Flexible Variable Annuity
Issued by Principal Life Insurance Company (the "Company")
This Prospectus is dated May 1, 1999.
The individual deferred annuity contract ("Contract") described in this
Prospectus is funded with the Principal Life Insurance Company Separate Account
B ("Separate Account") and a fixed account ("Fixed Account"). The assets of the
divisions of the Separate Account are invested in a corresponding Account of the
Principal Variable Contracts Fund, Inc. The Fixed Account is a part of the
General Account of the Company.
This prospectus provides information about the Contract and the Separate Account
that you should know before investing. It should be read and retained for future
reference. Additional information about the Contract is included in the
Statement of Additional Information ("SAI"), dated May 1, 1999, which has been
filed with the Securities and Exchange Commission (the "SEC"). The SAI is a part
of this prospectus. The table of contents of the SAI is on page 36 of this
prospectus. You may obtain a free copy of the SAI by writing or telephoning:
Flexible Variable Annuity
Principal Financial Group
P.O. Box 9382
Des Moines, Iowa 50306-9382
Telephone: 1-800-247-9988
An investment in the Contract is not a deposit nor obligation of any bank and is
not insured nor guaranteed by any bank, the Federal Deposit Insurance
Corporation nor any other government agency.
These securities have not been approved or disapproved by the Securities and
Exchange Commission or any state securities commission nor has the Securities
and Exchange Commission or any state securities commission passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
This prospectus is valid only when accompanied by the current prospectus for the
Principal Variable Contracts Fund, Inc. (the "Fund"). These prospectuses should
be kept for future reference.
TABLE OF CONTENTS
Glossary...................................................................... 4
Summary of Expense Information................................................ 5
Summary....................................................................... 7
Investment Limitations................................................... 7
Separate Account Investment Options...................................... 7
Transfers................................................................ 8
Surrenders............................................................... 8
Charges and Deductions................................................... 8
Annuity Payments......................................................... 8
Death Benefit............................................................ 8
Free-Look Provision...................................................... 8
Condensed Financial Information............................................... 9
The Principal Flexible Variable Annuity.......................................10
The Company ................................................................10
The Separate Account..........................................................10
The Fund......................................................................11
Manager and Sub-Advisors......................................................13
Surplus Distributions.........................................................14
The Contract ................................................................14
To Buy a Contract........................................................14
Purchase Payments....................................................15
Allocation of Purchase Payments and Free-Look Period.................15
Right to Examine the Contract........................................15
Exchange Credit......................................................16
The Accumulation Period..................................................16
The Value of Your Contract...........................................16
Allocation of Purchase Payments......................................17
Separate Account Division Transfers..................................18
Automatic Portfolio Rebalancing......................................18
Telephone Services...................................................19
Separate Account Surrenders..............................................19
Total Surrender......................................................19
Unscheduled Partial Surrender........................................19
Scheduled Partial Surrender..........................................20
Death Benefit............................................................20
Standard Death Benefit...............................................20
Annual Enhanced Death Benefit........................................21
Payment of Death Benefit.............................................21
Death of Annuitant...................................................21
The Annuity Payment Period...............................................22
Annuity Payment Date.................................................22
Annuity Payment Options..............................................22
Charges and Deductions........................................................23
Annual Fee...............................................................23
Mortality and Expense Risks Charge.......................................24
Transaction Fee..........................................................24
Premium Taxes............................................................24
Surrender Charge.........................................................24
Waiver of Surrender Charge...........................................25
Administration Charge....................................................26
Special Provisions for Group or Sponsored Arrangements...................26
Fixed Account ................................................................27
General Description......................................................27
Fixed Account Value......................................................27
Fixed Account Transfers, Total and Partial Surrender.....................27
Single Unscheduled Transfer..........................................28
Scheduled Fixed Account Transfer.....................................28
General Provisions............................................................28
The Contract.............................................................28
Delay of Payments........................................................28
Misstatement of Age or Gender............................................29
Assignment...............................................................29
Change of Owner..........................................................29
Beneficiary..............................................................29
Contract Termination.....................................................29
Reinstatement............................................................29
Reports ................................................................30
Rights Reserved by the Company................................................30
Distribution of the Contract..................................................30
Performance Calculation.......................................................30
Voting Rights ................................................................31
Federal Tax Matters...........................................................32
Non-Qualified Contracts..................................................32
Required Distributions for Non-Qualified Contracts.......................32
IRA, SEP and SIMPLE-IRA..................................................33
Withholding..............................................................33
Year 2000 Readiness Disclosure................................................34
Mutual Fund Diversification...................................................35
State Regulation..............................................................35
Legal Opinions................................................................35
Legal Proceedings.............................................................35
Registration Statement........................................................35
Other Variable Annuity Contracts..............................................35
Independent Auditors..........................................................36
Financial Statements..........................................................36
Customer Inquiries............................................................36
Table of Contents of the Statement of Additional Information..................36
The Contract offered by this prospectus may not be available in all states. This
prospectus is not an offer to sell, or solicitation of an offer to buy, the
Contract in states in which the offer or solicitation may not be lawfully made.
No person is authorized to give any information or to make any representation in
connection with this Contract other than those contained in this prospectus.
GLOSSARY
Account - series or portfolio of a mutual fund in which a Separate Account
division invests.
Accumulated value - an amount equal to the Fixed Account value plus the Separate
Account value.
Anniversary - the same date and month of each year following the Contract date.
Annuitant - the person, including any joint annuitant, on whose life the benefit
option payment is based. This person may or may not be the owner.
Annuity payment date - the date the owner's accumulated value is applied, under
an annuity payment option, to make income payments.
Contract date - the date that the Contract is issued and which is used to
determine Contract years.
Contract year - the one-year period beginning on the contract date and ending
one day before the Contract anniversary and any subsequent one year period
beginning on a Contract anniversary.
Division - a part of the Separate Account which invests in shares of an account
of a mutual fund.
Fixed Account - an account which earns guaranteed interest.
Fixed Account Value - The amount of your accumulated value which is in the Fixed
Account.
Joint annuitant - additional annuitant. Joint annuitants must be husband and
wife and must be named as owner and joint owner. Any reference to the
annuitant's death means the death of the last surviving annuitant.
Joint owner - an owner who has an undivided interest with the right of
survivorship in this Contract with another owner. Joint owners must be husband
and wife and must be named as annuitant and joint annuitant. Any reference to
the owner's death means the death of the last surviving owner.
Mutual fund - a registered open-end investment company in which a division
invests.
Notice - any form of written communication received by us, at our home office
P.O. Box 9382, Des Moines, Iowa 50306-9382, or in another form approved by us in
advance.
Owner - the person, including joint owner, who owns all the rights and
privileges of this contract.
Purchase payments - the gross amount contributed to the contract. Fixed Account
purchase payments include transfers into the Fixed Account from any Separate
Account division.
Separate Account B - an account established by us under Iowa law to receive
purchase payments under the Contract and other contracts issued by us. It is
divided into divisions which invest in shares of an Account of a mutual fund.
Divisions can be added, eliminated or combined in the future.
Separate Account Value - the amount of your accumulated value in all divisions
of the Separate Account.
Surrender Charge - the charge deducted upon any partial or total surrender of
the Contract before the annuity payment date.
Unit - the accounting measure used to calculate the value of the Separate
Account prior to annuity payment date.
Unit value - a measure used to determine the value of an investment in a
division.
Valuation date - the date as of which the net asset value of a mutual fund is
determined.
Valuation period - the period of time between determination of asset value on
one valuation date and the next valuation date.
SUMMARY OF EXPENSE INFORMATION
The purpose of these tables is to assist you in understanding the various costs
and expenses of the Contract. This information includes expenses of the Contract
as well as the Accounts but does not include any premium taxes that may apply.
For a more complete description of the Contract expenses, see CHARGES AND
DEDUCTIONS.
Contract owner transaction expenses:
o There is no sales charge imposed on purchase payments.
o Surrender charge (as a percentage of amounts surrendered):
<TABLE>
<CAPTION>
Table of Surrender Charges
--------------------------
Number of completed contract years Surrender charge applied to all purchase
since each purchase payment payments received in that contract year
---------------------------------- ----------------------------------------
<S> <C> <C>
2 years or less 6%
more than 2 years, up to 3 years 5%
more than 3 years, up to 4 years 4%
more than 4 years, up to 5 years 3%
more than 5 years, up to 6 years 2%
more than 6 years 0%
</TABLE>
o Transaction fee - a $30 fee is charged on each unscheduled partial
surrender after the 1st unscheduled partial surrender in a contract
year.
o Transfer fee - following the 12th unscheduled transfer among
divisions within a contract year each additional unscheduled transfer
results in a $30 fee.
o Annual contract fee - the lesser of $30 or 2% of the accumulated
value.
Separate Account annual expenses (as a percentage of average account
value)
mortality and expense risks charge 1.25%
other Separate Account expenses 0
-----
total Separate Account annual expenses 1.25%
Annual expense of Accounts (as a percentage of average net assets) as of
December 31, 1998.
Management Other Total Account
Account Fees Expenses Annual Expenses
------- ---------- -------- ---------------
Aggressive Growth 0.77% 0.01% 0.78%
Asset Allocation 0.80 0.09 0.89
Balanced 0.57 0.02 0.59
Bond 0.49 0.02 0.51
Capital Value 0.43 0.01 0.44
Government Securities 0.49 0.01 0.50
Growth 0.47 0.01 0.48
International 0.73 0.04 0.77
International SmallCap 1.21 0.13 1.34
MicroCap** 1.00 0.38 1.38
MidCap 0.61 0.01 0.62
MidCap Growth** 0.90 0.37 1.27
Money Market 0.50 0.02 0.52
Real Estate 0.90 0.10 1.00
SmallCap 0.85 0.40 0.40
SmallCap Growth** 1.01 0.13 0.98
SmallCap Value** 1.10 0.30 1.31
Utilities 0.60 0.09 0.69
* Estimated
**Manager has agreed to reimburse expenses, if necessary, so that total
Account operating expenses for 1999 will be:
MicroCap 1.06% SmallCap Value 1.16%
MidCap Growth 0.96% Stock Index 500 0.40%
SmallCap Growth 1.06%
Example:
The purpose of the following examples is to assist you in understanding the
various costs and expenses that a contract owner bears directly or indirectly.
They reflect expenses of the Separate Account as well as the expenses of the
Account in which the Separate Account invests. In certain circumstances, state
premium taxes also apply.
The examples should not be considered representations of past or future
expenses. Actual expenses may be more or less than those shown.
If you surrender your Contract at the end of the applicable time period, you
would pay the following expenses on a $1,000 investment, assuming 5% annual
return on assets and that expenses were the same as Account expenses for the
last fiscal year.
Separate Account Division 1 Year 3 Years 5 Years 10 Years
------------------------- ------ ------- ------- --------
Aggressive Growth $83 $119 $146 $239
Asset Allocation 84 122 151 250
Balanced 81 114 136 219
Bond 80 111 132 211
Capital Value 79 109 129 203
Government Securities 80 111 132 210
Growth 80 110 131 207
International 83 119 145 238
International SmallCap 88 135 173 296
MicroCap 85 127 159 268
MidCap 81 115 138 222
MidCap Growth 84 124 154 258
Money Market 80 112 133 212
Real Estate 85 125 156 262
SmallCap 85 125 155 260
SmallCap Growth 85 127 159 268
SmallCap Value 86 130 164 278
Stock Index 500* 85 125 N/A N/A
Utilities 82 117 141 230
* Estimated
If you annuitize at the end of the applicable time period or do not surrender
your Contract, you would pay the following expenses on a $1,000 investment,
assuming 5% annual return on assets and that expenses were the same as Account
expenses for the last fiscal year.
Separate Account Division 1 Year 3 Years 5 Years 10 Years
------------------------- ------ ------- ------- --------
Aggressive Growth $21 $65 $111 $239
Asset Allocation 22 68 117 250
Balanced 19 59 101 219
Bond 18 56 97 211
Capital Value 17 54 93 203
Government Securities 18 56 97 210
Growth 18 55 95 207
International 21 64 110 238
International SmallCap 27 81 139 296
MicroCap 24 73 125 268
MidCap 19 60 103 222
MidCap Growth 23 70 120 258
Money Market 18 57 98 212
Real Estate 23 71 122 262
SmallCap 23 71 121 260
SmallCap Growth 24 73 125 268
SmallCap Value 25 76 130 278
Stock Index 500* 23 71 N/A N/A
Utilities 20 62 106 230
* Estimated
SUMMARY
This prospectus describes a flexible variable annuity offered by the Company.
The Contract is designed to provide individuals with retirement benefits,
including (1) Individual Retirement Annuity plans or programs ("IRA Plans"),
Simplified Employee Pension plans ("SEPs") and Savings Incentive Match Plan for
Employees ("SIMPLE") IRAs adopted according to Section 408 of the Internal
Revenue Code (the "Code") and (2) non-qualified retirement plans.
This is a brief summary of the Contract's features. More detailed information
follows later in this prospectus.
