
The charges and deductions described above may be reduced for Contracts issued
in connection with group or sponsored arrangements. The rules in effect at the
time the application is approved will determine if reductions apply. Reductions
may include Contracts without, or with reduced, Fixed Account surrender charges
or transfer fees.
Availability of the reduction and the size of the reduction (if any) is based
factors such as:
o size of group;
o expected number of participants; and
o anticipated purchase payments from the group.
Reductions reflect the reduced sales efforts and administrative costs resulting
from these arrangements.
We may modify the criteria for and the amount of the reduction in the future.
Modifications will not unfairly discriminate against any person, including
affected Contract owners and other contract owners with contracts funded by the
Separate Account.
FIXED ACCOUNT
You may allocate purchase payments and transfer amounts from the Separate
Account to the Fixed Account. Assets in the Fixed Account are held in the
General Account of the Company. Because of exemptive and exclusionary
provisions, interests in the Fixed Account are not registered under the
Securities Act of 1933 and the General Account is not registered as an
investment company under the Investment Company Act of 1940. The Fixed Account
is not subject to these Acts. The staff of the Commission does not review the
prospectus disclosures relating to the Fixed Account. However, these disclosures
are subject to certain generally applicable provisions of the federal securities
laws relating to the accuracy and completeness of statements made in the
prospectus.
This prospectus is intended to serve as a disclosure document only for the
Contract as it relates to the Separate Account. It only contains selected
information regarding the Fixed Account. More information concerning the Fixed
Account is available from our home office or from a sales representative.
General Description
Our obligations with respect to the Fixed Account are supported by the Company's
General Account. The General Account is the assets of the Company other than
those allocated to any of the Company's Separate Accounts. Subject to applicable
law, the Company has sole discretion over the assets in the General Account.
The Company guarantees that purchase payments allocated to the Fixed Account
earn interest at a guaranteed interest rate. In no event will the guaranteed
interest rate be less than 3% compounded annually.
Each purchase payment allocated or amount transferred to the Fixed Account earns
interest at the guaranteed rate in effect on the date it is received or
transferred. This rate applies to each purchase payment or amount transferred
through the end of the contract year.
Each contract anniversary, we declare a renewal interest rate that is guaranteed
and applies to the Fixed Account value in existence at that time. This rate
applies until the end of the contract year. Interest is earned daily and
compounded annually at the end of each contract year. Once credited, the
interest is guaranteed and becomes part of the accumulated value in the Fixed
Account from which deductions for fees and charges may be made.
Fixed Account Value
Your Contract's Fixed Account value on any valuation date is the sum of:
o purchase payments allocated to the Fixed Account;
o plus any transfers to the Fixed Account from the Separate Account;
o plus interest credited to the Fixed Account;
o minus any surrenders, surrender charges, or transaction fees allocated to
the Fixed Account;
o minus any transfers (and transfer fees) to the Separate Account.
Fixed Account Transfers, Total and Partial Surrenders
Transfers and surrenders from your investment in the Fixed Account are subject
to certain limitations. In addition, surrenders and transfers from the Fixed
Account may be subject to a charge or fee (see Fixed Account Surrender Charge
and Transfer Fee). The total amount you may transfer and/or surrender from the
Fixed Account may not exceed your Fixed Account value.
You may transfer amounts from the Fixed Account to the Separate Account
divisions before the annuity payment date and as provided below. Transfer occurs
within one business day of our receiving your instructions. You may transfer
amounts by making either a scheduled or unscheduled Fixed Account transfer. You
may not make both a scheduled and unscheduled Fixed Account transfer in the same
contract year.
Fixed Account Free Transaction Amount
- -------------------------------------
Each contract year, a certain portion of your Fixed Account value may be:
o withdrawn free of the surrender charge, or
o transferred to the Separate Account free of the transfer fee.
The surrender charge and transfer fee do not apply to Fixed Account surrenders
or transfers (or a combination of surrenders and transfers) which do not exceed
the greater of:
o your Fixed Account's earnings (Fixed Account value minus
unsurrendered/non-transferred Fixed Account purchase payments still subject
to a surrender charge or transfer fee), or
o 10% of your total Fixed Account value recalculated as of the later of the
contract date or last contract anniversary, or
o any amount to satisfy the minimum distribution amount requirement of the
Code.
In addition, 10% of Fixed Account purchase payments during the current Contract
year may be surrendered without a surrender charge or transferred without a
transfer fee.
Unscheduled Fixed Account Transfer
- ----------------------------------
You may make an unscheduled transfer from the Fixed Account each contract year
as follows:
o Transfer occurs within one business day of our receiving your instructions.
o You must specify the dollar amount or percentage to be transferred.
o Amounts in excess of the Fixed Account Free Transaction Amount may be
subject to a transfer fee.
o You may transfer up to 100% of your Fixed Account value (without incurring
the transfer fee) within 30 days after a contract anniversary if:
o your Fixed Account value is less than $1,000, or
o the renewal interest rate for your Fixed Account value for the current
contract year is more than one percentage point lower than the weighted
average of your Fixed Account interest rates for the preceding contract
year.
o If you do not meet one of the preceding conditions, transfers from the
Fixed Account may be subject to a surrender charge (see Fixed Account
Surrender Charge and Transfer Fee).
Scheduled Fixed Account Transfer (Dollar Cost Averaging)
- --------------------------------------------------------
You may make scheduled transfers on a periodic basis from the Fixed Account as
follows:
o Transfers occur on a date you specify (other than the 29th, 30th or 31st of
any month).
o If the selected date is not a valuation date, the transfer is completed on
the next valuation date.
o The minimum transfer amount is $50.
o Transfers continue until your value in the Fixed Account is exhausted or we
receive your notice to stop them.
o If you stop the transfers, you may not start them again without our prior
approval.
GENERAL PROVISIONS
Telephone Services
Telephone services are permitted (unless prohibited by state law) for both
changes in the allocation of future purchase payments and transfers among
divisions. Telephone services may be declined on the Contract application or at
any later date by providing us with written notice. Telephone service is used by
calling us at 1-800-247-9988.
Telephone transfer requests must be made while we are open for business. They
are effective when received by us before the close of the New York Stock
Exchange (generally 3 p.m. Central Time). Requests received when we are not open
for business or after the New York Stock Exchange closes will be effective on
the next business day.
Neither the Company nor the Separate Account are responsible for the
authenticity of telephone service transaction requests. We reserve the right to
refuse telephone service transaction requests. You assume the risk of loss
caused by fraudulent telephone service transactions we reasonably believe to be
genuine. We follow procedures in an attempt to assure genuine telephone service
transactions. If these procedures are not followed, then we may be liable for
loss caused by unauthorized or fraudulent transactions. The procedures include
recording telephone service transactions, requesting personal identification
(name, daytime telephone number, social security number and/or birthdate) and
sending written confirmation to your address of record.
The Contract
The entire Contract is made up of: applications, amendments, riders and
endorsements attached to the Contract; current data page; copies of any
supplemental applications, amendments, endorsements and revised Contract pages
or data pages which are mailed to you. Only our corporate officers can agree to
change or waive any provisions of a Contract. Any change or waiver must be in
writing and signed by an officer of the Company.
Delay of Payments
Surrenders are generally made within seven days after we receive your
instruction for a surrender in a form acceptable to us. This period may be
shorter where required by law. However, payment of any amount upon total or
partial surrender, death or the transfer to or from a division of the Separate
Account may be deferred during any period when the right to sell Fund shares is
suspended as permitted under provisions of the Investment Company Act of 1940
(as amended).
The right to sell shares may be suspended during any period when:
o trading on the New York Stock Exchange is restricted as determined by the
Commission or when the Exchange is closed for other than weekends and
holidays, or
o an emergency exists, as determined by the Commission, as a result of which:
o disposal by a Fund of securities owned by it is not reasonably
practicable;
o it is not reasonably practicable for a Fund to fairly determine the
value of its net assets; or
o the Commission permits suspension for the protection of security
holders.
If payments are delayed and your surrender (or transfer) is not canceled by your
written instruction, the amount to be surrendered (or transferred) will be
determined the first valuation date following the expiration of the permitted
delay. The surrender will be made within seven days thereafter.
In addition, payments on surrenders (or transfers) attributable to a purchase
payment made by check may be delayed up to 15 days. This permits payment to be
collected on the check. We may also defer payment of surrender proceeds payable
out of the Fixed Account for a period of up to six months.
Misstatement of Age or Gender
If the age or, where applicable, gender of the annuitant has been misstated, we
adjust the income payable under your Contract to reflect the amount that would
have been payable at the correct age and gender. If we make any overpayment
because of incorrect information about age or gender, or any error or
miscalculation, we deduct the overpayment from the next payment or payments due.
Underpayments are added to the next payment.
Assignment
You may assign your non-qualified Contract. Each assignment is subject to any
payments made or action taken by the Company prior to our notification of the
assignment. We assume no responsibility for the validity of any assignment. An
assignment or pledge of a Contract may have adverse tax consequences.
An assignment must be made in writing and filed with us at our home office. The
irrevocable beneficiary(ies), if any, must authorize any assignment in writing.
Your rights, as well as those of the annuitant and beneficiary, are subject to
any assignment on file with us. Any amounts paid to an assignee are treated as a
partial surrender and is paid in a single lump sum.
Change of Owner
You may change your ownership designation at any time (this does not apply to
IRAs or IRA rollovers). Your request must be in writing and approved by us.
After approval, the change is effective as of the date you signed the request
for change. We reserve the right to require that you send us the Contract so
that we can record the change.
Beneficiary
Before the annuity payment date, you have the right to name a beneficiary. This
may be done as part of the application process or by sending us a written
request. Unless you have named an irrevocable beneficiary, you may change your
beneficiary designation by sending us a written request.
Contract Termination
We reserve the right to terminate the Contract and make a single sum payment
(without imposing any charges) to you if your accumulated value at the end of
the accumulation period is less than $5,000. Before the Contract is terminated,
we will send you a notice to increase the accumulated value to $5,000 within 60
days.
RIGHTS RESERVED BY THE COMPANY
We reserve the right to make certain changes if, in our judgement, they best
serve the interests of you and the annuitant or are appropriate in carrying out
the purpose of the Contract. Any changes will be made only to the extent and in
the manner permitted by applicable laws. Also, when required by law, we will
obtain your approval of the changes and approval from any appropriate regulatory
authority. Approvals may not be required in all cases. Examples of the changes
the Company may make include:
o transfer assets in any division to another division or to the Fixed
Account;
o add, combine or eliminate divisions in the Separate Account; or
o substitute the shares of an Account for the Account shares in any division:
o if shares of an Account are no longer available for investment; or
o if in our judgement, investment in an Account becomes inappropriate
considering the purposes of the Separate Account.
DISTRIBUTION OF THE CONTRACT
The individuals who sell the Contract are authorized to sell life and other
forms of personal insurance and variable annuities. Though it is sold primarily
by insurance agents who are employees of the Company, the Contract may also be
offered by insurance agents or brokers who are not our employees but who are
appointed by us to sell variable annuities. Our employees who sell the Contract
are also registered representatives of Princor Financial Services Corporation,
Principal Financial Group, Des Moines, Iowa 50392-0200. Princor is a
broker-dealer registered under the Securities Exchange Act of 1934 and a member
of the National Association of Securities Dealers, Inc. When the Contract is
sold by our employees, as the principal underwriter, Princor is paid 1.35% of
purchase payments by the Company for the distribution of the Contract. Princor
is also the principal underwriter for various registered investment companies
organized by the Company. Princor is an indirectly wholly-owned subsidiary of
the Company.
In addition to being sold by our employees, the Contract may be offered through
other registered representatives of Princor and registered representatives of
other selected broker-dealers. Such broker-dealers are either registered under
the Securities Exchanges Act of 1934 or are exempt from such registration. When
the Contract is sold by other than our employees, as the principal underwriter,
Princor is paid 1.50% of purchase payments by the Company for the distribution
of the Contract.
PERFORMANCE CALCULATION
The Separate Account may publish advertisements containing information
(including graphs, charts, tables and examples) about the performance of one or
more of its divisions. The Contract was not offered prior to May 1, 1999.
However, shares of Accounts in which the Bond, Capital Value, International,
MidCap, MidCap Growth, Money Market, SmallCap and SmallCap Growth divisions of
the Separate Account invest were offered prior to that date. The Separate
Account may publish advertisements containing information about the hypothetical
performance of one or more of its divisions for this Contract as if the Contract
had been issued on or after the date the Account in which the division invests
was first offered. The hypothetical performance from the date of the inception
of the Account in which the division invests is calculated by reducing the
actual performance of the underlying Account by the fees and charges of this
Contract as if it had been in existence.
The American Century VP Income & Growth, Blue Chip, LargeCap Growth, MidCap
Value, Stock Index 500, and Templeton VP Stock divisions of the Separate Account
were not offered until May 1, 1999. Performance data for these divisions are
calculated utilizing standardized performance formulas and shows performance
since the inception date of the division.
The yield and total return figures described below vary depending upon market
conditions, composition of the underlying Account's portfolios and operating
expenses. These factors and possible differences in the methods used in
calculating yield and total return should be considered when comparing the
Separate Account performance figures to performance figures published for other
investment vehicles. The Separate Account may also quote rankings, yields or
returns as published by independent statistical services or publishers and
information regarding performance of certain market indices. Any performance
data quoted for the Separate Account represents only historical performance and
is not intended to indicate future performance. For further information on how
the Separate Account calculates yield and total return figures, see the SAI.
From time to time the Separate Account advertises its Money Market division's
"yield" and "effective yield" for these Contracts. Both yield figures are based
on historical earnings and are not intended to indicate future performance. The
"yield" of the division refers to the income generated by an investment in the
division over a 7-day period (which period is 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" is slightly
higher than the "yield" because of the compounding effect of the assumed
reinvestment.
In addition, the Separate Account advertises the "yield" for other divisions for
the Contract. The "yield" of a division is determined by annualizing the net
investment income per unit for a specific, historical 30-day period and dividing
the result by the ending maximum offering price of the unit for the same period.
The Separate Account also advertises 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.
VOTING RIGHTS
The Company votes Account shares of the Principal Variable Contracts Fund, Inc.
held in the Separate Account at meetings of shareholders of those Accounts. It
follows your voting instructions if you have an investment in the corresponding
division of the Separate Account.
The number of Account shares in which you have a voting interest is determined
by the Company as of a date not more than 90 days before the meeting of the
shareholders of the Account. Your voting instructions are solicited by written
communication at least ten days prior to the meeting. The number of Account
shares held in Separate Account B attributable to your interest in each division
is determined by dividing the value of your interest in that division by the net
asset value of one share of the underlying Account. Account shares for which
owners are entitled to give voting instructions, but for which none are
received, and shares of the Account owned by the Company are voted in the same
proportion as the total shares for which voting instructions have been received.
Proxy materials are provided to you along with an appropriate form that may be
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
owners, then the Company may vote Account shares held in Separate Account B in
its own right.
FEDERAL TAX MATTERS
The following description is a general summary of the tax rules, primarily
related to federal income taxes, which in our opinion are currently in effect.
These rules are based on laws, regulations and interpretations which are subject
to change at any time. This summary is not comprehensive and is not intended as
tax advice. Federal estate and gift tax considerations, as well as state and
local taxes, may also be material. You should consult a qualified tax adviser
about the tax implications of taking action under a Contract or related
retirement plan.
Non-Qualified Contracts
Section 72 of the Code governs the taxation of annuities in general.
o Purchase payments made under non-qualified Contracts are not excludible or
deductible from your gross income or any other person's gross income.
o An increase in the accumulated value of a non-qualified Contract resulting
from the investment performance of the Separate Account or interest credit
to the Fixed Account is generally not taxable until paid out as surrender
proceeds, death benefit proceeds, or otherwise.
o Generally, owners who are not natural persons are immediately taxed on any
increase in the accumulated value.
The following discussion applies generally to Contracts owned by natural
persons.
o Surrenders or partial surrenders are taxed as ordinary income to the extent
of the accumulated income or gain under the Contract.
o The value of the Contract pledged or assigned is taxed as ordinary income
to the same extent as a partial withdrawal.
o Annuity payments:
o The investment in the Contract is generally the total of the purchase
payments made.
o The portion of the annuity payment that represents the amount by which
the accumulated value exceeds the investment in the Contract is taxed
as ordinary income. The remainder of each annuity payment is not taxed.
o After the investment in the Contract is paid out, the full amount of
any annuity payment is taxable.
For purposes of determining the amount of taxable income resulting from
distributions, all Contracts and other annuity contracts issued by us or our
affiliates to the same owner within the same calendar year are treated as if
they are a single contract.
A transfer of ownership of a Contract, or designation of an annuitant or other
payee who is not also the owner, may result in a certain income or gift tax
consequences to the owner. If you are contemplating any transfer or assignment
of a Contract, you should contact a competent tax advisor with respect to the
potential tax effects of such transactions.
Required Distributions for Non-Qualified Contracts
In order for a non-qualified Contract to be treated as an annuity contract for
federal income tax purposes, the Code requires:
o If the person receiving payments dies on or after the annuity payment date
but prior to the time the entire interest in the Contract has been
distributed, the remaining portion of the interest is distributed at least
as rapidly as under the method of distribution being used as of the date of
that person's death.
o If you die prior to the annuity payment date, the entire interest in the
Contract will be distributed:
o within five years after the date of your death, or
o as annuity payments which begin within one year of your death and which
are made over the life of your designated beneficiary or over a period
not extending beyond the life expectancy of that beneficiary.
o If you take a distribution from the Contract before you are 59 1/2, you may
incur an income tax penalty.
If your designated beneficiary is your surviving spouse, the Contract may be
continued with your spouse deemed to be the new owner for purposes of the Code.
Where the owner or other person receiving payments is not a natural person, the
required distributions provided for in the Code apply upon the death of the
primary annuitant.
Generally, unless the beneficiary elects otherwise, the above requirements are
satisfied prior to the annuity payment date by paying the death benefit in a
single sum, subject to proof of your death. The beneficiary may elect by written
request to receive a benefit option instead of a lump sum payment. However, if
the election is not made within 60 days of the date the single sum death benefit
otherwise becomes payable, the IRS may disregard the election for tax purposes
and tax the beneficiary as if a single sum payment had been made.
IRA and SEP
The Contract may be used to fund IRAs and SEPs. The tax rules applicable to
owners, annuitants and other payees vary according to the type of plan and the
terms and conditions of the plan itself. In general, purchase payments made
under a retirement program recognized under the Code are excluded from the
participant's gross income for tax purposes prior to the annuity payment date.
The portion, if any, of any purchase payment made that is not excluded from
their gross income is their investment in the Contract.
Aggregate deferrals under all plans at the employee's option may be subject to
limitations.
The tax implications of these plans are further discussed in the SAI under the
heading Taxation Under Certain Retirement Plans. Check with your tax advisor for
the rules which apply to your specific situation.
With respect to IRAs or IRA rollovers, there is a 10% penalty under the Code on
the taxable portion of a "premature distribution." Generally, an amount is a
"premature distribution" unless the distribution is:
o made on or after you reach age 59 1/2,
o made to a beneficiary on or after your death,
o made upon your disability,
o part of a series of substantially equal periodic payments for the life or
life expectancy of you or you and the beneficiary,
o made to pay medical expenses,
o for certain unemployment expenses,
o for first home purchases (up to $10,000), or
o for higher education expenses.
Rollover IRAs. If you receive a lump-sum distribution from a pension or profit
sharing plan, to maintain the tax deferred status of the money it may be rolled
into a "Rollover Individual Retirement Account." You have 60 days from receipt
of the money to complete this transaction. If you choose not to reinvest or go
beyond the 60 day limit and are under age 59 1/2, you will incur a 10% IRS
penalty as well as income tax expenses.
Withholding
Annuity payments and other amounts received under the Contract are subject to
income tax withholding unless the recipient elects not to have taxes withheld.
The amounts withheld vary among recipients depending on the tax status of the
individual and the type of payments from which taxes are withheld.
