Principal FreedomSM Variable Annuity
Issued by Principal Life Insurance Company (the "Company")
This Prospectus is dated May 1, 2000.
The individual deferred annuity contract ("Contract") described in this
Prospectus is funded with the Principal Life Insurance Company Separate Account
B ("Separate Account") and a fixed account ("Fixed Account"). The assets of the
divisions of the Separate Account are invested in a corresponding Account of the
Principal Variable Contracts Fund, Inc., the American Century Variable
Portfolios, Inc. - VP Income & Growth or the Franklin Templeton Variable
Insurance Products Trust - Templeton Growth Securities Fund Class 2. The Fixed
Account is a part of the General Account of the Company.
The Mutual Funds offered through this Contract may have names that are nearly
the same or similar to the names of retail mutual funds. However, these Mutual
Funds are not the same as those retail mutual funds, even though they have
similar names and may have similar characteristics and the same managers. The
investment performance of these Mutual Funds is not necessarily related to the
performance of the retail mutual funds. The Mutual Funds are described in
separate prospectuses that accompany this Prospectus.
This prospectus provides information about the Contract and the Separate Account
that you ought to know before investing. It should be read and retained for
future reference. Additional information about the Contract is included in the
Statement of Additional Information ("SAI"), dated May 1, 2000, which has been
filed with the Securities and Exchange Commission (the "Commission"). The SAI is
a part of this prospectus. The table of contents of the SAI is on page 31 of
this prospectus. You may obtain a free copy of the SAI by writing or
telephoning:
Principal FreedomSM Variable Annuity
Principal Financial Group
P. O. Box 9382
Des Moines, Iowa 50306-9382
Telephone: 1-800-852-4450
An investment in the Contract is not a deposit in any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
These securities have not been approved or disapproved by the Securities and
Exchange Commission or any state securities commission nor has the Securities
and Exchange Commission or any state securities commission passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
This prospectus is valid only when attached to the current prospectuses for the
Principal Variable Contracts Fund, Inc., the American Century Variable
Portfolios, Inc. - VP Income & Growth and the Franklin Templeton Variable
Insurance Products Trust - Templeton Growth Securities Fund Class 2 (the
"Funds").
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
Standard Death Benefit................................................. 8
Annuity Payments Options............................................... 8
Examination Offer...................................................... 8
CONDENSED FINANCIAL INFORMATION............................................ 9
THE PRINCIPAL FREEDOMSM VARIABLE ANNUITY................................... 10
THE COMPANY................................................................ 10
THE SEPARATE ACCOUNT....................................................... 10
THE FUNDS.................................................................. 11
THE CONTRACT............................................................... 13
To Buy a Contract...................................................... 13
The Accumulation Period................................................ 14
The Retirement Period.................................................. 18
CHARGES AND DEDUCTIONS..................................................... 19
Morality and Expense Risks Charge...................................... 19
Transaction Fee........................................................ 20
Premium Taxes.......................................................... 20
Fixed Account Surrender Charge and Transfer Fee........................ 20
Waiver of Fixed Account Surrender Charger Rider........................ 21
Administration Charge.................................................. 22
Special Provisions for Group or Sponsored Arrangements................. 22
FIXED ACCOUNT.............................................................. 22
General Description.................................................... 23
Fixed Account Value.................................................... 23
Fixed Account Transfers, Total and Partial Surrenders.................. 23
GENERAL PROVISIONS......................................................... 23
Telephone Services..................................................... 24
The Contract........................................................... 24
Delay of Payments...................................................... 25
Misstatement of Age or Gender.......................................... 25
Assignment............................................................. 25
Change of Owner........................................................ 25
Beneficiary............................................................ 25
Contract Termination................................................... 26
RIGHTS RESERVED BY THE COMPANY............................................. 26
DISTRIBUTION OF THE CONTRACT............................................... 26
PERFORMANCE CALCULATION.................................................... 26
VOTING RIGHTS.............................................................. 27
FEDERAL TAX MATTERS........................................................ 28
Non-Qualified Contracts................................................ 28
Required Distributions for Non-Qualified Contracts..................... 28
IRA ................................................................... 29
Withholding............................................................ 29
Mutual Fund Diversification............................................ 30
STATE REGULATION........................................................... 30
LEGAL OPINIONS............................................................. 30
LEGAL PROCEEDINGS.......................................................... 30
REGISTRATION STATEMENT..................................................... 30
OTHER VARIABLE ANNUITY CONTRACTS........................................... 30
INDEPENDENT AUDITORS....................................................... 31
FINANCIAL STATEMENTS....................................................... 31
CUSTOMER INQUIRIES......................................................... 32
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION............... 32
The Contract offered by this prospectus may not be available in all states. This
prospectus is not an offer to sell, or solicitation of an offer to buy, the
Contract in states in which the offer or solicitation may not be lawfully made.
No person is authorized to give any information or to make any representation in
connection with this Contract other than those contained in this prospectus.
GLOSSARY
account - series or portfolio of a mutual fund in which a Separate Account
division invests.
accumulated value - an amount equal to the Fixed Account value plus the Separate
Account value.
annuitant - the person, including any joint annuitant, on whose life the annuity
payment is based. This person may or may not be the owner.
annuity payment date - the date the owner's accumulated value is applied, under
an annuity payment option, to make income payments.
annuity service office - the office where notices, requests and purchase
payments must be sent. All amounts payable by us under the Contract are payable
through the annuity service office.
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 a Mutual
Fund.
Fixed Account - an account which earns guaranteed interest.
joint annuitant - additional annuitant. Joint annuitants must be husband and
wife and must be named as owner and joint owner.
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.
Mutual Fund - a registered open-end investment company in which a Separate
Account division invests.
non-qualified contract - a contract which does not qualify for favorable tax
treatment under the Internal Revenue Code as a Qualified Plan, Individual
Retirement Annuity, Roth IRA, SEP IRA, Simple IRA or Tax Sheltered Annuity.
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.
qualified plans - retirement plans which receive favorable tax treatment under
Section 401 or 403(a) of the Internal Revenue Code (the "Code").
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 - each day the New York Stock Exchange ("NYSE") is open.
valuation period - the period of time from one determination of the value of a
unit of a division of the Separate Account to the next. Each valuation period
begins at the close of normal trading on the NYSE, generally 4:00 p.m. E.T.
(3:00 p.m. C.T.) on each valuation date and ends at the close of normal trading
of the NYSE on the next valuation date.
written request - actual delivery to the Company at the annuity service office
of a written notice or request, signed and dated, on a form we supply or
approve. Your notice may be mailed to:
Principal FreedomSM Variable Annuity
Principal Financial Group
P. O. Box 9382
Des Moines, Iowa 50306-9382
SUMMARY OF EXPENSE INFORMATION
The purpose of these tables is to assist you in understanding the various costs
and expenses of the Contract. This information includes expenses of the Contract
as well as the underlying Mutual Funds but does not include any premium taxes
that may apply. For a more complete description of the contract expenses, see
CHARGES AND DEDUCTIONS.
Contract owner Transaction Expenses:
o There is no sales charge imposed on purchases.
o Deferred sales charge:
o No deferred sales charge applies to surrenders from the Separate
Account.
o The deferred sales charge (as a percentage of amounts surrendered from
the Fixed Account) is as follows:
<TABLE>
<CAPTION>
Number of completed contract years since each Surrender charge applied to Fixed Account
Fixed Account purchase* payment was made surrenders beyond Free Transaction Amount
--------------------------------------------- -----------------------------------------
<S> <C> <C>
0 (year of purchase payment) 6%
1 6%
2 6%
3 5%
4 4%
5 3%
6 2%
7 and later 0%
<FN>
* Includes amounts transferred to Fixed Account from Separate Account
divisions. Each Fixed Account purchase payment begins in year 0 for
purposes of calculating the percentage applied to that payment.
</FN>
</TABLE>
o Transfer fees may apply to transfers from the Fixed Account to any Separate
Account division (see Fixed Account Surrender Charge and Transfer Fee).
o Transaction fee - a $30 fee is charged on:
o each unscheduled transfer after the 12th unscheduled transfer; and
o each unscheduled partial surrender after the 12th unscheduled partial
surrender in a contract year.
o There is no annual contract fee.
o Separate Account annual expenses (as a percentage of average account
value):
o mortality and expense risks charge 0.85%
o other Separate Account expenses 0
-----
o total Separate Account annual expenses 0.85%
Annual expense of the Mutual Funds (as a percentage of average net assets) as of
December 31, 1999:
<TABLE>
<CAPTION>
Management Rule Other Total Mutual
Mutual Fund Fees 12(b)1 Fees Expenses Fund Expenses
<S> <C> <C> <C> <C>
American Century VP Income & Growth 0.70% N/A 0.00% 0.70%
Principal Variable Contracts Fund
Blue Chip 0.60 N/A 0.09 0.69
Bond 0.49 N/A 0.01 0.50
Capital Value 0.43(1) N/A 0.00 0.43
International 0.73(1) N/A 0.05 0.78
LargeCap Growth 1.10 N/A 0.13 1.23(2)
MidCap 0.61 N/A 0.00 0.61
MidCap Growth 0.90 N/A 0.19 1.09(2)
MidCap Value 1.05 N/A 0.21 1.26(2)
Money Market 0.50 N/A 0.02 0.52
SmallCap 0.85 N/A 0.06 0.91
SmallCap Growth 1.00 N/A 0.07 1.07(2)
Stock Index 500 0.35 N/A 0.14 0.49(2)
Templeton Growth Securities Class 2(3) 0.83(4) 0.25%(5)(6) 0.05 1.13
<FN>
(1) As a result of a shareholder meeting the Account's management fee was
modified effective 1/1/2000.
(2) Manager has agreed to reimburse expenses, if necessary, so that total
Account operating expenses for 2000 will be no more than:
LargeCap Growth 1.20% MidCap Value 1.20% Stock Index 500 0.40%
MidCap Growth 0.96% SmallCap Growth 1.06%
(3) On 2/8/00, a merger and reorganization was approved that combined the
fund with a similar fund of Templeton Variable Products Series Fund,
effective 5/1/00. The table shows total expenses based on the fund's
assets as of 12/31/99, and not the assets of the combined fund.
However, if the table reflected combined assets, the funds's expenses
after 5/1/00 would be estimated as: Management Fees 0.80%, Distribution
and Service Fees 0.25%, Other Expenses 0.05%, and Total Fund Operating
Expenses 1.10%.
(4) The fund administration fee is paid indirectly through the management fee.
(5) The fund's class 2 distribution plan or "rule 12b-1 plan" is described
in the fund's prospectus. While the maximum amount payable under the
fund's class 2 rule 12b-1 plan is 0.35% per year of the fund's average
daily net assets, the Board of Trustees of Franklin Templeton Variable
Insurance Products Trust has set the current rate at 0.25% per year.
(6) The Company and Princor Financial Services Corporation may receive a
portion of the fund expenses for recordkeeping, marketing and
distribution services.
</FN>
</TABLE>
Example
The purpose of the following example is to assist you in understanding the
various costs and expenses that a contract owner bears directly or indirectly.
It reflects expenses of the Separate Account as well as the expenses of the
Mutual Fund in which the Separate Account invests, both as of the calendar year
ended December 31, 1999. In certain circumstances, state premium taxes also
apply.
The example should not be considered a representation of past or future
expenses. Actual expenses may be more or less than those shown.You would pay the
following expenses on a $1,000 investment, assuming 5% annual return on assets.
There is no surrender charge imposed on total or partial surrenders from
divisions of the Separate Account.
<TABLE>
<CAPTION>
Division 1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
American Century VP Income & Growth $16 $49 $84 $185
Blue Chip 16 49 84 183
Bond 14 43 74 162
Capital Value 13 41 70 155
International 17 51 89 193
LargeCap Growth 21 65 112 241
MidCap 15 46 80 175
MidCap Growth 20 61 105 226
MidCap Value 21 66 113 244
Money Market 14 43 75 165
SmallCap 18 55 95 207
SmallCap Growth 19 60 104 224
Stock Index 500 14 42 73 161
Templeton Growth Securities 20 62 107 231
</TABLE>
SUMMARY
This prospectus describes a flexible variable annuity offered by the Company.
The Contract is designed to provide individuals with retirement benefits,
including plans and trusts that do not qualify for special tax treatment under
the Internal Revenue Code of 1986, as amended (the "Code") and for purchase by
persons participating in individual retirement annuity plans that meet the
requirements of Section 408 of the Code.
A significant advantage of the Contract is that it provides the ability to
accumulate capital on a tax-deferred basis. The purchase of a Contract to fund a
tax-qualified retirement account does not provide any additional tax deferred
treatment of earnings beyond the treatment provided by the tax-qualified
retirement plan itself. However, the Contract does provide benefits such as
lifetime income payments, family protection through death benefits and asset
allocation.
This is a brief summary of the Contract's features. More detailed information
follows later in this prospectus.
Investment Limitations
o Initial purchase payment must be $10,000 or more.
o Each subsequent investment must be $50 or more.
o The total purchase payments made during the life of the Contract may not be
greater than $2 million.
Separate Account Investment Options (see THE FUNDS):
You may allocate your net premium payments to Separate Account divisions and/or
the Fixed Account. Not all Separate Account divisions are available in all
states. A current list of Separate Account divisions available in your state may
be obtained from a sales representative or the annuity service office.
Each Separate Account 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 Mutual Funds offered through this Contract may have names that are nearly
the same or similar to the names of retail mutual funds. However, these Mutual
Funds are not the same as those retail mutual funds, even though they have
similar names and may have similar characteristics and the same managers. The
investment performance of these Mutual Funds is not necessarily related to the
performance of the retail mutual funds. The Mutual Funds are described in
separate prospectuses that accompany this Prospectus.
<TABLE>
<CAPTION>
Division invests in:
<S> <C> <C>
American Century Variable Portfolios, Inc.
American Century VP Growth & Income VP Income & Growth
Franklin Templeton Variable Insurance Products Trust
Templeton Growth Securities Templeton Growth Securities Fund Class 2
Principal Variable Contracts Fund, Inc.
Blue Chip Blue Chip Account
Bond Bond Account
Capital Value Capital Value Account
International International Account
LargeCap Growth LargeCap Growth Account
MidCap MidCap Account
MidCap Growth MidCap Growth Account
MidCap Value MidCap Value Account
Money Market Money Market Account
SmallCap SmallCap Account
SmallCap Growth SmallCap Growth Account
Stock Index 500 Stock Index 500 Account
</TABLE>
Transfers (see Separate Account Transfers for additional restrictions)
o During the accumulation period:
o from the Separate Account divisions:
o dollar amount or percentage of transfer must be specified; and
o transfer may occur on scheduled or unscheduled basis (a $30 fee is
imposed on each unscheduled transfer after the 12th unscheduled
transfer in a contract year).
o from the Fixed Account:
o percentage or dollar amount of transfer must be specified; and
o amounts available for transfer without payment of a transfer fee
are limited (see Fixed Account Transfers, Total and Partial
Surrenders).
o During the annuity payment period, transfers are not permitted.
Surrenders (total or partial) (see Separate Account Surrender and Fixed Account
Transfers, Total and Partial Surrenders)
o During the accumulation period:
o a dollar amount must be specified;
o surrenders before age 59 1/2 may involve an income tax penalty;
o full surrender permitted prior to the annuity payment date; and
o partial surrender permitted prior to annuity payment date (a $30 fee is
imposed on each unscheduled partial surrender after the 12th
unscheduled partial surrender in a contract year).
o During the annuity payment period, surrenders are not permitted.
Charges and Deductions
o No sales charge on purchase payment at the time of investment.
o A contingent deferred surrender charge is imposed on certain total or
partial surrenders from the Fixed Account.
o A transfer fee applies to certain transfers from the Fixed Account to
divisions of the Separate Account.
o A mortality and expense risks daily charge equal to 0.85% per year applies
to amounts in the Separate Account. The Company reserves the right to
increase this charge but guarantees that it will not exceed 1.25% per year.
o Daily Separate Account administration charge is currently zero but the
Company reserves the right to assess a charge not to exceed 0.15% annually.
o Certain states and local governments impose a premium tax. The Company
reserves the right to deduct the amount of the tax from purchase payments
or accumulated values.
Standard Death Benefit
o During the accumulation period:
o the death benefit is the greater of:
o accumulated value, or
o purchase payments minus partial surrenders, any transaction fees,
surrender charges and transfer fees.
o You may choose to have death benefit payments made under an annuity
payment option.
o During the annuity period:
o your named beneficiary(ies) receives only the continuing payments
provided by the annuity payment option selected.
Annuity Payment Options
o You may choose from several fixed payment options which start on your
selected annuity payment date.
o Payments are made to the annuitant (or beneficiary).
Examination Offer (Free-look period)
o You may surrender the Contract during the free-look period which is
generally 10 days from the date you receive your Contract. The free-look
period may be longer in certain states.
o We return either all purchase payments made or the accumulated value,
whichever is required by applicable state law.
CONDENSED FINANCIAL INFORMATION
The policy was first offered on April 30, 1999. The following unit values are
for the period from April 30, 1999 through December 31, 1999.
<TABLE>
<CAPTION>
Number of
Accumulation Unit Value Accumulation Units
Outstanding Beginning End of
Percentage of Change End of Period of Period Period
from Prior Period (in thousands)
<S> <C> <C> <C> <C> <C>
Blue Chip Division
1999 $10.000 $10.256 2.56% 123
Bond Division
1999 10.000 9.708 -2.92 107
Capital Value Division
1999 10.000 8.872 -11.28 103
International Division
1999 10.000 11.681 16.81 53
LargeCap Growth Division
1999 10.000 13.278 32.78 31
MidCap Division
1999 10.000 10.944 9.44 32
MidCap Growth Division
1999 10.000 11.285 12.85 9
MidCapValue Division
1999 10.000 11.200 12.00 18
Money Market Division
1999 10.000 10.253 2.53 94
SmallCap Division
1999 10.000 13.789 37.89 50
SmallCap Growth Division
1999 10.000 17.178 71.78 24
Stock Index 500 Division
1999 10.000 10.985 9.85 302
American Century Growth & Income Division
1999 10.000 11.110 11.10 43
Templeton Growth Securities Division*
1999 10.000 11.485 14.85 20
<FN>
* The Templeton Variable Products Series Fund - Templeton Stock Fund Class 2
was acquired and changed its name to the Franklin Templeton Variable
Insurance Products Trust - Templeton Growth Securities Fund - Class 2 on
5/1/2000. Performance shown for periods prior to this date represent the
historical results for Templeton Variable Products Series Fund - Templeton
Stock Fund Class 2.
</FN>
</TABLE>
THE PRINCIPAL FREEDOMSM VARIABLE ANNUITY
The Principal FreedomSM Variable Annuity is significantly different from a fixed
annuity. As the owner of a variable annuity, you assume the risk of investment
gain or loss (as to amounts in the Separate Account divisions) rather than the
insurance company. The amount available for annuity payments under a variable
annuity is not guaranteed. The amount available for payments vary with the
investment performance of the portfolio securities of the underlying Mutual
Fund(s).
Based on your investment objectives, you direct the allocation of purchase
payments and accumulated values. There can be no assurance that your investment
objectives will be achieved.
THE COMPANY
The Company is a stock life insurance company with its home office at: Principal
Financial Group, Des Moines, Iowa 50306-9382. It is authorized to transact life
and annuity business in all of the United States and the District of Columbia.
The Company is a wholly owned subsidiary of Principal Financial Services, Inc.
In 1879, Principal Life Insurance Company was incorporated under Iowa law as a
mutual life insurance company named Bankers Life Association. It changed its
name to Bankers Life Company in 1911 and then to Principal Mutual Life Insurance
Company in 1986. The name change to Principal Life Insurance Company and
reorganization into a mutual holding company structure took place in 1998.
THE SEPARATE ACCOUNT
The Separate Account was established under Iowa law on January 12, 1970. It was
registered as a unit investment trust with the Commission on July 17, 1970. This
registration does not involve Commission supervision of the investments or
investment policies of the Separate Account.
The income, gains, and losses, whether or not realized, of the Separate Account
are credited to or charged against the Separate Account without regard to other
income, gains, or losses of the Company. Obligations arising from the Contract,
including the promise to make annuity payments, are general corporate
obligations of the Company. However, the Contract provides that the portion of
the Separate Account's assets equal to the reserves and other liabilities under
the Contract are not charged with any liabilities arising out of any other
business of the Company.
The assets of each Separate Account division invest in a corresponding mutual
fund. New Separate Account divisions may be added and made available. Divisions
may also be eliminated from the Separate Account.
THE FUNDS
The Principal Variable Contracts Fund, Inc., American Century Variable
Portfolios, Inc. - VP Income & Growth and Franklin Templeton Variable Insurance
Products Trust - Templeton Growth Securities Fund Class 2 are Mutual Funds
registered under the Investment Company Act of 1940 as diversified open-end
investment management companies. The Mutual Funds provide the investment
vehicles for the Separate Account. A full description of the Mutual Funds, the
investment objectives, policies and restrictions, charges and expenses and other
operational information are contained in the accompanying prospectuses (which
should be read carefully before investing) and the Statement of Additional
Information ("SAI"). Additional copies of these documents are available from a
sales representative or our annuity service office.
Principal Management Corporation (the "Manager") serves as the manager for the
Principal Variable Contracts Fund. The Manager is a subsidiary of Princor
Financial Services Corporation. It has managed mutual funds since 1969. As of
December 31, 1999, the funds it managed had assets of approximately $6.4
billion. The Manager's address is Principal Financial Group, Des Moines, Iowa
50392-0200.