Investment Limitations
o Initial purchase payment must be $2,500 or more for non-qualified
retirement plan participants.
o Initial purchase payment must be $1,000 for all other contracts.
o Each subsequent payment must be at least $100.
o If you are a member of a retirement plan covering five or more persons and
payments are made through an automatic investment program, then the initial
and subsequent purchase payments for the contract must average at least
$100 and not be less than $50.
If purchase payments are not paid during two consecutive calendar years and the
accumulated value or total purchase payments less partial surrenders and
applicable surrender charges is less than $2,000, then we reserve the right to
terminate a Contract and distribute the accumulated value, less any applicable
charges.
Separate Account Investment Options (see THE FUND):
Division invests in:
- -------- -----------
Aggressive Growth Aggressive Growth Account
Asset Allocation Asset Allocation Account
Balanced Balanced Account
Bond Bond Account
Capital Value Capital Value Account
Government Securities Government Securities Account
Growth Growth Account
International International Account
International SmallCap International SmallCap Account
MicroCap MicroCap Account
MidCap MidCap Account
MidCap Growth MidCap Growth Account
Money Market Money Market Account
Real Estate Real Estate Account
SmallCap SmallCap Account
SmallCap Growth SmallCap Growth Account
SmallCap Value SmallCap Value Account
Stock Index 500 Stock Index 500 Account
Utilities Utilities Account
You may allocate your net premium payments to divisions of the Separate Account
and/or the Fixed Account. Currently there are nineteen 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.
Transfers (see Separate Account Transfers for additional restrictions)
During the accumulation period from the Separate Account divisions:
o dollar amount or percentage of transfer must be specified; and
o transfer may occur on a scheduled or unscheduled basis (a $30 fee is
imposed on each unscheduled transfer after the 12th unscheduled
transfer in a contract year).
During the annuity payment period, transfers are not permitted (no
transfers once payments have begun).
Surrenders (total or partial) (see THE CONTRACT - Separate Account Surrenders
and FIXED ACCOUNT - Fixed Account Transfers, Total and Partial Surrenders)
During the accumulation period:
o a dollar amount must be specified;
o surrendered amounts may be subject to surrender charge;
o total surrenders are subject to an annual fee;
o during a contract year partial surrenders less than the Contract's
earnings or 10% of purchase payments are not subject to a surrender
charge; and
o withdrawals before age 59 1/2 may involve an income tax penalty (see
Federal Tax Matters).
Charges and Deductions
o No sales charge on purchase payments.
o A contingent deferred surrender charge is imposed on certain total or
partial surrenders.
o A mortality and expense risks daily charge equal to 1.25% per year
applies to amounts in the Separate Account.
o Daily Separate Account administration charge is currently zero but we
reserve the right to assess a charge not to exceed 0.15% annually.
o Contracts with an accumulated value of less than $30,000 are subject to
an annual contract fee of the lesser of $30 or 2% of the accumulated
value.
o Currently there is no annual contract fee for Contracts with an
accumulated value of $30,000 or more.
o Certain states and local governments impose a premium tax. The Company
reserves the right to deduct the amount of the tax from purchase
payments or accumulated values.
Annuity Payments
o You may choose from several fixed annuity payment options which start
on your selected annuity payment date.
o Payments are made to the owner (or beneficiary depending on annuity
payment option selected). You should carefully consider the tax
implications of each annuity option (see THE CONTRACT - Annuity Payment
Options and FEDERAL TAX MATTERS).
o Your Contract refers to annuity payments as "retirement benefit"
payments.
Death Benefit
o If the annuitant or owner dies before the annuity payment date, then a
death benefit is payable to the beneficiary of the Contract.
o The death benefit may be paid as either a single sum cash benefit or
under a benefit option (see THE CONTRACT - Death Benefit).
o If the annuitant dies on or after the annuity payment date, then the
beneficiary will receive only any continuing payments which may be
provided by the annuity payment option in effect.
Free-Look Provision
o You may return the Contract during the free-look period which is
generally 10 days from the date you receive the contract. The free-look
period may be longer in certain states.
o We return either all purchase payments made or the accumulated value,
whichever is required by applicable state law.
CONDENSED FINANCIAL INFORMATION
Financial statements are included in the Statement of Additional Information.
Following are unit values for the Contract for the periods ended December 31.
<TABLE>
<CAPTION>
Number of
Accumulation
Accumulation Unit Value Units
Outstanding
Beginning End of Percentage of Change End of Period
of Period Period from Prior Period (in thousands)
--------- ------ -------------------- --------------
<S> <C> <C> <C> <C>
Aggressive Growth Division
Year Ended December 31
1998 23.628 27.815 17.72% 7,486
1997 18.340 23.689 29.17 6,077
1996 14.503 18.340 26.46 3,971
1995 10.184 14.503 42.41 1,324
1994(1) 10.075 10.184 1.08 362
Asset Allocation Division
Year Ended December 31
1998 15.477 16.690 7.84 3,762
1997 13.260 15.478 16.73 3,134
1996 11.891 13.260 11.51 2,264
1995 9.978 11.891 19.17 912
Period Ended December 31, 1994(1) 10.075 9.978 -0.96 303
Balanced Division
Year Ended December 31
1998 15.995 17.647 10.33 8,903
1997 13.708 15.966 16.47 6,717
1996 12.270 13.708 11.72 4,661
1995 9.972 12.270 23.04 1,373
Period Ended December 31, 1994(1) 10.266 9.972 -2.86 370
Bond Division
Year Ended December 31
1998 13.486 14.260 5.74 7,499
1997 12.275 13.408 9.23 5,017
1996 12.143 12.275 1.09 3,872
1995 10.064 12.143 20.66 1,401
Period Ended December 31, 1994(1) 10.050 10.064 0.14 301
Capital Value Division
Year Ended December 31
1998 20.676 23.156 12.00 11,720
1997 16.261 20.642 26.94 9,320
1996 13.333 16.261 21.96 6,267
1995 10.234 13.333 30.28 2,232
Period Ended December 31, 1994(1) 10.328 10.234 -0.91 699
Government Securities Division
Year Ended December 31
1998 13.096 13.954 6.55 8,554
1997 11.969 13.049 9.02 5,946
1996 11.728 11.969 2.06 5,443
1995 9.973 11.728 17.60 2,023
Period Ended December 31, 1994(1) 10.133 9.973 -1.93 572
Growth Division
Year Ended December 31
1998 18.099 21.657 19.66 9,863
1997 14.411 18.070 25.39 7,898
1996 12.970 14.411 11.11 6,089
1995 10.454 12.970 24.07 2,619
Period Ended December 31, 1994(1) 10.336 10.454 1.14 764
International Division
Year Ended December 31
1998 14.889 16.070 7.93 7,866
1997 13.347 14.795 10.85 7,316
1996 10.804 13.347 23.54 4,797
1995 9.582 10.804 12.75 2,146
Period Ended December 31, 1994(1) 9.624 9.582 -0.43 936
MidCap Division
Year Ended December 31
1998 18.664 19.125 2.47 10,738
1997 15.405 18.676 21.23 9,820
1996 12.880 15.405 19.60 7,285
1995 10.108 12.880 27.42 3,059
Period Ended December 31, 1994(1) 10.157 10.108 -0.48 973
Money Market Division
Year Ended December 31
1998 11.467 11.913 3.89 4,905
1997 11.027 11.463 3.95 2,752
1996 10.628 11.027 3.75 2,929
1995 10.194 10.628 4.26 1,370
Period Ended December 31, 1994(1) 10.027 10.194 1.67 702
<FN>
(1) Commenced operations on June 16, 1994.
</FN>
</TABLE>
THE PRINCIPAL FLEXIBLE VARIABLE ANNUITY
The Principal Flexible Variable Annuity is significantly different from a fixed
annuity. As the owner of a variable annuity, you assume the risk of investment
gain or loss (as to amounts in the Separate Account divisions) rather than the
insurance company. The amount of the annuity payment under a variable annuity is
not guaranteed. Payments vary with the investment performance of the portfolio
securities of the underlying Account.
Based on your investment objectives, you direct the allocation of purchase
payments and accumulated values. There can be no assurance that your investment
objectives will be achieved.
THE COMPANY
The Company is a stock life insurance company with its home office at: Principal
Financial Group, Des Moines, Iowa 50306. It is authorized to transact life and
annuity business in all of the United States and the District of Columbia. The
Company is a wholly owned subsidiary of Principal Financial Services, Inc.
In 1879, the Company was incorporated under Iowa law as a mutual life insurance
company named Bankers Life Association. It changed its name to Bankers Life
Company in 1911 and then to Principal Mutual Life Insurance Company in 1986. The
name change to Principal Life Insurance Company and reorganization into a mutual
holding company structure took place in 1998.
THE SEPARATE ACCOUNT
Separate Account B was established under Iowa law on January 12, 1970. It was
registered as a unit investment trust with the SEC on July 17, 1970. This
registration does not involve SEC supervision of the investments or investment
policies of the Separate Account.
The income, gains, and losses, whether or not realized, of the Separate Account
are credited to or charged against the Separate Account without regard to other
income, gains, or losses of the Company. Obligations arising from the Contract,
including the promise to make annuity payments, are general corporate
obligations of the Company. However, the Contract provides that the portion of
the Separate Account's assets equal to the reserves and other liabilities under
the Contract are not charged with any liabilities arising out of any other
business of the Company.
There currently are nineteen divisions in the Separate Account available to you.
The assets of each division invest in a corresponding Account of a mutual fund.
New Accounts may be added and made available. Accounts may also be eliminated
from the Separate Account.
THE FUND
The Principal Variable Contracts Fund, Inc. is a mutual fund registered under
the Investment Company Act of 1940 as a diversified open-end investment
management company. The Fund provides the investment vehicle for the Separate
Account. A full description of the Fund, the investment objectives of its
Accounts, policies and restrictions, charges and expenses and other operational
information is contained in the accompanying prospectus (which should be read
carefully before investing) and the Statement of Additional Information.
Additional copies of these documents are available from a sales representative
or our home office.
Principal Management Corporation manages the Fund. Some of the Fund's Accounts
are used to fund the Company's variable life-insurance contracts. The Fund's
Board of Directors (the "Board") monitors events in order to identify any
material irreconcilable conflicts between the interests of the variable annuity
contract owners and life-insurance policyowners. The Board determines any
responsive action which may need to be taken. If it becomes necessary for any
separate account to replace shares of any Account with an alternate investment,
then the Account may have to liquidate securities on a disadvantageous basis.
The Company purchases and sells fund shares for the Separate Account at their
net asset value without any sales or redemption charge. Shares of the fund
represent interests in the Accounts available for investment by the Separate
Account. Each Account corresponds to one of the divisions of the Separate
Account. The assets of each Account are separate from the others. An Account's
performance has no effect on the investment performance of any other Account.
The following is a brief summary of the investment objectives of each division:
<TABLE>
<CAPTION>
<S> <C> <C>
Division Division Invests In Investment Advisor
-------- ------------------- -------------------
Aggressive Growth Aggressive Growth Account Morgan Stanley through
a sub-advisory agreement.
Asset Allocation Asset Allocation Account Morgan Stanley through
a sub-advisory agreement.
Balanced Balanced Account Invista Capital Management, LLC
through a sub-advisory agreement
Bond Bond Account Principal Management Corporation
Capital Value Capital Value Account Invista Capital Management, LLC
through a sub-advisory agreement
Government Securities Government Securities Account Invista Capital Management, LLC
through a sub-advisory agreement
Growth Growth Account Invista Capital Management, LLC
through a sub-advisory agreement
International International Account Invista Capital Management, LLC
through a sub-advisory agreement
International SmallCap International SmallCap Account Invista Capital Management, LLC
through a sub-advisory agreement
MicroCap MicroCap Account Goldman Sachs Asset Management
through a sub-advisory agreement
MidCap MidCap Account Invista Capital Management, LLC
through a sub-advisory agreement
MidCap Growth MidCap Growth Account Dreyfus Corporation through
a sub-advisory agreement
Money Market Money Market Account Principal Management Corporation
Real Estate Real Estate Account Principal Management Corporation
SmallCap SmallCap Account Invista Capital Management, LLC
through a sub-advisory agreement
SmallCap Growth SmallCap Growth Account Berger Associates through
a sub-advisory agreement
SmallCap Value SmallCap Value Account J.P. Morgan through
a sub-advisory agreement
Stock Index 500 Stock Index 500 Account Invista Capital Management, LLC
through a sub-advisory agreement
Utilities Utilities Account Invista Capital Management, LLC
through a sub-advisory agreement
</TABLE>
Division Investment Objective
-------- --------------------
Aggressive Growth to provide long-term capital appreciation
by investing primarily in growth-oriented
common stocks of medium and large
capitalization U.S. corporations and, to a
limited extent, foreign corporations.
Asset Allocation to generate a total investment return
consistent with the preservation of capital.
The Account intends to pursue a flexible
investment policy in seeking to achieve this
investment objective.