Notwithstanding the recipient's election, withholding may be required on
payments delivered outside the United States. Moreover, special "backup
withholding" rules may require us to disregard the recipient's election if the
recipient fails to supply us with a "TIN" or taxpayer identification number
(social security number for individuals), or if the Internal Revenue Service
notifies us that the TIN provided by the recipient is incorrect.
Mutual Fund Diversification
The United States Treasury Department has adopted regulations under Section
817(h) of the Code which establishes standards of diversification for the
investments underlying the Contracts. Under this Code Section, Separate Account
investments must be adequately diversified in order for the increase in the
value of non-qualified Contracts to receive tax-deferred treatment. In order to
be adequately diversified, the portfolio of each underlying Account must, as of
the end of each calendar quarter or within 30 days thereafter, have no more than
55% of its assets invested in any one investment, 70% in any two investments,
80% in any three investments and 90% in any four investments. Failure of an
Account to meet the diversification requirements could result in tax liability
to non-qualified Contract holders.
The investment opportunities of the Accounts could conceivably be limited by
adhering to the above diversification requirements. This would affect all
owners, including owners of Contracts for whom diversification is not a
requirement for tax-deferred treatment.
STATE REGULATION
The Company is subject to the laws of the State of Iowa governing insurance
companies and to regulation by the Insurance Department of the State of Iowa. An
annual statement in a prescribed form must be filed by March 1 in each year
covering our operations for the preceding year and our financial condition on
December 31 of the prior year. Our books and assets are subject to examination
by the Commissioner of Insurance of the State of Iowa or her representatives at
all times. A full examination of our 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, we are subject to the insurance laws and regulations of other
states and jurisdictions where we are 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 our
right 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 SAI (Part B of the
Registration Statement) and Part C of the Registration Statement which the
Company has filed with the Commission. The SAI is a part of this Prospectus. You
may request a free copy of the SAI by writing or telephoning Princor. You may
obtain a copy of Part C of the Registration Statement from the Commission,
Washington, D.C. by paying the prescribed fees.
OTHER VARIABLE ANNUITY CONTRACTS
The Company currently offers other variable annuity contracts that participate
in Separate Account B. In the future, we may designate additional group or
individual variable annuity contracts as participating in Separate Account B.
INDEPENDENT AUDITORS
The financial statements of Principal Life Insurance Company Separate Account B
and the financial statements of Principal Life Insurance Company are included in
the SAI. Those statements have been audited by Ernst & Young LLP, independent
auditors, for the periods indicated in their reports which also appear in the
SAI.
FINANCIAL STATEMENTS
The financial statements of the Principal Life Insurance Company which are
included in the SAI should be considered only as it relates to our ability to
meet our obligations under the Contract. They do not relate to investment
performance of the assets held in the Separate Account.
YEAR 2000 READINESS DISCLOSURE
Starting in early 1995, as a corporate effort, the Company recognized the Year
2000 could have a significant impact on our operations. With the strong
commitment from the Board of Directors, Chief Executive Officer and Chief
Information Officer, we initiated a comprehensive plan to ensure our systems and
facilities would function correctly regardless of the date on the calendar.
Assessments of our computer systems were completed in 1996. We identified 35,000
programs comprising 40 million lines of mainframe code, 1,300 PC software
packages, and 400,000+ end-user PC applications that could be affected by the
Year 2000.
Our analysis didn't stop there. We requested Year 2000 compliance status
information from hardware and software vendors of over 1,000 PC systems and 450
mainframe systems. New purchase agreements, along with renewal agreements, have
included a "Year 2000" warranty clause since 1997.
In 1997, we contacted critical service and product suppliers such as banks and
utility companies regarding their Year 2000 readiness. To further assess the
stability of our external supply chain, we conducted another survey in 1998, and
a third evaluation of our most critical suppliers will take place in 1999.
As of December 31, 1998, 100 percent of our identified mission critical system
renovations were completed, tested and in production. We expect to complete the
remaining identified changes by June 30, 1999 (when we receive and install
updated software releases from our outside vendors).
Full-scale testing of our systems began in March 1998 using an in-house,
isolated testing facility. We include "system date manipulation" and "file
aging" processes to verify a wide variety of dates before, on, and after January
1, 2000, including February 29, 2000 (leap day).
Our objective is to complete full-scale testing of all identified mission
critical systems in second quarter 1999, with significant attentions to year-end
and leap-year processing. Verification will continue through 1999, and into the
early part of 2000, to ensure no new date related problems are introduced into
previously tested or newly developed systems.
We believe our thorough systems testing process should eliminate significant
date related problems that could affect our systems. We will have staff onsite
during critical times to ensure a timely and accurate response to unforeseen
issues which may arise.
Contingency plan development began July 1998. The methodology was documented in
November 1998. We expect initial plans to be completed by March 31, 1999. These
plans are being developed to address external systems and non-systems events
that could affect our operations. Many of those scenarios are beyond our
control, so we are identifying possible options, which will minimize their
impact. We are also communicating with other entities involved to encourage
their Year 2000 preparedness. We will reevaluate our contingency plans
throughout the Year 2000 experience.
The cost associated with completing our Year 2000 readiness for the business
unit of the Company which issues the Policy is estimated to be $1.3 - $1.6
million.
Additional corporate Y2K information can be found on our website at
www.principal.com/general/faqy2k.htm.
CUSTOMER INQUIRIES
Your questions should be directed to: Principal FreedomSM Variable Annuity,
Principal Financial Group, P.O. Box 9382, Des Moines, Iowa 50306-9382,
1-800-247-9988.
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
General Information and History............................................. 4
Independent Auditors ...................................................... 4
Calculation of Yield and Total Return ...................................... 4
Taxation Under Certain Retirement Plans..................................... 6
Principal Life Insurance Company Separate Account B
Report of Independent Auditors......................................... 9
Financial Statements................................................... 10
Principal Life Insurance Company
Report of Independent Auditors......................................... 33
Financial Statements................................................... 34
To obtain a free copy of the SAI write or telephone:
Principal FreedomSM Variable Annuity
Principal Financial Group
P.O. Box 9382
Des Moines, Iowa 50306-9382
Telephone: 1-800-247-9988
PART B
STATEMENT OF ADDITIONAL INFORMATION
PRINCIPAL FREEDOMSM VARIABLE ANNUITY CONTRACT
dated May 1, 1999
The Statement of Additional Information provides information about the Principal
Freedom Variable Annuity sponsored by Principal Life Insurance Company.
This Statement of Additional Information is not a prospectus but does provide
information that supplements the Contract's Prospectus dated May 1, 1999. It
should be read with that Prospectus which is available without charge. To
request a copy of the Prospectus, please contact us at:
Principal FreedomSM Variable Annuity
Principal Financial Group
P.O. Box 9382
Des Moines, Iowa 50306-9382
Telephone: 1-800-247-9988
TABLE OF CONTENTS
General Information and History............................................ 4
Independent Auditors ..................................................... 4
Calculation of Yield and Total Return ..................................... 4
Taxation Under Certain Retirement Plans.................................... 6
Principal Life Insurance Company Separate Account B
Report of Independent Auditors........................................ 9
Financial Statements.................................................. 10
Principal Life Insurance Company
Report of Independent Auditors........................................ 33
Financial Statements.................................................. 34
GENERAL INFORMATION AND HISTORY
Principal Life Insurance Company is the issuer of the Principal Freedom Variable
Annuity (the "Contract"). In 1879, it was incorporated under the laws of the
State of Iowa as a mutual life insurance company named Bankers Life Association.
It changed its name to Bankers Life Company in 1911 and then to Principal Mutual
Life Insurance Company in 1986. The name change to Principal Life Insurance
Company and reorganization into a mutual holding company structure was effective
July 1, 1998.
INDEPENDENT AUDITORS
Ernst & Young LLP, 801 Grand, Des Moines, Iowa, serves as independent auditors
for Principal Life Insurance Company Separate Account B and the Principal Life
Insurance Company. The firm performs audit and accounting services for Separate
Account B and the Principal Life Insurance Company.
CALCULATION OF YIELD AND TOTAL RETURN
The Separate Account may publish advertisements containing information
(including graphs, charts, tables and examples) about the performance of one or
more of its divisions.
The Contract was not offered prior to May 1, 1999. Each division of the Separate
Account which is available for investment through the Contract invests in an
Account of the Principal Variable Contracts Fund, Inc., the American Century
Variable Portfolios, Inc. - VP Income & Growth or the Templeton Variable
Products Series Fund - Templeton Stock Fund Class 2.
Certain of the Accounts of the Principal Variable Contracts Fund, Inc.
correspond to open-end investment companies ("mutual funds") which, effective
January 1, 1998, were reorganized into the Accounts of the Principal Variable
Contracts Fund, Inc. as follows:
Account Name Old Mutual Fund Name
------------ --------------------
Bond Account Principal Bond Fund, Inc.
Capital Value Account Principal Capital Accumulation Fund, Inc.
MidCap Account Principal Emerging Growth Fund, Inc.
Money Market Account Principal Money Market Fund, Inc.
International Account Principal World Fund, Inc.
These Accounts (under their former names), the MidCap Growth Account, SmallCap
Growth Account as well as the American Century Variable Portfolios, Inc. - VP
Income & Growth, and the Templeton Variable Products Series Fund - Templeton
Stock Fund Class 2 were offered prior to the date the Contract was available.
The Separate Account may publish advertisements containing information about the
hypothetical performance of one or more of its divisions for this Contract as if
the contract had been issued on or after the date the Account in which such
division invests was first offered. The hypothetical performance from the date
of the inception of the Account is derived by reducing the actual performance of
the underlying Account by the fees and charges of the Contract as if it had been
in existence. The yield and total return figures described below vary depending
upon market conditions, the composition of the underlying Account's portfolios
and operating expenses. These factors and possible differences in the methods
used in calculating yield and total return should be considered when comparing
the Separate Account performance figures to performance figures published for
other investment vehicles. The Separate Account may also quote rankings, yields
or returns published by independent statistical services or publishers and
information regarding performance of certain market indices. Any performance
data quoted for the Separate Account represents historical performance and is
not intended to indicate future performance.
From time to time the Account advertises its Money Market division's "yield" and
"effective yield" for the Contract. Both yield figures are based on historical
earnings and are not intended to indicate future performance. The "yield" of the
division refers to the income generated by an investment under the contract in
the division over a seven-day period (the 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" is slightly higher than the "yield" because of the compounding
effect of this assumed reinvestment. Neither yield quotation reflects a sales
load deducted from purchase payments which, if included, would reduce the
"yield" and "effective yield."
In addition, the Separate Account advertises the "yield" for certain other
divisions for the Contract. The "yield" of a division is determined by
annualizing the net investment income per unit for a specific, historical 30-day
period and dividing the result by the ending maximum offering price of the unit
for the same period. This yield quotation does not reflect a contingent deferred
sales charge which, if included, would reduce the "yield." No contingent
deferred sales charge is assessed on investments in the divisions of the
Separate Account of the Contract.
The Separate Account also advertises 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.
Following are the hypothetical average annual total returns for the period ended
December 31, 1998 assuming the contract had been offered as of the effective
dates of the underlying Accounts in which the Divisions invest:
<TABLE>
<CAPTION>
Division One Year Five Year Ten Year
-------- -------- --------- --------
American Century Variable Portfolios, Inc. -
<S> <C> <C> <C>
VP Income & Growth 25.80% 28.93%(2) N/A
Principal Variable Contracts Fund, Inc.
Bond 6.78 6.75 8.54%
Capital Value 12.62 18.04 14.18
International 9.05 11.50(4) N/A
MidCap 2.80 13.95 15.25
MidCap Growth -3.96(1) N/A N/A
Money Market 4.32 4.06 4.48
SmallCap -20.98(1) N/A N/A
SmallCap Growth 2.37(1) N/A N/A
Templeton Variable Products Series Fund
Templeton Stock Fund Class 2. -32.16 -17.71(3) N/A
<FN>
(1) Period from May 1, 1998 through December 31, 1998.
(2) Period from October 30, 1997 through December 31, 1998.
(3) Period from May 1, 1997 through December 31, 1998.
(4) Period from May 1, 1994 through December 31, 1998.
</FN>
</TABLE>
TAXATION UNDER CERTAIN RETIREMENT PLANS
Individual Retirement Annuities
Purchase Payments. Individuals may make contributions for individual retirement
annuity ("IRA") Contracts. Deductible contributions for any year may be made up
to the lesser of $2,000 or 100% of compensation for individuals who (1) are not
active participants in another retirement plan, (2) are unmarried and have
adjusted gross income of $40,000 or less, or (3) are married and have adjusted
gross income of $60,000 or less. Such individuals may establish an IRA for a
spouse who makes no contribution to an IRA for the tax year. The annual purchase
payments for both spouses' Contracts cannot exceed the lesser of $4,000 or 100%
of the working spouse's earned income, and no more than $2,000 may be
contributed to either spouse's IRA for any year. Individuals who are active
participants in other retirement plans and whose adjusted gross income (with
certain special adjustments) exceeds the cut-off point ($40,000 for unmarried,
$60,000 for married persons filing jointly, and $0 for married persons filing a
separate return) by less than $10,000 are entitled to make deductible IRA
contributions in proportionately reduced amounts. For example, a married
individual who is an active participant in another retirement plan and files a
separate tax return is entitled to a partial IRA deduction if the individual's
adjusted gross income is less than $10,000, and no IRA deduction if his or her
adjusted gross income is equal to or greater than $10,000. Individuals whose
spouse is an active participant in other retirement plans and whose combined
adjusted gross income exceeds the cutoff point of $150,000 by less than $10,000
are entitled to make deductible IRA contributions in proportionately reduced
amounts.
An individual may make non-deductible IRA contributions to the extent of the
excess of (1) the lesser of $2,000 ($4,000 in the case of a spousal IRA) or 100%
of compensation over (2) the IRA deductible contributions made with respect to
the individual.
An individual may not make any contribution to his/her own IRA for the year in
which he/she reaches age 70 1/2 or for any year thereafter.
Taxation of Distributions. Distributions from IRA Contracts are taxed as
ordinary income to the recipient, although special rules exist for the tax-free
return of non-deductible contributions. In addition, taxable distributions
received under an IRA Contract prior to age 59 1/2 are subject to a 10% penalty
tax in addition to regular income tax. Certain distributions are exempted from
this penalty tax, including distributions following the owner's death or
disability if the distribution is paid as part of a series of substantially
equal periodic payments made for the life (or life expectancy) of the Owner or
the joint lives (or joint life expectancies) of Owner and the Owner's designated
Beneficiary; distributions to pay medical expenses; distributions for certain
unemployment expenses; distributions for first home purchases (up to $10,000)
and distributions for higher education expenses.
Required Distributions. Generally, distributions from IRA Contracts must
commence not later than April 1 of the calendar year following the calendar year
in which the employee attains age 70 1/2, and such distributions must be made
over a period that does not exceed the life expectancy of the employee (or the
employee and Beneficiary). A penalty tax of 50% would be imposed on any amount
by which the minimum required distribution in any year exceeded the amount
actually distributed in that year. In addition, in the event that the employee
dies before his or her entire interest in the Contract has been distributed, the
employee's entire interest must be distributed in accordance with rules similar
to those applicable upon the death of the Contract Owner in the case of a
non-qualified contract, as described in the Prospectus.
Tax-Free Rollovers. The Code permits the taxable portion of funds to be
transferred in a tax-free rollover from a qualified employer pension,
profit-sharing, annuity, bond purchase or tax-deferred annuity plan to an IRA
Contract if certain conditions are met, and if the rollover of assets is
completed within 60 days after the distribution from the qualified plan is
received. A direct rollover of funds may avoid a 20% federal tax withholding
generally applicable to qualified plans or tax-deferred annuity plan
distributions. In addition, not more frequently than once every twelve months,
amounts may be rolled over tax-free from one IRA to another, subject to the
60-day limitation and other requirements. The once-per-year limitation on
rollovers does not apply to direct transfers of funds between IRA custodians or
trustees.
Simplified Employee Pension Plans and Salary Reduction Simplified Employee
Pension Plans Purchase Payments. Under Section 408(k) of the Code, employers may
establish a type of IRA plan referred to as a simplified employee pension plan
(SEP). Employer contributions to a SEP cannot exceed the lesser of $24,000 or
15% or the employee's earned income. Employees of certain small employers may
have contributions made to the salary reduction simplified employee pension plan
("SAR/SEP") on their behalf on a salary reduction basis. These salary reduction
contributions may not exceed $10,000 in 1999, which is indexed for inflation.
Employees of tax-exempt organizations and state and local government agencies
are not eligible for SAR/SEPs. SAR/SEPs may not be established after December
31, 1996.
Taxation of Distributions. Generally, distribution payments from SEPs and
SAR/SEPs are subject to the same distribution rules described above for IRAs.
Required Distributions. SEPs and SAR/SEPs are subject to the same minimum
required distribution rules described above for IRAs.
Tax-Free Rollovers. Generally, rollovers and direct transfers may be made to and
from SEPs and SAR/SEPs in the same manner as described above for IRAs, subject
to the same conditions and limitations.
Savings Incentive Match Plans for Employees (Simple Ira)
Purchase Payments. Under Section 408(p) of the Code, employers may establish a
type of IRA plan known as a Simple IRA. Employees may have contributions made to
the SIMPLE IRA on a salary reduction basis. These salary reduction contributions
may not exceed $6,000 in 1999, which is indexed for inflation. Total salary
reduction contributions are limited to $10,000 per year for any employee who
makes salary reduction contributions to more than one plan. Employers are
required to contribute to the SIMPLE IRA, which contributions may not exceed the
lesser of: (1) The amount of salary deferred by the employee, (2) 3% of the
employee's compensation, or (3) $6,000, if the employer contributes on a
matching basis; or the lesser of: (1) 2% of the employee's compensation, or (2)
$3,200, if the employer makes non-elective contributions. An employer may not
make contributions to both a SIMPLE IRA and another retirement plan for the same
calendar year.
Taxation of Distributions. Generally, distribution payments from SIMPLE IRAs are
subject to the same distribution rules described above for IRAs, except that
distributions made within two years of the date of an employee's first
participation in a SIMPLE IRA of an employer are subject to a 25% penalty tax
instead of the 10% penalty tax discussed previously.
Required Distributions. SIMPLE IRAs are subject to the same minimum required
distribution rules described above for IRAs.
Tax-Free Rollovers. Direct transfers may be made among SIMPLE IRAs in the same
manner as described above for IRAs, subject to the same conditions and
limitations. Rollovers from SIMPLE IRAs are permitted after two years have
elapsed from the date of an employee's first participation in a SIMPLE IRA of
the employer. Rollovers to SIMPLE IRAs from other plans are not permitted.