Some of the Principal Variable Contracts Fund's Accounts are used to fund the
Company's variable life insurance contracts. The 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
variable 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 division with an alternate investment, then the division
may have to liquidate securities on a disadvantageous basis.
American Century Investment Management, Inc. ("the Advisor") serves as the
investment advisor for American Century Variable Portfolios, Inc. - VP Income &
Growth. The Advisor has been managing mutual funds since 1958. American Century
is headquartered at 4500 Main Street, Kansas City, Missouri 64111. The Advisor
is responsible for managing the investment portfolio of the fund and directing
the purchase and sale of its investment securities. The Advisor also arranges
for transfer agency, custody and all other services necessary for the fund to
operate.
Templeton Global Advisors Limited serves as the investment advisor for the
Franklin Templeton Variable Insurance Products Trust - Templeton Growth
Securities Fund Class 2. The Advisor is located at Lyford Cay, Nassau, N.P.,
Bahamas. The Advisor supervises all aspects of the fund's operations including
managing its assets, making its investment decisions, and providing certain
administrative facilities and services to the fund.
The Company purchases and sells Mutual Fund shares for the Separate Account at
their net asset value without any sales or redemption charge. Shares represent
interests in the Mutual Fund available for investment by the Separate Account.
Each Mutual Fund corresponds to one of the divisions of the Separate Account.
The assets of each division are separate from the others. A division's
performance has no effect on the investment performance of any other division.
The following is a brief summary of the investment objectives of each division:
<TABLE>
<CAPTION>
Division Division Invests In Investment Advisor* Investment Objective
-------- ------------------- ------------------ --------------------
<S> <C> <C> <C>
American Century
Variable Portfolios, Inc.
American Century VP VP Income & Growth American Century Seeks dividend growth, current income and capital
Income & Growth Investment Management, Inc. appreciation.The Account will seek to achieve its
investment objective by investing in common
stocks.
Franklin Templeton Variable
Insurance Products Trust
Templeton Growth Templeton Growth Templeton Global Advisors Capital growth through investing primarily in
Securities Fund - Class 2 Limited Securities common and preferred stock issued by
companies, large and small, in various nations
throughout the world.
Principal Variable
Contracts Fund, Inc.
Blue Chip Blue Chip Account Invista Capital Management, Seeks to achieve growth of capital and growth of
LLC through a sub-advisory income by investing primarily in common stocks
agreement of well capitalized, established companies.
Bond Bond Account Principal Management To provide as high a level of income as is
Corporation consistent with preservation of capital and
prudent investment risk.
Capital Value Capital Value Account Invista Capital Management, To provide long-term capital appreciation
LLC through a sub-advisory and secondarily growth of investment income.
agreement The Account seeks to achieve its investment
objectives through the purchase primarily of
common stocks, but the Account may invest in
other securities.
International International Account Invista Capital Management, Seeks long-term growth of capital by investing in
LLC through a sub-advisory a portfolio of equity securities domiciled in any
agreement of the nations of the world.
LargeCap Growth LargeCap Growth Account Janus Capital Corporation Seeks long-term growth of capital by investing
through a sub-advisory primarily in equity securities of growth
agreement companies with market capitalization of greater
than $10 billion.
MidCap MidCap Account Invista Capital Management, To achieve capital appreciation by investing
LLC through a sub-advisory primarily in securities of emerging and other
agreement growth-oriented companies.
MidCap Growth MidCap Growth Account Dreyfus Corporation Seeks long-term growth of capital by investing
through a sub-advisory primarily in growth stocks of companies with
agreement market capitalizations in the $1 billion to $10
billion range.
MidCap Value MidCap Value Account Neuberger & Berman Seeks long-term growth of capital by investing
Management, Inc. through primarily in equity securities of companies with
a sub-advisory agreement value characteristics and market capitalizations
in the $1 billion to $10 billion range.
Money Market Money Market Account Principal Management Seeks as high a level of current income available
Corporation 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 moneymarket instruments.
SmallCap SmallCap Account Invista Capital Management, Seeks long-term growth of capital. The Account
LLC through a sub-advisory attempts to achieve its objective by investing
agreement primarily in equity securities of both growth
and value oriented companies with comparatively
smaller market capitalizations.
SmallCap Growth SmallCap Growth Account Berger Associates Seeks long-term growth of capital by investing
through a sub-advisory primarily in equity securities of small growth
agreement companies with market capitalization of less
than $1 billion.
Stock Index 500 Stock Index 500 Account Invista Capital Management, Seeks long-term growth of capital. The Account
LLC through a sub-advisory attempts to mirror the investment results of the
agreement Standard & Poor's Stock Index.
<FN>
* An investment advisor agrees to provide investment advisory services for a
specific underlying Mutual Fund or underlying Mutual Fund Account. For these
services, each investment advisor is paid a fee.
</FN>
</TABLE>
THE CONTRACT
The descriptions that follow are based on provisions of the Contract offered by
this prospectus. You should refer to the actual Contract and the terms and
limitations of any tax qualified plan which is to be funded by the Contract. Tax
qualified plans are subject to several requirements and limitations which may
affect the terms of any particular Contract or the advisability of taking
certain action permitted by the Contract.
To Buy a Contract
If you want to buy a Contract, you must submit an application and make an
initial purchase payment. If the application is complete and the Contract
applied for is suitable, the Contract is issued. If the completed application is
received in proper order, the initial purchase payment is credited within two
valuation days after the later of receipt of the application or receipt of the
initial purchase payment at the Company's home office. If the initial purchase
payment is not credited within five valuation days, it is refunded unless we
have received your permission to retain the purchase payment until we receive
the information necessary to issue the Contract.
1. Purchase payments
The initial purchase payment must be at least $10,000. Subsequent payments must
be at least $50. The total of all purchase payments may not be greater than
$2,000,000 without our prior approval.
The Company reserves the right to:
o increase the minimum amount for each purchase payment to not more than
$1,000; and
o terminate a Contract and distribute the accumulated value if no premiums
are paid during two consecutive calendar years and the accumulated value
(or total purchase payments less partial surrenders and applicable
surrender charges and transfer fees) is less than $5,000. The Company will
first notify you of its intent to exercise this right and give you 60 days
to increase the accumulated value to at least $5,000.
2. Allocation of purchase payments and examination offer (Free-Look period)
Your purchase payments are allocated to the Separate Account divisions and/or to
the Fixed Account according to your instructions. The percentage allocation for
future purchase payments may be changed, without charge, at any time by sending
a written request to or telephoning the annuity service office. The allocation
changes are effective at the end of the valuation period in which your new
instructions are received. You may not allocate your investment to the Fixed
Account if it causes the value of the Fixed Account to be more than $1,000,000
(without our prior approval).
Under state law, you have the right to return the Contract for any reason during
the free-look period. Some states require us to return the initial purchase
payment(s). 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(s) is reallocated
according to your allocation instructions. The states in which purchase payments
are returned are:
Colorado Kentucky North Carolina
Connecticut* Louisiana Oklahoma
Georgia Maryland Rhode Island
Hawaii Michigan South Carolina
Idaho Missouri Utah
Indiana Nebraska Washington
* Purchase payments are refunded if the Contract is canceled prior to its
delivery, otherwise accumulated value is refunded.
If your Contract is issued in a state not listed above and if you return the
Contract during the free-look period, you will receive the accumulated value.
If you are purchasing this Contract in a qualified plan, then your initial
purchase payment(s) is allocated to the Money Market Division. If the Contract
is issued in a state requiring the return of the purchase payment(s), the
purchase payment(s) remains in the Money Market Division until the examination
period expires (or at least 7 days if the examination period is shorter). In all
other states the purchase payment(s) remain in the Money Market Division for 7
days. Following the required holding period, the purchase payment(s) is
allocated according to your instructions.
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 (30 day free-look period);
b. Colorado (15 day free-look period); or
c. Idaho or North Dakota (20 day free-look period).
You may return the Contract by sending it, and a written request to cancel the
Contract, to the annuity service office or to the sales representative who sold
it to you before the close of business on the last day of the free-look period.
If you send your request (properly addressed and postage prepaid) to the annuity
service office, the date of the postmark is used to determine if the free-look
period has expired.
If the purchase of this Contract is a replacement for another annuity contract
or a life insurance policy, different free-look periods may apply. The Company
reserves the right to keep the initial purchase payment in the Money Market
Division longer than 15 days to correspond to the free-look period of a
particular state's replacement requirements.
The Accumulation Period
1. The value of your Contract
The value of your Contract is the total of the Separate Account value plus any
Fixed Account value. The Fixed Account value is described in the section titled
FIXED ACCOUNT.
There is no guaranteed minimum Separate Account value. Its value reflects the
investment experience of the Separate Account divisions that you choose. It also
reflects your purchase payments, partial surrenders and the Contract expenses
deducted from the Separate Account. At the end of any valuation period, your
Contract's value in a division is:
o the number of units you have in a division multiplied by
o the value of a unit in the division.
The number of units is the total of units purchased by allocations to the
division from:
o your initial purchase payment;
o subsequent investments; and
o transfers from another division or the Fixed Account.
minus units sold:
o for partial surrenders from the division;
o as part of a transfer to another division or the Fixed Account; and
o to pay Contract charges and fees.
Unit values are calculated each valuation date. To calculate the unit value of a
Separate Account division, the unit value from the previous valuation date is
multiplied by the divisions' net investment factor for the current valuation
period. The number of units does not change due to a change in unit value.
The net investment factor measures the performance of each Separate Account
division. The net investment factor for a valuation period is calculated as
follows:
<TABLE>
<CAPTION>
<S> <C>
[{share price (net asset value) of the Mutual Fund at the end of the valuation period
plus
per share amount of any dividend* (or other distribution) made by the Mutual Fund during the valuation period}
divided by
share price (net asset value) of the Mutual Fund at the end of the previous valuation period]
minus
{total Separate Account annual expenses}
<FN>
* When an investment owned by a Mutual Fund pays a dividend, the
dividend increases the net asset value of a share of the Mutual Fund
as of the date the dividend is recorded. As the net asset value of a
share of a Mutual Fund increases, the unit value of the corresponding
Separate Account division also reflects an increase. Payment of a
dividend under these circumstances does not increase the number of
units you own in the Separate Account division.
</FN>
</TABLE>
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.
2. Allocation of purchase payments
On your application for the Contract, you direct your purchase payments to be
allocated to Separate Account divisions, the Fixed Account or both. Percentages
must be in whole numbers and total 100%. Subsequent investments are made using
the same allocation percentages unless you change the allocations. Changes to
purchase payment allocations do not transfer existing accumulated value.
Using your allocation percentages, we will credit your purchase payments to the
Separate Account divisions and/or the Fixed Account. The payments are credited
to the Separate Account divisions using the unit value next calculated after we
receive your payment.
Changes to the allocation percentages may be made without charge. A change is
effective on the next valuation period after we receive your new instructions.
You can change the allocations by mailing your instructions to us, calling us at
1-800-852-4450, if telephone services apply, or faxing your instructions to us
at 1-515-248-9800.
3. Separate Account division transfers
You may request an unscheduled transfer or set up a periodic transfer by sending
us a written request, calling us if telephone services apply (1-800-852-4450) or
faxing your request at 1-515-248-9800. You must specify the dollar amount or
percentage to transfer from each Separate Account division. In states where
allowed, we reserve the right to reject transfer instructions from someone
providing them for multiple Contracts for which he or she is not the owner.
You may not make a transfer to the Fixed Account if:
o a transfer has been made from the Fixed Account to a Separate Account
division within six months; or
o after the transfer, the Fixed Account value would be more than $1,000,000
(without our prior approval).
Unscheduled
o You may make unscheduled Separate Account division transfers from a
division to another division or to the Fixed Account.
o The transfer is made, and values determined, as of the end of the valuation
period in which we receive your request.
o The transfer amount must be equal to or greater than the lesser of $50 or
the total value of the Separate Account division from which the transfer is
being made.
o A $30 fee is imposed on each unscheduled transfer after the 12th
unscheduled transfer in a contract year (for fee purposes, all transfers
based on a single instruction are considered to be a single transfer).
Scheduled
o You may elect to have automatic transfers made on a periodic basis.
o You select the transfer date (other than the 29th, 30th or 31st) and the
transfer period.
o automatic portfolio rebalancing (annually, semi-annually or quarterly)
o dollar cost averaging (annually, semi-annually, quarterly or monthly)
o If the selected date is not a valuation date, the transfer is completed on
the next valuation date.
o Transfers continue until your interest in the division is zero or we
receive notice to stop them.
o We reserve the right to limit the number of Separate Account divisions from
which simultaneous transfers are made. In no event will it ever be less
than two.
4. Separate Account surrenders
Surrenders from the Separate Account are generally paid within seven days of the
effective date of the request for surrender (or earlier if required by law).
However, certain delays in payment are permitted (see GENERAL PROVISIONS - Delay
of Payment). Surrenders before age 59 1/2 may involve an income tax penalty (see
FEDERAL TAX MATTERS). You must send us a written request for any surrender.
You may specify surrender allocations percentages with each partial surrender
request. If you don't provide us with specific percentages, we will use your
purchase payment allocation percentages for the partial surrender.
Total
o You may surrender the Contract on or before the annuity payment date.
o You receive the cash surrender value at the end of the valuation period
during which we receive your surrender request.
o The cash surrender value is the total of the values of your Separate
Account divisions plus any amount you have in the Fixed Account minus any
applicable surrender charge or transaction fee.
o The written consent of all collateral assignees and irrevocable
beneficiaries must be obtained prior to surrender.
o We reserve the right to require you to return the Contract to us prior to
making any payment though this does not affect the amount of the cash
surrender value.
Unscheduled partial
o Prior to the annuity payment date, you may surrender a part of the Fixed
Account and/or Separate Account value by sending us a written request.
o You must specify the dollar amount of the surrender (which must be $50 or
more).
o The surrender is effective at the end of the valuation period during which
we receive your written request for surrender.
o The surrender is deducted from your Fixed Account value and/or your
Separate Account division(s) 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
amounts to equal the dollar amount of the surrender request plus any
applicable Fixed Account surrender charge.
o The accumulated value after the unscheduled partial surrender must be equal
or greater than $5,000 (we reserve the right to change the minimum
remaining accumulated value but it will not be greater than $10,000).
o A $30 fee is imposed on each unscheduled partial surrender after the 12th
unscheduled partial surrender in a contract year. Surrenders from multiple
Separate Account divisions made at the same time are considered to be one
surrender for purposes of calculating this fee.
Scheduled partial
o You may elect partial surrenders on a periodic basis by sending us written
notice.
o Your accumulated value must be at least $5,000 when the surrenders begin.
o Surrenders are made from any of the Separate Account divisions and/or the
Fixed Account.
o You may specify monthly, quarterly, semi-annually or annually and pick a
surrender date (other than the 29th, 30th or 31st).
o If the selected date is not a valuation date, the transfer is completed on
the next valuation date.
o The surrender is deducted from your Fixed Account value and/or any Separate
Account division(s) according to the surrender allocation percentages you
specify.
o If surrender allocation percentages are not specified, we use your purchase
payment allocation percentages.
o We surrender units from the Separate Account divisions and/or Fixed Account
to equal the dollar amount of the surrender request plus any applicable
surrender charge.
o The surrenders continue until the accumulated value is zero or we receive
written notice to stop them.
5. Death Benefit
If you or the annuitant die before the annuity payment date, then we will pay a
death benefit. In the case of joint annuitants, the death benefit is paid upon
death of the first annuitant. If the owner is not a natural person, death
benefits are paid to the beneficiary(ies) upon the death of the annuitant.
Before the annuity payment date, you may give us written instructions for
payment under an annuity payment 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.
You name the beneficiary or beneficiaries in your application. The
beneficiary(ies) receive benefits upon your death. If the owner is not a natural
person, death benefits are paid to the beneficiary(ies) upon the death of the
annuitant.
Unless you have named an irrevocable beneficiary, you may change your
beneficiary(ies) by providing us with written notice. If a beneficiary dies
before you, on your death we will make equal payments to the surviving
beneficiaries unless you had provided us with other written instructions. If
none of your beneficiaries survives you, we will pay the death benefit to your
estate in a lump sum.
The death benefit is usually paid within seven days of our receiving all
documents (including proof of death) that we require to process the claim and
the beneficiary's written instructions. Some states require this payment to be
made in less than seven days. Under certain circumstances, this payment may be
delayed (see GENERAL PROVISIONS - Delay of Payments). We pay interest (at least
3% or as required by state law) on the death benefit from the date we receive
all required documents until payment is made or until the death benefit is
applied under an annuity payment option.
Standard Death Benefit
The amount of the death benefit is the greater of:
o your accumulated value on the date we receive all required documents; or
o the total of purchase payments minus any partial surrenders, fees and
charges as of the date we receive all required documents and notice
(including proof) of death.
If you die before the annuitant and your beneficiary is your spouse, we will
continue the Contract with your spouse as the new owner. Alternatively, within
60 days of your death, your spouse may elect to:
o apply the death benefit under an annuity payment option; or
o receive the death benefit as a single payment.
If the annuitant dies before you and is not a joint owner, you may name a new
annuitant. If a new annuitant is not named within 60 days of our receiving
notice (including proof) of the original annuitant's death, you will become the
annuitant. If the owner of the contract is not a natural person, the annuitant's
death is treated as the death of the owner.
If your beneficiary is a natural person but not your spouse, the death benefit
may be paid as:
o fixed income for a period of years that is not greater than the life
expectancy of the beneficiary;
o life income with no minimum guaranteed period or a minimum guaranteed
period that is not greater than the life expectancy of the beneficiary;
o a lump sum; or
o an individual arrangement approved by us.
NOTE: If your beneficiary is not a natural person, the death benefit must be
paid out within five years of your death. If you die before the
annuitant and before the annuity payment date, there may be additional
requirements imposed by the Code (see FEDERAL TAX MATTERS).
The Retirement Period
1. Annuity payment date
You may specify an annuity payment date in your application. If the annuitant is
living and the Contract is in force on that date, we will notify you to begin
taking payments under the Contract. You may not select an annuity payment date
which is on or after the later of the annuitant's 85th birthday or 10 years
after the contract date.
Depending on the type of retirement arrangement made when a Contract is issued,
payments that are made too early or too late may be subject to penalty taxes
(see FEDERAL TAX MATTERS). You should consider this carefully when you select or
change the annuity payment date.
You may change the annuity payment date with our prior approval. The request
must be in writing and approved before we issue a supplementary Contract which
provides an annuity payment option. The new annuity payment date must be any
contract anniversary on or before the maximum annuity payment date.
2. Annuity payment options
You may choose from several fixed 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 option selected; and
o age of annuitant (unless fixed income option is selected).
Annuity payments generally are higher for male annuitants than for female
annuitants with an otherwise identical contract. This is because statistically
females have longer life expectancies than males. In certain states, this
difference may not be taken into consideration in fixing the payment amount.
Additionally, contracts with no gender distinctions are made available for
certain employer-sponsored plans because under most such plans, such contract
provisions are prohibited by law.
You may select an annuity payment option or change a previous selection by
written request. We must receive the request on or before the annuity payment
date. You may not change your annuity payment option or make Separate Account
division transfers after the annuity payment date.
Payments under the annuity payment options are made as of the first day of each
payment period beginning with the annuity payment date. The available annuity
payment options are:
o Fixed Income. Payments of a fixed amount or payments for a fixed period of
at least five years but not more than 30 years. Payments stop after all
guaranteed payments are made.
o Life Income. Payments are made as of the first day of each payment period
during the annuitant's life, starting with the annuity payment date. No
payments are made after the annuitant dies. It is possible that you would
only receive one payment under this option if the annuitant dies before the
second payment is due. If you die after the payments begin and before the
end of the minimum guaranteed period (if applicable), the remaining
payments are made to the beneficiary named under your annuity payment
option.
o Joint and Survivor Life Income. Payments are made during the life of the
annuitant and joint annuitant, continuing until the death of the survivor.
This option includes a minimum guaranteed period of 10 years. If both
persons die before the end of the minimum guaranteed period, the remaining
payments are made to the beneficiary under your annuity payment option.
o Joint and Two-thirds Survivor Life Income. Payments continue as long as
either the annuitant or the joint annuitant is alive. If either the
annuitant or joint annuitant dies, payments continue to the survivor at
two-thirds the original amount. Payments stop when both the annuitant and
joint annuitant have died. It is possible that only one payment is made
under this option if both annuitants die before the second payment is due.
o Other annuity payment options may be available with our approval.
If you do not select an annuity payment option, your accumulated value will be
applied as follows to determine the annuity payment: o life income with a ten
year guarantee; or o if there are joint annuitants, joint and survivor life
income with a ten year guarantee.
In order to avoid tax penalties, payments from at least one of your qualified
contracts must start no later than April 1 following the calendar year in which
you turn age 70 1/2. The required minimum payment is a distribution in equal (or
substantially equal) amounts over your life or over the joint lives of you and
your designated beneficiary(ies). 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
A mortality and expense risks charge and in some circumstances a transaction fee
and state premium taxes are deducted under the Contract. A surrender charge (on
surrenders) and a transfer fee (on transfers to Separate Account divisions) may
also be deducted from certain withdrawals from the Fixed Account made before the
annuity payment date. We reserve the right to assess a daily Separate Account
administration charge. There are also deductions from and expenses paid out of
the assets of the Mutual Funds which are described in the Mutual Funds'
prospectuses.