Balanced to generate a total return consisting of
current income and capital appreciation
while assuming reasonable risks in
furtherance of this objective.
Bond to provide as high a level of income as is
consistent with preservation of capital
and prudent investment risk.
Capital Value to provide long-term capital appreciation
and secondarily is growth of investment
income. The Account seeks to achieve its
investment objectives through the
purchase primarily of common stocks, but
the Account may invest in other
securities.
Government Securities to seek a high level of current income,
liquidity and safety of principal. The
Account seeks to achieve its objective
through the purchase of obligations
issued or
guaranteed by the United States
Government or its agencies, with
emphasis on Government National
Mortgage Association Certificates ("GNMA
Certificates"). Account shares are not
guaranteed by the United States
Government.
Growth to seek growth of capital. The Account
seeks to achieve its objective through the
purchase primarily of common stocks, but
the Account may invest in other securities.
International to seek long-term growth of capital by
investing in a portfolio of equity
securities domiciled in any of the nations
of the world.
International SmallCap seeks long-term growth of capital. The
Account will attempt to achieve its
objective by investing primarily in equity
securities of non-United States companies with
comparatively smaller market
capitalizations.
MicroCap seeks long-term growth of capital. The
Account will attempt to achieve its
objective by investing primarily in value and
growth oriented companies with small
market capitalizations, generally less
than $700 million.
MidCap to achieve capital appreciation by
investing primarily in securities of
emerging and other growth-oriented
companies.
MidCap Growth seeks long-term growth of capital. The
Account will attempt to achieve its
objective by investing primarily in
growth stocks of companies with market
capitalizations in the $1 billion to
$10 billion range.
Money Market to seek as high a level of current income
available from short-term securities as is
considered consistent with preservation of
principal and maintenance of liquidity by
investing all of its assets in a portfolio
of money market instruments.
Real Estate seeks to generate a high total return. The
Account will attempt to achieve its
objective by investing primarily in equity
securities of companies principally engaged
in the real estate industry.
SmallCap seeks long-term growth of capital. The
Account will attempt to achieve its
objective by investing primarily in equity
securities of both growth and value oriented
companies with comparatively smaller market
capitalizations.
SmallCap Growth seeks long-term growth of capital. The
Account will attempt to achieve its
objective by investing primarily in equity
securities of small growth companies with
market capitalization of less than $1
billion.
SmallCap Value seeks long-term growth of capital. The
Account will attempt to achieve its
objective by investing primarily in
equity securities of small companies
with value characteristics and market
capitalizations of less than $1 billion.
Stock Index 500 The Account attempts to mirror the
investment results of the Standard &
Poor's 500 Stock Index.
Utilities seeks to provide current income and long-
term growth of income and capital. The
Account will attempt to achieve its
objective by investing primarily in equity
and fixed-income securities of companies
in the public utilities industry.
MANAGER AND SUB-ADVISORS
Principal Management Corporation (the "Manager") has executed agreements with
various sub-advisors. Under those sub-advisory agreements, the sub-advisor
agrees to assume the obligations of the Manager to provide investment advisory
services for a specific Account. For these services, each sub-advisor is paid a
fee by the Manager.
Account: Balanced, Capital Value, Government Securities, Growth,
International, International SmallCap, MidCap, SmallCap, Stock
Index 500 and Utilities.
Sub-Advisor: Invista Capital Management, LLC. Invista is a subsidiary
of Principal Life Insurance Company and an affiliate of the Manager.
Invista has managed investments for institutional investors, including
Principal Life, since 1985. As of December 31, 1998, it managed assets
of approximately $31 billion. Invista's address is 1800 Hub Tower, 699
Walnut Avenue, Des Moines, Iowa 50309.
Account: Aggressive Growth, and Asset Allocation
Sub-Advisor: Morgan Stanley Asset Management Inc. ("MSAM"), with
principal offices at 1221 Avenue of the Americas, New York, NY 10020,
provides a broad range of portfolio management services to customers in
the U.S. and abroad. At December 31, 1998 MSAM managed investments
totaling approximately $163.4 billion. On December 31, 1998, MSAM
changed its name to Morgan Stanley Dean Witter Investment Management
Inc. but continues to do business in certain instances using the name
Morgan Stanley Asset Managment.
Account: MidCap Growth
Sub-Advisor: The Dreyfus Corporation, located at 200 Park Avenue, New
York, NY 10166, was formed in 1947. The Dreyfus Corporation is a
wholly-owned subsidiary of Mellon Bank, N.A. which is a wholly-owned
subsidiary of Mellon Bank Corporation. As of December 31, 1998, the
Dreyfus Corporation managed or administered approximately $118.5
billion in assets for approximately 1.7 million investor accounts
nationwide.
Account: MicroCap
Sub-Advisor: Goldman Sachs Asset Management ("GSAM"), One New York
Plaza, New York, NY 10004, is a separate operating division of Goldman,
Sachs & Co. ("Goldman Sachs"). Goldman Sachs provides a wide range of
fully discretionary investment advisory services, quantitatively driven
and actively managed U.S. and international portfolios, commodity and
currency products, and money market mutual funds. As of December 31,
1998, GSAM, together with its affiliates, managed assets in excess of
$195 billion.
Account: SmallCap Value
Sub-Advisor: J.P. Morgan Investment Management Inc. J.P. Morgan
Investment, with principal offices at 522 Fifth Avenue, New York, NY
10036 is a wholly-owned subsidiary of J.P. Morgan & Co. Incorporated
("J.P. Morgan") a bank holding company. J.P. Morgan, through J.P.
Morgan investment and other subsidiaries, offers a wide range of
services to governmental, institutional, corporate and individual
customers and acts as investment advisor to individual and
institutional clients. As of December 31, 1998, J.P. Morgan and its
subsidiaries had total combined assets under management of
approximately $300 billion.
Account: SmallCap Growth
Sub-Advisor: Berger Associates. Berger's address is 210 University
Boulevard, Suite 900, Denver, CO 80206. It serves as investment
advisor, sub-advisor, administrator or sub-administrator to mutual
funds and institutional investors. Berger is a wholly owned subsidiary
of Kansas City Southern Industries, Inc. ("KCSI"). KCSI is a publicly
traded holding company with principal operations in rail
transportation, through its subsidiary the Kansas City Southern Railway
Company, and financial asset management businesses. Assets under
management for Berger as of December 31, 1998, were approximately $3.4
billion.
SURPLUS DISTRIBUTIONS
Divisible surplus distributions are not anticipated because the Contracts are
not expected to result in a contribution to the divisible surplus of the
Company. However, if any divisible surplus distribution is made, then it will be
made to the Owners in the form of cash.
THE CONTRACT
The following descriptions are based on provisions of the Contract offered by
this prospectus. You should refer to the actual Contract and the terms and
limitations of any tax qualified plan which is to be funded by the Contract. Tax
qualified plans are subject to several requirements and limitations which may
affect the terms of any particular Contract or the advisability of taking
certain action permitted by the Contract.
To Buy a Contract
If you want to buy a Contract, you must submit an application and make an
initial purchase payment. If you are buying the Contract to fund a SIMPLE-IRA or
SEP, an initial purchase payment is not required at the time you send in the
application. If the application is complete and the Contract applied for is
suitable, the Contract is issued subject to underwriting. If the completed
application is received in proper order, the initial purchase payment is
credited within two valuation days after the later of receipt of the application
or receipt of the initial purchase payment at the Company's home office. If the
initial purchase payment is not credited within five valuation days, it is
refunded unless we have received your permission to retain the purchase payment
until we receive the information necessary to issue the Contract.
The date the Contract is issued is the contract date. The contract date is the
date used to determine contract years, regardless of when the Contract is
delivered. The crediting of investment experience in the Separate Account, or a
fixed rate of return in the Fixed Account, begins on the contract date (even if
that date is delayed due to underwriting or administrative requirements.)
Purchase Payments
o The initial purchase payment must be at least $2,500 for non-qualified
retirement plans.
o All other initial purchase payments must be at least $1,000.
o Subsequent payments must be at least $100 and can be made until the
annuity payment date and while the Annuitant is living.
o If you are a member of a retirement plan covering five or more persons,
then the initial and subsequent purchase payments for the contract must
average at least $100 and cannot be less than $50.
o The total of all purchase payments may not be greater than $2,000,000
without our prior approval.
o In New Jersey after the first contract year, purchase payments cannot
exceed $100,000 per contract year.
The Company reserves the right to:
o increase the minimum amount for each purchase payment to not more than
$1,000; and
o terminate* a Contract and send you the accumulated value if no premiums
are paid during two consecutive calendar years and the accumulated
value (or total purchase payments less partial surrenders and
applicable surrender charges and transfer fees) is less than $2,000.
* The Company will first notify you of its intent to exercise this
right and give you 60 days to increase the accumulated value to at
least $2,000.
Allocation of Purchase Payments and Free-Look Period
Your purchase payments are allocated to the divisions of the Separate
Account and/or the Fixed Account according to your instructions. The
percentage allocation for future purchase payments may be changed, without
charge, at any time by sending a written request to us, telephoning the
Company at 1-800-247-9988 (if telephone privileges apply), or sending us a
fax (1-515-248-9800). The allocation changes are effective at the end of
the valuation period in which your new instructions are received. You may
not allocate your purchase payments to the Fixed Account if it causes the
value of the Fixed Account to be more than $1,000,000 (without our prior
approval).
You may return the Contract for any reason during the free-look period.
Some states require us to return the initial purchase payment. If your
Contract is issued in one of those states, your initial purchase payments
are allocated to the Money Market Division for 15 days (20 days for
contracts issued in Idaho) after the contract date. After the 15-day period
(20 days in Idaho), the initial purchase payment is reallocated according
to your allocation instructions. The states in which purchase payments are
returned are:
Colorado Kentucky North Carolina
Connecticut* Louisiana Oklahoma
Georgia Maryland Rhode Island
Hawaii Michigan South Carolina
Idaho Missouri Utah
Indiana Nebraska Washington
*Purchase payments are refunded if the Contract is canceled prior to its
delivery, otherwise the accumulated value is refunded.
If your Contract is issued in a state not listed above and if you return
the Contract during the free-look period, you will receive the accumulated
value.
Right to Examine the Contract
Under state law, you have the right to return the Contract for any reason
during the free-look period. The free-look period is 10 days after the
Contract is delivered to you in all states, unless your Contract is issued
in:
a.California and you are age 60 and over (your free-look period is 30
days);
b. Colorado (15 day free-look period); or
c. Idaho or North Dakota (20 day free-look period).
To return a Contract you must send it and a written request to the
Company's home office or to the sales representative who sold it to you
before the close of business on the last day of the free-look period. If
you send the request (properly addressed and postage prepaid) to the
Company, the date of the postmark is used to determine if the free-look
period has expired. If the purchase payments are allocated to the Money
Market Division, then the Company will return the greater of the Contract's
value or purchase payments paid if the Contract is canceled. Otherwise, the
accumulated value is returned.
If the purchase of this Contract is a replacement for another annuity
contract or a life insurance policy, different free-look periods may apply.
The Company reserves the right to keep the initial purchase payment in the
Money Market division longer than 15 days to correspond to the free-look
periods of a particular state's replacement requirements.
Exchange Credit
If you own a Single Premium Deferred Annuity ("SPDA") or a Single Premium
Deferred Annuity Plus ("SPDA+") issued by us and are within at least 8
months of the 8th Contract year, then you may transfer the accumulated
value, without charge, to the Contract described in this prospectus.
Additionally, we will add 1% of the current SPDA/SPDA+ surrender value to
the purchase payment. We reserve the right to change or terminate this
program.
Both SPDA and SPDA+ are annuities which provide a fixed rate of
accumulation. This Contract varies with the investment experience and
objectives of the various Separate Account divisions. Thus, the value of
your Contract may increase or decrease with the investment holdings of the
Account divisions.
When making an exchange decision, the owner should carefully review the SPDA
or SPDA+ Contract and this Prospectus because the charges and provisions of
the contracts differ. An existing SPDA or SPDA+ contract may be currently
eligible for waiver of surrender charge due to critical need, while similar
riders may not be available under this Contract.
To complete a transfer to this Contract, send
1) a Contract application,
2) a SPDA/SPDA+ surrender form,
3) a replacement form (based on state written), and
4) an Annuity Exchange Request and Release Form.
The exchange is effective when we receive the completed forms and accept the
application. The transaction is valued at the end of the valuation period in
which we receive the necessary documents.
(This "Exchange Credit" is not available in New York and may not be
available in other states as well. Specific information is available from
your registered representative or our home office (1-800-247-9988)).
The Exchange Credit is allocated among the Divisions of the Separate Account
or the Fixed Account, or both, in the same ratio as the allocation of the
purchase payment. The credit is treated as additional income for income tax
purposes. If the owner exercises the right to return the Contract during the
free-look period, then the amount returned is reduced by any credit applied
(see THE CONTRACT - Right to Examine the Contract).
The Accumulation Period
The Value of Your Contract
The value of your Contract is the total of the Separate Account value plus
any Fixed Account value. The Fixed Account value is described in the
section titled FIXED ACCOUNT.