Report of Independent Auditors
Board of Directors and Participants
Principal Life Insurance Company
We have audited the accompanying statement of net assets of Principal Life
Insurance Company Separate Account B (comprising, respectively, the Aggressive
Growth, Asset Allocation, Balanced, Bond, Capital Value [formerly Capital
Accumulation], Government Securities, Growth, International [formerly World],
MidCap [formerly Emerging Growth], and Money Market Divisions; and, beginning
May 1, 1998 [date operations commenced], the International SmallCap, MicroCap,
MidCap Growth, Real Estate, SmallCap, SmallCap Growth, SmallCap Value, and
Utilities Divisions) as of December 31, 1998, 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, 1998, 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 Life Insurance
Company Separate Account B at December 31, 1998, 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
January 29, 1999
<PAGE>
Principal Life Insurance
Company Separate Account B
Statement of Net Assets
December 31, 1998
Assets
Investments:
Aggressive Growth Division:
Aggressive Growth Account - 11,371,446 shares at net asset value of $18.33
per share (cost - $178,267,259)
$ 208,438,611
Asset Allocation Division:
Asset Allocation Account - 5,104,252 shares at net asset value of $12.30
per share (cost - $60,233,970)
62,782,299
Balanced Division:
Balanced Account - 11,546,085 shares at net asset value
of $16.25 per share (cost - $174,579,287)
187,623,872
Bond Division:
Bond Account - 9,732,261 shares at net asset value of $12.02 per share
(cost -$115,148,744)
116,981,771
Capital Value Division:
Capital Value Account - 9,635,914 shares at net asset value of $37.19
per share (cost - $302,231,124)
358,359,614
Government Securities Division:
Government Securities Account - 12,410,577 shares at
net asset value of $11.01 per share (cost - $132,699,642)
136,640,443
Growth Division:
Growth Account - 12,388,261 shares at net asset value of
$20.46 per share (cost - $183,113,548)
253,463,838
International Division:
International Account - 9,965,227 shares at net asset value of
$14.51 per share (cost - $128,347,758)
144,595,446
International SmallCap Division:
International SmallCap Account - 417,619 shares at net asset
value of $9.00 per share (cost - $3,801,982)
3,758,570
MicroCap Division:
MicroCap Account - 140,266 shares at net asset value of
$8.17 per share (cost - $1,225,445)
1,145,974
MidCap Division:
MidCap Account - 6,771,410 shares at net asset value of
$34.37 per share (cost - $198,836,712)
232,733,374
MidCap Growth Division:
MidCap Growth Account - 351,189 shares at net asset value
of $9.65 per share (cost - $3,104,721)
3,388,971
Money Market Division:
Money Market Account - 73,597,012 shares at net asset value of $1.00
per share (cost - $73,597,012)
73,597,012
See accompanying notes.
Assets (continued)
Real Estate Division:
Real Estate Account - 199,858 shares at net asset value of $9.07
per share (cost - $1,857,915)
$ 1,812,711
SmallCap Division:
SmallCap Account - 442,796 shares at net asset value of $8.21
per share (cost - $3,515,041)
3,635,355
SmallCap Growth Division:
SmallCap Growth Account - 316,865 shares at net asset value of $10.10
per share (cost - $2,744,450)
3,200,338
SmallCap Value Division:
SmallCap Value Account - 309,231 shares at net asset value
of $8.34 per share (cost - $2,559,608)
2,578,984
Utilities Division:
Utilities Account - 670,534 shares at net asset value of $10.93 per share
(cost - $6,711,416)
7,328,933
======================
Net assets $1,802,066,116
======================
<PAGE>
Principal Life Insurance
Company Separate Account B
Statement of Net Assets (continued)
December 31, 1998
<TABLE>
<CAPTION>
Unit
Units Value
------------------------
<S> <C> <C> <C>
Net assets are represented by:
Aggressive Growth Division:
Contracts in accumulation period:
The Principal Variable Annuity 7,485,637 $27.85 $208,438,611
Asset Allocation Division:
Contracts in accumulation period:
The Principal Variable Annuity 3,761,735 16.69 62,782,299
Balanced Division:
Contracts in accumulation period:
Personal Variable 2,321,229 1.77 4,109,836
Premier Variable 14,770,828 1.79 26,396,964
The Principal Variable Annuity 8,903,277 17.65 157,117,072
------------
------------
187,623,872
Bond Division:
Contracts in accumulation period:
Personal Variable 765,780 1.47 1,126,185
Premier Variable 6,013,799 1.48 8,926,784
The Principal Variable Annuity 7,498,613 14.26 106,928,802
------------
------------
116,981,771
Capital Value Division:
Currently payable annuity contracts:
Bankers Flexible Annuity 4,299 31.50 135,398
Pension Builder Plus - Rollover IRA 54,872 6.51 357,449
------------
492,847
Contracts in accumulation period:
Bankers Flexible Annuity 221,262 31.50 6,970,904
Pension Builder Plus 1,288,464 5.88 7,572,342
Pension Builder Plus - Rollover IRA 293,222 6.51 1,907,883
Personal Variable 3,764,848 2.65 9,982,371
Premier Variable 22,328,019 2.69 60,046,505
The Principal Variable Annuity 11,720,185 23.16 271,386,762
------------
357,866,767
------------
358,359,614
Government Securities Division:
Contracts in accumulation period:
Pension Builder Plus 488,033 2.17 1,061,229
Pension Builder Plus - Rollover IRA 151,353 2.31 348,924
Personal Variable 1,953,940 1.52 2,973,074
Premier Variable 8,358,244 1.54 12,899,067
The Principal Variable Annuity 8,553,946 13.95 119,358,149
------------
136,640,443
Growth Division:
Contracts in accumulation period:
Personal Variable 2,232,330 2.13 4,744,796
Premier Variable 16,370,833 2.15 35,121,256
The Principal Variable Annuity 9,862,571 21.66 213,597,786
------------
253,463,838
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Unit
Units Value
----------------------------
----------------------------
<S> <C> <C> <C>
Net assets are represented by:
International Division:
Contracts in accumulation period:
Personal Variable 1,510,915 $1.65 $ 2,488,857
Premier Variable 9,442,447 1.66 15,699,547
The Principal Variable Annuity 7,865,745 16.07 126,407,042
--------------
144,595,446
International SmallCap Division:
Contracts in accumulation period:
The Principal Variable Annuity 418,654 8.98 3,758,570
MicroCap Division:
Contracts in accumulation period:
The Principal Variable Annuity 141,369 8.11 1,145,974
MidCap Division:
Contracts in accumulation period:
Personal Variable 1,917,499 1.92 3,685,468
Premier Variable 12,204,415 1.94 23,677,140
The Principal Variable Annuity 10,738,428 19.12 205,370,766
--------------
232,733,374
MidCap Growth Division:
Contracts in accumulation period:
The Principal Variable Annuity 352,022 9.63 3,388,971
Money Market Division:
Contracts in accumulation period:
Pension Builder Plus 369,783 1.96 723,423
Pension Builder Plus - Rollover IRA 10,667 2.05 21,829
Personal Variable 1,329,920 1.28 1,695,975
Premier Variable 9,868,681 1.30 12,764,651
The Principal Variable Annuity 4,904,753 11.91 58,391,134
--------------
73,597,012
Real Estate Division:
Contracts in accumulation period:
The Principal Variable Annuity 195,435 9.28 1,812,711
SmallCap Division:
Contracts in accumulation period:
The Principal Variable Annuity 458,539 7.93 3,635,355
SmallCap Growth Division:
Contracts in accumulation period:
The Principal Variable Annuity 314,420 10.18 3,200,338
SmallCap Value Division:
Contracts in accumulation period:
The Principal Variable Annuity 305,572 8.44 2,578,984
Utilities Division:
Contracts in accumulation period:
The Principal Variable Annuity 639,299 11.46 7,328,933
==============
Net assets $1,802,066,116
==============
</TABLE>
<PAGE>
Principal Life Insurance Company
Separate Account B
Statement of Operations
Year ended December 31, 1998
<TABLE>
<CAPTION>
Aggressive Asset Allocation
Growth Division Division
Combined
--------------------------------------------------------
--------------------------------------------------------
<S> <C> <C> <C>
Investment income
Income:
Dividends $ 35,563,154 $ 386,909 $1,492,404
Capital gains distributions 50,235,913 10,088,357 1,853,405
--------------------------------------------------------
--------------------------------------------------------
Total income 85,799,067 10,475,266 3,345,809
Expenses:
Mortality and expense risks 17,696,159 2,218,045 702,097
Administration charges 552,069 116,130 7,655
Contingent sales charges 1,597,700 206,988 72,030
--------------------------------------------------------
--------------------------------------------------------
19,845,928 2,541,163 781,782
--------------------------------------------------------
--------------------------------------------------------
Net investment income (loss) 65,953,139 7,934,103 2,564,027
Realized and unrealized gains (losses) on
investments
Net realized gains (losses) on investments
12,416,637 2,390,605 109,943
Change in net unrealized appreciation/
depreciation of investments 69,585,710 16,690,371 1,193,914
--------------------------------------------------------
========================================================
Net increase (decrease) in net assets resulting
from operations $147,955,486 $27,015,079 $3,867,884
========================================================
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
Capital Government
Balanced Bond Value Securities
Division Division Division Division
-------------------------------------------------------------------------
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment income
Income:
Dividends $ 5,238,471 $5,971,195 $ 6,429,904 $6,927,074
Capital gains distributions 5,863,051 62,033 12,255,065 -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total income 11,101,522 6,033,228 18,684,969 6,927,074
Expenses:
Mortality and expense risks 1,755,460 1,099,671 3,396,860 1,319,686
Administration charges 38,695 15,794 174,201 29,797
Contingent sales charges 142,069 98,023 248,388 119,994
-------------------------------------------------------------------------
-------------------------------------------------------------------------
1,936,224 1,213,488 3,819,449 1,469,477
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net investment income (loss) 9,165,298 4,819,740 14,865,520 5,457,597
Realized and unrealized gains (losses) on
investments
Net realized gains (losses) on investments
612,459 256,093 3,370,612 519,217
Change in net unrealized appreciation/
depreciation of investments 5,916,307 403,378 16,709,725 1,581,620
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations $15,694,064 $5,479,211 $34,945,857 $7,558,434
=========================================================================
</TABLE>
<TABLE>
<CAPTION>
Growth International
Division Division
---------------------------------------
---------------------------------------
<S> <C> <C>
Investment income
Income:
Dividends $ 2,527,666 $2,324,284
Capital gains distributions 2,405,834 4,824,427
---------------------------------------
---------------------------------------
Total income 4,933,500 7,148,711
Expenses:
Mortality and expense risks 2,326,505 1,572,370
Administration charges 70,201 22,222
Contingent sales charges 181,708 133,172
---------------------------------------
---------------------------------------
2,578,414 1,727,764
---------------------------------------
---------------------------------------
Net investment income (loss) 2,355,086 5,420,947
Realized and unrealized gains (losses) on
investments
Net realized gains (losses) on investments
2,312,393 1,240,861
Change in net unrealized appreciation/
depreciation of investments 32,170,680 3,163,616
---------------------------------------
---------------------------------------
Net increase (decrease) in net assets resulting
from operations $36,838,159 $9,825,424
=======================================
</TABLE>
Principal Life Insurance Company
Separate Account B
Statement of Operations (continued)
Year ended December 31, 1998
<TABLE>
<CAPTION>
International MidCap
SmallCap Division* MicroCap MidCap Growth
Division* Division Division*
----------------------------------------------------------------------------
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment income
Income:
Dividends $ 9,794 $ 4,786 $ 1,368,645 $ -
Capital gains distributions - - 12,883,741 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total income 9,794 4,786 14,252,386 -
Expenses:
Mortality and expense risks 16,991 6,089 2,595,067 12,207
Administration charges 210 126 59,714 245
Contingent sales charges 87 378 249,206 1,273
----------------------------------------------------------------------------
----------------------------------------------------------------------------
17,288 6,593 2,903,987 13,725
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net investment income (loss) (7,494) (1,807) 11,348,399 (13,725)
Realized and unrealized gains
(losses) on investments
Net realized gains (losses) on
investments (34,310) (30,669) 1,666,097 (8,805)
Change in net unrealized
appreciation/depreciation of
investments (43,412) (79,471) (9,573,159) 284,250
----------------------------------------------------------------------------
============================================================================
Net increase (decrease) in net
assets resulting from operations
$(85,216) $(111,947) $ 3,441,337 $261,720
============================================================================
</TABLE>
<TABLE>
<CAPTION>
Money SmallCap Growth SmallCap Value
Market Division Real Estate SmallCap Division* Division*
Division* Division*
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment income
Income:
Dividends $2,711,098 $53,265 $ 338 $ - $ 9,921
Capital gains distributions - - - - -
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
Total income 2,711,098 53,265 338 - 9,921
Expenses:
Mortality and expense risks 607,616 7,997 13,571 11,177 10,196
Administration charges 15,992 131 228 166 159
Contingent sales charges 142,955 193 87 338 303
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
766,563 8,321 13,886 11,681 10,658
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
Net investment income (loss) 1,944,535 44,944 (13,548) (11,681) (737)
Realized and unrealized gains
(losses) on investments
Net realized gains (losses) on
investments - (1,854) (4,971) 1,417 (6,817)
Change in net unrealized
appreciation/depreciation of
investments - (45,204) 120,314 455,888 19,376
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets resulting from operations $1,944,535 $(2,114) $101,795 $445,624 $11,822
=============================================================================================
</TABLE>
Utilities
Division*
----------------
----------------
Investment income
Income:
Dividends $107,400
Capital gains distributions -
----------------
----------------
Total income 107,400
Expenses:
Mortality and expense risks 24,554
Administration charges 403
Contingent sales charges 508
----------------
----------------
25,465
----------------
----------------
Net investment income (loss) 81,935
Realized and unrealized gains
(losses) on investments
Net realized gains (losses) on
investments 24,366
Change in net unrealized
appreciation/depreciation of
investments 617,517
----------------
----------------
Net increase (decrease) in net
assets resulting from operations $723,818
================
* Commenced operations May 1, 1998.
See accompanying notes.
<PAGE>
Principal Life Insurance Company
Separate Account B
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Aggressive Asset
Growth Allocation Balanced
Combined Division 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 178,541,570 26,549,791 5,747,605 15,008,350
operations
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
Increase (decrease) in net assets
Operations:
Net investment income (loss) 65,953,139 7,934,103 2,564,027 9,165,298
Net realized gains (losses) on investments 12,416,637 2,390,605 109,943 612,459
Change in net unrealized appreciation/
depreciation of investments 69,585,710 16,690,371 1,193,914 5,916,307
------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 147,955,486 27,015,079 3,867,884 15,694,064
Changes from principal transactions:
Purchase payments, less sales charges, per
payment fees and applicable premium taxes 880,179,184 89,426,487 20,700,753 75,135,480
Contract terminations (82,987,332) (7,493,332) (2,607,601) (7,275,303)
Death benefit payments (6,720,662) (574,590) (356,750) (782,491)
Flexible withdrawal option payments (13,530,855) (1,052,669) (647,508) (2,009,052)
Transfer payments to other contracts (410,965,015) (42,840,180) (6,686,437) (20,238,081)
Annuity payments (47,900) - - -
------------------------------------------------------------------
Increase (decrease) in net assets from
principal transactions 365,927,420 37,465,716 10,402,457 44,830,553
------------------------------------------------------------------
Total increase 513,882,906 64,480,795 14,270,341 60,524,617
==================================================================
Net assets at December 31, 1998 $1,802,066,116 $208,438,611 $62,782,299 $187,623,872
==================================================================
* Commenced operations May 1, 1998.
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
Government
Capital Value Securities Growth
Bond Division Division Division Division
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net assets at January 1, 1997 $ 51,156,727 $164,206,061 $ 80,421,152 $ 98,430,386
Increase (decrease) in net assets
Operations:
Net investment income 3,568,462 20,413,652 4,278,724 1,112,338
Net realized gains on investments 110,974 2,848,843 274,681 452,453
Change in net unrealized appreciation/
depreciation of investments 1,830,541 27,562,078 2,797,737 27,128,828
------------------------------------------------------------------
Net increase in net assets resulting from
operations 5,509,977 50,824,573 7,351,142 28,693,619
Changes from principal transactions:
Purchase payments, less sales charges, per
payment fees and applicable premium taxes 29,283,340 88,457,676 25,613,735 53,502,269
Contract terminations (2,130,683) (18,056,258) (5,656,444) (4,866,079)
Death benefit payments (265,662) (501,663) (615,089) (543,121)
Flexible withdrawal option payments (880,841) (965,075) (1,128,199) (731,944)
Transfer payments to other contracts (9,182,990) (14,671,351) (13,132,281) (8,671,205)
Annuity payments - (42,217) - -
------------------------------------------------------------------
------------------------------------------------------------------
Increase (decrease) in net assets from
principal transactions 16,823,164 54,221,112 5,081,722 38,689,920
------------------------------------------------------------------
------------------------------------------------------------------
Total increase 22,333,141 105,045,685 12,432,864 67,383,539
------------------------------------------------------------------
------------------------------------------------------------------
Net assets at December 31, 1997 73,489,868 269,251,746 92,854,016 165,813,925
Increase (decrease) in net assets
Operations:
Net investment income (loss) 4,819,740 14,865,520 5,457,597 2,355,086
Net realized gains (losses) on investments 256,093 3,370,612 519,217 2,312,393
Change in net unrealized appreciation/
depreciation of investments 403,378 16,709,725 1,581,620 32,170,680
------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 5,479,211 34,945,857 7,558,434 36,838,159
Changes from principal transactions:
Purchase payments, less sales charges, per
payment fees and applicable premium taxes 58,231,814 104,873,017 63,571,935 84,755,953
Contract terminations (4,182,861) (20,291,443) (6,906,897) (9,260,589)
Death benefit payments (501,389) (1,069,753) (712,491) (806,053)
Flexible withdrawal option payments (1,522,331) (2,067,909) (1,740,621) (1,381,999)
Transfer payments to other contracts (14,012,541) (27,234,001) (17,983,933) (22,495,558)
Annuity payments - (47,900) - -
------------------------------------------------------------------
Increase (decrease) in net assets from
principal transactions 38,012,692 54,162,011 36,227,993 50,811,754
------------------------------------------------------------------
Total increase 43,491,903 89,107,868 43,786,427 87,649,913
------------------------------------------------------------------
Net assets at December 31, 1998 $116,981,771 $358,359,614 $136,640,443 $253,463,838
==================================================================
* Commenced operations May 1, 1998.
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
International
International SmallCap
Divisional Division*
-------------------------------
<S> <C> <C>
Net assets at January 1, 1997 $ 70,528,972 $ -
Increase (decrease) in net assets
Operations:
Net investment income 4,371,904 -
Net realized gains on investments 495,943 -
Change in net unrealized appreciation/
depreciation of investments 2,593,492 -
-------------------------------
Net increase in net assets resulting from
operations 7,461,339 -
Changes from principal transactions:
Purchase payments, less sales charges, per
payment fees and applicable premium taxes 57,394,881 -
Contract terminations (3,938,573) -
Death benefit payments (333,151) -
Flexible withdrawal option payments (438,591) -
Transfer payments to other contracts (9,238,723) -
Annuity payments - -
-------------------------------
-------------------------------
Increase (decrease) in net assets from
principal transactions 43,445,843 -
-------------------------------
-------------------------------
Total increase 50,907,182
-------------------------------
-------------------------------
Net assets at December 31, 1997 121,436,154 -
Increase (decrease) in net assets
Operations:
Net investment income (loss) 5,420,947 (7,494)
Net realized gains (losses) on investments 1,240,861 (34,310)
Change in net unrealized appreciation/
depreciation of investments 3,163,616 (43,412)
-------------------------------
Net increase (decrease) in net assets resulting
from operations 9,825,424 (85,216)
Changes from principal transactions:
Purchase payments, less sales charges, per
payment fees and applicable premium taxes 43,354,442 4,389,570
Contract terminations (6,288,874) (3,166)
Death benefit payments (361,156) -
Flexible withdrawal option payments (842,431) (8,380)
Transfer payments to other contracts (22,528,113) (534,238)
Annuity payments - -
-------------------------------
Increase (decrease) in net assets from
principal transactions 13,333,868 3,843,786
-------------------------------
Total increase 23,159,292 3,758,570
-------------------------------
Net assets at December 31, 1998 $144,595,446 $3,758,570
===============================
* Commenced operations May 1, 1998.
See accompanying notes.
