Registration No. 33-44565
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. ______ _____
Post-Effective Amendment No. __13__ __X__
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)
It is proposed that this filing will become effective (check appropriate box)
___ immediately upon filing pursuant to paragraph (b) of Rule 485
_X_ on May 1, 1999, pursuant to paragraph (b) of Rule 485
___ 60 days after filing pursuant to paragraph (a)(1) of Rule 485
___ on (date) pursuant to paragraph (a)(1) of Rule 485
___ 75 days after filing pursuant to paragraph (a)(2) of Rule 485
___ on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
___ This post-effective amendment designates a new effective date for
a previously filed post- effective amendment.
<PAGE>
PRINCIPAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT B
PERSONAL VARIABLE - GROUP VARIABLE ANNUITY CONTRACTS
Registration Statement on Form N-4
Cross Reference Sheet
Form N-4 Item Caption in Prospectus
Part A
1. Cover Page Principal Life Insurance Company
Separate Account B Personal Variable - A Group
Variable Annuity Contract For Employer
Sponsored Qualified and Non-Qualified
Retirement Plans
2. Definitions Glossary of Special Terms
3. Synopsis Expense Table and Example, Summary
4. Condensed Financial Condensed Financial Information,
Information Independent Auditors
5. General Description Summary, Description of
of Registrant Principal Life Insurance
Company, Principal Life
Insurance Company Separate Account B,
Voting Rights
6. Deductions Expense Table and Example, Summary, Deductions
Under the Contract, Contingent Deferred Sales
Charge, Contract Administration Expense/
Recordkeeping Charge, Mortality and Expense
Risks Charge, Distribution of the Contract,
Other Expenses, Application Fee and Transfer
Fee, Documentation Expense, Special Services
7. General Description of Summary, The Contract, Contract Values
Variable Annuity Contract and Accounting Before Annuity Commencement
Date, Income Benefits, Payment on Death of
Plan Participant, Withdrawals and Transfers,
Other Contractual Provisions, Contractholders'
Inquiries
8. Annuity Period Income Benefits
9. Death Benefit Payment on Death of Plan Participant,
Federal Tax Status
10. Purchases and Contract Summary, The Contract, Contract Values and
Value Accounting Before Annuity Commencement
Date, Other Contractual Provisions,
Distribution of the Contract
11. Redemptions Summary, Income Benefits,
Withdrawals and Transfers
12. Taxes Summary, Principal Life Insurance Company
Separate Account B, Income Benefits,
Federal Tax Status
13. Legal Proceedings Legal Proceedings
14. Table of Contents of Table of Contents of the Statement
the Statement of of Additional Information
Additional Information
Part B Statement of Additional Information Caption**
15. Cover Page Principal Life Insurance Company
Separate Account B Personal Variable - A Group
Variable Annuity Contract for Employer
Sponsored Qualified and Non-Qualified
Retirement Plans Issued by Principal Life
Insurance Company
16. Table of Contents Table of Contents
17. General Information None
and History
18. Services Independent Auditors**
19. Purchase of Securities Summary**, Deductions Under
Being Offered the Contracts**, Withdrawals and Transfers**,
Distribution of the Contract**
20. Underwriters Summary**, Distribution of the Contract**,
Underwriting Commissions
21. Calculation of Calculation of Yield and Total Return
Performance Data
22. Annuity Payments Income Benefits**
23. Financial Statements Financial Statements
** Prospectus caption given where appropriate.
<PAGE>
PRINCIPAL LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
PERSONAL VARIABLE
(A Group Variable Annuity Contract
For Employer Sponsored Qualified
And Non-Qualified Retirement Plans)
Issued by Principal Life Insurance Company (the "Company")
Prospectus dated May 1, 1999
This Prospectus concisely sets forth information about Principal Life
Insurance Company Separate Account B and Personal Variable (a Group Variable
Annuity Contract) (the "Contract") that an investor ought to know before
investing. It should be read and retained for future reference.
Additional information about the Contracts, including a Statement of
Additional Information, dated May 1, 1999, has been filed with the Securities
and Exchange Commission. The Statement of Additional Information is incorporated
by reference into this Prospectus. The table of contents of the Statement of
Additional Information appears on page 31 of this Prospectus. A copy of the
Statement of Additional Information can be obtained, free of charge, upon
request by writing or telephoning:
Princor Financial Services Corporation
a company of
the Principal Financial Group
Des Moines, IA 50392
Telephone: 1-800-633-1373
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
This Prospectus is valid only when accompanied by the current prospectus
for Principal Variable Contracts Fund, Inc. (the "Fund") which should be kept
for future reference.
TABLE OF CONTENTS
Page
Glossary of Special Terms ............................................. 4
Expense Table and Example.............................................. 6
Summary................................................................ 7
Condensed Financial Information ....................................... 9
Description of Principal Life Insurance Company .......................10
Principal Life Insurance Company Separate Account B ...................10
Deductions under the Contract .........................................12
Contingent Deferred Sales Charge...................................12
Contract Administration Expense/Recordkeeping Charge ..............13
Mortality and Expense Risks Charge ................................14
Other Expenses ........................................................14
Application Fee and Transfer Fee...................................14
Documentation Expense..............................................15
Location Fee .....................................................15
Outside Asset Recordkeeping Charge.................................15
Special Services...................................................15
Surplus Distribution at Sole Discretion of the Company ................15
The Contract .........................................................15
Contract Values and Accounting Before Annuity Commencement Date ...16
Investment Accounts ..........................................16
Unit Value ...................................................16
Net Investment Factor ........................................16
Hypothetical Example of Calculation of Unit Value for All
Divisions Except the Money Market Division................16
Hypothetical Example of Calculation of Unit Value for
the Money Market Division................................17
Income Benefits ...................................................17
Variable Annuity Payments.....................................17
Selecting a Variable Annuity .............................17
Forms of Variable Annuities ..............................18
Basis of Annuity Conversion Rates ........................19
Determining the Amount of the First Variable
Annuity Payment......................................19
Determining the Amount of the Second and Subsequent
Monthly Variable Annuity Payments ...................19
Hypothetical Example of Calculation of Variable Annuity
Payments ............................................20
Flexible Income Option........................................20
Payment on Death of Plan Participant...............................21
Prior to Annuity Purchase Date ...............................21
Subsequent to Annuity Purchase Date ..........................21
Page
Withdrawals and Transfers .........................................22
Cash Withdrawals .............................................22
Transfers Between Divisions ..................................22
Transfers to the Contract ....................................22
Transfers to Companion Contract ..............................23
Special Situation Involving Alternate Funding Agents .........23
Postponement of Cash Withdrawal or Transfer ..................23
Loans ........................................................23
Other Contractual Provisions ......................................23
Contribution Limits ..........................................23
Assignment ...................................................23
Cessation of Contributions ...................................24
Substitution of Securities....................................24
Changes in the Contract ......................................24
Statement of Values....................................................24
Services Available by Telephone........................................25
Distribution of the Contract...........................................25
Performance Calculation................................................25
Voting Rights ........................................................26
Federal Tax Status.....................................................27
Taxes Payable by Owners of Benefits and Annuitants.................27
Tax-Deferred Annuity Plans....................................27
Public Employee Deferred Compensation Plans...................28
401(a) Plans..................................................28
Creditor-Exempt Non-Qualified Plans...........................29
General Creditor Non-Qualified Plans..........................30
Fund Diversification...............................................30
State Regulation .....................................................30
Legal Opinions .....................................................30
Legal Proceedings .....................................................31
Registration Statement.................................................31
Independent Auditors...................................................31
Year 2000 Readiness Disclosure....................................... 31
Contractholders' Inquiries.............................................32
Table of Contents of the Statement of Additional Information...........32
This Prospectus does not constitute an offer of, or solicitation of any
offer to acquire, any interest or participation in the Contracts in any
jurisdiction in which such an offer or solicitation may not lawfully be made. No
person is authorized to give any information or to make any representations in
connection with the Contracts other than those contained in this Prospectus.
GLOSSARY OF SPECIAL TERMS
Account -- Series or portfolio of a Mutual Fund in which a Separate Account
Division invests.
Aggregate Investment Account Value -- The sum of the Investment Account Values
for Investment Accounts which correlate to a Plan Participant.
Annual Average Balance -- The total value at the beginning of the Deposit Year
of all Investment Accounts which correlate to a Plan Participant under the
contract and other Plan assets that correlate to a Plan Participant that are not
allocated to the contract or an Associated or Companion Contract but for which
the Company provides recordkeeping services ("Outside Assets"), adjusted by the
time weighted average of Contributions to, and withdrawals from, Investment
Accounts and Outside Assets (if any) which correlate to the Plan Participant
during the period.
Annuity Change Factor -- The factor used to determine the change in value of a
Variable Annuity in the course of payment.
Annuity Commencement Date -- The beginning date for Annuity Payments.
Annuity Premium -- The amount applied under the contract to purchase an annuity.
Annuity Purchase Date -- The date an Annuity Premium is applied to purchase an
annuity.
Associated Contract -- An annuity contract issued by the Company to the same
Contractholder to fund the same or a comparable Plan as determined by the
Company.
Commuted Value -- The dollar value, as of a given date, of remaining Variable
Annuity Payments. It is determined by the Company using the interest rate
assumed in determining the initial amount of monthly income and assuming no
variation in the amount of monthly payments after the date of determination.
Companion Contract -- An unregistered group annuity contract offering guaranteed
interest crediting rates and which is issued by the Company to the
Contractholder for the purpose of funding benefits under the Plan. The Company
must agree in writing that a contract is a Companion Contract.
Contingent Deferred Sales Charge -- The charge deducted from certain cash
withdrawals from an Investment Account before the Annuity Purchase Date,
payments made because of a Termination of Employment or amounts transferred to
an Alternate Funding Agent.
Contract Administration/Recordkeeping Charge -- A charge deducted or paid
separately by the Contractholder on a quarterly basis each Deposit Year prior to
the Annuity Commencement Date or on a complete redemption of Investment Accounts
which correlate to a Plan Participant from the Aggregate Investment Accounts
that correlate to each Plan Participant.
Contract Date -- The date this contract is effective, as shown on the face page
of the contract.
Contract Year -- A period beginning on a Yearly Date and ending on the day
before the next Yearly Date.
Contractholder -- The entity to which the contract will be issued, which will
normally be an Employer, an association, or a trust established for the benefit
of Plan Participants and their beneficiaries.
Contributions -- Amounts contributed under the contract which are accepted by
the Company.
Deposit Year -- The twelve-month period ending on a day selected by the
Contractholder.
Division -- The part of Separate Account B which is invested in shares of an
Account of a Mutual Fund.
Employer -- The corporation, sole proprietor, firm, organization, agency or
political subdivision named as employer in the Plan and any successor.
Flexible Income Option -- A periodic distribution from the contract in an amount
equal to the minimum annual amount determined in accordance with the minimum
distribution rules of the Internal Revenue Code, or a greater amount as
requested by the Owner of Benefits.
Funding Agent -- An insurance company, custodian or trustee designated by the
Contractholder and authorized to receive any amount or amounts transferred from
the contract described in this prospectus. Funding Agent will also mean
Principal Life Insurance Company where the Contractholder directs the Company to
transfer such amounts from the contract described in this prospectus to another
group annuity contract issued by the Company to the Contractholder.
Internal Revenue Code ("Code") -- The Internal Revenue Code of 1986, as amended,
and the regulations thereunder. Reference to the Internal Revenue Code means
such Code or the corresponding provisions of any subsequent revenue code and any
regulations thereunder.
Investment Account -- An account that correlates to a Plan Participant
established under the contract for each type of Contribution and for each
Division in which the Contribution is invested.
Investment Account Value -- The value of an Investment Account for a Division
which on any date will be equal to the number of units then credited to such
account multiplied by the Unit Value of this series of contracts for that
Division for the Valuation Period in which such date occurs.
Mutual Fund -- A registered open-end investment company in which a Division of
Separate Account B invests.
Net Investment Factor -- The factor used to determine the change in Unit Value
of a Division during a Valuation Period.
Normal Income Form -- The form of benefit to be provided under the Plan if the
Owner of Benefits does not elect some other form. If the Plan does not specify a
Normal Income Form, the Normal Income Form shall be: (a) for an unmarried Plan
Participant, the single life with ten years certain annuity option described in
this Prospectus, (b) for a married Plan Participant, the joint one-half survivor
annuity option described in this Prospectus.
Notification -- Any form of notice received by the Company at the Company's home
office and approved in advance by the Company including written forms,
electronic transmissions, telephone transmissions, facsimiles or photocopies.
Owner of Benefits -- The entity or individual that has the exclusive right to be
paid benefits and exercise rights and privileges pursuant to such benefits. The
Owner of Benefits is the Plan Participant under all contracts except contracts
used to fund General Creditor Non-Qualified Plans (see "Summary") wherein the
Contractholder is the Owner of Benefits.
Plan -- The plan established by the Employer in effect on the date the contract
is executed and as amended from time to time, which the Employer has designated
to the Company in writing as the Plan funded by the contract.
Plan Participant -- A person who is (i) a participant under the Plan, (ii) a
beneficiary of a deceased participant, or (iii) an alternative payee under a
Qualified Domestic Relations Order, in whose name an Investment Account has been
established under this contract.
Qualified Domestic Relations Order -- A Qualified Domestic Relations Order as
defined in Internal Revenue Code Section 414(p)(1)(A).
Quarterly Date -- The last Valuation Date of the third, sixth, ninth and twelfth
month of each Deposit Year.
Separate Account B -- A separate account established by the Company under Iowa
law to receive Contributions under the contract offered by this Prospectus and
other contracts issued by the Company. It is divided into Divisions, each of
which invest in a corresponding Account of the Principal Variable Contracts
Fund, Inc.
Termination of Employment -- A Plan Participant's termination of employment with
the Employer, determined under the Plan and as reported to the Company.
Total and Permanent Disability -- The condition of a Plan Participant when, as
the result of sickness or injury, the Plan Participant is prevented from
engaging in any substantial gainful activity and such total disability has been
continuous for a period of at least six months. For contracts sold in the state
of Pennsylvania, this term shall have the same meaning as defined in the Plan.
The Plan Participant must submit due proof thereof which is acceptable to the
Company.
Unit Value -- The value of a unit of a Division of Separate Account B.
Valuation Date -- The date as of which the net asset value of an Account is
determined.
Valuation Period -- The period of time between when the net asset value of an
Account is determined on one Valuation Date and when such value is determined on
the next following Valuation Date.
Variable Annuity Payments -- A series of periodic payments, the amounts of which
are not guaranteed but which will increase or decrease to reflect the investment
experience of the Capital Value Division of Separate Account B. Periodic
payments made pursuant to the Flexible Income Option are not Variable Annuity
Payments.
Variable Annuity Reserves -- The reserves held for annuities in the course of
payment for the Contract.
Yearly Date -- The Contract Date and the same day of each year thereafter.