Mortality and Expense Risks Charge
We assess each Separate Account division with a daily charge for mortality and
expense risks. The annual rate of the charge is 0.85% of the average daily net
assets of the Separate Account. We reserve the right to increase this charge but
guarantee that it will not exceed 1.25% per year. This charge is assessed only
prior to the annuity payment date. This charge is assessed daily when the value
of an accumulation unit is calculated.
We have a mortality risk in that we guarantee payment of a death benefit in a
single sum or under an annuity payment option. No surrender charge is imposed on
a death benefit payment which gives us an additional mortality risk.
The expense risk that we assume is that the actual expenses incurred in issuing
and administering the Contract exceed the Contract limits on administrative
charges.
If the mortality and expense risks charge is not enough to cover the costs, we
bear the loss. If the amount of mortality and expense risks charge deducted is
more than our costs, the excess is profit to the Company. We expect a profit
from the mortality and expense risks charge.
Transaction Fee
A transaction fee of $30 applies to each unscheduled partial surrender after the
twelfth unscheduled partial surrender in a contract year. A $30 transaction fee
is also charged to each unscheduled transfer from a division after the twelfth
such transfer in a contract year. The transaction fee is deducted from the Fixed
Account and/or your interest in a Separate Account division(s) from which the
amount is surrendered or transferred, on a pro rata basis.
Premium Taxes
We reserve the right to deduct an amount to cover any premium taxes imposed by
states or other jurisdictions. Any deduction is made from either a purchase
payment when we receive it, or the accumulated value when you request a
surrender (total or partial) or it is applied under an annuity payment option.
Currently, premium taxes range from zero to 3.5%.
Fixed Account Surrender Charge and Transfer Fee
No sales charge is collected or deducted when purchase payments are applied
under the Contract to provide an annuity payment option. A surrender charge is
assessed on certain total or partial surrenders from the Fixed Account. The
amounts we receive from the surrender charge are used to cover some of the
expenses of the sale of the Contract (commissions and other promotional or
distribution expenses). If the surrender charge collected is not enough to cover
the actual costs of distribution, the costs are paid from the Company's General
Account assets which will include profit, if any, from the mortality and expense
risks charge.
The surrender charge for any total or partial surrender is a percentage of the
Fixed Account purchase payments surrendered which were received by us during the
seven contract years prior to the surrender. The applicable percentage which is
applied to the sum of the Fixed Account purchase payments (which includes
amounts transferred to the Fixed Account from any of the Separate Account
divisions) paid during each contract year is determined by the following table.
The Fixed Account transfer fee is assessed on certain transfers from the Fixed
Account to the Separate Account (For contracts sold in South Carolina, the Fixed
Account transfer fee is waived).
<TABLE>
Table of Fixed Account Surrender Charges and Transfer Fees
<CAPTION>
Number of completed contract years Surrender charge and transfer fee applied
since each Fixed Account to Fixed Account surrenders and transfers
purchase* was made beyond Free Transaction Amount
<S> <C> <C>
0 (year of purchase payment) 6%
1 6%
2 6%
3 5%
4 4%
5 3%
6 2%
7 and later 0
<FN>
* Includes amounts transferred to Fixed Account from Separate Account
divisions. Each Fixed Account purchase payment begins in year 0 for
purposes of calculating the percentage applied to that payment.
</FN>
</TABLE>
For purposes of calculating surrenders and transfers, we assume that surrenders
and transfers are made in the following order*:
o first from Fixed Account purchase payments we received more than seven
completed contract years prior to the surrender (or transfer);
o then from the Fixed Account free transaction amount (first from the Fixed
Account's earnings, then from the oldest Fixed Account purchase payments
(first-in, first-out)) described below; and
o then from Fixed Account purchase payments we received within the seven
completed contract years before the surrender (or transfer) on a first-in,
first-out basis.
* The order for tax reporting purposes is different. You should consult your
tax advisor.
Where permitted by state law, we reserve the right to reduce:
o the surrender charge fee for any amounts surrendered from this Contract;
and/or
o transfer fees on amounts transferred from the Fixed Account to the Separate
Account.
These reductions would apply to Contracts that are attributable to a conversion
from other products issued by the Company and its subsidiaries and as otherwise
permitted by the Investment Company Act of 1940 (as amended).
For Contracts sold in Massachusetts:
o There is no transfer fee on purchase payments allocated to the Fixed
Account after the 13th contract year.
o There is no surrender charge on purchase payments allocated to the Fixed
Account after the 13th contract year.
Waiver of Fixed Account Surrender Charge Rider
The Fixed Account Surrender Charge will not apply to:
o amounts applied under an annuity payment option; or
o payment of death benefit; or
o amounts distributed to satisfy the minimum distribution requirement of
Section 401(a)9 of the Code (applies to qualified Contracts only); or
o amounts transferred, after the seventh contract year, from the Contract to
a single premium immediate annuity issued by the Company; or
o any amount transferred from a Contract used to fund another annuity
contract issued by the Company to the contract owner's spouse when the
distribution is made under a divorce decree; or
o surrenders made after the first contract anniversary (if permitted by state
law) if the owner or annuitant has a critical need.
Waiver of the charge is available for critical need if the following conditions
are met:
o owner or annuitant has a critical need;
o the owner or annuitant to whom the critical need applies is the original
owner or annuitant; and
o the critical need did not exist before the contract date.
For the purposes of this section, the following definitions apply:
o critical need - owner's or annuitant's confinement to a health care
facility, terminal illness diagnosis or total and permanent disability. If
the critical need is confinement to a health care facility, the confinement
must continue for at least 60 consecutive days after the contract date and
the surrender 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 but before the original owner or annuitant reaches age 65 and
qualifies to receive social security disability payments.
This rider may not available in all states. Specific provisions and/or
definitions may have state variations. Contact us at 1-800-852-4450 for
additional information.
The Waiver of Fixed Account Surrender Charge Rider is not available for
Contracts sold in Massachusetts.
Administration Charge
We reserve the right to assess each Separate Account division 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 or eliminated 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 but are not limited to sales of Contracts without,
or with reduced, mortality and expense risks charges, annual fees,
administrative charge, the cost of insurance or surrender charges.
Availability of the reduction and the size of the reduction (if any) is based on
certain criteria.
Eligibility for and the amount of these reductions are determined by a number of
factors, including the number of individuals in the group, the amount of
expected purchase payments, total assets under management for the Contract
owner, the relationship among the group's members, the purpose for which the
Contract is being purchased, the expected persistency of the Contract, and any
other circumstances which, in our opinion are rationally related to the expected
reduction in expenses. Reductions reflect the reduced sales efforts and
administrative costs resulting from these arrangements. We may modify the
criteria for and the amount of the reduction in the future. Modifications will
not unfairly discriminate against any person, including affected Contract owners
and other contract owners with contracts funded by the Separate Account.
FIXED ACCOUNT
You may allocate purchase payments and transfer amounts from the Separate
Account to the Fixed Account. Assets in the Fixed Account are held in the
General Account of the Company. Because of exemptive and exclusionary
provisions, interests in the Fixed Account are not registered under the
Securities Act of 1933 and the General Account is not registered as an
investment company under the Investment Company Act of 1940. The Fixed Account
is not subject to these Acts. The staff of the Commission does not review the
prospectus disclosures relating to the Fixed Account. However, these disclosures
are subject to certain generally applicable provisions of the federal securities
laws relating to the accuracy and completeness of statements made in the
prospectus.
This prospectus is intended to serve as a disclosure document only for the
Contract as it relates to the Separate Account. It only contains selected
information regarding the Fixed Account. More information concerning the Fixed
Account is available from the annuity service office or from a sales
representative.
General Description
Our obligations with respect to the Fixed Account are supported by the Company's
General Account. The General Account is the assets of the Company other than
those allocated to any of the Company's Separate Accounts. Subject to applicable
law, the Company has sole discretion over the assets in the General Account.
The Company guarantees that purchase payments allocated to the Fixed Account
earn interest at a guaranteed interest rate. In no event will the guaranteed
interest rate be less than 3% compounded annually.
Each purchase payment allocated or amount transferred to the Fixed Account earns
interest at the guaranteed rate in effect on the date it is received or
transferred. This rate applies to each purchase payment or amount transferred
through the end of the contract year.
Each contract anniversary, we declare a renewal interest rate that is guaranteed
and applies to the Fixed Account value in existence at that time. This rate
applies until the end of the contract year. Interest is earned daily and
compounded annually at the end of each contract year. Once credited, the
interest is guaranteed and becomes part of the accumulated value in the Fixed
Account from which deductions for fees and charges may be made.
Fixed Account Value
Your Contract's Fixed Account value on any valuation date is the sum of:
o purchase payments allocated to the Fixed Account;
o plus any transfers to the Fixed Account from the Separate Account;
o plus interest credited to the Fixed Account;
o minus any surrenders, surrender charges, or transaction fees allocated to
the Fixed Account;
o minus any transfers (and transfer fees) to the Separate Account.
Fixed Account Transfers, Total and Partial Surrenders
Transfers and surrenders from your investment in the Fixed Account are subject
to certain limitations. In addition, surrenders and transfers from the Fixed
Account may be subject to a charge or fee (see Fixed Account Surrender Charge
and Transfer Fee). The total amount you may transfer and/or surrender from the
Fixed Account may not exceed your Fixed Account value.
You may transfer amounts from the Fixed Account to the Separate Account
divisions before the annuity payment date and as provided below. The transfer is
effective on the valuation date following our receiving your instructions. You
may transfer amounts by making either a scheduled or unscheduled Fixed Account
transfer. You may not make both a scheduled and unscheduled Fixed Account
transfer in the same contract year.
Fixed Account Free Transaction Amount
Each contract year, a certain portion of your Fixed Account value may be:
o withdrawn free of the surrender charge; or
o transferred to the Separate Account free of the transfer fee.
The surrender charge and transfer fee do not apply to Fixed Account surrenders
or transfers (or a combination of surrenders and transfers) which do not exceed
the greater of:
o your Fixed Account's earnings (Fixed Account value minus
unsurrendered/non-transferred Fixed Account purchase payments still subject
to a surrender charge or transfer fee); or
o 10% of your total Fixed Account value recalculated as of the later of the
contract date or last contract anniversary; or
o an amount surrendered to satisfy the minimum distribution requirement of
Section 401(a)9 of the Code, provided that the amount surrendered does not
exceed the minimum distribution amount which would have been calculated
based on the value of this Contract alone.
In addition, 10% of Fixed Account purchase payments during the current Contract
year may be surrendered without a surrender charge or transferred without a
transfer fee.
Unscheduled Fixed Account Transfer
You may make an unscheduled transfer from the Fixed Account each contract year
as follows:
o The transfer is effective on the valuation date following our receiving
your instructions.
o You must specify the dollar amount or percentage to be transferred.
o Amounts in excess of the Fixed Account Free Transaction Amount may be
subject to a transfer fee.
o You may transfer up to 100% of your Fixed Account value (without incurring
the transfer fee) within 30 days after a contract anniversary if:
o your Fixed Account value is less than $1,000, or
o the renewal interest rate for your Fixed Account value for the current
contract year is more than one percentage point lower than the weighted
average of your Fixed Account interest rates for the preceding contract
year.
o If you do not meet one of the preceding conditions, transfers from the
Fixed Account may be subject to a surrender charge (see Fixed Account
Surrender Charge and Transfer Fee).
Scheduled Fixed Account Transfer (Dollar Cost Averaging)
You may make scheduled transfers on a periodic basis from the Fixed Account as
follows:
o Transfers occur on a date you specify (other than the 29th, 30th or 31st of
any month).
o If the selected date is not a valuation date, the transfer is completed on
the next valuation date.
o The minimum transfer amount is $50.
o Transfers continue until your value in the Fixed Account is zero or we
receive your notice to stop them.
o If you stop the transfers, you may not start them again without our prior
approval.
GENERAL PROVISIONS
Telephone Services
Telephone services are permitted (unless prohibited by state law) for both
changes in the allocation of future purchase payments and transfers among
divisions. Telephone services may be declined on the Contract application or at
any later date by providing us with written notice. Telephone services are used
by calling us at 1-800-852-4450.
Telephone instructions must be made while we are open for business. They are
effective when received by us before the close of normal trading 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 its normal
trading will be effective on the next valuation date.
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.
The Contract
The entire Contract is made up of: applications, amendments, riders and
endorsements attached to the Contract; current data page; copies of any
supplemental applications, amendments, endorsements and revised Contract pages
or data pages which are mailed to you. Only our corporate officers can agree to
change or waive any provisions of a Contract. Any change or waiver must be in
writing and signed by an officer of the Company.
Delay of Payments
Surrenders are generally made within seven days after we receive your
instruction for a surrender in a form acceptable to us. This period may be
shorter where required by law. However, payment of any amount upon total or
partial surrender, death or the transfer to or from a Separate Account division
may be deferred during any period when the right to sell mutual fund shares is
suspended as permitted under provisions of the Investment Company Act of 1940
(as amended).
The right to sell shares may be suspended during any period when:
o trading on the New York Stock Exchange is restricted as determined by the
Commission or when the Exchange is closed for other than weekends and
holidays, or
o an emergency exists, as determined by the Commission, as a result of which:
o disposal by a Mutual Fund of securities owned by it is not reasonably
practicable;
o it is not reasonably practicable for a Mutual Fund to fairly determine
the value of its net assets; or
o the Commission permits suspension for the protection of security
holders.
If payments are delayed and your surrender (or transfer) is not canceled by your
written instruction, the amount to be surrendered (or transferred) will be
determined the first valuation date following the expiration of the permitted
delay. The surrender will be made within seven days thereafter.
In addition, payments on surrenders (or transfers) attributable to a purchase
payment made by check may be delayed up to 15 days. This permits payment to be
collected on the check. We may also defer payment of surrender proceeds payable
out of the Fixed Account for a period of up to six months.
Misstatement of Age or Gender
If the age or, where applicable, gender of the annuitant has been misstated, we
adjust the income payable under your Contract to reflect the amount that would
have been payable at the correct age and gender. If we make any overpayment
because of incorrect information about age or gender, or any error or
miscalculation, we deduct the overpayment from the next annuity payment or
annuity payments due. Underpayments are added to the next annuity payment.
Assignment
You may assign your non-qualified Contract. Each assignment is subject to any
payments made or action taken by the Company prior to our notification of the
assignment. We assume no responsibility for the validity of any assignment. An
assignment or pledge of a Contract may have adverse tax consequences.
An assignment must be made in writing and filed with us at the annuity service
office. The irrevocable beneficiary(ies), if any, must authorize any assignment
in writing. Your rights, as well as those of the annuitant and beneficiary, are
subject to any assignment on file with us. Any amounts paid to an assignee are
treated as a partial surrender and is paid in a single lump sum.
Change of Owner
You may change your ownership designation at any time (this does not apply to
IRAs or IRA rollovers). Your request must be in writing and approved by us.
After approval, the change is effective as of the date you signed the request
for change. We reserve the right to require that you send us the Contract so
that we can record the change.
Beneficiary
Before the annuity payment date, you have the right to name a beneficiary. This
may be done as part of the application process or by sending us a written
request. Unless you have named an irrevocable beneficiary, you may change your
beneficiary designation by sending us a written request. A joint annuitant may
not be named as a beneficiary.
Contract Termination
We reserve the right to terminate the Contract and make a single sum payment
(without imposing any charges) to you if your accumulated value at the end of
the accumulation period is less than $5,000. Before the Contract is terminated,
we will send you a notice to increase the accumulated value to $5,000 within 60
days.
RIGHTS RESERVED BY THE COMPANY
We reserve the right to make certain changes if, in our judgement, they best
serve the interests of you and the annuitant or are appropriate in carrying out
the purpose of the Contract. Any changes will be made only to the extent and in
the manner permitted by applicable laws. Also, when required by law, we will
obtain your approval of the changes and approval from any appropriate regulatory
authority. Approvals may not be required in all cases. Examples of the changes
the Company may make include:
o transfer assets in any division to another division or to the Fixed
Account;
o add, combine or eliminate divisions in the Separate Account; or
o substitute the units of a division for the units of another division:
o if units of a division are no longer available for investment; or
o if in our judgement, investment in a division becomes inappropriate
considering the purposes of the Separate Account.
DISTRIBUTION OF THE CONTRACT
The individuals who sell the Contract are authorized to sell life and other
forms of personal insurance and variable annuities. Though it is sold primarily
by insurance agents who are employees of the Company, the Contract may also be
offered by insurance agents or brokers who are not our employees but who are
appointed by us to sell variable annuities. Our employees who sell the Contract
are also registered representatives of Princor Financial Services Corporation,
Principal Financial Group, Des Moines, Iowa 50392-0200. Princor is a
broker-dealer registered under the Securities Exchange Act of 1934 and a member
of the National Association of Securities Dealers, Inc. When the Contract is
sold by our employees, as the principal underwriter, Princor is paid 1.35% of
purchase payments by the Company for the distribution of the Contract. Princor
is also the principal underwriter for various registered investment companies
organized by the Company. Princor is an indirectly wholly-owned subsidiary of
the Company.
In addition to being sold by our employees, the Contract may be offered through
other registered representatives of Princor and registered representatives of
other selected broker-dealers. Such broker-dealers are either registered under
the Securities Exchanges Act of 1934 or are exempt from such registration. When
the Contract is sold by other than our employees, as the principal underwriter,
Princor is paid 1.50% of purchase payments by the Company for the distribution
of the Contract.
PERFORMANCE CALCULATION
The Separate Account may publish advertisements containing information
(including graphs, charts, tables and examples) about the performance of one or
more of its divisions. The Contract was not offered prior to April 30, 1999.
However, shares of Accounts in which the Bond, Capital Value, International,
MidCap, MidCap Growth, Money Market, SmallCap and SmallCap Growth divisions of
the Separate Account invest were offered prior to that date. The Separate
Account may publish advertisements containing information about the hypothetical
performance of one or more of its divisions for this Contract as if the Contract
had been issued on or after the date the Mutual Fund in which the division
invests was first offered. The hypothetical performance from the date of the
inception of the Mutual Fund in which the Separate Account division invests is
calculated by reducing the actual performance of the underlying Mutual Fund by
the fees and charges of this Contract as if it had been in existence.
The American Century VP Income & Growth, Blue Chip, LargeCap Growth, MidCap
Value, Stock Index 500, and Templeton Growth Securities divisions of the
Separate Account were not offered until April 30, 1999. Performance data for
these divisions are calculated utilizing standardized performance formulas and
shows performance since the inception date of the division.
The yield and total return figures described below vary depending upon market
conditions, composition of the underlying mutual fund'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 shares of the Mutual Funds held in the Separate Account at
meetings of shareholders of those Mutual Funds. It follows your voting
instructions if you have an investment in the corresponding Separate Account
division.
The number of shares in which you have a voting interest is determined by your
investment in the Separate Account division as of a "record date." The record
date is set by the Mutal Fund within the requirements of the laws of the state
which govern that Mutual Fund. The number of 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 Mutual Fund. Shares for which owners are entitled to give voting
instructions, but for which none are received, and shares of the Mutual Fund
owned by the Company are voted in the same proportion as the total shares for
which voting instructions have been received.
Voting 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 Mutual Fund shares
held in Separate Account B need not be voted pursuant to instructions received
from owners, then the Company may vote Mutual Fund shares held in Separate
Account B in its own right.
FEDERAL TAX MATTERS
The following description is a general summary of the tax rules, primarily
related to federal income taxes, which in our opinion are currently in effect.
These rules are based on laws, regulations and interpretations which are subject
to change at any time. This summary is not comprehensive and is not intended as
tax advice. Federal estate and gift tax considerations, as well as state and
local taxes, may also be material. You should consult a qualified tax adviser
about the tax implications of taking action under a Contract or related
retirement plan.
Non-Qualified Contracts
Section 72 of the Code governs the taxation of annuities in general.
o Purchase payments made under non-qualified Contracts are not excludible or
deductible from your gross income or any other person's gross income.
o An increase in the accumulated value of a non-qualified Contract resulting
from the investment performance of the Separate Account or interest credit
to the Fixed Account is generally not taxable until paid out as surrender
proceeds, death benefit proceeds, or otherwise.
o Generally, owners who are not natural persons are immediately taxed on any
increase in the accumulated value.
The following discussion applies generally to Contracts owned by natural
persons.
o Surrenders or partial surrenders are taxed as ordinary income to the extent
of the accumulated income or gain under the Contract.
o The value of the Contract pledged or assigned is taxed as ordinary income
to the same extent as a partial surrender.
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
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 payment under 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
The Contract may be used to fund 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.
A significant advantage of the Contract is that it provides the ability to
accumulate capital on a tax-deferred basis. The purchase of a Contract to fund a
tax-qualified retirement account does not provide any additional tax-deferred
treatment of earnings beyond the treatment provided by the tax-qualified
retirement plan itself. However, the Contract does provide benefits such as
lifetime income payments, family protection through death benefits and asset
allocation.
The tax implications of these plans are further discussed in the SAI under the
heading Taxation Under Certain Retirement Plans. Check with your tax advisor for
the rules which apply to your specific situation.
With respect to IRAs or IRA rollovers, there is a 10% penalty under the Code on
the taxable portion of a "premature distribution." Generally, an amount is a
"premature distribution" unless the distribution is:
o made on or after you reach age 59 1/2;
o made to a beneficiary on or after your death;
o made upon your disability;
o part of a series of substantially equal periodic payments for the life or
life expectancy of you or you and the beneficiary;
o made to pay medical expenses;
o for certain unemployment expenses;
o for first home purchases (up to $10,000); or
o for higher education expenses.