</TABLE>
Principal Life Insurance Company
Separate Account B
Statements of Changes in Net Assets (continued)
<TABLE>
<CAPTION>
MidCap Money
MicroCap MidCap Growth Market
Division* Division Division* Division
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Net assets at January 1, 1997 $ $122,287,543 $ $40,738,362
Increase (decrease) in net assets
Operations:
Net investment income - 3,233,729 - 1,545,123
Net realized gains on investments - 507,365 - -
Change in net unrealized appreciation/
depreciation of investments - 26,108,957 - -
-----------------------------------------------------------------
-----------------------------------------------------------------
Net increase in net assets resulting from - 29,850,051 - 1,545,123
operations
Changes from principal transactions:
Purchase payments, less sales charges, per
payment fees and applicable premium taxes - 71,186,197 - 172,161,862
Contract terminations - (6,477,064) - (6,125,231)
Death benefit payments - (451,603) - (189,873)
Flexible withdrawal option payments - (790,604) - (598,084)
Transfer payments to other contracts - (11,516,457) - (165,851,750)
Annuity payments - - - -
-----------------------------------------------------------------
-----------------------------------------------------------------
Increase (decrease) in net assets from
principal transactions - 51,950,469 - (603,076)
------------------------------------------------------------------
------------------------------------------------------------------
Total increase - 81,800,520 - 942,047
------------------------------------------------------------------
------------------------------------------------------------------
Net assets at December 31, 1997 - 204,088,063 - 41,680,409
Increase (decrease) in net assets
Operations:
Net investment income (loss) (1,807) 11,348,399 (13,725) 1,944,535
Net realized gains (losses) on investments (30,669) 1,666,097 (8,805) -
Change in net unrealized appreciation/
depreciation of investments (79,471) (9,573,159) 284,250 -
------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations (111,947) 3,441,337 261,720 1,944,535
Changes from principal transactions:
Purchase payments, less sales charges, per
payment fees and applicable premium taxes 1,525,355 66,169,872 3,381,739 245,196,048
Contract terminations (13,672) (11,333,222) (46,096) (7,232,550)
Death benefit payments - (893,824) - (658,257)
Flexible withdrawal option payments (764) (1,395,916) (5,134) (797,929)
Transfer payments to other contracts (252,998) (27,342,936) (203,258) (206,535,244)
------------------------------------------------------------------
Increase (decrease) in net assets from
principal transactions 1,257,921 25,203,974 3,127,251 29,972,068
------------------------------------------------------------------
Total increase 1,145,974 28,645,311 3,388,971 31,916,603
==================================================================
Net assets at December 31, 1998 $1,145,974 $232,733,374 $3,388,971 $73,597,012
==================================================================
* Commenced operations May 1, 1998.
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
SmallCap
Real Estate SmallCap Growth SmallCap Value
Division* Division* Division* Division*
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net assets at January 1, 1997 $ - $ - $ - $ -
Increase (decrease) in net assets
Operations:
Net investment income - - - -
Net realized gains on investments - - - -
Change in net unrealized appreciation/
depreciation of investments - - - -
Net increase in net assets resulting from
operations - - - -
Changes from principal transactions:
Purchase payments, less sales charges, per
payment fees and applicable premium taxes - - - -
Contract terminations - - - -
Death benefit payments - - - -
Flexible withdrawal option payments - - - -
Transfer payments to other contracts - - - -
Annuity payments - - - -
------------------------------------------------------------------------
Increase (decrease) in net assets from
principal transactions - - - -
------------------------------------------------------------------------
Total increase - - - -
------------------------------------------------------------------------
Net assets at December 31, 1997 - - - -
Increase (decrease) in net assets
Operations:
Net investment income (loss) 44,944 (13,548) (11,681) (737)
Net realized gains (losses) on investments (1,854) (4,971) 1,417 (6,817)
Change in net unrealized appreciation/
depreciation of investments (45,204) 120,314 455,888 19,376
------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations (2,114) 101,795 445,624 11,822
Changes from principal transactions:
Purchase payments, less sales charges, per
payment fees and applicable premium taxes 1,979,207 3,787,231 3,229,155 2,802,830
Contract terminations (6,972) (3,155) (12,246) (10,976)
Death benefit payments - - (3,908) -
Flexible withdrawal option payments (4,598) (9,905) (1,997) (9,311)
Transfer payments to other contracts (152,812) (240,611) (456,290) (215,381)
------------------------------------------------------------------------
Increase (decrease) in net assets from
principal transactions 1,814,825 3,533,560 2,754,714 2,567,162
------------------------------------------------------------------------
Total increase 1,812,711 3,635,355 3,200,338 2,578,984
------------------------------------------------------------------------
Net assets at December 31, 1998 $1,812,711 $3,635,355 $3,200,338 $2,578,984
========================================================================
* Commenced operations May 1, 1998.
See accompanying notes.
</TABLE>
Utilities
Division*
-------------------
Net assets at January 1, 1997 $ -
Increase (decrease) in net assets
Operations:
Net investment income -
Net realized gains on investments -
Change in net unrealized appreciation/
depreciation of investments -
Net increase in net assets resulting from
operations -
Changes from principal transactions:
Purchase payments, less sales charges, per
payment fees and applicable premium taxes -
Contract terminations -
Death benefit payments -
Flexible withdrawal option payments -
Transfer payments to other contracts -
Annuity payments -
-------------------
Increase (decrease) in net assets from
principal transactions -
-------------------
Total increase -
-------------------
Net assets at December 31, 1997 -
Increase (decrease) in net assets
Operations:
Net investment income (loss) 81,935
Net realized gains (losses) on investments 24,366
Change in net unrealized appreciation/
depreciation of investments 617,517
-------------------
Net increase (decrease) in net assets resulting
from operations 723,818
Changes from principal transactions:
Purchase payments, less sales charges, per
payment fees and applicable premium taxes 7,668,296
Contract terminations (18,377)
Death benefit payments -
Flexible withdrawal option payments (32,401)
Transfer payments to other contracts (1,012,403)
-------------------
Increase (decrease) in net assets from
principal transactions 6,605,115
-------------------
Total increase 7,328,933
-------------------
Net assets at December 31, 1998 $7,328,933
===================
* Commenced operations May 1, 1998.
See accompanying notes.
<PAGE>
Principal Life Insurance Company
Separate Account B
Notes to Financial Statements
December 31, 1998
1. Investment and Accounting Policies
Principal Life Insurance Company Separate Account B (Separate Account B) is a
segregated investment account of Principal Life Insurance Company (Principal
Life, formerly Principal Mutual Life Insurance Company) 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, each division of Separate Account B invests exclusively in
shares representing interests in a corresponding investment option. As of
December 31, 1998, contractholder investment options include the following
accounts of Principal Variable Contracts Fund, Inc., a diversified open-end
management investment company, organized by Principal Life: Aggressive Growth
Account, Asset Allocation Account, Balanced Account, Bond Account, Capital Value
Account, Government Securities Account, Growth Account, International Account,
International SmallCap Account, MicroCap Account, MidCap Account, MidCap Growth
Account, Money Market Account, Real Estate Account, SmallCap Account, SmallCap
Growth Account, SmallCap Value Account, and Utilities Account. Investments are
stated at the closing net asset values per share on December 31, 1998.
The Principal Variable Contracts Fund, Inc. (the Fund) was formed on January 1,
1998. Prior to that date, the accounts of the Fund were reported as separate
mutual funds. This reorganization resulted in changes to the names of the
following investment options:
<TABLE>
<CAPTION>
Former Name Name Subsequent to Reorganization
- -------------------------------------------- ---------------------------------
<S> <C>
Principal Aggressive Growth Fund, Inc. Aggressive Growth Account
Principal Asset Allocation Fund, Inc. Asset Allocation Account
Principal Balanced Fund, Inc. Balanced Account
Principal Bond Fund, Inc. Bond Account
Principal Capital Accumulation Fund, Inc. Capital Accumulation Account
Principal Emerging Growth Fund, Inc. Emerging Growth Account
Principal Government Securities Fund, Inc. Government Securities Account
Principal Growth Fund, Inc. Growth Account
Principal High Yield Fund, Inc. High Yield Account
Principal Money Market Fund, Inc. Money Market Account
Principal World Fund, Inc. World Account
Effective May 1, 1998, the following names within the Principal Variable
Contracts Fund, Inc. were changed:
</TABLE>
<TABLE>
<CAPTION>
Former Name Name as Changed
- -------------------------------------------- ---------------------------------
<S> <C>
Capital Accumulation Account Capital Value Account
Emerging Growth Account MidCap Account
World Account International Account
</TABLE>
Principal Life Insurance Company
Separate Account B
Notes to Financial Statements (continued)
1. Investment and Accounting Policies (continued)
On May 1, 1998, Principal Life increased contractholder investment options to
include: Principal Variable Contracts Fund, Inc. International SmallCap Account,
MicroCap Account, MidCap Growth Account, Real Estate Account, SmallCap Account,
SmallCap Growth Account, SmallCap Value Account and Utilities Account.
Contributions to the Personal Variable contracts are no longer accepted from new
customers, only from existing customers beginning January 1, 1998.
Effective July 1, 1998, Principal Mutual Life Insurance Company (the Company)
formed a mutual insurance holding company and converted to a stock life
insurance company. With the conversion, the Company's name was changed to
Principal Life Insurance Company.
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.
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 Life is compensated for the following expenses:
Bankers Flexible Annuity Contracts - Mortality and expense risks assumed by
Principal Life 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 $35,161 and $1,092, respectively, during the year ended December 31,
1998.
Pension Builder Plus and Pension Builder Plus - Rollover IRA Contracts -
Mortality and expense risks assumed by Principal Life 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 $180,477, $1,389, and
$58,703, respectively, during the year ended December 31, 1998.
Personal Variable Contracts - Mortality and expense risks assumed by Principal
Life 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 Life. 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 $170,640, $46,976, and
$59,111, respectively, during the year ended December 31, 1998.
Premier Variable Contracts - Mortality and expense risks assumed by Principal
Life 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 $722,455 and $16,533, respectively, during the year ended December
31, 1998. There were no contingent sales charges provided for in these
contracts.
The Principal Variable Annuity - Mortality and expense risks assumed by
Principal Life 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 Life 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 $16,587,426, $1,549,335, and $416,630,
respectively, during the year ended December 31, 1998.
3. Federal Income Taxes
The operations of Separate Account B are a part of the operations of Principal
Life. Under current practice, no federal income taxes are allocated by Principal
Life 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, 1998
--------------------------------------------------------------------------
Units Amount Units Amount
Purchased Purchased Redeemed Redeemed
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggressive Growth Division:
The Principal Variable Annuity 3,499,221 $99,901,754 2,090,432 $54,501,935
Asset Allocation Division:
The Principal Variable Annuity 1,282,525 24,046,561 654,896 11,080,077
Balanced Division:
Personal Variable 1,004,328 1,912,930 457,683 780,708
Premier Variable 10,422,806 19,013,537 6,268,556 10,551,964
The Principal Variable Annuity 3,344,124 65,310,536 1,158,043 20,908,480
--------------------------------------------------------------------------
14,771,258 86,237,003 7,884,282 32,241,152
Bond Division:
Personal Variable 483,609 749,413 204,963 298,308
Premier Variable 3,340,901 5,252,870 1,335,734 1,947,955
The Principal Variable Annuity 3,782,130 58,262,756 1,300,729 19,186,344
--------------------------------------------------------------------------
7,606,640 64,265,039 2,841,426 21,432,607
Capital Value Division:
Bankers Flexible Annuity - 378,745 33,142 1,019,158
Pension Builder Plus 12,400 489,669 347,496 2,079,127
Pension Builder - Rollover 13,394 206,030 61,664 413,253
Personal Variable 1,028,159 3,098,635 706,659 1,805,819
Premier Variable 6,692,409 20,064,223 5,703,586 14,753,134
The Principal Variable Annuity 3,851,690 99,320,683 1,451,484 34,459,963
--------------------------------------------------------------------------
11,598,052 123,557,985 8,304,031 54,530,454
Government Securities Division:
Pension Builder Plus 2,440 59,890 144,796 323,157
Pension Builder - Rollover 6,075 31,150 46,361 105,763
Personal Variable 533,981 932,430 395,901 592,463
Premier Variable 3,808,301 6,299,202 3,136,542 4,703,918
The Principal Variable Annuity 4,224,663 63,176,336 1,616,290 23,088,117
--------------------------------------------------------------------------
8,575,460 70,499,008 5,339,890 28,813,418
Growth Division:
Personal Variable 1,056,605 $ 2,120,837 399,346 $ 785,794
Premier Variable 9,492,310 19,278,673 4,562,959 9,075,786
The Principal Variable Annuity 3,220,065 68,289,943 1,255,802 26,661,033
--------------------------------------------------------------------------
13,768,980 89,689,453 6,218,107 36,522,613
International Division:
Personal Variable 805,432 1,415,902 308,660 500,015
Premier Variable 4,733,201 8,515,990 2,974,704 4,950,251
The Principal Variable Annuity 2,153,106 40,571,261 1,603,148 26,298,072
--------------------------------------------------------------------------
7,691,739 50,503,153 4,886,512 31,748,338
International SmallCap Division:
The Principal Variable Annuity 483,237 4,399,364 64,583 563,072
MicroCap Division:
The Principal Variable Annuity 175,619 1,530,140 34,250 274,026
MidCap Division:
Personal Variable 879,026 1,880,837 439,232 851,883
Premier Variable 5,642,259 12,250,222 2,973,492 5,798,868
The Principal Variable Annuity 2,793,284 66,291,200 1,875,347 37,219,135
--------------------------------------------------------------------------
9,314,569 80,422,259 5,288,071 43,869,886
MidCap Growth Division:
The Principal Variable Annuity 381,976 3,381,739 29,954 268,213
Money Market Division:
Pension Builder Plus 53,479 135,725 102,745 203,381
Pension Builder - Rollover 1,336 3,925 6,405 13,015
Personal Variable 3,575,718 4,528,715 3,302,133 4,121,381
Premier Variable 48,477,115 61,598,188 45,123,308 56,876,964
The Principal Variable Annuity 15,337,299 181,640,592 13,184,712 154,775,801
--------------------------------------------------------------------------
67,444,947 247,907,145 61,719,303 215,990,542
Real Estate Division:
The Principal Variable Annuity 213,750 2,032,472 18,315 172,703
SmallCap Division:
The Principal Variable Annuity 492,217 $ 3,787,569 33,678 $ 267,557
SmallCap Growth Division:
The Principal Variable Annuity 368,419 3,229,155 53,999 486,122
SmallCap Value Division:
The Principal Variable Annuity 334,867 2,812,751 29,295 246,326
Utilities Division:
The Principal Variable Annuity 741,204 7,775,696 101,905 1,088,646
---------------------------------------------------------------------------
===========================================================================
148,744,680 $965,978,246 105,592,929 $534,097,687
===========================================================================
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1997
--------------------------------------------------------------------------
Units Amount Units Amount
Purchased Purchased Redeemed Redeemed
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggressive Growth Division:
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 Value 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
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
International 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
MidCap 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
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
--------------------------------------------------------------------------
118,925,421 $711,382,234 80,964,990 $337,555,911
==========================================================================
</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.
<PAGE>
Principal Life Insurance Company
Separate Account B
Notes to Financial Statements (continued)
5. Net Assets
Net assets at December 31, 1998 consisted of the following:
<TABLE>
<CAPTION>
Net Unrealized
Accumulated Appreciation
Unit Net Investment (Depreciation)
Combined Transactions Income of Investments
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggressive Growth Division:
The Principal Variable Annuity $ 208,438,611 $ 154,950,165 $ 23,317,094 $30,171,352
Asset Allocation Division:
The Principal Variable Annuity 62,782,299 52,071,898 8,162,072 2,548,329
Balanced Division:
Personal Variable 4,109,836 3,683,235 176,085 250,516
Premier Variable 26,396,964 23,899,032 1,049,822 1,448,110
The Principal Variable Annuity 157,117,072 128,451,709 17,319,404 11,345,959
----------------------------------------------------------------------
187,623,872 156,033,976 18,545,311 13,044,585
Bond Division:
Personal Variable 1,126,185 1,087,120 38,350 715
Premier Variable 8,926,784 8,466,508 345,446 114,830
The Principal Variable Annuity 106,928,802 96,980,945 8,230,375 1,717,482
----------------------------------------------------------------------
116,981,771 106,534,573 8,614,171 1,833,027
Capital Value Division:
Bankers Flexible Annuity 7,106,302 4,287,364 302,409 2,516,529
Pension Builder Plus 7,572,342 5,238,165 203,355 2,130,822
Pension Builder Plus - Rollover IRA 2,265,332 1,545,362 77,147 642,823
Personal Variable 9,982,371 7,863,505 364,464 1,754,402
Premier Variable 60,046,505 46,288,705 2,283,433 11,474,367
The Principal Variable Annuity 271,386,762 202,044,892 31,732,323 37,609,547
----------------------------------------------------------------------
358,359,614 267,267,993 34,963,131 56,128,490
Government Securities Division:
Pension Builder Plus 1,061,229 972,846 24,160 64,223
Pension Builder Plus - Rollover IRA 348,924 320,834 10,126 17,964
Personal Variable 2,973,074 2,765,554 103,654 103,866
Premier Variable 12,899,067 12,039,838 443,589 415,640
The Principal Variable Annuity 119,358,149 106,682,124 9,336,917 3,339,108
----------------------------------------------------------------------
136,640,443 122,781,196 9,918,446 3,940,801
Growth Division:
Personal Variable 4,744,796 3,647,573 44,149 1,053,074
Premier Variable 35,121,256 27,146,937 433,857 7,540,462
The Principal Variable Annuity 213,597,786 148,732,392 3,108,640 61,756,754
----------------------------------------------------------------------
253,463,838 179,526,902 3,586,646 70,350,290
International Division:
Personal Variable $ 2,488,857 $ 2,290,386 $ 84,381 $ 114,090
Premier Variable 15,699,547 14,099,541 531,420 1,068,586
The Principal Variable Annuity 126,407,042 103,577,125 7,764,905 15,065,012
----------------------------------------------------------------------
144,595,446 119,967,052 8,380,706 16,247,688
International SmallCap Division
The Principal Variable Annuity 3,758,570 3,808,226 (6,244) (43,412)
MicroCap Division
The Principal Variable Annuity 1,145,974 1,226,493 (1,048) (79,471)
MidCap Division:
Personal Variable 3,685,468 3,250,816 155,802 278,850
Premier Variable 23,677,140 20,357,568 1,066,985 2,252,587
The Principal Variable Annuity 205,370,766 161,654,058 12,351,483 31,365,225
----------------------------------------------------------------------
232,733,374 185,262,442 13,574,270 33,896,662
MidCap Growth Division
The Principal Variable Annuity 3,388,971 3,115,968 (11,247) 284,250
Money Market Division:
Pension Builder Plus 723,423 704,183 19,240 -
Pension Builder Plus - Rollover IRA 21,829 21,296 533 -
Personal Variable 1,695,975 1,678,764 17,211 -
Premier Variable 12,764,651 12,678,626 86,025 -
The Principal Variable Annuity 58,391,134 57,893,036 498,098 -
----------------------------------------------------------------------
73,597,012 72,975,905 621,107 -
Real Estate Division:
The Principal Variable Annuity 1,812,711 1,816,371 41,544 (45,204)
SmallCap Division:
The Principal Variable Annuity 3,635,355 3,527,366 (12,325) 120,314
SmallCap Growth Division
The Principal Variable Annuity 3,200,338 2,753,982 (9,532) 455,888
SmallCap Value Division
The Principal Variable Annuity 2,578,984 2,559,859 (251) 19,376
Utilities Division
The Principal Variable Annuity 7,328,933 6,639,682 71,734 617,517
======================================================================
$1,802,066,116 $1,442,820,049 $129,755,585 $229,490,482
======================================================================
</TABLE>
<PAGE>
Principal Life Insurance Company
Separate Account B
Notes to Financial Statements (continued)
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 Life and other service providers do not
properly process and calculate date-related information and data from and after
January 1, 2000. In 1995, Principal Life began investigating the potential
impact of the Year 2000 on its systems, procedures, customers and business
processes. The Year 2000 assessment that was completed in 1996 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.
Principal Life will continue to use internal and external resources to modify,
replace and test its systems. Management estimates 100% of the identified
modifications to mission critical systems and 99% of the identified
modifications to other systems have been completed for its Year 2000 project.
The project completion is scheduled to occur prior to any anticipated impact on
Principal Life's operations.