There is no guaranteed minimum Separate Account value. Its value reflects
the investment experience of the divisions of the Separate Account that you
choose. It also reflects your purchase payments, partial surrenders,
surrender charges and the Contract expenses deducted from the Separate
Account.
The Separate Account value changes from day to day. To the extent the
accumulated value is allocated to the Separate Account, you bear the
investment risk. At the end of any valuation period, your Contract's value
in a division is:
o the number of units you have in a division multiplied by
o the value of a unit in the division.
The number of units is the total of units purchased by allocations to the
division from:
o your initial purchase payment;
o subsequent investments; and
o transfers from another division or the Fixed Account.
minus units sold:
o for partial surrenders from the division;
o as part of a transfer to another division or the Fixed Account; and
o to pay contract charges and fees.
Unit values are calculated each valuation date at the close of the New York
Stock Exchange. To calculate the unit value of a division, the unit value
from the previous valuation date is multiplied by the division's net
investment factor for the current valuation period. The number of units
does not change due to a change in unit value.
The net investment factor measures the performance of each division. The
net investment factor for a valuation period is calculated as follows:
[{share price of the underlying mutual fund account at the end of the
valuation period
plus
per share amount of the dividend (or other distribution) made by the
mutual fund account during the valuation period}
divided by
share price of the underlying mutual fund account at the end of the
previous valuation period]
minus
{an administration charge (if any) and the mortality and expense risks
charge}
The administration charge (if any) and the mortality and expense risks
charge are calculated by dividing the annual amount of the charge by 365
and multiplying by the number of days in the valuation period.
The charges and any taxes (currently none) are accrued daily and are
transferred from Separate Account B at the Company's discretion.
Allocation of Purchase Payments
o On your application for the Contract, you direct your purchase payments
to be allocated to divisions of the Separate Account, the Fixed Account
or both.
o Percentages must be in whole numbers and total 100%.
o Subsequent investments are made using the same allocation percentages
unless you change the allocations.
o Changes to the allocation percentages may be made without charge. A
change is effective on the next valuation period after we receive your
new instructions. You can change the allocations by mailing your
instructions to us, if telephone privileges apply, by calling us at
1-800-247-9988 or by faxing your instructions to us at 1-515-248-9800.
o Purchase payments are credited on the basis of accumulation unit value
next determined after receipt of a purchase payment.
Separate Account Division Transfers
o You may request an unscheduled transfer or set up a periodic transfer
by sending us a written request, calling us if telephone services apply
(1-800-247-9988) or sending us a fax (1-515-248-9800).
o You must specify the dollar amount or percentage to transfer from each
Separate Account division.
o The minimum amounts are $100 or 100% of your interest in the division
if your value in the division is less than $100.
o In states where allowed, we reserve the right to reject transfer
instructions from someone providing them for multiple Contracts for
which he or she is not the owner.
Unscheduled
-----------
o You may make unscheduled Separate Account division transfers from a
division to another division or to the Fixed Account.
o The transfer is made, and values determined, as of the end of the
valuation period in which we receive your request.
o A $30 fee is imposed on each unscheduled transfer after the 12th
unscheduled transfer in a contract year (for fee purposes, all
transfers based on a single instruction are considered to be a
single transfer).
You may not make a transfer to the Fixed Account if:
o a transfer has been made from the Fixed Account to a division
within six months, or
o after the transfer, the Fixed Account value would be more than
$1,000,000 (without our prior approval).
Scheduled
---------
o You may elect to have automatic transfers made on a periodic basis,
if the value of the division is at least $5,000.
o You must specify the dollar amount of the transfer ($100 minimum).
o Transfers continue until your value in the division is zero or we
receive notice to stop them.
o You select the transfer date (other than the 29th, 30th or 31st)
and the transfer period (monthly, quarterly, semi-annual or
annual).
o We reserve the right to limit the number of Separate Account
divisions from which simultaneous transfers are made. In no event
will it ever be less than two.
o If the selected date is not a valuation date, the transfer is
completed on the next valuation date.
Automatic Portfolio Rebalancing (APR)
o Allows you to maintain a specific percentage of your contract values in
each account over time.
o You may elect APR at any time.
o APR is not available for values in the Fixed Account.
o APR is not available if you have arranged scheduled transfers from the
same division.
o APR will not begin until the "free-look" period has expired.
o There is no charge for APR transfers.
o APR transfers are not considered unscheduled transfers in determining
any transfer fee.
o APR can be selected for quarterly, semi-annual or annual rebalancing.
o You may rebalance once by completing and submitting a form to us, by
telephoning if you have telephone privileges (1-800-247-9988) or faxing
your instructions to us (1-515-248-9800).(Rebalanced at the end of next
valuation period following request.)
Example:
You elect APR to maintain your Contract values with 50% in the Capital
Value Division and 50% in the Money Market Division. At the end of the
specified period, 60% of the values are in the Capital Value Division,
with the remaining 40% in the Money Market Division. By rebalancing,
units from the Capital Value Division are sold and applied as purchase
payments to the Money Market Division so that 50% of the accumulated
value is once again in each division.
Telephone Services
Telephone services are permitted (unless prohibited by state law) for both
changes in the allocation of future purchase payments and transfers among
divisions. Telephone service may be declined on the Contract application or
at any later date by providing us with written notice. Telephone service is
used by calling us at 1-800-247-9988. Telephone transfer requests must be
made while we are open for business. They are effective when received by us
before the close of the New York Stock Exchange (generally 3 p.m. Central
Time). Requests received when we are not open for business or after the New
York Stock Exchange closes will be effective on the next business day.
Neither the Company nor the Separate Account are responsible for the
authenticity of telephone service transaction requests. We reserve the
right to refuse telephone service transaction requests. You assume the risk
of loss caused by fraudulent telephone service transactions we reasonably
believe to be genuine. We follow procedures in an attempt to assure genuine
telephone service transactions. If these procedures are not followed, then
we may be liable for loss caused by unauthorized or fraudulent
transactions. The procedures include recording telephone service
transactions, requesting personal identification (name, daytime telephone
number, social security number and/or birthdate) and sending written
confirmation to your address of record.
We reserve the right to modify or terminate telephone service transaction
procedures at any time.
Separate Account Surrenders
Surrenders from the Separate Account are generally paid within seven days of the
effective date of the request for surrender (or earlier if required by law).
However, certain delays in payment are permitted (see GENERAL PROVISIONS - Delay
of Payments). Surrenders before age 59 1/2 may involve an income tax penalty
(see FEDERAL TAX MATTERS). You must send us a written request for any surrender.
You may specify surrender allocation percentages with each partial surrender
request. If you don't provide us with specific percentages, we will use your
purchase payment allocation percentages for the partial surrender. Surrenders
may be subject to a surrender charge (see Surrender Charge).
Total Surrender
---------------
o You may surrender the Contract during the life of the annuitant and
before the annuity payment date.
o You receive the cash surrender value at the end of the valuation period
during which we receive your surrender request.
o The cash surrender value is the total of the values of your accounts in
the Separate Account divisions plus any amount you have in the Fixed
Account minus any applicable surrender charge or transaction fee.
o The written consent of all collateral assignees and irrevocable
beneficiaries must be obtained prior to surrender.
o We reserve the right to require you to return the Contract to us prior
to making any payment though this does not affect the amount of the
cash surrender value.
Unscheduled Partial Surrender
-----------------------------
o Prior to the annuity payment date and during the lifetime of the
annuitant, you may surrender a part of the Fixed Account and/or
Separate Account value by sending us a written request.
o You must specify the dollar amount of the surrender which must be $100
or more
o The surrender is effective at the end of the valuation period during
which we receive your written request for surrender.
o The surrender is deducted from your Fixed Account value and/or your
account in any Separate Account division according to the surrender
allocation percentages you specify.
o If surrender allocation percentages are not specified, we use your
purchase payment allocation percentages.
o We surrender units from the Separate Account divisions and/or Fixed
Account to equal the dollar amount of the surrender request plus any
applicable surrender charge
o The accumulated value after the unscheduled partial surrender must be
equal or greater than $5,000 (we reserve the right to change the
minimum remaining accumulated value but it will not be greater than
$10,000).
o A $30 fee is imposed on each unscheduled partial surrender after the
1st unscheduled partial surrender in a contract year. Surrenders from
multiple divisions made at the same time are considered to be one
surrender for purposes of calculating this fee.
Scheduled Partial Surrender
---------------------------
o You may elect partial surrenders from the Fixed Account and/or the
Separate Account on a periodic basis by sending us written notice.
o Your accumulated value must be at least $5,000 when the surrenders
begin.
o Surrenders are made from any of the Separate Account divisions and/or
the Fixed Account.
o You may specify monthly, quarterly, semi-annually or annually and pick
a surrender date (other than the 29th, 30th or 31st).
o If the selected date is not a valuation date, the transfer is completed
on the next valuation date.
o The surrenders continue until your value in the division is zero or we
receive written notice to stop them.
Death Benefit
If you or the annuitant die before the annuity payment date, then we will pay a
death benefit. Before the annuity payment date, you may give us written
instructions for payment under a death benefit option. If we do not receive your
instructions, the death benefit is paid according to instructions from the
beneficiary. No surrender charge applies when a death benefit is paid.
The beneficiary is the person or persons you name in the application to receive
benefits upon your death. If the owner is not a natural person, death benefits
are paid to the beneficiary upon the death of the annuitant.
Unless you have named an irrevocable beneficiary, you may change your
beneficiary by providing us with written notice. If a beneficiary dies before
you, on your death we will make equal payments to the surviving beneficiaries
unless you had provided us with other written instructions. If none of your
beneficiaries survive you, we will pay the death benefit to your estate in a
lump sum.
If you die before the annuitant and your beneficiary is your spouse, we will
continue the Contract with your spouse as the new owner unless your spouse
elects to receive the death benefit.
Alternatively, within 60 days of your death, your beneficiary may elect to:
o apply the death benefit under a benefit option, or
o receive the death benefit as a single payment.
If the owner of a Contract, not issued in connection with retirement plans
qualified under Section 408 of the Internal Revenue Code (the "Code"), dies
before the annuitant and before the annuity payment date, written notice of the
death must be sent to us so distribution arrangements can be made to avoid
adverse tax consequences.
Standard Death Benefit
----------------------
The amount of the death benefit is the greater of:
o your accumulated value on the date we receive proof of death and all
required documents, or
o the total of purchase payments minus any partial surrenders, fees and
charges as of the date we receive all required documents and notice
(including proof) of death, or
o highest accumulated value on any prior anniversary that is divisible
equally by seven, plus any purchase payments and less any partial
surrenders (and surrender charges incurred) made after that
anniversary.
Annual Enhanced Death Benefit
-----------------------------
This is an optional death benefit rider. Under this rider, if the original
annuitant or owner dies before the annuity payment date, then the death
benefit payable the beneficiary is the greater of:
1) The standard death benefit;
2) The annual increasing death benefit, based on purchase payments
(accumulated at 5%) minus any surrenders and surrender charges
(accumulated at 5%) until the later of the Contract anniversary
after the original owner's or original annuitant's 75th birthday
or five years from the effective date of the rider; or
3) The highest accumulated value on a Contract anniversary until the
Contract anniversary following the original owner's or original
annuitant's 75th birthday or five years from the effective date of
the rider, whichever comes last.
Lock-In Feature At the later of the Contract anniversary following the
original owner's or original annuitant's 75th birthday or five years after
issue ("lock-in date"), the annual enhanced death benefit amount is
locked-in and will only increase by purchase payments made after the
lock-in date, minus any surrenders and surrender charges. (i.e. On the
lock-in date, a snapshot is taken setting the floor as to the minimum
amount of death benefit, less any surrenders and surrender charges.) The
lock-in does not prevent the accumulated value from increasing further as
provided by the standard death benefit provision in your Contract. Once the
standard death benefit equals the annual enhanced death benefit after the
lock-in date, the rider will terminate.
The annual cost of the rider is 0.20% of the annual accumulated value. The
charge is equal to 0.05% of the average accumulated value during the
calendar quarter. The cost will be deducted throughout the redemption of
units from your Contract's accumulated value in the same proportion as
purchase payment allocation between the Fixed and Separate Accounts. If the
rider is purchased after the beginning of a quarter, then the charge is
prorated according to the number of days it is in effect during the
quarter. Upon termination of the rider or upon death, you will be charged
based on the number of days it is in effect during the quarter. The
enhanced death benefit rider is only available at issuance. Thus, once a
Contract has been purchased without the rider, it may not be added at a
later date.
If the enhanced death benefit rider is terminated, then it cannot be
reinstated (except in the state of Florida.)
Payment of Death Benefit
------------------------
The death benefit is usually paid within seven days of our receiving all
documents (including proof of death) that we require to process the claim.
Payment is made according to benefit instructions provided by you. Some
states require this payment to be made in less than seven days. Under
certain circumstances, this payment may be delayed (see GENERAL PROVISIONS
- Delay of Payments). We pay interest (at least 3% or as required by state
law) on the death benefit from the date we receive all required documents
until payment is made or until the death benefit is applied under a benefit
option.