Rollover IRAs. If you receive a lump-sum distribution from a pension or profit
sharing plan, to maintain the tax deferred status of the money it may be rolled
into a "Rollover Individual Retirement Account." You have 60 days from receipt
of the money to complete this transaction. If you choose not to reinvest or go
beyond the 60 day limit and are under age 59 1/2, you will incur a 10% IRS
penalty as well as income tax expenses.
Withholding
Annuity payments and other amounts received under the Contract are subject to
income tax withholding unless the recipient elects not to have taxes withheld.
The amounts withheld vary among recipients depending on the tax status of the
individual and the type of payments from which taxes are withheld.
Notwithstanding the recipient's election, withholding may be required on
payments delivered outside the United States. Moreover, special "backup
withholding" rules may require us to disregard the recipient's election if the
recipient fails to supply us with a "TIN" or taxpayer identification number
(social security number for individuals), or if the Internal Revenue Service
notifies us that the TIN provided by the recipient is incorrect.
Mutual Fund Diversification
The United States Treasury Department has adopted regulations under Section
817(h) of the Code which establishes standards of diversification for the
investments underlying the Contracts. Under this Code Section, Separate Account
investments must be adequately diversified in order for the increase in the
value of non-qualified Contracts to receive tax-deferred treatment. In order to
be adequately diversified, the portfolio of each underlying Mutual Fund must, as
of the end of each calendar quarter or within 30 days thereafter, have no more
than 55% of its assets invested in any one investment, 70% in any two
investments, 80% in any three investments and 90% in any four investments.
Failure of a Mutual Fund to meet the diversification requirements could result
in tax liability to non-qualified Contract holders.
The investment opportunities of the Mutual Funds 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
Karen Shaff, General Counsel and Senior Vice President.
LEGAL PROCEEDINGS
There are no legal proceedings pending to which Separate Account B is a party or
which would materially affect Separate Account B.
REGISTRATION STATEMENT
This Prospectus omits some information contained in the SAI (Part B of the
Registration Statement) and Part C of the Registration Statement which the
Company has filed with the Commission. The SAI is a part of this Prospectus. You
may request a free copy of the SAI by writing or telephoning Princor. You may
obtain a copy of Part C of the Registration Statement from the Commission,
Washington, D.C. by paying the prescribed fees.
OTHER VARIABLE ANNUITY CONTRACTS
The Company currently offers other variable annuity contracts that participate
in Separate Account B. In the future, we may designate additional group or
individual variable annuity contracts as participating in Separate Account B.
INDEPENDENT AUDITORS
The financial statements of Principal Life Insurance Company Separate Account B
and the consolidated financial statements of Principal Life Insurance Company
are included in the SAI. Those statements have been audited by Ernst & Young
LLP, independent auditors, for the periods indicated in their reports which also
appear in the SAI.
FINANCIAL STATEMENTS
The financial statements of the Principal Life Insurance Company which are
included in the SAI should be considered only as it relates to our ability to
meet our obligations under the Contract. They do not relate to investment
performance of the assets held in the Separate Account.
CUSTOMER INQUIRIES
Your questions should be directed to: Principal FreedomSM Variable Annuity,
Principal Financial Group, P.O. Box 9382, Des Moines, Iowa 50306-9382,
1-800-852-4450.
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
General Information and History.................................. 3
Independent Auditors ........................................... 3
Calculation of Yield and Total Return ........................... 3
Taxation Under Certain Retirement Plans.......................... 5
Principal Life Insurance Company Separate Account B
Report of Independent Auditors.............................. 7
Financial Statements........................................ 8
Principal Life Insurance Company
Report of Independent Auditors.............................. 31
Consolidated Financial Statements........................... 32
To obtain a free copy of the SAI write or telephone:
Principal FreedomSM Variable Annuity
Principal Financial Group
P.O. Box 9382
Des Moines, Iowa 50306-9382
Telephone: 1-800-852-4450
PART B
STATEMENT OF ADDITIONAL INFORMATION
PRINCIPAL FREEDOMSM VARIABLE ANNUITY CONTRACT
dated May 1, 2000
The Statement of Additional Information provides information about the Principal
Freedom Variable Annuity sponsored by Principal Life Insurance Company.
This Statement of Additional Information is not a prospectus but does provide
information that supplements the Contract's Prospectus dated May 1, 2000. It
should be read with that Prospectus which is available without charge. To
request a copy of the Prospectus, please contact us at:
Principal FreedomSM Variable Annuity
Principal Financial Group
P.O. Box 9382
Des Moines, Iowa 50306-9382
Telephone: 1-800-852-4450
TABLE OF CONTENTS
General Information and History................................. 3
Independent Auditors .......................................... 3
Calculation of Yield and Total Return .......................... 3
Taxation Under Certain Retirement Plans......................... 5
Principal Life Insurance Company Separate Account B
Report of Independent Auditors.............................. 7
Financial Statements........................................ 8
Principal Life Insurance Company
Report of Independent Auditors.............................. 31
Consolidated Financial Statements........................... 32
GENERAL INFORMATION AND HISTORY
Principal Life Insurance Company is the issuer of the Principal Freedom Variable
Annuity (the "Contract"). In 1879, it was incorporated under the laws of the
State of Iowa as a mutual life insurance company named Bankers Life Association.
It changed its name to Bankers Life Company in 1911 and then to Principal Mutual
Life Insurance Company in 1986. The name change to Principal Life Insurance
Company and reorganization into a mutual holding company structure was effective
July 1, 1998.
INDEPENDENT AUDITORS
Ernst & Young LLP, 801 Grand, Des Moines, Iowa, serves as independent auditors
for Principal Life Insurance Company Separate Account B and the Principal Life
Insurance Company. The firm performs audit and accounting services for Separate
Account B and the Principal Life Insurance Company.
CALCULATION OF YIELD AND TOTAL RETURN
The Separate Account may publish advertisements containing information
(including graphs, charts, tables and examples) about the performance of one or
more of its divisions.
Effective January 1, 1998, the Mutual Funds which corresponded to Accounts of
the Principal Variable Contracts Fund, Inc. were reorganized as follows:
Current Name Old Mutual Fund Name
----------------- --------------------
Bond Account Principal Bond Fund, Inc.
Capital Value Account Principal Capital Accumulation Fund, Inc.
MidCap Account Principal Emerging Growth Fund, Inc.
Money Market Account Principal Money Market Fund, Inc.
International Account Principal World Fund, Inc.
Effective May 1, 2000, the Mutual Fund which corresponds to the Franklin
Templeton Variable Insurance Products Trust - Templeton Growth Securities Fund
Class 2 was reorganized as follows:
Current Name Old Mutual Fund Name
----------------- --------------------
Franklin Templeton Variable Templeton Variable Products
Insurance Products Trust - Series Fund - Templeton Stock
Templeton Growth Securities Fund Class 2
Fund - Class 2
The Contract was not offered prior to April 30, 1999. 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 Mutual Fund in which such division invests was
first offered. The hypothetical performance from the date of the inception of
the underlying Mutual Fund is derived by reducing the actual performance of the
underlying Mutual Fund by the fees and charges of the Contract as if it had been
in existence. The yield and total return figures described below vary depending
upon market conditions, the composition of the underlying Mutual Fund's
portfolios and operating expenses. These factors and possible differences in the
methods used in calculating yield and total return should be considered when
comparing the Separate Account performance figures to performance figures
published for other investment vehicles. The Separate Account may also quote
rankings, yields or returns published by independent statistical services or
publishers and information regarding performance of certain market indices. Any
performance data quoted for the Separate Account represents historical
performance and is not intended to indicate future performance.
From time to time the Account advertises its Money Market division's "yield" and
"effective yield" for the Contract. Both yield figures are based on historical
earnings and are not intended to indicate future performance. The "yield" of the
division refers to the income generated by an investment under the contract in
the division over a seven-day period (the period will be stated in the
advertisement). This income is then "annualized." That is, the amount of income
generated by the investment during that week is assumed to be generated each
week over a 52-week period and is shown as a percentage of the investment. The
"effective yield" is calculated similarly but, when annualized, the income
earned by an investment in the division is assumed to be reinvested. The
"effective yield" is slightly higher than the "yield" because of the compounding
effect of this assumed reinvestment. Neither yield quotation reflects a sales
load deducted from purchase payments which, if included, would reduce the
"yield" and "effective yield."
In addition, the Separate Account advertises the "yield" for certain other
divisions for the Contract. The "yield" of a division is determined by
annualizing the net investment income per unit for a specific, historical 30-day
period and dividing the result by the ending maximum offering price of the unit
for the same period. This yield quotation does not reflect a contingent deferred
sales charge which, if included, would reduce the "yield." No contingent
deferred sales charge is assessed on investments in the Separate Account
divisions of the Contract.
The Separate Account also advertises the average annual total return of its
various divisions. The average annual total return for any of the divisions is
computed by calculating the average annual compounded rate of return over the
stated period that would equate an initial $1,000 investment to the ending
redeemable contract value.
Following are the hypothetical average annual total returns for the period ended
December 31, 1999 assuming the Contract had been offered as of the effective
dates of the underlying Mutual Funds in which the divisions invest:
<TABLE>
<CAPTION>
Division One Year Five Year Ten Year
<S> <C> <C> <C>
American Century Variable Portfolios, Inc. -
VP Income & Growth 17.02% 23.33%(1) N/A
Principal Variable Contracts Fund, Inc.
Blue Chip 0.58(2) N/A N/A
Bond -3.41 6.82 6.86%
Capital Value -5.09 16.89 11.99
International 24.87 16.31 13.30(3)
LargeCap Growth 31.72(2) N/A N/A
MidCap 12.09 16.60 14.38
MidCap Growth 9.73 3.20(4) N/A
MidCap Value 9.62(2) N/A N/A
Money Market 3.94 4.27 4.07
SmallCap 42.37 7.32(4) N/A
SmallCap Growth 94.05 50.89(4) N/A
Stock Index 500 8.32(2) N/A N/A
Templeton Variable Insurance Products Trust
Templeton Growth Securities Fund Class 2 27.70 16.38 12.54
<FN>
(1) Period from October 31, 1997 through December 31, 1999.
(2) Period from May 3, 1999 through December 31, 1999.
(3) Period from May 2, 1994 through December 31, 1999.
(4) Period from May 1, 1998 through December 31, 1999.
</FN>
</TABLE>
TAXATION UNDER CERTAIN RETIREMENT PLANS
Individual Retirement Annuities
Purchase Payments. Individuals may make contributions for individual retirement
annuity ("IRA") Contracts. Deductible contributions for any year may be made up
to the lesser of $2,000 or 100% of compensation for individuals who (1) are not
active participants in another retirement plan, (2) are unmarried and have
adjusted gross income of $40,000 or less, or (3) are married and have adjusted
gross income of $60,000 or less. Such individuals may establish an IRA for a
spouse who makes no contribution to an IRA for the tax year. The annual purchase
payments for both spouses' Contracts cannot exceed the lesser of $4,000 or 100%
of the working spouse's earned income, and no more than $2,000 may be
contributed to either spouse's IRA for any year. Individuals who are active
participants in other retirement plans and whose adjusted gross income (with
certain special adjustments) exceeds the cut-off point ($40,000 for unmarried,
$60,000 for married persons filing jointly, and $0 for married persons filing a
separate return) by less than $10,000 are entitled to make deductible IRA
contributions in proportionately reduced amounts. For example, a married
individual who is an active participant in another retirement plan and files a
separate tax return is entitled to a partial IRA deduction if the individual's
adjusted gross income is less than $10,000, and no IRA deduction if his or her
adjusted gross income is equal to or greater than $10,000. Individuals whose
spouse is an active participant in other retirement plans and whose combined
adjusted gross income exceeds the cutoff point of $150,000 by less than $10,000
are entitled to make deductible IRA contributions in proportionately reduced
amounts.
An individual may make non-deductible IRA contributions to the extent of the
excess of (1) the lesser of $2,000 ($4,000 in the case of a spousal IRA) or 100%
of compensation over (2) the IRA deductible contributions made with respect to
the individual.
An individual may not make any contribution to his/her own IRA for the year in
which he/she reaches age 70 1/2 or for any year thereafter.
Taxation of Distributions. Distributions from IRA Contracts are taxed as
ordinary income to the recipient, although special rules exist for the tax-free
return of non-deductible contributions. In addition, taxable distributions
received under an IRA Contract prior to age 59 1/2 are subject to a 10% penalty
tax in addition to regular income tax. Certain distributions are exempted from
this penalty tax, including distributions following the owner's death or
disability if the distribution is paid as part of a series of substantially
equal periodic payments made for the life (or life expectancy) of the Owner or
the joint lives (or joint life expectancies) of Owner and the Owner's designated
Beneficiary; distributions to pay medical expenses; distributions for certain
unemployment expenses; distributions for first home purchases (up to $10,000)
and distributions for higher education expenses.
Required Distributions. Generally, distributions from IRA Contracts must
commence not later than April 1 of the calendar year following the calendar year
in which the employee attains age 70 1/2, and such distributions must be made
over a period that does not exceed the life expectancy of the employee (or the
employee and Beneficiary). A penalty tax of 50% would be imposed on any amount
by which the minimum required distribution in any year exceeded the amount
actually distributed in that year. In addition, in the event that the employee
dies before his or her entire interest in the Contract has been distributed, the
employee's entire interest must be distributed in accordance with rules similar
to those applicable upon the death of the Contract Owner in the case of a
non-qualified contract, as described in the Prospectus.
Tax-Free Rollovers. The Code permits the taxable portion of funds to be
transferred in a tax-free rollover from a qualified employer pension,
profit-sharing, annuity, bond purchase or tax-deferred annuity plan to an IRA
Contract if certain conditions are met, and if the rollover of assets is
completed within 60 days after the distribution from the qualified plan is
received. A direct rollover of funds may avoid a 20% federal tax withholding
generally applicable to qualified plans or tax-deferred annuity plan
distributions. In addition, not more frequently than once every twelve months,
amounts may be rolled over tax-free from one IRA to another, subject to the
60-day limitation and other requirements. The once-per-year limitation on
rollovers does not apply to direct transfers of funds between IRA custodians or
trustees.
Simplified Employee Pension Plans and Salary Reduction Simplified Employee
Pension Plans Purchase Payments. Under Section 408(k) of the Code, employers may
establish a type of IRA plan referred to as a simplified employee pension plan
(SEP). Employer contributions to a SEP cannot exceed the lesser of $24,000 or
15% or the employee's earned income. Employees of certain small employers may
have contributions made to the salary reduction simplified employee pension plan
("SAR/SEP") on their behalf on a salary reduction basis. These salary reduction
contributions may not exceed $10,000, which is indexed for inflation. Employees
of tax-exempt organizations and state and local government agencies are not
eligible for SAR/SEPs. SAR/SEPs may not be established after December 31, 1996.
Taxation of Distributions. Generally, distribution payments from SEPs and
SAR/SEPs are subject to the same distribution rules described above for IRAs.
Required Distributions. SEPs and SAR/SEPs are subject to the same minimum
required distribution rules described above for IRAs.
Tax-Free Rollovers. Generally, rollovers and direct transfers may be made to and
from SEPs and SAR/SEPs in the same manner as described above for IRAs, subject
to the same conditions and limitations.
Savings Incentive Match Plans for Employees (Simple Ira)
Purchase Payments. Under Section 408(p) of the Code, employers may establish a
type of IRA plan known as a Simple IRA. Employees may have contributions made to
the SIMPLE IRA on a salary reduction basis. These salary reduction contributions
may not exceed $6,000, which is indexed for inflation. Total salary reduction
contributions are limited to $10,000 per year for any employee who makes salary
reduction contributions to more than one plan. Employers are required to
contribute to the SIMPLE IRA, which contributions may not exceed the lesser of:
(1) The amount of salary deferred by the employee, (2) 3% of the employee's
compensation, or (3) $6,000, if the employer contributes on a matching basis; or
the lesser of: (1) 2% of the employee's compensation, or (2) $3,200, if the
employer makes non-elective contributions. An employer may not make
contributions to both a SIMPLE IRA and another retirement plan for the same
calendar year.
Taxation of Distributions. Generally, distribution payments from SIMPLE IRAs are
subject to the same distribution rules described above for IRAs, except that
distributions made within two years of the date of an employee's first
participation in a SIMPLE IRA of an employer are subject to a 25% penalty tax
instead of the 10% penalty tax discussed previously.
Required Distributions. SIMPLE IRAs are subject to the same minimum required
distribution rules described above for IRAs.
Tax-Free Rollovers. Direct transfers may be made among SIMPLE IRAs in the same
manner as described above for IRAs, subject to the same conditions and
limitations. Rollovers from SIMPLE IRAs are permitted after two years have
elapsed from the date of an employee's first participation in a SIMPLE IRA of
the employer. Rollovers to SIMPLE IRAs from other plans are not permitted.
Report of Independent Auditors
Board of Directors and Participants
Principal Life Insurance Company
We have audited the accompanying individual and combined statements of net
assets of Principal Life Insurance Company Separate Account B (comprised of the
Aggressive Growth, AIM V.I. Growth, AIM V.I. Growth and Income, AIM V.I. Value,
American Century VP Growth & Income, Asset Allocation, Balanced, Blue Chip,
Bond, Capital Value, Fidelity VIP II Contrafund, Fidelity VIP Growth, Government
Securities, Growth, International, International SmallCap, LargeCap Growth,
MicroCap, MidCap, MidCap Growth, MidCap Value, Money Market, Real Estate,
SmallCap, Small Cap Growth, SmallCap Value, Stock Index 500, Templeton VP Stock,
and Utilities Divisions) as of December 31, 1999, 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, except for those divisions operating for
portions of such periods as disclosed in the financial statements. These
financial statements are the responsibility of the management of Principal Life
Insurance Company. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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, 1999, by
correspondence with the transfer agents. 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 individual and combined financial position of the
respective divisions of Principal Life Insurance Company Separate Account B at
December 31, 1999, and the individual and combined results of their operations
and the changes in their net assets for the periods described above, in
conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Des Moines, Iowa
January 31, 2000
<PAGE>
Principal Life Insurance Company
Separate Account B
Statements of Net Assets
December 31, 1999
<TABLE>
<CAPTION>
<S> <C>
Assets
Investments:
Aggressive Growth Division:
Aggressive Growth Account - 14,480,324 shares at net asset value of $23.89
per share (cost - $247,636,940) $ 345,934,950
AIM V.I. Growth Division:
AIM V.I. Growth Fund - 367,954 shares at net asset value of
$32.25 per share (cost - $10,843,312) 11,866,523
AIM V.I. Growth and Income Division:
AIM V.I. Growth and Income Fund - 572,233 shares at net asset value
of $31.59 per share (cost - $15,842,561) 18,076,830
AIM V.I. Value Division:
AIM V.I. Value Fund - 396,108 shares at net asset value of
$33.50 per share (cost - $12,184,028) 13,269,626
American Century VP Growth & Income Division:
American Century Variable Portfolios Inc.: VP Income & Growth - 59,948
shares at net asset value of $8.00 per share (cost - $452,533) 479,584
Asset Allocation Division:
Asset Allocation Account - 5,825,489 shares at net asset value of
$13.23 per share (cost - $69,961,149) 77,071,217
Balanced Division:
Balanced Account - 12,810,215 shares at net asset value
of $15.41 per share (cost - $195,788,197) 197,405,415
Blue Chip Division:
Blue Chip Account - 121,699 shares at net asset value of
$10.38 per share (cost - $1,209,626) 1,263,239
Bond Division:
Bond Account - 10,877,467 shares at net asset value of
$10.89 per share (cost - $127,987,262) 118,455,611
Capital Value Division:
Capital Value Account - 10,954,082 shares at net asset value of
$30.74 per share (cost - $347,959,367) 336,728,479
Fidelity VIP II Contrafund Division:
Fidelity Variable Insurance Products Fund II: Fidelity VIP II Contrafund Portfolio
-557,500 shares at net asset value of $29.10 per share (cost - $14,465,592) 16,223,239
Fidelity VIP Growth Division:
Fidelity Variable Insurance Products Fund: Fidelity VIP Growth Portfolio -
318,430 shares at net asset value of $54.80 per share (cost - $15,490,259) 17,449,942
Government Securities Division:
Government Securities Account - 13,106,099 shares at
net asset value of $10.26 per share (cost - $140,102,412) 134,468,582
Growth Division:
Growth Account - 14,144,733 shares at net asset value of
$23.56 per share (cost - $225,380,262) 333,249,917
See accompanying notes.