EXPENSE TABLE AND EXAMPLE
The following tables depict fees and expenses applicable to the aggregate
of all Investment Accounts that correlate to a Plan Participant established
under the Contract. The purpose of the table is to assist the Owner of Benefits
in understanding the various costs and expenses that an Owner of Benefits will
bear directly or indirectly. The table reflects expenses of the Separate Account
as well as the expenses of the Accounts in which the Separate Account invests as
of the fiscal year ended December 31, 1998. The example below should not be
considered a representation of past or future expenses; actual expenses may be
greater or lesser than those shown. See "Deductions under the Contract."
- --------------------------------------------------------------------------------
EXPENSE TABLE(1)
Transaction Expenses
Sales Load Imposed on Purchases
(as a percentage of purchase payments) None
Deferred Sales Load(2)
(as a percentage of amount surrendered)
For Withdrawals Occurring During
Plan Participant's Year of Coverage
1 2 3 4 5 6 7 Thereafter
-------------------------------------------------------------
5.00% 4.25% 3.50% 2.75% 2.00% 1.25% 0.50% 0%
Surrender Fees None
Exchange Fee None
Annual Contract Fee (3)
Contract Administration Expense/ $34 per Plan Participant + (.35% of the
Recordkeeping Charge(2) Balance of the Investment Accounts and
Outside Assets which correlate to the
Plan Participant subject to a minimum
annual charge of $750).(4) (5)
Separate Account Annual Expenses
(as a percentage of average account value)
Mortality and Expense Risk Charge(2) .64%
Annual Expenses of Accounts
(as a percentage of average net assets of the following accounts)
Management Other Total Accounts
Fees Expenses Annual Expenses
---------- -------- ---------------
Balanced Account .57% .02% .59%
Bond Account .49 .02 .51
Capital Value Account .43 .01 .44
Government Securities Account .49 .01 .50
Growth Account .47 .01 .48
International Account .73 .04 .77
MidCap Account .61 .01 .62
Money Market Account .50 .02 .52
(1) In addition to the expenses described in the Expense Table, the
Contractholder must pay a $925 application fee. The Contractholder must
also pay a documentation expense (if applicable) and, if services are
provided to multiple employee group locations, a location fee. None of
these fees are deductible from Investment Accounts. (See "Other Expenses.")
(2) The Contingent Deferred Sales Charge, Contract Administration
Expense/Recordkeeping Charge and mortality and expense risks charge may be
changed on 60-days notice subject to certain limitations.
(3) Annual contract fees are charged on a quarterly basis (based on balance of
Investment Accounts at the end of each quarter) or assessed upon a complete
redemption of all Investment Accounts which correlate to a Plan
Participant. The amount of the quarterly charge deducted from Investment
Accounts which correlate to a Plan Participant will not exceed 1% of the
aggregate value of such accounts as of the date the charges are deducted.
The 1% limitation on the Contract Administration Expense/Recordkeeping
Charge does not apply if the annual contract fees are paid by the
Contractholder. See "Deductions Under the Contract."
(4) If benefit plan reports are mailed to the Plan Participants' home address,
the $34 charge will be increased to $37. If more than two 401(k) or 401(m)
non-discrimination tests are provided by the Company in any Deposit Year,
the $34 ($37) per Plan Participant Contract Administration Expense may be
increased by 3% for each additional test. If benefit plan reports are
mailed monthly instead of quarterly, the $34 ($37) charge will be increased
by 24%. See "Deductions Under the Contract."
(5) An additional $25 annual charge will be made for aggregate Investment
Account Values which correlate to the Plan Participant for which a Flexible
Income Option has been selected. (See "Deductions Under the Contract.")
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
EXAMPLE
Separate Account
Division 1 Year 3 Years 5 Years 10 Years
-------- ------ ------- ------- --------
If the Investments Accounts
which correlate to a Plan
Participant are surrendered
at the end of the applicable
time period:
The Owner of Benefits Balanced $71 $97 $125 $220
would pay the following Bond $70 $95 $121 $212
expenses on a $1,000 Capital Value $69 $93 $117 $203
investment, assuming a Government
5% annual return on Securities $70 $95 $120 $211
assets: Growth $70 $94 $119 $207
International $72 $103 $134 $239
MidCap $71 $98 $126 $223
Money Market $70 $95 $121 $213
If the Investment Accounts
which correlate to a Plan
Participant are annuitized
at the end of the applicable
time period or rate not
surrendered:
The Owner of Benefits Balanced $19 $59 $102 $220
would pay the Bond $18 $57 $97 $212
following expenses on Capital Value $17 $54 $93 $203
a $1,000 investment, Government
Securities $18 $56 $97 $211
assuming a 5% annual Growth $18 $55 $95 $207
return on assets: International $21 $65 $111 $239
MidCap $19 $60 $103 $223
Money Market $18 $57 $98 $213
- --------------------------------------------------------------------------------
SUMMARY
The following summary should be read in conjunction with the detailed
information appearing elsewhere in this Prospectus.
Contract Offered
The group variable annuity contract described by this Prospectus is issued
by the Company and designed to aid in retirement planning. The Contract provides
for the accumulation of Contributions and the payment of Variable Annuity
Payments on a completely variable basis. As of January 1, 1998, the Contract is
no longer offered.
The Contract is generally available to fund the following types of plans:
1. Tax Deferred Annuity Plans ("TDA Plan"). Annuity purchase plans adopted
pursuant to Section 403(b) of the Code by certain organizations that qualify for
tax-exempt status under Section 501(c)(3) of the Code or are eligible public
schools or colleges. Contracts are issued to Contractholders, which typically
are such tax-exempt organizations or an association representing such
organization or its employees. Plan Participants may obtain certain Federal
income tax benefits provided under Section 403(b) of the Code. (See "Federal Tax
Status.")
2. Public Employee Deferred Compensation Plans ("PEDC Plan"). Public
Employee Deferred Compensation plans or programs adopted by a unit of a state or
local government and non-profit organizations pursuant to Section 457 of the
Code. (See "Federal Tax Status.") Note: The contract is not currently offered to
fund government 457 Plans in the state of New York.
3. Qualified Pension or Profit-Sharing Plans ("401(a) Plans"). Plans
adopted pursuant to Section 401(a) of the Code. Participants of 401(a) Plans
obtain income tax benefits provided under the Code as qualified pension plans.
4. Creditor-Exempt or General Creditor Non-Qualified Plans
("Creditor-Exempt" or "General Creditor" Plan). Employer sponsored savings,
compensation or other plans the contributions for which are made without
Internal Revenue Code restrictions generally applicable to qualified retirement
plans. (See "Federal Tax Status.")
The Contract were sold primarily by persons who are insurance agents of or
brokers for Principal Life Insurance Company. In addition, these persons will
usually be registered representatives of Princor Financial Services Corporation,
which acts as distributor for the Contract. (See "Distribution of the
Contract.")
Contributions
The contract prescribes no limits on the minimum Contribution which may be
made to an Investment Account. Plan Participant maximum Contributions are
discussed under "Federal Tax Status." Contributions may also be limited by the
Plan. The Company may also limit Contributions on 60-days notice.
All Contributions made pursuant to the contract are allocated to one or
more Investment Accounts which correlate to a Plan Participant. An Investment
Account is established for each type of Contribution for each Division of
Separate Account B as directed by the Owner of Benefits. Currently, the
Divisions available under the Contract are: Balanced, Bond, Capital Value,
Government Securities, Growth, International, MidCap and Money Market. The
Contractholder may choose to limit the number of Divisions available to the
Owner of Benefits, but the Money Market Division may not be so restricted to the
extent the Division is necessary to permit the Company to allocate initial
Contributions and the Capital Value Division may not be so restricted to the
extent the Division is necessary to permit the Company to pay Variable Annuity
Payments. Additional Divisions may be added in the future. If no direction is
provided for a particular Contribution, such Contribution will be allocated to
an Investment Account which is invested in the Money Market Division.
Separate Account B
Each of the Divisions corresponds to one of the Accounts in which
Contributions may be invested. The objective of the contract is to provide a
return on amounts contributed that will reflect the investment experience of the
Accounts in which the Divisions to which Contributions are directed are
invested. The value of the Contributions accumulated in Separate Account B prior
to the Annuity Commencement Date will vary with the investment experience of the
Accounts.
Each of the Divisions invests only in shares of an Account of Principal
Variable Contracts Fund, Inc. as indicated in the table below.
Division Account
-------- -------
Balanced Division Balanced Account
Bond Division Bond Account
Capital Value Division Capital Value Account
Government Securities Division Government Securities Account
Growth Division Growth Account
International Division International Account
MidCap Division MidCap Account
Money Market Division Money Market Account
Distributions, Transfers and Withdrawals
Variable Annuity Payments will be made on and after a Plan Participant's
Annuity Commencement Date. All Variable Annuity Payments will reflect the
performance of the Account underlying the Capital Value Division and therefore
the annuitant is subject to the risk that the amount of variable annuity
payments may decline. (See "Income Benefits.")
Generally, at any time prior to the Annuity Purchase Date, the Owner of
Benefits may transfer all or any portion of an Investment Account which
correlates to a Plan Participant to another available Investment Account
correlating to such Plan Participant. If a Companion Contract has been issued to
the Contractholder to fund the Plan, and if permitted by the Plan and Companion
Contract, amounts transferred from such Companion Contract may be invested in
this Contract to establish Investment Accounts which correlate to a Plan
Participant at any time at least one month before the Annuity Commencement Date.
Similarly, if the Company has issued a Companion Contract to the Contractholder,
and if permitted by the Plan and the Companion Contract, the Owner of Benefits,
subject to certain limitations, may file a Notification with the Company to
transfer all or a portion of the Investment Account values which correlate to a
Plan Participant to the Companion Contract. (See "Withdrawals and Transfers.")
In addition, subject to any Plan limitations or any reduction for vesting
provided for in the Plan as to amounts available, the Owner of Benefits may
withdraw cash from the Investment Accounts that correlate to the Plan
Participant at any time prior to the Plan Participant's Termination of
Employment, disability, retirement or the Annuity Purchase Date subject to any
charges that may be applied. (See "Withdrawals and Transfers.") Note that
withdrawals before age 59 1/2 may involve an income tax penalty. (See "Federal
Tax Status.") No withdrawals are permitted after the Annuity Purchase Date.
CONDENSED FINANCIAL INFORMATION
Financial statements are included in the Statement of Additional
Information. Following are Unit Values for the Personal Variable Annuity
Contract for the periods ended December 31.
<TABLE>
<CAPTION>
Accumulation Unit Value Number of Accumulation Units
Beginning End Outstanding at End of Period
of Period of Period (in thousands)
--------- --------- ----------------------------
Balanced Division
Year Ended December 31
<S> <C> <C> <C> <C>
1998 $1.595 $1.771 2,321
1997 1.359 1.594 1,775
1996 1.208 1.359 1,015
1995 .975 1.208 327
Period Ended December 31, 1994 (1) 1.000 .975 101
Bond Division
Year Ended December 31
1998 1.382 1.471 766
1997 1.251 1.374 487
1996 1.229 1.251 274
1995 1.012 1.229 124
Period Ended December 31, 1994 (1) 1.000 1.012 0
Capital Value Division
Year Ended December 31
1998 2.353 2.651 3,764
1997 1.840 2.349 3,443
1996 1.498 1.840 2,915
1995 1.142 1.498 2,336
1994 1.143 1.142 1,638
1993 1.066 1.143 504
Government Securities Division
Year Ended December 31
1998 1.419 1.522 1,954
1997 1.289 1.414 1,816
1996 1.255 1.289 1,936
1995 1.060 1.255 1,890
1994 1.116 1.060 1,575
1993 1.020 1.116 809
1992 (2) 1.000 1.020 15
Growth Division
Year Ended December 31
1998 1.766 2.125 2,232
1997 1.397 1.763 1,575
1996 1.249 1.397 814
1995 1.000 1.249 278
Period Ended December 31, 1994 (1) 1.000 1.000 5
1992 (2) 1.000 1.066 14
International Division
Year Ended December 31
1998 1.517 1.647 1,511
1997 1.352 1.507 1,014
1996 1.087 1.352 487
1995 .957 1.087 160
Period Ended December 31, 1994 (1) 1.000 .957 21
MidCap Division
Year Ended December 31
1998 1.864 1.922 1,918
1997 1.530 1.866 1,478
1996 1.270 1.530 830
1995 .990 1.270 288
Period Ended December 31, 1994 (1) 1.000 .990 14
Money Market Division
Year Ended December 31
1998 1.223 1.278 1,330
1997 1.169 1.222 1,056
1996 1.119 1.169 841
1995 1.066 1.119 1,143
1994 1.033 1.066 742
1993 1.011 1.033 183
1992 (2) 1.000 1.011 29
<FN>
(1) Commenced operations on October 3, 1994.
(2) Commenced operations on July 15, 1992.
</FN>
</TABLE>
DESCRIPTION OF PRINCIPAL LIFE INSURANCE COMPANY (The "Company")
Principal Life Insurance Company is a life insurance company with its home
office at the Principal Financial Group, Des Moines, Iowa 50392, telephone
number 515-247-5111. It was originally incorporated under the laws of the State
of Iowa in 1879 as Bankers Life Association, changed its name to Bankers Life
Company in 1911 and changed its name to Principal Mutual Life Insurance Company
in 1986. The name change to Principal Life Insurance Company and reorganization
into a mutual holding company structure took place in 1998. The Company is a
company of the Principal Financial Group, a diversified family of insurance and
financial services corporations.
Principal Life Insurance Company is authorized to do business in the 50
states of the United States, the District of Columbia, the Commonwealth of
Puerto Rico, and the Canadian Provinces of Alberta, British Columbia, Manitoba,
Ontario and Quebec. The Company offers a full range of products and services for
businesses, groups and individuals including individual insurance, pension plans
and group/employee benefits. The Company has ranked in the upper one percent of
life insurers in assets and premium income and has consistently received
excellent ratings from the major rating firms based upon the Company's claims
paying ability. The Company has $70.1 billion in assets under management and
serves more than 10.1 million individuals and their families.
PRINCIPAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT B
Separate Account B was established on January 12, 1970 pursuant to a
resolution (as amended) of the Executive Committee of the Board of Directors of
the Company. Under Iowa insurance laws and regulations the income, gains or
losses, whether or not realized, of Separate Account B are credited to or
charged against the assets of Separate Account B without regard to the other
income, gains or losses of the Company. Although the assets of Separate Account
B equal to the reserves and liabilities arising under the contract will not be
charged with any liabilities arising out of any other business conducted by the
Company, the reverse is not true. Hence, all obligations arising under the
Contract, including the promise to make Variable Annuity Payments, are general
corporate obligations of the Company.
Separate Account B was registered on July 17, 1970 with the Securities and
Exchange Commission as a unit investment trust under the Investment Company Act
of 1940, as amended. Such registration does not involve supervision by the
Commission of the investments or investment policies of Separate Account B.
Separate Account B is divided into Divisions each of which invests only in
shares of an Account of Principal Variable Contracts Fund, Inc. as indicated in
the table below.
Division Account
---------------- --------------
Balanced Division Balanced Account
Bond Division Bond Account
Capital Value Division Capital Value Account
Government Securities Division Government Securities Account
Growth Division Growth Account
International Division International Account
MidCap Division MidCap Account
Money Market Division Money Market Account
The Fund is a diversified, open-end management investment company. The
investment Manager for the Fund is Principal Management Corporation (the
"Manager"). The Accounts are also used to fund variable life insurance
contracts. See "Eligible Purchasers" in the Fund's prospectus for a discussion
of the potential risks associated with "mixed funding."