NOTE: Proof of death includes: a certified copy of a death certificate; a
certified copy of a court order; a written statement by a medical
doctor; or other satisfactory proof.
Death of Annuitant
------------------
If the owner or annuitant dies during the annuity payment period, remaining
payments are made to the beneficiary throughout the guarantee period or for
the life of any joint annuitant. In all cases the person entitled to
receive payments also receives any rights and privileges under the annuity
payment option.
Additional rules apply to distributions under non-qualified contracts (see
FEDERAL TAX MATTERS - Required Distributions for Non-Qualified Contracts).
However, the rules do not apply to contracts issued in connection with
IRAs, SEPs or SIMPLE-IRAs.
The Annuity Payment Period
Annuity Payment Date
You may specify an annuity payment date in your application. If you do not
specify an annuity payment date, then the annuity payment date is the later
of the annuitant's 85th birthday or 10 years after issuance. If the
annuitant is living and the Contract is in force on that date, we will
notify you to begin taking payments under the Contract. You may not select
an annuity payment date which is on or after the Annuitant's 85th birthday
or 10 years after the contract date, whichever is the later. (No later than
age 88 in Pennsylvania, or age 90 in New York)
Depending on the type of annuity payment option selected when the Contract
is issued, payments that are initiated either before or after the annuity
payment date may be subject to penalty taxes (see FEDERAL TAX MATTERS). You
should consider this carefully when you select or change the annuity
payment date.
You may change the annuity payment date with our prior approval. The
request must be in writing and approved before we issue a supplementary
Contract which provides an annuity payment option. The new annuity payment
date must be any contract anniversary on or before the annuity payment
date.
Annuity Payment Options
We offer fixed annuity payments. If, however, the accumulated value on the
annuity payment date is less than $5,000 or if the amount applied under an
annuity payment option is less than the minimum requirement we may pay out
the entire amount. No surrender charge would be imposed. The Contract would
then be canceled.
You may choose from several fixed annuity payment options. Payments will be
made on the frequency you choose. You may elect to have your annuity
payments made on a monthly, quarterly, semiannual or annual basis. The
dollar amount of the payments is specified for the entire payment period
according to the option selected. There is no right to make any total or
partial surrender after the annuity payments start.
The amount of the annuity payment depends on:
o amount of accumulated value;
o annuity payment option selected; and
o age of annuitant (unless fixed income option is selected).
Annuity payments generally are higher for male annuitants than for female
annuitants with an otherwise identical Contract. This is because
statistically females have longer life expectancies than males. In certain
states, this difference may not be taken into consideration in fixing the
payment amount. Additionally, Contracts with no gender distinctions are
made available for certain employer-sponsored plans because under most such
plans, such Contract provisions are prohibited by law.
You may select an annuity payment option or change a previous selection by
written request. We must receive the request on or before the annuity
payment date. If an annuity payment option is not selected, then we will
automatically apply the Life Income option (see below). If you designate an
annuitant and joint annuitant, then payment will be made pursuant to a
joint and full survivor income (see below). Tax laws and regulations may
impose further restrictions on annuity payment options.
Payments under the annuity payment options are made as of the first day of
each payment period beginning with the annuity payment date. The available
annuity payment options are:
Fixed Income. Payments of a fixed amount or payments for a fixed period
of at least five years but not more than 30 years. Payments stop after
all guaranteed payments are made.
Life Income. Payments are made as of the first day of each payment
period during the annuitant's life, starting with the annuity payment
date. No payments are made after the annuitant dies. It is possible
that you would only receive one payment under this option if the
annuitant dies before the second payment is due.
Life Income with Payments Guaranteed for a Period of 5 to 20 Years.
Payments are made on the first day of each payment period beginning on
the annuity payment date. Payments will continue until the annuitant
dies. If the annuitant dies before all of the guaranteed payments have
been made, then we will continue the guaranteed payments to the
beneficiary.
Joint and Full Survivor Life Income with Payments Guaranteed for a
Period of 10 Years. Payments continue as long as either the annuitant
or the joint annuitant is alive. If both die before all guaranteed
payments have been made, the guaranteed remaining payments are made to
the beneficiary.
Joint and Two-thirds Survivor Life Income. Payments continue as long as
either the annuitant or the joint annuitant is alive. If either the
annuitant or joint annuitant dies, payments continue to the survivor at
two-thirds the original amount. Payments stop when both the annuitant
and joint annuitant have died. It is possible that only one payment is
made under this option if both annuitants die before the second payment
is due.
Other benefit options may be available with our approval.
The mortality risk assumed by the Company is to make annuity payments for
the full life of all annuitants regardless of how long they or any
individual annuitant might live. Mortality risk does not apply to the Fixed
Income option. Annuity payments are determined in accordance with annuity
tables and other provisions contained in the Contract. This assures neither
an annuitant's own longevity, nor an improvement in life expectancy, will
have an adverse effect on the annuity payments received under this
Contract. The annuity payment tables contained in this Contract are based
on the Annuity Mortality 1983 Table a. These tables are guaranteed for the
life of the Contract.
If you own one or more qualified annuity contracts, in order to avoid tax
penalties, payments from at least one of your qualified contracts must
start no later than April 1 following the calendar year in which you turn
age 70 1/2. The required minimum payment is a distribution in equal (or
substantially equal) amounts over your life or over the joint lives of you
and your designated beneficiary. In addition, payments must be made at
least once a year. Tax penalties may also apply at your death on certain
excess accumulations. You should consider potential tax penalties with your
tax advisor when selecting an annuity payment option or taking other
distributions from the Contract.
CHARGES AND DEDUCTIONS
An annual fee, a mortality and expense risks charge, in some circumstances a
transaction fee and state premium taxes are deducted under the Contract. A
surrender charge (on surrenders) may also be deducted from certain withdrawals
made before the annuity payment date. We reserve the right to assess a daily
Separate Account administration charge. There are also deductions from and
expenses paid out of the assets of the Accounts which are described in the
Fund's prospectus.
Annual Fee
An annual fee exists which is the lesser of $30 or 2% of your accumulated value
(subject to any applicable state law limitations). The fee is deducted from
either the Fixed Account or your interest in a Separate Account Division,
whichever has the greatest value. The fee is deducted on each contract
anniversary and upon total surrender of the Contract. This fee is currently
waived for Contracts having an accumulated value on the last day of the Contract
year of $30,000 or more. The fee assists in covering administrative costs. The
Company does not anticipate any profit from this fee.
The administrative costs include costs associated with:
o the issuance of Contracts;
o establishing and maintaining the records which relate to Contracts;
o making regulatory filings and furnishing confirmation notices;
o preparing, distributing and tabulating voting materials and other
communications;
o providing computer, actuarial and accounting services; and
o processing Contract transactions.
Mortality and Expense Risks Charge
We assess each division of the Separate Account with a daily charge for
mortality and expense risks. The annual rate of the charge is 1.25% of the
average daily net assets of the Separate Account. We agree not to increase this
charge for the duration of the Contract. This charge is assessed only prior to
the annuity payment date. This charge is assessed daily when the value of an
accumulation unit is calculated.
We have a mortality risk in that we guarantee payment of a death benefit in a
single sum or under an annuity payment option upon the death of an annuitant or
owner prior to the annuity payment date. No surrender charge is imposed on a
death benefit payment which gives us an additional mortality risk.
The expense risk that we assume is that the actual expenses incurred in issuing
and administering the Contract exceed the Contract limits on administrative
charges.
If the mortality and expense risks charge is not enough to cover the costs, we
bear the loss. If the amount of mortality and expense risks charge deducted is
more than our costs, the excess is profit to the Company. We expect a profit
from the mortality and expense risks charge.
Transaction Fee
A transaction fee of $30 applies to each unscheduled partial surrender after the
first unscheduled partial surrender in a contract year. A $30 transaction fee is
also charged to each unscheduled transfer from a division after the twelfth such
transfer in a contract year. The transaction fee is deducted from the Fixed
Account and/or your interest in a Separate Account division from which the
amount is surrendered or transferred, on a pro rata basis.
Premium Taxes
We reserve the right to deduct an amount to cover any premium taxes imposed by
states or other jurisdictions. Any deduction is made from either a purchase
payment when we receive it, or the accumulated value when you request a
surrender (total or partial) or it is applied under a benefit option. Premium
taxes range from 0% in most states to as high as 3.50%.
Surrender Charge
No sales charge is collected or deducted when purchase payments are applied
under the Contract. A surrender charge is assessed on certain total or partial
surrenders. The amounts we receive from the surrender charge are used to cover
some of the expenses of the sale of the Contract (commissions and other
promotional or distribution expenses). If the surrender charge collected is not
enough to cover the actual costs of distribution, the costs are paid from the
Company's General Account assets which includes profit, if any, from the
mortality and expense risks charge.
The surrender charge for any total or partial surrender is a percentage of the
purchase payments withdrawn or surrendered which were received by us during the
seven contract years prior to the withdrawal or surrender. The applicable
percentage which is applied to the sum of the purchase payments paid during each
contract year is determined by the following table.
Table of Surrender Charges
--------------------------
Number of completed contract years Surrender charge applied to all
since each Purchase Payment* Purchase Payments received
---------------------------------- -------------------------------
2 years or less 6%
more than 2 years, up to 3 years 5%
more than 3 years, up to 4 years 4%
more than 4 years, up to 5 years 3%
more than 5 years, up to 6 years 2%
more than 6 years 0%
* Each purchase payment begins in year 0 for
purposes of calculating the percentage applied to
that payment.
We assume that surrenders and transfers are made in the following order:
o first from purchase payments we received more than seven completed contract
years prior to the surrender (or transfer);
o then from the free surrender privilege (first from the earnings, then from
the oldest purchase payments (first-in, first-out)) described below; and
o then from purchase payments we received within the seven completed contract
years before the surrender on a first-in, first-out basis.
A surrender charge is not imposed in states where it is prohibited, including:
o New Jersey- no surrender charge for total surrender on or after the later
of the annuitant's 64th birthday or 4 years after the contract date.
o Washington- no surrender charge for total surrender on or after the later
of the annuitant's 70th birthday or 10 years after the contract date.
Waiver of Surrender Charge
- --------------------------
The surrender charge does not apply to:
o amounts applied under an annuity payment; or
o payment of any death benefit, however, the surrender charge does apply to
purchase payments made by the participant's surviving spouse after the
participant's date of death; or
o amounts distributed to satisfy the minimum distribution requirement of
Section 401(a)9 of the Code; or
o The Free Surrender Privilege, which is an amount surrendered during a
contract year which is not to exceed the greater of:
o earnings in the contract (earnings = accumulated value less
unsurrendered purchase payments as of the surrender date); or
o 10% of the purchase payments still subject to the surrender charge,
decreased by any partial surrenders since the last anniversary; or
o an amount transferred from the Contract to a single premium immediate
annuity issued by the Company after the seventh contract year; or.
o an amount transferred from a Contract used to fund an IRA to another
annuity contract issued by the Company to fund an IRA of the participant's
spouse when the distribution is made pursuant to a divorce decree; or
o if permitted by state law, withdrawals made after the first Contract
anniversary if the original owner or original annuitant has a critical
need.
Waiver of the surrender charge is available for critical need if the following
conditions are met if:
o original owner or original annuitant has a critical need; and
o the critical need did not exist before the Contract date.
For the purposes of this section, the following definitions apply:
o critical need - owner's or annuitant's confinement to a health care
facility, terminal illness diagnosis or total and permanent disability. If
the critical need is confinement to a health care facility, the confinement
must continue for at least 60 consecutive days after the Contract date and
the withdrawal must occur within 90 days of the confinement's end.
o health care facility - a licensed hospital or inpatient nursing facility
providing daily medical treatment and keeping daily medical records for
each patient (not primarily providing just residency or retirement care).
This does not include a facility primarily providing drug or alcohol
treatment, or a facility owned or operated by the owner, annuitant or a
member of their immediate families.
o terminal illness - sickness or injury that results in the owner's or
annuitant's life expectancy being 12 months or less from the date notice to
receive a distribution from the Contract is received by the Company.
o total and permanent disability - a disability that occurs after the
contract date and that qualifies the owner or annuitant to receive social
security disability payments. In New York and West Virginia, different
definitions of total and permanent disability apply. Contact us at
1-800-247-9988 for additional information.
This waiver of surrender charge rider is not available in New Jersey or
Pennsylvania. In New York, the rider only applies if the original owner or
original annuitant suffers a total and permanent disability.
Administration Charge
We reserve the right to assess each division of the Separate Account with a
daily charge at the annual rate of 0.15% of the average daily net assets of the
division. This charge would only be imposed before the annuity payment date.
This charge would be assessed to help cover administrative expenses.
Administrative expenses include the cost of issuing the Contract, clerical,
recordkeeping and bookkeeping services, keeping the required financial and
accounting records, communicating with Contract owners and making regulatory
filings.