Assets (continued)
International Division:
International Account - 11,452,229 shares at net asset value of
$15.95 per share (cost - $152,867,356) $ 182,663,050
International SmallCap Division:
International SmallCap Account - 1,285,315 shares at net asset
value of $16.66 per share (cost - $15,116,129) 21,413,344
LargeCap Growth Division:
LargeCap Growth Account - 31,315 shares at net asset value of
$13.26 per share (cost - $348,017) 415,243
MicroCap Division:
MicroCap Account - 239,140 shares at net asset value of
$8.07 per share (cost - $2,025,966) 1,929,858
MidCap Division:
MidCap Account - 6,237,946 shares at net asset value of
$36.90 per share (cost - $185,823,068) 230,180,208
MidCap Growth Division:
MidCap Growth Account - 746,126 shares at net asset value
of $10.66 per share (cost - $6,962,670) 7,953,706
MidCap Value Division:
MidCap Value Account - 18,033 shares at net asset value of
$11.11 per share (cost - $182,264) 200,351
Money Market Division:
Money Market Account - 105,970,695 shares at net asset value of $1.00 per share 105,970,695
Real Estate Division:
Real Estate Account - 278,645 shares at net asset value of $8.20
per share (cost - $2,533,981) 2,284,887
SmallCap Division:
SmallCap Account - 1,328,035 shares at net asset value of $10.74
per share (cost - $12,087,261) 14,263,092
SmallCap Growth Division:
SmallCap Growth Account - 1,417,579 shares at net asset value of
$19.56 per share (cost - $18,398,605) 27,727,835
SmallCap Value Division:
SmallCap Value Account - 539,656 shares at net asset value
of $10.06 per share (cost - $4,578,677) 5,428,934
Stock Index 500 Division:
Stock Index 500 Account - 2,676,801 shares at net asset value of
$10.71 per share (cost - $26,690,451) 28,668,536
Templeton VP Stock Division:
Templeton Variable Products Series Fund: Templeton Stock Fund Class 2 -
9,444 shares at net asset value of $24.29 per share (cost - $206,732) 229,397
Utilities Division:
Utilities Account - 1,774,898 shares at net asset value of $10.90 per share
(cost - $18,915,925) 19,346,388
Combined net assets $2,270,618,678
</TABLE>
<PAGE>
Principal Life Insurance Company
Separate Account B
Statements of Net Assets (continued)
December 31, 1999
<TABLE>
<CAPTION>
Units Unit
Value
<S> <C> <C> <C>
Net assets are represented by:
Aggressive Growth Division:
Contracts in accumulation period:
The Principal Variable Annuity 9,017,582 $38.36 $345,934,950
AIM V.I. Growth Division:
Contracts in accumulation period:
The Principal Variable Annuity 968,222 12.26 11,866,523
AIM V.I. Growth and Income Division:
Contracts in accumulation period:
The Principal Variable Annuity 1,493,915 12.10 18,076,830
AIM V.I. Value Division:
Contracts in accumulation period:
The Principal Variable Annuity 1,148,659 11.55 13,269,626
American Century VP Growth & Income Division:
Contracts in accumulation period:
Principal Freedom Variable Annuity 43,170 11.11 479,584
Asset Allocation Division:
Contracts in accumulation period:
The Principal Variable Annuity 3,913,104 19.70 77,071,217
Balanced Division:
Contracts in accumulation period:
Personal Variable 2,848,631 1.80 5,131,683
Premier Variable 16,370,101 1.82 29,830,647
The Principal Variable Annuity 9,102,804 17.85 162,443,085
197,405,415
Blue Chip Division:
Contracts in accumulation period:
Principal Freedom Variable Annuity 123,177 10.26 1,263,239
Bond Division:
Contracts in accumulation period:
Personal Variable 998,334 1.42 1,421,734
Premier Variable 7,414,544 1.44 10,676,104
Principal Freedom Variable Annuity 107,056 9.71 1,039,234
The Principal Variable Annuity 7,677,363 13.72 105,318,539
118,455,611
See accompanying notes.
Units Unit
Value
Net assets are represented by (continued):
Capital Value Division:
Currently payable annuity contracts:
Bankers Flexible Annuity 3,544 30.01 $ 106,344
Pension Builder Plus - Rollover IRA 50,709 6.17 313,027
Premier Variable 135,307 2.56 346,812
766,183
Contracts in accumulation period:
Bankers Flexible Annuity 199,132 $30.01 5,976,135
Pension Builder Plus 1,091,155 5.54 6,047,096
Pension Builder Plus - Rollover IRA 167,496 6.17 1,033,755
Personal Variable 4,014,371 2.52 10,123,021
Premier Variable 22,330,793 2.56 57,237,192
Principal Freedom Variable Annuity 103,107 8.87 914,718
Principal Variable Annuity 11,633,608 21.89 254,630,379
335,962,296
336,728,479
Fidelity VIP II Contrafund Division:
Contracts in accumulation period:
The Principal Variable Annuity 1,436,477 11.29 16,223,239
Fidelity VIP Growth Division:
Contracts in accumulation period:
The Principal Variable Annuity 1,441,196 12.11 17,449,942
Government Securities Division:
Contracts in accumulation period:
Pension Builder Plus 356,199 2.14 760,507
Pension Builder Plus - Rollover IRA 30,817 2.28 70,140
Personal Variable 2,110,735 1.51 3,182,014
Premier Variable 8,431,716 1.53 12,921,136
The Principal Variable Annuity 8,553,790 13.74 117,534,785
134,468,582
Growth Division:
Contracts in accumulation period:
Personal Variable 3,115,301 2.46 7,664,116
Premier Variable 20,774,213 2.49 51,676,583
The Principal Variable Annuity 10,998,654 24.90 273,909,218
333,249,917
International Division:
Contracts in accumulation period:
Personal Variable 1,754,632 2.06 3,619,950
Premier Variable 10,814,176 2.09 22,547,859
Principal Freedom Variable Annuity 53,300 11.68 622,564
The Principal Variable Annuity 7,798,860 19.99 155,872,677
182,663,050
International SmallCap Division:
Contracts in accumulation period:
The Principal Variable Annuity 1,246,116 17.18 21,413,344
<PAGE>
Principal Life Insurance Company
Separate Account B
Statements of Net Assets (continued)
December 31, 1999
Units Unit
Value
Net assets are represented by (continued):
LargeCap Growth Division:
Contracts in accumulation period:
Principal Freedom Variable Annuity 31,275 $13.28 $ 415,243
MicroCap Division:
Contracts in accumulation period:
The Principal Variable Annuity 243,675 7.92 1,929,858
MidCap Division:
Contracts in accumulation period:
Personal Variable 2,156,005 2.16 4,654,699
Premier Variable 12,882,746 2.18 28,134,044
Principal Freedom Variable Annuity 32,346 10.94 353,982
The Principal Variable Annuity 9,229,032 21.35 197,037,483
230,180,208
MidCap Growth Division:
Contracts in accumulation period:
Principal Freedom Variable Annuity 9,046 11.28 102,078
The Principal Variable Annuity 746,186 10.52 7,851,628
7,953,706
MidCap Value Division:
Contracts in accumulation period:
Principal Freedom Variable Annuity 17,888 11.20 200,351
Money Market Division:
Contracts in accumulation period:
Pension Builder Plus 338,145 2.01 680,364
Pension Builder Plus - Rollover IRA 10,610 2.12 22,536
Personal Variable 1,512,864 1.33 2,009,728
Premier Variable 10,632,065 1.35 14,359,351
Principal Freedom Variable Annuity 94,450 10.25 968,430
The Principal Variable Annuity 7,145,096 12.31 87,930,286
105,970,695
Real Estate Division:
Contracts in accumulation period:
The Principal Variable Annuity 261,126 8.75 2,284,887
SmallCap Division:
Contracts in accumulation period:
Principal Freedom Variable Annuity 49,733 13.79 685,747
The Principal Variable Annuity 1,207,717 11.24 13,577,345
14,263,092
See accompanying notes.
Units Unit
Value
Net assets are represented by (continued):
SmallCap Growth Division:
Contracts in accumulation period:
Principal Freedom Variable Annuity 24,440 $17.18 $ 419,827
The Principal Variable Annuity 1,388,214 19.67 27,308,008
27,727,835
SmallCap Value Division:
Contracts in accumulation period:
The Principal Variable Annuity 536,295 10.12 5,428,934
Stock Index 500 Division:
Contracts in accumulation period:
Principal Freedom Variable Annuity 301,818 10.98 3,315,448
The Principal Variable Annuity 2,314,127 10.96 25,353,088
28,668,536
Templeton VP Stock Division:
Contracts in accumulation period:
Principal Freedom Variable Annuity 19,975 11.48 229,397
Utilities Division:
Contracts in accumulation period:
The Principal Variable Annuity 1,670,481 11.58 19,346,388
Combined net assets $2,270,618,678
</TABLE>
<PAGE>
Principal Life Insurance Company
Separate Account B
Statements of Operations
Year ended December 31, 1999
<TABLE>
<CAPTION>
AIM V.I.
Aggressive AIM V.I. Growth and
Growth Growth Income
Combined Division Division (2) Division (2)
<S> <C> <C> <C> <C>
Investment income
Income:
Dividends $ 45,282,090 $ - $ 17,806 $ 77,291
Capital gains distributions 105,806,830 21,397,989 312,127 53,367
Total income 151,088,920 21,397,989 329,933 130,658
Expenses:
Mortality and expense risks 22,763,225 3,276,716 20,980 34,219
Administration charges 742,370 194,565 456 385
Contingent sales charges 3,165,426 457,098 3,214 4,269
26,671,021 3,928,379 24,650 38,873
Net investment income (loss) 124,417,899 17,469,610 305,283 91,785
Realized and unrealized gains (losses)
on investments
Net realized gains (losses) on investments 22,090,229 3,196,766 6,593 573
Change in net unrealized appreciation or
depreciation of investments 63,116,910 68,126,668 1,023,211 2,234,269
Net increase (decrease) in net assets resulting
from operations $209,625,038 $88,793,044 $1,335,087 $2,326,627
<FN>
(1) Commenced operations April 30, 1999.
(2) Commenced operations July 30, 1999.
</FN>
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
American
Century VP
AIM V.I. Growth & Asset
Value Income Allocation Balanced Blue Chip
Division (2) Division (1) Division Division Division (1) Bond Division
<S> <C> <C> <C> <C> <C>
$ 29,001 $ - $ 1,831,944 $ 6,834,925 $10,146 $ 8,279,063
151,654 - 5,618,939 7,645,759 - -
180,655 7,450,883 14,480,684 10,146 8,279,063
26,428 1,079 854,745 2,242,611 2,912 1,408,549
430 - 13,026 58,446 - 24,428
1,915 2 91,473 294,250 4 186,790
28,773 1,081 959,244 2,595,307 2,916 1,619,767
151,882 (1,081) 6,491,639 11,885,377 7,230 6,659,296
891 (497) 481,462 1,484,227 2,512 (108,685)
1,085,598 27,051 4,561,739 (11,427,368) 53,613 (11,364,679)
$1,238,371 $25,473 $11,534,840 $ 1,942,236 $63,355 $ (4,814,068)
</TABLE>
<PAGE>
Principal Life Insurance Company
Separate Account B
Statements of Operations (continued)
Year ended December 31, 1999
<TABLE>
<CAPTION>
Fidelity VIP II Fidelity VIP Government
Capital Value Contrafund Growth Securities
Division Division (2) Division (2) Division
<S> <C> <C> <C> <C>
Investment income
Income:
Dividends $ 7,693,507 $ - $ - $ 8,714,628
Capital gains distributions 38,733,240 - - -
Total income 46,426,747 - - 8,714,628
Expenses:
Mortality and expense risks 4,005,315 34,580 31,417 1,602,756
Administration charges 156,269 665 492 43,008
Contingent sales charges 498,264 1,863 3,790 242,416
4,659,848 37,108 35,699 1,888,180
Net investment income (loss) 41,766,899 (37,108) (35,699) 6,826,448
Realized and unrealized gains
(losses) on investments
Net realized gains (losses) on
investments 4,658,058 1,648 5,275 484,422
Change in net unrealized appreciation
or depreciation of investments (67,359,377) 1,757,647 1,959,683 (9,574,634)
Net increase (decrease) in net asset
resulting from operations $(20,934,420) $1,722,187 $1,929,259 $(2,263,764)
<FN>
(1) Commenced operations April 30, 1999.
(2) Commenced operations July 30, 1999.
</FN>
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
International LargeCap
Growth International SmallCap Growth MicroCap MidCap
Division Division Division Division(1) Division Division
<S> <C> <C> <C> <C> <C>
$ 1,947,097 $ 4,726,274 $ - $ - $ 2,813 $ 703,317
1,329,905 17,318,991 862,692 - - 10,660,187
3,277,002 22,045,265 862,692 - 2,813 11,363,504
3,297,312 1,777,625 105,356 782 19,385 2,532,895
123,956 33,015 2,741 - 495 51,070
372,883 228,462 5,566 4 1,058 372,706
3,794,151 2,039,102 113,663 786 20,938 2,956,671
(517,149) 20,006,163 749,029 (786) (18,125) 8,406,833
4,769,748 1,999,070 155,306 (259) (21,284) 4,548,722
37,519,367 13,548,007 6,340,627 67,226 (16,637) 10,460,479
$41,771,966 $35,553,240 $7,244,962 $66,181 $(56,046) $23,416,034
</TABLE>
<PAGE>
Principal Life Insurance Company
Separate Account B
Statements of Operations (continued)
Year ended December 31, 1999
<TABLE>
<CAPTION>
MidCap MidCap Money
Growth Value Market Real Estate
Division Division (1) Division Division
<S> <C> <C> <C> <C>
Investment income
Income:
Dividends $ 13,485 $ 303 $3,691,350 $ 117,060
Capital gains distributions - 3,640 - -
Total income 13,485 3,943 3,691,350 117,060
Expenses:
Mortality and expense risks 64,265 494 869,510 27,254
Administration charges 1,602 - 23,537 383
Contingent sales charges 3,790 - 357,209 1,571
69,657 494 1,250,256 29,208
Net investment income (loss) (56,172) 3,449 2,441,094 87,852
Realized and unrealized gains
(losses) on investments
Net realized gains (losses) on
investments 29,979 (55) - (22,348)
Change in net unrealized appreciation
or depreciation of investments 706,786 18,087 - (203,890)
Net increase (decrease) in net assets
resulting from operations $680,593 $21,481 $2,441,094 $(138,386)
<FN>
(1) Commenced operations April 30, 1999.
</FN>
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
SmallCap Stock Templeton
SmallCap Growth SmallCap Index 500 VP Stock Utilities
Division Division Value Division Division (1) Division (1) Division
<S> <C> <C> <C> <C> <C>
$ 4,386 $ - $ 34,529 $ 160,270 $ - $392,895
1,164,756 260,578 - 207,423 - 85,583
1,169,142 260,578 34,529 367,693 - 478,478
95,691 104,663 48,384 106,102 537 170,663
2,565 3,410 893 1,910 - 4,623
5,893 6,248 2,023 10,768 2 11,895
104,149 114,321 51,300 118,780 539 187,181
1,064,993 146,257 (16,771) 248,913 (539) 291,297
181,690 159,077 28,958 4,053 (696) 45,023
2,055,517 8,873,343 830,881 1,978,085 22,665 (187,054)
$3,302,200 $9,178,677 $843,068 $2,231,051 $21,430 $149,266
</TABLE>
<PAGE>
Principal Life Insurance Company
Separate Account B
Statements of Changes in Net Assets
Years ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
AIM V.I.
Aggrewssive AIM V.I. Growth and
Growth Growth Income
Combined Division Division (3) Division (3)
<S> <C> <C> <C> <C>
Net assets at January 1, 1998 $1,288,183,210 $143,957,816$ - $ -
Increase (decrease) in net assets
Operations:
Net investment income (loss) 65,953,139 7,934,103 - -
Net realized gains (losses) on investments 12,416,637 2,390,605 - -
Change in net unrealized appreciation or
depreciation of investments 69,585,710 16,690,371 - -
Net increase (decrease) in net assets resulting from
operations 147,955,486 27,015,079 - -
Changes from principal transactions:
Purchase payments, less sales charges, per
payment fees and applicable premium taxes 880,179,184 89,426,487 - -
Contract terminations (82,987,332) (7,493,332) - -
Death benefit payments (6,720,662) (574,590) - -
Flexible withdrawal option payments (13,530,855) (1,052,669) - -
Transfer payments to other contracts (410,965,015) (42,840,180) - -
Annuity payments (47,900) - - -
Increase in net assets from principal transactions 365,927,420 37,465,716 - -
Total increase 513,882,906 64,480,795 - -
Net assets at December 31, 1998 1,802,066,116 208,438,611 - -
Increase (decrease) in net assets
Operations:
Net investment income (loss) 124,417,899 17,469,610 305,283 91,785
Net realized gains (losses) on investments 22,090,229 3,196,766 6,593 573
Change in net unrealized appreciation or
depreciation of investments 63,116,910 68,126,668 1,023,211 2,234,269
Net increase (decrease) in net assets resulting from
operations 209,625,038 88,793,044 1,335,087 2,326,627
Changes from principal transactions:
Purchase payments, less sales charges, per
payment fees and applicable premium taxes 910,344,713 101,064,152 11,334,680 16,624,717
Contract terminations (141,526,084) (15,104,428) (106,201) (141,058)
Death benefit payments (10,198,348) (983,013) - -
Flexible withdrawal option payments (21,852,225) (1,779,766) (15,533) (59,632)
Transfer payments to other contracts (477,791,128) (34,493,650) (681,510) (673,824)
Annuity payments (49,404) - - -
Increase (decrease) in net assets from principal
transactions 258,927,524 48,703,295 10,531,436 15,750,203
Total increase (decrease) 468,552,562 137,496,339 11,866,523 18,076,830
Net assets at December 31, 1999 $2,270,618,678 $345,934,950 $11,866,523 $18,076,830
<FN>
(1) Commenced operations May 1, 1998.
(2) Commenced operations April 30, 1999.
(3) Commenced operations July 30, 1999.
</FN>
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
American
Century VP
AIM V.I. Growth & Asset Capital
Value Income Allocation Balanced Blue Chip Value
Division (3) Division (2) Division Division Division (2) Bond Division Division
<S> <C> <C> <C> <C> <C> <C>
$ - $ - $48,511,958 $127,099,255 $ - $ 73,489,868 $269,251,746
- - 2,564,027 9,165,298 - 4,819,740 14,865,520
- - 109,943 612,459 - 256,093 3,370,612
- - 1,193,914 5,916,307 - 403,378 16,709,725
- - 3,867,884 15,694,064 - 5,479,211 34,945,857
- - 20,700,753 75,135,480 - 58,231,814 104,873,017
- - (2,607,601) (7,275,303) - (4,182,861) (20,291,443)
- - (356,750) (782,491) - (501,389) (1,069,753)
- - (647,508) (2,009,052) - (1,522,331) (2,067,909)
- - (6,686,437) (20,238,081) - (14,012,541) (27,234,001)
- - - - - - (47,900)
- - 10,402,457 44,830,553 - 38,012,692 54,162,011
- - 14,270,341 60,524,617 - 43,491,903 89,107,868
- - 62,782,299 187,623,872 - 116,981,771 358,359,614
151,882 (1,081) 6,491,639 11,885,377 7,230 6,659,296 41,766,899
891 (497) 481,462 1,484,227 2,512 (108,685) 4,658,058
1,085,598 27,051 4,561,739 (11,427,368) 53,613 (11,364,679) (67,359,377)
1,238,371 25,473 11,534,840 1,942,236 63,355 (4,814,068) (20,934,420)
13,050,220 524,993 14,766,942 53,940,183 1,333,008 42,269,162 78,514,936
(63,264) (1,423) (3,022,661) (14,926,025) (3,596) (7,755,652) (27,487,047)
- - (516,925) (1,306,378) - (1,261,033) (1,652,461)
(34,809) (2,610) (881,819) (2,961,604) (51,191) (2,492,384) (3,352,498)
(920,892) (66,849) (7,591,459) (26,906,869) (78,337) (24,472,185) (46,670,241)
- - - - - - (49,404)
12,031,255 454,111 2,754,078 7,839,307 1,199,884 6,287,908 (696,715)
13,269,626 479,584 14,288,918 9,781,543 1,263,239 1,473,840 (21,631,135)
$13,269,626 $479,584 $77,071,217 $197,405,415 $1,263,239 $118,455,611 $336,728,479
</TABLE>
<PAGE>
Principal Life Insurance Company
Separate Account B
Statements of Changes in Net Assets (continued)
Years ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
Fidelity VIP II Fidelity VIP Government
Contrafund Growth Securities Growth
Division (3) Division (3) Division Division
<S> <C> <C> <C> <C>
Net assets at January 1, 1998 $ - $ - $ 92,854,016 $165,813,925
Increase (decrease) in net assets
Operations:
Net investment income (loss) - - 5,457,597 2,355,086
Net realized gains (losses) on investments - - 519,217 2,312,393
Change in net unrealized appreciation or
depreciation of investments - - 1,581,620 32,170,680
Net increase (decrease) in net assets resulting from
operations - - 7,558,434 36,838,159
Changes from principal transactions:
Purchase payments, less sales charges, per
payment fees and applicable premium taxes - - 63,571,935 84,755,953
Contract terminations - - (6,906,897) (9,260,589)
Death benefit payments - - (712,491) (806,053)
Flexible withdrawal option payments - - (1,740,621) (1,381,999)
Transfer payments to other contracts - - (17,983,933) (22,495,558)
Annuity payments - - - -
Increase in net assets from principal transactions - - 36,227,993 50,811,754
Total increase - - 43,786,427 87,649,913
Net assets at December 31, 1998 - - 136,640,443 253,463,838
Increase (decrease) in net assets
Operations:
Net investment income (loss) (37,108) (35,699) 6,826,448 (517,149)
Net realized gains (losses) on investments 1,648 5,275 484,422 4,769,748
Change in net unrealized appreciation or
depreciation of investments 1,757,647 1,959,683 (9,574,634) 37,519,367
Net increase (decrease) in net assets resulting from
operations 1,722,187 1,929,259 (2,263,764) 41,771,966
Changes from principal transactions:
Purchase payments, less sales charges, per
payment fees and applicable premium taxes 14,931,250 16,698,633 47,743,208 91,335,475
Contract terminations (61,565) (125,229) (10,465,377) (19,217,469)
Death benefit payments - - (1,341,588) (1,006,757)
Flexible withdrawal option payments (24,879) (26,375) (2,664,620) (2,479,569)
Transfer payments to other contracts (343,754) (1,026,346) (33,179,720) (30,617,567)
Annuity payments - - - -
Increase (decrease) in net assets from principal
transactions 14,501,052 15,520,683 91,903 38,014,113
Total increase (decrease) 16,223,239 17,449,942 (2,171,861) 79,786,079
Net assets at December 31, 1999 $16,223,239 $17,449,942 $134,468,582 $333,249,917
<FN>
(1) Commenced operations May 1, 1998.