You may allocate your net premium payments to divisions of the Separate
Account and/or the Fixed Account. Currently there are eight 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.
The investment objective of the Balanced Account is to generate a total
return consisting of current income and capital appreciation while assuming
reasonable risks in furtherance of the investment objective. In seeking to
achieve the investment objective, the Account invests primarily in growth and
income-oriented common stocks (including securities convertible into common
stocks), corporate bonds and debentures and short-term money market instruments.
The portions of the Account's total assets invested in equity securities, debt
securities and short-term money market instruments are not fixed, although
ordinarily 40% to 70% of the Account's portfolio will be invested in equity
securities with the balance of the portfolio invested in debt securities.
The investment objective of the Bond Account is to provide as high a level
of income as is consistent with preservation of capital and prudent investment
risk. In seeking to achieve the investment objective, the Account predominantly
invests in marketable fixed-income securities. Investments will be made
generally on a long-term basis, but the Account may make short-term investments
from time to time as deemed prudent by the Account's Manager. Longer maturities
typically provide better yields but will subject the Account to a greater
possibility of substantial changes in the values of its portfolio securities as
interest rates change.
The investment objective of the Capital Value Account is primarily
long-term capital appreciation and secondarily growth of investment income. The
Account invests primarily in common stocks, but it may invest in other equity
securities. In making selections for the Account's investment portfolio, the
Manager uses an approach described broadly as that of fundamental analysis. In
pursuit of the Account's investment objectives, investments will be made in
securities which as a group appear to offer long-term prospects for capital and
income growth. Securities chosen for investment may include those of companies
which the Account's Manager believes can reasonably be expected to share in the
growth of the nation's economy over the long term.
The Government Securities Account has an investment objective of a high
level of current income, liquidity and safety of principal. The Account seeks to
achieve this objective through the purchase of obligations issued or guaranteed
by the United States Government or its agencies, with up to 55% of the Account's
assets invested in Government National Mortgage Association Certificates ("GNMA
Certificates"). Account shares, however, are not guaranteed by the United States
Government. The value of the Account's investments fluctuates as interest rates
change. The value rises when rates decline and falls when rates increase.
Expected prepayments of mortgages included in a GNMA certificate can affect the
market value of the certificate, and actual prepayments can affect the return
ultimately received.
The objective of the Growth Account is growth of capital. Realization of
current income will be incidental to the objective of growth of capital. The
Account will invest primarily in common stocks, but it may invest in other
equity securities. In pursuit of the Account's investment objective, investments
will be made in securities which as a group appear to possess potential for
appreciation in market value. Common stocks chosen for investment may include
those of companies which have a record of sales and earnings growth that exceeds
the growth rate of corporate profits of the S&P 500 or which offer new products
or new services. The policy of investing in securities which have a high
potential for growth of capital can mean that the assets of the Account may be
subject to greater risk than securities which do not have such potential.
The investment objective of the International Account is to seek long-term
growth of capital through investment in a portfolio of equity securities of
companies domiciled in any of the nations of the world. The Account intends that
its investments normally will be allocated among various countries. Although
there is no limitation on the percentage of assets that may be invested in any
one country or denominated in any one currency, the Account intends under normal
market conditions to have at least 65% of its assets invested in securities
issued by corporations of at least three countries, one of which may be the
United States. Investments may be made anywhere in the world, but it is expected
that primary consideration will be given to investing in the securities issued
by corporations of Western Europe, North America and Australasia (Australia,
Japan and Far East Asia) that have developed economies. Changes in investments
may be made as prospects change for particular countries, industries or
companies.
The objective of the MidCap Account is to achieve capital appreciation. The
strategy of this Account is to invest primarily in common stocks and securities
(both debt and preferred stock) convertible into common stocks of emerging and
other growth-oriented companies that, in the judgment of the Account's Manager,
are responsive to changes within the marketplace and have the fundamental
characteristics to support growth. In pursuing its objective of capital
appreciation, the MidCap Account may invest, for any period of time, in any
industry, in any kind of growth-oriented company, whether new and unseasoned or
well known and established.
The Money Market Account has an investment objective of obtaining maximum
current income available from short-term securities consistent with preservation
of principal and maintenance of liquidity by investing all of its assets in a
portfolio of money market instruments. This Account invests in United States
dollar denominated instruments having a maturity of 397 days or less that the
Manager, subject to the oversight of the Fund's board of directors, determines
present minimal credit risks and which at the time of acquisition are "Eligible
Securities" as that term is defined in regulations issued under the Investment
Company Act of 1940. See the Fund's prospectus for details. The value of the
investments held by this Account may fluctuate, although the net asset value per
share is normally expected to remain at $1.00. However, its yield will vary with
changes in short-term interest rates. Over the last two decades there has been a
general correlation between short-term interest rates and the cost of living,
but there has been no exact correlation and for some periods such rates have
declined while the cost of living has risen.
Additional information concerning these Accounts, including their
investment policies and restrictions, investment management fees and operating
expenses is given in the prospectus for the Fund. A Prospectus for the Principal
Variable Contracts Fund, Inc. is attached to and follows this Prospectus. It
should be read carefully in conjunction with this Prospectus before investing.
Each Division purchases shares of an Account at net asset value. In
addition, all distributions made by an Account with respect to shares held by
Divisions of Separate Account B are reinvested at net asset value in additional
shares of the same Account. Contract benefits are provided and charges are made
in effect by redeeming Account shares at net asset value. Values under the
contract, both before and after the commencement of Variable Annuity Payments,
will increase or decrease to reflect the investment performance of the Account
and Owners of Benefits assume the risks of such change in values.
The Company is taxed as an insurance company under the Internal Revenue
Code. The operations of Separate Account B are part of the total operations of
the Company but are treated separately for accounting and financial statement
purposes and are considered separately in computing the Company's tax liability.
Separate Account B is not affected by federal income taxes paid by the Company
with respect to its other operations, and under existing federal income tax law,
investment income and capital gains attributable to Separate Account B are not
taxed. The Company reserves the right to charge Separate Account B with, and to
create a reserve for, any tax liability which the Company determines may result
from maintenance of Separate Account B. To the best of the Company's knowledge,
there is no current prospect of any such liability.
DEDUCTIONS UNDER THE CONTRACT
A Contract Administration Expense/Recordkeeping Charge and a mortality and
expense risks charge are deducted under the contract. Also, in certain
circumstances, a Contingent Deferred Sales Charge may be deducted from certain
cash withdrawals and transfers to alternate Funding Agents from an Investment
Account before the Annuity Purchase Date.
There are also deductions from and expenses paid out of the assets of the
Accounts. These expenses are described in the Fund's prospectus.
A. Contingent Deferred Sales Charge
There is no initial sales charge. However, any cash withdrawal from an
Investment Account which correlates to a Plan Participant before the
Annuity Purchase Date, may be subject to a Contingent Deferred Sales Charge
equal to a percentage of the amount being withdrawn. The percentage will be
determined according to the following table:
Number of Years From The
Date First Contribution
Which Correlates to a Plan
Participant is Accepted Contingent Deferred Sales
by the Company Charge Percentage
-------------------------- -------------------------
Less than 1 5.00%
1 but less than 2 4.25
2 but less than 3 3.50
3 but less than 4 2.75
4 but less than 5 2.00
5 but less than 6 1.25
6 but less than 7 0.50
7 or more None
The charge will be made by redeeming a sufficient number of units from the
Investment Account or Accounts from which the withdrawal is made by an
amount equal to the charge (see "Cash Withdrawals"). If the Investment
Account or Accounts from which the withdrawal is made are insufficient to
permit the full amount of the charge to be made, a sufficient number of
units from other Investment Accounts which correlate to the Plan
Participant will be redeemed on a pro rata basis in an amount equal to the
charge. If the amounts in the Investment Accounts which correlate to the
Plan Participant are insufficient to permit the full amount of the charge
to be made, the amount of the withdrawal will be reduced by an amount equal
to the charge.
The Contingent Deferred Sales Charge does not apply to withdrawals made as
a result of the Plan Participant's death or Total and Permanent Disability.
The charge also does not apply to amounts paid pursuant to the Flexible
Income Option that do not exceed the greater of (i) the minimum annual
amount determined in accordance with the minimum distribution rules of the
Internal Revenue Code, or (ii) 10% of the aggregate value of the Investment
Accounts which correlate to a Plan Participant determined as of the last
Valuation Date in the preceding Deposit Year. The charge also does not
apply to transfers between Investment Accounts or transfers to a Companion
Contract, transfers from a Premier Annuity Contract or to amounts applied
to provide Variable Annuity Payments. The charge may apply to amounts
transferred to an alternate Funding Agent. The charge does not apply to
amounts redeemed to assure the plan complies with Sections 401(k) and
401(m) of the Internal Revenue Code.
The amount of any Contingent Deferred Sales Charge will never exceed 9% of
Contributions which correlate to a Plan Participant. For this purpose, a
transfer from a Companion Contract will be considered a Contribution to
this contract.
The Contingent Deferred Sales Charge, when applicable, will be applied by
the Company to defray sales and distribution expenses incurred by the
Company. The Company may decrease or eliminate the Contingent Deferred
Sales Charge if it estimates that its sales expenses will be lower. The
Company will waive the Contingent Deferred Sales Charge on Contracts
(except Contracts sold in the state of New York) acquired directly from the
Company upon a recommendation of an independent pension consultant who
charges a fee for its pension consulting services and who receives no
remuneration from the Company in association with the sale of the contract.
If revenues from the Contingent Deferred Sales Charge are not sufficient to
cover sales expenses, the short fall could be viewed as being provided for
out of other revenues or the Company's surplus, including revenues
attributable to the mortality and expense risks charge.
B. Contract Administration Expense/Recordkeeping Charge
An annual Contract Administration Expense/Recordkeeping Charge of $34 per
Plan Participant plus .35% of the Annual Balance ($750 minimum) will be
assessed on a quarterly basis during each Deposit Year. The Annual Balance
used to compute the charge is the aggregate value of Investment Accounts
which correlate to a Plan Participant, and other Plan assets that correlate
to a Plan Participant that are not allocated to the contract or an
Associated or Companion Contract but for which the Company provides
recordkeeping services ("Outside Assets"), at the end of each quarter. The
$34 per Plan Participant charge is increased to $37 if the Company
distributes benefit plan reports directly to the homes of the Plan
Participants.
The Contract Administration Expense/Recordkeeping Charge will be assessed
on the earlier of (i) the date the Investment Accounts are paid in full (a
total redemption) or (ii) each Quarterly Date. One-fourth of the annual
charge is normally assessed on each Quarterly Date.
If the accounts are paid in full (a total redemption) at any time during
the Deposit Year, that portion of the $34 ($37) per Plan Participant charge
for the Deposit Year in which such total redemption occurs not yet paid to
the Company will be assessed in full. However, the remaining part of the
Contract Administration Expense/Recordkeeping Charge consisting of the .35%
of the Average Annual Balance will be assessed on a pro rata basis for any
fractional part of the Deposit Year.
The recordkeeping expense will be $34 ($37). The recordkeeping expense is
reduced by 10% if Plan contributions are reported in the Company's standard
form by modem. Effective on the first day of the Deposit Year in 1999, an
additional 5% recordkeeping charge will apply if investment changes and
transfers are transmitted to the Company by paper rather than through our
toll-free number (1-800-633-1373). In addition, if benefit plan reports are
mailed on other than a quarterly basis the $34 ($37) per Plan Participant
charge is adjusted according to the following schedule:
Reporting Frequency Adjustment to $34 ($37) Charge
------------------- ------------------------------
Annual 9% decrease
Semi-Annual 6% decrease
Monthly 24% increase
The $34 ($37) per Plan Participant charge is also adjusted if the Company
performs more (or less) than two 401(k) and 401(m) non-discrimination tests
in a Deposit Year. Such a charge is increased by 3% for each additional
test and is reduced by 3% for each test not performed by the Company.
The .35% portion of the Contract Administration Expense/Recordkeeping
charge will be reduced by 10% if the Company has issued an Associated
Contract to the Contractowner.
If the Owner of Benefits chooses the Flexible Income Option, an additional
charge of $25 will be assessed annually.
The Company does not expect to recover from the charge to the extent
deducted from the Investment Account Values, any amount above its
accumulated expenses associated with the administration of the contracts.
However, since a portion of the charge is based on a percent of Investment
Account Values, amounts derived from larger Investment Accounts may to an
extent cover expenses associated with smaller Investment Accounts depending
upon the relative degree of Investment Account activity.
As part of the Company's policy of ensuring client satisfaction with the
services it provides, the Company may agree to waive the assessment of all
or a portion of the Contract Administration Expense/Recordkeeping Charge in
response to any reasonably-based complaint the Company is unable to rectify
from the Contractholder as to the quality of the services covered by such
charge.
A Contractholder may agree to pay all or a portion of the Contract
Administration Expense/Recordkeeping Charge separately or have the fees
deducted from Investment Accounts which correlate to a Plan Participant. If
the Contractholder elects to deduct these charges, the amount of the
quarterly charge so deducted will not exceed 1% of the aggregate Investment
Account Values which correlate to the Plan Participant at the time the
charge is made.
If deducted from Investment Accounts, the charge will be allocated among
Investment Accounts which correlate to the Plan Participant in proportion
to the relative values of such Accounts and will be effected by cancelling
a number of units in each such Investment Account equal to such Account's
proportionate share of the deduction.
If the Contractholder pays the Contract Administration
Expense/Recordkeeping Charge separately, the 1% limitation described above
will not apply. If the Contractholder does not pay these expenses, they
will be deducted from Investment Accounts.
If the Company provides recordkeeping services for any Outside Assets, the
Contractholder can elect to deduct from Investment Accounts only the $34
($37) portion of the Contract Administration Expense/Recordkeeping Charges
which correlate to inactive Plan Participants (Plan Participants who have
died, retired or terminated employment or who are totally and Permanently
Disabled and alternate payees under a Qualified Domestic Relations Order);
Contract Administration Expense/Recordkeeping Charges for active Plan
Participants must be paid separately by the Contractholder.
C. Mortality and Expense Risks Charge
Variable Annuity Payments will not be affected by adverse mortality
experience or by any excess in the actual sales and administrative expenses
over the charges provided for in the Contract. The Company assumes the
risks that (i) Variable Annuity Payments will continue for a longer period
than anticipated and (ii) the allowance for administration expenses in the
annuity conversion rates will be insufficient to cover the actual costs of
administration relating to Variable Annuity Payments. For assuming these
risks, the Company, in determining Unit Values and Variable Annuity
Payments, makes a charge as of the end of each Valuation Period against the
assets of Separate Account B held with respect to the Contract. The charge
is equivalent to a simple annual rate of .64%. The Company does not believe
that it is possible to specifically identify that portion of the .64%
deduction applicable to the separate risks involved, but estimates that a
reasonable approximate allocation would be .43% for the mortality risks and
.21% for the expense risks. The mortality and expense risks charge may be
changed by the Company at any time by giving not less than 60-days prior
written notice to the Contractholder. However, the charge may not exceed
1.25% on an annual basis, and only one change may be made in any one-year
period. If the charge is insufficient to cover the actual costs of the
mortality and expense risks assumed, the financial loss will fall on the
Company; conversely, if the charge proves more than sufficient, the excess
will be a gain to the Company.