Special Provisions for Group or Sponsored Arrangements
Where permitted by state law, Contracts may be purchased under group or
sponsored arrangements as well as on an individual basis.
group arrangement - program under which a trustee, employer or similar
entity purchases Contracts covering a group of individuals on a group
basis.
sponsored arrangement - program under which an employer permits group
solicitation of its employees or an association permits group solicitation
of its members for the purchase of Contracts on an individual basis.
The charges and deductions described above may be reduced for Contracts issued
in connection with group or sponsored arrangements. The rules in effect at the
time the application is approved will determine if reductions apply. Reductions
may include sales of Contracts without, or with reduced, mortality and expense
risks charges, annual fees or surrender charges.
Availability of the reduction and the size of the reduction (if any) is based on
factors such as:
o size of group;
o expected number of participants; and
o anticipated purchase payments from the group.
Reductions reflect the reduced sales efforts and administrative costs resulting
from these arrangements. We may modify the criteria for and the amount of the
reduction in the future. Modifications will not unfairly discriminate against
any person, including affected Contract owners and other contract owners with
contracts funded by the Separate Account.
FIXED ACCOUNT
You may allocate purchase payments and transfer amounts from the Separate
Account to the Fixed Account. Assets in the Fixed Account are held in the
General Account of the Company. Because of exemptive and exclusionary
provisions, interests in the Fixed Account are not registered under the
Securities Act of 1933 and the General Account is not registered as an
investment company under the Investment Company Act of 1940. The Fixed Account
is not subject to these Acts. The staff of the SEC does not review the
prospectus disclosures relating to the Fixed Account. However, these disclosures
are subject to certain generally applicable provisions of the federal securities
laws relating to the accuracy and completeness of statements made in the
prospectus.
This prospectus is intended to serve as a disclosure document only for the
Contract as it relates to the Separate Account. It only contains selected
information regarding the Fixed Account. More information concerning the Fixed
Account is available from our home office or from a sales representative.
General Description
Our obligations with respect to the Fixed Account are supported by the Company's
General Account. The General Account is the assets of the Company other than
those allocated to any of the Company's Separate Accounts. Subject to applicable
law, the Company has sole discretion over the assets in the General Account.
The Company guarantees that purchase payments allocated to the Fixed Account
earn interest at a guaranteed interest rate. In no event will the guaranteed
interest rate be less than 3% compounded annually.
Each purchase payment allocated or amount transferred to the Fixed Account earns
interest at the guaranteed rate in effect on the date it is received or
transferred. This rate applies to each purchase payment or amount transferred
through the end of the contract year.
Each contract anniversary, we declare a renewal interest rate that is guaranteed
and applies to the Fixed Account value in existence at that time. This rate
applies until the end of the contract year. Interest is earned daily and
compounded annually at the end of each contract year. Once credited, the
interest is guaranteed and becomes part of the accumulated value in the Fixed
Account from which deductions for fees and charges may be made. Mortality and
expense risk charge and administration charges are not assessed against Fixed
Account values.
Fixed Account Value
Your Contract's Fixed Account value on any valuation date is the sum of: o
purchase payments allocated to the Fixed Account;
o plus any transfers to the Fixed Account from the Separate Account;
o plus interest credited to the Fixed Account;
o minus any surrenders, surrender charges, or transaction fees allocated to
the Fixed Account;
o minus any transfers to the Separate Account.
Fixed Account Transfers, Total and Partial Surrenders
Transfers and surrenders from your investment in the Fixed Account are subject
to certain limitations. In addition, surrenders from the Fixed Account may be
subject to a charge (see THE CONTRACT - Surrender Charge).
You may transfer amounts from the Fixed Account to the Separate Account
divisions before the annuity payment date and as provided below. Transfer occurs
within one business day of our receiving your instructions. You may transfer
amounts by making either a scheduled or unscheduled Fixed Account transfer. You
may not make both a scheduled and unscheduled Fixed Account transfer in the same
contract year.
Single Unscheduled Transfer
---------------------------
Once per Contract year, within the 30 days following the Contract date or
anniversary, you can transfer an amount not to exceed 25% of your Fixed
Account Value. If your Fixed Account value is less than $1,000 or the
renewal interest rate declared for your Fixed Account is more than one
percentage point lower than the average of your total Fixed Account value
earnings for the preceding year, then you may transfer your entire Fixed
Account value. We will inform you if the renewal interest rate falls to
that level. Minimum transfer amount of $100 (or less if entire Fixed
Account value).
Scheduled Fixed Account Transfer
-----------------------------------
(Dollar Cost Averaging) You may make scheduled transfers on a periodic
basis from the Fixed Account as follows:
o You may establish scheduled transfers by sending a written request or
by telephone.
o Transfers occur on a date you specify (other than the 29th, 30th or
31st of any month).
o If the selected date is not a valuation date, the transfer is completed
on the next valuation date.
o Scheduled transfers are only available if the fixed account value is
$5,000 or more at the time the scheduled transfers begin.
o Scheduled monthly transfers of an amount not to exceed 2% of your Fixed
Account's value at the beginning of the Contract year or the current
value and will continue until the Fixed Account value is zero or until
you notify us to discontinue them.
o The minimum transfer amount is $100.
o If the Fixed Account value is less than $100 at the time of transfer,
then the entire Fixed Account value will be transferred.
o If you stop the transfers, you may not start them again without our
prior approval.
GENERAL PROVISIONS
The Contract
The entire Contract is made up of: the contract, copies of any applications,
amendments, riders and endorsements attached to the Contract; current data page;
copies of any supplemental applications, amendments, endorsements and revised
Contract pages or data pages which are mailed to you. Only our corporate
officers can agree to change or waive any provisions of a Contract. Any change
or waiver must be in writing and signed by an officer of the Company.
Delay of Payments
Surrenders are generally made within seven days after we receive your
instruction for a surrender in a form acceptable to us. This period may be
shorter where required by law. However, payment of any amount upon total or
partial surrender, death or the transfer to or from a division of the Separate
Account may be deferred during any period when the right to sell Fund shares is
suspended as permitted under provisions of the Investment Company Act of 1940
(as amended).
The right to sell shares may be suspended during any period when:
o trading on the New York Stock Exchange is restricted as determined by the
SEC or when the Exchange is closed for other than weekends and holidays, or
o an emergency exists, as determined by the SEC, as a result of which:
o disposal by a fund of securities owned by it is not reasonably
practicable;
o it is not reasonably practicable for a fund to fairly determine the
value of its net assets; or
o the SEC permits suspension for the protection of security holders.
If payments are delayed and your surrender or transfer is not canceled by your
written instruction, the amount to be surrendered or transferred will be
determined the first valuation date following the expiration of the permitted
delay. The surrender or transfer will be made within seven days thereafter.
In addition, payments on surrenders attributable to a purchase payment made by
check may be delayed up to 15 days. This permits payment to be collected on the
check. We may also defer payment of surrender proceeds payable out of the Fixed
Account for a period of up to six months.
Misstatement of Age or Gender
If the age or, where applicable, gender of the annuitant has been misstated, we
adjust the income payable under your Contract to reflect the amount that would
have been payable at the correct age and gender. If we make any overpayment
because of incorrect information about age or gender, or any error or
miscalculation, we deduct the overpayment from the next payment or payments due.
Underpayments are added to the next payment.
Assignment
You may assign ownership of your non-qualified Contract. Each assignment is
subject to any payments made or action taken by the Company prior to our
notification of the assignment. We assume no responsibility for the validity of
any assignment. An assignment or pledge of a Contract may have adverse tax
consequences.
An assignment must be made in writing and filed with us at our home office. The
irrevocable beneficiary(ies), if any, must authorize any assignment in writing.
Your rights, as well as those of the annuitant and beneficiary, are subject to
any assignment on file with us. Any amount paid to an assignee is treated as a
partial surrender and is paid in a single lump sum.
Change of Owner
You may change your non-qualified contract ownership designation at any time.
Your request must be in writing and approved by us. After approval, the change
is effective as of the date you signed the request for change. If ownership is
changed, then the waiver of the sales charge for withdrawals made because of
critical need of the owner, is not available. We reserve the right to require
that you send us the Contract so that we can record the change.
Beneficiary
Before the annuity payment date and while the annuitant is alive, you have the
right to name or change a beneficiary. This may be done as part of the
application process or by sending us a written request. Under certain retirement
programs, however, spousal consent may be required to name or change a
beneficiary. Unless you have named an irrevocable beneficiary, you may change
your beneficiary designation by sending us a written request. If a beneficiary
has not been named at the time of the annuitant's death, then the benefit will
be paid to the owner, if living, otherwise, to the annuitant's estate. If the
beneficiary dies during the annuity payment period, and no other beneficiary is
alive, then any remaining benefits will be paid to the beneficiary's estate.
Contract Termination
We reserve the right to terminate the Contract and make a single sum payment
(without imposing any charges) to you if your accumulated value at the end of
the accumulation period is less than $2,000. Before the Contract is terminated,
we will send you a notice to increase the accumulated value to $2,000 within 60
days.
Reinstatement
If you have replaced this Annuity Contract with an annuity contract from another
company and want to reinstate this Contract, then the following applies;
o we reinstate the Contract effective on the original surrender date,
o we apply the amount received from the other company and the amount of the
surrender charge you paid when you surrendered the Contract,
o these amounts are priced on the valuation day the money from the other
company is received by us,
o commissions are not paid on the reinstatement amounts, and
o new data pages are sent to your address of record.
If you purchase this Contract as a replacement for another company's life
insurance policy or annuity contract, different free-look periods may apply. We
reserve the right to keep the initial purchase payment in the Money Market
division longer than 20 days to correspond to the free-look periods of a
particular state's replacement requirements.
Reports
We will mail to you a statement, along with any reports required by state law,
of your current accumulated value at least once per year prior to the annuity
payment date. After the annuity payment date, any reports will be mailed to the
person receiving the benefit option payments.
Quarterly statements reflect purchases and surrenders occurring during the
quarter as well as the balance of units owned and account values.
RIGHTS RESERVED BY THE COMPANY
We reserve the right to make certain changes if, in our judgment, they best
serve the interests of you and the annuitant or are appropriate in carrying out
the purpose of the Contract. Any changes will be made only to the extent and in
the manner permitted by applicable laws. Also, when required by law, we will
obtain your approval of the changes and approval from any appropriate regulatory
authority. Approvals may not be required in all cases. Examples of the changes
the Company may make include:
o transfer assets in any division to another division or to the Fixed
Account; o add, combine or eliminate divisions in the Separate Account;
o substitute the shares of an Account for the Account shares in any division;
o if shares of an Account are no longer available for investment; or
o if in our judgment, investment in an Account becomes inappropriate
considering the purposes of the Separate Account.
DISTRIBUTION OF THE CONTRACT
The individuals who sell the Contract are authorized to sell life and other
forms of personal insurance and variable annuities. These people will usually be
representatives of Princor Financial Services Corporation, Principal Financial
Group, Des Moines, Iowa 50392-0200 which is a broker-dealer registered under the
Securities Exchange Act of 1934 and a member of the National Association of
Securities Dealers, Inc. As the principal underwriter, Princor is paid 6.5% of
purchase payments by the Company for the distribution of the Contract. The
contract may also be sold through other selected broker-dealers registered under
the Securities and Exchange Act of 1933 or firms that are exempt from such
registration. Princor is also the principal underwriter for various registered
investment companies organized by the Company. Princor 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 June 16, 1994.
However, shares of Accounts in which the Aggressive Growth, Asset Allocation,
Balanced, Bond, Capital Value, Government Securities, Growth, International,
MidCap, and Money Market divisions of the Separate Account invest were offered
prior to that date. The Separate Account may publish advertisements containing
information about the hypothetical performance of one or more of its divisions
for this Contract as if the Contract had been issued on or after the date the
Account in which the division invests was first offered. The hypothetical
performance from the date of the inception of the Account in which the division
invests is calculated by reducing the actual performance of the underlying
Account by the fees and charges of this Contract as if it had been in existence.
The International SmallCap, MicroCap, MidCap Growth, Real Estate, SmallCap,
Small Cap Growth, SmallCap Value and Utilities divisions of the Separate Account
were not offered until May 1, 1998. The Stock Index 500 division was not offered
until May 1, 1999. Performance data for these divisions are calculated utilizing
standardized performance formulas and show performance since the inception date
of the division.
The yield and total return figures described below vary depending upon market
conditions, composition of the underlying Account's portfolios and operating
expenses. These factors and possible differences in the methods used in
calculating yield and total return should be considered when comparing the
Separate Account performance figures to performance figures published for other
investment vehicles. The Separate Account may also quote rankings, yields or
returns as published by independent statistical services or publishers and
information regarding performance of certain market indices. Any performance
data quoted for the Separate Account represents only historical performance and
is not intended to indicate future performance. For further information on how
the Separate Account calculates yield and total return figures, see the SAI.