(2) Commenced operations April 30, 1999.
(3) Commenced operations July 30, 1999.
</FN>
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
International LargeCap
International SmallCap Growth MicroCap MidCap
Division Division (1) Division (2) Division (1) Division
<S> <C> <C> <C> <C>
$121,436,154 $ - $ - $ - $204,088,063
5,420,947 (7,494) - (1,807) 11,348,399
1,240,861 (34,310) - (30,669) 1,666,097
3,163,616 (43,412) - (79,471) (9,573,159)
9,825,424 (85,216) - (111,947) 3,441,337
43,354,442 4,389,570 - 1,525,355 66,169,872
(6,288,874) (3,166) - (13,672) (11,333,222)
(361,156) - - - (893,824)
(842,431) (8,380) - (764) (1,395,916)
(22,528,113) (534,238) (252,998) (27,342,936)
- - - - -
13,333,868 3,843,786 - 1,257,921 25,203,974
23,159,292 3,758,570 - 1,145,974 28,645,311
144,595,446 3,758,570 - 1,145,974 232,733,374
20,006,163 749,029 (786) (18,125) 8,406,833
1,999,070 155,306 (259) (21,284) 4,548,722
13,548,007 6,340,627 67,226 (16,637) 10,460,479
35,553,240 7,244,962 66,181 (56,046) 23,416,034
34,132,051 13,166,004 375,030 1,266,131 35,597,163
(10,091,869) (183,916) (3,596) (34,951) (16,031,613)
(525,124) (45,140) - (1,942) (831,361)
(1,246,885) (74,313) (687) (3,256) (1,703,550)
(19,753,809) (2,452,823) (21,685) (386,052) (42,999,839)
- - - - -
2,514,364 10,409,812 349,062 839,930 (25,969,200)
38,067,604 17,654,774 415,243 783,884 (2,553,166)
$182,663,050 $21,413,344 $415,243 $1,929,858 $230,180,208
</TABLE>
<PAGE>
Principal Life Insurance Company
Separate Account B
Statements of Changes in Net Assets (continued)
Years ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
MidCap MidCap Money
Growth Value Market Real Estate
Division (1) Division (2) Division Division (1)
<S> <C> <C> <C> <C>
Net assets at January 1, 1998 $ - $ - $ 41,680,409 $ -
Increase (decrease) in net assets
Operations:
Net investment income (loss) (13,725) - 1,944,535 44,944
Net realized gains (losses) on investments (8,805) - - (1,854)
Change in net unrealized appreciation or
depreciation of investments 284,250 - - (45,204)
Net increase (decrease) in net assets resulting from
operations 261,720 - 1,944,535 (2,114)
Changes from principal transactions:
Purchase payments, less sales charges, per
payment fees and applicable premium taxes 3,381,739 - 245,196,048 1,979,207
Contract terminations (46,096) - (7,232,550) (6,972)
Death benefit payments - - (658,257) -
Flexible withdrawal option payments (5,134) - (797,929) (4,598)
Transfer payments to other contracts (203,258) - (206,535,244) (152,812)
Annuity payments - - - -
Increase in net assets from principal transactions 3,127,251 - 29,972,068 1,814,825
Total increase 3,388,971 - 31,916,603 1,812,711
Net assets at December 31, 1998 3,388,971 - 73,597,012 1,812,711
Increase (decrease) in net assets
Operations:
Net investment income (loss) (56,172) 3,449 2,441,094 87,852
Net realized gains (losses) on investments 29,979 (55) - (22,348)
Change in net unrealized appreciation or
depreciation of investments 706,786 18,087 - (203,890)
Net increase (decrease) in net assets resulting from
operations 680,593 21,481 2,441,094 (138,386)
Changes from principal transactions:
Purchase payments, less sales charges, per
payment fees and applicable premium taxes 5,299,244 199,655 238,793,125 1,050,155
Contract terminations (125,252) - (15,296,261) (51,913)
Death benefit payments (60,684) - (340,462) (1,942)
Flexible withdrawal option payments (41,920) (1,137) (1,358,192) (39,089)
Transfer payments to other contracts (1,187,246) (19,648) (191,865,621) (346,649)
Annuity payments - - - -
Increase (decrease) in net assets from principal
transactions 3,884,142 178,870 29,932,589 610,562
Total increase (decrease) 4,564,735 200,351 32,373,683 472,176
Net assets at December 31, 1999 $7,953,706 $200,351 $105,970,695 $2,284,887
<FN>
(1) Commenced operations May 1, 1998.
(2) Commenced operations April 30, 1999.
(3) Commenced operations July 30, 1999.
</FN>
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
SmallCap SmallCap Stock Templeton
SmallCap Growth Value Index 500 VP Stock Utilities
Division (1) Division (1) Division (1) Division (2) Division (2) Division (1)
<S> <C> <C> <C> <C> <C>
$ - $ - $ - $ - $ - $ -
(13,548) (11,681) (737) - - 81,935
(4,971) 1,417 (6,817) - - 24,366
120,314 455,888 19,376 - - 617,517
101,795 445,624 11,822 - - 723,818
3,787,231 3,229,155 2,802,830 - - 7,668,296
(3,155) (12,246) (10,976) - - (18,377)
- (3,908) - - - -
(9,905) (1,997) (9,311) - - (32,401)
(240,611) (456,290) (215,381) - - (1,012,403)
- - - - - -
3,533,560 2,754,714 2,567,162 - - 6,605,115
3,635,355 3,200,338 2,578,984 - - 7,328,933
3,635,355 3,200,338 2,578,984 - - 7,328,933
1,064,993 146,257 (16,771) 248,913 (539) 291,297
181,690 159,077 28,958 4,053 (696) 45,023
2,055,517 8,873,343 830,881 1,978,085 22,665 (187,054)
3,302,200 9,178,677 843,068 2,231,051 21,430 149,266
10,140,290 19,156,102 2,804,702 28,866,212 233,152 15,134,138
(194,731) (206,447) (66,861) (363,196) (1,423) (393,060)
(72,373) (142,968) - - - (108,197)
(55,329) (61,773) (31,699) (160,894) (687) (245,525)
(2,492,320) (3,396,094) (699,260) (1,904,637) (23,075) (2,519,167)
- - - - - -
7,325,537 15,348,820 2,006,882 26,437,485 207,967 11,868,189
10,627,737 24,527,497 2,849,950 28,668,536 229,397 12,017,455
$14,263,092 $27,727,835 $5,428,934 $28,668,536 $229,397 $19,346,388
</TABLE>
<PAGE>
Principal Life Insurance Company
Separate Account B
Notes to Financial Statements
December 31, 1999
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) 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, 1999, contractholder investment options
include the following open-end management investment companies:
<TABLE>
<S> <C>
Principal Variable Contracts Fund, Inc. (4) Principal Variable Contracts Fund, Inc. (4)
Aggressive Growth Account (continued):
Asset Allocation Account SmallCap Account (1)
Balanced Account Small Cap Growth Account (1)
Blue Chip Account (2) SmallCap Value Account (1)
Bond Account Stock Index 500 Account (2)
Capital Value Account Utilities Account (1)
Government Securities Account AIM V.I. Growth Fund (3)
Growth Account AIM V.I. Growth & Income Fund (3)
International Account AIM V.I. Value Fund (3)
International SmallCap Account (1) American Century Variable Portfolios Inc.
LargeCap Growth Account (2) VP Income & Growth (2)
MicroCap Account (1) Fidelity Variable Insurance Products Fund
MidCap Account II: Fidelity VIP II Contrafund Portfolio (3)
MidCap Growth Account (1) Fidelity Variable Insurance Products Fund:
MidCap Value Account (2) Fidelity VIP Growth Portfolio (3)
Money Market Account Templeton Variable Products Series Fund:
Real Estate Account (1) Templeton Stock Fund Class 2 (2)
<FN>
(1) Additional investment option available to contractholders as of May 1,
1998.
(2) Additional investment option available to contractholders as of April 30,
1999.
(3) Additional investment option available to contractholders as of July 30,
1999.
(4) Organized by Principal Life Insurance Company.
</FN>
</TABLE>
Investments are stated at the closing net asset values per share on December 31,
1999.
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.
<PAGE>
Principal Life Insurance Company
Separate Account B
Notes to Financial Statements (continued)
1. Investment and Accounting Policies (continued)
Separate Account B supports the following variable annuity contracts of
Principal Life: Bankers Flexible Annuity Contracts; Pension Builder Plus
Contracts; Pension Builder Plus - Rollover IRA Contracts; Personal Variable
Contracts; Premier Variable Contracts; and The Principal Variable Annuity. On
April 30, 1999, Principal Life introduced a new product, Principal Freedom
Variable Annuity, which invests in Separate Account B. Contributions to the
Personal Variable contracts are no longer accepted from new customers, only from
existing customers beginning January 1, 1998.
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 $32,392 and $917, respectively, during the year ended December 31,
1999.
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 $145,840, $14, and
$38,283, respectively, during the year ended December 31, 1999.
<PAGE>
Principal Life Insurance Company
Separate Account B
Notes to Financial Statements (continued)
2. Expenses (continued)
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 $34 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 $219,455, $46,869, and
$71,216, respectively, during the year ended December 31, 1999.
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. A fixed contract administration charge ranging
from $163 to $250 depending on plan type, plus a variable charge ranging from
.06% to .3% of quarterly assets (with a minimum charge of $188) is billed to the
contractholder each quarter. Additional quarterly administration charges for
recordkeeping services are based on the number of plan participants and can
range from a minimum of $512 to $22,579, plus $3.25 for each participant over
5,000. The charges for mortality expense risks and annual administration
amounted to $891,515 and $19,221, respectively, during the year ended December
31, 1999.
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 $21,448,417, $3,118,480, and $612,733,
respectively, during the year ended December 31, 1999.
Principal Freedom Variable Annuity (beginning in 1999) - Mortality and expenses
risk assumed by Principal Life are compensated for by a charge equivalent to an
annual rate of 0.85% of the asset value of each contract. A contingent sales
charge 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 facility, or terminal illness. Principal Life reserves
the right to charge an additional administrative fee of up to 0.15% of the asset
value of each Division. The mortality expense risk and contingent sales charges
amounted to $25,606 and $62, respectively, during the year ended December 31,
1999.
<PAGE>
Principal Life Insurance Company
Separate Account B
Notes to Financial Statements (continued)
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, 1999
Units Amount Units Amount
Purchased Purchased Redeemed Redeemed
<S> <C> <C> <C> <C>
Aggressive Growth Division:
The Principal Variable Annuity 3,214,960 $122,462,141 1,683,015 $ 56,289,236
AIM V.I. Growth Division:
The Principal Variable Annuity 1,043,639 11,664,612 75,317 827,893
AIM V.I. Growth and Income Division:
The Principal Variable Annuity 1,576,345 16,755,376 82,430 913,388
AIM V.I. Value Division:
The Principal Variable Annuity 1,243,905 13,230,876 95,246 1,047,739
American Century VP Growth &
Income Division:
Principal Freedom Variable Annuity 50,412 524,993 7,242 71,963
Asset Allocation Division:
The Principal Variable Annuity 834,729 22,217,825 683,360 12,972,108
Balanced Division:
Personal Variable 886,567 1,955,537 359,165 673,706
Premier Variable 6,339,318 13,629,736 4,740,045 8,750,890
The Principal Variable Annuity 2,284,756 52,835,595 2,085,229 39,271,588
9,510,641 68,420,868 7,184,439 48,696,184
Blue Chip Division:
Principal Freedom Variable Annuity 136,422 1,343,154 13,245 136,040
Bond Division:
Personal Variable 418,281 704,639 185,727 277,590
Premier Variable 4,132,232 6,826,337 2,731,487 4,028,982
Principal Freedom Variable Annuity 111,634 1,149,316 4,578 47,159
The Principal Variable Annuity 2,468,514 41,867,932 2,289,764 33,247,289
7,130,661 50,548,224 5,211,556 37,601,020
</TABLE>
<PAGE>
Principal Life Insurance Company
Separate Account B
Notes to Financial Statements (continued)
4. Purchases and Sales of Investment Securities (continued)
<TABLE>
Year ended December 31, 1999
<CAPTION>
Units Amount Units Amount
Purchased Purchased Redeemed Redeemed
<S> <C> <C> <C> <C>
Capital Value Division:
Bankers Flexible Annuity - $ 841,253 22,885 $ 766,530
Pension Builder Plus 7,017 888,413 204,326 1,317,343
Pension Builder - Rollover 769 200,803 130,658 853,075
Personal Variable 967,223 3,979,495 717,700 1,970,499
Premier Variable 5,573,357 22,944,583 5,435,276 14,926,095
Principal Freedom Variable Annuity 103,693 1,078,445 586 7,725
The Principal Variable Annuity 2,548,728 95,008,690 2,635,305 64,030,231
9,200,787 124,941,682 9,146,736 83,871,498
Fidelity VIP II Contrafund Division:
The Principal Variable Annuity 1,478,491 14,931,250 42,014 467,306
Fidelity VIP Growth Division:
The Principal Variable Annuity 1,551,497 16,698,632 110,301 1,213,648
Government Securities Division:
Pension Builder Plus 3,243 57,016 135,077 304,315
Pension Builder - Rollover 2,725 10,957 123,261 281,975
Personal Variable 559,774 1,055,722 402,979 629,754
Premier Variable 3,747,210 6,587,956 3,673,738 5,697,825
The Principal Variable Annuity 2,981,151 48,746,184 2,981,307 42,625,616
7,294,103 56,457,835 7,316,362 49,539,485
Growth Division:
Personal Variable 1,269,770 2,904,572 386,799 896,579
Premier Variable 9,481,990 21,824,588 5,078,610 11,584,283
The Principal Variable Annuity 2,961,592 69,883,318 1,825,509 44,634,652
13,713,352 94,612,478 7,290,918 57,115,514
International Division:
Personal Variable 582,324 1,455,068 338,607 600,098
Premier Variable 3,664,161 9,217,380 2,292,432 4,103,134
Principal Freedom Variable Annuity 54,996 630,306 1,696 19,226
The Principal Variable Annuity 1,517,640 44,874,562 1,584,525 28,934,331
5,819,121 56,177,316 4,217,260 33,656,789
International SmallCap Division:
The Principal Variable Annuity 1,049,723 14,028,696 222,261 2,869,855
LargeCap Growth Division:
Principal Freedom Variable Annuity 33,844 375,030 2,569 26,754
MicroCap Division:
The Principal Variable Annuity 156,137 1,268,945 53,831 447,140
</TABLE>
<PAGE>
Principal Life Insurance Company
Separate Account B
Notes to Financial Statements (continued)
4. Purchases and Sales of Investment Securities (continued)
<TABLE>
Year ended December 31, 1999
<CAPTION>
Units Amount Units Amount
Purchased Purchased Redeemed Redeemed
<S> <C> <C> <C> <C>
MidCap Division:
Personal Variable 731,578 $ 1,597,024 493,072 $ 956,950
Premier Variable 4,873,689 10,698,589 4,195,358 8,136,930
Principal Freedom Variable Annuity 34,298 347,942 1,952 19,145
The Principal Variable Annuity 1,298,049 34,317,113 2,807,445 55,410,009
6,937,614 46,960,668 7,497,827 64,523,034
MidCap Growth Division:
Principal Freedom Variable Annuity 9,110 96,654 64 834
The Principal Variable Annuity 542,934 5,216,076 148,770 1,483,926
552,044 5,312,730 148,834 1,484,760
MidCap Value Division:
Principal Freedom Variable Annuity 20,181 203,598 2,293 21,279
Money Market Division:
Pension Builder Plus 1,340 32,651 32,978 75,711
Pension Builder - Rollover 668 2,380 725 1,672
Personal Variable 4,953,979 6,553,954 4,771,035 6,240,201
Premier Variable 35,455,605 47,466,345 34,692,221 45,871,646
Principal Freedom Variable Annuity 306,893 3,135,144 212,443 2,166,714
The Principal Variable Annuity 15,033,975 185,294,000 12,793,632 155,754,849
55,752,460 242,484,474 52,503,034 210,110,793
Real Estate Division:
The Principal Variable Annuity 115,608 1,167,215 49,917 468,801
SmallCap Division:
Principal Freedom Variable Annuity 49,860 662,386 127 2,684
The Principal Variable Annuity 1,050,452 10,647,045 301,274 2,916,217
1,100,312 11,309,431 301,401 2,918,901
SmallCap Growth Division:
Principal Freedom Variable Annuity 28,563 318,177 4,123 56,732
The Principal Variable Annuity 1,353,563 19,098,502 279,769 3,864,869
1,382,126 19,416,679 283,892 3,921,601
SmallCap Value Division:
The Principal Variable Annuity 320,599 2,839,231 89,876 849,120
Stock Index 500 Division:
Principal Freedom Variable Annuity 321,884 3,278,717 20,066 209,923
The Principal Variable Annuity 2,535,758 25,955,190 221,631 2,337,587
2,857,642 29,233,907 241,697 2,547,510
Templeton VP Stock Division:
Principal Freedom Variable Annuity 22,553 233,152 2,578 25,724
Utilities Division:
The Principal Variable Annuity 1,317,255 15,612,615 286,073 3,453,129
135,417,163 $1,061,433,633 104,845,624 $678,088,212
</TABLE>
<PAGE>
Principal Life Insurance Company
Separate Account B
Notes to Financial Statements (continued)
4. Purchases and Sales of Investment Securities (continued)
<TABLE>
Year ended December 31, 1998
<CAPTION>
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
</TABLE>
<PAGE>
Principal Life Insurance Company
Separate Account B
Notes to Financial Statements (continued)
4. Purchases and Sales of Investment Securities (continued)
<TABLE>
Year ended December 31, 1998
<CAPTION>
Units Amount Units Amount
Purchased Purchased Redeemed Redeemed
<S> <C> <C> <C> <C>
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>
<PAGE>
Principal Life Insurance Company
Separate Account B
Notes to Financial Statements (continued)
4. Purchases and Sales of Investment Securities (continued)
Purchases include reinvested dividends and capital gains. Mortality adjustments
are included in purchases and redemptions, as applicable.
Money Market purchases include transactions where investment allocations are not
known at the time of the deposit. Redemptions reflect subsequent allocations to
directed investment divisions.
5. Year 2000 Issues (Unaudited)
As of January 31, 2000, virtually all of the major technology systems, processes
and infrastructure, including those which rely on third party vendors used by
Principal Life and other service providers of Separate Account B appear to be
operating smoothly following the rollover to the Year 2000. Principal Life has
experienced no significant interruptions to normal business operations,
including the processing of customer account data and transactions. Principal
Life will continue its Year 2000 vigilance into early 2001.
Based on the performance of its major technology systems to date, ongoing plans
to deal with external relationships, and contingency plans, Principal Life
believes that in the worst case scenario it will experience, at most, isolated
and insignificant disruptions of business processes as a result of Year 2000
issues. Such disruptions are not expected to have a material effect on Separate
Account B's future results of operations, liquidity, or financial condition.
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) as of December 31, 1999 and
1998, 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, 1999. 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 auditing standards generally accepted
in the United States. 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, 1999 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
/s/Ernst & Young LLP
Des Moines, Iowa
January 31, 2000
Principal Life Insurance Company
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
------------------------------------------
(In Millions)
<S> <C> <C> <C>
Revenues
Premiums and other considerations $3,152 $3,409 $4,668
Fees and other revenue 1,125 992 881
Net investment income 2,777 2,806 2,937
Net realized capital gains 459 466 176
Contribution from closed block 11 13 -
------------------------------------------
Total revenues 7,524 7,686 8,662
Expenses
Policy and contract benefits 4,210 4,500 5,271
Change in future policy benefits and
contractholder funds 415 277 361
Dividends to policyholders 9 155 299
Operating expenses 1,757 2,015 2,036
------------------------------------------
------------------------------------------
Total expenses 6,391 6,947 7,967
------------------------------------------
Income before income taxes 1,133 739 695
Income taxes 323 44 241
------------------------------------------
==========================================
Net income $ 810 $ 695 $ 454
==========================================
</TABLE>
See accompanying notes.
Principal Life Insurance Company
Consolidated Statements of Financial Position
<TABLE>
<CAPTION>
December 31
1999 1998
---------------------------
---------------------------
(In Millions)
<S> <C> <C>
Assets
Fixed maturities, available-for-sale $21,660 $21,006
Equity securities, available-for-sale 864 1,102
Mortgage loans 12,296 12,091
Real estate 2,212 2,585
Policy loans 28 25
Other investments 637 349
---------------------------
Total investments 37,697 37,158
Cash and cash equivalents 362 461
Accrued investment income 408 375
Deferred policy acquisition costs 792 456
Property and equipment 458 451
Goodwill and other intangibles 152 161
Premiums due and other receivables 284 261
Mortgage loan servicing rights 1,081 778
Closed block assets 4,318 4,251
Separate account assets 33,307 29,009
Other assets 451 582
---------------------------
===========================
Total assets $79,310 $73,943
===========================
===========================
Liabilities
Contractholder funds $24,523 $23,339
Future policy benefits and claims 7,623 7,082
Other policyholder funds 271 293
Short-term debt - 200
Long-term debt 834 671
Income taxes currently payable 15 27
Deferred income taxes 159 497
Closed block liabilities 5,395 5,299
Separate account liabilities 33,307 29,009
Other liabilities 2,232 2,057
---------------------------
---------------------------
Total liabilities 74,359 68,474
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 3
Retained earnings 5,110 4,749
Accumulated other comprehensive income (loss):
Net unrealized gains (losses) on available-for-sale securities (102) 746
Net foreign currency translation adjustment (60) (29)
---------------------------
---------------------------
Total stockholder's equity 4,951 5,469
---------------------------
===========================
Total liabilities and stockholder's equity $79,310 $73,943
===========================
</TABLE>
See accompanying notes.