OTHER EXPENSES
The Contractholder is obligated to pay additional expenses associated with
the acquisition and servicing of the contract in accordance with the terms of a
Service and Expense Agreement between the Contractholder and the Company. In no
event are these expenses deductible from Investment Accounts which correlate to
Plan Participants. The expenses which the Contractholder must pay if applicable
include an application fee, a transfer fee, documentation expense, a location
fee, Outside Asset Recordkeeping Charge and charges for special services
requested by the Contractholder. As part of the Company's policy of ensuring
client satisfaction with the services it provides, the Company may agree to
waive the assessment of all of these expenses or charges in response to any
reasonably-based complaint from the Contractholder as to the quality of the
services covered by such expenses or charges that the Company is unable to
rectify.
A. Application Fee and Transfer Fee
A $925 application fee is charged to the Contractholder in the first
Contract Year. If a Companion Contract has been issued by the Company to
the Contractholder to fund the Plan, the application fee will be assessed
to the Companion Contract. The total application fee paid by the
Contractholder to obtain both contracts will not exceed $925. If the
Company has issued an Associated Contract to the Contractholder to fund an
employee benefit plan administered by the Company, the application fee for
the contract described in this prospectus will be waived by the Company.
B. Documentation Expense
The Company can provide a sample Plan document and summary plan
descriptions to the Contractholder. The Contractholder will be billed $125
if the Contractholder uses a Principal Financial Group Prototype for
Savings Plans or Standardized Plan. If the Company provides a sample
custom-written Plan, the Contractholder will be billed $700 for the initial
Plan or for any restatement thereof, $300 for any amendments thereto, and
$500 for standard summary plan description booklets. If the Contractholder
adopts a Plan other than one provided by the Company, a $900 charge will be
made for summary plan description booklets requested by the Contractholder,
if any.
C. Location Fee
Contractholders may request the Company to provide services to groups of
employees at multiple locations. If the Company agrees to provide such
services, the Contractholder will be billed $150 on a quarterly basis ($600
annually) for each additional employee group or location. In addition,
separate contract administration/recordkeeping charges and documentation
fees may apply for each employee group or location requiring separate
government reports and/or sample plan documents.
D. Outside Asset Recordkeeping Charge
If the Company provides recordkeeping services for Plan assets which
correlate to a Plan Participant other than assets under this contract or an
Associated or Companion Contract ("Outside Assets"), the Company will bill
the Contractholder an Outside Asset Recordkeeping Charge. The annual charge
is calculated based upon the following table.
Number of Outside Asset
Members with Annual Recordkeeping
Outside Accounts Expense
---------------- ----------------------------------
1-25 $1,000
26-49 $15.30 per member + $614.70
50-99 $13.95 per member + $682.20
100-299 $12.60 per member + $817.20
300-499 $10.35 per member + $1,492.20
500-999 $8.55 per member + $2,392.20
1000-2499 $6.30 per member + $4,642.20
2500-4999 $5.40 per member + $6,892.20
5000 and over $4.50 per member + $11,392.20
The charge calculated in accordance with the above table will be increased
by 15% for the second and each additional Outside Asset for which the
Company provides recordkeeping services. One-fourth of the annual Outside
Asset Recordkeeping Charge will be billed on a quarterly basis. This charge
does not apply if the Outside Assets which correlate to the Plan
Participant consist solely of shares of mutual funds for which a subsidiary
of the Company serves as investment adviser.
E. Special Services
If requested by the Contractholder, the Company may provide services not
provided as part of the contract administration/recordkeeping services. The
Company will charge the Contractholder the cost of providing such services.
SURPLUS DISTRIBUTION AT SOLE DISCRETION OF THE COMPANY
It is not anticipated that any divisible surplus will ever be distributable
to the contract in the future because the contract is not expected to result in
a contribution to the divisible surplus of the Company. However, if any
distribution of divisible surplus is made, it will be made to Investment
Accounts in the form of additional units.
THE CONTRACT
The contract will normally be issued to an Employer or association or a
trust established for the benefit of Plan Participants and their beneficiaries.
The Company will issue a pre-retirement certificate describing the benefits
under the contract to Plan Participants who reside in a state that requires the
issuance of such certificates. The initial Contribution which correlates to a
Plan Participant will be invested in the Division or Divisions that are chosen
as of the end of the Valuation Period in which such Contribution is received by
the Company at its home office in Des Moines, Iowa. If the allocation
instructions are late, or not completed, the Company will invest such
unallocated Contributions in the Money Market Division on the date such
Contributions are received. Subsequently, the Company will transfer all or a
portion of such Contributions as of the date complete allocation instructions
are received by the Company in accordance with the allocation specified therein.
After complete allocation instructions have been received by the Company, all
current and future Contributions will be allocated to the chosen Divisions as of
the end of the Valuation Period in which such Contributions are received. If
complete allocation instructions are not received by the Company within 105 days
after the initial Contributions are allocated to the Money Market Division, the
Company will remit the Contributions plus any earnings thereon to the
Contractholder. The Contractholder may limit the number of Divisions available
to the Owner of Benefits, but the Money Market Division may not be so restricted
to the extent the Division is necessary to permit the Company to allocate
initial Contributions and the Capital Value Division may not be so restricted to
the extent the Division is necessary to permit the Company to pay Variable
Annuity Payments.
A. Contract Values and Accounting Before Annuity Commencement Date
1. Investment Accounts
An Investment Account or Accounts correlating to a Plan Participant
will be established for each type of Contribution and for each Division
of Separate Account B in which such Contribution is invested.
Investment Accounts will be maintained until the Investment Account
Values are either (a) applied to effect Variable Annuity Payments (b)
paid to the Owner of Benefits or the beneficiary or (c) transferred in
accordance with the provisions of the contract.
Each Contribution will be allocated to the Division or Divisions
designated by the Notification on file with the Company and will result
in a credit of units to the appropriate Investment Account. The number
of units so credited will be determined by dividing the portion of the
Contributions allocated to a Division by the Unit Value for such
Division for the Valuation Period within which the Contribution was
received by the Company at its home office in Des Moines, Iowa.
2. Unit Value
The Unit Value for a contract which participates in a Division of
Separate Account B determines the value of an Investment Account
consisting of Contributions allocated to that Division. The Unit Value
for each Division for the contract is determined on each day on which
the net asset value of its underlying Account is determined. The Unit
Value for a Valuation Period is determined as of the end of that
period. The investment performance of the underlying Account and
deducted expenses affect the Unit Value.
For this series of contracts, the Unit Value for each Division will be
fixed at $1.00 for the Valuation Period in which the first amount of
money is credited to the Division. A Division's Unit Value for any
later Valuation Period is equal to its Unit Value for the immediately
preceding Valuation Period multiplied by the Net Investment Factor (see
below) for that Division for this series of contracts for the later
Valuation Period.
3. Net Investment Factor
Each Net Investment Factor is the quantitative measure of the
investment performance of each Division of Separate Account B.
For any specified Valuation Period the Net Investment Factor for a
Division for this series of contracts is equal to
(a) the quotient obtained by dividing (i) the net asset value of a
share of the underlying Account as of the end of the Valuation
Period, plus the per share amount of any dividend or other
distribution made by the Account during the Valuation Period (less
an adjustment for taxes, if any) by (ii) the net asset value of a
share of the Account as of the end of the immediately preceding
Valuation Period,
reduced by
(b) a mortality and expense risks charge, equal to a simple interest
rate for the number of days within the Valuation Period at an
annual rate of 0.64%.
The amounts derived from applying the rate specified in subparagraph
(b) above and the amount of any taxes referred to in subparagraph (a)
above will be accrued daily and will be transferred from Separate
Account B at the discretion of the Company.
4. Hypothetical Example of Calculation of Unit Value for All Divisions
Except the Money Market Division
The computation of the Unit Value may be illustrated by the following
hypothetical example. Assume that the current net asset value of an
Account share is $14.8000; that there were no dividends or other
distributions made by the Account and no adjustment for taxes since the
last determination; that the net asset value of an Account share last
determined was $14.7800; that the last Unit Value was $1.0185363; and
that the Valuation Period was one day. To determine the current Net
Investment Factor, divide $14.8000 by $14.7800 which produces 1.0013532
and deduct from this amount the mortality and expense risks charge of
0.0000175, which is the rate for one day that is equivalent to a simple
annual rate of 0.64%. The result, 1.0013381, is the current Net
Investment Factor. The last Unit Value ($1.0185363) is then multiplied
by the current Net Investment Factor (1.0013381) which produces a
current Unit Value of $1.0198992.
5. Hypothetical Example of Calculation of Unit Value for the Money Market
Division
The computation of the Unit Value may be illustrated by the following
hypothetical example. Assume that the current net asset value of an
Account share is $1.0000; that a dividend of .0328767 cents per share
was declared by the Account prior to calculation of the net asset value
of the Account share and that no other distributions and no adjustment
for taxes were made since the last determination; that the net asset
value of an Account share last determined was $1.0000; that the last
Unit Value was $1.0162734; and that the Valuation Period was one day.
To determine the current Net Investment Factor, add the current net
asset value ($1.0000) to the amount of the dividend ($.000328767) and
divide by the last net asset value ($1.0000), which when rounded to
seven places equals 1.0003288. Deduct from this amount the mortality
and expense risks charge of .0000175 (the proportionate rate for one
day based on a simple annual rate of 0.64%). The result (1.0003137) is
the current Net Investment Factor. The last Unit Value ($1.0162734) is
then multiplied by the current Net Investment Factor (1.0003137),
resulting in a current Unit Value of $1.0165922.
B. Income Benefits
Income Benefits consist of either monthly Variable Annuity Payments or
periodic payments made on a monthly, quarterly, semi-annual or annual basis
pursuant to the Flexible Income Option.
1. Variable Annuity Payments
The amount applied to provide Variable Annuity Payments must be at
least $1,750. Variable Annuity Payments will be provided by the
Investment Accounts which correlate to the Plan Participant held under
the Capital Value Division. Thus, if the Owner of Benefits elects
Variable Annuity Payments, any amounts that are to be used to provide
Variable Annuity Payments will be transferred to Investment Accounts
held under the Capital Value Division as of the last Valuation Date in
the month which begins two months before the Annuity Commencement Date.
After any such transfer, the value of the Capital Value Division
Investment Accounts will be applied on the Annuity Purchase Date to
provide Variable Annuity Payments. The Annuity Commencement Date, which
will be one month following the Annuity Purchase Date, will be the
first day of a month. Thus, if the Annuity Commencement Date is August
1, the Annuity Purchase Date will be July 1, and the date of any
transfers to a Capital Value Division Investment Account will be the
Valuation Date immediately preceding July 1.
The Annuity Commencement Date must be no later than April 1 of the
calendar year following the calendar year in which the Plan Participant
attains age 70 1/2. (See "Federal Tax Status.")
a. Selecting a Variable Annuity
Variable Annuity Payments will be made to an Owner of Benefits
beginning on the Annuity Commencement Date and continuing
thereafter on the first day of each month. An Owner of
Benefits may select an Annuity Commencement Date by
Notification to the Company. The date selected may be the
first day of any month the Plan allows which is at least one
month after the Notification. Generally, the Annuity
Commencement Date cannot begin before the Plan Participant is
age 59 1/2, separated from service, or is totally disabled.
See "Federal Tax Status" for a discussion of required
distributions and the federal income tax consequences of
distributions.
At any time not less than one month preceding the desired
Annuity Commencement Date, an Owner of Benefits may, by
Notification, select one of the annuity options described
below (see "Forms of Variable Annuities"). If no annuity
option has been selected at least one month before the Annuity
Commencement Date, and if the Plan does not provide one,
payments which correlate to an unmarried Plan Participant will
be made under the annuity option providing Variable Life
Annuity with Monthly Payments Certain for Ten Years. Payments
which correlate to a married Plan Participant will be made
under the annuity option providing a Variable Life Annuity
with One-Half Survivorship.
b. Forms of Variable Annuities
Because of certain restrictions contained in the Internal
Revenue Code and regulations thereunder, an annuity option is
not available under a Contract used to fund a TDA Plan, PEDC
Plan or 401(a) Plan unless (i) the contingent annuitant is the
Plan Participant's spouse or (ii) on the Plan Participant's
Annuity Commencement Date, the present value of the amount to
be paid while the Plan Participant is living is greater than
50% of the present value of the total benefit to the Plan
Participant and the Plan Participant's beneficiary (or
contingent annuitant, if applicable).
An Owner of Benefits may elect to have all or a portion of
Investment Account Values applied under one of the following
annuity options. However, if the monthly Variable Annuity
Payment at any time would be less than $20, the Company may,
at its sole option, pay the Variable Annuity Reserves in full
settlement of all benefits otherwise available.
Variable Life Annuity with Monthly Payments Certain for Zero,
Five, Ten, Fifteen or Twenty Years or Installment Refund
Period -- a variable annuity which provides monthly payments
during the Plan Participant's lifetime, and further provides
that if, at the death of the Plan Participant, monthly
payments have been made for less than a minimum period, e.g.
five years, any remaining payments for the balance of such
period shall be paid to the Owner of Benefits, if the Owner of
Benefits is not the Plan Participant, or to a designated
beneficiary unless the Owner of Benefits or the beneficiary
requests in writing that the Commuted Value of the remaining
payments be paid in a single sum. (Persons entitled to take
the remaining payments or the Commuted Value thereof rather
than continuing monthly payments should consult with their tax
advisor to be made aware of the differences in tax treatment.)
The minimum period may be either zero, five, ten, fifteen or
twenty years or the period (called "installment refund
period") consisting of the number of months determined by
dividing the amount applied under the option by the initial
payment. If, for example, $14,400 is applied under a life
option with an installment refund period, and if the first
monthly payment provided by that amount, as determined from
the applicable annuity conversion rates, would be $100, the
minimum period would be 144 months ($14,400 divided by $100
per month) or 12 years. A variable life annuity with an
installment refund period guarantees a minimum number of
payments, but not the amount of any monthly payment or the
amount of aggregate monthly payments. The longer the minimum
period selected, the smaller will be the amount of the first
annuity payment.
Under the Variable Life Annuity with Zero Years Certain, which
provides monthly payments to the Owner of Benefits during the
Plan Participant's lifetime, it would be possible for the
Owner of Benefits to receive no Annuity Payments if the Plan
Participant died prior to the due date of the first payment
since payment is made only during the lifetime of the Plan
Participant.
Joint and Survivor Variable Life Annuity with Monthly Payments
Certain for Ten Years -- a variable annuity which provides
monthly payments for a minimum period of ten years and
thereafter during the joint lifetimes of the Plan Participant
on whose life the annuity is based and the contingent
annuitant named at the time this option is elected, and
continuing after the death of either of them for the amount
that would have been payable while both were living during the
remaining lifetime of the survivor. In the event the Plan
Participant and the contingent annuitant do not survive beyond
the minimum ten year period, any remaining payments for the
balance of such period will be paid to the Owner of Benefits,
if the owner of Benefits is not the Plan Participant, or to a
designated beneficiary unless the Owner of Benefits or the
beneficiary requests in writing that the Commuted Value of the
remaining payments be paid in a single sum. (Persons entitled
to take the remaining payments or the Commuted Value thereof
rather than continuing monthly payments should consult with
their tax advisor to be made aware of the differences in tax
treatment.)