From time to time the Separate Account advertises its Money Market division's
"yield" and "effective yield" for these Contracts. Both yield figures are based
on historical earnings and are not intended to indicate future performance. The
"yield" of the division refers to the income generated by an investment in the
division over a 7-day period (which period is stated in the advertisement). This
income is then "annualized." That is, the amount of income generated by the
investment during that week is assumed to be generated each week over a 52-week
period and is shown as a percentage of the investment. The "effective yield" is
calculated similarly but, when annualized, the income earned by an investment in
the division is assumed to be reinvested. The "effective yield" is slightly
higher than the "yield" because of the compounding effect of the assumed
reinvestment.
In addition, the Separate Account advertises the "yield" for other divisions for
the Contract. The "yield" of a division is determined by annualizing the net
investment income per unit for a specific, historical 30-day period and dividing
the result by the ending maximum offering price of the unit for the same period.
The Separate Account also advertises the average annual total return of its
various divisions. The average annual total return for any of the divisions is
computed by calculating the average annual compounded rate of return over the
stated period that would equate an initial $1,000 investment to the ending
redeemable Contract value.
VOTING RIGHTS
The Company votes Account shares of the Principal Variable Contracts Fund, Inc.
held in the Separate Account at meetings of shareholders of those Accounts. It
follows your voting instructions if you have an investment in the corresponding
division of the Separate Account.
The number of Account shares in which you have a voting interest is determined
by your investments in an Account as of a "record date." The record date is set
by the Company within the requirements of the laws of the state which govern the
various Accounts. The record date for the Accounts of the Principal Variable
Contracts Fund, Inc. will be not more than 90 days before the meeting of the
shareholders of those Accounts. Your voting instructions are solicited by
written communication at least ten days prior to the meeting. The number of
Account shares held in Separate Account B attributable to your interest in each
division is determined by dividing the value of your interest in that division
by the net asset value of one share of the underlying Account. Account shares
for which owners are entitled to give voting instructions, but for which none
are received, and shares of the Account owned by the Company are voted in the
same proportion as the total shares for which voting instructions have been
received.
Proxy materials are provided to you along with an appropriate form that may be
used to give voting instructions to the Company.
If the Company determines pursuant to applicable law that Account shares held in
Separate Account B need not be voted pursuant to instructions received from
owners, then the Company may vote Account shares held in Separate Account B in
its own right.
FEDERAL TAX MATTERS
The following description is a general summary of the tax rules, primarily
related to federal income taxes, which in our opinion are currently in effect.
These rules are based on laws, regulations and interpretations which are subject
to change at any time. This summary is not comprehensive and is not intended as
tax advice. Federal estate and gift tax considerations, as well as state and
local taxes, may also be material. You should consult a qualified tax adviser
about the tax implications of taking action under a Contract or related
retirement plan.
Non-Qualified Contracts
Section 72 of the Code governs the income taxation of annuities in general.
o Purchase payments made under non-qualified Contracts are not excludable or
deductible from your gross income or any other person's gross income.
o An increase in the accumulated value of a non-qualified Contract resulting
from the investment performance of the Separate Account or interest
credited to the Fixed Account is generally not taxable until paid out as
surrender proceeds, death benefit proceeds, or otherwise.
o Generally, owners who are not natural persons are immediately taxed on any
increase in the accumulated value.
The following discussion applies generally to Contracts owned by natural
persons.
o Surrenders or partial surrenders are taxed as ordinary income to the extent
of the accumulated income or gain under the Contract.
o The value of the Contract pledged or assigned is taxed as ordinary income
to the same extent as a partial withdrawal.
o Annuity payments:
o The investment in the Contract is generally the total of the purchase
payments made.
o The portion of the annuity payment that represents the amount by which
the accumulated value exceeds the investment in the Contract is taxed
as ordinary income. The remainder of each annuity payment is not taxed.
o After the investment in the Contract is paid out, the full amount of
any annuity payment is taxable.
For purposes of determining the amount of taxable income resulting from
distributions, all Contracts and other annuity contracts issued by us or our
affiliates to the same owner within the same calendar year are treated as if
they are a single contract.
A transfer of ownership of a Contract, or designation of an annuitant or other
payee who is not also the owner, may result in a certain income or gift tax
consequences to the owner. If you are contemplating any transfer or assignment
of a Contract, you should contact a competent tax advisor with respect to the
potential tax effects of such transactions.
Required Distributions for Non-Qualified Contracts
In order for a non-qualified Contract to be treated as an annuity contract for
federal income tax purposes, the Code requires:
o If the person receiving payments dies on or after the annuity payment date
but prior to the time the entire interest in the Contract has been
distributed, the remaining portion of the interest is distributed at least
as rapidly as under the method of distribution being used as of the date of
that person's death.
o If you die prior to the annuity payment date, the entire interest in the
Contract will be distributed:
o within five years after the date of your death, or
o as annuity payments which begin within one year of your death and which
are made over the life of your designated beneficiary or over a period
not extending beyond the life expectancy of that beneficiary.
o If you take a distribution from the Contract before you are 59 1/2, you may
incur an income tax penalty.
If your designated beneficiary is your surviving spouse, the Contract may be
continued with your spouse deemed to be the new owner for purposes of the Code.
Where the owner or other person receiving payments is not a natural person, the
required distributions provided for in the Code apply upon the death of the
primary annuitant.
Generally, unless the beneficiary elects otherwise, the above requirements are
satisfied prior to the annuity payment date by paying the death benefit in a
single sum, subject to proof of your death. The beneficiary may elect by written
request to receive an annuity payment option instead of a lump sum payment.
However, if the election is not made within 60 days of the date the single sum
death benefit otherwise becomes payable, the IRS may disregard the election for
tax purposes and tax the beneficiary as if a single sum payment had been made.
IRA, SEP, and SIMPLE-IRA
The Contract may be used to fund IRAs, SEPs, and SIMPLE-IRAs.
The tax rules applicable to owners, annuitants and other payees vary according
to the type of plan and the terms and conditions of the plan itself. In general,
purchase payments made under a retirement program recognized under the Code are
excluded from the participant's gross income for tax purposes prior to the
annuity payment date. The portion, if any, of any purchase payment made that is
not excluded from their gross income is their investment in the Contract.
Aggregate deferrals under all plans at the employee's option may be subject to
limitations.
The tax implications of these plans are further discussed in the SAI under the
heading Taxation Under Certain Retirement Plans. Check with your tax advisor for
the rules which apply to your specific situation.
With respect to IRAs, IRA rollovers and SIMPLE-IRAs there is a 10% penalty under
the Code on the taxable portion of a "premature distribution." Generally, an
amount is a "premature distribution" unless the distribution is:
o made on or after you reach age 59 1/2,
o made to a beneficiary on or after your death,
o made upon your disability,
o part of a series of substantially equal periodic payments for the life or
life expectancy of you or you and the beneficiary,
o made to pay medical expenses,
o for certain unemployment expenses,
o for first home purchases (up to $10,000), or
o for higher education expenses.
Rollover IRAs. If you receive a lump-sum distribution from a pension or profit
sharing plan, you may maintain the tax deferred status of the money by rolling
it into a "Rollover Individual Retirement Annuity." You have 60 days from
receipt of the money to complete this transaction. If you choose not to reinvest
or go beyond the 60 day limit and are under age 59 1/2, you will incur a 10% IRS
penalty as well as income tax expenses.
Withholding
Annuity payments and other amounts received under the Contract are subject to
income tax withholding unless the recipient elects not to have taxes withheld.
The amounts withheld vary among recipients depending on the tax status of the
individual and the type of payments from which taxes are withheld.
Notwithstanding the recipient's election, withholding may be required on
payments delivered outside the United States. Moreover, special "backup
withholding" rules may require us to disregard the recipient's election if the
recipient fails to supply us with a "TIN" or taxpayer identification number
(social security number for individuals), or if the Internal Revenue Service
notifies us that the TIN provided by the recipient is incorrect.
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 re-evaluate 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 Contract 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.
MUTUAL FUND DIVERSIFICATION
The United States Treasury Department has adopted regulations under Section
817(h) of the Code which establishes standards of diversification for the
investments underlying the Contracts. Under this Code Section, Separate Account
investments must be adequately diversified in order for the increase in the
value of non-qualified Contracts to receive tax-deferred treatment. In order to
be adequately diversified, the portfolio of each underlying Account must, as of
the end of each calendar quarter or within 30 days thereafter, have no more than
55% of its assets invested in any one investment, 70% in any two investments,
80% in any three investments and 90% in any four investments. Failure of an
Account to meet the diversification requirements could result in tax liability
to non-qualified Contract holders.
The investment opportunities of the Accounts could conceivably be limited by
adhering to the above diversification requirements. This would affect all
owners, including owners of Contracts for whom diversification is not a
requirement for tax-deferred treatment.
STATE REGULATION
The Company is subject to the laws of the State of Iowa governing insurance
companies and to regulation by the Insurance Department of the State of Iowa. An
annual statement in a prescribed form must be filed by March 1 in each year
covering our operations for the preceding year and our financial condition on
December 31 of the prior year. Our books and assets are subject to examination
by the Commissioner of Insurance of the State of Iowa or her representatives at
all times. A full examination of our operations is conducted periodically by the
National Association of Insurance Commissioners. Iowa law and regulations also
prescribe permissible investments, but this does not involve supervision of the
investment management or policy of the Company.
In addition, we are subject to the insurance laws and regulations of other
states and jurisdictions where we are licensed to operate. Generally, the
insurance departments of these states and jurisdictions apply the laws of the
state of domicile in determining the field of permissible investments.
LEGAL OPINIONS
Legal matters applicable to the issue and sale of the Contracts, including our
right to issue Contracts under Iowa Insurance Law, have been passed upon by
Gregg R. Narber, Senior Vice President and General Counsel.
LEGAL PROCEEDINGS
There are no legal proceedings pending to which Separate Account B is a party or
which would materially affect Separate Account B.
REGISTRATION STATEMENT
This Prospectus omits some information contained in the SAI (Part B of the
Registration Statement) and Part C of the Registration Statement which the
Company has filed with the SEC. The SAI is hereby incorporated by reference into
this Prospectus. You may request a free copy of the SAI by writing or
telephoning Princor. You may obtain a copy of Part C of the Registration
Statement from the SEC, Washington, D.C. by paying the prescribed fees.
OTHER VARIABLE ANNUITY CONTRACTS
The Company currently offers other variable annuity contracts that participate
in Separate Account B. In the future, we may designate additional group or
individual variable annuity contracts as participating in Separate Account B.
INDEPENDENT AUDITORS
The financial statements of Principal Life Insurance Company Separate Account B
and the financial statements of Principal Life Insurance Company are included in
the SAI. Those statements have been audited by Ernst & Young LLP, independent
auditors, for the periods indicated in their reports which also appear in the
SAI.
FINANCIAL STATEMENTS
The financial statements of Principal Life Insurance Company which are included
in the SAI should be considered only as they relate to our ability to meet our
obligations under the Contract. They do not relate to investment performance of
the assets held in the Separate Account.
CUSTOMER INQUIRIES
Your questions should be directed to: Principal Flexible Variable Annuity,
Principal Financial Group, P.O. Box 9382, Des Moines, Iowa 50306-9382, 1-800-
247-9988.
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
Independent Auditors ................................................... 4
Calculation of Yield and Total Return .................................. 4
Taxation Under Certain Retirement Plans................................... 5
Principal Life Insurance Company Separate Account B
Report of Independent Auditors ...................................... 9
Financial Statements................................................. 10
Principal Life Insurance Company
Report of Independent Auditors ...................................... 33
Financial Statements................................................. 34
To obtain a free copy of the SAI write or telephone:
Principal Flexible Variable Annuity
The Principal Financial Group
P.O. Box 9382
Des Moines, Iowa 50306-9382
Telephone: 1-800-247-9988
PART B
PRINCIPAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT B
FLEXIBLE VARIABLE ANNUITY ("FVA") CONTRACT
Statement of Additional Information
dated May 1, 1999
This Statement of Additional Information provides information about Principal
Life Insurance Company Separate Account B Flexible Variable Annuity (the
"Contract") in addition to the information that is contained in the Contract's
Prospectus, dated May 1, 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:
Variable Annuity
The Principal Financial Group
P.O. Box 9382
Des Moines Iowa 50306-9382
Telephone: 1800247-9988
TABLE OF CONTENTS
Independent Auditors...................................................... 4
Calculation of Yield and Total Return..................................... 4
Taxation Under Certain Retirement Plans................................... 5
Principal Life Insurance Company Separate Account B
Report of Independent Auditors........................................ 9
Financial Statements.................................................. 10
Principal Life Insurance Company
Report of Independent Auditors........................................ 33
Financial Statements.................................................. 34
INDEPENDENT AUDITORS
Ernst & Young LLP, Des Moines, Iowa, serve as independent auditors for Principal
Life Insurance Company Separate Account B and Principal Life Insurance Company
and perform audit and accounting services for Separate Account B and Principal
Life Insurance Company.
CALCULATION OF YIELD AND TOTAL RETURN
The Separate Account may publish advertisements containing information
(including graphs, charts, tables and examples) about the performance of one or
more of its Divisions.