Principal Life Insurance Company
Consolidated Statements of Stockholder's Equity
<TABLE>
<CAPTION>
Net Unrealized
Gains (Losses) on Net Foreign
Available-for-Sale Currency Total
Common Retained Securities Translation Stockholder's
Stock Earnings Adjustment Equity
-------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1997 $- $3,803 $ 860 $ (9) $4,654
Comprehensive income:
Net income - 454 - - 454
Net change in unrealized
gains and losses on fixed
maturities, - - 197 - 197
available-for-sale
Net change in unrealized
gains and losses 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 - - - (2) (2)
adjustment
----------------
Comprehensive income 630
-------------------------------------------------------------------------------
Balances at December 31, 1997 - 4,257 1,038 (11) 5,284
Issuance of 2,500,000 shares
of common stock to parent
holding company 3 (3) - - -
Dividend to parent holding - (200) - - (200)
company
Comprehensive income:
Net income - 695 - - 695
Net change in unrealized
gains and losses on fixed
maturities, - - (203) - (203)
available-for-sale
Net change in unrealized
gains and losses on
equity securities,
available-for-sale, - - (292) - (292)
including seed money in
separate accounts
Adjustments for assumed
changes in amortization
patterns:
Deferred policy
acquisition costs - - 37 - 37
Unearned revenue reserves - - (4) - (4)
Provision for deferred
income tax benefit - - 170 - 170
Change in net foreign
currency translation - - - (18) (18)
adjustment
----------------
Comprehensive income 385
-------------------------------------------------------------------------------
Balances at December 31, 1998 3 4,749 746 (29) 5,469
</TABLE>
Principal Life Insurance Company
Consolidated Statements of Stockholder's Equity (continued)
<TABLE>
<CAPTION>
Net Unrealized
Gains (Losses) on Net Foreign
Available-for-Sale Currency Total
Common Retained Securities Translation Stockholder's
Stock Earnings Adjustment Equity
-------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1999 $3 $4,749 $ 746 $ (29) $5,469
Dividend to parent holding - (449) - - (449)
company
Comprehensive loss:
Net income - 810 - - 810
Net change in unrealized
gains and losses on fixed
maturities, - - (1,375) - (1,375)
available-for-sale
Net change in unrealized
gains and losses on
equity securities,
available-for-sale, - - (142) - (142)
including seed money in
separate accounts
Adjustments for assumed
changes in amortization
patterns:
Deferred policy
acquisition costs - 246 - 246
Unearned revenue reserves - (30) - (30)
Provision for deferred
income tax benefit - 453 - 453
Change in net foreign
currency translation - - (31) (31)
adjustment
----------------
Comprehensive loss (69)
===============================================================================
Balances at December 31, 1999 $3 $5,110 $ (102) $(60) $4,951
===============================================================================
</TABLE>
See accompanying notes.
Principal Life Insurance Company
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
---------------------------------------
(In Millions)
<S> <C> <C> <C>
Operating activities
Net income $ 810 $ 695 $ 454
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of deferred policy acquisition costs 76 170 170
Additions to deferred policy acquisition costs (254) (229) (213)
Gain on sales of subsidiaries (11) (6) (14)
Accrued investment income (33) 24 7
Premiums due and other receivables (21) 87 (78)
Contractholder and policyholder liabilities and dividends
1,430 1,489 1,396
Current and deferred income taxes 103 (265) 96
Net realized capital gains (459) (466) (176)
Depreciation and amortization expense 72 100 117
Change in closed block operating assets and
liabilities, net 174 230 -
Other 163 115 (185)
---------------------------------------
Net adjustments 1,240 1,249 1,120
---------------------------------------
Net cash provided by operating activities 2,050 1,944 1,574
Investing activities Available-for-sale securities:
Purchases (10,956) (7,141) (7,478)
Sales 6,852 5,684 7,475
Maturities 2,500 1,377 1,204
Mortgage loans acquired or originated (16,503) (14,162) (9,925)
Mortgage loans sold or repaid 16,242 14,414 8,977
Net change in mortgage servicing rights (307) (387) (144)
Real estate acquired (449) (436) (309)
Real estate sold 870 662 198
Net change in property and equipment (20) (20) -
Change in closed block investments, net (169) (201) -
Proceeds from sales of subsidiaries 42 96 35
Purchases of interest in subsidiaries, net of cash acquired (13) (218) (99)
Net change in other investments (260) (249) (83)
---------------------------------------
Net cash used in investing activities (2,171) (581) (149)
</TABLE>
Principal Life Insurance Company
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
---------------------------------------
(In Millions)
<S> <C> <C> <C>
Financing activities
Issuance of debt $ 203 $ 243 $ 75
Principal repayments of debt (40) (51) (28)
Proceeds of short-term borrowings 4,952 8,628 5,089
Repayment of short-term borrowings (4,896) (8,924) (4,974)
Dividend paid to parent holding company (441) (140) -
Investment contract deposits 5,325 5,854 4,134
Investment contract withdrawals (5,081) (7,058) (5,446)
---------------------------------------
Net cash provided by (used in) financing activities 22 (1,448) (1,150)
---------------------------------------
Net increase (decrease) in cash and cash equivalents (99) (85) 275
Cash and cash equivalents at beginning of year 461 546 271
=======================================
Cash and cash equivalents at end of year $ 362 $ 461 $ 546
=======================================
Schedule of noncash operating and investing activities
Dividend of net noncash assets and liabilities of Princor Financial
Services Corporation to Principal Financial Services, Inc. on
April 1, 1999 $ 12
=============
Thefollowing 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.
</TABLE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements
December 31, 1999
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 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 Principal Life
Insurance Company and its consolidated subsidiaries, as the net assets so
transferred to achieve the change in legal organization were accounted for at
historical carrying amounts in a manner similar to that in pooling-of-interests
accounting.
Description of Business
Principal Life Insurance Company and its consolidated subsidiaries ("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 accounting
principles generally accepted in the United States ("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 $2.3 billion at December
31, 1999 and $2.2 billion at December 31, 1998. Total revenues of the
unconsolidated entities were $2.0 billion in 1999, $1.8 billion in 1998 and $294
million in 1997. During 1999, 1998 and 1997, the Company included $108 million,
$18 million and $19 million, respectively, in net investment income representing
the Company's share of current year net income 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 policyholders
included therein that, after
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
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 such that their cash flows
together with anticipated revenues 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 to
provide for the continuation of aggregate dividend scales in accordance with the
1997 policy dividend scales if the experience underlying such scales continued,
and to allow for appropriate adjustments in such scales if the experience
changes.
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 Company will continue to pay guaranteed benefits under all policies,
including the policies included in the Closed Block, in accordance with their
terms. If the assets allocated to the Closed Block, the investment cash flows
from those assets and the revenues from the policies included in the Closed
Block, including investment income thereon, prove to be insufficient to pay the
benefits guaranteed under the policies included in the Closed Block, the Company
will be required to make such payments from its general funds.
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), policyholder
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 operating income
or other comprehensive 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.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
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.
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.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
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 $432
million and $743 million and commercial mortgage loans held for sale in the
amount of $280 million and $22 million at December 31, 1999 and 1998,
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, excluding investments in unconsolidated
entities, 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 risk of loss is typically limited to the fair value of its
derivative instruments and not to the notional or contractual amounts of these
derivatives. Risk arises from changes in the fair value of the underlying
instruments. The Company is also exposed to credit losses in the event of
nonperformance of the counterparties. This credit risk is minimized by
purchasing such agreements from financial institutions with high credit ratings
and by establishing and monitoring exposure limits.
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.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
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 policyholders. 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 policyholder 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.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
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
policyholder 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.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
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 policyholder 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. 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 other considerations and policy and
contract benefits and changes in reserves is as follows (in millions):
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
Premiums and other considerations:
Direct $3,187 $3,390 $4,601
Assumed 4 59 106
Ceded (39) (40) (39)
==========================================
Net premiums and other considerations $3,152 $3,409 $4,668
==========================================
Policy and contract benefits and changes in reserves:
Direct $4,656 $4,739 $5,596
Assumed (1) 66 102
Ceded (30) (28) (66)
------------------------------------------
Net policy and contract benefits and changes in reserves
$4,625 $4,777 $5,632
==========================================
</TABLE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
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.
Guaranty-fund Assessments
Guaranty-fund assessments are accrued 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.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Pension and Postretirement Benefits
The Company accounts for its pension benefits and postretirement benefits other
than pension (medical, life insurance and long-term care) using the full accrual
method.
Property and Equipment
Property and equipment includes home office properties, related leasehold
improvements, purchased and internally developed software and other fixed
assets. Property and equipment use is shown in the consolidated statements of
financial position at cost less allowances for accumulated depreciation.
Provisions for depreciation of property and equipment are computed principally
on the straight-line method over the estimated useful lives of the assets.
Property and equipment and related accumulated depreciation are as follows (in
millions):
December 31
1999 1998
-----------------------------
Property and equipment $777 $730
Accumulated depreciation (319) (279)
=============================
Property and equipment, net $458 $451
=============================
Goodwill and Other Intangibles
Goodwill and other intangibles include the cost of acquired subsidiaries in
excess of the fair value of the net assets (i.e., goodwill) and other intangible
assets which 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 intangibles is reviewed periodically for
indicators of impairment in value, which in the view of management are other
than temporary, including unexpected or adverse changes in the economic or
competitive environments in which the Company operates, profitability analyses
and the fair value of the relevant subsidiary. If facts and circumstances
suggest that a subsidiary's goodwill is impaired, the Company assesses the fair
value of the underlying business and reduces the goodwill to an amount that
results in the book value of the subsidiary approximating fair value.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Goodwill and other intangibles, and related accumulated amortization, are as
follows (in millions):
<TABLE>
<CAPTION>
December 31
1999 1998
-----------------------------
<S> <C> <C>
Goodwill $176 $185
Other intangibles 21 16
-----------------------------
197 201
Accumulated amortization (45) (40)
=============================
Total goodwill and other intangibles, net $152 $161
=============================
</TABLE>
Premiums Due and Other Receivables
Premiums due and other receivables include life and health insurance premiums
due, reinsurance recoveries, guaranty funds receivable or on deposit,
receivables from the sale of securities and other receivables.
Mortgage Loan Servicing Rights
Mortgage loan servicing rights 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 loan 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
Included in other assets are certain assets pending transfer or novation that
are carried at fair value (see Note 2). The remainder of other assets are
reported primarily at cost.
Comprehensive Income (Loss)
Comprehensive income (loss) includes all changes in stockholder's equity during
a period except those resulting from investments by shareholders and
distributions to shareholders.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
The following table sets forth the adjustments necessary to avoid duplication of
items that are included as part of net income for a year that had been part of
other comprehensive income in prior years (in millions):
<TABLE>
<CAPTION>
December 31
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
Unrealized gains (losses) on available-for-sale securities
arising during the year $(1,039) $(530) $106
Adjustment for realized gains on available-for-sale
securities included in net income 191 238 72
==========================================
Unrealized gains (losses) on available-for-sale securities,
as adjusted $ (848) $(292) $178
==========================================
</TABLE>
The above adjustment for net realized gains on available-for-sale securities
included in net income is presented net of tax, related changes in the
amortization patterns of deferred policy acquisition costs and unearned revenue
reserves.
Reclassifications
Certain reclassifications have been made to the 1997 and 1998 consolidated
financial statements to conform to the 1999 presentation.
Accounting Changes
In June 1998, the Financial Accounting Standards Board ("the FASB") issued
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities
("SFAS 133"). In June 1999, Statement No. 137, Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133, ("SFAS 137") was issued deferring the effective date of SFAS
133 by one year. The new effective date for the Company to adopt SFAS 133 is
January 1, 2001. SFAS 133 will require the Company to include all derivatives in
the consolidated 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 consolidated financial position.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
On January 1, 1999, the Company implemented the Statement of Position ("SOP")
98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. SOP 98-1 defines internal use software and when the costs
associated with internal use should be capitalized. The implementation did not
have a material impact on the Company's consolidated financial statements.
2. Mergers, Acquisitions and Divestitures
During 1999, various acquisitions were made by the Company's subsidiaries at
purchase prices aggregating $13 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, 1999 and total 1999 revenue of $17 million and $12 million,
respectively.
Effective April 1, 1998, the Company merged substantially all of its managed
care operations with Coventry Corporation in exchange for a non-majority
ownership position in the resulting entity, 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.
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.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
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, 1999 and 1998, are
as follows (in millions):
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------------
---------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1999 Fixed maturities:
United States Government and agencies
$ 163 $ - $ 2 $ 161
Foreign governments 808 18 15 811
States and political subdivisions 139 1 9 131
Corporate - public 5,187 73 137 5,123
Corporate - private 10,300 95 332 10,063
Mortgage-backed and other asset-backed
securities 5,486 12 127 5,371
---------------------------------------------------------------
Total fixed maturities $22,083 $199 $622 $21,660
===============================================================
Total equity securities $ 721 $176 $ 33 $ 864
===============================================================
December 31, 1998 Fixed maturities:
United States Government and agencies
$ 615 $ - $ 10 $ 605
Foreign governments 340 29 5 364
States and political subdivisions 137 10 - 147
Corporate - public 3,841 249 84 4,006
Corporate - private 10,570 623 95 11,098
Mortgage-backed and other asset-backed
securities 4,659 138 11 4,786
---------------------------------------------------------------
===============================================================
Total fixed maturities $20,162 $1,049 $205 $21,006
===============================================================
Total equity securities $ 760 $ 395 $ 53 $ 1,102
===============================================================
</TABLE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
The cost and fair value of fixed maturities available-for-sale at December 31,
1999, by expected maturity, are as follows (in millions):
<TABLE>
<CAPTION>
Cost Fair Value
------------------------------
------------------------------
<S> <C> <C>
Due in one year or less $ 1,261 $ 1,260
Due after one year through five years 7,784 7,654
Due after five years through ten years 4,342 4,281
Due after ten years 3,210 3,094
------------------------------
------------------------------
16,597 16,289
Mortgage-backed and other asset-backed securities 5,486 5,371
------------------------------
==============================
Total $22,083 $21,660
==============================
</TABLE>
The above summarized activity is based on expected maturities. Actual maturities
may differ because borrowers may have the right to call or pre-pay obligations.
Major categories of net investment income are summarized as follows (in
millions):
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
Fixed maturities, available-for-sale $1,578 $1,525 $1,620
Equity securities, available-for-sale 46 32 39
Mortgage loans 1,025 1,100 1,084
Real estate 188 143 107
Policy loans 2 27 50
Cash and cash equivalents 19 9 9
Other 43 58 92
------------------------------------------
------------------------------------------
2,901 2,894 3,001
Less investment expenses (124) (88) (64)
------------------------------------------
==========================================
Net investment income $2,777 $2,806 $2,937
==========================================
</TABLE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
The major components of net realized capital gains on investments are summarized
as follows (in millions):
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
-------------------------------------------
<S> <C> <C> <C>
Fixed maturities, available-for-sale:
Gross gains $ 31 $ 67 $ 51
Gross losses (123) (31) (43)
Equity securities, available-for-sale:
Gross gains 409 329 132
Gross losses (26) (40) (26)
Mortgage loans (8) 8 (6)
Real estate 56 126 64
Other 120 7 4
===========================================
Net realized capital gains $459 $466 $176
===========================================
</TABLE>
Proceeds from sales of investments (excluding call and maturity proceeds) in
fixed maturities were $5.3 billion, $2.8 billion and $5.0 billion in 1999, 1998
and 1997 respectively. Of the 1999, 1998 and 1997 proceeds, $3.6 billion, $2.2
billion and $4.0 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 $2 million, $23 million and
$29 million and gross losses of $57 million, $7 million and $10 million in 1999,
1998 and 1997, respectively, were realized on sales of mortgage-backed
securities. At December 31, 1999, the Company had security purchases payable
totaling $910 million relating to the purchases of mortgage-backed securities at
forward dates.
The net unrealized gains and losses 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 and losses on
available-for-sale securities, including the net unrealized gains and losses on
the Closed Block available-for-sale securities, is as follows (in millions):
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
<TABLE>
<CAPTION>
December 31
1999 1998
-----------------------------
<S> <C> <C>
Net unrealized gains and losses on fixed maturities, available-for-sale
$(436) $939
Net unrealized gains and losses on equity securities, available-for-sale,
including seed money in separate accounts 205 347
Adjustments for assumed changes in amortization patterns:
Deferred policy acquisition costs 79 (167)
Unearned revenue reserves (13) 17
Provision for deferred income (taxes) tax benefit 63 (390)
=============================
Net unrealized gains and losses on available-for-sale securities $(102) $746
=============================
</TABLE>
During 1998, the net change in unrealized gains and losses on fixed maturities,
available-for-sale, appearing in the consolidated statements of equity 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.
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.
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, 1999 and 1998, the commercial mortgage portfolio is diversified by
geographic region and specific collateral property type as follows:
<TABLE>
<CAPTION>
Geographic Distribution Property Type Distribution
- ------------------------------------------------------ --------------------------------------------------
December 31 December 31
1999 1998 1999 1998
----------------------- -----------------------
----------------------- -----------------------
<S> <C> <C> <C> <C>
New England 5% 5% Office 30% 29%
Middle Atlantic 14 14 Retail 33 33
East North Central 10 10 Hotel 1 1
West North Central 4 5 Mixed use/other 2 2
South Atlantic 25 25 Industrial 32 33
East South Central 3 3 Apartments 3 3
West South Central 7 7 Valuation allowance (1) (1)
Mountain 5 4
Pacific 28 28
Valuation allowance (1) (1)
</TABLE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
Mortgage loans on real estate are considered impaired when, based on current
information and events, it is probable that the Company will be unable to
collect all amounts due according to contractual terms of the loan agreement.
When the Company determines that a loan is impaired, a provision for loss is
established for the difference between the carrying amount of the mortgage loan
and the estimated value. Estimated value is based on either the present value of
the expected future cash flows discounted at the loan's effective interest rate,
the loan's observable market price or fair value of the collateral. The
provision for losses is reported as 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):
<TABLE>
<CAPTION>
December 31
1999 1998 1997
------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $104 $121 $121
Establishment of closed block (see Note 5) - (9) -
Provision for losses 5 4 8
Releases due to write-downs, sales and foreclosures (1) (12) (8)
====================================
Balance at end of year $108 $104 $121
====================================
</TABLE>
The Company was servicing approximately 555,000 and 484,000 residential mortgage
loans with aggregate principal balances of approximately $51.9 billion and $42.1
billion at December 31, 1999 and 1998, respectively. In connection with these
mortgage servicing activities, the Company held funds in trust for others
totaling approximately $334 million and $284 million at December 31, 1999 and
1998, 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.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
Real estate holdings and related accumulated depreciation are as follows (in
millions):
December 31
1999 1998
-----------------------------
Investment real estate $1,461 $1,890
Accumulated depreciation (161) (183)
-----------------------------
1,300 1,707
Properties held for sale 912 878
=============================
Real estate, net $2,212 $2,585
=============================
Other investments include a temporarily controlled subsidiary. Also included in
other investments are 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 $760 million and $876 million at
December 31, 1999 and 1998, respectively. The Company is committed to providing
additional mortgage financing for such joint ventures aggregating $77 million at
December 31, 1999.
4. Derivatives Held or Issued for Purposes Other Than Trading
The Company uses exchange-traded interest rate futures and mortgage-backed
securities forwards 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 mortgage-backed
securities forwards 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 ($76 million at December 31, 1999, and $855 million at December 31,
1998) represent the extent of the Company's involvement. The Company had
outstanding mortgage-backed securities forwards of $149 million and $55 million
at December 31, 1999 and 1998, respectively.
The Company uses interest rate swaps to more closely match the interest rate
characteristics of its assets with those of its liabilities. Swaps are used in
asset and liability management to modify duration and match cash flows.
Occasionally, the Company will sell a callable investment-type contract and may
use interest rate swaptions or similar instruments to transform the callable
liability into a fixed term liability. In addition, the Company may sell an
investment-type contract with attributes tied to market indices in which case
the Company uses a call option to transform the liability into a
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
4. Derivatives Held or Issued for Purposes Other Than Trading (continued)
fixed rate liability. The notional principal amounts of the interest rate swaps
outstanding at December 31, 1999 and 1998 were $1,211 million and $1,533
million, respectively, and the credit exposure at December 31, 1999 and 1998 was
$19 million for both years. The notional principal amounts of the swaptions
outstanding at December 31, 1999 and 1998 were $470 million and $259 million,
respectively, and the credit exposure at December 31, 1999 and 1998 was $9
million and $6 million, respectively. The notional amounts of call options were
$30 million at both December 31, 1999 and 1998, and the credit exposure was $19
million and $6 million at December 31, 1999 and 1998, respectively. 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 five years at December 31, 1999 and six
years at December 31, 1998. The net amount payable or receivable from interest
rate swaps is accrued as an adjustment to interest income. The Company's
interest rate swap agreements include cross-default provisions when two or more
swaps are transacted with a given counterparty.