Joint and Two-Thirds Survivor Variable Life Annuity -- a
variable annuity which provides monthly payments during the
joint lives of a Plan Participant and the person designated as
contingent annuitant with two-thirds of the amount that would
have been payable while both were living continuing until the
death of the survivor.
Variable Life Annuity with One-Half Survivorship -- a variable
annuity which provides monthly payments during the life of the
Plan Participant with one-half of the amount otherwise payable
continuing so long as the contingent annuitant lives.
Under the Joint and Two-thirds Survivor Variable Life Annuity
and under the Variable Life Annuity with One-Half
Survivorship, it would be possible for the Owner of Benefits
and/or contingent annuitant to receive no annuity payments if
the Plan Participant and contingent annuitant both died prior
to the due date of the first payment since payment is made
only during their lifetimes.
Other Options -- Other variable annuity options permitted
under the applicable Plan may be arranged by mutual agreement
of the Owner of Benefits and the Company.
c. Basis of Annuity Conversion Rates
Because women as a class live longer than men, it has been
common that retirement annuities of equal cost for women and
men of the same age will provide women less periodic income at
retirement. The Supreme Court of the United States ruled in
Arizona Governing Committee vs. Norris that sex distinct
annuity tables under an employer-sponsored benefit plan result
in discrimination that is prohibited by Title VII of the
Federal Civil Rights Act of 1964. The Court further ruled that
sex distinct annuity tables will be deemed discriminatory only
when used with values accumulated from employer contributions
made after August 1, 1983, the date of the ruling.
Title VII applies only to employers with 15 or more employees.
However, certain State Fair Employment Laws and Equal Payment
Laws may apply to employers with less than 15 employees.
The contract described in this Prospectus offers both sex
distinct and sex neutral annuity conversion rates. The annuity
rates are used to convert a Plan Participant's pre-retirement
Investment Account Values to a monthly lifetime income at
retirement. Usage of either sex distinct or sex neutral
annuity rates will be determined by the Contractholder.
For each form of variable annuity, the annuity conversion
rates determine how much the first monthly Variable Annuity
Payment will be for each $1,000 of the Investment Account
Value applied to effect the variable annuity. The conversion
rates vary with the form of annuity, date of birth, and, if
distinct rates are used, the sex of the Plan Participant and
the contingent annuitant, if any. The sex neutral guaranteed
annuity conversion rates are based upon (i) an interest rate
of 2.5% per annum and (ii) mortality according to the "1983
Table a for Individual Annuity Valuation" projected with Scale
G to the year 2001 set back five years in age. The sex
distinct female rates are determined for all Plan Participants
in the same way as sex neutral rates, as described above. The
sex distinct male rates are determined for all Plan
Participants in the same way as the sex neutral rates, as
described above, except mortality is not set back five years
in age. The guaranteed annuity conversion rates may be
changed, but no change which would be less favorable to the
Owner of Benefits will take effect for a current Plan
Participant.
The contract provides that an interest rate of not less than
2.5% per annum will represent the assumed investment return.
Currently the assumed investment return used in determining
the amount of the first monthly payment is 4% per annum. This
rate may be increased or decreased by the Company in the
future but in no event will it be less than 2.5% per annum.
If, under the contract, the actual investment return (as
measured by an Annuity Change Factor, defined below) should
always equal the assumed investment return, Variable Annuity
Payments would remain level. If the actual investment return
should always exceed the assumed investment return, Variable
Annuity Payments would increase; conversely, if it should
always be less than the assumed investment return, Variable
Annuity Payments would decrease.
The current 4% assumed investment return is higher than the
2.5% interest rate reflected in the annuity conversion rates
contained in the contract. With a 4% assumption, Variable
Annuity Payments will commence at a higher level, will
increase less rapidly when actual investment return exceeds
4%, and will decrease more rapidly when actual investment
return is less than 4%, than would occur with a lower
assumption.
d. Determining the Amount of the First Variable Annuity Payment
The initial amount of monthly annuity income shall be based on
the option selected, the age of the Plan Participant and
contingent annuitant, if any, and the Investment Account
Values applied as of the Annuity Purchase Date. The initial
monthly income payment will be determined on the basis of the
annuity conversion rates applicable on such date to such
conversions under all contracts of this class issued by the
Company. However, the basis for the annuity conversion rates
will not produce payments less beneficial to the Owner of
Benefits than the annuity conversion rate basis described
above.
e. Determining the Amount of the Second and Subsequent Monthly
Variable Annuity Payments
The second and subsequent monthly Variable Annuity Payments
will increase or decrease in response to the investment
experience of the Account underlying the Capital Value
Division. The amount of each payment will be determined by
multiplying the amount of the monthly Variable Annuity Payment
due in the immediately preceding calendar month by the Annuity
Change Factor for the Capital Value Division for the Contract
for the calendar month in which the Variable Annuity Payment
is due.
The Annuity Change Factor for the Capital Value Division for a
calendar month is the quotient of (1) divided by (2), below:
(1) The number which results from dividing (i) the Contract's
Unit Value for the Capital Value Division for the first
Valuation Date in the calendar month beginning one month
before the given calendar month by (ii) the Contract's
Unit Value for such Division for the first Valuation Date
in the calendar month beginning two months before the
given calendar month.
(2) An amount equal to one plus the effective interest rate
for the number of days between the two Valuation Dates
specified in subparagraph (1) above at the interest rate
assumed to determine the initial payment of variable
benefits to the Owner of Benefits.
f. Hypothetical Example of Calculation of Variable Annuity
Payments
Assume that on the date one month before the Annuity
Commencement Date the Investment Account Value that is
invested in the Capital Value Division which correlates to a
Plan Participant is $37,592. Using the appropriate annuity
conversion factor (assuming $5.88 per $1,000 applied) the
Investment Account Value provides a first monthly Variable
Annuity Payment of $221.04. To determine the amount of the
second monthly payment assume that the Capital Value Division
Unit Value as of the first Valuation Date in the preceding
calendar month was $1.3712044 and the Unit Value as of the
first Valuation Date in the second preceding calendar month
was $1.3273110. The Annuity Change Factor is determined by
dividing $1.3712044 by $1.3273110, which equals 1.0330694, and
dividing the result by an amount corresponding to the amount
of one increased by an assumed investment return of 4% (which
for a thirty day period is 1.0032288). 1.0330694 divided by
1.0032288 results in an Annuity Change Factor for the month of
1.0297446. Applying this factor to the amount of Variable
Annuity Payment for the previous month results in a current
monthly payment of $227.61 ($221.04 multiplied by 1.0297446
equals $227.61).
2. Flexible Income Option
Instead of Variable Annuity Payments an Owner of Benefits may choose to
receive income benefits under the Flexible Income Option. Unlike
Variable Annuity Payments, payments under the Flexible Income Option
may be made from any Division of the Separate Account. Under the
Flexible Income Option, the Company will pay to the Owner of Benefits a
portion of the Aggregate Investment Accounts on a monthly, quarterly,
semi-annual or annual basis on the date or dates requested each Year
and continuing for a period not to exceed the life or life expectancy
of the Plan Participant, or the joint lives or life expectancy of such
Plan Participant and the contingent annuitant, if the contingent
annuitant is the Plan Participant's spouse. If the Notification does
not specify from which Investment Accounts payments are to be made,
amounts will be withdrawn on a pro rata basis from all Investment
Accounts which correlate to the Plan Participant. Payments will end,
however, on the date no amounts remain in such Accounts or the date
such Accounts are paid or applied in full as described below. Payments
will be subject to the following:
a. The life expectancy of the Plan Participant and the Plan
Participant's spouse, if applicable, will be determined in
accordance with the life expectancy tables contained in Internal
Revenue Regulation Section 1.72-9. Life expectancy will be
determined as of the date on which the first payment is made. Life
expectancy will be redetermined annually thereafter.
b. Payments may begin any time after the Flexible Income Option is
requested. Payments must begin no later than the latest date
permitted or required by the Plan or regulation to be the Owner of
Benefit's Annuity Commencement Date.
c. Payments will be made annually, semiannually, quarterly, or
monthly as requested by the Owner of Benefits and agreed to by the
Company. The annual amount payable will be the lesser of the
Aggregate Investment Account Value which correlates to the Plan
Participant or the minimum annual amount determined in accordance
with the minimum distribution rules of the Internal Revenue Code.
d. If the Plan Participant should die before the Aggregate Investment
Account Value has been paid or applied in full, the remaining
Investment Account Values will be treated as benefits payable at
death as described in this Prospectus.
e. Year for purposes of determining payments under the Flexible
Income Option means the twelve month period starting on the
installment payment starting date and each corresponding twelve
month period thereafter.
An Owner of Benefits may request a payment in excess of the minimum
described above. Such payment may be equal to all or any portion of the
Investment Accounts which correlate to the Plan Participant; provided,
however, that if the requested payment would reduce the total value of
such accounts to a total balance of less than $1,750 then such request
will be a request for the total of such Investment Accounts. Payments
in excess of the minimum described above may be subject to the
Contingent Deferred Sales Charge.
The Owner of Benefits may terminate the Flexible Income Payments by
giving the Company Notification (i) requesting an excess payment equal
to the remaining balance of the Aggregate Investment Account Values
which correlate to a Plan Participant, (ii) requesting that the
remaining balance of the Aggregate Investment Account Values be applied
to provide Variable Annuity Payments or (iii) a combination of (i) and
(ii), as long as the amount applied to provide an annuity is at least
$1,750. The Company will make such excess payment on the later of (i)
the date requested, or (ii) the date seven (7) calendar days after the
Company receives the Notification. The Annuity Commencement Date for
amounts so applied will be one month after the Annuity Purchase Date.
The Annuity Purchase Date for amounts so applied will be the first
Valuation Date in the month following the Company's receipt of the
Notification or the first Valuation Date of such subsequent month as
requested.
If the Owner of Benefits chooses the Flexible Income Option, an
additional charge $25.00 will be deducted annually on a pro rata basis
from the Investment Accounts which correlate to the Plan Participant.
C. Payment on Death of Plan Participant
1. Prior to Annuity Purchase Date
If a Plan Participant dies prior to the Annuity Purchase Date, the
Company (upon receipt of due proof of death and any waiver or consent
required by applicable state law) will pay the death benefit in
accordance with the provisions of the Plan. The Owner of Benefits may
elect to either (1) leave the assets in the contract to the extent
permitted by applicable laws; (2) receive such value as a single sum
benefit; or (3) apply the Investment Account Values which correlate to
the Plan Participant to purchase Variable Annuity Payments for the
beneficiary if the aggregate value of such Investment Accounts is at
least $1,750. If the beneficiary does not provide Notification to the
Company within 120 days of the date the Company receives due proof of
death (i.e. a certified copy of the death certificate, a certified copy
of a decree of a court of competent jurisdiction as to the finding of
death, a written statement by a medical doctor who attended the
deceased during his last illness), the beneficiary will be deemed a
Plan Participant under the contract described in the Prospectus.
A beneficiary may elect to have all or a part of the amount available
under this contract transferred to any Companion Contract.
Alternatively, this contract may accept all or part of the amount
available under a Companion Contract to establish an Investment Account
or Accounts for a beneficiary under this contract. If the aggregate
value of such Investment Accounts is less than $1,750, the Company may
at its option pay the beneficiary the value of such accounts in lieu of
all other benefits.
An election to receive Variable Annuity Payments must be made prior to
the single sum payment to the beneficiary. The amount of the death
benefit is determined by the terms of the Plan. Annuity income must be
payable as lifetime annuity income with no benefits beyond the
beneficiary's life or life expectancy. In addition, the amount of the
monthly Variable Annuity Payments must be at least $20, or the Company
may at its option pay the beneficiary the value of the Variable Annuity
Reserves in lieu of all other benefits. The beneficiary's Annuity
Purchase Date will be the first day of the calendar month specified in
the election, but in no event prior to the first day of the calendar
month following the date Notification is received by the Company. The
amount to be applied will be determined as of the Annuity Purchase
Date. The beneficiary's Annuity Commencement Date will be the first day
of the calendar month following the Annuity Purchase Date. The
beneficiary must be a natural person in order to elect Variable Annuity
Payments. The annuity conversion rates applicable to a beneficiary
shall be the annuity conversion rates the Company makes available to
Owners of Benefits under this contract. The beneficiary will receive a
written description of the options available.
2. Subsequent to Annuity Purchase Date
Upon the death of a Plan Participant subsequent to the Annuity Purchase
Date, no benefits will be available except as may be provided under the
form of annuity selected. If provided for under the form of annuity,
the Owner of Benefits or the beneficiary will continue receiving any
remaining payments unless the Owner of Benefits or the beneficiary
requests in writing that the Commuted Value of the remaining payments
be paid in a single sum.
D. Withdrawals and Transfers
1. Cash Withdrawals
The contract is designed for and intended to be used to fund retirement
Plans. However, subject to any Plan limitations or any reduction for
vesting provided for in the Plan as to amounts available, the Owner of
Benefits may withdraw cash from the Investment Accounts which correlate
to a Plan Participant at any time prior to the Annuity Purchase Date
subject to any charges that may be applied. The Internal Revenue Code
generally provides that distributions from the contracts (except those
used to fund Creditor Exempt or General Creditor Non-qualified Plans)
may begin only after the Plan Participant attains age 59 1/2,
terminates employment, dies or becomes disabled, or in the case of
deemed hardship (or, for PEDC Plans, unforeseen emergencies).
Withdrawals before age 59 1/2 may involve an income tax penalty. (See
"Federal Tax Status.")
The procedure with respect to cash withdrawals is as follows:
(a) The Plan must allow for such withdrawal.
(b) The Company must receive a Notification requesting a cash
withdrawal from the Owner of Benefits on a form either furnished
or approved by the Company. The Notification must specify the
amount to be withdrawn for each Investment Account from which
withdrawals are to be made. If no specification is made,
withdrawals from Investment Accounts will be made on a pro rata
basis.
(c) If a certificate has been issued to the Owner of Benefits the
Company may require that any Notification be accompanied by such
certificate.
(d) The amount withdrawn may be subject to the Contingent Deferred
Sales Charge and, in the case of a withdrawal of the Aggregate
Investment Account Value, will be subject to the Contract
Administration Expense/Recordkeeping Charge. If the Aggregate
Investment Account Values are insufficient to satisfy the amount
of the requested withdrawal and applicable charges, the amount
paid will be reduced to satisfy such charges.
Any cash withdrawal will result in the cancellation of a number of
units from each Investment Account from which values have been
withdrawn. The number of units cancelled from an Investment
Account will be equal to the amount withdrawn from that Account
divided by the Unit Value for the Division of Separate Account B
in which the Account is invested for the Valuation Period in which
the cancellation is effective. Units will also be cancelled to
cover any charges assessed under (d) above.