Principal Life and Separate Account B face the risk that one or more of its
critical suppliers or customers (external relationships) will not be able to
interact with them due to the third party's inability to resolve its own Year
2000 issues. Principal Life has completed its inventory of external
relationships and is attempting to determine the overall Year 2000 readiness of
its external relationships. Principal Life is engaged in discussions with the
third parties and is requesting information as to those parties' Year 2000 plans
and state of readiness. Principal Life, however, does not have sufficient
information at the current time to predict whether all of its external
relationships will be Year 2000 ready.
While Principal Life believes that it has addressed its Year 2000 concerns,
Principal Life has begun to develop contingency/recovery plans aimed at ensuring
the continuity of critical business functions before, on and after December 31,
1999. Principal Life expects contingency/recovery planning to be substantially
complete by April 1, 1999. The Year 2000 contingency plans will be reviewed
periodically throughout 1999 and revised as needed. Principal Life believes its
Year 2000 contingency plans coupled with existing "disaster recovery" and
"business resumption" plans minimize the impact Year 2000 issues may have on the
organization.
Report of Independent Auditors
The Board of Directors
Principal Life Insurance Company
We have audited the accompanying consolidated statements of financial position
of Principal Life Insurance Company (the Company, an indirect wholly-owned
subsidiary of Principal Mutual Holding Company), formerly Principal Mutual Life
Insurance Company, as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholder's equity and cash flows for
each of the three years in the period ended December 31, 1998. 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 Principal Life
Insurance Company at December 31, 1998 and 1997, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Des Moines, Iowa
January 29, 1999
Principal Life Insurance Company
Consolidated Statements of Operations
Year ended December 31
1998 1997 1996
---------------------------------------
(In Millions)
Revenue
Premiums and annuity and other
considerations $3,409 $4,668 $5,121
Policy and contract charges 780 682 572
Net investment income 2,821 2,948 2,905
Net realized capital gains 466 176 388
Commissions and other income 208 199 150
Contribution from the closed block 13 - -
---------------------------------------
Total revenue 7,697 8,673 9,136
Expenses
Benefits, claims and settlement
expenses 4,777 5,632 6,087
Dividends to policyholders 155 299 299
Operating expenses 2,026 2,047 1,920
---------------------------------------
---------------------------------------
Total expenses 6,958 7,978 8,306
---------------------------------------
Income before income taxes 739 695 830
Income taxes 44 241 304
---------------------------------------
=======================================
Net income $ 695 $ 454 $ 526
=======================================
See accompanying notes.
<PAGE>
Principal Life Insurance Company
Consolidated Statements of Financial Position
December 31
1998 1997
---------------------------
---------------------------
(In Millions)
Assets
Fixed maturities, available-for-sale $21,006 $21,546
Equity securities, available-for-sale 1,102 1,273
Mortgage loans 12,091 13,286
Real estate 2,691 2,632
Policy loans 25 749
Other investments 349 130
Cash and cash equivalents 461 546
Accrued investment income 375 457
Deferred policy acquisition costs 456 1,057
Property held for Company use 246 232
Closed block assets 4,251 -
Separate account assets 29,009 23,627
Other assets 1,881 1,519
---------------------------
===========================
Total assets $73,943 $67,054
===========================
===========================
Liabilities
Contractholder funds $23,339 $23,179
Future policy benefits and claims 7,082 11,239
Other policyholder funds 249 314
Policyholder dividends payable 44 444
Debt 671 459
Income taxes currently payable 27 298
Deferred income taxes 497 803
Closed block liabilities 5,299 -
Separate account liabilities 29,009 23,560
Other liabilities 2,257 1,474
---------------------------
---------------------------
Total liabilities 68,474 61,770
Stockholder's equity
Common stock, par value $1 per share - authorized 5,000,000 shares, issued and
outstanding 2,500,000 shares (wholly owned indirectly by Principal Mutual
Holding Company) 3 -
Retained earnings 4,749 4,257
Accumulated other comprehensive income:
Net unrealized gains on available-for-sale securities 746 1,038
Net foreign currency translation adjustment (29) (11)
-----------------------
-----------------------
Total stockholder's equity 5,469 5,284
-----------------------
=======================
Total liabilities and stockholder's equity $73,943 $67,054
=======================
See accompanying notes.
<PAGE>
Principal Life Insurance Company
Consolidated Statements of Stockholder's Equity
<TABLE>
<CAPTION>
Net Unrealized Net Foreign
Gains on Currency Total
Common Retained Available-for-Sale Translation Stockholder's
Stock Earnings Securities Adjustment Equity
----------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1996 $ - $3,277 $1,336 $ (7) $4,606
Comprehensive income:
Net income - 526 - - 526
Decrease in unrealized appreciation
on fixed maturities, - - (543) - (543)
available-for-sale
Decrease in unrealized appreciation
on equity securities, - - (262) - (262)
available-for-sale
Adjustments for assumed changes in
amortization patterns:
Deferred policy acquisition costs - - 83 - 83
Unearned revenue reserves - - (11) - (11)
Provision for deferred income tax - - 257 - 257
benefit
Change in net foreign currency
translation adjustment - - - (2) (2)
------------
Comprehensive income - 48
----------------------------------------------------------------------------
Balances at December 31, 1996 - 3,803 860 (9) 4,654
Comprehensive income:
Net income - 454 - - 454
Increase in unrealized appreciation
on fixed maturities, - - 197 - 197
available-for-sale
Increase in unrealized appreciation
on equity securities, - - 118 - 118
available-for-sale
Adjustments for assumed changes in
amortization patterns: -
Deferred policy acquisition costs - - (44) - (44)
Unearned revenue reserves - - 4 - 4
Provision for deferred income taxes - - (97) - (97)
Change in net foreign currency
translation adjustment - - - (2) (2)
------------
Comprehensive income 630
----------------------------------------------------------------------------
Balances at December 31, 1997 - 4,257 1,038 (11) 5,284
</TABLE>
<PAGE>
Principal Life Insurance Company
Consolidated Statements of Stockholder's Equity (continued)
<TABLE>
<CAPTION>
Net Unrealized Net Foreign
Gains on Currency Total
Common Retained Available-for-Sale Translation Stockholder's
Stock Earnings Securities Adjustment Equity
-------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1998 $ - $4,257 $1,038 $(11) $5,284
Comprehensive income:
Net income - 695 - - 695
Decrease in unrealized appreciation
on fixed maturities, - - (203) - (203)
available-for-sale
Decrease in unrealized appreciation
on equity securities,
available-for-sale, including
seed money in separate accounts - - (292) - (292)
Adjustments for assumed changes in
amortization patterns:
Deferred policy acquisition costs - - 37 - 37
Unearned revenue reserves - - (4) - (4)
Provision for deferred income tax - - 170 - 170
benefit
Change in net foreign currency
translation adjustment - - - (18) (18)
Issuance of 2,500,000 shares of
common stock to parent holding 3 (3) - - -
company
Dividend to parent holding company - (200) - - (200)
----------
Comprehensive income 185
===============================================================================
Balances at December 31, 1998 $ 3 $4,749 $746 $(29) $5,469
===============================================================================
See accompanying notes.
</TABLE>
<PAGE>
Principal Life Insurance Company
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
1998 1997 1996
---------------------------------------
(In Millions)
<S> <C> <C> <C>
Operating activities
Net income $ 695 $ 454 $ 526
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of deferred policy acquisition costs 114 170 178
Additions to deferred policy acquisition costs (173) (213) (215)
Gain on sales of subsidiaries (6) (14) -
Accrued investment income 24 7 15
Contractholder and policyholder liabilities and dividends
1,538 1,401 1,667
Current and deferred income taxes (265) 96 20
Net realized capital gains (466) (176) (388)
Depreciation and amortization expense 133 117 112
Other (197) (403) (253)
Change in closed block operating assets and
liabilities, net 230 - -
---------------------------------------
---------------------------------------
Net adjustments 932 985 1,136
---------------------------------------
Net cash provided by operating activities 1,627 1,439 1,662
Investing activities Available-for-sale securities:
Purchases (7,141) (7,478) (11,876)
Sales 5,684 7,475 9,089
Maturities 1,377 1,204 2,796
Mortgage loans acquired or originated (14,162) (9,925) (2,955)
Mortgage loans sold or repaid 14,414 8,977 1,619
Real estate acquired (436) (309) (166)
Real estate sold 662 198 253
Proceeds from sales of subsidiaries 96 35 -
Purchases of interest in subsidiaries, net of cash acquired (218) (99) (51)
Net change in policy loans (12) (13) (25)
Net change in property held for Company use (57) (11) (18)
Net change in other investments (270) (68) (74)
Change in closed block investments, net (201) - -
---------------------------------------
Net cash used in investing activities (264) (14) (1,408)
</TABLE>
<PAGE>
Principal Life Insurance Company
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
Year ended December 31
1998 1997 1996
---------------------------------------
(In Millions)
<S> <C> <C> <C>
Financing activities
Issuance of debt $ 243 $ 75 $ 43
Principal repayments of debt (51) (28) (29)
Proceeds of short-term borrowings 8,628 5,089 1,451
Repayment of short-term borrowings (8,924) (4,974) (1,282)
Dividend paid to parent holding company (140) - -
Investment contract deposits 5,854 4,134 4,221
Investment contract withdrawals (7,058) (5,446) (4,682)
---------------------------------------
Net cash used in financing activities (1,448) (1,150) (278)
---------------------------------------
Net increase (decrease) in cash and cash equivalents (85) 275 (24)
Cash and cash equivalents at beginning of year 546 271 295
=======================================
Cash and cash equivalents at end of year $ 461 $ 546 $ 271
=======================================
</TABLE>
Schedule of noncash operating and investing activities The following noncash
assets and liabilities were transferred to the
Closed Block as a result of the July 1, 1998 mutual holding company
formation:
Operating activities:
Accrued investment income $ 59
Deferred policy acquisition costs 697
Other assets 12
Future policy benefits and claims (4,545)
Other policyholder funds (7)
Policyholder dividends payable (388)
Other liabilities (173)
------------
Total noncash operating activities (4,345) Investing activities:
Fixed maturities, available-for-sale 1,562
Mortgage loans 1,027
Policy loans 736
Other investments 1
------------
Total noncash investing activities 3,326
============
Total noncash operating and investing activities $(1,019)
=============
Net transfer of noncash assets and liabilities of Principal Health
Care Inc. on April 1, 1998 in exchange for common shares of
Coventry Health Care, Inc. $ (160)
=============
See accompanying notes.
<PAGE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements
December 31, 1998
1. Nature of Operations and Significant Accounting Policies
Reorganization
Effective July 1, 1998, Principal Mutual Life Insurance Company formed a mutual
insurance holding company (Principal Mutual Holding Company) and converted to a
stock life insurance company (Principal Life Insurance Company). All of the
shares of Principal Life Insurance Company (the Company) were issued to
Principal Mutual Holding Company through two newly formed intermediate holding
companies, Principal Financial Group, Inc. and Principal Financial Services,
Inc. The reorganization itself did not have a material financial impact on the
Company.
Description of Business
The Company is a diversified financial services organization engaged in the
marketing and management of life insurance, annuity, health, pension and other
financial products and services, primarily in the United States.
Basis of Presentation
The accompanying consolidated financial statements of the Company and its
majority-owned subsidiaries have been prepared in conformity with generally
accepted accounting principles (GAAP). Less than majority-owned entities in
which the Company has at least a 20% interest are reported on the equity basis
in the consolidated statements of financial position as other investments. All
significant intercompany accounts and transactions have been eliminated.
Total assets of the unconsolidated entities amounted to $2.2 billion at December
31, 1998 and $1.1 billion at December 31, 1997. Total revenues of the
unconsolidated entities were $1.8 billion in 1998, $294 million in 1997 and $349
million in 1996. During 1998, 1997 and 1996, the Company included $18 million,
$19 million and $(3) million, respectively, in net investment income
representing the Company's share of current year net income (loss) of the
unconsolidated entities.
Closed Block
In conjunction with the formation of the mutual insurance holding company, the
Company established a Closed Block for the benefit of certain classes of
individual participating and dividend-paying policies in force on that date. The
Closed Block was designed to provide reasonable assurance to owners of insurance
policies included therein that, after the reorganization, assets would be
available to maintain the aggregate dividend scales in effect for 1997 if the
experience underlying such scales continued. Assets were allocated to the Closed
Block in amounts which, together with premiums from policies included in the
Closed Block, were reasonably expected to be sufficient to support such
policies, including provisions for payment of claims, certain expenses, charges
and taxes, and for continuation of dividend scales payable in 1997 in the
aggregate, assuming the experience underlying such scales continued.
Assets allocated to the Closed Block inure to the benefits of the holders of
policies included in the Closed Block. Closed Block assets and liabilities are
carried on the same basis as similar assets and liabilities held by the Company.
The contribution to the operating income of the Company from the Closed Block is
reported as a single line item in the statement of operations. Accordingly,
premiums, net investment income, realized capital gains (losses), policyowner
benefits and dividends attributable to the Closed Block, less certain expenses
and charges and the amortization of deferred policy acquisition costs, are shown
as a net number under the caption "Contribution from the Closed Block." This
results in material reductions in the respective line items in the statement of
operations while having no effect on net income. All assets allocated to the
Closed Block are grouped together and shown as a separate item entitled "Closed
Block assets"; and all liabilities attributable to the Closed Block are combined
and disclosed as the "Closed Block liabilities." The excess of Closed Block
liabilities over Closed Block assets represents the expected future post-tax
contribution from the Closed Block which would be recognized in income over the
period the policies and contracts in the Closed Block remain in force.
The Contribution from the Closed Block does not represent the total
profitability attributable to the policies included in the Closed Block. Certain
expenses attributable to the policies included in the Closed Block and
commissions on these policies are not included in the reported Contribution from
the Closed Block, but rather are included in operating expenses consistent with
the initial regulatory funding of the Closed Block. Consequently, the assets
needed to fund the Closed Block are less than the total accumulated assets
attributable to the policies included in the Closed Block. Income on the assets
held outside of the Closed Block is included in net investment income and not
included in the Contribution from the Closed Block.
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.
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 fixed maturities and equity securities are classified as
available-for-sale and, accordingly, are carried at fair value. (See Note 12 for
policies related to the determination of fair value.) The cost of fixed
maturities is adjusted for amortization of premiums and accrual of discounts,
both computed using the interest method. The cost of fixed maturities 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.
Real estate investments are reported at cost less accumulated depreciation. The
initial cost bases of properties acquired through loan foreclosures are the
lower of the loan balances or fair market values of the properties at the time
of foreclosure. Buildings and land improvements are generally depreciated on the
straight-line method over the estimated useful life of improvements, and tenant
improvement costs are depreciated on the straight-line method over the term of
the related lease. The Company recognizes impairment losses for its properties
when indicators of impairment are present and a property's expected undiscounted
cash flows are not sufficient to recover the property's carrying value. In such
cases, the cost bases of the properties are reduced accordingly. Real estate
expected to be disposed is carried at the lower of cost or fair value, less cost
to sell, with valuation allowances established accordingly and depreciation no
longer recognized. Any impairment losses and any changes in valuation allowances
are reported as net realized capital losses.
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 net realized capital gains (losses). 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
any valuation allowance is based upon the fair value of the collateral. The
Company includes residential mortgage loans held for sale in the amount of $802
million and $512 million at December 31, 1998 and 1997, respectively, which are
carried at lower of cost or fair value and reported as mortgage loans in the
statements of financial position.
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.
Derivatives
Derivatives are generally held for purposes other than trading and are primarily
used to hedge or reduce exposure to interest rate and foreign currency risks
associated with assets held or expected to be purchased or sold, and liabilities
incurred or expected to be incurred. Additionally, derivatives are used to
change the characteristics of the Company's asset/liability mix consistent with
the Company's risk management activities.
The Company's use of derivatives is further described in Note 4. The net
interest effect of interest rate and currency swap transactions is recorded as
an adjustment to net investment income or interest expense, as appropriate, over
the periods covered by the agreements. The cost of other derivative contracts is
amortized over the life of the contracts and classified with the results of the
underlying hedged item. Certain contracts are designated as hedges of specific
assets and, to the extent those assets are marked to market, the hedge contracts
are also marked to market and included as an adjustment of the underlying asset
value. Other contracts are designated and accounted for as hedges of certain
liabilities and are not marked to market.
Hedge accounting is used for derivatives that are specifically designated in
advance as hedges and that reduce the Company's exposure to an indicated risk by
having a high correlation between changes in the value of the derivatives and
the items being hedged at both the inception of the hedge and throughout the
hedge period. Should such criteria not be met or if the hedged items are sold,
terminated or matured, the changes in value of the derivatives are included in
net income.
Contractholder and Policyholder Liabilities
Contractholder and policyholder liabilities (contractholder funds, future policy
benefits and claims and other policyholder 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.
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.
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 Policy 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 policy 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
policy 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 policy 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 policy 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. Premiums and expenses are reported net of
reinsurance ceded. 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.
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 anticipated
assessments which are estimated using data available from various industry
sources that monitor the current status of open and closed insolvencies. The
Company has also established an other asset for assessments expected to be
recovered through future premium tax offsets.
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. Generally, 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
Principal Mutual Holding Company files a consolidated income tax return that
includes the Company and 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 temporary
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.
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
1998 1997
-----------------------------
Property held for Company use $328 $302
Accumulated depreciation (82) (70)
=============================
Property held for Company use, net $246 $232
=============================
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 have been
recorded in connection with acquisitions. These assets are amortized on a
straight-line basis generally over 10 to 15 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
1998 1997
---------------------------
Goodwill $185 $165
Accumulated amortization (40) (16)
---------------------------
Goodwill, net 145 149
Other intangible assets, net 16 74
---------------------------
Total intangible assets $161 $223
===========================
Mortgage servicing rights of $778 million and $432 million at December 31, 1998
and 1997, 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.
Pooled Investment Fund
The Company has an arrangement whereby short-term funds of Principal Financial
Services, Inc. are pooled with funds of the Company's subsidiaries and invested
by the Company. The Company credits Principal Financial Services, Inc. with
interest approximating the yield earned by the Company's Separate Account LI,
which invests in commercial paper. At December 31, 1998, the Company reported
$137 million in other liabilities in the statements of financial position
related to this arrangement with Principal Financial Services, Inc.
The Company's pooled funds are also made available to Principal Financial
Services, Inc. for short-term borrowings up to $1 million, with interest
approximating the yield earned by Separate Account LI. At December 31, 1998,
there were no such borrowings outstanding under this arrangement.
Comprehensive Income
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income ("SFAS 130"), and restated
prior years' financial statements to conform to the reporting standard. SFAS 130
establishes standards for reporting and displaying comprehensive income and its
components in a full set of general-purpose financial statements. Comprehensive
income includes all changes in equity during a period except those resulting
from investments by shareholders and distributions to shareholders. The adoption
of SFAS No. 130 resulted in revised and additional disclosures but had no effect
on the financial position, results of operations, or liquidity of the Company.
Other comprehensive income excludes net realized capital gains (losses) included
in net income of $344 million in 1998, $113 million in 1997 and $256 million in
1996. These amounts are net of income taxes and adjustments to deferred policy
acquisition costs and unearned revenue reserves of $122 million in 1998, $63
million in 1997 and $132 million in 1996.
Reclassifications
Certain reclassifications have been made to the 1996 and 1997 consolidated
financial statements to conform to the 1998 presentation.
Pending Accounting Change
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities
("SFAS 133"), which the Company is required to adopt January 1, 2000. SFAS 133
will require the Company to include all derivatives in the statement of
financial position at fair value. Changes in derivative fair values will either
be recognized in earnings as offsets to the changes in fair value of related
hedged assets, liabilities and firm commitments or, for forecasted transactions,
deferred and recorded as a component of equity until the hedged transactions
occur and are recognized in earnings. The ineffective portion of a hedging
derivative's change in fair value will be immediately recognized in earnings.
The impact of SFAS 133 on the Company's financial statements will depend on a
variety of factors, including future interpretive guidance from the FASB, the
future level of forecasted and actual foreign currency transactions, the extent
of the Company's hedging activities, the types of hedging instruments used and
the effectiveness of such instruments. However, the Company does not believe the
effect of adopting SFAS 133 will be material to its financial position.