The Company enters into currency exchange swap agreements to convert certain
foreign denominated fixed rate assets and liabilities into U. S. dollar
denominated instruments to eliminate the exposure to future currency volatility
on those items. At December 31, 1999, the Company had various foreign currency
exchange agreements with maturities ranging from 2000 to 2018, with an aggregate
notional amount of approximately $1,571 million and a credit exposure of $69
million. At December 31, 1998, such maturities ranged from 1999 to 2018 with an
aggregate notional amount of approximately $486 million and a credit exposure of
$35 million. The average unexpired term of the swaps was approximately six years
at December 31, 1999 and seven years at December 31, 1998.
With regard to its foreign operations, the Company attempts to conduct much of
its business in the functional currency of the country of operation. At times,
the Company is unable to do so, and beginning in 1999 for these cases, it uses
foreign exchange derivatives to hedge the resulting currency risk. At December
31, 1999, the Company had foreign currency swaps with a notional amount of $5
million outstanding.
The Company manages the risk on its commercial mortgage loan pipeline by buying
and selling mortgage-backed securities in the forward markets, interest rate
swaps, and interest rate futures. The Company entered into mortgage-backed
forwards totaling $87 million and $27 million at December 31, 1999 and 1998,
respectively, and interest rate swaps with notional amounts of $88 million with
a credit exposure totaling $2 million at December 31, 1999. In addition, the
Company entered into interest rate futures contracts with notional amounts of
$211 million and $58 million at December 31, 1999 and 1998, respectively. Such
futures contracts are marked to market and settled daily.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
4. Derivatives Held or Issued for Purposes Other Than Trading (continued)
The Company manages risk on its residential 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 $1,080 million and
$2,369 million at December 31, 1999 and 1998, 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 $372 million and $1,100
million of mortgage loans at December 31, 1999 and 1998, 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 $5,550 million
and $6,314 million at December 31, 1999 and 1998, 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.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
5. Closed Block
Summarized financial information of the Closed Block is as follows (in
millions):
<TABLE>
<CAPTION>
December 31
1999 1998
-----------------------------
<S> <C> <C>
Assets
Fixed maturities available-for-sale $1,782 $1,722
Mortgage loans 1,036 1,063
Policy loans 752 741
Other investments 1 1
-----------------------------
Total investments 3,571 3,527
Cash and cash equivalents 24 -
Accrued investment income 63 60
Deferred policy acquisition costs 639 649
Premiums due and other receivables 21 15
=============================
$4,318 $4,251
=============================
Liabilities
Future policy benefits and claims $4,864 $4,668
Other policyholder funds 406 399
Other liabilities 125 232
-----------------------------
$5,395 $5,299
=============================
</TABLE>
<TABLE>
<CAPTION>
For the six-month
For the year ended period from formation
December 31, 1999 to December 31, 1998
----------------------------------------------
<S> <C> <C>
Revenues and expenses
Premiums and other considerations $764 $390
Net investment income 269 127
Other income (expense) (2) 1
Policy and contract benefits (438) (196)
Change in future policy benefits and contractholder funds
(176) (110)
Dividends to policyholders (296) (143)
Operating expenses (110) (56)
==============================================
Contribution from Closed Block (before income taxes)
$ 11 $ 13
==============================================
</TABLE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
6. Deferred Policy Acquisition Costs
Policy acquisition costs deferred and amortized in 1999, 1998 and 1997 are as
follows (in millions):
<TABLE>
<CAPTION>
December 31
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $456 $1,057 $1,058
Balance transferred to the Closed Block - (697) -
Cost deferred during the year 254 229 213
Amortized to expense during the year (76) (170) (170)
Effect of unrealized (gains) losses 158 37 (44)
==========================================
Balance at end of year $792 $ 456 $1,057
==========================================
</TABLE>
7. Insurance Liabilities
Major components of contractholder funds in the consolidated statements of
financial position, are summarized as follows (in millions):
<TABLE>
<CAPTION>
December 31
1999 1998
-----------------------------
<S> <C> <C>
Liabilities for investment-type contracts:
Guaranteed investment contracts $15,941 $15,211
Domestic funding agreements 743 653
International funding agreements backing
medium-term notes 1,139 -
Other investment-type contracts 3,115 3,806
-----------------------------
Total liabilities for investment-type contracts 20,938 19,670
Liabilities for individual annuities 2,522 2,685
Universal life and other reserves 1,063 984
=============================
Total contractholder funds $24,523 $23,339
=============================
</TABLE>
The Company's contractholder funds, excluding universal life reserves, include
surrender and withdrawal provisions which mitigate the risk of losses due to
early withdrawals. Approximately 90% of such contractholder funds, include
surrender or market value adjustment provisions, or are not subject to
discretionary withdrawal. The remainder is subject to discretionary withdrawal
at book value with minimal or no surrender charge.
Approximately 3.0% of the Company's investment contract portfolio includes
puttable funding agreements, representing 1.3% of general account assets.
Approximately 2.5% of the portfolio includes contracts which require the
contractholder to give the Company a minimum of 90 days notice before contract
termination payment.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
7. Insurance Liabilities (continued)
Funding agreements are issued to non-qualified institutional investors both in
domestic and international markets. In late 1998, the Company established a $2
billion program under which an offshore special purpose entity was created to
issue nonrecourse medium-term notes. Under the program, the proceeds of each
note series issuance are used to purchase a funding agreement from the Company,
with the funding agreement so purchased then used to secure that particular
series of notes. In general, the payment terms of any particular series of notes
match the payment terms of the funding agreement that secures that series.
Claims for principal and interest under those international funding agreements
are afforded equal priority to claims of life insurance and annuity
policyholders under insolvency provisions of Iowa Insurance Laws. During 1999,
the Company began issuing international funding agreements to the offshore
special purpose vehicle under that program. The offshore special purpose vehicle
issued medium-term notes to investors in Europe, Asia and Australia. In general,
the medium-term note funding agreements do not give the contractholder the right
to terminate prior to contractually stated maturity dates, absent the existence
of certain circumstances which are largely within the Company's control. At
December 31, 1999, the contractual maturities were 2002 - $180 million; 2004 -
$358 million; 2008 - $36 million; and 2009 - $565 million.
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):
<TABLE>
<CAPTION>
December 31
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 641 $ 770 $ 800
Incurred:
Current year 1,831 1,922 2,723
Prior years 32 (14) (21)
------------------------------------------
------------------------------------------
Total incurred 1,863 1,908 2,702
Reclassification for subsidiary merger
(see Note 2) - 155 -
Payments:
Current year 1,380 1,523 2,235
Prior years 405 359 497
------------------------------------------
Total payments 1,785 2,037 2,732
------------------------------------------
Balance at end of year:
Current year 451 349 476
Prior years 268 292 294
------------------------------------------
==========================================
Total balance at end of year $ 719 $ 641 $ 770
==========================================
</TABLE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
7. Insurance Liabilities (continued)
The activity summary in the liability for unpaid accident and health claims
shows an increase of $32 million, a decrease of $14 million and a decrease of
$21 million to the December 31, 1998, 1997 and 1996 liability for unpaid
accident and health claims, respectively, arising in prior years. Such liability
adjustments, which affected current operations during 1999, 1998 and 1997,
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.
8. Debt
Short-term debt
Short-term debt consists primarily of commercial paper and outstanding balances
on credit facilities with various banks. At December 31, 1999, the Company and
certain subsidiaries had credit facilities with various banks in an aggregate
amount of $1.5 billion. The credit facilities may be used for general corporate
purposes and also to provide backup for the Company's commercial paper programs.
Long-term debt
The components of debt as of December 31, 1999 and December 31, 1998 are as
follows (in millions):
<TABLE>
<CAPTION>
December 31
1999 1998
------------------------------
<S> <C> <C> <C> <C>
7.875% surplus notes payable, due 2024 $199 199
8% surplus notes payable, due 2044 99 99
Non-recourse mortgages and notes payable 335 214
Other mortgages and notes payable 201 159
==============================
Total long-term debt $834 $671
==============================
</TABLE>
The amounts included above are net of the discount and direct costs associated
with issuing these notes which are being amortized to expense over their
respective terms using the interest method.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
8. Debt (continued)
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. 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, 1999,
1998 and 1997, 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, 1999 range
from $1 million to $38 million per development with interest rates generally
ranging from 6.4% to 9.3%. Outstanding principal balances as of December 31,
1998 range from $1 million to $39 million per development with interest rates
generally ranging from 6.6% to 9.3%.
At December 31, 1999, future annual maturities of debt are as follows (in
millions):
2000 $124
2001 72
2002 19
2003 12
2004 12
Thereafter 595
----------
==========
Total future maturities of debt $834
==========
Cash paid for interest for 1999, 1998 and 1997 was $96 million, $97 million and
$67 million, respectively. These amounts include interest paid on taxes during
these years.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
9. Income Taxes
The Company's income tax expense (benefit) is as follows (in millions):
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
Current income taxes:
Federal $ 84 $ (80) $144
State and foreign 13 10 3
Net realized capital gains 162 107 11
------------------------------------------
Total current income taxes 259 37 158
Deferred income taxes 64 7 83
==========================================
Total income taxes $323 $44 $241
==========================================
</TABLE>
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:
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
Statutory corporate tax rate 35% 35% 35%
Dividends received deduction (3) (4) (2)
Interest exclusion from taxable income - (1) (1)
Resolution of prior year tax issues - (20) -
Other (3) (4) 3
------------------------------------------
Effective tax rate 29% 6% 35%
==========================================
</TABLE>
Significant components of the Company's net deferred income taxes are as follows
(in millions):
<TABLE>
<CAPTION>
December 31
1999 1998
-----------------------------
<S> <C> <C>
Deferred income tax assets (liabilities):
Insurance liabilities $ 138 $ 117
Deferred policy acquisition costs (149) (111)
Net unrealized losses (gains) on available for sale
securities 88 (381)
Mortgage loan servicing rights (210) (111)
Other (26) (11)
=============================
$(159) $(497)
=============================
</TABLE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
9. Income Taxes (continued)
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 $270 million in 1999, $309 million in 1998 and
$143 million in 1997.
10. 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.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
10. Employee and Agent Benefits (continued)
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
Pension Benefits Benefits
---------------------------------- ------------------------------
December 31 December 31
1999 1998 1997 1999 1998 1997
---------- ----------- ----------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of $ (827) $(700) $(732) $(206) $(214) $(218)
year
Service cost (42) (34) (41) (11) (12) (12)
Interest cost (55) (50) (52) (14) (15) (16)
Actuarial gain (loss) 163 (79) 101 (3) 20 19
Curtailment adjustment - - 7 - - -
Benefits paid 29 36 17 6 15 13
========== =========== =========== ========= ========== =========
Benefit obligation at end of year $ (732) $(827) $(700) $(228) $(206) $(214)
========== =========== =========== ========= ========== =========
Change in plan assets
Fair value of plan assets at
beginning of year $ 993 $ 980 $ 841 $ 326 $ 300 $ 247
Actual return on plan assets 90 23 130 5 15 41
Employer contribution 6 26 26 21 26 25
Benefits paid (29) (36) (17) (6) (15) (13)
---------- ----------- ----------- --------- ---------- ---------
Fair value of plan assets at end of $1,060 $ 993 $ 980 $ 346 $ 326 $ 300
year
========== =========== =========== ========= ========== =========
Funded status $ 328 $ 166 $ 280 $ 118 $ 120 $ 86
Unrecognized net actuarial gain (216) (38) (182) (46) (71) (53)
Unrecognized prior service cost 11 12 14 - - -
Unamortized transition obligation (26) (37) (49) 4 8 12
(asset)
========== =========== =========== ========= ========== =========
Prepaid benefit cost $ 97 $ 103 $ 63 $ 76 $ 57 $ 45
========== =========== =========== ========= ========== =========
Weighted-average assumptions as of
December 31
Discount rate 8.00% 6.75% 7.25% 8.00% 6.75% 7.25%
</TABLE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
10. Employee and Agent Benefits (continued)
<TABLE>
<CAPTION>
Other Postretirement
Pension Benefits Benefits
---------------------------------- ------------------------------
December 31 December 31
1999 1998 1997 1999 1998 1997
---------- ----------- ----------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic benefit
cost
Service cost $ 42 $ 34 $ 41 $ 11 $ 12 $ 12
Interest cost 55 50 52 14 15 16
Expected return on plan assets (76) (75) (80) (24) (16) (16)
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 (2) (1) -
---------- ----------- ----------- --------- ---------- ---------
Net periodic benefit cost (income) $ 11 $ (9) $ 5 $ 3 $ 14 $ 16
========== =========== =========== ========= ========== =========
</TABLE>
For 1999, 1998 and 1997, the expected long-term rates of return on plan assets
for pension benefits were approximately 5% in each of these years (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% in each of the years 1999, 1998 and 1997. The assumed
rate of increase in future compensation levels varies by age for both the
qualified and non-qualified pension plans.
For 1999, 1998 and 1997, the expected long-term rates of return on plan assets
for other post-retirement benefits were approximately 5% in each of these years
(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 8.0%, 8.1% and 8.2% for 1999, 1998 and 1997,
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 14.1% in 1999 and declines to an
ultimate rate of 6% in 2009. 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):
<TABLE>
<CAPTION>
1-Percentage-Point 1-Percentage-Point
Increase Decrease
---------------------- ---------------------
<S> <C> <C>
Effect on total of service and interest cost components
$ 8 $ (6)
Effect on accumulated postretirement benefit obligation
41 (33)
</TABLE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
10. Employee and Agent Benefits (continued)
In addition, the Company has defined contribution plans that are generally
available to all employees and agents who are age 21 or older. Eligible
participants may contribute up to 20% of their compensation, to a maximum of
$10,000 annually, to the plans in 1999 and 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. 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 both 1999 and
1998, and $15 million in 1997 to these defined contribution plans.
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 $357 million in 1999, $362
million in 1998 and $344 million in 1997. At December 31, 1999, future minimum
annual rental commitments under these noncancelable operating leases are as
follows (in millions):
<TABLE>
<CAPTION>
Held for Sale Held for Total Rental
Investment Commitments
---------------------------------------------------
<S> <C> <C> <C>
2000 $ 96 $ 150 $ 246
2001 87 137 224
2002 67 127 194
2003 53 117 170
2004 41 105 146
Thereafter 180 796 976
===================================================
Total future minimum lease receipts $524 $1,432 $1,956
===================================================
</TABLE>
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 $73 million in 1999, $60
million in 1998 and $84 million in 1997. At December 31, 1999, future minimum
annual rental commitments under these noncancelable operating leases are as
follows (in millions):
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
11. Other Commitments and Contingencies (continued)
<TABLE>
<S> <C>
2000 $ 43
2001 32
2002 23
2003 16
2004 9
Thereafter 9
-----------
132
Less future sublease rental income on these noncancelable leases 3
===========
Total future minimum lease payments $129
===========
</TABLE>
The Company is a plaintiff or defendant in actions arising out of its insurance
business and investment operations. The Company is, from time to time, also
involved in various governmental and administrative proceedings. While the
outcome of any pending or future litigation cannot be predicted, management does
not believe that any pending litigation will have a material adverse effect on
the Company's business, financial condition or results of operations. However,
no assurances can be given that such litigation would not materially and
adversely affect the Company's business, financial condition or results of
operations.
Other companies in the life insurance industry have historically been subject to
substantial litigation resulting from claims disputes and other matters. Most
recently, such companies have faced extensive claims, including class-action
lawsuits, alleging improper life insurance sales practices. Negotiated
settlements of such class-action lawsuits have had a material adverse effect on
the business, financial condition and results of operations of certain of these
companies. The Company is currently a defendant in two purported class-action
lawsuits which allege improper life insurance sales practices. The Company
believes the claims are without merit and intends to vigorously contest such
suits. However, there can be no assurance that such sales practice litigation or
any future similar litigation will not have a material adverse effect on the
Company's business, financial condition or results of operations.
The Company is also subject to insurance guaranty laws in the states in which it
writes business. These laws provide for assessments against insurance companies
for the benefit of policyholders 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. The Company believes such
assessments in excess of amounts accrued would not materially affect its
financial condition or results of operations.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
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 policyholder 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
excluding equity investments in subsidiaries, cash and cash equivalents and
accrued investment income in the accompanying consolidated statements of
financial position approximate their carrying amounts.
Mortgage servicing rights represent the present value of estimated future net
revenues from contractually specified servicing fees. The fair value was
estimated with a valuation model using current prepayment speeds and a market
discount rate.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
12. Fair Value of Financial Instruments (continued)
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 policyholder 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, 1999 and 1998, are as follows (in millions):
<TABLE>
<CAPTION>
1999 1998
--------------------------- ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------------------- ----------------------------
<S> <C> <C> <C> <C>
Assets (liabilities)
Fixed maturities (see Note 3) $21,660 $21,660 $21,006 $21,006
Equity securities (see Note 3) 864 864 1,102 1,102
Mortgage loans 12,296 12,155 12,091 12,711
Policy loans 28 28 25 25
Other investments 465 465 198 198
Cash and cash equivalents 362 362 461 461
Accrued investment income 408 408 375 375
Financial instruments included in Closed
Block (see Note 5) 3,658 3,649 3,587 3,652
Mortgage servicing rights 1,081 1,288 778 821
Investment-type insurance contracts (23,563) (23,068) (22,127) (21,606)
Short-term debt - - (200) (200)
Long-term debt 834 790 (671) (708)
</TABLE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
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 upon formal adoption by
Iowa regulatory authorities. If adopted as proposed effective January 1, 2001,
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, 1999, the Company meets the RBC requirements.
Under Iowa law, the Company may pay dividends only from the earned surplus
arising from its business and must receive the prior approval of the Iowa
Commissioner to pay a dividend if such a dividend would exceed certain statutory
limitations. The current statutory limitation is the greater of 10% of the
Company's policyholder surplus as of the preceding year end or the net gain from
operations from the previous calendar year. Based on this limitation and 1999
statutory results, the Company could pay approximately $539 million in dividends
in 2000 without exceeding the statutory limitation. In 1999, the Company
notified the Iowa Commissioner in advance of all dividend payments and received
approval for an extraordinary dividend of $250 million. Total dividends paid to
its parent company in 1999 were $509 million. Dividends were composed of cash,
other assets and the net assets of the Company's subsidiary, Princor Financial
Services Corporation. The distribution of the Company's investment in Princor
Financial Services Corporation was recorded at fair market value of $77 million
and resulted in a gain of $56 million for a subsidiary of the Company.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
13. Statutory Insurance Financial Information (continued)
The following summary reconciles the assets and equity at December 31, 1999,
1998 and 1997, and net income for the years ended December 31, 1999, 1998 and
1997, 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 Net
Assets Equity Income
------------------------------------------
------------------------------------------
<S> <C> <C> <C>
December 31, 1999
As reported in accordance with statutory accounting practices
- unconsolidated $76,018 $3,152 $714
Additions (deductions):
Unrealized loss on fixed maturities available-for-sale (357) (357) -
Other investment adjustments 2,088 995 10
Adjustments to insurance reserves and dividends (125) (236) 15
Deferral of policy acquisition costs 1,409 1,409 68
Surplus note reclassification as debt - (298) -
Provision for deferred federal income taxes and other tax
reclassifications - 33 18
Other - net 277 253 (15)
------------------------------------------
As reported in these consolidated GAAP financial statements $79,310 $4,951 $810
==========================================
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
==========================================
</TABLE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
14. Non-domestic Operations
The Company's non-U.S. operations offer a variety of asset management and asset
accumulation products and services for businesses, groups and individuals, with
a focus on retirement savings.
The change in net foreign currency translation reflects decreases of $31
million, $18 million and $2 million for the years ended December 31, 1999, 1998
and 1997, respectively. Aggregate foreign exchange transaction gains and losses
were not material for the years ended December 31, 1999, 1998 and 1997. Total
revenues by geographic region are as follows (in millions):
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
Domestic (United States) $7,252 $7,449 $8,547
Non-domestic 272 237 115
------------------------------------------
Total revenues $7,524 $7,686 $8,662
==========================================
</TABLE>
Total assets by geographic region are as follows (in millions):
<TABLE>
<CAPTION>
December 31
1999 1998
-----------------------------
<S> <C> <C>
Domestic (United States) $77,856 $72,704
Non-domestic 1,454 1,239
=============================
Total assets $79,310 $73,943
=============================
</TABLE>
15. Year 2000 (Unaudited)
As of January 31, 2000, virtually all of the Company's major technology systems,
processes, and infrastructure, including those which rely on third party
vendors, appear to be operating smoothly following the rollover to the Year
2000. The Company has experienced no significant interruptions to normal
business operations, including the processing of customer account data and
transactions. The Company will continue its Year 2000 vigilance into early 2001.
The total cost for the project was approximately $24 million through December
31, 1999, with the costs expensed as incurred. Any additional costs to complete
activities related to internal processes, external relationships, contingency
plans and to maintain Year 2000 readiness are not expected to be material.
<PAGE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
15. Year 2000 (Unaudited) (continued)
Based on the performance of its major technology systems to date, ongoing plans
to deal with external relationships and contingency plans, the Company believes
that in the worst case scenario it will experience, at most, isolated and
insignificant disruptions of business processes as a result of Year 2000 issues.
Such disruptions are not expected to have a material effect on the Company's
future results of operations, liquidity or financial condition.