(Special Note: Under the Texas Education Code, Plan
Participants under contracts issued in connection with
Optional Retirement Programs for certain employees of Texas
institutions of higher education are prohibited from making
withdrawals except in the event of termination of employment,
retirement or death of the Plan Participant. Also, see
"Federal Tax Status" for a description of further withdrawal
restrictions.)
2. Transfers Between Divisions
Upon Notification, all or a portion of the value of an Investment
Account which correlates to a Plan Participant may be transferred to
another available Investment Account correlating to such Plan
Participant for the same type of Contribution.
Transfers may be made at any time before the Annuity Purchase Date.
A transfer will be effective as of the end of the Valuation Period in
which the request is received. Any amount transferred will result in
the cancellation of units in the Investment Account from which the
transfer is made. The number of units cancelled will be equal to the
amount transferred from that account divided by the Unit Value of the
Division for the Valuation Period in which the transfer is effective.
The transferred amount will result in the crediting of Units in the
Investment Account to which the transfer is made. The number of Units
credited will be equal to the amount transferred to that account
divided by the Unit Value of the Division for the Valuation Period in
which the transfer is effective.
3. Transfers to the Contract
If a Companion Contract has been issued by the Company to fund the
Plan, and except as otherwise provided by the applicable Plan, the
contract described in this prospectus may accept all or a portion of
the proceeds available under the Companion Contract at any time at
least one month before Annuity Commencement Date, subject to the terms
of the Companion Contract.
4. Transfers to Companion Contract
If a Companion Contract has been issued by the Company to fund the
Plan, except as otherwise provided by the applicable Plan and the
provisions of the Companion Contract, an Owner of Benefits may by
Notification transfer all or a portion of the Investment Account Values
which correlate to a Plan Participant to the Companion Contract. If the
Notification does not state otherwise, amounts will be transferred on a
pro rata basis from the Investment Accounts which correlate to the Plan
Participant. Transfers with respect to a Plan Participant from this
contract to the Companion Contract will not be permitted if this
contract has accepted, within the six-month period preceding the
proposed transfer from this contract to the Companion Contract, a
transfer from an unmatured Investment Account which correlates to the
Plan Participant established under the Companion Contract. An unmatured
Investment Account is an Investment Account which has not reached the
end of its interest guarantee period. In all other respects, such
transfers are subject to the same provisions regarding frequency of
transfer, effective date of transfer and cancellation of units as
described above in "Transfers Between Divisions".
5. Special Situation Involving Alternate Funding Agents
The contract allows the Investment Account Values of all Plan
Participants to be transferred to an alternate Funding Agent with or
without the consent of the Plan Participants. Transfers to an alternate
Funding Agent require Notification from the Contractholder.
The amount to be transferred will be equal to the Investment Account
Values determined as of the end of the Valuation Period in which the
Notification is received. Such transfers may be subject to the
Contingent Deferred Sales Charge and will be subject to the Contract
Administration Expense/Recordkeeping Charge.
6. Postponement of Cash Withdrawal or Transfer
Any cash withdrawal or transfer to be made from the contract or between
Investment Accounts in accordance with the preceding paragraphs will be
made (i) within seven calendar days after Notification for such payment
or transfer is received by the Company at its Home Office or (ii) on
the requested date of payment or transfer, if later. However, such
withdrawal or transfer may be deferred during any period when the right
to redeem Account shares is suspended as permitted under provisions of
the Investment Company Act of 1940, as amended. The right to redeem
shares may be suspended during any period when (a) trading on the New
York Stock Exchange is restricted as determined by the Securities and
Exchange Commission or such Exchange is closed for other than weekends
and holidays; (b) an emergency exists, as determined by the Securities
and Exchange Commission, as a result of which (i) disposal by the
Account of securities owned by it is not reasonably practicable or (ii)
it is not reasonably practicable for the Account fairly to determine
the value of its net assets; or (c) the Commission by order so permits
for the protection of security holders. If any deferment of transfer or
withdrawal is in effect and has not been cancelled by Notification to
the Company within the period of deferment, the amount to be
transferred or withdrawn shall be determined as of the first Valuation
Date following expiration of the permitted deferment, and transfer or
withdrawal will be made within seven calendar days thereafter. The
Company will notify the Contractholder of any deferment exceeding 30
days.
7. Loans.
The Company will not make available a loan option for the contract
described in this Prospectus.
E. Other Contractual Provisions
1. Contribution Limits
The contract prescribes no limits on the minimum Contribution which may
be made to an Investment Account which correlates to a Plan
Participant. Plan Participant maximum Contributions are discussed under
"Federal Tax Status." Contributions may also be limited by the Plan.
The Company may also limit Contributions on 60-days notice.
2. Assignment
No benefits in the course of payment under a contract used to fund a
TDA Plan, 401(a) Plan or Creditor-Exempt Non-Qualified Plan are
assignable, by any Owner of Benefits, Plan Participant, beneficiary or
contingent annuitant and all such benefits under such contracts, shall
be exempt from the claims of creditors to the maximum extent permitted
by law. Benefits in the course of payment for contracts used to fund
PEDC plans and General Creditor Non-Qualified Plans are assignable only
by the Contractholder and such benefits are subject to the claims of
the Contractholder's general creditors.
Investment Account Values which correlate to a Plan Participant are
non-forfeitable by the Owner of Benefits; provided, however, if the
Plan specifically so provides, Investment Account Values which
correlate to a Plan Participant shall be reduced to the extent required
by the vesting provisions of the Plan as of the date the Company
receives Notification of the event requiring the reduction.
3. Cessation of Contributions
A cessation of Contributions with respect to all Plan Participants
shall occur at the election of the Contractholder upon Notification to
the Company, on the date the Plan terminates or on the date no
Investment Account Values remain under the contract or at the election
of the Company upon 60-days notice to the Contractholder. Following a
cessation of Contributions all terms of the Contract will continue to
apply except that no further Contributions may be made.
4. Substitution of Securities
If shares of an Account are not available at some time in the future,
or if in the judgment of the Company further investment in such shares
would no longer be appropriate, there may be substituted therefor, or
Contributions received after a date specified by the Company may be
applied to purchase (i) shares of another Account or another registered
open-end investment company or (ii) securities or other property as the
Company should in its discretion select. In the event of any investment
pursuant to clause (ii) above, the Company can make such changes as in
its judgment are necessary or appropriate in the frequency and methods
of determination of Unit Values, Net Investment Factors, Annuity Change
Factors, and Investment Account Values, including any changes in the
foregoing which will provide for the payment of an investment advisory
fee; provided, however, that any such changes shall be made only after
approval by the Insurance Department of the State of Iowa. The Company
will give written notice to each Owner of Benefits of any substitution
or such change and any substitution will be subject to the rules and
regulations of the Securities and Exchange Commission.
5. Changes in the Contract
The terms of a contract may be changed at any time by written agreement
between the Company and the Contractholder without the consent of any
Plan Participant, Owner of Benefits, beneficiary, or contingent
annuitant. However, except as required by law or regulation, no such
change shall apply to variable annuities which were in the course of
payment prior to the effective date of the change. The Company will
notify any Contractholder affected by any change under this paragraph.
The Company may unilaterally change the contract at any time, including
retroactive changes, in order to meet the requirements of any law or
regulation issued by any governmental agency to which the Company is
subject. The Company may also add additional Divisions to Separate
Account B at any time. In addition, the Company may, on 60-days prior
notice to the Contractholder, unilaterally change the basis for
determining Investment Account Values, Net Investment Factors, Annuity
Change Factors; the guaranteed annuity conversion rates; the provisions
with respect to transfers to or from a Companion Contract or between
Investment Accounts; the Contingent Deferred Sales Charge; and the
Contract Administration Expense/Recordkeeping Charge.
However, no amendment or change will apply to annuities in the course
of payment except to the extent necessary to meet the requirements of
any law or regulation issued by any governmental agency to which the
company is subject. In addition, no change on the guaranteed annuity
conversion rates or the Contingent Deferred Sales Charge will be
effective for any current Plan Participant if the effect of such
amendment or change would be less favorable to the Owner of Benefits.
Also, any change in the Contract Administration Expense/Recordkeeping
Charge will not take affect as to any Investment Accounts to be
transferred to an Alternate Funding Agent if, prior to the date of the
amendment or change is to take affect, the Company receives a written
request from the Contractholder for payment of all such Investment
Account Values to the Alternate Funding Agent and such request is not
revoked.
Furthermore, the Company may, on 60-days notice to the Contractholder,
unilaterally change the mortality and expense risks charge provided
that (a) the charge shall in no event exceed 1.25%, (b) the charge
shall not be changed more frequently than once in any one year period
and (c) no change shall apply to annuities which were in the course of
payment prior to the effective date of the change.
STATEMENT OF VALUES
The Company will furnish each Owner of Benefits at least once during each
year a statement showing the number of units credited to the Investment Account
or Accounts which correlate to the Plan Participant, Unit Values for such
Investment Accounts and the resulting Investment Account Values.
SERVICES AVAILABLE BY TELEPHONE
The following transactions may be exercised by telephone by any Owner of
Benefits: 1) transfers between Investment Accounts; and 2) changes in
Contribution allocation percentages. The telephone transactions may be exercised
by telephoning 1-800-633-1373. Telephone transfer requests must be received by
the close of the New York Stock Exchange on a day when the Company is open for
business to be effective that day. Requests made after that time or on a day
when the Company is not open for business will be effective the next business
day.
Although neither the Separate Account nor the Company is responsible for
the authenticity of telephone transaction requests, the right is reserved to
refuse to accept telephone requests when in the opinion of the Company it seems
prudent to do so. The Owner of Benefits bears the risk of loss caused by
fraudulent telephone instructions the Company reasonably believes to be genuine.
The Company will employ reasonable procedures to assure telephone instructions
are genuine and if such procedures are not followed, the Company may be liable
for losses due to unauthorized or fraudulent transactions. Such procedures
include recording all telephone instructions, requesting personal identification
information such as the caller's name, daytime telephone number, social security
number and/or birthdate and sending a written confirmation of the transaction to
the Owner of Benefits' address of record. Owners of Benefits may obtain
additional information and assistance by telephoning the toll free number.
DISTRIBUTION OF THE CONTRACT
The contract, which is no longer offered, was sold primarily by persons who
are insurance agents of or brokers for the Company authorized by applicable law
to sell life and other forms of personal insurance and variable annuities. In
addition, those persons were usually registered representatives of Princor
Financial Services Corporation, a company of the Principal Financial Group, Des
Moines, Iowa 50392-0200, a broker-dealer registered under the Securities
Exchange Act of 1934 and a member of the National Association of Securities
Dealers, Inc. Princor Financial Services Corporation, the principal underwriter,
is paid for the distribution of the Contract in accordance with two separate
schedules one of which provides for payment of 4.5% of Contributions scaling
down for Contributions in excess of $5,000 and one which provides for payments
of 3.0% of Contributions scaling down for Contributions in excess of $50,000.
The contract was also sold through other selected broker-dealers registered
under the Securities Exchange Act of 1934. Princor Financial Services
Corporation is also the principal underwriter for various registered investment
companies organized by the Company. Princor Financial Services Corporation is a
subsidiary of Principal Financial Services, Inc.
PERFORMANCE CALCULATION
The Separate Account may publish advertisements containing information
(including graphs, charts, tables and examples) about the performance of one or
more of its Divisions. The contract was not offered prior to July 15, 1992.
However, the Divisions invest in Accounts of the Principal Variable Contract
Fund, Inc. These Accounts 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:
Old Mutual Fund Name New Corresponding Account Name
-------------------- ------------------------------
Principal Balanced Fund, Inc. Balanced Account
Principal Bond Fund, Inc. Bond Account
Principal Capital Accumulation Fund, Inc. Capital Value Account
Principal Emerging Growth Fund, Inc. MidCap Account
Principal Government Securities Fund, Inc. Government Securities Account
Principal Growth Fund, Inc. Growth Account
Principal Money Market Fund, Inc. Money Market Account
Principal World Fund, Inc. International Account
Some of the Accounts (under their former names) were offered prior to the date
that the Contract was available. Thus, the Separate Account may publish
advertisements containing information about the hypothetical performance of one
or more of its Divisions for this contract had the contract been issued on or
after the date the Account in which such Division invests was first offered. The
hypothetical performance from the date of inception of the Account in which the
Division invests 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 will 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 as published by independent statistical services or publishers and
information regarding performance of certain market indices. Any performance
data quoted for the Separate Account represents only historical performance and
is not intended to indicate future performance. For further information on how
the Separate Account calculates yield and total return figures, see the
Statement of Additional Information.
From time to time the Separate Account advertises its Money Market
Division's "yield" and "effective yield" for these contracts. Both yield figures
are based on historical earnings and are not intended to indicate future
performance. The "yield" of the Division refers to the income generated by an
investment under the contract in the Division over a seven-day period (which
period will be stated in the advertisement). This income is then "annualized."
That is, the amount of income generated by the investment during that week is
assumed to be generated each week over a 52-week period and is shown as a
percentage of the investment. The "effective yield" is calculated similarly but,
when annualized, the income earned by an investment in the Division is assumed
to be reinvested. The "effective yield" will be slightly higher than the "yield"
because of the compounding effect of this assumed reinvestment. Neither yield
quotation reflects contingent deferred sales charges which, if included, would
reduce the "yield" and "effective yield."
In addition, from time to time, the Separate Account will advertise its
"yield" for the Bond Division and Government Securities Division for these
contracts. The "yield" of these Divisions is determined by annualizing the net
investment income per unit for a specific, historical 30-day period and dividing
the result by the ending maximum offering price of the unit for the same period.
This yield quotation does not reflect a contingent deferred sales charge which,
if included, would reduce the "yield."
Also, from time to time, the Separate Account will advertise the average
annual total return of its various Divisions for these contracts. The average
annual total return for any of the Divisions is computed by calculating the
average annual compounded rate of return over the stated period that would
equate an initial $1,000 investment to the ending redeemable contract value. In
this calculation the ending value is reduced by a contingent deferred sales
charge that decreases from 5% to 0% over a period of 7 years. The Separate
Account may also advertise total return figures of its Divisions for a specified
period that do not take into account the contingent deferred sales charge in
order to illustrate the change in the Division's unit value over time. See
"Deductions Under the Contract" for a discussion of contingent deferred sales
charges. The Separate Account may also advertise total return figures of its
Divisions for a specified period that do not take into account the Contract
Administration Expense/Recordkeeping Charge in order to illustrate performance
applicable to Owners of Benefits when this charge is not deducted from
Investment Accounts.
VOTING RIGHTS
The Company shall vote Account shares held in Separate Account B at regular
and special meetings of shareholders of each Account, but will follow voting
instructions received from persons having the voting interest in the Account
shares.
The number of Account shares as to which a person has the voting interest
will be determined by the Company as of a date which will not be more than
ninety days prior to the meeting of the Account, and voting instructions will be
solicited by written communication at least ten days prior to the meeting.
During the accumulation period, the Owner of Benefits is the person having
the voting interest in the Account shares attributable to the Investment
Accounts which correlate to the Plan Participant. The number of Account shares
held in Separate Account B which are attributable to each Investment Account is
determined by dividing the Investment Account Value attributable to a Division
of Separate Account B by the net asset value of one share of the underlying
Account.