2. Mergers, Acquisitions and Divestitures
Effective April 1, 1998, the Company merged substantially all of its managed
care operations with Coventry Corporation in exchange for a share of ownership
in the resulting entity, Coventry Health Care, Inc. At December 31, 1998, the
Company held a 42% share of Coventry Health Care, Inc. The Company's investment
in Coventry Health Care, Inc. is accounted for using the equity method. Net
equity of the transferred business on April 1, 1998 was $170 million.
Consolidated financial results for 1997 included total assets at December 31,
1997, and total revenues and pretax loss for the year then ended of
approximately $419 million, $883 million and $(26) million, respectively, for
the transferred business.
During 1998, various acquisitions were made by the Company's subsidiaries at
purchase prices aggregating $224 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 acquired companies had total assets at
December 31, 1998 and total 1998 revenue of $459 million and $58 million,
respectively.
During 1998, various divestitures were made by certain of the Company's
subsidiaries at selling prices aggregating $118 million and $15 million in net
realized capital gains were realized as a result of these divestitures. In 1997,
the financial statements included $152 million in assets, $206 million in
revenues and $20 million of pretax losses related to these subsidiaries.
Beginning in 1998, the Company did not renew medical business in 14 states where
it does not believe it can effectively compete. The Company continues to offer
non-medical coverage and administrative services only products in these states.
Annual medical premium in these states was approximately $230 million in 1997.
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 acquired companies had total
assets at December 31, 1997 and total 1997 revenue of $459 million and $86
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.
3. 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 fixed
maturities 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 policy acquisition costs, unearned
revenue reserves and deferred income taxes.
The cost, gross unrealized gains and losses and fair value of fixed maturities
and equity securities available-for-sale as of December 31, 1998 and 1997, are
as follows (in millions):
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------------
---------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1998 Fixed maturities:
United States Government and agencies
$ 611 $ - $ 10 $ 601
Foreign governments 57 21 1 77
States and political subdivisions 428 19 4 443
Corporate - public 4,470 264 88 4,646
Corporate - private 11,935 653 97 12,491
Mortgage-backed securities 2,661 92 5 2,748
---------------------------------------------------------------
Total fixed maturities $20,162 $1,049 $205 $21,006
===============================================================
Total equity securities $ 760 $ 395 $ 53 $ 1,102
===============================================================
December 31, 1997 Fixed maturities:
United States Government and agencies
$ 337 $ 1 $ - $ 338
Foreign governments 217 - - 217
States and political subdivisions 232 15 2 245
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 fixed maturities $20,404 $1,195 $ 53 $21,546
===============================================================
Total equity securities $ 639 $ 664 $ 30 $ 1,273
===============================================================
</TABLE>
The cost and fair value of fixed maturities available-for-sale at December 31,
1998, by expected maturity, are as follows (in millions):
Cost Fair Value
--------------------------
--------------------------
Due in one year or less $ 1,043 $ 1,061
Due after one year through five years 6,922 7,012
Due after five years through ten years 5,283 5,590
Due after ten years 4,234 4,577
--------------------------
--------------------------
17,482 18,240
Mortgage-backed and other securities without
a single maturity date 2,680 2,766
--------------------------
==========================
Total $20,162 $21,006
==========================
The above summarized activity is based on expected maturities. Actual maturities
may differ because borrowers may have the right to call or pre-pay obligations.
Major categories of net investment income are summarized as follows (in
millions):
Year ended December 31
1998 1997 1996
------------------------------------
Fixed maturities, available-for-sale $1,525 $1,620 $1,649
Equity securities, available-for-sale 32 39 33
Mortgage loans 1,171 1,150 1,085
Real estate 525 501 486
Policy loans 27 50 49
Cash and cash equivalents 9 9 15
Other 49 92 48
------------------------------------
------------------------------------
3,338 3,461 3,365
Less investment expenses (517) (513) (460)
------------------------------------
====================================
Net investment income $2,821 $2,948 $2,905
====================================
The major components of net realized capital gains (losses) on investments are
summarized as follows (in millions):
Year ended December 31
1998 1997 1996
----------------------------------
Fixed maturities, available-for-sale:
Gross gains $ 67 $ 51 $ 80
Gross losses (31) (43) (73)
Equity securities, available-for-sale:
Gross gains 329 132 451
Gross losses (40) (26) (5)
Mortgage loans 8 (6) (11)
Real estate 126 64 14
Other 7 4 (68)
==================================
Net realized capital gains $466 $176 $388
==================================
Proceeds from sales of investments (excluding call and maturity proceeds) in
fixed maturities were $2.8 billion, $5.0 billion and $7.8 billion in 1998, 1997
and 1996 respectively. Of the 1998, 1997 and 1996 proceeds, $2.2 billion, $4.0
billion and $7.2 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 $23 million, $29 million
and $64 million and gross losses of $7 million, $10 million and $53 million in
1998, 1997 and 1996, respectively, were realized on sales of mortgage-backed
securities. At December 31, 1998, the Company had security purchases payable
totaling $576 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.
The unrealized appreciation on investments in fixed maturities and equity
securities available-for-sale is reported as a separate component of equity,
reduced by adjustments to deferred policy 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,
including the net unrealized gains on the Closed Block available-for-sale
securities, is as follows (in millions):
<TABLE>
<CAPTION>
December 31
1998 1997
-----------------------------
<S> <C> <C>
Unrealized appreciation on fixed maturities, available-for-sale $939 $1,142
Unrealized appreciation on equity securities, available-for-sale,
including seed money in separate accounts 347 639
Adjustments for assumed changes in amortization patterns:
Deferred policy acquisition costs (167) (204)
Unearned revenue reserves 17 21
Provision for deferred income taxes (390) (560)
=============================
Net unrealized gains on available-for-sale securities $746 $1,038
=============================
</TABLE>
The 1998 decrease in unrealized appreciation on fixed maturities,
available-for-sale, includes the effect of a change in the method of estimating
the fair value of certain corporate bonds, net of related adjustments for
assumed changes in amortization patterns and deferred income taxes, of $116
million.
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, 1998 and 1997, 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
1998 1997 1998 1997
---------------------- --------------------
---------------------- --------------------
Pacific 28% 28% Industrial 33% 33%
South Atlantic 24 24 Retail 33 33
North Central 15 16 Office 29 29
Mid Atlantic 14 14 Other 5 5
South Central 9 9
New England 5 5
Mountain 5 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 a net realized capital loss.
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
1998 1997 1996
------------------------------------
Balance at beginning of year $121 $121 $115
Provision for losses 4 8 16
Releases due to write-downs,
sales and foreclosures (12) (8) (10)
====================================
Balance at end of year $113 $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 484,000 and 371,000 residential mortgage
loans with aggregate principal balances of approximately $42.1 billion and $29.1
billion at December 31, 1998 and 1997, respectively. In connection with these
mortgage servicing activities, the Company held funds in trust for others
totaling approximately $284 million and $210 million at December 31, 1998 and
1997, 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
mortgage loan allowance for losses.
Real estate holdings and related accumulated depreciation are as follows (in
millions):
December 31
1998 1997
-----------------------------
Properties held for sale $1,043 $ 360
Investment real estate 2,007 2,625
-----------------------------
3,050 2,985
Accumulated depreciation (359) (353)
=============================
Real estate, net $2,691 $2,632
=============================
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 $0.9 billion and $1.2 billion at
December 31, 1998 and 1997, respectively. The Company is committed to providing
additional mortgage financing for such joint ventures aggregating $85 million at
December 31, 1998.
4. 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 contracts ($140 million at
December 31, 1998, and $36 million at December 31, 1997) represent the extent of
the Company's involvement but not the risk of loss. The Company had no forward
contracts at December 31, 1998 and 1997.
The Company enters into interest rate swaps to minimize its exposure to
fluctuations in interest rates. Swaps are used in asset and liability management
to modify duration and match cash flows. The notional principal amounts of the
swaps outstanding at December 31, 1998 and 1997, were $1.6 billion and $1.0
billion, respectively, and the credit exposure at December 31, 1998 and 1997 was
$19 million and $21 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
at both December 31, 1998 and 1997. The net amount payable or receivable from
interest rate swaps is accrued as an adjustment to interest income. The
Company's interest rate swap agreements include cross-default provisions when
two or more swaps are transacted with a given counterparty.
The Company manages risk on its mortgage loan pipeline by buying and selling
mortgage-backed securities in the forward markets, over-the-counter options on
mortgage-backed securities, U. S. Treasury futures contracts and options on
Treasury futures contracts. The Company entered into mandatory forward, option
and futures contracts totaling approximately $2.4 billion and $1.2 billion at
December 31, 1998 and 1997, respectively, to reduce interest rate risk on
certain mortgage loans held for sale and other commitments. The forward
contracts provide for the delivery of securities at a specified future date at a
specified price or yield. In the event the counterparty is unable to meet its
contractual obligations, the Company may be exposed to the risk of selling
mortgage loans at prevailing market prices. The effect of these contracts was
considered in the lower of cost or market calculation of mortgage loans held for
sale.
The Company has committed to originate approximately $1.1 billion and $612
million of mortgage loans at December 31, 1998 and 1997, respectively, subject
to borrowers meeting the Company's underwriting guidelines. These commitments
call for the Company to fund such loans at a future date with a specified rate
at a specified price. Because the borrowers are not obligated to close the
loans, the Company is exposed to risks that it may not have sufficient mortgage
loans to deliver to its mandatory forward contracts and, thus, would be
obligated to purchase mortgage loans at prevailing market rates to meet such
commitments. Conversely, the Company is exposed to the risk that more loans than
expected will close, and the loans would then be sold at current market prices.
The Company uses interest rate floors and options on futures contracts in
hedging a portion of its portfolio of mortgage servicing rights from prepayment
risk associated with changes in interest rates. The Company had entered into
interest rate floor and option contracts with a notional value of $6.3 billion
and $3.1 billion at December 31, 1998 and 1997, respectively. The floors and
contracts 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.
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, 1998, the Company had various foreign currency
exchange agreements with maturities ranging from 1999 to 2018, with an aggregate
notional amount involved of approximately $486 million and the credit exposure
was $35 million. At December 31, 1997, such maturities ranged from 1998 to 2018
with an aggregate notional amount of approximately $410 million and a credit
exposure of $17 million. The average unexpired term of the swaps was
approximately seven years at both December 31, 1998 and 1997.
5. Closed Block
Summarized financial information of the Closed Block as of and for the six-month
period from formation to December 31, 1998, is as follows (in millions):
Assets
Fixed maturities, available-for-sale $1,722
Mortgage loans 1,063
Policy loans 741
Other investments 1
Accrued investment income 60
Deferred policy acquisition costs 649
Other assets 15
===========
$4,251
===========
Liabilities
Future policy benefits and claims $4,668
Other policyholder funds 6
Policyholder dividends payable 393
Other liabilities 232
===========
$5,299
===========
Revenues and expenses
Premiums $ 390
Net investment income 127
Other income 1
Benefits, claims and settlement expenses (306)
Dividends to policyholders (143)
Operating expenses (56)
===========
Contribution from the Closed Block (before income taxes) $ 13
===========
6. 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
1998 1997 1996
------------------------------------
Balance at beginning of year $ 770 $ 800 $ 810
Incurred:
Current year 1,922 2,723 3,051
Prior years (14) (21) (29)
------------------------------------
------------------------------------
Total incurred 1,908 2,702 3,022
Reclassification for subsidiary merger
(see Note 2) 155 - -
Payments:
Current year 1,523 2,235 2,535
Prior years 359 497 497
------------------------------------
Total payments 2,037 2,732 3,032
------------------------------------
Balance at end of year:
Current year 349 476 516
Prior years 292 294 284
------------------------------------
====================================
Total balance at end of year $ 641 $ 770 $ 800
====================================
The activity summary in the liability for unpaid accident and health claims
shows a decrease of $14 million, $21 million and $29 million to the December 31,
1997, 1996 and 1995 liability for unpaid accident and health claims,
respectively, arising in prior years. Such liability adjustments, which affected
current operations during 1998, 1997 and 1996, 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.
7. Debt
The components of debt as of December 31, 1998 and December 31, 1997 are as
follows (in millions):
December 31
1998 1997
------------------------------
7.875% notes payable, due 2024 $199 $199
8% notes payable, due 2044 99 99
Mortgages and other notes payable 373 161
==============================
Total debt $671 $459
==============================
On March 10, 1994, the Company issued $300 million of surplus notes, including
$200 million due March 1, 2024 at a 7.875% annual interest rate and the
remaining $100 million due March 1, 2044 at an 8% annual interest rate. No
affiliates of the Company hold any portion of the 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 the Company has sufficient surplus earnings to make such
payments. For each of the years ended December 31, 1998, 1997 and 1996, 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 the Company's election on or after March 1, 2004 in whole or in part
at a redemption price of approximately 103.6% of par. The approximate 3.6%
premium is scheduled to gradually diminish over the following ten years. These
surplus notes may then be redeemed on or after March 1, 2014, at a redemption
price of 100% of the principal amount plus interest accrued to the date of
redemption.
In addition, subject to Commissioner approval, the notes due March 1, 2044 may
be redeemed at the Company's election on or after March 1, 2014, in whole or in
part at a redemption price of approximately 102.3% of par. The approximate 2.3%
premium is scheduled to gradually diminish over the following ten years. These
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, 1998 range
from $1 million to $39.1 million per development with interest rates generally
ranging from 6.6% to 9.3%. 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%.
At December 31, 1998, future annual maturities of debt are as follows (in
millions):
1999 $150
2000 9
2001 8
2002 8
2003 9
Thereafter 487
----------
==========
Total future maturities of debt $671
==========
Cash paid for interest for 1998, 1997 and 1996 was $97 million, $67 million and
$79 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 $200 million and $225 million at December
31, 1998 and 1997, respectively. These outstanding borrowings are included in
other liabilities in the consolidated statements of financial position.
8. Income Taxes
The Company's income tax expense (benefit) is as follows (in millions):
Year ended December 31
1998 1997 1996
---------------------------------------
Current income taxes:
Federal $ (80) $144 $145
State and foreign 10 3 (1)
Net realized capital gains 107 11 210
---------------------------------------
Total current income taxes 37 158 354
Deferred income taxes 7 83 (50)
=======================================
Total income taxes $44 $241 $304
=======================================
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. A reconciliation between the corporate income
tax rate and the effective tax rate is as follows (in millions):
Year ended December 31
1998 1997 1996
-----------------------------------
Statutory corporate tax rate 35% 35% 35%
Dividends received deduction (4) (2) (1)
Interest exclusion from taxable income (1) (1) (1)
Resolution of prior year tax issues (20) - -
Other (4) 3 4
-----------------------------------
Effective tax rate 6% 35% 37%
===================================
Significant components of the Company's net deferred income taxes are as follows
(in millions):
December 31
1998 1997
-------------------
Deferred income tax assets (liabilities):
Insurance liabilities $ 171 $ 179
Deferred policy acquisition costs (331) (341)
Net unrealized gains on available for sale securities (390) (560)
Other 53 (81)
===================
$(497) $(803)
===================
The Internal Revenue Service (the Service) has completed examination of the
consolidated federal income tax returns of the Company and affiliated companies
through 1992. The Service is completing their examination of the Company's
returns for 1993 and 1994. The Service has also begun to examine returns for
1995 and 1996. The Company believes that there are adequate defenses against or
sufficient provisions for any challenges.
Undistributed earnings of certain foreign subsidiaries are considered
indefinitely reinvested by the Company. A tax liability will be recognized when
the Company expects distribution of earnings in the form of dividends, sale of
the investment or otherwise.
Cash paid for income taxes was $309 million in 1998, $143 million in 1997 and
$285 million in 1996.
9. Employee and Agent Benefits
The Company has defined benefit pension plans covering substantially all of its
employees and certain agents. The employees and agents are generally first
eligible for the pension plans when they reach age 21. The pension benefits are
based on the years of service and generally the employee's or agent's average
annual compensation during the last five years of employment. Partial benefit
accrual of pension benefits is recognized from first eligibility until
retirement based on attained service divided by potential service to age 65 with
a minimum of 35 years of potential service. The Company's policy is to fund the
cost of providing pension benefits in the years that the employees and agents
are providing service to the Company. The Company's funding policy is to deposit
the actuarial normal cost and any change in unfunded accrued liability over a
30-year period as a percentage of compensation.
The 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 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>
Other Postretirement Benefits
Pension Benefits
---------------------------------- -------------------------------
Year ended December 31 Year ended December 31
1998 1997 1996 1998 1997 1996
--------- ----------- ------------ ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at beginning $(700) $(732) $(670) $(214) $(218) $(212)
of year
Service cost (34) (41) (38) (12) (12) (12)
Interest cost (50) (52) (46) (15) (16) (15)
Plan amendment - - (16) - - -
Actuarial gain (loss) (79) 97 19 22 22 14
Curtailment adjustment - 7 - - - -
Benefits paid 36 21 19 13 10 7
========= =========== ============ ========== ========== =========
Benefit obligation at end of year $(827) $(700) $(732) $(206) $(214) $(218)
========= =========== ============ ========== ========== =========
</TABLE>
<TABLE>
<CAPTION>
Other Postretirement Benefits
Pension Benefits
-------------------------------------- ------------------------------
Year ended December 31 Year ended December 31
1998 1997 1996 1998 1997 1996
----------- ------------ ------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Change in plan assets
Fair value of plan assets at
beginning of year $980 $841 $723 $300 $247 $208
Actual return on plan assets 23 130 118 15 41 32
Employer contribution 26 26 20 26 25 17
Benefits paid (36) (17) (20) (15) (13) (10)
----------- ------------ ------------- ---------- ---------- ----------
Fair value of plan assets at end of $993 $980 $841 $326 $300 $247
year
=========== ============ ============= ========== ========== ==========
Funded status $166 $280 $109 $120 $ 86 $ 29
Unrecognized net actuarial gain (38) (182) (29) (71) (53) (10)
Unrecognized prior service cost 12 14 17 - - -
Unamortized transition obligation (37) (49) (60) 8 12 17
----------- ------------ ------------- ---------- ---------- ----------
Prepaid benefit cost $103 $ 63 $ 37 $ 57 $ 45 $ 36
=========== ============ ============= ========== ========== ==========
Weighted-average assumptions as of
December 31
Discount rate 6.75% 7.25% 7.25% 6.75% 7.25% 7.25%
Components of net periodic benefit
cost
Service cost $ 34 $ 41 $ 38 $ 12 $ 12 $ 12
Interest cost 50 52 46 15 16 15
Expected return on plan assets (75) (80) (119) (16) (16) (13)
Amortization of prior service cost 1 1 1 - - -
Amortization of transition (asset)
obligation (11) (11) (11) 4 4 4
Recognized net actuarial loss (gain) (8) 2 52 (1) - -
----------- ------------ ------------- ---------- ---------- ----------
Net periodic benefit cost (income) $ (9) $ 5 $ 7 $ 14 $ 16 $ 18
=========== ============ ============= ========== ========== ==========
</TABLE>
For 1998, 1997 and 1996, the expected long-term rates of return on plan assets
for pension benefits were approximately 5%, 5% and 6.2%, respectively (after
estimated income taxes) for those trusts subject to income taxes. For trusts not
subject to income taxes, the expected long-term rates of return on plan assets
were approximately 8.1%, 8.1% and 9.6% for 1998, 1997 and 1996, respectively.
The assumed rate of increase in future compensation levels varies by age for
both the qualified and non-qualified pension plans.