The Contract was not offered prior to June 16, 1994. However, the Divisions
invest in Accounts of the Principal Variable Contracts Fund, Inc. These Accounts
correspond to open-end investment companies (mutual funds) which, effective
January1, 1998, were reorganized into the Accounts of the Principal Variable
Contracts Fund, Inc. as follows:
Old Mutual Fund Name New Corresponding Account Name
-------------------- ------------------------------
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 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
The Accounts (under their former names) were offered prior to the date 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 Accounts 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 sevenday 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 52week period and is shown as a percentage of the investment.
The "effective yield" is calculated similarly but, when annualized, the income
earned by an investment in the division is assumed to be reinvested. The
"effective yield" will be slightly higher than the "yield" because of the
compounding effect of this assumed reinvestment. Neither yield quotation
reflects a sales load deducted from purchase payments which, if included, would
reduce the "yield" and "effective yield."
In addition, from time to time, the Separate Account will advertise the "yield"
for certain other Divisions for the Contract. The "yield" of a Division is
determined by annualizing the net investment income per unit for a specific,
historical 30-day period and dividing the result by the ending maximum offering
price of the unit for the same period. This yield quotation does not reflect a
contingent deferred sales charge which, if included, would reduce the "yield."
Also, from time to time, the Separate Account will advertise the average annual
total return of its various Divisions. The average annual total return for any
of the Divisions is computed by calculating the average annual compounded rate
of return over the stated period that would equate an initial $1,000 investment
to the ending redeemable contract value. In this calculation the ending value is
reduced by a contingent deferred sales charge that decreases from 6% to 0% over
a period of 7 years. The Separate Account may also advertise total return
figures for its Divisions for a specified period that does not take into account
the sales charge in order to illustrate the change in the Division's unit value
over time. See "Charges and Deductions" in the Prospectus for a discussion of
contingent deferred sales charges.
Following are the hypothetical average annual total returns for the period
ending December 31, 1998 assuming the contract had been offered as of the
effective dates of the underlying Accounts in which the Divisions invest:
<TABLE>
<CAPTION>
With Contingent Deferred Without Contingent
Sales Charge Deferred Sales Charge
------------------------ ---------------------
Division One Year Five Year Ten Year One Year Five Year Ten Year
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Aggressive Growth Division 11.38 24.67* N/A 17.38 24.97* N/A
Asset Allocation Division 1.79 11.33* N/A 7.79 11.77* N/A
Balanced Division 4.50 10.88 10.87 10.50 11.27 10.87
Bond Division 0.32 5.78 8.04 6.32 6.25 8.04
Capital Value Division 6.14 17.18 13.65 12.14 17.50 13.65
Government Securities Division 0.90 5.13 7.93 6.90 5.62 7.93
Growth Division 13.82 17.61** N/A 19.82 17.97** N/A
International Division 2.59 10.21** N/A 2.59 10.21** N/A
International SmallCap (17.14)*** N/A N/A (11.14)*** N/A N/A
MicroCap Division (25.12)*** N/A N/A (19.12)*** N/A N/A
MidCap Division (3.63) 13.06 14.72 2.37 13.43 14.72
MidCap Growth Division (10.43)*** N/A N/A (4.43)*** N/A N/A
Money Market Division (2.11) 3.10 4.02 3.89 3.62 4.02
Real Estate Division (13.36)*** N/A N/A (7.36)*** N/A N/A
SmallCap Division (27.20)*** N/A N/A (21.20)*** N/A N/A
SmallCap Growth Division (3.93)*** N/A N/A (2.07)*** N/A N/A
SmallCap Value Division (21.80)*** N/A N/A (15.80)*** N/A N/A
Utilities Division 8.38*** N/A N/A 14.38*** N/A N/A
<FN>
* Partial period beginning June 1, 1994.
** Partial period beginning May 2, 1994.
*** Partial period beginning May 1, 1998.
</FN>
</TABLE>
TAXATION UNDER CERTAIN RETIREMENT PLANS
INDIVIDUAL RETIREMENT ANNUITIES
Purchase Payments. Individuals may make contributions for individual retirement
annuity ("IRA") Contracts. Deductible contributions for any year may be made up
to the lesser of $2,000 or 100% of compensation for individuals who (1) are not
active participants in another retirement plan, (2) are unmarried and have
adjusted gross income of $40,000 or less, or (3) are married and have adjusted
gross income of $60,000 or less. Such individuals may establish an IRA for a
spouse who makes no contribution to an IRA for the tax year. The annual purchase
payments for both spouses' Contracts cannot exceed the lesser of $4,000 or 100%
of the working spouse's earned income, and no more than $2,000 may be
contributed to either spouse's IRA for any year. Individuals who are active
participants in other retirement plans and whose adjusted gross income (with
certain special adjustments) exceeds the cut-off point ($40,000 for unmarried,
$60,000 for married persons filing jointly, and $0 for married persons filing a
separate return) by less than $10,000 are entitled to make deductible IRA
contributions in proportionately reduced amounts. For example, a married
individual who is an active participant in another retirement plan and files a
separate tax return is entitled to a partial IRA deduction if the individual's
adjusted gross income is less than $10,000, and no IRA deduction if his or her
adjusted gross income is equal to or greater than $10,000. Individuals whose
spouse is an active participant in other retirement plans and whose combined
adjusted gross income exceeds the cutoff point of $150,000 by less than $10,000
are entitled to make deductible IRA contributions in proportionately reduced
amounts.
An individual may make non-deductible IRA contributions to the extent of the
excess of (1) the lesser of $2,000 ($4,000 in the case of a spousal IRA) or 100%
of compensation over (2) the IRA deductible contributions made with respect to
the individual.
An individual may not make any contribution to his/her own IRA for the year in
which he/she reaches age 70 or for any year thereafter.
Taxation of Distributions. Distributions from IRA Contracts are taxed as
ordinary income to the recipient, although special rules exist for the tax-free
return of non-deductible contributions. In addition, taxable distributions
received under an IRA Contract prior to age 59 are subject to a 10% penalty tax
in addition to regular income tax. Certain distributions are exempted from this
penalty tax, including distributions following the owner's death or disability
if the distribution is paid as part of a series of substantially equal periodic
payments made for the life (or life expectancy) of the Owner or the joint lives
(or joint life expectancies) of Owner and the Owner's designated Beneficiary;
distributions to pay medical expenses; distributions for certain unemployment
expenses; distributions for first home purchases (up to $10,000) and
distributions for higher education expenses.
Required Distributions. Generally, distributions from IRA Contracts must
commence not later than April 1 of the calendar year following the calendar year
in which the employee attains age 70, and such distributions must be made over a
period that does not exceed the life expectancy of the employee (or the employee
and Beneficiary). A penalty tax of 50% would be imposed on any amount by which
the minimum required distribution in any year exceeded the amount actually
distributed in that year. In addition, in the event that the employee dies
before his or her entire interest in the Contract has been distributed, the
employee's entire interest must be distributed in accordance with rules similar
to those applicable upon the death of the Contract Owner in the case of a
non-qualified contract, as described in the Prospectus.
Tax-Free Rollovers. The Code permits the taxable portion of funds to be
transferred in a tax-free rollover from a qualified employer pension,
profit-sharing, annuity, bond purchase or tax-deferred annuity plan to an IRA
Contract if certain conditions are met, and if the rollover of assets is
completed within 60 days after the distribution from the qualified plan is
received. A direct rollover of funds may avoid a 20% federal tax withholding
generally applicable to qualified plans or tax-deferred annuity plan
distributions. In addition, not more frequently than once every twelve months,
amounts may be rolled over tax-free from one IRA to another, subject to the
60-day limitation and other requirements. The once-per-year limitation on
rollovers does not apply to direct transfers of funds between IRA custodians or
trustees.
SIMPLIFIED EMPLOYEE PENSION PLANS AND SALARY REDUCTION SIMPLIFIED EMPLOYEE
PENSION PLANS
Purchase Payments. Under Section 408(k) of the Code, employers may establish a
type of IRA plan referred to as a simplified employee pension plan (SEP).
Employer contributions to a SEP cannot exceed the lesser of $24,000 or 15% or
the employee's earned income. Employees of certain small employers may have
contributions made to the salary reduction simplified employee pension plan
("SAR/SEP") on their behalf on a salary reduction basis. These salary reduction
contributions may not exceed $10,000 in 1999, which is indexed for inflation.
Employees of tax-exempt organizations and state and local government agencies
are not eligible for SAR/SEPs.
Taxation of Distributions. Generally, distribution payments from SEPs and
SAR/SEPs are subject to the same distribution rules described above for IRAs.
Required Distributions. SEPs and SAR/SEPs are subject to the same minimum
required distribution rules described above for IRAs.
Tax-Free Rollovers. Generally, rollovers and direct transfers may be made to and
from SEPs and SAR/SEPs in the same manner as described above for IRAs, subject
to the same conditions and limitations.
SAVINGS INCENTIVE MATCH PLANS FOR EMPLOYEES (SIMPLE IRA)
Purchase Payments. Under Section 408(p) of the Code, employers may establish a
type of IRA plan known as a Simple IRA. Employees may have contributions made to
the SIMPLE IRA on a salary reduction basis. These salary reduction contributions
may not exceed $6,000 in 1999, which is indexed for inflation. Total salary
reduction contributions are limited to $10,000 per year for any employee who
makes salary reduction contributions to more than one plan. Employers are
required to contribute to the SIMPLE IRA, which contributions may not exceed the
lesser of: (1) The amount of salary deferred by the employee, (2) 3% of the
employees compensation, or (3) $6,000, if the employer contributes on a matching
basis; or the lesser of: (1) 2% of the employees compensation, or (2) $3,200, if
the employer makes non-elective contributions. An employer may not make
contributions to both a SIMPLE IRA and another retirement plan for the same
calendar year.
Taxation of Distributions. Generally, distribution payments from SIMPLE IRAs are
subject to the same distribution rules described above for IRAs, except that
distributions made within two years of the date of an employees first
participation in a SIMPLE IRA of an employer are subject to a 25% penalty tax
instead of the 10% penalty tax discussed previously.
Required Distributions. SIMPLE IRAs are subject to the same minimum required
distribution rules described above for IRAs.
Tax-Free Rollovers. Direct transfers may be made among SIMPLE IRAs in the same
manner as described above for IRAs, subject to the same conditions and
limitations. Rollovers from SIMPLE IRAs are permitted after two years have
elapsed from the date of an employees first participation in a SIMPLE IRA of the
employer. Rollovers to SIMPLE IRAs from other plans are not permitted.
ROTH INDIVIDUAL RETIREMENT ANNUITIES (ROTH IRA)
Purchase Payments. Under Section 408A of the Code, Individuals may make
nondeductible contributions to Roth IRA contracts up to $2,000. This
contribution amount must be reduced by the amount of any contributions made to
other IRAs for the benefit of the Roth IRA owner. The maximum $2,000
contribution is phased out for single taxpayers with adjusted gross income
between $95,000 and $110,000 and for joint filers with adjusted gross income
between $150,000 and $160,000. If taxable income is recognized on the regular
IRA, an IRA owner with adjusted gross income of less than $100,000 may convert a
regular IRA into a Roth IRA. If the conversion is made in 1999, IRA income
recognized may be spread over four years. Otherwise, all IRA income will need to
be recognized in the year of conversion. No IRS 10% tax penalty will apply to
the conversion.
Taxation of Distribution. Qualified distributions are received incometax free by
the Roth IRA owner, or beneficiary in case of the Roth IRA owner's death. A
qualified distribution is any distribution made after five years if the IRA
owner is over age 59, dies, becomes disabled, or uses the funds for firsttime
home buyer expenses at the time of distribution. The five year period for
converted amounts begins from the year of the conversion.
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
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
======================
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>
<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>
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.
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.
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.
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>
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.
Principal Principal Life
(Logo) Financial Insurance Company
Group
Princor Financial
Services Corporation
May 4, 1999
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549
Principal Life Insurance Company Separate Account B
Flexible Variable Annuity Contract File No. 33-74232
Pursuant to Rule 497(j) under the Securities Act of 1933, as amended, the
Separate Account hereby certifies that the form of prospectus that would have
been filed on behalf of the Separate Account pursuant to Rule 497(c) upon the
effectiveness of the Post-Effective Amendments referenced above to the Separate
Account's Registration Statement on Form N-4 (the "Amendment") would not have
differed from that contained in the Amendments, which are the most recent
amendments on such Registration Statement and was filed electronically on
April 21 1999.
Comments or questions concerning this certificate may be directed to Kathy
Arterburn at 1-800-451-5447, ext. 75477.
Sincerely
/S/ Kathy Arterburn
Kathy Arterburn
Registered Products Associate
/ka
The Principal Home Office: Des Moines, Iowa 50392-0200 (800) 451-5447
Securities offered through Princor Financial Services Corporation, Des Moines,
IA 50392-0200 FAX (515) 248-4745
Principal Life and Princor are members of the Principal Financial Group