During the annuity period, the person then entitled to Variable Annuity
Payments has the voting interest in the Account shares attributable to the
variable annuity. The number of Account shares held in Separate Account B which
are attributable to each variable annuity is determined by dividing the reserve
for the variable annuity by the net asset value of one Account share. The voting
interest in the Account shares attributable to the variable annuity will
ordinarily decrease during the annuity period since the reserve for the variable
annuity decreases due to the reduction in the expected payment period.
Account shares for which Owners of Benefits or payees of variable annuities
are entitled to give voting instructions, but for which none are received, and
shares of the Fund owned by the Company will be voted in the same proportion as
the aggregate shares for which voting instructions have been received.
Proxy material will be provided to each person having a voting interest
together with an appropriate form which may be used to give voting instructions
to the Company.
If the Company determines pursuant to applicable law that Account shares
held in Separate Account B need not be voted pursuant to instructions received
from persons otherwise having the voting interest as provided above, then the
Company may vote Account shares held in Separate Account B in its own right.
FEDERAL TAX STATUS
It should be recognized that the descriptions below of the federal income
tax status of amounts received under the contracts are not exhaustive and do not
purport to cover all situations. A qualified tax advisor should be consulted for
complete information. (For the federal tax status of the Company and Separate
Account B, see "Principal Life Insurance Company Separate Account B".)
A. Taxes Payable by Owners of Benefits and Annuitants
The contract offered in connection with this prospectus is used with
retirement programs which receive favorable tax deferred treatment under
Federal income tax law and deferred annuity contracts purchased with after
tax dollars. Annuity payments or other amounts received under the contract
are subject to income tax withholding. The amounts withheld will vary among
recipients depending on the tax status of the individual and the type of
payments from which taxes are withheld.
Contributions to contracts used to fund Creditor-Exempt and General
Creditor Non-Qualified Plans do not enjoy the advantages available to
qualified retirement plans, but Contributions invested in contracts used to
fund Creditor-Exempt Non-qualified Retirement Plans may receive tax
deferred treatment of the earnings , until distributed from the contract as
retirement benefits.
1. Tax Deferred Annuity Plans-- (Section 403(b) Annuities for Employees
of Certain Tax-Exempt Organizations or Public Educational Institutions)
Contributions. Under section 403(b) of the Code, payments made by
certain employers (i.e., tax-exempt organizations, meeting the
requirements of section 501(c)(3) of the Code and public educational
institutions) to purchase annuity contracts for their employees are
excludable from the gross income of employees to the extent that the
aggregate Contributions do not exceed the limitations prescribed by
section 402(g), section 403(b)(2), and section 415 of the Code. This
gross income exclusion applies to employer contributions and voluntary
salary reduction contributions.
An individual's voluntary salary reduction contributions under section
403(b) are generally limited to the lesser of $9,500 or 25 percent of
net salary (or 20 percent of gross salary); additional catch-up
contributions are permitted under certain circumstances. Combined
employer and salary reduction contributions are generally limited to
approximately 25 percent of net salary. In addition, for plan years
beginning after December 31, 1988, employer contributions must comply
with various nondiscrimination rules; these rules may have the effect
of further limiting the rate of employer contributions for highly
compensated employees.
Taxation of Distributions. Distributions are restricted. The
restrictions apply to amounts accumulated after December 31, 1988
(including voluntary contributions after that date and earnings on
prior and current voluntary contributions). These restrictions require
that no distributions will be permitted prior to one of the following
events: (1) attainment of age 59 1/2, (2) separation from service, (3)
death, (4) disability, or (5) hardship (hardship distributions will be
limited to the amount of salary reduction contributions exclusive of
earnings thereon).
All distributions, other than distributions from after-tax
Contributions, from a section 403(b) annuity Plan are taxed as ordinary
income of the recipient in accordance with section 72 of the Code and
are subject to 20% income tax withholding. Distributions received
before the recipient attains age 59 1/2 generally are subject to a 10%
penalty tax in addition to regular income tax. Certain distributions
are excepted from this penalty tax, including distributions following
(1) death, (2) disability, (3) separation from service during or after
the year the Plan Participant reaches age 55, (4) separation from
service at any age if the distribution is in the form of payments over
the life (or life expectancy) of the Plan Participant (or the Plan
Participant and beneficiary), and (5) distributions not in excess of
tax deductible medical expenses.
Required Distributions. Generally, distributions from section 403(b)
Plans must commence no later than April 1 of the calendar year
following the calendar year in which the Plan Participant attains age
70 1/2 and such distributions must be made over a period that does not
exceed the life expectancy of the Plan Participant (or the Plan
Participant and beneficiary). Plan Participants employed by
governmental entities and certain church organizations may delay the
commencement of payments until April 1 of the calendar year following
retirement if they remain employed after attaining age 70 1/2. However,
upon the death of the Plan Participant prior to the commencement of
annuity payments, the amount accumulated under the contract must be
distributed within five years or, if distributions to a beneficiary
designated under the contract commence within one year of the Plan
Participant's death, distributions are permitted over the life of the
beneficiary or over a period not extending beyond the beneficiary's
life expectancy. If the Plan Participant has commenced receiving
annuity distributions prior to the Plan Participant's death,
distributions must continue at least as rapidly as under the method in
effect at the date of death. Amounts accumulated under a contract on
December 31, 1986, are not subject to these minimum distributions
requirements. A penalty tax of 50% will be imposed on the amount by
which the minimum required distribution in any year exceeds the amount
actually distributed in that year.
Tax-Free Transfers and Rollovers. The Code provides for the tax-free
exchange of one annuity contract for another annuity contract, and the
IRS has ruled that total or partial amounts transferred between section
403(b) annuity contracts and/or 403(b)(7) custodial accounts may
qualify as tax-free exchanges under certain circumstances. In addition,
section 403(b) of the Code permits tax-free rollovers of eligible
rollover distributions from section 403(b) programs to Individual
Retirement Accounts (IRAs) under certain circumstances. If an eligible
rollover distribution is taken as a direct rollover to an IRA (or
another 403(b) plan) the mandatory 20% income tax withholding does not
apply. However, the 20% mandatory withholding requirement does apply to
an eligible rollover distribution that is not made as a direct
rollover. In addition, such a rollover must be completed within 60 days
of receipt of the distribution.
2. Public Employee Deferred Compensation Plans-- (Section 457 Unfunded
Deferred Compensation Plans of Public Employers and Tax-Exempt
Organizations)
Contributions. Under section 457 of the Code, individuals who perform
services for a unit of a state or local government may participate in a
deferred compensation program. Tax-exempt employers may establish
deferred compensation plans under section 457 only for a select group
of management or highly compensated employees and/or independent
contractors.
This type of program allows individuals to defer the receipt of
compensation which would otherwise be presently payable and to
therefore defer the payment of Federal income taxes on the amounts.
Assuming that the program meets the requirements to be considered a
Public Employee Deferred Compensation Plan (an "PEDC Plan"), an
individual may contribute (and thereby defer from current income for
tax purposes) the lesser of $7,500 or 331/3% of the individuals
includible compensation. (Includible compensation means compensation
from the employer which is current includible in gross income for
Federal tax purposes.) During the last three years before an individual
attains normal retirement age, additional catch-up deferrals are
permitted.
The amounts which are deferred may be used by the employer to purchase
the contract offered by this prospectus. The contract is owned by the
employer and, in fact, is subject to the claims of the employer's
creditors. The employee has no present rights or vested interest in the
contract and is only entitled to payment in accordance with the PEDC
Plan provisions.
Taxation of Distributions. Amounts received by an individual from an
PEDC Plan are includible in gross income for the taxable year in which
such amounts are paid or otherwise made available.
Distributions Before Separation from Service. Distributions generally
are not permitted under an PEDC Plan prior to separation from service
except for unforeseeable emergencies. Emergency distributions are
includible in the gross income of the individual in the year in which
paid.
Required Distributions. The minimum distribution requirements for PEDC
Plans are generally the same as those for qualified plans and section
403(b) Plans, except that no amounts are exempted from minimum
distribution requirements.
Tax Free Transfers and Rollovers. Federal income tax law permits the
tax free transfer of PEDC Plan amounts to another PEDC Plan, but not to
an IRA or other type of plan.
3. 401(a) Plans
Contributions. Payments made by employers to purchase annuity contracts
for qualified pension and profit sharing plans, under Section 401(a) of
the Code, are excludable from the gross income of employees to the
extent that the aggregate Contributions do not exceed the limitations
prescribed by section 402(g), and section 415 of the Code. This gross
income exclusion applies to employer contributions and voluntary salary
reduction contributions.
An individual's voluntary salary reduction contributions for a 401(k)
plan are generally limited to $10,000 (1998 limit).
For 401(a) qualified plans, the maximum annual contribution that a
member can receive is limited to the lesser of 25% of includible
compensation or $30,000.
Taxation of Distributions. Distributions are restricted. These
restrictions require that no distributions of employer contributions or
salary deferrals will be permitted prior to one of the following
events: (1) attainment of age 59 1/2, (2) separation from service, (3)
death, (4) disability, or (5) for certain 401(a) Plans, hardship
(hardship distributions will be limited to the amount of salary
reduction contributions exclusive of earnings thereon). In-service
distributions may be permitted under various circumstances in certain
plans.
All distributions from a section 401(a) Plan are taxed as ordinary
income of the recipient in accordance with section 72 of the Code.
Distributions received before the recipient attains age 59 1/2
generally are subject to a 10% penalty tax in addition to regular
income tax. Certain distributions are excepted from this penalty tax,
including distributions following (1) death, (2) disability, 3)
separation from service during or after the year the Plan Participant
reaches age 55, (4) separation from service at any age if the
distribution is in the form of payments over the life (or life
expectancy) of the Plan Participant (or the Plan Participant and
beneficiary), and (5) distributions not in excess of tax deductible
medical expenses.
Required Distributions. Generally, distributions from section 401(a)
Plans must commence no later than April 1 of the calendar year
following the calendar year in which the Plan Participant attains age
70 1/2 and such distributions must be made over a period that does not
exceed the life expectancy of the Plan Participant (or the Plan
Participant and beneficiary). Following the death of the Plan
Participant, the distribution requirements are generally the same as
those described with respect to 403(b) Plans. A penalty tax of 50% will
be imposed on the amount by which the minimum required distribution in
any year exceeds the amount actually distributed in that year.
Tax-Free Transfers and Rollovers. The Code provides for the tax-free
exchange of one annuity contract for another annuity contract.
Distributions from a 401(a) Plan may also be transferred to a Rollover
IRA.
4. Creditor-Exempt Non-Qualified Plans
Certain employers may establish Creditor-Exempt Non-Qualified Plans.
Under such Plans the employer formally funds the Plan either by
purchasing an annuity contract or by transferring funds on behalf of
Plan Participants to a trust established for the benefit of such Plan
Participants with a direction to the trustee to use the funds to
purchase an annuity contract. The Trustee is the Contractholder and is
considered the nominal owner of the contract. Each Plan Participant as
a Trust beneficiary, is an Owner of Benefits under the contract and is
treated as the owner for income tax purposes.
Taxation of Contract Earnings. Since each Plan Participant for income
tax purposes is considered the owner of the Investment Account or
Accounts which correlate to such Participant, any increase in a
Participant's Investment Account Value resulting from the investment
performance of the contract is not taxable to the Plan Participant
until received by such Plan Participant.
Contributions. Payments made by the employer to the Trust on behalf of
a Plan Participant are currently includible in the Plan Participant's
gross income as additional compensation and, if such payments coupled
with the Plan Participant's other compensation is reasonable in amount,
such payments are currently deductible as compensation by the Employer.
Taxation of Distributions. In general, partial withdrawals from an
Investment Account that are not received by a Plan Participant as an
annuity under the contract allocated to post-August 13, 1982
Contributions under a pre-existing contract are taxed as ordinary
income to the extent of the accumulated income or gain under the
contract. Partial redemptions from a contract that are allocated to
pre-August 14, 1982 Contributions under a pre-existing contract are
taxed only after the Plan Participant has received all of the
"investment in the contract" (Contributions less any amounts previously
received and excluded from gross income).
In the case of a complete redemption of an Investment Account under the
contract (regardless of the date of purchase), the amount received will
be taxed as ordinary income to the extent that it exceeds the Plan
Participant's investment in the contract.
If a Contractholder purchases two or more contracts from the Company
(or an affiliated company) within any twelve month period after October
21, 1988, those contracts are treated as a single contract for purposes
of measuring the income on a partial redemption or complete surrender.
When payments are received as an annuity, the Plan Participant's
investment in the contract is treated as received ratably over the
expected payment period of the annuity and excluded from gross income
as a tax-free return of capital. Individuals who commence receiving
annuity payments on or after January 1, 1987, can exclude from income
only their unrecovered investment in the contract. Where such
individuals die before they have recovered their entire investment in
the contract on a tax-free basis, they are entitled to a deduction of
the unrecovered amount on their final tax return.
In addition to regular income taxes, there is a 10% penalty tax on the
taxable portion of a distribution received before the Plan Participant
attains age 59 1/2 under the contract, unless the distribution is; (1)
made to a beneficiary on or after death of the Plan Participant, (2)
made upon the disability of the Plan Participant; (3) part of a series
of substantially equal annuity payments for the life or life expectancy
of the Plan Participant or the Plan Participant and beneficiary; (4)
made under an immediate annuity contract, or (5) allocable to
Contributions made prior to August 14, 1982.
Required Distributions. The Internal Revenue Code does not require a
Plan Participant under a Creditor-Exempt Non-Qualified Plan to commence
receiving distributions at any particular time and does not limit the
duration of annuity payments. However, the contract provides the
Annuity Commencement Date must be no later than the April 1 of the
calendar year following the calendar year in which the Plan Participant
attains age 70 1/2. However, upon the death of the Plan Participant
prior to the commencement of annuity payments, the amount accumulated
under the contract for the Plan Participant must be distributed within
five years or, if distributions to a beneficiary designated under the
contract commence within one year of the Plan Participant's death,
distributions are permitted over the life of the beneficiary or over a
period not extending beyond the beneficiary's life expectancy. If the
Plan Participant has commenced receiving annuity distributions prior to
the Plan Participant's death, distributions must continue at least as
rapidly as under the method in effect at the date of death.
Tax-Free Exchanges. Under Section 1035 of the Code, the exchange of one
annuity contract for another is not a taxable transaction, but is
reportable to the IRS. Transferring Investment Account Values from this
contract to a Companion Contract would fall within the provisions of
Section 1035 of the Code.
5. General Creditor Non-Qualified Plans
Contributions. Private taxable employers may establish informally
funded, General Creditor Non-Qualified Plans for a select group of
management or highly compensated employees and/or independent
contractors. Certain arrangements of nonprofit employers entered into
prior to August 16, 1989, and not subsequently modified, are subject to
the rules discussed below.
Informally funded General Creditor Non-Qualified Plans represent a bare
contractual promise on the part of the employer to pay wages at some
future time. The contract used to informally fund the employer's
obligation is owned by the employer and is subject to the claims of the
employer's creditors. The Plan Participant has no present right or
vested interest in the contract and is only entitled to payment in
accordance with Plan provisions. If the Employer who is the
Contractholder, is not a natural person, the contract does not receive
tax-deferred treatment afforded other Contractholders under the
Internal Revenue Code.