For 1998, 1997 and 1996, the expected long-term rates of return on plan assets
for other post-retirement benefits were approximately 5%, 5% and 6.2%,
respectively (after estimated income taxes) for those trusts subject to income
taxes. For trusts not subject to income taxes, the expected long-term rates of
return on plan assets were approximately 8.1%, 8.2% and 9.5% for 1998, 1997 and
1996, respectively. 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 8.75% in 1998 and declines to an
ultimate rate of 6% in 2025. Assumed health care cost trend rates have a
significant effect on the amounts reported for the health care plans. A
one-percentage-point change in assumed health care cost trend rates would have
the following effects (in millions):
1-Percentage- 1-Percentage-
Point Increase Point Decrease
--------------- ---------------
Effect on total of service and
interest cost components $ 9 $ (6)
Effect on accumulated postretirement
benefit obligation $43 $(34)
In addition, the Company has defined contribution plans that are generally
available to all employees and agents who are age 21 or older. Eligible
participants may contribute up to 20% of their compensation, to a maximum of
$10,000 annually to the plans in 1998. Eligible participants were able to
contribute up to 15% of their compensation, to a maximum of $9,500 annually to
the plans in 1997 and 1996. 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 $11 million in 1998, $15
million in 1997 and $13 million in 1996 to these defined contribution plans.
10. 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. To minimize the possibility of losses, the Company
evaluates the financial condition of its reinsurers and continually monitors
concentrations of credit risk.
The effect of reinsurance on premiums and annuity and other considerations and
benefits, claims and settlement expenses is as follows (in millions):
Year ended December 31
1998 1997 1996
-----------------------------------
-----------------------------------
Premiums and annuity and other
considerations:
Direct $3,380 $4,601 $5,034
Assumed 59 106 116
Ceded (30) (39) (29)
===================================
Net premiums and annuity and other
considerations $3,409 $4,668 $5,121
===================================
===================================
Benefits, claims and settlement expenses:
Direct $4,739 $5,596 $6,003
Assumed 66 102 109
Ceded (28) (66) (25)
===================================
Net benefits, claims and
settlement expenses $4,777 $5,632 $6,087
===================================
Effective July 1, 1998, the Company no longer participates in reinsurance pools
related to the Federal Employee Group Life Insurance and Service Group Life
Insurance programs. In 1997, the premium assumed from these arrangements was
approximately $85 million.
11. 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 $362 million in 1998, $344 million in
1997 and $310 million in 1996. At December 31, 1998, future minimum annual
rental commitments under these noncancelable operating leases are as follows (in
millions):
Held for Sale Held for Total Rental
Investment Commitments
-------------------------------------------
1999 $150 $ 172 $ 322
2000 127 162 289
2001 103 140 243
2002 77 117 194
2003 49 99 148
Thereafter 152 758 910
===========================================
Total future minimum lease receipts $658 $1,448 $2,106
===========================================
The Company, as a lessee, leases office space, data processing equipment,
corporate aircraft and office furniture and equipment under various operating
leases. Rental expense for all operating leases totaled $60 million in 1998 and
$84 million in both 1997 and 1996. At December 31, 1998, future minimum annual
rental commitments under these noncancelable operating leases are as follows (in
millions):
1999 $ 44
2000 38
2001 28
2002 22
2003 14
Thereafter 17
-----------
163
Less future sublease rental income on these
noncancelable leases 6
===========
Total future minimum lease payments $157
===========
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, 1998 and 1997, approximately $9 million and $6 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.
12. 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.
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 fixed maturities 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.
The carrying amounts and estimated fair values of the Company's financial
instruments at December 31, 1998 and 1997, are as follows (in millions):
<TABLE>
<CAPTION>
1998 1997
--------------------------- ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------------------- ----------------------------
Assets (liabilities)
<S> <C> <C> <C> <C>
Fixed maturities (see Note 3) $21,006 $21,006 $21,546 $21,546
Equity securities (see Note 3) 1,102 1,102 1,273 1,273
Mortgage loans 12,091 12,711 13,286 14,010
Policy loans 25 25 749 749
Other investments 349 349 130 130
Cash and cash equivalents 461 461 546 546
Accrued investment income 375 375 457 457
Financial instruments included in Closed
Block (see Note 5) 3,587 3,652 - -
Investment-type insurance contracts (22,127) (21,606) (22,115) (22,637)
Debt (671) (708) (459) (486)
</TABLE>
13. Statutory Insurance Financial Information
The Company 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 (NAIC) 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 has adopted the Codification of Statutory Accounting Principles
(Codification), the result of which is expected to constitute the primary source
of "prescribed" statutory accounting practices assuming formal adoption by Iowa
regulatory authorities. If adopted as proposed, the codification will likely
change, to some extent, prescribed statutory accounting practices and may result
in changes to the accounting practices that the Company uses to prepare its
statutory-basis financial statements. 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 the
Company's statutory financial statements has not been determined at this time.
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,
1998, the Company meets the RBC requirements.
The following summary reconciles the assets and stockholder's equity at December
31, 1998, 1997 and 1996, and net income for the years ended December 31, 1998,
1997 and 1996, in accordance with statutory reporting practices prescribed or
permitted by the Insurance Division of the Department of Commerce of the State
of Iowa with that reported in these consolidated GAAP financial statements (in
millions):
<TABLE>
<CAPTION>
Stockholder's
Assets Equity Net Income
---------------------------------------------
---------------------------------------------
<S> <C> <C> <C>
December 31, 1998
As reported in accordance with statutory accounting
practices - unconsolidated $70,096 $3,032 $511
Additions (deductions):
Unrealized gain on fixed maturities available-for-sale 997 997 -
Other investment adjustments 1,620 1,081 176
Adjustments to insurance reserves and dividends (169) (192) (56)
Deferral of policy acquisition costs 1,105 1,105 -
Surplus note reclassification as debt - (298) -
Provision for deferred federal income taxes and other
tax reclassifications - (475) 165
Other - net 294 219 (101)
=============================================
As reported in these consolidated GAAP financial statements
$73,943 $5,469 $695
=============================================
December 31, 1997
As reported in accordance with statutory accounting
practices - unconsolidated $63,957 $2,811 $432
Additions (deductions):
Unrealized gain on fixed maturities 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
=============================================
Stockholder's
Assets Equity Net Income
---------------------------------------------
December 31, 1996
As reported in accordance with statutory accounting
practices - unconsolidated $56,837 $2,504 $415
Additions (deductions):
Unrealized gain on fixed maturities 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>
14. Dividends
On December 1, 1998, the Company's Board of Directors declared dividends
comprising cash and other assets totaling $200 million to its sole shareholder,
Principal Financial Services, Inc. At December 31, 1998, $140 million of the
dividends have been paid and the remaining balance is reported in other
liabilities.
15. 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. 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 Company will continue to use internal and external resources to modify,
replace, and test its systems. Management estimates 100% of the identified
modifications to mission critical systems and 99% of the identified
modifications to other systems have been completed for its Year 2000 project.
The project completion is scheduled to occur prior to any anticipated impact on
the Company operations. The total cost for the project is estimated to be $20
million, with the costs being expensed as incurred until completion.
The Company faces the risk that one or more of its critical suppliers or
customers (external relationships) will not be able to interact with the Company
due to the third party's inability to resolve its own Year 2000 issues. The
Company has completed its inventory of external relationships and is attempting
to determine the overall Year 2000 readiness of its external relationships. The
Company is engaged in discussions with the third parties and is requesting
information as to those parties' Year 2000 plans and state of readiness. The
Company, however, does not have sufficient information at the current time to
predict whether all of its external relationships will be Year 2000 ready.
While the Company believes that it has addressed its Year 2000 concerns, the
Company has begun to develop contingency/recovery plans aimed at ensuring the
continuity of critical business functions before, on and after December 31,
1999. The Company expects contingency/recovery planning to be substantially
complete by April 1, 1999. The Year 2000 contingency plans will be reviewed
periodically throughout 1999 and revised as needed. The Company believes its
Year 2000 contingency plans coupled with existing "disaster recovery" and
"business resumption" plans minimize the impact Year 2000 issues may have on the
organization.
The process the Company is using encourages the developers of the contingency
plans to look beyond traditional systems problems which may include supply chain
issues, economic conditions, social changes, political aspects and other factors
which could influence the success of the business and customers.
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements included in the Registration Statement
(1) Part A:
None
(2) Part B:
Principal Life Insurance Company Separate Account B:
Report of Independent Auditors.
Statement of Net Assets, December 31, 1998.
Statement of Operations for the year ended
December 31, 1998.
Statements of Changes in Net Assets for the years
ended December 31, 1998 and 1997.
Notes to Financial Statements.
Principal Life Insurance Company:
Report of Independent Auditors.
Consolidated Statements of Operations for the years
ended December 31, 1998, 1997 and 1996.
Consolidated Statements of Financial Position,
December 31, 1998 and 1997.
Consolidated Statements of Stockholder's Equity for
the years ended December 31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the
years ended December 31, 1998, 1997 and 1996.
Notes to Consolidated Financial Statements.
(b) Exhibits
(1) Board Resolution of Registrant (filed 9/14/98)
(3a) Distribution Agreement (filed 9/14/98)
(3b) Selling Agreement
(4a) Form of Variable Annuity Contract (filed 9/14/98)
(4b) Form of Variable Annuity Contract (filed 9/14/98)
(5) Form of Variable Annuity Application (filed 9/14/98)
(6a) Articles of Incorporation of the Depositor (filed 9/14/98)
(6b) Bylaws of Depositor (filed 9/14/98)
(9) Opinion of Counsel (filed 9/14/98)
(10a) Consent of Ernst & Young LLP
(10b) Powers of Attorney
(13a) Total Return Calculation*
(13b) Annualized Yield for Separate Account B*
* To be filed by amendment
<PAGE>
Item 25. Officers and Directors of the Depositor
Principal 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
BETSY J. BERNARD U.S. West
Director
Member, Nominating Committee
JOCELYN CARTER-MILLER Motorola
Director
Member, Audit Committee
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
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
PAUL S. BOGNANNO Senior Vice President
C. ROBERT DUNCAN 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
ROBB B. HILL Senior Vice President
GREGG R. NARBER Senior Vice President and
General Counsel
MARY A. O'KEEFE Senior Vice President
RICHARD L. PREY Senior Vice President
ROBERT A. SLEPICKA Senior Vice President
NORMAN R. SORENSEN 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 Life Insurance Company (an Iowa corporation)
a life group, pension and individual insurance company.
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) 0.17% of
shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on February 12, 1999.
Principal Blue Chip Fund, Inc.(a Maryland Corporation) 0.84% of
shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on February 12, 1999.
Principal Bond Fund, Inc.(a Maryland Corporation) 0.62% of shares
outstanding owned by Principal Life Insurance Company (including
subsidiaries and affiliates) on February 12, 1999.
Principal Capital Value Fund, Inc. (a Maryland Corporation)
23.76% of outstanding shares owned by Principal Life Insurance
Company (including subsidiaries and affiliates) on February 12,
1999.
Principal Cash Management Fund, Inc. (a Maryland Corporation)
8.51% of outstanding shares owned by Principal Life Insurance
Company (including subsidiaries and affiliates) on February 12,
1999.
Principal Government Securities Income Fund, Inc. (a Maryland
Corporation) 0.04% of shares outstanding owned by Principal Life
Insurance Company (including subsidiaries and affiliates) on
February 12, 1999.
Principal Growth Fund, Inc. (a Maryland Corporation) 0.41% of
outstanding shares owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on February 12, 1999.
Principal High Yield Fund, Inc. (a Maryland Corporation) 7.38%
of shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on February 12, 1999.
Principal International Emerging Markets Fund, Inc. (a Maryland
Corporation) 47.07% of shares outstanding owned by Principal Life
Insurance Company (including subsidiaries and affiliates) on
February 12, 1999.
Principal International Fund, Inc. (a Maryland Corporation)
22.93% of shares outstanding owned by Principal Life Insurance
Company (including subsidiaries and affiliates) on February 12,
1999.
Principal International SmallCap Fund, Inc. (a Maryland
Corporation) 43.01% of shares outstanding owned by Principal Life
Insurance Company (including subsidiaries and affiliates) on
February 12, 1999.
Principal Limited Term Bond Fund, Inc. (a Maryland Corporation)
31.37% of shares outstanding owned by Principal Life Insurance
Company (including subsidiaries and affiliates) on February 12,
1999.
Principal MidCap Fund, Inc. (a Maryland Corporation) 0.66% of
shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on February 12, 1999
Principal Real Estate Fund, Inc. (a Maryland Corporation) 68.91%
of shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on February 12, 1999
Principal SmallCap Fund, Inc.(a Maryland Corporation) 22.07% of
shares outstanding owned by Principal Life Insurance
Company (including subsidiaries and affiliates) on February 12,
1999
Principal Special Markets Fund, Inc. (a Maryland Corporation)
83.30% of shares outstanding of the International Emerging
Markets Portfolio, 43.66% of the shares outstanding of the
International Securities Portfolio, 98.66% of shares outstanding
of the International SmallCap Portfolio and 100% of the shares
outstanding of the Mortgage-Backed Securities Portfolio were
owned by Principal Life Insurance Company (including subsidiaries
and affiliates) on February 12, 1999
Principal Tax-Exempt Bond Fund, Inc. (a Maryland Corporation)
0.05% of shares outstanding owned by Principal Life Insurance
Company (including subsidiaries and affiliates) on February 12,
1999.
Principal Utilities Fund, Inc. (a Maryland Corporation) 0.25% of
shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on February 12, 1999.
Principal Variable Contracts Fund, Inc. (a Maryland Corporation)
100% of shares outstanding of the following Accounts owned by
Principal Life Insurance Company and its Separate Accounts on
February 12, 1999: Aggressive Growth, Asset Allocation, Balanced,
Bond, Capital Value, Government Securities, Growth, High Yield,
International, International SmallCap, MicroCap, MidCap, MidCap
Growth, Money Market, Real Estate, SmallCap, SmallCap Growth,
SmallCap Value and Utilities.
Subsidiaries organized and wholly-owned by Principal Life
Insurance Company:
a. Principal Holding Company (an Iowa Corporation) A holding
company wholly-owned by Principal Life Insurance
Company.
b. PT Asuransi Jiwa Principal Egalita Indonesia (an Indonesia
Corporation)
c. Principal Development Investors, LLC (a Delaware
Corporation) A limited liability company engaged in
acquiring and improving real property through development
and redevelopment.
d. Principal Capital Management, LLC (a Delaware Corporation) A
limited liability company that provides investment
management services.
Subsidiaries wholly-owned by Principal Capital Management, LLC:
a. Principal Structured Investments, LLC (a Delaware
Corporation) a limited liability company that provides
product development administration, marketing and asset
management services associated with stable value products
together with other related institutional financial services
including derivatives, asset-liability management, fixed
income investment management and ancillary money management
products.
b. Principal Enterprise Capital, LLC (a Delaware Corporation) a
company engaged in the operation of nonresidential
buildings.
c. Principal Commercial Acceptance, LLC (a Delaware
Corporation) a limited liability company involved in
purchasing, managing and selling commercial real estate
assets in the secondary market.
d. Principal Real Estate Investors, LLC (a Delaware
Corporation) a registered investment advisor.
e. Principal Commercial Funding, LLC (a Delaware
Corporation) a correspondent lender and service provider for
loans.
f. Principal Real Estate Services, LLC (a Delaware Corporation)
a limited liability company which acts as a property manager
and real estate service provider.
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, LLC (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, d/b/a Trustar
Retirement Services (a Delaware Corporation) a nondepository
trust company.
i. The Admar Group, Inc. (a Florida Corporation) a national
managed care service organization that develops 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. Professional Pensions, Inc. (a Connecticut Corporation) a
corporation engaged in sales, marketing and administration
of group insurance plans and serves as a record keeper and
third party administrator for various clients' defined
contribution plans.
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.
v. Dental-Net, Inc. (an Arizona Corporation) holding company
of Employers Dental Services; a managed dental care services
organization. HMO and dental group practice.
w. Principal Investors Corporation (a New Jersey Corporation) a
registered broker-dealer with the Securities Exchange
Commission. It is not currently active.
Subsidiaries organized and wholly-owned by Princor Financial Services
Corporation:
a. Principal Management Corporation (an Iowa Corporation) a
registered investment advisor.
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.
Subsidiary owned by Principal Residential Mortgage, Inc.:
a. Principal Wholesale Mortgage, Inc. (an Iowa Corporation) a
brokerage and servicer of residential mortgages.
Subsidiaries owned by Dental-Net, Inc.
a. Employers Dental Services, Inc. (an Arizona corporation)
a prepaid dental plan organization.
Subsidiaries wholly-owned by Professional Pensions, Inc.:
a. Benefit Fiduciary Corporation (a Rhode Island corporation)
serves as a corporate trustee for retirement trusts.
b. PPI Employee Benefits Corporation (a Connecticut
corporation) a registered broker-dealer pursuant to Section
15(b) of the Securities Exchange Act an a member of the
National Association of Securities Dealers (NASD), limited
to the sale of open-end mutual funds and variable insurance
products.
c. Boston Insurance Trust, Inc. (a Massachusetts corporation)
authorized by charter to serve as a trustee in connection
with multiple-employer group life insurance trusts or
arrangements, and to generally participate in the
administration of insurance trusts.
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. Principal Afore, S.A. de C.V. (a Mexico Corporation),
pension.
h. Zao Principal International (a Russia Corporation) inactive.
i. Principal Trust Company (Asia) Limited (an Asia trust
company).
j. Principal Asset Management Company (Asia) Ltd. (Hong Kong)
a corporation which manages pension funds.
k. Principal Consulting (India) Private Limited (an India
corporation) an India consulting company.
Subsidiaries owned by Principal International Argentina, S.A.:
a. Principal Compania de Seguros de Retiro, S.A. (an Argentina
Corporation) an individual annuity/employee benefit company.
b. Principal Life Compania de Seguros, S.A. (an Argentina
Corporation) a life insurance company.
Subsidiary owned by Principal International de Chile, S.A.:
a. Principal Compania de Seguros de Vida Chile S.A. (a Chile
Corporation) life insurance and annuity company.
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 Principal Afore, S.A. de C.V.:
a. Siefore Principal, S.A. de C.V. (a Mexico
Corporation) an investment fund company.
Item 27. Number of Contractowners - As of: March 31, 1999
(1) (2) (3)
Number of Plan Number of
Title of Class Participants Contractowners
-------------- -------------- --------------
BFA Variable Annuity Contracts 78 8
Pension Builder Contracts 683 378
Personal Variable Contracts 5215 131
Premier Variable Contracts 21638 279
Flexible Variable Annuity Contract 36413 36413
Freedom Variable Annuity Contract 0 0
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 Utilities Fund, Inc., Principal
Variable Contracts Fund, Inc. and for variable annuity contracts participating
in Principal 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 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 Acting President
The Principal
Financial Group
Des Moines, IA 50392
Jerald L. Bogart Insurance License Officer
The Principal
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 Sales,
The Principal Princor Investment Network
Financial Group
Des Moines, IA 50392
David J. Drury Director
The Principal
Financial Group
Des Moines, IA 50392
Ralph C. Eucher Director and
The Principal Executive Vice President
Financial Group
Des Moines, IA 50392
Arthur S. Filean Vice President
The Principal
Financial Group
Des Moines, IA 50392
Dennis P. Francis Director
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 Vice President-
The Principal Compliance and Product
Financial Group Development
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
Susan R. Haupts Marketing Officer
The Principal
Financial Group
Des Moines, IA 50392
Joyce N. Hoffman Vice President and
The Principal Corporate Secretary
Financial Group
Des Moines, IA 50392
Kraig L. Kuhlers Marketing Officer
The Principal
Financial Group
Des Moines, IA 50392
Ellen Z. Lamale Director
The Principal
Financial Group
Des Moines, IA 50392
Julia M. Lawler 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
Kelly A. Paul Systems & Technology
The Principal Officer
Financial Group
Des Moines, IA 50392
Elise M. Pilkington Assistant Director -
The Principal Retirement Consulting
Financial Group
Des Moines, IA 50392
Richard L. Prey Director
The Principal
Financial Group
Des Moines, IA 50392
Layne A. Rasmussen Controller-Mutual Funds
The Principal
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-
The Principal Marketing
Financial Group
Des Moines, IA 50392
Minoo Spellerberg Compliance 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 $13,709,101.12
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 to file a post-effective amendment to this
registration statement as frequently as is necessary to ensure that
the audited financial statements in the registration statement are
never more than 16 months old for so long as payments under the
variable annuity contracts may be accepted.