Taxation of Distributions. Amounts received by an individual from a
General Creditor Non-Qualified Plan are includible in the employee's
gross income for the taxable year in which such amounts are paid or
otherwise made available. Such amounts are deductible by the employer
when paid to the individual.
B. Fund Diversification
Separate Account B investments must be adequately diversified in order for
the increase in the value of Creditor-Exempt Non-Qualified Contracts to
receive tax-deferred treatment. In order to be adequately diversified, the
portfolio of each underlying 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
Creditor-Exempt Non-Qualified Contractholders.
The investment opportunities of the Accounts could conceivably be limited
by adhering to the above diversification requirements. This would affect
all Contractholders, including those owners of contracts for whom
diversification is not a requirement for tax-deferred treatment.
STATE REGULATION
The Company is subject to the laws of the State of Iowa governing insurance
companies and to regulation by the Insurance Department of the State of Iowa. An
annual statement in a prescribed form must be filed by March 1 in each year
covering the operations of the Company for the preceding year and its financial
condition on December 31st of such year. Its books and assets are subject to
review or examination by the Commissioner of Insurance of the State of Iowa or
his representatives at all times, and a full examination of its operations is
conducted periodically by the National Association of Insurance Commissioners.
Iowa law and regulations also prescribe permissible investments, but this does
not involve supervision of the investment management or policy of the Company.
In addition, the Company is subject to the insurance laws and regulations
of other states and jurisdictions in which it is licensed to operate. Generally,
the insurance departments of these states and jurisdictions apply the laws of
the state of domicile in determining the field of permissible investments.
LEGAL OPINIONS
Legal matters applicable to the issue and sale of the Contracts, including
the right of the Company to issue Contracts under Iowa Insurance Law, have been
passed upon by Gregg Narber, Senior Vice President and General Counsel of the
Company.
LEGAL PROCEEDINGS
There are no legal proceedings pending to which Separate Account B is a
party or which would materially affect Separate Account B.
REGISTRATION STATEMENT
This Prospectus omits some information contained in the Statement of
Additional Information (or Part B of the Registration Statement) and Part C of
the Registration Statement which the Company has filed with the Securities and
Exchange Commission. The Statement of Additional Information is hereby
incorporated by reference into this Prospectus. A copy of the Statement of
Additional Information can be obtained upon request, free of charge, by writing
or telephoning Princor Financial Services Corporation. You may obtain a copy of
Part C of the Registration Statement filed with the Securities and Exchange
Commission, Washington, D.C. from the Commission upon payment of the prescribed
fees.
INDEPENDENT AUDITORS
The financial statements of Principal Life Insurance Company Separate
Account B and the financial statements of Principal Life Insurance Company which
are included in the Statement of Additional Information have been audited by
Ernst & Young LLP, independent auditors, for the periods indicated in their
reports thereon which appear in the Statement of Additional Information.
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.
CONTRACTHOLDERS' INQUIRIES
Contractholders' inquiries should be directed to Princor Financial Services
Corporation, a company of the Principal Financial Group, Des Moines, Iowa
50392-0200, (515) 247-5711.
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
The table of contents for the Statement of Additional Information is
provided below.
TABLE OF CONTENTS
Page
Independent Auditors......................................................3
Underwriting Commissions..................................................3
Calculation of Yield and Total Return.....................................3
Principal Life Insurance Company Separate Account B
Report of Independent Auditors...................................7
Financial Statements.............................................8
Principal Life Insurance Company
Report of Independent Auditors..................................31
Financial Statements............................................32
To obtain a copy of the Statement of Additional Information, free of
charge, write or telephone:
Princor Financial Services Corporation
a company of
the Principal Financial Group
Des Moines, IA 50392-0200
Telephone: 1-800-633-1373
PART B
PRINCIPAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT B
PERSONAL VARIABLE (A GROUP VARIABLE ANNUITY CONTRACT FOR
EMPLOYER SPONSORED QUALIFIED AND NON-QUALIFIED RETIREMENTPLANS)
Statement of Additional Information
dated May 1, 1999
This Statement of Additional Information provides information about Principal
Life Insurance Company Separate Account B Personal Variable - Group Variable
Annuity Contracts (the "Contract" or the "Contracts") in addition to the
information that is contained in the Contract's Prospectus, dated May 1, 1999.
This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the Prospectus, a copy of which can be obtained free of
charge by writing or telephoning:
Princor Financial Services Corporation
a company of
the Principal Financial Group
Des Moines Iowa 50392-0200
Telephone: 1-800-633-1373
TABLE OF CONTENTS
Independent Auditors ....................................................... 3
Underwriting Commissions ................................................... 3
Calculation of Yield and Total Return....................................... 3
Principal Life Insurance Company Separate Account B
Report of Independent Auditors...................................... 7
Financial Statements................................................ 8
Principal Life Insurance Company
Report of Independent Auditors...................................... 31
Financial Statements................................................ 32
INDEPENDENT AUDITORS
Ernst & Young LLP, Des Moines, Iowa, serve as independent auditors for Principal
Life Insurance Company Separate Account B and the Principal Life Insurance
Company and perform audit and accounting services for Separate Account B and the
Principal Life Insurance Company.
UNDERWRITING COMMISSIONS
Aggregate dollar amount of underwriting commissions paid to and retained by
Princor Financial Services Corporation for all Separate Account B contracts:
Year Paid To Retained by
---- ------- -----------
1998 $13,709,101.12 _
1997 $11,491,356.06 $340.24
1996 $11,090,837.12 $14,528.47
1995 $5,326,848.77 $26,014.78
CALCULATION OF YIELD AND TOTAL RETURN
The Separate Account may publish advertisements containing information
(including graphs, charts, tables and examples) about the performance of one or
more of its Divisions. The contract was not offered prior to July 15, 1992.
However, the Divisions invest in Accounts of the Principal Variable Contract
Fund, Inc. These Accounts 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:
Old Mutual Fund Name New Corresponding Account Name
-------------------- ------------------------------
Principal Balanced Fund, Inc. Balanced Account
Principal Bond Fund, Inc. Bond Account
Principal Capital Accumulation Fund, Inc. Capital Value Account
Principal Emerging Growth Fund, Inc. MidCap Account
Principal Government Securities Fund, Inc. Government Securities Account
Principal Growth Fund, Inc. Growth Account
Principal Money Market Fund, Inc. Money Market Account
Principal World Fund, Inc. International Account
Some of the Accounts (under their former names) were offered prior to the date
that the Contract was available. Thus, the Separate Account may publish
advertisements containing information about the hypothetical performance of one
or more of its Divisions for this contract had the contract been issued on or
after the date the Account in which such Division invests was first offered. The
hypothetical performance from the date of inception of the Account in which the
Division invests 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 will 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 as published by independent statistical services or publishers and
information regarding performance of certain market indices. Any performance
data quoted for the Separate Account represents only historical performance and
is not intended to indicate future performance.
From time to time the Account advertises its Money Market Division's "yield" and
"effective yield" for these contracts. Both yield figures are based on
historical earnings and are not intended to indicate future performance. The
"yield" of the Division refers to the income generated by an investment under
the contract in the Division over a seven-day period (which period will be
stated in the advertisement). This income is then "annualized." That is, the
amount of income generated by the investment during that week is assumed to be
generated each week over a 52-week period and is shown as a percentage of the
investment. The "effective yield" is calculated similarly but, when annualized,
the income earned by an investment in the division is assumed to be reinvested.
The "effective yield" will be slightly higher than the "yield" because of the
compounding effect of this assumed reinvestment. Neither yield quotation
reflects sales load deducted from purchase payments that, if included, would
reduce the "yield" and "effective yield." For the period ended December 31,
1998, the 7-day annualized and effective yields were 4.01% and 4.15%,
respectively.
From time to time, the Separate Account will advertise the average annual total
return of its various divisions for these contracts. The average annual total
return for any of the divisions is computed by calculating the average annual
compounded rate of return over the stated period that would equate an initial
$1,000 investment to the ending redeemable contract value. In this calculation
the ending value is reduced by a contingent deferred sales charge that decreases
from 5% to 0% over a period of 7 years. The Separate Account may also advertise
total return figures of its Divisions for a specified period that does not take
into account the sales charge in order to illustrate the change in the
Division's unit value over time. See "Deductions Under the Contract" for a
discussion of contingent deferred sales charges.
Assuming the contract had been offered as of the dates indicated in the table
below, the hypothetical average annual total returns for the periods ending
December 31, 1998 are:
<TABLE>
<CAPTION>
With Contingent Deferred Without Contingent Deferred
Sales Charge Sales Charge
-------------------------- ---------------------------
One Five Ten One Five Ten
Year Year Year Year Year Year
------ ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Balanced Division 6.24 11.43 11.18 10.97 11.72 11.18
Bond Division 2.21 6.41 8.34 6.76 6.68 8.34
Capital Value Division 7.80 17.65 13.97 12.60 17.95 13.97
Government Securities Division 2.76 5.78 8.23 7.34 6.05 8.23
Growth Division 15.18 18.00(1) N/A 20.31 18.52(1) N/A
International Division 4.39 10.69(1) N/A 9.03 11.18(1) N/A
MidCap Division (1.59) 13.58 15.16 2.79 13.87 15.16
Money Market Division (0.10) 3.75 4.35 4.34 4.02 4.35
<FN>
(1) Period from May 2, 1994 - December 31, 1998
</FN>
</TABLE>
Assuming the contract had been offered as of the dates indicated in the table
below and assuming the Contract Administration Expense/Recordkeeping Charge is
not deducted from Investment Accounts, the hypothetical average annual total
returns for the periods ending December 31, 1998 are:
<TABLE>
<CAPTION>
With Contingent Deferred Without Contingent Deferred
Sales Charge Sales Charge
-------------------------- ---------------------------
One Five Ten One Five Ten
Year Year Year Year Year Year
------ ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Balanced Division 6.48 11.79 11.70 11.20 12.07 11.70
Bond Division 2.45 6.75 8.84 7.00 7.02 8.84
Capital Value Division 8.06 18.03 14.49 12.86 18.33 14.49
Government Securities Division 3.01 6.12 8.73 7.58 6.39 8.73
Growth Division 15.46 18.26(1) N/A 20.58 18.77(1) N/A
International Division 4.64 10.94(1) N/A 9.28 11.42(1) N/A
MidCap Division -1.35 13.95 15.56 3.02 14.24 15.56
Money Market Division 0.14 4.09 4.83 4.58 4.35 4.83
<FN>
(1) Period from May 2, 1994 - December 31, 1998
</FN>
</TABLE>
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
PERSONAL VARIABLE CONTRACT
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements included in the Registration Statement
(1) Part A:
Condensed Financial Information for the six years ended
December 31, 1998 and for the period beginning July 15,
1992 and ended December 31, 1992.
(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 3/1/96)
(3a) Distribution Agreement (Filed 3/1/96)
(3b) Selling Agreement (Filed 3/1/96)
(4a) Form of Variable Annuity Contract (Filed 12/16/97)
(4b) Variable Annuity Contract Endorsement (Filed 12/16/97)
(4c) Variable Annuity Contract Rider (Filed 12/16/97)
(5) Form of Variable Annuity Application (Filed 10/23/97)
(6a) Articles of Incorporation of Depositor (Filed 3/1/96)
(6b) Bylaws of Depositor (Filed 3/1/96)
(9) Opinion of Counsel (Filed 3/1/96)
(10a) Consent of Ernst & Young LLP
(10b) Powers of Attorney
(13a) Total Return Calculation (Filed 3/1/96)
(13b) Annualized Yield for Separate Account B (Filed 3/1/96)
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 Mutual Life Insurance Company Separate Account B, a registered unit
investment trust for retirement plans adopted by public school systems or
certain tax-exempt organizations pursuant to Section 403(b) of the Internal
Revenue Code, Section 457 retirement plans, Section 401(a) retirement plans,
certain non- qualified deferred compensation plans and Individual Retirement
Annuity Plans adopted pursuant to Section 408 of the Internal Revenue Code, and
for variable life insurance contracts issued by Principal Mutual Life Insurance
Company Variable Life Separate Account, a registered unit investment trust.
(b) (1) (2)
Positions
and offices
Name and principal with principal
business address underwriter
John E. Aschenbrenner Director
The Principal
Financial Group
Des Moines, IA 50392
Robert W. Baehr Marketing Services
The Principal Officer
Financial Group
Des Moines, IA 50392
Craig L. Bassett Treasurer
The Principal
Financial Group
Des Moines, IA 50392
Michael J. Beer 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 that in restricting cash withdrawals from
Tax Sheltered Annuities to prohibit cash withdrawals before the
Participant attains age 59 1/2, separates from service, dies, or
becomes disabled or in the case of hardship, Registrant acts in
reliance of SEC No Action Letter addressed to American Counsel of Life
Insurance (available November 28, 1988). Registrant further undertakes
that:
1. Registrant has included appropriate disclosure regarding the
redemption restrictions imposed by Section 403(b)(11) in its
registration statement, including the prospectus, used in
connection with the offer of the contract;
2. Registrant will include appropriate disclosure regarding the
redemption restrictions imposed by Section 403(b)(11) in any
sales literature used in connection with the offer of the
contract;
3. Registrant will instruct sales representatives who solicit Plan
Participants to purchase the contract specifically to bring the
redemption restrictions imposed by Section 403(b)(11) to the
attention of the potential Plan Participants; and
4. Registrant will obtain from each Plan Participant who purchases a
Section 403(b) annuity contract, prior to or at the time of such
purchase, a signed statement acknowledging the Plan Participant's
understanding of (a) the restrictions on redemption imposed by
Section 403(b)(11), and (b) the investment alternatives available
under the employer's Section 403(b) arrangement, to which the
Plan Participant may elect to transfer his contract value.
REPRESENTATION PURSUANT TO SECTION 26 OF THE INVESTMENT COMPANY ACT OF 1940
Principal Mutual Life Insurance Company represents the fees and charges deducted
under the Policy, in the aggregate, are reasonable in relation to the services
rendered, the expenses expected to be incurred, and the risks assumed by the
Company.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, Principal Life Insurance Company
Separate Account B, certifies that it meets the requirements of Securities Act
Rule 485(b) for effectiveness of the Registration Statement and has duly caused
this Amendment to the Registration Statement to be signed on its behalf by the
undersigned thereto duly authorized in the City of Des Moines and State of Iowa,
on the 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 19, 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
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 Post-Effective Amendment No. 13 to the Registration Statement (Form
N-4 No. 33-44565) and related Prospectus of Principal Life Insurance Company
Separate Account B Personal Variable (a Group Variable Annuity Contract for
Employer-Sponsored Qualified and Non-Qualified Retirement Plans).
/s/ Ernst & Young LLP
Des Moines, Iowa
April 19, 1999
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
14th day of April, 1999.
/s/ Betsy J. Bernard
__________________________
B. J. Bernard
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
14th day of April, 1999.
/s/ Jocelyn Carter-Miller
__________________________
J. Carter-Miller