The Registrant undertakes to include either (1) as part of any
application to purchase a contract offered by the prospectus, a space
that an applicant can check to request a Statement of Additional
Information, or (2) a post card or similar written communication
affixed to or included in the prospectus that the applicant can remove
to send for a Statement of Additional Information.
The Registrant undertakes to deliver any Statement of Additional
Information and any financial statements required to be made available
under this Form promptly upon written or oral request.
REPRESENTATION PURSUANT TO SECTION 26 OF THE INVESTMENT COMPANY ACT OF 1940
Principal 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 Life Insurance Company
Separate Account B, 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 19th day of April, 1999
PRINCIPAL LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
(Registrant)
By: PRINCIPAL 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 19, 1999
- -------------------- Chief Executive Officer
D. J. Drury
/s/ D. C. Cunningham Vice President and April 19, 1999
- -------------------- Controller (Principal
D. C. Cunningham Accounting Officer)
/s/ M. H. Gersie Senior Vice President April 19, 1999
- -------------------- (Principal Financial
M. H. Gersie Officer)
(B. J. Bernard)* Director April 19, 1999
- --------------------
B. J. Bernard
(J. Carter-Miller)* Director April 19, 1999
- --------------------
J. Carter-Miller
(R. M. Davis)* Director April 19, 1999
- --------------------
R. M. Davis
(C. D. Gelatt, Jr.)* Director April 19, 1999
- --------------------
C. D. Gelatt, Jr.
(J. B. Griswell)* Director April 19, 1999
- --------------------
J. B. Griswell
(G. D. Hurd)* Director April 19, 1999
- --------------------
G. D. Hurd
(C. S. Johnson)* Director April 19, 1999
- --------------------
C. S. Johnson
(W. T. Kerr)* Director April 19, 1999
- --------------------
W. T. Kerr
(L. Liu)* Director April 19, 1999
- --------------------
L. Liu
(V. H. Loewenstein)* Director April 19, 1999
- --------------------
V. H. Loewenstein
(R. D. Pearson)* Director April 19, 1999
- --------------------
R. D. Pearson
(J. R. Price)* Director April 19, 1999
- --------------------
J. R. Price, Jr.
(D. M. Stewart)* Director April 19, 1999
- --------------------
D. M. Stewart
(E. E. Tallett)* Director April 19, 1999
- --------------------
E. E. Tallett
(D. D. Thornton)* Director April 19, 1999
- --------------------
D. D. Thornton
(F. W. Weitz)* Director April 14, 1999
- --------------------
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
BROKER-DEALER
MARKETING AND SERVICING AGREEMENT
FOR
VARIABLE ANNUITY CONTRACTS
AGREEMENT dated this ____ day of _______, ____, by and between Principal Life
Insurance Company, (hereinafter called "Issuer"), Princor Financial Services
Corporation (hereinafter called "Distributor") and (hereinafter called
"Broker"). For the purposes of this Agreement, in those states in which Broker
cannot obtain an insurance license the term "Broker" shall include such validly
licensed insurance representatives designated by Broker to effect the sale of
variable annuity contracts issued by the Issuer (hereinafter called "Annuity
Contracts").
MARKETING
In consideration of the mutual agreements herein contained, the Parties hereto
agree as follows:
1. The Distributor appoints the Broker to sell Annuity Contracts. This
agreement is a selling and servicing agreement between broker-dealers.
It does not designate any party as the broker, agent, or employee of
any other Party. Words and phrases in this Agreement given special
meaning in any Annuity Contracts shall have that same special meaning
in this Agreement unless specifically defined otherwise herein.
2. The Broker agrees to direct its best efforts to find purchasers and
provide service for Annuity Contracts. The Broker does not undertake to
sell or service any specific number of Annuity Contracts issued by the
Issuer.
3. The Distributor shall provide the Broker with a reasonable number of
current prospectuses, annual reports and such other material as the
Distributor determines to be desirable for use in connection with the
sale and servicing of Annuity Contracts or the solicitation of
applications for participation thereunder. The Distributor indemnifies
and holds the Broker harmless for misrepresentations or omissions with
regard to prospectuses and sales materials provided by the Distributor
as well as misrepresentations or omissions of employees of the
Distributor or Principal Life Insurance Company relied upon in
connection with the sale and servicing of Annuity Contracts.
4. The Broker warrants that it is a member in good standing of the
National Association of Securities Dealers, Inc. (NASD) and will
promptly notify Distributor of any change in Broker's status as a
member of the NASD.
5. The Broker represents that it is currently a member of SIPC and, while
this agreement is in effect, will continue to be a member of SIPC. The
Broker agrees to notify the Distributor if the Broker's SIPC membership
status changes.
6. The Broker warrants that the Broker, and any person associated with or
acting for the Broker in the solicitation of applications for Annuity
Contracts shall be qualified pursuant to the requirements of the NASD
and appropriate federal and state agencies regulating securities,
insurance, any other aspect of the Annuity Contracts or the sale and
servicing of them. The Broker shall be responsible for seeing to such
qualifications, and indemnifies and holds the Distributor and the
Issuer harmless for any failure to have all persons engaged in
solicitation or servicing on its behalf properly licensed, registered,
and appointed for securities and insurance sales.
7. The Broker is responsible for supervising and controlling the conduct
and activities of its Registered Representatives with regard to the
sale and distribution of Annuity Contracts. The Broker agrees to
indemnify and hold the Distributor and the Issuer harmless for claims
and actions of any sort which arise from the conduct and activities of
the persons associated with it who are involved in the sale, servicing
and distribution of the Annuity Contracts. The Distributor indemnifies
and holds the Broker harmless for claims which arise from alleged
untrue statements contained in the registration statement, prospectus
or approved sales material for the Annuity Contracts. The Broker shall
use only sales materials or advertising for the Annuity Contracts that
have been approved in writing by the Distributor.
8. The Broker acts only in its own behalf in making agreements with
Registered Representatives or other persons in connection with the
solicitation or sales of Annuity Contracts.
9. The Broker agrees to maintain all books and records relating to the
servicing and sale of Annuity Contracts or interests therein required
to be maintained by the Broker pursuant to the Securities Exchange Act
of 1934, in conformity with the requirements of Rules 17, 17a-3 and
17a-4 under such Act, and to the applicable securities or insurance
laws of any state.
10. The Broker shall transmit promptly and directly to the Distributor all
contributions collected by or paid to the Broker. All Annuity Contracts
are to be delivered promptly, and any undelivered Annuity Contracts are
to be returned within the time allowed or on demand.
COMPENSATION
1. While this Agreement is in force, compensation for the sale and
servicing of each Annuity Contract shall be paid pursuant to a
corresponding schedule attached hereto and made a part hereof. (Each
Annuity Contract will have a corresponding Compensation Schedule)
2. Compensation shall only be paid to the Broker of record on premiums
paid to and retained by Issuer while this Agreement is in force. Issuer
expressly reserves the right to change the broker-dealer of record or
Registered Representative in the event an Annuity Contract owner so
requests. Determination of the Annuity Contracts applicable to this
Agreement shall be by the Issuer.
3. In those states where Broker cannot obtain an insurance license, Broker
represents and warrants that: it will effect the sale of any contract
through a validly licensed insurance Representative (Compensation
Representative) who has entered into an agreement with Broker for this
purpose; it authorizes Distributor to pay any compensation due it from
sales of a contract to such Compensation Representative; it remains
fully responsible for recordkeeping and supervision of the solicitation
and/or sale of Annuity Contracts; all monies received by Compensation
Representative in accordance with this section will be distributed by
Compensation Representative only to duly licensed Registered
Representatives who have been appointed by the Issuer to solicit for
applications for Annuity Contracts.
4. The Distributor may, at any time, upon written notice to the Broker,
change any and all of the rates of Compensation set out herein. Broker
will be deemed to have accepted a new Compensation Schedule if an
application is submitted for an Annuity Contract affected after said
Compensation Schedule has been mailed to the broker.
5. Any indebtedness of any kind due to the Distributor or Issuer from the
Broker may be offset against any amount due the Broker.
GENERAL
1. The Broker has no authority to: incur any liability or debt against the
Distributor or the Issuer; accept risks or contracts of any kind; make,
alter, authorize or discharge any contract; extend the time of payment
of any contributions; waive payments, fail to transmit promptly any
contributions collected to the Distributor; bind the Distributor or the
Issuer in any way.
2. Any modifications of this Agreement must be in writing and signed by an
authorized officer of the Distributor and of the Issuer.
3. This Agreement may be terminated by either the Distributor, the Broker
or the Issuer upon written notice to the last known address of the
other parties.
4. This Agreement supersedes and replaces any and all prior agreements of
the Distributor or the Issuer with the Broker on the subject of Annuity
Contracts or the sale and service of them.
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed
in triplicate on the date first above written.
Broker______________________________
By__________________________________
____________________________________
Please type or print name
PRINCOR FINANCIAL SERVICES CORPORATION
By__________________________________
PRINCIPAL LIFE INSURANCE COMPANY
By__________________________________
<PAGE>
DEALER COMPENSATION SCHEDULE
FREEDOMsm VARIABLE ANNUITY CONTRACT
Contract Year Commission*
- ------------- -----------
1 - 4 years 0.35% (.0875% per quarter)
5 + 0.25% (.0625% per quarter)
* Annual Trail Commission paid quarterly starting at the end of the first
quarter as a percentage of account value.
NOTE: Commissions will not be paid, nor will they accrue, until the
Broker-Dealer Marketing and Servicing Agreement has been fully
executed.
<PAGE>
DEALER COMPENSATION SCHEDULE
FLEXIBLE VARIABLE ANNUITY ("FVA") CONTRACT
The Broker will be paid Dealer Compensation in accordance with the Compensation
Options elected herein and which the Broker's sales representative shall elect,
using the election procedures established by the Insurer, upon submission of the
product application to the Insurer and for which good payment has been received.
Compensation paid will be based on Option A unless;
1) the Broker has elected the other Options (making them available to
representatives), and
2) the sales representative selects another (Broker elected)
Compensation Option upon submission of the product application.
Irrespective of the Broker's election of Options, if the Broker becomes entitled
to commission as a result of a change of broker on such Annuity Contract, the
Broker will receive commissions on such Annuity Contract in accordance with the
compensation option in effect for such Annuity Contract prior to the transfer.
<TABLE>
<CAPTION>
A. Compensation
------------
Oldest of Owner's
or Annuitant's Age Commission (as a % of purchase payment)*
when purchase payment paid Option A Option B Option C Option D
-------------------------- -------- -------- -------- --------
Purchase payment less than $2 million
-------------------------------------
<S> <C> <C> <C> <C> <C>
0-75 5.500% 5.000% 4.000% 0.000%
Trail commission** 0.000% 0.100% 0.300% 1.000%
Purchase payment over $2 million
--------------------------------
0-75 4.125% 3.625% 2.625% 0.000%
Trail commission** 0.000% 0.100% 0.300% 1.000%
All purchase payment amounts
----------------------------
76-85 4.125% 3.625% 2.625% N/A
Trail commission** 0.000% 0.100% 0.300% N/A
</TABLE>
B. Reimbursement if Surrendered
----------------------------
In the event of a full or partial surrender of an Annuity Contract for any
reason within the first twelve (12) months after a purchase payment is
made, any compensation previously paid or payable with respect to such
purchase payment will be reimbursed to the Distributor by the Broker
promptly and on demand. The amount of the reimbursement will be determined
as follows:
<PAGE>
<TABLE>
<CAPTION>
Reimbursement Schedule
----------------------
=============================================================================================================
Percentage of Commission Percentage of Commission
Month of to be Reimbursed Month of to be Reimbursed
Surrender Surrender
=============================================================================================================
<S> <C> <C> <C>
1 100% 7 60%
------------------------- ---------------------------- -------------------------- ---------------------------
2 100% 8 50%
------------------------- ---------------------------- -------------------------- ---------------------------
3 100% 9 40%
------------------------- ---------------------------- -------------------------- ---------------------------
4 90% 10 30%
------------------------- ---------------------------- -------------------------- ---------------------------
5 80% 11 20%
------------------------- ---------------------------- -------------------------- ---------------------------
6 70% 12 10%
=============================================================================================================
</TABLE>
The Distributor also reserves the right to require reimbursement of any
compensation paid (less any applicable surrender charge) in the three years
prior to the surrender date on any purchase payments in excess of the
contractual purchase payment limitations.
C. Reimbursement if annuitized
If the Annuity Contract is annuitized within the first contract year, the
Broker will reimburse the Distributor for compensation paid in an amount
determined based upon the dollar amount applied and the type of
annuitization option selected.
PERCENTAGE OF COMPENSATION TO BE REIMBURSED
-------------------------------------------
I. 5-9 Year Fixed Amount or 5-9 Year Fixed Period
----------------------------------------------
Purchase Payments/Age Commission Option
--------------------- -----------------
Option A Option B
-------- --------
All purchase payments, all ages 75.00% 70.00%
Option C Option D
-------- --------
65.00% 0.00%
<TABLE>
<CAPTION>
II. All Other Annuitization Options
-------------------------------
Commission
Option A Option B Option C Option D
-------- -------- -------- --------
Purchase payment less than $2 million
-------------------------------------
<S> <C> <C> <C> <C>
0-75 45.00% 40.00% 25.00% 0.00%
76-85 30.00% 20.00% 0.00% 0.00%
Purchase payment $2 million to $5 million
-----------------------------------------
0-75 30.00% 20.00% 0.00% 0.00%
76-85 30.00% 20.00% 0.00% 0.00%
Purchase payment greater than $5 million
----------------------------------------
0-75 75.00% 70.00% 65.00% 0.00%
76-85 75.00% 70.00% 65.00% 0.00%
</TABLE>
<PAGE>
Check any or all options available to your representatives.
Broker elects the following compensation option(s)
X Option A - Full front end compensation with no trail
- ---
- --- Option B - Slightly lower front-end commission with a .10% annual trail
commission paid quarterly starting at the end of the fifth quarter
- --- Option C - Lower front-end commission with a .30% annual trail commission
paid quarterly starting at the end of the fifth quarter
- --- Option D - No front-end commission with a 1.0% annual trail commission paid
quarterly starting at the end of the fifth quarter
* In the State of New Jersey, additional purchase payments on or after the
later of policy anniversary age 64 or 4 years after issue are payable at
1.0% for Option A, 0.50% for Option B, and 0.0% for Option C and D. In the
State of Washington, additional purchase payments on or after the later of
policy anniversary age 70 or 10 years after issue are payable at 1.0% for
Option A, 0.50% for Option B, and 0.0% for Options C and D. Trail
commissions are not affected.
** Calculated as a percentage of account value.
ERNST & YOUNG LLP Suite 3400 Phone: 515 243 2727
801 Grand Avenue
Des Moines, Iowa 50309-2764
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 January 29, 1999 with respect to
Principal Life Insurance Company Separate Account B and Principal Life Insurance
Company, in Pre-Effective Amendment No. 1 to the Registraiton Statement (Form
N-4 No. 333-63401) and related Prospectus of Principal Life Insurance Company
Separate Account B Principal FreedomSM Variable Annuity Contract.
/s/ Ernst & Young LLP
Des Moines, Iowa
April 19, 1999
Ernst & Young LLP is a member of Ernst & Young International, Ltd.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Principal Life
Insurance Company, an Iowa corporation (the "Company"), hereby constitutes and
appoints D. J. Drury, J. B. Griswell, G. R. Narber and J. N. Hoffman, 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
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 19th
day of April 1999.
/s/ Betsy J. Bernard
B. J. Bernard
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Principal Life
Insurance Company, an Iowa corporation (the "Company"), hereby constitutes and
appoints D. J. Drury, J. B. Griswell, G. R. Narber and J. N. Hoffman, 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
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 19th
day of April 1999.
/s/ Jocelyn Carter-Miller
J. Carter-Miller
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Principal Life
Insurance Company, an Iowa corporation (the "Company"), hereby constitutes and
appoints D. J. Drury, J. B. Griswell, G. R. Narber and J. N. Hoffman, 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
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 19th
day of April 1999.
/s/ Ruth M. Davis
R. M. Davis
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Principal Life
Insurance Company, an Iowa corporation (the "Company"), hereby constitutes and
appoints J. B. Griswell, G. R. Narber and J. N. Hoffman, 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 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 19th
day of April 1999.
/s/ D. J. Drury
D. J. Drury
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Principal Life
Insurance Company, an Iowa corporation (the "Company"), hereby constitutes and
appoints D. J. Drury, J. B. Griswell, G. R. Narber and J. N. Hoffman, 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
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 19th
day of April 1999.
/s/ C. D. Gelatt
C. D. Gelatt, Jr.
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Principal Life
Insurance Company, an Iowa corporation (the "Company"), hereby constitutes and
appoints D. J. Drury, G. R. Narber and J. N. Hoffman, 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 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 19th
day of April 1999.
/s/ J. Barry Griswell
J. B. Griswell
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Principal Life
Insurance Company, an Iowa corporation (the "Company"), hereby constitutes and
appoints D. J. Drury, J. B. Griswell, G. R. Narber and J. N. Hoffman, 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
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 19th
day of April 1999.
/s/ G. David Hurd
G. D. Hurd
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Principal Life
Insurance Company, an Iowa corporation (the "Company"), hereby constitutes and
appoints D. J. Drury, J. B. Griswell, G. R. Narber and J. N. Hoffman, 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
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 19th
day of April 1999.
/s/ Charles S. Johnson
C. S. Johnson
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Principal Life
Insurance Company, an Iowa corporation (the "Company"), hereby constitutes and
appoints D. J. Drury, J. B. Griswell, G. R. Narber and J. N. Hoffman, 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
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 19th
day of April 1999.
/s/ William T. Kerr
W. T. Kerr
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Principal Life
Insurance Company, an Iowa corporation (the "Company"), hereby constitutes and
appoints D. J. Drury, J. B. Griswell, G. R. Narber and J. N. Hoffman, 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
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 19th
day of April 1999.
/s/ Lee Liu
L. Liu
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Principal Life
Insurance Company, an Iowa corporation (the "Company"), hereby constitutes and
appoints D. J. Drury, J. B. Griswell, G. R. Narber and J. N. Hoffman, 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
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 19th
day of April 1999.
/s/ V. H. Loewenstein
V. H. Lowenstein
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Principal Life
Insurance Company, an Iowa corporation (the "Company"), hereby constitutes and
appoints D. J. Drury, J. B. Griswell, G. R. Narber and J. N. Hoffman, 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
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 19th
day of April 1999.
/s/ Ronald D. Pearson
R. D. Pearson
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Principal Life
Insurance Company, an Iowa corporation (the "Company"), hereby constitutes and
appoints D. J. Drury, J. B. Griswell, G. R. Narber and J. N. Hoffman, 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
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 19th
day of April 1999.
/s/ John R. Price
J. R. Price
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Principal Life
Insurance Company, an Iowa corporation (the "Company"), hereby constitutes and
appoints D. J. Drury, J. B. Griswell, G. R. Narber and J. N. Hoffman, 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
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 19th
day of April 1999.
/s/ Donald M. Stewart
D. M. Stewart
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Principal Life
Insurance Company, an Iowa corporation (the "Company"), hereby constitutes and
appoints D. J. Drury, J. B. Griswell, G. R. Narber and J. N. Hoffman, 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
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 19th
day of April 1999.
/s/ E. E. Tallett
E. E. Tallett
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Principal Life
Insurance Company, an Iowa corporation (the "Company"), hereby constitutes and
appoints D. J. Drury, J. B. Griswell, G. R. Narber and J. N. Hoffman, 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
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 19th
day of April 1999.
/s/ Dean D. Thornton
D. D. Thornton
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Principal Life
Insurance Company, an Iowa corporation (the "Company"), hereby constitutes and
appoints D. J. Drury, J. B. Griswell, G. R. Narber and J. N. Hoffman, 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
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 19th
day of April 1999.
/s/ F. W. Weitz
F. W. Weitz
